ML18192A381

Palo Verde - Public Service Company of New Mexico 1977 Annual Report

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

Text

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

gaC!Iat~+~38+~eooirir e DEADLINE RETURN DATE 9 K 0~IS REGUlATORY DOCKET FILE s n~.u~~RECORDS FACILITY BRANCH Pw I Ig; Demonstration Financial Highlights

.Our Turn Money-1977..Coming In Going Out.Financing Operations Peak Leaps-13%Load Factor at All-Time High.Construction Pace Continues.Explosion Shuts Down San Juan Unit 2.Water Service Area..Subsidiaries

.R, D&D-Research, Development and Tomorrow..Management Audit Fuels.Franchises

.Five-Year Forecast Rates and Regulation PNM-People and Programs Employee Relations.Public Information

..Index to Financial Data Officers and Directors System Map Page 1 2 3 3 3 4 4 4 4 5 5 6 6 7 7 9 9 9 10 10 10 11 11 12 32 Inside Back Cover The annual meeting of stockholders is scheduled to be held April 25, 1978.A proxy form and notice of the annual meeting will be mailed to all stockholders on March 23, 1978.For further information and details pertaining to the information provided in this report contact D.E.Peck.-ham, Secretary and Treasurer, Public Service Company of New Mexico, Post Office Box 2267, Albuquerque, New Mexico 87103.The Common Stock of this Company is traded on the New York Stock Exchange under the symbol PNM.This Annual Report and the financial statements con-tained herein are submitted for the general information of the stockholders of the 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.COVER PHOTO: Workers disassemble a steam turbine at the San Juan Generating Station as part of regularly scheduled maintenance procedures.

CONDENSED EARNINGS STATEMENT Total Operating Revenues,,I977$138,635,951 0/I 976 Increase$99,523,146 39.3 Operating Expenses: Operations and Maintenance,...

Depreciation and Amortization

.Income Taxes..Other Taxes 76,524,378 11,463,823 10,986,162 7,257,043 51,535,167 9,548,173 8,028,464 5,874,485 48.5 20.1 36.8 23.5 Total Operating Expenses....Operating Income Other Income and Deductions, Net., Income Before Interest Charges.Interest Charges Net Earnings Preferred Dividends Earnings on Common Stock Earnings per Common Share Dividends per Common Share Gross Investment in Property Kilowatt-Hour Sales Peak Load (Kilowatts) 106,231,406 32,404,545 7,653,033 40,057,578 15,136,962 24,920,616 6,284,825$18,635,791

.$2.46$1.61$682,058,276

..4,367,003,062 715,000 74,986,289 41.7 24,536,857 32.1 4,797,724 29,334,581 11,977,418 17,357,163 4,194,268$13,162,895 59.5 36.6 26.4 43.6 49.8 41.6$2.16 13.9$1.42 13.4$532,277,564 28.1 3,595,233,061 21.5 633,000 13.0 The past year saw PNM make some amazing strides and encoun-ter some tremendously frustrating problems.From a financial point of view, the year was better than most in recent history and this is encour-aging.From an operational point of view, the job is clearly becoming more difficult.

The tremendous impact of infla-tion, fuel cost increases, environ-mental controls, and rapid capital expansion that people in the busi-ness have been all too aware of for the past several years is being translated into increased power costs.Our customers are becoming conscious of those things which business and government have been trying to bring to their attention for the past several years.Perhaps the story hasn't been told often enough, but that is doubtful.The fact is that rising prices get more attention than all the studies, projections and prophecies that have been made.We now find the same people who brand themselves as dedicated consumer advocates and who have had a hand in pro-ducing the climate of distrust and intervention that has contributed to the rising costs, disassociating themselves from responsibility and accusing the productive sector of failing in its stewardship by con-spiring to cheat customers through increased prices.Add to this astounding intellec-tual ambivalence the puzzling ten-dency of some critics to decry bur-geoning governmental bureaucracy while advocating governmental ownership of all public utilities and the conclusion comes to mind that Lewis Carroll is writing letters to editors.The question that all businesses must come to grips with is whether the public will see this Mad Hatter's Tea Party for what it is or whether the tendency to substitute opinion for fact will become the rule of thumb in years to come.Waiting for the solution to evolve may be a fatal mistake.If producers are fettered by various forces claim-ing to be acting in thc public inter-est to the point where production is severely inhibited, the consuming public will probably conclude that 2 the producers don't know how to do their jobs and demand that changes be made.There can be no better scenario to study than the nuclear power industry.Every con-ceivable obstacle has been thrown in the path of nuclear electric power generation.

The incredible tangle of regulatory procedures has pushed the cost in time and dollars to the point where the critics'laims that nuclear power is not economical are on the verge of becoming self-fulfilling prophecies.

Who benefits?Not the people who repeatedly tell us that they want low-cost energy.There may be no good solution, but those who believe that the mar-ket system of determining the range and availability of goods and serv-ices is a reasonably self-correcting mechanism which works in the interest of the consumer might do well to go out into the fray and confront their adversaries.

The American public is clearly the best educated mass of people on earth.The communications system in this country makes Americans the best informed people who have ever lived.The decisions the public is being asked to make regarding the future of their country must be made based on as thorough an understanding of the issues as pos-sible.The nature of our country is to continually seek what de Tocqueville called,"The American belief in the perfectability of man." To provide accurate information is the key.People who are more aware of the workings of the eco-nomic system, from managers to employees to stockholders, should commit themselves to insisting that'the information we all receive is accurate.The day-to-day problems of run-ning a company such as PNM are vexations that can be analyzed and dealt with.'The philosophical shifts in attitude which dictate the man-ner in which the economic system operates in this country are much more profound and are not prob-lems that can be addressed by management alone.Coping with these interrelated changes is developing into the most pressing challenge we all face in the future;and while we are J.D.Gebi confident the task can be managed, the sooner it is perceived as'a societal problem, the sooner we can get on with developing thc solutions.

We are confident that the people of this country will make the best decisions in their own interest once the entire scope of the problem is brought to their attention.

The time of awareness is rapidly approaching.

J.D.Geist President G.A.Schreiber Chairman of the Board Coming In Operating revenues topped the$100,000,000 mark for the first time in PNM's history.The year'total revenues of$138,635,951 eclipsed the 1976 revenues of$99,523,146 by 39.3 percent.How-evera substantial portion of this increase went directly to fuel sup-pliers as it was collected under the fuel adjustment clause.While this pass-through of increased fuel costs increases the gross revcnucs, it does not increase net earnings.The adjustmcnt is doing thc job it was designed for as the cost of fuels, particularly natural gas and oil, continues to increase rapidly.The increase in operating reve-nues also rcllects a 21.5 percent increase in the amount of energy delivered to customers over the 1976 total.These figures tell the real story of changes in New Mex-ico and PNM's effort to improve operations.

Although rising prices and the conservation ethic are certainly making consumers aware of how they use energy, the demand con-tinues to grow.The per customer increase in residential sector usage was only 0.2 percent over 1976 consumption levels.This indicates that people are slowing the rate at which their personal use of electric energy is increasing.

However, PNM pcrsonncl installed an aver-age of thirty-five ncw services per day during the year.That's 9,000 new mctcrs, an increase of 5.1 percent on the PNM system.This additional load put thc increase in sales to the rcsidcntial sector up 4.4 percent during the year.Then there is the industrial load growth.As one of thc nation's lead-ing repositories of energy resources, New Mexico is experiencing a boom in mining activity.With reserves of oil, gas, uranium and various grades of coal, the state is being called on to provide energy for use in other parts of the coun-try as well as for its own growing population.

This industrialization, in a place where little has ever existed, is creating new demands for electrical energy.As much of the uranium ore near the earth'surface has already been minedthe newer claims are extending shafts far into the earth to get at ore bodies.The power required to pump water from these deep mines is one of the largest nev demands facing PNM.Last year thc amount of kWhr delivered in thc industrial area jumped 13.4 percent over 1976 levels.With the ncw people and the new jobs come the corresponding increases in commercial activity to serve the community.

Commercial demand, in terms of delivered kWhr, increased 3.4 percent even though commercial customers engaged in noticeable conservation efforts, often assisted by PNM representatives.

Going Out Serving this increased energy demand means that operating costs are going to risc.Ncw employees, new equipmcnt, ncw generators and new methods all take money.Although construction costs will be covered separately, it is interesting to note that operating expenses plus funds expended for utility plant additions during 1977 came to$251,421,222.

Operating costs reached$106,231,406, an all-time high.As previously noted, fuel played an unusually strong part in the cost picture.Because of the temporary loss of the San Juan coal-fired unit in July (See'Explosion Shuts Down San Juan Unit 2', page 5), the need for additional gas-fired generation and purchased power further exacerbated fuel costs.Over 270 new employees were added during the year to enable PNM to continue providing the service our customers have come to expect.Needless to say, mainten-ance, general inflation and taxes all contributed to the increase in operating expenses.Efforts made to hold down operating costs included budgeting procedure revisions, a management audit by a professional management evaluation firm and the development of morc compre-hensive project management activities.

7 jlijII I I'4 I g Ijbu~'~gt!'r dtP~t 4 J Iigh Qg l~Ihis hybrid cooling tower, combining both wet and dry techniques, will uso 80%loss water than a conventional wot systom.Such systems aro more expensive but represent an important step in water conservation so Important to tho arid Southwest.

W~W LW SV'r rgb'IKp>A steelworker continues his work seemtnttly at home in tho iron anthill of construction activity at tho San Juan plant.Financing At present, PNM has over$3,000 in plant investment for every customer served.That is about$5 in equipment for every dollar of revenue realized in 1977.This points out very graphically what people mean when they state that an electric utility is a"capital inten-sive" business.Few other businesses require the investment in facilities to provide a product that electric utilities face.With capital invest-ment commitments of this size in comparison to revenues, it becomes clear that significant financing is required.As New Mexico continues to grow in population and new uses for electricity come about, this need for capital will also increase.The five-year construction budget, which was approved by the PNM Board of Directors in late 1977, authorized expenditures of over$1.2 billion through the year 1982.This projected need for capital coupled with the realization that the country is in a prolonged period of inflation prompted the development of PNM's Cost of Service Indexing for adjusting electric rates.(For more on Cost of Service Indexing, see'Rates and Regulation'ection on page 10.)During 1977, PNM issued 1,526,238 shares of common stock and 200,000 shares of preferred stock, acquired$30 million through the issuance of first mortgage bonds and utilized proceeds of approxi-mately$36 million from pollution control bonds.Thc total capital acquired during thc year amounted to$118,244,362.

These funds were used primarily to finance the con-struction programs at San Juan Gen-erating Station, including pollution control equipment, and Palo Verde Nuclear Generating Station.eemmmme Peak Leaps-13%Despite periodic allegations that electric utilities are building unneeded generators

-"excess capacity" is the usual term-PNM's 1977 peak was up 13 percent over the 1976 mark.The"excess capac-ity" claim is based on the premise that demand for electricity has leveled out due to conservation activities.

New units continuo to take shape adjacent to tho operational units at the San Juan plant.Although it is true that our cus-tomers are practicing conservation to the extent that residential per customer use went up less than.2 percent in 1977, the additional customers added to the system, the increased industrial load and the substitution of electricity for other energy forms all played a role in the new peak demand.The substitution effect is some-thing that many people have appar-ently overlooked when forming opinions about the need for addi-tional electric generating capacity.As other forms of energy become less available and more costly, the users will make a decision to find a replacement.

We see solar energy entering thc home and water heat-ing market for just these reasons.However, for various tasks from making steel to cooking food at restaurants, electricity is being sub-stituted for other energy forms.Should electric vehicles begin to be accepted, further demands for gen-eration equipment will result.Load Factor at All-Time High One of the critical problems fac-ing electric utilities and their cus-tomers is that the extremely costly machines used to convert fuel to electricity are not used to capacity.This is the result of the inability to store large amounts of electricity and the need to have generation equipment on hand to meet peak demands.If demands were level, fewer generators would be needed and they would be used more eco-nomically.

The ratio of how much an electric system is capable of producing as opposed to how much it actually is used is called the load factor.PNM managed an annual load factor of 72.5 percent during 1977, which is considerably higher than the industry average, and the results can be attributed to a great extent to time-of-day rates in effec with several large wholesale custom-ers.There arc times of the day when these customers can buy power from PNM more cheaply than they can produce it themselves or acquire it elsewhere.

These times occur when PNM's regular custom-ers are not using the capacity which was installed for their use.If PNM can sell energy during these off-peak hours, the resulting revenues hold down the rates that our regular customers must pay for the facilities.

One of the major efforts PNM will be making during coming years is the development of load manage-ment techniques to maintain and perhaps improve this load factor.Such a plan will assure investors and customers that the investments we are making arc put to the best use possible.Construction Pace Continues Construction at thc San Juan Generating Station, jointly owned by PNM and Tucson Gas and Elec-tric Company, continued through-out 1977 at a rapid pace.Thc repair to Unit 2 brought hundreds of addi-tional workers onto thc site in a dctcrmincd clfort to gct thc unit back on linc as quickly as possible.Unit 3, rated at 468 megawatts, scheduled for scrvicc in mid-1979, is 50 percent finished.The stack and turbine deck foundations for Unit 4 arc in place.Unit 4, rated at 472 megawatts, will bc complctcd in 1981, and will bring thc total PNM system capacity based on coal to 77 percent.The other major elfort at San Juan during 1977 was the construc-tion of thc sulfur dioxide removal system for Units 1 and 2, which r')x~f>/vs 5/I/I/e e-E!~, j Workers examine tho wreckago following tho boiler explosion which twistod motal fittings In San Jvan Unit 2 like a child's tin toy.rho secvrity gvard is campod at tho railhead at prewitt, New Mexico, whore ho watchos over an immense steam vessel.A special soml-tractor and trailer mvst bo constrvcted to haul it overland 90 milos to tho San Joan plant as roads and bridgos simply aren't capablo of bearing its woight.will bc complete in April 1978 at an approximate cost of$120 mil-lion.Thc system represents the state of thc art of sulfur dioxide control and is the largest installation of its type in thc world.Not only is it designed to remove up to 90 per-cent of thc SOt resulting from com-bustion of low sulfur coal in the boiler, but the process concentrates thc SO>from thc flue gas stream and reduces it to elemental sulfur.In Arizona, construction on thc Palo Verde Nuclear Generating Sta-tion is well underway.Workers are busy excavating, setting thousands of tons of steel reinforcement bars in thousands of cubic yards of con-crete as the first unit begins to take shape.This$3 billion project, in which PNM is a 10.2 pcrccnt par-ticipant, consists of three units.The first is scheduled for service in 1982.Thc second and third are planned for 1984 and 1986.Each unit consists of a 1270-megawatt turbine generator powered by a pressurized water reactor.Explosion Shuts Down San Juan Unit 2 In thc early morning of July 7, 1977, a tremendous explo-sion occurred in thc boiler of Unit 2 at San Juan.The force of the blast ripped thc twenty-two story boiler from bottom to top, pushing steel I-beams up to three feet off-ccnter and blowing insulation and metal hundreds of feet.The concussion was severe enough to trip the adjacent Unit 1 off linc at thc same time, and PNM went from a position of r-.'~r!'CPS,'.".When Iho work on unit 2 is complete, a l 000 is standing.exporting several hundred mega-watts to importing several hundred within seconds.However, the inter-connections did their job and cus-tomers were completely unaware of thc problem as service was not interrupted in the least.Unit 1 returned to service shortly there-after.Fortunately, a shift change was in progress and no workers were killed, although two suffered minor injuries.Crews on duty responded quickly and correctly to the acci-dent and prcvcntcd subsequent injuries.As soon as the metal began cool-ing, PNM engineers and representa-tives of the construction contractor, boiler manufacturer and insuror were probing the wreckage trying to determine the cause of the blast.To date, no specific cause has been identified.

r~Nip n t F inferno will rage in the boiler where this workman No similar incident has occurred in the history of thc United States electric utility industry.The explo-sion occurred as the unit was being operated for the fourth consecutive day at full load.No changes in operating settings were being made and the unit was performing quite normally.The most disconcerting problem resulting from the blast as far as PNM customers werc concerned was the fact that the power pro-duced by the unit would now have to come from gas-fired genera-tors or through purchases from other utilities.

Both of these options are considerably more expensive than the coal-fired kilowatts that San Juan produces.Since the, dam-aged unit was unable to provide power, personnel at PNM's gas-and oil-fired plants coaxed every avail-able kilowatt from their generators so that the need to purchase power from other utilities would be as limited as possible.The unit was 17.5 percent of PNM's entire sys-tem capacity and was base loaded at all times so that more expensive-to-operate gas units could be held in reserve for peaking.The unit was adequately insured, and its repair is estimated to be complete by June 1978.Water When PNM was being formed, two of the utilities that were acquired included municipal water operations along with the electric businesses.

Today, water service to the cities of Santa Fc and Las Vcgas is still provided by PNM.Those early water systems, con-sisting of reservoirs and gravity-fed distribution networks, have been upgraded over the years in order to meet growing demands for water.Millions of dollars have been spent in both communities on thc PNM water systems.The newer installa-tions include deep wells, pumping stations, massive storage tanks, treatment plants and computerized control systems.As communities across the nation struggle to upgrade their water systems to con-form to the 1974 Safe Drinking Water Act, Santa Fe's system will be a much studied model of how to do the job.Higher rates in effect in both communities resulted in a notice-able decrease in consumption dur-ing 1977.Conservation, particu-larly in the Santa Fe area, resulted in a decrease of 7.8 pcrccnt from 1976 consumption levels.le&New Mexico, the 47th state, is the fifth largest in the Union.How-ever, because of climatic conditions unfavorable to agriculture and com-paratively undeveloped transporta-tion systems, thc state remained one of the least populated.

Until recently, that is.Since the end of World War II, a rather short period as history goes, thc population of the state has increased by 98 percent.The greatest part of this growth has occurred in the urban areas, precisely the areas PNM serves.As thc economy, the nation's weather and people's perceptions of the good life change, it appears that Ncw Mexico will continue to grow for some time.Many newcomers, when asked why they chose New Mexico, respond,"It's the last place left." It may well be.This voluntary migration toward the Southwest is creating impacts that arc destined to change the very things that many people seek in coming here.Managing this growth is one of the state's most pressing problems and onc of PNM's most interesting challenges.

Albuquerque,'the largest metro-politan area in New Mexico, is the base for PNM operations.

Over 376,000 people live in greater Albuquerque, and of the 9,000 new services connected to the PNM sys-tem in 1977, more than 7,000 were in Albuquerque.

New residents and new jobs are raising the standard of living in Albuquerque and the changes will require much more energy in coming years.Santa Fe, the capital, also is experiencing sharp growing pains as people who discover the oldest capital city in the United States continue to adopt it as their home.State and Federal government agen-cies, with their tendency to expand, are spurring a great deal of the

't~0 r'~,(fag QL s~AKHHI5HOP J.lt.LA)IY L~ISSB-IBBB~sly Archbishop lamy of Santa Fe, immortaliced in Willa Cather's DEATH COMES To THE ARCHBISHOP, was a leading Iiguro in terri-torial New Mexico's roligious and political life.An ablo administrator, he was responsible for building numerous churches and schools throughout hb dlocoso In the iato 1880's, including tho Cathedral of Santa Fo, shown here.growth in Santa Fe.Las Vcgas, on the high plains at the foot of the eastern slopes of the Sangre de Cristo Mountains in north-central New Mexico, was originally a ranching town founded by Spanish settlers.Las Vegas became a booming railroad town during the years of western expan-sion of the United States.Eastern-ers followed the railroad and became captivated by the clear mountain air and open spaces.They stayed and the present-day Las Vegas is a mixture of Spanish colonial architecture, turn of the century railroad Victorian styles, and morc modern, if less aesthet-ically interesting, architecture.

The Montezuma Hotel, designed by Burnham and Root, two of Chicago's most noteworthy archi-tects of the post-Great Fire Renais-sance, still stands on the outskirts of town, waiting for someone to find a use appropriate to its grandeur.Deming, only 30 miles from the Mexican border, is the lowest spot in PNM's service area, only 4,301 feet above sea level.This farming community is similar to Phoenix, Arizona in its climate and geog-raphy.Deming sits astride the major southern transportation route linking the East and West coasts.Its location and climate will bring new people to Deming, particularly in light of recent eastern winters.Small towns and Indian pueblos along thc Rio Grande north and south of Albuquerque are also served by PNM.To the north, the Bernalillo Division serves Berna-lillo-onc of the oldest European cities in North America-and sev-eral villages and Indian pueblos.The Belen Division serves the communities immediately south of Albuquerque along with the Isleta Indian Pueblo.Thc gains in popu-lation which New Mexico is exper-iencing are largely concentrated near Albuquerque.

However, with mountains due cast, Indian land north and south of the City and essentially barren mesa land to the west, many newcomers are settling in thcsc smaller communities north and south of Albuquerque along the Rio Grande.~P s~Public Service Company has interest in two subsidiaries, the wholly owned Public Service Land Company and thc jointly owned Western Coal Co.The Land Com-pany provides an agency which acquires land and water rights for various utility expansion projects.The work entailed requires a full-time operation as land and water are costly, much sought after commodities.

Western Coal Co.manages fuel operations at thc San Juan Gener-ating Station and holds coal leases.It is owned in equal partnership with Tucson Gas and Electric Company.J t~t-~-'-o c'p i>c'Only a few yards of rock cover tho coal at tho San Juan mlno.Bvt it takes giant draglines to quickly remove this overburden so the coal can be mined.s p+p~o~BKD>>o'KON The thought persists in many quarters that utilities are bending their every effor to encourage growth in their service areas in spite of thc fact that utilitics nation-wide are facing extremely diAicult times adding new capacity.Few places offer a better example than New Mexico.The growth here is roughly twice the national average, and PNM is developing conven-tional generation resources at an incredible pace.Ten years ago the entire value of the Company's 50-year accumulation of property and equipment was$170 million.In five years the figure will be well over$1.5 billion.Even with the development of conventional generation there is still a need to look into new sources of power in the face of such growth.Although fossil fuels offer well understood technology and com-paratively predictable prices these days, they have a problem with which even elementary school chil-dren are becoming quite familiar-their days are numbered.Although nuclear fuels can provide power through known technology, prob-lems, both practical and philosophi-cal, presently cloud the future of this potent resource.Consequently, PNM has under-taken numerous studies to look into ways of using energy sources that have not yet been put into large-scale use.Solar, of course, is the most often thought of energy resource when the idea of"alter-native energy" is brought up.Of course, PNM feels that the word alternative is quite misleading and that"supplementary" is far better, semantically.

Engineers in PNM's resource analysis section are currently involved in at least a dozen solar energy projects, geothermal energy studies, a pumped storage facility design and numerous more esoteric studies dealing with improving the efficiency of existing and future power plants.One of the most promising kit, v Five solar homos aro under construction In Albuquerque as part of an Electric Powor Research Institute project.PNM is a sponsor in tho project which seeks to develop solar systems appropriate to tho New Mexico cli-mate.At tho samo time tho project will help planners assess Iho impact of solar enorgy uso on the utility genoratlon needs.projects, from a general point of view, is the"Solar Hybrid Repow-cring Project." Several years ago PNM engineers who were looking at the various proposals to build solar thermal electric plants began Southwest.

PNM is negotiating with the Department of Energy for the construction of the first demon-stration project, with the help of DOE funding, in the Company's service area.b lisgitli'i+i ii~$r~+dJ~9=>/gal I SIC wondering if the solar thermal con-cept could simply be added to an existing fossil fuel plant.In this way, the sun's energy could run the plant during the day, through peak periods, and if the plant's capacity was needed at night, the fossil fuel boiler could be fired-up.Most of thc plants which could be repowered with solar are older gas-fired plants, which, if not repowered, will have to be retired before the turn of the century due to fuel problems;but the generators, condensers, switchyards and all associated equipment will have a much longer life span if this plan is successful.

The repowering concept proved to be such an intriguing idea that the Department of Energy awarded PNM a$700,000 grant to produce a definitive study of the concept.So far the survey portion of the study has identified 10,000 mega-watts of potential solar capacity in the Southwest.

Because of this immense capacity, the Department of Energy (DOE)is now planning two solar rcpowcring projects in the Throughout his efforts to estab-lish a national energy policy, Pres-ident Carter has emphasized near-term solar concepts.The solar rc-powering idea is much more a ncar-term project titan stand-alone solar plants.Other interesting solar projects underway include PNM's part of a million dollar Electric Power Research Institute experiment on residential solar heating.Although the concept of using solar heat for residential space and water heating is certainly well understood and gaining wider acceptance every day, very few thorough studies designed to accurately measure system per-formance of various designs have been conducted under controlled conditions.

This project is centered on ten homes.Five are being built in Albu-querque and the other five on Long Island, Ncw York.Each home will have a different solar heating sys-tem.The systems will be monitored and over 100 functions constantly compared.At the end of thc test there will be hard evidence as to which is the most cKective.The"power towor" at Sandia laboratorios noar Albuquerquo has already shown that it is possible to use solar energy to heat wator lo boiler-level temperatures.

PNM ongineers aro study-ing the feasibility of retrofittlng an exbting gas-gred power plant with similar solar hardwaro.

0 00 Management Audit During 1976, the management consulting firm of Theodore Barry and Associates was rctaincd by PNM to conduct an audit of Com-pany management practices.

The purpose was to locate weak points as well as strengths so that mid-course corrections could be made during thc current period of rapid expansion without unnecessarily slowing down thc various processes within thc Company.The study was completed in 1977 and thc results werc, for the most part, favorable.

Several areas for improvcmcnt were cited and adjust-ments were being made even before thc study was entirely complete to take advantage of potential savings.Thc report was submitted to the New Mexico Public Service Com-mission in Junc 1977.The Barry firm lies conducted similar studies for a number of electric utilities, often at the insistence of the local regulatory body.Fuels Thc ability to provide electricity to our customers at thc lowest rea-sonable cost is intimately tied to using thc lowest-priced fuels.In the past this meant using natural gas.But today, with the cost of natural gas escalating sharply and even the availability of gas supplies in doubt, PNM, like other utilities around the country, is turning to other fuels.Ten years ago PNM used natural gas exclusively, with oil as a standby fuel, but today coal dominates the fuel mix.Last year about 60 per-cent of PNM's gcncration came from coal.Using coal as a fuel is not without its problems.Fuel han-dling and emission controls all push the cost pcr kilowatt for plant instal-lation beyond that needed for gas plants.Nevertheless, thc decision to go with coal has proven a wise one because of thc price and supply ques-tions associated with natural gas.In addition to coal generation, your Company is also participating in the Palo Verde Nuclear Gener-ating Station near Phoenix, Arizona.The three units of thc project, with an eventual total output of 3,810 megawatts, arc scheduled to begin commercial service in 1982, 1984, and 1986.PNM's 10.2 percent interest in the project will amount to a total of 390 megawatts for customers in Ncw Mexico.Other sources arc also entering PNM's fuel mix.A pumped storage project is now in its planning stages and will eventually produce 600 megawatts as a peaking and inter-mediate type of generating facility.Located near Scboyeta, New Mex-ico, this facility will usc off-peak base load energy to pump water to an upper reservoir.

During the day, when demand for electricity is high, the cycle is reversed and water flowing down to a lower reservoir will generate electricity by passing through turbines.This project is expected to come on linc in 1985.In cooperation with Union Oil Company, PNM is exploring the possible use of geothermal energy in the Jemcz Mountains of New Mexico.Using a massive reservoir of hot water lying thousands of New Mexico may have its first geothermal power plant if the Department of Energy approves PNM's proposal to build in the Jemos Mountains.

Shown horo ls ono of cloven producing wolls on tho Baca location.feet below the surface, this facility would generate clcctricity through a system called"flash-stcam." Hot water and stcam are pumped to the surface.The water and steam are separated in flash tanks, the water reinjected into thc reservoir and the steam used to run turbine genera-tors.A proposal is now before the federal Department of Energy for partial funding of this pioneering project.If funding is approved, this geothermal source could be provid-ing needed electricity by the mid-1980's.The proposed National Energy Act, currently under consideration by a joint Senate-House conference committee, contains provisions requiring electric utilities to convert from gas and oil as a boiler fuel to coal or other fuels.PNM's present construction program provides for coal burning facilitics which are scheduled to replace its gas-and oil-fired plants.Under these guidelines, PNM is planning thc construction of a nominal 2,000 megawatt gen-erating plant.This plant will be a mine-mouth operation located in thc Bisti area about 35 miles south of Farmington.

Called"Ncw Mexico Station," the first unit is scheduled to be installed in 1983.The final ownership in the first unit has not been determined.

In addition, PNM is currently engaged in the initial stages of an early site review process for pos-sible nuclear generating facilities in New Mexico.This study is aimed at gathering a data bank of infor-mation on hydrology, geology, seis-mology and economics at poten-tially superior sites throughout thc state.The early site review is a necessary step should PNM decide to exercise the nuclear option for electrical generation in the 1990's and beyond.These various projects arc being undertaken to provide the stability to electric service that comes from fuel diversification as well as to maintain that service at thc lowest reasonable cost.The future will, no doubt, see your Company explor-ing yet other ways to provide elec-tric service, other ways that today seem exotic but tomorrow will bc essential.

Franchises Public Service Company has long-term franchises for electric service in all of its divisions.

Thc Albuquer-que franchise will bc in effec until 1992;Santa Fe until 1999;Las Vegas until 1996;Belen until 1990;Deming until 1993;and Bcrnalillo until 1988.Water operation franchises in Santa Fe and Las Vegas will be in effect until 1979 and 1996, respec-tively.A 25-year franchise was granted for Santa Fe water service in November 1977, but was rejected by thc City's voters.Five-Year Forecast During 1977, the growth rate in New Mexico and the rest of the Southwest continued as ncw resi-dents, businesses, and energy-related industries moved to this area of thc"Sunbelt." Reflecting this growth, the Com-pany's five-year construction bud-get climbed to a record$1.2 bil-lion.With an annual growth rate in peak demand of 8 percent, more than twice the national average for utilities, PNM is one of the fastest growing utilities in the country.During the next five years,$690 million in generation-rclatcd con-struction is planned, with an addi-tional$248 million going for environmental control systems.This money is earmarked for continued construction on Units 3 and 4 at San Juan Generating Station, a large pumped storage project, the~'iI j lI i, Il lECl M%Is t tPJ p~K w ecJ~Palo Verde Nuclear Generating Station in Arizona, New Mexico Generating Station and PNM's interest in Four Corners Generating Station.The balance of the$1.2 billion will be spent over the next five years on transmission and dis-tribution systems plus additional operating facilities for both electric and water customers.

Sulfur dioxide scrubbers presently being constructod at the San Juan plant represent stato of the art octulpment and aro doslgned to remove 90%of Iho SOr from slack emisslons.

ASS BRDD'iN(o3i8 The Company is subject to the jurisdiction of the New Mexico Public Service Commission (the Commission) with respect to most of its rates, service, accounting, issuance of securities, construction of new generating and transmission facilities and other matters.The Federal Energy Regulatory Com-mission (FERC), formerly the Fed-eral Power Commission, has juris-diction with respect to rates for electric energy sold for resale.The Company is currently apply-ing a Cost of Service Index adjust-ment (Indexing) to all electric bill-ings subject to the jurisdiction of the Commission.

In July 1977, the Public Service 10 Commission held an open meeting to invite comments from the public and the Company to determine thc best way to review the Indexing.As a result of that meeting, thc Commission indicated that a series of hearings would be held to review the performance of Indexing as well as the Company's basic rate designs, the Company's request for full tax normalization and full inclusion of construction work in progress in the rate base.In January 1978, the Commis-sion denied the Company's request for full tax normalization and issued an order beginning a year-long inquiry into the operation of Indexing and the rate treatment of construction work in progress.Public Service Company has fuel adjustment clauses covering all kWhr sales.Heretofore, street lighting was the only service for which no adjustment was applica-ble.As of July, new rates were approved which include a fuel adjustment clause applicable to street lighting.In June, thc Company filed for a$5 million annual increase in rates, based on a future test year, for cer-tain FERC customers.

These cus-tomers include Community Public Service Company, Plains Electric Generation and Transmission Coop-erative and the Department of Energy at Los Alamos.This rate was permitted to become effective in October, subject to refund pend-ing final approval.In addition, the City of Farm-ington signed a contract in August for electric service under time-of-day rates similar to the Company's other FERC customers.

The Company filed a revised electric rate tariff in 1975 which would increase electric revenues from the City of Gallup by about$850,000 per year.Hearings before an Administrative Law Judge were completed in late 1976 and an increase of$544,000 was allowed pending final approval by the FERC.In February 1977, the Commis-sion approved a rate increase for Santa Fe water service.The original rate case was filed in 1976.This increase represents annual revenues of about$2,200,000.

The new rates designed to generate this amount went into effect on May 31.Last year the Commission also approved the Company's request for rate relief for PNM's water opera-tions in Las Vegas.The Commis-sion's order in September granted the Company an annual increase of approximately

$330,000 over 1975 test year revenues.~p e Over recent years, Public Service Company of Ncw Mexico has had the enviable record of attracting highly skilled and talented people of various occupations.

Their ability is the key to your Company's suc-cess.The many different and even unique projects and activities of PNM are testimony to their energy and skill.There arc now morc than 1,750 employees working together to provide our customers with reliable and economic electric and water service, both now and for the future.A.E.Rhodes, prcsidcnt of West-ern Coal Co., retired recently, hav-ing served PNM since 1958.R.B.Rountrec, PNM Senior Vice Presi-dent, has replaced Rhodes as the head of Western Coal Co.In June 1977, A.J.Robison was promoted from Manager of Rates to the position of Assistant Treasurer.

PNM'5 rapidly expanding systom demands constant training of new personnel.

These apprentico linemen aro practicing the pole top rescues that thoy all hope will never bo necessary.

Employee Relations Keeping talented employees is as important as attracting them in the first place.To help do this, PNM maintains a wide range of benefit programs including medical, dental, life insurance, stock purchase and pension plans.Such programs are a part of modern corporate life, of course, but their high quality here at PNM also reflect thc commit-ment of the Company's manage-ment to the employees who make success possible.Public Information In 1977 energy remained in the national and local spotlight.

Rising prices for utility services, efforts to establish a national energy policy, environmental concerns, conserva-tion, freezing winter weather-all these and more-have captured the attention of the nation.These public concerns about energy also voice a need for infor-mation.Responding to this need from our customers, PNM has increased its efforts to tell the pub-lic what we are doing and why and how it affects their lives.This is an important process because our customers, like their fellow citizens across the country, are faced with major decisions about energy that can determine the future of the nation.Without accurate informa-tion, such decisions cannot be responsibly made.Conservation has been thc other main topic of interest to our cus-tomers.Through paid advertising, bill stuffers and numerous public appearances, your Company has given information to its customers on ways to conserve and make effi-cient use of the energy they buy.The SMART Home concept, for 5!G.A.Schreiber, former PNM President and now Chairman of the Board, presides over last year's annual mooting of stockholders.

instance, has become more accepted as a way to efficient residential energy use.Communicating with our custom-ers is done in other ways as well, through thc Speakers Bureau, which addresses community groups on many energy-related topics.Demon-strations on energy use plus expla-nations of economics designed for students are regularly offered by PNM's Consumer Education and Educational Resources Depart-ments.Plant tours for media per-sonnel and public groups have been conducted and exhibits for cnergy-related museum shows and energy fairs have been prepared.The Company also has added a video production studio as another tool to communicate with thc pub-lic and employees as well.This facility has also been used as a support for community activities.

11 Growth Graphs.Comparative Operating Statistics Summary of Operations

..Management's Discussion and Analysis of the Summary of Operations Consolidated Balance Sheet.Consolidated Statement of Earnings..Consolidated Statement of Stockholders'quity Consolidated Statement of Changes in Financial Position.Notes to Consolidated Financial Statements

..Accountants'eport Stock/Dividend Data..Page 13 14 16 16 18 20 21 22 23 30 31 12

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

'an Juan Unit 2, the Company's share of which is 161,000 kW, is presently out of service.13 ELECTRIC SERVICE ENERGY SALES-kWhr (Thousands)

Residential Commercial

..Industrial

..Other Ultimate Customers........Total Sales to Ultimate Customers Sales for Resale.Total Energy Sales..........

ELECTRIC REVENUES (Thousands)

Residential Commercial Industrial

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

Total Electric Revenue.......CUSTOMERS AT YEAR END Residential Commercial Industrial Other Total Ultimate Customers Sales for Resale Total Customers Reliable net capability

-kW......Coincidental peak demand-kW..Average Fuel Cost per million BTU.BTU per kWhr of net generation

...WATER SERVICE SALES-Gallons (Thousands)

Customer sales Interdepartmental sales Total water sales........REVENUES Customer sales Interdepartmental sales Total water sales....Customers at year cnd..l977 957,390 1,320,651 686,845 160,922 3,125,808 1,241,195 4,367,003$39,547 45,520 18,918 5,215 109,200 23,219 132,419 2,605$135,024 164,803 18,374 493 265 183,935 5 183,940 858,000 715,000 92.74'1,004 2,726,059 5,742 2,731,801$3,605,984 5,642$3,611,626 17,427 1976 916,748 1,277,025 605,559 157,694 2,957,026 638,207 3,595,233$32,423 36,198 13,070 4,168 85,859 9,340 95,199 1,935$97,134 156,116 17,483 489 250 174,338 5 174)343 858,000 633,000 61.83'1,084 2,959,209 4,014 2,963,223$2,386,222 2,580$2,388,802 16,838 l975 875,361 1,177,953 530,188 136,136 2,719,638 578,037 3,297,675$28,912 30,851 9,993 3,361 73,117 8,241 81,358 1,412$82,770 151,111 16,738 (2)515 (2)246 168,610 4 168,614 727,000 586,000 47.23'0,848 2,859,783 9,195 2,868,978$2,204,967 2,721$2,207,688 16,437 l974 828,243 1,128,576 549,622 137,843 2,644,284 250,901 2,895,185$23,314 25,403 8,349 3,004 60,070 2,782 62,852 2,406$65,258 147,516 16,469 298 231 164,514 4 164,518 727,000 583,400 39.49'1,054 3,013,508 12,568 3,026,076$2,103,169 5,970$2,109,139 16,158 (1)Reclassified Against Expense (2)Certain customers werc reclassified from commercial to industrial during 1975.The reclassification accounted for a change of 220 customers in both categories.

14 1973'972 1971 1970 1969 lr)68 786,108 1,110,147 616,405 128,171 2,640,831 122,656 2,763,487 706,973 985,431 653,761 123,568 2,469,733 114,333 2,584,066 648,626 885,782 618,695 116,202 2,269,305 106,000 2,375,305 583,136 792,376 552,118 107,598 2,035,228 98,026 2,133,254 532,200 732,807 524,180 97,762 1,886,949 91,890 1,978,839 486,468 659,836 479,883 89,835 1,716,022 86,765 1,802,787$20,552 22,283 7,210 2,613 52,658 1,074 53,732 2,803$56,535 17,760 19,421 7,229 2,204 46,614 937 47,551 795 48,346$15,295 16,309 6,549 1,994 40,147 857 41,004 670$41,674$13,910 14,784 5,963 2,056 36,713 778 37,491 621$38,112 12,861 13,719 5,662 1,889 34,131 659 34,790 654 35,444$11,955 12,489 5,187 1,751 31,382 557 31,939 640$32,579 143,201 16,241 295 229 159,966 3 159,969 617,000 533,000 26.16'1,017 136,515 15,754 303 221 152,793 3 152,796 542,000 491,700 24.47'0,841 127,911 14,775 308 205 143,199 3 143,202 540,700 458,700 23.554 10,870 120,865 13,908 300 201 135,274 3 135,277 540,700 400,600 23.044 11,058 115,595 13,395 290 199 129,479 2 129,481 437,400 372,300 24.48'1,552 112,765 13,084 296 187 126,332 2 126,334 334,000 347,800 24.26It 11,550 2,855,673 10,710 2,866,383 2,781,854 3,638 2,785,492 2,563,745 1,707 2,565,452 2,564,580 1,782 2,566,362 2,397,078 1,609 2,398,687 2,356,690 1,132 2,357,822$1,566,730 3,585$1,570,315 15,848$1,530,012 (1)$1,530,012 15,454$1,434,685 813$1,435,498 15,024$1,417,697 899$1,418,596 14,495$1,209,617 780$1,210,397 14,216$1,172,831 659$1,173,490 14,092 15 (og Qo/QQQ)(oOj+

Operating revenues (977 1976 1975 l 974 1973$138,635,951

$99,523,146

$84,977,929

$67,367,044

$58,105,583 Operating expenses: Operations and maintenance Depreciation and amortization

........Taxes, other than income taxes...,...Income taxes.Total operating expenses Operating income Allowance for equity funds used during construction

..Other income and deductions, net...,....Income before interest charges........Interest charges..Net earnings Preferred stock dividends Net earnings applicablc to common stock Average common shares outstanding

......6,218,281 1,434,752 4,109,043 1,582,648 688,681 530,404 431,792 1,970,459 454,396 46,220 40~057t578 29t334)581 24~915>828 18>351>914 19>549t363 15,136,962 11,977,418 10,699,656 8,059,394 6,793,566 24,920,616 6,284,825 17,357,163 14,216,172 10,292,520 12,755,797 4,194,268 2,952,133 1,768,400 595,400$18,635,791

$13,162,895

$11,264,039

$8,524,120$12,160,397 7>569~1 3 1 6 106~0 15 4>608p773 4p370~9 19 4~32 1~1 1 3 76,524,378 51,535,167 39,784,697 30,836,104 22,984,163 11,463,823 9,548,173 8,649,772 7,974,988 6,210,576 7,257,043 5,874,485 5,114,600 4,451,727 3,643,430 10,986,162 8,028,464 8,626,084 6,638,499 7,734,730 106,231,406 74,986,289 62,175,153 49,901,318 40,572)899 32,404,545 24,536,857 22,802,776 17,465,726 17,532,684 Per share amounts-Net earnings Dividends$2.46$1.61$2.16$1.42$2.44$1.26$1.95$1.20$2.81$1.14 l3RBM BMNKS W IBB KH'SMM 16 The following factors, which may not be indicative of future operations or earnings, have had a significant effect upon the Company's results of operations during the years 1976 and 1977.Electric revenues increased$14.4 million in 1976 and$37.9 million in 1977.The principal factors causing these increases were: (a)Fuel cost adjustment

-natural gas fuel costs have accelerated rapidly, and the shutdown of the first unit of the San Juan Generating Station described below has resulted in a larger portion of the Company's system requirements being met through generation at gas-fired plants and through purchases from other utilities.

Generally, such costs are passed on to customers, and revenue from the fuel cost adjustment increased$5.3 million in 1976 and$12.1 million in 1977.(b)Rate increases-in August 1975, the Company implemented rate increases for certain industrial customers.

Also in August 1975, the Company began billing most customers under a Cost of Service Index order which provides for quarterly adjustments to rates based upon the jurisdictional return on common equity.Thc Company had revenues of$5.9 million in 1976 and$16.8 million in 1977 from Index adjustments.

The Company has periodically negotiated higher rates with certain customers whose rates are subject to the jurisdiction of the FERC.In 1977, new rates for time-of-day customers were filed with the FERC and accounted for$1.7 million of reve-nues which are subject to refund pending a determination by the FERC.(c)kWhr sales-although the effect of conservation of electricity by the Company's customers was experienced to a minor extent, both the number of customers and the average use per customer increased in each period.Wholesale customers provided increased base revenues of$.6 million in 1976 and$10.3 million in 1977.Increases in kWhr sales were 9.0%in 1976 and 21.5%in 1977.Water revenues increased$1.2 million in 1977, as a result of rate increases allowed by the New Mexico Public Service Commission.

Operating and general expenses increased by$10.3 million in 1976 and$23.0 million in 1977.Principal causes were: (a)Production of energy from the Company's own generating units decreased by 4.6%in 1976, due primarily to a scheduled major overhaul of the first San Juan generating unit during the first quarter of 1976.The growth in kWhr sales, coupled with the decline in generation, was made up through purchase and interchange agreements.

The Company was a net purchaser of 313 million kWhr in 1976 while in 1975 the Company sold 199 million kWhr through interchange agreements.

The second San Juan generating unit was declared operational in December 1976, and the production of energy from the Company's own generating units increased 26.2%during 1977.The growth in kWhr sales and the boiler explosion causing the shutdown of the first unit at the San Juan generating plant in July 1977 resulted in the Company being a net purchaser of 51 million kWhr for 1977.Increased fuel and purchased power expenses resulting from the boiler explosion are estimated at$4.5 million and are being passed on to customers through fuel adjustmcnt clauses by approval of the Ncw Mexico Public Service Commission.

The Commis-sion has ruled that charges for such increased cost are subject to refund if it is determined that the Company was responsible for the explosion.

Total increased costs, based upon a formula proposed to the Commission, are expected to bc approximately

$10.9 million through May 1978.(b)Rapidly accelerating fuel costs.(c)Amendments to the Company's pension plan necessitated by the Employee Retirement Income Security Act of 1974 and revision of health benefit plans.(d)Higher costs of labor due to escalating wage rates and an increase in the number of employees necessary to operate the expanded electric generating and water treatment facilities.(e)General inflationary factors.Maintenance and repair expenses increased by$1.5 million in 1976 and$2.0 million in 1977.Overhauls and inspections at the San Juan plant in 1976 and at the Four Corners plant, the San Juan plant and the Las Vegas turbine in 1977 accounted for increased costs of$1.1 million in 1976 and$1.7 million in 1977.The Company's gross utility plant increased by approximately 32%in 1976 and 28%in 1977 as a result of expanded operations, the need to maintain reliable service and increasing environmental protection requirements.

The increase in utility plant and the Company's construction program have been thc primary causes of increases experienced in thc following areas of operations: (a)Depreciation and amortization.(b)Taxes, other than income taxes-increases in ad valorem taxes resulted from increased plant.(c)Allowance for funds used during construction

-incrcascd construction at the San Juan plant and the Palo Verde Nuclear Generating Station resulted in an increase in AFUDC in 1976 and in 1977.TheNewMexico Public Service Commission ordered, effective April 22, 1975, that AFUDC be limited to generating plant construction.(d)Interest charges and preferred dividends-from 1975 through 1977, the Company issued$55 million principal amount of first mortgage bonds, utilized$80 million of proceeds of pollution control revenue bonds and issued$50 million cf Preferred Stock, generally at higher interest and dividend rates than previous issues,and had up to$56.1 million principal amount of short-term debt outstanding.

Other income and deductions, net of taxes increased by$.7 million in 1977, primarily bccausc the Company's wholly owned subsidiary completed a transaction for the sale of certain real estate and for reimbursement of certain operating expenses.As a result of items detailed above, earnings before income taxes and net earnings increased in 1976 and 1977.In 1976 income taxes decreased due to tax benefits associated with increased AFUDC and increased tax depreciation resulting from guideline depreciation provisions on the generating unit placed in service in Dcccmber 1976.Both of these tax benefits are accounted for by the fiow-through method.In 1977 income taxes increased due to higher earnings before income taxes.The increase in net earnings in 1976 did not result in a corresponding increase in earnings per share because of thc increase in average common shares outstanding resulting from the issuance of 675,000 shares in September, 1975, 1,000,000 shares in February 1976, and 1,200,000 shares in November 1976.17 December.31, 1)'77 and 1976 Assets Utility plant, at original cost (note 3): Electric plant in service Water plant in service Common plant in service 1977$379,811,692 28,218,610 12,190,902 1976$353,407,866 25,945,445 9,612,883 420,221,204 388,966,194 Less accumulated depreciation and amortization 88,284,054 77,225,159 Construction work in progress Net utility plant 311,741,035 143,311,370 33 1,937,150 261,837,072 593,774,222 455,052,405 Other property and investments:

Non-utility property, at cost, net of accumulated depreciation of$353,204 in 1977 and$208,744 in 1976 Investment in fifty-percent-owned company Other, at cost Total other property and investments 9,683,394 2,273,077 2,745,568 14,702,039 3,464,971 1,746,666 511,331 5,722,968 Current assets: Cash (note 4)Receivables:

Customers Income tax refunds Other Allowance for doubtful receivables Fuel, materials and supplies, at average cost Prepaid expenses Deferred fuel costs Total current assets 5,637,329 14,867,486 264,589 6,845,312 (158,340)14,214,636 1,231,591 7,128,200 50,030,803 3,055,958 7,813,645 5,649,579 3,562,726 (178,839)9,164,552 788,210 4,534,721 34,390,552 Dcfcrred charges: Unamortized debt expense Other deferred charges Total deferred charges 3,213,726 2,727,924 5,941,650 2,743,600 1,038,166 3,781,766$664,448,714

$498,947,691 18 See acconipanying notes lo consolidaled finnncinl sta1emenrs.

Stockholders'quity and Liabilities 1977 l976 Stockholders'quity (note 2): Cumulative preferred stock.Authorized 5,000,000 shares;outstanding 600,000 shares of$100 stated value in 1977 and 400,000 shares in 1976 and 800,000 shares of$25 stated value in 1977 and 1976 Common stock of$5 par value.Authorized 20,000,000 shares;outstanding 8,857,390 shares in 1977 and 7,331,152 shares in 1976 Additional paid-in capital Retained earnings Total stockholders'quity 44,286,950 90,947,569 56,212,750 36,655,760 68,238,436 49,476,949 271,447,269 214,371,145

$80,000,000

$60,000,000 Long-term debt, less maturities and sinking fund payments due within one year (note 3)244,720,992 178,432,864 Current liabilities:

Short-term debt (note 4)Accounts payable Preferred dividends declared Sinking fund requirements and maturities of long-term debt (note 3)Accrued interest Accrued taxes Other current liabilities Total current liabilities 50,000,000 33,195,095 1,421,850 1,364,665 3,591,742 4,156,580 4,900,941 98,630,873 30,592,000 21,477,929 997,849 5,869,230 2,026,900 2,575,314 2,773,348 66,312,570 Deferred credits: Customer advances for construction Accumulated deferred investment tax credits Accumulated deferred income taxes (note 5)Other deferred credits Total deferred credits Commitments and construction program (note 7)4,883,152 25,845,594 16,830,639 2,090,195 49,649,580 3,738,111 15,455,168 18,737,820 1,900,013 39,831,112

$664,448,714

$498,947,691 Years ended Decetnber 31, l977 and l976 Operating revenues: Electric (note 8)Water Total operating revenues l977$135,024,325 3,611,626 138,635,951 l976$97,134,344 2,388,802 99,523,146 Operating expenses: Operating and general expenses Maintenance and repairs Provision for depreciation and amortization Taxes, other than income taxes Income taxes (note 5)Total operating expenses Operating income 66,403,791 10,120,587 11,463,823 7,257,043 10,986,162 106,231,406 32,404,545 43,381,261 8,153,906 9,548,173 5,874,485 8,028,464 74,986,289 24,536,857 Other income and deductions:

Allowance for equity funds used during construction Equity in earnings of fifty-percent-owned company, net of taxes (note 5)Other, net of taxes (note 5)Net other income and deductions Income before interest charges 6,218,281 486,551 948,201 7,653,033 40,057,578 4,109,043 409,375 279,306 4,797,724 29,334,581 Interest charges: Interest on long-term debt Amortization of debt discount, expense and premium Other interest charges Allowance for borrowed funds used during construction Total interest charges Net earnings Preferred stock dividend requirements Net earnings applicable to common stock Average number of shares outstanding Pcr share amounts: Net earnings Dividends 15,294,803 239,371 2,161,477 (2,558,689) 15,136,962 24,920,616 6,284,825 11,683,381 205,205 1,781,064 (1,692,232) 11,977,418 17,357,163 4,194,268 7,569,131 6,106,015 2.46$1.61$2.16 1.42$18,635,791

$13,162,895 20 See accoinpanyiag notes lo consolidated financial statenients.

D 9X)OOB~o o Years ended Decetnber 3I, 1977 and 1976 1977 1976 Cumulative preferred stock: Balance at beginning of year Issuance of preferred stock Balance at end of year$60,000,000 20,000,000 80,000,000

$40,000,000 20,000,000 60,000,000 Common stock: Balance at beginning of year Issuance of common stock Balance at end of year 36,655,760 7,631,190 44,286,950 25,655,760 11,000,000 36,655,760 Additional paid-in capital: Balance at beginning of year Premium on common stock Expenses of stock issuance Balance at end of year 68,238,436 24,195,102 (1,485,969) 90,947,569 36,364,940 34,375,000 (2,501,504) 68,238,436 Retained earnings: Balance at beginning of year Net earnings 49,476,949 24,920,616 74,397,565 44,680,290 17,357,163 62,037,453 Cash dividends:

Cumulative preferred stock Common stock 6,284,825 11,899,990 18,184,815 4,194,268 8,366,236 12,560,504 Balance at end of year Total stockholders'quity at end of year 56,212,750 49,476,949

$271,447,269

$214,371,145 Number of shares issued:$100 stated value preferred stock$25 stated value preferred stock Common stock 200,000 1,526,238 800,000 2,200,000 See accompany>ing notes to consolidated financial statements.

21 0 0 D<D C+P (NMMXNKi8 Years ended Decent her 3I, l977 and l976 l977 1976 Funds provided: Net earnings Charges (credits)to earnings not requiring funds: Depreciation and amortization Provision for non-current deferred income taxes, nct Investmcnt tax credit, net Allowance for equity funds used during construction Undistributed earnings of fifty-percent-owned company Funds derived from operations Sale of first mortgage bonds Sale of preferred stock Proceeds from pollution control revenue bonds Sale of common stock Proceeds from other long-term debt Procccds from short-term debt Utility plant retirements, net of removal costs Customer advances for construction, net of refunds Decrease in other deferred charges Dccreasc in working capital other than short-term debt Other Funds used: Cash dividends Utility plant additions Payment of short-term debt Reduction of long-term debt Bond discount and expense Capital stock expense Increase in other deferred charges Additions to non-utility property Increase in working capital other than short-term debt Other Changes in working capital other than short-term debt: Increase (decrease) in current assets: Cash Rcccivables Fuel, materials and supplies Prepaid expenses Deferred fuel costs Increase (decrease) in current liabilities other than short-term debt: Accounts payable Preferred dividends declared Sinking fund requirements and maturities of long-term debt Accrued interest Accrued taxes Other current liabilities Increase (decrease) in working capital other than short-term debt$24,920,616 12,231,798 (1,907,181) 10,390,426 (6,218,281)

(526,411)38,890,967 30,000,000 20,000,000 36,418,069 31,826,293 2,532,155 158,350,000 1,035,275 1,145,041 213,697$320,411,497

$18,184,815 145,189,816 138,942,000 2,574,745 820,362 1,485,970 1 751 967 6,497,637 2,729,948 2,234,237$320,411,497

$2,581,371 4,971,936 5,050,084 443,381 2,593,479 15,640,251 11,717,166 424,001 (4,504,565) 1,564,842 1,581,266 2,127,593 12,910,303

$2,729,948 17,357,163 10,171,832 3,525,438 8,459,397 (4,109,043)

(442,912)34,961,875 20,000,000 36,653,858 45,375,000 1,825,658 71,310,000 1,094,079 339,842 566,168 9,191,859 1,622,562$222,940,901

$12,560,504 127,855,859 72,593,000 6,605,800 485,097 2,501,504 339,137$222,940,901 (1,483,598) 6,641,082 (789,629)(96,047)3,016,901 7,288,709 10,306,426 457,999 5,076,876 (113,748)150,407 602,608 16,480,568

$(9,191,859) 22 See accontpan>Iing notes to consolidated financial statenients.

~o tIQo 0 o 0~~0 5iB December 3I, l 977 anti l976 (l)Sutntnary of Signt Jicant Accounting Policies System of Accounts-The Company maintains its accounting records in accordance with the uniform system of accounts prescribed by the Federal Energy Regulatory Commission (FERC)and adopted by the New Mexico Public Service Commission.

As a result, the application of generally accepted accounting principles by the Company differs in certain respects from the application by nonregulated businesses.

Such differences generally regard the time at which certain items enter into the determination of net earnings in order to follow the principle of matching costs and revcnucs.Principles of Consolidation-The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Public Service Land Company.All significant intercompany transactions have been eliminated.

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.

Contributions received from customers to meet the customers'pecial construction requirements are credited to utility plant.It is Company policy to charge repairs and minor replacements of property to maintenance expense and to ctiarge major replacements to utility plant.Gains or losses resulting from retirements or other dispositions of operating property in the normal course of business are credited or charged to the accumulated provision for dcprcciation.

Allowance for Funds Used During Construction (AFUDC)-In accordance with the uniform system of accounts prescribed by the FERC, AFUDC, a noncash item, is charged to utility plant.The rate used for 1977 and 1976 was 6'h%as approved by the New Mexico Public Service Commission.

The Commission also ordered, effective April 22, 1975, that AFUDC be limited to generating plant construction.

Effective January I, 1977, thc FERC has ordered that the allowance for equity funds used during construction be credited to other income and deductions and that thc allowance for borrowed funds used during construction be credited to interest charges.The allowance for funds used during construction in 1976 has been reclassified accordingly in the accompanying consolidated statement of earnings.The allocation of AFUDC between borrowed funds, after taxes, and equity funds is based on themethodrcquircdby the FERC.Depreciation-Provision for depreciation of utility plant is made at annual straight-line rates prescribed by the New Mexico Public Service Commission.

The average depreciation rates used were as follows: Electric plant Water plant Common plant 1977 3.09%1.89%5.15%/976 3.147o 1.87%4.74%Thc provision for depreciation and amortization of certain equipment, including amortization applicable to capital leases, is charged to clearing accounts along with other costs of operation and subsequently apportioned to operating expenses and property accounts based on the use of the equipment.

Depreciation of non-utility property is computed on the straight-line method.Investment in Fifty-Percent-Owned Company-The Company's investment in a fifty-percent-owned company is stated at equity.The co-owner, Tucson Gas&Electric Company, is participating with the Company in thc construction and operation of a stcam turbo-electric generating plant described in note (7).The generating plant utilizes coal from properties of the fifty-percent-owned company as a source of fuel.23 Deferred Fuel Costs-The Company uses the deferred method of accounting for the portion of fuel costs which is recoverable in subsequent periods under fuel adjustmcnt clauses.Amortization of Debt Discount, Expense and Premium-Discount, expense and premium incurred in the issuance of the presently outstanding debt are being amortized by charges to income over the lives of thc respective issues on the debt outstanding method.Investment Tax Crcdits-Thc Company follows the practice of deferring investmcnt tax credits and amortizes them over the estimated useful lives of the related properties.

Investment tax credit carryforwards are recorded as a reduction of deferred federal income tax credits to thc extent of credits originating in the current year and those which will reverse in the investment tax credit carryforward period.Income Taxes-For income tax purposes, the Company has availed itself of accelerated amortization of emergency facilities and liberalized depreciation methods allowed by the Internal Revenue Code.Amounts equal to the resulting tax reductions are charged to income and accumulated in the deferred income tax accounts to offset the increase in taxes which occurs when deductions arc less than they arc under the method used for accounting purposes (normalization method).Generally, the Company uses guideline dcprcciation provisions for assets acquired prior to 1972 and the class life asset depreciation range system for assets acquired in 1972 and thereafter to compute depreciation for income tax purposes.The tax reductions related to guideline depreciation are recorded as a reduction in income tax expense in the current year (flow-through method).The reduction in income taxes attributable to asset class lives shorter than guideline lives is normalized by the method previously described.

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

Deferred fuel costs are deducted currently for income tax purposes.The Company accounts for thc related tax benefits by the normalization method.Thc Company deducted, for tax purposes, costs incurred in training employees in the operation of a ncw generating station.Such costs were capitalized for accounting purposes.The Company also deducted, for tax purposes, a loss from abandonment of property which is being deferred and amortized over five years for accounting purposes.The Company has adopted the normalization method of accounting for the rclatcd tax benefits.Revenues-Revenues are recognized based on cycle billings rendered to customers monthly.The Company does not accrue revenues in respect of energy sold but not billed at the end of a fiscal period.Segment Information

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

$27.6 million, or 19.9%of total operating revenues during 1977.Pension Plan-The Company's policy is to fund pension costs which are composed of normal costs and amortization of prior service costs over thirty years.24 (2)Stocl'.holders'qttity The cumulative preferred stock may be redeemed by the Company, upon thirty days notice thereof, at redemption prices per share (plus accrued and unpaid dividends) as follows: Series 1965 Series, 4.58%,$100 stated value 1974 Series, 9.2%,$100 stated value (b)1975 Series, 10.12'7o,$100 stated value (b)9.16%Series,$25 stated value (b)8.48%Series,$100 stated value (b)Shares Outstanding 130,000 170,000 100,000 800,000 200,000 Aggregate Stated Value$13,000,000 17,000,000 10,000,000 20,000,000 20,000,000 RedeInption Price (a)$103.032 109.20 110.12 27.29 108.48 1,400,000$80,000,000 (a)Redemption prices are at reduced premiums in future years.(b)Redemption may not be made through certain refunding operations prior to April 15, 1979 for the 1974 series, or prior to March 15, 1980 for the 1975 series, or prior to June 1, 1981 for the 9.16%series, or prior to April 1, 1982 for the 8.48%series.The Board of Directors has reserved 900,000 shares of unissued common stock for the dividend reinvestment program, the Employee Stock Purchase Plan and the Tax Reduction Act Stock Ownership Plan, of which 773,762 shares remained unissued at December 31, 1977.Charter provisions relating to the preferred stock and thc indenture securing the first mortgage bonds impose certain restrictions upon the payment of cash dividends on common stock of the Company.At December 31, 1977, there were no rctaincd earnings restricted under such provisions.

(3)Long-Term Debt The details of the Company's outstanding long-term debt including unamortized discount and premium, less sinking fund payments and maturities due within one year, are as follows: First Mortgage Bonds: 3%Series, due 1980 3%/o Series, due 1982 3/s%Series, due 1984 4ys%Series, due 1988 4~/s%Series, due 1991 57/s%Series, due 1997 7'/4%Series, due 1999 8/s%Series, due 2001 7'h%Series, due 2002 9i/s%Series, due 2005 8i/s%Series, due 2007 1976 Pollution Control Series, securing 67/s%Pollution Control Revenue Bonds, Series 1976, due 2006 ($20,000,000 principal amount less$1,799,799 at December 31, 1977 and$8,787,969 at December 31, 1976 held by trustee)7.6%Pollution Control Revenue Bonds, Series 1974, due 1984 ($55,000,000 principal amount less$15,273,651 at December 31, 1976 held by trustee)5%Pollution Control Revenue Bonds, 1977 Series A, due 1984 ($22,000,000 principal amount less$7,843,752 at Deccmbcr 31, 1977 held by trustee)Other l977$3,750,000 3,040,000 2,312,207 8,792,000 10,090,000 18,768,962 14,192,515 19,363,624 19,563,968 25,000,000 29,917,831 i976$3,800,000 3,080,000 2,372,579 8,910,000 10,177,000 18,979,660 14,339,083 19,561,562 19,761,940 25,000,000 18,200,201 11,212,031 55,000,000 39,726,349 14, 156,248 2,573,436 1,512,660$244,720,992

$178,432,864 Substantially all utility plant is pledged to sccurc thc first mortgage bonds.25 Approximately 25 percent of the original principal amount of each series of first mortgage bonds will be redeemed through sinking fund requirements prior to the aforcmcntioncd due dates.The aggregate amounts of maturities and sinking fund requirements on long-term debt outstanding at December 31, 1977 are as follows: 1978 1979 1980 1981 1982$1,364,665 1,539,067 5,508,936 1,751,426 4,796,204 In August 1977 the City of Farmington, New Mexico issued and sold$77,045,000 principal amount of its 5.9%Pollution Control Rcvcnue Refunding Bonds, Series 1977, the proceeds of which arc expected to be used to retire the Series 1974 Bonds and the 1977 Series A Bonds at their maturity in 1984.From and after such rctircment, but not before, the Refunding Bonds will be payable out of revenues received by the City from the Company.Upon such rctiremcnt the Company will also guarantee the payment of the Series 1977 Bonds and secure its guaranty with an equal principal amount of its first mortgage bonds.In March 1978 thc City of Farmington expects to scil$125,000,000 principal amount of its 6%Pollution Control Revenue Bonds, 1978 Series A, the proceeds of which will be utilized in the construction of pollution control facilities at the San Juan Plant.The Company will guarantee the 1978 Series A Bonds and sccurc its guaranty with an equal principal amount of its first mortgage bonds.(4)Short-Tenn Debt and Contpensating Balance Arrangements Thc Company's interim financing requirements arc met through issuance of unsecured notes payable to banks and commercial paper.The Company has agreed to maintain compensating balances with certain lending banks, generally equal to 20%of the outstanding indcbtcdness or 10%of the lines of credit at such banks, whichever is greater.Details of the Company's short-term debt at December 31, 1977 and December 31, 1976 and for the years then ended were as follows: l977 t976 Aggregate short-term debt outstanding:

Notes payable to banks Commercial paper Average interest rate on outstanding debt: Notes payable to banks Commercial paper Maximum short-term debt outstanding during year Average short-term debt outstanding during year Weighted average interest rate on short-term debt outstanding during year, computed using daily outstanding balances: Stated interest rates Effective rate considering the effect of compensating balances Unused lines of credit (subject to cancellation at the banks'ption)

Compensating balances at end of year$19,050,000

$30,950,000

$9,592,000$21,000,000 77/s%6s 6'/s%4%%6 6'/4%6'/s%6'/i%$31,525,000

$676,000$29,678,000

$1,125,000$56,120,000

$45,755,000

$36,950,000

$28,450,000 Compensating balances have been reduced by thc average difference between collected bank balances and book balances.26 (5)Income Tnxes Income taxes consist of thc following components:

Current Federal incornc tax Current State income tax Deferred Federal income tax Deferred State income tax Amount equivalent to current investment tax credit Amortization of accumulated investment tax credit/977$713,123 647,462 (2,314,593) 503,587 12,356,854 (368,463)/976$(4,772,252) 316,911 2,515,933 486,588 9,560,207 (264,627)Total income taxes Charged to operating expcnscs Charged to other income and deductions Total income taxes$11,537,970

$7,842,760$10,986, 162$8,028,464 551,808 (185,704)$11,537,970

$7,842,760 3,115,135 (31,397)33,538 229,310 (7,040,976)

Thc Company has investmcnt tax credit carryforwards which will expire in 1984 of approximately

$9,087,000.

Deferred income taxes result from timing differences in the recognition of income and expenses for tax and accounting purposes.Thc sources of these differences and the tax effects of each werc as follows: 1977 1976 Deferred fuel costs$1,309,188$1,523,083 Accelerated amortization of emergency facilities, liberalized dcprcciation methods and asset class lives shorter than guideline lives 3,557,809 Extraordinary property losses 93,803 Undistributed earnings of fifty-percent-owncd company (included in other deductions) 39,860 Construction costs deducted for tax purposes and miscellaneous timing diffcrcnces 408,162 Investment tax credit carryforward (2,046,000)

$(1,811,006)

$3,002,521 Federal income tax statutory rate Tax depreciation in excess of book depreciation caused by use of guideline depreciation provisions Allowance for funds used during construction, net of depreciation adjustments Certain employee benefits and taxes capitalized for financial statements, nct of depreciation adjustments State income taxes, net of Federal tax effect Undistributed earnings of fifty-perccnt-owned company Amortization of investmcnt tax credits Other miscellaneous items (2.8%)(4.7%)(10.2%)(11.0%)(2.0%)(1.3%)1.5%1.6%(.7%)(1.0%).2%31.1%(.6%)(1.0%)(1.3%)31.6%Company's effective income tax rate The current portion of deferred taxes (included in accrued taxes)results from timing differcnccs on deferred fuel costs.Such balance amounted to$339,302 as of December 31, 1977 and$243,127 as of December 31, 1976 after reduction for investment tax credit carryforwards.

The Company's effective income tax rate was less than thc Federal income tax statutory rate for each of the years shown.The diffcrcnces are attributable to the following factors: 1977/976 48.0%48.0%27 (6)Pension Plan The Company has a pension plan covering substantially all of its employees, including officers.The plan provides for monthly pension payments to participating employees upon their attaining the age of 65 or the age of 62 with 30 years service, the amount of such payments being dependent upon length of service and the average wage of the five most highly compensated consecutive years of employment.

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

$290,000.In addition, the employees contribute

$3 for the first$400 of monthly base salary, plus 3 percent of that part of base salary in excess of$400 during each month.The cstimatcd amount of the unfunded prior service liability at January I, 1976 was approximately

$3,600,000.

(7)Committnents and Construction Program Thc Company is participating with Tucson Gas&Electric Company in the construction of a steam turbo-electric generating station located in San Juan County, New Mexico.The Company will own an undivided fifty-percent interest therein.The first unit of the station was placed in service in 1973 and the second unit was placed in service in December 1976.Thc Company is also participating with several other utilities in the construction of a nuclear generating station with the first unit scheduled for completion in 1982.It is estimated that the Company's construction expenditures for 1978 will approximate

$215,000,000 including expenditures on the San Juan and nuclear projects.In connection therewith, substantial commitmcnts have been made.The Company leases data processing, communication and office equipment, utility poles (joint use), other equipmcnt and real estate.Certain data processing equipment, communication equipment and real estate leases are capital leases.All other leases are operating leases.Certain leases provide purchase options in the approximate amount of$1,984,000 for data processing equipment,$1,522,000 for construction equipment and$33,000 for other equipment.

Renewal options and contingent rental provisions were not significant.

Leased property under capital leases by major classes at December 31, 1977 and 1976 was as follows: Data processing equipinent Communication equipment Real estate Less accuinulatcd amortization 1977$1,653,195 115,738 94,800 1,863,733 651,405$1,212,328 l976$1,647,781 93,600 1,741,381 460,090$1,281,291 Future minimum lease payments under capital leases at December 31, 1977 were: 1978 1979 1980 1981 1982 Later years Total minimum lease payments Less amount representing executory costs Net minimum lease payments Less amount representing interest Present value of net minimum lease payments$418,469 419,909 419,439 418,026 350,095 250,440 2,276,378 305,000 1,971,378 604,350$1,367,028 28 Future minimum rental payments required under operating leases that have initial or remaining noncancellable lease terms in excess of one year as of December 31, 1977 were: 1978 1979 1980 1981 1982 Later years Total minimum payments required$667,932 459,787 348,251 195,629 144,506 611,182$2,427,287 Rents charged to operating and general expenses were$969,919 in 1977 and$852,256 in 1976.Such amounts exclude payments made on capital leases.Rents charged to utility plant were$1,006,126 in 1977 and$620,138 in 1976.(8)Revenues Subject to Refiind On July 7, 1977, a boiler explosion caused the shutdown of Unit 2 at the San Juan generating plant.The Company's portion of the total cost of repairs is estimated to be approximately

$7 million.The managcmcnt of the Company currently believes that substantially all of thc costs of repair will be covered by insurance.

The Company expects the unit to be back in operation in May 1978.The major part of increased costs for replacement energy required during the shutdown is, with the approval of the New Mexico Public Service Commission, being passed on to customers through fuel adjustment clauses;however, the Commission has ruled that charges for such increased costs are subject to refund if it is determined that the Company was responsible for the explosion.

Such increased costs, based upon a formula proposed to the Commission, were$4,487,000 through December 31, 1977 and are expected to total approximately

$10,900,000 through May 1978.The future effect on net earnings, if any, is not presently determinable.

In addition, wholesale rate increases have been implemented, providing rcvenucs of$1,705,000 which are subject to refund.(9)Quarterly Results of Operations (Unaudited)

The results of operations by quarters for 1977 and 1976 were as follows: Quarter Emled December 31, 1977 September 30, 1977 June 30, 1977 March 31, 1977 Total Operating Revenues$41,208,201

$36,566,841

$31,317,032

$29,543,877 Operating income$10,032,865

$8,910,264$6,913,172$6,548,244 Net Earnings$8,739,356$6,647,733$4,803,972$4,729,555 Net Earnings r sh$.87$.67$.42$.47 December 31, 1976$26,792,977

$6,402,957$4,969,674$.56 September 30, 1976$24,707,277

$6,670,488$4,976,042$.61 June 30, 1976$24,844,898

$5,711,626$3,749,347$.46 March 31, 1976$23,177,994

$5,751,786$3,662,100$.52 In the opinion of management of the Company, all adjustments (consisting only of normal recurring accruals)necessary for a fair statement of the results of operations for such periods have been included.(l0)Utility Plant Replaceinent Cost (Unautlited)

Replacing items of utility plant with assets having equivalent productive capacity generally requires a substantially greater capital investment than was required to purchase the assets which are being rcplaccd.Such additional capital investmcnt reflects the cumulative effect of inflation on the costs of these assets.The Company's annual report on Form 10-K (a copy of which is available upon request)contains specific information with respect to replacement cost of utility plant in service as of December 31, 1977 and 1976 and the approximate effect which replacement cost would have had on the computation of depreciation expense for the years then ended.

Q~~P PEAT,"WARWICK, MITCHELL&CO.CERTIFIED PUBLIC ACCOUNTANTS P.O.BOX I02Z AI.BUQUERQUE,NEW MEXICO 8ZI03 The Board of Directors Public Service Company of New Mexico: We have examined thc consolidated balance shcct of Public Service Company of Ncw Mexico and subsidiary as of December 3l, 1977 and l976 and the related consolidated statements of earnings, stockholders'quity and changes in financial position for the years then ended.Our examinations werc made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as wc considered necessary in the circumstances.

In our opinion, the aforementioned consolidated financial statements present fairly the financial position of Public Service Company of New Mexico and subsidiary at December 31, 1977 and l976 and thc results of their operations and changes in their financial position for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis.February 24, l 978 30 Range of sales prices of the Company's common stock, on the New York Stock Exchange (Symbol: PNM), and dividends paid on both common and pre-ferred stock for fiscal 1977 and 1976, by quarters.(Unaudited)

Fourth Quarter, 1977 Third Quarter, 1977 Second Quarter, 1977 First Quarter, 1977 Fiscal Year Fourth Quarter, 1976 Third Quarter, 1976 Second Quarter, 1976 First Quarter, 1976 Fiscal Year COMMON Range of Sales Prices High Loiv 22'0 23@, 21 23s/4 21'/s 24 21s/s 24 20 24s/e 19'3'/4 19 19~/s 17s/e 20s/s 18s/e 24~/8 17s/s STOCK Dividends Per Share$0.42 0.40 0.40 0.39$1.61$0.38 0.36 0.34 0.34$1.42 PREFERRED STOCK 1965 Series, 1974 Series, 1975 Series, 9.16%Series 8.48%Series 4.58%9.2%10.12%Fourth Quarter, 1977 Third Quarter, 1977 Second Quarter, 1977 First Quarter, 1977 Fiscal Year Fourth Quarter, 1976 Third Quarter, 1976 Second Quarter, 1976 First Quarter, 1976 Fiscal Year$1.145 1.145 1.145 1.145$4.58$1.145 1.145 1.145 1.145$4.58 (D$2.30 2.30 2.30 2.30$9.20$2.30 2.30 2.30 2.30$9.20 ividends per share)$2.53$0.5725 2.53 0.5725 2.53 0.5725 2.53 0.5725$10.12$2.2900$2.53$0.5725 2.53 0.1336 2.53 2.53$10.12$0.7061$2.12 2.12 2.167$6.407 Note: While isolated sales of the Company's preferred stock have occurred in the past, the Company is not aware of any active trading market for its preferred stock.

Board of Directors H.L.GALLES, JR.*-Cltairtnan o/the Board, Galles Chevrolet Company-illbuquerque, New Mexico J.D.GEIST>>-President, Public Service Company of Netv Mexico C.E.LEYENDECKERt

-President, Mimbres Valley Ban/-Deming, Ncw Mexico R.F.MATHER-President, Creamland Dairies, Inc.-Albuquerque, Ncw Mexico D.W.REEVES>>-Cltairman of thc Executive Cotnmittec, Public Service Cotnpany of New Mexico R.R.REHDER-Dean, Robert O.Anderson Scltool o/Business and Administrative Sciences, University of New Mexico-Albuquerque, New Mexico G.A.SCHREIBER>>

-Cltairman o/thc Board, Public Service Contpany of New Mexico R.H.STEPHENSt-President, Stepltens-Irish Agency-Las Vegas, New Mexico E.R.WOODt-President, Santa Fe Motor Company-Santa Fe, New Mexico>>Mentbers of the Executive Committee t Mentbers o/thc Audit Cotnmittee Officers G.A.SCHREIBER-Chairman of the Boartl J.D.GEIST-President R.B.ROUNTREE-Senior Vice President R.MULLINS-Vice President, Engineering and Construction C.D.BEDFORD-Vice President, Administration J.P.BUNDRANT-Vice President, Division Operations J.B.MULCOCK-Vice President, Public A//airs R.F.MERSHON-Vice President, Imlustrial Rclatiotts D.E.PECKHAM-Secretary aml Treasurer B.D.LACKEY-Controller P.J.ARCHIBECK-sfssistant Secretary anrl Assistant Treasurer A.J.ROBISON-Assistant Treasurer B.P.LOPEZ-Assistant Secretary H.L.HITCHINS, JR.-Assistant Secretary anrl Assistant Treasurer W.A.BADSGARD-Albuquerque Division Vice President F.E.GRAY-Vice Presirlcnt, IVater Operations E.L.FOGLEMAN-Las Vcgas Division Vice President P.R.GAMERTSFELDER

-Santa Fe Division Electric Vice President J.L.SMITH-Belen Division Manager W.R.STONE-Deming Division Manager T.P.WARNKE-San Juan Operations Manager L.C.EDWARDS-Bernalillo Division Manager W.M.HICKS, JR.-IVestern Division Manager Executive Offices 414 Silver Avenue SW, Albuquerque, Ncw Mexico Transfer Agents Albuquerque National Bank, Albuquerque, New Mexico Chemical Bank, New York, New York Irving Trust Company, New York, New York Registrars First National Bank in Albuquerque, Albuquerque, New Mexico Chemical Bank, New York, New York Irving Trust Company, New York, New York 32 UTAH C OLORADO HIPROCK SA JUAN 0 FARMINGTON I~r~(FOUR 1CORNER-.4----~---McKINLEY TAOS 0;0SPRINGER r'LO ALAMO++NORTON I~$rt r-x/\a k I~SANTA FE 3IA I~LAS VEGAS O INI IL Il III Iil III ALLUP0 g~MBROSIA LAKE L GRANTS0 J WEST MESA 11 ALGOOONE E I r I 1 RNALILLO A I ALB QUERQUE M SANDIA r~--'ELEN'j I I ORRO!'J I I" I.J L r CLOVISO I I I,, E'.J PORTALESO.rr OTUCUMCARI E I 0 SANTA ROSAi I rJ r---L-----~-*PICACH LAS CRUCESO<.~ELEPHANT BUTT(I l FACE ERRL (L NDRLGLF EEg LNNR DELGNG UNDER CONS I~,>I r"-I I I E~I I I I I I'T I E~~E I I E I I I EI ALAMOGORDOE G G E I E'I 0 ROSWELL L.~I E G E".J.E E E I E I I L.OCARLSBAD I I I I I I HOBBSO\EAL NEWMAN RID GRANDE Q L PASO TEXAS MEXIC 0~~N IIS 8 230KV OWNED BY PUBLIC SERVICE CO.OF NEW MEXICO 345KV OWNED BY PUBLIC SERVICE CO OF NEW MEXICO 345KV OWNED BY PUBLIC SERVICE CO OF NFW MEXICO 8 OTHERS~230KV 8 ABOVE OWNED BY OTHERS HSKV OWNED BY OTHERS LL, SYSTEM MAP PUBLIC SERVICE COMPANY OF NEW MEXICO L 0 0 GENERATION SWITCHING STATION CITIES SERVED BY PUBLIC SERVICE CO, OF NEW MEXICO GENERATION

~OTHER UTILITIES SWITCHING STATION OTHER UTILITIES OTHER PRINCIPAL CITIES D PUBLIC SERVICE COMPANY OF NEW MEXICO POST OFFICE BOX 1047 ALBUQUERQUE, NEW MEXICO 87103+~ave~<0 BULK RATE U.S.POSTAGE PAID Albvqverqve, N.M.Permit No.13 RETURN REQUESTED