<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
___________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(X) COMBINED ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------- -------
- -------------------------------------------------------------------------------
TNP ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Texas 4100 International Plaza, P. O. Box 2943, Fort Worth, Texas 76113 Commission File
- --------------- ----------------------------------------------------------------- Number: 1-8847
(State of (Address and zip code of principal executive offices) ------
incorporation)
Telephone number, including area code: 817-731-0099 75-1907501
------------ -------------------
(I.R.S. employer
identification no.)
Securities registered pursuant to Section 12(b) of the Act:
Shares Outstanding Name of each exchange
Title of each class on February 15, 2000 on which registered
- -------------------------- -------------------- -----------------------
Common stock, no par value 13,445,494 New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes \X\ No \ \
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K. \X\
The aggregate market value of TNP Enterprises, Inc. common stock held by
nonaffiliates on February 15, 2000, was $566,024,406 based on the common
stock's closing price on the New York Stock Exchange on the same date of
$42.75 per share.
------------------------------------------------------------
TEXAS-NEW MEXICO POWER COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Texas 4100 International Plaza, P. O. Box 2943, Fort Worth, Texas 76113 Commission File
- -------------- ----------------------------------------------------------------- Number: 2-97230
(State of (Address and zip code of principal executive offices) -------
incorporation)
Telephone number, including area code: 817-731-0099 75-0204070
-------------------
(I.R.S. employer
identification no.)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange
Title of each class on which registered
- ------------------- ---------------------
First mortgage bonds: Series U, 9.25% due 2000 None
Secured debentures: Series A, 10.75% due 2003 None
Senior notes: 6.25% due 2009 None
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes \X\ No \ \
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K. \X\
TNP Enterprises, Inc. holds all 10,705 outstanding common shares of
Texas-New Mexico Power Company.
- -------------------------------------------------------------------------------
<PAGE>
TNP ENTERPRISES INC. AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
Combined Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1999
This combined annual report on Form 10-K is filed separately by TNP
Enterprises, Inc. and Texas-New Mexico Power Company. Information contained in
this report relating to Texas-New Mexico Power Company is filed by TNP
Enterprises, Inc. and separately by Texas-New Mexico Power Company on its own
behalf. Texas-New Mexico Power Company makes no representation as to information
relating to TNP Enterprises, Inc. or to any other affiliate or subsidiary of TNP
Enterprises, Inc., except as it may relate to Texas-New Mexico Power Company.
TABLE OF CONTENTS
Glossary of Terms..................................................... 4
Part I
Item 1. BUSINESS................................................... 6
Introduction............................................... 6
Acquisition................................................ 6
TNMP's Service Areas....................................... 6
Seasonality of Business.................................... 7
Sources of Energy.......................................... 7
Government Regulation...................................... 8
Employees and Executive Officers........................... 8
Item 2. PROPERTIES................................................. 10
Generating Facilities...................................... 10
Transmission and Distribution Facilities................... 10
Administrative and Service Facilities...................... 10
Item 3. LEGAL PROCEEDINGS.......................................... 10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 11
Part II
Item 5. MARKET FOR REGISTRANTS' COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS............................ 11
Item 6. SELECTED FINANCIAL DATA.................................... 12
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................ 14
Acquisition................................................ 14
Competitive Conditions..................................... 14
Results of Operations...................................... 17
Liquidity and Capital Resources............................ 20
Other Matters.............................................. 21
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK................................................ 21
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 22
TNP Enterprises, Inc. and Subsidiaries..................... 24
Texas-New Mexico Power Company and Subsidiaries............ 29
Notes to Consolidated Financial Statements................. 34
Selected Quarterly Consolidated Financial Data............. 48
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................ 48
Part III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......... 49
Directors.................................................. 49
Committees and Meetings.................................... 50
Director Compensation...................................... 50
Compensation Committee Interlocks and Insider
Participation.............................................. 50
Executive Officers......................................... 50
Item 11. EXECUTIVE COMPENSATION..................................... 50
Long-Term Incentive Compensation........................... 52
Pension Plan............................................... 52
-2-
<PAGE>
Severance Agreements and Arrangements...................... 53
Section 16(a) Beneficial Ownership Reporting Compliance.... 54
Compensation Committee Report on Executive Compensation.... 54
Compensation Committee..................................... 56
Five Year Comparison of Cumulative Total Return............ 57
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................. 58
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 59
Part IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K........................................ 59
-3-
<PAGE>
TNP ENTERPRISES INC. AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
Combined Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1999
Glossary of Terms
As used in this combined report, the following abbreviations, acronyms, or
capitalized terms have the meanings set forth below:
<TABLE>
<CAPTION>
Abbreviation, Acronym,
or Capitalized Term Meaning
- ------------------- -------
<S> <C>
AFUDC..................................... Allowance for funds used during construction
Bond Indenture............................ Document pursuant to which FMBs are issued
BSP....................................... Business Separation Plan filed January 10, 2000
Clear Lake................................ Clear Lake Cogeneration Limited Partnership
Community Choice(R)....................... TNMP's transition-to-competition plan in New Mexico, which existed
prior to June 8, 1999
CTC....................................... Competition transition charge
EPS....................................... Earnings (loss) per share of common stock
ERCOT..................................... Electric Reliability Council of Texas
FWI....................................... Facility Works, Inc., a wholly owned subsidiary of TNP
FERC...................................... Federal Energy Regulatory Commission
FTC....................................... Federal Trade Commission
FMB(s).................................... One or more series of First Mortgage Bonds issued by TNMP
GWH....................................... Gigawatt-Hours
IRS....................................... Internal Revenue Service
ITC....................................... Investment Tax Credits
KWH....................................... Kilowatt-Hours
Merger.................................... Merger of ST Corp. with and into TNP with TNP as surviving
corporation
Merger Agreement.......................... Agreement and Plan of Merger, dated as of May 24, 1999, between TNP,
SW, and ST Corp.
MW........................................ Megawatts
MWH....................................... Megawatt-Hours
NMPRC..................................... New Mexico Public Regulation Commission
ORA....................................... Office of Regulatory Affairs-PUCT
PR Group.................................. Power Resource Group, Inc.
PUCT...................................... Public Utility Commission of Texas
SFAS...................................... Statement of Financial Accounting Standards
ST Corp. ................................. ST Acquisition Corp., a Texas corporation wholly owned by SW
SW........................................ SW Acquisition, L.P, a limited partnership organized and existing under
the laws of Texas
TGC....................................... Texas Generating Company, a wholly owned subsidiary of TNMP
TGC II.................................... Texas Generating Company II, a wholly owned subsidiary of TNMP
TNP One................................... A two-unit, lignite-fueled, circulating fluidized-bed generating plant
located in Robertson County, Texas
TNMP...................................... Texas-New Mexico Power Company, a wholly owned subsidiary of TNP
TNP....................................... TNP Enterprises, Inc.
Transition Plan........................... TNMP's transition-to-competition plan in Texas that began January 1,
1998, and was superceded by legislation passed in 1999
TXU....................................... Texas Utilities Electric Company
Unit 1.................................... The first electric generating unit of TNP One
Unit 2.................................... The second electric generating unit of TNP One
Y2K....................................... The Year 2000 Issue
</TABLE>
-4-
<PAGE>
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: electrical deregulation legislation and regulations in Texas and
New Mexico; our ability to adapt to open market competition enacted by our
legislators and regulators; the effects of accounting pronouncements that may be
issued periodically; 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; 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.
-5-
<PAGE>
PART I
------
Item 1. BUSINESS.
Introduction
TNP was organized as a holding company in 1983 and transacts business
through its subsidiaries. TNMP is a public utility engaged in generating,
purchasing, transmitting, distributing, and selling electricity to customers in
Texas and New Mexico. TNMP's predecessor was organized in 1925. TNMP has two
subsidiaries, TGC and TGC II, both of which were organized to facilitate TNMP's
acquisitions of TNP One, Unit 1 and Unit 2, in 1990 and 1991, respectively.
FWI was a wholly owned subsidiary of TNP that began operations in 1996. TNP
discontinued the construction operations of FWI in the late 1997, and
discontinued all remaining operations in the third quarter of 1998. The impact
of these discontinued operations to TNP's results of operations are described in
Item 7, "Results of Operations--Overall Results," and Note 4.
TNP, TNMP, TGC, TGC II and FWI are all Texas corporations. Their executive
offices are located at 4100 International Plaza, P.O. Box 2943, Fort Worth,
Texas 76113 and the telephone number is (817) 731-0099. Unless otherwise
indicated, all financial information in this report is presented on a
consolidated basis.
Acquisition
TNP, SW Acquisition, L.P., and ST Acquisition Corp. have entered into a
Merger Agreement, dated as of May 24, 1999, which provides for a merger of ST
Corp. with and into TNP, with TNP being the surviving corporation. Under the
terms of the Merger Agreement, 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 early in the second quarter of 2000. The
Merger Agreement requires various approvals. To date, approvals have been
obtained from TNP's shareholders, the Federal Trade Commission, FERC, the PUCT,
and the NMPRC. Approvals are final in all jurisdictions except Texas. Approval
by the PUCT is expected to be final in March 2000. Further information
regarding the Merger can be found in Note 2.
TNMP's Service Areas
TNMP provides electric service to 85 Texas and New Mexico municipalities and
adjacent rural areas with more than 233,000 customers. TNMP serves a market
niche of smaller to medium sized communities. Only two of the 85 communities in
TNMP's service area have populations in excess of 50,000. TNMP's service areas
are organized into three operating regions: the Gulf Coast Region, the North-
Central Region, and the Mountain Region.
Gulf Coast Region
The Gulf Coast Region includes the area along the Texas Gulf Coast between
Houston and Galveston. The oil and petrochemical industries, agricultural
industry and general commercial activity in the Houston area support the economy
of this area.
North-Central Region
The North-Central Region extends from Lewisville, Texas, which is 10 miles
north of Dallas-Fort Worth International Airport, to municipalities along the
Red River. TNMP provides electric service to a variety of commercial,
agricultural and petroleum industry customers in this area. This region also
includes municipalities and communities south and west of Fort Worth. This
area's economy depends largely on agriculture and, to a lesser extent, tourism
and oil production.
Mountain Region
The Mountain Region includes areas in southwest and south central New
Mexico. This area's economy is primarily dependent upon mining and agriculture.
Copper mines are the major industrial customers in this area. The Mountain
Region also includes the area in far west Texas between Midland and El Paso. The
economy in this area is based primarily on oil and gas production, agriculture,
and food processing.
-6-
<PAGE>
Franchises and Certificates of Public Convenience and Necessity
Texas law does not require an electric utility to execute a franchise
agreement with a Texas municipality to be entitled to provide or continue to
provide electrical service within the municipality. A franchise agreement does,
however, document the mutually agreeable terms under which the service will be
provided within a municipality. TNMP holds 82 franchises with terms ranging
from 20 to 50 years, one franchise with a five-year term, and two franchises
with indefinite terms from the 85 municipalities to which it provides electric
service. These franchises will expire on various dates from 2000 to 2039. One
Texas franchise, comprising 2% of total company revenues, is scheduled to expire
in 2000. TNMP intends to negotiate and execute new or amended franchise
agreements to be effective before existing franchises expire.
TNMP also holds PUCT certificates of public convenience and necessity
covering all Texas areas that TNMP serves. These certificates include terms that
are customary in the public utility industry. TNMP generally has not been
required to have certificates of public convenience and necessity to provide
electric power in New Mexico.
Seasonality of Business
TNMP experiences increased sales and operating revenues during the summer
months as a result of increased air conditioner usage in hot weather. In 1999,
approximately 43% of annual revenues were recorded in June, July, August, and
September.
Sources of Energy
TNMP owns one 300 MW lignite-fueled generating facility, TNP One. During
1999, TNP One provided approximately 20% of TNMP's system wide energy
requirements. Power generated at TNP One is transmitted over TNMP's own
transmission lines to other utilities' transmission systems for delivery to
TNMP's Texas service area systems. To maintain a reliable power supply for its
customers and to coordinate interconnected operations, TNMP is a member of
ERCOT and the Western Systems Coordinating Council.
TNMP purchases the remainder of its electricity from various suppliers with
diversified fuel sources. The availability and cost of purchased power to TNMP
is subject to changes in supplier costs, market forces, regulations and laws,
fuel costs, and other factors. TNMP has adequate resources through its firm
contracts to serve its entire customer load. These contracts allow TNMP the
option to purchase amounts of power within a specified minimum and maximum
range. Generally, TNMP makes purchases on the spot market in lieu of firm
contract options primarily when the spot market price represents savings to
TNMP's customers. In recent years TNMP has reduced its reliance upon long-term
power supply contracts in favor of contracts with shorter terms. This practice
enhances TNMP's ability to achieve greater purchased power savings during
periods of decreasing power costs, but exposes TNMP to greater risk in the
presence of rising costs.
The following table illustrates the composition of TNMP's sources of
electric energy in 1999.
<TABLE>
<CAPTION>
Year Contract Percent of
Expires Energy Provided
------- ---------------
<S> <C> <C>
Generation
TNP One............................... - 20%
Purchased Power
Firm contracts expiring in 2000....... - 6
Firm contracts expiring in 2001-2005
Clear Lake Cogeneration L.P.......... 2004 12
Texas Utilities...................... 2002 7
Others............................... Various 9
Buy-sell agreements................... - 26
Spot market purchases................. - 20
---
Total 100%
===
</TABLE>
Recovering Purchased Power and Fuel Costs
In Texas, fuel costs and the energy-related portion of purchased power costs
are recovered from TNMP customers through the fuel adjustment clause authorized
by the PUCT. The demand-related portion of purchased power costs is recovered
through base rates. At any point in time, TNMP may have recovered more or less
from customers through the fuel adjustment clause than its allowable costs under
the fuel adjustment clause. At December 31, 1999, TNMP's underrecovered balance
was $21.8 million. PUCT rules require TNMP to reconcile its fuel costs at least
every three years. TNMP expects to file a fuel reconciliation for the three-
year period ended December 31, 1999, in mid-2000. TNMP will also file a request
for a new fuel factor, which will take into account the expected cost of fuel
and purchased energy.
-7-
<PAGE>
Management believes the ultimate outcome of this fuel reconciliation will not
have a material adverse effect on TNP's or TNMP's consolidated financial
position.
In New Mexico, TNMP recovers all purchased power costs through the fuel and
purchased power adjustment clause authorized by the NMPRC. The purchased power
recovery factor changes monthly to reflect over or under collections of
purchased power costs. Prior to July 1, 1999, the recovery of purchased power
had been frozen in base rates in accordance with Community Choice.
Government Regulation
TNMP is subject to PUCT and NMPRC regulation. Some of its activities, such
as issuing securities, are also subject to FERC regulation. Utility industry
regulation continues to change both in reaction to, and as a primary force
behind, a more competitive industry. These changes are discussed in Item 7,
"Competitive Conditions" and Note 3.
In addition to regulation as a utility, TNMP's facilities are regulated by
the Environmental Protection Agency and Texas and New Mexico environmental
agencies. TNP One uses environmentally superior circulating fluidized bed
technology that eliminates the need for expensive scrubbers. Phase II of the
Clean Air Act of 1990 became effective January 1, 2000 and requires a 30%
reduction in sulfur dioxide emissions. TNP One is able to comply with this
requirement without capital additions or a significant increase in operating
costs. The Texas Natural Resources Conservation Commission (TNRCC) is proposing
a rule change that would lower allowable nitrous oxide emissions beginning in
2003. TNMP is investigating the cost of compliance at TNP One. TNMP expects that
expenditures necessary to achieve these reductions would not have a material
impact on TNMP's financial condition. During 1999, 1998, and 1997, TNMP incurred
expenses related to air, water, and solid waste pollution abatement (including
ash removal) of approximately $4.2 million, $4.0 million, and $5.0 million,
respectively.
Employees and Executive Officers
At December 31, 1999, TNP and TNMP had 823 employees. The employees are not
represented by a union or covered by a collective bargaining agreement.
Management believes relations with its employees are excellent.
Executive officers of TNP and TNMP, who are elected annually by the
respective boards of directors and serve at the discretion of the boards, are as
follows:
<TABLE>
<CAPTION>
Name Age Position with TNP
---- --- -----------------
<S> <C> <C>
Kevern R. Joyce 53 Chairman, President, & Chief Executive Officer
Jack V. Chambers, Jr. 50 Senior Vice President
Manjit S. Cheema 45 Senior Vice President & Chief Financial Officer
John P. Edwards 57 Senior Vice President
Ralph Johnson 56 Senior Vice President
Michael D. Blanchard 49 Vice President & General Counsel
Patrick L. Bridges 41 Vice President & Treasurer
R. Michael Matte 46 Vice President
Michael J. Ricketts 41 Controller
Paul W. Talbot 43 Secretary
Name Age Position with TNP
---- --- -----------------
Kevern R. Joyce 53 Chairman, President, & Chief Executive Officer
Jack V. Chambers, Jr. 50 Senior Vice President & Chief Customer Officer
Manjit S. Cheema 45 Senior Vice President & Chief Financial Officer
John P. Edwards 57 Senior Vice President - Corporate Relations
Ralph Johnson 56 Senior Vice President - Power Resources
Michael D. Blanchard 49 Vice President & General Counsel
Patrick L. Bridges 41 Vice President & Treasurer
Dennis R. Cash 46 Vice President & Regional Customer Officer
Robert Castillo 46 Vice President & Regional Customer Officer
W. Douglas Hobbs 56 Vice President & Regional Customer Officer
Melissa D. Davis 42 Vice President - Human Resources
Larry W. Dillon 45 Vice President - Power Resources
John A. Montgomery 38 Vice President - Marketing
Scott Forbes 42 Chief Information Officer
Michael J. Ricketts 41 Controller
Paul W. Talbot 43 Secretary
</TABLE>
-8-
<PAGE>
Kevern R. Joyce joined TNP and TNMP in April 1994 as President and Chief
Executive Officer. He became Chairman in April 1995
Jack V. Chambers has served as Senior Vice President and Chief Customer
Officer of TNMP since 1994 and as Senior Vice President of TNP since April 1996.
Manjit S. Cheema joined TNMP in June 1994. He was Treasurer of TNMP from
June 1994 until September 1995. In December 1994, he became Vice President &
Chief Financial Officer of TNP and TNMP. He became Senior Vice President & Chief
Financial Officer of TNMP in July 1996 and became Senior Vice President & Chief
Financial Officer of TNP in May 1997.
John P. Edwards joined TNMP and TNP in July 1996 as Senior Vice President -
Corporate Relations. From October 1994 until joining TNMP and TNP, he was
Senior Vice President/Customer Group and Special Assistant to the Chief
Operating Officer, Tennessee Valley Authority. His primary responsibilities
were general administration of TVA's transmission operations, customer
relationships, and regulatory affairs.
Ralph Johnson joined TNMP and TNP in January 1995 as a consultant and became
Vice President in February 1995. In July 1996, he was named Senior Vice
President - Power Resources of TNMP. In May 1997, he was appointed Senior Vice
President at TNP. From March 1991 until he joined TNMP and TNP, Mr. Johnson was
Assistant General Manager for Tri-State Generation and Transmission Cooperative
in Denver, Colorado, which sells power to rural electric cooperatives.
Michael D. Blanchard became Vice President and General Counsel of TNMP and
TNP in February 1998. He was Corporate Secretary and General Counsel of TNMP and
TNP from 1987 to February 1998.
Patrick L. Bridges has served as Vice President and Treasurer of TNMP and
TNP since November 1999. He served as Treasurer of TNMP and TNP from September
1995 until November 1999. He served as TNMP's Director - Finance from 1994 to
September 1995 and as Assistant Treasurer from 1993 to September 1995.
Dennis R. Cash became a TNMP Vice President and Regional Customer Officer
effective March 1999. He served as Vice President - Human Resources of TNMP
from 1994 until March 1999.
Larry W. Dillon became Vice President - Power Resources effective March
1999. He had served as TNMP Vice President and Regional Customer Officer from
1994 until March 1999.
W. Douglas Hobbs was appointed as Vice President - Regional Customer Officer
of TNMP effective March 1999. He served as Vice President - Business
Development of TNP from May 1997 until May 1999. He was Vice President -
Business Development of TNMP from February 1997 to May 1997. He was a TNMP Vice
President and Regional Customer Officer from 1994 to February 1997.
John A. Montgomery was elected Vice President - Marketing of TNMP in
November 1998 and served as Vice President of TNP from April 1996 until May
1999. He served as President of FWI from April 1996 until May 1998. From
December 1995 to January 1997, he served as TNMP's Vice President - Marketing.
From February 1994 until he joined TNMP, he served as Director of Marketing and
Regional Marketing Director of Greyhound Lines, Inc., a bus transportation
company.
Melissa D. Davis was appointed Vice President - Human Resources of TNMP
effective March 1999. She served as a TNMP Vice President and Regional Customer
Officer from February 1997 until March 1999. From September 1995 to February
1997 she was TNMP's Controller. From 1994 to September 1995, she was Director -
Financial Accounting and Assistant Controller of TNMP.
Robert Castillo became Vice President - Regional Customer Officer of TNMP
effective September 1999. He had served as TNMP Assistant Vice President - New
Mexico from January 1998 until September 1999. From 1991 until he joined TNMP,
he was executive vice president and general manager for the New Mexico Rural
Electric Cooperative Association.
Scott Forbes was elected Chief Information Officer of TNMP in June 1998. He
was Controller of TNMP from February 1997 to June 1998 and was Controller of TNP
from May 1997 to June 1998. From September 1996 to February 1997, he was
Manager-Financial Systems and Reporting. From January 1994 to September 1996 he
was Manager-Financial Reporting and Accounting Policy with Entergy Services,
Inc.
-9-
<PAGE>
Paul W. Talbot was elected Corporate Secretary of TNP and TNMP in February
1998. He has been Senior Counsel of TNMP since August 1996. Before joining
TNMP, he was in the private practice of law in Dallas, Texas, for more than ten
years.
R. Michael Matte became President of FWI in May 1998 and became Vice
President-Business Development of TNP effective November 1998. From January 1997
until joining FWI in May 1998, he was an independent management and utility
services consultant in Atlanta, Georgia. From March 1996 to January 1997, he
served as Regional Vice President Operations for ADT Security Services, an
electronic services company, and from January 1991 to March 1996, he served as
Regional General Manager of ADT.
Michael J. Ricketts was elected Controller of TNMP and TNP in June 1998.
From November 1996 to June 1998, he was Manager - Accounting Projects and from
1994 to November 1996, he was Supervisor - Accounting Support of TNMP.
Item 2. PROPERTIES.
Substantially all of TNMP's real and personal property secures its FMBs.
Substantially all of TNMP's real and personal property in Texas also secure its
Series A, 10.75% Secured Debentures. TNMP's long-term debt is described in Note
7.
Generating Facilities
TNP One is a two-unit, lignite-fueled generating plant, located in Robertson
County, Texas. TNP One generates power for TNMP's Texas service areas and
operates as a base load facility.
Transmission and Distribution Facilities
Management believes that TNMP's transmission and distribution facilities
have sufficient capacity to serve existing customers adequately and can be
extended and expanded to serve customer growth for the foreseeable future. These
facilities primarily consist of overhead and underground lines, substations,
transformers, and meters. TNMP generally constructs its transmission and
distribution facilities on easements or public rights of way and not on real
property held in fee simple.
Administrative and Service Facilities
TNP's and TNMP's corporate headquarters are located in an office building in
Fort Worth, Texas. Space in this building is leased through 2003.
TNMP owns or leases local offices in 37 of the municipalities that it
serves. TNMP owns 14 construction/service centers in Texas and New Mexico.
Item 3. LEGAL PROCEEDINGS.
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 paid Clear Lake $8 million,
which TNMP expects to recover through customer rates.
Phillips Petroleum Company. 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 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
-10-
<PAGE>
event that any 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.
Power Resource Group. TNMP is a defendant in a suit styled Power Resource
Group, Inc. v. Public Utility Commission of Texas and Texas-New Mexico Power
Company, pending in the 345th District Court of Travis County, Texas. This
lawsuit, which was originally filed on May 21, 1999, appeals the PUCT's
dismissal of a regulatory case that Power Resource Group, Inc. had filed against
TNMP. PR Group is a developer of electric generating plants that are intended
to be qualifying cogeneration facilities. This lawsuit and the regulatory case
it appeals both stem from discontinued negotiations for power supply. PR Group
alleged that TNMP was required to buy power to be generated from an as-yet-
unbuilt cogeneration facility. TNMP filed its original answer with the court on
June 28, 1999.
In an amended petition filed January 13, 2000, PR Group asserts a claim of
damages of at least $158,000,000. It bases its claim on the assertion that it
was damaged when TNMP refused to execute an agreement after the aforementioned
discontinued negotiations, that TNMP profited significantly from PR Group's
work, that TNMP is in error when it relies on a PUCT order dismissing PR Group's
petition before the PUCT on substantially the same facts, and that TNMP
misrepresented that it would enter into a contract with PR Group to purchase
energy and capacity at rates equal to or below TNMP's avoided costs. TNMP
believes that PR Group's claims are without merit and intends to contest this
claim vigorously.
Information regarding additional regulatory and legal matters is provided in
Notes 3 and 10.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders in the fourth
quarter of 1999.
PART II
-------
Item 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
TNP's common stock is traded on the New York Stock Exchange under the symbol
"TNP." The high and low prices of, and the amount of dividends declared and paid
on, TNP's common stock during each quarter in 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
MARKET PRICE RANGE TNP
------------------------------------- DIVIDENDS
1999 1998 PAID
------------- --------------- ---------------
QUARTER HIGH LOW HIGH LOW 1999 1998
------- ---- --- ---- --- ---- ----
<S> <C> <C> <C> <C> <C> <C>
First $38 1/16 $28 5/16 $33 7/8 $31 5/16 $ 0.29 $ 0.27
Second 40 9/16 28 34 1/32 30 11/16 0.29 0.27
Third 39 1/8 36 1/4 34 15/16 29 0.29 0.27
Fourth 42 1/8 38 9/16 38 11/16 31 3/8 0.29 0.29
------ ------
$ 1.16 $ 1.10
====== ======
</TABLE>
As of January 31, 2000, there were approximately 3,161 record holders of TNP
common stock.
TNP holds all 10,705 outstanding common shares of TNMP. During 1999 and
1998, TNMP paid common dividends to TNP as follows (in thousands):
<TABLE>
<CAPTION>
QUARTER 1999 1998
------- ---- ----
<S> <C> <C>
First $ - $10,000
Second - 3,600
Third 25,000 5,500
Fourth 4,000 -
------ -------
Total $29,000 $19,100
======= =======
</TABLE>
-11-
<PAGE>
Item 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial data of TNP and TNMP for
1995 through 1999.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
TNP ENTERPRISES, INC (In thousands except per share amounts and percentages)
- --------------------
<S> <C> <C> <C> <C> <C>
Consolidated results
Operating revenues $ 576,150 $ 585,941 $ 578,534 $ 502,737 $ 485,823
Income from continuing operations before
the cumulative effect of change in accounting $ 30,167 $ 32,134 $ 42,561 $ 26,150 $ 33,060
Net income $ 30,167 $ 19,424 $ 29,678 $ 23,053 $ 41,505
Total assets $1,001,199 $ 993,765 $ 991,926 $1,006,784 $1,030,433
Common shares outstanding
Weighted average 13,394 13,244 13,083 11,465 10,901
End of year 13,417 13,294 13,133 13,006 10,920
Per share of common stock
Earnings from continuing operations before
the cumulative effect of change in accounting $ 2.25 $ 2.42 $ 3.24 $ 2.27 $ 2.98
Earnings $ 2.25 $ 1.46 $ 2.26 $ 2.00 $ 3.75
Cash dividends declared $ 1.16 $ 1.10 $ 1.005 $ 0.93 $ 0.82
Book value $ 24.38 $ 23.19 $ 22.71 $ 21.41 $ 19.91
Capitalization
Common shareholders' equity $ 327,110 $ 308,294 $ 298,241 $ 278,474 $ 217,457
Preferred stock 1,664 3,060 3,240 3,420 3,600
Long-term debt, including current maturities 440,244 459,000 478,141 534,102 612,995
---------- ---------- ---------- ---------- ----------
Total capitalization $ 769,018 $ 770,354 $ 779,622 $ 815,996 $ 834,052
========== ========== ========== ========== ==========
Capitalization ratios
Common shareholders' equity 42.5% 40.0% 38.3% 34.1% 26.1%
Preferred stock 0.2 0.4 0.4 0.4 0.4
Long-term debt, including current maturities 57.3 59.6 61.3 65.5 73.5
---------- ---------- ---------- ---------- ----------
Total capitalization 100.0% 100.0% 100.0% 100.0% 100.0%
========== ========== ========== ========== ==========
TEXAS-NEW MEXICO POWER COMPANY
- ------------------------------
Consolidated results
Operating revenues $ 576,093 $ 585,892 $ 578,534 $ 502,737 $ 485,823
Income before the cumulative effect
of change in accounting $ 39,443 $ 34,321 $ 43,918 $ 26,862 $ 33,364
Net income $ 39,443 $ 34,321 $ 43,918 $ 26,862 $ 41,809
Total assets $ 984,395 $ 973,566 $ 967,006 $1,002,157 $1,024,943
Capitalization
Common shareholder's equity $ 312,558 $ 302,096 $ 287,021 $ 287,548 $ 224,351
Preferred stock 1,664 3,060 3,240 3,420 3,600
Long-term debt, including current maturities 440,244 450,000 478,000 533,900 612,995
---------- ---------- ---------- ---------- ----------
Total capitalization $ 754,466 $ 755,156 $ 768,261 $ 824,868 $ 840,946
========== ========== ========== ========== ==========
Capitalization ratios
Common shareholder's equity 41.4% 40.0% 37.4% 34.9% 26.7%
Preferred stock 0.2 0.4 0.4 0.4 0.4
Long-term debt, including current maturities 58.4 59.6 62.2 64.7 72.9
---------- ---------- ---------- ---------- ----------
Total capitalization 100.0% 100.0% 100.0% 100.0% 100.0%
========== ========== ========== ========== ==========
</TABLE>
<PAGE>
TEXAS-NEW MEXICO POWER COMPANY
SELECTED OPERATING STATISTICS
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Operating revenues (in thousands):
Residential* $ 216,374 $ 225,870 $ 211,398 $ 206,748 $ 200,455
Commercial* 163,248 164,800 155,539 150,034 148,908
Industrial* 147,110 150,883 170,169 129,972 113,728
Other* 45,695 33,178 27,672 15,983 22,732
Power Marketing 3,666 11,161 13,756 -- --
----------- ----------- ----------- ----------- -----------
Total $ 576,093 $ 585,892 $ 578,534 $ 502,737 $ 485,823
=========== =========== =========== =========== ===========
Sales (MWH):
Residential 2,420,512 2,439,478 2,251,119 2,230,558 2,141,553
Commercial 1,921,614 1,883,422 1,772,591 1,725,650 1,681,130
Industrial 4,799,146 4,981,773 5,523,907 3,797,776 2,704,159
Other 108,547 113,535 107,847 108,039 113,985
Power Marketing 119,344 425,216 494,705 -- --
----------- ----------- ----------- ----------- -----------
Total 9,369,163 9,843,424 10,150,169 7,862,023 6,640,827
=========== =========== =========== =========== ===========
Number of customers (at year end):
Residential 199,617 197,155 192,005 187,796 183,863
Commercial 33,127 30,884 30,289 29,864 29,361
Industrial 116 138 139 135 136
Other 799 227 222 224 244
Power Marketing 8 16 16 -- --
----------- ----------- ----------- ----------- -----------
Total 233,667 228,420 222,671 218,019 213,604
=========== =========== =========== =========== ===========
Revenue statistics:
Average annual use per residential
customer (KWH) 12,130 12,491 11,835 11,973 11,476
Average annual revenue per residential
customer (dollars) 1,084 1,157 1,111 1,110 1,074
Average revenue per KWH sold
per residential customer (cents) 8.94 9.26 9.39 9.27 9.36
Average revenue per KWH sold
total sales (cents) 6.15 5.95 5.70 6.39 7.32
Net generation and purchases (MWH):
Generated 1,912,673 2,062,958 2,089,448 2,296,056 2,351,000
Purchased 7,716,856 8,256,857 8,443,990 5,769,173 4,612,186
----------- ----------- ----------- ----------- -----------
Total 9,629,529 10,319,815 10,533,438 8,065,229 6,963,186
=========== =========== =========== =========== ===========
Average cost per KWH purchased (cents) 3.18 3.39 3.13 3.51 3.87
Employees (year-end) 823 827 811 819 858
</TABLE>
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
SIGNIFICANT EVENTS AND KNOWN TRENDS AFFECTING TNP AND TNMP
Acquisition
TNP, SW Acquisition, L.P., and ST Acquisition Corp. have entered into a
Merger Agreement, dated as of May 24, 1999, which provides for a merger of ST
Corp. with and into TNP, with TNP being the surviving corporation. Under the
terms of the Merger Agreement, 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 early in the second quarter of 2000. The
Merger Agreement requires various approvals. To date, approvals have been
obtained from TNP's shareholders, the Federal Trade Commission, FERC, the PUCT,
and the NMPRC. Approvals are final in all jurisdictions except Texas. Approval
by the PUCT is expected to be final in March 2000. Further information
regarding the Merger can be found in Note 2.
Competitive Conditions
The electric utility industry continues its transition toward increased
competition. During 1999, legislation was passed in both Texas and New Mexico
that establishes retail competition for generation operations. Retail
competition is scheduled to begin in New Mexico and Texas on January 1, 2001,
and January 1, 2002, respectively. The legislation in both states provides for
recovery of "stranded costs", the difference between the regulatory value of
TNMP's investments in generation assets and purchased power contracts, and the
market price for energy in a competitive market. The increasingly competitive
environment presents opportunities to compete for new customers, as well as the
risk of loss of existing customers. TNMP expects the portions of operations
pertaining to transmission and distribution to continue to be regulated.
The following discusses the legislation in Texas and New Mexico, the effects
of the legislation on TNMP's operating results, and the relationship of the
legislation in Texas to the Transition Plan.
Texas
Legislation. On September 1, 1999, legislation that establishes competition
in the generation portion of the Texas electric utility industry went into
effect. The legislation will implement retail competition in generation for
customers in most areas of Texas on January 1, 2002. Among other provisions, the
legislation:
. Requires utilities to provide service according to the base rate
tariffs in effect at September 1, 1999, until December 31, 2001. The
legislation does not prohibit changes in the fixed fuel factor that
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 (January 1, 1999 through
December 31, 2001), 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 stranded costs.
. 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
charge approved by the PUCT.
. Assessment of 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, 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.
-14-
<PAGE>
. 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 the utility's
affiliate retail energy provider at a "price-to-beat" 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. This "price to beat" must be offered by the utility until
the earlier of 36 months after customer choice is offered or when it
loses 40% or more of its residential sales within its certified
service area.
Prior to the legislation, TNMP had been operating under a voluntary
Transition Plan approved by the PUCT in 1998. The Transition Plan covered a
five-year period, and had provided for rate reductions, sharing of earnings in
excess of 11.25% return on equity and recovery of stranded costs. It also
included a provision requiring that TNMP conform the Plan to any legislation
enacting competition in the electric utility industry. There are provisions of
the legislation that conflict with provisions of the Transition Plan. In such
instances, including the calculation and subsequent application of excess
earnings, Management believes the legislation supercedes the Transition Plan.
Management has calculated excess earnings for the twelve months ended
December 31, 1999, based on the provisions of the legislation. The calculation
resulted in a reduction to 1999 pre-tax operating income of $23.4 million ($1.09
per share). The $23.4 million of excess earnings are displayed in the income
statement under the caption "Charge for recovery of stranded plant." TNMP did
not have excess earnings under the Transition Plan in 1998.
1998 Earnings Monitoring Report and Transition Plan Conformance. 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.
ORA's petition did not quantify the amount of the alleged errors. In addition,
the ORA proposed to use the Earnings Report contest as a means for conforming
the Transition Plan to the legislation. The PUCT hearing examiner assigned to
the Earnings Report is considering the issues related to TNMP's calculation of
excess earnings for 1998.
The ORA is the only party contesting TNMP's calculation of excess earnings.
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. On January 25, 2000,
TNMP filed a Motion for Dismissal or Summary Decision, asking the PUCT to reject
ORA's contest, and approve TNMP's 1998 Earnings Report. TNMP believes the
issues relating to its calculation of excess earnings can be disposed of as a
matter of law without a factual hearing. TNMP does not expect resolution of
this matter to have a material effect on its financial condition.
Regarding the conformance of the Transition Plan to the legislation, TNMP
filed a Conformed Stipulation with the PUCT on October 6, 1999. 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
legislation. On December 6, 1999, the PUCT issued a Declaratory Order stating
that TNMP was required "to give effect to base rate reductions reflected in" the
Transition Plan. Accordingly, TNMP reduced base rates for residential and
commercial customers by 3% and 1%, respectively, effective January 1, 2000.
Similar rate reductions will take effect January 1, 2001. As a result,
operating revenues are estimated to decrease in 2000 and 2001 by $6.7 million
and $13.9 million, respectively. The order also established that the base rate
reductions would offset the 6% rate reduction required by the legislation, as
previously described in the section "Texas - Legislation." The order is interim
in nature, and can be appealed.
Uncertainties exist as to the application of the legislation to other
provisions of the Transition Plan. Such uncertainties will not be resolved
until TNMP reports to the PUCT regarding its efforts to conform the Transition
Plan to the legislation. That report will be the subject of a PUCT review that
will occur in 2001.
Discontinuing SFAS 71. Historically, 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. 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." With the
passage of the legislation, TNMP discontinued the application of SFAS 71 to the
generation/power supply portion of its Texas business during the fourth quarter
of 1999. As a direct result of discontinuing SFAS 71 and in accordance with the
legislation, TNMP has reclassified net regulatory assets (regulatory assets less
liabilities) of $19.3 million that pertain to these deregulated operations as
Recoverable Stranded Costs. TNMP believes the $19.3 million represents
verifiable stranded costs and intends to recover them from customers pursuant to
the methods discussed under "Texas -Legislation."
In conjunction with the discontinuance of SFAS 71, TNMP is required to
determine if its generating plant asset, TNP One, is impaired under SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." Based on TNMP's undiscounted cash flow analysis over the
estimated useful life of TNP One, there is no impairment of TNP One, as defined
by SFAS 121, as of December 31, 1999. TNMP's impairment analysis includes
reasonable estimates of future market
-15-
<PAGE>
prices, capacity factors, operating costs, the effects of competition, and many
other factors over the life of TNP One. TNMP's impairment analysis is highly
dependent on these estimates. As of December 31, 1999, the net book value of TNP
One is $435 million.
Business Separation Plan. As noted above, the legislation requires utilities
to disaggregate, on or before January 1, 2002, into three distinct businesses:
generation, transmission and distribution, and retail electric provider. On
January 10, 2000, TNMP filed its Business Separation Plan with the PUCT. The BSP
details TNMP's plans for complying with the legislation, which include creating
three new affiliated companies, and establishing a timeline for accomplishing
the separation.
Unbundled Cost of Service Filing. The legislation also requires TNMP to file
a rate case that will set rates for the transmission and distribution company
that will provide regulated services once competition begins in 2002. The filing
must be made no later than March 31, 2000. The rates will be composed of a
transmission and distribution charge; a competition transition charge for
stranded cost recovery, which may include securitization; and a system benefits
charge. The CTC is designed to recover stranded costs related to TNMP's
generation assets and purchased power contracts, as determined by a PUCT-
established model. The PUCT will also use this proceeding to review and approve
the BSP.
Annual Report. The legislation requires TNMP to file a report prior to March
30, 2000 that will allow the PUCT to review TNMP's calculation of excess
earnings for the year ended December 31, 1999.
Fuel Reconciliation. At December 31, 1999, TNMP had an underrecovered
balance of fuel and the energy-related portion of purchased power costs of $21.8
million. PUCT rules require TNMP to reconcile its fuel costs at least every
three years. TNMP expects to file a fuel reconciliation for the three-year
period ended December 31, 1999, in mid-2000. TNMP will also file a request for a
new fuel factor, which will take into account the expected cost of fuel and
purchased energy. Management believes the ultimate outcome of this fuel
reconciliation will not have a material adverse effect on TNP's or TNMP's
consolidated financial position.
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 transmission and distribution business activities from their
generation operations, that will be subject to competition, and guarantees
recovery of at least 50% of a utility's stranded costs over a five-year period.
Prior to the passage of the Act, TNMP had been operating under Community Choice.
Community Choice 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 related to its purchased
power contracts in New Mexico from $3.4 million as of December 31, 1998, to $2.1
million as of December 31, 1999. Stranded costs in New Mexico could ultimately
be in a range from zero to $6 million, depending on the market price of
purchased power at the onset of competition.
TNMP is required to file its plan for complying with the Act by June 1,
2000.
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 effective July
1, 1999. Under Community Choice, purchased power costs were a fixed component of
base rates. Therefore, the difference between the actual amounts recovered from
customers and actual purchased power costs affected operating income.
Community Choice provided for the filing of a rate case by TNMP on June 1,
1999. TNMP and the NMPRC Staff have reached a settlement, and have submitted
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
has reflected the base rate reductions in its fourth quarter revenues. TNMP
expects the NMPRC to act on the proposed settlement during the second quarter of
2000.
Impact of Competition on TNMP
TNMP is pursuing strategies to retain and attract new customers. TNMP's
competitive position has been strengthened with the PUCT open access to
transmission rule. Management believes TNMP's revenue growth opportunities are
through an increased customer base. However, increased competition could result
in losses of existing customers.
As noted in "Recovering Purchased Power and Fuel Costs," TNMP recovers the
demand component of purchased power in base rates. As such, TNMP is exposed to
the risk of increases in the demand component of purchased power. At the same
time, TNMP has the opportunity to retain the benefit of savings realized from
lowering these costs. TNMP is actively managing its resources to optimize the
rewards and diminish the risks in its power supply portfolio.
-16-
<PAGE>
The legislation establishing competition in both states provides for
recovery of stranded costs. The actual amount of stranded cost recovery is
subject to regulatory review and approval.
Results of Operations
As discussed in "Competitive Conditions--Texas," legislation that
establishes competition in the Texas electric utility industry became law in the
second quarter of 1999. The 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
Income applicable to common stock was $30.2 million for 1999, compared to
$19.3 million in 1998. The 1999 results included the effect of a $2.8 million
charge to write off certain nonregulated business ventures and legal and outside
consultant fees of $4.1 million associated with the Merger. The 1998 results
included a $12.7 million loss associated with FWI's discontinued operations, and
costs to implement the Transition Plan of $3.0. Exclusive of one-time items,
the 1999 earnings were $37.1 million, a $2.1 million increase as compared to the
1998 earnings of $35.0 million.
Income applicable to common stock was $29.5 million in 1997. Results for
1997 included a $12.9 million loss associated with FWI's discontinued
operations. Excluding the one-time items, 1998 earnings were $7.4 million lower
than 1997 earnings of $42.4 million.
The following table sets forth results of operations for 1999, 1998, and
1997 and the impact of one-time items:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- ------------------- ------------------
Amount EPS Amount EPS Amount EPS
------ --- ------ --- ------ ---
(In thousands except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Income applicable to common
stock before one-time items.......... $ 37,127 $ 2.77 $ 34,969 $ 2.65 $ 42,403 $ 3.24
-------- ------- -------- ------ -------- ------
One-time items, net of income taxes:
Discontinued operations of FWI....... - - (12,710) (0.96) (12,883) (0.98)
Transition plan costs................ - - (2,985) (0.23) - -
Charge for nonregulated ventures..... (2,829) (0.21) - - - -
Acquisition charges.................. (4,112) (0.31) - - - -
-------- ------- -------- ------ -------- ------
Total one-time items, net.......... (6,941) (0.52) (15,695) (1.19) (12,883) (0.98)
-------- ------- -------- ------ -------- ------
Income applicable to common stock..... $ 30,186 $ 2.25 $ 19,274 $ 1.46 $ 29,520 $ 2.26
======== ======= ======== ====== ======== ======
</TABLE>
In late 1997, management discontinued the construction segment of FWI. In
1998, TNP elected to discontinue all remaining operations of FWI. See Note 4
for additional information regarding the discontinued operations.
The operations of TNMP currently represent most of TNP's operations. The
following discussion focuses on TNMP's operations, except where stated
otherwise.
Under the 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 its stranded costs. Based on the provisions of the legislation,
TNMP recorded pre-tax excess earnings of $23.4 million ($1.09 per share) in
1999. TNMP did not have excess earnings in 1998.
TNMP's income applicable to common stock was $39.5 million in 1999 as
compared to $34.2 million in 1998. The $5.3 million earnings improvement is due
to decreases in purchased power and interest costs. These cost savings allowed
TNMP to generate the excess earnings described above.
Operating Revenues
The following table summarizes the components of revenues (in thousands).
<TABLE>
<CAPTION>
Increase (Decrease)
-----------------------
1999 1998 1997 `99 v. `98 `98 v. `97
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 576,093 $ 585,892 $ 578,534 $ (9,799) $ 7,358
Pass-through expenses 199,939 193,016 188,971 6,923 4,045
--------- --------- --------- ---------- ----------
Base revenues $ 376,154 $ 392,876 $ 389,563 $ (16,722) $ 3,313
========= ========= ========= ========== ==========
</TABLE>
-17-
<PAGE>
Pass-through expenses in Texas include fuel and the energy-related portion
of purchased power. In New Mexico, pass-through expenses include all purchased
power costs effective July 1, 1999. Prior to July 1, 1999, purchased power costs
were recovered from customers as discussed under "Results of Operations--
Operating Expenses."
The following table summarizes the components of the changes in base revenues
from 1999 to 1998 and from 1998 to 1997 (in thousands).
`99 v. `98 `98 v. `97
---------- ----------
Base revenues
-------------
Weather related $ (3,979) $11,711
Customer growth 5,064 4,896
New Mexico purchased power
recovery effects from
termination of Community Choice (10,192) 1,416
Industrial - firm rate sales (3,325) (9,020)
Clear Lake standby revenue (2,453) -
Other (3,534) (5,307)
-------- -------
Other changes in base revenues (18,419) 3,696
New Mexico stranded cost adjustment 1,697 (383)
-------- -------
Base revenues increase (decrease) $(16,722) $ 3,313
======== =======
The primary reason for the $16.7 million base revenue decrease in 1999 was a
change in the classification of New Mexico purchased power recovery revenues
from base revenues to pass-through revenues. The $10.2 million decrease in New
Mexico base revenues was offset by a $10.2 million increase in pass-through
revenues. Other factors contributing to the base revenue decrease were a
renegotiated contract with a large industrial customer and the absence of
standby revenue payments resulting from the Clear Lake settlement. Overall, the
combined base revenues from residential and commercial customers increased due
to growth in these customer classes. This increase was offset by milder weather
as compared to 1998.
The base revenue increase of $3.3 million during 1998 resulted primarily
from hotter than normal weather and growth in residential and commercial
customers. The increase was partially offset by the loss of a significant
industrial customer.
The components of GWH sales for 1999 and 1998 are summarized in the
following table:
1999 1998 Variance %
----- ----- --------- ------
Residential 2,420 2,440 (20) (0.8)
Commercial 1,922 1,883 39 2.0
Industrial:
Firm 516 505 11 2.2
Economy 4,283 4,476 (193) (4.3)
Power marketing 119 425 (306) (72.0)
Other 109 114 (5) (4.4)
----- ----- ---- -----
Total GWH sales 9,369 9,843 (474) (4.8)
===== ===== ==== =====
1999 sales decreased 474 GWHs (or 5%), from 1998 levels, due to the reduced
sales to a large industrial customer and decreased power marketing sales.
As discussed in "Competitive Conditions--New Mexico," 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.
Effective January 1, 1999, a large industrial customer in New Mexico reduced
its firm purchased power commitment by 55%. During 1999, TNMP renegotiated with
this customer to continue providing full service until the customer is allowed
to choose suppliers under the legislation described in "Competitive Conditions--
New Mexico". When competition begins, TNMP will provide firm transmission
service to this customer, and this customer can purchase its KWH requirements on
the open market. This customer provided sales of 1,142 GWH and revenues of
$40.0 million in 1999 ($8.4 million in base revenues).
Operating Expenses
Operating expenses for 1999 were $3.1 million lower than in 1998, due
primarily to lower purchased power expenses, offset by the charge for recovery
of stranded plant and higher transmission expenses.
-18-
<PAGE>
Operating expenses for 1998 were $19.7 million higher than in 1997, due
primarily to higher purchased power expenses and higher other operating and
maintenance expenses.
The following table summarizes the components of TNMP's total operating expenses
(in thousands).
<TABLE>
<CAPTION>
Increase (Decrease)
------------------
1999 1998 1997 `99 v. `98 `98 v. `97
----- ------ ------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Purchased power and fuel expenses:
Pass-through expenses
Purchased power $ 167,637 $ 158,330 $ 154,940 $ 9,307 $ 3,390
Fuel 32,302 34,686 34,031 (2,384) 655
--------- ---------- --------- --------- --------
199,939 193,016 188,971 6,923 4,045
--------- ---------- --------- --------- --------
Non pass-through expenses:
Purchased power 78,043 121,287 109,588 (43,244) 11,699
Fuel 1,605 1,646 2,055 (41) (409)
--------- ---------- --------- --------- --------
79,648 122,933 111,643 (43,285) 11,290
--------- ---------- --------- --------- --------
Total 279,587 315,949 300,614 (36,362) 15,335
Transmission expense 19,788 12,749 10,316 7,039 2,433
Depreciation expense 39,295 38,054 38,851 1,241 (797)
Charge for recovery of stranded plant 23,376 - - 23,376 -
Other operating expenses 79,602 78,914 73,978 688 4,936
Income and other tax expenses 54,095 53,161 55,322 934 (2,161)
--------- ---------- --------- --------- --------
Operating Expenses $ 495,743 $ 498,827 $ 479,081 $ (3,084) $ 19,746
========= ========== ========= ========= ========
</TABLE>
Purchased Power and Fuel Expenses
In 1999, purchased power and fuel expenses decreased $36.4 million from the
level incurred during 1998. Non pass-through expenses decreased $43.3 million,
reflecting lower demand costs resulting from the replacement of purchases from
TXU with purchases from lower cost providers, significant reductions of the rate
under which TNMP purchases capacity from Clear Lake, and effects of the
termination of Community Choice. The decreases in non-pass through costs were
partially offset by increases in pass-through expenses of $6.9 million. Pass-
through expenses increased because of price increases in the spot market during
the third quarter's extreme weather.
As discussed in "Competitive Conditions--New Mexico", 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, $11.4 million of New Mexico purchased power
costs incurred in the third and fourth quarter were recorded as pass-through
expenses. Those costs would have been recorded as non pass-through expenses
under Community Choice.
During 1998, purchased power and fuel expenses increased by $15.3 million
primarily due to increased purchased power expenses during the hotter than
normal summer weather, recognition of expenses in compliance with the Transition
Plan, and settlement of a billing dispute.
Transmission Expenses
Transmission expenses increased $7.0 million in 1999, from the same period
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. While terminating the
contract has produced purchased power savings, these savings have been partially
offset by these higher transmission payments. A second PUCT action in September
1999 partially offset these increases. In accordance with the legislation
discussed in "Competitive Conditions--Texas", the PUCT approved a change in the
method of allocating transmission costs effective September 1, 1999. This change
resulted in TNMP's transmission expenses in the fourth quarter of 1999 being
$1.7 million lower than they would have been without the change.
-19-
<PAGE>
During 1998, transmission expenses were $2.4 million higher than in 1997 due
to the effects of the Clear Lake settlement described above.
Charge for Recovery of Stranded Plant
TNMP recorded a charge for recovery of stranded plant of $23.4 million as
discussed in "Competitive Conditions--Texas" and the section "Overall Results."
Other Operating Expenses
Other operating expenses in 1999 increased slightly, by $0.7 million,
compared to 1998. Other operating expenses increased in 1998 by $4.9 million
compared to 1997, reflecting the write-off of $3.3 million of deferred costs
related to the Transition Plan.
Interest Charges
During 1999, interest charges decreased $10.6 million from 1998 levels due
to the issuance of $175 million of 6.25% senior notes, which replaced $130
million of 12.5% secured debentures and borrowings against the credit
facilities.
During 1998, interest charges decreased $3.2 million due primarily to
reduced borrowings and lower interest rates on the credit facilities.
Liquidity and Capital Resources
Sources of Liquidity
The main sources of liquidity for TNP are cash flow from operations and
borrowings from credit facilities.
TNP's cash flow from operations totaled $74.6 million, $72.9 million and
$103.9 million in 1999, 1998 and 1997, respectively. Cash flow from operations
increased slightly in 1999 due to reduced expenditures for nonregulated
activities. Cash flow from operations decreased in 1998 due to increases in
purchased power costs and expenses for nonregulated activities. In addition,
1997 cash flow included $20.5 million from the one-time factoring of unbilled
accounts receivables. TNMP's cash flow decreased in 1999 due to a $10.3 million
Transition Plan refund and higher income tax payments caused by increased intra-
company funding to TNP. Lower payments for purchased power and interest
partially offset the cash flow decrease at TNMP. TNMP's cash flow in 1998
mirrored that of TNP.
In the second quarter of 1999, TNMP cancelled its 1995 Credit Facility,
which had a total commitment of $100 million, and was scheduled to expire in
November 2000. TNMP's remaining credit facility, which expires in September
2001, had a total of $54 million of unused borrowings available as of December
31, 1999.
In November 1998, TNP entered into a new credit facility with a total
commitment of $50 million, and unused borrowing capacity of $50 million at
December 31, 1999. TNP can use borrowings under this facility to invest in
TNP's subsidiaries, pay dividends to its shareholders, invest in nonregulated
businesses, and for other general corporate purposes. The facility expires in
November 2003.
At December 31 1999, TNP had approximately 933,000 shares reserved for
issuance under its direct stock purchase plan. The plan is designed to provide
investors with a convenient method to purchase shares of TNP's common stock
directly from the company and to reinvest cash dividends.
Capital Resources
TNP's and TNMP's capital structure continued to improve during 1999, as TNMP
was able to reduce debt due to continued strong cash generation for the year.
The equity portion of TNP's capital structure increased from 40.0% at December
31, 1998, to 42.5% at December 31, 1999. Conversely, the long-term debt ratio
decreased from 59.6% to 57.3% for the same period. TNMP experienced similar
results with its capital ratios.
-20-
<PAGE>
TNMP's capital requirements through 2004 are projected to be as follows
(amounts in millions):
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004
----- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C>
FMB and secured debenture maturities (see Note 7) $ 100.0 $ - $ - $ 140.0 $ -
Capital expenditures 41.9 41.1 42.4 43.7 45.1
------- ------- ------- -------- -------
Total capital requirements $ 141.9 $ 41.1 $ 42.4 $ 183.7 $ 45.1
======== ======= ======= ======== =======
</TABLE>
TNMP believes that cash flow from operations, borrowings in the capital
markets, and periodic borrowings under the credit facilities will be sufficient
to retire or refinance $100 million of 9.25%, Series U, FMBs and meet its other
capital requirements through the end of 2000.
Other Matters
Year 2000
TNMP actively addressed the Year 2000 issue (Y2K) throughout its operating
and office environments. It conducted extensive studies to analyze the impact of
Y2K on all operating systems. As a result of these studies, TNMP developed a Y2K
mitigation plan that required 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.
As a result of its planning and preparation, TNMP experienced no disruption
of service or any other material effect in any of its computer systems in any of
its critical business areas - generation, transmission, distribution, energy
management and corporate information systems.
In addition, TNMP experienced no material event or disruption caused by a
failure of any of its key vendors or other third parties to achieve Y2K
compliance in those systems affecting TNMP's operations.
The costs associated with TNMP's Y2K efforts were approximately $10.7
million. Approximately $9.9 million of that amount was to upgrade or replace
various information technology systems, and to improve the infrastructure to
support those systems.
TNMP does not expect any future material effects to arise from the Y2K
issue.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
TNP's and TNMP's involvement in the trading of market risk sensitive
instruments is minimal and does not have a material impact to either company's
financial condition or results of operations. As noted in Item 1, "Sources of
Energy," TNMP's exposure to changes in the prevailing market price of power has
increased. This exposure is due to TNMP's greater reliance on shorter term
contracts and, as discussed in Item 7, "Competitive Conditions," the fact that
TNMP no longer passes the demand component of purchased power costs directly
through to its customers. As a result, TNMP is exposed to the risk of executing
new purchased power contracts at market prices. Conversely, TNMP has the
opportunity to benefit from a favorable market for purchased power.
-21-
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of TNP Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets and consolidated
statements of capitalization of TNP Enterprises, Inc. (a Texas corporation) (the
"Company") as of December 31, 1999 and 1998, and the related consolidated
statements of income, common shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those Standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the years ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
February 16, 2000
-22-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder and Board of Directors of Texas-New Mexico Power Company:
We have audited the accompanying consolidated balance sheets and consolidated
statements of capitalization of Texas-New Mexico Power Company (a Texas
corporation) (the "Company") as of December 31, 1999 and 1998, and the related
consolidated statements of income, common shareholder's equity and cash flows
for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those Standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the years ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
February 16, 2000
-23-
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(In thousands except per share amounts)
<S> <C> <C> <C>
OPERATING REVENUES $ 576,150 $ 585,941 $ 578,534
--------- --------- ---------
OPERATING EXPENSES:
Purchased power and fuel 279,587 315,949 300,614
Other operating and maintenance 106,634 95,661 86,385
Depreciation 39,295 38,056 38,853
Charge for recovery of stranded plant (Note 3) 23,376 -- --
Taxes other than income taxes 33,746 36,014 33,667
Income taxes 19,120 15,480 21,242
--------- --------- ---------
Total operating expenses 501,758 501,160 480,761
--------- --------- ---------
NET OPERATING INCOME 74,392 84,781 97,773
--------- --------- ---------
OTHER INCOME (LOSS):
Other income and deductions, net (2,348) 1,363 1,443
Income taxes 1,866 (125) 257
--------- --------- ---------
Other income (loss), net of taxes (482) 1,238 1,700
--------- --------- ---------
INCOME BEFORE INTEREST CHARGES 73,910 86,019 99,473
--------- --------- ---------
INTEREST CHARGES:
Interest on long-term debt 38,538 48,393 52,557
Other interest and amortization of debt-related costs 5,205 5,492 4,355
--------- --------- ---------
Total interest charges 43,743 53,885 56,912
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 30,167 32,134 42,561
Loss from discontinued nonregulated operations, net of taxes (Note 4) -- 12,710 12,883
--------- --------- ---------
NET INCOME 30,167 19,424 29,678
Dividends on preferred stock and other (19) 150 158
--------- --------- ---------
INCOME APPLICABLE TO COMMON STOCK $ 30,186 $ 19,274 $ 29,520
========= ========= =========
EARNINGS PER SHARE OF COMMON STOCK:
Earnings from continuing operations $ 2.25 $ 2.42 $ 3.24
Loss from discontinued nonregulated operations -- (0.96) (0.98)
========= ========= =========
EARNINGS PER SHARE $ 2.25 $ 1.46 $ 2.26
========= ========= =========
DIVIDENDS PER SHARE OF COMMON STOCK $ 1.16 $ 1.10 $ 1.005
========= ========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 13,394 13,244 13,083
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-24-
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from sales to customers $ 532,237 $ 600,596 $ 625,032
Purchased power and fuel costs paid (291,384) (318,616) (299,554)
Cash paid for payroll and to other suppliers (89,455) (116,852) (125,188)
Interest paid, net of amounts capitalized (35,527) (51,592) (57,337)
Income taxes paid (7,527) (6,825) (9,089)
Other taxes paid (34,140) (35,089) (32,990)
Other operating cash receipts and payments, net 353 1,250 2,979
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 74,557 72,872 103,853
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant (41,144) (37,534) (28,232)
Additions to other property and nonregulated investments 100 (1,020) (1,777)
Withdrawals from (deposits to) escrow account 1,902 (1,902) --
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (39,142) (40,456) (30,009)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on preferred and common stocks (15,640) (14,729) (13,305)
Common stock issuances 4,167 5,355 3,392
Borrowings from (repayments to) revolving credit facilities - net (63,000) (11,000) 45,000
Issuances:
Senior notes, net of discount 174,164 -- --
Deferred expenses associated with financings (1,588) (7,382) --
Redemptions:
First mortgage bonds -- (8,000) (100,900)
Secured debentures (130,000) -- --
Preferred stock (1,396) (180) (180)
Other 118 (141) (361)
--------- --------- ---------
NET CASH USED IN FINANCING ACTIVITIES (33,175) (36,077) (66,354)
--------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS 2,240 (3,661) 7,490
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,216 15,877 8,387
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,456 $ 12,216 $ 15,877
========= ========= =========
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income $ 30,167 $ 19,424 $ 29,678
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 39,295 38,056 38,853
Charge for recovery of stranded plant 23,376 -- --
Amortization of debt-related costs and other deferred charges 8,044 7,390 5,633
Allowance for funds used during construction (933) (228) (47)
Deferred income taxes 6,535 4,722 7,434
Investment tax credits 2,205 1,281 1,406
Deferred purchased power and fuel costs (20,425) 894 995
Cash flows impacted by changes in current assets and liabilities:
Accounts payable (7,711) 976 (1,411)
Accrued interest 3,400 (2,303) (3,556)
Accrued taxes (1,472) (3,299) (1,244)
Reserve for customer refund (10,289) 10,971 --
Changes in other current assets and liabilities 8,862 (2,215) 25,099
Clear Lake settlement payment (8,000) -- --
Other, net 1,503 (2,797) 1,013
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 74,557 $ 72,872 $ 103,853
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-25-
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(In thousands)
<S> <C> <C>
ASSETS
- ------
UTILITY PLANT:
Electric plant $1,288,104 $1,260,147
Construction work in progress 2,501 6,294
---------- ----------
Total 1,290,605 1,266,441
Less accumulated depreciation 382,627 343,562
---------- ----------
Net utility plant 907,978 922,879
---------- ----------
OTHER PROPERTY AND INVESTMENTS, at cost 4,243 10,384
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 14,456 12,216
Accounts receivable 8,384 5,955
Inventories, at lower of average cost or market:
Fuel 575 677
Materials and supplies 3,834 4,567
Deferred purchased power and fuel costs 304 --
Accumulated deferred income taxes -- 2,235
Other current assets 635 4,403
---------- ----------
Total current assets 28,188 30,053
---------- ----------
LONG-TERM AND OTHER ASSETS:
Recoverable stranded costs (Note 3) 19,256 --
Deferred purchased power and fuel costs (Note 3) 21,797 1,676
Deferred charges 19,737 28,773
---------- ----------
Total long-term and other assets 60,790 30,449
---------- ----------
$1,001,199 $ 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 $ 196,685 $ 192,518
Retained earnings 130,425 115,776
---------- ----------
Total common shareholders' equity 327,110 308,294
Redeemable cumulative preferred stock 1,664 3,060
Long-term debt, less current maturities 340,244 459,000
---------- ----------
Total capitalization 669,018 770,354
---------- ----------
CURRENT LIABILITIES:
Current maturities of long-term debt 100,000 --
Accounts payable 20,300 28,011
Accrued interest 8,420 5,020
Accrued taxes 12,818 14,290
Customers' deposits 3,786 3,609
Accumulated deferred income taxes 7,543 --
Reserve for customer refund (Note 3) 682 10,971
Other current liabilities 29,720 25,202
---------- ----------
Total current liabilities 183,269 87,103
---------- ----------
LONG-TERM AND OTHER LIABILITIES:
Regulatory tax liabilities 6,633 957
Accumulated deferred income taxes 97,196 97,346
Accumulated deferred investment tax credits 23,978 20,916
Deferred credits 21,105 17,089
---------- ----------
Total long-term and other liabilities 148,912 136,308
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 10)
---------- ----------
$1,001,199 $ 993,765
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-26-
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31,
<TABLE>
<CAPTION>
1999 1998
--------- ----------
(In thousands)
COMMON SHAREHOLDERS' EQUITY
- ---------------------------
Common stock with no par value per share
Authorized shares - 50,000,000
<S> <C> <C>
Outstanding shares - 13,416,556 in 1999 and 13,293,996 in 1998 $ 196,685 $ 192,518
Retained earnings 130,425 115,776
--------- ---------
Total common shareholders' equity 327,110 308,294
--------- ---------
<CAPTION>
PREFERRED STOCK
- ---------------
Preferred stock with no par value
Authorized shares - 5,000,000
Outstanding shares - None
Redeemable cumulative preferred stock of TNMP with $100 par value
Authorized shares - 1,000,000
Redemption
price at TNMP's Outstanding shares
option 1999 1998
------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Series B 4.65% $ 100.00 8,390 19,200 839 1,920
Series C 4.75% 100.00 8,250 11,400 825 1,140
------- ------- --------- ---------
Total redeemable cumulative preferred stock 16,640 30,600 1,664 3,060
------- ------- --------- ---------
<CAPTION>
<S> <C> <C>
LONG-TERM DEBT
FIRST MORTGAGE BONDS
Series U 9.25% due 2000 100,000 100,000
SENIOR NOTES
6.25% due 2009 175,000 --
Unamortized discount (756) --
SECURED DEBENTURES
12.50% due 1999 -- 130,000
Series A 10.75% due 2003 140,000 140,000
REVOLVING CREDIT FACILITIES
1996 Facility 26,000 80,000
1998 Facility -- 9,000
--------- ---------
Total long-term debt 440,244 459,000
Less current maturities (100,000) --
--------- ---------
Total long-term debt, less current maturities 340,244 459,000
--------- ---------
TOTAL CAPITALIZATION $ 669,018 $ 770,354
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-27-
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
For the Years Ended December 31,
<TABLE>
<CAPTION>
Common Shareholders' Equity
-----------------------------------------------
Common Stock Retained
Shares Amount Earnings Total
------ ------ -------- -----
(In thousands)
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Balance at January 1, 1997 13,006 $ 183,771 $ 94,703 $ 278,474
Net income -- -- 29,678 29,678
Dividends on preferred stock -- -- (158) (158)
Dividends on common stock - $1.005 per share -- -- (13,158) (13,158)
Sale of common stock 127 3,392 -- 3,392
Retirement of preferred stock -- -- 13 13
--------- --------- --------- ---------
Balance at December 31, 1997 13,133 187,163 111,078 298,241
YEAR ENDED DECEMBER 31, 1998
Net income -- -- 19,424 19,424
Dividends on preferred stock -- -- (150) (150)
Dividends on common stock - $1.10 per share -- -- (14,579) (14,579)
Sale of common stock 161 5,355 -- 5,355
Retirement of preferred stock -- -- 3 3
--------- --------- --------- ---------
Balance at December 31, 1998 13,294 192,518 115,776 308,294
YEAR ENDED DECEMBER 31, 1999
Net income -- -- 30,167 30,167
Dividends on preferred stock -- -- (99) (99)
Dividends on common stock - $1.16 per share -- -- (15,537) (15,537)
Sale of common stock 123 4,167 -- 4,167
Retirement of preferred stock -- -- 118 118
--------- --------- --------- ---------
Balance at December 31, 1999 13,417 $ 196,685 $ 130,425 $ 327,110
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-28-
<PAGE>
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of TNP Enterprises, Inc.)
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
OPERATING REVENUES $ 576,093 $ 585,892 $ 578,534
--------- --------- ---------
OPERATING EXPENSES:
Purchased power and fuel 279,587 315,949 300,614
Other operating and maintenance 99,390 91,663 84,294
Depreciation of utility plant 39,295 38,054 38,851
Charge for recovery of stranded plant (Note 3) 23,376 -- --
Taxes other than income taxes 33,296 36,298 33,260
Income taxes 20,799 16,863 22,062
--------- --------- ---------
Total operating expenses 495,743 498,827 479,081
--------- --------- ---------
NET OPERATING INCOME 80,350 87,065 99,453
--------- --------- ---------
OTHER INCOME:
Other income and deductions, net 1,940 1,035 1,120
Income taxes 277 (52) 257
--------- --------- ---------
Other income, net of taxes 2,217 983 1,377
--------- --------- ---------
INCOME BEFORE INTEREST CHARGES 82,567 88,048 100,830
--------- --------- ---------
INTEREST CHARGES:
Interest on long-term debt 37,919 48,342 52,557
Other interest and amortization of debt-related costs 5,205 5,385 4,355
--------- --------- ---------
Total interest charges 43,124 53,727 56,912
--------- --------- ---------
NET INCOME 39,443 34,321 43,918
Dividends on preferred stock and other (19) 150 158
--------- --------- ---------
INCOME APPLICABLE TO COMMON STOCK $ 39,462 $ 34,171 $ 43,760
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-29-
<PAGE>
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of TNP Enterprises, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from sales to customers $ 528,552 $ 579,482 $ 606,803
Purchased power and fuel costs paid (291,384) (318,616) (299,554)
Cash paid for payroll and to other suppliers (74,372) (72,590) (86,607)
Interest paid, net of amounts capitalized (34,924) (51,545) (57,331)
Income taxes paid (17,592) (2,786) (8,464)
Other taxes paid (33,540) (35,492) (32,980)
Other operating cash receipts and payments, net 99 864 2,600
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 76,840 99,317 124,467
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant (40,911) (37,506) (27,942)
Withdrawals from (deposits to) escrow account 1,902 (1,902) 1,670
--------- --------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES (39,009) (39,408) (26,272)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on preferred and common stocks (29,102) (19,249) (44,458)
Borrowings from (repayments to) revolving credit facilities - net (54,000) (20,000) 45,000
Issuances:
Senior notes, net of discount 174,164 -- --
Deferred expenses associated with financings (1,588) (7,275) --
Redemptions:
First mortgage bonds -- (8,000) (100,900)
Secured debentures (130,000) -- --
Preferred stock (1,396) (180) (180)
Other 118 -- --
--------- --------- ---------
NET CASH USED IN FINANCING ACTIVITIES (41,806) (54,704) (100,538)
--------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (3,975) 5,205 (2,343)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,977 2,772 5,115
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,002 $ 7,977 $ 2,772
========= ========= =========
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income $ 39,443 $ 34,321 $ 43,918
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of utility plant 39,295 38,054 38,851
Charge for recovery of stranded plant 23,376 -- --
Amortization of debt-related costs and other deferred charges 8,044 7,281 5,633
Allowance for funds used during construction (933) (228) (47)
Deferred income taxes 6,716 9,559 10,650
Investment tax credits 2,149 1,173 2,121
Deferred purchased power and fuel costs (20,425) 894 995
Cash flows impacted by changes in current assets and liabilities:
Accounts payable (6,814) 2,029 (2,395)
Accrued interest 3,384 (2,319) (3,556)
Accrued taxes (6,260) 2,698 850
Reserve for customer refund (10,289) 10,971 --
Changes in other current assets and liabilities 10,264 (4,485) 24,751
Clear Lake settlement payment (8,000) -- --
Other, net (3,110) (631) 2,696
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 76,840 $ 99,317 $124,467
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-30-
<PAGE>
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of TNP Enterprises, Inc.)
CONSOLIDATED BALANCE SHEETS
December 31,
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(In thousands)
<S> <C> <C>
ASSETS
- ------
UTILITY PLANT:
Electric plant $1,288,080 $1,260,099
Construction work in progress 2,501 6,294
---------- ----------
Total 1,290,581 1,266,393
Less accumulated depreciation 382,627 343,562
---------- ----------
Net utility plant 907,954 922,831
---------- ----------
OTHER PROPERTY AND INVESTMENTS, at cost 213 2,116
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 4,002 7,977
Accounts receivable 6,347 923
Inventories, at lower of average cost or market:
Fuel 575 677
Materials and supplies 3,834 4,567
Deferred purchased power and fuel costs 304 --
Other current assets 356 4,093
---------- ----------
Total current assets 15,418 18,237
---------- ----------
LONG-TERM AND OTHER ASSETS:
Recoverable stranded costs (Note 3) 19,256 --
Deferred purchased power and fuel costs (Note 3) 21,797 1,676
Deferred charges 19,757 28,706
---------- ----------
Total long-term and other assets 60,810 30,382
---------- ----------
$ 984,395 $ 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 90,302 79,840
---------- ----------
Total common shareholder's equity 312,558 302,096
Redeemable cumulative preferred stock 1,664 3,060
Long-term debt, less current maturities 340,244 450,000
---------- ----------
Total capitalization 654,466 755,156
---------- ----------
CURRENT LIABILITIES:
Current maturities of long-term debt 100,000 --
Accounts payable 20,074 26,888
Accrued interest 8,388 5,004
Accrued taxes 14,189 20,449
Customers' deposits 3,786 3,609
Accumulated deferred income taxes 8,434 649
Reserve for customer refund (Note 3) 682 10,971
Other current liabilities 28,015 17,076
---------- ----------
Total current liabilities 183,568 84,646
---------- ----------
LONG-TERM AND OTHER LIABILITIES:
Regulatory tax liabilities 6,633 957
Accumulated deferred income taxes 95,165 93,378
Accumulated deferred investment tax credits 23,978 22,729
Deferred credits 20,585 16,700
---------- ----------
Total long-term and other liabilities 146,361 133,764
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 10)
---------- ----------
$ 984,395 $ 973,566
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-31-
<PAGE>
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of TNP Enterprises, Inc.)
CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31,
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(In thousands)
<S> <C> <C>
COMMON SHAREHOLDER'S EQUITY
- ---------------------------
Common stock, $10 par value per share
Authorized shares - 12,000,000
Outstanding shares - 10,705 $ 107 $ 107
Capital in excess of par value 222,149 222,149
Retained earnings 90,302 79,840
---------- -----------
Total common shareholder's equity 312,558 302,096
---------- -----------
<CAPTION>
PREFERRED STOCK
- ---------------
Redeemable cumulative preferred stock with $100 par value
Authorized shares - 1,000,000
Redemption
price at TNMP's Outstanding shares
option 1999 1998
------ ---- ----
<S> <C> <C> <C> <C> <C> <C>
Series B 4.65% $ 100.00 8,390 19,200 839 1,920
Series C 4.75% 100.00 8,250 11,400 825 1,140
--------- --------- --------- ----------
Total redeemable cumulative preferred stock 16,640 30,600 1,664 3,060
--------- --------- --------- ----------
LONG-TERM DEBT
- --------------
FIRST MORTGAGE BONDS
Series U 9.25% due 2000 100,000 100,000
SENIOR NOTES
6.25% due 2009 175,000 -
Unamortized discount (756) -
SECURED DEBENTURES
12.50% due 1999 - 130,000
Series A 10.75% due 2003 140,000 140,000
REVOLVING CREDIT FACILITIES
1996 Facility 26,000 80,000
---------- -----------
Total long-term debt 440,244 450,000
Less current maturities (100,000) -
---------- -----------
Total long-term debt, less current maturities 340,244 450,000
---------- -----------
TOTAL CAPITALIZATION $ 654,466 $ 755,156
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-32-
<PAGE>
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of TNP Enterprises, Inc.)
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDER'S EQUITY
For the Years Ended December 31,
<TABLE>
<CAPTION>
Common Shareholder's Equity
-------------------------------------------------------------------------------------------
Capital in
Common Stock Excess of Retained
Shares Amount Par Value Earnings Total
------ ------ --------- -------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Balance at January 1, 1997 11 107 $ 222,133 $ 65,308 $ 287,548
Net income -- -- -- 43,918 43,918
Dividends on preferred stock -- -- -- (158) (158)
Dividends on common stock -- -- -- (44,300) (44,300)
Retirement of preferred stock -- -- 13 -- 13
--------- --------- --------- ---------- ----------
Balance at December 31, 1997 11 107 222,146 64,768 287,021
YEAR ENDED DECEMBER 31, 1998
Net income -- -- -- 34,321 34,321
Dividends on preferred stock -- -- -- (150) (150)
Dividends on common stock -- -- -- (19,099) (19,099)
Retirement of preferred stock -- -- 3 -- 3
--------- --------- --------- ---------- ----------
Balance at December 31, 1998 11 107 222,149 79,840 302,096
YEAR ENDED DECEMBER 31, 1999
Net income -- -- -- 39,443 39,443
Dividends on preferred stock -- -- -- (99) (99)
Dividends on common stock -- -- -- (29,000) (29,000)
Retirement of preferred stock -- -- -- 118 118
--------- --------- --------- ---------- ----------
Balance at December 31, 1999 11 107 $ 222,149 $ 90,302 $ 312,558
========= ========= ========= ========== ==========
</TABLE>
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
General Information
The consolidated financial statements of TNP and subsidiaries include the
accounts of TNP and its wholly owned subsidiaries, TNMP, FWI, and TNP Operating
Company. The consolidated financial statements of TNMP and subsidiaries include
the accounts of TNMP and its wholly owned subsidiaries, TGC and TGC II. All
intercompany transactions and balances have been eliminated in consolidation.
TNMP is TNP's principal operating subsidiary. TNMP is a public utility
engaged in generating, purchasing, transmitting, distributing, and selling
electricity in Texas and New Mexico. TNMP is subject to PUCT and NMPRC
regulation. Some of TNMP's activities, including the issuance of securities, are
subject to FERC regulation, and its accounting records are maintained in
accordance with FERC's Uniform System of Accounts.
The use of estimates is required to prepare TNP's and TNMP's consolidated
financial statements in conformity with generally accepted accounting
principles. Management believes that estimates are essential and will not
materially differ from actual results. However, adjustments may be necessary in
the future to the extent that future estimates or actual results are different
from the estimates used in the 1999 financial statements.
Accounting for the Effects of Regulation
As discussed in Note 3, legislation that establishes competition became
effective during 1999 in Texas and New Mexico. As a result, SFAS 71,
"Accounting for the Effects of Certain Types of Regulation," is no longer
applied to the generation/power supply portion of TNMP's operations in Texas and
New Mexico. Based on the legislation, TNMP believes that SFAS 71 continues to
apply to the transmission and distribution portion of its operations in both
states.
SFAS 71 allows TNMP to recognize the economic effects of rate regulation in
the transmission and distribution portion of its business. Among these effects
are the recognition of regulatory assets and liabilities. Regulatory assets
represent revenues associated with certain costs that TNMP expects to recover
from customers in future rates. Regulatory liabilities are costs previously
collected from customers or other amounts that reduce future rates. The
following table summarizes TNP's and TNMP's regulatory assets and liabilities as
of December 31, 1999 and 1998.
1999 1998
------ ------
(In thousands)
Regulatory Assets:
Deferred purchased power and fuel costs $ 22,101 $ 1,676
Deferred charges:
Losses on reacquired debt 2,837 6,494
Rate case expenses 201 1,396
Recoverable stranded costs 19,256 -
Deferred accounting amounts - 3,221
--------- ---------
Total $ 44,395 $ 12,787
========= =========
Regulatory Liabilities:
Income tax related, net $ 6,633 $ 957
========= =========
As a result of discontinuing SFAS 71 to the generation/power supply Texas
operations, the following accounting policy changes will be effective January 1,
2000:
. Allowance for funds used during construction will no longer be accrued to
generation-related construction projects. Interest will be capitalized to
these projects in accordance with SFAS 34, "Capitalization of Interest
Cost."
. Under SFAS 71, TNMP deferred the gains or losses that arose when long-term
debt was redeemed prior to maturity, and amortized those costs over the
life of the new debt. Effective January 1, 2000, gains or losses incurred
for the early retirement of debt attributable to TNMP's generation/power
supply operations will be recorded in accordance with SFAS 4, "Reporting
Gains and Losses from Extinguishment of Debt."
-34-
<PAGE>
Utility Plant
Utility plant is stated at the historical cost of construction, which
includes labor, materials, indirect charges for such items as engineering and
administrative costs, and AFUDC. Property repairs and replacement of minor items
are charged to operating expenses; major replacements and improvements are
capitalized to utility plant.
AFUDC is a non-cash item designed to enable a utility to capitalize
financing costs during periods of construction. Established regulatory practices
enable TNMP to recover these costs from customers. The composite rate used for
AFUDC was 10.6% in 1999 and 6% in both 1998 and 1997.
The costs of depreciable units of plant retired or disposed of in the normal
course of business are eliminated from utility plant accounts and such costs
plus removal expenses less salvage are charged to accumulated depreciation. When
complete operating units are disposed of, appropriate adjustments are made to
accumulated depreciation, and the resulting gains or losses, if any, are
recognized.
Depreciation is provided on a straight-line method based on the estimated
lives of the properties as indicated by periodic depreciation studies. A
portion of depreciation of transportation equipment used in construction is
charged to utility plant accounts in accordance with the equipment's use.
Depreciation as a percentage of average depreciable cost was 3.1%, 3.2%, and
3.3% in 1999, 1998, and 1997, respectively.
Cash Equivalents
All highly liquid debt instruments with maturities of three months or less
when purchased are considered cash equivalents.
Customer Receivables and Operating Revenues
TNMP accrues estimated revenues for electricity delivered since the latest
billing. TNMP, under a factoring arrangement with an unaffiliated company,
sells its customer receivables on a nonrecourse basis. Amounts estimated to
have been delivered, but remaining unbilled, are also sold in connection with
this agreement.
Purchased Power and Fuel Costs
In Texas, fuel and the energy-related portion of purchased power costs are
recovered from customers through the fuel adjustment clause authorized by the
PUCT. The demand-related portion of purchased power is recovered through base
rates and is not subject to adjustment or future reconciliation. Therefore, any
difference between the amount of demand-related purchased power recovered
through TNMP's rates and the actual cost of such affects operating income.
In New Mexico, TNMP recovers all purchased power costs through the fuel and
purchased power adjustment clause authorized by the NMPRC. The purchased power
recovery factor changes monthly to reflect over or under collections of
purchased power costs. Prior to July 1, 1999, the recovery of purchased power
had been frozen in base rates in accordance with Community Choice.
Deferred Charges
Expenses incurred in issuing long-term debt and related discount and premium
are amortized on a straight-line basis over the lives of the respective issues.
Included in deferred charges are other assets that are expected to benefit
future periods and certain costs that are deferred for ratemaking purposes and
amortized over periods allowed by regulatory authorities.
Derivatives
The initial cost of an interest rate collar is being amortized over the term
of the related agreement. Unamortized premiums of $66,000 are included in
Deferred Charges in the consolidated balance sheets. Amounts to be received or
paid under the agreement, if any, will be recognized when they occur as a
component of interest expense. As of December 31, 1999, TNMP had neither an
obligation to pay, nor the right to receive any amounts under the agreement.
Income Taxes
TNP files a consolidated federal income tax return that includes its
subsidiaries and the consolidated operations of TNMP. The amounts of income
taxes recognized in TNMP's accompanying consolidated financial statements were
computed as if TNMP and its subsidiaries filed a separate consolidated federal
income tax return.
ITC amounts utilized in the federal income tax return are generally deferred
and amortized to earnings ratably over the estimated service lives of the
related assets.
-35-
<PAGE>
Fair Values of Financial Instruments
Fair values of cash equivalents, temporary investments, and customer
receivables approximated the carrying amounts because of the short maturities of
those instruments.
The estimated fair values of long-term debt and preferred stock were based
on quoted market prices of the same or similar issues. The estimated fair values
of TNP's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
---------------------------- -----------------------------
Carrying Amount Fair Values Carrying Amount Fair Values
--------------- ----------- --------------- ------------
(In thousands)
<S> <C> <C> <C> <C>
Assets
------
Interest rate collars $ 66 $ 3,578 $ 164 $ (333)
Capitalization and Liabilities
------------------------------
Long-term debt 441,000 420,731 459,000 475,189
Preferred stock 1,664 1,664 3,060 1,978
</TABLE>
Common Stock
At December 31, 1999, 519,304 shares of TNP's common stock were reserved for
issuance to TNMP's 401(k) plan, and 1,738,491 shares of TNP's common stock were
reserved for subsequent issuance under other stock compensation or shareholder
plans.
Shareholder Rights Plan
TNP has a shareholder rights plan that is designed to protect TNP's
shareholders from coercive takeover tactics and inadequate or unfair takeover
bids. The rights plan provides for the distribution of one right for each share
of TNP's common stock currently outstanding or issued until the close of
business on August 11, 2008.
Upon the occurrence of certain events, each right entitles a shareholder to
elect to purchase one share of common stock at $100 per share or, under certain
circumstances, shares of common stock at half the then-current market price, or
to receive TNP common stock or other securities having an aggregate value equal
to the excess of (i) the value of the common stock or other securities on the
date the rights are exercised over or (ii) the cash payment that would have been
payable upon exercise of the rights if cash payment had been elected.
Until certain triggering events occur, the rights will trade together with
TNP's common stock and separate rights certificates will not be issued. Among
the triggering events are the acquisition by a person or group of 10% or more of
TNP's outstanding common stock or the commencement of a tender or exchange offer
that, upon consummation, would result in a person or group of persons owning 15%
or more of TNP's outstanding common stock. The rights expire August 11, 2008,
unless earlier redeemed or exchanged by TNP, and have had no effect on EPS.
On June 4, 1999, TNP amended its shareholder rights plan to exempt the
Merger discussed in Note 2 from the provisions of the shareholder rights plan.
Stock-Based Compensation
As discussed in Note 5, TNP has an equity-based incentive compensation plan
that awards stock-based compensation. In 1995 the FASB issued SFAS 123,
"Accounting for Stock-Based Compensation", that changes the method for
calculating expenses associated with stock-based compensation. SFAS 123, which
became effective for 1996, also allows companies to retain the approach as set
forth in APB Opinion 25, "Accounting for Stock Issued to Employees", for
measuring expense for its stock-based compensation. TNP has elected to continue
to apply the provisions of APB Opinion 25 in calculating stock-based
compensation. The application of SFAS 123 would have had no significant effect
on the amount of expense associated with TNP's stock-based compensation.
Reclassification
Certain items in 1997 and 1998 were reclassified to conform to the 1999
presentation.
-36-
<PAGE>
Note 2. Acquisition
TNP, SW Acquisition, L.P., and ST Acquisition Corp. have entered into a
Merger Agreement, dated as of May 24, 1999, which provides for a merger of ST
Corp. with and into TNP, with TNP being the surviving corporation. Under the
terms of the Merger Agreement, 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 early in the second quarter of 2000. The
Merger Agreement requires various approvals. To date, approvals have been
obtained from TNP's shareholders, the Federal Trade Commission, FERC, the PUCT,
and the NMPRC. Approvals are final in all jurisdictions except Texas.
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.
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 PUCT
seeking a determination that the Merger is consistent with the public interest.
On November 10, 1999, TNMP and the staff of the PUCT agreed to a settlement that
resolves all issues between the two parties. At a hearing held November 12,
1999, the remaining parties joined the settlement, withdrew from the case, or
waived their rights to hearing and did not oppose the settlement. In late
December 1999, the administrative law judge assigned to the case issued a draft
order approving the Merger. On February 10, 2000, the PUCT voted unanimously to
approve the Merger. Approval by the PUCT is expected to be final in March 2000.
Approval by the PUCT requires TNMP to honor certain financial and operational
commitments, including a guaranteed level of stranded cost mitigation equal to
$59 million less base rate reductions in 2000 and 2001. The subject base rate
reductions are described in Note 3.
New Mexico. Also on July 15, TNMP filed an application with the 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. On January 18, 2000, the NMPRC voted to approve
the Merger. The decision became final on February 17, 2000.
Note 3. Regulatory Matters
The electric utility industry continues its transition toward increased
competition. During 1999, legislation was passed in both Texas and New Mexico
that establishes retail competition for generation operations. Retail
competition is scheduled to begin in New Mexico and Texas on January 1, 2001,
and January 1, 2002, respectively. The legislation in both states provides for
recovery of "stranded costs", the difference between the regulatory value of
TNMP's investments in generation assets and purchased power contracts and the
market price for energy in a competitive market. The increasingly competitive
environment presents opportunities to compete for new customers, as well as the
risk of loss of existing customers. TNMP expects the portions of operations
pertaining to transmission and distribution to continue to be regulated.
The following discusses the legislation in Texas and New Mexico, the effects
of the legislation on TNMP's operating results, and the relationship of the
legislation in Texas to the Transition Plan.
Texas
Legislation. On September 1, 1999, legislation that establishes competition
in the generation portion of the Texas electric utility industry went into
effect. The legislation will implement retail competition in generation for
customers in most areas of Texas on January 1, 2002. Among other provisions,
the legislation:
. Requires utilities to provide service according to the base rate
tariffs in effect at September 1, 1999, until December 31, 2001. The
legislation does not prohibit changes in the fixed fuel factor that
passes through fuel and purchased power energy costs to customers.
-37-
<PAGE>
. 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 (January 1, 1999 through December 31,
2001), 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 stranded costs.
. 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 charge approved by the
PUCT.
. Assessment of 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, 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-to-beat" 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. This "price to
beat" must be offered by the utility until the earlier of 36 months
after customer choice is offered or when it loses 40% or more of its
residential sales within its certified service area.
Prior to the legislation, TNMP had been operating under a voluntary
Transition Plan approved by the PUCT in 1998. The Transition Plan covered a
five-year period, and had provided for rate reductions, sharing of earnings in
excess of 11.25% return on equity and recovery of stranded costs. It also
included a provision requiring that TNMP conform the Plan to any legislation
enacting competition in the electric utility industry. There are provisions of
the legislation that conflict with provisions of the Transition Plan. In such
instances, including the calculation and subsequent application of excess
earnings, Management believes the legislation supercedes the Transition Plan.
Management has calculated excess earnings for the twelve months ended
December 31, 1999, based on the provisions of the legislation. The calculation
resulted in a reduction to 1999 pre-tax operating income of $23.4 million ($1.09
per share). The $23.4 million of excess earnings are displayed in the income
statement under the caption "Charge for recovery of stranded plant." TNMP did
not have excess earnings under the Transition Plan in 1998.
1998 Earnings Monitoring Report and Transition Plan Conformance. 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.
ORA's petition did not quantify the amount of its alleged errors. In addition,
the ORA proposed to use the Earnings Report contest as a means for conforming
the Transition Plan to the legislation. The PUCT hearing examiner assigned to
the Earnings Report is considering the issues related to TNMP's calculation of
excess earnings for 1998.
The ORA is the only party contesting TNMP's calculation of excess earnings.
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. On January 25, 2000,
TNMP filed a Motion for Dismissal or Summary Decision, asking the PUCT to reject
ORA's contest, and approve TNMP's 1998 Earnings Report. TNMP believes the
issues relating to its calculation of excess earnings can be disposed of as a
matter of law without a factual hearing. TNMP does not expect resolution of
this matter to have a material effect on its financial condition.
Regarding the conformance of the Transition Plan to the legislation, TNMP
filed a Conformed Stipulation with the PUCT on October 6, 1999. 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
legislation. On December 6, 1999, the PUCT issued a Declaratory Order stating
that TNMP was required "to give effect to base rate reductions reflected in" the
Transition Plan. Accordingly, TNMP reduced base rates for residential and
commercial customers by 3% and 1%, respectively, effective January 1, 2000.
Similar rate reductions will take effect January 1, 2001. As a result,
operating revenues are estimated to decrease in 2000 and 2001 by $6.7
-38-
<PAGE>
million and $13.9 million, respectively. The order also established that the
base rate reductions would offset the 6% rate reduction required by the
legislation, as previously described in the section "Texas - Legislation." The
order is interim in nature, and can be appealed.
Uncertainties exist as to the application of the legislation to other
provisions of the Transition Plan. Such uncertainties will not be resolved
until TNMP reports to the PUCT regarding its efforts to conform the Transition
Plan to the legislation. That report will be the subject of a PUCT review that
will occur in 2001.
Discontinuing SFAS 71. Historically, 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. 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." With the
passage of the legislation, TNMP discontinued the application of SFAS 71 to the
generation/power supply portion of its Texas business during the fourth quarter
of 1999. As a direct result of discontinuing SFAS 71, and in accordance with the
legislation, TNMP has reclassified net regulatory assets (regulatory assets less
liabilities) of $19.3 million that pertain to these deregulated operations as
Recoverable Stranded Costs. TNMP believes the $19.3 million represents
verifiable stranded costs and intends to recover them from customers pursuant to
the methods discussed under "Texas - Legislation."
In conjunction with the discontinuance of SFAS 71, TNMP is required to
determine if its generating plant asset, TNP One, is impaired under SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." Based on TNMP's undiscounted cash flow analysis over the
estimated useful life of TNP One, there is no impairment of TNP One, as defined
by SFAS 121, as of December 31, 1999. TNMP's impairment analysis includes
reasonable estimates of future market prices, capacity factors, operating costs,
the effects of competition, and many other factors over the life of TNP One.
TNMP's impairment analysis is highly dependent on these estimates. As of
December 31, 1999, the net book value of TNP One is $435 million.
Business Separation Plan. As noted above, the legislation requires utilities
to disaggregate, on or before January 1, 2002, into three distinct businesses:
generation, transmission and distribution, and retail electric provider. On
January 10, 2000, TNMP filed its Business Separation Plan with the PUCT. The BSP
details TNMP's plans for complying with the legislation, which include creating
three new affiliated companies, and establishing a timeline for accomplishing
the separation.
Unbundled Cost of Service Filing. The legislation also requires TNMP to file
a rate case that will set rates for the transmission and distribution company
that will provide regulated services once competition begins in 2002. The filing
must be made no later than March 31, 2000. The rates will be composed of a
transmission and distribution charge; a competition transition charge for
stranded cost recovery, which may include securitization; and a system benefits
charge. The CTC is designed to recover stranded costs related to TNMP's
generation assets and purchased power contracts, as determined by a PUCT-
established model. The PUCT will also use this proceeding to review and approve
the BSP.
Annual Report. The legislation requires TNMP to file a report prior to March
30, 2000 that will allow the PUCT to review TNMP's calculation of excess
earnings for the year ended December 31, 1999.
Fuel Reconciliation. At December 31, 1999, TNMP had an underrecovered
balance of fuel and the energy-related portion of purchased power costs of $21.8
million. PUCT rules require TNMP to reconcile its fuel costs at least every
three years. TNMP expects to file a fuel reconciliation for the three-year
period ended December 31, 1999, in mid-2000. TNMP will also file a request for a
new fuel factor, which will take into account the expected cost of fuel and
purchased energy. Management believes the ultimate outcome of this fuel
reconciliation will not have a material adverse effect on TNP's or TNMP's
consolidated financial position.
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 transmission and distribution business activities from their
generation operations, that will be subject to competition, and guarantees
recovery of at least 50% of a utility's stranded costs over a five-year period.
Prior to the passage of the Act, TNMP had been operating under Community Choice.
Community Choice 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 related to its purchased
power contracts in New Mexico from $3.4 million as of December 31, 1998, to $2.1
million as of December 31, 1999. Stranded costs in New Mexico could ultimately
be in a range from zero to $6 million, depending on the market price of
purchased power at the onset of competition.
-39-
<PAGE>
TNMP is required to file its plan for complying with the Act by June 1,
2000.
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 effective July
1, 1999. Under Community Choice, purchased power costs were a fixed component of
base rates. Therefore, the difference between the actual amounts recovered from
customers and actual purchased power costs affected operating income.
Community Choice provided for the filing of a rate case by TNMP on June 1,
1999. TNMP and the NMPRC Staff have reached a settlement, and have submitted
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
has reflected the base rate reductions in its fourth quarter revenues. TNMP
expects the NMPRC to act on the proposed settlement during the second quarter of
2000.
Note 4. Discontinued Nonregulated Operations
Management, with approval from the Board of Directors, authorized a plan to
discontinue the construction activities of FWI in late 1997. During the third
quarter of 1998, TNP elected to discontinue all remaining operations of FWI.
The pre-tax loss on discontinued operations recognized in 1998 was $19.6
million ($12.7 million, net of taxes, or $0.96 per share). The 1998 pre-tax
loss resulted from construction delays, a shortage of skilled labor, and job
site performance problems. Due to these reasons, there were a few jobs not
completed at December 31, 1999. TNP expects the jobs to be completed during
early 2000.
The pre-tax loss on discontinued operations recognized in 1997 was $19.8
million ($12.9 million, net of taxes, or $0.98 per share). All losses incurred
by FWI, both construction and service, incurred in 1997 have been reclassified
as losses from discontinued operations.
Note 5. Employee Benefit Plans
Pension and Postretirement Benefits Plans
TNMP has a defined benefit pension plan covering substantially all of its
employees. Benefits are based on an employee's years of service and
compensation. TNMP's funding policy is to contribute the minimum amount
required by federal funding standards. TNMP also sponsors a health care plan
that provides postretirement medical and death benefits to retirees who
satisfied minimum age and service requirements during employment.
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
----------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Change in projected benefit obligation:
Benefit obligation at beginning of year $76,395 $76,316 $10,875 $10,651
Service cost 1,705 1,439 362 309
Interest cost 5,010 5,055 722 736
Participant contributions - - 179 183
Plan amendments - (873) - -
Actuarial (gain) or loss, including changes
in discount rate (7,540) 1,366 (1,468) 442
Benefits paid (6,926) (6,908) (1,701) (1,446)
------- ------- ------- -------
Benefit obligation at end of year $68,644 $76,395 $ 8,969 $10,875
======= ======= ======= =======
</TABLE>
-40-
<PAGE>
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
---------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Change in plan assets:
Fair value of plan assets at beginning of year $ 97,714 $ 95,751 $ 9,936 $ 8,274
Actual return on plan assets, net of expenses 13,409 8,871 (198) 1,105
Employer contributions - - 618 1,597
Participant contributions - - 179 183
Benefits paid (6,926) (6,908) (1,680) (1,223)
-------- -------- ------- -------
Fair value of plan assets at end of year $104,197 $ 97,714 $ 8,855 $ 9,936
======== ======== ======= =======
Reconciliation of funded status:
Funded status $ 35,553 $ 21,319 $ (113) $ (938)
Unrecognized actuarial gain (39,551) (25,620) (6,560) (6,216)
Unrecognized transition (asset) or obligation (11) (35) 4,216 4,540
Unrecognized prior service cost (1,996) (2,152) - -
-------- -------- ------- -------
Prepaid (accrued) benefit cost $ (6,005) $ (6,488) $(2,457) $(2,614)
======== ======== ======= =======
Components of net periodic benefit cost:
Service cost $ 1,705 $ 1,439 $ 362 $ 309
Interest cost 5,010 5,055 722 736
Expected return on plan assets (7,018) (6,664) (583) (484)
Amortization of prior service cost (156) (156) - -
Amortization of transitional (asset) or obligation (24) (24) 325 325
Recognized actuarial gain - - (344) (326)
-------- -------- ------- -------
Net periodic benefit cost $ (483) $ (350) $ 482 $ 560
======== ======== ======= =======
Weighted-average assumptions as of December 31:
Discount rate 8.00% 6.75% 8.00% 6.75%
Expected long-term rate of return on plan assets 9.50% 9.50% 5.25% 5.25%
Average rate of compensation increase 4.00% 4.00% N/A N/A
</TABLE>
The assumed health care cost trend rate used to measure the expected cost of
benefits was 5.2% for 1999 and is assumed to trend downward slightly each year
to 4.3% for 2003 and thereafter. Assumed health care cost trend rates could
have a significant effect on the amounts reported for the health care plans. A
one-percentage-point change in assumed health care cost trend rates would have
the following effects (in thousands):
<TABLE>
<CAPTION>
One-Percentage-Point One-Percentage-Point
Increase Decrease
-------- --------
<S> <C> <C>
Effect on total of service and interest cost
components for 1999 $ 1 $ (3)
Effect on year-end 1999 postretirement
benefit obligation 27 (32)
</TABLE>
Incentive Plans
TNP and TNMP have several incentive compensation plans. All employees
participate in one or more of these plans. Incentive compensation is based on
meeting key financial and operational performance goals such as cash value
added, customer satisfaction, and system reliability measures. Operating
expenses for 1999, 1998, and 1997 included costs for the various cash and equity
plans of $5.3 million, $5.9 million, and $6.0 million, respectively.
Other Employee Benefits
TNMP has a 401(k) plan designed to enhance the other retirement plans
available to its employees. Employees may invest their contributions in fixed
income securities, mutual funds, or TNP common stock. TNMP's contributions are
used to purchase TNP common stock, which employees may later convert to other
investment options.
-41-
<PAGE>
TNMP has change in control severance agreements with certain members of
management and other key personnel. The contracts provide for lump sum
compensation payments and other rights in the event of termination of employment
or other adverse treatment of such persons following a "change in control" of
TNP or TNMP. Such event is defined to include, among other things, substantial
changes in the corporate structure, ownership, or board of directors of either
entity. The Merger described in Note 2 is considered a "change in control"
event. The Merger Agreement requires that employment contracts be accepted by
four specific employees, and by at least six of a group of 11 other employees.
An excess benefit plan has been provided for certain key personnel and
retired employees, whose benefits are restricted by federal law. The payment of
benefits under the excess benefit plan is partially funded under an insurance
policy arrangement.
Note 6. Income Taxes
Components of income taxes were as follows:
<TABLE>
<CAPTION>
TNP TNMP
----------------------------------- ---------------------------------
1999 1998 1997 1999 1998 1997
------- ------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Taxes on net operating income:
Federal - current $ 10,161 $ 9,751 $ 12,251 $ 11,652 $ 6,299 $ 9,140
State - current 582 164 428 645 197 428
Federal - deferred 5,849 3,962 6,747 6,029 8,872 9,963
ITC adjustments 2,528 1,603 1,816 2,473 1,495 2,531
--------- --------- --------- --------- --------- ---------
19,120 15,480 21,242 20,799 16,863 22,062
--------- --------- --------- --------- --------- ---------
Taxes on other income (loss):
Federal - current (2,229) (313) (534) (640) (313) (534)
Federal - deferred 687 760 687 687 687 687
ITC adjustments (324) (322) (410) (324) (322) (410)
--------- --------- --------- --------- --------- ---------
(1,866) 125 (257) (277) 52 (257)
--------- --------- --------- --------- --------- ---------
Tax benefit from discontinued
nonregulated operations (Note 4) - (6,843) (6,660) - - -
--------- --------- --------- --------- --------- ---------
Total income taxes $ 17,254 $ 8,762 $ 14,325 $ 20,522 $ 16,915 $ 21,805
========= ========= ========= ========= ========= =========
</TABLE>
The amounts for total income taxes differ from the amounts computed by
applying the appropriate federal income tax rate to earnings (loss) before
income taxes for the following reasons:
<TABLE>
<CAPTION>
TNP TNMP
----------------------------------- ---------------------------------
1999 1998 1997 1999 1998 1997
------- ------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory tax rate $ 16,393 $ 9,796 $ 15,252 $ 20,762 $ 17,864 $ 22,854
Amortization of
accumulated deferred ITC (1,632) (1,525) (1,403) (1,632) (1,525) (1,403)
Amortization of
excess deferred taxes (141) (141) (141) (141) (141) (141)
State income taxes 1,044 197 428 1,107 197 428
ITC related to 1995
PUCT disallowance (324) (322) (410) (324) (322) (410)
Other, net 1,914 757 599 750 842 477
--------- --------- --------- --------- --------- ---------
Actual income taxes $ 17,254 $ 8,762 $ 14,325 $ 20,522 $ 16,915 $ 21,805
========= ========= ========= ========= ========= ========
</TABLE>
-42-
<PAGE>
The tax effects of temporary differences that gave rise to significant
portions of net current and net noncurrent deferred income taxes as of December
31, 1999, and 1998, are presented below.
<TABLE>
<CAPTION>
TNP TNMP
-------------------------- ----------------------------
1999 1998 1999 1998
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Current deferred income taxes:
Deferred tax assets:
Unbilled revenues $ 673 $ 91 $ 673 $ 91
Other 2,273 2,999 1,382 115
---------- ---------- ---------- ----------
2,946 3,090 2,055 206
Deferred tax liability:
Recoverable stranded costs (2,648) - (2,648) -
Deferred purchased power and fuel costs (7,841) (855) (7,841) (855)
---------- ---------- ---------- ----------
Current deferred income taxes, net $ (7,543) $ 2,235 $ (8,434) $ (649)
========== ========== ========== ==========
Noncurrent deferred income taxes:
Deferred tax assets:
Minimum tax credit carryforwards $ 29,624 $ 30,241 $ 33,365 $ 34,437
ITC carryforwards 1,482 5,018 - 3,206
Regulatory related items 13,493 12,731 13,493 12,731
Accrued employee benefit costs 3,109 3,330 3,109 3,330
Excess earnings 7,825 - 7,825 -
Other 1,384 (890) 1,156 694
---------- ---------- ---------- ----------
56,917 50,430 58,948 54,398
---------- ---------- ---------- ----------
Deferred tax liabilities:
Utility plant, principally due to
depreciation and basis differences (135,973) (135,870) (135,973) (135,870)
Deferred charges (12,257) (4,611) (12,257) (4,611)
Recoverable stranded costs (noncurrent) (4,455) - (4,455)
Regulatory related items (1,428) (7,295) (1,428) (7,295)
---------- ---------- ---------- ----------
(154,113) (147,776) (154,113) (147,776)
---------- ---------- ---------- ----------
Noncurrent deferred income taxes, net $ (97,196) $ (97,346) $ (95,165) $ (93,378)
========== ========== ========== ==========
</TABLE>
Federal tax carryforwards as of December 31, 1999, were as follows:
<TABLE>
<CAPTION>
TNP TNMP
--- ----
(In thousands)
<S> <C> <C>
Minimum tax credits
Amount $ 29,624 $ 33,365
Expiration period None None
Investment tax credit
Amount $ 1,482 $ -
Expiration period 2005
</TABLE>
Note 7. Long-Term Debt
First Mortgage Bonds
FMBs issued under the Bond Indenture are secured by substantially all
utility plant owned directly by TNMP. The Bond Indenture restricts cash dividend
payments on TNMP common stock.
The maximum amount of any additional FMBs that TNMP can issue is determined
by both a collateral requirement and by an interest coverage requirement. The
collateral requirement is a function of property additions, previously redeemed
FMBs, and cash deposited with the trustee. As of December 31, 1999, the
collateral requirement was more restrictive than the interest coverage
requirement, and TNMP could therefore issue up to $96 million of additional
FMBs.
-43-
<PAGE>
Secured Debentures
TNMP's Series A, 10.75% secured debentures ($140 million) are secured with a
first lien on a portion of Unit 1, and by second liens on substantially all
utility plant in Texas owned directly by TNMP. The secured debentures also
contain restrictions on dividends and asset dispositions.
Senior Notes
In January 1999, TNMP issued $175 million of 6.25% Senior Notes due in 2009
and used the proceeds to retire $130 million of its 12.5% Secured Debentures and
reduce outstanding borrowings under the credit facilities. The Senior Notes
were issued under a new indenture that allows the issuance of unsecured debt.
The new notes are initially secured by FMBs. However, when TNMP repays its
existing FMBs and secured debentures, the collateral securing the Senior Notes
can be released. The Senior Notes would become unsecured, but will remain the
senior debt obligations of TNMP.
Revolving Credit Facilities
The following table summarizes the terms of TNP's and TNMP's revolving
credit facilities at December 31,1999:
<TABLE>
<CAPTION>
Total Amount Commitment 1999 Average
Commitment Outstanding Expires Interest Rate Security
---------- ----------- ------- ------------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
1998 TNP Facility $ 50,000 $ - November 2003 5.49% Unsecured
1996 TNMP Facility 80,000 26,000 September 2001 6.11% Unsecured
</TABLE>
The composite average borrowing rates under TNMP's credit facilities were
6.11% and 6.99% for 1999 and 1998, respectively.
TNMP has a $50 million interest rate collar to mitigate exposure to variable
interest rates. The collar sets floor and ceiling rates on the 90-day LIBOR rate
at 5.25% and 7.50%, respectively. The term of the interest rate collar is
September 1997 through September 2000. TNMP also has a $100 million interest
rate collar to mitigate the risk of refinancing the debt that matures or is
callable in 2000. The collar sets floor and ceiling rates on the 10-year U. S.
Treasury bond at 4.91% and 6.25%, respectively. The collar expires, and is
exercisable only on, September 15, 2000.
TNMP believes that cash flow from operations, borrowings in the capital
markets, and periodic borrowings under the credit facilities will be sufficient
to retire or refinance $100 million of its 9.25%, Series U, FMBs, and meet its
other capital requirements through the end of 2000.
Under specified conditions, TNMP's credit facilities restrict the payment of
cash dividends on TNMP common stock. The credit facilities also prohibit the
sale, lease, transfer, or other disposition of assets other than in the ordinary
course of business.
Maturities
As of December 31, 1999, scheduled maturities of long-term debt for the five
years following 1999 are as follows:
<TABLE>
<CAPTION>
Credit Secured
Year FMBs Facilities Debentures Total
---- ---- ---------- ---------- -----
(In thousands)
<S> <C> <C> <C> <C>
2000 $ 100,000 $ - $ - $ 100,000
2001 - 26,000 - 26,000
2002 - - - -
2003 - - 140,000 140,000
2004 - - - -
</TABLE>
In January 1999, TNMP retired upon their maturity, $130 million of 12.5%
secured debentures, and issued $175 million of 6.25% Senior Notes due in 2009.
TNMP's Series A, 10.75% Secured Debentures due 2003 of $140 million are callable
at par on September 15, 2000.
-44-
<PAGE>
Note 8. Capital Stock and Dividends
TNP
In November 1998, TNP increased its quarterly dividend from $0.27 to $0.29
per share.
TNMP
The 1996 TNMP Credit Facility restricts the payment of cash dividends by
TNMP. As of December 31, 1999, $27.7 million of unrestricted retained earnings
were available for dividends.
Note 9. Segment and Related Information
During 1998, TNP adopted FASB Statement No. 131, "Disclosures about Segments
of an Enterprise and Related Information". In 1998, 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 accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Intersegment revenues are not
material.
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>
Twelve Months Ended
-------------------
December 31,
------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Texas
-----
Operating revenues $ 492,535 $ 500,556 $ 499,978
Depreciation and amortization 35,754 37,370 34,416
Charge for recovery of stranded plant 23,376 - -
Income taxes 17,719 13,938 19,323
Interest revenue 601 829 1,315
Total interest charges 39,936 50,253 53,247
Income from continuing operations 34,819 29,008 38,323
Loss from discontinued nonregulated
operations - - -
Net income 34,819 29,008 38,323
Total assets 821,160 840,258 846,482
Property additions 36,710 33,774 25,193
New Mexico
----------
Operating revenues $ 83,558 $ 85,337 $ 78,556
Depreciation and amortization 5,368 4,791 4,566
Charge for recovery of stranded plant - - -
Income taxes 3,080 2,925 2,739
Interest revenue 106 115 182
Total interest charges 3,188 3,473 3,665
Income from continuing operations 4,624 5,313 5,595
Loss from discontinued nonregulated
operations - - -
Net income 4,624 5,313 5,595
Total assets 86,541 82,574 76,768
Property additions 4,202 3,732 2,749
</TABLE>
-45-
<PAGE>
<TABLE>
<CAPTION>
Twelve Months Ended
-------------------
December 31,
------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
All Other and Eliminations
--------------------------
Operating revenues $ 57 $ 48 $ -
Depreciation and amortization - 2 2
Charge for recovery of stranded plant - - -
Income taxes (1,679) (1,383) (820)
Interest revenue 253 391 326
Total interest charges 619 159 -
Income (loss) from continuing operations (9,276) (2,187) (1,357)
Loss from discontinued nonregulated
operations - 12,710 12,883
Net income (loss) (9,276) (14,897) (14,240)
Total assets 93,498 70,933 68,676
Property additions 132 1,048 2,067
Consolidated
------------
Operating revenues $ 576,150 $585,941 $578,534
Depreciation and amortization 41,122 42,163 38,984
Charge for recovery of stranded plant 23,376 - -
Income taxes 19,120 15,480 21,242
Interest revenue 960 1,335 1,823
Total interest charges 43,743 53,885 56,912
Income (loss) from continuing operations 30,167 32,134 42,561
Loss from discontinued nonregulated
operations - 12,710 12,883
Net income 30,167 19,424 29,678
Total assets 1,001,199 993,765 991,926
Property additions 41,044 38,554 30,009
</TABLE>
Note 10. Commitments and Contingencies
Fuel Supply Agreement
TNMP has an agreement with the Walnut Creek Mining Company to purchase
lignite for TNP One through at least 2017. Depending on the output of TNP one,
the contract could supply the plant for several years beyond 2017. Phillips Coal
Company and Peter Kiewit Sons' jointly own Walnut Creek Mining Company, Inc.
Wholesale Purchased Power Agreements
TNMP purchases approximately 80% of its electricity requirements from
various wholesale suppliers. These contracts are scheduled to expire in various
years through 2005.
In 1999, Clear Lake was TNMP's largest wholesale supplier of electricity. In
1999, Clear Lake supplied approximately 23% of TNMP's Texas capacity and 16% of
its Texas energy requirements.
At December 31, 1999, TNMP had various outstanding commitments for take or
pay agreements, including the fuel supply agreement discussed above. Detailed
below are the fixed and determinable portion of the obligations (amounts in
millions):
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Purchased power agreements $ 76.1 $ 66.6 $ 36.7 $ 22.7 $ 11.5
Fuel supply agreements 32.4 31.6 30.7 31.5 32.3
-------- ------- ------- ------- -------
Total $ 108.5 $ 98.2 $ 67.4 $ 54.2 $ 43.8
======== ======= ======= ======= =======
</TABLE>
-46-
<PAGE>
Legal Actions
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 paid Clear Lake $8 million,
which TNMP expects to recover through customer rates.
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 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.
Power Resource Group. TNMP is a defendant in a suit styled Power Resource
Group, Inc. v. Public Utility Commission of Texas and Texas-New Mexico Power
Company, pending in the 345th District Court of Travis County, Texas. This
lawsuit, which was originally filed on May 21, 1999, appeals the PUCT's
dismissal of a regulatory case that Power Resource Group, Inc. had filed against
TNMP. PR Group is a developer of electric generating plants that are intended
to be qualifying cogeneration facilities. This lawsuit and the regulatory case
it appeals both stem from discontinued negotiations for power supply. PR Group
alleged that TNMP was required to buy power to be generated from an as-yet-
unbuilt cogeneration facility. TNMP filed its original answer with the court on
June 28, 1999.
In an amended petition filed January 13, 2000, PR Group asserts a claim of
damages of at least $158,000,000. It bases its claim on the assertion that it
was damaged when TNMP refused to execute an agreement after the aforementioned
discontinued negotiations, that TNMP profited significantly from PR Group's
work, that TNMP is in error when it relies on a PUCT order dismissing PR Group's
petition before the PUCT on substantially the same facts, and that TNMP
misrepresented that it would enter into a contract with PR Group to purchase
energy and capacity at rates equal to or below TNMP's avoided costs. TNMP
believes that PR Group's claims are without merit and intends to contest this
claim vigorously.
TNMP is involved in various claims and other legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
dispositions of these matters, as well as those described above, will not have a
material adverse effect on TNMP's and TNP's consolidated financial position or
results of operations.
-47-
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
Selected Quarterly Consolidated Financial Data
The following selected quarterly consolidated financial data for TNP is
unaudited, and, in the opinion of TNP's management, is a fair summary of the
results of operations for such periods:
<TABLE>
<CAPTION>
March 31 June 30 Sept. 30 Dec. 31
---------- ------- -------- -------
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
1999
- ----
Operating revenues.............................. $ 118,125 $ 144,027 $ 190,570 $ 123,428
Net operating income............................ 14,492 22,175 25,611 12,114
Income (loss) from continuing operations........ 3,132 12,403 15,047 (414)
Net income (loss)............................... 3,132 12,403 15,047 (414)
Earnings (loss) per share of common stock from
continuing operations*......................... 0.23 0.93 1.12 (0.03)
Earnings (loss) per share of common stock*...... 0.23 0.93 1.12 (0.03)
Dividends per share of common stock............. $ 0.29 $ 0.29 $ 0.29 $ 0.29
Weighted average common shares outstanding...... 13,346 13,398 13,416 13,417
1998
- ----
Operating revenues.............................. $ 125,938 $ 142,099 $ 188,566 $ 129,338
Net operating income............................ 18,492 19,101 33,076 14,112
Income from continuing operations............... 5,130 5,831 20,890 283
Net income (loss)............................... 4,625 (767) 18,561 (2,995)
Earnings per share of common stock from
continuing operations*......................... 0.39 0.44 1.58 0.02
Earnings (loss) per share of common stock*...... 0.35 (0.06) 1.40 (0.23)
Dividends per share of common stock............. $ 0.27 $ 0.27 $ 0.27 $ 0.29
Weighted average common shares outstanding...... 13,188 13,240 13,263 13,283
</TABLE>
* The individual quarters do not add to the yearly totals since the per share
amounts are based upon the average number of shares outstanding during each
quarter.
Generally, the variations between quarters reflect the seasonal fluctuations
of TNMP's business. Provisions for losses related to discontinuing operations
at FWI's construction segment account for the decreases in operating results
reported in the second and fourth quarters of 1998. Discontinuing operations of
FWI's service segment caused the decreased operating results shown in the third
quarter of 1998. Implementation of the Texas Transition Plan also had a
negative impact on operating results in the second, third, and fourth quarters
of 1998. Operating results in 1999 reflect the effects of the new legislation
described in Note 3.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
-48-
<PAGE>
PART III
--------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors
R. Denny Alexander, 54, has been a director of TNP and TNMP since 1989.
Since 1978, he has owned and managed R. Denny Alexander & Company, an investment
management firm, and has been the Managing Partner of OPNB Building Joint
Venture, a real estate investment partnership. He became a director of
Cullen/Frost Bankers, Inc., a bank holding company, and Frost National Bank, a
national bank, in 1998 following the acquisition by Frost of Overton Bancshares,
Inc., and Overton Bank and Trust, N.A., of which he had been a director and
Chairman since 1984. Mr. Alexander is Chairman of the Board of Trustees of W. I.
Cook Foundation, Cook Children's Health Care System, and Cook Children's Medical
Center in Fort Worth. He is also on the Board of Trustees of Texas Christian
University in Fort Worth.
John A. Fanning, 60, has been a director of TNP and TNMP since 1984. He was
Executive Vice President of Snyder Oil Corporation from March 1990 to November
1995, and a director of Snyder from 1981 to 1995. Since November 1995, he has
been involved in private investments in oil, gas and manufacturing. From
February to April 1997, he was Interim President, Chief Executive Officer and a
director of Heartland Wireless Communications, Inc., which sells wireless cable
television services.
Sidney M. Gutierrez, 48, has been a director of TNP and TNMP since November
1994. From 1984 to 1994, he was a NASA astronaut serving as Space Shuttle
Mission Commander. From 1991 to 1994, he was also an Air Force officer serving
in the rank of Colonel. Since his retirement from NASA and the Air Force in
1994, Mr. Gutierrez has served in various management capacities at Sandia
National Laboratories, a prime contractor for the Department of Energy. He
serves on the Board of Regents of New Mexico Institute of Mining and Technology
and is a member of the Board of Directors of Goodwill Industries of New Mexico
and the New Mexico Space Commission. He serves as a consultant to the National
Aerospace Advisory Panel.
J. R. Holland, Jr., 56, was elected as a director of TNP and TNMP in May
1996. He has been President and Chief Executive Officer of Unity Hunt, Inc., a
large international private holding company with interests in technology,
entertainment, telecommunications, retail, investments, real estate, natural
resources and energy businesses, since 1991. He is a director of Optical
Security Group, Inc., Placid Refining Company, and Texas Capital Bancshares,
Inc.
Kevern R. Joyce, 53, was appointed Chief Executive Officer, President, and
director of TNP and TNMP in April 1994 and was elected Chairman of the Board of
both companies in April 1995. He is a director of Aztec Manufacturing Co., an
electrical products manufacturer for the industrial market, a provider of
galvanizing services and oil field tubular products.
Harris L. Kempner, Jr., 60, has been a TNP director since 1984, and a TNMP
director since 1980. He has been President of Kempner Capital Management, an
investment advisory firm, since 1981; a Trustee of H. Kempner Trust Association,
which engages in investments, since 1964; Chairman Emeritus and Advisor to the
board of United States National Bank, Galveston, Texas, since 1992; a director
of Balmorhea Ranches, a ranching/farming operation, and Imperial Holly Corp., a
sugar products company, since 1982; and a director or advisory director of
Cullen/Frost Bankers, Inc., a bank holding company, since 1982.
Dr. Carol Diann Smith Surles, 53, became a director of TNP and TNMP in
September 1995. She became President of Eastern Illinois University,
Charleston, Illinois, in March 1999. She was President of Texas Woman's
University, Denton, Texas, from August 1994 until March 1999.
Larry G. Wheeler, 53, has been a director of TNP and TNMP since October
1997. In February 1999, he was named Chief Executive Officer of Granny Goose
Foods, Inc., Oakland, California, a snack food manufacturer and marketer.
Beginning in May 1995, he was president and chief executive officer of Mrs.
Baird's Bakeries, Inc., Fort Worth, Texas, presiding over the sale of that
company in May 1998. He was president of Alpo Pet Foods, Inc. from September
1993 until May 1995. Mrs. Baird's Bakeries filed bankruptcy under Chapter 11 of
the U.S. Bankruptcy Code in March 1996, and exited the Chapter 11 proceedings in
September 1996. In February 2000, he became a director of Horizon Food Group, a
privately held food company.
Dennis H. Withers, 54, became a director of TNP and TNMP in August 1995,
after serving as an advisory director from December 1994. He has been Chairman
of Trinity Forge, Inc., a metal forging and manufacturing company, since 1997,
its President since 1979, and a director since 1972. He was a director of
Overton Bancshares, Inc., a bank holding company, from 1985 until its
acquisition by Cullen/Frost Bankers, Inc. in 1998. He was an advisory director
of the North Texas Division of Frost National Bank in 1998 and 1999, and was a
director of Overton Bank and Trust, N. A. from 1993 until 1998. In October 1999,
he became a manager partner in CECA, LLC, a cold steel extrusion company.
-49-
<PAGE>
Committees and Meetings.
TNP's Board of Directors maintains the following four standing committees.
. Audit Committee. This committee meets with management to consider
the adequacy of the internal controls and the objectivity of financial
reporting; meets with the independent auditors and with appropriate
financial personnel and internal auditors regarding these matters and
regarding the scope of internal and independent audits; and determines and
reviews internal and external audit staff qualifications and recommends to
the full board the appointment of the independent auditors. Messrs.
Alexander, Gutierrez, Wheeler, and Dr. Surles comprised the Audit
Committee in 1999.
. Compensation Committee. This committee evaluates the Chief Executive
Officer's performance and reviews the performance of officers who report
to him; reviews the terms and conditions of all employee benefit plans;
establishes performance goals for all incentive compensation plans and
designates participants in incentive compensation plans for management;
sets compensation for officers; and makes recommendations to the full
board with respect to directors' compensation. Messrs. Fanning, Gutierrez,
Holland, Kempner, and Withers comprised the Compensation Committee in
1999.
. Financial Committee. This committee reviews and approves dividend
policy, securities offerings and capital budgets; reviews strategic,
financial and other plans; and reports and recommends in its discretion to
the full board on internal financial affairs. Messrs. Kempner, Alexander,
Joyce, Withers, and Dr. Surles comprised the Financial Committee in 1999.
. Nominating Committee. This committee evaluates and recommends to the
full board candidates for board positions whose terms are expiring or that
have become vacant, and recommends persons for election or re-election as
officers. Messrs. Joyce, Fanning, Kempner, and Alexander comprised the
Nominating Committee in 1999.
TNP's board of directors held eight meetings during 1999, and acted by
unanimous consent twice. TNMP's board of directors held four meetings during
1999, and acted by unanimous consent once. The committees held the following
number of meetings: Audit Committee, two; Compensation Committee, five, and took
one action by unanimous written consent; Financial Committee, five; and
Nominating Committee, three. All directors attended at least 75% of all the
meetings of the Board of Directors and committees on which they served during
1999.
Director Compensation
Each non-employee director receives an annual retainer of 525 shares of TNP
common stock from TNP and $8,000 from TNMP, and a fee of $1,000 for each meeting
of the TNP and TNMP boards and committees that he or she attends. TNP and TNMP
split the $1,000 cost when their boards of directors or committees hold combined
meetings. Directors and committee members are also reimbursed for travel and
other incidental expenses incurred in connection with their duties. Directors
who are employees receive no additional compensation for serving as directors.
The shares of TNP common stock paid to the non-employee directors are issued
under the TNP Non-employee Director Stock Plan.
Compensation Committee Interlocks and Insider Participation
No Compensation Committee member is a director of or serves on the
compensation committee of an entity that has an executive officer serving on
TNP's Board of Directors or Compensation Committee.
Executive Officers
The information set forth under "Employees and Executives" in Part I is
incorporated here by reference.
Item 11. EXECUTIVE COMPENSATION.
The following table summarizes the compensation paid to the Chief Executive
Officer and each of the four other most highly compensated executive officers of
TNP and its subsidiaries (the "Named Executive Officers") for services rendered
in all capacities to TNP and its subsidiaries during 1999, 1998 and 1997.
-50-
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LTIP All Other
Name & Principal Position Year Salary Bonus(1) Payouts(3) Compensation(3)
- ------------------------- ---- ------ -------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Kevern R. Joyce, President and 1999 $391,146 $278,466 $304,714 $19,174
Chief Executive Officer 1998 370,525 340,822 418,151 25,367
1997 355,083 147,000 449,816 25,944
Jack V. Chambers, Senior Vice 1999 $233,294 $ 99,826 $175,666 $11,143
President 1998 223,819 129,092 249,893 14,347
1997 215,733 77,597 268,831 14,794
Manjit S. Cheema, Senior Vice 1999 $204,898 $ 94,413 $158,229 $10,246
President & Chief Financial 1998 195,239 118,488 213,756 12,775
Officer 1997 183,750 68,378 205,835 12,837
John P. Edwards, Senior Vice 1999 $207,633 $ 86,861 $158,229 $12,315
President 1998 199,202 111,476 187,634 16,352
1997 192,000 68,900 121,128 18,242
Ralph S. Johnson, Senior Vice 1999 $197,327 $ 85,091 $158,229 $10,927
President 1998 189,314 107,586 210,240 13,870
1997 182,333 68,212 197,110 13,153
</TABLE>
________________________
(1) The 1999 amounts shown in this column are the following awards relating to
1999 and paid in 2000: (a) cash awards under the Management and Broad-Based
Short-Term Incentive Plans; and (b) the second installment of an incentive
and retention bonus. The Compensation Committee awarded the incentive and
retention bonuses as additional compensation to reflect contributions
during 1998 and prior years to the improvement in TNP's value to its
shareholders. These incentive and retention bonuses are being paid in five
equal annual installments; the first installment was paid in 1999.
Subsequent installments are subject to the named officer being employed by
TNP or TNMP on the scheduled date of the payment. See "Merger", below. The
total amounts of the bonuses to be paid over the five year period are Mr.
Joyce -$850,000; Mr. Chambers - $235,000; Mr. Cheema - $235,000; Mr.
Edwards -$200,000; and Mr. Johnson - $200,000.
(2) The 1999 amounts in this column are the value of shares issued and dividend
equivalents paid in 2000 under the TNP Long-Term Incentive Compensation
Plan for the 1997-1999 performance period. These amounts represent the
value of the following numbers of shares, at $41.22 per share, the average
of the high and low prices of TNP stock on December 31, 1999, and dividend
equivalents of $3.26 per share: Mr. Joyce - 6,850; Mr. Chambers - 3,949;
Mr. Cheema - 3,557; Mr. Edwards - 3,557; and Mr. Johnson - 3,557. This
payout reflects TNP's performance under criteria established at the
beginning of the performance period as follows: TNP's shareholder return
relative to the S&P 500 was at 134.5% of the target; TNP's shareholder
return relative to the S&P Electric Utility Index exceeded the maximum
level of 150% of the target. This performance is also described in
"Compensation Committee Report on Executive Compensation - Long Term
Incentive Compensation." Awards for the 1999-2001 performance period are
described below under "Long-Term Incentive Compensation."
(3) The 1999 amounts in this column and the table below consist of the
following items earned or paid in 1999: (a) company contributions to TNMP's
401(k) plan; (b) company contributions to the TNMP Deferred Compensation
Plan, an unfunded benefit plan that allows eligible employees, including
the Named Executive Officers, to defer receipt of salary and bonuses and
receive matching Company contributions and interest credits, whenever and
to the extent that Internal Revenue Code restrictions limit their
participation in the 401(k) plan; (c) premiums for group life insurance
paid by the Company (none of the Named Executive Officers has any cash
value rights related to such insurance); and (d) the amounts shown for the
401(k) and Deferred Compensation Plans include incentive matching
contributions for 1999 paid in 2000.
<TABLE>
<CAPTION>
401(k) Plan Deferred Compensation Plan Life Insurance Premiums
----------- -------------------------- -----------------------
<S> <C> <C> <C>
Mr. Joyce $6,468 $9,344 $2,982
Mr. Chambers 6,468 2,963 1,712
Mr. Cheema 6,212 2,070 1,964
Mr. Edwards 6,468 1,925 3,922
Mr. Johnson 6,468 1,509 2,950
</TABLE>
-51-
<PAGE>
Long-Term Incentive Compensation
The following table contains information about awards made in 1999 of long-
term stock incentive opportunities made under the TNP Equity Incentive Plan to
the Named Executive Officers for the 1999-2001 performance period.
EQUITY INCENTIVE PLAN - LONG-TERM INCENTIVE AWARDS IN 1999
<TABLE>
<CAPTION>
Estimated Payout at End of Period/(2)/
--------------------------------------------------------------
Performance
Name Period until Payout Threshold Target/(1)/ Maximum
--------------------------- ------------------------- ------------------- ----------------- ---------------------
<S> <C> <C> <C> <C>
Kevern R. Joyce 1999-2001 3,270 shares 6,540 shares 12,900 shares
Jack V. Chambers 1999-2001 1,385 shares 2,769 shares 5,538 shares
Manjit S. Cheema 1999-2001 1,248 shares 2,495 shares 4,990 shares
John P. Edwards 1999-2001 1,248 shares 2,495 shares 4,990 shares
Ralph S. Johnson 1999-2001 1,248 shares 2,495 shares 4,990 shares
</TABLE>
(1) The target number of shares was based on (i) the following percentages of
the Named Executive Officers' respective base salary midpoints: Mr. Joyce -
70%; Messrs. Chambers, Cheema, Edwards and Johnson - 45%. and (ii) the
average of the high and low prices of TNP common stock on the NYSE on
January 4, 1999, $37 7/8.
(2) The awards listed in the table relate to the performance period from January
1, 1999 through December 31, 2001. Payouts are scheduled to occur in early
2002 and will be based on the level of attainment of a performance goal
measuring the total return during the performance period of TNP common stock
relative to the Redwood Small Cap Utility Index. Payouts can range from 0%
(if the minimum performance goal is not achieved) to 200% of the target
number of shares. At payout, plan participants will receive the stock
awards and dividend equivalents, paid in cash. Based on dividends paid in
1999 and assuming that the current quarterly dividend rate will remain in
effect for the remainder of the performance period, plan participants would
receive dividend equivalent payments of $3.48 per share of stock awarded at
payout. See "Compensation Committee Report on Executive Compensation -
Incentive Compensation."
Pension Plan
Effective October 1, 1997, TNMP amended its pension plan to change it to a
cash balance retirement plan. As amended, the pension plan provides benefits
based on an account balance rather than a formula-based benefit. Before that
date, the pension plan was a noncontributory defined benefit plan. Employees
who, as of October 1, 1997, were at least 50 years of age and had at least 10
years of service, can be "grandfathered" in the prior pension plan, and will
receive benefits under the plan that provides the better retirement payments.
The amended pension plan bases its benefits on an employee's account balance
when he or she retires or leaves the company. An employee's initial account
balance was based on his or her accrued pension benefits under the pre-amendment
plan. The account balance will grow as TNMP adds benefit credits consisting of
a percentage of compensation and interest credits based on one-year Treasury
bill rates. All employees are eligible to participate in the pension plan. All
Named Executive Officers will participate in the pension plan.
The following table sets forth information concerning annual benefits
payable upon normal retirement at age 65 to TNP and TNMP employees under the
pre-amendment pension plan, and reflects the "grandfathered" benefit formula for
individuals retiring in 1999 with the years of service indicated.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
Years of Service
---------------------------------------------------------------------
Remuneration/(1)/ 15 20 25 30 35 40
- ----------------------- --------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
$125,000 $ 27,519 $ 36,692 $ 45,865 $ 55,038 $ 64,219 $ 72,336
150,000 33,894 45,192 56,490 67,788 79,086 88,836
175,000 40,269 53,692 67,115 80,538 93,961 105,336
200,000 46,644 62,192 77,740 93,288 108,836 121,836
250,000 59,394 79,192 98,990 118,788 138,586 154,836
300,000 72,144 96,192 120,240 144,288 168,336 187,836
350,000 84,894 113,192 141,490 169,788 198,086 220,836
400,000 97,644 133,192 162,740 195,288 227,836 253,836
450,000 110,394 147,192 183,990 220,788 257,586 286,836
500,000 123,144 164,192 205,240 246,288 287,336 319,836
</TABLE>
-52-
<PAGE>
(1) Benefits shown do not take into account limits under (S)415 of the Internal
Revenue Code of 1986, as amended (the "Tax Code") or the $160,000 salary cap
in effect after 1996, resulting from Tax Code (S)401(a)(17) limits.
Consequently, a portion of the benefits would be paid from the Excess
Benefit Plan (as defined below).
Annual contributions to the pre-amendment pension plan are computed on an
actuarial basis and cannot be calculated readily on a per person basis. Benefits
for each eligible employee under the old formula are based on his or her years
of service computed through the month of his or her retirement, multiplied by a
specified percentage of his or her average monthly compensation for each full
calendar year of service completed after 1992. TNMP made no contribution to the
pension plan for 1999.
Pension plan benefits are not subject to reduction for Social Security
benefits, but are subject to reduction for retirement prior to age 62.
Highly compensated employees whose pensions are subject to being reduced to
an amount below what the pension plan otherwise would provide as a result of
compliance with Tax Code (S)(S)415 and 401(a)(17), and whom the Board of
Directors designate as eligible, may also participate in TNP's "Excess Benefit
Plan." The Board has designated 24 active or retired employees as eligible to
participate in the Excess Benefit Plan, including the Named Executive Officers
and three retired employees now receiving excess benefit payments. Amounts paid
as long-term incentive compensation pursuant to the TNP Equity Incentive Plan or
other plans will be included in the remuneration base for pension and Excess
Benefit Plan purposes. TNMP owns policies insuring the lives of the Excess
Benefit Plan participants; policy proceeds are payable to TNMP to reimburse it
for its payments to the retirees.
As of December 31, 1999, the Named Executive Officers were credited with the
years of service set forth in the following table. Executive pension benefits
are computed actuarially.
<TABLE>
<CAPTION>
Name Years of Credited Service
---- -------------------------
<S> <C> <C>
Kevern R. Joyce 18 years/(1)/
Jack V. Chambers 20 years, 11 months
Manjit S. Cheema 5 years, 6 months
John P. Edwards 22 years/(1)/
Ralph S. Johnson 21 years/(1)/
</TABLE>
________________________
(1) TNMP has credited each of Messrs. Joyce, Edwards and Johnson with additional
years of service, including years served with other employers prior to
joining TNP and TNMP, for purposes of determining their retirement benefits
under the TNMP Excess Benefit Plan. The credit for prior years service were
required in order to retain the services of the Executives. Each who is
employed by TNP or TNMP at age 65 will be credited with a total of 30 years
of service; this number will be reduced by one year for each year that his
retirement precedes age 65. Excess Benefit Plan benefits that each receives
will be reduced by the amount of any retirement payments that he receives
from the TNMP pension plan and from other employers. Any who retires before
age 55 and five years of service will receive no benefits, unless there is a
change in control of TNP or TNMP. If there is a change in control, the
benefits to each will be fully vested and accrued as of either the date of
the change in control or as of the date at which the executive would have
been age 62, whichever date provides the greater benefit.
Severance Agreements and Arrangements
TNMP has entered into employment severance contracts with its officers and
other key personnel. The principal purpose of these contracts is to encourage
retention of management and other key personnel required for the orderly conduct
of TNP's business during any threatened or pending acquisition of TNP or TNMP
and during any ownership transition. Agreements between TNP and its officers
under which TNP has made its incentive compensation plan awards also contain
provisions relating to payment of incentive plan awards in the event the
employee is terminated in connection with a change of control of TNP.
The agreements between the Named Executive Officers and the Company provide
that an officer will receive severance compensation if, following a change of
control of TNP or TNMP, his employment is terminated or he suffers other adverse
treatment. A change in control includes, among other things, certain substantial
changes in the corporate structure, ownership, assets, existence, or Board of
Directors of either entity. The Named Executive Officers' employment severance
contracts provide for lump sum compensation payments equal to three times their
current annual salaries and other rights. Their incentive plan award agreements
provide for payment of long-term and short-term incentive awards at the target
level. In addition to payments under these agreements, the Named Executive
Officers, upon involuntary termination, would receive any remaining unpaid
balance of the incentive and retention bonus awarded in early 1999.
The TNMP officers' employment severance contracts have three-year terms;
those of other key personnel have two-year terms. TNMP's Board of Directors
periodically reviews the contracts and determines whether to extend them for an
additional year, in effect returning them to their original three- or two-year
term with each review. TNMP's Board of Directors, acting through its
Compensation Committee, last reviewed the contracts in February 1998. The
current contracts of the Named Executive Officers expire in February 2001.
-53-
<PAGE>
The incentive plan award agreements are awarded annually and expire when the
awards under the agreements are paid out. The agreements between TNMP and the
Named Executive Officers have three-year terms.
Merger
In connection with the Merger, TNMP expects to enter into employment
agreements with each of the Named Executive Officers. The acceptance of the
employment agreements by Messrs. Joyce, Chambers, Cheema, and Larry W. Dillon,
TNMP's Vice President - Power Resources, are conditions to the Merger. These
employment agreements are expected to provide that the Named Executive Officer
will continue to perform duties consistent with the Officer's current duties at
a minimum level of compensation over the next three years consisting of:
. An annual base salary and an annual bonus payable in a lump sum on
each of the first, second and third anniversary of the new
agreement, provided the Named Executive Officer is still employed
by TNMP;
. An annual incentive bonus ranging from 0% to 37.5% of the Named
Executive Officer's base salary based on his attainment of certain
pre-established financial and operational goals, and subject to
employment through the end of the relevant year; and
. An additional bonus equal to the shortfall from a minimum
predetermined compensation including base salary, bonus and
incentive bonus.
The new employment agreements will supersede the employment severance
agreements, the incentive compensation agreements, and the retention bonus
payments. They will compensate the Named Executive Officers for forgoing
payments to which they would otherwise be entitled under the employment
severance and incentive compensation agreements as a result of the Merger.
Similar agreements are also required to be accepted by six of eleven other
officers.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires TNP's and
TNMP's directors and executive officers to file reports of beneficial ownership
and changes in ownership of TNP's equity securities with the Securities and
Exchange Commission and the NYSE. All such reports were filed on time.
Compensation Committee Report on Executive Compensation
The Compensation Committee furnishes the following report on executive
compensation for 1999.
Compensation Philosophy and Strategy. The Committee believes that
executives' compensation should be competitive with other companies in the
electric utility industry, and that executives should be rewarded when TNP's
operations and financial returns reflect above-average performance and
continuing improvement in operations, customer satisfaction and shareholder
value.
The main components of executives' regular compensation are a base salary,
annual incentive compensation and long-term incentive compensation. The
compensation package enables TNP to meet the requirements of the competitive
market in which it operates, while ensuring that the executives are compensated
in a way that advances both the short-term and long-term interests of
shareholders. Under this approach, a high proportion of these officers'
compensation is "at risk," namely, the short-term and long-term incentive
compensation.
The Committee relates total compensation levels for TNP's executive officers
to the total compensation paid to similarly situated executives of a peer group
of companies, both within and outside of the electric utility industry, that are
of a similar size and have performance characteristics similar to TNP. TNP has
selected the executive compensation Peer Group under an outside consulting
firm's counsel. Some of these companies are also included in the S&P Electric
Company Index found under the caption "Performance Graph," below.
Total compensation is targeted to approximate the median of the peer group.
Because of the performance-oriented nature of the incentive programs, total
compensation may exceed market norms when TNP exceeds its targeted performance
goals, and lag the market when it does not.
The Committee also reviews the Company's longer-term performance as compared
to the average performance of the peer group, and, where appropriate, takes such
relative performance into account in determining future compensation levels.
Base Salary. The Committee determines salaries for all officers annually,
based on the review of each executive's level of responsibility, experience,
expertise, sustained corporate performance and, in the case of officers other
than the Chief Executive Officer, upon the recommendation of the Chief Executive
Officer. Based on competitive market data supplied by an independent
consultant, executive salaries approximate the Peer Group median level.
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<PAGE>
Annual Incentive Compensation. Executive officers and key employees
participate in the TNP Short-Term Incentive Compensation program and, along with
all other full-time employees, the TNP Broad-Based Incentive Compensation Plan.
They can receive annual cash incentive awards under both plans if certain
specified objectives are met. Awards for 1999 under both plans were paid in
early 2000, and were based on:
. financial measures of cash value added and excess earnings under the
TNMP transition plan;
. operational performance measures of customer satisfaction, system
reliability and safety, and other measures of individual and
departmental performance.
These measures were weighted depending upon the executive officer's area of
responsibility. The operational performance measures of system reliability and
safety exceeded the maximum goals for the year. Customer satisfaction measures
were slightly below the target goal. The financial measures were both below the
minimum goal. The Compensation Committee elected, however, to award Short-Term
Incentive Compensation and Broad-Based Incentive Compensation at the minimum
level because of the strong performance of the operating measures, and because
unanticipated, acquisition-related transactions were significant factors in the
failure of the Company to meet the minimum financial goals.
In 1999, a portion of TNP's matching contribution to its 401(k) retirement
plan for employees was based on the same financial performance measures used in
the Short-Term and Broad-Based Incentive Compensation Plans. Although the cash
value added and excess earnings per share goals fell short of the minimum goal
for any payment, the Committee decided to make the matching contributions to the
401(k) retirement plans at the minimum level, for the reasons described in the
preceding paragraph. Accordingly, TNP made an incentive matching contribution
to the 401(k) accounts of eligible participants, including executive officers,
equal to approximately 33.3% of the total amount that TNP matched during 1999 as
part of its regular employee benefits.
Long-Term Incentive Compensation. Long-term incentive compensation awards
are granted for a three-year performance period. Awards are expressed as a
percentage of the individual's salary range midpoint and, if earned, are paid in
TNP stock at the end of the period. At the beginning of the period, the
Committee approves a payout schedule based on prescribed financial performance.
Performance targets for the 1999 - 2001 performance cycle are a total
shareholder return that exceeds the 62.5th percentile of the Redwood Small Cap
Utility Index. If the target level is reached, payout will equal 100% of the
amount granted at the beginning of the period. Performance above or below pays
more or less than the target amount, based on the schedule. The maximum amount
payable is 200% of the amount granted, and the minimum is 0%. Award recipients
do not receive any portion of an award related to the objective unless the
minimum threshold for the objective has been achieved. Recipients also receive
dividend equivalents, payable in cash, for the stock that they earn.
The payout for awards made for the 1997-1999 performance period occurred in
January 2000. The strong shareholder return relative to the S&P 500 and S&P
Electric Company Indices during that period resulted in a payout of 142.3% of
target.
Special Incentive and Retention Bonus. In early 1999 the Compensation
Committee voted to award a special incentive and retention bonus to officers and
certain key employees as additional compensation to reflect their contributions
to the improvement in TNP's value to its shareholders during 1998 and previous
years. For the officers named in the Executive Compensation Table elsewhere in
this report, the bonus consists of five equal annual installments, the first two
of which were paid in January 1999 and January 2000. The remaining installments
are expected to be replaced with new compensation arrangements in connection
with the Merger. If the Merger does not occur, the payment of the remaining
installments is subject to such officers' continuing employment by TNP at the
anniversary date of the Compensation Committee's vote to award the special
bonus. An officer would receive the unpaid balance of the bonus if he or she
were terminated after a change in control of the company. The amount of such
bonuses was calculated based on competitive market data supplied by an
independent consultant.
Compensation of Chairman and Chief Executive Officer. Mr. Joyce participates
in the same executive compensation plans that cover the other executive
officers, determined according to the same compensation philosophy and
principles.
Each year, Mr. Joyce and the Board of Directors agree on a set of personal
and strategic company objectives. The Committee reviews Mr. Joyce's performance
against those objectives at year end. The review includes a detailed analysis of
the short- and long-term financial results as well as progress towards TNP's
strategic objectives. The Committee oversees this review and makes appropriate
adjustments to Mr. Joyce's compensation. The Committee, with the participation
of most outside directors, determined that the results for 1999 were
outstanding.
The Committee increased Mr. Joyce's base salary from $375,000 to $395,000,
effective March 1, 1999. In setting Mr. Joyce's salary, the Committee, with the
participation of all outside directors, determined that critical goals were
achieved and that the results for TNP for the preceding year were outstanding.
For 1999, Mr. Joyce's short-term incentive award was, like other
participants in the Short-Term Incentive Plan, paid at the minimum level. He was
awarded a short-term incentive compensation bonus of $96,614 and received
$11,852 under the all-employee plan.
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<PAGE>
In January 2000, Mr. Joyce received a payout of 6,850 shares of TNP common
stock and dividend equivalents of $22,365 under the long-term incentive plan for
the 1997-1999 long-term incentive performance period. This payout reflected
strong TNP shareholder return relative to the S&P 500 and the S&P Electric
Company Indices, and was at 142.3% of the target payout for that period.
In January 1999, Mr. Joyce received $170,000 as the first of five annual
installments of the special incentive and retention bonus awarded by the
Compensation Committee, relating to his performance in 1998 and previous years;
he received a second installment for the same amount in January 2000. The total
amount of the bonus awarded is $850,000.
Internal Revenue Code (S)162(m). Internal Revenue Code Section 162(m) limits
tax deductions for executive compensation to $1 million. There are several
exemptions to Section 162(m), including one for qualified performance-based
compensation. To be qualified, performance-based compensation must meet various
requirements, including shareholder approval. The Committee's policy with
respect to the deductibility limit of Section 162(m) generally is to preserve
the federal income tax deductibility of compensation paid when it is appropriate
and is in the best interests of TNP and its shareholders. However, the Committee
reserves the right to authorize the payment of nondeductible compensation if it
deems that is appropriate.
Compensation Committee
John A. Fanning Sidney M. Gutierrez
J. R. Holland, Jr. Harris L. Kempner, Jr.
Dennis H. Withers
The Compensation Committee Report on Executive Compensation and the
performance graph that follows will not be deemed incorporated by reference by
any general statement incorporating this report by reference into any filing
under the Securities Act of 1933 or the Securities Exchange Act of 1934, except
to the extent that TNP specifically incorporates the information by reference.
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<PAGE>
Five Year Comparison of Cumulative Total Return
The graph below shows TNP's performance relative to the S&P Electric
Company Index and the S&P 500 Index. The graph spans TNP's last five years,
assumes that $100 is invested at the close of trading on December 31, 1994, and
is calculated assuming quarterly reinvestment of dividends.
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1994 1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TNP Enterprises, Inc. 100 132 201 254 300 337
S&P 500 Index 100 138 169 226 290 351
S&P Electric Index 100 131 131 165 191 154
- --------------------------------------------------------------------------------
</TABLE>
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<PAGE>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the beneficial
ownership of TNP's common stock as of February 1, 2000, for (i) each director,
(ii) the Named Executive Officers, (iii) all directors and officers of TNP and
TNMP as a group, and (iv) persons known to management to beneficially own more
than 5% of TNP's common stock. Except as otherwise noted, each named individual
or family member has sole voting and investment power with respect to such
shares.
Amount and Nature Percent of
----------------- ----------
Name of Beneficial Owner of Beneficial Ownership Class
------------------------ ----------------------- -----
R. Denny Alexander 3,125 *
John A. Fanning 3,025 *
Sidney M. Gutierrez 2,787 *
J. R. Holland, Jr. 2,100 *
Kevern R. Joyce 26,829 *
Harris L. Kempner, Jr. 3,025(1) *
Carol D. Surles 2,100 *
Larry G. Wheeler 1,088 *
Dennis H. Withers 3,125 *
Jack V. Chambers 34,949 *
Manjit S. Cheema 14,845(2) *
John P. Edwards 8,817 *
Ralph S. Johnson 17,474 *
All directors and officers
as a group (25 persons) 205,542 1.5%
The Vanguard Group/(3)/ 1,437,321 10.7%
First Union Corporation/(4)/ 775,356 5.8%
Taunus Corporation/(5)/ 979,400 7.3%
_______
________________________
*Less than 1%.
(1) Includes 200 shares that Mr. Kempner's wife owns, beneficial ownership of
which Mr. Kempner disclaims.
(2) Includes 1,463 shares held by Mr. Cheema's wife, beneficial ownership of
which he disclaims.
(3) This amount is as of February 1, 2000. The address of The Vanguard Group is
14321 North Northsight Blvd., Scottsdale, AZ 85260. The Vanguard Group
holds all shares included in the table as trustee of the TNMP 401(k) plan.
(4) The address of First Union Corporation is One First Union Center,
Charlotte, North Carolina 28288-0137. First Union is the parent holding
company of Evergreen Asset Management Corporation, Lieber & Company,
Evergreen Asset Management Company and First Union National Bank.
Evergreen Asset Management Corporation, Lieber & Company and Evergreen
Investment Management Company are investment advisors for mutual funds and
other clients. First Union National Bank holds securities in a fiduciary
capacity for its respective customers. First Union Corporation or its
subsidiaries have sole voting power with respect to 764,656 shares, shared
voting power with respect to 10,000 shares, sole dispositive power with
respect to 763,456 shares, and shared dispositive power with respect to
11,000 shares. The information included in the table and in this note is
derived from a report on Schedule 13G dated February 14, 2000 filed with
the Securities and Exchange Commission.
(5) The address of Taunus Corporation is 31 West 52nd Street, New York, NY
10019. Taunus is the parent holding company of Deutsche Bank Securities,
Inc. ("DBSI"). DBSI and Taunus each have sole voting and dispositive power
with respect to 824,000 shares, and Taunus Corporation has sole voting
power over an additional 73,000 shares and sole dispositive power over an
additional 155,400 shares. Bankers Trust Company and DB Alex. Brown LLC
are indirect wholly owned subsidiaries of Taunus. Omitted from the
ownership structure are certain intermediate and/or indirect holding
companies of Taunus which do not exercise voting or investment discretion
with respect to these shares. The information included in the table and in
this note is derived from a joint report on Schedule 13G dated February 11,
2000, filed with the Securities and Exchange Commission.
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<PAGE>
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following financial statements are filed as part of this report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Reports of Independent Public Accountants................................... 22
TNP
---
Consolidated Statements of Income, Three Years Ended December 31, 1999...... 24
Consolidated Statements of Cash Flows, Three Years Ended December 31, 1999.. 25
Consolidated Balance Sheets, December 31, 1999, and 1998.................... 26
Consolidated Statements of Capitalization, December 31, 1999, and 1998...... 27
Consolidated Statements of Common Shareholders' Equity, Three Years
Ended December 31, 1999.................................................... 28
TNMP
----
Consolidated Statements of Income, Three Years Ended December 31, 1999...... 29
Consolidated Statements of Cash Flows, Three Years Ended December 31, 1999.. 30
Consolidated Balance Sheets, December 31, 1999, and 1998.................... 31
Consolidated Statements of Capitalization, December 31, 1999, and 1998...... 32
Consolidated Statements of Common Shareholder's Equity, Three Years
Ended December 31, 1999.................................................... 33
Notes to Consolidated Financial Statements.................................. 34
Selected Quarterly Consolidated Financial Data - TNP........................ 48
</TABLE>
(b) Report 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 date August 10, 1999, to disclose an
amendment to the Merger Agreement and provide documentation related to
financing agreements for the Merger.
(c) The Exhibit Index on pages 61 - 64 is incorporated here by reference.
(d) All financial statement schedules are omitted, as the required information
is not applicable or the information is presented in the consolidated
financial statements or related Notes.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrants have duly caused this report to be signed
on their behalf by the undersigned, thereunto duly authorized.
<TABLE>
<CAPTION>
TNP ENTERPRISES, INC. AND TEXAS-NEW MEXICO POWER COMPANY
<S> <C>
Date: February 25, 2000 By: \s\ Manjit S. Cheema
-----------------------------------------------------------------
Manjit S. Cheema, Senior Vice President & Chief Financial Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrants and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Title Date
----- ----
<S> <C> <C>
By \s\ Kevern R. Joyce Chairman, President & Chief Executive Officer 2/25/00
------------------------------------ -------
Kevern R. Joyce
By \s\ Manjit S. Cheema Senior Vice President & Chief Financial Officer 2/25/00
------------------------------------ -------
Manjit S. Cheema of TNMP and TNP
By \s\ Michael J. Ricketts Controller of TNMP & TNP 2/25/00
------------------------------------ -------
Michael J. Ricketts
By \s\ R. Denny Alexander Director 2/25/00
------------------------------------ -------
R. Denny Alexander
By \s\ John A. Fanning Director 2/25/00
------------------------------------ -------
John A. Fanning
By \s\ Sidney M. Gutierrez Director 2/25/00
------------------------------------ -------
Sidney M. Gutierrez
By \s\ J. R. Holland, Jr. Director 2/25/00
------------------------------------ -------
J. R. Holland, Jr.
By \s\ Harris L. Kempner, Jr. Director 2/25/00
------------------------------------ -------
Harris L. Kempner, Jr.
By \s\ Dr. Carol D. Smith Surles Director 2/25/00
------------------------------------ -------
Dr. Carol D. Smith Surles
By \s\ Larry G. Wheeler Director 2/25/00
------------------------------------ -------
Larry G. Wheeler
By \s\ Dennis H. Withers Director 2/25/00
------------------------------------ -------
Dennis H. Withers
</TABLE>
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<PAGE>
Exhibit
No. Description
- ------ -----------
EXHIBIT INDEX
-------------
Exhibits filed with this report are denoted by "*."
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------ -----------
TNP incorporates the following Exhibits by reference to the Exhibits and filings
noted in parenthesis.
<S> <C>
2(a) Agreement and Plan of Merger, dated May 24, 1999, by and among SW Acquisition, L.P., ST Acquisition Corp. and TNP (Ex. 2, TNP
Form 8-K filed June 7, 1999).
2(b) First Amendment to Agreement and Plan of Merger, by and among SW Acquisition, L.P., ST Acquisition Corp. and TNP, dated Aug.
9, 1999 (Ex. 99.10, TNP Form 8-K filed Aug. 10, 1999).
3(a) Articles of Incorporation and Amendments through March 6, 1984 (Ex. 3(a), TNP 1984 Form S-14, File No. 2-89800).
3(b) Amendment to Articles of Incorporation filed Sept. 25, 1984 (Ex. 3(b), TNP 1984 Form 10-K).
3(c) Amendment to Articles of Incorporation filed Aug. 29, 1985 (Ex. 3(a), TNP 1985 Form 10-K).
3(d) Amendment to Articles of Incorporation filed June 2, 1986 (Ex. 3(a), TNP 1986 Form 10-K).
3(e) Amendment to Articles of Incorporation filed May 10, 1988 (Ex. 3(e), TNP 1988 Form 10-K).
3(f) Amendment to Articles of Incorporation filed May 10, 1988 (Ex. 3(f), TNP 1988 Form 10-K).
3(g) Amendment to Articles of Incorporation filed Dec. 27, 1988 (Ex. 3(g), TNP 1988 Form 10-K).
3(h) Bylaws, as amended (Ex. 3(h), TNP 1994 Form 10-K).
4(x) Amended and Restated Rights Agreement between TNP Enterprises, Inc. and Bank of New York, as Rights Agent, dated Aug. 11,
1998and Form of Right Certificate, effective Aug. 11, 1998 (Ex. 10, TNP Form 8-K filed Oct. 9, 1998).
4(y) Amendment No. 1, dated May 24, 1999, to the Amended and Restated Rights Agreement between TNP Enterprises, Inc. and Bank of
New York. (Ex. 4.2, TNP Form 8-A/A filed June 7, 1999).
*23 Independent Public Accountants' Consent - Arthur Andersen LLP.
*27 Financial Data Schedule for TNP.
99(a) General Partner Subscription Agreement for SW Acquisition, L.P. (Ex. 99.01, TNP Form 8-K filed Aug. 10, 1999)
99(b) Subscription Agreement for SW Acquisition, L.P. (Ex. 99.02, TNP Form 8-K filed Aug. 10, 1999)
99(c) Bridge Loan Commitment Letter from CIBC World Markets Corp. and The Chase Manhattan Bank to SW Acquisition, L.P., dated May
24, 1999. (Ex. 99.03, TNP Form 8-K filed Aug. 10, 1999)
99(d) Amendment to Bridge Loan Commitment Letter from CIBC World Markets Corp. and The Chase Manhattan Bank to SW Acquisition,
L.P., dated July 9, 1999. (Ex. 99.04, TNP Form 8-K filed Aug. 10, 1999)
99(e) Bridge Preferred Commitment Letter from CIBC World Markets Corp., The Chase Manhattan Bank, Continental Casualty Company and
Laurel Hill Capital Partners LLC to SW Acquisition, L.P., dated May 24, 1999. (Ex. 99.05, TNP Form 8-K filed Aug. 10, 1999)
99(f) Senior Secured Credit Facilities Commitment Letter from Canadian Imperial Bank of Commerce, CIBC World Markets Corp., The
Chase Manhattan Bank and Chase Securities Inc. to SW Acquisition Corp., dated May 24, 1999. (Ex. 99.06, TNP Form 8-K filed
Aug. 10, 1999)
99(g) First Amendment to Senior Secured Credit Facilities Commitment Letter from Canadian Imperial Bank of Commerce, CIBC World
Markets Corp., The Chase Manhattan Bank and Chase Securities Inc. to SW Acquisition Corp., dated July 13, 1999. (Ex. 99.07,
TNP Form 8-K filed Aug. 10, 1999)
99(h) Second Amendment to Senior Backstop Credit Facility Commitment Letter from Canadian Imperial Bank of Commerce, CIBC World
Markets Corp., The Chase Manhattan Bank and Chase Securities Inc. to SW Acquisition Corp., dated July 21, 1999. (Ex. 99.08,
TNP Form 8-K filed Aug. 10, 1999).
99(i) Senior Backstop Credit Facility Commitment Letter from Canadian Imperial Bank of Commerce, CIBC World Markets Corp., The
Chase Manhattan Bank and Chase Securities Inc. to SW Acquisition Corp., dated May 24, 1999 (Ex. 99.09, TNP Form 8-K filed
Aug. 10, 1999).
TNMP incorporates the following Exhibits by reference to the Exhibits and
filings noted in parenthesis.
3(i) Restated Articles of Incorporation. (Ex. 3(i), TNMP 1996 10-K, File No.
2-97230)
3(ii) Bylaws, as amended Nov. 15, 1994 (Ex. 3(hh), TNMP 1994 Form 10-K).
*27 Financial Data Schedule for TNMP.
TNP and TNMP incorporate the following Exhibits by reference to the Exhibits and
filings noted in parenthesis.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C>
4(a) Indenture of Mortgage and Deed of Trust dated Nov. 1, 1944 (Ex. 2(d), Community Public Service Co. ("CPS") 1978 Form S-7,
File No. 2-61323).
4(b) Seventh Supplemental Indenture dated May 1, 1963 (Ex. 2(k), CPS Form S-7, File No. 2-61323).
4(c) Eighth Supplemental Indenture dated July 1, 1963 (Ex. 2(1), CPS Form S-7, File No. 2-61323).
4(d) Ninth Supplemental Indenture dated Aug. 1, 1965 (Ex. 2(m), CPS Form S-7, File No. 2-61323).
4(e) Tenth Supplemental Indenture dated May 1, 1966 (Ex. 2(n), CPS Form S-7, File No. 2-61323).
4(f) Eleventh Supplemental Indenture dated Oct. 1, 1969 (Ex. 2(o), CPS Form S-7, File No. 2-61323).
4(g) Twelfth Supplemental Indenture dated May 1, 1971 (Ex. 2(p), CPS Form S-7, File No. 2-61323).
4(h) Thirteenth Supplemental Indenture dated July 1, 1974 (Ex. 2(q), CPS Form S-7, File No. 2-61323).
4(i) Fourteenth Supplemental Indenture dated March 1, 1975 (Ex. 2(r), CPS Form S-7, File No. 2-61323).
4(j) Fifteenth Supplemental Indenture dated Sept. 1, 1976 (Ex. 2(e), File No. 2-57034).
4(k) Sixteenth Supplemental Indenture dated as of Nov. 1, 1981 (Ex. 4(x), File No. 2-74332).
4(l) Seventeenth Supplemental Indenture dated Dec. 1, 1982 (Ex. 4(cc), File No. 2-80407).
4(m) Eighteenth Supplemental Indenture dated Sept. 1, 1983 (Ex. (a), TNMP Form 10-Q, quarter ended Sept. 30, 1983).
4(n) Nineteenth Supplemental Indenture dated May 1, 1985 (Ex. 4(v), TNMP Form 10-Q, quarter ended June 30, 1985).
4(o) Twentieth Supplemental Indenture dated July 1, 1987 (Ex. 4(o), TNMP 1987 Form 10-K).
4(p) Twenty-First Supplemental Indenture dated July 1, 1989 (Ex. 4(p), TNMP Form 10-Q, quarter ended June 30, 1989).
4(q) Twenty-Second Supplemental Indenture dated Jan. 15, 1992 (Ex. 4(q), TNMP 1991 Form 10-K).
4(r) Twenty-Third Supplemental Indenture dated Sept. 15, 1993 (Ex. 4(r), TNMP 1993 Form 10-K).
4(s) Twenty-Fourth Supplemental Indenture dated Nov. 3, 1995 (Ex. 4(s), TNMP 1993 Form 10-K).
4(t) Twenty-Fifth Supplemental Indenture dated Sept. 10, 1996 (Ex. 4(t), TNMP Form 10-Q, quarter ended Sept. 30, 1996).
4(u) Twenty-Sixth Supplemental Indenture dated Jan. 1, 1999. (Ex. 4(u), TNMP 1998 Form 10-K).
4(v) Indenture and Security Agreement for 10 3/4% Secured Debentures dated Sep. 15, 1993 (Ex. 4(t), TNMP 1993 Form 10-K).
4(w) Indenture dated Jan. 1, 1999 between TNMP and the Chase Bank of Texas, N. A. (Ex. 4(w), TNMP 1998 Form 10-K).
4(x) First Supplemental Indenture dated Jan. 1, 1999 to Indenture dated Jan. 1, 1999 between TNMP and the Chase Bank of Texas, N.
A. (Ex. 4(x), TNMP 1998 Form 10-K).
Contracts Relating to TNP One
10(a) Fuel Supply Agreement, dated Nov. 18, 1987, between Phillips Coal Company and TNMP (Ex. 10(j), TNMP 1987 Form 10-K).
10(a)1 Amendment No. 1, dated April 1, 1988, to Fuel Supply Agreement dated Nov. 18, 1987, between Phillips Coal Company and TNMP
(Ex. 10(a)1, TNP and TNMP 1994 Form 10-K).
10(a)2 Amendment No. 2, dated Nov. 29, 1994, between Walnut Creek Mining Company and TNMP, to Fuel Supply Agreement dated Nov. 18,
1987, between Phillips Coal Company and TNMP, (Ex. 10(a)2, TNP and TNMP 1994 Form 10-K).
10(b) Unit 1 First Amended and Restated Project Loan and Credit Agreement, dated Jan. 8, 1992 (the "Unit 1 Credit Agreement"),
among TNMP, TGC, certain banks (the "Unit 1 Banks") and Chase Manhattan Bank (National Association), as Agent for the Unit 1
Banks (the "Unit 1 Agent"), (Ex. 10(c), TNMP 1991 Form 10-K).
10(b)1 Participation Agreement, dated Jan. 8, 1992, among certain banks, Participants, and the Unit 1 Agent (Ex. 10(c)1, TNMP 1991
Form 10-K).
10(b)2 Amendment No. 1, dated Sep. 21, 1993, to the Unit 1 Credit Agreement (Ex. 10(b)2, TNMP 1993 Form 10-K ).
10(c) Assignment and Security Agreement, dated Jan. 8, 1992, among TGC and the Unit 1 Agent (Ex. 10(d), TNMP 1991 Form 10-K).
10(d) Amended and Restated Subordination Agreement, dated Oct. 1, 1988, among TNMP, Continental Illinois National Bank and Trust
Company of Chicago and the Unit 1 Agent (Ex. 10(uu), TNMP 1988 Form 10-K).
10(e) Unit 1 Mortgage and Deed of Trust, dated Dec. 1, 1987 (Ex. 10(ee), TNMP 1987 Form 10-K).
10(e)1 Supplemental Unit 1 Mortgage and Deed of Trust executed on Jan. 27, 1992, (Ex. 10(g)4, TNMP 1991 Form 10-K).
10(e)2 First TGC Modification and Extension Agreement, dated Jan. 24, 1992, among the Unit 1 Banks, the Unit 1 Agent, TNMP, and TGC
(Ex. 10(g)1, TNMP 1991 Form 10-K).
10(e)3 Second TGC Modification and Extension Agreement, dated Jan. 27, 1992, among the Unit 1 Banks, the Unit 1 Agent, TNMP, and
TGC (Ex. 10(g)2, TNMP 1991 Form 10-K).
10(e)4 Third TGC Modification and Extension Agreement, dated Jan. 27, 1992, among the Unit 1 Banks, the Unit 1 Agent, TNMP, and TGC
(Ex. 10(g)3, TNMP 1991 Form 10-K).
10(e)5 Fourth TGC Modification and Extension Agreement, dated Sept. 29, 1993, among the Unit 1 Banks, the Unit 1 Agent, TNMP, and
TGC (Ex. 10(f)5, TNMP 1993 Form 10-K).
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10(e)6 Fifth TGC Modification and Extension Agreement, dated Sept. 29, 1993, among the Unit 1 Banks, the Unit 1 Agent, TNMP, and
TGC (Ex. 10(f)6, TNMP 1993 Form 10-K).
10(f) Indemnity Agreement dated Dec. 1, 1987 by Westinghouse, GE and Zachry (Ex. 10(ff) TNMP 1987 Form 10-K).
10(g) Unit 1 Second Lien Mortgage and Deed of Trust dated Dec. 1, 1987 (Ex. 10(jj), TNMP 1987 Form 10-K).
10(g)1 Correction Second Lien Mortgage and Deed of Trust, dated Dec. 1, 1987 (Ex. 10(vv), TNMP 1988 Form 10-K).
10(g)2 Second Lien Mortgage and Deed of Trust Modification, Extension and Amendment Agreement, dated Jan. 8, 1992 (Ex. 10(i)2, TNMP
1991 Form 10-K).
10(g)3 TNMP Second Lien Mortgage Modification No. 2, dated Sept. 21, 1993 (Ex. 10(h)3, TNMP 1993 Form 10-K).
10(h) Agreement for Conveyance and Partial Release of Liens, dated Dec. 1, 1987, by PFC and the Unit 1 Agent (Ex. 10(kk), TNMP
1987 Form 10-K).
10(i) Inducement and Consent Agreement, dated June 15, 1988, among Phillips Coal Company, Kiewit Texas Mining Company, TNMP,
Phillips Petroleum Company, and Peter Kiewit Son's, Inc. (Ex. 10(nn) TNMP 1988 Form 10-K).
10(j) Assumption Agreement, dated Oct. 1, 1988, by TGC, in favor of certain banks, the Unit 1 Agent, and the Depositary, as
defined therein (Ex. 10(ww), TNMP 1988 Form 10-K).
10(k) Guaranty dated Oct. 1, 1988, by TNMP of TGC obligations under Unit 1 Credit Agreement (Ex. 10(xx), TNMP 1988 Form 10-K of
TNMP).
10(l) First Amended and Restated Facility Purchase Agreement dated Jan. 8, 1992, between TNMP and TGC (Ex. 10(n), TNMP 1991 Form
10-K).
10(m) Operating Agreement dated Oct. 1, 1988, between TNMP and TGC (Ex. 10(zz), TNMP 1988 Form 10-K).
10(n) Unit 2 First Amended and Restated Project Loan and Credit Agreement, dated Jan. 8, 1992 (the "Unit 2 Credit Agreement"),
among TNMP, TGC II, certain banks (the "Unit 2 Banks") and The Chase Manhattan Bank, N.A., as Agent for the Unit 2 Banks
(the "Unit 2 Agent") (Ex. 10(q), TNMP 1991 Form 10-K).
10(n)1 Amendment No. 1, dated Sep. 21, 1993, the Unit 2 Credit Agreement (Ex. 10(o)1, TNMP 1993 Form 10-K).
10(o) Assignment and Security Agreement, dated Jan. 8, 1992, among TGC II and the Unit 2 Agent (Ex. 10(r), TNMP 1991 Form 10-K).
10(p) Assignment and Security Agreement dated Oct. 1, 1988, by TNMP to the Unit 2 Agent (Ex. 10(jjj), TNMP 1988 Form 10-K).
10(q) Subordination Agreement, dated Oct. 1, 1988, among TNMP, Continental Illinois National Bank and Trust Company of Chicago,
and the Unit 2 Agent (Ex. 10(mmm), TNMP 1988 Form 10-K).
10(r) Unit 2 Mortgage and Deed of Trust dated Oct. 1, 1988 (Ex. 10(uuu), TNMP 1988 Form 10-K).
10(r)1 First TGC II Modification and Extension Agreement, dated Jan. 24, 1992, among the Unit 2 Banks, the Unit 2 Agent, TNMP, and
TGC II (Ex. 10(u)1, TNMP 1991 Form 10-K).
10(r)2 Second TGC II Modification and Extension Agreement, dated Jan. 27, 1992, among the Unit 2 Banks, the Unit 2 Agent, TNMP and
TGC II (Ex. 10(u)2, TNMP 1991 Form 10-K).
10(r)3 Third TGC II Modification and Extension Agreement, dated Jan. 27, 1992, among the Unit 2 Banks, the Unit 2 Agent, TNMP, and
TGC II (Ex. 10(u)3, TNMP 1991 Form 10-K).
10(r)4 Fourth TGC II Modification and Extension Agreement, dated Sept. 29, 1993, among the Unit 2 Banks, the Unit 2 Agent, TNMP,
and TGC II (Ex. 10(s)4, TNMP 1993 Form 10-K).
10(r)5 Fifth TGC II Modification and Extension Agreement, dated June 15, 1994, among the Unit 2 Banks, the Unit 2 Agent, TNMP, and
TGC II (Ex. 10(s)5, TNMP Form 10-Q for quarter ended June 30, 1994).
10(s) Release and Waiver of Liens and Indemnity Agreement, dated Oct. 1, 1988, by Westinghouse, CE, and Zachry (Ex. 10(vvv), TNMP
1988 Form 10-K).
10(t) Second Lien Mortgage and Deed of Trust, dated Oct. 1, 1988, (Ex. 10(www), TNMP 1988 Form 10-K).
10(t)1 Second Lien Mortgage and Deed of Trust Modification, Extension and Amendment Agreement, dated Jan. 8, 1992, (Ex. 10(w)1,
TNMP 1991 Form 10-K).
10(t)2 TNMP Second Lien Mortgage Modification No. 2, dated Sep. 21, 1993, (Ex. 10(u)2, TNMP 1993 Form 10-K).
10(u) Intercreditor and Nondisturbance Agreement, dated Oct. 1, 1988, among PFC, Texas PFC, Inc., TNMP, certain creditors and the
Collateral Agent, each as defined therein (Ex. 10(xxx), TNMP 1988 Form 10-K).
10(u)1 Amendment No. 1, dated Jan. 8, 1992, to Intercreditor and Nondisturbance Agreement, (Ex. 10(x)1, TNMP 1991 Form 10-K).
10(u)2 Amendment No. 2, dated Sept. 21, 1993, to Intercreditor and Nondisturbance Agreement, (Ex. 10(v)2, TNMP 1993 Form 10-K).
10(v) Grant of Reciprocal Easements and Declaration of Covenants Running with the Land, dated Oct. 1, 1988, between PFC and Texas
PFC, Inc. (Ex. 10(yyy), TNMP 1988 Form 10-K).
</TABLE>
-63-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10(w) Non-Partition Agreement, dated May 30, 1990, among TNMP, TGC, and the
Unit 1 Agent (Ex. 10(ss), TNMP 1990 Form 10-K of TNMP).
10(x) Assumption Agreement, dated May 31, 1991, by TGC II in favor of certain banks, the Unit 2 Agent, and the Depositary, as
defined therein (Ex. 10(kkk), Amendment No. 1 to File No. 33-41903).
10(y) Guaranty, dated May 31, 1991, by TNMP, for TGC II obligations under the Unit 2 Credit Agreement (Ex. 10(lll), Amendment No.
1 to File No. 33-41903).
10(z) First Amended and Restated Facility Purchase Agreement dated Jan. 8, 1992, between TNMP, and TGC II (Ex. 10(dd), TNMP 1991
Form 10-K).
10(z)1 Amendment No. 1 to the Unit 2 First Amended and Restated Facility Purchase Agreement, dated Sept. 21, 1993, between TNMP
and TGC II (Ex. 10(aa)1, TNMP 1993 Form 10-K).
10(aa) Operating Agreement, dated May 31, 1991, between TNMP and TGC II (Ex. 10(nnn), Amendment No. 1 to File No. 33-41903).
10(bb) Non-Partition Agreement, dated May 31, 1991, among TNMP, TGC II, and the Unit 2 Agent (Ex. 10(ppp), Amendment No. 1 to File
No. 33-41903).
Power Supply Contracts
10(dd) Contract dated May 12, 1976, between TNMP and Houston Lighting & Power Company (Ex. 5(a), TNMP 1976 Form 10-K).
10(dd)1 Amendment, dated Jan. 4, 1989, to contract between TNMP and Houston Lighting & Power Company (Ex. 10(cccc), TNMP 1988 Form
10-K).
10(ee) Amended and Restated Agreement for Electric Service dated May 14, 1990, between TNMP and Texas Utilities Electric Company
(Ex. 10(vv), TNMP 1990 Form 10-K).
10(ee)1 Amendment dated April 19, 1993 to Amended and Restated Agreement for Electric Service between TNMP and Texas Utilities
Electric Company (Ex. 10(ii)1, 1993 Form S-2, Registration Statement, File No. 33-66232).
10(ee)2 Letter agreement dated Nov. 24, 1997 between TNMP and Texas Utilities Electric Company (Ex. 10(qq), TNMP 1998 Form 10-K).
10(ff) Contract dated April 27, 1977, between TNMP and West Texas Utilities Company, as amended (Ex. 10(e), Form 8 applicable to
TNMP 1986 Form 10-K).
10(gg) Contract dated April 29, 1987, between TNMP and El Paso Electric Company (Ex. 10(f), Form 8 applicable to TNMP 1986 Form
10-K).
10(hh) Contract dated Dec. 8, 1981, between TNMP and SPS as amended (Ex. 10(h), Form 8 applicable to TNMP 1986 Form 10-K).
10(hh)1 Amendment, dated Dec. 12, 1988, to contract between TNMP and SPS (Ex. 10(llll), TNMP 1988 Form 10-K).
10(hh)2 Amendment, dated Dec. 12, 1990, to contract between TNMP and SPS (Ex. 19(t), TNMP 1990 Form 10-K).
10(ii) Interconnection Agreement between TNMP and Plains Electric Generation and Transmission Cooperative, Inc. dated July 19,
1984 (Ex. 10(j), Form 8 applicable to TNMP 1986 Form 10-K).
10(jj) Interchange Agreement between TNMP and El Paso Electric Company dated April 29, 1987 (Ex. 10(l), Form 8 applicable to TNMP
1986 Form 10-K).
10(kk) Amendment No. 1, dated Nov. 21, 1994, to Interchange Agreement between TNMP and El Paso Electric Company (Ex. 10(nn)1, TNP
and TNMP 1994 Form 10-K).
10(ll) DC Terminal Participation Agreement between TNMP and El Paso Electric Company dated Dec. 8, 1981 as amended (Ex. 10(m),
Form 8 applicable to TNMP 1986 Form 10-K).
10(mm) Agreement for Purchase and Sale of Energy effective May 1, 1996 among TNMP, Amoco Chemical Company and Amoco Oil Company
(Ex. 10 (pp), TNP and TNMP 1997 Form 10-K).
10(nn) Agreement dated Dec. 30, 1994 between TNMP and Union Carbide Corporation for Purchase of Capacity and Energy from UCC (Ex.
10(qq), TNP and TNMP 1997 Form 10-K).
Management Contracts
10(rr) Form of TNMP Executive Agreement for Severance Compensation Upon Change in Control and schedule of substantially identical
agreements (Ex. 10(rr), TNP and TNMP 1998 Form 10-K).
10(ss) Agreement dated March 25, 1994 between Kevern Joyce and TNP and TNMP
(Ex. 10(tt), TNP and TNMP 1994 Form 10-K.)
10(tt) Amendment dated Feb. 16, 1998 to Agreement dated March 25, 1994 between Kevern Joyce and TNP and TNMP (Ex. 10(rr), TNP and
TNMP Form 10-K for 1998.)
10(uu) Agreement dated Feb. 16, 1998 between John Edwards and TNMP (Ex. 10(rr), TNP and TNMP 1998 Form 10-K)
10(vv) Agreement dated Feb. 16, 1998 between Ralph S. Johnson and TNMP (Ex. 10(rr), TNP and TNMP 1998 Form 10-K).
*21 Subsidiaries of the Registrants.
</TABLE>
-64-
<PAGE>
SUBSIDIARIES OF THE REGISTRANTS Exhibit 21
------------------------------- ----------
Name State of Incorporation
- ---- ----------------------
TNP
- ---
Texas-New Mexico Power Company Texas
Facility Works, Inc. Texas
TNP Operating Company Texas
TNMP
- ----
Texas Generating Company Texas
Texas Generating Company II Texas
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES Exhibit 23
--------------------------------------
Consent of Independent Public Accountants
-----------------------------------------
The Board of Directors
TNP Enterprises, Inc.:
As independent public accountants, we hereby consent to the incorporation by
reference of our reports included in this Form 10-K, into TNP Enterprises,
Inc.'s previously filed Registration Statements on Form S-8 (File nos. 2-93265
and 33-58897) and Registration Statement on Form S-3 (No. 333-17835). It should
be noted that we have not audited any financial statements of the company
subsequent to December 31, 1999 or performed any audit procedures subsequent to
the date of our report.
Arthur Andersen LLP
Fort Worth, Texas
February 16, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<CIK> 0000741612
<NAME> TNP ENTERPRISES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 907,978
<OTHER-PROPERTY-AND-INVEST> 4,243
<TOTAL-CURRENT-ASSETS> 28,188
<TOTAL-DEFERRED-CHARGES> 60,790
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 1,001,199
<COMMON> 196,685
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 130,425
<TOTAL-COMMON-STOCKHOLDERS-EQ> 327,110
0
1,664
<LONG-TERM-DEBT-NET> 340,244
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 100,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 232,181
<TOT-CAPITALIZATION-AND-LIAB> 1,001,199
<GROSS-OPERATING-REVENUE> 576,150
<INCOME-TAX-EXPENSE> 19,120
<OTHER-OPERATING-EXPENSES> 482,638
<TOTAL-OPERATING-EXPENSES> 501,758
<OPERATING-INCOME-LOSS> 74,392
<OTHER-INCOME-NET> (482)
<INCOME-BEFORE-INTEREST-EXPEN> 73,910
<TOTAL-INTEREST-EXPENSE> 43,743
<NET-INCOME> 30,167
(19)
<EARNINGS-AVAILABLE-FOR-COMM> 30,186
<COMMON-STOCK-DIVIDENDS> 15,537
<TOTAL-INTEREST-ON-BONDS> 38,538
<CASH-FLOW-OPERATIONS> 74,557
<EPS-BASIC> 2.25
<EPS-DILUTED> 2.24
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<CIK> 0000022767
<NAME> TEXAS-NEW MEXICO POWER COMPANY
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 907,954
<OTHER-PROPERTY-AND-INVEST> 213
<TOTAL-CURRENT-ASSETS> 15,418
<TOTAL-DEFERRED-CHARGES> 60,810
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 984,395
<COMMON> 107
<CAPITAL-SURPLUS-PAID-IN> 222,149
<RETAINED-EARNINGS> 90,302
<TOTAL-COMMON-STOCKHOLDERS-EQ> 312,558
0
1,664
<LONG-TERM-DEBT-NET> 340,244
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 100,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 229,929
<TOT-CAPITALIZATION-AND-LIAB> 984,395
<GROSS-OPERATING-REVENUE> 576,093
<INCOME-TAX-EXPENSE> 20,799
<OTHER-OPERATING-EXPENSES> 474,944
<TOTAL-OPERATING-EXPENSES> 495,743
<OPERATING-INCOME-LOSS> 80,350
<OTHER-INCOME-NET> 2,217
<INCOME-BEFORE-INTEREST-EXPEN> 82,567
<TOTAL-INTEREST-EXPENSE> 43,124
<NET-INCOME> 39,443
(19)
<EARNINGS-AVAILABLE-FOR-COMM> 39,462
<COMMON-STOCK-DIVIDENDS> 29,000
<TOTAL-INTEREST-ON-BONDS> 37,919
<CASH-FLOW-OPERATIONS> 76,840
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
