<PAGE>
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 September 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 13,416,566 shares of common stock outstanding as of
November 5, 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 September 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 Nine Month Periods Ended September 30,
1999, and 1998 3
Consolidated Statements of Cash Flows
Nine Month Periods Ended September 30, 1999, and 1998 4
Consolidated Balance Sheets
September 30, 1999, and December 31, 1998 5
Texas-New Mexico Power Company (TNMP) and Subsidiaries:
Consolidated Statements of Income
Three and Nine Month Periods Ended September 30,
1999, and 1998 6
Consolidated Statements of Cash Flows
Nine Month Periods Ended September 30, 1999, and 1998 7
Consolidated Balance Sheets
September 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. 14
PART II. OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings. 21
Item 4. Submission of Matters to a Vote of Securities Holders. 21
Item 6. Exhibits and Reports on Form 8-K. 21
(a) Exhibit Index 21
(b) Reports on Form 8-K 21
Statement Regarding Forward Looking Information 21
Signature page 21
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<PAGE>
<TABLE>
<CAPTION>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
1999 1998 1999 1998
-------- -------- ------- --------
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
OPERATING REVENUES $190,570 $188,566 $452,722 $456,603
--------- -------- -------- --------
OPERATING EXPENSES:
Purchased power and fuel 92,081 103,674 216,435 245,057
Other operating and maintenance 27,959 22,869 80,392 68,738
Depreciation 9,688 9,540 29,175 28,416
Charge for recovery of stranded plant (Note 3) 17,264 (584) 22,917 577
Taxes other than income taxes 9,627 10,913 25,912 27,489
Income taxes 8,340 9,078 15,613 15,657
--------- -------- -------- --------
Total operating expenses 164,959 155,490 390,444 385,934
--------- -------- -------- --------
NET OPERATING INCOME 25,611 33,076 62,278 70,669
--------- -------- -------- --------
OTHER INCOME:
Other income and deductions, net 428 434 1,367 902
Income taxes (2) 407 296 462
--------- -------- -------- --------
Other income, net of taxes 426 841 1,663 1,364
--------- -------- -------- --------
INCOME BEFORE INTEREST CHARGES 26,037 33,917 63,941 72,033
--------- -------- -------- --------
INTEREST CHARGES:
Interest on long-term debt 9,298 11,835 29,210 36,875
Other interest and amortization of debt-related costs 1,692 1,192 4,149 3,306
--------- -------- -------- --------
Total interest charges 10,990 13,027 33,359 40,181
--------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS 15,047 20,890 30,582 31,852
Loss from discontinued nonregulated operations (Note 4) - 2,329 - 9,432
--------- -------- -------- --------
NET INCOME 15,047 18,561 30,582 22,420
Dividends on preferred stock and other 25 38 (33) 114
--------- -------- -------- --------
INCOME APPLICABLE TO COMMON STOCK $ 15,022 $ 18,523 $ 30,615 $ 22,306
========= ======== ======== ========
EARNINGS PER SHARE OF COMMON STOCK
Earnings from continuing operations $1.12 $1.58 $2.29 $2.40
Loss from discontinued nonregulated operations - (0.18) - (0.71)
--------- -------- -------- --------
EARNINGS PER SHARE $1.12 $1.40 $2.29 $1.69
========= ======== ======== ========
DIVIDENDS PER SHARE OF COMMON STOCK $0.29 $0.27 $0.87 $0.81
========= ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 13,416 13,263 13,387 13,231
========= ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30
----------------------------
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 412,894 $ 467,232
Purchased power (195,179) (210,270)
Fuel costs paid (25,963) (26,953)
Cash paid for payroll and to other suppliers (68,362) (89,771)
Interest paid, net of amounts capitalized (31,126) (42,232)
Income taxes refunded (paid) 414 (3,000)
Other taxes paid (28,047) (28,032)
Other operating cash receipts and payments, net 99 1,002
--------- ---------
NET CASH FROM OPERATING ACTIVITIES 64,730 67,976
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant (31,285) (27,324)
Additions to other property and nonregulated investments - (554)
Withdrawals from (deposits to) escrow account 1,952 -
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (29,333) (27,878)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on preferred and common stocks (11,729) (10,841)
Common stock issuances 4,168 4,647
Borrowings from (repayments to) revolving credit facilities - net (62,000) (38,000)
Issuances:
Senior notes, net of discount 174,164 -
Deferred expenses associated with financings (1,580) -
Redemptions:
Preferred stock, net of gain (1,100) -
Secured debentures (130,000)
First mortgage bonds - (100)
Other long-term debt - (104)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (28,077) (44,398)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS 7,320 (4,300)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,216 15,877
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,536 $ 11,577
========= =========
RECONCILIATION OF NET INCOME TO NET
CASH FROM OPERATING ACTIVITIES:
Net income $ 30,582 $ 22,420
Adjustments to reconcile net income to net cash from operating activities:
Depreciation 29,175 28,416
Charge for recovery of stranded plant 22,917 577
Amortization of debt-related costs and other deferred charges 4,115 2,749
Allowance for funds used during construction (735) (99)
Deferred income taxes (3,486) 4,525
Investment tax credits 4,688 (133)
Deferred fuel costs (18,838) 765
Cash flows impacted by changes in current assets and liabilities:
Accounts payable 1,573 11,453
Accrued interest (1,603) (4,669)
Accrued taxes 12,110 2,711
Reserve for customer refund (10,723) 9,982
Changes in other current assets and liabilities 2,838 (10,798)
Other, net (7,883) 77
--------- ---------
NET CASH FROM OPERATING ACTIVITIES $ 64,730 $ 67,976
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1999 December 31,
(Unaudited) 1998
------------------ ------------
(In thousands)
<S> <C> <C>
ASSETS
- ------
UTILITY PLANT:
Electric plant $1,275,321 $1,260,147
Construction work in progress 6,760 6,294
---------- ----------
Total 1,282,081 1,266,441
Less accumulated depreciation 356,103 343,562
---------- ----------
Net utility plant 925,978 922,879
---------- ----------
OTHER PROPERTY AND INVESTMENTS, at cost 9,006 10,384
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 19,536 12,216
Accounts receivable 3,224 5,955
Inventories, at lower of average cost or market:
Fuel 608 677
Materials and supplies 3,767 4,567
Accumulated deferred income taxes 1,100 2,235
Other current assets 2,008 4,403
---------- ----------
Total current assets 30,243 30,053
---------- ----------
REGULATORY TAX ASSETS 1,757 -
DEFERRED FUEL COSTS 20,514 1,676
DEFERRED CHARGES 32,754 28,773
---------- ----------
$1,020,252 $ 993,765
========== ==========
CAPITALIZATION AND LIABILITIES
- ------------------------------
CAPITALIZATION:
Common shareholders' equity:
Common stock - no par value per share. Authorized 50,000,000
shares; issued 13,416,556 shares in 1999 and 13,293,996 in 1998 $ 196,686 $ 192,518
Retained earnings 134,745 115,776
---------- ----------
Total common shareholders' equity 331,431 308,294
Preferred stock 1,844 3,060
Long-term debt, less current maturities 341,222 459,000
---------- ----------
Total capitalization 674,497 770,354
---------- ----------
CURRENT LIABILITIES:
Current maturities of long-term debt 100,000 -
Accounts payable 29,584 28,011
Accrued interest 3,417 5,020
Accrued taxes 26,400 14,290
Customers' deposits 3,900 3,609
Reserve for customer refunds 248 10,971
Other current liabilities 21,754 25,202
---------- ----------
Total current liabilities 185,303 87,103
---------- ----------
REGULATORY TAX LIABILITIES - 957
ACCUMULATED DEFERRED INCOME TAXES 96,769 97,346
ACCUMULATED DEFERRED INVESTMENT TAX CREDITS 25,050 20,916
DEFERRED CREDITS (Note 3) 38,633 17,089
COMMITMENTS AND CONTINGENCIES (Note 6)
---------- ----------
$1,020,252 $ 993,765
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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<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 Nine Months Ended
September 30, September 30,
---------------------- -----------------------
1999 1998 1999 1998
(In thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES $190,554 $188,553 $452,678 $456,569
-------- -------- -------- --------
OPERATING EXPENSES:
Purchased power and fuel 92,081 103,674 216,435 245,057
Other operating and maintenance 25,386 21,871 74,730 65,679
Depreciation 9,688 9,540 29,175 28,416
Charge for recovery of stranded plant (Note 3) 17,264 (584) 22,917 577
Taxes other than income taxes 9,498 10,812 25,549 27,934
Income taxes 9,620 9,676 18,204 16,622
-------- -------- -------- --------
Total operating expenses 163,537 154,989 387,010 384,285
-------- -------- -------- --------
NET OPERATING INCOME 27,017 33,564 65,668 72,284
-------- -------- -------- --------
OTHER INCOME:
Other income and deductions, net 352 397 1,451 566
Income taxes (2) 407 230 535
-------- -------- -------- --------
Other income, net of taxes 350 804 1,681 1,101
-------- -------- -------- --------
INCOME BEFORE INTEREST CHARGES 27,367 34,368 67,349 73,385
-------- -------- -------- --------
INTEREST CHARGES:
Interest on long-term debt 9,107 11,835 28,622 36,875
Other interest and amortization of debt-related costs 1,692 1,192 4,149 3,306
-------- -------- -------- --------
Total interest charges 10,799 13,027 32,771 40,181
-------- -------- -------- --------
NET INCOME 16,568 21,341 34,578 33,204
Dividends on preferred stock and other 25 38 (33) 114
-------- -------- -------- --------
INCOME APPLICABLE TO COMMON STOCK $ 16,543 $ 21,303 $ 34,611 $ 33,090
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of TNP Enterprises, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30
-------------------------
1999 1998
-------------------------
<S> <C> <C>
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 409,929 $ 448,945
Purchased power (195,179) (210,270)
Fuel costs paid (25,963) (26,953)
Cash paid for payroll and to other suppliers (55,775) (53,959)
Interest paid, net of amounts capitalized (30,556) (42,222)
Income taxes refunded (paid) (9,535) 1,039
Other taxes paid (27,484) (28,452)
Other operating cash receipts and payments, net (5) 611
--------- ---------
NET CASH FROM OPERATING ACTIVITIES 65,432 88,739
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant (31,104) (27,221)
Withdrawal from (deposits to) escrow account 1,903 -
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES (29,201) (27,221)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on preferred and common stocks (25,082) (17,296)
Borrowings from (repayments to) revolving credit facilities - net (53,000) (38,000)
Issuances:
Senior notes, net of discount 174,164 -
Deferred expenses associated with financings (1,580) -
Redemptions:
Preferred stock, net of gain (1,100) -
Secured debentures (130,000)
First mortgage bonds - (100)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (36,598) (55,396)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (367) 6,122
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,977 2,772
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,610 $ 8,894
========= =========
RECONCILIATION OF NET INCOME TO NET
CASH FROM OPERATING ACTIVITIES:
Net income $ 34,578 $ 33,204
Adjustments to reconcile net income to net cash from operating activities:
Depreciation of utility plant 29,175 28,416
Charge for recovery of stranded plant 22,917 577
Amortization of debt-related costs and other deferred charges 4,115 2,749
Allowance for funds used during construction (735) (99)
Deferred income taxes (1,199) 8,282
Investment tax credits 4,632 (224)
Deferred fuel costs (18,838) 765
Cash flows impacted by changes in current assets and liabilities:
Accounts payable 2,346 12,902
Accrued interest (1,621) (4,669)
Accrued taxes 4,375 8,044
Reserve for customer refund (10,723) 9,982
Changes in other current assets and liabilities 6,123 (1,215)
Other, net (9,713) (9,975)
--------- ---------
NET CASH FROM OPERATING ACTIVITIES $ 65,432 $ 88,739
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of TNP Enterprises, Inc.)
CONSOLIDATED BALANCE SHEETS
September 30, 1999 December 31,
(Unaudited) 1998
------------------ ------------
(In thousands)
<S> <C> <C>
ASSETS
- ------
UTILITY PLANT:
Electric plant $1,275,297 $1,260,099
Construction work in progress 6,761 6,294
---------- ----------
Total 1,282,058 1,266,393
Less accumulated depreciation 356,103 343,562
---------- ----------
Net utility plant 925,955 922,831
---------- ----------
OTHER PROPERTY AND INVESTMENTS, at cost 213 2,116
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 7,610 7,977
Accounts receivable 413 923
Inventories, at lower of average cost or market:
Fuel 608 677
Materials and supplies 3,767 4,567
Other current assets 1,653 4,093
---------- ----------
Total current assets 14,051 18,237
---------- ----------
REGULATORY TAX ASSETS 1,757 -
DEFERRED FUEL COSTS 20,514 1,676
DEFERRED CHARGES 32,755 28,706
---------- ----------
$ 995,245 $ 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 89,451 79,840
---------- ----------
Total common shareholder's equity 311,707 302,096
Redeemable cumulative preferred stock 1,844 3,060
Long-term debt, less current maturities 341,223 450,000
---------- ----------
Total capitalization 654,774 755,156
---------- ----------
CURRENT LIABILITIES:
Current maturities of long-term debt 100,000 -
Accounts payable 29,234 26,888
Accrued interest 3,383 5,004
Accrued taxes 24,824 20,449
Customers' deposits 3,899 3,609
Accumulated deferred income taxes 802 649
Reserve for customer refunds 248 10,971
Other current liabilities 19,090 17,076
---------- ----------
Total current liabilities 181,480 84,646
---------- ----------
REGULATORY TAX LIABILITIES - 957
ACCUMULATED DEFERRED INCOME TAXES 96,154 93,378
ACCUMULATED DEFERRED INVESTMENT TAX CREDITS 25,050 22,729
DEFERRED CREDITS (Note 3) 37,787 16,700
COMMITMENTS AND CONTINGENCIES (Note 6)
---------- ----------
$ 995,245 $ 973,566
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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<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 TNP's board of
directors unanimously approved, 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, subject to dissenting shareholders' rights under the
Texas Business Corporation Act. The Merger will convert TNP from a listed
public corporation to a privately owned corporation.
TNP expects the Merger to close early in 2000. The Merger Agreement is
subject to financing, and requires various approvals. To date, approvals have
been obtained from TNP's shareholders, the Federal Trade Commission (FTC), and
the Federal Energy Regulatory Commission (FERC). Approvals are still pending
before the state regulators in Texas and New Mexico. Information regarding the
approval status in each jurisdiction is as follows:
Shareholder Approval. A special meeting of TNP shareholders was held
September 22, 1999, at which shareholders approved the Merger, with more than 98
percent of the votes cast favoring the transaction. The affirmative votes
represented approximately 81 percent of the outstanding shares of TNP.
FERC. 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 September 29, 1999, the FERC
issued an order approving the Merger, concluding that the Merger would be
consistent with the public interest. The FERC issued an order approving the
Credit Facility on September 30, 1999.
Federal Trade Commission (FTC). On September 3, 1999, TNMP filed an
application with the FTC seeking approval of the Merger, as required under the
Hart-Scott-Rodino Act. The FTC approved the application on September 21, 1999.
Texas. 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. The PUCT is considering TNMP's
application. The staff of the PUCT filed testimony on October 22, 1999. A
hearing before the PUCT held November 2, 1999, was recessed until November 12,
1999, to allow parties additional time to work toward a settlement in the case.
On November 10, 1999, TNMP and the staff of the PUCT agreed to a settlement that
resolves all issues between the two parties. The remaining parties will indicate
their positions before hearings on the matter resume on November 12, 1999. TNMP
expects the PUCT to issue its final decision early in 2000.
New Mexico. 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, including approval of the
Credit Facility described above. On October 8, 1999, the Staff of the NMPRC
filed testimony recommending approval of the Merger, subject to certain
financial and operational commitments of TNMP. On October 18, 1999, TNMP filed
testimony agreeing to make the proposed commitments. No other parties opposed
the Merger. Hearings before the NMPRC were held October 25 and 26, 1999. TNMP
anticipates receiving an order from the NMPRC prior to the end of the year.
-9-
<PAGE>
Note 3. Regulatory Matters
Texas
New Legislation. On September 1, 1999, new legislation that establishes
competition in the Texas electric utility industry went into effect. 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.
. Allows a utility to recover 100% of its verifiable stranded costs
via several methods, including:
. Redirection of depreciation - A utility may redirect all or a
part of the depreciation related to transmission and
distribution assets to its generation assets for the periods
1998 through 2001.
. 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 a 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 - 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 competition
transition charge approved by the PUCT.
. Assessment of a competition transition charge - After the freeze
period (January 1, 1999 through December 31, 2001), 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. Reconciliation will occur sometime after
January 10, 2004, according to a schedule to be established by the
PUCT.
. Requires utilities to disaggregate, on or before January 1, 2002,
into three distinct businesses: generation, transmission and
distribution, and retail electric provider. A retail electric
provider is an entity that sells electric energy to retail
customers in Texas. Such an entity cannot own or operate generation
assets.
. 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. On October 6,
1999, TNMP filed a Conformed Stipulation with the PUCT. The Conformed
Stipulation identifies all of the provisions in the Transition Plan that TNMP
believes must be changed in order for the Transition Plan to comply with the new
legislation. The PUCT is considering TNMP's Conformed Stipulation in concert
with its consideration of a contest to TNMP's Earnings Report. Details of that
proceeding are discussed below in the section titled "Earnings Monitoring
Report".
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 of this situation, and with the
uncertainty regarding conforming the Transition Plan to the new legislation,
currently TNMP cannot reasonably determine how the new legislation will affect
the generation/power supply portion of its Texas business. Therefore, TNMP will
continue to apply SFAS 71 to that portion of
-10-
<PAGE>
its business until a reasonable determination of the impact of the new
legislation can be made. TNMP is participating in a series of workshops
sponsored by the PUCT that are designed to address numerous unresolved issues
surrounding the implementation of competition.
Management has calculated excess earnings for the three months ended
September 30, 1999, based on the provisions of the new legislation. The
calculation resulted in a reduction to third quarter pre-tax operating income of
$17.3 million ($0.80 per share). For the nine months ended September 30, 1999,
excess earnings reduced pre-tax operating income by $22.9 million ($1.06 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. After reviewing the Addendum, the Office of Regulatory Affairs
(ORA) of the PUCT filed a contest to TNMP's earnings report on August 16, 1999,
asserting errors in TNMP's calculation of excess earnings. In addition, the ORA
proposed to use the Earnings Report contest as a means for conforming the
Transition Plan to the new legislation. The PUCT hearing examiner assigned to
the Earnings Report agreed, and is considering both issues in one docket.
The ORA is the only party contesting TNMP's calculation of excess
earnings. TNMP and ORA met to discuss ORA's issues regarding the Earnings Report
on October 14, 1999. In a letter to the hearing examiner on November 1, 1999,
TNMP reported that TNMP and ORA had not yet resolved the Earnings Report issues.
TNMP expects to continue discussions with ORA toward resolution of this matter.
ORA and other parties are involved in determining how to conform the
Transition Plan to the new legislation. The parties met on October 14, 1999.
Thus far, the parties have been unable to resolve their differences concerning
the interaction between the new legislation and the Transition Plan.
New Mexico
The New Mexico Legislature opened the state'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. TNMP's Community Choice transition plan did not
define stranded costs, or their recovery, and 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 September 30, 1999.
On June 8, 1999, the NMPRC entered a Final Order terminating Community
Choice. 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.
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 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%, effective October 1, 1999. TNMP expects the NMPRC to act on the
proposed settlement during the fourth quarter 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.
-11-
<PAGE>
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 Nine Months Ended
---------------------- ----------------------
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Texas
- ------
Operating revenues $ 169,708 $ 164,166 $ 390,853 $ 391,660
Net income 16,247 19,389 30,880 28,666
Total assets at September 30, 1999
and December 31, 1998 839,916 839,771 839,916 839,771
New Mexico
- -----------
Operating revenues $ 20,846 $ 24,387 $ 61,825 $ 64,909
Net income 321 1,952 3,698 4,538
Total assets at September 30, 1999
and December 31, 1998 86,039 82,623 86,039 82,623
All Other and Eliminations
- ---------------------------
Operating revenues $ 16 $ 13 $ 44 $ 34
Net loss (1,522) (2,780) (3,996) (10,784)
Total assets at September 30, 1999
and December 31, 1998 94,297 71,371 94,297 71,371
Consolidated
- -------------
Operating revenues $ 190,570 $ 188,566 $ 452,722 $ 456,603
Net income 15,046 18,561 30,582 22,420
Total assets at September 30, 1999
and December 31, 1998 1,020,252 993,765 1,020,252 993,765
</TABLE>
-12-
<PAGE>
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. The PUCT approved the settlement on July 15, 1999. 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.
The PUCT order approving the settlement 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 made to Clear Lake in September 1999 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.
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, which is in the discovery stage, 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 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 by Phillips to the cost of its
electrical equipment in the event that any damages are awarded in this matter.
Discovery has not sufficiently progressed to quantify any damages to Phillips
electrical equipment; however, Phillips has previously reported to the SEC that
it incurred costs of approximately $2.0 million in this interruption. In May
1999, TNMP filed a Third Party Petition naming Sweeny Cogeneration Limited
Partnership, the operator of cogeneration and related facilities at the Phillips
refinery, as a defendant. TNMP has previously charged to earnings the deductible
amount of its insurance coverage, $500,000.
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.
-13-
<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 $15.0 million for the
quarter ended September 30, 1999 (current quarter) as compared to income of
$18.5 million for the quarter ended September 30, 1998. Earnings for the third
quarter of 1998 included the loss on FWI's discontinued operations. Excluding
that unusual item, earnings for the third quarter of 1998 were $20.9 million.
TNP had income applicable to common stock of $30.6 million for the nine
months ended September 30, 1999 (year-to-date), as compared to $22.3 million for
the nine months ended September 30, 1998. Excluding the unusual item noted
above and a one time charge for Transition Plan implementation ($3.1 million),
earnings for the nine months ended September 30, 1998, were $34.9 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. Based on the provisions of the new
legislation, TNMP recorded pre-tax excess earnings of $17.3 million ($0.80 per
share) for the three months ended September 30, 1999. In the third quarter of
1998, TNMP recorded negative excess earnings, based on the Transition Plan, of
$0.8 million ($0.06 per share) due to resolution of a billing matter.
Excess earnings for the nine months ended September 30, 1999 were $22.9
million ($1.06 per share) based on the new legislation. For the corresponding
1998 period, TNMP recorded excess earnings of $1.2 million ($.05 per share)
under the Transition Plan. The $1.2 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 $16.5 million for the
quarter ended September 30, 1999, as compared to $21.3 million for the quarter
ended September 30, 1998. For the nine months ended September 30, TNMP's income
applicable to common stock was $34.6 million in 1999 as compared to $33.1
million in 1998. Excluding the effect of the 1998 Transition Plan costs
discussed earlier, earnings for the third quarter of 1998 were $36.2 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 Nine Months
Ended Ended
9/30/99 9/30/99
-------- ------
<S> <C> <C>
New Mexico stranded cost adjustment (Note 3) $ - $ 1.3
Other changes in base revenues (6.8) (10.1)
Non-pass through purchased power and fuel expenses 20.4 32.0
Transmission expenses (1.4) (6.5)
Charge for recovery of stranded plant (17.8) (22.3)
Interest 2.2 7.4
All other (including income tax effects on the items above) (1.4) (3.4)
-------- ------
Earnings decrease excluding one-time items (4.8) (1.6)
One-time Transition Plan costs (including tax effects) - 3.1
-------- ------
Earnings increase (decrease) including one-time items $ (4.8) $ 1.5
======== ======
</TABLE>
-14-
<PAGE>
Operating Revenues
The components of TNMP's base revenues are summarized in the following
tables (in thousands).
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- --------------------------------
Increase Increase
1999 1998 (Decrease) 1999 1998 (Decrease)
--------- --------- ----------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $ 190,554 $ 188,553 $ 2,001 $ 452,678 $ 456,569 $ (3,891)
Pass-through expenses 69,735 60,917 8,818 152,008 148,667 3,341
-------- -------- ------ -------- -------- -------
Base revenues $ 120,819 $ 127,636 $ (6,817) $ 300,670 $ 307,902 $ (7,232)
======== ======== ======= ======== ======== =======
</TABLE>
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 for the three and nine months ended September 30, 1999 compared to
the same periods in 1998 (in thousands).
<TABLE>
<CAPTION>
Base revenues
-------------
<S> <C> <C>
Weather related $ (1,726) $ (3,101)
Customer growth 2,004 4,439
New Mexico purchased power
recovery effects from
termination of Community Choice (5,255) (2,318)
Industrial - firm rate sales (710) (2,658)
Clear Lake standby revenue (818) (2,453)
Other (312) (4,017)
------- --------
Other changes in base revenues (6,817) (10,108)
New Mexico stranded cost adjustment - 1,314
------- --------
Base revenues increase (decrease)
before one-time items (6,817) (8,794)
One-time Transition Plan refund - 1,562
------- --------
Base revenues increase (decrease) $ (6,817) $ (7,232)
======= ========
</TABLE>
Base revenues decreased $6.8 million in the current quarter due the absence
of standby revenue payments resulting from the Clear Lake settlement and the
reclassification of revenues received for the recovery of purchased power costs
in New Mexico. In addition, base revenues decreased because even though
combined commercial and residential sales were above normal, they did not reach
the levels achieved during last year's hot summer. The decrease was partially
offset by customer growth.
As discussed in Note 3, the NMPRC terminated Community Choice and, as of
July 1, 1999, restored the pass-through of purchased power costs to TNMP's New
Mexico customers. Under Community Choice, the difference between purchased
power recovery and actual purchased power costs affected operating income. The
termination of Community Choice limits purchased power recovery to actual
purchased power costs incurred and does not affect operating income.
Year-to-date base revenues decreased $7.2 million from the same period in
1998. In addition to the factors cited for the third quarter decrease, year-to-
date base revenues decreased due to the loss of a significant industrial
customer and a renegotiated contract with a second significant industrial
customer.
-15-
<PAGE>
The following table summarizes the components of gigawatt-hour (GWH) sales.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- --------------------------------
Increase Increase
1999 1998 (Decrease) 1999 1998 (Decrease)
-------- -------- ------------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
GWH sales:
----------
Residential 883 896 (13) 1,925 1,917 8
Commercial 595 589 6 1,469 1,435 34
Industrial:
Firm 144 108 36 388 407 (19)
Economy 1,059 1,155 (96) 3,256 3,383 (127)
Power marketing 14 76 (62) 62 345 (283)
Other 30 32 (2) 83 84 (1)
----- ----- ---- ----- ----- ----
Total GWH sales 2,725 2,856 (131) 7,183 7,571 (388)
===== ===== ==== ===== ===== ====
</TABLE>
Current quarter and year-to-date sales decreased 131 GWHs (or 5%) and 388
GWHs (or 5%), respectively, as compared to the corresponding 1998 periods. The
current quarter decrease resulted primarily from reduced sales to a significant
industrial customer and reduced off-system sales. In addition, commercial and
residential sales did not reach the levels experienced during last year's hot
summer, even though those sales were higher than normal. The decrease was
partially offset by customer growth in the commercial class. 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).
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 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 $ 61,580 $ 51,362 $ 10,218 $128,679 $121,465 $ 7,214
Fuel 8,155 9,555 (1,400) 23,329 27,202 (3,873)
-------- -------- -------- -------- -------- --------
69,735 60,917 8,818 152,008 148,667 3,341
-------- -------- -------- -------- -------- --------
Non-pass through expenses:
Purchased power 21,821 42,297 (20,476) 63,265 95,147 (31,882)
Fuel 525 460 65 1,162 1,243 (81)
-------- -------- -------- -------- -------- --------
22,346 42,757 (20,411) 64,427 96,390 (31,963)
-------- -------- -------- -------- -------- --------
Total 92,081 103,674 (11,593) 216,435 245,057 (28,622)
Transmission expense 4,650 3,268 1,382 15,056 8,556 6,500
Depreciation expense 9,688 9,540 148 29,175 28,416 759
Charge for recovery of stranded plant 17,264 (584) 17,848 22,917 577 22,340
Other operating expenses 20,736 18,603 2,133 59,674 57,123 2,551
Income and other tax expenses 19,118 20,488 (1,370) 43,753 44,556 (803)
-------- -------- -------- -------- -------- --------
Operating expenses $163,537 $154,989 $ 8,548 $387,010 $384,285 $ 2,725
======== ======== ======== ======== ======== ========
</TABLE>
Overall, current quarter and year-to-date operating expenses increased by
$8.5 million and $2.7 million, respectively. The increase reflects higher
charges for recovery of stranded plant as discussed in Note 3 and higher
transmission expenses partially offset by lower purchased power costs.
-16-
<PAGE>
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. As a result,
$5.9 million of third quarter New Mexico purchased power costs were recorded as
pass-through expenses. Those costs would have been recorded as non-pass through
expenses under Community Choice.
In the third quarter of 1999, purchased power and fuel expenses decreased
$11.6 million from the level incurred during the third quarter of 1998. For the
year-to-date, purchased power and fuel expenses decreased $28.6 million as
compared to 1998. Non pass-through expenses decreased $20.4 million for the
quarter and $32.0 million for the year-to-date, reflecting lower demand costs
resulting from the replacement of purchases from TXU with purchases from lower
cost providers and significant reductions of the rate under which TNMP purchases
capacity from Clear Lake. The rate reductions are a component of the Clear Lake
settlement. The decreases in non-pass through costs were partially offset by
increases in pass-through expenses of $8.8 million and $3.3 million for the
quarter and year-to date, respectively, due to increases in the cost of energy
purchased in the spot market during the third quarter that were caused by the
extreme weather this summer.
Transmission Expenses
Transmission expenses increased $1.4 million for the quarter and $6.5
million for the nine months ended September 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 new allocation of transmission
costs that the PUCT approved in July 1999. 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. Partially offsetting
these increases was a second action by the PUCT during September 1999. In
accordance with the new legislation discussed in Note 3, the PUCT approved a
change in the method of allocating transmission costs effective September 1,
1999. As a result of this change, TNMP expects transmission expenses in the
fourth quarter of 1999 to be $1.5 million lower than they would have been
without the change. However, this outcome is subject to further action by the
PUCT in connection with a Texas utility's challenge to its September 1999
decision.
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.
Depreciation Expenses, Other Operating Expenses, Income and Other Tax Expenses
Depreciation expense increased by $0.1 million and $0.8 million for the
quarter and nine months ended September 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.
Other operating expenses for TNMP increased by $2.1 million for the current
quarter, and $2.6 million for the year-to-date, as compared to the corresponding
1998 periods. The increase resulted primarily from higher costs associated with
payroll, benefits, and outside services.
Current quarter income and other tax expenses for TNMP decreased $1.3
million and 0.8 million for the nine months ended September 30, 1999, compared
to the corresponding 1998 periods. The decrease for the quarter reflects lower
payments for street rental and revenue related taxes. For the year to date, the
decrease in the quarter is partially offset by higher income taxes due to higher
pre-tax income.
Other operating expenses for TNP include $1.5 million and $3.3 million of
costs related to the acquisition discussed in Note 2 for the quarter and year-
to-date, respectively.
-17-
<PAGE>
Interest Expense
Interest charges decreased by $2.2 million for the quarter and $7.4 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.
Financial Condition
Liquidity
TNP's main sources of liquidity 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.
As described in Note 2, the FERC has granted TNMP authority to issue a
Backstop Credit Facility (Credit Facility), and the NMPPRC is considering such
approval. Completion of the Merger will require that TNMP offer to repurchase
certain existing debt. If holders of this debt accept TNMP's repurchase offer,
proceeds from the Credit Facility would fund the repurchase.
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 the fall of 2000.
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 completed the assessment, testing and
remediation of all mission-critical facilities.
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.
-18-
<PAGE>
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 completed the assessment, testing, and remediation of
all mission-critical distribution system facilities. TNMP has tested the
devices that have external clock functions. Devices that have no external clock
function have been checked with the manufacturer and TNMP has reviewed 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 completed the testing and remediation of all
transmission line electronic protective devices.
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 August 30, 1999, TNMP completed the assessment, testing and
remediation of the three Texas SCADA systems.
On November 1, 1999, TNMP completed the process of replacing the SCADA
system in New Mexico, which is not Year 2000 compliant, with a Year 2000
compliant system.
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. A new customer information system, which has been Y2K
tested, was implemented in August 1999. Other corporate information systems
directly related to TNMP's operations were installed and tested 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 September 30, 1999, TNMP had spent approximately $9.9 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.
-19-
<PAGE>
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.
-20-
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings.
See Note 6 for information regarding material legal proceedings.
Item 4. Submission of Matters to a Vote of Securities Holders.
At the special meeting of the Company's shareholders on September 22,
1999, the shareholders approved the adoption of the Agreement and Plan of Merger
and approved the merger.
The vote was 10,893,305 shares for; 107,777 shares against; and 36,721
shares abstaining.
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 - None.
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; PUCT and NMPRC action on
the proposed acquisition; 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: November 11, 1999 Senior Vice President and Chief Financial
Officer
By \s\ MICHAEL J. RICKETTS
-----------------------
Michael J. Ricketts
Date: November 11, 1999 Controller and as Chief Accounting Officer
-21-
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