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:
Shared Package
ML17306A314	List: ML17306A313 ML17306A318 ML17306A319 ML17306A320
References
NUDOCS 9112170346
Download: ML17306A319 (105)

Text

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Public Service Company EQQO AIL

%PORT gFefggpve create opportunities for growth.

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Table of Contents Mission Statement Operations Summary President's Letter Operations Overview Stockholder Information Directors and Officers Financial Information Index Form 10-K....................

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10ll 12 Following Page 12 prinred on reeyeled paper O

%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 utilityproducts and services.

WE BELIEVEthat 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 BELIEVEthat business must make a fair profitwhile 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, forrewarding quality performance, and forrecognizing the value ofdiversity in our work force.

COMMUNITY WE BELIEVE we are responsible to the communities we serve. We accept our role in enhancing the quality of lifeby 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.

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Operations Summary Public Service Company of New Mexico and Subsidiaries 1990 1989 Change Operating revenues Operating expenses Net earnings Return on average common equity Earnings (loss) per common share Dividends paid per common share Book value per common share at year-end 855,134,000 915,310,000 762,693,000 762,074,000 442,000 82,593,000 (1.3)%

9.596 (0.23) 1.73 0.00 0.38 17.36 18.02

( 6.6) 0.1 (99.5)

N/M N/M N/M

( 3.7)

Construction expenditures ELECTRIC:

Total kilowatt-hour sales 7,168,066,000 8,006,050,000 84,236,000 78,289,000 (10.5)

GAS:

Decatherm throughput 99,045,000 79,015,000 25.3 Nibs Not meaningful Revenues(innn)tinnt)

$9)$

$776

$7(5 Bee(tie Tetnf )Gtnnnu~ Snten (in b7$nen)

'66 0 Bette(e Retennen 0 Otn 7etennen 5 Water Retenncn Gnu Denthhettn hensufta (in nn))teen) 69 79

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~ 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 ofthis 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 ofthe 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 LITIGATIONCOMMITTEEACTIONS 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 filingof 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 ofcompensation 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 cityis 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.

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

.-,::;WE'BELIEVEou'rfirstrespon--

.sibility is to our customers.

Customer satisfaction is

.the.-

foundation'or'. growth:in a

'-':.competitive etiergy environ-';;:.,ment.-.:We are dedicated to-" '-

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

.'omers'.

needs. by providing

- safe, dependable, high-quality '

,.-

arid competitively.-priced elec-

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

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

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

-":a'n'd'berlieve each work. force:

- -. ",m'ember.'serves a 'custo'mer.

A NEW MISSION DEFINES OUR COURSE In 1990, we developed a new mission statement forour company that sets forth our core values and defines our future direction. With this mission in mind, we outlined our objectives and identified key strategies to address them. And, we developed measurements to assess our progress on these objectives. Our intent is that clear, measurable goals willrequire accountability by every member ofour work force.

OUR CUSTOMERS ARE OUR FOUNDATION Our customers are the foundation ofour business. They expect and demand a competitively-priced product and a high level of service. We intend to be price-competitive withother regional utilities and have set a long-term goal ofoffering rates in the lowest one-third of regional energy suppliers. To help meet that objective, we intend to freeze our current base rates for the next three years. In addition, we have targeted all major cost components to reduce our budgeted non-fuel operations and maintenance expense ten percent by 1993.

VALUEFOR OUR INVESTORS Our investors have been faced withtough decisions regarding their investment in our company. For our investors, our goals are to reinstate a sustainable dividend and improve our bond rating. The key to our success willbe our abilityto 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 ofsome tasks. Other savings may come from the efforts ofa new team formed to work full-timeto 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.

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-.;.Customer Service gepresenfatfve Ofarin D'Angefo assfsfs a, customer'at ournevvestfv'efglhorhqodOfficefnAlbuquerque's South Valley, GOALS AND INCENTIVES FOR OUR WORK FORCE Our work force is our greatest resource. In 1990, we conducted a survey that 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 Court. We willcontinue to worktoward the goal ofresolving these issues to reach a contract which sustains a long-term and productive relationship with those work force members represented by the IBEW.

TRUST WITHINOUR COMMUNITY For us to succeed in the future, it is imperative that we regain the trust and credibilitywe once enjoyed. We are deeply committed to responsible actions and open and forthright communication.

BOARD OF DIRECTORS Your board has taken an aggressive role in form'ulating the necessary changes outlined above. In addition, a separate Chairman of the Board was designated, independent ofthe President and Chief Executive Officer. Further, aboard tenure policy has been set in place, with a four term (of three years each) limit.

In December 1990, two board members retired, each having served, loyally, beyond their normal board retirement date. They are E.R "Ned" Wood, who retired after 22 years of service, and Russell H. Stephens, who retired after 20 years.

On December 20, 1990, the board announced the appointment of VickieL Fisher to fillMr. 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 willcomplete their terms in 1991 and willnot stand for reelection John P. Bundrant, formerly President ofElectric Operations, willhave served on the board foreightyears and is not standing forreelection due to his retirement as an employee. Ashton B. Collins, Jr. willhave served the full 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 leadership in critical times, loyalty and effectiveness in setting a new course for this company willbe of lasting value.

INVESTORS

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

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

-.: dealing honestly and respon- -.'"

siblywith our,'customers, work.

-,,.',force members,",our.commsuni- ",,

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:ties,.and our::eiiyironmernt'.

We::,',:,'.,'-.',:

.are. committed:;to'generating

.;:=,profits that will'providea com-.,'.-.

petitive r'etur'n-.to those,who

".,:- invest in the 'company.

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CLEAR VISION To chart the future one must first understand the past and come to terms with the present. We have done that in this most difficultyear and the work we'e begun will continue. Our mission will be to work relentlessly to address, constructively, the concerns ofour customers, our investors, our workforce, and our community.

Then, our future willbe more than a vision. Itwillbe the reality of the Public Service Company of New Mexico.

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Ashton B. Collins, Jr.

Chairman of the Board John T. Ackerman President and Chief Executive Officer

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Februaiy 22, 1991 II

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Operations Overview OPERATING RESULTS THECOMPANYREPORTED a net loss per common share in 1990 of23 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 millionin revenues in 1989. Details concerning results ofoperations are found in the company's report on Form IO-K, which is a part of this 1990 Annual Report.

NEW MARKETINGCENTERS ASIGNIFICANTCHANGE in the company was the recent reorganization ofthe 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 ofsome 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.

RETAILELECTRIC 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-offof 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 CITYOF 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 cityexpires in earlyJanuaty 1992. The city has stated that itmust comply withArticle XV,an amendment to the citycharter, passed in November 1989, which would preclude the cityfrom issuing a franchise agreement unless it is through a competitive bid process.

We believe that the franchise is basically a right-of-wayagreement. We further believe that the price and terms and conditions of service are subject to the jurisdiction ofthe NMPSC and that ArticleXV conflicts wit the powers delegated to the NMPSC under State law. The NMPSC has agreed to hear this matter.

Recently, a study was commissioned on behalf of the company which 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 electric utilitybusiness, our Albuquerque customers may face as much as a 45 percent increase in their rates over a ten-year period. The city has 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 willstrive for a resolution of the Albuquerque franchise matter in a way which protects our property interests while assuring continued reliable service to customers in the Albuquerque area.

Should the 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.

RETAILGAS GAS COMPANY OF NEW MEXICO NOW SERVES more than 345,000 retail gas customers in 80 communities throughout New Mexico. Our primary goal is to offer these customers competitively-priced 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 willcontinue to realize savings ofhundreds ofmillionsofdollars over the lifeof 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 method of recovery of these costs.

TOTALDELIVEREDGAS VOLUMESin 1990 were the highest since 1986 and greatly exceed 1989 totals. Of this record amount in 1990, transportation volumes accounted for 43 percent of total system throughput.

Gas operating revenues increased $ 1 9.3 millionin 1990 due mainly to increased gas liquids revenues 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.

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WHOLESALE ELECTRIC AS ANTICIPATED,THE DECEMBER 1989 EXPIRATIONof 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 ofexcess capacity and the sale ofgeneration assets; currently, several proposals are outstanding.

To facilitate sales, we have taken the firststeps in strengthening our ties to markets in the We~t by signing an interconnection agreement and an exchange ofservice agreement with the Salt River Project Agricultural Improvement and Power District in"Arizona. In conjunction with these agreements, the company is pursuing construction ofthe Ambrosia-Coronado Line, which willinterconnect our western NewMexico 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.

ANOTHERTRANSMISSIONPROJECTwhich we are pursuing is the Ojo Line Extension Transmission Project, which would be a new 345-kVtransmission line through the Jemez Mountains. The new line would greatly improve the reliabilityof 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 of23 percent. The national average capacity factor fornuclear 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.

WHOLESALEGAS 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 fornearly all ofits 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 abilityto move gas from the San Juan Basin into the interstate pipeline grid and should provide additional transportation revenues.

WATER SANGRE DE CRISTO WATER COMPANYtotal revenues for 1990 were $ 11.7 million, a decline from 1989 of about $400,000. Water consumption in Santa Fe declined from 1989's record level by almost 6 percent. This reduction was due to 1990's normal weather conditions as opposed to 1989's dry conditions which increased consumption.

PROTECTING OUR ENVIRONMENT THE ENVIRONMENT continues to be of major concern to our

company, as well as our customers.

From supporting grass roots environmental groups, like Tree New Mexico, who intend to plant 16 million trees in our state by the year 2000, to supporting on-going research on electric and magnetic fields (EMF), the company makes an investment in the future.

The 1990 amendments to the Clean AirAct are anticipated to have a minimal impact on the company with respect to sulfur and nitrous oxide 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.

In 1990, our customers paid 11 cents of evelyn dollar of their electric bills forenvironmental controls at our generating plants. Investment in air and water pollution control at our coal-fired plants has reached more than

$400 million.

Environmental concerns also led the gas company to ask the NMPSC to authorize several new rate classes and two experimental rates designed to offer incentives to customers. These incentives, approved in August 1990, are offered in the area of gas air conditioning and natural gas 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 readings forcustomers 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.

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Stockholder Information ANNUALMEETING The annual meeting of Public Service Company of New Mexico stockholders will be held in the auditorium of the UNMContinuing Education Center, 1634 University Boulevard N.E., Albuquerque, New Mexico on May 23, 1991 at 9:30 a.m. Mountain DaylightTime. 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 willbe 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.

ABOUTYOUR 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. Aconsolidated quote is published in numerous dailystock 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.

TAXREPORTS ON PREFERRED DIVIDENDINCOME Public Service Company of New Mexico is required by the Internal Revenue Service to report the total amount ofstockholder dividends paid to each stockholder during the precedingyear. Information supplied by the company was mailed to preferred stockholders inJanuary 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 withholdingfrom dividends ofstockholders who failto 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 willbe 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 Director since 1990, age 49 President and Chief Executive Officer Public Service Company of New Mexico John P. Bundrant 2,4 Director since 1983, age 58 Retired former President, Heclric Operations Public Service Company of New hlexico Ashton B. Collins, Jr. 4 Chairman of the Board Director since 1979, age 58 President and Chief Executive Officer Reddy Communications, lnc.,

a management consulting and services firm Albuquerque, NM Vickie L Fisher Director since 1990, age 44 Controller, ABQ Federal Savings Bank A!buquerque, NM Joyce A. Godwin 2,3,6 Director since 1989, age 48 Vice President, Southwest Community Health Services Albuquerque, Nhl Claude E Leyendecker 1,5,6 Director since 1970, age 68 Chairman of the Board, United New Mexico Bank at Mimbres Valley Deming, NM Arturo G. Ortega 3,4,6 Director since 1985, age 70 Attorney Albuquerque, NM Robert R Rehder 1,3,5 Director since 1975, age 60 Professor of Management The Robert O. Anderson Graduate Schools of htanagement Universily of New Mexico Albuquerque, Nhl 1 htember ol Audit Committee 2 htember of Compensahon Committee 3 htember of Corporate and Public Responsibility Committee 4 Member ol Executive Committee 5 htember of Finance Committee 6 htember of Nominating Committee OFFICERS Ashton B. Collins, Jr.

Chairman of the Board, age 58 John T. Ackerman President and Chief Executive Officer (19), age 49 William M. Eglinton Executive Vice President and Chief Operating Officer, Hectric and Water Operations (20), age 43 James B. Mulcock, Jr.

Senior Vice President, Corporate Affairs and Secretary, (18), age 51 Max H. Maerki Senior Vice President and Chief Financial Officer, (7), age 51 WilliamJ. Real Executive Vice President, Gas Operations (12), age 42 M. Phyllis Bourque Senior Vice President, Gas Management Services, (3), age 43 Judith A. Zanotti Senior Vice President, Human Resources and Communications (5), age 52 Jeff E Sterba Senior Vice President, Retail Hectric and Water Services, (13), age 35 BillyD. Lackey Vice President and Corporate Controller (17), age 54 Jerty L. Godwin Senior Vice President, Wholesale Marketing and Power Supply (10), age 48 Edwin A. Kraft Vice President, Central Rio Grande Customer Services (20), age 42 Ellen A. Wilson Vice President, Human Resources (12), age 43 Lawrence D. Ratliff Vice President, Power Production, and Plant Manager (16), age 44 Michael E Slota Vice President, (17), age 44 D.A. "Zan" James Vice President, Strategic Services (4), age 47 John Renner Vice President, Processing and San Juan Operations, Gas Operations, (4), age 62 James A. Hunter Vice President, htarketing, (4), age 49 David J. Davis Vice President, Metropolitan Operations, Gas Operations, (17), age 46 Terry D. Rister Vice President, Regional Operations, Gas Operations, (19), age 39 Alfonso R. Lujan Vice President, Regional Customer Senices, (18), age 42 MiloL McGonagle Vice President, Industrial Development Services (3), age 60 Robert M. Wilson Controller and Assistant Secretary, Electric and Water Operations (13), age 45 Andrew R Vogt'ontroller and Assistant Secretaty, Gas Operations, (3), age 40 Karen A. Knight Assistant Secretary, (16), age 51 MitchellJ. Marzec Treasurer, (15), age 43

(

) Years of service with the company or a company controlled affiliate. Ages, years of service and committee assignments as ol Feb-ruary 19, 1991.

Financial Information Index Stock/Dividend Data Selected Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations Management's Responsibility for Financial Statements Independent Auditors'eport Consolidated Statement of Earnings (Loss)

Consolidated Statement of Retained Earnings (Deficit)

Consolidated Balance Sheet Consolidated Statement of Cash Flows Consolidated Statement of Capitalization Notes to Consolidated Financial Statements Consolidated Financial Statement Schedules Quarterly Operating Results Comparative Operating Statistics Located in Form lO.K

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63 12

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

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

For the Fiscal Year Ended December 31, 1990 OR 0 TRANSITIONREPORT 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 ofthe 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) ofthe 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.

GLOSSARY TABLE OF CONTENTS Page nl PART I

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ITEM 1.

BUSINESS.

THE COMPANY ELECTRIC OPERATIONS..................

Service Area and Customers............

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Power Sales Sources of Power Coal-fired Plants Nuclear Plant Fuel and Water Supply...................

Coal e

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Natural Gas Nuclear Fuel................'.....

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Water NATURALGAS OPERATIONS..............

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Acquisition of Natural Gas Properties Gas Company of New Mexico Division........

Natural Gas Supply

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Gathering Company..................

Processing Company..................'atural Gas Sales........

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RATES AND REGULATION Electric Rate Case ~.................

PVNGS Cost Investigation........... ~...............

Decertification of Electric Generating Plant..

SDG&E Sales Agreement..............

Other Electric Matters Natural Gas General Rate Case.... '..........,..........

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

Other Natural Gas Matters..............,..............

ENVIRONMENTALFACTORS.........

NON-UTILITYSUBSIDIARY OPERATIONS ITEM 2. PROPERTIES....................

ITEM 3.

LEGALPROCEEDINGS SHAREHOLDER LITIGATION Securities Law-Related Litigation...

Shareholder Derivative Litigation and the Special Litigation Committee PVNGS WATER SUPPLY LITIGATION SAN JUAN RIVER ADJUDICATION DIVERSIFICATIONCLAIMS....

NATURALGAS SUPPLY LITIGATION OTHER PROCEEDINGS.......

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...

SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE COMPANY 1

1 1

2 3

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5 5

6 6

6 7

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8 8

9 9

10 10 11 11 12 12 13 13 14 14 14 15 17 17 17 18 19 20 20 21 21 21 21

PART II ITEM 5.

MARKETFOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. ~..........

ITEM 6.

SELECTED FINANCIALDATA..........

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MANAGEMENT'SDISCUSSION AND ANALYSISOF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS.

ITEM 8.

FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA........

ITEM 9.

CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIALDISCLOSURE.............

PART III ITEM 10.

DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY ITEM 11.

EXECUTIVE COMPENSATION ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS P'ART IV ITEM 14.

EXHIBITS, FINANCIALSTATEMENT SCHEDULES, AND REPORTS ON FORM 8 K o

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SIGNATURES.................. ~.......'....

Page 22 23 24 32 65 65 65 65

,65 65 82

AFUDC.........

BHP-Utah..

BTU Century. ~.......

decatherm.......

DOE EIP...

El Paso.........

EPA...

EPNG FASB..........

FERC..........

Gathering Company GCNM.........

Kwh..... ~....

Los Alamos mcf e

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Meadows......

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M-S-R MW Mwh..........

NMEIB.........

NMIEC.........

NMPSC NRC PGAC........'..

Processing Company PVNGS.........

Salt River Project...

SCE...........

SDGErE.........

SJCC.. ~.......

SJGS..........

Southern Union....

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

Sunbelt.........

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throughput....

WSCC WSPP Tucson.............

uncommitted capacity....

GLOSSARY Allowance for funds used during construction

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Arizona Public Service Company BHP-Utah International, Inc.

British Thermal Unit Century Power Corporation 1,000,000 BTUs United States Department of Energy

. 'astern Interconnection Project El Paso Electric Company United States Environmental Protection Agency El Paso Natural Gas Company Financial Accounting Standards Board Federal Energy Regulatory Commission Sunterra Gas Gathering Company, a wholly-owned subsidiary of the Company, Gas Company of New Mexico, a division of the Company Kilowatt Hour The County of Los Alamos, New Mexico Thousand cubic feet Meadows Resources, Inc., a wholly-owned subsidiary of the Company M-S-R Public Power Agency, a California public power agency Megawatt Megawatt Hour New Mexico Environmental Improvement Board New Mexico Industrial Energy Consumers New Mexico Public Service Commission United States Nuclear Regulatory Commission GCNM's Purchased Gas Adjustment Clause Sunterra Gas Processing Company, a wholly-owned subsidiary of the Company Palo Verde Nuclear Generating Station Salt River Project Agricultural Improvement and Power District Southern California Edison Company San Diego Gas and Electric Company San Juan Coal Company San Juan Generating Station Southern Union Company Southwestern Public Service Company Sunbelt Mining Company, Inc., a wholly-owned subsidiary of the Company Volumes of gas delivered, whether or not owned by GCNM or Gathering Company Tucson Electric Power Company Capacity in excess of that included in New Mexico jurisdic-tional rates or otherwise required to serve firm system load

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Western System Coordinating Council

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Western Systems Power Pool

ITEM 1.

BUSINESS PART I THE COMPANY Public Service Company ofNew Mexico was incorporated in the State ofNew 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 utilityengaged in the generation, transmission, distribution and sale of electricity and in the gathering, processing, transmission, distribution and sale of natural gas withinthe State ofNew 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 ofrevenue 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 ofthese markets. The third market consists ofother contracted sales to utilities forwhich the Company commits to deliver a specified amount ofcapacity (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 abilityto 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 ofnorth 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 ofwhich 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 ofvarying 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 ofmatters 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 COMPANYThe 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 KWhsales 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 BYMARKET

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(Thousands of dollars) 1990 1989

$427,505

$413,644 25,739 27,679 109,773 70,640 52,804 21,541 4,267 Retail.......

Firm-requirements wholesale......

SPS contract (see "Sources of Power" )

Other contracted sales..........

Economy interchange*..........

$404,863 27,554 100,006 62,525 6,903

$387,542 32,312 91,064 44,351 4,642

$363,748 34,431 72,090 42,704 6,369 1988 1987 1986

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

ELECTRIC SALES BY MARKET (Megawatt hours) 1990 1989 1988 Retail.....................

5,048,830 4,909,592 4,684,588 Firm-requirements wholesale.......

376,040 397,792 362,934 SPS contract (see "Sources of Power" )

1,618,694 1,577,950 Other contracted sales..........,.

1,743,196 1,079,972 1,567,712 Econoiny interchange*........'...

1,183,489 289,432 356,681 1987 4,447,798 396,297 1,585,639 508,990 226,941 1986

4,233,296 471,676 1,482,189 540,369 349,689

• Net of economy purchases Summer Winter/'

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SYSTEM PEAK DEMAND*

(Megawatts) 1990 1,051 897 1989 1988 "1987 1986 1,006 956 916 916 896 862 880 838

• 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 MWfrom the Company for the period May 1988 through April2001. (See "RATES ANDREGU-LATIONSDG&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 ofthe competitive conditions affecting off-system sales and of negotiations of sales contracts, see PART II,ITEM7"MANAGEMENT'SDISCUSSION ANDANALYSISOF FINAN-CIAL CONDITION AND RESULTS OF OPERATIONS CURRENT ISSUES FACING THE COMPANYThe Wholesale Power Market".

Sources of Power The total net generation capacity offacilities owned or leased by the Company was 1,591 MWas 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 SJGS is located in northwestern New Mexico, and consists offour 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. SJGS 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,ITEM7"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERA-TIONSCURRENT ISSUES FACINGTHE COMPANYTucson 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)ofM-S-R's capacity through April30, 1995, an amount which may be reduced by M-S-R under certain conditions. The Company also agreed to market the energy associated withthe remaining 26.47% portion ofM-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 MWofnet 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 MWunits of PVNGS, also known as the Arizona Nuclear Power Project, with APS (the operating agent), Salt

El.Paso SCE, Southern California Public Power Authority and The Department of River Project,

. aso,,

ou Water and Power of the City ofLos 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 NGS amount to 130 MWper unit, or a total of390 MW.PVNGS Units 1, 2 and 3 were ec are in in PV amoun o

6 Se tember 1986 and January 1988, respectively.

commercial service by the Company in January 198, ep m er 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 NAGEMENT'SDISCUSSION ANDANALY-the o eration of'PVNGS, see PART II,ITEM7"MANA SIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS CURRENT ISSUES FACING THE COMPANYPVNGS".

In eleven transactions consumma e

in an t d 1985 and 1986 the Company sold and leased back its entire 10.2% interest in PVNGS Units 1 and 2, together with portions ofthe 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 institutional q

y 1 e uit investor. The owner trustees, as lessors, lease t ein eres e

d h t

ts to th Company under lease agreements having initialterms expiring January it 2 leases). Each 2015 (wit respec o

e ni

( '

t t th Unit11eases) or January15,2016 (with respect to theUn'.

'd n o tion to the Company to extend the term ofthe lease as well as'a rep p

urchase o tion.

lease provi es an op ion e

o S leases are a roximately $84.6 million per The aggregate lease payments for the Company's PVNGS eases are app year. Throughout the terms of the leases, the Company an continues to have fulland exclusive au ori y an responsi i i y o e d

'b'1't to exercise and perform all ofthe rights and duties ofa participant in un er elusive ri ht to sell and the rizona uc ear ower A '

1 P

Project Participation Agreement and retains the,,exclu i

'g Units 1 and 2. The Company dispose of its 10.2% share of the power and energy generated by PVNGS Units an also retains responsi i i y orpay b'1 t f yment,of its share of all taxes, insurance premiums, operating and maintenance cos, cos re a ts ts 1 ted to capital improvements and decommissioning an a

o i ted with the leased facilities. Each lease describes certain even vents the costs and expenses associa wi e

e 1) a the lessor and the occurrence o w ic cou f

h'ch could require the Company to, among other things, ( ) pay e

e e uit investor, in return for such investor's interest in PVNGS, cash in the am p

mount rovided in the lease, which amount, primarily because of certain tax q

conse 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 ing.

e om d

The Company has a program for funding its share ofdecommission-for PVNGS. Under this program, the Company willmake a series of annua eposi ing costs for unit and the trust funds willbe invested under external trust fund over the estimated useful lifeofeach uni, an sis throu h the use of life lan which allows the accumulation of funds largely on a tax-deferred basis through the use o i e 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

, h C

an 's 10.2% share of total estimated PVNGS decommissioning, costs per unit, is based upon,t e

ompany s 0 s a

d 'h t ust funds over time. Based on current assessm'ents, e us

)

sits for the insurance policies will necessitate the'Company prefunding,certain annual trust deposits o

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 men or c an t

t f h nges 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 Liabilityand Insurance Matters.

The PVNGS participants have insurance for public liabilitypayments resulting from nuclear energy hazards to d d b r

to the current $7.8 billion limitof liability deral law. This otential liability is covered by primary liability insurance provi e y

f $200 million and the balance by an industry-wide commercial insurance carriers in the amount of $200 mi ion an e

a t

imum assessment per reactor under the retrospec ive retrospective assessment program. The maximum as p

rating program for each nuclear, incident occurring at a y p

an nuclear ower plant in the Unite ta s is approximately $66 million, subject to an annual limitof $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 85.6 121.3-13.2 76.0

'.2 216.6 1987..

~.."..:......

79.7 141.1 20.0 73.3 0.3 246.6 1988...-...........

'. '0.0 142.5 '9.6 75.9 0.4 320.9 1989............

89.3 139.3

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10.3 76.3 0.4 364.1 1990..............

74.6 152.0 25.2 73.1 0.2 310.3 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 SJGS are being supplied by SJCC, a wholly-owned subsidiary ofBHP-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 SJGS through approximately 2017. The primary sources of coal are a mine adjacent to SJGS and a mine located approximately 25 miles northeast of SJGS in the La Plata area ofnorthwest-ern New Mexico. The average cost of fuel, including ash disposal and land reclamation costs, for SJGS 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 lifeofthe 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 offuel, 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 millionBTU ($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, ofgas increases or decreases according to the average cost ofgas 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:

Mining and milling of uranium concentrate Conversion of uranium concentrate to uranium hexafluoride Enrichment of uranium hexafluoride Fabrication of fuel assemblies Storage and disposal of spent fuel.....,...............

Units 1 and 2 1997(a) 1994(b) 1999(c) 1996(d)

(e)

Unit 3 1997(a) 1994(b) 1999(c) 1998(d)

(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 ofconversion 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 ofthe 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 ofspent fuel discharged from normal operation ofall 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 ofthe 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 facilitywould not likely be available until 2010. The Company believes that alternative interim spent fuel storage facilities willbe available for use by PVNGS until DOE's scheduled shipments from PVNGS begin.

Water Water for the Four Corners plant and SJGS is obtained from the San Juan River. (See ITEM3 "LEGALPROCEEDINGS SAN JUAN RIVERADJUDICATION".)BHP-Utah holds rights to San Juan River water and h'as committed a portion ofsuch rights to the Four Corners plant. The Company and Tucson have a contract with the United States Bureau ofReclamation for consumption of 16,200 acre feet of w'ater per year for SJGS, 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 ofthe PVNGS units has been obtained under contracts with certain municipalities in the area. The contracted quantity ofefBuent 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 ITEM3"LEGALPROCEEDINGS PVNGS WATER

SUPPLY LITIGATION".)APS has stated that, although the litigation remains subject to further evaluation, it expects that the litigation willnot 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 ofthe New Mexico natural gas utility assets of Southern Union (principally a natural gas retail distribution system operated by Southern Union as the Gas Company ofNew 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 ofSouthern 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 ofGathering 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 ofthe 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 itis necessary to do so in order to carry on its gas utilitybusiness 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 ofGCNM's load is related to heating, levels oftherm 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 withinNew 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 ofGCNM's system. Approximately 40% of GCNM's total therm deliveries in 1990 were ofgas 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.

Atthe time ofthe Company's acquisition ofGCNM and Gathering Company, GCNM obtained its natural gas supply generally pursuant to long-term contracts withproducers that obligated GCNMand 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, GCNMand Gathering Company are stilldisputing 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 ANDREGU-LATIONSNatural 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 ofgas 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 GCNMin 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 REGULATIONNatural 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:

Residential Commercial Industrial Public authorities Irrigation Sales for resale Transportation*f Spot market salest Brokerage GASTHROUGHPUT (Millionsof decatherms) 1990 25.2 11.3

~

~

~

~

~

~

~

~

~

1 3

~

~

~

~

~

5 3

~

~

~

~

~

I 3 5 42.5 8.1 99.0 1989 1988 23.2 24.7 10.7 11.5 1.5 1.7 5.5 6.2 2.0 1.4 4.6 2.7 19.6 9.1 11.1 0.8 0.9 79.0 58.2 1987 1986 24.5 22.1

~ 11.4 10.8 2.2 5.9 6.8 8.3 1.4 1.9 1.2 1.5 5.1 2.2 2.8 2.1 55.4 54.8

'Customer-owned gas.

II, tIncludes gas throughput from Gathering Company beginning January 1, 1989 (see note,1 ofthe notes to consolidated financial statements).

The following table shows gas revenues by customer class:

Residential Commercial....

Industrial

. ~...

Public authorities Irrigation Sales for resale..

Transportation*

Liquids Processing fees..

Spot market sales Brokerage.....

Other.....

~..

I

~

I

~

~

GAS REVENUES)

(thousands of dollars) 1990 1989

$137,633

$130,130 49,575 47,876 4,993 5,693 20,392 21,757 5,934 7,001 7,253 9,874 11>939 7,618 39>086 25,294 3,127 448 13,880 19,810 1,378 8,292 5,948

$302,104

$282,827 1988

$122,592 45,235 6,063 22,289 4,546 6,969 4,841 1987

$114,164 42,120 8,102 22,729 3,781 3,819 4,315 1986

$117,011 45,812 23,139 30,213 6>1,42 5,675 2,207 1,514 5,213 9,742 6,391 3,759 10,708

$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 ofthe NMPSC with respect to its retail electric, gas and water rates, service, accounting, issuance ofsecurities, construction ofnew 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 ofthe order, the Company was required to reduce its existing base rates by approximately $2.9 millionper year. Also, as a result of the order, the Company wrote off approximately $19.4 million, net of taxes, in March 1990, which resulted primarilyfrom the NMPSC's treatment ofprior 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 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 jurisdictional excess capacity and that excluded from the NMPSC jurisdic-tional rates.

10

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 millionfrom NMPSC jurisdictional electric rate base. This disallowance did not require write-offs in addition to the amounts written offby 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 ofall three PVNGS units over the fuel cycle. Withinthe 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 ofthe avoided fuel costs ifPVNGS 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 ofmore than $90 million,such furtherieduction 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 ofany use or disposition ofthe 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 MWofSJGS Unit 4. The hearing examiner recommended against the Company's request. He concluded that the SJGS Unit 4 resource willbe needed within the near-term as a jurisdictional resource'and'that itfits the future needs ofthe Company's New Mexicojurisdictional 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 SJGS Unit4 coal resource.

On August 3, 1990, the NMPSC issued an order adopting the recommended decision ofthe hearing examiner denying the Company's request for decertification of 130 MWof SJGS Unit4. 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 ofits"costs but provide no return on investment. The Coinpany believes that denial ofdecertification 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 justifyingthe 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 ofthat 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 ofthe 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 billingpurposes, 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 GCNMwhich provides for mandatory public hearings, withnotice to the Attorney General, on any gas cost factor statement which shows a 10% increase in the cost ofgas 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 filecomments 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 willingto 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 millionor 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 withthe NMPSC on July 19, 1989. In the stipulation the parties agreed to a settlement ofmost ofthe issues considered in this proceeding.

The stipulation, which was approved by an NMPSC order on December 18, 1989, provides for the partial recovery ofcertain gas costs arising from reformation ofgas 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 initialjudgement 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, GCNMfiled with the NMPSC seeking approval to recover $73 millionof costs arising from settlement of MDLcontract 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 "NATURALGAS 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 GCNMto collect the deferred costs untilitdemonstrates 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 millionof 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 millionrecovery. Before becoming efFec-tive, the recommended decision must be acted upon by the NMPSG.

3 13

Other Natural Gas Matters GCNM's retail gas rate schedules contain a PGAC which provides for timely recovery ofthe 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 ofthe 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 ofthe 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 willbe 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 NMEIBgranted a variance which extended through September 30, 1989 for Unit4 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 ofadditional 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 AirAct Amendments of 1977, the EPA has adopted regulations, applicable to certain Federally-protected areas, that address visibilityimpairment which can be reasonably attributed to specific sources. The 1990 amendments to the Federal Clear AirAct (the "Act")commissioned a five-year study to identify sources ofvisibilityimpairments. 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 utilityboilers.

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 willbe afFected particularly by the section of the Act which deals with acid rain. To be in compliance with the Act, many utilities willbe 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 SJGS and Four Corners, the Company currently believes that itwillnot be faced withany 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 willbe 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-UTILITYSUBSIDIARYOPERATIONS In 1988, the Company made the decision to discontinue the non-utilityoperations ofits 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

Wintersburg, Arizona Waterfiow, New Mexico'ruitland, New Mexico Albuquerque, New Mexico Las Vegas, New Mexico mining operations (although mine-reclamation activities continue). During 1989, the Company's sub-sidiaries disposed ofthe fiberboard manufacturing and telecommunications manufacturing operations.

.In 1990, additional non-utilityproperties 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 fullyliable 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 ofMeadows'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 "LEGALPROCEEDINGS DIVERSIFICATIONCLAIMS".)

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, ifany, as to why the settlement agreement, the discontinuance of the Company's non-utility operations and the disposal ofnon-utilityassets 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-. The Company does not believe that the ultimate outcome ofthe current investigation willhave a material impact on its financial condition or results of operations.

ITEM 2.

PROPERTIES Substantially all of the Co'mpa'ny's utilityplant 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) 990 Coal...

SJGS (b) 835 Coal...

Four Corners (c) 192 Gas/Oil Reeves 154 Gas/Oil

~

Las Vegas 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 ofwhich 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 ofdistribution 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 ofapproxi-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 facilitylocated 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 ofPower 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 willcost approximately $46 million and will increase the bulk system capability and provide adequate reliability to North-Central New Mexico.

This project was originallyplanned to be in-service in May of 1987. Due to ongoing litigationrelating 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,ITEM7 "MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS CURRENT

. ISSUES FACING THE COMPANYThe 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., LEGALPROCEEDINGS SHAREHOLDER LITIGATION Securities Law-Related Litigation A civilsuit, 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 ofthe Company, alleges misrepresentations and omissions ofmaterial 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 plaintifFhas sought to represent shareholders claimed to be "similarly situated". Generally, the complaint alleges misrepresentations and omissions relating to, among other things, (i) the recovery ofinvestment in excess electric generat-ing capacity, (ii)diversification, (iii)dividends on the Company's common stock and (iv)the attempted restructuring ofthe Company. Itis alleged that the market prices ofthe common stock were artificially inflated during the class period ofMarch 14, 1987 through April14, 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 plaintifFseeks 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 ifthe 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 April6, 1990, a civilsuit 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 ofApril15, 1989 through April6, 1990. The complaint alleges that the Company and the individual defendants engaged in conduct in violation ofSection 10(b) ofthe Securities Exchange Actof 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-utilitysubsidiary 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-ARYOPERATIONS".) Itis alleged,'that market prices ofthe Company's stock were artificiallyinflated during the class period and that the plaintifFand 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 ofthe 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 ofthe Company filed a civilsuit in the United States District Court for the Districtof New Mexico, alleging breaches offiduciary duties, mismanagement and waste by eleven individual,defendants 'who currently serve, or formerly served, as'directors or officers ofthe 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 civilsuit 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 ofthe 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 ofthe 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 ofthe Company's electric franchise with the City of Albuquerque; by causing the Company to purchase certain assets froin Meadows in connection withthe 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 ofthe 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 ofthe 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 ofthe 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 ofits 16 months ofinvestigation, the Committee concluded that itwas 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 firmbelief that the Company's management, based on what management knew at the time, did not act improperly. The Committee also concluded that itwas not in the Company's best interests to pursue claims against any ofthe 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 liabilityin 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 itwas not in the Company's best interests to seek dismissal ofpending 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 ofthe 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 ofthe 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 ofthe 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 validityofthe primary effluent contract under which water necessary for the operation ofthe 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 ofthe 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 ofthe 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 ofNew Mexico filed an action entitled State ofNew 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 SJGS 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 forwater at SJGS and the Four Corners plant, nor can itdetermine what effect the action willhave 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 DistrictofNew 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. Itis the position of Meadows that itmade 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 millionto $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 ofthe 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 forany potential loss by reason ofthe claims ofthe 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 ofthe NMPSC relating to GONM's recovery ofsettlement and reformation costs (see ITEM 1"BUSINESSRATES 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, initiallyfiled on Febru-ary 20, 1990 in the United States DistrictCourt for the DistrictofNew 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 millionfrom GCNM. Most ofthe amount claimed by Conoco and Amoco relate to take-or-pay claims. GCNM and Gathering Company are vigorously defending against these claims.

June 19, 1990 June 19,1990 September 1, 1988 April 23, 1985 June 1, 1988 June 19, 1990 June 19, 1990 OTHER PROCEEDINGS See ITEM 1 "BUSINESS RATES AND REGULATION" and "BUSINESS NON-UTILITYSUBSIDIARY OPERATIONS" and PART II, ITEM 7 "MANAGEMENT'SDISCUS-SION ANDANALYSISOF FINANCIALCONDITIONANDRESULTS OF OPERATIONS CUR-RENT ISSUES FACING THE COMPANYThe 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 ofBernalillo County, New Mexico, against three individual defendants who formerly served as directors or officers ofthe Company or its subsidiaries, including the Company's former Chairman and Pt;esident, as well as against a consulting firmformed by one ofthe individual defendants. The decision to filethe complaint was made by the special, litigation committee appointed by the Company's Board ofDirectors in 1989 to conduct an independent investigation ofcertain matters. (See "SHAREHOLDERLITIGATION 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 SECURITYHOLDERS None.

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

Name'ge Office Initial Effective Date Ashton B. Collins...

58 Chairman of the Board J. T. Ackerman.....

49 President and Chief Executive Officer W. M. Eglinton.....

42 Executive Vice President and Chief Operating Officer, Electric and Water Operations J. B. Mulcock, Jr....

51 Senior Vice President, Corporate Affairs and Secretary M. H., Maerki.. ~...

50 Senior Vice President and Chief Financial Officer W. J. Real... ~....

42 Executive Vice President, Gas Operations M. Phyllis Bourque..

43 Senior Vice President, Gas Management Services J. A. Zanotti......

51 Senior Vice President, Human Resources and Communications 21

Allofficers are elected annually by the Board of Directors of the Company.

Allofthe 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 ofAshton 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 COMMONEQUITYAND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the New York Stock Exchange. Ranges ofsales 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 1990:

December 31..

September 30 June 30.....

March 31...

~

Fiscal Year 1989:

December 31..

September 30 June 30.....

March 31....

Fiscal Year I

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

High 9e/e 12e/s 12e/e 15'/e" 15t/s 15 t/i 15'/e

'14e/i 14'/s

'57/e 8

9 '/i 97/s 12'/s 8

127/e..'4 ll 10e/~

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 firstquarter of 1989 were $.38 per share. InApril1989, the Company announced the suspension ofdividend 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 ofthe notes to consolidated financial statements and ITEM7"MANAGE-MENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION 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 Total Operating Revenues* ~...'.

Earnings (Loss) from Continuing Operations Net Earnings (Loss)

Earnings (Loss) per Common Share From Contiriuing Operations Earnings (Loss) per Common Share Total Assets........

~

Preferred Stock with Mandatory Redemption Requirements.. ~...

Long-germ Debt, less Current Maturities,...............

Common Stock Data:

Dividends paid per common share Dividend pay-out ratio Market price per common share at year end..............

Book value per common share at year end......

~

. ~.....

Average. number of common shares outstan'ding Return on Average Common Equity.

Capitalization:

Common stock equity........

Preferred stock:

Without mandatory redemption requirements With mandatory redeinption requirements =...........

Long-term debt, less current maturities.... ~...

~

~.,..

855,134 (1n thousands except per share amounts and ratios)

'915,310 841,924 785,224 775,807 442 442 82,593 82,593 (9,942)t 117,121

$ (230,137) 95,389 159,324 151,005

(.23)

(.23)

. $2,313,709 45,581 790,126 1.73 1.73

$2,387,005 49,268 801,706

(.50)t (5.78)

$2,392,749

$ =

55,242 980,767 2.52 3.49 2.00 3.29

$2,717,141

. $2,667,639 60,513 862,962 66,147 862,796

~ $

0.38 1.87 22.0%

N/M 2.92 2.92 146.0%

88.8%

.. $ ". 17.36'18.02 18.03 25.68 26.51 41,774-(1.3)%

44.8 %

41,774 9.5%

45.3%

41,761 (23.9)%

40.7 %

41,647 7.7%

52.2%

40,401 12.8%

52.6%

3.6 2.8 3.5

'.0

. 32 3.0 2.9 2.9 2.8 3.2 48.8 100.0 %

48.2 100.0%

53.1 100.0 %

42,0 100.0%

41.4 100.0%

8.375 14.625 12.50 18.75 33.00

• 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-offof deferred carrying costs on uncommitted electric generating capacity, the write-offof 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 ofFinancial Condition and Results of Operations contained elsewhere in this report.

23

ITEM 7.

MANAGEMENT'SDISCUSSION ANDANALYSISOF 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.

$ 81

$116 3'

$ 84

$119 LIQUIDITYAND CAPITALRESOURCES 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 millionfor 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 utilityconstruction). 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.

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

1990 1991 1992 1993 1994 1995 (In millions)

Cash....................

$116

$ 95 AFUDC..................

5 7

Total....................

$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 ofinflation,'the availability and timing ofenvironmental and other regulatory approvals,

'he availability and costs of outside sources of capital and changes in project construction schedules.

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 millionfor 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, willmeet 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 willdepend 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 facilitywith major banks. The new facilityis secured by first mortgage bonds of the Company and is currently scheduled t'o terminate on June 30, 1992. The facilitycontains a provision that could prevent the Company from borrowing under the facilityin the event ofa material adverse change in the financial condition, results of operations, assets, business or prospects of the Company. UntilJuly 31, 1991, the termination date of the facilityis 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% ofthe 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 ofPower Nuclear Plant"), is to limitthe 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% ofits 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 ofthe holders of a majority ofthe shares ofpreferred 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 offirstmortgage 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 ofdirectors 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 primarilyfrom

the NMPSC's treatment ofprior 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-utilityoperations, a provision for an extraordinary loss, on discontinuation of application of regulatory accounting principles regarding certain assets, the write-offof the Com-

'any's.investment in a proposed coal-fired generating station, the write-offofdeferred carrrying costs 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 millionin 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 millionin 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 millionincrease 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 oftaxes" 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 millionin 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 millionin 1989 'primarily as a result of the inclusion ofgas 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 milliondue 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 utilityproperty 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-offrelating to the stipulation reached between the NMPSC Staff and the Company, which was approved by the NMPSC, settling all issues ofprudence as they relate to the Company's 10.2%

interest in PVNGS Units 1

and 2

(see PART I, ITEM 1 "BUSINESS RATES ANDREGULATIONPVNGS Cost Investigation" ), the write-off of deferred gas processing costs and a provision for other losses.

Interest charges decreased $7.0 milliondue primarilyto the retirement of$30 millionof 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 April5, 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 ofPower".) 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 April5, 1989 order. On April12, 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 April1990, 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 willcause 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 millionarising from settlement ofcertain contract claims. (See PART I,ITEM1"BUSINESS 27

RATES AND REGULATIONNatural Gas Supply Matters".) Even'though significant natural gas contracts have been reformed or terminated, GCNM and Gathering Company are stilldisputing 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 "LEGALPROCEEDINGS NATURALGAS 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 willhave 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 formarket 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 ofother utilities in the WSCC have made and are making long-term transmission service commitments difficultto 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'oiland 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 difficultyin 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 willcontinue 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 ofDirectors approved plans to proceed withthe 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 ofthe 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.forJune 1994 through May 2002, and 15 MW thereafter through 2008. The APPA agreement would also provide for sales of an additional 25 MWof seasonal power in the months ofJune 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 ofthe 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 ofthe 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 viabilityof other alternatives, and 'the methods that may be available to the City to implement the recent charter amendment. In October 1990, the City Council ofAlbuquerque voted to approve the formation ofa "MunicipalElectric Utility."The goals and objectives ofthe new entity are at present not well defined, but itis 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 utilityrates 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 ofthe franchise prior to its expiration. Absent a renewal ofthe 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 utilityplant. While the Company cannot predict the ultimate outcome*of the franchise renewal issue, itcurrently, 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 ofthe 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 ofthe 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 civilpenalties 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 ofPVNGS'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 IIIviolation of NRC requirements at PVNGS. The base value ofthe civilpenalty 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 civilpenalty 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 willevaluate further enforcement action.

In recent years, the NRC has monitored closely the operation ofthe 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 jointlyowns SJGS, in which Tucson and Century also have interests.

On January 23, 1991, Tucson announced that, in a meeting with its bank group, itproposed a morato-rium commencing February 1, 1991, during which itwould 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 ofpayments. 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 ofevents ofdefault 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 liabilitywith 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 ofmaterial 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-utilityoperations and securities fraud. (See PART I, ITEM3 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 ofthe 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 ofthese 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 ofthis new standard has not been fullydetermined, but the change likelywillresult 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 willbe 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.

FINANCIALSTATEMENTSAND SUPPLEMENTARY DATA INDEX Management's Responsibility for Financial Statements..

Independent Auditors'eport Financial Statements:

Consolidated Statement of Earnings (Loss)........

Consolidated Statement of Retained Earnings (Deficit)

Consolidated Balance Sheet Consolidated Statement of Cash Flows Consolidated Statement of Capitalization ~........

Notes to Consolidated Financial Statements.. ~....

Supplementary Data:

Consolidated Financial Statement Schedules.......

Quarterly Operating Results Comparative Operating Statistics..............

~

~

~

~

~

~

~

~

~

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~

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0

~

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Page 32 33 34 35 36 37~

38 39 55 62 63 MANAGEMENT'SRESPONSIBILITY FOR FINANCIALSTATEMENTS The management ofPublic Service Company ofNew Mexico is responsible forthe preparation and presentation ofthe 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 ofPublic Service Company ofNew Mexico and subsidiaries as listed in the accompanying index. In connection with our audits ofthe 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 ofPublic Service Company ofNew 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

Operating Revenu Electric....

Gas (note 1)

Water.....

Total opera Operating Expenses:

Fuel and purchased power Gas purchased for resale Other operation expenses.......... -......................

Maintenance and repairs Depreciation and amortization.............................

Taxes, other than income taxes...,......,.......'............

Income taxes (note 4)..................................

Total operating expenses.......................:.......

Operating income.......,...'....."..................

Other Income and Deductions; net of taxes (note 4):

Allowance for equity funds used during construction Deferred carrying costs on uncommitted electric generating capacity (note 11)..

Write-oKof proposed generating station (note 6)

Write-offs due to electric regulatory order (note 11).......:..'.'.......

Other Net other income and deductions................. ~.......

Income before interest charges Interest Charges:

Interest on long-term debt Other interest charges.............................,....

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

Net interest charges Earnings (Loss) From Continuing Operations......................

Discontinued Operations, net of tax (note 10):

Loss from operations of non-utilityoperations....................

Estimated loss on disposal of non-utility operations, including provision for operating losses during the phase-out period Earnings (Loss) before Extraordinary Item Extraordinary Item loss on discontinuation of application of regulatory accounting principles regarding certain assets, net of tax (note ll)

Net Earnings (Loss)

Preferred Stock Dividend Requirements.........................

Net Earnings (Loss) Available for Common Stock Average Number of Common Shares Outstanding Earnings (Loss) per Share of Common Stock:

Earnings (loss) from continuing operations............. ~........

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

Estimated loss on disposal of non-utilityoperations.................

Earnings (loss) before extraordinary item.......................

Extraordinary item Net Earnings (Loss)

Dividends Paid per Share of Common Stock 152,017 122,575 261.,687 46,568 66,920 34,823 17,268

'55,279 155,232 268,826

, 50,755 71,981 34,043 25,958 142,482 170,320 275,851 56,385 73,204 36,961 7,490 762,693 762,074 701,858 92,441 153,236 140,066 2,909 4,658 (20,234)

(38,104)

(10,634)

(19,396)

(5,188) 2,392 (24,584) 5,301 (64,314) 67,857 158,537 75,752 81,775 6,329 (2,410) 71,572 6,283 (1,911) 61,176 9,697 (3,458) 85,694

'7,415 75,944 442 82,593 (9,942)

(35,826)

(137,773) 442 82,593 (183,541)

(46,596) 82,593 (230,137) 10,456 11,117 442 10,002

$ (9,560)

$ 72,137

$(241,254) 41,774 41,761 41,774

(.23) 1.73

(.50)

(.86)

(3.30)

(4.66)

(1.12)

(.23) 1.73 8

(23>

L73 (578) 1.87

.38 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) es:

$541,330

$620,381

$ 607,317 302,104 282,827 223,791 11,700 12,102 10,816 ting revenues........... '...................

855,134 915,310 841,924 See accompanying notes to consolidated financial statements.

34

PUBLIC SERVICE COMPANY OF NEW MEXICO'ANDSUBSIDIARIES Balance at Elimination of deficit through quasi-reorganization of equity accounts (note 2)..

Net Earnings (Loss)..

Dividends:

Cumulative pref Common stock Balance at End of 144,004 442 82,593 (230,137) erred stock.....................

(10,002)

(10,456)

(11,117)

(15,874)

(78,087)

Year 6 46,703 3

56,263

$(144,004)

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENT OF RETAINED EARNINGS (DEFICIT)

Year Ended December 31, 1990 1989 1988 (In thousands)

Beginning of Year.....................

$ 56,263

$(144,004)

$ 175,337 35

PUBLIC:SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES'ONSOLIDATED

'BALANCESHEET, December 31, 1990 1989 (In thousands)

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

Electric plant in service Gas plant in service Water plant in service Common plant in service Plant held for future use..............

Less accumulated depreciation and amortization CAPITALIZATIONAND LIABILITIES Capitalization (note 2):

Common stock equity:

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

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

Total common stock equity...............

Cumulative preferred stock without mandatory redemptio Cumulative preferred stock with mandatory redemption re Long-term debt, less current maturities Total capitalization Current Liabilities:

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

Accounts payable...................

~ ~...

Current maturities of long-term debt (note 2)........

Accrued interest and taxes............ ~......

Other current liabilities Total current liabilities..................

Deferred Credits:

Accumulated deferred investment tax credits (note 4)

Accumulated deferred income taxes (note 4).........

Other deferred credits.....................

Total deferred credits...................

Commitments and Contingencies (notes 6 through 12) n requirements quirements Construction work inprogress.............................

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

Net utilityplant....

~

~

~

~

~

~

~

~

~ '

~

~

Other Property and Investments:

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

Other investments, at cost.. '........... ~......'...........

Total other property and investments... ~..................

Current Assets:

Cash...........................

~

~

~..

~

~

~

~

~

~

~

Temporary investments, at cost Receivables....,...... ~............................

Income taxes receivable Fuel, materials and supplies, at average cost.................

~...

Gas in underground storage, at weighted average cost Prepaid expenses..............

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

Total current assets................................

Deferred Charges.....................................

$1,938,243 445,814 49,946 40,085 1,258 2,475,346 697,744 1,777,602 86,127 50,732 1,914,461

$1,920,545 426,666 48,901 46,579 16,782

'2~459,473 652,890 1 806 583 67,981 57,281 1,931,845 9,869 31,146 41,015 12,601 19,327 31,928 4,588 1,365 104,053 11,008 48,013 11,499 7,775 6,660 11,130 119,139 37,024 49,642 11,700 7,101 208,870 208,870 469,688 487,465 46,703-56,263

= 725,261 59,000

=45,581 790,126 752,598 59,000 49,268 801,706 1,619,968 1,662,572 15,000 127,516 9,214 30,918 33,946 33,880 150,203 12,324 31,143 41,164 216,594 268,714 116,495 146,642 214,010 123,558 139,756 192,405 477,147 455,719 188,301 242,396 169 932 180 836

$2,313,'709

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

$2,313,709

$2,387,005 36

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

Net earnings (loss)...

~

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

Adjustments to reconcile net earnings (loss) to net cash flows from operating activities:

Depreciation and amortization Allowance for equity funds used during construction....

Deferred carrying costs on uncommitted electric generating capacity Accumulated deferred investment tax credit........

~

Accumulated deferred income tax Write-offof proposed generating station Write-offs due to electric regulatory order Loss from extraordina'ry item."...,..............

Provision for other losses Changes in certain assets and liabilities:

Receivables Fuel, materials and supplies Net assets of discontinued operations............

Deferred charges........................

Accounts payable.......,......

Accrued interest and taxes..............

Deferred credits.............

Other...................

Other

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

Net cash flows from operating activities.........

Cash Flows From Investing Activities:

Utilityplant additions Other property additions ~........

Other property sales.........,....

Temporary investments, net.......

Net cash flows from investing activities Cash Flows From Financing Activities:

Proceeds from issuance of common 'stock Redemptions and repurchases of preferred stock.....,.,

Proceeds from long-term debt........... ~.......

Repayments of long-term debt Net increase (decrease) in short-term debt...........

Dividends paid..............

Net cash flows from financing activities........

~

Increase (Decrease) in Cash Cash at Beginning of Year Cash at End ofYear................

Supplemental cash flow disclosures:

Interest paid,..... ~.........

Income taxes paid (refunded).....

'ash consists of currency on hand and demand deposits.

442 82,593

$(230,137) 88,852 (7,063) 28,755 19,707 40,897 1,718 (49,101)

(22,549)

(1,217) 24,971 (572) 1,053 80,286 (2,909)

(6,475) 42,254 (38,000) 9,778 (33,998)

(5,020) 23,361 1,005 (10,101)

(10,281) 91,087 (4,658) 20,234 (20,142)

(67,963) 50,970 53,504 381452 (17,779)

(10,470)

'180,069 (5,458) 31,464 6,904 16,006 16,025 6,420 125,893 132,493 154,528 (81,290)

(11,156) 1,605 9,765 (74,088)

(12,081) 7,560 152,877.

(86,549)

(7,701) 9,729 42,482 (81,076) 74,268 (42,039)

(3,813)

(14,570)

(18,880)

(9,626)

(5,510) 3,043 (206,170) 33,880 (26,723)

(46,889)

(201,480)

(2,072) 6,660 5,281 1,379 4,588 6,660 682 (5,257) 50,195 (66,468)

'3,000)

, (89,524)

'113,372)

(883)

'2,262 1,379

$ (52,865) 12,'397 (9,842) 68,415 86,444

$ 101,179 See accompanying notes to consolidated financial statements.

37

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CAPITALIZATION December 31, Common Stock Equity (note 2):

Common stock, par value $5 per share Additional paid-in capital.......

Retained earnings since January 1, 1989 Total common stock equity.....

~

~

~ ~,

~

1990 1989 (In thousands) 208,870 208,870 469,688 487,465 46,703 56,263 725,261 752,598 Cumulative Preferred Stock (note 2):

Without mandatory redemption requirements:

1965 Series, 4.58%................

8.48% Series....................

8.80% Series.....

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

~

~

Stated Value Shares Outstanding at December 31, 1990 Current Redemption Price

$100 130,000

$ 102.00 13,000 100 200,000 103.00 20,000 100 260,000 103.10, 26,000 590,000 59,000 13,000 20,000 26,000 59,000 With mandatory redemption requirements:

8.75% Series....................

12.52% Series...................

Redeemable within one year..........

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

Issue and Final Maturity First mortgage bonds:

1990 through 1995....,............

1996 through 2000.................

2001 through 2005.................

2006 through 2010................

~

2011 through 2013.........,... ~...

1993 through 2013 pollution control series, securing pollution control revenue bonds Total first mortgage bonds Pollution control revenue bonds:

2003 through 2013......,..........

2009

~

~

~

~

~

~

~

~

~

~

~

~

~

Other, including unamortized premium and discount.

Interest Rates 4'/s%

5'/s% to 7'/<%

7/s% to 10/s%

8'/s% to 9

127/s%

5.9% to 10s/<%

10% to 102/<%

variable rate a

8,655 28,202 100,747 86,003 540 8,655 28,417 101,465 87,040 1,716 100,000 37,300 848 100,000 37,300 12,392 437,045 437,045

, 661,192 664,338 Total long-term debt...,..........

Current maturities 799,340 9,214 814,030 12,324 Long-term debt, less current maturities...

Total Capitalization 790,126 801,706

$1,619,968

$1,662,572 See accompanying notes to consolidated financial statements.

PUBLIC SERVICE COMPANYOF NEW MEXICOAND 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 ofaccounts 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 ofthe 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 ofnet earnings in order to followthe principle ofmatching 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. Allsignificant 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 ofsuch 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 ofbusiness are credited or charged to the accumulated provision for depreciation."

F Depreciation and Amortization Provision for depreciation and amortization of utilityplant 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%

Gas plant 3.13%

3.11%

2.97%

Waterplant.....,........

2.68%

2.78%

2.25%

Common plant 7.36%

9.54%

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.

Alloisance for Funds Used During Construction ("AFUDC")

's 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 withthe 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 AFUDCrates 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 utilityare 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 ofcertain 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 offirstmortgage 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 ofamounts necessary to provide additional tax normaliza-tion ofthe 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,itrequires 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 ofsuch 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 ofnatural 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

Balance at December 31, 1987.......

Stock Plans................

Redemption of preferred stock Redeemable within one year.. ~....

Balance at December 31, 1988.......

Quasi-reorganization of equity accounts:

Elimination of deficit in retained earnings Adoption of SFAS No. 96 Other adjustments...........

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

Redeemable within one year......

Balance at December 31, 1989.......

Adjustments related to quasi-reorganization of equity accounts Redemption of preferred stock Redeemable within one year.......

Balance at December 31, 1990.......

(144,004)

(32,302)

(24,767)

(53,232)

(3,323) 49 837 2 651) 146

(,

) (,

41,774,083 208,870 487,465 590,000 59,000 689,360 49,268 (17,968) 191

(13,537)

(1,354)

(46,660)

(2,333) 41,774,083

$208,870

$469,688 590,000

$59>000 629,163

$45,581 (Dollars in thousands) 41,733,504

$208,668

$687,899 590,000

$59,000 888,472

$60,513 40,579 202 436 57

(49,383)

(2,938)

(46,660)

(2,333) 41,774,083 208,870 688,392 590,000 59,000 792,429 55,242 41

PUBLIC SERVICE COMPANY OF NEW MEXICOAND 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 utilityplant 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 ofdirectors 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 April1989, the Company announced the suspension of dividend payments on the Company's common stock as a result ofthe deficit in retained earnings as of December 31, 1988. Although the implementation ofthe Company's quasi-reorganization, efFective as of January 1, 1989, eliminated the retained'earnings deficit, the Company's board ofdirectors has not declared dividends on its common stock since January 1989. The board ofdirectors 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 millionfor 1991 and $3.6 millionannually for 1992 through 1995.

42

PUBLIC SERVICE COMPANYOF 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 willbe 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......

1993......

1994......

1995......

$ 9,214

$ 1,639

$11,314

$ 2,220

$ 2,235 h

(3)

Short-Term Debt The Company's interim financing requirements have been met through the issuance ofcommercial 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. Ofthese commitments, $141 millionexpired 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 millionrevolving 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:

Current Federal income tax Current State income tax....

~

Deferred Federal income tax.

~

Deferred State income tax.....

Investment tax credit utilized and deferred.....

Amortization of accumulated investment tax credits Total income taxes.......

Charged to operating expenses l

Charged (credited) to other income and deductions Total income taxes.....

~

~

1998 1989 1988 dtn thousands)

$21,155

$ 59425 7,432.

6,611 (920) 1,521 (1,667) 26,852 (8,983)

(3,878) 6,'669 (916)

(730)

(333)

(6,332)

(6,475)

(6,383)

$15,159

$31,"551

$ (7,662)

$ 7,490

$25,958

$ 17,268 7,669 5,593 (24,930)

$15,159

$31,551

$ (7,662) 43

PUBLIC SERVICE COMPANYOF 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 ofextraordinary items, differed from the Federal income tax computed at the statutory rate for each ofthe years shown.

The differences are attributable to the following factors:

Federal income tax'at "statutory rate of34%.........

AHowance for funds used during construction Deferred carrying costs on uncommitted electric generating capacity.......................

Investment tax credits PVNGS start-up and pre-operational costs.........

Depreciation of flow-through items... ~..........

Gains on the sale and leaseback of PVNGS

. ~.......

Amortization of pollution control facilities Reversal of permanent differences resulting from write-off of proposed generating station..

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

~

Reversal of flow through tr'eatment for debt retirements and hedge transactions as ordered by the NMPSC....

State income tax....,..... ~,.......'-......

Tax rate differential on capital'loss carryback 0

h ther

~

~

~

~

~

~

~

~

~

~

~

~

0 Total income taxes

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

~

1990

$ 5,304 (6,332)

(1,479) 1,687 1,027 lt 14,043 i 308 601

$15,159

'6,475)

(3,354) 1,079 (960)

(1,533) 6,879 (6,383)

(3,836) 2,971 (907)

(1,528) 6,234 3,855" (215) 2,197 (1,078)

(2,488)

$31,551

$ (7,662) 1989 1988 Pn thousands)

$38,809

$ (5,986)

(989)

(2,403)

Deferred fuel costs.......................

Depreciation'and cost recovery..... ~..........

Contributions in aid ofconstruction.............

Advance lease payments....................

Unbilled revenues........................

Alternative minimum tax in excess of regular tax.....

Write-offof proposed utilityfacilities............

Limitation on deferred taxes due to tax net operating losses o

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

Reversal of flow through treatment for debt retire and hedge transactions as ordered by the NMPS 0ther

~

~

~

~

~

0

~

\\

0

~

~

~

~

~

~

(43,606) ments C...

14,043 3,912 3,137

. (11,192)

$ (5,545)

$33,521

$ (9,899)

Total deferred taxes............

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 gn thousands)

$ (3,591)

$ 4,366 8,160 12,317 19,504 16,985 (1,397)

(1,776)

(4,113) 14,710 744 (650)

(1,880)

(2,486) 1,671 (6,548)

(5,132) 11,756 2,008

. (12,865)

In addition, the balance ofdeferred 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 AtDecember 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 ofSFAS No. 96 to regulated enterprises results in the creation ofregulatory 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 liabilitiesof $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 primarilyupon years ofservice 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 ofthis 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......... ~......... ~.......

6,287 4,165 4,338 Interest cost........,.. ~........ ~.....

13,404 12,191 10,634 Actual return on plan assets.................

(2,469)

(25,360)

(14,088)

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

(13,930) 11,015 1,413

, Other..............................

(1,130)

(1,205)

(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 followingsets forth the plan's funded status and amounts (in thousands) at December 31, 1990 and 1989:

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

Non-vested benefits.................

Accumulated benefit obligation Effect of future compensation levels Projected benefit obligation Fair value of plan assets Assets in excess of projected benefit obligation

$115,162

$111,633 634 663 115,796 48,324 164,120 167,389 112,296 38,598 150,894 166,002 3,269

$ 15,108 45

PUBLIC SERVICE COMPANYOF NEW'MEXICOAND'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 Net unrecognized gain (loss) from past experience different from assumed..;................. '......'..... '.

Unamortized asset at transition, being amortized through the year 2002 0

~

~

~

~

~

~

~

~

~

~

~

~

~

Accrued pension liability................'.......,..

Unrecognized prior service cost

$ (10,885) 5,900 12,798 1,788 (432) 13,962 (4,288)

(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 ofproviding 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 ofpostretirement benefits (such as medical and dental benefits) during the years employees provide services. The costs ofthese benefits are currently expensed on a pay-as-you-go basis. The impact ofthis new standard has not been fullydetermined, but the change likelywillresult 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 willbe 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

~

AtDecember 31, 1990, the Company's ownership interest and investments injointly-owned gener-ating facilities are:

Station (Fuel +pe)

San Juan Generating Station (Coal)..........

Palo Verde Nuclear Generating Station Unit 3 (Nuclear)*

Four Corners Generating Station Units 4 and 5 (Coal).....

Plant In Service

$815,827 Construction Accumulated Ivork in Depreciation Progress (In thousands)

$251,389

$ 2,420 Composite Ownership Interest 51.6%

$327,680

$ 28,610

$28,559 10.2%

$ 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 jointlyowns the San Juan Generating Station ("SJGS"). AtDecem-ber 31, 1990, SJGS Units 1 and 2 are owned on a 50% shared basis withTucson 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 ofdefault 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 itmay need to file for protection from its creditors under Chapter llof 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 liabilitywith 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 ofthe Company's investment in PVNGS.

The Company had the burden ofproving, and the Company believes, that PVNGS construction costs

'ere reasonable and that its decisions to invest in and continue participation in PVNGS were prudent.

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 ofsuch 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 ofprudence 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 Unit3 has been excluded from New Mexicojurisdictional 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 limitof liabilityunder Federal'aw. This potential liabilityis covered by primary liabilityinsurance 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

'ny nuclear power plant in the United States is approximately $66 million,subject to an annual limitof

$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 billionas ofJanuary 1, 1991, a substantial portion ofwhich must first be applied to decontami-nation. The Company has also secured insurance against a portion ofthe increased cost ofgeneration 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 willmake a series of annual deposits to an external trust fund over the estimated useful life of each unit, and the trust funds willbe 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 willnecessitate the Company prefunding certain annual trust deposits for the aggregate amount ofapproximately $4.8 mil-

'ion for the years 1991 through 1993. The annual funding amount is subject to periodic'adjustment for 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 ofa 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 offits investment of$38.1 million(net ofincome taxes) in the proposed generating station in 1988.

(7)

Long-Term Power Contracts and Franchises The Company has entered into contracts for the purchase ofelectric 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 ofthe 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 itis necessary to do so in order to provide utilityservices withinthose 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 ofthe Company's distribution system. The Company has been actively pursuing the re'newal ofthe franchise prior to its expiration. Absent a renewal ofthe franchise, the Company is likely to continue service to the City franchise area for an undetermined period oftime without a franchise. Furthermore, the Company, as necessary, willtake vigorous action to protect the value ofthe 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 withgenerally accepted accounting principles. The Company leases Units 1 and 2 ofPVNGS, transmission facilities, office buildings and other equipment under operating leases. The aggregate lease payments for the PVNGS leases are $84.6 millionper 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 1992 1993...........

1994...........

1995...........

Later years.......

Total minimum lease

~

~

~

~

payments 96,648 96,219 95,291 94,667 94,569 1,844,664

$2,322,058

'perating lease expense was approximately $96.0 million in 1990, $95.8 million in 1989 and

$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 ofNew Mexico ("GCNM"),a division ofthe Company, and Sunterra Gas Gathering Company ("Gathering Company" ), a subsidiary ofthe 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

'atters.

In addition, the Company has settled with third-parties who, the Company believes, have contributed to the Company's potential liabilities. The Company has evaluated, and willcontinue 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% ofproducer take-or-pay costs. The Company willbe permitted to recover from its sales and transportation customers the remaining 75% of such costs over a period ofyears. 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 ofthe 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 itis 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% ofthe 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 COMPANYOF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

December 31, 1990, 1989 and 1988 which have some form ofpenalty 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-UtilityOperations In 1988, the Company made the decision to discontinue the non-utilityoperations ofits subsidiar-ies. Such operations consisted primarilyoffiberboard 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-utilityoperations in 1988 were $137.8 million (net ofincome'tax benefits of $64.1'million) which primarilyreflected 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 millionfor expected operating losses prior to their expected disposal ofnon-utilityoperations 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 ofthe discontinued operations were disposed ofin 1988 and 1989. In 1989, the Company reevaluated the cost ofdisposing ofthe discontinued operations including the related income tax effects, and recorded appropriate adjustments.

(See note 2.) In 1990, additional non-utilityproper-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, ifany, 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 abilityto 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 ofregulatory 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 ofPVNGS Unit3 but denied such a request for the 130 MWofSJGS Unit4. 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 Mexicojurisdictional 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 millionand 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 millionper year. Also, as a result ofthe order, the Company wrote ofF approximately $19.4 million,net oftaxes, in March 1990, which resulted primarilyfrom the NMPSC's treatment ofprior years'ax benefits from debt retir'ement and losses on hedge transactions of$14.0 millionas well as the NMPSC's treatment ofamortization periods for gains resulting from sale and leaseback transactions of $4.5 millionon 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 ofthe Company. These suits allege misrepresentations and omissions ofmaterial 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 ofthe 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 ofthese lawsuits willnot have a material adverse efFect on the Company's results of operations or its financial condition.

52

PUBLIC SERVICE COMPANYOF NEW MEXICOAND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL'TATEMENTS(Continued)

December 31; 1990, 1989 and 1988 (13)

Segment Information The financial information pertaining to tions for the years ended December 31, 199 I

the Company's electric, gas (see note 1) and 0, 1989 and 1988 are as follows:

Electric Gas Other (In thousands),

other opera-Total 1990:

Operating revenues Operating expenses excluding income taxes Pre-tax operating income

~.. ~......

Operating income tax......... ~...

Operating income Depreciation and amortization expense Construction expenditures..........

Identifiable assets:

Net utilityplant...............

Other Total assets 0

~

~

~

~

~

~

~

~

~

~

~

1989:

Operating revenues Operating expenses excluding income taxes Pre-tax operating income ~..........

Operating income tax.............

Operating income Depreciation and amortization expense Construction expenditures..........

Identifiable assets:

Net utilityplant...............

Other

~

~

~

~

~

~

~

I Total assets 1988:

Operating revenues

~

~

~

Operating expenses excluding income taxes.....

Pre-tax operating income Operating income tax Operating income Depreciation and amortization expense Construction expenditures Identifiable assets:

Net utilityplant Other....

Total assets 541,330

$302,104

$ 11,700 855,134 479,259 269,556 6,388 755,203 62,071 (973) 32,548 7,032 5,312 1,431 99,931 7,490 63,044

$ 25,516 57,745

$ 14,416 53,080

$ 24,499

$1,574,670

$297,877 219,135 152,459

$1,793,805

$450,336 3,881 1,043 6,657

$ 41,914 27,654

$ 69,568 92,441 73,204 84,236

$1,914,461 399,248

$2,313,709 620,381

$282,827

$ 12,102 915,310 475,405 254,677 6,034 736,116 144,976 20,411 28,150 3,759 6,068 1,788 179,194 25,958 124,565

$ 24,391 58,129

$ 12,730 55,334

$ 20,375 4,280 1,122 2,580 153,236 71,981 78,289 607,317

$223,791

$ 10,816 841,924 470,162 208,540 5,888 684,590 137,155 15,624 15,251 448 121,531

$ 14,803 56,450 9,548 68,230

$ 19,524 4,928 1,196 3 732 922 9,427 157,334 17,268 140,066 66,920 97,181

$1,601,556

$243,123

$ 40,264

$1,884,943 323,006 93,616 91,184 507,806

$1,924,562

$336,739

$131,448

$2,392,749

$1,603,242

$287,779

$ 40,824

$1,931,845 284,314 146,085 24,761 455,160

$1,887,556

$433,864

$ 65,585

$2,387,005 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)

$18,345

$16,473

$14,950 6,940 6,664 8,890 7,749 7,052 7,'112 3,927 3,854 3,871'

$36,961

$34,043

$34,823 Ad valorem City franchise..........

Payroll.....;.;......

Other Total.....

~

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 December 31, 1990 Year at Cost Retirements Add Deduct Utility.plant:

Pn thousands)

Electric plant in service:

Intangible.................

30,876,

$ 1,460 357 63

$ 1,018 Production...

~

~

. ~.........

1,235,981 8,262 2,429 15 6,614 Transmission.............

~

214,667 858 7

2 90 Distribution

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

375,872 17,741 1,611 151 1,683

, General..................

63,149 2,960 317 836 524 1,920,545 31,281 4,721 1,067 9,929 Balance at End of Year 31,024 1,235,215 215,430 390,470 66,104 1,938,243 Gas plant in service:

Intangible..........

Production and processing Natural gas storage....

Transmission........

Distribution General...........

7,136 107,454 4,897 66,489

'203,951 36,739 426,666 2,357 34161 700 13,140 3,856 23,214 563 56 2 373 1,316 4,308 137 475 612 14 136 164 1'5 370 9,479 110,189 4,761 66,969 214,717 39,699

" 445,814 Water plant in service:

Intangible..............

~

~

~

Source of supply plant.........

Pumping plant..............

Water treatment plant.........

Transmission and distribution General..................

Common plant in service:

Intangible.................

Construction work in progress....

'lectric plant held for future use..

Nuclear fuel.. ~.........

~..

Total utilityplant Non-utility property

. ~..... ~...

Total property, plant and equipment............

296 4,977 2,130 3,963 32,140 5,395 48,901' 18,536 28,043 46,579 67,981 16,782 88,670 2,616,124 15,370 32,631,434 686 248 1,277 1

2,212 881 367 1,248 18,159 7,955 84,069 167 841 3

154 98 1,096 1,135 6,692 7,827 428 18,384 36,764 1,590 2,688 75 459 3 222 145 5

150 122 5,173 15,544

$84,236

$38,354

$20,717 145 1

3,147 3,293 63 2

65 13 15,218 766 29,654 18,804

$48,458 151 7,510 2,375 4,038 33,721 2,151 49,946 18,364 21,721 40,085

'6,127 1,258 77,475 2,638,948 10,687

$2,649,635 Description of other changes Transfers between accounts.......... ~.......

Transfer of expired contract deposits to plant in service Write-offof plant-in-service Write-offof non-utilityproperty..............

Miscellaneous corrections and adjustments.. '"....

~.

$16,335 4,382

$20,717

$16,335 1,515

'" 6,245 18,200 6,163

$48,458 (Contirtued) 55

Classification December 31, 1989 Utilityplant:

Electric plant in service:

Intangible......

Production.....

Transmission Distribution General.....

30,876 1,235,981 214,667 375,872 63,149 1

46 921 21 378 18,438 669 143 114 19,742 12,169 1,214,366 210,984

'361,772 64,845

$18,364 4,270 3,092 18,040 100 43,866 35 1,092 32 3,162 1,889 6,210

~

~

~

~

~

1,864,136 989 1,920,545 PUBLIC SERVICE COMPANYOF NEW MEXICOAND SUBSIDIARIES SCHEDULE VPROPERTY, PLANTAND EQUIPMENT (Continued)

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

Gas plant in service:

Intangible..

Production and processing Natural gas storage....

Transmission Distribution General Water plant in service:

Intangible Source of supply plant.. -.......

Pumping plant..............

Water treatment plant ~........

Transmission and distribution General Common plant in service:

Intangible.................

General Construction work in progress......

Electric plant held for future use..'.

Nuclear fuel.................

Total utilityplant Non-utilityproperty.............

Total property, plant and equipment 2,826 57,949 4,885 64,992 195,341 32,538 358,631 259 4,964 2,110 3,968 30,164 2,221 43,686 14,389 27,139 41,528" 72,401

'1,975 77,971',480,228 82,206 4,353 580 12 805 10,577 4,141 20,468 111 13 36 6

1,988 3,209

~ 5,363 3,346 527 3,873 (6,450) 10,706 77,826 463

$2,562,434

$78,289 767 27 1,958 1,485 4,237 74 16 11 47 35 20 50,190 719 1,545 62,474 50 63 498 570 7,136

'07,454 4,897 66,489 203,951 36,739 426,666 296 4,977 2,130 3,963 32,140 5,395 183 50 15 48,901 1,735 454 2,189 5,193 18,012 10,339 2,536 893 3,429 2,030 1,238 78,963 144 18,536 62 28,043 62 1,245 2,881 57,104 e

46,579 67,981 16,782 88,670 2,616,124 16,370

$28,351

$79,107

$59,985

$2,631,494 DescrIption of other changes Transfers between accounts........,........

Transfer of expired contract deposits to plant in service Adoption of SFAS No. 96..................

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

$57,143

$57,143 847 20,798 1,166 1,995

$79,107

$59,985 (Continued) 56

C Dec Utilityplant:

Electric plant in service:

Intangible............

Production Transmission.........

Distribution..........

, General s

res Gas plant in service:

Intangible..1.......,..

Production Natural gas storage Transmission.........

Distribution..........

General 3,181 905,110 208,296 340,067 61,956 8,988 311,538 2,956 25,713 4,774 1,171 222 3,338 2,366 7,097 859 1,970 46 684 746 3,446 14 1,227 2,100 1,518,610 353,969 269 1,428 1,105 14,837 4,098 2,376 57,816 4,885 62,507 182,200 29,058 181 326 969 156 6

1,731 195 1,690 1,130 3,984 512 2,424 488 338,842 21,737 Water plant in service:

Intangible................

'ource of supply plant Pum'ping plant.'............

Water-treatment plant.......

~

Transmission and distribution...

~

General 259 4,964 2,052 3,968 28,537 2,165 71 13 1,738 345 73 188 274 19 57 101 158 41,945 19 2,154 Common plant in service:

Intangible........

General 13,613 28,613 776 1,138 143 143 83 83 2,552 2,552 42,226 1,914 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

,, SCHEDULE VPROPERTY, PLANT AND EQUIPMENT (Continued)

Years Ended December 31, 1990, 1989 and 1988 Balance at lassification Beginning of Additions Other Changes ember 31, 1988 Year at Cost Rettremeats Add Dedaet r

(In thousands)

Balance at End of Year 12,169 1,214,366 210,984 361,772 64,845 1,864,136 2,826 57,949 4,885 64,992 195,341 32,538 358,531 259 4,964 2,110 3,968 30,164 2,221 43,686 14,389 27,139 41,528 Construction work in progress Electric plant held for future use Nuclear fuel Total utilityplant........

Non-utilityproperty*..........

Total property, plant and equipment 369,092 33,103 76,826 2,420,644 139,884 (296,867) 277 9,808 92,992 4,189 8,663 22,570

'2,931 176 4,802 1,200 11,405 15,640 50,136 72,401 21,975 77,971 2,480,228 82,206

$2,560,528

$ 07,181

$35,501

$ 6,002

$65,776

$2,562,434 Description of other changes Transfers between accounts......

Transfer of expired contract deposits to plant in service.

Write-offof electric plant held for future use Write-offof non-utilityproperty.......

Original cost of property acquired......

Miscellaneous corrections and adjustments

'Excludes properties of discontinued operations.

$ 2,530 1,742 1,730

$ 6,002

$ 2,530 449 11,405 48,451 156 2,785

$65,776

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

Balance at End of Year Utilityplant:

Accumulated provision for depreciation of utilityplant:

Electric plant in service Gas plant in service.....

Water plant in service Common plant in service..

. $469,266

$53,453 139,893 12,391 9,578 981 15,005 1,912 633,742 68,737 593 827 53 707 2,180

$ 4,737

$ 2,275

$14,360

$506,490 4,160 219 38 149,132 1,110 223

" 3 9,722 6,695 1

10,930 16,702 2,718 14,401 676,274 Accumulated provision for amortization of intangible assets franchises and computer software Accumulated provision for amortization of nuclear fuel.

Retirement work in progress Total utilityplant.....

Non-utilityproperty.......

Other 17,570 31,389 1,578 5,000 684,279 73,737 2,769

$687,048

73377, (533)

$73,204 221 1,493 13,899 16,300 41

$16,341 3

1,105 20,196 18,384 304 36,883 161 26,743

, 1,274 2,721 15,667 724,487 14,152 16,144 818

$36,883

$16,873

$31,811

$725,305 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 Write-offof non-utilityproperty..................

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

$16,341 14,515 14,515 15,945 2,358 1,351

$16,873

$31,811

'(Continued) 58

Balance at End of Year Description December 31, 1989 Utilityplant:

Accumulated provision for depreciation of utilityplant:

Electric plant in service...

Gas plant in service...,..

, Water plant in service Common plant in service..

$53,065 11,457 1,160 1,680 598 706 50 1,440 2,794

$5,642 2,216 122 426 8,406

$ 1,470 52 $469,266 14,231 974 139,893 9,578 1,943 27 15,005

~.. $419,827 116,689 8,490 10,395 555,401 67,362 17,644 1,053 633,742 PUBL'IC SERVICE COMPANYOF NEW MEXICO AND SUBSIDIARIES SCHEDULE VIACCUMULATEDDEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT (Continued)

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

'H Accumulated provision for amortization of intangible assets franchises and computer software Accumulated provision for amortization of nuclear fuel....-...

Retirement work in progress.......

Total utilityplant...........

Non-utility property.. ~...........

13,984 5,217 26,624 (724) 595,285 72,579 19,209 Other..

$614,494 72,579

~

~

~

~

~

~

~

~

~

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...

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

Depreciation of non-utility property charged to other income and deductions............ ~..........

Transfers between accounts.........

~

~ ~.........

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

6,220 9,245 98

$9,343 (2,310) 7,939 385

$8,324

$3,025 6,220 98

$9,343 231 1,843 19 17,570 1,455 31,389 (8) 1,578 17,636 2,527 684,279 16,153 2,769

$17,636

$18,680

$687,048 16,180 16,180 1,456 2,500

$17,636

$18,680 (Continued) 59

PUBLIC SERVICE COMPANY OF NEW MEXICOAND SUBSIDIARIES SCHEDULE VIACCUMULATEDDEPRECIATION AND AMORTIZATION OF PROPERTY, PLANTAND EQUIPMENT (Continued)

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

Balance at End of Year Utilityplant:

Accumulated provision for depreciation of utilityplant:

Electric plant in service Gas plant in service.....

Water plant in service Common plant in service..

Accumulated provision for amortization of intangible assets franchises and computer software Accumulated provision for amortization of nuclear fuel.....

Retirement work in progress.....

Total utilityplant.........

Non-utility property*

.. $373,936

$52,627 110,201 8,876 7,846 882 8,741 873 500,724 63,258 10,190 3,626 18,088 (912) 528,090 66,884 16,326 876 842 46 1,552 3,316 226 19,106 22,648 2,988

$ 7,482 4,925 279 765 13,451 8,663

" (188) 21,926 277

$ 1,037

$ 1,167

$419,827 1,695 '

116,689 5

8,490 99 '05 10,395 2,831 1,277 555,401 58 13,984 1,907 26,624 (724) 2,831 3,242 595,285 179 7

19,209 Other

$544,416 66,884

$25,636 36

$66,320

$22,203

$ 3,010 $ 3,249

$614,494 Description of other additions and changes Depreciation and amortization of equipment charged to clearing accounts for distribution in accoidance with use Amortization of nuclear fuel charged to fuel and purchased power. ~.........................

Depreciation of non-utility property charged to other income and deductions.......................

Transfers between accounts.....................

Accumulated depreciation on property acquired Miscellaneous corrections and adjustments ~..........

~

$ 3,542 1

19,106 2,988

$25,636

'548'48 1,397 1,065 2,701

$ 3,010

$ 3,249

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

60

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

Average Interest Rate During the Year December 31, 1990:

~ Notes payable to banks

, Commercial paper.....

December 31, 1989:(1)

Notes payable to banks Commercial paper,.......

December 31, 1988:(2)

Notes payable to banks

, Commercial paper ~......

$15,000

$19,100

$14,780 8.90%

9.50%

8.91%

$ 86,750

$ 71,230

$40,943

$13,401

$ 19,100

$ 62,250

$ 1,492

$18,203 8,528

$ 2,910

$160,550,$ 12,898 9.81%

9.11%

,9.52%

9.61%

8.35%

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 QUARTERLYOPERATING 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........................

$ 31,539

$ 16,277

$ 25,903

$ 18,722 Net Earnings (Loss)......................

$ (4,718)

(769) 8,099

$ (2,170)

Net Earnings (Loss) per Share................

(.17)

(.08)

.13

(.11) 1989:

Operating Revenues.......................

$266,181

$210,617

$218,506

$220,006 Operating Income........................

$ 48,237

$ 29,144

$ 42,920

$ 32,935 Net Earnings...........................

$ 29,907

$ 14,265

$ 25,765

$ 12,656 Net Earnings per Share....................

.65

.28

.55

.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

1987 PUBLIC SERVICE COMPANYOF NEW MEXICOAND SUBSIDIARIES COMPARATIVEOPERATING STATISTICS 1990 1989 1988 1986 Electric Service Energy Sales KWh (in thousands):

- Residential Commercial..'............

Industrial Other ultimate customers......

Total sales to ultimate customers Sales for resale............

1,575,622 2,270,380 999,823 203,005 5,048,830 2,119,236 1,527,108 2,203,037 961,251 218,196 4,909,592 3,096,458 1,493,009 2,097,277 899,508 194,794 4,684,588 3,508,596 1,448,989 2,003,735 787,901 207,173 4,447,798 2,490,926 1,353,933 1,872,902 797,927 208,534 4,233,296 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 Commercial Industrial Other ultimate customers......

147,059 141,465 140,731 136,194 126,053 200,041 192,273 187,800 179,653 166,424 66,351 64,519 62,401 56,534 56,649 14,054 15,387 13,931 15,161 14,622 Total revenues from ultimate customers Sales for resale.... ~.......

Total revenues from energy sales Miscellaneous electric revenues 427)505 96,379 523,884 17,446 413,644 190,256 603,900 16,481 404,863 190,085 594,948 12,369 387,542 167,727 555,269 8,348 363,748 149,225 512,973 7,923 Total electric revenues...........

541,330 620,381 607,317 563,617 8

520,896 Customers at Year End:

Residential Commercial Industrial Other ultimate customers.. ~...

Total ultimate customers.....

Sales for resale Total customers Reliable Net CapabilityKW Coincidental Peak Demand KW Average Fuel Cost per MillionBTU.

BTU per KWh of Net Generation..

Water Service Water Sales-Gallons (in thousands)

Revenues (in thousands)

Customers at Year End 259,546 31,295 392 454 291,687 8

254,864 31,402 393 415 287,074 9

250,076 31,024 390 376 281,866Il 244,427 29,882 399 332 275,040 8

237,759 28,736 414 213 267,122 7

291,695 287,083 281,877 275,048 267,129 1,591,000 1,591,000 1,591,000 1,461,000 1,566,000 1,051,000 1,006,000 956,000 916,000 916,000 1.3384 1.3445 1.2460 1.2894 1.1710 11,181 11,034 11,146 11,526 11,608 3,001,391 3,179,711 2,726,666 2,683,961 2,535,656 11,700 12,102 10,816 10,973 10,245 21,134 20,565 19,713,19,448 18,820

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES COMPARATIVEOPERATING STATISTICS 1990 1989 1988 1987 1986 Gas Service Gas Throughput Decatherms (in thousands)

GCNM:

.Residential Commercial...................

Industrial Public authorities Irrigation Sales forresale...............

~

~

Brokerage......

~

~.

~

~

~

~

~

~

~

~

~

~

~

GCNM sales Transportation throughput.. '.;......

GCNM throughput Gathering Company:

Spot market sales Transportation throughput..........

Total gas throughput 25,190 11,344

',278 5,300 1,780 3,539 48,431 31,717 80,148 8,112 10,785 99,045

- 23,253 10,730 1,478 5,492 2,010 4,557 776 48,296 16,041 64,337 11,081 3,597 79,015 24,692 11,460 1,726 6,206 1,440 2,667 879 49,070 9,133 58,203 58,203 24,510 11,359 2,196 6>811 1,402 1,211 2,796 50,285 5,149 55>434 55,434 22,076 10,745 5,909 8,323 1,853 1,535 2,079 52,520 2,245 54,765 54,765 Gas Revenues (in thousands)

GCNM:

Residential Commercial..........

Industrial.........

~.

Public authorities Irrigation Sales for resale........

Brokerage...........

Revenues from gas sales..

Transportation........

Other GCNM gas, revenues....

Gathering Company:

Spot market sales

- Transportation........

Processing Company:

Sales of liquids......;-

-Processing fees........

Total gas revenues.....

Customers at Year End GCNM:

-Residential Commercial..........

Industrial...........

Public authorities Irrigation Sales forresale........

Transportation......,.

Brokerage...........

GCNM customers.....

Gathering Company:

Off-system sales Transportation........

Processing Company......

Total customers I

~

~

t

~

137,633 49,575 4,993 20,392 5>934 7,253 225,780 10,246

, 8,292 244,318 13,880 1,693 39,086 3,127 302,104 312,899 29,305 81 2,125

,1,224 4

40 345,678 12 9

20 345,719 130,130 47,876 5,693 21,757 7,001 9,874 1,378 223,709 6,788 5,948 236,445 19,810 830

'5,294 448 282,827 306,604 28,949 103 2,242 1,252 28 1

339,186 13 5

23 339,227 122,592 45,235 6,063 22,289 4,546 6,969 1,514 209,208 4,841 9,742 223,791 223,791 303,173 28,858 105 2,469 1,261 6

20 2

335,894 335>894 114,164 42,120 8,102 22,729 3,781 3,819, 5,213 199,928 4,315 6,391 210,634 117,011 45,812 23,139 30,213 6,142 5,675 3,759 231,751 2,207 10,708 244,666 210,634 244,666 297,204 28,661 118 2,425 1,257 5

16 2

329,688 290,175 28,218 145 "2,444 1,328ll 16 14 322,351 329,688

'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 ACCOUNTINGAND FINANCIAL DISCLOSURE None.

PART III ITEM 10.

DIRECTORS AND EXECUTIVEOFFICERS OF THE COMPANY Reference is hereby made to "Election ofDirectors" 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.

EXECUTIVECOMPENSATION Reference is hereby made to "Executive Compensation" in the 1991 Proxy'Statement.'TEM 12.

SECURITY OWNERSHIP OF CERTAINBENEFICIALOWNERS ANDMANAGEMENT Reference is hereby made to "VotingInformation" and "Election of,Directors" in the.1991 Proxy Statement.

8 ITEM 13.

CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS'eference is hereby made to the 1991 Proxy Statement for such disclosure, if any, as may be required by this item.

W lf PART IV ITEM 14.

EXHIBITS, FINANCIALSTATEMENTSCHEDULES, ANDREPORTS 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.

Allother 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 10.8.10 10.42.2 10.50 22 Bylaws of Public Service Company of New Mexico With AllAmendments to and Including August 21, 1990.

Amendment No. 13 to the Arizona Nuclear Power Project Participation Agreement dated April4, 1990, and effective thirty days after filingwith the Nuclear Regulatory Commission.

Executive Retention Agreements.

U.S. $225,000,000 Credit Agreement dated as of March 8, 1991 among the Company and the banks and co-agents named therein.

Certain Subsidiaries of the Registrant.

(a) 3-'B.; Exhibits Incorporated By

Reference:

In addition to those Exhibits shown above, the Company hereby incorporates t Exhibits pursuant to Exchange Act Rule 12b-32 and Regulation 201.24 by reference to t forth below:

Exhibit No.

Description Filed as Exhibit:

Articles of Incorporation and By-laws 3.1 Restated A'rticles of Incorporation'f the 4-(b) to Registration Statement 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 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 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 or the making of other distributions on

'r 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 Item 601(b)(4)(iii) of Regulation S-K.

Registrant on Form 10-K for fiscal year ending December 31, 1983.

he following he filings set File No.

2-99990 2-99990 2-99990 1-6986 Material Contracts 10.1 Supplemental Indenture of Lease dated as of July 19, 1966 between the Company and other participants in the Four Corners Project and the Navajo Indian Tribal Council.

4-D to Registration Statement 2-26116 No. 2-26116 of the Company.

66

Exhibit No.

10.1.1 10.2 10.3 10.4 10.4.1 10.5 10.5.1 10.5.2 10.6 Description Amendment and Supplement No. 1 to Supplemental and Additional Indenture of Lease dated April 25, 1985 between the Navajo Tribe of Indians and 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.

Fuel Agreement, as supplemented, dated as of September 1, 1966 between Utah Construction & Mining Co. and the participants in the Four Corners Project including the Company.

Fourth Supplement to Four Corners Fuel Agreement No. 2 eQ'ective as of January 1, 1981; between Utah International'Inc. and the participants in the Four Corners Project including the Company.

Contract between the United States and the Company dated April 11, 1968, for furnishing water.

Amendatory Contract between the United States and the Company dated September 29, 1977 for furnishing water.

Co-Tenancy Agreement between the Company and Tucson Gas & Electric Company dated February 15, 1972 pertaining to the San Juan generating plant.

Modification No. 4 to Co-Tenancy Agreement between, the Company and Tucson Electric Power Company dated October 25, 1984.

Modification No. 5 to Co-Tenancy Agreement between the Company and Tucson Electric Power Company dated July 1, 1985.

San Juan Project Construction Agreement between the Company and Tucson Gas & Electric Company, executed December 21, 1973.

Filed as Exhibit:

10.1.1 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1985.

4-H to Registration Statement No. 2-35042 of the Company.

1 (10)-BB to Annual Report of the Registrant on Form 10-K for the fiscal year ending December 31, 1980.

5-L to Registration Statement No. 2-41010 of the Company.

5-R to Registration Statement, No. 2-60021 of the Company.

5-0 to Registration Statement No. 2-44425 of the Company.

10.5.1 to Annual Report, of the Registrant on Form 10-K for fiscal year ending December 31, 1985.

10.5.2 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31,'985.

5-R to Registration Statement No. 2-50338 of the Company.

File No.

1-6986 2-35042 1-6986 2-41010 2-60021 2-44425 1-6986 1-6986 2-50338 67

Exhibit No.

10.6.1 10.6.2 10.7 10.7.1 10.7.2 10.8 10.8.1 10.8.2 10.8.3 10.8.4 10.8.5 Description Modification No. 4 to San Juan Project Construction Agreement between the Company and Tucson Electric Power Company dated October 25, 1984.

Modification No. 5 to San Juan Project Construction Agreement between the Company and Tucson Electric Power Company dated July 1, 1985.

San Juan Project Operating Agreement between the Company and Tucson Gas & Electric Company, executed December 21, 1973.

Modification No. 4 to San Juan Project Operating Agreement between the Company and Tucson Electric Power Company dated October 25, 1984.

Modification No. 5 to San Juan Project Operating Agreement between the Company and Tucson Electric Power Company dated July 1, 1985.

Arizona Nuclear Power Project Participation Agreement among the 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.

Amendments One through Four to Arizona Nuclear Power Project Participation Agreement.

Amendment No. 5 to the Arizona Nuclear Power Project Participation Agreement dated as of December 5, 1979.

Amendment No. 6 to the Arizona Nuclear Power Project Participation Agreement effective October 16, 1981.

Amendment No. 7, effective April 1, 1982, to th'e Arizona Nuclear Power Project Participation Agreement.

Amendment No. 8 effective September 12, 1983, to the Arizona Nuclear Power Project Participation Agreement.

Filed as Exhibit:

10.6.1 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31,

'985.

10.6.2 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1985.

5-S to Registration Statement No. 2-50338 of the Company.

10.7.1 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1985.

10.7.2 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1985.

5-T to Registration Statement No. 2-50338 of the Company, (c) to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1979.

10-Z to Annual Report of the Registrant on Form 10-K for fiscal year ending'December 31, 1981.

10-AA to Annual Report of the Registrant on Form 10-K for'iscal year ending December 31, 1981.

10-BB to Annual Report of the Registrant on Form 10-K for fiscal year ending Dec'ember 31, 1982.

10-JJ to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1983.

File No.

1-6986 1-6986 2-50338 1-6986 1-6986 2-50338 1-6986 1-6986 1-6986 1-6986 1-6986 68

Exhibit

'o.

10.8.6 10.8.7 10.8.8 10.8.9 10.9 10.9,1, 10.9.2 10.10

'0.11 Description Amendment No. 9 to Arizona Nuclear Power Project Participation Agreement dated as'of June 12, 1984.

Amendment No. 10 to Arizona Nuclear Power Project Participation Agreement dated as of November 21, 1985.

Amendment No. 11 to Arizona Nuclear Power Project Participation Agreement dated June 13, 1986 and effective January 10, 1987.

Amendment No. 12 to Arizona Nuclear Power Project Participation Agreement dated June 14, 1988, and effective August 5, 1988.

Coal Sales Agreement executed August 18, 1989 between San'Juan Coal Company, the Company and Tucson Electric Power Company.

Amendment Number 1 to Coal Sales Agreement dated September 30, 1981 among San Juan Coal Company, the Company'nd Tucson Electric Power Company.

Amendment No. Three to Coal Sales Agreement dated April 30, 1984 among San Juan Coal Company, the Company and Tucson Electric Power Company (confidentiality treatment has been requested and exhibit is not filed herewith).

Modifications No. 1 to San Juan Project Agreements.

San Juan Unit 4'Early Purchase and Participation Agreement dated as of September 26, 1983, between the Company and M-S-R Public Power Agency, and Modifications No. 2 to the San Juan'Project Agreements dated December 31, 1983.

Filed as Exhibit:

10-JJ to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1984.

10.8.7 to Annual Report of the Registrant on Form 10-K for fiscal year endin'g December'1, 1985.

10.8.8 to'Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1986.

19.1 to the Company's Quarterly

'eport on Form 10-Q for the quarter ended September 30, 1990.

(10)-EE to Annual Report of the Registrant on Form 10-K for fiscal year ending, December 31, 1980.

10-V to Annual Report of the Registrant on'Form 10-K for fiscal year ending December 31, 1981.

10-NN to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1984.

A part of 10-T to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1981.

10-KK to Annual Report of the Registrant on Form 10-K for fiscal 'year ending December 31, 1983.

Exhibit No.

10.11.1 10.12 10.13 10.14 10.15 10.16 10.17 10.18*

10.18.1~

Description Amendment No. 1 to the Early Purchase and Participation Agreement between Public Service Company of New Mexico and M-S-R Public Power Agency, executed as of December 16, 1987, for San Juan Unit 4.

Amended and Restated San Juan Unit 4 Purchase and Participation Agreement dated as of December 28, 1984 between the Company and the Inc'orporated County of Los Alamos.

Modifications No. 3 to San Juan Project Agreements dated July 17, 1984.

Participation Agreement among the Company, Tucson Electric Power Company and certain financial institutions relating to the San Juan Coal trust dated as of December 31, 1981.

Participation Agreement dated as of June 30, 1983 among Security Tr'ust Company, as Trustee, the Company, Tucson Electric Power Company and certain financial institutions relating to San Juan Coal Trust.

Participation Agreement between the Company, the Owner Trustee and the Equity Participants with respect to the leveraged preferred stock of the Company dated as of December 1, 1981 Interconnection Agreement dated November 24, 1982, between the Company and Southwestern Public Service Company.

Lease dated February 5, 1985 between The First National Bank of Boston, Lessor, and the Company, Lessee.

Supplement No. 1 dated September 30, 1985, to Lease dated February 5, 1985 between The First National Bank of Boston, Lessor, and the Company, Lessee.

Filed as Exhibit:

10.11.1 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31,

'987.

A 10-00 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1984.

10-KK to Annual Report of.the Registrant on Form 10-K for fiscal year ending December 31, 1984.

10-W to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1981.

10-II to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1983.

10-CC to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1981.

j 10-II to Annual Report of the Registrant on Form 10-K for fiscal year ending Dec'ember 31, 1982.

10.28 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31,

'985.

10.28.1 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1985.

70

Exhibit

., No.

10.19 10.20 10.21*

10.22 10.22.1 10.22.2 10.22.3 10.23*

Description New Mexico Public Service Commission Order dated December 12, 1984, and Exhibit A thereto, in NMPSC Case No. 1804, regarding inventoried capacity.

New Mexico Public'Service Commission Order dated August 12, 1986, and Attachment A thereto, in NMPSC Case No. 2011, regarding the application of the=inventorying methodology to certain sale and leaseback transactions.

Facility Lease dated as of December 16, 1985, between The First National Bank of Boston, as Owner Trustee, and Public Service Company of New Mexico.

Amendment No. 1 dated as of July 15, 1986, to Facility Lease dated as of December 16, 1985.

Amendment No. 2 dated as of November 18, 1986, to Facility Lease dated as of December 16, 1985.

Amendment No. 3 dated as of March 30, 1987, to Facility Lease dated as of December 16, 1985.

Facility Lease dated as of July 31, 1986, between The First National Bank of Boston, as Owner Trustee, and Public Service Company of New Mexico.

Amendment No. 1 dated as of November 18, 1986, Facility Lease dated as of July 31, 1986.

Amendment No. 2 dated as of December ll, 1986, to Facility Lease dated as of July 31, 1986.

Amendment No. 3 dated as of April 8, 1987, to Facility Lease dated as of July 31, 1986.

Facility Lease dated as of August 12,

'986, between The First National Bank of Boston, as Owner Trustee, and Public Service Company of New Mexico.

Amendment No. 1 dated as of November 18, 1986, to Facility Lease dated as of August 12, 1986.

Filed as Exhibit:

10-PP to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1984.

10.20 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1986.

28(a) to the Company's Current Report on Form 8-K dated December 31, 1985.

i 28.1 to the Company's Current Report on Form 8-K dated July 17, 1986.

28.1 to the Company's Current Report on Form 8-K dated November 25, 1986.

10.21.3 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1987.

28.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1986.

28.5 to the Company's Current Report on Form 8-K dated November 25, 1986.

10.22.2 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1986.

10.22.3 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1987.

28.1 to the Company's Current Report on Form'8-K dated August 18, 1986.

28.9 to the Company Current Report on Form 8-K dated'ovember 25, 1986.

File No.

10-6986 1-6986 1-6986 1-6986 1-6986 1-6986 1-6986 1-6986 1-6986 1-6986 1-6986 1-6986 71

Exhibit N0.

10.23.2 10.24 10.24.1 10.25 10.25.1 10.26 10.26.1 10.26.2 10.27 10.27.1 10.27.2 Description Amendment No. 2 dated as of November 25, 1986, to Facility Lease dated as of August 12, 1986.

Facility Lease dated as of December 15, 1986, between The First National Bank of Boston, as Owner Trustee, and Public Service Company of New Mexico (Unit 1 Transaction).

Amendment No. 1 dated as of April 8, 1987, to Facility Lease dated as of December 15, 1986.

Facility Lease dated as of December 15,

'986, between The First National Bank of Boston, as Owner Trustee, and Public Service Company of New Mexico (Unit 2 Transaction).

Amendment No. 1 dated as of April 8, 1987, to Facility Lease dated as of December 15, 1986.

Restated and Amended Public Service Company of New Mexico Accelerated Management Performance Plan (1988).(August 16, 1988.)

First Amendinent,to Restated and Amended Public Service Company of New Mexico Accelerated Management Performance Plan (1988) ~ (August 30, 1988.)

Second Amendment to Restated and Amended Public Service Company of New Mexico Accelerated Management Performance Plan (1988)(December 29, 1989).

Public Service Company, of New Mexico Service Bonus Plan, October 23, 1984.

First Amendment to Public Service Company of New Mexico Service Bonus Plan dated November 20, 1985.

Second Amendment to Public Service Company of New Mexico Service Bonus Plan dated December 29, 1989.-

Filed as Exhibit:

10.23.2 to Annual Report of the Registrant on Form 10-K for fiscal year ending December'31,

'986.

28.1 to the Company's Current Report on Form 8-K dated December 17, 1986.

10.24.1 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1987 28.9 to the Company's Current Repo'rt on Form 8-K dated December 17, 1986.

10.25.1 to'Annual Report of the Registrant on Form 10-K 'for fiscal year ending December 31, 1987.

19.5 to the Company's Report on Form 10-Q for the quarter ended September 30, 1988.

19.6 to the Company's Report on Form 10-Q for the quarter ended September 30, 1988.

10.26.2 to Annual Report of the Registrant on Form 10-K for the fiscal year ending December 31, 1989.

r

,19.4 to the Company's Report on Form 10-Q for the quarter ended September 30, 1988.

10.11.1 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1985.

10.27.2 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31,

'989.

72

Exhibit No.

10.28 10.29 10.29.1 10.30 10.31 10.32 10.33 10.34 10.35 Description Management Life Insurance Plan (July 1985) of the Company.

Supplemental Executive Retirement Plan of the Company dated July 23, 1985.

First Amendment to Public Service Company of New Mexico Supplemental Executive Retirement Plan dated December 29, 1989.

Compensatory Agreement with Mr. James F. Jennings, Jr.

Public Service Company of New Mexico Exec-U-.Care Group Medical Reimbursement Insurance Trust Participation Agreement.

Amended and Restated Medical Reimbursement Plan of Public Service Company of,New Mexico.

Republic Holding Company Series M Preferred Stock Program.

Meadows Resources, Inc., Second Restated and Amended Executive Deferred Compensation Plan, Alliance Telecommunications Investment.

(August 24, 1988.)

Amendment No. 2 dated as of April 10, 1987, to the Facility Lease dated as of August 12, 1986, between The First National Bank of Boston, as Owner 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.)

Filed as Exhibit:

10.39 to Annual Report of the Registrant on Form 10-K for fiscal year ending December.31, 1985.

10.41 to Annual Report of the Registrant on Form 10-K for fiscal year ending Decembe'r 31, 1985.

I,0.29.1 to the Company's Annual Report on Form 10-K for fiscal year ending December 31, 1989.

10-MM to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1984.

19.5 to the Company's Quarterly Report on Form 10-Q for Quarter ended March 31, 1987.

19.6 to the Company's Quarterly Report. on Form 10-Q for Quarter.

ended March 31, 1987.

19.4 to the Company's Quarterly Report on Form 10-Q for Quarter ended June 30, 1987.

19.3 to the Company's Quarterly Report on Form 10-Q for Quarter ended September 30, 1988.

10.53 to Annual Report of the, Registrant on Form 10-K for fiscal year ending December 31, 1987.

73

Exhibit No.

10.36 10.37 10.38 10.39 10.40 10.41 10.42 10.42.1 10.43 Description Amendment No. 3 dated as of March 30, 1987, to the Facility Lease dated as of December 16, 1985, between The First National Bank of Boston, as 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.)

Decommissioning Trust Agreement between Public Service Company'of New Mexico and First Interstate Bank of Albuquerque dated as of 'July 31, 1987.

New Mexico Public Service Commission Order'dated July 30, 1987, and Exhibit 1 thereto, in NMPSC Case No. 2004, regarding the PVNGS decommissioning trust fund.

MCB/RSB Management Incentive Programs.

(December 1, 1985.)

Form of Executive Retention Plan, CMC Group and January 24, 1989 Resolution Authorizing Plan.

Public Service Company of New Mexico and Paragon Resources, Inc. Deferred Compensation Trust Agreement dated December 30, 1988.

Executive Retention Agreements (1989).

Termination Agreement. June 19, 1990.

Agreement to Continue Medical Benefits dated August 4, 1989.

Filed as Exhibit:

10.54 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1987.

10.55 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1987.

10.56 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1987.

10.57 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1987.

10.61 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1988.

10.62 to Annual Report of 'the Registrant on Form 10-K for fiscal year ending December 31; 1988.

19.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1989.

19.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990.

19.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1989.

74

Exhibit No.

10.44 10.45 10.46 10.47 10.48 10.49 Description Supplemental Employee Retirement Agreements dated August 4, 1989.

Supplemental Employee Retirement Agreement dated December 1, 1989.

Supplemental Retirement Agreement dated January 23, 1990.

Supplemental Employee Retirement Agreement dated March 6, 1990.

Settlement Agreement between Public Service Company of New Mexico and Creditors of Meadows Resources, Inc.

dated November 2, 1989.

Consulting Agreement between Public Service Company of New Mexico and North Sandia Paitners, Inc. dated January 1, 1990.

Filed as Exhibit:

19.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1989.

10.45 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1989.

10.46 to Annual Report of the Registrant on Form 10-K for fiscal year ending'December 31, 1989.

10.47 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1989.

10.48 to Annual Report" of the Registrant on Form 10-K for fiscal year ending December 31, 1989.

10.49 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1989.

Additional Exhibits 28.1.1 28.1.2 28.1 28.1.3 Collateral Trust Indenture dated as of December 16, 1985, among First PV Funding Corporation, Public Service Company of New Mexico and Chemical Bank, as Trustee.

Series 1986A Bond Supplemental Indenture dated as of July 15, 1986, to Collateral Trust Indenture dated as of December 16, 1985.

Series 1986B Bond Supplemental Indenture dated as of November 18, 1986, to Collateral Trust Indenture dated as of December 16, 1985.

Unit 1 Supplemental Indenture of Pledge (Lease Obligation Bonds, Series 1986B) dated as of December 15, 1986, to the Collateral Trust Indenture dated as of December 16, 1985.

28(i) to the Company's Current Report on Form 8-K dated December 31, 1985.

28.4 to the Company's Current Report on Form 8-K dated July 17, 1986.

28.1.2 to the Company's Current Report on Form 8-K dated November 25, 1986.

28.8 to the Company's Current Report'n Form 8-K dated December 17, 1986.

75

Exhibit No.,

28.1.4 28.2e 28.2.1*

28.2.2*

28.3*

28.3.1*

28.3.2*

Description Unit 2 Supplemental Indenture of Pledge (Lease Obligation Bonds, Series 1986B) dated as of December 15, 1986, to the Collateral Trust Indenture dated as of December 16, 1985.

Participation Agreement dated as of December 16, 1985, among the Owner Participant named therein, First PV 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.

Amendment No. 1 dated as of July 15, 1986, to Participation Agreement dated as of December 16, 1985.

Amendment No. 2 dated as of November 18, 1986, to Participation Agreement dated as of December 16, 1985.

Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of December 16, 1985, between The First National Bank of Boston, as Owner Trustee, and Chemical Bank, as Indenture Trustee.

Supplemental Indenture No. 1 dated as of July 15, 1986, to the Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of December 16, 1985.

Supplemental Indenture No. 2 dated as of November 18, 1986, to the Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of December 16, 1985.

Filed as Exhibit:

28.16 to the Company's Current Report on Form 8-K 'dated December 17, 1986.

2 to the Company's Current Report on Form 8-K dated December 31, 1985.

2.1 to the Company's Current Report on Form 8-K dated July 17, 1986.

2.1 to the Company's Current Report on Form 8-K dated November 25,.1986.

28(b) to the', Company's Current Report on Form 8-K dated December 31, 1985.

28.2 to the Company's Current Report on Form 8-K dated July 17, 1986.

28.2 to the Company's Current Report on Form 8-K dated November 25, 1986.

~76

Exhibit No.

Description Filed as Exhibit:

V File No.

28.4>>

28.5 28.5.1 28.6 28.6.1 28.7 Assignment, Assumption and Further Agreement dated as of December 16, 1985, between Public Service Company of New Mexico and The First National Bank of Boston, as Owner Trustee.

Participation Agreement dated as of July 31, 1986, among the Owner Participant named therein, First PV 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.

Amendment No. 1 dated as of November 18, 1986, to Participation Agreement dated as of July 31, 1986.

Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of July 31, 1986, between The First National Bank of Boston, as Owner Trustee, and Chemical Bank, as Indenture Trustee.

Supplemental Indenture No. 1 dated as of November 18, 1986, to the Trust'ndenture, Mortgage, Security Agreement and Assignments of Rents dated as of July 31, 1986.

Assignment, Assumption, and Further Agreement dated as of July 31, 1986, between Public Service Company of New Mexico and The First National Bank of Boston, as Owner Trustee.

28(e) to the Company's Current.

Report on Form 8;K dated December 31, 1985.

1-6986 28.4 to the Company's Current Report on Form 8-K dated Novemb'er 25, 1986.

28.2 to the Company's Quarterly

'eport on Form 10-Q for Quarter ended June 30, 1986.

1-6986 1-6986 28.6 to the Company's Current

,Report on Form 8-K dated, November 25, 1986; 1-6986 28.3 to the Company's Quarterly Report on Form 10-Q for quarter ended June 30, 1986.

1-6986 2.1 to the Company's Quarterly 1-6986 Report on Form 10-Q for Quarter ended June 30, 1986.

77

Exhibit No.

Description Filed as Exhibit:

File No.

28.84 28.8.1*

28.9*

28.9.1*

28.10'articipation Agreement dated as of August 12, 1986, among the Owner'articipant named therein, First PV 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, 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.

Amendment No. 1 dated as of November 18, 1986, to Participation Agreement dated as of August 12, 1986.

Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of August 12, 1986, between The First National Bank of Boston, as Owner Trustee, and Chemical Bank, as Indenture Trustee.

Supplemental Indenture No. 1 dated as of November 18, 1986, to the Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of August 12, 1986.

Assignment,"Assumption, and Further Agreement dated as of August 12, 1986, between Public Service Company of New Mexico and The First National Bank of Boston, as Owner Trustee.

2.1 to the Company's Current Report on Form 8-K dated August 18, 1986.

1-6986 28.8 to the Company's Current Report on Form 8-K dated November 25, 1986.

28.2 to the Company's Current Report on Form 8-K dated August 18, 1986.

1-6986 1-6986 28.3 to the Company's Current Report on Form 8-K dated August 18, 1986.

1-6986 28.10 to the Company's Current 1-6986 Report on Form 8-K dated November 25, 1986.

78

Exhibit No.

28.11 "Description Participation Agreement dated as of December 15, 1986, among the Owner Participant named therein; First PV 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 Filed as Exhibit:

2.1 to the Company's Current Repoit on Form 8-K dated December 17, 1986.

File No.

1-6986 28.12 28.13 28.14 of New Mexico, including Appendix A definitions (Unit 1 Transaction).

Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of December 15, 1986, between The First National Bank of Boston, as Owner Trustee, and Chemical Bank, as Indenture Trustee (Unit 1 Transaction).

Assignment, Assumption and Further Agreement dated as of December 15, 1986,'between Public Service Company of New Mexico and The First National Bank of Boston, as Owner Trustee (Unit 1 Transaction).

Participation Agreement dated as of December 15, 1986, among the Owner Participant named therein, First PV 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).

28.2 to the Company's Current 1-6986 Report on Form 8-K dated December 17, 1986.

28.3 to the Company's Current 1-6986 Report on Form 8-K dated December 17, 1986.

2.2 to the Company's Current 1-6986 Report on Form 8-K dated December 17,'986.

79

Exhibit No.

28.15 28.16 28.17*

28.18¹ 28.19 28.20 Description Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of December 15, 1986, between the First National Bank of Boston, as Owner Trustee, and Chemical Bank, as Indenture Trustee (Unit 2 Transaction).

Assignment, Assumption, and Further Agreement dated as of December 15, 1986, between Public Service Company of New Mexico and The First National Bank of Boston, as Owner Trustee (Unit 2 Transaction).

Waiver letter with respect to "Deemed Loss Event" dated as of August 18, 1986, between the Owner Participant named therein, and Public Service Company of New Mexico.

Waiver letter with respect to "Deemed Loss Event" dated as of August 18, 1986, between the Owner Participant named therein, and Public Service Company of New Mexico.

Agreement No. 13904 (Option and Purchase of EfHuent), dated April 23, 1973, among Arizona Public Service Company, Salt River Project Agricultural Improvement and Power District, the Cities of Phoenix, Glendale, Mesa, Scottsdale, and Tempe, and the Town of Youngtown.

Agreement for the Sale and Purchase of Wastewater EfBuent, dated June 12, 1981, among Arizona Public Service Company, Salt River Project Agricultural Improvement and Power District and the City of Tolleson, as amended.

Filed as Exhibit:

28.10 to the Company's Current Report on Form 8-K dated December 17, 1986.

28.11 to the Company's Current Report on Form 8-K dated December 17, 1986.

28.12 to the Company's Current Report on Form 8-K dated August 18, 1986.

28.13 to the Company's Current Report on Form 8-K dated August 18, 1986.

28.19 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1986.

28.20 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1986.

File No.

1-6986 1-6986 1-6986 1-6986 1-6986 1-6986

• 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 differin 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 followingreports on Form 8-K:

Dated:

Filed:

Relating to:

October 15, 1990

.'ctober 16, 1990 January 25, 1991 January 28, 1991 February 13, 1991 February 14, 1991 Strategic Business Plan, Discussions Terminated with Wheeler Peak Capital Corporation Group, and Shareholder Litigation.

. 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.

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 Actof 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 J. T. Ackerman President and Chief Executive 0/ficer

/s/M. H. MAERKI M. H. Maerki Senior Vice President and Chief Einancial Officer

/s/B. D. LACKEY B. D. Lackey Vice President and Corporate Controller Principal Executive Officer March 11, 1991 and Director Principal Financial Officer March ll, 1991 Principal Accounting Officer March 11, 1991

/s/ J. P. BUNDRANT J. P. Bundrant

/s/A. B. COLLINS, JR.

A. B. Collins, Jr.

Chairman of the Board

's/

V. L. FISHER V. L. Fisher

/s/ J. A. GODWIN J. A. Godwin

/s/ C. E. LEYENDECKER C. E. Leyendecker

/s/A. G. ORTEGA A. G. Ortega

/s/R. R. REHDER R. R. Rehder Director Director Director Director Director Director Director March 11, 1991 March ll, 1991 March ll, 1991 March ll, 1991 March 11, 1991 March 11, 1991 March 11, 1991 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 Transaction Transaction Date Date of Letter Notifying NRC of Pending Amendments to Facility Leases Date of Letter Transmitting Transaction Documents NRC Addressee Unit 1 Sale and 12/31/85 Leasebacks (3)

Not applicable 1/29/86 Hr. George W. Knighton Debt Refunding 7/17/86 7/14/86 8/4/86 Hr. Frank

3. Hiraglia Additional Unit 1

8/1/86 Sale and Leaseback (1)

Not applicable 8/8/86 Hr. Frank

3. Hiraglia Unit 2 Sale and 8/1/86 Leasebacks (5)

Not applicable 9/4/86 Mr. Frank J. Hiraglia Debt Refunding 11/25/86 11/20/86 12/11/86 Hr. Frank

3. Miraglia Amendments to Leases (2) 12/15/86 12/11/86 12/24/86 Hr. Frank

3. Hiraglia Additional Unit 1

(1) and Unit 2 (1) Sale and Leasebacks 12/17/86 Not applicable 12/24/86 Hr. Frank

3. Miraglia Transfer of 1/30/87 Beneficial Interest in Lessor (1) 1/27/87 3/16/87 Hr. Frank J. Hiraglia 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

.Leases (3) 3/31/87 3/30/87 7/14/88 Hr. Frank J. Hiraglia Amendments to Leases (4) 4/8/87 4/10/87 4/3/87

~ 7/14/88 Hr. Frank

3. Hiraglia

< Transfer of 8/14/87 Beneficial Interest in Lessor (1) 8/12/87

.7/14/88 Hr. Frank J. Hiraglia Transfer of 1/6/88 Beneficial Interest in Lessors (3) 12/31/87 7/14/88 Hr. Frank J. Hiraglia 0575q:7/14/88:1 j

4),

k v'<

1 h

n