UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
(X) COMBINED QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
- --------------------------------------------------------------------------------
Commission File Number: 1-8847
TNP ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Texas 75-1907501
(State of incorporation) (I.R.S. employer identification number)
4100 International Plaza, P. O. Box 2943, Fort Worth, Texas 76113
(Address and zip code of principal executive offices)
Registrant's telephone number, including area code 817-731-0099
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 \ \
TNP Enterprises, Inc. had 13,415,566 shares of common stock outstanding as of
August 3, 1999.
- --------------------------------------------------------------------------------
Commission File Number: 2-97230
TEXAS-NEW MEXICO POWER COMPANY
(Exact name of registrant as specified in its charter)
Texas 75-0204070
(State of incorporation) (I.R.S. employer identification number)
4100 International Plaza, P. O. Box 2943, Fort Worth, Texas 76113
(Address and zip code of principal executive offices)
Registrant's telephone number, including area code 817-731-0099
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 \ \
TNP Enterprises, Inc. holds all 10,705 outstanding common shares of Texas-New
Mexico Power Company.
<PAGE>
TNP Enterprises, Inc. And Subsidiaries
Texas-New Mexico Power Company and Subsidiaries
Combined Quarterly Report on Form 10-Q for the period ended June 30, 1999
This Combined Quarterly Report on Form 10-Q is filed separately by TNP
Enterprises, Inc., and Texas-New Mexico Power Company. Texas-New Mexico Power
Company makes no representation as to information relating to TNP Enterprises,
Inc., except as it may relate to Texas-New Mexico Power Company, or to any other
affiliate or subsidiary of TNP Enterprises, Inc.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
TNP Enterprises, Inc. (TNP) and Subsidiaries:
Consolidated Statements of Income
Three and Six Month Periods Ended June 30, 1999, and 1998 3
Consolidated Statements of Cash Flows
Six Month Periods Ended June 30, 1999, and 1998 4
Consolidated Balance Sheets
June 30, 1999, and December 31, 1998 5
Texas-New Mexico Power Company (TNMP) and Subsidiaries:
Consolidated Statements of Income
Three and Six Month Periods Ended June 30, 1999, and 1998 6
Consolidated Statements of Cash Flows
Six Month Periods Ended June 30, 1999, and 1998 7
Consolidated Balance Sheets
June 30, 1999, and December 31, 1998 8
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 19
Item 6. Exhibits and Reports on Form 8-K. 19
(a) Exhibit Index 19
(b) Reports on Form 8-K 19
Statement Regarding Forward Looking Information 19
Signature page 19
<PAGE>
<TABLE>
<CAPTION>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------------------------------------
1999 1998 1999 1998
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
(In thousands except per share amounts)
OPERATING REVENUES $ 144,027 $ 142,099 $ 262,153 $ 268,036
-------------- -------------- --------------- ---------------
OPERATING EXPENSES:
Purchased power and fuel 66,982 74,558 124,354 141,383
Other operating and maintenance 28,608 25,485 52,432 45,869
Depreciation 9,513 9,005 19,487 18,877
Charge for recovery of stranded plant (Note 3) 1,903 1,160 5,653 1,160
Taxes other than income taxes 8,285 8,850 16,285 16,576
Income taxes 6,561 3,940 7,274 6,579
-------------- -------------- --------------- ---------------
Total operating expenses 121,852 122,998 225,485 230,444
-------------- -------------- --------------- ---------------
NET OPERATING INCOME 22,175 19,101 36,668 37,592
-------------- -------------- --------------- ---------------
OTHER INCOME:
Other income and deductions, net 777 104 939 468
Income taxes 180 221 298 55
-------------- -------------- --------------- ---------------
Other income, net of taxes 957 325 1,237 523
-------------- -------------- --------------- ---------------
INCOME BEFORE INTEREST CHARGES 23,132 19,426 37,905 38,115
-------------- -------------- --------------- ---------------
INTEREST CHARGES:
Interest on long-term debt 9,688 12,542 19,912 25,039
Other interest and amortization of debt-related costs 1,041 1,053 2,457 2,115
-------------- -------------- --------------- ---------------
Total interest charges 10,729 13,595 22,369 27,154
-------------- -------------- --------------- ---------------
INCOME FROM CONTINUING OPERATIONS 12,403 5,831 15,536 10,961
Loss from discontinued nonregulated operations (Note 4) - 6,598 - 7,102
-------------- -------------- --------------- ---------------
NET INCOME (LOSS) 12,403 (767) 15,536 3,859
Dividends on preferred stock and other (94) 38 (58) 76
-------------- -------------- --------------- ---------------
INCOME (LOSS) APPLICABLE TO COMMON STOCK $ 12,497 $ (805) $ 15,594 $ 3,783
============== ============== =============== ===============
EARNINGS (LOSS) PER SHARE OF COMMON STOCK
Earnings from continuing operations $ 0.93 $ 0.44 $ 1.17 $ 0.83
Loss from discontinued nonregulated operations - (0.50) - (0.54)
-------------- -------------- --------------- ---------------
EARNINGS (LOSS) PER SHARE $ 0.93 $ (0.06) $ 1.17 $ 0.29
============== ============== =============== ===============
DIVIDENDS PER SHARE OF COMMON STOCK $ 0.29 $ 0.27 $ 0.58 $ 0.54
============== ============== =============== ===============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 13,398 13,240 13,372 13,214
============== ============== =============== ===============
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
(Unaudited)
Six Months Ended
June 30
-------------------------------
1999 1998
-------------- --------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: $ 235,599 $ 279,467
Purchased power (108,928) (119,963)
Fuel costs paid (16,373) (17,549)
Cash paid for payroll and to other suppliers (51,345) (64,098)
Interest paid, net of amounts capitalized (16,507) (26,162)
Income taxes refunded (paid) 3,391 (1,788)
Other taxes paid (22,886) (21,496)
Other operating cash receipts and payments, net (7) 506
-------------- --------------
NET CASH FROM OPERATING ACTIVITIES 22,944 28,917
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant (21,277) (17,066)
Additions to other property and nonregulated investments - 300
Withdrawals from (deposits to) escrow account 1,952 -
-------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (19,325) (16,766)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on preferred and common stocks (7,817) (7,221)
Common stock issuances 3,956 3,957
Borrowings from (repayments to) revolving credit facilities - net (43,500) -
Issuances:
Senior notes, net of discount 174,164 -
Deferred expenses associated with financings (1,577) -
Redemptions:
Preferred stock, net of gain (1,100) -
Secured debentures (130,000) -
Other long-term debt - (104)
-------------- --------------
NET CASH USED IN FINANCING ACTIVITIES (5,874) (3,368)
-------------- --------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (2,255) 8,782
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,216 15,877
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,961 $ 24,659
============== ==============
RECONCILIATION OF NET INCOME TO NET
CASH FROM OPERATING ACTIVITIES: $ 15,536 $ 3,859
Adjustments to reconcile net income to net cash from operating activities:
Depreciation 19,487 18,877
Charge for recovery of stranded plant 5,653 1,160
Amortization of debt-related costs and other deferred charges 2,370 1,881
Allowance for funds used during construction (382) (15)
Deferred income taxes (1,896) 2,382
Investment tax credits 3,599 (363)
Cash flows impacted by changes in current assets and liabilities:
Deferred fuel costs (4,830) (223)
Accounts payable (1,862) (794)
Accrued interest 3,648 (4,837)
Accrued taxes 856 4,424
Reserve for customer refund (10,725) 5,416
Changes in other current assets and liabilities (8,921) (2,386)
Other, net 411 (464)
-------------- --------------
NET CASH FROM OPERATING ACTIVITIES $ 22,944 $ 28,917
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1999 December 31,
(Unaudited) 1998
---------------- ----------------
(In thousands)
<S> <C> <C>
UTILITY PLANT:
Electric plant $ 1,263,813 $ 1,260,147
Construction work in progress 11,372 6,294
---------------- ----------------
Total 1,275,185 1,266,441
Less accumulated depreciation 349,862 343,562
---------------- ----------------
Net utility plant 925,323 922,879
---------------- ----------------
OTHER PROPERTY AND INVESTMENTS, at cost 8,916 10,384
---------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents 9,961 12,216
Accounts receivable 5,646 5,955
Inventories, at lower of average cost or market:
Fuel 513 677
Materials and supplies 4,702 4,567
Deferred fuel costs 6,506 1,676
Accumulated deferred income taxes 384 2,235
Other current assets 3,986 4,403
---------------- ----------------
Total current assets 31,698 31,729
---------------- ----------------
REGULATORY TAX ASSETS 2,405 -
DEFERRED CHARGES 26,924 28,773
---------------- ----------------
$ 995,266 $ 993,765
================ ================
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common shareholders' equity:
Common stock - no par value per share. Authorized 50,000,000
shares; issued 13,412,615 shares in 1999 and 13,293,996
in 1998 $ 196,473 $ 192,518
Retained earnings 123,614 115,776
---------------- ----------------
Total common shareholders' equity 320,087 308,294
Preferred stock 1,844 3,060
Long-term debt, less current maturities 459,702 459,000
---------------- ----------------
Total capitalization 781,633 770,354
---------------- ----------------
CURRENT LIABILITIES:
Accounts payable 26,149 28,011
Accrued interest 8,668 5,020
Accrued taxes 15,146 14,290
Customers' deposits 3,972 3,609
Reserve for customer refunds 246 10,971
Other current liabilities 15,163 25,202
---------------- ----------------
Total current liabilities 69,344 87,103
---------------- ----------------
REGULATORY TAX LIABILITIES - 957
ACCUMULATED DEFERRED INCOME TAXES 101,850 97,346
ACCUMULATED DEFERRED INVESTMENT TAX CREDITS 21,523 20,916
DEFERRED CREDITS (Note 3) 20,916 17,089
COMMITMENTS AND CONTINGENCIES (Note 6)
---------------- ----------------
$ 995,266 $ 993,765
================ ================
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
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 144,014 $ 142,085 $ 262,125 $ 268,016
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Purchased power and fuel 66,982 74,558 124,354 141,383
Other operating and maintenance 26,321 24,538 49,344 43,809
Depreciation 9,513 9,004 19,487 18,876
Charge for recovery of stranded plant (Note 3) 1,903 1,160 5,653 1,160
Taxes other than income taxes 8,172 8,738 16,052 17,122
Income taxes 7,540 4,143 8,584 6,946
---------- ---------- ---------- ----------
Total operating expenses 120,431 122,141 223,474 229,296
---------- ---------- ---------- ----------
NET OPERATING INCOME 23,583 19,944 38,651 38,720
---------- ---------- ---------- ----------
OTHER INCOME:
Other income and deductions, net 1,026 (25) 1,100 170
Income taxes 90 221 232 128
---------- ---------- ---------- -----------
Other income, net of taxes 1,116 196 1,332 298
---------- ---------- ---------- -----------
INCOME BEFORE INTEREST CHARGES 24,699 20,140 39,983 39,018
---------- ---------- ---------- -----------
INTEREST CHARGES:
Interest on long-term debt 9,462 12,542 19,516 25,039
Other interest and amortization of debt-related costs 1,041 1,053 2,457 2,115
---------- ---------- ---------- -----------
Total interest charges 10,503 13,595 21,973 27,154
---------- ---------- ---------- -----------
NET INCOME 14,196 6,545 18,010 11,864
Dividends on preferred stock and other (94) 38 (58) 76
---------- ---------- ---------- -----------
INCOME APPLICABLE TO COMMON STOCK $ 14,290 $ 6,507 $ 18,068 $ 11,788
========== ========== ========== ==========
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
(Unaudited)
Six Months Ended
June 30
--------------------------------
1999 1998
-------------- --------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 233,573 $ 265,989
Purchased power (108,928) (119,963)
Fuel costs paid (16,373) (17,549)
Cash paid for payroll and to other suppliers (41,398) (38,279)
Interest paid, net of amounts capitalized (16,166) (26,154)
Income taxes refunded (paid) 3,391 2,206
Other taxes paid (22,409) (21,963)
Other operating cash receipts and payments, net (36) 173
-------------- --------------
NET CASH FROM OPERATING ACTIVITIES 31,654 44,460
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant (21,051) (16,955)
Withdrawal from (deposits to) escrow account 1,903 -
-------------- --------------
CASH FLOWS USED IN INVESTING ACTIVITIES (19,148) (16,955)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on preferred and common stocks (61) (13,676)
Borrowings from (repayments to) revolving credit facilities, net (54,000) -
Issuances:
Senior notes, net of discount 174,164 -
Deferred expenses associated with financings (1,577) -
Redemptions:
Preferred stock, net of gain (1,100) -
Secured debentures (130,000) -
-------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES (12,574) (13,676)
-------------- --------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (68) 13,829
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,977 2,772
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,909 $ 16,601
============== ==============
RECONCILIATION OF NET INCOME TO NET
CASH FROM OPERATING ACTIVITIES:
Net income $ 18,010 $ 11,864
Adjustments to reconcile net income to net cash from operating
activities:
Depreciation of utility plant 19,487 18,876
Charge for recovery of stranded plant 5,653 1,160
Amortization of debt-related costs and other deferred 2,370 1,881
Allowance for funds used during construction (382) (15)
Deferred income taxes (289) 4,032
Investment tax credits 3,543 (363)
Cash flows impacted by changes in current assets and liabilities:
Deferred fuel costs (4,830) (223)
Accounts payable (1,258) 5,622
Accrued interest 3,593 (795)
Accrued taxes 2,707 (897)
Reserve for customer refund (10,725) 5,416
Changes in other current assets and liabilities (4,822) (4,386)
Other, net (1,403) 2,288
-------------- --------------
NET CASH FROM OPERATING ACTIVITIES $ 31,654 $ 44,460
============== ==============
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
June 30, 1999 December 31,
(Unaudited) 1998
---------------- ----------------
(In thousands)
<S> <C> <C>
ASSETS
UTILITY PLANT:
Electric plant $ 1,263,744 $ 1,260,099
Construction work in progress 11,372 6,294
---------------- ----------------
Total 1,275,116 1,266,393
Less accumulated depreciation 349,862 343,562
---------------- ----------------
Net utility plant 925,254 922,831
---------------- ----------------
OTHER PROPERTY AND INVESTMENTS, at cost 213 2,116
---------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents 7,909 7,977
Accounts receivable 1,981 923
Inventories, at lower of average cost or market:
Fuel 513 677
Materials and supplies 4,702 4,567
Deferred fuel costs 6,506 1,676
Other current assets 3,571 4,093
---------------- ----------------
Total current assets 25,182 19,913
---------------- ----------------
REGULATORY TAX ASSETS 2,405 -
DEFERRED CHARGES 26,831 28,706
---------------- ----------------
$ 979,885 $ 973,566
================ ================
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 222,149 222,149
Retained earnings 97,907 79,840
---------------- ----------------
Total common shareholder's equity 320,163 302,096
Redeemable cumulative preferred stock 1,844 3,060
Long-term debt, less current maturities 440,202 450,000
---------------- ----------------
Total capitalization 762,209 755,156
---------------- ----------------
CURRENT LIABILITIES:
Accounts payable 25,630 26,888
Accrued interest 8,597 5,004
Accrued taxes 23,156 20,449
Customers' deposits 3,972 3,609
Accumulated deferred income taxes 1,295 649
Reserve for customer refunds 246 10,971
Other current liabilities 12,398 17,076
---------------- ----------------
Total current liabilities 75,294 84,646
---------------- ----------------
REGULATORY TAX LIABILITIES - 957
ACCUMULATED DEFERRED INCOME TAXES 97,190 93,378
ACCUMULATED DEFERRED INVESTMENT TAX CREDITS 24,860 22,729
DEFERRED CREDITS (Note 3) 20,332 16,700
COMMITMENTS AND CONTINGENCIES (Note 6)
---------------- ----------------
$ 979,885 $ 973,566
================ ================
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
TNP Enterprises Inc. and Subsidiaries (TNP)
Texas-New Mexico Power Company and Subsidiaries (TNMP)
Notes to Consolidated Financial Statements
Note 1. Interim Financial Statements
The interim consolidated financial statements of TNP and subsidiaries,
and TNMP and subsidiaries are unaudited, and contain all adjustments (consisting
primarily of normal recurring accruals) necessary for a fair statement of the
results for the interim periods presented. Results for interim periods are not
necessarily indicative of results to be expected for a full year or for
previously reported periods due in part to seasonal revenue fluctuations. It is
suggested that these consolidated financial statements be read in conjunction
with the audited consolidated financial statements and notes thereto included in
TNP's and TNMP's 1998 Combined Annual Report on Form 10-K.
Prior period statements have been reclassified in order to be
consistent with current period presentation. The reclassification had no effect
on net income or common shareholders equity.
Note 2. Acquisition
TNP, SW Acquisition, L.P. (SW), a limited partnership organized and
existing under the laws of Texas, and ST Acquisition Corp. (ST Corp.), a Texas
corporation wholly owned by SW, have entered into an Agreement and Plan of
Merger, dated as of May 24, 1999 (the Merger Agreement), which provides for a
merger of TNP with and into ST Corp., with TNP being the surviving corporation
(the Merger). Under the terms of the Merger Agreement, which was unanimously
approved by TNP's board of directors, each issued and outstanding share of
common stock of TNP will be canceled and converted automatically into the right
to receive $44.00 in cash. The Merger will convert TNP from a listed public
corporation to a privately owned corporation.
TNP expects the Merger to close by the end of the first quarter of
2000. The Merger Agreement is subject to financing, and requires approval by TNP
shareholders and approval or regulatory review by the Federal Energy Regulatory
Commission (FERC), the Department of Justice, and state regulators in Texas and
New Mexico. A special meeting of shareholders has been called for September 22,
1999. The purpose of the meeting is to consider and vote on the Merger
Agreement. The record date for this meeting is August 3, 1999. The proxy
statement related to the special meeting will be mailed to shareholders the week
of August 9.
On July 9, 1999, TNMP and SW filed a joint application with the FERC
seeking approval of the Merger. Simultaneously, TNMP filed an application with
the FERC seeking approval of a Backstop Credit Facility (Credit Facility). As a
result of the Merger, TNMP must offer to repurchase certain existing debt.
Should holders of this debt accept TNMP's repurchase offer, proceeds from the
Credit Facility would fund the repurchase.
On July 15, 1999, TNP and TNMP filed an application with the Public
Utility Commission of Texas (PUCT) seeking a determination that the Merger is
consistent with the public interest. Also on July 15, TNMP filed an application
with the New Mexico Public Regulation Commission (NMPRC) seeking to obtain all
approvals and authorizations necessary to consummate the Merger.
Note 3. Regulatory Matters
Texas
New Legislation. On June 18, 1999, new legislation that establishes
competition in the Texas electric utility industry became law, retroactive to
January 1, 1999. The new legislation will implement retail competition for
customers in most areas of Texas on January 1, 2002. Among other provisions, the
new legislation:
* Freezes base rates through December 31, 2001, based on the levels
in effect on September 1, 1999 adjusted for changes in the fixed
fuel factor which passes through fuel and purchased power energy
costs to customers.
<PAGE>
* Allows a utility to recover 100% of its verifiable stranded
costs via several methods, including:
* Redirection of depreciation - During 1998 - 2001, a utility
may redirect all or a part of the depreciation related to
transmission and distribution assets to its generation
assets.
* Application of earnings in excess of an allowed rate of
return - During the freeze period, utilities' earnings are
capped by the cost of capital approved in the utility's most
recent rate proceeding before the PUCT. For TNMP, the cap is
10.53% return on rate base. Earnings in excess of the cap
will be used to reduce the net book value of generation
assets.
* Securitization - At any time after the start of the freeze
period, a utility may securitize 100% of its regulatory
assets and up to 75% of its estimated stranded costs, and
recover those costs from its customers through a transition
charge approved by the PUCT.
* Assessing a competition transition charge - After the freeze
period, stranded costs that have not been recovered by one of
the methods above will be recovered through a competition
transition charge levied upon all retail customers within a
utility's geographical certificated service area as it
existed on May 1, 1999.
* Establishes four alternatives for quantifying the final amount
of stranded costs to be used in establishing the competition
transition charge, and provides a framework for reconciling
estimated stranded costs to the actual stranded costs quantified
using those methods.
* Requires utilities to disaggregate into three distinct
businesses: generation, transmission and distribution, and retail
energy provider.
* Provides that once customer choice begins on January 1, 2002,
residential and small commercial customers who do not choose an
alternative provider will continue to be served by TNMP's
affiliate retail energy provider at a price which is 6% lower
than the rate in effect on January 1, 1999, adjusted to reflect a
fuel factor that the PUCT shall determine as of December 31,
2001.
Prior to the new legislation, TNMP had been operating under a
transition-to-competition plan (Transition Plan) approved by the PUCT in 1998.
The Transition Plan provides that it will be modified to conform to any
legislation enacting competition in the electric utility industry. There are
provisions of the new legislation that conflict with provisions of the
Transition Plan. In such instances, management believes the new legislation
supercedes the Transition Plan. TNMP will make a filing with the PUCT during
August 1999 that sets out its position regarding the effect of the new
legislation on the Transition Plan. Management believes that any changes to the
Transition Plan to reflect the new legislation will have a minimal effect on
rates. However, such an outcome is subject to the PUCT resolving significant
uncertainties regarding the new legislation.
TNP's and TNMP's consolidated financial statements reflect the
application of SFAS 71, "Accounting for the Effects of Certain Types of
Regulation," which provides for recognition of the economic effects of rate
regulation. The passage of the new legislation raises the issue of whether SFAS
71 should continue to be applied to the generation/power supply portion of
TNMP's Texas business. EITF 97-4, "Deregulation of the Pricing of Electricity -
Issues Related to the Application of SFAS Statements No. 71 and 101," states
that application of SFAS 71 should stop "when deregulatory legislation is passed
or when a rate order (whichever is necessary to effect the change in the
jurisdiction) that contains sufficient detail for the enterprise to reasonably
determine how the transition plan will affect the separable portion of its
business whose pricing is being deregulated is issued." While the new
legislation provides the framework as to how competition will be implemented, it
delegates significant authority to the PUCT to resolve uncertainties regarding
implementation of competition. As a result, currently TNMP cannot reasonably
determine how the new legislation will affect the generation/power supply
portion of its Texas business, and it will continue to apply SFAS 71 to that
portion of its business until a reasonable determination of the impact of the
new legislation can be made.
Management has calculated excess earnings for the six months ended June
30, 1999, based on the provisions of the new legislation. The calculation
resulted in a reduction to pre-tax operating income of $5.7 million ($0.26 per
share). The amounts previously recorded in the first quarter for stranded cost
recovery under the Transition Plan have been reclassified, and along with the
excess earnings, are displayed in the income statement under the caption "Charge
for recovery of stranded plant" and included in the balance sheet as a
regulatory liability under the caption "Deferred Credits".
Earnings Monitoring Report. On May 17, 1999, TNMP filed its Electric
Investor-Owned Utilities Earnings Report (Earnings Report) with the PUCT.
Simultaneously, TNMP filed an Addendum to the Earnings Report (Addendum)
detailing TNMP's calculation of excess earnings under the Transition Plan for
the twelve months ended December 31, 1998. The Addendum showed that TNMP had not
earned in excess of the 11.25% return on equity cap established in the
Transition Plan. The Staff of the PUCT and the Office of Public Utility Counsel
are reviewing the Addendum. The Transition Plan provides that persons may
challenge the Addendum by filing a written contest within 90 days of TNMP's
filing with the PUCT. If no such contests are filed, the Addendum shall be
deemed approved. Should a party contest the Addendum, the PUCT will establish a
schedule allowing a Final Order to be entered within 90 days of the filing of
the contest.
<PAGE>
New Mexico
The New Mexico Legislature opened New Mexico's electric power market to
consumer choice with the passage of the Electric Utility Industry Restructuring
Act of 1999 (the Act) in April 1999. The Act provides for the phase-in of retail
choice beginning January 1, 2001, requires utilities to disaggregate their
regulated business activities from those that will be subject to competition,
and guarantees recovery of at least 50% of a utility's stranded costs over a
five-year period. On June 8, 1999, the NMPRC entered a Final Order terminating
TNMP's Community Choice(R) transition plan. By terminating Community Choice, the
NMPRC placed TNMP on the same timetable as other New Mexico utilities with
regard to retail competition and restored the pass-through of purchased power
costs to customers.
Under the Act, utilities are guaranteed recovery from customers of at
least 50% of their stranded costs over a five-year period. Community Choice did
not define stranded costs, nor their recovery. In addition, the Act delays
competition to January 1, 2001. Community Choice had specified May 1, 2000, for
the beginning of retail choice. As a result, TNMP has reduced its accrual for
potential stranded costs in New Mexico from $3.4 million as of December 31,
1998, to $2.1 million as of June 30, 1999.
Community Choice provided for the filing of a rate case by TNMP on June
1, 1999. Notwithstanding the termination of Community Choice, TNMP and the NMPRC
Staff agreed that TNMP would file information that would allow the Staff to
review the reasonableness of TNMP's rates. Settlement talks between the parties
began, with the intent of reaching a settlement without the necessity of filing
a rate case. The parties have reached a tentative settlement that resolves the
issues between the parties, and are preparing to submit the settlement to the
NMPRC for approval. The settlement calls for a decrease in TNMP's base rates of
$1.8 million, or 6%. TNMP expects the NMPRC to act on the proposed settlement
during the second half of 1999.
Note 4. Discontinued Nonregulated Operations
As discussed in TNP's and TNMP's 1998 Combined Annual Report on Form
10-K, management discontinued the remaining operations of Facility Works Inc.
(FWI), TNP's wholly owned unregulated subsidiary, in late 1998. All losses
incurred by FWI during 1998 have been reclassified as losses from discontinued
operations.
Note 5. Segment and Related Information
In TNP's and TNMP's 1998 Combined Annual Report on Form 10-K, TNP
reported two segments, TNMP, which provides regulated electric service in Texas
and New Mexico, and FWI, which before operations were discontinued, provided
integrated mechanical, electrical, plumbing and other maintenance and repair
services to commercial customers in Texas metropolitan areas.
The operations of TNMP have been separated into two segments, Texas and
New Mexico. TNP manages the segments separately to respond to the differing
operational and regulatory climates in the two states.
The following tables present information about profits, losses and
assets of TNP's reportable segments (in thousands). In the tables below, "Total
assets" for Texas and New Mexico includes only net utility plant. All other
assets are included in All Other and Eliminations.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
------ ------ ------ ------
Texas
<S> <C> <C> <C> <C>
Operating revenues $ 122,152 $ 122,394 $ 221,146 $ 227,494
Net income (loss) 11,438 5,761 14,633 9,278
Total assets at June 30, 1999
and December 31, 1998 841,697 839,771 841,697 839,771
New Mexico
Operating revenues $ 21,861 $ 19,691 $ 40,979 $ 40,522
Net income (loss) 2,758 784 3,377 2,586
Total assets at June 30, 1999
and December 31, 1998 83,557 82,623 83,557 82,623
<PAGE>
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
------ ------ ------ ------
All Other and Eliminations
Operating revenues $ 14 $ 14 $ 28 $ 20
Net income (loss) (1,793) (7,312) (2,474) (8,005)
Total assets at June 30, 1999
and December 31, 1998 70,012 71,371 70,012 71,371
Consolidated
Operating revenues $ 144,027 $ 142,099 $ 262,153 $ 268,036
Net income (loss) 12,403 (767) 15,536 3,859
Total assets at June 30, 1999
and December 31, 1998 995,266 993,765 995,266 993,765
</TABLE>
Note 6. Commitments and Contingencies
Legal Proceedings
Clear Lake. TNMP and Clear Lake Limited Partnership ("Clear Lake")
agreed in March 1999 to settle the lawsuit styled Clear Lake Cogeneration
Limited Partnership vs. Texas-New Mexico Power Company, pending in the 234th
District Court of Harris County, Texas, and the parallel proceeding pending
before the PUCT. These proceedings arose out of disagreements between TNMP and
Clear Lake over the interpretation of certain terms of an agreement under which
TNMP purchases cogenerated electricity from Clear Lake.
Under the settlement, TNMP, Clear Lake, and Calpine Power Services
Company (an affiliate of Clear Lake) have entered into a revised purchased power
contract effective as of October 1, 1998, governing energy and capacity
transactions between the parties. In addition, TNMP agreed to pay Clear Lake $8
million, subject to PUCT approval of the settlement.
On July 15, 1999, the PUCT approved the settlement. The PUCT order
ensures that TNMP's customers will realize the savings associated with the
revised purchased power contract between TNMP and Clear Lake. The order also
requires TNMP to defer recognition of the $8 million payment that TNMP will make
to Clear Lake as part of the settlement, and include amortization of the payment
in its calculation of excess earnings over the life of the revised purchased
power contract. TNMP expects the $8 million payment to occur in the third
quarter of 1999.
Phillips Petroleum. TNMP is the defendant in a suit styled Phillips
Petroleum Company vs. Texas-New Mexico Power Company, filed on October 1, 1997
and 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
Petroleum Company is seeking the recovery of damages arising from the
interruption and in May 1999 demanded payment in the amount of $47.1 million.
TNMP's tariff approved by the PUCT contains limitations against recovery of the
great majority of Phillip's alleged actual damages. The Texas Supreme Court, in
another matter, has recently upheld the enforceability of such tariff
limitations in litigation of this type; TNMP believes the ruling will operate to
substantially limit any recovery of actual damages by Phillips, in the event
that any are awarded in this matter. In May 1999, TNMP filed a Third Party
Petition naming Sweeny Cogeneration Limited Partnership as a defendant. The
lawsuit is in the discovery stage. TNMP believes that it has insurance coverage
on most of Phillips' claims up to a total of $31 million, with a $500,000
self-retention that has been charged to earnings.
Other. TNMP is involved in various claims and other legal proceedings
arising in the ordinary course of business. In the opinion of management, the
ultimate dispositions of these matters will not have a material adverse effect
on TNMP's and TNP's consolidated financial position or results of operations.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (MD&A).
The following discussion should be read in conjunction with the related
interim consolidated financial statements and notes.
Results of Operations
As discussed in Note 3, new legislation that establishes competition in
the Texas electric utility industry became law in the second quarter of 1999.
The new legislation includes a number of provisions that management believes
supercede provisions of the Transition Plan. The impact of those provisions on
TNMP's financial results will be noted as necessary in the following discussion.
Overall Results
TNP had income applicable to common stock of $12.5 million for the
quarter ended June 30, 1999 (current quarter) as compared to a loss of $0.8
million for the quarter ended June 30, 1998. Earnings for the second quarter of
1998 included a one-time charge for costs related to implementing the Transition
Plan ($3.1 million) and the loss on FWI's discontinued operations. Excluding
those unusual items, earnings for the second quarter of 1998 were $8.9 million.
TNP had income applicable to common stock of $15.6 million for the six
months ended June 30, 1999 (year-to-date), as compared to $3.8 million for the
six months ended June 30, 1998. Excluding the unusual items noted above,
earnings for the six months ended June 30, 1998, were $13.9 million.
Since the operations of TNMP (the principal subsidiary) currently
represent most of TNP's operations, the following discussion focuses on TNMP's
operations unless noted otherwise.
Under the new legislation, TNMP's earnings on its Texas operations are
capped at a 10.53% return on rate base. TNMP will apply Texas earnings in excess
of the cap to recover stranded plant. For the six months ended June 30, 1999,
TNMP recorded pre-tax excess earnings of $5.7 million ($0.26 per share). Amounts
recorded in the first quarter of 1999 for recovery of stranded plant under the
Transition Plan have been reclassified as described in Note 3. The charge
results from TNMP's calculation of excess earnings for the six months ended June
30, 1999, based on the provisions of the new legislation. In the corresponding
period of 1998 TNMP recorded pre-tax excess earnings under the Transition Plan
of $2.3 million ($0.11 per share). The $2.3 million was applied equally between
additional depreciation and provision for rate refund, according to PUCT
guidelines. The portion of 1998 excess earnings applied to additional
depreciation has been reclassified as "Charge for recovery of stranded plant".
TNMP's income applicable to common stock was $14.3 million for the
quarter ended June 30, 1999, as compared to $6.5 million for the quarter ended
June 30, 1998. Excluding the effect of the 1998 Transition Plan costs discussed
earlier, earnings for the second quarter of 1998 were $9.6 million.
For the six months ended June 30, TNMP's income applicable to common
stock was $18.1 million in 1999 as compared to $11.8 million in 1998. Excluding
the effect of the 1998 Transition Plan costs discussed earlier, earnings for the
second quarter of 1998 were $14.9 million.
The changes in TNMP's earnings for the quarter and the year-to-date are
attributable to the factors listed below (in millions):
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
6/30/99 6/30/99
--------- ---------
<S> <C> <C>
New Mexico stranded cost adjustment $ 1.9 $ 1.3
Other changes in base revenues 0.9 (3.3)
Non-pass through purchased power and fuel expenses 5.1 11.6
Transmission expenses (3.1) (5.1)
Depreciation expenses (0.5) (0.6)
Charge for recovery of stranded plant (0.7) (4.5)
Interest 3.1 5.2
All other (including income tax effects on the items above) (2.0) (1.4)
------------ -------------
Earnings increase excluding one-time items 4.7 3.2
One-time Transition Plan costs (including tax effects) 3.1 3.1
------------ -------------
Earnings increase including one-time items $ 7.8 $ 6.3
============ =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Operating Revenues
The components of TNMP's base revenues are summarized in the following tables (in thousands).
Three Months Ended June 30, Six Months Ended June 30,
Increase Increase
1999 1998 (Decrease) 1999 1998 (Decrease)
-------- --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $ 144,014 $ 142,085 $ 1,929 $ 262,125 $ 268,016 $ (5,891)
Pass-through expenses 43,961 46,399 (2,438) 82,273 87,750 (5,477)
--------- ---------- --------- ---------- --------- ---------
Base revenues $ 100,053 $ 95,686 $ 4,367 $ 179,852 $ 180,266 $ (414)
========= ========== ========= ========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
Pass-through expenses in Texas include fuel and the energy-related portion of purchased power. In New Mexico, the
composition of pass-through expenses changed on July 1, 1999, as described in Note 3. Details of pass-through expenses
are discussed under "Results of Operations -- Operating Expenses."
The following table summarizes the components of the changes in base revenues in 1999 compared to 1998 (in thousands).
<S> <C> <C>
Base revenues
Weather related $ (1,803) $ (1,737)
Customer growth 1,851 2,798
1998 Transition Plan excess earnings 1,160 1,160
Industrial - firm rate sales (367) (1,948)
Clear Lake standby revenue (818) (1,635)
Other 894 (1,928)
--------- ---------
Other changes in base revenue 917 (3,290)
New Mexico stranded cost adjustment 1,888 1,314
--------- ---------
Base revenues increase (decrease)
before one-time items 2,805 (1,976)
One-time Transition Plan refund 1,562 1,562
--------- ---------
Base revenues increase (decrease) $ 4,367 $ (414)
========= =========
</TABLE>
<TABLE>
<CAPTION>
Base revenues increased $4.4 million in the current quarter due to Texas rate refunds accrued in 1998 pursuant to the
Transition Plan, the reversal of accrued stranded costs in New Mexico as discussed in Note 3, and customer growth. Those factors
were partially offset by milder weather in the second quarter as compared to 1998, and the absence of standby revenue
payments resulting from the Clear Lake settlement.
Year-to-date base revenues decreased $0.4 million from the same period in 1998. The base revenues increase in the
second quarter was offset by decreases as a result of the Transition Plan, loss of a significant industrial customer, and lower
revenues from a second significant industrial customer.
The following table summarizes the components of gigawatt-hour (GWH) sales.
Three Months Ended June 30, Six Months Ended June 30,
Increase Increase
1999 1998 (Decrease) 1999 1998 (Decrease)
-------- --------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
GWH sales:
Residential 549 542 7 1,041 1,020 21
Commercial 472 464 8 874 846 28
Industrial:
Firm 132 124 8 244 299 (55)
Economy 1,153 1,167 (14) 2,197 2,228 (31)
Power marketing 26 156 (130) 48 269 (221)
Other 27 29 (2) 53 54 (1)
-------- --------- -------- ---------- ------- -----------
Total GWH sales 2,359 2,482 (123) 4,457 4,716 (259)
======== ========= ======== ========== ======= ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Current quarter and year-to-date sales decreased 123 GWHs (or 5%) and 259 GWHs (or 5%), respectively, as compared to the
corresponding 1998 periods. The current quarter decrease resulted primarily from reduced off-system sales. This was partially
offset by increased commercial and residential sales as customer growth offset the effects of milder weather. Year-to-date
sales decreased for the same reasons, and due to the loss of a significant customer.
Operating Expenses
The following table summarizes the components of TNMP's total operating expenses (in thousands).
Three Months Ended June 30, Six Months Ended June 30,
Increase Increase
1999 1998 (Decrease) 1999 1998 (Decrease)
-------- --------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Purchased power and fuel expenses:
Pass through expenses:
Purchased power $ 35,749 $ 36,524 $ (775) $ 67,099 $ 70,103 $ (3,004)
Fuel 8,212 9,875 (1,663) 15,174 17,647 (2,473)
--------- ---------- --------- ---------- ---------- ---------
43,961 46,399 (2,438) 82,273 87,750 (5,477)
--------- ---------- --------- ---------- ---------- ---------
Non-pass through expenses:
Purchased power 22,632 27,671 (5,039) 41,444 52,850 (11,406)
Fuel 389 488 (99) 637 783 (146)
--------- ---------- --------- ---------- ---------- ---------
23,021 28,159 (5,138) 42,081 53,633 (11,552)
--------- ---------- --------- ---------- ---------- ---------
Total 66,982 74,558 (7,576) 124,354 141,383 (17,029)
Transmission expense 5,801 2,694 3,107 10,406 5,288 5,118
Depreciation expense 9,513 9,004 509 19,487 18,876 611
Charge for recovery of stranded plant 1,903 1,160 743 5,653 1,160 4,493
Other operating expenses 20,520 21,844 (1,324) 38,938 38,521 417
Income and other tax expenses 15,712 12,881 2,831 24,636 24,068 568
--------- ---------- --------- ---------- ---------- ---------
Operating expenses $ 120,431 $ 122,141 $ (1,710) $ 223,474 $ 229,296 $ (5,822)
========= ========== ========= ========== ========== =========
Overall, current quarter and year-to-date operating expenses decreased by $1.7 million and $5.8 million, respectively.
The decrease reflects lower purchased power costs partially offset by higher transmission expenses and the charge for recovery
of stranded plant discussed in Note 3.
</TABLE>
Purchased Power and Fuel Expenses
As discussed in Note 3, the NMPRC terminated Community Choice in the
second quarter. Under Community Choice, rates for recovery of New Mexico
purchased power costs were frozen, except those charged to certain industrial
customers. The NMPRC order terminating Community Choice required TNMP to pass
through to all customers New Mexico purchased power costs as of July 1, 1999.
Therefore, operating income will not be affected by changes in purchased power
costs, beginning July 1, 1999.
In the second quarter of 1999, purchased power and fuel expenses
decreased $7.6 million from the level incurred during the second quarter of
1998. For the year-to-date, purchased power and fuel expenses decreased $17.0
million as compared to 1998. Pass-through expenses accounted for $2.4 million
and $5.5 million of the decrease for the quarter and year-to-date, respectively,
while non pass-through expenses accounted for the remaining $5.2 million for the
quarter and $11.5 million for the year-to-date. The decrease reflects lower
overall GWH requirements due to lower sales, and lower energy costs due to
increased purchases of spot market power in 1999 as compared to 1998. In the
first six months of 1999, the cost of energy purchased in the spot market was
significantly less than the cost of energy available from alternative sources of
supply. In addition, demand costs have decreased, due to the replacement of
purchases from TXU with purchases from lower cost providers. Demand costs have
also decreased because the rate under which TNMP purchases capacity from Clear
Lake has been significantly reduced under the Clear Lake settlement.
<PAGE>
Transmission Expenses
Transmission expenses increased $3.1 million for the quarter and $5.1
million for the six months ended June 30, 1999, as compared to the same periods
in 1998. The higher expenses were due to discontinued reimbursements in
accordance with the Clear Lake settlement, and a true up for the first half of
1999 based on a recently approved allocation of transmission costs by the PUCT.
The increased transmission expense approved by the PUCT resulted from the
termination of the majority of the TXU purchased power contract at the beginning
of 1999. Terminating the contract has produced purchased power savings, but its
effects have been partially offset by the higher transmission payments approved
by the PUCT.
Depreciation Expenses
Depreciation expense increased by $0.5 million and $0.6 million for
the quarter and six months ended June 30, 1999, respectively, compared to 1998.
The increases are due to additions to depreciable plant partially offset by
lower depreciation rates established under the Transition Plan.
Charge for Recovery of Stranded Plant
Please see Note 3 and the section "Overall Results" for a discussion of
the excess earnings calculation under the new legislation in Texas.
Other Operating Expenses, Income and Other Tax Expenses
Other operating expenses for TNMP decreased by $1.3 million for the
current quarter as compared to the corresponding 1998 period. The decrease
resulted from the inclusion in 1998 of $3.1 million of costs related to the
original adoption of the Transition Plan. Other operating expenses for the six
months ended June 30, 1999, were comparable to corresponding 1998 period.
Current quarter income and other tax expenses for TNMP increased $2.8
million compared to the corresponding 1998 period, and increased $0.6 million
during the six months ended June 30, 1999, over the same period in 1999. The
increases are due to higher pre-tax income.
Other operating expenses for TNP include $1.5 million and $1.8 million
of costs related to the acquisition discussed in Note 2 for the quarter and
year-to-date, respectively.
Interest Expense
Interest charges decreased by $3.1 million for the quarter and $5.2
million for the year-to-date from 1998 levels due to TNMP's January 1999
issuance of $175 million of 6.25% senior notes, which replaced $130 million of
12.5% secured debentures, and reduced debt levels of the credit facilities.
Financial Condition
Liquidity
Currently, the main sources of liquidity for TNP are cash flow from
operations and borrowings from credit facilities. TNP's cash flow from
operations was lower for the current year-to-date than during the same period in
1998 due to lower receipts from customers. This decrease was offset somewhat by
lower payments for purchased power and interest costs. The changes in TNMP's
cash flow from operations mirrored those of TNP.
In January 1999, TNMP issued $175 million of 6.25% Senior Notes due in
2009 and used the proceeds to retire its 12.5% secured debentures and reduce
outstanding borrowings under the credit facilities, as discussed in TNP's and
TNMP's 1998 Combined Annual Report on Form 10-K.
During the second quarter, TNMP cancelled its 1995 Credit Facility,
which had a total commitment of $100 million, and was scheduled to expire in
November 2000.
TNMP has sufficient liquidity to satisfy any known contingencies.
Management believes cash flow from operations, the new debt described above, and
periodic borrowings under its remaining revolving credit facility should be
sufficient to meet working capital requirements and planned capital expenditures
at least through 1999.
<PAGE>
Year 2000
TNMP is actively addressing the Year 2000 issue (Y2K) throughout its
operating and office environments. Many existing computer programs were designed
and developed to use only two digits to identify a year in the date field. If
not addressed, these computer systems could fail, with possible material adverse
effects on TNMP's operations.
In mid-1997 TNMP's information technology staff began to identify and
assess corporate software applications, equipment and operating systems. In
early 1998, the project was expanded to include professionals from throughout
the company to identify and assess embedded systems. TNMP's project to analyze
Y2K has included the following phases: identification, assessment, remediation/
implementation and testing.
In its analysis to identify and assess the Y2K impact on company
systems, TNMP has conducted extensive studies to analyze the impact of Y2K on
all operating systems. As a result of these studies, TNMP has developed a Y2K
mitigation plan. The plan requires TNMP to amend, replace, or upgrade most of
its primary corporate information systems, some of which were already being
replaced or upgraded pursuant to a previously approved plan to replace or
upgrade such systems.
The following is a brief summary of the renovation and validation, and
implementation progress for the critical business areas of TNMP - generation,
transmission, distribution, energy management, and corporate information
systems.
Generating Units. TNMP owns one power plant, TNP One, which is located
in Robertson County, Texas. TNP One has two units that burn lignite as the
primary fuel source to generate power. The total lignite supply is provided from
a mine adjacent to the power plant. TNMP plans to increase the coal supply to
provide for an additional six-week supply prior to January 1, 2000. The plant is
also capable of burning natural gas, as well as various waste products. As of
June 30, 1999, the TNP One generation plant has completed the assessment,
testing and remediation of all mission-critical facilities. Such facilities
include the Plant Control Computer, which provides for most of the computerized
operations of the boiler and turbine controls, and the Continuous Emissions
Monitoring System.
Integrated testing of the Plant Control Computer at TNP One was
completed on Unit 1 in February 1999 and on Unit 2 in April 1999. The integrated
testing of the Plant Control Computer detected no Y2K problems.
In late 1998, tests of the Continuous Emissions Monitoring System
determined that only non-critical Y2K issues existed. In April 1999, TNMP
completed upgrades to the Continuous Emissions Monitoring System software.
Subsequent testing of the Continuous Emissions Monitoring System detected no Y2K
issues.
Distribution System. TNMP is primarily a distribution company. Over 600
suspect distribution system devices have been identified and are being tested.
As of June 30, 1999, TNMP has completed the assessment, testing, and remediation
of all mission-critical distribution system devices. TNMP is currently testing
the remaining devices, and anticipates completing that testing by September 30,
1999. TNMP is testing the devices that have external clock functions. Devices
that have no external clock function are being checked with the manufacturer and
TNMP is reviewing their testing of those devices. All of TNMP's critical
distribution substations have designs which contain redundant relaying or bypass
switching schemes to remove failed devices and equipment for normal operations,
allowing for quick restoration of power to customers.
Transmission System. TNMP has transmission lines which are a part of
the transmission grid comprised within the Electric Reliability Council of Texas
(ERCOT). The transmission grid within ERCOT is operated by member utilities in
conjunction with an Independent System Operator. TNMP has transmission lines in
New Mexico which are part of the Western Systems Coordinating Council (WSCC).
TNMP is participating on ERCOT's Year 2000 Technical Task Force and on the Year
2000 Operational Preparedness and Planning Task Force. TNMP is also
participating in all testing, drills and contingency planning done by ERCOT, the
Independent System Operator and the WSCC.
As of June 30, 1999, TNMP has completed the testing and remediation of
all transmission line electronic protective devices.
<PAGE>
Supervisory Control and Data Acquisition Systems (SCADA) and Energy
Management Systems. TNMP has three SCADA systems in Texas and one in New Mexico.
A SCADA system reports on the status of protective devices, allows for the
remote control of these same devices, and reports and tracks critical power flow
information on the transmission and distribution grids. These systems are new,
having been upgraded in 1997 and 1998.
As of June 30, 1999, TNMP has completed the assessment, testing and
remediation on two of the Texas SCADA systems. TNMP has scheduled integrated
testing of the third Texas SCADA system by the vendor for mid-August.
TNMP is in the process of replacing the SCADA system in New Mexico,
which is not Year 2000 compliant, with a Year 2000 compliant system. This
replacement is scheduled for completion by September 30, 1999.
Information Technology Systems. As of June 30, 1999, 100 percent of
TNMP's infrastructure supporting its business systems has been tested and
verified as Y2K ready. TNMP has completed the upgrade of its financial and
accounting system to a Y2K compliant version. Integrated testing of the upgraded
financial system was completed in May 1999, and the testing confirmed that the
system was Year 2000 compliant. TNMP expects to implement and test a new
customer information system during the third quarter of 1999, and other
corporate information systems directly related to TNMP's operations by September
1999. TNMP incorporates unit testing, system testing, integration testing and
acceptance testing into the verification methodology.
Y2K Remediation Cost. The costs associated with TNMP's Y2K efforts are
expected to be approximately $10.2 million. Approximately $9 million of that
amount is to upgrade or replace various information technology systems, as
discussed above, as well as improve the infrastructure to support those systems.
As of July 31, 1999, TNMP had spent approximately $8.9 million on Y2K
remediation. TNMP does not expect these costs to have a material impact on its
financial position or results of operations. TNMP has in the past used, and
expects to continue to use, cash flow from operations to fund costs associated
with Y2K.
Third-Party Vendors. In addition to its own mitigation plan, TNMP is
actively working with its key vendors and other third parties with which TNMP
has a material relationship to assist such parties in achieving compliance with
respect to Y2K in those systems affecting TNMP's operations. Such parties
include electric power providers in Texas and New Mexico; the fuel, ash
disposal, and limestone contractors at TNP One; transmission and distribution
material suppliers; and banking partners. Although TNMP believes that such
persons are working diligently to properly address Y2K, TNMP cannot guarantee
that these third-party systems will be timely converted, or that a failure to
convert by another company or a conversion that is incompatible with TNMP's
systems, would not have a material adverse effect on TNMP.
Contingency Plans. The primary operating processes of TNMP's business
(e.g., the production, transmission, and distribution of electric power) are
subject to contingencies related to weather, equipment failure, and other
factors. TNMP has completed Y2K contingency plans by adapting previously
existing contingency plans.
The Risks of the Company's Year 2000 Issues. Based upon its current
assessment and testing of the Y2K issue, TNMP believes the reasonably likely
worst-case Y2K scenarios would have the following impacts upon it and its
operations. With respect to its ability to provide energy to its customers, TNMP
believes that the reasonably likely worst-case scenario is for small, localized
interruptions of electrical service that are restored in a time frame that is
within normal service levels. With respect to services that are essential to
TNMP's operations, such as customer service, business operations, supplies and
emergency response capabilities, the reasonably likely worst-case scenario is
for minor disruptions of essential services with rapid recovery and all
essential information and processes ultimately recovered.
While risks related to the third parties' lack of Y2K readiness could
materially and adversely affect TNMP's business, results of operations and
financial condition, TNMP expects its Y2K readiness efforts to reduce
significantly its level of uncertainty about the impact of third party Y2K
issues on both its IT systems and non-IT systems.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 6 for information regarding material legal proceedings.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
The following exhibits are filed with this report:
27(a) Financial Data Schedule for TNP.
27(b) Financial Data Schedule for TNMP.
(b) Reports on Form 8-K:
* TNP filed a report on Form 8-K dated June 7, 1999, to
disclose the proposed acquisition of TNP by SW and ST Corp.
* TNP filed a report on Form 8-K dated August 10, 1999, to
disclose an amendment to the Merger Agreement and provide
documentation related to financing agreements for the Merger.
Statement Regarding Forward Looking Information
The discussions in this document that are not historical facts,
including, but not limited to, 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: interpretation of the legislation enacted
in Texas, and its effects on TNMP's business and rates; the effects of recently
passed legislation in New Mexico on the regulation of TNMP's business; changes
in regulations affecting TNP's and TNMP's businesses; insurance coverage
available for claims made in litigation; the effect of a recent Texas Supreme
Court decision on the limitations of any actual damages awarded in currently
ongoing litigation; future acquisitions or strategic partnerships; general
business and economic conditions, and price fluctuations in the electric power
market; the effectiveness of TNMP's Y2K mitigation plan, and the timely Y2K
compliance by TNP's and TNMP's vendors; 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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
(Registrant) TNP ENTERPRISES, INC. AND
TEXAS-NEW MEXICO POWER COMPANY
By \s\ MANJIT S. CHEEMA
-------------------------------------------------
Manjit S. Cheema
Date: August 11, 1999 Senior Vice President and Chief Financial Officer
By \s\ MICHAEL J. RICKETTS
-------------------------------------------------
Michael J. Ricketts
Date: August 11, 1999 Controller and as Chief Accounting Officer
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