UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
___________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(X) COMBINED ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
________________________________________________________________________________
TNP ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
4100 International Plaza,
P. O. Box 2943, Commission File
Texas Fort Worth, Texas 76113 Number: 1-8847
----------- --------------------------- --------------
(State of (Address and zip code of
incorporation) principal executive offices)
Telephone number, including area code: 817-731-0099 75-1907501
------------ ----------
(I.R.S. employer
identification no.)
Securities registered pursuant to Section 12(b) of the Act:
Shares Outstanding Name of each exchange
Title of each class on January 30, 1998 on which registered
- --------------------- ------------------- ---------------------
Common stock, no par value 13,184,489 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes \X\ No \ \
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. \X\
The aggregate market value of TNP Enterprises, Inc. common stock held by
nonaffiliates on January 30, 1998, was $435,870,418 based on the common stock's
closing price on the New York Stock Exchange on the same date of $33.44 per
share.
______________________________________________________
TEXAS-NEW MEXICO POWER COMPANY
(Exact name of registrant as specified in its charter)
4100 International Plaza,
P. O. Box 2943, Commission File
Texas Fort Worth, Texas 76113 Number: 2-97230
---------- ------------------------ ---------------
(State of (Address and zip code of
incorporation) principal executive offices)
Telephone number, including area code: 817-731-0099 75-0204070
------------ ----------
(I.R.S. employer
identification no.)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange
Title of each class on which registered
- ------------------- --------------------
First mortgage bonds: Series M, 8.7%
due 2006 and Series U, 9.25% due 2000 None
Secured debentures: 12.5% due 1999; Series A,
10.75% due 2003 None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes \X\ No \ \
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. \X\
TNP Enterprises, Inc. holds all 10,705 outstanding common shares of Texas-New
Mexico Power Company.
________________________________________________________________________________
DOCUMENTS INCORPORATED BY REFERENCE
Document Part Where Incorporated
-------- -----------------------
Proxy Statement for 1998 Annual Meeting of
Holders of TNP Enterprises, Inc. Common Stock III
<PAGE>
TNP ENTERPRISES INC. AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
Combined Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1997
This combined annual report on Form 10-K is filed separately by TNP
Enterprises, Inc. and Texas-New Mexico Power Company. Information contained in
this report relating to Texas-New Mexico Power Company is filed by TNP
Enterprises, Inc. and separately by Texas-New Mexico Power Company on its own
behalf. Texas-New Mexico Power Company makes no representation as to information
relating to TNP Enterprises, Inc. or to any other affiliate or subsidiary of TNP
Enterprises, Inc., except as it may relate to Texas-New Mexico Power Company.
TABLE OF CONTENTS
Glossary of Terms........................................................... 3
Part I
Item 1. BUSINESS.......................................................... 4
Introduction...................................................... 4
TNMP's Service Areas.............................................. 4
Seasonality of Business........................................... 5
Sources of Energy................................................. 5
Government Regulation............................................. 6
Employees and Executive Officers.................................. 6
Item 2. PROPERTIES........................................................ 8
Generating Facilities............................................. 8
Transmission and Distribution Facilities.......................... 8
Administrative and Service Facilities............................. 8
Item 3. LEGAL PROCEEDINGS................................................. 8
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 8
Part II
Item 5. MARKET FOR REGISTRANTS' COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS................................... 9
Item 6. SELECTED FINANCIAL DATA........................................... 10
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................... 12
Competitive Conditions............................................ 12
Results of Operations............................................. 13
Liquidity and Capital Resources................................... 16
Other Matters..................................................... 17
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........ 17
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................... 18
TNP Enterprises, Inc. and Subsidiaries............................ 22
Texas-New Mexico Power Company and Subsidiaries................... 27
Notes to Consolidated Financial Statements........................ 32
Selected Quarterly Consolidated Financial Data.................... 43
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................... 43
Part III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................ 44
Directors......................................................... 44
Executive Officers................................................ 44
Item 11. EXECUTIVE COMPENSATION............................................ 44
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.... 44
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................... 44
Part IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K... 44
<PAGE>
TNP ENTERPRISES INC. AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
Combined Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1997
Glossary of Terms
As used in this combined report, the following abbreviations, acronyms, or
capitalized terms have the meanings set forth below:
Abbreviation, Acronym,
or Capitalized Term Meaning
- ---------------------- -------
AFUDC ............ Allowance for borrowed funds used during construction
Bond Indenture ... Document pursuant to which FMBs are issued
Clear Lake ....... Clear Lake Cogeneration Limited Partnership
EPE .............. El Paso Electric Company
EPS .............. Earnings (loss) per share of common stock
ERCOT ............ Electric Reliability Council of Texas
FWI .............. Facility Works, Inc., a wholly owned subsidiary of TNP
FERC ............. Federal Energy Regulatory Commission
FMB(s) ........... One or more First Mortgage Bonds issued by TNMP
GWH .............. Gigawatt-Hours
IRS .............. Internal Revenue Service
ITC .............. Investment Tax Credits
KWH .............. Kilowatt-Hours
MW ............... Megawatts
MWH .............. Megawatt-Hours
NMPUC ............ New Mexico Public Utility Commission
PPM .............. PPM America, Inc.
PUCT ............. Public Utility Commission of Texas
SPS .............. Southwestern Public Service Company
SFAS ............. Statement of Financial Accounting Standards
TEP .............. Tucson Electric Power Company
TGC .............. Texas Generating Company, a wholly owned subsidiary of TNMP
TGC II ........... Texas Generating Company II, a wholly owned subsidiary of
TNMP
TNP One .......... A two-unit, lignite-fueled, circulating fluidized-bed
generating plant located in Robertson County, Texas
TNMP ............. Texas-New Mexico Power Company, a wholly owned subsidiary of
TNP
TNP .............. TNP Enterprises, Inc.
TU ............... Texas Utilities Electric Company
Unit 1 ........... The first electric generating unit of TNP One
Unit 2 ........... The second electric generating unit of TNP One
Statement Regarding Forward Looking Information
The discussions in this document that are not historical facts, including,
but not limited to, the outcome of current and future rate/regulatory
proceedings, the continued application of regulatory accounting principles,
future cash flows and the potential recovery of stranded costs, are based upon
current expectations. Actual results may differ materially. Among the facts that
could cause the results to differ materially from expectations are the
following: legislation in the states TNMP serves affecting the regulation of
TNMP's business; changes in regulations affecting TNP and TNMP's businesses;
results of regulatory proceedings affecting TNP and TNMP's operations; future
acquisitions or strategic partnerships; general business and economic
conditions; negotiations regarding TNMP's proposal regarding transition to
competition in its Texas service area; and other factors described from time to
time in TNP's and TNMP's reports filed with the Securities and Exchange
Commission. TNP and TNMP wish to caution readers not to place undue reliance on
any such forward looking statements, which are made pursuant to the Private
Securities Litigation Reform Act of 1995 and, as such, speak only as of the date
made.
<PAGE>
PART I
------
Item 1. BUSINESS.
Introduction
TNP was organized as a holding company in 1983 and transacts business
through its subsidiaries. TNMP is a public utility engaged in generating,
purchasing, transmitting, distributing, and selling electricity to customers in
Texas and New Mexico. TNMP's predecessor was organized in 1925. TNMP has two
subsidiaries, TGC and TGC II, both of which were organized to facilitate TNMP's
acquisitions of TNP One, Unit 1 and Unit 2, in 1990 and 1991, respectively.
FWI is a wholly owned subsidiary of TNP that began operations in 1996. FWI
provides integrated mechanical, electrical, plumbing, and other maintenance and
repair services to commercial customers in Texas metropolitan areas. FWI was
engaged in construction activities in 1996 and 1997; however, this segment was
discontinued in late 1997. The impact of these discontinued operations to TNP's
results of operations are described in Item 7, "Results of Operations--Overall
Results," and Note 4.
TNP, TNMP, TGC, TGC II and FWI are all Texas corporations. Their executive
offices are located at 4100 International Plaza, P.O. Box 2943, Fort Worth,
Texas 76113 and the telephone number is (817) 731-0099. Unless otherwise
indicated, all financial information in this report is presented on a
consolidated basis.
TNMP's Service Areas
TNMP provides electric service to 85 Texas and New Mexico municipalities
and adjacent rural areas with more than 222,000 customers. TNMP's service areas
are organized into three operating regions: the Gulf Coast Region, the
North-Central Region, and the Mountain Region. In addition, power marketing
activities represent an emerging opportunity for TNMP. Additional information
regarding power marketing sales is provided in Item 7, "Results of
Operations--Operating Revenues."
Gulf Coast Region
The Gulf Coast Region includes the area along the Texas Gulf Coast between
Houston and Galveston. The oil and petrochemical industries, agricultural
industry and general commercial activity in the Houston area support the economy
of this area.
North-Central Region
The North-Central Region extends from Lewisville, Texas, which is 10 miles
north of Dallas-Fort Worth International Airport, to municipalities along the
Red River. TNMP provides electric service to a variety of commercial,
agricultural and petroleum industry customers in this area. This region also
includes municipalities and communities south and west of Fort Worth. This
area's economy depends largely on agriculture and, to a lesser extent, tourism
and oil production.
Mountain Region
The Mountain Region includes areas in southwest and south-central New
Mexico. This region's economy is primarily dependent upon mining and
agriculture. Copper mines are the major industrial customers in this region.
This region also includes the area in far west Texas between Midland and El
Paso. The economy in this area is based primarily on oil and gas production,
agriculture, and food processing.
TNMP's sales in all regions are primarily to retail customers. TNMP's power
marketing sales represent resale of electricity to customers outside TNMP's
system. Revenues contributed by each operating sector and its percentage of
total operating revenues in 1997, 1996, and 1995, respectively, are set forth in
the following table. No single customer accounted for more than 10% of operating
revenues during the years presented in the table.
<TABLE>
<CAPTION>
Operating Revenues ($000s)
Sector 1997 1996 1995
--------------- -------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Gulf Coast $ 315,596 54.3% $ 269,535 53.6% $ 250,165 51.5%
North-Central 144,098 24.8 134,236 26.7 130,200 26.8
Panhandle - - - - 7,322 1.5
Mountain 107,243 18.5 98,966 19.7 98,136 20.2
Power Marketing 13,756 2.4 - - - -
---------- ------ ---------- ------ ---------- ------
Total $ 580,693 100.0% $ 502,737 100.0% $ 485,823 100.0%
========== ====== ========== ====== ========== ======
</TABLE>
<PAGE>
Franchises and Certificates of Public Convenience and Necessity
TNMP holds 83 franchises with terms ranging from 20 to 50 years and two
franchises with indefinite terms from the 85 municipalities to which it provides
electric service. These franchises will expire on various dates from 1998 to
2039. Three Texas franchises, composing 28% of total company revenues, are
scheduled to expire in 1998 and 1999. However, Texas law does not require an
electric utility to execute a franchise agreement with a Texas municipality to
be entitled to provide or continue to provide electrical service within the
municipality. A franchise agreement documents the mutually agreeable terms under
which the service will be provided. TNMP intends to negotiate and execute new or
amended franchise agreements to be effective before existing franchises expire.
TNMP also holds PUCT certificates of public convenience and necessity
covering all Texas areas that TNMP serves. These certificates include terms that
are customary in the public utility industry. TNMP generally has not been
required to have certificates of public convenience and necessity to provide
electric power in New Mexico.
Seasonality of Business
TNMP experiences increased sales and operating revenues during the summer
months as a result of increased air conditioner usage in hot weather. In 1997,
approximately 42% of annual revenues were recorded in June, July, August, and
September.
Sources of Energy
TNMP owns one 300 MW lignite-fueled generating facility, TNP One. During
1997, TNP One provided approximately 20% of TNMP's total energy requirements.
Power generated at TNP One is transmitted over TNMP's own transmission lines to
other utilities' transmission systems for delivery to TNMP's Texas service area
systems. To maintain a reliable power supply for its customers and to coordinate
interconnected operations, TNMP is a member of the ERCOT and the Western Systems
Coordinating Council.
TNMP purchases the remainder of its electricity from various suppliers with
diversified fuel sources. During 1997, approximately 81% of the purchases of
power were made under firm contracts, while 19% was purchased through short-term
spot market purchases. The availability and cost of purchased power to TNMP is
subject to changes in supplier costs, regulations and laws, fuel costs, and
other factors. TNMP continues to pursue various opportunities to reduce
purchased power costs.
The following table sets forth certain information concerning TNMP's
sources of electric energy in 1997.
<TABLE>
<CAPTION>
Year Contract Percent of
Expires Energy Provided
------------- ---------------
TEXAS
-----
Generation
<S> <C> <C>
TNP One.................................... - 26%
Purchased Power
Texas Utilities (1)........................ 2002 20
Clear Lake Cogeneration L.P................ 2004 16
Other (primarily cogenerators)............. Various 38
----
Total 100%
====
NEW MEXICO
----------
Purchased Power
Public Service Co. of New Mexico(2)........ 1999 12%
El Paso Electric Co........................ 2002 12
New Century Energy Co. .................... 2001 15
Other (primarily short-term contracts) (3). - 61
----
Total 100%
====
</TABLE>
(1) During December 1997, TNMP executed a new agreement with TU as
described in Note 10.
(2) TNMP has notified PNM of its intent to cease purchasing full power and
energy requirements effective January 1, 1999, under the existing
agreement.
(3) Suppliers under the short-term contracts include Tucson Electric Power
Co., Public Service Co. of New Mexico, El Paso Electric Co. and New
Century Energy Co.
Management believes that current supply arrangements and available
capacities on the wholesale market are adequate to satisfy TNMP's foreseeable
power requirements.
<PAGE>
Recovering Purchased Power and Fuel Costs
During 1997, a significant portion of purchased power costs in the Texas
jurisdiction was recovered from TNMP customers through a power cost recovery
adjustment clause authorized by the PUCT. The clause enables TNMP to recover
this significant component of operating expenses within two months of billing by
its suppliers. In New Mexico, a similar clause was used to recover purchased
power costs through April 1997. As explained in Item 7, "Competitive
Conditions", TNMP implemented Community ChoiceR in New Mexico effective May 1,
1997. This plan freezes rates (including the recovery of purchased power) during
the succeeding three-year transition period.
Fuel costs are recovered from TNMP's Texas customers through a fixed fuel
recovery factor approved by the PUCT. The fixed fuel recovery factor and the
related fuel reconciliation filed with the PUCT are described in Item 7,
"Pass-Through Expenses--Fuel," and Note 2, respectively.
Government Regulation
TNMP is subject to PUCT and NMPUC regulation. Some of its activities, such
as issuing securities, are also subject to FERC regulation. Recent regulatory
developments are changing competitive conditions in the electric utility
industry. These changes are discussed in Item 7, "Competitive Conditions."
In addition to regulation as a utility, TNMP's facilities are regulated by
the Environmental Protection Agency and Texas and New Mexico environmental
agencies. TNP One uses environmentally superior circulating fluidized bed
technology that eliminates the need for expensive scrubbers. TNMP was allotted
sufficient emission allowances to comply with the Clean Air Act of 1990 through
the year 2000. During 1997, 1996, and 1995, TNMP incurred expenses related to
air, water, and solid waste pollution abatement (including ash removal) of
approximately $5.0 million, $6.1 million, and $5.5 million, respectively.
Employees And Executive Officers
At December 31, 1997, TNMP had 811 employees and FWI had 494 employees. The
employees are not represented by a union or covered by a collective bargaining
agreement. Management believes relations with its employees are good. During
1998, FWI's employee count is expected to decrease significantly due to its
discontinued construction segment as explained in Note 4.
Executive officers of TNP and TNMP, who are elected annually by the
respective boards of directors and serve at the discretion of the boards, are as
follows:
Name Age Position with TNP
---- --- -----------------
Kevern R. Joyce 51 Chairman, President, & Chief Executive Officer
Jack V. Chambers, Jr. 48 Senior Vice President
Manjit S. Cheema 43 Senior Vice President & Chief Financial Officer
John P. Edwards 55 Senior Vice President
Ralph Johnson 54 Senior Vice President
W. Douglas Hobbs 54 Vice President - Business Development
John A. Montgomery 36 Vice President
Michael D. Blanchard 47 Vice President & General Counsel
Patrick L. Bridges 39 Treasurer
Scott Forbes 40 Controller
Paul W. Talbot 41 Corporate Secretary
Name Age Position with TNMP
---- --- ------------------
Kevern R. Joyce 51 Chairman, President, & Chief Executive Officer
Jack V. Chambers, Jr. 48 Senior Vice President & Chief Customer Officer
Manjit S. Cheema 43 Senior Vice President & Chief Financial Officer
John P. Edwards 55 Senior Vice President - Corporate Relations
Ralph Johnson 54 Senior Vice President - Power Resources
Dennis R. Cash 44 Vice President - Human Resources
Allan B. Davis 60 Vice President & Regional Customer Officer
Melissa D. Davis 40 Vice President & Regional Customer Officer
Larry W. Dillon 43 Vice President & Regional Customer Officer
Michael D. Blanchard 47 Vice President & General Counsel
Patrick L. Bridges 39 Treasurer
Scott Forbes 40 Controller
Paul W. Talbot 41 Corporate Secretary
Kevern R. Joyce joined TNP and TNMP in April 1994 as President and Chief
Executive Officer. He became Chairman in April 1995. From 1992 until April 1994,
Mr. Joyce served as Senior Vice President and Chief Operating Officer of TEP.
Jack V. Chambers has served as Senior Vice President and Chief Customer
Officer of TNMP since 1994 and as Senior Vice President of TNP since April 1996.
He was TNMP's Sector Vice President - Revenue Production from 1990 to 1994.
Manjit S. Cheema joined TNMP in June 1994. He was Treasurer of TNMP from
June 1994 until September 1995. In December 1994, he became Vice President &
Chief Financial Officer of TNP and TNMP. He became Senior Vice President & Chief
Financial Officer of TNMP in July 1996 and became Senior Vice President & Chief
Financial Officer of TNP in May 1997. From March 1990 until he joined TNP and
TNMP, Mr. Cheema was Assistant Treasurer and Manager of Financial Planning and
Budgeting for TEP.
John P. Edwards joined TNMP and TNP in July 1996 as Senior Vice President -
Corporate Relations. From October 1994 until joining TNMP and TNP, he was Senior
Vice President/Customer Group and Special Assistant to the Chief Operating
Officer, Tennessee Valley Authority. His primary responsibilities were general
administrative in nature for TVA's transmission operations, customer
relationships, rate and regulatory affairs. From July 1990 until October 1994,
he was President/CEO of Old Dominion Electric Cooperative and the
Virginia-Maryland-Delaware Association of Electric Cooperatives.
Ralph Johnson joined TNMP and TNP as Vice President in January 1995 as a
consultant and became Vice President in February 1995. In July 1996, he was
named Senior Vice President - Power Resources of TNMP. In May 1997, he was
appointed Senior Vice President at TNP. From March 1991 until he joined TNMP and
TNP, Mr. Johnson was Assistant General Manager for Tri-State Generation and
Transmission Cooperative in Denver, Colorado, which sells power to rural
electric cooperatives.
W. Douglas Hobbs was appointed as Vice President - Business Development of
TNP in May 1997. He was Vice President - Business Development of TNMP from
February 1997 to May 1997. He was a TNMP Vice President and Regional Customer
Officer from April 1994 to February 1997. He served as TNP One Plant Manager
from April 1992 to 1994.
John A. Montgomery became President of FWI in April 1996. From December
1995 to January 1997, he served as TNMP's Vice President - Marketing. He became
Vice President of TNP in April 1996. From February 1994 until he joined TNMP, he
served as Director of Marketing and Regional Marketing Director of Greyhound
Lines, Inc., a bus transportation company. From August 1990 to February 1994,
Mr. Montgomery was President of Viva Brands International, Inc., a tropical
fruit beverage company that he founded.
Michael D. Blanchard became Vice President and General Counsel of TNMP and
TNP in February 1998. He was Corporate Secretary and General Counsel of TNMP and
TNP from 1987 to February 1998.
Patrick L. Bridges was appointed Treasurer of TNP and TNMP in September
1995. He served as TNMP's Director - Finance from 1994 to September 1995, and
served as the Assistant Treasurer from 1993 to September 1995.
Scott Forbes was appointed Controller of TNMP in February 1997 and
appointed Controller of TNP in May 1997. From September 1996 to February 1997,
he was Manager - Financial Systems and Reporting. From January 1994 to September
1996 he was Manager - Financial Reporting and Accounting Policy with Entergy
Services, Inc. From 1991 to 1993 he was Manager - Regulatory and Financial
Reporting with Gulf States Utilities Company.
Paul W. Talbot was elected Corporate Secretary of TNP and TNMP in February
1998. He has been Senior Counsel of TNMP since August 1996. Before joining TNMP,
he was in the private practice of law in Dallas, Texas for more than ten years.
Dennis R. Cash has served TNMP as Vice President - Human Resources since
1994. From 1990 until 1994 he was General Manager - or Manager - Human
Resources.
Allan B. Davis has been a TNMP Vice President and Regional Customer Officer
since 1994. From 1991 to 1994, he was TNMP's Vice President - Chief Engineer,
Chief Engineer, or Assistant Chief Engineer.
Melissa D. Davis became a TNMP Vice President and Regional Customer Officer
in February 1997. From September 1995 to February 1997 she was TNMP's
Controller. From 1994 to September 1995, she was Director - Financial Accounting
and Assistant Controller of TNMP. She served as Division Accounting Manager from
1991 to 1994.
Larry W. Dillon has been a TNMP Vice President and Regional Customer
Officer since 1994. From 1993 to 1994, he was TNMP's Vice President -
Operations.
<PAGE>
Item 2. PROPERTIES.
Substantially all of TNMP's real and personal property secures its FMBs.
Substantially all of TNMP's real and personal property in Texas also secures its
revolving credit facilities and debentures. TNMP's long-term debt is described
in Note 7.
Generating Facilities
TNP One is a two-unit, lignite-fueled generating plant, located in
Robertson County, Texas. TNP One generates power for TNMP's Texas service areas
and operates as a base load facility.
Transmission and Distribution Facilities
Management believes that TNMP's transmission and distribution facilities
are of sufficient capacity to serve existing customers adequately and can be
extended and expanded to serve customer growth for the foreseeable future. These
facilities primarily consist of overhead and underground lines, substations,
transformers, and meters. TNMP generally constructs its transmission and
distribution facilities on easements or public rights of way and not on real
property held in fee simple.
Administrative and Service Facilities
TNP's, TNMP's and FWI's corporate headquarters are located in an office
building in Fort Worth, Texas. Space in this building is leased through 2003.
TNMP owns or leases local offices in 37 of the municipalities that it
serves. TNMP owns 14 construction/service centers in Texas and New Mexico.
Item 3. LEGAL PROCEEDINGS.
TNMP is the defendant in a suit styled Clear Lake Cogeneration Limited
Partnership vs. Texas-New Mexico Power Company, pending in the 234th District
Court of Harris County, Texas. This lawsuit and a parallel proceeding pending
before the PUCT arose out of disagreements between the limited partnership
(Clear Lake) and TNMP over the interpretation of certain provisions of a
purchased power agreement under which TNMP purchases cogenerated electricity
from Clear Lake. Clear Lake disputes several charges for which TNMP has billed
Clear Lake, alleges that TNMP has failed to abide by contractual language
concerning several issues, and seeks in the lawsuit approximately $15 million in
damages. TNMP has moved for summary judgment in the lawsuit, which is in the
discovery phase. TNMP is vigorously contesting the lawsuit and the PUCT
proceeding. The ultimate disposition is not expected to have a material effect
on TNMP's results of operations.
TNMP is the defendant in a suit styled Phillips Petroleum Company vs.
Texas-New Mexico Power Company, pending in the 149th State District Court of
Brazoria County, Texas. The suit is based on events surrounding an interruption
of electricity to a petroleum refinery and related facilities that occurred in
May 1997. Phillips is seeking the recovery of approximately $36 million in
damages arising from the interruption. TNMP is vigorously contesting this
lawsuit, which is in the discovery phase. The ultimate disposition is not
expected to have a material effect on TNMP's results of operations.
The lawsuit in a state district court in New Mexico styled El Paso Electric
Company vs. Texas-New Mexico Power Company has been dismissed.
Information regarding additional regulatory and legal matters is provided
in Notes 2 and 10.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders in the fourth
quarter of 1997.
<PAGE>
PART II
-------
Item 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
TNP's common stock is traded on the New York Stock Exchange under the
symbol "TNP." The high and low prices of, and the amount of dividends declared
and paid on, TNP's common stock during each quarter in 1997 and 1996 were as
follows:
TNP
Market Price Range Dividends
-------------------------------------- Paid
1997 1996
------------------- ----------------- --------------
Quarter high low high low 1997 1996
------- --------- --------- ------- ------- ------ -------
First $27 3/4 $21 3/8 $23 1/4 $18 1/2 $0.245 $ 0.22
Second 24 18 7/8 28 5/8 22 0.245 0.22
Third 25 15/16 22 15/16 28 1/8 23 0.245 0.245
Fourth 33 3/4 24 7/16 28 1/8 24 1/2 0.27 0.245
------ -------
$1.005 $ 0.930
====== =======
As of January 31, 1998, there were approximately 4,830 record holders of
TNP common stock.
TNP holds all 10,705 outstanding common shares of TNMP. During 1997 and
1996, TNMP paid common dividends to TNP as follows:
TNMP Dividends Paid ($000's)
----------------------------
Quarter 1997 1996
------- --------- ---------
First $ 9,000 $ 2,400
Second 11,800 2,400
Third 9,500 2,700
Fourth 14,000 3,200
--------- ---------
Total $ 44,300 $ 10,700
========= =========
<PAGE>
<TABLE>
<CAPTION>
Item 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial data of TNP and TNMP for 1993 through 1997.
1997 1996 1995 1994 1993
-------------- ------------- ------------- ------------- --------------
TNP ENTERPRISES, INC. (In thousands except per share amounts and percentages)
Consolidated results
<S> <C> <C> <C> <C> <C>
Operating revenues $ 585,234 $ 502,737 $ 485,823 $ 477,989 $ 474,242
Income (loss) from continuing operations before
the cumulative effect of change in accounting $ 40,455 $ 26,150 $ 33,060 $ (17,441) $ 11,605
Net income (loss) $ 29,678 $ 23,053 $ 41,505 $ (17,441) $ 11,605
Total assets $ 991,926 $ 1,006,784 $ 1,030,433 $ 1,054,488 $ 1,086,938
Common shares outstanding
Weighted average 13,083 11,465 10,901 10,750 10,641
End of year 13,133 13,006 10,920 10,866 10,696
Per share of common stock
Earnings (loss) from continuing operations before
the cumulative effect of change in accounting $ 3.08 $ 2.27 $ 2.98 $ (1.70) $ 1.01
Earnings (loss) $ 2.26 $ 2.00 $ 3.75 $ (1.70) $ 1.01
Cash dividends declared $ 1.005 $ 0.93 $ 0.82 $ 1.22 $ 1.63
Book value $ 22.71 $ 21.41 $ 19.91 $ 17.01 $ 19.97
Capitalization
Common shareholders' equity $ 298,241 $ 278,474 $ 217,457 $ 184,869 $ 213,627
Preferred stock 3,240 3,420 3,600 8,680 9,560
Long-term debt, less current maturities 478,041 533,964 611,925 682,832 678,994
-------------- ------------- ------------- ------------- --------------
Total capitalization $ 779,522 $ 815,858 $ 832,982 $ 876,381 $ 902,181
============== ============= ============= ============= ==============
Capitalization ratios
Common shareholders' equity 38.3% 34.1% 26.1% 21.1% 23.7%
Preferred stock 0.4 0.4 0.4 1.0 1.1
Long-term debt, less current maturities 61.3 65.5 73.5 77.9 75.2
-------------- ------------- ------------- ------------- --------------
Total capitalization 100.0% 100.0% 100.0% 100.0% 100.0%
============== ============= ============= ============= ==============
TEXAS-NEW MEXICO POWER COMPANY
Consolidated results
Operating revenues $ 580,693 $ 502,737 $ 485,823 $ 477,989 $ 474,242
Income (loss) before the cumulative effect
of change in accounting $ 43,918 $ 26,862 $ 33,364 $ (16,634) $ 11,523
Net income (loss) $ 43,918 $ 26,862 $ 41,809 $ (16,634) $ 11,523
Total assets $ 967,006 $ 1,002,157 $ 1,024,943 $ 1,043,178 $ 1,076,820
Capitalization
Common shareholder's equity $ 287,021 $ 287,548 $ 224,351 $ 185,777 $ 214,184
Preferred stock 3,240 3,420 3,600 8,680 9,560
Long-term debt, less current maturities 477,900 533,800 611,925 682,832 678,994
-------------- ------------- ------------- ------------- --------------
Total capitalization $ 768,161 $ 824,768 $ 839,876 $ 877,289 $ 902,738
============== ============= ============= ============= ==============
Capitalization ratios
Common shareholder's equity 37.4% 34.9% 26.7% 21.2% 23.7%
Preferred stock 0.4 0.4 0.4 1.0 1.1
Long-term debt, less current maturities 62.2 64.7 72.9 77.8 75.2
-------------- ------------- ------------- ------------- --------------
Total capitalization 100.0% 100.0% 100.0% 100.0% 100.0%
============== ============= ============= ============= ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TEXAS-NEW MEXICO POWER COMPANY
SELECTED OPERATING STATISTICS
1997 1996 1995 1994 1993
-------------- --------------- --------------- --------------- ---------------
Operating revenues (in thousands):
<S> <C> <C> <C> <C> <C>
Residential $ 211,398 $ 206,748 $ 200,455 $ 194,933 $ 193,484
Commercial 155,539 150,034 148,908 141,886 138,680
Industrial 170,169 129,972 113,728 122,714 124,474
Other 29,831 15,983 22,732 18,456 17,604
Power Marketing 13,756 - - - -
-------------- --------------- --------------- --------------- ---------------
Total $ 580,693 $ 502,737 $ 485,823 $ 477,989 $ 474,242
============== =============== =============== =============== ===============
Sales (MWH):
Residential 2,251,119 2,230,558 2,141,553 2,085,621 2,047,360
Commercial 1,772,591 1,725,650 1,681,130 1,618,840 1,567,083
Industrial 5,523,907 3,797,776 2,704,159 2,652,844 2,567,552
Other 107,847 108,039 113,985 114,190 104,882
Power Marketing 494,705 - - - -
-------------- --------------- --------------- --------------- ---------------
Total 10,150,169 7,862,023 6,640,827 6,471,495 6,286,877
============== =============== =============== =============== ===============
Number of customers (at year end):
Residential 192,005 187,796 183,863 185,364 181,298
Commercial 30,289 29,864 29,361 30,624 30,235
Industrial 139 135 136 142 141
Other 222 224 244 237 237
Power Marketing 16 - - - -
-------------- --------------- --------------- --------------- ---------------
Total 222,671 218,019 213,604 216,367 211,911
============== =============== =============== =============== ===============
Revenue statistics:
Average annual use per residential
customer (KWH) 11,835 11,973 11,476 11,354 11,362
Average annual revenue per residential
customer (dollars) 1,111 1,110 1,074 1,061 1,067
Average revenue per KWH sold
per residential customer (cents) 9.39 9.27 9.36 9.35 9.45
Average revenue per KWH sold
total sales (cents) 5.72 6.39 7.32 7.39 7.54
Net generation and purchases (MWH):
Generated 2,089,448 2,296,056 2,351,000 2,336,830 2,363,493
Purchased 8,443,990 5,769,173 4,612,186 4,472,306 4,385,697
-------------- --------------- --------------- --------------- ---------------
Total 10,533,438 8,065,229 6,963,186 6,809,136 6,749,190
============== =============== =============== =============== ===============
Average cost per KWH purchased (cents) 3.09 3.51 3.87 4.35 4.56
Employees (year-end)
Texas-New Mexico Power Company 811 819 858 894 1,051
Facility Works 494 116 - - -
</TABLE>
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
SIGNIFICANT EVENTS AND KNOWN TRENDS AFFECTING TNP AND TNMP
Competitive Conditions
The electric utility industry continues its transition toward an
environment of increased competition for energy generation. The portions of
operations pertaining to transmission and distribution are expected to continue
to be regulated. Pressures that underlie the movement toward increasing
competition are numerous and complex. They include legislative and regulatory
changes, technological advances, consumer demands, greater availability of
natural gas, environmental needs, and other factors. The increasingly
competitive environment presents opportunities to compete for new customers, as
well as the risk of loss of existing customers.
The most significant effect of competition on TNMP, as well as other
utilities, will be the ability to recover potential stranded costs. "Stranded
costs" is the difference between what it costs TNMP to provide energy and what a
customer would be willing to pay for energy in a competitive market. The
inability to recover a significant portion of stranded costs would adversely
impact TNP's and TNMP's financial condition. In Texas, TNMP's potential stranded
cost relates to TNP One, its 300 MW generating unit, and could potentially be
more than $270 million. In New Mexico, TNMP's potential stranded cost relates to
its fixed purchased power contracts and could potentially be $3 million to $9
million.
The following discusses TNMP's strategy to transition to competition and to
provide TNMP the ability to recover its potential stranded costs in Texas and
New Mexico. Although the final resolution and magnitude of this issue is
uncertain, management realizes it is possible that shareholders may share the
financial burden of stranded costs with customers.
Texas Rate Filing and Transition to Competition Plan
In December 1996, certain cities in the Texas Gulf Coast area (Gulf Coast
Cities) served by TNMP passed resolutions requiring TNMP to file complete rate
information with those cities. On July 31, 1997, TNMP filed the required
traditional rate information with the Gulf Coast Cities based on the test year
ended December 31, 1996. Agreements with the cities provide that any rate
reduction resulting from the traditional rate filing required by the city
ordinances will be placed into effect retroactive to May 15, 1997. Based on its
analysis, TNMP believes the filing supports the reasonableness of TNMP's current
rates.
Simultaneous with the Gulf Coast Cities rate filing, TNMP filed a
transition to competition plan with the PUCT and all of its Texas cities. On
December 22, 1997, TNMP and the staff of the PUCT, along with other signatories,
reached an agreement on TNMP's proposed transition to competition plan. The
agreement proposes a five-year transition period, with a series of rate
reductions for residential and commercial customers beginning in 1998. At the
end of the transition period, TNMP's Texas customers would be allowed to choose
their energy supplier. The agreement provides the opportunity for TNMP to
recover a portion of its stranded costs during the transition period by using
accelerated recovery of its investment in TNP One. Also, the agreement specifies
an earnings cap mechanism that provides earnings in excess of the earnings cap
to be applied by TNMP to recover stranded costs or refunded to customers. Also,
the agreement establishes a competitive transition charge to recover any
stranded cost that remains at the end of the transition period over the
subsequent five years. TNMP will continue working with other interested parties
to obtain their approval before forwarding this agreement to the PUCT for their
approval. PUCT approval is expected by mid-1998.
New Mexico Community Choice
Following NMPUC approval on April 11, 1997, TNMP implemented Community
Choice, its plan for transition to competition for its New Mexico service
territory effective May 1, 1997. The plan provides TNMP's customers the right to
choose their energy provider after a three-year transition period. The plan
freezes rates (including the recovery of purchased power) during the transition
period, and allows for customer aggregation based on market forces. TNMP
believes the plan will allow it to recover its potential stranded costs in New
Mexico; however, the actual recovery and amount of potential stranded costs will
depend on the future market and price for energy through May 1, 2000.
Impact of Competition on TNMP
In addition to pursuing the satisfactory resolution of the stranded costs
issue, TNMP is pursuing strategies to retain and attract new customers. TNMP
believes that current competitive developments on the wholesale market are
benefiting TNMP and its customers. Because TNMP purchases much of its power,
TNMP can take advantage of lower overall wholesale power pricing , additional
market flexibility, and new options in obtaining purchased power. TNMP's
competitive position has been strengthened with the PUCT open access to
transmission rule. Management believes TNMP's revenue growth opportunities are
through an increased customer base and new services.
TNMP serves a market niche of smaller to medium sized communities. Only two
of the 85 communities in TNMP's service area have populations in excess of
50,000.
Texas Transmission Access
During 1996, the PUCT passed a wholesale transmission access rule, which
went into effect on January 1, 1997, in order to increase competition in
wholesale energy sales within Texas. The new rule established an Independent
System Operator for the ERCOT transmission system, and a regional method of
transmission pricing, terms and conditions. As discussed in "MD&A - Results of
Operations," the new rule had a favorable impact on TNMP's earnings.
Unregulated Operations
TNP also plans to address the effects of competition on the traditional
utility business by expanding earnings through unregulated operations. During
1998, FWI, TNP's unregulated wholly owned subsidiary, intends to establish
itself in the maintenance and repair services business and focus on commercial
customers in Texas metropolitan areas. Through the end of 1997, TNP has made
modest investments in unregulated activities, in addition to FWI, and will
continue to evaluate unregulated investment and joint venture opportunities in
additional energy-related businesses.
Results of Operations
Overall Results
Income applicable to common stock was $29.5 million for 1997, compared to
$22.9 million in 1996. The 1997 results included the effect of FWI's
discontinued operations of $10.8 million. The 1996 results included a $3.1
million loss associated with FWI's discontinued operations and a $1.3 million
after tax charge for the settlement of litigation associated with the Series T
FMB retirement in 1995. Exclusive of one-time items, the 1997 earnings were
$40.3 million, a $13.0 million improvement as compared to the 1996 earnings of
$27.3 million.
Income applicable to common stock was $40.9 million in 1995. Results for
1995 included a number of one-time items consisting of the cumulative effect of
the change in accounting for unbilled revenues of $8.4 million (see Note 3), a
gain on sale of the Texas Panhandle properties of $9.5 million, and recognition
of deferred revenues related to a favorable IRS private letter ruling of $3.0
million. Excluding the one-time items, 1996 earnings were $7.4 million higher
than 1995 earnings of $19.9 million.
The following table sets forth results of operations for 1997, 1996, and
1995 and the impact of one-time items:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- --------------------- ------------------
Amount EPS Amount EPS Amount EPS
--------- ------- ---------- --------- --------- -------
(In thousands except per share amounts)
Income applicable to common
<S> <C> <C> <C> <C> <C> <C>
stock before one-time items.................. $ 40,297 $ 3.08 $ 27,283 $ 2.38 $ 19,908 $ 1.83
--------- -------- ---------- --------- --------- -------
One-time items, net of income taxes:
Discontinued operations of FWI............... (10,777) (0.82) (3,097) (0.27) - -
Series T litigation settlement............... - - (1,300) (0.11) - -
Cumulative effect of change in accounting.... - - - - 8,445 0.77
Gain on sale of Texas Panhandle properties... - - - - 9,479 0.87
Recognition of deferred revenues............ - - - - 3,018 0.28
--------- -------- ---------- --------- --------- -------
Total one-time items, net................ (10,777) (0.82) (4,397) (0.38) 20,942 1.92
--------- -------- ---------- --------- --------- -------
Income applicable to common stock............... $ 29,520 $ 2.26 $ 22,886 $ 2.00 $ 40,850 $ 3.75
========= ======== ========== ========= ========= =======
</TABLE>
During 1997 and 1996, FWI's operations included construction and service
activities. In late 1997, management reevaluated FWI's strategy and adopted a
revised strategy to concentrate on service and maintenance activities and to
discontinue the construction segment. Management believes this course of action
should improve FWI's competitive position within its industry and improve FWI's
financial strength. See Note 4 for additional information regarding the
discontinued operations.
The operations of TNMP currently represent most of TNP's operations. The
following discussion focuses on TNMP's operations, except where stated
otherwise.
<PAGE>
Operating Revenues
The following table summarizes the components of operating revenues (in
thousands).
<TABLE>
<CAPTION>
Increase (Decrease)
-------------------
1997 1996 1995 '97 v. '96 '96 v. '95
---------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 580,693 $ 502,737 $ 485,823 $ 77,956 $ 16,914
Effect of recognizing deferred
revenue from private letter ruling - - (4,128) - 4,128
---------- ---------- ----------- ---------- -----------
Subtotal 580,693 502,737 481,695 77,956 21,042
Pass-through items 299,281 244,889 228,903 54,392 15,986
---------- ---------- ----------- ---------- -----------
Base revenues $ 281,412 $ 257,848 $ 252,792 $ 23,564 $ 5,056
========== ========== =========== ========== ===========
</TABLE>
Pass-through items are the portion of operating revenues that recover from
customers the costs of purchased power, fuel, and standby power. These items
affect customer rates but do not affect operating income. Annual variances are
discussed in "Results of Operations--Operating Expenses."
The following table summarizes the components of the base revenues increase
from 1996 to 1997 (in thousands).
<TABLE>
<CAPTION>
<S> <C>
Customer growth $ 3,905
Price - sales mix and other 400
Weather related (360)
Industrial - economy rate sales 5,950
Industrial - firm rate sales (2,359)
Power marketing sales 2,307
Non industrial standby revenues 1,845
Transmission revenue 8,251
Unbilled revenue and other 3,625
---------------
Base revenues increase $ 23,564
===============
</TABLE>
The base revenue increase of $23.6 million during 1997 resulted primarily
from implementing the new transmission access rules during 1997, growth in
residential and commercial customers, and a full year benefit from operation of
the control area. TNMP implemented a control area in Texas on July 31, 1996. The
control area is an electrical system that enables TNMP to instantaneously
balance its system resources with loads. Implementation of the control area
enabled TNMP to enhance its industrial economy rate sales, non-industrial
standby revenues, and power marketing sales. The control area also permitted
TNMP to replace standby power for TNP One with the purchase of planning
reserves.
The base revenue increase of $5.1 million during 1996 was attributable to
increased residential, commercial, and economy rate industrial sales, and
additional base revenues provided by the control area. The overall increase was
partially offset by a reduction in firm rate industrial sales and lower margins
on the industrial economy rate sales.
The components of GWH sales for 1997 and 1996 are summarized in the
following table:
<TABLE>
<CAPTION>
1997 1996 Variance %
----- ----- -------- ----
<S> <C> <C> <C> <C>
Residential 2,251 2,230 21 0.9
Commercial 1,772 1,726 46 2.7
Industrial:
Firm 1,080 1,295 (215) (16.6)
Economy 4,444 2,503 1,941 77.5
Power marketing 495 - 495 *
Other 108 108 - -
------ ----- ----- -----
Total GWH sales 10,150 7,862 2,288 29.1
====== ===== ===== =====
* Variance greater than 100%
</TABLE>
The increase in GWH sales resulted primarily from a substantial increase in
industrial economy sales. During the second quarter of 1996, TNMP entered into
new sales agreements with two cogeneration customers. The new economy rate sales
are at significantly lower margins than traditional firm rate industrial sales.
The 1997 sales results reflect a full year impact from the two cogeneration
customers. Also contributing to the sales increase were increased sales to
residential and commercial customers, and the addition of power marketing sales.
Residential and commercial sales increased during 1997 due to steady customer
growth. TNMP significantly increased the resale of electricity to off-system
customers beginning in mid-1997. These power marketing sales are generally made
at low margins. TNMP views power marketing as a new business opportunity and
expects its sales to grow in 1998.
Currently, TNMP may not increase its base rates in Texas prior to March
1999 except in certain extraordinary circumstances pursuant to a rate case
settlement approved by the PUCT in October 1994. As discussed in "Competitive
Conditions--Texas Rate Filing and Transition to Competition Plan" and Note 2,
TNMP reached an agreement with the staff of the PUCT and other signatories on
December 22, 1997, regarding TNMP's proposed transition to competition plan. The
agreement proposes a five year transition period, with a series of rate
reductions for residential and commercial customers beginning in 1998. The
agreement provides for TNMP to recover a portion of its potential stranded costs
during the transition period and to recover the remainder through a competitive
transition charge at the end of the transition period over the subsequent five
years. This agreement is subject to approval by the PUCT.
As discussed in "Competitive Conditions--New Mexico Community Choice" and
Note 2, TNMP implemented its Community Choice plan in New Mexico on May 1, 1997.
The plan provides TNMP's customers the right to choose their energy provider
after a three-year transition period and freezes rates (including the recovery
of purchased power) during the transition period. The rates represent a slight
reduction as compared to rates in effect at December 1997. Management believes
the implemented rates will not have a material adverse effect on TNP's and
TNMP's financial condition.
As of February 1, 1998, TNMP received notification that a significant
customer in Texas will replace the power previously provided by TNMP with power
from a cogeneration plant built by a third party wholesale power producer. The
plant is scheduled to commence operations in the first quarter of 1998. This
customer provided sales of 629 GWH and annual revenues of $28.3 million in 1997
($10.1 million in base revenues). TNMP has an agreement with the wholesale power
producer to continue providing certain services to the cogeneration plant. The
base revenues from this agreement are expected to be $0.5 million annually.
TNMP had received notice from a large industrial customer in New Mexico to
terminate its contract. This customer provided sales of 1,098 GWH and annual
revenues of $34.7 million in 1997 ($8.1 million in base revenues). TNMP
renegotiated with this customer to continue providing full service until the end
of the New Mexico Community Choice transition period (April 30, 2000). After the
end of the transition period, TNMP will provide firm transmission service to
this customer, and this customer can purchase its KWH requirements on the open
market. Currently, TNMP is this customer's lowest cost U.S. electric supplier.
Operating Expenses
Operating expenses for 1997 were $79.7 million higher than in 1996, due
primarily to higher pass-through expenses and income taxes.
Operating expenses for 1996 were $20.7 million higher than in 1995, due
primarily to higher pass-through expenses, property taxes and franchise taxes.
Pass-Through Expenses
The following table summarizes the components of pass-through expenses (in
thousands).
<TABLE>
<CAPTION>
Increase (Decrease)
-------------------
1997 1996 1995 '97 v. '96 '96 v. '95
---------- ------------ ----------- ----------- -------------
Pass-through expenses:
<S> <C> <C> <C> <C> <C>
Purchased power $ 259,605 $ 196,481 $ 178,465 $ 63,124 $ 18,016
Fuel 39,676 45,300 44,828 (5,624) 472
Standby power - 3,108 5,610 (3,108) (2,502)
---------- ------------ ----------- ----------- -------------
Total $ 299,281 $ 244,889 $ 228,903 $ 54,392 $ 15,986
========== ============ =========== =========== =============
</TABLE>
Purchased Power. During 1997, purchased power expense increased by $63.1
million due to additional MWH's purchased to meet increased sales requirements
from the agreements negotiated with the two cogeneration customers during the
second quarter of 1996.
During 1996, purchased power expense increased by $18 million due to the
increased purchases to meet increased sales requirements, primarily for the two
cogeneration customers.
Purchased power costs represent TNMP's largest operating expense. Based on
current contracts, TU continues as TNMP's largest supplier of purchased power in
Texas and is TNMP's highest priced supplier. As described in Note 10, TNMP
entered into a new agreement to continue purchasing power from TU through June
30, 2002. TNMP expects a $22.4 million reduction in purchased power expense over
the remaining life of this new agreement as compared to the existing agreement.
Management expects, as a result of the developing competition within the
wholesale power market, to enter into other new arrangements for such capacity
and energy on terms that are more favorable for its customers.
Fuel. Fuel expense in 1997 decreased $5.6 million, excluding amounts of non
pass-through fuel expenditures, as compared to 1996. The decrease resulted from
an extended planned outage at TNP One and increased economy sales. No fuel cost
recovery is included in industrial economy rate sales.
Fuel expense is directly related to the fixed fuel recovery factor last
approved by the PUCT in connection with the 1994 Texas rate case settlement. The
majority of TNMP's fuel expense is recovered in revenues and any difference from
actual costs is deferred until a new factor is established. On June 30, 1997,
TNMP filed a reconciliation of fuel expenses for the period from September 30,
1993 to December 31, 1996, with the PUCT. At the beginning of the reconciliation
period, TNMP had a cumulative under-recovery of $11 million, and had a $4.4
million under-recovery as of the end of the reconciliation period. As of
December 31, 1997, the under-recovered fuel amount was $0.1 million. The related
fuel reconciliation filed with the PUCT is described in Note 2.
<PAGE>
Other Operating Expenses
Other operating expenses in 1997 were comparable to 1996. Cost savings from
reduced standby expenses resulting from implementation of the control area
offset a $2.0 increase in the Texas transmission expenses.
Other operating expenses were $2.0 million higher in 1996 than in 1995. The
increase is due to higher payroll and payroll related items, incentive
compensation and the reserve associated with the settlement of Series T FMB
litigation. These increases were offset in part by reduced standby power costs
resulting from the implementation of the control area in July 1996, as discussed
in "Operating Revenues."
Interest Charges
During 1997, interest charges decreased $12.5 million due primarily to the
retirement of Series T FMBs in January 1997 and applying strong cash flow from
operations to reduce debt levels. The 11.25% Series T FMBs were retired with
lower cost borrowings from the credit facilities and an equity contribution from
TNP in late 1996, resulting from its common stock sale.
During 1996 interest charges decreased $4.6 million due to the reduction in
the amount of debt and lower interest rates on the credit facilities. During
1996 TNMP retired $91.7 million of FMBs and reduced the average amount
outstanding under the credit facilities. Partially offsetting the reductions
discussed above were interest charges of $1.3 million payable to the IRS
associated with the resolution of outstanding tax audits for the years 1990
through 1994.
Interest charges are expected to continue to decrease during 1998 due to
reduced levels of overall long-term debt and reduced interest rate margins on
the credit facilities.
Liquidity and Capital Resources
Sources of Liquidity
The main sources of liquidity for TNP are cash flow from operations,
borrowings from credit facilities and sale of additional common stock.
TNP's cash flow from operations totaled $103.9 million, $65.2 million and
$88.4 million in 1997, 1996, and 1995. Cash flow from operations continues to be
strong, and increased in 1997 due to increased base revenues as described in
"Results of Operations--Operating Revenues," and the one-time factoring of
unbilled accounts receivables, which contributed $20.5 million to 1997 cash
flow. Cash flow from operations had decreased in 1996 due to increased income
tax payments. TNMP's cash flow from operations mirrored that of TNP.
TNMP has two existing credit facilities with $150 million of unused
borrowings available, as of December 31, 1997.
TNP reserved 1 million shares of common stock for issuance through a direct
stock purchase plan which began in 1997. The plan is designed to provide
investors with a convenient method to purchase shares of TNP's common stock
directly from the company and to reinvest cash dividends. The plan has replaced
TNP's prior dividend reinvestment plan. As of January 26, 1998, the remaining
reserve for direct stock purchase plan was 967,000 shares.
Capital Resources
TNP's and TNMP's capital structure continued to improve during 1997 as TNMP
was able to reduce debt due to continued strong earnings for the year. The
equity portion of TNP's capital structure increased from 34.1% at December 31,
1996, to 38.3% at December 31, 1997. Conversely, the long-term debt ratio
decreased from 65.5% to 61.3% for the same period. TNMP experienced similar
results with its capital ratios.
TNMP's capital requirements through 2002 are projected to be as follows
(amounts in millions):
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002
------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
FMB and secured debenture maturities (see Note 7) $ .1 $ 130.1 $ 100.1 $ .1 $ .1
Capital expenditures 32.1 36.4 36.5 37.4 39.0
------- -------- -------- ------- -------
Total capital requirements $ 32.2 $ 166.5 $ 136.6 $ 37.5 $ 39.1
======= ======== ======== ======= =======
</TABLE>
TNMP believes that cash flow from operations and periodic borrowings under
the credit facilities will be sufficient to meet working capital requirements
and planned capital requirements through 1998.
<PAGE>
Other Matters
Application of SFAS 71
As a result of the Energy Policy Act of 1992 and actions of regulatory
commissions, the electric utility industry is moving toward a combination of
competition and a modified regulatory environment. TNMP's financial statements
currently reflect assets and costs based on current cost-based ratemaking
regulations in accordance with SFAS 71, Accounting for the Effects of Certain
Types of Regulation. Continued applicability of SFAS 71 to TNMP's financial
statements requires that rates set by an independent regulator on a
cost-of-service basis can actually be charged to and collected from customers.
In the event that all or a portion of a utility's operations cease to meet
those criteria for various reasons, including deregulation, a change in the
method of regulation, or a change in the competitive environment for the
utilities regulated service, the utility will have to discontinue SFAS 71 for
that portion of operations. That discontinuation would be reported by the
write-off of unrecoverable regulatory assets and liabilities.
As discussed in Note 2, as a result of the Community Choice program in New
Mexico, TNMP discontinued the application of SFAS 71 to its generation/power
supply operations in New Mexico during 1997. The discontinuing of regulatory
accounting principles had no effect on TNMP's financial condition. Also, as
discussed in Note 2, TNMP has reached an agreement with the staff of the PUCT
and other signatories regarding TNMP's proposed transition to competition plan.
This agreement, subject to PUCT approval, would result in TNMP discontinuing the
application of SFAS 71 to its generation/power supply operations in Texas. If
the plan is approved without significant modification, the discontinuing of
regulatory accounting principles is not expected to have a material effect on
TNMP's financial condition. Management believes that, as of December 31, 1997,
and for the foreseeable future, TNMP's transmission and distribution operations
continue to follow SFAS 71.
Earnings Per Share
The Financial Accounting Standards Board issued SFAS 128, Earnings per
Share, which became effective for financial statements ending December 31, 1997.
SFAS 128 requires the calculation of basic and diluted earnings per share. Basic
earnings per share is computed by dividing income applicable to common stock by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed by dividing income applicable to common
stock by the weighted average number of common shares outstanding and common
stock equivalents. The difference in current year basic and diluted earnings per
share for TNP is immaterial, and, therefore, diluted earnings per share
information is not presented. The application of SFAS 128 resulted in 1996
earnings per share to be increased by $0.02.
Year 2000 Impact to Systems
TNP has conducted extensive studies to analyze the impact of Year 2000 to
all computerized systems. Based on these studies, it has devised, and is in the
early stages of implementing, a plan to address the affected systems. The plan
incorporates replacing outdated systems, upgrading to new vendor releases, and
purchasing additional hardware during the next two years. The expected costs to
implement this plan during the next two years are $7.2 million. TNP does not
expect these expenditures to have a material impact on its results of
operations. TNP expects to address the most critical systems during 1998.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
TNP's and TNMP's involvement in the trading of market risk sensitive
instruments is minimal and does not have a material impact to either company's
financial condition or results of operations.
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Independent Public Accountants
----------------------------------------
To the Shareholders and Board of Directors of TNP Enterprises, Inc.:
We have audited the accompanying consolidated balance sheet of TNP
Enterprises, Inc. (the "Company") (a Texas corporation) as of December 31, 1997,
and the related consolidated statements of income, shareholders' investment and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1997, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Fort Worth, Texas
February 13, 1998
<PAGE>
Report of Independent Public Accountants
----------------------------------------
To the Shareholder and Board of Directors of Texas-New Mexico Power Company:
We have audited the accompanying consolidated balance sheet of Texas-New
Mexico Power Company (the "Company") (a Texas corporation) as of December 31,
1997, and the related consolidated statements of income, shareholder's
investment and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1997, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Fort Worth, Texas
February 13, 1998
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors and Shareholders
TNP Enterprises, Inc.:
We have audited the accompanying consolidated balance sheet and statement of
capitalization of TNP Enterprises, Inc. and subsidiaries as of December 31,
1996, and the related consolidated statements of income, common shareholders'
equity and cash flows for each of the years in the two-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of TNP Enterprises,
Inc. and subsidiaries as of December 31, 1996, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 3 to the consolidated financial statements, the Company
changed its method of accounting for operating revenues in 1995.
KPMG Peat Marwick LLP
Fort Worth, Texas
January 30, 1997
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors
Texas-New Mexico Power Company:
We have audited the accompanying consolidated balance sheet and statement of
capitalization of Texas-New Mexico Power Company (a wholly owned subsidiary of
TNP Enterprises, Inc.) and subsidiaries as of December 31, 1996, and the related
consolidated statements of income, common shareholder's equity and cash flows
for each of the years in the two-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Texas-New Mexico
Power Company and subsidiaries as of December 31, 1996, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 3 to the consolidated financial statements, the Company
changed its method of accounting for operating revenues in 1995.
KPMG Peat Marwick LLP
Fort Worth, Texas
January 30, 1997
<PAGE>
<TABLE>
<CAPTION>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31,
1997 1996 1995
----------------- ----------------- -----------------
(In thousands except per share amounts)
<S> <C> <C> <C>
OPERATING REVENUES $ 585,234 $ 502,737 $ 485,823
----------------- ----------------- -----------------
OPERATING EXPENSES:
Purchased power 261,043 196,481 178,465
Fuel 41,730 47,201 48,898
Other operating and maintenance 94,075 84,417 82,833
Depreciation 38,936 38,172 37,850
Taxes other than income taxes 33,696 33,256 28,865
Income taxes 20,108 10,375 12,317
----------------- ----------------- -----------------
Total operating expenses 489,588 409,902 389,228
----------------- ----------------- -----------------
NET OPERATING INCOME 95,646 92,835 96,595
----------------- ----------------- -----------------
OTHER INCOME:
Gain on sale of Texas Panhandle properties - - 14,583
Other income and deductions, net 1,466 1,956 1,245
Income taxes 257 722 (5,403)
----------------- ----------------- -----------------
Other income, net of taxes 1,723 2,678 10,425
----------------- ----------------- -----------------
INCOME BEFORE INTEREST CHARGES 97,369 95,513 107,020
----------------- ----------------- -----------------
INTEREST CHARGES:
Interest on long-term debt 52,557 64,654 70,544
Other interest and amortization of debt-related
costs 4,357 4,709 3,416
----------------- ----------------- -----------------
Total interest charges 56,914 69,363 73,960
----------------- ----------------- -----------------
INCOME FROM CONTINUING OPERATIONS BEFORE
THE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 40,455 26,150 33,060
Loss from discontinued nonregulated operations,
net of taxes (note 4) 10,777 3,097 -
----------------- ----------------- -----------------
INCOME BEFORE THE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING 29,678 23,053 33,060
Cumulative effect of change in accounting for
unbilled revenues, net of taxes (note 3) - - 8,445
----------------- ----------------- -----------------
NET INCOME 29,678 23,053 41,505
Dividends on preferred stock 158 167 655
----------------- ----------------- -----------------
INCOME APPLICABLE TO COMMON STOCK $ 29,520 $ 22,886 $ 40,850
================= ================= =================
EARNINGS PER SHARE OF COMMON STOCK:
Earnings from continuing operations before the
cumulative effect of accounting change $ 3.08 $ 2.27 $ 2.98
Loss from discontinued nonregulated operations (0.82) (0.27) -
Earnings from cumulative effect of change in
accounting - - 0.77
----------------- ----------------- -----------------
EARNINGS PER SHARE $ 2.26 $ 2.00 $ 3.75
================= ================= =================
DIVIDENDS PER SHARE OF COMMON STOCK $ 1.005 $ 0.93 $ 0.82
================= ================= =================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 13,083 11,465 10,901
================= ================= =================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
1997 1996 1995
---------------- ------------------ -----------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Cash received from sales to customers $ 625,032 $ 505,307 $ 481,470
Purchased power (262,107) (198,696) (172,486)
Fuel costs paid (37,447) (45,576) (44,781)
Cash paid for payroll and to other suppliers (125,188) (75,138) (76,735)
Interest paid, net of amounts capitalized (57,337) (69,247) (68,484)
Income taxes paid (9,089) (15,684) (1,095)
Other taxes paid (32,990) (32,243) (30,556)
Other operating cash receipts and payments, net 2,979 (3,522) 1,043
---------------- ------------------ -----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 103,853 65,201 88,376
---------------- ------------------ -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant (28,232) (28,006) (28,689)
Additions to other property and nonregulated
investments (1,777) (2,771) -
Net proceeds from sale of Texas Panhandle
properties - - 29,009
Maturities of temporary investments - - 5,590
---------------- ------------------ -----------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES (30,009) (30,777) 5,910
---------------- ------------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on preferred and common stocks (13,305) (10,866) (9,616)
Common stock issuances 3,392 48,798 856
Borrowings from (repayments to) revolving
credit facilities - net 45,000 12,000 (42,272)
Other long-term debt issuances - 202 -
Deferred expenses associated with financings - (588) (2,096)
Redemptions:
Obligation - FWI investment aquisition (300) - -
Other long-term debt (61) - -
Preferred stock (180) (180) (5,080)
First mortgage bonds (100,900) (96,508) (30,270)
---------------- ------------------ -----------------
NET CASH USED IN FINANCING ACTIVITIES (66,354) (47,142) (88,478)
---------------- ------------------ -----------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 7,490 (12,718) 5,808
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,387 21,105 15,297
---------------- ------------------ -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15,877 $ 8,387 $ 21,105
================ ================== =================
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income $ 29,678 $ 23,053 $ 41,505
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of change in accounting
for unbilled revenues, net of taxes - - (8,445)
Gain on sale of Texas Panhandle properties - - (14,583)
Recognition of deferred revenues - - (4,782)
Depreciation 38,936 38,170 37,850
Amortization of debt-related costs and
other deferred charges 3,184 3,329 4,952
Allowance for borrowed funds used during
construction (47) (99) (162)
Deferred income taxes 9,064 (193) 5,256
Investment tax credits (1,813) (380) 1,679
Cash flows impacted by changes in current assets
and liabilities:
Deferred purchased power and fuel costs 995 5,696 5,997
Accrued interest (3,556) (3,103) 2,289
Accrued taxes (1,244) (7,372) 8,483
Changes in other current assets and
liabilities 25,099 (1,507) 8,826
Other, net 3,557 7,607 (489)
---------------- ------------------ -----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 103,853 $ 65,201 $ 88,376
================ ================== =================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
1997 1996
--------------- ----------------
(In thousands)
ASSETS
UTILITY PLANT:
<S> <C> <C>
Electric plant $ 1,235,257 $ 1,215,355
Construction work in progress 2,281 906
--------------- ----------------
Total 1,237,538 1,216,261
Less accumulated depreciation 314,270 282,322
--------------- ----------------
Net utility plant 923,268 933,939
--------------- ----------------
OTHER PROPERTY AND INVESTMENTS, at cost 5,704 3,927
--------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents 15,877 8,387
Receivables:
Customer 7,380 16,362
Other 1,205 594
Inventories, at lower of average cost or market:
Fuel 483 367
Materials and supplies 4,440 6,384
Deferred purchased power and fuel costs 2,570 3,565
Accumulated deferred income taxes 1,707 1,937
Other current assets 982 527
--------------- ----------------
Total current assets 34,644 38,123
--------------- ----------------
DEFERRED CHARGES 28,310 30,795
--------------- ----------------
$ 991,926 $ 1,006,784
=============== ================
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common shareholders' equity:
Common stock - no par value per share.
Authorized 50,000,000
shares; issued 13,132,821 shares
in 1997 and 13,006,492 in 1996 $ 187,163 $ 183,771
Retained earnings 111,078 94,703
--------------- ----------------
Total common shareholders' equity 298,241 278,474
Preferred stock 3,240 3,420
Long-term debt, less current maturities 478,041 533,964
--------------- ----------------
Total capitalization 779,522 815,858
--------------- ----------------
CURRENT LIABILITIES:
Current maturities of long-term debt 100 138
Accounts payable 27,035 28,446
Accrued interest 7,323 10,879
Accrued taxes 17,589 18,833
Customers' deposits 3,249 2,662
Other current liabilities 26,665 11,797
--------------- ----------------
Total current liabilities 81,961 72,755
--------------- ----------------
REGULATORY TAX LIABILITIES 6,318 10,963
ACCUMULATED DEFERRED INCOME TAXES 85,250 74,844
ACCUMULATED DEFERRED INVESTMENT TAX CREDITS 21,149 19,734
DEFERRED CREDITS 17,726 12,630
COMMITMENTS AND CONTINGENCIES (Notes 1, 2,
and 10) --------------- ----------------
$ 991,926 $ 1,006,784
=============== ================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31,
1997 1996
-------------- ---------------
(In thousands)
COMMON SHAREHOLDERS' EQUITY
- ---------------------------
Common stock with no par value per share
Authorized shares - 50,000,000
Outstanding shares - 13,132,821 in
<S> <C> <C>
1997 and 13,006,492 in 1996 $ 187,163 $ 183,771
Retained earnings 111,078 94,703
-------------- ---------------
Total common shareholders' equity 298,241 278,474
-------------- ---------------
PREFERRED STOCK
- ---------------
Preferred stock with no par value
Authorized shares - 5,000,000
Outstanding shares - None
Redeemable cumulative preferred stock of TNMP with $100 par value
Authorized shares - 1,000,000
Redemption
price at TNMP's Outstanding shares
option 1997 1996
------ ---- ----
<S> <C> <C> <C> <C>
Series B 4.65% $ 100.00 20,400 21,600 2,040 2,160
Series C 4.75% 100.00 12,000 12,600 1,200 1,260
--------- ---------- -------------- ---------------
Total redeemable cumulative preferred stock 32,400 34,200 3,240 3,420
--------- ---------- -------------- ---------------
LONG-TERM DEBT
- --------------
FIRST MORTGAGE BONDS
<S> <C> <C>
Series M 8.7 due 2006 8,000 8,100
Series T 11.2 due 1997 - 100,800
Series U 9.2 due 2000 100,000 100,000
SECURED DEBENTURES
12.50% due 1999 130,000 130,000
Series A 10.75% due 2003 140,000 140,000
REVOLVING CREDIT FACILITIES
1995 Facility - -
1996 Facility 100,000 55,000
OTHER 141 202
-------------- ---------------
Total long-term debt 478,141 534,102
Less current maturities (100) (138)
-------------- ---------------
Total long-term debt, less current maturities 478,041 533,964
-------------- ---------------
TOTAL CAPITALIZATION $ 779,522 $ 815,858
============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
For the Years Ended December 31,
Common Shareholders' Equity
------------------------------------------------------------
Common Stock Retained
Shares Amount Earnings Total
------------ ------------- ------------- --------------
(In thousands)
YEAR ENDED DECEMBER 31, 1995
<S> <C> <C> <C> <C>
Balance at January 1, 1995 10,866 $ 134,117 $ 50,752 $ 184,869
Net income - - 41,505 41,505
Dividends on preferred stock - - (655) (655)
Dividends on common stock - $0.82 per share - - (8,938) (8,938)
Sale of common stock 54 856 - 856
Retirement of preferred stock - - (180) (180)
------------ ------------- -------------- --------------
Balance at December 31, 1995 10,920 134,973 82,484 217,457
YEAR ENDED DECEMBER 31, 1996
Net income - - 23,053 23,053
Dividends on preferred stock - - (167) (167)
Dividends on common stock - $0.93 per share - - (10,699) (10,699)
Sale of common stock 2,086 48,798 - 48,798
Retirement of preferred stock - - 32 32
------------ ------------- -------------- --------------
Balance at December 31, 1996 13,006 183,771 94,703 278,474
YEAR ENDED DECEMBER 31, 1997
Net income - - 29,678 29,678
Dividends on preferred stock - - (158) (158)
Dividends on common stock - $1.005 per share - - (13,158) (13,158)
Sale of common stock 127 3,392 - 3,392
Retirement of preferred stock - - 13 13
------------ ------------- -------------- --------------
Balance at December 31, 1997 13,133 $ 187,163 $ 111,078 $ 298,241
============ ============= ============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of TNP Enterprises, Inc.)
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31,
1997 1996 1995
---------------- ---------------- ----------------
(In thousands)
<S> <C> <C> <C>
OPERATING REVENUES $ 580,693 $ 502,737 $ 485,823
---------------- ---------------- ----------------
OPERATING EXPENSES:
Purchased power 261,043 196,481 178,465
Fuel 41,730 47,201 48,898
Other operating and maintenance 84,294 83,948 82,833
Depreciation of utility plant 38,851 38,170 37,850
Taxes other than income taxes 33,260 32,727 28,865
Income taxes 22,062 10,333 12,317
---------------- ---------------- ----------------
Total operating expenses 481,240 408,860 389,228
---------------- ---------------- ----------------
NET OPERATING INCOME 99,453 93,877 96,595
---------------- ---------------- ----------------
OTHER INCOME:
Gain on sale of Texas Panhandle properties - - 14,583
Other income and deductions, net 1,120 1,626 1,470
Income taxes 257 722 (5,324)
---------------- ---------------- ----------------
Other income, net of taxes 1,377 2,348 10,729
---------------- ---------------- ----------------
INCOME BEFORE INTEREST CHARGES 100,830 96,225 107,324
---------------- ---------------- ----------------
INTEREST CHARGES:
Interest on long-term debt 52,557 64,654 70,544
Other interest and amortization of debt-related costs 4,355 4,709 3,416
---------------- ---------------- ----------------
Total interest charges 56,912 69,363 73,960
---------------- ---------------- ----------------
INCOME BEFORE THE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING 43,918 26,862 33,364
Cumulative effect of change in accounting for
unbilled revenues, net of taxes (note 3) - - 8,445
---------------- ---------------- ----------------
NET INCOME 43,918 26,862 41,809
Dividends on preferred stock 158 167 655
---------------- ---------------- ----------------
INCOME APPLICABLE TO COMMON STOCK $ 43,760 $ 26,695 $ 41,154
================ ================ ================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of TNP Enterprises, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
1997 1996 1995
---------------- -------------- ---------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Cash received from sales to customers $ 606,803 $ 502,954 $ 481,470
Purchased power (262,107) (198,696) (172,486)
Fuel costs paid (37,447) (45,576) (44,781)
Cash paid for payroll and to other suppliers (86,607) (75,807) (76,793)
Interest paid, net of amounts capitalized (57,331) (69,236) (68,484)
Income taxes paid (8,464) (14,242) (1,199)
Other taxes paid (32,980) (31,219) (30,054)
Other operating cash receipts and payments, net 2,600 1,135 639
---------------- -------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 124,467 69,313 88,312
---------------- -------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant (27,942) (28,006) (28,689)
Net proceeds from sale of Texas Panhandle properties - - 29,009
Withdrawals from (deposits to) escrow account 1,670 (1,669) -
---------------- -------------- ---------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES (26,272) (29,675) 320
---------------- -------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on preferred and common stocks (44,458) (10,867) (3,078)
Equity contribution from TNP Enterprises - 47,170 -
Borrowings from (repayments to) revolving credit facilities - net 45,000 12,000 (42,272)
Deferred expenses associated with financings - (588) (2,096)
Redemptions:
First mortgage bonds (100,900) (96,508) (30,270)
Preferred stock (180) (180) (5,080)
---------------- -------------- ---------------
NET CASH USED IN FINANCING ACTIVITIES (100,538) (48,973) (82,796)
---------------- -------------- ---------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (2,343) (9,335) 5,836
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,115 14,450 8,614
---------------- -------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,772 $ 5,115 $ 14,450
================ ============== ===============
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income $ 43,918 $ 26,862 $ 41,809
Adjustments to reconcile net income to net cash provided by
operating activities:
Cumulative effect of change in accounting for unbilled
revenues, net of taxes - - (8,445)
Gain on sale of Texas Panhandle properties - - (14,583)
Recognition of deferred revenues - - (4,782)
Depreciation of utility plant 38,851 38,170 37,850
Amortization of debt-related costs and other deferred charges 3,184 3,329 4,952
Allowance for borrowed funds used during construction (47) (99) (162)
Deferred income taxes (excluding the effect of change in
accounting) 14,584 1,140 5,132
Investment tax credits (1,813) (111) 1,691
Cash flows impacted by changes in current assets and liabilities:
Deferred purchased power and fuel costs 995 5,696 5,997
Accrued interest (3,556) (3,103) 2,289
Accrued taxes 850 (8,429) 8,432
Changes in other current assets and liabilities 24,751 786 8,862
Other, net 2,750 5,072 (730)
---------------- -------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 124,467 $ 69,313 $ 88,312
================ ============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of TNP Enterprises, Inc.)
CONSOLIDATED BALANCE SHEETS
December 31,
1997 1996
--------------- ----------------
(In thousands)
ASSETS
UTILITY PLANT:
<S> <C> <C>
Electric plant $ 1,235,239 $ 1,215,355
Construction work in progress 2,281 906
--------------- ----------------
Total 1,237,520 1,216,261
Less accumulated depreciation 314,270 282,322
--------------- ----------------
Net utility plant 923,250 933,939
--------------- ----------------
OTHER PROPERTY AND INVESTMENTS, at cost 214 1,884
--------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents 2,772 5,115
Receivables:
Customer 460 15,521
Other 1,882 1,196
Inventories, at lower of average cost or market:
Fuel 483 367
Materials and supplies 4,440 6,384
Deferred purchased power and fuel costs 2,570 3,565
Accumulated deferred income taxes 1,707 1,937
Other current assets 222 128
--------------- ----------------
Total current assets 14,536 34,213
--------------- ----------------
DEFERRED CHARGES 29,006 32,121
--------------- ----------------
$ 967,006 $ 1,002,157
=============== ================
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common shareholder's equity:
Common stock, $10 par value per share
Authorized 12,000,000 shares; issued 10,705
shares $ 107 $ 107
Capital in excess of par value 222,146 222,133
Retained earnings 64,768 65,308
--------------- ----------------
Total common shareholder's equity 287,021 287,548
Redeemable cumulative preferred stock 3,240 3,420
Long-term debt, less current maturities 477,900 533,800
--------------- ----------------
Total capitalization 768,161 824,768
--------------- ----------------
CURRENT LIABILITIES:
Current maturities of long-term debt 100 100
Accounts payable 24,859 27,254
Accrued interest 7,323 10,879
Accrued taxes 17,751 16,901
Customers' deposits 3,249 2,662
Other current liabilities 19,148 10,993
--------------- ----------------
Total current liabilities 72,430 68,789
--------------- ----------------
REGULATORY TAX LIABILITIES 6,318 10,963
ACCUMULATED DEFERRED INCOME TAXES 81,085 65,860
ACCUMULATED DEFERRED INVESTMENT TAX CREDITS 21,286 19,164
DEFERRED CREDITS 17,726 12,613
COMMITMENTS AND CONTINGENCIES (Notes 1, 2, and 10)
--------------- ----------------
$ 967,006 $ 1,002,157
=============== ================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of TNP Enterprises, Inc.)
CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31,
1997 1996
--------------- ----------------
(In thousands)
COMMON SHAREHOLDER'S EQUITY
- ---------------------------
<S> <C> <C>
Common stock, $10 par value per share
Authorized shares - 12,000,000
Outstanding shares - 10,705 $ 107 $ 107
Capital in excess of par value 222,146 222,133
Retained earnings 64,768 65,308
--------------- ----------------
Total common shareholder's equity 287,021 287,548
--------------- ----------------
PREFERRED STOCK
- ---------------
Redeemable cumulative preferred stock with $100 par value
Authorized shares - 1,000,000
Redemption
price at TNMP's Outstanding shares
option 1997 1996
------ ---- ----
<S> <C> <C> <C> <C>
Series B 4.65% $ 100.00 20,400 21,600 2,040 2,160
Series C 4.75% 100.00 12,000 12,600 1,200 1,260
---------- ----------- --------------- ----------------
Total redeemable cumulative preferred stock 32,400 34,200 3,240 3,420
---------- ----------- --------------- ----------------
LONG-TERM DEBT
- --------------
FIRST MORTGAGE BONDS
<S> <C> <C> <C> <C>
Series M 8.7 due 2006 8,000 8,100
Series T 11.2 due 1997 - 100,800
Series U 9.2 due 2000 100,000 100,000
SECURED DEBENTURES
12.50% due 1999 130,000 130,000
Series A 10.75% due 2003 140,000 140,000
REVOLVING CREDIT FACILITIES
1995 Facility - -
1996 Facility 100,000 55,000
--------------- ----------------
Total long-term debt 478,000 533,900
Less current maturities (100) (100)
--------------- ----------------
Total long-term debt, less current maturities 477,900 533,800
--------------- ----------------
TOTAL CAPITALIZATION $ 768,161 $ 824,768
=============== ================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of TNP Enterprises, Inc.)
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDER'S EQUITY
For the Years Ended December 31,
Common Shareholder's Equity
-----------------------------------------------------------------------
Capital in
Common Stock Excess of Retained
Shares Amount Par Value Earnings Total
------------ ------------- ------------- ------------- -------------
(In thousands)
YEAR ENDED DECEMBER 31, 1995
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 11 $ 107 $ 175,111 $ 10,559 $ 185,777
Net income - - - 41,809 41,809
Dividends on preferred stock - - - (655) (655)
Dividends on common stock - - - (2,400) (2,400)
Retirement of preferred stock - - (180) - (180)
------------ ------------- ------------- ------------- -------------
Balance at December 31, 1995 11 107 174,931 49,313 224,351
YEAR ENDED DECEMBER 31, 1996
Net income - - - 26,862 26,862
Dividends on preferred stock - - - (167) (167)
Dividends on common stock - - - (10,700) (10,700)
Equity contribution from TNP Enterprises - - 47,170 - 47,170
Retirement of preferred stock - - 32 - 32
------------ ------------- ------------- ------------- -------------
Balance at December 31, 1996 11 107 222,133 65,308 287,548
YEAR ENDED DECEMBER 31, 1997
Net income - - - 43,918 43,918
Dividends on preferred stock - - - (158) (158)
Dividends on common stock - - - (44,300) (44,300)
Retirement of preferred stock - - 13 - 13
------------ ------------- ------------- ------------- -------------
Balance at December 31, 1997 11 $ 107 $ 222,146 $ 64,768 $ 287,021
============ ============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
General Information
The consolidated financial statements of TNP and subsidiaries include the
accounts of TNP and its wholly owned subsidiaries, TNMP, FWI, and TNP Operating
Company. The consolidated financial statements of TNMP and subsidiaries include
the accounts of TNMP and its wholly owned subsidiaries, TGC and TGC II. All
intercompany transactions and balances have been eliminated in consolidation.
TNMP is TNP's principal operating subsidiary. TNMP is a public utility
engaged in generating, purchasing, transmitting, distributing, and selling
electricity in Texas and New Mexico. TNMP is subject to PUCT and NMPUC
regulation. Some of TNMP's activities, including the issuance of securities, are
subject to FERC regulation, and its accounting records are maintained in
accordance with FERC's Uniform System of Accounts.
The use of estimates is required to prepare TNP's and TNMP's consolidated
financial statements in conformity with generally accepted accounting
principles. Management believes that estimates are essential and will not
materially differ from actual results. However, adjustments may be necessary in
the future to the extent that future estimates or actual results are different
from the estimates used in the 1997 financial statements.
Accounting for the Effects of Regulation
Electric utilities operate in a highly regulated environment. TNP's and
TNMP's consolidated financial statements reflect the application of certain
accounting standards, including SFAS 71, "Accounting for the Effects of Certain
Types of Regulation," which provide for recognition of the economic effects of
rate regulation. Among these effects are the recognition of regulatory assets
and liabilities. Regulatory assets represent revenues associated with certain
costs that are expected to be recovered from customers in future rates.
Regulatory liabilities are costs previously collected from customers or other
amounts that reduce future rates. The following table summarizes TNP's and
TNMP's regulatory assets and liabilities as of December 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
---- ----
(In thousands)
Regulatory Assets:
<S> <C> <C>
Deferred purchased power and fuel costs $ 2,570 $ 3,565
Deferred charges:
Losses on reacquired debt 8,621 10,000
Rate case expenses 3,638 3,743
Deferred accounting amounts 4,026 4,157
-------- ---------
Total $ 18,855 $ 21,465
======== =========
Regulatory Liabilities:
Income tax related $ 6,318 $ 10,963
======== =========
</TABLE>
Federal and state legislators and regulatory authorities have adopted or
are considering a number of changes that are significantly impacting competitive
conditions in the electric utility industry, such as the emergence of
independent power producers, wholesale transmission access, and retail wheeling.
If recovery of costs through rates becomes uncertain or unlikely, whether due to
legislative or regulatory changes, competition, or otherwise, accounting
standards such as SFAS 71 may no longer apply to TNP and TNMP. As a result, TNP
and TNMP could be required to write off all or a portion of their regulatory
assets and liabilities. Moreover, to the extent that future rates are
insufficient to recover costs, additional write downs could be required.
Management of TNP and TNMP are currently unable to predict the ultimate outcome
of changes in the electric utility industry and whether the outcome will have a
significant effect on their consolidated financial position and results of
operations. However, based upon current regulatory conditions in the states in
which TNMP operates, management believes it probable that TNMP will continue,
for the foreseeable future, to meet the criteria for continued application of
SFAS 71 to its transmission and distribution portions of its business. See Note
2 for information regarding the Texas transition to competition plan and the New
Mexico Community Choice plan. Based on those plans it is probable that TNMP will
recover from customers the regulatory assets included in the table above.
<PAGE>
Utility Plant
Utility plant is stated at the historical cost of construction which
includes labor, materials, indirect charges for such items as engineering and
administrative costs, and AFUDC. Property repairs and replacement of minor items
are charged to operating expenses; major replacements and improvements are
capitalized to utility plant.
AFUDC is a noncash item designed to enable a utility to capitalize interest
costs during periods of construction. Established regulatory practices enable
TNMP to recover these costs from ratepayers. The composite rates used for AFUDC
were 6.0%, 6.0%, and 8.0% in 1997, 1996, and 1995, respectively.
The costs of depreciable units of plant retired or disposed of in the
normal course of business are eliminated from utility plant accounts and such
costs plus removal expenses less salvage are charged to accumulated
depreciation. When complete operating units are disposed of, appropriate
adjustments are made to accumulated depreciation, and the resulting gains or
losses, if any, are recognized.
Depreciation is provided on a straight-line method based on the estimated
lives of the properties as indicated by periodic depreciation studies. A portion
of depreciation of transportation equipment used in construction is charged to
utility plant accounts in accordance with the equipment's use. Depreciation as a
percentage of average depreciable cost was 3.3%, 3.2%, and 3.3% in 1997, 1996,
and 1995, respectively.
Cash Equivalents
All highly liquid debt instruments with maturities of three months or less
when purchased are considered cash equivalents.
Customer Receivables and Operating Revenues
TNMP accrues estimated revenues for energy delivered since the latest
billing. Prior to January 1, 1995, TNMP recognized revenue when billed. See Note
3 for the effects of the change in recognizing revenues from cycle billing to
the accrual method in 1995.
TNMP sells customer receivables to an unaffiliated company on a nonrecourse
basis.
Purchased Power and Fuel Costs
Electric rates include estimates of purchased power and fuel costs incurred
by TNMP in purchasing or generating electricity. In TNMP's Texas jurisdiction,
differences between amounts collected and allowable costs are generally recorded
either as purchased power subject to refund or deferred purchased power and fuel
costs in accordance with regulatory ratemaking policy. See Note 2 for changes in
the recovery of purchased power costs, resulting from the implementation of New
Mexico Community Choice.
Deferred Charges
Expenses incurred in issuing long-term debt and related discount and
premium are amortized on a straight-line basis over the lives of the respective
issues.
Included in deferred charges are other assets that are expected to benefit
future periods and certain costs that are deferred for ratemaking purposes and
amortized over periods allowed by regulatory authorities.
Derivatives
Premiums paid for an interest rate collar will be amortized over the term
of the related agreement. Unamortized premiums are included in Deferred Charges
in the consolidated balance sheets. Amounts to be received or paid under the
agreement will be recognized on the accrual basis as a component of interest
expense.
Income Taxes
TNP files a consolidated federal income tax return that includes the
consolidated operations of TNMP and its subsidiaries. The amounts of income
taxes recognized in TNMP's accompanying consolidated financial statements were
computed as if TNMP and its subsidiaries filed a separate consolidated federal
income tax return.
ITC amounts utilized in the federal income tax return are deferred and
amortized to earnings ratably over the estimated service lives of the related
assets.
<PAGE>
Fair Values of Financial Instruments
Fair values of cash equivalents, temporary investments, and customer
receivables approximated the carrying amounts because of the short maturities of
those instruments.
The estimated fair values of long-term debt and preferred stock were based
on quoted market prices of the same or similar issues. The estimated fair values
of long-term debt and preferred stock were as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------------------- ------------------------------
Carrying Amount Fair Values Carrying Amount Fair Values
--------------- ----------- --------------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Long-term debt $ 478,000 $505,400 $ 533,900 $ 564,000
Preferred stock 3,240 2,653 3,420 1,500
Interest rate collar 262 235 295 180
</TABLE>
Common Stock
At December 31, 1997, 170,495 shares of TNP's common stock were reserved
for issuance to TNMP's 401(k) plan. Additionally, at January 26, 1998, 1,224,056
shares of TNP's common stock were reserved for subsequent issuance under other
stock compensation or shareholder plans.
Shareholder Rights Plan
TNP has a shareholder rights plan that is designed to protect TNP's
shareholders from coercive takeover tactics and inadequate or unfair takeover
bids. The rights plan provides for the distribution of one right for each share
of TNP's common stock currently outstanding or issued until the close of
business on November 4, 1998.
Upon the occurrence of certain events, each right entitles a shareholder to
elect to purchase one share of common stock at $45 per share or, under certain
circumstances, shares of common stock at half the then-current market price or
to receive TNP common stock or other securities having an aggregate value equal
to the excess of (i) the value of the common stock or other securities on the
date the rights are exercised over (ii) the cash payment that would have been
payable upon exercise of the rights if cash payment had been elected.
Until certain triggering events occur, the rights will trade together with
TNP's common stock and separate rights certificates will not be issued. Among
the triggering events are the acquisition by a person or group of 10% or more of
TNP's outstanding common stock or the commencement of a tender or exchange offer
that, upon consummation, would result in a person or group of persons owning 15%
or more of TNP's outstanding common stock. The rights expire November 4, 1998,
unless earlier redeemed or exchanged by TNP, and have had no effect on EPS.
Stock-Based Compensation
As discussed in Note 5, TNP has an equity based incentive compensation plan
that awards stock-based compensation. In 1995 the FASB issued SFAS 123,
Accounting for Stock-Based Compensation, that changes the method for calculating
expenses associated with stock-based compensation. SFAS 123, which became
effective for 1996, also allows companies to retain the approach as set forth in
APB Opinion 25, Accounting for Stock Issued to Employees, for measuring expense
for its stock-based compensation. TNMP has elected to continue to apply the
provisions of APB Opinion 25 in calculating stock-based compensation. The
application of SFAS 123 would have had no effect on the amount of expense
associated with its stock-based compensation.
Reclassification
Certain amounts in 1996 were restated to conform with the 1997 method of
presentation. In accordance with SFAS 128, 1996 earnings per share was restated
and resulted in an increase of $0.02 per share.
Note 2. Regulatory Matters
As the electric utility industry continues its transition toward an
environment of increased competition, the most significant effect of competition
on TNMP, as well as other utilities, will be the ability to recover potential
stranded costs. "Stranded costs" is the difference between what it currently
costs TNMP to provide energy and what a customer would be willing to pay for
such service in a competitive market. The inability to recover a significant
portion of stranded costs would adversely impact TNP's and TNMP's financial
condition. In Texas, TNMP's potential stranded cost relates to TNP One, its 300
MW generating unit, and could potentially be more than $270 million. In New
Mexico, TNMP's potential stranded cost relates to its fixed purchased power
contracts and could potentially be $3 million to $9 million.
The following discusses TNMP's strategy to transition to competition and
provides TNMP the ability to recover its potential stranded costs in Texas and
New Mexico.
Texas Rate Filing and Transition to Competition Plan
In December 1996, certain cities in the Texas Gulf Coast area (Gulf Coast
Cities) served by TNMP passed resolutions requiring TNMP to file complete rate
information with those cities. On July 31, 1997, TNMP filed the required
traditional rate information, based on the test year ended December 31, 1996,
with the Gulf Coast Cities. Agreements with the cities provide that any rate
reduction resulting from the city ordinances requiring the traditional rate
filing will be placed into effect retroactive to May 15, 1997. Based on its
analysis, TNMP believes the filing supports the reasonableness of TNMP's current
rates.
Simultaneous with the Gulf Coast Cities rate filing, TNMP filed a
transition to competition plan with the PUCT and all of its Texas cities. On
December 22, 1997, TNMP and the staff of the PUCT, along with other signatories
reached an agreement on TNMP's proposed transition to competition plan. The
agreement proposes a five-year transition period, with a series of rate
reductions for residential and commercial customers beginning in 1998. At the
end of the transition period, TNMP's Texas customers would be allowed to choose
their energy supplier. The agreement provides the opportunity for TNMP to
recover a portion of its stranded costs during the transition period by using
additional depreciation on TNP One and applying a portion of earnings in excess
of an earnings cap amount. Also, the agreement establishes a competitive
transition charge to recover any stranded cost that remains at the end of the
transition period over the subsequent five years. TNMP will continue working
with other interested parties to obtain their approval before forwarding this
agreement to PUCT for their approval. PUCT approval is expected by mid-1998.
This agreement, subject to PUCT approval, would result in TNMP discontinuing the
application of SFAS 71 to its generation/power supply operations in Texas. If
the plan is approved without significant modification, the discontinuation of
regulatory accounting principles is not expected to have a material effect on
TNMP's financial condition. The transmission and distribution operations in
Texas will continue to follow SFAS 71.
New Mexico Community Choice
Following NMPUC approval on April 11, 1997, TNMP implemented Community
Choice, its plan for transition to competition for its New Mexico service
territory effective May 1, 1997. The plan provides TNMP's customers the right to
choose their energy provider after a three-year transition period. The plan
freezes rates (including the recovery of purchased power) during the transition
period, and allows for customer aggregation based on market forces. TNMP
believes the plan will allow it to recover its potential stranded costs in New
Mexico.
As a result of the New Mexico Community Choice plan, the power supply
portion of TNMP's New Mexico operations no longer qualifies for the application
of SFAS 71. Accordingly, in 1997, TNMP discontinued regulatory accounting
principles for the New Mexico power supply operations. The discontinuation of
SFAS 71 had no effect on TNMP's financial statements as of December 31, 1997.
The transmission and distribution operations in New Mexico will continue to
follow SFAS 71.
Fuel Reconciliation
TNMP's fixed fuel factor remains constant until changed as part of a
general rate case or fuel reconciliation, or until the PUCT orders a
reconciliation for any over or under collections of fuel costs. TNMP filed a
reconciliation of fuel costs in June 1997, for the period of October 1993
through December 1996. In January 1998, TNMP reached a stipulated agreement with
the staff of the PUCT and several other interested parties. The agreement, which
is subject to approval by the PUCT, specifies all fuel costs incurred during the
reconciliation period should be approved as reasonable and necessary costs.
Also, the agreement does not propose a change to the fixed fuel factor; however,
it specifies the fuel factor is expected to be addressed in the "Texas Rate
Filing and Transition to Competition Plan" described above.
Note 3. Change in Accounting for Unbilled Revenues
Effective January 1, 1995, TNMP changed its method of accounting for
operating revenues from cycle billing to the accrual method. The change was made
in order to more closely match revenues and expenses and more closely conforms
to common utility industry practice. The cumulative effect of this change was to
recognize $12,993,000 of additional revenues ($8,445,000, net of taxes, or $0.77
per share).
Note 4. Discontinued Nonregulated Operations
Management, with approval from the Board of Directors, authorized a plan to
discontinue the construction activities of FWI in late 1997. FWI will continue
to operate its service and maintenance segment of its business.
The pre-tax loss on discontinued operations recognized in 1997 of $16.3
million ($10.8 million, net of taxes, or $0.82 per share) includes the net loss
on the construction segment and costs to satisfy remaining contractual
obligations related to its discontinued construction operations of $9.5 million,
net of taxes, as well as disposal costs of $1.3 million, net of taxes. Since the
costs to dispose of the construction segment are not significant, this amount
has been included in the 1997 loss on discontinued operations. The construction
segment is expected to be fully disposed of within one year. During 1996, FWI
had incurred a net loss from construction segment of $3.1 million, or $0.27 per
share.
Note 5. Employee Benefit Plans
Pension Plan
TNMP has a defined benefit pension plan covering substantially all of its
employees. Benefits are based on an employee's years of service and
compensation. TNMP's funding policy is to contribute the minimum amount required
by federal funding standards. The following table sets forth the plan's funded
status and amounts recognized in the consolidated balance sheets at December 31,
1997, and 1996.
<TABLE>
<CAPTION>
1997 1996
-------- ----------
(In thousands)
Actuarial present value of benefit obligations:
<S> <C> <C>
Vested benefit obligation $ 66,061 $ 58,466
Unvested benefit obligation 4,803 4,539
-------- ----------
Accumulated benefit obligation $ 70,864 $ 63,005
======== ==========
Projected benefit obligation $ 76,316 $ 66,406
Unrecognized net asset 59 83
Unrecognized prior service cost 1,434 1,588
Unrecognized net gain from past experience 24,779 21,484
-------- ----------
102,588 89,561
Plan assets (principally marketable securities)
at estimated fair value 95,751 82,771
-------- ----------
Accrued pension costs (included in deferred
credits in the consolidated balance sheets) $ 6,837 $ 6,790
======== ==========
Net pension costs were comprised of the following components as determined
using the projected unit credit actuarial method:
1997 1996 1995
--------- ----------- -----------
(In thousands)
Service cost $ 1,371 $ 1,425 $ 1,071
Interest cost on projected benefit obligation 5,074 4,841 4,762
Adjustment for actual return on plan assets (17,788) (12,398) (13,797)
Net amortization and deferral 11,390 6,207 7,607
--------- ----------- -----------
Net pension costs $ 47 $ 75 $ (357)
========= =========== ===========
</TABLE>
Assumptions used in accounting for the pension plan as of December 31,
1997, and 1996 were as follows:
1997 1996
---- ----
Discount rates 7.0% 7.75%
Rates of increase in compensation levels 4.0% 4.0%
Expected long-term rate of return on assets 9.5% 9.5%
Postretirement Benefit Plan
TNMP sponsors a health care plan that provides postretirement medical and
death benefits to retirees who satisfied minimum age and service requirements
during employment. TNMP recognizes the costs of postretirement benefits on the
accrual basis during the periods that employees render service to earn the
benefits in accordance with SFAS 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." TNMP has been permitted to recover through rates
the additional costs resulting from the adoption of SFAS 106. TNMP has a trust
fund dedicated to paying these postretirement benefits.
The following table sets forth the plan's funded status and amounts
recognized in the consolidated balance sheets at December 31, 1997, and 1996.
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(In thousands)
Accumulated postretirement benefit obligation:
<S> <C> <C>
Retirees and dependents $ 7,615 $ 13,060
Active employees 3,036 4,244
---------- ----------
Total benefits earned 10,651 17,304
Plan assets (principally marketable securities)
at estimated fair value 8,274 6,975
---------- ----------
Accumulated postretirement benefit
obligation in excess of plan assets 2,377 10,329
Unrecognized transition obligation (12,864) (13,721)
Unrecognized net gain from past experience 14,168 6,998
---------- ----------
Accrued postretirement benefit costs (included in
deferred credits in the consolidated balance sheets) $ 3,681 $ 3,606
========== ==========
Net postretirement benefit costs were comprised of the following
components:
1997 1996 1995
--------- --------- --------
(In thousands)
<S> <C> <C> <C>
Service cost $ 467 $ 524 $ 374
Interest cost on postretirement benefit obligation 1,253 1,259 1,265
Reduction for actual return on plan assets (1,037) (708) (956)
Net amortization and deferral 1,056 922 1,145
--------- --------- --------
Net postretirement benefit costs $ 1,739 $ 1,997 $ 1,828
========= ========= ========
</TABLE>
The transition obligation is being amortized over a 20-year period that
began in 1993. The assumed health care cost trend rate used to measure the
expected cost of benefits was 5.5% for 1997 and is assumed to trend downward
slightly each year to 4.3% for 2003 and thereafter. That assumed rate has an
effect on the amounts reported. For example, increasing the assumed health care
cost trend rates by one percentage point in each year would increase the
accumulated postretirement benefit obligation as of December 31, 1997, by
$47,000 and the aggregate of the service and interest cost components of net
postretirement benefit cost for 1997 by $274,000.
Additional assumptions used in accounting for the postretirement benefit
plan as of December 31, 1997, and 1996, were as follows:
1997 1996
-------- --------
Discount rates 7.0% 7.75%
Expected rate of return on assets (net of taxes) 5.25% 5.7%
Incentive Plans
TNP and TNMP have several incentive compensation plans. All employees
participate in one or more of these plans. Incentive compensation is based on
meeting key financial and operational performance goals such as cash value added
or earnings per share, operations and maintenance costs per KWH, and system
reliability measures. Operating expenses for 1997, 1996, and 1995 included costs
for the various cash and equity plans of $6.0 million, $4.8 million, and $2.0
million, respectively.
Other Employee Benefits
TNMP has a 401(k) plan designed to enhance the other retirement plans
available to its employees. Employees may invest their contributions in fixed
income securities, mutual funds, or TNP common stock. TNMP's contributions are
used to purchase TNP common stock, which employees may later convert into
investments in other investment options.
TNMP has employment contracts with certain members of management and other
key personnel. The contracts provide for lump sum compensation payments and
other rights in the event of termination of employment or other adverse
treatment of such persons following a "change in control" of TNP or TNMP. Such
event is defined to include, among other things, substantial changes in the
corporate structure, ownership, or board of directors of either entity.
An excess benefit plan has been provided for certain key personnel and
retired employees. The payment of benefits under the excess benefit plan is
partially provided under an insurance policy arrangement for paying the benefits
that generally would have been provided by the pension and thrift plans except
for federal limitations.
<PAGE>
<TABLE>
<CAPTION>
Note 6. Income Taxes
Components of income taxes were as follows:
TNP TNMP
------------------------------------- ------------------------------------
1997 1996 1995 1997 1996 1995
--------- ----------- ----------- --------- ----------- -----------
(In thousands)
Taxes on net operating income:
<S> <C> <C> <C> <C> <C> <C>
Federal - current $ 10,730 $ 10,240 $ 3,108 $ 9,140 $ 8,596 $ 3,108
State - current 428 86 507 428 86 507
Federal - deferred 7,134 49 6,700 9,963 1,381 6,700
ITC adjustments 1,816 - 2,002 2,531 270 2,002
--------- ----------- ----------- --------- ----------- -----------
20,108 10,375 12,317 22,062 10,333 12,317
Taxes on other income (loss):
Federal - current (534) (100) 7,170 (534) (100) 7,203
Federal - deferred 687 (241) (1,444) 687 (241) (1,568)
ITC adjustments (410) (381) (323) (410) (381) (311)
--------- ----------- ----------- --------- ----------- -----------
(257) (722) 5,403 (257) (722) 5,324
--------- ----------- ----------- --------- ----------- -----------
Taxes on loss from discontinued
nonregulated operations (Note 4) (5,526) (1,658) - - - -
Taxes on cumulative effect
of change in accounting,
federal-deferred (Note 3) - - 4,548 - - 4,548
--------- ----------- ----------- --------- ----------- -----------
Total income taxes $ 14,325 $ 7,995 $ 22,268 $ 21,805 $ 9,611 $ 22,189
========= =========== =========== ========= =========== ===========
The amounts for total income taxes differ from the amounts computed by
applying the appropriate federal income tax rate to earnings (loss) before
income taxes for the following reasons:
TNP TNMP
---------------------------------- ---------------------------------
1997 1996 1995 1997 1996 1995
---------- ---------- ---------- --------- ----------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory tax rate $ 15,252 $ 10,850 $ 17,595 $ 22,854 $ 12,735 $ 17,674
Amortization of
accumulated deferred ITC (1,403) (1,323) (1,079) (1,403) (1,323) (1,079)
Amortization of
excess deferred taxes (141) (143) (160) (141) (143) (318)
State income taxes 428 86 507 428 86 507
ITC related to disallowance (410) (191) (312) (410) (191) (312)
ITC adjustment - (760) - - - -
Taxes on cumulative effect
of change in accounting,
federal- deferred (Note 3) - - 4,548 - - 4,548
Other, net 599 (524) 1,169 477 (1,553) 1,169
---------- ---------- ---------- --------- ----------- ---------
Actual income taxes $ 14,325 $ 7,995 $ 22,268 $ 21,805 $ 9,611 $ 22,189
========== ========== ========== ========= =========== =========
</TABLE>
<PAGE>
The tax effects of temporary differences that gave rise to significant
portions of net current and net noncurrent deferred income taxes as of December
31, 1997, and 1996, are presented below.
<TABLE>
<CAPTION>
TNP TNMP
--------------------------- ---------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
(In thousands)
Current deferred income taxes:
Deferred tax assets:
<S> <C> <C> <C> <C>
Unbilled revenues $ 2,905 $ 2,470 $ 2,905 $ 2,470
Other - 663 663
------------ ------------ ------------ ------------
2,905 3,133 2,905 3,133
Deferred tax liability:
Deferred purchased power and fuel costs (1,198) (1,196) (1,198) (1,196)
------------ ------------ ------------ ------------
Current deferred income taxes, net $ 1,707 $ 1,937 $ 1,707 $ 1,937
============ ============ ============ ============
Noncurrent deferred income taxes:
Deferred tax assets:
Minimum tax credit carryforwards $ 27,414 $ 27,445 $ 34,377 $ 34,703
Federal regular tax net operating
loss carryforwards - - - 1,724
ITC carryforwards 6,608 11,255 6,472 11,823
Regulatory related items 17,135 16,844 17,135 16,844
Accrued employee benefit costs 3,195 3,486 3,195 3,486
Other 3,449 1,263 700 696
------------ ------------ ------------ ------------
57,801 60,293 61,879 69,276
------------ ------------ ------------ ------------
Deferred tax liabilities:
Utility plant, principally due to
depreciation and basis differences (128,913) (115,823) (128,912) (115,823)
Deferred charges (6,101) (5,565) (6,101) (5,565)
Regulatory related items (8,037) (13,749) (7,951) (13,748)
------------ ------------ ------------ ------------
(143,051) (135,137) (142,964) (135,136)
------------ ------------ ------------ ------------
Noncurrent deferred income taxes, net $ (85,250) $ (74,844) $ (81,085) $ (65,860)
============ ============ ============ ============
Federal tax carryforwards as of December 31, 1997, were as follows:
TNP TNMP
-------- ---------
(In thousands)
Minimum tax credits
<S> <C> <C>
Amount $ 27,414 $ 34,377
Expiration period None None
Investment tax credit
Amount $ 6,608 $ 6,472
Expiration period 2005 2005
</TABLE>
An Internal Revenue Service (IRS) revenue agent involved in auditing TNP's
1990 and 1991 consolidated federal income tax returns recommended, in March
1995, that a private letter ruling concerning eligibility of the TNP One
generating plant for investment tax credit (ITC) be revoked retroactively. On
July 29, 1997, TNP received notification from the IRS that revoked the private
letter ruling. However, the IRS simultaneously granted full relief from the
effects of this revocation and has allowed TNP to rely on the private letter
ruling as issued. The current ruling will have no material effect on the amount
of ITC previously recognized.
Note 7. Long-Term Debt
First Mortgage Bonds
FMBs issued under the Bond Indenture are secured by substantially all
utility plant owned directly by TNMP. The Bond Indenture restricts cash dividend
payments on TNMP common stock as discussed in Note 9.
TNMP has the ability to issue additional FMBs based on certain financial
tests, or based on previously retired FMBs. As of December 31, 1997, TNMP could
not issue any additional FMBs based on the required financial tests. However,
TNMP also has the ability to issue additional FMBs against previously retired
FMBs, as limited by an earnings test. As of December 31, 1997, TNMP could issue
up to $91 million of FMBs.
Secured Debentures
TNMP's Series A, 10.75% secured debentures and 12.5% secured debentures are
secured with a first lien on a portion of Unit 1. The 12.5% secured debentures
are also secured by a first lien on a portion of Unit 2. TNMP's secured
debenture holders are also secured by second liens on substantially all utility
plant in Texas owned directly by TNMP. The secured debentures also contain
restrictions on dividends and asset dispositions.
Revolving Credit Facilities
TNMP has two credit facilities, the 1996 Facility and the 1995 Facility.
The 1996 Facility provides for a total commitment of $100 million, while the
1995 Facility provides for a total commitment of $150 million. The 1996 Facility
commitment expires September 2001. The 1995 Facility commitment will reduce to
$125 million on November 3, 1998, and to $100 million on November 3, 1999, and
will expire on November 3, 2000. The collateral securing the 1996 Facility is
$100 million of non-interest bearing (except upon default) FMBs. Collateral
securing the 1995 Facility is generally a first lien on a portion of TNP One, a
second lien on TNMP's first mortgage bond trust estate located in Texas, and $30
million of non-interest bearing FMBs. This collateral secures borrowings up to
$100 million. Before increasing borrowings above $100 million, TNMP must pledge
additional non-interest bearing FMBs in an amount equal to the borrowings over
$100 million.
Associated with the 1996 Facility, TNMP has a $50 million interest rate
collar to mitigate exposure to variable interest rates. The collar sets floor
and ceiling rates on the 90-day LIBOR rate at 5.25% and 7.50%, respectively. The
term of the interest rate collar is September 1997 through September 2000.
TNMP has sufficient liquidity to satisfy the possibility of any known
contingencies. Management believes cash flow from operations and periodic
borrowings under its two credit facilities should be sufficient to meet working
capital requirements and planned capital expenditures at least through 1998.
At December 31, 1997, interest rate on borrowings under the 1996 Facility
was 7.11% and would have been 7.26% on the 1995 Facility. The composite average
borrowing rates under TNMP's credit facilities were 7.15% and 7.32% for 1997 and
1996, respectively. The interest rate margins on both facilities will decrease
as the ratings on TNMP's FMBs improve.
Under specified conditions, TNMP's credit facilities restrict the payment
of cash dividends on TNMP common stock. The credit facilities also prohibit the
sale, lease, transfer, or other disposition of assets other than in the ordinary
course of business.
Maturities
As of December 31, 1997, FMB and secured debenture maturities and sinking
fund requirements for the five years following 1997 are as follows:
Secured Total FMBs and
Year FMBs Debentures Secured Debentures
---- ---------- -------------- ------------------
(In thousands)
1998 $ 100 $ - $ 100
1999 100 130,000 130,100
2000 100,100 - 100,100
2001 100 - 100
2002 100 - 100
At the end of 1997, $100 million was outstanding under the 1996 Facility,
which matures in 2001. TNMP had available borrowing capacity of $150 million
under the 1995 Facility.
As of December 31, 1997, FWI had $141,000 of debt associated with the
purchase of vehicles.
<PAGE>
Note 8. Redeemable Cumulative Preferred Stock
If TNMP liquidates voluntarily or involuntarily, holders of preferred stock
have preferences equal to amounts payable on redemption or par, respectively,
plus accrued dividends. TNMP's charter provides that additional shares of
preferred stock may not be issued unless certain tests are met. As of December
31, 1997, $188 million of additional preferred stock could be issued.
Note 9. Capital Stock and Dividends
TNP
In November 1997, TNP increased its quarterly dividend from $0.245 to $0.27
per share.
In October 1996, TNP issued 2 million shares of common stock in a public
offering, with net proceeds of approximately $47,170,000. The net proceeds were
transferred to TNMP as an equity contribution.
TNMP
The Bond Indenture prohibits TNMP from paying cash dividends on its common
stock to TNP unless unrestricted retained earnings are available. As of December
31, 1997, $56.8 million of unrestricted retained earnings were available for
dividends.
Note 10. Commitments and Contingencies
Fuel Supply Agreement
TNMP has an agreement with the Walnut Creek Mining Company for the purchase
of lignite through the remaining life of TNP One. Walnut Creek Mining Company is
jointly owned by Phillips Coal Company and Peter Kiewit Sons', Inc.
Wholesale Purchased Power Agreements
TNMP purchases a significant portion of its electric requirements from
various wholesale suppliers. These contracts are scheduled to expire in various
years through 2005.
TU is TNMP's largest wholesaler of energy. In 1997, TU supplied
approximately 39% of TNMP's Texas capacity and 20% of the Texas energy
requirements. During 1995 TNMP notified TU of its intent to cease purchasing a
significant portion of the full requirements power and energy from TU effective
January 1, 1999. The TU Agreement provided for certain purchases through 2010.
Since 1995, TNMP and TU have been involved in various legal and regulatory
appeals regarding various terms of the TU Agreement. In late 1997, TNMP and TU
entered into an agreement that resolves the appeals. The agreement, effective
January 1, 1999, shortens the term of the previous agreement, which now ends in
June 2002, instead of May 2010, and reduces the expected 1999 minimum
contractual commitments by 80% of the projected 1998 levels. This is expected to
result in a $22.4 million reduction in purchased power expense over the
remaining life of the agreement as compared to the existing agreement.
At December 31, 1997, TNMP had various outstanding commitments for take or
pay agreements, including the fuel supply agreement discussed above. Detailed
below are the fixed and determinable portion of the obligations (amounts in
millions):
1998 1999 2000 2001 2002
------ ------ ------ ------ -------
Purchased power agreements $ 65.7 $ 24.4 $ 24.1 $ 13.9 $ 5.4
Fuel supply agreements 30.2 30.2 30.2 30.2 30.2
------ ------ ------ ------ ------
Total $ 95.9 $ 54.6 $ 54.3 $ 44.1 $ 35.6
====== ====== ====== ====== ======
<PAGE>
Significant Customer
TNMP has received notification that a significant customer in Texas will
replace the power previously provided by TNMP with power from a cogeneration
plant built by a third party wholesale power producer. The plant is scheduled to
commence operations in the first quarter of 1998. This customer provided sales
of 629 GWH and annual revenues of $28.3 million in 1997 ($10.1 million in base
revenues). TNMP has an agreement with the wholesale power producer to continue
providing certain services to the cogeneration plant. The base revenues from
this agreement are expected to be $0.5 million annually.
Legal Actions
TNMP is the defendant in a suit styled Clear Lake Cogeneration Limited
Partnership vs. Texas-New Mexico Power Company, pending in the 234th District
Court of Harris County, Texas. This lawsuit and a parallel proceeding also
pending before the PUCT arose out of disagreements between the limited
partnership (Clear Lake) and TNMP over the interpretation of certain provisions
of a purchased power agreement under which TNMP purchases cogenerated
electricity from Clear Lake. Clear Lake disputes several charges for which TNMP
has billed Clear Lake, alleges that TNMP has failed to abide by contractual
language concerning several issues, and seeks in the lawsuit approximately $15
million in damages. TNMP has moved for summary judgment in the lawsuit, which is
in the discovery phase. TNMP is vigorously contesting the lawsuit and the PUCT
proceeding. The ultimate disposition is not expected to have a material effect
on TNMP's results of operations.
TNMP is the defendant in a suit styled Phillips Petroleum Company vs.
Texas-New Mexico Power Company, pending in the 149th State District Court of
Brazoria County, Texas. The suit is based on events surrounding an interruption
of electricity to a petroleum refinery and related facilities that occurred in
May 1997. Phillips is seeking the recovery of approximately $36 million in
damages arising from the interruption. TNMP is vigorously contesting this
lawsuit, which is in the discovery phase. The ultimate disposition is not
expected to have a material effect on TNMP's results of operations.
See Note 2 for information regarding the rate filing with the Texas Gulf
Coast Cities, the transition to competition plan filed with the PUCT and the
fuel reconciliation with the PUCT.
TNMP is involved in various claims and other legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on TNMP's
and TNP's consolidated financial position or results of operations.
<PAGE>
<TABLE>
<CAPTION>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
Selected Quarterly Consolidated Financial Data
The following selected quarterly consolidated financial data for TNP is
unaudited, and, in the opinion of TNP's management, is a fair summary of the
results of operations for such periods:
March 31 June 30 Sept. 30 Dec. 31
---------- ---------- ---------- ----------
(In thousands except per share amounts)
1997
<S> <C> <C> <C> <C>
Operating revenues........................................ $ 126,847 $ 133,338 $ 189,339 $ 135,710
Net operating income...................................... 19,348 23,049 36,486 16,763
Income from continuing operations......................... 5,040 8,871 22,736 3,808
Net income................................................ 4,110 7,431 20,694 (2,557)
Earnings per share of common stock from
continuing operations.................................. 0.38 0.68 1.73 0.29
Earnings per share of common stock *...................... 0.31 0.56 1.57 (0.20)
Dividends per share of common stock....................... $ 0.245 $ 0.245 $ 0.245 $ 0.27
Weighted average common shares outstanding................ 13,025 13,069 13,092 13,128
1996
Operating revenues........................................ $ 99,827 $ 122,020 $ 157,453 $ 123,437
Net operating income...................................... 17,638 25,143 31,050 19,004
Income from continuing operations......................... 559 7,956 15,152 2,483
Net income................................................ 562 7,831 14,292 368
Earnings per share of common stock from
continuing operations *................................ 0.05 0.72 1.37 0.19
Earnings per share of common stock *...................... 0.05 0.71 1.29 0.03
Dividends per share of common stock....................... $ 0.22 $ 0.22 $ 0.245 $ 0.245
Weighted average common shares outstanding................ 10,936 10,994 11,015 12,955
</TABLE>
* The individual quarters may not add to the yearly totals since the per
share amounts are based upon the average number of shares outstanding
during each quarter.
Generally, the variations between quarters reflect the seasonal
fluctuations of TNMP's business. Also, the fourth quarter of 1996 results
reflect a $1.3 million after tax charge for the settlement of litigation
associated with the Series T FMB retirement in 1995.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
<PAGE>
PART III
--------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors
The information required by this item is incorporated by reference to
"Election of Directors" and "Security Ownership of Management and Certain
Beneficial Owners" in the proxy statement relating to the 1998 Annual Meeting of
Holders of TNP Common Stock.
Executive Officers
The information set forth under "Employees and Executives" in Part I is
incorporated here by reference.
Item 11. EXECUTIVE COMPENSATION.*
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.*
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.*
* The information required by Items 11, 12, and 13 is incorporated by
reference to "Compensation of Executive Officers," "Election of Directors -
Direct Compensation," and "Security Ownership of Management and Certain
Beneficial Owners" in the proxy statement relating to the 1998 Annual
Meeting of Holders of TNP Common Stock.
<TABLE>
<CAPTION>
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following financial statements are filed as part of this report:
Page
<S> <C>
Reports of Independent Public Accountants.......................................................... 18
Independent Auditors' Reports...................................................................... 20
TNP
Consolidated Statements of Income, Three Years Ended December 31, 1997............................. 22
Consolidated Statements of Cash Flows, Three Years Ended December 31, 1997......................... 23
Consolidated Balance Sheets, December 31, 1997, and 1996........................................... 24
Consolidated Statements of Capitalization, December 31, 1997, and 1996............................. 25
Consolidated Statements of Common Shareholders' Equity, Three Years
Ended December 31, 1997.......................................................................... 26
TNMP
Consolidated Statements of Income, Three Years Ended December 31, 1997............................. 27
Consolidated Statements of Cash Flows, Three Years Ended December 31, 1997......................... 28
Consolidated Balance Sheets, December 31, 1997, and 1996........................................... 29
Consolidated Statements of Capitalization, December 31, 1997, and 1996............................. 30
Consolidated Statements of Common Shareholder's Equity, Three Years
Ended December 31, 1997.......................................................................... 31
Notes to Consolidated Financial Statements......................................................... 32
Selected Quarterly Consolidated Financial Data - TNP............................................... 43
(b) No reports on Form 8-K were filed during the last quarter of 1997.
(c) The Exhibit Index on pages 46 - 51 is incorporated here by reference.
(d) All financial statement schedules are omitted, as the required information
is not applicable or the information is presented in the consolidated
financial statements or related Notes.
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrants have duly caused this report to be signed
on their behalf by the undersigned, thereunto duly authorized.
TNP ENTERPRISES, INC. AND TEXAS-NEW MEXICO POWER COMPANY
Date: March 18, 1998 By: \s\ Manjit. S. Cheema
---------------------------------------
Manjit S. Cheema, Senior Vice President
& Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrants and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Title Date
----- ----
<S> <C>
By \s\ Kevern R. Joyce Chairman, President, & Chief Executive Officer 3/18/98
---------------------------- ------
Kevern R. Joyce
By \s\ Manjit. S. Cheema Senior Vice President & Chief Financial Officer 3/18/98
---------------------------- of TNMP and TNP ------
Manjit S. Cheema
By \s\ Scott Forbes Controller of TNMP & TNP 3/18/98
---------------------------- ------
Scott Forbes
By \s\ R. Denny Alexander Director 3/18/98
---------------------------- ------
R. Denny Alexander
By \s\ John A. Fanning Director 3/18/98
---------------------------- ------
John A. Fanning
By \s\ Sidney M. Gutierrez Director 3/18/98
---------------------------- ------
Sidney M. Gutierrez
By \s\ J. R. Holland, Jr. Director 3/18/98
---------------------------- ------
J. R. Holland, Jr.
By \s\ Harris L. Kempner, Jr. Director 3/18/98
---------------------------- ------
Harris L. Kempner, Jr.
By \s\ Dr. Carol D. Smith Surles Director 3/18/98
---------------------------- ------
Dr. Carol D. Smith Surles
By \s\ Larry G. Wheeler Director 3/18/98
---------------------------- ------
Larry G. Wheeler
By \s\ Dennis H. Withers Director 3/18/98
---------------------------- ------
Dennis H. Withers
</TABLE>
<PAGE>
EXHIBIT INDEX
-------------
Exhibits filed with this report are denoted by "*."
Exhibit
No. Description
- ------- -----------
TNP incorporates the following exhibits by reference to the exhibits and filings
noted in parenthesis.
3(a) - Articles of Incorporation and Amendments through March 6, 1984 (Exhibit
3(a) to TNP 1984 Form S-14, File No. 2-89800).
3(b) - Amendment to Articles of Incorporation filed September 25, 1984 (Exhibit
3(b) to TNP 1984 Form 10-K, File No. 1-8847).
3(c) - Amendment to Articles of Incorporation filed August 29, 1985 (Exhibit
3(a) to TNP 1985 Form 10-K, File No. 1-8847).
3(d) - Amendment to Articles of Incorporation filed June 2, 1986 (Exhibit 3(a)
to TNP 1986 Form 10-K, File No. 1-8847).
3(e) - Amendment to Articles of Incorporation filed May 10, 1988 (Exhibit 3(e)
to TNP 1988 Form 10-K, File No. 1-8847).
3(f) - Amendment to Articles of Incorporation filed May 10, 1988 (Exhibit 3(f)
to TNP 1988 Form 10-K, File No. 1-8847).
3(g) - Amendment to Articles of Incorporation filed December 27, 1988 (Exhibit
3(g) to TNP 1988 Form 10-K, File No. 1-8847).
3(h) - Bylaws, as amended (Exhibit 3(h) to joint 1994 Form 10-K, File Nos.
1-8847 and 2-97230).
4(u) - Rights Agreement and Form of Right Certificate, as amended, effective
November 13, 1990 (Exhibit 2.1 to TNP Form 8-A, File No. 1-8847).
*23 - Independent Public Accountants' Consent - Arthur Andersen LLP.
Independent Auditors' Consent - KPMG Peat Marwick LLP.
*27 - Financial Data Schedule for TNP.
TNMP incorporates the following exhibits by reference to the exhibits and
filings noted in parenthesis.
3(i) - Restated Articles of Incorporation. (Exhibit 3(i) to TNMP 1996 10-K, File
No. 2-97230)
3(ii)- Bylaws, as amended November 15, 1994 (Exhibit 3(hh) to TNMP 1994 Form
10-K, File No. 2-97230).
*27 - Financial Data Schedule for TNMP.
TNP and TNMP incorporate the following exhibits by reference to the exhibits and
filings noted in parenthesis.
4(a) - Indenture of Mortgage and Deed of Trust dated as of November 1, 1944
(Exhibit 2(d) to Community Public Service Co. ("CPS") 1978 Form S-7,
File No. 2-61323).
4(b) - Seventh Supplemental Indenture dated as of May 1, 1963 (Exhibit 2(k) to
CPS Form S-7, File No. 2-61323).
4(c) - Eighth Supplemental Indenture dated as of July 1, 1963 (Exhibit 2(1), to
CPS Form S-7, File No. 2-61323).
4(d) - Ninth Supplemental Indenture dated as of August 1, 1965 (Exhibit 2(m), to
CPS Form S-7, File No. 2-61323).
4(e) - Tenth Supplemental Indenture dated as of May 1, 1966 (Exhibit 2(n), to
CPS Form S-7, File No. 2-61323).
4(f) - Eleventh Supplemental Indenture dated as of October 1, 1969 (Exhibit
2(o), to CPS Form S-7, File No. 2-61323).
4(g) - Twelfth Supplemental Indenture dated as of May 1, 1971 (Exhibit 2(p), to
CPS Form S-7, File No. 2-61323).
4(h) - Thirteenth Supplemental Indenture dated as of July 1, 1974 (Exhibit 2(q),
to CPS Form S-7, File No. 2-61323).
4(i) - Fourteenth Supplemental Indenture dated as of March 1, 1975 (Exhibit
2(r), to CPS Form S-7, File No. 2-61323).
4(j) - Fifteenth Supplemental Indenture dated as of September 1, 1976 (Exhibit
2(e), File No. 2-57034).
4(k) - Sixteenth Supplemental Indenture dated as of November 1, 1981 (Exhibit
4(x), File No. 2-74332).
4(l) - Seventeenth Supplemental Indenture dated as of December 1, 1982
(Exhibit 4(cc), File No. 2-80407).
4(m) - Eighteenth Supplemental Indenture dated as of September 1, 1983
Exhibit (a) to Form 10-Q of TNMP for the quarter ended September 30,
1983, File No. 1-4756).
4(n) - Nineteenth Supplemental Indenture dated as of May 1, 1985 (Exhibit
4(v), File No. 2-97230).
4(o) - Twentieth Supplemental Indenture dated as of July 1, 1987 (Exhibit
4(o) to Form 10-K of TNMP for the year ended December 31, 1987,
File No. 2-97230).
4(p) - Twenty-First Supplemental Indenture dated as of July 1, 1989
(Exhibit 4(p) to Form 10-Q of TNMP for the quarter ended June 30,
1989, File No. 2-97230).
4(q) - Twenty-Second Supplemental Indenture dated as of January 15,
1992 (Exhibit 4(q) to Form 10-K of TNMP for the year ended December
31, 1991, File No. 2-97230).
4(r) - Twenty-Third Supplemental Indenture dated as of September 15,
1993 (Exhibit 4(r) to Form 10-K of TNMP for the year ended December
31, 1993, File No. 2-97230).
4(s) - Twenty-Fourth Supplemental Indenture dated as of November 3,
1995 (Exhibit 4(s) to Form 10-K of TNMP for the year ended December
31, 1993, File No. 2-97230).
4(t) - Twenty-Fifth Supplemental Indenture dated as of September 10,
1996 (Exhibit 4(t) to Form 10-Q of TNMP for the quarter ended
September 30, 1996, File No. 2-97230).
4(u) - Indenture and Security Agreement for 12 1/2% Secured Debentures dated
as of January 15, 1992 (Exhibit 4(r) to TNMP 1991 Form 10-K,
File No. 2-97230).
4(v) - Indenture and Security Agreement for 10 3/4% Secured Debentures dated
as of September 15, 1993 (Exhibit 4(t) to TNMP 1993 Form 10-K,
File No. 2-97230).
Contracts Relating to TNP One
-----------------------------
10(a)- Fuel Supply Agreement, dated November 18, 1987, between Phillips
Coal Company and TNMP (Exhibit 10(j) to TNMP 1987 Form 10-K, File
No.2-97230).
10(a)1 - Amendment No. 1, dated as of April 1, 1988, to Fuel Supply Agreement
dated November 18, 1987, between Phillips Coal Company and TNMP
(Exhibit 10(a)1 to Joint 1994 Form 10-K, File Nos. 1-8847 and 2-97230).
10(a)2 - Amendment No. 2, dated as of November 29, 1994, between Walnut Creek
Mining Company and TNMP, to Fuel Supply Agreement dated November 18,
1987, between Phillips Coal Company and TNMP, (Exhibit 10(a)2 to joint
1994 Form 10-K, File Nos. 1-8847 and 2-97230).
10(b)- Unit 1 First Amended and Restated Project Loan and Credit
Agreement, dated as of January 8, 1992 (the "Unit 1 Credit Agreement"),
among TNMP, TGC, certain banks (the "Unit 1 Banks") and Chase
Manhattan Bank (National Association), as Agent for the Unit 1 Banks
(the "Unit 1 Agent"), (Exhibit 10(c) to TNMP 1991 Form 10-K , File No.
2-97230).
10(b)1 - Participation Agreement, dated as of January 8, 1992, among certain
banks, Participants, and the Unit 1 Agent (Exhibit 10(c)1 to TNMP 1991
Form 10-K, File No. 2-97230).
10(b)2 - Amendment No. 1, dated as of September 21, 1993, to the Unit 1 Credit
Agreement (Exhibit 10(b)2 to TNMP 1993 Form 10-K , File No. 2-97230).
10(c)- Assignment and Security Agreement, dated as of January 8, 1992,
among TGC and the Unit 1 Agent (Exhibit 10(d) to TNMP 1991 Form 10-K ,
File No. 2-97230).
10(d)- Amended and Restated Subordination Agreement, dated as of October
1, 1988, among TNMP, Continental Illinois National Bank and Trust
Company of Chicago and the Unit 1 Agent(Exhibit 10(uu) to TNMP 1988
Form 10-K, File No. 2-97230).
10(e)- Unit 1 Mortgage and Deed of Trust, dated as of December 1,
1987, (Exhibit 10(ee) to TNMP 1987 Form 10-K , File No. 2-97230).
10(e)1 - Supplemental Unit 1 Mortgage and Deed of Trust executed on January 27,
1992, (Exhibit 10(g)4 to TNMP 1991 Form 10-K , File No. 2-97230).
10(e)2 - First TGC Modification and Extension Agreement, dated as of January 24,
1992, among the Unit 1 Banks, the Unit 1 Agent, TNMP, and TGC
(Exhibit 10(g)1 to TNMP 1991 Form 10-K, File No. 2-97230).
10(e)3 - Second TGC Modification and Extension Agreement, dated as of January
27, 1992, among the Unit 1 Banks, the Unit 1 Agent, TNMP, and TGC
(Exhibit 10(g)2 to TNMP 1991 Form 10-K, File No. 2-97230).
10(e)4 - Third TGC Modification and Extension Agreement, dated as of January 27,
1992, among the Unit 1 Banks, the Unit 1 Agent, TNMP, and TGC
(Exhibit 10(g)3 to TNMP 1991 Form 10-K, File No. 2-97230).
10(e)5 - Fourth TGC Modification and Extension Agreement, dated as of September
29, 1993, among the Unit 1 Banks, the Unit 1 Agent, TNMP, and TGC
(Exhibit 10(f)5 to TNMP 1993 Form 10-K, File No. 2-97230).
10(e)6 - Fifth TGC Modification and Extension Agreement, dated as of September
29, 1993, among the Unit 1 Banks, the Unit 1 Agent, TNMP, and TGC
(Exhibit 10(f)6 to TNMP 1993 Form 10-K, File No. 2-97230).
10(f)- Indemnity Agreement, dated December 1, 1987, by Westinghouse, CE
and Zachry, (Exhibit 10(ff) to TNMP 1987 Form 10-K, File No. 2-97230).
10(g)- Unit 1 Second Lien Mortgage and Deed of Trust dated as of December
1, 1987, (Exhibit 10(jj) to TNMP 1987 Form 10-K, File No. 2-97230).
10(g)1 - Correction Second Lien Mortgage and Deed of Trust, dated as of December
1, 1987, (Exhibit 10(vv) to TNMP 1988 Form 10-K, File No. 2-97230).
10(g)2 - Second Lien Mortgage and Deed of Trust Modification, Extension and
Amendment Agreement, dated as of January 8, 1992 (Exhibit 10(i)2 to
TNMP 1991 Form 10-K, File No. 2-97230).
10(g)3 - TNMP Second Lien Mortgage Modification No. 2, dated as of September 21,
1993 (Exhibit 10(h)3 to TNMP 1993 Form 10-K, File No. 2-97230).
10(h) - Agreement for Conveyance and Partial Release of Liens, dated as
of December 1, 1987, by PFC and the Unit 1 Agent (Exhibit 10(kk) to
TNMP 1987 Form 10-K, File No. 2-97230).
10(i)- Inducement and Consent Agreement, dated as of June 15, 1988,
among Phillips Coal Company, Kiewit Texas Mining Company, TNMP,
Phillips Petroleum Company, and Peter Kiewit Son's, Inc. (Exhibit
10(nn) to TNMP 1988 Form 10-K, File No. 2-97230).
10(j)- Assumption Agreement, dated as of October 1, 1988, by TGC, in favor
of certain banks, the Unit 1 Agent, and the Depositary, as defined
therein (Exhibit 10(ww) to TNMP 1988 Form 10-K, File No. 2-97230).
10(k)- Guaranty, dated as of October 1, 1988, by TNMP of TGC obligations
under Unit 1 Credit Agreement (Exhibit 10(xx) to TNMP 1988 Form
10-K of TNMP, File No. 2-97230).
10(l)- First Amended and Restated Facility Purchase Agreement, dated as
of January 8, 1992, between TNMP and TGC (Exhibit 10(n) to TNMP
1991 Form 10-K, 1991, File No. 2-97230).
10(m)- Operating Agreement, dated as of October 1, 1988, between TNMP and
TGC (Exhibit 10(zz) to TNMP 1988 Form 10-K, File No. 2-97230).
10(n)- Unit 2 First Amended and Restated Project Loan and Credit
Agreement, dated as of January 8, 1992 (the "Unit 2 Credit Agreement"),
among TNMP, TGC II, certain banks (the "Unit 2 Banks") and The Chase
Manhattan Bank (National Association), as Agent for the Unit 2 Banks
(the "Unit 2 Agent") (Exhibit 10(q) to TNMP 1991 Form 10-K, File No.
2-97230).
10(n)1 - Amendment No. 1, dated as of September 21, 1993, to the Unit 2 Credit
Agreement (Exhibit 10(o)1 to TNMP 1993 Form 10-K, File No. 2-97230).
10(o)- Assignment and Security Agreement, dated as of January 8, 1992,
among TGC II and the Unit 2 Agent (Exhibit 10(r) to TNMP 1991 Form
10-K, File No. 2-97230).
10(p)- Assignment and Security Agreement, dated as of October 1, 1988, by
TNMP to the Unit 2 Agent (Exhibit 10(jjj) to TNMP 1988 Form 10-K,
File No. 2-97230).
10(q)- Subordination Agreement, dated as of October 1, 1988, among TNMP,
Continental Illinois National Bank and Trust Company of Chicago, and
the Unit 2 Agent (Exhibit 10(mmm) to TNMP 1988 Form 10-K, File No.
2-97230).
10(r)- Unit 2 Mortgage and Deed of Trust dated as of October 1, 1988
(Exhibit 10(uuu) to TNMP 1988 Form 10-K, File No. 2-97230).
10(r)1 - First TGC II Modification and Extension Agreement, dated as of January
24, 1992, among the Unit 2 Banks, the Unit 2 Agent, TNMP, and
TGC II (Exhibit 10(u)1 to TNMP 1991 Form 10-K, File No. 2-97230).
10(r)2 - Second TGC II Modification and Extension Agreement, dated as of January
27, 1992, among the Unit 2 Banks, the Unit 2 Agent, TNMP and
TGC II (Exhibit 10(u)2 to TNMP 1991 Form 10-K, File No. 2-97230).
10(r)3 - Third TGC II Modification and Extension Agreement, dated as of January
27, 1992, among the Unit 2 Banks, the Unit 2 Agent, TNMP, and
TGC II (Exhibit 10(u)3 to TNMP 1991 Form 10-K, File No. 2-97230).
10(r)4 - Fourth TGC II Modification and Extension Agreement, dated as of
September 29, 1993, among the Unit 2 Banks, the Unit 2 Agent, TNMP, and
TGC II (Exhibit 10(s)4 to TNMP 1993 Form 10-K, File No. 2-97230).
10(r)5 - Fifth TGC II Modification and Extension Agreement, dated as of June 15,
1994, among the Unit 2 Banks, the Unit 2 Agent, TNMP, and TGC II
(Exhibit 10(s)5 to TNMP Form 10-Q for quarter ended June 30,
1994, File No. 2-97230).
10(s)- Release and Waiver of Liens and Indemnity Agreement, dated October
1, 1988, by Westinghouse, CE, and Zachry (Exhibit 10(vvv) to TNMP
1988 Form 10-K, File No. 2-97230).
10(t)- Second Lien Mortgage and Deed of Trust, dated as of October 1,
1988, (Exhibit 10(www) to TNMP 1988 Form 10-K, File No. 2-97230).
10(t)1 - Second Lien Mortgage and Deed of Trust Modification, Extension and
Amendment Agreement, dated as of January 8, 1992, (Exhibit 10(w)1 to
TNMP 1991 Form 10-K, File No. 2-97230).
10(t)2 - TNMP Second Lien Mortgage Modification No. 2, dated as of September 21,
1993, (Exhibit 10(u)2 to TNMP 1993 Form 10-K, File No. 2-97230).
10(u)- Intercreditor and Nondisturbance Agreement, dated as of October 1,
1988, among PFC, Texas PFC, Inc., TNMP, certain creditors, as
defined therein, and the Collateral Agent, as defined therein (Exhibit
10(xxx) to TNMP 1988 Form 10-K, File No. 2-97230).
10(u)1 - Amendment No. 1, dated as of January 8, 1992, to Intercreditor and
Nondisturbance Agreement, (Exhibit 10(x)1 to TNMP 1991 Form 10-K, File
No. 2-97230).
10(u)2 - Amendment No. 2, dated as of September 21, 1993, to Intercreditor and
Nondisturbance Agreement, (Exhibit 10(v)2 to TNMP 1993 Form 10-K of
TNMP, File No. 2-97230).
10(v)- Grant of Reciprocal Easements and Declaration of Covenants Running
with the Land, dated October 1, 1988, between PFC and Texas PFC, Inc.
(Exhibit 10(yyy) to TNMP 1988 Form 10-K, File No. 2-97230).
10(w)- Non-Partition Agreement, dated as of May 30, 1990, among TNMP, TGC,
and the Unit 1 Agent (Exhibit 10(ss) to TNMP 1990 Form 10-K of TNMP,
File No. 2-97230).
10(x)- Assumption Agreement, dated as of May 31, 1991, by TGC II in favor
of certain banks, the Unit 2 Agent, and the Depositary, as defined
therein (Exhibit 10(kkk) to Amendment No. 1 to File No. 33-41903).
10(y)- Guaranty, dated as of May 31, 1991, by TNMP, for TGC II obligations
under the Unit 2 Credit Agreement (Exhibit 10(lll) to Amendment No.
1 to File No. 33-41903).
10(z)- First Amended and Restated Facility Purchase Agreement, dated as
of January 8, 1992, between TNMP, and TGC II (Exhibit 10(dd) to TNMP
1991 Form 10-K, File No. 2-97230).
10(z)1 - Amendment No. 1 to the Unit 2 First Amended and Restated Facility
Purchase Agreement, dated as of September 21, 1993, between TNMP and
TGC II (Exhibit 10(aa)1 to TNMP 1993 Form 10-K, File No. 2-97230).
10(aa) - Operating Agreement, dated as of May 31, 1991, between TNMP and TGC II
(Exhibit 10(nnn) to Amendment No. 1 to File No. 33-41903).
10(bb) - Non-Partition Agreement, dated as of May 31, 1991, among TNMP, TGC II,
and the Unit 2 Agent (Exhibit 10(ppp) to Amendment No. 1 to File
No. 33-41903).
Contracts Relating to TNP One
-----------------------------
10(cc) - Revolving Credit Facility Agreement, dated as of November 3, 1995,
among TNMP, certain lenders, and Chemical Bank, as Administrative Agent
and Collateral Agent. (Exhibit 10(cc) to Form 10-K of TNP and TNMP
for 1996, File Nos. 1-8847 and 2-97230).
10(cc)1- Form of Guarantee and Pledge Agreement, dated as of November 3, 1995,
between TGC II, and Chemical Bank, as collateral agent (Exhibit
D to Revolving Credit Facility Agreement). (Exhibit 10(cc)1 to Form
10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230).
10(cc)2- Form of Bond Agreement, dated as of November 3, 1995, between TNMP and
Chemical Bank, as Collateral Agent (Exhibit E to Revolving Credit
Facility Agreement). (Exhibit 10(cc)2 to Form 10-K of TNP and TNMP
for 1996, File Nos. 1-8847 and 2-97230).
10(cc)3- Form of Note Pledge Agreement, dated as of November 3, 1995, between
TNMP and Chemical Bank, as collateral agent (Exhibit F to Revolving
Credit Facility Agreement). (Exhibit 10(cc)3 to Form 10-K of TNP
and TNMP for 1996, File Nos. 1-8847 and 2-97230).
10(cc)4- Form of Sixth TGC II Modification and Extension Agreement, dated as of
November 3, 1995, among the Unit 2 Banks, The Chase Manhattan Bank,
as agent, TNMP, and TGC II (Exhibit H to the Revolving Credit
Facility Agreement). (Exhibit 10(cc)4 to Form 10-K of TNP and TNMP
for 1996, File Nos. 1-8847 and 2-97230).
10(cc)5- Form of Second Lien Mortgage and Deed of Trust Modification, Extension
and Amendment Agreement No. 3, dated as of November 3, 1995 (Exhibit
I to the Revolving Credit Facility Agreement). (Exhibit 10(cc)5 to
Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230).
10(cc)6- Form of Assignment and Amendment Agreement, dated as of November 3,
1995, among TNMP, TGC II, and Chemical Bank, as administrative agent
and collateral agent (Exhibit J to the Revolving Credit Facility
Agreement). (Exhibit 10(cc)6 to Form 10-K of TNP and TNMP for 1996,
File Nos. 1-8847 and 2-97230).
10(cc)7- Form of Assignment of TGC II Mortgage Lien, dated as of November 3,
1995, by The Chase Manhattan Bank as agent to Chemical Bank (Exhibit
K to the Revolving Credit Facility Agreement). (Exhibit 10(cc)7 to
Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230).
10(cc)8- Form of Collateral Transfer of Notes, Rights and Interests, dated as of
November 3, 1995, between TNMP and Chemical Bank, as Administrative
Agent and as Collateral Agent (Exhibit L to the Revolving Credit
Facility Agreement). (Exhibit 10(cc)8 to Form 10-K of TNP and TNMP
for 1996, File Nos. 1-8847 and 2-97230).
10(cc)9- Form of Assignment of Second Lien Mortgage and Deed of Trust, dated as
of November 3, 1995, between the Chase Manhattan Bank, as Agent,
and Chemical Bank, as agent (Exhibit M to the Revolving Credit
Facility Agreement). (Exhibit 10(cc)9 to Form 10-K of TNP and TNMP
for 1996, File Nos. 1-8847 and 2-97230).
10(cc)10-Form of Collateral Transfer of Notes, Rights and Interests, dated as
of November 3, 1995, between TNMP and Chemical Bank, as
Administrative Agent and as Collateral Agent (Exhibit N to the
Revolving Credit Facility Agreement). (Exhibit 10(cc)10 to Form 10-K
of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230).
10(cc)11-Form of Amendment No. 1, dated as of November 3, 1995, to the
Assignment and Security Agreement between TNMP, and The Chase
Manhattan Bank, as agent (Exhibit O to the Revolving Credit
Agreement). (Exhibit 10(cc)11 to Form 10-K of TNP and TNMP for 1996,
File Nos. 1-8847 and 2-97230).
Power Supply Contracts
----------------------
10(dd) - Contract dated May 12, 1976, between TNMP and Houston Lighting & Power
Company (Exhibit 5(a), File No. 2-69353).
10(dd)1- Amendment, dated January 4, 1989, to contract between TNMP and Houston
Lighting & Power Company (Exhibit 10(cccc) to TNMP 1988 Form 10-K, File
No.2-97230).
10(ee) - Amended and Restated Agreement for Electric Service dated May 14, 1990,
between TNMP and Texas Utilities Electric Company (Exhibit 10(vv) to
TNMP 1990 Form 10-K, File No. 2-97230).
10(ee)1- Amendment, dated April 19, 1993, to Amended and Restated Agreement for
Electric Service, between TNMP and Texas Utilities Electric
Company (Exhibit 10(ii)1 to 1993 Form S-2, Registration Statement,
File No. 33-66232).
10(ff) - Contract dated April 27, 1977, between TNMP and West Texas Utilities
Company, as amended (Exhibit 10(e) of Form 8 applicable to TNMP 1986
Form 10-K, File No. 2-97230).
10(gg) - Contract dated April 29, 1987, between TNMP and El Paso Electric
Company (Exhibit 10(f) of Form 8 applicable to TNMP 1986 Form 10-K,
File No. 2-97230).
10(hh) - Amended and Restated Contract for Electric Service, dated April 29,
1988, between TNMP and Public Service Company of New Mexico
(Exhibit 10(zz)3 to Amendment No. 1 to File No. 33-41903).
10(ii) - Contract dated December 8, 1981, between TNMP and SPS as amended
(Exhibit 10(h) of Form 8 applicable to TNMP 1986 Form 10-K, File
No. 2-97230).
10(ii)1- Amendment, dated December 12, 1988, to contract between TNMP and SPS
(Exhibit 10(llll) to TNMP 1988 Form 10-K, File No. 2-97230).
10(ii)2- Amendment, dated December 12, 1990, to contract between TNMP and SPS
(Exhibit 19(t) to TNMP 1990 Form 10-K, File No. 2-97230).
10(jj) - Contract dated August 31, 1983, between TNMP and Capitol Cogeneration
Company, Ltd. (Exhibit 10(i) of Form 8 applicable to TNMP 1986 Form
10-K, File No. 2-97230).
10(jj)1- Agreement Substituting a Party, dated May 3, 1988, among Capitol
Cogeneration Company, Ltd., Clear Lake Cogeneration Limited Partnership
and TNMP (Exhibit 10(nnnn) to TNMP 1988 Form 10-K, File No. 2-97230).
10(jj)2- Letter Agreements, dated May 30, 1990, and August 28, 1991, between
Clear Lake Cogeneration Limited Partnership and TNMP (Exhibit
10(oo)2 to TNMP 1992 Form 10-K, File No. 2-97230).
10(jj)3- Notice of Extension Letter, dated August 31, 1992, between Clear Lake
Cogeneration Limited Partnership and TNMP (Exhibit 10(oo)3 to TNMP
1992 Form 10-K, File No. 2-97230).
10(jj)4- Scheduling Agreement, dated September 15, 1992, between Clear Lake
Cogeneration Limited Partnership and TNMP (Exhibit 10(oo)4 to TNMP
1992 Form 10-K, File No. 2-97230).
10(kk) - Interconnection Agreement between TNMP and Plains Electric Generation
and Transmission Cooperative, Inc. dated July 19, 1984 (Exhibit
10(j) of Form 8 applicable to TNMP 1986 Form 10-K, File No. 2-97230).
10(ll) - Interchange Agreement between TNMP and El Paso Electric Company dated
April 29, 1987 (Exhibit 10(l) of Form 8 applicable to TNMP 1986 Form
10-K, File No. 2-97230).
10(mm) - Amendment No. 1, dated November 21, 1994, to Interchange Agreement
between TNMP and El Paso Electric Company (Exhibit 10(nn)1 to joint
1994 Form 10-K, File Nos. 1-8847 and 2-97230).
10(nn) - DC Terminal Participation Agreement between TNMP and El Paso Electric
Company dated December 8, 1981 as amended (Exhibit 10(m) of
Form 8 applicable to TNMP 1986 Form 10-K, File No. 2-97230).
10(oo) - Agreement for Purchase and Sale of Energy effective as of May 1, 1996
among TNMP, Amoco Chemical Company and Amoco Oil Company(Exhibit 10
(pp) to joint 1997 Form 10-K, File Nos. 1-8847 and 2-97230).
10(pp) - Agreement dated December 30, 1994 between TNMP and Union Carbide
Corporation ("UCC") for Purchase of Capacity and Energy from UCC
(Exhibit 10(qq) to joint 1997 Form 10-K, File Nos. 1-8847 and 2-97230).
*10(qq) Letter agreement dated November 24, 1997 between TNMP and Texas
Utilities Electric Company.
Management Contracts
--------------------
*10(rr)- Form of TNMP Executive Agreement for Severance Compensation Upon
Change in Control and schedule of substantially identical agreements.
10(ss) - Agreement dated March 25, 1994 between Kevern Joyce and TNP and TNMP
(Exhibit 10(tt) to TNP and TNMP 1994 Form 10-Q, File Nos. 1-8847
and 2-97230).
*10(tt)- Amendment dated February 16, 1998 to Agreement dated March 25, 1994
between Kevern Joyce and TNP and TNMP.
*10(uu)- Agreement dated February 16, 1998 between John Edwards and TNMP.
*10(vv)- Agreement dated February 16, 1998 between Ralph S. Johnson and TNMP.
*10(ww)- Form of TNP Incentive Compensation Award Agreement and schedule of
substantially identical agreements.
*21 - Subsidiaries of the Registrants.
<PAGE>
Exhibit 21
----------
SUBSIDIARIES OF THE REGISTRANTS
-------------------------------
Name State of Incorporation
- ---- ----------------------
TNP
- ---
Texas-New Mexico Power Company Texas
Facility Works, Inc. Texas
TNP Operating Company Texas
TNMP
- ----
Texas Generating Company Texas
Texas Generating Company II Texas
<PAGE>
Exhibit 23
TNP ENTERPRISES, INC. AND SUBSIDIARIES
--------------------------------------
Independent Public Accountants' Consent
---------------------------------------
The Board of Directors
TNP Enterprises, Inc.:
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into TNP Enterprises, Inc.'s previously
filed Registration Statements on Form S-8 (File nos. 2-93265 and 33-58897) and
Registration Statement on Form S-3 (No. 333-17835)
Arthur Andersen LLP
Fort Worth, Texas
March 18, 1998
<PAGE>
Exhibit 23
TNP ENTERPRISES, INC. AND SUBSIDIARIES
--------------------------------------
Independent Auditors' Consent
-----------------------------
The Board of Directors
TNP Enterprises, Inc.:
We consent to incorporation by reference in the Registration Statement (No.
333-17835) on Form S-3 and in the Registration Statements (Nos. 2-93265 and
33-58897) on Form S-8 of TNP Enterprises, Inc. of our report dated January 30,
1997, relating to the consolidated balance sheet and statement of capitalization
of TNP Enterprises, Inc. and subsidiaries as of December 31, 1996, and the
related consolidated statements of income, common shareholders' equity, and cash
flows for each of the years in the two-year period ended December 31, 1996,
which report appears in the December 31, 1997, annual report on Form 10-K of TNP
Enterprises, Inc.
Our report refers to a change in the method of accounting for operating revenues
in 1995.
KPMG Peat Marwick LLP
Fort Worth, Texas
March 18, 1998
Texas-New Mexico 4100 International Plaza
Power Company Fort Worth, Texas 75109
P.O. Box 2943
Ralph S. Johnson Fort Worth Texas, 76113-2943
Senior Vice President - (817) 737-5566
Power Resources Fax (817) 737-1384
November 24, 1997
Mr. Steven M. Philley
Director, Power Supply
TU Electric
Energy Plaza
1601 Bryan Street
Dallas, Texas 75201-3411
Dear Mr. Philley:
Thank you for taking the time to discuss the various alternatives for Power
Supply at the Lewisville Point of Delivery under our Amended and Restated
Agreement for Electric Service between Texas-New Mexico Power Company (TNMP) and
Texas Utilities Electric (TUE) Company (Contract). In order to resolve the
issues that have been discussed and to allow TNMP further discussion of its
transition to competition plan, we propose the following:
1) TNMP's obligation to TUE shall be the equivalent of being full
requirements customer at the Lewisville Point of Delivery (LPOD)
through June 30, 2002.
2) The term of the above contract shall be adjusted to terminate with our
obligation at LPOD.
3) Agreement in Principle on these (Items 1 & 2) with good faith
commitment to amend the contract is required November 24, 1997.
4) At any time prior to June 30, 2002, TNMP will not intervene in any
proceeding before the Public Utility Commission of Texas in which
TUE's rates are to be determined, except for the sole and limited
purpose of intervention in the Rate Design phase of any such
proceeding.
I appreciate your willingness to consider our changing needs and look
forward to a mutually beneficial relationship. I look forward to hearing from
you and remain available to meet you in our office at any time.
Sincerely,
/S/ Ralph S. Johnson
Agreed: Date: 11/24/97
/s/ Steven M Philley
Signature
TEXAS-NEW MEXICO POWER COMPANY EXECUTIVE AGREEMENT FOR
SEVERANCE COMPENSATION UPON CHANGE IN CONTROL
This Texas-New Mexico Power Company Executive Agreement for Severance
Compensation Upon Change in Control ("Agreement") dated ___________________, is
by and between Texas-New Mexico Power Company ("Company") and _______________
("Executive").
Witnesseth That:
WHEREAS, the Company considers the establishment and maintenance of a sound
and vital management to be essential to protecting and enhancing the best
interests of the Company and its shareholders; and
WHEREAS, the Company has determined that in order to best establish and
maintain such sound and vital management it is appropriate to establish certain
means for reinforcing and encouraging the continued attention and dedication of
the Executive as a part of the management of the Company such that they may
continue their assigned duties in a proper and efficient manner without
distraction because of the possibility of a Change in Control of the Company;
and
WHEREAS, the Executive is willing to continue to serve the Company but is
concerned about the possible effects any Change in Control might have on his
duties and responsibility and status as an Executive:
NOW, THEREFORE, in consideration of the promises and the mutual agreements
herein contained, the Company and Executive hereby enter into this Agreement
setting forth the severance compensation and extended benefits which the Company
agrees it will pay to the Executive if the Executive's employment with the
Company terminates under the circumstances described herein:
1) Company's Right to Terminate
Prior to a Change in Control of the Company as herein defined, this
Agreement shall terminate if Executive shall resign or retire voluntarily,
become disabled, or die. Except as provided in paragraph 3)a)(vi) hereof,
this Agreement shall also terminate if Executive's employment by the
Company shall be terminated, with or without Cause, as herein defined,
prior to any Change in Control of the Company by action of either the Board
of Directors or Chief Executive Officer of the Company, as applicable.
2) Term
(a) The term of this Agreement (the "Term") shall commence as of the date
of this Agreement and shall expire as of the earliest of (i) the third
annual anniversary of the date hereof; provided that the Board of
Directors, by resolution duly adopted, may extend the Term of this
Agreement from time to time, or (ii) termination of the Executive's
employment because of death, Disability, voluntary termination or
retirement by the Executive for other than Good Reason, or Cause (as
those terms may be herein defined);
(b) Any obligation which has vested under the terms of the Agreement and
remains unpaid as of the date the Agreement expires or is terminated
shall survive such expiration or termination and be enforceable under
the terms of the Agreement.
3) Change in Control of the Company
(a) For the purposes of this Agreement, a Change in Control of the Company
is defined as the occurrence of any one of the following events: (i)
there shall be consummated any consolidation or merger of the Company
into or with another corporation or other legal person, and as a
result of such consolidation or merger less than a majority of the
combined voting power of the then-outstanding securities of such
corporation or person immediately after such transactions are held in
the aggregate by holders of Voting Stock, as herein defined, of the
Company immediately prior to such transactions; or (ii) any sale,
lease, exchange or other transfer, whether in one transaction or any
series of related transactions, of all or significant portions of the
assets of the Company to any other corporation or other legal person,
less than a majority of the combined voting power of the
then-outstanding securities of such corporation or person immediately
after such sale, lease, exchange, or transfer is held in the aggregate
by the holders of Voting Stock of the Company immediately prior to
such sale, lease, exchange, or transfer; or (iii) the shareholders of
the Company approve any plan for the liquidation or dissolution of the
Company; or (iv) any person (as such term is used in Sections 13(d)
and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), becomes, either directly or indirectly, the
beneficial owner (within the meaning of Rule 13d-3 under the Exchange
Act) of securities representing 15% or more of the combined voting
power of the then-outstanding securities entitled to vote generally in
the election of directors of the Company ("Voting Stock"); provided
that the Trustee of the Thrift Plan shall not be deemed such a person
for the purposes of this Section 3(iv); or (v) if at any time during a
fiscal year a majority of the Board of Directors of the Company shall
be replaced by persons who were not recommended for those positions by
at least two-thirds of the directors of the Company who were directors
of the Company at the beginning of the fiscal year; or (vi) the
Executive's employment is terminated for other than Cause or the
Executive is removed from office or position with the Company in
either case following commencement by one or more representatives of
the Company of discussions (authorized by the Board of Directors or
Chief Executive Officer of the Company) with a third party that
ultimately results in the occurrence of an event described in clauses
(i), (ii), (iii), (iv), or (v) herein, regardless of whether such
third party is a party to such occurrence, in which event, for the
purposes of this Agreement, the date of the authorization of such
discussions is deemed to be the date of the Change in Control of the
Company;
(b) For all purposes of this paragraph 3), the term Company, as previously
defined herein, shall include TNP Enterprises, Inc., the parent of
Texas-New Mexico Power Company.
4) Termination Following Change in Control of the Company
(a) Termination
If a Change in Control of the Company shall have occurred while the
Executive is still an employee of the Company, the Executive shall be
entitled to the compensation provided in paragraph 5 upon the
subsequent termination of the Executive's employment with the Company
by the Executive or by the Company unless such termination is the
result of (i) the Executive's death, (ii) the Executive's Disability,
(iii) the Executive's decision voluntarily to terminate his employment
or retire, but only if Good Reason does not exist, or (iv) the
Executive's termination for Cause. Notwithstanding anything in this
Agreement to the contrary, termination of the Executive shall not have
been for Cause if termination occurred because of (i) bad judgment or
negligence on the part of the Executive unless it is demonstrable from
historical events that the Executive's bad judgment or negligence
shall have been of such an extensive and ongoing nature that it
rendered the Executive unable adequately to perform his duties; or
(ii) an act or omission believed by the Executive in good faith to
have been in, or at least not opposed to, the Company's best
interests.
For the purposes of this paragraph a), no act, or failure to act,
shall be considered "willful" unless done, or omitted to be done, by
the Executive without good faith. Good faith shall be based upon a
reasonable belief that the action or omission was in, or at least not
opposed to, the best interests of the Company.
(b) Disability
For the purposes of this Agreement, Disability shall mean that the
Executive is incapacitated due to physical or mental illness or injury
and shall have been unable to perform his duties for the Company on a
full time basis for six months and, within 30 days after written
Notice of Termination is thereafter given by the Company, the
Executive shall not have returned to the full time performance of his
duties.
(c) Cause
For the purposes of this Agreement, Cause shall mean (i) the willful
and continued failure by the Executive substantially to perform his
duties with the Company (excluding any failure resulting from
Disability), after a written demand for substantial performance is
delivered to the Executive by the Chief Executive Officer of the
Company setting forth the manner in which the Executive has not been
substantially performing his duties and providing the Executive an
opportunity to appear before the Board of Directors of the Company
with counsel in order to respond to such notice; (ii) the performance
by the Executive of any act or acts constituting a felony involving
moral turpitude and which results or is intended to result in damage
or harm to the Company, whether monetary or otherwise, or which
results in or is intended to result in improper gain or personal
enrichment; and (iii) violations of the Company's Personnel Policy
Manual, as constituted at any time prior to a Change in Control,
concerning personal conduct; provided, that the Company must follow
its disciplinary procedures as set forth therein.
(d) Good Reason
The Executive may terminate the Executive's employment with the
Company and retain his rights to benefits hereunder if Good Reason
exists at any time following a Change in Control of the Company. For
the purposes of this Agreement, Good Reason shall mean any of the
following, unless the Executive has expressly consented in writing
otherwise:
(i) within six months after a Change in Control of the Company
occurs, the Executive, at his discretion, determines that he will
not be able to work in a harmonious and effective manner in the
performance of his duties on behalf of the Company; provided
that, notwithstanding anything in this Agreement to the contrary,
the six month period set forth above does not commence until the
satisfaction of all conditions precedent to and the closing of
the transactions contemplated in paragraph 3)a) (i), (ii), (iii),
(iv), or (v) of this Agreement;
(ii) the Executive is assigned by the Company to a position or duties
which are inconsistent with or materially different from the
Executive's duties or position with the Company immediately prior
to the Change in Control of the Company;
(iii)the Company removes the Executive from or fails to re-elect the
Executive to any positions or offices held by the Executive
immediately prior to the Change in Control of the Company, unless
such action is for Disability, Cause, the Executive's death or
the Executive's voluntary termination or retirement if Good
Reason does not exist prior to such termination or retirement;
(iv) the Executive's base salary or total compensation in effect
immediately prior to the Change in Control of the Company is
reduced by the Company;
(v) the Company fails to increase the Executive's base salary and
total compensation after the Change in Control of the Company by
the average percentage increase in base salary and total
compensation of other persons holding similar positions and
titles within the Company;
(vi) any failure by the Company to continue in effect any benefit plan
or arrangement, or related trust, in which the Executive is
participating or in which he may participate at the time of a
Change in Control of the Company. Such plans, arrangements, or
related trusts (collectively "Plans"), include, but are not
limited to, Texas-New Mexico Power Company's Thrift Plan for
Employees and Trust Agreement ("Thrift Plan"), Texas-New Mexico
Power Company's Pension Plan ("Pension Plan"), Excess Benefit
Plan, group life insurance plan, medical, dental, accident and
disability plans and any other plans and related trusts which
might exist at the time of a Change in Control of the Company;
the Company's obligation hereunder to continue in effect any
benefit plan or arrangement includes the obligation to
irrevocably fund such Plans to the fullest extent allowed by any
applicable rules and regulations, within 90 days of the
occurrence of a Change in Control of the Company, and to maintain
such funding thereafter;
(vii)any action taken by the Company which would adversely affect the
Executive's participation in or reduce the Executive's benefits
received from any Plan;
(viii) any action requiring the Executive to relocate outside the
county in which he was officed prior to the Change in Control of
the Company, except for travel required in the performance of his
duties for the Company to an extent substantially consistent with
the Executive's travel obligations immediately prior to a Change
in Control of the Company;
(ix) any failure by the Company to provide an automobile of similar
style, class and size which was provided to the Executive by the
Company immediately prior to a Change in Control of the Company;
(x) any failure by the Company to provide the Executive with the
number of paid vacation days to which the Executive was entitled
immediately prior to a Change in Control of the Company;
(xi) any material breach by the Company of any provision of this
Agreement following a Change in Control of the Company;
(xii)any failure by the Company to obtain the assumption of this
Agreement by any successor or assign of the Company;
(xiii) any purported termination by the Company not in compliance with
the Notice of Termination provision in paragraph 4)e) below
following a Change in Control of the Company; and
(xiv)after a Change in Control of the Company, the Company gives
notice to the Executive that the term of this Agreement shall not
be extended as provided in paragraph 2)a)(i).
(e) Notice of Termination
Any termination of the Executive by the Company pursuant to paragraphs
4)b) or 4)c) for Disability or Cause shall be communicated by a Notice
of Termination in substantial compliance with the provisions of
paragraph 8). For the purpose of this Agreement, a Notice of
Termination shall mean a written notice which shall indicate the
specific provisions in this Agreement relied upon for termination of
Executive's employment and which sets forth in reasonable detail the
facts and circumstances claimed to provide a basis for such
termination. For the purposes of this Agreement, no purported
termination by the Company shall be effective without such Notice of
Termination.
(f) Effective Date of Termination
Any termination of the Executive for Disability or Cause pursuant to
paragraphs 4)b) or 4)c) shall be effective 30 calendar days after the
Notice of Termination is delivered to the Executive; provided that, in
the event the termination is for Disability as set out in paragraph
4)b), the Executive has not returned to full time performance of his
duties within the 30-day period. All other terminations subject to the
terms of this Agreement, whether by the Company or the Executive,
shall be effective immediately upon the giving of the Notice of
Termination.
5) Severance Compensation upon Termination of Employment
If, during the period commencing upon a Change in Control of the Company
and ending two years following the satisfaction of all conditions precedent
to and consummation of an event described in clauses (i), (ii), (iii),
(iv), or (v) of paragraph 3), the Company shall terminate the Executive's
employment for any reason other than as a result of the Executive's death
or the reasons set out in paragraphs 4)b) or 4)c) in full compliance of the
requirements for notice set out in paragraph 4)e) or if the Executive shall
terminate his employment with the Company when Good Reason exists, then the
Company shall provide for and pay to the Executive the following
compensation:
(a) severance pay in a lump sum, in cash, no later than the fifth calendar
day following the date of termination, an amount equal to three times
the annual base salary as calculated by reference to the Executive's
rate of pay set forth in the Company's payroll records and in effect
for the Executive immediately prior to a Change in Control of the
Company;
(b) incentive compensation under the Company's several incentive
compensation plans in existence immediately prior to the Change in
Control for which Executive has been granted an award and to the
extent an agreement exists between Executive and the Company
addressing a Change in Control, such agreement shall control the
manner and amount of payment, otherwise payments of incentive
compensation shall be determined as if the goals required to be met
for payment had been attained at target and shall be made in the same
manner as payments under paragraph 5)(a) above;
(c) medical, dental, disability and life insurance and other employee
benefits upon the same terms and conditions and at the same cost to
the Executive that existed immediately prior to the Change in Control
of the Company for the lesser of three years or until substantially
similar employee benefits are available through other employment;
(d) if the Executive is fifty years of age or older and has at least
fifteen years of service with the Company, the Company, in addition to
the foregoing benefits, shall pay to the Executive, as an early
retirement incentive, an amount, on a monthly basis for the remainder
of his life, that is equal to what the Executive's retirement pay
would be, calculated using the applicable formula set forth in the
Company's Pension Plan as supplemented by the Excess Benefit Plan
based upon the base salary earned by the Executive for the necessary
number of years immediately prior to the Change in Control of the
Company and the number of service credits that the Executive would
accumulate if he continued his employment until age 62; provided that
to the extent that the Executive would be entitled to retire on the
date of termination or upon his achieving an age upon which the
Executive could retire pursuant to the Company's Pension Plan as
supplemented by the Excess Benefit Plan, and receive payments pursuant
to said Pension Plan and Excess Benefit Plan, the Company's obligation
to make monthly payments shall be equal to the difference between the
amount actually received by the Executive under the Pension Plan as
supplemented by the Excess Benefit Plan and the amount required to be
paid by the Company as set forth above; provided further that if the
Executive becomes entitled to any of the benefits set forth in
paragraph 5)(c) as a retiree under the Company's Pension Plan on or
after the date of termination, then the benefits provided under said
Pension Plan and Excess Benefit Plan shall be substituted for and take
the place of the benefits that the Company would otherwise be required
to provide; and further provided that to the extent any payment or
obligation to pay under this paragraph 5)(d) is determined by the
Internal Revenue Service to be subject to taxation upon the net
present value of the stream of payments for which the Company is
obligated to pay, then the Company shall pay to the Executive within
30 days of such determination, a lump sum equal to the amount
determined by the Internal Revenue Service to be subject to taxation;
further, provided that if the Executive has an employment agreement
that provides for treatment of pension benefits, then the amount of
compensation payable hereunder shall be determined by the terms of the
employment agreement;
(e) without limiting the generality or effect of any other provision
hereof, employee benefit plan, arrangement, or related trust referred
to in paragraph 4)d)(vi), the Company shall fully fund each Plan in
which the Executive is a participant or is otherwise entitled to
payments or benefits within 5 calendar days of the termination of the
Executive's employment;
(f) any excise tax payable pursuant to Section 4999 of the Internal
Revenue Code of 1986, as amended (the "Code"), as a result of the
payment of the amounts described in this paragraph 5); and
(g) any additional federal, state, or local income tax liability
(calculated at the highest effective rate applicable to individuals)
and excise tax liability (under Section 4999 of the Code) attributable
to payments related to any incremental payment for excise taxes.
6) No Obligation to Mitigate Damages; No Effect on Other Contractual Rights
(a) The Company hereby acknowledges that it will be difficult, and may be
impossible, for the Executive to find reasonably comparable employment
following the date of termination. In addition, the Company
acknowledges that its severance pay plans applicable in general to its
salaried employees do not provide for mitigation, offset, or reduction
of any severance payment received thereunder. Accordingly, the parties
hereto expressly agree that the payment of the severance compensation
by the Company to the Executive in accordance with the terms of this
Agreement will be liquidated damages, and that the Executive shall not
be required to mitigate the amount of any payment provided for in this
Agreement by seeking other employment or otherwise, nor shall any
profits, income, earnings, or other benefits from any source
whatsoever create any mitigation, offset, reduction, or any other
obligation on the part of the Executive hereunder or otherwise;
(b) The provisions of this Agreement, and any payment provided for
hereunder, shall not reduce any amounts otherwise payable, or in any
way diminish the Executive's existing rights, or rights which would
accrue solely as a result of the passage of time, under any benefit
plan, incentive plan or securities plan, employment agreement or other
contract, plan or arrangement.
7) Successor to the Company
(a) The Company will require any successor or assign (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, by
agreement in form and substance satisfactory to the Executive,
expressly, absolutely and unconditionally to assume and agree to
perform this Agreement in the same manner and to the same extent that
the Company would be required to perform it if no such succession or
assignment had taken place. Any failure of the Company to obtain such
agreement prior to the effectiveness of any such succession or
assignment shall be a material breach of this Agreement and shall
entitle the Executive to terminate the Executive's employment for Good
Reason. As used in this paragraph 7, Company shall have the same
meaning as hereinbefore defined and shall include any successor or
assign to its business and/or assets as aforesaid which executes and
delivers the agreement provided for in this paragraph 7 or which
otherwise becomes bound by all the terms and provisions of this
Agreement by operation of law. If at any time during the term of this
Agreement, the Executive is employed by any corporation a majority of
the voting securities of which is then owned by the Company, the
Company as used in paragraphs 3, 4, 5, 12, and 13 hereof shall in
addition include such employer. In such event, the Company shall pay
or shall cause such employer to pay any amount owed to the Executive
pursuant to paragraph 5 hereof;
(b) This Agreement shall inure to the benefit of and be enforceable by the
Executive's personal and legal representatives, executors,
administrators, successors, heirs, distributees, devisees and
legatees. If the Executive should die while any amounts are still
payable to him hereunder, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this Agreement
to the Executive's devisee, legatee, or other designee or, if there be
no such designee, to the Executive's estate;
(c) This Agreement is personal in nature and neither of the parties hereto
shall, without the consent of the other, assign, transfer, or delegate
this Agreement or any rights or obligations hereunder except as
expressly provided in paragraph 7)(a) above. Without limiting the
generality of the foregoing, the Executive's right to receive payments
hereunder shall not be assignable, transferable, or delegable, whether
by pledge, creation of a security interest, or otherwise, other than
by a transfer by his or her will or by the laws of descent and
distribution and, in the event of any attempted assignment or transfer
contrary to this paragraph 7)(c), the Company shall have no liability
to pay any amount so attempted to be assigned, transferred, or
delegated;
(d) The Company and the Executive recognize that each party will have no
adequate remedy at law for breach by the other of any of the
agreements contained herein and, in the event of any such breach, the
Company and the Executive hereby agree and consent that the other
shall be entitled to a decree of specific performance, mandamus, or
other appropriate remedy to enforce performance of this Agreement.
8) Notice
For purposes of this Agreement, notices and all other communications
provided for in the Agreement shall be in writing and shall be deemed to
have been duly given when delivered or mailed by United States registered
mail, return receipt requested, postage prepaid, as follows:
If to the Company:
Texas-New Mexico Power Company
4100 International Plaza, Tower II
Fort Worth, Texas 76109
If to the Executive:
_________________________________________________
_________________________________________________
or such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address
shall be effective only upon receipt.
9) Miscellaneous
No provisions of this Agreement may be modified, waived or discharged
unless such waiver, modification or discharge is agreed to in writing
signed by the Executive and the Company. No waiver by either party hereto
at any time of any breach by the other party hereto of, or compliance with,
any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not set
forth expressly in this Agreement. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas.
10) Validity
The invalidity or unenforceability of any provision or any part of a
provision of this Agreement shall not affect the validity or enforceability
of the remaining provisions of this Agreement, which shall remain in full
force and effect.
11) Counterparts
This Agreement may be executed in one or more counterparts, each of which
shall be deemed to be an original but all of which together will constitute
one and the same instrument.
12) Legal Fees and Expenses
The Company is aware that the Board of Directors or a shareholder of the
Company or the Company's parent may then cause or attempt to cause the
Company to refuse to comply with its obligations under this Agreement, or
may cause or attempt to cause the Company or the Company's parent to
institute, or may institute, litigation seeking to have this Agreement
declared unenforceable, or may take, or attempt to take other action to
deny the Executive the benefits intended under this Agreement. In these
circumstances, the purpose of this Agreement could be frustrated. It is the
intent of the Company that the Executive not be required to incur the
expenses associated with the enforcement of his rights under this Agreement
by litigation or other legal action because the cost and expense thereof
would substantially detract from the benefits intended to be extended to
the Executive hereunder, nor be bound to negotiate any settlement of his
rights hereunder under threat of incurring such expenses. Accordingly, if
it should appear to the Executive that the Company has failed to comply
with any of its obligations under this Agreement or in the event that the
Company or any other person takes any action to declare this Agreement void
or unenforceable, or institutes any litigation or other legal action
designed to deny, diminish or to recover from the Executive the benefits
intended to be provided to the Executive hereunder, the Company irrevocably
authorizes the Executive from time to time to retain counsel of his choice
at the expense of the Company as provided in this paragraph 12, to
represent the Executive in connection with the initiation or defense of any
litigation or other legal action, whether by or against the Company or any
Director, officer, shareholder or other person affiliated with the Company,
in any jurisdiction. Notwithstanding any existing or prior attorney-client
relationship between the Company and such counsel, the Company irrevocably
consents to the Executive entering into an attorney-client relationship
with such counsel, and in that connection the Company and Executive agree
that a confidential relationship shall exist between the Executive and such
counsel. The Company shall pay or cause to be paid and shall be solely
responsible for any and all attorneys' and related fees and expenses
incurred by the Executive as a result of the Company's failure to perform
this Agreement or any provision hereof or as a result of the Company or any
person contesting the validity or enforceability of this Agreement or any
provision hereof. Such fees and expenses shall be paid or reimbursed to the
Executive by the Company on a regular, periodic basis, within thirty days
following receipt by the Company of statements of such counsel in
accordance with such counsel's customary practice. In no event shall the
Executive be required to reimburse the Company for attorneys' fees or
expenses previously paid on behalf of the Executive or reimbursed to the
Executive, or for any attorneys' fees or expenses incurred by the Company
in connection with any contest of validity or enforceability of this
Agreement or any provisions hereof; provided, however, that any litigation
by the Executive, whether as plaintiff or defendant, shall be in good
faith.
13) Confidentiality
The Executive shall retain in confidence any and all confidential
information known to the Executive concerning the Company and its business
so long as such information is not otherwise publicly disclosed.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
TEXAS-NEW MEXICO POWER COMPANY
By:___________________________
Name: Kevern R. Joyce
Title: Chairman, President & Chief
Executive Officer
By:___________________________
Name:
Title:
ATTEST:
__________________________________
Secretary
Schedule of Executives
Party to Executive Severance Compensation Agreements
Kevern R. Joyce
Jack V. Chambers
Manjit S. Cheema
Ralph S. Johnson
John P. Edwards
Larry Dillon
Melissa Davis
Allan Davis
Dennis R. Cash
Michael D. Blanchard
Paul W. Talbot
Patrick Bridges
Scott Forbes
Mark Coulson
Robert Castillo
W. Douglas Hobbs
John Montgomery
On March 28, 1994 you entered into a final version of a letter agreement
which provided in paragraph 4. a method to credit you additional years of
service should you work until age 65 and set forth the manner for calculating
the retirement benefit. Since the date of the letter agreement the Company has
amended its Pension Plan and the Excess Benefit Plan to institute a Cash Balance
Plan. This plan resulted in a significant adverse change to the benefits
available to you under the original letter agreement. In order to continue the
benefit as it existed at the time of the March 28 offer letter the Company will
use the use the then existing pension formula as the basis to determine your
supplemental retirement benefits previously discussed. This formula is being
added to the pension formula as Supplement A, a copy of which is attached
hereto.
The Company therefore offers to you the following benefit in full and
complete satisfaction of its commitment to you in its offer letter of March 28,
1994:
In the event you are still employed by the Company at age 65, your
retirement benefits payable from TNMP's Excess Benefit Plan will be
calculated using the Supplement A formula.
In the case of a "Change-in-Control", you will become fully vested in
this supplemental pension benefit. The benefit will be accrued and vested
as of the date of the change-in-control or the date at which the executive
would have been age 62, whichever benefit is greater. "Change of Control"
is defined as that term is defined in the Executive Severance Compensation
Agreement which you have executed previously with the Company .
If you agree with the foregoing please sign in the space provided below.
/s/ John Fanning Dated February 16, 1998
John Fanning, Chairman - Compensation Committee
Texas-New Mexico Power Company
/s/ Kevern R. Joyce Dated February 16, 1998
Kevern Joyce, Chairman, President & CEO
TNP Board of Directors
<PAGE>
SUPPLEMENT A
In the event the executive is still employed by the Company at age 65,
their retirement benefits payable from Texas-New Mexico Power Company's Excess
Benefit Plan will be calculated using the Supplement A formula.
FORMULA:
1.3% of career average compensation times 30 years of service, plus
0.4% of the excess of career average compensation over one-half of the
Social Security maximum wage base in the year of retirement times 30
years of service.
If the executive retires prior to age 65 (but not earlier than age 55 and 5
years of service) the 30 years of service used in the formula will be reduced by
one year for each year that the retirement precedes age 65. If the executive
retires before age 65 and requests a monthly benefit payment, the amount of the
monthly payment will be the actuarial equivalent of the benefit payable at age
65. If the executive retires prior to age 55 and 5 years of service, no benefit
would be provided under the terms of the employment contract (except in the case
of a change-in-control).
This benefit will be reduced by the benefits that are provided by the
Texas-New Mexico Power Company Pension Plan (qualified plan) and the retirement
benefits provided by previous employers under their qualified and non-qualified
plans.
On May 14, 1996 you were offered the position of Senior Vice-President for
Texas-New Mexico Power Company. The offer letter from Kevern Joyce commits "to
work out a retirement benefit using the Excess Benefit Plan, to credit you for
years of experience from which you gained no vested benefits, assuming you work
until age 65." Since you were employed, the company has revised the Pension Plan
to a Cash Balance Plan. The Cash Balance Plan determines retirement in a much
different manner than the plan that was in place at the time of your offer
letter and has affected the Company's prior efforts to honor its commitment in
the May 14 letter. In order to continue the benefit as it existed at the time of
the May 14 offer the Company will use the use the then existing pension formula
as the basis to determine your supplemental retirement benefits previously
discussed. This formula is being added to the pension formula as Supplement A, a
copy of which is attached hereto.
The Company therefore offers to you the following benefit in full and
complete satisfaction of its commitment to you in its offer letter of May 14,
1996:
In the event you are still employed by the Company at age 65,
your retirement benefits payable from TNMP's Excess Benefit Plan will
be calculated using the Supplement A formula.
In the case of a "Change-in-Control", you will become fully
vested in this supplemental pension benefit. The benefit will be
accrued and vested as of the date of the change-in-control or the date
at which the executive would have been age 62, whichever benefit is
greater. "Change of Control" is defined as that term is defined in the
Executive Severance Compensation Agreement which you have executed
previously with the Company .
If you agree with the foregoing please sign in the space provided below.
/s/ Kevern R. Joyce Dated February 16, 1998
Kevern Joyce, Chairman, President & CEO
Texas-New Mexico Power Company
I agree with the foregoing:
/s/ John Edwards Dated February 16, 1998
John Edwards, Sr. Vice President
<PAGE>
SUPPLEMENT A
In the event the executive is still employed by the Company at age 65,
their retirement benefits payable from Texas-New Mexico Power Company's Excess
Benefit Plan will be calculated using the Supplement A formula.
FORMULA:
1.3% of career average compensation times 30 years of service, plus
0.4% of the excess of career average compensation over one-half of the
Social Security maximum wage base in the year of retirement times 30
years of service.
If the executive retires prior to age 65 (but not earlier than age 55 and 5
years of service) the 30 years of service used in the formula will be reduced by
one year for each year that the retirement precedes age 65. If the executive
retires before age 65 and requests a monthly benefit payment, the amount of the
monthly payment will be the actuarial equivalent of the benefit payable at age
65. If the executive retires prior to age 55 and 5 years of service, no benefit
would be provided under the terms of the employment contract (except in the case
of a change-in-control).
This benefit will be reduced by the benefits that are provided by the
Texas-New Mexico Power Company Pension Plan (qualified plan) and the retirement
benefits provided by previous employers under their qualified and non-qualified
plans.
On December 15, 1994 you were offered the position of Vice-President for
Texas-New Mexico Power Company. The offer letter from Kevern Joyce commits "to
develop a method to give you some credit for non-vested service with other
employers should you ultimately retire from TNP." Since you were employed, the
company has revised the Pension Plan to a Cash Balance Plan. The Cash Balance
Plan determines retirement in a much different manner than the plan that was in
place at the time of your offer letter and has affected the Company's prior
efforts to honor its commitment in the original offer letter. In order to
continue the benefit as it existed at the time of the December 15 offer the
Company will use the use the then existing pension formula as the basis to
determine your supplemental retirement benefits previously discussed. This
formula is being added to the pension formula as Supplement A, a copy of which
is attached hereto.
The Company therefore offers to you the following benefit in full and
complete satisfaction of its commitment to you in its offer letter of December
15, 1994:
In the event you are still employed by the Company at age 65,
your retirement benefits payable from TNMP's Excess Benefit Plan will
be calculated using the Supplement A formula.
In the case of a Change-in-Control, you will become fully
vested in this supplemental pension benefit. The benefit will be
accrued and vested as of the date of the change-in-control or the date
at which the executive would have been age 62, whichever benefit is
greater. Change of Control is defined as that term is defined in the
Executive Severance Compensation Agreement which you have executed
previously with the Company .
If you agree with the foregoing please sign in the space provided below.
/s/ Kevern R. Joyce Dated February 16, 1998
- ---------------------------------------
Kevern Joyce, Chairman, President & CEO
Texas-New Mexico Power Company
I agree with the foregoing:
/s/ Ralph Johnson Dated February 16, 1998
- ---------------------------------
Ralph Johnson, Sr. Vice President
<PAGE>
SUPPLEMENT A
------------
In the event the executive is still employed by the Company at age 65,
their retirement benefits payable from Texas-New Mexico Power Company's Excess
Benefit Plan will be calculated using the Supplement A formula.
FORMULA:
1.3% of career average compensation times 30 years of service, plus
0.4% of the excess of career average compensation over one-half of the
Social Security maximum wage base in the year of retirement times 30
years of service.
If the executive retires prior to age 65 (but not earlier than age 55 and 5
years of service) the 30 years of service used in the formula will be reduced by
one year for each year that the retirement precedes age 65. If the executive
retires before age 65 and requests a monthly benefit payment, the amount of the
monthly payment will be the actuarial equivalent of the benefit payable at age
65. If the executive retires prior to age 55 and 5 years of service, no benefit
would be provided under the terms of the employment contract (except in the case
of a change-in-control).
This benefit will be reduced by the benefits that are provided by the
Texas-New Mexico Power Company Pension Plan (qualified plan) and the retirement
benefits provided by previous employers under their qualified and non-qualified
plans.
Incentive Compensation Award Agreement
for Short- and Long-Term Awards
This Agreement is dated and effective as of January 1, 1998, and is between
___________________________________ ("Participant"), Texas-New Mexico Power
Company (the "Company") and TNP Enterprises, Inc. ("TNPE").
RECITALS
A Committee appointed by and having full authority to act on behalf of the
Board of Directors of the Company and TNPE, respectively, (collectively, the
"Compensation Committee") adopted the following incentive compensation plans:
A. Texas-New Mexico Power Company Management Short-Term Incentive
Plan ("Management Plan"); and
B. TNP Enterprises, Inc. Equity Incentive Plan ("Equity Plan").
On April 28, 1995, the Shareholders approved the adoption by the Board of
Directors of the Equity Plan.
The Management Plan provides for the payment of cash if certain incentive
goals are achieved. The Equity Plan provides for the delivery of stock options,
stock, and performance units upon the achievement of certain incentive goals
which may be short-term and/or long-term goals.
On February 16, 1998, the Compensation Committee (the "Committee")
established the performance goals to be achieved in order to earn incentive
compensation under the plans.
The Participant has been selected to receive awards under each plan subject
to the terms of each applicable plan and the Participant signing this Award
Agreement.
The Participant and the Company agree that this Agreement does not affect
Participant's status as an employee at will and further agree that either party
may terminate Participant's employment at any time with or without cause.
The Committee reserves, in its sole discretion, the right to interpret the
terms and conditions of any award and this agreement and to resolve any
disagreements or disputes concerning this Award Agreement and any decision is
binding upon all parties.
In consideration of the Recitals and mutual covenants and agreements below,
the Participant and the Company desire to and by their respective signatures do
hereby agree to the terms and conditions set forth below.
AGREEMENT
SHORT-TERM AWARDS
Short-Term Cash Award: Participant is hereby granted _____% of the control
point for Participant's salary range as established by the Compensation
Committee at the beginning of each plan year. The cash award is subject to the
1998 short-term goals for the Management Plan being met as such goals are set
forth on Exhibit A attached hereto and made a part hereof for all purposes. Such
award may be adjusted between 50% and 150% on a straight line basis depending
upon where the performance related to each goal occurs within the range
established for each goal. No award payment will be made for performance below
the established minimum for each goal set forth in Exhibit A. The cash award
shall be paid no later than March 15th following the end of the plan year.
The parties agree that no portion of the cash award is due or payable
regardless of whether any Corporate Operational Goal or Departmental/Individual
Goals are met unless the minimum Corporate Financial Goal is met. Further, the
Committee reserves the right to make year-end adjustments which may account for
any unusual or unforeseen events that impact the attainability of any goal.
Allocation of Awards: Participant agrees that the total amount of the cash
award will be allocated among the Corporate Financial Goal, Corporate
Operational Goals, and Departmental/Individual Performance Goals applicable to
such Participant as is set forth in Exhibit B which is attached hereto and made
a part hereof for all purposes.
Participant agrees that to the extent any amount of the total award is
allocated to the Departmental/Individual Performance Goals, such amount will be
due and payable only to the extent the performance of the Participant, as
determined by the officer executing this Agreement on behalf of the Company in
such officer's sole discretion (or, if Participant is the Chief Executive
Officer, then as determined by the Committee in its sole discretion), falls
within the Performance Rating range set forth in Exhibit C which is attached
hereto and made a part hereof for all purposes.
LONG-TERM AWARD
Long-Term Stock Award: Participant is hereby granted a stock award equal to
_____% of the control point for Participant's salary range as established by the
Compensation Committee as of the beginning of the long-term plan cycle. Such
long-term plan cycle award opportunity granted pursuant to the Equity Plan being
met is subject to the goals set forth on Exhibit D which is attached hereto and
made a part hereof for all purposes. Such award may be adjusted between 50% and
150% on a straight line basis, depending upon where the performance related to
each goal occurs within the range established for each goal. No award payment
will be made for performance below the established minimum for each goal set
forth in Exhibit D. Any stock award earned shall be paid no later than March
15th following the end of the 1998 long-term plan cycle. The 1998 Plan year
cycle will be a period of three years beginning January 1, 1998.
Allocation of Award: Participant agrees that the total amount awarded under
the Equity Plan will be allocated 35% to the goal established for Total
Shareholder Return in comparison to the S&P 500, and 65% to the goal established
for Total Shareholder Return in comparison to the S&P Electrical Utility Group.
The amounts allocated to each set of goals will be due and payable only to the
extent each such goal shall be met as set forth in Exhibit D.
GENERAL TERMS
Dividend Equivalents: Participant shall have the right to receive, at the
time any stock awards are paid, cash in an amount equal in value to the
dividends declared on each Share on each record date occurring during the
applicable performance period established for each plan. Dividend equivalents
will not include any dividends on the dividend equivalents accrued during the
applicable performance periods.
Pro-Ration of Awards: If a Participant begins employment or Participant's
employment is terminated due to retirement, death, or disability during a plan
year or the 1998 long-term performance cycle, any award earned shall be prorated
based on the number of months of participation within the plan year or long-term
plan cycle. The prorated award will be based upon performance determined at year
or cycle end and will be paid at the same time as all other awards are paid from
each of the plans under which awards are made.
Termination of Employment: If employment is terminated for any reason other
than retirement, death, or disability, any award opportunity granted under
either plan shall be forfeited, provided that the Committee may waive such
forfeiture upon the CEO's recommendation, provided that if the Change in Control
paragraph is applicable that paragraph shall control.
Change in Control: In the event a Change in Control occurs as that term is
defined in the Executive Agreement for Severance Compensation, then performance
under this Agreement will be deemed to have been at target. To the extent any
payment of an award would have been in stock, such award shall be deemed
converted to a cash award in an amount equal to the value of the stock as of the
day the Change in Control event occurs. Provided that Participant is not
terminated for Cause, as that term is defined in the Executive Agreement for
Severance compensation, the Participant shall be entitled to receive payment of
the awards granted herein no later than the fifth calendar day following the
date of termination or 30 days following the Change in Control event, whichever
first occurs.
Valuation of Shares: Shares issued under the Equity Plan pursuant to having
been earned under the plan and the terms of this Agreement shall be valued by
averaging the high and low prices of the stock on the first trading day of the
plan performance period (the "Share Value"). The Share Value shall be applied to
the dollar value of the award to arrive at the equivalent number of shares
awarded. The awarded shares shall be adjusted for the average of the high and
low stock price on the last trading day of the plan year.
Tax Treatment: Payments are taxable to the Participant in the year of
receipt. The Company will have the right to deduct any federal, state, or local
taxes required by law to be withheld. In regard to any award made hereunder, a
Participant, at Participant's option, may elect to have the Company withhold
sufficient stock, to the extent payable, to pay the taxes then due on such
award.
Provisions Consistent with Plan: This Agreement shall be construed
consistent with the provisions of the applicable plan under which any award may
be made. Where matters are not addressed in this Award Agreement, but are
addressed in the Management Plan or Equity Plan, then such terms are deemed a
part of this Award Agreement and shall apply equally to all awards granted
herein, except for where such terms obviously apply solely to one of the plans.
If there is a conflict between the provisions of this Agreement and such plan,
the provisions of the applicable plan control. Unless otherwise noted to the
contrary, the definition of terms in each Plan also apply in this Agreement.
Attorney Fees: In the event either party is required to bring a cause of
action against the other to enforce the terms of this Agreement, then such
party, to the extent such party is successful in such action, shall be entitled
to reasonable attorney fees.
Governing Law: This Agreement shall be governed by the laws of the State of
Texas. Venue for any cause of action shall be Tarrant County, Texas.
Texas-New Mexico Power Company Participant:
By: ____________________ By: ____________________
Kevern R. Joyce
President & Chief Executive Officer
TNP Enterprises, Inc. Participant
By:_____________________ By:_____________________
Kevern R. Joyce
President & Chief Executive Officer
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT A
TNP ENTERPRISES, INC.
TEXAS-NEW MEXICO POWER COMPANY
Short-Term Incentive Corporate Goals
- -------------------------------------------- ---------------------------- ---------------------------------------------
1997 Goals
Measurement Objective Minimum Target Maximum
---------------- ------------- --------------
Financial
<C> <C> <C> <C>
1. Cash Value Added Improve Financial 4.05 4.40 4.75
Condition
Corporate Threshold 4.05
- -------------------------------------------- ---------------------------- ---------------- ------------- --------------
- -------------------------------------------- ---------------------------- ---------------- ------------- --------------
Operational
2. Customer Satisfaction Rating Improve Customer 79 82 85
(Use CSI instead of overall Service
favorability in 1997)
3. O&M Costs/KWH Sales (cents per KWH) Reduce Operating Costs
4.15 3.95 3.75
4. Equivalent Forced Outage Rate (Moved Improve TNP One's
to Plant Specific Goals in 1997) Reliability 4.7 4.5 4.3
5. Injury Frequency Ratio Reduce Employee
Accidents 5.05 4.44 3.82
49 43 37
6. System Reliability
A) Average Minutes of Outage per Reduce Outage Time 86 76 66
customer
B) Average Number of Outages per Reduce No. of
customer Customers Interrupted 1.40 1.25 1.10
- -------------------------------------------- ---------------------------- ---------------- ------------- --------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT B
TEXAS-NEW MEXICO POWER COMPANY
Short-Term Incentive Plan
Weighting of 1997 Goals for
Texas-New Mexico Power Company Participants
Corporate
Financial Corporate Operational
Cash Customer O&M Avg. Avg.
Value Satisfaction Costs/per Minutes of Number of Departmental/
Added Rating KWH IFR Outage Outages EFOR Individual Total
------- ------------- ----------- ---- --------- ---------- ------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CEO 60 5 5 5 5 5 5 10 100%
SR VP CCO 60 10 5 5 5 5 10 100%
RCOs 50 5 5 5 2.5 2.5 30 100%
Key Employees 50 5 5 5 2.5 2.5 30 100%
SR VP Power Resources 60 5 5 5 25 100%
Asst. Res. Acq. 60 5 5 30 100%
Asst. VP Ind. Mkt. 60 5 5 30 100%
Key Participants 60 5 5 30 100%
Plant Mgr. & Key Participants 60 5 5 * 30 100%
SR VP CFO 60 5 5 30 100%
Controller 60 5 5 30 100%
Treasurer 60 5 5 30 100%
Key Employees 60 5 5 30 100%
SR VP Corporate Relations 60 5 5 5 25 100%
VP HR 60 5 5 5 25 100%
Sec Gen Counsel 60 5 5 30 100%
Key Employees 60 5 5 30 100%
* 1/3 of TNP One's Departmental Goal will be EFOR.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT C
DEPARTMENTAL/INDIVIDUAL PERFORMANCE TARGET GOALS
Individual Performance as a % of
Performance Rating Target Award
<C> <C>
4 -- Greatly exceeded expectations for objective(s) 150%
(maximum)
3 -- Exceeded expectations for objective(s) 125%
2 -- Achieved expectations for objective(s) (target) 100%
1 -- Almost achieved expectations for objective(s) 50%
(minimum)
0 -- Improvement needed, failed to meet objective(s) 0%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT D
LONG-TERM STOCK AWARD GOALS
Total Shareholder Return Payout on the basis of matrix reflecting total
shareholder return in relation to each of the
S&P 500 and the S&P Electric Utility Index.
TSR to S&P 500 (35% weighting)
Performance Ranking % of Target Shares Earned
<S> <C> <C>
Maximum =>75th percentile 150%
Target =>55th percentile 100%
Minimum =>35th percentile 50%
Below Minimum <=35th percentile 0%
TSR to S&P Electric Utility Index (65% weighting)
Performance Ranking % of Target Shares Earned
Maximum =>75th percentile 150%
Target =>55th percentile 100%
Minimum =>35th percentile 50%
Below Minimum <=35th percentile 0%
</TABLE>
Schedule of Executives and Key Employees
Party to Incentive Compensation Award Agreements
For Short-and Long-Term Awards
Kevern R. Joyce, Chairman, President & CEO
Jack V. Chambers, Senior Vice President and Chief Customer Officer
Manjit S. Cheema, Senior Vice President and Chief Financial Officer
Ralph S. Johnson, Senior Vice President - Power Resources
John P. Edwards, Senior Vice President - Corporate Relations
W. Douglas Hobbs, Vice President - Business Development
Larry Dillon, Vice President - Regional Customer Officer
Melissa Davis, Vice President - Regional Customer Officer
Allan Davis, Vice President - Regional Customer Officer
John Montgomery, President, Facility Works, Inc.
Michael D. Blanchard, , Vice President - General Counsel
Dennis R. Cash, Vice President - Human Resources
Patrick Bridges, Treasurer
Scott Forbes, Controller
Paul W. Talbot, Corporate Secretary
Robert Castillo, Assistant Vice President - New Mexico
Mark Coulson, Assistant Vice President - Industrial Marketing
Larry Gunderson, Director Regulatory and Government Affairs
Cathy Means, Director - Information Services
Thomas Houle, Director - Power Planning and Supply
Mark Wilson, TNP One Plant Manager
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000741612
<NAME> TNP ENTERPRISES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 923,268
<OTHER-PROPERTY-AND-INVEST> 5,704
<TOTAL-CURRENT-ASSETS> 34,644
<TOTAL-DEFERRED-CHARGES> 28,310
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 991,926
<COMMON> 187,163
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 111,078
<TOTAL-COMMON-STOCKHOLDERS-EQ> 298,241
0
3,240
<LONG-TERM-DEBT-NET> 478,041
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 100
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 212,304
<TOT-CAPITALIZATION-AND-LIAB> 991,926
<GROSS-OPERATING-REVENUE> 585,234
<INCOME-TAX-EXPENSE> 20,108
<OTHER-OPERATING-EXPENSES> 469,480
<TOTAL-OPERATING-EXPENSES> 489,588
<OPERATING-INCOME-LOSS> 95,646
<OTHER-INCOME-NET> 1,723
<INCOME-BEFORE-INTEREST-EXPEN> 97,369
<TOTAL-INTEREST-EXPENSE> 56,914
<NET-INCOME> 29,678
158
<EARNINGS-AVAILABLE-FOR-COMM> 29,520
<COMMON-STOCK-DIVIDENDS> 13,147
<TOTAL-INTEREST-ON-BONDS> 52,557
<CASH-FLOW-OPERATIONS> 103,853
<EPS-PRIMARY> 2.26
<EPS-DILUTED> 2.26
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000022767
<NAME> TEXAS-NEW MEXICO POWER CO.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 923,250
<OTHER-PROPERTY-AND-INVEST> 214
<TOTAL-CURRENT-ASSETS> 14,536
<TOTAL-DEFERRED-CHARGES> 29,006
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 967,006
<COMMON> 107
<CAPITAL-SURPLUS-PAID-IN> 222,146
<RETAINED-EARNINGS> 64,768
<TOTAL-COMMON-STOCKHOLDERS-EQ> 287,021
0
3,240
<LONG-TERM-DEBT-NET> 477,900
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 100
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 198,745
<TOT-CAPITALIZATION-AND-LIAB> 967,006
<GROSS-OPERATING-REVENUE> 580,693
<INCOME-TAX-EXPENSE> 22,062
<OTHER-OPERATING-EXPENSES> 459,178
<TOTAL-OPERATING-EXPENSES> 481,240
<OPERATING-INCOME-LOSS> 99,453
<OTHER-INCOME-NET> 1,377
<INCOME-BEFORE-INTEREST-EXPEN> 100,830
<TOTAL-INTEREST-EXPENSE> 56,912
<NET-INCOME> 43,918
158
<EARNINGS-AVAILABLE-FOR-COMM> 43,760
<COMMON-STOCK-DIVIDENDS> 44,300
<TOTAL-INTEREST-ON-BONDS> 52,557
<CASH-FLOW-OPERATIONS> 124,467
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
