ITEM 1. BUSINESS
THE COMPANY
Public Service Company of New Mexico (the "Company") was incorporated in the State of New Mexico in 1917 and has its principal offices at Alvarado Square, Albuquerque, New Mexico 87158 (telephone number 505-848-2700). The Company is a public utility engaged in the generation, transmission, distribution and sale of electricity and in the gathering, processing, transmission, distribution and sale of natural gas within the State of New Mexico. The Company also owns facilities for the pumping, storage, transmission, distribution and sale of water in Santa Fe, New Mexico.
On January 11, 1993, the Company announced its intention to dispose of the Company's natural gas gathering and natural gas processing assets and SDCW. On February 12, 1994, an agreement was executed for the sale of substantially all of the gas gathering and processing assets of Gathering Company and Processing Company and for the sale of the Northwest and Southeast gas gathering and processing facilities of GCNM. On February 28, 1994, the Company and the City of Santa Fe signed a purchase and sale agreement for the sale of the Company's water utility division. (See PART II, ITEM 7.--"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Sale of Gas Gathering and Processing Assets" and "--Sale of SDCW.")
The total population of the area served by one or more of the Company's utility services is estimated to be approximately 1.1 million, of which 52.0% live in the greater Albuquerque area.
For the year ended December 31, 1993, the Company derived 67.5% of its utility operating revenues from electric operations, 31.0% from natural gas operations and 1.5% from water operations.
As of December 31, 1993, the Company employed 2,619 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 12 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, comprise two of these markets. The third market consists of other contracted sales to utilities for which the Company commits to deliver a specified amount of capacity (measured in MW) or energy (measured in MWh) over a given period of time. The fourth market consists of economy energy sales made on an hourly basis to utilities at fluctuating, spot-market rates. Sales to the third and fourth markets are sometimes referred to collectively as "off-system" sales.
The Company provides retail electric service to a large area of north central New Mexico, including the cities of Albuquerque, Santa Fe, Rio Rancho, Las Vegas, Belen and Bernalillo. The Company also provides retail electric service to Deming in southwestern New Mexico and to Clayton in northeastern New Mexico. As of December 31, 1993, approximately 313,000 retail electric customers were served by the Company, the largest of which accounted for approximately 3.6% of the Company's total electric revenues for the year ended December 31, 1993.
The Company holds 23 long-term, non-exclusive franchise agreements for its electric retail operations, expiring between August 1996 and November 2028. The City of Albuquerque (the "City") franchise expired in early 1992. Customers in the area covered by the City franchise represent approximately 46.0% of the Company's 1993 total electric operating revenues, and no other franchise area represents more than 7.0%. These franchises are agreements that provide the Company access to public rights-of-way for placement of the Company's electric facilities. The Company 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. (See PART II, ITEM 7.--"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--OTHER ISSUES FACING THE COMPANY--Albuquerque Franchise Issues".)
POWER SALES
For the years 1989 through 1993, retail KWh sales have grown at a compound annual rate of approximately 3.1%. However, the growth rate has been lower than had been anticipated at the time the Company committed to construct new generating units in the 1970's. As a result, the Company has excess capacity and has marketed most of such capacity in the off-system sales market. Additionally, the Company is attempting to reduce its excess capacity through asset sales. (See PART II, ITEM 7.--"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--OTHER ISSUES FACING THE COMPANY--Excess Capacity Sales/Wholesale Power Market".) 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 MARKET (THOUSANDS OF DOLLARS)
ELECTRIC SALES BY MARKET (MEGAWATT HOURS)
- -------- * Pursuant to FERC Order No. 529, all spot market economy sale transactions were reclassified from net purchased power to revenue. + Due to the provision for the loss associated with the M-S-R contingent power purchase contract recognized in 1992, revenues from other contracted off- system sales and economy energy sales were reduced by a total of $20.5 million. (See Note 2 of the notes to consolidated financial statements.)
SYSTEM PEAK DEMAND* (MEGAWATTS)
- -------- * System peak demand relates to retail and firm-requirements wholesale markets only.
During 1993 and 1992, the Company's sales in the off-system markets accounted for approximately 34.4 percent and 37.2 percent, respectively, of its total KWh sales and approximately 17.2 percent (before reduction of revenues from the M- S-R contingent power purchase contract, which were accounted for in the determination of the provision for loss recorded in 1992) and 17.8 percent, respectively, of its total revenues from energy sales. During 1993, the Company's major off-system sale contracts in effect were with SDG&E, APPA, AEPCO, IID and PSCo.
The SDG&E contract requires SDG&E to purchase 100 MW from the Company through April 2001. On October 27, 1993, SDG&E filed a complaint with the FERC against the Company, alleging that certain charges under this 1985 power purchase agreement are unjust, unreasonable and unduly discriminatory. SDG&E is requesting that the FERC investigate the rates charged under the agreement and establish a refund date effective as of December 26, 1993. The relief, if granted, would reduce annual demand charges paid by SDG&E by up to $11 million per year from the effective refund date through April 2001, subject to certain limitations if the FERC has not acted within 15 months. The Company responded to the complaint on December 8, 1993, and SDG&E and the Company filed subsequent pleadings. The Company believes that the complaint is without merit, and the Company intends to vigorously resist the complaint.
The APPA contract requires APPA to purchase varying amounts of power from the Company through May 2008. Under the terms of the agreement, APPA will increase its purchase starting June 1, 1994 from 33 MW to 89 MW, decreasing in October 1994 to 74 MW. The AEPCO contract requires AEPCO to purchase from 9 MW to 15 MW of power through May 31, 1994, depending upon AEPCO's customer requirements. The IID contract requires IID to purchase 56 MW of power from the Company through February 1995 and an additional 25 MW of power in the months of April through October during the term of the contract. On April 27, 1993, PSCo and the Company entered into an agreement whereby the Company will sell 75 MW of capacity and associated energy to PSCo from October 1, 1993 through September 30, 1994.
The Company furnishes firm-requirements wholesale power in New Mexico to the cities of Farmington and Gallup, TNP and Plains. Plains may terminate its contract for 10 MW at any time with one year's advance notice. The Company expects to receive a termination notice from Plains but cannot predict the
timing of such notice. In February 1993, the Company began a new 10 year firm power contract with the City of Gallup. Under terms of its contract, TNP has increased its purchase, beginning January 1994, from a peak of 25 MW to 36 MW. No firm-requirements wholesale customer accounted for more than 1.4% of the Company's total electric operating revenues for the year ended December 31, 1993.
For other information concerning the competitive conditions affecting off- system sales, see PART II, ITEM 7.--"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--OTHER ISSUES FACING THE COMPANY--Excess Capacity Sales/Wholesale Power Market".
SOURCES OF POWER
As of December 31, 1993, the total net generation capacity of facilities owned or leased by the Company was 1,541 MW. The Company's electric generating stations in commercial service as of December 31, 1993, were as follows:
- -------- (a) The Company is entitled to 10.2% of the power and energy generated by PVNGS. The Company has a 10.2% ownership interest in Unit 3 and has leasehold interests in Units 1 and 2 (see ITEM 2.
ITEM 2. PROPERTIES
Substantially all of the Company's utility plant is mortgaged to secure its first mortgage bonds.
ELECTRIC
COAL-FIRED PLANTS
SJGS is located in northwestern New Mexico, and consists of four units operated by the Company. Units 1, 2, 3 and 4 at SJGS have net rated capacities of 316 MW, 312 MW, 488 MW and 498 MW, respectively. SJGS Units 1 and 2 are owned on a 50% shared basis with Tucson. Unit 3 is owned 50% by the Company, 41.8% by SCPPA and 8.2% by Century. Century has agreed to sell its remaining 8.2% interest to Tri-State Generation and Transmission Association, Inc. Unit 4 is owned 45.485% by the Company, 8.475% by Farmington, 28.8% by M-S-R, 7.2% by Los Alamos and 10.04% by Anaheim. The Company has agreed to sell 35 MW of SJGS Unit 4 to UAMPS. (See PART II, ITEM 7.--"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--OTHER ISSUES FACING THE COMPANY--Excess Capacity Sales/Wholesale Power Market".) The Company's net aggregate ownership in SJGS is 785 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 April 30, 1995. This marketing arrangement may be terminated by M-S-R at any time upon 30 days notice.
The Company also owns 192 MW of net rated capacity derived from its 13% interest in Units 4 and 5 of Four 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.
NUCLEAR PLANT
The Company's Interest in PVNGS. The Company is participating in the three 1,270 MW units of PVNGS, also known as the Arizona Nuclear Power Project, with APS (the operating agent), Salt River Project, El Paso, SCE, SCPPA 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 interests in Units 1 and 2 held under leases. In September 1992, the Company purchased approximately 22% of the beneficial interests in PVNGS Units 1 and 2 leases for approximately $17.5 million. The Company's ownership and leasehold interests in PVNGS amount to 130 MW per unit, or a total of 390 MW. PVNGS Units 1, 2 and 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. Maintenance of these licenses is subject to NRC regulation.
Operation and Regulation. A stipulation adopted by the NMPUC on March 6, 1990 establishes a performance standard 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 of all 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. During 1993, PVNGS Units 1, 2 and 3 had capacity factors of approximately 67.5%, 46.1% and 84.4%, respectively, for a station capacity factor of 66.0%. These performance standards would be terminated if the NMPUC approves the stipulation entered into by the Company requesting elimination of the FPPCAC. (See ITEM 1.--"RATES AND REGULATION--FPPCAC".)
In July 1993, the NRC issued a Systematic Assessment of Licensee Performance ("SALP") for PVNGS for the period March 1, 1992 through May 31, 1993. The SALP is the standard performance grading process used by the NRC to communicate to the public in a formal manner how each nuclear plant operates. The ratings have slightly declined since the previous assessment. Overall, however, the SALP Board found the performance of licensed activities at PVNGS to be acceptable and directed toward safe facility operation.
Steam Generator Tubes. For information concerning steam generator tubes, see PART II, ITEM 7.--"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--OTHER ISSUES FACING THE COMPANY--Palo Verde Nuclear Generating Station--Steam Generator Tubes".
Discrimination Allegations. By letter dated July 7, 1993, the NRC advised APS that, as a result of a recommended decision and order by a Department of Labor Administrative Law Judge (the "DOL ALJ") finding that APS discriminated against a former contract employee at PVNGS because he engaged in "protected activities" (as defined under Federal regulations), the NRC intended to schedule an enforcement conference with APS.
Following the DOL ALJ's finding, APS investigated various elements of both the substantive allegations and the manner in which the U.S. Department of Labor (the "DOL") proceedings were conducted. As a result of that investigation, APS determined that one of its employees had falsely testified during the proceedings, that there were inconsistencies in the testimony of another employee, and that certain documents were requested in, but not provided during, discovery. The two employees in question are no longer with APS. APS provided the results of its investigation to the DOL ALJ, who referred matters relating to the conduct of the two former employees of APS to the U.S. Attorney's office in Phoenix, Arizona. On December 15, 1993, APS and the former contract employee who had raised the DOL claim entered into a settlement agreement, a part of which remains subject to approval by the Secretary of Labor.
By letter dated August 10, 1993, APS also provided the results of its investigation to the NRC, and advised the NRC that, as a result of APS's investigation, APS had changed its position opposing the finding of discrimination. The NRC is investigating this matter and APS is fully cooperating with the NRC in this regard.
Sale and Leaseback Transactions of PVNGS Units 1 and 2. In eleven transactions consummated 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 facilities. 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 $66.3 million per year. Throughout the terms of the leases, the Company continues to have full and exclusive authority and responsibility to exercise and perform all of the rights and duties of a 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. On September 2, 1992, the Company purchased approximately 22% of the beneficial interests in the PVNGS Units 1 and 2 leases for $17.5 million. For accounting purposes, this transaction was recorded as a purchase with the Company recording approximately $158.3 million as utility plant and $140.8 million as long-term debt on the Company's consolidated balance sheet. The purchase is expected to provide the Company with (1) the residual value of a certain portion of the PVNGS Units at no cost, (2) reduced exposure to indemnification provisions in the lease agreements and (3) added flexibility to cause the retirement of the underlying lease obligation bonds ("LOBs"). (See also Notes 7 and 9 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. In connection with the stipulation, the Company wrote down the purchased beneficial interests in PVNGS Units 1 and 2 leases to $46.7 million. (See PART II, ITEM 7.-- "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--January 12, 1994 Stipulation.")
Each lease describes certain events, "Events of Loss" 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 of certain 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 "Deemed 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 of such "Events of Loss" or "Deemed Loss Events" occurring is remote. Such belief is based on the following reasons: (a) to a large extent, prevention of "Events of Loss" 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 policy, the Company is unaware of any pending proposals or proposals being considered for introduction in Congress or any state legislative or regulatory body that, if adopted, would cause any such events.
PVNGS Decommissioning Funding. For information concerning PVNGS decommissioning funding, see PART II, ITEM 7.--"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--OTHER ISSUES FACING THE COMPANY--PVNGS Decommissioning Funding".
PVNGS Liability and Insurance Matters. The PVNGS participants have insurance for public liability payments resulting from nuclear energy hazards to the full limit of 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 $79.3 million, subject to an annual limit of $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 $24.3 million, with an annual payment limitation of $3 million. The insureds under this liability insurance include the PVNGS participants and "any other person or organization with respect to his legal responsibility for damage caused by the nuclear energy hazard". The PVNGS participants maintain "all-risk" (including nuclear hazards) insurance for nuclear property damage to, and decontamination of, property at PVNGS in the aggregate amount of $2.75 billion as of January 1, 1994, a substantial portion of which must be applied to stabilization and decontamination. The Company has also secured insurance against a portion of the increased cost of generation or purchased power resulting from certain accidental outages of any of the three PVNGS units if the outage exceeds 21 weeks.
OTHER ELECTRIC PROPERTIES
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 properties. (See PART II, ITEM 7.--"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--OTHER ISSUES FACING THE COMPANY--A Transmission Right-of-Way".)
As of December 31, 1993, the Company owned, jointly owned or leased 2,781 circuit miles of electric transmission lines, 5,218 miles of distribution overhead lines, 2,826 cable miles of underground distribution lines (excluding street lighting) and 215 substations.
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.--"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--OTHER ISSUES FACING THE COMPANY--OLE Transmission Project".
NATURAL GAS
The property owned by GCNM, as of December 31, 1993, consisted primarily of natural gas gathering, storage, transmission and distribution systems. The gathering systems consisted of approximately 1,184 miles (approximately 308 miles of which are leased to Gathering Company) of pipe with compression and treatment facilities. Provisions for storage made by GCNM include ownership and operation of an underground storage facility located near Albuquerque and an agreement with owners of a unitized oil field located near Artesia, New Mexico, in which GCNM has injection and redelivery rights. The transmission systems consisted of approximately 1,355 miles of pipe with appurtenant compression facilities. The distribution systems consisted of approximately 9,471 miles of pipe.
GCNM leases approximately 128 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 has the right to use the facility for two years after termination.
The property of Gathering Company includes approximately 552 miles of gathering pipe with appurtenant compression facilities.
Processing Company owns facilities located in northwestern New Mexico having an aggregate design capacity for processing of natural gas of approximately 300,000 mcf per day.
The Company, Gathering Company and Processing Company have entered into an agreement to sell substantially all of their natural gas gathering and processing assets. (See PART II, ITEM 7.--"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Sale of Gas Gathering and Processing Assets".)
WATER
The Company's water property consists of wells, water rights, pumping and treatment plants, storage reservoirs and transmission and distribution mains. The Company has reached agreement with the City of Santa Fe for the sale of its water utility division. (See PART II, ITEM 7.--"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Sale of SDCW".)
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, EIP and associated equipment, data processing, communication, office and other equipment, office space, utility poles (joint use), 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.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
NATURAL GAS SUPPLY LITIGATION
A lawsuit was filed on August 31, 1990 in the United States District Court for the District of New Mexico by a group of producers seeking damages under a gas purchase contract. This action was brought by Caulkins Producing Company as the operator and Caulkins Oil Co. (collectively "Caulkins"), Louis Dreyfus Natural Gas Corp. ("Dreyfus") and Marathon Oil Company ("Marathon") for alleged breach of a long-term natural gas purchase contract by GCNM. The suit alleged that GCNM failed to take or pay for contracted quantities of natural gas for the period of 1986 to the present, and further, that GCNM failed to take gas ratably from the producers during the same period of time.
In August 1993, Caulkins, Dreyfus and GCNM reached an agreement settling all disputes arising under the contract as to those parties for $7.9 million. The parties also entered into gas purchase agreements which are favorable to GCNM as part of the settlements. On October 14, 1993, the Company and Marathon entered into an agreement settling all disputes between GCNM and Marathon. GCNM paid Marathon $4.9 million on November 10, 1993 and obtained favorable terms in new gas purchase and related contracts. The Company had previously made sufficient reserves for losses in this litigation. Pursuant to a prior order of the NMPUC, GCNM began collecting 75% of the amounts paid to settle this lawsuit in January 1994.
PVNGS WATER SUPPLY LITIGATION
The validity of the primary effluent contract under which water necessary for the operation of the PVNGS units is obtained was challenged in a suit filed in January 1982 by the Salt River Pima-Maricopa Indian Community (the "community") against the Department of the Interior, the Federal agency alleged to have jurisdiction over the use of the effluent. The PVNGS participants, including the Company, were named as additional defendants in the proceeding, which is before the United States District Court for the District of Arizona. The portion of the action challenging the effluent contract has been stayed until the community litigates certain claims in the same action against the Department of the Interior and other defendants. On October 21, 1988, Federal legislation was enacted conforming to the requirements of a proposed settlement that would terminate this case without affecting the validity of the primary effluent contract. However, certain contingencies are to be 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 of the PVNGS participants to the use of groundwater and effluent 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' groundwater 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.
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 it determine what effect the action will have on water for Santa Fe. It is the Company's understanding that final resolution of the case cannot be expected for several years.
PVNGS PROPERTY TAXES
On June 29, 1990, an Arizona state tax law was enacted, effective as of December 31, 1989, which adversely impacted the Company's earnings in the 1990, 1991, 1992 and 1993 tax years by approximately $5 million per year, before income taxes and capitalized and deferred costs. On December 20, 1990, the PVNGS participants, including the Company, filed a lawsuit in the Arizona Tax Court, a division of the Maricopa County Superior Court, against the Arizona Department of Revenue, the Treasurer of the State of Arizona, and various Arizona counties, claiming, among other things, that portions of the new tax law are unconstitutional. In December 1992, the court granted summary judgment to the taxing authorities, holding that the law is constitutional. The PVNGS participants appealed this decision to the Arizona Court of Appeals. The Company cannot currently predict the ultimate outcome of this matter.
OTHER PROCEEDINGS
On March 31, 1993, certain individuals ("the New Mexico Plaintiffs"), formerly affiliated with Bellamah Community Development ("BCD") whose general partners include Meadows, filed suit ("the New Mexico suit") in the United States District Court for the District of New Mexico against numerous parties, including the Company, current and former employees of the Company or Meadows, and MCB Financial Group, Inc., a Delaware corporation ("MCB"), 50% of which stock is owned by Meadows. The New Mexico Plaintiffs have not requested any monetary relief against the Company or certain current and former employees of the Company and Meadows but have joined those parties in connection with insurance coverage and bad faith insurance practices alleged against the insurance company which had issued a directors and officers liability policy to various entities, including MCB and BCD. The insurance allegations are made in connection with claims which were then threatened by the Resolution Trust Corporation ("RTC"), as receiver for Western Savings & Loan Association ("Western"), against the Company and others. The New Mexico Plaintiffs also sued the RTC for a declaration that they are not liable for any claims asserted by the RTC involving Western and BCD. The Company and the current and former employees of the Company or Meadows counterclaimed against the New Mexico Plaintiffs and cross-claimed against the insurance company and the RTC in connection with insurance coverage and bad faith insurance practices. In addition, the Company and the current and former employees of the Company or Meadows cross-claimed against the RTC, seeking a declaration of non-liability.
The RTC moved to transfer the case to the United States District Court for the District of Arizona. On February 7, 1994, an order was entered transferring the case in its entirety. Prior to the transfer, however, the New Mexico magistrate judge issued a proposed order which, if accepted by the district judge, would require the parties to enter into mediation of all the claims. The parties have agreed to a form of order dismissing without prejudice the claims asserted in the New Mexico suit against MCB and against the RTC, recommending the remand of the remaining claim for declaratory relief against the insurance company to the Federal District Court in New Mexico, and ordering the mediation of the claims asserted in the Arizona proceeding (described below) by the RTC against all of the other parties in the New Mexico suit except the insurance company and MCB.
On April 16, 1993, the Company and certain current and former employees of the Company or Meadows were named as defendants in two actions filed in the United States District Court for the District of Arizona by the RTC, as receiver for Western. The claims related to alleged actions of the Company's employees in connection with a loan procured by BCD from Western and the purchase by that partnership of property owned by Western in 1987. The RTC apparently claims that the Company's liability stems from the actions of a former employee who allegedly acted on behalf of the Company for the Company's benefit. The RTC is claiming in excess of $40 million in actual damages from the BCD/Western transactions and alternatively is claiming damages substantially exceeding that amount on a joint and several liability theory for injury to Western from an alleged conspiracy in which the Company and the other defendants are alleged to be co-conspirators. The conspiracy allegations involve all other transactions claimed by the RTC to have harmed Western but to which BCD was not a party. The RTC claims the $40 million damages would be trebled under application of Arizona law. The RTC may also seek attorneys fees and costs. In February 1994, the RTC advised that the RTC would be seeking to amend the complaint to allege civil conspiracy, common law fraud and aiding and abetting breach of fiduciary duties, aiding and abetting common law fraud and aiding and abetting violation of federal and Arizona RICO statutes against the Company and is considering claims against Meadows and against the Company as "successor to and alter ego" of Meadows.
Three of the individuals sued by the RTC have indemnity agreements with the Company.
On March 3 and 4, 1994, the parties participated in a mediation session aimed at settling the litigation. The session ended without a settlement. It is anticipated that settlement discussions will continue although no dates have been scheduled yet for future meetings.
In July 1993, the Company and certain current or former employees of the Company or its subsidiaries were also named in an action filed in Federal District Court in Arizona on behalf of a class of common stockholders of Western. The allegations were similar to those filed in the RTC actions described above. On January 24, 1994, motions to dismiss filed by the Company and certain current or former employees of the Company or its subsidiaries were granted by the Arizona court for lack of standing to bring the actions. Although the plaintiffs may appeal the order of the court, the Company believes the claims are without merit.
Although the Company continues to investigate all of the relevant claims raised in all of the suits, the Company believes that a material loss to the Company will not likely occur as a result of claims that have been or may be asserted by any of the parties.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE COMPANY
Executive officers, their ages, offices held with the Company in the past five years and initial effective dates thereof, were as follows on December 31, 1993:
- -------- * W. M. Eglinton retired effective December 31, 1993.
All officers are elected annually by the board of directors of the Company.
All of the above executive officers have been employed by the Company and/or its subsidiaries for more than five years in executive or management positions, with the exception of P. T. Ortiz, M. D. Christensen and B. F. Montoya. Prior to employment with the Company, P. T. Ortiz was employed by U S WEST Communications during the period of January 1988 to October 1991 as Chief Counsel--New Mexico and during the period of June 1985 to January 1988, as an attorney by U S WEST Communications (then known as Mountain Bell). The principal business of U S WEST Communications is telecommunications. Prior to employment with the Company, M. D. Christensen was employed with Southern California Gas since 1978. During the period 1990 through 1991, M. D. Christensen was Vice President of Planning and for the period 1987 through 1990, M. D. Christensen was Vice President of Public Affairs. Prior to 1987, M. D. Christensen held various management positions relating to marketing and legislative services. Prior to employment with the Company, B. F. Montoya was employed with Pacific Gas and Electric Company ("PG&E") since 1989. In 1991, he was promoted to Senior Vice President and General Manager of the Gas Supply Business Unit of PG&E. Prior to his employment with PG&E, B. F. Montoya spent 31 years in the Civil Engineer Corps of the U.S. Navy, performing a wide range of management and utility-related assignments. B. F. Montoya achieved the rank of Rear Admiral when he became Commander, Naval Facilities Engineering Command and Chief of Civil Engineers.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange. Ranges of sales prices of the Company's common stock, reported as composite transactions (Symbol: PNM) for 1993 and 1992, by quarters, are as follows:
On January 31, 1994, there were 24,469 holders of record of the Company's common stock.
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 1993 and 1992.
For a discussion of dividend restrictions on the Company's common and preferred stock, see Note 3 of notes to consolidated financial statements and ITEM 7.--"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--LIQUIDITY AND CAPITAL RESOURCES--Financing Capability and Dividend Restrictions".
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
- -------- * As discussed in note 1 to consolidated financial statements, the Company changed its method of accounting for unbilled revenues in 1992. ** Includes the write-down of the 22% beneficial interests in PVNGS Units 1 and 2 leases purchased by the Company, the write-off of certain regulatory assets and other deferred costs and the write-off of certain PVGNS Units 1 and 2 common costs, aggregating $108.2 million, net of taxes ($2.59 per share). + Includes the write-down of the Company's investment in PVNGS Unit 3 and the provision for loss associated with the M-S-R power purchase contract, aggregating $126.2 million, net of taxes ($3.02 per share).
The selected financial data should be read in conjunction with the consolidated financial statements, the notes to consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's assessment of the Company's financial condition and the significant factors affecting the results of operations. This discussion should be read in conjunction with the Company's consolidated financial statements.
On January 11, 1993, the Company announced specific actions which were determined to be necessary in order to accelerate the Company's preparation for the new challenges in the competitive electric energy market. Included in the announcement was the Company's intention to file a plan ("framework filing") with the NMPUC designed to lower electric prices by consolidating certain gas and electric functions, restructuring assets and reducing operation and maintenance expenses by $25 million annually. The Company separated the gas and electric customer service consolidation issues from the balance of the framework filing and filed for necessary approvals for the consolidation of the customer service functions on December 21, 1993. On January 11, 1993, the Company also announced its intention to dispose of the Company's natural gas gathering and natural gas processing assets and SDCW. (See "Sale of Gas Gathering and Processing Assets" and "Sale of SDCW".)
January 12, 1994 Stipulation
On January 12, 1994, the Company and the NMPUC staff and primary intervenor groups (AG, the New Mexico Industrial Energy Consumers, the City of Albuquerque, the United States Executive Agencies and the New Mexico Retail Association) ("interested parties") entered into a stipulation ("stipulation") which addresses retail electric prices, generation assets and certain financial concerns of the Company. The Company filed the stipulation with the NMPUC, recommending that electric retail rates be reduced by $30 million. This reduction is accomplished primarily through the write-down of the 22% beneficial interests in the PVNGS Units 1 and 2 leases purchased by the Company, the write-off of certain regulatory assets and other deferred costs, the write-off of certain PVNGS Units 1 and 2 common costs and the Company's previously announced cost reduction efforts. In connection with the stipulation, the Company has charged approximately $108.2 million, after-tax, to the 1993 results of operations. Such after-tax charge resulted in the Company continuing to have a deficit in retained earnings as of December 31, 1993. As a result, the Company is unable to resume payment of dividends on its common stock. The Company evaluated the possibility of a quasi-reorganization but does not intend to implement a quasi-reorganization at this time.
The stipulation contains provisions which call for PVNGS Units 1 and 2 to be confirmed as "used and useful" for New Mexico customers pursuant to tests previously set forth by the NMPUC. The stipulation also establishes transition and gain allocation mechanisms to be implemented if generation assets are sold or otherwise removed from rates. The interested parties acknowledged that restructuring of the Company's generation mix may result in benefits to both customers and stockholders and future generation asset sales may need to include a mix of PVNGS and coal-fired generation. If any PVNGS unit included in rates is sold, subleased, assigned, or removed from full cost of service recovery for any reason, the difference between the cost of PVNGS units included in rates and its sale price shall continue to be recovered through rates. The Company's ability to record this difference as a regulatory asset, for financial reporting purposes, will be subject to the continued determination that the regulated portion of its electric operations meets the provisions of SFAS No.71, Accounting for the Effects of Certain Types of Regulation. The interested parties also agreed that the reduction in cost of service resulting from any future refinancing or restructuring of the PVNGS Units 1 and 2 leases shall be allocated 60% to shareholders and 40% to customers. The stipulation affirms the Company's right to recover all fair, just and reasonable costs arising from the decommissioning of its fossil-fueled generating plants in service, including demolition, waste disposal, environmental and site restoration. The stipulation also resolves the issues of decertification and decommissioning of the Company's three retired fossil- fueled generating stations resulting in the Company foregoing recovery of the first $24.4 million of decommissioning costs associated with these stations. The interested parties also agreed to use a
targeted capital structure in the cost of service filed with the stipulation, which recognized the Company's need to move toward investment grade guidelines.
In the stipulation, the Company expressed its intent not to seek general rate changes and the interested parties expressed their intent not to cause the filing of general rate changes before January 1, 1998. However, should unforeseen circumstances occasion the need for a review of general rate levels before January 1, 1998, the interested parties will meet before seeking a change in rates.
The stipulation is subject to NMPUC approval. The Company believes that the approval of the stipulation would result in a reduction of competitive risk and regulatory uncertainty. However, there can be no assurance that the stipulation will be approved by the NMPUC. If the stipulation is not approved in its entirety, unless otherwise agreed to by all interested parties, the stipulation shall be null and void.
On January 3, 1994, the NMPUC issued an order establishing investigations of rates for both the Company and SPS. The order required the Company to file a general rate case no later than July 1, 1994. However, at the prehearing conference held on February 23, 1994, regarding the stipulation, the NMPUC vacated the requirements of its original request and will allow the stipulation to satisfy their requirements. Hearings on the stipulation have not been scheduled; however, the Company and interested parties are scheduled to file testimony on April 18, 1994. The NMPUC confirmed the oral rulings in a written order issued on March 7, 1994.
On March 7, 1994, the Albuquerque City Council deadlocked on endorsing the Mayor's signing of the stipulation. The Company is currently unable to determine what impact, if any, the City Council's action might have on the stipulation. However, the Company remains committed to the process and will meet with the other parties who signed the stipulation to evaluate this new development. The Company believes that the stipulation will continue through the hearing process being established by the NMPUC.
Sale of Gas Gathering and Processing Assets
On January 11, 1993, the Company announced its intention to dispose of the Company's natural gas gathering and natural gas processing assets. A purchaser has now been selected following a competitive bidding process.
On February 12, 1994, an agreement was executed with Williams Gas Processing--Blanco, Inc. ("Williams"), a subsidiary of the Williams Field Services Group, Inc. of Tulsa, Oklahoma, for the sale of substantially all of the assets of Gathering Company and Processing Company, and for the sale of the Northwest and Southeast gas gathering and processing facilities of GCNM. The agreement provides for a cash selling price of $155 million, subject to certain adjustments. In addition, the Company and Williams entered into agreements for gas gathering and processing services, which the Company believes to be competitively priced, to be provided by Williams on the facilities being sold for a period up to 15 years. The transaction is subject to applicable waiting periods under the Federal Hart-Scott-Rodino Antitrust Improvements Act of 1976 and subject to approval by the NMPUC. If approved, the closing is expected to take place in 1995. The closing is also subject to other customary closing conditions, such as obtaining necessary material consents from lenders and other third parties.
Under the sale agreement, the Company agreed to retain certain liabilities pertaining to the assets being sold, including certain environmental liabilities. Such retained environmental liabilities include liabilities under environmental laws as of closing associated with (i) the mercury meter remediation project, (ii) identified friable asbestos, (iii) environmental permits required by various agencies, and (iv) pits at certain abandoned compressor sites. The Company's retained environmental liabilities also include liabilities associated with certain unlined disposal pits subject to an existing New Mexico Oil Conservation Division ("OCD") order. The Company has also agreed to retain liability for a portion of potential liabilities relating to a contaminated landfill that has been declared a Federal superfund site. Further, the Company agreed to indemnify Williams against other third party environmental claims arising from pre-closing ownership, operations or conditions and for breaches of environmental representations and warranties for a period of
five years after closing in an amount up to $10.6 million. The Company's retained environmental liabilities described above are not subject to the $10.6 million cap. The Company has evaluated the potential impact of the above retained environmental liabilities. The Company believes, after consideration of established reserves, that the ultimate outcome of these environmental issues will not have a material adverse effect on the Company's financial condition or results of operations (see "OTHER ISSUES FACING THE COMPANY-- Environmental Issues--Gas"). The Company intends to offset costs associated with the environmental liabilities with proceeds from the sale to the maximum extent possible.
Under the agreement, the Company also agreed to indemnify Williams, subject to equal sharing of the first $1.5 million, (i) against third party claims (other than environmental) arising from pre-closing ownership, operations and conditions for a period of two years after closing, (ii) for breaches of other customary representations and warranties for a period of two years from the date of closing, and (iii) for 30 days past the applicable statute of limitations for breaches of the Company's tax representations. The Company also agreed to indemnify Williams for three years after closing for third party claims relating to certain property rights. Under the agreement, the Company will, subject to prior NMPUC approval, guarantee the obligations of its subsidiaries which are parties to the agreement.
The book value of the facilities being sold, plus regulatory assets and deferred charges, is expected to be approximately $85 million. In addition, the Company expects approximately $8 million to be incurred for transaction and other ascertainable costs prior to closing. The Company anticipates that a significant amount of income tax will become payable as a result of this transaction.
Also, the NMPUC will determine the allocation of the resulting gain between the Company's gas customers and shareholders. Therefore, the Company is not able at this time to estimate the amount of any gain that would be allocated to shareholders.
The Company believes that the sale of these assets will improve its flexibility to take advantage of changing market conditions while maintaining continued access to competitively priced, reliable and secure long-term gas supplies.
Sale of SDCW
On July 29, 1993, Santa Fe city officials announced a verbal agreement under which the City of Santa Fe (the "City") would purchase SDCW. Under the verbal agreement, the Company would receive approximately $48 million for its water utility division. The proposed agreement excluded from the sale certain Santa Fe area real estate which the Company would either sell or trade separately. The Company would also continue to operate the water utility for up to four years for a fee under a proposed contract with the City. On September 3, 1993, a nonbinding memorandum of understanding was entered into with the City, which contains the general principles for the sale of the Company's water utility division. The Company's board of directors authorized the sale on January 11, 1994. On February 23, 1994, the City Council authorized the transaction and the Company and the City signed a purchase and sale agreement on February 28, 1994. The Company anticipates filing for regulatory approvals in March 1994. Consummation of a sale will require approval by the NMPUC. The Company expects to consummate the sale by the end of 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's ability to generate sufficient amounts of cash to meet its operating and capital cash requirements ("liquidity") is a function of the rates it is allowed to charge and its ability to access the credit markets. The Company's filed stipulation and potential longer-term effects of a more competitive energy market are expected to affect the Company liquidity through reductions in the level of rates charged for the Company's electric operations, partially mitigated by the Company's cost reduction effort and anticipated proceeds from sales of assets. The Company currently anticipates that cash generated from internal sources will be sufficient to meet the capital requirements during the 1994 through 1998 period.
CAPITAL REQUIREMENTS
Total capital requirements include construction expenditures as well as other major capital requirements. Construction projects of significance include upgrading generating systems, upgrading and expanding the electric and gas transmission and distribution systems and purchasing nuclear fuel. Total capital requirements for 1993 and projections for 1994-1998 are shown below:
- -------- * Includes expenditures for construction of OLE. ** Total construction expenditures do not include expenditures for SDCW after 1993 and for Gathering Company and Processing Company after 1994. (See "Sale of Gas Gathering and Processing Assets" and "Sale of SDCW".) *** Other major capital requirements include bond maturities/sinking funds, debt retirement and preferred stock redemptions/preferred stock dividends. Requirements for 1993 also include payments for gas contract settlements and the severance program. Requirements for 1994 and 1997 include retirement of approximately $45 million and approximately $15 million of first mortgage bonds, respectively.
These estimates are under continuing review and subject to on-going adjustment.
LIQUIDITY
In addition to cash flow from operations, the Company received cash proceeds from certain asset sales and an asset securitization during 1993. On August 3, 1993, the Company received $60 million from the securitization relating to amounts being recovered from gas customers relating to certain gas contract settlements. On August 12, 1993, the Company also received $55 million from the sale of a 10.04% undivided interest in SJGS Unit 4 to Anaheim. Proceeds therefrom were used to pay off short-term debt and to establish short-term investments. Also during 1993, pollution control revenue bonds totaling $182 million and EIP Secured Facility Bonds totaling $51.3 million were refunded and replaced. The refundings will provide pre-tax interest savings of approximately $5.5 million per year and $.4 million in reduced lease payments.
In addition, in 1993, the Company entered into a $100 million secured revolving credit facility ("Facility") and the Company entered into an additional $40 million credit facility collateralized by the Company's electric customer accounts receivable (the "Accounts Receivable Securitization"). The Accounts Receivable Securitization has a term of five years. Together with $11 million in local lines of credit, the Company thus has $151 million in liquidity arrangements.
The Company currently estimates a total of $768 million for its capital requirements for the period of 1994 through 1998. The Company expects that such cash requirements are to be met primarily through internally-generated cash. However, to cover differences in the amounts and timing of cash generation and cash requirements, the Company intends to utilize short-term borrowings under its liquidity arrangements, including the Facility.
The Facility has an expiration date of June 13, 1995 and contains a provision that could prevent additional borrowings in the event of a material adverse change in the condition (financial or otherwise), results of operations, assets, business or prospects of the Company. In respect to the total debt to total capitalization test under the Facility and the letter of credit issued to support certain pollution control bonds, the Company is allowed to exclude from the calculation of total capitalization up to $200 million in pre-tax write- offs resulting from the Company's restructuring efforts. The Company was allowed to exclude, from the calculation, approximately $180 million in pre-tax write-offs resulting from the stipulation. The maximum allowed ratio of the Company's total debt to total capitalization under the Facility and the letter of credit is 72%. As of December 31, 1993, such ratio was 68.3%.
The Company also expects to receive cash proceeds from additional asset sales during 1994 and 1995. The Company is seeking to close the UAMPS transaction in the first half of 1994. The purchase price for the 35 MW of SJGS Unit 4 is approximately $40 million. In addition, the Company expects to consummate the sale of the Company's water division to the City of Santa Fe for approximately $48 million in the second half of 1994. The Company, along with its subsidiaries, Gathering Company and Processing Company, also anticipates to receive approximately $155 million from the sale of certain natural gas gathering and processing assets. If these sales are consummated, the proceeds from these sales which the Company is allowed to retain after tax payments and sharing of the gains could be used to retire long-term debt. The sale of these assets, as well as the amount of proceeds the Company would ultimately retain and the use of those proceeds will be subject to a number of conditions and various regulatory approvals.
FINANCING CAPABILITY AND DIVIDEND RESTRICTIONS
The Company's ability to raise external capital and the cost of such funds depend on, among other things, its results of operations, credit ratings, regulatory approvals and financial market conditions. During 1993, the Company's securities which were not already rated below "investment grade" were downgraded to below "investment grade" by the major rating agencies. The immediate effect of the reduction in the Company's credit ratings by the major rating agencies was to increase the Company's cost of short-term borrowings under the Facility and the cost of the letter of credit supporting $37.3 million pollution control revenue bonds. The Company believes that the downgrade of the above securities does not affect materially the Company's current financial condition and results of operations.
One impact of the Company's current ratings, together with covenants in the Company's PVNGS Unit 1 and Unit 2 lease agreements (see PART I, ITEM 2.-- "PROPERTIES--Nuclear Plant"), is to limit the Company's ability, without consent of the owner participants and bondholders in the lease transactions, (i) to enter into any merger or consolidation, or (ii) except in connection with normal dividend policy, to convey, transfer, lease or dividend more than 5% of its assets, including cash, in any single transaction or series of related transactions. The Facility and the Reimbursement Agreement impose similar restrictions irrespective of credit ratings.
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 indenture, without regard to the earnings test but subject to other conditions, to issue first mortgage bonds on the basis of certain previously retired bonds. The Company currently has no requirements for long-term financing during the 1994 through 1998 period. However, during this period, the Company could enter into long- term financings for the purpose of strengthening its balance sheet and reducing its cost of capital. In 1994, the Company plans to redeem $45 million of its 10 1/8% first mortgage bonds due 2004.
The Company's board of directors, which reviews the Company's dividend policy on a continuing basis, has not declared dividends on its common stock since January 1989. As of December 31, 1993, the Company had a deficit in retained earnings of $120.8 million and is currently unable to resume payment of dividends on its common stock. The resumption of common dividends is dependent upon a number of factors including the outcome of the stipulation discussed herein, earnings and financial condition of the Company and market
conditions. The Company evaluated its ability to continue paying dividends on its preferred stock under restrictions imposed by the Federal Power Act due to the Company's negative retained earnings. By letter dated April 7, 1993, the Company advised the FERC staff of the Company's position that payment of preferred stock dividends would not be in violation of the Federal Power Act. As a result, the Company has continued to declare and pay dividends on its preferred stock on scheduled dates.
CAPITAL STRUCTURE:
The Company's capitalization, including short-term debt, at December 31 is shown below:
- -------- * Total capitalization does not include the present value of the Company's lease obligations for PVNGS Units 1 and 2 and EIP leases as debt, but does include the debt associated with the beneficial interests in certain PVNGS Units 1 and 2 leases purchased by the Company on September 2, 1992.
RESULTS OF OPERATIONS
The Company sustained a loss per common share in 1993 of $1.64, compared to a loss of $2.67 per common share in 1992 and earnings of $.32 per common share in 1991. The loss experienced in 1993 was due primarily to the Company recording an after-tax charge of $108.2 million to 1993 earnings resulting from the stipulation filed with the NMPUC recommending that electric retail rates be reduced by $30 million. The loss experienced in 1992 was due primarily to the write-down of PVNGS Unit 3 and the provision for loss associated with the M-S-R power purchase contract. This resulted in an $126.2 million after-tax charge to 1992 earnings.
Resources excluded from NMPUC jurisdictional rates continue to negatively impact the Company's results of operations; however, as a result of the PVNGS Unit 3 write-down and the provision for loss associated with the M-S-R power purchase contract recorded in 1992, the Company experienced positive operating income from the excluded resources during 1993.
Selected financial information for the excluded resources for 1993, 1992 and 1991, is shown below:
- -------- * Due to the provision for the loss associated with the M-S-R contingent power purchase contract recognized in 1992, operating revenues were reduced by $20.5 million.
The following discussion highlights other significant items which affected the results of operations in 1993, 1992 and 1991, and certain items impacting future earnings.
Electric gross margin (electric operating revenues less fuel and purchased power expense) increased $30.1 million in 1993 due primarily to increased gross margin of $20.9 million from the excluded resources resulting from the 1992 provision for loss associated with the M-S-R power purchase contract and $9.3 million resulting from a 2.7% increase in jurisdictional energy sales of 145.5 million KWh. Electric gross margin also increased $15.2 million in 1992 compared to 1991 primarily resulting from a 4.3% increase in jurisdictional energy sales of 161.3 million KWh, or $10.1 million, and an increase in off- system sales revenues of $15.7 million due to increased sales activity in the wholesale power market.
Gas operating revenues increased $27.9 million and gas purchased for resale increased $27.4 million in 1993 when compared to 1992 due primarily to an increase in transportation revenues and higher purchased gas costs (which are recovered from customers through the PGAC). Purchased gas costs affect revenues and gas purchased for resale equally. Gas operating revenues and gas purchased for resale decreased $33.9 million and $33.0 million, respectively, in 1992 compared to 1991 mainly due to lower purchased gas costs.
Other operation and maintenance expenses increased $3.4 million in 1993 over 1992 primarily due to the $10.6 million effect of the Company's severance program, increased pension and benefit expense of $4.8 million due to the adoption of SFAS No. 106, Employer's Accounting for Postretirement Benefits Other Than Pensions, higher electric regulatory expenses of $2.5 million due to the framework filing and PVNGS related NRC fees, and higher PVNGS decommissioning expense of $2.4 million. Such increases were partially offset by a decrease in PVNGS lease expense of $12.2 million resulting from the Company's purchase of approximately 22% of the beneficial interests in the PVNGS Units 1 and 2 leases in September 1992 and a decrease in PVNGS operating costs of $5.6 million as a result of the cost cutting efforts at PVNGS. Other operation and maintenance expenses decreased $7.2 million in 1992 compared to 1991 primarily as a result of reduced lease payments resulting from the Company's purchase of approximately 22% of the beneficial interests in the PVNGS Units 1 and 2 leases and to a decrease in administrative and general expenses. Another item contributing to the decrease was an accrual in the second quarter of 1991 for estimated costs associated with the clean-up of mercury at gas metering sites.
The Company recorded an after-tax charge of $108.2 million in 1993 as a result of the stipulation. In 1992, the Company recorded an after-tax charge of $126.2 million resulting from the write-down of the Company's investment in PVNGS Unit 3 and the provision for loss associated with the M-S-R power purchase contract (see note 2 of notes to consolidated financial statements).
Other, under the caption, Other Income and Deductions increased $16.1 million from a year ago. Significant 1993 items, net of taxes, include the following: (1) the gain of $7.5 million recognized from the sale of an investment, (2) the gain of $5.6 million from the sale of generating facilities to Anaheim, (3) the tax benefit of $2.0 million related to sharing the Anaheim gain with jurisdictional customers, (4) tax benefits of $3.2 million due to the Federal income tax rate change which will allow the Company to utilize its net operating loss at a higher tax rate and (5) tax benefits of $1.4 million resulting from the settlement of the Internal Revenue Service ("IRS") examination of the years 1990 and 1991. Partially offsetting such increases were: (1) additional provisions for legal and litigation expenses of $5.7 million, (2) a write-off of $4.6 million of other deferred costs, (3) a PVNGS decommissioning fund adjustment of $2.8 million to recognize the cash surrender value of the policies, (4) a write-off of $2.1 million resulting from costs associated with refunding certain pollution control and, EIP bonds which represents the amount related to FERC firm-requirement wholesale customers and resources excluded from New Mexico jurisdictional rates, which cannot be deferred for regulatory purposes and (5) a provision for gas environmental costs of $1.8 million.
Significant 1992 items, net of taxes, included the following: (1) a $9.8 million charge recorded as a result of the Company's conclusion in the fourth quarter of 1992 that it did not meet the criteria of SFAS No. 71, Accounting for the Effects of Certain Types of Regulation, for recording electric regulatory assets, (2) additional loss provision of $6.3 million related to gas contract disputes, (3) recognition of an additional $2.3 million of PVNGS decommissioning and decontamination costs related to the excluded resources, (4) write-offs of $2.3 million resulting from the application of SFAS No. 101, Accounting for the Discontinuance of
Application of SFAS No. 71, to the Company's firm-requirement wholesale customers, (5) write-downs of $2.2 million for various non-utility properties, (6) a write-off of $2.2 million relating to a canceled transmission project, (7) additional transaction privilege taxes of $2.1 million, and (8) a number of other miscellaneous items of $2.3 million. Partially offsetting such charges were the cumulative effect of the change in the method of accounting for unbilled revenues of $12.7 million (see note 1 of notes to consolidated financial statements) and the gain of $2.3 million recognized from the sale of an investment.
Significant 1991 items, net of taxes, included the following: (1) additional shareholder litigation expenses of $7.1 million, (2) an additional provision for loss of $2.5 million for disputes related to gas purchase contracts, (3) losses of $2.4 million related to the M-S-R energy brokerage agreement caused by the poor wholesale power market and (4) the write-off of AFUDC and depreciation related to Four Corners of $2.2 million. Partially offsetting such charges was the recapture of damage payments of $2.8 million related to the Company's exit from diversification activities.
Net interest charges increased $12.4 million in 1993 due primarily to: (1) recording long-term debt of $141 million for the purchase of approximately 22% of the beneficial interests in the PVNGS Units 1 and 2 leases in September 1992, (2) the recording of the interest component of the provision for loss on the M-S-R power purchase contract which was recorded in 1992, and (3) interest resulting from the IRS examination settlement. Net interest charges increased $7.7 million in 1992 compared to 1991 primarily due to the interest expense resulting from the purchase of approximately 22% of the beneficial interests in the PVNGS Units 1 and 2 leases, interest owed to PGAC customers and the interest payment related to the settlement of PVNGS transaction privilege taxes.
OTHER ISSUES FACING THE COMPANY
Excess Capacity Sales/Wholesale Power Market
In its January 11, 1993 announcement, the Company stated its intention to dispose of excess electric generating capacity not needed by New Mexicans including, if possible, some or all of the Company's share of PVNGS. Excess electric generating capacity includes excluded capacity, as well as excess capacity which is currently in New Mexico jurisdictional rates and excess capacity associated with the firm-requirement wholesale customers. As of December 31, 1993, the Company's excluded capacity consists of 130 MW of PVNGS Unit 3, 80 MW of San Juan Unit 4 and the 105 MW M-S-R power purchase contract. The 105 MW purchase from M-S-R expires April 30, 1995.
In connection with the determination to sell PVNGS Unit 3, the Company has made on-going assessments of its net realizable value. The Company continues to evaluate its estimates of such amounts on an on-going basis but currently does not anticipate additional write-downs or write-offs relating to PVNGS Unit 3. The Company continues to seek prospective buyers.
On May 27, 1993, the Company executed a purchase and participation agreement with UAMPS to sell not less than 6.024% (30 MW) and up to 8.03% (40 MW) undivided ownership interest in SJGS Unit 4.On September 1, 1993, the Company and UAMPS amended the purchase and participation agreement to establish the UAMPS purchase of excluded SJGS Unit 4 capacity at 35 MW for approximately $40 million. On November 19, 1993, the Company filed an application with the NMPUC for approval of this sale. On January 21, 1994, the Company, the NMPUC Staff and the New Mexico Industrial Energy Consumers entered into a stipulation requesting approval of the sale. Hearings were held February 15, 1994, and the Company is awaiting a recommended decision. In addition, the Company made three filings with the FERC associated with the sale and has received approval on two and is awaiting the outcome of the remaining filing. Closing of the transaction will depend on the fulfillment of numerous closing conditions and will be subject to regulatory approvals from the NMPUC and the FERC. If approved, the Company anticipates that the closing of the sale will be in the first half of 1994.
Until such time as excess electric generating resources can be disposed of, the Company continues to be dependent on the wholesale power market for the recovery of its costs associated with the excluded portion of these excess resources. The Company has experienced price competition in the wholesale market 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, and expects such availability to continue. The Company has committed most of its excess capacity to off-system sales during the 1994 to 2001 timeframe.
On October 27, 1993, SDG&E filed a complaint with the FERC against the Company, alleging that certain charges under its 1985 power purchase agreement are unjust, unreasonable and unduly discriminatory. SDG&E is requesting that the FERC investigate the rates charged under the agreement and establish a refund date effective as of December 26, 1993. The relief, if granted, would reduce annual demand charges paid by SDG&E by up to $11 million per year from the effective refund date through April 2001, subject to certain limitations if the FERC has not acted within 15 months. The Company responded to the complaint on December 8, 1993, and SDG&E and the Company filed subsequent pleadings. The Company believes that the complaint is without merit, and the Company intends to vigorously resist the complaint.
PVNGS Decommissioning Funding
The Company has a program for funding its share of decommissioning costs for PVNGS. Under this program, the Company makes a series of annual deposits to an external trust fund over the estimated useful life of each unit, and the trust funds are being 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 current and former employees. The annual trust deposit, approved by the NMPUC in 1987, is currently $396,000 per unit. The NMPUC jurisdictional share of this amount related to PVNGS Units 1 and 2 is currently included in retail rates. The results of the 1992 decommissioning cost study indicate that the Company's share of the PVNGS decommissioning costs will be approximately $143.2 million, an increase from $94.2 million based on the previous study (both amounts are stated in 1993 dollars). The Company has determined that a supplemental investment program will be needed as a result of both the cost increase and the under performance of the existing investment program. However, a supplemental funding program will not be established until clarification and/or possible revisions to a FERC order issued in October 1993 regarding restricted investment vehicles for nuclear decommissioning trusts are obtained. Although a supplemental program will not be established pending resolution from the FERC, the Company has requested recovery of the increased decommissioning costs in the stipulation. The market value of the existing trust at the end of 1993 was approximately $11.0 million, including cash surrender value of the policies.
A Transmission Right-of-Way
The Company has easements for right-of-way with the Navajo Nation for portions of two transmission lines that emanate from SJGS and connect with Four Corners and with a switching station in the Albuquerque area. One grant of easement for approximately 4.2 miles of right-of-way for two parallel 345 Kv transmission lines expired on January 17, 1993. The Company has been negotiating with the Navajo Nation to renew the grant and in light of the expiring grant of easement, requested the development of an interim agreement under which the parties would operate until a long-term solution could be reached.
On January 6, 1994, the Navajo Nation and the Company executed an agreement whereby the Navajo Nation agreed not to object to the Company's operating and maintaining the facilities on the easement for right-of-way until July 17, 1994 in return for a cash payment and transfer of title to land located near the Navajo Nation. Additionally, the Navajo Nation and the Company agreed to exert a good faith effort to reach a long-term right-of-way renewal agreement prior to July 17, 1994. In pursuit of resolution of this issue, the Navajo Nation sent the Company on February 4, 1994 a letter identifying non-monetary items the Navajo Nation would be willing to negotiate as consideration for the grant of easement. On February 11, 1994, the
Navajo Nation and the Company met to establish a schedule for conducting their negotiations. Additionally, the meeting was conducted for the purpose of the Navajo Nation's presentation of their consultant's findings on the value of the easement but did not represent these findings to be the Navajo Nation's position for compensation for renewal of the easement. The Company is evaluating the consultant's findings and has committed to submitting a proposal to the Navajo Nation by mid-March. The Company continues to assess its options but is not pursuing other alternatives unless it receives indications that settlement cannot be reached in a satisfactory manner. The Company is currently unable to predict the outcome of the negotiations or the costs resulting therefrom.
OLE Transmission Project
In May 1984, the Company's Board of Directors approved plans to construct OLE, a 345 Kv transmission line connecting the existing Ojo 345 Kv line to the existing Norton Station. The Company has incurred approximately $15 million of costs associated with OLE as of December 31, 1993, and it currently estimates that project costs will total approximately $48 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 Company obtained right-of-way permits from two of the three Federal agencies having authority over the lands involved in the project. Federal district and appellate courts upheld the record of decision on the OLE environmental impact statement. However, OLE faces considerable opposition by persons concerned primarily about the environmental impacts of the project.
On March 11, 1991, the Company filed for NMPUC approval for construction of OLE. Hearings have been held and final briefs were filed in December 1992. Until final approvals are received, the Company will use interim measures to continue to provide reliable service. The Company is awaiting a final decision from the NMPUC and has no indication of when a decision will be made.
Environmental Issues--Gas
The Company has evaluated the potential impacts of the following environmental issues. The Company believes, after consideration of established reserves, that the ultimate outcome of these environmental issues will not have a material adverse effect on the Company's financial condition or results of operations.
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA")
Two CERCLA 104(e) orders were received from the EPA in late December 1993, requesting information regarding shipment of wastes to the Lee Acres Landfill, located on BLM land near the city of Bloomfield in San Juan County, New Mexico. The landfill is currently listed on the National Priorities List as a superfund site. GCNM and Gathering Company have assessed their records and other information to determine whether wastes were ever shipped from their facilities to the landfill during the period when they owned and operated the natural gas facilities. GCNM and Gathering Company's assessment indicated that no hazardous wastes or cause of such wastes were shipped from their facilities to the landfill during this time period. Nonetheless, GCNM and Gathering Company could be determined to be potentially responsible parties if the EPA determines GCNM and Gathering Company shipped wastes to the site, and could be asked or compelled to provide funds for site cleanup. GCNM and Gathering Company prepared and submitted their response to the EPA on March 8, 1994.
Toxic Substances Control Act ("TSCA")
TSCA requires manufacturers and importers of organic chemicals, including natural gas substances, to report a listing and quantity of certain toxic chemicals to the EPA every four years. Naturally occurring substances such as crude oil and unprocessed natural gas need not be reported. Due to the natural gas industry's interpretation on when unprocessed natural gas becomes a reportable substance, GCNM and Processing Company did not report TSCA substances to the EPA in prior reporting years of 1986 and 1990. As a result of the EPA's clarification on the limited scope of the exemption, GCNM and Processing Company now have filed their reports for 1986 and 1990 and will report such substances to the EPA in the 1994 reporting year. The companies may be subject to administrative fines/penalties for their failure to report in 1986 and 1990. The maximum penalty allowed under the statute is $25,000/day for every day the report has not been filed.
Gas Wellhead Pit Remediation
Effective September 1992, the OCD issued a ruling which affects GCNM and Gathering Company's natural gas gathering facilities located in the northwestern part of New Mexico. The ruling prohibits the further discharge of fluids associated with the production of natural gas into unlined open pits in certain areas deemed environmentally sensitive due to their proximity to fresh water supplies. In addition to the cessation of the discharge of fluids, the ruling requires that GCNM and Gathering Company remediate the areas where discharges have contaminated fresh water supplies. GCNM has submitted generic closure plans for the pits, which have been approved by OCD and the BLM.
Air Permits
A recent environmental audit, associated with the Company's proposed sale of certain gas assets, brought to light certain discrepancies regarding required air permits associated with certain natural gas facilities. The audit identified a total of thirteen facilities containing discrepancies. The vast majority of the discrepancies are minor in nature and include discrepancies in record keeping, equipment identification and inaccurate information in air permit applications. The discrepancies at three of the facilities involve permit issuance and modification and are more serious in nature. The Company is subject to administrative fines/penalties by the New Mexico Environment Department ("NMED") for these discrepancies.
The Company plans to meet with the NMED in March 1994 to discuss the nature of the permit discrepancies and to propose methods and schedules to resolve the discrepancies. The resolution process will include the filing of permit applications, modifications and revisions where necessary. After reviewing the applications, NMED will determine whether to grant the application, modification or revision and make a determination whether to impose any fines/penalties.
The CERCLA, air permits and gas wellhead pit remediation issues previously discussed are part of the retained environmental liabilities under the sale agreement with Williams (see Sale of Gas Gathering and Processing Assets).
Environmental Issue--Electric
The Company's current estimate to decommission its retired fossil-fueled plants (see "Fossil-Fueled Plant Decommissioning Costs") includes approximately $17.2 million for a groundwater remediation program at Person Station. The Company, in compliance with a New Mexico Environment Action Directive, has determined that ground water contamination exists in the deep and shallow water aquifers. The Company is required to delineate the extent of the contamination and remediate the contaminant in the ground water. The extent of the contaminant plume in the deep water aquifer is not currently known, and the estimate assumes that the deep ground water plume can be easily delineated with a minimum number of monitoring wells. As part of the financial assurance requirements of the Person Station Hazardous Waste Permit, the Company posted a $3.7 million performance bond with a trustee. The remediation program continues on schedule. The Company does not anticipate any material adverse impact on its financial condition or the results of operations with respect to the remediation program.
Fossil-Fueled Plant Decommissioning Costs
The Company's six owned or partially owned, in service and retired, fossil- fueled generating stations are expected to incur dismantling and reclamation costs as they are decommissioned. The Company's share of decommissioning costs for all of its fossil-fueled generating stations is projected to be approximately $126 million stated in 1992 dollars, including approximately $24 million for Person, Prager and Santa Fe Stations which have been retired.
In June of 1993, the Company filed for recovery of all estimated decommissioning costs by factoring them into its depreciation rates included in the Company's depreciation rate study filed with the NMPUC.
As previously discussed, the Company and the interested parties entered into the January 12, 1994 stipulation. The stipulation affirms the Company's right to recover all fair, just and reasonable costs arising from the decommissioning of its fossil-fueled generating plants in service, including demolition, waste disposal, environmental and site restoration. The stipulation also resolves the issues of decertification and decommissioning of the Company's three retired fossil-fueled generating stations resulting in the Company foregoing recovery of the first $24.4 million of decommissioning costs associated with these stations. The stipulation is subject to NMPUC approval.
Palo Verde Nuclear Generating Station--Steam Generator Tubes
On December 26, 1993, PVNGS Unit 3 returned to service at approximately 85% power following a mid-cycle outage during which APS inspected Unit 3's steam generators. APS has informed the NRC that the inspection did not reveal the type of tube degradation (axial cracking in upper bundle) experienced in Unit 2's steam generators; however, the inspection did reveal another more common type of tube degradation (circumferential cracking at tubesheet) in Unit 3's steam generators which has occurred in similarly-designed steam generators at other plants. The next regular refueling outage for Unit 3 is scheduled to begin in March 1994, at which time APS plans to inspect and chemically clean that unit's steam generators.
On January 8, 1994, APS removed Unit 2 from service to inspect and chemically clean its two steam generators during a mid-cycle outage. The inspection revealed additional tube degradation of the type (axial cracking in upper bundle) previously found in that unit's steam generators. The inspection has also revealed the common type of tube degradation (circumferential cracking at tubesheet) which has occurred in similarly-designed steam generators at other plants. Based on these findings, APS expanded the scope of the inspection of the Unit 2 steam generators and the planned duration of the outage until late March. However, because APS's analysis of Unit 2's steam generators is ongoing, APS cannot predict with certainty the timing of the restart of Unit 2. APS is currently evaluating the need for an additional mid-cycle outage for Unit 2 during 1994.
Unit 1 and Unit 3 continue to operate at approximately 85% power since each unit returned to service in November 1993 and December 1993, respectively, after outages during which each unit's steam generators were inspected.
APS has performed, and is continuing, certain corrective actions including, among other things, chemical cleaning, operating the units at reduced temperatures, and, for some period, operating the units at approximately 85% power. As a result of these corrective actions, all three units should be returned to 100% power by mid 1995, and one or more of the units could be returned to 100% power during the course of 1994. So long as the three units are involved in mid-cycle outages and are operated at approximately 85% power, the Company will incur replacement power costs and reduced wholesale sale incentives of approximately $5.7 million during 1994, approximately 75% of which will be recovered through the Company's FPPCAC.
El Paso Electric Company
The Company owns or leases a 10.2% interest in PVNGS and owns a 13% interest in Four Corners Units 4 and 5, which are operated by APS. El Paso owns or leases a 15.8% interest 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 11 of the United States Bankruptcy Code. On September 8, 1992, El Paso filed a plan of reorganization with the bankruptcy court, which was later amended pursuant to an October 26, 1992 filing with the court. On May 4, 1993, El Paso and Central and South West Corporation ("CSW") announced a plan for merger in connection with El Paso's Chapter 11 reorganization, under which El Paso would become a wholly-owned subsidiary of CSW.
A modified amended El Paso--CSW plan and disclosure statement dated August 27, 1993 has been filed with the bankruptcy court and was approved December 8, 1993. In order for the merger to be implemented, CSW and El Paso must receive appropriate regulatory approvals, including approval of the NRC and the FERC. In the El Paso--CSW FERC proceedings, the Company has intervened to protect its interests relative to the various transmission issues raised by the El Paso-- CSW filings. The Company's regulatory filings in the FERC proceeding address reliability and potential system impacts that may result to the Company from the merger. At this time the Company is unable to predict the result of these regulatory proceedings.
In addition to approving the El Paso--CSW plan, the bankruptcy court approved the Cure and Assumption Agreement between El Paso and the PVNGS participants, which provides for (i) various mutual releases and (ii) the execution of a release by El Paso and any alleged claims regarding the 1989-90 PVNGS outages. All such releases will be effective on the effective date of the El Paso--CSW plan. The Cure and Assumption Agreement also provided for payment in full to the PVNGS participants of pre-petition monies owed by El Paso. El Paso has made the payment contingent upon its completion of the merger with CSW.
The bankruptcy court also approved the assumption by El Paso of several wheeling agreements that El Paso and the Company agreed to extend as part of a 120 day transition agreement. In connection with the assumptions, El Paso paid the Company approximately $2.3 million owed for pre and post-petition wheeling services. Although the transition agreement has expired by its terms, the parties have signed an agreement in principle for near-term and longer-term wheeling services. The agreement would provide El Paso with a total of 80 MW of transmission service until such time as El Paso installs a phase shifting transformer ("PST") which is expected to be late 1995. The agreement would provide El Paso with 20 MW of service after the PST is installed in exchange for payment by El Paso of proportional costs incurred by the Company for generation support of the transmission as well as wheeling charges. The Company and El Paso have also agreed to negotiate both near-term and longer-term operating procedures, which may include transfer by the Company of operating agent status for the Southern New Mexico Transmission System to El Paso. The Company will continue to retain its transmission rights (presently 75 MW) in southern New Mexico. The wheeling agreement will be subject to regulatory approval at FERC and will also be reviewed by the NMPUC in connection with several regulatory filings of El Paso, both predating and in connection with the El Paso-- CSW merger.
Albuquerque Franchise Issues
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 Company's use of City property for electric service rights-of- way. The Company continues service to the area, which contributed 46% of the Company's total 1993 electric operating revenues. The absence of a franchise does not change the Company's right and obligation to serve those customers under state law. In November 1991, the NMPUC issued an order concluding, among other things, that the City could bid for services to its own facilities (Albuquerque municipal loads generated approximately $17.0 million, $16 million and $17 million in annual revenue for 1993, 1992 and 1991, respectively), but not for service to other customers. In reaching this conclusion, the NMPUC noted that New Mexico law reflects a legislative choice to vest the NMPUC with exclusive control over utility rates and services. The NMPUC also noted that the Company's obligation to serve its customers in Albuquerque will continue irrespective of whether the municipal franchise is renewed. The City appealed the NMPUC's order to the New Mexico Supreme Court (the "Court"). On April 21, 1993, the Court issued its decision on the City's appeal of the NMPUC order. The Court ruled that a city can negotiate rates for its citizens in addition to its own facility uses. The Court also ruled that any contracts with utilities for electric rates are a matter of statewide concern and subject to approval, disapproval or modification by the NMPUC. In addition, the Court reaffirmed the NMPUC's exclusive power to designate providers of utility service within a municipality and confirmed that municipal franchises were not licenses to serve but rather to provide access to public rights-of-way.
In 1992, representatives of the Company and the City met in attempts to resolve the franchise renewal issue. Currently, the franchise renewal meetings are in abeyance due to the City's interest in the outcome of the retail wheeling legislation which was introduced in the 1993 state legislative session. The Company continues to pay franchise fees to the City.
Retail Wheeling
During 1992, open access to transmission grids in the electric wholesale market, as mandated by the National Energy Policy Act, stimulated interest in the retail wheeling concept in New Mexico, resulting in the introduction of legislation in the 1993 New Mexico state legislature. On March 6, 1993, the New Mexico State Senate passed Senate Memorial 54, which calls for the concept of retail wheeling to be studied by the Integrated Resource Planning Committee which is an interim legislative committee, with a report to be made to the 1995 legislature. The Company has been providing information for the study effort. The study is anticipated to be completed by December 1994.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Public Service Company of New Mexico is responsible for the preparation and presentation of the accompanying consolidated financial statements. The consolidated financial statements 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 financial statements. The system of internal accounting controls is supported by written policies and procedures, by a staff of internal auditors who conduct comprehensive internal audits and by the selection and training of qualified personnel.
The Board of Directors, through its Audit Committee comprised entirely of outside directors, meets periodically with management, internal auditors and the Company's independent auditors to discuss auditing, internal control and financial reporting matters. To ensure their independence, both the internal auditors and independent auditors have full and free access to the Audit Committee.
The independent auditors, Arthur Andersen & Co., are engaged to audit the Company's consolidated financial statements in accordance with generally accepted auditing standards.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and the Stockholders of Public Service Company of New Mexico:
We have audited the accompanying consolidated balance sheet and statement of capitalization of Public Service Company of New Mexico (a New Mexico corporation) and subsidiaries as of December 31, 1993, and the related consolidated statements of earnings (loss), retained earnings (deficit), and cash flows for the year then ended. In connection with our audit of the consolidated financial statements, we have also audited the financial statement schedules V, VI and IX for the year ended December 31, 1993. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Public Service Company of New Mexico and subsidiaries as of December 31, 1993, and the results of its operations and its cash flows for the year then ended 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. These financial statement schedules are presented for purposes of complying with the Securities and Exchange Commissions rules and are not part of the basic consolidated financial statements.
As explained in Notes 1 and 6 to the financial statements, effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, and No. 109, Accounting for Income Taxes.
Arthur Andersen & Co.
Albuquerque, New Mexico February 25, 1994
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders Public Service Company of New Mexico:
We have audited the consolidated balance sheet and statement of capitalization of Public Service Company of New Mexico and subsidiaries as of December 31, 1992, and the related statements of earnings (loss), retained earnings (deficit) and cash flows for each of the years in the two-year period ended December 31, 1992. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules V, VI and IX for each of the years in the two-year period ended December 31, 1992. These consolidated financial statements and financial statement schedules are the responsibility 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 standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Public Service Company of New Mexico and subsidiaries as of December 31, 1992, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 1992, 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.
The Company has substantial excess electric generating capacity, the cost and amount of which continue to negatively impact financial condition and results of operations as well as the level of New Mexico retail rates. The Company has adopted certain plans and is evaluating other options to address the negative effects related to its excess capacity. Because the ultimate outcome of these matters, including NMPUC regulatory responses thereto, is not presently determinable, the recovery of (i) the Company's remaining direct investment in Palo Verde Nuclear Generating Station (PVNGS) Unit 3, and (ii) its lease costs related to PVNGS Units 1 and 2, is uncertain. Accordingly, neither a provision for any additional loss related to PVNGS Unit 3 nor any provision for loss related to PVNGS Units 1 and 2 has been recognized in the accompanying 1992 consolidated financial statements.
As discussed in note 1 of notes to consolidated financial statements, the Company changed its method of accounting for unbilled revenues in 1992.
KPMG PEAT MARWICK Albuquerque, New Mexico March 11, 1993
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS (LOSS)
The accompanying notes are an integral part of these financial statements.
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (DEFICIT)
The accompanying notes are an integral part of these financial statements.
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
The accompanying notes are an integral part of these financial statements.
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Cash consists of currency on hand and demand deposits. The accompanying notes are an integral part of these financial statements.
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CAPITALIZATION
The accompanying notes are an integral part of these financial statements.
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1992 AND 1991
(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 Utility Commissioners ("NARUC"), and adopted by the New Mexico Public Utility Commission ("NMPUC").
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and subsidiaries in which it owns a majority voting interest. All significant intercompany transactions and balances have been eliminated.
Utility Plant
Utility plant, with the exception of Palo Verde Nuclear Generating Station ("PVNGS") Unit 3 and the Company's purchased 22% beneficial interests in the PVNGS Units 1 and 2 leases, 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 ("AFUDC"). Utility plant includes certain electric assets not subject to NMPUC regulation. The results of operations of such electric assets are included in operating income. (See note 2.)
It is Company policy to charge repairs and minor replacements of property to maintenance expense and to charge major replacements to utility plant. Gains or losses resulting from retirements or other dispositions of operating property in the normal course of business are credited or charged to the accumulated provision for depreciation.
Depreciation and Amortization
Provision for depreciation and amortization of utility plant is made at annual straight-line rates approved by the NMPUC. The average rates used are as follows:
The provision for depreciation of certain equipment is charged to clearing accounts and subsequently 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
As provided by the uniform systems of accounts, AFUDC, a noncash item, is charged to utility plant. AFUDC represents the cost of borrowed funds (allowance for borrowed funds used during construction) and
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) a return on other funds (allowance for equity funds used during construction). The Company capitalizes AFUDC on construction work in progress and nuclear fuel in the process of enrichment to the extent allowed by regulatory commissions. With the January 11, 1993 announcement, the Company determined that beginning with the fourth quarter of 1992, it would suspend recording AFUDC on construction work in progress pending the outcome of the framework filing (see note 2). The Company did record AFUDC on nuclear fuel in process during this time.
AFUDC is computed using the maximum rate permitted by the FERC. The total AFUDC rates used were 4.37%, 5.27%, and 8.96% for 1993, 1992 and 1991, respectively, compounded semi-annually.
Fuel, Purchased Power and Gas Purchase Costs
The Company uses the deferral method of accounting for the portion of base fuel costs (defined as fuel costs plus net purchased power costs less off- system sales revenues) and gas purchase costs which is reflected in subsequent periods under fuel and purchased power cost adjustment clauses and gas adjustment clauses. Future recovery of these costs is based on orders issued by the regulatory commissions.
Amortization of Debt Discount, Premium and Expense
Discount, premium and expense related to the issuance and retirement of long- term debt are amortized over the lives of the respective issues. Costs associated with retirement of long-term debt related to the Company's NMPUC jurisdictional customers were written off as part of the January 12, 1994 stipulation. (See note 2.)
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 NMPUC jurisdiction are charged currently for the tax effects of certain of these differences (normalization). However, the income tax effects of certain other differences result in reductions of income tax expense for ratemaking purposes in the current year as required by the NMPUC (flow-through). This flow-through method is used primarily for minor differences between book and tax depreciation. A 1990 NMPUC order in an electric rate case required reversal of the flow-through treatment previously accorded the premiums on retirement of first mortgage bonds and losses on hedging transactions, and retroactively required tax normalization of these items. Additional tax normalization is required by generally accepted accounting principles ("GAAP") for all temporary differences not subject to NMPUC rate regulation.
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 accumulated deferred income taxes may not be immediately recognized because of ratemaking and tax accounting provisions contained in the Tax Reform Act of 1986. For items accorded flow-through treatment under NMPUC orders, deferred income taxes and the future ratemaking effects of such taxes, as well as corresponding regulatory assets and liabilities, are recorded.
Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. SFAS No. 109 requires the use of the liability method for
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) recording deferred income taxes on temporary differences between income tax and financial reporting using the enacted tax rates at which such differences are expected to reverse. The Company had previously adopted SFAS No. 96, which also required the use of the liability method. For that reason, the adoption of SFAS No. 109 had no material effect upon 1993 operating results.
The Revenue Reconciliation Act of 1993, enacted in August of 1993, contains a provision which raises the corporate Federal income tax rate from 34 to 35 percent, retroactive to January 1, 1993. The effects of this change were recorded during 1993. Neither this nor any other provision of this Act is expected to have any material impact on the Company's financial condition or its results of operations.
Change in Accounting for Unbilled Revenues
Prior to January 1, 1992, the Company recognized utility revenues when billed. To provide a better matching of the Company's revenues from sales with the related costs, effective January 1, 1992, the Company changed its method of accounting to record estimated revenues from sales of utility services provided subsequent to monthly billing cycle dates but prior to the end of the accounting period. The cumulative effect of this accounting change as of January 1, 1992, net of taxes, was $12.7 million or $.30 per common share and was included in 1992 net earnings as a component of other income and deductions. The effect of the accounting change on 1992 net income, exclusive of the cumulative effect, was to increase net earnings and net earnings per common share by $1.7 million and $.04, respectively. Had the accrual method been applied in 1991, net earnings for that year would not have been materially different from that shown in the consolidated statement of earnings. The effect of this accounting change has resulted in a decrease in net earnings and net earnings per common share by $1.0 million and $.02, respectively, for the twelve months ended December 31, 1993.
(2)ELECTRIC OPERATIONS STIPULATION AND WRITE-OFFS
On January 11, 1993, the Company announced specific actions which were determined to be necessary in order to accelerate the Company's preparation for the new challenges in the competitive electric energy market. Included in the announcement was the Company's intention to file a plan ("framework filing") with the NMPUC designed to lower electric prices by consolidating certain gas and electric functions, restructuring assets and reducing operation and maintenance expenses by $25 million annually. The Company separated the gas and electric customer service consolidation issues from the balance of the framework filing.
In its January 11, 1993 announcement, the Company also stated its intention to dispose of excess electric generating capacity not needed by New Mexicans including, if possible, some or all of the Company's share of PVNGS. Excess electric generating capacity includes excluded capacity, as well as excess capacity which is currently in New Mexico jurisdictional rates and excess capacity associated with the firm-requirement wholesale customers. As of December 31, 1993, the Company's excluded capacity consists of 130 MW of PVNGS Unit 3, 80 MW of San Juan Generating Station ("SJGS") Unit 4 and the 105 MW M- S-R Public Power Agency ("M-S-R") power purchase contract. As a result of the Company's decision to attempt to sell PVNGS Unit 3, the Company estimated the net realizable value of PVNGS Unit 3 and the M-S-R power purchase contract and recorded an after-tax loss of $126.2 million at December 31, 1992. The Company continues to evaluate its estimate of such amounts on an on-going basis but currently does not anticipate additional write-downs or write-offs of PVNGS Unit 3 and the M-S-R power purchase contract. The Company continues to seek prospective buyers for the PVNGS units.
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(2)ELECTRIC OPERATIONS STIPULATION AND WRITE-OFFS--(CONTINUED)
On January 12, 1994, the Company and the NMPUC staff and primary intervenor groups (the New Mexico Attorney General, the New Mexico Industrial Energy Consumers, the City of Albuquerque, the United States Executive Agencies and the New Mexico Retail Association) ("interested parties") entered into a stipulation ("stipulation") which addresses retail electric prices, generation assets and certain financial concerns of the Company. The Company filed the stipulation with the NMPUC, recommending that electric retail rates be reduced by $30 million. This reduction is accomplished primarily through the write-down of the 22% beneficial interests in the PVNGS Units 1 and 2 leases purchased by the Company, the write-off of certain regulatory assets and other deferred costs, the write-off of certain PVNGS Units 1 and 2 common costs and the Company's previously announced cost reduction efforts. In connection with the stipulation, the Company has charged approximately $108.2 million, after-tax, to the 1993 results of operations. Such after-tax charge resulted in the Company continuing to have a deficit in retained earnings as of December 31, 1993. As a result, the Company is unable to resume payment of dividends on its common stock. The Company evaluated the possibility of a quasi-reorganization but does not intend to implement a quasi-reorganization at this time.
The stipulation is subject to NMPUC approval. The Company believes that the approval of the stipulation would result in a reduction of competitive risk and regulatory uncertainty. However, there can be no assurance that the stipulation will be approved by the NMPUC. If the stipulation is not approved in its entirety, unless otherwise agreed to by all interested parties, the stipulation shall be null and void.
On January 3, 1994, the NMPUC issued an order establishing investigations of rates for both the Company and Southwestern Public Service Company ("SPS"). The order required the Company to file a general rate case no later than July 1, 1994. However, at the prehearing conference held on February 23, 1994, regarding the stipulation, the NMPUC vacated the requirements of its original request and will allow the stipulation to satisfy their requirements. Hearings on the stipulation have not been scheduled; however, the Company and interested parties are scheduled to file testimony on April 18, 1994. The NMPUC confirmed the oral rulings in a written order issued on March 7, 1994.
On March 7, 1994, the Albuquerque City Council deadlocked on endorsing the Mayor's signing of the stipulation. The Company is currently unable to determine what impact, if any, the City Council's action might have on the stipulation. However, the Company remains committed to the process and will meet with the other parties who signed the stipulation to evaluate this new development. The Company believes that the stipulation will continue through the hearing process being established by the NMPUC.
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(3)CAPITALIZATION
Changes in common stock, additional paid-in capital and cumulative preferred stock are as follows:
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 the payment of dividends on common stock unless the Company has positive retained earnings. The Company's board of directors, which reviews the Company's dividend policy on a continuing basis, has not declared dividends on its common stock since January 1989. As of December 31, 1993, the Company had a deficit in retained earnings of $120.8 million and is, therefore, currently unable to resume payment of dividends on its common stock. The resumption of common dividends is dependent upon a number of factors including the outcome of the stipulation discussed in note 2, earnings and financial condition of the Company and market conditions.
Cumulative Preferred Stock
The number of authorized shares of cumulative preferred stock is 10 million shares. The earnings tests in the Company's Restated Articles of Incorporation currently restrict the issuance of preferred stock.
The Company, upon 30 days notice, may redeem the cumulative preferred stock at stated redemption 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.
The Company evaluated its ability to continue paying dividends on its preferred stock under restrictions imposed by the Federal Power Act due to the Company's negative retained earnings. By letter dated April 7, 1993, the Company advised the FERC staff of the Company's position that payment of preferred stock dividends would not be in violation of the Federal Power Act. As a result, the Company continued to declare and pay dividends on its preferred stock on scheduled dates.
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(3)CAPITALIZATION--(CONTINUED)
Mandatory redemption requirements for 1994 through 1998 are $1.3 million annually. During any period that the Company is unable to pay preferred dividends, if that should occur, the Company would be prohibited by its Articles of Incorporation from making future mandatory redemption payments.
Long-Term Debt
Substantially all utility plant 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 indenture, without regard to the earnings test but subject to other conditions, to issue first mortgage bonds on the basis of certain previously retired bonds.
In November 1992, pollution control revenue refunding bonds, 1992 Series A, in the principal amount of $37.3 million, were issued. Such bonds are supported by a letter of credit ("LOC") and are collaterally secured by certain first mortgage bonds issued by the Company. The LOC will expire on November 26, 1995, unless extended or renewed, and prior thereto may be terminated or replaced by an alternate LOC or alternate security. As the Company believes it has the ability to extend the LOC, the $37.3 million is not included in the aggregate maturities.
The aggregate amounts (in thousands) of maturities for 1994 through 1998 on long-term debt outstanding at December 31, 1993 (including estimates of remittance of collections for the Asset Securitization discussed below) are as follows:
On August 3, 1993, the Company received $60 million from the securitization relating to amounts being recovered from gas customers relating to certain gas contract settlements. Proceeds were used to pay down short-term debt. Pollution control revenue bonds totaling $182 million and EIP Secured Facility Bonds totaling $51.3 million were refunded and replaced during 1993. The refundings will provide pre-tax interest savings of approximately $5.5 million per year and $.4 million in reduced lease payments.
Fair Value of Financial Instruments
Effective January 1, 1992, the Company adopted SFAS No. 107, Disclosures about Fair Value of Financial Instruments, which requires the disclosure of the fair value of all financial instruments. As of December 31, 1993, the fair value of the Company's long-term debt and preferred stock (including current maturities) is estimated to be approximately $986 million and $75 million, respectively, based on market quotes obtained from the Company's investment bankers.
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(4)REVOLVING CREDIT FACILITY AND OTHER CREDIT FACILITIES
At December 31, 1993, the Company had a $100 million secured revolving credit facility (the "Facility") with the expiration date of June 13, 1995. The Company must pay commitment fees of .5% per year on the total amount of the Facility. The Company also has a $40 million credit facility, collaterialized by the Company's electric customer account receivable (the "Accounts Receivable Securitization"). Such credit facility has a term of five years. Together with $11 million in local lines of credit, the Company has $151 million in liquidity arrangements. As of December 31,1993, there were no borrowings outstanding under the Facility, the Accounts Receivable Securitization or any of the local lines of credit.
(5)INCOME TAXES
Income taxes consist of the following components:
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 following factors:
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(5)INCOME TAXES--(CONTINUED) 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:
The gross accumulated deferred income tax liability as of December 31, 1993 was $303.9 million and consisted principally of $265.1 million relating to accelerated tax depreciation. The gross accumulated deferred income tax asset was $256.6 million, the largest element of which was $84.4 million relating to unutilized net operating loss carryforwards, the balance being comprised primarily of numerous items previously recognized as expenses for financial accounting purposes which had not been deducted for tax purposes. In addition, the balance of deferred income taxes at December 31, 1993 includes amounts for temporary differences related to deferred gains on sale and leaseback transactions, settlements of gas contract disputes, deferred investment tax credits and regulatory assets and liabilities.
At December 31, 1993, the Company had net operating loss carryforwards for Federal income tax purposes of $21.6 million, $133.9 million, $15.1 million, and $46.6 million which expire in 2003, 2004, 2005 and 2007, respectively. For purposes of New Mexico state income tax, these carryforwards, if unused, would expire in 2003, 2004, 2005 and 1997, respectively. New Mexico law provides a five-year carryforward for all net operating losses incurred after 1990. The Company anticipates that all of these carryforwards will be fully utilized before expiration, and the financial statements reflect that expectation.
The application of SFAS No. 109 to regulated enterprises results in the creation of regulatory assets and liabilities. At December 31, 1993 and 1992, deferred charges included regulatory assets of $75.2 million and $65.9 million, respectively, and deferred credits included regulatory liabilities of $69.9 million and $73.1 million, respectively.
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(5)INCOME TAXES--(CONTINUED) The Company defers investment tax credits related to utility assets and amortizes them over the estimated useful lives of those assets. Investment tax credits related to non-utility assets have been flowed through in earlier years.
In 1993, the Company reached a settlement with the Internal Revenue Service regarding income taxes for the years 1990 through 1991. The primary effect of the settlement is an acceleration of certain previously deferred items into current income tax expense.
(6)EMPLOYEE AND POST-EMPLOYMENT BENEFITS
Pension Plan
The Company and its subsidiaries have a pension plan covering substantially all of their employees, 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 average of highest annual base salary for three consecutive years. The Company's policy is to fund actuarially-determined contributions. Contributions to the plan reflect benefits attributed to employees' years 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:
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(6)EMPLOYEE AND POST-EMPLOYMENT BENEFITS--(CONTINUED)
The following sets forth the plan's funded status and amounts (in thousands) at December 31, 1993 and 1992:
The weighted average discount rate used to measure the projected benefit obligation was 7.0% for 1993 and 8.0% for 1992 and the expected long-term rate of return on plan assets was 9.0% for 1993 and 9.5% for 1992. The rate of increase in future compensation levels based on age-related scales was 4.1% for 1993 and 5.0% for 1992.
As of December 31, 1993, the Company recognized $2.8 million, net of tax, as a separate component of common stock equity, for the amount of additional pension liability in excess of the unrecognized prior service cost in accordance with SFAS No. 87, Employers' Accounting for Pensions.
Other Postretirement Benefits
The Company adopted SFAS No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, effective January 1, 1993. The Company provides medical and dental benefits to eligible retirees. Currently, retirees are offered the same benefits as active employees after reflecting Medicare coordination. The components of postretirement benefit cost (in thousands) for 1993 are as follows:
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(6)EMPLOYEE AND POST-EMPLOYMENT BENEFITS--(CONTINUED)
The following sets forth the plan's funded status and amounts (in thousands) at December 31, 1993:
Prior to 1993, the costs of these benefits were expensed on a pay-as-you-go basis. The cost of providing these benefits was $1,531,000 and $1,139,000 for 1992 and 1991, respectively. As of December 31, 1993, the discount rate used to measure the postretirement benefit obligation was 7.0% and the health care cost trend rate was 6%. The effect of a 1% increase in the health care trend rate assumption would increase the accumulated postretirement benefit obligation as of December 31, 1993 by approximately $10.2 million and the aggregate service and interest cost components of net periodic postretirement benefit cost for 1993 by approximately $1.0 million. On December 20, 1993, the NMPUC issued a final order in a NMPUC case regarding an inquiry into SFAS No. 106. In its final order, the NMPUC adopted a policy which provides for accrual accounting for the postretirement benefit costs, funding requirements into an irrevocable trust and specific reporting for the benefit costs in future rate cases. The order also provides for specific waiver provisions with respect to the external trust funding requirements and a deferral of the benefit costs in excess of the pay-as-you-go basis. The Company has requested recovery of the full accrual amount of SFAS No. 106 expense in the stipulation for its electric business unit (see note 2). The Company will address the recovery of the amounts related to the gas business unit in a future rate case. The Company currently intends to fund the full amount of these costs in 1994.
Employee Stock Ownership Plan
Effective January 1, 1989, the Company adopted an Employee Stock Ownership Plan covering substantially all of its employees. Under the plan, the Company makes cash contributions which are utilized to purchase the Company's common stock on the open market. Contributions to the plan were approximately $5.3 million in 1989. No contributions or accruals were made in 1990, 1991 and 1992 and effective March 1, 1993, the plan has been cancelled.
Performance Stock Plan
As approved by the Company's shareholders on May 25, 1993, the Company adopted a nonqualified stock option plan (Performance Stock Plan) covering a group of management employees. Under the terms of the plan which became effective on July 1, 1993, options to purchase shares of the Company's common stock are granted with an exercise price equal to the fair market value of the stock at the date of grant. On July 1, 1993, the Company granted 370,000 shares to the covered employees under the plan at an exercise price of
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(6)EMPLOYEE AND POST-EMPLOYMENT BENEFITS--(CONTINUED) $13.75 per share. The remaining 1,630,000 shares approved under the plan are reserved for future grants. Options may be exercised following vesting as described in the plan. Currently no options are eligible for exercise.
Executive Retirement Program
In addition, the Company had an executive retirement program for a group of management employees. The program was intended to attract, motivate and retain key management employees. The Company's projected benefit obligation for this program, as of December 31, 1993, was $18.5 million, of which the accumulated and vested benefit obligation was $17.4 million. In addition, in 1993, the Company recognized an additional liability of $7.2 million for the amount of unfunded accumulated benefits in excess of accrued pension costs. The net periodic pension cost for 1993, 1992 and 1991 was $2.1 million, $2.0 million and $1.8 million, respectively. In 1989, the Company established an irrevocable grantor trust in connection with the executive retirement program. Under the terms of the trust, the Company may, but is not obligated to, provide funds to the trust, which was established with an independent trustee, to aid it in meeting its obligations under such program. Funds in the amount of approximately $12.7 million (fair market value of $13.0 million) were provided to the trust in 1989. No additional funds have been provided to the trust.
(7)CONSTRUCTION PROGRAM AND JOINTLY-OWNED PLANTS
It is estimated that the Company's construction expenditures for 1994 will be approximately $129 million, including expenditures on jointly-owned projects.
The Company's proportionate share of expenses for the jointly-owned plants is included in operating expenses in the consolidated statement of earnings.
At December 31, 1993, the Company's interest (including leasehold interests in PVNGS Units 1 and 2 for power entitlement) and investments in jointly-owned generating facilities are:
- -------- * Includes the Company's interest in PVNGS Unit 3, the Company's interest in common facilities for all PVNGS units and the 22% beneficial interests in PVNGS Units 1 and 2 leases purchased on September 2, 1992.
San Juan Generating Station
The Company operates and jointly owns SJGS. At December 31, 1993, SJGS Units 1 and 2 are owned on a 50% shared basis with Tucson Electric Power Company ("Tucson"), Unit 3 is owned 50% by the Company, 41.8% by Southern California Public Power Authority and 8.2% by Century Power Corporation ("Century"), (Century has agreed to sell its remaining 8.2% interest to Tri-State Generation and
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(7)CONSTRUCTION PROGRAM AND JOINTLY-OWNED PLANTS--(CONTINUED) Transmission Association, Inc.). Unit 4 is owned 45.485% by the Company, 8.475% by the City of Farmington, 28.8% by M-S-R, 7.2% by the County of Los Alamos and 10.04% by the City of Anaheim, California.
On May 27, 1993, the Company executed a purchase and participation agreement with Utah Associated Municipal Power Systems ("UAMPS") to sell not less than 6.024% (30 MW) and up to 8.03% (40 MW) undivided ownership interest in SJGS Unit 4. On September 1, 1993, the Company and UAMPS amended the purchase and participation agreement to establish the UAMPS purchase at 35 MW for approximately $40 million. On November 19, 1993, the Company filed an application with the NMPUC for approval of this sale. On January 21, 1994, the Company, the NMPUC staff, and the New Mexico Industrial Energy Consumers entered into a stipulation requesting approval of the sale. Hearings were held February 15, 1994, and the Company is awaiting a recommended decision. In addition, the Company made three filings with the FERC associated with the sale and has received approval on two and is awaiting the outcome of the remaining filing. Closing of the transaction will depend on the fulfillment of numerous closing conditions and will be subject to regulatory approvals from the NMPUC and the FERC. If approved, the Company anticipates that the closing of the sale will be in the first half of 1994.
Palo Verde Nuclear Generating Station
The Company has a 10.2% interest in PVNGS. Commercial operation commenced 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.
On September 2, 1992, the Company purchased approximately 22% of the beneficial interests in PVNGS Units 1 and 2 leases for approximately $17.5 million. For accounting purposes, this transaction was recorded as a purchase with the Company recording approximately $158.3 million as utility plant (written down to $46.7 million as a result of the stipulation, see note 2) and $140.8 million as long-term debt on the Company's consolidated balance sheet.
The PVNGS participants have insurance for public liability payments resulting from nuclear energy hazards to the full limit of 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 $79.3 million, subject to an annual limit of $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 $24 million, with an annual payment limitation of $3 million. The insureds, under this liability insurance include the PVNGS participants and "any other person or organization with respect to his legal responsibility for damage caused by the nuclear energy hazard".
The PVNGS participants maintain "all-risk" (including nuclear hazards) insurance for nuclear property damage to, and decontamination of, property at PVNGS in the aggregate amount of $2.75 billion as of January 1, 1994, a substantial portion of which must first be applied to stabilization and decontamination. The Company has also secured insurance against a portion of the increased cost of generation or purchased power resulting from certain accidental outages of any of the three PVNGS units if such outage exceeds 21 weeks.
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(7)CONSTRUCTION PROGRAM AND JOINTLY-OWNED PLANTS--(CONTINUED)
The Company has a program for funding its share of decommissioning costs for PVNGS. Under this program, the Company will make a series of annual deposits to an external trust fund over the estimated useful life of each unit, and the trust funds are being 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 current and former employees. The annual trust deposit, approved by the NMPUC in 1987, is currently $396,000 per unit. The NMPUC jurisdictional share of this amount related to PVNGS Units 1 and 2 is currently included in retail rates. The results of the 1992 decommissioning cost study indicate that the Company's share of the PVNGS decommissioning costs will be approximately $143.2 million, an increase from $94.2 million based on the previous study (both amounts are stated in 1993 dollars). Additional expense associated with the decommissioning cost increase has been included in the cost of service filed with the NMPUC in the stipulation (see note 2). The Company has determined that a supplemental investment program will be needed as a result of both the cost increase and the underperformance of the existing investment program. However, a supplemental funding program will not be established until clarification and/or possible revisions to a FERC order issued in October 1993 regarding restricted investment vehicles for nuclear decommissioning trusts are obtained. The market value of the existing trust at the end of 1993 was approximately $11.0 million, including cash surrender value of the insurance policies.
El Paso Electric Company
The Company owns or leases a 10.2% interest in PVNGS and owns a 13% interest in the Four Corners Power Plant ("Four Corners") Units 4 and 5, which are operated by Arizona Public Service Company ("APS"). El Paso Electric Company ("El Paso") owns or leases a 15.8% interest 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 11 of the United States Bankruptcy Code. On September 8, 1992, El Paso filed a plan of reorganization with the bankruptcy court, which was later amended pursuant to an October 26, 1992 filing with the court. On May 4, 1993, El Paso and Central and South West Corporation ("CSW") announced a plan for merger in connection with El Paso's Chapter 11 reorganization, under which El Paso would become a wholly-owned subsidiary of CSW. A modified amended El Paso--CSW plan and disclosure statement dated August 27, 1993 has been filed with the bankruptcy court and was approved December 8, 1993. In order for the merger to be implemented, CSW and El Paso must receive appropriate regulatory approvals, including approval of the NRC and the FERC. In the El Paso--CSW FERC proceedings, the Company has intervened to protect its interests relative to the various transmission issues raised by the El Paso--CSW filings. The Company's regulatory filings in the FERC proceeding address reliability and potential system impacts that may result to the Company from the merger. At this time the Company is unable to predict the result of these regulatory proceedings.
In addition to approving the El Paso-CSW plan, the bankruptcy court approved the Cure and Assumption Agreement between El Paso and the PVNGS participants, which provides for (i) various mutual releases and (ii) the execution of a release by El Paso and any alleged claims regarding the 1989-90 PVNGS outages. All such releases will be effective on the effective date of the El Paso-CSW plan. The Cure and Assumption Agreement also provided for payment in full to the PVNGS participants of pre-petition monies owed by El Paso. El Paso has made the payment contingent upon its completion of the merger with CSW.
The bankruptcy court also approved the assumption by El Paso of several wheeling agreements that El Paso and the Company agreed to extend as part of a 120 day transition agreement. In connection with the
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(7)CONSTRUCTION PROGRAM AND JOINTLY-OWNED PLANTS--(CONTINUED) assumptions, El Paso paid the Company approximately $2.3 million owed for pre and post-petition wheeling services. Although the transition agreement has expired by its terms, the parties have signed an agreement in principle for near-term and longer-term wheeling services. The agreement would provide El Paso with a total of 80 MW of transmission service until such time as El Paso installs a phase shifting transformer ("PST") which is expected to be late 1995. The agreement would provide El Paso with 20 MW of service after the PST is installed in exchange for payment by El Paso of proportional costs incurred by the Company for generation support of the transmission as well as wheeling charges. The Company and El Paso have also agreed to negotiate both near-term and longer-term operating procedures, which may include transfer by the Company of operating agent status for the Southern New Mexico Transmission System to El Paso. The Company will continue to retain its transmission rights (presently 75 MW) in southern New Mexico. The wheeling agreement will be subject to regulatory approval by the FERC and will also be reviewed by the NMPUC in connection with several regulatory filings of El Paso, both predating and in connection with the El Paso-CSW merger.
(8)LONG-TERM POWER CONTRACTS AND FRANCHISES
The Company entered into contracts for the purchase of electric power. Under a contract with M-S-R, which expires in early 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 approximately $42 million for 1993, and approximately $40 million and $41 million for each of the years 1992 and 1991, respectively. The minimum payment for 1994 under this contract is $26.7 million, with a minimum of $9.0 million for the first four months of 1995, at which time this contract expires. The Company, based on the January 11, 1993 announcement, recorded a provision for loss associated with the M-S-R power purchase contract in its 1992 results of operation. (See note 2.)
The Company has a long-term contract with SPS to purchase interruptible power which began in June 1991. Total payments under this contract amounted to approximately $10.8 million in 1993. Minimum payments under the contract amount to approximately $7.0 million for 1994 and approximately $11.7 million and $14 million for each of the years 1995 and 1996, respectively. In addition, the Company will be required to pay for any energy purchased under the contract. The amount of minimum payments after 1995 will depend on whether the Company exercises certain options to either reduce or increase its purchase obligations.
The Company holds long-term, non-exclusive franchises of varying durations in all incorporated communities except for the City of Albuquerque (the "City"). The Company's non-exclusive electric service franchise with the City expired in early 1992. The franchise agreement provided for the Company's use of City property for electric service rights-of-way. The Company continues service to the area, which contributed 46.0% of the Company's total 1993 electric operating revenues. The absence of a franchise does not change the Company's right and obligation to serve those customers under state law. In November 1991, the NMPUC issued an order concluding, among other things, that the City could bid for services to its own facilities (Albuquerque municipal loads generated approximately $17 million, $16 million and $17 million in annual revenues for 1993, 1992 and 1991, respectively), but not for service to other customers. In reaching this conclusion, the NMPUC noted that New Mexico law reflects a legislative choice to vest the NMPUC with exclusive control over utility rates and services. The NMPUC also noted that the Company's obligation
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(8)LONG-TERM POWER CONTRACTS AND FRANCHISES--(CONTINUED) to serve its customers in Albuquerque will continue irrespective of whether the municipal franchise is renewed. The City appealed the NMPUC's order to the New Mexico Supreme Court ("Court") solely on the grounds of the City's authority to bid for rates for its citizens. On April 21, 1993, the Court issued its decision on the City's appeal of the NMPUC order. The Court ruled that a city can negotiate rates for its citizens in addition to its own facility uses. The Court also ruled that any contracts with utilities for electric rates are a matter of statewide concern and subject to approval, disapproval or modification by the NMPUC. In addition, the Court reaffirmed the NMPUC's exclusive power to designate providers of utility service within a municipality and confirmed that municipal franchises were not licenses to serve but rather to provide access to public rights-of-way.
In 1992, representatives of the Company and the City met in attempts to resolve the franchise renewal issue. Currently, the franchise renewal meetings are in abeyance due to the City's interest in the outcome of the retail wheeling legislation which was introduced in the 1993 state legislative session. The Company continues to pay franchise fees to the City.
During 1992, open access to transmission grids in the electric wholesale market, as mandated by the National Energy Policy Act, stimulated interest in the retail wheeling concept in New Mexico, resulting in the introduction of legislation in the 1993 New Mexico state legislature. On March 6, 1993, the New Mexico State Senate passed Senate Memorial 54, which calls for the concept of retail wheeling to be studied by the Integrated Resource Planning Committee, which is an interim legislative committee, with a report to be made to the 1995 legislature. The Company has been providing information for the study effort. The study is anticipated to be completed by December 1994.
(9)LEASE COMMITMENTS
The Company classifies its leases in accordance with generally accepted accounting principles. The Company leases Units 1 and 2 of PVNGS, transmission facilities, office buildings and other equipment under operating leases. The aggregate lease payments for the PVNGS leases are $66.3 million per year over base lease terms expiring in 2015 and 2016. Prior to 1992, the aggregate lease payments for the PVNGS leases were $84.6 million per year over the base lease terms; however, this amount was reduced by the purchase of approximately 22% of the beneficial interests in the PVNGS Units 1 and 2 leases (see note 7). The 1992 aggregate lease payments for the PVNGS leases were approximately $76.4 million. Each PVNGS lease contains renewal and fair market value purchase options at the end of the base lease term. For regulatory purposes, these leases continue to be classified as operating leases and costs continue to be recovered in NMPUC jurisdictional rates.
Future minimum operating lease payments (in thousands) at December 31, 1993 are:
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(9)LEASE COMMITMENTS--(CONTINUED) Operating lease expense, inclusive of PVNGS, was approximately $80.6 million in 1993, $91.1 million in 1992 and $96.8 million in 1991. The aggregate minimum payments to be received in future periods under noncancelable subleases are approximately $7.6 million.
(10)ENVIRONMENTAL ISSUES AND FOSSIL-FUELED PLANT DECOMMISSIONING COSTS
The Company has evaluated the potential impacts of the following environmental issues. The Company believes, after consideration of established reserves, that the ultimate outcome of these environmental issues will not have a material adverse effect on the Company's financial condition or results of operations.
Environmental Issues--Gas
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA")
Two CERCLA 104(e) orders were received from the United States Environmental Protection Agency ("EPA") in late December 1993 requesting information regarding shipment of wastes to the Lee Acres Landfill, located on Bureau of Land Management ("BLM") land near the city of Bloomfield in San Juan County, New Mexico. The landfill is currently listed on the National Priorities List as a superfund site. Gas Company of New Mexico, a division of the Company ("GCNM") and Sunterra Gas Gathering Company, a wholly-owned subsidiary of the Company ("Gathering Company") have assessed their records and other information to determine whether wastes were ever shipped from their facilities to the landfill during the period when they owned and operated the natural gas facilities. GCNM and Gathering Company's assessment indicated that no hazardous wastes or cause of such wastes were shipped from their facilities to the landfill during this time period. Nonetheless, GCNM and Gathering Company could be determined to be potentially responsible parties if the EPA determines GCNM and Gathering Company shipped wastes to the site, and could be asked or compelled to provide funds for site cleanup. GCNM and Gathering Company prepared and submitted their response to the EPA on March 8, 1994.
Toxic Substances Control Act ("TSCA")
TSCA requires manufacturers and importers of organic chemicals, including natural gas substances, to report a listing and quantity of certain toxic chemicals to the EPA every four years. Naturally occurring substances such as crude oil and unprocessed natural gas need not be reported. Due to the natural gas industry's interpretation on when unprocessed natural gas becomes a reportable substance, GCNM and Processing Company did not report TSCA substances to the EPA in prior reporting years 1986 and 1990. As a result of the EPA's clarification on the limited scope of the exemption, GCNM and Processing Company now have filed their reports for 1986 and 1990 and will report such substances to the EPA in the 1994 reporting year. The maximum penalty allowed under the statute is $25,000/day for every day the report has not been filed. The companies may be subject to administrative fines/penalties for their failure to report in 1986 and 1990.
Gas Wellhead Pit Remediation
Effective September 1992, the New Mexico Oil Conservation Division ("OCD") issued a ruling which affects GCNM and Gathering Company's natural gas gathering facilities located in the northwestern part of New Mexico. The ruling prohibits the further discharge of fluids associated with the production of natural gas into unlined open pits in certain areas, deemed environmentally sensitive due to their proximity to fresh water supplies. In addition to the cessation of the discharge of fluids, the ruling requires that GCNM and Gathering Company remediate the areas where discharges have contaminated fresh water supplies. GCNM has submitted generic closure plans for the pits, which have been approved by OCD and the BLM.
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(10)ENVIRONMENTAL ISSUES AND FOSSIL-FUELED PLANT DECOMMISSIONING COSTS-- (CONTINUED)
Air Permits
A recent environmental audit, associated with the Company's proposed sale of certain gas assets, brought to light certain discrepancies regarding required air permits associated with certain natural gas facilities. The audit identified a total of thirteen facilities containing discrepancies. The vast majority of the discrepancies are minor in nature and include discrepancies in record keeping, equipment identification and inaccurate information in air permit applications. The discrepancies at three of the facilities involve permit issuance and modification and are more serious in nature. The Company is subject to administrative fines/penalties by the New Mexico Environment Department ("NMED") for these discrepancies.
The Company plans to meet with the NMED in March 1994 to discuss the nature of the permit discrepancies and to propose methods and schedules to resolve the discrepancies. The resolution process will include the filing of permit applications, modifications and revisions where necessary. After reviewing the applications, NMED will determine whether to grant the application, modification or revision and make a determination whether to impose any fines/penalties.
The CERCLA, air permits and gas wellhead pit remediation issues previously discussed are part of the retained environmental liabilities under the sale agreement with Williams Gas Processing--Blanco, Inc. ("Williams"), a subsidiary of the Williams Field Services Group, Inc. of Tulsa, Oklahoma. (See note 11.)
Environmental Issue--Electric
Included in the estimate of $24.4 million to decommission the Company's retired fossil-fuel plants is approximately $17.2 million for a groundwater remediation program at Person Station. The Company, in compliance with a New Mexico Environment Action Directive, has determined that ground water contamination exists in the deep and shallow water aquifers. The Company is required to delineate the extent of the contamination and remediate the contaminant in the ground water. The extent of the contaminant plume in the deep water aquifer is not currently known, and the estimate assumes that the deep ground water plume can be easily delineated with a minimum number of monitoring wells. As part of the financial assurance requirements of the Person Station Hazardous Waste Permit, the Company posted a $3.7 million performance bond with a trustee. The remediation program continues to be on schedule and the Company does not anticipate any material adverse impact on its financial condition or the results of operations with respect to the remediation program.
Fossil-Fueled Plant Decommissioning Costs
The Company's six owned or partially owned in service and retired fossil- fueled generating stations are expected to incur dismantling and reclamation costs as they are decommissioned. The Company's share of decommissioning costs for all of its fossil-fueled generating stations is projected to be approximately $126 million stated in 1992 dollars, including approximately $24 million for the Person, Prager and Santa Fe Stations, which have been retired.
In June of 1993, the Company filed for recovery of all estimated decommissioning costs by factoring them into its depreciation rates included in the Company's depreciation rate study filed with the NMPUC.
As previously discussed, the Company and the interested parties entered into the January 12, 1994 stipulation. The stipulation affirms the Company's right to recover all fair, just and reasonable costs arising
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(10)ENVIRONMENTAL ISSUES AND FOSSIL-FUELED PLANT DECOMMISSIONING COSTS-- (CONTINUED) from the decommissioning of its fossil-fueled generating plants in service, including demolition, waste disposal, environmental and site restoration. The stipulation also resolves the issues of decertification and decommissioning of the Company's three retired fossil-fueled generating stations resulting in the Company foregoing recovery of the first $24.4 million of decommissioning costs associated with these stations. The stipulation is subject to NMPUC approval.
(11)ASSET SALES
Sale of Gas Gathering and Processing Assets
On January 11, 1993, the Company announced its intention to dispose of the Company's natural gas gathering and natural gas processing assets. A purchaser has now been selected following a competitive bidding process.
On February 12, 1994, an agreement was executed with Williams for the sale of substantially all of the assets of Gathering Company and Sunterra Gas Processing Company, a wholly-owned subsidiary of the Company and for the sale of the Northwest and Southeast gas gathering and processing facilities of GCNM. The agreement provides for a cash selling price of $155 million, subject to certain adjustments. In addition, the Company and Williams entered into agreements for gas gathering and processing services, which the Company believes to be competitively priced, to be provided by Williams on the facilities being sold for a period up to 15 years. The transaction is subject to applicable waiting periods under the Federal Hart-Scott-Rodino Antitrust Improvements Act of 1976 and subject to approval by the NMPUC. If approved, the closing is expected to take place in 1995. The closing is also subject to other customary closing conditions, such as obtaining necessary material consents from lenders and other third parties.
Under the sale agreement, the Company agreed to retain certain liabilities pertaining to the assets being sold, including certain environmental liabilities. Such retained environmental liabilities include liabilities under environmental laws as of closing associated with (i) the mercury meter remediation project, (ii) identified friable asbestos, (iii) environmental permits required by various agencies, and (iv) pits at certain abandoned compressor sites. The Company's retained environmental liabilities also include liabilities associated with certain unlined disposal pits subject to an existing New Mexico Oil Conservation Division order. The Company has also agreed to retain liability for a portion of potential liabilities relating to a contaminated landfill that has been declared a Federal superfund site. Further, the Company agreed to indemnify Williams against other third party environmental claims arising from pre-closing ownership, operations or conditions and for breaches of environmental representations and warranties for a period of five years after closing in an amount up to $10.6 million. The Company's retained environmental liabilities described above are not subject to the $10.6 million cap. The Company has evaluated the potential impact of the above retained environmental liabilities. The Company believes, after consideration of established reserves, that the ultimate outcome of these environmental issues will not have a material adverse effect on the Company's financial condition or results of operations. The Company intends to offset costs associated with the environmental liabilities with proceeds from the sale.
Under the agreement, the Company also agreed to indemnify Williams, subject to equal sharing of the first $1.5 million (i) against third party claims (other than environmental) arising from pre-closing ownership, operations and conditions for a period of two years after closing, (ii) for breaches of other customary
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(11)ASSET SALES--(CONTINUED) representations and warranties for a period of two years from the date of closing, and (iii) for 30 days past the applicable statute of limitations for breaches of the Company's tax representations. The Company also agreed to indemnify Williams for three years after closing for third party claims relating to certain property rights. Under the agreement, the Company will, subject to prior NMPUC approval, guarantee the obligations of its subsidiaries which are parties to the agreement.
The book value of the facilities being sold, plus regulatory assets and deferred charges, is expected to be approximately $85 million. In addition, the Company expects approximately $8 million to be incurred for transaction and other ascertainable costs prior to closing. The Company anticipates that a significant amount of income tax will become payable as a result of this transaction.
Also, the NMPUC will determine the allocation of the resulting gain between the Company's gas customers and shareholders. Therefore, the Company is not able at this time to estimate the amount of any gain that would be allocated to shareholders.
The Company believes that the sale of these assets will improve its flexibility to take advantage of changing market conditions while maintaining continued access to competitively priced, reliable and secure long-term gas supplies.
Sale of Sangre de Cristo Water Company
On July 29, 1993, Santa Fe city officials announced a verbal agreement under which the City of Santa Fe ("Santa Fe") would purchase the Sangre de Cristo Water Company ("SDCW"), a division of the Company. Under the verbal agreement, the Company would receive approximately $48 million for its water utility division. The proposed agreement excluded from the sale certain Santa Fe area real estate which the Company would either sell or trade separately. The Company would also continue to operate the water utility for up to four years for a fee under a proposed contract with Santa Fe. The Company's board of directors authorized the sale on January 11, 1994. On February 23, 1994, the Santa Fe City Council authorized the sales transaction, and the Company and Santa Fe signed a purchase and sale agreement on February 28, 1994. The Company anticipates filing for regulatory approvals in March 1994. Consummation of a sale will require approval by the NMPUC. The Company expects to consummate the sale by the end of 1994.
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(12)SEGMENT INFORMATION
The financial information pertaining to the Company's electric, gas (see note 1) and other operations for the years ended December 31, 1993, 1992 and 1991 are as follows:
- -------- * Includes the resources excluded from NMPUC regulation (see note 2).
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(12)SEGMENT INFORMATION--(CONTINUED)
On January 11, 1993, the Company announced its intention to dispose of SDCW and all or major portions of the natural gas gathering and natural gas processing assets (see note 2). Such sales require NMPUC approval.
(13)SUPPLEMENTAL INCOME STATEMENT INFORMATION
Taxes, other than income taxes, charged to operating expenses were as follows:
Amortization of intangibles, royalties, and advertising costs were less than 1% of revenues in each of the above periods.
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
SCHEDULE V--PROPERTY, PLANT AND EQUIPMENT
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(continued)
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
SCHEDULE V--PROPERTY, PLANT AND EQUIPMENT--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(continued)
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
SCHEDULE V--PROPERTY, PLANT AND EQUIPMENT--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
SCHEDULE VI--ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(continued)
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
SCHEDULE VI--ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(continued)
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
SCHEDULE VI--ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
SCHEDULE IX--SHORT-TERM BORROWINGS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
- -------- The average amount outstanding during the year is calculated by using average monthly balances. The average interest rate during the year is calculated by dividing average interest expense by the average amount outstanding during the year.
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PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
QUARTERLY OPERATING RESULTS
The unaudited operating results by quarters for 1993 and 1992 are as follows:
In the opinion of management of the Company, all adjustments (consisting of normal recurring accruals) necessary for a fair statement of the results of operations for such periods have been included. - -------- (1) On January 12, 1994, the Company and the NMPUC staff and the interested parties entered into a stipulation which addresses retail electric prices, generation assets and the financial concerns of the Company. The Company filed the stipulation with the NMPUC, recommending that electric retail rates be reduced by $30 million. This reduction is accomplished primarily through the write-down of the 22% beneficial interests in the PVNGS Units 1 & 2 leases purchased by the Company, the write-off of certain regulatory assets and other deferred costs, the write-off of certain PVNGS Units 1 & 2 common costs and the Company's previously announced cost reduction efforts. In connection with the stipulation, the Company has charged approximately $108.2 million, after-tax, to the 1993 results of operations. (See PART II, ITEM 7. --"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--January 12, 1994 Stipulation".) (2) To provide a better matching of the Company's revenues from sales with the related costs, effective January 1, 1992, the Company changed its method of accounting to record estimated revenues from sales of utility services provided subsequent to monthly billing cycle dates but prior to the end of the accounting period. The cumulative effect of this accounting change as of January 1, 1992, net of income taxes, was $12.7 million and has been reflected in the above schedule in the quarter ended December 31 in its entirety. The effect of this change has not been reflected in each quarter as it would not cause a material difference. See note 1 of notes to consolidated financial statements. (3) On January 11, 1993, the Company announced specific actions which were determined to be necessary in order to accelerate the Company's preparation for the new challenges in the competitive energy market. One element of the January 11, 1993 announcement was the decision to attempt to sell PVNGS Unit 3. As a result of such decision the Company has estimated the net realizable value of PVNGS Unit 3 and the M-S-R power purchase contract, and recorded an after-tax loss of $126.2 million at December 31, 1992. In addition, during the fourth quarter of 1992, the Company recorded a write- down of other charges, aggregating $15.9 million, net of taxes. (See PART II, ITEM 7. --"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS".)
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
COMPARATIVE OPERATING STATISTICS
- -------- * Due to the provision for the loss associated with the M-S-R contingent power purchase contract recognized in 1992, operating revenues were reduced by $20.5 million. (See Note 2 of the notes to consolidated financial statements.) 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.
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
COMPARATIVE OPERATING STATISTICS
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On January 5, 1993, the Company notified its certifying accountants, KPMG Peat Marwick ("KPMG"), that the client-auditor relationship between the Company and KPMG will be terminated effective with the completion of the 1992 financial audit. Additionally, the Company announced its new certifying accountants, Arthur Andersen & Co., to serve as independent accountants for fiscal year 1993. The decision to change accountants was recommended by management and the Audit Committee and approved by the Company's board of directors, and was ratified at the Company's annual meeting of stockholders held on May 25, 1993. The information required by Item 304 of Regulation S-K has been "previously reports", as that term is defined in Rule 12b-2, in a Current Report on Form 8- K dated January 8, 1993.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Reference is hereby made to "Election of Directors" in the Company's Proxy Statement relating to the annual meeting of stockholders to be held on April 27, 1994 (the "1994 Proxy Statement") and to PART I, SUPPLEMENTAL ITEM-- "EXECUTIVE OFFICERS OF THE COMPANY".
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Reference is hereby made to "Executive Compensation" in the 1994 Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is hereby made to "Voting Information", "Election of Directors" and "Stock Ownership of Certain Executor Officer" in the 1994 Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is hereby made to the 1994 Proxy Statement for such disclosure, if any, as may be required by this item.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, 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 1993, 1992, and 1991 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.
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(a) -- 3-A. Exhibits Filed:
(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:
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- -------- * One or more additional documents, substantially identical in all material respects to this exhibit, have been entered into, relating to one or more additional sale and leaseback transactions. Although such additional documents may differ in other respects (such as dollar amounts and percentages), there are no material details in which such additional documents differ from this exhibit. ** Designates each management contract or compensatory plan arrangement required to be identified pursuant to paragraph 3 of Item 14(a) of Form 10- K.
(b) Reports on Form 8-K:
During the quarter ended December 31, 1993, and during the period beginning January 1, 1994 and ending March 8, 1994, the Company filed, on the dates indicated, the following reports on Form 8-K.
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Public Service Company of New Mexico (Registrant)
Date: March 8, 1994 By /s/ B. F. Montoya ----------------------------------- B. F. Montoya President and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
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INDEX TO EXHIBITS