Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|_| Preliminary Proxy Statement |_| Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
|X| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
TNP ENTERPRISES, INC.
(Name of Registrant as Specified in Its Charter)
________________________
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|X| No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing is calculated and state how it
was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
|_| Fee paid previously with preliminary materials.
|_| Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
TNP ENTERPRISES, INC.
4100 International Plaza, Tower II
Fort Worth, Texas 76109
(817) 731-0099
NOTICE OF ANNUAL MEETING OF HOLDERS OF COMMON STOCK
To Be Held on May 6, 1997
The Annual Meeting of Holders of TNP Enterprises, Inc. Common Stock will be
held on Tuesday, May 6, 1997, at 11:00 a.m., Central Time, at the company's
headquarters, 4100 International Plaza, Tower II, 9th Floor, Fort Worth, Texas,
for the following purposes:
1. To elect three Class 3 directors for terms continuing until the Annual
Meeting of Holders of Common Stock in 2000 or until respective successors are
elected and qualified;
2. To consider and vote upon an amendment to the TNP Enterprises Equity
Incentive Plan that adds an additional performance measure to be achieved for a
participant to earn and receive payment of performance-based stock awards;
3. To ratify the appointment of Arthur Andersen LLP, Certified Independent
Public Accountants, as independent auditors for 1997; and
4. To transact any other business that properly may come before the Annual
Meeting or any adjournments of the Annual Meeting.
Shareholders of record at the close of business on March 17, 1997 are
entitled to notice of and to vote at the Annual Meeting and any adjournment
thereof.
Whether or not you expect to attend the Annual Meeting in person, please
complete, sign, and date the enclosed proxy card and return it promptly in the
postage-paid envelope provided so that your shares of common stock can be
represented and voted at the Annual Meeting. If you attend the Annual Meeting,
your proxy will be returned to you upon your request and you may vote your
shares in person.
By Order of the Board of Directors
Michael D. Blanchard,
Secretary
Fort Worth, Texas
March 25, 1997
<PAGE>
TNP ENTERPRISES, INC.
4100 International Plaza, Tower II
Fort Worth, Texas 76109
PROXY STATEMENT
For
ANNUAL MEETING OF HOLDERS OF COMMON STOCK
To Be Held on May 6, 1997
This proxy statement is furnished in connection with the solicitation of
proxies by the Board of Directors of TNP Enterprises, Inc. ("TNPE"), for use at
the Annual Meeting of Holders of Common Stock to be held at TNPE's headquarters,
4100 International Plaza, Tower II, 9th Floor, Fort Worth, Texas on Tuesday, May
6, 1997, at 11:00 a.m., Central Time, and at any adjournment thereof (the
"Annual Meeting").
A shareholder who has given a proxy may revoke it at any time before it is
voted by submitting written notice of revocation to TNPE's Secretary, submitting
a new proxy with a later date, or voting in person at the Annual Meeting after
withdrawing any proxy previously given.
TNPE will pay for preparing, printing, assembling, and mailing this proxy
statement, the enclosed proxy card, and any additional material, and for
forwarding solicitation material to beneficial owners of TNPE common stock.
This proxy statement, which includes Consolidated Financial Statements, and
the accompanying Notice of Annual Meeting of Shareholders, form of proxy and the
Summary Annual Report to Shareholders covering operations of TNPE and its
wholly-owned electric utility subsidiary, Texas-New Mexico Power Company ("TNP")
for 1996, are first being sent or given to holders of TNPE's common stock on or
about March 25, 1997.
VOTING RIGHTS
Shareholders of record at the close of business on March 17, 1997 (the
"Record Date") will be entitled to receive notice of and vote at the Annual
Meeting. On that date, 13,053,102 shares of common stock were outstanding.
Shareholders present at the Annual Meeting in person or by proxy will be
entitled to one vote on each matter that comes before the Annual Meeting for
each share of TNPE common stock that they hold at the close of business on the
Record Date. Cumulative voting is not permitted. No other class of TNPE
securities is entitled to vote at the Annual Meeting.
The presence, in person or by proxy, of shareholders holding a majority of
the outstanding shares of TNPE's common stock is necessary to constitute a
quorum at the Annual Meeting. The affirmative vote of a plurality of shares of
common stock represented at the Annual Meeting and entitled to vote is required
to elect directors. All other matters to be voted on will be decided by the
affirmative vote of a majority of the shares of common stock represented at the
meeting and entitled to vote.
In determining whether a proposal has received the required vote, the
election inspectors will include abstentions in the vote total, with the result
that an abstention will have the same effect as a negative vote. Under the rules
of the New York Stock Exchange ("NYSE"), brokers who hold shares in "street
name" for customers have the authority to vote on certain items in the absence
of instructions from their customers, the beneficial owners of the shares. Under
these rules, brokers that do not receive instructions are entitled to vote on
all three proposals being presented at the Annual Meeting. Such brokers are
generally not entitled to vote, however, on other matters that may come before
the Annual Meeting. The election inspectors will count abstentions and shares
for which no instructions are received in determining whether a quorum is
present at the Annual Meeting.
1. ELECTION OF DIRECTORS
TNPE's board of directors consists of nine members, divided into three
classes of three members each: Class 1, Class 2 and Class 3. Directors in each
class are elected to serve three-year terms. Only Class 3 positions will be
elected at the Annual Meeting. The Class 1 and Class 2 positions will be due for
nomination and election at the 1998 and 1999 Annual Meetings, respectively. Each
nominee who is elected or re-elected as a TNPE director will also be a member of
the board of directors of TNP.
The persons appointed as proxies intend to vote all shares represented by
proxy FOR election of J. R. Holland, Jr., Harris L. Kempner, Jr., and Carol D.
Surles as Class 3 directors, unless shareholder directions on individual proxy
cards indicate otherwise. TNPE's board of directors (with nominee directors
abstaining) nominated Messrs. Holland and Kempner and Dr. Surles, all of whom
are currently TNPE and TNP directors, to stand for re-election to TNPE's board
of directors until their terms expire or until their respective successors are
elected and qualified. If any nominee for Class 3 director becomes unavailable
to serve as a director, then the persons appointed as proxies intend to vote all
shares of TNPE common stock represented by proxy for a substitute to be
nominated by TNPE's board of directors.
Information About Nominees for Terms Expiring in 2000 (Class 3 Directors)
The names and ages of the nominees for election as directors, their
principal occupations and employment during the last five years, including a
brief biography, and the year each was first elected as a director, are as
follows:
J. R. Holland, Jr., 53, was elected as a member of TNPE's and TNP's boards
of directors in May 1996. He has been President and Chief Executive Officer of
Unity Hunt, Inc., a large international private holding company with interests
in entertainment, cable television, retail, investments, real estate, natural
resources and energy businesses, since 1991.
Harris L. Kempner, Jr., 57, has been a TNPE board member since 1984, and a
TNP board member 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, located in Galveston,
Texas, since 1992; a director of Balmorhea Ranches, a ranching/farming
operation, and Imperial Holly Corp., a sugar products company, since 1982; a
director or advisory director of Cullen/Frost Bankers, Inc., a bank holding
company, since 1982; a director of American Indemnity Company, an insurance
company, since 1987; and a director of American Indemnity Financial, an
insurance company, since 1990.
Dr. Carol Diann Smith Surles, 50, joined TNPE's and TNP's boards of
directors in September 1995. She has been President of Texas Woman's University
since August 1994. From July 1992 to August 1994, Dr. Surles served as Vice
President for Administration and Business Affairs of California State
University. She served as Visiting Administrator in Residence of that
university's Chancellor's Office from January 1992 to July 1992. Prior to 1992,
she was Vice President for Academic Affairs and Professor of Management at
Jackson State University in Mississippi. Dr. Surles has been a director of First
State Bank in Denton, Texas, since 1995.
The board of directors recommends a vote FOR all Class 3 director nominees.
<PAGE>
Information about Continuing Directors
The names and ages of directors who continue in terms expiring in 1998 and
1999, their principal occupations and employment during the past five years,
including a brief biography, and the year each was first elected as a director,
are as follows:
Directors Whose Terms Expire in 1998 (Class 1 Directors)
R. Denny Alexander, 51, has been a director of both TNPE and TNP since
1989. Mr. Alexander has owned and managed R. Denny Alexander & Company, an
investment management firm, since 1978. He has also served as Managing Partner
of OPNB Building Joint Venture, a real estate investment partnership, since
1978. Since 1982, Mr. Alexander has served as director of Overton Bancshares,
Inc., a bank holding company, and since 1984 as Chairman of Overton Bank and
Trust, National Association, a national bank.
Sidney M. Gutierrez, 45, joined TNPE's and TNP's boards of directors in
November 1994. From 1984 to 1994, he was a NASA astronaut serving as Space
Shuttle Mission Commander and Chief of the Operations Development Branch. From
1991 to 1994, he was also an Air Force officer serving at the rank of Colonel.
Since his retirement from NASA and the Air Force in 1994, Mr. Gutierrez has
served as a Manager in the Exploratory Systems Development Center at Sandia
National Laboratories' Sandia Corporation, a prime contractor for the Department
of Energy. He is a member of the Board of Directors of Goodwill Industries of
New Mexico and vice chairman of the New Mexico Space Center Commission.
Kevern R. Joyce, 50, was appointed Chief Executive Officer, President, and
director of TNPE and TNP in April 1994 and was elected Chairman of the Board of
both companies in April 1995. From 1992 until he joined TNPE and TNP, Mr. Joyce
served as Senior Vice President and Chief Operating Officer, and from 1990 to
1992, he was Vice President - Rates and Conservation, of Tucson Electric Power
Company.
Directors Whose Terms Expire in 1999 (Class 2 Directors)
John A. Fanning, 57, has been a member of TNPE's and TNP's boards of
directors since 1984. He served as Executive Vice President of Snyder Oil
Corporation from March 1990 to November 1995, and served on Snyder's board of
directors from 1981 to 1995. Since November 1995, he has been involved in
private investments in oil, gas and manufacturing. In February 1997, he was
named as Interim President and Chief Executive Officer and director of Heartland
Wireless Communications, Inc., a Plano, Texas- and Durant, Oklahoma-based
company that sells wireless cable television services.
Dwight R. Spurlock, 64, joined TNPE's and TNP's boards of directors in
1993. He was both companies' Interim President and Chief Executive Officer from
November 1993 to April 1994. From 1990 until his retirement in 1992, Mr.
Spurlock was TNP's Sector Vice President - Operations. Mr. Spurlock has been a
director of Texas City National Bank since 1976.
Dennis H. Withers, 51, was elected as a member of TNPE's and TNP's boards
of directors in August 1995. Before that date, he was an advisory director on
both boards from December 1994. Mr. Withers has been President of Trinity Forge,
Inc., a metal forging and manufacturing company, since 1979, and a director
since 1972. He has been a director of Overton Bancshares, Inc., a bank holding
company, since 1985, and a director of Overton Bank and Trust, National
Association, since 1993.
<PAGE>
Meetings of Board of Directors and Standing Committees
TNPE's and TNP's boards of directors each held five meetings during 1996.
TNP's board acted by unanimous consent twice. All directors attended at least
75% of the aggregate meetings of the board of directors and of board committees
of which they were members during 1996. TNPE's board of directors has four
standing committees: the Audit Committee, the Compensation Committee, the
Financial Committee and the Nominating Committee.
The duties and members of the standing committees are:
Audit Committee
The Audit Committee recommends to the full board an accounting firm to
serve as independent auditors of TNPE and TNP; determines and reviews internal
and external audit staff qualifications; meets and reviews with the independent
auditors and the internal audit manager corporate financial reporting and
accounting procedures and policies, financial reporting and accounting adequacy,
operating controls, and the scope of all independent and internal audits; and
makes appropriate recommendations to the full board of directors. Audit
Committee members are Messrs. Alexander, Gutierrez, Spurlock and Dr. Surles. The
Audit Committee met twice in 1996.
Compensation Committee
The Compensation Committee evaluates the Chief Executive Officer's
performance; reviews the performances of all officers who report to the Chief
Executive Officer; reviews the terms and conditions of all employee benefit
plans; establishes performance goals for, and designates employees to
participate in, all incentive compensation plans; and evaluates board
compensation. Compensation Committee members are Messrs. Fanning, Gutierrez,
Holland, Kempner and Withers. The Compensation Committee met five times in 1996.
Financial Committee
The Financial 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. Financial Committee members are Messrs. Alexander, Joyce, Kempner,
Withers and Dr. Surles. The Financial Committee held five meetings in 1996.
Nominating Committee
The Nominating Committee evaluates and recommends to the full board,
nominees for director positions that have become vacant or are due for
nomination and election, and considers director nominees recommended by
shareholders. TNPE's bylaws require generally that a shareholder deliver any
nomination to the committee at least 30 and not more than 60 days before the
anniversary of the notice of the preceding year's annual meeting of
shareholders, with certain exceptions. A shareholder must include the
shareholder's name and address, the class and number of TNPE shares that the
shareholder owns beneficially and of record and the date on which each was
acquired, information about the nominee that satisfies applicable requirements
of Regulation 14A under the Securities Exchange Act of 1934, and the nominee's
consent. Nominating Committee members are Messrs. Alexander, Fanning and
Kempner. The Nominating Committee met twice during 1996.
Director Compensation
Each nonemployee director receives an annual retainer of 525 shares of TNPE
common stock from TNPE and $8,000 from TNP, and a fee of $750 for each meeting
of the TNPE and TNP boards and committees that the director attends. TNPE and
TNP split the $750 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 TNPE common stock paid to the nonemployee directors are
issued under the TNPE Nonemployee Director Stock Plan.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee recommends to the full board appropriate
executive compensation levels. Committee members are Messrs. Fanning, Gutierrez,
Holland, Kempner and Withers.
Mr. Alexander is a director of Overton Bancshares, Inc. and Chairman of
Overton Bank and Trust, National Association. Mr. Withers is a director of both
Overton Bancshares, Inc. and Overton Bank and Trust, National Association. TNPE
and TNP use Overton Bank and Trust, National Association, for general banking
and short-term investments in the ordinary course of business. All such
transactions are conducted on substantially the same terms, including collateral
and interest rates, as those prevailing at the time for comparable transactions
between the bank and its other customers.
COMPENSATION OF EXECUTIVE OFFICERS
The following table summarizes the compensation paid to the Chief Executive
Officer and each of the four other most highly compensated executive officers of
TNPE and its subsidiaries (the "Named Executive Officers") for services rendered
in all capacities to TNPE and its subsidiaries during 1996, 1995 and 1994.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation
Other Annual All Other
Name & Principal Position Year Salary Bonus(1) Compensation(2) Compensation(3)
<S> <C> <C> <C> <C> <C>
Kevern R. Joyce, President and Chief 1996 $336,500 $143,557 -- $24,698
Executive Officer(4) 1995 300,000 125,152 -- 9,174
1994 212,307 75,000 $ 41,869 16,843
Jack V. Chambers, TNP Senior Vice 1996 $204,338 $ 79,151 -- $13,554
President & Chief Customer Officer 1995 185,885 68,779 -- 36,088
1994 154,266 40,000 -- 6,056
Manjit S. Cheema, Vice President & 1996 $162,296 $ 58,412 -- $11,133
Chief Financial Officer(4) 1995 139,145 39,810 -- 7,546
1994 61,032 7,500 $ 22,477 124
Ralph S. Johnson, TNP Senior Vice 1996 $156,730 $ 55,344 -- $11,281
President - Power Resources(4) 1995 132,459 39,932 $ 21,473 3,797
1994 -- -- -- --
W. Douglas Hobbs, TNP Vice 1996 $137,232 $ 39,827 -- $10,424
President-Business Development 1995 134,111 36,241 -- 7,573
1994 85,523 7,000 $ 25,509 3,226
</TABLE>
____________________
(1) The amounts shown in this column for 1996 are (a) cash awards earned
under the Management Short-Term Incentive Plan and the Broad-Based Short-Term
Incentive Plan and (b) the value of the following short-term stock incentive
bonuses earned, based on the $27.38 per share closing price of TNPE common stock
on the NYSE on December 31, 1996, and dividends paid on such shares in the
amount of $.93 per share: Mr. Joyce - 1,479 shares; Mr. Chambers - 803 shares;
Mr. Cheema - 585 shares; Mr. Johnson - 553 shares; and Mr. Hobbs - 381 shares.
(2) Other Annual Compensation consists of allowances or reimbursements for
relocation expenses. In 1994, the totals for Messrs. Joyce, Cheema and Hobbs
also include $1,869, $2,046 and $1,053, respectively, imputed income for
personal use of a company car. In 1995, the total for Mr. Johnson includes
$1,473 imputed income for personal use of a company car. TNPE's and TNP's
executive officers received personal benefits in addition to salary and cash
bonuses during the years reported. However, except as shown in the table, the
total amounts of the personal benefits did not exceed the lesser of $50,000 or
10% of the officers' total annual salary and bonus.
(3) As shown on the following table, the amounts shown in this column for
1996 consist of (a) company contributions to the Texas-New Mexico Power Company
Thrift Plan (the "Thrift Plan"), a deferred compensation plan under IRS Section
401(k) (including incentive matching contributions for 1996 that were paid in
1997); (b) company contributions to the Texas-New Mexico Power Company Deferred
Compensation Plan, (the "Deferral Plan"), an unfunded, defined benefit Plan that
allows eligible employees, including the Named Executive Officers, to elect
deferral of base salary and bonuses, and receive matching Company contributions
and interest credits, whenever and to the extent that their participation in the
Thrift Plan is limited by the Internal Revenue Code; (c) payments made prior to
the inauguration of the Deferral Plan representing restoration of Thrift Plan
matching contributions exceeding the statutory maximum, and (d) premiums for
group life insurance paid by the Company (none of the Named Executive Officers
has any cash value rights related to such insurance). The amounts shown under
(a) and (b) include incentive matching contributions for 1996 that were paid in
1997. The amounts shown for Mr. Chambers include Excess Benefit Plan (as defined
below) benefits accrued of $23,746 and $761 in 1995 and 1994, respectively.
<TABLE>
<CAPTION>
c. Thrift Plan d. Life Insurance
a. Thrift Plan b. Deferral Plan Restoration Premiums
<S> <C> <C> <C> <C>
Mr. Joyce $9,000 $8,215 $ 5,971 $1,512
Mr. Chambers 9,000 3,210 191 953
Mr. Cheema 9,000 1,693 -- 440
Mr. Johnson 9,000 1,147 -- 1,134
Mr. Hobbs 8,342 954 -- 1,128
</TABLE>
(4) Mr. Joyce joined TNPE and its subsidiaries on April 12, 1994, pursuant
to an employment contract providing for an annual base salary of $300,000. His
base salary was raised to $345,000 effective March 1, 1996. Mr. Cheema joined
TNP and its subsidiaries effective June 22, 1994, and TNPE and its subsidiaries
effective December 16, 1994. Mr. Johnson joined TNPE and its subsidiaries
effective January 3, 1995.
<PAGE>
Long-Term Incentive Compensation
The following table contains information about awards of long-term stock
incentive opportunities made under the TNPE Equity Incentive Plan to the Named
Executive Officers in 1996.
<TABLE>
<CAPTION>
EQUITY INCENTIVE PLAN(1) - LONG TERM INCENTIVE AWARDS IN 1996
Performance Estimated Payout at End of Period(3)
----------------------------------------------------
Name Plan Cycle Threshold Target (2) Maximum
- -------------------------- ----------------------- ----------------- ---------------- -------------------
<S> <C> <C> <C> <C>
Kevern R. Joyce 1996-1998 3,410 shares 6,819 shares 10,229 shares
Jack V. Chambers 1996-1998 2,038 shares 4,075 shares 6,113 shares
Manjit S. Cheema 1996-1998 1,743 shares 3,485 shares 5,228 shares
Ralph S. Johnson 1996-1998 1,714 shares 3,429 shares 5,143 shares
W. Douglas Hobbs 1996-1998 1,106 shares 2,212 shares 3,318 shares
</TABLE>
________________________
(1) The TNPE Equity Incentive Plan permits the grant of long-term incentive
awards to motivate and reward long-term strategic planning and corporate
performance. See the Executive Long-Term Incentive Compensation portion of the
Report of the Compensation Committee of the Board of Directors on page 10 for
additional information and "Proposal to Amend the TNPE Equity Incentive Plan,"
beginning at page 14 of this proxy statement for a description of the Plan.
(2) The target number of shares is based on the following percentages of
the Named Executive Officers' respective base salary midpoints: Mr. Joyce - 40%;
Mr. Chambers - 35%; Messrs. Cheema and Johnson - 30% for the first six-months of
1996, and 35% for the remainder of the plan cycle; and Mr. Hobbs - 30%.
(3) Awards are earned based on TNPE's relative total shareholder return and
performance relative to the companies comprising the S&P 500 Index and the S&P
Electric Utility Index. The estimated future payouts described in the table
assume the achievement of all performance goals for the specified level of the
future payouts. The number of shares actually awarded will be determined at the
end of the three-year performance period, and can range from 0% (if none of the
performance goals are achieved) to 150% of the target number of shares. In
addition to the stock awards, at payout the Plan participants will receive
dividend equivalents, paid in cash. Based on dividends paid in 1996 and assuming
that the current quarterly dividend rate will remain in effect for the remainder
of the three-year plan cycle, at payout the Named Executive Officers will
receive dividend equivalent payments of $2.89 per share of stock awarded. See
"Compensation Committee Report on Executive Compensation - Incentive
Compensation."
During 1995, the Company made similar awards of long-term incentive stock
opportunities to the Named Executive Officers for the 1995-1997 performance plan
cycle. The target number of shares subject to their awards are as follows: Mr.
Joyce - 8,271; Mr. Chambers - 4,943; Mr. Cheema - 3,777; Mr. Johnson - 3,623;
and Mr. Hobbs - 2,791. The number of shares that will actually be awarded will
be determined in early 1998 and will range from 0% to 150% of the target
amounts, depending on the degree to which applicable performance goals are
achieved. Plan participants will also receive dividend equivalents, paid in
cash. Based on dividends paid in 1995 and 1996, and assuming that the current
dividend rate will remain in effect for 1997, at payout the Named Executive
Officers will receive dividend equivalents of $2.73 per share of stock awarded.
<PAGE>
Pension Plan
The following table sets forth certain information concerning annual
benefits payable upon normal retirement at age 65 to TNPE and TNP employees
under TNP's pension plan, a noncontributory defined benefit retirement plan (the
"Pension Plan").
<TABLE>
<CAPTION>
PENSION PLAN TABLE
Years of Service
--------------------------------------------------------------------------------------
Remuneration (1) 15 20 25 30 35 40
- ------------------------------ ----------- ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
$125,000 $29,994 $ 39,992 $ 49,990 $ 59,988 $ 69,986 $ 78,111
150,000 36,369 48,492 60,615 72,738 84,861 94,611
175,000 42,744 56,992 71,240 85,488 99,736 111,111
200,000 49,119 65,492 81,865 98,238 114,611 127,611
250,000 61,869 82,492 103,115 123,738 144,361 160,611
300,000 74,619 99,492 124,365 149,238 174,111 193,611
350,000 87,369 116,492 145,615 174,738 203,861 226,611
400,000 100,119 133,492 166,865 200,238 233,611 259,611
450,000 112,869 159,492 188,115 225,738 263,361 292,611
500,000 125,619 167,492 209,365 251,238 293,111 325,611
</TABLE>
______________________
(1) Benefits in other than the $125,000 row are shown without taking into
account limits under Section 415 of the Internal Revenue Code of 1986, as
amended (the "Tax Code") or the $150,000 salary cap in effect after 1993,
resulting from Tax Code Section 401(a)-17-1 limits. Consequently, a portion of
the benefits would be paid from the Excess Benefit Plan (as defined below).
Potentially all employees are eligible to participate in TNP's Pension
Plan. Because it is a defined benefit plan, annual contributions to the Pension
Plan are computed on an actuarial basis and cannot be calculated readily on a
per person basis. Benefits for each eligible employee are based on the
employee's years of service computed through the month in which the employee
retires multiplied by a specified percentage of the employee's average monthly
compensation for each full calendar year of service completed after 1994.
Average monthly compensation for the Named Executive Officers consists only of
salary. Pension benefits are not subject to deduction for Social Security
benefits, but are subject to reduction for retirement prior to age 62. TNP made
no contribution to the Pension Plan for 1996.
Highly compensated employees whose pensions are subject to reduction below
the amount that the Pension Plan otherwise would have provided as a result of
compliance with Tax Code Sections 415 and 401(a)-17-1, and who the board of
directors designate as eligible, may also participate in TNP's "Excess Benefit
Plan." As of the date of this proxy statement, 14 active or retired employees
have been designated as eligible to participate in the Excess Benefit Plan,
including the Named Executive Officers and three retired employees who are now
receiving excess benefit payments. TNP owns policies insuring the lives of the
Excess Benefit Plan participants; policy proceeds are payable to TNP to
reimburse it for its payments to the retirees.
As of December 31, 1996, the Named Executive Officers were credited with
the years of service set forth in the following table. Executive pension
benefits are computed actuarially.
EXECUTIVE PENSION BENEFITS
Name Years of Credited Service
Kevern R. Joyce 15 years, 9 months (1)
Jack V. Chambers 17 years, 11 months
Manjit S. Cheema 2 year, 6 months
Ralph S. Johnson 2 years, 0 months
W. Douglas Hobbs 4 years, 8 months
________________________
(1) Under his 1994 employment contract, if Mr. Joyce is still employed by
TNPE and TNP at age 65, he will be credited with 13 years of service earned
prior to joining TNPE and TNP; this table includes those years. Mr. Joyce will
be vested in his pension benefits upon five years of employment with TNPE and
TNP. His retirement payments will be reduced by and to the extent of any
retirement payments that he receives from other employers or their successors.
Severance Agreements
Employment severance contracts between TNP and its officers and other key
personnel are in effect. 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 TNPE or TNP and during any ownership transition. The officers' contracts,
including those of the Named Executive Officers, provide for lump sum
compensation payments equal to three times their current annual salaries and
other rights; contracts for other key personnel provide for payments equal to
their annual salary. These payments will occur only if their employment is
terminated or they suffer other adverse treatment following a "change in
control" of TNPE or TNP. 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 TNP officers' contracts
have three-year terms; those of other key personnel have two-year terms. TNP'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. TNP's board of directors last extended
the contracts of the Named Executive Officers in November 1995, and the
contracts are currently set to expire at various times from 1997 to 1999.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires TNPE's and
TNP's directors and executive officers to file reports of beneficial ownership
and changes in ownership of TNPE's equity securities with the Securities and
Exchange Commission and the NYSE. To TNPE's knowledge, based solely on a review
of copies of such reports provided to TNPE and written representations that no
such reports were required, all directors and executive officers made all
required filings on time.
<PAGE>
Compensation Committee Report on Executive Compensation
Compensation Philosophy and Strategy
In 1995, TNPE adopted a strategic plan to create shareholder value by
meeting the challenges of a consolidating and increasingly competitive utility
industry. Success under the strategic plan depends on employees who are focused
on providing value to customers and communities through competitive pricing,
innovative, high quality, personalized energy services and community leadership.
This strategic plan continued to guide TNPE in 1996.
TNPE's executive compensation policy reflects this strategic plan. The
Compensation Committee of the board of directors (the "Committee") is committed
to providing TNPE's officers with compensation that is competitive with other
companies in the electric utility industry and rewards them for TNPE's achieving
levels of operational excellence and financial returns consistent with
continuous improvement in customer satisfaction and shareholder value.
The compensation for executive officers consists of base salary and
short-term and long-term incentive compensation. When determining executive
officers' compensation, the Committee reviews and considers compensation data of
other electric utilities whose annual revenues are comparable to TNPE. These
other electric utilities are not the same as those that comprise the S&P
Electric Utility Index used in the performance graph included in this proxy
statement.
The Committee carries out its responsibilities with assistance from an
international compensation consulting firm and with input from the Chief
Executive Officer and management as it deems necessary. All components of
executive compensation, however, including performance criteria, are matters of
Committee discretion.
Base Salary
The base salaries of executive officers are based on competitive pay
practices of electric utilities whose annual revenues are comparable to TNPE.
The Committee has established officer salary grades as guidelines in setting
each executive's compensation, with each grade having a minimum, midpoint and
maximum. The midpoints of each grade are generally set at around the fiftieth
percentile of the base salary of persons in similar positions in other companies
in this electric utility peer group. The Chief Executive Officer annually
reviews the other executive officers' base salaries, and the Committee acts
after considering his recommendations. Individual officers' salaries are set
within the salary grade and are based on a subjective evaluation of several
factors, including the executive officer's performance during the past year in
view of established individual objectives, the individual's position in the
salary grade and his or her overall contributions to the organization's success
during the preceding year.
Incentive Compensation
TNPE and its subsidiaries provide annual cash and stock-based incentive
compensation opportunities to their officers and key employees. Incentive
compensation awards are based on the company's achievement of specific annual
financial and operational goals. Incentive compensation for executive officers
and other management consists of short-term cash and stock incentive awards and
long-term stock incentive award opportunities.
Short-Term Incentive Compensation. Short-term incentives are designed to
reward performance measured in terms of short-term corporate financial and
operational goals and individual goals that support shareholder- and
customer-focused objectives. The Committee establishes performance goals and
amounts of all short-term incentive award opportunities under the plans at the
beginning of each year. In 1996, performance criteria for all incentive awards
were (i) earnings per share and (ii) factors developed to measure operations and
maintenance costs, customer satisfaction, system reliability and safety. No
portion of a potential award related to a particular goal is earned unless a
minimum threshold is achieved during that year. The Committee determines at
year-end whether awards have been earned, and awards earned are paid as soon as
practicable after that determination.
For 1996, officers had opportunities to earn short-term incentive awards
with target levels of up to between 10% to 25% of their salary range midpoint.
Actual awards earned could range from 0% to 150% of the target award level,
depending on the extent to which performance criteria were met. Their incentives
were weighted more heavily to earnings per share than were the incentives for
other employees because of their greater influence on corporate financial
performance.
Because of the extent to which 1996 performance goals applicable to
executive officers were achieved, executives received short-term incentive
awards ranging from 13.6% to 33.7% of their respective salary midpoints, with
three-fourths of each such incentive award paid in cash and one-fourth in stock.
Executives received dividend equivalents for 1996 on the stock that they earned.
Company stock awarded as short-term incentive compensation may not be sold
or transferred for two years after it is earned, except in certain limited
circumstances.
Broad-Based Incentive Compensation. The broad-based short-term incentive
plan authorizes the Committee to make cash incentive awards to all full-time
hourly and salaried employees of TNPE and its subsidiaries, including all
executive officers. Awards under this plan to executive officers were
apportioned 70% to earnings per share and 30% to corporate operational goals.
The target level for executive officers was 4% of annual salary. Overall
corporate performance was 140% of target goals applicable to executive officers.
Awards to executive officers for 1996 under this plan were 5.6% of annual
salary.
401(k) Retirement Plan Incentive Matching. In 1996, a portion of TNPE's
matching contribution to its 401(k) retirement plan for employees was contingent
upon meeting the earnings per share performance goal. Because the maximum
incentive matching goals were attained for 1996, TNPE made an incentive matching
contribution equal to approximately 50% of the eligible contributions (up to 6%
of eligible pay) of eligible participants, including executive officers, in
addition to TNPE's regular matching contribution for the 1996 plan year.
Executive Long-Term Incentive Compensation. The Committee awarded long-term
stock incentive opportunities to executive officers and other key management in
1996. These awards are designed to motivate and reward long-term strategic
planning and corporate performance. The Committee believes that the longer-term
perspective of these awards balance the short-term emphasis inherent in
short-term awards. Long-term awards also focus achievement on shareholder value
by linking compensation to total shareholder return and enhance teamwork by
linking compensation to overall company performance.
For 1996, executive officers and other key employees were awarded incentive
opportunities to earn target amounts from 25% to 40% of their 1996 salary range
midpoint in stock over the three-year period ending December 31, 1998. In 1995,
they were awarded similar incentive opportunities for the three-year period
ending December 31, 1997, with target amounts from 25% to 40% of their 1995
salary range midpoint in stock. Performance criteria for 1996 awards are based
on total shareholder return relative to companies that comprise the S&P 500
Index and the S&P Electric Utility Index. Performance criteria for 1995 awards
also require relative improvement in TNPE's competitive position in terms of
retail rate comparison. Whether long-term awards have been earned will be
determined at the end of the respective three-year periods.
Internal Revenue Code Section 162(m)
Total compensation paid to executive officers did not exceed the
deductibility limits of Internal Revenue Code Section 162(m) in 1996. TNPE does
not expect total compensation to exceed Section 162(m) limits in the foreseeable
future.
Chief Executive Officer Compensation
Kevern R. Joyce became President and Chief Executive Officer of TNPE in
April 1994. TNPE based Mr. Joyce's 1996 compensation on the policies and plans
described above.
The Committee invokes the active participation of all non-management
directors in reviewing Mr. Joyce's performance before it makes recommendations
regarding his compensation. The Committee is responsible for administering the
processes for completing this review. The process starts early in the year when
the board of directors works with Mr. Joyce to establish his personal goals and
short- and long-term strategic goals for TNPE. At the end of the year, the
Directors and Mr. Joyce review his performance. The Committee oversees this
review and recommends to the board appropriate adjustments to his compensation.
In setting Mr. Joyce's 1996 salary, the Committee, with the participation of all
outside directors, determined that important goals were achieved and that the
results for TNPE for the year were outstanding. Mr. Joyce's vision of the
industry's evolution has led, and is continuing to lead, to appropriate
redeployment of TNPE resources. The Committee concluded that in 1996 Mr. Joyce's
performance continued to advance TNPE toward the accomplishment of its strategic
objectives.
Mr. Joyce's 1996 short-term incentive compensation plan awards were
calculated in the same manner as awards for all other officers. His target award
opportunity for short-term cash and stock incentive awards totaled 25% of his
1996 salary range midpoint. He earned an amount equal to 33.7% of his 1996
salary range midpoint as a result of the overall corporate achievement of the
performance goals applicable to executive officers, and based on the Committee's
assessment of his individual performance in 1996.
The amount of Mr. Joyce's cash award under the all-employee short-term
incentive plan was determined by operation of the corporate financial and
operational goals that applied to all other employees. He received an amount
equal to 5.6% of his 1996 salary midpoint under the all-employee plan.
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 proxy statement by reference into any
filing under the Securities Act of 1933 or the Securities Exchange Act of 1934,
except to the extent that TNPE specifically incorporates the information by
reference.
<PAGE>
Five Year Comparison of Cumulative Total Return
The graph below shows TNPE's performance relative to the S&P Electric
Companies-500 Index (formerly called the S&P Electric Companies Index) and the
S&P 500 Index. The graph spans TNPE's last five years, assumes that $100 is
invested at the close of trading on December 31, 1991, and is calculated
assuming quarterly reinvestment of dividends and quarterly weighting by market
capitalization.
GRAPH
Performance Graph reflecting the tabular data set forth below.
<TABLE>
<CAPTION>
- -------------------------------------- --------- -------- --------- -------- --------- --------
1991 1992 1993 1994 1995 1996
- -------------------------------------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
TNP Enterprises, Inc. 100 107 102 99 131 199
S&P 500 Index 100 108 118 120 165 203
Electric Companies-500 Index 100 106 119 104 136 136
- -------------------------------------- --------- -------- --------- -------- --------- --------
</TABLE>
<PAGE>
2. PROPOSAL TO AMEND THE TNPE EQUITY INCENTIVE PLAN
At the Annual Meeting, shareholders will be asked to approve an amendment
to the TNPE Equity Incentive Plan (the "Incentive Plan"). The Incentive Plan,
adopted in 1995, makes available a variety of stock and stock-based incentive
awards, such as performance shares, restricted stock awards, incentive and
non-qualified options to purchase TNPE common stock. This variety gives TNPE
flexibility in designing incentive compensation packages and permits it to
respond to its and its subsidiaries' changing needs and to reflect changes in
laws and rules affecting compensation and benefit plans, primarily tax laws,
accounting rules and securities regulations.
The amendment being presented for shareholder approval is the addition of
"cash value added" as a performance measure available for use in designing
incentive compensation packages under the Incentive Plan. Cash value added is
defined as the excess of cash flow from operations over a target return on
equity. This new performance measure will complement and be used in conjunction
with the Incentive Plan's existing performance measures. The board of directors
has approved the use of this performance measure in determining incentive
compensation to be earned during 1997, subject to shareholder approval of the
amendment.
The board of directors has approved this amendment. The amendment is
subject to the approval by the holders of a majority of the shares of TNPE
common stock present and entitled to vote at the Annual Meeting.
The following is a summary of the principal features of the Incentive Plan,
together with the applicable tax implications, which will be in effect if the
amendment is approved by the shareholders. The summary, however, is not a
complete description of all provisions of the Incentive Plan. Any shareholder
who wishes to obtain a copy of the actual plan document may do so upon written
request to the Corporate Secretary at TNPE's principal offices in Fort Worth,
Texas.
Description of the Plan
The purpose of the Incentive Plan is to promote TNPE's success and enhance
its value by linking participants' personal interests to those of TNPE's
shareholders and providing them with an incentive for outstanding performance.
It is designed to provide TNPE with flexibility to design compensation packages
that attract, motivate and retain individuals on whose judgment, interest and
special effort TNPE depends for success and to encourage them to devote their
best efforts to TNPE's business and financial success. All employees of TNPE and
its subsidiaries (the "Company") are eligible to participate in the Incentive
Plan. Awards are currently being made only to executive officers and certain key
employees.
Administration
The Compensation Committee of the board of directors (the "Compensation
Committee") administers the Incentive Plan. The Compensation Committee may:
* establish and change rules for administering the Incentive Plan;
* designate participants to whom awards will be made;
determine award sizes, types, terms, conditions, and
methods of payment, whether dividend equivalents will be
included with awards, and participant rights upon termination
of employment (Under the Incentive Plan, "dividend equivalents"
are contingent rights to dividends declared on securities
underlying Incentive Plan awards);
* establish performance goals to be achieved for a
participant to earn and receive any performance-based awards
under the Incentive Plan; and
* amend terms of outstanding awards subject to certain limitations.
The Compensation Committee may also permit or require participants
to defer cash and stock award payouts.
Compensation Committee decisions made pursuant to the Incentive Plan, and
all related orders of the full board, are final and binding on all interested
persons. The Compensation Committee cannot replace outstanding awards that it
has canceled with substitute awards.
Awards
The Incentive Plan provides for several types of stock and stock-based
incentive awards.
Performance Shares and Units. The Compensation Committee may award
performance shares or units. The value of each performance share or unit must
equal the fair market value of one share of TNPE common stock on the grant date.
The Compensation Committee establishes performance goals, based on the
performance measures described below. The amount that a participant can earn may
vary depending on the achievement of the applicable performance goals and the
number of shares or units comprising the award. The period during which
performance goals may be achieved must always exceed six months.
Payout of dividend equivalents will depend on the extent to which the
underlying performance shares or units are earned. Dividends declared on earned
performance shares or units that have not been distributed will be subject to
transfer and other restrictions like those applicable to dividends and
distributions declared on restricted stock.
All shares issued and award opportunities awarded under the Incentive Plan
since its inception have been performance shares or units.
Stock Options. The Compensation Committee may grant incentive stock
options, nonqualified stock options, or any combination of these. The terms and
conditions of individual option agreements may vary, provided that the option
price cannot be less than the fair market value of one share of TNPE common
stock on the grant date, and the term of each option can be up to ten years from
the grant date. Dividend equivalents are not permitted on incentive stock
options. Cashless option exercises under Federal Reserve Board Regulation T
generally may be permitted. No stock options have been awarded under the
Incentive Plan.
Restricted Stock. The Compensation Committee may grant shares of restricted
stock to eligible employees in amounts that it determines, and subject to
transfer and such other restrictions that it may impose. During the restriction
period, participants may exercise all voting rights of and may be credited with
all dividends and distributions declared on their restricted stock; dividends
and distributions, other than cash dividends, are subject to the same
restrictions as the underlying restricted stock. To date, no restricted stock
awards have been made.
Other Stock-Based Awards. Other stock-based awards may be granted under the
Incentive Plan as the Compensation Committee may determine.
Shares Subject to Awards
The Incentive Plan originally authorized up to 300,000 shares of TNPE
common stock for awards under the Incentive Plan, of which 285,339 shares
remain. Up to 100,000 of these shares may be issued as awards of restricted
stock.
Performance Measures
Performance goals to be achieved for a participant to earn and receive
payment of any performance-based award will be selected from the following:
* Earnings per share;
* Measurements of cost control effectiveness such as the ratio of
operations and maintenance costs to kilowatt hour sales;
* Measurements of community involvement and customer satisfaction;
* Measurements of anticipation and resolution of environmental issues;
* Measurements of reliability such as the equivalent forced outage
rate, minutes of outage per customer served, and number of customers
interrupted per customer served;
* Measurements of employee safety;
* Measurements of long-term rate competitiveness;
* Total shareholder return compared to one or more groups as determined by
the Compensation Committee; and
* Cash value added.
The Compensation Committee may establish a range of performance around any
predetermined goal; the range may have corresponding adjustments to the
performance payout within the range. However, awards held by TNPE's Chief
Executive Officer and four other most highly compensated executive officers that
are designed to qualify for tax deductibility under the performance-based
exception to IRS Code Section 162(m) may not be adjusted upward.
The general performance measures to be used for awards designed for the
purpose and to the executives mentioned in the previous paragraph may not be
changed without shareholder approval unless future tax or securities laws permit
otherwise.
Change in Control
If a change in control occurs, then all outstanding options will become
exercisable immediately. With respect to awards made at least six months
previously, restrictions imposed on shares will lapse and performance goals for
restricted stock, performance shares and units and other stock-based awards will
be deemed to have been achieved at the target level as of the effective date of
the change in control. The Compensation Committee may make other appropriate
changes to outstanding awards before the change in control is effective. Events
constituting a "change in control" are defined in the employee severance
contracts described in "Compensation of Executive Officers--Severance
Agreements."
Effective Period of Incentive Plan
The Incentive Plan became effective January 1, 1995, and will remain in
effect until all shares of TNPE common stock reserved for awards have been
awarded or until the board of directors terminates this plan. In any case, no
awards may be made under this plan after December 31, 2004. Termination of the
Incentive Plan will not affect participant rights under awards made prior to
termination.
Transferability of Incentive Plan Awards and Underlying Stock
In general, unearned and unvested Incentive Plan awards are not
transferable, other than by will or the laws of descent and distribution.
Certificates representing awards or stock underlying awards will bear
appropriate legends referring to applicable restrictions on earning, vesting and
transfer.
TNPE has registered its issuance of all stock reserved for Incentive Plan
awards under applicable federal and state securities laws; such registration
generally would make awarded stock that was free from earnout, vesting and
transfer restrictions freely tradable on the open market. Under award agreements
currently in use, however, long-term incentive stock awards generally cannot be
transferred and are subject to forfeiture for three years after the stock is
granted, except in certain limited circumstances. After the three-year
restrictive period, officers of TNPE and its subsidiaries generally will be able
to sell TNPE common stock only (i) in accordance with the provisions of
Securities and Exchange Commission Rule 144, (ii) pursuant to an effective
registration statement or (iii) in transactions that are exempt from
registration under applicable securities laws. Because the stock will not be
transferable for three years, TNPE does not intend to register participant
resales of the stock under applicable securities laws.
The award agreements currently in use also restrict the transfer of stock
issued as short-term incentive stock awards for two years after the award is
earned, and a participant may not sell or otherwise transfer the stock until the
end of the two-year period. After the end of the two-year period, award
recipients who are not officers of TNPE or its subsidiaries may resell their
stock without further securities law registration and the stock would be freely
tradable on the open market, if the awarded stock is otherwise free from
earnout, vesting and transfer restrictions. Sales of TNPE stock by officers will
remain subject to the restrictions under Rule 144 described in the preceding
paragraph for as long as they are officers, substantial shareholders or
directors of TNPE and its subsidiaries. Because the stock will not be
transferable for two years, TNPE does not intend to register participant resales
of the stock under the securities laws.
Future award agreements may restrict the transfer of stock issued as short-
or long-term incentive stock awards for periods shorter than the award
agreements currently in use. Rule 144 restrictions will apply to stock awarded
pursuant to such agreements, if the agreements restrict the transfer of awarded
stock for less than two years after the award is earned. After two years,
recipients other than officers, directors or substantial stockholders of TNPE
and its subsidiaries may sell their stock without restriction in the open market
pursuant to paragraph (k) of Rule 144.
The Company has adopted an insider trading policy applicable to all
employees that places additional restrictions on all employee stock sales. In
addition, all employee sales are subject to securities law prohibitions on
insider trading prohibitions.
Indemnification of Directors and Compensation Committee Members
The Incentive Plan requires TNPE to hold harmless and indemnify board and
Compensation Committee members against losses, costs, liabilities, expenses,
TNPE-approved settlements, and judgments that they may incur in connection with
claims or proceedings involving actions or failures to act under the Incentive
Plan. These protections are (i) conditioned upon affected board or committee
members providing TNPE the opportunity to handle and defend the claim or
proceeding before doing so themselves and (ii) in addition to any other
available indemnification rights.
Certain Federal Income Tax Consequences
The tax consequences of performance shares, restricted stock awards and
stock options are quite complex. The following description of tax consequences
is necessarily general in nature and does not purport to be complete. Moreover,
statutory provisions are subject to change, as are their interpretations, and
their application may vary in individual circumstances.
Performance Shares and Units
The grant of performance shares or units generally does not result in
income tax consequences for the participant or TNPE. Upon receiving cash,
shares, or other property at the end of a performance period, the participant
generally will recognize ordinary income equal to the fair market value of the
asset received. TNPE generally will be entitled to a deduction in the same
amount and at the same time that income is recognized by the participant.
Restricted Stock
A recipient of a restricted stock award generally will recognize ordinary
income when the award is made, in an amount equal to the shares' fair market
value on the award date, less any payment he or she has made for the shares.
TNPE will be entitled to a deduction equal to the income amount recognized by
the participant when the participant recognizes income, subject to the
requirements of Section 162(m) (as discussed further below) of the Internal
Revenue Code of 1986, as amended (the "Tax Code"). The participant will treat
any dividends received as dividend income in the year of payment; such dividend
will not be deductible by TNPE. If a participant subsequently forfeits the
restricted stock, then he or she will be entitled to treat any amount paid for
the stock as a short- or long-term capital loss, depending on his or her holding
period. TNPE must then recognize as ordinary income the amount of its original
deduction with respect to the stock.
Stock Options
Incentive Stock Options. There will be no federal income tax consequences
to either TNPE or a participant upon the grant or exercise of an incentive stock
option (other than the possible application of alternative minimum tax). Any
disposition of shares acquired upon exercising the option will constitute
long-term capital gain to the participant if the participant holds the shares
for the later of (1) two years from the grant option date or (2) one year from
the option exercise date. The entire gain on sales made under these conditions
generally will receive long-term capital gain treatment. Under the Tax Code, the
maximum tax rate imposed on capital gains is currently 28%. Otherwise, the
difference between the option price and the stock's fair market value when
exercised will be taxed as ordinary income in the year of disposition. Under the
Tax Code, ordinary income is taxed at four rates depending upon a taxpayer's
income level: 15%, 28%, 31% or 36%. In addition, a 10% surtax applies to certain
high-income taxpayers. The surtax is computed by applying a 39.6% rate to
taxable income over $256,500 for all individuals except those married filing
separately and $128,000 for all individuals married filing separately. TNPE will
receive a deduction equal to the ordinary income that the participant
recognizes. Any additional gain generally will be taxed as capital gains with no
tax implications to TNPE. Incentive stock options having no more than $100,000
aggregate fair market value (determined as of each option's grant date) may
become exercisable for the first time in any one year. Amounts exceeding
$100,000 generally will be treated as nonqualified options.
Nonqualified Stock Options. No federal income tax consequences will result
to either TNPE or a participant upon a nonqualified stock option grant. A
participant generally will recognize ordinary income upon exercising a
nonqualified stock option to the extent that the fair market value of the shares
acquired exceed their option price. TNPE will receive a corresponding deduction
upon the participant's exercise of the option. Any gain realized upon a
subsequent disposition of the shares will be treated either as a short- or
long-term capital gain, depending on the participant's holding period.
Section 162(m) of the Tax Code
Tax Code Section 162(m) limits TNPE's income tax deduction for compensation
paid to TNPE's Chief Executive Officer and the Company's four other most highly
compensated executive officers in any taxable year to $1,000,000 per individual,
subject to several exceptions. The Compensation Committee further intends for
shareholder approval of the Incentive Plan and this amendment to qualify all
amounts paid under the Incentive Plan for federal income tax deductibility under
this exception.
Awards to the executives mentioned in the previous paragraph that are
designed to comply with the Section 162(m) performance-based compensation
exception are subject to the following Incentive Plan maximum annual award
amount limitations: (i) 75,000 options and stock appreciation rights; (ii)
25,000 shares of restricted stock; (iii) 30,000 performance shares and units;
(iv) $450,000 cash payout with respect to performance shares and units and other
stock-based awards; and (v) 40,000 other stock-based award shares. While grants
of options and performance shares and units can be structured to qualify for the
performance-based compensation exception, restricted stock grants cannot. The
Compensation Committee intends to grant Incentive Plan awards designed, in most
cases, to qualify for the Section 162(m)(4)(C) performance-based compensation
exception, unless it determines that noncomplying awards will best serve TNPE's
interests with respect to a particular award or executive officer. The board
anticipates that tax consequences resulting to TNPE and its subsidiaries from
nonqualifying compensation, if any, will not be materially adverse. Termination
of employment generally will not affect vesting of restricted stock awards if
the restricted stock qualifies for tax deductibility under the performance-based
exception.
Tax Withholding
TNPE will deduct, withhold, or collect from a participant amounts necessary
to satisfy applicable federal, state, and local tax requirements, as well as
requirements of the Securities and Exchange Commission Rule 16b-3 employee
benefit plan exemption from short-swing trading prohibitions.
1997 Estimated Benefits
The following table sets forth the estimated dollar value and number of
shares proposed to be awarded in 1997 under the short- and long-term components
of the Incentive Plan. Information in the table is based on participant salary
ranges on the award date and assumes: shareholder approval of the amendment to
the Incentive Plan; achievement of all pre-established performance goals; one-
to three-year performance periods; and no changes in the management employees
who are expected to be designated for participation in the Incentive Plan.
Actual awards earned can range from 0% to 150% of the designated award level.
Information concerning the estimated dollar value of plan awards is based on a
$25 price of one share of TNPE common stock on the NYSE.
<TABLE>
<CAPTION>
TNPE EQUITY INCENTIVE PLAN(1)
Dollar Value Number of Shares
Name Short-Term Long-Term Short-Term Long-Term Total Dollar Total Number of Shares
Value
<S> <C> <C> <C> <C> <C> <C>
Kevern R. Joyce $20,646 $132,132 826 5,285 $ 152,778 6,111
Jack V. Chambers 10,880 87,040 435 3,482 97,920 3,917
Manjit S. Cheema 9,802 78,414 392 3,137 88,216 3,529
Ralph S. Johnson 9,802 78,414 392 3,137 88,216 3,529
W. Douglas Hobbs 5,375 57,336 215 2,293 62,711 2,508
Executive Group (14
Persons) 99,498 923,127 3,980 36,925 1,022,624 40,905
Nonexecutive Officer
Employee Group
(29 Persons)(2) 53,516 193,948 1,231 7,758 247,464 8,989
1) All information included in the table is estimated and based on achievement of goal levels and excludes
cash awards made under other employee incentive plans.
2) Of the nonexecutive officer employee group, five are eligible to receive long-term incentive awards under
the Incentive Plan for the 1997-1999 performance cycle.
</TABLE>
The board of directors recommends a vote FOR approval of the amendment to
the Incentive Plan.
<PAGE>
3. SELECTION OF AUDITORS
The board of directors has appointed Arthur Andersen LLP, Certified
Independent Public Accountants ("Andersen"), to serve as independent auditors
for the current year, subject to shareholder approval. KPMG Peat Marwick LLP
("KPMG") served as the independent auditors for 1996. A representative of KPMG
is expected to attend the Annual Meeting and will have an opportunity to make a
statement if the representative desires to do so and to respond to appropriate
questions.
The board of directors recommends a vote FOR ratification of the
appointment of Arthur Andersen LLP, Certified Independent Public Accountants, as
independent auditors for 1997.
Change of Certifying Accountants
In August 1996, the Audit Committee of the Boards of Directors of TNPE and
TNP instructed management to request proposals from four qualified firms of
certified public accountants to perform independent audit services for TNPE, TNP
and their subsidiaries (collectively, the "Company") beginning in 1997.
Management had recommended to the Audit Committee that a solicitation for
external auditing services be made as part of a proper qualitative analysis and
review of existing services. The Company had never previously made a request for
competitive proposals for external auditing services.
On January 6, 1997, management advised KPMG that it had not recommended the
reappointment of KPMG as the Company's independent accountants to the Audit
Committee. On January 20, 1997, the Audit Committee interviewed two accounting
firms. As a result of this process, it determined that it would recommend
Andersen as the new independent accountants.
On February 18, 1997, the Board of Directors of TNPE, upon recommendation
by its Audit Committee, approved the engagement of Andersen as the Company's new
independent accountants. Andersen will replace KPMG beginning with the audit for
1997. KPMG, which was notified of the Board's action on the same date, was
dismissed as the independent accountant of the Company effective upon completion
of the 1996 audit.
KPMG's reports on the Company's consolidated financial statements for
fiscal years 1996 and 1995 contained no adverse opinions or disclaimers of
opinion, nor were such reports qualified as to uncertainty, audit scope or
accounting principles. During such periods and through February 18, 1997, there
were no disagreements between the Company and KPMG on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedures which, if not resolved to KPMG's satisfaction, would have caused it
to make a reference in connection with its report to the subject matter of the
disagreements, except for a disagreement that occurred in early February 1997
arising out of discussions at a senior level regarding when the Company should
report the accounting effect of the tentative settlement reached January 30,
1997 of the litigation between TNP and Jackson National Life Insurance Company.
The Audit Committees discussed the subject matter of the disagreement with KPMG.
This issue was resolved to the satisfaction of KPMG.
During discussions regarding this issue, the Company communicated to KPMG
that two other accounting firms disagreed with KPMG's conclusions. On February
5, 1997, the Company informally discussed the potential effects of this
settlement as a 1997 transaction with Andersen, in anticipation of their
appointment as auditors of TNP for 1997, but relied upon the previous experience
of a TNP staff member with regard to the expressed views of another accounting
firm. The Company did not request from Andersen or any other accounting firm a
formal opinion on KPMG's conclusions on the accounting of this transaction.
During 1997, in connection with its audit of the Company's 1996
consolidated financial statements, KPMG informed the Company of a material
weakness in the internal control structure of a newly-formed non-regulated
subsidiary. Management has begun measures to correct such weakness.
Except as described in the preceding paragraph, during 1995 and 1996 and
through the date of this proxy statement, there were no other reportable events
with KPMG on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure that were not resolved to
the satisfaction of KPMG. As defined by Securities and Exchange Commission
regulations, "reportable events," with respect to KPMG and the Company, would
be: (1) KPMG advising the Company that internal controls necessary for the
Company to develop reliable financial statements do not exist; (2) KPMG advising
the Company that information has come to its attention that has led it to no
longer be able to rely on management"s representations or that made it unwilling
to be associated with the financial statements prepared by management; (3) (a)
KPMG advising the Company of the need to expand significantly the scope of its
audit, or that information had come to its attention that, if further
investigated, may (i) materially impact the fairness of either: a previously
issued audit report or the underlying financial statements; or the financial
statements issued or to be issued covering 1996, or (ii) cause it to be
unwilling to rely on management's representations or be associated with the
Company's financial statements, and (b) due to KPMG's dismissal, or for any
other reason, KPMG did not so expand the scope of its audit or conduct such
further investigation; and (4) KPMG advising the Company that information has
come to its attention and that it has concluded that it materially impacts the
fairness or reliability of either a previously issued audit report or the
underlying financial statements, or the 1996 financial statements.
TNPE and TNP have authorized KPMG to respond fully to inquiries of Andersen
concerning the subject matter of the disagreement described herein.
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information regarding the beneficial
ownership of TNPE's common stock as of January 31, 1997, by (i) each director
and nominee for director, (ii) the Chief Executive Officer and the four other
most highly compensated executive officers, (iii) all directors and executive
officers of TNPE and TNP as a group, and (iv) persons known to management to
beneficially own more than 5% of TNPE's common stock. Except as noted below,
each person included in the table has sole voting and investment power with
respect to the shares that the person beneficially owns.
<TABLE>
<CAPTION>
Amount and Nature Percent of
Name of Beneficial Owner of Beneficial Ownership Class
<S> <C> <C>
R. Denny Alexander 1,550 *
John A. Fanning 1,450 *
Sidney M. Gutierrez 1,098 *
J. R. Holland, Jr. 525 *
Kevern R. Joyce 7,492(1) *
Harris L. Kempner, Jr. 1,450(2) *
Dwight R. Spurlock 2,109 *
Carol D. Surles 525 *
Dennis H. Withers 1,550 *
Jack V. Chambers 20,462(3) *
Manjit S. Cheema 6,096(4) *
Ralph S. Johnson 5,547(5) *
W. Douglas Hobbs 2,010(6) *
All directors and officers
as a group (22 persons) 83,500(7) *
NationsBank of Georgia, N.A.(8) 1,392,092 10.7%
First Union Corporation(9) 877,750 6.8%
Putnam Investments, Inc.(10) 716,500 5.5%
</TABLE>
________________________
* Less than 1%.
(1) Includes 3,282 shares held in Mr. Joyce's Thrift Plan account.
(2) Includes 200 shares that Mr. Kempner's wife owns, beneficial ownership of
which Mr. Kempner disclaims.
(3) Includes 19,514 shares held in Mr. Chambers' Thrift Plan account.
(4) Includes 1,677 shares held in Mr. Cheema's Thrift Plan account. Also
includes 199 shares that Mr. Cheema's wife owns directly and 1,298 shares
held in his wife's Thrift Plan account, beneficial ownership of which he
disclaims.
(5) Includes 3,844 shares held in Mr. Johnson's Thrift Plan account.
(6) Includes 1,155 shares held in Mr. Hobbs' Thrift Plan account.
(7) Includes 63,166 shares held in Thrift Plan accounts of executive officers
and Mrs. Cheema.
(8) The address of NationsBank of Georgia N.A. (the "Trustee") is 715 Peachtree
Street, Atlanta, Georgia 30308. The Trustee holds all Thrift Plan shares
included in the table as trustee of the Thrift Plan.
(9) The address of First Union Corporation is One First Union Center,
Charlotte, North Carolina 28288-0137. First Union Corporation has sole
voting power with respect to 820,900 shares, shared voting power with
respect to the remaining 55,530 shares, sole dispositive power with respect
to 821,400 shares and shared dispositive power with respect to 56,530
shares. First Union Corporation is the parent holding company of Evergreen
Asset Management Group and Lieber and Company, both of which are investment
advisers registered under the Investment Advisers Act of 1940. The
subsidiary investment advisers actually acquired the shares of TNPE common
stock included in the table of which First Union Corporation is deemed to
have beneficial ownership. The information included in the table and this
note is derived from First Union Corporation's amended report on Schedule
13G dated February 3, 1997, filed with the Securities and Exchange
Commission. The report did not disclose the subsidiaries' addresses or
voting and dispositive power over the common stock that it covered.
(10) The address of Putnam Investments, Inc. ("PI") is One Post Office Square,
Boston, Massachusetts 10036. PI is the parent holding company of Putnam
Investment Management, Inc. ("PIM") and The Putnam Advisory Company, Inc.
("PAC"), both of which are investment advisers registered under the
Investment Advisers Act of 1940, and both of whose addresses are One Post
Office Square, Boston, Massachusetts 10036. Neither PI, PIM nor PAC have
any voting or sole dispositive power over the shares included in the table.
PI has shared dispositive power over all the shares. PIM has shared
dispositive power with respect to 712,500 shares, and PAC has shared
dispositive power with respect to 4,000 shares. Each holds their respective
shares on behalf of their investment advisory clients. The parent holding
company of PI is Marsh & McLennan Companies, Inc., the address of which is
1166 Avenue of the Americas, New York, New York 10036. The information
included in the table and this note is derived from a joint report on
Schedule 13G dated January 27, 1997, filed with the Securities and Exchange
Commission.
OTHER MATTERS
Copies of TNPE and TNP's Annual Report on Form 10-K are available to
shareholders. Requests should be addressed to TNP Enterprises, Inc., Investor
Relations, 4100 International Plaza, Fort Worth, Texas 76109.
Any proposal by a shareholder for presentation at the next Annual meeting
must be received at TNPE's executive offices not later than November 26, 1997.
The notice must provide the exact wording and purpose of the proposal, describe
the proposing shareholder's reasons for supporting the proposal, provide the
shareholder's name, address, number of the shares of TNPE stock that the
shareholder owns beneficially and of record, the date on which the shareholder
acquired such stock, and disclose any material interest that the shareholder has
in the subject of the proposal. Shareholder proposals must also satisfy
applicable requirements of Regulation 14A under the Securities Exchange Act of
1934.
Kevern R. Joyce,
President
Fort Worth, Texas
March 25, 1997
<PAGE>
APPENDIX
1996 ANNUAL REPORT TO SHAREHOLDERS
<PAGE>
TNP ENTERPRISES INC. AND SUBSIDIARIES
TEXAS NEW-MEXICO POWER COMPANY AND SUBSIDIARIES
Annual Report For the Fiscal Year Ended December 31, 1996
TABLE OF CONTENTS
Glossary of Terms......................................................... A-2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................................... A-3
Competitive Conditions.................................................... A-3
Results of Operations..................................................... A-4
Liquidity and Capital Resources........................................... A-7
Other Matters............................................................. A-8
INDEPENDENT AUDITORS' REPORTS
TNP Enterprises, Inc. and Subsidiaries............................... A-9
Texas-New Mexico Power Company and Subsidiaries...................... A-10
TNP ENTERPRISES, INC. AND SUBSIDIARIES
Consolidated Statements of Income (Loss),
Three Years Ended December 31, 1996.................................. A-11
Consolidated Statements of Cash Flows,
Three Years Ended December 31, 1996.................................. A-12
Consolidated Balance Sheets, December 31, 1996 and 1995.............. A-13
Consolidated Statements of Capitalization,
December 31, 1996 and 1995........................................... A-14
Consolidated Statements of Common Shareholders' Equity,
Three Years Ended December 31, 1996.................................. A-15
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
Consolidated Statements of Income (Loss),
Three Years Ended December 31, 1996.................................. A-16
Consolidated Statements of Cash Flows,
Three Years Ended December 31,1996................................... A-17
Consolidated Balance Sheets, December 31, 1996 and 1995.............. A-18
Consolidated Statements of Capitalization,
December 31, 1996, and 1995.......................................... A-19
Consolidated Statements of Common Shareholder's Equity,
Three Years Ended December 31, 1996.................................. A-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................ A-21
SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA - TNPE..................... A-32
<PAGE>
TNP ENTERPRISES INC. AND SUBSIDIARIES
TEXAS NEW-MEXICO POWER COMPANY AND SUBSIDIARIES
Glossary of Terms
As used in this combined report, the following abbreviations, acronyms, or
capitalized terms have the meanings set forth below:
Abbreviation, Acronym,
or Capitalized Term Meaning
AFUDC ................Allowance for borrowed funds used during construction
Bond Indenture .......Document pursuant to which FMBs are issued
EPS...................Earnings (loss) per share of common stock
Facility Works........Facility Works, Inc., a wholly owned subsidiary of TNPE,
formerly known as Community Public Service Company
FERC..................Federal Energy Regulatory Commission
FMB(s)................One or more First Mortgage Bonds issued by TNP
GWH...................Gigawatt-Hours
IRS...................Internal Revenue Service
ITC...................Investment Tax Credits
KWH...................Kilowatt-Hours
MW....................Megawatts
MWH...................Megawatt-Hours
NMPUC.................New Mexico Public Utility Commission
PPM...................PPM America, Inc.
PUCT..................Public Utility Commission of Texas
SPS...................Southwestern Public Service Company
SFAS..................Statement of Financial Accounting Standards
TGC...................Texas Generating Company, a wholly owned subsidiary of TNP
TGC II................Texas Generating Company II, a wholly owned subsidiary of
TNP
TNP One...............A two-unit, lignite-fueled, circulating fluidized-bed
generating plant located in Robertson County, Texas
TNP...................Texas-New Mexico Power Company, a wholly owned subsidiary
of TNPE
TNPE..................TNP Enterprises, Inc.
TU....................Texas Utilities Electric Company
Unit 1................The first completed electric generating unit of TNP One
Unit 2................The second completed electric generating unit of TNP One
Statement Regarding Forward Looking Information
The discussions in this document that are not historical facts, including,
but not limited to, statements regarding TNPE and TNP's business strategy,
projected sources and uses of cash, and projected operations, are based upon
current expectations. Actual results may differ materially. Among the facts that
could cause the results to differ materially are the following: changes in
regulations; results of regulatory proceedings; future acquisitions or strategic
partnerships; general business and economic conditions; and other factors
described from time to time in TNPE and TNP's reports filed with the Securities
and Exchange Commission. TNPE and TNP wish to caution readers not to place undue
reliance on any such forward-looking statements, which are made pursuant to the
Private Securities Litigation Reform Act of 1995 and, as such, speak only as of
the date made.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
SIGNIFICANT EVENTS AND KNOWN TRENDS AFFECTING TNPE AND TNP
Competitive Conditions
The electric utility industry continues its transition toward an
environment of increased competition. Pressures that underlie the movement
toward increasing competition are numerous and complex. They include legislative
and regulatory changes, technological advances, consumer demands, greater
availability of natural gas, environmental needs, and other factors. The
increasingly competitive environment presents opportunities to compete for new
customers, as well as the risk of loss of existing customers.
Community ChoiceSM
In May 1996, in order to meet the issue of competition head on, TNP filed
an application with the PUCT requesting approval of a program known as Community
Choice that would apply to electric services provided by TNP in Texas. On June
21, 1996, TNP filed an application with the NMPUC requesting approval of a
similar Community Choice program that would apply to electric service provided
by TNP in New Mexico. Community Choice is a transition plan designed to address
the opportunities and challenges presented by the increasingly deregulated and
competitive environment of the electric services industry.
As proposed by TNP, Community Choice provided for transition periods of
four years in New Mexico and five years in Texas. Community Choice proposed
that, during the transition periods, TNP's rates for electric service in New
Mexico and Texas would be structured to provide TNP a reasonable opportunity to
reduce its so-called potential "stranded costs." "Stranded costs" means the
difference between what it currently costs TNP to provide service and what a
customer would be willing to pay for such service in a competitive market. In
Texas, TNP's potential stranded cost relates to TNP One, its 300 MW generating
unit, and could potentially be more than $250 million. In New Mexico, TNP's
potential stranded cost relates to its purchased power contracts and could
potentially be more than $10 million. At the end of the transition periods, TNP
would aggregate, or combine, its customers at the community level and permit
these aggregated electrical loads to choose the types and nature of electric
services that will be available to individual customers within each aggregated
load.
In November 1996, TNP withdrew its Community Choice filing in Texas. Prior
to the withdrawal TNP had attempted to work through the numerous issues with
various intervenors. The withdrawal was due to a lack of consensus on key
issues, including the issue of stranded costs.
In late February 1997, TNP proposed a new plan for transition to
competition to the communities within TNP's service territory in Texas. The new
plan includes a five-year transition period and the opportunity to reduce
potential stranded costs. The new plan also includes options providing various
levels of access to the open market, which TNP customers will be able to select
from at the end of the transition period. Due to the numerous issues involved,
TNP can provide no assurance as to the timing or outcome of the new transition
to competition plan in Texas. As discussed below, certain gulf coast cities and
TNP agreed to delay a rate review filing until July 1, 1997, in order to reopen
negotiations on the new transition to competition plan.
On February 4, 1997, TNP filed a stipulation with the NMPUC adjusting
several of the components of the original Community Choice proposal. The
stipulation has the support of the major stakeholders. The revised plan gives
TNP customers the right to choose their energy provider after a three-year
transition period, freezes rates (including fuel and purchased power) for a
three-year period, and allows for customer aggregation based on market forces.
Hearings were held in late February 1997. Approval by the NMPUC is the final
step. TNP believes the plan will allow it to recover most if not all of its
potential stranded costs in New Mexico, however, the actual recovery of any
stranded costs will depend on the future market and price for energy through
2002.
Impact of Competition on TNP
The most significant effect of competition on TNP, as well as other
utilities, will be the ability to recover potential stranded costs, as well as
to retain and attract new customers. The inability to recover a significant
portion of stranded costs would adversely impact TNPE's and TNP's financial
condition. TNP will continue to seek solutions to the recovery of its potential
stranded costs. Although the final resolution and magnitude of the issue is
uncertain, management realizes it is possible that shareholders may share the
financial burden of stranded costs with customers.
Assuming satisfactory resolution of the stranded costs issue, TNP believes
that current competitive developments on the wholesale market ultimately will
benefit TNP and its customers. Because TNP purchases much of its power, TNP can
take advantage of the lower transmission prices, additional market flexibility,
and new options in obtaining purchased power. TNP's competitive position has
been strengthened with the PUCT open access to transmission rule. TNP currently
has no significant wholesale power sales but expects to position itself to take
advantage of opportunities to serve additional wholesale customers as they
arise. Management believes TNP's revenue growth opportunities are in an
increased customer base and new services.
TNP believes its market niche is in smaller to medium sized communities.
Only two of the 85 communities in TNP's service area have populations in excess
of 50,000.
Control Area
TNP implemented a control area in Texas which became operational on July
31, 1996. The control area is an electrical system which enables TNP to
instantaneously balance its system resources with loads. TNP had previously
contracted with another utility for these services. It also permits TNP to
replace standby power for TNP One with the purchase of planning reserves.
Implementation of the control area is estimated to result in additional base
revenues and cost savings of approximately $10 million annually.
Texas Transmission Access Filing
During 1996 the PUCT passed a wholesale transmission access rule which
establishes a regional method of transmission pricing, terms, and conditions.
The purpose is to increase competition in wholesale energy sales within Texas
and establish an Independent System Operator for the Electric Reliability
Council of Texas ("ERCOT") transmission system. The PUCT will set the
transmission pricing rules for the ERCOT region. TNP believes it should benefit
from the new rules as competition should increase in the wholesale power market
and result in reduced purchased power and wheeling costs. The new transmission
fee structure is scheduled to start in early 1997. However, several Texas
utilities have petitioned the PUCT to revise the new transmission rules.
Unregulated Operations
TNPE also plans to meet the effects of competition on the traditional
utility business by expanding earnings through unregulated operations. In early
1996, TNPE formed Facility Works, a wholly owned subsidiary, to provide energy
and utility related facility services to commercial and institutional customers
in primarily nonmetropolitan areas. TNPE is also evaluating unregulated
investment and joint venture opportunities in additional energy-related
businesses, but has not entered into any agreements related to such activities.
Results of Operations
Overall Results
Income applicable to common stock was $22.9 million for 1996, compared to
$40.9 million in 1995. Results for 1996 included a $3.1 million loss associated
with the start-up operations of Facility Works, and a $1.3 million after tax
reserve for the tentative settlement of litigation associated with the Series T
FMB retirement in 1995. Results for 1995 included a number of one-time items
consisting of the cumulative effect of the change in accounting for unbilled
revenues of $8.4 million, a gain on sale of the Texas Panhandle properties of
$9.5 million, and recognition of deferred revenues related to a favorable IRS
private letter ruling of $3.0 million. Excluding the one-time items, 1996
earnings were $27.3 million, and 1995 earnings were $19.9 million.
One-time items, net of taxes, in 1994 consisted of the recognition of
regulatory disallowances of $20.5 million and reorganization costs of $5.7
million. Additional information concerning these one-time items is set forth in
Notes 2, 3, 4, 5, and 6.
The following table sets forth results of operations for 1996, 1995, and
1994 and the impact of one-time items:
<TABLE>
<CAPTION>
1996 1995 1994
_________________ _________________ ________________
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................. $27,283 $ 2.36 $19,908 $ 1.83 $ 7,997 $ 0.74
One-time items, net of income taxes:
Start up costs of Facility Works............ (3,097) (0.27) - - - -
Reserve for Series T litigation settlement.. (1,300) (0.11) - - - -
Cumulative effect of change in accounting... - - 8,445 0.77 - -
Gain on sale of Texas Panhandle properties.. - - 9,479 0.87 - -
Recognition of deferred revenues............ - - 3,018 0.28 - -
Reorganization costs........................ - - - - (5,723) (0.53)
Regulatory disallowances.................... - - - - (20,505) (1.91)
Total one-time items, net................. (4,397) (0.38) 20,942 1.92 (26,228) (2.44)
Income (loss) applicable
to common stock............................. $22,886 $ 1.98 $40,850 $ 3.75 $(18,231) $(1.70)
</TABLE>
<PAGE>
The operations of TNP currently represent most of TNPE's operations. The
following discussion focuses on TNP's operations, except where stated otherwise.
Operating Revenues
The following table summarizes the components of operating revenues (in
thousands).
<TABLE>
<CAPTION>
Increase (Decrease)
___________________
1996 1995 1994 '96 v. '95 '95 v. '94
<S> <C> <C> <C> <C> <C>
__________ _________ __________ __________ __________
Operating revenues $ 502,737 $ 485,823 $ 477,989 $ 16,914 $ 7,834
Effect of recognizing deferred
revenue from private letter ruling - (4,128) - 4,128 (4,128)
__________ _________ __________ __________ __________
Subtotal 502,737 481,695 477,989 21,042 3,706
Pass-through items 244,889 228,903 243,513 15,986 (14,610)
__________ _________ __________ __________ __________
Base revenues $ 257,848 $ 252,792 $ 234,476 $ 5,056 $ 18,316
========== ========= ========== ========== ==========
</TABLE>
Pass-through items are the portion of operating revenues that recover from
customers the costs of purchased power, fuel, and standby power. These items
affect customer rates but do not affect operating income. Annual variances are
discussed under "Results of Operations--Operating Expenses."
The base revenue increase of $5.1 million during 1996 was attributable to
increased residential, commercial, and economy rate industrial sales, and
additional base revenues provided by the control area. The overall increase, was
partially offset by a reduction in firm rate industrial sales and lower margins
on the industrial economy rate sales.
Excluding the effects of one-time items, 1995 base revenues exceeded 1994
base revenues by $18.3 million. The increase is primarily due to rate increases
in both Texas ($17.5 million annualized) and New Mexico ($0.4 million
annualized) resulting from settlement agreements in October and May of 1994,
respectively. Increased sales also contributed to the base revenue increase.
Sales of 6,641 GWH in 1995 represented a 2.6% improvement over prior year sales
and contributed $5.1 million to the increase in 1995 base revenues.
The components of GWH sales for 1996 and 1995 are summarized in the
following table:
1996 1995 Variance %
________ _______ _________ ________
Residential 2,230 2,142 88 4.1
Commercial 1,726 1,681 45 2.7
Industrial:
Firm 1,295 1,440 (145) (10.1)
Economy 2,503 1,264 1,239 98.0
Other 108 114 (6) (5.3)
Total GWH sales 7,862 6,641 1,221 18.4
Sales to residential and commercial customers increased during 1996 due to
warmer than usual weather during the second quarter of 1996, in addition to
colder than usual weather in Texas during the first quarter. The increase in GWH
sales resulted primarily from increased industrial economy sales. During 1996,
TNP entered into new sales agreements with two cogeneration customers. The new
economy rate sales are at significantly lower margins than traditional firm rate
industrial sales.
Pursuant to a rate case settlement approved by the PUCT in October 1994,
TNP may not increase its base rates in Texas prior to March 1999 except in
certain extraordinary circumstances. Additional information about the settlement
is set forth in Note 2. In December 1996, certain cities in the Texas gulf coast
area served by TNP passed resolutions requiring TNP to file complete rate
information with those cities. In February 1997, those cities have agreed to
reopen negotiations on a new transition to competition proposal and have
deferred the required rate filing until July 1, 1997. If negotiations on the new
transition to competition proposal are not successful and the rate filings are
made, TNP anticipates a final resolution of the rate review with the cities in
late 1997. Based on its preliminary analysis, TNP believes the filing will
support the reasonableness of TNP's current rates.
TNP is actively negotiating with a significant industrial customer in Texas
that provided sales of 628 GWH and annual revenues of $27.8 million in 1996
($9.9 million in base revenues). This customer will replace the power previously
provided by TNP with a cogeneration plant, which is expected to commence
operations in 1998. TNP is negotiating with the customer to continue providing
transmission, distribution and other services. Even if TNP is successful in
these negotiations, base revenues from this customer are expected to be
significantly less.
In October 1996, a large industrial customer in New Mexico gave TNP notice
to reduce their power supply requirements under its current contract by 25 MW's
effective December 1998, and to terminate the contract effective December 1999.
TNP believes the customer is positioning itself for access to a competitive
power supply market. Due to the potential effects that the recently approved
Community Choice plan in New Mexico may have on which power supplier this
customer may ultimately choose, TNP is unable to determine the impact of this
notice at this time.
Operating Expenses
Operating expenses for 1996 were $19.6 million higher than in 1995, due
primarily to higher pass-through expenses, property taxes and franchise taxes.
Operating expenses for 1995 were $2.0 million lower than in 1994, excluding
the $8.8 million reorganization costs in 1994. The decrease is primarily due to
lower pass-through expenses of $14.6 million and labor/benefits expenses of $1.0
million offset by increased income tax expense of $13.6 million.
Pass-Through Expenses
The following table summarizes the components of pass-through expenses (in
thousands).
<TABLE>
<CAPTION>
Increase (Decrease)
________________________
1996 1995 1994 '96 v. '95 '95 v. '94
__________ _________ __________ ___________ ___________
<S> <C> <C> <C> <C> <C>
Pass-through expenses:
Purchased power $ 196,481 $ 178,465 $ 194,595 $ 18,016 $ (16,130)
Fuel 45,300 44,828 43,024 472 1,804
Standby power 3,108 5,610 5,894 (2,502) (284)
Total $ 244,889 $ 228,903 $ 243,513 $ 15,986 $ (14,610)
</TABLE>
Purchased Power. During 1996, purchased power expense increased by $18
million due to the substantial increase in the number of MWH's purchased. The
additional purchases were made to meet increased sales requirements, primarily
for two new economy rate industrial customers.
Purchased power decreased $16.1 million in 1995. Purchases for Texas
service areas were shifted to lower cost suppliers for 1995 supplemental summer
peaking capacity. This arrangement became effective May 1, 1995, and resulted in
annualized cost savings of $7.0 million. During 1995, TNP actively intervened in
a Texas rate case of a major supplier and is benefiting with annualized cost
savings of $10.5 million. Purchases for New Mexico service areas were also
shifted to lower cost suppliers beginning mid 1994 and continuing in 1995. TNP's
customers directly benefit from these cost reductions as these expenses are
recovered through adjustment clauses.
Purchased power costs represent TNP's largest operating expense. Based on
current contracts, TU continues as TNP's largest supplier of purchased power in
Texas and is TNP's highest price supplier. As described in Note 12, TNP has
notified TU of its intent to cease purchasing full requirements power and energy
effective January 1, 1999. TNP has requested proposals for purchased power
resources to replace most of the power currently provided by TU.
Fuel. Fuel expense in 1996 and 1995 increased $.5 million and $1.8 million,
excluding amounts of nonpass-through fuel expenditures, respectively, as
compared to the corresponding prior years. Fuel expense is directly related to
an increased fixed fuel recovery factor approved by the PUCT in connection with
the 1994 Texas rate case settlement. The majority of TNP's fuel expense is
recovered in revenues and any difference from actual costs is deferred until a
new factor is established. TNP expects to file a reconciliation of fuel costs in
June 1997, for the period of October 1993 through December 1996. Management
believes the ultimate outcome of this fuel reconciliation will not have a
material adverse effect on TNP's or TNPE's consolidated financial position or
results of operations. The under-recovered fuel amount at December 31, 1996, was
$4.4 million. TNP currently estimates that the current fixed fuel factor should
enable the recovery of under-recovered fuel costs during 1997.
Other Operating Expenses
Other operating expense was $2.0 million higher in 1996 than in 1995. The
increase is due to higher payroll and payroll related items, incentive
compensation and the reserve associated with the tentative settlement of Series
T FMB litigation. These increases were offset in part by reduced standby power
costs resulting from the implementation of the control area in July 1996, as
discussed above.
Other operating expense was $1.0 million lower in 1995 than in 1994.
Payroll and payroll related items decreased $7.2 million, primarily as a result
of the 1994 reorganization. Offsetting these savings were the costs of employee
incentive compensation plans adopted in 1995, increases in customer collection
costs, outsourcing, outside services, wage and salary increases, and other
administrative expenses.
Interest Charges
During 1996 interest charges decreased $4.6 million due to the reduction in
the amount of debt and lower interest rates on the credit facilities. During
1996 TNP retired $91.7 million of FMBs and reduced the average amount
outstanding under the credit facilities. Partially offsetting the reductions
discussed above was interest charges of $1.3 million payable to the IRS
associated with the resolution of outstanding tax audits for the years 1990
through 1994.
A $1.3 million decrease in 1995 interest charges, compared to 1994 resulted
from reduced long-term debt levels and decreased interest rates associated with
the 1995 Credit Facility. Contributing to reduced debt levels were the
retirement of $29.2 million of Series T FMBs in October 1995 with proceeds from
the sale of the Texas panhandle properties and lower average borrowings under
TNP's credit facility. Increased cash flow during 1995 enabled TNP to reduce its
average borrowings under its credit facility.
Interest charges are expected to continue to decrease during 1997 due to
reduced levels of overall long-term debt, the refinancing of high cost long-term
debt with borrowings under the credit facilities, and reduced interest rate
margins on the credit facilities.
Liquidity and Capital Resources
Sources of Liquidity
The main sources of liquidity for TNPE are cash flow from operations,
borrowings from credit facilities and sale of additional common stock.
TNPE's cash flow from operations totaled $65.2 million, $88.4 million and
$44.3 million in 1996, 1995, and 1994. Cash flow from operations continues to be
strong, however it decreased in 1996 due to increased income tax payments. Cash
flow from operations had increased in 1995 due to increased base revenues. TNP's
cash flow from operations mirrored that of TNPE.
As discussed in Note 9, TNP entered into a new credit facility in 1996 to
supplement the existing credit facility. As of December 31, 1996, the unused
commitment under the credit facilities was $195 million. In January 1997 TNP
used borrowings from the credit facilities to retire the $100.8 million of
outstanding Series T FMBs, which reduced the available borrowings under the
credit facilities to $90.5 million.
TNPE has reserved 1 million shares of common stock for issuance through a
new direct stock purchase plan beginning in 1997. The plan is designed to
provide investors with a convenient method to purchase shares of TNPE's common
stock directly from the company and to reinvest cash dividends. The plan has
replaced TNPE's prior dividend reinvestment plan.
Capital Resources
TNPE's and TNP's capital structure continued to improve during 1996, due to
reduced debt levels and increased common equity. TNPE's common equity increased
during 1996, due to an issuance of 2 million shares of common stock with
proceeds of $47.2 million in October 1996, in addition to strong earnings for
the year. Proceeds from TNPE's common stock issuance were transferred to TNP as
an equity contribution. The equity portion of TNPE's capital structure increased
from 26.1% at December 31, 1995, to 34.1% at December 31, 1996. Conversely, the
long-term debt ratio decreased from 73.5% to 65.5% for the same period. TNP
experienced similar results with its capital ratios.
TNP's capital requirements through 2001 are projected to be as follows
(amounts in millions):
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001
_______ ________ ________ _______ _______
<S> <C> <C> <C> <C> <C>
FMB and secured debenture maturities (see Note 9) $ .1 $ .1 $ 130.1 $ 100.1 $ .1
Capital expenditures 28.6 29.9 31.2 32.7 34.1
Total capital requirements $ 28.7 $ 30.0 $ 161.3 $ 132.8 $ 34.2
</TABLE>
TNP believes that cash flow from operations and periodic borrowings under
the credit facilities will be sufficient to meet working capital requirements
and planned capital requirements through 1998.
Other Matters
As a result of the Energy Policy Act of 1992 and actions of regulatory
commissions, the electric utility industry is moving toward a combination of
competition and modified regulatory environment. TNP's financial statements
currently reflect assets and costs based on current cost-based ratemaking
regulations in accordance with SFAS 71, Accounting for the Effects of Certain
Types of Regulation. Continued applicability of SFAS 71 to TNP's financial
statements requires that rates set by an independent regulator on a
cost-of-service basis can actually be charged to and collected from customers.
In the event that all or a portion of a utility's operations cease to meet
those criteria for various reasons, including deregulation, a change in the
method of regulation, or a change in the competitive environment for the
utilities regulated service, the utility will have to discontinue SFAS 71 for
that portion of operations. That discontinuation would be reported by the
write-off of regulatory assets and liabilities.
Management believes that, as of December 31, 1996, and for the foreseeable
future, TNP's financial statements continue to follow SFAS 71.
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
TNP Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets and statements of
capitalization of TNP Enterprises, Inc. and subsidiaries as of December 31, 1996
and 1995, and the related statements of income (loss), common shareholders'
equity, and cash flows for each of the three - year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of TNP Enterprises,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 3 to the consolidated financial statements, the Company
changed its method of accounting for operating revenues in 1995.
KPMG Peat Marwick LLP
Fort Worth, Texas
January 30, 1997
Independent Auditors' Report
The Board of Directors
Texas-New Mexico Power Company:
We have audited the accompanying consolidated balance sheets and statements of
capitalization of Texas-New Mexico Power Company (a wholly owned subsidiary of
TNP Enterprises, Inc.) and subsidiaries as of December 31, 1996 and 1995, and
the related statements of income (loss), common shareholder's equity, and cash
flows for each of the three - year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Texas-New Mexico
Power Company and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 3 to the consolidated financial statements, the Company
changed its method of accounting for operating revenues in 1995.
KPMG Peat Marwick LLP
Fort Worth, Texas
January 30, 1997
<TABLE>
<CAPTION>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
For the Years Ended December 31,
1996 1995 1994
--------------- --------------- ---------------
(In thousands except per share amounts)
<S> <C> <C> <C>
OPERATING REVENUES $ 502,737 $ 485,823 $ 477,989
--------------- --------------- ---------------
OPERATING EXPENSES:
Purchased power 196,481 178,465 194,595
Fuel 47,201 48,898 46,988
Other operating and general expenses 73,276 71,311 72,472
Maintenance 10,672 11,522 11,966
Reorganization costs - - 8,782
Depreciation of utility plant 38,170 37,850 36,782
Taxes other than income taxes 32,727 28,865 29,651
Income taxes 10,333 12,317 (1,238)
--------------- --------------- ---------------
Total operating expenses 408,860 389,228 399,998
--------------- --------------- ---------------
NET OPERATING INCOME 93,877 96,595 77,991
--------------- --------------- ---------------
OTHER INCOME (LOSS):
Gain on sale of Texas Panhandle properties (note 4) - 14,583 -
Recognition of regulatory disallowances (note 2) - - (31,546)
Other income and deductions, net (3,799) 1,245 1,057
Income taxes 2,338 (5,403) 10,305
--------------- --------------- ---------------
Other income (loss), net of taxes (1,461) 10,425 (20,184)
--------------- --------------- ---------------
INCOME BEFORE INTEREST CHARGES AND
CHANGE IN ACCOUNTING 92,416 107,020 57,807
--------------- --------------- ---------------
INTEREST CHARGES:
Interest on long-term debt 64,654 70,544 71,568
Other interest and amortization of debt-related costs 4,709 3,416 3,680
--------------- --------------- ---------------
Total interest charges 69,363 73,960 75,248
--------------- --------------- ---------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING 23,053 33,060 (17,441)
Cumulative effect of change in accounting for
unbilled revenues, net of taxes (note 3) - 8,445 -
--------------- --------------- ---------------
NET INCOME (LOSS) 23,053 41,505 (17,441)
Dividends on preferred stock 167 655 790
--------------- --------------- ---------------
INCOME (LOSS) APPLICABLE TO COMMON STOCK $ 22,886 $ 40,850 $ (18,231)
=============== =============== ===============
EARNINGS PER SHARE OF COMMON STOCK:
Earnings (loss) before cumulative effect of change in accounting $ 1.98 $ 2.98 $ (1.70)
Cumulative effect of change in accounting for unbilled revenues - 0.77 -
--------------- --------------- ---------------
Earnings (loss) per share $ 1.98 $ 3.75 $ (1.70)
=============== =============== ===============
DIVIDENDS PER SHARE OF COMMON STOCK $ 0.93 $ 0.82 $ 1.22
=============== =============== ===============
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 11,543 10,901 10,750
=============== =============== ===============
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
1996 1995 1994
--------------- ---------------- -----------------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 505,307 $ 481,470 $ 475,462
Purchased power (198,696) (172,486) (193,366)
Fuel costs paid (45,576) (44,781) (46,537)
Cash paid for payroll and to other suppliers (75,138) (76,735) (85,912)
Interest paid, net of amounts capitalized (69,247) (68,484) (76,402)
Income taxes paid (15,684) (1,095) 365
Other taxes paid, net of amounts capitalized (32,243) (30,556) (30,323)
Other operating cash receipts and payments, net (3,522) 1,043 1,014
--------------- ---------------- -----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 65,201 88,376 44,301
--------------- ---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant, net of capitalized
depreciation and interest (28,006) (28,689) (29,038)
Net proceeds from sale of Texas Panhandle properties - 29,009 -
Maturities (purchases) of temporary investments - 5,590 (5,590)
Additions to other property and investments (2,771) - -
--------------- ---------------- -----------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (30,777) 5,910 (34,628)
--------------- ---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on preferred and common stocks (10,866) (9,616) (13,823)
Borrowings (repayments) under revolving credit
facilities 12,000 (42,272) 6,472
Issuances:
Common stock 48,798 856 2,502
Other long-term debt 202 - -
Deferred expenses associated with financings (588) (2,096) -
Redemptions:
Preferred stock (180) (5,080) (880)
First mortgage bonds (96,508) (30,270) (1,070)
--------------- ---------------- -----------------
NET CASH USED IN FINANCING ACTIVITIES (47,142) (88,478) (6,799)
--------------- ---------------- -----------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (12,718) 5,808 2,874
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 21,105 15,297 12,423
--------------- ---------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,387 $ 21,105 $ 15,297
=============== ================ =================
RECONCILIATION OF NET EARNINGS TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income (loss) $ 23,053 $ 41,505 $ (17,441)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Cumulative effect of change in accounting for
unbilled revenues, net of taxes - (8,445) -
Gain on sale of Texas Panhandle properties - (14,583) -
Recognition of deferred revenues - (4,782) 1,382
Depreciation of utility plant 38,170 37,850 36,782
Amortization of debt-related costs and other
deferred charges 3,329 4,952 5,495
Allowance for borrowed funds used during
construction (99) (162) (275)
Deferred income taxes (excluding effect of
change in accounting) (193) 5,256 (10,915)
Investment tax credits (380) 1,679 (1,436)
Reorganization costs - - 6,858
Recognition of regulatory disallowances - - 31,546
Cash flows impacted by changes in current assets
and liabilities:
Deferred purchased power and fuel costs 5,696 5,997 (107)
Accrued interest (3,103) 2,289 (4,422)
Accrued taxes (7,372) 8,483 (1,108)
Purchased power costs subject to refund (5,688) 5,688 -
Changes in other current assets and liabilities 4,181 3,138 (1,387)
Other, net 7,607 (489) (671)
--------------- ---------------- -----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 65,201 $ 88,376 $ 44,301
=============== ================ =================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
1996 1995
--------------- ----------------
(In thousands)
<S> <C> <C>
ASSETS
UTILITY PLANT:
Electric plant $ 1,215,355 $ 1,193,538
Construction work in progress 906 3,334
--------------- ----------------
Total 1,216,261 1,196,872
Less accumulated depreciation 282,322 252,868
--------------- ----------------
Net utility plant 933,939 944,004
--------------- ----------------
OTHER PROPERTY AND INVESTMENTS, at cost 3,927 1,156
--------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents 8,387 21,105
Customer receivables 16,362 15,569
Inventories, at lower of average cost or market:
Fuel 367 492
Materials and supplies 6,384 7,287
Deferred purchased power and fuel costs 3,565 9,261
Accumulated deferred income taxes 1,937 144
Other current assets 1,121 960
--------------- ----------------
Total current assets 38,123 54,818
--------------- ----------------
DEFERRED CHARGES 30,795 30,455
--------------- ----------------
$ 1,006,784 $ 1,030,433
=============== ================
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common shareholders' equity:
Common stock - no par value per share. Authorized 50,000,000
shares; issued 13,006,492 shares in 1996 and 10,920,060
in 1995 $ 183,771 $ 134,973
Retained earnings 94,703 82,484
--------------- ----------------
Total common shareholders' equity 278,474 217,457
Preferred stock 3,420 3,600
Long-term debt, less current maturities 533,964 611,925
--------------- ----------------
Total capitalization 815,858 832,982
--------------- ----------------
CURRENT LIABILITIES:
Current maturities of long-term debt 138 1,070
Accounts payable 28,446 22,040
Accrued interest 10,879 13,982
Accrued taxes 18,833 26,205
Customers' deposits 2,662 2,493
Purchased power costs subject to refund - 5,688
Other current liabilities 11,797 12,472
--------------- ----------------
Total current liabilities 72,755 83,950
--------------- ----------------
REGULATORY TAX LIABILITIES 10,963 26,826
ACCUMULATED DEFERRED INCOME TAXES 74,844 57,381
ACCUMULATED DEFERRED INVESTMENT TAX CREDITS 19,734 18,592
DEFERRED CREDITS 12,630 10,702
COMMITMENTS AND CONTINGENCIES (Notes 1, 2, 4, 8 and 12)
--------------- ----------------
$ 1,006,784 $ 1,030,433
=============== ================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31,
1996 1995
--------------- ---------------
(In thousands)
<S> <C> <C>
COMMON SHAREHOLDERS' EQUITY
Common stock with no par value per share
Authorized shares - 50,000,000
Outstanding shares - 13,006,492 in 1996 and 10,920,060 in 1995 $ 183,771 $ 134,973
Retained earnings 94,703 82,484
--------------- ---------------
Total common shareholders' equity 278,474 217,457
--------------- ---------------
PREFERRED STOCK
Preferred stock with no par value
Authorized shares - 5,000,000
Outstanding shares - None
Redeemable cumulative preferred stock of TNP with $100 par value
Authorized shares - 1,000,000
Redemption
price at TNP's Outstanding shares
option 1996 1995
------ ---- ----
Series B 4.65% $ 100.00 21,600 22,800 2,160 2,280
Series C 4.75% 100.00 12,600 13,200 1,260 1,320
------------ ------------ --------------- ---------------
Total redeemable cumulative preferred stock 34,200 36,000 3,420 3,600
------------ ------------ --------------- ---------------
LONG-TERM DEBT
FIRST MORTGAGE BONDS
Series L 10.50% due 2000 - 9,600
Series M 8.70% due 2006 8,100 8,200
Series R 10.00% due 2017 - 62,400
Series S 9.63% due 2019 - 19,600
Series T 11.25% due 1997 100,800 100,800
Series U 9.25% due 2000 100,000 100,000
Unamortized debt discount - (605)
SECURED DEBENTURES
12.50% due 1999 130,000 130,000
Series A 10.75% due 2003 140,000 140,000
REVOLVING CREDIT FACILITIES
1995 Facility - 43,000
1996 Facility 55,000 -
OTHER 202 -
--------------- ---------------
Total long-term debt 534,102 612,995
Less current maturities (138) (1,070)
--------------- ---------------
Total long-term debt, less current maturities 533,964 611,925
--------------- ---------------
TOTAL CAPITALIZATION $ 815,858 $ 832,982
=============== ===============
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
For the Years Ended December 31,
Common Shareholders' Equity
--------------------------------------------------------
Common Stock Retained
Shares Amount Earnings Total
______ ______ ________ _____
(In thousands)
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Balance at December 31, 1993 10,696 $ 131,615 $ 82,012 $ 213,627
Net loss - - (17,441) (17,441)
Dividends on preferred stock - - (790) (790)
Dividends on common stock - $1.22 per share - - (13,046) (13,046)
Sale of common stock 170 2,502 - 2,502
Retirement of preferred stock - - 17 17
------------ ------------ ------------- -------------
Balance at December 31, 1994 10,866 134,117 50,752 184,869
YEAR ENDED DECEMBER 31, 1995
Net income - - 41,505 41,505
Dividends on preferred stock - - (655) (655)
Dividends on common stock - $0.82 per share - - (8,938) (8,938)
Sale of common stock 54 856 - 856
Retirement of preferred stock - - (180) (180)
------------ ------------ ------------- -------------
Balance at December 31, 1995 10,920 134,973 82,484 217,457
YEAR ENDED DECEMBER 31, 1996
Net income - - 23,053 23,053
Dividends on preferred stock - - (167) (167)
Dividends on common stock - $0.93 per share - - (10,699) (10,699)
Sale of common stock 2,086 48,798 - 48,798
Retirement of preferred stock - - 32 32
------------ ------------ ------------- -------------
Balance at December 31, 1996 13,006 $ 183,771 $ 94,703 $ 278,474
============ ============ ============= =============
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of TNP Enterprises, Inc.)
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
For the Years Ended December 31,
1996 1995 1994
-------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
OPERATING REVENUES $ 502,737 $ 485,823 $ 477,989
-------------- -------------- --------------
OPERATING EXPENSES:
Purchased power 196,481 178,465 194,595
Fuel 47,201 48,898 46,988
Other operating and general expenses 73,276 71,311 72,472
Maintenance 10,672 11,522 11,966
Reorganization costs - - 8,782
Depreciation of utility plant 38,170 37,850 36,782
Taxes other than income taxes 32,727 28,865 29,651
Income taxes 10,333 12,317 (1,238)
------------- -------------- --------------
Total operating expenses 408,860 389,228 399,998
------------- -------------- --------------
NET OPERATING INCOME 93,877 96,595 77,991
------------- -------------- --------------
OTHER INCOME (LOSS) :
Gain on sale of Texas Panhandle
properties (note 4) - 14,583 -
Recognition of regulatory disallowances
(note 2) - - (31,546)
Other income and deductions, net 1,626 1,470 1,475
Income taxes 722 (5,324) 10,694
------------- -------------- --------------
Other income (loss), net of taxes 2,348 10,729 (19,377)
------------- -------------- --------------
INCOME BEFORE INTEREST CHARGES
AND CHANGE IN ACCOUNTING 96,225 107,324 58,614
------------- -------------- --------------
INTEREST CHARGES:
Interest on long-term debt 64,654 70,544 71,568
Other interest and amortization of
debt-related costs 4,709 3,416 3,680
------------- -------------- --------------
Total interest charges 69,363 73,960 75,248
------------- -------------- --------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING 26,862 33,364 (16,634)
Cumulative effect of change in accounting for
unbilled revenues, net of taxes (note 3) - 8,445 -
------------- -------------- --------------
NET INCOME (LOSS) 26,862 41,809 (16,634)
Dividends on preferred stock 167 655 790
------------- -------------- --------------
INCOME (LOSS) APPLICABLE TO COMMON STOCK $ 26,695 $ 41,154 $ (17,424)
============= ============== ==============
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of TNP Enterprises, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
1996 1995 1994
--------------- ------------- ---------------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 502,954 $ 481,470 $ 475,462
Purchased power (198,696) (172,486) (193,366)
Fuel costs paid (45,576) (44,781) (46,537)
Cash paid for payroll and to other suppliers (75,807) (76,793) (86,632)
Interest paid, net of amounts capitalized (69,236) (68,484) (76,402)
Income taxes paid (14,242) (1,199) (1,215)
Other taxes paid, net of amounts capitalized (31,219) (30,054) (29,906)
Other operating cash receipts and payments, net 1,135 639 1,442
--------------- ------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 69,313 88,312 42,846
--------------- ------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant, net of capitalized
depreciation and interest (28,006) (28,689) (29,038)
Net proceeds from sale of Texas Panhandle properties - 29,009 -
Additions to other property and investments (1,669) - -
--------------- ------------- ---------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES (29,675) 320 (29,038)
--------------- ------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on preferred and common stocks (10,867) (3,078) (11,794)
Equity contribution from TNPE 47,170 - -
Borrowings (repayments) under revolving credit
facilities 12,000 (42,272) 6,472
Deferred expenses associated with financings (588) (2,096) -
Redemptions:
Preferred stock (180) (5,080) (880)
First mortgage bonds (96,508) (30,270) (1,070)
--------------- ------------- ---------------
NET CASH USED IN FINANCING ACTIVITIES (48,973) (82,796) (7,272)
--------------- ------------- ---------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (9,335) 5,836 6,536
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 14,450 8,614 2,078
--------------- ------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,115 14,450 $ 8,614
=============== ============= ===============
RECONCILIATION OF NET EARNINGS TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income (loss) $ 26,862 $ 41,809 $ (16,634)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Cumulative effect of change in accounting for
unbilled revenues, net of taxes - (8,445) -
Gain on sale of Texas Panhandle properties - (14,583) -
Recognition of deferred revenues - (4,782) 1,382
Depreciation of utility plant 38,170 37,850 36,782
Amortization of debt-related costs and other
deferred charges 3,329 4,952 5,495
Allowance for borrowed funds used during
construction (99) (162) (275)
Deferred income taxes (excluding effect of
change in accounting) 1,140 5,132 (10,920)
Investment tax credits (111) 1,691 (1,374)
Reorganization costs - - 6,858
Recognition of regulatory disallowances - - 31,546
Cash flows impacted by changes in current assets
and liabilities:
Deferred purchased power and fuel costs 5,696 5,997 (107)
Accrued interest (3,103) 2,289 (4,422)
Accrued taxes (8,429) 8,432 (1,108)
Purchased power costs subject to refund (5,688) 5,688 -
Changes in other current assets and liabilities 6,474 3,174 (3,103)
Other, net 5,072 (730) (1,274)
--------------- ------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 69,313 $ 88,312 $ 42,846
=============== ============= ===============
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of TNP Enterprises, Inc.)
CONSOLIDATED BALANCE SHEETS
December 31,
1996 1995
--------------- ----------------
(In thousands)
<S> <C> <C>
ASSETS
UTILITY PLANT:
Electric plant $ 1,215,355 $ 1,193,538
Construction work in progress 906 3,334
--------------- ----------------
Total 1,216,261 1,196,872
Less accumulated depreciation 282,322 252,868
--------------- ----------------
Net utility plant 933,939 944,004
--------------- ----------------
OTHER PROPERTY AND INVESTMENTS, at cost 1,884 175
--------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents 5,115 14,450
Customer receivables 15,521 15,569
Inventories, at lower of average cost or market:
Fuel 367 492
Materials and supplies 6,384 7,287
Deferred purchased power and fuel costs 3,565 9,261
Accumulated deferred income taxes 1,937 144
Other current assets 1,324 1,274
--------------- ----------------
Total current assets 34,213 48,477
--------------- ----------------
DEFERRED CHARGES 32,121 32,287
--------------- ----------------
$ 1,002,157 $ 1,024,943
=============== ================
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 222,133 174,931
Retained earnings 65,308 49,313
--------------- ----------------
Total common shareholder's equity 287,548 224,351
Redeemable cumulative preferred stock 3,420 3,600
Long-term debt, less current maturities 533,800 611,925
--------------- ----------------
Total capitalization 824,768 839,876
--------------- ----------------
CURRENT LIABILITIES:
Current maturities of long-term debt 100 1,070
Accounts payable 27,254 22,040
Accrued interest 10,879 13,982
Accrued taxes 16,901 25,330
Customers' deposits 2,662 2,493
Purchased power costs subject to refund - 5,688
Other current liabilities 10,993 12,472
--------------- ----------------
Total current liabilities 68,789 83,075
--------------- ----------------
REGULATORY TAX LIABILITIES 10,963 26,826
ACCUMULATED DEFERRED INCOME TAXES 65,860 47,066
ACCUMULATED DEFERRED INVESTMENT TAX CREDITS 19,164 17,398
DEFERRED CREDITS 12,613 10,702
COMMITMENTS AND CONTINGENCIES (Notes 1, 2, 4, 8 and 12)
--------------- ----------------
$ 1,002,157 $ 1,024,943
=============== ================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of TNP Enterprises, Inc.)
CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31,
1996 1995
--------------- ---------------
(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 222,133 174,931
Retained earnings 65,308 49,313
--------------- ----------------
Total common shareholder's equity 287,548 224,351
--------------- ----------------
PREFERRED STOCK
Redeemable cumulative preferred stock with $100 par value
Authorized shares - 1,000,000
Redemption
price at TNP's Outstanding shares
option 1996 1995
------ ---- ----
Series B 4.65% 100.00 21,600 22,800 2,160 2,280
Series C 4.75% 100.00 12,600 13,200 1,260 1,320
------------ ----------- --------------- ---------------
Total redeemable cumulative preferred stock 34,200 36,000 3,420 3,600
------------ ----------- --------------- ---------------
LONG-TERM DEBT
FIRST MORTGAGE BONDS
Series L 10.50% due 2000 - 9,600
Series M 8.70% due 2006 8,100 8,200
Series R 10.00% due 2017 - 62,400
Series S 9.63% due 2019 - 19,600
Series T 11.25% due 1997 100,800 100,800
Series U 9.25% due 2000 100,000 100,000
Unamortized debt discount - (605)
SECURED DEBENTURES
12.50% due 1999 130,000 130,000
Series A 10.75% due 2003 140,000 140,000
REVOLVING CREDIT FACILITIES
1995 Facility - 43,000
1996 Facility 55,000 -
--------------- ---------------
Total long-term debt 533,900 612,995
Less current maturities (100) (1,070)
--------------- ---------------
Total long-term debt, less current maturities 533,800 611,925
--------------- ---------------
TOTAL CAPITALIZATION $ 824,768 $ 839,876
=============== ===============
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of TNP Enterprises, Inc.)
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDER'S EQUITY
For the Years Ended December 31,
Common Shareholder's Equity
--------------------------------------------------------------
Capital in
Common Stock Excess of Retained
Shares Amount Par Value Earnings Total
______ ______ __________ ________ _____
(In thousands)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Balance at December 31, 1993 11 $ 107 $ 175,094 $ 38,983 $ 214,184
Net loss - - - (16,634) (16,634)
Dividends on preferred stock - - - (790) (790)
Dividends on common stock - - - (11,000) (11,000)
Retirement of preferred stock - - 17 - 17
---------- ---------- ----------- ------------ -----------
Balance at December 31, 1994 11 107 175,111 10,559 185,777
YEAR ENDED DECEMBER 31, 1995
Net income - - - 41,809 41,809
Dividends on preferred stock - - - (655) (655)
Dividends on common stock - - - (2,400) (2,400)
Retirement of preferred stock - - (180) - (180)
---------- ---------- ----------- ------------ -----------
Balance at December 31, 1995 11 107 174,931 49,313 224,351
YEAR ENDED DECEMBER 31, 1996
Net income - - - 26,862 26,862
Dividends on preferred stock - - - (167) (167)
Dividends on common stock - - - (10,700) (10,700)
Equity contribution from TNPE - - 47,170 - 47,170
Retirement of preferred stock - - 32 - 32
---------- ---------- ----------- ------------ -----------
Balance at December 31, 1996 11 $ 107 $ 222,133 $ 65,308 $ 287,548
========== ========== =========== ============ ===========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
General Information
The consolidated financial statements of TNPE and subsidiaries include the
accounts of TNPE and its wholly owned subsidiaries, TNP, Facility Works, Inc.,
and TNP Operating Company. The consolidated financial statements of TNP and
subsidiaries include the accounts of TNP and its wholly owned subsidiaries, TGC
and TGC II. All intercompany transactions and balances have been eliminated in
consolidation.
TNP is TNPE's principal operating subsidiary. TNP is a public utility
engaged in generating, purchasing, transmitting, distributing, and selling
electricity in Texas and New Mexico. TNP is subject to PUCT and NMPUC
regulation. Some of TNP'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 TNPE's and TNP'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 1996 financial statements.
Accounting for the Effects of Regulation
Electric utilities operate in a highly regulated environment. TNPE's and
TNP's consolidated financial statements reflect the application of certain
accounting standards, including SFAS 71, "Accounting for the Effects of Certain
Types of Regulation," which provide for recognition of the economic effects of
rate regulation. Included among these effects are the recognition of regulatory
assets and liabilities. Regulatory assets represent revenues associated with
certain costs that are expected to be recovered from customers in future rates.
Regulatory liabilities are costs previously collected from customers or other
amounts that reduce future rates. The following table summarizes TNPE's and
TNP's regulatory assets and liabilities as of December 31, 1996 and 1995.
1996 1995
________ _________
(In thousands)
Regulatory Assets:
Deferred purchased power and fuel costs $ 3,565 $ 9,261
Deferred charges:
Losses on reaquired debt 10,000 4,810
Rate case expenses 3,743 4,454
Deferred accounting amounts 4,157 4,287
Other - 792
________ _________
Total $ 21,465 $ 23,604
======== =========
Regulatory Liabilities:
Income tax related $ 10,963 $ 26,826
Purchased power costs subject to refund - 5,688
________ _________
Total $ 10,963 $ 32,514
======== =========
Federal and state legislators and regulatory authorities have adopted or
are considering a number of changes that are significantly impacting competitive
conditions in the electric utility industry, such as the emergence of
independent power producers, wholesale transmission access, and retail wheeling.
If recovery of costs through rates becomes uncertain or unlikely, whether due to
legislative or regulatory changes, competition, or otherwise, accounting
standards such as SFAS 71 may no longer apply to TNPE and TNP. As a result, TNPE
and TNP could be required to write off all or a portion of their regulatory
assets and liabilities. Moreover, to the extent that future rates are
insufficient to recover costs, additional write downs could be required.
Management of TNPE and TNP are currently unable to predict the ultimate outcome
of changes in the electric utility industry and whether the outcome will have a
significant effect on their consolidated financial position and results of
operations. However, based upon current regulatory conditions in the states in
which TNP operates, management believes it probable that TNP will continue, for
the foreseeable future, to meet the criteria for continued application of SFAS
71, and it is probable that TNP will recover from ratepayers the regulatory
assets included in the table above.
Utility Plant
Utility plant is stated at the historical cost of construction which
includes labor, materials, indirect charges for such items as engineering and
administrative costs, and AFUDC. Property repairs and replacement of minor items
are charged to operating expenses; major replacements and improvements are
capitalized to utility plant.
AFUDC is a noncash item designed to enable a utility to capitalize interest
costs during periods of construction. Established regulatory practices enable
TNP to recover these costs from ratepayers. The composite rates used for AFUDC
were 6.0%, 8.0%, and 8.8% in 1996, 1995, and 1994, respectively.
The costs of depreciable units of plant retired or disposed of in the
normal course of business are eliminated from utility plant accounts and such
costs plus removal expenses less salvage are charged to accumulated
depreciation. When complete operating units are disposed of, appropriate
adjustments are made to accumulated depreciation, and the resulting gains or
losses, if any, are recognized.
Depreciation is provided on a straight-line method based on the estimated
lives of the properties as indicated by periodic depreciation studies. A portion
of depreciation of transportation equipment used in construction is charged to
utility plant accounts in accordance with the equipment's use. Depreciation as a
percentage of average depreciable cost was 3.2%, 3.3%, and 3.1% in 1996, 1995,
and 1994, 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
TNP accrues estimated revenues for energy delivered since the latest
billing. Prior to January 1, 1995, TNP recognized revenue when billed. See Note
3 for the effects of the change in recognizing revenues from cycle billing to
the accrual method in 1995.
TNP sells customer receivables to an unaffiliated company on a nonrecourse
basis.
Purchased Power and Fuel Costs
Electric rates include estimates of purchased power and fuel costs incurred
by TNP in purchasing or generating electricity. Differences between amounts
collected and allowable costs are recorded either as purchased power subject to
refund or deferred purchased power and fuel costs in accordance with regulatory
ratemaking policy.
Deferred Charges
Expenses incurred in issuing long-term debt and related discount and
premium are amortized on a straight-line basis over the lives of the respective
issues.
Included in deferred charges are other assets that are expected to benefit
future periods and certain costs that are deferred for ratemaking purposes and
amortized over periods allowed by regulatory authorities.
Derivatives
Premiums paid for an interest rate collar will be amortized over the term
of the related agreement. Unamortized premiums are included in Deferred Charges
in the consolidated balance sheets. Amounts to be received or paid under the
agreement will be recognized on the accrual basis as a component of interest
expense.
Income Taxes
TNPE files a consolidated federal income tax return that includes the
consolidated operations of TNP and its subsidiaries. The amounts of income taxes
recognized in TNP's accompanying consolidated financial statements were computed
as if TNP and its subsidiaries filed a separate consolidated federal income tax
return.
ITC amounts utilized in the federal income tax return are deferred and
amortized to earnings ratably over the estimated service lives of the related
assets.
Fair Values of Financial Instruments
Fair values of cash equivalents, temporary investments, and customer
receivables approximated the carrying amounts because of the short maturities of
those instruments.
The estimated fair values of long-term debt and preferred stock were based
on quoted market prices of the same or similar issues. The estimated fair values
of long-term debt and preferred stock were as follows:
December 31, 1996 December 31, 1995
_________________ _________________
Carrying Amount Fair Values Carrying Amount Fair Values
_______________ ___________ _______________ ___________
(In thousands)
Long-term debt $ 533,900 $ 564,000 $ 612,995 $ 643,000
Preferred stock 3,420 1,500 3,600 1,600
Interest rate collar 295 180 - -
Common Stock
At December 31, 1996, 280,799 shares of TNPE's common stock were reserved
for issuance to TNP's 401(k) plan. Additionally, 576,947 shares of TNPE's common
stock were reserved for subsequent issuance under other stock compensation or
shareholder plans.
Shareholder Rights Plan
TNPE has a Rights Plan that is designed to protect TNPE'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 TNPE's common
stock currently outstanding or issued until the close of business on November 4,
1998.
Upon the occurrence of certain events, each right entitles a shareholder to
elect to purchase one share of common stock at $45 per share or, under certain
circumstances, shares of common stock at half the then-current market price or
to receive TNPE common stock or other securities having an aggregate value equal
to the excess of (i) the value of the common stock or other securities on the
date the rights are exercised over (ii) the cash payment that would have been
payable upon exercise of the rights if cash payment had been elected.
Until certain triggering events occur, the rights will trade together with
TNPE'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
TNPE'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 TNPE's outstanding common stock. The rights expire
November 4, 1998, unless earlier redeemed or exchanged by TNPE, and have had no
effect on EPS.
Stock-Based Compensation
As discussed in Note 7, TNPE 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 stock-based compensation. TNP has elected to continue to apply the
provisions of APB Opinion 25 in calculating stock-based compensation. The pro
forma effect of applying SFAS 123 to the equity awards during 1995 and 1996 was
immaterial.
Note 2. Regulatory Matters
Cities Rate Review
In December 1996, certain cities in the Texas gulf coast area served by TNP
passed resolutions requiring TNP to file complete rate information with those
cities. In 1997 those cities have agreed to reopen negotiations on a new
transition to competition proposal and have deferred the required rate filing
until July 1, 1997. If negotiations on the new transition to competition
proposal is not successful and the rate filings are made, TNP anticipates a
final resolution of the rate review with the cities in late 1997. Based on its
preliminary analysis, TNP believes the filing will support the reasonableness of
TNP's current rates.
Community ChoiceSM
On May 2, 1996, TNP filed an application with the PUCT requesting approval
of a program known as Community Choice that would apply to electric services
provided by TNP in Texas. On June 21, 1996, TNP filed an application with the
NMPUC requesting approval of a similar program that would apply to electric
service provided by TNP in New Mexico. Community Choice is a transition plan
designed to address the opportunities and challenges presented by the
increasingly deregulated and competitive environment of the electric services
industry.
As proposed by TNP, Community Choice provided for transition periods of
four years in New Mexico and five years in Texas. Community Choice proposed that
during the transition periods, TNP's rates for electric service in New Mexico
and Texas would be structured to provide TNP a reasonable opportunity to reduce
its so-called potential "stranded costs." "Stranded costs" means the difference
between what it currently costs TNP to provide service and what a customer would
be willing to pay for such service in a competitive market. In Texas, TNP's
potential stranded cost relates to TNP One, its 300 MW generating unit, and
could potentially be more than $250 million. In New Mexico, TNP's potential
stranded cost relates to its purchased power contracts and could potentially be
more than $10 million. At the end of the transition periods, TNP would
aggregate, or combine, its customers at the community level and permit these
aggregated electrical loads to choose the types and nature of electric services
that will be available to individual customers within each aggregated load.
In November 1996, TNP withdrew its Community Choice filing in Texas. Prior
to the withdrawal TNP had attempted to work through the numerous issues with
various intervenors. The withdrawal was due to a lack of consensus on key
issues, including the issue of stranded costs.
In 1997 TNP proposed a new plan for transition to competition to the
communities within TNP's service territory in Texas. The new plan includes a
five-year transition period and the opportunity to reduce potential stranded
costs. The new plan also entails options providing various levels of access to
the open market, which TNP customers will be able to select from at the end of
the transition period. Due to the numerous issues involved, TNP can provide no
assurance as to the timing or outcome of the new transition to competition plan
in Texas.
In 1997 TNP filed a stipulation with the NMPUC adjusting several of the
components of the original Community Choice proposal. The stipulation has the
support of the major stakeholders. The revised plan gives TNP customers the
right to choose their energy provider after a three-year transition period,
freezes rates (including fuel and purchased power) for a three-year period, and
allows for customer aggregation based on market forces. Hearings were held in
late February 1997. Approval by the NMPUC is the final step. TNP believes the
plan will allow it to recover most if not all of its potential stranded costs in
New Mexico, however, the actual recovery of any stranded costs will depend on
the future market and price for energy through 2002.
Fuel Reconciliation
TNP's fixed fuel factor remains the same until changed as part of general
rate case or fuel reconciliation, or until the PUCT orders a reconciliation for
any over or under collections of fuel costs. TNP expects to file a
reconciliation of fuel costs in June 1997, for the period of October 1993
through December 1996. Management believes the ultimate outcome of this fuel
reconciliation will not have a material adverse effect on TNP's or TNPE's
consolidated financial position or results of operations.
1994 Texas Rate Case Settlement
On October 6, 1994, the PUCT approved a unanimous settlement among the
parties in TNP's 1994 retail rate application. The rate case settlement provided
for an increase in annualized revenues in Texas of $17.5 million, or 4.5%, which
TNP implemented on October 2, 1994.
The settlement resolved all outstanding court appeals in connection with
TNP's two previous rate cases and required TNP to write off $31.5 million ($35.0
million of the original cost of TNP One). TNP recognized the write-off in the
second quarter of 1994, which resulted in an after-tax charge of approximately
$20.5 million, or $1.91 per share of TNPE common stock. The settlement also
required TNP to sell its Texas Panhandle properties, subject to certain
conditions.
The rate case settlement includes a moratorium restricting TNP from
applying for rate increases in Texas until March 31, 1999, subject to certain
conditions. These conditions do not allow TNP to apply for any base rate
increase under any circumstances prior to March 31, 1997, but would allow an
application for increased rates to be filed after that time if certain force
majeure events (as defined in the agreement) occur during the moratorium.
Note 3. Change in Accounting for Unbilled Revenues
Effective January 1, 1995, TNP changed its method of accounting for
operating revenues from cycle billing to the accrual method. The change was made
in order to more closely match revenues and expenses and more closely conforms
to common utility industry practice. The cumulative effect of this change was to
recognize $12,993,000 of additional revenues ($8,445,000, net of taxes, or $0.77
per share). The pro forma effects of the change in accounting on 1994, assuming
the new method was applied retroactively to that year, would have been to
decrease the net loss by $1,347,000 or $0.13 per share).
Note 4. Sale of Texas Panhandle Properties
In September 1995, TNP sold its Texas Panhandle properties to SPS for $29.2
million, and recognized a net of tax gain of $9.5 million, or $0.87 per share of
TNPE common stock. The sale was consummated pursuant to the sale agreement
between TNP and SPS in connection with the Texas rate case settlement discussed
in Note 2. The Panhandle properties comprised a relatively small portion of
TNP's business. The book value of the Panhandle properties sold was $14.3
million. Revenues from the properties for 1995 through the closing date were
$7.4 million with corresponding sales of 76.3 GWH to 7,350 customers.
The proceeds received from SPS were used to redeem $29.2 million of Series
T FMBs. In January 1996, TNP filed a class action lawsuit against John Hancock
Mutual Life Insurance Company, a Series T bondholder. TNP sought confirmation
that its redemption of Series T FMBs with proceeds from the Panhandle sale was
within its rights under the indenture governing the FMBs.
TNP's lawsuit was originally filed against PPM, which claimed to be a
bondholder and threatened to take legal action against TNP over the redemption.
PPM filed a counterclaim seeking declarations that the Series T partial
redemption breached the indenture governing the FMBs and that TNP could not
redeem Series T FMBs prior to maturity under circumstances like the Panhandle
sale. Because PPM was not a bondholder, it was dismissed from the lawsuit and,
on PPM's motion, Jackson National Life Insurance Company was substituted as
defendant.
As a result of federal mediation on January 30, 1997, TNP, Jackson National
Life Insurance Company and John Hancock Insurance Co. agreed to a tentative
settlement of the lawsuit. The proposed settlement, which is subject to approval
of the federal judge, calls for TNP to pay $2 million to the parties of the
lawsuit. Accordingly, TNP established a reserve for the settlement in 1996. The
proposed settlement, if approved, will allow for the end of costly ongoing
litigation.
Note 5. Revenues Subject to Refund
During the third quarter of 1995, the IRS issued TNP a favorable private
letter ruling that enabled TNP to recognize additional revenues and accrued
interest of $4.9 million that previously had been deferred. This resulted in a
one-time after-tax earnings increase of $3.0 million, or $0.28 per share of TNPE
common stock.
The revenues recognized were collected from October 1991 through October
1994, as a result of a Texas rate case filed in 1991. The PUCT allowed TNP to
collect additional annualized revenues of $1.6 million pending the resolution of
the regulatory tax treatment of disallowed utility plant. Recognition of these
revenues was conditioned upon TNP obtaining the ruling from the IRS.
Note 6. Reorganization
During the fourth quarter of 1994, TNP reduced company-wide staffing levels
by 140 positions, or 14% of the workforce, as a result of work elimination
reviews by employee teams. The goals of the teams were to streamline operations
and reduce future costs. The staffing reductions were accomplished primarily
through early retirements and involuntary terminations. The aggregate costs
impacting TNP's 1994 operations were $8,782,000 ($5,723,000, net of taxes, or
$0.53 per share of TNPE common stock).
Note 7. Employee Benefit Plans
Pension Plan
TNP has a defined benefit pension plan covering substantially all of its
employees. Benefits are based on an employee's years of service and
compensation. TNP's funding policy is to contribute the minimum amount required
by federal funding standards. The following table sets forth the plan's funded
status and amounts recognized in the consolidated balance sheets at December 31,
1996, and 1995.
1996 1995
_________ _________
(In thousands)
Actuarial present value of benefit obligations:
Vested benefit obligation $ 58,466 $ 59,393
Unvested benefit obligation 4,539 4,383
_________ _________
Accumulated benefit obligation $ 63,005 $ 63,776
========= =========
Projected benefit obligation $ 66,406 $ 67,752
Unrecognized net asset 83 107
Unrecognized prior service cost 1,588 2,536
Unrecognized net gain from past experience 21,484 11,357
_________ _________
89,561 81,752
Plan assets (principally marketable securities)
at estimated fair value 82,771 75,037
________ _________
Accrued pension costs (included in deferred
credits in the consolidated balance sheets) $ 6,790 $ 6,715
========= =========
Net pension costs were comprised of the following components as determined
using the projected unit credit actuarial method:
1996 1995 1994
_______ _______ _______
(In thousands)
Service cost $ 1,425 $ 1,071 $ 1,763
Interest cost on projected benefit obligation 4,841 4,762 4,179
Adjustment for actual return on plan assets (12,398) (13,797) 260
Effect of reorganization costs, net - - 3,537
Net amortization and deferral 6,207 7,607 (6,238)
_______ ________ ________
Net pension costs $ 75 $ (357) $ 3,501
======= ======== ========
Assumptions used in accounting for the pension plan as of December 31,
1996, and 1995 were as follows:
1996 1995
____ ____
Discount rates 7.75% 7.25%
Rates of increase in compensation levels 4.0% 4.0%
Expected long-term rate of return on assets 9.5% 9.5%
Postretirement Benefit Plan
TNP sponsors a health care plan that provides postretirement medical and
death benefits to retirees who satisfied minimum age and service requirements
during employment. TNP recognizes the costs of postretirement benefits on the
accrual basis during the periods that employees render service to earn the
benefits in accordance with SFAS 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions". Prior to 1993, the costs of these benefits were
expensed on a "pay-as-you-go" basis. TNP has been permitted to recover through
rates the additional costs resulting from the adoption of SFAS 106. TNP
established a trust fund dedicated to paying these postretirement benefits.
The following table sets forth the plan's funded status and amounts
recognized in the consolidated balance sheets at December 31, 1996, and 1995.
1996 1995
_______ _______
(In thousands)
Accumulated postretirement benefit obligation:
Retirees and dependents $13,060 $14,229
Active employees 4,244 4,093
_______ _______
Total benefits earned 17,304 18,322
Plan assets (principally marketable securities)
at estimated fair value 6,975 5,710
_______ _______
Accumulated postretirement benefit
obligation in excess of plan assets 10,329 12,612
Unrecognized transition obligation (13,721) (14,579)
Unrecognized net gain from past experience 6,998 5,603
_______ _______
Accrued postretirement benefit costs (included in
deferred credits in the consolidated balance sheets) $ 3,606 $ 3,636
======= =======
Net postretirement benefit costs were comprised of the following
components:
1996 1995 1994
______ ______ ______
(In thousands)
Service cost $ 524 $ 374 $ 738
Interest cost on postretirement
benefit obligation 1,259 1,265 1,642
Reduction for actual return on plan
assets (708) (956) (59)
Effect of reorganization costs, net - - 2,945
Net amortization and deferral 922 1,145 784
______ ______ ______
Net postretirement benefit costs $1,997 $1,828 $6,050
====== ====== ======
The transition obligation is being amortized over a 20-year period that
began in 1993. The assumed health care cost trend rate used to measure the
expected cost of benefits was 5.7% for 1996 and is assumed to trend downward
slightly each year to 4.3% for 2003 and thereafter. That assumed rate has a
significant effect on the amounts reported. For example, increasing the assumed
health care cost trend rates by one percentage point in each year would increase
the accumulated postretirement benefit obligation as of December 31, 1996, by
$2.1 million and the aggregate of the service and interest cost components of
net postretirement benefit cost for 1996 by $288,000.
<PAGE>
Additional assumptions used in accounting for the postretirement benefit
plan as of December 31, 1996, and 1995, were as follows:
1996 1995
____ ____
Discount rates 7.75% 7.25%
Expected rate of return on assets (net of taxes) 5.7% 6.0%
Incentive Plans
TNPE and TNP 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 EPS, operations
and maintenance costs per KWH, and system reliability measures. Operating
expenses for 1996 and 1995 included costs for the various cash and equity plans
of $4.8 million and $2.0 million, respectively.
Other Employee Benefits
TNP 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 TNPE common stock. TNP's contributions are
used to purchase TNPE common stock, which employees may later convert into
investments in other investment options.
TNP has employment contracts with certain members of management and other
key personnel. The contracts provide for lump sum compensation payments and
other rights in the event of termination of employment or other adverse
treatment of such persons following a "change in control" of TNPE or TNP. Such
event is defined to include, among other things, substantial changes in the
corporate structure, ownership, or board of directors of either entity.
An excess benefit plan has been provided for certain key personnel and
retired employees. The payment of benefits under the excess benefit plan is
partially provided under an insurance policy arrangement for paying the benefits
that generally would have been provided by the pension and thrift plans except
for federal limitations.
Note 8. Income Taxes
<TABLE>
<CAPTION>
Components of income taxes were as follows:
TNPE TNP
____________________________________ _____________________________________
1996 1995 1994 1996 1995 1994
____ ____ ____ ____ ____ ____
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Taxes on net operating income:
Federal - current $ 8,596 $ 3,108 $ (253) $ 8,596 $ 3,108 $ (253)
State - current 86 507 55 86 507 55
Federal - deferred 1,381 6,700 (13) 1,381 6,700 (13)
ITC adjustments 270 2,002 (1,027) 270 2,002 (1,027)
_________ ___________ __________ __________ ___________ __________
10,333 12,317 (1,238) 10,333 12,317 (1,238)
_________ ___________ __________ __________ ___________ __________
Taxes on other income (loss):
Federal - current (114) 7,170 1,006 (100) 7,203 560
Federal - deferred (1,574) (1,444) (10,902) (241) (1,568) (10,907)
ITC adjustments (650) (323) (409) (381) (311) (347)
_________ ___________ __________ __________ ___________ __________
(2,338) 5,403 (10,305) (722) 5,324 (10,694)
_________ ___________ __________ __________ ___________ __________
Taxes on cumulative effect
of change in accounting,
federal-deferred (Note 3) - 4,548 - - 4,548 -
_________ ___________ __________ __________ ___________ __________
Total income taxes $ 7,995 $ 22,268 $ (11,543) $ 9,611 $ 22,189 $ (11,932)
======== ========== =========== ========== =========== ==========
</TABLE>
<PAGE>
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>
TNPE TNP
___________________________________ ___________________________________
1996 1995 1994 1996 1995 1994
____ ____ ____ ____ ____ ____
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory tax rate $ 10,850 $ 17,595 $ (9,873) $ 12,735 $ 17,674 $ (9,731)
Amortization of
accumulated deferred ITC (1,323) (1,079) (1,055) (1,323) (1,079) (1,055)
Amortization of
excess deferred taxes (143) (160) (183) (143) (318) (183)
State income taxes 86 507 55 86 507 55
ITC related to disallowances (191) (312) (347) (191) (312) (347)
ITC adjustment (760) - - - - -
Taxes on cumulative effect
of change in accounting,
federal- deferred (Note 3) - 4,548 - - 4,548 -
Other, net (524) 1,169 (140) (1,553) 1,169 (671)
_________ _________ __________ _________ _________ _________
Actual income taxes $ 7,995 $ 22,268 $ (11,543) $ 9,611 $ 22,189 $(11,932)
========= ========= ========== ========= ========= =========
</TABLE>
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, 1996, and 1995, are presented below.
<TABLE>
<CAPTION>
TNPE TNP
__________________________ __________________________
1996 1995 1996 1995
____ ____ ____ ____
(In thousands)
<S> <C> <C> <C> <C>
Current deferred income taxes:
Deferred tax assets:
Unbilled revenues $ 2,470 $ 2,413 $ 2,470 $ 2,413
Other 663 264 663 264
____________ ____________ ____________ ____________
3,133 2,677 3,133 2,677
Deferred tax liability:
Deferred purchased power and fuel costs (1,196) (2,533) (1,196) (2,533)
____________ ____________ ____________ ____________
Current deferred income taxes, net $ 1,937 $ 144 $ 1,937 $ 144
============ ============ ============ ============
Noncurrent deferred income taxes:
Deferred tax assets:
Minimum tax credit carryforwards $ 27,445 $ 22,365 $ 34,703 $ 27,317
Federal regular tax net operating
loss carryforwards - 4,240 1,724 9,604
ITC carryforwards 11,255 14,399 11,823 15,591
Regulatory related items 16,844 17,921 16,844 17,921
Accrued employee benefit costs 3,486 3,323 3,486 3,323
Other 1,263 1,900 696 707
____________ ____________ ___________ ____________
60,293 64,148 69,276 74,463
____________ ____________ ___________ ____________
Deferred tax liabilities:
Utility plant, principally due to
depreciation and basis differences (115,823) (114,446) (115,823) (114,446)
Deferred charges and other (5,565) (4,743) (5,565) (4,743)
Regulatory related items (13,749) (2,340) (13,748) (2,340)
____________ ____________ ____________ ____________
(135,137) (121,529) (135,136) (121,529)
____________ ____________ ____________ ____________
Noncurrent deferred income taxes, net $ (74,844) $ (57,381) $ (65,860) $ (47,066)
============ ============ ============ ============
</TABLE>
<PAGE>
Federal tax carryforwards as of December 31, 1996, were as follows:
TNPE TNP
(In thousands)
Net operating loss
Amount $ - $ 4,926
Expiration period - 2009
Minimum tax credits
Amount $ 27,445 $ 34,703
Expiration period None None
Investment tax credit
Amount $ 11,255 $ 11,823
Expiration period 2005 2005
In March 1995, an Internal Revenue Service revenue agent involved in
auditing TNPE's 1990-1994 consolidated federal income tax returns recommended
that a private letter ruling concerning eligibility of the TNP One generating
plant for ITC be revoked retroactively. Management believes that TNP's claim for
ITC is valid and is contesting the agent's recommendation. Of the $22.5 million
of ITC at issue, TNPE and its subsidiaries have utilized $8.2 million of ITC in
the consolidated tax returns through 1995 and expect to utilize $1.6 million in
the 1996 consolidated tax returns. TNP's portion is $7.0 million and $1.8
million, respectively. However, since 1990 TNPE and TNP have only recognized
$2.2 million of the ITC in results of operations.
Note 9. Long-Term Debt
First Mortgage Bonds
FMBs issued under the Bond Indenture are secured by substantially all
utility plant owned directly by TNP. The Bond Indenture restricts cash dividend
payments on TNP common stock as discussed in Note 11.
TNP has the ability to issue additional FMBs based on certain financial
tests, or based on previously retired FMBs. As of December 31, 1996, TNP could
not issue any additional FMBs based on the required financial tests. However,
TNP also has the ability to issue additional FMBs against previously retired
FMBs, as limited by an earnings test. As of December 31, 1996, TNP could issue
up to $91 million of FMBs at an assumed interest rate of 9% based on previously
retired FMBs.
Secured Debentures
TNP's Series A, 10.75% secured debentures and 12.5% secured debentures are
secured with a first lien on a portion of Unit 1. The 12.5% secured debentures
are also secured by a first lien on a portion of Unit 2. TNP's secured debenture
holders are also secured by second liens on substantially all utility plant in
Texas owned directly by TNP. The secured debentures also contain restrictions on
dividends and asset dispositions.
Revolving Credit Facilities
In September 1996, TNP entered into a new credit facility ("1996
Facility"). The 1996 Facility provides for a total commitment of $100 million
and supplements the existing credit facility ("1995 Facility"). The 1995
Facility provides for a total commitment of $150 million. The 1996 Facility
commitment expires September 2001, while the 1995 Facility commitment will
reduce to $125 million on November 3, 1998, and to $100 million on November 3,
1999, and will expire on November 3, 2000. The collateral securing the 1996
Facility is $100 million of non-interest bearing (except upon default) FMBs.
Collateral securing the 1995 Facility is generally a first lien on a portion of
TNP One, a second lien on TNP's first mortgage bond trust estate located in
Texas, and $30 million of noninterest bearing FMBs. This collateral secures
borrowings up to $100 million. Before increasing borrowings above $100 million,
TNP must pledge additional noninterest bearing FMBs in an amount equal to the
borrowings over $100 million.
In addition to the 1996 Facility, TNP purchased 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.
TNP has sufficient liquidity to satisfy the possibility of any known
contingencies. Management believes cash flow from operations and periodic
borrowings under its two revolving credit facilities should be sufficient to
meet working capital requirements and planned capital expenditures at least
through 1998.
At December 31, 1996, interest rates on borrowings under the 1996 Facility
were 7.06% and would have been 7.12% on the 1995 Facility. The composite average
borrowing rates under TNP's credit facilities were 7.32% and 8.92% for 1996 and
1995, respectively. The interest rate margins on both facilities will decrease
as the ratings on TNP's FMBs improve.
Under specified conditions, TNP's credit facilities restrict the payment of
cash dividends on TNP 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, 1996, FMB and secured debenture maturities and sinking
fund requirements for the five years following 1996 are as follows:
Secured Total FMBs and
Year FMBs Debentures Secured Debentures
____ ____ __________ __________________
(In thousands)
1997 $ 100 $ - $ 100
1998 100 - 100
1999 100 130,000 130,100
2000 100,100 - 100,100
2001 100 - 100
At the end of 1996, $55 million was outstanding under the 1996 Facility,
which matures in 2001. In January 1997 TNP borrowed from its credit facilities
in order to retire the $100.8 million of 11.25% Series T FMBs. Accordingly, at
December 31, 1996, the $100.8 million was classified as long-term debt.
Following the retirement of the Series T FMBs, TNP had available borrowing
capacity of $90.5 million under the credit facilities.
As of December 31, 1996, Facility Works had $202,000 of debt associated
with the purchase of vehicles.
Note 10. Redeemable Cumulative Preferred Stock
If TNP liquidates voluntarily or involuntarily, holders of preferred stock
have preferences equal to amounts payable on redemption or par, respectively,
plus accrued dividends. TNP's charter provides that additional shares of
preferred stock may not be issued unless certain tests are met. As of December
31, 1996, $25 million additional preferred stock could be issued.
Note 11. Capital Stock and Dividends
TNPE
In October 1996, TNPE issued 2 million shares of common stock in a public
offering, with net proceeds of approximately $47,170,000. The net proceeds were
transferred to TNP as an equity contribution.
In September 1996, TNPE increased its quarterly dividend from $0.22 to
$0.245 per share. TNPE had reduced the quarterly dividend by 51% from $0.41 to
$0.20 per share beginning with the third quarter of 1994 due to TNP's
restriction (discussed below) and other factors such as the relatively low
common equity component of TNPE's capital structure and industry considerations.
TNP
The Bond Indenture prohibits TNP from paying cash dividends on its common
stock to TNPE unless unrestricted retained earnings are available. The
restriction became operative during 1994 due to the recognition of $35.0 million
of regulatory disallowances as discussed in Note 2 and temporarily precluded TNP
from paying cash dividends until March 1995.
As of December 31, 1996, $46.6 million of unrestricted retained earnings
were available for dividends.
Note 12. Commitments and Contingencies
Fuel Supply Agreement
TNP successfully negotiated a 20% reduction in the cost of lignite provided
by Walnut Creek Mining Company effective January 1, 1995, for the life of TNP
One. Walnut Creek Mining Company is jointly owned by Phillips Coal Company and
Peter Kiewit Sons', Inc.
<PAGE>
Wholesale Purchased Power Agreements
TNP purchases a significant portion of its electric requirements from
various wholesale suppliers. These contracts are scheduled to expire in various
years through 2010.
TNP has notified TU of its intent to cease purchasing full requirements
power and energy effective January 1, 1999. In addition, in July 1995 TNP filed
proceedings with the PUCT and in a Texas state district court to declare TNP's
wholesale purchased power agreement with TU null and void. On August 29, 1996,
The PUCT entered an order declaring two of the terms of the TU Agreement void,
but upheld the validity of the remainder of the contract. In November 1996, TNP
filed an a appeal of the PUCT's ruling with a state district court.
In 1996, TU supplied approximately 43% of TNP's Texas capacity and 24% of
its Texas energy requirements. Management expects, as a result of the developing
competition within the wholesale power market, to enter into new arrangements
for such capacity and energy on terms that are more favorable for its customers.
TNP has requested proposals for purchased power resources to replace power
currently purchased from TU.
At December 31, 1996, TNP 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>
1997 1998 1999 2000 2001
_______ ________ ________ _______ _______
<S> <C> <C> <C> <C> <C>
Purchased power agreements $ 67.4 $ 52.0 $ 17.1 $ 16.7 $ 16.4
Fuel supply agreements 30.2 30.2 30.2 30.2 30.2
_______ ________ ________ _______ _______
Total $ 97.6 $ 82.2 $ 47.3 $ 46.9 $ 46.6
======= ======== ======== ======= =======
</TABLE>
Significant Customer
TNP is actively negotiating with a significant major industrial customer in
Texas that provided GWH sales of 628 and annual revenues of $27.8 million in
1996 ($9.9 million in base revenues). This customer is constructing a 300-MW
cogeneration plant, the first phase of which is expected to commence operations
in 1998. TNP is negotiating with the customer to continue providing
transmission, distribution and other services. Even if TNP is successful in
these negotiations, base revenues from this customer are expected to be
significantly less.
Legal Actions
TNP is involved in various claims and other legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on TNP's
and TNPE's consolidated financial position or results of operations.
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
Selected Quarterly Consolidated Financial Data
The following selected quarterly consolidated financial data for TNPE is
unaudited, and, in the opinion of the TNPE'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>
1996
____
Operating revenues........................................ $ 99,827 $ 122,020 $ 157,453 $ 123,437
Net operating income...................................... 17,786 25,327 31,237 19,527
Net income................................................ 562 7,831 14,292 368
Income applicable to common stock......................... 520 7,789 14,250 327
Earnings per share of common stock........................ 0.05 0.71 1.29 0.03
Dividends per share of common stock....................... $ 0.22 $ 0.22 $ 0.245 $ 0.245
Weighted average common shares outstanding................ 10,986 11,028 11,080 13,032
1995
____
Operating revenues........................................ $ 105,647 $ 121,237 $ 151,586 $ 107,353
Net operating income...................................... 17,044 25,100 35,147 19,304
Net income ............................................... 6,124 6,131 26,728 2,522
Income applicable to common stock......................... 5,936 5,951 26,576 2,387
Earnings per share of common stock........................ 0.55 0.54 2.44 0.22
Dividends per share of common stock....................... $ 0.20 $ 0.20 $ 0.20 $ 0.22
Weighted average common shares outstanding................ 10,877 10,901 10,909 10,915
</TABLE>
Generally, the variations between quarters reflect the seasonal
fluctuations of TNP's business. In addition, the results above are impacted by
one-time items. These items, net of taxes, are as follows:
- - reserve for tentative settlement of Series T litigation $1.3 million in
fourth quarter of 1996 (Note 4)
- - change in accounting for unbilled revenues of $8.4 million in first quarter
of 1995 (Note 3)
- - gain on sale of Texas Panhandle properties of $9.5 million in third quarter
of 1995 (Note 4)
- - recognition of previously deferred revenues of $3.0 million during the
third quarter of 1995 (Note 5)
TNP ENTERPRISES, INC. EQUITY INCENTIVE PLAN
EFFECTIVE JANUARY 1, 1995
AS AMENDED EFFECTIVE JANUARY 1, 1997
Article 1. Establishment, Purpose, and Duration
1.1 Establishment of the Plan. TNP Enterprises, Inc., a Texas corporation
(hereinafter referred to as the "Company"), hereby establishes an incentive
compensation plan to be known as the "TNP Enterprises, Inc. Equity Incentive
Plan" (hereinafter referred to as the "Plan"), as set forth in this document.
The Plan permits the grant of Nonqualified Stock Options, Incentive Stock
Options, Restricted Stock, Performance Units, Performance Shares, and Other
Stock-Based Awards.
Subject to approval by the Company's shareholders, the Plan shall become
effective as of January 1, 1995 (the "Effective Date"), and shall remain in
effect as provided in Section 1.3 herein.
1.2 Purpose of the Plan. The purpose of the Plan is to promote the success
and enhance the value of the Company by linking the personal interests of
Participants to those of Company shareholders, and by providing Participants
with an incentive for outstanding performance.
The Plan is further intended to provide flexibility to the Company in its
ability to motivate, attract, and retain the services of Participants upon whose
judgment, interest, and special effort the successful conduct of its operation
largely is dependent.
1.3 Duration of the Plan. The Plan shall commence on the Effective Date, as
described in Section 1.1 herein, and shall remain in effect, subject to the
right of the Board of Directors to terminate the Plan at any time pursuant to
Article 15 herein, until all Shares subject to it shall have been purchased or
acquired according to the Plan's provisions. However, in no event may an Award
be granted under the Plan on or after January 1, 2005.
Article 2. Definitions
Whenever used in the Plan, the following terms shall have the meanings set
forth below and, when the meaning is intended, the initial letter of the word is
capitalized:
(a) "Award" means, individually or collectively, a grant under this Plan
of Nonqualified Stock Options, Incentive Stock Options, Restricted
Stock, Performance Units, Performance Shares, or Other Stock-Based
Awards.
(b) "Award Agreement" means an agreement entered into by each Participant
and the Company, setting forth the terms and provisions applicable to
Awards granted to Participants under this Plan.
(c) "Beneficial Owner" shall have the meaning ascribed to such term in
Rule 13d-3 of the General Rules and Regulations under the Exchange
Act.
(d) "Board" or "Board of Directors" means the Board of Directors of the
Company.
(e) "Cause" means the admission by or the conviction of the Participant of
an act of fraud, embezzlement, theft, or other criminal act
constituting a felony under laws involving moral turpitude. The
Board of Directors, by majority vote, shall make the determination of
whether Cause exists.
(f) "Change in Control" shall have the meaning ascribed to such term in
the Texas-New Mexico Power Company Executive Agreement for Severance
Compensation Upon Change in Control.
(g) "Code" means the Internal Revenue Code of 1986, as amended from time to
time.
(h) "Committee" means the committee, as specified in Article 3, appointed
by the Board to administer the Plan.
(i) "Company" means TNP Enterprises, Inc., a Texas corporation, and the
Company's subsidiaries, as well as any successor thereto as provided
in Article 18 herein.
(j) "Director" means any individual who is a member of the Board of
Directors of the Company.
(k) "Disability" shall have the meaning ascribed to such term in the
Participants' governing long-term disability plan.
(l) "Dividend Equivalent" means a contingent right to be paid dividends
declared with respect to outstanding Awards, pursuant to the terms of
Sections 6.5 and 8.3 herein.
(m) "Employee" means any full-time, nonunion employee of the Company or of
the Company's Subsidiaries. Directors who are not otherwise employed
by the Company shall not be considered Employees under this Plan.
(n) "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, or any successor Act thereto.
(o) "Fair Market Value" means the Fair Market Value of the Shares
determined by such methods or procedures as shall be established from
time to time by the Committee; provided, however, that so long as the
Shares are traded in a public market, Fair Market Value means the
average of the high and low prices of a Share in the principal market
for the Shares on the specified date (or, if no sales occurred on such
date, the last preceding date on which sales occurred).
(p) "Incentive Stock Option" or "ISO" means an option to purchase Shares,
granted under Article 6 herein, which is designated as an Incentive
Stock Option and is intended to meet the requirements of Section 422
of the Code, or any successor provision thereto.
(q) "Insider" shall mean an Employee who is, on the relevant date,
an officer, director, or ten percent (10%) Beneficial Owner of any
class of the Company's equity securities that is registered pursuant
to Section 12 of the Exchange Act, all as defined under Section 16 of
the Exchange Act.
(r) "Named Executive Officer" means a Participant who, as of the date of
vesting and/or payout of an Award, as applicable, is one of the group
of "covered employees," as defined in the regulations promulgated
under Code Section 162(m), or any successor statute.
(s) "Nonqualified Stock Option" or "NQSO" means an option to purchase
Shares, granted under Article 6 herein, which is not intended to be an
Incentive Stock Option.
(t) "Option" means an Incentive Stock Option or a Nonqualified Stock
Option.
(u) "Option Price" means the price at which a Share may be purchased by a
Participant pursuant to an Option, as determined by the Committee.
(v) "Other Stock-Based Award" means an Award granted pursuant to Article
9 hereof.
(w) "Participant" means an Employee of the Company who has outstanding an
Award granted under the Plan.
(x) "Performance-Based Exception" means the performance-based exception
from the tax deductibility limitations of Code Section 162(m).
(y) "Performance Unit" means an Award granted to an Employee, as described
in Article 8 herein.
(z) "Performance Share" means an Award granted to an Employee, as described
in Article 8 herein.
(aa) "Period of Restriction" means the period during which the transfer of
Shares of Restricted Stock is limited in some way (based on the
passage of time, the achievement of performance goals, or upon the
occurrence of other events as determined by the Committee, at its
discretion), and the Shares are subject to a substantial risk of
forfeiture, as provided in Article 7 herein.
(ab) "Person" shall have the meaning ascribed to such term in Section
3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d)
thereof, including a "group" as defined in Section 13(d).
(ac) "Restricted Stock" means an Award granted to a Participant pursuant to
Article 7 herein.
(ad) "Retirement" shall have the meaning ascribed to such term in the
Participants' governing Company-sponsored Retirement plan.
(ae) "Shares" means Shares of common stock of the Company.
(af) "Subsidiary" means any corporation in which the Company owns directly,
or indirectly through subsidiaries, at least fifty percent (50%) of
the total combined voting power of all classes of stock, or any other
entity (including, but not limited to, partnerships and joint
ventures) in which the Company owns at least fifty percent (50%) of
the combined equity thereof.
(ag) "Window Period" means the period beginning on the third business day
following the date of public release of the Company's quarterly sales
and earnings information, and ending on the twelfth (12th) business
day following such date.
Article 3. Administration
3.1 The Committee. The Plan shall be administered by the Personnel,
Organization, and Nominating Committee of the Board or by any other Committee
appointed by the Board consisting of not less than two (2) Directors. The
members of the Committee shall be appointed from time to time by, and shall
serve at the discretion of, the Board of Directors.
The Committee shall be comprised solely of Directors who are eligible to
administer the Plan pursuant to Rule 16b-3(c)(2) under the Exchange Act.
3.2 Authority of the Committee. The Committee shall have full power except
as limited by law or by the Articles of Incorporation or Bylaws of the Company,
and subject to the provisions herein, to designate employees to be Participants
in the Plan; to determine the size and types of Awards; to determine the terms
and conditions of such Awards in a manner consistent with the Plan; to determine
whether, to what extent, and under what circumstances, Awards granted to
Participants may be settled or exercised in cash, Shares or other property; to
construe and interpret the Plan and any agreement or instrument entered into
under the Plan; to establish, amend, or waive rules and regulations for the
Plan's administration; and (subject to the provisions of Article 15 herein) to
amend the terms and conditions of any outstanding Award to the extent such terms
and conditions are within the discretion of the Committee as provided in the
Plan. Further, the Committee shall make all other determinations which may be
necessary or advisable for the administration of the Plan. As permitted by law,
the Committee may delegate its authorities as identified hereunder.
3.3 Decisions Binding. All determinations and decisions made by the
Committee pursuant to the provisions of the Plan and all related orders or
resolutions of the Board shall be final, conclusive, and binding on all persons,
including the Company, its shareholders, Employees, Participants, and their
estates and beneficiaries.
Article 4. Shares Subject to the Plan
4.1 Number of Shares Available for Grants. Subject to adjustment as
provided in section 4.3 herein, the number of Shares hereby reserved for
issuance to Participants under the Plan shall be three hundred thousand
(300,000); provided, however, that the maximum number of Shares of Restricted
Stock granted pursuant to Article 7 herein, shall be one hundred thousand
(100,000).
Unless and until the Committee determines that an Award to a Named
Executive Officer shall not be designed to comply with the Performance-Based
Exception, the following rules shall apply to grants of such Awards to any Named
Executive Officer under the Plan:
(a) The maximum annual aggregate number of Options/SARs that may be
granted shall be seventy-five thousand (75,000); and
(b) The maximum annual aggregate number of Restricted Shares that may
be granted shall be twenty-five thousand (25,000); and
(c) The maximum annual aggregate number of Performance Shares that
may be granted shall be thirty thousand (30,000); and
(d) The maximum annual aggregate cash payout with respect to Awards
granted pursuant to Articles 8 and 9 herein which may be made to any
Named Executive Officer shall be four hundred fifty thousand dollars
($450,000); and
(e) The maximum annual aggregate number of Shares granted under Article 9
herein shall be forty thousand (40,000).
4.2 Lapsed Awards. If any Award granted under this Plan is canceled,
terminates, expires, or lapses for any reason, any Shares subject to such Award
again shall be available for the grant of an Award under the Plan. However, in
the event that prior to the Award's cancellation, termination, expiration, or
lapse, the holder of the Award at any time received one or more "benefits of
ownership" pursuant to such Award (as defined by the Securities and Exchange
Commission, pursuant to any rule or interpretation promulgated under Section 16
of the Exchange Act), the Shares subject to such Award shall not be made
available for regrant under the Plan.
4.3 Adjustments in Authorized Shares. In the event of any merger,
reorganization, consolidation, recapitalization, separation, liquidation, stock
dividend, split-up, Share combination, or other change in the corporate
structure of the Company affecting the Shares, such adjustment shall be made in
the number and class of Shares which may be delivered under the Plan, and in the
number and class of and/or price of Shares subject to outstanding Awards granted
under the Plan, as may be determined to be appropriate and equitable by the
Committee, in its sole discretion, to prevent dilution or enlargement of rights;
and provided that the number of Shares subject to any Award shall always be a
whole number.
Article 5. Eligibility and Participation
5.1 Eligibility. Persons eligible to participate in this Plan include all
active Employees of the Company and its Subsidiaries, as determined by the
Committee, including Employees who are members of the Board, but excluding
Directors who are not Employees.
5.2 Actual Participation. Subject to the provisions of the Plan, the
Committee may, from time to time, select from all eligible Employees, those to
whom Awards shall be granted and shall determine the nature and amount of each
Award.
Article 6. Stock Options
6.1 Grant of Options. Subject to the terms and provisions of the Plan,
Options may be granted to Employees at any time and from time to time as shall
be determined by the Committee. The Committee shall have discretion in
determining the number of Shares subject to Options granted to each Participant.
The Committee may grant ISOs, NQSOs, or a combination thereof.
6.2 Award Agreement. Each Option grant shall be evidenced by an Award
Agreement that shall specify the Option Price, the duration of the Option, the
number of Shares to which the Option pertains, and such other provisions as the
Committee shall determine. The Award Agreement also shall specify whether the
Option is intended to be an ISO within the meaning of Section 422 of the Code,
or a NQSO whose grant is intended not to fall under the Code provisions of
Section 422.
6.3 Option Price. The Option Price for each grant of an Option under this
Section 6.3 shall be at least equal to one hundred percent (100%) of the Fair
Market Value of a Share on the date the Option is granted.
6.4 Duration of Options. Each Option shall expire at such time as the
Committee shall determine at the time of grant; provided, however, that no
Option shall be exercisable later than the tenth (10th) anniversary date of its
grant.
6.5 Dividend Equivalents. Simultaneous with the grant of a Nonqualified
Stock Option, the Participant receiving the Option may be granted, at no
additional cost, under any terms and conditions set forth by the Committee,
Dividend Equivalents. Each Dividend Equivalent shall entitle the Participant to
receive a contingent right to be paid an amount equal to the dividends declared
on a Share on all record dates occurring during the period between the grant
date of an Option and the date the Option is exercised.
The underlying value of each Dividend Equivalent shall accrue as a book
entry in the name of each Participant holding the Dividend Equivalent. Payout of
the accrued value of a Dividend Equivalent shall occur only in the event the
Option issued in tandem with the Dividend Equivalent is "in the money" (i.e.,
the Fair Market Value of Shares underlying the Option as of the exercise date
exceeds the Option Price) as of the exercise date. Payout of Dividend
Equivalents shall be made in cash or Shares, in one lump sum, within thirty (30)
days following the exercise of the corresponding Option, subject to such terms
and conditions as the Committee deems appropriate.
6.6 Exercise of Options. Options granted under the Plan shall be
exercisable at such times and be subject to such restrictions and conditions as
the Committee shall in each instance approve, which need not be the same for
each grant or for each Participant.
6.7 Payment. Options shall be exercised by the delivery of a written notice
of exercise to the Company, setting forth the number of Shares with respect to
which the Option is to be exercised, accompanied by full payment for the Shares.
The Option Price upon exercise of any Option shall be payable to the
Company in full either: (a) in cash or its equivalent, or (b) by tendering
previously acquired Shares having an aggregate Fair Market Value at the time of
exercise equal to the total Option Price (provided that the Shares which are
tendered must have been held by the Participant for at least six (6) months
prior to their tender to satisfy the Option Price), or (c) by a combination of
(a) and (b), as specified by the Committee.
The Committee also may allow cashless exercises as permitted under Federal
Reserve Board's Regulation T, subject to applicable securities law restrictions,
or by any other means which the Committee determines to be consistent with the
Plan's purpose and applicable law.
As soon as practicable after receipt of a written notification of exercise
and full payment, the Company shall deliver to the Participant, in the
Participant's name, Share certificates in an appropriate amount based upon the
number of Shares purchased under the Option(s).
6.8 Termination of Employment. Each Participant's Award Agreement shall set
forth the extent to which the Participant shall have the right to exercise the
Option following termination of the Participant's employment with the Company
and/or its Subsidiaries. Such provisions shall be determined in the sole
discretion of the Committee, shall be included in the Award Agreement entered
into with each Participant, need not be uniform among all Options issued
pursuant to this Article 6, and may reflect distinctions based on the reasons
for termination of employment.
6.9 Nontransferability of Options. No Option granted under the Plan may be
sold, transferred, pledged, assigned, or otherwise alienated or hypothecated,
other than by will or by the laws of descent and distribution. Further, all
Options granted to a Participant under the Plan shall be exercisable during his
or her lifetime only by such Participant, or, if permissible under applicable
law, by such Participant's guardian or legal representative.
Article 7. Restricted Stock
7.1 Grant of Restricted Stock. Subject to the terms and provisions of the
Plan, the Committee, at any time and from time to time, may grant Shares of
Restricted Stock to eligible Employees in such amounts as the Committee shall
determine.
7.2 Restricted Stock Agreement. Each Restricted Stock grant shall be
evidenced by an Award Agreement that shall specify the Period of Restriction, or
Periods, the number of Restricted Stock Shares granted, and such other
provisions as the Committee shall determine.
7.3 Transferability. Except as provided in this Article 7, the Shares of
Restricted Stock granted herein may not be sold, transferred, pledged, assigned,
or otherwise alienated or hypothecated until the end of the applicable Period of
Restriction established by the Committee and specified in the Award Agreement,
or upon earlier satisfaction of any other conditions, as specified by the
Committee in its sole discretion and set forth in the Award Agreement. All
rights with respect to the Restricted Stock granted to a Participant under the
Plan shall be available during his or her lifetime only to such Participant.
7.4 Other Restrictions. The Committee shall impose such other conditions
and/or restrictions on any Shares of Restricted Stock granted pursuant to the
Plan as it may deem advisable including, without limitation, a requirement that
Participants pay a stipulated purchase price for each Share of Restricted Stock,
restrictions based upon the achievement of specific performance goals
(Company-wide, divisional, and/or individual), and/or restrictions under
applicable Federal or state securities laws; and may legend the certificates
representing Restricted Stock to give appropriate notice of such restrictions.
7.5 Certificate Legend. In addition to any legends placed on certificates
pursuant to Section 7.4 herein, each certificate representing Shares of
Restricted Stock granted pursuant to the Plan may bear the following legend:
"The sale or other transfer of the Shares of stock represented by this
certificate, whether voluntary, involuntary, or by operation of law, is
subject to certain restrictions on transfer as set forth in the TNP
Enterprises, Inc. Equity Incentive Plan, and in an Award Agreement. A
copy of the Plan and such Award Agreement may be obtained from TNP
Enterprises, Inc."
The Company shall have the right to retain the certificates representing
Shares of Restricted Stock in the Company's possession until such time as all
conditions and/or restrictions applicable to such Shares have been satisfied.
7.6 Removal of Restrictions. Except as otherwise provided in this Article
7, Shares of Restricted Stock covered by each Restricted Stock grant made under
the Plan shall become freely transferable by the Participant after the last day
of the Period of Restriction. Once the Shares are released from the
restrictions, the Participant shall be entitled to have the legend required by
Section 7.5 removed from his or her Share certificate.
7.7 Voting Rights. During the Period of Restriction, Participants holding
Shares of Restricted Stock granted hereunder may exercise full voting rights
with respect to those Shares.
7.8 Dividends and Other Distributions. During the Period of Restriction,
Participants holding Shares of Restricted Stock granted hereunder may be
credited with all regular cash dividends paid with respect to all Shares while
they are so held. Except as provided in the succeeding sentence, all other cash
dividends and other distributions paid with respect to Shares of Restricted
Stock may be credited to Participants subject to the same restrictions on
transferability and forfeitability as the Shares of Restricted Stock with
respect to which they were paid. If any such dividends or distributions are paid
in Shares, the Shares shall be subject to the same restrictions on
transferability and forfeitability as the Shares of Restricted Stock with
respect to which they were paid. Subject to the succeeding paragraph, all
dividends credited to a Participant shall be paid to the Participant within
forty-five (45) days following the full vesting of the Shares of Restricted
Stock with respect to which such dividends were earned.
7.9 Termination of Employment. Each Award Agreement shall set forth the
extent to which the Participant shall have the right to receive unvested
Restricted Shares following termination of the Participant's employment with the
Company and/or its Subsidiaries. Such provisions shall be determined in the sole
discretion of the Committee, shall be included in the Award Agreement entered
into with each Participant, need not be uniform among all Shares of Restricted
Stock issued pursuant to the Plan, and may reflect distinctions based on the
reasons for termination of employment; provided, however, that except in the
cases of terminations connected with a Change in Control and terminations by
reason of death or Disability, the vesting of Shares of Restricted Stock which
qualify for the Performance-Based Exception and which are held by Named
Executive Officers shall occur at the time they otherwise would have, but for
the employment termination.
Article 8. Performance Units and Performance Shares
8.1 Grant of Performance Units/Shares. Subject to the terms of the Plan,
Performance Units and Performance Shares may be granted to eligible Employees at
any time and from time to time, as shall be determined by the Committee. The
Committee shall have complete discretion in determining the number of
Performance Units and Performance Shares granted to each Participant.
8.2 Award Agreement. Each Performance Share/Unit grant shall be evidenced
by an Award Agreement that shall specify the number of Performance Shares/Units
granted, the value of each Performance Share/Unit granted, the Performance
Period, the performance measures, and such other provisions as the Committee may
determine.
8.3 Value of Performance Units/Shares. Each Performance Unit shall have an
initial value that is established by the Committee at the time of grant. Each
Performance Share shall have an initial value equal to the Fair Market Value of
a Share on the date of grant. The Committee shall set performance goals in its
discretion which, depending on the extent to which they are met, will determine
the number and/or value of Performance Units/Shares that will be paid out to the
Participants. The time period during which the performance goals must be met
shall be called a "Performance Period." Performance Periods shall, in all cases,
exceed six (6) months in length.
8.4 Dividend Equivalents. Simultaneous with the grant of Performance
Units/Shares, the Participant receiving the Performance Units/Shares may be
granted, at no additional cost, Dividend Equivalents. Each Dividend Equivalent
shall entitle the Participant to receive a contingent right to be paid an amount
equal to the dividends declared on a Share on all record dates occurring during
the period between the grant of Performance Units/Shares and the date the
Performance Units/Shares are earned, subject to such terms and conditions as the
Committee deems appropriate.
The underlying value of each Dividend Equivalent shall accrue as a book
entry in the name of each Participant holding the Dividend Equivalent. Payout of
the accrued value of a Dividend Equivalent may be contingent on the achievement
of performance goal(s) set by the Committee which, depending on the extent to
which they are met, will determine the number and/or value of Dividend
Equivalents that will be paid out to the Participants. Notwithstanding the
foregoing, the Company or Subsidiary performance measures to be used for
purposes of grants to Named Executive Officers shall be chosen from and subject
to the conditions specified in Article 10 hereof.
Payout of Dividend Equivalents shall be made in cash or Shares or a
combination thereof, as determined by the Committee, in one (1) lump sum, within
thirty (30) days following the payout of Performance Units/Shares.
8.5 Earning of Performance Units/Shares. After the applicable Performance
Period has ended, the holder of Performance Units/Shares shall be entitled to
receive payout on the number and value of Performance Units/Shares earned by the
Participant over the Performance Period, to be determined by the Committee as a
function of the extent to which the corresponding performance goals have been
achieved.
8.6 Form and Timing of Payment of Performance Units/Shares. Payment of
earned Performance Units/Shares shall be made in a single lump sum, within
seventy-five (75) calendar days following the close of the applicable
Performance Period. The Committee, in its sole discretion, may pay earned
Performance Units/Shares in the form of cash or in Shares (or in a combination
thereof), which have an aggregate Fair Market Value equal to the value of the
earned Performance Units/Shares at the close of the applicable Performance
Period. Such Shares may be granted subject to any restrictions deemed
appropriate by the Committee.
At the discretion of the Committee, Participants may be entitled to receive
any dividends declared with respect to Shares which have been earned in
connection with grants of Performance Units and/or Performance Shares which have
been earned, but not yet distributed to Participants. (Such dividends shall be
subject to the same accrual, forfeiture, and payout restrictions as apply to
dividends earned with respect to Shares of Restricted Stock, as set forth in
Section 7.8 herein.) In addition, Participants may, at the discretion of the
Committee, be entitled to exercise their voting rights with respect to such
Shares.
8.7 Termination of Employment Due to Death, Disability, Retirement, or
Involuntary Termination Without Cause. In the event the employment of a
Participant is terminated by reason of death, Disability, Retirement, or
involuntary termination without Cause during a Performance Period, the
Participant shall receive a prorated payout of the Performance Units/Shares. The
prorated payout shall be determined by the Committee, in its sole discretion,
and shall be based upon the length of time that the Participant held the
Performance Units/Shares during the Performance Period, and shall further be
adjusted based on the achievement of the preestablished performance goals.
Payment of earned Performance Units/Shares shall be made at the same time
payments are made to Participants who did not terminate employment during the
applicable Performance Period.
8.8 Termination of Employment for Other Reasons. In the event that a
Participant's employment terminates for any reason other than those reasons set
forth in Section 8.7 herein, all Performance Units/Shares shall be forfeited by
the Participant to the Company. The Committee, however, in its sole discretion,
shall have the right to make payment of Awards for any Performance Periods
coincident with terminations pursuant to this Section 8.8.
8.9 Nontransferability. Except as provided in a Participant's Award
Agreement, Performance Units/Shares may not be sold, transferred, pledged,
assigned, or otherwise alienated or hypothecated, other than by will or by the
laws of descent and distribution. Further, a Participant's rights under the Plan
shall be exercisable during the Participant's lifetime only by the Participant
or the Participant's legal representative.
Article 9. Other Stock-Based Awards
Subject to the terms of the Plan, Other Stock-Based Awards may be granted
to eligible Employees at any time and from time to time and in such amounts and
upon such terms as the Committee deems appropriate.
Article 10. Performance Measures
Unless and until the Committee proposes for shareholder vote and
shareholders approve a change in the general performance measures set forth in
this Article 10, the attainment of which may determine the degree of payout
and/or vesting with respect to Awards to Named Executive Officers which are
designed to qualify for the Performance-Based Exception, the performance
measure(s) to be used for purposes of such grants shall be chosen from among the
following alternatives:
Earnings per share;
Measurements of cost control effectiveness such as the ratio of operations
and maintenance costs to kilowatt hour sales;
Measurements of community involvement and customer satisfaction;
Measurements of anticipation and resolution of environmental issues;
Measurements of reliability such as the equivalent forced outage rate,
minutes of outage per customer served, and number of customers
interrupted per customer served;
Measurements of employee safety;
Measurements of long-term rate competitiveness;
Total shareholder return compared to one or more groups as determined by
the Incentive Plan Committee;and Cash value added.
The Committee shall have the discretion to adjust the determinations of the
degree of attainment of the preestablished performance goals; provided, however,
that Awards which are designed to qualify for the Performance-Based Exception,
and which are held by the Named Executive officers, may not be adjusted upward.
(The Committee shall retain the discretion to adjust such Awards downward.)
In the event that applicable tax and/or securities laws change to permit
Committee discretion to alter the governing performance measures without
obtaining shareholder approval of such changes, the Committee shall have sole
discretion to make such changes without obtaining shareholder approval. In
addition, in the event the Committee determines it is advisable to grant Awards
which shall not qualify for the Performance-Based Exception, the Committee may
make such grants without satisfying the requirements of Code Section 162(m).
Article 11. Beneficiary Designation
Each Participant under the Plan may, from time to time, name any
beneficiary or beneficiaries (who may be named contingently or successively) to
whom any benefit under the Plan is to be paid in case of his or her death before
he or she receives any or all of such benefit. Each such designation shall
revoke all prior designations by the same Participant, shall be in a form
prescribed by the Company, and will be effective only when filed by the
Participant in writing with the Company during the Participant's lifetime. In
the absence of any such designation, benefits remaining unpaid at the
Participant's death shall be paid to the Participant's estate.
The spouse of a married Participant domiciled in a community property
jurisdiction shall join in any designation of beneficiary or beneficiaries other
than the spouse.
Article 12. Deferrals
The Committee, in its sole discretion, may permit or require a Participant
to defer such Participant's receipt of the payment of cash or the delivery of
Shares that would otherwise be due to such Participant by virtue of the exercise
of an Option or the lapse or waiver of restrictions with respect to Restricted
Stock, or the satisfaction of any requirements or goals with respect to
Performance Units/Shares or Other Stock-Based Awards hereunder. If any such
deferral election is required or permitted, the Committee shall, in its sole
discretion, establish rules and procedures for such payment deferrals.
Article 13. Rights of Employees
13.1 Employment. Nothing in the Plan shall interfere with or limit in any
way the right of the Company to terminate any Participant's employment at any
time, nor confer upon any Participant any right to continue in the employ of the
Company.
For purposes of the Plan, transfer of employment of a Participant between
the Company and any one of its Subsidiaries, or vice-versa, (or between
Subsidiaries) shall not be deemed a termination of employment. Upon such a
transfer, the Committee may make such adjustments to outstanding Awards as it
deems appropriate to reflect the changed reporting relationships.
13.2 Participation. No Employee shall have the right to be selected to
receive an Award under this Plan, or, having been so selected, to be selected to
receive a future Award.
Article 14. Change in Control
Upon the occurrence of a Change in Control, unless otherwise specifically
prohibited by applicable law or by the rules and regulations of any governmental
agencies or national securities exchanges:
(a) Any and all Options granted hereunder shall become immediately
exercisable;
(b) Any Period of Restriction and restrictions imposed on Restricted Shares
shall lapse;
(c) The target payout opportunity attainable under all outstanding
Awards of Restricted Stock, Performance Units, Performance Shares,
and Other Stock-Based Awards shall be deemed to have been fully
earned for the entire Performance Period(s) as of the effective date
of the Change in Control. The vesting of all Awards denominated
in Shares shall be accelerated as of the effective date of the Change
in Control, and there shall be paid out in
cash to Participants within thirty (30) days following the
effective date of the Change in Control the full portion of such
target payout opportunity; provided, however, that there shall not be
an accelerated payout with respect to Restricted Stock, Performance
Units, Performance Shares, and Other Stock-Based Awards which were
granted less than six (6) months prior to the effective date of the
Change in Control; and
(d) Subject to Article 15 herein, the Committee shall have the authority
to make any modifications to the Awards as determined by the Committee
to be appropriate before the effective date of the Change in Control.
Article 15. Amendment, Modification, and Termination
15.1 Amendment, Modification, and Termination. The Board may, at any time,
and from time to time, alter, amend, suspend or terminate the Plan in whole or
in part; provided, that no amendment which requires shareholder approval in
order for the Plan to continue to comply with Rule 16b-3 under the Exchange Act,
including any successor to such Rule, shall be effective unless such amendment
shall be approved by the requisite vote of shareholders of the Company entitled
to vote thereon.
The Committee shall not have the authority to cancel outstanding Awards and
issue substitute Awards in replacement thereof.
15.2 Awards Previously Granted. No termination, amendment, or modification
of the Plan shall adversely affect in any material way any Award previously
granted under the Plan, without the written consent of the Participant holding
such Award.
15.3 Compliance With Code Section 162(m). At all times when Code Section
162(m) is applicable, all Awards granted under this Plan shall comply with the
requirements of Code Section 162(m); provided, however, that in the event the
Committee determines that such compliance is not desired with respect to any
Award or Awards available for grant under the Plan, then compliance with Code
Section 162(m) will not be required. In addition, in the event changes are made
to Code Section 162(m) to permit greater flexibility with respect to any Award
or Awards available under the Plan, the Committee may, subject to this Article
15, make any adjustments it deems appropriate.
<PAGE>
Article 16. Withholding
16.1 Tax Withholding. The Company shall have the power and the right to
deduct or withhold, or require a Participant to remit to the Company, an amount
sufficient to satisfy Federal, state, and local taxes (including the
Participant's FICA obligation) required by law to be withheld with respect to
any taxable event arising or as a result of any Award to a Participant under
this Plan.
16.2 Share Withholding. With respect to withholding required upon the
exercise of Options, upon the lapse of restrictions on Restricted Stock, or upon
any other taxable event arising as a result of Awards granted hereunder,
Participants may elect, subject to the approval of the Committee, to satisfy the
withholding requirement, in whole or in part, by having the Company withhold
Shares having a Fair Market Value on the date the tax is to be determined equal
to the minimum statutory total tax which could be imposed on the transaction.
The Committee may establish such procedures as it deems appropriate for the
settling of withholding obligations with Shares, including, without limitation,
the establishment of such procedures as may be necessary to comply with the
requirements of Rule 16b-3, unless otherwise determined by the Committee.
Article 17. Indemnification
Each person who is or shall have been a member of the Committee, or of the
Board, shall be indemnified and held harmless by the Company against and from
any loss, cost, liability, or expense that may be imposed upon or reasonably
incurred by him or her in connection with or resulting from any claim, action,
suit, or proceeding to which he or she may be a party or in which he or she may
be involved by reason of any action taken or failure to act under the Plan and
against and from any and all amounts paid by him or her in settlement thereof,
with the Company's approval, or paid by him or her in satisfaction of any
judgment in any such action, suit, or proceeding against him or her, provided he
or she shall give the Company an opportunity, at its own expense, to handle and
defend the same before he or she undertakes to handle and defend it on his or
her own behalf. The foregoing right of indemnification shall not be exclusive of
any other rights of indemnification to which such persons may be entitled under
the Company's Articles of Incorporation or Bylaws, as a matter of law, or
otherwise, or any power that the Company may have to indemnify them or hold them
harmless.
Article 18. Successors
All obligations of the Company under the Plan, with respect to Awards
granted hereunder, shall be binding on any successor to the Company, whether the
existence of such successor is the result of a direct or indirect purchase,
merger, consolidation, or otherwise, of all or substantially all of the business
and/or assets of the Company.
Article 19. Restrictions on Share Transferability
In addition to any restrictions imposed pursuant to the Plan, all
certificates for Shares delivered under the Plan pursuant to any Award or the
exercise thereof shall be subject to such stop transfer orders and other
restrictions as the Committee may deem advisable under the Plan or the rules,
regulations, and other requirements of the Securities and Exchange Commission,
any stock exchange or market upon which such Shares are then listed or traded,
any applicable Federal or state securities laws, and the Committee may cause a
legend or legends to be put on any such certificates to make appropriate
reference to such restrictions.
Article 20. Legal Construction
20.1 Gender and Number. Except where otherwise indicated by the context,
any masculine term used herein also shall include the feminine; the plural shall
include the singular and the singular shall include the plural.
20.2 Severability. In the event any provision of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.
20.3 Requirements of Law. The granting of Awards and the issuance of Shares
under the Plan shall be subject to all applicable laws, rules, and regulations,
and to such approvals by any governmental agencies or national securities
exchanges as may be required.
20.4 Securities Law Compliance. With respect to Insiders, transactions
under this Plan are intended to comply with all applicable conditions or Rule
16b-3 or its successors under the 1934 Act. To the extent any provision of the
Plan or action by the Committee fails to so comply, it shall be deemed null and
void, to the extent permitted by law and deemed advisable by the Committee.
20.5 Governing Law. To the extent not preempted by Federal law, the Plan,
and all agreements hereunder, shall be construed in accordance with and
governed by the laws of the State of Texas.
