ML20151Z831
| ML20151Z831 | |
| Person / Time | |
|---|---|
| Site: | Palo Verde  |
| Issue date: | 12/31/1997 |
| From: | Ackerman J, Brenda Montoya PUBLIC SERVICE CO. OF NEW MEXICO |
| To: | |
| Shared Package | |
| ML17313A590 | List: |
| References | |
| NUDOCS 9809220143 | |
| Download: ML20151Z831 (57) | |
Text
1 U' B L I C S E R V I C E C O M P A N Y O F M E W M E X I C O e
PNM 1997 ANNUAL REPORT
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r PNM's primary ~ business is providing elsetric and gas ;
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, [ } l sell ( poweri to utilities an'djother large wholesale c s,5 37 ' ? customers, market natural gas outside the state of-New Mexico,'anid offer a wide. range of energy and w . -
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PERCENTAGE 5-YEAR ANNUAL ,;
' < - ;p [.,,Y 1997- 1998' CHANGE GROWTH MATE
_i.,;,..;, l v Rt' Financial Data i l iOperating Revenues . $1,135,267 $883,386 28.5 % 5.9% 1 (N ', ; lOjkrating E$penses '$1,011,222 - $757,367 33.5 % 6.4%'
.s ' 'f:eOperating Income : $ 124,045 $126,019 (1.6%) 2.1%
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/ Retained Earnings .. S '129,188 .$ 77,185 67.4 % NM- 1 y, M Ty , -x .
? Return on Average Common Equity 10.2 % 9.8% 4,5% NM
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4'Edinings(Basic)[ $ 1.92 $ 1.72 11.6 % NM .i
, } Earnings (Liluted) $ 1.91- S 1.7! 11.7 % NM
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. ? Book Value" $ 19.26 - $ 18.06 6.6% 5.1% I
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TClosing Price l. $- 23.69: $ 19.63 20.7 % 13.9 %
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PELLOW SHAREHOLDERS:
PNAt keeps getting better at what we do best: Utilities all across the country, each once comfort-delivering reliable, cost-effective electric and gas ably secure in the uncontested possession ofits local service to the people of New Alexico. Providing service territory, must now face the prospect of com-superior value to customers continues to pay off for peting in the open market place. Some will succeed shareholders. In 1997 PNA1 stock provided a 25 percent and some will fail, total return on investment. We intend to have PNA1 ranked among the Thanks to continued strong growth in our local winners. We have a plan in place that will position service territory, a substantial increase in our whole- your company for a competitive environment. We sale power sales and the rapid expansion of our new have a management team that has proven its ability gas marketing business, PNA1 operating revenues to carry out that plan.
were up $252 million last year, to more than $1.1 Although competition is bringing rapid and some-
! billion. Earnings per share increased i1.6 percent for times unpredictable change to our business, our the year.
commitment to maximizing your return on your This upward trend in revenues and earnings, investment in PNA1 remains constant. We are not together with your company's growing financial simply waiting for the future. We are helping to strength, enabled the Board of Directors to approve create it.
a 40 percent increase in the common stock dividend in 1997, from 48 to 68 cents a share for the year.
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But tomorrow is not won by yesterday's success - and never has this been more true than in ,
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today's energy business. In California, retail electric competition is becoming a reality this year. Dozens BFNJ AMIN E MoNToYA President & Chief Executive Officer of other stater, including New Alexico, are working on their own plans to restructure the electric and gas utility industry. While these plans vary in detail, they 7~ & L all share one common goal: to offer customers Jous T. ACKF RM AN
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expanded choice.
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s .; T v, It O O J G Il 0 IT USED TO BE A SIMPLE CHOICE:"ON" OR "OFF."
- BUT TODAY, PNM CUSTOMERS HAVE NEW OPTIONS i
- FOR THEIR NATURAL GAS.
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4 COMPETITION SPREADS, WE HAVE TO FIND NEW WAYS TO CONVINCE CUSTOMERS TO CHOOSE PNM.
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o ALL IT " R E S T R U C T U R I N G ." CALL IT " RETAIL W H E E L I N G ," OR "OPEN ACCESS." BY WHATEVER NAME, CUSTOMER CHOICE IS COMING TO THE ELECTRIC U TILIT Y INDUSTRY ALL ACROSS T H T: COUNTRY.
At the beginning of 1997, customers told us they customers money, PNA1's Energy Place is offering wanted greater control over their energy costs. PNA1 customers a free IIome Energy Analysis.
responded by leading the way to Gas Choice. We The PNA1 Advantage program offers the same expert moved so fast that by the end of the year, PNA1 was assistance to business customers, identifying energy inef-one of the first natural gas utilities in the nation to ficiencies and suggesting money-saving solutions. The offer all its customers the opportunity to shop for goal is to position PNA1 as a trusted energy adviser and their supplier. ally, the customer's choice in a competitive market.
With the advent of Gas Choice, PNM continues to Competition came to the wholesale power business deliver the gas, read the meters and send out bills. But in 1992, when federal regulators opened the nation-O customers can now either continue to have PNA1 buy wide network of high-voltage transmission lines to all their gas for them or negotiate a separate deal with a users. Last year the number of participants in this gas marketer. market - other utilities, independent power genera-At the same time, we improved our own budget tors, and marketers - exploded to more than 300.
billing plan and offered an expanded array of options PNA1 adapted by expanding and reorganizing our to help customers better manage their energy dollars. wholesale power trading desk, staffing it with experts We extended the Sours at our customer phone center offering deals tailored to each customer's needs. As a so that customers could reach us on evenings and result, these power sales were up 48.3 percent last weekends. I ecause an energy efficient home saves year, on top of a 76.6 percent increast - e 96.
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Wimlesale power sales accounted for $185.3 million customers offers substantial opportunities to further of PNA1 revenues last year. improve margins by capturing economics of scale.
Because wholesale power has become a commodi- New Alexico remains one of the fastest-growing ty product, where competitive advantage is measured states in the nation. Through the 1990s, our vibrant in fractions of a cent, generating that electricity is also local economy has fueled a growth rate for PNS1 of becoming a fiercely competitive business. We're find- nearly twice the national average.
ing new ways to make our own plants more efficient, To serve more customers more efficiently, PNA1 is without compromising om commitment to the emi- investing in the latest technology. PNA1's new ronment. We have lowered costs at our San Juan customer information computer system, our new plant and will lower them further with a $40 million interactive voice response system in the customer call investment in new emissions technology that will save center, and a new computerized trouble management us another $10 million a year. system that dramatically speeds outage response time Competition will take other forms in different are all aimed at delivering superior service to cus-parts of our business. Because building competing tomers at the lowest possible cost.
networks of electric and gas lines is economically Improving the way we run our core business has I wasteful, delivering energy to the customer's meter other advantages beyond lowering costs and enhanc-will remain a " natural monopoly," regulated much the inF senice to PNA1 retail customers. As deregulation way it is today. Providing that delivery senice will of the industry proceeds, further "unbundling" of the offer steady profits and a reliable cash flow to effi- basic utility package may make such basic functions as cient, well-managed companies. billing, meter reading, and phone center operations The PNA1 electric and gas distribution systems are competitive offerings. When that day comes, PNAl's among the most reliable and cost-effective in the nation. superior performance in these areas may enable us to And, for a relatively small utility like PNA1, adding new retain these senices as profit centers.
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< 9 j-a IN A COMPETITIVE ENVIRONMENT, YOU CAN'T AFFORD TO STAND STILL.
- PNM IS CHARGING AHEAD.
- WE ARE RETHINKING STRATEGY AND CHANGING INCENTIVES.
- WE'RE ANSWERING THE TOUGH QUESTIO COME WITH A COMPETITIVE ENVIRONMENT WITH IDEAS THAT WILL SET US APART FROM THE COMP 1
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OW COSTS. AN ErrICIENT, PRODUCTIVE WORK TORCE. EN ORGANIZATION TOTALLY FOCUSED ON C R E ATIN G VALUE FOR SHAREHOLDERS BY MEETING THE NEEDS Or ITS CUSTOMERS. THoSE ARE THE ELEMENTS OF SUCCESS IN TOD AY'S ENERGY BUSINESS. A new company policy rewards employees with a applying those lessons to PNA1. The goal is not to simply streamline or fine-tune what we do now, but to casual dress day for every day PNAt stock hits a new re-examine every facet of our business so that we can high. Sounds kind of silly at Orst, the kind of stunt do it better than anyone else. IIerb Kelleher used to revolutionize the airline In 1997, we assembled a team of experienced business, or Sam Walton used in creating the nation's employees to tackle the company's largest re-engi-number-one mass retailer. But it works. The " Stock's Up!" casual days are only one small neering project to date. The team is studying how PNA1 spends $30 million a year to extend gas and example of the ways we are fostering a competitive electric senice to new customers. The goal is to mindset among PNA1 employees, O Our compensation plan pays workers for redesign this entire process to boost customer satis-faction, while assuring the most ef6cient use of the measurable results achieved, emphasizing return to company's resources. shareholders and customer satisfaction. The new YES We're taking the same innovative approach to our (You Energize Service) Award, instituted in mid-1997, financing needs. At the end of 1997, PNA1 took a rewards employees who go beyond their nonnal job major step toward eliminating reliance on the 50-duties to provide exceptional customer service. We're looking at what has worked for companies in year-old mortgage that served as the foundation for other industries, and to what's being tried by the "best our financing arrangements in the past. In 1998, we will be one of the first utilities in the nation to use a practice" companies in our own industry. We're s%- n' f
new financial instrument that should make future Indian reservations to help them upgrade, expand and borrowing easier and provide greatly increased manage their utility and water systems. fmancial flexibility. We are pursuing another new opportunity in sell-We continue to repurchase, refinance or retire ing natural gas to large industrial and commercial long-term debt, reducing interest expense and customers and to local gas utilities outside of New strengthening our balance sheet so that we will be able Alexico. We first entered this business in 1996 and to respond quickly as opportunities arise in the future. grew it to more than $114 million in sales in 1997. We're discovering some of those opportunities in This year, we are starting up another new energy the rapidly growing field of energy senices, where senices bu;.iness in the newly dereg' dated California today's heightened emphasis on conservation and market. This new business is installing and maintain-emironmental protection is fueling demand for the ing a new generation of high-tech electric meters for kinds of expert assistance PNA1 can provide. utilities and business customers. PNA1's strategy targets specialized segments of this These new ventures are a relatively small part of new market where we can use our experience to build PNAl's business today, and we do not expect them a profitable, competitive advantage. to contribute to earnings for several more years. O One of these market niches is in sening the energy Characteristic of a start-up business, in 1997 Energy management needs of federal agencies and Senices reduced PNA1 earnings by about 22 cents installations. Committed to reducing their energy a share. consumption by nearly a third by 2005, these agencies But as these markets evolve and expand - and as are in the market for the innovative, cost-effective PNA1 gains valuable experience in these new fiekis - w e energy solutions available from PNA1 Energy believe our investment in energy senices will become Senices. We are also putting our long years of an important source of revenues and profits for experience to work with smaller municipalities and tomorrow's PNA1. y e i
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- POWER GENERATED BY SOLAR PANELS LIKE THIS ONE d
WILL BE JUST ONE OF THE MANY MEW OPTIONS CONSUMERS WILL HAVE IN A COMPETITIVE MARKET. i j j
- AS ENERGY CHOICES MULTIPLY, WE ARE POSITIONING PNM TO GIVE CUSTOMERS WHAT THEY WANT, i
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4 4 l l 1 We know that customers want an affordable, depend- Conunission in January 1999. The first elections to the new commission, together with state legislative and able supply of power. We also know that they care about the environment, and they want to deal with a gubernatorial ekctions, will shape the ongoing debatt. over industry restructuring in New Alexico this year. company that shares that sense of stewardship, In 1997, PNA1 led the way in this debate, bringing As part of fulfilling that responsibility, we have established the new PNA1 Enchantment Energy Trust together all interested parties in an attempt to reach a consensus over the changes in our industry. While to fund projects that will assure New Alexico's con-those collaborative discussions did not produce a gen-tinued leadership role in alternative energy research eral agreement, the talks did help us all identify the and development. llut even as we enter tomorrow's market place, we important issues and find some common ground. In 1998, PNA1 continues to advocate change that must continue to operate effectively in today's regu-lated environment, where substantial challenges both offers benefits to all customers and serves the remain.The New Alexico Public Utility Commission best interests of our sharehoklers. In tomorrow's competitive market, consumers will - ordered PNA1 to present both an electric and a gas O rate case in 1997. While we are seeking a $12.6 mil- be able to compare PNM side by side with other lion increase in gas rates and advocating no change energy prosiders. In that new emironment, the company in electric rates, there is no certainty regarding the with the latest technology, the company reinventing customer senice, the company that is changing the outcome of these cases. Another uncertainty lies in New Alexico's move way it does business, is the company that will thrive. PNA1 is committed to making competition work for toward an elected Public Regulation Commission, which is scheduled to replace the existing Public Utility our customers and our shareholders.
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OF # EW M E E IC S A N 3 8 U B S 89I AAI E 8
- P W 5L ie S E 4W 8C E O OMP&N Y SELECTED FIN A N CI A L DATA toes tese toss voor toss (in thawavb except pw share amorma eralreta)
$ 808,465 $ 904,711 $ 873,878
$1,135,267 $ 883,386 lota! Operating Revenues $ 75,562 $ 80,318 $ (61,486)*
$ - 80,995 , 5 72,580 Net Earnings (Loss)
Earnings (less) per Gunmon Share:
$ 1.92 $ 1,72 $ L72 5 1.77 $ (1/4)*
Basic 1,71 $ 1.72 $ 1.77 $ (1.64)* _$- 1.91 $
- Diluted . $2,203,265 52,212,189
$2,313,732 $2,230,314 : $2,035,669
'Ibta! Assets Preferred Stock with Alandatory
- - $ 17,975 $ 24,386 Redemption Requirements
' teng-Tenn Debt, $ 728,989 5 900,595 $ 976,525 S 714,345 _ $ 728,889 including Current Alaturities Common Stock Data: ~
Afarket price per conunon share at 5 13.00 $ 11.25
$ 23.688 5 19.625 $ 17.625 year end Ikx2k ulue per ctxnmon share at 16.82 5 15.11 $ 1329
$ 19.26 5 1H.06 5 year end 41,774 41,774 41,774 41,774 41,774 Average number of common shares outstanding - -
$ 0.68 $ 0.48
' Cash dividend declared per conunon share 12.4 % (10.7)%
10.2 % 9.8% 10.7 % Return on Average Common Equity Capitalization: 48.6 % 39.2 % 34.4 % 52.5 % 50.4 % Oxnmon stock equity Preferred stcx k: 0.9 3.7 3.6 0.8 0.9 Without mandatory redemption requirements - ~ 1.1 1.5 With mandatory redemption requirements 56.0 60.5 46.7 48.7 50.5 O Long-term debt, including current maturities 100 % 100 % 100 % 100 % 100 % h Company, the write-off
- Includes the write-down of the 22% beneficial interests in the PVNGS Units I and 2 leases purchased i by t e of certain regulatc y assets and other deferred rosts and the write-off of certain la'NCS Units I and 2 common costs,
$108.2 million, net of taxes ($2.59 per share).
The selected financial data should be read in conjunctica with the consolidated financial statements, the no statements and Alanagement's Discussion and Analysis of Financial Condition and Results of Operations. Return on Average Common Equity
. peeLes'eaaveeo eecnaay er to s or oeaeoe a so o auoe eeaaiee MANAGEMENT'S DISCUSSION AND AMALTRIS l
OPFINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's assessment of the tional rates. However, the Company would recover all fixed Company 13 financial condition and the significant factors costs associated with PVNGS Units I and 2 through a non-affecting the results of operations.1his discussion should be bypassable " wires charge" from 2001 to 2016. The proins-read in conjunction' with the Company's consolidated al also called for certain credits to stranded costs which financial statements, would effectively shorten the time period for recovery. The Company currently estimates that if the market dearing price for power, which represents the cost of generation at Restructuring the Electric Utility Industry the plant, fell to 3.0 centsflGVh, it may incur an after-tax Competition and restructming of the electric utility indus-write-off of appmximately $176 million related to its fossil try continue to be key issues facing the Company. EfTorts to fuel generation if the Company assumes this risk. 'Ihe advance and determine the eventual form of industry Companyh proposal was supported by various parties to the restructuring continued during 1997. colldx>rative pmcess, including Enron Corporation, the At the state level, the Company propwed in April 1997 New Alexico Retail Association, Southwestern Public that the New Alexico Public Utility Commission Senice Company ("SPS"), the United States Executive ('NAIPUC") reccmvene the proceedings invahing the Agencies and the International Bmtherhood of Electrical NAIPUC's Notice ofInquiry into the restructuring of the Workers. Ilowever, the Company's proposal was not adopt-electric industry, in an attempt to arrive at consensus legis-ed by the WUNR and not intr xluced during the1998 lation to be presented to the 1998 session of the Neu' legislative session. The WUNR declined to recommend Alexico Legislature. In Aiay 1997, the NAIPUC issued an any restructuring legislation as a committee bill during the order accepting the Company's pmposal for a collaborative 1998 legislative session.
- effort, and the proposal for a series of meetings to be held On January 22,1998, the NAIPUC submitted its own 4 among all interested parties. He parties held several meet- l repon to the New Alexico Legislature related to restructur-ings in w hich the Company actively participated. Ilowever, @
ing of the electric utility industry. The following key piints in September 1997, the collaborative process to draft legis' were induded in the report: (i) PVNGS and Plains lation was dedared at an impasse due to disagreement on Escalante Generating Station are the most debated issues in issues regarding the divestiture of generation and energy deregulation because of their patential stranded costs; (ii) senice units from electric distribution and transmission stranded costs, ifdetennined to be lawful, should be verified systems, and the recoverability of stranded costs, by the NAtPUC or its successor, the Public Regulation Although the parties could not reach agreement, the Commission ("PRC"); (iii) market p>wer issues may be Company filed its own prop > sal for industry restructuring in addressed through functional separation or partial or September 1997 with lx>th the NAIPUC, and the Water, complete divestiture of generation, transmission and distri-Utilities and Natural Resources Committee ("WUNR") of bution; (iv) unbundling is neces.,ary to undentand the the New Alexico Legislature-disparities among various electricity providers; (v) despite The Company's pmposal called for an immediate rate an abundance of natural resources to fuel generation facili-
. reduction of $10 million per year for residential customers ties, New Alexico customers pay more for electricity from the effective date of proposed legislation until open because of costs associated with generation gilants; (si) on access without the need for a rate case. The proposal also average, New Alexico residential customers pay more for called for full retail mmpetition no later than January 1, electricity than regional and national residential customer; 2001. Other parts of the Company's pmposal induded an and (vii) system reliability must be maintained or enhanced, offer to create a regulated distribution " wires and pipes" and customers must be educated and emironmental pro-company dedicated only to the delivery of electricity and tections should be promoted. In addition, sample legislation natural gas. Other senices, usually associated with distribu-was attached to the report, giving either the NAIPUC or tion, such as meter reading, billing and customer senices the PRC authority to conclude matters relating to electric j would be prmided through competitive markets. The industry restructuring. De report was issued as a result of i
Company offered to assume the risk of smuuled cost recov-a NAIPUC case and, with the issuance of the repart, the ery on all fossil fuel generation and for PVNGS Unit 3 case was ch> sed. De NAIPUC's draft legislation was not which was previously excluded fmm New Alexico jmisdic-introduced during the 1998 legislative session. Ifouse l
' - - ~ - - - ------ _ ___ ~ - - ' - - ' ~ ' - - - - ~ ~ - - - - - - - - - - _ ____ ___
M E E lO O & N D 8USS8DIAR98S* O F N 5 W DUSL 80 G E R V 80 a e6 M P4N Y
- all-requirements contracts, llowever, upon reconsideration, Alemorial 27, the only measure dealing with restructuring, FERC determined tlut it will serve as the primary forum for passed the I kruse. Atemorial 27 stated the intent ofdeciding the leg-stranded cost rectwery cases if a non-jurisdictional islature to address the issue of electric industry restructuringmunicipal utility annexes territory currently served by a kical l in the 1999 session and declared tlut the NAIPUCretail does utility.His not m<we by FERC fdled a jurisdictional gap have statutory authority to implement re'structuririg at thistlut could have arisen since municipal utilities are not neces-l time.The Aiemorial 27 did not require concurrence by the sarily subject to state commission jurisdiction.
Senate, however, an identical Senate Aiemorial was not acted Although it is currently unable to predict the ultinute upon by the full Senate ptior to adjournment. outcome of possible retail competition initiatives, the In a related matter, in 1996, the NAIPUC ordered all f Company has been and will continue to be active at both the utilities under its jurisdiction to file their estimates of strand-state and Federallevels in the public policy debates on the ed costs, absent any recovery method being adopted, based restructuring of the electric utility industry. %e Gimpany on the Texas Public Utility Conunission Economic Cost will continue to work with customers, regulators, legislators Over Alarket ("ECOAl") model %e Company, in its filing, and other interested parties to ftnd solutions that bring ben-presented two meduxtokigies:(i) using the ECOAt model, efits from competition while recognizing past commitments. the Company's stranded cut estimates run from $657 mil-Competithe Srmtegy Lion for a 1998 full retail access case to S119 million for a ne Company's strategy for dealing with competition 2002 full retail access case and (ii) using a second metiuxtol-includes ongoing cost reductions, increased pnxluctivity, ogy, based upon the difference between the Company's costs of existing generation and the costs of new combmed cycle pursuit of growth opportunities, seeking to impnwe credit and combustion turbine units to serve the same load, the ratings to investment grade and strengthening of customer relations. To accomplish these objectives, the Company con-Crimpanyi costs alxwe the level of new gas units, in 1997 . . is dollars, were estirnated at S748 million for a 1998 full retailtmues to mamtam the focus on its n>re business and . aggressively pursuing its efforts to expand its energy and util-
@ access case to S327 million for a 2002 full retail access case.
ne Company advised the NAIPUC that the results of the ny related business into carefully targeted markets for new ECOAl model are highly sensitive to various assumptions' businesses opportunities. ne restructuring of the utility industry, coupled with primarily pmjections of future gas prices.This infomution was addressed in the NAIPUCh report submitted to the today's renewed emphasis on energy conservation and emimnmental protection, is fueling a gmwing denund for New Alexico Legislature. At the Federal level, legislation was intnxluced in the energy, water and wastewater management senices. In pur-United States Congress in 1996 to alk>w retail competition suing new busmess opportumties, ... the Company is focusing on energy and utility related actmties under .its I,mergy by the year 2000 Since then, a number of bills have been Sem. ces Business Um. t. nese activities will provide energy drafted for potential intmduction in Congress. It is antici-marketing and energy management senices, the nurketing pat-d that these bills will be heavily lobbied by utilities, g
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.mdustrials, power marketers, generators, envimamental for water and wastewater systems and utility related man-groups, consumer groups and state regulators.
%c Federal Faergy Regulatory Commission ("FERC") agement and operations senices for Federal installations and .
issued Order 888 in 1996, requiring utilities that own trans- other large commercial institutions. The Company is mission facilities to file open access tariffs to make availablecurrently operating the City of Santa Fe's water system.ne Energy Senices Business Unit is also pursuing utility transmission senices to affiliates and non-affiliates at fair and . nondiscriminatory rates. Order 888 also states that public related business op;wrrtunities in Alexico. utilities will be allowed to seek recovery of legitimate and In June 1995, the Company filed an application with the verifiable stranded costs from departing customers as a result NAIPUC for authorization for the creation of three wholly-owned non-utility subsidiaries as part of the E,nerp,enices of wholesale competition. %e FERC indicated that it will Business Unit. The Company sought approval to invest a provide for the recovery of retail stranded costs only if state regulators lack the legal authority to address those costs atmaximum of S50 million in the three subsidiaries over time the time retail wheeling is required. He FERC also stated and to enter into recipncd hun agreements for up to S30 that it would permit stranded cost recovery under wholesale
-. eso6se eaavse e s c e n ic v ee ce s a osxsee ano e is o e i s e a m i e e million with these subsidiaries. InJune 1997, the NAIPUC %e Company?s construction experulitums for 1997 were hearing examiner issued a recommended decision for entirely funded through cash generated fmm operations.
approval, with a number of conditions. ne reconunenda- The Company currently anticipates that intemal cash gen-tion indicated that any capital infusion or fmancial assistance cration will be sufficient to meet capital requirements for the to its proposed subsidiaries beyond the requested $50 mil- - years 1998 through 2002 To cover the difference in the lion and reciprocal h>ans exceeding more than $30 million amounts and timing of cash generation and cash require-with these subsidiaries will require prior approval from the ments, the Company intends to use short-term borrowings NAIPUC. The recommendation also directed that all under its liquidity anungements, investments made in the subsidiaries and their operations At the end of 1997, the Company had $130.0 million of should not advenely affect the Company's ratepayers. The available liquidity arrangements, consisting of $100.0 nnl-Company is currently awaiting the NAIPUCis final order in lion from a secured revohing credit facility (" Facility"), this case. $15.0 million from an accounts receivable seemitization and The Company does not anticipate an camings contribu- $15.0 million in k> cal lines of credit.1he Facility will expire tion from the Energy Senices Business Unit over the next inJune 1998 and the Company intends to replace the facili-few years, llowever, the Company believes that successful ty uith a five-year $300 million senior unsecured revohing operation of the Energy Senices Business Unit activities will credit facility ("Revoher"). better position the Company in an increasingly competitive In November 1997, the Company requested NAIPUC utility emimnment. approval to enter into the Revolver In addition, the Company intends to lx>rrow $140 million from the Revoh er Liouloiry ano cantat nasouncas to retire all of its outstanding taxable first mortgage Exmds. Capital Requirements and liquidity The Company also requested authority to exchange the first "Ibtal capital requirements include construction expendi- mortgage Ex nds currendy collateralizing the outstanding tures as well as other major capital requirements, including $575 ndllion of tax-exempt pollution control revenue lxmds O retirement oflong-tenn debt, king-term debt sinking funds with senior unsecured notes (" SUNS"). After completion of and cash dividend requirements for both common and pre- these transactions, the 1947 Indenture of Alortgage and ferred stock.The main focus of the Company's construction Deed of Trust would be extinguished, restdting in more pmgram is upgrading generating systems, upgrading and administrative, financial and strategie flexibility for the expanding the electric and gas transmission and distribution Company. The extinguishment of the monpge requires the systems and purchasing nuclear fuel.1btal capital require- consent of one party which has not yet consented and may ments and construction expenditures for 1997 were $173.9 not consent. Due to concern about the consent, the million and $128.2 million, respectively. Projections for total Company also requested NA1PUC authority to leave an capital requirements and construction expenditures for 1998 amended mortgage in place. Among other modifications, are $218.9 million and $141.3 ndtlion, respectively. Such the mortgage would be amended such that only $111 million projections for the years 1998 through 2002 are $940.3 mil- of tax-exempt polhition cimtrol revenue londs would have lion and $563.2 million, respectively. The projected capital die tenefit of the lien. The property under the hen woukt be requirements do not include the planned refinancing of reduced and no future bonds could be issued under the
$140 million of taxable first mortgage bonds or the planned monpge. The SUNS are planned to be issued under an refinancing of PVNGS Lease Obliption Bonds ("LOlh") indenture containing a restriction on liens (except in cenain discussed below. These estimates are under continuing limited circumstances) and certain other covenants and review and subject to on-going adjustment. In conjunction restrictions. With the exception of the $111 million of tax-
- . with the upgrading of generating systems, the Company exempt pollution contml revenue bonds secured by first l began a retrofit emimnmental project at SanJuan monpge kmds, the SUNS uill be the ser ior debt of the Generating Station ("SJGS") u hich is scheduled to be com- Company. On February 16,1998, the NA1PUC issued an pleted in January 1999. The project will cost the Company order approving these (nmsactions. The Company is antici-approximately $40 million. The Company's anticipated sav- pating completion of these transactions in mid-Atarch 1998.
ings in fuel and operating expense are estimated to be As of December 31,1997, the Company had approxi-approximately $10 million per year over the life of the plant- mately $18.2 million in cash and temporary investments. I l l
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Company could have issued $525 million of preferred stock Financing Capability as of year-end, ne Gunpanys ability to fmance its construction program at a reasonable cost and to provide for other capital needs is Financing Actnirin In February 1997, the Company refinanced $190 million of largely dependent upon its ability to earn a fair return on equity, results of operations, credit ratings, regulatory pollution control revenue londs issued by the City of Farmington, all maturing in April 2022, %e effect of the approvals and financial market conditions. Financing flexi-refinancing resulted in a decrease in interest charges of bility is enhanced by providing a high percentage of total capital requirements from internal sources and having the approximately $1.1 million in 1997. On December 1,1997, the Company converted $137.3 million of variable rate tol-ability, if necessary, to issue long-term securities, and to lution control revenue bonds to fued rates. Of the total, obtain short-term credit. Standard & Poort Corp. and
$100 million of City of Farmington londs were converted Aloody's Investors Services, Inc. currently maintain the to a fued rate of 5.80% and $37.3 million of Ataricopa Company's credit ratings at one level below investment County, Arizona Pollution Control Corporation Londs grade. Duff & Phelps Credit Rating Co. currently main-were converted to a fixed rate of 5.75%. De City of rains an investment grade rating for the Company's first Fannington bonds mature on April 1, mortgage bonds, but continues to rate all MM'"M""E 2022, and the Ataricopa County, Arizona other securities of the Onnpany below 9,ht te Capital Ratio Pollution Control Corporation londs investment grade. %e Gimpany may mature on November I,2022.
face lindted credit markets and higher In December 1997, the Company pur-financing costs as a result ofits securities chased $28.9 million of PVNGS LOBS, being rated below investment grade. 10.15% Series. Although the LOBS are One impact of the Company's current off-balance sheet debt, these outstanding ratings, together with covenants in the londs have been included in the calculation O Companyt PVNGS Units 1 and 2 lease of the Company's debt to capitalization agreements, is to limit the Company's ratio as well as various fmancial coverage ability, without consent of the owner par-ratios by the major rating agencies. He ticipants and londholders in the lease purchase of the LOBS will not only transactions: (i) to enter into any merger improve these ratios, but will also increase or consolidation, or (ii) except in connec-camings in the fonn ofinterest income. tion with normal dividend policy, to con-ne Company is currently preparing vey, transfer, lease or dividend more than 5% of its assets in any single transaction to request NA1PUC approval to issue up to $443 million in or series of related transactions.%e Facility imposes simi- fixed income securities to refinance the $208 nullion in LOBS remaining in the public markets and the 5219 mil-lar restrictions regardless of credit ratings. De issuance of first mortgage bonds by the Company is lion in LOBS held by the Company as an irwestment. Under a stipulated agreement with the NAIPUC, any sav-subject to earnings andlendable property provisions of the Company's first mortgage lond indenture. %e Company ings generated fmm the refinancing will be split 40% to also has the capability under the mortgage indenture, with- the O2mpany's customers and 60% to shareholders. De out regard to the earnings test but subject to other condi- Company hopes to complete the transaction during the tions, to issue first mortgage bonds on the basis of certain second quarter of 1998. Other than the financing actisities discussed atove, the previously retired bonds. At December 31,1997, based on the camings test, the Company could have issued approxi- Company currently has no requirements for long-term mately $463 million of additional first mortgage bonds, financing during the period of 1998 through 2002. Ilowever,during this period, the Company could enter into assuming an annual interest rate of 7.34 percent. The further long-tenn financings for the purimse of strengthen-Company's restated articles of incorporation limit the amount of preferred stock which may be issued. Assuming ing its balance sheet and reducing its cost of capital. %e O>mpany's continuing program of retiring or repurchasing a preferred stock dividend rate of 7.24 percent, the
* .peet is oneviea semeanv - e, asa asseee aus eeoesseaasee f
long-tenn debt provided a net increase in earnings of impmvement in wholesale power market conditions. approximately $9.7 million, before taxes, during 1997. Electric gross margin increased $23.3 million in 1996 The Company continues to evaluate its investment and from 1995 as a result of retail load growth and warmer ilebt retirement options to optimize its financing strategy than nonnal weather and increased off-system sales and earnings potential. margin us a result ofimproved wholesale power market Dh*W, e nditions. Gas gmss margin (operating revenues less gas pur-
' The Company resumed the payment of cash dividends on chased for resale) increased $1.3 million in 1997 over common stock in Alay 1996. The Companys luard of 1996 resulting from the implementation of a higher fixed directors (" Board") reviews the Company's dividend policy monthly customer charge (access fee) starting l'ebruary
- on a continuing basis. The declaration of common div.e 1997 pursuant to the NAIPUC's final order in the gas rate dends is dependent upon a number of factors meluding
.. case. This was offset by a reduced per therm rate per the earnings and financial conditmn of the Company and NMPUC's final order and lower off-system sales margin.
market conditions. Gas gross margin in 1996 was unchanged from 1995. Capita / Structur' IIigher off-system sales margiu and The Companys capitalization, including . .- higher retail sales margin as a result of current matmities of long-term debt, at cooler than nonnal weather in 1996 7;, ,, g,,,,,j,g g,y,,,,, December 31 is shown below: were offset by the absence of the gas t en sesa sees gathering and processing margin in Common 1996 due to the sale of the gas gathering Equity S2.5% 50.4 % 48.6 % _m_ and processing assets in 1995. Prefermi 'ne increase in the Energy Senices Stod 0.8 0.9 0.9 Business Unit operating revenues and gas @ Img-term purchased for resale in 1997 was due to Debt 46.7 48.7 50.5 the Companyt first full year of natural
'Ibtal gas marketing operations outside of New Capitalization
- 100.0 % 100.0 % 100.0 % Mexico. Gross margin decreased $4.6 million in 1997 from 1996 due mainly to
- Total capitalization does not include as debt the present value a negative margin from the gas marketing operations as a of the Company's lease obligations for PVNGS Units I and 2 result of unusual weather conditions on the West Coast t.nd ElP. and elsewhere around the cour.try contributing to the volatility in natural gas prices during the fourth quarter of RasuLTs OF 0PaRAYIONs 1997. The Company does not anticipate an earnings con-Basic earnings per share of common stock were $1.92, tribution from the Energy Senices Business Unit over the
$1.72 and $1.72 for 1997,1996 and 1995: respectively- next few years.
Earnings in 1997 increased substantially above the 1996 Other operation and maintenance expenses ("O&M") level due to increased electric gross margin and interest increased $13.2 million in 1997 from 1996 due to the fol-income. The sales of the gas gathering and processing lowing: (i) higher operating expenses of $4.3 million assets and the Companyk water division in 1995 had a sig- related to the Energy Senices Business Unit's operations; nificant positive earnings effect in 1995 and impacted (ii) higher distribution expense of $4.2 million as a result 1996 carnings by reducing operating margin, reducing of increased maintenance and service enhancement operating expenses, reducing interest charges and efforts; (iii) higher production expenses of $4.3 million increasing investment income. resulting from the write-off of obsolete inventory and Electric gross margin (operating revenues less fuel and undistributed stores expense at PVNGS and a severance purchased power expense) increased $20.1 million in pay accrual at SJGS; (iv) higher customer related senice 1997 from 1996 as a result of retail load growth and expenses of $2.9 million resulting from the Company's increased off-system sales margin as a result of continued customer enhancement program; (v) higher sales expense
~ - - - - - - - - - - - - - _ - - - - - _ _ - -
O F M E W WE N 4 eO A N D S uB S I 9 i A R I S S
- p U S L 8O SERVICE C O SI PA N V plan and higher interest income of $7.6 million as a result of $2.0.million and (vi) higher transmission expense of of increased temporary investments in 1996 and the
$1.1 million. Offsetting these increases were lower main-purchase of the PVNGS LOBS.
tenance expense at Four Corners due to a scheduled Significant 1995 items, net of taxes, included the fol-maintenance outage in 1996, lower gas and oil production lowing: (i) a gain of $12.8 million recognized from the expense, and lower administrative and general ("A&G") gas assets sale;(ii) a gain of 56.4 million recognized from laixar and benefit expense. the sale of the Company's water division;(iii) a $2.6 mil-Other O&M decreased $.3 million in 1996 from 1995 lion adjustment to the carrying costs related to gas take-due to the following: (i) lower production expenses of or-pay settlement amounts; (iv) a $1.9 million insurance
$7.9 million as a result of reduced scheduled maintenance recovery and (v) a $1.4 million adjustment to reclamation outages in 1996, decreased down time in 1996 for refuel- reserves for certain mining operations. Offsetting these ing outages and lower property taxes in 1996; (ii) a increases were: (i) additional regulatory reserves of $4.8 decrease of $6.3 million in gas production and pr xiucts million awl (ii) write-downs of $1.8 million for various extraction expense resulting from the gas assets sale in non-utility properties.
June 1995;(iii) lower pension and benefit costs of $4.2 Net interest charges increased $1.5 million as a result of an adjustment to
-ummmmusummuu muumusumumuurmillion in 1997 due to increased short-
[ the retirees' health care costs and (iv) a term borrowings for the purchase of the decrease in water division expense of ,997 st,ctric g,v,,,,, h1Cunomer (1/ast $200 million of PVNGS LOBS in
$3.0 million resulting fmm the safe of ou October 1996 and interest accruals on the the Company's water division in July balance due customers related to the gain 1995. These decreases were offset by 87 associated with the 1995 gas asset sale.
m g , higher A&G expense of $21.0 milhon as* Net interest charges decreased S3.2 due to increased labor, increased of6ce million in 1996 from 1995 as a result of O supplies and expense and higher outside j' . the retirement of 5132.7 million of services expenses. PVNGS LOBS in March 1995. Offsets so Depreciation and amortiution expens- the 1996 decrease were higher short-tenn c- I es increased $4.6 million in 1997 as a result 48% interest charges resulting from short-of additional utility plant and an adjust- tenn borrowings for the purchase of the ment recorded in 1996 for the over amor. PVNGS LOBS and an interest assess-tization of certain intangthie utility plant. _ ment from the Internal Revenue Service. Depreciation and amortization expens- Preferred stock dividend requirements decreased es decreased $2.7 milhon in 1996 from 1995 as a result of the sale of the Company's water division and gas assets in 1995
$3.1 million in 1996 as a result of the retirement of $64 million of preferred stock in August 1995.
and an adjustment recorded in 1996 for the over amortization of cer:ain intangible utility plant. OTHEB ISSUES Net other income and deductions increased SI1.9 mil. FACINO THE COMPANY lion from a year ago and decreased $18.8 million in 1996 from 1995. Significant 1997 items, net of taxes, includes! I GULATORY ISSUES interest income of $14.3 million resulting from the ELECWC R ATE C ASE investment in the PVNGS LOf>s and settlement of liti. The NMPUC issued an order in May 1997, requiring the gation. Significant 1996 items, net of taxes, included the Company to fde an electric rate case by September 1,1997, following: (i) a regtdatory liability of $10.1 million; (ii) a if the collaborative process failed to reach c<msensus on an
$1.7 million write-down of certain assets related to the industry restructuring plan by August 1, 1997. In Company's natural gas vehicle program and (iii) an addi-September 1997, the collaborative process was declared at tional accmal of $1.0 million for envimnmental liabilitiesan impasse. On October 21,1997, the collaborative process associated with the 1995 gas assets sale. Offsetting these was formally ended without a consensus (see " Restructuring decreases were a curtailment gain of $8.0 million related the E/ccrric Utility Industry" discussed above). As a result, to the change of the Company's dermed benefit pension
.eenose e avie: eoerAmv ee aea es seee amo eeoeis Aaseo on November 3,1997, the Company fded its electric rate THE 199Y GA5 R ATE CASE case. In the fding, the Company stated that although the lly order issued in February 1997, as subsequently modified Company could justify a $5.0 nJWe increase, it would in April 1997, in a pmceeding related to the cost of gas, the not seek to increase rates, stating d at rate stability is important NA1PUC ordered the Company to fde a new gas rate case.
in preparing for industry restructuring. On October 15,1997, the Company completed the filing of in the Companyt proposal for restructuring fded with the case, requesting a rate increase of $12.6 million. Also, the NAIPUC and the WUNR, the Company had offered the Company fded a motion for clarification and request for to reduce residential and small commercial customers rates variance voluntarily dischising that it had not perfonned by $10.0 million per year during the transition period, with and filed a study of fuel and unaccounted for gas usage in its another $5.0 million rate reduction upon the advent of full system as required by the NAIPUC in a 1990 order. He open eccess.%e Company stated that these substantial rate Company explained that it is currently perfonning such a reduction commitments in the context ofindustry restruc- study and only seeks a variance until the current study is turing may need to be modified if an acklitional rate reduc- completed. %e NAIPUC has scheduled public hearings tion results from this rate case. for this case to begin on Alarch 23,1998. The NA1PUC has scheduled public hearings for the rate ne NAIPUC staff and intervenors in the rate case filed case to begin on April 15,1998. The Company anticipates their testimony on February 16,1998. He NAIPUC staff a final order from the NA1PUC during 1998. The recommended an increase of $2.5 million to current rates Company is currently unable to predict the ultimate while the AG reconunended a deen ase of $4.9 million. Iloth outcome of this case. recommendations are significantly lower than the In conjunction with the Companyh ekctric rate case fil-Companyk request for a $12.6 million rate increase. Other ing, the Company requested the New Alexico Supreme parties to the case recommended certain adjustments to the Court (" Supreme Court") to issue an order disqualifying and Company's proposed rate increase. The Company is cur-removing the Chainnan of the NAIPUC from participating rently resiewing all testimony and will file its rebuttal testi- O in this case. uis request was based on his prior invoh ement mony on Alarch 13,1998.The Company anticipates a final in Company cases while he was with the New Alexico order from the NAIPUC during 1998. He Company is Attorney Genend ("AG's") office and in private practice. currently unable to predict the ultimate outcome of this case. The Company stated that becauw of positions taken by the Chairman in past cases, the Companyk due process rights '"T'887""T'""T'""'""T*" AND UNACCOUNTED FOR O AS COSTS PASSED for a fair heating would be violated. ne Supn me Court has inROuon twE PuStiC SERVICE COMPANY OF established a briefing schedule and will hear oral arguments NEW MEXlCO O AS SERVICES' PURCH ASED G AS on April 13,1998. Pending the decision, the Supreme Court ADJu$TuENr CL Au5E aruuos' Po AC 3 has issued a stay pmhibiting the Chainnan from participating In connection with the motion for clarification filed in the in the electric rate case. 1997 gas rate case concerning the study of fuel and unac-counted for gas, the NA1PUC staff requested that the THE 1995 OAS RATE CASE APPEAL g jg In 1995, the Company filed a request for a $13.3 million and unaccounted for gas costs that have passed through the increase in its retail natural gas sales and transportation Company's PGAC.The NAIPUC staffis concerned that a rates. On February 13,1997, the NAIPUC issued a final 1995 reduction in the rate for fuel and unaccounted for gas order in the gas rate case, ordering a rate decrease of collected from transportation customers may have unfairly approximately $6.9 million. In the order, the NAIPUC dis- shifted costs to sales customers. The NAIPUC staff's allowed, among other things, the recovery of certain regu- motion seeks an investigation into the amount of fuel and latory assets. De Company strongly disagrees with the unaccounted for gas associated with the Company's trans-NAIPUCs fmal order. De Company and the AG filed mission and distribution systems, the actual amount of fuel appeals with the Supreme Court. The Company is await- and unaccounted for gas that should have been alkicated to ing a decision by the Supreme Court, but is unable to pre- sales customen6 beginning inJuly 1995 and the amount, if dict the timing or the ultimate outcome. While the appeal any, ofimproper cost shifting that may have occurred as the is pending, the NAIPUC's final order remains in effect. result of the 1995 reduction. The Company has responded
N E W II E X 1 0 0 &N O O U S S I D 1 AR I $ $
- C 0 Of PAN Y OP PW GLi C S E RVaC 8
- NAIPUC and lack of standing to fde the case by the COA.
that it is not opposed to the requested investigation
%e NA1PUC has not ruled on the motion. He NAIPUC and believes that the results of the investigation will has not issued an order on this case. Once an order is issued, demonstrate that there has been no significant cost shifting the Company will review the fmdings and will evaluate its resulting from the reduction in the factor charged to options at that time.
transportation customers. S AN DIEGO G AS AND ELECTRIC COMPANY'S CITY OF ALSUGUERQUE (*CO A") RETAIL PILOT (*SDO&E*) COMPL AINTS LO AD AGOREG ATION PROGR AM The Company has a contract with SDG&E which requires In September 1997, the COA filed a petition with the SDG&E to purchase 100 A1W from the Company through NA1PUC to institute a Retail Pdot Load Aggregation April 2001. In 1993, SDG&E filed a complaint with the Prognun that would run from January 1,1998 throughFERC against the Company, alleging that certain charges December 31,1998.%e petitbn n quests that the NAIPUC under the 1985 power purchase agreement were unjust, provide:(i) an expedited registration / certification process;(ii)unreasonable and unduly discriminatory. In 1996, SDG&E an NAIPUC order' compelling transmission (by the fded a second complaint with the FERC against the Company) on behalf of COA;(iii) derivation of retail rates Company, again alleging that charges under the agreement exclusive of the Compny's prothiction costs;(iv) arbitration were unjust, unreasonable and unduly discriminatory. assistance to facilitate a "true-up" or reconciliation of any SDG&E has requested the FERC, in both complaints, to over or under recovered costs and (v) arbitration assistance to imestigate charges under the agreement. accommodate metering, billing, and collection processes. On August 22,1997, SDG&E filed a third complaint In January 1998, hearings on this case were conducted. with Atthe FERC against the Company, again alleging that the hearings, the Company stated its position as follows: (i) charges under the agreement were unjust, unreasonable and the Gimpany believes that only the New Alexico Legislature unduly discriminatory. SDG&E is again requesting that the has the authority to order retail competition or a pik,t on FERC investigate charges under the agreement. The g retail access;(ii) several pilots have already been conductedCompanyin responded to the third complaint on September other states and the key implementation issues to be 29,1997. The relief sought by SDG&E under the third addressed in a transition to a competitive environment have complaint is similar to that regt.ested under the first and already been identified and (iii) if state legislation were passed second complaints. He refund period requested in the regarding electric industry restructuring, a pilot as a compo- third complaint, if granted, would extend for a fifteen nent of that leg: station could 2 e useful ta test the enabling month period beginning October 21,1997. The FERC has systems and infrastructure necessary to implement that not legis-issued a nding on any of the three complaints and has lation on a small scale prior to implementation of full scale not indicated when or if any of these complaints will be con-open access.%e Company also identified numerous pmblems sidered. He relief, as a result of all three complaints, if with the COA proposed pilot program, as it is not structured granted, wouhl reduce annual demand charges paid by to pnnide benefits to anyone other than COA. SDG&E by approximately $11 million per year from the
%e NAIPUC staff presented an attemative proposal to date of the reling through April 2001, and could result in a the COA pilot pmposal, which was for a larger pilot that refund of approximately $27 to $31 million as of December included a broader mix of customer classes. At the hearing, 31,1997.The Company believes that all three of the com-the COA was receptive to the proposal and suggested that itplaints are without merit and intends to vigorously resist all be mn coincidentally with CONS pilot. The NAIPUC staff three complaints.
also proposed that the NAtPUC order a separate proceed-ing to identify what stranded costs, transition costs and """"^'""""""""^"**"" administrative costs would be incurred by the Company in The Company is currently marketing natural gas in whole-connection with a pilot and the proper methodology for sale markets outside of New Alexico in its Energy Senices quantifying any appropriate recovery. Ilusiness Unit. As of December 31, 1997, the Company The Company believes it is entitled to recover all ofits served over 120 end-user facilities in California and has costs, less avoided production costs, if a pilot is pursued, but many industrial and utility customer commitments has moved to dismiss this case for lack of jurisdiction by the
- oeetse eaavioa s e ei c a ce y or ci a = :s s x s e e aus sesoeasinosee throughout the Pacific Northwest, Rm.ky Atountain and late 1999. In addition, certain portions of the project could Alid-continent regions. The gas contract portfolio currently be delayed if new hardware or software upgrades are not extends through June 1999. available on time. As part of the Year 2000 project, the In 1997, the Company relied on physical commodity Company also plans to inquire of other companies with contracts to mitigate its price risk exp>sure. Reliance on which it transacts business regarding their Year 2000 com-physical commodity contracts subjects the Company to pliance issues in order to identify any potential acherse market, liquidity, performance anMher risks that can have impact to the Company, negative impacts on margins. In W , the Company expe- He Company is in the process of assessing the cost to riented margin kisses of $4.4 million on sales of approxi- resolve the impact of the Year 2000 issue on its operations, mately $115 million related to its gas marketing acti ities. and anticipates to complete its assessment by the end of 1998.
Although the Company attempts to manage the risks asso- The Company believes that if modificatiens, conversions ciated with its fixed price physical contracts in terms of con- and replacements are not completed timely, the Year 2000 tract volumes and prices, net open positions exist. To the issue could have a material adverse impact on the extent these net open positions exist, the Company is Company's operations. exposed to the risk of fluctuating market prices which may
'""""'"'88"'8 result in future kwses to the Company.
During 1997, the Company did not use derivative finan- The Company is committed to complying with all applica-cial instruments to manage its price risk expmme in the mar- ble emironmental regulations. Emiromnental issues have keting of natural gas. However, the Company anticipates presented and will continue to present a challenge to the using derivative furtncial ins'ruments beginning in 1998. Company. The Company has evaluated the potential
%e Company measures the risk in the Company's com- impacts of the folh> wing environmental issues and believes, modity portfolio in accordance with the "value-at-riska after consideration of established reserves, that the ultimate methodology. This methodology uses forward price curves outcome of these emironmental issues will not have a mate- G in the energy markets to estimate the size and probability of rial adverse effect on the Company's financial condition or future gains and losses. The Company also monitors com- results of operations.
pliance with policies approved by the Board relating to it-ELECTRIC OPERATIONS trading aethities. Santa Fe Grnerating Station (" Santa Fe Station") THE IMPACT OF THE YEAR 2000 lasuE The Company and the New Alexico Environment The Company is continuing to assess the impact of the Department ("NA1ET) have conducted investigations of Year 2000 issue on its reporting systems, equipment and the gmundwa;er contamination detected beneath the for-operations. The Year 2000 issue is the result of computer mer Santa Fe Station site to determine tne source of the programs being written using two digits rather than four contamination. De Company has been and is continuing to define the applicable year. As a result, the computer sys- to cooperate with the NA1ED regarding site investigations tems could recognize the year 2000 as the year 1900. This and remedial planning pursuant to a Settlement Agreement could result in a system failure or miscalculations causing between the Company and the N\tED. InJune 1996, the disruptions of operations. Equipment that contains Cmnpany received a letter from the NA1ED, indicating that embedded chips may also be affected by the Year 2000 the NAiED believes the Company is the source of gasoline issue. Equipment affected may range fmm hand held cal, contamination in a municipal well supplying the City of culators, elevators, routers, transfonners and generators. Santa Fe and groundwater underlying the Santa Fe Station. The Company plans to use both internal and external Further, the NAIED letter stated that the Company was resources to have its critical systems Year 2000 compliant required to proceed with interim remediation of the conta-t by mid-1999. The Company is currently replacing two mination pursuant to the New Alexim Water Quality maior software systems which are projected to be com. Contml Commission ("NA1WQCC") regulations. In July pleted during 1998 and will be Year 2000 compliant. 1996, the Company filed an appeal with the NA1WQCC Ilowever, the Company anticipates that the conversion of protesting the determination and directives contained in the certain non-critical systems may not be completed until NAIEDijune 199Gtter. Subsequently, negotiation meetings l
cue 6 se o aviss s e ce r a ce e or a a ca es s x s e e ano eocesosamise were conducted between the Company and the NAIED for contaminant plume in the deep groundwater was assessed and resuhs were reported to the NAtED.The Oxnpany cur-a resolution of the groundwater contamination issue, On October 3,19%, the Company and the NMED rendy is involved with the [.rocess to renew the Resource O nservation and Recovery Act (" RCRA") post-closure care signed an Amendment to the Settlement Agreement con-cerning the gmundwater contamination underlying the site. pennit for the facility. Remedial actions for the deep ground-water will be inwrporated into the new pennit. He As part of the Amendment, the Oxnpany agreed to spend approximately $1.2 million ("Setdement Amount") for cer- Company has proposed a rmnitoring program in cmjunc-tion with natural attenuation processes as the most cost effec-tain costs related to sampling, monitoring, and de-elopment and implementation of a remediation plan. tive approach for the deep gmundurer remediation. The
%e amended Settlement Agreement does not, however, Companyh current estimate to demmmission its retired fos-pmvide the Coropany with a full and complete release fmm sil-fueled plants includes appmximately $6.3 million in addi-potential funher liability for remediation of the groundwater tional expenses to complete the groundwater remediation contamhation. After the Company has expended the pmgram at Person Station. As part of the 6nancial assurance Settlement Amount, if the NA1ED can establish thmugh requirement of the Person Station Ilazardous Waste Pennit, binding arbitration that the Santa Fe Station is the source of the Company established a trust fund. The current value of the mntamination, the Company could be required to per- the trust fund at December 31, IW7, was $7.3 million. The fann further remediation that is determined to be necessary. remediation pmgram continues on schedule.
De Company ctmtinues to dispute any contention that the
. . . GAS OPERATIONS Santa Fe Stanon is the source of the groundwater contanu-Gas cad Mr Rundiadon nation and believes that insufficient data exists to identify the The New Alexico Oil Omservation Conunission ("OCD")
sources of groundwater contamination. The Company has issued an order, effective onJanuary 14, IW3, that affects the completed an aquifer characterization report and a grouml. gas gathering facilities h>cated in the San Juan Basin in O water quality report associated with the 40 day reactivation of n rthwestern New Alexico. The Bureau of Land the adjacent Santa Fe supply well inJuly and August of IW6. Alanagement ("B131") has issued a similar order. ne order Hese reports strongly suggest the groundwater contamina. pmhibits the further discharge of fluids associated with the tion does not originate fmm the Santa Fe Station site and has prmluction ofnatural gas into urdined earthen pits in speci-been drawn under the site by the pumping of the Santa Fe fled areas (designated as "vidnerable areas") in the San Juan supply well. In addition, otiwr urban wells in Santa Fe are Ihsin. The order aho required the submission of ek>sure likely to be vulnerable to contamination from off-site sources. plans for the pits where further discharge was prohibited. The Company and the NAIED, with the cooperation of The Onnpany has complied with the orders and has sub-the City of Santa Fe, have chosen a remediation plan pro. mitted and received approval for pit ch>sures fmm the OCD posed by a remediation contractor.Be City of Santa Fe, the and the BLM. Company and the NA1ED have entered into a These gas gathering f cilities were sold to Milliams Gas Memorandum of Understanding concernine dw chosen Processing - Blanco, Inc., a subsidiary of the Williams licids remediation plan and the operation of the me ipal well Senices Group, Inc., of Tulsa, Oklahoma (" Williams") on adjacent to the Santa Fe Station site in connection with car-June 30,1995. As a part of the purchase and sale agreement, rying out that plan. Construction of the remediation syvem the Company agreed to cease discharge to unlined earthen under the plan is expected to conunence in the second quar _ pits in designated vulnerable areas and to retain the respon-ter of 1998. The system is expected to be in operation early sibility for pit ch>sures for a stated period of time and to a in the third quarter of 1998. s ate ar anmunt. The Company has assessed the pits in Penon Generating Station (Tenon Station") accordance with OCD/B131 directives, and is now in the
. He Gimpany, m compliance with the NATED's Corrective process of closing pits and remediating them, .fi necessary, at Action Directive, detenmned that gmundwater contamina- wellhead h> cations withm. the designated vtdnerable area tion exists in the deep and shallow gmundwater at the Person Ihe Company has subnu.tted a groundwater managemem Station site.ne 0, >mpany is reqmred to delineate the extent plan to the OCD and has received approval of the plan, and of the contamination and remediate the contanunants in the . .
is proceeth.ng with delineation of groundwater contamina-groundwater at the Person 5,tation site. He extent of the
. poet as oseusea s e ca p a u y er so a o cm a x i s e amo enoesenasiee tion and, as necessary, cleanup, in accordance with the Company is currently assessing the potential imiuct to the approved plan. He Gunpany will address soil and ground-~ Company and the validity of the audit exceptions and claims, water contamination within the dollar and time limitations in 1996, the Onnpany was newified by BilP, fuel suppli-imposed by the purchase and sale agreement with Williams, er to SJGS, that the Navajo Nation has proposed to select and in accor lance with the requirements of the OCD. cenain properties within the San Juan and La Plata Alines in Alarch 1995, the Jicarilla Apache Tribe ("Jicarilla") (the " mining properties") pursuant to the Navajo-Hopi enacted an ordinance directing that unlined surface Land Setdement Act of 1974 (the "Act"). %e mining prop- ;
-impoundments kicated within emimnmentally sensitive erties are operated by BIIP under leases from the Bl31 and j areas be remediated and closed by December 1996, and that comprise a portion of the fuel supply for SJGS. An adminis-all other tmlined surface impoundments on jicarilla lands be trative appeal by BHP is pending. In the appeal, BilP ,
remediated and closed by December 1998. In 1995, the expressed concern that transfer of the mining properties to ) Company received a claim for indenmification by Williams, the Navaja Nation may subject the mining operations to tax-the purchaser of the Companyt gas gathering and process- ation and additional regulation by the Navajo Nation, both ing assets, for the emimnmental work required to comply of which could increase the pr:ce of coal that might 1mten-with theJicarilla ordinance. %e Company submitted a clo- tially be passed on to SJGS through the existing Coal Sales sure/remediation plan to theJicarillas, which was appmved. Agreement. A stay of all actions by the Bill has been The Companyt remediation work pursuant to the plan ordere i by the Interior Boani ofI,and Appeals pending res-cmmnenced in mid-1996, and the costs of remediation are olutim of the issues on appeal. He Company is monitoring being charged against the $10.6 million indemnification cap closely the appeal and other developments on this issue and contained in the purchase and sale agreement between the will continue to assess potential impacts to SJGS and tht. I Company and Williams. The Company met the require- Company's operations. Currently, the Company is unable to ment for ch> sing and remediating pits within the emiron- predict the ultimate outcome of this matter but does not mentally sensithe area by December 1996, and anticipates believe it will have a material adverse effect on the O ck> sing and remediating all other pits associated with the gas Comi anyk financial condition w results of operations. gathering and processing assets by the December 1998 deadline specified in the ordinance. OF CERTAIN TYPES OF REOUL ATION C0 AL FUEL 5UPPLv As described in note 3 to the cons (Aidated financial state-The coal requirements for SJGS are being supplied by San ments, the Company is subject to the pmvisions of Juan Coal Company ("SJCC"), a wholly owned subsidiary of Statement of Financial Accounting Standards ("SFAS")No. ElIP Alinerals International, Inc. (" BHP"), from certain 71, Arountmgfer the @ cts of Certain Types ofRrgidation. In Federal, state and private coal leases under a Coal Sales the event the Company determines that it no k>nger meets Agreement, pursuant to which SJCC will supply processed the criteria for following SFAS No. 71, the accounting coal for operation of SJGS until 2017. The primary sources impact would be an extraordinary, non-cash charge to oper-of coal are a mine adjacent to SJGS and a mine kicated ations of an amount that could be material. Criteria that nuy appmximately 25 miles northeast of SJGS in the La Plata give rise to the dismntinuance of SFAS No. 71 include: (1) area of northwestern New Alexico. increasing mmpetition that restricts the Companyk ability to establish prices to recover specific costs and (2) a significant During the thini quaner of 1997, the Canpany was noti-fled by SJCC of certain audit exceptions identified by the change in the manner in which rates are set by regulators Federal Alinerals Atanagement Senice for the period 1986 from cost-based regulation to another fann of regulation. through 1997. These exceptions pertain to the valuation of The Company periodically reviews these criteria to ensure cual for purposes of calculating the Federal coal myalty. that the mntinuing application of SFAS No. 71 is appropri-ate. Based on a current evaluation of the various factors and l Primary issues include whether coal processing and trans_ conditions that are expected to impact future cost recovery, i portation costs should be included in the base value of La Plata coal for royalty detennination. In addition, the the Onnpany believes that its regulatory assets (net of related L Company was notified of claims by a private royahyhokler regtdatory liabilities), including those irlated to generatian, involving royalty valuation at the La Plata Aline. He are pmbable of future recovery. i
ar e a er asasee ame eusssesaanae. avatis eaavisa e e a r a os y e ACCoUNTINo STANDAnDS Comprehensive income is the total of net income and all other nonowner changes in equity. SFAS No.13 I requires a Em'inmmental Remediation Liabilities. Effective January 1, public company to report selected information about its 1997, the Company adopted the provision of the American reportable operating segments in annual and interim con-Institute of Certified Public Accountants' Statement of Position (" SOP") 96-1, Environmental Remediation densed financial statements. His statement introduces a new model for segment reporting, called the " management Liabilities. His Statement pnnides authoritative guidance appnnch" for identifying operating segments. Operating for recognition, measurement, display and disdosure of segments are compments of an enterprise for which discrete envinemental remediation liabilities in financial state-fmanJa! infonnation is asailable, that is enluated regularly ments. The Company previously recorded environmental liabilities of $24.0 million for its retired fossil-fueled plants. by the chief operating decision-maker within a company in order to make operating decisions and assess performance. Approximately $14.4 million of the $24.0 million has been expended through December 31, 1997. The adoption of osscLosune nsoanotwo SOP 96-1 did not have a material impact on the Company's i yonwano.Looniwa s7aTeMeNYS l fmancial position or results of operations. . De Private Secun. .nes Litigation Refonn Act of 1995 (the Nudear Plant Dewmminioning. The staff af the Secun. .nes 1 "Act") pnnides a " safe harbor" for forward-looking state-and Exchange Cmunu. .ssion ("SEC") has questioned certain ments to encourage companies to provide prospective of the current accounting practices of the electnc utd. ity . mformation about their companies without fear of h. .aganon mdustry regarding the recognition, measurement and das- . so long as those statements are idenu.fied as forward-kiok-sification of decormnissioning costs for nudear generating ing and are accompanied by meaningful, cautionary state-stations in financial statements of electne unh. .oes. In ments identifying important factors that could cause actual resymse to these questions, the h,.nancial Accountmg resuhs to differ materially from those projected in the state-Standards Board ("FASB") has added a project to its agenda ment. Accordingly, the Company hereby identifies the fol-O- to review the accounting for ck>sure and removal costs, lowing important factors which could cause the Company's mduding decommissioning of nudear power pfants. If cur- actual financial results to differ materially from any such i . rent electric utih.ty mdustry accounting pmetices for nudear , forecasted, estimated or mu c m t pm ! power plant deemnmissioning are changed, the annual pro-budgeted by the Company in forward-koking statements: vision for decommissioning could increase relative to 1996, (i) adverse actions of utility ugulatory commissions; (ii) util-and the estimated cost for decommissioning could be ity industry restructuring; (iii) failure to recover stranded recorded as a liability (rather than as accumulated deprecia-amts v) fade to obtain new customers or retain existing tion), with recognition of an increase in the cost of the rdat-cuswen; @) inabh m cany out markedng and sdes ed nuclear peer plant. The Company does not bdieve that p ans; (vi) adverse impacts resulting from emironmental such changes, if required, would have a material advene regul donsdsii) Ims of favorable fuel supply contracts;(viii) 1 effect on results of operations. fanure w obtain water rights and rights-of-way; (ix) onera-Reporting Comprehensive income and Disdosure about nonal and emironmental problems at generating stations; Segments ofan Enterpri e and Relatedlnfbnnation. During (r) weather conditions and (ri) failure to maintain adequate 1997, FASB issued SFAS No.130, Reporting Comprehensive
"*"' 5""5"" '*P*'UY' l Income and SFAS No. I31, Disdosure about Segments ofan any of the foregoing factors discussed have been Enterprhe and Rdated Information. These statements are addressed in the Company's previous fdings with the SEC not efTective until 1998. SFAS No.130 requires the reparting pursuant to the Securities Exchange Act of 1934. He fore-and display of comprehensive income and its components in go ng redew Uanon punuant m the Act should not be financial statements. The objective of this statement is asted as exhausdve or as any admission regarding the to report a measure of all changes in equity that resulted adequacy of disdosures made by the Company prior to the from transactions and other economic events of cEcaive date of the Act.
l the period other than transactions with owners. i 1
e GP W@ L99 05 El W 6 8 5 8 4 $$ P & 01 V SF 10 5 O C$ R I IOO & IC 3 9 if S S 69,1 433 3$ l FINANCIAL STATEMENTSAND SUPPLEMENTARY DATA I M AN AGEMENT'S RESPONSISILITY FOM ' REPORT OF INDEPENDENT FIN ANCI AL STATEMENTS PUBLIC ACCOUNTANTS The management of Public Senice Company of New To the Board of Directors and Stockholders of Alexico (the
- Company") is responsible for the prepara- Public Service Company ofNew Mexico:
tion and presentation of the accompanying consolidated We have audited the accompanying consolidated balance financial statements. The consolidated financial state-sheets and statements of capitalization of Public Service ments have been prepared m. confonnity with generally
. Company of New Afexico (a New Alexico corporation) and accepted accounting principles and include amounts that
, subsidiaries as of December 31, IW7 and IW6, and the are based on infonned estimates and judgments of man-related consolidated statements of earnings, retained earn-agement. Alanagement maintains a system of internal
. ings (deficit), and cash flows for each of the three years in accounting controls uhich it believes is adequate to pro .
. the period ended December 31, lW7. These financial vide reasonable assurance that assets are safeguarded, statements are the resp >nsibility of the Company's manage-transactions are executed m. accordance w>.t h management
. ment. Our responsibility is to express an opinion on these authorization and the financial records are reliable for
. financial statements based on our audits.
preparing the consolidated financial statements. The sys-tem ofinternal accounting controls is supported by writ- We conducted our audits in accordance with generally ten policies and procedures, by a staff ofinternal auditors accepted auditing standards. Those standards require that who conduct comprehensive internal audits and by the we plan and perfim the audit to obtain reasonable assur-selection and training of qualified personnel. The board of ance about whether the financial statements are free of directors, through its audit committee comprised entirely material misstatement. An audit includes examining, on a of outside directors, meets periodically with management, test basis, evidence supportmg the amounts and dischisures . internal auditors and the Company's independent auditors in the fmancial statements. An audit also includes assessing to discuss auditing, internal control and financial report- the accounting principles used and significant estimates G ing matters. 'lh ensure their independence, both the inter- made by management, as well as evaluating the overall nal auditors and independent auditors have full and free financial statement presentation. We believe that our audits access to the audit committee. The independent auditors, provide a reasonable basis for our opinion. Arthur _ Andersen L.LP, are engaged to audit the Company's consolidated financial statements in accor- In our pini n, the financial statements referred to alx>ve dance with generally accepted auditing standards. P'"'*"' f*I'IY' I" *II ****'I*I "P"'' the fmancial p>sition of Public Senice Company of New Alexico and subsidiaries as of December 31, IW7 and IW6, and the results of their operations and their cash flows for each of the three years in the period ended December 31, lW7 in confbrmity with generally accepted accounting principles. AlmIUR ANDERSEN LLP Albuquerque, New Alexico l February 10, IW8 I i l i
- - - - - - _ _ ___ ~ ~~~-~-- - _ ~ __ _
E e + puoLeo 9 8 e v:e c.s eoeeauy or. nE w eaaaeo aaD auoeieiaR CONSOLIDATED STATEMENTS OF EARNINGS VtaR ENDED DECEMsER 31, 1996 1995 1997 (in thawatult emyt per sban amounU) Operating Revenues: $ 722,438 5 645,639 'S 584,284 Electric 294,769 227,301 217,985 Gas 118,060 10,446 Energy Services -
- 6,196 Water 883,386 808,465 1,135,267 Total operating revenues' Operating Expenses: 170,807 140,752 235,508 Fuelandpurchased1 mer 103,574 94,299 169,758 Gas purchased for resale 121,728 9,485 Gas purchased for resale and other - Energy Services 263,432 257,627 273,692 Other operation expenses . 49,694 55,809 52,629 Maintenance and repairs 78,116 80,865 82,702 Depreciation and amortization 34,864 35,531 36,871 Tues, other than income taxes 39,395 30,194 38,334 Income taxes 757,367 695,077 1,011,222 Total ogwrating expenses 126,019 113,388 124,045 Operating income Other Income and Deductions: 2,367 40,707 21,548 Other (1,099) (20,599)
(8,384) Income tax expense 13,164 1,268 20,108 Net other income and deductions 137,209 127,287 133,496 Income before interest charges interest Charges: 49,009 52,637 Q 46,670 5,297 Interest on long-tenu debt 9,544 5,698 f 57,934 Other interest charges 56,214 54,707 Net interest charges 75,562 80,995 72,580 Net Earnings 586 3,714 586 Preferred Stock Dividend Requireinents $ 71,9 % 5 71,84R
$ 80,409 Net Earnings Available for Conumm Stock 41,774 41,774 41,774 Average Number of Common Shares Outstanding 1.72 5 1.72
$ 1.92 5 Net Earnings per Common Share (llasic) 5 1.72
$ 1.91 5 1.71 Net Earnings per Common Share (Diluted) 0.36 5 -
5 0.63 S Dividends Paid per Share of Common Stock CO N S OLID ATE D STATEMENTS OF RETAINED EARNINGS (DEFICIT) VEaR ENDED DECEMBER 31, 1996 1995 1997 (in thawands) S 77,185 5 25,243 $ (46,006) Balance at Ileginning of Year 72,580 75,562 80,995 Net candngs -
- (599)
Redemption of cumulative preferred stock Dividends: (586) (3,714) (586) Cumulative preferred stock (28,406) (20,052) - Common stock $ 129,188 $ 77,185 5 25,243 Balance at End of Year 7be aannpanying notes are an integralpart of thesefinancialstatements.
I
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. l i
. 1 l . C O N S O L I D A T E D . R A L A N C E' SHEETS !
j AsssTs vaan suoso onesussa si, seer. isee . (in thousands) g Utility Plant, at original cost except PVNGS:
. Electric plant in senice $1,958,912 $1,918,238 Gas plant in service 441,045 424,827
' Energy services plant in service - 1,241 Common plant in service 43,413 40,005 Plant held for future use 551 639 2,443,923 2,384,950 Less accumulated depreciation and amortization 1,003,086 937,228 1,440,837 1,447,722 Construction work in progtrss ' 104,497 76,038 Nuclear fuel, net of accumulated amortization of $21,263 and $20,413 27,816 28,933 Net utility plant 1,573,150 1,552,693
. Other Property and Investments: . ;
Non-utility property, net of accumulated depreciation of $2,146 and $1,774 4,502 3,434 I Other investments, at amt 300,438 250,834 Total other propeny and investments 304,940 254,268 Current Assets: I j Cash . 8,705 -11,125 ' Temporary investments, at cost 9,490 9,128 Receivables, net of allowance for uncollectible accounts of $783 and $709 - 216,305 197,025 income taxes receivable - -18,825 Fuel, materials and supplies, at average cost 33,664 41,260 Gas in underground storage, at average cost 13,158 2,679 Other current assets 4,509 6,632 ' @- Total current assets 285,831 286,674 Deferred charges 149,811 136,679
$2,313,732 $2,230,340 C APITALIZ ATION AND LI ABILITIES Capitalization:
Common stock equity: Common stock outstanding - 41,774 shares $ 208,870 $ 208,870 Additional paid-in capital 469,073 470,358 Excess pension liability, net of tax (2,727) (2,102) Retained earnings since January 1,1989 129,188 77,185 Tbtal common stock equity 804,404 754,311 Cumulative preferred stock without mandatory redemption requirements 12,800 12,800 Long-term debt, less current maturities 713,995 713,919 Total capitahzation 1,531,199 1,481,030 Current Liabilities:
- Short-term debt - 114,100 100,400 Accounts payable 154,501 130,661 Dividends payable 7,248 5,159 Current maturities oflong-tern debt . 350 14,970 Accrued interest and taxes 24,161 23,356 Other current liabilities 26,102 25,477 Total current liabilities 326,462 300,023 Deferred Credits:
Accumulated deferred investinent tax credits 57,823 62,258 Accumulated deferred income taxes 121,353 110,266 Other deferred credits 276,895 276,737 Total deferred credits . 456,071 449,261 Comminnents and Contingencies
$2.313.732 $2,230,314 Tk aawnpenymg notes err en integruipart ofthmfinamialstatemenu.
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7
. . . i .:. .. api
. .3(aav- .i . . te CONSOLIDATED 5TATEMENTS or CASHFLOWS YEAR ENDED DEeEMBER as, voor sees sees-(in thousandr)
Cash Hows From Operating Acthities:
$ 80,995 '$ 72,580 $ 75,562 j Net earnings . .
J Adjustments to reconcile net earnings to net cash flows I from operating activities: 92,588 94,924 90,458 Depreciation and amortization (4,436) (4,476) (4,830) Accumulated deferred investment tax credit 11,080 31,436 1,622 Accumulated deferred income taxes (309) (39,050) - Gain on sale of utility pro [erty
- 2,810 1,445 Writedown of natural gas vehicle program '
- (13,316) -
Curtailment gain on defmed benefit pension plan Changes in certain assets and liabilities: 4,554 (83,416) 795
' Receivables (2,883) 5,795 (26,505)
Fe:1, materials and supplies (11,190) 5,190 6,731 Deferred charges 23,808 36,930 (11,527) Accounts payable 805 (3,500)~ (1,218) Accrued interest and taxes 2,455 12,655 29,185 Deferred credits (371) (9,279) 5,615 Other 13.381 22,343 17,671-Other, net 213,122 165,901 148,114 Net cash flows from operating acrhities Cash Hows From Investing Acthities: (128,371) (103,087) (107,666) Utility plant additions Increase in nuclear decommissioning trust (23,000)- - - 5,018 - - O Return of principal of PVNGS lease obligation lxands
- .333 206,482 Utility plant sales
- 702 (801)
Other property sales ~ Net increase in other property and investments (6,814) (14,706) - Escrow for purchase of PVNGS lease ohiigation bondr, (28,900) (208,446) .- Decrease (increase) in temporary investments, net (363) 86,844 (21,45I) (182,430) (238,360) 76,564 Net cash flows from investing activities Cash Flows From Financing Activities: Redemption of PVNGS lease obligation bonds
-- - (132,663)
Redemptions and repurchases of preferred stock
- - (64,175)
- Bond redemption premium and costs (3,693) (5,158) (505)
Proceeds from (repayments of) asset securitization (13,900) 100,400 18,758 Repayments oflong-term debt (14,970) (326) (57,768) Trust lxurowing for nuclear deconunissioning 23,000 - - Increase in short-term debt 4,600 - - Exercise of employee stock options (1,285) - - Dhidends paid (26,864) (15,560) (5,126) Net cash flows from financing activities (33,112) 79,356 (241,479) Increase (Decrease)in Cash (2,420) 6,897 (16,801) Cash at Beginning of Year 11,125 4,228 21,029 Cash at End of Year S 8,705 $ 11,125 $ 4,228 Supplemental cash flow disclosures:
. interest paid S 57,302 $ 55,480 '$ 63,366 Income taxes paid, net of refunds $ 20,175 $ 31,617 $ 52,405 Cash consists of currency on hand and demand degxisits. i 7he ammepanying notes an an meegmlp,nt ofkrfnunnktstatements.
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- P. 9 0 4 0 0 8 E CW IOE' 8 9 le 9 A de Y 99- NE 3 25 E E I 99 AN9 8 U S$49I AEI E S '
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-CONSOLIDATEDSTATEMENTS OF CAPITALIEATION VEAR kNDED DECEMBER 31,
-seef test
.. (in thetam&)
Common Stock Equity: Cmmnon Stock, par value $5 per share $ 208,870 $ 208,870. ]
~ Additional paid-in capital 469,073 470,358 !
, & cess pension liability, net of tax - (2,727) (2,102) l Retained earnings sinceJanuary 1,1989 129,188 77,185 local common stock equity 804,404 754,3 I i l
SNARES OUTSTANDING AT CURRENT ; STATED D E C E M B E R 31, ' R E DE MPTION WALUE 1997 PRICE I Cumulative Preferred Stock: ' Without mandatory redemption requirements: 1965 Series,4.58% $100.00 128,000 $102.00 12,800 12,800 l Long-Term Debt: Issue and Final Maturity Interest Rates First mortgage bonds: l 1997- 57/8% - '14,650 l 1999 through 2002 - 71/4% to 81/8% 42,556 42,876
' 2005 through 2007 81/8% to 91/8% 43,276 43,276 2008 9% 54,374 54,374 Pollution control revenue lxands: $
2007 through 2026 5.7% to 61/2% 574,345 537,045 2022 Variable rate - 37,300 lbtal first mortgage Ixinds 714,551 729,521 Other, including unamortized premium and (discount), net (206) (632) lbtallong-term debt 714,345 728,H89 Less current maturities 350 14,970 Long-tenn debt, less current maturities 713,995 713,919 Total Capitalization $1,531,199 $1,481,030 The samrywnsmg notes are an integralpen ofthemjhun&d statemenn. l l t 4
- l. i L l
! I
,ent ee oaaeie: easp aay er aea =aaeee aao euoeaoaaanse NOTES TO CONSOLIDATED FINANCIAL STATEMENTO Ikceml> cry, s997,1996 and1995 . til summany or sionirscaNT voting interest. All significant intercompany transactions accounrewa roucias and bbnces have been elindnated.
Organiaation Use ofEstimates Public Service Gmpany of New Alexico (the " Company") is The preparation of financial statements in conformity with an inwstor-owned utility company engaged in the generation, generally accepted accounting principles requires manage-transmission, distribution and sale of electricity. He ment to make estimates and assumptions that affect the Company provides retail electric senice to a large area of rep rted amounts of assets and liabih .ues and disclosure of north central New Alexico, including the cities of c ntingent assets and liabilities at the date of the hnancial Albuquerque, Santa Fe, Rio Rancho, Las Vegas, Belen and statements and the reported amounts of revenues and Bemalillo. He City of Albuquerque (" COA"), Bernalillo expenses during the reporting period. Actual recorded County and the City of Las Vegas franchises expired in 1992, amounts could differ from those estimated. 1997 and 1996, respectively. Customers in the area coven:d by the expired franchises represent approximately 40.2%,8.6% grifj,ypf,nt ) and 1.2%, respectively, of the Companyt 1997 total electric - Unlity plant, with the exception of PVNGS ' Unit 3 and the operating revenues, and no other franchie area represents Company's purchased 22% beneficial interests in the more than 6.1% %e Company continues to collect and pay PVNGS Units I and 2 leases, is stated at original cost, which franchise fees to both the COA and the City of Las Vegas, indudes capitalized payroll-re'ated costs such as taxes, pen-De Company currendy does not pay franchise fees to sion and other fdnge benefits, administrative msts and an Bernalillo County. The Company remains obligated under allowane for funds used during construction. Utility plant state law to provide senice to customers in the franchise area includes cenain electric assets not subject to regulation. He even in the absence of a franchise agreement. The Company results of operations of such electric assets are included in also provides retail electric senice to Deming in southwestern operating income. C- New Alexico and to Clapon in northeastern New Alexico. It is Company policy to charge repairs and minor The Company is also engaged in the transmission, distribu- replacements of property to maintenance expense and to tion and sale of natural gas within the State of New Alexico. charge major replacernents to utility plant. Gains or losses The Company distributes natural gas to most of the major resulting from retirements or other dispositions of operat-communities in New Alexico, including Albuquerque and ing property in the nonnal course of business are credited Santa Fe. In addition, in pursuing new business opportunities, or charged to the accumulated provision for depreciation. the Company is focusing on energy and utility related aethi-ties under its Energy Senices Business Unit. nese activities Depreciation and Amortization will provide energy marketing and energy management Provision for depreciation and amortization of utility plant senices, the marketing of natural gas outside of New Alexim, is made at annual straight-line rates approved by the managanent senices for water and wastewater systems and NAIPUC. The average rates used are as follows: utility related management and operation senices for Federal ieer sees i es installations and other large commercial institutions. %e Electric plant 3.33 % 3.32 % 3.32 % Company is also operating the City of Santa Fe's water system. Gas plant 3.23 % 3.27 % 3.21 % Systems officcounts Common plant 7.60 % 7.00 % 9.61 %
%e Company maintains its accounts for utility operations primarily in accordance with the unifonn systems of Effective January 1,1995, electric plant depreciation accounts prescribed by the FERC and the National rates were revised and include a prmision for the recovery Associauon of Regulatory Utility Commissioners, and of fossil-fueled plant decommissioning costs approved by -
adopted by the NAIPUC. the NA1PUC m. 1994. Gas plant depreciation rates were Principles ofConsolidation approved by the NA1PUC and reviwd in Alarch 1997.
%e puisi n for depreciation of certain equipment is The consolidated financial statements include the accounts of charged to clearing accounts and subsequently alkicated to the Company and subsidiaries in which it owns a majority operating expenses or construction projects based on the
. a s :: L ee eecvisa e s e r a ci v er :: sa ts xsee amo e is m e i o s a a n a e 1 l l l l use of the equipment. Depreciation of non-utility pmper- any changes in tax rates applied to accumubted deferred I ty is computed on the straight-line method. Amortization income taxes may not be immediately recognized because of nuclear fuel is computed based on the units of produe- of ratemaking and tax accounting prmisions contained in tion method. the Tax Refonn Act of 1986. Items accorded flow-through i treatment under NA1PUC orden, deferred income taxes i Nudear Decommissioning i and the future ratemaking effects of such taxes, as well as i The Company accounts for nuclear decommissioning costs con esponding regulatory assets and liabilities, are recorded
. on a straight-line basis over the estimated useful life of the in the financial statements.
facilities. Such amounts are based on the net present value of expenditures estimated to be required to decommission Anounting Standards the plant. Enrinmmental Remediation Liabilities. Eficctive January 1, l Fuel and Purchased Power Cost Adjustment Clause 1997, the Company adopted the provisions of The 1 ("FPPCAC") American Institute of Certified Public Accountants j Statement of Position (" SOP") 96-1, Environmental The C,ompany uses the deferral methal of accounting for fuel and purchased power costs for its finn-requirements Remediation Liabilities. This Statement provides authori- . l tat ve gu dance for recognition, measurement, display and wholesale customers. Such amounts are reflected in subse-quent periods under a FPPCAC approved by the FERC. disclosure of emironmental remediation liabilities in financial statements. The Company previously recorded Purchased Gas Adjustment Clause ("PGAC") emironmental liabilities of $24.0 million for its retired The Company uses the deferral methal of accounting for fossil-fueled plants. Approximately $14A million of the gas purchase costs which are settled in subsequent periods $24.0 million has been expended as of December 31,1997. under gas adjustment clauses. Future recovery of these costs The adoption of SOP 96-1 did not have a material impact is subject to approval by the NAIPUC. on the Company's fmancial position or results ofoperations. g Amortization ofDebt Discount, Premium and Expense A"0""ti"Kfor hansfen and SarMng of Rnandal Auen and Ertinguishment of Liabilities. In June 1996, the FASB Discount, premium and expense related to th: issuance of . nssued SFAS h,a.125, Aucunting for Transfers and long-term debt are amortized over the lives c f the respec- .. . . Serviang of Financial Assets and Extinguishment of rive issues. In connection with the retirement oflong-tenn .
. Liabilities. This Statement establishes, among other things, debt, such amounts associated with resourtes subject to new criteria for determining whether a transfer of financial NAIPUC regulation are amortized over the lives of the assets should be accounted for as a sale or as a pledge of respective issues. Amounts asociated with the Company's collateral .m a secured lx>rrowing. SFAS No.125 also estab-firm-requirements wholesale cu;tomen and its resources lishes new accounting requirements for pledged collateral.
excimled fmm NAIPUC retail rates are recognized imme-SFAS No.125 is effective for all transfers and servicing of diately as expense or income as they are incurned. financial assets and extinguishments oi nabilities occurring Income 7 ares after December 31,1996, is to be applied pmspectively, and
' The Company reports income tax expense in accordance earlier or retroactive application is not pennitted.
with SFAS No.109, Axounting for income laxes. SFAS Nudear Plant Demmmizioning. The statf of the SEC has No.109 requires deferred income taxes for temix>rary dif- questioned certain of the current accounting practices of ferences between financial and income tax reponing to be the electric utility industry regarding the recognition, mea-recorded using the liability method. Deferred income taxes surement and classification of decommissioning costs for are computed using the stattm>ry tax rates scheduled to be nuclear generating stations in financial statements of elec-in effect when the temporary differences reverse. Current tne utilities. In response to these questions, the FASB has NA1PUC jurisdictional rates include the tax effects of the added a project to its agenda to resiew the accounting for majority of these temporary differences (nonnalization), closure and removal costs, including deconunissioning of Recovery of reversing temporary differences presiously nuclear power plants. If current electric utility industry
- accounted for under the flow-thmugh method is also includ- accounting practices for nuclear power plant decommissioning ed in rates charged to customers. For regulated operations,
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i poet se esevsea eonesev or c a ts se s a s e e a ci o suoesoiassas i l I ! I are changed, the annual pnnision for decommissioning Employees, and related interpretations in accounting for its f could increase relative to 1997, and the estimated cost for plan. Accordingly, no compensation cosc has been recognized decommissioning could be recorded as a liability (rather for its fixed stock option plan. than as accumulated depreciation), with recognition of an ,
' increase in the cost of the related nuclear power plant. %e ,
l Competition and restructuring of the electric utih,ty mdus-Company does not believe that such changes, if raluired, would have a material adverse effect on results of opera. try contmue to be key issues facing the Company. Efforts to advance and determine the eventual form of mdustry tions. restructuring continued during 1997. Risk Management Actititiet At the state level, the Company proposed in April 1997 i ne Companyk Board of Directors (" Board") approved a that the NAiPUC reconvene the proceedings involving the Corpirate policy statement regarding risk management NAIPUC's Notice ofInquiry into the restructuring of the actkities. The Company is exposed to market risk fmm electric industry, in an attempt to arrive at consensus legis- f changes in certain energy related commodity prices. lation to be presented to the 1998 session of the New Although the Company is allowed to enter into certain Alexico Legislature. In Alay 1997, the NatPUC issued an derivative transactions to manage the vdaulity relating to order accepting the Compmy's proposal for a collaborative the price exposure, the Company did not use derivative effort, and the proposal for a series of meetings to be held fmancial instruments to hedge this price risk exposure dur- among all interested parties. The parties held several meet-ing 1997. Because market prices of certain energy com- ings in which the Company actively participated. IIowever, modities depend on a number of unpredictable factors, such in September 1997, the collaborative process to draft legis-as weather, the Company is currently managing the restdt- lation was declared at an impasse due to disagreement on ing volatility using commodities contracts. Beginning in issues regarding the divestiture of generation end energy O 1998, the Company is planning to use derivative financial service units from electric distribution and transmission instruments, including exchange-traded fmancial futures, . systems, and the recoverability of stranded costs. , options, swaps and other derivatiw financial instruments as Although the parties could not reach agreement, the j part of an overall risk-management strategy. These instru- Company filed its own proposal for industry restructuring
- ments are to be used only as a means of hedging exposure to in September 1997 with both the NA1PUC, and the Water,
! price and interest-rate risk connected to anticipated transac- Utilities & Natural Resources Cmnmittee ("WUNR") of tions or existing assets and liabilities.The Company does not the New A1exico Legislature, intend ro open a derivative position for speculative purposes. He Company's proposal called for an immediate rate Once the Company enters into derivative transactions, reduction of $10 million per year for residential customers deferral (hedge) accounting will be applied only if the deriva- from the effective date of proposed legislation until open tive fmancial instrument reduces the risk of the underlying access without the need for a rate case. He propisal also hedged item and is designated at inception as a hedge with called for full retail competition no later than January 1, respect to the hedged item. Additionally, the derkative must 2001. Other parts of the Companyt proposal included an result in payoffs tlut are expected to be inversely correlated to offer to create a regulated distribution " wires and pipes" those of the hedged item. Correlation will be assessed month- company dedicatea only to the delivery of electricity and ly and measured on a rolling three month average. If a deriv- natural gas. Other senices, usually associated with distribu-ative instrument ceases to meet the criteria for deferral or set- tion, such as meter reading, billing and customer senices tlement acmunting, any subsequent gains and kisses wiU be would be prwided through competitive markets. The recognized in income. If a hedging instrument is sold or ter- Company offered to assume the risk of stranded cost recov-minated prior to maturity, gains and losses will continue to be s v on all fossil fuel generation and on PVNGS Unit 3 f
~ deferred until the hedged item is recognized in income. i :ch was previously excluded from New Alexico jurisdic-t mal rates. IIowever, the Company would recover all fixed Pnfonnance Stock Plan costs associated with PVNGS Units 1 and 2 through a non.
%e Company continues to apply Accounting Principles bypassable " wires charge" from 2001 to 2016. ,The propos-Board ("ApB") Opinion No. 25, Auvrmringfsr Srock Izued ro al also called for certain credits to stranded costs which l
eaot ie oeaviea eoecauv or aae aamioe a=3 seoessiamise l
]
4 i would effectively shorten the time period for recovery.The ed. In addition, sample legislation was attached to the ! Company currendy estimates that if the mrket clearing report, giving either the NAIPUC or the PRC authority to price for power, which represents the cost of generation at conclude matters relating to electric industry restructuring. , the plant, fell to 3.0 cents /lGVh, it may incur an after-tax The report was issued as a result of a NAIPUC case and, write-off of approximately $176 million related to its fossil with the issuance of the report, the case was closed. The fuel generation if the Company assumes this risk. De NMPUC's draft legislation was not introduced during the Compr.nyt proposal was supported by various parties to the 1998 legislative session. Ilouse Alemorial 27, the only mea-collaborative process, including Enron Corporation, the sure dealing wita restructuring, passed the Ilouse. j New Alexico Retail Association, Southwestern Public Atemorial 27 stated the intent of the legislature to address i Senice Company ("SPS"), the United States Executive the issue of electric industry restructuring in the 1999 ses-
)
Agencies and the International Brotherhomi of Elecuical sion and declared that the NMPUC does not have statuto- ! Workers. Ilowever, the Company's proposal was not adopt- ry authority to implement restructuring at this time, ne j
'd e by the WUNR and not introduced during the 1998 leg- Alemorial 27 did not require concurrence by the Senate; )
islative session. The WUNR declined to recommend any however, an identical Senate Memorial was not acted upon restructuring legislation as a committee bill during the 1998 by the full Senate prior to adjournment. ; legislative session. In a related matter, in 1996, the NMPUC ordered all l On January 22,1998, the NMPUC submitted its own utilities under its jurisdiction to file their estimates of l report to the New Mexico Legislature related to restructur. stranded costs, absent any recovery methat being adopted, ing of the electric utility industry. The following key points based on the Texas Pubhc Utility Commission Ecmomic were included in the report (i) PVNGS and Plains . Cost Over Market ("ECOM") model. The Company, in its Escalante Generating Station are the most debated issues in' filing, oresental two methodologies: (i) using the ECOM deregulation b cause of their potential stranded costs; (ii) model, the Company's stranded cost estimates mn from stranded costs,if determined to be lawful, should be verified $657 million for a 1998 full retail access case to SI19 mil- O by the NMPUC or its successor, the Public Regulation lion for a 2002 ftdl retail access case and (ii) using a second Conunission ("PRC"); (iii) market power issues may be methodology, based upon the difference between the addressed through functional separation or partial or com- Company's costs of existing generation and the costs of new plete divestiture of generation, transmission and distribution; combined cycle and combustion turbine units to sene the (iv) unbundling is necessary to understand the disparities same load,
- ne Company's costs above the level of new gas among various electricity providers;(v) despite an abundance units, ir. I' 97 dollars, were estimated at $748 million for a of natural resonces to fuel generation facilities, New Mexico 1998 full etail access case to $327 million for a 2002 full customers pay more for electricity because of costs associated retail access case. The Company advised the NMPUC that with generation plants; (vi) on average, New Mexico reti- the results of the ECOM malel are highly sensitive to var-dential customers pay more for electricity than regional and ious assumpoons, primarily projections of futun. gas prices, national residential customers and (vii) system reliability This information was addressed in the NMI-UC's report must be maintained or enhanced, and customers must be submitted to the New Mexico Legislature.
educated and emionmental protections should be promot-l l t
p-
,,2.......,,
acetie esavses o e ce g a : , or ~ usp- cr e n . . . -to, Is) mEoULATORY ASSETS AND LIABILITIES He Company is subject to the provisions of SFAS No. 71, Acormtingfor tbc Affrar ofCenain 7) pes ofRe d with certain costs
- regulated by the NMPUC. Regulatory assets represent probable future revenue to the Company associate lf d o which will be recovered from customers through the ratemaking process. Regulatory liabilities represent probab e uture re uc tions in revenues associated with amounts that are to be credited to customers through the ratemaking process. Regulato and liabilities reflected in the Consolidated Balance Sheets as of December 31 relate to the fo!!owing:
seer sees (In rbmms)
$ 70,%8 $ 71,682 Deferred Income Taxes 36,335 19,953 Gas Take-or-Pay Costs . 28,873 16,006 PGAC 12,823 10,362 GrImputed Revenues _ 7,850 8,869 Loss on Reacquired Debt 7,029 7,029 Gas Reservation Fees 4,437 6,345 .
Gas Retirees
- IIcalth Care Costs 5,260 5,260 Deferred Customer Expense on Gas Assets Sale 2,903 3,111 Proposed Transmission Line Costs 2,196 -
EPNG Risk Sharing Surcharge 1,571 1,571 Gas Rate Case Costs 118 598 Other 177,108 154,041 Subtotal ' (53,132) (56,961) Deferred Income Taxes (27,881) (24,614)
' Gas Regulatory Reserve (11,856) (22,230)
O- Customer Gain on Cas Assets Sale - PVNGS Prudence Audit ; . (6,561) (6,937) (3,896) (3,594) Revenue Subject to Refund (3,743) (4,072)
- Settlement Due Customers
= EPNG Risk Sharing Surcharge (2,1%) -
Other (723). Gain on Reacxjuired Debt (546) (559) (110,534) (118,967) Subtotal S 43,507 $ 58,141 Net Regulatory Assets As of December 31,1997, substantially all cf the Company's regulatory assets and regulatory liabilities are being recovered in rates charged to customers or have been addressed in a regulatory proceeding. If a portion of the Company's operations under the NMPUC jurisdiction becomes no longer subject to the provisions of SFAS No. 71, a write-off of related regulatory assets and lia-bilities would be required, unless some fonn of transition cost recovery (refund) continues through rates established and collected for the Company's remaining regulated operations. Based on a current evaluation of the various factors and conditions that are expected to impact future cost recovery, the Company believes that its regulatory assets are probable of future recovery. ElfectiveJanuary 1,1996, the Company adopted SFAS No.121, Aaounting for the impairment of Long-Lived Assetr and
' Long-livedAssets to bc Dispr! y This statement imposes a stricter criterion for regulatory assets by requiring that such assets be probable of future recovery at each balance sheet date. Based on the current regulatory structure in which the Company oper-ates, adoption of this standard did not have a material impact on the Company's fmancial position or results of operations.
Ilowever, the Companyls ability to rneet the criterion may change in the future as competitive factors influence wholesale and retail pricing in this indusuy.
... .. . , -. .~... . - - . - . . - -. .
. aeL se eE ovseE. e e e P a ss y er -- es t w- es E xsee a es e eU neisinesse (4) C APITALIZ ATION Changes in common stock, additional paid-in capital and cumulative preferred stock are as follows:
eu nd uL AttV E PREFERRED ST0eK WITNOUT SI AND ATORY R E D E aA P TIO N e088880N ET0eK R E Q UIR E SIE N T S ADDefiONAL ASSRESATE N U RIS E R AGGREGATE PAtD.IN NUNSER STAFED
$ NARES PAR WALUE c APITAL OF $ NARES VALUE i
{DOSm in thatntnds) Balance at December 31,1995 and 1996 41,774,083 5208,870 5470,358 128,000 $12,800 Eactrise of stock options - - (1,285) - - Balance at December 31,1997 41.774.083 $208.870 5469.073 128.000 $12,800 Common Stock any liquidation or dissolution or distribtion of assets of the The number of authorized shares of common stock with Company. In addition, the 1%5 Series is not entitled to a par value of $5 per share is 80 million shares. sinking fund and cannot le converted into any other class of 5 On December 9,1997, the Company's Board declared a stock of the Company. The Company's restated articles of quarterly cash dividend of 17 cents per share of common incorporation limit the amount of preferred stock which @ stock payable February 20,1998 to sharehoklers of record may be issued. %e earnings test in the Company's restated as of February 2,1998. He Company resumed the pay- articles ofincorporation currently allows for the issuance of ment of cash dividends on common stock starting in Alay preferred stock.
, 1996. The Company's Board reviews the Company's divi-c Long-Term Debt dend policy on a continuing basis. %e declaration of com-Substantially all utility plat t is pledged to secure the mon dividends is dependent upon a number of factors unpany nt mongage lmndsl mnion i ofcenain senes including earnings and financial condition of the Company oHong-term debt will be redeemed serially prior to their and market conditions.
e ates. e mance f 6nt nwngage londs l>y ee On September 16,1996. .e Company implemented a Company is subject to earnings coverage and londable dividend reinvestment and stock purchase plan for pmpeny puisions of the Onnpany's first mangage fond investors, including customers and employees. He plan, indenture. %e Company aho has the capability under the called PNM Direct, aho includes safekeeping senices and nmng ge in enture to uue Ent mortgage londs on the automatic investment features. The Company's stock is liasis of certain presiously retired Imnds and earnings. purchased in the open market to meet plan requirements. He aggregate amounts (in thousands) of maturities for
' Cumulative Preferred Stock 1998 through 2002 on long-term debt outstanding at The number of authorized shares of cumulative preferred December 31,1997 are as follows:
stock is 10 million shates. The Company has 128,000 shares,1965 Series,4.58%, stated value of $100 per share, 1998 5 350 of cumulative preferred stock outstanding. %e 1965 Series 1999 $12,030 does not have a mandatory redemption requirement but 2000 $ 1,050 may be redeemable at 102% of the par value with accrued 2001 516,038 dividends. He holde s of the 1965 Series are entitled to 2002 515,900 payment before hoklers of conunon stock in the event of
SI E W GI E E 4C O AN O S U B S 1 D 1A A I E S . , C 0 M P A 90 V O F P W9 L G O S S It V $C E In November 1997, the Company requested NMPUC On February 21,1997, the Company compfeted the refi-approval tr> enter into the Revoher. In addition, the nancing of $190 million of poUution control revenue londs Company intends to Imrrow $140 million from the issued by the City of Fannington, all maturing in April Revolver to retire all of its outstanding taxable first mort-2022. He $60 million 1978 Series A PoUution Control gage bonds. The Company also requested authority to Revenue Bomis and the $40 million 1979 Series A Pollution exchange the first mortgage londs currently couateralizing Control Revenue Bonds were refmanced as variable rate the outstanding $575 million of tax-exempt tollution con-tonds (Ibilution Contnd Retenue Refruuling Bondr, $.go mi# ion trol revenue londs with senior unsecured notes (" SUNS"). 1997Series A, $ 3 7 millim 1997 Series B and $y mi# ion After completion of these transactions, the 1947 1997 eries C). The initial variable rates were 3.35% S Indenture for of Mortgage $40 and Deed of Trust would be extin-
. million 1997 Series A and $37 million 1997 Series B, and guished, resuhing in more administrative, financial and 3.30% for $23 nVllion 1997 Series C. The remaining $90 strategic flexibility for the Company. The extinguishment million 1979 Series A Pollution Control Revenue Bonds of the mortgage requires the consent of one party which has were refinanced with a fixed rate of 6.375% (ibl/urion not yet consented and may not consent. Due to concern Control Revenue Refunding Bonds, ryg7 Series D). De alout the consent, the Company also requested NMPUC effect of the refinancing resulted in a decrease in interest authority to leave an amended mortgage in place. Among charges of approximately $1.1 miUion in 1997, other modifications, the mortgage would be amended such On December 1,1997, the Company converted $137.3 that only $111 million of tax-exempt pollution control rev-million of pollution control revenue londs from variable enue londs would have the benefit of the lien. He proper-rate to Sxed rates. Of the total, $100 miUion of City of ry under the lien would be reduced and no future lmnds Fanningtoc. hands (Pollution Ccmtrol Revenue Refunding could be issued under the mortgage. The SUNS are Bonds, $40 million 1997 Series A, $37 million 1997 Series planned to be issued under an indenture containing a B, and S23 million 1997 Series C) were converted to r axed restriction on liens (except in certain limited circumstances)
O rate of 5.80% and $37.3 miHion of Maricopa County, and certain other covenants and restrictions. With the Arizona Pollution Control Corporation londs (Pollution exception of the $111 million of tax exempt pollution con-Control Revenue Refunding Bonds, $37.3 million 1992 trol revenue bonds secured by first mortgage bonds, the Series A) were comerted to a fixed rate of 5.75% The City SUNS will be the senior debt of the Company. On February of Farmington londs mature on April 1, 2022, and the 16, 1998, the NMPUC issued an order approving these Maticopa County, Arizona Pouution Control Corporation transactions. The Company is anticipating completion of bonds nuture on November 1,2022. these transactions in mid-March 1998. Revolving Credit Facility and Other Credit Facilitie, Off. Balance Sheer 1 rems At December 31,1997, the Company has a $100 million In October 1996, the Company purchased $200 million of revohing credit facility (the " Facility") with an expiration the PVNGS Lease Obligation Bonds (" LOBS") at a premi-date of June 30,1998. The Company must pay commit- um with accrued interest and on December 30,1997, the ment fees of 3/10% per year on the total amount of the i Company purchased $28.9 million of 10.15% Series Facility.The Company expects to renew the Facility beforePVNGS LOBS at a premium with accrued interest. its expiration date with a fwe-year $300 million senior unse- Although the PVNGS LOBS are off-balance sheet debt, cured revohing credit facility (" Revolver"). He Company these bonds are included in the calculation of the Companyi, aho has a $100 mi!! ion credit facility, which expires on May debt to capitalization ratio as well as various fuuncial cover-20,2001, and is collateralized by the Company's electric and age ratios by the major rating agencies.The purchase of the gas customer accounts recchable and certain amounts being PVNGS LOBS is treated by the rating ames as a defea-recovered from gas customers relating to certain gas con-sance of the bonds thereby resulting in an improvement to tract settlements. As of December 31,1997, the Company these ratios. The purchase of the PVNGS LOBS has also had $130 million of available liquidity arrangements, con-increased earnings in the fonn ofinterest income, sisting of $100 milhon from the Facility, $15 miUion from the accounts receivable securitization, and $15 miUion from locallines of credit.
~ . . .. . ~ - . -
emo$es e a n V i e :- ootsPAsy eF m a 'w a 's s s e e A=o sU msio Aniss 3 v. -
)
Fair Value ofFinancialInstruments The estimated fair value of the Companyt financial instruments (including current maturities) at December 31, is as follcws: test toes CARRYING FAIR CARRYING FA AMOUNT WALUs AuOUNT VALUs (in t% sand) LongIrerm Debt $714,345 $743,524 $728,889 $731,358 l DecamnissioningTrust Debt $ 23,000 $ 23,000 . $ - l Investment in PVNGS Lolls $237,774 $236,049 $212,979 $211,327 ! Decommissioning Trust $ 51,857 $ 53,900 $ 25,M1 $ 25,600 Fossil-Fucted Plant Decommissioning Trust $ 7,245 $ 7,27? $ 6,785 S 6,785
- Rabbi Trust $ 10,080 $ 15,218 $ 10,087 $ 13,991 4
I Fair ~value is based on market quotes provided by the Companyh investment bankers. The carrying amounts reflected on the consolidated balance sheets approximate fair value for cash, temporary investments, and receivables and payables due to the shon period of maturity. Is) E ARNINGS PER SN ARE in 1997, the Company adopted SFAS No.128, Earnings per Sbare. As a result, dual presentation oflusic and diluted earnings per share has been presented in the Consolidated Statement of Earnings. The following reconciliation illustrates the impact on .. the share amounts of potential common shares and the earnings per share amounts: 1 PsR.sH A R s sucous swARas Amouur O (In thwnb emptpersharr amenms) December 31.1997 Net Earnings . $80,995 Less: Preferred stock dnidends (586) 1 Basic Earnings per Share Net earnings available for common stock 80,409 41,774 $1.92 Options issued 217 Diluted Earnings per Share Net earnings available for common stock ".,80,409 41,991 $1.91
' December 31,1996 Net Earnings $72,580 Less: Preferred stock dividends (586)
Basic Earnings per Share Net earnings available for common stock 71,994 41,774 $1.72 Options issued 332 Diluted Earnings per Share Net earnings available for common stock $71.994 42.106 $1.71 l December 3i, s995 l Net Earnings $75,562 ! Less: Preferred stock dividends (3,714) ! Basic earnings per share t Net earnings available for common stock 71,M8 41,774 $1.72 Options issued - 103 Diluted earnings per share Net earnings available for common stock $71.848 41.877 $1.72 The adoption of SFAS No.128 did not have an impact on previously reported earnings per share (basic).
revosso esovsea eemsmany er ase en a a s e e - ano eveeeoeaseae , Istsuconsa Taxas Income taxes consist of the fcWowing components: sees sese seer (in thouuud) 5 32,911 $ 14,815 $ 45,940
' Current Federalincome tax 9,859 2,847 5,864 Current state income tax . 8,781 22,372 (3,212)
Deferred Federal income tax 4,936 7,031 (397) Deferred state income tax (4,436) (4,476) (4,442) Amortization of accumulated investment tax credits Recognition of accumulated deferred investment tax credits - - (388) relating to sales of utility property S 46,718 $ 40,494 $ 50,793
'lotalincome taxes S 38,334 $ 39,395 $ 30,194 Charged to operating expenses 8,384 1,099 20,599 Charged to other income and deductions ; $ 46,718 S 40,494 $ 50,793 l l
. Totalincome taxes The Company % provision for income taxes differed from the Federalincome tax computed at the statutor years shown.%c differences are attributable to the following factors: sees sees teo7 (In thouwd)
S 44,700 5 39,576 $ 44,224 Federalinmme tax at statutory rates (4,442) (4,436) (4,476) Investment tax credits 519 519' 723 Depreciation of flow-through items Gains on the sale and leaseback of PVNGS 0- (527) -(527) (527) Units 1 and 2 7,146 5,963 5,192 State income tax - 3,090 Gains on sale of utility property 499 210 579 Odier $ 40,494 $ 50,793 5 46,718 Totalincome taxes Deferred income taxes result from certain temporary differences between the recognition ofincinne and expense for tax and finandal reporting purposes, as described in note 1.The major sources of these differences for which deferred taxes have been and the tax effects of each are as follows: seer sees sees (In thmuard) 5 (9,133) S 8,234 5 (3,990) Deferred fuel costs 6,390 18,048 12,730 Depreciation and cost recovery
- - 3,497 Loss prmision for the M-S-R power purchase contract (3,185) (4,053) (4,308)
Contributions in aid of construction 12,482 (1,052) (26,002) Ahernative minimum tax in excess of regular tax
- - 55,217 Net operating losses utilized.
(1,512) 537 (2,321) PVNGS decommissioning
- - (29,868)
Gains on sale ofutility property Contribution to 401(h) plan 3,181 (510) (885)
- (6,651) -
_. Regulatory 1iability 1
- 5,272 -
Curtailment gain
- 4,898 (3,177)
Transmission project cost 161 2,585 2,926 Other S 8,384 5 27,308 5 3,819 Net deferred taxes provided
seetce e s o -v i e s >
- e a sa nov or. meo amnio, a'a o sesseoimais.
The components of the net accumulated deferred income tax liability were: seer .... (in thunds) Deferred Tax Assets:. ,
' Alternative minimum tax credit carryforward ' .S 55,198 $ 67,681 I Nuclear decommissioning - 18,226 - 16,303 i Regulatory liabilities 50,689 54,430 Other .
46,079 - 48,944' j Tbtal deferred tax assets $170,192 $187,358 Deferred Tax Liabilities: Depreciation .
$182,641 $179,430 Investment tax credit 57,823 62,258 Fuel costs 23,905 33,038 ;
Regulatory assets 68,524 ~69,151 Other _ 16,475 16,005 Total deferred taxliabilities 349,368 359,882 , Axumulated deferred income taxes, nu $179.176 $172,524 j l
. The following table reconciles the change ia the net accumulated deferred income tax liability to the deferred income tax expense l
4 included in the consolidated statement of carnings for the period: ] Net change in deferred income tax liability per above table $ ' 6,652 l
- Change in tax effects ofincome tax related regulatory assets and liabilities (3,114) l
.Thx effect of excess pension liability 410 ;
Deferred income tax expense for the period $ 3,948 l mammmmmmmm
- The Company has no net operating loss carryforwards as of December 31,1997.
O (T) EMPLOYEE AND POST . RETIREMENT BENEFITS 1 Pension Plan
- 'The Company and its subsidiaries have a pension plan covering substantially all of their employees, including officers. The plan is non-contributory and provides for benefits to be paid to eligible employees at retirement based primarily upon years of service with the Company and the average of their highest annual base salary for three consecutive years. The Companys policy is to
' fund actuarially-determined contributions. Contributions to the plan reflect benefits attributed to employees' years of senice to
- date and also for senices expected to be prosided in the future. Plan assets primarily consist of common stock, fixed income securities, cash equivalents and real estate.The componerm of pension cost (in thousands) are as follows:
seer iese sees Service cost S 6,535 $ 8,540 $ 6,770 Interest cost 19,592 20,546 !8,332 Actual return on plan assets (69,069) (31,211) (42,148)
' Net amortization and deferral 44,513 9,577 23,295 Net periodic pension cost 1,571 7,452 6,249 Curtailment gain - - (13,317) -
7btal pendon expense (income) $ 1,571 $ (5,865) $ 6.249 In December 1996, the Company's Board approved changes to the Companyh defined benefit pension plan and implementation of a defined contribution plan no later than January 1,1998. As a result, the Company recorded a curtaihaent gain of approxi-mately $13.3 million in the consolidated financial statements for the year ended December 31,1996.
eue6se eeavsee seasonv ea mew a xsee ano euseasianiee t The following sets forth the plan's funded status and amounts (in thousands) at December 31: vser sees
$267,0?! $233,687 Vested benefits 13,470 30,658 Non-vested benc6ts 247,157 297,679 Accumulated benefit obligation
- 11,894 Effect of future compensation levels 297,679 259,051 Projected benefit obligation 273,981 330,550 Fair value of plan assets (32,871) (14,930)
Projected benefit obligation less than plan assets (146) (180) Unrecognized prior service cost Net unrecognized kiss fmm past experience different from assumed and 14,828 (5,814) the effects of changes in assumptions 4,650 5,814 I- Unamortized asset at transition, being air rtized through the year 2002 S (13,539) $ (15,110) ( t Accrued pension asset i The weighted average discount rate used to measure the pmjected benefit obligation was 7.75% for 1997 and 1996, and the expected long-term rate of return on plan assets was 8.75% for 1997 and 1996. The rate ofincrease in future compensation le based on age-related scales was not applicable for 1997 and 4,1% for 1996. Other lbstretirement llenefits The Company provides medical and dental benefits to cligible retirees, Currendy, retirees are offered the same benefits as active employees after reflect ng Medicare coordination. The components of postretirement benefit cost (in thousands) are as follows: toer sees isee
$ 1,300 $ 1,449 $ 1,869 Service cost O 4,452 4,478 4,962 Interest cost (2,726)
(6,076) (1,208) Actual return on plan assets 1,817 1,817 1,817 Transition obligation amortization 4,192 (159) 2,498 Net amortization and deferral $ 6,377 $ 8,420
$ 5,685 Tbtal postretirement benefit expense The following sets forth the plank funded status and amounts (in thousands) at December 31:
1eer iese Accumulated benefit obligations for:
$ 26,664 5 25,237 Retirees 15,375 16,079 Fully eligible emphiyees 17,787 16,341 Active empk2yees 59,084 58,399 Accumulated benefit obliption 33,159 20,930 Fair value of plan assets (25,925) (37,469)
Funded status 2,416 (4,033) Net unrecognized (gain) loss 27,256 29.074 Unrecogni7ed transition obligation (being amortized through the year 2012)
$ (2,702) $ (5.979)
Accmed postretirement liability Plan assets consist primarily of domestic cormnon stock, fixed income securities and cash equivalents. The weighted average discount rate used to measure the pmjected benefit obligation was 7.25% and 7.75% for 1997 and 1996, respectively, and the expected long-term rate of return on plan assets was 8.75% for 1997 and 1996.The health care cost tren rate was 8.0% for 1997,1996 and 1995. The effect of a 1% increase in the health care trend rate assumption would increase the accumulated postretirement benefit obligation as of December 31,1997 by approximately $10.5 million and the aggregate ser-vice and interest cost components of net periodic postretire.nent benefit cost for 1997 by approximately $1.2 million. The health care cost trend rate was expected to decrease to 5.0% by 2010 and to remain at that level thereafter. {
.- . - ~- - , . -_
. eset so .oE nvieE sempaa, *P = = a eE mies ano seeeinsaniee r_
Executive Retirement Program - rnent employees. Options are granted at the' fair market he Company has an executive retirement program for a value of the shares on the date of the grant. Options grant-gmup of management employees.ne pmgram was intend- ed through December 31,1995, vested on June 30,1996,
. ed to attract, motivate and retain key management empk>yees. have an exercise term of up to 10 years. All subsequent He Companyk projected benefit obligation for this program, j. awards granted after December 31,1995, vest three years as of December 31,1997, was $19.2 million, of which the from the grant date of the awards. %e maximum number accumulated and vestal benefit obligation was $19.2 million, of options authorized are five million shares through As of December 31,1997, the Company has recognized an December 31,2000.
additional liability of $2.7 million for the amount of unfund. In addition, the Company has a Director Retainer ed accumulated benefits in excess of accrued pension costs. Plan which provides for payment of the Directors' annu-
%e net periodic pension cost for 1997,1996 and 1995 was al retainer in the fonn of cash, restricted stock or stock
$2.2 million, $2.1 million and $2.0 million, respectively. In options. The number of options granted in 1997 under 1989, the Company established an irrevocable grantor trust the Director Retainer Plan was 12,000 shares with an in connection with the executive retirement program. Under exercise price of $6.625. No options under the Director the terms of the trust, the Company may, but is not obligat- Retainer Plan were exercised during 1997. He number ed to, pnnide funds to the trust, which was established with of option shares outstanding as of December 31,1997 an independent trustee, to aid it in meeting its obligations was 16,000, under such program. Marketable securities in the amount of The fair value of each option grant is detennined on appmxinutely $10.1 million (fair market value of S15.2 mil. the date of grant using the Illack-Scholes option-pricing lion) are presently in trust. No additional funds have been model with the following average assumptions used for provided to the tmst since 1989 grants in 1995,1996 and 1997, respectively: dividend yield of 2.7%,2.4% and 3.0%; expected volatility of 20%,18%
Stuk Option Plans and 20%, risk-free interest rates of 5.5%, 5.59% and O The Company's Performance Stock Plan is a non- 5.69%; and expected lives of four years. qualified stock option plan, covering a group of manage-A summary of the status of the Company's stock option plans at December 31, and changes during the years then ended is presented below: 1eef sees sees WEIGHTED WElGMT8D WEIGHTED AVERAGE AVERAGE AVERAGE ExEnessE ExEncisE ExEncisE FIIED OPTIOnes SMAmES PetiC E SHARES PRBCE SHARES pit lC E Outstanding at beginning of year 846,787 $18.480 508,986 $17.625 - - Granted 312,707 $23.033 390,228 $19.480 508,986 $17.625 Exercised 98,211 $17.625 51,286 $17.625 - - Forfeited 13,998 $19.625 1,141 $17.625 - - Outstanding at end of year iA47,285 $19.858 846/ 27 $18.480 508.986 $17.625 mummmmmumes summmmmmmmi Options exercisable at year-end 362,348 456,559 - Weighted-average fair value of options granted during the year $4.71 $3.56 $3.49 l l i
at W measeo aN D sums eesaniE S . Pust ic S saveoe C omeA N v eP t He fbilowing table summarizes information about stock opthans outstanding at December 31,1997: OPTSONS EXERC4SASLE OpflONS OUTSTANDlue WEIONTED WEIGNTED AVERAGE WEIGHTSD NUMSER AVERAGE REMAIN #Ne AVERAGE R AutE OF NUMBER EXERCIS ABLE AT EXERCISE CONTRACTUAL EXERCISE BREROtJE OUTSTANDtue 10/31597 PRICES
&#FE PRICES PRICES AT 18/41/97 S 6.344 4,000 $5.50 16,000 9.75 years
$ 5.50 - $ 6.625 358,348 $17.625 1,031,285 8.93 years $ 20.06
$ 17.625 - $ 23.6875 362,348 $17.491 1,M7,285 8.95 years $ 19.858
$ 5.50 - $ 23.6875 mummmmmmmenmann amm m m mmmmmmmme Had compensation cost for the Company's performance stock plan been determined consistent with SFA Accountingfor Stod-Based Compensation, the effect on the Company's pro forma net earnings and pro f would be as follows: teos toss toef (In thouwnh exapt per share amounu)
$80,409 $71,994 $71,848 As Reported Net Earnings: pkai/ahlefurmmman) $71,848
$80,0I8 $70,952 Pro Forma
$ 1.92 $ I.72 S 1.72 As Reported Basic EPS: $ 1.72 Pro Forma $ 1.92 '$ 1.70
$ 1.91 $ 1.71 $ 1.72 As Neported Diluted EPS: $ 1.72
$ 1.90 $ 1.70
'0 Pro Forma
- 18) CONSTRUCTION PROGR AM AND JOINTLY. OWNED PLANTS It is estimated that the Company's construction expenditures for 1998 will bei approximately h d d in oper-
$141.3 million, in l
tures on jointly-owned projects.%e Company's proportionate share of expenses for the jointly -owned p ants is nc i ating expenses in the consolidated statements of earnings. At December 31,1997, the Company's interests and irwestments in joindy-med generating facilities are: CONSTRvCT60N ACCUM U L AT E D WORKIN COMPOSITE PLANT IN INTEREST DEPRECIATl0N PROGRESS SERVICE STAT 60N (FUEL TYPE) (in thawank)
$341,237 $ 21,679 46.3 %
$ 725,308 SanJuan Generating Station (Coal) $ 40,434 $16,537 10.2 %
Palo Verde Nuclear Generating Station (Nuclear)*
$100/49
$ 118,305 $ 55,703 $ 3,812 13.0 %
Four Corners Power Plant Units 4 and 5 (Coat)
- Includes the Company's interest in PVNGS Unit 3, the Company's interest in common facilities for all PVN 22% beneficial interests in the PVNGS Units 1 and 2 leases.
I l
,. st e o s i s osaviea .e o c e a u v 'er uso aeniso a ss e ovesiesaosee l
l San Juan Generating Station He PVNGS participants maintain "all-risk"(including The Company operates and jointly owns SJGS. At nuclear hazards) insurance for nudear property damage to, { December 31,1997, SJGS Units 1 and 2 are owned on a a sd decontamination of, property at PVNGS in the aggre-
)
50% shared basis with Tucson Electric Power Company, gate amount of appmximately $2.75 billion as ofJanuary 1, Unit 3 is owned 50% by the Company,41.8% by Southern 1998, a subst ntial portion of which must be applied to sta-California Public Power Authority and 8.2% by Tri-State bilization and decontamination. He Company has also Generation and Transmission Association, Inc. Unit 4 is secured insurance against portions of the increased cost of ; owned 38.457% by the Company,28.8% by Al-S-R Public generation or purchased power and business interruption ! Power Agency, California public p>wer agency ("A1-S-R"), resulting from certain accidental outages of any of the three 10.04% by the City o(Anaheim, California,8.475% by the . PVNGS units if the outage exceeds 17 weeks. The i City of Fannington,7.2% by the County of los Alamos, Company is a member of two industry mutual insurers. and 7.028% by Utah Associated Alunicipal Power Systems. These mutual insurers provide both the "all-risk" and ! increased cost of generation insurance to the Company. In Palo Verde Nudear Generating Station the event of adverse losses experienced by these insurers, he Company has a 10.2% undivided interest in PVNGS. the Company is subject to an assessment. De Company's Commercial operation commenced in 1986 for Unit I and - maximum share of any assessment is approximately $4.3 Unit 2 and 1988 for Unit 3. In 1985 and 1986, the million per year. Company completed sale and leaseback transacticas for its The Company has a program for funding its share of undivided interests in Units I and 2 and certain related decommissioning costs for PVNGS. Under a portion of common facilities. this program, the Company makes a series of annual In 1992, the Company purchased approximately 22% of deposits under agreements appmved by the NAtPUC to an the beneficial interests in the PVNGS Units I and 2 leases external non-qualifiei rust t which are applied towards an for approximately $17.5 million, recording $158.3 million investment in life insurance policies on certain current and O as utility plant and $140.8 million as long-term debt. In former empk3yees, %e remaining portion of the nuclear 1993, such utihty plant was written down to $46.7 million decommissioning funding program is invested in equities in in conjunction with an dectric retail rate reduction. qualified and non-qualified trusts. The results of the 1995 The PVNGS participants have insurance for public liabil- decommissioning cost study indicated that the Company's ity payments resulting fmm nuclear energy hazards to the full share of the PVNGS decommissioning costs will be limit of liability under Federal law. nis p3tential liability is appmximately $162.6 million (in 1997 dollars). covered by primary liability insurance prmided by conuner- Pursuant to NA1PUC approval, the Company funded an cial insurance carriers in the amount of $200 million and the additional $2.1 million and $12.5 million in 1997 and 1996, balance by an industry-wide remwpective assessment program- respectively,into the qualified and non-qualified trust funds. He inaximum assessment per reactor under the retrospective The estimated market value of the trusts, induding the net rating program for each nudear incident occurring at any cash value of the current life insurance policies, at the end nudear power plant in the United States is approximately of 1997 was approximately $30.9 million.
$79.3 million, subject to an annual limit of $10 million per oradent. Based upon the Companyt 10.2% interest in the io)LoNo.Yanu eawaa con 7nACTS three PVNGS units, the Companyt maximum potential ne Company had two long-tenn mntracts for the purchase assessment per incident for all three units is appmximately of electric power. Under a contract with A1-S-R, which
$24.3 million, with an annual payment limitation of $3 mil- expired in early 1995, the Company was obligated to pay cer-l l lion per incident. The insureds under this liability insurance tain minimum amounts and a variable compment represent-include the PVNGS partidpants and "any other person or ing the expenses associated with the energy purchased and organization with respect to his legal responsibility for dam- debt senim costs associated with capital improvements. 'Ibtal age caused by the nuclear energy hazard". If the funds pro- payments under this mntract amounted to approximately vided by this retnwpective assessment pmgram prove to be $14 million for 1995.
insuflicient, Congress could impose revenue raising measures He Company has a power purchase contract with SPS on the nudear industry to pay daims. for up to 200 A1W, expiring in Alay 2011. The Company l [
OF N E W M E X I C O A N D SUSS$DIARIES P U B L IC S E A V I C E e0 M P AN V a On December 23, 1997, the PLP received FERC may reduce its purchases from SPS by 25 MW annually upon approval for " exempt uholesale generator" status with three years' notice. He Company provided such notice to respect to the gas turbine generating unit, as defined in reduce the purchase by 25 MW in 1999 and by an addition-Section 32 of the Public Utility Ilolding Onupany Act. al 25 MW in 2000. Aho, the Company has 39 MW of con-Under the power purchase agreement, construction of the tingent capacity obtained fmm El Paso Electric Company gas turbine generating unit is expected to begin in August under a transmission capacity for genention capacity trade 1998, with commercial operation and power delivery sched-arrangement that increases to 70 MW from 1998 through uled in May 1999. The operation date was chosen to satisfy 2003. In addition, the Company is interconnected with vari-both resource and transmission needs anticipated for the ous utilities for economy interchanges and mutual assistance Companyt jurisdictional load. Ilowever, a reduction in the in emergencies. Companyk k ad forecast for 19W mmbined with technical
%e Company anticipates the need for approximately 100 issues concerning one of the candidate gas turbines has lead to 200 MW of additional capacity in the 1998 dunugh 2000 the Company and PLP to consider a nine to twelve month timefmme.'Ib meet this need,in 1996, the Company entered delay in the operation date.
into a long-term power purtiuse contract with the Cobisa-In addition to the long-term power purduse contract with Person Limited Partnership ("PLP") to purchase approxi-the PLP, the Cosnluny is pursuing other options to ensure its mately 100 MW of unit contingent peaking capacity fmm a additional capacity needs are met. gas turbine generating unit for a period of 20 years, with an option to renew for an additional five years. ne gas turbine W""*""'*"" generating unit will be constructed and opented by the PLP ne Gampany leases Units 1 and 2 of PVNGS, certain and will be krated on the Company's retired Person transmission facilities, office buildings and other equipment Generating Station site located in Albuquerque, New under operating leases. He lease expense for PVNGS is Mexico.%e site for the generating unit was chosen,in part,
$66.3 million per year over base lease terms expiring in O to pnnide needed bene 6ts to the Companyk constrained 2015 and 2016. Prior to 1992, the aggregate lease expense transmission sptem. In October 1996, the Company filed a for the PVNGS leases was 584.6 million per year over the request for appnwal from the NMPUC. He NMPUC base lease terms; however, this amount was reduced by the issued a final order appnning the application in September purchase of approximately 22% of the beneficial interests in IW7.ne final order also included appmval of a stipulated the PVNGS Units 1 and 2 leases (see note 8). Each settlement agreement ("Scipulation") which had earlier been PVNGS lease contains renewal and fair nurket value pur-entered into among the Company, the PLP and the chase options at the end of the base lease term. Covenants NMPUC staff to resolve certain issues raised in this pm-in the Oxnpany's PVNGS Units 1 and 2 lease agreements ceeding. %e Stipulation included, among other things, a limit the O2mpany's ability, without consent of the owner pnnision wherein the Company committed, in cooperation participants and bondholders in the lease transactions,(i) to with the NMPUC staff, to the development and evaluation enter into any merger or consolidation, or (ii) except in con-of a nxtuest for proposal ("RFP") for purchase of approxi. nection with nornul dividend policy, to convey, transfer, mately 5 MW of capacity fnxn solar generation resources. lease or dividend more than 5% of its assets in any single
%e Company would not be obligated to build such a unit or transaction or series of related transactions.
commit to such a power purduse agreement prior to Future minimum operating lease payments (in thou-NMPUC approval of a full-recovery mechanism dut would sands) at December 31,1997 are: not put the Company at a inmpetitive disadvantage. He NMPUC docketed a new case to follow the progns
$ 79,436 1998 79,068 of the RFP and acktress the issue of full-cost recovery. %e 1999 78,7 H RFP was issued on January 16,1998. Proposals are due on 2000 78 528 March 24,1998, it is expected that contracts with successful m 7g,43 bidders will be signed byJune 6,1998 in order to facilitate the g 950,979 NMPUC hearing on full-cost recovery, which has been years scheduled forJune 15,1998. $1,345,147
'Thral minimum lease payments mmmmmmmmmum
. 90CL I e CE AW 893 e e O P & II V OF C3 5 9 le E I I $$ & OB S 6 U 3S I D1 A Gk 9 E $
e l
$ i l
l l l l l Operating lease expense, inclusive of PVNGS leases, was ment and implementation of a remediation plan. approximately $80.8 million in 1997, $80.3 million in 1W6 The amended Settlement Agreement does not, however, and $80.0 million in 1995. Aggregate minimum payments pnnide the Company with a full and complete release from to be received in future periods under noncancelable sub- potential further liability for remediation of the gmundwa-leases are approximately $5.9 million. ter contamination. After the Company has expended the l l Setdement Amount, if the NA1ED can establish through upa vnao oss L UsLaD PLANT oacouuisseonina costs the contamination, the Company could be required to per-1he Company is committed to complying with all applica- '""",further remediation that is determined to be news-ble emironmental regulations. Emironmental issues have sarp e Onnpany mntinues t dispute any contention presented and will continue to present a challenge to the that the Santa Fe Station is the source of the groundwater j e ntam nation and believes that insufficient data exists to Company. The Company has evahated the potential identify the sources of groundwater contamination. The impacts of the following emironmental issues and believes, l after consideration of established reserves, that the ultimate ompany has mmpleted an aquifer characterization report and a groundwater quality repon associated with the 40 day i outcome of these environmental issues will not have a mate-mactivatim of the adjacent Santa Fe supply well in July and I rial adverse effect on the Company's fmancial condition or usults of operations. ^"8""* *** "P""" ***"E'Y '"EE**" E*"" water contamination does not originate from the Santa Fe ELECTRIC OPERATIONS Station site and has been drawn under the site by the pump-Santa Fr Generating Station (" Santa Fe Station") ing f the Santa Fe supply well. In addition, other urban wells in Santa Fe are lilsely to be vulnerable to contamina-The Company and the New Alexico Environment
'I " I"* 'I'* ""#'**'
Department ("NAIED) have conducted investigations of The Company and the NAIED, with the cooperation of O the groundwater contamination detected beneath the fonner the City of Santa Fe, have chosen a remediation plan pm-San:a Fe Station site to determine the source of the conta-posed by a remediation contractor. The City of Santa Fe, mination. The Company has been and is continuing to the Company and the NAiED have entered into a cooperate with the NA1ED regarding site investigations Atemorandum of Understanding concerning the chosen and remedial planning pursuant to a Settlement Agreement mmediation plan and the operation of the municipal well between the Company and the NAIED. InJune 1996, the a acent m t anta e tat on site in connecti n with car-Company received a letter from the NA1ED, indicating that rying out that plan. Construction of the remediation system the NA1ED believes the Company is the source of gasoline under the plan is expected to commence in the second quar-contamination in a municipal well supplying the City of ter of 1998. The system is expected to be in operation early Santa Fe and gmundwater underlying the Santa Fe Station. in the third quarter of 1998. Further, the NA1ED letter stated that the Company was required to proceed with interim remediation of the conta. Perron Generating Station ("Penon Station") mination pursuant to the New Alexico Water Quality The Company,in compliance with the NA1ED's Corrective Q ntml Commission ("NA1WQCC") regulations, in July Action Directive, determined that groundwater contamina-1996, the Company fded an appeal with the NA1WQCC tion exists in the deep and shallow groundwater at the Person protesting the determination and directives contained in the Station site.1he Companyis required to delineate the extent NA1ED'sJune 1996 letter. Subsequently, negotiation meet- of the contamination and remediate the contaminants in the ings were conducted betw een the Company and the NAIED groundwater at the Person Station site. The extent of the j for a resolution of the groundwater contamination issue, contaminant plume in the deep groundwater was assessed On October 3,1996, the Company and the NA1ED and results were reported to the NA1ED. The Company atr-signed an Amendment to the Settlement Agreement con- rently is involved with the process to renew the Rescurce cerning the Froundw ater contamination underlying the site. Conservation and Recovery 3ct post-chisure care permit for As pan of the Amendment, the Gunpany agreed to spend the facility. Remedial actions for the deep groundwater will approximately $1.2 million (" Settlement Amount") for cer- be incoquated into the new permit. %e Company has pm. tain costs related to sampling, monitoring, and develop- posed a monitoring program in conjunction with natural
98 E W al E E 4 C 9 AN D 9USS IDI ABI E 6 -. C SS P& N Y O F
,P U S LI C SERV E C E 4
impoundments hicated within environmentally sensitive attenuation pmcesses as the most cost effective approach for areas be remediated and ekised by December 1996, and that the deep gmundwater remediation. De Company's current all other unlined surface impoundmems onJicarilla lands be estimate to demmmission its retired fossil-fueled plants remediared and chised by December 1998. In 1995, the includes appmximately $6.3 million in additional expenses to Company received a claim for indemnification by Williams, complete the gmundwater remediation program at Person the purchaser of the Compt.ay's ps gathering and process-Station. As part of the financial assurance requirement of the ing assets, for the environmental work required to comply Person Station llazardous Waste Pennit, the Company with theJicarilla ordinance.He Company submitted a clo-established a trust fund.The current value of the trust fund sure/remediation plan to theJicarillas, which was approved. at December 31,1997, was $7.3 million.The remediation The Companyt remediation work pursuant to the plan program continues on schedule. commenced in mid-1996, and the costs of remediation are being charged against the $10.6 million indemnification cap GAS OPERATIONS contained in the purchase and sale agreement between the Gas Wellhead fit Remediation Company and Williams.The Company met the require-The New Alexico Oil Conservation Commission issued mentan for ek> sing and remediating pits within the emiron-order, effective onJanuary 14,1993,that affects the ps gath-mentally sensitive area by December 1996, and anticipates ering facilities hicated in the San Juan Basin in northwesternclosing and remediating all other pits associated with the New Alexico. %e Bureau of Land Afanagement ("BI31") gas gathering and pmcessing assets by the December 1998 has issued a similar order. He onler prohibits the further deadline specified in the ordinance, discharge of fluids associated with the pnxluction of natural ps into unlined carthen pits in specified areas (designated " ' ' as
^**"**""
" vulnerable areas") in the San Juan Basin. The order alsothe Company and its subsidiaries soki certain non-In 1995, required the submission of closure plans for the pits where strategic gas assets for approximately $154 million to O further discharge was prohibited. %e Company has com. Williams, recognizing an after-tax gain of $12.8 million.
plied with the orders and has subnutted and received His gain was adjusted to $11.8 million in 1996 due to an appmval for pit ch>sures from the New Alexico Oil accrual for additional gas emimnmental costs. Under the Conservation Division ("OCD") and the BLAI. NAIPUC order appmving the sale, the Company _ is These gas gathering facilities were sold to Williams Gas required to share approximately $35 million from the sale Processing-Blanco, Inc., a subsidiary of the Williams Field with customers, which is being credited to the customer's Senices Group, Inc., of Tulsa, Oklahoma ("Wdliams") on bills over five years. After completion of the fifth year, the June 30,1995. As a part of the purchase and sale agreement,amount of gain will be recalculated to include actual expens-the Company agreed to cease discharge to unlined earthen es specified in the agreement, subject to NAIPUC resiew. pits in designated velnerable areas and to retain the respon As of December 31,1997, the Company has a remaining sibility for pit ek>sures for a stated period of time and to a balance of $11.9 million for future years credit to its cus-stated dollar amount.The Company has assessed the pits in romers. Ilowever, as a result of the increase in estimated accordance with OCD/BIA1 directives, and is now in the sales expeme, the Company proposed in another NAIPUC process of closing pits and remediating them, if necessary, at case to retain $7.2 million of the 511.9 million until all actu-wellhead kications within the designated vulnerable areas. al expenses have been accumulated. The NAIPUC has not The Company has submitted a groundwater management issued an order on the Company's pmposal, fr. addition, the plan to the OCD and has received appmval of the plan, and Company, in 1995, sold its water division to the City of is proceeding with delineation of groundwater contamina- Santa Fe for $51.2 million (exclusive of current assetz net-tion and, as necessary, cleanup, in accordance with the red against current liabilities), recognizing an after-tax gain approved plan.The Company will address soil and ground- of $6.4 million.The Company, through its Energy Senices water contamination within the dollar and time limitations Business Unit, has a contract with the City of Santa Fe to imposed by the purchase and sale agreement with Williams, operate the Santa Fe water systems through the year 2001. and in accordance with the requirements of the OCD. In Alarch 1995, the Jicarilla Apache Tribe ("Jicarilla") enacted an ordinance directing that unlined surface
~..-.~... - - ~ _ - . . . - . - . - . - . - . . . . . - . . . - . - . - - - . .
. eseose asevsea comp anv- er eem ==xsoe ano euosessasses e-4 Ital ssGMENT INFORMATION The Company primarily operates in three business segments, as indicated below. A description of each of the Company's three segments and their products, services and markets served is included in Part I of the Annual Report on Form 10-K. Corporate administrative expenses are allocated to segments based upon the nature of the expense.
Summarized financial information by business segment for 1997,1996 and 1995 is as follows: ENERGY ELECTRIC
- OA8 SERVICES"' OTHER TOTAL (la alvuornh) 39973 Operating revenues $ 722,438 $294,769 $118,060 - $ - $1,135,267 Operating expenses excluding income taxes 576,521 263,738 132,629 - 972,888 Pre-tax operating income (loss) 145,917 31,031 (14,569) - 162,379 Operating income tax (benefit) 36,446 7,587 (5,732) 33 38,334 Operating income (loss) $ 109,471 $ 23A44 $ (8,837) $ 03) $ 124.M5 Depreciation and amortization expense $ 68,089 $ 14,587 $ 26 $ -
$ 82.702 mer Construction expenditures $ 96/>63 $ 31 A08 $ -
$ - $ 128,371 Identifiable assets:
Net utility pirat $1,276,927 $296,223 $ -
$ - $1,573,150
- Other 509,007 183,097 40A79 7,999 740,582 Total assets $1,785,934 $479,320 $ 40,479 $ 7,999 $2,313,732 1996:
Operating revenues S 645,639 $227,301 $ 10,446 $ -- $ 881,386 Operating expenses excluding income taxes 509,804 191,922 16,246 - 717,972 - Pre-tax operating income (loss) 135,835 35,379 (5,800) - 165,414 g Operating income tax (benefit) 32,422 8,927 (2,296) 342 39,395 Operating income (loss) $ 103A13 $ 26,452 $ O,5M) $ 042) $ 126,019 Depredation and amortization expense $ 64,817 $ 13,122 $ -177 $ - S 78,116 Construction expenditures $ - 76,572 $ 26,497 $ 18 $ -
$ 103.087 Identifiable assets:
Net utility plant $1,270,141 $281,348 $ 1,2M $ - $1,552,693 Other 449,478 202,725 13,618 11,800 677,621 Total assets $1.719,619 $484,073 $ 14,822 $11,800 $2,230,314 1995:- Operating revenues S 584,284 $217,985 - $ 6,196 $ 808,46S Operating expenses excluding income taxes 470,824 190,128 - 3,931 (>64,883 Pre-tax operating income i13,460 27,857 - 2,265 143,582 Oprating income tax 24,884 4,313 - 997 30,194 Operating income $ 88.576 $ 23,544 - $ 1,268 $ 113,388 Depreciation and amortization expense $ 63,047 $ 17,248 ' - $ 570 $ 80,865 Construction expenditures S 76,610 $ 26,315 - $ 4,741 $ 107,666 Identifiable assets: Net utility plant $1,298,103 $276,218 -
$ 113 $1,574,434 Other 327,547 125,387 - 8,301 461,235 Total assets $1,625,650 $401,605 -
$ HA14 $2,035/>69
- Includes the resources excluded from NAIPUC retail rates regulation.
" Energy Services began operations in 1996.
OnJune 30,1995, the Company sold sulstantially all of the gas Fathering and processing assets of the Company and its gas subsidiaries and onJuly 3,1995, the Company sold its water division (see note 12).
M S X t C 0 A N D SU$$$D f & il iE $ ,. ooMP& N Y O F. N B W eue6 ec eeavsoe 4 1 QUARTERLY OPERATING RESULTS
%e unaudited operating results by quarters for 1997 and 1996 are as follows:
evARTER ENDED auna se s5PTEMBERSt DECEMBER 31 MaRcw as (in thouunds except per sbm amounn) 997: $238,712 $285,971 $311,732
$298,822 Operating Revenues $ 25,994 $ 34,885 $ 26,473
$ 36,693 Operating Income $ 15,567 $ 24,319 $ 16,213
$ 24,896 Nct Earning $ 0.58 $ 0.38 0.37
$ 0.59 $
Net Eaminp per Share (basic) 0.38
$ 0.59 $ 0.37 $ 0.57 $
Net Earnings per share (diluted) 1996: $241,904 $197,597 $210,7$7 $233,128 Operating Revenues $ 25,346 $ 32,412 $ 29,786
$ 38,475 Operating Income $ 13,542 $ 19,940 $ 12,650
$ 26,448 Net Earnings (1)
$ 0.63 $ 0.32 $ 0.47 $ 0.30 Net Eamings per Share (basic)(1)
$ 0.62 $ 0.32 $ DA7 $ 0.30 Net Earnings per Share (diluted)(1)
In the opinion of management of the Company, all adjustments (consisting of nornul recurring acenials) ne statement of the results of operations for such periods have been included. (1) During the quarter ended December 31,1996, the Company made a pmvision for loss of $10.0 million, net of conunon share), as a result of the gas rate order, pending the outcome of the appeal. In addition, the Company reco after-tax curtailment gain of $8.0 million ($.19 per common share) related to the change of the Company's defined pension plan. Operating Revennes
. per Division IM inh A : 1M m...,__
.Ik
' r esasse m ID tam .
1+ r r'.. gv gAgg L] . a
- -. . -- .. - - . . - . . . . -. -- - .~ - . .
i
, 'e u e L 4 c . e a a v .s e a e o se e a m y ee aaw eexeoe aao euoeae aaeso j - I I
L I I otossany AG . . . . . . . . . . . . . . . .New Alexico Attorney General NAIED . . . . . . . .New Alexico Environment Deparonent BIIP . . . . . . . . . . . . .. .BilP Alinerals International, Inc. . NAIPUC . . . .New Alexico Public Utility Commission l 11LM . . . . . . . . . . . Bureau of Land Atanagement OCD.. . . . . .New Alexico Oil Conservation Division COA'.. ...... ........ . . . .Ci yt of Albuquerque PCAC . . .~.PNMGS' Purchased Gas Adjusanent Clause EIP . . . . . . . . . . . . . . . . Eastern Interconnection Project PNMGS . . . .Public Service Company of New Alexico ; Gas Services, a division of the Company ! El Paso .. . . . . . . . . . . . . . . .El Paso Electric Company ; EPNG . . . . . . . . . . .13 Paso Natural Gas Company. l
, . PVNGS . . . . .Palo Verde Nuclear Generating Station !
FASB . . . . . . . . . . Financial Accounting Standards Board ; SDG&E.,... . San Diego Gas and Electric Company j Fannington . . . . . . . . City of Fandngton, New Mexico ; FERC . . , . . . . . . Federal Energy Regulatory Commission SFAS . . . . . Statement oflinancial Accounting Standards ' j Four Corners . . . . . . . . . . . .Four Corners Power Plant FPPCAC .... . . . . . . .. . . . Fuel and Purchased Power Cost Adjustment Clause . . .SanJuan Generating Station SJGS . . . . . . . . KWh . . . .. .... . . . . . . . . . . . . . Kilowatt 1Iour SPS . . . . . Southwestern Public Senice Company LOBS . . . . . . . . . . . . . . . . Lease Obligation Bonds SUNS . . . .. . . . . . . . . Senior Unsecured Notes Los Alamos. Ifhe County oflos Alamos, New Alexico UAMPS . . . . Utah Associated Alunicipal Power Systems M-S-R . . . . . . . . . . . . . .A1-S-R Public Power Agency, Williams . . , . . . . Williams Gas Processing-Blanco, Inc., a California public power agency a subsidiary of the Williams Field Services = Group,Inc., of Tulsa, Oklahoma 1
' ^ ~ ~ - - - - - - - - - - _ --
e o INVESTOR INPORMATION . COMMON STOCK PRICES AMD DIVID EN D S DECLARED
$ses (la dallon) $sst LOW DIVIDEND WlON MION LOW GuARTER D9VIDEND
$0. l '. 18 m 17 #8
$0.17 20 1/2 17 m l $0.12 201/2 17 W
$0.17 18 Us 15 m 19 2 $0.12 20 m
$0.17 19W16 17 M 3 19 7/8 18 t/8 18 7/s $0.12
$0.17 23 ls/06 4
COMMON sTOCN LisflNG CORPOR ATE NE ADQu ARTERs PNM's common stock is listed under the symbol PNA1 and Public Senice Company of New Mexico primarily traded on the New York Stock Exchange. As of s Aharado Square, Albuquerque, NM 87158 December 31, 1997, there were 17,634 common share-(505)241-2700 holders of record. ANNu AL MEETING REcutsTs roR ANNUAL REroRTs The 1998 annual meeting of shareholders will be heki on ronM $o.x on Tuesday, April 28, at the UNM Continuing FAucation To obtain an additional copy of this annual arpon or a Conference Center, k>cated at 1634 University Boulevard copy of the annual Fomi 10-K filed with se Securities NE, Albuquerque, NM. The meeting will begin at and Exchange Commission, call 800-545-4425, or write 9:30 a.m. (MD't). to Barbara liarsky at the corporate headquaners address. TR ANsrER AGENT AND REQlsTRAR rusLlc roLacT issues PNM Shareholder Records Department, Alvarado Square . PNM encourages its shareholders to take an active interest 1104, Albuquerque, NM 87158 Tekphone:(800) 545-4425; in the legislative and pubuc policy issues that affect the com-Q Fax:(505) 241-4311 E-Mail: yjohnson@ mail.pnm.com pany and the utility industry. For more information, contact PNM'E Investor Relations Department at 1-800-545-4425. INVESTOR INFORM ATION AND sN ARENOLDER RECORDS INQulRits PNM DlRRc7 investor infonnation is availabh 24 hours a day, seven days a The following investor services are available through PNAPs week by calling PNM's shareholder information line. This direct stock purchase and dividend reitwestment plan: automated system feattr, earnings and dividend information, news releases, financial statements and a daily stock quote. Direct purchase ofFNMstock PNM offers a dinxt stock purthase plan to all interested partid-Call (800) 840-OPNM. Oth questions concerning stock ownership may be pants. Shares can be purchaul (or sold) at nominal commissions. directed to PNMk Sharehokler Records Department. Call A "'""'#'I"#d "d"'I*"# 1-804545-4425 or write to the above address. Hrough PNM Direct participants can make regular cash contributions to purchase additional shares of PNM com-sECuRiflEs AN ALTsT INoutRIEs umn stock by having funds automatically withdrawn from Securities analysts, portfolio managers and representatives their bank accounts. of financial institutions seeking information about Direct deposit ofdividends PNM should contact Barbara Barsky, Vice President, Your PNM quarterly dhidends can be deposited automari-Strategy, Analysis and investor Relations at the corporate cally into your personal checking or savings account. headquarters address, or call (505) 241-2662. E-Maih bbarsky@ mail.pnm.com o,y,,7,,,,,,, ,,3 ,,,v;,,,
+ Acceptance of PNM stock cenificates for safekeeping PNM ON TME INTERNET PNM's home page on the World Wide Web contains back- Call or write Shareholder Records for a prospectus on this Fround information on the company, news releases. financial ;npular pmgram.
information, and an electronic version of our annual repon. Specific information of interest to investors can be found at www.pnmrom
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