ML17306A319

Public Svc Co of Nm 1990 Annual Rept.

ML17306A319
Person / Time
Site:	Palo Verde
Issue date:	12/31/1990
From:	Ackerman J, Collins A PUBLIC SERVICE CO. OF NEW MEXICO
To:
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ML17306A314	List: ML17306A313 ML17306A318 ML17306A319 ML17306A320
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NUDOCS 9112170346
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Text

pi~ +g gr 192 I Dc.L8 lk Q/Z I Of Lti~t BC~GUiL<Lv'I) Ltv4/ Flfs Public Service Company of New Mexico EQQO AIL

%PORT gFefggpve create opportunities for growth.

,. PDR ADOCK 05000528 PDR

Table of Contents Mission Statement ... I Operations Summary 2 President's Letter ........................ 3 Operations Overview ........................ 6 Stockholder Information 10 Directors and Officers ll Financial Information Index 12 Form 10-K.................... Following Page 12 O prinred on reeyeled paper

%E BELIEVE TOGETHER WE CREATE OPPORTUNITIES FOR GROWTH.

OUR MISSION is to be the energy supplier of choice in New Mexico and regional markets and to provide high-quality, competitive utility products and services.

WE BELIEVE that to achieve our mission, we must work together as a team unified by our commitment to excellence and high ethical standards.

CUSTOMERS WE BELIEVE our first responsibility is to our customers. Customer satisfaction is the foundation for growth in a competitive energy environment. We are dedicated to serving our external customers'eeds by providing safe, dependable, high-quality and competitively-priced electric, natural gas, and water services. We support each other, our internal customers, and believe each work force member serves a customer.

INVESTORS WE BELIEVE that business must make a fair profit while dealing honestly and responsibly with our customers, work force members, our communities, and our environment. We are committed to generating profits that willprovide a competitive return to those who invest in the company.

WORK FORCE WE BELIEVEeach of us is responsible for his or her performance and shares responsibility for the performance of our company. Acceptance of these responsibilities is critical to the success of the company. We respect the dignity of individual work force members. Our work environment shall provide an opportunity for personal growth and satisfaction, for working together as teams, for rewarding quality performance, and for recognizing the value of diversity in our work force.

COMMUNITY WE BELIEVE we are responsible to the communities we serve. We accept our role in enhancing the of quality life by supporting civic pride, economic development, better health and education, and protection of the environment. We are dedicated to our communities through volunteer leadership and providing company resources where possible.

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This statement oi commitment was developed by the employees oi Public Savice Company of New hteaico.

I

Operations Summary Public Service Company of New Mexico and Subsidiaries 1990 1989 Change Operating revenues $ 855,134,000 $ 915,310,000 ( 6.6)

Operating expenses $ 762,693,000 $ 762,074,000 0.1 Net earnings $ 442,000 $ 82,593,000 (99.5)

Return on average common equity (1.3)% . 9.596 N/M Earnings (loss) per common share $ (0.23) $ 1.73 N/M Dividends paid per common share $ 0.00 $ 0.38 N/M Book value per common share at year-end $ 17.36 $ 18.02 ( 3.7)

Construction expenditures $ 84,236,000 $ 78,289,000 ELECTRIC:

Total kilowatt-hour sales 7,168,066,000 8,006,050,000 (10.5)

GAS:

Decatherm throughput 99,045,000 79,015,000 25.3 Nibs Not meaningful

$ Revenues(innn)tinnt)

$ 9)$

$ 776 $ 7(5

'66 0 Bette(e Retennen 0 Otn 7etennen 5 Water Retenncn Bee(tie Gnu Tetnf )Gtnnnu~ Snten Denthhettn hensufta (in b7$ nen) (in nn))teen) 79 69

'S7 S9

~ To the Stockholders:

The past year continued a period of transition for investors, work force members and customers of Public Service Company of New Mexico. This decade promises even more change. Out of this change, together, we can create opportunities for growth.

In November 1988, the company began a return to our core business and exit from non-utility operations. These activities carried over and dominated 1989 and much of 1990. This course of action is now well established.

In 1990,your company put into place the foundation for long-term shareholder value. We have established a new management team, with new leadership at the top. We created a new set of goals and guiding principles for our work force. In addition, we are moving to realize gains in efficiency through combined operations of some of our electric and gas units. Savings from this and other activities will allow us to freeze our base rates for three years. Finally, new governance practices were developed by our Board of Directors.

Those are positive steps, but there is much'more to be done. We must put behind us the turmoil and uncertainties of the past. We must seek a successful resolution of the Albuquerque franchise, and we must market our excess capacity.

In this letter, we will outline our approach for addressing these key areas of concern.

STOCKHOLDER LAWSUITS AND SPECIAL LITIGATIONCOMMITTEE ACTIONS Issues of the past continue to be a part of our present. That past includes six stockholder lawsuits, including three derivative actions.

In July 1989, following the filing of the first stockholder lawsuit, the board established a Special Litigation Committee (SLC) to conduct an independent investigation of allegations of mismanagement against present or former directors and officers. In January 1991, following 16 months of comprehensive investigation and analysis, the SLC filed its report with the appropriate courts.

The SLC concluded that it was not in the company's best interests to pursue certain of the claims in the derivative lawsuits, and directed counsel to seek dismissal of those claims. If the motions to dismiss are granted, no current directors or officers would be defendants in the remaining pending claims.

Also, at the direction of the SLC, the company filed a lawsuit against three former executives seeking return of compensation it claims was excessive and for cancellation of the company's obligation to make certain future payments.

Details are discussed in the company's report on Form IO-K, which is a part of this 1990 Annual Report.

ALBUQUERQUE FRANCHISE Issues surrounding the Albuquerque electric franchise continue to cause uncertainty in our business and we intend to resolve this issue in a way that benefits our key constituencies: our owners, our customers, the community and employees. The city is exploring three options: purchase our system, build its own system or condemn our system.

Our effort is geared toward remaining the supplier of choice for our Albuquerque customers. We have initiated actions to further the public and our customers'understanding of the issues. To date, we have not seen any analysis or proposal which satisfies us that the city's options can be implemented in a way that benefits our key constituencies. The Albuquerque franchise is further discussed elsewhere in this 1990 Annual Report.

A NEW MISSION DEFINES OUR COURSE

'::,.: CUSTOfvIMS:: ...

In 1990, we developed a new mission statement for our company that sets forth our core values and defines our future direction. With this mission in mind, we

.-,::;WE'BELIEVEou'r first respon-- outlined our objectives and identified key strategies to address them. And, we

.sibility is to our customers. developed measurements to assess our progress on these objectives. Our intent Customer satisfaction is is that clear, measurable goals willrequire accountability by every member of our

.the.-

work force.

foundation'or'. growth:in a

'-':.competitive etiergy OUR CUSTOMERS ARE OUR FOUNDATION are dedicated to-" '-

environ-';;:.,ment.-.:We Our customers are the foundation of our business. They expect and demand a

'.: Servlng our" external,'.cus- -

competitively-priced product and a high level of service. We intend to be price-competitive with other regional utilities and have set a long-term goal of offering needs. by providing ' .'omers'.

rates in the lowest one-third of regional energy suppliers. To help meet that safe, dependable, high-quality objective, we intend to freeze our current base rates for the next three years. In

, .-

arid competitively.-priced elec-

."'tric, natural gas,'and viat'er

-, --:.::services.'. We.. support each.:

- ' addition, we have targeted all major cost components to reduce our budgeted non-fuel operations and maintenance expense ten percent by 1993.

VALUE FOR OUR INVESTORS

..' 'other,.our internal costomers,,-',,'," '

Our investors have been faced with tough decisions regarding their investment

-":a'n'd'berlieve each work. force: in our company. For our investors, our goals are to reinstate a sustainable

- -. ",m'ember.'serves a 'custo'mer. dividend and improve our bond rating. The key to our success willbe our ability to manage changes in the energy market, while finding innovative ways to meet the needs of our customers. In other words, we must be competitive.

RESPONDING TO A CHANGING MARKETPLACE We believe electric industry deregulation is continuing to evolve. To meet this challenge, we'e reorganized the company to reflect a new market orientation.

Five new marketing centers have been established: Retail Electric, Retail Gas, Wholesale Electric, Wholesale Gas, and Water. This neworganization allows for consolidation of some support services and certain gas and electric functions, avoiding duplication of some tasks. Other savings may come from the efforts of a new team formed to work full-time to review all major "fixed" cost elements of our company. The charter of this team is to evaluate and take actions, if appropriate, to significantly reduce our cost structure. Another important area of emphasis issellingor marketing our excess, non-productive, or non-competitive assets.

It won't be easy, but we'e already begun.

e GOALS AND INCENTIVES FOR OUR WORK FORCE Our work force is our greatest resource. In 1990, we conducted a survey that v showed our workers want to do their jobs well. In the survey, the employees expressed concerns which we intend to address in a variety of ways, including new programs to reward individual, team and company performance.

At this writing, the company does not have a signed agreement with our employees represented by the International Brotherhood of Electrical Workers (IBEW), Local Union No. 611. These workers, numbering about 744, are currently on the job working under our last offer, made September 28, 1990.

Issues concerning the union bargaining agreement are before the U.S. District

-.;.Customer Service gepresenfatfve Ofarin D'Angefo assfsfs a, '

customer'at ournevvestfv'efglhorhqodOfficefnAlbuquerque's Court. We willcontinue to work toward the goal of resolving these issues to reach South Valley, a contract which sustains a long-term and productive relationship with those work force members represented by the IBEW.

TRUST WITHIN OUR COMMUNITY  :

For us to succeed in the future, it is imperative that we regain the trust and

.. INVESTORS credibility we once enjoyed. We are deeply committed to responsible actions and open and forthright communication.

,"WE BELIEVE., that, busine)ss",

,"

.'. ="must,.make a'fair. profit while ";,

BOARD OF DIRECTORS  : -.: dealing honestly and respon- -.'"

Your board has taken an aggressive role in form'ulating the necessary changes siblywith our,'customers, work. '; -

outlined above. In addition, a separate Chairman of the Board was designated,  :; -,,.',force members,",our.commsuni- ",,:

independent of the President and Chief Executive Officer. Further, aboard tenure policy has been set in place, with a four term (of three years each) limit.

.

: ties,.and our::eiiyironmernt'. We::,',:,'.,'-.',:

In December 1990, two board members retired, each having served, loyally, .are. committed:;to'generating -""..;

beyond their normal board retirement date. They are E.R "Ned" Wood, who  :.;:=,profits that will'provide a com-.,'.-.

retired after 22 years of service, and Russell H. Stephens, who retired after 20 years. petitive r'etur'n-.to those,who On December 20, 1990, the board announced the appointment of Vickie L ".,:- invest in the 'company.

Fisher to fill Mr. Wood's position. Ms. Fisher currently is Controller for ABQ Federal Savings Bank. The Nominating Committee is currently interviewing candidates for Mr. Stephens'osition.

Two additional board members will complete their terms in 1991 and will not stand for reelection John P. Bundrant, formerly President of Electric Operations, will have served on the board for eightyears and is not standing for reelection due to his retirement as an employee. Ashton B. Collins, Jr. will have served the full

=- k allowed term of 12 years on the board, the last year as Chairman.

We thank these board members for their combined 62 years of service. Their r

leadership in critical times, loyalty and effectiveness in setting a new course for this company will be of lasting value.

-1 Dghti r/ffrgft=T.'

CLEAR VISION To chart the future one must first understand the past and come to terms with ", 'hQ

.<f $

the present. We have done that in this most difficult year and the work we'e i begun will continue. Our mission will be to work relentlessly to address, constructively, the concerns of our customers, our investors, our work force, and our community. E 7

Then, our future will be more than a vision. It will be the reality of the Public as Service Company of New Mexico.

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Ashton B. Collins, Jr. John T. Ackerman Chairman of the Board President and Chief Executive Officer

'. AJocaf,hrokcr discusses the'cornpey'y outtootc with '".

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Februaiy 22, 1991 II t

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Operations Overview OPERATING RESULTS THE COMPANYREPORTED a net loss per common share in 1990 of 23 cents, compared to earnings of

$ 1.73 in 1989. Tlie loss experienced in 1990 primarily reflects after-tax write-offs of 46 cents per share resulting from the New Mexico Public Service Commission's (NMPSC) decision on the company's electric rate case. Also affecting our 1990 results, as compared to 1989, was the expiration of a long-term power sale contract with a regional utility. This long-term power sales contract had contributed $ 109.8 million in revenues in 1989. Details concerning results of operations are found in the company's report on Form IO-K, which is a part of this 1990 Annual Report.

NEW MARKETING CENTERS A SIGNIFICANTCHANGE in the company was the recent reorganization of the company's work force.

Five major marketing centers were developed in early January 1991 which willserve as our foundation in the years ahead. These new marketing centers are: Retail Electric, Retail Gas, Wholesale Electric, Wholesale Gas, and Water. As a result, management changes at many levels of the company occurred and consolidation of some departments was initiated. The followingsummarizes activities in the five major areas over the last year, as well as some information about the company's environmental commitment.

RETAIL ELECTRIC ELECTRIC SALES TO RETAILCUSTOMERS INCREASED in 1990 by 2.8 percent over 1989 due to increased use by residential, commercial and industrial jurisdictional customers. On April 12, 1990, the NMPSC issued its final order in the company's electric rate case. The company had proposed a $ 12.2 million rate increase and a phase-in plan relating to our investment in Palo Verde Nuclear Generating Station (PVNGS) Units I and 2. The result was mixed. While the order included Units I and 2 in rates, it disallowed the phase-in plan and also reduced our base electric rates by $ 2.9 million per year. It also resulted in a write-off of approximately $ 19 million, net of taxes.

TO PLAY A STRONGER ROLE IN NEW MEXICO'S ECONOMIC GROWTH, we offer a range of economic development rates and services to help attract new businesses and aid expansion for existing customers. These special rates, authorized by the New Mexico Legislature and approved by the NMPSC, helped attract a new General Mills cereal manufacturing plant to Albuquerque. In addition, Intel and Motorola are taking advantage of our economic development rates for their plant expansions.

THE CITY OF ALBUQUERQUE ELECTRIC FRANCHISE has been a major issue for the company throughout 1990. The Albuquerque franchise area accounts for about 47 percent of our electric revenues.

Our franchise with the city expires in early Januaty 1992. The city has stated that it must comply with Article XV, an amendment to the city charter, passed in November 1989, which would preclude the city from issuing a franchise agreement unless it is through a competitive bid process.

We believe that the franchise is basically a right-of-way agreement. We su 2

<<E <<2 further believe that the price and terms and conditions of service are conflicts subject to the jurisdiction of the NMPSC and that Article XV wit the powers delegated to the NMPSC under State law. The NMPSC has i~~4<>>WE@/EL'IEVE~:t'a'ch~o'f'-'iis:is',.':"-"~"".'";l"'9;:'sibilih;;for.',th'"',

agreed to hear this matter.

Recently, a study was commissioned on behalf of the company which erforrn'aii'ce'~'of~:'~i examined the impact of municipalization on our customers'ates. This analysis, conducted by an independent engineering firm, indicated that, should the city of Albuquerque condemn our facilities and go into the ~~-,"'":-;fh'ese'res'po'nsibilities',Is':,cr'itical~'pj::

electric utilitybusiness, our Albuquerque customers may face as much as ~~"'hj:.t'o;th'e":.siicce'ss'.of.'the".cojiipany'=-'.~~"",.

a 45 percent increase in their rates over a ten-year period. The city has '<j~j,"!vVet'ks'pe'cath'e'~digiiitJof'ii'i'd!-:.'"<<!.<

also commissioned an independent study which asserts that potential rate savings for the three municipal options could range from one to 26 percent over the same period.

We will strive for a resolution of the Albuquerque franchise matter in a A9>-."';rifoi'ia'e','":Fin:'.;oop.o'r'tu'nits>fo'r,";.,~P:"'"";:=;;~'-.';fac'tioii way which protects our property interests while assuring continued reliable service to customers in the Albuquerque area. Should the ~forq~oikiiig.",'togetlje'r',;,-';j'~

franchise expire without an agreement in place, we would continue to have the obligation, as a New Mexico public utility, to serve our Albuquerque customers. '4-",";tiiiziiii;::.fh'elva[~'e.-"of,"'diier!slh eI'n>."'"":~

RETAIL GAS 5;;."" ",,':;~. ~".,"-;:."~.~~,;~~-:-~~<;;.'-:, v~ ..-:>"~,;."

GAS COMPANY OF NEW MEXICO NOW SERVES more than 345,000 retail gas customers in 80 communities throughout New C Mexico. Our primary goal is to offer these customers competitively-priced joQ and reliable natural gas and services throughout the year. Through our winter supply planning effort, we have secured natural gas supplies during winter months, our peak season. In 1990, we continued to renegotiate and reform gas supply contracts. Through these efforts, our customers have and will continue to realize savings of hundreds of millions of dollars over the life of those contracts. These efforts have also entailed the payment of substantial settlement costs. The right to seek recovery of necessary and prudent settlement costs has been approved by the NMPSC. Yet to be decided, however, are the total recovery amount, the timetable, and exact

~W method of recovery of these costs.

t TOTALDELIVERED GAS VOLUMES in 1990 were the highest since i'/7

/II 1986 and greatly exceed 1989 totals. Of this record amount in 1990, transportation volumes accounted for 43 percent of total system  ! '

<<A throughput.

Gas operating revenues increased $ 1 9.3 million in 1990 due mainly to increased gas liquids revenues resulting from increased price and throughput, to increased gas consumption by residential and commercial py t~,+ply'sw(o!st)'d'gi!ei.'<.',.Y",s"; wwpy~gggg>PyB;-u$v4'.in ~;-:,p >g'r4 customers in the spring of 1990, and to an increase in transportation e~<<'ttt'l?qw'ei'Qperatlonsjtt!!!tbujueique>empt'ee's& ~s'h'i'!'t!nt!,qq,"'.';>~~';~JR!hijgufi1hiand Bob'!!Vjnn!an'a+and phi'isf4e'sate<<powei.'safe@<<~~-'",",

throughput.  :.:; if+",0ugotnet's 9iioujhout,the,Wes<<t~V '-Q4.-">>'~~j!;::~S Zi,~~-".":~.>M~'>

WHOLESALE ELECTRIC AS ANTICIPATED,THE DECEMBER 1989 EXPIRATION of a wholesale electric sale contract with a regional electric utilityadversely impacted our results in this important marketing center in 1990. In 1989, this contract represented $ 1.13 of the reported $ 1.73 per share earnings. Efforts to replace these revenues through long-term sales of excess capacity have been hampered by regional excess capacity and limited transmission access to the marketplace. The company has been successful in making spot market sales. We continue to pursue the sale of excess capacity and the sale of generation assets; currently, several proposals are outstanding.

To facilitate sales, we have taken the first steps in strengthening our ties to markets in the We~t by signing an interconnection agreement and an exchange of service agreement with the Salt River Project Agricultural Improvement and Power District in"Arizona. In conjunction with these agreements, the company is pursuing construction of the Ambrosia-Coronado Line, which willinterconnect our western New Mexico system with the northern Arizona system. Preliminary public meetings on proposed routes have begun, but construction will not proceed until all environmental and regulatory approvals have been obtained. This project would provide vital access to western wholesale markets in southern California and Nevada.

ANOTHER TRANSMISSION PROJECTwhich we are pursuing is the Ojo Line Extension Transmission Project, which would be a new 345-kV transmission line through the Jemez Mountains. The new line would greatly improve the reliability of our system for northern New Mexico customers.

PALO VERDE NUCLEAR GENERATING STATION (PVNGS) made history in 1990. The facility operated at 62 percent average capacity factor in 1990, a dramatic improvement over 1989's operating average of 23 percent. The national average capacity factor for nuclear generating stations in 1989 was 63 percent. PVNGS has operated at an average capacity factor of 91 percent since Units I and 2 were returned to service in July 1990.

The U.S. Nuclear Regulatory Commission (NRC) found in its annual review of the plant that improvements had been made in its management and operations and that the facility generally was performing well after recent difficulties. On the other hand, in 1990 the NRC assessed two fines at PVNGS associated with certain violations of NRC requirements.

WHOLESALE GAS INCREASED UTILIZATIONOF GAS ASSETS enabled us to widen the market for New Mexico resources by transporting natural gas produced in-state to California and other markets. The gas division continued to rely on New Mexico gas wells for nearly all of its supplies."Off-system" transportation and spot sales accounted for 33 percent of the year's total gas throughput, compared to 25 percent in 1989. These accomplishments were the result of contract reformation, marketing our system to producers connected to our facilities, and attracting new supplies through competitive services.

A project we are pursuing is the Rio Puerco Compression project, which would add a maximum of 11,900 horse power to our transmission line from the San Juan Basin to interconnects with interstate pipelines. The new compression should greatly enhance our ability to move gas from the San Juan Basin into the interstate pipeline grid and should provide additional transportation revenues.

WATER COÃ'MUNITY, SANGRE DE CRISTO WATER COMPANY total revenues for 1990 were $ 11.7 million, a decline from 1989 of about $ 400,000. Water  ;:.',': WE:::BELIEVE"...we are, r,e-..-:.::-.

consumption in Santa Fe declined from 1989's record level by almost 6 ';;:;-"..';sp'onsible,', to'h'e'ommunities'-.: .",;.-;:

percent. This reduction was due to 1990's normal weather conditions as =:-.we:;scerye. We accept orur"r'o1e:,,'.'

opposed to 1989's dry conditions which increased consumption.  ;., in,enhancinLg th'e:quality of life

.: .: bysupportingcivicpride,eco- .

PROTECTING OUR ENVIRONMENT  ::-,:.,'notmic developmLent; bFetter' THE ENVIRONMENT continues to be of major concern to our

,.-';:health and educatioLnI'and pro-.

;;-tection'.;.of- 'the',em'yIronmeLnt.;-,- ':-':

company, as well as our customers. From supporting grass roots environmental groups, like Tree New Mexico, who intend to plant 16  :".'-."'-;We'aare dedIC*atedr tO.OurCO'm-.: .';:","

million trees in our state by the year 2000, to supporting on-going  :

"'munities'. thro'ugh 'volunteer:;;.:

research on electric and magnetic fields (EMF), the company makes an I -.leadership and:--providing investment in the future. ,";-'-'.company resour'ces where The 1990 amendments to the Clean Air Act are anticipated to have a ".';

!, ',,;.'possible.';

minimal impact on the company with respect to sulfur and nitrous oxide -;,.':'":.'lL emissions due to the existing air pollution equipment at San Juan Generating Station and Four Corners Generating Station.

The company has invested in air pollution control since the early 1970s. r~

In 1990, our customers paid 11 cents of evelyn dollar of their electric bills I

for environmental controls at our generating plants. Investment in air and water pollution control at our coal-fired plants has reached more than

$ 400 million.

t' Environmental concerns also led the gas company to ask the NMPSC 1

L L

to authorize several new rate classes and two experimental rates designed h to offer incentives to customers. These incentives, approved in August , L 1990, are offered in the area of gas air conditioning and natural gas r ,F r L vehicle usage. In addition, the gas company is currently involved in a  !

natural gas vehicle pilot program with several customers.

The past year has seen a growing concern by customers about EMFs.

Scientific and medical studies are still examining possible linkages between EMFs and health problems. The company provides EMF L readings for customers and has developed a company task force to assess and monitor various on-going industry-wide studies. This task force provides presentations to company and public groups while keeping abreast of current research findings. In addition, we support scientific research through our affiliation with the Electric Power Research Institute.

As a company with concerns for the environment, we intend to be part of the solution. t "Slap ~, ErecIrtNe Dlredor ol the focus Forint&I','inc,.':irid eiiiplcIIee Jetl Aragon Itrorlcwith hig school sopoinores.-

Stockholder Information ANNUALMEETING The annual meeting of Public Service Company of New Mexico stockholders will be held in the auditorium of the UNM Continuing Education Center, 1634 University Boulevard N.E., Albuquerque, New Mexico on May 23, 1991 at 9:30 a.m. Mountain Daylight Time. Stockholders are urged to attend; however, whether or not attending, proxies should be marked, signed, dated and returned promptly. A proxy statement and form of proxy will be mailed to stockholders on or about April 15, 1991.

STOCKHOLDER INFORMATION Stockholders may obtain information relating to their share position, dividends, transfer requirements, lost certificates, and other related matters by telephoning Stockholder Services (numbers given below).

Stockholders must provide their Tax Identification Number, the name(s) in which their shares are registered and their address of record when they request information. This service is available to all stockholders Monday through Friday 7:30 a.m. to 5:00 p.m. Mountain Time Zone.

ABOUT YOUR SECURITIES AND RECORDS The common stock of the company is listed on the New York Stock Exchange and is also traded on the Pacific antt Philadelphia Stock Exchanges. A consolidated quote is published in numerous daily stock tables carried by many newspapers. The ticker symbol for the common stock is PNM. The most common newspaper symbol is PSvNM.

Public Service Company of New Mexico is the sole transfer agent and registrar for our common and preferred stock. The company maintains all corporate stockholder records.

TAX REPORTS ON PREFERRED DIVIDEND INCOME Public Service Company of New Mexico is required by the Internal Revenue Service to report the total amount of stockholder dividends paid to each stockholder during the precedingyear. Information supplied by the company was mailed to preferred stockholders in January 1991 on Form 1099 or 1042. Common stockholders were not paid a dividend in 1990; therefore, a 1099 or 1042 was not mailed to common stockholders or reported to the Internal Revenue Service. Dividends paid to preferred stockholders in 1990 are 100 percent taxable as ordinal income.

The Internal Revenue Service may require the company to begin 20% backup withholding from dividends of stockholders who fail to provide a Taxpayer Identification Number (TIN), or provide an incorrect number, or when the Internal Revenue Service has notified the company that a stockholder has underreported income. Verifythe TINwe have on record foryour account by looking atyour dividend check stub. Ifthe TIN is incorrect, notify the Stockholder Records Department and a Form W-9 will be sent to you.

INQUIRIES-ADDITIONALINFORMATIONWRITE OR CALL Public Service Company of New Mexico Alvarado Square Albuquerque, New Mexico 87158 I (800) 545-4425 Investor Relations Stockholder Relations Stockholder Services (Institutions 6 Analysts) (Stockholders 6i Brokers) (Stockholders 6 Brokers)

Frank Craig (505) 848-2366 Ernie C'deBaca (505) 848-2806 Yvonne Johnson (505) 848-2054 10

Directors and Officers BOARD OF DIRECTORS John T. Ackerman 4,5,6 Vickie L Fisher Arturo G. Ortega 3,4,6 Director since 1990, age 49 Director since 1990, age 44 Director since 1985, age 70 President and Chief Executive Officer Controller, ABQ Federal Savings Bank Attorney Public Service Company of New Mexico A!buquerque, NM Albuquerque, NM John P. Bundrant 2,4 Joyce A. Godwin 2,3,6 Robert R Rehder 1,3,5 Director since 1983, age 58 Director since 1989, age 48 Director since 1975, age 60 Retired former President, Heclric Operations Vice President, Southwest Professor of Management Public Service Company of New hlexico Community Health Services The Robert O. Anderson Graduate Albuquerque, Nhl Schools of htanagement Ashton B. Collins, Jr. 4 Universily of New Mexico Chairman of the Board Claude E Leyendecker 1,5,6 Albuquerque, Nhl Director since 1979, age 58 Director since 1970, age 68 President and Chief Executive Officer Chairman of the Board, United 1 htember ol Audit Committee Reddy Communications, lnc., New Mexico Bank at Mimbres Valley 2 htember of Compensahon Committee a management consulting and services firm Deming, NM 3 htember of Corporate and Public Albuquerque, NM Responsibility Committee 4 Member ol Executive Committee 5 htember of Finance Committee 6 htember of Nominating Committee OFFICERS Ashton B. Collins, Jr. Billy D. Lackey David J. Davis Chairman of the Board, age 58 Vice President and Corporate Controller Vice President, Metropolitan Operations, (17), age 54 Gas Operations, (17), age 46 John T. Ackerman President and Chief Executive Officer Jerty L. Godwin Terry D. Rister (19), age 49 Senior Vice President, Vice President, Regional Operations, Wholesale Marketing and Power Supply Gas Operations, (19), age 39 William M. Eglinton (10), age 48 Executive Vice President and Chief Operating Alfonso R. Lujan Officer, Hectric and Water Operations Edwin A. Kraft Vice President, Regional Customer (20), age 43 Vice President, Senices, (18), age 42 Central Rio Grande Customer Services James B. Mulcock, Jr. (20), age 42 Milo L McGonagle Senior Vice President, Corporate Affairs Vice President, and Secretary, (18), age 51 Ellen A. Wilson Industrial Development Services Vice President, Human Resources (3), age 60 Max H. Maerki (12), age 43 Senior Vice President and Robert M. Wilson Chief Financial Officer, (7), age 51 Lawrence D. Ratliff Controller and Assistant Secretary, Vice President, Electric and Water Operations William J. Real Power Production, and Plant Manager (13), age 45 Executive Vice President, Gas Operations (16), age 44 (12), age 42 Andrew R Michael E Slota and Assistant Secretaty, Vogt'ontroller M. Phyllis Bourque Vice President, (17), age 44 Gas Operations, (3), age 40 Senior Vice President, Gas Management Services, (3), age 43 D.A. "Zan" James Karen A. Knight Vice President, Strategic Services Assistant Secretary, (16), age 51 Judith A. Zanotti (4), age 47 Senior Vice President, Mitchell J. Marzec Human Resources and Communications John Renner Treasurer, (15), age 43 (5), age 52 Vice President, Processing and San Juan Operations, Gas Operations, (4), age 62

( ) Years of service with the company or a Jeff E Sterba company controlled affiliate. Ages, years of Senior Vice President, Retail Hectric James A. Hunter service and committee assignments as ol Feb-and Water Services, (13), age 35 Vice President, htarketing, (4), age 49 ruary 19, 1991.

Financial Information Index Located in Form lO.K Stock/Dividend Data . ~ ~ ~ ~ ~ ~ ~ 22 Selected Financial Data 23 Management's Discussion and Analysis of Financial Condition and Results of Operations ~ ~ ~ ~ ~ ~ ~ 24 Management's Responsibility for Financial Statements ~ ~ ~ ~ ~ ~ ~ 32 Independent Auditors'eport . ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ \ 33 Consolidated Statement of Earnings (Loss) . . 34 Consolidated Statement of Retained Earnings (Deficit) . ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 35 Consolidated Balance Sheet . . 36 Consolidated Statement of Cash Flows . ., 37 Consolidated Statement of Capitalization ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 0 38 Notes to Consolidated Financial Statements ... 39 Consolidated Financial Statement Schedules ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 55 Quarterly Operating Results ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 62 Comparative Operating Statistics ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 63 12

UNITED STATES SECURITIES 'AND'EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM K (Mark One)

H ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACl'F 1934 fFEE REQUIRED)

For the Fiscal Year Ended December 31, 1990 OR 0 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRFD)

For the transition period from to Commission File Number 1-6986 Public Service Company of New Mexico (Exact name of registrant as specified in its charter)

New Mexico 85-0019030 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)

Alvarado Square 87158 Albuquerque, New Mexico (Zip Code)

(Address of principal executive offices)

Registrant's telephone number, including area code: (505) 848-2700 Securities registered pursuant to Section'12(b) of the Act:

Title of each class Name of each exchange on which registered Common Stock, $ 5.00 Par Value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act:

(Title of Class)

Cumulative Preferred Stock ($ 100 stated value and without sinking fund) comprised of the following series:

1965 Series, 4.58% 8.48% Series, 8.80% Series 8.75 le Cumulative Preferred Stock ($ 100 stated value and with,a periodic sinking fund)

(

Indicate by check mark, whether the registrant-(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. YES ~ NO The total number of shares of the Company's Common Stock outstanding as of February 1, 1991 was 41,774,083. On such date, the aggregate market value of the voting stock held by non-affiliates of the Company, as computed by reference to the New York Stock Exchange 'composite transaction closing price of $ 8s/s per share, reported by the Wall Street Journal, was $ 349,274,752.

DOCUMENTS INCORPORATED BY REFERENCE Portions of the following document are incorporated by reference into the indicated part of this report:

Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A relating to the annual meeting of stockholders to be held on May 23, 1991 PART III.

TABLE OF CONTENTS Page GLOSSARY nl PART I ITEM 1. BUSINESS . 1 THE COMPANY ELECTRIC OPERATIONS.................. 1 Service Area and Customers............ ~... 1 Power Sales 2 Sources of Power 3 Coal-fired Plants 3 Nuclear Plant 3 Fuel and Water Supply................... 5 C oal e ~ ~ ~ 5 Natural Gas 6 Nuclear Fuel................'..... ~ .. ~ ~ 6 Water 6 NATURAL GAS OPERATIONS.............. ~ 7 Acquisition of Natural Gas Properties 7 Gas Company of New Mexico Division........ 7 Natural Gas Supply . ~...... ~....

~ ~ . ~ ~ ~ ~ 8 Gathering Company.................. 8 Processing Company..................'atural Gas Sales RATES AND REGULATION

........ ~ ~ ~ . ~ . ~ ~ ~ ~ ~ ~ ~

10 9

9 Electric Rate Case PVNGS Cost Investigation...........

~.................~............... 0 ~

10 11 Decertification of Electric Generating Plant .. 11 SDG&E Sales Agreement.............. 12 Other Electric Matters 12 Natural Gas General Rate Case....

Natural Gas Supply Matters..........................

13 13 Matters..............,..............

~ ~ ~

Other Natural Gas 14 ENVIRONMENTAL FACTORS......... 14 NON-UTILITYSUBSIDIARY OPERATIONS 14 ITEM 2. PROPERTIES.................... 15 ITEM 3. LEGAL PROCEEDINGS 17 SHAREHOLDER LITIGATION 17 Securities Law-Related Litigation... 17 Shareholder Derivative Litigation and the Special Litigation Committee ~ ~ 18 PVNGS WATER SUPPLY LITIGATION 19 SAN JUAN RIVER ADJUDICATION 20 DIVERSIFICATION CLAIMS.... 20 NATURALGAS SUPPLY LITIGATION 21 OTHER PROCEEDINGS....... 21 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS... 21 SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE COMPANY 21

Page PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS . ~..........

DATA..........

22 ITEM 6. SELECTED FINANCIAL ~ 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . 24 ITEM 8. FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA........ 32 ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIALDISCLOSURE............. 65 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY 65 ITEM 11. EXECUTIVE COMPENSATION 65 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 65 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ,65 P'ART IV ITEM 14. EXHIBITS, FINANCIALSTATEMENT SCHEDULES, AND REPORTS ON FORM 8 K 65

~.......'....

o ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~

SIGNATURES.................. 82

GLOSSARY AFUDC......... Allowance for funds used during construction

~ Arizona Public Service Company BHP-Utah .. .' BHP-Utah International, Inc.

BTU British Thermal Unit Century. ~.......

decatherm.......

Century Power Corporation 1,000,000 BTUs DOE United States Department of Energy EIP... . 'astern Interconnection Project El Paso......... El Paso Electric Company EPA... United States Environmental Protection Agency EPNG El Paso Natural Gas Company FASB.......... Financial Accounting Standards Board FERC.......... Federal Energy Regulatory Commission Gathering Company Sunterra Gas Gathering Company, a wholly-owned subsidiary of the Company, GCNM......... Gas Company of New Mexico, a division of the Company Kwh..... ~.... Kilowatt Hour Los Alamos The County of Los Alamos, New Mexico mcf e ~ ~ ~ ~ ~ ~ ~ ~ ~ Thousand cubic feet Meadows...... ~ . Meadows Resources, Inc., a wholly-owned subsidiary of the Company M-S-R M-S-R Public Power Agency, a California public power agency MW Megawatt Mwh..........

NMEIB.........

Megawatt Hour New Mexico Environmental Improvement Board NMIEC......... New Mexico Industrial Energy Consumers NMPSC New Mexico Public Service Commission NRC United States Nuclear Regulatory Commission PGAC........'.. GCNM's Purchased Gas Adjustment Clause Processing Company . Sunterra Gas Processing Company, a wholly-owned subsidiary of the Company PVNGS......... Palo Verde Nuclear Generating Station Salt River Project... Salt River Project Agricultural Improvement and Power District SCE........... Southern California Edison Company SDGErE......... San Diego Gas and Electric Company SJCC .. ~.......

SJGS..........

~ ~

~ ~

~

~

San Juan Coal Company San Juan Generating Station Union....

SPS ...........

Southern Sunbelt.........

Southern Union Company Southwestern Public Service Company Sunbelt Mining Company, Inc., a wholly-owned subsidiary of the Company throughput.... Volumes of gas delivered, whether or not owned by GCNM or Gathering Company Tucson............. Tucson Electric Power Company uncommitted capacity.... Capacity in excess of that included in New Mexico jurisdic-tional rates or otherwise required to serve firm system load WSCC ~ Western System Coordinating Council WSPP ~ Western Systems Power Pool

PART I ITEM 1. BUSINESS THE COMPANY Public Service Company of New Mexico was incorporated in the State of New Mexico in 1917 and has its principal offices at Alvarado Square, Albuquerque, New Mexico 87158 (telephone number 505-848-2700). The Company is a public utility engaged in the generation, transmission, distribution and sale of electricity and in the gathering, processing, transmission, distribution and sale of natural gas within the State of New Mexico. The Company also owns facilities for the pumping, storage, transmis-sion, distribution and sale of water in Santa Fe, New Mexico.

The total population of the area served by one or more of the Company's utility services is estimated to be approximately one million, of which 54% live in the greater Albuquerque area.

For the year ended December 31, 1990, the Company derived 63.3% of its utility operating revenues from electr'ic operations, 35.3% from natural gas operations and 1.4% from water operations.

As of December 31, 1990, the Company employed 3,187 persons.

Financial information relating to amounts of revenue and operating income and identifiable assets attributable to the Company's industry segmerits is'contained in note 13 of the notes to consolidated financial statements.

ELECTRIC OPERATIONS Service Area and Customers The Company's electric operations serve four principal markets. Sales t'o retail customers and sales to firm-requirements wholesale customers, sometimes referred to collectively as "system" sales, com-prise two of these markets. The third market consists of other contracted sales to utilities for which the Company commits to deliver a specified amount of capacity (measured in MW) or energy (measured in MWh) over a given period of time. The fourth market consists of economy interchange sales made on an hourly basis to utilities at fluctuating, spot-market rates. Sales to the third and fourth markets are sometimes referred to collectively as "off-system" sales. The Company's success in marketing its uncommitted capacity largely depends on its ability to compete in the off-system markets on the basis of availability, price and deliverability, and on its ability to market electricity to retail customers.

The Company provides retail electric service to a large area of north central New Mexico, including the cities of Albuquerque, Santa Fe, Rio Rancho, Las Vegas, Belen and Bernalillo. The Company also, provides retail electric service to Deming in southwestern New Mexico and to Clayton in northeastern New Mexico. As of December 31, 1990, approximately 292,000 retail electric customers were served by the Company, the largest of which accounted for 3.8% of the Company's total electric revenues for the year ended December 31, 1990.

The Company holds long-term, non-exclusive franchises of varying durations for electric service in all incorporated communities where it is necessary to do so in order to carry on its electric utility business as it is now being conducted. These franchises are essentially agreements that permit the Company to use municipal property for electric service rights-of-way. The Company believes that while the expiration of a franchise may terminate such permission, the Company remains obligated under state law to provide service to customers in the franchise area. The Company endeavors to renew franchises as they expire. With respect to gas operations, the Company has in the past operated in certain communities without a current franchise. For a discussion of matters related to the renewal of the electric franchise for the City of Albuquerque, see PART II, ITEM 7 "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERA-TIONS CURRENT ISSUES FACING THE COMPANY The Retail Electric Market".

In 1990, the Company furnished firm-requirements wholesale power in New Mexico to the cities of Farmington and Gallup, Texas-New Mexico Power Company and Plains Electric Generation & Trans-mission Cooperative, Inc. ("Plains" ). Plains has notified the Company that it intends to terminate its firm-power purchase contract with the Company, which contract provides 25 MW to Plains until August 1991 and 10 MW thereafter until terminated. This termination could be effective as early as October 1992. No firm-requirements wholesale customer accounted for more than 2.1% of the Com-pany's total electric revenues for the year ended December 31, 1990.

Power Sales For the years 1985 through 1990, retail KWh sales have grown at a compound annual rate of 4.4%.

However, retail and firm-requirements wholesale power sales have been lower than had been antici-pated at the time the Company committed in the 1970's to construct new generating units. As a result, the Company has substantial uncommitted capacity and must rely on off-system sales to try to recoup the cost of this capacity. Substantial portions of the Company's off-system sales are made in the economy interchange market at prices which average only slightly above incremental costs. The Company's system and off-system sales and system peak demands in summer and winter are shown in the following tables:

ELECTRIC SALES BY MARKET ~

(Thousands of dollars) 1990 1989 1988 1987 1986 Retail....... $ 427,505 $ 413,644 $ 404,863 $ 387,542 $ 363,748 Firm-requirements wholesale...... 25,739 27,679 27,554 32,312 34,431 SPS contract (see "Sources of Power" ) 109,773 100,006 91,064 72,090 Other contracted sales.......... 70,640 52,804 62,525 44,351 42,704 Economy interchange*.......... 21,541 4,267 6,903 4,642 6,369

• Economy interchange sales are net of economy purchases and are accounted for as a reduction of fuel and purchased power expense.

ELECTRIC SALES BY MARKET (Megawatt hours) 1990 1989 1988 1987 1986 Retail..................... 5,048,830 4,909,592 4,684,588 4,447,798 4,233,296 Firm-requirements wholesale....... 376,040 397,792 362,934 396,297 471,676 SPS contract (see "Sources of Power" ) 1,618,694 1,577,950 1,585,639 1,482,189 Other contracted sales..........,. 1,743,196 1,079,972 1,567,712 508,990 540,369 Econoiny interchange*........'... 1,183,489 289,432 356,681 226,941 349,689

• Net of economy purchases SYSTEM PEAK DEMAND*

(Megawatts) 1990 1989 1988 "1987 1986 Summer . 1,051 1,006 956 916 916 Winter/' ~ ~ ~ ~ ~ ~ 897 896 862 880 838

• System peak demand relates to retail and firm-requirements wholesale markets only.

(For the winter season beginning in the year noted.

During 1990, the Company's only major off-system sale contract in effect was with SDG&E. In November 1985, the Company and SDG&E executed an agreement providing for SDG&E to purchase 100 MW from the Company for the period May 1988 through April 2001. (See "RATES AND REGU-LATION SDG&E Sales Agreement".) Energy sales under this agreement, which commenced in June 1988,"'ccounted for 4.1% of the Company's total 1990 MWh sales and 6.3% oE total -1990 electric revenue's.

For discussion of the competitive conditions affecting off-system sales and of negotiations of sales contracts, see PART II, ITEM 7 "MANAGEMENT'SDISCUSSION AND ANALYSISOF FINAN-CIAL CONDITION AND RESULTS OF OPERATIONS CURRENT ISSUES FACING THE COMPANY The Wholesale Power Market".

Sources of Power The total net generation capacity of facilities owned or leased by the Company was 1,591 MW as of December 31, 1990, comprised of generation from a nuclear plant, located in Arizona, and from two coal-fired plants and two gas/oil-fired plants, located in New Mexico. This amount does not include capacity purchases, totalling 109 gdW, from other participants in SJGS Unit 4. The two gas/oil-fired plants are used for peaking capacity and transmission support requirements. In addition, the Company is interconnected with various utilities making possible economy interchanges and mutual assistance in emergencies.

The Company and SPS entered into an agreement in 1982 to provide for a transmission intercon-nection'between the two utilities. The interconnection agreement required the purchase by SPS of energy at a rate of 200 MW per hour from 1985 through 1989. This portion of the contract expired on December 31, 1989. The agreement furth'er requires the Company to purchase from SPS up to 100 MW of interruptible power from June 1991 to 1995 and up to 200 MW of interruptible power from 1995 through 201'1. The Company may reduce its purchases under the contract by 25 MW annually begin-ning in 1994 and'upon three-years'otice.

Coal- fired Plants S JGS is located in northwestern New Mexico, and consists of four units operated by the Company.

Units 1, 2, 3 and 4 at SJGS have net rated capacities of 316 MW, 312 MW, 488 MW and 498 MW, respectively. S JGS Units 1 and 2 are owned on a 50% shared basis with Tucson, Unit, 3 is owned on a 50% shared basis with Century and Unit 4 is owned 55.525% by the Company, 8.475% by the City of Farmington, 28.8% by M-S-R and 7.2% by Los Alamos. (See PART II, ITEM 7 "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERA-TIONS CURRENT ISSUES FACING THE COMPANY Tucson Electric Power Company.") The Company's net aggrega'te ownership in SJGS is 835 MW. In connection with the Company's sale to M-S-R in December 1983 of a 28.8% interest in SJGS Unit 4, the Company agreed to purchase under certain conditions 73.53% (105 MW) of M-S-R's capacity through April 30, 1995, an amount which may be reduced by M-S-R under certain conditions. The Company also agreed to market the energy associated with the remaining 26.47% portion of M-S-R's capacity through April30, 1995. This market-ing arrangement may be terminated by M-S-R at any time upon 30 days notice. In connection with the Company's sale to Los Alamos in July 1985 of a 7.2% interest in SJGS Unit 4, the Company agreed to purchase'capacity and associated energy of up to 4 MW beginning January 1, 1988 and ending December 31, 1990.

The Company also owns 192 MW of net rated capacity derived from its 13% interest in Units 4 and 5 of the Four Corners plant located in northwestern New Mexico on land leased 'from the Navajo Nation and adjacent to available coal deposits. Units 4 and 5 at the Four Corners plant are jointly owned with FACE, APS, Salt River Project, Tucson and El Paso and are operated by APS.

Nuclear Plant The Company's Interest in PVNGS. The Company is participating in the three 1,270 MW units of PVNGS, also known as the Arizona Nuclear Power Project, with APS (the operating agent), Salt

aso,,

River Project, El.Paso SCE, Southern

. ou California Public Power Authority and The Department of Water and Power of the City of Los Angeles. The Company as a with its interest in Units 1 and 2 held under leases. The Company's ownership and lease o in eres in PVNGS amounamount too 130 MW per unit, or a total of 390 MW. PVNGS Units 1, 2 and 3 were ec are in commercial service by the Company in January 198, m er 1986 and January 1988, respectively.

6 Seep tember Commercial operation of PVNGS requires full power operating licenses which were gran y e, e licenses is sub ect to NRC regulation. For additional discussion relating to the o eration of'PVNGS, see PART II, ITEM 7 "MANA NAGEMENT'S DISCUSSION AND ANALY-SIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS CURRENT ISSU ES FACING THE COMPANY PVNGS".

In eleven transactions consumma te d in 1985 and an 1986 the Company sold and leased back its entire 10.2% interest in PVNGS Units 1 and 2, together with portions of the Company's undivided in eres in certain PVNGS common facilities. In each transaction, the Company so in eres under an owner trust agreement with an institutional1 e q uity investor. The owner trustees, as lessors, lease d th ein teres ts to th e Company under lease agreements having initial terms expiring January 2015 (wit

(

respec t to th e Unit11eases) lease provi'd es ann oop tion ni ion to thee Company o

or January15,2016 (with respect to the Un'.it 2 leases). Each to extend the term of the lease as well as'a rep urchase o p tion.

The aggregate lease payments for the Company's PVNGSS leases eases are appa roximately $ 84.6 million per year. Throughout the terms of the leases, the Company an continues to have full and exclusive au ori y an d responsi 'b'1't i i y too eexercise and perform all of the rights and duties of a participant in un er the Arizona uc 1 ear P ower Project Participation Agreement and retains the,,exclu i ri'g ht to sell and elusive dispose of its 10.2% share of the power and energy generated by PVNGS Units 1 an and 2. The Company f

also retains responsi b'1i ity orpayyment,of its share of all taxes, insurance premiums, operating and maintenance cos, ts cos ts re 1 a ted to capital improvements and decommissioning an a o costs and expenses associai ted wi with thee leased e facilities. Each lease describes certain even vents the f h'ch occurrence o w ic could cou require the Company to, among other things, ( 1)) pay a thee lessor e and the e uit investor, in return for such investor's interest in PVNGS, cash in the mount am p rovided in the lease, which amount, primarily because of certain tax conse q uences, would exceed such equity inves-tor's outstanding equity investment, and (2) assume debt obligations relating to the PVN ease. e Company believes the probability of such events occurring to be remote. The PVNGS leases are classified as operating leases in accordance with generally accepted accounting principles.

Decommissioning un ding.. Thee Company om has a program for funding its share of decommission-ing costs for PVNGS. Under this program, the Company will make a series of annua eposi external trust fund over the estimated useful life of each uni, unit anand the trust funds willbe invested under lan which allows the accumulation of funds largely on a tax-deferred basis throughh the use oof life sis throu ie

'h insurance policies on employees. The Company began un ing i s are o e PVNGS Units 1 and 2 in 1987 and Unit 3 in 1988. The annual trust deposit, currently set at per unit, is based upon,t h e C ompany an 'ss 10.2%

. a of total estimated PVNGS decommissioning, costs 0 sshare d t ust funds over time. Based on current assessm'ents, e us

)

insurance policies will necessitate the'Company prefunding,certain annual trust deposits sits for o the a re ate amount of approximately,$ 4.8 million for the years 1991 through 1993. The annual funding amount is subject to periodic a jus tmen t for c h annges in decommissioning cost estimates and earnings of the trust fund. The Company's share of PVNGS decommissioning costs is present y estima e, in 1990 dollars, at approximately $ 81.4 million.

PVNGS Liability and Insurance Matters. The PVNGS participants have insurance for public liability payments resulting from nuclear energy hazards r to the current $ 7.8 billion limit of liability deral law. This otential liability is covered by primary liability insurance provid e d b y commercial insurance carriers in the amount off $ 200 mi million and thee balance ion an a by an industry-wide retrospective assessment program. The maximum imum as assessment per p reactor under the retrospec tive rating program for each nuclear, incident occurring at an a y nuclear p ower plant in the Unite ta s is approximately $ 66 million, subject to an annual limit of $ 10 million per incident. Based upon t e

Company's 10.2% interest in the three PVNGS units, the Company's maximum potential assessment per incident is approximately $ 20 million, with an, annual payment limitation of $ 3 million. The insureds under this liability insurance include the PVNGS participants and "any other person or organization with respect to his legal responsibility for damage caused by the nuclear energy hazard."

The PVNGS participants maintain "all-risk" (including nuclear hazards) insurance for nuclear property damage to, and decontamination of, property at PVNGS in the aggregate amount of $ 2.325 billion as of January 1, 1991, a substantial portion of which must first be applied to decontamination.

The Company has also secured insurance against a portion of, the increased cost of generation or purchased power resulting from certain accidental outages of any of the PVNGS units.

Fuel and Water Supply The percentages of the Company's generation of electricity (on the basis of KWh) fueled by coal, nuclear fuel and gas and oil, and the average costs to the Company of those fuels (in cents per million BTU), during the past five years were as follows:

Coal Nuclear Gas and Oil Percent of Average Percent of Average Percent of Average Generation Cost Generation Cost Generation Cost 1986 1987

. '. 85.6 79.7 121.3-141.1 13.2 20.0 76.0 73.3

'.2 0.3 216.6 246.6

...-........... ".'. '0.0

~

'9.6 75.9 0.4 320.9 1988

............ 142.5 76.3 0.4 1989 1990 .............. 89.3 74.6 139.3 152.0

~ 10.3 25.2 73.1 0.2 364.1 310.3 Althou'gh not included in the above table, start-up and test energy was available from PVNGS in 1986 and 1987.

The estimated generation mix for 1991 is 75.2% coal, 24.3% nuclear and .5% gas and oil. Due to locally available natural gas and oil supplies, the utilization o$ locally available coal deposits and the generally abundant supply of nuclear fuel, the Company believes that adequate sources of fuel are available for its generating stations.

Coal The coal requirements for S JGS are being supplied by S JCC, a wholly-owned subsidiary of BHP-Utah, from certain Federal, state and private coal leases under a coal sales agreement, pursuant to which SJCC-will supply processed coal for operation of SJGS until 2017. BHP-Utah guaranteed the obligations of SJCC under the agreement, which contemplates the delivery of approximately 147 million tons of coal during its remaining term. Such amount would supply substantially all the requirements of S JGS through approximately 2017. The primary sources of coal are a mine adjacent to S JGS and a mine located approximately 25 miles northeast of S JGS in the La Plata area of northwest-ern New Mexico. The average cost of fuel, including ash disposal and land reclamation costs, for S JGS for the years 1988, 1989 and 1990 was 153.9 cents, 145.9 cents and 161.9 cents, respectively, per million BTU ($ 30.04, $ 28.80 and $ 32.38 per ton,'espectively).

The Four Corners plant is supplied with coal under a fuel agreement between the owners and BHP-Utah, under which BHP-Utah agreed to supply all the coal requirements for the life of the plant.

BHP-Utah holds a long-term coal mining lease, with options for renewal, from the Navajo Nation and operates a strip mine adjacent to the Four Corners plant with the coal supply expected to be sufficient to supply the units for their estimated useful lives. The average cost of fuel, including ash disposal and land reclamation costs, for the years 1988, 1989 and 1990 at the Four Corners plant was 101.4 cents, 108.3 and 112.2 cents, respectively, per million BTU ($ 17.70, $ 18.96 and $ 19.92 per ton, respectively).

Natural Gas The natural gas used as fuel for the Company's Albuquerque electric generating plant is delivered by GCNM. (See "NATURALGAS OPERATIONS".) In addition to rate changes under filed tariffs, the Company's cost, of gas increases or decreases according to the average cost of gas supplied by GCNM or other sources.

Nuclear Fuel The nuclear fuel cycle includes services performed by others. These services and the dates through which they are under contract for PVNGS are as follows:

Units 1 and 2 Unit 3 Mining and milling of uranium concentrate 1997(a) 1997(a)

Conversion of uranium concentrate to uranium hexafluoride 1994(b) 1994(b)

Enrichment of uranium hexafluoride 1999(c) 1999(c)

Fabrication of fuel assemblies 1996(d) 1998(d)

Storage and disposal of spent fuel.....,............... (e) (e)

(a) The Company and the PVNGS participants have obtained quantities of uranium concentrate anticipated to be sufficient, ifcertain contract options are exercised, to meet operational require-ments through 1997. The Company and the PVNGS-participants are currently purchasing ura-nium in the spot market. Spot purchases on the open market willbe made as appropriate in lieu of any uranium that might be obtained pursuant. to the contract options.

(b) The participants have contracted for a substantial portion of conversion services required through 1994.

(c) DOE has contracted to provide enrichment services to the three PVNGS units.

(d) Existing contracts willprovide fuel assembly fabrication services for each of the PVNGS units for at least the first ten years of operation and if options are exercised, for approximately fifteen additional years of operation.

(e) PVNGS is designed to permit on-site storage of spent fuel discharged from normal operation of all three PVNGS units through at least the year 2003. Pursuant to the Nuclear Waste Policy Act of 1982, APS, on its own behalf and on behalf of the other participants, entered into a contract with the DOE for spent fuel disposal. Under the agreement, DOE is responsible for the ultimate disposition of spent fuel. The DOE announced in November"1989 that a pe'rmanent disposal facility would not likely be available until 2010. The Company believes that alternative interim spent fuel storage facilities will be available for use by PVNGS until DOE's scheduled shipments from PVNGS begin.

Water Water for the Four Corners plant and S JGS is obtained from the San Juan River. (See ITEM 3 "LEGALPROCEEDINGS SAN JUAN RIVER ADJUDICATION".)BHP-Utah holds rights to San Juan River water and h'as committed a portion of such rights to the Four Corners plant. The Company and Tucson have a contract with the United States Bureau of Reclamation for consumption of 16,200 acre feet of w'ater per year for S JGS, which contract expires in 2005, and in addition the Company has been granted the authority to consume 8,000 acre feet per year'of water under a state permit that is held by BHP-Utah. The Coinpany is of the opinion that'sufficient water is under contract for SJGS until 2005. However, steps are being taken to extend water rights permits to the year 2045.

Sewage efBuent used for cooling purposes in the operation of the PVNGS units has been obtained under contracts with certain municipalities in the area. The contracted quantity of efBuent exceeds the amount required for the three PVNGS units. The validity of these efBuent contracts is the subject of litigation in state and Federal courts. (See ITEM 3 "LEGALPROCEEDINGS PVNGS WATER

SUPPLY LITIGATION".)APS has stated that, although the litigation remains subject to further evaluation, it expects that the litigation will not have a material adverse impact on the operation of PVNGS.

NATURALGAS OPERATIONS Acquisition of Natural Gas Properties On January 28, 1985, the Company acquired substantially all of the New Mexico natural gas utility assets of Southern Union (principally a natural gas retail distribution system operated by Southern Union as the Gas Company of New Mexico division and now operated by the Company as GCNM) and Sunbelt acquired all of the stock of Southern Union Gathering Company (subsequently renamed Sunterra Gas Gathering Company), a wholly-owned subsidiary of Southern Union, in connection with the settlement of antitrust litigation against Southern Union in which the Company and others were plaintiffs. In a separate transaction, Transwestern, a wholly-owned subsidiary of Sunbelt, acquired from Southern Union all of the stock of Southern Union Processing Company (subsequently renamed Sunterra Gas Processing Company) on December 31, 1986. In January 1990, the Company acquired all of. the common stock of Gathering Company and Processing Company from Sunbelt and Transwestern, respectively. Together with GCNM, Gathering Company and Processing Company are referred to as the Company's natural gas operations.

Gas Company of New Mexico Division The Company distributes natural gas through GCNM to most of the major communities in New Mexico, including Albuquerque and Santa Fe, serving approximately 346,000 customers as of Decem-ber 31, 1990. GCNM's customers include "sales-service" customers and "transportation-service" cus-tomers. Sales-service customers purchase natural gas and receive transportation and delivery services from GCNM for which GCNM receives both cost-of-gas and cost-of-service revenues. Cost-of-gas revenues collected from sales service customers are a recovery of the cost of purchased gas in accor-dance with NMPSC rules and regulations and in that sense do not contribute to the net earnings of the Company. Transportation-service customers, who procure gas independently from third parties but contract with GCNM for transportation and related services, provide GCNM with cost-of-service revenues only.

GCNM is organized along geographic lines into three operating regions (central, eastern and western) and one pipeline district. The central region, comprised primarily of Albuquerque, accounts for approximately 55% of GCNM's,total customers. The Company holds~long-term, non-exclusive franchises with varying expiration dates in all incorporated communities where it is necessary to do so in order to carry on its gas utility business as it is now being conducted. The expiration dates for the Company's franchises in Albuquerque and Santa Fe are 1998 and 1995, respectively.

For the twelve months ended December 31, 1990, GCNM had throughput of approximately 80.1 million decatherms, including sales of 48.4 million decatherms t'o sales-service customers. No single custoiner accounted for more than 3% of GCNM's therm sales in 1990.

GCNM's total operating revenues for the year ended December 31, 1990, were approximately $ 244 million. Cost-of-gas revenues, received from sales-service customers, accounted for approximately 60%

of GCNM's total operating revenues.

Since a major portion of GCNM's load is related to heating, levels of therm sales are affected by the weather. Approximately 44% of GCNM's total therm sales in 1990 occurred in the months of January',

February and December.'uring the 1980's, FERC and NMPSG orders relating to the nondiscriminatory transportation of gas in certain instances, as well as other changes in the natural gas industry, led to increased competi-tion for sales of natural gas within New Mexico. An order issued by the NMPSC requires New Mexico gas utilities to offer transportation service to all customers on an available capacity basis. Thus, GCNM's customers may choose to purchase natural gas from sources other than GCNM and require

transportation by GCNM, subject to the capacity of GCNM's system. Approximately 40% of GCNM's total therm deliveries in 1990 were of gas owned by transportation-service customers. Transportation-service customers pay GCNM according to the services they receive.

Natural Gas Supply GCNM obtains its supply of natural gas primarily from New Mexico wells pursuant to contracts with producers. A significant portion of GCNM's natural gas supply is provided through Gathering Company. (See "Gathering Company".) The contracts of GCNM and Gathering Company are gener-ally sufficient to meet GCNM's peak-day demand. \

GCNM depends on EPNG and Transwestern Pipeline Co'mpany for its transportation of gas supplies purchased from sources that 'are not on GCNM's system. Such transportation is regulated by the FERC. Gas purchased from or transported by these companies is the sole supply for GCNM in certain locations.

At the time of the Company's acquisition of GCNM and Gathering Company, GCNM obtained its natural gas supply generally pursuant to long-term contracts with producers that obligated GCNM and Gathering Company to take volumes of gas in excess of their annual demand. As a result of changes in regulations and market conditions since the execution of these long-term contracts, GCNM and Gathering Company have faced the challenge of marketing excess gas under unfavorable,'ofi'-peak conditions.

GCNM and Gathering Company have sought and are seeking reformation or termination of certain gas supply contracts with producers in an effort to match their obligations to take gas with the demand of GCNM customers. In recent years, GCNM has obtained new gas supplies through the negotiation of medium-term contracts containing no take-or-pay provisions and through spot market purchases. GCNM and Gathering Company have also renegotiated or terminated a significant portion of their long-term contracts. These reformed contracts contain provisions that (a) greatly reduce GCNM's and Gathering Company's take-.or-pay requirements and allow GCNM and'Gathering Com-pany (without penalty) not to purchase gas during the o6'-peak seasons; or (b) have no take-'or-pay requirements. Currently, approximately 56% of GCNM's gas supply sources connected to the,Com-pany's gathering and transmission systems is pursuant to contracts entered into or reformed since the Company's acquisition of GCNM and Gathering Company, up from about 50% from a year ago.

In 1989 and 1990, GCNM. and Gathering Company settled litigation involving substantial claims relating to gas purchase contracts. Even though significant natural gas contracts have been reformed or terminated, GCNM and Gathering Company are still disputing claims by certain natural gas producers relating to take-or-pay obligations, contract pricing and other matters. Near the end of 1990 and in response to a December 1989 order of the NMPSC relating to GCNM's recovery of settlement and reformation costs, eight producers brought lawsuits against GCNM or Gathering Company or both seeking to recover damages relating'to GCNM's or Gathering Company's performance under gas purchase contracts. (See ITEM 3 "LEGALPROCEEDINGS NATURALGAS SUPPLY LITI-GATION.") Based on provisions made for the natural gas contract disputes 'and on the Company's current expectation of regulatory recovery of certain settlement amounts (see "RATES AND REGU-LATIONS Natural Gas,Supply Matters" ), the Company believes it is unlikely that the pending litigation will have a material adverse impact on the Company's financial condition or results of operations.

Gathering Company Gathering Company is engaged in the ownership and operation of gas gathering facilities primarily in the San Juan Basin in northwestern New Mexico, the purchase of gas under long-term contracts from sources in the San Juan Basin, the sale of gas to GCNM and third parties and the transportation of gas for third parties. In-1990,, Gathering Company sold approximately 20'.1 million decatherms to GCNM and 8.1 million decatherms to third parties primarily in the spot market and transported 10.8 million decatherms for third parties.

In January 1988, Gathering Company entered into a natural gas sale and gas gathering contract with GCNM that was subject to NMPSC review. Consistent with an order from the NMPSC, a new contract was entered into between Gathering Company and GCNM in January 1990. The new contract allows Gathering Company to recover from GCNM substantially all of its operating costs, net of its third-party revenues (including revenues received from Processing Company), and to earn a regulated return on its investment in its operating assets. In addition to the recovery of its operating expenses plus a return on its investment in its operating assets, Gathering Company is permitted under the contract to charge to GCNM all costs arising from take-or-pay obligations and from contract reforma-tion. (See "RATES AND REGULATION Natural Gas Supply Matters".)

Processing Company Processing Company processes natural gas owned or transported by GCNM and Gathering Com-pany and others. The natural gas is processed at Processing Company's plants under separate con-tracts. Both GCNM and Gathering Company executed new contracts with Processing Company in January of 1990. The GCNM contract provides that GCNM willreimburse Processing Company for all of its operating costs, net of its third-party revenues (including fees from Gathering Company), and provides a return on Processing Company's investment in its operating assets, in return for providing the service of processing GCNM's natural gas throughput at the plants. Additionally, Processing Company reimburses GCNM for all revenues from liquid by-products derived from GCNM's throughput through the plants. Such revenues, including all third party processing fees, are ultimately credited to GCNM's ratepayers through the PGAC. The Gathering Company's contract provides the same service for Gathering Company and in return for such service, Gathering Company pays Process-ing Company a fee per mcf of gas which is processed on behalf of Gathering Company. Processing Company reimburses Gathering Company for all revenues from liquid by-products derived from Gathering Company's throughput through the plants.

Natural Gas Sales The following table shows gas throughput by customer class:

GASTHROUGHPUT (Millions of decatherms) 1990 1989 1988 1987 1986 Residential 25.2 23.2 24.7 24.5 22.1 Commercial 11.3 10.7 11.5 ~ 11.4 10.8 Industrial ~ ~ ~ ~ ~ ~ ~ ~ ~ 1 3 1.5 1.7 2.2 5.9 Public authorities ~ ~ ~ ~ ~ 5 3 5.5 6.2 6.8 8.3 Irrigation 2.0 1.4 1.4 1.9 Sales for resale ~ ~ ~ ~ ~ I 3 5 4.6 ,

2.7 . 1.2 1.5 Transportation*f 42.5 19.6 9.1 5.1 2.2 Spot market salest 8.1 11.1 Brokerage 0.8 0.9 2.8 2.1 99.0 79.0 58.2 55.4 54.8

'Customer-owned gas. II, tIncludes gas throughput from Gathering Company beginning January 1, 1989 (see note,1 of the notes to consolidated financial statements).

The following table shows gas revenues by customer class:

GAS REVENUES)

(thousands of dollars) 1990 1989 1988 1987 1986 Residential $ 137,633 $ 130,130 $ 122,592 $ 114,164 $ 117,011 Commercial.... 49,575 47,876 45,235 42,120 45,812 Industrial . ~... 4,993 5,693 6,063 8,102 23,139 Public authorities 20,392 21,757 22,289 22,729 30,213 Irrigation 5,934 7,001 4,546 3,781 6>1,42 Sales for resale .. I ~ I ~ ~ 7,253 9,874 6,969 3,819 5,675 Transportation* 11>939 7,618 4,841 4,315 2,207 Liquids 39>086 25,294 Processing fees .. 3,127 448 Spot market sales 13,880 19,810 Brokerage..... 1,378 1,514 5,213 3,759 Other..... ~ .. 8,292 5,948 9,742 .

6,391 10,708

$ 302,104 $ 282,827 $ 223,791 $ 210,634 $ 244,666,

'Customer-owned gas.

tIncludes gas revenues from Gathering Company and Processing Company beginning January 1, 1989 (see note 1 of the notes to consolidated financial statements).

RATES AND REGULATION The Company is subject to the jurisdiction of the NMPSC with respect to its retail electric, gas and water rates, service, accounting, issuance of securities, construction of new generation and transmission facilities and other matters. The FERC has jurisdiction over rates and other matters related to wholesale electric sales.

Electric Rate Case On April5, 1989, the NMPSC issued an order addressing the Company's excess capacity situation which, among other things, provides for the inclusion in NMPSC jurisdictional electric rates of the Company's jurisdictional interests in PVNGS Units 1 and 2, 147 MW of SJGS Unit 4 and the power purchase contract with SPS. However, the order provides for the exclusion from New Mexico jurisdic-tional rates of the Company's 130 MW interest in PVNGS Unit 3, 130 MW of SJGS Unit 4 and the power purchase contract with M-S-R. (See "ELECTRIC OPERATIONS Sources of Power".) The order, which was appealed to the New Mexico Supreme Court by two parties in the case, was upheld by the court on February 20, 1991.

On June 12, 1989, the Company filed a rate request with the NMPSC to increase its retail electric rates by $ 13.7 inillion, later revised to $ 12.2 million, from then current annualized electric revenues. On April12, 1990, the NMPSC issued its final order in the rate case. As a result of the order, the Company was required to reduce its existing base rates by approximately $ 2.9 million per year. Also, as a result of the order, the Company wrote off approximately $ 19.4 million, net of taxes, in March 1990, which resulted primarily from the NMPSC's treatment of prior years'ax benefits from debt retirement and losses on hedge transactions as well as the NMPSC's treatment of amortization periods for gains resulting from sale and leaseback transactions of PVNGS Units 1 and 2 consummated in previous years. The April 12, 1990 order also stated that as long as there is excess capacity in the Company's jurisdictional rates, then that excess capacity will share off-system sales equitably with the capacity excluded. In April 1990, the Company implemented the allocation procedures associated with off-system sales between the jurisdictional excess capacity and that excluded from the NMPSC jurisdic-tional rates.

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PVNGS Cost Investigation In January 1987, the NMPSC docketed an investi'gation of PVNGS costs and indicated that the proceeding would determine the prudence of such costs incurred by the Company and quantify the costs resulting from imprudence. On March 6, '1990, the NMPSC issued a final order, adopting a stipulation reached by, the NMPSC staff and the Company. Pursuant to the stipulation, all issues of prudence existing at May 31, 1989,,as they related to the Company's system planning and, construction costs on the 'Company's 10.2% interest in PVNGS Units 1 and 2, were settled. The stipulation provides for the disallowance of $ 90 million from NMPSC jurisdictional electric rate base. This disallowance did not require write-offs in addition to the amounts written off by the Company in 1988. The stipulation also set performance standards for the operation of PVNGS Units 1 and 2. Under the performance standards, a "dead band" was established at capacity factors of 60% through 75% as measured by the capacity factor of all three PVNGS units over the fuel cycle. Within the dead band, the Company would receive no reward or penalty.'Zhe Company would be penalized with one-half of the additional fuel costs incurred for PVNGS capacity factors of 50% to 60%,and would be rewarded with one-half of the avoided fuel costs if PVNGS operates at capacity factors from 75% through 85%. Capacity factors above 85% or below 50% would reward or'penalize the Company by an amount equal to the additional fuel costs avoided or incurred. In addition, the stipulation provides that if a FERC audit of the Company's interest in PVNGS Units 1 and 2 construction costs were conducted and resulted in a reduction of more than $ 90 million, such further i eduction shall be refiected on an allocated basis in the next New Mexico rate case.

The New Mexico Attorney General, who did not enter into the stipulation, appealed the NMPSC's final order in the case to the New Mexico Supreme Court. Oral, arguments were heard by the court on January 16, 1991 and a decision on the case is pending.

Decertification of.Electric Generating 'Plant On August 28, 1989, the Company filed with the NMPSC a request for regulatory abandonment and decertification of its interest in PVNGS Unit 3, 130 MW of SJGS Unit 4 and in certain related common and transmission facilities. This capacity had been excluded from New, Mexico jurisdictional rates in the NMPSC's April 5, 1989 and April 12, 1990 orders. The Company's request asked the NMPSC to relinquish its authority and jurisdiction ove'r the specified facilities such that the Company may, without further action or assent by the NMPSC, use, change, modify, rebuild, sell, sell and lease back, mortgage, pledge, alienate, decommission or otherwise manage and control the assets, and also to sell power and energy therefrom, such that the Company would be free to use the proceeds of any use or disposition of the assets'and that such proceeds would not be allowable to or charged or credited to the Compa'ny's New Mexico retail customers to the end that neither such assets nor the proceeds thereof would benefit or burden such retail customers.

'he NMPSC bifurcated tlie case such that the Company's request related to PVNGS Unit 3 was considered separately from'its request related to SJGS Unit 4.

On May 21, 1990, the NMPSC approved the Company's request to decertify PVNGS Unit 3.

On June 21, 1990,' NMPSC hearing examiner issued a recommended decision on the Company's request for decertification of 130 MW of S JGS Unit 4. The hearing examiner recommended against the Company's request. He concluded that the S JGS Unit 4 resource will be needed within the near-term as a jurisdictional resource'and'that it fits the future needs of the Company's New Mexico jurisdictional customers. The hearing examiner concluded that the NMPSC did not intend to relinquish control when it ruled to exclude the portion of SJGS Unit 4 from New Mexico jurisdictional pates. He stated that the Company could need capacity additio'ns before 1997-1998 when the projected costs for purchased power and peaking generation fuel may not be as attractive as the S JGS Unit 4 coal resource.

On August 3, 1990, the NMPSC issued an order adopting the recommended decision of the hearing examiner denying the Company's request for decertification of 130 MW of S JGS Unit 4. On August 29, 1990, the Company filed a motion for a rehearing of the case, which the NMPSC also denied. On September 28, 1990, the Company appealed the NMPSC decision to the New Mexico Supreme Court.

New Mexico customers are not currently paying for the excluded SJGS generation and the Company is making wholesale power sales from the excluded plant which cover a portion of its"costs but provide no return on investment. The Coinpany believes that denial of decertification raises significant legal issues including confiscation of property.

SDGAE Sales Agreement In November 1985, the Company and SDG&E entered into an agreement providing for SDG&E to purchase 100 MW of capacity from the Company for the period May 1988 through April 2001. (See "ELECTRIC OPERATIONS Service Area and Customers".) In March 1988, the Company submit-ted the agreement to the FERC for approval. Subsequently, SDG&E filed an intervention and protest challenging the Company's filing at the FERC, and requesting that, due to allegedly inadequate information justifying the Company's request for approval, the FERC either reject the filingor suspend it and set it aside for hearings. SDG&E further requested that the FERC modify the agreemen't to reflect changes in southwestern utilityfuel costs and in the purchase power market since the execution of the agreement. On June 13, 1988, the FERC accepted. the agreement and ordered service under the agreement to be effective as of that date. Sales to SDG&E began on June 14, 1988. On July 13, 1988, the Company filed a request for rehearing seeking an effective date of May 1, 1988, as provided in the agreement itself. SDG&E also filed a request for rehearing of the FERC order. On October 6, 1988, the FERC denied both the Company's and SDG&E's requests for rehearing. Subsequently, both the Company and SDG&E filed requests with the United States Court of Appeals for the District of Columbia Circuit for review of the FERC orders. On June 8, 1990, the Court of Appeals upheld the FERC's ruling on all contested issues. K Other Electric Matters The Company has electric fuel adjustment clauses covering all retail and firm-requirements wholesale KWh sales. There is an approximate 60-day time lag in implementation of the fuel adjust-ment clause for billing purposes, except for firm-requirements wholesale customers for which there is an approximate 30-day time lag.

On October 18, 1990, the New Mexico Attorney General filed a complaint requesting the NMPSC to initiate a rulemaking proceeding in the matter of amendments to NMPSC Rule 550 (Fuel and Purchased Power Cost Adjustment Clauses for Electric Utilities). The New Mexico Attorney General specifically requested the NMPSC to institute a rulemaking for notice and hearings similar to those imposed on GCNM which provides for mandatory public hearings, with notice to the Attorney General, on any gas cost factor statement which shows a 10% increase in the cost of gas from the previous gas cost factor statement. On October 25, 1990, the NMIEC filed a Joinder in the New Mexico Attorney General's Complaint and Petition for Rulemaking.

,On November 19, 1990, the NMPSC dismissed the complaint filed by the New Mexico Attorney General and NMIEC; however, the NMPSC requested that all electric utilities and interested parties file comments on the matter. In addition, the responses were to address ifand why the NMPSC should issue a Noticeof Proposed Rulemaking as requested by the New Mexico Attorney General and NMIEC.

On December 21, 1990, the Company issued its response to the New Mexico Attorney General and NMIEC's Complaint and Petition for Rulemaking stating that the Company opposes the Notice of Proposed Rulemaking. In the response, however, the Company stated that it would be willing to have informal discussions with interested parties regarding possible mechanisms for levelizing monthly

~

fluctuations in fuel cost recovery. No additional action has been taken on this issue by the NMPSC at this time.

Natural Gas General Rate Case On January 2, 1990, GCNM filed a request with the NMPSC to increase its retail natural gas revenues $ 19.0 million or 8% from its then current level. On August 3, 1990, the NMPSC issued an order approving a stipulated settlement in this case in its entirety. The order allowed GCNM to implement rate increases that provide for $ 7 million, or 3.1%, of additional annualized cost-of-service revenues.

The new rates went into efFect on August 15, 1990.

Natural Gas Supply Matters In response to a GCNM report concerning imbalances in its gas supply and demand (see "NATU-RAL GAS OPERATIONS Natural Gas Supply" ), the NMPSC initiated, on February 29, 1988, a proceeding to examine the matter. The proceeding led to a, stipulation which was filed with the NMPSC on July 19, 1989. In the stipulation the parties agreed to a settlement of most of the issues considered in this proceeding.

The stipulation, which was approved by an NMPSC order on December 18, 1989, provides for the partial recovery of certain gas costs arising from reformation of gas purchase contrac'ts and from claims by certain producers relating to take-or-pay obligations, contract pricing and other'matters. Under the order, GCNM bears 25% of producer take-or-pay costs (including such costs paid by GCNM to

.Gathering Company under their gas sale and gas gathering contract) for claims'ettled or for which litigation has been commenced by December 31, 1990, but in any event the mechanism does not apply to any suits not settled or for which no initial judgement on the merits has been rendered by Decem-ber 31, 1993. GCNM will be permitted to recover from its sales and transportation customers the remaining 75% of such costs over a period of years. The order allows GCNM to recover from its customers all take-or-pay costs assessed by interstate pipelines. The order also provides that GCNM and Gathering Company may recover all costs prudently incurred (as determined by the NMPSC on a case-by- case basis) as the result of the settlement or litigation of claims'("MDL contract claims" )

arising from certain intrastate gas purchase contracts that were the subject of'the antitrust litigation that resulted in the Company's acquisition of GCNM from Southern Union in January 1985. (See "NATURALGAS OPERATIONS Natural Gas Supply".) On September 21, 1990, GCNM filed with the NMPSC seeking approval to recover $ 73 million of costs arising from settlement of MDL contract claims. This case is presently in the discovery phase, and hearings have been scheduled for October 1991. On June 16, 1990, GCNM filed with the NMPSC for approval of a rate rider that would be the mechanism to recover all costs described above plus interest. Hearings were held in this case in February 1991.

Since January 1988, GCNM has deferred on its books and has not passed through'to its customers the difFerence between the amounts GCNM paid to Gathering Company under the 1988 gas sales and gathering contract (see "Gathering Company" under "NATURAL GAS OPERATIONS" ) and the amounts that GCNM would have paid to Gathering Company under the previous contract. The order of 'the NMPSC issued on December 18, 1989 allows the methodology agreed to in the stipulation to become'efFective as of January 1, 1988. Because the methodology is based on a cost reimbursable concept, the NMPSC order does not allow GCNM to collect the deferred costs until it demonstrates the reasonableness of the expenses incurred by Gathering Coinpany and quantifies the amount to be collected. GCNM filed a reconciliation report with the NMPSC on January 31, 1990'providing the information requeste'd.

Challenges to GCNM's reconciliation report were filed by the NMPSC StafF and the New Mexico Attorney General and a case was docketed by the NMPSC to address the challenges and determine the appropriate amount to be collected. GCNM requested recovery of $ 10.0 million of deferred costs, plus interest. Hearings were held in this case on October 9, 1990. On February 8, 1991, the Hearing Examiner issued a recommended decision authorizing a $ 9.1 million recovery. Before becoming efFec-tive, the recommended decision must be acted upon by the NMPSG.

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Other Natural Gas Matters GCNM's retail gas rate schedules contain a PGAC which provides for timely recovery of the cost of gas purchased by GCNM for resale to its customers. On August 20, 1990, GCNM filed its biannual application for continued use of its PGAC pursuant to NMPSC rules. This case is presently set for hearing in May 1991. The NMPSC, through.its review of the PGAC costs, has jurisdiction over amounts charged by Gathering Company and Processing Company to GCNM for gas purchases and for gather-ing and processing services provided.

ENVIRONMENTALFACTORS, The Company, in common with other electric and gas utilities, is subject to stringent regulations for protection of the environment by both state and Federal authorities. PVNGS is subject to the jurisdiction of the NRC, which has authority to issue permits and licenses and to regulate nuclear facilities in order to protect the health and safety of the public from radioactive hazards and to conduct environmental reviews pursuant to the National Environmental Policy Act. (See "ELECTRIC OPER-ATIONS Sources of Power 'uclear Plant".) The Company does not currently expect that material expenditures for additional pollution control equipment for its facilities will be required in 1991 and 1992.

The New Mexico regulation for nitrogen oxides is extremely stringent. Four Corners Units 4 and 5, which could not meet this regulation with existing pollution control equipment, have operated for several years under variances from this regulation. In December 1987, the NMEIB granted a variance which extended through September 30, 1989 for Unit 4 and which extends through September 30, 1991 for Unit 5. This variance was granted by the NMEIB to provide time to install certain additional equipment intended to achieve compliance with existing emissions limitations without adverse opera-tional impacts. APS, the operating agent for the Four Corners plant, has successfully completed the installation of additional equipment on Unit 4 and is presently installing equipment on Unit 5 to meet

, the existing emissions limitations.

Revisions to environmental laws and regulations continue to be proposed and adopted at Federal

'and state levels. Pursuant to "the Federal Clean Air Act Amendments of 1977, the EPA has adopted regulations, applicable to certain Federally-protected areas, that address visibility impairment which can be reasonably attributed to specific sources. The 1990 amendments to the Federal Clear Air Act (the "Act") commissioned a five-year study to identify sources of visibilityimpairments. The EPA may also adopt regulations to deal with visibility impairment resulting from regional haze, but these regulations are not anticipated in the near future.

,On November 15, 1990, amendments to the Act were adopted. which, among other things, impose "stringent emission control limitations on sulfur and nitrous oxides from fossil fuel fired utility boilers.

The Act is intended to reduce air contamination from every sizeable source of air pollution in the nation. Electric utilities with fossil-fuel generating units will be afFected particularly by the section of the Act which deals with acid rain. To be in compliance with the Act, many utilities will be faced with installing. expensive sulfur dioxide removal equipment, securing low sulfur coal, buying sulfur dioxide emission allowances, or a combination of these. Due to the existing air pollution control equipment on the coal-fired S JGS and Four Corners, the Company currently believes that it willnot be faced with any material capital expenditures in order to be in compliance with the acid rain provision of the Act.

Under other provisions of the Act, the Company will be required to obtain operating permits for its coal- and gas-fired generating units and to pay annual fees associated with the operating permit program.

NON-UTILITYSUBSIDIARY OPERATIONS In 1988, the Company made the decision to discontinue the non-utility operations of its subsidiar-ies and to dispose of non-utility properties. (See note 10 of the notes to con'solidated financial state-ments.) Such operations consisted primarily of fiberboard manufacturing, real estate, coal mining, telecommunications manufacturing, venture capital activities and financial services and were carried out by Meadows, Sunbelt or their subsidiaries. During 1988, the Company's subsidiaries ceased all coal 14

mining operations (although mine-reclamation activities continue). During 1989, the Company's sub-sidiaries disposed of the fiberboard manufacturing and telecommunications manufacturing operations.

.In 1990, additional non-utility properties were sold, and the remaining assets are expected to be sold in 1991.

During 1989, Meadows defaulted on obligations owed to secured creditors and such creditors subsequently made a claim against the Company, asserting that the Company was fully liable for the obligations of Meadows due such secured creditors. Although the Company denied such claims, and without admitting any liability, the Company, in November 1989, entered into an agreement with the secured c'reditors which provided for the Company'o pay damages to such creditors. The amount of such damage payments would depend on, among other things, the amount of Meadows'ebt payments received and retained by such creditors. In return, the secured creditors released the Company from all claims. At the time of the signing of the settlement, the Company estimated that there would be no damages to be paid by the Company. Upon further evaluation, however, the Company projected damage payments which were recorded in the 1989 consolidated financial statements. (See note 10 of the notes to the consolidated financial statements.) Based on debt payments made by Meadows to such secured creditors in 1989 and 1990, and subject to the secured creditors retaining all such debt payments, the Company has made the damage payments required under the settlement agreement.

The settlement agreement would require the Company to make additional damage payments in the event that Meadows, or (among others) any creditor or any trustee, receiver or other person acting on behalf of Meadows or its creditors, recovers from any such secured creditor certain Meadows debt payments. (See ITEM 3 "LEGAL PROCEEDINGS DIVERSIFICATION CLAIMS".)

On April 18 and July 20, 1990, the NMPSC issued orders docketing a formal investigation regarding the settlement agreement between the Company and secured creditors of Meadows and the Company's discontinuance of its non-utility subsidiary operations. The Company is required to show cause, if any, as to why the settlement agreement, the discontinuance of the Company's non-utility operations and the disposal of non-utility assets are not subject to prior NMPSC approval and why the resulting efFect of the Company's actions has not materially and adversely affected the Company's ability to provide utility service at fair, just and reasonable rates. The formal investigation will also inquire into whether the Company's actions are in compliance with other applicable law and whether sanctions should be imposed. Hearings are set for May 6, 1991-. The Company does not believe that the ultimate outcome of the current investigation will have a material impact on its financial condition or results of operations.

ITEM 2. PROPERTIES Substantially all of the Co'mpa'ny's utility plant is mortgaged to secure its first mortgage bonds.

As of December 31, 1990, the total net generation capacity of facilities owned or leased by the Company was 1,591 MW. The Company's electric generating stations in commercial service as of December 31, 1990, were as follows:

Net MIV Generation ape Name Location Capaeily Nuclear .... PVNGS (a) Wintersburg, Arizona 990 Coal... SJGS (b) Waterfiow, New 835 Coal... Four Corners (c) New Mexico Mexico'ruitland, 192 Gas/Oil . Reeves Albuquerque, New Mexico 154 Gas/Oil . ~ Las Vegas Las Vegas, New Mexico 20 1,591 (a) The Company is entitled to 10.2% of the power and energy generated by PVNGS Units 1 and 2 under leasehold interests. The Company has a 10.2% ownership interest in, PVNGS Unit 3.

(b) SJGS Units 1, 2 and 3 are 50% owned'by the Company; SJGS Unit 4 is 55.525% owried by the Company.

(c) Four Corners Units 4 and 5 are 13% owned by the Company.

The Four Corners plant and a portion of the facilities adjacent to SJGS are located on land held under easements from the United States and also under leases from the Navajo Nation, the enforce-ment of which leases might require Congressional consent. The risk with respect to the enforcement of these easements and leases is not deemed by the Company to be material. However, the Company is dependent in some measure upon the willingness and ability of the Navajo Nation to protect these properties.

'As of December 31, 1990, the Company owned, jointly owned or leased 2,788 circuit miles of electric transmission lines, 4,772 miles of distribution overhead lines,'2,451 cable miles of undergroun'd distribution lines (excluding street lighting) and 212 substations.

The property owned by GCNM, as of December 31, 1990, consisted primarily of natural gas gathering, storage, transmission and distribution systems. The gathering systems consisted of approxi-mately 1,200 miles (approximately 360 miles of which are leased to Gathering Company) of pipe with compression and,treatment facilities. Provisions for storage made by GCNM include ownership and operation of an underground storage facility located near Albuquerque and an agreement with owners of a unitized oil field located near Artesia, New Mexico, in which GCNM has injection and. redelivery rights. The transmission systems consisted of approximately 1,300 miles of pipe with appurtenant compression facilities. The distribution systems consisted of approximately 8,900 miles of pipe.

GCNM leases approximately 130 miles of transmission pipe from the DOE for transportation of natural gas to Los Alamos and to certain other communities in northern New Mexico. The lease can be terminated by either party on 30 days written notice, although the Company would have the right to use the facility for two years thereafter.

The property of Gathering Company includes approximately 550 miles of gathering pipe with appurtenant compression facilities.

Processing Company owns facilities located in northwestern New Mexico having an aggregate design capacity for processing of natural gas of approximately 300,000 mcf per day.

The electric and gas transmission and distribution lines are generally located within easements and rights-of-way on public, private and Indian lands.

The Company also owns and leases service and oSce facilities in Albuquerque and in'other operating divisions throughout its service territory.

The Company's water property consists of wells, water rights, pumping and treatment plants, storage reservoirs and transmission and distribution mains.

The Company leases interests in PVNGS Units 1 and 2 and related property (see ITEM 1 "BUSINESS ELECTRIC OPERATIONS Sources of Power Nuclear Plant" ), EIP and associ-ated equipment, data processing, communication, oflice and other equipment, ofBce space, utilitypoles (joint use), vehicles and real estate.

On May 1, 1984, the Company's Board of Directors approved plans to proceed with the Ojo Line Extension, which involves construction of a 345 kV transmission line connecting the existing Ojo 345 kV line to the existing Norton Station. The project will cost approximately $ 46 million and will increase the bulk system capability and provide adequate reliability to North-Central New Mexico.

This project was originally planned to be in-service in May of 1987. Due to ongoing litigation relating to the Bureau of Indian Affairs Environmental Impact Statement, the project in-service date has been revised to November 1993. The Company has applied for approval of the NMPSC in March 1991 to construct the Ojo Line Extension. See PART II, ITEM 7 "MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CURRENT

. ISSUES FACING THE COMPANY The Wholesale Power Market" for information regarding the proposed Ambrosia - Coronado transmission project.

16

The Board of Directors has approved GCNM's installation of additional compression facilities between the San Juan Basin and the EPNG and Transwestern Pipeline Company interconnects. These facilities, which will cost approximately $ 8.9 million, will provide new capacity to producers on GCNM's and Gathering Company's systems, which should permit the transportation of incremental quantities of natural gas and should provide additional transportation revenues.

Additional information required by this item is included in ITEM. 1 "BUSINESS".

ITEM 3., LEGAL PROCEEDINGS SHAREHOLDER LITIGATION Securities Law-Related Litigation A civil suit, filed in the United. States District Court for the District of New Mexico on April 18, 1989 against the Company and three individuals who currently serve, or formerly served, as officers or directors of the Company, alleges misrepresentations and omissions of material facts in the Company's shareholder reports, Securities and Exchange Commission filings, news releases and other communica-tions. The 1989 suit has been brought as a class action, in which the plaintifF has sought to represent shareholders claimed to be "similarly situated". Generally, the complaint alleges misrepresentations and omissions relating to, among other things, (i) the recovery of investment in excess electric generat-ing capacity, (ii) diversification, (iii) dividends on the Company's common stock and (iv) the attempted restructuring of the Company. It is alleged that the market prices of the common stock were artificially inflated during the class period of March 14, 1987 through April 14, 1989 and that the plaintifFs were damaged by their purchases in reliance upon "the integrity of the market or upon statements dissemi-nated by the defendants". The plaintifF seeks to recover damages, fees and costs. On December 3, 1990, the court granted the plaintifF's motion for class certification with respect to claims based on alleged conduct in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promul-gated thereunder. The court's order stated that since a court "retains the power to modify the class period or establish sub-classes at any time prior to judgment, the court will do so if the facts later require such a modification." The court's order denied class certification with respect to the plaintifF's claim based on a common-law theory of negligent misrepresentation. "

On April 6, 1990, a civil suit was filed in the United States District Court for the District of New Mexico against the Company and three individuals who currently serve, or formerly served, as officers or directors of the Company, alleging violation of federal securities law and common-law causes of action. The plaintifF, who claims to have purchased 100 shares of the Company's common stock on March 27, '1990, is requesting unspecified compensatory and punitive damages as well as fees and costs.

The plaintifF is also seeking class action certification, with the plaintifF class to consist of all persons who purchased the Company's common stock during the class period of April15, 1989 through April 6, 1990. The complaint alleges that the Company and the individual defendants engaged in conduct in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereun-der. Generally, the complaint alleges misrepresentations and omissions and other fraudulent c'onduct relating to, among other things, Company disclosures of (i) non-utility subsidiary losses, (ii) risks to the Company resulting from the financial condition of Meadows and (iii) the Company's settlement with creditors of Meadows in November 1989. (See ITEM 1 "BUSINESS NON-UTILITYSUBSIDI-ARY OPERATIONS".) It is alleged,'that market prices of the Company's stock were artificiallyinflated during the class period and that the plaintifF and others were damaged by their purchases in reliance upon statements made by the defendants in the Company's p'ublic documents or the integrity of the market price of the stock during the class period. The complaint also seeks recovery based on common-law theories of fraud and negligent misrepresentation.

On September 24, 1990, a shareholder of the Company filed a class action lawsuit in the United States District Court for the District of New Mexico against the Company and eight individual defendants who currently serve, or formerly served, as directors or officers of the Company or 'its

subsidiaries. The plaintiK seeks to bring this'action on behalf of all persons who purchased the Company's stock-through the consumer stock plan or in sale's transacted within'the state of New Mexico during the period from October 1, 1985 through April 15; 1989. The complaint alleges, among other things, that the defendants overstated the net earnings of the Company's diversified non-utility operations in the financial statements of the Company, resulting in inflated market prices of the Companyls common stock. The complaint further alleges that the Company's public reports and financial stateinents were ma'terially false and misleading, because they allegedly failed to disclose negative information about the Company's financial condition. The plaintiÃ'claims, among other things, Federal and state securities law violations, common-law fraud, negligent misrepresentation and violations of the New Mexico Unfair Practices Act and seeks compensatory and punitive damages as well as fees and costs. In December 1990, all defendants in this suit filed a joint motion to dismiss the complaint. J Shareholder Derivative Litigation and the Special Litigation Committee On September 14, 1'989, a shareholder of the Company filed a civilsuit in the United States District Court for the District of New Mexico, alleging breaches of fiduciary duties, mismanagement and waste by eleven individual, defendants 'who currently serve, or formerly served, as'directors or officers of the Company. Subsequently, a second shareholder joined the suit as a'plaintiff. The plaintiff'shareholders seek to bring the action derivatively on behalf of the'Company, which was named as a nominal defendant."The complaint alleges, amorig, other things, that each of the defendants, because of his position as an officer or director of the, Company, owed fiduciary duties to the Company and its shareholders in connection with the operations, management and direction of the Company and that each breached those duties by causing the Compa'ny to invest in PVNGS, the Dinch Power Project (see n'ote 6 of the notes to consolidated financial statements) and diversified, non-utility operations, by causing a deficit in the retained earnings'f the Company, forcing it to suspend dividends on the Company's coinmon stockand byexposirig the Company to substantial liability arid expense for "

securities fraud.

On-May 11, 1990, two shareholders of the Company filed a civil suit in the District Court of Bernalillo County,-New Mexico, claiming bre'aches of fiduciary duty by eleven individual defendants who currently serve, or formerly served, as directors or officers of the Company or its subsidiaries. On June 14, 1990, a third shareholder filed a civil suit in the same state court raising similar claims against ten of the same individuals. The plaintiffs seek to bring their respective actions derivatively on behalf of the. Company, which was named 'in. each action as a nominal defendant. The complaints allege, among other things, that each of the defendants, because of his position as an officer or director, owed fiduciary duties to the Company and, its shareholders in connection with the operations, management and direction of the Company and that each de/endant breached those duties by causing the Co'mpany to invest in PVNGS, the Dinch Power Project, and diversified non-utility operations; by causing a deficit. in the retained earnings of the Company, forcing it to'suspend dividends on'the Company's common, stock; by making false and misleading statements in filings and piess releases, resulting in suits for securities fraud; by jeopardizing, renewal of the Company's electric franchise with the City of Albuquerque; by causing the Company to purchase certain assets froin Meadows in connection with the liquidation of Meadows; by causing Meadows to borrow from various banks in order to continue funding real 'estate operations; by causing the Company to provide assurances or guarantees to, and to ente'r into'a settlement agreement with, Meadows'enders, resulting in Company liabilitywith respect to Meadows',loans (see ITEM 1 '"BUSINESS NON-UTILITYSUBSIDIARY, OPERATIONS");

and by causing the Company to enter" into a consulting contract'with an entity controlled by one of the defendants.

On July 25, 1989, the Company's Board of Directors created a special litigation committee (the "Committee" ) to conduct an independent investigation, generally encompassing the matters alleged in the three shareholder derivative actions described above, and to determine whether it is in the best inteies't of,the Company to continue or, seek dismissal of, or otherwise resolve, 'the litigation. The Committee consists of the director who was newly-elected to the Board at the May 1989 annual meeting 18

of shareholders and who is not a named defendant in the litigation. The Committee has performed its responsibilities with.the assistance of independent legal counsel and independent business advisors.

The respective courts stayed the shareholder derivative litigation until the completion of the Commit-tee's report of the results of the investigation.

On January 31, 1991, the Committee filed its report with the respective courts in which the derivative lawsuits are pending. As a result of its 16 months of investigation, the Committee concluded that it was not in the Company's best interests to pursue litigation against any of the defendants with respect to claims concerning excess electric generating capacity, and directed counsel to seek dismissal of such claims in all derivative lawsuits. The report stated that the most important basis for the Committee's conclusion regarding excess capacity was its firm belief that the Company's management, based on what management knew at the time, did not act improperly. The Committee also concluded that it was not in the Company's best interests to pursue claims against any of the defendants based on the securities fraud allegations set forth in three pending class action lawsuits (see "Securities Law-related Litigation"), and directed counsel to seek dismissal of those claims against all defendants, but without prejudice. The Committee stated that its conclusion was based primarily on the fact that pursuing such claims against the defendants at this time would be premature because the Company has denied liability in the three pending class action lawsuits. The report noted that dismissal without prejudice would permit the Company to file claims against appropriate defendants in the future, ifthe outcome of the class action lawsuits suggests that such claims would be appropriate. The Committee concluded that it was not in the Company's best interests to seek dismissal of pending claims regarding diversification against four individuals who formerly served as directors or officers of the Company or its subsidiaries. The Committee's report states that those four individuals exercised the primary responsibility for decision-making concerning diversification. The Committee concluded that diversifi-cation claims against the remaining defendants should be dismissed, and directed counsel to seek dismissal of those claims. The report states'that the. Committee found no evidence that current senior management of the Company should be considered responsible for diversification losses. The Company is unable to predict whether the motions to dismiss the derivative claims discussed above will be granted or what the ultimate impact of the Committee's report willbe..However, the report states that the Committee assumes that the plaintifF shareholders will pursue on the Company's behalf the diversification claims against the four individuals referenced above. In addition, at, the direction of the Committee, the Company has filed a lawsuit against its former Chairman and President and two other former officers or directors of the Company or its subsidiaries to recover compensation it claims was excessive and to cancel the Company's obligation to make certain future payments to them. (See "OTHER PROCEEDINGS".)

PVNGS WATER SUPPLY LITIGATION The validity of the primary effluent contract under which water necessary for the operation of the PVNGS units is obtained was challenged in a suit filed in January 1982 by the Salt River X'ima-Maricopa Indian Community (the "community") against the Department of the Interior, the Federal agency alleged to have jurisdiction over the use of such effluent. The PVNGS participants, including the Company, were named as additional defendants in the proceeding, which is before the United States District Court for the District of Arizona. The portion of the action challenging the effluent contract has been stayed until the community litigates certain claims in the same action against the Department of the Interior and other defendants. On October 21, 1988, Federal legislation was enacted conforming to the requirements of a proposed settlement that would terminate this case without afFecting the validity of the primary effluent contract. However, certain contingencies are to be per-formed before the settlement is finalized and the suit is dismissed. One of these contingencies is the approval of the settlement by the court in the Lower Gila River Watershed litigation referre'd to below.

The Company understands that a summons served on APS in early 1986 required all water claimants in the Lower Gila River Watershed of Arizona to assert any claims to water by January 20, 1987 in an action pending in the Maricopa County Superior Court. PVNGS is located within the II 19

geographic area subject to the summons and the rights of the PVNGS participants to the use of groundwater and effiuent at PVNGS are potentially at issue in this action. APS, as the PVNGS project manager, filed claims that dispute the court's jurisdiction over the PVNGS participants'roundwater rights and their contractual rights to effiuent and, alternatively, seek confirmation of such rights. No trial date has been set in this matter.

SAN JUAN RIVER ADJUDICATION In 1975, the State of New Mexico filed an action entitled State of New Mexico v. United States, et al., in the District Court of San Juan County, New Mexico, to adjudicate all water rights in the "San Juan River Stream System". The Company was made a defendant in the litigation in 1976. The action is expected to adjudicate water rights used at the Four. Corners plant, at S JGS and at Santa Fe. (See ITEM 1 "BUSINESS ELECTRIC OPERATIONS Fuel and Water Supply".) The Company cannot at this time anticipate the effect, if any, of any water rights adjudication on the present arrangements for water at S JGS and the Four Corners plant, nor can it determine what effect the action will have on water for Santa Fe. It is the Company's understanding that final resolution of the case cannot be expected for several years.

I DIVERSIFICATIONCLAIMS Bellamah Community Development ("BCD"), a general partnership that engaged in real estate operations in the southwestern United States, is the debtor in a proceeding in the United States Bankruptcy Court for the District of New Mexico that commenced on June 1, 1989 under Chapter 11 of the Bankruptcy Code and converted to a Chapter 7 proceeding by order entered on January 29, 1990.

The general partners of BCD include Meadows.

During 1990, the trustee in the bankruptcy case (the "BCD Trustee" ) filed an adversary proceed-

'ing in the case against the general partners of BCD, including Meadows, seeking contribution for all debts of BCD; The BCD Trustee lawsuit further asserts that the claim of'Meadows against BCD (including secured claims of approximately $ 80 million) should be subordinated to the claims of all other creditors. It is the position of Meadows that it made loans to BCD secured by mortgage liens and it is therefore resisting the BCD Trustee's'position. The Company currently estimates that the claims against BCD (excluding the claims of Meadows) exceed BCD's assets by a range of $ 40 million to $ 60 million. The assets of the general partners are inadequate to fund such excess.

In January 1991, the BCD Trustee placed the Company on notice that he believed that the bankruptcy estate has strong claims against the Company and certain of its officers by reason of tax-sharing payments, amounting to approximately $ 22 million, made by the Company to Meadows during 1989 and utilized by Meadows to make payments to its secured creditors, the effect of which was to reduce partially the damages that the Company would otherwise have paid to the secured creditors of Meadows. (See ITEM 1 "BUSINESS NON-UTILITYSUBSIDIARY OPERATIONS".) The BCD Trustee has further asserted that certain members of the BCD management committee were acting in a representative capacity for the Company and that the Company knew of, endorsed and/or approved of the actions of'such management committee members. The BCD Trustee further asserts that the bankruptcy estate may have a direct claim against the Company based on the theory that Meadows was the alter ego of the Company. The Company denies'any liabilityto the BCD Trustee and, if litigation results, will defend vigorously against claims made by the BCD Trustee against the Company. If In 1988 and 1989, the Company made provisions for losses, it, estimated would result from its investment in Meadows,. including the anticipated loss of the Meadows investment in BCD. (See note 10 of the notes to consolidated financial statements.) The Company believes no additional provision is required for any potential loss by reason of the claims of the BCD'Trustee or any creditor of Meadows or by reason of any possible increase in damage payments to, the sec'ured creditors of

Meadows, 20

NATURALGAS SUPPLY LITIGATION Near the end of 1990 and in response to a December 1989 order of the NMPSC relating to GONM's recovery of settlement and reformation costs (see ITEM 1 "BUSINESS RATES ANDREGULA-TION Natural Gas Supply Matters" ), eight producers, including Conoco, Inc. ("Conoco") and Amoco Production Company ("Amoco"), brought lawsuits against GCNM or Gatherin'g Company or both seeking to recover damages relating to GCNM's or Gathering Company's performance under gas purchase contracts. In December 1990, Conoco and Amoco amended a suit, initially filed on Febru-ary 20, 1990 in the United States District Court for the District of New Mexico for claims relating to two gas purchase contracts, to assert claims relating to all of their contracts with GCNM and Gathering Company in northwestern New Mexico. Conoco has claimed damages of at least $ 12.9 million against Gathering Company. Amoco has claimed damages of at least $ 15.3 million from Gathering Company and $ 6.8 million from GCNM. Most of the amount claimed by Conoco and Amoco relate to take-or-pay claims. GCNM and Gathering Company are vigorously defending against these claims.

OTHER PROCEEDINGS See ITEM 1 "BUSINESS RATES AND REGULATION" and "BUSINESS NON-UTILITYSUBSIDIARY OPERATIONS" and PART II, ITEM 7 "MANAGEMENT'SDISCUS-SION AND ANALYSISOF FINANCIALCONDITION AND RESULTS OF OPERATIONS CUR-RENT ISSUES FACING THE COMPANY The Retail Electric Market" for a discussion of other proceedings and disputes.

On January 23, 1991, the Company and Meadows filed a lawsuit in the District Court of Bernalillo County, New Mexico, against three individual defendants who formerly served as directors or officers of the Company or its subsidiaries, including the Company's former Chairman and Pt;esident, as well as against a consulting firm formed by one of the individual defendants. The decision to file the complaint was made by the special, litigation committee appointed by the Company's Board of Directors in 1989 to conduct an independent investigation of certain matters. (See "SHAREHOLDER LITIGATION Shareholder Derivative Litigation and the Special Litigation Committee".) The complaint seeks dam-ages or restitution relating to bonuses, fees and compensation paid to the defendants, alleges breaches of fiduciary duty by the individual defendants and seeks to cancel or reform certain agreements, including supplemental"retirement agreements of two of the defendants and the agreement between the Company and the consulting firm.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None.

SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE COMPANY Executive officers, their ages, offices held and initial effective dates thereof, were'as follows on Name'ge December 31, 1990:

Ashton B. Collins ... 58 Chairman of the Board Office Initial Effective Date June 19, 1990 J. T. Ackerman..... 49 President and Chief Executive Officer June 19,1990 W. M. Eglinton..... 42 Executive Vice President and Chief Operating September 1, 1988 Officer, Electric and Water Operations J. B. Mulcock, Jr.... 51 Senior Vice President, Corporate Affairs and April 23, 1985 Secretary M. H., Maerki .. ~... 50 Senior Vice President and Chief Financial June 1, 1988 Officer W. J. Real... ~.... 42 Executive Vice President, Gas Operations June 19, 1990 M. Phyllis Bourque .. 43 Senior Vice President, Gas Management June 19, 1990 Services J. A. Zanotti ...... 51 Senior Vice President, Human Resources and Communications 21

All officers are elected annually by the Board of Directors of the Company.

Allof the above executive officers have been employed by the Company and/or its subsidiaries for more than five years in executive or management positions, with the exception of Ashton B. Collins and M. Phyllis Bourque. Ashton B. Collins has been a director of the Company and President and Chief Executive Officer of Reddy Communications Inc., for more than five years. M. Phyllis Bourque has been employed as an officer of the Company for four years. Prior to employment with the Company, M. Phyllis Bourque was employed by Mid Con Service Company during the period of March 1986 through February 1987 as Assistant Vice President Gas Acquisition and Contract Management.

During the period of March 1985 through March 1986, M. Phyllis Bourque was employed by United Gas Pipeline Company as Vice President, Gas Supply.

PART II ITEM 5. MARKETFOR THE COMPANY'S COMMON EQUITYAND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the New York Stock Exchange. Ranges of sales prices of the Company's common stock, reported as composite transactions (Symbol: PNM) for 1990 and 1989, by quarters, are as follows:

Range of Sales Prices Quarter Ended High 1990:

December 31 .. 9e/e 8 September 30 12e/s 9 '/i June 30..... 12e/e 97/s March 31... ~ ~ ~ ~ ~ ~ ~ ~ 15'/e" 12'/s Fiscal Year ~ ~ ~ ~ ~ 15t/s 8 1989:

December 31 .. ~ ~ ~ 15 t/i 127/e..'4 September 30 I 15'/e ll

~ ~

June 30..... '14e/i March 31.... 14'/s 10e/~

Fiscal Year '57/e 10%

On February 1, 1991, there were 37,772 holders of record of the Company's common stock.

Dividends paid on common stock for the first quarter of 1989 were $ .38 per share. In April 1989, the Company announced the suspension of dividend payments on the Company's common stock as a result of a deficit in retained earnings. For a discussion of the suspension of dividends on the Company's common stock, see note 2 of the notes to consolidated financial statements and ITEM7 "MANAGE-MENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS".

Cumulative Preferred Stock While isolated sales of the Company's cumulative preferred stock have occurred in the past, the Company is not aware of any active trading market for its cumulative preferred stock. Quarterly cash dividends were paid on each series of the Company's cumulative preferred stock at their stated rates during 1990 and 1989.

22

ITEM 6. SELECTED FINANCIALDATA 1990 1989 1988 1987 1986 (1n thousands except per share amounts and ratios)

Total Operating Revenues* ~...'. .. $ 855,134 $ 841,924 $ 785,224 $ 775,807

'915,310 Earnings (Loss) from Continuing Operations .. $ 442 $ 82,593 $ (9,942) t $ 117,121 $ 159,324 Net Earnings (Loss) .. $" 442 $ 82,593 $ (230,137) $ 95,389 $ 151,005 Earnings (Loss) per Common Share From Contiriuing Operations . $ , (.23) $ 1.73 $ (.50)t $ -

2.52 $ 3.49 Earnings (Loss) per Common Share Total Assets ........

Preferred Stock with Mandatory

~ .

$ (.23)

$ 2,313,709

$ 1.73

$ 2,387,005

$ (5.78)

$ 2,392,749

$ 2.00

$ 2,717,141 .

$ 3.29

$ 2,667,639 Redemption Requirements .. ~... .. $ 45,581 $ 49,268 $ =

55,242 60,513 $ 66,147 Long-germ Debt, less Current Maturities,............... .. $ 790,126 $ 801,706 $ 980,767 $ 862,962 $ 862,796 Common Stock Data:

Dividends paid per common share ~ $ $ 0.38 $ 1.87 $ 2.92 $ 2.92 Dividend pay-out ratio 22.0% N/M 146.0% 88.8%

Market price per common share at year end.............. $ 8.375 $ 14.625 $ 12.50 $ 18.75 $ 33.00 Book value per common share at year end...... ~ . ~..... .. $ ". 17.36'18.02 $ 18.03 $ 25.68 $ 26.51 Average. number of common shares outstan'ding 41,774- 41,774 41,761 41,647 40,401 Return on Average Common Equity . (1.3)% 9.5% (23.9)% 7.7% 12.8%

Capitalization:

Common stock equity........ 44.8 % 45.3% 40.7 % 52.2% 52.6%

Preferred stock:

Without mandatory redemption requirements 3.6 3.5 .

32 2.9 2.8 With mandatory redeinption requirements =...........

Long-term debt, less current 2.8

'.0 3.0 2.9 3.2 maturities.... ~... ~ ~ ., .. 48.8 48.2 53.1 42,0 41.4 100.0 % 100.0% 100.0 % 100.0% 100.0%

• Includes gas operating revenues (excluding intercompany sales) of Gathering Company and Processing Com-pany beginning with 1989. (See note 1 of the notes to consolidated financial statements.)

tIncludes charges for the write-off of deferred carrying costs on uncommitted electric generating capacity, the write-off of a proposed generating station and other non-recurring charges aggregating $ 120.3 million ($ 2.88 per share) ~

N/M 'ot meaningful N The selected financial data should be read in conjunction with the consolidated financial statements, the notes to,consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations contained elsewhere in this report.

23

ITEM 7. MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS The following is management's'assessment of the Company's financial condition and the signifi-cant factors which influence the results of operations. Tjiis discussion should be read in conjunction with the Company's consolidated financial statements.

LIQUIDITYAND CAPITAL RESOURCES Construction expenditures for the years 1991-1995 are expected to consist primarily of upgrading generating systems,'pgrading and expanding the'lectric and gas transinission and distribution systems and purchasing nuclear fuel. For the period 1991-1995, the Company expects to incur $ 526 mil-lion of construction expenditures. This amount includes $ 59 million for the purchase of nuclear fuel and $ 17 million in AFUDC (a non-cash item that reflects the Company's costs of debt and equity capital used to finance utility construction). The Company currently has no material capital commit-ments beyond 1995 which would significantly differ from the levels reflected in the five-year construc-tion projections.

construction expenditures for 1990 and the Company's projections for 199'-1995 are shown

'ctual below:

1990 1991 1992 1993 1994 1995 Cash AFUDC

.................. $ 81 3' $ 116 (In millions)

$ 116 5

$ 95 7

Total.................... $ 84 $ 119 $ 121 $ 102 The Company conducts a continuing review of its construction prbgram. This program and the above estimates are subject to periodic revisions based upon changes in assumptions as to system load growth, rates of inflation,'the availability and timing of environmental and other regulatory approvals, availability and costs of outside sources of capital and changes in project construction schedules.

'he The Company's other major cash requirements include payments of long-term debt maturities, mandatory redemption of preferred stock, and settlements of certain gas contract disputes (see PART I, ITEM 1 "BUSINESS NATURALGAS OPERATIONS Natural Gas Supply" ). Cash requirements for the above items are estimated at $ 39.9 million for 1991 and:$ 63.3 million for 1992-1995.

The Company currently estimates that its total internal cash generation during the years 1991-1995 willbe adequat'e to meet its operating expenditures, including the annual lease payments of

$ 84.6 million for the Company's leasehold interests in PVNGS Units 1 and 2, and to meet its other cash requirements for that five-year period. However, the Company anticipates that in 1991 internally generated cash, after meeting operating'expenditures, will meet approximately 75% of its 1991 cash requirements for construction expenditures, payments of long-"term debt maturities, mandatory redemption of preferred stock and settlement of certain gas contract disputes. To cover differences in the amounts and timing of internal cash generation and cash requirements, the Company intends to utilize short-term borrowings under revolving credit commitments from various banks. The Company currently estimates its peak short-term borrowing requirements for 1991 to be approximately $ 70 mil-lion. The level of these borrowings in any given year will depend on; among other things, the actual amount and timing, of cash generation and cash needs. Continuing efforts to boost the Company's internal cash generation include cost control programs and increased efforts to market electricity and gas at both the retail and wholesale levels.

The Company's revolving credit commitments from various banks totaled approximately

$ 253 million as of December 31, 1990. However, $ 141 million of these commitments expired on 24

February 1, 1991 and the remaining commitments were scheduled to expiie by August 1, 1991. Effec-tive March 8, 1991, the Company replaced its expiring commitments with a $ 225 million revolving credit facility with major banks. The new facility is secured by first mortgage bonds of the Company and is currently scheduled t'o terminate on June 30, 1992. The facility contains a provision that could prevent the Company from borrowing under the facility in the event of a material adverse change in the financial condition, results of operations, assets, business or prospects of the Company. Until July 31, 1991, the termination date of the facility is subject to extension, at the Company's option, to Decem-ber 31, 1993 upon certain conditions, including NMPSC approval. Such an extension, which the Company currently is evaluating, would increase the cost of borrowing under the facility and would subject the Company to additional terms and conditions that, absent lender consent, (a) would gener-ally restrict the Company from making dividend payments or other distributions with respect to common stock or from acquiring shares of common stock and (b) would impose a maximum debt capitalization ratio. However, the Company'would be alldwed to declare cash dividends on the Com-pany's common stock or acquire shares of the Company's common stock during any twelve month period in an amount not to exceed 100% of the Company's net earnings (excluding extraordinary gains and losses), less the amount of preferred stock dividends.

The Company's ability to raise external capital and the cost of such funds depends on, among other things, its results of operations, credit ratings, regulatory approvals and financial market condi-tions. In 1989 and 1990, major rating agencies lowered the ratings of certain of the Company's securi-ties, including lease obligation bonds (which are secured indirectly by an assignment of rentals to be paid by the Company) to below "investment grade". One impact of the Company's current ratings, together with covenants in the Company's PVNGS Unit 1 and Unit 2 lease agreements (see PART I, ITEM 1 "BUSINESS ELECTRIC OPERATIONS Sources of Power Nuclear Plant" ), is to limit the Company's ability, without consent of the owner participants and bondholders in the lease transactions, (i) to enter into any merger or consolidation, or (ii) except in connection with normal dividend policy, to convey, transfer, lease or dividend more than 5% of its assets, including cash, in any single transaction or series of related transactions. The Company's revolving credit facility imposes similar restrictions irrespective of credit ratings.

I Due to earnings tests in the Company's Restated Articles of Incorporation, the issuance of pre-ferred stock (other than in connection with certain exchanges, redemptions or other retirements of preferred stock) would require the consent of the holders of a majority of the shares of preferred stock then outstanding until such time as the tests are met. Also due to 1990 results of operations, earnings tests in its mortgage indenture would limitthe amount of first mortgage bonds the Company may issue.

The Company has the capability under the mortgage indenture, without regard to the earnings test but subject to other conditions, to issue first mortgage bonds on the basis of certain previously retired bonds. Most of this capacity was used for the bonds securing the Company's revolving credit facility.

The Company's board of directors has not declared dividends on its common stock since January 1989. The Company's board of directors reviews its dividend policy on a continuing basis. The payment of future dividends is dependent upon earnings, the financial condition of the Company, market conditions and other factors.

The Company's capital structure at December 31, 1990 consisted of 48.8 percent long-term debt, less current maturities, 2.8 percent preferred stock with mandatory redemption requirements, 3.6 per-cent preferred stock without mandatory redemption requirements and 44.8 percent common stock equity.

RESULTS OF OPERATIONS Net loss per common share in 1990 was $ .23, compared to earnings of $ 1.73 in 1989 and a loss of

$ 5.78 in 1988. The results of operations in 1990 reflect after-tax write-offs of $

19.4 million resulting from the NMPSC's decision on the Company's electric rate case. The write-offs resulted primarily from

the NMPSC's treatment of prior years'ax benefits from debt retirement and losses on hedge transac-tions as well as the NMPSC's treatment of amortization periods for gains resulting from the sale and leaseback transactions on PVNGS Units 1 and 2 consummated in previous years. The loss experienced in 1988 was due primarily to a provision for the estimated, loss of $ 137.8 million from the discontinu-ance of the Company's non-utility operations, a provision for an extraordinary loss, on discontinuation of application of regulatory accounting principles regarding certain assets, the write-off of the Com-in a proposed coal-fired generating station, the write-off of deferred carrrying costs 'any's.investment on uncommitted electric generating capacity and one-time costs related to a work force reduction. The following discussion highlights significant items which affected the results of operations in 1990 and 1989, and certain items impacting future earnings.

Electric operating revenues decreased=$ 79.1 million in 1990 due*primarily to the expiration'on December 31, 1989 of the long-term power sale contract with Southwestern Public Service Company.

However, such decrease was partially offset by higher en'ergy sales to retail customers, which increased by 2.8% in the current year. The $ 13.1 million increase in 1989 was due primarily to increased energy sales to retail customers of 4,8% and SPS of 2.6%; mostly'offset,by a 31.1% decrease in energy sales to other contracted wholesale customers as a result of outages at the PVNGS units. The long-term sales contract with SPS contributed $ 109.8.million and $ 100.0 million in revenues in 1989 and 1988, respec-tively. Sales under the SPS contract contributed approximately $ 1.13 to'1989 earnings per share.

Replacement sales have been at prices substantially lower than the SPS contract price.

Gas operating revenues increased $ 19.3 million in 1990 due mainly to increased gas liquids reve-nues resulting from increased price and throughput, to increased gas consumption by residential and commercial customers in the spring of 1990 and to an increase in transportation throughput. The

$ 59.0 million increase in 1989 was due primarily to inclusion in 1989 of revenues of $ 46.4.million from Processing Company and Gathering Company due to a change in regulatory treatment. Revenues from these subsidiaries were included in the caption "Other Income and Deductions, net of taxes" in 1988. A gas rate increase approved in August 1990 also contributed to the increased revenues for the current period.

Fuel and purchased power expense decreased $ 12.8 million in 1990 due primarily to a decrease in purchased power expense and an increase in economy sales and hazard sharing deliveries in the region, which were partially offset by increases in the cost of fuel during the current year. Fuel'and purchased power expense increased $ 3.3 million in 1989 due mainly'o additional purchases of energy and increased coal fuel expense resulting; in part, 'from the unscheduled outages at PVNGS. The PVNGS units were out of service for substantial p'eriods during 1989; Gas purchased for resale increased $ 15.1 million in 1990 due primarily to a higher net cost of gas and increased gas deliveries to residential and commercial customers.'Gas purchased for resale increased $ 32.7 million in 1989 'primarily as a result of the inclusion of gas purchase costs 'of $ 20.7 mil-lion from Gathering Company, whereas such expenses were reflected in the caption "Other Income and Deductions, net of taxes" in 1988. In addition, certain gas processing costs, previously deferred, are being collected from customers, commencing in 1989.

Other operation and maintenance expenses increased $ 12.7 million in 1990 due primarily to increased operating costs resulting from increased availability of the PVNGS units along with addi-tional personnel and training costs at PVNGS and increased Arizona property taxes on the leased PVNGS units. Increased scheduled outages at SJGS Unit 4 also contributed to such increase in other operation and maintenance expenses. Other operation and maintenance expenses increased $ 11.3 million in 1989. Included therein are expenses of Processing Company and Gathering Company of

$ 16.9 million for 1989, whereas such expenses were reflected in the caption "Other Income and Deductions, net of taxes" in 1988. Excluding the expenses of the gas subsidiaries, other operation and maintenance expenses decreased $ 5.6 million in 1989 due primarily to a work-force reduction imple-mented in August 1988. However, expenses associated with the PVNGS units for 1989 increased

$ 12.1 million due primarily to outages at PVNGS and increased Arizona property taxes on the leased PVNGS units.

26

Operating income taxes decreased by $ 18.5 million in 1990 due primarily. to lower pre-tax operat-ing income, in 1990 partially offset by the absence in 1990 of certain tax benefits which were flowed through in 1989. Operating income taxes for 1989 increased $ 8,7 million. This increase primarily resulted from a higher pre-tax operating income in 1989.

Other, under Other Income and Deductions, net of taxes, decreased $ 7.6 'million in 1990 due primarily to a reserve for costs related to retirement of utility property and additional provisions for defending shareholders'itigation. The $ 13.0 million increase in 1989 was primarily due to losses recognized in 1988 primarily as a result of a write-off relating to the stipulation reached between the NMPSC Staff and the Company, which was approved by the NMPSC, settling all issues of prudence as they relate to the Company's 10.2% interest in PVNGS Units 1 and 2 (see PART I, ITEM 1 "BUSINESS RATES AND REGULATION PVNGS Cost Investigation" ), the write-off of deferred gas processing costs and a provision for other losses.

Interest charges decreased $ 7.0 million due primarily to the retirement of $ 30 million of 13'/8% first mortgage bonds in August 1989, and a decrease in other long-term debt outstanding during 1990.

Interest charges decreased $ 10.2 million in 1989 primarily due to a reduction in commercial paper outstanding.

CURRENT ISSUES FACING THE COMPANY The Company's future financial condition and results of operations may be-affected by the factors discussed below.

Regulatory Issues On April 5, 1989, the.NMPSC issued an order addressing the Company's excess electric generating capacity situation which, among other things, provides for the inclusion in NMPSC jurisdictional electric rates of the Company's jurisdictional interests in PVNGS Units 1 and 2, 147 MW of SJGS Unit 4 and the power purchase contract with SPS. However, the order provides for the exclusion from New Mexico jurisdictional rates of the Company's 130 MW interest in PVNGS Unit 3, 130 MW of SJGS Unit 4 and the power purchase contract with M-S-R. (See PART I, ITEM 1 "BUSINESS ELECTRIC OPERATIONS Sources of Power".) The NMPSC approved the Company's request for decertifiction and regulatory abandonment of PVNGS Unit 3 but denied such a request for the 130 MW of SJGS Unit 4. The Company has appealed the denial to the New Mexico Supreme Court.

On June 12, 1989, the Company filed a rate request with the NMPSC incorporating the effects of the April 5, 1989 order. On April 12, 1990, the NMPSC issued its final order in the rate case requiring the Company to'reduce its existing base rates'y approximately $ 2.9 million per year. The order also stated'that as long as there is excess capacity in the Company's jurisdictional rates, then that excess capacity willshare off-system sales equitably with the capacity excluded. In April 1990, the Company implemented the allocation procedures associated with off-system sales between the NMPSC jurisdic-tion's excess capacity and that excluded from the jurisdictional rates.

The Company believes that the NMPSC's April 5, 1989 and April 12, 1990 orders and existing wholesale market conditions will cause the Company's shareholders to receive little or no return on their investment over the next several years. Therefore, the Company's management has been evaluat-ing other possible strategic options in an effort to maxiinize shareholders'nvestment value. Recently, the Company's management has announced specific objectives and has established action plans designed to achieve these objectives by the end of 1993. The plans include, among other things, no rate increase request for three ye'ars (if at all possible), reduction of budgeted non-fuel operation and inaintenance expenses by 10% by 1993 and concentration on market expansion, including resolution of the Albuquerque franchise issue (see "The Retail Electric Market" ), for revenue growth.

In 1989 and 1990, GCNM and Gathering Company settled litigation involving substantial claims relating to gas purchase contracts. The Company is currently seeking NMPSC approval to recover

$ 73 million arising from settlement of certain contract claims. (See PART I, ITEM 1 "BUSINESS 27

RATES AND REGULATION Natural Gas Supply Matters".) Even'though significant natural gas contracts have been reformed or terminated, GCNM and Gathering Company are still disputing claims by certain natural gas producers relating to take-or-pay obligations, contract pricing and other matters.

Near the end of 1990 and in response to a December 1989 order of the NMPSC relating to GCNM's recovery of settlement and reformation costs, eight producers brought lawsuits against GCNM or Gathering Company or both seeking to recover damages relating to GCNM's or Gathering Company's performance under gas purchase contracts. (See PART I, ITEM 3 "LEGAL PROCEEDINGS NATURAL GAS SUPPLY LITIGATION".)Based on provisions made for the natural gas contract disputes and on the Company's current expectation of regulatory. recovery of certain settlement amounts, the Company believes it is unlikely that the pending litigation will have a material adverse impact on the Company's financial condition or results of operations.

The Wholesale Power Market The Company is dependent primarily on the wholesale market for the ultimate recovery of its investment in capacity, excluded from=New Mexico jurisdictional rates. The Company considers its potential market for wholesale power sales to be generally defined by those entities interconnected within the WSCC. The Company's ability to market its uncommitted capacity is under pressure as a result of limited transmission availability and abundant alternative short-term energy resources from competitors.

The Company's ability to sell its power within the WSCC has been enhanced for short-term sales by the WSPP experiment. The WSPP has allowed for market level pricing and negotiated transactions for transmission services. The WSPP experiment is scheduled to terminate on April30, 1991. However, the participants in this experiment have petitioned the FERC to allow the experiment's concepts to continue under a permanent agreement. The Company currently cannot'predict the outcome from the FERC ruling in this matter. Technical limitations and jurisdictional service concerns of other utilities in the WSCC have made and are making long-term transmission service commitments difficult to obtain. Environmental, technical and economic constraints combine to make the construction of new transmission facilities also difficult. Price competition in this market is expected to continue to be intense due to the availability of surplus capacity from other utilities, projected low prices for'oil and gas and the existence of cogeneration, independent power producers and self-generation as competing energy sources. In addition, continuing utility merger activity in the WSCC may, the Company believes, add to the difficulty in marketing the Company's uncommitted capacity and its power. The Company's market assessments indicate that other southwestern and western utilities will have increasing capacity and energy requirements in the 1990s. However, the Company projects that the current soft wholesale power market will continue into the mid-1990s and that, as a result, there will continue to be downward pressure on near-term wholesale power prices. Substantial portions of the Company's off-system sales are made in the economy interchange market at prices which averaged only slightly above incremental costs.

On July 26, 1990, the Compariy's Board of Directors approved plans to proceed with the Ambrosia-Coronado Project (the "ACP"), which involves construction of a 230kV transmission line connecting the Plains Escalante Generating Station in New Mexico to the Salt River Project Coronado station in Arizona. As currently proposed, the Company's portion of the estimated costs of the ACP would be approximately $ 52 million. The ACP would give the Company additional transmission capability to deliver power to western markets, including Nevada and southern California. This project would also enhance the Company's seasonal interchange capabilities. The line is projected to be completed in 1994. However, the line would not be constructed if necessary rights-of-way, environmental and regulatory approvals cannot be obtained or ifthe NMPSC orders adverse treatment of the project costs and sales revenues.

On March 7, 1991, the Company executed a power sale agreement with Arizona Power Pooling Association ("APPA") whereby the Company, would be a supplierof power under a 17-year contract.

The APPA agreement calls for a sale of 15 MW of base power beginning in June 1991, increasing to 28

35 MW for June 1992 through May 1994 and "80 MW.for June 1994 through May 2002, and 15 MW thereafter through 2008. The APPA agreement would also provide for sales of an additional 25 MW of seasonal power in the months of June through September for 1991 through 1998. Regulatory approval of the contract is required.

The Retail Electric Market The Company's electric service franchise with the City of Albuquerque, covering an area which contributed 46.9% of the Company's total 1990 electric operating revenues, expires in early 1992. In a municipal election held on November 1, 1989, voters approved an amendment to the charter of the City of Albuquerque, that provides that the city has no power to grant or extend"any franchises, licenses or other'ights'o provide electricity to the public or to wholesalers unless the franchise, license or right has been awarded by competitive bid to the lowest cost suppliers. The amendment allows the grant of multiple franchises, licenses or rights for all or part of the city and also provides that the total term of any franchise, license or right will not exceed 25 years. The City of Albuquerque has selected a consultant to st'udy alternatives available to it, including municipalization of the Company's distribu-tion system, the viability of other alternatives, and 'the methods that may be available to the City to implement the recent charter amendment. In October 1990, the City Council of Albuquerque voted to approve the formation of a "Municipal Electric Utility."The goals and objectives of the new entity are at present not well defined, but it is assumed that such an entity was created to become a self-regulated electric supplier in and around Albuquerque. On December 14, 1990, the Company filed a petition for a declaratory order with the NMPSC regarding the inconsistencies between the charter amendment and the NMPSC's jurisdiction over public utility rates and service areas under state law. On February 18, 1991, the NMPSC agreed to consider the Company's petition. The Company has been actively pursu-ing the renewal of the franchise prior to its expiration. Absent a renewal of the franchise, the Company is likely to continue service to the City franchise area for an undetermined period of time without a franchise. The Company, as necessary, willtake vigorous action to protect the value of the Company's distribution system in the City franchise area and related utility plant. While the Company cannot predict the ultimate outcome*of the franchise renewal issue, it currently, believes that such outcome will not have a,material adverse effect on the Company's financial condition or results of operations.

PVNGS In March 1989, after two of the PVNGS units experienced unscheduled outages and the third unit was removed from service for testing, the NRC issued confirmatory action letters requiring APS to take certain corrective actions and to'receive NRC approval before restarting any of the PVNGS units. Unit 2 returned to service in 1989, but was placed in its second refueling outage on February 24, 1990 and did not return to service until July 19;- 1990, PVNGS Unit 3 returned to service on January 21, 1990 and Unit 1 returned to service on July 5, 1990. The three units together operated at an average capacity of about 62 percent in 1990, compared to an average capacity factor of 23 percent in 1989.

On several occasions, including during 1990, the NRC has proposed and assessed civil penalties for various violations at PVNGS that have been categorized as problems of Severity Level III 'or lesser severity (on a scale of I to V in accordance with the "General Statement of Policy and Procedure for NRC Enforcement Actions", with,Level I being the most severe). On one such occasion in 1990, the NRC took enforcement action relating, primarily to the allegedly unreliable performance of PVNGS's emergency.,lighting, system. In October 1990, the NRC imposed a civil penalty in the amount of

$ 125,000, which 4PS subsequently paid, for a Severity Level III violation of NRC requirements at PVNGS. The base value of the civil penalty for a Severity Level III.problem is $ 50,000, which amount is subject to either escalation or mitigation. The NRC increased the base, level of the civil penalty to

$ 125,000 because (1) the NRC, rather than APS, identified these violations, and (2) the NRC concluded that APS's past performance involving required emergency lighting, engineering and technical sup-port, and quality oversight was not satisfactory. Although the NRC notice indicated that APS's corrective actions appear comprehensive, the NRC did not decrease the base civil penalty because, in

/

29

the NRC's view, these corrective actions were not sufficiently prompt. After reviewing APS's response, including proposed corrective actions and results of future inspections', the NRC notice indicated that the NRC will evaluate further enforcement action.

In recent years, the NRC has monitored closely the operation of the PVNGS units and, in various instances, expressed concern over certain operational and management aspects. However, a recently-issued Systematic Assessment of Licensee Performance, a comprehensive NRC report for the twelve-month period ending November 30, 1990, showed favorable improvements.

Tucson Electric Power Company The Company operates and jointly owns S JGS, in which Tucson and Century also have interests.

On January 23, 1991, Tucson announced that, in a meeting with its bank group, it proposed a morato-rium commencing February 1, 1991, during which it would suspend payment of interest and principal on certain collateralized debts, and asked the banks to refrain from legal action at least through March 15, 1991, on the discontinuance of payments. The Company understands that Tucson instituted a payment moratorium on February 1, 1991, including a payment moratorium with respect to other creditor groups and major suppliers such as Century. The Company understands that Tucson is discussing restructuring Tucson's obligations with its creditors and major. suppliers. Tucson has reported that its failure to pay has resulted in a number of events of default under its various financing arrangements.

The Company understands that Tucson is the major customer of Century and that the financial difficulties of Tucson are having an adverse impact on Century. f The Company also understands that Tucson's senior executives had previously briefed the Arizona Corporation Commission (the "ACC") on the implications of a possible bankruptcy filing and that Tucson is attempting to negotiate a comprehensive rate plan with the ACC.

Tucson has reported that, in the event that Tucson's creditors do not forebear from exercising remedies against Tucson during the period while the restructuring of obligations and'rate plans aid being negotiated or in the event that a comprehensive rate settlement cannot be negotiated with the ACC, Tucson anticipates that it may need to file for protection from its creditors under Chapter 11 of the United States Bankruptcy Code.

In view of Tucson's discussion of the possibility of bankruptcy, the Company. is evaluating what impact Tucson's financial difficulties might have on the Company, including indirect impacts that might arise from the efFect on Century of Tucson's financial difficulties. The Company currently believes it is unlikely that the financial difficulties of Tucson will have a material impact on the Company's future financial condition or results of operations. However, as a co-participant in and operating agent of SJGS, the Company has certain contingent obligations under the plant operating agreement and joint and several liability with Tucson under the coal supply agreement.

Shareholder Litigation The Company and certain individuals who currently serve, or formerly served, as officers or directors of the Company or its subsidiaries are defendants in three class action suits brought by shareholders of the Company. These suits allege misrepresentations and omissions of material facts in the various reports filed with the Securities and Exchange Commission and in other communications primarily related to the Company's excess electric generating capacity and diversified non-utility operations. In addition, there are three suits against present and former officers and directors that shareholders seek to bring derivatively on behalf of the Company. These suits allege, among other things, mismanagement and breach of fiduciary duty relating to excess electric generating capacity, diversified non-utility operations and securities fraud. (See PART I, ITEM 3 LEGALPROCEED-INGS SHAREHOLDER LITIGATION".)

A special litigation committee was created by the Company's Board of Directors in July 1989 to conduct an independent investigation generally encompassing the matters alleged in the derivative 30

suits. In January 1991, the special litigation committee'iled its report with the respective courts, concluding, among other things, that it was not in the Company's best interests to pursue litigation against any of the defendants with respect to claims concerning excess electric generating capacity and securities fraud, and directing counsel to seek dismissal of such claims in the derivative suits. The special litigation committee also concluded that it was not in the Company's best interests to seek dismissal of pending claims regarding diversification against four individuals who formerly served as directors or officers of the Company or its subsidiaries.

In 1990, the Company made a provision for the estimated cost of defending the shareholder lawsuits. The Company currently believes that the disposition of these lawsuits willnot have a material adverse effect on the Company's results of operations or its financial condition.

Postretirement Benefits In December 1990, the FASB issued Statement of'Financial Accounting Standards ("SFAS")

No. 106, Employers'ccounting for Postretirement Benejits Other than Pensions, effective for fiscal years beginning after December 15, 1992. SFAS No. 106 willrequire accrual of postretirement benefits (such as medical and dental benefits) during the years employees provide services. The costs of these benefits are currently expensed on a pay-as-you-go basis. The impact of this new standard has not been fully determined, but the change likely willresult in significantly greater expense being recognized for these benefits. The Company expects that the increased benefits expense will either be recovered currently through rates or that a regulatory asset will be recorded to reflect amounts to be recovered through rates in the future as the costs are paid; therefore, SFAS No. 106 should not have a significant impact on the Company's financial condition or results of operations.

31

ITEM 8. FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA INDEX Page Management's Responsibility for Financial Statements .. 32 Independent Auditors'eport 33 Financial Statements:

Consolidated Statement of Earnings (Loss)........ 34 Consolidated Statement of Retained Earnings (Deficit) ~ ~ ~ ~ ~ 35 Consolidated Balance Sheet 36 Consolidated Statement of Cash Flows 37~

Consolidated Statement of Capitalization ~........ 38 Notes to Consolidated Financial Statements .. ~.... 39 Supplementary Data:

Consolidated Financial Statement Schedules....... 55 Quarterly Operating Results ~ ~ ~ ~ ~ ~ ~ ~ ~ 0 ~ ~ ~ ~ 62 Comparative Operating Statistics.............. ~ ~ ~ ~ ~ ~ 63 MANAGEMENT'S RESPONSIBILITY FOR FINANCIALSTATEMENTS The management of Public Service Company of New Mexico is responsible for the preparation and presentation of the accompanying consolidated financial statements. The consolidated financial state-ments have been prepared in conformity with generally accepted accounting principles and include amounts that are based on informed estimates and judgments of management.

Management maintains a system of internal accounting controls which it believes is adequate to provide reasonable assurance that assets are safeguarded, transactions are executed in accordance with management authorization and the financial records are reliable for preparing the consolidated finan-cial statements. The system of internal accounting controls is supported by written policies and procedures, by a staff of internal auditors who conduct comprehensive internal audits and by the selection and training of qualified personnel.

The Board of Directors, through its Audit Committee comprised entirely of outside directors, meets periodically with management, internal auditors and the Company's independent auditors to discuss auditing, internal control and financial reporting matters. To ensure their independence, both the internal auditors and independent auditors have full and free access to the Audit Committee.

The independent auditors, KPMG Peat Marwick, are engaged to audit the Company's consoli-dated financial statements in accordance with generally accepted auditing standards.

32

INDEPENDENT AUDITORS'EPORT The Board of Directors and Stockholders Public Service Company of New Mexico:

'e have audited the consolidated financial statements of Public Service Company of New Mexico and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompa-nying index. These consolidated financial statements and financial statement schedules are the respon-sibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those stan-dards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Public Service Company of New Mexico and subsidiaries as of December 31, 1990 and 1989, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1990, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

As discussed in note 1 to the consolidated financial statements, the Company changed its method of accounting for income taxes in 1989.

KPMG PEAT MARWICK Albuquerque, New Mexico February 21, 1991 33

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS (LOSS)

Year Ended December 31, 1990 1989 1988 (In thousands except per share amounts)

Operating Revenu es:

Electric.... $ 541,330

$ 620,381 $ 607,317 302,104 282,827 223,791 Water .....

Gas (note 1) 11,700 12,102 10,816 Total opera ting revenues........... '................... 855,134 915,310 841,924 Operating Expenses:

Fuel and purchased power 142,482 '55,279 152,017 Gas purchased for resale Other operation expenses..........

Maintenance and repairs

-...................... 170,320 275,851 56,385 155,232 268,826

, 50,755 122,575 261.,687 46,568 Depreciation and amortization.............................

taxes...,......,.......'............ 73,204 71,981 66,920 Taxes, other than income Income taxes (note 4) .................................. 36,961 7,490 34,043 25,958 34,823 17,268 Total operating expenses.......................:....... 762,693 762,074 701,858 Operating income.......,...'.....".................. 92,441 153,236 140,066 Other Income and Deductions; net of taxes (note 4):

Allowance for equity funds used during construction 2,909 4,658 Deferred carrying costs on uncommitted electric generating capacity (note 11) .. (20,234)

Write-oK of proposed generating station (note 6) 11).......: ..'.'.......

(38,104)

Write-offs due to electric regulatory order (note (19,396)

Other (5,188) 2,392 (10,634)

Net other income and deductions................. ~....... (24,584) 5,301 (64,314)

Income before interest charges 67,857 158,537 75,752 Interest Charges:

Interest on long-term debt 61,176 71,572 81,775 Other interest charges.............................,....

Allowance for borrowed funds used during construction...............

9,697 (3,458) 6,283 (1,911) 6,329 (2,410)

Net interest charges '7,415 75,944 85,694 Earnings (Loss) From Continuing Operations...................... 442 82,593 (9,942)

Discontinued Operations, net of tax (note 10):

Loss from operations of non-utility operations.................... (35,826)

Estimated loss on disposal of non-utility operations, including provision for operating losses during the phase-out period (137,773)

Earnings (Loss) before Extraordinary Item 442 82,593 (183,541)

Extraordinary Item loss on discontinuation of application of regulatory accounting principles regarding certain assets, net of tax (note ll) (46,596)

Net Earnings (Loss) 442 82,593 (230,137)

Preferred Stock Dividend Requirements......................... 10,002 10,456 11,117 Net Earnings (Loss) Available for Common Stock $ (9,560) $ 72,137 $ (241,254)

Average Number of Common Shares Outstanding 41,774 41,774 41,761 Earnings (Loss) per Share of Common Stock:

Earnings (loss) from continuing operations............. ~........ $ (.23) $ 1.73 $ (.50)

Loss from discontinued operations...........................

Estimated loss on disposal of non-utility operations.................

(.86)

(3.30)

Earnings (loss) before extraordinary Extraordinary item item....................... (.23) 1.73 (4.66)

(1.12)

Net Earnings (Loss) 8 (23> $ L73 $ (578)

Dividends Paid per Share of Common Stock $ .38 $ 1.87 See accompanying notes to consolidated financial statements.

34

PUBLIC SERVICE COMPANY OF NEW MEXICO'ANDSUBSIDIARIES CONSOLIDATED STATEMENT OF RETAINED EARNINGS (DEFICIT)

Year Ended December 31, 1990 1989 1988 Balance at Beginning of Year .....................

Elimination of deficit through quasi-reorganization of equity

$ 56,263 (In thousands)

$ (144,004) $ 175,337 accounts (note 2) .. 144,004 Net Earnings (Loss) .. 442 82,593 (230,137)

Dividends:

Cumulative preferred Common stock stock..................... (10,002) (10,456) (11,117)

(15,874) (78,087)

Balance at End of Year . 6 46,703 3 56,263 $ (144,004)

See accompanying notes to consolidated financial statements.

35

PUBLIC:SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES'ONSOLIDATED

'BALANCE SHEET, December 31, 1990 1989 (In thousands)

ASSETS Utility Plant, at Original Cost (notes 2, 6, and 1'1):

Electric plant in service $ 1,938,243 $ 1,920,545 Gas plant in service 445,814 426,666 Water plant in service 49,946 48,901 Common plant in service 40,085 46,579 Plant held for future use.............. 1,258 2,475,346 16,782

'2~459,473 Less accumulated depreciation and amortization 697,744 652,890 1,777,602 1 806 583 Construction work in progress.............................

Nuclear fuel, net of accumulated amortization....................

86,127 50,732 67,981 57,281 Net utility plant.... ~ ~ ~ ~ . ~ ~ ~ ~ ~ ' ~ ~ 1,914,461 1,931,845 Other Property and Investments:

'........... ~......'...........

Non-utility property, at cost, net of accumulated depreciation, partially pledged.

Other investments, at cost ..

9,869 31,146 12,601 19,327 Total other property and investments... ~.................. 41,015 31,928 Cash...........................

Current Assets:

~ ~ ~ .. ~ ~ ~ ~ ~ ~ ~ 4,588 6,660 Receivables....,...... ~............................

Temporary investments, at cost 1,365 11,130 104,053 119,139 11,008 37,024 Income taxes receivable Fuel, materials and supplies, at average cost................. ~... 48,013 49,642 Gas in underground storage, Prepaid expenses..............

at weighted

~....................

average cost 11,499 7,775 11,700 7,101 assets................................

~

Total current 188,301 242,396 Deferred Charges..................................... 169 932 180 836

$ 2,313,'709 $ 2,387,005 CAPITALIZATIONAND LIABILITIES Capitalization (note 2):

Common stock equity:

Common stock outstanding 41,774,083 shares $ 208,870 $ 208,870 Additional paid-in capital...............;

Retained earnings since January 1, 1989............

469,688 46,703-487,465 56,263 Total common stock equity...............

Cumulative preferred stock without mandatory redemptio n requirements

=

725,261 59,000 752,598 59,000 Cumulative preferred stock with mandatory redemption re quirements =45,581 49,268 Long-term debt, less current maturities 790,126 801,706 Total capitalization 1,619,968 1,662,572 Current Liabilities:

Short-term debt (note 3)....................

payable................... ~...

15,000 127,516 33,880 150,203 Accounts Current maturities of long-term debt (note Accrued interest and taxes............ ~...... 2)........

~

9,214 30,918 12,324 31,143 Other current liabilities 33,946 41,164 Total current liabilities .................. 216,594 268,714 Deferred Credits:

Accumulated deferred investment tax credits (note 4) 116,495 123,558 Accumulated deferred income taxes (note Other deferred credits..................... 4)......... 146,642 214,010 139,756 192,405 Total deferred credits................... 477,147 455,719 Commitments and Contingencies (notes 6 through 12)

$ 2,313,709 $ 2,387,005 See accompanying notes to consolidated financial statements.

36

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Year Ended December 31, 1990 1989 1988 (In thousands)

Cash Flows From Operating Activities:

Net earnings (loss)... ~ ~ ~..........'..........

Adjustments to reconcile net earnings (loss) to net cash flows

$ 442 $ 82,593 $ (230,137) from operating activities:

Depreciation and amortization 88,852 80,286 91,087 Allowance for equity funds used during construction.... (2,909) (4,658)

Deferred carrying costs on uncommitted electric generating capacity 20,234 Accumulated deferred investment tax credit........ ~ (7,063) (6,475) (20,142)

Accumulated deferred income tax 28,755 42,254 (67,963)

Write-off of proposed generating station 50,970 Write-offs due to electric regulatory order Loss from extraordina'ry item Provision for other losses

."...,.............. 19,707 53,504 381452 Changes in certain assets and liabilities:

Receivables 40,897 (38,000) (17,779)

Fuel, materials and supplies 1,718 9,778 (10,470)

Net assets of discontinued operations............ '180,069 Deferred charges........................

payable.......,......

(49,101) (33,998) (5,458)

Accounts Accrued interest and taxes Deferred credits.............

.............. (22,549)

(1,217) 24,971 (5,020) 23,361 1,005 31,464 6,904 16,006 Other...................

Other . ~..............'.... (572) 1,053 (10,101)

(10,281) 16,025 6,420 Net cash flows from operating activities......... 125,893 132,493 154,528 Cash Flows From Investing Activities:

Utility plant additions (81,290) (74,088) (86,549)

Other property additions Other property

~........

sales.........,....

(11,156) 1,605 (12,081) 7,560 (7,701) 9,729 Temporary investments, net....... 9,765 152,877. 42,482 Net cash flows from investing activities (81,076) 74,268 (42,039)

Cash Flows From Financing Activities:

Proceeds from issuance of common 'stock 682 Redemptions and repurchases of preferred stock....., ., (3,813) (5,510) (5,257)

Proceeds from long-term debt........... ~....... 3,043 50,195 Repayments of long-term debt Net increase (decrease) in short-term debt Dividends paid.............. ........... (14,570)

(18,880)

(9,626)

(206,170) 33,880 (66,468)

'3,000)

(26,723) , (89,524)

Net cash flows from financing activities ........ ~ (46,889) (201,480) '113,372)

Increase (Decrease) in Cash (2,072) 5,281 (883)

Cash at Beginning of Year 6,660 1,379 '2,262 Cash at End of Year................ $ 4,588 $ 6,660 $ 1,379 Supplemental cash flow disclosures:

Interest paid,..... ~......... $ 68,415 $ 86,444 $ 101,179 Income taxes paid (refunded) ..... $ (52,865) $ 12,'397 $ (9,842)

'ash consists of currency on hand and demand deposits.

See accompanying notes to consolidated financial statements.

37

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CAPITALIZATION December 31, 1990 1989 (In thousands)

Common Stock Equity (note 2):

Common stock, par value $ 5 per share $ 208,870 $ 208,870 Additional paid-in capital....... 469,688 487,465 Retained earnings since January 1, 1989 46,703 56,263 Total common stock equity..... ~ ~ ~ ~, ~ 725,261 752,598 Shares Outstanding at Current Stated December 31, Redemption Value 1990 Price Cumulative Preferred Stock (note 2):

Without mandatory redemption requirements:

1965 Series, 4.58%................ $ 100 130,000 $ 102.00 13,000 13,000 8.48% Series.................... 100 200,000 103.00 20,000 20,000 8.80% Series..... ~ .. ~......... ~ ~ 100 260,000 103.10, 26,000 26,000 590,000 59,000 . 59,000 With mandatory redemption requirements:

8.75% Series.................... 100 282,463 102.90 28,246 29,918 12.52% Series................... 50 393,360 19,668 22,001 675,823 47,914 51,919 Redeemable within one year.......... 46,660 2 333 2,651 629,163 45,581 49,268 Long-Term Debt (note 2):

Issue and Final Maturity Interest Rates First mortgage bonds:

1990 through 1995....,............ 4'/s% 8,655 8,655 1996 through 2000................. 5'/s% to 7'/<% 28,202 28,417 2001 through 2005................. 7/s% to 10/s% 100,747 101,465 2006 through 2010................ 8'/s% to 9 86,003 87,040 2013.........,...

~

2011 through ~... 127/s% 540 1,716 1993 through 2013 pollution control series, securing pollution control revenue bonds 5.9% to 10s/<% a 437,045 437,045 Total first mortgage bonds , 661,192 664,338 Pollution control revenue bonds:

2003 through 2013......,.......... 10% to 102/<% 100,000 100,000 2009 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ variable rate 37,300 37,300 Other, including unamortized premium and discount . 848 12,392 Total long-term debt ..., .......... 799,340 814,030 Current maturities 9,214 12,324 Long-term debt, less current maturities... 790,126 801,706 Total Capitalization $ 1,619,968 $ 1,662,572 See accompanying notes to consolidated financial statements.

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS December 31, 1990, 1989 and 1988 (1) Summary of Significant Accounting Policies Systems of Accounts The Company maintains its accounts for utility operations primarily in accordance with the uniform system's of accounts prescribed by the Federal Energy Regulatory Commission ("FERC") and the National Association of Regulatory UtilityCommissioners ("NARUC"), and adopted by the New Mexico Public Service Commission ("NMPSC"). As a result of the ratemaking process, the application of generally accepted accounting principles by the Company differs in certain respects from the application by non-regulated businesses. Such differences generally regard the time at which certain items enter into the determination of net earnings in order to follow the principle of matching costs and revenues.

Principles of Consolidation The consolidated financial statements include the accounts of the Company and subsidiaries in which it owns a majority voting interest. To the extent the operations of the Company's subsidiaries have been discontinued (see note 10), all amounts have been segregated in the accompanying financial statements as discontinued operations. All significant intercompany transactions and balances have been eliminated.

UtilityPlant Utilityplant is stated at original cost, which includes payroll-related costs such as taxes, pension and other fringe benefits, administrative costs and an allowance for funds used during construction.

Utilityplant includes certain electric assets not subject to NMPSC regulation. The operations of such electric assets are included in operating income. (See note 11).

It is Company policy to charge repairs and minor replacements of property to maintenance expense and to charge major replacements to utilityplant. 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."

F Depreciation and Amortization Provision for depreciation and amortization of utility plant is made at annual straight-line rates approved by the NMPSC. The average rates used are as follows:

1990 1989 1988 Electric plant... ~ . 2.88% 2.87% 3.06%

Water plant.....,........

Gas plant Common plant 3.13%

2.68%

7.36%

3.11%

2.78%

9.54%

2.97%

2.25%

8.62%

The provision for depreciation of certain equipment is charged to clearing accounts and subse-quently allocated to operating expenses or construction projects based on the use of the equipment.

Depreciation of non-utility property is computed on the straight-line method. Amortization of nuclear fuel is computed based on the units'of productio'n method.

's Alloisance for Funds Used During Construction ("AFUDC")

provided by the uniform systems of a'ccounts, AFUDC, a noncash item, is charged to utility plant. AFUDC represents the cost, of borrowed funds (allowance for borrowed funds used during construction) and a return on other funds (allowance for equity funds used during construction). The Company capitalizes AFUDC on construction work in progress and nuclear fuel in the process of enrichment to the extent allowed by regulatory commissions.

39

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

December 31, 1990, 1989 and 1988 AFUDC is computed using the maximum rate permitted by the FERC. Beginning in 1989, the Company converted from an after-tax rate to a pre-tax rate in order to comply with the requirements of Statement of Financial Accounting Standards ("SFAS") No. 96, Accounting for Income Taxes issued by the Financial Accounting Standards Board ("FASB"). In calculating AFUDC rates for 1990, the average short-term debt balance exceeded the average construction work in progress balance, resulting in a zero AFUDC rate for equity funds. The total AFUDC rates used were 8.96%, 10.94% and 8.37% for 1990, 1989 and 1988, respectively, compounded semi-annually.

Fuel, Purchased Popover and Gas Purchase Costs Economy sales and other near-term energy delivery transactions by the electric utility are shown as a reduction of fuel and purchased power expenses. The Company uses the deferral method of accounting for the portion of fuel, net purchased power and gas purchase costs which are reflected in subsequent periods under fuel and purchased power clauses and gas adjustment clauses. Future recovery of these costs is based on orders issued by the regulatory commissions.

Amortization of Debt Discount, Premium and Expense Discount, premium'and expense relat'ed to the issuance and retirement of long-term debt are amortized over the lives of the respective issues.

Income Taxes Certain revenue and expense items in the consolidated statement of earnings (loss) are recorded for financial reporting purposes in years different from those in which they are recorded for income tax purposes. For ratemaking purposes, customers are charged currently for the tax effects of certain of these differences (normalization). How'ever, the income tax effects of certain other differences result in reductions of income tax expense for ratemaking purposes in the current year as required by the NMPSC (flow-through). This flow-through method, is used primarily for certain capitalized start-up and pre-operational costs at the Palo Verde Nuclear Generating Station ("PVNGS"), accelerated amortization of pollution control facilities and for minor differences between book and.tax deprecia-tion. A 1990 NMPSC order in an electric rate case required reversal of the flow-through treatment previously accorded the premiums on retirement of first mortgage bonds and losses on hedging transac-tions and retroactively required tax normalization of these items. (See note 11.)

Prior to 1989, in accordance with generally accepted accounting principles, deferred income taxes were provided to the extent allowed for ratemaking purposes through normalization. In addition, rates subject to FERC jurisdiction allow recovery of amounts necessary to provide additional tax normaliza-tion of the differences described above which are treated in ratemaking under the flow-through method for other customers. Provision was made in years prior to 1989 for additional deferred income taxes attributable to amounts collected under these rates. Deferred income taxes were also provided on all non-permanent differences between book and taxable income attributable to non-utility operations.

Effective January 1, 1989, the Company adopted SFAS No. 96, which prescribes a new accounting standard for income taxes. SFAS No.,96 retains the requirement that deferred income taxes be recorded to reflect tax normalization. Additionally, it requires that such deferrals be recorded using the liabilitymethod. Under this method, deferred tax liabilities are computed using the enacted tax rates scheduled to be in effect when the temporary differences reverse. For regulated operations, any changes in tax rates applied to accumulated deferred income taxes may not be immediately recognized because of ratemaking and tax accounting provisions contained in the Tax Reform Act of 1986. For items accorded flow-through treatment under NMPSC orders, deferred income taxes and the future

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

'December 31, 1990, 1989 and 1988 ratemaking effects of such taxes, as well as corresponding regulatory assets and liabilities, are recorded as required by SFAS No. 96. The adoption of SFAS No. 96 had no material impact upon 1989 or 1990 operating results.

The Company defers investment tax credits related to utilityassets and amortizes them over the estimated useful lives of those assets.

Reoenues Revenues are recognized based on cycle billings rendered to customers monthly. The Company does not accrue revenues for service provided but not billed at the end of a fiscal period.

Gas Operations Due to a change in the regulatory treatment of two of the Company's subsidiaries engaged in the gathering and processing of natural gas, beginning in 1989, these activities are included in the consoli-dated financial statements as utility operations. Accordingly, the utility portion of their results of operations and property are reflected in operating income and utilityplant, respectively, whereas, such items had previously been included in other income and deductions and non-utility property, respectively.

(2) Capitalization Changes in common stock, additional paid-in capital and cumulative preferred stock are as follows:

Cumulative Preferred Stock ivithout Mandatory Ivith Mandatory Redemption Redemption Common Stock Requirements Requirements Aggregate Additional Number Aggregate Number Aggregate Number of Par Paid-In of Stated of Stated Shares Value Capital Shares Value Shares Value F

(Dollars in thousands)

Balance at December 31, 1987....... 41,733,504 $ 208,668 $ 687,899 590,000 $ 59,000 888,472 $ 60,513 Stock Plans................

Redemption of preferred stock 40,579 202 436 57 (49,383) (2,938)

Redeemable within one year .. ~.... (46,660) (2,333)

Balance at December 31, 1988....... 41,774,083 208,870 688,392 590,000 59,000 792,429 55,242 Quasi-reorganization of equity accounts:

Elimination of deficit in retained earnings (144,004)

Adoption of SFAS No. 96 (32,302)

Other adjustments........... (24,767)

Redemption of preferred stock.................. year......

146 (53,232)

(, (3,323)

Redeemable within one 49 837 ) (,

2 651)

Balance at December 31, 1989....... 41,774,083 208,870 487,465 590,000 59,000 689,360 49,268 Adjustments related to quasi-reorganization of equity accounts (17,968)

Redemption of preferred stock 191 (13,537) (1,354)

Redeemable within one year....... (46,660) (2,333)

Balance at December 31, 1990....... 41,774,083 $ 208,870 $ 469,688 590,000 $ 59>000 629,163 $ 45,581 41

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

December 31, 1990, 1989 and 1988 Quasi-Reorganization On May 4, 1989, the Company's board of directors adopted a resolution approving elimination of the Company's deficit in retained earnings through a quasi-reorganization efFective January 1, 1989.

The quasi-reorganization resulted in the transfer of a portion of additional paid-in capital to retained earnings to eliminate the $ 144.0 million deficit in retained earnings and set the retained earnings balance to zero as of January 1, 1989.

In implementing the quasi-reorganization, the Company adopted SFAS No. 96 effective January 1, 1989. Such adoption resulted in a direct charge to'additional paid-in capital of $ 32.3 million in 1989 which represents the cumulative efFect of applying SFAS No. 96. This amount relates primarily to deferred income taxes accrued under SFAS No. 96 for utility plant assets excluded from New Mexico jurisdictional electric rate base in an order issued by the NMPSC on April 5, 1989. (See note 11.)

The Company also evaluated other'ssets and liabilities recorded as of January 1, 1989 for the purpose of adjusting such assets and liabilities to fair value. Adjustments were made based on further evaluation of discontinued operations,'rovisions for settlements of gas purchase contract disputes, abandoned assets, regulatory'djustments and the income tax efFects thereof totaling approximately

$ 24.8 million in 1989. In 1990, adjustments of approximately $ 18.0 million were made, primarily reflecting the results of a FERC examination of the Company's accounts for years prior to 1989. Such amounts have been recorded as charges to additional paid-in capital.

Common Stock The number of authorized shares of common stock with par value of $ 5 per share is 80 million shares. Prior to 1989, the Company periodically issued common stock for the Shareholder's Dividend Reinvestment Plan, the Employee Stock Purchase Plan, the Master Employee Savings Plans and the Consumer Stock Plan ("Stock Plans" ). The board of directors of the Company terminated the Share-holder's Dividend Reinvestment Plan, the Employee Stock Purchase Plan and the Consumer Stock Plan as of September 1, 1988.

The payment of cash dividends on the common stock of the Company is subject to certain restrictions, including those contained in the Company's mortgage indenture, which efFectively prevent the payment of dividends on common stock unless the Company has retained earnings. In April 1989, the Company announced the suspension of dividend payments on the Company's common stock as a result of the deficit in retained earnings as of December 31, 1988. Although the implementation of the Company's quasi-reorganization, efFective as of January 1, 1989, eliminated the retained'earnings deficit, the Company's board of directors has not declared dividends on its common stock since January 1989. The board of directors reviews its dividend policy on a continuing basis. The payment of future dividends is dependent upon earnings, the financial condition of the Company, market requirements and other factors.

1 Cumulatioe Preferred Stock

'he number of authorized shares of cumulative preferred stock is 10 million shares.

I The Company, upon 30 days notice, may redeem the cumulative preferred stock at stated redemp-tion prices plus accrued and unpaid dividends. Redemption prices are at reduced premiums in future years. No redemptions for the 12.52% Series may be made prior to October 15, 1991, except for the use of sinking fund and optional redemptions.

Mandatory redemption requirements are $ 2.3 million for 1991 and $ 3.6 million annually for 1992 through 1995.

42

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

December 31,'1990, 1989 and 1988 In 1990, 1989 and 1988, the Company redeemed or purchased approximately $ 4.0 million, $ 5.7 million and $ 5.3 million, respectively, of the Company's cumulative preferred stock.

Long-Term Debt Substantially all utilityplant is pledged to secure the Company's first mortgage bonds. A portion of certain series of long-term debt will be redeemed serially prior to their due dates. The aggregate amounts,(in thousands) of maturities through 1995 on long-term debt outstanding at December 31, 1990, are as follows:

1991 ......

,1992......

$ 9,214

$ 1,639 1993 ......

...... $ 11,314 1994 $ 2,220 1995 ...... $ 2,235 h (3) Short-Term Debt The Company's interim financing requirements have been met through the issuance of commercial paper and notes payable to banks. As of December,31, 1990, the Company had credit commitments from various banks totaling approximately $ 252.7 million. As of such date, $ 15 million of these commitments were being used for bank borrowings and $ 237.7 million was available for additional bank borrowings. Of these commitments, $ 141 million expired on February 1, 1991 and the remaining commitments are scheduled to expire by August 1, 1991. As of February 21, 1991, the Company is negotiating with major banks for a $ 225 million revolving credit facility. The Company generally pays commitment fees or maintains cash balances on deposit with banks to assure availability of its credit commitments.

n (4) Income Taxes Income taxes included in earnings (loss) from continuing operations consist of the following components:

1998 1989 1988 dtn thousands)

Current Federal income tax $ 21,155 $ 59425 $ 7,432.

Current State income tax.... ~ 6,611 (920) 1,521 Deferred Federal income tax . (1,667) 26,852 (8,983) tax.....

~

Deferred State income (3,878) 6,'669 (916)

Investment tax credit utilized and deferred..... (730) (333)

Amortization of accumulated investment tax credits (6,332) (6,475) (6,383)

Total income taxes....... $ 15,159 $ 31,"551 $ (7,662)

Charged to operating expenses l $ 7,490 $ 25,958 $ 17,268 Charged (credited) to other income and deductions 7,669 5,593 (24,930)

Total income taxes..... ~ ~ . $ 15,159 $ 31,551 $ (7,662) 43

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

December 31, 1990, 1989 and 1988 The Company's provision for income taxes from continuing operations, exclusive of extraordinary items, differed from the Federal income tax computed at the statutory rate for each of the years shown.

The differences are attributable to the following factors:

1990 1989 1988 Pn thousands)

Federal income tax'at "statutory rate of 34%......... $ 5,304 $ 38,809 $ (5,986)

AHowance for funds used during construction (989) (2,403)

Deferred carrying costs on uncommitted electric generating capacity....................... 6,879 Investment tax credits (6,332) '6,475) (6,383)

PVNGS start-up and pre-operational costs Depreciation of flow-through items...

~.......... (1,479) 1,687 (3,354) 1,079 (3,836) 2,971 Gains on the sale and leaseback of PVNGS . ~....... 1,027 (960) (907)

Amortization of pollution control facilities (1,533) (1,528)

Reversal of permanent differences resulting from write-off of proposed generating station .. ~ ..'..........

Reversal of flow through tr'eatment for debt retirements

~

lt 6,234 and hedge transactions as ordered by the NMPSC.... 14,043 State income tax....,..... ~,.......'-...... i 308 3,855" (215)

Tax rate differential on capital'loss carryback 2,197 0 ther h 601 (1,078) (2,488)

~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 0 Total income taxes . ~ ~ $ 15,159 $ 31,551 $ (7,662)

Deferred income taxes result from certain difFerences between the recognition of income and expense for tax and financial reporting purposes, as described in note 1. The major sources of these difl'erences for which deferred taxes have been provided and the tax effects of each are as follows:

1990 1989 1988 Deferred fuel costs .......................

Depreciation'and cost recovery..... ~.......... 12,317 gn thousands)

$ (3,591) $ 4,366 19,504

$ 8,160 16,985 Contributions in aid of construction............. (1,397) (1,776) (4,113)

Advance lease payments.................... 14,710 744 Unbilled revenues........................ (650) (1,880) (2,486)

Alternative minimum tax in excess of regular tax..... 1,671 (6,548) (5,132)

Write-off of proposed utility facilities............ 11,756 2,008 . (12,865)

Limitation on deferred taxes due to tax net operating losses o ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ (43,606)

Reversal of flow through treatment for debt retire ments and hedge transactions as ordered by the NMPS C ... 14,043 0 ther ~ ~ ~ ~ ~ 0 ~ \ 0 ~ ~ ~ ~ ~ ~ 3,912 3,137 . (11,192)

Total deferred taxes............ $ (5,545) $ 33,521 $ (9,899)

In addition, the balance of deferred income taxes at December 31, 1990 includes amounts for losses on disposition of assets, premiums on retirement of bonds, deferred gains on sale and leaseback transactions, deferred investment tax credits and regulatory assets and liabilities.

See notes 10 and 11 for income taxes applicable to discontinued operations and extraordinary item.

44

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

December 31, 1990, 1989 and 1988 At December 31, 1990, the Company had net operating loss carryforwards for Federal income tax purposes of $ 156 million which expire in the years 2003 through 2005.

The application of SFAS No. 96 to regulated enterprises results in the creation of regulatory assets and liabilities. AtDecember 31, 1990 and 1989 deferred charges included regulatory assets of $ 59.4 mil-lion and $ 93.8 million, respectively, and deferred credits included regulatory liabilities of $ 82.4 million and $ 86.7 million, respectively.

(5) Employee and Post-Employment Benefits Pension Plan The Company and its subsidiaries have a pension plan covering substantially all of their employ-

'ees, including oflicers. The plan is non-contributory and provides for benefits to be paid to eligible employees at retirement based primarily upon years of service with the Company and their compensa-tion rates near retirement. The Company's policy is to fund actuarially-determined contributions.

Contributions to the plan reflect benefits attributed to employees'ears of service to date and also for services expected to be provided in the future. Plan assets primarily consist of common stock, fixed income securities (United States government obligations), cash equivalents and real estate.

In 1988, the Company reduced its work-force by 799 positions in a program that included early retirements, voluntary and involuntary separation packages and layoffs. The effect of this reduction on pension costs is reflected in the table below.

The component of pension cost (in thousands) are as follows:

1990 1989 1988 Service cost......... ~......... ~....... 4,165 4,338 Interest cost ........,

Actual return on plan

.. ~........ ~.....

assets.................

$ 6,287 13,404 (2,469) 12,191 (25,360) 10,634 (14,088)

Asset gain deferred (amortized)....'...........

Other .............................. (13,930)

(1,130) 11,015 (1,205) 1,413 (1,241)

Net periodic pension cost 2,162 806',056 Termination loss...... ~................ 9,036 Curtailment gain........................ ~

(1,819)

Total pension cost .',...................... $ 2,162 $ 806 $ 8,273 The following sets forth the plan's funded status and amounts (in thousands) at December 31, 1990 and 1989:

1990 1989 Vested benefits...,;...

Non-vested

~............

benefits.................

$ 115,162 634

$ 111,633 663 Accumulated benefit obligation 115,796 112,296 Effect of future compensation levels 48,324 38,598 Projected benefit obligation 164,120 150,894 Fair value of plan assets 167,389 166,002 Assets in excess of projected benefit obligation . $ 3,269 $ 15,108 45

PUBLIC SERVICE COMPANY OF NEW'MEXICO AND'SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

December 31, 1990, 1989 and 1988 The components of assets in excess of projected benefit obligation (in thousands) are as follows:

1990 1989 assumed ..;.................

Net unrecognized gain (loss) from past experience different from Unamortized asset at transition, being amortized through the

$ (10,885) $ 5,900 year 2002 12,798 13,962 liability................'.......,..

0 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~

Accrued pension 1,788 (4,288)

Unrecognized prior service cost (432) (466)

$ 3,269 $ 15,108 For both years, the weighted average discount rate used to measure the projected benefit obliga-tion was 9% and the expected long-term rate of return on plan assets was 10%. The rate of increase in future compensation levels based on age-related scales was 7.0% for 1990 and 6.5% for 1989.

Other Post-employment Benefits The Company provides medical and dental benefits to eligible retirees who retire either at normal retirement date or early retirement. Currently, retirees are offered the same benefits as active employ-ees after reflecting Medicare coordination. The cost of providing these benefits for retirees is expensed when paid and was $ 1,323,000, $ 1,348,000 and $ 901,000 for 1990, 1989 and 1988, respectively.

In December 1990, the FASB issued SFAS No. 106, Employers'ccounting for Postretirement Benefits Other than Pensions, effective for fiscal years beginning after December 15, 1992. SFAS No. 106 willrequire accrual of postretirement benefits (such as medical and dental benefits) during the years employees provide services. The costs of these benefits are currently expensed on a pay-as-you-go basis. The impact of this new standard has not been fully determined, but the change likely willresult in significantly greater expense being recognized for provision of these benefits. The Company expects that the increased benefits expense willeither be recovered currently through rates or that a regulatory asset will be recorded to reflect amounts to be recovered through rates in the future as the costs are paid; therefore, SFAS No. 106 should not have a significant impact on the Company's financial condition or results of operations.

Employee Stock Ownership Plan Effective January 1, 1989, the Company adopted an Employee Stock Ownership Plan covering substantially all of its employees. Under the plan, the Company makes cash contributions which are utilized to purchase the Company's common stock on the open market. Contributions to the plan were approximately $ 5.3 million in 1989. No contributions were made in 1990.

(6) Construction Program and Jointly-Owned Plants It is estimated that the Company's construction expenditures (including AFUDC) for 1991 will approximate $ 119 million, including expenditures on jointly-owned projects. In connection therewith, substantial commitments have been made.

46

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

December 31, 1990, 1989 and 1988 ~

At December 31, 1990, the Company's ownership interest and investments in jointly-owned gener-ating facilities are:

Construction Composite Plant In Accumulated Ivork in Ownership Station (Fuel +pe) Service Depreciation Progress Interest (In thousands)

San Juan Generating Station (Coal).......... $ 815,827 $ 251,389 $ 2,420 51.6%

Palo Verde Nuclear Generating Station Unit 3 (Nuclear)* $ 327,680 $ 28,610 $ 28,559 10.2%

Four Corners Generating Station Units 4 and 5 (Coal)..... $ 97,000 $ 23,978 $ 19,135 13.0%

• Includes the Company's remaining interest in common facilities for all PVNGS units.

San Juan Generating Station The Company operates and jointly owns the San Juan Generating Station ("S JGS"). At Decem-ber 31, 1990, S JGS Units 1 and 2 are owned on a 50% shared basis with Tucson Electric Power Company

("Tucson" ), Unit 3 is owned on a 50% shared basis with Century Power Corporation ("Century" ) and Unit 4 is owned 55.525% by the Company, 8.475% by the City of Farmington, 28.8% by the M-S-R Public Power Agency ("M-S-R") and 7.2% by the County of Los Alamos.

On January 23, 1991, Tucson announced that, in a meeting with its bank group, it proposed a moratorium commencing February 1, 1991, during which it would suspend payment of interest and principal on certain collateralized debts, and asked'the banks to refrain from legal action at least through March 15, 1991, on the discontinuance of payments. The Company understands that Tucson instituted a payment moratorium on February 1, 1991, including a payment moratorium with respect to other creditor groups and major suppliers such as Century. The Company understands that Tucson is discussing restructuring Tucson's obligations with its creditors and major suppliers. Tucson has reported that its failure to pay has resulted in a number of events of default under its various financing arrangements.

The Company understands that Tucson is the major customer of Century and that the financial difficulties of Tucson are having an adverse impact on Century.

The Company also understands that Tucson's senior executives had previously briefed the Arizona Corporation Commission (the "ACC") on the implications of a possible bankruptcy filing and that Tucson is attempting to negotiate a comprehensive rate settlement with the ACC.

Tucson has reported that, in the event that Tucson's creditors do not forbear from exercising remedie's against Tucson during the period while the restructuring of obligations and rate plans are being negotiated or in the event that a comprehensive rate settlement cannot be negotiated with the ACC, Tucson anticipates that it may need to file for protection from its creditors under Chapter ll of the United States Bankruptcy Code.

fl In view of Tucson's discussion of the possibility of bankruptcy, the Company is evaluating what impact Tucson's financial difficulties'might have on the Company, including indirect impacts that might arise from, the effect on Century of Tucson's financial difficulties. The Company currently believes it is unlikely that the financial difficulties of Tucson will have a material impact on the Company's future financial condition or results of operations. However, as a co-participant in and operating agent of SJGS, the Company has certain contingent obligations under the plant operating agreement and joint and several liability with Tucson under the coal supply agreement.

47

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

December 31, 1990,'1989 and 1988 Palo Verde Nuclear Generating Station The Company has a 10.2% undivided ownership interest in PVNGS. Commercial operation com-menced in 1986 for Unit 1 and Unit 2 and 1988 for Unit 3. In 1985 and 1986, the Company completed sale and leaseback transactions for its undivided interests in Units 1 and 2 and certain related common facilities.

The NMPSC issued an order to investigate the prudence of the Company's investment in PVNGS.

The Company had the burden of proving, and the Company believes, that PVNGS construction costs reasonable and that its decisions to invest in and continue participation in PVNGS were prudent. 'ere In March 1989, the report on a PVNGS construction audit being performed for the Arizona Corpora-tion Commission was released. The report concluded that certain PVNGS construction costs, AFUDC and ad valorem taxes were unreasonable. The Company's share of such costs is approximately $ 7.8 mil-lion (after income taxes), which was charged to expense in 1988. In May 1989, the NMPSC staff and the Company reached an agreement (the "stipulation") settling all issues of prudence existing at that date, as they relate to the Company's 10.2% interest in PVNGS Units 1 and 2. (The Company's interest in PVNGS Unit 3 has been excluded from New Mexico jurisdictional rates. See note 11.) The stipulation, which is opposed by the other parties to the PVNGS cost investigation case, was approved by the NMPSC on March 6, 1990. The New Mexico Attorney Geneial has appealed the NMPSC's March 6, 1990 order to the New Mexico Supreme Court. The stipulation as approved by the NMPSC does not require write-offs in addition to the amounts written off by the Company in 1988.

The PVNGS participants have insurance for public liability payments resulting from nuclear energy hazards to the full $ 7.8 billion limit of liability under Federal'aw. This potential liability is covered by primary liability insurance provided by commercial insurance carriers in the amount of ,

$ 200 million and the balance by an industry-wide retrospective assessment program. The maximum assessment per reactor under the retrospective rating program for each nuclear incident occurring at nuclear power plant in the United States is approximately $ 66 million, subject to an annual limitof

'ny

$ 10 million per incident. Based upon the Company's 10.2% ownership interest in the three PVNGS units, the Company's maximum potential assessment per incident is approximately $ 20 million, with 'n annual payment limitation of $ 3 million.

The PVNGS participants maintain "all-risk" (including nuclear hazards) insurance for nuclear property damage to, and decontamination of, property at PVNGS in the aggregate amou'nt of

$ 2.325 billion as of January 1, 1991, a substantial portion of which must first be applied to decontami-nation. The Company has also secured insurance against a portion of the increased cost of generation or purchased power resulting from the accidental outage of any of the three PVNGS units.

The Company has a program for funding its share of decommissioning costs for PVNGS. Under this program, the Company will make a series of annual deposits to an external trust fund over the estimated useful life of each unit, and the trust funds will be invested under a plan, which allows the accumulation of funds largely on a tax-deferred basis through the use of life insurance policies on employees. The annual trust deposit, currently set at $ 396,000 per unit, is based upon the Company's 10.2% share of total estimated PVNGS decommissioning costs and projected earnings on the trust funds over time. Based on current assessments, the use of life insurance policies will necessitate the Company prefunding certain annual trust deposits for the aggregate amount of approximately $ 4.8 mil-for the years 1991 through 1993. The annual funding amount is subject to periodic'adjustment for 'ion changes in decommissioning cost estimates and earnings of the trust fund. The Company's share of PVNGS decommissioning costs is presently estimated, in 1990 dollars, at approximately $ 81.4 million.

48

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

December 31, 1990, 1989 and 1988 Dinch Power Project Since 1972, the Company had participated in a joint project, known as the Dinch Power Project, for the construction of a coal-fired generating station. The markets for such a project did not develop as had been anticipated and'it could not be determined when or if the proposed station would be constructed. In 1988, the Company determined that the recovery of its investinent in this project was remote. Accordingly, the Company wrote off its investment of $ 38.1 million (net of income taxes) in the proposed generating station in 1988.

(7) Long-Term Power Contracts and Franchises The Company has entered into contracts for the purchase of electric power. Under a contract with M-S-R, which contract expires in 1995, the Company is obligated to pay certain minimum amounts and a variable component representing the expenses associated with the energy purchased and debt service costs associated with capital improvements. Total payments under this contract amounted to approxi-mately $ 41 million for each of 1990, 1989 and 1988. The minimum payment for each of the next five years under this contract is $ 28.1 million annually.

The Company has a long-term contract with Southwestern Public Service Company ("SPS")

requiring the Company to purchase capacity beginning in June 1991. Minimum payments under the contract for 1991, 1992 and 1993 will be $ 4.1 million, $ 7.0 million and $ 7.0 million, respectively. In addition, the Company will be required to'ay for any energy purchased under the contract. The amount of minimum payments after 1993 will depend on whether, the Company exercises certain options to reduce its purchase obligations.

The'contract with SPS also required SPS to purchase power from the Company through the end of 1989. This portion of the contract expired on December 31, 1989. Revenues from such sales accounted for approximately 11.9% of total revenues in each of 1989 and 1988. Sales under, the SPS contract contributed approximately $ 1.13 and $ 1.12 to earnings per share in 1989 and 1988, respectively.

The Company holds long-term; non-exclusive franchises of varying durations in all incorporated communities where it is necessary to do so in order to provide utilityservices within those communities.

The Company's electric franchise in Albuquerque, covering an area which contributed 46.9% of the Company's total 1990 electric operating revenues, expires in early 1992. The'City of Albuquerque is studying alternatives, including municipalization of the Company's distribution system. The Company has been actively pursuing the re'newal of the franchise prior to its expiration. Absent a renewal of the franchise, the Company is likely to continue service to the City franchise area for an undetermined period of time without a franchise. Furthermore, the Company, as necessary, willtake vigorous action to protect the value of the Company's distribution system in the City franchise area and related utility plant. While the Company cannot predict the ultimate outcome of the franchise renewal issues, it currently believes that such outcome willnot have a material adverse effect on the Company's financial condition or results of operations.

(8) .Lease Commitments The Company classifies its leases in accordance with generally accepted accounting principles. The Company leases Units 1 and 2 of PVNGS, transmission facilities, office buildings and other equipment under operating leases. The aggregate lease payments for the PVNGS leases are $ 84.6 million per year over base lease terms expiring in 2015 an'd 2016. Each PVNGS lease contains renewal and fair'market value purchase options at the end of the base lease term.

49

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

December 31, 1990, 1989 and 1988 Future minimum operating lease payments (in thousands) at December 31, 1990 are:

1991 $ 96,648 1992 1993 1994 96,219 95,291 1995 ...........

Later years....... ~ ~ ~ ~

94,667 94,569 1,844,664 Total minimum lease payments $ 2,322,058 lease expense was approximately $ 96.0 million in 1990, $ 95.8 million in 1989 and

'perating

$ 101.4 million in 1988. The aggregate minimum payments to be received in future periods under noncancelable subleases are approximately $ 9.4 million.

(9) Natural Gas Proceedings, Contract Disputes and Supply Contracts Gas Company of New Mexico ("GCNM"),a division of the Company, and Sunterra Gas Gathering Company ("Gathering Company" ), a subsidiary of the Company, have been disputing claims by'certain natural gas producers*relating to contract pricing, take-or-pay obligations and other matters, some of which are, or have been, the subject of litigation. In addition, other claims and litigation may arise.

GCNM and Gathering'Company are vigorously defending against these claims. Certain matters have been settled and the Company intends to continue active pursuit of negotiations to resolve these In addition, the Company has settled with third-parties who, the Company believes, have 'atters.

contributed to the Company's potential liabilities. The Company has evaluated, and will continue to evaluate, the impact of these matters on the Company.

On December 18, 1989, the NMPSC issued an order which provides for the partial recovery of certain gas costs incurred for take-or-pay obligations, contract pricing and other gas purchase contract litigation items. Under the order, the Company bears 25% of producer take-or-pay costs. The Company will be permitted to recover from its sales and transportation customers the remaining 75% of such costs over a period of years. The order allows the Company to recover all take-or-pay costs assessed by interstate pipelines. The order also provides that the. Company may recover all costs prudently incurred (as defined by the NMPSC on a case-by-case basis) as the result of the settlement or litigation of claims arising from certain intrastate gas purchase contracts that were the subject of antitrust litigation that resulted in the Company's acquisition of GCNM from Southern Union Company in January 1985. On September 21, 1990, GCNM filed with the NMPSC seeking approval to recover

$ 73 million of costs arising from settlement of these contract claims. This case is presently in the discovery phase, and hearings have been scheduled for October 1991. On June 16, 1990, GCNM filed with the NMPSC for approval of a rate rider that would be the mechanism to recover all the costs described above, plus interest.

A provision for losses arising from natural gas contract disputes was made in 1988. In 1989, the Company made an adjustment to the provision reflecting the Company's further evaluation of claims by natural gas producers. (See note 2.) Based on the amounts it believes are recoverable under the December 1989 NMPSC order, the amounts of the settlements achieved and the provisions made, the Company currently believes it is unlikely that remaining disputes with natural gas producers willhave a material adverse impact on the Company's future financial condition or results of operations.

Approximately 50% of the Company's 1990 gas supplies from all sources came from contracts that allowed the Company, without penalty, to not purchase gas during its off-peak season or have no take-or-pay requirements. The remaining 50% of the gas supplies from all sources came from contracts 50

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

December 31, 1990, 1989 and 1988 which have some form of penalty associated with the failure to take the volume of gas set forth in the contract. The Company believes that the payment of any penalties not recovered from customers would not materially affect the financial condition or results of operations of the Company.

(10) Discontinuance of Non-Utility Operations In 1988, the Company made the decision to discontinue the non-utility operations of its subsidiar-ies. Such operations consisted primarily of fiberboard manufacturing, real estate, coal mining, telecom-munications manufacturing and financial services and were carried out by or through the Company's wholly-owned subsidiaries. Estimated losses on disposal of non-utility operations in 1988 were $ 137.8 million (net of income'tax benefits of $ 64.1'million) which primarily reflected the decrease in the value of southwestern real estate holdings and the loss the Company expected to incur on the sale of a fiberboard manufacturing facility. Such losses also included a'provision of $ 29.5 million for expected operating losses prior to their expected disposal of non-utility operations in 1989. Approximately $ 13.8 million of the expected operating loss was incurred in 1988.

i Operating results of the discontinued operations prior to the date of discontinuation are shown separately in the accompanying Consolidated Statement of Earnings (Loss). Such amounts include income tax benefits related to the losses from discontinued operations of $ 13.6 million,in 1988. Total sales from the discontinued operations were $ 128.0 million in 1988.

Substantial portions of the discontinued operations were disposed of in 1988 and 1989. In 1989, the Company reevaluated the cost of disposing of the discontinued operations including the related income tax effects, and recorded appropriate adjustments. (See note 2.) In 1990, additional non-utility proper-ties were sold, and the remaining assets are expected to be sold in 1991.

On April 18 and July 20, 1990, the NMPSC issued orders docketing a formal investigation regarding the settlement agreement between the Company and secured creditors of one of the Com-pany's subsidiaries and the Company's discontinuance of its non-utility subsidiary operations. The Company is required to show cause, if any, as,to why the settlement agreement, the discontinuance of the Company's non-utility operations and the disposal of non-utility assets are not subject to prior NMPSC approval and why the resulting effect of the Company's actions has not materially and adversely affected the Company's ability to provide utilityservice at fair, just and reasonable rates. The formal investigation willalso inquire into whether the Company's actions are in compliance with other applicable law and whether sanctions should be imposed. Hearings are set for May 6, 1991. However, the Company does not believe that the ultimate outcome of the current investigation will have a material, impact on its financial condition or results of operations.

(11) Regulatory Issues Electric Operations The Company's investment in PVNGS has been the subject of regulatory inquiry in recent years.

On April 5, 1989, the NMPSC issued an order addressing the Company's excess capacity situation which, among other things, provides for the inclusion in NMPSC jurisdictional electric rates of the Company's jurisdictional interests in PVNGS Units 1 and 2, 147 MW of SJGS Unit 4 and the power purchase contract with SPS. (See note 7.) However, the order provides for the exclusion from New Mexico jurisdictional rates of the Company's 130 MW interest in PVNGS Unit 3, 130 MW of SJGS Unit 4 and the power purchase contract with M-S-R. (See notes 6 and 7.) The order stated that as long as there is excess capacity in the Company's jurisdictional rates, then that excess capacity willshare off-system sales equitably with the capacity excluded in the order. The NMPSC approved the Company's request for decertification and regulatory abandonment of PVNGS Unit 3 but denied such a request for the 130 MW of S JGS Unit 4. The Company has appealed the denial to the New Mexico Supreme Court.

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continue'd)

December 31, 1990, 1989 and 1988 Since the order did not provide for the recovery of carrying costs being deferred by the Company on uncommitted electric generating capacity as required by SFAS No. 92, Regulated Enterprises Accounting for Phase-in Plans, the Company discontinued deferring such carrying costs and, in 1988, wrote-ofF $ 70.1 million of such cost previously deferred. Of such amount, $ 52.7 million, related to generating capacity to be included in New Mexico jurisdictional rates, was charged to other income and deductions and $ 17.4 million, related to excluded'generating capacity, was reported as an extraordinary item.

.In 1988, the Company discontinued the use of regulatory accounting principles for the resources excluded from regulation. Such discontinuance required the Company to adjust'the carrying value of excluded resources by those items, other than A'FUDC, which were recorded solely based on regulatory accounting principles. The Company recognized a loss, which was treated as an extraordinary item, of

$ 46.6 million (including an income tax expense of $ 6.8 million and write-oQ'of deferred carr'ying costs on uncommitted electric generating capacity).

On April 12, 1990, the NMPSC issued its final order in an electric rate case, which required the Company to reduce its existing base rates by approximately $ 2.9 million per year. Also, as a result of the order, the Company wrote ofF approximately $ 19.4 million, net of taxes, in March 1990, which resulted primarily from the NMPSC's treatment of prior years'ax benefits from debt retir'ement and losses on hedge transactions of $ 14.0 million as well as the NMPSC's treatment of amortization periods for gains resulting from sale and leaseback transactions of $ 4.5 million on PVNGS Units 1 and 2 consummated in previous years.

(12) Shareholder Litigation The Company and certain individuals who currently serve, or formerly served, as officers or directors of the Company or its subsidiaries are defendants in three class action suits brought by shareholders of the Company. These suits allege misrepresentations and omissions of material facts in the various reports filed with the Securities and Exchange Commission and in other communications primarily related to the Company's excess electric generating capacity and diversified non-utility operations. In addition, there are three suits against present and former officers and directors that shareholders seek to bring derivatively on behalf of the Company. These suits allege, among other things, mismanagement and breach of fiduciary duty relating to excess electric generating capacity, diversified non-utility operations and securities fraud.

A special litigation committee was created by the Company's Board of Directors in July 1989 to conduct an independent investigation generally encompassing the matters alleged in the derivative suits. In January 1991, the special litigation committee filed its report with the respective courts, concluding, among other things, that it was not in the Company's best interests to pursue litigation against any of the defendants with respect to claims concerning excess electric generating capacity and securities fraud, and directing counsel to seek dismissal of such claims in the derivative suits. The special litigation committee also concluded that it was not in the Company's best interests to seek dismissal of pending claims regarding diversification against four individuals who formerly served as directors or officers of the Company or its subsidiaries.

In 1990, the Company made a provision for the estimated cost of defending the shareholder lawsuits. The Company currently believes that the disposition of these lawsuits willnot have a material adverse efFect on the Company's results of operations or its financial condition.

52

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL'TATEMENTS(Continued)

December 31; 1990, 1989 and 1988 (13) Segment Information I The financial information pertaining to the Company's electric, gas (see note 1) and other opera-tions for the years ended December 31, 199 0, 1989 and 1988 are as follows:

Electric Gas Other Total (In thousands),

1990:

Operating revenues $ 541,330 $ 302,104 $ 11,700 $ 855,134 Operating expenses excluding income taxes 479,259 269,556 6,388 755,203 Pre-tax operating income . .. ~...... 62,071 32,548 5,312 99,931 Operating income tax.........

~

~... (973) 7,032 1,431 7,490 Operating income $ 63,044 $ 25,516 3,881 $ 92,441 Depreciation and amortization expense $ 57,745 $ 14,416 1,043 $ 73,204 Construction expenditures.......... $ 53,080 $ 24,499 6,657 $ 84,236 Identifiable assets:

Net utility plant............... $ 1,574,670 $ 297,877 $ 41,914 27,654

$ 1,914,461 399,248 Other 219,135 152,459 Total assets 0 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ $ 1,793,805 $ 450,336 $ 69,568 $ 2,313,709 1989:

Operating revenues $ 620,381 $ 282,827 $ 12,102 $ 915,310 Operating expenses excluding income taxes 475,405 254,677 6,034 736,116 Pre-tax operating income Operating income

~..........

tax............. 144,976 20,411 28,150 3,759 6,068 1,788 179,194 25,958 Operating income $ 124,565 $ 24,391 4,280 153,236 Depreciation and amortization expense $ 58,129 $ 12,730 1,122 $ 71,981 Construction expenditures.......... $ 55,334 $ 20,375 2,580 $ 78,289 Identifiable assets:

Net utility plant............... $ 1,603,242 284,314

$ 287,779 146,085

$ 40,824 24,761

$ 1,931,845 455,160 Other ~ ~ ~ ~ ~ ~ ~ I Total assets $ 1,887,556 $ 433,864 $ 65,585 $ 2,387,005 1988:

Operating revenues ~ ~ ~ $ 607,317 $ 223,791 $ 10,816 $ 841,924 Operating expenses excluding income taxes..... 470,162 208,540 5,888 684,590 Pre-tax operating income 137,155 15,251 4,928 157,334 Operating income tax 15,624 448 1,196 17,268 Operating income $ 121,531 $ 14,803 3 732 $ 140,066 Depreciation and amortization expense $ 56,450 $ 9,548 922 $ 66,920 Construction expenditures $ 68,230 $ 19,524 9,427 $ 97,181 Identifiable assets:

Net utility plant $ 1,601,556 $ 243,123 $ 40,264 $ 1,884,943 Other.... 323,006 93,616 91,184 507,806 Total assets $ 1,924,562 $ 336,739 $ 131,448 $ 2,392,749 53

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

December 31, 1990, 1989 and 1988 (14) Supplemental Income Statement Information Taxes, other than income taxes, charged to operating expenses were as follows:

1990 1989 1988 (In thousands)

Ad valorem $ 18,345 $ 16,473 $ 14,950 City franchise.......... 6,940 6,664 Payroll.....;

Other

.;...... 7,749 3,927 7,052 3,854 8,890 7,'112 3,871' Total..... ~ . $ 36,961 $ 34,043 $ 34,823 Amortization of intangibles, royalties, and advertising costs were less than 1% of revenues in each of the above periods.

54

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES SCHEDULE V 'ROPERTY, PLANT AND EQUIPMENT Years Ended December 31, 1990, 1989 and 1988 Balance at Classification Beginning of Additions Balance at December 31, 1990 Year at Cost Retirements Add Deduct End of Year Utility.plant: Pn thousands)

Electric plant in service:

Intangible................. $ 30,876, $ 1,460 $ 357 $ 63 $ 1,018 $ 31,024 Production... ~

Transmission.............

~ . ~......... 1,235,981 214,667 8,262 858 2,429 7

15 2

6,614 90 1,235,215 215,430 Distribution . ~.............

General..................

~ .

375,872 63,149 17,741 2,960 1,611 317 151 836 1,683 524 390,470 66,104 1,920,545 31,281 4,721 1,067 9,929 1,938,243 Gas plant in service:

Intangible.......... 7,136 2,357 14 9,479 Production and processing 107,454 34161 563 137 110,189 Natural gas storage.... 4,897 136 4,761 Transmission........ 66,489 700 56 164 66,969 Distribution '203,951 13,140 2 373 214,717 General...........

1'5 36,739 3,856 1,316 475 39,699 426,666 23,214 4,308 612 370 "

445,814 Water plant in service:

Intangible.............. 296 145 151 plant.........

~ ~ ~

Source of supply 4,977 686 841 2,688 7,510 Pumping plant.............. 2,130 248 3 2,375 Water treatment plant......... 3,963 75 4,038 Transmission and distribution 32,140 1,277 154 459 1 33,721 General.................. 5,395 1 98 3,147 2,151 48,901' 2,212 1,096 3 222 3,293 49,946 Common plant in service:

Intangible................. 18,536 881 367 1,135 6,692 145 5

63 2

18,364 21,721 28,043 46,579 1,248 7,827 150 65 40,085 Construction work in progress.... 67,981 18,159 13 '6,127

'lectric plant held for future use .. 16,782 428 122 15,218 1,258 Nuclear fuel .. ~......... ~ .. 88,670 7,955 18,384 766 77,475 Total utility plant 2,616,124 84,069 36,764 5,173 29,654 2,638,948 Non-utility property . ~..... ~... 15,370 167 1,590 15,544 18,804 10,687 equipment ............

Total property, plant and 32,631,434 $ 84,236 $ 38,354 $ 20,717 $ 48,458 $ 2,649,635 Description of other changes Transfers between accounts.......... ~....... $ 16,335 $ 16,335 Transfer of expired contract deposits to plant in service .

1,515 Write-off of plant-in-service 6,245 Write-off of non-utility property.............. '"....

18,200 Miscellaneous corrections and adjustments .. ~ . 4,382 6,163

$ 20,717 $ 48,458 (Contirtued) 55

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES SCHEDULE V PROPERTY, PLANT AND EQUIPMENT (Continued)

Years Ended December 31, 1990, 1989 and 1988 Balance at Classification Beginning of Additions Balance at December 31, 1989 Year at Cost Retirements Add Deduct End of Year Utilityplant: (In thousands)

Electric plant in service:

Intangible...... $ 12,169 $ 18,364 $ 35 $ 378 $ $ 30,876 Production..... 1,214,366 4,270 1,092 18,438 1 1,235,981 Transmission 210,984 3,092 32 669 46 214,667 Distribution ~ ~ ~ ~ ~ '361,772 18,040 3,162 143 921 375,872 General..... 64,845 100 1,889 114 21 63,149 1,864,136 43,866 6,210 19,742 989 1,920,545 Gas plant in service:

Intangible .. 2,826 4,353 20 63 7,136 Production and processing 57,949 580 767 50,190 498 '07,454 Natural gas storage.... 4,885 12 4,897 Transmission 64,992 805 27 719 66,489 Distribution 195,341 10,577 1,958 203,951 General 32,538 4,141 1,485 1,545 36,739 358,631 20,468 4,237 62,474 570 426,666 Water plant in service:

Intangible 259 111 74 296 Source of supply plant .. -....... 4,964 13 4,977 Pumping plant.............. 2,110 36 16 2,130 Water treatment plant Transmission and distribution

~........ 3,968 6 11 3,963 30,164 1,988 47 50 32,140 General 2,221 3,209 35 5,395 43,686 ~

5,363 183 50 15 48,901 Common plant in service:

Intangible................. 14,389 3,346 1,735 2,536 18,536 General 27,139 527 454 893 62 28,043 41,528" 3,873 2,189 3,429 62 46,579 Construction work in progress......

Electric plant held for future use Nuclear fuel.................

..'. 72,401

'1,975 (6,450) 5,193 2,030 67,981 16,782 10,706 1,238 1,245 88,670 77,971',480,228 Total utility plant 77,826 18,012 78,963 2,881 2,616,124 Non-utility property............. 82,206 463 10,339 144 57,104 16,370 Total property, plant and e equipment $ 2,562,434 $ 78,289 $ 28,351 $ 79,107 $ 59,985 $ 2,631,494 DescrIption of other changes Transfers between accounts........,........ $ 57,143 $ 57,143 Transfer of expired contract deposits to plant in service 847 Adoption of SFAS No. 96..................

Miscellaneous corrections and adjustments........

20,798 1,166 1,995

$ 79,107 $ 59,985 (Continued) 56

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES SCHEDULE V PROPERTY, PLANT AND EQUIPMENT (Continued)

Years Ended December 31, 1990, 1989 and 1988 Balance at Other Changes C lassification Beginning of Additions Balance at Dec ember 31, 1988 Year at Cost Rettremeats Add Dedaet End of Year Utility plant: r (In thousands)

Electric plant in service:

Intangible............ $ 3,181 $ 8,988 $ $ $ 12,169 Production 905,110 311,538 1,171 859 1,970 1,214,366 Transmission......... 208,296 2,956 222 46 210,984 Distribution.......... 340,067 25,713 3,338 14 684 361,772

, General 61,956 4,774 2,366 1,227 746 64,845 s

res 1,518,610 353,969 7,097 2,100 3,446 1,864,136 Gas plant in service:

Intangible ..1.......,.. 2,376 269 969 181 326 2,826 57,949 Production 57,816 1,428 Natural gas storage 4,885 4,885 Transmission......... 62,507 1,105 195 1,731 156 64,992 Distribution.......... 182,200 14,837 1,690 6 195,341 General 29,058 4,098 1,130 512 32,538 338,842 21,737 3,984 2,424 488 358,531 Water plant in service:

Intangible................ 259 259

'ource of supply plant 4,964 4,964 Pum'ping plant Water- treatment plant....... ~ .

2,052 3,968 71 13 2,110 3,968 Transmission and distribution... ~ 28,537 1,738 73 19 57 30,164 General 2,165 345 188 101 2,221 41,945 2,154 274 19 158 43,686 Common plant in service:

Intangible........ 13,613 776 14,389 General 28,613 1,138 2,552 83 143 27,139 42,226 1,914 2,552 83 143 41,528 Construction work in progress 369,092 (296,867) 176 72,401 Electric plant held for future use 33,103 277 11,405 21,975 Nuclear fuel 76,826 9,808 8,663 77,971 Total utility plant........ 2,420,644 92,992 22,570 4,802 15,640 2,480,228 Non-utility property*.......... 139,884 4,189 '2,931 1,200 50,136 82,206 Total property, plant and equipment $ 2,560,528 $ 07,181 $ 35,501 $ 6,002 $ 65,776 $ 2,562,434 Description of other changes Transfers between accounts...... $ 2,530 $ 2,530 Transfer of expired contract deposits to plant in service . 449 Write-off of electric plant held for future use 11,405 Write-off of non-utility property....... 48,451 Original cost of property acquired...... 1,742 156 Miscellaneous corrections and adjustments 1,730 2,785

$ 6,002 $ 65,776

'Excludes properties of discontinued operations.

PUBLIC, SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES SCHEDULE VI ACCUMULATEDDEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT Years Ended December 31, 1990, 1989 and 1988 Additions Balance at Charged to Charged to Balance Description Beginning Operating Other Other Changes at End December 31, 1990 of Year Expenses Accounts Retirements Add Deduct of Year (In thousands)

Utility plant:

Accumulated provision for depreciation of utility plant:

Electric plant in service . $ 469,266 $ 53,453 $ 593 $ 4,737 $ 2,275 $ 14,360 $ 506,490 Gas plant in service..... 139,893 12,391 827 4,160 219 38 149,132 Water plant in service 9,578 981 53 1,110 223 3 9,722 Common plant in service .. 15,005 1,912 707 6,695 1 10,930 633,742 68,737 2,180 16,702 2,718 14,401 676,274 Accumulated provision for amortization of intangible assets franchises and computer software 17,570 5,000 221 1,493 3 1,105 20,196 Accumulated provision for amortization of nuclear fuel . 31,389 13,899 18,384 161 26,743 Retirement work in progress . 1,578 304 , 1,274 Total utility plant..... 684,279 73,737 16,300 36,883 2,721 15,667 724,487 Non-utility property....... 2,769 41 14,152 16,144 818

$ 687,048 73377,$ 16,341 $ 36,883 $ 16,873 $ 31,811 $ 725,305 Other (533)

$ 73,204 Description of other additions and changes Depreciation and amortization of'equipment charged to clearing accounts for distribution in accordarice with use .. $ 2,401 Amortization of nuclear fuel charged to fuel and purchased power Depreciation of non-utility property charged to other income and deductions 41 Transfers between accounts 14,515 14,515 Write-off of non-utility property.................. 15,945 Miscellaneous corrections and adjustments............ 2,358 1,351

$ 16,341 $ 16,873 $ 31,811

'(Continued) 58

PUBL'IC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES SCHEDULE VI ACCUMULATEDDEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT (Continued)

Years Ended December 31, 1990, 1989 and 1988 Additions Balance at Charged to, Charged to Balance Other Other Changes at End Description Beginning Operating December 31, 1989 of Year Expenses Accounts Retirements Add Deduct of Year (In thousands)

Utility plant: 'H Accumulated provision for depreciation of utility plant:

Electric plant in service... .. ..

~ $ 419,827 $ 53,065 $ 598 $ 5,642 $ 1,470 $ 52 $ 469,266 Gas plant in service..., .. 116,689 11,457 706 2,216 14,231 974 139,893

, Water plant in service 8,490 1,160 50 122 9,578 Common plant in service .. 10,395 1,680 1,440 426 1,943 27 15,005 555,401 67,362 2,794 8,406 17,644 1,053 633,742 Accumulated provision for amortization of intangible assets franchises and computer software 13,984 5,217 231 1,843 19 17,570 Accumulated provision for amortization of nuclear fuel....-... 26,624 6,220 1,455 31,389 Retirement work in progress....... (724) (2,310) (8) 1,578 Total utility plant........... 595,285 72,579 9,245 7,939 17,636 2,527 684,279 Non-utility property .. ~........... 19,209 98 385 16,153 2,769

$ 614,494 72,579 $ 9,343 $ 8,324 $ 17,636 $ 18,680 $ 687,048 Other .. ~ ~ ~ ~ ~ ~ ~ ~ ~ 0 ~ (598)

$ 71,981 Description of other additions and changes Depreciation and amortization of equipment charged to clearing accounts for distribution in accordance with use... $ 3,025 Amortization of nuclear fuel charged to fuel and purchased power.............. 6,220 Depreciation of non-utility property charged to other income and deductions............ ~..........

~.........

98 Transfers between accounts......... ~ ~ 16,180 16,180 Miscellaneous corrections and adjustments............ 1,456 2,500

$ 9,343 $ 17,636 $ 18,680 (Continued) 59

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES SCHEDULE VI ACCUMULATEDDEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT (Continued)

Years Ended December 31, 1990, 1989 and 1988 Additions Balance at Charged to Charged to Balance Description Beginning Operating Other Other Changes at End December 31, 1988 of Year Expenses Accounts Retirements Add Deduct of Year (In thousands)

Utility plant:

Accumulated provision for depreciation of utility plant:

Electric plant in service .. $ 373,936 $ 52,627 $ 876 $ 7,482 $ 1,037 $ 1,167 $ 419,827 Gas plant in service..... 110,201 8,876 842 4,925 1,695 116,689 Water plant in service 7,846 882 46 279 5 8,490 Common plant in service .. 8,741 873 1,552 765 99 '05 10,395 500,724 63,258 3,316 13,451 2,831 1,277 555,401 Accumulated provision for amortization of intangible assets franchises and computer software 10,190 3,626 226 58 13,984 Accumulated provision for amortization of nuclear fuel..... 18,088 19,106 8,663 1,907 26,624 Retirement work in progress..... (912) "

(188) (724)

Total utility plant......... 528,090 66,884 22,648 21,926 2,831 3,242 595,285 Non-utility property* 16,326 2,988 277 179 7 19,209

$ 544,416 66,884 $ 25,636 $ 22,203 $ 3,010 $ 3,249 $ 614,494 Other . 36

$ 66,320 Description of other additions and changes Depreciation and amortization of equipment charged to clearing accounts for distribution in accoidance with use ': .'

$ 3,542 $ "" $

Amortization of nuclear fuel charged to fuel and 1 purchased power . ~.........................

Depreciation of non-utility property charged to other 19,106 income and deductions....................... 2,988 Transfers between accounts.....................

Accumulated depreciation on property acquired

'548'48 1,397 Miscellaneous corrections and adjustments ~.......... ~ 1,065 2,701

$ 25,636 $ 3,010 $ 3,249

• Excludes accumulated depreciation and amortization on properties of discontinued operations.

60

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES SCHEDULE IX SHORT-TERM BORROWINGS Years Ended December 31, 1990, 1989 and 1988 Weighted Maximum Average Average Average Amount Amount Interest Balance at Interest Outstanding Outstanding Rate Category of Aggregate End of Rate at End During During the During the Short-Term Borrowings Year of Year Year Year Year (Dollars ln thousands)

December 31, 1990:

~ Notes payable to banks $ 15,000 8.90% $ 86,750 $ 40,943 9.81%

, Commercial paper..... $ $ 71,230 $ 13,401 9.11%

December 31, 1989:(1)

Notes payable to banks $ 19,100 9.50% $ 19,100 $ 1,492 ,9.52%

Commercial paper,....... $ 14,780 8.91% $ 62,250 $ 18,203 9.61%

December 31, 1988:(2)

Notes payable to banks $ 8,528 $ 2,910 8.35%

, Commercial paper ~...... $ 160,550,$ 12,898 7.06%

(1) 'EfFective June 30, 1989, certain bank loans and commercial'paper were reclassified as short-term debt consistent with management's current intent not to refinance by long-term credit arrangements.

(2) EfFective February 1, 1988, certain bank loans and commercial paper were classified as long-term debt consistent with underlying credit agreements and management's intention to maintain this debt for more than twelve months.

The average amount outstanding during the year is calculated using month-end balances. The average interest rate during the year is calculated by dividing interest expense by the average amount outstanding during the year.

The above table excludes short-term borrowings of discontinued operations.

61

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES QUARTERLY OPERATING RESULTS The unaudited operating results by quarters. for 1990 and 1989 are as follows:

Quarter Ended March 31 June 30 September 30 December 31, (In thousands except per share amounts) 1990:

Operating Revenues....................... $ 254,431 $ 195,700 $ 193,225 $ 211,778 Operating Income........................

Net Earnings (Loss) ......................

Net Earnings (Loss) per Share ................

$ 31,539

$ (4,718)

$ (.17)

$ 16,277 (769)

(.08)

$ 25,903

$ 8,099

$ .13

$ 18,722

$ (2,170)

$ (.11) 1989:

Operating Revenues....................... $ 266,181 $ 210,617 $ 218,506 $ 220,006 Operating Income........................ $ 48,237 $ 29,144 $ 42,920 $ 32,935 Net Earnings...........................

Net Earnings per Share .................... $ 29,907

$ .65

$ 14,265

$ .28

$ 25,765

$ .55

$ 12,656

$ .25 In the opinion of management of the Company, all adjustments (consisting of normal recurring accruals) necessary for a fair statement of the results of operations for such periods have been included.

62

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES COMPARATIVE OPERATING STATISTICS 1990 1989 1988 1987 1986 Electric Service Energy Sales KWh (in thousands):

Residential 1,575,622 1,527,108 1,493,009 1,448,989 1,353,933 Commercial 2,270,380 2,203,037 2,097,277 2,003,735 1,872,902 Industrial 999,823 961,251 899,508 787,901 797,927 Other ultimate customers...... 203,005 218,196 194,794 207,173 208,534 Total sales to ultimate customers 5,048,830 4,909,592 4,684,588 4,447,798 4,233,296 Sales for resale............ 2,119,236 3,096,458 3,508,596 2,490,926 2,494,234 Total KWh sales... ~...... 7,168,066 8,006,050 8,193,184 6,938,724, 6,727,530 Electric Revenues (in thousands):

Residential $ 147,059 $ 141,465 $ 140,731 $ 136,194 $ 126,053 Commercial 200,041 192,273 187,800 179,653 166,424 Industrial 66,351 64,519 62,401 56,534 56,649 Other ultimate customers...... 14,054 15,387 13,931 15,161 14,622 Total revenues from ultimate customers 427)505 413,644 404,863 387,542 363,748 Sales for resale.... ~....... 96,379 190,256 190,085 167,727 149,225 Total revenues from energy sales 523,884 603,900 594,948 555,269 512,973 Miscellaneous electric revenues 17,446 16,481 12,369 8,348 7,923 Total electric revenues ........... $ 541,330 $ 620,381 $ 607,317 $ 563,617 8 520,896 Customers at Year End:

Residential 259,546 254,864 250,076 244,427 237,759 Commercial 31,295 31,402 31,024 29,882 28,736 Industrial 392 393 390 399 414 Other ultimate customers .. ~... 454 415 376 332 213 Total ultimate customers..... 291,687 287,074 281,866 275,040 267,122 Sales for resale 8 9 Il 8 7 Total customers 291,695 287,083 281,877 275,048 267,129 Reliable Net Capability KW 1,591,000 1,591,000 1,591,000 1,461,000 1,566,000 Coincidental Peak Demand KW 1,051,000 1,006,000 956,000 916,000 916,000 Average Fuel Cost per Million BTU . $ 1.3384 $ 1.3445 $ 1.2460 $ 1.2894 $ 1.1710 BTU per KWh of Net Generation .. 11,181 11,034 11,146 11,526 11,608 Water Service Water Sales-Gallons (in thousands) 3,001,391 3,179,711 2,726,666 2,683,961 2,535,656 Revenues (in thousands) $ 11,700 $ 12,102 $ 10,816 $ 10,973 $ 10,245 Customers at Year End . 21,134 20,565 19,713,19,448 18,820

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES COMPARATIVE OPERATING STATISTICS 1990 1989 1988 1987 1986 Gas Service Gas Throughput Decatherms (in thousands)

GCNM:

.Residential 25,190 -

23,253 24,692 24,510 22,076 Commercial...................

Industrial 11,344 10,730 11,460 11,359 10,745

',278 1,478 1,726 2,196 5,909 Public authorities 5,300 5,492 6,206 6>811 8,323 Irrigation 1,780 Sales for resale...............

Brokerage......

~ ~ 3,539 2,010 4,557 776 1,440 2,667 1,402 1,211 1,853 1,535

~ ~ . ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 879 2,796 2,079 GCNM sales Transportation throughput .. '.;...... 48,431 31,717 48,296 16,041 49,070 9,133 50,285 5,149 52,520 2,245 GCNM throughput 80,148 64,337 58,203 55>434 54,765 Gathering Company:

Spot market sales 8,112 11,081 Transportation throughput.......... 10,785 3,597 Total gas throughput 99,045 79,015 58,203 55,434 54,765 Gas Revenues (in thousands)

GCNM:

Residential 137,633 130,130 122,592 $ 114,164 $ 117,011 Commercial.......... 49,575 47,876 45,235 42,120 45,812 Industrial......... ~ . 4,993 5,693 6,063 8,102 23,139 Public authorities 20,392 21,757 22,289 22,729 30,213 Irrigation 5>934 7,001 4,546 3,781 6,142 Sales for resale........ 7,253 9,874 6,969 3,819, 5,675 Brokerage........... 1,378 1,514 5,213 3,759 Revenues from gas sales .. 225,780 223,709 209,208 199,928 231,751 Transportation........ 10,246 6,788 4,841 4,315 2,207 Other , 8,292 5,948 9,742 6,391 10,708 GCNM gas, revenues.... 244,318 236,445 223,791 210,634 244,666 Gathering Company:

Spot market sales 13,880 19,810 Transportation........ 1,693 830 Processing Company:

Sales of liquids......;- . 39,086 '5,294

-Processing fees........ 3,127 448 Total gas revenues..... 302,104 282,827 223,791 210,634 $ 244,666 Customers at Year End GCNM:

-Residential 312,899 306,604 303,173 297,204 290,175 Commercial.......... 29,305 28,949 28,858 28,661 28,218 Industrial...........

Public I ~ ~ t ~ 81 103 105 118 145 authorities 2,125 2,242 2,469 2,425 "2,444 Irrigation ,1,224 1,252

' 1,261 1,257 1,328 Sales for resale........ 4 6 5 ll Transportation......,. '.

40 28 20 16 16 Brokerage........... 1 2 2 14 GCNM customers Gathering Company:

..... 345,678 339,186 335,894 329,688 322,351 Off-system sales 12 13 Transportation........ 9 5 Processing Company...... 20 23 Total customers 345,719 339,227 335>894 329,688 '22,351 Starting in 1989, Gas Throughput includes Gathering Company's gas throughput and Gas Revenues include revenues of Gathering Company and Processing Company. (See note 1 of the notes to consolidated financial statements.)

64

ITEM 9. CHANGES INAND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.

PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Reference is hereby made to "Election of Directors" in the Company's Proxy Statement relating to the annual meeting of stockholders to be held on May 23, 1991 (the "1991 Proxy Statement" ) and to PART I, SUPPLEMENTAL ITEM "EXECUTIVE,OFFICERS OF THE COMPANY".

ITEM 11. EXECUTIVE COMPENSATION Reference is hereby made to "Executive Compensation" in the 1991 Proxy'Statement.'TEM

12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Reference is hereby made to "Voting Information" and "Election of, Directors" in the.1991 Proxy Statement. 8 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED if any, TRANSACTIONS'eference is hereby made to the 1991 Proxy Statement for such disclosure, as may be required by this item. W lf PART IV ITEM 14. EXHIBITS, FINANCIALSTATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. See Index to Financial Statements under Ite'm 8.

(a) 2. The following consolidated financial information for the years 1990, l989, and 1988 is submitted under Item 8.

Schedule V Property, plant and equipment.

Schedule VI Accumulated depreciation and amortization of property, plant and equipment.

Schedule IX Short-term borrowings.

All other schedules are omitted for the reason that they are not applicable,'ot required or the information is otherwise supplied.

(a) 3-A. Exhibits Filed:

Exhibit No. Description 3.2 Bylaws of Public Service Company of New Mexico With All Amendments to and Including August 21, 1990.

10.8.10 Amendment No. 13 to the Arizona Nuclear Power Project Participation Agreement dated April 4, 1990, and effective thirty days after filing with the Nuclear Regulatory Commission.

10.42.2 Executive Retention Agreements.

10.50 U.S. $ 225,000,000 Credit Agreement dated as of March 8, 1991 among the Company and the banks and co-agents named therein.

22 Certain Subsidiaries of the Registrant.

(a) 3-'B.; Exhibits Incorporated By

Reference:

In addition to those Exhibits shown above, the Company hereby incorporates the following Exhibits pursuant to Exchange Act Rule 12b-32 and Regulation 201.24 by reference to the filings set forth below:

Exhibit No. Description Filed as Exhibit: File No.

Articles of Incorporation and By-laws 3.1 Restated A'rticles of Incorporation'f the 4-(b) to Registration Statement 2-99990 Company, as amended through May 10, No. 2-99990 of the Company.

1985.

Instruments Defining the Rights of Security Holders, Including Indentures 4.1 Indenture of Mortgage and Deed of 4-(d) to Registration Statement 2-99990 Trust dated as of June 1, 1947, between No. 2-99990 of the Company.

the Company and the Bank of New York (formerly'rving Trust Company),

as Trustee, together with the Ninth Supplemental Indenture dated as of January 1, 1967, the Twelfth Supplemental Indenture dated as of September 15, 1971, the Fourteenth Supplemental Indenture dated as of December 1, 1974 and the Twenty-second Supplemental Indenture dated as of October 1, 1979 thereto relating to First Mortgage Bonds of the Company.

4.2 Portions of sixteen supplemental 4-(e) to Registration Statement 2-99990 indentures to the Indenture of Mortgage No. 2-99990 of'the Company.

and Deed of Trust dated as of June 1, 1947, between the Company and the Bank of New York (formerly Irving Trust Company), as Trustee, relevant to the declaration or payment of dividends

'r or the making of other distributions on the purchase by'he Company of shares of the Company's Common Stock.

4.3 Agreement of the Company pursuant to 4-C to Annual Report of the 1-6986 Item 601(b)(4)(iii) of Regulation S-K. Registrant on Form 10-K for fiscal year ending December 31, 1983.

Material Contracts 10.1 Supplemental Indenture of Lease dated 4-D to Registration Statement 2-26116 as of July 19, 1966 between the No. 2-26116 of the Company.

Company and other participants in the Four Corners Project and the Navajo Indian Tribal Council.

66

Exhibit No. Description Filed as Exhibit: File No.

10.1.1 Amendment and Supplement No. 1 to 10.1.1 to Annual Report of the 1-6986 Supplemental and Additional Indenture Registrant on Form 10-K for of Lease dated April 25, 1985 between fiscal year ending December 31, the Navajo Tribe of Indians and 1985.

Arizona Public Service Company, El Paso Electric Company, Public Service Company of New Mexico, Salt River Project Agricultural Improvement and Power District, Southern California Edison Company,'nd Tucson Electric Power Company.

10.2 Fuel Agreement, as supplemented, dated 4-H to Registration Statement 2-35042 as of September 1, 1966 between Utah No. 2-35042 of the Company.

Construction & Mining Co. and the 1 participants in the Four Corners Project including the Company.

10.3 Fourth Supplement to Four Corners (10)-BB to Annual Report of the 1-6986 Fuel Agreement No. 2 eQ'ective as of Registrant on Form 10-K for the January 1, 1981; between Utah fiscal year ending December 31, International'Inc. and the participants 1980.

in the Four Corners Project including the Company.

10.4 Contract between the United States and 5-L to Registration Statement 2-41010 the Company dated April 11, 1968, for No. 2-41010 of the Company.

furnishing water.

10.4.1 Amendatory Contract between the 5-R to Registration Statement, 2-60021 United States and the Company dated No. 2-60021 of the Company.

September 29, 1977 for furnishing water.

10.5 Co-Tenancy Agreement between the 5-0 to Registration Statement 2-44425 Company and Tucson Gas & Electric No. 2-44425 of the Company.

Company dated February 15, 1972 pertaining to the San Juan generating plant.

10.5.1 Modification No. 4 to Co-Tenancy 10.5.1 to Annual Report, of the 1-6986 Agreement between, the Company and Registrant on Form 10-K for Tucson Electric Power Company dated fiscal year ending December 31, October 25, 1984. 1985.

10.5.2 Modification No. 5 to Co-Tenancy 10.5.2 to Annual Report of the 1-6986 Agreement between the Company and Registrant on Form 10-K for Tucson Electric Power Company dated fiscal year ending December 31,'985.

July 1, 1985.

10.6 San Juan Project Construction 5-R to Registration Statement 2-50338 Agreement between the Company and No. 2-50338 of the Company.

Tucson Gas & Electric Company, executed December 21, 1973.

67

Exhibit No. Description Filed as Exhibit: File No.

10.6.1 Modification No. 4 to San Juan Project 10.6.1 to Annual Report of the 1-6986 Construction Agreement between the Registrant on Form 10-K for Company and Tucson Electric Power fiscal year ending December 31, Company dated October 25, 1984. '985.

10.6.2 Modification No. 5 to San Juan Project 10.6.2 to Annual Report of the 1-6986 Construction Agreement between the Registrant on Form 10-K for Company and Tucson Electric Power fiscal year ending December 31, Company dated July 1, 1985. 1985.

10.7 San Juan Project Operating Agreement 5-S to Registration Statement 2-50338 between the Company and Tucson No. 2-50338 of the Company.

Gas & Electric Company, executed December 21, 1973.

10.7.1 Modification No. 4 to San Juan Project 10.7.1 to Annual Report of the 1-6986 Operating Agreement between the Registrant on Form 10-K for Company and Tucson Electric Power fiscal year ending December 31, Company dated October 25, 1984. 1985.

10.7.2 Modification No. 5 to San Juan Project 10.7.2 to Annual Report of the 1-6986 Operating Agreement between the Registrant on Form 10-K for Company and Tucson Electric Power fiscal year ending December 31, Company dated July 1, 1985. 1985.

10.8 Arizona Nuclear Power Project 5-T to Registration Statement 2-50338 Participation Agreement among the No. 2-50338 of the Company, Company and Arizona Public Service Company, Salt River Project Agricultural Improvement and Power District, Tucson Gas gr, Electric Company and El Paso Electric Company, dated August 23, 1973.

10.8.1 Amendments One through Four to (c) to Annual Report of the 1-6986 Arizona Nuclear Power Project Registrant on Form 10-K for Participation Agreement. fiscal year ending December 31, 1979.

10.8.2 Amendment No. 5 to the Arizona 10-Z to Annual Report of the 1-6986 Nuclear Power Project Participation Registrant on Form 10-K for Agreement dated as of December 5, fiscal year ending'December 31, 1979. 1981.

10.8.3 Amendment No. 6 to the Arizona 10-AA to Annual Report of the 1-6986 Nuclear Power Project Participation Registrant on Form 10-K Agreement effective October 16, 1981. year ending December 31, for'iscal 1981.

10.8.4 Amendment No. 7, effective April 1, 10-BB to Annual Report of the 1-6986 1982, to th'e Arizona Nuclear Power Registrant on Form 10-K for Project Participation Agreement. fiscal year ending Dec'ember 31, 1982.

10.8.5 Amendment No. 8 effective 10-JJ to Annual Report of the 1-6986 September 12, 1983, to the Arizona Registrant on Form 10-K for Nuclear Power Project Participation fiscal year ending December 31, Agreement. 1983.

68

Exhibit

'o. Description Filed as Exhibit:

10.8.6 Amendment No. 9 to Arizona Nuclear 10-JJ to Annual Report of the Power Project Participation Agreement Registrant on Form 10-K for dated as'of June 12, 1984. fiscal year ending December 31, 1984.

10.8.7 Amendment No. 10 to Arizona Nuclear 10.8.7 to Annual Report of the Power Project Participation Agreement Registrant on Form 10-K for dated as of November 21, 1985. fiscal year endin'g December'1, 1985.

10.8.8 Amendment No. 11 to Arizona Nuclear 10.8.8 to'Annual Report of the Power Project Participation Agreement Registrant on Form 10-K for dated June 13, 1986 and effective fiscal year ending December 31, January 10, 1987. 1986.

10.8.9 Amendment No. 12 to Arizona Nuclear 19.1 to the Company's Quarterly Power Project Participation Agreement on Form 10-Q for the 'eport dated June 14, 1988, and effective quarter ended September 30, August 5, 1988. 1990.

10.9 Coal Sales Agreement executed (10)-EE to Annual Report of the August 18, 1989 between San'Juan Coal Registrant on Form 10-K for Company, the Company and Tucson fiscal year ending, December 31, Electric Power Company. 1980.

10.9,1, Amendment Number 1 to Coal Sales 10-V to Annual Report of the Agreement dated September 30, 1981 Registrant on'Form 10-K for among San Juan Coal Company, the fiscal year ending December 31, Company'nd Tucson Electric Power 1981.

Company.

10.9.2 Amendment No. Three to Coal Sales 10-NN to Annual Report of the Agreement dated April 30, 1984 among Registrant on Form 10-K for San Juan Coal Company, the Company fiscal year ending December 31, and Tucson Electric Power Company 1984.

(confidentiality treatment has been requested and exhibit is not filed herewith).

10.10 Modifications No. 1 to San Juan Project A part of 10-T to Annual Report Agreements. of the Registrant on Form 10-K for fiscal year ending December 31, 1981.

'0.11 San Juan Unit 4'Early Purchase and 10-KK to Annual Report of the Participation Agreement dated as of Registrant on Form 10-K for September 26, 1983, between the fiscal 'year ending December 31, Company and M-S-R Public Power 1983.

Agency, and Modifications No. 2 to the San Juan'Project Agreements dated December 31, 1983.

Exhibit No. Description Filed as Exhibit:

10.11.1 Amendment No. 1 to the Early 10.11.1 to Annual Report of the Purchase and Participation Agreement Registrant on Form 10-K for between Public Service Company of fiscal year ending December 31, New Mexico and M-S-R Public Power '987.

Agency, executed as of December 16, 1987, for San Juan Unit 4.

A 10.12 Amended and Restated San Juan Unit 4 10-00 to Annual Report of the Purchase and Participation Agreement Registrant on Form 10-K for dated as of December 28, 1984 between fiscal year ending December 31, the Company and the Inc'orporated 1984.

County of Los Alamos.

10.13 Modifications No. 3 to San Juan Project 10-KK to Annual Report of. the Agreements dated July 17, 1984. Registrant on Form 10-K for fiscal year ending December 31, 1984.

10.14 Participation Agreement among the 10-W to Annual Report of the Company, Tucson Electric Power Registrant on Form 10-K for Company and certain financial fiscal year ending December 31, institutions relating to the San Juan 1981.

Coal trust dated as of December 31, 1981.

10.15 Participation Agreement dated as of 10-II to Annual Report of the June 30, 1983 among Security Tr'ust Registrant on Form 10-K for Company, as Trustee, the Company, fiscal year ending December 31, Tucson Electric Power Company and 1983.

certain financial institutions relating to San Juan Coal Trust.

10.16 Participation Agreement between the 10-CC to Annual Report of the Company, the Owner Trustee and the Registrant on Form 10-K for Equity Participants with respect to the fiscal year ending December 31, leveraged preferred stock of the 1981.

Company dated as of December 1, 1981 j

10.17 Interconnection Agreement dated 10-II to Annual Report of the November 24, 1982, between the Registrant on Form 10-K for Company and Southwestern Public fiscal year ending Dec'ember 31, Service Company. 1982.

10.18* Lease dated February 5, 1985 between 10.28 to Annual Report of the The First National Bank of Boston, Registrant on Form 10-K for Lessor, and the Company, Lessee. fiscal year ending December 31,

'985.

10.18.1~ Supplement No. 1 dated September 30, 10.28.1 to Annual Report of the 1985, to Lease dated February 5, 1985 Registrant on Form 10-K for between The First National Bank of fiscal year ending December 31, Boston, Lessor, and the Company, 1985.

Lessee.

70

Exhibit

., No. Description Filed as Exhibit: File No.

10.19 New Mexico Public Service Commission 10-PP to Annual Report of the 10-6986 Order dated December 12, 1984, and Registrant on Form 10-K for Exhibit A thereto, in NMPSC Case fiscal year ending December 31, No. 1804, regarding inventoried 1984.

capacity.

10.20 New Mexico Public'Service Commission 10.20 to Annual Report of the 1-6986 Order dated August 12, 1986, and Registrant on Form 10-K for Attachment A thereto, in NMPSC Case fiscal year ending December 31, No. 2011, regarding the application of 1986.

the=inventorying methodology to certain sale and leaseback transactions.

10.21* Facility Lease dated as of December 16, 28(a) to the Company's Current 1-6986 1985, between The First National Bank Report on Form 8-K dated of Boston, as Owner Trustee, and Public December 31, 1985.

Service Company of New Mexico. i Amendment No. 1 dated as of July 15, 28.1 to the Company's Current 1-6986 1986, to Facility Lease dated as of Report on Form 8-K dated July December 16, 1985. 17, 1986.

Amendment No. 2 dated as of 28.1 to the Company's Current 1-6986 November 18, 1986, to Facility Lease Report on Form 8-K dated dated as of December 16, 1985. November 25, 1986.

Amendment No. 3 dated as of 10.21.3 to Annual Report of the 1-6986 March 30, 1987, to Facility Lease dated Registrant on Form 10-K for as of December 16, 1985. fiscal year ending December 31, 1987.

10.22 Facility Lease dated as of July 31, 1986, 28.1 to the Company's Quarterly 1-6986 between The First National Bank of Report on Form 10-Q for the Boston, as Owner Trustee, and Public quarter ended June 30, 1986.

Service Company of New Mexico.

10.22.1 Amendment No. 1 dated as of 28.5 to the Company's Current 1-6986 November 18, 1986, Facility Lease dated Report on Form 8-K dated as of July 31, 1986. November 25, 1986.

10.22.2 Amendment No. 2 dated as of 10.22.2 to Annual Report of the 1-6986 December ll, 1986, to Facility Lease Registrant on Form 10-K for dated as of July 31, 1986. fiscal year ending December 31, 1986.

10.22.3 Amendment No. 3 dated as of April 8, 10.22.3 to Annual Report of the 1-6986 1987, to Facility Lease dated as of Registrant on Form 10-K for July 31, 1986. fiscal year ending December 31, 1987.

10.23* Facility Lease dated as of August 12, 28.1 to the Company's Current 1-6986 between The First National Bank '986, Report on Form'8-K dated of Boston, as Owner Trustee, and Public August 18, 1986.

Service Company of New Mexico.

Amendment No. 1 dated as of 28.9 to the Company Current 1-6986 November 18, 1986, to Facility Lease Report on Form 8-K dated as of August 12, 1986.

dated'ovember 25, 1986.

71

Exhibit N0. Description Filed as Exhibit:

10.23.2 Amendment No. 2 dated as of 10.23.2 to Annual Report of the November 25, 1986, to Facility Lease Registrant on Form 10-K for dated as of August 12, 1986. fiscal year ending December'31,

'986.

10.24 Facility Lease dated as of December 15, 28.1 to the Company's Current 1986, between The First National Bank Report on Form 8-K dated of Boston, as Owner Trustee, and Public December 17, 1986.

Service Company of New Mexico (Unit 1 Transaction).

10.24.1 Amendment No. 1 dated as of April 8, 10.24.1 to Annual Report of the 1987, to Facility Lease dated as of Registrant on Form 10-K for December 15, 1986. fiscal year ending December 31, 1987 .

10.25 Facility Lease dated as of December 15, 28.9 to the Company's Current between The First National Bank '986, Repo'rt on Form 8-K dated of Boston, as Owner Trustee, and Public December 17, 1986.

Service Company of New Mexico (Unit 2 Transaction).

10.25.1 Amendment No. 1 dated as of April 8, 10.25.1 to'Annual Report of the 1987, to Facility Lease dated as of Registrant on Form 10-K 'for December 15, 1986. fiscal year ending December 31, 1987.

10.26 Restated and Amended Public Service 19.5 to the Company's Report on Company of New Mexico Accelerated Form 10-Q for the quarter ended Management Performance Plan September 30, 1988.

(1988).(August 16, 1988.)

10.26.1 First Amendinent,to Restated and 19.6 to the Company's Report on Amended Public Service Company of Form 10-Q for the quarter ended New Mexico Accelerated Management September 30, 1988.

Performance Plan (1988) (August 30,

~

1988.)

10.26.2 Second Amendment to Restated and 10.26.2 to Annual Report of the Amended Public Service Company of Registrant on Form 10-K for the New Mexico Accelerated Management fiscal year ending December 31, Performance Plan (1988)(December 29, 1989. r 1989).

10.27 Public Service Company, of New Mexico ,19.4 to the Company's Report on Service Bonus Plan, October 23, 1984. Form 10-Q for the quarter ended September 30, 1988.

10.27.1 First Amendment to Public Service 10.11.1 to Annual Report of the Company of New Mexico Service Bonus Registrant on Form 10-K for Plan dated November 20, 1985. fiscal year ending December 31, 1985.

10.27.2 Second Amendment to Public Service 10.27.2 to Annual Report of the Company of New Mexico Service Bonus Registrant on Form 10-K for Plan dated December 29, 1989.- fiscal year ending December 31,

'989.

72

Exhibit No. Description Filed as Exhibit:

10.28 Management Life Insurance Plan (July 10.39 to Annual Report of the 1985) of the Company. Registrant on Form 10-K for fiscal year ending December.31, 1985.

10.29 Supplemental Executive Retirement 10.41 to Annual Report of the Plan of the Company dated July 23, Registrant on Form 10-K for 1985. fiscal year ending Decembe'r 31, 1985.

10.29.1 First Amendment to Public Service I,0.29.1 to the Company's Annual Company of New Mexico Supplemental Report on Form 10-K for fiscal Executive Retirement Plan dated year ending December 31, 1989.

December 29, 1989.

10.30 Compensatory Agreement with 10-MM to Annual Report of the Mr. James F. Jennings, Jr. Registrant on Form 10-K for fiscal year ending December 31, 1984.

10.31 Public Service Company of New Mexico 19.5 to the Company's Quarterly Exec-U-.Care Group Medical Report on Form 10-Q for Quarter Reimbursement Insurance Trust ended March 31, 1987.

Participation Agreement.

10.32 Amended and Restated Medical 19.6 to the Company's Quarterly Reimbursement Plan of Public Service Report. on Form 10-Q for Quarter .

Company of,New Mexico. ended March 31, 1987.

10.33 Republic Holding Company Series M 19.4 to the Company's Quarterly Preferred Stock Program. Report on Form 10-Q for Quarter ended June 30, 1987.

10.34 Meadows Resources, Inc., Second 19.3 to the Company's Quarterly Restated and Amended Executive Report on Form 10-Q for Quarter Deferred Compensation Plan, Alliance ended September 30, 1988.

Telecommunications Investment.

(August 24, 1988.)

10.35 Amendment No. 2 dated as of April 10, 10.53 to Annual Report of the, 1987, to the Facility Lease dated as of Registrant on Form 10-K for August 12, 1986, between The First fiscal year ending December 31, National Bank of Boston, as Owner 1987.

Trustee, and Public Service Company of New Mexico. (Unit 2 Transaction.)

(This is an amendment to a Facility Lease which is substantially similar to the Facility Lease filed as Exhibit 28.1 to the Company's Current Report on Form 8-K dated August 18, 1986.)

73

Exhibit No. Description Filed as Exhibit:

10.36 Amendment No. 3 dated as of 10.54 to Annual Report of the March 30, 1987, to the Facility Lease Registrant on Form 10-K for dated as of December 16, 1985, between fiscal year ending December 31, The First National Bank of Boston, as 1987.

Owner Trustee, and Public Service Company of New Mexico. (Unit 1 Transaction.) (This is an amendment to a Facility Lease which is substantially similar to the Facility Lease filed as Exhibit 28(a) to the Company's Current Report on Form 8-K dated December 31, 1985.)

10.37 Decommissioning Trust Agreement 10.55 to Annual Report of the between Public Service Company'of Registrant on Form 10-K for New Mexico and First Interstate Bank fiscal year ending December 31, of Albuquerque dated as of 'July 31, 1987.

1987.

10.38 New Mexico Public Service Commission 10.56 to Annual Report of the Order'dated July 30, 1987, and Registrant on Form 10-K for Exhibit 1 thereto, in NMPSC Case fiscal year ending December 31, No. 2004, regarding the PVNGS 1987.

decommissioning trust fund.

10.39 MCB/RSB Management Incentive 10.57 to Annual Report of the Programs. (December 1, 1985.) Registrant on Form 10-K for fiscal year ending December 31, 1987.

10.40 Form of Executive Retention Plan, 10.61 to Annual Report of the CMC Group and January 24, 1989 Registrant on Form 10-K for Resolution Authorizing Plan. fiscal year ending December 31, 1988.

10.41 Public Service Company of New Mexico 10.62 to Annual Report of 'the and Paragon Resources, Inc. Deferred Registrant on Form 10-K for Compensation Trust Agreement dated fiscal year ending December 31; December 30, 1988. 1988.

10.42 Executive Retention Agreements (1989). 19.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1989.

10.42.1 Termination Agreement. June 19, 1990. 19.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990.

10.43 Agreement to Continue Medical Benefits 19.3 to the Company's Quarterly dated August 4, 1989. Report on Form 10-Q for the quarter ended September 30, 1989.

74

Exhibit No. Description Filed as Exhibit:

10.44 Supplemental Employee Retirement 19.4 to the Company's Quarterly Agreements dated August 4, 1989. Report on Form 10-Q for the quarter ended September 30, 1989.

10.45 Supplemental Employee Retirement 10.45 to Annual Report of the Agreement dated December 1, 1989. Registrant on Form 10-K for fiscal year ending December 31, 1989.

10.46 Supplemental Retirement Agreement 10.46 to Annual Report of the dated January 23, 1990. Registrant on Form 10-K for fiscal year ending'December 31, 1989.

10.47 Supplemental Employee Retirement 10.47 to Annual Report of the Agreement dated March 6, 1990. Registrant on Form 10-K for fiscal year ending December 31, 1989.

10.48 Settlement Agreement between Public 10.48 to Annual Report" of the Service Company of New Mexico and Registrant on Form 10-K for Creditors of Meadows Resources, Inc. fiscal year ending December 31, dated November 2, 1989. 1989.

10.49 Consulting Agreement between Public 10.49 to Annual Report of the Service Company of New Mexico and Registrant on Form 10-K for North Sandia Paitners, Inc. dated fiscal year ending December 31, January 1, 1990. 1989.

Additional Exhibits 28.1 Collateral Trust Indenture dated as of 28(i) to the Company's Current December 16, 1985, among First PV Report on Form 8-K dated Funding Corporation, Public Service December 31, 1985.

Company of New Mexico and Chemical Bank, as Trustee.

28.1.1 Series 1986A Bond Supplemental 28.4 to the Company's Current Indenture dated as of July 15, 1986, to Report on Form 8-K dated July Collateral Trust Indenture dated as of 17, 1986.

December 16, 1985.

28.1.2 Series 1986B Bond Supplemental 28.1.2 to the Company's Current Indenture dated as of November 18, Report on Form 8-K dated 1986, to Collateral Trust Indenture November 25, 1986.

dated as of December 16, 1985.

28.1.3 Unit 1 Supplemental Indenture of 28.8 to the Company's Current Pledge (Lease Obligation Bonds, Series Report'n Form 8-K dated 1986B) dated as of December 15, 1986, December 17, 1986.

to the Collateral Trust Indenture dated as of December 16, 1985.

75

Exhibit No., Description Filed as Exhibit:

28.1.4 Unit 2 Supplemental Indenture of 28.16 to the Company's Current Pledge (Lease Obligation Bonds, Series Report on Form 8-K 'dated 1986B) dated as of December 15, 1986, December 17, 1986.

to the Collateral Trust Indenture dated as of December 16, 1985.

28.2e Participation Agreement dated as of 2 to the Company's Current December 16, 1985, among the Owner Report on Form 8-K dated Participant named therein, First PV December 31, 1985.

Funding Corporation. The First National Bank of Boston, in its individual capacity and as Owner Trustee (under a Trust Agreement dated as of December 16, 1985 with the Owner Participant), Chemical Bank, in its individual capacity and as Indenture Trustee (under a Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of December 16, 1985 with the Owner Trustee), and Public Service Company of New Mexico, including Appendix A definitions.

28.2.1* Amendment No. 1 dated as of July 15, 2.1 to the Company's Current 1986, to Participation Agreement dated Report on Form 8-K dated July as of December 16, 1985. 17, 1986.

28.2.2* Amendment No. 2 dated as of 2.1 to the Company's Current November 18, 1986, to Participation Report on Form 8-K dated Agreement dated as of December 16, November 25,.1986.

1985.

28.3* Trust Indenture, Mortgage, Security 28(b) to the', Company's Current Agreement and Assignment of Rents Report on Form 8-K dated dated as of December 16, 1985, between December 31, 1985.

The First National Bank of Boston, as Owner Trustee, and Chemical Bank, as Indenture Trustee.

28.3.1* Supplemental Indenture No. 1 dated as 28.2 to the Company's Current of July 15, 1986, to the Trust Indenture, Report on Form 8-K dated July Mortgage, Security Agreement and 17, 1986.

Assignment of Rents dated as of December 16, 1985.

28.3.2* Supplemental Indenture No. 2 dated as 28.2 to the Company's Current of November 18, 1986, to the Trust Report on Form 8-K dated Indenture, Mortgage, Security November 25, 1986.

Agreement and Assignment of Rents dated as of December 16, 1985.

~

76

Exhibit V No. Description Filed as Exhibit: File No.

28.4>> Assignment, Assumption and Further 28(e) to the Company's Current. 1-6986 Agreement dated as of December 16, Report on Form 8;K dated 1985, between Public Service Company December 31, 1985.

of New Mexico and The First National Bank of Boston, as Owner Trustee.

28.5 Participation Agreement dated as of 2.1 to the Company's Quarterly 1-6986 July 31, 1986, among the Owner Report on Form 10-Q for Quarter Participant named therein, First PV ended June 30, 1986.

Funding Corporation. The First National Bank of Boston, in its individual capacity and as Owner Trustee (under a Trust Agreement dated as of July 31, 1986, with the Owner Participant), Chemical Bank, in its individual capacity and as Indenture Trustee (under a Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of July 31, 1986, with the Owner Trustee),

and Public Service Company of New Mexico, including Appendix A definitions.

28.5.1 Amendment No. 1 dated as of 28.4 to the Company's Current 1-6986 November 18, 1986, to Participation Report on Form 8-K dated Agreement dated as of July 31, 1986. Novemb'er 25, 1986.

28.6 Trust Indenture, Mortgage, Security 28.2 to the Company's Quarterly 1-6986 Agreement and Assignment of Rents 'eport on Form 10-Q for Quarter dated as of July 31, 1986, between The ended June 30, 1986.

First National Bank of Boston, as Owner Trustee, and Chemical Bank, as Indenture Trustee.

28.6.1 Supplemental Indenture No. 1 dated as 28.6 to the Company's Current 1-6986 of November 18, 1986, to the ,Report on Form 8-K dated, Mortgage, Security Trust'ndenture, November 25, 1986; Agreement and Assignments of Rents dated as of July 31, 1986.

28.7 Assignment, Assumption, and Further 28.3 to the Company's Quarterly 1-6986 Agreement dated as of July 31, 1986, Report on Form 10-Q for quarter between Public Service Company of ended June 30, 1986.

New Mexico and The First National Bank of Boston, as Owner Trustee.

77

Exhibit No. Description Filed as Exhibit: File No.

28.84 Agreement dated as of 2.1 to the Company's Current 1-6986 August 12, 1986, among the Report on Form 8-K dated named therein, First PV Owner'articipant August 18, 1986.

Funding Corporation. The First National Bank of Boston, in its individual capacity and as Owner Trustee (under a Trust Agreement dated as of August 12, 1986, with the Owner Participant), Chemical Bank, in its individual capacity and as Indenture Trustee (under a Trust Indenture, 28.10'articipation Mortgage, Security Agreement and Assignment of Rents dated as of August 12, 1986, with the Owner Trustee), and Public Service Company of New Mexico, including Appendix A definitions.

28.8.1* Amendment No. 1 dated as of 28.8 to the Company's Current 1-6986 November 18, 1986, to Participation Report on Form 8-K dated Agreement dated as of August 12, 1986. November 25, 1986.

28.9* Trust Indenture, Mortgage, Security 28.2 to the Company's Current 1-6986 Agreement and Assignment of Rents Report on Form 8-K dated dated as of August 12, 1986, between August 18, 1986.

The First National Bank of Boston, as Owner Trustee, and Chemical Bank, as Indenture Trustee.

28.9.1* Supplemental Indenture No. 1 dated as 28.10 to the Company's Current 1-6986 of November 18, 1986, to the Trust Report on Form 8-K dated Indenture, Mortgage, Security November 25, 1986.

Agreement and Assignment of Rents dated as of August 12, 1986.

Assignment,"Assumption, and Further 28.3 to the Company's Current 1-6986 Agreement dated as of August 12, 1986, Report on Form 8-K dated between Public Service Company of August 18, 1986.

New Mexico and The First National Bank of Boston, as Owner Trustee.

78

Exhibit No. "Description Filed as Exhibit: File No.

28.11 Participation Agreement dated as of 2.1 to the Company's Current 1-6986 December 15, 1986, among the Owner Repoit on Form 8-K dated Participant named therein; First PV December 17, 1986.

Funding Corporation. The First National Bank of Boston, in its individual capacity and as Owner Trustee (under a Trust Agreement dated as of December 15, 1986, with the Owner Participant), Chemical Bank, in its individual capacity and as Indenture Trustee (under a Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of December 15, 1986, with the Owner Trustee), and Public Service Company of New Mexico, including Appendix A definitions (Unit 1 Transaction).

28.12 Trust Indenture, Mortgage, Security 28.2 to the Company's Current 1-6986 Agreement and Assignment of Rents Report on Form 8-K dated dated as of December 15, 1986, between December 17, 1986.

The First National Bank of Boston, as Owner Trustee, and Chemical Bank, as Indenture Trustee (Unit 1 Transaction).

28.13 Assignment, Assumption and Further 28.3 to the Company's Current 1-6986 Agreement dated as of December 15, Report on Form 8-K dated 1986,'between Public Service Company December 17, 1986.

of New Mexico and The First National Bank of Boston, as Owner Trustee (Unit 1 Transaction).

28.14 Participation Agreement dated as of 2.2 to the Company's Current 1-6986 December 15, 1986, among the Owner Report on Form 8-K dated Participant named therein, First PV December 17,'986.

Funding Corporation. The First National Bank of Boston, in its individual capacity and as Owner Trustee (under a Trust Agreement dated as of December 15, 1986, with the Owner Participant), Chemical Bank, in its individual capacity and as Indenture Trustee (under a Trust Indenture,

'ortgage, Security Agreement and

~

Assignment of Rents dated as of December 15, 1986, with the Owner Trustee), and Public Service Company of New Mexico, including Appendix A definitions (Unit 2 Transaction).

79

Exhibit No. Description Filed as Exhibit: File No.

28.15 Trust Indenture, Mortgage, Security 28.10 to the Company's Current 1-6986 Agreement and Assignment of Rents Report on Form 8-K dated dated as of December 15, 1986, between December 17, 1986.

the First National Bank of Boston, as Owner Trustee, and Chemical Bank, as Indenture Trustee (Unit 2 Transaction).

28.16 Assignment, Assumption, and Further 28.11 to the Company's Current 1-6986 Agreement dated as of December 15, Report on Form 8-K dated 1986, between Public Service Company December 17, 1986.

of New Mexico and The First National Bank of Boston, as Owner Trustee (Unit 2 Transaction).

28.17* Waiver letter with respect to "Deemed 28.12 to the Company's Current 1-6986 Loss Event" dated as of August 18, Report on Form 8-K dated 1986, between the Owner Participant August 18, 1986.

named therein, and Public Service Company of New Mexico.

28.18¹ Waiver letter with respect to "Deemed 28.13 to the Company's Current 1-6986 Loss Event" dated as of August 18, Report on Form 8-K dated 1986, between the Owner Participant August 18, 1986.

named therein, and Public Service Company of New Mexico.

28.19 Agreement No. 13904 (Option and 28.19 to Annual Report of the 1-6986 Purchase of EfHuent), dated April 23, Registrant on Form 10-K for 1973, among Arizona Public Service fiscal year ending December 31, Company, Salt River Project 1986.

Agricultural Improvement and Power District, the Cities of Phoenix, Glendale, Mesa, Scottsdale, and Tempe, and the Town of Youngtown.

28.20 Agreement for the Sale and Purchase of 28.20 to Annual Report of the 1-6986 Wastewater EfBuent, dated June 12, Registrant on Form 10-K for 1981, among Arizona Public Service fiscal year ending December 31, Company, Salt River Project 1986.

Agricultural Improvement and Power District and the City of Tolleson, as amended.

• One or more additional documents, substantially identical in all material respects to this exhibit, have been entered into, relating to one or more additional sale and leaseback transactions. Although such additional documents may differ in other respects (such as dollar amounts and percentages), there are no material details in which such additional documents differ from this exhibit.

80

(b) Reports on Form 8-K:

During the quarter ended December 31, 1990, and during the period beginning January 1, 1991 and ending March 11, 1991, the Company filed, on the dates indicated, the following reports on Form 8-K:

Dated: Filed: Relating to:

October 15, 1990 .'ctober 16, 1990 Strategic Business Plan, Discussions Terminated with Wheeler Peak Capital Corporation Group, and Shareholder Litigation.

January 25, 1991 January 28, 1991 .

1990 Financing Case, Palo Verde Nuclear Generating Station, M-S-R Ad Valorem Tax, Shareholder Litigation,, Other Litigation against former directors or

, officers of the Company or its subsidiaries, and Tucson Electric Power Company's Financial Matters.

February 13, 1991 February 14, 1991 Special Litigation Committee Actions.

81

SIGNATURES Pursuant to'the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

PUBLIC SERVICE COMPANY OF NEW MEXICO (Registrant)

Date: March 11, 1991 By: /s/ J. T. ACKERMAN J. T. Ackerman President and Chief Executive 0/li cer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature Capacity ,

Date

/s/ J. T. ACKERMAN Principal Executive Officer March 11, 1991 J. T. Ackerman and Director President and Chief Executive 0/ficer

/s/M. H. MAERKI Principal Financial Officer March ll, 1991 M. H. Maerki Senior Vice President and Chief Einancial Officer

/s/B. D. LACKEY Principal Accounting Officer March 11, 1991 B. D. Lackey Vice President and Corporate Controller

/s/ J. P. BUNDRANT Director March 11, 1991 J. P. Bundrant

/s/A. B. COLLINS, JR. Director March ll, 1991 A. B. Collins, Jr.

Chairman of the Board ll, 1991

's/

V. L. FISHER Director March V. L. Fisher

/s/ J. A. GODWIN Director March ll, 1991 J. A. Godwin

/s/ C. E. LEYENDECKER Director March 11, 1991 C. E. Leyendecker

/s/A. G. ORTEGA Director March 11, 1991 A. G. Ortega

/s/R. R. REHDER Director March 11, 1991 R. R. Rehder 82

.88072S0168 l Transmittals to NRC With Respect to Transaction Documents Relating to Palo Verde Sale and Leaseback Transactions Consuaanated by Public Service Company of New Mexico Date of Letter Notifying NRC Date of Letter of Pending Transmitting Transaction Amendments to Transaction NRC Transaction Date Facility Leases Documents Addressee Unit 1 Sale and 12/31/85 Not applicable 1/29/86 Hr . George Leasebacks (3) W. Kni ghton Debt Refunding 7/17/86 7/14/86 8/4/86 Hr. Frank

3. Hiraglia Additional Unit 1 8/1/86 Not applicable 8/8/86 Hr. Frank Sale and 3. Hiraglia Leaseback (1)

Unit 2 Sale and 8/1/86 Not applicable 9/4/86 Mr. Frank Leasebacks (5) J. Hiraglia Debt Refunding 11/25/86 11/20/86 12/11/86 Hr. Frank

3. Miraglia Amendments to 12/15/86 12/11/86 12/24/86 Hr. Frank Leases (2) 3. Hiraglia Addi ti onal Uni t 1 12/17/86 Not applicable 12/24/86 Hr. Frank (1) and Unit 2 3. Miraglia (1) Sale and Leasebacks Transfer of 1/30/87 1/27/87 3/16/87 Hr. Frank Beneficial Interest J. Hiraglia in Lessor (1)

The number in parentheses refers to the number of separate sale and leaseback transactions involved in the matter reported.

g~j Sa

)~c

Amendments to 3/31/87 3/30/87 7/14/88 Hr. Frank

.Leases (3) J. Hiraglia Amendments to 4/8/87 4/3/87 ~ 7/14/88 Hr. Frank Leases (4) 4/10/87 3. Hiraglia Transfer of 8/14/87 8/12/87 .7/14/88 Hr. Frank Beneficial Interest J. Hiraglia in Lessor (1)

Transfer of 1/6/88 12/31/87 7/14/88 Hr. Frank Beneficial Interest J. Hiraglia in Lessors (3) 0575q:7/14/88:1 j

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