ML17296A707
| ML17296A707 | |
| Person / Time | |
|---|---|
| Site: | Palo Verde  |
| Issue date: | 05/13/1980 |
| From: | Van Brunt E ARIZONA PUBLIC SERVICE CO. (FORMERLY ARIZONA NUCLEAR |
| To: | Office of Nuclear Reactor Regulation |
| Shared Package | |
| ML17296A708 | List: |
| References | |
| ANPP-15429, NUDOCS 8005200565 | |
| Download: ML17296A707 (99) | |
Text
i.. 0( U REGULATORY4FORMATION OISTRI BUTION SEM (RIBS) P ACCESSION NBR ~ 80052005b5 DOC ~ DATE ~ 80/05/13 NOTARIZKDe YES DO ¹ FACIL:STN 50 528 Palo Ver de Nuclear Stati one Unit i~ Arizona 'Publ i - 00052 STN 50-529 Palo Ver de Nuclear Stat i on~ Uni t 2i Ar i zona Publ i 0 STN 50 530 Palo Verde Nuclear Stationi Unit 3i Arizona Publi 05000530 AUTH'AME AUTHOR AFF ILIATION VAN BRUNT,E.E.
RECIP ~ NAME Arizona Public Service Co.
RECIPIENT AFFILIAT'ION Q+ P~g ,j Office of Nuclear Reactor Regulation
SUBJECT:
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aoKGM 2I'r PHOENIXA ARIZONA 85036 May 13, 1980 ANPP-15429 - JMA/JPS Director of Nuclear Reactor Regulation U.S. Nuclear Regulatory Commission Washington, D.C. 20555 Re: Palo Verde Nuclear Generating Station Units 1, 2 and 3 NRC Docket Nos. STN 50-528/529/530
Dear S'ir:
Pursuant to 10 CFR Part 50.71(b), Arizona Public Service Company (APS) submits herewith two (2) copies of the 1979 financial state-ments for each of the Participants who jointly own the Palo Verde Nuclear Generating Station.
Respectfully submitted, ARIZONA PUBLIC SERVICE C NY By:
EEVBJr/JPS/av Edwin E. an Brunt, Jr.
Attachment Vice President STATE OF ARI'Z(liiA ) On its own behalf and as agent
) ss. for all other joint participants County of Maricopa)
Subscribed and sworn to before me this ~5 day of /fyAS9, 1980.
ic j \
Notary Pu
'>>:"'" My Commission expires:
jssieb Espbes Iaa 28, EESS g P0@g00565
ARTHUR ANDERSEN 8: CO.
PHOENIX, ARIZONA To the Board of Directors, Salt River Project Agricultural Improvement and Power District, and Board of Governors, Salt River Valley Water Users'ssociation:
We have examined the combined balance sheets of SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT (a political subdivision of the State of Arizona) and its agent, SALT RIVER VALLEY WATER USERS'SSOCIATION, together referred to as the SALT RIVER PROJECT, as of December 31, 1979 and 1978, and the related combined statements of net revenues and sources of funds for additions to utility plant for the years then ended. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.
In our opinion, the financial statements referred to above present fairly the financial position of the Salt River Project as of December 31, 1979 and 1978, and the results of its operations and sources of funds for additions to utility plant for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis.
Phoenix, Arizona, February 15, 1980.
SALT RIVER PROJECT AGRICULTURAL IHPROVEHENT AND POWER DISTRICT AND ITS AGENT SALT RIVER VALLEY WATER USERS'SSOCIATION COHBINED BALANCE SHEETS - DECEHBER 31 1979 AND 1978 ASSETS CAPITALIZATION AND LIABILITIES
($ 000) ($ 000) 1979 1978 1979 UTILITY PLANT, at original cost LONG-TERN DEBT (Note 5):
1978 (Notes I, 2, 3 and 4): Electric system revenue bonds Plant in service- $ 1,658,844 $ 1,386,725 General obligation bonds and other 255,236 Electric $ 1,467,048 $ 891,865 269,289 Irrigation 67,381 66,140 1,914,080 1,656,014 General 51,792 44,468 Total plant in service 1,586,221 1,002,473 Less- Accumulated depreciation ACCUHULATED NET REVENUES, invested plant in service on 286,099 254,019 principally in utility plant:
Balance beginning of year 276,684 210,891 Net revenues for the year 100,435 65,793 1,300,122 748,454 Construction work in progress 769,562 .909,666 Balance end of year 377,119 276,684 2,069,684 1,658,120 Total capitalization 2,291,199 1,932,698 SEGREGATED FUNDS, consisting of cash, U. S.-
Government obligations and set aside in accordance with bankers'cceptances resolutions of bond issues: CURRENT LIABILITIES, excluding $ 18,999,000 in Debt service funds, excluding $ 54,768,000 1979 and $ 16,132,000 -in 1978 representing in 1979 and $ 47,156,000 in 1978 for current portion of long-term debt which is payment of accrued interest (Note 5) 138,540 118,487 to be paid from segregated funds:
Construction funds 246 491 Notes payable to banks (Note 7) 120,000 Accounts payable 74,302 50,635 138,786 118,978 Accrued taxes and tax equivalents (Note 6) 18,419 17,875 CURRENT ASSETS:
Accrued interest 56,044 47,156 Cash Customers'eposits 6,440 5,255 Temporary investments, at cost, held 396 524 Other current and accrued liabilities 7,271 6,572 primarily for construction 115,631 119,938 282,476 127,493 Deposit in debt service fund for payment of accrued interest on bonds 54,768 47,156 Trade and other accounts receivable, less reserves of $ 1,455,000 in 1979 and DEFERRED CREDITS AND RESERVES
$ 1,335,000 in 1978 for doubtful accounts 10,161 8,733 37,335 38,621 Fuel stocks, at average cost 77,427 15,221 Haterials and supplies, at average cost 20,625 14,926 Prepayments, interesr. receivable and other 9,935 8,387 COHHITHENTS AND CONTINGENCIES (Notes 3 and 6) 316,117 244,773 DEFERRED CHARGES AND OTHER ASSETS (Note 1) 59,249 47,053 $ 2,583,836 $ 2,068,924
$ 2,583,836 $ 2>068,924 The accompanying notes are an integral part of these combined balance sheets.
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SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT
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AND ITS AGENT, SALT RIVER VALLEY WATER USERS'SSOCIATION COMBINED STATEMENTS OF NET REVENUES FOR THE YEARS ENDED DECEMBER 31, 1979 AND 1978
($ ooo) 1979 1978 OPERATING REVENUES:
Electric $ 413,066 $ 333,329 Water and irrigation 4,723 4,435 Total operating revenues 417,789 337,764 OPERATING EXPENSES Power purchased 25,020 23,449 Fuel used in electric generation 100,352 73,050 Other operation expenses 57,876 52,051 Maintenance 32,508 29,201 Depreciation and amortization (Note 1) 32,995 30,806 Taxes and tax equivalents (Note 6) 42,859 38,340 Total operating expenses 291,610 246,897 Net operating revenues 126,179 90,867 FINANCING COSTS:
Interest on bonds at coupon rates 104,964 88,125 Amortization of bond discount 1,100 953 Amortization of bond issue expense 231 211 Amortization of loss on defeased debt 976 901 Interest on other obligations 6,475 1,797 Interest earned on investments and
.deposits (28,841) (25,059)
Net financing costs 84,905 66,928 Less- Allowance for funds used during construction (Note 1) (59,735) (42,183)
Financing costs less allowance for funds used during construction 25,170 24,745 OTHER DEDUCTIONS, net 574 329 NET REVENUES FOR THE YEAR $ 100,435 $ 65,793 The accompanying notes are an integral part of these combined statements.
AND ITS AGENT SALT RIVER VALLEY WATER USERS'SSOCIATION COMBINED STATEMENTS OF SOURCES OF FUNDS FOR ADDITIONS TO UTILITY PLANT FOR THE YEARS ENDED DECEMBER 31 1979 AND 1978
($ 000) 1979 1978 GROSS ADDITIONS TO UTILITY PLANT, excluding allowance for funds used during construction $ 394,728 $ 406,124 FUNDS GENERATED FROM OPERATIONS:
Net revenues for the year $ 100,435 $ 65,793 Add- Depreciation (including charges to clearing accounts) and other charges not requiring current funds 37,624 34,969 Deduct- Allowance for funds used during construction not providing current funds (59,735) (42,183)
Total funds generated from operations before retirement of debt 78,324 58,579 Less- Repayment of long-term debt (16,167) (15,393)
Net funds generated from operations 62,157 43,186 FUNDS OBTAINED FROM FINANCING:
Proceeds of bond issues, less defeased bonds 273,122 239,588 Advances from U.S. Government for rehabilitation of irrigation'lant 766 1,236 Contributions in aid of construction 7,582 7,898 Borrowings, net of repayments 119,256 926 Total funds obtained from financing 400,726 249,648 Other-Increase in segregated funds set aside for debt service (20,053) (13,417)
Decrease in segregated funds set aside for construction 245 49,856 Decrease in temporary investments held primarily for construction 4,307 26,517 Net funds obtained from financing 385,225 312,604 CHANGES IN OTHER ITEMS AFFECTING FUNDS:
Decrease in receivable on sale of plant 47,480 Increase in unamortized loss on defeased debt (6,639)
Increase in accounts payable 23,667 9,563 Decrease (increase) in accounts 1,286 (7,413) decrease in fuel stocks and receivable'Increase) materials and supplies (67,905) 5,998 Increase in deposits for payment of accrued interest on bonds (7,612) (8,300)
Increase in accrued interest 8,888 8,300 (Increase) decrease in cash 128 (183)
Change in other assets .and liabilities, net (11,106) 1,528 Net change in other items (52,654) 50,334 FUNDS USED FOR ADDITIONS TO UTILITY PLANT $ 394,728 $ 406,124 The accompanying notes are an integral part of these combined statements'
SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT AND ITS AGENT, SALT RIVER VALLEY WATER USERS'SSOCIATION NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1979 AND 1978 (1)
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES:
(a) The Project's Board of Directors serves as its regulatory agent.
(b) Principles of Combination The combined financial statements include the accounts of the Salt River Project Agricultural Improvement and Power District
("the District" ) and the accounts of its agent, the Salt River Valley Water Users'ssociation, together referred to as the Salt River Project ("the Project" ), and a wholly owned subsidiary, Salt River Generating Company. All significant intercompany transactions have been eliminated.
(c) Utility Plant, Depreciation and Maintenance The accounting records of the Project are maintained substantially in accordance with the Uniform System of Accounts pre-scribed for electric utilities by the Federal Energy Regulatory Commission. Utility plant is stated at the historical cost of con-struction. Construction costs include labor, materi'als, services purchased under contract, and allocations of indirect charges for engineering, supervision, transportation, and administrative expenses.
An allowance for funds used to finance construction work in progress. is capitalized as a part of the electric and general plant. This allowance is deducted from net financing costs in the combined statements of net revenues and added to utility plant.
Capitalization rates of 7.2% and 7.5% were used in 1979 and 1978, respectively.
Depreciation expense is computed on the straight-line basis over estimated useful -lives of the various classes of plant. Rates in effect resulted in provisions approximating 3 49% for 1979 and 3.46%
for 1978 on the average .cost of depreciable electric plant, and 1.94%
.for 1979 and 1.93% for 1978 for depreciable irrigation plant. When property representing a retirement unit is replaced, removed, or abandoned, the cost of such property is credited to the appropriate utility plant account, accumulated and such cost together with removal costs less salvage is charged to depreciation.
The Project charges to maintenance expense the cost of labor, materials, and other expenses incurred in the repair, restoration of condition and replacement of minor-items of property.
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(d) Bond Expense Bond discount, premium, and bond issue expense are being amortized over the terms of the related bond issues.
(e) Unamortized Loss on Defeased Debt In April 1978 and August 1977 electric system revenue bonds were sold. Portions of the proceeds of these bonds were used to defease $ 210,000,000 of the outstanding electric system revenue bonds. These defeasances resulted in gross savings in.
debt service over the lives of the new issues of $ 32,300,000. The combined financing costs of the defeasances were $ 26,055,000.
The District Board of Directors approved deferral of the financing costs and their amortization over the lives of the April 1978 and August 1977 issues.
(f) Employes'etirement Plan The Project has a retirement plan covering substantially all employes. The plan is funded entirely from employers'ontri-butions and the earnings of the invested assets. The estimated unfunded past service liability, as determined by the plan's actuary using the "entry age normal cost" valuation method, with frozen initial liability, was $ 9,641,776 as of July 1, 1979. This amount is being funded and amortized over a period ending in 2009. The employers'ontributions to this plan totaled $ 7,392,482 in 1979 and $ 5,970,882 in 1978.
At July 1, 1979, the plan's assets exceeded the actuarially computed value of the vested benefits at the same date.
(g) Revenues Meters for residential, commercial and small industrial customers are read cyclically and sales recorded only when billed.
This system of billing results in earned but unbilled revenues which amounted to $ 10,438,200 at December 31, 1979, and $ 8,956,000 at December 31, 1978. For large industrial customers, meters are read near month-end and billings recorded on the accrual basis. Electric revenue billings are adjusted periodically for changes in costs of fuel and purchased power. Revenues from water and irrigation operations are recorded when earned.
(h) Electric Rates Under Arizona law, the District Board of Directors has the exclusive authority to establish electric rates. The District is required to follow certain procedures, including certain public notice requirements and holding a special Board meeting, before implementing any changes in the standard electric rate schedules.
A general rate increase of 9.6% approved by the District's Board on January 29, 1980 becomes effective March 1, 1980.
(2) POSSESSION AND USE OF UTILITY PLANT:
The United States of America retains a paramount right or claim in the Project which arises from the original construction and operation of the Project's facilities as a Federal Reclamation Project. The Project's right to the possession and use of, and to all revenues produced by, these facilities is evidenced by contractual arrangements with the United States.
(3) CONSTRUCTION PROGRAM:
Balances shown for construction work in progress represent expenditures for new facilities required to serve anticipated customer needs, and consist of:
December 31 ($ 000) 1979 1978 Electric generating facilities $ 741,638 $ 828,371 Transmission and distribution 19,937 75,349 Irrigation plant 5,219 3,247 Other construction 2,768 2,699 Total $ 769,562 $ 909,666 Construction expenditures planned for 1980 through 1984 approximate $ 328,200,000; $ 300,900,000; $ 197,500,000; $ 281,100,000 and $ 221,100,000, respectively.
At December 31, 1979, necessary commitments had been entered into for delivery of materials and services on construc-tion projects. In addition, various firm commitments exist under coal and fuel oil supply contracts.
Palo Verde Nuclear Generating Station (PVNGS):
The Project has a 29.1% interest in PVNGS. From informa-tion now available the Project cannot assess whether the construction schedule used for Units 1, 2 and 3 will be affected by delays or moratoriums in the issuance of permits and licenses of the nature currently under review by Congress and the Nuclear Regulatory Commission as a result of the Three Mile Island incident.
Currently there is a -contingency allowance to reflect the possibility of one year delays in the completion of Unit 2 and 3, and the possibility of more stringent regulatory requirements related to nuclear facilities. There can be no assurance that this provision will be adequate to cover possible increased costs associated with any major changes mandated by regulatory agencies as a result of the Three Mile Island incident.
Anti-nuclear groups active in Arizona are circulating petitions for ballot measures that purport to prohibit the con-struction and operation of any nuclear facilities in Arizona, including those now under construction, until certain conditions are met, and to deny recovery of expenses resulting from accidents and outages of such facilities to PVNGS participants whose rates are regulated by the Arizona Corporation Commission. If these measures are on the:1980 Arizona general election ballot,, the PVNGS participants intend to actively oppose their approval.
(4) INTERESTS IN JOINTLY OWNED ELECTRIC UTILITY PLANTS:
The Project has entered into various agreements with other electric utilities for the joint ownership of electric generating and transmission facilities. Each participating owner in these facilities must provide for and furnish the financing for its ownership share. The following schedule reflects the Project's ownership interest (at cost) in jointly owned electric utility plant at December 31, 1979.
In Millions Ownership Plant Construction Share in Accumulated Work in Plant Name Eour Corners (New Mexico) 10.0 0 21.0 6.7 $ 3.1 Mohave (Nevada) 10.0 30.5 7.9 2.7 Navajo (Arizona) 21.7 200.6 29.5 .3 Hayden (Colorado) 80.0 102.1 11.7 Coronado (Arizona) 70.0 439.8 .5 167.2 Craig (Colorado) 29.0 124.5 78.0 Palo Verde (Arizona) 29.1 3.4 428.6 8921.9 q56.4 8680.0 The Project's share of direct expenses of the jointly owned plants is included in the corresponding operating expenses in the combined statements of net revenues.
(5) LONG-TERti DEBT:
($ 000)
Future Interest Rate 1979 1978 Haturities Electric System Revenue Bonds (a):
1973 Series A and B 5 to 6-1/2 $ '44,090 $ 145,885 1980"2011 1974 Series A and B 5.7 to 7.6 140,000 140,000 1983"2012 1976 Series A, B, C and D 4.0 to 7.2 405,000 '05,000 1980-2016 1977 Series A, B Refunding and C 3-3/4 to 6-1/8 395,915 395,915 1980-2017 1978 Series A, B and C 4.4 to 7 317,900 317,900 1981"2018 1979 Series A, B and C 4-3/4 to 7-1/4 281,107 1983-2019 1,684,012 1,404,700 Unamortized bond discount (25,168) (17,975)
Total electric system revenue bonds outstanding 1,658,844 1,386,725 General Obligations Bonds and Other, 1/ to 7.77/ (b) 255,236 269)289 1980"2004 Total long-term debt $ 1,914,080 $ 1,656,014 (a) Electric system revenue bonds are secured by a pledge of, and a lien on, the revenues of the electric system after deducting "operating expenses", as defined in the bond resolutions, subject to prior liens of general obligation bonds of $ 241,074,998 and amounts due the United States of $ 12,545,337. In all years to date electric revenues, after deducting "operating expenses" as defined in the bond resolutions, have been more than sufficient to meet all debt service requirements.
(b) General obligation bonds are a lien upon the real property included in the District and are additionally secured by a pledge of revenues from, the operation of the electric system. If the net electric revenues, as defined in the bond resolutions, are not sufficient to meet the principal and interest payments, the bonds and interest are payable from a levy of taxes on the real property.
The annual maturities of bonds and other long-term debt outstanding as of December 31, 1979 due in each of the years 1980 through 1984 are $ 19,524,000; $ 21,934,000; $ 22,814,000; $ 23,220,000 and $ 24,642,000, respectively.
Interest and amortization of discount on the various issues outstanding during the year resulted in an effective rate of 6.17%
for 1979 and 6.04% in 1978. This rate approximates 6.40% over the remaining terms of the bonds.
The debt service portion of segregated funds includes
$ 29,309,000 at December 31, 1979, and $ 22,463,000 at December 31, 1978, restricted for operating reserve requirements under bond resolutions.
Electric system revenue bonds totaling $ 405,888,000 principal amount are authorized, but unissued. Electric system refunding revenue bonds not to exceed $ 115,000,000 principal amount were also authorized, but unissued.
In Harch 1980, the District plans to issue Electric System Revenue Bonds (1980 Series A) for an estimated amount of
$ 100,000,000.
(6) LITIGATION:
Environmental Various pending litigation or administrative proceedings involving environmental matters could affect interests owned by the Project in present and- proposed generating facilities, In general, these lawsuits seek to impose higher air quality standards for generating plants. If ultimately decided adversely to the interest of the Project, the outcome of the lawsuits could result in increased construction costs, increased future operating costs, and a possible loss in the operational reliability of certain generating to be passed plants'll on to of these effects would increase the costs customers through increased electric rates.
Property Valuation Lawsuits filed by the State of Arizona against the Project to increase contributions in lieu of property taxes over the amounts already paid by the Project for the years 1970 through 1974 and 1978 were settled and $ 2,100,000 was paid in August, 1979 to the various taxing authorities in full and final settlement of all claims.
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Navajo Tax The Navajo. Tribe has created a Tax Commission which claims authority to tax facilities on the Navajo Indian Reservation. The Tribe has adopted a possessory interest tax and a business activity tax on certain facilities and operations on the Reservation, and the District is informed that such taxes are intended to apply to the Navajo and Four Corners Projects. The District is unable to estimate the magnitude of the possessory interest taz because of its inability to interpret the way the tax is to be calculated. The District estimates that the business activity taz, if upheld by the courts, could expose it to claims approximating $ 4.6 million per year. The District and other Navajo and Four Corners Project co-owners have filed actions in the Federal District Court for Arizona and New Mexico contesting the validity and imposition of the taxes. The District has appealed a decision from Federal District Court for Arizona upholding the right of the Tribe to impose the possessory interest tax to the Ninth Circuit Court of Appeals.
The Navajo Tribal Council has adopted resolutions which, if valid, require permits and the quarterly payment of taxes for emission of sulphur at rates which commence at $ .15 per lb. the first year and increase annually to $ .75 per lb. in the fifth year.
The District and other Navajo and Four Corners Project co-owne s filed actions in Federal District Court for Arizona and New Mexico.
The tax will become effective subsequent to either approval of the Secretary of the Interior or a finding by him that such approval is not required. If such tax is upheld by the courts, the District could be exposed to claims approximating $ 3 million in the first year and increasing to $ 15 million in the fifth year and each year thereafter, 1 The assertion-by the tribal council of taxing and regulatory authority on the Navajo Indian Reservation has caused the Board of Directors of the District to adopt a resolution allowing it to recover from its customers the amounts of such tazes if the payment thereof is ultimately required.
Other Principally as a result of certain water flooding in March and December 1978, various lawsuits have been filed against the Project alleging that the Project has a responsibility in regard to flood control and a liability in regard to flood damage. The ultimate liability, if any, is "not determinable, but management ezpects that a significant portion of any liabilities which might result from flood damage claims will be covered by insurance.
(7) LINE OF CREDIT:
The District has a line-of-credit agreement with 14 banks, which provides for a maximum commitment of $ 120,000,000 with interest on borrowings at a rate equal to 60% of the banks'rime rate as established from time to time by a lead bank. No compensating balances nor commitment fees are required under the line of credit.
The current agreement terminates on September 2, 1980. The line-of-credit borrowings are borrowed in the name of and payable from the General Fund and rank junior to payments required for the Prior Lien Bonds and the Revenue Bonds. At December 31, 1979, $ 120,000,000 was borrowed at an initial rate of 9.45'/ payable on or before September 2, 1980.
(8) IRRIGATION AND WATER OPERATIONS:
The expenses, including depreciation, for irrigation and water operations exceeded the assessments, delivery fees, and other revenues therefrom by approximately $ 6,182,000 in 1979 and $ 7,507,000 in 1978. These amounts do not include expenditures for additions and improvements to irrigation plant and for repayment of long-term debt.
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 PAGEOS) FROM DOCUMENT FOR REPRODUCTION MUST BE REFERRED TO FILE PERSONNEL.
'5G-528 DEADLINE RETURN DATE Oa I R~G
~ a.a RECORDS FACILITYBRANCH
Page No.
FINANCIALHIGHLIGHTS I PRESIDENT'S LETTER ECONOMIC PICTURE 4 New Mexico Economy 4 Construction and Financing 4 Revenues and Expenses 4 Earnings ................. 5 Rates and Regulation . 5 ELECTRIC OPERATIONS WATER OPERATIONS THE FUTURE............... 7 Construction and Financing . 7 Sales and Rate Activities 7 THE COMPANY AND ITS PEOPLE 8 Employee Development 8 Employee Benefits 8 Promotions and Management Changes 8 SUBSIDIARIES RESEARCH, DEVELOPMENT AND DEMONSTRATION INDEX TO FINANCIALDATA 10 DIRECTORS AND OFFICERS 32 SYSTEM MAP . Inside Back Cover The annual meeting of stockholders is scheduled to be held The Common Stock of this Company is traded on the New April 22, 1980. A proxy form and notice of the annual York Stock Exchange under the symbol PNM.
meeting will be mailed to all stockholders on March 3, 1980.
This Annual Report and the financial statements contained herein are submitted for the general information of the For further information and details pertaining to the infor- stockholders of the Company and are not intended for use in mation provided in this rcport contact D. E. Peckham, connection with any sale or purchase of, or any offer or Secretary, Public Service Company of New Mexico, Post solicitation of offers to buy or sell, any securities of the Office Box 2267, Albuquerque, New Mexico 87103. Company.
1979 1978 ~Cli<<<<e Operating revenues . $ 244,370,000 $ 187,205,000 30.5 Operating expenses $ 184,554,000 $ 143,258,000 28.8 Operating income . $ 59,816,000 $ 43,947,000 36.1 Net earnings $ 54,803,000 $ 37,464,000 46.3 Net earnings applicable to common stock....... $ 42,607,000 $ 29,081,000 46.5 Return on average common equity . 13.6% 13.0% 4.6 Average number of common shares outstanding .. 14,363,000 10,289,000 39.6 Net earnings per common share $ 297 $ 2.83 5.0 Dividends paid per common share $ 1.88 $ 1.72 9.3 Construction expenditures . $ 323,361,000 $ 198,976,000 62.5 Gross investment in utility property . $ 1,197,514,000 $ 879,893,000 36.1 Kilowatt-hour sales (thousand kWhr) 4,960,451 4,527,826 9.6 Number of electric customers served at year end . 206,000 196,000 5.1 Average kWhr usage pcr residential customer ... 5,929 5,880 .8 Number of employees . 2,311 2,054 12.5 Number of common stockholders 34,236 27,026 26.7 I
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Bryan
The end of a decade has come. For our industry, as for the country in general, it was ten years of unrelenting change. The rules and the perceptions of society, the attitude of the government and the attitude toward the ,(
government seemed to shift daily. It was a strange ten jl years no matter who you were or hoav you looked at it.
It was a decade which saw the United States disengage itself from a hvar which it neither bothered to,.'jg declare nor set realistic military goals. It was a decade in '.~3) which, for the first time, an American president resigned;;!!
in disgrace. It was a decade that saw "liberals" begin to militantly support the status quo under the no-growth v-theme and "conservatives" argue heatedly for growth and change. It was a decade that saw the nation seemingly go into shock and refuse to make decisions or take action on matters of paramount importance energy, defense, economic policy... the list is endless.
Yet, through it all, our institutions did manage to survive and to keep providing the public with far mori than human history could define as "basic necessitiis."
Life went on, although polls revealed that for the first time in American history many people no longer felt confident in the future essential, 'it was decided that a touchstone was needed to 1970 s, the last ten years may well go down as a decade help us all make sure we were looking in the right of solutions for PNM.
direction. A statement of principle was adopted. The full statement ls on page 31. As simpltsnc as these thoughts PNM initiated a shift to coal widioul governmenlal may seem, it is only necessary to reflect for a moment suggestion or advice more than two decades ago. The on the complexities of life and the confusion third unit at the San Juan Generating Station came surrounding us to see why a straightforward standard on-lme in 1979. During the past year, your Company was developed. If PNM can adhere to these simple acquired full ownership of the fourth unit now under thoughts, our customers will have the service they expect construction at San Juan. By this action, we can assure at a price they can afford and in a manner they can our customers that they will have electricity in the understand. Our employees will have worthwhile jobs 1990's. Such assurance is becoming difficult for all and our owners will be repaid for making it all possible. utilities to make in these uncertain times.
An astounding expansion came about during this However, using coal as an energy iesource is not decade, in part, as people in other states began to without its problems. Stringent constraints have been develop an appreciation for the way of life offered by established on the burning of coal. PNM is committed to New Mexico. It also resulted from the commitment the building and operating facilities to meet those people of New Mexico have made to their environment. requirements. When new regulations were being The investment in pollution control equipment at the San developed, and when regulatory actions were required, Juan Generating Station now exceeds the total investment we often found that the desires of environmentalists of the Company just ten years ago. compounded our already complex business environment.
However, PNM has worhed hard to establish a good problems, companies, including PNM, had to come~u As a result, we have often been able to achieve with solutions to their ownproblems. In light of the agreements with those groups that contribute to the
preservation of New Mexico's environment and maintam any unexpected circumstances, there will be little change a balanced consideration of the customers'eeds. in thc real price of electricity in the foreseeable fu~turc.
It is clear that in order to continue the financing required, In addition, we continue to search for new and better our emphasis must be on performance for shareholders.
ways to meet future needs without relying on natural gas During f979, our common shareholders provided us~wiih and oil. As part of this search, work continued on the more than $ 57.2 million of additional equity capital, Palo Verde Nuclear Generating Station. As you know, 2,959,506 additional shares, to help finance needed your Company committed itself to a 10.2 percent share facilities. In return, our common shareholders earned in that pioject in 1973. In the aftermath of Three Mile Island, extensive reviews of the engineering and construction at Palo Verde have been conducted and You, our shareholders, have taken long-term risks in some are still underway. We are confident that Palo order to ensure in adequate power supply. The rate Verde will serve our customers safely and reliably. We structure simply must be such that the bottom line is are also confident that society will conclude that the enticing to shareholders. Stock must be selling above benefits of having domestic energy resources beyond the book value, and we will do everything reasonable to control of international politics will outweigh the limited make that happen. 1 risks of nuclear energy.
To our employees we say thanks for a dedicated PNM studies continue to demonstrate that nuclear decade; your innovation and individual energy have power has economic, environmental, and safety made our Company part of the solution to our country' advantages over other available generating alternatives. problems. To our directors we again express appreciation Even though this is the case, the nuclear option is for the widsom, stability and leadership you provide.
currently plagued with political and regulatory uncertainties. Therefore, PNM has not made a contmitmcnt to the construcuon of a nuclear plant wllhtn New Mexico, but the Company does continue to include
==the nuclear option as a consideration in its generation PNM enters the 1980's confident of its abihty to provide reliable service an~maturate the htgli~eve accountability to its custoiners and to you, our shareholders.
o~
planmng activities. Such planning includes the examination of design options, economics, and feasible Sincerely, sites for any future projects.
Work will soon commence on PNM's and the country's first hot water geothermal generating facility.
Though geotherinal energy now provides a significant part of northern California's electricity, the hot dry steam J. D. Geist used there is a geological rarity. Geothermal hot water is President not as rare and, if the PNM project now under development with the Department of Energy and Union Oil Company is successful, the technology could lend itself to application in many areas of the country. 3-Q. /J=~~ --
G. A. Schreiber The decade of the 1970's was remarkable for both the Chairman of the Board nation and PNM. But changing the calendar has not changed all our problems; energy remains a critical issue; economics of uncertainty are still part of our everyday life; and the quest for understanding and solutions to these pressing issues will be the hallmark of the 1980's.
Your Company's requirements for new construction in the 1980-84 five-year period is predicted to be $ 1,084 million. This is less than in the 1979-83 period. Barring
PNM is situated in one of the growth areas of the Nineteen seventy-nine was a significant year for PNM.
Rocky Mountain West, as the Company's construction The year represented the peak of our construction budget over the past decade indicates. Projections show program in terms of annual dollars spent. In 1979, net that during 1979-1984 population in PNM's service area utility plant additions totaled about $ 317 million, will grow by 16 percent, or an average of 2.9 percent compared to about $ 199 million in 1978. Our current per year. The national annual growth rate is expected to construction budget indicates a downward trend in be about I percent. In contrast, the growth rate over annual construction dollars for the next several years 1974-1979 was 14.5 percent, an annual rate of 2.5 until we begin our next major generating project. Also, percent. The population in PNM's service area is the Company acquired full ownership of San Juan Unit 4 currently estimated to be 532,000. Total state population by purchasing Tucson Electric Power Company's 50 is about 1,241,000. percent share of the unit. Construction of this 472-megawatt unit is scheduled for completion in 1982; Einpfoymenl for the growing population in New The third unit at the San Juan Generating Station went Mexico is centered on government agencies plus trade into commercial service in December, bringing 240 net and service businesses. Manufacturing iepresents a small megawatts into the grid for PNM's customers.
portion of the economy with about 7 percent employment. This low percentage of manufacturing New external funding for 1979 included a $ 40 million workers serves as insulation, tending to protect New 8.75 percent preferred stock issue, an issue of common Mexico from the effects of any national recession. The stock for $ 48 million, and $ 130 million in 6.5 percent combined industrial segment of the economy (mining, pollution control revenue bonds. Common stock totahng manufacturing, and construction) provides about 20 $ 9.3 million was also raised through the Dividend percent of total employment. Reinvestment Plan, the Employee Stock Purchase Plan, and the Tax Reduction Act Stock Ownership Plan 3ut thIs industrial figure is climbfng due to significant (TRASOP). The Company also obtained commitments to growth in coal and uranium mthing.13esides the place directly with institutional investors $ 45 million of increasing development of huge coal reserves, the state IOg/s percent first mortgage bonds, of which $ 17 million currently supplies approximately 50 percent of the was received in 1979, with the remaining $ 28 million country's production of yellowcake. PNM supplies received in January 1980.
electnctty to about 70 percent of the state's uramum mining activity.
n addition to the traditional segments ofÃew Mexico's economy, there is also a large and active high Revenues rose from $ 187 million in 1978 to $ 244 technology research sector, including Los Alamos million in 1979, or 31 percent. This follows a 35 percent Scientific Laboratories and Sandia Laboratories. PNM is mcrease fiom 1977 to 1978. Of the $ 57 million increase also recognized as a leader in energy research and in revenues, it is estimated that 26 percent resulted from development because of its work in projects such as increased kilowatt-hour sales, 26 percent from fuel solar and geothermal energy applications. clause adjustments and 48 percent from increases in base electric rates. Electric sales grew from about 4.5 billion While the per capita income in New Mexico ranks in to almost 5 billion kilowatt-hours, a 9.6 percent increase.
the bottom one-fifth of all states, the rate of increase is greater than most other states. Since 1974, personal In 1979, fuel and purchased power expense was up by income in New Mexico has been growing at one of the about 36 percent due to increased energy requirements fastest rates in the Rocky Mountain region. Per capita and costs of fuel. Other operating and maintenance income in the Albuquerque metro area, in which 80 expenses climbed by 22 percent, compared to 26 percent percent of PNM's customers live, is currently about in 1977-1978. Cost control programs were continued equal to the national average. The continuation of these during the year and a trend toward improved trends is expected to lift New Mexico's per capita cost-effectiveness is evident.
income above its current national ranking.
As a result of thc financing for our construction designed to attain earnings of 13.5 percent on year-end program, interest expenses on short-term debt rose due common equity. The first annual Index factor was to a higher level of borrowing and increases in the calculated on 1978 revenues and expenses, with certain interest levels. Long-term debt also grew in 1979 and adjustments. Investment in the construction work in total interest charges were up by about $ 3.7 million. progress relating to San Juan Unit 3, placed in service Preferred dividends increased by about $ 3.8 million. in late 1979, and all pollution control equipment at the San Juan Generating Station was included in the revised calculations. The allowance for funds used during construction rate on other construction work in progress was changed from 6.5 percent to 7.5 percent. A During 1979, PNM's net earnings available to composite return on accumulated deferred investment tax common shares grew from about $ 29 million to $ 43 credits was allowed. With the switch from quarterly to million, or about 47 percent. However, reflecting the annual adjustment of the factor and with the additional Company's increased investment in plant, shares procedural and reporting requirements, Indexing has outstanding climbed from approximately 12.6 million become less automatic; however, it retains many shares to 15.6 million, or 23 percent. Earnings pcr sharc advantages over a traditional rate filing, including for 1979 were $ 2.97, compared to $ 2.83 for 1978, on significant reductions in traditional regulatory lag. The average shares outstanding. New Mexico Attorney General appealed the May 1979 Order to thc Santa Fe District Court and is contending The increase in average shares outstanding was due to that the formula used by the NMPSC in arriving at the the sale of common stock in 1978 and 1979 to finance annual Index factor produces excessive revenues. Thc our construction program. Return on average common NMPSC and the Company are opposing the Attorney equity for 1979 was 13.6 percent, compared to 13 General's position.
percent for 1978.
On the basis of most measures of financial integrity, the Cost of Service Index has been successful to date.
JSEl@cAu6~NNfich/ PNM's total capitalization more than tripled between 1974 and 1978, compared to an industry average As an electric and water utility operating in the State increase of about 40 percent. Yet, during. this period, of New Mexico, PNM is subject to the jurisdiction of PNM iinprovcd its position relative to the industry the New Mexico Public Service Commission (NMPSC). avcragc. Return on average capital, return on equity, Activities of the Company regulated by the NMPSC before and after tax interest coverages, and market include rates, quality of service, issuance of securities, price-to-book value ratio improved markedly. In and generation and transmission construction. The particular, return on average common equity rose Federal Energy Regulatory Commission (FERC) has approximately 39 percent from 9.7 percent in 1974 to jurisdiction over rates charged by PNM for electricity 13.6 pcrccnt in 1979.
sold to other electric utilities.
As part of a review of the Indexing procedures, PNM Since mid-1975, PNM has used a method of rate flilcd a rate redesign package ivith the NMPSC adjustment called Cost of Service Indexing, which 31, 1979, to assist the NMPSC in complying on'cccmber allows recovery of present-day costs of generating and with the Public Utilities Regulatory Policies Act distributing clcctricity. As originally designed, the Index (PURPA). Thc federal law requires utility regulators was applied to rates under jurisdiction of the NMPSC, nationally to review cost and price standards, to promote and allowed a quarterly adjustment when return on conservation by utility customers and to increase thc average common equity fell below or exceeded a band of efficiency of electric energy use.
13.5 to 14.5 percent. 'I If approved by the NMPSC the Company's proposed In May of 1979, however, the NMPSC ruled that the rate redesign would promote energy conservation as well rate adjustment method could serve its intent by allowing as provide rate incentives to.high-use customers who annual adjustments. At that time, the NMPSC allowed shift electric consumption off-peak when generating costs the "rolling-in" of the factor into the base rate charge are lowest. The proposal would offer high-use electric and during the remainder of 1979 the Indexing factor customers the possibility of being billed for electricity was removed as a separate item. The NMPSC determined based on the times of the day and seasons the power is that PNM would be allowed to adjust rates in a manner used. The concept called Time-of-Day or Time-of-Use
rates currentl is not available from any utility in New PNM through its operating divisions provides electric Mexico. service to about half the ople living in New Mexico.
The Albuque ue Division service area includes roughly The Compauy~has a fuel ad'ustmeut clause which a third of the po ulation o'f the entire state. The Belen allows the direct pass-through of increased fuel costs. and Bernalillo Divisions serve the rapidly growing areas The ad'ustment is applicable to all sales. An additional south and north of Albuquerque, respectively. The Santa art of the ro osed rate redesign filed with the NMPSC Fe Division serves the State Capital and surrounding would allow the Com an to "zero out" the fuel communities. The Las Vegas Division serves Las Vegas on the eastern slopes of the Sangre de Cristo Mountains for electrical service. in north-central New Mexico. The Deming Division service area lies in the extreme southern portion of the state, just north of the Mexican border. The Western Division serves a portion of the uranium and coal mining areas west of Albuquerque.
The power produced by PNM comes from generating In addition to the operating divisions, PNM-generated facilities as shown in the following table: electricity is purchased by several other utilities, both publicly and privately owned, for distribution to their PNM's Share customers within the state.
of Capacity Location and Generating Station (MW) As a regulated business, PNM operates under franchise agreements. Municipal electric franchise Coal-Fired Stations expiration dates are as follows: Albuquerque 1992, Near Farmington Belen 1990, Bernalillo 1998, Deming 1993, Four Corners Units 4 & 5 208 Las Vegas 1996, and Santa Fe 1999.
San Juan Units 1, 2, & 3 550 Gas- and Oil-Fired Stations Albuquerque Person Station 96 Reeves Station 175 Water service in Santa Fe and Las Vegas is also Prager Station 22 provided by PNM. The water facilities were acquired Santa Fe along with the Santa Fe and Las Vegas electric systems Santa Fe Station many years ago.
Las Vegas Las Vegas Turbine 20 During the year, PNM reached agreement with the OT>L 1,082 City of Santa Fe resulting in a new water franchise.
Resolution of conflictin oints of view ex ressed by the The Company holds a 13 percent ownership in Units 4 City, PNM, and Santa Fe County was gained by further and 5 of the Four Corners Generating Station, a 50 ex ansion of the duties of the Metro olitan Water Board.
rcent ownershi in San Juan Station Units 1, 2, and 3, In an area where water is a critical resource and a key to development the Board will serve as a way for the three stations. The Prager Santa Fe, and Las Vegas Stations parties to combine their expertise and meet the long-term are used p~rimaril to meet eak loads. needs for all concerned.
In large part, the credit for the success of the accounting for about 67 percent of total kilowatt-hours negotiations which resulted in the franchise agreement produced. Natural gas rovided 31.5 ercent and oil 1.5 belongs to the PNM employees in Santa Fe. Their percent. With the addition of 240 megawatts of abilities and persistence turned a difficult situatioh into coal-fired capacity from San Juan Unit 3 in December of one of cooperation for the long-term future of water 1979 PNM's forecasted generation requirements from supply in Santa Fe. The new water franchise for Santa coal will rise to 83 percent with natural gas and oil Fe will be in effect until the year 2004. The water franchise for Las Vcgas expires in 1993.
1980.
4Qgg ~ percent. The forecasted peak demand for the summer of 1980 is 987 megawatts. To supply this peak demand and Capital expenditures in 1980 are expected to drop to maintain an adequate reserve margin for contingencies, about $ 299 million, the major portion of which is for the PNM has a total installed capacity of 1,082 megawatts construction of the fourth generating unit at San Juan (11 megawatts of which is scheduled for retirement in and the three units at the Palo Verde Nuclear Generating early 1980, subject to a current review) and has Station in Arizona. To provide funds for the 1980 contractually arranged to purchase an additional 160 construction program, your company anticipates that it megawatts of capacity from other utilities plus a will offer up to $ 50 million of preferred stock in April projected eight megawatts from load management for and approximately $ 60 million of common stock during resource capacity of 1,239 megawatts.
the second half of the year. PNM also expects to raise approximately $ 14 million through its internal stock During the fourth quarter of 1979, PNM and the Los programs. Angeles Department of Water and Power completed negotiations for the sale of firm surplus energy from San In addition to the January receipt of the $ 28 million Juan Station to Los Angeles. Final contracts, signed in from the private placement first mongage bond January 1980, provide for the sale of 700,000 transaction, the Company's curient financing plan also megawatt-hours until April 1982.
includes a first mortgage issue of approximately $ 60 million during the second half of the year. Use of In January 1980, your Company completed contract approximately $ 77 million of low-cost pollution control negotiations with San Diego Gas and Electric Company revenue bonds cumntly held in trust is planned. Funding for the sale of contingent capacity from San Juan requirements will also be provided for by continued use Station. This delivery of energy is contingent on the of short-term debt. Additionally, your Company plans to availability of the four units at San Juan and Palo Verde participate with the City of Farmington in the issue of Unit 1. The contract specifies the sale of 236 megawatts~
$ 26 million in pollution control revenue bonds for each year over a six-year period (a total of about 8.6 environmental control structures it the Four Corners million megawatt-hours of energy) commencing with the Generating Station. in-service date of San Juan Unit 4, anticipated to be May 1982.
PNM's planned construction program over the next five years is estimated to be $ 1,084 million. Of this As a result of the purchase of Tucson Electric Power amount, approximately $ 593 million is for Company's share of San Juan Unit 4, and the contingent generation-related construction, including nuclear fuel, sale of power from this unit to San Diego Gas and land and water acquisitions, with an additional $ 187 Electric during 1982-1987, PNM has not only assured million for environmental control systems. The majority availability of electricity to its customers into the 1990's, of this money is for continuing construction at the San but additionally has been able to accomplish this at Juan Generating Station, the Palo Verde Nuclear capacity costs of the 1970's rather than the late 1980's.
Generating Station in Arizona, a large pumped storage The savings to PNM's customers will be substantial.
project, and PNM's interest in additional pollution control equipment for the Four Corners Generating According to the schedule set by the NMPSC, PNM Station. The balance of the $ 1,084 million will be spent has filed a new Cost of Service Indexing factor which over the next five years on transmission and distribution will be collected subject to refund beginning on March systems plus additional operating facilities for both 21, 1980, while the NMPSC decides the case. The factor electric and water customers. Additionally, PNM's refiects increased costs PNM experienced during 1979.
ivholly owned subsidiary, Paragon Resources, Inc., has a five~ear capital expenditure program of $ 48 million, In the near fuiurc, PNM will submit revised rates to with about $ 1$ million in 1980, primarily for the Federal Energy Regulatory Commission for developmenls related to future generation prodects. wholesale customers based on test year 1980 budgeted operating data. Final decisions in pending cases have not yet been issued; however, the rates have been put into effect sub'ect to refund.
Total system requirements in 1980 including sales to wholesale customers~are projected to increase by 15.8 percent. Total peak demand is projected to grow by 15.4
Employees are PNM's most important asset. The AM5&lgA$'lydia employees work together to provide customers not only with the reliable service they expect today, but An expressed principle of the Company is to promote employees also test and implement new ideas and plans from within its own ranks whenever practical. As a for dependable service in the years ahead. company operating in a growth mode, many jobs become available. During 1979, 877 employees were During 1979 PNM added 257 additional employees. promoted to positions of higher responsibility.
Although the Company's continued growth accounted for some of the increase, it was growing regulatory and The Company's Board of Directors elected two environmental requirements which accounted for much employees to vice president positions and promoted a of the increase. Effective environmental performance third employee to Treasurer in April of 1979.
requires that the Company constantly monitor power plant emissions and maintain the necessary pollution P. J. Archibeck was promoted to Treasurer from his control equipment. Detailed environmental studies are previous position as Assistant Treasurer.
now required to support the construction of new generation and transmission facilities. To encourage T. P. Warnke was elected District Vice President of energy conservation and to meet the requirements of the PNM's San Juan area. Mr. Warnke, a former manager of Public Utilities Regulatory Policies Act, personnel were PNM's Deming Division, previously served as manager added to provide additional assistance to customers and of the San Juan area.
prepare studies for submission to appropriate agencies.
The continued effect of these various activities on the J. L. Wilkins was elected Vice President of total number of employees was significant. Engineering and Construction. A past chairman of the National Electric Reliability Council, Mr. Wilkins PNM continues its tradition of attracting very talented previously was group manager of engineering and and highly skilled new employees necessary to keep pace construction.
with customer needs. Of the 2,311 employees, almost 850 craft personnel are represented by Local Union 611 of the International Brotherhood of Electrical Workers.
The PNM-IBEW contract expires April 30, 1981.
PNM has an intcrcst in two subsidiaries, Paragon Resources, Inc. (formerly Public Service Land Company) and Wcsrern Coal Co. Paragon Resources, Inc. is a wholly owned subsidiary, organized to secure A total of 1,730 employees participated in water rights and property for the Company's various Co'mpany-sponsored training programs during the projects and business-related needs. Chief among these 12-month period. Additional programs assisting needs are plant sites and water for Company water employees wishing to further their education and job systems and for cooling purposes at generating plants skills at local schools and universities are also offered.
Western Coal Co. is jointly owned by PNM and Tucson Electric Power Company. The purpose of Western Coal Co. is to secure coal leases and provide fuel for San Juan Generating Station. The San Juan As part of a continuing effort to retain skilled and Generating Station has contracted with Western Coal Co.
trained employees as well as to attract new personnel, to supply all coal required for the life of the plant.
benefits, including life, health, and dental insurance as well as retirement plans, have been upgraded. Employee wages during 1979 stayed within the President's salary guidelines with isolated exceptions receiving prior approval by the federal government.
PNM is involved in a number of research, development, and demonstration projects designed to increase Company operating efficiency, expand
knowledge in energy use and alternatives, and protect Union Oil Co., is constructing the nation's first hot the environment. water geothermal generating facility. When completed, this demonstration plant will produce 50
~ Because water resources are scarce in New Mexico, megawatts. Ultimately, the geothermal field could PNM is evaluating treatment procedures necessary for produce about 400 megawatts. The Company is also water to be recovered from uranium mining activities in the beginning phase of work on a pumped storage for use in generating station applications. facility which, when completed in 1989, will produce about 600 megawatts.
~ PNM is investigating the economic recovery of deep seam Fruitland Formation coal at depths below < In 1980, Company load management engineers will strippable levels, using underground coal gasification join with private individuals in the Deming area to technology. construct a vertical wind axis generator for use in irrigation and rural homes.
~ Numerous solar research projects are underway including the performance of both passive and active ~ Subsynchronous resonance, hardly a household word, solar residential and commercial systems plus water is. very important to utilities. The problem lies in heating applications. PNM is also participating with vibrations created by transmission lines which can Western Energy Supply and Transmission Associates damage the power plant turbine-generator. PNM and (WEST) in the nation's largest solar monitoring ten other western utilities contracted with General project which will provide an excellent data base for Electric and Westinghouse in 1978 to develop a relay future solar projects. that could sense the vibrations and disconnect the generator before any damage could be done. As a
~ PNM is also studying the effect of transmission lines result of this study, two relays were installed at the on birds of prey and their habitats. This nationally San Juan Generating Station in 1979 the first of recognized study will bc completed in carly 1980. their kind in the country. Additional equipment is scheduled to be installed in 1980.
~ At San Juan, PNM is developing techniques for remote measurement of visible and invisible power ~ Another major project during 1978 and 1979 was the plant plumes. This project is also funded by WEST. High Silica Control Project. This involved PNM is also testing the use of ceramic-lined pipe experimentation with a new chemical to disperse silica sections in an effort to find ways to increase abrasion in the water that normally collects as scale on heat resistance in coal-handling systems at San Juan. transfer surfaces of power plant equipment, thereby reducing plant efficiency and causing the plant to use
~ An improved computer-assisted planning tool is being more water. The experiment carried out at developed to enhance PNM engineers'bility to Albuquerque's Person Generating Station resulted in evaluate system distribution plans and alternatives. saving onc million gallons of water per day on just one unit.
~ In the area of nonconventional electric generation, PNM, along with the Department of Energy and
. A>N~AeJen P PiVAv Ay
Page Growth Graphs 11 Comparative Operating Statistics 12 Summary of Operations 14 Management's Discussion and Analysis of the Summary of Operations .. 14 Consolidated Balance Sheet 16 Consolidated Statement of Earnings 18 Consolidated Statement of Capitalization 19 Consolidated Statement of Changes in Financial Position 20 Notes to Consolidated Financial Statements . 21 Accountants'eport 28 Stock1Dividend Data 29 Supplementary Infoimation on Changing Prices. 29 i~7 07 Syexo
182 193 213 257 285 328 402 532 682 880 1,198 37 40 43 50 58 67 85 100 139 187 244 MILLIONSOF DOLLARS MILLIONS OF DOLLARS Pcckurl'LzkgmCmcdguieml'2~ aVA I/P1$hX&hf5/N~Lf4/
'69 '70 '7g '72 '7V '74 'T5 '76 'T7 '7d '79 te m v~ m'vv<vrv<'rrvX v 9 9 9 10 11 11 14 14 19 26 33 437 541 541 542 617 727 727 858 858 842 1>082 MII.LIONS OF DOLLARS THOUSANDS OF KILOWATTS
J~gie l978 1972 1976 ELECTRIC-SERVICE- =
=- -=-
ENERGY-SALES kWhr (in thousands)
Residential 1,067,755 1,000,564 957,390 916,748 1,403,282 1,353,805 1,320,651 1,277,025 Industrial 858,533 797,314 686,845 605,559 Other ultimate customers 159,396 164,901 160,922 157,694 Total sales to ultimate customers . 3,488,966 3,316,584 3,125,808 2,957,026 Sales for resale 1,471,485 1,211,242 1,241,195 638,207
-Total-energy. sales ............. . 4 960 45 I- 4,527,826 -4,367,003 3,595,233 ELECTRIC REVENUES (in tliousands)
'l1 Residential . $ '6,262 $ 51,414 $ 39,547 $ 32,423 Commercial 77,806 60,125 45,520 36,198 Industrial 40,467 28,860 18,918 13,070 Other ultimate customers ........... 8,704 7,052 5,215 4,168 Total revenue from ultimate customers... 193,239 147,451 109,200 85,859 Sales for resale 44,000 32,568 23,219 9,340 Total revenue from energy
-sales .. 237,239 180,019 . 132,419 95, 199 Miscellaneous electric revenues ...... 2,532 2.581 2.605 1,935
$ 239,771- $ 182,600 $ 135,024 $ 97,134 Total electric revenue CUSTOMERS AT YEAR END Residential 184,979 175,439 164,803 156,116 Commercial . 20,334 19,496 18,374 17,483 Industrial . 485 482 493 489 Other 264 263 265 250 Total ultimate- customers 206,062 195,680 183,935 174,338
-Sales-for resale ... 5 5 5 5 Total customers -- 206,067 195,685 183,940 174,343 Reliable net capability kW 1,082,000 842,000 858,000 858,000 Coincidental peak demand kW .. 855,000 809,000 715,000 633,000 Average fuel cost per million BTU . 120.72tt 105.52tt! 92.74/ 61.83tt!
BTU per kWhr of net generation ... 10,476 10,993 11,004 11,084 WATER SERVICE SALES Gallons (in thousands)
Customer sales. 2,509,868 2,747,924 2,726,059 2,959,209 Interdepartmental sales ......... 5,947 5,198 5,742 4,014 Total-water-sales- ............ 2,515,815 2,753,122 2,731,801 2,963,223 REVENUES (in thousands)
Customer sales . $ 4,595 $ 4,599 $ 3,606 $ 2,386 Interdepartmental sales ... 4 6 6 3 Total water sales ...... $ 4,599 $ 4,605 $ 3,612 $ 2,389 Customers at-year cnd .. 18,755 18,079 17,427 16,838 (I) Reclassified against expense (2) Certain customers were reclassified-from-commercial to industrial during 1975. The reclassification accounted for a change of 220 customers in both-categories-.
1975 1974 875,361'28,243 786,108 706,973 648,626'83,136 I, 177,953 I, 128,576 1,110,147 985,431 885,782 792,376 530,188 549,622 616,405 653,761 552,1'18 '18,695 136,136 137,843 128,171 123,568 116.202 107,598 2,719,638 2,644,284 2,640,831 2,469,733 2,269,305 2,035,228 578,037 250,901 122,656 114,333 106,000 98,026 I 3,297,675 2,895,185 2,763,487 2,584,066 2,375,305 2,133,254 S 28,912 S 23,314 $ 20,552 17,760 S 15,295 S 13,910 30,851 25,403 22,283 19,421 16,309 14,784 9,993 8349 7,210 7,229 6,549 5,963 3,361 3,004 ',613 2,204 1,994 2;056- --
73,117 60,070 52,658 46,614 40,147 36,713 8,241 2,782 1,074 937 857 778 81,358 62,852 53,732 47,551 41,004 37 491 1,412 2,406 2,803 795 670 621
$ 82,770 -$ - .65,258-- -- --$ -56,535 $ ., 48,346
$ 41,674- $ 38,112 151,111 147,516 143,201 136,515 127,911 120,865 16,738(2) 16;469'98 16,241 15,754 14,775 13,908 515(2) 295 303 308 300 246 231 229 221 205 201 168,610 164,514 159,966 152,793 143,199 135,274 4 4 3 3 3 3 168,614 164,518 159,969 152.796 143,202 135,277 727,000
= 727,000 617,000 -542,000 540,700 540,700 586,000 583,400 533,000 491,700 458,700 400,600 47.23g 39.49g 26.169 24.47g 23.550 23.04l1 10,848 11,054 11,017 10,841 10,870 11;058 2,859,783 3,013,508 2 855 673 2 781 854 2 563 745 2 564 580 9,195 12,568 10,710 3,638 1,707 1,782 2,868,978 3,026.076 2,866,383 .2,785,492 = 2,565,452 2,566,362 2,205
S =2,103 $ 1,567 'S =1,530 = S 1,434
$ 1,418
=
6 --(I) ,
I .I S 2,208 $ 2,109 S 1,570 S 1,530 S 1,435 $ 1,419
-. 16,437 16,158 = 15,848 . -15,454 15,024 . 14,495
1979 1978 1977 1976 1975 (In thousands except per share amounts)
Total operating revenues $ 244,370 $ 187,205 $ 138.636 $ 99,523 $ 84,978 Operating expenses Operation and maintenance . ,. ... 134,539 103,864 76,524 51,535 39,785 Provision for depreciation and amortization .........,...... 17,603 14,451 11,464 9,548 8,650 Taxes,.other than income taxes ....... 10,531 8,221 7,257 5,875 5,114 Income taxes . .. ~ 21,881 16,722 10,986 8,028 8 626
-Total operating expenses-;;; ;.;.. 184,554- 143,258 106,231 74,986 62,175 Operating income ............. 59,816 43,947 32,405 24,537 22,803 Allowance for equity fundswsed during construction . 15,594 10,541 6,218 4,109 1,583
=
Other income and deductions; net....=.... =.
2,401 '2,257 1,435 689 530 Income before interest charges ....... 77,811 56,745 40,058 29,335 24,916 Net interest charges . 23,008 19,281 15,137 11.978 10,700 Net earnings 54,803 37,464 24,921 17,357 14,216 Preferred stock dividend requirements ..... 12,196 8,384 6,285 4,194 2,952 Netearningsapplicabletocommon stock $ 42,607 $ 29,080 -$ -1 8,636 $ 13,163 $ 11,264 Average number of shares outstariding . 14,363 10,289 7,569 6,106 4,609
. Per>hare amounts Netearnings ................. $ 2.97 $ 2.83 $ 2.46 $ 2.16 $ 2.44 Dividends $ 1.88 $ 1.72 $ 1.61 $ 1.42 $ 1.26 gAi $
The following factors, wfiich may not be indicative of future operations or earnings, have had a significant effect upon the Company's results of operations during the years 1978 and 1979.
Electric revenues increased $ 47.6 million m 1978 and $ 57.2 million in 1979. The principal factors causing these increases are as follows:
1979 1978
--==--.- =-Increase in electric-revenues due to: (In thousands)
Increased kWhr sales (a) $ 14,660 $ 4,584 Increased base rates (b) 27,597 29,912 Increased fuel cost-adjustment factor (c) 14,963 13,104
$ 57,220 $ 47,600 (a) -kWhr-sales the-number-of-customers increased in each period-and the-average use per customer de-
-creased in 1978 but-increased-in 1979. Increases in kWhr sales were 3.7% in-1978 and 9.6% in 1979.
(b) Rate increases the Company-bills-most customers under a Cost of Service Index order based upon the
=--
jurisdictional-return on common equity. The Index order, formerly a quarterly adjustment, was revised to provide
-for-annual adjustments-to base rates effective May 15, 1979. The Company-has periodically negotiated higher rates with-certain-customers-whose rates are subject to the jurisdiction of the Federal Energy Regulatory Commission (FERC)=New-rates-for-such-customers-were-filed with the-FERC and accounted for revenues, net of recorded provisions-for possible refund,-of $ 6.7 million in 1978 and $ 9.9 million in 1979 which are subject to refund pending a determination by the FERC. Accumulated revenues subject to refund, net of provisions for refund, at Decemberd1, 1979 are.$ 18.3 million. --
(c) Fuel cost adjustment natural gas fuel cos~ts cost of coal~r ton and purchased power have accelerated rapidly. Such costs are passed on to customers.
Water revenues increased $ 1.0 million in 1978 as a result of rate increases allowed by the New Mexico Public Service Commission (Commission).
Operation and maintenance expenses increased $ 27.3 million in 1978 and $ 30.7 million in 1979. Principal causes are:
(a) Production of energy from the Company's own generating units decreased by 14.3% in 1978 but increased by 16.3% in 1979. A boiler explosion, causing the shutdown of the first unit at the San Juan Generating Plant in July 1977 nnd the return to service of the unit in Mey 1979, coupled with~the urchnse of lower cost energy on the interchange market rather than generating from the Company's gas and oil fired units, resulted in the Company being a net purchaser of 957 million kWhr in 1978. Although generation increased in 1979, the growth in kWhr sales resulted in the Company being a net purchaser of 752 million kWhr. Increased fuel and. purchased~ower expenses resulting from the boiler explosion were $ 6.9 million for the entire period of the outage. Of such expenses
$ 6.6 million were passed on to customers through the fuel adjustment clause by approval of the Commission and are subject to refund if it is determined that the Company was responsible for the explosion.
(b) Rapidly accelerating fuel costs.
(c) Higher cost of labor and related benefits due to higher wage rates and an increase in the number of employees necessary to operate the expanded electric generating and water facilities.
(d) General inflationary factors.
(e) Maintenance and repair expenses increased by $ 3.0 million in 1978 and $ 1.9 million in 1979. Overhauls and inspections at Person Station, the Four Corners plant and the San Juan plant accounted for increased costs of
$ 2.4 million in 1978 and $ 1.3 million in 19797 The Company's gross utility plant increased by approximate~1 29% in 1978 and 36% in 1979 as a result of expanded operations, the need to maintain reliable service and increasing environmental protection requirements. In addition, the Company purchased the fifty-percent undivided interest of Tucson Electric Power Company in San Juan Unit 4. This increase in utility plant and the Company's construction program have been the primary causes of increases experienced in the following areas of operations:
(a) Depreciation and amortization.
(b) Taxes, other than income taxes increases in ad valorem taxes resulted from increased plant.
(c) Allowance for funds used during construction increased construction at the San Juan plant and the Palo Verde Nuclear Generating Station.
(d) Interest charges and preferred stock dividend requirements from 1977 through 1979 the Company issued
$ 112 million principal amount of first mortgage bonds, utilized $ 147 million of proceeds of pollution control revenue bonds and issued $ 86 million of preferred stock, generally at higher rates than previous issues, and had up to $ 96 million principal amount of short-term debt outstanding.
Other income and deductions, net, increased $ .8 million in 1978~rima~ril because the Company's share of earnings of its fifty-percent-owned subsidiary increased due to increased coal deliveries to the San Juan plant and an increase in the price per ton delivered.
As a result of items detailed above, earnings before income taxes, income taxes, net earnings and earning~ser share of common stock all increased in 1978 and 1979.
December 31, 1979 and 1978 1979 1978 (In tltonsands J Utilityplant, at original cost (notes 4 and 8):
Electric plant in service $ 712,096 $ 462,621
= =- -- - Water plant in service 31,639 30,284 Common plant in service 17,340 t4,t48 761,075 507,053 Less accumulated depreciation and amortization 127,939 '102,033 633,136 405,020 Coristruction work in progress 435,353 371,754
'lectric plantheld for futureuse 1,086 1,086 Net utility plant 1,069,575 777,860 i
Other property and investments:
"Noiiutility property, ut cost, uct of accumulated depreciation of $ 757,000 in 1979 and $ 456,000 in 1978 17,362 9,516
= Investment-in fifty-percent-owned company 6,111 -
3,895--
--- =-Other, at cost 1,875 -- ,747
~
~
Total other property and investments 25,348 15-,158=
Current assets:
-- =Cash (note-5) 3,810 1-,929 Receivables:
Customers--
23,818 -- - -18,835
,=Other 13,809 18,231
.Allowance for doubtful receivables (224) (106)
Fuel, materials and supplies, at average cost 22,073 16,015 Prepaid expenses 2,040 1,116 Deferred fuel costs 11,322 11,875 Total current assets 76,648 67,895 Deferred charges:
Construction advance 17 037 Unamortized debt expense 6,918 5,364 Other deferred charges 7,957 5,433 Total deferred charges 14,875 27,834
$ 1,186,446 . $ 888,747 See.accompanying notes to consolidated financial statements.
htN Atk6 = =
I979 =1978 (In rhotisands)
Capitalization:
Common stock equity (note 2):
Common stock of $ 5 par value. Authorized 20,000,000 shares; outstanding 15,601,739
$ ,009 $ -63;2 l-l ---
shares in 1979 and 12,642,233 shares in 1978 Additional paid-in capital 185,600 -- --145,433~~
.Retained earnings 83,719. 67,645~~
Total common stock equity 347,328 -276-,289 Cumulative preferred stock. Authorized 5,000,000 shares (note 3):
Without mandatory redemption requirements.
Outstanding 860,000 shares of $ 100 stated --
value and 800,000 shares of $ 25 stated value
-106,000 - - - --106,000= = =-=-
With mandatory redemption requirements.
Outstanding 400,000 shares of $ 100 stated value in 1979. 40,000 Long-term debt, less current maturities (notes 4 and I I) 431,655 356,347 Total capitalization 924,983, . 738,636 Current liabilities:
Short-term debt (note 5) 95,960 23,80 Accounts payable 51,695 43,072 Preferred dividends declared Current maturities of long-term debt (note 4) 5+24= 2;869 1-,994 1-,189 Accrued interest 5;577 - =--- ,424 Accrued taxes 9,418 7,191 Other current liabilities. 4,220 4,226--
Total current liabilities - ---
174-,963 ,901---
Deferred credits:
Customer advances for construction 7,180 5,603 Accumulated deferred investment tax credits (note 6) 47,896 36,224 Accumulated deferred income taxes (note 6) 22,529 17,980 Other deferred credits 8,895 =4,403 Total deferred credits 86,500 64,210 Commitments and contingencies (notes 8, 9 and 10)
$ 1,186,446= $ 888,747
Years enrled Decetnber 3 1, 1979 and 1978 1979 1978 (ln lhonsantls except per sharc atnottnls)
Operating revenues:
Electric (note 10) $ 239,771 $ 182>600 Water 4,599 4,605 Total operating revenues 244,370 187,205 Operating expenses:
Fuel and purchased power 85,143 62,694 Other operation expenses 34,351 28,002 Maintenance and repairs 15,045 13,168 Provision for depreciation and amortization 17,603 14,451 Taxes, other than income taxes 10,531 8,221 Income taxes (note 6) 21,881 16,722 Total operating expenses 184,554 143,258 Operating income 59,816 43,947 Other income and deductions:
Allowance for equity funds used during construction 15,594 10,541 Equity in earnings of fifty-percent-owned company, net of taxes (note 6) 2,151 1,498 Other, net of taxes (note 6) 250 759 Net other income and deductions 17,995 12,798 Income before interest charges 77,811 56,745 Interest charges:
Interest on long-term debt 24,236 21,349 Amortization of debt discount, expense and premium 394 347
=
Other interest charges =4,302 1,668 Allowance for borrowed funds used during construction (5,924) (4,083)
Net interest charges 23,008 19,281 Net earnings 54,803 37,464 Preferred stock dividend requirements 12,196 8,383 Net earnings applicable to common stock $ 42,607 $ 29,081
--Average number of shares outstanding ---14,363= -- 10,289-
-
Per share amounts:
Net earnings $ 2.97 $ 283=
Dividends $ 1.88 $ 1.72 See accompanying notes to cottsolidated jinancial statements.
Years ended Deeentber 31, 1979 and 1978 1979 1978 P~ercenta es (In thottsands) 1979 - --=-1978 Common stock equity:
Common stock:
Balance at beginning of year- $ 63,211 $ 44,287 Issuance of common stock 14,798 18,924 Balance at end of year 78,009 63,211 Additional paid-in capital:
Balance at beginning of year 145,433 90,947 Premium on common stock- issued 42,466 57,241 Expenses of stock issuance - -
(2,299) (2,755)-
Balance at end of year 185,600 145,433 Retained earnings:
Balance at beginning of year 67,645 56,213 Net earnings 54,803 37,464 122,448 93,677 Cash dividends:
Cumulative preferred stock 12,196 8,383 Common stock 26,533 17,649 38,729 26,032 Balance at end of year 83,719 67,646 Total common stock equity 347,328 276,289 37.5% 37.4%
Cumulative. preferred stock:
Without mandatory redemption requirements:
Balance at beginning of year 106,000 80,000 Issuance of preferred stock 26,000 Balance at end of year 106,000 106,000 11.5 14.4 With mandatory redemption requirements:
Balance at beginning of year Issuance of preferred stock 40,000 Balance at end of year 40,000 4.3 Long-term debt, less current maturities:
Balance at beginning of year 356,347 244,721 Addition to long-term debt 82,763 114,561 Reduction of long-term debt (6,544) (2,305)
Net change in unamortized discount and premium (911) (630)
Balance at end of~ear 431,655 356,347 46.7 48.2 Total capitalization at end of year $ 924,983 $ 738,636 100.0%
100.0'umber of shares issued:
$ 100 stated value cumulative=- ----
preferred stock -400-- 260 Common stock 2,960 3,785 See accontpanying notes to consolidated financial st atetnent.
Years curled December 31; 1979 and 1978 1979 -
1978 (In thousands)
Funds provided:
Net earnings S 54,803 S 37,464 Charges (credits) to earnings not requiring funds:
Depreciation and amortization 19,128 15,510 Provision for noncurrent deferred income taxes, net
--Investment tax credit, net 4,549 11,672 1,149 10,378 Allowance for equityfunds used during construction (15,594) (10,541)
Undistributed earnings of fifty-percent-owned company (2,216) (1,621)
Funds derived from operations 72,342 52,339 Sale of fiist mortgage bonds 17,000 65,000 Sale of cumulative preferred stock 40,000 26,000
-Proceeds-from-pollution control revenue bonds 62,166 48,818 Sale of common stock 57,264 76,165 Proceeds-from other-long-term debt 3,597 743 Proceeds from short-term debt 290,315 142,280 Decrease in. deferred charges 12,405 Utilityplant retirements, net of removal costs 14,137 809 Decrease in working capital other than short-term debt 8,154 Other 6,113 4,086
$ 583,493 6416,240 Funds used:
Cash dividends $ 38,729 $ 26,032 Utilityplant. additions 308,526 189,307 Payment of short-term debt 218,160 168,475 Reduction of long-term debt 6,544 2,305 Additions to non-utility property 8,157 Increase in deferred charges 22,316 Increase in working capital other than short-term debt 4,400 Other 3,377 3,405
$ 583,493 $ 416,240 Changes in working capital other than short-term debt:
Cash $ 1,881 S (3,708)
Receivables 443 15,140 Fuel materials and supplies 6,058 1,801 Prepaid expenses 924 (115)
Deferred fuel costs (553) 4,747 Accounts payable (8,623) (9,87T)
Preferred dividends declared (875) (572)
Current maturities of long-term debt (4,035) 176 Accrued interest (1,153) (832)
Accrued taxes (2,227) (3,035)
Other current liabilities 6 675 Increase (decrease) in working capital other than short-term debt S (8,154) S 4,400 See.accompanying. notes.to consolidated financial statements.
Deceinber 3l, l 979 ninl l978 (1) Summary ofSignificnnt rfccoinning Policies System of Accounts-The Company inaintains 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 (Commission). As a result of thc rate-making process, 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 itcins enter into the determination of net earnings in order to follow the principle of matching costs and revenues.
Principles of Consolidation-The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Paragon Resources, Inc. (formerly Public Scrvicc Land Company). All significant intercompany transactions have been eliminated.
UtilityPlant Utility plant is stated at original cost, which includes payroll-related costs such as taxes, pensions and other fringe benefits, administrative costs and an allowance for funds used during construction. Contributions re-ceived from customers to mcct 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 charge major rcplaccments to utility plant. Gains or losses resulting from retirements or other dispositions of operating property in the normal course of business are credited or charged to the accumulated provision for depreciation.
Allowance for Funds Used During Construction (AFUDC)
In accordance with the uniform system of accounts, AFUDC, a noncash income item, is charged to utility plant.
The Coinmission ordcrcd that AFUDC be limited to gcncrating plant construction, cffcctive April 22, 1975.
The Commission further ordered, effcctivc May 15, 1979, that the rate be increased from the previously approved 6.5% to 7.5% and allowed thc Company to eliminate the recording of AFUDC on Unit 3 at the San Juan Generating Station and on pollution control plant associated with all San Juan units. The allowance for equity funds used during construction is credited to other income and deductions and the allowance for borrowed funds used during construction is credited to interest charges. The allocation of AFUDC between borrowed funds, after taxes, and equity funds is based on the method required by FERC.
Dcprcciation-Provision for depreciation of utility plant is made at annual straight-line rates approved by the Commission.
The average depreciation rates used were as follows:
/979 1978 Electric plant 3.62% 3.39'7o Water plant 1.88% 1.89 7o Common plant 7. 13% 5.89'7o The provision for depreciation and amortization of certain equipment, including amortization applicable to capital leases, is charged to clearing accounts along with other costs of operation and subsequently apportioned to operating expenses and property accounts based on the usc of the equipment. Depreciation of non-utility property is computed on thc 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 Electric Power Company, is participating with the Company in the construction and operation of a steam turbo-electric generating plant described in note (8). The generating plant utilizes coal from properties of the fifty-percent-owned company as a source of fuel.
Deferred Fuel Costs-The Company uses thc deferred method of accounting for the portion of fuel costs which is recoverable in sub-sequent periods under fuel adjustment clauses.
Amortization of Debt Discount, Expense and Prcmium-Discount, expense and prcmiuin incurred in the issuance of the presently outstanding debt are being amortized by charges to income over the lives of the respective issues on thc debt outstanding method.
Investment Tax Credits-The Company follows the practice of deferring investment tax credits and amortizes them over the estimated useful lives of the related properties. Investment tax credit carryforwards are recorded to the extent of the sum of the investment tax credits which would have been realized if taxes payable had been based on pretax accounting income adjusted for permanent differences and the existing net deferred tax credits which would reverse during the investment tax credit carryforward period.
Income Taxes-Certam revenue and expense items In the Consolidated Statement of Earnings are recorded in a year different from the year in which they are recorded for income tax purposes. Deferred income taxes are provided on these timing differences to the extent allowed for rate-making purposes. This normalization method is used primarily for differences attributable to deferred fuel costs, the use of liberalized depreciation methods and different lives under the asset depreciation range (ADR) than under the guideline depreciation provisions. Certain other differ-ences result in a reduction in income tax expense in the current year. This flow-through method is used primarily for diiierences between tax depreciation computed under the guideline life provisions and book depreciation and certain capitalized construction costs, principally AFUDC, deducted currently for income tax purposes.
At present, rates applicable to certam customers subject to FERC control allow recovery of amounts necessary to provide additional tax normalization of the items described above which are accounted for under the flow-through method for other customers. Provision has been made for additional deferred income taxes attributable to amounts collected under these rates.
Revenues Revenues are recognized based on cycle billings rendered to customers monthly. The Company does not accrue revenues for services provided but not billed at the end of a fiscal period.
PensTon Plan-The Company's policy is to fund pension costs which are composed of normal costs and amortization of prior service costs over thirty years.
(2) Common Stock Equity The Board of Directors reserved 2,000,000 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 1,229,413 shares remained unissued at December 31, 1979.
Charter provisions relating to the cumulative preferred stock and the indenture securing the first mortgage bonds impose certain restrictions upon the payment of cash dividends on common stock of the Company. At December 31; '1979, there were no retained earnings restricted under such provision.
(3j Ctttttu!strive Preferred Stock The=cumulative preferred stock may be redeemed by'he Company, upon thirty days notice thereof, at stated redemption prices (plus accrued and unpaid dividends). Inforination concerning the cumulative preferred stock is as follows:
Aggregate Stated
=
Stated Shares Stated Vaiue Redemption Series traiue Outstanding iin thousandsi Price (a)
Without mandatory redemp-
=
=tion requirements:
1965 Series, 4.58% $ 100 130,000 $ 13,000 $ 102.516 1974 Series, 9.2% 100 170,000 17,000 107.00 1975 Series, 10.12% (b) 100 100,000 10,000 110.12 9.16% Series (b) 25 800,000 20,000 27.29 8.48% Series (b) 100 200,000 20,000 108.48
==
8.80% Series (b) 100 260,000 26,000 108.80 1,660,000 $ 106,000
- -=
-With mandatory redemption
=-=requirements:
== --=100 =-- - 108.75 8g75% Series (b) (c) 400,000 $ 40,000 -
(a) Redemption prices are at reduced premiums in future years.
(b) 'Redemption may not be made through certain refunding operations prior to March 15, 1980 foi the 1975 Senes, or pnor to June I, 1981 for the 9.16% Series, or prior to April I, 1982 for the 8.48% Series, or prior to April I, 1983 for the 8.80% Series, or prior to February I, 1984 for the 8.75% Serie.
(c) On February I, 1984 and on each February I thereafter, the Company shall redeem 13,000 shares of the 8.75% Series, pursuant to a mandatory sinking fund at a redemption price of $ 100 per share plus accrued and unpaid dividends.
(4) Long-Term Debt The details of-the Company's outstanding long-term debt including unamortized discount and premium, less current--
maturities, are as follows:
Isstte andhtatitrity Interest Rates 1979 I978 (In tltausaniTs)
First Mortgage Bonds:
=
1980 through 1984 3 % to 3'/s% $ 5,241 $ 9,012 1985 through 1989 4s/s% 8,580 8,690 1990 through 1994 47/s% 9,880 10,002 1995 through 1999 57/s% to 7'/4% 32,197 32,602 2000 through 2004 7t/s% to 10'/s% 55;031 38,532 2005 through 2009 8th% to 9'/s% 119,073 119,290 2004 through 2009:
pollution control series, securing pollution control revenue bonds 6 % to 67/s% 274,061 145,000 Funds held b)r trustee (153,660) (85,825)
Total first mortgage bonds 350,403 277,303 Pollution control revenue bonds, due 1984 5 % to 7.6% 77,000 77,000 Other 4,252 2,044 Total long-term debt $ 431,655 $ 356,347 Substantially all utility plant is pledged to secure the first mortgage bonds.
-Approximately 25 percent of the original principal amount of each series of first mortgage bonds will be redeemed through sinking-fund requirements'prior to the aforementioned due dates. The aggregate amounts (in thousands)
==
of maturities on long-term debt outstanding at December 31, 1979 are as follows:
1980 $ 5,224 1981 2,314 1982 5,508 1983 2,816 1984 4,914 In August 1977 the City of Farmington, New Mexico issued and sold $ 77,045,000 principal amount of-its 5.9%
Pollution Control Revenue Refunding Bonds, Series-1977, the proceeds of which are expected to be used-to-re-tire 7.6% Pollution Control Revenue Bonds and 5% Pollution-Control Revenue Bonds at their maturity in-l984.=-
From and after such retirement, but not before, the Refunding Bonds will be payable out of revenues received =---
- --by the City from the Company. Upon such retirement 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.
(5) Short-Term Debt and Compensating Balance Arrangements The. Company's interim-financing requirements are met through issuance of-unsecured notes payable to banks==--
and commercial paper. The Company has agreed to maintain compensating balances with certain lending-banks or to pay fees in lieu of such balances. Compensating-balances are-generally equal to 20% of the outstanding-in-debtedness or 10% of the lines of credit at such banks, whichever is greater. Details of the Company's short-term -=-=
debt at Decemberd I, 1979 and December 31, -1978 and for the years then ended were as follows:
/979 /978
(/n Ihousatu/s)
Aggregate short-term debt outstanding:
Notes payable to banks $ 37,250 $ 4,050 Commercial paper $ 58,710 $ 19,755 Average interest rate on outstanding debt:
Notes payable to banks 14/4% 1 1 '/4%
Commercial paper 13/s% 10'/s%
Maximum short-term debt outstanding during year $ 95,960 $ 68,600 Average short-term debt outstanding during year $ 38,460 $ 23,028 Weighted average interest rate on short-term debt outstanding during year, computed using daily outstanding balances:
Stated interest rates 117/s /o 7%%
Effective rate considering the effect of compensating balances and fees in lieu thereof 127/s'7o 8'/s%
Unused lines of credit (subject to cancellation at the banks'ption) $ 60,140 $ 53,120 Compensating balances at end of year $ 1,956 S 916
= = =- -Compensating-balances have been rcduccd by the average difference between collected bank balances and book balances .--===---
(6) Incoiite Tnxes Income taxes consist of the following components:
/979 /978
(/n thousands)
Current Federal income tax $ 3,864 $ 1,609 Current>tate.income tax 1,467 1,048 DeferredEederai income tax 3,583 2,130 Deferred state income tax 677 657 Amount equivalent to current. investment tax credit 13,611 12,413 Amortization. of accumulated investment tax credit (742) (527)
-Total income taxes .$ 17,330
$ 22,460 Charged to operating expenses $ 21,881 $ 16,722 Charged to other income and deductions 579 608 Total income taxes $ 22,460 $ 17,330 The Company has investment tax credit carryforwards, for tax purposes, of approximately $ 56,000,000 as of. Decem-ber 31, 1979 which will expire in 1985 and 1986. Of this amount, approximately $ 17,075,000 has been recorded,
= for financialstatement.purposes, as a reduction of deferred. Federal income tax credits.
Deferred income taxes result from timing differences in the recognition of income and expenses for tax and account-ing purposes. The major. sources of these differences and the tax effects of each were as follows:
/979-- -
/978
(/n thousands)
- -Deferred fuel costs $ (495) $ 2,396 Liberalized-depreciation methods and
-- asset-class lives shorter than guideline lives 8,049
--- 4,376 Other miscellaneous items 662 47 Investment tax credit carryforward (3;956) (4,032)
S 4,260 S 2,787
The current portion of deferred income taxes (included in accrued taxes) results from timing differences on deferred fuel costs. Such balances amounted to $ 1,688,000 as of December 31, 1979 and $ 1,977,000 as of December 31, 1978 after reduction for investment tax credit carryforwards.
The Company's effective income tax rate was less than thc Fcdcral income tax statutory rate for each of the years shown. The differences are attributable to the following factors:
1979 1978 Federal income tax statutory rate 46.0% 48.0%
Tax depreciation in excess of book depreciation caused by use of guideline depreciation provisions (2.7%) (1.2%)
Allowance for funds used during construction, net of depreciation adjustments (12.1%) (12.3%)
Certain employee benefits and taxes capitalized for financial statements, net of depreciation adjustments (.5 "7o) (.7 7o)
Amortization of investment tax credits (1.0%) (1.0 "7o)
Other miscellaneous items (.6%) (1.2%)
Company's effective income tax rate 29.1% 31.6%
(7) 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 65% of the participant's average annual base earnings rate minus $ 1,320 or 2% of the participant's average annual base earnings rate times his years of credited service. The Company made contributions to the employees'ension plan of $ 3,058,000 in 1979 and $ 2,807,000 in 1978 including normal costs and amortization of prior service costs.
Prior to May I, 1978, the employees contributed $ 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 Company's funding of this portion of pension costs after such date did not have a significant cffcct on net earnings.
As of January I, 1978, the most recent valuation date, the actuarially computed present value of vested benefits did not exceed the total market value of the pension fund assets and the estimated amount of the unfunded prior service liabilitywas approximately $ 3,400,000.
(8) Construction Progratn and Jointly-Oivned Plants The Company is participating with Tucson Electric Power Company in the construction of the steam turbo-electric San Juan Generating Station. The Company owns an undivided fifty-percent interest in the first three units of the station. The Company purchased Tucson's fifty-percent undivided interest in the fourth and final unit of the San Juan Station in 1979 and now owns all of such unit.
The Company is also participating with several other utilities in the construction of the Palo Verde Nuclear Gen-erating Station with the first unit scheduled for completion in 1983.
It is estimated that the Company's construction expenditures for 1980 will approximate $ 299,000,000 including expenditures on the jointly-owned projects. In connection, therewith, substantial commitments have been made.
In addition to such amount, the Company's wholly-owned subsidiary forecasts construction expenditures of ap-proximately $ 15,000,000.
Details of the Company's interest in jointly-owned plants at December 31, 1979 are as follows:
Plantin Sen'ice Accutnutaterl Depreciation Constructiott tYort:in Progress Sltare of Total Ptmrt (In tltousandsl San Juan Generating Station $ 388,893 $ 26,788 65 '7o Palo Verde Nuclear Generating Station $ 170,159 10.2%
Four Corners Generating Station Units 4 and 5 $ 26,019 $ 6,440 $ 6,087 13
T ese amounts represent t he Com p an y 's share of ca p ital costs and the Com p an y has p rovided its own inancmg.
Statement of Earnings. The Company also has undivided interests tn transmission famlities which are not stg-m icant.
9 Lease Commiirnenrs The Compaan'eases data processing communication office and other equipment office space utility poles (joint use and real estate. Certain leases primarily for data processing equipment are capital leases. AE other leases are o rating leases.
Certain leases rovide urchase options in the approximate amount of $ 2,146 000 for data processing equipment and
$~423 000 for construction equipment. Renewal options and contingent rental provisions were not significant.
Leased prop~ert under capital leases'at December 31 1979 and 1978 is as follows:
l979 /978 (Iff fhousanf(sl Data processing equipment 3-,871 2r310 Other 232 181 4,103 Less accumulated amortization 1,550 970
$ 2,553 $ 1,521 utureminimumJease payments. (in. thousands). under. capital Jeases;at December.31, 1979.are:
1980 $ 922 1981 927 1982 812 1983 320 1984 230 Later-years 457 Total mmimum lease payments 3,668 Le ss amount representmg executory costs 142 Net minimum lease a ments 3 526 Less amount representing interest 770 resent value of.netminimum Jease.payments $ 2,756 utute~inimuttLgentaLpayments (in thousands)mequired under operating leases that hare initial or remaining.noncancellable.lease. terms. in. excess. of one year. as. of December.31, 1979 are:
1980 $ 670 1981 351 1982 192 1983 147 1984 146 Lateryears 56 Total minimum payments required $ 1,862 ents charged to operating expenses were $J.,227,000 in 1929 and $J.,091,000 in 1928 Such. amounts exclude pay-ments. made orLcapitaLleasesMents.charged.to.utility plant were9236,000Jn J979 and.$ 577.,000Jn J978 Jie Company~as enteredJnto an agreement,mot included above,/or the lease of an office building currently under construction~are payments wilLcommence after construction is completed in fatei980 at ernie of 2'f construction cost per yeaMor the first three years and at9.62% per year for the remaining thirty-two~ears of theJnitiaLlease term Construction costs covered by the lease are projected to be approximately
$J 8,200,000Auch JeaseJs an operating. lease
(10) Revenues Subject to Refitttd A boiler explosion caused the shutdown of Unit 2 at the San Juan Generaling Station during the~rind Jul 1977 to May 1978. The major part of increased costs for replacement energy required during the shutdown was with the approval of the Commission, initially passed on to customers through the fuel adjustment clause; however, the Commission subsequently ruled that charges for such increased costs are subject to refund if it is determined that the Company was responsible for the explosion. Amounts collected subject to refund, based upon a formula proposed to the Commission, were approximately $2.1 million in 1978 and $ 4.5 million in 1977. Based on the Company's investigation the Company is of the opinion that no refunds will be due. Thc Co~ma~n's insurance covered a major portion of the cost of replacement.
In addition, the Company has collected certain revenues and has established a provision for possible refund of a portion of those revenues that have been collected subject to refund under wholesale rate cases filed with the FERC.
Information concerning such revenues and provision is as follows:
Revenues Provision for Collected Possible Reffmd Ifiet (ln tlfoftsands) 1977 $ 1,705 S S 1,705 1978 6,678 6,678 1979 13,177 3,292 9,885 Total $ 21,560 $ 3,292 $ 18,268 (11) Subsequent Event On October 1, 1979 the Company entered into an agreement with a group of private investors to scil-$ 45 million==--
principal amount of 10t/8% first mortgage bonds due 2004. On October 24, 1979 the Company received-$ 17-=
million principal amount of such issue-with the balance of$ 28 million received on January 28,-1980. =-- == --=-==-=-=- -
(12) Quarterly Results of Operations (Unaudited)
The results of operations (in thousands except-per share amounts) by quarters for 1979 and 1978 are as follows;-
Total itlet gffarter Ended Operating --- = Operating --= ¹t Earnings ---=-== -=-
Revenues Ittcome Earnings per 5ifarnt December 31r 1979 -$ 64,335 - -$ 16,378 -- -= $ 16,623
-$ .87 September 30, 1979 $ 66,725 -- $ 18,998-- --$ 16,661-- =-$ ,88 June-30,-1979 - - = - - -- -
$ 56,475 $ 13,192
$ 11,504 - --$ .61 March 31,-1979- - --
$ 56,835 $ 11,248 $ 10,015 -
$ u57(a)
December 31; 1978 $ 49,473 S 9,548 S 7,781 $ .45 September 30,'978 $ 50,643 $ 13,039 $ 11,725 $.90 June 30, 1978 $ 44,079 $ 1 1,148 $ 10,005 $ .84
'-- -- S '7,953
$ 43,010-March 31, 1978 - -
$ 10,212 $ .71
==
(a) In June 1979, the Company established a provision for possible refund'on certain revenues collected subject
-to refund since October1977. The 'effect of such provision was to reduce operating revenues,'et earnings and net-earnings per share by approximately $ 1.9 million, $ 1.3 million and $ .10, respectively; for the first quarter of 1979. The quarterly results of operations have been restated accordingly.
In the opinion of management of the Company, all adjustments (consisting of normal recurring accruals) necessar for a fair statement of the results of operations for such periods have been included.
Certified Public Accountants Suite 500 First Plaza Post Oflice Box 1027 Albuquerque, New Mexico 87103 Peat, Marwick,Mitchell%Co The Board of Directors and Stockholders Public Service Company of New Mexico:
We have examined the consolidated balance sheet of Public Service Company of New Mexico and subsidiary as of December 31, 1979 and 1978 and the related consoli-dated statements of earnings, capitalization and changes in financial position for the years then ended. Our examinations were made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.
In our opinion, the aforementioned consolidated financial statements present fairly the financial position of Public Service Company of New Mexico and subsidiary at December 31, 1979 and 1978 and the results of their operations and changes in their position for the years then ended, in conformity with generally accepted account- 'inancial ing principles applied on a consistent basis.
February 19, 1980
Common Stock:
Range of sales prices of the Company's common stock, on the New York Stock Exchange (Symbol: PNM), and dividends paid on common stock for fiscal 1979 and 1978, by quarters, are as follows:
Ran eo SalesPrlees Dividends Lew Per Share Fourth Quarter, 1979 20'/4 i7Pa 80.48 Third Quarter, 1979 21'/8 17s/s 0.48 Second Quarter, 1979 21/4 19 0.48 First Quaiter, 1979 20/s 19'/s 0.44 Fiscal Year 21'h 17 /s $ 1. 88 Fourth. Quarter, 1978 20'h 187s $ 0.44 .
Third Quarter, 1978 21% 19 /s 0.44 Second Quarter, 1978 21'/s 19'/~ 0.42 First Quarter, 1978 21 /s 197s 0.42 Fiscal Year 21/~ 18% $ 1.72 Cumulative Preferred Stock:
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.
Quarterly cash dividends were paid on each series of the Company's preferred stock at their stated rates during 1978 and 1979.
The following supplementary information is supplied in accordance with the requirements of Financial Accounting Standards Board (FASB) Statement No. 33, Financial Reporting and Changing Prices, for the purpose of providing certain information about the effects of changing prices. It should be viewed as an estimate of the approximate effect of inflation, rather than as a precise measure.
Constant dollar amounts represent historical costs stated in terms of dollars of equal purchasing power, as measured by the average Consumer Price Index for All Urban Consumers (CPI-U). Current cost amounts reflect the changes in specific prices of plant from the date the plant was acquired to the present, and differ from constant dollar amounts to the extent that specific prices have increased more or less rapidly than prices in general.
The current cost of property, plant and equipment, which includes land, land rights, intangible plant, property held for future use and construction work in progress, represents the estimated cost of replacing existing plant assets and was determined by indices provided by an independent appraisal firm. These indices consist of a combination of the Handy-Whitman Index of Public UtilityConstruction Costs and special indices derived from actual appraisals of certain property, plant and equipment.
The accumulated provision for depreciation and amortization on the constant dollar and current cost amounts of property, plant and equipment was determined by calculating the ratio of the actual reserve to historical cost for each plant account and applying this ratio to the indexed amounts, The current year's provision for depreciation and amortization on the constant dollar and current cost amounts was determined by applying the Company's average annual depreciation and amortization rates for each plant account to the indexed amounts.
Fuel inventories~the cost of fuel used in generation, and power purchased for resale have not been restated from their historical cost. Regulation limits the recovery of fuel and purchased power through the operation of adjustment clauses or adjustments in basic rate schedules to actual costs. For this reason fuel inventories are effectively monetary assets.
As prescribed in Statement No. 33, income taxes were not adjusted. Accumulated Deferred Investment Tax Credits is treated as a monetary item, since it is returned to customers through adjustments in rates.
Under the rate making prescribed by the regulatory commissions to which the Company is subject, only the historical cost of plant is recoverable in revenues as depreciation. Therefore, the excess of the cost of plant stated in terms of constant dollars or current cost over the historical cost of plant is not presently recoverable in rates as depreciation, and is reflected as a reduction to net recoverable cost. While the rate-making process gives no recognition to the current cost of replacing property, plant and equipment, based on past practices, the Company believes it will be allowed to earn on the increased cost of its net investment when replacement of facilities actually occurs.
To properly reflect the economics of rate regulation in the Statement of Earnings from Continuing Operations, the reduction of net property, plant and equipment should be offset by the gain from the decline in purchasing power of net amounts owed. During a riod of inflation, holders of monetary assets suffer a loss of general purchasing power while holders of monetary liabilities experience a gain. The gain from the decline in purchasing power of net amounts owed is primarily attributable to the substantial amount of debt which has been used to finance property, plant and equipment.
Since the depreciation on this plant is limited to the recovery of historical costs, the Company does not have the opportunity to realize a holding gain on debt and is limited to recovery only of the embedded cost of debt capital.
Statement-of-Earnings-from-Continuing Operations Adjusted-for-Changing Prices Year-Ended-December-31;-1979 Adj usted for Adjusted for s>eported i>> >l>a Pri>>>ar Statement
~ln Gejiefal ariaa (Constant Dollars)
Cliangesin Sp~eci ic Prices (Current Cost)
(ln.thousands)
Operating revenues $ 244,370 $ 244,370 $ 244,370
.uel.and.purchased. power 85,L43 85,143 85,143 Other operation expenses 34 351 34 351 34 351 Maintenance and re airs 15,045 15,045 15 045 De reciation and amortization 17,603 27,364 28,666 Taxes, other than income taxes 10,531 10,531 10,53'1 Income taxes 22,460 22,460 22,460 Interest charges 23;008 23;008 23;008 Other income and deductions net (18;574) ~((8;574 ~((8;574 189,567 199,328 200,630 reduction to net recoverable cost) $ 54,803 $ 45,042* $ 43,740 Increase. in. specific. prices. (current. cost), of property,.plant.and.equipment held during. the year $ 62,686 Reduction to net recoverable cost $ (103 ~692 (18 ~568 Effect of increase in general price level 151,580 Excess. of. increase. in. general. price level. over
'ncreaseirLspecific prices afteueduction to net recoverable cost (102,462)
Gain from decline in urchasin ower of net amounts owed 62,665 62,665 Net $ (41,027) $ (39,797)
- Including.the reduction.to net.recoverable cost, the earnings (loss) from continuing operations on a constant dollar basis would have been'(58,650)XorJ929
Five Year Comparison of Selected Supplementary Financial Data Adjusted For Effects of Changing Prices Years Ended December 31, 1975 1976 1977 1978. = U979 (Itt thousands of average 1979 dollars--
except per share amounts)
Operating revenues $ 114,657 $ 126,957 $ 166,134 $ 208,378 ~244,370 Historical cost. information adjusted for general inflation:
Earnings from continuing operations $ 45,042 Earnings from continuing operations per common share $ 2.29 Net assets at year-end at net recoverable cost $ 428,877=
Current cost information:
-Earnings from continuing operations ==$ =43;740 Earnings from continuing operations per common share ..$ = 2.20 =
Excess of increase in general price level over increase in specific price after reduction to net recoverable cost $ 102,462 Net assets at year-end at net recoverable cost $ 428,877 General information:
Gain from decline in purchasing power of net amounts owed ~-62,666 Cash dividends declared per common share $ 1.70 $ 1.81 $ 1.93 $ 1.91 $ 1.88 Market price per common share at year-end $ 24.36 $ 29.95 $ 25.13 $ 21.31 $ 17.27 Average consumer price index 161.2 170.5 181.5 195.4 217.5 Public Service Company of ¹w hfexico believes that each successive generation's quality of life will be progressively more dependent upon the availability and reliability of electric and water service.
Consistent with this belief, we recognize our obligations to:
Our Customers An adequate and reliable source of electric and water service at the lowest reasonable cost; Our Shareholders A reasonable return on, with optimum security of, their investtnent t Our Employees An objective opportunity to progress and grow through productive aml meaningful participation; aml Our Future Generations A legacy of adequate electric and ivater service provided through free enterprise ivith environmental and economic compatibilit>
To meet these obligations, ive a+irm a policy of:
Operating our Company in a responsible ntanner which rejlects the highest corporate integrity; Providing open communications in order to achieve a high level of umlerstamling and acceptance of our purpose and endeavors; Sharing our teclmical and administrative sl'ills with all levels of govermnent to assist in assuring the best decisions are made; and Promoting, supporting and participating in ivortlnvliile community activities atul development.
J. D. Geist, President
Pgieev yJtNdritSJtrrreht A B COLLINS~R~President,-RerldyCo>nrnunications, Inc Greenrvich, Connecticut H L GALLES,JR
- Cliairtnan of the Board, Galles Chevrolet Company Albuquerqrrc, hie>v hlexico J. D. GEIST* President, Pirblic Service Coinpany of iVerv h1exico C. E. LEYENDECKERt Presidem, hfimbres Valley Bank - Deming. hlerv h1exico
=
D. W; REEVES*: Cliarnnan ofthe Executive Commhter ofthe Board of Directors, Prrbllc Servicb Company ofhlerv hfexlco R R. REHDERt=Professorof hfanagement, Robert O. Anderson Graduate School of hfanagement, University of Nerv hfexico-Albuquerque, iVew hfexico
. G. A SCH REI BER>> Cirairnran of the Board of Directors, Public Service Company of Ifew hfexico R. H. STEPHENSt President, Stephens.Irish Agency - Las Vegas. New hfcxico E. R. WOOD Presidenr, Sagitta Fe Motor Company - Santa Fe, iVerv hfexico
->>-hfembers-of the-Executive Committee fembers othe Audit Commiuee
== ==J. D. GEIST: President R. B. ROUNTREE Senior Vice President C. D.-BEDFORD Vice-President, Administration JP BUNDRANT ,VicePresirlent, Division Operations B. D. LACKEY Controller R. F. MERSHON Vice President, Industrial Relations J. B. MULCOCK: Vice Presi<lent, Public Affairs R;-MULLINS Vice-President, Operations
== D E PECKHAM Secretary anil Assistant Treasurer
,A J ROBISON P. J. ARCHIBECK Vice+residentFinance Treasurer nnrl Assistant Secretary J. L. WILKINS Vice President, Engineering aml Operations B.= P. LOPEZ = Assistant Secretary
-=-= H;L.HITCHINS ,JR .Assistant Srcrctary and Assistant-Treasurer J. T. ACKERMAN District-Vice President, Albuquerque and IVestern Area P,R. GAMERTSFELDER District Vice President, Santa Fe and Las Vegas F. E. GRAY Vice President, Urban Development R. A. LAKE District Vice Presirlent, Belen, Bernalillo and Deming Divisions T. P; WARNKE =District Vice Presirlent, San Jrran
-=-=Wv A; BADSGARD IVestern Division hfanager L C EDWARDS Bernalillo Division hfanager E. L. FOGLEMAN Las Vegas Division hfanager R. H. HALLFORD Deming Division hfanager tV. M. HICKS, JR. hfanager, IVater Operations, Santa Fe J. L. SMITH: Bclen Division hfanager AI4 Silver Avenue SW, Albuquerque, New Mexico-
-Albuquerque National Bank, Albuquerque, Ncw Mexico Chemical Bank,New York, New York Irving Trust Company, New York, New York
~
First National Bank in Albuquerque, Albuquerque, New Mexico
~
Chemical Barik, New'Yoik, New York Irving Trust Company, New York, Ncw York
~<Qu@ BULK RATE UEL POSI'AGE PAID Albuquerque, N.M.
PUBLIC SERVICE COMPANY OF NEW MEXICO Pennlt Ão. 13 POST OFFICE BOX l 047 ALBUQUERQUE, NET MEXICO 87I03 ~O
~~ MS+~
RETURN REQUESTED
p aoo<zoo <>r I
1979 Annual Report El Paso Electric Company .
MOTICE OF THE THE ATTACHED FILES ARE OFFICIAL RECORDS CONTROL. THEY HAVE BEEN, DIVISION OF DOCUMENT TO YOU FOR A LIMITED TIME PERIOD AND CHARGED THE RECORDS FACILITY MUST BE RETURNED TO BRANCH 016. PLEASE DO NOT SEND DOCUMENTS ANY CHARGED OUT THROUGH THE MAIL. REMOVAL OF FROM DOCUMENT FOR REPRODUCTION MUST PAGE(S)
BE REFERRED TO FILE PERSONNEL.
Docket g 50-5>8 DEADLINE RETURN DAl3bntro Da f Document REGULATORY D,O,CERT I<'IL K
RECORDS FACILITYBRANCH
Contents 1 Highlights 2 Letter to Shareholders 4 Report on the Palo Verde Nuclear Generating Station: Energy for the 80's 6 -
Year in Review Operations and Area Development 8 Fuel 9 Rates and Regulations 10 Customer Communications 12 Board of Directors Officers 13 Financial MarketPriceof Common Stock and Dividends 14 Consolidated Balance Sheet 16 Consolidated Statement of Income 17 Consolidated Statement of Retained Earnings 18 Consolidated Statement of Changes in Financial Position 20 Notes to Consolidated Financial Statements 37 Report of Independent Certified Public Accountants 38 Summary of Operating Data 42 Management's Discussion and Analysis of the Consolidated Statement of Income 44 Corporate Information Dividend Reinvestment Another year of growth was noted in the Company's Dividend Reinvestment and Stock Purchase Plan. The plan is available to holders of record of Common Stock and is a convenient method of investing dividends and optional cash payments in new shares without payment of issuing expenses.
An enrollment card may be obtained by writing the Company Secretary.
About the Cover Figures appearing in this report are An on. site look at presented as general information and construction in progress not in connection with any sale or offer inside the containment to sell or solicitation of any offer to buy building at Palo Verde any securities nor are they intended as Nuclear Generating a representationby the Company of Station Unit No.2. the value of its securities.
Highlights At December 31, 1979 1978 Operating Revenues (000) $ 159,712 $ 136,556 Operating Expenses (000) $ 135,643 $ 116,107 Net Income (000) $ 23,190 $ 16,024 Net Income per share (Common) $ 1.45 $ 1.30 Dividends per share (Common) $ 1.07 $ 1.02 Book Value per share $ 10.44 $ 10.01 Common Shares Outstanding 14,503,373 11,191,371 Number of Common Shareholders 32,995 25,633 Number of Customers 175,311 168,009 Number of Employees 965
'08 Peak Load 688,000 KW 690,000 KW Net Generating Capacity 982,000 KW 982,000 KW Average Residential Use 6,072 KWH 6,153 KWH Fuel Expense (000) $ 81,669 $ 73,447 Energy Sales (MWH) 3,424,284 3,320,649 Electric Plant (000) $ 561,783 $ 438,085 El Paso Electric
Letter to Shareholders The 1970's were a period of vast Company's Texas rate increase request filed in technological, industrial, economic and social June, 1979. Under terms of the settlement the change. The 1980's should also prove to be a Company received an $ 11.9 million annual pivotal period for the electric utility industry revenue increase for its Texas service area.
since we will continue to need additional energy The negotiated settlement was adopted by the facilities in the future despite reduced economic Public UtilityCommission of Texas for the growth projections. unincorporated areas and for the balance of the The 1980's will be an era of great challenges Company's Texas service area. To my as reliance on imported petroleum products knowledge this was the first time since the continues while we make the difficultand implementation of the Texas Public Utility expensive transition from a petroleum-based Regulatory Act of 1975 that a municipality and economy to alternative energy resources. You an electric utilityreached a negotiated willfind in this report how The Electric Company settlement of a major electric rate case. In the is adjusting its operations and plans to address settlement the Company was authorized a the new challenges it faces. 15.5% return on common equity and the new Dividends in 1979 totaled $ 1.07 a share, up rates were made effective with November, 5e from 1978. The quarterly dividend on 1979 billings, two months earlier than had the Common Stock was increased from 25e to case followed the usual course of appeal to the 27-1/2e per share in September, 1979. Public UtilityCommission of Texas.
Dividends on Common Stock continued, In New Mexico the Company applied for a $ 7 without interruption, as they have since million increase in December, 1978. The New distribution of the Common Stock to the public Mexico Public Service Commission authorized in 1947. an increase of $ 1.9 million and disallowed the Operating revenues for 1979 reached inclusion of construction work in progress approximately $ 160 million. Total operating (CWIP) in rate base relative to the Palo Verde expenses were approximately $ 136 million, an Nuclear Generating Station. The Company increase of 17% over 1978. We continue to presently has an application pending for an exercise careful control over expenses to $ 8.9 million increase in New Mexico including insure that electricity is generated or purchased $ 1.6 million interim rate relief. Testimony has at the lowest possible cost to our customers. been presented to the commission regarding Fuel costs represented 60% of the Company's the interim rate relief and a decision is expected total operating expenses. by May" 1, 1980.
Earnings per share of The funds for the Company's construction Common Stock for 1979 were program are obtained from internally generated
$ 1.45, compared with $ 1.30 in funds and sale of securities and long-term 1978. The weighted average borrowings. Construction spending for 1979 number of common was about $ 130 million and approximately shares outstanding $ 158 million is budgeted for 1980.
increased from 10.3 million Achieving adequate rates is a challenge for I in 1978 to 13.3 million in our Company and the utilityindustry in general.
1979. Such nationwide problems as double-digit j A landmark inflation, soaring interest rates, higher raw negotiated settlement energy prices and increased environmental was reached between and other regulatory requirements have j the City of El Paso and the Company regarding the required periodic rate increases. Rate structures that accurately reflect our cost to serve each customer and provide a fair return to investors are an integral part of the Company's rate requests.
Since the late 1920's The Electric Company has been largely dependent on natural gas and oil for boiler fuel. In 1969 the Company's cost of fuel was $ 6.5 million. The Company's total fuel bill in 1979 was approximately $ 81.7 million, representing an 11.6 times increase over the past ten years, primarily the result of the fuel shortage and rapid inflation. The price of oil and natural gas has increased much faster than the inflation rate and fuel continues to be the Company's largest expense item.
. Your Company must contend with The Electric Company works agressively to diminishing'and uncertain petroleum fuel protect natural resources as well as to comply supplies, inflationary costs, major capital with the many and proliferating laws and requirements, and shifting often conflicting regulations in the environmental area. The government policies and regulations to provide Company is working on a number of projects to reliable electric service to a growing service improve the environment primarily at the Four territory. Our best hope to lessen the impact of Corners Power Station. Construction these soaring costs and to lend stability to our improvements are continually being made to customers'ising energy bills is the Palo Verde insure that all facilities are in satisfactory Nuclear Generating Station. Your Company compliance with environmental requirements.
owns an undivided 15.8% interest in the 3,810 Looking back over the last decade it can be megawatt Palo Verde Project, now under said that your Company did its job of providing a construction 50 miles west of Phoenix, Arizona. necessary product exceptionally well in the Nuclear power will be increasingly relied upon face of many adversities.
by the Company the remainder of this century This record of accomplishment is a tribute to to make it less dependent on risky petroleum the people of The Electric Company working fuels. together to serve the customers and Public awareness of nuclear power was communities in our service territory.
intensified in 1979 as a result of the accident at The many successes we have experienced the Three Mile Island (TMI) nuclear power over the years have been due to the combined station in Pennsylvania. The accident at TMI efforts of many individuals: employees, was the most serious in the history of directors, friends, and Shareholders. We look commercial nuclear power and opponents forward to their continuing support and active quickly seized the opportunity in an attempt to participation in meeting the challenges of the influence public opinion. At TMI not a single years ahead.
injury or fatality resulted. No energy source is 100% risk-free and the risk to the public posed by operating nuclear plants is less than those posed by other methods of generating the same quantity of electricity. Nuclear power will become an even safer and more efficient energy source as a result of industry and government actions following the TMI incident as explained elsewhere in this report. Evern R. Wall Our customers view higher energy prices as 'resident and Chief Executive Officer particularly upsetting when accompanied by the dramatic rise in other living costs. A number of factors must be addressed during the near term by consumers, business and government to exert downward pressure on inflation. These include the reduction of excessive government spending, elimination of unnecessary and costly government regulations, reduction of business taxes and institution of measures to boost productivity and stimulate investment.
The Electric Company intends to continue its efforts to hold the line on costs wherever possible and continue to speak out whenever necessary to identify actions by government and regulators when their policies will result in increased costs.
A Report on The Palo Verde Nuclear Generating Station: ,4 Nuclear power is a proven technology for generating electricity benefits in the future. In 1979 commercial economcally, cleanly and safely and now provides a substantial portion nuclear power saved the nation approximately of the electricity consumed in the United States, saving thousands of 425 million barrels of oil while producing about barrels of oil daily. 11.5% of all the electricity produced in this At The Electric Company nuclear power will play an increasingly country. At the same time the Organization of significant role in satisfying the energy demands of our customers Petroleum Exporting Countries (OPEC) raised beginning in 1983 when the first unit at the Palo Verde Nuclear oil prices by an average of 94% with further Generating Station is scheduled to go into commercial operation. increases a certainty.
The Electric Company owns a 15.8% undivided interest in the Palo The nuclear industry experienced its first Verde Project, 50 miles west of Phoenix, along with four other major industrial accident in the 25-year history Southwestern utilities: Public Service Company of New Mexico, of commercial nuclear power generation in Southern California Edison Co., Arizona Public Service Company and 1979 at the Three Mile Island power station in Salt River Project. The three Palo Verde units, each with a capacity of Pennsylvania. The public was made more 1,270 megawatts, are scheduled for commercial operation in 1983, acutely aware of the nuclear industry as a 1984, and 1986, respectively. Upon completion the Palo Verde Nuclear result. While the planned nucfear safeguards Generating Station will be the largest nuclear power station in the United functioned at TMIand the public was protected, States, delivering three times the amount of electricity as the Hoover several lessons were learned from the incident Dam. The Electric Company will receive 200 megawatts from each unit. which will result in an even safer nuclear Construction advanced significantly during 1979 on the Palo Verde industry.
Station and at year's end Unit 1 was 57% complete; Unit 2 was 26% Immediately after the TMI incident the Palo complete; and Unit 3 was 6% complete. The Company's estimated Verde participants organized a task force share of the cost of the Palo Verde Project, including transmission composed of experts from among the facilities and Allowance for Funds Used During Construction (AFUDC), participants and suppliers of major components is approximately $ 853.9 million. As of December 31, 1979, the Company to conduct a thorough and exhaustive review of had invested approximately $ 241.3 million in the Project. the safety related systems at Palo Verde. The Labor and weather related problems at the site resulted in a one year task force is expected to issue its final report in delay in the completion of Unit One until May of 1983 while the other two mid-1980.
units remained on schedule. The industry demonstrated its seriousness When nuclear power becomes a part of the Company's fuel mix in the and dedication to nuclear safety planning and 1980's, it will begin reducing the Company's dependence on oil and operation in the immediate aftermath of the TMI natural gas and help stabilize rising energy costs. The Electric Company incident, anticipating the "fundamental is confident its investment in Palo Verde will provide important economic changes" recommended by the President's
Energy for the 80's Commission on the Accident at Three Mile The Electric Company views the future of nuclear power with Island. The industry moved swiftly to establish confidence as the world petroleum situation tightens and international the Nuclear Safety Analysis Center (NSAC) politics continues to distort the oil markets.
through the Electric Power Research Institute The energy shortage, clearly signaled at least in the late 1960's and and the Institute of Nuclear Power Operations confirmed by the arab oil embargo of 1973-74, is not difficultto (INPO) which will set standards of excellence comprehend. The world, and the United States in particular, simply has for operation and management of nuclear been consuming and continues to consume energy at a rate faster than power programs. Another major component of new energy sources are being developed. Since before 1956 our nation the industry's efforts is a mutual insurance has been using more energy than it produced domestically and since company to help protect utilities against some 1972 that gap has widened dramatically. OPEC has pushed the price of of the financial consequences of a prolonged their exports higher since 1974 while in the United States federal controls nuclear reactor outage. Improved reactor on oil and natural gas pricing have discouraged production and operator training, equipment and controls stimulated use by maintaining prices at artificially low levels.
improvement, and improved operating The Electric Company is examining various energy sources for the procedures are also being addressed. long term and contemplates additional use of nuclear and coal in the foreseeable future. The Company participates in a variety of Research and Development programs through the Electric Power Research Institute and is increasing its level of participation with The Department of Energy, private research organizations and area universities including several local solar, geothermal and wind energy projects. Nuclear fusion willprove to be a valuable energy option and EI Paso Electric is backing fusion research through the Texas Atomic Energy Research Foundation.
All research is vital to the future application of alternate energy resources and it is part of the. commitment The Electric Company has made to its customers as a major energy supplier. Management remains convinced, after considering all the immediately available options, that nuclear power is the safest, most economical and environmentally superior method of generating electricity particularly in the 1980's and 1990's.
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Year In Review Throughout the 1970's El Paso and Construction activity in 1979 continued at a surrounding areas experienced substantial moderate pace in El Paso and Las Cruces, growth and development and has continued to New Mexico, the largest community served by develop as a major regional economic, trade the Company in its New Mexico jurisdiction.
and population center of the Sun Belt. The value of all building permits in El Paso The El Paso area economy exhibited totaled approximately $ 238 million in 1979, a unusual strength in the 1970's and its solid nine percent increase over 1978.
development was supported by a modern and Approximately $ 20 million of the 1979 total is for broad-based economy. One of the most solid the new 18-story El Paso Natural Gas indicators is employment which increased Company building now under construction in 15.6% during the past five years. downtown El Paso.
During the 1970's, the population of El Paso A decrease in construction of single family increased 27% to 410,000 and is projected to units from 3,153 in 1978 to 2,606 in 1979 increase an additional 40% during the 1980's. appears to be the result of sharply higher The economic impact of new industries interest rates during the year.
locating in El Paso in 1979 is approximately Retail sales in El Paso have established new
$ 1.1 billion as calculated by the Texas highs almost every year. In 1979 retail sales Industrial Commission. By the end of 1979 a were up about 15 percent over 1978. Military total of 27 new industrial locations in El Paso installations continue to be major economic and vicinity had been announced. This growth factors in the Company's service area. Fort will provide about 3,000 new jobs. Interest in Bliss Army Air Defense Center, William El Paso and twin plant locations in Ciudad Beaumont Army Medical Center, White Sands Juarez, Mexico remains high and several large Missile Range and Holloman Air Force Base foreign and domestic firms have indicated an are major facilities served by the Company.
interest in far West Texas.
More than 105 American companies are operating under the Mexican Border Industrialization Program, or twin-plant concept. When Juarez begins to receive natural gas through a pipeline now under construction from the Mexican interior, the twin-plant operation could expand significantly, resulting in a strong economic impact on the entire area. In addition, El Paso is now the Ill I I
busiest international port of entry in the United jfPr~j States as measured by border crossings between the United States and Mexico. I' A,i?T
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The Company's Total system sales climbed to 3,424,284 Mesilla Valley megawatt-hours (MWH), a 3.1 percent Division, increase over 1978.
headquartered in The commercial and industrial customer Las Cruces, New category, including schools, hospitals and Mexico, also other public facilities, as well as stores and Las Cruces continued to attract offices, accounted for 1,632,000 MWH, up four new residents and percent from 1978. Residential customers businesses in 1979. accounted for 938,000 MWH, up three percent "-
Building permit totals from 1978. The average residential customer for 1979 in Las used 6,072 KWH, a one percent decrease in Cruces declined 1979. The average cost per KWH for residential somewhat from last customers was 5.6c.
year's record pace. The annual growth rate in energy sales has The total for 1979 was slowed during the 1970's. Conservation and
$ 29.3 million increased energy price awareness, while compared with $ 38.3 expected to continue, should not totally negate million in 1978. the impact of customer growth.
Las Cruces was The 1979 maximum one hour peak demand designated a on the system of 688,000 KW occurred on
~c t Standard July 10 and was slightly less than the all-time Metropolitan high system peak of 690,000 KW established in Statistical Area in 1978.
1979 as a result of a special census. The The EI Paso Electric 1979 net system population of Las Cruces grew from 48,000 in capacity was 982 megawatts, composed of 498 1978 to 50,000 in 1979. At the end of the year megawatts at Newman Power Station in the Company was serving 34,292 customers in El Paso; 372 megawatts at the Rio Grande New Mexico, five percent more than in 1978. Power Station, five miles from downtown Business relocations to Las Cruces include the El Paso in New Mexico, and a seven percent Joy Canning Company, Furtex, Inc., a synthetic entitlement, or 112 megawatts, from the coal-fur manufacturer, and Davidson Rubber fueled Four Corners Power Station near Company, an auto parts manufacturer. Farmington, New Mexico.
In 1979, The Electric Company added The Company is constructing a 73 megawatt approximately 7,300 new customers to its combustion turbine generating station in system reflecting the steady growth of the El Paso to be used for peaking purposes. The Southwest as an attractive place to live and unit, capable of operating on oil or gas, is work. scheduled for operation in the second quarter of 1980. The total estimated cost of the peaking unit is $ 11 million.
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Fuel The Company's fuel mix in the 1980's will not be derived totally from oil and natural gas as has been the case for much of its 78-year history. The events of the 1970's have served as additional stimulus for recognizing the need to reduce dependence on uncertain and increasingly expensive supplies of oil and natural gas.
Natural gas in 1979 provided 79% of the Company's fuel mix. The remainder of its fuel requirements were 13% coal and 8% oil. The gas and oil outlook has changed over the decade of the 1970's with even more uncertainty foreseen in the 1980's. The industry continues to receive mixed signals from the government concerning natural gas.
During the past 10 years the Company's total fuel bill increased more than eleven times. Individually, since 1970 the cost of oil has increased approximately 600%, natural gas increased 500% and coal increased 100%. Fuel costs increased approximately $ 8.3 million in 1979 over 1978 to approximately $ 81.7 million, or approximately 60% of 1979 operating expenses.
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The nation's energy policies are designed to reduce dependence on expensive depleting petroleum fuels and to encourage conversion to more abundant alternative fuel supplies such as coal and nuclear power.
C k,~ pw The National Energy Act goes so far as to prohibit new electric power plants from using natural gas or petroleum as a primary energy source except in certain cases and also requires the phasing out of these fuels in existing plants.
Converting to alternative fuel sources requires an extensive financial commitment by the Company but it is a commitment the Company must undertake in order to provide adequate and reliable electric service in the Four Corners Power Station future at the most economical price.
The Palo Verde Nuclear Generating Station represents the Company's effort to reduce substantially the use of oil and gas and provide electricty to a growing service area at the most reasonable cost possible. With the Palo Verde Station the Company willregain some control over fuel costs by using uranium, one of the only viable domestic fuels available. The participants in the Palo Verde Project have firm contracts for the supply of uranium concentrate to fuel the three units extending to the year 2003. In addition, the participants have acquired a 50% interest in and are developing 60,000 acres of uranium properties in Wyoming which will further assure Palo Verde fuel requirements.
The Company began diversifying its fuel mix in the late 1960's when it became a part owner of the coal-fueled Four Corners Power Station. By the 1990's electric generation is expected to be approximately 60% coal and nuclear-fueled.
Franklin Land and Resources, Inc. is the Electric Company's wholly Oil Storage Tank owned subsidiary, organized to secure property and water rights for the Rio Grande Power Station Company's various projects and business-related needs, primarily plant sites and water for cooling purposes at generating plants.
As we continue to develop important domestic energy resources like coal and nuclear fuels, we are increasingly concerned over rising inflation, higher fuel prices, increased operating expenses and higher interest rates.
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Rates and Regulation Converting to alternate fuel sources to assure an adequate supply of studies. This information will be utilized for electricity for the coming decades has required an extensive financial engineering and system planning as well as for commitment by The Electric Company. It has been necessary for the regulatory requirements.
Company to seek rate increases during the last few years to support its The Company continually strives to maintain construction program and to offset the effects of persistent high inflation. rates which adequately cover all costs of In 1979, the Company and the City of El Paso reached a landmark service, including fair compensation to negotiated rate settlement calling for a revenue increase of $ 11.9 million, investors, and which preserve its financial a 15.5% return on common equity and an effective'date two months integrity and ability to attract the capital earlier than would have otherwise been possible. In addition, the required to build the facilities to meet the needs negotiated settlement eliminated the prospect of an appeal to the Public of all customers. As the economic and UtilityCommission of Texas, which has been costly in the past and regulatory factors described throughout this provides an opportunity for the City and the Company to undertake report continue to affect the Company's settlements of pending litigation without further appeals. If no further financial results and because the rates appeal to past cases is made by the City, the time and money which approved have been lower than requested, it would otherwise be spent solving these problems in court will be saved. will be necessary for the Company to file for The negotiated rate settlement with the City of El Paso was the first additional rate relief in the near future.
since the implementation of the Texas Public Utility Regulatory Act of 1975. The Act created the Public UtilityCommission of Texas as the appellate jurisdiction over electric rates and services in Texas municipalities and empowered it with original jurisdiction in unincorporated areas of the state. The PUC and other incorporated areas later adopted the City settlement to cover the balance of the 00 22i Corripany's Texas service territory. Cooperation between the City and 0ANOAMO The Electric Company is very important to the community,and this (/iI Q, agreement should pave the way to improved relations and cooperation for the benefit of all concerned since continued community support is Iti/ g>>
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2 88 22 889 2 essential if long-range energy needs are to be satisfied. 4334 77 4334 77 8443 We believe it is clearly advantageous from an economic and financial KKOWATTHOVAW I
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expense to the Company and its customers.
The Company has appealed the New Mexico Public Service 50 095 207 Commission decision that granted the Company a $ 1.9 million increase in annual revenues on retail sales in New Mexico. An application for an
$ 8.9 million increase in annual revenues is pending in New Mexico
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including $ 1.6 million interim rate relief. The commission has heard the Company's testimony regarding the interim rate relief and a decision is expected by May 1, 1980.
The Company was allowed to include in its rate base approximately
$ 49.9 million of construction work in progress (CWIP) for the Palo Verde Station by its Texas regulatory authorities. The New Mexico rate order did not authorize the Company to include CWIP in rate base.
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In a world where government actions and The public demand for the Company's various printed materials -r public opinion may have as much impact on regarding electrical safety, energy conservation, and alternative energy business decisions as market considerations, sources has been very strong with thousands of copies distributed to the the responsibilities of management must public, local schools and organizations during the year. The Company's extend beyond day to day operations. standardized monthly bill insert "The Electric Guide" has been favorably Responding to the impact of these external received by customers.
forces on the business environment The Much of this material is utilized by the Company's Community Electric Company, like other electric utilities, Services Section's public school energy education program.
has started speaking out and providing Programs on the environment, solar energy, conservation, nuclear information to its customers on important energy, safety and field trips to Company facilities are provided to issues. consumers and area school districts. In addition, the Company has Throughout the 1970's energy conservation provided much valuable information to several schools through the and proper energy management have been the Edison Electric Institute High School Grant Program.
predominant theme of corporate The Company's Energy Utilization and Conservation Section is communications. This has been broadened to trained and statfed to provide energy management information and include pertinent information on such matters energy audits for residential and commercial customers. The National as the Company's construction program, Energy Act requirements for utilities to offer home energy audits starting electrical safety and nuclear power. in 1980 will pose no unusual problems for the Company since this activity The Three Mile Island accident created has been offered for a number of years.
some contusion and uncertainty regarding The Company continues to encourage construction of the WISE nuclear power in the United States. To provide (Weatherized and Insulated to Save Energy) Home among local home accurate information and to facilitate better builders as well as retrofitting existing homes to energy efficient public understanding of nuclear power in standards.
general and the Company's participation in the Palo Verde Nuclear Generating Station, a Employees thorough mass-media campaign addressing these issues was launched in 1979. Former The Company's success in accomplishing its stated goals of:
protecting and enhancing the investment of its shareholders; astronaut Scott Carpenter appears in many of providing an enriching and satisfying place to work; the advertisements speaking on behalf of The providing the best possible service to its customers at a reasonable Electric Company and Palo Verde.
These messages have been well-received cost; and are carrying the Company's message to can be attributed to the skills and contributions ot its dedicated customers: That Palo Verde and nuclear employees.
energy are essential to the continued economic At year-end 1979 the Company had 965 employees in its two-state well-being in the area served by the Company service area.
and that despite setbacks in 1979 nuclear Employees continued to demonstrate interest in the Company's power is as safe as any technology ever Employee Stock Purchase Plan through payroll deductions to purchase developed by man and sater than most common stock. Approximately 180 ot the Company's employees were comparable industrial undertakings. participating at the end of the year. The Company also offers an The Company recognizes the diverse Employee Stock Ownership Plan (ESOP) which provides employees cultural backgrounds which exist throughout its with greater participation in the ownership of the Company under service area and has attempted to tailor its attractive terms and provides the Company with additional tax credits towards its federal income tax liability.
communications to meet the needs of this population. Most corporate communications with customers are produced in both English
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~ The Company continues to emphasize Financing training in all its operations to further upgrade the quality of service as well as employee During 1979 the Company's construction program, beyond internally performance and productivity. generated cash, was funded by the sale of a combination of Common A two-year labor agreement between the Stock, Preferred Stock, First Mortgage Bonds, and various banking Company and Local 960 of the International arrangements. The permanent financing provided aggregate gross Brotherhood of Electrical Workers, which proceeds to the Company of approximately $ 107.8 million.
represents 340 bargaining unit employees, was To finance the Company's construction program in the 1980's it is finalized in February, 1980. The contract estimated that funds generated from operations will provide became effective March 1, 1980, and contains approximately 30% to 32% of the cash required. Additional financing will a mutually acceptable wage and benefit come from sources outside the Company and will be influenced by package for the IBEW. market conditions, earnings performance and reasonable regulatory The Company's move to its new treatment.
headquarters in the historic Mills Building in Shareholders authorized additional future financing by approving an downtown El Paso was completed in the amendment to the Restated Articles of Incorporation to increase the summer of 1979. The renovated Mills Building number of authorized shares of Common Stock from 15 million to 30 provides expanded and economical facilities million shares at the annual meeting in May, 1979.
conducive to the orderly and efficient An additional positive long-range financial step was taken in January, operations of a growing employee family. 1979, when the Company entered into a nuclear fuel financing The first woman director of El Paso Electric arrangement whereby a Trust acquired a portion of the nuclear fuel Company was elected during the annual necessary for the Palo Verde Nuclear Generating Station. Under this meeting of shareholders in May as one of two arrangement the Company was reimbursed for all previous nuclear fuel new directors. Mrs. Josefina A. Salas-Porras is expenditures and intends to enter into a basic heat supply contract executive director of Bl Language Services, a whereby title to the fuel will remain with the Trust and the Company will firm she founded in 1970, and also serves as a make lease payments for the heat generated.
director of the El Paso branch of the Federal Reserve Bank of Dallas.
Leonard A. Goodman, Jr., general agent for John Hancock Mutual Life Insurance Company, was also elected to the Board.
Mrs. Salas-Porras and Mr. Goodman succeeded former Company president, Chairman of the Board and retiring director Dennis H. Lane and retiring director Dr. Joseph R. Smiley. Dr. SmileyandMr. Lane served as advisory directors to the Board during 1979.
Board of Directors 12 0$
From left to right seated George G. Paul Evern R. Wall Robert E. Robert H.
Matkln'hairman Harvey'onorary of the Board, The Chairman of the President and Chief Boney'nvestments, Las Cruces, Cutler'hairman of the Board, State National Bank of Board of the Company; Executive Officer of the New Mexico (32) illinois-California Express, El Paso; Chairman of the Honorary Vice President, Company (5) Inc.; Chairman of the Board PanNational Group, El Paso National Bank; Board, ICX, Inc. (9)
Inc.(13) Chairman of the Board, First State Bank (39)
From left to right standing Leonard A. Goodman, Jr. Tad R. Smith Josefina A. Salas-Porras Ben L. Ivey Members of the Executive Chartered Life Underwriter; Attorney; Partner, Kemp, Executive Director, Farmer; Director, Chairman Committee General Agent, John Smith, White, Duncan and Bl Language Services (1) of the Board, Bank of Ysleta Hancock Mutual Life Hammond; Counsel for the (10) Years of Service on the
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insurance Co. (1) Company (19) Board Officers EVERN R. WALL, HARRY I .ZIMMER, CHARLES MAIS, THETA S. FIELDS, RICHARD E. FARLOW, President and Chief Vice President Vice President Secretary Assistant Treasurer Executive Officer JAMES H. JONES, RALPH G. CROCKER, ROBERT L. CORBIN, CECELIA R. SHEA ROLLAND E. YORK, Vice President Treasurer Assistant Treasurer and Assistant Secretary Senior Vice President DONALD G. ISBELL, WILLIAMJ. JOHNSON, Assistant Secretary BILLYE E. BOSTIC, Vice President Controller Senior Vice President
Financial 13 FINANCIALINFORMATION (Not covered by Report of Independent Certified Public Accountant)
WHERE THE REVENUE DOLLAR CAME FROM:
Residential 33C Sales to Public Authorities 17e Sales for Resale 3e Other 10 Commercial and Industrial Large 17C Commercial and Industrial Small 29C WHERE THE REVENUE DOLLAR WENT:
Taxes 14C Other Operating Expenses 108 Depreciation 5e Interest Expense 5c Dividends 12C Retained Earnings 3C Fuei Expense 51C MARKET PRICES OF COMMON STOCK AND DIVIDENDS (Not covered by Report of Independent Certified Public Accountants)
The following table indicates the high and low bid price of the common stock and dividends paid for the quarters indicated:
Bid Price Range Quarter High 'ividends 1979 First Quarter . 10r/s 1(Ati S0.26 Second Quarter 10s/s 9r/s 0.26 Third Quarter 11 10 0.275 Fourth Quarter 10'/s 9'/s 0.275 1978 First Quarter 11s/s 10r/s $ 0.25 Second Quarter 11% 10s/s 025 Third Quarter 11'/2 10i/s 0.26 Fourth Quarter 1(84 9~/s 0.26 El Paso Electric Company Common Stock is traded in the over-the-counter market.
The tabulation, which sets forth the high and low bid prices and represents prices between dealers, does not include retail markups, markdowns or commissions.
Financial 14 EL PASO ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEET ASSETS December 31, 1979 1978 (In thousands)
Utilityplant:
Electric plant (Notes B and E) $ 561,783 $ 438,085 Accumulated provision for depreciation (76,053) (68,672) 485,730 369,413 Nonutility property, at cost 2,357 1,563 Accumulated provision for depreciation (81) (27) 2,276 1,536
'Current assets:
Cash (Note F) 10,684 6,032 Accounts receivable (less allowance for doubtful accounts of $ 205,000 and $ 228,000, respectively) . 18,327 15,325 Federal income taxes refundable 2,694 6,038 Materials and supplies 3,880 2,821 Fuel (Note H) 8,060 8,849 Prepayments . 1,712 1,788 Deferred fuel costs 309 1,823 Other . 721 303 46,387 42,979 Deferred charges and other assets:
Unamortized debt expense 844 808 Other . 1,881 1,239 2,725 2,047
$ 537,118 $ 415,975 The accompanying notes are an integral part of the consolidated financial statements.
Financial 15 EL PASO ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEET (Continued)
LIABILITIESAND SHAREHOLDERS'QUITY December 31, 1979 1978 (In thousands)
Capitalization:
Common stock, no par value, 30,000,000 and 15,000,000 shares authorized, 14,503,373 and 11,191,371 shares issued and outstanding at December 31, 1979 and 1978, respectively (Note C) $ 106,329 $ 71,269 Unamortized capital stock expense . (1,029) (788)
Retained earnings (Note E) . 46,126 41,541 Common stock equity . 151,426 112,022 Preferred stock Redemption required, cumulative, no par value, 500,000 and 240,000 shares outstanding at December 31, 1979 and 1978, respectively (Note D) 50,000 24,000 Preferred stock Redemption not required, cumulative, no par value, 190,000 shares outstanding at December 31, 1979 and 1978 (Note D) 18,873 18,873 Long-term debt(Note E) . 171,721 126,152 Total capitalization =
392,020 281,047 Current liabilities:
Current portion of long-term debt (Note E) 4,549 1,045 Notes payable to banks (Note F) . 2,125 26,600 Notes payable to other (Note F) 15,290 Commercial paper (Note F) . 34,332 32,175 Turbine contract payable (Note B) 7,754 Fuel purchase commitment (Note H) 7,958 8,747 Accounts payable, principally trade . 10,607 8,982 Customer deposits 2,849 2,447 Taxes accrued 6,123 5,419 Deferred income taxes . 284 1,021 Interest accrued . 3,183 2,831 Other 1,841 955 96,895 90,222 Deferred credits and other liabilities:
Accumulated deferred federal income taxes . 241873 17,998 Accumulated deferred investment tax credit . 22,537 19,191 Customer advances for construction and other 793 354 48,203 37,543 Long-term purchase commitment (Note B) 7,163 Commitments and contingencies (Notes H and J)
$ 537,118 $ 415,975 The accompanying notes are an integral part of the consolidated financial statements.
Financial 16 EL PASO ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENT OF INCOME For the years ended December 31, 1979 and 1978 1979 1978 (In thousands)
Operating revenues $ 159,712 $ 136,556 Operating expenses (Notes' and K):
Fuel 81,669 73,447 Purchased and interchanged power . (3,531) (2,110)
Operation 20,962 17 722 Maintenance 6,725 5,559 Depreciation (Note B) 8+45 7,361 Taxes (Note G):
Federal income, current 1,238 (2,617)
Federal income, deferred . 6,138 (1,500)
Charge equivalent to investment tax credit, net of amortization 4,083 9,014 Other 10,114 9,231 135,643 116,107 Operating income 24,069 20,449 Other income:
Allowance for other funds used during construction (Note I) . 7,450 3,197 Other income, net of other expenses . 561 954 Federal income taxes (Note G) (269) (463) 7,742 3,688 Income before interest charges . 31,811 24,137 Interest charges:
Interest on long-term debt 11,589 9,477 Other interest (Note B) 7,420 4,041 Other interest capitalized (Note B) (1,643) (1,098)
Allowance for borrowed funds used during construction (Note I) (8,745) (4,307) 8,621 8,113 Net income(Note I) . 23,190 16,024 Preferred dividend requirements (Note D) 3,948 2,575 Net income applicable to common stock (Note C) .. $ 19,242 $ 13,449 Net income per share of common stock (Notes C and I) .... $ 1.45 $ 1.30 Weighted average number of common shares outstanding . ...13,252,102 10,333,109 The accompanying notes are an integral part of the consolidated financial statements.
Financial 17 EL PASO ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENT OF RETAINED EARNINGS For the years ended December 31, 1979 and 1978 1979 1978 (In thousands)
Retained earnings at beginning of year $ 41 541 $ 39,056 Net income . 23,190 16,024 Amortization of capital stock expense . (134) (139) 641597 54,941 Cash dividends:
Preferred stock 3,948 2,575 Common stock 14,523 10,825 18,471 13,400 Retained earnings at end of year $ 46,126 $ 41,541 The accompanying notes are an integral part of the consolidated financial statements.
Financial 18 EL PASO ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN FINANCIALPOSITION For the years ended December 31, 1979 and 1978 1979 1978 (In thousands)
Source of funds:
From operations:
Net income $ 23,190 $ 16,024 Items not requiring outlay of working capital in the current period:
Depreciation 8,245 7,361 Deferred federal income tax 6,875 1,354 Investment tax credit . 4,083 9,014 Allowance for other funds used during construction .'.......... (7,450) (3,197)
Other . 278 223 Funds provided by operations . 35,221 30,779 Other sources:
Sale of nuclear fuel to trust 4,712 Sale of preferred stock . 26,000 14,000 Sale of common stock 35,060 30,205 Sale of first mortgage bonds 25,000 9,000 Sale of unsecured floating rate promissory note 25,000 Long-term mortgages 2,124 Long-term purchase commitment 591 563 Advances for construction and other 439 (51) 152)023 86,620 Application of funds:
Gross additions to plant 130,282 100,101 Allowance for other funds used during construction .... (7,450) (3,197)
Transfer of long-term purchase commitment to current . 7,754 Gross additions to other property and investments 794 1,539 Increase (decrease) in other deferred debits 642 (74)
Dividends on preferred stock . 3,948 2,575 Dividends on common stock . 14,523 10,825 Capital stock expense 375 431 Reduction of long-term debt 4,549 1,000 Increase in bond discount 2,196 Other (129) 903 155,288 116,299 Decrease in working capital $ 3,265 $ 29,679 The accompanying notes are an integral part of the consolidated financial statements.
Financial 19 EL PASO ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN FINANCIALPOSITION (Continued)
For the years ended December 31, 1979 and 1978 1979 1978 (In thousands)
Increase (decrease) in components of working capital:
Current assets:
Cash $ 4)652 $ 1,685 Restricted cash . (6,600)
Accounts receivable 3,002 942 Federal income tax refundable . (3,344) 2,011 Materials and supplies . 1)059 203 Fuel (789) 2,647 P repayments (76) 272 Deferred fuel costs (1,514) (5,411)
Other 418 (534) 3,408 (4,785)
Current liabilities:
Current portion of long-term debt 3,504 1,045 Notes payable to banks (24,475) 15,735 Notes payable, other 15,290 Commercial paper . 2,157 6,875 Turbine contract payable 7,754 Fuel purchase commitment (789) 2,647 Accounts payable . 1,625 (823)
Customer deposits 402 450 Taxes accrued . 704 1,132 Deferred income taxes . (737) (2,854)
Interest accrued 352 509 Other 886 178 6)673 24,894 Decrease in working capital $ 3,265 $ 29,679 The accompanying notes are an integral part of the consolidated financial statements.
Financial 20 EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS A. Summary of Significant Accounting Policies:
General The Company maintains its accounts in accordance with the Uniform System of Accounts prescribed for electric utilities by the Federal Energy Regulatory Commission (FERC).
Reclassification In accordance with the Securities and Exchange Commission Accounting Series Release No. 268 issued July 27, 1979, the Consolidated Balance Sheet at December 31, 1978, has been reclassified to state preferred stock-redemption required and preferred stock-redemption not required, separately.
Principles of Consolidation The consolidated financial statements include El Paso Electric Company and its wholly-owned subsidiary, Franklin Land 8 Resources, Inc. All intercompany balances and significant intercompany transactions have been eliminated in consolidation.
UtilityPlant Utilityplant and equipment are stated at original cost. The Company provides for depreciation on a straight-line basis at annual rates which willamortize the undepreciated cost of depreciable property over estimated remaining service lives.
The Company charges the cost of repairs and minor replacements to the appropriate operating expense and capitalizes the cost of renewals and betterments. The cost of depreciable plant retired or sold, and the cost of removal, less salvage, is charged to accumulated provision for depreciation.
Inventories Materials and supplies and fuel inventories are valued at the lower of average cost or market.
Unamortized Capital Stock Expense Unamortized amounts apply to outstanding issues and are being charged to retained earnings over a ten-year period.
Revenue(
Revenues are recognized based on cycle billings rendered to customers monthly. The Company does not accrue revenues in respect to energy consumed but not billed at the end of a fiscal period.
Financial 21 EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
Unamortized Expense, Premium and Discount on Debt Unamortized amounts apply to outstanding issues and are being amortized ratably over the lives ot such issues.
Federal Income Taxes and Investment Tax Credits Accelerated depreciation of utility plant and amortization of emergency facilities are used for federal income tax reporting purposes which differs from the methods used for financial reporting purposes. Ditferences in the tax and financial methods of accounting for fuel costs and other capitalized costs also exist. In accordance with regulatory authority requirements, provision has been made in the financial statements for federal income taxes deferred to future years as a result of these items. The Company has not provided deferred taxes on certain other differences between financial and tax reporting, prior to 1979, since such differences were not approved as an expense in rate ot return computations by regulatory authorities.
Effective January 1, 1979, in accordance with a Texas rate order, the Company began providing deferred federal income taxes relating to the borrowed portion of AFUDC, to certain capitalized costs, and to all ditferences between book and tax depreciation for pro perty placed in service after 1978.
Investment tax credits are deferred and amortized to income over the estimated service lives ot the related properties.
Pension Plan The Company has a noncontributory retirement annuity plan (future participation terminable at any time) under a group annuity contract. The pension plan provides annual pensions for regular employees with more than one year ot service. The Company's policy is to fund pension costs accrued. Prior service costs are being amortized over a thirty-year period beginning in 1972 and are included in the determination of annual expenses.
Net Income Per Common Share Net income per common share is computed using the weighted average number of common shares outstanding during the year. Common equivalent shares related to the Amended Employee Stock Purchase Plan are not significant.
Financial 22 EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
B. Utility Plant:
Electric plant consisted of the following:
December 31, 1979 1978 (In thousands)
Intangibles . $ 50 $ 50 Production . 131,761 130,714 Transmission 48,668 47,159 Distribution . 100>148 92,959 General 9,205 9,324 Plant held for future use 397 397 Construction work in progress 260,419 143,826 Nuclear fuel and other investments . 11,135 13,656 Total $561,783 $ 438,085 At December 31, 1979 and 1978, a commitment in the amount of approximately $ 7,754,000 and $ 7,163,000, respectively, to purchase a turbine from an independent trust no later than June 20, 1980, has been included in construction work in progress. Corresponding amounts have been reflected as a turbine contract payable and as a long-term purchase commitment at December 31, 1979 and 1978, respectively.
During the years ended December 31, 1979 and 1978, interest in the amount of approximately
$ 1,643,000 and $ 1,098,000, respectively, relative to funds borrowed by a turbine trust and the Company's subsidiary has been capitalized. The borrowed funds at rates ranging from 4-1/4% to 15-1/4% were used to acquire utility plant (construction work in progress and nuclear fuel and other investments). The interest amount has been included in the Consolidated Statement of Income as "Other Interest" with a corresponding amount included in "Other Interest Capitalized." Such interest amounts prior to January 1, 1978, were minimal.
The Company has a 7% undividedinterest in Units 4 and 5 of the Four Corners Project located in northwestern New Mexico and a 15.8% undivided interest in Units 1, 2 and 3 of Palo Verde Nuclear Generating Station which are under construction near Phoenix, Arizona. The Company is also constructing transmission facilities related to this station. Participants in the joint plants are responsible for obtaining their respective financing. The extent of Company interests in these facilities, excluding nuclear fuel, is as follows:
December 31, 1979 1978 Palo Verde Nuclear Four Corners Palo Verde Nuclear Four Comers Generating Station Project Generating Station Project (In thousands)
Utilityplant (in service) $ 13>681 $ 13,391 Accumulated provision for depreciation (2>712) (2,362)
Utilityplant (under construction) $ 241,352 1>453 $ 130,900 848
Financial 23 EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
The Company's direct expenses associated with Four Corners Project are included in the applicable operating expense categories of the Consolidated Statement of Income.
Total depreciation was approximately $ 8,531,000 in 1979 and $ 7,616,000 in 1978, of which approximately $ 286,000 and $ 255,000, respectively, was applicable to transportation equipment and has been charged to other accounts.
The average annual depreciation rate used by the Company. for the years ended December 31, 1979 and 1978, was 2.93%.
C. Common Stock:
Under a shareholder approved employee stock purchase plan qualified employees may purchase shares of the Company's common stock at two specified dates each year for a period ending no later than June 30, 1984. The purchase price is 90% of the average bid price of the stock at the option dates. During 1979 and 1978, 6,717 and 11,120 shares of common stock, respectively, were purchased at an aggregate cost of approximately $ 63,000 and $ 111,000, respectively. The cumulative aggregate corresponding fair market values as of the purchase dates were approximately $ 70,000 and $ 117,000, in 1979 and 1978, respectively. At December 31, 1979, 66,878 shares were reserved for future purchases under the plan.
Proceeds from purchases are credited to common stock and no charges are reflected in income with respect to the plan.
The Company has a Dividend Reinvestment and Stock Purchase Plan which provides holders of its common stock the option to invest cash dividends and/or optional cash payments (up to
$ 3,000 per quarter) in additional shares of the Company's common stock. During 1979 and 1978, 178,652 and 116,904 shares, respectively, were purchased by shareholders who reinvested dividends and invested cash in the amounts of approximately $ 1,854,000 and $ 1,263,000, respectively. At December 31, 1979, 332,195 shares were reserved for future purchases under the plan. The purchase price is the average of the last bid and asked price of the stock on the purchase date.
Financial 24 EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
The Company adopted an employee stock ownership plan in May, 1978, pursuant to which it contributes common stock to the plan for the benetit of employees. The value ot such common stock is equal to a specified amount of investment tax credit. The Company reserved 500,000 shares of common stock for issuance under the plan. In October, 1979, the Company contributed 126,633 shares of stock with a market value of approximately $ 1,287,000 to the plan. In June, 1978, the Company contributed 26,529 shares of stock with a market value ot approximately
$ 294,000 to the plan. At December 31, 1979, 346,838 shares were reserved for tuture contributions under the plan.
During June, 1979, the Company's Restated Articles of Incorporation were amended, increasing the number of authorized shares of common stock to 30,000,000.
Changes in common stock and unamortized capital stock expense were as follows (In thousands, except share amounts):
Unamortized Capital Stock Common Stock Expense Description Shares Amount Net'$
Balance, December 31, 1977... 8,536,818 S 41,064 496)
Sales of Common Stock ..... 2,654,553 30.205 ~202 Balance, December 31, 1978... 11,191,371 71,269 (788)
Sales of Common Stock ..... 3 312,002 35,060 ~244 Balance, December 31, 1979... 14,503,373 $ 106,329 ($ 1,029)
- Capital stock expenses reflected above are stated net of amortization and include expenses of all capital stock issues.
Subsequent to December 31, 1979 (in February 1980), the Company sold 1,500,000 shares for aggregate net proceeds of $ 13,518,000 before expenses ot sale.
Net income applicable to common stock, het income,per share of. common stock, and weighted average number of common shares outstanding for the year ended December 31, 1979, would have been $ 19,469,000, $ 1.34, and 14,502,102, respectively, assuming that the proceeds (betore expenses of sale) of $ 121,374,000 from the sale of first mortgage bonds, preferred stock, common stock and a promissory note during the year and in February, 1980, were used to retire short-term debt outstanding during the year ended December 31, 1979.
Financial 25 EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
D. Preferred Stock (authorized 1,000,000 shares):
Preferred stock Redemption required Following is a summary of outstanding preferred stock redemption required:
Optional Redemption Stated Value Price Per Share December 31, Issue 1979 1978 December 31, 1979 (In thousands) 100,000 Shares $ 1 0.75 Dividend $ 10,000 $ 10,000 $ 110.75 140,000 Shares $ 8.44 Dividend 14,000 14,000 108.44 10,000 Shares $ 8.44 Dividend 1,000 108.44 150,000 Shares $ 8.95 Dividend 15,000 108.95 100,000 Shares $ 9.00 Dividend ~10 000
$ 50,000 $ 24,000 The $ 10.75 preferred shares are entitled to the benefits of an annual sinking fund whereby on January 1 of each year, beginning in 1980, the Company will redeem 4,000 shares at the sinking fund redemption price ot $ 100 per share plus accrued dividends. The $ 10.75 preferred shares are redeemable at the option of the Company; however, no optional redemption of the shares may be made prior to January 1, 1985, as a part of, or. in anticipation of, any refunding involving the issue of indebtedness or preferred stock having an effective interest or dividend cost of less than 10.75% per annum.
The $ 8.44 preferred shares are entitled to the benetits of an annual sinking fund whereby on October 1 of each year, beginning in 1984, the Company will redeem 4% (and may, at its option, redeem an additional 4%) ot the aggregate maximum number of shares outstanding at the sinking fund redemption price of $ 100 per share plus accrued dividends. The $ 8.44 preferred shares are redeemable at the option ot the Company; however, except as set forth above, no optional redemption of the shares may be made prior to October 1, 1988, as a part of, or in anticipation of, any retunding involving the issue ot indebtedness or preferred stock having an effective interest or dividend cost of less than 8.44% per annum.
The $ 8.95 preferred shares are entitled to the benefits of an annual sinking fund whereby on October 1 of each year, beginning in 1985, the Company will redeem 5% (and may, at its option, redeem an additional 5%) of the aggregate maximum number of shares outstanding at the sinking fund redemption price of $ 100 per share plus accrued dividends. The $ 8.95 preferred shares are redeemable at the option of the Company; however, no optional redemption of the shares may be made prior to October 1, 1984, as a part ot, or in anticipation of, any refunding involving the issue of indebtedness or preferred stock having an effective interest or dividend cost of less than 8.95% per annum.
Sinking fund requirements for each of the above series are cumulative and, in the event they are not satisfied at any redemption date, the Company is restricted from paying any dividends on its common stock (other than dividends in common stock or other class of stock ranking junior to the preferred stock as to dividends and assets).
The $ 9.00 preferred shares have no provision for a sinking fund, are not redeemable at the option of the Company, and must be redeemed in full on October 1, 1986 at $ 100 per share pIus accrued dividends. In the event the Company fails to provide sufficient funds for redemption, the Company is restricted from paying any dividends on its common stock (other than dividends in common stock or other class of stock ranking junior to the preferred stock as to dividends and assets).
Financial 26 EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
The aggregate amounts of the above preferred stock required to be retired for each of the next five years are as follows:
(In thousands) 1980 $ 400 1981 400 1982 400 1983 400 1984 1,000 Sales of preferred stock redemption required were as follows:
Description Shares Amount (In thousands)
Balance, December 31, 1977 . 100,000 $ 10,000 Issuance of Preferred Stock, $ 8.44 Dividend 140 Mo 14,000 Balance, December 31 ~ 1978 . 240,000 24,000 Issuance of Preferred Stock, $ 8.44 Dividend 10,000 1,000 Issuance of Preferred Stock, $ 8.95 Dividend 150,000 15,000 Issuance of Preferred Stock, $ 9.00 Dividend 100,000 10,000 Balance, December 31, 1979 . 500,000 $ 50,000 Preferred stock Redemption not required Following is a summary of preferred stock which is not redeemable except at the option of the Company: Optional Redemption Stated Value at Price Per Share December 31, at Issue 1979 1978 December 31, 1979 (In thousands) 15,000 Shares $ 4.50 Dividend . S 1,534 $ 1,534 $ 109.00 15,000 Shares $ 4.12 Dividend . 11506 1,506 103.98 20,000 Shares $ 4.72 Dividend . 2,001 2,001 104.00 40,000 Shares $ 4.56 Dividend . 4,000 4,000 100.00 100,000 Shares $8.24 Dividend . 9 832 9,832 107.52
$ 18,873 $ 18,873 The $ 8.24 preferred shares are redeemable at the option of the Company; however, no optional redemption of the shares may be made prior to April 1, 1982, directly or indirectly as part of, or in anticipation of, any r'efunding involving the issue of the indebtedness or preferred stock having an interest or dividend cost less than the effective dividend cost of the $ 8.24 preferred stock.
All preferred stock issues (redemption required and redemption not required) are entitled, in preference to common stock, to $ 100.00 per share, plus accrued dividends, upon involuntary liquidation. All issues except the $ 9.00 preferred stock are entitled to an amount per share equal to the applicable optional redemption price, plus accrued dividends, upon voluntary liquidation.
The $ 9.00 preferred stock issue is entitled to a fixed price ($ 109.00 per share at December 31, 1979), plus accrued dividends, upon voluntary liquidation.
There have been no changes in preferred stock redemption not required during the two years ended December 31, 1979.
Financial 27 EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
E. Long-Term Debt:
Outstanding long-term debt is as follows:
Redemption Price at December 31 December 31, 1979 1078 1979 (In >has>ands)
First mortgage bonds:
2-7/8/o Series, due 1980 $ 4,500 $ 4,500 $ 100.00 3-1/8'/o Series, due 1984 4,950 4,950 100.85 4-1/4'/o Series, due 1988 6>100 6,100 101.90 4-5/8 /o Series, due 1992 101385 10,385 102.42 6-3/4%%d Series, due 1998 24,800 24,800 104.19 7-3/4'/o Series, due 2001 151838 15,838'0,000 106.46 9'/o Series, due 2004 .~ 20>000 107.04 9.95'/o Series, due 2004 25>000 109.95 10-1/2'/o Series, due 2005 15,000 15,000 109.84 8-1/2 /o Series, due 2007 25 000 25,000 108.15 1511573 126,573 Unsecured floating rate (15.25/o at December 31, 1979) promissory note, due 1984 25,000 4-1/4/o pollution control revenue bonds, 1977 Series A, due 1979 5,000 Less funds on deposit with trustee (4,000)
Other, 8.8125/o, due in installments through 1998 2 124 2,169 178,697 129,742 Current maturities of long-term debt (4>549) (1,045)
Unamortized premium and discount ~2427 ~2.545 8171 721 $ 1 26,152 Scheduled maturities of long-term debt at December 31, 1979, are as follows (in thousands):
1980 . $ 4,549 1981 54 1982 59 1983 . 64 1984 . 30,020 Thereafter 143,951
$ 178,697
Financial 28 EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
The Company's indenture of mortgage provides for sinking and improvement funds. For each series other than the 9.95% series, the Company is required to make annual payments to the trustee equivalent to 1% ($ 1,275,000 at December31, 1979 and 1978) of the greatest aggregate principal amount of such series outstanding prior to a specitied date. The Company has generally satisfied the 1% requirement by relinquishing the right to use a net amount of additional property for the issuance of bonds or by purchasing bonds in the open market and expects to continue this practice in the future. With respect to the 9.95% series, commencing April 30, 1985, the Company will be required to make annual cash payments to the trustee equivalent to 4-1/4% of the greatest aggregate principal amount of such series outstanding at any one time prior to a specified date. The 4-1/4% cash payment must be applied to redeembonds ot the 9.95% series at 100% of the principal amount thereof plus accrued interest.
The premiums retlected in the redemption prices shown above continue at reduced amounts in future years, finally resulting in each case in redemption at par at maturity.
Substantially all of the Company's utility plant is subject to a lien under the indenture of mortgage collateralizing the Company's bonds.
In accordance with certain provisions of the indenture covering the first mortgage bonds, payment of cash dividends on common stock is restricted to an amount equal to retained earnings accumulated after December 31, 1966, plus $ 4,100,000. Retained earnings in the amount of approximately $ 27,800,000 is unrestricted as to the payment of cash dividends at December 31, 1979.
The funds on deposit with a trustee ($ 4,000,000) at December 31, 1978, represent a portion ot the proceeds from pollution control revenue bonds issued in November, 1977. The bonds were redeemed in November, 1979.
F. Notes Payable and Commercial Paper:
Short-term notes at, December 31, 1979, consisted of $ 34,332,000 of commercial paper with an effective weighted average interest rate, of 13,9%, $ 2,125,000 of notes payable to banks with an effective weighted average interest rate of 14.7%, and $ 15,290,000 of notes payable, other, with an etfective weighted average interest rate of 13.1%.
Short-term notes at December 31, 1978, consisted of $ 32,175,000 of commercial paper with an effective weighted average interest rate of 10.4% and $ 26,600,000 of notes payable to banks with an effective weighted average interest rate of 10.6%.
The Company and its subsidiary have informal lines of credit with various lenders. Certain of these arrangements provide for the maintenance of compensating balances for the available lines ot credit and the loans outstanding. At December 31, 1979 and 1978, the lines of credit available under these arrangements totaled $ 104,336,000 (including subsidiary lines of
$ 17,625,000 not guaranteed by the Company) and $ 67,925,000 (including subsidiary lines of
$ 10,925,000 not guaranteed by the Company), respectively. Average bank balances of approximately $ 4,710,000 and $ 2,550,000 were required to be maintained as compensating balances at December 31, 1979 and 1978, respectively, in connection with the informal lines of credit.
Financial 29 EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
The maximum and average amounts of aggregate short-term borrowings outstanding at any month-end during the year ended December 31, 1979, were $ 74,767,000 and $ 59,717,000, respectively, and for the year ended December 31, 1978, were $ 58,775,000 and $ 43,054,000, respectively. The weighted average interest rate was 10.9% and 7.4% during the years ended December 31, 1979 and 1978, respectively, and was calculated by dividing actual interest expense by the average month-end balances outstanding during the related period.
Through December 31, 1980, the F ERG has authorized the Company to incur short-term debt (in the form of promissory notes or commercial paper) in an amount not to exceed $ 130,000,000 outstanding at any one time. The interest rates on the notes are to be at the prime rate in effect at the time of issuance, plus in some cases, provisions for compensating balances of 20% under certain conditions. The net proceeds from the issuance of the short-term debt are to be used for construction expenditures.
G. Federal Income Taxes:
The provisions for deferred federal income taxes, which arise from timing differences between financial and tax reporting, are as follows:
Years Ended December 31, 1979 1978 (In thousands)
Tax effect of:
Depreciation differences . $ 1,769 $ 1,572 Deferred fuel costs (1>074) (2,597)
Allowance for borrowed funds used during construction 4,023 Other costs capitalized . 733 Amortization related to emergency faciiities (111) (111)
Deferred rate case expense and other 798 ~364
$ 6,138 ($ 1,500)
Effective January 1, 1979, in accordance with a Texas rate order, the Company began providing deferred federal income taxes applicable to the allowance for borrowed funds used during construction, to other costs capitalized and to all differences between book and tax depreciation for property placed in service after 1978. Accordingly, additional deferred taxes of approximately $ 4,828,000 are reflected in deferred tax expense for the year ended December 31, 1979.
30 EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
Federal income tax provisions are less than the amounts computed by applying the statutory rate to income before federal income taxes. Details are as follows:
Years Ended December 31, 1979 1978 (In thousands)
Tax computed at statutory rate $ 16,062 $ 10,264 Decreases due to:
Allowance for funds used during construction . (3,427) (3,602)
Excess of straight-line tax depreciation over book depreciation . (176) (348)
Amortization of deferred investment tax credit . (296) (398)
Other ~425 (556)
Total federal income tax expense 211 722 S 5,360 Effective federal income tax rate 33.6% 25.1%
Total federal income tax expense is as follows:
Years Ended December 31, 1979 1978 (ln thousands)
Federal income tax, current (credit) $ 11238 ($ 2,617)
Income taxes associated with other income 269 463 Total current . 1,507 (2,154)
Deferred federal income tax (credit) 61138 (1,500)
Deferred investment tax credit 4,379 9,412 Amortization of deferred investment tax credit . ~226 ~398
$ 11,728 $ 5,360 At December 31, 1979, the Company has available for federal income tax purposes an investment tax credit carryforward of approximately $ 7,000,000 expiring in 1986.
Financial 31 EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
H. Commitments and Contingencies:
The Company has a 15.8% interest in three units of a nuclear plant and related transmission lines and switchyard presently under construction. The costs to be incurred by the Company at December 31, 1979, are approximately $ 612,600,000, including approximately $ 169,700,000 of AFUDC. The Company is also committed at December 31, 1979, for construction of pollution control facilities in the amount of approximately $ 15,200,000, including approximately
$ 2,600,000 of AFUDC. The above amounts were computed assuming an estimated average annual inflation rate of 7%.
In January, 1979, the Company entered into an agreement with an independent trust whereby the Company sold to the trust, at cost, substantially all of its nuclear fuel. Under the trust agreement the Company has the option of either repurchasing the fuel from the trust or leasing the heat generated by the fuel. Management of the Company intends to enter into a basic heat supply contract whereby title to the fuel remains with the trust and the Company makes lease payments for the heat generated. Based on this intention and in accordance with industry practice, the nuclear fuel and related liability are not included in the accompanying balance sheet. At December 31, 1979, the trust has incurred cumulative costs of approximately
$ 8,200,000. The Company expects that fuel costs incurred will be recouped at the time the fuel is used. The Company is committed to reimburse the trust for its cash investment in nuclear fuel, not expected to exceed a maximum cash amount of $ 68,000,000 during the ten-year period ending December 31, 1989, as well as for interest and other carrying costs of the trust.
The Company's fuel supply arrangements include short-term commitments under a fuel supply arrangement entered into in 1977 with a trust, whereby the Company concurrently assigned its principal long-term fuel supply contract to the trust and agreed to purchase all fuel oil delivered to the trust by the fuel supplier. Payments to the trust for fuel oil purchases consist of the trust's cost of oil determined on an average cost basis plus related administrative and carrying costs. For financial reporting purposes, purchases of the trust are assumed to have been made on behalf of the Company. Accordingly, the balance sheet at December 31, 1979 and 1978, includes approximately $ 7,958,000 and $ 8,747,000, respectively, recorded as fuel and fuel purchase commitment, representing the Company's commitment to purchase the trust's fuel oil inventory as of those dates.
The Company's operations are subject to environmental protection measures imposed under federal and state laws and regulations. Management does not believe that the impact of any of these matters will have a material adverse effect on the financial statements.
The Company's rates, including fuel adjustment clauses, are subject to the jurisdiction of local, state, and federal authorities. The Company believes that regulatory agencies will continue to allow rate increases designed to allow utilities to recover costs and a reasonable return on investment.
Revenues for 1979 and 1978 include approximately $ 623,000 and $ 635,000, respectively, subject to refund pending final determination by the FERC.
Financial 32 EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
I. Allowance for Funds Used During Construction:
The applicable regulatory uniform system of accounts provides for "allowance for funds used during construction" ("AFUDC")which is defined as an amount which includes the net cost during a period of construction of borrowed funds used for construction purposes plus a reasonable rate on other funds when so used. While AFUDC results in an increase inutilityplant under construction for ratemaking purposes with a corresponding credit to income, it is not a current cash item. AFUDC is realized in cash after the related plant is placed in service through the allowance for depreciation charges based on the total cost of the plant, including AFUDC.
The amount of AFUDC is determined by applying an accrual rate to the balance of certain utility plant additions. The Company used an accrual rate of 9-1/2% ln 1978. During 1979, the Company changed the rate used to calculate AFUDC from 9-1/2% to 11%, effective as of January 1, 1979. In this connection, the FERC promulgated procedures for the computation (a prescribed formula) of the accrual rate which became effective in 1977. The rates used by the Company do not exceed those permitted under the prescribed FERC formula.
The increase in the AFUDC rate as of January 1, 1979, increased net income by approximately $ 1,659,000 and net income per share by approximately $ .13 for the year ended December 31, 1979. The AFUDC rate is reviewed quarterly and adjustments, if any, are applied to the full year.
J. Pension Plan:
The Company had $ 751,000 of pension expense in 1979 and $ 680,000 in 1978. As of July 1, 1978, date of the most current actuarial valuation, assets of the pension fund exceeded vested benefits by approximately $ 677,000 and unfunded prior service benefits were estimated to be approximately $ 3,500,000.
K. Supplementary Profit and Loss Information:
Supplementary profit and loss information with respect to operating expenses is as follows:
Years Ended December 31, 1979 1978 (In thousands)
Taxes, other than federal income taxes:
Municipal and state property S 6,653 s 4,654 Occupancy and street rental . 1 1964 1,701 State gross receipts . 27029 1,741 Other I 109 2 473 Total 511 755 310 569 Charged to:
Taxes, other S10,114 S 9,231 Utilityplant and other accounts I 64'I I 339 Total $ 11,755 $ 10,569
Financial 33 EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
Expenditures for rents, royalties, advertising and development costs individually did not exceed 1% of total revenues and hence are not presented.
L. Quarterly Financial Summary (Unaudited):
The following table sets forth the quarterly financial summary of the Company for the years ended December 31, 1979 and 1978:
(In Thousands of Dollars Except for Per Share Data)
(AllQuarteAy Data, is Unaudited)
Net Net Income Income Applicable Per Operating Operating Operating Net To Common Common 1979 Revenues Expenses Income Income Stock Share 1st quarter .. $36,873 $ 32,119 $ 4,754 $3,976 $ 3,085 $ .25 2nd quarter .. 37,147 31,564 5,583 5,334 4,441 .35 3rd quarter .. 45,604 37,927 7,677 7,705 6,801 .50 4thquarter .. 40,088 34,033 6,055 6,175 4,915 .34 1978 1stquarter .. 31,418 27,142 4,276 2,812 2,236 .24 2nd quarter .. 36,219 30,899 5,320 3,883 3,307 .33 3rd quarter .. 37,787 31,470 6,317 5,133 4,556 .43 4thquarter .. 31,132 26,596 4,536 4,196 3,350 .30 M. Replacement Cost Information (Unaudited):
The impact of inflation experienced in recent years has resulted in replacement costs of productive capacity that are significantly greater than the historical costs of such assets reported in the Company's financial statements. The Company's ability to maintain its productive capacity in the future will be contingent upon its ability to finance the needed additions. This, in turn, will depend on the Company's ability to obtain adequate and timely rate relief. The Company retained Stone 8 Webster Appraisal Corporation of Boston, Massachusetts ("Stone 8 Webster Appraisal" ) to determine the approximate replacement cost of the Company's productive capacity.
The replacement cost information does not purport to represent the current value or reproduction costs of the assets or the amounts which could be realized if the assets were sold.
Rather, replacement cost generally represents the estimated amount that would be required to replace, at today's prices, the productive capacity of certain of the Company's existing assets with assets of a modern type including additional pollution control equipment presently required under environmental regulations. Such replacement would result in changes in fuel, operation and maintenance cost which are not reflected in the data submitted.
Financial 34 EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
The replacement costs reflected in the table below were determined on the basis of replacing existing capacity (which uses gas, oil and coal as fuels) with capacity fueled by oil and coal. Due to federal legislation in connection with a national energy policy, replacement of existing capacity with capacity fueled by oil may no longer be a viable alternative. To the extent existing capacity must be replaced by capacity using coal or nuclear fuel, replacement costs could be expected to increase substantially.
The difference between historical and replacement cost of net plant investment does not represent additional book value for the Company's common stock; instead, it indicates the capital funds (in excess of booked depreciation and other prior capital provisions) that may have to be provided to replace existing service capacity of the plant of the Company.
The Company's business is subject to the jurisdiction of regulatory commissions in the determination of fair rates of return on its investment in utility plant. Under current ratemaking policy, the Company recovers, through future depreciation charges, the historical dollars invested in productive capacity. The ratemaking process does not allow the Company to recover the excess of replacement cost over historical cost. However, at such time as amounts are actually expended to replace existing assets, such amounts will be considered in determining the Company's rate base for purposes of ratemaking.
The Company believes that the difference between depreciation based on historical cost and depreciation based on estimated replacement cost, which difference is not deductible in determining income tax expense, is not truly an additional amount of depreciation expense.
Rather, it is a measure of the extent to which the Company should be making provision in the current year for replacement of its existing plant, assuming no growth in demands for service and no further inflation in costs.
The consolidated replacement cost information on a comparative basis with historical cost is shown in the tabulation below as of December 31, 1979 and 1978 (amounts in thousands):
1979 1978 Estimated Actual Estimated Actual Replacement Historical Replacement Historical Cost Cost Cost Cost Plant investment subject to replacement cost disclosure ' .. $ 17043,102 $ 561,783 $ 854,720 $ 438,085 Accumulated depreciation 203 860 76 063 171 808 68,672 Net plant investment . ., S 839,242 S485,730 $682,912 $ 369,413 Depreciation expense for the year . $ 20,205 S 8,531 S 18,089 $ 7,616 "Amounts exclude nonutility plant of approximately $ 2,357,000 and $ 1,563,000, respectively, and include land, intangible assets, construction work in progress, and nuclear fuel and other investments at original cost of approximately $ 275,712,000 and $ 160,750,000 as of December 31, 1979 and 1978, respectively.
Financial 35 EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
N. Estimated Effect of Inflation (Unaudited):
The Financial Accounting Standards Board issued Statement No. 33 "Financial Reporting and Changing Prices" to provide estimates of the impact from inflation on a business'perations. The schedules below are intended to indicate the effect on the Company from general inflationary pressures as measured by the Consumer Piice Index (CPI). Due to estimating techniques and certain judgemental decisions, the information should be viewed as only an approximation of inflation's effect.
Constant dollar amounts represent historical costs stated in dollars of equal purchasing power, as measured by the Consumer Price Index for all Urban Consumers. The cost of plant was restated to average 1979 dollars and depreciation expense was calculated by applying the Company's depreciation rate to the restated amounts.
As prescribed in Statement 33 income taxes were not adjusted.
Fuel used in generation has not been restated from historical cost amounts nor have inventories. Fuel costs are recoverable currently through the operation of fuel adjustment clauses and inventory turnover periods are relatively short. In accordance with FASB Statement No. 33, other items of income and expense have not been restated.
The regulatory commissions having jurisdiction over the Company's rates allow for the recovery of the historical cost of plant through depreciation. The restated cost of plant is not presently recoverable. Therefore, the difference between historical plant cost and restated plant cost is shown below as a reduction to net recoverable cost. The reduction to recoverable cost should be offset by the gain from the decline. in purchasing power of net amounts owed.
During inflationary periods, holders of monetary assets suffer a loss of general purchasing power while holders of monetary liabilities experience a gain. The gain from the decline in purchasing power shown below is attributable to the substantial amount of debt used to finance property, plant and equipment. Since the depreciation on plant is limited to the recovery of historical costs, the Company does not have the opportunity to realize a holding gain on debt and is limited to the recovery only of the embedded cost of debt capital.
Financial 36 EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
SUPPLEMENTARY STATEMENT OF INCOME FROM OPERATIONS ADJUSTED FOR CHANGING PRICES (Unaudited)
Year Ended December 31, 1979 (Thousands of Dollars)
Constant Conventional Dollar Historical Average Cost 1979 Dollars Operating Revenues $ 159,712 $ 159,712 Fuel Purchased and Interchanged Power . 78,138 78,138 Other Operating and Maintenance Expenses .. 37,801 37,801 Depreciation 8,245 15,614 Federal Income Tax . 11,459 11,459 Interest Expense . 8,621 8,621 Other Income . (7,742) (7,742) 136,522 143,891 Income From Operations $ 23,190 $ 15,821' Net Income Per Share of Common Stock $ 1.45 .90 Net Assets at Year End at Not Recoverable Amount $ 208,321 Reduction of Plant to Not Recoverable Cost ($ 45,674)*
Gain From Decline in Purchasing Power of Net Amounts Owed 29,996 Difference ($ 15,678)
'nclusion of the reduction to net recoverablo cost in income from operations produces a loss of $29,853.
FIVE YEAR COMPARISON OF SELECTED FINANCIALDATA AVERAGE 1979 CONSTANT DOLLARS (Unaudited)
Years Ended December 31 ~
1979 1978 1977 1976 1975 Operating Revenues (Thousands)
Actual ....... $ 1591712 $ 136,556 $ 112,339 $ 111,188 $ 91,461 1979 Dollars 159,712 151,931 134,559 141,773 123,348 Cash Dividends Per Common Share Actual ....... $ 1.07 $ 1.02 $ .99 $ .95 S .91 1979 Dollars $ 1.07 $ 1.13 $ 1.19 $ 1.21 $ 1.23 Year-End Market Price Per Common Share Actual ........ $ 9.38 S10.88 $ 12.00 $ 12.00 $ 10.38 1979 Dollars $ 8.87 11.66 14.02 14.97 13.57 Average Consumer Price Index 217.4 195.4 181.5 170.5 161.2
Financial 37 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors El Paso Electric Company We have examined the consolidated balance sheet of El Paso Electric Company and Subsidiary at December 31, 1979 and 1978, and the related consolidated statements of income, retained earnings and changes in financial position for the years then ended. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.
In our opinion, the consolidated financial statements referred to above present fairly the consolidated financial position of El Paso Electric Company and Subsidiary at December 31, 1979 and 1978, and the consolidated results of operations and changes in financial position for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis.
COOPERS 8cLYBRAND Dallas, Texas February 22, 1980
Financial 38
SUMMARY
OF OPERATING DATA 1979 1978 1977 Population served at retail, estimated (a) 554,000 544,000 532,000 Number of Customers:
Residential 157,601 150,739 143,645 Commercial and industrial, small 15>791 15,381 14,518 Commercial and industrial, large 44 47 46 Other . 1,875 1,842 1,715 Total 175,311 168,009 159,924 Annual system peak load, net kilowatts 688,000 690,000 657,000 Output, net generated and purchased, thousand kilowatt-hours:
Steam 3>771,043 3,673,685 3,475,753 Purchased and interchanged (119,166) (84,609) (3,574)
Total(b)(c) . 3,651,877 3,589,076 3,472,179 Sales of electricit, thousands of dollars:
Residential $ 52,899 $ 44,178 $ 34,484 Commercial and industrial, small 46,741 39,780 33,583 Commercial and industrial, large 26,402 22,402 17,666 Other 32,577 29,289 25,581 Total $ 158,619 $ 135,649 $ 111,314 Sales, thousand kilowatt-hours:
Residential 937>858 907,956 874,140 Commercial and industrial, small 949>514 913,038 902,699 Commercial and industrial, large 682,163 650,542 617,955 Other 854,749 849,113 847,930 Total(b)(c) . 3,424,284 3,320,649 3,242,724 Average annual use per residential customer, kwh 6,072 6,153 6,261 Average annual revenue per residential customer $ 342.49 5 299.40 S 246.99 Average revenue per kwh sold, cents:
Residential (d) 5.64 4.87 3.94 Commercial and industrial small (d)
~ 4.92 4.36 3.72 Commercial and industrial, large (d) 3.87 4.14 3.47 Average revenue per kwh; total sales (d) 4.63 4.09 3.45 Electric line, pole miles:
Over 15,000 volts . 2,070 1,999 1,811 Less than 15,000 volts (e) 2,794 2,759 2,755 Total 4,864 4,758 4,566 Total employees 965 908 (a) Restated as a result of 1970 census.
(b) Differences between total output and total sales represent company use and losses.
(c) In addition to the Company's 345 kv transmission line between EI Paso and Albuquerque, the company system is interconnected at Las Cruces, New Mexico, with Public Service Company of New Mexico; Community Public Service Company, Plains Electric Generation and Transmission Cooperative, Inc., and Elephant Butte Generating Station through the facilities of the United States Bureau of Reclamation under a pool agreement.
(d) Includes adjustments under existing fuel clauses.
(e) Includes small amount of line on poles owned by telephone company.
39 1976 1975 1974 1973 1972 1971 1970 520,000 505,000 495,000 485,000 475,000 465,000 450,000 135,344 130,010 126,760 123,653 119,170 114,640 110,308 14,203 13,294 13,163 12,816 12,333 11,666 11,279 39 32 29 27 27 23 21 1,748 1,663 1,545 1,445 1,351 1,255 1,228 151,334 144,999 141,497 137,941 132,881 127,584 122,836 677,000 640,000 638,000 618,000 543,400 500,700 469,100 3,501,416 3,433,698 3,369,606 3,450,021 3,075,013 2,705,160 2,506,048 51,013 15,837 (13,709) (180,767) (112,435) (43,375) 360 3,552,429 3,449,535 3,355,897 3,269,254 2,962,578 2,661,785 2,506,408 S 31,415 S 27,080 S 20,126 S 16,749 S 15,133 S 14,081 S 13,099 33,628 28,870 19,192 14.942 12,948 11,515 10,336 15,709 11,816 7,824 6,061 5,231 4,517 4,194 29,537 22,880 15,595 11,416 9,696 8,565 8,155 S 110,289 S 90,646 $ 62,737 S 49168 $ 43,008 S 38,678 $ 35,784 816,169 782,285 765,636 755,701 694,855 643,313 598,240 929,556 909,967 853,960 799,997 696,584 610,876 540,529 582,125 513,637 508,482 536,754 487,945 440,568 426,177 1,030,812 1,006,311 980,175 958,252 853,978 758,769 763,597 3,358,662 3,212,200 3,108,253 3,050,704 2,733,362 2,453,526 2,328,543 6,193 6,097 6,116 6,211 5,948 5,718 5,499 S 238.36 S 211.04 $ 160.72 S 137.59 $ 129.53 S 125.16 S 120.39 3.85 3.46 2.63 2.22 2.18 2.19 2.19 3.62 3.17 2.25 1.87 1.86 1.89 1.91 2.70 2.30 1.54 1.13 1.07 1.03 .98 3.30 2.82 2.02 1.61 1.57 1.58 1.54 1,759 1,706 1,647 1,581 1,539 1,503 1,442 2 727 2,691 2,673 2,616 2,565 2,507 2,457 4,486 4,397 4,320 4,197 4,104 4,010 3,899 816 778 726 659 629
Financial 40
SUMMARY
OF OPERATIONS (Thousands of Dollars)
Year Ended December 31 1979 1978 1977 Operating revenues $ 159,712 $ 136,556 $ 112,339 Fuel 81,669 73,447 59,442 Operation and maintenance 24,156 21,171 16,685 Depreciation (a) 81245 7,361 6,498 Taxes 21,573 14,128 12,377 Other income (7,742) (3,688) (1,689) 1271901 112,419 93,313 Income before interest charges . 31>811 24,137 19,026 Total interest charges 8,621 8,113 7,604 Income before cumulative effect on prior years of change in accounting method 23,190 16,024 11,422 Cumulative effect to January 1, 1974 of change in accounting for fuel costs, net of related income taxes ($912,000)
Net income . S 23,190 S 16,024 $ 11,422 Earnings per share of common stock, based on weighted average number of shares outstanding during each year:
Income applicable to common stock before cumulative effect of change in accounting method S 1.45 S 1.30 $ 1.11 Cumulative effect to January 1, 1974, of change in accounting for fuel costs Net income applicable to common stock . S 1.45 S 1.30 S 1.11 Pro forma amounts assuming the new method of accounting for fuel costs is applied retroactively (b):
Net income applicable to common stock Earnings per share Dividends paid per share on common stock S 1.07 S 1.02 S .99 Electric Piant . $ 561,783 $ 438,085 $ 338,598 (a) Does not include depreciation on automobiles and trucks, which was allocated to other accounts.
(b) The effect of the accounting change in years prior to January 1, 1971, is not significant.
1976 1975 1974 1973 1972 1971 1970
$ 111,188 $ 91,461 $ 63,072 $ 49,483 $ 43,284 $ 38,919 $ 36,026 53,154 44,714 24,914 15,766 10,951 8,974 7,330 17,954 14,516 11,463 8,160 8,101 7,717 7,149 6,233 5,506 4,345 4,102 3,776 3,509 3,256 15,727 11,197 9,809 9,573 9,279 8,151 8,194 (838) (1,423) (770) (84) (668) (699) (393) 92,230 74,510 49,761 37,517 31,439 27,652 25,536 18,958 16,951 13,311 11,966 11,845 11,267 10,490 7,442 6,853 5,280 3,962 3,591 3,450 3,073 11,516 10,098 8,031 8,004 8,254 7,817 7,417 988 S 11,516 S 10,098 S 9019 S 8,004 S 8,254 $ 7,817 S 7417 S 1.29 S 1.30 S 1.19 S 119 S 122 S 116 S 110
.15 S 129 S 130 S 134 S 119 S 122 S 116 S 110 S 8,270 $ 8,035 S 7,481 S 1.29 $ 1.25 S 1.17
$ .95 S .91 $ .88 S .86 S .83 S .80 S .76
$ 274,502 $ 250,375 $ 227,196 $ 185,058 $ 174,485 $ 166,275 $ 150,859
Financial 42 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED STATEMENT OF INCOME The factors discussed in the following summary of period to period changes, which may not be indicative of future operations or earnings, have had an effect upon the Company's results of operations during the years ended December 31, 1979 and 1978 (in thousands, except for per share data).
1979 Increase (Decrease) 1978 Increase Over 1978 Over 1977 Operating revenues .... $ 23,156 170/o $ 24,217 21.6'/o Operating expenses . 19,536 16.8 lo 21,105 22.2o/o Operating income 3,620 17 7/o 3,112 18 oo/o Allowance for funds used during construction:
Other 4,253 133.0/o 1,597 99.8/o Sorrowed . 4,438 103.0/o 2,196 104.0O/o Other income . (199) (40 5/a) 402 451.7O/o Interest charges:
Long. term debt 2,112 22.3'lo 1,316 16.1O/o Other 2,834 96 3o/o 1,389 89.4'lo Net income . 7,166 44 7o/o 4,602 40.3o/o Preferred dividend requirements 1,373 53.3'/o 538 26.4O/o Net income per share .15 11 5O/o .19 17 1o/o Weighted average number of common shares outstanding 2,919 28.2O/o 1,845 21.7/o Operating Revenues Operating revenues increased in 1979 over 1978 principally as a result of an increase in the average base rate (calculated without giving effect to the recovery of fuel costs). The average base rate for 1979 was.3(f: per kilowatt-hour higher than it was in 1978. Base rates, fuel (collected both in base rates and through fuel adjustment clauses) and volume accounted tor approximately 62/o, 29/o and 9/., respectively, of the total 17.0/o increase in revenues in 1979 over 1978.
Operating revenues increased in 1978 over 1977 partially as a result of increased base rates (calculated without giving effect to the recovery of fuel costs). Base rates for 1978 were approximately.3(f: per kilowatt-hour higher than those in 1977. Base rates, fuel (collected both in base rates and through fuel adjustment clauses) and volume accounted for approximately 45'/o, 50 /o and 5 /o, respectively, of the total 21.6 /o increase in revenues in 1978 over 1977.
Operating Expenses Increases in operating expenses for 1979 over 1978 were due primarily to increases in fuel expense and federal income tax provisions. Escalations in fuel cost accounted for approximately 42'/o of the total 16.8'/o increase, while federal income tax increases contributed 34'/o. Taxes increased in 1979 over 1978 partially due to the presence of tax credits in 1978 not present in 1979 and the deferral of taxes on allowance tor borrowed funds used during construction (ABFUDC) which began in January, 1979.
Increases in operations and maintenance expense (23o/o of the increase) were due primadly to inflationary pressure on wages, employee benetits, materials and other costs.
Increased operating expenses in 1978 over 1977 were due principally to escalating fuel costs and increases in the aggregate costs of operation, maintenance and depreciation. Such costs accounted for approximately 92/o of the total increase. The escalating fuel costs accounted for approximately 66/o of the total increase. Increased operations expense (18'/o of the increase) was due to inflationary pressure on wages, employee benetits, materials and other costs.
Increased depreciation expense, which accounted for approximately 4'/o of the increase, was due to increases in depreciable property together with increased average annual rates in 1978.
Increases in federal income taxes accounted for approximately 2'/o of the increase, while other taxes contributed 7'/o toward the total increase.
Financial 43 Operating Income Increases in operating income are directly related to changes in operating revenues and operating expenses in their respective periods. (See the captions "Operating Revenues" and "Operating Expenses" above.)
Allowance for Funds Used During Construction AFUDC increased in 1979 over 1978 and in 1978 over 1977 due to increased construction expenditures principally associated with the Palo Verde Station as well as increased accrual rates. The Company changed its accrual rate from 9-1/2% to 11% effective January 1, 1979, and from 7-1/2% to 9-1/2% effective January 1, 1978.
AFUDC amounted to 63% and 56% of net income applicable to common stock during the years ended December 31, 1979 and 1978. The 1979 AFUDC contribution to net income is net of the effect of deferred federal income taxes on the borrowed portion of AFUDC.
Other Income Other income changed in each comparable period primarily as a result of fluctuations in interest income.
Interest Charges Interest on long-term debt increased in all periods due to the issuance of additional first mortgage bonds and a long-term promissory note during the periods. The changes in other interest in 1979 and 1978 reflect increased short-term borrowing and higher prevailing interest rates in both years.
Net Income Per Share Changes in net income per share are the result of fluctuations in net income, increases in preferred dividend requirements, and increases in common shares outstanding during the periods.
Corporate Information 44 Annual Meeting of Shareholders Common Stock Shareholders All shareholders are invited to attend the 1980 Annual The Common Stockof the Company is heldineverystate Meeting of Shareholders Monday, May 19, 1980 at 10 a.m. of the union, the District ol Columbia, some U.S. territories El Paso time, in the Oleander Room of the Rodeway inn, and many foreign countries. The number of Shareholders 6201 Gateway West, El Paso, Texas. increased from 25,633 in 1978 to 32,995 in 1979. Many of Proxies for the meeting will be solicited by the Board of our customers and other persons in the Southwest are Directors in a communication to be mailed in early April. Shareholders as evidenced by the 5,874 Shareholders in This Annual Report is not a part of such proxy solicitation Texas and New Mexico who own 19 percent of the and is not intended to be used as such. outstanding shares. Our records show that 82 percent of the Company's shareholders own less than 500 shares A copy of the Company's most recent each.
10-K Report, including the financial statements and Transfer Agents schedules thereto, filed by EI Paso Electric Company Irving Trust Company with the Securities and Exchange Commission, willbe One Wall Street made available to Shareholders without charge upon New York, New York 10015 written request to: (Common and Preferred Stock)
Theta S. Fields, Secretary The State National Bank of EI Paso El Paso Electric Company Post Office Box 1072 Post Office Box 982 El Paso, Texas 79958 EI Paso, Texas 79960 (Common Stock Only)
ILITOAOT OTTTO OAO TOLL~ EL PASO I1 CAOAILO OLLT I
ALAOOOOAOO ELECTR(C
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COMPANY LINES TAOTI IAOOO COMPANY 345 KV OTHER LINES POWER STATION E OQ rrXAS TOIIT OLIII TTII OIAlAAOTTT
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'OO 4p Service Area El Paso Electric is an investor-owned, tax.paying electric utilityoperating in Texas and New Mexico.
The Company is engaged in the generation, El Paso Electric Company transmission, distribution and sale of electric P. O. Box 982 energy. EI Paso Electric serves approximately El Paso, Texas 79960 175,000 customers in West Texas and South Central New Mexico in a service area of approximately 10,000 square miles. The service area extends from the Caballo Darn in New Mexico southeasterly to Van Horn, Texas. Equal Opportunity Employer
EL PASO ELECTRIC COMPANY P.O. Box 982 BULK RATE El Paso, Texas 79960 US. POSTAGE PAID EL PASO, TEXAS PERMIT NO. 552
HOT(CE 0 D ~
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.
DEADLINE RETURN DCPF~~+
Contml "P ~DO QaO4 of Document E
RECORDS FACILITYBRANCH
Eiighlights 19Z9
% Increase 1979 1978 (Decrease)
Property and Plant:
Total utility plant, year end $ 2,735',073,000 $ 2,288,604,000 195 "
Capital expenditures 0 468,i 16,000 405,789,000 15.4 Sales and Customers:
Total operating revenues 664,423,000 562,217,000 18.2 Total electric sales (mtvh) 11,584,898 10,912,704 6.2 Electric customers, year end 401,983 378,553 6.2 Total gas sales (m therms) 467,088 449,451 3.9 Gas customers, year end 340,343 339,803 0.2 Income, Earnings, Dividends:
Net income 121,578,000 5 106,759,000 13.9 Earnings for common stock 99,696,000 0 89,288.000 I 1.7 Average common shares outstanding 34,426,346 28,363,223 21.4 Earnings (based on average shares outstanding) 2.90 3.15 (7.9)
Dividends paid per share of common stock 1.94 1.73 12.1 Shareholders:
Common 92,396 78,275 18.0 Preferred 7,049 7,158 (1.5)
Employees, year end: 5,263 4,951 Annual Report This report is published to provide general information concerning the company and not in connection with any sale, offer for sale, or solicitation of an offer to buy, any securities.
Annual Meeting of Stockholders All stockholders are invited to attend the company's sixtieth annual meeting. It will be held at 10 a.m. Thurs-day, April 24, in the Regency Ballroom of the Hyatt Regency Hotel, 122 North Second Street, Phoenix, Arizona.
Our Cover:
The Arizona sky is ablaze with These energy needs are grow- Arizona the sun, the ultimate energy source ing at a time when energy issues MPersonal Income APS is working to harness for the have become the focal point of C3Retail Sales future. public debate and soaring infla- In Millions But while the search for new tion is pushing construction and energy alternatives goes on, Ari- operating costs higher and higher.
zona's energy needs continue to The planning, the people, the grow, reminding us of our more programs geared to meet these immediate task. And most of challenges as we begin a new Arizona's energy needs-for the decade are featured in your 1979
'80s-must be met with conven- Annual Report.
tional sources.
1975 1976 1977 1978 1979 Arizona Public Service Company, 411 North Central Avenue, Phoenix, Arizona