ML17306B049

Annual Rept 1991 PSC of New Mexico

ML17306B049
Person / Time
Site:	Palo Verde
Issue date:	12/31/1991
From:	Ackerman J PUBLIC SERVICE CO. OF NEW MEXICO
To:
Shared Package
ML17306B046	List: ML17306B048 ML17306B049 ML17306B051
References
NUDOCS 9210190163
Download: ML17306B049 (196)

Text

oK~(c Q5 Qo3 o

~ ng oofy Msw EC(K>c(QD 9210190163 921008 PDR ADOCK 05000528 I

PDR

PUBLIC SERVICE COMPANY OF NEW MEXICO is a public utilitywith principal offices located at Alvarado Square, Albuquerque, ¹w Mexico. Incorporated in 1917, we are the largest public utilityheadquartered in the state. Primarily an electric and natural gas utility,we also own a water company serving the city ofSanta Fe, New Mexico. Our mission is to be the energy supplier ofchoice in¹w Mexico and regional markets and to provide high-quality, competitive utilityproducts and services.

D ABOUT The tasks facing PUBLIC SERVICE COMPANYOF NEW MEXICOare like finding the solution to the puzzle on our cover. Each piece ofthe puzzle represents a challenge the company Faces. We continue to fitthe complex, notched pieces together, making progress toward restoring our financial health and competing in the changing retail and wholesale marketplaces. This annual report examines the primary challenges we face, and the strategies we are using to resolve them. ti

PUBLIC SHRVICH COMPANY OF NHIVMHXICOand Subsidiaries 1991 1990

%%uo'hange Operating revenues Operating expenses Net earnings Return on average common equity L'arnings (loss) per common share Book value per common share at year-end

$857,168,000

$759,915,000

$ 22,960,000 1.8%%uo 0.32 17.69

$881,186,000

()788,745,000 442,000 (1.3)%

(0.23) 17.36 (2 /)

(3 7)

N/M N/M N/M

1.9 IcLHCTRIC

Total kilowatt-hour sales 8,231,495,000 8,546,336,000 (3 7)

GAs:

Decatherm throughput 110,291,000 99,045,000 11.4 85S 75'I 857 Revenues (in miuans)a

~ Pouococ co ~ )990 Po)eccl Enerey yscsolacory Comission order. au sync mukcc cmnom sabs ccuusccuns wu

~cctassincuP(coca ncc yuccbucJ sowr co rcecuu utes.

Prior years'nounu luce bccn rulusiyml (u coo yorabilicy.

1,000 Elec(Pic Tora) kilooucc.hour sa)rs (in billions) 10 8.8 8

7.5 8.5 "

82

80 55A 58.2 79.0 Gas Drcachrrm chcousbpuc (in millions) 120 l(0.3 0

'87

'88

'89

)Xyscee Revenues Gss Revenues Eleccric Revenues

'90

'9l

'87

'88

'89

'90

'9 l 20

'87

'88

'89

'90

'91 TABLE OF CONTEiXTS...

About the Company Pinancial Highlights Chairman's Letter.

Status ofour Goals Directors Inside I'ront Cover

............ 1

..6 14 Officers.

Financial Information Index Porm 10-K Shareholder Information...;.

.15

.........................16 Pollobving Page 16

.Inside Back Cover

To MyFellow Shareholders:

March 12, 1992 You have probably seen a wooden puzzle like the one pictured on the cover ofthis 'report. To us, the puzzle symbolizes our business. It has manypieces.

Eachpiece isdiEerent.

Each maychange.

Yet each iscritical ro success.

And sometimes the shape ofthe whole changes and a new piece needs to be developed or re-fit into the puzzle to make it work.

In 1991 we added some key pieces to our business puzzle. In 1992 we'l add more. We are accommodating the pieces that change, like our marketplace.

Flexibilityis the key to meeting our goal of being the energy supplier ofchoice in New Mexico and our region. Our main thrust hasn't changed.

We will deliver competitively-priced, high-quality energy products and services.

In doing so, we intend to return to financial health.

'iVORKNGTO RESTORE ADMDE%

Our 1991 earnings were 32 cents per common share. This represents an increase of55 cents over last year's loss of23 cents per share.

However, 1990's results included a write-offof46 cents per share due to a negative rate order. Our 1991 earnings were reduced by one-time charges totalling 21 cents per share related to litigation expenses and additional gas contract settlement reserves.

By achieving our business plan, we expect 1992 results to continue to improve. We'e gaining on our goal ofrestoring the common dividend, but we'e got more work to do before we can commit to a date when this willhappen.

This critical piece ofthe puzzle is very much on our minds.

HITTNGOUR BUDGETTARGETS We met our 1991 targets for reductions in non-fuel operations and maintenance budgets. In some areas, we did better than that.

About mid-year I asked the work force to step up the pace. Our people responded; by year end $ 15.2 millionwas saved.

We set an even more aggressive target for 1992.

LK5GI-IEADWAYON EXCESS CAPACITY We'e doing better on our biggest problem, as wellour investment in power plants which are excluded from tie base and which have remained unprofitable. This excess generating capacity is a large piece ofthe puzzle.

Our excluded capacity created a financial drain ofapproximately 86 cents,per share in 1991.

To temper the capacity problem, we have been aggressively pursuing wholesale power sales.

Recently the Imperial Irrigation District in Southern California signed a three year 81 MWpower sale agreement beginning in March 1992. It's good news. We also have been selected by another utilityas one ofthe final candidates for a power sale agreement offive years.

And these come on the heels of 1991 wholesale power sales to the Arizona Power Pooling Association (APPA) and to the Arizona Hlectric Power Cooperative (AHPCO). The APPA conuact and the AHPCO conuact are for 17 years and three years, respectively; together, those two contracts are estimated to have contributed 3 cents per share in 1991 and are expected to contribute 5 cents per share in 1992.

We are also investigating the sale ofsome ofour generation assets.

We believe the sale ofgeneration assets may be necessary to help us achieve the right generation mix for the future.

We put a good piece into the puzzle in February 1992, when we announced a stipulated agreement which willpave the way for an asset sale ofapproximately 50 iMWofSan Juan Unit 4 to the city ofAnaheim, California. This stipulation also calls for the decertification ofthe remaining 80 MWofSan Juan Unit 4 presently excluded from our rate base.

Decertification should enhance future sales ofthe remaining capacity by eliminating the requirement for future New Mexico Public Service Commission approval. The Commission's order on the stipulated agreement is expected in May 1992.

EXPkyM'G GAS OPERATIONS Our gas division, Gas Company ofNew Mexico, and two gas-related subsidiaries, increased volume throughput for the third consecutive year. As we said last year, new facilitiescompression and transmission extensions helped drive these increases.

In November 1991, Gas Company entered into a joint ownership agreement with two interstate pipeline companies to own and operate the Blanco Hub in the San Juan Basin. The facilityis expected to be connected to two major coal-seam gas treating plants and to at least two interstate pipelines as well as to Gas Company. Initial capacity willbe about 800 millioncubic feet per day with about 150 millioncubic feet available to Gas Company.

Blanco Hub willprovide a direct source oflower cost gas supplies for consumers in New Mexico. And it will enhance our ability to move gas offGas Company's system to the interstate market.

THEREALITYOFCnmETITION There's been a lot ofheated discussion in our industry about competition, but we think it's here. How power is generated, sold, transported and consumed just about every aspect ofthis business is likelyto be a6'ected by regulatory and legislative changes.

Proposed legislation could usher in a new era ofcompetition. We'e got to be ready to compete.

How do we prepare for the new world? Throughout 1991, we took steps to streamline our organization.

Study teams from acmss the company looked at ways to increase efficiency and improve quality in our services and operations. In most cases, they are redefining how we deliver services and run our operations.

We willadopt their best ideas and begin implementation in 1992. We need to be a low-cost supplier in our regional market.

This past year, natural gas prices hit their lowest levels in more than a decade. At the same time, cheap hydroelectricity became more abundant after several years ofdrought. It was harder for our nuclear and coal-fired generation to compete on the wholesale market. We decided to find out ifthere were alternatives to coal-firing some ofour generation. And we decided to look again at our coal supply contract at San Juan Generating Station.

We have conducted preliminary studies ofthe cost ofconverting two units at San Juan from coal-fired to natural gas. We have solicited bids for a long-term natural gas supply to complete this evaluation.

We are also working with the San Juan Coal Company, supplier at San Juan, to further reduce mining operation costs and lower contract prices for coal. The best economic choice willprevail. That's competition.

Competition is directly related to consumer costs.

So, we announced a three-year rate freeze in January 1991 after Albuquerque voters passed an amendment to the City Charter in 1989 seeking competitive bidding for electric franchises.

CITY OF ALBUQUERQUEELECTRIC FRAiXCHISE In the minds ofvoters, competitive bidding for the electric franchise now embodied in ArticleXVofthe City Charter-should produce lower rates. But voters'oncern for lower electric rates cannot be served by ArticleXV. In November 1991, the Commission issued an order which, among other things, seated that:

a A municipal franchise cannot set rates for customers other than the municipality, and the authority to approve rates rests solely with the Commission. The city is currently appealing this aspect to the New Mexico Supreme Court.

a Our company has an obligation to serve Albuquerque customers with or without a franchise.

The issue remains unresolved.

The franchise has expiml; but we willcontinue to serve. And we willcontinue to work with thc city to fccollcllcthis issue.

HEACIlPlG$EYfLEilKbi'T$

In December 1991, we settled the lawsuit brought at the direction ofthe Board's special litigation committee against our Former chairman and two other former executives.

The suit sought, among other things, recovery of certain bonuses, fees and compensation previously paid to these executives.

The defendents denied any wrongdoing and asserted various counterclaims against the company.

Early this month, we announced an agreement in principle settling all pending shareholder class action and derivative lawsuits. The S33 millionsettlement is subject to court approval, and willbe funded by the company's directors'nd oHicers'iability insurance carriers.

These settlements represent an important step toward closing these chapters in our company's history. Because ofthe complexity ofthese senlements, Iwillnot elaborate on them in this letter. However, a more detailed discussion appears in the company's report on Eorm 10-K which is a part ofthis annual report.

pirrmGmjl:pmCr$

As I wrote at the start ofthis letter, the puzzle contains many critical pieces. Moving one piece aHects the positions ofall the rest. In 1991, we looked at each piece from every angle. The ones we could put in place, we did. The ones that are more di6icult, we'e working on. But we know what they are and where they fitand what we need to do to make them fit.

We know that in the final analysis, we must complete this puzzle for our shareholders and our customers.

We must complete the overall design ofa healthy organization providing low-cost, high-quality energy products and services, and a competitive return for our investors. And that is what we intend to do PIECE BY pIECE. 0

PROFITABILITY GOAL:

Reinstate sustainable common dividend and improve bond rating to investment grade as soon as possible.

STATUS*

~ Earnings increased 55 cents over 1990.

~ Significant cost savings achieved, more to come.

~ Service Design Teams promoting e6iciency, quality.

~ Pmgress made in committing excess calxicity.

~ Albuquerque franchise remains an open issue.

PRODKT PRICE GOAI'etail electric and gas rates reach the lowest one-third ofregional energy comlxinies.

STATUS a Froze base rates through 1993.

~ Residential electric rates in middle third, improvement needed.

~ Working on reducing coal costs to compete.

a Analyzing conversion ofcoal-fired generation to less expensive natural gas.

~ Gas rates reached lowest third for December 1991 bills.

a Gas contract litigation and regulatory proceedings continue.

)IARKETEXPAi%IOiblRE)'Ei%EGROVTII GOAL:

Increase earnings before interest and taxes (EBIT) by $ 5 millionfor electric operations and $2 millionfor gas operations over the 1990 business plan.

STATUS:

~ Improved EBIT$ 1.2 millionover 1990 business plan.

~ Innovative service, incentive rates, and economic development activities add new load.

~ New Mexico continues to grow and diversify.

WORK FORCE SATISFACI'IOii GOAI'ncrease work force satisfaction by 10 percent each year as measured by the 1990 Working Environment Survey.

STATUS:

~ Improved results but did not reach goal.

~ Management commitment to improved communication.

PUBLIC TRUSTED CREDIBILITY GOAL:

Improve public trust and credibility by 15 percent per year as measured by 1990 customer survey data.

STATUS:

~ Exceeded goal in 1991.

a Regulatory stipulations indicate progress.

~ Sangre de Cristo Water Company received Environmental Excellence Award.

In last year's annual report, we presented our Mission Statement, which set forth our commitments to our customers, investors, work force, and community. Our Mission Statement identified five broad objectives which we are striving to achieve by the end of 1993. These objectives center around profitability,product price, market expansion and revenue growth, work force satisfaction, and public trust. In the next few pages, we'l discuss the work we'e done with every piece ofthe puzzle and the work we envision in the years ahead.

PROFITABILITY GOAL: Reinstate sUstainable common dividend and improve bond rating to investment grade as soon as possible.

OUR 1991 RESULTS Our 1991 operating results show that we have made progress in controlling costs, but also indicate that the recession has had an effect on our revenues, especially in the wholesale power market.

We earned 32 cents per share in 1991, after non-recurring charges ofapproximately 21 cents per share. Our earnings before one-time charges were 53 cents per share, an improvement of30 cents over 1990.

In 1991, we committed to reduce budgeted non-fuel operations and maintenance (08aM) expenses ten percent by 1993. In setting this goal, we called for a $6 millionreduction in 1991. We did better titan that. Actual 1991 ORM was $ 15.2 millionless than budgeted.

Compared to 1990, our operating costs only increased by 1 percent-less than the rate ofinflation.

New wholesale power contracts added another 3 cents to our bottom line, although operating revenues actually declined $24 millionrelative to 1990. This drop in revenues was more than offset by a $42.7 million reduction in fuel, purchased power, and gas costs.

Our retail electric sales grew by 1.8 percent in 1991, with a better than expected increase of3.2 percent in the fourth quarter.

Wholesale revenues, however, declined 12.1 percent for the year, a result ofthe recession and increased competition from natural gas and hydroelectric generation.

We did, however, see an improvement in the fourth quarter as wholesale revenues increased almost 3.2 percent over the same period in 1990.

LQQKINGAHEAD A crucial piece ofthe puzzle is reducing the financial drag created by excluded capacity, either by marketing power or selling the assets outright.

In 1991, our generation capability and purchased power commitment totaled 1,835 MW, ofwhich the following capacity is excluded from rate base:

~ 105 MW is purchased power under contract through 1994;

~ 130 MW is from Unit4, San Juan Generating Station; a 130 MWis from Unit 3, Palo Verde Nuclear Generating Station.

Excluded capacity can offer a return through either wholesale power sales or through selling generating assets outright.

We made additional long-term and short-term power sales in 1991 which include:

~ a three-year 15 MWpower sale to the Arizona Electric Power Cooperative through May 1994;

~ a 17-year power sale to the Arizona Power Pooling Association. This sale started at 40 MW, increases to 105 MWfromJune 1994 through May 1998, steps down to 15 MWby 2002, and remains at that level through 2008.

These sales contributed 3 cents per share to our 1991 earnings and are expected to contribute around 5 cents in 1992.

In March 1992, a three-year 81 MWpower sale agreement was signed by the Imperial Irrigation District in California, and we have been selected by another utilityas one ofthe final candidates for another short-term power sale agreement.

Although bulk power sales such as these absorb some ofthe costs ofexcluded assets, they do not cover them.

This, coupled with our analysis ofcurrent and projected market conditions, has caused us to investigate selling our excluded assets.

Some pmgress has already been made. In Pebruary1992, we reached a stipulated agreement with the sta6'of the ¹w Mexico Public Service Commission and other intervenors which, upon Commission approval, will decertify the 130 MWportion ofSan Juan Unit 4 currently excluded from our rates. The agreement provides for the sale of50 MWofSan Juan Unit 4 to the city ofAnaheim, California. We expect to complete this sale this summer at a price of$55 million,resulting in an after-tax gain ofaround $8.6 million.

This sale willbenefit both shareholders and customers.

The gain on the sale would add approximately 18 cents per share in 1992, and the sales proceeds willbe used to reduce capital costs. The reduction ofcapital and operating costs should yield a net ongoing annual benefit of6 to 8 cents per shaie. And our customers willreceive

$ 1 millionfrom the gain in the form ofcredits against fuel and purchased power costs.

Lastly, ifthe agreement is approved, all ofthe excluded portion ofSan Juan Unit 4 willbe decertified leaving us free to sell the remaining 80 MWwithout Commission approval. We willcontinue to investigate selling our remaining excluded capacity.

THH ALBUQUHRQUHFRANCHISH Demand for lower electric rates has led to ArticleXVofthe City Charter. ArticleXVmandates competitive bidding ofthe electric utilityfianchise. What used to be a simple right-of-way agreement has become the focal point for a highly politicized debate.

InJuly 1991, we entered negotiations aimed at reaching a new agreement with the city. Although both parties presented innovative appttxiches to comply with the spirit ofArticleXV, the gap between what the city wanted and what the company could offer ultimately remained too vast. The negotiations ended in December.

The franchise agreement has since expired, and we have not entered into a new franchise agreement with the cityof Albuquerque as ofthis writing.

Late in 1991, the Commission affirmed its sole authority with respect to service territory and rate making over non-municipal utilities in New ivfexico. Despite this ruling, city government continues to seek rate concessions or to find an alternative to our service. The city formed a "paper utility"the Albuquerque Electric Utility and is studying the possibility ofcondemning part or all ofour Albuquerque distribution system. Our Albuquerque customers may eventually be asked to vote on city condemnation ofour distribution facilities.

We have clearly stated that our system is not for sale. Furthermore, we do not believe that a government-run electric utilitycould offer lower rates. We have commissioned two studies, both ofwhich show that a city takeover would raise customer rates as much as 33 to 40 percent over 10 years.

Early in 1992, the city requested bids for a one-year franchise agreement.

B'ecause our investment in Albuquerque represents a long-term commitment, we rejected the notion ofa one-year franchise and submitted a bid for a 25-year agreement.

Our bid was subsequently rejected by the city, as was the only other bid submitted.

The expired franchise provided for the collection ofa franchise fee of2 percent ofour gross revenues.

That fee, which amounted to $5.2 millionlast year, was collected as a component ofbase rates and paid monthly to the city.

Because franchise fees are a component ofbase rates, they are aggregated and collected from all our New Mexico customers, not just those in areas affecte by a franchise agreement.

In submitting our bid, we advised the city that ifwe are unable to reach a long-term agreement by June 30, 1992, we intend to halt monthly payments. At that time, we willwork to reduce our Albuquerque customers'ills by the fee amount. To that end, we have sought Commission approval to separate franchise fees from base rates. Itemizing the franchise fee on customers'ills is not newour gas division has used this process since 1988.

Albuquerque city government is one ofour biggest customers, generating revenues of$ 17 millionin 1991.

We do not seek an adversarial relationship with the city. We want to work together to resolve the franchise issue.

Recently, there have been signs pointing toward reestablishing discussions.

We welcome that, and hope to report a successful resolution ofthis issue later this year.

PHODUCT PMCE GOAL: Retail electric and gas rates reach the lowest one-third oE regional energy companies.

Reducing our costs and improving efficiency is an important piece ofthe puzzle. Our relatively new electric generating stations and pollution control equipment for our coal-fired plants helped drive up our electric rates in the early 1980s. Our residential electric customers pay 9.66 cents per kWh, a price which places us in the middle third ofregional utilitiesabove our goal.

Recognizing this, we froze our base electric and gas rates in 1991, and have pledged to keep this freeze in effect through 1993.

Because several utilities in our region have recently received or applied for rate increases, we expect our relative position to improve in years to come.

CONTROLUNG COMMIS

'We made real progress in controlling costs in 1991. To achieve our objectives, however, we must do more. In the fourth quarter of 1991, more than 120 gas, electric, and water employees formed Service Design Teams which reviewed 15 functions such as meter reading, billing,payment processing, and engineering.

These teams have recommended consolidation and/or centralization in a number ofthese areas.

The consolidation ofcertain functions may require Commission approval; others we plan to begin implementing by the second quarter of 1992.

We are also seeking ways to reduce our cost offuel. To this end, we are discussing the reformation ofour existing axil contract at San Juan. We have already obtained some concessions from our supplier, whose improved mining operations reduced costs by over $5 millionlast year. In the third quarter of 1991, we began a series of discussions to determine ifwe could achieve more savings. Low natural gas prices have reduced the competitiveness ofour coal-fired energy. 'We are working to regain our competitive edge.

Low gas prices also caused us to begin examining the fusibilityofconverting San Juan Units 1 and 2 from'oal-fired to natural gas. Iffeasible, a conversion to natural gas could allow us to take advantage ofthe low gas prices which have lessened the competitiveness ofcoah Conversion could also allow us to better match our generatioh to the marketplace.

We would convert only ifwe are able to:

~ secure a firm,economic, long-term gas supply contract;

~ obtain support ofother San Juan participants;

~ secure Commission approval;

~ resolve environmental permitting issues.

We willdecide whether or not to proceed with a conversion in the second halfofthis year.

RE1AILGAS RATES While our electric rates continue to impmve relative to regional for comparisons, lower gas costs helped move our gas division's rates to the lower one-third in the region for December 1991 bills. We willstrive to keep them there.

Low natural gas prices are not the only reason gas prices have become so competitive. We acquired Gas Company of¹w Mexico in 1985 as Ixirtofa settlement ofan antitrust lawsuit related to alleged price-fixing of gas purchase contracts by producers.

Many changes followed the purchase, including the pursuit ofgas supply contract reformation, which yielded substantial savings in gas costs.

Because the cost ofgas is charged directly to our customers, these savings are passed along as well and do not affect our bottom line. Lower gas costs have made our gas competitive in the marketplace.

Despite early successes in reforming the contracts, a number ofproducers'sued the company. To settle claims and reform contracts in a manner that would preserve the lower, market-based pricing for customers, Gas Company paid about S76 millionto certain producers.

InJanuary and February 1992, the prudence ofthese settlements was the subject ofregulatory hearings. Although the company is seeking to mover about $68 million,a recent proposal by the hearing examiner would, ifadopted by the Commission, allow recovery of$57 million. We expect itwillbe at least May before the Commission decides the case.

l)MKjlYEXPANSION/

HEVE5%JE GROIN'H GOAL: Increase earnings before interest and taxes (EBIT) by

$5 millionfor electric operations and $2 millionfor gas operations over the 1990 business plan.

We intend to achieve this goal through added revenues.

By the end of 1991, the first year ofour effor, we'd increased EBIT by $ 1.2 millionover our 1990 business plan. This increase, in spite ofa recessionary economy and a tough wholesale market, was achieved through innovative marketing efforts, new incentive rates, and economic development activities.

INNOVATIVESERVICE In addition to a competitive price, our customers value service and reliability. This is an area in which we continue to be competitive. Good customer service involves more than a friendly face. Our customers have come to value our expertise and willingness to respond to particular needs.

For example, the manufacturing processes ofour industrial customers require a wide variety ofservices.

Computer-controlled processes are increasingly vital parts oftheir operations.

Such state-of-the-ait controls are highly sensitive to normal power system disturbances, such as lightning strikes, or the effects ofother electrical equipment operating within the facility. In many cases, such disturbances can cause significant production losses.

In early 1992, the company joined with the Electric Power Research Institute (EPRI) to address power quality at Intel's microchip fabrication facilityin Rio Rancho, ¹w Mexico.

Company engineers, in conjunction with EPRI and Intel personnel, are researching power fluctuations which affect an increasing number of manufacturers who use sensitive elect tonic equipment.

These efforts have generated inquiries from out-of-state companies whose processes require very stable electrical power.

High-tech manufacturers nial high.tech so Public Service Company's BillJones, Direct

'V lutions. Intel's Rio Rancho, Net hfexico plant needs a sophisticated pov er supply to manufacnue its silimn wafers.

or ofindustrial llarket Services, works with a team ofintel engineets to improve power qual ityat the plant.

EcoNohnc DEvELQPhfENT Despite a nationwide recession, ¹w Mexico continued to gain new jobs, although at a modest rate of 1 percent.

Albuquerque job growth increased just one-half of 1 percent.

Our state's economy is heavily dependent on militaryand other federal spending.

Almost 10 percent ofour state's employment is tied directly to defense spending and an additional 15 percent depends on other government dollars. There is littleagreement on how and where government spending willbe cut. However, even as military bases are closing around the nation, ¹w Mexico has benefit ted. Consolidation ofmilitaryfacilities may bring new people and projects to New Mexico's bases, including Kirtland AirForce Base in Albuquerque.

Attracting new or expanding industry to our service territory is another piece ofthe puzzle. Public Service Company ofNew Mexico offers special economic development rates to a wide variety ofmanufacturing businesses.

These rates offer incentives in the early years but escalate over time. General Mills,Solo Cup, Intel, and other companies have taken advantage ofthese rates to either build new facilities or expand existing ones. As a result, new jobs, as well as electric load, have been created.

We look forward to creating additional growth opportunities withinNew Mexico.

Santa Pe, New Mexico's upscale residential market, continues to grow. At our water divison, Sangre de Cristo Water Company, annual customer growth in 1991 was 2.3 percent, compared to 3.0 percent in 1990.

A second wet year in a row suppressed demand by our water customers, but also provided plentiful surface water supplies. With full reservoirs, demands for pumping well water willbe kept at a minimum in 1992, meaning lower service costs.

A major effort is underway at the Gas Company to build a market for compressed natural gas as a fuel for automobiles and other commercial vehicles. Increasing concerns about vehicle emissions make this an attractive alternative fuel. We are working with regulators on the state and national level to improve our ability to compete in this emerging marketplace.

W01K FORCE SXV1SFi1.CT1ON GOAI.: Increase work force satisfaction by 10 percent each year as measured by thel990 Working Environment Survey.

Results ofthe 1991 Working Environment Survey revealed that, overall, employee attitudes have improved over 1990. But we did not meet our goal ofa 10 percent gain over last year's survey.

More employees felt positive about their work place and believed they could contribute to the financial success ofthe company. The number ofemployees stating that they knew the company's direction also increased.

Perception ofleadership at the top level ofthe company remains essentially unchanged.

There is some improvement in perception ofleadership at the supervisor level, with increased confidence in their leadership and communication abilities.

In 1991, management made a commitment to improve communications with employees concerning issues

facing the company.

Formal communications werc increased, and senior management met with employees around the state, listening to their concerns.

Because nothing can replace a face-to-face discussion, these meetings will continue on a regular basis throughout 1992. These meetings give work force members a forum to air their concerns, as well as a chance to meet company leaders on a first-name basis.

More training is being offered to help employees adapt to a changing, competitive environment. Our people must increasingly become "problem solvers" and work cooperatively in teams. In 1991, the Service Design Teams challenged the status qtto and proposed creative solutions to common problems. The process has fostered a new way ofthinking about our company and about our roles in it.

PUBLIC TRUST AhlD CHEDIBILITY GOAL: Improve public trust and credibility by 15 percent per year as measured by 1990 cusromer survey data.

We have seen improvement in the public's trust and credibility in our company.

Compared to the previous year, over twice as many customers tell us that they find our company trustworthy and believable.

Customers have taken note ofour actions to resolve past issues, improve our service and change our company.

I3ut restoring the public trust is a goal we know willtake some time to meet.

Wirh improved trust and credibility comes a greater ability to work cooperatively with other key constituencies.

We are continually working to improve cooperation with parties in regulatory proceedings.

This effort has helped to avoid protracted regulatory arguments and has resulted in stipulated agreements among the parties, including the previously discussed stipulation to decertify 130 MWofSan Juan Unit 4.

Our Sangrc de Cristo Water Company received an award from the United States Environmental Protection Agency in 1991. The water company received the Environmental Excellence Award in competition against water suppliers in a five-state area. The award is given to water companies which demonstrate a commitment to maintaining and protecting public water supplies.

The Albuquerque franchise issue also involves public trust and credibility. Progress made toward its resolution willfurther our success in meeting this goal during the coming months.

OUR CO-PARTICIPANTS'ROBLKhIS The financial di6iculties ofTucson Electric Power, Century Power, and El Paso Electric Company have been publicized during the last year. These three companies, along with Public Service Company ofNew Mexico, are co-participants in certain generating stations.

Financial implications for the company arc discussed in the company's report on Form 10-K which is a part ofthis annual report. a

JOHN T. ACKERMAN4/s,v Director since 1990, agc 50 Chairman, President ntnl Chicl.xecu(ivc Officer Public Service Company of Yc)v Alcxico

~1

'c c~+

" c&y s

/

PI1

~ c X's g+\\\\

1 Iy ROBERT G. ARMSTRONG 2,s,7 Director since 1991, ngc 51 Prcsldcnt Armstrong Energy Co(Porn(ion llos)veil, N!il VICKIEL. FISHER (p,y Director since 1990, agc 45 Vice President, I'inanec llountain States Life h)sufancc Con)[)any Albuqucrquc, i(i!)I JOYCE A. GODWIN 2347 Director since 1989, agc 48 Vice President Prcsbytcrian Ilcalth Care Scrviccs Albuqucrquc, (ill

(~>~j CLAUDEL'. LEYENDECKER t)4,(i Director since 1970, agc 69 Chairman of thc Board United Nccv l>Iexieo Bank at!(Iitnbres Valley Dcming, Nll ROBERT R. REHDER (J Director since 1975, ngc 61 Professor of i)ionogen)ent Un(vers>tv of Ne)v llexico Thc Rol>crt O. Andetson Graduate Sclmols of i>lanagcmcnt Albuquerque, N3I PAUI.E ROTH 2p,s,v Director since 1991, agc 59 President Greater Dallas Cllaml>er ofCommcrce Dallas, 'I'iX (Not Pictured) ARTURO G. ORTEGA 3)t/> Director since 1985, agc 71, Attorney, Albuquerque, i%31 1 Member ofAudit Commit cce / 2 Meraber ofCompensacion Commiuee /3 Member ofCotporate and Public Responsibility Comminee / I Member ofExecutive Comminec 5 Member ofFinance Commit cee / 6 Member ofNominating Comlnittee /7 Member oflitigation Commit cce

/Ages alai commiccee assignments as ofFebruary 24, 1992.

k j I I I Members ofthe bxKc(rilvELEADEosnlp TEast include: standing left to right, IVilliamhf. Eglinton, Judith A. Zanotti,John T. Acketman a(xi hf. Phyllis Bouique; sitting left to right, Patrick T. Ottiz, hfax 11. Maerkii,Jerry L Godwin, WilliamJ. Real and Jeff Mr Stetba.

JOHN T. ACKERhIAN Chairn)on, I'rrsid(nt and Chi( f Executive Officer (20). age 50 WILLIAhfM. LGLINTON I'xeculiv('ice I rcsid('nt and CliiefOprrating Oflicer (21), a< r W4 WILLIAhfJ. REAI.

I':xccutive Vice I'rcsidnit, Gas Operations (13), agr 03 MAXH. MAERKI Srnior Vic< I'rrsi<l<nt au<I Chief Financial Officer (8), oge 52 JEFF L'. STKRBA Sniior Vice Prcsi<lrnt.

Retail I'.Irclricoml '5'nter Services (14), agr 36 M. PHYLLIS BOURQUE Sn)ior Vice Pr< si<lrnt, Gns hlnnagrment Srrvires (4), ngc 44 JUDITH A. ZANOTTI Sniior Vier Prrsi<lrnt, I luman Resourrrs an<I Con)mnuications (6). oge 53 PATRICK T. ORTIZ Senior Vice Prrsi<l< nt, Genrral Counsel iuul (:arporatc Secretary iigc 'I JERRY L. GODWIN Sniior Vice Presi<l< nt, Whol< sole hlnrkrting an<i Power Supply (11), agc d9 EDI)VINA. KRAFT Vice Presidn)t, Central Ria Gramlc Custoincr Services (21), ag< 03 ELLEN A. WILSON Vir('resi<lrnt, IlunIan R('sources (13)< <1ge d'I LAI)VRENCED. RATLIFF Vier I'resident, Pmvrr Production (17), agc 45 MICHAKLC. SLOTA Vice Prrsi<lnit (18), ngr 45 ALFONSO R. LUJAN Vier I'residnit, Rrgimml Custonier Scrviccs (19), agc d3 D.A. "ZAN"JAhIES Vier Pre~ident, Strategic Srrs irrs (5). o<<c 48 JOHN RKNNER Vier Presi<l< nt, Gos I ransnussian Opci'a(lolls (5), og(< 63 JAhIES A. HUNTER Vire Prrsidnit, hlnrkcting (5), og( 50 DAVIDJ. DAVIS Vic( I'resident hietrx)poli(an Operations. Gas Operations (18), age 07

'TERRY D. RISTER Virc Presi<lcnt, Regional Opcrntions, Gos Opcrotions (20), ogr 00 MILOL. MCGONAGLE Vice President, In<luslrial Development Services (4)< agc 61 MARC D. CHRISTENSEN Vice President,

( aiiunilliicattons agr 43 DONNA M. BURNETT Corporate Controller nnd CliicfAccaunting Officer (12), agc 38 THOMAS G. SATKGNA Controller, I'.Iectric Oi)erations (15), ag( 38 ANDREW R. VOGT Cantroller and Assistnnt Secretory, Gas Operations (4), agc 41 KARENA. KNIGHT Assistant Secretary (17), agc 52 MITCHELLJ. MARZEC

'I'rea surer (16), ngc 44 ROBERT G. MCMAHON Assistant Trcasurcr (15), ago 48 TKRRYR. HORN Assistmit Treasurer (6), oge 39

( ) Yeats ofservice with the company or a company conuollcd aAiliate. Ages aod >xars ofservice as ofFcbruaty 24, 1992.

F56 IAL Lontcd in Eorm Io-K Stock/Dividend Data Selected Financial Data Management's Discussion and Analysis of Pinancial Condition and Results ofOperations Management's Responsibility for Financial Statements.

Independent Auditors'eport Consolidated Statement ofEarnings (Loss)

Consolidated Statement ofRetained Earnings (Deficit).

Consolidated Balance Sheet Consolidated Statement ofCash Plows Consolidated Statement ofCapitalization Notes to Consolidated Pinancial Statements Consolidated Financial Statement Schedules Quarterly Operating Results Comparative Operating Statistics

.26 27 27

.38

.39

.40

.4>

42 43 45 62

.6g

.70 Earnings Per Share ofCommon Stock Dollars 0

-6

>4.23>>

t3.22

>3.S3>>

>>su 1 l3.30 <3.29

>>2.00

>>),7 l23>>>>>>

ls,)S>>>>

'81

'82

'83

'84

'85

'86

'87

'88 '89

'90

'91 Includes sale ofretained economic interest in coal leases which contributed $.90 and $,73 pcr share, rcspcctivcly in 1981 and 1983.

In 1988, the company reported a loss of$5.78 per s)tare due primarily to a provision for the estimated loss from the discontinuance ofthe company's non-utihty operations, a provision for an extraordinary loss on discontinuation ofapplication ofregulatory accounting principles regarding certain assets, the write-offofthe company's investmcnt in a proposed coal-fired generating station, the write-offofdeferred carrying costs on uncommited electric generating capacity and one-time costs related to a work force reduction.

• • • In 1990, the company recorded a write-offof46 cents per share due to a negative electric rate order.

'UNITED STATES SECURITIES AND EXCHANGE COMMISSION AVASHINGTON,D.C. 20549 FORM 10-K ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d)

'OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1991 Commission File Number 1-6986 Public Service Company of New Mexico

~ (Exact name of registrant as specified in its charter)

Neiv Mexico 85-0019030 (State or other jurisdiction of (I.R.S. Employer incorporation or organization)

Identification No.)

Alvarado Square Albuquerque, Nciv Mexico (Address of principal executive oSces) 87158 (Zip Code)

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>>hich rcgistcred

'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 (8100 stated value and without sinking fund) comprised ofthe folloiving series:

1965'eries, 4.58%

8.48% Series 8.80% Series 8.75% Cumulative Preferred Stock ($100 stated value and with a periodic sinking fond)

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 Indicate by check mark ifdisclosure ofdelinquent filers pursuant to Item 405 ofRegulation S-IZ is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-IC or any amendment to this Form 10-K. S I

The total number of shares of the Company's Common Stock outstanding as of January 31, 1992 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 $ 10s/s per share reported by the Wall Street Journal, was $432,804,071.

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 28, 1992 PART III.

I

GLOSSARY TABLE OF CONTENTS Page nI PART I ommittee DERS ITEM

1. BUSINESS.....

~

~

~ ~....

~

~

~

~

~

~

~

THE COMPANY..............................

ELECTRIC OPERATIONS........................

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

Power Sales.......................,........

Sources ofPower.............................

Coal-jired Plants Nuclear Plant Fuel and Water Supply.........................

Coal.............................

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

Water...........

NATURALGAS OPERATIONS.............

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

Gathering Company..

Processing Company Natural Gas Sales RATES AND REGULATION Electric Rate Case PVNGS Cost Investigation Decertification of Electric Generating Plant Other Electric Matters Natural Gas Supply Matters Other Natural Gas Matters ENVIRONMENTALFACTORS NON-UTILITYSUBSIDIARY OPERATIONS ITEM 2.

PROPERTIES ELECTRIC GAS WATE<R OTHER INFORMATION ITE<M 3.

LEGAL PROCEEDINGS SHAREHOLDER LITIGATION Securities Law-Related Litigation Shareholder Derivative Litigation and the Special Litigation C PVNGS WATER SUPPLY LITIGATION SAN JUAN RIVER ADJUDICATION DIVERSIFICATIONCLAIMS NATURALGAS SUPPLY LITIGATION................

OTHER PROCEEDINGS................

ITEM 4.

SUBMISSION OF MATTE<RS TO A VOTE OF< SECURITY HOL SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE COMPANY 1

1 1

1 2

3 3

4 6

7 7

7 8

8 8

8 9

10 10 11 12 12 12 12 13 13 14 14, 15 16 16 17 17 17 18 18 18 19 20 21 21 22 22 23 24

PART II ITEM 5.

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

ITEM 6.

SELECTED FINANCIALDATA................ ~..........

ITEM 7.

MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................

ITEM 8.

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

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 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 PART IAT ITEM 14.

EXHIBITS,FINANCIALSTATEMENT SCHEDULES, AND REPORTS ON FORM 8-K SIGNATURES......,...,..........

Page 26 27 27 38 72 72 72 72 86

1

ACP...........

AEPCO.........

AFUDC.........

APPA..........

APS...........

BCD BHP-Utah.......

BTU Century.........

decatherm.......

DOE EIP...........

El Paso....

EPA...

EPNG FASB Farmington FERC Four Corners Gathering Company GCNM KW}1 Los A}amos mcf Meadows M-S-R MW MWh NMEIB NMIEC NMPSC NRC OLE..........

PGAC.........

Plains.........

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

Salt River Project...

~

SCE........

SDG&E......

SJCC.....

~

SJGS.......

Southern Union.

SPS..

~.....

Sunbelt......

throughput.

Tucson WSCC WSPP GLOSSARY Ambrosia Coronado Project Arizona Electric Power Cooperative Allowance for funds used during construction Arizona Power Pooling Association Arizona Public Service Company Bellamah Community Development BHP-Utah International, Inc.

British Thermal Unit Century Power Corporation 1,000,000 BTUs United States Department of Energy Eastern Interconnection Project El Paso Electric Company United States Environmental Protection Agency El Paso Natural Gas Company Financial Accounting Standards Board City of Farmington, New Mexico Federal Energy Regulatory Commission Four Corners Power Plant 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 Ojo Line Extension GCNM's Purchased Gas Adjustment Clause Plains Electric Generation and Transmission Cooperative, Inc.

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 Western System Coordinating Council Western Systems Power Pool

l i )

ITEM 1.

BUSINESS PART I THE COMPANY Public Service Company of New Mexico was incorporated in the State ofNew Mexico in 1917 and has its principal ofllces 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, distribut,ion and sale of natural gas within the State of New Mexico. The Company also owns facilities for the pumping, storage, transmission, distribution and sale of water in Santa Fe, New Mexico.

T e total population of the area served by one or more of the Company's utility services is Th estimated to be approximately 1.1 million, of which 52% live in the greater Albuquerque area.

For the year ended December 31, 1991, the Company derived 66.3% of its utility operating revenues from electric operations, 32.3% from natural gas operations and 1.4% from water operations.

As of December 31, 1991, the Company employed 3,150 persons.

Financial information relating to amounts of revenue and operating income and identifiable assets attributable to the Company's industry segments 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 to retail customers and sales to firm-requirements wholesale customers, sometimes referred to collectively as "system" sales, com-prise two of these markets. The third market consists ofother contracted sales to utilities for which the MWh ver Company commits to deliver a specified amount ofcapacity (measured in MW)or energy (me s

d

'gy measure in

) over a given period of time. The fourth market consists of economy energy sales made o houri i

r y basis to utilities,at fluctuating, spot-market rates. Sales to the third and fourth markets are ma conan sometimes referred to collectively as "off-system" sales.

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, 1991, approximately 297,000 retail electric customers were served by the Company, the largest ofwhich accounted for 3.5% of the Company's total electric revenues for the year ended December 31, 1991.

Th C

e Company holds 22 long-term, non-exclusive franchise agreements for its electric retail opera-tions, expiring between August 1996 and November 2028. The City of Albuquerque franchise expired in early 1992. Customers in the area covered by the City of Albuquerque franchise represent approxi-mately 45.4% of the Company's 1991 total electric operating revenues, and no other franchise area represents more than 7%. These franchises are essentially agreements that permit the Company to use municipal property for electric service rights-of-way. The Company believes that it remains obligated under state law to provide service to customers in the franchise area even in the absence of a franchise agreement with the City. The Company endeavors to renew franchises as they expire. For a discussion of matters related to the electric franchise for the City of Albuquerque, see PART II, ITEM7.

"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CURRENT ISSUES FACING THE COMPANY The Retail Electric Market".

J

Power Sales For the years 1986 through 1991, retail KWh sales have grown at a compound annual rate of 4.0%.

However, the growth rate has been lower than had been anticipated at the time the Company commit-ted to construct new generating units in the 1970's. As a result, the Company has substantial excess capacity and must rely on off-system sales to try to recoup the cost of this capacity. The Company has contracted to sell and continues to market power at prices which only recover variable costs and a portion of the fixed costs of its excess capacity. Remaining energy produced by excess capacity is then sold in the economy energy market at prices which average only slightly above incremental operating costs. The Company's system and off-system sales (revenues and energy consumption) and system peak demands in summer and winter are shown in the following tables:

ELECTRIC SALES BY bIARKET (Thousands of dollars) 1991 1990 1989 1988 1987 Retail.................

Firm-requirements wholesale...

SPS contract Other contracted off-system sales Economy energy sales*

$444,594

$427,505

$413,644 22,390 25,739 27,679 109,773 55,581 70,640 52,804 29,665 26,052 14,507

$404,863 27,554 100,006 62,525 12,112

$387,o42 32,312 91,064 44,351 8,735 ELECTRIC SALES BY MARKET (Megawatt hours) 1991 1990 1989 1988 1987 Retail.....

Firm-requirements wholesale.......

SPS contract Other contracted off-system sales Economy energy sales*..........

~

5,139,954 5,048,830 308,390 376,040 1,223,212 1,743,196 1,559,939 1,378,270 4,909,592 397,792 1,618,694 1,079,972 735,558 4,684,588 362,934 1,577,950 1,567,712 621,773 4,447,798 396,297 1,585,639 508,990 515,673

• Pursuant to FERC Order No. 529, all spot market economy sale transactions were reclassified from net purchased power to revenue sales.

Summer Wintert SYSTEM PEAK DEMAND*

(Megawatts) 1991 1990 1989 1988 1987 1,018 1,051 1,006 956 916 955 897 896 862 880

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

)For the winter season beginning in the year noted.

In 1991, the Company furnished firm-requirements wholesale power in New Mexico to the cities of Farmington and Gallup, Texas-New Mexico Power Company and Plains. During 1991, the Company agreed to a modification to Plains'holesale firm power contract that increased Plains'ower purchases from 10 MWto 13 MWeffective August 1, 1991 through October 31, 1992. After October 31, 1992, Plains will purchase 10 MW until terminated. Such termination may occur at any time after October 31, 1992. During 1991, the Company entered into negotiations with the City of Gallup to replace its firm-requirements wholesale power contract which expires in February 1993. The City of

I f

l f

Gallup has tentatively selected the Company as its supplier based on those negotiations and has authorized the Company to draft a new contract. No firm-requirements wholesale customer accounted for more than 1.6% of the Company's total electric revenues for the year ended December 31, 1991.

During 1991, the Company's major off-system sale contracts in effect were with SDGE:E, APPA and AEPCO. In November 1985, the Company and SDG8:E executed an agreement providing for SDGM to purchase 100 MW from the Company for the period May 1988 through April 2001. On March 7, 1991, APPA and the Company executed a power sale agreement whereby the Company would supply power under a 17-year contract. This agreement calls for a sale of 15 MW of base power beginning in June 1991, increasing to 35 MWfor June 1992 through May 1994, 80 MW for June 1994 through May 2002, and 15 MWthereafter through 2008. The APPA agreement also provides for sales of an additional 25 MW of seasonal power in the months of June through September for 1991 through 1998. On March 19, 1991, AEPCO and the Company executed a power sale agreement whereby the Company would supply base power under a three-year agreement. This agreement calls for a sale of 15 MW of power beginning on June 1, 1991 and ending on May 31, 1994. On March 1, 1992, the Company began service pursuant to a three-year off-system sales agreement with the Imperial Irriga-tion Districtin Southern California. The agreement which extends through 1995 provides for 56 MWof power in each month and'an additional 25 MWof power in the months of Aprilthrough October each year.

For discussion ofthe competitive conditions affecting off-system sales and ofnegotiations with the City of Gallup, see PART II, ITEM 7. "MANAGEMENT'SDISCUSSION AND ANALYSISOF FINANCIALCONDITION 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, 1991, 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. The two gas/oil-fired plants are used for peaking capacity and transmission support requirements.

In addition, the Company has purchase power contracts withM-S-R for 105 MWthrough April1995 and with SPS for up to 100 MW of interruptible power through April 1995 and up to 200 MWfrom May 1995 through May 2011. The Company may reduce its purchases from SPS by 25 MW annually and upon three years'otice. Also, the Company has 39 MWof contingent capacity obtained from El Paso under a transmission capacity for generation capacity trade arrangement. The Company also is interconnected with various utilities for economy interchanges and mutual assistance in emergencies. For discussion of issues relating to co-participants in generating stations, see "Tucson Electric Power Company and Century Power Corpora-tion" and "El Paso Electric Company" under PART II, ITEM 7. "MANAGEMENT'SDISCUS-SION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS CURRENT ISSUES FACING THE COMPANY".

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 Farmington, 28.8% by M-S-R and 7.2% by Los Alamos. The Company's net, aggregate ownership in SJGS is 835 MW.

In connection with the Company's sale to M-S-R in December 1983 of a 28.8% interest in SJGS Unit 4, the Company agreed to purchase under certain conditions 73.53% (105 MW) of M-S-R's capacity through April 30, 1995, an amount which may be reduced by M-S-R under certain conditions. The Company also agreed to market the energy associated with the remaining 26.47% portion of M-S-R's capacity through April30, 1995. This marketing arrangement may be terminated by M-S-R at any time upon 30 days notice.

(

r I

l

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

In an eff'ort to maintain the competitiveness of power produced by SJGS, the Company is studying the feasibility of converting SJGS Units 1 and/or 2 from coal-fired generation to natural gas or dual-fired generation.

iVuclear Plant The Company's Interest inPIGS.

The Company is participating in the three 1,270 MW units of PVNGS, also known as the Arizona Nuclear Power Project, with APS (the operating agent), Salt River Project, El Paso, SCE, Southern California Public Power Authority and The Department, of Water and Power of the City of Los Angeles. The Company has a 10.2% undivided interest in PVNGS, with its interest in Units 1 and 2 held under leases. The Company's ownership and leasehold'inte e ts V

i res in P NGS amount to 130 MWper unit, or a total of3905'IW. PVNGS Units 1, 2and 3 were declared in commercial service by the Company in January 1986, September 1986 and January 1988, respectively.

Commercial operation of PVNGS requires full power operating licenses which were granted by the NRC. 5Iaintenance of these licenses is subject to NRC regulation. During 1991, PVNGS Units 1, 2 and 3 had capacity factors of approximately 83.7%, 74.3% and 67.6%, respectively. A stipulation adopted by the NMPSC on March 6, 1990 sets performance standards for the operation of PVNGS.

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. Within the dead band, the Company would receive no reward or penalty. The Company would be penalized with one-half of the additional fuel costs incurred for PVNGS capacity factors of 50% to 60% and would be rewarded with one-half of the avoided fuel costs if PVNGS operates at capacity factors from 75%

through 85%. Capacity factors above 85% or below 50% would reward or penalize the Company by an amount equal to the additional fuel costs avoided or incurred.

In January 1991, the NRC issued a Systematic Assessment ofLicensee Performance ("SALP")for PVNGS for the twelve month-period ending November 30, 1990. The SALP is the standard perform-ance grading process used by the NRC to communicate to the public in a formal manner how each nuclear plant operates. The January 1991 SALP showed an improvement in four ofthe seven areas that the NRC had evaluated. Of the remaining three areas, two showed an improving trend, while one remained the same. The Company expects that the NRC willissue the next SALP for PVNGS in April 1992.

During 1991 and prior years, the NRC has proposed and assessed civil penalties for various violations at PVNGS that have been categorized as problems ofSeverity Level IIIor less severity (on a scale of I to V in accordance with the "General Statement of Policy and Procedure for NRC Enforce-ment Actions", with Level I being the most severe). By letter dated February 3, 1992, the NRC sent a Notice of Violation and Proposed Imposition of CivilPenalties (the "NRC Notice") notifying APS, as operating agent ofPVNGS, that the NRC proposes to impose civilpenalties in the cumulative amount of $ 162,500 for several violations categorized as two "Severity Level III"problems. The first Severity Level IIIevent involved the partial loss ofoffsite power due to a crane boom contacting a transmission line, and the second Severity Level IIIevent involved the failure to ensure that reactor core alternation activities were supervised by a senior reactor operator. For the first event, the NRC increased the base civil penalty of $50,000 to $112,500 due to inadequate corrective actions and prior notice of similar events. For the second event, the NRC proposed a civilpenalty of $50,000, reflecting a mitigation ofthe base civil penalty because of APS's identification and reporting of the violation, and a corresponding escalation of the base civil penalty because, although corrective actions were prompt, APS did not, in the NRC's view, adequately address issues ofresponsibility and control. By letter dated March 2, 1992, APS responded to the NRC notice and paid the $162,500 of penalties.

i r

I

Sale and Leaseback Transactions of PVNGS Units I and 2.

In eleven transactions consum-mated in 1985 and 1986, the Company sold and leased back its entire 10.2% interest in PVNGS Units 1 and 2, together with portions of the Company's undivided interest in certain PVNGS common facili-ties. In each transaction, the Company sold interests to an owner trustee under an owner trust agreement with an institutional equity investor. The owner trustees, as lessors, leased the interests to the Company. under lease agreements having initial terms expiring January 15, 2015 (with respect to the Unit 1 leases) or January 15, 2016 (with respect to the Unit 2 leases). Each lease provides an option to the Company to extend the term of the lease as well as a repurchase option. The aggregate lease payments for the Company's PVNGS leases are approximately $84.6 millionper year. Throughout the terms of the leases, the Company continues to have fulland exclusive authority and responsibility to exercise and perform all ofthe rights and duties ofa participant in PVNGS under the Arizona Nuclear Power Project Participation Agreement and retains the exclusive right to sell and dispose of its 10.2%

share of the power and energy generated by PVNGS Units 1 and

2. The Company also retains responsibility for payment of its share of all taxes, insurance premiums, operating and maintenance costs, costs related to capital improvements and decommissioning and all other similar costs and expenses associated with the leased facilities. The PVNGS leases are classified as operating leases in accordance with generally accepted accounting principles.

Each lease describes certain events, "Events ofLoss" or "Deemed Loss Events", the occurrence of which could require the Company to, among other things, (1) pay the lessor and the equity investor, in return for such investor's interest in PVNGS, cash in the amount provided in the lease, which amount, primarily because ofcertain tax consequences, would exceed such equity investor's outstanding equity investment, and (2) assume debt obligations relating to the PVNGS lease. The "Events of Loss" generally relate to casualties, accidents and other events at PVNGS, which would severely adversely affect the ability of the operating agent, APS, to operate, and the ability of the Company to earn a return on its interests in, PVNGS. The lDeemed Loss Events" consist mostly of legal and regulatory changes (such as changes in law making the sale and leaseback transactions illegal, or changes in law making the lessors liable for nuclear decommissioning obligations). The Company believes the probability ofsuch "Events ofLoss" or "Deemed Loss Events" occurring is remote. Such belief is based on the followingreasons

(a) To a large extent, prevention of"Events ofLoss" and some "Deemed Loss Events" is within the control of,the PVNGS participants, including the Company, and the PVNGS operating agent, through the general PVNGS operational and safety oversight process and (b) with respect to other "Deemed Loss Events," which would involve a significant change in current law and polic'y, the Company is unaware of any pending proposals or proposals being considered for introduc-tion in Congress, or any state legislative or regulatory body that, ifadopted, would cause any such events.

On February 21, 1992, the Company filed a case with the NMPSC for approval to purchase the beneficial interests in two owner trusts that hold PVNGS leases in which the Company is the lessee (approximately 29 MW each of PVNGS Unit 1 and 2). The purchase is expected to provide the Company with (1) added flexibilityto decrease future rates, (2) the residual value of a certain portion of the PVNGS Units at no cost, (3) reduced exposure to indemnification provisions in the lease agree-ments and (4) added flexibility to cause the'retirement of the underlying lease obligation bonds

("LOBs"). (See also note'8 of the notes to consolidated financial statements.)

The retirement of the LOBs would only be caused if(1) adequate cash is available, (2) it is determined to be the best use of funds, and (3) the appropriate approvals are obtained. The closing date for the purchase is anticipated in July 1992, subject to receipt of a satisfactory, final, non-appealable order from the NMPSC by the end of June 1992.

Decommissioning Funding.

The Company has a program for funding its share ofdecommission-ing costs for PVNGS. Under this program, the Company willmake a series of annual deposits to an external trust fund over the estimated useful lifeofeach 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 certain employees. The Company began funding its share of decommissioning

costs for PVNGS Units 1 and 2 in 1987 and Unit 3 in 1988. The annual trust deposit, currently set at

$396,000 per unit, is based upon the Company's 10.2% share of total estimated PVNGS decommission-ing costs and projected earnings on the trust funds over time. The NMPSC jurisdictional share of these decommissioning costs related to Units 1 and 2 are currently included in jurisdictional rates. The annual funding amount is subject to periodic adjustment for changes in decommissioning cost esti-mates and earnings ofthe trust fund. As ofFebruary 18, 1992, the Company has funded $10.3 millionto cover program costs. This includes $4.8 million in prefunding of future contributions which were needed to satisfy cashflow requirements. The trust balance at the end of 1991 was approximately

$3.3 million, including cash surrender value of the policies. Insurance coverage at the end of 1991 was approximately

$95.7 million. The Company's share of PVNGS decommissioning costs is presently estimated, in 1991 dollars, at approximately $85.4 million. An updated decommissioning cost study is expected to be completed mid-1992. The Company has received preliminary indications that decom-missioning costs willincrease due primarily to updated estimates for new permanent disposal sites for radio-active materials, but is currently unable to estimate the amount of such increase. Factors which both positively and negatively influence future cost estimates include. uncertain permanent disposal sites, labor costs, robotics, technological change and NRC license extension policy. It is anticipated that a supplemental investment program may be needed.

PVNGS Liabilityand Insurance Matters.

The PVNGS participants have insurance for public liabilitypayments resulting from nuclear energy hazards to the full$7.8 billionlimitofliabilityunder Federal law; 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 any 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%

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 liabilityinsurance 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

$2.515 billion as ofJanuary 1, 1992, a substantial portion ofwhich must be applied to stabilization and decontamination. The. Company has also secured insurance against a portion of the increased cost of generation or purchased powei resulting from certain accidental outages of any of the three PVNGS units.

Fuel and 'vVater 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 1987..............

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

70.0 142.5 29.6 75.9 0.4 320.9 1989..............

89.3 139.3 10.3 76.3 0.4

'64.1 1990............ -..

74.6 152.0 25.2 73.1 0.2.

310.3 1991........ ~.....

67.1 167.9 32.9

'7.9

216.5 Although not included in the above table, start-up and test energy was available from PVNGS in 1987.

The estimated generation mix for 1992 is 68.6% coal, 31.3% nuclear and.1% gas and oil. Due to locally available natural gas and oil supplies, the utilization of 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.

J r

1 I

Coal The coal req'uirements for SJGS are being supplied by SJCC, a wholly-owned subsidiary of BHP-Utah, from certain Federal, state and private coal leases under a coal sales agreement, pursuant to which SJCC willsupply processed coal for operation of SJGS until 2017. BHP-Utah guaranteed the obligations of SJCC under the agreement, which contemplates the delivery of approximately 143 mil-lion tons of coal during its remaining term. Such amount would supply substantially all the require-ments of SJGS through approximately 2017. The primary sources of coal are a mine adjacent to SJGS and a mine located approximately 25 miles northeast ofSJGS in the La Plata area ofnorthwestern New Mexico. The average cost of fuel, including ash disposal and land reclamation costs, for SJGS for the years 1989, 1990 and 1991 was 145.9 cents, 161.9 cents and 183.3 cents, respectively, per millionBTU

($28.80, $32.38 and $36.63 per ton, respectively).

(See PART II, ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERA-TIONS CURRENT ISSUES FACING THE COMPANYCoal Sales Agreement".)

Four Corners is supplied with coal under a fuel agreement between the owners and BHP-Utah, under which BHP-Utah agreed to supply all the coal requirements for the life ofthe 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 Four Corners with the coal supply expected to be sufficient to supply. the units for their estimated useful lives. The average cost of fuel, including ash disposal and land reclamation costs, for the years 1989, 1990 and 1991 at Four Corners was 108.3 cents, 112.2 and 112.6 cents, respectively, per million BTU ($18.96, 819.92 and $19.94 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 of gas supplied by GCNM or other sources.

Nuclear Fuel The fuel cycle for PVNGS.is comprised of the following stages:

(1) the mining and milling of uranium ore to produce uranium concentrates, (2) the conversion ofuranium concentrates to uranium hexaAuoride, (3) the enrichment ofuranium hexafiuoride, (4) the fabrication offuel assemblies, (5) the utilization offuel assemblies in reactors, and (6) the storage ofspent fuel and the disposal thereof. The PVNGS participants have made arrangements to obtain quantities of uranium concentrates antici-pated to be sufficient to meet operational requirements through 1997. Existing contract options could be utilized to meet approximately 30% of requirements from 1998 through 2000. Spot purchases in the uranium market will be made, as appropriate.

The PVNGS participants have contracted for all conversion services required through 1994 and for up to 65% of conversion services required through 1998, with options to continue through the year 2000. The PVNGS participants, including the Com-pany, have an enrichment services contract with DOE which obligates DOE to furnish enrichment services required for the operation of the three PVNGS units over a term expiring in November 2014, with annual options to terminate each year ofthe contract with ten years prior notice. The participants have exercised this option, terminating 30% of requirements for 1996 and 100% of requirements during the years 1999 through 2001. In addition, existing contracts will provide fuel assembly fabrication services for at least ten years from the date of operation of each PVNGS unit and through contract options, approximately fifteen additional years are available.

Spent fuel storage facilities at PVNGS have sufIicient capacity with certain modifications to store all fuel expected to be discharged from normal operation ofall ofthe PVNGS units through at least the year 2003. Pursuant to the Nuclear Waste Policy Act of 1982, as amended in 1987 (the "Waste Act"),

DOE is obligated to accept and dispose ofall spent nuclear fuel and other high-level radioactive wastes generated by all domestic power reactors. The NRC, pursuant to the Waste Act, also requires operators of nuclear power reactors to enter into spent fuel disposal contracts with DOE. APS, the operating agent, on its own behalf and on behalf of the other PVNGS participants, has executed a spent fuel disposal contract with DOE. The Act also obligates DOE to develop the facilities necessary for the

permanent disposal of all spent fuel generated by domestic power reactors and to have the first such facilityin operation by 1998 under prescribed procedures. In November 1989, DOE reported that such a permanent disposal facility will not be in operation until at least 2010. As a result, under DOE's current criteria for shipping allocation rights, PVNGS would begin spent fuel shipments to the DOE disposal facility in 2017. APS indicates that alternative interim spent fuel storage methods will be available for use by PVNGS until DOE's scheduled shipments from PVNGS begin.

1Vater Water for Four Corners and SJGS is obtained from the San Juan River. (See ITEM3. "LEGAL PROCEEDINGS SAN JUAN RIVER ADJUDICATION".)BHP-Utah holds rights to San Juan River water and has committed a portion of such rights to the Four Corners plant. The Company and Tucson have a contract with the United States Bureau of Reclamation for consumption of 16,200 acre feet of water 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 Company is of the opinion that suflicient water is under contract for SJGS unti12005.

Steps are being taken to extend water rights permits to the year 2045.

Sewage effluent used for cooling purposes in the operation of the PVNGS units has been obtained under contracts with certain municipalities in the area. The contracted quantity ofeffluent exceeds the amount required for the three PVNGS units. The validity of these effluent contracts is the subject of litigation in state and Federal courts. (See ITEM3. "LEGALPROCEEDINGS PVNGS WATER SUPPLY LITIGATION".)

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 353,000 customers as of Decem-ber 31, 1991. The Albuquerque metropolitan area accounts for approximately 54% of the Company's total customers. The Company holds long-term, non-exclusive franchises with varying expiration dates in all incorporated communities requiring franchise agreements.

The expiration dates for the Com-pany's franchises in Albuquerque and Santa Fe are 1998 and 1995, respectively. GCNM's customer base includes both "sales-service" customers and "transportation-service" customers.

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 ofthe cost of purchased gas in accordance with NMPSC rules and regulations and in that sense do not affect the net earnings of the Company. Transportation-service customers, who procure gas independently of GCNM and contract with GCNM for transportation and related services, provide GCNM with cost-of-service revenues only. Transportation services are pro-vided both to gas marketers generally for delivery to locations throughout GCNivI's distribution systems and to natural gas producers generally for delivery to other interstate pipelines.

J i

I I

For the twelve months ended December 31, 1991, GCNM had throughput of approximately 85.0 million decatherms, including sales of 46.1 million decatherms to sales-service customers.

No single customer accounted for more than 3% of GCNM's therm sales in 1991.

GCNM's total operating revenues for the year ended December 31, 1991, were approximately

$235 million.Cost-of-gas revenues, received from sales-service customers, accounted for approximately 55% 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 47% of GCNM's total therm sales in 1991 occurred in the months of January, February and December.

During the 1980's, FERC and NMPSC orders relating to the nondiscriminatory transportation of ti gas in certain instances, as well as other changes in the natural gas industry led to increased compet-ion for sales of natural gas within New Mexico. An order issued by the NMPSC requires New Mexico gas utilities to offer transportation service to all customers on an available capacity basis. Thus, GCNM's customers may choose to purchase natural gas from sources other than GCNM and require transportation by GCNM, subject to the capacity ofGCNM's system. During 1991, approximately 46%

of GCNM's total gas throughput was related to transportation gas deliveries. GCNM's transportation rates are unbundled, and transportation customers only pay for the amount of transportation service they receive from GCNM; Natural Gas Supply GCNM obtains its supply of natural gas primarily from New Mexico wells pursuant to contracts with producers and brokers. 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 generally sufficient to meet GCNM's peak-day demand.

GCNM serves certain cities which depend on EPNG or'Transwestern Pipeline Company for transportation of gas supplies purchased from sources that are not on GCNM's system. Because these cities are not directly connected to GCNM's transmission facilities, gas purchased from or transported by these companies is the sole supply source for those cities. Such transportation is regulated by FERC.

Prior to 1985, the Company had no gas utilityoperations. Atthe time ofthe Company's acquisition of GCNM and Gathering Company, GCNM obtained its natural gas supply generally pursuant to long-term contracts with producers that obligated GCNM and Gathering Company to take volumes ofgas in excess of GCNM's sales-service customers'nnual demand. At that time, GCNM and Gathering Company were able to sell all excess gas to interstate pipelines. At about the same time as the acquisition of the gas operations, the FERC began promulgating a series of orders that have dramati-cally altered the way gas is bought, transported and sold nationwide.

~ 'i )

In essence these orders allowed customers of the interstate pipelines to purchase non-pipeline supplies and use the interstate pipeline's transmission facilities to transport that gas. Since Gathering Company traditionally had sold oQ'-peak excess supplies to interstate pipelines, the regulatory changes dramatically altered the Company's ability to market these non-peak supplies. Over the past several years, GCNM and Gathering Company have sought and are seeking reformation or termination of certain gas supply contracts with producers in an efi'ort to match their obligations to take gas with the demand of GCNM's sales-service customers. GCNM and Gathering Company have renegotiated or terminated a significant portion of their long-term contracts.

Over the past several years these reformed contracts, along with new contracts, have allowed both GCNM and Gathering to create a fiexible gas supply portfolio which allows the Company to meet its customers'emand profile. During 1991, approximately 35% of the gas'supplies from all sources came from contracts which have some form of take-or-pay requirement.

Approximately 9% of the gas supplies came from sources that have a reservation/demand fee that the Company might be obligated to pay the supplier for standing ready to serve during the contract's purchase period. These reservation

fee contracts enable the Company to compare contract prices to prevailing market prices and make the best economic choice for our customers. Any reservation fees which might be paid are charged to sales-service customers through the PGAC. The remaining 56% of gas supplies came from gas contracts with no minimum purchase obligation. As a result of the above mix ofgas supplies, the Company expects to have minimal exposure to litigation resulting from the Company's 1991 gas purchasing activities.

Although numerous claims relating to natural gas contracts have been settled in recent years and those contracts reformed or terminated, GCNM and Gathering Company are still disputing claims related to prior years by some natural gas producers relating to take-or-pay obligations, contract pricing and other matters. (See ITEM3. "LEGALPROCEEDINGS Natural Gas Supply Litiga-tion" and PART II, ITEM 7. "MANAGEMENT'SDISCUSSION AND ANALYSISOF FINAN-CIAL CONDITION AND RESULTS OF OPERATIONS CURRENT ISSUES FACING THE COMPANYGas Litigation and Regulatory Issues".)

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 from sources in the San Juan Basin, the sale of gas to GCNM and third parties and the gathering of gas for third parties. In 1991, Gathering Company sold approximately 24.1 milliondecatherms to GCNM and 1.6 milliondecatherms to third parties primarily in the spot market and gathered 23.6 million decatherm's for third parties.

In January 1990, Gathering Company entered into a natural gas sale and gas gathering contract with GCNM. The contract allows Gathering Company to recover from GCNM, effective January 1988, substantially all ofits operating costs, net ofits third-party revenues (including revenues received from Processing Company), and to earn a regulated return on its investment in its operatin'g assets. In addition, Gathering Company is permitted under the contract to charge to GCNM all costs arising from take-or-pay obligations and from contract reformation. (See "RATES AND REGULATIONNatu-ral Gas Supply Matters".)

Processing Company Processing Company processes natural gas for GCNM, Gathering Company and others. The natural gas is processed at Processing Company's plants under separate contracts. 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 ofprocessing GCNM's natural gas. Additionally, Processing Company reimburses GCNM for all revenues from liquid by-products derived from GCNM's throughput processed at the plants. Such revenues, including all third party processing fees, are ultimately credited to GCNM's sales-service customers through the PGAC. The Gathering Company's contract with Processing Company provides the same service for Gathering Company and in return for such service, Gathering Company pays Processing Company a fee per mcfofgas which is processed on behalf ofGathering Company. Processing Company reimburses Gathering Company for all revenues from liquid by-products derived from Gathering Company's throughput processed at the plants.

10

I l

l

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

GAS THROUGHPUT (Millions of decatherms)

Residential Commercial.....

Industrial......

Public authorities Irrigation Sales for resale...

Transportation*g..

Spot market salest Brokerage......

1991 26.2 11.4 0.8 4.9 1.4 1.4 62.6 1.6 110.3 1990 1989 1988 1987 25.2 23.2 24.7 24.5 11.3 10.7 11.5 11.4 1.3 1.5 1.7 2.2 5.3 5.5 6.2 6.8 1.8 2.0 1.4

=

1.4 3.5 4.6 2.7 1.2 42.5 19.6 9.1 5.1 8.1 11.1 0.8 0.9 2.8 99.0 79.0 58.2 55.4 Residential Commercial.-

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

Transportationt'.....'

Liquidsf Processing feesg "......

Spot market salest.....

~

'Brokerage Other The following table shows gas revenues by customer class GAS REVENUES (Thousands of dollars) 1991 1990

$137,436

'$137,633 46,676 49,575 2,754 4,993 17,711 20,392 4,495 5,934 3,848 7,253 16,997 11,939 30,500 39,086 5,819 3,127 1,771 13,880 9,062 8,292

'$277,069

$302,104 8989

$ 130,130 47,876 5,693 21,757

, 7,001 9,874 7,618 25,294 448 19,810 1,378 5,948

$282,827 8988

$122,592 45,235 6,063 22,289 4,546 6,969 4,841 8

1987

$114,164 42,120 8,102 22,729 3,781 3,819 4,315 1,514 9,742 5,213 6,391

$223,791

$210,634

• Customer-owned gas.

tIncludes gas revenues from Gathering Company and Processing Company beginning January 1, 1989 due to a change in regulatory treatment.

I I-

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. 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 million, later revised to $ 12.2 million, from the then-current annualized electric reve-nues. On April 12, 1990, the NMPSC issued its final order in the rate case. As a result of the order, the Company was required to reduce its annualized existing base rates by approximately $2.9 million.Also, as a result ofthe order, the Company wrote offapproximately $19.4 million,net of taxes, in March 1990, which resulted primarily from the NMPSC's treatment of prior years'ax benefits from debt retire-ment and losses on hedge transactions as well as the NMPSC's treatment of amortization periods for gains resulting from sale and leaseback transactions ofPVNGS 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, FERC excess capacity and that capacity excluded from the NMPSC jurisdictional rates.

PVNGS Cost Investigation 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 also set performance standards for the operation of PVNGS Units 1 and 2. (See "ELECTRIC OPERATIONS Sources of Power Nuclear Plant".)

In addition, the stipulation provides that ifa FERC audit ofthe Company's interest in PVNGS Units 1 and 2 construction costs were conducted and resulted in a reduction of more than $90 million, such further reduction shall be refiected on an allocated basis in the next New Mexico rate case.

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.

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

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 MWofSJGS Unit 4. On August 29, 1990, the Company filed a motion for a rehearing of the case, which the NMPSC also denied. On September 28, 1990, the Company appealed the NMPSC decision to the New Mexico Supreme Court.

On July 9, 1991, the New Mexico Supreme Court upheld the NMPSC's ruling.

Following the Supreme Court ruling, the Company filed a request with the NMPSC on August 9, 1991 for decertification of the 50 MW which the Company agreed to sell to the City of Anaheim. In January 1992, the Company reached a stipulated agreement with the NMPSC Staff and intervenors 12

i

approving the sale of 50 MW to the City of Anaheim and decertification of 130 MW of SJGS Unit 4.

The stipulation is subject to NMPSC approval and a final order from the NMPSC is expected in the second quarter of 1992. (See PART II,ITEM7. "MANAGEMENT'SDISCUSSION ANDANALY-SIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS CURRENT ISSUES FACING THE COMPANYSale of 50 MW of SJGS Unit 4".)

Other E<lectric Matters The Company has electric fuel adjustment clauses covering all retail and firm-requirements wholesale ICWh sales. There is an approximate 60-day time lag in implementation of the fuel adjust-ment clause for billing purposes, except for firm-requirements wholesale customers for which there is an approximate 30-day time lag.

On October 18, 1990, the New Mexico Attorney General filed a complaint requesting the NMPSC to initiate a rulemaking proceeding in the matter of amendments to NMPSC Rule 550 (Fuel and Purchased Power Cost Adjustment Clauses for Electric Utilities). The New Mexico Attorney General specifically requested the NMPSC to institute a rulemaking for notice and hearings similar to those imposed on GCNMwhich provides for mandatory public hearings, with notice to the Attorney General, on any gas cost factor statement which shows a 10% increase in the cost 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 file comments on the matter. In addition, the responses were to address ifand why the NMPSC should issue a Notice of Proposed Rulemaking as requested by the New Mexico Attorney General and NMXEC.

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.

For a discussion of NMPSC proceedings relating to OLE, see PART II, ITEM 7. "MANAGE-MENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CURRENT ISSUES FACING THE COMPANYThe Retail E<lectric Market".

Natural Gas Supply Matters On February 29, 1988, the NMPSC initiated a proceeding to examine imbalances in GCNM's gas supply and demand. (See "NATURALGAS OPERATIONS Natural Gas Supply".) The proceeding led to a stipulation which was filed with the NMPSC on July 19, 1989. The stipulation, which was approved by an NMPSC order on December 18, 1989, provides for the partial recovery of certain gas costs arising from reformation ofgas purchase contracts 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 GCNMto Gathering Company under their gas sale and gas gathering contract) for claims settled or for which litigation had 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 December 31, 1993. GCNM willbe permitted

'i recover from its sales and transportation customers the remaining 75% of take-or-pay costs over a

'od ofyears. The order allows GCNM to recover from its customers all take-or-pay costs assessed by

'~te pipelines. The order also provides that GCNM may recover all costs (including costs paid by

-sthering Company under their gas sale and gas gathering contract) determined by the

'gently incurred or just and reasonable (on a case-by-case basis) as the result of the

~ ofclaims ("MDLcontract claims") arising from certain intrastate gas purchase 13

contracts that were the subject of the antitrust litigation that resulted in the Company's acquisition of GCNM from Southern Union in January 1985. (See "NATURALGAS OPERATIONS Natural Gas Supply".) On September 21, 1990, GCNM filed with the NMPSC seeking approval to recover approxi-mately $73 millionof costs from settlement of MDLcontract claims and approximately $3 million of producer take-or-pay costs. Hearings on this case were held in January and February 1992. At issue in these proceedings are (i) the allocation of this amount between take-or-pay claims and MDLcontract claims and (ii) the prudence of costs relating to the latter. During the hearings, GCNM amended its request to approximately $68 million. On March 11, 1991, the hearing examiner issued a recommended decision which, ifadopted by the NMPSC, would allow GCNM to recover a total of approximately

$57.3 million (see PART II, ITEM 7. "MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS CURRENT ISSUES FACING THE COMPANY,Gas Litigation and Regulatory Issues" ). A final order in this case is not expected before May 1992.

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. An order was issued in this case by the NMPSC on January 21, 1992. The order allows implementation of a rate rider mechanism that will provide recovery ofcosts as described above. The mechanism provides for recovery ofinteiest after the first year of collection on unamortized balances over the five-year recovery period of each claim. The order denies GCNM's request for recovery ofinterest costs incurred prior to the implementation ofthe rate rider. GCNM willrequest recovery of outstanding eligible take-or-pay costs upon completion of the NMPSC's compliance review ofthe rate-rider. GCNM expects that recovery of these amounts will commence later in 1992 unless implementation is suspended in whole or part by the NMPSC. Recovery of MDLcosts willnot commence until an order on the hearing examiners recommended decision is received.

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 sales-service, customers. On August 20;1990, GCNM filed its biannual application for continued use of its PGAC pursuant,to NMPSC rules. Hearings on this case were held in June 1991 and a decision is expected later in 1992. 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 gathering 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 envir'onmental reviews pursuant to the National Environmental Policy Act. (See'ELECTRIC OPER-ATIONS Sources of Power Nuclear Plant".) The Company does not currently expect that material expenditures for additional pollution control equipment for its facilities willbe required in 1992 and 1993.

On November 15, 1990, amendments to the Clean AirAct (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 utilitieswith fossil fuel generating units willbe affected particularly b the section ofthe Actwhich deals with acid rain. To be in compliance with the Act, many utilities wil~

faced with installing expensive sulfur dioxide removal equipment, securing low sulfur coal, l sulfur dioxide emission allowances, or a combination of these. Due to the existing air pollut "

equipment on the coal-fired SJGS and Four Corners, the Company believes that it" with any material capital expenditures in order to be in compliance with the acid 14

I

Act. Under other provisions ofthe Act, the Company willbe required to obtain operating permits forits coal-and gas-fired generating units and to pay annual fees associated with the operating permit program.

Itis anticipated that in April1992, the New Mexico Oil Conservation Division ("OCD")willissue a ruling which would affect the Company's gas gathering facilities. It is expected that the OCD will prohibit the further discharge of fluids associated with the production ofnatural gas into unlined open pits as of some point in the future. In addition, it is expected that sites where this has occurred in the past willbe required to be remediated in some fashion. The areas targeted by the OCD for this project are in the Northwestern part of New Mexico and are deemed by the OCD to be environmentally sensitive due to their proximityto water table areas. Itis anticipated that the proposed order willaffect other natural gas producers and gatherers as well. Because ofuncertainties such as the final form ofthe proposed order, the regulatory treatment and the producer involvement with respect to cost sharing, the Company cannot currently conclude what effect the ruling willhave on the Company, but does not believe the impact will be material.

NON-UTILITYSUBSIDIARYOPERATIONS In 1988, the Company discontinued the non-utility operations of its subsidiaries.

(See note 10 of the notes to consolidated financial statements.)

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 mining activities (although mine-reclamation activities con-tinue). During 1989, the Company's subsidiaries disposed of the fiberboard manufacturing and tele-communications manufacturing operations. In 1990 and 1991, additional non-utility properties were sold, and the remaining assets are expected to be sold in 1992.

During 1989, Meadows defaulted on obligations, owed to secured creditors and the creditors subsequently made claims against the Company, asserting that the Company was fullyliable for the obligations of Meadows to the secured creditors. Although the Company denied the claims, and without admitting any liability,the Company, in November 1989, entered into an agreement with the secured creditors which provides for the Company to pay damages.

The amount of the damage payments would depend on, among other things, the amount ofMeadows'ebt payments received and retained by the creditors. In return, the secured creditors released the Company from all claims. Atthe 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 the secured creditors in 1989 and 1990, and subject to the secured creditors retaining all the debt payments, the Company made the damage payments of $17.8 millionrequired under the settlemen't 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 of the secured creditors certain Meadows debt payments.

(See ITEM 3. "LEGALPROCEEDINGS DIVERSIFICATIONCLAIMS".) Under the settle-ment agreement, the Company is entitled to recapture from the secured creditors any excess payments (up to $17.8 million) made by Meadows over the agreed amount.

As of December 31, 1991, the Company has recaptured approximately 84.5 million from the secured creditors. Meadows, on its own behalf, entered into an agreement dated as of February 14, 1990 with its secured creditors, which precludes such creditors from exercising their remedies under the loan documents to allow Meadows'rderly disposition of the remaining Meadows'ssets.

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 and the Company's discontinuance of its non-utilitysubsidiary 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 15

1 1

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 also inquired into whether the Company's actions are in compliance with other applicable law and whether sanctions should be imposed. Hearings were held beginning May 6, 1991 and a recommended decision in the case is pending before the hearing ezaminer.

On November 15, 1991, the Company filed with the NMPSC for approval of the Meadows Status Report and Asset Disposition Plan. As part of the plan, the Company requested NMPSC approval to (1) consent to the use by Meadows of up to $991,000 of the proceeds from the disposition of Meadows'ssets to fund Meadows'iquidation expenses during 1992 (which proceeds would otherwise be reim-bursable to the Company as recapture payments under the settlement agreement) and (2) to the extent the timing of asset sales by Meadows does not generate funds for liquidation ezpenses, allow the Company to loan up to $750,000 to Meadows to fund such liquidation expenses, with such loan to be repaid out of asset sales proceeds. The Ni>IPSC granted interim approval to the Company to proceed with the $750,000 loan to 5'leadows.

ITEM 2.

PROPERTIES Substantially all of the Company's utilityplant is mortgaged to secure its first mortgage bonds.

ELECTRIC As of December 31, 1991, 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, 1991, were as follows:

Nuclear Coal Coal Gas/Oil Gas/Oil T)'pe i@me Location PVNGS (a)

Wintersburg, Arizona SJGS (b)

Waterfiow, New Mezico Four Corners (c)

Fruitland, New Mezico Reeves Albuquerque, New Mexico Las Vegas Las Vegas, New Mexico Net MIV Generation Capadly 390 835 192 154 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% owned by the Company.

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

Four Corners 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 enforcement of which leases might require Congressional consent. The risk with respect to the enforcement of these easements and leases is not deemed by the Company to be material. However, the Company is dependent in some measure upon the willingness and ability of the Navajo Nation to protect these proper ties.

As of December 31, 1991, the Company owned, jointly owned or leased 2,789 circuit miles of electric transmission lines, 4,791 miles ofdistribution overhead lines, 2,528 cable miles ofunderground distribution lines (excluding street lighting) and 212 substations.

The Company, with Plains, continues to pursue licensing activities for ACP, which involves construction of a 230 kV transmission line connecting the Plains Escalante Generating Station in New

I

Mexico to the Salt River Project Coronado Station in Arizona. ACP would provide the Company additional transmission capability to deliver power to western markets, including Nevada and southern California, and would give Plains a direct transmission connection to serve its member cooperative located in eastern Arizona. This project would also enhance the Company's seasonal interchange capabilities. The line could be completed as early as 1995; however, the Company's continued partici-pation in the project is subject to various conditions including the Company's wholesale sales activities and regulatory approvals.

On May 1, 1984, the Company's Board of Directors approved plans to proceed with OLE, which involves construction of a 345 kV transmission line connecting the existing Ojo 345 kV line to the existing Norton Station. For discussion of issues relating to OLE, see PART II, ITEM 7. "MAN-AGEMENT'S DISCUSSION AND ANALYSISOF FINANCIALCONDITIONAND RESULTS OF OPERATIONS CURRENT ISSUES FACING THE COMPANYThe Retail Electric Market".

GAS The property owned by GCNM, as of December 31, 1991, 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 9,000 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.

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

OTHER INFORMATION 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 leases interests in PVNGS Units 1 and 2 and related property (see ITEM 1. "BUSINESS ELECTRIC OPERATIONS Sources ofPower Nuclear Plant"), EIP and associated equipment, data processing, communication, office and other equipment, office space, utilitypoles (jointuse), vehicles and real estate. The Company also owns and leases service and office facilities in Albuquerque and in other operating divisions throughout its service territory.

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

17

f t

ITEM 3.

LEGALPROCEEDIlVGS SHAREHOLDER LITIGATION An agreement in principle has been reached potentially settling all of the shareholder class action and derivative lawsuits reported below. (See PART II,ITEM7. "MANAGEiMENT'SDISCUSSION ANDANALYSISOF FINANCIALCONDITIONANDRESULTS OF OPERATIONS CURRENT ISSUES FACING THE COMPANYShareholder 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 formerly served as oflicers or directors of the Company, alleges misrepresentations and omissions of material facts in the Company's shareholder reports, Securities and Exchange Commission filings, news releases and other communications. The 1989 suit has been brought as a class action, in which the plaintiffhas sought to represent shareholders claimed to be "similarlysituated". Generally, the complaint alleges misrepresentations and omissions relating to, among other things, (i) the recovery of investment in excess electric generating capacity, (ii) diversification, (iii)dividends on the Company's common stock and (iv) the attempted restructur-ing of the Company. It is alleged that the market prices of the common stock were artificiallyinflated during the class period of March 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 disseminated 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 ofSection 10(b) of the Securities Exchange Actof 1934 and Rule 10b-5 promulgated thereun-der. 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. On May 24, 1991, the court permitted the substitution of a new named plaintiffin this action.

The new plaintiffclaims to have purchased 100 shares of the Company's common stock on March 27, 1990, and requests unspecified compensatory and punitive damages as well as fees and costs. The plaintiffis also seeking class action certification, with the plaintiffclass 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 of Section 10(b) of the Securities Exchange Act, of 1934 and Rule 10b-5 promulgated thereunder.

Generally, the complaint alleges misrepresentations and omissions and other fraudulent conduct 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 ITEMl."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 public 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 plaintiff seeks to bring this action on behalf of all persons who purchased the Company's stock through the consumer stock plan or in sales transacted within the state of iVew'exico 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 18

t h

1 J

Company's common stock. The complaint further alleges that the Company's public reports and financial statements were materially false and misleading, because they allegedly failed to disclose negative information about the Company's financial condition. The plaintiff 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. In July 1991, the district court dismissed the suit due to a statute oflimitations, with respect to the federal-law claims, adopted retroactively by the United States Supreme Court in June 1991 in an unrelated case. The plaintiffappealed this decision to the United States Court ofAppeals for the Tenth Circuit. In December 1991, the President of the United States signed legislation which purports to reverse the retroactive application of the Supreme Court's ruling. Pursuant to this new legislation, the Tenth Circuit remanded the case to the district court to consider reinstatement of this action.

The plaintiffin the September 24, 1990 federal class action lawsuit filed a lawsuit on July 26, 1991, and in November 1991 an amended complaint, in the District Court ofBernalillo County, New Mexico reasserting her state-law claims against the same defendants as in the federal action and adding a cia u

ingac aim un er the New Mexico Racketeering Act against the Company and three of the individual defendants.

The plaintiffseeks to represent a class of New Mexico residents who purchased common stock from September 24, 1986 through January 31, 1991. The plaintiffalso seeks rescission of the proposed class members'tock purchase transactions, or, in the alternative, damages.

In addition, plaintiffseeks treble damages, punitive damages and attorneys'ees.

On April22, 1991, a civilsuit was filed in the United States DistrictCourt for the Southern District of California against the Company and eight individuals who currently serve, or formerly served, as officers or directors of the Company or its subsidiaries, alleging violation of securities laws and other causes ofaction. The plaintiff,who claims to be a citizen of California and to have purchased shares of the Company's common stock in December 1985 and June 1988, is requesting unspecified compensa-tory and punitive damages as well as fees and costs. The suit has been brought as a class action.

Following dismissal of her federal claims without prejudice based upon the June 1991 United States Supreme Court decision referenced above, the plaintifffiled an amended complaint on October 16, 1991 seeking to bring this action on behalf of all California residents who purchased the Company's common stock from April23, 1988 through January 31, 1991. Generally, the complaint alleges that the Company and the individual defendants engaged in conduct in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. As amended, the complaint also seeks recovery based on allegations under the Racketeer Inffuenced and Corrupt Organizations Act and unfair practice laws (for which the plaintiffseeks treble damage) and on theories of common law fraud and negligent misrepresentation.

On December 2, 1991, the court certified the requested class.

Shareholder Derivative Litigation and the Special Litigation Committee The Company is a nominal defendant in four civil actions which shareholders seek to bring derivatively on behalf of the Company. The first suit was filed in the United States District Court for the District of New Mexico on September 14, 1989. The remaining three suits were filed on May 11, 1990, June 14, 1990 and May 29, 1991 in the District Court ofBernalillo County, New Mexico and have been consolidated.

The four actions claim breaches of fiduciary duty, mismanagement and waste by four individual defendants who formerly served as directors or officers of the Company or its subsidiaries.

The complaints allege that each of the defendants, because of his position as an officer or director, owed fiduciary duties to the Company and its shareholders in connection with the operations, management and direction of the Company. The complaints allege further that each breached those duties by (1) causing the Company to invest in diversified, non-utilityoperations, which in turn was a cause of a deficit in the retained earnings ofthe Company that resulted in suspension ofcommon stock dividends, (2) causing Meadows to borrow from various lenders in order to continue funding real estate opera-tions, (3) causing the Company to provide assurances to Meadows'enders that the Company would be 19

'f tf J

I l

responsible for any losses sustained with respect to a substantial portion of the loans to Meadows (see ITEM 1. "BUSINESS NON-UTILITYSUBSIDIARY OPERATIONS"), (4) wrongdoing in connection with the Company's discontinuance ofnon-utilityoperations, and (5) acting to conceal their alleged wrongdoing, thereby exposing the Company to liability.

Initially, the first three actions contained additional claims and also named other current and former officers and directors as 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 initially in these actions, and to determine whether it would be in the best interest of the Company to continue to seek dismissal of, or otherwise resolve, litigation. The Committee originally consisted of the director newly-elected to the Board at the May 1989 annual meeting of shareholders and acted with the assistance of independent legal counsel and independent business advisors. In January 1991, the Committee issued its report, which concluded that it would not be in the Company's best interest to pursue all of the initial claims. Subsequently, the plaintiffs amended their complaints in these actions. In addition, at the direction of the Committee, the Company joined with Meadows in filinga lawsuit against three of the remaining individual defendants and a consulting firm. (See "OTHER PROCEEDINGS".)

In September 1991, three of the individual defendants filed third-party complaints in all four actions against current and former directors, as well as unnamed persons, as third-party defendants.

The third-party complaints assert that, in the event that the defendants are found.liable to the derivative plaintiffs, the defendants are entitled to indemnification or, in the alternative, contribution from the third-party defendants. The fourth individual defendant is seeking to file cross-claims against the Company and two of its current directors and third-party complaints against past and present directors of the Company who were previously dismissed as defendants.

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

One of these contingencies is the approval of the settlement by the court in the Lower Gila River Watershed litigation referred 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 on or before January 20, 1987, in an action pending in the Maricopa County Superior Court. PVNGS is located within the geographic area subject to the summons and the rights ofthe PVNGS participants to the use of groundwater and efHuent 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 effluent relating to PVNGS and, alternatively, seek confirmation of such rights. No trial date has been set in this matter.

Although the foregoing matters remain subject to further evaluation, APS expects that the described litigation will not have a material adverse impact on the operation of PVNGS.

20

(

SAN JUAN RIVER ADJUDICATION In 1975, the State of New Mexico filed an action entitled State of New Mexico v. United States, et al., in the District Court of San Juan County, New Mexico, to adjudicate all water rights in the "San Juan River Stream System". The Company was made a defendant in the litigation in 1976. The action was 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 for water at SJGS and Four Corners, 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.

DIVERSIFICATIONCLAIMS BCD, a general partnership that engaged in real estate operations in the southwestern United States, is the debtor in a proceeding in the United States Bankruptcy Court for the District of New Mexico that commenced on June 1, 1989 under Chapter 11 ofthe 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'roceed-ing against the general partners ofBCD, including Meadows, seeking contribution forall debts ofBCD.

The BCD Trustee has threatened further to assert that the claims of Meadows against BCD (including administrative, secured, and unsecured claims ofapproximately 887 million)should be subordinated to the claims ofall other creditors. Ithas been the position ofMeadows that itmade loans to BCD secured by mortgage liens and it has therefore resisted the BCD Trustee's position. The Company currently estimates that the claims against BCD (excluding the claims of Meadows) exceed BCD's assets by a range of $40 million to $60 million. The assets of the general partners are inadequate to fund such excess.

=

In January 1991', the BCD Trustee placed the Company on notice that it 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 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 asserted that the bankruptcy estate may have a direct claim against the Company based on the theory that Meadows was th'e alter ego of the Company. The Company denies any liabilityto the BCD Trustee.

On May 31, 1991, the BCD Trustee filed an action in the District Court of Bernalillo County, New Mexico, against the Company, Meadows and five individuals who served as members of the BCD management committee, including three who also served as directors or officers of the Company or its subsidiaries. The complaint alleges that, without authority and to the detriment of BCD, the BCD management committee approved certain bonus plan payments by BCD in excess of $4 million to individual defendants, designated employees of the Company and Meadows, and others. The plaintiff alleges that the defendants are liable for such payments and seeks damages or restitution under various theories.

On August 5, 1991, the BCD Trustee, the Company and Meadows negotiated the essential terms of a settlement ofall disputes, as between these parties, relating to the BCD bankruptcy proceedings and the state-court action. Among other things, the proposed settlement would require release by Meadows 21

1 I

of its claims against BCD in the bankruptcy proceedings and payment of $ 1.5 million to the BCD Trustee by Meadows or the Company. The settlement would also be subject to several contingencies, including final approval by the secured creditors of Meadows, the Bankruptcy Court and the NMPSC.

NATURALGAS SUPPLY LITIGATION Near the end of 1990 and in response to a December 1989 order ofthe NMPSC relating to GCNM's recovery ofsettlement and reformation costs (see ITEM1. "BUSINESS RATES ANDREGULA-TION Natural Gas Supply Matters"), eight producers, including Conoco, Inc. ("Conoco") and Amoco Production Company ("Amoco"), commenced or amended lawsuits against GCNM or Gather-ing Company or both seeking to recover damages relating to GCNM's or Gathering Company's per-formance under gas purchase contracts. Four ofthe eight lawsuits have been dismissed or settled by the Company and Gathering Company. An agreement in principle has been reached for the fifthlawsuit.

During 1991, no new significant claims were asserted by natural gas producers for damages relating to the performance of GCNM or Gathering Company under gas purchase contracts.

One ofthe pending proceedings against GCNM and Gathering Company is a lawsuit in the United States District Court for the District of New Mexico by Conoco and Amoco. Conoco initiallyfiled the action on February 20, 1990 asserting claims under two gas purchase contracts. The complaint was subsequently amended to assert take-or-pay and pricing claims relating to 20 contracts with GCNM and Gathering Company in northwestern New Mexico. The claims quantified in the complaint total approximately $54 million,with approximately $ 16.9 millionattributed to pricing claims. However, not all take-or-pay claims have been quantified, and the Company anticipates that the asserted claims will ultimately be much higher.

A second pending lawsuit is one that was filed on August 31, 1990 in the United States District Court for the District of New Mexico. This action was brought by three producers of natural gas-Caulkins Producing Company, DeKalb Energy Company, Marathon Oil Company and a number of small-interest owners in a long-term natural gas contract with GCNM. The suit alleges that GCNM has take-or-pay obligations for the period 1986 to the present and further that GCNM failed to take gas ratably from the producers during that same period of time. The suit does not specify a dollar figure being claimed. However, a preliminary report by plaintiffs'xpert indicates take'-or-pay claims of approximately $26.1 million and ratable-take claims of approximately $45.2 million. The Company believes that substantial portions of these claims are duplicative.

A third pending lawsuit is one that was filed on March 20, 1990 in Texas state court but subse-quently removed to the United States District Court for Northern District of Texas, Dallas Division.

The plaintiffs, known as the Hill Group, allege that GCNM and Gathering failed to pay the price required by five contracts, failed to take the plaintiffs'as ratably, and owe take-or-pay obligations to the plaintiffs. The complaint does not set forth a specific monetary demand, but the plaintiffs'xperts have computed their alleged damages in the amount of approximately $7 million. A bifurcated trial began on February 18, 1992.

GCNM and Gathering Company are vigorously defending against the claims in these three pend-ing actions.

OTHER PROCEEDINGS See ITEM 1. "BUSINESS RATES AND REGULATION" and "BUSINESS NON-UTILITYSUBSIDIARY OPERATIONS" for a discussion of other proceedings and disputes.'n 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 President, 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 of Directors in 1989 22

i%atne M. Phyllis Bourque J. A. Zanotti P. T. Ortiz Age ONce 44 Senior Vice President, Gas Management Services Vice President, Gas Supply, Gas Company of New Mexico Division 52 Senior Vice President, Human Resources and Communications Vice President, Human Resources and Sta6'Services, Gas Company of New Mexico Division District Vice President, Southwest, Gas Company of New Mexico Division Director, Public Affairs, Gas Company of New Mexico Division 41 Senior Vice President, General Counsel Initial Efi'ective Date June 19, 1990 March 2, 1987 July 26, 1990 September 1, 1988 April 26, 1988 July 15, 1980 October 14, 1991 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 of M. Phyllis Bourque and P.T. Ortiz. M. Phyllis Bourque has been employed as an officer ofthe Company for approximately five 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 Presi-dent Gas Acquisition and Contr'act Management. Mid Con Service Company, a subsidiary of Occidental Petroleum Co., processes, transmits and sells natural gas. Prior to employment with the Company, P.T. Ortiz was employed by U S WEST Communications during the period ofJanuary 1988 to October 1991 as Chief Counsel New Mexico and during the period ofJune 1985 to January 1988, as ari attorney by U S WEST Communications (then known as Mountain Bell). The principal business of U S WEST Communications is telecommunications.

25

PART II ITEM 5. GREET FOR THE COMPANF'S COMMONEQVlTYAND RELATED STOCKHOLDER 1VXdTTERS The Company's common stock is traded on the New York Stock Exchange. Ranges of sales prices of the Company's common stock, reported as composite transactions (Symbol: PNM) for 1991 and 1990, by quarters, are as follows:

Range of Sales Prices Quarter Ended 1991:

December 31 September 30 June 30 March 31 High Low 9'/s 8'/2 10t/e 8e/s 1 le/e 9'/e 9s/s 7'/s Fiscal Year 1 le/e 7s/e 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 1991 and 1990.

~

s 1990:

December 31

~..............,.

9s/>>

-. 8-September 30.......,

12s/s, 9t/>>

June 30

. '..........,:.......'.'2%'7/s March31....,

..',,:,'..;.15'ls, ".12'ls Fiscal Year 15i/s '

s sl$ k s'sA>>

&4 ~

s ~ s On January 31, 1992, there were 30,736 holders of record of'the Company's cominon stock.

Js g ~ ~ps,,

In April 1989, the Co'mpany announced the, suspension of dividend, payments on the Company's common stock as a result of a deficit'in retained earnings. For a discussion of the suspension of dividends on the Company's common stock, see note,2 ofthe notes to consolidated financial statements and ITEM 7. "MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIALCONDI-TION AND RESULTS OF OPERATIONS".

J I

ITEM 6.

SELECTED FINANCIALDATA 1989 1988 1987 per share amounts and ratios) 929,817 854,036

- S 793,959 82,593 (9,942)t $

117,121 82,593 (230,137) 95,389 1990 (In thousands except Total Operating Revenues'.......

857,168 881,186 Earnings (Loss) from Continuing Operations...............

S 22960 442 S

Net Earnings (Loss)...........

22,960 442 Earnings (Loss) per Common Share From Continuing Operations.....

0.32 (0.23)

Earnings (Loss) 'per Common Share..

0.32 (0.23)

Total Assets...............

$ 2,344,332

$ 2,313,709 Preferred Stock with Mandatory Redemption Requirements......

26 982 45 581 Long-Term Debt, less Current Maturities...............

786,279

'l90,126 S

Common Stock Data:

Dividends paid per common share Dividend pay-out ratio........

Market price per common share at year end..:............

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

S 17.69 Average number'f common shares outstanding..............

41,7'l4 Retur'n on Aver'age Common Equity..

1.8%

Capitalization Common stock equity ".'". '.. '....

44.8%,

Preferred stock:

Without mandatory redemption" requirements..".'."."."....'.. =" '.7 3.6"

~

With mandatory redemption requirements...

~.

~

~

~

~

~

~

1.7 2.8 Long-term debt, less current maturities ~-.';".".".'

~

~

~

~

48.8 100.0%

'Includes gas operating revenues (excluding intercompany sales} of ing Company beginning with 1989 due to a change in regulatory f'Includes charges for the write-ofl'fdeferred 'carrying costs on capacity,"the'rite-bff of a proposed generating station and other

$120.8-'-million ($2.88 per share).

N/MNot meaningful 1991 173 (0.50)t $

252 1.73 (5.78) 2.00 2,387,005 '2,392,749

$ 2,717,141 49,268 55,242

~

60,513 801,706 980,767 862,962 0.38 22.0%

2.92 146.0%

1.87 N/M 14.625 12.50 18.75 18.02 18.03 25.68 8375 17.36 41,774 9.5%

41,774 (1.3)%

41,761 i

41,647 (23.9)%

7.7%

52.2%

45.3%

40.7%

45.8%

3.2 2.9 3.5

'\\

2.9 3.0 3.0 48.8 100.0%

48.2 100.0%

,53.1 100.0%

42.0 100.0%

Gathering Company and Process-treatment.

uncommitted electric generating non-recurring charges aggregating The selected financial data should be read in conjunction with the consolidated fmancial state-ments, the notes to consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations contained elsewhere in this report.

ITEM 7.

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

27

l l

LIQUIDITYAND CAPITALRESOURCES Construction expenditures for the years 1992-1996 are expected to consist primarily of upgrading generating

systems, upgrading and expanding the electric and gas transmission and distribution systems and purchasing nuclear fuel. For the period 1992-1996, the Company expects to incur $508 mil-lion of construction expenditures. This amount includes $63 million for the purchase of nuclear fuel and $10 million in AFUDC (a non-cash item that reflects the Company's costs of debt and equity capital used to finance utility construction). This projection of construction expenditures includes costs for OLE (see "The Wholesale Power Market" and "The Retail Electric Market" under "CUR-RENT ISSUES FACING THE COMPANY") but assumes all costs for ACP would be paid by other parties. The Company currently has no material capital commitments beyond 1996 which would significantly differ from the levels reflected in the five-year construction projections.

Cash requirements for construction expenditures for 1991 and the Company's projections for 1992-1996 are shown below:

1991 1992 1993 1994 1995 1996 (In millions)

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

$80

$115 894

$98

$ 99 892 AFUDC.....................

3 3

4 1

1 1

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

383

$118

$98

$99

$100

$93 These projections are under continuing review and are subject to periodic adjustments.

The Company's other major cash requirements include payments of long-term debt maturities, redemption of preferred stock, purchase of certain PVNGS lease interests (see "CURRENT ISSUES FACINGTHE COMPANYPurchase ofBeneficial Interests in PVNGS Leases" ), and settlements of certain gas contract disputes (see PART I, ITEM 1. "BUSINESS NATURALGAS OPERA-TIONS Natural Gas Supply"). Cash requirements for the above items are estimated at $65 million for 1992 and a total of $35 millionfor 1993-1996. These estimates are under continuing. review and are subject to periodic adjustments.

(See also note 8 of the notes to consolidated financial statements concerning lease payments.)

The Company currently estimates that its total internal cash gen'eration during the years 1992-1996 will be adequate to meet its cash requirements for construction expenditures and other major cash requirements for that five-year period. However, the Company anticipates that in 1992 internally generated cash after meeting operating expenditures willmeet approximately 63% ofits 1992 cash requirements for construction expenditures and other major cash requirements. In addition to internally generated cash, the Company anticipates receiving. approximately $55 million in proceeds from the sale of a portion of SJGS Unit4 to the City ofAnaheim. (See,"CURRENT ISSUES FACING THE COMPANY,Sale of 50 MWof SJGS Unit4".) To cover differences in the amounts and timing ofcash generation and cash requirements, the Company intends to utilize short-term borrowings under revolving credit facilities with various banks. The Company currently estimates its peak short-term borrowing requirements for 1992 to be no greater than $80 million.

In addition, continuing efForts to improve the Company's cash position include cost control programs, increased efForts to market excess electric generating capacity and power, and efforts to settle various pending Company litigation issues.

As of December 31, 1991, the Company had a $225 millionrevolving credit facility(the "Facility")

with major banks and $ 11 millionin other, unsecured revolving credit facilities. The Facility is secured through firstmortgage bonds ofthe Company and is currently scheduled to terminate on December 31, 1993. The Facility is subject to annual extensions at the banks'ole discretion and the Company expects to request such extensions. The Facility contains a provision that could prevent the Company from borrowing under the Facility in the event of a material adverse change in the financial condition,

,results of operations,

assets, business or prospects of the Company. Additional provisions in the 28

I

~

Facility (a) generally restrict the Company from making dividend payments or other distributions with respect to common stock or from acquiring shares of common stock and (b) impose a maximum total debt to total capitalization ratio. However, the Facility allows the Company to declare cash dividends on the Company's common stock or acquire shares ofthe 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 has a letter of credit ("LOC") from a bank, which secures

$37.3 million of the Company's pollution control revenue bonds and requires either extension, reissuance, renewal, or b

m substitution on December 4, 1992. The LOC is subject to annual extension at the sole discret o fth ank. It is the ompany s intention to keep the bonds outstanding and to request an extension of the LOC. In addition, the Company could replace the debt with draws under the Facility.

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. Currently, the ratings by Standards

& Poor's Corporation ("S&P") of the Company's first mortgage bonds, including pollution control bonds secured through the Company's first mortgage bonds, are "investment grade" (BBB-). However, the ratings of such bonds by Moody's Investor Service ("Moody's") and the ratings by both S&P and Moody's of the Company's other securities, including lease obligation bonds (which are secured indirectly by an assignment ofrentals to be paid by the Company) are below "investment grade". One impact of the Company's current ratings, together with covenants in the Company's PVNGS Unit 1 and Unit2 lease agreements (see PART I, ITEM1.

"BUSINESS ELECTRIC OPERATIONS Sources of Power Nuclear Plant"), is to limitthe Co'mpany's ability,'without consent of the owner participants and bondholders in the lease transac-tions, (i) to enter into any'erger or consolidation, or'(ii) except in connection with normal dividend policy,,to convey, transfer, lease or dividend more, than 5% of its assets, including cash, in any single transaction or series of related transactions. The Company's revolving credit facilityimposes similar restrictions irrespective of credit ratings.

Th'e issuance offirstmortgage bonds by the Company'is subject to earnings coverage and bondable property provisions ofthe Company's firstmortgage'indenture. The Company has the capability under the mortgage indenture, without'regard to'the earnings test but subject to other conditions, to issue firstmortgage bonds on the basis ofcertain previously retired bonds. However, the Company is unable to issue any significant amounts of first mortgage bonds" at this time. The earnings tests in the Company's Restated Articles of Incorporation currently limit the issuance of preferred stock (other than in connection with certain exchanges, redemptions or retirements of preferred stock) and any issuance would require the consent of the holders of a majority of the shares of preferred stock then outstanding until such time as the earnings tests are met.

" 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, 1991 consisted of 48.8 percent long-term debt, less current maturities, 1.7 percent preferred stock with mandatory redemption requirements, 3.7 per-cent preferred stock without mandatory redemption requirements and 45.8 percent common stock equity.

RESULTS OF OPERATIONS Net earnings per common share in 1991 were $.32, compared to a loss of $.23 per common share in 1990 and earnings of $1.73 per common share in 1989. The results ofoperations in 1990 reflect after-tax write-offs of $ 19.4 million resulting from the NMPSC's decision on the Company's electric rate case.

The write-offs resulted primarily from the NMPSC's treatment of prior years'ax benefits from debt

}

retirement and losses on hedge transactions as well as the NMPSC's treatment ofamortization periods for gains resulting from the sale and leaseback transactions on PVNGS Units 1 and 2 consummated in previous years.

Resources excluded from NMPSC jurisdiction rates ("excluded capacity") have had a negative e ect on the Company's results of operations.

(See note ll of the notes to consolidated financial statements.) For 1991 and May to December of 1990, selected financial information for this excluded capacity is shown below:

1999 9999 (In ths sands, nsnsnt per share amounts)

Operating revenues............................

$ 59,248

$ 38,076 Operating income (loss)..........................

$ (17,324)

$ (10,697)

Net earnings (loss).............................

$ (33,729)

$ (19,804)

Net earnings (loss) per share of common stock............

(0.86)

(0.51)

Net utilityplant at year-end.......................

$377,262

$392,408 The followingdiscussion highlights other significant items which affected the results ofoperations in 1991 and 1990, and certain items impacting future earnings.

n Electric operating revenues increased

$1.1 million in 1991 due primarily to higher energy sales of 1.8% to retail customers. Partially offsetting such increases were lower sales for resale refiecting the soft wholesale power market. Electric operating revenues decreased

$67.5 millionin 199Q due mainly to the expiration on December 31, 1989 ofthe long-term popover sale contract withSPS. However, the decrease was partially offset by higher energy sales to retail customers, which increased by 2.8% in 1990.

Gas operating revenues decreased

$25.Q million and gas purchased for resale decieased

$38.8 million in 1991, due primarily to lower purchased gas costs (which are recovered from customers through the PGAC) and a decrease in spot-market sales. Despite the decrease in total gas operating revenues, cost-of-service revenues and the gas operations margin (gas revenues less gas purchased for resale) increased primarilyas a result ofan increase in retail natural gas rates approved by the NMPSC in August 1990 and an increase in transportation throughput. The $19.3 million increase. in gas

'operating revenues in 1990 was due mainly to increased gas liquids revenues resulting from increased prices and throughput, to increased gas consumption by residential and commercial customers in the spring of 1990 and to an increase in transportation throughput. The 1990 gas rate increase also contributed to the increased revenues for that year. The $15.1 million increase in gas purchased for resale in 1990 was due primarily to a higher net cost of gas and increased gas deliveries to residential and commercial customers.

Fuel and purchased power expense decreased

$3.8 millionin 1991 due mainly to a decrease in coal-fuel costs as a result of reduced generation at both SJGS and Four Corners. The soft wholesale power market has caused lower load conditions for those plants. Partially offsetting this decrease was increased nuclear fuel expense due to increased availability of the PVNGS units.

Other operation and maintenance expenses increased

$2.4 million in 1991 due primarily to mer-cury meter clean-up costs by gas operations, increased salary expenses and an increase in employee'enefits due to reduced accruals in 1990 resulting from over-funding for health and dental expenses Such increases were partially offset by decreased maintenance expenses at SJGS due to two major outages in 1990 versus one major outage in 1991 and the 1990 write-offof obsolete stores material Other operation and maintenance expenses increased $12.7 million in 1990 due primarily to increased operating costs resulting from increased availability ofthe PVNGS units along with additional person-nel 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.

30

J l~

Operating income taxes increased by $6.3 millionin 1991 due primarily to higher pre-tax operating income in 1991. Operating income taxes for 1990 decreased

$ 18.5 milliondue primarily to lower pre-tax operating income in 1990 partially offset by the absence in 1990 of certain tax benefits which were flowed through in 1989.

Other, under the caption Other Income and Deductions, net of taxes, decreased

$4.5 million in 1991 due mainly to a write-offofAFUDCand depreciation related to Four Corners, increased litigation expense, an additional provision for disputes related to gas purchase contracts and losses related to the M-S-R energy brokerage agreement caused by the poor wholesale power market. Such expenses were partially offset by the recapture of damage payments related to the Company's exit from diversifica-tion. Other, under the caption Other Income and Deductions, net of taxes, decreased

$7.6 million in 1990 due primarily to a reserve for costs related to retirement of utility property and additional provision for defending shareholders'itigation.

Interest charges decreased

$3.3 million in 1991 due primarily to a decrease in short-term borrow-ings along with a decrease in interest rates. Interest charges decreased

$7.0 million in 1990 due primarilyto the retirement of$30 millionof 13'/8% firstmortgage bonds in August 1989, and a decrease in other long-term debt outstanding during 1990.

CURRENT ISSUES FACING THE COMPANY The Company believes that the excess capacity of its electric operations, combined with competi-tive conditions in the wholesale electric market, will cause the Company's results of operations to be depressed over the next several years.

The Company's future financial condition and results of operations may be also affected by other issues discussed below.

The Company's management has been evaluating possible strategic options in an effort to maxi-mize shareholders'nvestment value and improve its standing with its customers and the communities in which itserves. In 1990, the Company's management announced specific objectives and established action plans designed to achieve these objectives. The plans include, among other things, no increase in base rates through 1993, reduction of budgeted non-fuel operation and maintenance expenses by 10 percent by the end of 1993 (excluding PVNGS operation and maintenance expenses), concentration on increased opportunities for revenue growth, marketing of excess energy and capacity, resolution ofthe Albuquerque franchise issue and improvements in the level ofpublic and customers trust and satisfac-tion of the Company's performance.

The Wholesale Power Market System Sales During 1991, the Company entered into negotiations with the City of Gallup to replace its firm-requirements wholesale power contract which expires in February 1993. The City of Gallup has tentatively selected the Company as its supplier based on those negotiations and has authorized the Company to draft a new contract. It is anticipated that this tentative contract, if executed, would have a slight negative impact on the Company's revenues from the current level.

Off-System Sales The Company's interest in PVNGS Unit 3 (130 MW), a portion of SJGS Unit 4 (130 MW) and the power purchase contract with M-S-R (105 MW) are excluded from the NMPSC jurisdictional rates.

(See "ELECTRIC OPERATIONS Sources of Power" and "RATES AND REGULATIONElectric Rate Case" under PART I, ITEM 1. "BUSINESS".) The Com-pany is dependent on the wholesale power market for the recovery of its investment in this excluded capacity.

The off-system markets for contracted sales to utilities and for economy energy are highly compet-itive. The Company has contracted to sell, and continues to market, power at prices which recover variable costs and a portion of the fixed costs of its excess capacity. Remaining energy produced by excess capacity is then sold in the economy energy market at prices which average only slightly above 31

f I

1 I

I

incremental operating costs. An April 12, 1990 NMPSC order provides that as long as there is excess capacity in the Company's jurisdictional rates, then that excess capacity will share off-system sales equitably with the capacity excluded from NiVIPSC jurisdictional rates.

During 1991, the Company's sales in the off-system markets accounted for approximately 33.8 per-cent of its total KWh sales and approximately 15.4 percent ofits total revenues from energy sales. The net operating loss for the Company's excluded capacity was $17.3 million in 1991. The Company expects contracts with APPA and AEPCO, under which sales began in June 1991 (see PART I, ITEM 1. "BUSINESS ELECTRIC OPERATIONS Power Sales" ), to have a positive impact (approximately 3 cents and 5 cents per common share in 1991 and 1992, respectively) on the Company's results of operations.

On March 1, 1992, the Company began service pursuant to a three-year off-system sales agreement with the Imperial Irrigation District in Southern California. The agreement which extends through 1995 provides for 56 MWof power in each month and an additional 25 MWof power in the months of Aprilthrough October each year. The sale willfurther reduce the Company's excess capacity and positively impact the Company's results of operations. However, the Company's ability to market its excluded capacity will continue to be under pressure as a result of both price competition and limited transmission availability.

The Company expects price competition in the wholesale market to continue to be intense due to the availability of surplus capacity from other utilities, projected natural gas fuel prices and the existence of cogeneration, independent power producers and self-generation as competing energy sources. The on-going recession, the availability of hydro power and the abundance of inexpensive natural gas have had a negative effect on the Company's ability to market its excess power. The Company expects the supplies of lower-cost natural gas to be available for some time, as a result of tax credits on coal-seam gas, increased use of gas storage, and recently-increased ability to transport natural gas to markets in which the Company competes for off-system sales. The use of lower-cost natural gas in intermediate and peaking power generation has established a new ceiling for wholesale electric prices. The Company's market assessments indicate that other southwestern and western utilities willhave increasing requirements for capacity and energy 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 willcontinue to be downward pressure on near-term wholesale power prices.

Given its reliance on coal and nuclear fuel for electric generation for base load, the Company expects that off-system sales will continue to be negatively affected. The Company is assessing its future course of action to regain competitiveness in the wholesale electric power markets and is reviewing its cost structure and its fuel and electricity generation resource mix based on its customers needs. The Company has marketed a portion of its interest in SJGS Unit 4. (See "Sale of 50 MW of 8JGS Unit4".) In addition, the Company is currently evaluating the market for its interest in PVNGS Unit 3. Initialindications are that ifthe Company's interest in PVNGS Unit 3 were to be sold, the sales price would be significantly below book value. However, the Company believes that ifit continues to own its interest in PVNGS Unit 3, it will be able to recover its costs and investment, on an undis-counted basis, through sales of power from the unit. Once the market evaluation is completed, the Company willevaluate the results, and consider whether or not to pursue selling its interest in PVNGS Unit 3.

The Company considers its potential market for wholesale power sales to be defined generally by those entities interconnected within the WSCC. The Company's ability to sell its power within the WSCC has been enhanced for short-term sales by the WSPP experiment. The WSPP has allowed for market level pricing and negotiated transactions for transmission services. Orders issued on April 23, 1991 and June 27, 1991 by the FERC allow the WSCC experiment's concept to continue with certain cost-based price ceilings, under a permanent agreement.

"Environmental externalities" is a subject of discussion before regulatory bodies throughout the United States, and of particular note to the Company, in California. As a result, a competitive pricing disadvantage could be imposed on the energy produced by fossil-fueled generators, affecting the

'1 I

1 l

J 1

II f

I

Company's off-system sales strategies.

The Company is currently unable to predict the ultimate outcome of these discussions, but has taken an active position as an intervenor, opposing any penalty on existing generation resources which meet all applicable environmental regulations.

Technical limitations and jurisdictional service concerns ofother utilities in the WSCC have made and are making long-term transmission service commitments difficultto obtain. Environmental, tech-nical and economic constraints combine to make the construction of new transmission facilities also difficult.

The Company currently provides transmission services to other utilities operating within New Mexico. The Company's abilityto continue or expand these services in northern New Mexico depends, in part, on the completion of OLE. (See "The Retail Electric Market".)

Sale of 50 MW of SJGS Unit 4 On April26, 1991, the Company executed a purchase and participation agreement with the City of Anaheim, California to sell a 10.04% (50 MW) undivided ownership interest in SJGS Unit 4 for approximately $55 million.The Company filed a request with the NMPSC in August 1991 for decertifi-cation of the 50 MW of SJGS Unit 4 for the anticipated sale.

'n January 1992, the Company reached a stipulated agreement with the NMPSC StafF and intervenors which approves this sale and the decertification of 130 MWofSJGS Unit4. The stipulation requires, among other things, the Company to pass through to New Mexico ratepayers $1 millionofthe estimated $8.6 millionafter-tax gain from the sale and allows the Company to retain any gain on future sales ofthe remaining 80 MW.The stipulation also provides that the cost per installed KWfor the next 130 MW of supply-side resource added by the Company before December 2002 can not exceed the depreciated book value of SJGS Unit 4 plus $175 per KW. The stipulation is subject to NMPSC approval and a decision from the NMPSC is expected in the second quarter of 1992.

The closing ofthis sale is currently anticipated in the third quarter of 1992. In addition to the gain from the transaction, the Company estimates that the transaction would have a positive impact on the Company's future results of operations through avoided operating costs.

The Retail Electric Market Albuquerque Franchise Issue The Company's non-exclusive electric service franchise with the City of Albuquerque (the "City") expired in early 1992. The franchise agreement provided for the Cit Company's use of City property for electric service rights-of-way. The Company's facilities loc ted i y property account for less than 20% ofthe total distribution equipment within the geographic area.

The Company continues service to the area, which contributed 45.4% of the Company's total 1991 electric operating revenues. The Compariy willtake vigorous action to protect the value of its distribu-tion system in the City franchise area.

In a municipal election held on November 1, 1989, voters approved an amendment to the City' charter that provides that the City has no power to grant or extend any franchises, licenses or other rights to 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 charter provision also provides that the total term of any franchise willnot exceed 25 years. The City has conducted studies on alternatives available to it, including municipalization of the Company's distribution system, the viabilityof other alternatives, and the methods that may be available to implement the charter provision.

The Company continues to challenge the charter provision. In December 1990, the Company filed with the NMPSC a petition for a declaratory order regarding inconsistencies between the charter provision and the NMPSC's exclusive jurisdiction over public utilityrates and service areas under state law. In November 1991, the NMPSC issued an order concluding, among other things, that the City could bid for services to its own facilities, but not for service to other customers. In reaching this conclusion, the NMPSC noted that New Mexico law reflects a legislative choice to vest the NMPSC with exclusive control over utility rates and services. The NMPSC also noted that the Company's obligation to serve its customers in Albuquerque willcontinue irrespective of whether the municipal franchise is renewed. The City has appealed the NMPSC's order to the New Mexico Supreme Court.

33

I 1

f I

Representatives of the Company and the City have met in attempts to resolve the franchise renewal issue. While the Company cannot predict the ultimate outcome of the issue, it currently believes that such outcome willnot have a material adverse effect on the Company's financial condition or results of operations. The failure to obtain a franchise renewal may make itmore diScult for the Company to serve customers in the Albuquerque area by potentially requiring the Company to obtain right-of-way permits on a case-by-case basis for line extension or maintenance work on property owned by the City. The lack of a franchise renewal may also have adverse implications regarding the Company's provision of service to some portion of the City's municipal loads. In 1991, Albuquerque municipal loads generated approxi-mately $17 millionin annual revenue. However, the Company believes the absence ofa franchise does not change its right and obligation to serve those customers under state law. The Company's transmission and distribution facilities are the only existing facilities which could be used to provide service to customers in the franchise area. Ifthe City were to pursue condemnation of the Company's system, the Company believes the City would have to compensate the Company for the fair value for all assets deployed to serve the Albuquerque area. The Company believes that municipalization, which would require voter approval, is not an economically viable alternative for the City.

OLE Transmission Project In May 1984, the Company's Board of Directors approved plans to construct OLE, a 345kV transmission line connecting the ezisting Ojo 345kV line to the existing Norton Station. The Company had spent approximately $10 million on OLE as of December 31, 1991, and it currently estimates that project costs willtotal approximately $47 million. OLE is designed to provide a needed improvement to the northern New Mexico transmission system and to allow greater delivery of power from SJGS, Four Corners and PVNGS into the Company's two largest service territories, the greater Albuquerque area and the Santa Fe/Las Vegas area. The timing of the project, currently sched-uled for completion in April1994, is important since the existing transmission system limits the amount of additional retail load that can be reliably served. However, OLE faces considerable opposition by persons concerned primarily about the environmental impacts of the project.

The Company has obtained right-of-way permits from two of the three Federal agencies having authority over the lands involved in the project. AFederal district court has upheld the record ofdecision on the OLE environmental impact statement, but opponents have appealed to the United States Court of Appeals for the Tenth Circuit. The Company ezpects that the Tenth Circuitwillrule in the third quarter of 1992. On March ll, 1991, the Company filed for the NMPSC approval for construction of OLE.

Although the NMPSC StaK generally supports the project, several opposing parties have intervened in the case. Hearings are scheduled to begin in April1992, and the Company expects the NMPSC willissue its decision in the third quarter of 1992.

Coal Sales Agreement The Company is party to a Coal Sales Agreement with SJCC, a subsidiary of BHP-Utah Interna-tional Inc., under which SJCC is required to provide all of the coal required by SJGS. The agreement expires in 2017 and contains minimum take provisions and a pricing mechanism that includes elements for capital improvements and operating cost reimbursement.

The Company is concerned that the terms of the agreement and SJCC's interpretation of its provisions, particularly with respect to the capital investment element, causes energy produced from coal mined thereunder to become less and less competitive in the wholesale power market compared to energy produced from abundant supplies of inexpensive natural gas.

(See "Wholesale Power Market".) In addition, the Company established a goal for NMPSC jurisdictional base rates to be in the lowest one-third of regional competitors. ICeeping coal costs competitive must therefore be one of the Company's major strategic objectives. The Company has begun negotiations with SJCC to reform the agreement, with the goal of raising productivity, reducing minimum take obligations, and including incentives and escalation factors which would keep coal delivered under the agreement competitive with natural gas.

The Company has also notified SJCC that it is paying the current invoices for coal delivered under protest.

While the Company believes that maintaining the competitiveness ofpower generated by SJGS is of material importance because in excess of 50% of its total electricity supply is generated by SJGS, there can be no guarantee as to a favorable outcome of the discussions with SJCC.

Gas Litigation and Regulatory Issues In 1989, 1990 and 1991, GCNM and Gathering Company settled litigation involving substantial claims relating to gas purchase contracts. Even though numerous claims relating to natural gas contracts have been settled and those contracts reformed or terminated, and no significant new claims were asserted in 1991, GCNM and Gathering Company are still disputing claims by certain natural gas producers relating to take-or-pay obligations, contract, pricing and other matters.

(See PART I, ITEM3. "LEGALPROCEEDINGS NATURALGAS SUPPLY LITIGATION".)In a case filed on September 21, 1990, the Company seeks NMPSC approval to recover $68 millionofcosts arising from the settlement of certain contract claims. At issue in this proceeding are (i) GCNM's allocation of costs between take-or-pay claims and MDL-contract claims and (ii) the prudence ofcosts relating to the latter.

On March ll,1992, the hearing examiner in the case issued a recommended decision which, ifadopted by the NMPSC, would allocate to take-or-pay claims all costs GCNM had previously allocated to MDL-contract, claims and would allow GCNM to recover approximately $57.3 million. (See PART I, ITEM1.

"BUSINESS RATES AND REGULATIONNatural Gas Supply Matters".)

In 1989 and 1990, the Company provided a reserve in its financial statements for losses arising from natural gas contract disputes, considering the anticipated regulatory treatment. The Company reevalu-ates periodically the adequacy of the reserve and made an additional provision in 1991. The reserve is based on (a) consultations with counsel with respect to pending litigation, taking into account the Company's past experience in resolving natural gas contract claims, (b) the amounts of the settlements the Company has achieved to-date, and (c) the amounts the Company believes are recoverable under a 1989 NMPSC order. GCNM is contesting the March ll, 1992 recommended decision, which itbelieves, is inconsistent with both the evidence presented in the case and the express provisions of the 1989 order. If the NMPSC adopts the recommended decision, a further adjustment of the Company's reserve would be required. Hoivever, the Company currently believes itis unlikelythat the pending regulatory proceedings or the remaining disputes with natural gas producers willhave a material adverse impact on the Com-pany's future financial condition or results of operations.

Tucson Electric Power Company and Century Power Corporation The Company operates and jointlyowns SJGS, in which Tucson and Century have certain ownership interests. In July 1991, a group ofTucson's creditors in Tucson's sale and leaseback transactions filed an involuntary petition for reorganization of Tucson under Chapter 11 of the United States Bankruptcy Code. A similar petition was filed against Century. On December 31, 1991, the United States Bankruptcy Court for the District of Arizona dismissed, without prejudice, the pending involuntary petition for the reorganization ofTucson under Chapter 11. In addition, Tucson has been granted rate reliefand is in the process of restructuring its financial obligations.

Tucson transferred its 50% ownership interest in SJGS Unit 3 to Alamito Company (currently known as Century), then a wholly-owned subsidiary of Tucson, in 1984. Alamito Company was subse-quently spun offby Tucson. In September 1991, Century informed the Company that Century's 178 MW power sale contract with SDG&E was not renewed and would expire on December 31, 1991 and that the loss of this contract might cause Century to be unable to meet its obligations under the SJGS operation agreement.

Since this time, however, it is the Company's understanding that Century has executed a

short-term agreement with SDG8-E to purchase at least Century's minimum generation requirement from SJGS Unit 3 through May of 1992, with possible extensions thereafter. The Company believes that Tucson is ultimately liable for Century's SJGS obligations under the original contracts executed prior to the transfer ofownership from Tucson. Century's share ofSJGS obligations is approximately $3.2 million per month. The Company understands that Tucson and Century have reached an agreement whereby, after December 1, 1992 and through 1996, Tucson would advance funds on Century's behalf directly to the Company (as the operating agent of SJGS) for costs and expenses associated with Century's owner-ship share of SJGS Unit 3. Such advances are not to exceed $45 million in the aggregate or $15 millionin any one year.

The Company believes that the current financial difficulties of Tucson and Century willnot 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 35

I 1

I j

1

plant operating agreement and joint and several liabilitywith Tucson under the coal supply agreement.

The Company bases its belief on its understanding that (1) Tucson would have an on-going need for and 2a power and that SJGS is one ofTucson's least expensive resources, (2) Tucson's interests 'JGS U ts 1 are in its rate base, (3) Tucson is ultimately liable for Century's SJGS obligations and (4) the best way to maintain SJGS's value in the market place would be to keep it operational.

El Paso Electric Company The Company owns or leases a 10.2% interest in P VNGS and owns a 13.0% interest in Four Corners Units 4 and 5, which are operated by APS. El Paso owns or leases a 15.8'nterest in PVNGS and owns a 7.0% interest in Four Corners Units 4 and 5.

On January 8, 1992, El Paso filed a voluntary petition to reorganize under Chapter llofthe United States Bankruptcy Code. Pursuant to an agreement among the participants in PVNGS and an agreement among the participants in Four Corners Units 4 and 5, each participant is required to fund its proportion-ate share of operation and maintenance, capital, and fuel costs of PVNGS and Four Corners Units 4 and 5, APS estimates El Paso's total monthly share of these costs to be approximately $9 million for P

NGS and $ 1 millionfor Four Corners Units 4 and 5. The agreements provide that ifa participant fails to meet its payment obligations, each non-defaulting participant shall pay its proportionate share of the payments owed by the defaulting participant. On February 13, 1992, the bankruptcy court'approved a

stipulation between El Paso and APS, as the operating agent of PVNGS, pursuant to which EI Paso agreed to pay its proportionate share of all PVNGS invoices delivered to El Paso after February 6 1992.

Eip E Paso agreed to make these payments until such time as an order is entered by the bankruptcy court, if I

ever, authorizing or directing El Paso's rejection of the participation agreement governing the relations among the PVNGS participants. As long as El Paso continues to make these payments, APS and the other PVNGS par tici'pants have agreed not to filea motion prior to December 31, 1992; seeking a deadline for the assumption or rejection of the participation agreement. IfEI Paso defaults, APS.and the other participants may take steps to pursue other available remedies. The stipulation also 'specifies that approximately $9.3 millionofEl Paso's PVNGS payment obligations invoiced prior to February 7, 1992, are to be considered "pre-petition" general unsecured claims of the other PVNGS participants. The Company paid $1.1 millionas its proportionate share of the pre-petition obligation. In addition, El Paso as unpaid invoices for the Company's transmission services and economy energy deliveries of approxi-mately $.6 million which is considered to be a pre-petition amount. The Company cannot, currently predict the outcome of this matter. However, the Company is participating in the El Paso bankruptcy proceedings. The Company consults on an on-going basis with its counsel, as, well as with APS, the PVNGS and Four Corners operating agent, concerning the proceedings and continues to evaluate the potential impacts of the El Paso bankruptcy.

Shareholder Litigation Th C

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

(See PART I, ITEM 3. "LEGALPRO-CEEDINGS SHAREHOLDER LITIGATION".)

In early 1992, the respective courts entered orders staying proceedings in this shareholder litigation and appointing Honorable Harry R. McCue, United States Magistrate Judge for the Southern District of California, to act as a settlement judge. Following extensive discussions conducted by Judge McCue, the parties agreed in principle to settle all of the litigation. The Company's directors'nd officers'iability insurance carriers would fund the $33 millionsettlement amount, of which the Company would receive

$3 million as partial reimbursement of litigation-related'xpenses.

On March 3, 1992, Judge McCue

l l

, I I

I I

1

approved an agreement in principle, which would settle the class action and derivative lawsuits brought against the Company and each ofthe other named defendants. Final settlement of the litigation requires approval by the respective courts.

In 1990, the Company made a provision for the estimated cost of defending shareholder lawsuits. In 1991, the Company recorded additional provisions for costs itincurred in excess of the reimbursement to be received in the settlement.

Postretirement Benefits In December 1990, the FASB issued Statement of Financial Accounting Standards

("SFAS")

No. 106, Employers'ccounting for Postretirement Benefits Other than Pensions, effective for fiscal years beginning after December 15, 1992. The Company plans to adopt SFAS No. 106 effective January 1, 1993. 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 Company's study on the adoption of SFAS No. 106 indicates that its unrecognized postretirement benefit obligation as of January 1, 1993 would be approximately $37.3 million which would be amortized over a 20-year period and that in the firstyear the expense would be approximately

$5.6 million as compared to an estimate of $1.5 million on a pay-as-you-go basis. The Company is evaluating various funding alternatives in an effort to reduce the additional benefit expense. In addition, the Company has been notified that its portion of other postretirement benefits for PVNGS is antici-pated to increase about $1.2 million. Although the Company has discussed with the NMPSC Staff the impact ofSFAS No. 106 and believes that this additional expense is reasonable and should be recoverable from the ratepayers, the Company has not requested a ruling on the rate treatment of the additional expense. The Company is currently unable to predict the ultimate effect on the Company's financial condition and results of operations since it is unknown ifthis additional expense willbe recovered from the ratepayers.

Transaction Privilege Tax In 1991, the Company was verbally notified by the Arizona Department of Revenue ("DOR") that the DOR plans to issue an audit fin'ding that additional transaction privilege (sales) tax is due on the lease payments associated with the Company's sale and leaseback transactions of PVNGS Units 1 and 2. The Company currently pays transaction privilege tax based on approximately 9% ofthe payments which are classified by the Company as payments for leases of real property.

The DOR has indicated that the preliminary assessment will classify and tax 100% of the leased pioperty as real property. The Company does not agree with DOR's position, and will appeal DOR's findings, ifnecessary. Ifthe lease payments are classified entirely as leases ofreal property, the amount of tax due would be approximately $14 million in tax and interest from January 1, 1988 through Decem-ber 31,"1991 and approximately $4.2 millionin tax per year thereafter. The Company does not agree with DOR's position, and will appeal DOR's findings, if necessary.

Under the terms of the PVNGS lease agreements, the Company is liable for all transaction privilegetax due on the lease payments.

The Company has recorded no provision for this potential tax assessment.

Purchase of Beneficial Interests in PVNGS Leases As of February 7, 1992, the Company entered into a purchase agreement, subject to NMPSC approval, whereby the Company would purchase approximately 22% of the lessors'nterests in the PVNGS Units 1 and 2 leases for approximately $17.5 million in cash. While legally the leases would remain in effect, for accounting purposes, this transaction would be recorded as a purchase. Accordingly, the Company would record approximately $158.8 millionas utilityplant and $141.3 millionas long-term debt on the Company's consolidated balance sheet and reduce the annual operating lease commitments by approximately $ 18.2 million.It is anticipated that for regulatory purposes these would continue to be classiTied as operating leases and the lease costs would continue to be recovered in rates. The Company is proposing to reduce rates by $1.8 millionbeginning in 1999 through the remainder ofthe lease term. The transaction, as proposed in the NMPSC filing,would reduce net earnings in the years 1992 through 1996 by $1.9 million, $1.1 million, $.8 million, $.5 million and $.2 million, respectively, and gradually increase net earnings thereafter over the remainder lease terms. On February 21, 1992, the Company filed a case with the NMPSC for approval of this purchase.

37

1 1

j 1

ITEM 8.

FINANCIALSTATEMENTS AND SUPPLEMENTARYDATA 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 Page 38 39 40 41 42 43 62 69 70 MANAGEMENT'SRESPONSIBILITY FOR FINANCIALSTATEMENTS The management ofPublic Service Company ofNew Mexico is responsible for the preparation and presentation of the accompanying consolidated financial statements. The consolidated financial state-ments have been prepared in conformity with generally accepted accounting principles and include amounts that are based on informed estimates and judgments of management.

Management maintains a system of internal accounting controls which it believes is adequate to provide reasonable assurance that assets are safeguarded, transactions are executed in accordance with management authorization and the financial records are reliable for preparing the, consolidated finan-cial statements.

The system of internal accounting controls is'supported by 'written policies and procedures, by a staff of internal auditors who conduct comprehensive int'ernal" audits and'by the selection and training of qualified personnel.

V 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,independenceboth 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.

38

I t

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

We 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 of New Mexico and subsidiaries as of December 31, 1991 and 1990, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1991, 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.

KPMG PEAT MARWICK Albuquerque, New Mexico February 18, 1992, except as to note 12 which is as of March 3, 1992 39

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

Year Ended December 31, thpt Ipsp 1739 (In tho sunds except per shnre amounts)

Operating Revenues:

Electric (note 1)

Gas Water......

Total operating revenues Operating Expenses:

Fuel and purchased power (note 1)

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

$568,486 277,069 11,613

$567,382 302,104 11,700

$634,888 282,827 12,102 857,168 881,186 929,817 164,711 131,479 282,418 52,229 76,053 39,214 13,811 168,534 170,320 275,851 56,385 73,204 36,961 7,490 169,786 155,232 268,826 50,755 71,981 34,043 25,958 97,253 92,441 153,236 759,915 788,745 776,581 Other Income and Deductions, net of taxes (note 4):

Allowance for equity funds used during construction..

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

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

Net other income and deductions Income before interest charges 1,105 (9,666)

(8,561)

" '8,692 2,909 (19,396),.

(5,188), 2,392 (24,584)

'1 5,301 67,857'58;537 Interest Charges:

Interest on long-term debt Other interest charges Allowance for borrowed funds used during construction Net interest charges Net Earnings Preferred Stock Dividend Requirements Net Earnings (Loss) Available for Common Stock..

~..

Average Number of Common Shares Outstanding Net Edarnings (Loss) per Share of Common Stock Dividends Paid per Share of Common Stock....

59,928 61,176 71,572 7,608 9,697 6,283 (1,804)

(3,458)

(1,911) 65,732 67,415 75,944 22,960 9,474 442 10,002 82,593 10,456

$ 13,486

$ (9,560)

$ 72,137 41,774 41,774 41,774 3

0.32 3

(0.23) 8 1.73 0.38 See accompanying notes to consolidated financial statements.

40

I J

1 t

PUBLIC SERVICE COMPANY OF NET MEXICO AND SUBSIDIARIES CONSOLIDATED STATEMENT OF RETAINED EARNINGS (DEFICIT)

Year Ended December 31, Balance at Beginning of Year Elimination of deficit through quasi-reorganization of equity accounts (note 2)

~

~..

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

Net Earnings

~

~

~

~

~

~

~

Dividends:

Cumulative preferred stock Common stock...........................,

Balance at End ofYear'..........................

22,960 442 (9,474)

(10,002)

$60,139

$ 56,703 144,004 82,593 (10,456)

(15,874) 56,263 1991 1990 1989 (In thousands)

$46,703

$ 56,263

$(144,004)

See accompanying notes to consolidated financial statements.

41

I

PUBLIC SERVICE COMPANY OF NET MEXICO AND SUBSIDIARIES CONSOLIDATED BALANCESHEET December 31, ASSETS 1991 1990 (In thousands)

UtilityPlant, at original cost (notes 2, 3, 6, and 11):

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

Gas plant inservice.................

IVater plant in service................

Common plant in service Plant held for future use Less accumulated depreciation and amortization

$ 1,990,782 465,474 53,169 37,709 1,258 2,548,392 760,180

$1,938,243 445,814 49,946 40,085 1,258 2,475,346 697,744 Construction work in progress Nuclear fuel, net of accumulated amortization of $34,273 and $26,743.......

Net utilityplant Other Property and Investments:

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

1,788,212 75,007 42,094 1,777,602 86,127 50,732 11,040 23,494 34,534 9,869 31,146 41,015 10,705 4,105 95,707 20,141 51,929 10,756 8,094 4,588 1,365 104,053 11,008 48,013 11,499 7 775 201,437 188,301 203,048 169,932 1,905,313 1,914,461 CAPITALIZATIONAND LIABILITIES

$ 2,344,332

$2,313,709 n requirements quirements..

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 5 through 12) 208,870 469,823 60,189 738,882 59,000 26,982 786,279 208,870 469,688 46,703 725,261 59,000 45,581 790,126 13,000 157,060 120 29,517 45,976 15,000 127,516 9,214 30,918 33,946 245,673 216,594 108,173 187,541 191,802 487,516

$2,344,332 116,495 146,642 214,010 477,147

$2,313,709 1,611,143 1,619,968

• A deficit in retained earnings of $144.0 million was eliminated against additional paid-in capital through a quasi-reorganization as of January 1, 1989.

See accompanying notes to consolidated financial statements.

42

I l

I f

l

PUBLIC SERVICE COMPANY OF NET MEXICO AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOiVS Year Ended December 31,

's

~

~

o Supplemental cash flow disclosures:

Interest paid Income taxes paid (refunded)

Cash consists of currency on hand and demand deposits.

Cash Flows From Operating Activities:

Net earnings............................

Adjustments to reconcile net earnings to net cash flows from operating activities:

Depreciation and amortization............ ~...

Allowance for equity funds used during construction...

Accumulated deferred investment tax credit........

Accumulated deferred income tax..............

Write-offs due to electric regulatory order Changes in certain assets and liabilities:

Receivables......................

~...

Fuel, materials and supplies

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

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

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

Deferred credits Other......................

Other, net..................

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:

Redemptions and repurchases of pieferred 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 Period Cash at End of Year 1991

$22,960 97,226 (1,105)

(8,323) 25,539 (787)

(3,916)

(27,312) 29,592 (1,401)

(17,372)

(2,602)

(5,456) 107,043 (79,894)

(6,827) 15,878 (2,061)

(72,904)

(3,462)

(12,938)

(2,000)

(9,622)

(28,022) 6,117 4,588

$10,705

$66,200

$ 2,065 9999 9999 (I

thousands) 442 82,593 88,852 (7,063) 28,755 19,707 80,286 (2,909)

(6,475) 42,254 40,897 1,718 (49,101)

(22,549)

(1,217) 24,971 (572) 1,053 (38,000) 9,778 (33,998)

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

(10,281) 125,893 132,493 (81,290)

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

(12,081) 7,560 152,877 (81,076) 74,268 (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

$ 68,415 8

86,444

$ (52,865) 12,397 8

4,588 8

6,660 See accompanying notes to consolidated financial statements.

43

1 I

Il 1

j r

l

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CAPITALIZATION December 31, 1991 1990 Common Stock Equity (note 2):

Common Stock, par value 85 per share Additional paid-in capital Retained earnings since January 1, 1989 Total common stock equity......

Shares Current Stated Outstanding at Redemption Value December 31, 1991 Price (In thousands) 208,870 $

208,870 469,823 469,688 60,189 46,703 738,882 725,261 Cummulative Preferred Stock (note 2):

Without mandatory redemption requirements:

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

8.48% Series 8.80% Series 8100 100 100 130,000 200,000 260,000 590,000 8 102.00 13,000 13,000 103.00 20,000 20,000 103.10 26;000 26,000 59,000 59,000 With mandatory redemption requirements:

8.75% Series 12.52% Series........

Redeemable within one year 100 50 269,821 346,700 616,521 346,700 269,821 102.90 26,982 52.97.

17,335 44,317 17,335 26,982 28,246 19,668 47,914 2 333 45,581 Long-Term Debt (note 2):

Issue and Final Maturity First mortgage bonds:

1991 through 1996...........

1997 through 2001...........

2002 through 2006...........

2007 through 2011...........

2012 through 2013...........

1993 through 2013pollution 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)........

Total long-term debt.......

Less current maturities.........

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

Total Capitalization Interest Rates 4r/s%

5/s% to St/s%

7t/a% to 10'/s%

8'ls% to 9

123/s%

5.9% to 10s/4%

10% to 102/4%

variable rate 44,634 83,465

'85,038 8,655 44,972 83,977 86,003 540 437,045 437,045 650,182 661,192 786,279 790,126

$1,611,143

$1,619,968

,100,000 100,000 37,300 37,300 (1,083) 848 786,399 799,340 120 9,214 See accompanying notes to consolidated financial statements.

44

I l

t

PUBLIC SERVICE COMPANY OF NET MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS December 31, 1991, 1990 and 1989 (1) Summary of Significant Accounting Policies systems of Accounts The Company maintains its accounts for utility operations primarily in accordance with the uniform systems of accounts prescribed by the Federal Energy Regulatory Commission ("FERC") and the National Association of Regulatory UtilityCommissioners ("NARUC"),and adopted by the New Mexico Public Service Commission ("NMPSC"). As a result of the ratemaking process, the application of generally accepted accounting principles by the Company differs in certain respects from the application by non-regulated businesses.

Such differences generally regard the time at which certain items enter into the determination 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. Allsignificant intercompany transactions and balances have been eliminated.

UtilityPlant Utilityplant is stated at original cost, which includes capitalized 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 results of operations of such electric assets are included in operating income. (See note 11.)

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

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:

1991 1990 1989

, Electric plant...............................

2.90%

2.88%

2.87%

Gas plant........................

3.13%

3.13%

3.11%

Water plant 2.58%

2.68%

2.78%

Common plant.....................

6.53%

7.36%

9.54%

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 production method.

Allowance for Funds Used During Construction ("AFUDC")

As provided by the uniform systems of accounts, AFUDC, a noncasn 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 AFVDC on construction work in progress and nuclear fuel in the process of enrichment to the extent allowed by regulatory commissions.

45

}

l,'

J f

l I

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

December 31, 1991, 1990 and 1989 (1) Summary of Significant Accounting Policies (Continued)

AFUDC is computed using the maximum rate permitted by the FERC. In calculating AFUDC rates for 1990, the average short.-term debt balance exceeded the average construction work in progress balance, resulting in a zero AFUDC rate for equity funds. The total AFUDC rates used were 8.96%,

8.96% and 10.94% for 1991, 1990 and 1989, respectively, compounded semi-annually.

Fuel, Purchased Power and Gas Purchase Costs The Company uses the deferral method ofaccounting 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.

Economy Energy Sales In 1991, the Company implemented a FERC order requiring classification of economy sales as operating revenues. Previously, such sales were accounted for as a reduction in fuel and purchased power expense. Prior years amounts have been reclassified for comparability purposes.

Amortization of Debt Discount, Premium and Expense Discount, premium and expense related 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. Customers under NMPSC jurisdiction are charged currently for the tax effects of certain of these differences (normalization). However, 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.) In addition, rates subject to FERC jurisdiction allow recovery ofamounts necessary to provide additional tax normaliza-tion of the differences described above which are treated in ratemaking under the flow-through method for other customers.

Deferred income taxes are recorded to reflect tax normalization using the liability 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 accumu-lated 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 ratemaking effects of such taxes, as well as corresponding regulatory assets and liabilities, are recorded.

In February 1992, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Z'axes, which changes the conditions under which deferred tax assets may be recognized. The Company does not expect that future operating results will be significantly affected by the adoption of the new standard.

1 1

I l

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

December 31, 1991, 1990 and 1989 (1) Summary of Significant Accounting Policies (Continued)

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

Reuenues 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.

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

Cumulative Preferred Stock Common Stock Number of Aggregate Shares Par Value ivithout Mandatory Redemption Rcquircments Ivith Mandatory Redemption Rcquiremcnts Additional Aggregate Aggregate Paid-In Number Stated Number Stated Capital of Shares Value ol'hares Value 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;-;

'Redeemable within one year Balance at December 31, 1989..

Adjustments related to quasi-reorganization of equity accounts'. '.......

Redemption of preferred stock..;........ *...

Redemption within one year..

Balance at December 31, 1990..

Redemption of preferred stock Redeemable within one year..

Balance at December 31, 1991..

(Dollars in thousands) 41,774,083

$208,870 8688,392 590,000

$59,000 792,429 8 55,242 (144,004)

'32,302)

(24,767)

146, (53,232)

(3,323)

(49,837)

(2,651)

(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 41,774,083 8208,870 135

$469,828 (12,642)

{1,264)

(346,700)

(17,335) 590,000

$59,000 269,821

$ 26,982 41,774,083 208,870 487,465 590,000 59,000 689,360 49,268 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 8144'.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, Accounting for Income Taxes, effective January 1, 1989. Such adoption resulted in a direct charge to additional paid-in capital of 832.3 millionin 1989, which represents the cumulative effect of applying SFAS No. 96. This

l I

f J

I l

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

December 31, 1991, 1990 and 1989 (2) Capitalization (Continued) 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 assets and liabilities recorded as of January 1, 1989 for the purpose ofadjusting such assets and liabilities to fair value. Adjustments were made based on further evaluation of discontinued operations, provisions for settlements of gas purchase contract disputes, abandoned assets, regulatory adjustments 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.

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'he 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 of the deficit in retained earnings as of December 31, 1988. Although the implementation of the Company's quasi-reorganization, effective as of January 1, 1989, eliminated the retained, earnings deficit, the Company's board ofdirectors has not declared dividends on its common stock since January 1989. The board of directors reviews its dividend policy on a continuing basis. The payment of future dividends is dependent upon earnings, the financial condition of the Company, market requirements and other factors.

Cumulative Preferred Stock The number ofauthorized shares of cumulative preferred stock is 10 millionshares. The'earnings tests in the Company's Restated Articles of Incorporation currently limit the issuance of preferred stock (other than in connection with certain exchanges, redemption or retirements of preferred stock) and any issuance would require the consent ofthe holders of a majority ofthe shares ofpreferred stock then outstanding until such time as the earnings tests are met.

~

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. On February 10, 1992, the Company redeemed all 346,700 shares of its Cumulative Preferred Stock, 12.52% series, $50.00 stated value at a redemption price of $52.97 per share plus accrued and unpaid dividends. Accordingly, such series is shown as a current liabilityin the accompanying consoli-dated balance sheet.

Mandatory redemption requirements are $1.3 million annually for 1993 through 1996. There are no mandatory redemption requirements for 1992.

Long-Term Debt Substantially all utilityplant is pledged to secure the Company's first mortgage bonds. A portion of certain series of long-term debt will be redeemed serially prior to their due dates. The issuance of first mortgage bonds by the Company is subject to earnings coverage and bondable property provisions of the Company's first mortgage indenture. The Company has the capability under the mortgage 48

1 l

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

December 31, 1991, 1990 and 1989 (2) Capitalization (Continued) indenture, without regard to the earnings test but subject to other conditions, to issue first mortgage bonds on the basis ofpreviously retired bonds. However, the Company is unable to issue any significant amount of first mortgage bonds at this time.

The Company has a letter of credit ("LOC") from a bank which secures

$37.3 million of the Company's pollution control revenue bonds and requires either extension, reissuance, renewal, or substitution on December 4, 1992. The LOC is subject to annual extension at the sole discretion ofthe bank. It is the Company's intention to keep the bonds outstanding and to request an extension of the LOC. In addition, the Company could replace the debt with draws under its revolving credit facility, which expires on December 31, 1993 (note 3).

The aggregate amounts (in thousands) of maturities through 1996 on long-term debt outstanding at December 31, 1991, are as follows:

1992 1993 1994 1995 1996 (3) Short-Term Debt As of December 31, 1991, the Company has a $225 million revolving credit facility with major banks and $11 million in other, unsecured revolving credit. agreements. The facilityis secured through first mortgage bonds of the Company and is currently scheduled to terminate on December 31, 1993.

The facility is subject to annual extensions at the banks'ole discretion and the Company expects to request such extensions.

The facility contains 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. As,of December 31, 1991, $13 million of these commitments were being used for bank borrowings. The Company generally pays commitment fees with banks to assure availability of its credit commitments.

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

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

Current State income tax Deferred Federal income tax Deferred State incoine'tax...............

Investment tax credit carryforward Amortization of accumulated investment tax credits Total income taxes Charged to operating expenses............

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

1991 1990 (In thousands)

(436)

$21,155 4

6,611 16,494 (1,667) 2,453 (3,878)

(2,240)

(730)

(6,082)

(6,332)

$10,193

$15,159

$13,811

$ 7,490 (3,618) 7,669

$10,193

$15,159 1989

$ 5,425 (920) 26,852 6,669 (6,475)

$31,551

$25,958 5,593

$31,551

l

PUBLIC SERVICE COMPANY OF NET MEXICO AND SUBSIDIARIES iNOTES TO CONSOLIDATED FIiNANCIALSTATEMENTS (Continued)

December 31, 1991, 1990 and 1989 Federal income tax at statutory rate of 34%

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

Investment tax credits.. ~..................

PVNGS start-up and pre-operational costs.........

Depreciation of fiow-through items Gains on the sale and leaseback of PVNGS Amortization of pollution control facilities.........

Reversal of basis difference resulting from sale of investment Reversal of fiow through treatment for debt retirements and hedge transactions as ordered by the NMPSC State income tax Tax rate differential on capital loss carryback.......

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

1,328 14,043 1,582 308 3,855 2,197 327 601 (1,078)

Total income taxes.....................

$10,193

$ 15,159

$31,551 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 differences for which deferred taxes have been provided and the tax effects of each are as follows:

1991 1990 1989 (In thousands)

$ 6,380 8 (3,591) 8, 4,366 14,489 12,317 19,504 (1,932)

(1,397)

(1,776) 14,710 (2,036)

(650)

(1,880) 2,696 1,671 (6,548) 11,756 2,008 4,066 (43,606)

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

Depreciation and cost recovery..................

Contributions in aid of construction..... ~.........

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

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

~

. ~.........

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

Write-offof proposed utilityfacilities...

Net operating losses utilized (carryforward)

Reversal of Qow through treatment for debt retirements and hedge transactions as ordered by the NMPSC......

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

Total deferred taxes 14,043 (4,716) 3,912 3,137

$13,947

$ (5,545)

$33,521 (4)

Income Taxes (Continued)

The Company's provision for income taxes differed from the Federal income tax computed at the statutory rate for each of the years shown. The differences are attributable to the follosving factors:

1991 1990 1989 (In thousands) 811,272

$ 5,304

$38,809 (110)

(989)

(6,082)

(6,332)

(6,475)

(1,479)

(3,354) 2,367 1,687 1,079 (491) 1,027 (960)

(1,533)

In addition, the balance of deferred income taxes at December 31, 1991 includes amounts for temporary differences related to premiums on retirement of bonds, deferred gains on sale and lease-back transactions, settlements of gas contract disputes, deferred investment tax credits and regulatory assets and liabilities.

At December 31, 1991, the Company had net operating loss carryforwards for Federal income tax purposes of 813.0 million, $82.0 million and 862.2 million which expire in 2003, 2004 and 2005, respectively.

50

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

December 31, 1991, 1990 and 1989 (4)

Income Taxes (Continued)

The application ofSFAS No. 96 to regulated enterprises results in the creation ofregulatory assets and liabilities. At December 31, 1991 and 1990, deferred charges included regulatory assets of $69.3 million and $59.4 million, respectively, and deferred credits included regulatory liabilities of $77.1 million and $82.4 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 officers. The plan is non-contributory and provides for benefits to be paid to eligible employees at retirement based primarily upon years of service with the Company and their compensa-tion rates near retirement. The Company's policy is to fund actuarially-determined contributions.

Contributions to the plan refiect 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.

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

1991 1990 1989 Service cost............

Interest cost Actual return on plan assets Asset gain deferred (amortized)

Other..........

~

Net periodic pension cost 6,027 13,204 (35,903) 20,422 (1,130) 6,287 13,404 (2,469)

(13,930)

(1,130) 4,165 12>191 (25,360) 11,015 (1,205) 2,620 2,162 806 The followingsets forth the plan's funded status and amounts (in thousands) at December 31, 1991 and 1990:

1991 1990 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 141,246 42,176 183,422 193,729

$ 10,307 115,796 48,324 164,120 167,389 3

3,263

$ 140,600

$115,162 646 634 The components of assets in excess of projected benefit obligation (in thousands) 1991 are as follows:

1990 Net unrecognized gain (loss) from past experience different from assumed.:..........................

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

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

Accrued pension (asset) liability..................

Unrecognized prior service cost 11,634 (529)

(398)

$ 10,307 12,798 1,788 (432) 3 3,'266 (400)

$(10,885)

I

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

December 31, 1991, 1990 and 1989 (5)

Employee and Post-Employment Benefits (Continued)

The weighted average discount rate used to measure the projected benefit obligation was 8.0"7o for 1991 and 9.0% for 1990 and the expected long-term rate of return on plan assets was 9.5% for 1991 and 10.0% for 1990. The rate of increase in future compensation levels based on age-related scales was 5.0%

for 1991 and 7.0% for 1990.

Other Post-employment Benefits The Company provides medical and dental benefits to eligible retirees. Currently, retirees are offered the same benefits as active employees after refiecting Medicare coordination. The cost of providing these benefits for retirees is expensed when paid and was $ 1,139,000,

$ 1,323,000, and

$1,348,000 for 1991, 1990 and 1989, respectively.

.In December 1990, the FASB issued SFAS No. 106, Employers'ccounting for Postretirement Benefits Other than Pensions, which is effective for fiscal years beginning after December 15, 1992. The Company plans to adopt SFAS No. 106 effective January 1, 1993. SFAS No. 106 willrequire accrual of postretirement benefits (such as medical and dental benefits) during the years employees provide services. The Company's study on the adoption of SFAS No. 106 indicates that its unrecognized postretirement benefit obligation as of January 1, 1993 would be approximately $37.3 million which would be amortized over a 20-year period and that in the firstyear the expense would be approximately

$5.6 million as compared to an estimated

$1.5 million on a pay-as-you-go basis. The Company is evaluating various funding alternatives in an effort to reduce the additional benefit expense.

In addition, the Company has been notified that its portion ofother postretirement benefits for PVNGS is anticipated to increase about $1.2 million.Although the Company has discussed with the NMPSC Staff the impact of SFAS No. 106 and believes that this additional expense is reasonable and should be recoverable from the ratepayers, the Company has not requested a ruling on the rate treatment of the additional expense. The Company is currently unable to predict the ultimate effect on the Company's financial condition and results of operations since it is unknown if this additional expense will be recovered from the ratepayers.

Employee Stock Oumership 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 or accruals were made in 1990 and 1991.

(6)

Construction Program and Jointly-Owned Plants It is estimated that the Company's construction expenditures (including AFUDC) for 1992 will approximate $118 million, including expenditures on jointly-owned projects. In connection therewith, substantial commitments have been made.

The Company's proportionate share of expenses for the jointly-owned plants is included in operat-ing expenses in the consolidated statement of earnings.

I I

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

December 31, 1991, 1990 and 1989 San Juan Generating Station (Coal)

Palo Verde Nuclear Generating Station Unit 3 (Nuclear)'...............

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

$339,815

$ 38,358

$26,880 10.2%

$114,870

$ 27,357

$ 2,754 13.0%

(6) Construction Program and Jointly-Oivned Plants (Continued)

AtDecember 31, 1991, the Company's ownership interest and investments injointly-owned gener-ating facilities are:

Construction Composite Plant in Accumulated ivork in Ownership Station (Fuel Tg>e)

Service Depreciation Progress Interest (In thousands)

$826,211

$270,858

$ 2,995 51.6%

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

San Juan Generating Station The Company operates and jointly owns the San Juan Generating Station ("SJGS"). At Decem-ber 31, 1991, 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.

Both Tucson and Century have been experiencing financial diSculties. In July 1991, an involun-tary petition for reorganization of Tucson was filed. A similar petition was filed against Century. On December 31, 1991, the pending involuntary petition for Tucson was dismissed. In addition, Tucson has been granted rate relief and is in the process of restructuring its financial obligations.

Century, formerly known as Alamito Company, acquired its interest in SJGS Unit 3 from Tucson in 1984 when Century was a wholly-owned subsidiary ofTucson. The Company believes that Tucson is ultimately liable for Century's SJGS obligations under the original contracts executed prior to the transfer ofownership from Tucson. Century's share of SJGS obligations is approximately $3.2 million per month. Tucson and Century have reached an agreement whereby, after December 1, 1992 and through 1996, Tucson would advance funds on Century's behalf directly to the Company (as the operating agent of SJGS Unit 3). Such advances are not to exceed $45 million in the aggregate or

$15 million in any one year.

The Company believes that the current financial difficulties ofTucson and Century willnot have a material impact on the Company's future financial condition or results ofoperations. However, as a co-participant in and operating agent of SJGS, the Company has certain contingent obligations under the plant operating agreement and jointand several liabilitywithTucson under th'e coal supply agreement.

The Company bases its belief on its understanding that (1) Tucson would have an on-going need for power and that SJGS is one of Tucson's least expensive resources, (2) Tucson's interests in SJGS Units 1 and 2 are in its rate base, (3) Tucson is ultimately liable for Century's SJGS obligations and (4) the best way to maintain SJGS's value in the market place would be to keep it operational.

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.

53

t

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

December 31, 1991, 1990 and 1989 (6) Construction Program and Jointly-Owned Plants (Continued)

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

$200 million and the balance by an industry wide retrospective assessment program. The maximum assessment per reactor under the retrospective rating program for each nuclear incident occurring at any 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%'nterest 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 insured, 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

$2.515 billion, a substantial portion of which must first be applied to stabilization and decontamina-tion. The Company has also secured insurance against portions of any increased cost of generation or purchased power resulting from certain accidental outages of any of the three PVNGS units ifoutage exceeds 21 weeks.

The Company has a program for funding its share of decommissioning costs for PVNGS. Under this program, the Company will inake 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 certain 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. The NMPSC jurisdictional share of these decommissioning costs related to Units 1 and 2 are currently included in jurisdictional rates. The annual funding amount is subject to periodic adjustment for changes in decommissioning cost estimates and earnings ofthe trust fund. The trust balance at the end of 1991 was approximately 83.3 million, including cash surrender value of the policies. Insurance coverage at the end of 1991 was approximately $95.7 million.The Company's share of PVNGS decommissioning costs is presently estimated, in 1991 dollars, at approximately

$85.4 million.

El Paso Electric Company ("El Paso" ) owns or leases a 15.8% interest in PVNGS. On January 8, 1992, El Paso filed a voluntary petition to reorganize under Chapter 11 of the United States Bank-ruptcy Code. The operating agent ofPVNGS estimates El Paso's total monthly share ofoperating costs to be approximately $9 million for PVNGS. The PVNGS participation agreement provides that ifa participant fails to meet its payment obligations, each non-defaulting participant shall pay its propor-tionate share of the payments owed by the defaulting participant. On February 13, 1992, the bank-ruptcy court approved a stipulation between El Paso and the operating agent of PVNGS, pursuant to which El Paso agreed to pay its proportionate share of all PVNGS invoices delivered to El Paso after February 6, 1992. El Paso agreed to make these payments until such time as an order is entered by the bankruptcy court, ifever, authorizing or directing El Paso's rejection of the participation agreement governing the relations among the PVNGS participants. As long as El Paso continues to make these payments, APS and the other PVNGS participants have agreed not to file a motion prior to Decem-ber 31, 1992, seeking a deadline for the assumption or rejection of the participation agreement. If El Paso defaults, APS and the other participants may take steps to pursue other available remedies.

The stipulation also specifies that approximately 89.3 millionofEl Paso's PVNGS payment obligations

f f

I

')

f

PUBLIC SERVICE COMPANY OF NE%'EXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

December 31, 1991, 1990 and 1989 (6) Construction Program and Jointly-Owned Plants (Continued) invoiced prior to February 7, 1992, are to be considered "pre-petition" general unsecured claims of the other PVNGS participants. The Company paid $1.1 million as its proportionate share of the pre-petition obligation. The Company cannot currently predict the outcome of this matter. However, the Company is participating in the El Paso Bankruptcy'roceedings.

The Company consults on an on-going basis with its counsel, as well as with APS, the PVNGS and Four Corners operating agent, concerning the proceedings and continues to evaluate the potential impacts ofthe El Paso Bankruptcy.

(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 1991, 1990 and 1989. The minimum'payment for each of the next four years under this contract is $28.5 million annually.

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

requiring the Company to purchase interruptible power beginning in June 1991. Total payments under this contract amounted to approximately $5.6 millionin 1991. Minimum payments under the contract amount to approximately $7.0 millionfor each of 1992, 1993 and 1994. In addition, the Company willbe required to pay for any energy purchased unde'r the contra'ct. The amount ofminimum payments after 1994 willdepend on whether the Company exercises certain options to reduce its purchase obligations.

The contract with SPS also required SPS to puichase power from the Company through the end of 1989. Revenues fiom such sales accounted for approximately 11.9% of total revenues and contributed approximately $1.13 to earnings per share in 1989.

4 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 within those communities.

The Company's electric franchise in Albuquerque, covering an area which contributed 45.4% of the Company's total 1991 electric operating revenues, expired in early 1992. The failure to obtain a franchise renewal may make it more difficultfor the Company to serve customers in the Albuquerque area by potentially requiring the Company to obtain right-of-way permits on a case-by-case basis for line extension or maintenance work on property owned by the City. However, the Company believes the absence of a franchise does not change its right and obligation to serve those customers under state law. The City of Albuquerque is studying alternatives, including municipalization of the Company's distribution system. While the Company cannot predict the ultimate outcome of the franchise renewal issues, itbelieves that such outcome willnot have a material adverse efFect on the Company's financial condition or results of operations.

(8)

Lease Commitments The Company classifies its leases in accordance with generally accepted accounting principles. The Company leases Units 1 and 2 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 and 2016. Each PVNGS lease contains renewal and fair market value purchase options at the end of the base lease term.

55

, t l

I

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

December 31, 1991, 1990 and 1989 (8)

Lease Commitments (Continued)

Future minimum operating lease 1992 1993 1994 1995 1996 Later years Total minimum lease payments 32,226,331 payments (in thousands) at December 31, 1991 are:

96,346 95,759 94,771 94,674 94,619 1,750,162 Operating lease expense was approximately

$96.8 million in 1991, $96.0 million in 1990 and

$95.8 million in 1989. The aggregate minimum payments to be received in future periods under noncancelable subleases are approximately $8.6 million.

In 1991, the Company was verbally notified by the Arizona Department of Revenue ("DOR") that the DOR plans to issue an audit finding that additional transaction privilege (sales) tax is due on the lease payments associated with the Company's sale and leaseback transactions of PVNGS Units 1 and 2. The Company currently pays transaction privilege tax based on approximately 9% of the payments which are classified by the Company as payments for leases of real property.

The DOR has indicated that the preliminary assessment willclassify and tax 100% of the leased property as real property. Ifthe lease payments are classified entirely as leases of real property, the amount oftax due would be approximately $14 millionin tax and interest from January 1, 1988 through December 31, 1991 and approximately $4.2 million in tax per year thereafter. The Company does not agree with DOR's position, and will appeal DOR's findings, if necessary.

Under the terms of the PVNGS lease agreements, the Company is liable for all transaction privilege tax due on the lease payments. The Company has recorded no provision for this potential tax assessment.

As of February 7, 1992, the Company entered into a purchase agreement, subject to NMPSC approval, whereby the Company would purchase approximately 22% of the beneficial interests in the PVNGS Units 1 and 2 leases for approximately $17.5 million in cash. While legally the leases would remain in effect, for accounting purposes, this transaction would be recorded as a purchase. Accord-ingly, the Company would record approximately $158.8 million as utilityplant and $141.3 million as long-term debt on the Company's consolidated balance sheet and reduce the annual operating lease commitments shown above by approximately $ 18.2 million. It is anticipated that for regulatory pur-poses these would continue to be classified as operating leases and the lease costs would continue to be recovered in rates. The transaction is estimated to reduce net earnings in the years 1992 through 1996 by $1.9 million,$1.1 million,$.8 million,$.5 millionand $.2 million,respectively, and gradually increase net earnings thereafter over the remainder of the lease terms.

(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. GCNM and Gathering Company are vigorously defending against these claims. Certain matters have been settled and the Company intends to con-tinue active pursuit of negotiations to resolve the remaining matters. The Company has evaluated, and willcontinue to evaluate, the impact of these matters on the Company.

56

J, l

l

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

December 31, 1991, 1990 and 1989 (9) Natural Gas Proceedings, Contract Disputes and Supply Contracts (Continued)

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 matters. Under the order, the Company bears 25% of producer take-or-pay costs. The Company will be permitted to recover from its sales and transportation customers the remaining 75% of such costs over a period of years. The order allows the Company to recover 100% of take-or-pay costs assessed by interstate pipelines. The order also provides that the Company may recover all costs determined by the NMPSC to be prudently incurred or just and reasonable (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 Souther'n Union Com-pany in January 1985. On September 21, 1990, GCNM filed with the NMPSC seeking approval to recover $76 millionof costs arising from settlement of these contract, claims. Hearings on this case were held in January and February 1992. During the hearings, GCNM amended its request to approximately 868 million. A final order in this case is not expected before May 1992.

Provisions for losses arising from natural gas contract disputes were made in 1988 and 1989. In 1991, the Company made an adjustment to the provision reflecting the Company's further evaluation of claims by natural gas producers and the related regulatory environment. Based on the amounts it believes are recoverable under the December 1989 NMPSC order, the amounts of the settlements achieved and the provisions made, the Company currently believes it is unlikely that remaining disputes with natural gas producers and regulatory proceedings willhave a material adverse impact on the Company's future financial condition or results of operations.

Approximately 56% ofthe Company's 1991 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 44% of the gas supplies from all sources came from contracts which have some form of penalty associated with the failure to take the volume of gas set forth in the contract. The Company believes that the payment of any penalties not recovered from customers would not materially affect the financial condition or results of operations of the Company.

(10) Discontinuance of Non-UtilityOperations In 1988, the Company discontinued the non-utility operations of its subsidiaries. Such operations consisted primarily of fiberboard manufacturing, real estate, coal mining, telecommunications manu-facturing and financial services and were carried out by or through the Company's wholly-owned subsidiaries.

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 and 1991, additional non-utility properties were sold, and the remaining assets are expected to be sold in 1992.

During 1989, a subsidiary of the Company defaulted on obligations owed to secured creditors and such creditors subsequentl'y made claims against the Company. Although the Company denied such claims, the Company, in November 1989, entered into an agreement with the secured creditors which provided for the Company to pay damages to such creditors. The Company originally estimated that there would be no damages to be paid by the Company. Upon further evaluation, however, the Company projected damage payments of $17.8 million which were recorded in the 1989 consolidated financial statements.

The Company is entitled to recapture the damage payments from the secured creditors ifpayments are made by the subsidiary to the secured creditors. During 1991, the Company recaptured approximately $4.5 million from the secured creditors.

57

,l f

I I

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

December 31, 1991, 1990 and 1989 (10) Discontinuance of Non-UtilityOperations (Continued)

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-utility assets are not subject to prior NMPSC approval and why the resulting effect of the Company's actions has not materially and adversely affected the Company's ability to provide utility service at fair, just and reasonable rates. The formal investigation also inquired into whether the Company's actions are in compliance with other applicable law and whether sanctions should be imposed. Hearings were held on May 6, 1991 and a recommended decision in the case is pending before the hearing examiner. The Company does not believe that the ultimate outcome of the current, investigation will have a material impact on its financial condition or results of operations.

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

On April 5, 1989, the NMPSC issued an order addressing the Company's excess capacity situation which, among other things, provides for the inclusion in NMPSC jurisdictional electric rates of the Company's jurisdictional interests in PVNGS Units 1 and 2, 147 MW of SJGS Unit 4 and the power purchase contract with SPS. 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. The order states 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. Because of the conditions in the wholesale power market, the revenues generated from the sale of power and energy from the excluded resources is currently insufiicient to cover operating costs and has a significant impact on the Company's results of operations. In April 1990, the Company and the NMPSC Staff reached an agreement on the methodology, which was to be applied prospectively, for sharing off-system sales. For 1991 and May to December of 1990, selected financial information for the excluded capacity is shown below:

Operating revenues Operating income (loss)..........

Net earnings (loss).............

Net utility plant at year-end.....

~

~

1991 1990 (In thousands, except per share amounts)

$ 59,248

$ 38,076

$ (17,324)

$ (10,697)

$ (33,729)

$ (19,804)

$377,262"

$392,408 In determining the operating results ofthe excluded capacity, operating revenues were specifically assigned pursuant to the agreed-to methodology. The majority of operating expenses are specifically identified and interest charges are based on the ratio of excluded capacity ratebase to total electric ratebase.

On April26, 1991, the Company executed a purchase and participation agreement with the Cityof Anaheim, California to sell a 10.04% (50 MW) undivided ownership interest in SJGS Unit 4 for approximately $55 million. In January 1992, the Company reached a stipulated agreement with the NMPSC Staff and intervenors which approves this sale and the decertification of 130 MW of SJGS Unit 4. The stipulation requires, among other things, the Company to pass through to New Mexico ratepayers $ 1 millionofthe estimated $8.6 millionafter-tax gain from the sale and allows the Company to retain any gain on future sales of the remaining 80 MW.The stipulation also provides that the cost 58

Il f

l 1

l

PUBLIC SERVICE COMPANY OF NEQ'EXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

December 31, 1991, 1990 and 1989 (11) Regulatory Issues Electric Operations (Continued) per installed KWfor the next 130 MWofsupply-side resource added by the Company before December 2002 could not exceed the depreciated book value of SJGS Unit 4 plus $175 per KW. The stipulation is subject to NMPSC approval.

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

(12) Shareholder Litigation The Company and certain individuals who currently serve, or formerly served, as officers or directors of the Company or its subsidiaries are defendants in five class action suits brought by shareholders ofthe Company. These suits alleged 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 four lawsuits against former oilicers and directors that shareholders brought derivatively on behalf of the Company.

On March 3, 1992, a U.S. Magistrate Judge approved an agreement in principle, which would settle the class action and derivative lawsuits brought against the Company and each of the other named defendants.

The settlement provides for the establishment of a $33 million settlement fund by the Company insurers, of which the Company would receive $3 million as reimbursements for its defense costs and is subject to court approval.

In 1990, the Company made a provision for the estimated cost of defending the shareholder lawsuits. In 1991, the Company recorded additional provisions for costs it incurred in excess of the reimbursement to be received in the settlement.

59

I 1

I 4

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

December 31, 1991, 1990 and 1989 (13) Segment Information The financial information pertaining to the Company's electric, gas (see note 1) and other opera-tions for the years ended December 31, 1991, 1990 and 1989 are as follows:

Eleettle*

Gas Other Total (ln thousands) 1991:

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 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 568,486

$277,069 503,428 236,403 65,058 40,666 2,114 10,222 62,944 8 30,444 8

59,469

$ 15,452 8

54,431

$ 24,620

$11,613 6,273 5,340 1,475

$ 3,865

$ 1,132 8 6,520 567,382

$302,104 505,311 269,556 62,071

~

32,548 I973) 7,032 63,044

$ 25,516 8

57,745

$ 14,416 53,030

$ 24,499

$11,700 6,388 5,312

'1,431

$ 3,881 8 1,043

$ 6,657

$1,574,670

$297,877

$41,914 219,135 152,459 27,654

$1,793,305

$450,336

$69,566

$1,554,776

$306,655

$43,882 254,157 167,669 17,193

$1,606,933

$474,324

$61,075 857,168 746,104 111,064 13,811 97,253 76,053 8

37,571

$ 1,905,313 439,019

$2,344,332 881,186 781,255 99,931 7,490 92,441 73,204 84,236,

$1,914,461 399,248

$2,313,709 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:

634,888 489,912 144,976 20,411 124,565 8

56,129 55,334

$282,827 254,677 28,150 3,759

$ 24,391

$ 12,730

$ 20,375

$12,102 6,034 6,068 1,788

$ 4,260

$ 1,122

$ 2,580 929,817 750,623 179,194 25,958 153,236 71,981 78,289 Net utilityplant...................

$1,603,242

$287,779 Other.............. ~...........

284,314 146,085 Total assets...................

$1,637,5N

$433,664

'Includes the resources excluded from NhIPSC regulations (see note 11).

$40,824 24,761

$65,585

$ 1,931,845 455,160

$2,387,005 60

l I

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

December 31, 1991, 1990 and 1989 s

(14) Supplemental Income Statement Information Taxes, other than income taxes, charged to operating expenses were as follows:

1999 1999 1939 0n shsnssnds)

Ad valorem...

~

~

~

~

$19,809

$ 18,345

$16,473 City franchise."...... ~:

6,983 6,940 6,664 Payroll ~....':..........:.....

7,938 7,749 7,052 Other.......:-

• 4,484 3,927-3,854 Total

$33,214

$36,361

$34,043 Amortization of intangibles, royalties, and advertising costs were less than 1% of revenues in each of the above periods.'

61

I I

f 1

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES SCHEDULE VPROPERTY, PLANT AND EQUIPMENT Years Ended December 31, 1991, 1990 and 1989 Balance at Classification Beginning Additions Other Changes Balance at December 31, 1991 of Year at Cost Retirements Add Deduct End of Year (In thousands)

Utilityplant:

Electric plant in service:

Intangible........

Production Transmission......

Distribution.......

General 31,024 1,235,215 215,430 390,470 66,104 1,938,243 0 1,862 26 28,015 1,099 7,068 666 15,326 2,628 6,420 277 58,691 4,696 4 8 3,599 8

29,265 2,230

1,264,361 141 81 221,892 215 650 402,733 303 19 72,531 2,893 4,349 1,990,782 Gas plant in service:

Intangible.........

~..

Production Natural gas storage Transmission Distribution General 9,479 110,189 4,761 66,969 214,717 39,699 5,362 679 1,023 8,920 3,994 445,814 19,978 315 161 1,622 711 2,809 5

ll 515 43 645 1,093 201 14,835 111,068 4,804 68,476 223,108 43,183 2,502 11 465,474 Water plant in service:

Intangible Source of supply plant Pumping plant.........

Water treatment plant.....

Transmission and distribution General 151 7,510 2,375 4,038 33,721 2,151 39 938 27 1,975 39 75 281 190 8,729 2,402 4,038 1

35,620 2,190 49,946 3,018 75 281 1

53,169 Common plant in service:

Intangible General 18,364 21,721 1,661 4,093 7,741 356 12,284 33 25,425

. Construction work in progress Electric plant held for future use Nuclear fuel Total utilityplant.......

Non-utility property Total property, plant and equipment 40,085 5,754 8,097

33 37,709 86,127 (11,120) 1,258 77,475 9,981 2,638,948 86,302 10,687 1,269 8,019 23,696 207 75,007 1,258 47 3,117 76,367 5,723 7,511 2,699,766 665 518 11,896

$2,649,635

$87,571

$23,903

$ 6,388

$ 8,029

$2,711,662 Description of other changes Transfers between accounts......

Transfers of expired contract deposits to plant in service..

Transfers of termination fees to deferred debits Miscellaneous corrections and adjustments 8

32 $

32 496 2,685 6,356 4,816 8 6,388 8 8,029 (Continued) 62

I 1

l

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

Years Ended December 31, 1991, 1990 and 1989 Balance at Beginning Additions of Year at Cost Retircmcnts Classl61cation December 3l, 199t)

Other Changes Add Deduct Balance at End of Year Utilityplant:

Electric plant in service:

Intangible Production Transmission......

Distribution General 30,876 1,235,981 214,667 375,872 63,149 8 1,460 8,262 858 17,741 2,960 (In thousands) 357 2,429 7

1,611 317 63 8 1,018 8

31,024 15 6,614 1,235,215 2

90 215,430 151 1,683 390,470 836 524 66,104 1,920,545 31,281 4,721 1,067 9,929 1,938,243 Gas plant in service:

Intangible........

Production Natural gas storage Transmission......

Distribution.......

General 7,136 107,454 4,897 66,489 203,951 36,739 2,357

~ 3,161 700 13,140 3,856 563 56 2 373 1,316 137 475 14 136 164 1

55 9,479 110,189 4,761 66,969 214,717 39,699 426,666 23,214 4,308 612 370 445,814 Water plant in service:

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

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

Water treatment plant......

Transmission and distribution General 296 4,977 2,130 686 248 3,963

=

32,140 1,277 5,395

- 48,901 ',212 841 3

154 98 1,096.

145 2,688 75 459 1

3,147 3,222 3,293 151 7,510 2,375 4,038 331721 2,151 49,946 Common plant in service:

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

General Construction work in progress Electric plant held for future use Nuclear fuel.............

Total utilityplant.......

Non-utility property Total property, plant and equipment 18,536 28,043 46,579 67,981 16,782 88,670 2,616,124 15,370 881 367 1,248 18,159 7,955 84,069 167 1,135 6,692 7,827 428 18,384 36,764 1,590 145 63 5

2 150 65 13 122 15,218 766 5,173 29,654 15,544 18,804 18,364 21,721 40,085 86,127 1,258 77,475 2,638,948 10,687

$2,631,494

$84,236

$38,364

$20,717

$48,468

$2,649,636 Description of other changes Transfers between accounts...............

Transfers of expired contract deposits to plant in service Write-offof plant-in-service..........

Write-off of non-utility property.......

Miscellaneous corrections and adjustments

$16,335 816,335 1,515 6,245 18,200 4,382 6,163 820,717 848,458 (Continued) 63

I

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

Years Ended December 31, 1991, 1990 and 1989 Balance at Classification Beginning Additions Other Changes Balance at December 31, 1989 of Year at Cost Retirements Add Deduct End of Year (In thousands)

Utilityplant:

Electric plant in sevice:

Intangible.......

Production Transmission.....

Distribution......

General 8

12,169 1,214,366 210,984 361,772 64,845 818,364 4,270 3,092 18,040 100 8

35 1,092 32 3,162 1,889 8

378 8 30,876 18,438 1

1,235,981 669 46 214,667 143 921 375,872 114 21 63,149 1,864,136 43,866 6,210 19,742 989 1,920,545 Gas plant in service:

Intangible......

Production Natural gas storage Transmission....

Distribution.....

General 2,826 57,949 4,885 64,992 195,341 32,538 4,353 580 12 805 10,577 4,141 358,531 20,468 767 27 1,958 1,485 4,237 20 63 50,190 498 719 9

1,545 7,136 107,454 4,897 66,489 203,951 36,739 52,474 570 426,666 Water plant in service:

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

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

Water treatment plant.....

Transmission and distribution General 259 4,964 2,110 3,968 30,164 2,221 ill 13 36 6

1,988 3,209 74 16 11 47 35 50 15 296 4,977 2,130 3,963 32,140 5,395 43,686 5,363 183 50 15 48,901 Common plant in service:

Intangible........

General 14,389 27,139 3,346 527 1,735 454 C

2,536

18,536 893 62 28,043 Construction work in progress Electric plant held for future use Nuclear fuel.............

Total utilityplant.......

Non-utility property Total property, plant and equipment...........

41,528 3,873 2,189 3,429 62 !

46,579 72,401 (6,450) 21,975 77,971 10,706 5,193

. 2,030

67,981 16,782 1,238 1,245 88,670 2,480,228 77,826 18,012 82,206 463 10,339 78,963 2,881 2,616,124 144 57,104 15,370

$2,562,434

$78,289

$28,351

$79,107

$59,985

$2,631,494 Description of other changes Transfers between accounts Transfers 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 64

PUBLIC SERVICE COMPANY OF NEQ'EXICO AND SUBSIDIARIES SCHEDULE VIACCUMULATEDDEPRECIATION AND AMORTIZATION OF PROPERTY) PLANT AND EQUIPMENT Years Ended December 1991, 1990 and 1989 Description December 31, 1991 Additions Balance at Charged to Charged to Other Changes Beginning Operating Other 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......

ttVater plant in service.....

Common plant in service...

$506,490

$55,108 149,132 12,796 9;722 1,251 10,930 1,880 676,274 71,035 552

$ 4,690

$ 1,600

$2,106

$556,954 934 (207)

35 163,034 43 79 282 22 11,197 624 357 12 21 13,068 2,153 4,919 1,894 2,184 744,253 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 20,196 5,430 26,743 1,274 724,487 76,465 818

$725,305 76,465 (412)

$76,053 15,549 17,821 41

$17,862 8,019 3,194 23,899 3

$23,902 119 7,767 29 160 17,847 34,273 (1,920) 1,923 2,344 794,453 856

$1,923

$2,344

$795,309 Description of other additions and changes Depreciation and amortization of equipment charged to clearing accounts for distribution in accordance withuse....................

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.......

$ 2,272 15,549 41

$17,362 21 21 1,909 2,323

$1,923

$2,344 (Continued)

1, I

J I

PUBLIC SERVICE COMPANY OF NET MEXICO AND SUBSIDIARIES SCHEDULE VIACCUIMULATEDDEPRECIATION AND AMORTIZATION OF PROPERTY, PLANTAND EQUIPMENT (Continued)

Years Ended December 1991, 1990 and 1989 Description December 31, 1990 Additions Balance at Charged to Charged to Beginning Operating Other of Year Expenses Accounts Retirements (In thousands)

Other Changes Add Deduct 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 5,000 31,389 1,578 684,279 2,769 73 737

$687,048 73,737 (533)

$73,304 13,899 16,300 41 16,341'8,384 304 36,883

$36,883 221 1,493 3

1,105 20,196 161 26,743 1,274 2,721 15,667 724,487 14,152 16,144 818

$16,873

$31,811

$725,305 Description of other additions and changes

~

$ 2,401 13,899 41

$16,341 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 Write-offof non-utility property Miscellaneous corrections and adjustments 14,515 14,515 15,945 2,358 1,351

$16,873

$31,811 (Continued) 66

l l

I I

l

PUBLIC SERVICE COMPANY OF NET MEXICO AND SUBSIDIARIES SCHEDULE IXSHORT-TERM BORROiVINGS Years Ended December 31, 1991, 1990 and 1989 Category of Aggregate Short-Term Borrowings Balance at End of Year IVcightcd Maximum Average Average Amount Amount In(crest Outstanding Outstanding Rate at End During During thc of Year theYear, Year (Dollars in thousands)

Average Interest Rate During thc Year December 31, 1991:

Notes payable to banks December 31, 1990:

Notes payable to banks Commercial paper December 31, 1989:(1)

Notes payable to banks Commercial paper

$13,000 6.05%

$37,300

$24,324 7.63%

$15,000 8.90%

$86,750

$40,943 9.81%

$71,230

$13,401 9.11%

$19,100 9.50%

$19,100

$ 1,492 9.52%

$ 14,780 8.91%

$62,250

$18,203 9.61%

(1) Effective June 30, 1989, certain banks loans and commercial paper were reclassified as short-term debt consistent with management's current intent not to refinance by long-term credit arrangements.

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.,

68

1 l

I

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

Years Ended December 1991, 1990 and 1989 Description December 31, 1989 Additions Balance at Charged to Charged to Beginning Operating Other of Year Expenses Accounts Retirements (In thousands)

Other Changes Balance at End Add Deduct 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-utilityproperty...;...

Other

$419,827

$53,065 116,689 11,457 8,490 1,160 10,395 1,680 555,401 67,362 13,984 5,217 26,624 (724) 595,285 72,579 19,209

$614,494 72,579 (598)

$71,981 598 706 50 1,440 2,794 231 6,220 9,245 98

$9,343

$ 5,642 2,216 122 426 8,406 1,843 (2,310) 7,939 385

$ 8,324 (8) 19 17,570 1,455 31,389 1,578 17,636 2,527 '84,279 16,153 2,769

$17,636

$18,680

$687,048

$ 1,470 52 $469,266 14,231 974 139,893 9,578 1,943 27 15,005 17,644 1,053 633,742 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

$3,025 6,220 98

$9,343 16,180 16,180 1,456 2,500

$ 17,636

$18,680 67

f

'I "r

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES QUARTERLY OPERATING RESULTS The unaudited operating results by quarters for 1991 and 1990 are as follows:

Quarter Ended Itta clt 31 Junc 30 September 30 December 31 (In thousands ascent sarah rc amounts) 1991:

Operating Revenues (1)

Operating Income Net Earnings (Loss)

Net Earnings (Loss) per Share 1990:

Operating Revenues (1)....

Operating Income... ~....

Net Earnings (Loss)

Net Earnings (Loss) per Share

$248,483

$194,248

$199,156

$215,281

$ 31,429

$ 17,345

$ 25,822

$ 22,657

$ 13,249 (1,623) 8,934 2,400 0.26 (0.10) 0.16

$260,088

$201,198

$201,053

$218,847

$ 31,539

$ 16,277

$ 25,903

$ 18,722 (4,718)

(769) 8,099

$ (2,170)

(0.17)

(0.08) 0.13 (0.11)

In the opinion of management of the Company, all adjustments (consisting of normal recurring accruals) necessary for a fairstatement ofthe results ofoperations for such periods have been included.

(1) In 1991, the Company implemented a FERC order requiring classification of economy sales as operating revenues. Prior period amounts have been reclassified for comparability purposes.

69

f I

l l

PUBLIC SERVICE COMPANY OF NET MEXICO AND SUBSIDIARIES COMPARATIVEOPERATING STATISTICS 1991 1990 1989 1988 1987 Electric Service Energy Sales ICWh (in thousands):

Residential...............

Commercial Industrial..............

~

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

Electric Revenues (in thousands):

Residential..............

Commercial Industrial...............

Other ultimate customers.....

Total revenues to ultimate customers..............

Sales for resale Total revenues from energy sales Miscellaneous electric revenues...

Total electric revenues.......

Customers at Year End:

Residential Commercial Industrial Other ultimate customers Total ultimate customers Sales for Resale.......

Total customers......

155,162 $

147,059 141,465 140,731 136,194 207,929 200,041 192,273 187,800 17/9,653 67,031 66,351 64,519 62,401 56,534 14,472 14,054 15,387 13,931 15,161 444,594 427,505 413,644 107,636 122,431 204,763 552,230 549,936 618,407 16,256 17,446 16,481 404,863 387,542 202,197 176,462 607)060 564,004 12,369 8,348 568,486 567,382 634,888 619,429 572,352 264,425 259,546 254,864 250,076 244,427 31,666 31,295 31,402 31,024 29,882 385 392 393 390 399 499 454 415 376 332 296,975 291,687 33 34 287,074 281,866 275,040 33 30 27 297,008 291,721 287,107 281,896 275,067 1,606,993 1,575,622 1,527,108 1,493,009 1,448,989 2,299,213 2,270,380 2,203,037 2,097,277 2,003,735 1,025,420 999,823 961,251 899,508 7(87,901 208,328 203,005 218,196 194,794 207,173 5,139,954 5,048,830 4,909,592 4,684,588 4,447,798 3,091,541 3,497,506 3,832,016 4,130,369 3,006,599 8,231,495 8,546,336 8,741,608 8,814,957 7,454,397 1,591,000 1,591,000 1,591,000 1,591,000 1,461,000 1,018,000 1,051,000 1,006,000 956,000 916,000 1.3696 $

1.3384 1.3445 1.2460 1.2894 11,086 11,181 11,034 11,146 11,526 Note:

In 1991, the Company implemented a FERC order requiring classification of economy sales as operating revenues. Prior period amounts have been reclassified for comparability purposes.

Reliable Net CapabilityICW.......

Coincidental Peak Demand ICW..

~..

Average Fuel Cost per MillionBTU BTU per KWh of Net Generation YVater Service Water Sales-Gallon (in thousands)...

2,996,587 3,001,391 3,179,711 2,726,666 2,683,961 Revenues (in thousands).........

11,613 $

11,700 $

12,102 10,816 10,973 Customers at Year End.......... '1,522 21,134 20,565 19,713 19,448 70

j f

I i

l i

PUBLIC SERVICE COMPANY OF NE%V MEXICO AND SUBSIDIARIES COMPARATIVEOPERATING STATISTICS (Continued) 1991 1990 1989 1988 1987 Gas Service Gas Throughput Decatherms (in thousands)

GCNM:

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

~

~.

~

~

~

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

~..

~

~

~

~

~

~

Brokerage....

~

~

~

~

GCNM sales Transportation throughput...........

GCNM throughput................

Gathering Company:

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

Total gas throughput 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 26,237 11,375 766 4,951 1,374 1,357 46,060 38,976 25,190 11,344 1,278 5,300 1,780 3,539 48,431 31,717 23,253 10,730 1,478 5,492 2,010 4,557 776 48,296 16,041 24,692 11,460 1,726 6,206 1,440 2,667 879 49,070 9,133 24,510 11,359 2,196 6,811 1,402 1,211 2,796 50,285 5,149 85,036 80,148 64,337 58,203 55,434 1,624 23,631 8,112 10,785 11,081 3,597 110,291 99,045 79,015 58,203 '5,434 8137,436 46,676 2,754 17,711 4,495 3,848 212,920 13,386 9,062 8137,633 49,575 4,993 20,392 5,934 7,253 225,780 10,246 8,292 8130,130 47)876 5,693 21,757 7,001 9,874 1,378 223,709 6,788 5,948 8122,592 45,235 6,063 22,289 4,546 6,969 1,514 209,208 4,841 9,742 8114,164 42,120 8,102 22,729 3,781 3,819 5,213 199,928 4,315 6,391 235,368 244,318 236,445 223,791 210,634 1,771 3,611 30,500 5,819 13,880 1,693 39,086 3,127 19,810 830 25,294 448 320,546 29,608'2 2,153 1,043 41 312,899 29,305 81 2,125 1,224 4

40 306,604 28,949 103 2,242 1,252 7

28I 303,173 28,858 105 2,469 1,261 6

20 2

2S7,204 28,661 118 2,425 1,257 5-16 2

353,470 13 8

21 353,512 345,678 12 9

20 345,719 339,186 335,894 329,688 13 5

23 339,227 335,894 329,688

$277,069

$302,104

$282,827

$223,791

$210,634 Starting in 1989, Gas Throughput includes Gathering Company's gas throughput and Gas Revenues includes revenues of Gathering Company and Processing Company due to a change in regulatory treatment.

71

I l

I I

ITEM 9.

CHANGES INAIVDDISAGREEMENTS ON ACCOUNTING AtVDFINANCIAL DISCLOSURE None.

ITEtvl 13.

CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS Reference is hereby made to the 1992 Proxy Statement for such disclosure, if any, as may be required by this item.

K PART IV ITEM 14.

EYHIBITS, FINANCIILSTATEMENTSCHEDULES, AND REPORTS ON FORM 8-K (a) 1 ~

See Index to Financial Statements under Item 8.

(a) 2.

The following consolidated financial information for the years 1991, 199Q, and 1989 is submitted under Item 8.

Schedule V Property, plant and equipment.

Schedule VI Accumulated depreciation and amortization of property, plant and equipment.

Schedule IX Short-term borrowings.

All other schedules are omitted for the reason that they are not applicable, not required or the information is otherwise supplied.

(a) 3-A.

Exhibits Filed:

Exhibit Description 3.2 Bylaws of Public Service Company of New Mexico With All Amendments to and Including December 3, 1991.

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

Amendments No. 1 through No. 6 to Arizona Nuclear Power Project Participation Agreement.

Coal Sales Agreement executed August 18, 198Q among San Juan Coal Company, the Company and Tucson Electric Power Company, together with Amendments No. One, Two, Four, and Six thereto.

10.3 10.8.1 PART III ITEM 10.

DIRECTORS AND EYECUTIVLOFFICERS 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 28, 1992 (the "1992 Proxy Statement" ) and to PART I, SUPPLEMENTAL ITEM"EXECUTIVEOFFICERS OF THE COMPANY".

ITEtVI 11.

EXECUTIVECOMPENSATION Reference is hereby made to "Executive Compensation" in the 1992 Proxy Statement.

ITEM 12.

SECURITY OIVNERSHIP OF CERTAItVBENEFICIAL OJVNERS AND MANAGEMENT Reference is hereby made to Voting Information" and "Election of Directors" in the 1992 Proxy Statement.

72

I

Exhibit No.

10.9.2 10.10 10.25.1 10.37 10.38 10.39 10.40 Description Amendment No. Five to Coal Sales Agreement dated May 29, 1990 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.

Description of Medical Reimbursement Plan Amendment.

Executive Retention Plan.

Stipulation in the matter of the application of Public Service Company of New Mexico for NMPSC approval to sell a 10.04% undivided interest in San Juan Generating Station Unit 4 to the City of Anaheim, California, and for related orders and approvals.

Purchase agreement dated February 7, 1992 between Burnham Leasing Corporation and Public Service Company of New Mexico.

Director Restricted Stock Retainer Plan.

(a) 3-B.

Exhibits Incorporated By

Reference:

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

Exhibit No.

Description Filed as Exhibit File No.

Articles of Incorporation and By-laws 3.1 Restated Articles of Incorporation of the Company, as amended through May 10, 1985.

Instruments Defining the Rights of Security Iiolders, Indenture of Mortgage 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, together with the Ninth Supplemental Indenture dated as of January 1, 1967, the Twelfth Supple-mental Indenture dated as of Septem-ber 15, 1971, the Fourteenth Supple-mental Indenture dated as of Decem-ber 1, 1974 and the Twenty-second Supplemental Indenture dated as of October 1, 1979 thereto relating to First Mortgage Bonds of the Company.

4-(b) to Registration Statement No. 2-99990 of the Company.

Including Indentures 4-(d) to Registration Statement No. 2-99990 of the Company.

2-99990 2-99990 73

I

Exhibit iso.

4.2 4.3 Description Portions of sixteen supplemental inden-tures to the Indenture of Mortgage and Deed of Trust dated as of June 1, 1947, between the Company and The Bank of New York (formerly Irving Trust Com-pany), as Trustee, relevant to the decla-ration or payment of dividends or the making of other distributions on or the purchase by the Company of shares of the Company's Common Stock.

Agreement of the Company pursuant to Item 601(b)(4)(iii) of Regulation S-K.

Filed as Exhibit:

4-(e) to Registration Statement No. 2-99990 of the Company.

4-C to Annual Report of the Registrant on Form 10-K for fis-cal year ended December 31, 1983.

File iso.

2-99990 1-6986 Material Contracts 10 10.1.1 10.2 10.4 10.4.1 10.5 Supplemental Indenture of Lease dated as of July 19, 1966 between the Compa-ny and other participants in the Four Corners Project and the Navajo Indian Tribal Council.

Amendment and Supplement No. 1 to Supplemental and Additional Indenture of Lease dated April 25, 1985 between the Navajo Tribe of Indians and Arizo-na Public Service Company, El Paso Electric Company, Public Service Com-pany of New Mexico, Salt River Project Agricultural Improvement and Power District, Southern California Edison Company, and 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.

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

Amendatory Contract between the Unit-ed States and the Company dated Sep-tember 29, 1977 for furnishing water.

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

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

10.1.1 to Annual Report of the Registrant on Form 10-K for fis-"

cal year ended December 31, 1985.

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

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.

2-26116 1-6986 2-35042 2-41010 2-60021 2-44425

j I

Description 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 Agree-ment between the Company and Tucson Gas & Electric Company, executed De-cember 21, 1973.

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 De-cember 21, 1973.

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

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

Arizona Nuclear Power Project Partici-pation Agreement among the Company and Arizona Public Service Company, Salt River Project Agricultural Improve-ment and Power District, Tucson Gas &

Electric Company and El Paso Electric Company, dated August 23, 1973.

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

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

Filed as Exhibic 10.5.1 to Annual Report. of the Registrant on Form 10-IC for fis-cal year ended December 31, 1985.

10.5.2 to Annual Report of the Registrant on Form 10-K for fis-cal year ended December 31, 1985.

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

10.6.1 to Annual Report of the Registrant on Form 10-K for fis-cal year ended December 31, 1985.

10.6.2 to Annual Report of the Registrant on Form 10-K for fis-cal year ended 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 fis-cal year ended December 31, 1985.

10.7.2 to Annual Report of the-Registrant on Form 10-K for fis-cal year ended December 31, 1985.

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

10-BB to Annual Report of the Registrant on Form 10-K for fis-cal year ended December 31, 1989.

10-JJ to Annual Report of the Registrant on Form 10-K for fis-cal year ended December 31, 1983.

File No.

1-6986 1-6986 2-50338 1-6986 1-6986 2-50338 1-6986 1-6986 2-50338 1-6986 1-6986 75

l

Exhibit i io.

10.8.4 10.8.5 10.8.6 10.8.7 10.8.8 10.9.1 10.11 10.11.1 10.12 10.13 Description Amendment No. 9 to Arizona Nuclear Power Project Participation Agreement dated as of June 12, 1984.

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

Amendment No. 11 to Arizona Nuclear Power Project Participation Agreement dated June 13, 1986 and efFective Janu-ary 10, 1987.

Amendment No. 12 to Arizona Nuclear Power Project Participation Agreement dated June 14, 1988, and e6'ective Au-gust 5, 1988.

Amendment No. 13 to the Arizona Nu-clear Power Project Participation Agree-ment dated April 4, 1990, and effective June 15, 1991.

Amendment No. Three to Coal Sales Agreement dated April 30, 1984 among San Juan Coal Company, the Company and Tucson Electric Power Company.

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

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 Incorporated County of Los Alamos.

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

Filed as Exhibit 10-JJ to Annual Report of the Registrant on Form 10-K for fis-cal year ended December 31, 1984.

10.8.7 to Annual Report of the Registrant on Form 10-EC for fis-cal year ended December 31, 1985.

10.8.8 to Annual Report of the Registrant on Form 10-EC for fis-cal year ended December 31, 1986.

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

10.8.10 to Annual Report of the Registrant on Form 10-K for fis-cal year ended December 31, 1990.

10-NN to Annual Report of the Registrant on Form 10-K for fis-cal year ended December 31, 1984 (confidentiality treatment was requested and exhibit'was not filed therewith).

10-KIC to Annual Report of the Registrant on Form 10-K for fis-cal year ended December 31, 1983.

10.11.1 to Annual Report of the Registrant on Form 10-EC for fis-cal year ended December 31, 1987.

10-00 to Annual Report of the Registrant on Form 10-K for fis-cal year ended December 31, 1984.

10-KK to Annual Report of the Registrant on Form 10-K for fis-cal year ended December 31, 1984.

76

t l

Exhibit i%0.

10.14 10.15 10.16 10.17*

10.17.1*

10.18*

10.18.1*

10.18.2*

10.18.3*

10.19 10.19.1 Description Participation Agreement among the Company, Tucson Electric Power Com-pany 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 Trust Company, as Trustee, the Company, Tucson Electric Power Company and certain financial institutions relating to the San Juan Coal Trust.

Interconnection Agreement dated No-vember 24, 1982, between the Company and Southwestern Public Service Com-pany.

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, Less-ee.

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 Novem-ber 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 Novem-ber 18, 1986, Facility Lease dated as of July 31, 1986.

Filed as Exhibit:

10-W to Annual Report of the Registrant on Form 10-K for fis-cal year ended December 31, 1981.

10-II to Annual Report of the Registrant on Form 10-K for fis-cal year ended December 31, 1983.

10-II to Annual Report of the Registrant on Form 10-K for fis-cal year ended December 31, 1982.

10.28 to Annual Report of the Registrant on Form 10-K for fis-cal year ended December 31, 1985.

10.28.1 to Annual Report of the Registrant on Form 10-K for fis-cal year ended December 31, 1985.

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

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 No-vember 25, 1986.

10.21.3 to Annual Report of the Registrant on Form 10-K for fis-cal year ended 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 No-vember 25, 1986.

Fle No.

1-6966 1-6986 1-6986 1-6986 1-6986 1-6986 1-6986 1-6986 1-6986 1-6986 1-6986 77

J t

Description Amendment No. 2 dated as of Decem-ber 11, 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, 1986, between The First National Bank of Boston, as Owner Trustee, and Public Service Company of New Mexico.

Amendment No. 1 dated as of Novem-ber 18, 1986, to Facility Lease dated as of August 12, 1986.

Amendment No. 2 dated as of Novem-ber 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, 1986, 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 Amendment to Restated and Amended Public Service Company of New Mexico Accelerated Management Performance Plan (1988). (August 30, 1988.)

Filed as Exhibit:

10.22.2 to Annual Report of the Registrant on Form 10-K for fis-cal year ended December 81, 1986.

10.22.3 to Annual Report of the Registrant on Form 10-K for fis-cal year ended December 31, 1987.

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

28.9 to the Company Current Report on Form 8-K dated:No-vember 25, 1986.

10.23.2 to Annual Report of the Registrant on Form 10-K for fis-cal year ended December 31, 1986.

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

10.24.1 to Annual Report of the Registrant on Form 10-K for fis-cal year, ended December 31, 1987.

28.9 to the Company's Current Report on Form 8-K dated De-cember 17, 1986.

10.25.1 to Annual Report of the Registrant on Form 10-K for fis-cal year ended 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.

78

l 1

j I

I I

t f

j

Exhibit Yo.

10.23.2 10.24 10.25 10.26 10.27 10.28 10.29 10.30 Description Second Amendment to Restated and Amended Public Service Company of New Mexico Accelerated Management Performance Plan (1988)(December 29, 1989).

Management Life Insurance Plan (July 1985) of the Company.

Amended and Restated Medical Reim-bursement Plan of Public Service Com-pany of New Mexico.

Republic Holding Company Series M Preferred Stock Program.

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'ew 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.)

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 Decem-ber 31, 1985.)

Decommissioning Trust Agreement be-tween 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.

Filed as Exhibit:

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

10.39 to Annual Report of the Registrant on Form 10-K for fis-cal year ended December 31, 1985.

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.

10.53 to Annual Report of the Registrant on Form 10-K for fis-cal year ended December 31, 1987.

10.54 to Annual Report of the Registrant on Form 10-IC for fis-cal year ended December 31, 1987.

10.55 to Annual Report of the Registrant on Form 10-IC for fis-cal year ended December 31, 1987.

10.56 to Annual Report of the Registrant on Form 10-K for fis-cal year ended December 31, 1987.

File No.

1-6986 1-6986 1-6986 1-6986 1-6986 1-6986 1-6986 1-6986 79

l 1

i

Exhibit No.

10.31 10.32 10.33 10.34 10.35 10.35.1 10.36 Description Executive Retention Agreements.

Supplemental Employee Retirement Agreements dated August 4, 1989.

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.

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

Amendment dated Aprilll, 1991 among Public Service Company of New Mexico, certain banks and Chemical Bank and Citibank, N.A., as agents for the banks.

San Juan Unit 4 Purchase and Partici-pation Agreement Public Service Com-pany of New Mexico and the City of Anaheim, California dated April 26, 1991.

Filed as Exhibit:

10.42 to Annual Report of the Registrant on Form 10-K for fis-cal year ended December 31, 1990.

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

10.47 to Annual Report, of the Registrant on Form 10-K for fis-cal year ended December 31, 1989.

10.48 to Annual Report of the Registrant on Form 10-K for fis-cal year ended December 31, 1989.

10.50 to Annual Report of the Registrant on Form 10-K for fis-cal year ended December 31, 1990.

19.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1991.

19.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1991.

Additio 22 28.1 28.1.1 28.1.2 nal Exhibits Certain Subsidiaries of the Registrant.

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 Inden-ture dated as of July 15, 1986, to Collateral Trust Indenture dated as of December 16, 1985.

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

22 to Annual Report of the Reg-istrant on Form 10-IC for the fiscal year ended December 31, 1990.

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

28.4 to the Company's Current Report on Form 8-IC dated July 17, 1986.

28.1.2 to the Company's Current Report on Form 8-K dated No-vember 25, 1986.

80

l 4

I

Exhibit No.

28.1.3 28.1.4 28.2'8.2.1*

28.2.2'8.3*

28.3.1*

28.3.2*

Description 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.

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 Nation-al Bank of Boston, in its individual capacity and as Owner Trustee (under a Trust Agreement dated as of Decem-ber 16, 1985 with the Owner Partici-pant), 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, in-cluding 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 Novem-ber 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 As-signment of Rents dated as of Decem-ber 16, 1985.

Supplemental Indenture No. 2 dated as of November 18, 1986, to the Trust Indenture, Mortgage, Security Agree-ment and Assignment of Rents dated as of December 16, 1985.

Filed as Exhibit:

28.8 to the Company's Current Report on Form 8-K dated De-cember 17, 1986.

28.16 to the Company's Current Report on Form 8-K dated De-cember 17, 1986.

2 to the Company's Current Re-port on Form 8-K dated Decem-ber 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 No-vember 25, 1986.

28(b) to the Company's Current Report on Form 8-K dated De-cember 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 No-vember 25, 1986.

File No.

1-6986 1-6986 1-6986 1-6986 1-6986 1-6986 1-6986 1-6986 81

I

Exhibit No.

28.4'8.5 28.5.1 28.6 28.6.1 28.7 Description 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 Partici-pant named therein, First PV Funding Corporation. The First National Bank of Boston, in its individual capacity and as Owner Trustee (under a Trust Agree-ment 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 As-signment 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 Novem-ber 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 Own-er Trustee, and Chemical Bank, as In-denture Trustee.

Supplemental Indenture No. 1 dated as of November 18, 1986, to the Trust Indenture, Mortgage, Security Agree-ment 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.

Filed as Exhibit:

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

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

28.'4 to the Company's Current Report on Form 8-K dated No-vember 25, 1986.

28.2 to the Company's Quarterly

'Report on Form 10-Q for quarter ended" June 30, 1986.

~28.6 to the Company's Current Report on Form 8-K dated No-vember 25, 1986.

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

82

l

Description Participation Agreement dated as of August 12, 1986, among the Owner Par-ticipant named therein, First PV Fund-ing Corporation. The First National Bank of Boston, in its individual capaci-ty 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 In-denture, Mortgage, Security Agreement and Assignment of Rents dated as of August 12, 1986, with the Owner Trus-tee), and Public Service Company of New Mexico, including Appendix A defi-nitions.

Amendment No. 1 dated as of Novem-ber 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 Agree-ment 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.

Filed as Exhibit:

2.1 to the Company's Current Report on Form 8-K dated Au-gust 18, 1986.

28.8 to the Company's Current Report on Form 8-K dated No-vember 25, 1986.

28.2 to the Company's Current Report on Form 8-K dated Au-gust 18, 1986.

28.10 to the Company's Current Report on Form 8-K dated No-vember 25, 1986.

28.3 to the Company's Current Report on Form 8-K dated Au-gust 18, 1986.

83

l t

Exhibit No.

28.11 28.12 28.13 28.14 Description Participation Agreement dated as of December 15, 1986, among the Owner Participant named therein, First PV Funding Corporation. The First Nation-al Bank of Boston, in its individual capa'city and as Owner Trustee (under a Trust Agreement dated as of Decem-ber 15, 1986, with the Owner Partici-pant), Chemical Bank, in its individual capacity and as Indenture Trustee (under a Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of December 15, 1986, with the Owner Trustee), and Public Service Company of New Mexico, in-cluding Appendix A definitions (Unit 1 Transaction).

Trust Indenture, Mortgage, Se'curity 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 Nation-al Bank of Boston, in its individual capacity and as Owner Trustee (under a Trust Agreement dated as of Decem-ber 15, 1986, with the Owner Partici-pant), Chemical Bank, in its individual capacity and as Indenture Trustee (under a Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of December 15, 1986, with the Owner Trustee), and Public Service Company of New Mexico, in-cluding Appendix A definitions (Unit 2 Transaction).

Filed as Exhibit:

2.1 to the Company's Current Report on Form 8-K dated De-cember 17, 1986.

28.2 to the Company's Current Report on Form 8-K dated De-cember 17, 1986.,

28.3 to the Company's Current Report on Form 8-K dated De-cember 17, 1986.

2.2 to the Company's Current Report on Form 8-K dated De-cember 17, 1986.

File Ne.

1-6986 1-6986 1-6986 1-6986 84

I

Exhibit Description 28.15 Truet 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).

28.16 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).

28.17'aiver letter with respect to "Deemed Loss Event" dated as of August 18, 1986, between the Owner Participant named therein, and Public Service Com-pany of New Mexico.

28.18*

Waiver letter with respect to "Deemed

'Loss Event" dated as of August 18, 1986, between the Owner Participant named therein, and Public Service Com-pany of New Mexico.

28.19 Agreement No. 13904 (Option and Purchase of Eflluent), dated April 23, 1973, among Arizona Public Service Company, Salt River Project Agricultur-al Improvement and Power District, the Cities of Phoenix, Glendale, Mesa, Scottsdale, and Tempe, and the Town of Youngtown.

28.20 Agreement for the Sale and Purchase of astewater Eflluent, dated June 12, 1981, among Arizona Public Service Company, Salt River Project Agricultur-al 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-IC dated De-cember 17, 1986.

28.11 to the Company's Current Report on Form 8-K dated De-cember 17, 1986.

28.12 to the Company's Current Report on Form 8-K dated Au-gust 18, 1986.

28.13 to the Company's Current Report on Form 8-K dated Au-gust 18, 1986.

28.19 to Annual Report of the Registrant on Form 10-K for fis-cal year ended December 31, 1986.

28.20 to Annual Report of the Registrant on Form 10-K for fis-cal year ended 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 res ects t thb' been entered into relatin t spec o

isex i it, ave additional docu ing to one or more additional sale and leaseback transacti

. Alth h

h ments may differin other respects (such as dollar amounts and percentages); there are no material details in which such additional documents differ from this exhibit.

(b)

Reports on Form 8-IC:

7he Company filed no reports on Form 8-K during the quarter ended December 31, 1991, and durin

.he period beginning January 1, 1992 and ended March 13, 1992.

85

I I

I J

I A

SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, t?

Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto du',

authorized.

PUBLIC SERVICE COivPPANY OF NE%'EXICO (Registrant)

Date: March 13, 1992 By:

/s/ J. T. ACKERMAN J. T. Ackerman Chairman, President and Chief Executive Officer 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 Chairman, President and Chief Executive Officer Principal Executive Officer and Director March 13 1992

/s/M. H. MAERKI M. H. Maerki Senior Vice President and Chief Financial Officer

/s/D. M. BURNETT D. M. Burnett Corporate Controller and Chief Accounting Officer r

a'ta Principal Financial Officer

= -'..--March 13, 1992 a

a p

,a p'rincipal Accounting Officer

". March 13, 1992

~ a

/s/R. G. ARMSTRONG R. G. Armstrong

/s/ V. L. FISHER V. L. Fisher

/s/ J. A. GODKIN J. A. Godwin js/C. E. LEYENDECKER C. E. Leyendecker A. G. Ortega

/s/R. R. REHDER R. R. Rehder

/s/P. F. ROTH P. F. Roth Director Director Director Director Director Director Director March 13, 1992 March 13, 1992 March 13, 1992 March 13, 1992 March

, 1992

~

a( \\

March 13, 1992 March 13, 1992

-NGTICE-THE ATTACHED FILES ARE OFFICIAL RECORDS OF THE INFORMATION &

REPORTS MANAGEMENT BRANCH.

THEY HAVE BEEN CHARGED TO YOU FOR A E.IMITED TIME PERIOD AND MUST BE RETURNED TO THE RE-CORDS &ARCHIVES SERVICES SEC-TION P1-22 WHITE FLINT. PLEASE DO NOT SEND DOCUMENTS CHARGED OUT THROUGH THE MAIL.REMOVAL OF ANY PAGE(S) FROM DOCUMENT FOR REPRODUCTION MUST BE RE-FERRED TO FILE PERSONNEL.

SHAREHOLDER Punuc Sanvrcn CosmANY on Nnw Mmuco is che sole rransfer agenc and regisnar foronr common and preferred crock. As ofDecember 31, 1991, there were 31,d33 regiscered shareholders.

LIST5G:

The common stock ofthe company is listed on the New York Stock Exchange and is also traded on theYi Pacific and Philadelphia Stock Exchanges. Aconsolidated quote is published in numerous daily stock tables carried by many newspapers. The ticker symbol for the common stock is PNM. The most common newspaper symbol is PSvNM.

Al1%ALifKrETINC:

Date: May 28, 1992 Time: 9:30 a.m. (Mountain Daylight Time)

Location: UNMContinuing Education Center 1634 University Boulevard N.E.

Albuquerque, New Mexico Notice ofmeeting, proxy statement and proxy willbe mailed to shareholders on or about April 13, 1992.

FOR ADDITIONALSHfIEHOLDERÃORillATION,%fRITEOR CALL:

Punuc Snnvrcn CQMpANYOF Nnsv Mnxrco Aran: Shareholder Records Alvarado Square Albuquerque, NM 87158'505) 848-2054 - Albuquerque 1-800-5454425 - Other than Albuquerque (IUARTERLYHIGHAI%9 LOW SHARE PRICES:

1991 1990 Hlgll LOW Higll Low First Quarter 9 '/s 7 '/s 15 '/z 12 '/s Second Quarter 1 1 '/s 9 '/s

.12 '/s 9 '/s Third Quarter 10 '/z 8 '/s 12 '/s 9 '/d Fourth Quarter 9 '/s 8 '/2 9 3/d 8

SUSPENSION OF COifSION STOCK DAflDEtiDS:

In April1989, the company announced the suspension ofdividend payments on the company's common stock as a result ofa deficit in retained earnings. I'or a discussion ofthe suspension ofdividends on the company's common stock, please refer to the 1991 Form 10-K which is a part ofthis annual report.

Public Service Company ofNew Mexico Alvarado Square Albuquerque, Net Mexico 87158

~ BULKRATE g,S, POSTAGE PAlD PERMIT Na. 13 Aeeuaveeava N.M.

Address Correction Requested

-NOTICE-THE ATTACHED FILES ARE OFFICIAL RECORDS OF THE INFORMATION 8 REPORTS MANAGEMENT BRANCH.

THEY HAVE BEEN CHARGED TO YOU FOR A LIMITED TIME PERIOD AND MUST BE RETURNED TO THE RE-CORDS 8 ARCHIVES SERVICES SEC-TION P1-22 WHITE FLINT. PLEASE DO NOT SEND DOCUMENTS CHARGED OUT THROUGH THE MAIL.REMOVAI OF ANY PAGE(S) FROM DOCUMENT FOR REPRODUCTION MUST BE RE-FERRED TO FILE PERSONNEL.

-NOTICE-pnnred on recycled paper