Forwards "Application in Respect of Sale & Leaseback ...

REGULATORY FORMATION DISTRIBUTION SY EM <RIDS)

ACCESQLPN sNBR: 85111103'IP5 DOC. DATE: 85/11/04 NOTARIZED: NO DOCKET 0FAG IL:STN-50-528 Palo Verde Nuclear Stationf Unit if Arizona Publi 05000528

AUTH. NAME AUTHOR AFFILIATIONTOY I T. M. Mudgef Rose. Guthrie LOB Alexander

RECIP. NAME RECIPIENT AFFILIATIONDENTONI H. R ~ Office of Nuclear Reactor Regulationp Director

SUBJECT: Forwards N*pp lication in Respect of Bale 2 Leaseback Ico~~cme o(Financing Transaction bg Public Svc Co of New Mexico" dtd ~~851018 5 supp or ting dtd 851104.

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MUDGE ROSE GUTHRIE ALEXANDER 6 FERDON

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November 4, 1985

Mr. Harold C. DentonDirector,Office of Nuclear Reactor RegulationNuclear Regulatory CommissionWashington, D.C. 20555

Application in Respect of aSale and Leaseback Financing Transaction by

Public Service Company of New Mexico

Dear Mr. Denton:

On behalf of Public Service Company of New Mexico (RPNM"),its counsel Keleher 6 McLeod and Snell & Wilmer, Kidder, Peabody 6

Co. Incorporated and this firm, I enclose herewith one copy of eachof the above-captioned Application and memorandum in support thereof,both dated October 18, 1985, and a brief with respect thereto onbehalf PNM dated November 4, 1985.

Thank you for your attention to this transaction.

'85111103»15 851104PDR ADOCK 05000M8I PDR

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~i~4LU~!Timothy Michael Toy

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UNITED STATES OF AMERICA

NUCLEAR REGULATORY COMMISSION

In the matter of .

ARIZONA r'UBLIC SERVICE COMPANY,et al., DOCKET NO. STN

50-528

(Palo Verde Nuclear Generating Station, Unit 1)

APPLICATION IN RESPECT OF A SALE ANDLEASEBACK FINANCING TRANSACTION BY

PUBLIC SERVICE COMPANY OF NEW MEXICO

October 18, 1985

TABLE OF CONTENTS

Relief Requested

Pacae

2 0 Purpose of the Financing Transaction .. 3

3 ~ Description of the Proposed Sale andLeaseback Financing Transaction .... 4

4 ~ Conditions Precedent to theFinancing Transaction ......... 6

5. 'Schedule of the FinancingTransaction ~ ~ 7

6.

7.

8.

Supporting Xnformation ......... 8

'Environmental Considerations ......10No Significant Hazards Consideration ..10

9. Responsibility for Management ofPVNGS Unit 1 ..............11

TABLE OF - CONTENTS, Continued

EXEIBITS

ExhibitDesi nation Descri tion

,.General Information ConcerningPublic Service Company of New Mexico

Attachment A: 1984 Annual Report of PublicService Company of New Mexicoand Annual Report on Form10-K for the Fiscal YearEnded December 31, 1984

General Information Concerning:TheFirst National Bank of Boston

Attachment A: Affidavit of U.S. Citizenshipof The First National Bank ofBoston

Attachment B: Affidavit of U.S. Citizenshipof Bank of Boston Corporation

Attachment C: 1984 Annual Report of Bank ofBoston Corporation.

Final Report of the S.M. StollerCorporation dated August 3, 1982,entitled "Estimated Cost forDecommissioning Palo Verde NuclearGenera ting Sta tion (PVNGS) "

-11-

UNITED STATES OF AHERICA

NUCLEAR REGULATORY COHMISSION

In the matter of

ARIZONA PUBLIC SERVICECOMPANY, et al(Palo Verde NuclearGenerating Station', Unit 1)

X

DOCKET NO. STN 50-528

APPLICATION IH RESPECT OF ASALE AND LEASEBACK PIMANCIEG TRANSACTION BY

PUBLIC SERVICE COHPAHY OF NEN MEXICO

Pursuant to Section 103 of the Atomic Energy Act of 1954,

as amended, and 10 CFR 50.22 and 50 .54(c), Arizona Public Service

Company (APS), as Project Manager and Operating Agent of Palo Verde

Nuclear Generating Station (PVKGS) Units 1, 2 and 3, submits thisapplication, under 10 CFR 2.206> on behalf of Public Service Company

of New Mexico (PP1H), licensee under Facility Operating License No.

NPF-41, and The First National Bank of Boston, as Owner Trustee under

two or more separate grantor trust agreements (hereinafter Owner

Trustee) . Accompanying this Application is a Memorandum in Support

thereof (the Menorandum) .

l. Relief Requested

PNM proposes to refinance its construction financing forPVNGS Unit= 1 by entering into two or more sale and leaseback

financing transactions relating to all or a portion of PNM's 10.2%

undivided ownership interest in Unit 1 and all or a proportionate

share of one-th'ird .of PNM' 10.2% undivided ownership interest inPVNGS common facilities (said interest in Unit 1 and in the common

E

facilities being hereinafter collectively referred to as the

Faci1ities) .1 The relief requested by this Application is the issu-

ance of an order (i) authorizing the transfers of. the Facilitiesthrough the sale and leaseback financing transactions, pursuant to

Sections 50.22 and 50.54(c) of the Commission's regulations (10

CFR 50.22 and 50.54(c)), subject to the conditions that:

(a) The rights acquired by the Owner Trustee andany equity investor and any successors and assigns(including any mortgagee or secured party of suchOwner Trustee) in and to PVMS Unit 1 may be exercisedonly in compliance with and subject to the samerequirements and restrictions as would apply to PNMpursuant to the provisions of Facility OperatingLicense No. NPF-41 (the License), the Atomic EnergyAct of 1954, as amended (the Act), and the regulationsissued by the Commission pursuant to the Act; and

(b) Neither the Owner Trustee nor any quityinvestor nor any of their respective successors orassigns may take possession of any interest in PVNGSUnit 1 prior to either (1) the issuance o.". a licensefrom the Commission authorizing such possession or(2) the transfer of the License authorizing PNM topossess an interest in PVNGS Unit 1 upon an applica-tion for transfer of such License filed pursuant to 10CFR 50.80(b);

1. PNM will retain, however, ownership of easements, rights-of-wayand certain other real property rights associated with theFacilities, including property referred to under the Internal RevenueCode as "Section 1250 property" (such as the AdministrationBuilding) . PNM will also retain ownership of the nuclear fuel andelectric transmission facilities asso'ciated with PVNGS.

and (ii) acknowledging that neither the Owner Trustee nor any equity~

~investor nor any of their respective successors and assigns is or

shall become a licensee under the License unless and until the

Commission shall have issued an amendment of the License authorizing

such Owner Trustee, equity investor, successor or assign to take pos-

session of an interest in PVNGS Unit 1 or shall have approved a

transfer of PNM's license to such Owner Trustee, equity investor,

successor or assign.

2. Purpose of the Financing Transaction

The proposed sale and leaseba'ck financing transactions willprovide benefits to PNM's customers through two channels. First, the

net present value of capital costs (and the total nominal costs) willbe reduced Ly the transfer of tax benefits and by the recapitaliza-

tion of the p..ant financing with greater debt leverage. Second, the

revenue requ'ements associated with PNM's capital costs in PVNG's

Unit 1 wi3.1 be levelized over the life of the Unit.

Because the lessors in the proposed sale and leaseback

transactions will recapitalize the Unit with greater debt leverage,

the required lease payments represent a lower cost of capital than

would PNM's composite cost of capital. Also, PNM's tax situation is

such that it cannot take full advantage of tax benef its at the

present time. The sale will transfer the benefits of tax

depreciation to such lessors.

The leveling of revenue requirements over time yieldsseveral benefits. Under conventional utility regulation, carrying

charges are determined by the asset's net book value which declines

over time as the asset is depreciated. This produces so-called

"front-end" loading —the familiar situation in which the stream of

revenue requirements falls'ver time while the actual value of the

plant output rises over time. Front-end loading is eliminated with

the proposed sale and leaseback transaction because a fixed lease

payment replaces'the conventional "high front-end" revenue require-

ments stream, thus benefitting PNM's ratepayers and insulating them

from potential "rate shock".

3 . Description of the Proposed Sa3.e and Leaseback Financing

Transaction

PNM proposes to sell to grantor trusts, the beneficiari. "

of which will be institutional equity investors, the Facilities,including without limitation PNM's 10.2% Generation Entitlement

Share> in PVNGS Unit 1. Such investors will enter into one or more

trust agreements with the Owner Trustee who will take and hold titleto the Facilities sold by PNM. The Owner Trustee will in turn

lease'he

Facilities back to PNM for a term of approximately 28-1/2 yea-s

2. "Generation Entitlement Share" is defined in Section 3.28 of theArizona Nuclear Power Project Participation Agreement as amended (seeAppendix D attached to the Memorandum) as: "The percentage entitle-ment of each Participant to the Net Energy Generation and to theAvailable Generating Capability..."

for a'tipulated basic rent. [See Section 4 of the Memorandum for a

more complete description of certain signif icant terms of the

leases.]

Under the ANPP Participation Agreement [see Appendices D

and E to the Memorandum] which governs the ownership and operation of

Unit 1, PNM will be empowered with respect to the Facilities to be

and act as the "Participant" with full power and authority, to the

exclusion of the Owner Trustee and/or the equity investors, to exer-

cise all the rights and perform all the duties and responsibilities

under such Agreement. The leases will confirm this authorization to

PNM. The Owner Trustee, as lessor under the leases, will be subject

only to typical financing risks and not to operational risks or

responsibilities.Sale and leas back financing is a recognized and accepted

t

mechanism that has been csed for many years by a number of* commercial

institutions involving a wide variety of property types. APS and a

number of other electric utilities have used this mechanism to

f inance or ref inance their investments in non-nuclear generating

facilities. In the past year PNM refinanced its investment in one of

its transmission lines, known as the Eastern Interconnection Project

(EIP), using sale and 2 easeback documentation similar to that pro-

posed for refinancing its interest in PVNGS Unit 1. Nhen used by

electric utilities, sale and leaseback transactions have been

subjected to review and approval of state and/or federal regulatory

agencies. [See, for example, Appendices A and B attached to the

Memorandum.l

While this will be the first occasion of the use of a sale

and leaseback transaction in financing a nuclear power facility, the

secured financing of the nuclear fuel used in such facilities utiliz-ing a lease format is not unique.

4. Conditions Precedent to the Financing Transaction

The proposed financing transaction is subject to the fol-lowing conditions precedent, in addition to others commonly associ-

ated with any financial transaction of th'is nature:

4.1 The approval of the transaction by the New Mexico

Public Service Commission as required by the laws of the State of New

Mexico, such approval to be in form and substance satisfactory to allparties to such transaction.

4.2 The issuance of a declaratory order by the Federal

Energy Regulatory Commission (FERC), satisfactory in form and sub-

stance to all parties to the transaction, ruling that the equity

investors and the Owner Trustee will not, as a result of their hold-

ing title to the Leased Interests, become "public utilities" as

defined in section 203(a) of the Federal Power Act.

4.3 The actions of the Commission as applied for in this

Application.

4.4 Ownership and operation of PIGS Unit 1, together with

Units 2 and 3, is governed by the Arizona Nuclear Power Project

Participation Agreement, as amended. [See Appendices D and E

attached to the Memorandum.) The ANPP Administrative Committee cre-

ated by such Agreement will be required to make a determination that

the conditions to the proposed sale and leaseback transaction speci-

fied in proposed Amendment No. 10- to such Participation Agreement

have been met.

5. Schedule of the Financing Transaction

5 .1 The viability of the proposed financing transaction

hinges upon its consummation on or before December 31, 1985. To meet

this date it is planned that preliminary conditional commitments willbe obtained from the equity investors and the Owner Trustee on or

. about October 22, 1985. Thereafter, it is expected that on or about

November 15, 1985, approval of the proposed sale and leaseback from

the New Mexico Public Service Commis'ion and the requisite order from

FERC will be obtained. Finally, i~ is very desirable that the clos-

ing of the sale and leaseback transactions take place on or about

December 18, 1985. This is necessary to provide the equity investors

with the 1985 available tax benefits without which the proposed

transactions will fail to close. A December 18 closing will ensure

that the associated public debt o.".'fering can be sold in the public

market prior to the Christmas holidays.

5.2 To achieve this schedule it will be necessary that the

Commission i:ssue its final order not later than November 20, 1985,

authorizing the transfers of the Facilities by PNM to the Owner

Trustee and by the Owner Trustee back to PNM. [See Section 1

hereof.)

6. Supporting Information

6.1 The general information respecting applicant PNM

required by 10 CFR 50.33 (a) through (d) is provided by Exhibit A

attached to this Application.

6.2 The general information respecting applicant Owner

Trustee required by 10 CFR 50.33 (a) through (d) is provided, as

appropriate, by Exhibit B attached to this Application.

6.3 The total estimated annual operating costs (operation

and maintenance expense, including fuel expense) for each of the

first five years of operation of PVNGS Unit 1 and PNM's share of such

costs are tabulated below:

Tota1 Estimated PNN's Share ofYear Operating Costs Operating Costs

(in thousands)

19861987198819891990

$ 122 i 851- 111,729

104,514128,490133,652

812 F58011,56610,88813 i 40513,976

6.4 The estimates set forth in Section 6.3 above are based

on the following assumptions: (a) with respect to operation and

maintenance expense (excluding fuel expense and using ANPP Forecast

No. 18), (i) the inclusion in common costs of common facilities and

water reclamation facilities, (ii) inclusion of only Unit 1's share

of common costs with even allocation across all units (using APS's

date of firm power operation for Unit 2), (iii) loads have been

included (payroll, with the exception of taxes, materials and service

and outside services), and insurance and administrative and general

expense have been excluded, (iv) the projection of all dollars atyear's cost (escalation at 6% per year), and (v) the exclusion of PNM

legal fees, replacement power insurance costs and other PNM in-house

costs.; and (b) with respect to fuel expense (using the June 1985

nuclear fuel financial forcast) > (i) the subtracting out of Western

Nuclear's cash flow for 1985, (ii) the assignment to Unit 1 of one

third of each of U308 cash flows and conversion cash flows, (iii) the

use of the ratio of the current SWU price projection to the old SNU

price projection times Unit 1 enrichment cash flows to calculate

enrichment, (iv) no change in either fabrication or spent fuel dis-

posal fees and (v) recalculation of use tax assuming 5% of U308 costs

instead of 5% of total fuel assembly costs.

6.5 As Exhibit, C attached to this Application indicates,

the cost of decommissioning PVHGS Unit 1 using the DECON alternative

(as described in the notice of proposed rulemaking published in the

Federal Register on February 11, 1985, at pages 23025 ~et e .) is

879 million (expressed in 1982 dollars). PNM is now and, pursuant to

the proposed leases, will continue to be-obligated to pay 10.2$ of

the costs of decommissioning PVNGS Unit l.

t

J

l

0

7. Environmental Considerations

The proposed conveyances of the Facilities to the Owner

Trustee and the leasebacks of the Facilities to PNM by the Owner

Trustee do not involve any design or physical change to PVNGS Unit 1,

any change in the transmission or other facilities associated with

PVNGS Unit 1, any change in types or amounts of effluents from PVNGS

Unit 1, any change in the potential for accidental releas s from

PVNGS Unit 1 or any change in the authorized power level of PVNGS

Unit l. Accordingly, the grant of the relief requested by thisApplication does not present an unreviewed environmental impact.

Pursuant to 10 CFR 51.5(d)(4), no environmental impact statement,

negative declaration, or environmental impact appraisal need be pre-

pared in connection with this Application.

3. No Significant Hazards Consideration

The consummation of the proposed sale and leaseback financ-

ing transactions will not involve any increase in the probability„or

consequences of an accident previously evaluated, or create the pos-

sibility of a new or different kind of accident from any accident

previously evaluated, or involve any reduction in a margin of

saf ety. Accordingly, the consummation of the transfers of the

Facilities as contemplated by the proposed sale and leaseback financ-

ing transactions does not involve a "significant hazards

consideration" within the meaning of that phrase as defined in 10 CFR

50.92.

-10-

9. Responsibility for Management of PVHGS Unit 1

9.1 The consummation of the proposed sale and leaseback

financing transactions 'will not result in any change in the responsi-

bilities, obligations or authorities of APS as licensee under the

License authorized to operate and maintain PVNGS Unit 1, nor as

Operating Agent under the ANPP Participation Agreement.

9.2 Under the terms of the proposed leases and pursuant to

the proposed amendment of the ANPP Participation Agreement, PNM shall

continue throughout the term of the leases to be a Participant under

the ANPP Participation Agreement, entitled to a 10.2% Generation

Entitlement Share of the power and energy generated by PVNGS Unit 1,

entitled to a full vote on all Unit 1 business and obligated to pay

10.2% of the costs of operating, maintaining and decomissioning such

9.3 It is not necessary to issue a license to the Owner

Trustee and/or equity investors since only APS, as Operating Agent,

and the other Unit 1 licensees, including PNM, are .ble to insure

that Unit 1's operation is consistent with the Commission's licensing

responsibilities. APS and the other Unit 1 licensees alone have con-

trol of and responsibility for the Operating Agent with respect to

the operation and maintenance of Unit 1. The ownership rights of 'the

Owner Trustee and/or the equity investors are far too limited in this

regard to require a license, as the Memorandum makes abundantly

clear. The Owner Trustee and/or the equity investors will have (i)

no ability to restrict or inhibit compliance with the security,

safety or other regulations of the Commission, (ii) no capacity to

control the use of Unit 1 nuclear fuel or to dispose of special

nuclear material generated by Unit 1, and (iii) no right to use or

direct the use of the Facilities. Although legal title to the

Facilities will reside with the Owner Trustee, the current regime of

control, supervision and responsibility is unaltered by the proposed

'transaction. APS is and will remain responsible to the Commission

for the proper operation and maintenance of Unit 1.

-12-

WHEREFORE, APS requests on behalf of PNM and the Owner

Trustee that the Commission grant the reliefhereof or in such other form and/or subject to

requested in Section 1

conditions in addition

to those stated in such Section as the Commission may deem

appropriate..

Respectfully submitted,

ARIZONA PUBLIC SERVICE COIG'ANY

ByEdwin E. Van Brunt, Jr./DBKEdwin E. Van Brunt, Jr.Executive Vice President-ANPP

Dated: October 18, 1985

-13-

STATE OP ARIZOHK )) ss.

COUNTY OP HARICOPA )

I, Donald B. Karner, represent that I am Assistant VicePresident, Nuclear Production of Arizona Nuclear Power Project, thatthe foregoing document has been signed by me on behalf of ArizonaPublic Service Company with full authority to do so, that I have readsuch document and know its contents, and that to the best of myknowledge and belief, the statements made therein are true.

Donald B. KarnerDonald B. Karner

Sworn before me this 17th day of October, 198S.

J.M. AllenNotary Public

My Commission Expires:

My Commission Ex ires Jan. 23, 1987

-14-



In the matter of

ARIZONA PUBLIC SERVICECOMPANY, et al,(Palo Verde NuclearGenerating Station, Unit l)

DOCKET NO STN 50-528

EXHIBIT A

TO

APPLICATIONIN RESPECT OF A SALES AND LEASEBACK

FINANCING TRANSACTION BYPUBLIC SERVICE COMPANY OF NEW MEXICO

GENERAL INFORMATION CONCERNINGPUBLIC SERVICE COMPANY OF NEW. MEXICO

General Information Concerning Public ServiceCompany of New iLexico

(a) Name of applicant:Public Service Company of New Mexico ("PNM")

(b) Address of applicant:Alvarado SquareAlbuquerque, New Mexico 87158

(c) Description of business of applicant:PNM is a. public utility engaged principally in the generation,transmission, distribution and sale of electricity and, sinceJanuary 28, 1985, in the gathering, transmission, distributionand sale of natural gas within the State of New Mexico. PNMalso owns facilities for the pumping, storage, transmission,distribution and sale o'f water. In addition, PNM through itssubsidiaries, is engaged in a program of diversification intonon-utility areas.

(d) (1) Not applicable.(d) (2) Not applicable.

y(d) (3) (i) State 'of incorporation and principal location:PNM is an investor-owned corporation organized and existingunder and by virtue of the laws of the State of New Me-'co.Its principal offices are in Albuquerque, New Mexico. PNM pro-vides electric service to (1) a large area of north central NewMexico, including the cities of Albuquerque, Belen, Bernalillo,Santa Fe and Las Vegas, (2) Deming in southwestern New Mexicoand (3) Clayton in northeastern New Mexico. PNM also provideswholesale electric service to the the City of Gallup, the Cityof Farmington, Plains Electric Generation & TransmissionCooperative, Inc., and Texas-New Mexico Power Company.

(d) (3) (ii) Names of directors and principal officers:Directors of Public Service Company of New Mexico

F

. J.P. BundrantPresident, Electric OperationsPublic Service Company of New Mexico

A-1

A.B. Collins, Jr.PresidentReddy Communications, Inc.Albuquerque, NM

J.D. GeistChairman and PresidentPublic Service Company of New Mexico

C.E. Leyendec!cerChairman of the Board andChief Executive Officer,United New Mexico Bank at Mimbres ValleyDeming, NH

A.G. OrtegaAttorney at LawOrtega 6 Snead, P.A.Alburquerque, NM

R.R. RehderProfessor of ManagementRobert O. Anderson Graduate School of ManagementUniversity of New MexicoAlbuquerque, NM

R.B. RountreeSenior Vice PresidentPublic Service Company of New Mexico

R.H. StephensPresidentStephens-Irish Agency,

Inc.'as

Vegas, NM

E.R. Mood'icePresident and General Manager

Wood 5. Hill CorporationSanta Fe, NM

H.L. Gall s, Jr.Director EmeritusChairman of the BoardGalles Chevrolet CompanyAlbuquerque, NM

Principal Officers of Public Service Company of New Mexico

PNH CORPORATE

A-2

J.D. GeistChairman and President

B. Hulcock, Jr.Senior Vice President<Corporate Affairs andSecretary

A.J. RobisonSenior Vice Presidentand Chief Financial Officer

R.B. RountreeSenior Vice President

H.A. CliftonVice President,Financial Planning

B.D. LackeyVice. President andCorporate Controller

J.K. MurphyVice President, Regulatoryand Business Policy

N.C. ITygantVice President,Corporate Services

P.J. ArchibeckTreasurer and Assistant Secretary

H.L. Hitchins, Jr.Assistant Secretary andAssistant Treasurer

M.J. NarzecAssistant Treasurer

H. Mason-PlunkettAssistant Secretary

PHH ELECTRIC

J.P. BundrantPresident and Chief Operating Officer

A-3

C.D. BedfordSenior Vice President,Planning, Finance and Administration

H.H. EglintonSenior Vice President,Operations

J.L. TlilkinsSenior Vice President,Power Supply

J.L. God@inVice President,Power Production andNanager, San Juan Station

N.N. Hicks, Jr.Vice,President,Energy Nanagement

R.A. LakeVice President,Operations Services

N.A. NcDonaldVice President,Human Resources andSupport Service

R.P. HershonVice President,Regional Division Operations

D.J. NorseVice President<Albuquerque Division Operations

R.M. WilsonController, Electric Operationsand Assistant Secretary

GAS COMPANY OF NEW &IEXICO

J.T. AckermanPresident and Chief Operating OfficerGas Operations

A-4

O.L. SlaughterSenior Vice President andExecutive Assistant

J J RuizDistrict Vice President

H.J. RealDistrict Vice President

T.D. RisterDistrict Vice President

D.L. PickelDistrict Vice President

T.A. CoersDistrict Vice President, Transmission

G.D. HischeDistrict Vice President, Transmission

H.H. LambertVice President, Pipeline Operations

J.C. omanVice President, Gas Supply

D.WT. HcPearinVice President, Controller andAssistant Secretary

D.J. DavisVice President and Chief Engineer,Distribution

E.R. CorlissVice President and Chief Engineer, Transmission

T.H. HorseVice President,Distribution Operations

Each of the directors and principal officers of PNM is a citi-zen of the United States of America.

(d) (3) (iii) Public Service Company of New Mexico is not owned,controlled, or dominated by an alien, a foreign corporation, ora foreign government.

A-5

(d) (4) Public Service Company of New Mexico is not acting as agentor representative of another person in -respect of thisapplication.(e) See the Application to which this document is attached asExhibi t A.

(f) Xn accordance with 10 CFR 50, Appendix C, a copy of PublicService Company of New Mexico's 1984 Annual Report and itsAnnual Report on Form 10-K for the f iscal year endedDecember 31, 1984, are attached hereto as Attachment A.

(g) Not applicable.(h) Not applicable.

(i) The names and addresses of regulatory agencies which have juris-diction over Public Service Company of New Mexico's rates andservices are:

New Mexico Public Service CommissionMarian Hall224 East Palace AvenueSanta Fe, New Mexico 87503

Federal Energy Regulatory CommissionNashington, D.C. 20426

News publications which circulate in the area in which thefacility is located are:

The Arizona Republic120 East Van BurenPhoenix, Arizona 85004

The Phoenix Gazette120 East Van BurenPhoenix, Arizona 85004

Buckeye Valley NewsP.O. Box 217Buckeye, Arizona 85326

News publications which circulate in Public Service Company ofNew Mexico's service area include the following:

Las Uegas Daily OpticLas Vegas, New Mexico 87701

The New Mexican, Inc.Post Oifice Box 2048Santa Fe, New Mexico 87501

A-6

Los Alamos MonitorPost Office Box 899Los Alamos, New Mexico 87544

Albuquerque JournalAlbuquerque Publishing Company.Post Office Drawer J-TAlbuquerque, New Mexico

87103'allup

Daily IndependentPost Office Box 1210Gallup, New Mexico 87301

(j) Not applicable.

A-7

UNITED STATES OF AHERXCA

NUCLEAR REGULATORY COKCISSION

In the matter of

ARIZONA PUBLIC SERVICECOMPANY, et

al,'Palo

Verde NuclearGenerating Station, Unit 1)


ATTACHHENT A TO EXHIBIT A

TO


FINANCING TRANSACTXON BYPUBLIC SERVICE COHPANY OF NEW HEXXCO

1984 ANNUAL REPORT OF

PUBLIC SERVICE COHPANY OF NEÃ MEXICOAND ANNUAL REPORT ON FORH10-K FOR THE FISCAL YEARENDED DECEHBER 31'984

"A fine wind is blowing the new direction of time"—D.H. Lawrence

PNM ANNUAL REPORT 1984

Changing, Yet Unchanged

The Southwest is a land of sharpcontrasts-modern cities rising fromtimeless deserts, multistory granite andglass office buildings standing withinsight of adobe Indian villages.

Laura Gilpin's "Storm From LaBajada Hill,New Mexico," on the coverof this year's annual report, reveals adramatic landscape. Since the Gilpinphotograph was taken in 1946, amodern interstate has been built acrossLa Pqjada's weather-beaten, highmountain desert. Wise travelers have ahealthy respect for the storms thatoften rack the otherwise serene hill.

As you turn the pages of the reportyou'l see other vintage photographsthat convey the ageless quality of NewMexico. They are accompanied byquotes from well-known authors andothers whose work has been deeplyinfluenced by experiences inthe Southwest.

PNM has also been influenced by thenatural beauty and the rich culturalheritage ofNew Mexico and theSouthwest. As we'e grown, as we'echanged to meet the chaHenges andtake advantage of the opportunitiesof the 1980s, we'e retained ourdose affinity for the land and for thepeople we serve.

"STORM FROM lABAJADAHILI„NEWMEXICO,"Laura Grlpln 1946 O 1985 Amon Caner,.

Table of Contents

Chair man's LetterCorporate OverviewElectric and Water UtilityActivitiesBroadening Our Base

Financial Data and Consolidated Financial Statements

Stockholder InformationDirectors and Officers

Regional Electric System MapFeatures

'as Company ofNew. Mexico

Eastern Interconnection ProjectMontaiia de Fibra

15

19

37

40

9

13

17'inancial

Highlights

" Operating revenuesting expensesing income

arnings' Net earnings applicable to common stock

Return on=average common equityAverage number of common shares outstandingEarnings per common shareDividends paid per common shareBook value per common share at year-end

1984

S 445,328,000 '

S 298,834,000 S

S 146,494,000 S

S 132,840,000 S

S 108,850,000 S

12.5%35,011,000

S 311 S

S 2.85 S

S 25 28 S

1983 % Change

397,474,000 12.0261,227,000 14.4136,247,000 7.5140,519,000 (5.5)116,332,000 (6.4)

14.3% (12.6)32,956,000 6.2

3.53 (11.9)281 14

25.20 0.3

, -; Utilityconstruction expendituresGross investment in utility property

S 278,205,000 S 261,964,000 6.2S2,405,961,000 $2,139,329,000 12.5

, Kilowatt-hour sales

. iVumber of electric customers served at year-end;Average kWhr usage per residential customer

-. -'System peak demand (MW)

6,317,338,000243,864

6,022976

6,105,201,000 3.5233,256 4.5

5,915 1.8998 (2.2)

Number of PNM employees,,Number of common shareholders

2,82266,855

2,845 (0.8)70,210 .(4.8)

Chairman's Letter

The midpoint of this decade is pivotalfor the Public Service Company ofNew Mexico.

For years we have been building,endowing New Mexico and the South-west with the energy resources neededto carry vigorous economic growthwell into the next century. That long-term construction strategy is nowapproaching completion, and we havebegun to focus on new services, freshapproaches to marketing and invest-ments that help spur the growth of ourstate and region.

Such a period of transition demandsinnovation along with cautiousmanagement of the Company's re-sources. Change is inevitable, a positiveresponse to needs and opportunities.Yet a critical management function isto recognize what should not change-the values, policies and traditions thatgive a corporation its character anddurability—the stable business basethat makes it possible to innovatewithout undue risk to shareholders orcustomers.

With this in mind, I think it appro-priate to report this year not only onthe changes underway, but also onthose qualities of PNM which werecognize as changeless.

A Year of Opportunity

For PNM, this has been an excitingyear. We entered 1984 faced withenormous challenges. The events ofthe past twelve months have proventhat those challenges were, in fact,opportunities.

The year brought settlement of alandmark antitrust lawsuit in whichPNM was an active plaintiff. Thesettlement led to PNM's acquisition,early in 1985, of the Gas Company ofNew Mexico and other New Mexicoutilityassets of the Dallas-basedSouthern Union Company. With theacquisition, PNM has added 303,000

gas customers to its service communityand should realize approximately $400million in new revenues during 1985.

Late in the year, the Palo VerdeNuclear Generating Station, in whichPNM holds a 10.2 percent interest,received an. operating license from theNuclear Regulatory Commission forUnit 1 of the project. Fuel loading inUnit 1 was completed on January I 1,

1985 and low power operation of theunit is underway. The license allowsfor possible full power operation laterin 1985.

In December, the New Mexico PublicService Commission approved a newratemakmg methodology called Inven-tory of Capacity. This importantratemaking concept successfully dealswith the problem of uncommittedcapacity while protecting the interestsof shareholders and shielding ourcustomers from the impact of suddenrate increases.

Other 1984 highlights: the underbudget and ahead of schedule com-pletion of our Eastern InterconnectionProject, a 216-mile transmission linewhich links us to eastern marketsand allows immediate bulk power salesto Southwestern Public Service Com-pany; completion—also under budgetand ahead of schedule —of Montanade Fibra, a 867 millionmedium densityfiberboard facility in which our sub-sidiary, Meadows Resources, Inc., holdsa primary interest; and finally, theimplementation of a major rate reliefpackage granted by the Commission toour electric utility.

Much of this good news is theoutgrowth ofyears of strategic planningand careful management.

Marshaling of Resources

Our long-term commitment to utilityconstruction began more than a decadeago, triggered in part by twophenomena. The first was the extra-ordinary growth rate of the 1960s, attimes approaching 10 percent annually.The second was the oil crisis of the

~.p,CP,,)

1970s, which radically altered thewa.'e

and all Americans viewed energy.We recognized at the time our

responsibility to ensure that thenomic potential of New Mexico athe Southwest must never be checksby insufficient supplies of energy. Wesaw clearly that our sources of fuelmust be cost efficient, dependableand independent of external manipulation. As a result, PNM launched anintensive construction program toprovide a balanced coal and nuclearpower base.

Construction activity is now de-creasing. The San Juan GeneratingStation, particularly San Juan Unit 4,which came on-line in 1982, isrecognized as one of the most reliabland efficient coal-fired generatingunits in the nation. At Palo VerdeNuclear Generating Station, Unit 1

should be generating at full powerlater in 1985. Palo Verde Units 2 andare on schedule and should be inoperation by 1987. The ample anddependable energy supplies provide~by these facilities represent a majorresource for development in New M~

ico and throughout the Southwepowerful attraction for new indand businesses.

I

: SS ilange isinevi tab!e,a,oosiiive

',response to needs andopportunities. Ye1 a criiicai

. fnenaeernent ionction is-'" '"-~~~"'"-~ "f~sf ~i oulcf

'arketing: The Future Challenge

Added capacity brings with it a

ne 'ty for new emphasis on market-'ii the Eastern InterconnectionPi complete, PNM is now linkedwith power systems to the east. We are

also seeking markets to the north andin California. The early results of theseefforts are notable. The Company has

in-hand contracts to sell nearly three-quarters of our capacity in excess ofthat demanded by our New Mexicocustomers from 1985 through 1987.

An important element of our mar-

)eting program is the recognition that,. by promoting the success of our cus-

tomers, we ensure our own success.

We are listening more closely thanver to what our customers are telling

us about their energy needs.'] Our marketing program is gainingmomentum, but to protect our share-

holders and customers against the'oossible negative impact of uncom-mitted capacity, we have embracedinventory of Capacity. Inventoryingorotects customers from "stairstep"

'ate increases by holding uncommitted"a ity out of the rate base until it is

At the same time, this new'

concept recognizes the,egitimate interests of shareholders by

allowing capital costs to earn a fairreturn and to be recovered in thefuture.

Broadening Our Base

PNM is now a diversified businessfamily, organized to accomplish twocomplementary tasks. Our electric andgas utilitydivisions serve as NewMexico's primary energy resources.Our investment group, headed byMeadows Resources, Inc., enhancescorporate profitabilitywhile it spreadsour investment risk and creates eco-nomic opportunities in New Mexicoand the Southwest.

Our investment subsidiary, Meadows,accounted for 14 percent of our netearnings applicable to common stockfor the year. Meadows has developed abroad base of interests with invest-ments in forest products, minerals,land and new technologies.

Montana de Fibra, completed in 1984,is expected to produce as much as 88million square feet of medium densityfiberboard annually. It has also gen-erated 200 new jobs in an economicallydepressed area of New Mexico.

Meadows is tapping into South-western real estate markets throughits active partnership with BellamahAssociates, Ltd., a New Mexico-basedland development firm. The success ofreal estate activities has far exceededour expectations, with total sales during1984 amounting to $83.0 million.

The Meadows venture capital port-folio includes investments in gas lasersand other exciting technologies. Onlyabout 4 percent of Meadows'ssetsare dedicated to venture investments,but we expect good returns.

Changing, Yet Unchanged

These key events and accomplish-ments of 1984 and early 1985 representmajor milestones in the Company'sstrategic plan for the 1980s and beyond.But underlying the developments thatI have briefly described, which haveaccelerated the evolution of PNM, there

are solid principles of Company practicethat do not change.

Among those principles is our com-mitment to strong leadership. Therecent appointment of John Bundrantas President and Chief OperatingOfficer of our Electric Operations andJohn Ackerman as President and ChiefOperating Officer of our Gas Operationsreaffirms that commitment. These newappointments clearly separate ourelectric utilityfrom our gas operationsand assure a strengthening of activecompetition between the two utilities.'e seek only the best employees.The early completion of major projectssuch as Eastern InterconnectionProject and Montana de Fibra—at lessthan projected cost —is a testament totheir skill and dedication.

A tough but fair regulatory atmos-phere has yielded rate relief—$38.5million in relief became available lastJuly with another $ 7.5 million madeavailable on February 1, 1985 —andmade possible ratemaking innovationssuch as Inventory of Capacity.

Finally, we are firmlycommitted toour customers, our state and our region.Our enduring goals are to help preservean irreplaceable way of life and toenhance it through new opportunities.

Our shareholders, employees andcustomers recognize the importanceof these goals and commitments. ThePNM management and directors thankthem all for their confidence andsupport.

J. D. GeistChairman and President

"The wind lay upon me. The monoliths were therein the long light, standing cleanly apart from time."

—N. Scott Motttaday

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"NAVAJOCHURCH NEAR FORT WINGATE(New Mexico)," John K. Hitters. Citca 1880. Albumen Print

Corporate Overview

In the decades ahead, the Public.Se 'ompany of New Mexico

( nticipates a continuing popu-la 'o the Southwestern Sunbelt.A land of rich cultural heritage andburgeoning economic development, theSouthwest willrequire a steady andreliable supply of energy to match thisexpansion. As New Mexico and theSouthwest region grow, the Com-pany is committed to meet increasingcustomer demand —with its electric,'gas, and water utilities.,'ecognizing its obligation to promotethe success of its customers as well as

Its shareholders, PNM plays a uniqueiole in the development of the region.PNM believes in the importance ofoeneficial traditions —of development,of goals shared with the citizens itierves, and of a special concern for'he land and the resources with which.t is entrusted.

1 984 Earnings

„Careful management of Company..'esources is reflected in revenues and

s. Net earnings for 1984 totaled'on. This represented a 14

;: )e t increase in earnings over 1983,

after eliminating a nonrecurring gainof $24.1 million, in 1983, on the sale ofthe equity interest in a trust whichheld certain coal leases.

Earnings per share of common stockwere $3.11 in 1984. The average numberof shares outstanding was 35.0 million,up 6.2 percent from the 33.0 millionshares outstanding in 1983. Return onaverage common equity was 12.5

percent.

Regulatory Environment

During 1984, PNM was successfulin negotiating settlements of severalimportant cases before the New MexicoPublic Service Commission (Commis-sion). PNM believes that vigorousnegotiation in good faith better servesall interests —the shareholder's, thecustomer's and the public's —than doesprolonged and adversarial litigation.

Rate Filings

In 1984, the Commission approvedthe stipulated settlement of a raterelief request filed in August 1983, theCompany's first electric rate filingsinceOctober 1981. The April 1984 settle-ment allowed PNM's electric utilitytocollect approximately $300 million inannualized revenues (excluding fueladjustment clause revenues). The raterelief amounted to $46 million to beimplemented in two steps. The firstincrease, of $38.5 million, was imple-mented in July 1984. An additionalincrease of $7.5 million was effectivein February 1985.

The bulk of the overall rate adjust-ment reflects inclusion in the ratebase of PNM's portion of constructioncosts for the fourth and final unit atthe Company's coal-fired San JuanGenerating Station (San Juan), locatedin northwest New Mexico.

Inventory of Capacity

The Commission also approved inDecember 1984 a stipulation between

PNM, the Commission staff and otherparties that established a ratemakingmethodology called "Inventory of Ca-

pacity." This methodology places newgenerating facilities into the rate basegradually. Inventorying protects share-holder investment in new generatingplant, while shielding customers fromthe sudden rate impacts that wouldotherwise occur ifa new plant wereput into the rate base all at once.

Faced with the challenge of placingnew, capital intensive plant on-linewhile minimizing the impact on custo-mers, the Company and the Commissionbegan, in 1982, to study this newratemaking concept, which placescertain portions of uncommitted plantcapacity into "inventory." In 1983 theCommission established a task forcerepresenting the Commission staff,PNM, the Attorney General's staff andthree customer groups. This task forcewas charged with examining the in-ventorying concept and providing arecommendation on its application as

a ratemaking method.Inventorying defers certain costs

associated with uncommitted capacityabove a 20 percent reserve margin. Italso defers some of the cash return onshareholders'nvestment and accruesnon-cash earnings while the plant isin inventory. Such deferred carryingcosts willbe recovered from futurecustomers when the inventoried plantis placed into the rate base.

Inventorying includes other cost-recovery methods. Revenues from bulksales of inventoried capacity willbeused first to pay fuel costs and othervariable operating costs, then to payup to half of the depreciation andproperty tax costs. Any additionalrevenues willbe allocated to thesecosts and carrying charges, whichwould otherwise be paid by futurecustomers.

The plan also contains a cap whichlimits the cost that customers willpay in the future.

"Wherever humanity has made the hardest of all startsand lifteditselfout of mere brutality, is a sacred spot."

—Willa Cather

QYg e,qXg (p AJ v w ~%,f(vga'v'gPp i w QJ )'gv '%v'u'.

A

"CLIFF PERCHED ACOMA,"Edward S. Curtis. 190s. Glass Plate Negative

Securities Transactions

Bonds issued in 1984 were comprised" of first mortgage bonds and pollution

control revenue bonds. In August,PNM sold $ 65 million of its FirstMortgage Bonds, 13 I/8% Series due1994. Proceeds were applied to reduceshort-term debt. In September, approx-imately $77 mBlion of first mortgagebonds was issued to secure PNM'sguarantee of an equal amount of 5.9%Pollution Control Revenue RefundingBonds, Series 1977 due 2007, issuedby the City of Farmington, New Mexico.

- The refunding bonds were issued in1977 to provide funds to pay two prior

'ssues of pollution control revenuebonds which matured October 1, 1984.

ecember, a total of $38.5 milliontion control revenue bonds

was sold in two series through theMaricopa County, Arizona PollutionControl Corporation. The bonds wereissued to defray a portion of cost toPNM of certain pollution control facil-ities associated with the Palo VerdeNuclear Generating Station (Palo Verde)Units 1, 2, and 3. Of the $38.5 million,$23 millionwas Annual Tender Bonds

,maturing in 2009 which were sold in a'ublic offering and secured by the', Company's first mortgage bonds, and„$15.5 million was in a separate series,'sold as a private placement on an'unsecured basis.

Approximately $48 millionof newequity capital was raised through theCompany's special stock plans through-,out the year. About 2.2 million sharesof PNM common stock were issued,through such plans, including the.Company's Dividend Reinvestment

!

Plan.As of December 31, 1984, on a

'dated basis, commercial paperrt-term notes totaling $30.3

n had been borrowed under PNM'sI

$ 164 millionof bank lines of creditand revolving credit arrangements.

During the year, four rating agenciesreviewed the Company's securities.Standard & Poor's Corp. and FitchInvestors Service, Inc. reaffirmedtheir ratings. Duffand Phelps, Inc.removed the Company from its credit-watch list, maintaining its prior rating.Moody's Investors Service loweredits rating on the Company's firstmortgage bonds and secured pollutioncontrol revenue bonds from Al to A2.Unsecured pollution control revenuebond ratings have been lowered fromA2 to A3, with preferred stock ratingsreduced from a2 to a3.

PNM Acquires Gas Company of NewMexico

Among the most significant develop-ments in PNM's history is the recentsubstantial broadening of its utilitycommitment. In January 1985, PNMcompleted the acquisition of Gas

Company of New Mexico (GCNM) fromthe Texas-based Southern UnionCompany (Southern Union) as partialsettlement of an antitrust suit. Withthe acquisition PNM anticipates thattotal utilityrevenues willnearly doublein 1985.

PNM purchased Southern Union'sNew Mexico gas utilityassets for netbook value (less assumed liabilities)of approximately $224.3 million, withSouthern Union to receive $ 172.8 mil-lion. The $51.5 million differencerepresents Southern Union's settlementof the suit with all parties, includingPNM. As part of the settlement, PNMfunded $ 15.6 million, in cash and byissuing a note for $20 million, of thetotal $ 51.5 millionsettlement amountto the other plaintiffs. The remaining$ 15.9 million of the settlement, lessexpenses, willbe refunded to PNM'selectric customers by PNM.

Customers willbenefit from directrefunds made as part of the settlementand by PNM negotiations, made pos-sible through the acquisition, for lowergas prices at the wellhead.

Planning for the Future: New MexicoGenerating Station

PNM is considering a project withextraordinary potential for serving newmarkets while contributing to thequality of life in the region. In August,the Company entered into an agreementin principle with the Navajo Nation,General Electric Company and BechtelPower Corporation to explore thepossibility ofjointlybuilding and op-erating a major regional power projectin New Mexico. Participants willbeevaluating markets, design, fuel sourcesand financing to determine whetherthe project would be economicallyviable in the 1990s.

The proposed coal-fired plant, NewMexico Generating Station, would notbe designed as generating capacity forPNM's New Mexico electric customers,but would position the Company torespond to growing regional powerneeds. The project would complementelectric operations with associated newtransmission lines and facilities thatwould enhance the Company's abilityto market and deliver power.

"Itis the same now, as a thousand years ago once you overlook the cities:The desert begins just beyond those lights it crouches."

—Keith Wi(son

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"CHURCH BUTTRESS. RANCHOS DE TAOS CHURCH," Paul Strand, t 932, Silver Print

Gas Company ofNew Mexico

'0

Attorney Gene Gallegos argued one ofthe strongest cases of his career at analtitude of 85,000 feet. In 1981, chanceplaced the Santa Fe lawyer in an airlineseat beside Al Robison, PNM's VicePresident of Finance. Itwas a meetingwith far-reaching consequences forhundreds of thousands of New Mexicogas and electric customers, for PNMand, ultimately, for PM I shareholders.

Rvo years earlier, a group of NewMexico school teachers had hiredGallegos to challenge natural gas pricingpractices in court. Gallegos believed hecould make a credible antitrust price-fixing case against Southern UnionCompany, the Dallas-based owner of theGas Company af New Mexico, andseveral major natural gas producers andsuppliers. An antitrust lawsuit was filedon behalf of residential gas consumerspurchasing natural gas from GCNM.Certain agencies of the State of NewMexico, all large volume purchasers ofnatural gas, joined the lawsuit,

The battle dragged on far 23 monthsthrough depositions and hearings. Then„on an east-bound airliner, Gallegos foundan "attentive ear" in Robison, and laidout the facts of his case.

"As I listened, I realized PNM neededto lool at this case very, very carefully,"says Robison.

Some of PNM's generating plants werefired by natural gas. Ifallegations ofprice fang were true, PMI was payingtoo much for its gas and, worse, passingthe higher costs along to its own electriccustomers.

When Robison returned to Albuquer-que, he discussed the matter with JenyGeist, PNI I's President', wha authorizeda further investigation. A few weekslater, PNM joined the suit on the side ofthe residential gas consumers.

Shortly after PNM entered the case,two defendants, Southland Royalty Com-

pany and Supron Energy Corporation,settled out of court. After seven weeksof trial in Las Cruces, New hiexico, thejury ruled against Southern Union andthe remaining defendants. However, theliabilityverdict was overturned on a

technicality and a new trial ordered.Conoco and Consolidated Oil and Gas,also defendants, then settled, bringingthe settlement total to S70.3 million forPNM and the other plaintiffs.

By the faIIof 1983, all defend antsexcept Southern Union had settled. Witha second trial scheduled for the springof 1984, settlement negotiations withSouthern Union were conducted over aperiod ofweeks. When these negotiationsfailed, Sherman G. Finesilver, ChiefJudge of the United States District Courtfor the District of Colorado, ordered topofficials of Southern Union and PNI I toDenver for a face-to-face talk.

Only a few days before the case wasslated for trial, a series af around-the-clock discussions was held. Terms of asettlement were worked out, includingan understanding that Sauthern Unionwould sell its New Mexico gas utiTityassets to PNM.

The residential plaintiffs had wantedfor several months to bring ownershipand control of the gas utih*ty "home toNew Mexico.'" Many months before,Gallegos had suggested to PNM officialsthat acquisition of GCNM by PNMwould be af value to New Mexico andall gas consumers in the state, Aftercareful investigation of the gas utilitybusiness, PNM became convinced thatthe purchase was iri the best interest ofNew Mexico, residential gas customersand the corporation and agreed to thesettlement. For PÃM, the settlementincreases total Campany assets,broadens its earnings base and shouldimprove cash Ilaw.

The settlement benefits Nev Mexicansin a variety of ways. Itwillprovidemillions ofdollars in refunds to utiTitycustomers. And along with bringingcontrol of the state's gas utiTityback toNew Mexico, itmay bring lower gasrates as welL According to settlementterms, PNM willrenegotiate natural gas

supply contracts.

"From any distance itis all by itself... Risen alone off the dry Plateau,this rock or a mountain of a rock has seemed as alive as itis dead."

—Joseph McEiroy

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"SHIPRCCK, NEW MEXICO,"Jody Forsrer. 1979. Sihrer Prinr

10

Electric and WaterUtilityActivities

The social, political and economic

, environment has changed over the,

>years, and the utilityindustry has

I adapted in a number of ways. Utilities..'„have changed fuel sources to limit

t dependence on foreign supply. Theyhave broadened resource bases andestablished nonutility subsidiaries to

l ensure stability. And they now function,I in much more competitive markets.

Operating in a changing marketplace,PNM has adapted successfully. Amidstthese changes, however, PNM continuesto balance its commitments to share-

: holders, customers and the region withtough productivity goals and innovativemarketing.

Electric and Water UtilityReport

operating revenues for 1984sed 12.0 percent from $397

million in 1983 to $445 million in 1984.This increase in total operating revenuesresulted primarily from rate reliefgranted by the Commission andincreased fuel clause revenues.

Due to significant cost containmentefforts, utilityoperation and main-tenance expenses, excluding fuel andpurchased power expenses, decreased2.3 percent from $ 105 million in 1983to $ 102 million in 1984. However, totaloperating expenses in 1984 increased14.4 percent over 1983, largely becauseof higher fuel and purchased powercosts.

Kilowatt-hour sales increased 3.5percent in 1984, while retail saleswere up 5.3 percent. Sales to wholesalecustomers increased slightly over 1983levels. The average number of electriccustomers rose to 238,000, up from228,000 in 1983.

Marshaling Resources For The Future

In the 1960s, PNM recognized twofactors in the utilityindustry that wouldaffect the way the Company operates.Sharply rising demand for electricityindicated that it was time to buildadditional generating capacity, andfluctuating fuel prices cautioned againstreliance upon one fuel source.

In response to these signals, PNMlaunched a construction program toprepare for anticipated rising con-sumption. It also began to shift its fuelbase away from a dependence on oiland gas to a greater reliance on coaland nuclear fuels.

As the Company enters 1985, it hasmet these objectives. Net operatingcapacity for 1984 was 1,337 megawatts.Energy is supplied by two coal-firedplants, as well as by reserve oil-firedand natural gas-fired plants. A majornuclear power plant, in which PNMholds an interest, is nearing completion.

Palo Verde Unit 1 Licensed

Beginning in 1985, PNM's system isscheduled to receive its first energy

from a 10.2 percent interest in PaloVerde, located 55 miles west of Phoeni~,Arizona.

In December, the Nuclear RegulatoryCommission issued a 40-year operatinglicense for Palo Verde Unit 1. Thelicense temporarily restricts powerproduction to 5 percent, with successfullow-power testing leading to possiblefullpower operation by the end of1985. Units 2 and 3 are scheduledfor operation in 1986 and 1987,respectively.

When all units are complete, PaloVerde willgenerate 3,810 megawatts.PNM's share willbe 390 megawatts.The projected cost for the Company'stotal interest in the three units is $938million.

The new inventorying method ofratemaking willallow shareholders torecover the significant capital invest-ment in Palo Verde, while protectingPNM customers from the "rate shock"attributed to sudden rate increases.More important, Palo Verde is securingenergy independence for PNM wellinto the next centmy.

San Juan Surpasses Expectations

San Juan represents PNM's earlycommitment to end its reliance onunstable oil and gas markets. Locatedadjacent to a rich coal supply, SanJuan has surpassed Company expec-tations for cost, reliability andefficiency.

San Juan Unit 4 stands among themost reliable generating units of itstype and size in the country. SinceApril 1982, when Unit 4 was placed inservice, it has been available for service89.5 percent of the time. This comparesto an industry average of about 79percent.

Much of PNM's pride in San Juanstems from its environmental record.The coal-fired plant is equipped withpollution control equipment thatmeets or exceeds state and federalregulations.

11

Eastern Interconnection ProjectOpens New Markets

With capacity additions in place,PNM is looking ahead toward a periodof expanded marketing. One importantstep in reaching new markets is toimprove PNM's transmission capabilitythrough efforts such as the constructionof the Eastern Interconnection Project(EIP). This 216-mile, 345-kilovolt lineruns from just north of Albuquerqueto an AC/DC converter station locatednear Clovis, New Mexico and willlinkthe Company with Texas.

In January 1985, PNM began thesale of up to 220 megawatts per hourof surplus energy to SouthwesternPublic Service Company (SPS). Thisenergy sale willend in 1989, whichSPS may extend into 1990. Starting in1991, the Company willpurchase 100megawatts of interruptible power fromSPS, thus improving system reliabilityand power mix. Between 1995 and2011, PNM willpurchase up to 200megawatts of interruptible power fromSPS.

To speed recovery of investment,the Company sold the facilities asso-ciated with the EIP to private investorsin February 1985. The facilities havebeen leased back to PNM, reducingrevenue requirements by approximately310 million in 1984, or 335 million inpresent value over the life of the project.

Sangre de Cristo Water Company

In January 1985, the Commissionapproved an additional N million rateincrease for PNM's Sangre de CristoWater Company, to be placed intoeffect in three-steps: one immediateincrease, a second scheduled for April1985 and a third for October 1985.

In November 1984, at the request ofthe City of Santa Fe, discussionsopened regarding a possible sale ofthis division to the city. Ifanagreement is reached, the sale couldbe completed during 1985.

~ /

k4

Developing New Markets

PNM recognizes that utilities operatein an increasingly competitive market.Today's customers have the option tochoose energy from a sizeable assort-ment of alternatives, including wood,propane, solar and cogeneration.

To compete effectively in this market,PNM has stepped up its retail marketingefforts. Anew marketing program basedon the concept of "customer success"willenable PNM to improve its alreadystrong market position by providingmore responsive, flexible services tocustomers.

The business of the electric ut'is service. For PNM's electric utility,customer success means finding waysto assist customers with their energymanagement needs and seeking newways to help industrial customersincrease their profit margins. The netresult of this marketing approach forPNM willbe increased profitabilityand enhanced credibility with itscustomers.

Marketing New Capacity

The Company initiated a marketingprogram six years ago to increase sakto wholesale customers. During thisperiod, PNM negotiated long- termcontracts and annual sales agreement.representing approximately 73 percei.of what was projected to be availableas uncommitted capacity from 1985through 1987.

Ongoing sales include contracts toseH as much as 236 megawatts oJuan Unit 4 capacity to San Dieand Electric Company. Also, P icontracted with Arizona Public ServicCompany to sell 60 megawatts dur~the 1985 summer peak. Plains ElectriGeneration and 'Aansmission Cooperative, Inc. willreceive 15 megawattsof peaking power until 1989.

During 1984, PNM also sold blocksof energy on the wholesale market tosuch diverse entities as El Paso ElectriCompany, Texas-New Mexico PowerCompany, Nevada Power Companyand the California cities of Burbankand Pasadena.

The creative challenge that lies ahe;for PNM is to design energy productsthat improve the Company's marketiiability. For example, the InterutilityMarketing Department is developinginnovative energy packages to attracbulk power purchasers. At the sametime, the Company is studying im-piovements for the transmission system

that would open up entirely new

12

Eastern InterconnectionProject

North of Albuquerque, along the RioGrande, stands PÃi's Bernalillo-Algodones transmission switching sta-tion. Eastward, beyond the majesticcentral mountains of New Mexico,stretch rambling plains and many-fingered gulches, reaching for Texas.To motorists traveling the smoothribbons of eastbound interstate, thepower lines darting in and out ofviewappear almost part of the landscape.

For the people who surveyed andstrung the miles of PiVih's EasternInterconnection Project from Algodonesto Clovis, New Mexico, those hightransmission lines represent two yearsof hard work in dramatic terrain.

Piei announced the project in No-vember 1982. Plans called for 216 milesof 345-kilovolt transmission line to bestrung and operational in less than twoyears —about half the normal construc-tion time fora project this size.

Southwestern Public Service Companyhad agreed to purchase up to 220megawatts per hour ofsurplus energyfrom PNM starting in January 1985 andcontinuing to at, least 1989. In 1991,PNM willbegin the purchase of 100megawatts of interruptible power fromSPS, and from 1995 through the remain-ing life of the contract, SPS willprovidePNI I with up to 200 megawatts ofinterruptible power.

PNM builtboth the line and theACIDCBlackwater Converter Station(Blaclnvater). Completed late in 1984the project, linked. PNM for the firsttime withpower systems ta the east.

Not only does the project enablePNM to sell available power not currentIydemanded by customers in New Mexico,but, says PNM Senior Vice PresidentJack Wilkins, "The interconnectiongives us fle~bili*tyin planning futuregenerating projects to meet New Mex-ico's energy needs. Italso providesboth PNM and SPS with additionalreliability."

One immediate consideration for theEIP team was to solve the problem ofinterconnecting the systems of PNMand SPS. The generators of the twosystems do not rotate identically, sothey needed an "interpreter" to completethe connection. The ultimate solution

was the Blackwater high voltage direct:current (HVDC) converter station whichconverts the AC of one system to auniform HVDC and then to a compatibleACsystem. Thisrathersimple-soundingconversion at Blaciovater is accom-plished with complex, state-of-the-artequipment.

Looking back on the project, PNM'sEIP Project Manager, Larry Sullivansees some advantages to working undersuch a tight construction schedule. "We

knew going into the project that wewould have to be flexible and creativeto meet the extremely short

deadline,*'ays

Sullivan.The EIP team devised faster, more

efficien ways to perform environmentalstudies, land surveys, right-of-way ne-gotiations and construction. Even withthe tight schedule, the team conductedcareful route and environmental studies,consulting withmore than a dozenfederal, state and, local agencies andcommunity leaders. Along the way„ theproject turned up such unexpectedtreasures as historical. artifacts, ancientarchaeological sites and rare flora—allfinds ofvalue to scientists and archae-ologists.

Looking for innovative ways to speedup construction, the project team re-placed plodding truck caravans withhelicopters and increased the pace oftower emplacements from 6 to 30 aday. The 8,000-pound towers wereassembled at staging areas about everysix miles along the line and liftedby helicopters to their precise con-crete foundations where ground crewsanchored them with guy wires. Thehelicopters not only saved time butminimized, the amount ofneeded accessland and reduced the project's environ-mental impact,

With such methods, some of whichhad never before been used by PNIII,the EIP team completed the projectahead of schedule and under budget."Alot of the innovations just came outofpeople's enthusiasm," Sullivan says."We tried to anticipate problems as wewent along. Anyone with an idea knewit was going to be heard. Itwas theenthusiasm of the people involved thatmade ita success."

13

"... I found that l was no longer lost in the enormous landscape of hills and sky.l was a veryimportant part of the teeming life of the llano and the river."

-Rudolfo A. Anaya

l1

~a~

0

l

h.w f

a

"LAMESITA. NEW MEXfco," filtttamC'itt, l978, Silver Pnnt

14

Broadening Our Base

At the core of PNM's long-termbusiness philosophy is a diversiTicationstrategy aimed at improving return onequity and stimulating economic growth.The broadening of PNM's revenue base

" willhelp stabilize earnings in the years" ahead, while enabling the Company to'ontribute to the economic development

, of the region. PNM is examining an'rray of nonutility investments with

"",exciting future earnings potentiaLt

Sunbelt Acquires GasGathering Company

Pl&I's mining subsidiary, SunbeltMining Company, Inc., (Sunbelt)acquires, markets and develops coaland other mineral resources and pro-

"

vides contract mining services. Underthe GCNM settlement agreement,

' Sunbelt acquired the stock ofSouthernUnion Gathering Company (Gathering

i C any), which purchases and trans-atural gas for GCNM. Gathering

plant and equipment assets

I are in excess of $ 19 million.Suribelt also purchased the stock of

'ranswestern Mining, Inc. (Trans-western). Transwestern's subsidiary,Calgom Mining Inc. is the operator ofGoldstripe joint venture, a surface gold

. mining project located in California.I

,'nvestment Subsidiary~ Creates Opportunities

The Company's nonutility arm,Meadows Resources, Inc. (Meadows),invests in nonutility ventures with highgrowth potential. Its real estate activi-

,ties have contributed to overall earnings

'or three years, while in July its first'ajor New Mexico project, Montanade Fibra (MdF), began creatingrevenues and jobs. Examining a widevariety of potential investment oppor-tunities, from manufacturing plants tohigh technology products, Meadows

'eeks to enhance PNM's earnings while'buting to the economic develop-

New Mexico and the Southwest.,I

Land Partnership DevelopsNew Potential

Three years ago Meadows entered aland development partnership calledBellamah Community Development(BCD). Meadows owns 50 percent ofBCD, and a successor to BellamahLand Company, a long-time New Mex-ico-based real estate company, ownsthe other 50 percent.

BCD's activities range from realestate acquisition, planning and devel-opment to the marketing of residentiallots or commercial and industrial tractsto builders. While approximately 26percent of the land owned by BCD isin New Mexico, development activitiesreach into Arizona, Texas, Oklahoma,and Colorado.

BCD has earned a respected placein the Southwestern real estate devel-opment market with two large-scaleprojects in Dallas, Texas. In 1982;BCDacquired Flower Mound, a 3,018 acredevelopment in northwest Dallas. Bythe end of 1984 almost all FlowerMound acreage had been sold todevelopers and builders. This successled the partners to purchase the4,377 acre Mountain Creek develop-ment, 10 miles southwest ofdowntown Dallas.

Both developments involve multi-purpose residential, commercial andindustrial land use with sales of parcelsto smaller developers who build inaccordance with BCD specifications.The projects are also similar in twoother important respects: (1) theyinvolve very large, previously un-developed acreage which allows forcomprehensive master planning andzoning; and (2) they are large enoughto-provide a wide mix of land uses andthus eliminate dependence on a singlesegment of the real,estate market.

Montana de Fibra, Inc.

Meadows has invested approxi-mately $67 million in the Las Vegas,New Mexico MdF facilitywhich

manufactures a wood substitute calledmedium density fiberboard. Construc-tion of the project was completed in1984.

Formerly a joint venture betweenPonderosa Products Inc. and Meadows,MdF is now a corporation in whichMeadows holds a 90 percent ownership.In October, Meadows entered into asale-leaseback transaction with MdFinvolving assets of about $55 million.

Meadows Invests Capital

One of Meadows'ost excitingactivities is its venture capital portfolio.By year-end Meadows held interests ineleven companies, representing a totalinvestment of nearly $7.6 million.

The primary investment focus is incompanies with high growth potential.These include a range of medium tohigh technology enterprises, both instart-up and later stages of develop-ment. Most such investments rangefrom $250,000 to $ 1 million.

Meadows has also joined with otherventure capital firms located in Texas,New York and California. This networkis providing a new channel for capital,contacts and expertise to supportdevelopment in New Mexico, whileexpanding Meadows'nvestment op-portunities outside the state and region.

Further development ofMeadows'enture

capital portfolio should increasereturn on equity, whBe contributing tothe New Mexico economy. Wheneverpossible, Meadows invests in companiesthat either operate in New Mexico orplan expansion into the state. Meadowsalso lends its expertise and capitalsupport to state economic develop-ment efforts, such as the BusinessDevelopment Corporation, the TechnicalInnovation Center, New MexicoEntrepreneurs'lub and New MexicoTechnet, Inc.

15

"You should understand the way it was back then,becauseitis the same even now."

—Leslie Mattnon Siiko

g f, ~tgC @Qf,

'a ~> k k''a"f'i

"-" M~~~ tti'"=" «-'Vg."tt~~~~$~$I'ot~"'~g~~~>(

~ ' p~QiI

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"CAVE DWELLING,BANDELIERNATIONALMONUMENT,NEW MEXICO," David Noble. 1982. Silver Print

Montana de Fibra

* t

P

I

The eastern slopes of the Sangre deCristo mountains are covered with pinetrees. At the point where the tall,mountain forest meets the broad NewMexico plains stands the once-frontiertown of Las Vegas. Tlus historic com-munity has a new and beneficialneighbor.

Montana de Fibra-that's Spanish for"mountain of fiber"—is also the nameof an exciting, new manufacturingfacility located a short distance fromLas Vegas, New Mexico within view ofthe mountains and the pine forest ituses as a resource. Completed in1984-under budget and six monthsahead of schedule —the $67 millionfacility is a source of pride for the townand for Meadows Resources, Inc.,PNM's wholly-owned, nonutilityinvestment subsidiary.

MdF takes wood chips, shavings andsawdust —waste from local sawmills,including its own nearby sawmill—andturns them into a highly marketableproduct called medium density fiber-board. EVhen fullyoperational, the250,000-square-foot plant willproducefiberboard at a rate of up to 88 millionsquare feet annually.

You may be more familiar with me-dium density fiberboard than you think.It's free of knots, saws cleanly andholds a screw just as snugly as thewood in your favorite rocking chair.Unlike particle board, it does not chipor splinter easily. Fiberboard is a highquality product used to manufacture a

host of common items, such as furni-ture, cabinets, heavy-duty crates andeven church pews.

Meadows has the majority interest inthe plant Ponderosa Products, Inc.,the operating partner, is a companywith many years of experience in thewood products industry. Strategicallysituated near major transportationroutes, emerging markets, and thenecessary raw materials, the plant maysoon capture as much as 10 percent ofthe national fiberboard market.

Meadows'ontribution to the projectincludes its financial strength, construc-tion experience and knowledge of NewMexico. Ponderosa brought to the joint

venture extensive operating experiencein forest products, lumber manufactur-ing, and marketing. The combinationhas produced an efficient plantoperation.

Ecology and efficiency go hand-in-hand at MdF. Use of sawmill waste tomanufacture fiberboard eliminates anenvironmental nuisance, which other-wise must be burned, buried or dumped.MdF plant waste is used to fuel a boilerin the manufacturing process, and theboiler ash is sold to Las Vegas forfertilizer.

For PNM and its shareholders, MdFis a milestone in a carefully wroughtnonutility investment strategy, of wluchan important element is economicdevelopment in New Mexico and theSouthwest. The plant already employsover 200 people, and many other newemployment possibilities exist becauseof anciHary businesses attracted to Las

Vegas by h IdF. A modest estimate in-dicates this increased employment willgenerate $3.5 million in income, $2 mB-lion in retail sales and $ 1.7 million inbank deposits for the area. Demand forelectricity from the hfdF plant alone isexpected to generate revenues forPNM's electric utilityof about $300,000a month.

Las Vegas Mayor Steve Franken saysMdF not only has "contributed signif-icantly to the economy of the town, butalso has enhanced our image as a goodhome for industry."

Indeed, the industry has brought anew kind of thinking to the community,says MdF Personnel Manager AbelinoMontoya. "More than in buildings andsteel, the shareholders of PNM havemade a wise investment in the peopleof New Mexico."

17

"Black thunder-storms used to roll up from behindit and pounce on us like apanther without warning. The lightning would play round it and jab into it so thatwe were always expecting it would fire the brush. I'e never heard thunder so loudasit was there." —WillaCather

"."~ ~

"(««W»-'jest'4«r&r««tt«7«~xge~',0" 7'pt7cc., +~~a'.. 7

I( tw+fi7«z «~~)~~ » s«j'j «» '. 'i''.~ 'll

7

It'7

"LIGHTNINGOVER THE RIO GRANDE VALLEY,NEW MEXICO,"Jim Bones, f983, Dye Transfer

No reproduction of the works contained herein should be made without first obtaining express permission from the copyright holders.

18

Financial Data and Consolidated Financial Statements

Comparative Operating Statistics

Selected Financial DataManagement's Discussion and Analysis of Financial Condition

and Results ofOperationsManagement's Responsibility for Financial Statements

Auditors'eportConsolidated Balance Sheet

Consolidated Statement ofEarnings

Consolidated Statement ofRetained Earnings

Consolidated Statement ofChanges in Financial Position

iVotes to Consolidated Financial Statements

Supplementary Information Concerning the Effects ofChanging Prices

Quarterly Operating Results

Stock/Dividend Data

2021

22

23

23

24

25

25

26

27

19

Public Service Company of New Mexico and Subsidiaries

Comparative Operating Statistics

1984 1983 1982 1981

Electric ServiceEnergy sales —kWhr (in thousands)

ResidentialCommercialIndustrialOther ultimate customers

lbtal sales toultimate customers

Sales for resale'Ibtal energy sales

1,279,9171,706,044

762,117184,725

3,932,8032,384,5356,317,338

1,205,0461,600,199

742,272185,824

3,733,3412,371,8606,105,201

1,134,8271,515,664

784,158215,853

3,650,5022,840,9576,491,459

1,104,8271,483,105

858,454186,939

3,633,3252,127,2495,760,574

1,090,0031,441,634

859,178167,070

3.557,8851,844,2135.402,098

Electric revenues (in thousands)ResidentialCommercialIndustrialOther ultimate customers

lbtal revenues fromultimate customers

Sales for resale'Ibtal revenues from

energy salesMiscellaneous electric revenues

'Ibtal electric revenues

S 1071395134,53250,43911,950

304,316131,013

435,3293,645

S 438,974

252,828136,273

268,299149,115

389,1012,846

S 391,947 S

417,4142,743

420,157

S '90,020 S 91,065107,729 110,74544;166 51,71410,913 14,775

S 80,62797,69950,11112,170

240,60786,781

327,3882,581

S 329,969

S 72,59685,.48044.52 I

9 i.212.35<

59,47;

271.82.".

2,59&S 274,42';

Customers at year-endResidentialCommercialIndustrialOther ultimate customers

'Ibtal ultimate customersSales for resale

Total customers

217,61425,614

436194

243,8586

243,864

208,36824,259

438186

233,2515

233,256

199,67922,) 48

453185

222,4656

222,471

195,72221,164

458180

217,5246

217,530

,20,93c

46r17!

213,07.

213,0(

Reliable net capability-kWCoincidental peak

demand —kWAverage fuel cost per

million BTUBTU per kWhr of

net generation

1,337,000

976,000

S 1.0970

11,023

1,343,000

998,000

S .9957

11,296

1,473,000

957,000

S 1.1502

11,296

1,047,000

992,000

S 1.1952

11,227

1,080,001

913,00<

S 1.096

10,55

'iVater ServiceSales-gallons (in thousands)

Revenues (in thousands)

Customers at year-end

2,392,085 2,315,980 2,842,381 2,729,457 '2,699,81

S 6,354 S 5,527 S 6,386 S 6,196 S 6,09

17,717 16,721 20,432* 19,899 19,30

'Includes 4,508 customers for the Las Vegas water system which was contributed to the City of Las Vegas on December 30, 1982.

20


Selected Financial Data

1984 1983 1982 1981 1980

gn thousands except per share amounts and ratios)

Total operating revenues

Net earnings

Earnings per common share

Total assets

S 445,328

S 132,840

S 3.11

S2,598,744

S 397,474

S 140,519

S 426,543

S 115,822

S2,486,429 S2,145,984

S 3.53 S 3.22

S 336,165

S 107,958

S 280,516

S 71,436

S1,831,803 S1,457,900

S 423 S 336

Preferred stock with mandatoryredemption requirements

iLong-term debt, less

II current maturities S1,030,557 S 974,290 S 811,653 S 707,472 S 567,190

S 121,080 S 123;700 S 125,000 S 90,000 S 90,000

Common stock data:Cash dividends declared per

common shareDividend pay-out ratioMarket price per common

share at year endBook value per common share

at year endAverage number of common

shares outstandingrn on average common equity

Ratio of earnings to fixedcharges (S.E.C. method)

35,01112.5 X

32,95614.3%

28,50813.6%

2.33 2.81 2.70

S 285 S 281 S 27791.7N 79.6% 86.0%

S 24.375 S 25.375 S 26.00

S 25.28 S 25.20 S 24.35

S 23.75 S 19.75

S 23.87 S 23.33

20,80418.6%

15,93314.9X

3.00 2.94

S '2.68 S 2.0463.4% 60.7%

Capitalization:Common stock equityPreferred stock:

Without mandatoryredemption requirements

With mandatoryredemption requirements

Long-term debt, less currentmaturities

42.1 A

5.5

47.5100.0%

41.5X

5.2

6.0

47.3100.0X

42.8X

5.8

6.9

44.5100.0%

39.5X

7.1

6.0

47.4100.0%

33.3M

9.3

7.9

49.5100.0X

public Service Company of New Mexico and Subsidiaries

Management's Discussion and Analysis ofFinancial Condition and Results of Operations

The following discussion is management's assessment of the Company's financial condition and the significant factorswhich have an impact on the results of operations. This discussion should be read in conjunction with the Company'sconsolidated financial statements.

I

Liquidityand Capital ResourcesThe Company is continuing a construction program which willbe necessary to meet prospective customer servicerequirements. The Company's five-year utilityconstruction program for the period 1985-1989 provides for theexpenditure of approximately S819 million, including allowance for funds used during construction (AFUDC) of S171

million. Included in such total amount are proposed expenditures during the five-year period of approximately S67 miHionfor the Company's share of nuclear fuel for the Palo Verde Nuclear Generating Station and approximately $112 million forgas utilityconstruction expenditures which willbe required as a result of the Company's acquisition of gas utility assets inNew Mexico.

The Company currently estimates total utilityexternal funding requirements for the 1985-1989 period to be approximately$427 million including $293 million for long-term debt repayments, mandatory preferred stock redemptions andrepayment of notes issued in connection with the acquisition of gas utility assets in New Mexico. Estimates of externalfunding requirements give effect to the implementation of the "Inventory of Capacity" ratemaking methodology. (Seepage 5.) The Company's projection of internal cash generation in the 1985-1989 time period assumes timely and adequ iierate relief with respect to both retail and wholesale customers. The projection also assumes that the Company's non-utilitysubsidiaries willprovide their capital requirements from internally generated funds and from independent;borrowings which would be nonrecourse to the utility.Utilityconstruction expenditures for the year ended 1984 amounted to S278 million including AFUDC of $73 million.In 1984, internal sources of funds provided from continuing operations equaled $ 16 million. In 1984, the Company issued$65 million of first mortgage bonds, $48 million of common stock and utilized $ 15 million of proceeds from pollutioncontrol financings to finance the Company's utilityconstruction program. In addition to the issuance of permanent andlong-term securities, the Company has financed its capital expenditures on an interim basis through the use of short-borrowings, commercial paper and reduction of temporary cash investments. Arrangements for bank lines of creditamounted to $21 million and revolving credit arrangements amounted to $143 million at December 31, 1984.

The indenture under which the Company's first mortgage bonds may be issued and the Restated Articles of Incorporationof the Company under which additional shares of its preferred stock may be issued restrict the ability of the Company toissue additional first mortgage bonds and additional preferred stock, respectively, unless certain earnings tests providedtherein are met. As of December 31, 1984, after giving effect to the acquisition of gas utility assets in iNew Mexico, theCompany could have issued $238 million of additional first mortgage bonds at an assumed interest rate of 13 1/4 percent.The Company could have issued $307 million of additional preferred stock at an assumed dividend rate of 13 percentwithout the consent of the holders of outstanding preferred stock.,The Company's capital structure at December 31, 1984 consisted of 47.5 percent long-term debt less current maturities,5.5 percent preferred stock with mandatory redemption requirements, 4.9 percent preferred stock without mandatoryredemption requirements and 42.1 percent common stock equity.

Results of OperationsOperating revenues increased 12.0 percent, or S47.9 million, in 1984 over 1983. The increase reflects increased kWhr salesalong with rate relief granted by the iNew Mexico Public Service Commission which became effective in July 1984.

In addition, increased fuel and purchased power expenses which are passed on to customers resulted in higher recovery offuel costs through fuel adjustment clauses in 1984. The decrease in kWhr sales to wholesale customers in 1983 was theprimary factor contributing to the decreased operating revenues in 1983 from 1982.

Other operation expenses in 1984 decreased approximately S4.5 million from 1983 as a result of the sale of a 28.8 percentownership interest in San Juan Unit 4 in December 1983. Fuel and purchased power expenses, however, increasedsubstantially in 1984 over 1983 due primarily to a long-term power contract.The 48.6 percent decrease in fuel and purchased power expense in 1983 from 1982 was due primarily to a greater volume <

economy energy sales to other utilities, offsetting fuel and purchased power expense in 1983.

During 1984, the Company earned approximately S14.8 million of interest from temporary cash investments, an incre$ 13.7 million over 1983. Such investment funds consisted primarily of proceeds from the sale of a 28.8 percent owners

22


interest in San Juan Unit 4. However, net other income and deductions decreased in 1984 from 1983 due primarily to inclusion

of an after-tax gain of S24.1 million in 1983 from the sale of the equity interest in a trust which held certain coal leases.

Interest on long-term debt has increased steadily over the three-year period, reflecting issuances of first mortgage bonds and'. pollution control revenue bonds to finance the Company's construction program.'As a result of items discussed above, net earnings of the Company fluctuated during the three-year period. However, netI earnings of the Company, exclusive of the gain on the sale of the equity interest in the trust in 1983, have increased overi the comparable period. AIter eliminating the S24.1 million gain (S.73 per share) on the sale of the equity interest in the

I trust, net earnings applicable to common stock increased in 1983 and 1984, while earnings per share of common stock~ decreased in 1983 and increased in 1984.~ The effect of inflation on the Company's operation is discussed within the Supplementaiy Information Concerning the'ffects'fChanging Prices on pages 34-35.

Management's Responsibility for Financial Statements

The management of Public Service Company of iNew Mexico is responsible for the preparation and presentation of theaccompanying financial statements. The financial statements have been prepared in conformity with generally acceptedaccounting principles and include amounts that are based on informed estimates and judgments of management.

i Management maintains a system of internal accounting controls which it believes is adequate to provide reasonable

I assurance that assets are safeguarded, transactions are executed in accordance with management authorization and the

) financial records are reliable for preparing the financial statements. The system of internal accounting controls is

s orted by written policies and procedures, a staff of internal auditors who conduct comprehensive internal audits andselection and training of qualified personnel.

oard of Directors, through its Audit Committee comprised entirely of outside directors, meets periodically withmanagement, internal auditors and the Company's independent auditors to discuss auditing, internal control and financialrepor'ting matters. 'Ib ensure their independence, both the internal auditors and independent auditors have full and free

, access to the Audit Committee.

The independent auditors, Peat, Marwick, Mitchell & Co., are engaged to examine the Company's financial statements inaccordance with generally accepted auditing standards.

Auditors'eport

The Board of Directors and Stockholders

.! Public Service Company of New Mexico:

~ ., We have examined the consolidated balance sheet of Public Service Company of New Mexico and subsidiaries as ofDecember 31, 1984 and 1983 and the related consolidated statements of earnings, retained earnings and changes infinancial position for each of the years in the three-year period ended December 31, 1984. Our examinations were made

in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records

and such other auditing procedures as we considered necessary in the circumstances.

In our opinion, the aforementioned consolidated financial statements present fairly the financial position of Public Service

Company of New Mexico and subsidiaries at December 31, 1984 and 1983 and the results of their operations and changes" in their financial position for each of the years in the three-year period ended December 31, 1984, in conformity with

generally accepted accounting principles applied on a consistent basis.

PEAT, MARWICK, MITCHELL& CO.

uerque, New Mexicoary 18, 1985

23

Pub(ic Service Company of New Mexico and Subsidiaries

Consolidated Balance Sheet

AssetsUtilityplant, at original cost (notes 3 and 7):

Electric plant in serviceKVater plant in serviceCommon plant in service

S1,436,92935 72935,909

S1,304,24934,90631.628

December 3119S4 1

(in thousands)

Less accumulated depreciation and amortization

Construction work in progressElectric plant, held for future use

Net utility plant

Other property and investments:Non-utility property, at cost, net of accumulated depreciation, partially pledgedNon-utility property under construction, at costInvestment in unconsolidated affiliatesOther, at cost

Total other property and investments

Current assets:CashTemporary cash investmentsReceivables, netFuel, materials and supplies, at average costPrepaid expenses

Total current assetsDeferred charges

Capitalization and LiabmtiesCapitalization(

" Common stock equity (note 2):Common stock-outstanding 36,127,189 shares in 1984 and

33,932,809 shares in 1983Additional paid-in capitalRetained earnings

1btal common stock equityCumulative preferred stock without mandatory redemption requirements (note 2)Cumulative preferred stock with mandatory redemption requirements (note 2)Long-term debt, less current maturities (note 3)

Total capitalization

Current liabilities:Short-term debt (note 4)Accounts payableCurrent maturities of long-term debt (note 3)Accrued interest and taxesProvision for refundsOther current liabilities

'!btal current liabilities

Deferred credits:Accumulated deferred investment tax credits (note 5)Accumulated deferred income taxes (note 5)Other deferred credits

Total deferred creditsCommitments, contingencies and subsequent events

(notes 5, 7, 8, 9 and 12)

1,5082567282,602

1,225 965832,252

65,1422 123,359

110,602

70,1669,415

190,183

9,434140,776

53,79941,629

4,049249,687

35,515$ 2 598 744

S 180,636549,633182 IIG4913,233106,000121,080

1,030,5672 170 870

30,31334,66051,70833,16811,15120,323

181,313

101,805114,85829 808

246,561

$ 2 598,744

1,370,783240.097

1,130,686705,191

63.3551.899.232

48.AS: )

31,05051.063

S. 72(

139.3! i

5,17i~

318,97745.77443,78l

3.02!;"

416.73!31

S2.4P

S 169,66.511,97:1 r

3.42'55

0~"

106,00(123,70(974,29(

2,059,04!

126,29(36

66',63

35,82',04I

24 441

229.89'4,49

87,6825.29

197,48

See accompanying notes to consolidated financial statements.

24


Consolidated Statement of Earnings

Year ended December 311984 1983 1982

(in thousands except per share amounts)Operating revenues:

Electric (note 8)IVater

1btal operating 'revenues

Operating expenses:Fuel and purchased powerOther operation expenses

~1 Maintenance and repairs! Depreciation and amortization

'ihxes, other than income taxesIncome taxes (note 5)

lbtal operating expensesOperating income

Other income and deductions:Allowance for equity funds used during constructionEquity in earnings of unconsolidated affiliates,

net of taxes (note 5)Gain on sale of equity interest in trust,

net of taxes (notes 5 and 10)Other, net of taxes (note 5)

Net other income and deductionsIncome before interest charges

- Earnings per share of common stock„'ividends paid per share of common stock

i

i I rest charges:est on long-term debtr interest charges

owance for borrowed funds used during constructionNet interest charges

Net earningsPreferred stock dividend requirementsNet earnings applicable to common stockAverage number of common shares outstanding

S 438,9746,354

445,328

95,90468,27834,07548,97519,24632,356

298,834146,494

52,754

7,975

8 86569,594

216,088

98,4638,421

~23 03683,248

132,84023,990

$ 108,85036,011

S 3.11S 2.85

$391,9475.527

397.474

59,36572,76032,02847,17218,69431,208

261.227136.247

45,789

6,373

24,129779

77.070213.317

80,92211,182

~19.30672.798

140,51924.187

$ 116.33232.956

S 3.53S 281

$ 420,1576.386

426.543

115,53168,84238,12534,98416,55234.855

308.889117.654

45,911

2,001

1 li849,090

166.744

55,53714,476

~19.09150.922

115,82224.062

S 91.76028.508

S 322$ 2.77

:: Consolidated Statement ot Retained Earnings

1984Year ended December 31

1983 1982

', Balance at beginning of year (note 1)

'et earnings1

iDividends:

Cumulative preferred stockCommon stock

ce at end of year

$ 173,420

132,840

(23,990)~99,306

$ 182,964

(in thousands)S 149,409

140,519

(24,187)~92.321

$ 173.420

$ 138,002

115,822

(24,062)~80.353

S149 409

,'ee accompanying notes to consolidated financial statements.

1 25


Consolidated Statement of Changesln Financial Position

1984Year ended December 31

1983

(in thousands)

Funds provided:beet earningsCharges (credits) to earnings not requiring funds:

Depreciation and amortizationProvision for non-current deferred income taxes, netInvestment tax credits, net ~

Allowance for equity funds used during constructionEarnings of unconsolidated affiliates

Funds derived from operationsSale of common stockSale of cumulative preferred stockSale of first mortgage bondsProceeds from pollution control revenue bondsIncrease in short-term debt, netincrease in other long.terra debtProceeds from sale of utility plant, netDecrease in working capital, other than short-term debtOther

S 132,840

52,84427,17517,306

(52,754)~14. 133

163,25848,254

65,00014,583

31,377

214,44311,910

S 548,825

$ 140,519

51,06034,4639,076

(45,789)~9.321

180,00850,886

65,000101,18362,428

3,711156,406

8.461$628.083

$ 115.8"

37,9404 o79

16,463(45,911

~3.13312o 45v184,06835.00060.00(

4.93(

15.48'469

07'unds

used:Cash dividendsUtilityplant additionsIncrease in other property and investmentsDecrease in short-term debt, netReduction of long. term debtIncrease in working capital other than short. term debtOther

S 123,296222,580

39,83295,97754,266

12,874S 548,825

$ 116,508210,014

27,788

7,370255) 125

11,278$ 628.083

$104,41'67,13)

12,47(

e14.30

$469.07'haiiges

in working capital other than short-term debt: .

CashTemporary cash investmentsReceivables, nerFuel, materials and suppliesPrepaid expensesAccounts payableCurrent maturities of long-term debtAccrued interest and taxesProvision for refundsOther current liabilitiesIncrease (decrease) in working capital other than

short-term debt

S 4,256(178,201)

8,025(2,152)1,0202,019

(46,077)2,655

(10,105)4,117

~3214,443

S 457265,270(13,434)(2,461)

(634)(1,307)(1,939)(9,177)18,055

295

S255.125

$ (5.:3~25.11

4,0(i12 24

1,0512,80

1,694 82

(16,95~18.31

S 21.15

See accompanying notes to consolidated financial statements.

26

0

Public Service Company ot New Mexico and Subsidiaries

Notes to Consolidated Financial StatementsDecember 31, 1984, 1983 and 1982

ummary of SigniTicant Accounting Policies

m of Accountsrespect to utilityoperations, the Company maintains its accounting records in accordance with the uniform system

of accounts prescribed by the Federal Energy Regulatory Commission (FERC) and adopted by the Yew Mexico Public

Service Commission (ihiXIPSC). As a result of the ratemaking process, the application of generally accepted accounting

principles by the Company differs in certain respects from the application by non-regulated businesses. Such differences

; generally regard the time at which certain items enter into the determination of net earnings in order to follow theii principle of matching costs and revenues. The balance of retained earnings as of January 1, 1982 has been restated by a

l charge of 8512,000 to reflect a FERC audit a/ustment applicable to periods prior to those presented herein. The effect of

,'this restatement on the periods presented herein is insignificant.

I Principles of Consolidation

I The consolidated financial statements include the accounts of Public Service Company of iMew Mexico, its wholly-owned'ubsidiaries and its majority-owned joint ventures. Allsignificant intercompany transactions and balances have

been eliminated.The Company's investments in unconsolidated affiliates are accounted for by the equity method.

UtilityPlantUtilityplant is stated at original cost,, which includes payroll-related costs such as taxes, pension and other fringe

benefits, administrative costs and an allowance for funds used during construction.

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

Provision for depreciation of utility plant is made at annual straight-line rates approved by the NMPSC. The average

]depreciation rates used were as follows:

1984 1983 1982

Electric plant 3.29% 3.30K 3.16KWater plant 2.04 1.89 1.94

Common plant 7.28 7.32 6.87

'he provision for depreciation of certain equipment, including amortization applicable to capital leases, 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.

i Allowance for Funds Used During Construction (AFUDC)

> As provided by the uniform system 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 a return on other funds- i (allowance for equity funds used during construction) and is allocated based on the method required by FERC. The

. Company capitalizes AFUDC on construction work in progress (CWIP) to the extent allowed by regulatory agencies. The

'ompany also capitalizes AFUDC on its plant held for future use as allowed by the iiMPSC.

< AFUDC is computed using the maximum rate, net of taxes, permitted by FERC. Effective May 1983, the FERC changed

'he prescribed formula and required AFUDC to be calculated on pollution control trust fund balances with the interest

earned from such funds to be credited against CWIP. The rates used were 9.34 percent, 8.74 percent and 9.38 percent for

1984, 1983 and 1982, respectively, compounded semiannually.

The Company records as AFUDC carrying charges associated with specifically identifiable uncommitted generating

.'capacity as allowed by the lilr'rIPSC. Uncommitted capacity was 97 iWIW for 1984 and 105 MW for 1983 and 1982. The

'arrying charge is calculated using the maxim'um rate, net of taxes, permitted bv FERC except for the exclusion of short-

term debt from such calculation. In December 1984, the liIMPSC issued an order alloiving the deferral of carrying charges

'or the period from January 1, 1984 through June 6, 1984 and allowing the deferral of carrying charges to resume

i beginning in July 1985. Amounts recorded under iMibIPSC orders have totaled 817.2 million. Of such amounts, S12.3

i ~ 'on have been or are presently being recovered through rates. The remainder is to be recovered over the useful life ofr

operty when such capacity is required for customers.'-'

27


Deferred Fuel and Purchased PowerEconomy and other near-term energy transactions are shown as a reduction of fuel and purchased power expenses.

The Company uses the deferral method of accounting for the portion of fuel and purchased power costs which is reflectedin subsequent periods under fuel a/ustment clauses.

Amortization of Debt Discount, Premium and ExpenseLong-term debt discount, premium and expense of issuance are amortized over the lives of the respective issues on thedebt outstanding method.

Income TaxesCertain revenue and expense items in the Consolidated Statement of Earnings are recorded for financial reportingpurposes in a year different from the year in which they are recorded for income tax purposes. Deferred income taxes areprovided on these timing differences to the extent allowed for ratemaking purposes. This method known as taxnormalization is used primarily for differences attributable to deferred fuel costs and the use of libera!ized depreciationand accelerated cost recovery methods. Certain other timing differences result in reductions of income tax expense in thecurrent year as required by the NMPSC. This flow-through method is used primarily for minor differences between bookand tax depreciation and for certain capitalized construction costs.

Rates subject to FERC control allow recovery of amounts necessary to provide additional tax normalization of the itemsdescribed above which are accounted for under the flow-through method for other customers. Provision has been madefor additional deferred income taxes attributable to amounts collected under these rates.

idion-utilitydeferred taxes are provided on all non-permanent differences between book and taxable income. Thesedifferences consist primarily of interest and other expenses which are capitalized for book purposes and income which istaxable in periods other than when recognized for financial reporting purposes.

The Company defers investment tax credits related to utilityassets and amortizes them over the estimated useful lives ofthe related assets. Investment tax credits generated by non-utility properties are recognized as reductions of consolidatedincome tax expense.

RevenuesRevenues are recognized based on cycle billings rendered to customers monthly. The Company does not accrue revenuesfor'service provided but not billed at the end of a fiscal period.

(2) Common Stock and Cumulative Preferred StockThe number of authorized shares of common stock with par value of $5 per share is 80,000,000 shares at December 31984 and 40,000,000 shares at December 31, 1983. The Board of Directors has periodically reserved common stock for theShareholder's Dividend Reinvestment, Plan, the Employee Stock Purchase Plan, the Master Employee Savings Plans andthe Consumer Stock Plan (Stock Plans), with 1,674,000 shares remaining unissued at December 31, 1984.

The number of authorized shares of cumulative preferred stock is 10,000,000 shares. Information concerning thecumulative preferred stock at December 31, 1984 is as follows:

Without mandatory redemption requirements:1965 Series, 4.58%1974 Series, 9.2%1975 Series, 10.12%9.16% Series8.48% Series8.80% Series

With mandatory redemption requirements:8.75% Series14.75% Series12.52% Series

StatedValue

$ 10010010025

100100

10010060

SharesOutstanding

130,000170,000100,000800,000200,000260,000

1,660,000

360,800600,000700,000

1,660,800

StatedRedemption

Price

$ 102.00104.00107.0026.70

106.00106.20

105.80114.7552.97

AggregateStated Value

(in thousands)

$ 13,00017,00010,00020,00020,00026,000

$ 106,000

$ 36,08050,00035,000

$ 121,080

The Company, upon thirty days notice, may redeem the cumulative preferred stock at stated redemption pricesaccrued and unpaid dividends. Redemption prices are at reduced premiums in future years. Redemption may nmade through certain refunding operations prior to April 1, 1990 for the 14.76% Series and October 15, 1991 for12.52% Series.

28


The Company has agreed to indemnify the holders of the 12.52% Series against the loss of certain income taxbenefits. However, the Company has the option to redeem the entire series should payments under suchindemnification increase the effective dividend rate on the stock by more than one-half of one percent.

datory redemption requirements for 1985, 1986, 1987, 1988 and 1989 are none, $2,000,000, S5,613,000,,000 and $5,633,000, respectively.

hanges in common stock, additional paid-in capital and cumulative preferred stock were as follows:

Cumulative Preferred Stock

without MandatoryRedemption

Requirements

Additional iNumber AggregatePaid-In of StatedCapital Shares Value

(Dollars in thousands)$327,625 1,660,000 $ 106,000

116,92425,928

470,477 1,660,000 106,00041,298

200

511,975 1,660,000 106,00037,151

507

$549,633 1,660,000 $ 106,000

IVith 5 IandatoryRedemption

RequirementsCommon Stock

AggregateStatedValue

Numberof

Shares

Numberof

Shares

AggregatePar

Value

$ 123,37730,000

6,827

900,000700,000

S 90,00035,000

125,000

~1.3001231700

~2,620

169,66410,972

$ 121,0801,560,800

Long-Term DebtThe. details of the Company's outstanding long-term debt are as follows:

I Balance at December 31, 1981 24,675,305Public issue of stock 6,000,000Stock plans , 1,365,426

, Balance at December 31, 1982 32,040,731 '160,204 1,600,000Stock plans 1,892,078 '9,'460

Redemption of stock ~13.000)Balance at December 31, 1983 33,932,809 1,587,000

Stock plans 2,194,380Redemption of stock ~26,200

'alance at December 31, 1984 36,127,189 $ 180,636

,'harter provisions relating to the cumulative preferred stock and the indenture securing the first mortgage. bonds impose

' certain restrictions upon the payment of cash dividends on common stock of the Company. At December 31, 1984, thereno retained earnings restricted under such provisions.

' Issu'e and Final Maturity Interest Rates 1984

(ln thousands)

1983

First mortgage bonds:1984 through 19891990 through 19941995 through 19992000 through 20042005 through 20092010 through 20141993 through 2013 —securing pollution

control revenue bonds:Pollution control ser'ies

Annual tender bondsFunds held by trustee

'lbtal first mortgage bondsPollution control revenue bonds:

1984 through 20131985Funds held by trustee

Other, including unamortized premium and discount

'Ibtal long-term debt..nt maturities

ng-term debt, less current maturities

3 5/8% to 12.95%4 7/8% to 13 I/8%5 7/8% to 7 I/4%7 I/2% to 10 I/8%8 I/8% to 9 I/8%12 7/8% to 17 I/2%

5.9% to 10 3/4%7 5/8%

5% to 10 3/4%59% to 65% of prime rate

S 58,14074,20330,39781,449

115,344185,000

414,04523,000

(35,468)946,110

100,00039,000

(39,708)36,863

1,082,265~51,708)S1,030,557

S 60,3309,403

30,71681,896

116,538185,000

337,000

~11,099809,784

208,09023,500

(70,118)8,665

979,921~6.631$ 974,290

29


S51,70811,02311,301

. 18,93811,608

Substantially all utilityplant is pledged to secure the first mortgage bonds. A portion of certain series of long-term debtwillbe redeemed serially prior to their due dates. The aggregate amounts (in thousands) of maturities on all long-termdebt outstanding at December 31, 1984 are as follows:

19881989

The annual tender bonds are redeemable at the option of the holders annually on November 1. The interest rate willbeadjusted annually, as of each iNovember 1, so that the bonds willhave a market value as of the date of such a/ustmentwhich approximates their par value. The bonds're subject to a maximum interest rate of 15 percent. The Companyconsiders these obligations, as well as $39 million of unsecured pollution control revenue bonds scheduled to mature in1985, to be long-term debt since the Company has available unused noncancelable long-term lines ofcredit (note 4) equalto or exceeding the aggregate outstanding principal amounts and it is management's intent to refinance these obligationson a long-term basis. Accordingly, these obligations have been excluded from the above five-year maturity schedule.

In August 1977, the City of Farmington, New Mexico, issued and sold $77,045,000 principal amount of its 5.9 percentPollution Control Revenue Refunding Bonds, Series 1977, the proceeds of which were used to retire $77,000,000 ofoutstanding Pollution Control Revenue Bonds on October 1, 1984.

{4) Short-Term DebtThe Company's interim financing requirements are met through the issuance of commercial paper and notes pavable tobanks which, respectively, amounted to S22 million and $8 million at December 31, 1984 and S91 million and S35 niiHionat December 31, 1983. At December 31, 1984, the company had unused credit commitments from various banks totaling8164 million. These credit arrangements are used to support the issuance of commercial paper and to provide for short-term borrowings. The Company generally pays commitment fees or maintains cash balances on deposit with banks toassure availability of its credit commitments. These commitments consist of both lines of credit and revolving creditagreements ranging in duration from one to six years.

(5) Income 'IhxesIncome taxes consist of the following components:

Current Federal income taxCurrent state income taxDeferred Fedenl income taxDeferred state income taxInvestment tax credit utilizedAmortization of accumulated investment tax credit

1btal income taxes

1984

8 1,8782,519

20,3653,966

20,726~3060)846 894

1983

(In thousands)S 3,046

3,98925,350

4,44818,640

~2.958)$ 52.515

1982

8 1,2622,3497>332

98016,785

~2. 689

$26.069

Charged to operating expenses $ 32,356 S31,208 $ 34,855Charged to other income and deductions 14 038 21 307. ~8. 786)

'Ibtal income taxes 846 894 552.515 $ 26.069

The Company has investment tax credit carryforwards of approximately $47 million as of December 31, 1984 whichwould, ifunused, expire in 1996 through 1999 and a charitable contribution carryforward of $3 million which would, ifunused, expire in 1987.

Deferred income taxes result from certain timing differences between the recognition of income and expense for tax andfinancial reporting purposes, as described in note (1).

30


The major sources of these differences for which deferred taxes have been provided and the tax effects of each, are

as follows:

1984 1983 198o

.red fuel costsDepreciation and cost recovery timing differencesProvision for refunds

,. Charitable contribution carryforward:, Sale of an equity interest in a trust

Other1

Total deferred taxes

~ The Company's effective income tax rate was less than'he differences are attributable to the following factors:

S 1425124,000(7,071)2,301

3 350624 331

(ln thousands)

S (140)17,587

(232)3,926

10,287~1. 630

$29.798

S(6,566)16,153

(6,915)741

4.899S 8.312

the Federal income tax statutory rate for each of the years shown.

1984 1983 1982

46.0%(19.6)

Federal income tax statutory rate 46.0% 46.0%

Allowance for funds used during construction (15.5) (21.1)Charitable contribution of appreciated property (3.4)Taxes recorded at capital gains rate net of

related minimum tax (6) (3 5)Amortization of utility and flow-through

of non-utility investment tax credits (4. 1) (1.5) (1.9),'ther 4.2 1.7 ~1. 1

Company's effective tax rate 25.9% 27.2% 18.4%

. I The cumulative net amount of income tax timing differences (which excludes AFUDC) upon which deferred income

,'axes have not been provided is estimated to be approximately $ 17 million as of December 31, 1984.

gust 1984, the Internal Revenue Service issued a statutory notice of deficiency related to the examination ofrn Coal Co. for the tax years 1975 and 1977-1981. Western Coal Co., liquidated ih 1981, was a corporation

I owned fifty-percent by the Company. The Company has evaluated its exposure on the issues raised and is of the

opinion that any amount eventually found to be due willhave an immaterial impact on the financial statements. Aprovision for estimated additional tax expense has been made in the financial statements.

(6) Pension Plan

, The Company and its subsidiaries have a pension plan covering substantially all of their employees, including officers.

I The plan is noncontributory and provides for monthly pension payments to participating employees with 30 years of" service or at age 65 with less than 30 years of service. The amounts of such payments are dependent upon length of

service and the average salary of the three highest consecutive years of employment. The Company's policy is to fund

pension costs which were S5,560,000 in 1984, S8,500,000 in 1983, and $7,798,000 in 1982, which include normal costs

and amortization of past service costs over 30 years. In 1984, the funding was reduced by $2,650,000 due to the

., utilization of a portion of the existing credit balance in the funding standard account.'. Changes in plan characteristics were not deemed significant enough to warrant a 1984 actuarial valuation report. As ofI the two most recent actuarial valuation dates, accumulated plan benefits and plan net assets for the Company's pension

plan are as follows:

Actuarial present value ofaccumulated plan benefits:

Vested, iSIonvested

1983 1982

$29,9894,036

$21,0142,163

January 1

(ln thousands)

Net assets available for benefits(market value)

634,075

$ 45,308

$ 23,177

'620,301

31


The weighted average assumed rate of return used in determining the actuarial present value of accumulated plan

benefits was 8 percent for 1983 and 8 3/4 percent for 1982. The effect of this change and a revision in the mortalitv

assumption was an increase in the actuarial present value of accumulated plan benefits by approximately $ 3.2 million

(7) Construction Program and Jointly-Owned Plants

The Company operates and jointly'owns the steam turbo-electric San Juan Generating Station. In December 1983, the

Company sold 28.8 percent of its undivided interest in San Juan Unit 4. The Company received approximately $ 170

million from the sale, which approximates the book value of the assets sold plus a recovery of applicable income taxes.

The Company owns an undivided 50 percent interest in the first three units of the San Juan Generating Station and

62.725 percent in Unit 4.

The Company also is participating with several other utilities in the construction of the Palo Verde iNuclear Generating

Station and anticipates that the first unit willbe in commercial operation for the Company's 1986 summer peak.

At December 31, 1984, the Company's ownership interest and investments in the jointly-owned generating facilities were

as follows:

Station uel Type

Plant AccumulatedIn Service Depreciation

ConstructionWork InProgress

OwnershipInterest

San Juan Generating Station (Coal) $ 820,955Palo Verde Nuclear Generating Station (Nuclear)Four Corners Generating Station Units 4 and 5 (Coal) 56,148

(ln thousands)

$ 119,868

10,965

$ 17,107736,172

35,338

53.8X)10.213.0

These amounts represent the Company's share of capital costs, for which the Company has provided its own financing.

The Company's share of direct expenses is included in the corresponding operating expenses in the Consolidated

Statement of Earnings. The Company also has undivided interests in transmission facilities which are not significant.

It is estimated that the Company's electric utilityconstruction expenditures for 1985 willapproximate $243 inillion,

including expenditures of the jointly-owned projects. In connection therewith, substantial commitments have been made.

(8) Long-Term Power Purchase and Sales ContractsThe Company has entered into contracts for the purchase of electric power. Under one of these contracts which expire

in 1995, the Company is obligated to pay certain minimum amounts and a variable component representing the expenses

associated with the energy purchased and debt service costs associated with capital improvements. Total obligations under

this contract during 1984 amounted to $36.4 million. Total minimum payment for each of the next five years is

$22.8 million.The Company has contracts to sell power to two unaffiliated utilitycompanies, which accounted for approximately 12.9

percent and 10.0 percent of total operating revenue during 1983 and 12.5 percent and 10.5 percent during 1982. Sales to

these unaffiliated utilitycompanies accounted for less than 10 percent of total operating revenues in 1984.

(9) Lease CommitmentsThe Company leases data processing, communication, office and other equipment, office space, utilitypoles (joint use)

and real estate. The leases for office buildings provide for purchase options equal to fair market value at the end of the

primary terms. Other purchase options, renewal options and contingent rental provisions were not significant.

Leased property under capital leases at December 31, 1984 and 1983 is as follows:

1984 1983

Data processing equipmentOther

Less accumulated amortization

(ln thousands)

$ 5,283 $ 5,137428 409

5,711 5,5461,864 1,869

$ 3,847 $ 3,677

32


Future minimum lease payments at December 31, 1984 are:

Capital Leases Operating Leases

19851986198719881989Later years

'Ibtal minimum lease payments

$ 1,8861,5841>4751,3711,163

53

7,532

(fn thousands)

S 4,2333,7123,6033,6203,457

58,585

$ 77,210

Less amount representing executory costs 21

lNet minimum lease payments 7,511Less amount representing interest 3,056

Present value of net minimum lease payments $ 4,455

Operating lease expense was $6,047,000 in 1984, $5,252,000 in 1983 and $5,243,000 in 1982. As of December 31, 1984, the

aggregate minimum payments to be received in future periods under noncancelable subleases are approximately $3,026,000.

(10) Gain on Sale of Equity Interest in TrustThe Company held, in a trust, a retained economic interest in a sublease covering various Federal, state and private coal

leases at the mine which is the primary source of coal for the San Juan Generating Station. See note (7). On June 30,1983 the interest in the trust was sold to institutional investors for S38.7 million, resulting in an after-tax gain ofapproximately $24.1 million, or $ .73 per share of common stock.

l(ll) =Charitable Contribution of Appreciated PropertyOn December 30, 1982, the Company entered into an agreement with the City of Las Vegas, New Mexico whereby the

'ICompany contributed its Las Vegas water system to the City of Las Vegas. The physical assets contributed had a net book:val e of $ 6,726,000 and a fair market value of $ 19,600,000. The transaction resulted in a S1,171,000 gain aker

'tion of income tax benefits under the rules governing contributions of appreciated property.'(, Subsequent Events. 'Gas Company of New Mexico Acquisition

'Effective January 28, 1985, the Company acquired the New Mexico natural gas utility assets of Southern Union Company.. The acquisition was in connection with the settlement of antitrust litigation brought against Southern Union by the

Company and others. The assets were purchased for net book value net of liabilities assumed, which was approximately,$ 224.3 million, less S51.5 million representing the amount of the settlement to all plaintiffs. Of the $ 51.5 million'„settlement, $ 15.9 million less expenses willbe refunded to the Company's customers and $35.6 million represents the~other plaintiffs'ortion. The Company paid $97.5 million in cash at closing and issued $70.7 million of one-year 8% notes

: 'nd $40.2 million of two-year 8% notes.

. '.'he acquisition willbe accounted for as a purchase and, accordingly, the Company's financial statements will reflect the'ssets, liabilities and operating results from the acquisition date forward. The following unaudited pro forma consolidated

".,"balance sheet gives effect to the above transaction as if it had been consummated on December 31, 1984. Valuations

assigned are preliminary and subject to change.

December 31, 1984

AssetsNet utilityplantOther property and investmentsCurrent assetsDeferred charges

Capitalization and Liabilities'ibtal capitalizationCurrent liabilitiesDeferred credits

(In thousands)

$2,348,611190,193238,878

42,205

$2,819,887

$2,278,915261,507279,465

$2,819,887

33


The following summarizes on a pro forma basis the unaudited combined results of operations as though the acquisitionhad occurred on January 1, 1984.

, Year ended December 31, 1984

(ln thousands except per share amount)Operating revenues $903,037iiIet earnings 142,705

r h m nstock 3.39Earnings pe s are of co mo

Sale and LeasebackOn February 5, 1985, the Company sold a 216-mile, 345kV bulk electrical transmission line and related facilities to a trustcomprised of two institutional investors. The Company wBI lease the system on a long-term net lease basis. The totalconsideration from the sale was the appraisal value of S73 millionwhich approximates the book value plus recovery ofapplicable income taxes. The transaction willbe accounted for as an operating lease with semiannual lease payments ofS3.7 million over a 30 year term.

Supplementary Information Concerning the Effects of Changing Prices

The following supplementary information is presented in accordance with the requirements of the Financial AccountiiigStandards Board. These requirements deal with certain aspects of inflation in regard to the effects of changes in specificprices of certain assets of the Company (the "current cost" method).The Company believes it is important for users of the financial statements to develop an understanding of the moresignificant impacts of inflation upon the Company. However, the Company advises readers that the information presente«is determined through the use of experimental techniques and is not intended to replace traditional statements based or>

historical cost.

«The current cost data reflects the change in specific prices of utilityplant and equipment from the date the property wasacquired to the present, as measured primarily by the Handy-Whitman Index of Public UtilityConstruction Costs.

Consolidated Statement of Earnings Adjusted for Changing Prices

Year Ended December 31, 1984

As Reported Adjusted forin the Primary in Specific Prie s

Statement (Current Cost)

4-f

Operating revenues

Operating expenses (excluding depreciation and amortization)Depreciation and amortization (note A)Interest chargesOther income and deductions, net

Net earnings (excluding reduction to net recoverable cost)

Increase in specific prices of net utilityplantReduction to net recoverable cost (note B)Effects of increase in the general price level

Excess of increase in the general price level over the increase inspecific prices of net utility plant after reduction to net recoverable cost

Gain from decline in purchasing power of net amounts owed (note C)

lilet

(lnS445,328

249,85948,97583,248

~69.594312,488

S 132,840

thousands)

6445,328

249,85975> 15783,248

~69,594338,670

S 106,658

S187,581

(132,143)~106,441

(51,003)38,801

~612,202

34

Public Sefvlce Company of New Mexico and Subsidiaries

Five Year Comparison of Selected Supplementary Financial DataAdjusted for Effects of Changing Prices

1984Years ended December 31

1983 1982 1981 1980

gn thousands of average 1984 dollars except per share amounts)Current cost information:

iNet earnings excluding reductionto net recoverable cost

Earnings per common share

IExcess of increase in general

price level over increase ini specific prices after reduction

to net recoverable costNet assets at year-end, at net

recoverable cost

S 106,658S 2.36

S 51,003

S1,005,019

S 119,786S 287

S 46,097

$ 985,610

S 90,460S 226

S 49,461

$ 943,345

S 98,253S 363

$ 133,120

$ 768,684

S 67,612S 283

$ 153,161

$ 586,931

'eneral information:Purchasing power gain on net

amounts owedCash dividends declared per

common shareMarket price per common share

at year-endConsumer price index for all

urban consumers:AverageYear-end

S 38,801

S 2.85

S 24.04

311.1315.5

S 2.93

$ 26 01

S 2.98 S 3.06 S 2.57

S 27.66 $ 26.25 $ 23.78

298.4303.5

289.1292.4

272.4281.5

246.8258.4

S 36,981 $ 45,417 S 94,673 S109,779

—Depreciation and amortization a@usted for changing prices'stinghistorical cost income statement items for general inflation, changes were made only to the provision for

depreciation and amortization. Allother revenue and expense items were considered to reflect the current average pricei level, for the year.

Estimated utility plant was determined by applying the indices specified to the historical cost of utilityplant by vintageyear. Depreciation expense w'as then determined for the ac!Iusted amounts of utilityplant by applying the same rates used

to compute the historical amount of depreciation.' Note B—Reduction to net recoverable cost

" Under the ratemaking prescribed by the regulatory commissions to which the Company is subject, only histo'rical cost ofplant is recoverable in revenues as depreciation and amortization. Therefore, the excess of the cost of plant, stated interms of current cost over the historical cost of plant, is not presently recoverable in rates as depreciation and

amortization, and is reflected as a reduction to net recoverable cost. While the ratemaking process gives no recognition to

~the current cost of replacing property, plant and equipment, the Company believes it willbe allowed to earn on the

: increased cost of its net investment when replacement of facilities actually cccurs.

Note C—Gain from decline in purchasing power of net amounts owed

'I During periods of inflation, the holders of monetary assets suffer a loss of general purchasing power because such itemswillpurchase less at a future date. Alternatively, holders of monetary liabilities such as long-term debt experience a gainbecause the amount of money required to ultimately settle the liabilities represents dollars of diminishedpurchasing power.

i Since the Company owed net monetary liabilities during a period in which the general purchasing power of the dollar'eclined, the Company experienced an economic gain in purchasing power. All assets and liabilities other than utility

plant and amounts applicable to the cumulative preferred stock not subject to mandatory redemption requirements weretreated as monetary items.

35

Pubffc Service Company of New Mexico and Subsidiaries

Quarterly Operating Results

The unaudited operating results (in thousands except per share amounts) by quarters for 1984 and 1983 are as follows:

Quarter EndedOperatingRevenues

OperatingIncome

i%et Earnirq~pEarnings per Share

December 31, 1984September 30, 1984June 30, 1984March 31, 1984

S 110,838126,922109,57497,994

S32,52751,07231,60031,295

December 31, 1983 94,479 30,497September 30, 1983 107,227 39,589June 30, 1983 93,217 30,277March 31, 1983 102,551 35,884

In the opinion of management of the Company, all adjustments (consisting of normalfair statement of the results of operations for such periods have been included.

S34,602 S .8044,749 1.1025,413 .5628,076 65

18,761 .3840,349 1.0349,578 1.3331,831 .80

recurring accruals) necessary for a

Stock/Dividend Data

Common Stock:Range of sales prices of the Company's common stock, reported as composite transactions (Symbol: PiMM), and dividendspaid on common stock for fiscal year '1984 and 1983, by quarters, are as follows:

Range ofSales Prices

High LowDividendsPer Share

Fourth Quarter, 1984Third Quarter, 1984Second Quarter, 1984First Quarter, 1984

25 1/422 3/424 1/426 5/8

2219 1/220 3/823

$ 0.720.710.710.71

Fiscal Year 26 5/8 19 1/2 82.85

Fourth Quarter, 1983Third Quarter, 1983Second Quarter, 1983First Quarter, 1983

29 5/828 3/428 7/828

22 3/425 7/826 3/425 1/2

S0.710.700.700.70

Fiscal Year 29 5/8 22 3/4 S2.81

Cumulative Preferred Stock:While isolated sales of the Company's cumulative preferred stock have occurred in the past, the Company is not aware ofany 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 ratesduring 1984 and 1983.

36

Stockholder Information

Annual Meeting of Stockholders Stockholder Communications Duplicate Mailings

The annual meeting of stockholders of, Public Service Company of New Mexico„willbe held at the Kimo Theatre, 419

.I Central Avenue, N.AV., Albuquerque, New

I Mexico, on Tuesday, April23, 1985, at 9:30

i am.f,,

'. Stockholders are urged to attend; however,'hether or not they attend, their proxies

should be mailed to the Company. A~ proxy statement and form of proxy willbe

mailed to stockholders on or about March

18, 1985.

For copies of the Company's Form 10-K

filed with the Securities and ExchangeCommission, please contact D. E. Peckham,

Secretary, Public Service Company of New

Mexico Alvarado Square Albuquerque, NM; 87158 (505) 848-2842

.'! Stock Exchange Listing

on stock of the Company is listedNew York Stock Exchange under the

ol PNM.

I

Registrar of Stock

First National Bank in AlbuquerquePost Office Box 1305Albuquerque, New Mexico 87103

Harris Trust Company of New York'orporate Trust Department, 9th Floor, 110 William Street

New York, New York 10038

To notify the Company of change ofaddress, lost certificates, or to requesttransfer of stock to another name, pleasewrite to:

Public Service Company of New MexicoStockholder ServicesAlvarado SquareAlbuquerque, New Mexico 87158

To request transfer of stock please write to:

Common StockPublic Service Company of New MexicoStockholder ServicesAlvarado SquareAlbuquerque, New Mexico 87158

Harris Trust Company of New YorkCorporate Trust Department. 9th Floor110 William StreetNew York, New York 10038

Preferred StockPublic Service Company of New MexicoAlvarado Square,Albuquerque, New Mexico 87158

Questions and Comments

Questions and comments about PNM orany information appearing in the annualreport and quarterly reports are welcomeand may be directed to:

Public Information:

Gayland BryantDirector, Public InformationAlvarado SquareAlbuquerque, New Mexico 87158(505) 848-2746

Stockholder Information:

Karen KnightDirector, Stockholder ServicesAlvarado SquareAlbuquerque, New Mexico 87158(505) 8484538

Financial Oueslions:

Sometimes stockholders receive additionalmailings of annual and quarterly reports.The Company is required by law to mail toeach name on the stockholder list. lfahusband, wife, and child each own stockin his/her own name, reports willbe sentto each. Since the quarterly and annual.reports are sent with either dividend checksor proxies, it is not possible at this time forPNM to eliminate duplicate mailings.

Dividend Reinvestment Plan

During 1984, the number of stockholdersin the Shareholder Dividend ReinvestmentPlan increased by 4@37 to 29,978. Divi-dends and cash invested through theDividend Reinvestment Plan during thelast eight years by shareholders now total$ 1522 million. Under present law, stock-holders can defer reinvested dividends ofup to $750 annually ($ 1,500 for a jointreturn) from income on their federal returns.TMs law wiH be in effect until December31, 1985. A prospectus describing theDividend Reinvestment Plan and an. enroll-ment form are available by writing to theCompany, or telephoning (505).848-2122(local calls), 1-800-432-4494 (New Mexico),or 1-800-545-4425 (outside New Mexico),

Valerie C. CheesemanDirector, Investor RelationsAlvarado SquareAlbuquerque, New Mexico 87158(505) 848-4673

,37

Directors and Officers

Board of Directors

J. P. Bundrant"President, Electric OperationsPublic Service Company qfNew hfericoA. B. ColHns, Jr.PresidentBeddy Communications, IncAlbuquerque, NMJ. D. Geist"Chairman and PresidentPublic Service Company ofNew hfancoC. E.

Leyendecker'hairman

qfthe Board andChiefExecutive OfficerUnited New hfexico Bank at 8fimbres ValleyDeming, Nhf

A. G. OrtegaAttorney at LawOrtega 4 Snead, P, AAlbuquerque, Nhf

R. R.Rehder'yqfessor Ofhfanagement

Robert O. Anderson GraduateSchool qfManagementUniversity OfNew MancoAlbuquerque, NhfR. B. RountreeSenior Vice PresidentPublic Service Company ofNew hfexico

R. H.Stephens'President

Stephens-Insh Agency, IncLas Vegas, Nhf

.E. R. Wood~~Vice President and General i'tfanagerlVood Zc HillCorporationSanta Fe, NiffH. L. Galles, Jr.Director EmeritusChairman qfthe BoardGalles Chevrolet CompanyAlbtutuerque, Nhf

PNM Corporate

J. D. GeistChairman and President

J. B. Mulcock, Jr.Senior Vice President,Corporate cQj"airs andAssistant Secretary

A. J. Robison,Senior Vice Presidentand Ch'Financial OfficerR. B. RountreeSenior Vice President andChairman, hfeadows Resources, Inc. andSunbelt,lfining Company, Inc.

M. A. Clit'tonVice President,Financial PlanningB. D. LackeyVice President andCorporate Controller

J. K. MurphyVice President, Regulatoryand Business Policy

P. J. ArchibeckTreasurer and AssistantSecretary

D. E. PeckhamSecretary and AssistantTreasurer

H. L. Hitchins, Jr.Assistant Secretary andAssistant Treasurer

M. J. MarzecAssistant Treasurer

Gas Company of New Mexico

J. T. AckermanPresident and Chief Operating OfficerGas Operations

O. L. SlaughterSenior Vice President,DistributionJ. J. RuizDistrict Vice President

W. J. RealDistrict Vice Presulent

T. D. RisterDistrict Vice President

D. A. PickelDistrict Vice President

T. A, CoersDistrict Vice President,Transmission

G. D. MischeDistrict Vice President,Transmfssum

M. H. LambertVice President,Pipeline Operations

J. C. WymanVice President,Gas SupplyD. W. McpearinVice President,Controller andAssistant Secretary

D. J. DavisVice President and ChiefEngineer,DistributionE. R. CorlissVice President and ChiefEngineer,Transmission

'Member ofAudit Committee"hfember ofExecutive Committee

38

PNM Electric

J. P. Bundrant,President and Ch'Operating Ogicer

- C. D. Bedford',Senior Vice President,Planning, Finance and

~ AdminfstrationlW. M. Eglinton

'Senior Vice President,'Operations".J. L. WilkinsrSenior Vice President,'Power SupplyJ. L. GodwinVice President, POwer Productionand hfanager, San Juan Station

W. M. Hicks, Jr.Vice President, Energy hfanagement

. R.A. LakeVice President,Operations Senrice,M. A. McDonald

' Vice President, Human Resources. -and Support Service

',R. F. Mershon!Vice President,

lDivision Operations

orseesident,

.Albuquenpce Division Operations

R. M.'WilsonAssistant Controller

Electric Division Managers

L. G. BoyceDivision hlanager,Clayton

C. L, EdwardsDivision Manager,Belen

E. L. KingDivision hfanager,BernalilloA. R. LvjanDfviMmManager,Las Vegas

J. R. SloanDivision hfanager,Sangre de Cristo tyater Co.

M. C. SlotaDivision hfanager,Santa Fe

F. M. Van GundyDivision hfanager,Deming

PNM Subsidiaries

R. B. RountreeChairman, hfeadowsResources, Inc.Chairman arui Presrdent,Sunbelt hfining Company, Inc.

J. F. Jennings, Jr.President and ChieJ'Operating Ogicer,Meadows Resources, IncC. E. HunterVice President andGeneral hfanager,Sunbelt hfining Company, IncT. D. BauerVice President,Sunbelt hfining Company, Irrc

R. C. RankinVice President,Meadows Resources, Inc.

C. A. UnderwoodVice President,Paragon Resources, IncJ. H. von RustenController,hfeadows Resources, Inc, andSunbelt hfining Company, IncM. H. MaerkiVice President,Meadows Resources, Inc

-.I39

Regional Electric System Map

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MAJOR ELECTRIC TRANSMISSION LINES

345 kV and Above Owned by PNM230 kV and Below Owned by PNM345 kV and Above Owned by PNM and Others230 kV and Above Owned by Others115 kV Not Shown

ASwitching Station

PROPOSED

~ Cities and To

4Q

"Our enduring goals are to help preserve an irreplaceable wayof life and to enhance it through new opportunities."

—J.D. GeistC'uID PRESIDENT. PUBLIC SERVICE COMPANY OF NEW MEXCO

phy Index'l : Laura Gilpin, 1946

on Carter Museum,.11. 7 orth, Texas

'age 4: John K. Hillers, Circa 1880:ourtesy Andrew Smith Gallery,Ifbuquerque, New Mexico

'age 6: Edward S. Curtis, 1904'ourresy Andrew Smith Gallery.Jbuquerque. New Mexico

'age 8: Paul Strand, 1932b 1971 The Paul Strand Foundation. as

~ .ublished In Paul Strand: A Relrospeclivefonograph, The years 1915. 1968. Apeture,

I . Iillerton, New york

'age 10: Jody Forster, 1979:ourtesy Andrew Smith Gallery,Ibuquerque, New Mexico

age 14: William Clif!, 1978'ourtesy of the artist,anra Fe. New Mexico

age 16: David Noble. 1982'ourtesy Scheinbaum 6 Russek Gallery.ants Fe. New Mexico

age 18: Jim Bones, 1983'ourtesy Andrew Smith Gallery,Ibuquerque, New Mexico

age 40: Landsaf map courtesy of'arlonal Geographic Society andeneral Electric Company

additional color photographs by:

'ick Ruddy (Page 2: J.D. Geist. 17: CarsonNational Forest, NM, 17: MdF plant)

(Page 12. 13: EIP, near Oovis. NM)

Page 7: natural gas gathering system)'",' tagto (Page 5: near Acorns Pueblo, NM)

,kk Kent(Page 9: near Taos, NM. 11: Shiprock, NM)

Quote Source IndexFront cover: D.H. Lawrence, "Song of a Man Who hasCene Through." fn Collected Poems D.H. Lawrence(New York: Viking Press, 1964London: Lawrence Pollinger Ltd.).

Page 4: N. Scott Momaday. "The Monoliths,"In The Gourd Dancer(New York:Harper 8 Row, 1976).

Page 6: Willa Cather, The Professor's House(New York: Random House, inc.,Vintage Books edition. 1973).

Page 8: Keith Wilson, -AWinter Poemfor New Mexico," in Retablos(Los Cerrillos, New Mexico:San Marcos Press. 1980).

Page 10: Joseph McElroy, Women and Men(New York Knopf, 1985).

Page 14: Rudolfo A. Anaya, Bless MeUltima (Berkeley: Ouinto SolPublications, 1975).

Page 16: Leslie Marmon Silko, "Storytelling,"in Storyteller (New YorkSeaver Books. 1981).

Page 18: WillaCather, The Professor's House(New York Random House, inc.,Vintage Books edition, 1973).

PUBLIC SERVICE COMPANY OF NEW MEXCO

„i9

~ t

SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

Form 10-KANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For,,the fiscal-year ended-December 31, 1984 Commission File Number 1-6986

Public Service Company of New Mexico(Exact name of r'egistrant as specified in its charter)

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

Alvarado Square 87158Albuquerque, New Mexico (Zip Code)

(Address of principal executive oiBces)

Registrant's telephone number, including area code (505) 848-2700

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered

Comn:on-Stock; $5.00'Par Value New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

(Title of Class)

Cumulative Preferred Stock, $100 Stated Value, Comprised of the Following Series:

1965 Series, 4.58% 8.80% Series1974 Series, 9.2% 8.75% Series1975 Series, 10.12% 14.75% Series8.48% Series

Cumulative Preferred Stock, $25 Stated Value, 9,16'eriesIndicate by check mark whether the registrant (1) has filed all reports required to be filed by

Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and(2) has been subject to such'filing requirements for the past 90 days. YES X NO

The aggregate-market value'of" the voting stock held by non-affiliates of the registrant as ofMarch 4, 1985 was $875,906,254.

Shares of Common Stock outstanding as of March 4, 1985 —36,580,608.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents are incorporated by reference into the indicated part orparts of this report:

(a) Annual Aeport to Stockholders for fiscal year ended December 31, 1984 —Parts IIand IV; and

(b) Proxy Statement, dated March 22, 1985, relating to the annual meeting of stockholders to beheld on April 23, 1985, Bled with the Commission pursuant to Regulation 14A-Part III.

TABLE OF CONTENTS

PART IItem 1..Business

Item 2. Properties

Item 3. Legal Proceedings

Item 4. Submission of il5atters to a Vote of Security Holders

16

18

21

Supplemental Item. Executive OfBcers of the Company ............. 21

PART IIItem S. Market for the Company's Common Equity and Related

Stockholder Matters

Item 6. Selected Financial Data .,

Item 7. Management's Discussion and Analysis of FinancialCondition and Results of Operations

Item 8. Financial Statements and Supplementary Data .........Item 9. Disagreements on Accounting and Financial Disclosure .

22

PART IIIItem 10. Directors and Executive OfBcers of the Company ....Item ll. Executive Compensation ............Item 12. Security Ownership of Certain Bene6cial

Owners and Management .

Item 13. Certain Relationships and Related Transactions .....

PART IV

Item 14. Exhibits, Financial Statement Schedules,and Reports on Form 8-K

SIGNATURES 39

PART IITEM 1. BUSINESS

The Company was incorporated in the State of New Mexico in 1917 and has its principal execu-

tive offices at Alvarado Square, Albuquerque, New Mexico 87158 (telephone number 505448-2700).The Company is a public utility engaged principally in the generation, transmission, distribution andsale of electricity (see "Electric Operations" ) and, since January 28, 1985, in the gathering, trans-

mission, distribution and sale of natural gas (see "Natural Gas Operations" ) within the State ofNew Mexico. The Company also owns facilities for the pumping, storage, transmission, distributionand sale of water. In addition, the Company, through its subsidiaries, is engaged in a program ofdiversification into non-utility areas,

The total population of the area served by one. or more of the Company's utility services is

estimated to be approximately 921,300, of which 51.4% live in the greater Albuquerque area.

For the fiscal year ended December 31, 1984, the Company derived approximately 98.6% ofits operating revenues from electric operations and 1.4% from water operations.

Service Area and Potver Sales

Electric Operations

The Company provides electric service to a large area of north central New Mexico, includingthe cities of Albuquerque, Santa Fe, Las Vegas, Belen and Bernalillo. The Company also provideselectric service to Deming in southwestern New Mexico and to Clayton in northeastern New Mexico.As of December 31, 1984, approximately 244,000 electric customers were served by the Company. TheCompany has long-term franchises for electric service in the major communities in which it operates.In addition, during 1984, the Company furnished electric service at wholesale in New Mexico to thecities of Farmington ("Farmington") and Gallup, the United States Department of Energy ("DOE")at Los Alamos, Texas-New Mexico Power Company ("TislP") and Plains Electric GenerationTransmission Cooperative, Inc.

For the years 1979 through 1984, total firm energy sales have grown at a compound annual rateof approximately 2.2%. During this same period, the Company's system peak demands in the summerand winter have grown at compound annual rates of approximately 2.7% and 3.5%, respectively,as shown in the following table:

M%V PEAK DEMAND

Year

197919801981198219831984

Retail

668690749702730741

Summer

AVholesale

187

243255

'68

235

System

855913992957998976

XVinterl

Svstem

774796835860880919

f For the winter season beginning in the year noted.

Firm sales to wholesale customers accounted for 28.S% of the Company's kWVh sales for the yearended December 31, 1984. In addition, the Company had 6 retail customers with demands generallyover 5 ivDV each, which accounted for 8.3% of total kAVh sales during 1984.

The discussion in the two preceding paragraphs does not include contingent sales to otherutilities. The most significant contingent sale contracts are those with San Diego Gas 5 ElectricCompany ("SDGRE") and Arizona Public Service Company ("APS") discussed below.

In 1979, the Company and SDG8cE executed a power sales agreement with sales beginning in1982. The levels of sales to SDGSE through the expiration of the agreement in April 1988 be23B MW, 106 MW or zero at various times, dependent on the dates the three Palo Verde irGenerating Station ("PVNGS") units commence operation. On May 1, 1982, the Compan andeliveries of 236 MW to SDGRE and, effective May 1, 1983, sales to SDGRE dropped to 10B MW.Under the agreement, since'PVNGS Unit 1 will not be in operation by May 1, 1985, such sales will

'rop to zero on that date until Unit 1 commences operation, at which time sales would return to106 MW, subject to later change depending on commencement of operation of PVNGS Units 2 and 3.

(See discussion of PVNGS under "Sources of Power-Nuclear Plant".)

The Company entered into a contingent capacity agreement with APS on May 4, 1984, to provideAPS with 35 MW of San Juan Unit 4 contingent capacity from May 1, 1985 through October 31, 1985.

In addition to the firm and contingent sales discussed above, in 1984 the Company had non-firmsales of 1,540,630,000 kWh to other regional utilities. The most significant of the Company's currentnon-firm sales contracts are discussed below.

The Company entered into a block energy agreement with APS on May 4, 1984, to provideAPS with up to 110,000,000 kWh of block energy from May 1, 1985 through October 31, 1985.The block energy agreement is being implemented under the Southwest Bulk Power Marl'et Experi-ment (see "Sources of Power-Other Sources" ) and thus does not require a filing with the FederalEnergy Regulatory Commission ("FERC").

In mid-1983, the Company began deliveries of surplus energy to TNP under an agreement whichprovided for rates of deliveries of up to 50 MW per hour. This agreement, which was terminated bythe Company and TNP effective February 28, 1985, was replaced by a new agreement entered intoon January 31, 1985, under which the Company will provide up to 370,000,000 kWh to TNP at ratesof delivery of up to 50 MW per hour during the period of March 1, 1985 through December 31, 1985,subject to acceptance for filingby FERC.

The Company and Southwestern Public Service Company ("SPS") entered into an agreer nNovember 23, 1982, to provide for a transmission interconnection bebveen the two utilities whrc isexpected to provide the Company with greater Hexibility in planning to meet customer needs. SPS

provides electric service to portions of Texas, New Mexico, Kansas and Oklahoma. A 345 kV trans-mission line to implement the interconnection was placed into service from the Albuquerque area tothe vicinity of Clovis, New Mexico in December 1984 and was the subject of a sale and leasebacktransaction in February 1985. (See "Funding Requirements".) Subject to certain conditions, theinterconnection agreement provides for the sale by the Company of uncommitted energy to SPS at arate of up to 220 MW per hour between 1985 and 1990. From 1991 to 1995, the Company wouldpurchase 100 MW of interruptible power from SPS, and from 1995 through 2011, the Company wouldpurchase up to 200 MWof interruptible power.

The Company's load forecasts indicate that the Company will have varying amounts of capacityand associated energy which will not be required to serve firm retail and wholesale loads, satisfycontingent sales contract commitments or meet reserve margins during the next decade. The NewMexico Public Service Commission (the "Commission" ) has approved an inventoried capacity rate-making methodology (see "Rates and Regulation" ) which is designed to move incremental base loadplant into rate base in conjunction with increased load. To recover operating expenses and offset, inpart, carrying charges to be recorded under such methodology, the Company has contracted salesfrom its othenvise uncommitted capacity as indicated by the foregoing discussion of non-firm salesactivities. Although the Company has been successful in contracting sales from its othenvise uncom-mitted capacity, significant levels of uncommitted capacity remain to be marketed after 1985. TheCompany has an average of approximately 456 MW of estimated inventoried capacity available tobe sold between 1985 and 1989, beginning with 301 MW in 1985 and amounting to 579 MW in 1989.Taking into account present commitments, the Company has sold approximately 57% of the energyassociated with such inventoried capacity for the years 1985-1989. The Company's market asse s

2

conclude that other southwestern and western utilities will have increasing requirements for capacityand energy through 1989. The Company's ability to sell its remaining uncommitted capacity will beaffected by transmission availability and the actual market for bulk power which develops. Addi-tionally, the actual amount of additional capacity or energy available for sale to other utilities willdepend in part on the development of actual loads and determinations regarding economic reservemargins of the Company.

Sources of Poiver

The total net generation capacity of Company-owned generating facilities was 1,340 MW as

of December 31, 1984, comprised of generation from two coal-fired plants and three gas/oil-firedplants, all located in New Mexico. This amount includes capacity committed under sales contracts withother utilities. (See "Service Area and Poiver Sales".) The three gas/oil-fired plants, with an aggre-gate capacity of 294 MW, are located in the Company's service area, with one in Las Vegas and twoin Albuquerque, and are mainly used for mid-range and peaking capacity requirements,

Coal-fired Plants. The San Juan plant is located near Farmington, New Mexico, and consistsof four units. Units 1, 2, 3 and 4 at the San Juan plant have rated capacities of 314 MW, 306

MW, 468 MW and 472 iMW, respectively. San Juan Units 1 and 2 are owned on a 50%%uo shared basis

with Tucson Electric Power Company ("Tucson" ), Unit 3 is owned on a 50% shared basis withAlamito Company, formerly a wholly-owned subsidiary of Tucson which is now publicly owned, andUnit 4 is owned 62.725% by the Company, 8.475% by Farmington and 28.8% by M-S-R PublicPower Agency ("M-S-R"), a California public power agency. The Company's aggregate ownership inthe San Juan plant is 840 MW. In connection with the Company's sale to M-S-R of a 28.8% interestin San Juan Unit 4, the Company agreed to purchase under certain conditions 73.53% (approximately100 MW) of M-S-R's capacity and associated energy through April 30, 1995, an amount which maybe reduced by M-S-R under certain conditions. The Company also agreed to market the remainingenergy associated with M-S-R's ownership interest through April 30, 1995 in return for half theprofits from such sales, which arrangement may be terminated by M-S-R at any time upon 30 daysnotice.

The Company also owns ~ MW of capacity derived from its 13% interest in Units 4 and 5of the Four Corners plant located in northwestern New Mexico on land leased from the NavajoTribe and adjacent to available coal deposits. Units 4 and 5 at Four Corners are jointly owned withSouthern California L'dison'Company, APS, the Salt River Project, Tucson and El Paso ElectricCompany ("El Paso" ) and are operated by APS.

In December 1984, the Company signed an agreement with the County of Los Alamos ("LosAlamos") and DOE under which Los Alamos would purchase a 7.2% undivided ownership interest(approximately 34 MW) in San Juan Unit 4 and also purchase the Company's distribution systemserving the community of White Rock. The aggregate purchase price is estimated to be approximately$50 million. The Company has historically served the Los Alamos area with retail service to WhiteRock and wholesale power to DOE. The proposed arrangement would replace the current method ofservice and would include the purchase of up to 8 MW of contingent power by the Company fromLos Alamos. The transaction is scheduled to occur in the spring of 1985, subject to receiving regulatoryapproval. There is no assurance that closing willoccur.

The Company had previously determined that the best location in New Mexico for a mine-mouthgenerating station ("New Mexico Generating Station" ) would be approximately 40 miles southeastof the San Juan plant. On August 7, 1984, the Company, the Navajo Tribe, Bechtel Power Corporationand General Electric Company entered into an agreement in principle, in which the parties undertooka cooperative feasibility study of the New Mexico Generating Station. Negotiations are continuingwith respect to extension and revision of the agreement in principle which expired January 31, 1985.

Since August 1984, such parties have conducted analyses to determine whether to proceed with theproject. If the project proceeds, it is presently contemplated by the parties that the plant would be

3

located within the Navajo Reservation on land which may be acquired by the Navajo Tribe pursuantto Federal law. It is expected that at the outset sales from the plant would be to customer. 'de

New Mexico.

Nuclear Plant. The Company is participating in the three 1,270 MW units of PVNGS, also knownas the Arizona Nuclear Power Project, with APS, the project manager, and three other utilities and a

public power agency. The Nuclear Regulatory Commission (the "NRC') issued construction permitsfor PVNGS in May 1976. APS has reported that, as of December 31, 1984, construction of Units 1

and 2 was 99.7% complete, and construction of Unit 3 was 95.9% complete, based on constructionman-hours expended and materials installed. Testing phases follow the completion of construction.As project manager, APS is responsible for maintaining schedules.

The Company's 10.2% interest in the project will amount to approximately 130 MW per unitor a total of 390 MW. Through December 31, 1984, the Company had expended approximately 9691

million for construction of its share of the PVNGS units, including allowance for funds used duringconstruction ("AFUDC"), and approximately $45 million for nuclear fuel. Based on the Company'sconstruction budget estimates, the total estimated aggregate cost, excluding costs of related trans-mission facilities and nuclear fuel prior to commercial operation, but including AFUDC and costs ofrelated pollution control facilities, is expected to be approximately 9938 million, resulting in anestimated cost for 390 MW of approximately $2,405 per kW. Such estimate represents the Company'sbest current forecast. However, APS has advised that actual completion dates, unexpected infiationarypressures and compliance with any additional governmental procedures and regulations could causefinal costs to vary substantially from these and any later estimates, as could changes in the plans ofthe participants.

In January 1985, nuclear fuel loading was completed at PVNGS Unit 1, which is scheduled for firmpower operation by the end of 1985. Unit 2 is scheduled for fuel loading in the last quarter of 1985and for firm power operation in the second quarter of 1986. Unit 3 is scheduled for fuel loadin 'efirst quarter of 1987 and for firm power operati"n in the second quarter of 1987. Between fuel gand firm power operation, each unit must un''o.rgo extensive testing. APS has indicated th nnpower operation represents the time when power from the units can be reliably scheduled for serviceto customers, although electricity would be prc-'need prior to the firm power operation dates.

Operation of each of the three PVNGS units following its completion will require the obtainingof low and full power operating licer ses f;om the NRC. An application for operating licenses has beendocketed by the NRC, and the NRC staff has issued a satisfactory safety evaluation report, subject tocertain conditions, and a favorable final environmental statement on such application. Hearings on anintervenor's petition were concluded in 1982, and the Atomic Safety and Licensing Board (the "ASLB")issued a favorable initial decision rejecting the intervenor's contentions. Such initial decision wasreviewed and affirmed by the NRC appeal board. After such hearings had been concluded, an entityrepresenting parties who farm in the vicinity of PVNGS petitioned the ASLB to reopen the hearingsto consider an environmental issue related to salt emissions associated with the plant's cooling sys-tem. By an order issued in December 1982, the ASLB denied the petition as to Unit 1, but grantedthe petition as to Units 2 and 3. APS has requested that the hearing be delayed indefinitely, but theoutcome of the reopened proceedings relating to Units 2 and 3 and their impact on additionalconstruction expenditures cannot currently be predicted.

In December 1984, the NRC granted a facility operating license for Unit 1. Certain pre-operational and start-up tests and other items are required to be completed to the satisfaction of theNRC. The license initiallyallows operation of Unit 1 at up to 5% of its capability, which may not beexceeded without specific NRC approval. With NRC approval, the power output of Unit 1 may begradually increased to 100% of its capability.

Other Sources. The Company is also interconnected with various utilities making possible mutualassistance in emergencies and economy energy interchange. The Company participates in the 'd

4

Power Pool from which the Company anticipates economic benefits resulting from reduced operatingreserve requirements, enhanced bulk power electric system reliability and increased efficiency ofoperations.

In 1983, the Company entered into an experimental arrangement called the Southwest BulkPower Market Experiment with El Paso, Farmington, SPS, APS and the Salt River Project. Theexperiment allows certain kinds oE energy transactions to occur with only limited regulatory oversight

and provides for modified FERC rate treatment. The agreement implementing the experiment was

accepted by FERC on December 30, 1983, at which time the rates contained in the agreement were

approved by FERC. The agreement became efFective on January 1, 1984, for a two-year term, withcertain options Eor the participants to terminate participation earlier. A block energy agreement has

been entered into with APS under this arrangement. (See "Service Area and Pou:er Sales".)

Fuel and AVater Supply

The percentages of the Company'saverage costs to the Company of thosewere as follows:

generation of electricity fueled by coal, gas and oil, and thefuels (in cents per million BTU) during the past five years

1980 .........1981 .........1982 ......,..1983 .........1984 .........

Coal

Percent ofGeneration

84.0%85.995.099.399.7

AverageCost

79.lg89.5

101.397.1

108.7

Gas

Percent ofGeneration

15.9%14.14,40.60.1

AverageCost

243.6g281.2350.8407.8451.8

OilPercent ofGeneration

0.1%0

0.60.10.2

AverageCost

331.8y392.9292.0330.9290.9

'ess than 0.01%

The estimated generation mix in 1985 is 98.9% coal and 1.1% gas and oil. Although not included

in the planned generation mix, it is expected that start-up and test energy will be available from

PVNGS in 1985. Due to locally available natural gas and oil supplies and the utilization of locallyavailable coal deposits, the Company believes that adequate sources oE fuel are available for its

generating stations,

Coal. The average cost of fuel for the years 1982, 1983 and 1984 at Four Corners was 71.6g, 79.64

and 84.24, respectively, per million BTU ($12.70, $ 14.18 and 814.77 per ton, respectively) includingash disposal and land reclamation costs. The average cost of fuel, including ash disposal and land

reclamation costs, for the San Juan plant for the years 1982, 1983 and 1984 was 107.2'!, 100.24 and

1I3.6<, respectively, per million BTU (821.20, $19.57 and $22.16 per ton, respectively).

The I"our Corners plant is supplied with coal under a fuel agreement between the owners

and Utah International Inc. ("Utah" ), under which Utah has agreed to supply all the coal require-

ments for the life of the plant. The sulfur content of the coal to be supplied cannot exceed an average

of 1.5% or a maximum of 2.5%, and to date has averaged .7%. Utah holds a long-term coal

mining lease, with options for renewal, from the Navajo Tribe and operates its strip mine adjacent

to the Four Corners plant with the coal supply expected to be sufficient to supply the units

for their estimated useful lives. In response to indications by the Navajo Tribe that it will contest

the mining lease governing the coal reserves from which Utah is currently obtaining coal for the

Four Corners plant unless royalties payable to the Navajo Tribe under the lease are substantially

increased, Utah and the plant participants (to whom any such increases would be passed through)have negotiated agreements, which, if executed, would provide for royalty increases in return forcertain contractual and other concessions from the Navajo Tribe, including an agreement by the

Navajo Tribe to sell water for use, in the Four Corners plant under certain circumstances if water

5

rights for the Four Corners plant are adversely affected. (See Item 3-"Legal Proceedings".) Anycollection of the "possessory interest tax" and the "business activity tax" enacted by the ioTribe (see Item 3-"Legal Proceedings" ) could also increase Utah's coal costs. The fuel a itprovides for certain adjustments in coal prices due to increases or decreases in the cost of electricity,environmental compliance (including mine reclamation), labor, materials, supplies, taxes androyalties.

The coal requirements for the San Juan plant are being supplied by San Juan Coal Company("SJCC"), a wholly-owned subsidiary of Utah, from certain I"ederal, state and private coal leases

under a coal sales agreement, pursuant to which SJCC will sell processed coal for operation of theSan Juan plant until 2017, Utah has guaranteed the obligations of SJCC under the agreement,which contemplates the delivery of approximately 168 million tons of coal during its remainingterm. Such amount would supply the requirements of the San Juan plant through approximately 2017.

Such supply is dependent in part upon the successful development of approximately 2,843 acres

of coal leases (one Federal and two private) held by SJCC in the La Plata area of northwesternNew Mexico located approximately 25 miles northeast of the San Juan plant. An amendment tothe coal sales agreement, as well as a transportation agreement among San Juan TransportationCompany, a wholly-owned subsidiary of Utah, the Company and Tucson, were executed in April1984. These agreements provide for the development of a mine to produce coal from the La Plataleases and transportation of such coal to the San Juan plant. Deliveries are expected to begin in 1987.

Naturnl Gas. The natural gas used as fuel for the Company's Albuquerque electric generatingplants has been supplied by Gas Company of New Mexico, which was acquired by the Company onJanuary 28, 1985. (See "Natural Gas Operations".) The Company's cost of gas increases or decreasesaccording to the wellhead prices. The Company has the ability to burn residual fuel oil if the gassupply is curtailed and maintains a supply of fuel oil in storage which it believes is adequate toprevent a reduction of service to its customers.

Nuclear Fuel. The fuel cycle for PVNGS is comprised of the following elements: (1) the gand milling of uranium ore to produce uranium concentrates; (2) the conversion of uraniun con-centrates to uranium hexafiuoride; (3) the enrichment of uranium hexafluoride; (4) the fabricationof fuel assemblies; (5) the utilization of fuel assemblies in reactors; and (6) the storage of spent fueland the disposal or (if future circumstances permit) the reprocessing thereof. The participants inPVNGS are parties to a contract with Anaconda Minerals Company for a quantity of uraniumconcentrate anticipated to be sufFicient to supply the initial cores for Units 1, 2 and 3, the first reloadfor each of Units 1 and 2 and most of the first reload for Unit 3, deliveries of which are complete. Inaddition, certain participants, including the Company, have entered into contracts with Energy FuelsExploration Company, Western Nuclear, Inc. and Pathfinder Mines Corporation, which are more thansufficient, if certain options are exercised, to meet operational requirements through 1998. The fuelfabrication contract with Westinghouse Electric Corporation referred to below also gives the partici-pants options to obtain their uranium requirements for the period 1993 through 1997 and 1998 throughthe expiration of the contract. Spot purchases of uranium in lieu of any which might be obtained pur-suant to contract options willbe made as appropriate.

The participants have contracted with Allied Corporation for conversion services required through1987. Contracts have also been entered into with Combustion Engineering, Inc. for the fabricationof fuel assemblies required for the first two years of operatioi. of each of the three PVNGS units andwith Westinghouse for the fabrication of fuel assemblies required for approximately the next 15years of operation of each such unit. Contracts have been entered into with DOE for necessary enrich-ment services required for the lifetime operation of the three units. The participants presently haveno commitments for reprocessing of fuel discharged from reactors. PViNGS is designed to permiton-site storage of spent fuel discharged from normal operation of all three units beyond theyear 2000. Federal legislation imposes the responsibility for the disposal of spent nuclear fueland other high level wastes upon the Federal government and directs the Secretary of I to

' undertake a program for the development of a waste disposal facility for the receipt and disposal ofspent nuclear fuel not later than 1998. The requirements of the legislation are such that the participantswere obligated to enter into a contract with DOE prior to the receipt of operating licenses forPVNGS for the disposal of the spent nuclear fuel discharged therefrom. The participants entered intosuch a,contract in July 1984, which provides for the eventual disposal of all spent nuclear fuelexpected to be generated by PVNGS Units 1, 2 and 3 during their useful lives.

Water. Water for the Four Corners and San Juan plants is obtained from the San Juan River.{See Item 3 —"Legal Proceedings".) Utah holds rights to San Juan River water and has com-mitted a portion of such rights to the Four Corners plant. The Company and Tucson have a contractwith the United States Bureau of Reclamation for consumption of 16,200 acre feet of water per yearfor the San Juan plant, which contract expires in 2005, and in addition have been granted the authorityto consume 8,000 acre feet per year of'-water under a state permit that is held by Utah. The Companyis of the opinion that sufficient water has been secured for the San Juan plant until 2005.

It is anticipated that water necessary for the operation of the PVNGS units will be obtained fromsewage effiuent under contracts with certain municipalities in the area. The contracted quantity ofefHuent exceeds the amount required for the three PVNGS units. The validity of the major efHuentcontract was challenged in a suit filed by the Salt River Pima-Maricopa Indian Community againstthe Department of the Interior, the 1"ederal agency alleged to have jurisdiction over the use ofsuch efHuent. The PVNGS participants, including the Company, were named as additional defendants.The United States'District Court for the District of Arizona dismissed the lawsuit as to the Companyand certain others for lack of standing, which decision was reversed in September 1984 by the NinthCircuit Court of Appeals. The Company and such others filed a petition with the United StatesSupreme Court in December 1984 seeking review of the Ninth Circuit decision, which petition wasdenied in March 1985. In November 1982, certain operators of farms located in the vicinity of thePVNGS site filed a lawsuit in Maricopa Cour.ty Superior Court claiming prior rights to effiuentto be delivered to PVNGS under the primary aad secondary efHuent contracts. On December 12,1983, an owner of land in the river basin from wl,!ch the efHuent to be received under the primarycontract is alleged to be derived filed a complaint '.n the United States District Court for the Districtof Arizona chaHenging the primary eNuent co»i'act and seeking, among other things, to enjoinits performance. APS has joined with the Salt River Project in bringing an action in an Arizonastate court against the plaintiffs in the lat;.er two lawsuits, seeking a declaratory judgment as torights to effiuent under Arizona law. Such declaratory judgment action has been consolidated in theArizona state court with the lawsuit which was filed in November 1982.

The Company has been informed by APS that, although the foregoing matters remain subjectto further evaluation, APS expects that neither the described litigation nor any renegotiation of existingcontracts willhave a materially adverse impact on the completion, licensing and operation of PVNGS.

Natural Gas ')perations

Acquisition of Neio Mexico Natural Gas Properties

On January 28, 1985, the Company acquired substantially all of the New Mexico natural gasutility assets of Southern Union Company ("Southern Union") {principally a natural gas retail distri-bution system operated by Southern Union as the Gas Company of New Mexico division and herein-after referred to as "GCbM"), and Sunbelt Mining Company, Inc. ("Sunbelt" ), a wholly-ownedsubsidiary of the Company, acquired all of the stock of Southern Union Gathering Company("Gathering Company" ), a wholly-owned subsidiary of Southern Union (such assets and stock beinghereinafter collectively referred to as the "New Mexico Gas Properties" ), in connection with the settle-ment of antitrust litigation against Southern Union. (See Item 3-"Legal Proceedings".) The approvalof FERC is still pending with respect to the Company's acquisition of one minor transmission linewhich is not material to the. operation of the New Mexico Gas Properties. If authorized, the Com-pany willpurchase such transmission line at a later date.

The New Mexico Gas Properties were purchased from Southern Union for their net boo " lue(which gives effect to an assumption of operating liabilities) of $224,326,000 and less $51,'nrepresenting the amount of the settlement to all plaintifFs in the litigation. Such amount re, nts

the preliminary purchase price which is subject to final adjustments within 75 dayd from closing torefiect actual values at the closing date. As discussed below, the $51.5 million settlement amount is

being funded by the Company by payments to the other plaintiffs and refunds to the Company'selectric customers. An initial cash payment of $74,460,000 was made by the Company to SouthernUnion at closing. Two promissory notes of the Company secured by a first mortgage lien on theproperties acquired by the Company were also delivered at the closing, one in the amount of$50,690,000 "due January 27, 1986 and one in the amount of $40,203,000 due January 27, 1987. Bothnotes bear interest at 8% per annum. Sunbelt acquired all of the stock of Gathering Companyfor a cash payment at closing of $7,473,000.

As part of the settlement, the Company was to fund $35,650,000 of the total $51.5 million settle-

ment amount to the other plaintifFs as payment for their shares of the settlement. Of the $35,650,000,

a cash payment of $ 15,650,000 was made at closing to the other plaintiffs, and the Company issued a

promissory note to the other plaintiffs for the $20 million balance bearing 8% interest and dueJanuary 2, 1986. The remaining $ 15,850,000 of the settlement, less expenses, will be refunded tothe Company's electric customers by the Company.

Southern Union has agreed to indemnify and hold the Company harmless from any and alloccurrences and legal actions (except assumed operational liabilities) arising prior to the closing date,January 28, 1985, in c'onnection with the New Mexico Gas Properties.

Gas Company of Nero iaaf enrico Dit'iYion

The Company distributes natural gas through the GCNM division to most of the major com-munities in New Mexico, including Albuquerque and Santa Fe, serving approximately 307, rs-

tomers as of January 28, 1985. GCNM is organized into four distribution districts along geogra es

(central, eastern, northwest and southwest), and two pipeline districts (related to the majo gas-

producing areas in the San Juan Basin in northwest New Mexico and the Permian Basin in southeastNew Mexico). The central district, comprised primarily of Albuquerque, accounts for approximately51% of GCNM's total customers. The distribution of GCNM customers by customer class (indicatedas a percentage of sales volume) is as follows: residential (35%); industrial (28%); commercial(18%); public authority (15%); irrigation (3%); and resale customers (1%) ~

The Company holds non-exclusive franchises with varying expiration dates in all incorporatedcommunities where it is necessary to do so in order to carry on its gas utility business as it is

noiv'eing

conducted. The expiration dates for the Company's franchises in Albuquerque and Santa Fe are1998 and 1995, respectively.

Gathering CompanyII

Gathering Company is engaged in the ownership, leasing and operation of gas gathering facilitiesin the San Juan Basin, and sale of that gas under long-term contracts to GCNM and to El PasoNatural Gas Company ("EPNG"). Gathering Company also engages in other off-peak sales of gasfrom sources located in the San Juan Basin and the Permian Basin.

Gathering Company has a contract with EPNG under which EPNG purchased. approximately.7 billion cubic feet ("Bcf") of gas in 1984. Under this contract, originally entered into during 1953,EPNG has a preferential first right to purchase all gas gathered by Gathering Company throughcertain gathering systems in the San Juan Basin in excess of GCNM's needs. The contract continuesthrough June 30, 1985, and from month-to-month thereafter unless terminated by either party on 30days written notice. In the first two months of 1985, EPNG purchased approximately 5.9 Bcf of gasfrom Gathering Company.

In addition, Gathering Company has entered into a number of gas sales contracts for the sale ofgas in excess of GCNM's and EPNG's current needs. Gathering Company sold approximately23.9 Bcf of gas under these excess sales contracts in 1984. Such sales of excess gas, during off-peakperiods, enable the Company to compete more effectively for gas supplies through higher load factorvolume purchases and to better ensure that peak-day requirements of GCNM can be met.

Gas Suppler and Prices

Approximately 85% of GCNM's gas requirements in 1984 came from direct purchases at thewellhead under long-term contracts, from field gathering systems (including those of GatheringCompany) and from gas processing plants. Th'e remainder was purchased primarily under long-termcontracts from interstate pipeline companies. The Company does not anticipate any material changein the makeup oF such sources nor any significant problems in meeting the requirements of its highpriority cus'tomers in its service area during the next few years.

The direct Beld purchases (which include wellhead purchases and purchases from Beld gatheringsystems) of both interstate and intrastate natural gas is made from supply sources located in northwest(the San Juan Basin) and southeast (the Permian Basin) New Mexico and such purchases provideapproximately 77% of GCNM's gas requirements.

The prices paid for wellhead purchases of natural gas are generally subject to price regulationunder the Natural Gas Policy Act of 1978 (the "NGPA"), which established a series of maximum lawfulprices for various categories of both interstate and intrastate natural gas. The base prices under theNGPA are subject to monthly adjustments.

Certain of the Company's purchases of intrastate natural gas in New'exico are also subject toprice regulation under the New Mexico Natural Gas Price Protection Act (the "NMPPA") whichprovides for ceiling price regulation for intrastate gas in New Mexico. These ceiling prices are generallylower than the price levels which would otherwise be applicable under the NGPA. The NMPPA willterminate June 30, 1985.

Because of current: market conditions and'because of certain matters alleged by the Companyin the antitrust litigation against Southern Union (see Item 3 —"Legal Proceedings" ), the Companyis presently engaged in renegotiations of wellhead purchase contracts. This renegotiation is also thesubject matter of an agreement between the Company and other plaintiffs in such litigation.

Supplemental Gas Supplies

The Company owns and operates an underground storage facility located near Albuquerque forthe storage of natural gas and withdrawals therefrom during peak usage periods. At January 28, 1985,

approximately 1.2 Bcf of gas was included in the inventory of this facility.

Under a gas injection agreement with a group of unaffiliated producers conducting a gas pressuremaintenance program for secondary oil recovery, the Company has =the right to inject up to 25,000

Mcf of gas per day into a unitized oil field located near Artesia, New Mexico. Subject to the termsof the gas injection agreement, the Company has the right, during each semi-annual calendar period,to take redelivery of up to one-third of the volume of the gas injected by it during the last semi-

annual calendar period in which it injected gas. Further, there are provisions for withdrawal of allrecoverable volumes with advance notice to the operator. At January 28, 1985, the Company had an

inventory of approximately 3.2.Bcf of gas stored under the agreement.

The Company is a party to various FEHC-approved transportation agreements to supple-ment supplies in service areas where EPNG is the Company's primary wholesale supplier of naturalgas. An agreement with EPNG, as amended in 1981 and further amended in 1983, provides that

up to 50,000 Mcf per day of system gas may be transported between the companies'arious service

territories when needed. In addition, agreements, with other companies provide:for- the transportationof up to 8,000 Mcf of gas per day from sources located in southeast New Mexico to augment gas

supplies for the Company's service areas in and around Clovis, Portales and Tucumcari, New Mexico.

9

53ll

. 1133

$836

Total GasWVater Construction,

Total Utility .

UtilityConstruction Program

The Company is continuing a construction program which is intended to meet future r

service requirements. The Company estimates its five-year utility construction program he

period 1985-1989 to be approximately $836 million, including AFUDC of $ 171 million. Included in

such total amount are proposed expenditures during the five-year period of approximately $71 million

for the Company's share of nuclear fuel for PVNGS and approximately $113 million of gas utility

construction expenditures which will be required as a result of the Company's acquisition of the

New Mexico Gas Properties. Utilityconstruction expenditures, including AFUDC, were approximately

$278 million in 1984, and are forecasted to be $261 million and $201 million in 1985 and 1986,

respectively. The Company's utility construction expenditures are expected to decline to $134 million

in 1987, $ 117 million in 1988 and $ 123 million in 1989.

A summary of the Company's utility capital expenditures program, including AFUDC, for the

period 1985-1989 follows:(In millions)

Electric ConstructionPVNGS Units 1, 2 and 3 $259

Other Generation 76

Nuclear Fuel .......................................... 71

Pollution Control on Existing Facilities ....,.... 18

Total Generation .424

Transmission 75

Distribution and General .221

Total Electric ... 720

Gas ConstructionNatural Gas ProductionTransmissionDistribution...General .

The above-estimated capital expenditures program represents the Company's most current fore-

cast. Such program does not include the acquisition cost required in connection with the Company's

acquisition of the New Mexico Gas Properties. (See "Natural Gas Operations".)

The Company conducts a continuing review of its construction program, and such program

and the above estimates are subject to periodic revisions based upon changes in assumptions as to

system load growth, rates of inflation (including costs of labor), the availability and timing of

environmental and other regulatory approvals, the availability and costs of outside sources of

capital and changes in project construction schedules. The Company has in the past revised its

construction budget in light of such factors and will effect further revisions in the future.

Funding Requirements

The Company estimates its total external funding requirements to be approximately $388 millionfor the period 1985-1989, including $309 million required for long-term debt repayments, mandatorypreferred stock redemptions and repayment of notes issued in connection with the acquisition of theNew Mexico Gas Properties. Estimates of external funding requirements give effect to the imple enta-

tion of the inventoried capacity ratemaking methodology. (See "Rates and Regulation".) The ny

10

will defer carrying charges associated with specifically identifiable uncommitted generating capacityas allowed by the Commission. On the. basis of the current load growth projections and resultinglevels of inventoried capacity, the gross amount of such carrying charges for 1985 through 1989

is projected to be approximately $354 million before applying applicable revenues from powerand energy sales from'inventoried plant. After giving effect to the application of revenues frominventoried plant, the Company projects that the inventoried capacity ratemaking methodology willdefer approximately $203 million of net carrying charges during the period 1985-1989. (See "ElectricOperations —Service Area and Pou:er Sales".) Such amounts will be recovered through charges tocustomers over the useful life of the property as such capacity is required for such customers.

The Company's projection of'internal cash generation in the 1985-1989 time period assumes timelyand adequate rate relief with respect to both retail and wholesale customers and assumes that theCompany will sell significant amounts of~additional. uncommitted'apacity or energy not currentlycontracted for, and that'revenues from such sales will be sufficient to offset significant amounts ofdepreciation and property tax expenses for which the Company is at risk according to the inventoriedcapacity methodology. (See "Electric Operations —Service Area and Pou:er Sales" and "Rates andRegulation".) Under such methodology, and based on the Company's current load forecasts, totalat-risk costs for the period 1985-1989 are estimated.to be approximately $ 150 million. After

giving'ffect

to presently contracted sales from inventoried capacity, the Company projects that at-riskcosts not recovered would be approximately $30 million for such period. Taking into account theCompany's expected ability to make additional sales, the Company projects that such amount wouldbe further reduced significantly. The projection also assumes that the Company's non-utility subsid-iaries will provide their capital requirements from internally generated funds and from indepen'dentborrowings which would be non-recourse to the Company.

In 1984, the Company issued $65 million of its First Mortgage Bonds, 13'/s% Series due 1994, andutilized approximately $15 million of proceeds from various polluticn control financings. The Companyalso utilized short-term borrowings and generated approximately $43 million from its Common Stockplans. The Company issued $77,045,000 principal amount of its first niortgage bonds on September 28,1984 to secure its guarantee in connection with the crossover refunding effected on October.l, 1984.with the proceeds of the outstanding City of Farmington, New Mexico 5.9% Pollution ControlRevenue Refunding Bonds, Series 1977 (Public Service Company of New Mexico San Juan Project).In December 1984, the Maricopa County, Arizona Pollution Control Corporation issued $38;5 millionprincipal amount of its pollution control revenue bonds, the proceeds of which were loaned to theCompany. Of the $38.5 million, $23 million were 1984 Series A Annual Tender Bonds sold in a

public offering and secured by the Company's first mortgage bonds, and $ 15.5 million were 1984

Series B Bonds sold as a private placement on an unsecured basis.

In February 1985, the Company completed a sale-leaseback financing of the transmission inter-connection between the Company and SPS (see "Electric Operations —Service Area and. PoioerSales" ) through the sale to institutional investors by the Company o.'-such facilities and the concurrentlease to the Company of. those facilities.

The Company's interim financing requirements are met through issuance of notes payable tobanks and commercial gaper. The bank commitments for the Company and its subsidiaries consistof both lines of credit and revolving credit agreements ranging in duration from one to six

years.'rrangementsfor bank lines of credit amounted to $21 million and revolving credit arrangementsamounted to $255 million at March 15, 1985.

In order to meet its 1985 external capital requirements of $ 195 million, the Company proposesto issue common stock and/or preferred stock and to utilize short-term borrowings and approximately$61 million of proceeds from various pollution control financings. The Company also expects togenerate approximately $46 million from its Common Stock plans.

The foregoing requirements take into, account the„proposed sales in 1985.,to Los„Alamos of,theWhite Rock. distribution system and an interest in San, Juan "Unit 4. (See "Electric Operations—Sources of Poioer".)

ll

jC

C',C,I'I

,C

I

Rates and Regulation

The Company is subject to the jurisdiction of the Commission with respect to its retail ic

rates, water rates, gas rates, service, accounting, issuance of securities, construction of new generatingand transmission facilities and other matters. FERC has jurisdiction over rates and other matters related

to wholesale electric sales and over Gathering Company's operations.

A stipulation was agreed upon in November 1984 by a majority of the members, including the

Company, of a task force created by the Commission to evaluate the merits of the inventoried capacityratemaking concept, and was subsequently approved in its entirety by the Commission on Decem-

ber 12, 1984. Inventorying is a ratemaking methodology designed to move incremental base load

plant into the New Mexico jurisdictional rate base in conjunction with increased New Mexicojurisdictional load. The actual amount of plant to be inventoried pending inclusion in rate base wouldbe determined annually and is defined as the New Mexico jurisdictional share of that base load plantmost recently placed in service which is above a historical 20% reserve margin.

The stipulation permits the capitalization of certain carrying'charges associated with inventoriedplant. Fixed operation and maintenance expenses associated with inventoried plant willbe included inthe New Mexico jurisdictional rate base on a current basis. In addition, the stipulation (I) limitsthe capitalization of carrying charges to an amount equal to 5% per year of the inventoried plant's

book value, which limit decreases to 4% over an 11-year period, (2) applies revenues from sales frominventoried plant, to the extent available, first to the payment of fuel expenses and other variableoperation and maintenance expenses, second to the payment of up to half of the depreciation and

property tax expenses and third to the pro rata payment of remaining depreciation and property taxexpenses and capitalized carrying charges and (3) provides that the inventorying methodology can

only be altered on a prospective basis. (See "Funding Requirements".)

This inventorying methodology will become effective on July 1, 1985, at which time 9 Wof San Juan Unit 3 and 202 MW of San Juan Unit 4 will be inventoried. The Company an s

that the PVNGS units will also be inventoried upon achieving commercial operation. Thc er

also allowed the Company in December 1984 to record capitalized carrying charges of approximately

$2.9 million, which were refiected in 1984 earnings. A group of consumers, including a dissentingmember of the task force, filed an appeal on March 1, 1985 with the New Mexico Supreme Court. Theoutcome of the appeal and its effect on inventorying cannot currently be predicted.

The second phase of a rate increase granted in April 1984 by the Commission became effectiveon February 1, 1985 and is designed to increase revenues by $7.5 million annually based upon1982 data.

On August 28, 1984, the Company filed a request with the Commission to increase its retailelectric rates to provide for $76 million of additional annualized revenues. The filing was adjusted on

January 31, 1985, to rellect the Commission's approval of the inventorying stipulation. The inventoryadjustment lowered the requested revenue increase to 845 million on an annualized basis. Data used

in the filing are based on a historical test-year period which ended March 31, 1984, adjusted forknown and measurable changes which are expected to occur through May 1985. A decision by theCommission on the proposed increase is expected in August 1985. As a result of the approved inven-

torying stipulation, 75% of any Commission-granted increase willbecome effective with bills renderedSeptember 1, 1985, and the remaining 25% willbecome eEective with service rendered January 1, 1986.

On April 18, 1983, the Commission issued an order initiating an investigation regarding thereasonableness of the retained economic interest payments incurred as part of the cost of coal for theSan Juan plant. (See Item 2-"Properties".) In its order, the Commission indicated that the ultimateissues to be determined in the investigation are whether or not the retained economic interest pay-ments constitute a legitimate cost at a reasonable level to be passed on to the Company's New Mexicojurisdictional ratepayers and whether the ratepayers or the shareholders are entitled to t sinresulting from the sale of the interest in the San Juan Coal Trust. Hearings have been schec >y

the Commission to begin in late 1985.12

"The Commission has joined with the utility regulatory bodies of Texas, Arizona and California in

sponsoring an independent audit of PVNGS management and construction costs. The regulatorybodies have selected the accounting firm of Ernst 6 Whinney to be. the audit manager. The Com-

pany has agreed to fund up to $510,000 of the costs of the audit. The impact, if any, of the proposedaudit on the Company or on the operation of PVNGS cannot currently be predicted.

The Company has fuel adjustment clauses covering all kWh sales. There is an approximate 60

day time lag in implementation of the fuel adjustment clause for billing purposes, except for FERCjurisdictional customers for which there is an approximate 30 day time lag.

GCNM's retail gas rate schedules contain purchased gas adjustment clauses which permit GCNMto adjust its rates as the cost of purchased gas changes. There are no material proceedings currentlypending before the Commission with respect to GCNM.

Gathering Company has filed a petition with FERC for a declaratory order to the effect thatGathering Company may sell surplus gas not taken by EPNG without having to obtain a certificateof public convenience and necessity from FERC or an abandonment authorization.

On January 21, 1985, the Commission granted a 6L6% increase allowing $3.3 million of additionalannualized revenues for Sangre de Cristo Water Company, the Company's water system divisionin the Santa Fe area. The increase is being implemented in three phases, the first with bills rendered

January 25, 1985, the second with service rendered April 1, 1985, and the third with service renderedOctober 1, 1985. A notice of appeal has been filed by the City of Santa Fe, and the Company has

cross-appealed. (See "Water Operations".)

Environmental Factors

The Company, in common with other electric and gas utilities, is subject to stringent regulations

for protection of the environment by both state and Federal au'.horities, particularly in regard topermissible emissions from its coal-fired generating stations. Capital expenditures for pollution controlfacilities at the Four Corners and San Juan plants were approximaie.y $9 million in 1984, excludingAFUDC..Based on the Company's most recent construction forecasts for such facilities, capital expen-

ditures for pollution control facilities at the Four Corners and Saic Juan plants are estimated toapproximate $8 million in 1985 and $2 million in 1986, excluding AFUDC. In addition, the Companyhas made, and will continue to make, expenditures for pollutii n control facilities at PVNGS. Capitalexpenditures for pollution control facilities at PVNGS have been approximately $59 million through1984, excluding AFUDC. 1'or 1985, the Company estimates capital expenditures for pollution controlfacilities at PVNGS to be approximately $ 1 million, excluding AFUDC. A portion of the costs forpollution control facilities at PVNGS has been financed through the issuance of pollution controlrevenu'e bonds. (See "Funding Requirements".) Except for such additional equipment for FourCorners Units 4 and 5, which are operated by APS, as may be required or permitted by the CleanAir Act Amendments of 1977, or by the sulfur emission permit system of the Navajo Tribe, if ulti-mately upheld (see Item 3 —"Legal Proceedings" ), the Company does not believe that any materialadditional pollution control equipment, other than as already contemplated and included in itsconstruction program, will be required under the applicable environmental laws for its existing facili-ties. However, the costs of pollution control equipment may be higher than presently forecast.

PVNGS is subject to the jurisdiction of the NRC, which has authority to issue permits and licenses

and to regulate nuclear facilities in order to protect the health and safety of the public from radio-active hazards and to conduct environmental reviews pursuant to the National Environmental PolicyAct. The NRC has issued construction permits for PVNGS Units 1, 2 and 3 and an operating license forUnit 1. Before PVNGS Units 2 and 3 can become operational, operating licenses from the NRC willbe required. (See "Electric Operations —Sources oj Poioer".)

Except as noted below, existing generating units of the Company are in substantial compliancewith all presently effective state and Federal air and water pollution control regulations.

13

AirQuality

The State of New Mexico has adopted emission regulations restricting the emissions fromboth existing and future coal, oil and gas-fired plants. Regulations adopted by the State of New,~Mexico are in some instances more stringent than those adopted by the Federal Environmental ~

'rotectionAgency ("EPA"). The New Mexico Environmental Improvement Board (the "NMEIB")has

adopted regulations that prohibit emissions of sulfur dioxide, particulates and nitrogen oxides abovecertain levels. These apply to "existing sources", including San Juan Unit 2 and Four Corners Units 4

and 5, and "new sources", which include San Juan Units 1, 3 and 4.

APS, operating agent for the Four Corners plant, has for some time been engaged in regulatoryand legal proceedings in New Mexico in regard to the necessity for further sulfur dioxide control atthe Four Corners plant. Adversaries of APS in such proceedings have included environmental groupsand certain state authorities. On August 21, 1980, those adversaries and the Four Corners participantsreache'. a settlement that required achievement of a specified level of control of Four Corners sulfurdioxide emissions from Units 4 and 5 by December 31, 1984. Installation of equipment to achieve thislevel of control was completed in 1984, with the Company's share of construction expendituresbeing approximately $31 million. APS has advised the Company that operation of the equipmenthas resulted in the level of control required by the settlement.

The New Mexico regulation for nitrogen oxides is extremely stringent. Four Corners Units 4 and5 have operated under variances from this regulation, granted by the NMEIB, since December 1,1977. The curren~ variance will expire on the earlier of May 13, 1985 or the development of controltechnology. APS has advised the Company that APS intends to petition the NMEIB for an extensionof the current variance.

Tne Federal Clean Air Act Amendments of 1977 may require installation of "the best availableretrofit technology" on existing sources located near certain federally protected areas, in whichvisibility is an important attribute. The installation is to occur as expeditiously as practicable, andin any event, within approximately five years after revision of the applicable state implementationplan. The full significance of the visibility provisions to the Company's generating stations is diffi-cult to predict pending finalization of state and Federal implementing regulations. The Companybelieves that the equipment currently installed. at the San Juan plant will be in compliance withanticipated regulations.

9'ater Quality

The Company's National Pollutant Discharge Elimination System ("NPDES") permit from EPAfor the San Juan plant, which has a term of five years beginning March 20, 1984, generallyprohibits all off-site discharges of pollutants. The San Juan plant water management system,which was phased into operation during 1983 and the Brst quarter of 1984, is designed to enablecompliance with the NPDES permit, as well as with other state and Federal water standards andregulations.

On October 26, 1983, the United States, at the request of the EPA Administrator, Bled a civilaction in the United States District Court for the District of New Mexico for assessment of civilpenalties of up to 910,000 per day of violation for alleged discharges on an unspecified number of daysfrom the San Juan plant in violation of the Clean Water Act. The complaint also seeks to enjoin theCompany against future violations. The Company and the United States have signed a consent decreethat has been lodged with the District Court. The Federal government has yet to respond formally tothe public comments received during the public comment period which ended on December 26, 1983.The Company understands that allegations of personal injury and property damages were madeduring the public comment period. The consent decree, as presently drafted, requires the Companyto pay the sum of $50,000 for all past reported violations of its NPDES permit, prohibits the dischargeof pollutants to navigable waters except as authorized by an effective NPDES permit, settles the

14

4>,~

( e

hV,0:

:issues raised in the complaint and provides for the court to retain jurisdiction to enforce the provisionsof the decree for two years from the date of entry. Under the terms of the proposed consent decree,

agreement thereto is not to be construed as an admission of a violation by the Company.

A group of residents near the San Juan plant gave notice dated August 30, 1983, of their intentionto file a citizens'uit as provided for in the Clean Water Act for alleged past violations at the San

Juan plant. On November 10, 1983, the Company received from substantially the same group ofresidents a copy of a motion to intervene in the above-described suit by the United States. Themotion and an accompanying proposed complaint object to the terms of the above-described consent

decree. The intervenors'omplaint alleges "hundr'eds of violations" of the Clean Water Act and asks

the court to disapprove the consent decree, to have a trial on the merits, to assess the Companypenalties of $10,000 for each day of violation, and to permanently enjoin the Company from futureviolations. The court granted the motion to intervene on July 16, 1984. A tentative settlement has sincebeen reached, under which the intervenors would withdraw their objection to the consent decree.

On April 13, 1984, six of such'intervenors filed suit against the Company in the San Juan CountyDistrict Court claiming damage to property and personal injuries resulting from "discharges ofwastewater and pollutants" from the San Juan plant into a nearby arroyo. The plaintiffs seek a totalof $6 million in compensation for their alleged damages and injuries, a total of $3 million as punitivedamages, and injunctive relief. A tentative settlement agreement has been reached, whereby theplaintiffs would dismiss the lawsuit.

Water Operations

The Company's water system in the Santa Fe area accounted for approximately 1.4% of operatingrevenues in 1984: In 1981, the water operations were reorganized as a division separate from theCompany's electric operations. This division, the Sangre de Cristo Water Company, is headquarteredin Santa Fe. The Company and the City of Santa.Fe have studied the feasibility of the City acquiringthe water system. A joint negotiating committee has recommended the adoption of a letter of principleswhich, if a opted by the City and the Company and subject to required approvals, would provide-for such acq 'isition by the end of 1985.

Non-Utility Subsidiary Operations

Sunbelt Mining Company, Inc. was incorporated in 1979 for the purpose of acquiring, developingand marketing coal and other mineral resources and to provide related contract mining services forboth xhe Company and independent regional customers. Sunbelt operates the De-Na-Zin/Gatewaymine in northwestern New Mexico, which provides coal under contract to SJCC and is capable ofsupplying coal throughout the southwest regional market as opportunities develop. In addition to itscoal properties, Sunbelt's interests include leases of chemical-grade limestone in Cibola County, NewMexico. In February 1984, Sunbelt purchased all of the stock of a company engaged in the gold miningbusiness for approximately $2 million. On January 28, 1985, Sunbelt acquired all of the stock ofGathering Company. (See "Natural Gas Operations".)

In 1981, the Company formed Meadows Resources, Inc. ("Meadows" ) to engage in business

ventures that have no connection with the utility business. Meadows'irst such venture was a partner-

ship called Bellamah Community Development ("BCD") with Dale Bellamah Land Company, Inc.(such partner now being Bellamah Associates, Ltd., a New Mexico limited partnership).-As ofDecember 31, 1984, BCD owned approximately 12,000 acres of land throughout the Southwest forfuture commercial and residential development. As of December 31, 1984, Meadows'nvestment forits 50% interest in BCD was approximately $54 million. In addition, Meadows has a note receivablefrom BCD of approximately $9.1 million.

On December 22, 1983, BCD entered into the Mountain Creek joint venture to acquire and

develop approximately 4,200 acres of land in Dallas, Texas, of which more than 3,600 acres have been

acquired. BCD's share of Mountain Creek's net profits is approximately,52%.

15

Another Meadows venture involves the operation of a medium density fiberboard manufacturingplant near Las Vegas, New Mexico. In May 1982, Meadows entered into a joint venture agreementwith Frontier Fiber, Inc. (which has since been merged into Ponderosa Products, Inc. ("Ponde ~)

creating a joint venture known as Montana de Fibra. Ponderosa acts as operating manager e

plant. In October 1984, Meadows purchased substantially all of the fixed assets of the joint ventur t a

sale-leaseback transaction. The lease is for an initial period of 10 years, renewable under varyingconditions for four additional 10-year, lease periods and includes the right to purchase the plant atthe end of each lease period at its then fair market value. The plant went into commercial operationin late 1984. The venturers incorporated the joint venture on January 2, 1985, into Montana deFibra, Inc., with Ponderosa owning 10% and Meadows owning S0% of the new corporation.

Meadows continues its venture capital investment programs. As of December 1984, a total ofapproximately $8 million was invested in three venture capital funds and eight start-up companies.

Meadows and the shareholders of Hellamah IIolding Company ("HFiC"), the corporation whichcontrols Hellamah Associates, Ltd., anticipate entering into an agreement to form MCB Finan-cial Group, Inc., to be owned 50% by Meadows and 50% by the shareholders of BHC. BHCshareholders would contribute all of the shares of HHC, and Meadows would contribute a 31%interest in BCD and the assets leased to Montana de Fibra, Inc. The transaction is expected to haveno operational impact on BCD.

The Company's non-utility investment program for the 1S85-1989 period is projected to beapproximately $136 million. The Company's equity investment in its non-utility subsidiaries, Sunbeltand Meadows, at December 31, 1984 was $20.7 million and $142.7 million, respectively. Although it isprojected that the non-utility subsidiaries will provide a substantial portion of their capital require-ments from internally generated sources, to the extent that external financing may be required, suchborrowings will be made independently by the subsidiaries from third-party sources and will benon-recourse to the Company.

Employees

At December 31, 1984, the Company and it subsidiaries employed 2,979 people. Of thesare covered by a collective bargaining agreemet 'ith the International Brotherhood of El 1

AVorkers which expires May 31, 1986, and 36 by a collective bargaining agreement with the Inter-national'Union of Operating Engineers which e.:,:ires on December 31, 1986.,As of January 28, 1985,the closing date of the acquisition of the New Mexico Gas Properties, GCNM had 1,182 employeesand Gathering Company had 44 employees. Of these, 112 employees are covered by collectivebargaining agreements with two unions, which agreements expire in May and September 1986.

Net M%VGenerating

Type Location Capacity

Coal Waterfiow, New Mexico 840Coal Fruitland, New Mexico 206Gas/Oil Albuquerque, New Mexico 169Gas/Oil Albuquerque, New Mexico 105Gas/Oil Las Vegas, New Mexico 20

1,340(3)

(1) San Juan Units 1, 2 and 3 are 50% owned by the Company; San Juan Unit 4 is 62.725% ownedby the Company.

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

(3) Excludes approximately 6 MW of diesel capacity at Clayton, New Mexico which could dfor supplying the town in an emergency.

iName

San Juan(1)Four Corners(2)ReevesPersonLas Vegas

16

ITEiQ 2. PROPERTIES

As of December 31, 1984, the total net generation capacity of the Company's owned generatingfacilities was 1,340 MW. The Company's thermal electric generating stations as of December 31,1984 were as follows:

The Four Corners plant and a portion of the facilities adjacent to the San Juan plant are locatedon land held under easements from the United States and also under leases from the NavajoTribe, the enforcement of which might require Congressional consent. The risk with respect tothe enforcement of these easements and leases is not deemed by the Company to be material. How-ever, the Company is dependent in some measure upon the willingness and ability of the NavajoTribe to protect these properties and to honor its commitments. The San Juan plant is located onprivate land owned by the Company and Tucson.

On December 31, 1984, the Company's electric transmission system, including jointly-owned lines,consisted of 246 circuit miles of 46,000 volt lines, 5 circuit miles of 69,000 volt lines, 628 circuit milesof 115,000 volt lines, 180 circuit miles of 230,000 volt lines, 1,529 circuit miles of 345,000 volt lines(including a 216 circuit mile transmission line which has since been sold and leased back by theCompany) and 45 miles of 500,000 volt lines. The distribution systems consisted of 4,404 miles ofoverhead lines and approximately 1,786 cable miles of underground lines (excluding street lighting).The. Company owns 228 substations having an aggregate transformer capacity of 9,115,970 kVA ofwhich approximately 2,345,100 kVA is step-up transformer capacity at generating stations.

The property of GCNM consists primarily of natural gas gathering, storage, transmission anddistribution systems. The gathering systems consist of approximately 1,200 miles (approximately360 miles of which are leased to Gathering Company) of pipe with compression and treatmentfacilities. The storage systems are described above. (See "Natural Gas Operations —Supplemental Gas

Supplies" under Item 1 —"Business".) The transmission systems consist of approximately 1,200 milesof pipe with compression facilities. The distribution system consists of approximately 6,400 miles ofpipe. The property of Gathering Company consists primarily of natural gas gathering systems

containing approximately 550 miles of pipe with compression facilities.

The Company also owns service and office facilities in Albuquerque and in other operatingdivisions throughout its service territory. The Company's water property consists of wells, pumpingand treatment plants, storage reservoirs and transmission and'istribution mains. (See "Water Opera-tions" under Item 1-"Business".)

Substantially all of the Company's utility plant is pledged to secure its first mortage bonds. Thenatural gas utility assets acquired by the Company from Southern Union are also subject to a firstmortgage lien securing two promissory notes of the Company issued in connection with the acquisi-tion. (See "Natural Gas Operations —Acquisition of Neic Mexico Natural Gas Properties" underItem 1- "Business".)

The Company leases a major transmission line and associated equipment, data processing, com-munication, office and other equipment, office space, utility poles (joint use), vehicles and real estate.Certain leases, primarily for data processing equipment, are capital leases. All other leases are

operating leases.

Meadows holds nine State of iNew Mexico coal leases covering 5,101 acres in Catron County,New Mexico. In addition, Sunbelt holds four State of New Mexico coal leases covering 1,600 acres inCatron County and jointly holds, with Salt'River Project, eight state coal leases covering.3,499 acres

in Catron County, New Mexico. No exploration or resource evaluation has yet been undertaken on

any of the Catron County leases.

Paragon Resources, Inc. ("Paragon" ), a wholly-owned subsidiary of the Company, holds an

undivided one-half interest in three Federal and two state coal leases comprising approximately5,282 acres, located approximately 40 miles southeast of the San Juan plant and in the. vicinity of theproposed site for the New Mexico Generating Station. An exploration program was conducted on

the leases held prior to the exchange discussed in the next sentence in an effort to define coal reserves

on such leases, and it was estimated that approximately 87 million tons of coal with an average sulfurcontent of less than 1% were recoverable by surface mining operations on the leases. One of the threeFederal leases was obtained in September 1984, through an exchange with the Bureau of LandManagement ("BLM")for a.similar leasehold, as authorized by an Act of Congress, which is expectedto result in an overall increase of three million tons of recoverable coal,

17

In December 1982,'Meadows acquired approximately 43,500 acres of mineral properties in the

vicinity of the proposed New Mexico Generating Station site for $9 million, of which 94 mill'

paid at closing, with the balance payable in five equal annual installment.".. Of the total, appro y41,000 acres are coal properties consisting of one Federal coal lease, ten Federal preference righ coal

lease applications ("PRLAs") and five state coal leases. Approximately 3,000 acres of mineral properties

consist of state general mining leases, which overlap to some extent the area covered by coal leases.

Such acquisitions are subject to approval by the BLM with respect to Federal properties. It is

contemplated that the leases and PRLAs, when converted into leases, may be a source of coal supplyfor the proposed New Mexico Generating Station as well as for other markets. In addition, Sunbelt

holds state coal leases covering 1,560 acres in the area from which it is currently mining coal to fillcontractual obligations to SJCC and for sale to regional consumers.

Sunbelt holds additional mineral interests. (See "Non-Utility Subsidiary Operations" under

Item 1 —"Business".) The Company currently anticipates that all mineral leases of Meadows

and Paragon will be assigned to Sunbelt.

Paragon provides services for the Company's utility operations. It also maintains land and water

rights for future power plants by operating or by leasing and managing farms and ranches. Under NewMexico law, water rights must be put to beneficial use or revert to the public. Therefore, Paragon

operates or leases those farms and ranches to maintain water rights for the future.

Western Coal Co. ("Western" ), a jointly-owned subsidiary of the Company and Tucson whichhas now been liquidated, formerly held a retained economic interest under the sublease fromWestern to Utah covering various Federal, state and private leases at the surface coal mine whichis the primary source of coal for the San Juan plant. (See "Electric Operations —Fuel and WaterSupplij'nder Item 1-"Business".) On November 30, 1981, in the completion of its liquidation,Western assigned all of its interest under the sublease to the Bank of America National Trust and

Savings Association, as Trustee of the San Juan Coal Trust, of which the Company and Tucso re

initially the sole beneficiaries. Thereafter, pursuant to a Participation Agreement dated as ofber 31, 1981, the Company sold 37.512% of its interest in the San Juan Coal Trust to instit alinvestors for 930 million, resulting in an after-tax gain of approximately 918.8 million. On May 17,

5982, all of the Company's remaining interest in the San Juan Coal Trust was transferred to a trustwith Meadows as the sole beneficiary. This remaining interest was sold to institutional investorson June 30, 1983, for $38.7 million, resulting in an after-tax gain of approximately $24.1 million.

ITEM 3. LEGAL PROCEEDIiNGS

San Juan Bicer Adjudication. In 1975, the State. of New Mexico filed an action entitled State

oj New iiIexico o. United States, et al., in the District Court of San Juan County, New Mexico, toadjudicate all water rights in the "San Juan River Stream System". The Company was made a

defendant in the litigation in 1976. The action is expected to adjudicate water rights used at the FourCorners and San Juan plants and at Santa Fe. (See "Electric Operation." —Fuel and Water Supplijunder Item 1 —"Business".) The Company cannot at this time anticipate the effect, if any, of anywater rights adjudication on the present arrangements for water at the San Juan and Four Corners

plants, nor can it determine what effect the action willhave on water for Santa Fe. It is the Company'sunderstanding that no final resolution of the case can be expected for several years.

Four Corners Litigation. The Navajo Tribal Council has enacted three resolutions assertingtaxing and regulatory authority on the Navajo Indian Reservation which affect the Four Cornersplant. One such resolution purports to impose, as of January 1, 1978, a "possessory interest tax" on thevalue of natural resources on land leased by the Navajo Tribe; another purports to impose a "business

activity tax" effective July 1, 1978. These taxes would also extend to Utah, the contract supplierof fuel for the Four Corners plant, and it is anticipated that any increased cost to Utah resultingfrom payment of the taxes would be passed on to the participants. The third resolution, to be e tivefollowing affirmative action by the Secretary of the Interior (the "Secretary" ), purports to sh

18

a sulfur emission permit system which would require participants in the Four Corners plant to paya "sulfur emission fee". If validly imposed, the fee would appear to be in an amount that wouldeconomically justify an attempt to remove more sulfur dioxide from emissions at the Four Cornersplant than required by Federal and state law, in order to minimize the fee. Although none have

yet been made, any payments of taxes or fees to the Navajo Tribe prior to the conclusion of legalproceedings willbe under protest to the extent possible.

In September 1981, the Navajo Tribal Council's advisory committee adopted a resolution expressingthe intent of the Navajo Tribe to honor tax waiver provisions in its lease agreements with the FourCorners participants. If binding upon the Navajo Tribe and not withdrawn by subsequent NavajoTribal action, this resolution would render th'e two taxing resolutions inapplicable to the Four Cornersplant and its coal supplier. Th'e advisory committee's resolution was apparently adopted with a viewtoward intensifying, negotiations, to, increase the royalties payable to the Navajo Tribe by the coalsupplier, which increase; by. agreement; would be passed through to the participants, including theCompany. (See "Electric Operations —Fuel and EVafer Supply" under Item 1 —"Business".)

In April 1978, the Four Corners participants filed suit in the United States District Court forthe District of New Mexico contesting the action taken by the Navajo Tribe. The District Court dis-missed the claims relating to the Navajo Tribe's sulfur emissions.resolution on the grounds that suchresolution was not yet effective. In 1984, however, the Navajo Tribe informed the District Courtthat its expressed intent to honor the tax waiver provisions in the Four Corners plant lease agreementdid not extend to certain taxes upon the coal supplier to that plant. The District Court has stayed theproceedings relating to the Navajo Tribe's two taxing resolutions pending a decision, expected laterthis year, by the United States Supreme Court in its review of a Ninth Circuit Court of Appeals caseinvolving other parties which. specifically addr'esses the taxing power of the Navajo Tribe. The DistrictCourt has also noted the relevance of a decision by the United States Supreme Court in January 1982involving other parties which upheld the authority of Indian tribes to impose taxes upon non-Indianbusinesses under certain circumstances and a decision by the Tenth Circuit Court of Appeals in August1983 involving other parties which upheld the authority of the Navajo Tribe to impose taxes upon non-Indian businesses pursuant to the two resolutions referred to above. In view of the September 1981resolution of the Navajo Tribal Council's advisory committee, the Navajo Tribe has requested dismissalof the participants'awsuit. Although the participants have informed the District Court that this resultis acceptable to them, the effect of such resolution on any further assertion with respect to tribal taxingauthority has not been determined.

In addition to the Navajo Tribal action, the United States Department of the Interior cited in thelate 1970s provisions in the Four Corners plant site lease pursuant to which representatives of theparticipants and the Department are to meet periodically to review technological advances in air pollu-tion control equipment and mutually decide upon the feasibility of installing additional equipment. TheDepartment has taken no further action in this regard, but if it determined to do so, the partici-pants would contend that, with the intervening enactment of the Clean Air Act, these review functionshave lapsed and have been merged into EPA.

Antitrust Litigntion against Southern Union and Others. In 1981, the Company filed suit in theUnited States District Court for the District of New Mexico against Southern Union and otherdefendants alleging that natural gas supply contracts entered into by the defendants constitutedviolations of the Federal antitrust laws. Natural gas was purchased by the Company at the time froma division of Southern Union (such division having since been acquired by the Company) for usein the generation of electricity. The suit was consolidated with similar suits filed by a class ofresidential gas customers of Southern Union and the State of New Mexico. Through 1983, settle-ment agreements were reached between the plaintiEs and four defendants. In April 1984, a definitivesettlement agreement was reached with Southern Union, which provided, among other things, forthe purchase by the Company of substantially all of the New Mexico gas utility assets of SouthernUnion. In an order filed on August 1, 1984, Chief Judge Sherman G. Finesilver, United States District

19

Judge for the United States District Court for the District of Colorado, approved a Stipulati~ sdAgreement of Settlement providing for the final settlement of the proceedings assuming the

mation of said purchase, which occurred on January 28, 1985. (See "Natural Gas Operations — si-

tion of Neu: Mexico Natural Gas Properties" under Item 1 —"Business".)

'iVestern Coal Tax Assessment. By letter dated August 17, 1984, the District Director of the

Internal Revenue Service for the Albuquerque District (the "IRS District Director" ) sent a Noticeof Deficiency (the "Notice") to western alleging additional Federal income taxes due from Western.

By a second letter of August 17, 1984, the IRS District Director alleged that the Company has a

liability for the tax deficiency as a transferee. (See Item 2 —"Properties".) On November 13 and 14,

1984, petitions ivere filed with the United States Tax Court (the "Tax Court" ) on behalf of Western

and the Company, respectively, seehng a redetermination of the alleged deficiency.

Prior to December 1, 1980, the coal requirements for the San Juan plant had been supplied

by Western from certain Federal, state and private coal leases held by Western, which were

mined by Utah, as Western's contract miner. Effective in December 19SO, Western subleased its

leases to Utah, retaining an economic interest in the coal. Utah further subleased the leases to SJCC,

and SJCC entered into a Coal Sales Agreement with the Company and Tucson pursuant to whichSJCC will sell processed coal for operation of the San Juan plant until the year 2017. SJCC also

purchased from Western, at Western's net book cost of approximately $24.6 million, certain coal

processing and reclamation equipment that had been used by Western in connection with its activitieson the leases. Western adopted a complete plan of liquidation and was liquidated in 1981, with itsassets being distributed to the Company and Tucson.

The Notice alleges additional Federal income taxes due from Western for the 1975 and 1977-1981

tax years, in the aggregate amount of $ 122,809,131, plus interest. The Internal Revenue Servicecalculated the portion of the assessment for the tax year ended November 30, 1981, at 8117,71 46.

Various issues are raised in the Notice, with the largest single issue relating to the proper tax tr tof the sublease of coal leases to Utah, which issue accounts for approximately 95% of th 1 .

assessment.

The Company intends to take appropriate steps to see that the deficiency is vigorously contestedin the Tax Court. At the time of filing of the tax returns in question, Western believed,on advice of counsel, that the returns were properly filed. The Company has been advised by counselthat Western has a strong defense to the position of the Internal Revenue Service regarding the taxtreatment of the sublease of coal leases to Utah. The Company further is of the opinion that theaggregate assessment is far in excess of the amount, if any, that will ultimately be found due byWestern for the years in question. The Company, as a former 50% shareholder in Western, has amaximum exposure of 50% of ivhatever tax deficiency, if any, is ultimately assessed against Western.The Company has evaluated its exposure on the issues raised and is of the opinion that any amounteventually found to be due willhave an immaterial impact on its financial statements.

Also see "Electric Operations-Sources of Pou:er" and "—Fuel and YVater Supply", "Rates.andRegulation" and "Environmental Factors" under Item 1 —"Business" with regard to other litigationand disputes.

20

ITEM 4. SUBMISSION'OF MATTERSa TO A"VOTE OF SECURITY'HOLDERS

None.

SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE COMPANY

Name

J. D. Geist

OfBce

Chairman of the Boardand President

Executive oiBcers, their ages, ofBces held and initial effective dates thereof, are as follows:

InitialEffective

Age Date

50 November 23, 1982

J. P. Bundrant

J. T; Ackerman

C. D. Bedford

W. M. Eglinton

J. F. Jennings, Jr.

J. B. Mulcock, Jr.

A. J. Robison

R. B. Rountree

43

44

37

51

45

44

60

President —Electric Operations

President —Gas Operations

Senior Vice President


President and Chief OperatirigOfBcer, MeadowsResources, Inc.




February 5, 1985

February 5, 1985

November 1, 1983

May 1, 1984

June 15, 1983

November 1, 1983

November 1, 1983

November 1, 1983

J. L. Wilkins 61 Senior Vice President November 1, 1983

All executive oiBcers are elected annually by the Board oF Directors of the Company, with theexception of Mr. Jennings who is elected by the Meadows Board of Directors.

All of the above executive ofBcers, with the exception of Mr. Jennings, have been employed bythe Company and/or its subsidiaries for more than five years in executive or management positions.For at least four years prior to his employment with Meadows in 1983, Mr. Jennings was president ofPhelps-Dodge Communications Co. =

PART IIITEM 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.

The following table indicates the high and low sales prices of the Common Stock of the Companyreported as composite transactions:

Year

19841st Quarter2nd Quarter3rd Quarter4th Quarter

19831st Quarter2nd Quarter3rd Quarter4th Quarter

High

, 26/a24V422%25V4

2828~/e

28%29s/a

Lobv

2320s/s

19'/a22

25Va26%257/a

22%

On March 4, 1985, there were 67,172 holders of record of the Common Stock.

The Company has paid quarterly cash dividends on its Common Stock in each year commencingin 1946 when the stock Brst became publicly held. Dividends per share on the Common Stock since1980 are as follows:

1980

$2.04

1981

$2.68

1~82

2 (7

1983

$2.81

1984

$2.85

On January 22, 1985, the Board of Directors of the Company declared a dividend of $ .72 pershare of Common Stock payable February 22, 1985, to stockholders of record February 1, 1985. Thepayment of future dividends will dep('nd

idion

earnings, the Bnancial condition of the Company,market requirements and other factors.

ITEM 6, SELECTED FINANCIALDATA

Reference is hereby made to page 21 of the Company's Annual Report to its shareholders for theyear ended December 31, 1984.

ITEM 7. MANAGEMENT'S DISCUSSION ANL ANALYSIS OF FINANCIALCONDITIONAND RESULTS OF OPERATIONS

Reference is hereby made to pages 22 and 23 of the Company's Annual Report to its shareholdersfor the year ended December 31, 1984.

ITEM 8. FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

Reference is hereby made to pages 23 through 36 of the Company's Annual Report to its share-holders for the year ended December 31, 1984,

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIALDISCLOSURE

None.

I

, ~

PART III-ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

Reference is hereby made to pages 2 through 4 of the Company's Proxy Statement datedMarch 22, 1985 and to the Supplemental Item —Executive Officers of the Company, under Part I.

ITEM ll, EXECUTIVE COMPENSATION

Reference is hereby made to pages 7 through 10 of the Company's Proxy Statement datedMarch 22, 1985.

ITEM 12, SECURITY OWNERSEIIP"OF CERTAIN BENEFICIAL'WNERSAND.MANAGEMENT

Reference is h'ereby'made': to'ages-1 through'4~of- the Company's Proxy Statement datedMarch 22, 1985.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Reference is hereby made to page 4 of the Company's Proxy Statement dated March 22, 1985.

ITEM 14. EXHIBITS, FINANCIALSTATEiMENT SCFIEDULES, AND REPORTS ON FORM 8-K

(a)-1 Th'e following,consolidated'financial=statements of. Public Service Company of New Mexicoand subsidiaries together with the auditors'eport thereon, included on pages 23 through 34 of theAnnual Report of Public.,Service Company of"New, Mexico to its, stockholders for the year ended"December 31, 1984, are incorporated herein by reference:

Consolidated Balance Sheet- December 31, 1984 and 1983'.

Consolidated'Statement'of"Earnings- Years ended December 31, 39'i4, 1983 and 1982.

Consolidated Statement of Retained Earnings —Years ended December 31, 1984, 1983 and1982.

Consolidated Statement of Changes in Financial Position- Years ended December 31, 1984,1983 and 1982.

Notes to Consolidated Financial Statements —December 31, 1984, 1983 and 1982.

(a)-2 The following consolidated financial information for the years 1984, 1983 and 1982 issubmitted herewith together with the report thereon of independent auditors:

Supplementary;note;-to 1984;;:1983'.and 1982.consolidated financial statements;:

Schedule I —Marketable securities'- Other investments.

Schedule V-Property, plant'and equipment.

Schedule VI-Accumulated depreciation and amortization of property, plant and equipment.

Schedule VIII—Valuation and qualifying accounts and reserves.

Schedule IX—Short-term borrowings.

All other schedules are omitted for the reason that they are not applicable, not required, or theinformation is otherwise supplied.

'

23

(a)-3 Exhibits:

The following exhibits are being filed with this report or are incorporated by referen

permitted by Rule 12b-32 under the Securities Exchange Act of 1934, to the Registration State tor other document with which they have been previously filed. (Asterisk denotes exhibits filed withthis report.)

'(3)-A'(3)-B

(4)-A

(4)-B

(4)-C

(10)-A

(10)-B

(10)-C

(10)-D

(10)-E

(10)-F

(10)-G

(10)-H

List of Exhibits

—Restated Articles of Incorporation of the Company, as amended.

-Bylaws of the Company, as amended.

—Indenture of Mortgage and Deed of Trust dated as of June 1, 1947, between

the Company and Irving Trust Company, as Trustee, creating First MortgageBonds 2~/s% Series due 1977, of the Company. (Filed as Exhibit 2-C to Form

8, registration under Section 12(g), Securities Exchange Act of 1934).

—Fourteenth Supplemental Indenture dated as of December 1, 1974. (Filed as

Exhibit 2-B-2 to Registration Statement No. 2-52832 of the Company).

—Agreement of the Company pursuant to Item 601(b)(4)(iii) of RegulationS-K. (Filed as Exhibit 4-C to Annual Report of Registrant on Form 10-K forfiscal year ending December 31, 1983).

—Supplemental Indenture of Lease dated as of July 19, 1966 between the Com-

pany and other participants in the Four Corners Project and the NavajoIndian Tribal Council. (Filed as Exhibit 4-D to Registration Statement No.2-26116 of the Company).

—Fuel Agreement, as supplement.d, dated as of September 1, 1966 beUtah Construction 6 Mining Co. and the participants in the Four CProject including the Company. (I"led as Exhibit 4-H to Registrationment No. 2-35042 of the Company)

—Contract between the United States and the Company dated April ll, 1968 forfurnishing water. (Filed as Exhibit 5-L to Registration Statement No. 241010of the Company).

—Co-Tenancy Agreement between the Company and Tucson Gas h ElectricCompany dated February 15, 1972 pertaining to the San Juan generating plant.(Filed as Exhibit 5-0 to Registration Statement No. 2-44425 of the Company).

—San Juan Project Construction Agreement between the Company and TucsonGas 6 Electric Company, executed December 21, 1973. (Filed as Exhibit toRegistration Statement No. 2-50338 of the Company).

—San Juan Project Operating Agreement between the Company and TucsonGas & Electric Company, executed December 21, 1973. (Filed as Exhibit toRegistration Statement No. 2-50338 of the Company).

—Arizona Nuclear Power Project Participation Agreement among the Companyand Arizona Public Service Company, Salt River Project Agricultural Improve-ment and Power District, Tucson Gas 6 Electric Company and El Paso ElectricCompany, dated August 23, 1973. (Filed as Exhibit to Registration StatementNo, 2-50338 of the Company).

—Amendatory Contract between the United States and the Company datedSeptember 29, 1977 for furnishing water. (Filed as Exhibit to RegistrationStatement No. 2-60021 of the Company).

List of Exhibits

Amendments One through Four to Arizona Nuclear Power Project Participa-tion Agreement. (Filed as Exhibit (c) to Annual Report of Registrant onForm 10-K for fiscal year ending December 31, 1979).

Contingent Capacity Agreement between the Company and San Diego Gas 6Electric Company dated October 30, 1979. (Filed as Exhibit (a) to AnnualReport of Registrant on Form 10-K for fiscal year ending December 31, 1979) ~

Fourth Supplement: to Four Corners Fuel Agreement No. 2 eifective as ofJanuary 1, 1981 between Utah International Inc. and the participants in theFour Corners, Project including. the Company. (Filed as Exhibit'(10)-BB toAnnual Report of Registrant on Form 10-K for the fiscal year endingDecember 31, 1980).

Accelerated,Ma'nagement Performance Plan of the Company dated January1981. (Filed as Exhibit (10)-CC to Annual Report of Registrant on Form 10-Kfor the fiscal year ending December 31, 1980).

Service Bonus Plan of the Company dated January 1981. (Filed as Exhibit(10)-DD to Annual Report of Registrant on Form 10-K for the fiscal year end-ing December 31, 1980).

Coal Sales Agreement executed August 18, 1980 between San Juan Coal Com-pany and the Company and Tucson Electric Power Company. (Filed as Exhibit(10)-EE to Annual Report of Registrant on Form 10-K-for the fiscal year end-ing December 31, 1980).

San Juan Unit 4 Purchase Agreement between the Company and TucsonElectric Power Company dated as of May 16, 1979 and Modifications No. 1 toSan Juan Project Agreements. (Filed as Exhibit 10-T to Annual Report ofRegistrant on Form 10-K for fiscal year ending December 31, 1981).-

Amendment, Number 1 to Coal Sales Agreement dated September 30,1981 among San Juan Coal Company, the Company and Tucson ElectricPower Company. (Filed as Exhibit 10-V to Annual Report of Registrant onForm 10-K for fiscal year ending December 31, 1981).

Participation Agreement among the Company, Tucson Electric Power Com-

pany and certain financial institutions relating to the San Juan Coal Trustdated as of December 31, 1981. (Filed as Exhibit 10-W to Annual Report ofRegistrant on Form 10-K for fiscal year ending December 31, 1981).

Four Corners Units 4 and 5 Capital Improvements Design and ConstructionAgreement bet~veen the Company and the other Four Corners Participantsdated as of.March 23;1981. (Filed as Exhibit 10-X to Annual Report of Regis-trant on Form 10-K for fiscal year ending December 31, 1981).

Amendment No. 5 of Arizona Nuclear Power Project Participation Agree-ment dated as of December 5, 1979. (Filed as Exhibit 10-Z to Annual Report ofRegistrant on Form 10-K for fiscal year ending December 31, 1981) ~

Amendment No. 6 to the Arizona Nuclear Power Project Participation Agree-ment effective October 16, 1981. (Filed as Exhibit 10-AA to Annual Report ofRegistrant on Form 10-K for fiscal year ending December 31, 1981).

Executive Incentive Compensation Plan, eGective date January 1, 1977. (Filedas Exhibit 10-BB to Annual Report of Registrant on Form 10-K for fiscal yearending December'31, 1981).

List of Exhibits

Participation Agreement between the Company, the Owner Trustee a

Equity Participants with 'respect to the leveraged preferred stock of thepany dated as of December 1, 1981. (Filed as Exhibit 10-CC to Annual Reportof Registrant on Form 10-K for fiscal year ending December 31, 1981).

Amendment No. 7, effective April 1, 1982, to the Arizona Nuclear PowerProject Participation Agreement. (Filed as Exhibit 10-BB to Annual Report ofRegistrant on Form 10-K for fiscal year ending December 31, 1982).

Amendment No. 1, dated as of April 2, 1982, to the San Juan ContingentCapacity Agreement between the Company and San Diego Gas & ElectricCompany. (Filed as Exhibit 10-CC to Annual Report of Registrant on Form10-K for fiscal year ending December 31, 1982).

Amendment dated September 8, 1982 to Executive Incentive CompensationPlan of the Company. (Filed as Exhibit 10-DD to Annual Report of Registranton Form 10-K for fiscal year ending December 31, 1982).

Interconnection Agreement dated November 24, 1982, between the Companyand Southwestern Public Service Company. (Filed as Exhibit 10-II to AnnualReport of Registrant on Form 10-K for fiscal year ending December 31, 1982).

San Juan Unit 4 Purchase and Participation Agreement, dated as of Novem-ber 29, 1982, between the Company and M-S-R Public Power Agency. {Filedas Exhibit 10-JJ to Annual Report of Registrant on Form 10-K for fiscal yearending December 31, 1982).

Participation Agreement dated as of June 30, 1983 among Security TrustCompany, as Trustee, the Company, Tucson Electric Power Compancertain financial institutions relating to the San Juan Coal Trust.

(F'xhibit10-II to Annual Report of Registrant on Form 10-K for fiscal yearending December 31, 1983).

Amendment No. 8, effective September 12, 1983, to the Arizona Nuclear PowerProject Participation Agreement. (Filed as Exhibit 10-JJ to Annual Report ofRegistrant on Form 10-K for fiscal year ending December 31, 1983).

San Juan Unit 4 Early Purchase and Participation Agreement dated as ofSeptember 26, 1983, between the Company and M-S-R Public Power Agency,and Modifications No. 2 to the San Juan Project Agreements dated Decem-ber 31, 1983. {Filed as Exhibit 10-KK to Annual Report of Registrant on Form10-K for fiscal year ending December 31, 1983).

Purchase and Sale Agreement, dated april 12, 1984, between the Companyand Southern Union Company. (Filed as Exhibit 2 to Registration StatementNo. 2-95151 of the Company).

Collateral Trust Indenture dated as of February 1, 1985 among E.I.P. FundingCorporation, the Company and Morgan Guaranty Trust Company of NewYork,.as Trustee. (Filed as Exhibit 4(a) to Registration Statement 2-95151 ofthe Company).

Lease dated as of January 2, 1985 between The First National Bank of Boston,Lessor, and the Company, Lessee. (Filed as Exhibit 4(b) to Registration State-ment 2-95151 of the Company).

(10)-HH

'(10)-KK

'(10)-LL

'(10)-MM

(10)-NN

'(10)-OO

'(10)-PP

'(13) —Annual Report to St

'(22) —Subsidiaries of the

'(24)-A —Auditors'onsent.

'(24)-B —Attorneys'onsent.

(b) Reports on Form 8-K:

List of ExhibitsE

—Participation Agreements dated as of January 2, 1985 among E.I.P. FundingCorporation, The First National Bank of Boston, Morgan Guaranty TrustCompany of New York, the Company and the Owner Participant namedtherein. (Filed as Exhibit 28(a) to Registration"'Statement 2-95151 of theCompany).

—Bellamah Community Development Executive Deferred Compensation Plan.

—Amendment No. 9 to Arizona Nuclear Power Project Participation Agreementdated as of June 12, 1984.

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

—Stipulation and Agreement of Settlement of Claims Against'SouthernUnion'ompany

and Southern Union Gathering Company in MDL Docket No. 403,dated April12, 1984.

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

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

—Amended and Restated San Juan Unit 4 Purchase and Participation Agreementdated as of December 28, 1984 between the Company and the IncorporatedCounty of Los Alamos.

—New Mexico Public Service Commission Order dated December 12, 1984, andExhibit A thereto, in NMPSC Case iso. 1804, regarding inventoried capacity.

ockholders for 1984.

Company.

A Current Report on Form 8-K, dated December 12, 1984, was filed on January 14, 1985, reportingon (i) approval by the Commission of a stipulated agreement concerning the inventoried capacity rate-making methodology; (ii) approval by the Commission of the acquisition of the New Mexico GasProperties; and (iii) the filing of a lawsuit challenging the acquisition of the New Mexico GasProperties.

AUDITORS'EPORT

The Board of Directors and StockholdersPublic Service Company of New Mexico:

Under date of February 18, 1985, we reported on the consolidated balance sheet of PublicService Company of New Mexico and subsidiaries as of December 31, 1984 and 1983, and the related

consolidated statements of earnings, retained earnings and changes in financial position for each of the'earsin the three year period ended December 31, 1984, as contained in the 1984 annual report to

stockholders. These financial statements and our report thereon are incorporated by reference in the

annual report on Form 10-K for the year 1984. In connection with our examinations of the afore-

mentioned consolidated financial statements, we also examined the related supplementary note (13)and financial statement schedules as listed in the accompanying index.

In our opinion, such supplementary note and financial statement schedules, when considered

in relation to the basic consolidated fimancial statements taken as a whole, present fairly in all materialrespects the information set forth therein.

PEAT, MARWICK,MITCHELL5 CO.

Albuquerque, New MexicoFebruary 18, 1985

: PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

SUPPLEMENTARY NOTE TO 1984, 1983 AND 1982

CONSOLIDATED FINANCIALSTATEMENTS

(13) Supplementary Income Statement Information

Taxes, other than income taxes, charged to operating expenses were as follows:

Ad valorem .

City franchise .

Payroll .

OtherTotal taxes, other than income taxes,

charged to operating expenses ....

1984

0 8,5794,6683,8622,137

$19,946

1983

(In Shonsonds)

9 9,0533,5903,6842,367

1989

9 7,2824,2213,2821,767

$ 16,694 $ 16,559

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 I—MARKETABLESECURITIES —OTHER INVESTMENTSYear Ended December 31, 1983

Name of issuer andtitle of each issue

Number ofshares orunits—

principalamountsof bondsand notes

Marketvalue of

each issueCost of at balance

each issue sheet date

(In thousands)

Amount atwhich each

portfolioof equitysecurity

issues andeach other

security issuecarriedin the

balancesheet

Time deposits and certificates ofdeposit(1)

E. F. Hutton repurchase agreementU. S. Government and Government

agency securitiesOther(2)

Total

$ 79,505$175,191

$ 57,787

$ 79,505.175,191

55,2379,06B

$318,999

$ 79,505175,287

5B,1549,044

$319,990

$ 79,505175,191

55,2379,044

$318,977

(1) No individual issue exceeds hvo percent of total assets.

(2) Includes 123,400 shares of non-convertible preferred stock, 2,000 shares of common stock and

principal amount of $3,839,500 in commercial paper.

NOTE: Marketable Securities —Other Investments did not exceed 10 percent of total ass tDecember 31, 1984 and 1982.

30

:PUBldIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

SCHEDULE V PROPERTY PLANT AND EQUIPMENTYears Ended December 31, 1984, 1983 and 1982

rt

- o

Classification

December 31, 1984

Balance at Other changesbeginning hdditions Balance atof year al oosl Redremeal ~ ddd 'Dedoet ead oi year

(In thousands)

Utilityplant:Electric plant. in service:

IntangibleProduction .

Transmission ...........DistributionGeneral

3,132886,218163,277212,67038,9ad

8 1,19115,24485,94632,102

4,045

1,304,249 138,528

151,231

1722,160

708

4,286

49841

12

515

80850

847372

2,077

4,308899,921249,005241,766

41,929

1,436,929

Water plant in service:IntangibleSource of supply plant .......Pumping plant ..............Water treatment plant........Transmission and distribution .

General

2254,7111,9024,058

21,9382,072

171,083

113

34,906 1,213

67881

165

4152

5017

100 325

2254,6791,8744,069

22,7812,121

35,729

Common plant in service:IntangibleGeneral

10,91720,711

1,1873,923

31,628 5,110

228812

840

19

19

11,8768 24,033

8 35,909

Construction work in progress ..Electric plant held for future use.

Total utility plant ....,...Non-utility property ...............Non-utility property under

constructionTotal property, plant

and equipment ........Description oi tother changes

705,19163,355

2,139,32951,600

31,050

127,0616,293 3,980

278,205 9,2719,056 2,270

25,137

$2,221,979 $312,398 911,541

63456,524

832,252526 65,142

2,936 2,405,98110 114,900

56,187

$57,158 $59,133 $'2,520,861

Transfers between accounts .

Transfer of expired contract deposits to plant in service .

Wri:e-down of electric plant held for future useTransfer of contract termination chargesMiscellaneous corrections and adjustments .

$56,711

447

857,158

056,711743317462900

$59,133

y

(Continued)

31


SCHEDULE V-PROPERTY, PLANT AND EQUIPMENT —(Continued)Years Ended December 31, 1984, 1983 and 1982

Classification

December 31, 1983

Balance atbeginningof year

Additions Other changes Bal~n~eat cost Itetirements Add Deduct end of year

(In thousands)

Utilityplant:Electric plant in service:

IntangibleProductionTransmissionDistributionGeneral .

Water plant in service:

Intangible'ourceof supply plant ........

Pumping plant ...............Water treatment plant ....., ..Transmission and distribution .

General .

$ 1,843953,887155,499184,992

32,942

$ 78488,453

9,70130,982

7,126

$ 26156,093

1,8983,0221,038

2146,0031,9114,032

19,9961,972

ll77

631,087

143

378843

1,329,163 137,026 182,077

$ 531 $2925

107 36978

638 501

1,3699

1,369

3,132886,218163,277212,670

38,952

1,304,249

2254,7111,9024,058

21,9382,072

34,128 1,361 168 1,369 1,784 34,908

Common plant in service:IntangibleGeneral .

10,042 2,30219,795 7,375

8965,994 77 472

29,767 9,677 6,890 77 1,003 31,828

Construction work in progress .....Electric plant held for future use ..

Total utility plant ..Non-utility property ....Non-utility property under


and equipment ..

Description of other changes

599,27261,871

2,054,20143,435

107,9385,973

261,97313,445

2,017312

171,1528,253

2,3963,256

4,801

8,089283

705,19183,355

2,139,32951,600

1,913 29,137 31,050

$2,099,549 $304,555 $179,405 $5,852 $8,372 $2,221,979

Transfers between accounts .

Transfer of expired contract deposits to plant in service ..., ..Write-down of electric plant held for future use .

Miscellaneous corrections and adjustments .

$4,133 $4,133778

2,6881,519 795

$5,652 $8,372

(Con

PUBLIC.SERVICE'OMPANY OF» NEW MEXICO,AND SUBSIDIARIES

SCHEDULE V —PROPERTY, PLANT AND EQUIPMENT —(Continued)Years Ended December 31,= 1984, 1983 and 1982

Classi7ication

December 31, 1982

Utilityplant:Electric. plant in service:

Intangible .

ProductionTransmissionDistributionGeneral

Balance atbeginning

of year

$ 1',764

474,254

137,825'57,091

29,290

74484,603

17,76329,734

3,763

$ 9318

821,715

500

4,6527

118

1,843953,887155,499184,99232,942

AdldlitionsOther changes Balance at

at cost Retirements ddd Dadoes ended year

(In thousands)

800,224 535,937 2,824 403 4,777 '1,329,183

Water plant in service:IntangibleSource of supply plant ..........Pumping plant ...........,.....Water treatment plant ..........Transmission and distribution ...General .

7,7351,3895,032

21,4132,046

2141,053

84757

2,841197

ll26

2,785257

1,0574,247

~

245'146,0031,9114,032

19,9981,972

37,615 5,209 105 8,591 . 34,128

Common plant in service:IntangibleGeneral .

6,17118,359

24,530

3,891 6

2,169 69

6,060

14

734

748

. 10,04219,725

29,787

Construction work in progress .....Electric plant held for future use,.

Total utility plant,.........Non-utility property .......,....,...Non*utilityproperty under


and equipment ...........

887,100 (269,429)7,048 38,915

1,758,517 314,69260,695 22,186

" 1,913

2,8041,791

18,39917,908

18,311 32,51531 37,886

599,27261,871

2,054,20143,435

1,913

91,817,212 $338,771 $4,595 $ 18,342 $70,181 $2,099,549

Description of.'other.changcs43

Transfers between accountsTransfer of expired contract deposits to plant in service ....,...,Disposition of utility plantConversion of non-utility property to utilityoperations ..........,Miscellaneous corrections and adjustments .

$18,311 818,3111,086

13,01437,668

31, 124

$ 18,342 $70,181

)4

/

rr'

9

y - yfy

6


SCHEDULE VI—ACCUMULATEDDEPRECIATION AND AMORTIZATIONOF PROPERTY, PLANT AND EQUIPMENT

Years Ended December 31, 1984, 1983 and 1982

rA

Description

December 31, 1984

Balance atbeginningof year

Additions

Charged to Chargedoperating to otherexpenses accounts Retirements Add Deduct

(In thousands)

Balance atend of year

I

~ r

Utilityplant:Accumulated provision for

depreciation of utilityplant:

Electric plant in serviceWater plant in service .

Common plant in service

Accumulated provision foramortization ofintangible assets—franchises and computersoftware

Retirement work inprogress

Total utility plant ...Non-utility property ........,

Amortization of deferredcarrying charges .......

$225,7335~75o4,105

235,593

4,057

239,650

447

240,0973,117

$243,214

$2,919 $ 31227 8394 7

3,540 46

2,231

45,156

443 '482,302 3,788 46

45,156

45;156

2,3021,401

$3,703

(1,004)2,784

288

$3,072

4672

$118

3,819

$48,975

$41,596 $ 931641 36688 892

42,925 1,859

$2,20366

2,215

$263,1696,2075,993

274,668

2,2154

$2,219

1

2,998

8986,900

8,483

2,215 281,151

Description of other additions and changes

Depreciation and amortization ofequipment charged to clearingaccounts for distributionin accordance with use .

Depreciation of non-utilityproperty charged to otherincome and deductions .

Disposition of utility plantTransfers between accountsMiscellaneous corrections and adjustments ..

$2,302

1,401

$3,703

25 6693 93

2,060

$118 $2,219

(Continued)

' PUBLIC', SERVICE'COMPANY"OF NEW MEXICO AND SUBSIDIARIES"

SCHEDULE VI—ACCUMULATEDDEPRECIATION AND AMORTIZATIONOF PROPERTY, PLANT AND EQUIPMENT —(Continued)


Description

Deccmbcr 31„1983

Additions

Balance at Charged to Chargedbeginning operating to otherof year expenses accounts Retirements

(In thousands)

Other changes

Add Deduct

Balanceat endof year

Utilityplant!Accumulated provisions for

depreciation "of 'utility,plant:

Electric plant in service $ 191,836Water plant in service 5,371Common plant in service 6,743

203,950

$43,946 $ 675 $11,421 $ S41 $ 244 $225,733594 31 241 — — 5755601 874 4,591 488 10 4,105

45,141 1,580 16,253, 1,429 254 235,593

Accumulated provisions foramortization ofintangible assets—franchises and computersoftware ...........,.. 2,479

206,429

2,031

47,172 2,023

896

17,149 1,429

4,057

254 239,650


1 Total utilityplant ..Non-utility property ......

463

206,8S22,848

$209,740

47,172

47,172

2,0231,170

$3,193

16

17,165154

$17,319

1,42915

$ 1,444

254762

$1,016

447

240,0973,117

8243,214


Depreciation and amortization ofequipment charged to clearingaccounts for distributionin accordance with use

Depreciation of non-utilityproperty charged to otherincome and deductions .

Disposition'f- utilityplantTransfers between accounts ..Accumulated depreciation-on an acquisition .

Miscellaneous corrections and adjustments ...

1,170

$3,193

490'

93415

$1,444

2495

762

$1,016

(Continued)

ea yed

'd* 5

*Io

d

~ '1

~,'UBLICSERVICE COMPANY Ol NEW MEXICO AND SUBSIDIARIES

SCHEDULE VI—ACCU1MULATED DEPRECIATION AND AMORTIZATIONOF PROPERTY, PLANT AND EQUIPMENT- (Continued)


DescriptionDecember 31, 1982

Additions

Baiance at Charged to Chargedbeginning operating to otherof year expenses accounts Betircmcnts Add Deduct

(In thousands)


Utilityplant:Accumulated provision for

depreciation of utilityplant:

Electric plant in service . $160,482Water plant in service .. 5,985Common plant in service 5,631

172,098

$32,318 $ 484685 34431 861

33,434 1,379

$2,000 $55213448

2,182 552

$ — $ 191,8361,199 5,371

132 6,743

1,331 203,950

d

Accumulated provisions foramortization ofintangible assets—franchises and computersoftware


Total utility plant ....Non-utility property ......,,

Amortization of propertylosses .

962

173,060

929

173,9892,538

$ 176,527

4 1,531

34,965

34,965

34,965

19

$34,984

1,379

1,3791,591

$2,970

14

2,196

466

2,66273

$2,735

2,479

552 1;331 206,429

552 1,331 2, 2

27 1,235 2,848

$579 $2,566 $209,740


Depreciation and amortization ofequipment charged to clearingaccounts for distributionin accordance with use .

Depreciation of non-utilityproperty charged to otherincome and deductions

Disposition of utilityplant,,Conversion of non-utility

property to utilityoperations .

1Miscellaneous corrections and adjustments ...,.....

36

$1,379

1,591

$2,970

$ — $

27

$579

1,235

$2,566

552 1,331

0

PUBLIC SERVICE-COMPANY OI" NEW MEXICO AND SUBSIDIARIES

SCHEDULE VIII-VALUATIONAND QUALIFYINGACCOUNTS AND RESERVESYears Ended December 31, 1984, 1983 and 1989

Additions

Baiance at Charged to Chargedbeginning operating to otherof year expenses accounts Deductions

(In thousands)


December 31, 1984

Allowance for doubtful receivables .

Reserves for injuries and damages

December 31, 1983

$1,099

83

$ 1,258 $376(a) $1,918(b) $ 813

$ 910 $ 3(c) $ 966(d) $ 30

Allowance for doubtful receivables

Reserves for injuries and damages ....

December 31, 1983

Allowance for doubtful receivables ...Reserves for injuries and damages ....

$1,140 $ 1,415 $360(a)

$ 140 $ 479 $ 18(c)

$1,816(b) $ 1,099

554(d) $ 83

$ 499 $2,427 $341(a) $2,1R7(b) $1,140

81 $ 492 $ 6(c) $ 439(d) $ 140

(a) Recoveries of amounts previously written off.

(b) Uncollectible receivables written oif.

(c) Amounts received from insurance companies.

(d) Payments made for injuries and damages.

37


SCHEDULE IX—;SHORT-TERM BORROWINGSYears Ended December 31, 1984, 1983 and 1982

Categoryof aggregate

short-termborrowings

December 31, 1984

Balanceat end of

year

hverage daByWeighted weightedaverage hfaximum amountinterest amount outstandingrate at outstanding during

end of year during year the year

(Dollars in thousands)

hveragedaily

weightedinterest

rateduring

the year

Notes payable to banks .

Commercial paper ......December 31, 1983

Notes payable to banks ....Commercial paper .........December 31, 1982

Notes payable to banks .

Commercial paper ......

$ 8,004$22,309

$35,280$91,010

$13,887

$49,975

11.62%9.15%

10.44%9.66%

10.19%9.09%

$ 47,655 $29,296 11.47%

$ 145,635 $60,908 10.70%

$ 35,280 $18,294 10.32%

$107,525 $86,637 9.16%

$ 67,003 . $29,832 14.39%

$105,225 $71,806 12.61%

,i','.

~ 1

SIGNATURES

'ursuantto 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 28; 1985 By /s/ J. D;GEISTJ. D. Geist

Chairman of'the Board and President

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 thedates indicated.

El

I

:

Signature

/s/ J. D. GEIST

J. D. GeistChairman of the Board and President

/s/ A=. J. ROBISON

A. J. RobisonSenior Vice President, Finance

/s/ B. D. LACKEYB. D. Lackey

Vlcc President and Corporate Controller

/s/ J. P. BUNDRANT

J, P. Bundrant

/s/ A. B. COLLINS, JR.

A. B. Collins, Jr.

/s/ C. E. LEYEiNDECKER

C. E. Leyendecker

/s/ A. G. ORTEGA

A. G.'Ortega

/s/ R. R; REHDERR. R. Rehder

/s/ R. B. ROUNTREE

R. B. Rountree

/s/ R. H., STEPHENS

R. H. Stephens

/s/ E. R. WOODE. R. Wood

Capacity

Principal Executive OiBcerand Director

Principal Financial OfBcer

Principal Accounting Of6cer

Director

Director

Director

Director

Director

Director

Director

Director

Date

March 28, 1985

March 28, 1985

March 28, 1985

March 28, 1985

March 28, 1985

March 28, 198o

March 28, 1985

March 28, 1985

March 28, 1985

March 28, 1985

March 28, 1985

l

~ a


NUCLEAR REGULATORY COIKISSION

In the matter of

ARIZONA PUBLIC SERVICECOliPANY, et al,(Palo Verde NuclearGenerating Station, Unit 1)


EXHIBIT B

TO


FINANCING TRANSACTION BYPUBLIC SERVICE CONPANY OF NEÃ i~lEXICO

GENERAL INFORHATION CONCERNING THEFIRST NATIONAL BANK OF BOSTON

General Information Concerning The FirstNational Bank of Boston

Name:

(b)

The First National Bank og Boston (the "Bank" )i '

Address:

100 Federal StreetBoston, Massachusetts 02110Attention of Corporate Trust Division

(c) Description of business:

The Bank 'is .a national banking association and has been for anumber of years the largest commercial bank in New England.Except for directors'ualifying shares, the Bank is a wholly-owned subsidiary of Bank of Boston Corporation ("BBC"), a bankholding company organized under Massachusetts law. Through itssubsidiaries, principally the Bank, BBC is engaged in providinga wide variety of services to corporate and institutional cus-tomers, governments, individuals and other banks. These ser-vices 'include domestic corporate banking services, interna-tional banking services, investment and fund management ser-vices, personal banking services, trust services, and bankingoperations and corporate services. Through its Corporate TrustDivision, the Bank provides corporate trust services to a broadrange of entities.

(d)

(d)

(d)

(1) Not applicable.-

(2) Not applicable.\

(3) (i) State of incorporation and principal location:

The Bank is a national banking association chartered under theNational Bank Act in 1864. The principal offices of the Bankare located in Boston, Massachusetts.

(d) (3) (ii) Names of directors and principal officers:The names of the directors of the Bank and BBC are set forth inAttachments A and B hereto, respectively. Znformati on withrespect to the officers of the Bank and BBC .is set forth onpages 86 and 87 of Attachment C hereto.

(3) (iii) Neither the Bank- nor BBC is owned, controlled, or dom-inated by an alien, a foreign corporation, or a foreigngovernment. Further information relating to the U.S.citizenship of the Bank and BBC and the directors of the Bank

„

and BBC is contained in Attachments A and B hereto,r espectively.

(4) The Bang will serve as trustee under two or more trustagreements to be dated as of December 15, 1985, between theBank and the respective equity investors described in theApplication to which this document is attached as Exhibit B.The trusts created by these trust agreements will (i) receivetitle to the interests in PVNGS Unit 1 conveyed thereto by.PNMand (ii) lease such interests back to PNM, all as more fullydescribed in said Application. Although the Bank is notlegally an "agent" for or a "representative" of such equityinvestors, the Bank does act as trustee of the trusts of whichsuch investors are the respective beneficiaries. Under theterms of the trust agreements the Bank is generally obligatedto act upon the instructions of the relevant equityinvestor/beneficiary so long as such instructions are notinconsistent with the provisions of documents constituting thesale and leaseback transaction.

The Bank is without knowledge, however, concerning possiblefoxeign ownership, control or domination of the proposed equityinvestors, and is thus unable to provide information withrespect thereto.

The Bank is not making application for a license under 10 C.F.R.Part 50, or any other license available from the NuclearRegulatory Commission.

A copy of BBC's 1984 Annual Report is attached as Attachment Chereto. Provision to the Commission of BBC's 1984 AnnualReport is without prejudice to the pxovisions of the respectivetrust agreements which provide that, (i) except in certain verylimited cixcumstances (such as the Bank's wilful misconduct orgross negligence), the Bank is not answerable or accountable inits individual capacity and (ii) that all persons (individuals,partnerships, corporations, trusts, unincorporated associationsor joint ventures, governments or any departments or agenciesthereof, or any other entities) having any claim against theBank, in its capacity as trustee-, by reason of any aspect ofthe sale and leaseback transaction (including the holding bythe Bank of legal title interests in PVNGS Unit 1) shall lookonly to the assets held by the Bank (including but not limitedto the interests in PVNGS Unit 1 and PNM's obligations underthe txansaction documents) pursuant to the trust agreements forpayment or satisfaction of such claim.

(g) Not applicable.

(h) Not applicable.

B-2

(i) Not applicable.

j) Not applicable.

B-3

UNITED STATES OF AHERICA


In the matter of

ARIZONA PUBLIC SERVICECOHPANY, et al,(Palo Verde NuclearGenerating Station, Unit l)


ATTACHMENT A TO EXHIBIT B

TO


FINANCING TRANSACTION BYPUBLIC SERVICE COMPANY OF NEW 1'IEXICO

AFFIDAVIT OF U. S CITIZENSHIPOF THE FIRST NATIONAL BANK OF BOSTON

AFFIDAVIT OF U.S. CITIZENSHIP

The Cowarn;ealth of Massachusetts)) ss.

County of Suffolk )

I, T. McLean Griffin, 14 Beckford Street, Salem, Massachusetts,being duly sworn, depose and say:

1. That I am Cashier, General Counsel, and Secretary of the Boardof Directors of The First Nati'onal Bank of Boston, a national bankingassociation, organized and existing under the laws of the United States(hereinafter called the "Bank" ), with offices at 100 Federal Street,Boston, Massachusetts, in evidence of which organization a certifiedcopy of the Articles of Association is filed herewith together with acertified copy of the By-Laws;

2. That I am authorized by and on behalf of the Bank to execute anddeliver this Affidavit of U.S. Citizenship;

3. That the names of the Chairman of the Board of Directors who isthe Chief Executive Officer, the President, and the Executive VicePresidents or other individuals who are authorized to act in the absenceor disability of the President or other Chief Executive, Officer, and ofthe Directors of the Bank as of September 30, 1985, are as follows:Manic Title Date and Place of Birth

Martin A. Allen Director January 27, 1931Des Moines, IA

William F. Andrews Director October 7, 1931Easton, PA

Benjamin J. Bowden

William L. Brown

Executive Vice President

Chairman of the Board ofDirectors and Director

June 13, 1932Beverly, MA

February 1, 1922Hendersonville, NC

J. Richard Bullock Director March 2, 1923Worcester, MA

William J. Clark Director October 1, 1923Kansas City, MO

Gary L. Countryman

John F. Cunningham

Director

Director

July 30, 1939South Bend, WA

March 5, 1943Boston, MA

Name

Alice F. Emerson

Title

Director

Date and Place of Birth

October 26, 1931Durham, NC

Lawrence K. Fish

Raymond C. Foster

Gerhard M. Freche

Charles K. Gifford


Director

Director


October 9, 1944Chicago, IL

March 30, 1919Natertown, MA

July 13, 1931Kansas City, MO

November 8, 1942Providence, RZ

Nelson S. Gifford Director May 3, 1930Newton, MA

T. McLean Griffin Senior Vice PresidentrGeneral Counsel andCashier

September 12, 1922Lake Placid, NY

Richard D. Hill Dix'ector November 6, 1919Salem, MA

D. Br-inerd Holmes

Samuel Huntington

Director

Director

March 24, 1921New York, NY

April 24, 1939Bayshore, N.Y.

John G. McElwee Director December 19, 1921Port Bannatyne,Scotland

Donald F. McHenry =-

Alan L. McKinnon

Director


October 13, 1936St. Louis, MO

February 13, 1928Boston, MA

Clark N. Miller Executive Vice President January 25, 1930Columbia, PA

Colman J. Mockler, Jr. Director December 29, 1929St. Louis, MO

J. Donald !conan Director December 31, 1924Blaisdell, NY

Name

Edwin B. Morris, 1IE

Title Date and Place of Birth

Executive Vice President July 19, 1939Washington, D.C.

Peter C. Read Executive Vice President March 15, 1936Cambridge, MA

Charles A. Sanders Director Febiuary 10, 1932Dallas, TX

Richard A. Smith Director November 1, 1924Boston, MA

Zra Stepanian

Stephen J. Sweeney

President and Director

Director

November 14, 1936Cambridge, MA

December 15, 1928Winthrop, MA

Eugene M. Tangney Executive Vice President April 8, 1928Boston, MA

Paul N. Vonckx, Jr. Executive Vice President January 22, 1938Cambridge, lQ

George R. Wes Director April 11, 1920Boston, MA

Richard A. Wiley Executive Vice President July 18, 1928Brooklyn, NY

and that each of said individuals is a citizen of the United States byvirtue of birth in the United States, birth abroad of U.S. citizenparents, by naturalization during minority through the naturalization ofa parent, by marriage to a U.S. citizen prior to September 22, 1922, oras otherwise authorized by law.

4. That the information as to stock ownership, upon which the Bank.relies to establish that the required percentage of stock ownership isvested in citizens of the United States as of September 30, 1985, is asfollows:

Name of Stockholder Number of Shares Percentaae ofShares Owned

Bank of BostonCorporation

6,015,520 common 99+%

Martin A. Allen

William F. Andrews

J. Richard Bullock

William L. Brown

William J. Clark

Gary L. Countryman

John F. Cunningham

0

0

~

~

Alice F. Emerson

Raymond C. Foster * 80

Gerhard M. Freche

Nelson S. Gifford *

Richard D. HillD. Brainerd Holmes *

Samuel Huntington

John G. McElwee

Donald F. McHenry

Colman M. Mockler, Jr.

J. Donald Monan *

Charles A. Sanders *.

80

80

0'0

80

Name of Stockholder Number of Shares Percenta e ofS ares Ownea

Richard A. Smith

Ira Stepanian

Stephen J. Sweeney 0

George R. Nest * 80

* In Accordance witn the National Bank Act, each National Bank Directormust own in his or her own right either shares of the capitol stock of theassociation of which he or she is a director the aggregate par value ofwhich is not less than $1,000, or an equivalent interest in any companywhich has control over such association. As of September 30, 1985, thesesix (6) Directors of The First National Bank of Boston qualified withshares of capitol stock of the Bank. The remaining Directors, qualifiedwith commn stock of the Bank of Boston Corporation.

5. That the controlling interest in said Bank, as established by thedata hereinbefore set forth, is owned by citizens of the United States;that the title to such proportion of the stock of said Bank is vested incitizens of the Unit d States free from any trust or fiduciary obligationin favor of any person not a citizen of the United States; that suchproportion of the voting power of said Bank is vested in citizens of theUnited States; that through no contract'or understanding it is so arrangedthat the majority of the voting power of said Bank may be exercised,directly or indirectly in behalf of any person who is not a citizen of theUnited States; and that by no means whatsoever, is control of said Bankconferred upon or permitted to be exercised by any person who is not acitizen of the United States.

6. That affiant has carefully examined this affidavit and assertsthat all of the statement and representations contained therein are trueto the best of his knowledge, information, and belief.

Dated: /%/g~

T. McLean G xn

The Commonwealth of Massachusetts)) ss.

County of Suffolk )

On the 15th day of October,, 1985, before me appeared T. McLean

Griffin, to me personally known, who being by me duly sworn, did deposeand say that he is the Senior Vice President, General Counsel, Cashier,and Secretary of the Board of Directors of THE FIRST NATIONAL BANK OF

BOSTON, a national banking association, that the seal was affixed to theinstrumen by T. McLean Griffin in his capacity aforesaid by authorityconferred upon him by the By-Laws of the Bank and that he acknowledgedsaid instrument to be the free act and deed of THE FIRST NATIONAL BANK OF

BOSTON.

Notary Pub zcMy commission expires March 31, 1989


NUCLEAR REGULATORY COHMISSION

In the matter of

ARIZONA PUBLIC SERVICECOliPANY, et al <

(Palo Verde NuclearGenerating Station, Unit 1)


ATTACHMENT B TO EXHIBIT B

TO


FINANCING TRANSACTION BYPUBTIC SERVICE COMPANY.OF NEW MEXICO

AFFIDAVIT OF U S CITIZENSHIPOF BANK OF BOSTON CORPORATION

. AFFIDAUIT OF U.S. CITIZENSHIP

The Commonwealth of Massachusetts)

Country of Suffolk )

I, T. McLean Griffin, of 14 Beckford Street, Salem, Massachusetts,being duly sworn, depose and say:

1. That I am Clerk, General Counsel and Secretary of the Board ofBank of Boston Corporation, a Massachusetts corporation, organized andexisting under the laws of the Commonwealth of Massachusetts "theCorporation", with offices at 100 Federal. Street, Boston, Massachusetts,in evidence of which organization a'ertified copy of the By-Laws isfiled.

2. That I am authorized by and on behalf of the Corporation toexecute and deliver this Affidavit of U.S. Citizenship;

3. That the names of the Chairman of the Board of Directors, who isthe Chief Executive Officer, the President, and other individuals whoare successively authorized to act in the absence or disability of theChairman of the Board and the names of the Directors of the Corporationas of September 30, 1985 are as follows:

Martin A. Allen

Vi'lliam F. Andrews

Title

Director

Director


. January 27, 1931Des Moines, IA

October 7, 1931Easton, PA

William L. Brown Chairman and Director February 1, 1922Hendersonville, NC

J. Richard Bullock

William J. Clark

Director

Director

March 2, 1923Worcester, MA

October 1, 1923Kansas City, MO

Gary L. Countryman Director July 30, 1939South BendWashington

John F. Cunningham

. Alice F. Emerson~~

~~Raymond C. Foster

Director

. Director

Director,

March 5, 1943Boston, MA

October 26, 1931Durham, NC

March 30, 1919New York, NY

Name

Gerhard M. Freche

Title

Director


July 13, 1931Kansas City, MO

Nelson S. Gifford Director May 3, 1930Newton, MA

T. McLean Griffin Clerk, General Counsel, September 12, 1922and Secretary of the Lake Placid, NYBoard of Directors

Richard D. Hill Director November 6, 1919Salem'A

Samuel Huntington Direotor April 24, 1939Bayshore, N.Y.

D. Brainerd Holmes Director May 24, 1921New York

John G. McElwee Director December 19, 1921Port Bannatyne,Scotland

~~

Donald F. McHenry

Alan L. McKinnon

Director- October 13, 1936St. Louis, MO

I

Executive Uice February 13, 1928President, Comptroller Boston, MAand Treasurer

Colman M. Mockler, Jr. Director Dece~i r 29, 1929St. Louis, MO

J. Donald Monan

Charles A. Sanders

Richard A. Sm'th

Director

Director

Director

December 31, 1924Blaisdell, NY

February 10, 1932Dallas, TX

November 1, 1924Boston, MA

Ira Stepanian

Stephen J. Sweeney

President andDirector

Director

November 14, 1936Cambridge, MA

December 15, 1928Winthrop, MA

Name

George R. West

Title

Director


April 11I 1920Boston, NA

and that each of said individuals is a citizen of the United States byvirtue of birth in the United States, birth abroad of U.S. citizenparents, by naturalization during minority through the naturalization ofa parent, by marriage (if a women) to a U.S. citizen prior to September22, 1922, or as otherwise authorized by law.

4. That I have access to the stock books and records of theCorporation; that said stock books and records have been examined anddisclose (a) that as of September 30, 1985 the Corporation had issuedand outstanding 19,525,938 shares of Common Stock of the Corporationissued and outstanding owned of record by 13,936 stockholders;

(b) That the registered address of 13,854 owners as of September 30,1985 of record of 19,463,294 shares of the issued and outstanding CommonStock of the Corporation are shown on the stock books and records of theCorporation as being within the United States, said 19,463,294 beingninety-nine and sixty-seven one hundredths per centum of the totalnumber of shares of said stock; As of September 30, 1985 the Corporationhad 1,045,712 issued and outstanding shares of Adjustable RateCumulative Preferred Stock, Series A (liquidation preference $50 pershare). Of this amoun", 1602 shareholders representing 99.81% of thetotal number of shares are United States citizens. As of September 30,1985, the Corporation had 1,576,068 issued and outstanding shares ofAdjustable Rate Cumulative Preferred Stock, Series B. Of this amount,3,089 shareholders representing 99.87% of the total number of shares areUnited States citizens.

(c) That pursuant to Section 13 of the Se'curities Exchange Act of1934, any beneficial owner of more than 5% of the Corporation's class ofCommon Stock is required to file a report on Schedule 13G or 13D withthe Securities and Exchange Comnission with a cooy sent to theCorporation. The records of the Corporation indicate that only two

'chedule13G and no Schedule 13D was filed in 1985 with respect to theCorporation's Common Stock. A Schedule 13G was filed by WellingtonManagement Company/Thorndike, Doran, Paine & Lewis ("Wellington" ) whobeneficially owned 1,638,129 shares of the Common Stock of theCorporation, representing 8.53% of the issued and outstanding CommonStock of the Corporation as of December 31, 1984. A Copy of thisSchedule 13G is enclosed herewith as Exhibit A an indicates that no oneadvisory client of Wellington has ownership of more than 5% of theissued and outstanding Common Stock of the Corporation (see Item 6 ofthe attacheo Schedule 13G) and that Wellington has shared voting powerwith respect to only 146,900 of such shares, and shared investmentdiscretion with respect to all such shares. As of September 30, 1985,tne beneficial owner hip of Wellington was 1,728,349 shares of the

'Common Stock of 'the Corporation, representing 8.88%. Wellington hasshared voting power witn respect to only 266,100 of such shares, andshared inves~nt discretion for all shares.

(d) That the following individuals are all partners of "Wellington".and that each of said individuals is a citizen of the United States ofAmerica unless otherwise indicated.

Daniel A. AbeamNancy T. AugustVincent BajakianAnthony T, Cope (U.K.)William D. DiIanniRobert W. DoranCharles T. FreemanJames C. FrenchJohn H. GoochWilliam C. S. HicksWilliam D. Jones, Jr.F. Danby Lackey, IIIGeorge LewisEarl E. McEvoyDuncan M. McFarlandPaul M. Mecray, IIIErnst Hans von Metszch(Netherlands)Jerrold I. MitchellJohn B. NeffJohn A. MyheimEdward P. OvensStephen D. PaineSaul J. PannellStephen M. PazukEugene E. Record, Jr.Dena W. ReedDavid W. ScudderBinkley C. ShortsStephen A. SoderbergRalph E. Stuart, Jr.Paul G. SullivanW. Nicholas ThorndikeGene R. TremblayJames L. WaltersFrancis V. Wisneski

That "Wellington", holds title as nominee, to none of the shares ofCommon Stock as of September 30, 1985; all such shares are held innominee names of individual clients.

That the beneficial interest of such shares is held by 30discrentionary client accounts of which shares 1,685,176 or 8.74% isshown to be held by stockholders having registered addresses within theUnited. States; and

That non~ of the owners of the shares so held owns 5 percent or moreof the issued and outstanding common stock.

(e) That as of December 31, 1984 Sanford C. Bernstein and Co., Inc.was the holder of record ownership of 1,290,160 shares or 6.7% of theCommon Stock of the Corporation, with sole investment discretion for1 f290, 160 shares and sole voting power for al1 348, 500 shares. A copyof this Schedule 13G is enclosed herewith as Exhibit B.

(f) That none of the owners of the'shares so held owns 5% or moreof the issued and outstanding Common Stock.

(g) That the following individuals are all directors of Sanford C.Bernstein and Co., Inc. and are all U.S. citizens.

Ualrr~ C. Bernstein, ChairmanLewis A. Sanders, PresidentRoger HertogJoseph B. GreeleyStuart K. Nelson

(h) As of July 31, 1985, Sanford C. Bernstein and Co., Inc. held250 shares of Common Stock of the Corporation.

(i) As of September 30, 1985, no other stockholder owned of'ecord5% or more of the outstanding Conan Stock of the Corporation other thanCede & Co., a nominee for The Depository Trust Company, who owned ofrecord 13,985,104 shares, or 71.62% of the issued and outstanding CanonStock. Cede & Co., owned 502,996 shares of Adjustable Rate CumulativePrefe red Stock, Series A or 48.1% of the issued and outstanding stock.Cede & Co., owned 692,289 shares of Adjustable Rate Cumulative PreferredStock, Series B or 43.92% of the issued and outstanding stock. TheDepository Trust Company is a limited purpose trust company charteredunder the Banking Law of the State of New York, a member of the Federal,Reserve System, and a "clearing corporation" within the definition setforth in Section 8-102(3) of the Uniform Ccarmercial Code. DepositoryTrust is presently a wholly-owned subsidiary of the New York StockExchange, Inc. and is engaged in the business of effecting the transferand pledge of secur'ities deposited with it by its participants throughbookkeeping entries as permitted by the Uniform Commercial Code. Inorder to facilitate subsequent transfers, all securities deposited byparticipants with Depository Trust are registered in the name of itspartnership nominee, Cede & Co.'either Depository Trust nor itsnominee, Cede & Co., beneficially own any securities. Participants inthe Depository Trust system are financial organizations, such as memberfirms of the New York Stock Exchange and the American Stock Exchange,banks, registered management companies and clearing corporations. theorganizations which deposit securities with Depository Trust may or maynot be the beneficial owners of such securities. Depository Trust has noindication whether or not securities are beneficially owned by theorganizations which deposit them in its system. Cede & Co., as nominee,holds tne shares of the Corporation Common Stock for the clearingmembers.

5. That the controlling interest in said Corporation, asestabiisned by the data hereinbefore set forth, is owned by citizens ofthe United States; that the title to such proportion of the stock ofsaid Corporation is vested in citizens of the United States free fromany trust or fiduciary obligation in favor of any person not a citizenof the United States; that such proportion of the voting power of said

Corporation is vested in citizens of the United States; that through nocontract or understanding it is so arranged that the majority votingpower of said Corporation may be exercised, directly or indirectly inbehalf of any person who is not a citizen of the United States; and thatby no means whatsoever, is control of said Corporation conferred upon orpermitted to be exercised by any person who is,not a citizen of theUnited States.

6. That the affiant has carefully examined this affidavit andasserts that all of the statements and representations contained thereinare true to the best of his knowledge, information, and belief.

Da~ea /o/(i/) s

~. IccLean Grz n

The Commonwealth of Massachusetts)) ss.

Country of Suffolk )

On the 15th day of October, 1985, before me, the undersigned NotaryPublic in and for said- Commonwealth duly commissioned and sworn,personally came T. McLean Griffin, to me known, who being by me dulysworn, did depose and say that he resides at No. 14 Beckford Street,Salem, Massachusetts; that he is Clerk, General Counsel, and Secretaryof the Board of Directors of BANK OF BOSTON CORPORATION, a Massachusettsbusiness corporation organized and existing under the laws of. theCommonwealth of Massachusetts that the seal affixed thereto is. the sealof said Corporation, and that he was duly authorized by the Board ofDirectors of said Corporation to execute said certificate and to affixthe seal of said Corporation thereto.

IIIotary uo ic

My Commission Expires March 31, 1989

I

I

I

I

1

I

ri

H



In the matter of

ARIZONA PUBLIC SERVICECOMPANY, ec al,(Palo Verde NuclearGenerating Station, Unit l)


ATTACHMENT C TO EXHIBIT B



1984 ANNUAL REPORT OFBANK OF BOSTON CORPORATION

1984 Annual Report

KOF BOSTONCORPORATlON

Corporate Group

"To enhance our leadership position

through innovative and responsive

financial services for our customers."

200 Years of Service

International Group

"To provide global reach for our

domestic businesses and to be a key local

bank zoithin selected countries."

Qa 4~m

\8 P4

New England Group

"To be the preeminent Nero England

bank in profitability, size and creative

management thinking."

Real Estate Group

"To reaffirm our co~nmitment to

the real estate capital and mortgage

markets."

t)g /!-I

)pit

Treasury/Investment Banking Group

"To serve as the financial crossroads

for structuring, funding and placing

debt and equity transactions."

Financial Highlights'IFor the Year(in thousands)

Net interest revenueProvision for credit lossesOther operating incomeOther operating expenseNet income

1984

$669,932180,000479,802722,280164,054

1983

$606,45154,000

266,001595,211135,736

Percentage Increase(Decrease)

1984 19S3Compared with

19S2 1983 1982

$554,125 10% 9%48,000 233 13

227,686 80 17549,189 21 8124,401 21 9

Per Common Share Data Net incomeDividends declaredBook valueMarket value at December 31Average shares outstanding

$ 8.352.34

58.7539'/4

19,117,167

$ 7.402.17

53.2640'/z

18,349,634

$ 6.671.97

48.7033'/i

18,660,785

13% 11%8 10

10 9(2) 204 (2)

, Selected RatiosI

Return on average assetsReturn on average common

stockholders'quityDividends declared per common

share to net income percommon share

Price/earnings at December 31Total assets to

stockholders'quity

at December 31

.79% .72'/o .71% 10% 1%

28.024.76X

18.62X

29.32 29.54 (4) (1)5.47X 5.06X (13) 8

19.40X 20.66X (4) (6)

15.19 14.44 14.70 5 (2)

, cr E

jkp

Endions)

Loans and lease financingTotal assetsDepositsTotal stockholders'quity

$ 14,58922,07915,258

1,185

$ 11,89619,53812,381

1,007

$ 10,714 23'Fo 11 /o

18,267 13 711,674 23 6

884 18 14

C

c>.i n~

0 7,

1'k

~(P":j'C

Contents

~ rllg

BANKOFBOSTONCORPORATION

Letter to StockholdersSpecial Feature:

Bank of Boston's New StrategyFinancial ReviewReport of ManagementReport of AccountantsFinancial StatementsConsolidated Statistical InformationQuarterly Financial Information

and Common Stock DataBoard of DirectorsCorporate OfficersStockholder Information

8

23

43

4461

838486

88

To Our Stockholders

e -~1

/

i, l

William L Brown, Chairman Ira Stepanian, President

"To maximize long-term shareholder value in

the conduct oja highly ethical financial

enterprise."

our Corporation generated record earnings of

$8.35 per common share in 1984, an increase of 13%-;-'; over the $740 reported a year earlier. Net income:„'~ for 1984 was $ 164.1 million, an improvement of.'>g- 21% over the $135.7 million recorded in 1983.

Continued growth in earnings allowed your;;. =; Directors to increase the annual dividend rate on

the Corporation's common stock from $2.32 a

, „'.„share to $2.40. This is the seventh increase in as

„:; many years and the 18th in the last 20 years, repre-'enting a 3% increase in the dividend rate.

Increases were also posted in two common mea-.„-'; sures of your Corporation's profitability. Return on;i "„'ommon equity (ROE) was 15.19% for 1984, com-

~~g pared with 14.44% for 1983. Return on assetspf ««(RQA) was .79%, np from .72% in 1983.

This year's strong performance reflects the gainto the sale of our Boston headquarters

F:""ing, as well as increases in net interest reve-

nue and other operating income. These gains were,,'-; offset in part by a higher provision for credit

=- 'osses, including a $100 million special provision,;=-.',„and increases in other operating expenses. The

jij~building, which willbe leased back to the Corpo-~>A ration, willcontinue to be known as the Bank of

Boston Building and remain your Corporation's

@p,'orld headquarters. The building was sold for-".4 $363 million in December, resulting in a pre-tax'': gain of $295 million. Of that amount, $177 million

'as recognized in 1984's operating earnings.lf«

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remaining $118 millionwas required to be

deferred and amortized over the initial term ofthe lease agreement.

After adjusting for the effect of the sale of the

building and other special fourth quarter events,such as the special provision for credit losses andthe writedown of the mortgages previously held inthe portfolio, operating income for the year was a

disappointing $5.99 per share. However, we

expect a better performance in 1985 based on ourstrategic plan.

Bank of Boston's Strategic Plan

To enhance our performance in the years ahead,

we implemented our strategic plan at the begin-ning of 1985. Our more formalized planning effortbegan two years ago in response to developmentsboth inside and outside the Corporation. These

included:

~ Our size, after more than a decade of worldwidegrowth

~ The rapidly changing competitive and regulatoryenvironment

~ Higher shareholder expectations

Grmoth: Until recently, the banking industry—including Bank of Boston —emphasized growththrough the expansion of services. For manyyears, this strategy proved successful. Our pri-mary objective was service; our willingness toenter new businesses in response to customerneeds was well rewarded: But the fortuitous linkbetween growth and profits began to weaken. By

Dividends DeclaredPer Common Share

Net IncomePer Common Share

$ 3

$ 10

4

79 80 81 82 83 84

(F,

F

79 80 81 82 83 84

1982, we had become a giant institution. Cle

the time had come to take a closer look at ourstructure and management systems.

The changing marketplace: While we were expand-

ing, deregulation and increased competition were

altering the shape of the financial services indus-

try. The most profound change was the emergence

of money market funds, with their pronouncedability to attract consumer assets. In addition, bro-

kerage firms, insurance companies and otherfinancial service companies began offering com-

petitive alternatives to banking products. Bankers,hobbled by outmoded regulations, watched help-lessly as their traditional retail business waseroded by "non-banks." By the time the regula-

tory burden was lifted, we found ourselves faced

with stiffer competition than ever before —fromcompetitors that had been non-existent only a fewyears ago. Successfully meeting our competitioand capitalizing on new opportunities now a

able to us, required a thorough examination o rstrengths and weaknesses and a plan for the rede-

ployment of our resources.

Higher shareholder expectations: Along withincreased competition for business, we foresawincreased competition for capital, a vital resource.Investors began demanding a higher return onequity —a return sufficient to increase the priceof their shares. To satisfy these expectations, it wa

that we had to instill new disciplines and

kindle a new management consciousness at all lev-

els of the Corporation.

The new plan, the new structure

After two years of analysis and evaluation, the

strategic planning processes generated the blue-

print for Bank of Boston's new structure: a decen-

tralized, numbers driven, strategically managedCorporation, well positioned to maximize the

value of its shareholders'nvestment. 79 80 81 82 83 84

80 %

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A new organization: Bank of Boston has a new five-

Group organizational structure that is examined indetail in this year's special section:

~ Corporate Group

~ International Group

Mew England Group

eal Estate Group

~ Treasuryilnvestment Banking Group

Each of these Groups is now an independent, sep-

arately managed business with its own strategicdirection and with control over and responsibilityfor its own costs and profitability.

Establishing the strategic direction of the Corpor-ation and setting its public posture is the role ofthe Office of the Chairman, which also retains

79 80 81 82 83 84

16%

12

10

Return onAverageCommonEquity

ultimate decision-making responsibility. TheOffice of the Chairman and the five Group Execu-

tives compose the Management Committee, whichis responsible for the Corporation's overall perfor-mance and policies. In addition, the ManagementCommittee initiates and supervises intergroupcooperation and the sharing of resources.

While many staff services have been decentral-ized to give line managers control over costs, andthereby increase efficiency, a small staff unitremains: the Corporate Center. This core group ofsenior staff professionals provides support to theOffice of the Chairman, and functional guidanceand advisory services to the Groups.

A new financial discipline: In response to compet-itive and profitabilitypressures, the Corporationnow is analyzing itself in a new way. We are nowconcentrating our focus on the return on equity,not only of the consolidated Corporation, but also

of each of our individual businesses.

This yardstick allows us to compare empiricallythe productivity of resources committed to each ofour domestic and international business units. Ourgoal is to temper and direct our growth to maxi-mize returns. The ROE standard willlargely indi-cate those businesses to expand, those businesses

to merely maintain, and those we should divest.A new approach to enrployee commitment: Closely

related to this discipline are our efforts to developa new management and employee consciousness:

an entrepreneurial dedication to the profitabilityof'the business unit and Group to which the employee

is assigned. Our goal is for each employee to

ticipate in and contribute creatively to his or hei

particular area —whether through new business

development, cost control or productivity improve-ments. In return, employees willreceive the

rewards and personal satisfaction that accompanythe attainment of positive results.

Our strategy in New England

A key element of your Corporation's strategy is to

be our region's preeminent bank. Our objective is

to have a major presence in each New Englandstate. Regional expansion efforts have been tempor-arily halted by a suit before the United States

Supreme Court challenging provisions in some

interstate banking laws that allow reciprocity onlywith other New England states. We believe that the

constitutionality of these statutes willbe upheldand that we willsoon be able to complete the

pending acquisitions of Colonial Bancorp in Cnecticut and RIHT Financial Corporation in RhodeIsland. A significant step in our New Englandstrategy was accomplished in March with the

acquisition of Maine's Casco-NorthernCorporation.

Economic outlook

After two years of vigorous growth, it is likely thatthe pace of business activity willmoderate some-what during 1985. There is little doubt, however,that both the national and regional economies willremain firmlyon the path of expansion. Withinflation expected to remain in the range of 3 to4%, continuing gains in real consumer income will

~4/

(s

ibute to the forward momentum of the econ-

omy. Moreover, the easier credit conditions fos-

tered by the Federal Reserve, and the resultantdeclines in interest rates seen in recent months,willundoubtedly have a rejuvenating effect onbusiness activity.

A time of change

Obviously, this is a time of significant change at

Bank of Boston. But one goaI remains: to maxi-mize long-term shareholder value in the conductof a highly ethical financial enterprise. We also

reaffirm our commitment to our employees andthe communities and customers we serve. In an

important sense, these commitments are but-tressed by our quest for improved profitability. For

ifour return on equity is not sufficient, we willbe

unable to serve these constituencies.

est as our success over the years has been the

duct of our employees'ride, dedication andprofessionalism, so our'uture success willspringfrom their continued commitment and tomorrow's

'* accomplishments. Your Corporation values highlyits ability to attract and retain the widest range ofqualified employees, so we have expanded ouraffirmative action programs for women, minoritiesand other groups. The results are gratifying: We

have reduced the turnover rate among women and

minorities, increased the number of handicappedemployees in our workforce, and achieved a

higher representation of women and minorities inkey managerial and professional positions.

It is also appropriate that we express our grati-tude to two individuals whose accomplishments

have set high standards for the Corporation formany years: former Chairman Richard D. Hill,who retired as Chairman of the Executive Com-mittee this year, and George E. Phelan, whoretired as Vice Chairman of the Corporation. Theirvaluable counsel willstill be available to us, how-ever, as Mr. Hillcontinues to serve as a Director ofthe Bank and Corporation and Mr. Phelan remainson the Board of Casco-Northern Corporation.

During 1984, three new members were elected

to our Board of Directors. WilliamF. Andrews,President, Chairman and Chief Executive Officerof Scovill Inc. was named in March. In August,John F. Cunningham, President of Wang Labora-tories, replaced An Wang, who continues to serveas an honorary director. In December, Samuel

Huntington, President and Chief Executive Officerof New England Electric System, replaced Guy W.

Nichols, who retired from the Board. We thankMr. Nichols for his years of service to the

Corporation.

WilliamL. BrownChairman

Ira StepanianPresident

"Anew structure was created to capitalize on

the characteristics that have made us unique

among American banks."

.1

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Sculptor Chuck Hotttman

ank of Boston'sNew Strategy

In 1984, Bank of Boston'sstrategic planning processresulted in a new formand new direction for theCorporation.

A new structure wascreated to capitalize on thecharacteristics that havemade us unique amongAmerican banks. We are:

~ a sophisticated nationalprovider of corporatefinancial services

~ a significant interna-tional bank

~ the largest bank in NewEngland

~ one of the country'leading real estate banks

~ a major participant innational and interna-tional money markets

Each of these characteris-tics represents an impor-tant opportunity for us,which is reflected in ournew organization:

~ Corporate Group~ International Group~ New England Group~ Real Estate Group~ Treasury/Investment

Banhng Group

Each Group has its ownsupport units, controls itsown costs and is responsi-ble for its own pr'ofitabil-ity. Each is a distinct yetintegral part of the Bank.Each has an importantrole to play in helpingBank of Boston thrive now—and in the future.

Corporate Group

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Charles K. Gifford, Group Executive

"To enhance our

leadership position

through innovative

and responsive

financial services

for our customers."

Boston GarCh

. ~ argues

Engineering supervisor Keith Ha>at WNEV-TV ~

new direction

Corporate lending haslong been a mainstay ofBank of Boston's earnings.Much of our growth isattributable to our histori-cal strength in the New

-':, England corporate lendingmarket, our participation

'"., in national markets and'ur international lendingcapabilities, particularlyin Latin America.

But traditional lending, willno longer be enoughto sustain any true com-petitor in today's rapidlychanging financial mar-

; -'etplace. New competi-'

tion, new techniques andnew financing ideas arechanging the way corpor-

assess and meetapital needs. A

ma>or thrust of the Bank,through its Corporate

. Group and the closelyrelated Treasury/Invest-ment Banking Group, isexpansion beyond lending

to provide a broad rangeof high value financialproducts. These includeinnovative and sophisti-cated techniques in theareas of tax advantagedfinancing, interest rateprotection, corporatefinance and speciallydesigned leasing prod-ucts, which willmorecompletely meet the needsof a broader range of cus-tomers and prospects.

Where we are going

The Bank has recognizedthat this strategy requireschanges in the way weapproach our markets. Asa result, we have reorgan-ized along customer lines—Large Corporate, Mid-dle Market and Special-ized Industries.

Simultaneously, we aredesigning two new ap-proaches to cross-sellingcredit and non-creditproducts and services—transaction managementand relationship planning.

Transaction manage-ment willpermit us to

bring together the specialcombination of investmentbanking and corporatelending skills needed toprovide solutions to com-plex financing problems

, such as mergers, lever-aged buy-outs, or capitalstructure. The other, rela-tionship planning, willbring a new discipline toour marketing activitiesby encouraging officers tofocus on the total range ofa customer's needs. Toaccomplish this, we havebrought two importantservices, Cash Manage-ment and Freight Manage-ment, within theCorporate Group.

Large Corporate: The pri-mary goal is to enhanceour relationships withcarefully selected cus-tomers and prospects, andto become a more signifi-cant supplier of productsand services to them on a

mutually beneficial basis.Our global approach tothe management of desig-

nated U.S. multinationalcompanies provides uswith numerous opportuni-ties to enhance theseimportant relationships.The ability to create newproducts quickly willbeone important tool inachieving this objective.Another is our ability topinpoint those customersand prospects that canbenefit most from abroad spectrum of ourresources, allowing us tomore efficiently deliverour services to this seg-ment of our market.Despite the strength of thedollar, foreign investmentin this country continuesto present attractive financ-ing opportunities to us.

Middle Market: Thevitalityof mid-sized com-panies —those with salesranging from $50 millionto $150 million—is a true

tin?In

ElnQv,ginteanin+fact+

. Manning heads one of theest bank leasing operations in

the tLS.

New ventures team leader Barbara Mastro talks with Kenneth Leavitt ofCGX Corporation

Corporate bankers (from left)Constantin R. Boden, Phillip M. Sullivan,T. Lincoln Morison lr., Paul N. Vonckx fr.

International CroL

indicator of America's re-juvenated economy. Thesecorporations willplay animportant role in assetand earnings growth.Today we are the largestlender to middle marketcorporations in NewEngland.

Our middle-marketprominence in other areasof the country reflects the.success of our asset basedfinancing activities—commercial finance, fac-toring and leasing. Weintend to'build on thisprominence by commit-ting more resources to ourregional centers in'Atlanta, Dallas, Chicagoand Los Angeles. The'flow of new products fromthe Treasury/InvestmentBanking Group willper-mit us to better retainthose relationships we

'stablished through assetbased financing at anearly stage of the custom-er's development.

Specialized Industries: Bycommitting people andresources to particularindustries, Bank of Bostonhas become a nationalleader in specialized lend-ing. We are one of threerecognized high technol-ogy banks in the country.In addition, we have along history of successfulinvolvement with theentertainment, communi-cations, transportationand utilities industries.More recently, we haveachieved a significant yetselective penetration ofthe energy and insurancemarkets. Our familiaritywith industry trends,business cycles andunusual financingrequirements gives us animportant competitiveadvantage in these indus-tries and a major opportu-nity for growth andincreased profitability.

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Clark W. Miller, Group Exe

"To provide global

reach for our

domestic businesses

and to be a key local

bank within selected

countries."

12

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turbulence, the Bank hasmaintained its commit-ment to the region —andhas reaped substantialrewards for doing so.

Today, our extensiveLatin American presenceis one of the Bank's mostvaluable assets. Althoughthere has been a need torestructure some loans,by limiting our involve-ment in certain countriesand expanding in others,we have preserved a com-petitive position that willallow aggressive businessdevelopment during theregion's anticipated eco-nomic recovery later inthis decade.,'ur strategy in ther'egion, which has been toemphasize local currencylending and minimizecross-border exposure,remains unchanged.Increased local currencyneeds have led to theexpansion of branch net-works in Argentina, Uru-guay and Chile.

Other opportunities haveemerged as well:

~ International cash man-agement is increasing inimportance. For exam-ple, in Brazil, the intro-duction of this serviceresulted in the expan-sion of our local feebusinesses.

~ We have opened loanproduction offices forindigenous lending andnon-traditional bankingservices in variousLatin Americancountries.

~ We continue to havesignificant interestin deposit-gatheringcapabilities in theCaribbean.

Asia/Pacific: Trade ser-vices, correspondentbanking and, to a lesserextent, private banking,are our most significantopportunities in the FarEast.

A new attitude towardforeign investments bythe government of Aus-tralia also creates wel-come opportunities there.We look forward to offer-ing additional servicesthat willsupplement oursuccessful leasing andmerchant bankingactivities.Europe/Middle East/AfricatIn Europe, special empha-sis is being placed onleasing, high technologylending and on the prod-ucts and services offeredby Worldwide FinancialServices. Our new branchin Istanbul, established tocapitalize on bankingopportunities withinTurkish borders, forges alink between our Euro-pean operations and theMiddle East.

fnternational teller Alice Vasquez

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Bank of Boston, Hong

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14

New England Group

tz

ecoming theregion's leader

The six-state area presentsgreater opportunities thanever before to Bank ofBoston. With more than5,000 employees andnearly 200 branches dedi-cated to serving New Eng-landers, the Bank enjoysunmatched access to thebusiness and personalbanking customers in oneof America's most attrac-tive markets.

Our goal is to be thepreeminent New Englandbank in profitability, sizeand creative managementthinking. Preeminentmeans that Bank of Bostonwillachieve a leadershipposition that is widely rec-ognized by our customers,our competition and ouremployees; New Englandreemphasizes our commit-ment to the region; profit-ability underscores returnon equity as the primary

Lawrence K. Fish, Group Fxecuffve Orleans branch. Cape Cod. Massachusetts

"To be the

preeminent New

England bank in

profitability, size and

creative management

thinking."

The weekly review meeting of the New England Management Committeeincludes (from left) fohn C. Martin, Benjamin f. Bowden, Lawrence K. Fish,D. Bruce Wheeler, Eugene M. Tangney and Ralph B. Fi%eld

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measurement for all ourbusinesses; size conveysknowing how and whento use our strengths tobet ter serve our regionalmarkets, and creative man-agement thinking addressesour concern that all man-agers be bold enough toexperiment and make dif-ficultdecisions.

As a "bank within abank," the New EnglandGroup willmeasure itsperformance and profit-ability against the topregional banks in thecountry. By achievingreturns equal to or ex-ceeding the levels set bythese banks, the Groupcan have a major impacton stockholderinvestment.

Regional Financial Cen-"ters: A significant shift inmanagement philosophy

New England's distinctdiversity —both geo-graphic and economic—demands a bold approachto managing, where eachbusiness is responsible forits own profitability.Region-wide success willdepend on how well we

understand and meet theneeds of each geographicarea and the particularcustomer segments inwhich we choose to com-pete. Rather than havemultiple units reportingto a single Boston man-agement headquarters, theMassachusetts networkhas been decentralizedinto seven Regional Finan-cial Centers (RFCs): GreaterBoston, MetropolitanNorth, MetropolitanSouth, Southeastern Mas-sachusetts, Cape Cod,Worcester, and WesternMassachusetts.

Each RFC is a self-con-tained, autonomous bankwithin the Group, provid-ing comprehensive ser-vices to the prioritycustomer segments in itsgeographic area. Depend-ing upon the region, thesesegments may include:

~ Retail Banking for themass market and up-scale customers

~ Personal Trust for high-net-worth individuals

who have investmentand fiduciary needs

~ Private Banking for highincome individuals whohave credit needs

~ Middle marketcompanies

~ Small commercial andcommunity businesses

~ Commercial real estate

Each RFC has its ownPresident and RegionalBoard of Directors, all ofwhom are prominentmembers of the local com-munity. Each RFC has dis-cretionary credit-grantingcapability. Each deter-mines how best to serveits market.

This decentralizedstructure brings impor-tant advantages to bothour customers and theBank:~ Localized management

leads to greater under-standing of local needsand allows us to tailorour staffing and servicesto meet those needs.

~ Each RFC becomes a

single source provider ofa spectrum of highlypersonalized banking

services. For examthrough their relatiship officers, businessexecutives can obtaincommercial loans, mor t-

gages, personal loans,education loans andestate planning services.

~ Local managers havecontrol of the directcosts associated withproviding services tolocal customers.

Product management andcost management: Essen-tial disciplines

The localized managementapproach is the most visi-ble aspect of the NewEngland Group's strategy.Less evident but equallyimportant are our productmanagement capabilityand stringent cost comeasures.

Product nranagement.While products requiringhighly personalized ser-vice are being managed atthe RFC level, manage-ment of certain basic retailproducts is being central-

Automated Teller MachineBenjamin f. Bmoden (center, seated), Massachusetts banking head; ——.confers toith Regional Financial Center Presidents (from left) Myles BorlandBarrett C. ¹chols, Francis f. McCorntack, Ronald S. LaStaiti,Karl Walcrak and Francis D. McGrath

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Edwin B. Morris Iii, Group &ecutive Intemationd tthce at Fort Hia, Boston

"To reaffirm our

commitment to the

real estate capital and

mortgage markets." John F. Abeam tot th developers Do(center) and his father, Arnold (left

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Lead lender in high-rise office build-ing at 599 Lexinglon Avenue inNeo York City r

national leader" Real Estate has been a dis-

tinctive specialty of Bankof Boston for many years.Rather than signaling a

strategic change, the crea-tion of the Real EstateGroup reaffirms the Cor-poration's commitment toserving this major indus-try. The independence andspecialization of our staffand our long-standingdedication of financial

;. resources have earned the' Real Estate Group a repu-

tation for responsivenessand industry competenceunmatched by bankswhere real estate is simplyan adjunct of corporatebanking.

!~~/~ s a result, the Bankdy ranks among the

on's leaders in theGroup's two primarybusinesses: wholesale realestate lending and retailmortgage banking.

Wholesale lending: Bycarefully managing our

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relationships with devel-opers to emphasize officercontinuity and personal-ized service, we havebecome one of the topproviders of real estatefinancing in the country.Like our customers'roj-ects, our financings areindividually designed andreflect the knowledge andinnovation available onlyfrom professionals withyears of experience. Fouryears ago, this "customcrafted" approach tofinancing motivated us tobecome one of the firstcommercial real estatelenders to match fundmany of our constructionloans, thereby removingthe interest cost variablefrom the critical project

'udget. Later, during a

period of tightness in theavailability of commerciallong-term real estateloans, we instituted whathas become a highly suc-cessful program in whichthe Bank shares in a proj-ect's profit in exchange forproviding medium-termfunds at predictable, sta-ble interest rates.

This reputation withdevelopers greatlyenhances our ability tostructure attractive syndi-cations of loans to otherlenders desiring loan par-ticipations from the RealEstate Group.

Mortgage Banking: TheBank's prominence in theretail mortgage markets ofthe Southeast, as well asNew England, places itamong the top ten U.S.mortgage bankers. Anexcellent counterbalancefor wholesale real estatelending, residential mort-gage volume typicallyincreases early in an eco-nomic recovery wheninterest rates are tradition-ally low—and well beforewholesale constructionloan volume builds. Todaythe mortgage bankingindustry faces importantchallenges, including therole of technology in mort-gage generation and a

shifting regulatory out-look. We have imple-mented an operating

strategy designed specifi-cally to meet thesechallenges.

The Pooled Real EstateInvestment Fund

The Real Estate Groupmanages the Pooled RealEstate Investment Fund.Formed in 1975, the Fundprovides pension andprofit sharing plans witha real estate investmentvehicle that generates anattractive total rate ofreturn and contributes topor tfolio diversification.Currently, the Fund'sportfolio exceeds $230millionand consists ofinvestments in incomeproducing propertiesacross the country.

During the past threeyears, a time of relativelylow inflation, the fund hasearned an inflation-adjusted annual realreturn of 9.4%. Duringthe same period, theFund's unit valueincreased by 46%, com-pared with an increase inthe, Consumer Price Indexof 12.6%.

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Garlan Morse lr. tvith David Bar-rett (left) of Boston Properties atCambridge (Mass.) Center 19

Treasury/Investment Banking Group

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Peter C. Read, Croup Executive

"To serve as the

financial crossroads

for structuring,

funding and placing

debt and equity

transactions."

Trading room ttoor, Boston headquarters

20

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new role

The role of Treasury/Investment Banking iscentral to the success ofBank of Boston's strategy.The Group's primary cus-tomers are the Bank's ownrelationship officers, par-ticularly those of the Cor-porate Group. Treasury/Investment Banking isboth the source of fundsfor delivery to commercialborrowers, and the devel-

per of new financialroducts and services thatre aimed at expandingxisting relationships andttracting new ones.

The product source:Investment Banking

financing techniquesvide special benefits to

customers and Bank ofBoston alike. For our cus-tomers, they promise newsolutions to financingproblems and offer waysto tailor financing moreclosely to a corporation's

special requirements. Forthe Bank, these tech-niques offer a way to gen-erate increased incomewithout creating assets,thereby removing con-straints created by capitalratios, tax position andother factors.

Shaping these tech-niques into products thatare valuable to corporatecustomers, and then mar-keting them to a widerange of investors, is therole of Investment Bank-ing. In the process, Invest-ment Banking providescorporate lending officerswith the broad range ofproducts they need to becompetitive in today'marketplace. For example,Investment Banking cre-ated a highly successfulprogram involving thepackaging and placing oftax-exempt AdjustableRate Industrial RevenueBonds to meet the needsof corporate customers forlow-cost financing of capi-tal investment.

Investment Banking oper-ates in five discrete areas:

~ Merchant battkirtgtInvolvement as principalin venture capital andmezzanine financing,and leveraged buyouts

~ Corporate finance: Struc-turing of corporate debtinstruments, mergersand acquisitions, corpor-ate advisory services,and project finance

~ Public finance: Under-writing tax-exemptissues such as municipaland Industrial RevenueBonds

~ Placemett ts: Sellingassets to corporations,other banks and finan-cial institutions, andindividuals

~ Product development:Working closely withTreasury to design,structure and delivernew products to rela-tionship officers

In fulfillingits expand-ed investment banker role,Bank of Boston has sev-eral distinct advantages.First, unlike large invest-

ment banks, we have abuilt-in origination

system'ith

our existing staff ofrelationship officers.These officers regularlyaddress the financingrequirements of severalthousand companies.

Second, we have a sub-stantial presence in themiddle market, where thegreatest growth andfinancing needs exist.,

Finally, our potentialcompetitors in the middlemarket cannot offer amajor international pres-ence, which is a gatewayto sources of capital thatrange from foreign multi-national corporations tosophisticated individualinvestors seeking toenhance their financialreturns through invest-ment opportunities inthe U. S.

The funds source:Treasury

Treasury is the banker forthe Corporation: It is theclearing house for allfunds. In executing thisrole, it must balance

Richard L. Timpson, Treasury head,discusses interest rates at bank offi-cers meeting

Peter F. Grofj, Government Securities head, monitors price movements

., )wV) '-.',- ~*

I

« Thorrras A. Fransioli, InvestmentBanking head

E 'rp

«~;at~ «

h

1„

requirements of its provid-ers of funds —depositorsand investors —for mar-ket rates of return withthe needs of borrowers-the asset generators of theother groups —for fundsat the lowest possible cost.

To meet this challenge,substantial investmentsare being made in sophis-ticated management infor-mation systems, enablinga worldwide approach toasset/liability managementand aggressive develop-ment of untapped orunderutilized sources offunds.

Treasury also worksclosely with InvestmentBa'nking to create newfinancial products andservices, such as interestrate swaps, where floatingrate loans are converted tofixed rate, and loan partic-ipation programs, designedto enhance both our rela-tionships with corporateborrowers and our feeincome.

In addition, Treasurymanages several stand-

alone businesses: It is a

major U.S. governmentbond dealer; the premierunderwriter of tax-exemptsecurities in the region;New England's primaryforeign exchange trader,and an important partici-pant in national moneymarkets. The "BostonOption," an innovativeand highly flexible foreignexchange product thatinsulates customers fromrate fluctuations, wasintroduced in 1984 andfound high customeracceptance. In addition,Treasury provides a broadrange of investment man-agement and advisory ser-vices to corporations andcorrespondent banksthroughout New England.

Bank of Boston: Newopportunities, newflexibility

While Bank of Boston'snew organization shouldfacilitate maximum profit-ability in each of our busi-nesses, it also createschannels of interactionamong the five Groups. Infact, one of the primary

goals of Bank of Boston isto spark intergroup syn-ergy by making thestrengths of one valuableand easily accessible to theothers.

But even more impor-tant than our intergroupstrength is our unprece-dented flexibility—adeliberate outgrowth ofthe strategic planning pro-cess. The financial ser-vices industry is one ofthe country's most fluid,and few financial institu-tions can afford to limittheir direction or theirvision by setting theirsights on a single, nar-rowly defined goal. Onthe contrary, we haveworked to assure that weare among the small num-ber of leaders who willone day be the backboneof financial services in theUnited States.

Today, Bank of Bostonpossesses the organiza-tional, analytical and tacti-cal tools to reach thatgoal.

70

0

Constance Johrisori lists municipalbond sales

BANK OF BOSTON CORPORATlON

Consolidated Selected Financial Data

fin mi7lions) 1984 1983 1982 1981

Years Ended December 31 w Five YearCom

1980 1979 Grorvl

Income statement data:

Interest incomeInterest expense

Net interest revenueProvision for credit losses

Net interest revenue afterprovision for credit losses

Other operating incomeOther operating expense

Income before income taxes

Provision for income taxes

$2,922.4 $2,333.2 $2,506.3 $2,748.5 $2,163.7 $ 1,513.9

2,252.5 1,726.8 1,952.2 2,221.6 1,697.8 1,109.3

669.9 606.4 554.1 526.9 465.9 404.6

180.0 54.0 48.0 48.0 48.0 . 49.0

489.9 552.4 506.1 478.9 417.9 355.6

479.8 266.0 227.7 195.4 '66.8 120.9

722.2 595.2 549.2 500.2 421.0 328.8

247.S 223.2 184.6 174.1 163.7 147.7

83.4, 87.5 60.2 55.5 61.6 63.5

14.1%

15.2

10.6

29.7 <>I

6.6

31.7 <2>

17.0

10.9

5.6

Net income $ 164.1 $ 135.7 $ 124.4 $ 118.6 $ 102.1 $ 84.2 14.3

Balance sheet data:

Average for the period:Cash and due from banksInterest bearing deposits

in other banks

Federal funds sold andresale agreements

Trading account securitiesInvestment securitiesLoans and lease financingOther assets

2,420 2,940 2,984 2,452 2,781 2,324

286

413

1,018

13,210

2,038

189

427

1,167

11,076

1,845

222

272

1,296

10,125

1,441

177

164

1,667

9,050

1,212

159

111

1,926

8,D46

1,064

297

123

1,354

6,524

899

$ 1,434 $ 1,177 $ 1,166 $ 1,209 $ 1,297 $ 1,288 2.2

.8

(8)27.

1

17.8

Total assets $ 20,819 $ 18,821 $ 17,506 $ 15,931 $ 15,384 $ 12,809 10.2

DepositsFederal funds purchased and

repurchase agreementsNotes and other funds borrowedOther liabilitiesStockholders'quity

Total liabilities andstockholders'quity

2+451,958

1,621'1,091

2,709

1,573

1,598

940

2/891,S30

1305846

2,218

1,384

1,127

775

2,666

1,293

1,009

689

1,721

1,187

929

619

$ 20,819 $ 18,821 $ I/506 $ 15,931 $ 15384 $ 12,809

$ 13+04 $ 12,0D1 $ 11,436 $ 10,427 $ 9,727 $ 8,353 10.6

6.4

10.5

11.8

12.0

10.2

At December 31:

Loans and lease financingTotal assets

DepositsStockholders'quity

$ 14,589 $ 11,896

22,079 19,S38

15,258 12,381

1,185 1,007

$ 10,714

18,267

11,674

884

$ 9,551

16,809

11,020

821

$ 8,848 $ 7,369

15,948 13,760

10,815 8,965

730 649

14.6

9.9

11.2

12.8

(1) Growth rate calculated without the $ 100 millionspecial provision for credit losses in 1984 is 10.3%.

(2) Growth rate calculated without the $177 million gainfrom sale of headquarters building in 1984 is 20.1%.

24

RABACIBl P~G~Jl8LJ

1)

)I

V

C

J'

$%'

C,,g

>Q; rj

p'gk '

.*,t

gr

'ANK OF BOSTON CORPORATION

Consolidated Selected Financial Data, continued'e

1984 1983 1982 1981

Years Ended December 31

1980

Five YearCompound

1979 Growlh Rate

Per common share:

Net incomeDividends declared

Book value at December 31

Market value at December 31

$ 8.35 S 7.40 S 6.67 S 6.25 S 5.48 $ 4.56

2.34 2.17 1.97 1.73 1.52 1.40

.58.75 53.26 48.70 43.02 38.66 35.14

3914 40'/I 33/4 30% 23M 19$

12.9%

10.8

10.8

15.8

Average common shares outstanding(in thousands)

Common stockhofdersof record (1)

19,117 18,350 18,661 18,975 18,646 18,469

15,138 15,983 16,630 17,450 18,767 19,320 (4.8)

i

'I'(.

/l

,* Chi''j

Selected ratios:

Return on average assets(Net income to average assets)

Return on average common equity(Net income applicable tocommon stock to averagecommon stockholders'quity)

Common dividend payout ratio(Dividends declared percommon share to netincome per commonshare)

Average stockholders'quityto average assets

'mary capital ratio atecember 31 (2)

rket value/book valueat December 31

Double leverageat December 31 (3>

Total assets tostockholders'quity

at December 31

Price/earnings ratioat December 31

.79% .72% .71% .74% .66/o .66%

15.19 14.44 14.70 15.30 14.83 13.61 2.2

28.02 29.32 29.54 27.68 27.74 30.70 (1.8)

5.24 5.00 4.83 4.86 4.48 4.83 1.6

6.87 5.85 5.52 5.58 5.22 5.32 5.2

67.66 76.04 69.30 70.70 61.43 54.54 4,4

110.16 103.81 102.88 101.93 104.52 111.22 (2)

4./6 5.47 5.06 4.86 4.33 4.19 2.6

18.62 X 19.40 X 20.66 X 20.49 X 21.85 X 21.20 X (2.6)

(2)

(3)

The number of stockholders of record includes banksand brokers who act as nominees, each of whom mayrepresent more than one stockholder.

Computed based on regulatory guidelines in effect atDecember 31, 1984.

Double leverage describes in percentage terms theextent to which equity investments in subsidiaries arefinanced with parent company debt. This situationoccurs when a parent company borrows funds(leveraged once), then invests the funds in equity of a

subsidiary, thus adding to the subsidiary's borrowingpower (leveraged twice). The ratio is derived bydividing equity investment in subsidiaries lessgoodwill by the parent company's net worth lessgoodwill.

(4) Share amounts prior to 1982 have been restated toreflect the three-for-two stock split approved bystockholders on March 31, 1982.

25

Net Income

SqJ 7" ~

S Millions

140

120

This section presents management's discussion~analysis of the results of operations for the last ti~years and financial condition at the end of 1984 forBank of Boston Corporation. The Corporation's netincome is derived principally from the operationsof The First National Bank of Boston and itssubsidiaries. In order to understand this section incontext, it should be read in conjunction with theFinancial Statements and Statistical Data on pages44 through 82 of this report.

40

20

~ International

~ United States

1979 1980 1981 1982 1983 1984

20% 22% 35% 20% 26% 4%

80 78 6580 74 96

1979 1980 1981 1982 1983 1984

Summary

Net income in 1984 increased 21% from 1983. InDecember 1984, the Boston headquarters building at100 Federal Street was sold and a $ 177 million pre-tax ($105 million after-tax) gain was reported in1984. The building willcontinue to be known asthe Bank of Boston Building and house the,Corporation's world headquarters. Other significanttransactions during 1984 were a $100 million specialprovision for credit losses, a $ 16 million write-downof fixed rate mortgages which the Corporationdecided to liquidate, a $5 million group of chargesrelated to the restructuring of certain businesses inconnection with strategic planning initiatives and a

$5 million year-end contribution to the Corporacharitable foundation. The net effect of thesetransactions was to increase earnings per commonshare in 1984 by $2.36.

Net income per common share was $8.35 or 13%higher in 1984. The lower per share percentageincrease when compared with net income reflects theeffect of preferred dividends in 1984 and greateraverage common shares outstanding. The dividendson the preferred stock, which was issued inconnection with the acquisition of Casco-NorthernCorporation (Casco), have been more than covered

- by Casco's earnings since acquisition.Exclusive of the transactions described above,

increases in net interest revenue and other operatingincome were more than offset by higher other

'operating expense and a larger provision for creditlosses.

Net income in 1983 increased 9% from 1982because of increases in net interestzevenue andother operating income, which were partially offsetby higher other operating expense, a higherprovision for income taxes and an increase in theprovision for credit losses.

As depicted in the Net Income chart, net incomefrom United States and International Operations s

varied signifilcantly in the past three years. UnStates Operations, including the gain on the sal

26

».

P

adquarters building, contributed 96% of totalcome in 1984, 74% in 1983, and 80% in 1982.

United States Operations in 1984 increased $58million to $ 158.2 million while InternationalOperations decreased $30 million to $5.9 million.

. „For additional information relating to the geographic: segmentation of operations refer to pages 66

and 67.

In March 1984 Casco, a Maine-based bank holdingcompany, became a subsidiary of Bank of BostonCorporation. The acquisition was accomplishedthrough the issuance by the Corporation of 1,045,712shares of adjustable rate cumulative preferred stockvalued at $52 million at the time of acquisition.Casco added $522 million to loans and leases, $654

million to deposits, $749 million to total assets and$52 million to total stockholders'quity. In July1983, Stockton, Whatley, Davin & Company (SWD), a

Florida-based mortgage banking company, wasacquired for $ 120 million in cash. At the time ofacquisition, SWD was servicing approximately $4

billion of mortgage loans for third party investors.Financial Statement Footnote 21 contains additionalinformation on the acquisition of Casco and ad'ssion of the pending acquisitions of Colonial

rp, Inc.-and RIHT Financial Corporation.December 31, 1984 the Corporation was the

1 th,largest bank holding company in the UnitedStates with total assets of $22.1 billion, a 13%

»; increase compared with 1983. Loans and leases at'ecember 31, 1984 were $ 14.6 billion, up 23% from a

., 'year ago and deposits increased 23% to $ 15.3 billion.Stockholders'quity was higher by 18%, totalling$ 1.2 billion at December 31, 1984. Return onaverage common equity was 15.19% in 1984 as

compared with 14.44% in 1983. The return onaverage assets increased in 1984 to .79% as comparedwith .72% in 1983.

The following is a more detailed discussion of theCorporation's operating results and Gnancial

~ condition.

Average Earn tng Assets

, P;.

L f PL

'i

'9791980 1981 1982 1983 1984

CI International0 United States

S Billions18

16

10

Results of Operations

Net Interest Revenue (fully taxable equivalent basis)

This discussion of Net Interest Revenue should be

read in conjunction with the Average Balances andInterest Rates and Interest Differential Analysis andthe Change in Net Interest Revenue-Volume andRate Analysis on pages 61 through 65. For

oses of this review, income that is either exemptfederal income taxes or taxed at a preferentialas been adjusted to a fully taxable equivalent

basis. The adjustment of income to a fully taxable

27

,nii gjILP ill

Net Interest Revenue Taxable fquiwlenl

5

S h1llllons

800

700

600

900

400

300

(in millions)


1984 1983 1982

equivalent basis has been calculated using a tax ra~of 52.8%, which is equal to the statutory federalincome tax rate adjusted for applicable state andlocal income taxes net of the related federal taxbeneflt.

The following table shows an analysis of netinterest revenue between United States andInternational Operations. It also presents theadjustment to reflect net interest revenue on a fullytaxable equivalent basis.

ar

b5

1979 1980 1981 1982 1983 1984

g InternationalQ United States

100 United States Operations:

Net interest revenuebefore provision foruncollectible income

Adjustment of tax-exempt income to aEully taxableequivalent basis

Net interest revenue—fully taxable equivalentbasis before provisionfor uncollectibleincome

Lem Provision foruncollectible income

$488.3 $403.0 $384.3

48.7 47.2 67.7

537.0 450.2 452.0

24.4 5.4 23.7

Net interest revenue-Eully taxable equivalentbasis 512.6 444.8 42

International Operations:

Net interest revenuebefore provision foruncollectible income

Adjustment of tax-exempt income to afullytaxableequivalent basis

Net interest revenue—fullytaxable equivalentbasis before provisionEor uncollectibleincome

Less: Provision foruncollectible income

228.5 223.8 207.7

1.7 2.8

230.2 226.6 207.7

22.5 14.9 14.2

Net interest revenue—fullytaxable equivalentbasis 207.7 211.7 193.5

Consolidated netinterest revenue-fullytaxableequivalent basis $720.3 $656.5 $621.8

028

Compared with 1983

et Interest Revenue from United States Operations

Net interest revenue from United States Operationsimproved $ 67.8 million (15%) compared with 1983.

Revenue from Casco as well as a $ 1.9 billionincrease in average loans and lease financing,including Casco, and improved loan fees of $ 19.9

million (51%), including Casco, were responsible forthe rise. These increases were moderated by a

higher provision for uncollectible income andnarrower spreads.

Casco's net interest revenue for the nine monthssince acquisition, was $33 million or about one halfof the total domestic increase. At year end, Casco's

earning assets amounted to $747 million, includingoutstanding loans and leases of $ 625 million. Realestate loans and commercial and industrial loanseach accounted for approximately one-third, whilepersonal banking amounted to about one-fourth ofCasco's total loan portfolio.

Overall, loan and lease financing volume, whichincreased 27%, was strongest in the areas of realestate, commercial lending and asset-based financing.

Real estate lending continues to report strongwth as its loan volume increased by over 35%.

construction lending was once again a majorason for this improvement, reflecting strong

demand for new loans from existing customers as

well as normal advances to complete projectsoriginated in previous years. The increase alsoreflected the first full year of having SWD as a

subsidiary and from the addition of Casco.

Commercial lending benefited from the generallyimproved economy which brought about increasedborrowings by existing customers as well as newbusiness. Some areas, such as the MassachusettsCorporate Lending function which serves the state'

small and middle sized businesses, also carried out a

more selective and productive marketing effort. Thisfunction reached its goal of doubling its volume in1984.

The asset-based financing function specializes insecured financing techniques such as factoring,receivable and inventory financing and chattelmortgage loans. In 1984, because of their knowledgeand expertise in these types of fitnancing, thisfunction was able to increase its average loanportfolio by over 50%.

Average Loans and Leases

s

S Bitttons

14

12

10

t, c

1979 1980 1981 1982 1983 1984

United States:

g Personal banking

g Asset. basedfinancing

1979 1980 1981 1982 1983 1984

59o 5% 5% 5% 4% 57s

8 7 6 6

Q Real estate 9 9 10 12 13 16

g Commercial lending 39 39 40 40 40 40

g International 39 40 39 37 37 32

29

Cents5 hlllltons

450

1007550

e Qe<s'h P

1t

s

t~,. "!

I -pal iI

s

400

350

300

250

200

150

100

50

1979 1980 1981

~ Principal at Year EndE EPS Effect

1982 1983 1984

Nonperforming Loans and Leases waar. nati. pershtreEIfnt

The increase in loan fees was primarilyattributable to higher commercial loan fees of $7million, commitment fees of $5.2 million and feesfrom BancBoston Mortgage Corporation of $ 1.8million. SWD and Casco added $2.9 million and$ 1.5 million, respectively.

Moderating the positive effects of loan growth andhigher fees was a $ 19 million increase in theprovision for uncollectible income. This rise resultedfrom a combination of factors including an increasein nonaccrual loans and leases to $244 million atDecember 31, 1984 from $ 185 million last year; ahigher average base lending rate during the year;and lower recognition of cash previously receivedand deferred on loans that had been on nonaccrual.

Interest rates, which affect net interest revenue, atthe end of 1984 were approximately the same as atthe end of 1983, although the average base lendingrate rose 126 basis points during 1984. Specifically,the base rate began the year at 11%, where itremained until the end of the first quarter when itincreased 50 basis points. In the second quarter, itrose steadily until it reached a high of 13%, a levelthat was maintained throughout the third quarter.During the fourth quarter, the base rate fell to itsyear end level of 10.75%.

The effect of movements in the base rate areindicated in changes in average rates on earningassets and interest bearing liabilities. During thefirst quarter, the yield on earning assets remainedconstant, but the average cost of funds rose 34 basis

,. points, thus causing narrower spreads that stabilizedin the second quarter. Spreads were furtherconstricted in the third quarter as increases in thecost of funds out-paced those for earning assets. Inthe fourth quarter, spreads increased as the cost offunds dropped faster than yields on earning assets.The average spread for the year decreased to 3.02%from 3.31% for 1983 as the turnabout in the fourthquarter spread was not enough to offset earlierdeclines. Interest rate margin decreased 30 basispoints in 1984, to 4.81% from 5.11%. See page 61for definitions of interest rate spread and margin.

H

30

nterest Revenue from International Operations

et interest revenue from International Operationsdecreased $4 million. This decline was the result ofa $7.6 million increase in the provision foruncollectible income, reflecting higher interest ratesand a $83 million rise in the level of loans andleases on nonaccrual. Net interest revenue beforethe provision for uncollectible income increased $3.6million. Average earning assets declined $406million, primarily because of a $678 million decreasein average interest bearing deposits in other banksreflecting a planned decrease in internationalplacements. This was partially offset by a $235million increase in average loans and leases.

Net interest revenue from operations in Argentinadecreased $ 16.4 million (37%) from 1983 resulting, inpart, from additional governmental regulations whichlimited local currency loan spreads. Furthermore,the increased level of cross-border nonaccrual loansnegatively affected Argentine results by $ 8.6 million.

Brazil's net interest revenue was down $2.6million, or 6%, partly reflecting an increase in theprovision for uncollectible income of $ 1.9 million.As the result of changes in local market conditions,

strong momentum and favorable fundingions taken in 1983 did not continue throughout

Other Latin American operations, on a taxableequivalent basis, recorded an $ 11.4 million (29%)gain in net interest revenue primarily associatedwith the favorable effect in 1984 of the Corporation'sNassau-based funding operations with other regions.

The Corporation's European operations reported a

$ .6 million increase in net interest revenue over1983. Improvements were realized in the UnitedKingdom, primarily due to loan volume, and in theMilan Branch, which concluded its first full year ofoperations. These were moderated by declines inFrance as a result of a decrease in inter-bankactivity, and in Germany as the favorable spreads of1983 were unable to be matched in 1984.

Net interest revenue from the Asia/Pacific regionwas down $ 1.4 million or 6% in 1984. TheCorporation reduced operations in Australia incompliance with governmental restrictions, whichcaused lower loan volume and reduced net interestrevenue. However, these restrictions were lifted inNovember of 1984, and the Corporation's Australianaffiliates are in the process of returning to fulloperations.

Interest Rate Spread

1979 1980 1981 1982 1983 1984

12 United States

II Consolidated

9 International

Interest Rate Margin

1979 1980 1981 1982 1983 1984

9 United States

~ Consolidated~ International

Percent

3.0

2.S

2.0

1.S

1,0

O.S

Percent

Other regions recorded an increase of $4.4 millionin net interest revenue. A major contributor to thisincrease was the growth in volume of Canadianlending operations.

In conjunction with strategic planning goals, theCorporation continues to seek selective expansion innations where our presence has previously beenestablished. In 1984 a branch office was opened inTurkey and locations were added in Chile, Uruguayand Argentina.

1983 Compared with 1982

Net Interest Revenue from United States Operations

Net interest revenue from United States Operationsincreased $ 16.5 million (4%), primarily as a result ofa higher volume of loans, a lower provision foruncollectible income and wider spreads. This wasmoderated by the effects of lower average interestrates in 1983. Average loans and leases increased$ 690 million. The 11% improvement in loan andlease volume was mainly generated in the areas ofreal estate and commercial lending.

Real estate lending showed strong growth with aloan volume increase of over 30%. This expansionwas primarily the result of major increases in theconstruction loan portfolio reflecting activedevelopment of customers in Massachusetts and theregional offices across the country. The Corpora-tion's mortgage banking subsidiaries also played animportant role. Loan volume of MortgageCorporation of the South increased substantially.The acquisition of SAD in 1983, added an averageof more than $60 million to total loans.

Commercial lending volume reflects diversificationin both a wide range of industries and in geographiclocations. The Corporation's offices throughout thenation offer expertise to customers in such fields ashigh technology, communications, entertainment andinsurance. Also, this expertise extends to the abilityto offer customers a variety of financing packages. A9% improvement in 'commercial lending was mainlybecause of expanded marketing efforts and increasedborrowings by existing customers.

Net interest revenue also benefited from a decreaseof $ 18.3 million in the provision for uncollectibleincome. This decline resulted from a lower averagebase lending rate as well as greater recognition ofcash previously received and deferred on loans thathad been on nonaccrual. The level of domesticnonaccrual loans rose slightly in 1983.

~,

Finally, net interest revenue was helped by wispreads. Interest rates remained relatively stablethroughout 1983; however, average interest rateswere significantly lower than in 1982. Specifically,the base lending rate began the year at 11.5%,dropped to 10.5% at the end of February andremained at that level until early August, when itrose to the year-end level of 11%. The average baserate decreased approximately 400 basis pointscompared with 1982. Cost of funds were in the 9%to 10% range throughout 1983, a decline of about275 basis points from the prior year. However,average interest rate spread rose 40 basis points from2.91% in 1982 to 3.31% in 1983 as the decline in theyield on earning assets was exceeded by a greaterreduction in the cost of funds. The lower interestrate environment resulted in a 22 basis point declinein average interest rate margin as the relative valueof free funds declined.

Net Interest Revenue from International Operations

International net interest revenue rose more than9% when comparing 1983 with 1982. This $ 18.2million improvement was derived from nearly allregions where the Corporation conducted businessand reflected an increase in average earning asse$232 million (3%) and an increase in the interestmargin of 17 basis points.

Argentina's net interest revenue declined $5.4million (11%), stemming from restricted volumegrowth and riarrower spreads that affected thebanking industry in that country in general.

Net interest revenue from Brazil improved $9.9million (28%). This increase was attributable to ahigher volume of loan activity and improved spreadsresulting from favorable positions taken in Brazil'smoney markets.

Other Latin American operations, on a taxableequivalent basis, recorded a $5.4 million (16%) gainin net interest revenue. In addition to new aircraftleasing activity in Mexico and the Caribbean,operating conditions in Chile were favorable,resulting in higher earning assets and wider spreads.

In Europe, the increase of $5.4 million (12%) wasthe result of greater loan volume and lower fundingcosts in Germany and United Kingdom.

The Asia/Pacific region experienced a 16% increasefrom $19.6 million in 1982 to $22.7 million in 1983,as the operations in Australia, Taiwan and Koreaturned in favorable results.

h

t

32

ing 1983, new branches were established inand Curacao (Netherlands Antilles) and

additional. locations were added to our existingnetworks in Chile, Panama, Paraguay and Uruguay.Also, a new representative office was opened inBahrain.I!~'p !

4 ~

isa

'rovision for Credit Losses

'.'„and rp9", perce

..61%~~fjr, Corpoa,', losses

~~. ,'year a

increa~„~," howe

!

J,v

The 1984 provision for credit losses was $ 180million, including the $ 100 million special provision,as compared with $54 million in 1983. The increasereflects the higher level of 1984 net charge-offs andthe Corporation's concern, shared with growingsegments of the banking industry, about generalworldwide economic conditions. These charge-offs,together with the additional provision for creditlosses, are in line with the Corporation's aggressivecharge-off policy and conservative approach to thecredit loss reserve.

The consolidated reserve for credit losses as a

percentage of loans and lease financing was 1.66% atDecember 31, 1984, up from 1.14% last year. Thespecial provision for credit losses was allocated toUnited States and International Operations on the

of their respective outstanding loan balances.nited States Operations, the reserve was 1.49%

ar-end 1984, an increase from last year's 1.03%.The International portion of the reserve was 2.08%

for 1984, up from 1.33% a year ago. The changes inthe total provision allocated to United StatesOperations and International Operations also reflectchanges in the amounts of net credit losses. Netcredit losses in the U.S. were $45.3 million comparedwith $22.5 million last year. Internationally, theselosses increased to $34.7 million this year from $21.7million in 1983. The increases in net credit losseswere caused by the sharp deterioration during thefourth quarter of a limited number of loans in boththe domestic and international portfolios.

The Corporation's aggressive charge-off policy isreflected in the relatively high ratios of charge-offs

ecoveries.. Consolidated net credit losses as a

ntage of average loans and lease financing wasin 1984, up from .40% in 1983. Theration's recoveries as compared with creditdecreased to 24%, as compared with 28% a

go, as the rise in credit losses outpaced these in recoveries. Over the last five years,ver, this ratio has approximated 30%.

PrOViSiOn fOr Credit LOSSeS A af Net Credit Lossrs

S Millions

150

100

50

0 Provision for CreditLosses

United SlatesInternational

0 Net Credit LossesUnited StatesInternational

1979 1980 1981 1982 1983 1984

67% 33% 55% 23% 42% 62%33 67 45 77 58 38

73 36 53 26 51 5727 64 47 74 49 43

1979 1980 1981 1982 1983 1984

33

1984 1983 1982

$479.8 million $266.0 million $227.7 million

Other operating income excluding the buildingsale gain and the write down of mortgages held forsale, increased 20% to $318.7 million in 1984. Onthe same basis, other operating income was 31% ofthe total of net interest income and other operatingincome as compared with 29% and 27% for the twoprevious years. The rising percentage is anindication of the importance of fee-generatingactivities as a source of income for the Corporation.

Gain on Sale of Building:On December 31, 1984, the Bank sold its

headquarters building in Boston for $363 million.'This resulted in a gain of $295 million, of which$177 million, or $ 105 million after tax, wasrecognized in 1984's income. The additional amountof $118 million was required to be deferred andamortized over the initial terms of the leaseagreement. For additional details on this transaction,see Financial Statement Footnote 8.

Financial Service Fees:

1984 1983 1982

$161.8 million $125.0 million $ 100.7 million

The Corporation provides a number of servicessuch as: letter of credit and acceptance financing;freight payment processing; payroll preparation andother data processing activities; factoring andmortgage servicing; and maintenance of demanddeposits along with various other services. The feesand commissions earned from these activitiescomprise financial service fees. In the past threeyears, these fees have accounted for approximatelyone-half of total other operating income (notincluding the gain on the building sale in 1984 asmentioned previously).

Domestic increases in 1984 were primarilyattributable to higher demand deposit fees of $7.3million, mortgage servicing fees of $3.5 million,

t

Other Operating Income and Expense

Other important sources of income for theCorporation, in addition to interest-bearing activities,are its wide range of fee-based services and itsglobal participation in financial markets. To remaincompetitive, these services require specializedpersonnel and equipment that generate relatedexpenses.

Other Operating Income:

factoring fees of $3.2 million and letter of creditcommissions of $2.8 million. Internationally, thArgentine branch contributed $6.8 million to theincrease, as a result of a greater demand fordocumentary letters of credit and acceptances, as wellas by offering new services, such as cashmanagement.

Mortgage servicing fees contributed $ 14 million tothe increase in 1983, reQecting the acquisition ofSWD in July of that year. Additionally, domesticincreases in letters of credit, demand deposit andfactoring fees added $ 10.2 million to the 1983improvement.

Trust and Agency Fees:

1984 1983 1982


$7.2 million $9.8 million $14.5 millior

The Corporation is very active in worldwidemoney markets, as both an issuer and a dealer.Income is earned thxough the net gains andcommissions on the sale of securites from our dealerportfolios. Interest rate and related price changes inthe securities markets are primarily responsible forQuctuations which occur. =

P

j

To service a broad range of both private andcorporate customers, the Corporation offers itsexpertise in a variety of activities generating trustand agency fees. These services include managingpersonal trusts and estates, administering pensionand profit-sharing plans, managing endowments,servicing mutual funds, and acting as a securitiestransfer agent or registrar.

The greater value of assets held in 1984 wasresponsible for the higher fees earned from themanagement of personal trusts of $2.9 million andcorporate trusts of $2.1 million. Additionally, the1984 acquisition of Casco contributed $ 1.7 million.Higher fees in both personal trusts, as well as

custody and operational fees, increased the income ol1983.

In 1984, price increases and TEFRA related specialwork performed by the stock transfer departmentaccounted for $2.3 million of the total $5.1 millionimprovement in mutual fund and stock transferservices fees. These accounts increased $3.8 millionin 1983, which resulted from a higher volume ofbusiness.

Trading Account Projts and Commissions:

1984 1983 1982

34

decline in 1984 reflects the upward trend instic interest rates in the first half of the year.

Also, a $5.6 million decline was reported in thetrading account of Brazil, which was caused by boththe absence of revaluation gains that were recordedin 1983, as well as the effects of market declines onthe trading portfolio during 1984.

Domestic interest rates stabilized in 1983, reducingtrading account profits to a level more in line withprevious years. The establishment of the Braziliantrading account, which reported profits of more than$3 million, moderated the decrease in the domesticincome.

Investment Portfolio Gains (Losses):

1984 1983 1982

l $ (.5) million $3.9 million $ (11.2) million

This category consists of pre-tax gains and lossesfrom the sale of securities held in our investmentportfolio.

The net loss in 1984 was mainly the result oflosse's incurred on the sale of U.S. Treasury securitiesbeing greater than the gains recorded on the sale ofequity securities. In 1983, gains were recorded from

le of equity securities and other securities heldrseas offices. These gains were partially offset

oss on the liquidation of the Bank's state andmunicipal securities portfolio.

Other Income:

1984 1983 1982


Other income consists of various fees andP"".; commissions earned on foreign exchange activity,

credit card services and sales of various securities as

., well as income from other sources. For further

."' details see Financial Statement Footnote 14.

In 1984 other income was down $5 million as a

result of a $16 million loss recorded in connection':- with the Corporation's decision to sell approximately"' $ 150 million of its fixed rate mortgages. Also

contributing to the decrease was the absence of1983's $ 12.2 million gains from the sale of

~~ Commodore Corporation warrants and sales of> various securities by venture capital subsidiaries.

P~< These factors were partially offset by higher credit.

'

card and other fees of $ 11.1 million and lower nettranslation/hedge losses of $ 6.3 million.

In 1983, net translation/hedge losses were $6.9million greater than in 1982 and losses relating to

ale of 'mortgages were $4.9 million. Partially

*a, " t

1984 1983 1982


Other operating expense rose 21% in 1984 ascompared with 8% in 1983. Substantial increaseswere reported in all categories with the exception ofemployee benefits. The acquisitions of Casco andSWD were major contributors to these increases.

The Corporation is a service-oriented businesswhich requires a relatively high number ofemployees to perform these services. Thus, it isexpected that salaries and employee benefit costswould be the largest components of total otheroperating expense.

Domestic salaries were up 22% and 14% in 1984and 1983, respectively. These increases reflectadditional staff, primarily from the acquisitions ofCasco and SWD as well as merit and promotionalincreases for existing staff. Salaries for overseasemployees rose 12% in 1984 and declined 3% in1983. The Argentine government policy ofmandating salary increases to keep pace with thatcountry's inflation was primarily responsible for therise in 1984. The decrease in 1983 resulted from theeffect of devaluation in certain Latin Americancountries more than offsetting increases in normalannual compensation.

The total number of employees grew 8% in 1984and 12% in 1983. At year end, total employeeswere:1984 1983 1982

16,000 14,800 13,200

In past years, employee benefit costs havegenerally risen similarly to salaries, as many of thesebenefits are directly related to salary levels or thenumber of employees. However, in 1984, eventhough salaries and the total number of employeeswere up, benefit costs remained at about 1983 levels.This resulted principally from reduced thrift-incentive costs, which are a function of the level ofearnings from normal operations, and revisions tocertain other benefit plans.

Equipment expense was higher in 1984 by $14.8million. The domestic increase included depreciationexpense of $5.1 million and repairs and maintenance

rs

offsetting these declines, was the gain on the sale ofCommodore Corporation warrants and venture capitalsecurities of $ 12.2 million.

Other Operating Expense:

Geographic Distribution of Average Assets

4% Argentina

3% Brazil

6% Other Latin America

13% Europe

8% Asia/Pacific

4% Other Regions

62% United States

of $ 1 million, as well as $2.9 million and $ 1.5million from the additions of Casco and SWD,respectively.

Other non-interest expenses included a special $5million contribution to the Corporation's charitablefoundation, as well as charges of about $5 millionassociated with current strategic planning initiativesFootnote 17 to the Financial Statements furtherdetails other non-interest expenses which have risenwith the Corporation's need to support expandedoperations, and with generally increased prices forgoods and services.

Income Taxes

Provision for income Taxes:

1984 1983 1982


The effective tax rate in 1984 was 34%, down from39% in 1983 and up from 33% in 1982. Thedecreased effective tax rate in 1984 was the result ofapplying the lower capital gains tax rate to the gainon the sale of the Corporation's headquartersbuilding. The higher effective tax rate in 1983reQected a reduction in the ratio of tax-exempt totaxable income. The Corporation's decision earl1983 to substantially reduce its holdings of tax-exempt assets was the reason for the reduction intax-exempt income in that year. Financial StatementFootnote 11 contains additional information withrespect to the Corporation's income taxes.

Financial Condition

LiquidityIt is the Corporation's objective to meet at a

reasonable cost its cash needs, which arise primarilyfrom new or additional loans and leases, thematuring of liabilities used to fund assets and thewithdrawal of deposits. Liquidity managementrequires the ability to obtain funds for various terms,

As the Geographic Distribution of Average Assetschart indicates, United States Operations accountedfor 62% of total assets while International's asset bastis diversified to many parts of the world. It is alsothe Corporation's objective to fund assets to themaximum extent possible with liabilities in the samecurrency so as to reduce transfer risk exposure.

The Corporation's need for funds has increased, a.is depicted in the Average Total Assets Distributionchart, at a five year annual compound growth rate o."

10%. This chart also shows that the greatest usfunds was for loans„which grew 19% from 198

36

i

s

a c,'

Thin thabili

;4~'~ oblig

k

presmarkSing

d

more than doubled in the past six years.cative of the liquidity of the loan portfolio, theentage of total loans maturing in one year or

less was about 60% at December 31, 1984.Funds obtained to support asset growth are

detailed in the Average Total Sources of Funds chart.This chart indicates interest bearing funds, whichrose 10% in 1984 from 1983, to be the major source.Interest bearing deposits, with a five year compoundgrowth rate of 12%, have remained a stable source offunds. Money market deposit accounts (First RateAccounts) have been an important source of funds,totalling $2.2 billion and $ 1.2 billion at the end of1984 and 1983, respectively. These funds are used as

a substitute for certificates of deposits and areconsidered more stable. In order to secure funds atthe lowest possible cost, the Corporation maintainsready access to both Domestic and Internationalmarkets.

e Corporation possesses an excellent reputatione worldwide money markets, thus enhancing itsty to obtain funds. The Corporation continues

an active dealer in bank and governmentations and an issuer of repurchase agreements,dollar notes, commercial paper and other moneyet instruments. A worldwide branch network

s the Corporation a 24-hour a day tradingence in the various international fundingets such as Boston, New York, London,

apore and Hong Kong. Should it be necessaryto a d funds rapidly, sufficient residual capacityremains in these markets to meet funding needs.

Average Total Assets DistributionS Billions

22

20

18

16

14

12

10

1979 1980 1981 1982 1983 1984

u Loans and LeaseFinancing

1979 1980 1981 1982 1983 1984

51% 52% 57% 58% 59% 63%

~ Acceptances

~ Other Assets

4 4 4 $ 6 5

13 11 11 10 10 12

Average Total Sources of FundsS 8il lions

22

20

18

16

~ Interest BearingDeposits in Other Banks 18 18 15 17 16 12

~ Investment Securitiesand Other Earning Assets 14 1S 13 10 9 . 8

$g)

v+"e "s

~Ej ',

Managing Interest Rate Risk

Interest rates Quctuated more in 1984 than in 1983but not with the volatility that characterized the1980-1982 period. Thus, as it has been in past, years,Qexibility in the management of interest rate riskwas very important to the profitability of theCorporation.

Interest rate risk arises when an asset matures orwhen its rate of interest changes in a time framedifferent from that of the supporting liability. Forthe most part, the Corporation does not match eachof its assets with specific liabilities, however, theaggregate of all its assets and liabilities is used todetermine overall interest rate risk within severalspecific time frames. This interest rate risk isreferred to as the "interest sensitivity gap", and isessentially the difference between the amount of

terest-sensitive assets and interest-sensitiveilities maturing during a specific time frame. A

ositive"'gap results when the amount of interest-

sJt* s

12

10

1979 1980 1981 1982 1983 1984

~ Interest BearingDeposits

1979 1980 1981 1982 1983 1984

38% 37% 38% 39% 44% 45%

~ Acceptances andOther Liabilities

~ Stockholders'quity7 7 7 8 9 8

$ 4 5 5 $ 5

~ Money Market Fundsand Other Borrowings 32 36 3S 35 29 28

~ Non.interest BearingDeposits 18 16 15 13 13 14

37

Domestic Spread and Base Rate p«acterly Averages

Percent

14

12

10

Dec. 82

g Spread

P Base Rate

Dec. 83 Dec. 84

Average Domestic Gap$ h1it lions

2400

2000

1600

1200

800

400

-400

Dec. 82

~ 30 Day8 90Day8 1Year

Dec. 83 Dec. 84

Note: Interest sensitivity gap analysis has limitations and shouldtherefore be used with great caution. Gap analysis is only one of severalfactors considered when assessing lhe effec ofinlets! rale changes onnel interest revenue. Specifically, changes in interest rates do not affecall.categories of assets and liabilities equally or simultaneously.Furthermore, the gap position al any one specific lime can be quickly andsignificantly changed by management as conditions dictate. Also, thereplacement of maturing am'ts and liabilities can have opposite affect onnet interest revenue and gap position; for example, while the presenttrend of interest rates may be downward, lhe current level may still be

high. lfmedium-lerm debt that was originally issued during a period ofiota rates is renewed al a higher level, nel interest revenue willbe

adversely affecte despite!he fact that the gap position may be negative.

sensitive assets exceeds that of interest-sensitiveliabilities; a "negative" gap results when the amouof interest-sensitive liabilities exceeds that of interes-sensitive assets.

Management uses gap analysis to monitor thepotential effect of rate changes on net interestrevenue. While the Corporation monitors a numberof gap positions in managing interest rate risk,particular attention is paid to the cumulative ninetyday gap. Ninety days is believed to be the optimalperiod to exercise control of interest rate risk.Ninety days is long enough to allow an orderedrestructuring of asset and liabilitypositions and shortenough to allow those actions to positively affectcurrent performance in a changing rate environment.

The Corporation has sought to maintain Qexibilityin its gap positions in order to take advantage ofboth short-term and long-term changes in marketrates. This Qexibility has also been accomplished, inpart, by maintaining short-term maturities in a

portion of the Corporation's assets and liabilities,including the relatively short average maturity of itsfixed-rate U.S. Treasury securities, currently less thanone year.

The accompanying charts, which plot the domesticinterest rate spread and the average base lendingrate, and the domestic average gap positions, shothe relationship between interest rates and the gappositions taken. at the Corporation's Bostonheadquarters in anticipation of changes in rates forthe last two years.

At the end of 1983, the cumulative ninety day gapwas in a small positive position, thus allowing quickmovement in either direction depending on marketindications. In the first quarter of 1984, interestrates began to rise and, accordingly, the positive gapposition was increased. This move was accomplishedby liquidating portions of the fixed-rate U.S.Government securities portfolio. The averageinterest rate spread narrowed as the cost of fundsrose while the average base lending rate wasrelatively Qat.

During the second and third quarters, the averagegap was moved into a more positive position asinterest rates continued to increase. Spreadsdeclined only slightly as increases in the base ratekept pace with the higher cost of funds.

In the early part of the fourth quarter, interestrates began to decline and movement was made tobring the gap into a smaller positive position. Thisreversal in the cumulative ninety day gap positionwillcontinue during the beginning of 198S, as ion

, as there are no indications that domestic interest~ 'ates willbegin to rise again;

ble presents the interest sensitivitynalysis at year-end for the Corporation's

operations located at its Boston headquarters and forits Massachusetts banking affiliates. The gappositions of the Corporation's overseas operations are

monitored for compliance with overall corporateobjectives and policies that limit the size ofinternational gap positions. At December 31, 1984,the overseas dollar position had a negative ninetyday cumulative gap of about $ 170 million.

Interest Sensitivity Gap Analysis at December 31, 1984Interest Srnsitivity Period(1)

fin millions) One Day2-30Days

31-90Days

91-365Days

OverOne Year Total

Earning Assets:

Loans and lease financingU.S. Treasury securities

Allother

Total earning assets

$5,081

463

5,544

$ 658 $ 853

6 366

127 '8 8

$1,487

1,614 702 ),227

$ 1,669 $ 9,748

68 440

139 775

1,876 10,963

Interest Bearing Liabilities:

Federal funds and repurchase agreements

Certificates of deposit, commercial paper, and notes payable

A'llother

Tot'al interest bearing liabilities

1,099

1

20

1,120

447

1,674

2,603

4,724

138

459

283

880

162

461

667

428

814

1,242

1,728

2,724

4,181

8,633

Non-interest bearing funds

est sensitivity gap

ulative interest sensitivity gap

503

$3,921 (3,110)

$ 811

(178) 560

$ 633 $ 1,193

1,827

(1,193)

$ 0

2,330

$ 0

C

(1}"«For the analysis, deposits have been includedafter deducting applicable reserve requirements.Allocations to specific interest sensitivity periodsare based primarily on contractual maturities.The most notable exception is non-interestbearing funds, primarily demand deposits thatcan be withdrawn without notice. These havebeen allocated on the following basis: the

estimated core level of non-interest bearing fundshas been allocated to the over one year period; thedifference between the actual non-interest bearingfunds at December 31, 1984, and the core level hasbeen allocated to the one day interest sensitivityperiod.

39

Stockholders'quity w r~r eat

1979 1980 1981 1982 1983 1984

8 Preferred Stock

El Retained Earnings0 Common Stock, Surpius and Other

santlion'200

1000

800

600

400

200

Capital Resources

Strong capitalization has always been a primaryobjective of management and the Corporation haslong been a leader among its peers in comparisonsof capital ratios. During 1983, the bank regulatoryagencies established a 5% minimum capitalizationguideline and late in 1984, they proposed newguidelines which when issued will raise theminimum primary capital ratio to 5.5% and clarifythe components of this ratio. Under current rules,the Corporation's primary capital ratio was 6.87% atthe end of 1984 and 5.85% at the end of 1983; andfor the Bank it was 6.13% and 5.03% at the end of1984 and 1983, respectively.

In February 1984 the Corporation issued $ 100million of floating-rate subordinated "equitycommitment" notes due in 1996. These notes,because of a commitment to issue an equal amountof equity over the life of the notes, are consideredas primary capital for regulatory capital adequacypurposes. The Corporation expects to meet thiscommitment entirely through its dividendreinvestment and employee.beneflt plans. AtDecember 31, the amount of notes considered asprimary capital was $90 million, the difference beingthe common stock issued since February 1984.

Other transactions in 1984 that enhanced thecapital adequacy ratio were the issuance of preferrestock, the sale of the Bank's headquarters buildingand the $ 100 million special addition to the reservefor possible credit losses. The preferred stock, whichaccounts for 4% of total stockholders'quity, wasissued in March for- the acquisition of Casco andadded $52 million to stockholders'quity. Also, thebuilding sale together with the increase in thereserve for credit losses raised primary capital by$ 158 million.

The Corporation's strong capital base, which isdepicted in the Stockholders'quity chart, wasprimarily increased through the retention ofearnings: In 1984 the percentage of retainedearnings was 70% as compared with 71% in 1983.Another measure of capital strength is leverage, totalassets to stockholders'quity. At December 31, 1984,this ratio was 18.62, an improvement from 19.40 at

40

d 1983. This decrease is consistent withgement's goal of growth without relying on

ever-increasing leverage. The Corporation's ability to

support asset growth through earnings is alsoreflected in the internal growth rate, or return oncommon equity times the percentage of earningsretained, which was 10.63% in 1984 and 10.21% in1983.

Total return to common stockholders grew overthe past Bve years at an annual compound rate of26.58%. This return is the sum of a 10.82% growthrate in common dividends declared plus a 15.76%

appreciation in the market price of common stock.The Corporation's dividend reinvestment and

'ommon stock purchase plan continued to contribute'o the growth of its capital base. In 1984, proceedswere approximately 24% of common dividends paid,up from 18% last year. This plan not only providesa source of capital for the Corporation but it is also

an economical and convenient method forstockholders to increase their investment in theCorporation.

Shares reissued from treasury in 1984 added $4.4

million to the Corporation's capital, while in 1983

th contributed $9 million. These shares wereased in 1982, at an average price ofximately $23 while the average reissued price

approximated $34 in 1984 and $37 in 1983.

Adversely affecting the capital base was the effectof exchange-rate fluctuations on the net assets of

'ertain foreign units. The cumulative effect ofranslation adjustments reduced capital by $6.3

million at December 31, 1984, of which $2.1 millionccurred in 1984. These fluctuations are oftenemporary, and are excluded from the incometatement until realized.

Leverage Year-E>id Assails to Eqully

*

1979 1980 1981 1982 1983 1984

20

12

ffects of Inflation and Changing Prices

The discussion of the impact of inflation and

hanging prices on the Corporation's performance,nd the information required by Statement ofinancial Accounting Standards No. 33, Financial

Reporting and Changing Prices, is presented onages 80 and 81 of this report.

HANKQF BQSTQN IRPQRATIQN.100 FFDERAL STREET BOSTON . MASSACHUSETTS 02110

Report of Management

The accompanying financial statements of Bank of Boston Corporation have been prepared by manage-ment, which is responsible for their integrity. The statements have been prepared in conformity withgenerally accepted accounting principles appropriate in the circumstances, and necessarily include someamounts that are based on management's judgment.

Bank of Boston Corporation maintains a system of internal accounting control designed to providereasonable assurance that assets are safeguarded against loss from unauthorized use; that transactions areexecuted in accordance with management's authorizations; and that the financial records are adequate andreliable for the preparation of financial statements. The concept of reasonable assurance is based on therecognition that the cost of a system of internal control must not exceed the related benefits. The systemin use is supported by written policies and procedures that are communicated to the Corporation'soperating units worldwide. Adherence to these policies and procedures is monitored by management andevaluated by a coordinated audit effort of the internal audit staff and independent certified publicaccountants.

The Audit Committee of the Board of Directors, composed solely of outside directors, meets periodically."with the Corporation's management, internal auditors and independent certified public accountants toreview matters relating to the quality of financial reporting and internal accounting control and thenature, extent and results of the audit effort. The independent certified public accountants and internalauditors have direct access to the Audit Committee, with or without management present.

The accompanying financial statements have been examined by Coopers & Lybrand, independent certified"public accountants. Their examinations include a study and evaluation of the Corporation's system of"internal accounting control as required by generally accepted auditing standards. Under these standards,

the purpose of such evaluations is to establish a basis for reliance on the system of internal accountingcontrol in determining the nature, timing and extent of other auditing procedures required to supporttheir opinion on the financial statements.

WILLIAML. BROWNChairman of the Board

IRA STEPANIANPresident

ALANL. MCKINNONExecutive Vice President

Comptroller and Treasurer

F ial Statements:

t of Independent Certified Public AccountantsBank of Boston Corporation and Subsidiaries:

Consolidated Balance SheetConsolidated Statement of IncomeConsolidated Statement of Changes in

Stockholders'quityConsolidated Statement of Changes in

Financial PositionBank of Boston Corporation:

Parent Company Balance SheetParent Company Statement of IncomeParent Company Statement of Changes in

Stockholders'quityParent Company Statement of Changes in

Financial PositionNotes to Financial Statements

Consolidated Statistical Information:Average Balances and Interest Rates and

Interest Differential:ConsolidatedUnited States OperationsInternational Operations

Change in Net Interest Revenue —Volume andRate Analysis:

1984 as compared with 19831983 as compared with 1982

raphic Segment Informationational Outstandings

oans and Lease FinancingNonperforming Loans and Leases:

Provision for Uncollectible Accrued InterestReceivable and Lease Income Receivable

Renegotiated Loans

Reserve for Possible Credit Losses:

Allocation of Reserve for PossibleCredit Losses

Analysis of Reserve for PossibleCredit Losses

Investment Securities

DepositsShort-Term BorrowingsSummary of Selected Financial Data Adjusted

for the Effects of Changing Prices

Trust Data

ummary of Quarterly Consolidated FinancialInformation and Common Stock Data

Page

4445

46

47

4849

50

51

616263

6465

66

68

73

74

75

75

76

77

78

78

79

80

82

Coopers8 Lybrand

cer trfied pubrc accountants

The Board of Directors and StockholdersBank of Boston Corporation:

Boston, MassachusettsJanuary 21, 1985

We have examined the consolidated and parentcompany balance sheets of Bank of BostonCorporation as of December 31, 1984 and 1983, andthe related consolidated and parent companystatements of income, changes in stockholders'quityand changes in financial position for each of thethree years in the period ended December 31, 1984.Our examinations were made in accordance withgenerally accepted auditing standards and,accordingly, included such tests of the accountingrecords and such other auditing procedures as weconsidered necessary in the circumstances.

In our opinion, the financial statements referred toabove present fairly the consolidated and parentcompany financial position of Bank of BostonCorporation as of December 31, 1984 and 1983, andthe consolidated and parent company results ofoperations and changes in consolidated and parentcompany financial position for each of the threeyears in the period ended December 31, 1984, inconformity with generally accepted accountingprinciples applied on a consistent basis.

43

BANK OF BOSTON CORPORATION

Consolidated Balance Sheet

(in thousands, except share amounts)

December 31

1984

Assets Cash and due from banks (Note 2)Interest bearing deposits in other banksFederal funds sold and securities purchased under

agreements to resellTrading account securities

(market value of $222,000 in 1984 and $ 191,800 in 1983)Investment securities (Note 3):

U.S. TreasuryOther

$ 1,193,2572,131,243

495+53

221,565

506,983459+35

$ 1,47,2,456,064

115,425

190,073

755,529442,741

Total investment securities(market value of $ 1,011,000 in 1984 and $ 1,240,000 in 1983)

Loans and lease financing (net of unearned income of $ 199,030 in1984 and $217,960 in 1983) (Notes 4 and 5)

Reserve for possible credit losses (Note 6)14,588,515

(242384)11,895,923

(135,842)

966,818 1,198,270

Premises and equipment (Note 8)Due from customers on acceptancesAccrued interest receivable (Note 5)Other assets (Note 9)

14@46,131318,201

1,035,612289,039481,594

11,760,081325,155

1,305,884275,265432,798

Total Assets $22,078,819 $ 19,538382

Liabilities andStockholders'quity

Deposits:Domestic ofices:

Non-interest bearingInterest bearing

Overseas offices:Non-interest bearingInterest bearing

Total depositsFunds borrowed (Note 10)Acceptances outstandingAccrued and deferred income taxes (Note 11)Accrued expenses and other liabilities {Note 8)Notes payable (Note 12)

Total Liabilities

Commitments and contingencies (Notes 19, 20 and 21)

Stockholders'quity (Notes 7, 13, 16 and 21):

Preferred stock without par value:Authorized —10,000,000 sharesIssued and outstanding:

Series A—1,045,712 shares

Common stock, par value $4.50:Authorized —40,000,000 sharesIssued —19,440,807 shares

SurplusRetained earningsTreasury stock, at cost —154,124 shares

in 1984; S26,938 shares in 1983Cumulative translation adjustments

Total Stockholders'quity

$ 33585065,853,753

3688675,671,440

15,258,2663,415,7661,044,931

110@83639,673424350

20,893975

52,286

87.,484201@23854,208

(3+10)(6+47)

1,185,444

$ 2,488,1413,461,659

12,380,9243,981,3141,307,032

113,645448,115300„000

18,531,030

87,484196,958739 085

(11,965{4,21C

1,00

44

Total Liabilities and Stockholders'quity

The accompanying notes are an integral part of these jinanciat statements.

$22,078+19 $19,5


Consolidated Statement-of income

1984


1983 1982

Interest income: Loans and lease financing, including fees (Note 5)

Investment securities

Trading account securities

Federal funds sold and securitiespurchased under agreements to resell

Deposits with banks

$2,253,128

136,421

78,985

106,086

347,804

$ 1,757,446

145,877

67,364

73,736

288,841

$ 1,857,692

175,733

32,494

48,145

392,267

Total interest income 2,922,424 2,333,264 2,506,331

Interest expense: Deposits of domestic offices

Deposits of overseas offices

Funds borrowed

Notes payable

450,917

1,025,401

729,964

46,210

284,949

747,824

660,280

33,760

369,805

935,756

614,351

32,294

Total interest expense 2,252,492 1,726,813 1,952,206

Net interest revenue

Provision for credit losses (Note 6)

669,932

180,000

606,451

54,000

554,125

48,000

Other operatingme:

Net interest revenue after'provision for credit losses

Financial service fees

Trust and agency fees

Trading account profits and commissions

Investment portfolio gains (losses) (Note 11)

Gain on sale of headquarters building (Note 8)

Other income (Note 14)

Total other operating income

161,802

71.317

/,240

(497)

177,128

62,812

125,011

59,470

9,806

3,891

67,823

479,802 266,001

489,932 552,451 506,125

100,743

51,898

14,478

(11,245)

71,812

227,686

Other operatingexpense:

Salaries

Employee benefits (Note 15)

Occupancy expense

Equipment expense

Other expense (Note 17)

309,878

74,690

54,038

57,009

.226,665

258,772

70,215

42,930

42,240

181,054

236,632

66,188

40307

37,544

168,518

Total other operating expense 722,280 595,211 549,189


Provision for income taxes (Note 11)

247,454

83,400

223,241

87,505

184,622

60,221

Net Income $ 164,054 $ 135,736 "$ 124,401

Preferred dividends

Net income applicable to common stock

Per common, share:.

Net income

Dividends declared

Average common shares outstanding'he

accompanying notes are an integral part of these Pnancial statements.

$ 4@50

$ 159,'704 $ 135,736 $ 124,401

$ 8.35 $ 7.40 $ 6.67

$ 2-34 $ 2.17 $ 1.97

" 19,117,167 18349,634 18,660,785

45

BANK OF BOSTON CORPORAT1ON

Consolidated and Parent Company Statement of Changes in Stockholders'quity

(in thousands, except share amounts)

Three Years Ended December 31, 1984

Treasury Cumulative,Preferred Common Retained Stock, Translation

Stock Stock Surplus Earnings at cost Adjustments Total

Balance, December 31, 1981

Adjustment at January 1, 1982 forforeign currency translation (netof tax benefit of$ 188)

Common shares issued inconnection with:Stock split—6,377,329 shares

Dividend reinvestment andstock purchase plan—261,009 shares

Net income —1982

Dividends declared

Treasury stock purchased—1,200,000 shares

Translation adjustments, net of tax

6377 (6+77)

1,245 5,846

124,401

(36,675)

$79,467 $185,407 5555,65S

5(27,715)

$ 820,532

$ (340) (340)

7,091

124,401

(36,675)

(27,715)

(3,220) (3,220)

Balance, December 31, 1982

'ommon shares issued inconnection with:Acquisitions—501,288 shares

Dividend reinvestment andstock purchase plan—191,380 shares

Employee benefit plans—68,175 shares

„Net income —1983

Dividends declared


6,621 11,739 18,360

395 4,402 2,422

1,059

135,736

(40,035)

1589 2,

135,736

(40,035)

(650) (650)

87,089 184,876 643,384 (27,715) (3,560) 884,074

'alance,

December 31, 1983

Preferred shares issued inconnection with acquisition—1,045,712 shares

Common shares issued inconnection with:Dividend reinvestment and

stock purchase plan—292,829 shares

Employee benefit plans—79,985 shares

Net income —1984

Dividends declared:

Preferred stock

Common stock


$52,286

3+39 6,640

1,026

164,054

1,815

(4,131)

(44400)

87,484 196,958 739,085 (11,965) (4,210) 1,007+52

52,286

9,979

2,841

164,054

(4,131)

(44,800)

(2,137) (2,137)

Balance, December 31, 1984 $52,286 $87,484 $201823 $854,208 $ (3810) $ (6347) $1,185,444

Thc accompanying noles are an integral part of these tinancial slatemcnls.


Consolidated Statement of Changes in Financial Position

isa nds)


1984 1983 1982

Funds wereprovided from:

Net incomeNon-cash charges (credits) included in net income:

Provision for credit lossesDepreciation and amortizationDeferred income taxes

$ 164,054

180,00040,293

(20,835)

54,00032,29015,808

48,00024,095(8,762)

$ 135,736 $ 124,401

s(wh

7

Funds provided from operationsIncrease in:

DepositsFunds borrowedAcceptances outstandingAccrued income taxesAccrued expenses and other liabilitiesNotes payable

Decrease in:Cash and due from banksInterest bearing deposits in other banksFederal funds sold and securities purchased

under agreements to resellInvestment and trading account securitiesDue from customers on acceptancesAccrued interest receivable

Proceeds from sale of headquarters building, net ofgain included in pretax income

Issuance of stock:PreferredCommon

Treasury stock reissued

363,512

2,877+42

17,57368,700

124,350

324,821

200,924270,272

185,872

52,286

12,820

237,834

706,42820,187

393,144

21,263500

637,187

69176,367

27,226

3,43224,795

187,734

654,588538,908205,730

7,121

151,444

10,7493,830

7,091

$4,498,472 $2,248,432 $ 1,767,195

Funds wereused for:

'0

Dividends declared:Preferred stockCommon stock

Increase in:Cash and due from banksInterest bearing deposits in other banksFederal funds sold and securities purchased under

agreements to resellLoans and lease financingPremises and equipment, excluding sale of

headquarters buildingDue from customers on acceptancesAccrued interest receivableOther assets

Decrease in:Funds borrowedAcceptances outstandingAccrued income taxesAccrued expenses and other liabilitiesNotes payable

Treasury stock purchasedTranslation adjustments

$ 4,13144,800

313,890

$ 40,035 $ 36,675

350,933124,372

379,9282,766,050 1,224,243 1,204,601

90,452

13,77455,667

85,974395,424

141539

57,720204,493

17,73787,560

565,548262,095

2,137

9,6342,262

50027,715

650 3,560

$4398,472 $2,248,432 $1,767,195

The accompanying notes are an integral part of these financial statements.

47


Parent Company Balance Sheet

fin thousands, exec t share amounts)

December 31

1984

Assets Cash and due from banksU.S. Treasury securities (market value of $ 187,400 in

1984 and $493,300 in 1983)Loans (net of reserve for possible credit losses of $2,000 in

1984 and in 1983) (Note 6)Advances to subsidiaries:

Bank subsidiariesNonbank subsidiaries

Investments in subsidiaries (Note 7):Bank subsidiariesNonbank subsidiaries

Accrued interest and dividends receivable:SubsidiariesOther

Prepaid and refundable income taxes

Other assets

$ 1,009

185,163

171,700

966,196

1,110,566 "

191,076

3,7957,1307,8219,077

5

493,025

170,268

15,680776,672

875,251163,914

3,98713,3186,7337,493

Total Assets $2,653,533 $2,526,531

Uabilitles andStockholders'quity

Funds borrowedDividends payableAccrued interest payable:

SubsidiariesOther

Other liabilitiesAdvance from nonbank subsidiaryNotes payable

$1,047,03711472

8,15911,259

6290,000

30

$ 1,198,49510,970

8,15910,296

1,2599

Total Liabilities 1,468,089 1,519,179

Commitments and contingencies (Notes 19 and 21)

Stockholders'quity (Notes 7, 13, 16 and 21):

Preferred stock. without par value:Authorized —10,000,000 sharesIssued and outstanding:

Series A—1,045,712 shares

Common stock, par value $4.50:Authorized—40,000,000 sharesIssued —19,440,807 shares

SurplusRetained earningsTreasury stock, at cost —154,124 shares in 1984;

526,938 shares in 1983

Cumulative translation adjustments

52,286

87,484201323854,208

(3410)(6@47)

87,484196,958739,085

(11,965)(4,210)

Total Stockholders'quity

Total Liabilities and Stockholders'quity

The accompanying notes are an integral part of these financial statements.

1,185,444 1,007,352

$2,653+33 $2,526,S31

048


Parent Company Statement of Income

sands) 1984


1983 ii 1982

5

pic

ll,

Operating income: Dividends:Bank subsidiaries

Nonbank subsidiaries

Interest income:

U.S. Treasury securities

Loans

Advances to subsidiaries

Investment portfolio losses

Total operating income

$ 12,812

4,668

27,289

22,846

90,079

(1,141)

156,553

$ 38,856

4,650

5,228

18,510

67,065

(78)

134,231

$ 34,584

6,500

1,501

40,469

93,818

176,872

1a

Operating expense: Interest expense:

Funds borrowed

Advance from subsidiary

Notes payable

Reversal of reserve for possible creditlosses (Note 6)

Other expense

Total operating expense

Income before income taxes and equityin undistributed net income of substdiaries

Provision (bene6t) for income taxes

Income before equity in undistributednet income of subsidiaries

Equity in undistributednet income of subsidiaries

104,622

13,954

29,349

1,096

149,021

7832

(4,478)

12,010

152,044

60,005

13,916

19,184

(1,000)

378

92,483

41,748

(624)

42,372

93,364

84,061

8,311

23,579

(3,130)

209

113,030

63,842

11590

52,252

72,149

Net Income

The accompanying notes are an integral part of these jinanciat statements.

$164,054 $ 135,736 $ 124,401

qpgkp

~C'>4~

49


Parent Company Statement of Changes in Financial Position

(in thousands) 1984


1983

Funds wereprovided from:

Net incomeLess equity in undistributed net income of subsidiaries

Funds provided from operationsIncrease in:

Funds borrowedDividends payableAccrued interest payableAdvance from nonbank subsidiaryNotes payable

Decrease in:Cash and due from banksInvestment securitiesLoansAccrued interest and dividends receivableOther assets

Issuance of stock:PreferredCommon

Treasury stock reissuedReduction of investment in subsidiaries

$164,054

152,044

12,010

602

963

100,000

307,862

6@80

52,286

12,820

2.137

$ 135,736

93,364

42,372

598,627

1,349

927

2,163

3,432

24,795

650

$12,72,149

52,252

467

3,325

90,000

22,258

1S5,622

1,727

401

7,091

3,560

$495,060 $674,315 $336,703

Funds wereused for.

Dividends declared:Preferred stockCommon stock

Increase in:Cash and due from banksInvestment securitiesLoansAdvances to subsidiariesAccrued interest and dividends receivablePrepaid and refundable income taxes

Other assets

Additional investment in subsidiariesDecrease in:

Funds borrowedAccrued and deferred income taxes

Other liabilitiesNotes payable

Treasury stock purchasedTranslation adjustments

$ 4,131

44,800

819

1,432

173,844

1,088

1+84112+70

151,458

1,197

2,137

478,294

15,238

86,575

1,396

6,733

3,125

39,905

1,640

49,534

4,60C

2,214150

.. 650

96,554

12,5? s

3,90:100,00(

27 711

3,56(

$ 40,035 $ 36,675

$495,060 $674,315 $336,70.'he

accompanying notes are an integrai part of these fnanciat statements.

t s

50


Notes to Financial Statements

oun ting Policies

financial reporting and accounting policies ofBank of Boston Corporation (the "Corporation" )conform to generally accepted accounting principles.The following is a summary of the significantaccounting policies.

Basis of Presentation. The consolidated financialstatements include the accounts of the Corporationand its subsidiaries. All material intercompanytransactions have been eliminated. The FirstNational Bank of Boston (the "Bank") is theprincipal subsidiary and currently representsapproximately 80% of consolidated assets and 75% ofconsolidated net income.

Investments in 20% to 50%-owned companies("affiliates") are recorded using the equity method ofaccounting. The Corporation's equity interest intheir earnings, which in the aggregate is notsignificant, is included in other income. In theparent company financial statements, investments insubsidiaries are also recorded using the equitymethod of accounting.

The excess of cost over the assigned value of nets acquired is included in other assetss being amortized on a straight-line basisperiods ranging from eight to forty years.

The Corporation recognizes income and expensesusing the accrual method of accounting, except forcertain fees and other minor sources of incomewhich are recorded as received. These exceptions donot have a material effect on results of operations.

International Operations. On January 1, 1982, theCorporation began accounting for the translation offinancial statements of its foreign operations inaccordance with Statement of Financial AccountingStandards No. 52. This statement requires adetermination of the functional currency of eachforeign unit (generally the currency of the primaryeconomic environment in which the unit operates).For those foreign units in which the functionalcurrency is not the U.S. dollar, the assets andliabilities are translated into U.S. dollars at year-endexchange rates while income and expenses aretranslated using average rates. The resulting

translation adjustment and any related hedge gainsand losses are recorded, net of tax, as a separatecomponent of stockholders'quity.For those foreign units operating in a highlyinflationary economy, the functional currency isconsidered to be the U.S. dollar. Their financialstatements are translated into U.S. dollars using year-end exchange rates for monetary assets andliabilities, exchange rates in effect on the date ofacquisition for property and equipment and certaininvestments, and average exchange rates for incomeand expenses. The resulting translation adjustmentsand related hedge gains and losses for these unitsare recorded in the income statement as a

component of foreign exchange gains and losses.

The Corporation hedges a significant portion of itsexposure to translation gains and losses in overseasbranches and foreign subsidiaries through thepurchase of forward exchange contracts and throughinvestments in fixed assets and certain securities.

The Corporation values its foreign exchangepositions monthly. Such valuation includes pricingall spot and forward positions at market rates on thedate of valuation. Net foreign exchange gains orlosses are included in other income as presented inNote 14.

Securities. Investment securities are stated at costadjusted for amortization of premiums and accretionof discounts, with the exception of marketable equitysecurities which are valued at the lower of aggregatecost or market value. Gains or losses on sales ofinvestment securities are generally computed on aspecific identified cost basis.

Trading account securities are valued at the lower ofcost or market value. Unrealized appreciation onsecurities which have been written down is notrecognized. Gains or losses on the sale of tradingaccount securities and adjustments to the lower ofcost or market value are included in other operatingincome.

51


Notes to Financial Statements, continued

Loans and Lease Financing. Loan principaloutstanding is stated net of unearned income.Mortgage loans held for sale are carried at the lowerof aggregate cost or market value.

The Corporation accrues interest income on loansand leases at contractual interest rates. However, theCorporation maintains a reserve for uncollectibleaccrued interest receivable on certain loans as wellas a reserve for uncollectible lease income on certainlease payments receivable. The Corporation providesfully for loan interest and lease income receivablewhen any portion of the principal or interest is

ninety days past due. In some cases, where concernexists as to the ultimate collection of principal oz.

interest, a provision is made with respect to theinterest accrued or lease income even thoughpayments are less than ninety days past due. Theseprovisions are deducted from interest income, whilethe reserve is deducted from the related receivablebalance. Except for loans which have been placedon nonaccrual as a result of foreign exchangeavailability problems, interest payments received onnonaccrual loans and leases are not recognized inincome before the credit becomes current as to bothprincipal and interest. Interest on loans which areon nonaccrual as a result of foreign exchangeavailability problems is recognized in income as cash

is received.

Reserve for Possible Credit Losses and Provisionfor Credit Losses. The reserve for possible creditlosses is available for future charge-offs of extensionsof credit. The reserve is increased by the provisionfor credit losses and recoveries on items previouslycharged off. The reserve is decreased as loans andlease Gnancing receivables are charged off. Thecharge-off, in whole or in part, occurs once a

probability of loss has been established, withconsideration given to such factors as the customer'financial condition, underlying collateral andguarantees.

Securities and real estate acquired in connection withtroubled debt restructurings are recorded at thelower of the book value of the loan or the fair valueof the asset received in the exchange. The excess, ifany, of the loan value over the fair value of theasset received is charged to the reserve for possiblecredit losses. Subsequent declines in the value ofsuch assets are charged directly against income.

The provision for credit losses is based uponmanagement's estimation of the amount necess

maintain the reserve at an adequate level, consi er-

ing net losses charged to the reserve, currenteconomic conditions, sovereign and transfer risks,changes in the size and character of the credit risksand other pertinent factors warranting currentrecognition.

Premises and Equipment. Premises and equipmentare stated at cost less accumulated depreciation andamortization. Depreciation is computed on thestraight-line method over the estimated useful livesof the assets. Leasehold improvements are amortizedover the lesser of the estimated life of the improve-ment or the term of the lease.

Income Taxes. The Corporation accounts for certainitems of income and expense in different periods forGnancial reporting than for income tax reportingpurposes, including the accrual for Gnancial report-ing purposes of income taxes on undistributedearnings of foreign subsidiaries and equity invest-ments. The tax effects of these timing differ-ences are recognized currently in the provision fordeferred income taxes.

For Gnancial reporting purposes, the investmercredit on lease Gnancing is recognized as lease

income over the investment life of the related asset;

for premises and equipment, the credit is applied as

a reduction of current tax expense in the year theproperty is placed in service.

Pension Plan, The Corporation has defined benefitpension plans covering the majority of its domesticemployees. Under the predominant pension plan,annual pension expense is determined using theAggregate Cost Method which spreads the entireunfunded cost of future pension benefits over theprojected future service lives of employees. Accruedpension costs are funded on a current basis.

Per Share Calculations. Net income per commonshare is computed by dividing net income, reduced

by prefer'red stock dividends, by the weightedaverage number of common shares outstanding foreach period presented. The dilutiye effect of stockoptions granted is insignificant.

052


Notes to financial Statements, continued

!

eserve Requirements

t December 31, 1984 and 1983, cash and due frombanks included $363,721,000 and $367,931,000,respectively, to satisfy the reserve requirements ofthe Federal Reserve and various foreign centralbanks.

4. Loans and Lease Financing

(in thousands) 1984

The following are the details of loan and leasefinancing balances:

December 31

1983

3. Investment Securities

(in thousands)

U.S. TreasuryI

States and politicalsubdivisions

Other bonds, notes anddebentures

Marketable equity securities

Other equity securities

i4

December 31, 1984

BookValue

MarketValue

$506,983 $ 522,000

22,792 22,000

321,092

16,206

99,745

315,000

50,000

102,000

$966,818 $1,011,000

December 31, 1983

(in thousands)Book

ValueMarket

Value

U.S. Treasury

States and politicalsubdivisions

$ 755,529 $ 755,000

12,827 12,000

A summary comparison of book and market valuesof investment securities is as follows:

United States Operations:

Commercial, industrial andfinancial

Real estate —construction

Real estate-otherLoans to individuals

Lease financing

Unearned income

International Operations:

Commercial and industrial

Banks and other financialinstitutions

Governments and officialinstitutions

Lease financing

Loans to affiliates

Allother

Unearned income

$ 7,010+21

955,782

1,329+37

921,377

264,244

(98,843)

$ 5,253,197

810,444

778,114

620,180

212,962

(98,236)

2,374,665 2,446,677

558,445 643,288

843,057

286,895

11+40

231,682

(100,187)

776,150

313,432

33,882

225,557

(119,724)

4,206,097 4,319,262

10,382,418 7,576,661

Other bonds, notes anddebentures 337,000

53,000

83,000

338,S09

14,129

77,276

3P

hr a>

Jkgc.Pp', g.,

'1~stIs )s



$ 1,198,270 $ 1,240,000

the

1

Other equity securities consist of equity securitieswhich are not traded on established exchanges andinclude investments in non-voting stock of otherfinancial institutions, Federal Reserve Bank stock,certain investments of venture capital subsidiariesand securities acquired in debt restructurings. Themarket value for these securities is based uponmanagement's estimate with consideration given to

underlying value of the issuer's net assets.

$14,588,515 $ 11,895,923

Lease financing is net of long-term debt of$6,850,000 in 1984 and $8,044,000 in 1983 for UnitedStates Operations and $41,552,000 in 1984 and$44,548,000 in 1983 for International Operations, allof which is nonrecourse and is secured by liens onthe equipment under lease and assignment of therelated lease payments receivable.

The Securities and Exchange Commission requiresdisclosure of loans which exceed $60,000 to executiveofficers and directors of the Corporation or to theirassociates. At December 31, 1984 and 1983, theseloans totalled $32,617,000 and $23,744,000,respectively. During 1984, total principal additionswere $77,360,000 and total principal payments were$68,487,000. Such loans were made on substantiallythe same terms as those prevailing for comparabletransactions with similar risk.

1



5. Reserve for Uncollectible Accrued Interest andLease Income Receivable

An analysis of the changes in the reserve foruncollectible accrued interest and lease incomereceivable is as follows: (in thousands) 1984 1983

The year-end loan principal and lease financing.balances for which interest and lease income wfully reserved are as follows:

December 31

1982

(in thousands)United States International

Operations Operations ConsolidatedUnited States

Operations $244,048 $ 185,495 $ 177,240

Balance,January 1, 1982

Provision charged tointerest income

Interest and leaseincome receivablecharged off

Adjustment offoreign currencybalances (1)

Balance,December 31, 1982


. Interest and leaseincome receivablecharged off


23,776 14,160 37,936

(10,064) (5,736) (15,800)

44,583

5,437

19,588 64,171

14,890 20,327

(4,300) (6,902) (11,202)

(2,604) (2,604)

$ 30,871 $1S,720 $ 46,591International

Operations

Total

223,837 140,279 106,230

$467,885 $325,774 $283,470

Balance,January 1, 1982

Provision$ 76,170

11,100$ 40,970 $ 117,140

36,900 48,000

Credit lossesRecoveries

(31,584)20,814

(36,733) (68,317)6,735 2"

A discussion of certain international nonaccrualbalances is included under the caption InternationalOutstandings on pages 68 through 72.

6. Reserve for Possible Credit Losses

An analysis of changes in the reserve is as follows:United States international

(in thousands) Operations Operations Consolidated



Interest and leaseincome receivablecharged off


45,720

24@52

24I972 70 692

22,548 46,900

(3,135) (3,135)

(13@96) (5,605) (19,001)

Net credit losses


Reserves of acquiredcompanies

Provision

Credit lossesRecoveries

Net credit losses

(10,770) (29,998) (4

76500 47,872 124,372

1,641

22,700 31,300

1,641

54,000

(34,267) (27,052)11,790 5,358

(61,319)17,148

(22,477) (21,694) (44,171)Balance,

December 31, 1984 $ 56,676 $38,780 $ 95356

(1) The adjustments of foreign currency balances arerelated to foreign exchange rate Quctuations and areequal to and offset by the effects of exchange rateQuctuations on the corresponding accrued interestand lease income receivable balance.


Reserve of acquiredcompany

Provision

Credit losses

Recoveries

78364

6+19115@00

(62,034)16,754

57,478 135,842

6+1964,700 180,000

(43,075) (105,109)8378 25,132

Net credit losses (45,280) (34,697) (79,977)

Balance,December 31, 1984 $154,903 $ 87,481 $ 242@84

As a result of the Corporation's concern, shared withgrowing segments of the banking industry abou

'4

BANK OF BOSTON CORPORATIONr


9&

P~

t(4I'j

P~

ral worldwide economic conditions, the 1984ision for credit losses includes a $ 100,000,000

special provision which was recorded in the fourthquarter. This amount was allocated between UnitedStates and International Operations based on therelative size of their respective loan and leasefinancing portfolios.

The parent company's reserve for possible creditlosses was reduced by $3,130,000 in 1982, becauserecoveries on loans previously charged off caused thereserve balance to be in excess of the amountdeemed necessary. In 1983, after consideration ofthe size and risk characteristics of the loan portfolio,an additional $ 1,000,000 adjustment was made toreduce the reserve.

7. Dividend and I.oan Restrictions

The approval of bank regulatory authorities isrequired ifdividends declared by the banksubsidiaries during the year exceed certain prescribedlimits. In this connection, the Corporation's banksubsidiaries can declare dividends in 1985, withoutapproval of the regulatory authorities, ofapproximately $250,000,000 of the undistributed

ings at December 31, 1984 plus an additionalunt equal to the net profits, as defined for 1985,

„to the date of any such dividend declaration.Furthermore, the bank subsidiaries are prohibited bythe bank regulatory authorities from granting loansand advances to the parent company which exceed10% of their capital and surplus, as defined.

Assuming declaration of the above dividends, anysuch extensions of credit would be limited to anaggregate of $75,500,000, and would be subject tostrict collateral requirements.

Therefore, under the foregoing regulations, anaggregate of $785,066,000 of the parent company'sequity in the net assets of the bank subsidiaries,which totalled $ 1,110,566,000, was restricted.

8. Premises and Equipment

In December, 1984, the Bank sold its headquartersbuilding to an investor for $363,000,000, of which$223,000,000 was in cash and $ 140,000,000 was in the

9. Other Assets

Other assets consist of:

(in thousands)

December 31

1984 1983

Accounts receivableExcess of cost over assigned

value of net assetsacquired

Refundable income taxes

Accounts receivable forsecurities transactions

Unrealized foreign exchangerevaluation profits

Prepaid expenses

Equity investment inaffiliates

Other real estate ownedDeferred payment letters of

creditAllother

$108360 $ 121,692

138,985

28,910

108,023

32,429

63,893 26,049

18,739

24+3021,618

17,574

12+684,906

12,752

10,449

7,268

73+358,757

73,455

$481,594 $432,798

Excess of cost over assigned value of net assetsacquired includes mortgage servicing of$96,716,000 and $87,368,000 at December 31, 1984and December 31, 1983, respectively.

form of a mortgage note maturing in 1985. TheBank has leased back space which it presentlyoccupies for initial terms ranging from 2'A to 10

years with options to renew at market rental ratesfor up to an additional 25 years. The sale resultedin a pre-tax gain of $295,500,000 of which$ 118,400,000 has been deferred and willberecognized in proportion to the lease payments, overthe initial terms of the leases, as a reduction ofoccupancy costs.

Premises and equipment are stated at cost lessaccumulated depreciation and amortization of$ 144,385,000 at December 31, 1984 and $ 115,771,000at December 31, 1983. Depreciation and amortizationexpense for premises and equipment was $34,243,000in 1984, $25,415,000 in 1983 and $20,186,000 in 1982.



10. Funds Borrowed

Funds borrowed consist of:December 31

(in thousands)

Federal funds purchasedTerm federal funds purchasedSecurities sold under

agreements to repurchaseCommercial paperDemand notes issued to the

U.S. TreasuryAllother

19S4

$ 731,180

606,455

381,407

916+24

140,757

639,443

1983

$ 1,492,836

348,250

646,119

724,929

106,471

662,709

$3,415,766 $3,981314

11. Income Taxes

The components of the provision for income taxesare as follows:


(in thousands) 1984 1983 1982

Current:'ederal

Foreign:Based on incomeWithheld on

interest anddividends

State and local

$ 42I321 $ 1,538 $ 10,774

23477 36,503 19,899

11.237

31,810

15,884

21,142

18,864

20,096

All other funds borrowed includes long-termborrowings of $ 143,020,000 at December 31, 1984 and$ 139,880,000 at December 31, 1983.

(in thousands) 1984 1983 1982

Provision for creditlosses

Interest on nonaccrualloans

'ash basis accountingfor tax purposes

Foreign operationsIncremental taxes

on unremittedearnings offoreign subsidiaries

Depreciation andamortization

Amortization ofmortgageservicing rights

Leasing operationsSale of headquarters

buildingMortgages held for sale

Other, net

$ (36,682) $ (16,059) $ (5,979)

(9,972) (6,168) (24,900)

4,404 (977) (1,653)

21,077 11,448 6,684

4,170 9,615 5,128

(5,850) 1,253 (83)

3,248

15,839

1,769

12,567

(2,907)

(8,443)

(5,/19) 2,360 . 828

$(20,835) $ 15,808 5 (8,762)

Included in the federal and state and local curre'ax

expense are the tax provisions (benefits) ielto investment portfolio gains or losses of $ (207,in 1984, $ 1,894,000 in 1983 and $ (6,505,000) in 1982.

Deferred taxes arise from differences in the timing ofrecognition of income and expense for tax andfinancial reporting purposes. The sources of thesedifferences and the tax effect of each were:


Deferred:Federal

ForeignState and local

108,945 75,067 69,633

(13,724) 13,865 (6,597)

8/ 1,460 1,462

(7,198) 483 (3,627)

Deferred income taxes included in consolidatedaccrued and deferred income taxes amounted to$ 63,789,000 at December 31, 1984 and $84,624,000 atDecember 31, 1983.

Income taxesapplicable totranslationadjustmentsrecorded directlyinto

stockholders'quity

(20835) 15,808 (8,762)

(4,710) (3,370) (650)

$ 83,400 $87,505 $60,221

h

56



1984 19S3

llowing tabulation reconciles the federalry tax rate to the consolidated effective tax

rate:Years Ended December 31

1982

12. Notes Payable

Notes payable consist of:

fin lltausands)

December 31

19S4 1983

Federal statutory taxrate

Tax-exempt incomeInvestment tax creditState and local income

taxes, net of federal~ tax benefit

Income subject to tax atcapital gains rate,net of minimum tax

Other, net

Effective tax rate

46.0% 46.0% 46.0%

{7.3) (8.8) (15.7)(.9) (1.1) (1.1)

5.1 5.0

(8.5) (.8) (1.5){.7) (1.1) .2

33.'7% 39.2% 32.6%

8.3% notes due July 15, 1985(issued March, 1978)

10.65% notes due August 15,1987 (issued July, 1980)

14.25% notes due June 1, 1989(issued May, 1982)

Floating rate subordinatedequity commitment notes,9.56% at December 31, 1984,due February, 1996 (issuedFebruary, 1984)

Other notes with an averageinterest rate of 11.03% due1986 through 1992

„$100,000

100,000

100,000

100,000

24350

$100,000

100,000

100,000

The effective tax rate for the parent company issubstantially less than the federal statutory ratebecause dividends from subsidiaries are non-taxable.

Domestic pre-tax income was $218,556,000 in 1984,$ 129,585,000 in 1983 and $ 113,459,000 in 1982 and

ign pre-tax income was $28,898,000 in 1984,56,000 in 1983 and $71,163,000 in 1982. For

purpose, foreign income is defined as incomegenerated from operations that are located outsidethe United States.

$424,350 $300,000

The notes payable are unsecured obligations of theCorporation or of its subsidiaries. The indenturesunder which certain of these notes were issuedprohibit the Corporation from making any paymentor other distribution in the stock of the Bank unlessthe Bank unconditionally guarantees payment ofprincipal and interest on the notes.

13. Preferred Stock

On March 30, 1984, the Corporation issued 1,045,712shares of the Corporation's Adjustable RateCumulative Preferred Stock, Series A, in connectionwith the acquisition of Casco-Northern Corporation.The dividend rate is adjusted quarterly according toa formula based upon the highest of three interestrate benchmarks. Such, dividend rates shall not beless than 6% per annum nor greater than 13% perannum. At December 31, 1984, the dividend ratewas 9.6%. Dividends declared in 1984 amounted to$3.95 per share. The preferred stock, which has nopreemptive or general voting rights, has aliquidation preference of $50 per share, plus accruedand unpaid dividends, and may be redeemed at theoption of the Corporation at $51'.50 per share on orafter March 30, 1989 through March 29, 1994, and at$50 per share thereafter.



14. Other Income

The components of other income are:Years Ended December 31

(in thousands) 1984 1983 1982

Foreign exchange:

Trading profltsNet translation/

hedge results fromhighly inflationaryeconomies

Credit card feeincome

Other fees andcommissions

Loss on mortgages soldor held for sale

Gains on sales ofsecurities acquired introubled debtrestructurings

Gains on sales ofventure capitalsecurities

Equity in undistributedearnings of afflliates

Allother

$ 17,427 $ 15,172 $ 14,039

(3805) (9,788) (2,860)

19381 13,379 12,373

19,545 14,398 11,864

(16,405) (4,930) (429)

6,268 3,744

5,979 6,330

2,219

24,027

4,389

22,956

3,397

23@54

$ 62,812 $67,823 $71,812

15. Employee Benefits

Pension expense amounted to $ 13,991,000 in 1984,$ 13,765,000 in 1983 and $ 16,798,000 in 1982. Acomparison of the present value of the accumulatedplan benefits and plan net assets, computed as ofSeptember 30 of each year for the predominant planis as follows:(in thousands) 1984 1983

The assumed rate of return used in determininactuarial present value of accumulated plan bewas 7% for 1984 and 1983.

Under the Corporation's thrift incentive plan andother domestic, defined contribution plans, theamounts charged to operating expense were$ 13,189,000 in 1984, $ 15,186,000 in 1983 and$ 13,813,000 in 1982.

In addition, the Corporation provides a limitedamount of health and life insurance benefits forretired employees. The cost of these benefits fordomestic employees, which are expensed as paid,was $267,000 in 1984.

1984 1983 198

16. Stock Options

A total of 562,960 shares of common stock isreserved for issuance to key employees under theCorporation's 1982 Stock Option Plan (the "Plan").Options may not be issued at less than fair marketvalue at date of grant. Generally, 25% of theoptions granted become exercisable at the date ofgrant, with an additional 25% becoming exercisableeach anniversary thereafter. Alloptions expire notlater than ten years from the date of grant. ThePlan also provides for the granting of units entithe holder to receive a cash payment at the entwo-year period based on the performance of tCorporation in relation to other leading financialinstitutions. Cash units granted are not significant.Options outstanding at December 31, 1984 are atprices ranging from $24.75 to $41.25 per share. Nooptions or units may be granted under the Plan afteDecember, 1991.

The following is a summary of the changes inoptions outstanding:

Years Ended Deccmbcr 31

Present value of accumulatedplan beneflts:VestedNonvested

Total

Net assets available for planbeneflts

$123+349,463'105,9208,197

$132,997 $ 114,117

$225,214 $ 195,030

Options outstanding,January 1

Granted ($24.75 to$41.25 per share)

Exercised ($24.75 pershare)

Cancelled

Options outstanding,December 31

88,815 98,057

174,0/6 98,05

(4,040)(7,635) (5,202)

255,256 88,81598,0'ptions

exercisable,December 31 112,463 44,982 24,51

Shares available forfuture options 307,704 474,145

58



her Expense

omponents of other expense are:


against or involving the Corporation and itssubsidiaries, considers that the aggregate liabilityorloss, ifany, resulting from the final outcome ofthese proceedings will not be material.

(in thousarrds) 1984 1983 1982

pk.r

lgI

54c.'ij

rl'„'+

J,

Professional, otherservices andregulatoryexamination fees

Travel, customercontact andadvertising

CommunicationsForms and suppliesNon-income taxes

Other staff costs

FDIC insuranceFederal Reserve service

fees

Property and casualtyinsurance

Allother

$ 46,217 $ 38,009 $ 36,032

40,740

34,950

19,101

13,047

9,512

4,603

35,575

28,594

16,246

11,253

7,496

4,364

29,671

2555814,025

12,020

7,068

4,099.

4,581 3,456 3,112

1,960

51,954

1,557

34,504

1,926

35,007

$226,665 $ 181,054 $ 168,518

ledged Assets

ecember 31, 1984, investment securities andother assets of $922,985,000 were used to collateralizerepurchase agreements, public deposits and otheritems.

20. Lease Commitments

Rental expense for leases of real estate andequipment is summarized below:


(in!housands) 1984 1983 1982

Rental expenseLess sublease rental

income

$34,084 $32,S97 $27,372

3,160 2,874 2,168

At December 31, 1984, the Corporation was obligatedunder noncancelable leases for real estate andequipment, including the leases entered into in 1984for the Corporation's headquarters building asdescribed in Note 8. The minimum rentals underthese leases, exclusive of executory costs and net ofamortization of deferred gain on sale of headquartersbuilding and sublease rental income, for the years1985 through 1989 are $32,250,000, $28,158,000,$23,838,000, $ 19,678,000 and $18,114,000 respectively,and $71,362,000 for 1990 and later.

Capital leases, the minimum rentals of which areincluded in the preceding amounts, are notsignificant.

Net rental expense $30,924 $29,723 $25,204

1984of crparti$ 1,41ti

r".Pi.k

Cp4

i~cP p

(as~)t

The Corporation and its subsidiaries are defendantsin a number of legal proceedings arising in thenormal course of business. Management, after

'ewing all actions and proceedings pending

19. Commitments and Contingencies

In the normal course of business, there areoutstanding a number of commitments to extendcredit, letters of credit, guarantees and letters ofindemnity, as well as obligations related to bankersacceptances participated to other financial institutionsand agreements to purchase or sell securities, foreignexchange or interest. In the opinion of manage-ment, these agreements do not represent unusualrisks for the Corporation and losses, ifany, resultingfrom them willnot be material. At December 31,

, commitments under outstanding standby lettersedit and similar arrangements, net ofcipations to other financial institutions, were0,000,000.

21. Acquisitions

On March 30, 1984, the Corporation purchased all ofthe common stock of Casco-Northern Corporation("Casco") in exchange for 1,045,712 shares of theCorporation's Adjustable Rate Cumulative PreferredStock, Series A, which had a value of $52,286,000 atthe time of the acquisition. Casco, with total assetsof $857.3 million at December 31, 1984, is engagedin retail and commercial banking in Maine.

Pro forma results of operations, including Casco, forthe entire year have not been shown since theresults would not be significantly different inrelation to the Corporation's consolidated assets ornet income.

59



In November, 1983, the Corporation entered into anacquisition agreement with Colonial Bancorp, Inc.("Colonial"). Colonial, with assets of approximately$ 1.5 billion, is engaged in retail and commercialbanking in Connecticut. This proposed merger has

been approved by Colonial's stockholders, theFederal Reserve Board and the regulatory authoritiesof both Massachusetts and Connecticut. Under theterms of the agreement, the Corporation will issueshares of a second series of preferred stock whichwillbe, at the discretion of the Corporation, eitheradjustable rate cumulative preferred stock orconvertible cumulative preferred stock. The value ofsuch shares, had the transaction been consummatedon December 31, 1984, would have beenapproximately $74 million. Under the terms of theagreement, since the acquisition was notconsummated by January 1, 1985, the purchase pricewillbe increased to reflect certain increases inColonial's net worth. In addition, the agreementwill terminate on June 30, 1986 unless extended bymutual consent.

In February, 1984, the Corporation entered into anacquisition agreement with RIHT Financial

"Corporation ("RIHT"). RIHT, with assets ofapproximately $2.3 billion, is a provider of retail,"commercial banking and trust services and is basedin Rhode Island. This proposed transaction, the

-consideration for which, had it been consummatedon December 31, 1984, would have been valued atapproximately $ 120 million, has been approved byRIHT's stockholders, the Federal Reserve Board andboth Massachusetts and Rhode Island regulatoryauthorities. Under the terms of the agreement, theconsideration payable to RIHT shareholders willconsist of a combination of cash and shares of a

third series of preferred stock which willbe, at thediscretion of the Corporation, either adjustable ratecumulative preferred stock or convertible cumulativepreferred stock. It is intended that the mix betweencash and stock willbe such as may be required forthe transaction to be treated as a tax-freereorganization by those RIHT stockholders electingto receive Corporation stock. The Corporation has

agreed that the purchase price willbe increased toreflect certain increases in RIHT's net worth. Theagreement may be terminated by either party if themerger is not consummated by December 31, 1985.

The acquisitions of Colonial and RIHT describe'boveare proposed to be consummated under t

interstate banking statutes of Connecticut and Rn e

Island, respectively, each of which requiresreciprocity with the Massachusetts Interstate BankingStatute. The validity of the Massachusetts,Connecticut and Rhode Island statutes has beenchallenged on constitutional grounds both before theFederal Reserve Board and in court. On August 1,

1984, the United States Court of Appeals for theSecond Circuit issued a decision (the "NortheastDecision" ) affirming several Federal Reserve Boarddecisions approving New England interstate bankacquisitions, including the Corporation's proposedacquisition of Colonial, and holding that theMassachusetts and Connecticut interstate bankingstatutes were constitutional. On January 7, 1985, theUnited States Supreme Court agreed to review theNortheast Decision, and the Corporation's proposedacquisitions of Colonial and RIHT are stayedpending that review.

In addition, stockholders of RIHT have brought twosuits, to which the Corporation is not a party, whichseek, among other relief, to enjoin RIHT and itsdirectors from consummating the proposedacquisition by the Corporation at the price provfor by the agreement. One of the suits has beedismissed, and that dismissal has been appealed tothe United States Court of Appeals for the FirstCircuit.

22. Segment Information

The Corporation operates in the financial servicesindustry segment. Seivices are provided through a

network of offices located both in the United Statesand overseas and, consequently, a substantial part ofthe Corporation's assets are denominated incurrencies other than the U.S. dollar. In order tominimize exposure to movements in various currencexchange rates the major portion of such assets isfinanced with liabilities of the same currency andthe remaining portion is substantially hedged.Geographic segment information for the Corporationfor the three years ended December 31, 1984 ispresented on pages 66 and 67.

60


Consolidated Statistical Information

following three tables present average balancesinterest rates and interest differential

information for the Corporation consolidated andseparately for its United States and InternationalOperations. Incorporated in these tables is anadjustment of tax exempt income to a fully taxableequivalent basis. This adjustment is calculatedassuming a 46% federal income tax rate adjusted for

applicable state and local income taxes, net of therelated federal tax benefit. Data for loans includesnonaccrual and renegotiated balances as well as feesearned on loans. Average rates for interest bearingfunds of United States Operations have beencalculated after deducting applicable reserverequirements from average balances shown in thetable.

Average Balances and Interest Rates and InterestDifferential—Consolidated

1984


1983 1982

(dottarsin nnltions)AverageBalance

Average Average Average Average AverageInterest Rate Balance interest Rate Balance interest Rate

AssetsInterest bearing deposits in

other banksFederal funds sold and

resale agreementsTrading account securitiesInvestment securities:

U.S. TreasuryStates and political

subdivisionsOther

Loans and lease financing (1)

Total earnin assets-interest income

286413

106.1 37.1085.4 20.68

556 59.6 10.'72

189427

762

73.7 38.9975.1 17.59

85.9 11.27

222272

48.143.4

21.6715.96

785 93.2 11.87

22440

13,210

2.780.7

2,287.4

'12.2118.3417.32

40365

1 1,076

5.659.1

1,794.5

14.0016.3616.20

192319

10,125

21.473.8

1,901.8

11.1523.1318.78

17347 2,972.8 17.14 15,799 2,383.3 15.09 14,899 2,574.0 17.28

$ 2,420 $ 350.9 14.50% $ 2,940 $ 288.8 9.82% $ 2,984 $ 392.3 13.15%

Cash and due from banksOther non-earning assets

Total assets

Lfabilittes and Stockholders'quityDeposits:

SavingsTimeInternational Operations

Federal funds purchased andrepurchase agreements

Other funds borrowedNotes payable

1,4342,038

$20,819

$ 2,2662,8465,741

23451+53

405

1,1771,845

$18,821

188.5 8.46 $ 1,520 114.1 7.62290.6 10.39 1,995 185.8 9.59991.2 11.35 6,006 732.8 12.20

402.8 17.18 2,709 363.6 13.42327.2 21.16 1,273 296.7 23.59

46.2 11.41 300 33.8 11.26

1,1661,441

$ 17,506

$ S322,864

. 5,769

2,3891,217

313

27.8 5.493S3.6 12.73924.2 16.02

343.3 14.37271.0 22.56

32.3 10.32

Total interest bearing tunds-interest expense 15,162 2,2S2.5 14.99 13,803 1,726.8 12.60 13,084 1,952.2 15.07

r>

.c ~%@~

i

Demand and othernon-interest bearingdeposits

Other liabilitiesStockholders'quity


Net Interest Revenue

Interest Rate Spread (2)Interest Rate Margin (3)

2,9451,6211,091

$20,819

$ 120.3

2.15%4.15%

2,4801598

940

$18,821

$ 656.5

2.49%4.16%

2,2711,305

846

$ 17,506

$ 621.8

2.21%4.17%

Interest on loans and lease financing includesfees earned of $72.3 million in 1984, $52.2million in 1983 and $48.4 million in 1982.

{2) Interest rate spread is calculated by subtractingthe average rate paid for interest bearing funds

from the average rate earned on total earningassets.

{3) Interest rate margin is calculated by dividing netinterest revenue by total earning assets.


Consolidated Statistical Information, cottfintted

Average Balances and Interest Rates and InterestDifferential —United States Operations

1984


1983 1982

(dollars in millions)AverageBalance

Average Average Average Average Averageinterest Rate Balance interest Rate Balance interest Rate

Assets

Interest bearing deposits inother banks

Federal funds sold andresale agreements!

Trading account securitiesInvestment securities:

V.S. TreasuryStates and political

subdivisionsOther

Loans and lease financing (1)

217350

22.8 10.5136.8 10.51

132

381

12.8

37.89.70 190 23.9 „12.589.92 258 34.6 13.41

556 59.6 10.72 762 85.9 11.27 785 93.2 11.87

22

180

8,928

2.7

21.41,196.0

12.2711.89

'3.40

40

113

7,029

5.611.4

889.1

14.00 192 21.4 11.15

10.09 84 9.0 10.71

12.65 6,339 968.1 15.27

$ 411 $ 44.0 10.71%'253 $ 24.1 9.53% $ 194 $ 26.2 13.51%

Total earning assets—interest income 10,664 1383.3 12.97 8,710 1,066.7 12.25 8,042 1,176.4 14.63


Total assets

Liabilities and Stockholders'quityDeposits:

SavingsTime


Other funds borrowedNotes payableIntersegment funding, net

1,2991,006

$12,969

$ 2,2662,846

2,2031,009

291

272

1,018

744

$ 10,472

226.4 10.28102.5 10.68

29.6 10.1733.1 12.17

2,582845200

(93)

232.1 8.99

80.4 9.69

19.1 9.59

(9.6) (10.32)

188.5 8.46 $ 1,520 114.1 7.62

290.6 10.39 1,995 185.8 9.59

1,030452

$9,524

$ 5322,864

27.8 5.

353.6 12.73

2,295 272.3 11.86

886 109.0 12.53

253 ~ 23.6 9.33

(315) (38.2) (12.13)

Total interest bearing funds-interest expense 8,887 870.7 9.95 7,049 621.9 8.94 6,515 748.1 11.72

Demand and othernon-interest bearingdeposits




Interest Rate Spread (2)Interest Rate Margin (3)

2,705612765

$12,969

$ 512.6

3.02%4.81%

2,267557599

$ 10,472

$ 444.8

3.31%5.11%

2,074351584

$9,524

$ 428.3

2.91%

5.33%

(1) Interest on loans and lease financing includesfees earned of $58.8 million in 1984, $38.9million in 1983 and $38 million in 1982.

(2) Interest rate spread is calculated by subtractingthe average rate paid for interest bearing funds

from the average rate earned on total earningassets.

(3) Interest rate margin is calculated by dividing netinterest revenue by total earning assets.

h

62

7


Consolidated Statistical Information, continued

ge Balances and interest, Rates and interestrentiai —International Operations

1984


1983 1982

(dollars in millions)AverageBalance

AverageInterest Rate

AverageBalance

Average Average AverageInterest Rate Ba(ance Interest Rate

k'vP

C

AssetsInterest bearing deposits in

other banksResale agreementsTrading account securitiesInvestment securities-otherLoans and lease financing (1)

$2,009 $ 306.9 15.28%69 83.3 120.7263 48.6 77.14

260 59.3 22.814,282 1,091.4 25.49

$2,687 $ 264.7 9.85% $2,790 $ 366.1 13.12%57 61.0 107.02 32 24.2 75.6346 37.2 80.87 14 8.8 62.86

252 48.3 19.17 235 64.8 27.574,047 905.4 22.37 3,786 933.7 24.66

Total earning assets-interest income


Total assetst

6,683 1889.5 23.78

1351,032

$7,850

7,089 1,316.6 18.57

1591,101

$8,349

6,857 1,397.6 20.38

136989

$7,982

Liabilities and Stockholders'quityDeposits (2):

Banks in foreign countries— Other foreign savings and

time

$2,199 208.4 9.48 $2,288 218.9 9.57

3,S48 788.8 22.23 3,718 513.9 13.82

Total InternationalOperations

purchase agreementsther funds borrowed

Notes payableIntersegment funding, net

5,747142544114

(272)

997.2 17.35176.4 124.23224.7 41.31

16.6 14.56(33.1) (12.17)

6,006127428100

93

732.8 12.20131.5 103.54216.3 50.54

14.7 14.629.6 '10.32

$5,76994

33160

315

924.2 16.0271.0 75.53

162.0 48.948.7 14.62

38.2 12.13

Total interest bearing funds-interest expense 6,275 1381.8 22.02 6,754 1,104.9 16.36 6,569 1,204.1 18.33

Non-interest bearingdeposits




interest Rate S pread (3)Interest Rate Margin (4)

2401,009

326

$7,850

$ 207.7

1.76%3.11%

2131,041

341

$8,349

$ 211.7

2.21%2.99%

197954262

$7,982

$ 193.5

2.05%2.82%

(1) Interest on loans and lease financing includesfees earned of $ 13.5 million in 1984, $ 13.3million in 1983 and $ 10.4 million in 1982.

(2) The breakdown by category for deposits ofInternational Operations for 1982 is not readilyavailable.

Average Asset and Liability Ratios

(3) Interest rate spread is calculated by subtractingthe average rate paid for interest bearing fundsfrom the average rate earned on total earning "

assets.

(4) Interest rate margin is calculated by dividing netinterest revenue by total earning assets.


rage assets of International Operations to average consolidated assets

verage liabilities of International Operations to average consolidated liabilities

1984

38%38%

1983

44%45%

1982

46%46%

rP~4"

63



Change in Net Interest Revenue —Volume and

Rate Analysis-1984 as compared with 1983

The following table presents,,on a fully taxableequivalent basis, an analysis of the effect on netinterest revenue of volume and rate changes for 1984

Consolidated United States international

as compared with 1983. The change due to thevolume/rate variance has been allocated to volume.

(in millions)

increase (Decrease)Due to Change in

Volume RateNet

Change

Increase (Decrease)Due to Change in

NetVolume Rate Change

increase (Decrease)Due to Change in

Volume RateNet

Change

Earning Assets:





subdivisionsOther

; Loans and lease financingAdjustment (1)

36.0 (3.7)(2.9) 13.3

32.3 8.9

10.4 (3.3)1.1 10.0 14.5 7.8 22.3

2.3 (1.0) 13.1 (1.7) 11.4

(22.1) (4.2) (26.3) (22.1) (4.2) (26.3)

(2.2) (.7) (2.9) (2.2)

13.8 7.2 21.0 8.0

369.5 123.4 492.9 254.4

(51.4) 51.4 (7 1)

.(7) (29)2.0 10.0

52.5 306.97.1

1.8 9.2 11.0

59.9 126.1 186.0

(82.3) 82.3

$ (75.4) $ 137.5 $ 62.1 $ 16.9 $ 3.0 $ 19.9 $(103.6) $ 145.8 $ 42.2

Interest income 265.3 324.2 589.5 253.5 63.1 316.6 (96.6) 369.5 272.9

Interest Bearing Funds:

Deposits:SavingsTimeInternational Operations


Other funds borrowedNotes payableIntersegment funding, netAdjustment (1)

61.8 12.6 74.489.2 15.6 104.8

(44.9) 309.3 264.4

(62.5) 101.7 39.2

53.5 (23.0) 30.5

11.5 .9 12.4

92.4 (92.4)

61.8 12.6 74.489.2 15.6 104.8

(39.0) 33.3

13.9 8.29.3 1.2

21.8 20.92.6 (2.6)

(5.7) 18.6

22.1 47.9

10.5 2.0

42.7 (21.8)(85.8)

26.3 44.9

(39.5) 8.4

(.1) 1.9

(20.9) (42.7)85.8

(44.9) 309.3 264.4

Interest expense 201.0 324.7 525.7 159.6 89.2 248.8 (84.0) 360.9 276.9

Net Interest Revenue $ 64.3 $ (.5) $ 63.8 $ 93.9 $ (26.1) $ 67.8 $ (12.6) $ 8.6 $ (4.0)

(1) Adjustment to reQect the effect on total volumeand rate changes of the differences in the

component mix of earning assets and interest b'earingliabilities from year to year.



e in Net Interest Revenue-Volume andnalysis-1983 as compared with 1982

The following table presents, on a fully taxableequivalent basis, an analysis of the effect on netinterest revenue of volume and rate changes for 1983

as compared with 1982. The change due to thevolume/rate variance has been allocated to volume.

(in millions)

Consolidated



United States



Internalional


Volume RateNet

Change

Earning Assets:





subdivisionsOther

Loans and lease financingAdjustment (1)

(12.9) 38.5 25.6

27.3 4.4 31.7

(2 6) (4 7) (7 3)

(21.3) 5.5 (15.8)7.5 (21.6) (14.1)

154.1 (261.4) (107.3)

(12.0) 12.0

(5.6) (5.6) (11.2)12.2 (8.9) 3.3

(2.6) (4.7) (7.3)

(21.3) 5.5 (15.8)2.9 (.5) 2.4

87.3 (166.3) (79.0)3.3 (3.3)

26.8 10.0 36.825.9 2.5 28.4

3.3 (19.8) (16.5)58.4 (86.7) (28.3)

(61.2) 61.2

$ (4.3) $ (99.2) $ (103.5) $ 5.6 $ (7.7) $ (2.1) $(10.1) $ (91.3) $ (101.4)

Interest income 135.8 (326.5) (190.7) 81.8 (191.5) (109.7) 43.1 (124.1) (81.0)

t Bearing Funds:

osits:avings

TimeInternational Operations


Other funds borrowedNotes payableIntersegment funding, netAdjustment (1)

43.0 (22.7)13.4 12.3

(1.5) 3.0

19.4 (19.4)

20.325.7

1.5

25.8 (66.0) (40.2)(3.9) (24.7) (28.6)

(5.1) .6 (4.5)22.9 5.7 28.6

12.8 (12.8)

26.3 60.5

5.3 54.36.0

(5.7) (28.6)

34.249.0

6.0

(22.9)"

(59.0) 59.0

75.6 10.7 86.3 75.6 10.7 86.3

(80.4) (87.4) (167.8) (80.4) (87.4) (167.8)

28.9 (220.3) (191.4) 28.9 (220.3) (191.4)

Interest expense 98.4 (323.8) (225.4) 47.7 (173.9) (126.2) 36.2 (135.4) (99.2)

Net Interest Revenue $ 37.4 $ (2.7) $ 34.7 $ 34.1 $ (17.6) $ 16.5 $ 6.9 $ 11.3 $ 18.2

jgtk

4

(1) Adjustment to reflect the effect on total volumeand rate changes of the differences in the

component mix of earning assets and interest bearingliabilities from year to year.

65


Consolidated Statistical information, continued

Geographic Segment information

The following tables present geographic segmentinformation for the Corporation for each of the threeyears ended December 31, 1984. This geographicsegment information presents assets and incomesegregated into country or regional locations basedupon the domicile of the customer or borrower, butwithout regard to such factors as method of funding(Le., local vs. non-local currency), or location of anycash collateral or guarantees.

As a result of the inter-relationships that exist withinthe Corporation's worldwide network, allocations ofcertain income and expense items are necessarilybased on assumptions and subjective criteria.Interest expense allocations, for example,. are basedon an assumed average money market rate.Additionally, corporate capital is allocated based on

the relative risk characteristics of assets in thevarious geographic regions. Finally, allocations ebeen made among units based upon theCorporation's management accounting systemwhereby non-interest income and expenses areadjusted to reflect the cost of services provided byone unit to another, including corporate overhead.

For the purpose of evaluating the potential forcertain transfer risks associated with cross-borderoutstandings, such factors as method of funding andlocation of any cash collateral or guarantees shouldbe taken into account. A discussion of cross-borderoutstandings may be found under the captionInternational Outstandings on pages 68 through 72.

iin millions) Argentina

OtherLatin

AmericanBrazil Countries

Totalinter- Uniled

Other national StatesRegions Operations Operations

Asia/ Consol-Europe Pacifi'c idated

For the Year EndedDecember 31, 1984

Net interest revenueprovision for credit

losses

Net interest revenueafter provision forcredit losses

Other operating incomeOther operating expenseNon-interest allocations,

net-charge/{credit)Income before income taxes

Net incomeAverage assets:

Interest bearing depositsin other banks

Loans and lease GnancingAllother assets

4.0 5.4 11.8 16.3 22.0 5.2 64.'7 115,3

24.1

29.5

44.5

36.9

1.9

20.9

36.8 34.6 ~ (.7) 9.6 141.3 348.6 489.9

8.4 8.9 12.1 6.3 67.1 412.7 479.S

21.4 35.1 18.7 7.4 148.0 574.2 722.2

4.0 6.1 15.2 12.3 8.5 2.7 48.8 (48.8)

5.1 11.8 8.6 (3.9) (15.8) S.8 11.6 235.9 247.5

$ 2.5 $ 5.1 $ 4.1 $ (2.3) $ (7.7) $ 4.2 $ 5.9 $ 158.2 $ 164.1

$ 41.0 $ 16.0 $ 1'78.0 $1,243.0 $ 369.0

488.0 448.0 '42.0 1,147.0 857.0

232.0 187.0 203.0 431.0 406.0

$162.0 $2,009.0 $ 411.0 $ 2,420.0

500.0 4,282.0 8,928.0 13,210.0

100.0 1459.0 3,630.0 S,189.0

$ 28.1 $ 42.3 $ 48.6 $ 50.9 $ 21.3 $ 14.8 $ 206.0 $ 463.9 $ 669.9

Total average assets $761.0 $651.0 $1+23.0 $2+21.0 $1,632.0 $762.0 $7,850.0 $12,969.0 $20,819.0

66



II

aphic Segment information

(in millions) Argentina

OtherLatin


TotalInter- Uniled

Asia/ Other nalional States Consol-

Europe Pacifi'c Regions Operations Operations idated

ls;"1

I,1'

~

1.'or

the Year EndedDecember 31, 1983




Other operating income

Other operating expense

Non-interest allocations,net-charge/(credit)




Loans and lease Bnancing

Allother assets

tal average assets

$ 44.5 $ 44.9 $ 36.1 $ 50.3 $ 22.7 $ 10.4 $ 208.9 S 397.5 $ 606.4

2.1 3.0 15.8 3.7 5.6 1.1 31.3 22.7 54.0

42.4 41.9 20.3 46.6 17.1

19.8 11.2 .5 12.7 12.5

37.0 19.6 15.4 32.6 15.2

9.3 177.6 374.8 552.4

4.4 61.1 204.9 266.0

6.9 126.7 468.5 595.2

5.8 5.2 6.6 14.7 5.9

19.4 28.3 (1.2) 12.0 8.5

S 9.2 S 13.4 $ (.5) $ 7.0 S 4.1

2.8 41.0 " (41.0)

4.0 71.0 152.2 223.2

S 2.2 $ 35.4 S 100.3 S 135.7

$751.0 $5S6.0 $ 1,175.0 $3,180.0 $ 1,924.0 $763.0 $8,349.0 $ 10,472.0 $18,821.0

$ 1.0 $ 6.0 $ 192.0 $ 1,781.0 $ 453.0 $254.0 $2,687.0 $ 253.0 $ 2,940.0

503.0 351.0 811.0 1,041.0 893.0 448.0 4,047.0 7,029.0 11,076.0

247.0 199.0 172.0 358.0 578.0 61.0 1,615.0 3,190.0 4,805.0

(in millions) Argentina

OtherLatin


TotalInter- United

Asia/ Other national States Consol-

Europe Pacific Regions Operalions Operations idated

I*

Itr4

»" s

For the Year EndedDecember 31, 1982




Other operating income

Other operating expense

Non-interest allocations,net-charge/(credit)




Loans and lease financingother assets

$ 49.9 $ 35.0 $ 33.5 $ 44.8 $ 19.5 $ 10.8 $ 193.5 $ 360.6 $ 554.1

3.2 1.0 13.8 15.4 2.5 1.0 36.9 11.1 48.0

46.7 34.0 19.7 29.4 17.0

21.5 12.1 4.0 9.5 9.5

42.2 24.5 15.2 30.9 11.0

9.8

3.1

4.7

156.6

59.7

128.5

349.5 506.1

168.0 227.7

420.7 549.2

7.6 6.1 3.4 12.5 3.6

18.4 15.5 5.1 (4.5) 11.9

$ 9.1 $ 7.4 $ 2.4 $ (2.3) $ 5.6

2.0 35.2 (35.2)

6.2 52.6 132.0 184.6

$ 3.1 $ 25.3 $ 99.1 $ 124.4

$ 2.0 $ 1.0 $ 314.0 $1,778.0 $ 493.0 $202.0 $2,790.0 $ 194.0 $ 2,984.0

595.0 339.0 769.0 1,020.0 692.0 371.0 3,786.0 6,339.0 10,125.0

179.0 149.0 151.0 342.0 S44.0 41.0 1,406.0 2,991.0 4397.0

otal average assets $776.0 $489.0 $ 1,234.0 $3,140.0 $1,729.0 $614.0 $7,982.0 $9,S24.0 $ 17,506.0

67



International Outstandings

At December 31, 1984, international outstandingsr'epresent approximately 35% of the Corporation'sconsolidated total assets. Included in theseoutstandings are cash and deposits in other banks,resale agreements, investment and trading accountsecurities, loans and lease Gnancing, amounts duefrom customers on acceptances and accrued interestreceivable. Total cross-border outstandings representapproximately 25% of consolidated total assets atDecember 31, 1984. Cross-border outstandings aredefined as amounts payable to the Corporation inU.S. dollars or other non-local currencies, plus

amounts payable in local currency but fundedU.S. dollars or other non-local currencies. Excludefrom the computation of cross-border outstandingsfor a given country are (a) local currencyoutstandings funded locally and (b) U.S. dollar orother non-local currency outstandings reallocated as a

result of external guarantees or cash collateral.

Cross-border outstandings in countries whichindividually exceed .75% of consolidated total assetsat December 31, 1984 and December 31, 1983 areapproximately as follows:

December 31, 1984

(dollarsin millions) Public (1) Banks (2) Other

Percentatte ofConsohdated Total

Total Assets Commitments (3)

CountryArgentinaBrazil'Canada

'France

ItalyJapanMexicoSouth Korea

United Kingdom

; West Germany

$110

190

15

15

95

40

15

40

$ 5

5

240

335

220

220

20

115

240

45

$135

135

30

20

10

55

115

65

250

100

$250

330

270

370

245

275

230

220

,505

185

1.1%

1.5

1.2

1.7

1.1

1.2

1.0

1.0

2.2

.8

$ 80

20

60

25

5

105

45

December 31, 1983

(dollarsin millions) Public (1) Banks (2) Other Total

Percentage ofConsolidated Total

Assets Commitments (3)

Country

ArgentinaAustraliaBrazilCanada

France

ItalyJapanLuxembourgMexicoSouth KoreaTaiwanUnited KingdomWest Germany

$ 75

120

20

40

75

60

15

10

40

$ 70

10

325

275

240

475

165

30

255

30

270

85

$215

115

175

55

20

10

165

10

120

55

120

250

105

$290

185(4)

305

380(4)315

290

640(4)

175(4)225

370(4)

165(4)

530(4)

230(4)

1.5%

.9

1.6

1.9

1.6

1.5

3.3.'9

1.2

1.9

.8

2.7

1.2

$ 35

3c

6C

2(e

Ie

1(

1(

4(

10!

68


Consolidated Statistical lnforrnatio, continued

ncluded within public are cross-borderutstandings to central governments and their

agencies, central or government developmentbanks, state and local foreign governments andnon-bank commercial enterprises, majority-ownedby central governments. Excluded are banksowned by foreign governments that do notfunction as central banks or banks of issue.

(2) Included within banks are cross-borderoutstandings to (a) private banking institutions,and (b) banks owned by a foreign governmentother than central banks or banks of issue.

(3) Included within commitments are letters ofcredit, the undisbursed portion of loancommitments and guarantees. Amountspresented are net of reallocations.

(4) December 31, 1983 amounts have been restatedto reflect current judgments as to the inclusionof certain funding arrangements as cross-borderoutstandings.

Allof the overseas activities of the Corporation'ssubsidiaries are subject to the political conditions in,and economic and regulatory policies of, the

vernments of the countries in which the activitiesonducted, including the policies of suchrnments toward indebtedness to foreign lenders,

toward private business, and toward the UnitedStates. In addition, high rates of inflation and local,regional and worldwide recessionary conditions ofvarying degrees of severity affect local economiesand governments and accordingly may also affectoverseas activities.

Moreover, from time to time, conditions in a countrymay be such that, due to foreign exchange liquidityproblems, currency restrictions or other situationsunrelated to normal credit risk, non-local currency

debt service payments are not made as originallyscheduled. Currently, such conditions exist in anumber of countries throughout the world, includingthree countries whose cross-border outstandingsindividually exceed .75% of consolidated total assetsat December 31, 1984 (Argentina, Brazil and Mexico).

Argentina. A proposal, endorsed by the IMP andArgentina's Bank Advisory Committee, to providenew funds and to reschedule certain public andprivate credits has been submitted to Argentina'sinternational lenders. In responding to thisproposal, the Corporation has agreed to disburseapproximately $50 million in financing (primarily 10-year-term; 3 years grace on installments of principal)during the course of 1985 and the Grst quarter of1986. The proposal also calls for Argentina to repaythe remaining balance of a bridge loan provided byinternational lenders in prior years. The Corporationwould expect to receive $ 10 million from thisrepayment in 1985. In addition to the new moneycommitment discussed above, $7 million in medium-term Gnancing disbursed by the Corporation in prioryears, at Argentina's request, will remainoutstanding.

The proposal also provides for a rescheduling ofapproximately $70 million of the Corporation's cross-border loans and calls upon the Corporation tomaintain trade lines into Argentina at September 30,1984 levels (approximately $120 million). TheCorporation's Argentine trade financing is primarilyassociated with acceptances and documentary lettersof credit.

69



The following summarizes significant data relative tothe approximately $70 million in non-trade related

cross-border loans which willbe rescheduled unthis proposal.

Approximate1984 Interest income

(doltarsin millions)

(1) Certain privatesector loans

ApproximatePrincipalAmount

$55

Weighted Averageinterest Rate

Current Proposed

15.5% Libor + 1.4%

Actual

$3.6

Pro FormaAssuming all

Loans onFull Accrual

$8.4

Pro FormaAssuming

Full Accrualat Proposed

Interest Rates

$7.4

(2) Certain publicsector loans $15 12.9% Libor + 1.4% $ 1.4 $2.1 $2.0

Repayment of private and public sector loans willgenerally be over a ten-year period with three yearsgrace on installments of principal.

In late December 1984, approximately $ 1 million inpast due interest was received by the Corporation onthe approximately $ 15 million in public sector loansreferred to above. This interest was recognized as

income; however substantially all of the relatedprincipal remained on nonaccrual at December 31,1984. In addition, $28 million of the approximately$55 million in private sector loans affected by thisproposal were on nonaccrual at December 31, 1984.

Approximately $70 million of the Corporation's cross-

border outstandings to Argentina, which originatedin the private sector and originally matured in 1982

and 1983, have been subject to a reschedulingprogram initially established under ArgentineCommunication A-251. Under this program, lendersmay either accept dollar-denominated five-yeargovernment obligations as payment or extend theoriginal loan for five additional years, using thegovernment obligations as collateral. Therescheduling arrangement in effect provides theguarantee of the Argentine government for loans tosuch private borrowers, or transfers fully the

obligation from private outstandings to publicoutstandings. At December 31, 1984, the Corporationhad received (in payment or as collateral) all ofthese government obligations associated with suchcross-border outstandings. These loans are on fullaccrual status at December 31, 1984 since theunderlying government obligation has been issued inpayment or as collateral and the interest owed isbeing paid in accordance with the terms of theprogram.

To the extent the government obligation was issuebefore November 4, 1983, interest due was receiin cash. On November 4, 1983 CommunicationA-404, affecting approximately $55 million of the $ 0

million of the Corporation's cross-border outstanding.referred to in the preceding paragraph, wasannounced. This Communication included a

provision which amended the manner in whichinterest would be paid for government obligationsissued from that date onward. Interest due on theseloans is being paid ten percent in cash and ninety

70



nt in the form of a 120-day, Argentine Centralinterest bearing deposit. As these deposits

mature, they are being paid out to the Corporationin cash. As of December 31, 19iI4, the Corporationheld $2 million of these deposits associated withcross-border outstandings.

During 1984, approximately $25 million of interestincome was recorded on cross-border outstandings toArgentina and approximately $25 million wasreceived in cash. Total Argentine loans onnonaccrual at December 31, 1984, including thecross-border outstandings discussed previously were$ 60 million, representing $46 million of private and$ 14 million of public outstandings.

Brazil. During 1983 and 1984, the Corporationdisbursed $31 million and $33 million respectively toBrazil in medium to long-term financing underagreements negotiated between Brazil and itsinternational lenders.

The Corporation has agreed to reschedule non-traderelated cross-border outstandings maturing in 1983and 1984 amounting to approximately $35 millionand $20 million respectively. Under these

heduling plans, referred to as Project II,owers with dollar debt make principal payments

ocal currency to the Central Bank,,whichconverts the local currency to an interest bearingdollar account which is payable to the Corporationin scheduled payments extending to 1993.

Under both the medium-term financing and ProjectII programs, referred to above, the interest-bearingdollar account funds are available to the Corporationunder certain conditions for relending within Brazil.At December 31, 1984, the Corporation had relentapproximately $70 million under this aspect of theprograms.

In connection with that portion of Brazil'srefinancing package dealing with short-term tradefinancing, the Corporation agreed to maintain itscurrent level of funding (approximately $80 million)during 1984.

During 1984, approximately $40 million of interestincome was recorded on cross-border outstandings toBrazil and approximately $45 million was received incash. Total Brazilian loans on nonaccrual atDecember 31, 1984 were $ 6 million, all of which areattributable to credit-related problems.

Mexico. During 1983 and 1984, the Corporationdisbursed $ 17 million and $ 10 million respectively toMexico in medium to long-term financing underagreements negotiated between Mexico and itsinternational lenders. The Corporation's aggregatecommitment under these agreements is $31 million.

During 1984, approximately $ 10 million of interestincome was recorded on public cross-borderoutstandings to Mexico and approximately $ 10million was received in cash. Total public cross-border outstandings to Mexico at December 31, 1984were approximately $95 million.

An agreement in principle to reschedule certainpublic loans has been reached between Mexico andits international lenders. The rescheduling, whichaffects approximately $70 million of the Corporation'spublic cross-border outstandings, calls for (1) afurther rescheduling of outstandings which originallymatured between August, 1982 and December, 1984(12 year term; no grace on installments of principal),(2) a rescheduling of the 1983 portion of themedium- to long-term financing previously referred


Consolidated Statistical information, confintted

(dollars in millions)PrincipalAmount Current Proposed

(1) Furtherreschedulingof loans originallymaturing betweenAugust f982 andDecember 1984

-(2) 1983 MediumTerm Loan

(3) First reschedulingofLoansmaturing between1985 ant( 1990

$45 Prime + 1.7% Libor + 1.2%

$17'rime + 2.1% Prime + 1.1%

$ 9 Libor + .9% Libor + 1.2%

't is expected that Mexico willprepayapproximately $3 million to $4 million of this loan

— as part of the proposed package during 1985. TheCorporation received the Grst installment of thisprepayment amounting to approximately $ 1 millionin January, 1985.

Approximately $20 million of the Corporation's cross-border outstandings represent placements withMexican banks. These outstandings continue to berenewed under short-term arrangements at marketrates of interest.

Mexico has established a program, known as

FICORCA, whereby principal amounts due fromprivate borrowers willgenerally be repaid overterms ranging from six to eight years. Substantiallyall of the Corporation's private cross-borderoutstandings are covered by this program.

Total Mexican loans on nonaccrual at December 31,1984 were $20 million, all of which are to privateborrowers and are attributable to credit-related

to (10 year term; 4 years grace on installments ofprincipal), and (3) a rescheduling (for the first time)of the Corporation's public cross-border outstandingswith original maturities falling between 1985 and1990 (14 year term; 1 year grace on installments ofprincipal). The Corporation received no principalrepayments on any public cross-border outstandingsin 1984.

The following summarizes the effects which thisproposal willhave on the Corporation's public cross-border outstandings.

Weighted AverageInterest Rate

problems. The Mexican government is makingforeign exchange available for the payment ofinterest on private and public loans.

Venezuela. Although not included in the .75% andhigher outstandings, cross-border outstandings toVenezuela at December 31, 1984 were approximately$ 125 million, of which approximately $ 10 millionwas to public borrowers, $45 million was to banks(of which approximately $20 million was togovernment owned banks) and $70 million was toprivate borrowers. In addition, cross-border lettersof credit into Venezuela amounted to $10 million atDecember 31, 1984.

The Venezuelan government has reached anagreement with its Bank Advisory Committee on therescheduling of public debt. It is not expected thatVenezuela's international creditors willsign theagreement until the private rescheduling program,referred to below, is Gnalized. Currently, paymentsof principal on public debt have been deferred untilApril 30, 1985. The Corporation's public borrowerswere substantially current with respect to thepayment of interest at December 31, 1984.

Although not yet Gnalized, Venezuela has announceda rescheduling program for private sector debt.Presently, borrowers continue to experience

'ifficultiesin obtaining foreign exchange and aportion of private sector loan principal and interesthas fallen past due.

Total Venezuelan loans on nonaccrual at December31, 1984 were $46 million, most of which isattributable to delays in obtaining foreign exchange.

In management's opinion, the conditions describedabove willnot ultimately have a material adverseeffect on the Corporation. However, in light ofcontinuing uncertainties within countriesexperiencing difficulties in meeting non-local debtservice, it is likely that from time to time additionalloans willbe placed on nonaccrual.

72

BANK OF BOSTON CORPORATlONI


Ill and Lease Financing

orporation's lending activities are conductedprincipally by the Bank. The loan and lease

financing portfolio is broadly diversified both interms of geographical and industrial categories.There are no concentrations of loans exceeding 10%

of total loans which are not otherwise disclosedbelow. The following table presents details ofconsolidated loan and lease financing balancesoutstanding on the dates indicated.

1984 1983

December 31

1982 1981 1980

(dollarsin millions)


Commercial, industrialand financial

Real estate-construction

Real estate —otherLoans to individualsLease financing

Unearned income

Balance Percent Balance Percent Balance Percent Balance Percent Balance Percent

955.8

1329.3921.4

264.2

(98.8)

6.6 810.4

9.1 778.1

6.3 620.2

1.8 213.0

(.7) (98.2)

6.8 585.3 5.5 435.9 4.6

6.5 588.1 5.5 554.5 5.8

5.2 602.2 5.6 618.5 6.5

1.8 214.0 2.0 171.3 1.8

(.8) (115.4) (1.0) (111.2) (1.2)

373.6 4.2

379.9 4.3

570.2 6.4

131.7 1.5

(116.6) (1.3)

10882.4 71.2 7,576.7 63.7 6,820.1 63.7 6,008.8 62.9 5,238.9 59.2

$ 7,010.5 48.1% $ S,253.2 44.2% $ 4,945.9 46.1% $4,339.8 4S.4% $3,900.1 44.1%

lt lt,;r

oIII"

<

<,'j'nternationalOperations:

Commercial andindustrial

ks and othernancial institutions

Governments andofficial institutions

Lease financingAllother

Unearned income

2,374.7 16.3 2,446.7 20.6 2,534.8 23.7 2,418.5 25.3 2,599.2 29.4

558.4 3.8 643.3 5.4 558.3 5.2 404.6 4.2 409.8 4.6

843.1 5.8

286.9 1.9

243.2 1.7

(100.2) (.7)

776.1 6.5

313.4 2.6

259.4 2.2

(119.7) (1.0)

355.2 3.3

307.2 2.9

262.5 2.4

(123.9) (1.2)

310.7 3.3

295.8 3.1

228.6 2.4

(116.0) (1.2)

290.5 3.3223.9 2.5

156.4 1.8

(71.2) (.8)

4,206.1 28.8 4,319.2 36.3 3,894.1 36.3 3,542.2 37.1 3,608.6 40.8

$141588.5 100.0% $ 11,895.9 100.0% $ 10,714.2 100.0% $9,S51.0 100.0% $8,847.5 100.0%

ajs;t,."j

l(1 „

.<,t)lr

The Corporation does not have an automatic rollover(renewal) policy for maturing loans. Rather, loansare renewed at the maturity date only at the requestof those customers who are deemed to becreditworthy by the Corporation. Additionally, theCorporation reviews such requests in substantiallythe same manner as applications by new customersfor extensions of credit (see also InternationalQutstandings beginning on page 68). The maturitydate and interest terms of renewed loans are based,

in part, upon the needs of the individual customerand the Corporation's credit review and evaluationof current and future economic conditions. Sincethese factors have varied considerably and willmostlikely continue to do so, the Corporation believes itis impracticable to estimate the amount of loans inthe portfolio which may be rolled over in thefuture.

73



The following table presents the maturities andinterest sensitivity, based on original contractualterms, of the Corporation's loans at December 31,

lin millions)

1984, exclusive of domestic office loans secured bone to four-family residential properties, domestloans to individuals and lease financing.

Within AfterOne but AfterOne Year within Five Years Five Years Total

Commercial, industrial and financialReal estate-constructionReal estate-otherOverseas otfices

Loans with predetermined interest rateLoans with floating interest rate

$3,932.0746.4355.6

2,861.4

$7,895.4

$3,184.64,710.8

$2,333.9199.3215.1891.4

$3,639.7

$ 620.33,019.4

$ 523.510.1

135.1492.4

$1,161.1

$ 234.4926.7

$ 6,789.4955.8705.8

4,245.2

$ 12,696.2

$ 4,039.38,656.9

$7,895.4 $3,639.7 $ 1,161.1 $ 12,696.2

Nonperforming Loans and Leases

Provision for Uncollectible Accrued Interest Receivable andLease Income Receivable:

The Corporation's policy with respect to nonaccrualloans and leases is discussed in Note 1 of Notesto Financial Statements under the caption Loansand Lease Financing. At December 31, 1984,approximately 15% of nonaccrual loans and leaseswere less than ninety days past due. The aggregateprovision for uncollectible interest and lease income

was $46.9 million in 1984, $20.3 million in 1983,$37.9 million in 1982, $27 million in 1981 and $ 18.5million in 1980.

The following is a summary of outstanding loansand leases by type and as a percentage of the relatedconsolidated loan category for which the relatedaccrued interest and lease income receivable waspartially or fully reserved.

December 31

(dollars in millions)

1984

Percentof Loan

Balance Category

1983

Percentof Loan

Balance Category

1982

Percentof Loan

Balance Category

1981

Percent PercentofLoan of Loan

Balance Category Balance Category

United States Operations:Commercial, industrial

and financialReal'state—

constructionReal estate-otherLoans to individualsLease financing

24.39.39.03.2

2.5.7

1.01.2

37.2 4.611.7 1.5

7.8 1.33.7 1.7

8.8 1.54.8 .86.6 1.14.8 2.3

$198.3 2.8% $ 125.1 2.4% $ 152.3 3.1% $ 99.2 2.3% $ 58.5

17.2 4.0 2.810.2 1.8 9.65.4 .9 19.51.7 1.0

1.5%

.72.53.4

International Operations:Commercial and

industrialBanks and other financial

institutionsGovernments and official

institutionsLease financingAllother

150.0 6.3 111.6 3.9 70.9 2.8

12.4 2.5 14.4 2.8 10.4 1.9

51.8 5.8.8 .3

8.8 3.6

9.6 2.0 17.2 4.9.3 .I 1.1 .3

4.4 1.7 6.6 2.9

223.8 5.3 140.3 3.2 106.2 2.7 101.2 3.0

244.1 2.4 185.5 2.4 177.3 2.6 133.7 2.3 90.4 1.8

64.6 1.9

$467.9 3.2% $325.8 2.7% $283.5 2.6% $234.9 2.5% $155.0 1.8%

The breakdown by category of Internationalnonaccrual loans and leases for years prior to 1982 isnot available.

74



llowing is an analysis of interest incomed to loans and leases on nonaccrual at

December 31, 1984:

fin millions)

Interest income that would have been recognizedduring the period if the loans had been current atoriginal contractual rates

United Slates

Operations

$24.4

internationalOperations

$36.2

Total

$60.6

Amount recognized as interest income

Difference

7.9

$16.5

10.8

$25.4

18.7

$41.9

Renegotiated Loans:

A renegotiated loan is one for which theCorporation has compromised the contractual termsto provide a reduction in the rate of interest and, inmost instances, an extension of payments of principalor interest or both because of a deterioration in thefinancial position of the borrower. Renegotiatedloans, which are performing in accordance with theirnew terms, are not included in outstanding loans forwhich the related accrued interest receivable was

partially or fully reserved unless concern exists as toultimate collection of principal or interest.

s for which contractual interest rates had beenuced and which are performing in accordance

with their new terms were less than .1% of totalrelated consolidated loan categories in 1981 through1984. In 1980, the total balance was $33.7 millionor .4%.

Reserve for Possible Credit Losses

The Corporation's reserve for possible credit losses

(the "Reserve" ) is available for future charge-offs ofextensions of credit. The provision for credit losses

(the "Provision"), added to the Reserve by charges to

income, is based upon management's estimation ofthe amount necessary to maintain the Reserve at an

adequate level, considering net losses charged to theReserve, current economic conditions, sovereign andtransfer risks, changes in the size and character ofthe credit risks, and other pertinent factorswarranting current recognition.

The Corporation charges all or a portion of a loan orlease receivable against the Reserve when a

probability of loss has been established, withconsideration given to such factors as the customer'financial condition, underlying collateral andguarantees. The Corporation utilizes a loan ratingsystem in its United States and InternationalOperations to assist management in its evaluation ofthe loan portfolio. At least annually, individualloans are reviewed and assigned ratings based

principally upon potential risk. If indicated by theassigned rating, particular loans are reviewed morefrequently.

In addition, the Corporation's independent certifiedpublic accountants review the loan and lease

financing portfolio on an annual basis. The loans ofthe Corporation's bank subsidiaries are also subject toperiodic examination by bank regulatory authorities.

75


Consolidated Statistical Information, contittued

Allocation of Reserve for Possible Credit Losses

The Corporation does not allocate its reserve forpossible credit losses to specific loan and leasecategories because management views the reserve as

being available for all categories of prospective loss.However, to be responsive to the Securities andExchange Commission's Guides for StatisticalDisclosures by Bank Holding Companies, theCorporation has allocated its year end reserves forpossible credit losses to the major loan and leasecategories. The allocations result from giving

Loans and Lease Financing

consideration to management's evaluation of risthe portfolios, current economic conditions, recentyears'oss experience, and the review of the loanportfolio of the Bank by the Comptroller of theCurrency. The unallocated reserve in 1984 wasincreased to reflect the ef'feet of the $ 100 millionspecial provision recorded during the year. SeeNote 6 of Notes to Financial Statements. Basedupon the foregoing, the allocations of the Reservewere as follows:

December 31

1984 1983 1982 1981 1980

(dollars in millions)Pcrccnl Percent

Amount of Total Amount of TotalPercent Percent Percent

Amount of Total Amount of Tolal Amount of Total


Commercial, industrialand financial

Real estate

Loans to individualsLease financing

$ 1 010.5 48.1% $ 5,253.2 44.2% $ 4,945.9 46.1% [email protected] 45.4% $3,900.0 44.1%

2,285.1 15.7 1,588.5 13.3 1,173.4 11.0 990.4 10.4 753.5 8.5

921.4 6.3 620.2 5.2 602.2 5.6 618.5 6.5 570.2 6.4

264.2 1.8 213.0 1.8 214.0 2.0 171.3 1.8 131.7 1.5

International Operations

10,481.2 71.9

4,306.3 29.5

7,674.9 64.5 6,935.5 64.7 6,120.0 64.1 5,355.4 60.5

4,439.0 37.3 4,018.0 37.5 3,658.2 38.3 3,679.9

Unearned income

14,787.5 101.4 12,113.9 101.8 10,953.5 102.2 9,778.2 102.4 9,035.3 1

(199.0) (1.4) (218.0) (1.8) (239.3) (2.2) (227.2) (2.4) (187.8) (2.1)

$14,588.5 100.0% $ 11,89S.9 100.0% $ 10,714.2 100.0% $9,5S1.0 100.0% $8,847.5 100.0%

Allocation of Reserve for Possible Credit Losses

1984 1983

December 31

1982 1981 1980

(dollars in millions)Percent

Amount of TotalPercent Pcrccnt Percent

Amount of Total Amount of Tolal Amount of TotalPercent

Amount of Total

United States Operations:Commercial, industrial

and financial

Real estate

Loans to individualsLease financing

$ 54.0 22.3% $ 39.0 28.7%

7.0 2.9 8.0 5.9

8.0 3.3 6.0 4.4

2.0 .8 2.0 1.5

$ 36.0 29.0% $ 36.0 30.7%

6.0 4.8 7.0 6.0

7.0 5.6 8.0 6.8

4.0 3.2 2.0 1.7

$ 31.0 30.3%

5.0 4.9

8.5 8.3

2.0 2.0


11.0 29.3 55.0 40.5 53.0 42.6 53.0 45.2 46.5 45.5

50.0 20.6 40.0 29.5 34.0 27.4 29.0 24.8 25.1 24.5

Unallocated

121.0 49.9

121.4 50.1

95.0 70.0

40.8 30.0

87.0 70.0 82.0 70.0 71.6 70.0

37.4 30.0 35.1 30.0 30.7 30.0

$242 4 100.0% $135.8 100.0% $124.4 100.0% $117.1 100.0% $102.3 100.0%

76



is of Reserve for Possible Credit Losses

ollowing table presents a five year analysis ofthe Corporation's reserve for possible credit losses.

{inmillions) 1984 1983 1982 1981 1980

United States Operations:Balance, January IReserves of acquired companiesProvisionCredit losses, net of recoveries:

Commercial, industrial and financial:LossesRecoveries

Real estate —construction:LossesRecoveries

Real estate-other:LossesRecoveries

Loans to individuals:LossesRecoveries

Lease financing:LossesRecoveries

$ 78.46.5

1'15.3

{55.5)12.9

{42.6)

{.3)1.0

(.3).2

(5.2)2.4

(2.8)

{7).2

S 76.51.6

22.7

(27.7)9.4

(18.3)

(5.1)2.0

$ 76.2

(20.4))5.S

(4 6)

{2.0)

(2.0)

(3)

(3)

(5.5)4.7

(8)

(3.3).2

$ 67.4.6

26.2

(23.5)10.9

(12.6)

(6.9)1.6

(5 3)

(3).I

$ 61.3.6

15.8

(13.8)8.8

{5.0)

(3).I

(2)

(6.1)1.1

{5.0)

(2).I

pl

R g

V

j0J'g~i

lr

rr4~ ',

I

.ioCi

Net credit losses

Balance, December 31

international Operations:Balance, January IProvisionCredit lossesRecoveries

Net credit losses


Consolidated:Balance, January IReserves of acquired companiesProvisionCredit lossesRecoveries

Net credit losses


Loans and lease financing atDecember 31

Average loans and lease financing

Ratios:Reserve for possible credit losses

to loans and lease financing atDecember 31t credit losses to average loans andease financing

et credit losses to provision for creditlosses

Total recoveries to total credit losses

(45.3)

$ 154.9

$ 57.464.7

(43.1)8.5

(34.6)

$ 87.5

$ 135.86.5

1S0.0(105.1)

25.2

(79.9)

$ 242.4

$14,589

$13,210

1.66%

.61

44.4323.91

(22.4)

$ 78.4

$ 47.931.3

(27.1)5.3

(21.8)

$ 57.4

$ 124.41.6

54.0(61.3)17.1

(44.2)

$ 135.8

$ 11,896

$11,076

1.14%

.40

81.8027.97

(10.8)

$ 76.5

$ 40.936.9

(36.7)6.8

(29.9)

$ 47.9

$ 117.1

48.0(68.2)27.5

(40.7)

$ 124.4

$ 10,714

$10,125

1.16%

.40

84.9340.33

(18.0)

$ 76.2

$ 34.921.8

(17.0)1.2

(15.8)

$ 40.9

$102.3.6

48.0(47.7)13.9

(33.8)

$ 117.1

$9,551

$9,050

1.23%

.37

70.3029.27

(10.3)

$ 67.4

$ 21.532.2

(21.5)2.7

(18.8)

$ 34.9

$ 82.8.6

48.0(41.9)12.8

(29.1)

$ 102.3

$8,848

$8,046

1.16%

.36

60.8730.49

77



Investment Securities

The following table sets forth the book values ofinvestment securities of the Corporation on the datesindicated.

(in millions)

U.S. Treasury

States and political subdivisions

Other bonds, notes and debentures



1984

$507.0

22.8

321.1

16.2

99.7

$966.8

December 31

1983

$ 755.5

12.8

338.5

14.1

77.3

$ 1,198.2

1982

$ 874.5

171.1

265.1

17.6

61.2

$ 1,389.5

The following table illustrates the relative maturitiesand weighted average interest rates of investmentsecurities held at December 31, 1984, excludingequity securities. Rates for states and political

subdivisions are stated on a fully taxable equivalentbasis assuming a 46% federal income tax rate,adjusted for applicable state and local income taxesnet of the related federal tax benefit.

'll's)

WithinOne Year

Amount Rate

AfterOncbut withinFive Years

Amount Rate

After Fivebut toithinTen Years

Amount Rate

AfterTcn Years

Amount Rate

Total

Amount Rate

U.S. Treasury $401.5

States and political subdivisions 8.6

Other bonds, notes anddebentures:

10.6% $ 97.2

12.2 8.2

11.5% $ 2.5

16.6 5.5

'0.8% $ 5.8

12.3 .5

11.6% $507.0 1

12.7 22.8 13.

United States Operations


11.5 13.5 20.4

173.6 31.8 71.3

11.7 13.3

42.9 12.8

9.9 18.1 8.7 63.3 10.8

14.0 .1 68.0 257.8 34.0

$595.2 16.9% $ 197.1 23.1% $34.1 11.9% $24.5 9.9% $850.9 17.9%

Deposits

The aggregate amount of deposits by foreigndepositors in domestic offices averaged $235,103,000in 1984, $ 173,686,000 in 1983 and $ 157,058,000 in1982.

The following table presents the maturities of timecertificates of deposit and other time deposits issuedby domestic offices in denominations of $ 100,000 ormore, at December 31, 1984.

(in millions)

Maturing within three months

Over three through six months

Over six through 12 months

Over 12 months

Time Certificateof Deposit

$1,262.9

29.8

32.1

230.2

Other TimeDeposits

$ 77.8

31.8

16.5

21.0

Total

$ 1,340.7

61.6

48.6

251.2

$1+55.0 $147.1 $1,7

78

The majority of foreign office deposits aie indenominations of $ 100,000 or more.


Consolidated Statistical Information, cottfittttcd

~Term Sorrowings

ldollars in millions)

Category of AggregateShort. Term Borrowirrgs:

Balanceat Enrtof

Period

WeightedAvcragcinterest

Rate

MaxirrrrrmArnorrnt

OutstandingDuring thc

Period

DailyAverageAmount

OutstarrdingDuring Ihc

Period

Weighted

Averagelntcrcst Rate

During thePeriod

For the Year Ended December 31, 1984Federal funds purchased (I)Term federal funds purchased (I)Securities sold under agreements

to repurchase (2)Commercial paper (3)Demand notes issued to the

U.S. Treasury (4)Allother (5)

$ 731.2606.5

381.4916.5

140.8496.4

8.72%9.67

84.159.40

8.5036.32

$1,500.1996.0

735.3916.5

216.6689.1

$1,119.0664.3

562.0804.5

115.1

494.0

10.24%11.03

38.2410.65

10.1236.51

For the Year Ended December 31, 1983Federal funds purchased (I)Term federal funds purchased (I)Securities sold under agreements


U.S. Treasury (4)ther (5)

$ 1,492.8348.3

646.1

724.9

106.5

522.8

10.29%

10.17

29.839.76

9.9435.74

$2,130.2779.1

1,199.8724.9

222.6594.1

$ 1,549.4

516.6

643.2593.8

135.8

441.0

8.08%

9.55

29.409.25

9.00

42.38

For the Year Ended December 31, 1982

Federal funds purchased (I)Term federal funds purchased (I)Securities sold under agreements


U.S. Treasury (4)Allother (5)

$ 1,227.0646.1

767.7577.3

201.4430.6

10.44%9.60

22.688.92

10.8742.56

$ 1,412.1

646.1

986.5665.6

209.9430.6

$ 1,149.3467.1

772.3639.1

120.3

351.7

11.73%

13.06

19.08

12.68

12.66

38.23

(1) Federal funds purchased are overnighttransactions while term federal funds purchasedhave maturities in excess of one day. A largeportion of federal funds purchased arise becauseof the Bank's money market activity in federalfunds for its regional correspondent banks.

(2) Securities sold under agreements to repurchaseby domestic offices are collateralized by UnitedStates Government securities and mature withinone year. Securities sold under agreements torepurchase by overseas offices related primarilyto the Brazilian operations of the Bank forwhich various Brazilian Government securitiesserve as collateral.

(3) Commercial paper represents unsecuredobligations with maximum maturities of ninemonths.

(4) 'Demand notes issued to the U.S. Treasuryrepresent depository liabilities that are notsubject to reserve requirements and bear interestat tlat of one percent below the weekly averagefederal funds interest rate.

(5) Allother short-term borrowings representsecured and unsecured obligations, primarily ofthe Corporation's overseas branches andsubsidiaries, to financial institutions at variousrates and terms.

79



Summary of Selected Financial Data Adjusted forthe Effects of Changing Prices

Inflation has had a pervasive influence on theworldwide economic system. This has resulted in aneffort being made to measure inflation's impact onthe performance of business enterprises. Although a

consensus has not been reached as to the best meansto achieve this goal, the Financial AccountingStandards Board (the "Board") has issued Statementof Financial Accounting Standards No. 33 (the"Statement" ), entitled "Financial Reporting andChanging Prices." This Statement, as amended,requires that certain large entities measure andreport the effects of changing prices by presentingcertain historical cost information adjusted for theeffects of general inflation. The Corporation uses thehistorical cost/constant dollar method of accounting,which adjusts assets and liabilities based on changesin the consumer price index for all urban consumers(the "CPI-U"), to measure the effects of inflation.This method is used since less than 2% of theCorporation's assets are comprised of premises andequipment and the majority of its assets andliabilities are monetary. Therefore, the results ofusing the more specific current cost method ofmeasurement would not be materially different thanthe constant dollar method.

As with any analytical tool, financial statementsadjusted for the effects of changing prices presentonly a partial picture and, consequently, should notbe viewed without reference to other financial andeconomic indicators. This caveat is especially

appropriate in the case of the banking industry. Abank's asset and liabilitystructure differssignificantly from that of manufacturing and otherconcerns in that virtually all assets and liabilities are

of a monetary nature. Accordingly, other factorssuch as its ability to manage interest rate risk mayhave a much more important impact on a bank'sperformance. Also, interest rates do not necessarily

- move in the same direction or magnitude as theprices of goods and services as reflected by theCPI-U. It is not surprising, therefore, that there is

little agreement as to the overall usefulness of thistype of information.

The impact of inflation on banks is primarily in thelending area. Since customers'oods and servicescost more in inflationary times, the level of theirfinancing needs may increase to keep pace. If loandemand increases, the rates charged for the fundsmay also rise as the financial institutions compete forfunds to support the demand. Furthermore, because

the borrowers'xposure to financial risk is greatlyenhanced as a result of increased leverage at higherrates, banks are faced with increased credit risk.Therefore, additional emphasis must be placed o

evaluating the adequacy of the reserve for possibcredit losses.

The following table compares selected financial dataon a historical basis with the same amounts adjustedto average 1984 dollars using the CPI-U.

Net interest revenue after provision forcredit losses (in millions):

Historical dollarsAverage 1984 dollars

Per share data:Net income

Historical dollarsAverage 1984 dollars

Dividends declaredHistorical dollarsAverage 1984 dollars

1984

$489.9489.9

$ 8.358.35

$ 2.342.34

19s3

$552.5580.0

$ 7.407.71

$ 2.172.26

1982

$506.1544.6

$ 6.677.17

$ 1.972.12

1981

$478.9547.0

$ 6.257.14

$ 1.731.98

1980

$417.9526.7

$ 5.486.91

$ 1.521.92

Market price at year endHistorical dollarsAverage 1984 dollars

$39.7539.20

$40.5041.51

$33.75 '30.4235.91 33.62

$23.7528

;Average Consumer Price Index (base year'"'":'1967= 100)

'" ' '''"''"-'''" '"'." - ='-'." '311.1'' '298.4.' '~

" 289.1'- ' .:,,',"272.4'0

BANK OF BOSTON CORPORATIONh

Consolidated Statistical information, continued

]

i4

i-.tj

urchasing power loss on net monetary. assets isstant dollar concept, designed to measure how

general inflation affects monetary assets andliabilities, and is a function of the level of inflation.In periods of inflation, monetary assets such as cashand fixed claims to cash lose in terms of generalpurchasing power because the cash willbuy less atthe end of the period than at the beginning.Conversely, monetary liabilities, such as deposits andother funds borrowed, willgain under the samecircumstances. This has significant reportingimplications for a bank, whose assets and liabilitiesare almost all monetary. in nature. In inflationaryperiods, a bank willgenerally report a purchasingpower loss, the magnitude of which is inverselyrelated to the degree to which it is leveraged. Thelower the proportion of liabilities to equity, thegreater the loss to be reported; the more highlycapitalized financial institutions will, because of

adjustments required by the Statement, show thelarger purchasing power loss. Basically, a bank doesnot hold a significant amount of non-monetary assetsand such assets are not material relative to therevenue producing process. Instead, it fundsmonetary asset growth by simultaneously incurringequal monetary liabilities; interest rates beingadjusted to maintain interest margins sufficient tocompensate for risk, to mitigate inflationary pressuresand to increase capital consistent with the expansionof the bank. Management believes, therefore, thatthe purchasing power loss amount is not relevant inthat it is not indicative of how well a financialinstitution manages its asset/liability structure.

In the following table, amounts adjusted for generalinflation and purchasing power losses are stated inaverage 1984 dollars.

1984 1983 1982 1981 1980

7%'t fin mi7iions, rxccpl sharc amounts)Pcr

Amount Share AmountPer

SharePer Pcr Pcr

Amount Share Amount Share Amount Sharc

tic

Net income (I)Additional depreciation resulting

from adjusting premises anduipment for the effects of'l '2)

S 164.1 $ 8.35 $ 141.5 $ 7.71 $ 133.9 $ 7.17 S 135.5 $ 7.14 $ 128.8 5 6.91

(11.2) (.58) (9.0) (.49) (9.0) (.48) (7.5) (.40) (7.2) (.39)

Net income as adjusted forgeneral inflation $ 1S2.9 $ 7.77 $ 132.5 $ 7.22 S 124.9 $ 6.69 $ 128.0 $ 6.74 $ 121.6 5 6.52

Net assets at year end (I)Increase resulting from adjusting

premises and equipment forthe effects of generalinflation (2)

$1,168.9

88.3 165.0 159.1 144.8 126.1

$ 1,032.6 S 940.6 5 906.8 $ 878.8

Net assets at year end as adjustedfor general inflation $1,2S7.2 $ 1,197.6 $ 1,099.7 $ 1,051.6 $1,004.9

Purchasing power loss on netmonetary assets held duringthe year (2) $ 16.4 $ 11.2 $ 14.1 S 29.1 S 41.3

(1) Represents amounts reported in the historicalcost financial statements stated in average 1984dollars.

(2) In accordance with the Statement, additionaldepreciation and other adjustments have beencomputed without regard to any related taxbenefits.

81


Consolidated Statistical Information, corrtinued

Trust Data

The assets shown below represent holdings inaccounts for which the Corporation's subsidiarieshave investment responsibility at December 31, 1984.


Assets by type of investment:Common stocksCorporate bonds and notesV.S. Government and agency obligationsState, county and municipal obligationsMiscellaneous assetsReal estate and real estate mortgagesCashPreferred stocks

Market Value

$3,790.71,216.5

932.9388.9278.9151.167.656.5

Percentageof Total

55.1%17.7

13.55.64.12.21.0

.8

Total assets under investment supervision $6,883.1 100.0%


Assets by type of account:Employee benefit trustsPersonal trustsAgenciesEstates, conservatorships and guardianships

Number ofAccounts

1,9746,9571,368

441

Market Value

$3,434.62,607.1

802.139.3

Percentageof Total

49.9%37.911.6

10,740 $6,883.1 10

~ I'

82


Summary of Quarterly Consolidated Financial information and Common Stock Data

opinion of management, all adjustments,include only normal recurring adjustments,

necessary to present fairly the results of operationsfor each of the following quarterly periods have

been made. Notes 6 and 8 af Notes to FinancialStatements on pages 54 and 55 include additionalinformation with respect to certain transactionsrecorded in the fourth quarter 1984.

(in millions, except share amounts)Fourth

QuarterThird

QuarterSecond

Quarter

1984

FirstQuarler

FourthQuarter

ThirdQuarter

1983

Second FirstQuarter Quarter

Income statement data:Interest incomeInterest expense

Net interest revenueProvision for credit losses

$ 812.6 $ 785.4 $ 724.4 $ 600.0 $ 612.0 $ 596.7 $ 563.0 $ 561.5625.6 613.9 553.0 460.0 458.8 438.3 413.6 416.1

187.0 171.5 171.4 140.0 153.2 158.4 149.4 145.4134.5 16.0 16.0 ~ 13.5 13.5 13.5 13.5 13.5

Net interest revenue afterprovision for credit losses

Other operating incomeOther operating expense

Income before income taxesProvision for income taxes

Net income

52.5 155.5 155.4 126.5 139.7 144.9 135.9 131.9252.1 79.3 74.4 73.4 75.0 65.0 56.3 69.7204.0 178.2 179.4 160.6 156.3 154.9 142.6 141.4

101.2 56.6 50.4 39.3 58.4 55.0 49.6 60.226.6 22.9 19.5 14.4 23.8 22.2 18.4 23.1

$ 14.6 $ 33.7 $ 30.9 $ 24.9 $ 34.6 $ 32.8 $ 31.2 $ 37.1

Average balance sheet data:Cash and due from banksInterest bearing deposits

in other'anksderal funds sold andresale agreements

rading account securitiesIn'vestment securitiesLoans and lease RnancingOther assets

323474964

14,1182,093

282330963

13,7282,014

344401

1,00913,078

2,102

195448

1,13911,889

1,940

$ 1,512 $ 1,439 $ I+95 '$ 1,384

2,311 2,469 2+21 2,375

150434

1,132"11,500

2,102

301325842

11,1161,831

147474

1,39710,905

1,751

156476

1,30310,772

1,692

$ 1,311 $ 1,160 $ 1,173 $ 1,063

2,709 3,110 2,953 2,993

Total assets $21,795 $21,225 $20,856 $ 19,370 $ 19,338 $ 18,685 $ 18,800 $ 18,455

DepositsFederal funds purchased and

repurchase agreementsNotes and other funds borrowedOther liabilitiesStockholders'quity

2+741,9711,6171,152

2,2211,9971,5801,109

2+571,991I 7121,086

2,4321,87314731,015

$14,681 $14318 $13,7IO $12,477

2,6311,6661,806

983

-2,3411,6081,515

949

3,01715241,583

927

2,8541,4901,491

900

$ 12,252 $12,272 $11,749 $11,720

c,C,

g(p

t


Per common share:Net incomeDividends declaredMarket value:

HighLow

Average common shares outstanding(in thousands)

$21,795 $21,225 $20,856 $19370 $ 19,338 $18,685 $18,800 $18,455

$ 3.80 $ 1.68 $ 1.55 $ 1.31 $ 1.86 $ 1.79 $ 1.71 $ 2.04.60 .58 .58 .58 .58 .53 .53 .53

41Fs 39 37% 43542 44 47% 41%34'/s 29 30 35'/s 34'/t ~ 37'h 39/s - 32%

19,267 19,172 19,061 18,967 18,614 18322 18,262 18,197

ur

~ $4

&~~

The common stock of the Corporation (BkBos), ticker symbol is "BKB". The registrar is State Streetich is the only class of its securities entitled to Bank and Trust Company and the transfer agent is

at the Annual. Meeting, is listed and traded on The First National Bank of Boston.New York and Boston Stock. Exchanges. The

83

Board of Directors

Martin A. AllenChairmanComputervision Corporation

WilliamF. AndrewsChairman, President andChief Executive OfficerScovill Inc.

WilliamL. BrownChairman andChief Executive Officer

WilliamJ. ClarkPresident andChief Executive OfficerMassachusetts MutualLife insurance Company

Gerhard M. FrechePresident andChief Executive OfficerNero England Telephoneand Telegraph Company

Thomas J. Galligan, Jr.Chairman, President andChief Executive OfficerBoston Edison Company

Nelson S. GiffordPresidentDennison Manufacturing Company

Richard D. HillFormer Chairman

4

1I

Colman M. Mockler, Jr.Chairman andChief Executive OfficerThe Gillette Company

J. Donald Monan, S.J.PresidentBoston College

Charles A. Sanders, M.D.Executive Vice PresidentSquibb Corporation

Richard A. SmithChairman andChief Executive OfficerGeneral Cinema Corporation

Honorary Directors

Frank L. Farwell James R. Martine

Austin B. Mason WilliamC. Mercer

84

-.I- J

)

Gary L. CountrymanPresidentLiberty Mutual Insurance Company

I

)t

John F. CunninghamPresident andChief Operating OfficerWang Laboratories, fnc.

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88



In the matter of

ARIZONA PUBLIC SERVICECOMPANY, et al(Palo Verde NuclearGenerating Station, Unit 1)


EXHIBIT C

TO



FINAL REPORT OF THE S M STOLLERCORPORATION DATED AUGUST 3g

1982'NTITLED~ESTIMATED COST FOR DECOMISSIONING PALO VERDENUCLEAR GENERATING STATION (PVNGS)"

ESTIMATED COST FOR

DECOMMISSIONING

PALO VERDE NUCLEAR GENERATING'TATION

PVNGS

F.anal Repor tAugust 3, 1982

R. M. KuppA. A. Meinstein

Because of the nature of the work provided herein, SMSC cannot guaranteethe results will completely meet the objectives sought. SMSC has, however,exercised its best efforts toward that end, and have applied to the workprofessional 'er sonnel having the required ski 1 ls, experience andcompetence. It is understood that SMSC liability, if any, for any damagesdirect or consequential resulting from this work will be limited to theamount paid SMSC hereunder.

ESTIMATED COST FOR OECONNISSIONIN6 PALO VERDE NUCLEAR GENERATING

STATION PVNGS

INTRODUCTION AND BACKGROUND

The S. M. Stoller Corporation prepared two previous decomissioning

studies for ANPP one in 1975 and an update in 1979 . Both of these

previous studies were based on the actual PVNGS Units with specific

material take-offs appropriate to the designs developed for those units.

The purpose of this study is to revise those estimates to 1982 dollars and

at the same time generally review the approaches taken in those previous~

~ ~

~~ ~

~

~

studies and modify them as necessary in light of current data or changes in

decomissioning views. Utilizing a more explicit budget, decommissioning

project payment schedules are defined that are appropriate for the several

decomnissioning alternatives to assist in evaluating and- defining the

associated financing policies.

(2)

(3)

(4)

Estimated Costs for Oecommissionin One of the Palo Verde NuclearGeneratin Plant, Prepared by the S.M. Stoller Corporation for theArizona Nuc ear Power Project, 1975.U date of Estimated Costs for Oecommissionin One of the Paloerde Nuc ear Generatin tation VNG Units, Prepared by the.M. to er Corporation for the Arizona Nuc ear Power Project,

October 3, 1975.Regulatory Guide 1.86, Termination of 0 eratin Licenses forNuclear Reactors, U.S. NRC, unePPPf i fHRCPti D i i i f

aci ities NUR G-0436, Revision , U.S. Nuc ear Regu atoryCommission, December 1978 and Supplement 1, August 1980.

Decomrissioning Alternatives

The three approaches to the decomnissioning of a nuclear facility

identified by the NRC have been evaluated in the previous SMSC

analyses of the PVNGS Units. These approaches are:

A. Complete removal

This decomnissioning approach is sometimes broken down into two

steps, an inmediate "dismantlement", the removal of all

radioactively contaminated materials from the plant, including

radioactively contaminated concrete, steel, etc. such that the

facility could then be considered to be a "conventional" non-

radioactive plant; and "demolition", the removal of all equipment

and buildings to below grade followed by the restoration of the

site to its "original" condition. The previous decoamissioning

studies by SMSC (1975 and 1979) incorporated both of these steps

in the dismantling decommissioning alternative. The scenario is

sometimes called "DECON".

B. Mothballing

Decontamination followed by "securing" a plant in place fot some

"long" period of time e.g. 30 years. Eventual dismantlement is

necessary if unrestricted release and license termination is

desired. This scenario's sometimes called "SAFSTOR".

-2-

C. Iso 1 ati on

Decontamination followed,'by sealing the remaining radioactivity in

a "monolithic" structure ("entombed" for additional safety) for

very long term storage. Even with such long term storage

dismantlement is probably required. This scenario is sometimes

called "ENTOMB".

Costing Background

In the 1975 cost analysis it was assumed in alternatives "B" and "C",

Mothballing and Isolation (entombment), that there would be yearly ongoing

operating and surveillance costs after the initial decoamissioning

activities. An entombment structure cannot be designed for a "lifetime"

consistent with the long lived isotopes contained therein; therefore, itis not expected that a permanent entombment, the equivalent of an above

ground burial facility, would be acceptable as a permanent alternative.

Interim isolation of the plant, under scenarios "8" or "C" with plans for

complete removal at some future date, is a probable scenario and a

reasonable approach for cost estimating. In such a procedur e it is clear,

even though the complete removal steps are somewhat less expensive in the

future because of the reduced radioactivity levels resulting in more

efficient use of manpower and lower disposal charges, that the total cost,

in constant 19S2 dollars, which includes initial decontamination, inter im

surveillance and eventual removal, will be higher.

Among the "A", "8" and "C" alternatives there're major displacements in

time for the expenditure of the funds; hence, the evaluated cost can vary

substantially, depending upon how "Present Morth" techniques are utilized.

This analysis utilizes constant ~1982 dollars for all expenditures and

assumes a present worth factor of 3'A a year, a value compatible with the

constant dollar assumption of the study.

Federal Requirenents

There are a number of Federal regulations which 'establish the basis for

decommissioning of a nuclear facility. Those requirements and guidelines,

which have been the basis for the development of'his decommissioning

analysis, are defined in the following documents:

ib

Title 10, Code of Federal Regulations (10CFR), the Rules and Regu-

lations of the Nuclear Regulatory Commission (NRC).

Part 50, Sections 50.33, 50.51, 50.59, 50.82, 50.90..

Part 51, Sec. 51.5

Parts 20, 30, 40, 70

NRC Regulatory Guide 1.86

NRC Regulatory Guide 4.2, Rev. 2, Sec. 5.8

NUREG - 0436 Revision 1 (Plan for Reevaluation of NRC Policy on

Oecommissioning of Nuclear Facilities)

-4-

In 1981 the Nuclear Regulatory Cori ssi on proposed additional

guidelines regarding the funding requirements for decommissioning at

the end of pl ant lifctime, and in additi on proposed new funding

requirements for early decommissioning which would not normally be anti-7.

cipated. The cost for such early decommissioning would be similar, but

slightly lower than that developed for "end of life", because the total

induced radioactivity would be somewhat less as a result of shorter

radiation exposure. It has been proposed by NRC that utilities maintainI,

property damage insurance available to'the nuclear industry which could be

applicable to such early and unanticipated Decommissioning

(5)

(6)

"Decommissioning Criteria for Nuclear Facilities; Notice ofAvailability of Draft Generic Environmental Impact Statement",Federal Register, 46:11666, February 10, 1981.

~ t'i hRqi gutiliyLi P h 0-Site Property Insurance to be Used for Decontamination ExpensesArising from an Accident", Federal Re ister, 47:13750, March 31,1982.

-5-

SUMMARY AND CONCLUSIONS

Basis of Study

This decommissioning study updates the costs developed in previous studies

in several ways as summarized below:

l. A review has been completed of the major components of the

plant to assure that the weights and volumes are appropriate

for the PVNGS as designed and built

2. Labor cost and constr uction equipment charges have beenli

updated to January 1, 1982 dollars;

3. Radioactive waste shipment and disposal charges have been

updated to conform to current charges for such service;

4. A credit has been taken for those items and materials which

have a positive salvage value;

5. A task and work schedule was prepared and analyzed so as to

form a basis for the cash flow required for the manpower,

contract services, equipment and fees;

-6-

6. Expensed nuclear fuel has been eliminated from the cost of

di sposal as these charges are r ecovered from uti 1 ity

customers as a part of fuel cycle cost.

A major reference used in developing the manpower and cost analysis is the

detailed report prepared for the Nuclear Regulatory Coamission on the

decomissioning of a pressurized water reactor station . In addition,

several other historic and current decomissioning reports (8) (9) (1o)

were utilized to develop the plan and cost summarized in this

document. These costing data as developed and presented in these

references, and specifically the prior PVNGS S. M. Stoller Studies

have been, reviewed and compared to the updated costs presented herein as a

check for consistency.

(7)

(8)

(9)

(10)

(12)

II. I. K ITN. K. J. K I d II. N. I dy, J ., ~ThSafet and Costs of Oecommissionin a Reference Pressurized WaterReactor Power Station, NUREG/CR-130, Prepared by Pacific NorthwestLabor atory for,U.S. Nuclear Regulator y Comission, June 1978,Addendum, August 1979.H. O. Oak et al., Technoloa Safet and Costs of Deconmissionina a

Reference Boilin Water Reactor Power Station, NUREG/CR-0672,Prepared by Pacific Northwest Laboratory - for U.S. NuclearRegulatory Commission, June 1980.W. J. Manion, T.S. La Guardia and P. Garrett,. An En ineerinoEvaluation of Nuclear Power Reactor Oecommissionin A ternatives,

N - -0 9 R, a Nationa nvironmenta tudses Project ofthe Atomic Industrial Forum, Inc., November 1976.B. J. Davis, "Elk River Reactor Dismantling", Proceedings of theFirst Conference on Decontamination and Oecommissionin 0 & 0 of

ROA aci ities, COMF- 5-82 p. 83, August 975.d I I I K d I NIT III N

and , Prepared by Northeast Utilities Service Company, Ber in,Connecticut, Nay, 1991.Op. Cit. (1), (2) ~

REFERENCE OECOWISSIONIH6 SCENARIO

The ANPP reference for decomnissioning OF PVNGS is that of scenario "A"-

"Complete Removal" (immediate dismantlement) after plant shutdown which

includes the decontamination and removal of all radioactive components and

materials followed by the demolition of all structures to below grade and

the regrading of the site.

This scenario A reference was decided upon, rather than scenario "B" -"Safe

Storage" followed by dismantlement or "C", long term "Entombment" also

followed by dismantlement, as scenario A represents the most straight-

forward approach to. recovery of the site to its original condition and its

~ ~ ~

~~

~

~

~

~early subsequent unlimited use. Iomediate dismantlement also is con-

servative in that it results in the highest "Present Worth" dollar cost

which must be provided at the time of plant shutdown. The other two

decommissioning alternatives although they result in higher total dollars,

are lower in "Present Worth" charges. Table 1 sumnarizes the cash flow for

the three alternatives in 1982 dollars as a function of years after shut-

down and it also summarizes the "Present Worth" cost of these different

patterns of expenditure using a 3 percent discount rate.

Another factor in the decision to use the immediate dismantlement.,

scenario A, as the decommissioning reference 'is the view expressed in the

NRC draft statement on decommissioning of nuclear facilities ' In

(13) Oraft Generic Environmental Impact Statement, NUREG-0586, U.S.Nuclear Regulatory Commission, January 1981.

-8-

TABLE 1

PALO VERDE NUCLEAR GENERATING STATION DECGbSISSIONING COSTS FOR ONE UNIT

TOTAL COST AND CASH FLOW fOR ALTERNATIVE DECOMMISSIONING SCENARIOS

(Millions of 1982 Dollars)

YEAR

(0 is theTime of

Shutdown

-2-1

AImmediate

Dismantlement& Remov~)3~

DECON

1.13.0

SCENAR IO

B

MothballingFollowed by

RemovalSAFSTOR (

1.12.7

C

Iso 1 at i onFollowed by

Remova]]3)ENTOMB

1.12.8

5-27*-$/Year

2829

30313233

15.128.023.88.1

79.1 10.36.61.0.14

0.14

0.51.7

12.622.820.3

7.9

22. 6

3.4

65.8

ll.39.12.0.0

0.0

0.61.9

12. 823. 120.68.1

26.6

1.2

67.1

TOTAL 1982 5

PRESENT WORTH $~79.1

74.3

91.8

50. 2

94.9

53.1

* Could be for a shorter or longer isolation period which would result inhigher or lower present worth costs.Based on 3X/year discount rate to zero time (shutdown of reactor).

(13) Nomenclature used by NRC - NUREG 0586

-9-

ENTOMB period) is not considered a reasonable option since it results in the

continued presence of a site dedicated to radioactivity containment for an

s also stated NUREG-0585 that the economics op(13)extended time period. 1t wa

cit. were not as good.

that'ocument, although it was stated that 30 year SAFSTOR (Scenario B) was a

reasonable option, longer term, e.g. "100 Year SAFSTOR (or presumably a similar,

The cost data in Table 1 assumes that each unit on the PVNGS site would be

decommissioned separately.'f multiple units were to be decommissioned at about

the same time there would be some savings per unit as a result of sharing co+non

costs (e.g. planning, engineering, licensing), from more efficient use of

personnel and equipment and also from "learning" from the first unit to the next.

These savings have been estimated and the cash flows and totals for a three-unit

decomnissioning, with a time displacement of two years between units, is

summarized in Table 2 for the scenario A alternative. This two-year displacement

is reasonably optimum which is illustrated by the relatively level total cash

flow.

The costs and cash flows in Table 1 have'een used as a basis for a funding

requirement and a recomnended funding plan.

A summary by major components of costs for the reference decomnissioning is given

in Table 2. It should be noted that fuel shipment and disposal are not included

as these charges are incorporated into the fuel cycle costing and are collected

from customers and accrued during the operating period.

-10-

TABLE 2

PVNGS Decoamissionin Cost for Nulti le Units

SCENARIO A - Tamed iate Dismantlement and Removal (DECGN)

Cash Flow - (Millions of 1982 Dollars)

Year

(0 is timeof Shutdown

Unit 1)-2

TOTAL

PRESENT WORTH

(to Zero Time9 3X per year)

Unit 1

1.1.

3.0

15.1

28.0

23.8

8.1

79.1

74.3

Unit 2

0.2

0.5

14.7

27.1

23.5

8.1

74.1

65.3

Unit 3

0.2

0.5

14. 7

27.1

23.5

8.1

74.1

61.5

TOTAL

3.0

15.3

28.5

38.7

35.7

38.2

35.2

23.5

8.1

227.. 3r

201.1

-11-

The cost savings for the second and- third units are also summarized in

Table 3. These savings result from a nominal expenditure for additional

planning, engineering and licensing requirements and modest savings, on

the order of five percent from more efficient use of labor, radioactive

waste packaging and improved scheduling as a result of learning on the

first.unit. There is a reasonable possibility that even more savings may

develop. To maintain a conservative approach a twenty five percent con-

tingency has been used for all three units.

The cash flow requirement has been developed from the costing of the "Major

~ ~ ~

~

Activities" which are shown on a project schedule, Figure 1, and the total

expenditures as suamarized in Table 3. Inherent in this cash flow de-

velopment is a a credit for the sa1e of scrap equipment or materials. In

the past most contaminated materi'als, those with "surface" radioactivity,

have not been sufficiently decontaminated to be useful as standard items of

commerce, although sufficient decontamination could theoretically be ac-

complished and in some cases has actually been achieved. Whether the ad-

ditional expenditure of funds for this extra treatment is justified, would

have to be determined from a balance between those costs, radioactive

transportation and disposal charges, and the market for such commercial

scrap material. As this balance has not been well established from

historical data to date, we have stayed with the known technology, the

more conservative approach, which results in a'igher cost and assumed

disposal.

-12-

TABLE 3

SUGARY OF PALO VERDE DECOMMISSIONING COST ESTIMATE

SINGLE AND MULTIPLE UNIT DECO'SSIONINB

Scenario "A" - Immediate Dismantlement and Demolition (DECON)

Millions of 1982 S

Cost Cate or

Disposal of Radioactive Material

Labor

Energy

Contract Demolition*

Insurance

LicensingSpecial Tools and Equipment

Miscellaneous Supplies

Unit 1

18.8

16.7

12.6

7.41.2

1.5'.7

3.4

Unit2E 3

17. 9

15. 9

12. 6

7.1

1.2

.21.03.4

'TOTAL

Contingency 9 25K

GRAND TOTAL

63.3

15.8

$79.1

59.3

14. 8

74.1

Net including credit for salvage value.

-13-

tII ~ ~ V ~ ~ ~ ~ ~ I

I

~ I ~ 'I ~ ~

FIRURE 1

PVNRS DECOMMISSIONING SCHEDULE

(Single Unit)

PRE SHUTDOWN

Preparation and Anal sistaff inc and Tr ainin

Re orts and Licensino

POST SHUTDOWN

DecontaminationPrimary Loop EquipmentContainment Suilding

~

~

~

~

~

~

~

~

Auxi 1 iary BuildingFuel Bui lding

Radioactivitv Removal

Pr imary Loop EquipmentAuxiliary Build EquipmentFue1 Bui 1ding Equipment

Radioactive Shipments

Spent FuelDecontamination SolMsPrimary LoopSuilding Materials

Non Radioactive Demolition and Shioment

Containment Building Materi alsAuxiliary Suilding MaterialsTurbine & Electrical EquipmentTurbine Building MaterialsCooling Tower

Backfi 1 1 in and. Landscao in

YEARS

-14-

~ ~

For the non-radioactive portions of the plant the demolition costs are a

net charge as the demolition contractor would sell, for his own account,

that equipment having a positive salvage value. This was the basis on

which the estimate was developed

Costing Procedures

The principle costing reference is that of NUREG-130, the very

complete PWR decommissioning study developed by the NRC. As this study

was completed in May 1978 and published shortly thereafter, it is necessary

to update the costing to account for economic changes between that date and

~

~ ~

today. In addition diferences in plant design, site location, a project

management approach and energy costs all require additional corrections

for the final costs to be appropriate for the PVNGS units.

Those charges previously developed for PVNGS were to a lar ge extent based

on the decommisioning of the Elk River reactor - the only major nuclear

facility fully dismantled and demolished. A check of this historic data

against the updated NUREG-130 provides an independent correlation and con-

fidence in the costs developed.

J. N. Nc Farland, Renort on Re resentative Cost Estimates forOemolition of Structures at a Pressurized Mater Reactor Site,

NL- , repared or Hatte e, Pacific Northwest La oratory, byMcFarland Wrecking Corporation, Seattle WA 98108, September 30,1976.

-15-.

\

Several major corrections were made to the data developed in the NRC report

to make the costs applicable to the PVNGS site. These are summarized as

follows:

l. Labor cost - The labor unit rates have been adjusted to

account for escalation between 1978 and 1982.

2. Tools, equipment and supplies - Adjusted from 1978 to 1982

with a composite index of steel products, chemical,

electrical, and commodities.

3. Electrical energy - Use of a current incremental electrical

cost for Arizona as compared to the lower "average" cost used

in NUREG-130.

4. Contract demolition - Adjusted for increases in construction

labor and equipment.

5. Waste OisposaI - Use'f current rates which have increased by

more than 400Ã for disposal charges. In addition, shipping

charges are based on a 500 mile shipment (reflecting

state/regionalization of disposal sites) and actual current

tarriff rates.

-16-

6. Licensing - A significant increase in this charge reflecting

a view that more preplanning and technical work is necessary

for such major demolition both for licensing and project

management..

7'. Size - Related to most of the above items. Corrections were

made for the somewhat larger size of the unit and for specific

quantities take-off.

-17-

Forwards "Application in Respect of Sale & Leaseback ...

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