ML18192A389

Public Service Company of New Mexico 1974 Annual Report, as Response to Request for Additional Financial Information

ML18192A389
Person / Time
Site:	Palo Verde
Issue date:	12/31/1975
From:	Public Service Co of New Mexico
To:	Office of Nuclear Reactor Regulation
References
Download: ML18192A389 (46)

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ADDITIONAL FINANCIAL INFORMATION PALO VERDE NUCLEAR GENERATING STATION UNITS 1, 2 and. 3 Dockets Number STN 50-528, 529 and. 530 Public Service Company of New Mexico l975

YELLOW SHEETS SEPARATE QUESTIONS GREEN SHEETS SEPARATE ATTACHMENTS WITHIN QUESTIONS

UESTION 6 Provide copies of the 1974 Annual Report to Stockholders and copies of the prospectus for each of the participants'ost recent security issue.

Provide copies of the prelimin'ary prospectus for any pending security issue. Continue to submit copies of the Annual Report for each year thereafter as required by 10 CFR 50.71(b).

el ANNUALREPORT OF THE PUBLIC SERVICE COMPANY OF NEW MEXICO rAaI.H Ov CONrHNrS Page 1 Highlights 2 Message to the Stockholders 5 Financial Matters Operating Revenues Operating Expenses Plant and Property Additions Earnings Per Share and Dividends Financing Rates and Regulations 8 System Expansion Electric Water Five-Year Forecast Research and Development Fuel Supply 11 Marketing Area Served Consumer Services Home Economics Marketing Research Franchises 14 Environment Ecology 15 People Management Changes Employee Relations Union Education and Training 16 Index to Financial Data 36 Officers and Directors Inside Back Cover System Map This Annual Heport and the financial statements contained herein are submitted for the general information of the stockholders of tho Company and are not intended for use in connection with any sale or purchase of, or any offer or solicitation of offers to buy or sell, any securities of the Company.

Increase or 1974 1973 (Decrease)

CONDENSED EARNINGS STATEMENTS Total Operating Revenues .. ...$ 67,367,044 $ 58,105,583 15.9 Operating Revenue Deductions:

Operations and Maintenance ... 30,836,104 22,984,163 34.2 Depreciation ................ 7,974,988 6,210,576 28.4 Income Taxes 6,638,499 7,734,730 (14.2)

Other Taxes ................. 4,451,727 3,643,430 22.2 Total Operating Revenue Deductions . 49,901,318 40,572,899 23.0 Operating Income 17,465,726 17,532,684 (.4)

Other Income and Deductions, Net .............. 1,497,373 2,838,821 (47.3)

Income Before Interest Charges .. 18,963,099 20,371,505 (6.9)

Interest Charges 8,670,579 7,615,708 13.9 Net Earnings . 10,292,520 12,755,797 (19.3)

Preferred Dividends ............ 1,768,400 595,400 197.0 Earnings on Common Stocg .....$ 8,524,120 $ 12,160,397 (29.9)

Earnings per Common Share ....$ 1.95 $ 2.81 (30.6)

Dividends per Common Share....8 1.20 $ 1.14 5.3 Gross Investment in Property .... $ 327,845,187 $ 282,934,098 15.9 Kilowatt-Hour Sales ............ 2,895,185,185 2,763,486,506 4.8 Peak Load (Kilowatts) .......... 583,400 533,000 9.5 The annual mooting of stockholdors is schedulod to be held April 22, 197s. A proxy form and notice of tho annual moot-ing will bo mailod to all stockholders on March 25, ss75.

For further information and dotails pertaining to the infor-mation provided in this report contact D. E. Peckham, Secrotary ond Treasurer, Public Service Company of Now Mexico, Post Office Box 2267, Albuquerquo, New Mexico enos.

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

MHSSAG-H TO TH H STOCMH OI DHRS The year 1974 was unlike any previous one in your Company's twenty-eight-year history. Despite conservation, which was particularly apparent during the 12 months following the oil embargo, total. kilowatt-hour sales for the year were up 4.8% over 1973. For the months of November and December, kilowatt-hour sales were up more than 10% over the same months a year ago. The peak demand upon the electric system increased 9.5% to 583 megawatts. Base electric revenues, excluding adjustment for increased fuel expense, amounted to $ 57,047,898, an increase of 10.6% over 1973. Total electric revenue, including adjustment for increased fuel expense, was $ 65,257,905 or 15.4% above 1973. Electric customers totaled 164,537, an increase of 2.9%.

Earnings for the year were $ 1.95 per common share compared to

$ 2.81 for 1973. The decline in earnings is attributable primarily to the increased costs of capital, labor, materials, and supplies caused by inflation and the reduced amount of allowance for funds used during construction.

Net earnings available for the common stockholder amounted to $ 8,524,120 for the year. Included in the net earnings was $ 1,042,977 reflecting the amount of allowance for funds used during construction for 1974.

Construction expenditures for the year totaled nearly $ 47,1.15,000.

Approximately $ 11,271,000 was expended in the construction of the second unit at the San Juan Generating Station. Other construction, including transmission, distribution, and other facilities required for the operation of the electric system, amounted to $ 30,534,000. Approximately $ 5,310,000 was spent for new equipment and improvements to the water facilities in Santa Fe and Las Vegas. The major expenditure, amounting to $ 2,780,000, was for a filtration plant on the Santa Fe water system.

In last year's message to the stockholders, mention was made that your Company had filed revised electric rates with the New Mexico Public Service Commission on December 20, 1973, which would have increased revenues $ 5.4 million based upon the twelve month period ending October, 1973. During the public hearings that were concluded in June, 1974, your management amended the request to seek $ 8.4 million in increased electric revenues. On October 10, 1974, the Cominission issued its order granting a $ 3.7 million increase. In its order, the Commission eliminated several major items from the rate base, the most important being construction work in progress, and as a result, the Commission's order was appealed to the Santa Fe District Court on November 1, 1974.

However, prior to the court hearing, conferences among your Company, the Commission, its staff, and the Intervenors resulted in an agreement to hold open hearings with regard to a new rate setting system. The appeal date was then deferred to allow Commission hearings on this agreement.

The central issue of the settlement was a concept of rate scheduling desig-nated as the cost of service index. Cost of service indexing is predicated upon the return on common equity and provides for increases or decreases in electric rates if this return varies above or below certain specified limits.

New Mexico is the first state to adopt this method which will largely eliminate the time lag and significant expense involved in utility rate cases.

These two problems have been among the more serious facing utilities and their customers in this country.

During the past year, 170,000 shares of $ 100 par value 9.2% preferred stock were issued and the funds, approximately $ 16.8 million, were applied

1 G. A. Schrciber I. D. Geist Chairman of thc Board/President Executive Vice President to the then outstanding short-term indebtedness. In addition, 855 million of 7.6% Pollution Control Revenue Bonds were issued by the city of Farmington, New Mexico, and guaranteed by your Company to provide funds for the pollution control devices and equipment on Units 1 and 2 at the San juan Generating Station. The balance of funds required for the 1974'onstruction program was obtained by short-term bank loans and through the issuance of commercial paper.

To repay current short-term indebtedness, management plans the sale of $ 10 million of preferred stock and $ 25 million of first mortgage bonds during the first quarter of 1975. To provide the funds for the 1975 con-struction program, funds will be obtained by the use of bank loans and commercial paper. Your management is contemplating additional long-term financing in late 1975 or early 1976.

Load growth on the electric system indicates that the second unit at the San Juan Generating Station will be required in December, 1976, and the third unit in mid-1978. The fourth unit is now scheduled for mid-1980, pending further study of peak requirements during the coming summer.

Your Company is indeed fortunate, as through our fifty-percent owned company, Western Coal Co., we have provided for sufficient coal for the economic life of the additional generating units that will be constructed at San Juan and possibly other sites in the future.

The participants in the Arizona Nuclear Power Project (ANPP),

including your Company, are currently reviewing the resource and load requirements for the early 1980's. Hopefully, this review will allow a new schedule for commercial operation with the first 1270 megawatt unit com-pleted in 1982; the second unit in 1984, and the final unit in 1986.

1974 was a year of unusual activity in the water departments in Las Vegas and Santa Fe. Water sales in Santa Fe and Las Vegas surpassed, all previous years.

During December, revised water rate schedules for both Santa Fe and Las Vegas were filed with the New Mexico Public Service Commission requesting a $ 200,000 annual increase in Santa Fe and a $ 54,000 annual 6 ',i increase in Las Vegas. Public hearings on these requests were concluded in January, 1975, and the Commission's decision is pending.

Your Company has embarked upon a vigorous public information effort to inform our consumers about Company operations and the need for a financially healthy company. Information regarding utility economics, oper-ation, financing, etc. is the subject of a new public information program, as we believe our consumers, who can understand the rules of professional and college football and the statistics of baseball, basketball, etc., are capable of understanding our business. Only by having our consumers understand our Company and our industry will we be able to accomplish the tasks that lie before us.

The year 1975 and those to come will continue to emphasize the present challenge of securing additional revenues to maintain the financial health of your Company and to prepare for the coming electric-energy economy. Your Company is dedicated to seeking the necessary rate increases as required to maintain financial stability while we continue to supply our customer's requirements at the lowest possible cost. With the continued dedication of our employees and the support of the shareowners, your Board of Directors and officers are confident that the challenges of the future will be met and your Company will have adequate and reliable electric energy for the coming electric economy.

G. A. Schreiber Chairman of the Board/President

OPEH,ATING REVENUES Total operating revenues for the year 1974 amounted to $ 67,367,044, a 15.9% increase over 1973. Electric revenues for the year amounted to

$ 65,257,905 or 96.9% of the total revenue. Water revenue accounted for

$ 2,109,'l39 or 3.'l% of the total. Net earnings for 1974 were $ 10,292,520, a decrease of 19.3% from the previous year.

OPEH,ATING EXPENSES Operating expenses for the year totaled $ 30,836,104, an increase of

$ 7,851,941 over the previous year. The rising cost of fuel, labor, and envi-ronmental equipment were responsible for the major portions of the increase.

PLANT AND PROPERTY ADDITIONS The Company's gross utility plant totaled $ 327,845,187 on December 31, 1974, an increase of $ 44,911,089 for the year, or 15.9%.

This increase in facilities is discussed in more detail under the heading of "System Expansion."

EARNINGS PEH. SHAHE AND DIVIDENDS Based upon the average number of common shares outstanding in 1974, earnings per share were $ 1.95. This compares to earnings per share of

$ 2.81 in 1973. The decrease in earnings resulted primarily from a decrease in allowance for funds used during construction, increased financing costs,:

and inflation experienced in labor and material costs.

Four quarterly dividends of 30 cents per share were paid to common I (

stockholders during 1974. A total of $ 5,244,726 was paid in common stock dividends during the year.

Quarterly dividends of $ 1.14'h and $ 2.30, respectively, were declared '

upon the outstanding shares of 4.58% and the 9.2% cumulative preferred stock resulting in a total payment of $ 1,768,400 to preferred stock-holders in 1974.

F'INANCING The continued heavy construction schedules required long-term financ-,",.',

ing throughout the year.

In April, 1974, 170,000 shares of 9.2/0 cumulative preferred stock,

$ 100 par value, were sold to the public. The sale of this issue provided net receipts of approximately $ 16.8 million.

In September, 1974, $ 55 million of 7.6% Pollution Contzol,,Revenue Bonds were issued by the city of Farmington, New Mexico, and guaranteed, by your Company to provide funds necessary for,the installation. of'pollu-'ion abatement equipment at the San Juan Genera'ting;Station. Approxi-, '.-

mately $ 7 million of the funds have been applied to',,such,,equi'pment -'>

Present plans call for the sale of $ 10 million;o('lpreferr'ed.'-stock"a'ndi

$ 25 million of first mortgage bonds during the.,first quarter'f=1975. The--

proceeds from these sales will be used to--reduce. outstanding short-term indebtedness. It is also anticipated that addition'al permanent financing l ~).

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may be required in the latter part of 1975. However, no decision has been made as to the dollar amount, the type, or the timing of this permanent financing. Interim financing for necessary facility expansion throughout the year will be obtained from internal sources and from short-term borrowings.

During the past year, the owners of over 75% of outstanding first mortgage bonds consented to certain revisions in some of the provisions of the indenture which will modernize this document and, among other things, allow your Company to invest in and own generating and transmission facilities outside the borders of the state of New Mexico.

Your Company is presently investigating several new possible methods of financing the construction of new generating facilities. Investment counselors and attorneys are studying all consequences of these new methods, and a decision is expected on the feasibility of these new methods early in 1975.

RATES AND REGVLATIONS During December, 1973, Public Service Company filed an application with the New Mexico Public Service Commission, the regulating body for utilities in the state of New Mexico, for permission to increase rates to all classes of electric customers. Hearings were held in Santa Pe in March, 1974. Cross examination was held from May 20 until June 7. The Commis-sion issued an order on October 10, 1974.

The Company's original petition requested an annual revenue increase of $ 5.4 million which was amended during the hearings to $ 8.4 million. The Commission's decision and order granted a $ 3.7 million increase in electric revenue to the Company.

Your management took immediate issue with this decision as it failed to allow sufficient revenues for financial stability; was contrary to the evidence presented during the hearings; and was inconsistent with state law governing the regulation of utilities. Consequently, an appeal was filed with State District Court on November 1, 1974.

While the appeal was pending, the Commission allowed the rates requested in December, 1973, to be implemented but with the excess subject to refund. In the meantime, an agreement, resulting from confer-ences among the Company, Commission, and Intervenors, was developed with the hope of avoiding a long and costly court settlement. The basic part of this agreement centered on a cost of service index method of rate adjustment. On March 7, following a two day public hearing, the settle-ment, including the indexing proposal, was approved by the Public Service Commission with a formal order to follow.

The cost of service indexing procedure provides for a quarterly review to determine return on common equity. Since the Commission in the appealed order set the rate of return on common equity at 14%, the indexing plan is based on a range of return from 13.5% to 14.5% per annum in order to maintain a stable return. Should the review find that earnings have fallen below the established band, an adjustment the follow-ing quarter to bring earnings to the allowed level will be made. Should earnings rise above the band, a decrease the following quarter will result.

Billings under the indexing plan will begin in August, 1975, following a review of income for April, May, and June. Until this method is put into effect, your Company will collect revenues based on the rates filed in the original rate case, as modified by the Commission's final order and in accordance with the stipulated settlement of the rate case appeal.

An increase in the rate charged for energy delivered to the Energy Research and Development Agency (formerly the Atomic Energy Com-mission) at Los Alamos, a Federal Power Commission jurisdictional cus-tomer, produced added revenues of approximately $ 299,000. A new wheel-ing contract filed with the Federal Power Commission will provide increased annual revenues of $ 74,000.

The wholesale power agreement reached with Community Public Service Company during the year will add over $ 1.4 million in revenues during the first year it is in effect. Additional increases are anticipated as load growth in the area continues. An agreement to provide wholesale power to Plains Electric Generation and Transmission Cooperative will take effect in 1976 and continue until 2006.

New contracts reflecting increased rates were negotiated with the U.S. Air Force and General Electric Company's plant in Albuquerque.

These contracts will produce additional revenues in the large power category.

Negotiations for an increase in the rates charged by the Company to the city of Gallup have been unsuccessful and the Company is in the process of preparing an electric rate case with the Federal Power Com-mission, which has jurisdiction over the Gallup contract, The city of Gallup and two other contract customers accounted for 10% of the Com-pany's 1974 energy sales.

Public Service Company filed two separate cases for increased rates for water service in Santa Fe and Las Vegas in November, 1974. Based on test year 1973, these rates would increase revenues by $ 200,000 in Santa Fe and $ 54,000 in Las Vegas. Public hearings on these requests were con-cluded in January, 1975, and the Commission decision is pending.

Q HX ECTH,IC Conservation by consumers had an apparent impact on the number of kilowatt hours sold in the months following the oil embargo of 1974.

However, growth in the Company's service areas continued with kilowatt-hour sales for 1974 increased 4.8% over 1973. During the last two months of 1974, kilowatt-hour sales increased more than 10% over the previous year. A new system peak of 583 megawatts occurred on June 21, 1974. This was an increase of 9.5% over the previous peak set in June, 1973.

Construction began on the second unit at the San Juan Generating Station in June. This 326 megawatt unit is scheduled for completion in December, 1976. The first unit at San Juan produced 605,840 megawatt hours of energy for customers from coal during 1974. With the addition of San juan to PNM's share in Units 4 and 5 at the Four Corners Plant, coal accounted for 51% of all power delivered to PNM customers in 1974.

Sulfur dioxide removal systems for both the first and second units at San Juan are estimated to require an investment by your Company of approximately 845 million. The construction'and installation of the units, which use the Wellman-Lord process, will be completed by July 31, 1977.

Average sulfur content of the coal in the area is 8/10 of one per cent, and the SO. removal system is designed to remove 90% of this amount.

Preliminary engineering and the application for necessary U.S. Nuclear Regulatory Commission approvals continued during 1974 on the Arizona Nuclear Power Project. Public Service Company is a participant in ANPP with five other southwestern utilities. PNM's 10.2% share in the development of three 1270 megawatt nuclear generating units near Phoenix will-provide our customers with an additional 390 megawatts by 1986.

', Construction Iproceeded during the year on the Company's transmis-sion network. The 160'mile Ojo Transmission Line, set for completion in September, 1975, will, link PNM's northernmost service areas directly with the coal;fired generating stations in northwestern New Mexico.

The combined cost of construction of generating and transmission facilities during 1974 reached $ 25,056,000.

A contract with" Community Public Service Company, a supplier of electrical energy in several areas in the southern portion of New Mexico, was negotiated during the year. Wholesale power for distribution by CPS to its customers in Lordsburg, Silver City, and other southern New Mexico areas will,be.'ought fiom Public, Service Company.

MTATHH, '

.'

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'Public Service Company's"Water Division provides service to 16,158 customers in the cities of. Santa Fe 'and Las Vegas.

'evenues from'water operations accounted for 3.1% of total Company revenues.

,, 'ainfallnd snowpack runoff provide surface water which is collected

'in reservoirs.',This supply's augmented by subsurface water from wells.

,The 'water'upply.,'during 1974 fromthe r'eservoirs was normal, but the expansion of well systems is continuing so t6'at'customers in these growing

'dmmunities can be assured of adequat'e'ater in years of below average precipitation.,

Many of the major construction projects underway in 1973 were completed this year. These projects include: the 8 million gallon per day treatment plant; the 6 million gallon storage tank; the 7 million gallon per day booster station and associated transmission facilities, all in Santa Fe.

In Las Vegas a 2.5 million gallon treated water storage tank was finished and improved mains from the Gallinas Canyon Reservoir were put in service.

Applications for increased water rates in both communities were filed with the New Mexico Public Service Commission in November, 1974. For further information, see the section of Rates and Regulations.

PIVE-YEAH, POH,ECAST A record $ 742 million is forecast for construction programs for the years 1975 through 1979. The majority of these dollars, approximately 73%,

will be spent on new generating facilities.

The Company's participation in the Arizona Nuclear Power Project will account for $ 114 million of the amount. Costs associated with addi-tional coal-fired units at the San Juan Generating Station will be approxi-mately $ 382 million during the period. The balance will be spent on related projects such as switching stations, transmission and distribution lines, and substations.

B,ESEARCH AND DEVELOPMENT Expanded research and development activities are rapidly becoming one of the most important tasks of energy-related industries. Public Service Company is involved with energy research and development both internally and through outside cooperative efforts.

Within the Company, members of PNM's staff are engaged in projects ranging from solar collector/heat pump hybrid systems for homes to geo-thermal base load generating facility development. Evaluation of newly developed geothermal sources within New Mexico is underway and, if feasible, utilization of these resources for electrical generation could begin within a few years.

PNM is participating in cooperative research projects through Western Energy Supply and Transmission Associates and the Electric Power Research Institute. EPRI is the largest private energy research and develop-ment endeavor presently in existence. Public Service Company, along with 500 other utilities and industries, contributes annually to EPRI to finance the 265 research projects currently underway. These projects, costing an estimated $ 120 million in 1975, vary from efforts to improve existing energy supply sources to the development of new sources of generation including solar and geothermal.

PUEL SUPPLY'ver a decade ago, the Company decided to begin the transition to coal as the primary fuel for generation in order to lessen the dependence on natural gas. Even with the staggering costs of environmental control systems necessitated by regulations governing the operation of coal-fired plants, the lower fuel costs should provide Company customers adequate energy at reasonable costs in the future.

In 1974, 51% of the power used by PNM customers was generated from coal. This will increase in the coming years as the development of the San Juan Generating Station continues. This energy is also supplied in

part from the Company's share in two large units at the Four Corners Power Plant. Coal for both generating plants is abundant in the area near Farm-ington, New Mexico. Over 60 million tons of surface mineable coal near the San Juan plant will provide fuel for electrical generation for many years.

In addition to this lease, Western Coal Co. a company jointly owned by PNM and Tucson Gas and Electric Company which provides the coal to the San Juan Generating Station, holds extensive leases south of Farm-ington in the Bisti area. This further assures adequate fuel supplies as the coal-fired facilities are constructed.

Natural gas accounted for 46.2% of the kilowatt hours generated in 1974, with oil used to produce the remaining 2.8%. The intrastate natural gas contract with Southern Union Gas runs through September, 1989, allowing for smooth transition into a coal based generation system.

To supplement coal, nuclear energy will be utilized beginning in 1982 when the first unit of the Arizona Nuclear Power Project goes into com-mercial operation. PNM is a 10.2% participant in this joint project now developing three 1270 megawatt pressurized water reactor/generating units in southern Arizona. Increases in nuclear fuel prices are not anticipated to be as dramatic and, therefore, will not have the impact such cost increases in fossil fuels have on consumers. The amount of nuclear fuel needed to run a reactor is comparatively small, making the overall fuel cost a much smaller portion of total operating costs.

Public Service Company engineers ran tests during 1974 to determine the feasibility of using recycled waste oil in the oil/natural gas fired boilers located in Albuquerque. Results indicate that this is possible; however, no large scale system is presently in existence to collect such fuel. If an economic collection system is developed which can supply reasonable quantities for generation purposes, not only will PNM have another fuel source, but the environmental effects of dumping such wastes will be lessened.

AREA SERVED New Mexico, the fifth largest state in the nation, is a vast land of mountains, deserts, and high plains. The majority of New Mexico's people live along the Rio Grande Valley. This fertile strip of land runs from Colorado southward to the Mexican border. Public Service Company, in providing electrical service to almost one half of the state's 1,122,000 people, operates through six divisions. Four of these divisions serve cities, pueblos, and towns near the Rio Grande: Santa Fe, Bernalillo, Albuquerque, and Belen. The Las Vegas Division serves the city of Las Vegas which is located on the high plains in the northeastern quadrant of the state, and the Deming Division provides service to customers in this southwest New Mexico agricultural hub city.

The Company also provides energy to the city of Gallup for distribu-tion through a municipal system; to the Energy Research and Development Agency (formerly the Atomic Energy Commission) facilities in Los Alamos; to the U.S. Air Force installation and General Electric Company plant in Albuquerque; to the extensive uranium mining and milling operations in the Ambrosia Lake area near Grants, New Mexico; and to Community Public Service Company for resale to its customers in southern New Mexico.

Public Service Company provided electrical energy to 164,537 cus-tomers through its own system at the end of 1974. This is an increase of 2.9% over the number served at the close of 1973.

The Company also provides water service to customers in Santa Fe and Las Vegas through the Water Division.

Public Service Company's main office is located in Albuquerque, New Mexico's largest city. Albuquerque experienced a slowing in rate of growth during 1974 as the general economy nationwide began reacting to problems caused by continuing inflation and high interest rates.

Although tight money affected the construction activities in the home and apartment sector, commercial construction in the downtown area has continued to be strong. New buildings on the skyline in or near downtown Albuquerque include the Central Public Library; First Plaza, a multi-story, block square complex housing the First National Bank and num'erous shops; t ..

the Albuquerque Inn, a new hotel adjacent to the recently completed Convention Center; a new American Bank of Commerce building; several f

high rise office complexes; and a new central plaza adjacent.,'to-)he-Con-vention Center with underground parking. A new Sheraton hotel is being built just north of Old Town. This facility will, provide visitors with lodging within walking distance of the shopsbillionthand>galleries in 'this historic area.

New Mexico ranks seventh in total mineral 'production, among the . II 50 states, leading in uranium, perlite, and potassium salts; rariking-third in copper; fourth in natural gas; and sixth in oil. With the renewed interest nationally in developing the country's coal resources, New, mexico's,esti-mated g.o billion tons of strippable coal and Syy ton'st of de'ep seain r coal are potential for an mcreasmgly energy oriented economic develop-'h, -.

ment. Since Albuquerque is the banking and trade center fora"'that,state,;,',, l:,

much of the activity relating to mining and energy development will ib ;ar, centered there. Energy related research, especially af Sandra, Laborato'ries,<lr'lI'i:,,'r increase Federal Government appropriations in the"A'lb'uquerque,area.fJ'.', <If,,'

.,'ill t 'II ',"' tah I,hi " Jb

Several manufacturing operations created new jobs in 1974. Among them were Grandinetti and Colt Industries. Real estate transactions set a new record during the year, up 10% in total dollar volume over 1973.

The Santa Fe Division serves customers in and around the state' capital. Santa Fe is the second largest city in New Mexico with over 50,000 residents. State government operations and tourism continued to contribute significantly to Santa Fe's economy in 1974. The number of electric cus-tomers increased by 4.4%, and water customers were up 2.1%.

Just west of Santa Fe, in the Jemez Mountains, is the Los Alamos Scientific Laboratory where much of the nation's nuclear research has been performed since the Manhattan Project. Power for the LASL facilities, such as the half mile long meson accelerator, is furnished through the Santa Fe Division. The communities of White Rock and Pajarito Acres are also served directly by the Santa Fe Division.

The Belen Division serves customers in the Rio Grande Valley just south of Albuquerque. The rapid growth experienced by Belen slowed somewhat in 1974. Even with the slower growth, overall business increased during the year, and the gains are projected to continue in 1975 with the addition of shopping facilities and homes both planned and now under construction. The traditional business in the fertile valley surrounding Belen, agriculture, is expected to continue to be an economic mainstay as demand for food grows.

Las Vegas and the surrounding area continued to experience economic growth during 1974. Building permits for the city were up 8.7% in value.

Just outside the city, work was begun on a 81.2 million vocational educa-tion school while work was being completed on a $ 1.4 million New Mexico Highway Department facility. Las Vegas is a historic ranching community located on high plains just east of the Sangre de Cristo mountains in north-eastern New Mexico. Two large state hospitals and New Mexico Highlands University are located in Las Vegas.

Deming is located in southwestern New Mexico about an hour's drive from Arizona and just 30 miles north of the Mexican border. Irrigation has allowed land near Deming to be put to extensive use as farmland even though the climate is semi-arid, warm, and sunny. The volume of building permits declined from the record level set in 1973 but was still higher than in 1972. Electric customers increased in number 4.2%, and financial insti-tution assets also went up during the year.

The Bernalillo Division put in its first full year of operation in 1974, serving customers along the Rio Grande Valley north of Albuquerque to the town of Cochiti. The service area includes Bernalillo, one of the oldest European settlements in the United States, and several small villages, as well as five Indian pueblos. Agriculture is the principal activity in the Bernalillo area. The proximity to Albuquerque accounts for continuing growth in the service area. Increased interest in Indian jewelry resulted in active trading and in the opening of many wholesale and retail jewelry operations in and around Bernalillo.

CONSUMHB, SKR,VICES I Revenue from residential consumers accounted for 35.6% of the Company's electric revenues. Commercial energy use accounted for 38.6%

while industrial sales represented 12.8%.

Consumer Service Department representatives maintained a liaison with architects, home builders, appliance distributors and dealers to help

them keep abreast of the many innovations in electric heating, ventilation, air conditioning systems, and other electrical energy applications in prepara-tion for the expected increased use of electricity. Future consumer messages will also relate to this increasing reliance on electricity as the known reserves of natural gas and oil continue to diminish. The Company is presently developing a selective marketing program which will attempt to build greater off-peak use of electricity. This will provide for a more profitable load structure while making better and more efficient use of the Company's generating facilities.

H:OMH HCONOMICS The Home Economics Department continued to provide educational assistance to schools, appliance dealers, homemakers, students, builders, architects, and lighting dealers in the proper application of electricity, electrical products, and cooking. Approximately 10,000 adults'attended lectures on Convenience Foods, Wise Shopping, Microwave Ovens, Kitchen Planning and Lighting, Building Know How, and miscellaneous cooking demonstrations. Over 9,000 young people from the various communities served attended youth oriented programs on cooking, consumerism, and the selection and care of an electrical appliance. The Department also handled over 7,000 telephone requests for information covering a variety of subjects relating to the home.

The Home Economics Department publishes and distributes several recipe booklets each year such as "Holiday Cooking" and "Cocinas de New Mexico," a popular cooking booklet which tells how to prepare many traditional southwestern dishes. The home economists are constantly handling requests from newly arrived homemakers on high altitude cooking and baking.

MAHKHTINGHHSHAH,CH:

The Marketing Research Department continued to strengthen its ability to support effective marketing efforts with the addition of an economist to the staff. A long range market projection program was initiated to evaluate new patterns of electrical usage as opposed to the historical trends. For the first time at PNM a residential customer attitude and aware-ness survey was completed. The information obtained from this survey will be an important contributing factor in developing a more comprehen-sive public information program. A surplus energy forecasting program for economy sales has been implemented, and load models for distribution planning have been provided.

PH,ANCHISHS After lengthy negotiations, franchises to provide both electric and water service to the city of Santa Fe were renewed effective December 1, 1974. The electric franchise is for a 25 year period, terminating in 1999.

The water franchise is for a period of five years.

The Company has long-term electric franchises in effect in its other operating divisions and 22 years remaining in the water franchise for the city of Las Vegas.

HN VIR,ONMHNT ECOLOGY Public Service Company's transition to coal as the primary fuel for electrical generation will provide assured power in the face of dwindling reserves of natural gas and oil and the resulting rising costs associated with those fuels. However, the fuel saving realized in the utilization of coal will be somewhat offset by significant costs involved in construction and opera-tion of environmental protection systems which coal burning necessitates.

In addition to the extremely efficient electrostatic precipitator in opera-tion at the San Juan Generating Station, sulfur dioxide controls are being added to meet state and federal air quality standards.

During 1974, 50 delegates to the World Energy Conference, which was held in Detroit, visited the San Juan Generating Station. These representa-tives from 20 foreign countries were impressed by the effectiveness of the precipitator which is designed to remove 99.5% of the fly ash resulting from combustion of coal.

The selection was completed during the year for the sulfur dioxide removal systems for Units 1 and 2 at San Juan. These scrubbers will be the largest application of the Wellman-Lord process yet installed. Based on an average coal sulfur content of 8/10 of one percent, the design calls for 90% SO= removal.

Added to the 88 million already committed as PNM's share in precipi-tator assemblies for Units 1 and 2, the sulfur removal systems will increase your Company's share of the environmental control costs to 824.7 million for the first unit and $ 27.9 million for the second. This represents 38% of PNM's construction costs for both units.

Western Coal Co. began reclamation efforts at the San Juan mine site during 1974. Over 20 acres have been graded, covered with topsoil, and reseeded. Irrigation began in July, and by the end of the growing season in early fall, vegetation was quite evident in both the test areas and through-out, the watered area.

,,t'~ ',Revegetation'studies are being conducted at the site by experts from th'e New Mexico State'hUniversity Experimental Station. Numerous variables are b'eing tried. in order to determine the optimum depth of topsoil cover, best'mix of grasses, and the effect of mulching.

-

Company engIneers conduct on-going studies of environmental effects of. generating stations, monitoring emission levels, studying plume disper-sion; and the effects on visibility, health, and vegetation, and other factors.

MANAGEMENTCH:ANGES Public Service Company, in keeping with the policy of maximum utilization of management talent and resources from within the Company, made the following changes in 1974: Ross Mullins, former Vice President of Engineering and Operations, was promoted to Vice President, Engineering and Construction. C. D. Bedford, Vice President of Corporate Planning, was promoted to Vice President, Administration. Philip Archibeck, Assistant Secretary, was promoted to Assistant Secretary and Assistant Treasurer.

J. B. Mulcock, Jr., Executive Assistant, was promoted to Manager, Public Affairs. Mr. A. C. Underwood, previously responsible for operation and maintenance of various Company real estate, was promoted to General Manager of the Company's wholly-owned subsidiary, Public Service Land Company. A. E. Rhodes, former Vice President of Production Plant, moved to his new position as President of Western Coal Co., a company jointly owned by Public Service Company of New Mexico and Tucson Gas &

Electric Company. George A. Schreiber, Public Service Company President, also assumed the position of Chairman of the Board of Directors.

Employees throughout the Company were saddened with the passing of Mr. Arthur Prager on November 4, 1974. Mr. Prager was the prin'cipal organizer of Public Service Company of New Mexico in 1946. He served

'.';

as President from 1946 to 1955, and Chairman of the Board from, 1955 to 1966 and was Director Emeritus at the time of his death.

Your management was shocked by the untimely death of Robert' Tripp in December. He was elected to the Board of Directors in July, 1973.

Mr. Tripp was one of the most progressive bankers in the Southwest, and his advice and counsel will be missed.

1( l',

pl EMPLOYEE RELATIONS Public Service Company's work force increased to 1216 employees during 1974. This was 49 people below the manpower budgeted, for the year. The primary increase in personnel was necessitated by the,expanslo'ri1. >

of the San Juan Generating Station.

Benefits available to regular PNM employees include health in'surance, life insurance, long-term disability insurance, retirement. plan, and aptock purchase plan. In addition, employees continue to take advantag1e,'of,'the,'. ll

'/

Company's educational assistance program. Employees wishing to continue their education are reimbursed for their expenses upon satisfactory,com-pletion of the courses taken.

Improved employee communications was a primary','goal. during 1974 Programs designed to increase an awareness and understanding of"',PNM;.',, '..

were presented to all employees. The programs included', such, 'tim'ely '>,','

subjects as the energy crisis and its effect on utilities",the'ratezcase, and ~ J/J:, ",,-'->

'<

PNM in 1975. I Jr The current contract between Local 611 of the Int'er'natio'nal'Brother-',,'~'t ~,'I, of Electrical Workers and your Company wa's "opene'd",for 'wage" "'-,t'";

',)~',,I'ood

'j' on May 1, 1974. An agreement reached in,,late June'provjdedp 'egotiations a 9% salary increase retroactive to May 1 and an additional 3,75,fo,increas'e, ,"'I~'

on November 1, 1974. This contract with the IBEW expires on April 30, 1975, and negotiations on a new agreement have begun.

EDUCATION AND TRAINING Education is an essential and vital element in the successful operation of any company. At Public Service Company of New Mexico, various training programs were conducted for employees throughout 1974. New apprenticeship programs for coal-fired plant operations were initiated at the San Juan Generating Station for plant operators, electricians, and maintenance personnel. A total of 22 new apprentices were indentured, and 10 were graduated from all apprenticeship programs.

Presentations of both technical and non-technical subjects were pre-sented to universities, high schools, junior high schools, and civic and private groups by members of the Company's Speakers Bureau. Nearly 70 programs were presented during the year with audiences totaling over 3,000 people.

PNM has also been active in community-oriented educational assistance programs. Work-study students from the University of New Mexico's School of Engineering and the School of Business and Administrative Sciences were provided practical work experience commensurate with their academic standing. In addition, three programs designed for high school students received support from the Company.

INDE'O PINANCIAI DATA 17 Growth Graphs 18 Comparative Operating Statistics 20 Summary of Operations Management's Discussion and Analysis of the Summary of Operations 22 Consolidated Balance Sheet Assets Stockholder's Equity and Liabilities 24 Statement of Consolidated Earnings 25 Statement of Consolidated Retained Earnings 26 Statement of Consolidated Changes in Financial Position 27 Notes to Consolidated Financial Statements 34 Stock/Dividend Data 35 Accountant's Report

G-R,0~TH: G-R,APH:S 64 100 136 172 208 280 316 352 1964 GROSS PLANT 1968 IN VESTMENTS 1970 FICURES IN MILLIONSOF DOLLARS 1972 1974 2~ 30 42 48 54 GO 72 1064~

196G GROSS REVENUES FICURES IN MILLIONSOF DOLLARS 1970 1972 1974 4.0 5.0 0.0 7.0 8.0 9.0 10.0 11.0 12,0 19G4 196G 1988 NET EARNINGS 1970 FICURES IN MILLIONSOF DOLl.ARS 1972 1974 5.4 7.0 9.4 10.2 11.0 11.8 19G4

PEDERAL, STATE, LOCAL AND GENERAL 1970 TAX.ES 1972 FICURES IN MILLIONSOF DOLLARS 1974 118 126 134 '142 150 158 174 182 19G4 NUMHER OP CUSTOMERS 1968 ELECTRIC 1970 AND WATER 1972 FICURES IN THOUSANDS OF CUSTOMERS 1974 280 340 400 460 520 580 G40 700 7GO 1964 19GG NET GENERATING 'l968 CAPABILITY 1970 FICURES IN THOUSANDS OF KILOWATTS 1972 1974

COMPARATIV'H OPElRATING STATISTICS 1974 1973 1972 1971 ELECTRIC SERVICE SALES KWH (Thousands)

Residential . 825,279 783,284 703 945 645,155 Commercial 1,1I8,039 1,100,412 976,218 874,445 Industrial 549,622 502(939 653,761 618,694 Other electric utilities ......... 250,901 236,'123 114,333 106,000 Other . 151,344 140,729 l35,809 131,011 Total KWH sales ......... 2,895,185 2,763,487 2,584,066 2,375,305 REVENUE (Thousands)

Residential $ 23,228 $ 20,343 $ 17,673 $ 15,210 Commercial 25,157 22,328 19,233 16,099 Indus trial 8,349 6,307 7,229 6,550 Other electric utilities ..... 2,782 1,977 937 857 Other 5,742 5,580 3,274 2,958 Total electric revenue .. $ 65,258 $ 56,535 $ 48,346 $ 41,674 CUSTOMERS AT YEAR END-Residential 147,182 142,854 136,155 127,544 Commercial '16,254 16,022 15,531 14,547 Indus trial 298 295 303 308 Other electric utilities ......... 10 3 3 3 Other 793 594 599 6 Total customers ........... 164,537 159,768 152,591

143,0'eliable net capability KW .... 727,000 617,000 542,000 540,700 Coincidental peak demand KW 583,400 533,000 491,700 458,700 Average fuel cost per million BTU 39.49) 26.16$ 24.47/ 23.55$

BTU per KWH of net generation .. 11,054 11,017 10,841 10,870 WATER SERVICE SALES Gallons (Thousands)

Customer sales 3,013,508 2,855,673 2,781,854 2,563,745 Interdepartmental sales ........ 12,568 10,710 3,638 1,707 Total water sales .......... 3,026,076 2,866,383 2,785,492 2,565,452 REVENUE Customer sales ........ $ 2,103,169 $ 1,566,730 $ 1,530,012 $ 1,434,685 Interdepartmental sales . 5,970 3,585 (1) 813 Total water sales ... $ 2,109,139 $ 1,570,315 $ 1,530,012 $ 1,435,498 Customers at year end I6,158 15,848 15,454 15,024 (1) Reclassified against operating expense 0

18

1970 1969 1968 1967 1966 1965 1964 579,910 529,108 483,324 440,897 417,992 385,340 359,323 781,548 722,312 650,996 606,504 555,142 485,151 430,788 552,118 524,180 479,883 444,907 4'16,594 393,916 381,792 98,026 91,890 86,765 80,322 78,864 '109,506 92,288 121,652 111,349 101,819 100,514 99,041 93,204 94,280 2,133,254 1,978,839 1,802,787 1,673,144 1,567,633 1,467,117 1,358,471

$ 13,831 12,786 $ 11,876 $ H.,061 $ 10,579 $ 9,898 $ 9,491 14,587 13,526 12,321 11,594 10,783 9,660 8,702 5,963 5,662 5,187 4,732 4,625 4,410 4,406 778 659 557 550 597 701 629 2,953 2,811 2,638 2,515 2,428 2,199 2,003

$ 38,uZ $ 35,444 $ 32,579 $ 30,452 $ 29,012 $ 26,868 $ 25,231 120,504 115,238 l12,401 110,132 108,483 106,648 103,906 13,669 '13,150 12,831 12,520 12,326 12,370 12,044 300 290 296 303 319 332 408 3 2 2 2 3 3 4 627 624 639 647 646 658 674 135,103, 'l29,304 126,169 123,604 121 777 120,011 1'17,036 540,700 437,400 334,000 334,000 334,000 334,000 334,000 400,600 372,300 347,800 328,500 316,300 302,600 277,700 23.044 24.48$ 24.26$ 24.034 24.004 23.654 23.014 11,058 552 11,550 11,263 11,199 J1,195 11,087 2,564,580 2,397,078 2,356,690 2,253,347 2,145,483 1,952,755 2,154,425 l,782 1,609 1 132 1,261 1,630 1,259 1,397 2,566,362 2,398,687 2,357,822 2,254,608 2,147,113 1,954,014 2,155,822

$ 1,417,697 $ 1,209,617 $ 1,172,831 $ 1,144,096 $ 1,100,523 $ 1,008,162 $ 1,048,'130 899 780 659 689 757 717 698

$ 1,418,596 $ 1,210,397 $ 1,173,490 $ 1,144,785 $ 1,101,280 $ 1,008,879 $ 1,048,828 14,495 14,216 14,092 13,8H. 13,679 13,388 13,105

SUMMAR,T OF'PER,ATIONS 1974 1973 1972 1971 1970 Operating revenue $ 67,367,044 58,105,583 49,875,643 43,109,355 39,530,502 Operating revenue deductions:

Operations and maintenance .............. 30,836,104 22,984,163 18,845,306 16,928,703 14,262,778 Depreciation and amortization ............. 7,974,988 6,210,576 5,682,019 5,437,159 5,177,502 Taxes, other than income taxes ............ 4,451,727 3,643,430 3,268,059 3,078,585 3,089,489 Income taxes . 6,638,499 7,734,730 7,175,543 5,751,000 6,052,579 Total operating revenue deductions ...... 49,901,318 40,572,899 34,970,927 31,195,447 28,582,348 Operating income . 17,465,726 17,532,684 14,904,716 11,913,908 10,948,154 Allowance for funds used during construction . 1,042,977 2,792,601 2,046,691 574,442 435,742 Other income and deductions, net ............ 454,396 46,220 (14,622) 176,600 232,493 Income before interest charges ........... 18,963,099 20,371,505 1.6,936,785 12,664,950 1'1,616,389 Interest charges 8,670,579 7,615,708 6,421,470 4,914,250 4,577,612 Net earnings 10,292,520 12,755,797 10,515,315 7,750,700 7,038,777 Preferred stock dividends . 1,768,400 595,400 595,400 595,400 595,400 Net earnings applicable to common stock . $ 8,524,120 12,160,397 9,919,915 7,155,300 6,443,377 Average common shares outstanding ......... 4,370,919 4,321,113 3,973,723 3,670,265 3,551,869 Per share amounts-Net earnings $ 1.95 2.81 2.50 1.95 1.81 Dividends $ 1.20 1.14 1.04 .9>>h .90 MANAGEMENT'SDISCUSSION AND ANALYSISOF THE

SUMMARY

OF OPERATIONS Operating revenue increased $ 8.2 million in 1973 and $ 9.3 million in 1974. The principal factors causing these increases were:

(a) Fuel cost adjustment natural gas fuel costs have accelerated rapidly since November, 1973. Generally, such costs are passed on to customers and revenue from the fuel cost adjustment increased $ 1.1 million in 1973 and $ 3.6 million in 1974.

(b) Rate increases the Company put into effect general rate increases for electric service under the jurisdiction of the New Mexico Public Service Commission of approximately 7% in April, 1972 and 10% in November, 1974. During the summer of 1974 the Company negotiated higher rates with certain electric customers whose rates are subject to the jurisdiction of the Federal Power Commission. Water revenues were increased by rate increases implemented in January, 1974 of approximately 25%.

(c) Sales volume although the effect of conservation of elec-tricity by the Company's customers has been experienced, both the number of customers and the average use per customer has increased in each of the last two years. KWH sales increased 6.9% in 1973 and 4.8% in 1974. The Company experienced a 5.6% increase in the volume of water sales in 1974.

(d) Miscellaneous electric revenue the Company received revenue of $ 260,389 per month from June, 1973 through May, 1974 for

costs related to operation of two-thirds of Tucson Gas 5 Electric Company's fifty-percent share of San Juan Unit ~~2.

Operation and maintenance expenses increased by $ 4.1 million in 1973 and $ 7.9 million in 1974. Principal causes were:

(a) Rapidly accelerating fuel costs.

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

(c) General inflationary factors.

(d) Overhauls and inspections at both the San Juan and Four Corners coal-fired generating plants and at certain gas and oil fired generating plants accounting for increases of $ .5 million in 1973 and

$ 2.0 million in 1974.

Credits to operation and maintenance expenses from power transferred to other utilities under interchange agreements (net of power purchases) increased by $ 2.9 million in 1974, primarily because the Company's San Juan generating unit, placed in service on November 30, 1973, has operated with a high level of reliability which, together with improved reliability of the Four Corners plant, has allowed the Company to provide more inter-change energy to other utilities.

The Company's gross utility plant increased by approximately 11%

in 1973 and 16% in 1974 as a result of expanded operations, the need to maintain reliable service and increasing environmental protection require-ments. This increase in utility plant and the Company's construction pro-gram have been the primary causes of increases experienced in the follow-ing areas of operations:

(a) Depreciation and amortization in addition to increased plant, new depreciation rates approved by the New Mexico Public Service Commission increased depreciation expense in 1974 by approxi-mately $ 380,000.

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

(c) Allowance for funds used during construction (AFDC) the Company's construction program, which was at a peak late in 1973, caused AFDC to increase in 1973 and to decrease significantly in 1974.

(d) Interest charges and preferred stock dividends during 1972-1974 the Company issued $ 20 million principal amount of First Mortgage Bonds, $ 17 million par value of preferred stock and $ 32 million principal amount of short-term debt, generally at higher interest and dividend rates than previous issues.

Other income increased in 1974 because the Company's equity in earn-ings of a fifty-percent owned company, which provides coal for the San Juan generating unit, increased when the first San Juan unit was placed in service late in 1973. Before the San Juan unit was placed in service, the fifty-percent owned company had no material revenue-producing operations.

As a result of the foregoing items, earnings before income taxes, income taxes, net earnings and earnings per share of common stock all increased in 1973 but decreased in 1974.

CONSOLIDATHD HALANCH SH:HHT December 31, 1974 and 1973 ASSHTS 1974 1973 Utility plant, at original cost:

Electric plant in service $ 258,607,327 238,881,356 Water plant in service 19,332,072 16,964,648 Common plant in service 7,571,124 6,651,509 285,510,523 262,497,513 Less accumulated depreciation and amortization 59,781,406 53,444,638 225,729,117 209,052,875 Construction work in progress 42,313,989 20,415,910 Electric plant held for future use 20,675 20,675 Net utility plant 268,063,781 229,489,460 Other property and investments:

Non-utility property, at cost, net of accumulated depreciation of $ 145,876 in 1974 and $ 147,154 in 1973 3,627,191 3,328,851 Investment in fifty-percent owned company 845,009 322,877 Other, at cost 155,313 39,998 Total other property and investments 4,627,513 3,691,726 Current assets:

Cash (note 5) 3,856,624 3,159,851 Receivables:

Customers 5,540,263 3,877,683 Others 2,477,441 2,830,713 Allowance for doubtful receivables (108,466) (117,685)

Materials and supplies, at average cost 10,683,186 5,866,264 Prepaid expenses 700,130 568,568 Total current assets 23,149,178 16,'185,394 Deferred charges:

Unamortized debt expense 2,362,813 986,241 Other deferred charges 2,677,119 1,710,001 Total deferred charges 5,039,932 2,696,242

$ 300,880,404 252,062,822 See accompanying notes to consolidated jinancial statements.

STOCKHOI DHHS'QUITY AND I IAHIIITIHS 1974 1973 Stockholders'quity (note 2):

Cumulative preferred stock of $ 100 par value.

Authorized 600,000 shares in 1974 and 300,000 shares in 1973; outstanding:

130,000 shares 1965 Series, 4.58% $ 13,000,000 13,000,000 170,000 shares 1974 Series, 9.2% 17,000,000 Common stock of $ 5 par value.

Authorized 10,000,000 shares in 1974 and 6,000,000 shares in 1973; outstanding 4,412,145 shares in 1974 and 4,340,261 shares in 1973 22,060,725 21,701,305 Premium on capital stock 29,613,997 29,037,813 Capital stock expense (1,338,902) (1,071,173)

Retained earnings (note 3) 39,223,076 35,943,682 Total stockholders'quity 119,558,896 98,611,627 Long-term debt, less maturities and sinking fund payments due within one year (note 4) 115,529,484 108,815,575 Current liabilities:

Short-term debt (note 5) 31,950,000 18,121,000 Accounts payable 6,731,757 4,037,240 Preferred dividends 539,850 148,850 Sinking fund requirements for long-term debt (note 4) 786,017 559,890 Customer deposits 'l00,539 83,118 Accrued interest l,743,1.03 1,492,595 Accrued taxes 1,678,895 1,194,068 Other current liabilities 1,385,821 1,134,053 Total current liabilities 44,915,982 26,770,814 Deferred credits:

Customer advances for construction 2,771,728 2,778,169 Accumulated deferred investment tax credits 5,173,095 4,465,052 Accumulated deferred income taxes (note 6) 'l2,659,779 10,395,016 Other deferred credits 271,440 226,569 Total deferred credits 20,876,042 17,864,806 Commitments and construction program (note 9)

$ 300,880,404 252,062,822

STATEMENT OP CONSOLIDATED HaamINGS Years ended December 31, 1974 and 1973 1974 1973 Operating revenues:

Electric (note 7) $ 65,257,905 56,535,268 Water 2,109,139 1,570,315 Total operating revenues 67,367,044 58,'l05,583 Operating revenue deductions:

Power purchased and interchanged, net (3,171,014) (287,338)

Operating and general expenses 28,297,353 19,888,555 Maintenance 5,709,765 3,382,946 Provision for depreciation and amortization 7,974,988 6,210,576 Taxes, other than income taxes 4,451,727 3,643,430 Income taxes (note 6) 6,638,499 7,734,730 Total operating revenue deductions 49,901,318 40,572,899 Operating income 17,465,726 17,532,684 Other income and deductions:

Allowance for funds used during construction 1,042,977 2,792,601 Equity in earnings of fifty-percent owned company, net of taxes (note 6) 482,601 86,733 Other, net of taxes (note 6) (28,205) (40,513)

Net other income and deductions 1,497,373 2,838,821 Income before interest charges 18,963,099 20,371,505 Interest charges:

Interest on long-term debt 6,727,983 6,771,440 Amortization of debt discount, expense and premium 85,565 52,082 Other interest charges 1,857,031 792,186 Total interest charges 8,670,579 7,615,708 Net earnings $ 10,292,520 12,755,797 Net earnings per common share, based on average shares outstanding 2.81 See accompanying notes to consolidated financial statements.

SVAYHMHNT OV COmSOr.IDATHD a,Hm XmHD HmaWIWG-S Years ended December 31, 1974 and 1973 1974 1973 Balance at beginning of year 3 35,943,682 28,708,932 Net earnings for the year 10,292,520 12,755,797 46,236,202 41,464,729 Dividends declared:

Cumulative preferred stock 1,768,400 595,400 Common stock 81.20 per share in 1974 and $ 1.14 per share in 1973 5,244,726 4,925,647 7,013,126 5,521,047 Balance at end of year 8 39,223,076 35,943,682 See accompanying notes to consolidated financial statements.

STATEMENT OF'ONSOX IDATHD CH:ANGHS IN F'INANCIAI POSITION Years ended December 31, 1974 and 1973 1974 1973 Funds provided:

Net earnings $ 10,292,520 12,755,797 Charges (credits) to earnings not requiring funds:

Depreciation and amortization 8,264,383 6,544,842 Provision for deferred income taxes, net 2,264,763. 1,961,418 Investment tax credit, net 708,043 1,898,463 Allowance for funds used during construction (1,042,977) (2,792,601)

Undistributed earnings of fifty-percent owned company (522,132) (94,002)

Funds derived from operations 19,964,600 20,273,917 Sale of preferred stock 17,000,000 Proceeds from Pollution Control Revenue Bonds 7,'145,278 Sale of common stock 935,604 647,906 Proceeds from other long-term debt 459,726 152,470 Proceeds from short-term debt 38,998,500 16,121,000 Utilityplant retirements, net of removal costs 1,256,572 1,071,880 Customer advances for construction, net of refunds 570,387 Other 46,325 41,336

$ 85,806,605 38,878,896 Funds used:

Cash dividends 7,013,126 5,521,047 Utility plant additions 46,471,625 27,081,114 Payment of short-term debt 25,169,500 Reduction of long-term debt 886,016 790,864 Bond discount and expense 1,468,670 Capital stock expense 267,729 31,150 Additions to non-utility property 793,015 239,813 Increase in other deferred charges 967,118 913,220 Increase in working capital other than short-term debt 2.647,616 4,289,774 Other 122,190 11,914

$ 85,806,605 38,878,896 Changes in working capital other than short-term debt:

Increase (decrease) in current assets:

Cash 696,773 (62,858)

Receivables 1,318,527 1,065,629 Materials and supplies 4,816,922 3,441,095 Prepaid expenses 131,562 90,838 6,963,784 4,534,704 Increase (decrease) in current liabilities other than short-term debt:

Accounts payable 2,694,517 'l,410,186 Preferred dividends 391,000 Sinking fund requirements for long-term debt 226,127 349,890 Customer deposits 17,421 6,826 Accrued interest 250,508 '145,814 Accrued taxes 484,827 (1,674,766)

Other current liabilities 251,768 6,980 4,316,'168 244,930 Increase in working capital other than short-term debt 2,647,616 4,289,774 See accompanying notes to consolidated financial statements.

NOTES TO CONSOLIDATED F'INANCIALSTATEMENTS December 31, 1974 and 1973 t1) Summary of Significant Accounting Policies System of Accounts-The Company maintains its accounting records in accordance with the uniform system of accounts prescribed by the Federal Power Com-mission and adopted by the New Mexico Public Service Commission.

As a result, the application of generally accepted accounting princi-ples by the Company differs in certain respects from the application by nonregulated businesses. Such differences generally regard the time at which certain items enter into the determination of net earnings in order to follow the principle of matching costs and revenues.

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

Utility Plant Utility plant is stated at original cost, which includes payroll related costs such as taxes, pensions and other fringe benefits, administrative costs and an allowance for funds used during construction. Such allowance was computed using a rate of 6'/2% in 1974 and 1973 as approved by the New Mexico Public Service Commission.

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

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

A study of remaining lives was conducted in 1973 and approved by the Commission resulting in an adjustment of depreciation rates effective January 1974. The change, increased depreciation expense by approximately $ 380,000 for 1974. The average depreciation rates used were as follows:

1974 1973 Electric plant 3.16% 3.12%

Water plant 1.61% 1.74%

Common plant 2.96% 2.03%

The provision for depreciation of transportation equipment is charged, along with other costs of operation, to a clearing account and sub-sequently apportioned to operating expenses and property accounts based on the use of the equipment. Depreciation of non-utility prop-erty is computed on the straight-line method.

Investment in Fifty-Percent Owned Company The Company's investment in a fifty-percent owned company is stated at equity. The co-owner, Tucson Gas I Electric Company, is partici-pating with the Company in the construction and operation of a steam turbo-electric generating plant described in note (9). The generating plant utilizes coal from properties of the fifty-percent owned company as a source of fuel.

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

Contributions in Aid of Construction Prior to January 1, 1974 amounts received from customers specifically for the construction of Company-owned facilities were recorded as contributions in aid of construction. Effective January 1, 1974, by order of the Federal Power Commission, the accumulated amount thereof related to utility plant still in service is reflected as a reduc-tion in the original cost of utility plant. The amount related to utility plant which has been retired is reflected as an increase in the accumulated depreciation. The resultant effect on net earnings is not significant. The accumulated balance at December 31, 1973 has been reclassified on the accompanying balance sheet in the manner prescribed by the order of the Federal Power Commission.

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

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

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

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

The Company deducted, for tax purposes, costs incurred in training employees in the operation of a new generating station. Such costs

are capitalized for accounting purposes. The Company has adopted the normalization method of accounting for the related tax benefit.

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

The Company has a fuel adjustment clause which generally passes increased fuel costs on to customers in a'subsequent month. The Company does not defer the unrecovered fuel costs.

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

(2) Capital Stock The 1965 Series, 4.58% cumulative preferred stock may be redeemed by the Company at any time, in whole or in part, upon thirty days notice thereof, at redemption prices per share (plus accrued and unpaid dividends) as follows:

To January 14, 1976 $ 103.548 january 15, 1976 to January 14, 1979 103.032 January 15, 1979 to January 14, 1982 102.516 January 15, 1982 and thereafter 102.000 Except that redemption may not be made through certain refunding operations prior to April 15, 1979, the 1974 Series, 9.2% cumulative preferred stock may be redeemed by the Company at any time, in whole or in part, upon thirty days notice thereof, at redemption prices per share (plus accrued and unpaid dividends) as follows:

To April 14, 1979 $ 109.20 April 15, 1979 to April 14, 1984 107.00 April 15, 1984 to April 14, 1989 104.00 April 15, 1989 and thereafter 101.00 Under its stock purchase plan for employees, the Company issued 33,205 shares of common stock in 1973 and 71,884 shares of common stock'n 1974 from 150,000 shares reserved for issuance under the plan.

Compensation accounts of the Company are charged for one-half of the market value of stock issued under the plan and the employee pays the balance. In 1974 the Company sold 170,000 shares of its 1974 Series, 9.2% cumulative preferred stock at $ 100 per share. The changes in stockholders'quity accounts were as follows:

Premium on Capital Preferred Common capital stock stock stock stock expense Balance at December 31, 1972 $ 13,000,000 21,535,280 28,555,932 (1,040,023)

Sale of 33,205 shares common stock 166,025 481,881 (31,150)

Balance at December 31, 1973 13,000,000 2'1,701,305 29,037,813 (1,071,173)

Premium on Capi tal Preferred Common capital stock stock stock stock expense Sale of 71,884 shares common stock 359,420 576,184 Sale of 170,000 shares preferred stock 17,000,000 (267,729)

Balance at December 31, 1974 $ 30,000,000 22,060,725 29,613,997 (1,338,902)

(3) Restrictions Charter provisions relating to the preferred stock and the indenture securing the first mortgage bonds impose certain restrictions upon the payment of cash dividends on common stock of the Company. At December 31, 1974, there were no retained earnings restricted under such provisions.

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

1974 First Mortgage Bonds:

2~/e% Series, due 1977 $ 4,899,671 4,968,713 3 % Series, due 1980 3,900,000 3,950,000 3'/~% Series, due 1982 3,160,000 3,200,000 3/e% Series, due 1984 2,433,346 2,463,736 4%% Series, due 1988 9,130,000 9,240,000 4/8% Series, due 1991 10,460,000 10,560,000 5%% Series, due 1997 19,402,028 19,613,780 7'/~% Series, due 1999 14,631,851 14,778,007 8'/8% Series, due 2001 19,957,789 19,955,045 7'h% Series, due 2002 19,957,232 19,955,714 Pollution Control Revenue Bonds 7.6% Series due 1984 ($ 55,000,000 principal amount less $ 47,854,722 held by trustee) 7,145,278 Other 452,289 130,580

$ 115,529,484 108,815,575 Effective January 1, 1974 unamortized discount and premium are com-bined with long-term debt in compliance with an order of the Federal Power Commission. The December 31, 1973 balance sheet has been reclassified to give effect to this revision.

Approximately 25 percent of the original principal amount of each series of first mortgage bonds will be redeemed through sinking fund require-ments prior to the aforementioned due dates. The aggregate amounts of maturities and sinking fund requirements on long-term debt out-standing at December 31, 1974 are as follows:

1975 $ 786,017 1976 1,048,758

1977 6,012,760 1978 'l,'l56,529 1979 'l,104,402 (5) Short-Term Debt and Compensating Balance Arrangements The Company's notes payable to banks aggregated $ 25,450,000 at Decem-ber 31, 1974 and $ 18,'l21,000 at December 31, 1973 with average interest rates of approximately 10'h% and 9'h%, respectively. Commercial paper aggregating $ 6,500,000 at December 31, 1974 had an average interest rate of approximately 9'/4%. In each case, such amount was the maximum amount outstanding during the year.

The average short-term debt outstanding and the weighted average interest rate thereon, computed using daily debt outstanding balances, were approximately $ 17,350,000 and 10'/2% (11'/2% effective rate after considering the effect of compensating balance arrangements), respec-tively, for 1974 and $ 9,875,000 and 8% (9% effective rate after con-sidering the effect of compensating balance arrangements), respectively, for 1973. The Company has agreed to maintain compensating balances with certain lending banks equal to 20% of the outstanding indebted-ness or 10% of the lines of credit at such banks, whichever is greater.

Such compensating balances totaled $ 2,440,000 at December 31, 1974 and $ 1,240,468 at December 31, 1973.

The Company had unused lines of credit for short-term borrowings aggregating approximately $ 900,000 at December 31, 1974 subject to cancellation at the banks'ption and $ 6,300,000 at December 31, 1973.

(6) Income Taxes Income taxes consist of the following components:

Charged to operating revenue deductions: 1974 1973 Federal income tax $ 3,217,600 3,339,323 State income tax 4l0,027 542,795 Deferred Federal income tax 2,002,339 1,760,114 Deferred State income tax 222,892 194,035 Amount equivalent to cuirent investment credit 876,130 1,999,889 Amortization of accumulated investment credit (90,489) (101,426) 6,638,499 7,734,730 Charged to other income and deductions:

Federal income tax (55,842) (72,373)

State income tax (5,801) (7,530)

Deferred Federal income tax 35,805 6,583 Deferred State income tax 3 727 686 Amortization'f accumulated investment credit (77,598)

(99,709) (72,634)

Total income taxes $ 6,538,790 7,662,096 Deferred income taxes deducted currently result from timing differences in the recognition of income and expenses for tax and accounting purposes. The sources of these differences and the tax effects of each were as follows:

1974 1973 Accelerated amortization of emergency facilities, liberalized depreciation methods and asset class lives shorter than guideline lives $ 2,235,272 1,672,322 Training costs (10,041) 281,827 Undistributed earnings of fifty-percent owned company (included in other deductions) 39,532 7,269

$ 2,264,763 1,961,418 The Company's effective income tax rate was less than the Federal income tax statutory rate for each of the years shown. The differences are attributable to the following factors:

1974 1973 Federal income tax statutory rate 48.0% 48.0%

Tax depreciation in excess of book depreciation caused by use of guideline depreciation provisions (3.3%) (3.8%)

Allowance for funds used during construction, net of depreciation adjustments (2.1%) (6.1%)

Certain employee benefits and taxes capitalized for financial statements, net of depreciation adjustments (2.5%) (1.1%)

State income taxes, net of Federal tax effect 1.9% 1.9%

Undistributed earnings of fifty-percent owned company (1.3%) ( .2%)

Amortization of investment tax credits (1.0%) ( .5%)

Other miscellaneous items ( .9%) ( .5%)

Company's effective income tax rate 38.8% 37.7%

(7) Hevenues In November, 1974 the Company was granted permission by the New Mexico Public Service Commission to implement new rate schedules for electric service with a portion of the increased revenues being subject to refund, depending on the final determination of the Com-pany's rate case. As of December 31, 1974 the Company had recorded electric revenues of approximately $ 570,000 which are subject to refund.

(8) Pension Plan The Company has a pension plan covering substantially all of its employees, including officers. The plan provides for monthly pension payments to participating employees upon their attaining the age of 65 or the age of 62 with 30 years service, the amount of such pay-ments being dependent upon length of service and the average wages of the five highest consecutive years of employment. Retirement benefits are 2% per year of service but not to exceed 65% of the employee's salary less a social security offset. The Company made contributions to the employees'ension plan of $ 945,000 in 1974 and

$ 944,000 in 1973, including normal costs and amortization of prior service costs. The actuarially computed value of vested benefits as of

December 31, 1973, the most recent valuation date, did not exceed the total of the pension fund assets.

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

The estimated amount of the unfunded prior service liability at December 31, 1973, was approximately $ 3,850,000.

The Employee Retirement Income Security Act of 1974 will require amendments to the plan's participation and vesting provisions. The effect of the amendments on the provision for pension expense and vested benefits cannot be estimated pending completion of further studies.

(9) Commitments and Construction Program The Company is participating with Tucson Gas 5 Electric Company in the construction of a steam turbo-electric generating station located in San Juan County, New Mexico. The Company will own an undivided 50% interest therein. The first unit of the station was completed and placed in service in 1973. Construction of the second unit, with the Company's share of the cost estimated to be approximately $ 75,000,000, commenced 'in 1974.

The Company is also participating with several other utilities in the construction of a nuclear generating station with the first unit sched-uled for completion in 1982.

It is estimated that the Company's construction expenditures for 1975 will approximate $ 91,000,000 including expenditures on the San Juan and nuclear projects. In connection therewith, substantial commitments have been made.

The Company has noncancelable leases for data processing and office equipment, utility poles (joint use), water processing apparatus, other equipment and real estate. Certain leases provide purchase options in the approximate amount of $ 1,700,000 for data processing equipment and $ 800,000 for construction equipment and a purchase obligation in the approximate amount of $ 1,400,000 for water processing apparatus provided it meets certain performance requirements. Renewal options and contingent rental provisions were not significant. The effect on net earnings of not capitalizing financing leases was not significant.

At December 31, 1974, lease commitments for subsequent years were approximately:

1975 $ 1,218,000 1976 862>000 1977 830,000 1978 703,000 1979 491,000 1980-1984 1,619,000 1985-1989 101,000 1990-1994 83,000 1995 and thereafter 241,000 Rents, charged to operating expense except for insignificant amounts charged to utility plant, were $ 1,172,676 in 1974 and $ 629,778 in 1973.

Range of sales prices of the Company's common stock, on the New York Stock Exchange (symbol: PNM), and dividends paid on both common and preferred stock for fiscal 1974 and 1973, by quarters. (Unaudited)

COMMON STOCK Dividends Hange of Sales Prices Per Share Higll Low Fourth Quarter, 1974 13% 10'/~ $ 0.30 Third Quarter, 1974 13% 10% 0.30 Second Quarter, 1974 17'/4 13 0.30 First Quarter, 1974 19% 16'/8 0.30 Fiscal Year 19% 10'/8 $ 1.20 Fourth Quarter, 1973 21'/8 15% $ 0.30 Third Quarter, 1973 21'/2 'l8'/c 0.30 Second Quarter, 1973 22 19'/s 0.27 First Quarter, 1973 25% 21'/~ 0.27 Fiscal Year 25% 15% $ 1.14 PREFERRED STOCK 1965 Series, 4.58% 1974 Series, 9.2%

Dividends Per Share Dividends Per Share Fourth Quarter, 1974 $ 1.145 $ 2.30 Third Quarter, l974 1.145 2.30 Second Quarter, l974 1.145 2.30 First Quarter, 1974 1.'145 Fiscal Year $ 4.58 $ 6.90 Fourth Quarter, 1973 $ 1.145 $

Third Quarter, 1973 1.'145 Second Quarter, l973 1.'145 First Quarter, 1973 1.145 Fiscal Year $ 4.58 $

Note: While isolated sales of the Company's preferred stock have occurred in the past, the Company is not aware of any active trading market for its preferred stock.

PEAT, MARWICE, MITCHELL 8c CO.

CERTIFIED PUBLIC ACCOUNTANTS P. O.BOX 502Z ALBUQUERQUE,NEW ~5EXICO OT103 The Board of Directors and Stockholders Public Service Company of New Mexico:

We have examined the consolidated balance sheet of Public Service Company of New Mexico and subsidiary as of December 31, 1974 and 1973 and the related statements of consolidated earnings, retained earnings and changes in financial position for the years then ended. Our examination was made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

In our opinion, the aforementioned consolidated financial statements present fairly the financial position of Public Service Company of New Mexico and subsidiary at December 31, 1974 and 1973 and the results of their operations and changes in their financial position for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis.

February 12, 1975

HOAR,D OP DIR,ECTOR,S H. L. GALLES, JR.* President, Galles Chovrolot Company Albuquerque, New Moxico J. D. GEIST' Executive Vice President, Public Sorvico Company of New Mexico C. E. LEYENDECKER President, Mimbrcs Valley Bank Deming, Now Moxico R. F. MATHER President, Creamland Dairios, Inc. Albuquerque, New Moxico D. W. REEVES" Chairman of the Exccutivo Committee, Public Service Company of Nmv Mexico G. A. SCHREIBER* Chairman of the Board/President, Public Service Company of New Mexico R. H. STEPHENS President, Stephens-Irish Agoncy Las Vegas, New Mexico R. L. TRIPPt Chairman and Chiof Executivo of Albuquorque National Bank Albuquerque, Now Mexico E. R. WOOD President, Santa Fe Motor Company Santa Fe, New Mexico

• Membors of tho Executive Committee tDeccased December 11, 1974 OPPICER,S G. A. SCHREIBER Chairman of tho Board/Prcsidont J. D. GEIST Executive Vice Presidont R. B. ROUNTREE Senior Vice Prosident R. MULLINS Vico President, Engincoring and Construction C. D. BEDFORD Vice President, Administration E. L. FOGLEMAN Vice Prcsidont, Markoting and Staff Sorvicos D. E. PECKHAM Secrotory and Trcasuror B. D. LACKEY Controller P. J. ARCHIBECK Assistant Socrotary and Assistant Treasurer B. P. LOPEZ Assistant Secretary H. L. HITCHINS, JR. Assistant Secrotary ond Assistant Treasurer J. P. BUNDRANT Albuquerque Division Vico President W. A. BADSGARD Santa Pe Division Vice President F. E. GRAY Vice President, Water Operations E. W. CARR Belon Division Manager P. R. GAMERTSFELDER Las Vegas Division Manager R. A. LAKE Darning Division Managor T. P. WARNKE San juan Operations Managor L. EDWARDS Bornalillo Division Managor EXECUTIVE OPPICES 414 Silver Avenue SW, Albuquerque, Ncw Mexico TRANSPER AGENT Albuqucrquo National Bank, Albuquerque, New Mexico Chemical Bank, New York, New York H,E6 ISTH,AH,S Irving Trust Company, New York, New York First National Bank in Albuquerque, Albuquerque, New Mexico

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