TNP Enterprises, Inc.
4100 International Plaza
Fort Worth, Texas 76109
(817) 731-0099
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held on May 4, 1998
The Annual Meeting of Shareholders of TNP Enterprises, Inc. will be held on
Monday, May 4, 1998, at 10:30 a.m., Central Time, at the Houston General
Building, First Floor Auditorium, 4055 International Plaza, Fort Worth, Texas,
for the following purposes:
1. To elect three directors for three-year terms and one director to
serve for the remaining portion of a term expiring in 1999;
2. To ratify the appointment of Arthur Andersen LLP, Certified
Independent Public Accountants, as independent auditors for 1998; and
3. 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 16, 1998, 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.
The Houston General Building is located across International Plaza from the
headquarters of TNP Enterprises and Texas-New Mexico Power Company.
By Order of the Board of Directors
/S/
Paul W. Talbot,
Secretary
Fort Worth, Texas
March 30, 1998
<PAGE>
TNP Enterprises, Inc.
4100 International Plaza
Fort Worth, Texas 76109
PROXY STATEMENT
For
ANNUAL MEETING OF HOLDERS OF COMMON STOCK
To Be Held on May 4, 1998
These proxy materials are furnished in connection with the solicitation by
the board of directors of TNP Enterprises, Inc. ("TNP"), of proxies to be voted
at the 1998 Annual Meeting of Shareholders to be held at the Houston General
Building, First Floor Auditorium, 4055 International Plaza, Fort Worth, Texas on
Monday, May 4, 1998, at 10:30 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 TNP's Secretary, submitting
a new proxy with a later date, or voting in person at the Annual Meeting after
withdrawing any proxy previously given.
TNP 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 TNP common stock.
TNP is first sending this proxy statement and the accompanying Notice of
Annual Meeting of Shareholders, form of proxy and the 1997 Summary Annual Report
to Shareholders covering operations of TNP and Texas-New Mexico Power Company,
its wholly owned electric utility subsidiary ("TNMP"), to its shareholders on or
about March 30, 1998. This proxy statement includes the Consolidated Financial
Statements of TNMP and TNP.
VOTING RIGHTS
Shareholders of record at the close of business on March 16, 1998 (the
"Record Date") are entitled to receive notice of and vote at the Annual Meeting.
On that date, 13,222,125 shares were outstanding. Each common share is entitled
to one vote on each matter properly brought before the Annual Meeting.
Cumulative voting is not permitted. No other class of securities is entitled to
vote at the Annual Meeting.
The presence at the Annual Meeting, in person or by proxy, of the holders
of a majority of the outstanding shares of TNP's common stock is necessary to
constitute a quorum. A plurality of the votes cast at the Annual Meeting is
required to elect directors. All other matters to be voted on require a majority
of the votes cast to pass. When determining whether a quorum is present,
election inspectors will include abstentions and shares for which no voting
instructions are received.
Election inspectors will include abstentions in the vote total when
determining whether a proposal has received the required vote. As a result, an
abstention will have the same effect as a negative vote. Under New York Stock
Exchange ("NYSE") rules, brokers who hold shares in "street name" for customers
can vote these shares on certain items in the absence of instructions from their
customers, including both proposals being presented at the Annual Meeting. Such
brokers generally cannot vote these shares, however, on other matters that may
come before the Annual Meeting.
<PAGE>
1. ELECTION OF DIRECTORS
The board of directors is divided into three classes, each consisting of
three directors, whose terms expire at successive annual meetings. Three
directors will be elected at the Annual Meeting to serve a three-year term
expiring in 2001, and one director will be elected to fill the remainder of a
term that will expire in 1999. Each TNP director is also a director of TNMP.
The persons named in the enclosed proxy intend to vote all shares
represented by proxy for the election of the four nominees named below, unless
you indicate on the proxy card that your vote should be withheld from any or all
of such nominees. Each nominee elected will serve as a director until the
election of a successor, or until the earliest of his death, resignation or
retirement.
The Company expects that each nominee can serve as a director if elected.
If, before the Annual Meeting, any nominee becomes unavailable to serve, then
the persons appointed as proxies intend to vote all shares represented by proxy
for a substitute nominee that the board of directors will nominate.
Nominees for terms expiring in 2001 are R. Denny Alexander, Sidney M.
Gutierrez and Kevern R. Joyce. The nominee for the remainder of the term
expiring in 1999 is Larry G. Wheeler. The Board of Directors recommends a vote
FOR the election of the above-named nominees for election as directors.
Information about Nominees and Continuing Directors
Following are brief biographies describing the principal occupation and
certain other information about each nominee and the other incumbent directors
whose terms are continuing.
Nominees
R. Denny Alexander, 52, has been a director of TNP and TNMP since 1989.
Since 1978, he has owned and managed R. Denny Alexander & Company, an investment
management firm, and has been the Managing Partner of OPNB Building Joint
Venture, a real estate investment partnership. Mr. Alexander has been a director
of Overton Bancshares, Inc., a bank holding company, since 1982, and has been
Chairman of Overton Bank and Trust, N. A., a national bank, since 1984.
Sidney M. Gutierrez, 46, has been a director of TNP and TNMP since November
1994. From 1984 to 1994, he was a NASA astronaut serving as Space Shuttle
Mission Commander. From 1991 to 1994, he was also an Air Force officer serving
at the rank of Colonel. Since his retirement from NASA and the Air Force in
1994, Mr. Gutierrez has served in various management capacities at Sandia
National Laboratories, a prime contractor for the Department of Energy. He is a
member of the Board of Regents of New Mexico Institute of Mining and Technology,
the Board of Directors of Goodwill Industries of New Mexico and vice chairman of
the New Mexico Space Center Commission.
Kevern R. Joyce, 51, was appointed Chief Executive Officer, President, and
director of TNP and TNMP in April 1994 and was elected Chairman of the Board of
both companies in April 1995. From 1992 until joining TNP and TNMP, Mr. Joyce
was Senior Vice President and Chief Operating Officer of Tucson Electric Power
Company. He is a director of Aztec Manufacturing Co., an electrical products
manufacturer for the industrial market, a provider of galvanizing services and
oil field tubular products.
Larry G. Wheeler, 51, joined TNP's and TNMP's boards of directors in
October 1997, filling a vacancy on the Board. Since May 1995, Mr. Wheeler has
been president and chief executive officer of Mrs. Baird's Bakeries, Inc., Fort
Worth, Texas. He was president of Alpo Pet Foods, Inc. from September 1993 until
May 1995. He was a vice president of The Pillsbury Company from 1988 until
September 1993. He is a member of the board of directors of the American Bakers
Association and the International Board of Visitors Neeley School of Business at
Texas Christian University. Mrs. Baird's Bakeries filed bankruptcy under Chapter
11 of the U.S. Bankrupcty Code in March 1996, and exited the Chapter 11
proceedings in September 1996.
<PAGE>
Directors Whose Terms Expire in 1999
John A. Fanning, 58, has been a director of TNP and TNMP since 1984. He was
Executive Vice President of Snyder Oil Corporation from March 1990 to November
1995, and a director of Snyder from 1981 to 1995. Since November 1995, he has
been involved in private investments in oil, gas and manufacturing. From
February to April 1997, he was Interim President, Chief Executive Officer and a
director of Heartland Wireless Communications, Inc., which sells wireless cable
television services.
Dennis H. Withers, 52, became a director of TNP and TNMP in August 1995,
after serving as an advisory director from December 1994. He has been Chairman
of Trinity Forge, Inc., a metal forging and manufacturing company, since 1997,
its President since 1979, and a director since 1972. He has been a director of
Overton Bancshares, Inc., a bank holding company, since 1985, and a director of
Overton Bank and Trust, N.A., since 1993.
Directors Whose Terms Expire in 2000
J. R. Holland, Jr., 54, was elected as a director of TNP and TNMP in May
1996. He has been President and Chief Executive Officer of Unity Hunt, Inc., a
large international private holding company with interests in technology,
entertainment, telecommunications, retail, investments, real estate, natural
resources and energy businesses, since 1991. He is a director of Optical
Security Group, Inc., and Placid Refining Company.
Harris L. Kempner, Jr., 58, has been a TNP director since 1984, and a TNMP
director since 1980. He has been President of Kempner Capital Management, an
investment advisory firm, since 1981; a Trustee of H. Kempner Trust Association,
which engages in investments, since 1964; Chairman Emeritus and Advisor to the
board of United States National Bank, 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, 51, became a director of TNP and TNMP in
September 1995. She has been President of Texas Woman's University, Denton,
Texas, since August 1994. From July 1992 to August 1994, she was Vice President
for Administration and Business Affairs of California State University. Dr.
Surles has been a director of First State Bank in Denton, Texas, since 1995.
Meetings of Board of Directors and Standing Committees
TNP's and TNMP's boards of directors held five and four meetings,
respectively, during 1997. TNP's board acted by unanimous consent once. All
directors attended at least 75 percent of the aggregate meetings of the board of
directors and of board committees of which they were members during 1997.
TNP's board of directors has four standing committees: Audit, Compensation,
Financial and Nominating. The duties and members of these committees are:
Audit Committee
The Audit Committee meets with management to consider the adequacy of the
internal controls and the objectivity of financial reporting. It also meets with
the independent auditors and with appropriate financial personnel and internal
auditors of TNP and TNMP regarding these matters and regarding the scope of
internal and independent audits. It determines and reviews internal and external
audit staff qualifications and recommends to the full board the appointment of
the independent auditors. Audit Committee members are Messrs. Alexander,
Gutierrez, Wheeler and Dr. Surles. The Audit Committee met four times in 1997.
<PAGE>
Compensation Committee
The Compensation Committee evaluates the Chief Executive Officer's
performance and reviews the performance of officers who report to him; reviews
the terms and conditions of all employee benefit plans; establishes performance
goals for all incentive compensation plans and designates participants in
incentive compensation plans for management; sets compensation for TNP and TNMP
officers; and makes recommendations to the full board with respect to directors'
compensation. Compensation Committee members are Messrs. Fanning, Gutierrez,
Holland, Kempner and Withers. The Compensation Committee met five times in 1997.
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 four meetings in 1997.
Nominating Committee
The Nominating Committee evaluates and recommends to the full board
candidates for board positions whose terms are expiring or that have become
vacant. Nominating Committee members are Messrs. Alexander, Fanning and Kempner.
The Nominating Committee met three times during 1997.
This committee may consider director candidates recommended by
shareholders. TNP's bylaws require generally that a shareholder deliver a
nomination in writing to the committee from 30 to 60 days before the anniversary
of the notice of the preceding year's annual shareholders' meeting, with certain
exceptions. The nomination notice must include the shareholder's name and
address, the class and number of TNP 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.
Director Compensation
Each nonemployee director receives an annual retainer of 525 shares of TNP
common stock from TNP and $8,000 from TNMP, and a fee of $1,000 for each meeting
of the TNP and TNMP boards and committees that he or she attends. TNP and TNMP
split the $1,000 cost when their boards of directors or committees hold combined
meetings. Directors and committee members are also reimbursed for travel and
other incidental expenses incurred in connection with their duties. Directors
who are employees receive no additional compensation for serving as directors.
The shares of TNP common stock paid to the nonemployee directors are issued
under the TNP Nonemployee Director Stock Plan.
Compensation Committee Interlocks and Insider Participation
During 1997, Compensation Committee members were John A. Fanning, Sidney M.
Gutierrez, J. R. Holland, Jr., Harris L. Kempner, Jr., and Dennis H. Withers. No
Compensation Committee member serves on the board of directors or compensation
committee of an entity that has an executive officer serving on TNP's board of
directors or Compensation Committee.
Mr. Alexander is a director of Overton Bancshares, Inc. and Chairman of
Overton Bank and Trust, N.A. Mr. Withers is a director of both Overton
Bancshares, Inc. and Overton Bank and Trust, N.A. During 1997, TNP and TNMP used
Overton Bank and Trust, N.A., for general banking and short-term investments in
the ordinary course of business. All such transactions were 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.
<PAGE>
2. 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. Andersen served as the
independent auditors for 1997. A representative of Andersen 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 1998.
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
TNP and its subsidiaries (the "Named Executive Officers") for services rendered
in all capacities to TNP and its subsidiaries during 1997, 1996 and 1995.
<TABLE>
SUMMARY COMPENSATION TABLE
Annual Compensation
<CAPTION>
Other Annual LTIP All Other
Name & Principal Position Year Salary Bonus(1) Compensation(2) Payouts(3) Compensation(4)
<S> <C> <C> <C> <C> <C> <C>
Kevern R. Joyce, President and 1997 $355,083 $147,000 -- $449,816 $25,944
Chief Executive Officer 1996 336,500 143,557 -- -- 24,698
1995 300,000 125,152 -- -- 9,174
Jack V. Chambers, Senior Vice 1997 $215,733 $ 77,597 -- $268,831 $14,794
President & Chief Customer 1996 204,338 79,151 -- -- 13,554
Officer 1995 185,885 68,779 -- -- 36,088
Manjit S. Cheema, Senior Vice 1997 $183,750 $ 68,378 -- $205,835 $12,837
President & Chief Financial 1996 162,296 58,412 -- -- 11,133
Officer 1995 139,145 39,810 -- -- 7,546
John P. Edwards, Senior Vice 1997 $192,000 $ 68,900 -- $121,128 $18,242
President - Corporate 1996 81,827 56,903 $20,000 -- 5,365
Relations(5) 1995 -- --- -- -- --
Ralph S. Johnson, Senior Vice 1997 $182,333 $ 68,212 $197,110 $13,153
President - Power Resources(5) 1996 156,730 55,344 -- -- 11,281
1995 132,459 39,932 $21,473 -- 3,797
- -------------------------------
<F1>
(1) The 1997 amounts shown in this column are (a) cash awards under the
Management and Broad-Based Short-Term Incentive Plans relating to 1997 and
paid in early 1998, and (b) the value of the following number of shares of
TNP common stock, relating to 1997 and paid in 1998 as short-term incentive
bonuses under the Management Short-Term Incentive Plan, valued at $33.50
per share, the average of the high and low prices on the NYSE on December
31, 1997, and 1997 dividends paid on such shares in the amount of $1.01:
Mr. Joyce - 1,091 shares; Mr. Chambers - 560 shares; Mr. Cheema - 498
shares; Mr. Edwards - 498 shares; and Mr. Johnson - 497 shares. Mr.
Edwards' 1996 amount includes a $20,000 signing bonus.
<F2>
(2) Other Annual Compensation consists primarily of relocation allowances.
Although the officers named in the table received other personal benefits
during the years reported, the total value of such benefits did not exceed
the lesser of $50,000 or 10 percent of their respective total annual
salaries and bonuses, except as shown in the table.
<F3>
(3) The 1997 amounts in this column are the value of shares issued and dividend
equivalents paid in 1998 under the TNP Long-Term Incentive Compensation
Plan relative to the 1995-1997 performance period. These amounts represent
the value of the following numbers of shares, at $33.50 per share, the
average of the high and low prices on the NYSE on December 31, 1997, and
dividend equivalents in the amount of $2.76 per share: Mr. Joyce - 12,407
shares; Mr. Chambers - 7,415 shares; Mr. Cheema - 5,665 shares; Mr. Edwards
- 3,341 shares; and Mr. Johnson - 5,434 shares. This payout reflects that
TNP exceeded the maximum performance goals set at the
<PAGE>
beginning of the performance period for total shareholder return relative
to the S&P 500 and S&P Electric Company 500 Indices, and the relative
improvement in TNP's competitive position in terms of retail rate
comparison, as described on page 10, under "Compensation Committee Report
on Executive Compensation - Long Term Incentive Compensation." Awards for
the 1997-1999 performance period are described below under "Long-Term
Incentive Compensation."
<F4>
(4) The 1997 amounts in this column and the table below consist of the
following items earned or paid in 1997: (a) company contributions to TNMP's
401(k) plan; (b) company contributions to the TNMP Deferred Compensation
Plan, an unfunded benefit plan that allows eligible employees, including
the Named Executive Officers, to defer receipt of salary and bonuses and
receive matching Company contributions and interest credits, whenever and
to the extent that Internal Revenue Code restrictions limit their
participation in the 401(k) plan; and (c) premiums for group life insurance
paid by the Company (none of the Named Executive Officers has any cash
value rights related to such insurance). The amounts shown for the 401(k)
and Deferred Compensation Plans include incentive matching contributions
for 1997 paid in 1998. Mr. Chambers' 1995 amount includes accrued Excess
Benefit Plan benefits of $23,746.
</TABLE>
<TABLE>
<CAPTION>
401(k) Plan Deferred Compensation Plan Life Insurance Premiums
<S> <C> <C> <C>
Mr. Joyce $9,500 $12,708 $3,686
Mr. Chambers 9,500 4,020 1,274
Mr. Cheema 5,637 5,874 1,326
Mr. Edwards 9,500 2,532 6,210
Mr. Johnson 9,500 1,925 1,728
</TABLE>
<F5>
(5) Mr. Johnson joined TNP and its subsidiaries on January 3, 1995. Mr. Edwards
joined TNP and its subsidiaries on July 1, 1996.
Long-Term Incentive Compensation
The following table contains information about awards made in 1997 of
long-term stock incentive opportunities made under the TNP Equity Incentive Plan
to the Named Executive Officers for the 1997-1999 performance period.
EQUITY INCENTIVE PLAN - LONG TERM INCENTIVE AWARDS IN 1997
<TABLE>
<CAPTION>
Estimated Payout at End of Period(2)
----------------------------------------------------
Performance
Name Period until Payout Threshold Target (1) Maximum
- ------------------------ ------------------------- ----------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Kevern R. Joyce 1997-1999 2,408 shares 4,816 shares 7,224 shares
Jack V. Chambers 1997-1999 1,388 shares 2,776 shares 4,164 shares
Manjit S. Cheema 1997-1999 1,250 shares 2,501 shares 3,751 shares
John P. Edwards 1997-1999 1,250 shares 2,501 shares 3,751 shares
Ralph S. Johnson 1997-1999 1,250 shares 2,501 shares 3,751 shares
<F1>
(1) The target number of shares was based on (i) the following percentages of
the Named Executive Officers' respective base salary midpoints: Mr. Joyce -
40 percent; Messrs. Chambers, Cheema, Edwards and Johnson - 35 percent; and
(ii) the average of the high and low prices of TNP common stock on the NYSE
on January 2, 1997, $27.438.
<F3>
(2) The awards listed in the table relate to the performance period from
January 1, 1997 through December 31, 1999. Payouts, if any, will occur in
early 2000 and will be based on the level of attainment of two equally
weighted performance goals measuring the total return during the
performance period of TNP common stock relative to the S&P 500 and the S&P
Electric Company 500 Indices. Payouts can range from 0 percent (if neither
performance goal is achieved) to 150 percent of the target number of
shares. At payout, Plan participants will receive the stock awards and
dividend equivalents, paid in cash. Based on dividends paid in 1997 and
assuming that the current quarterly dividend rate will remain in effect for
the remainder of the performance period, plan participants would receive
dividend equivalent payments of $3.17 per share of stock awarded at payout.
See "Compensation Committee Report on Executive Compensation - Incentive
Compensation."
</TABLE>
<PAGE>
Pension Plan
The following table sets forth information concerning annual benefits
payable upon normal retirement at age 65 to TNP and TNMP employees under TNMP's
amended pension plan, a noncontributory defined benefit retirement plan (the
"Pension Plan"). TNMP amended the Pension Plan effective October 1, 1997, and
changed it to a cash balance retirement plan. The amended Pension Plan provides
pension benefits based on an account balance rather than a formula-based
benefit. This table reflects the "grandfathered" benefit formula (as under the
prior plan) for individuals retiring in 1997 with the years of service
indicated.
<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 $ 29,913 $ 39,884 $ 49,855 $ 59,826 $ 69,797 $ 77,922
150,000 36,288 48,384 60,480 72,576 84,672 94,422
175,000 42,663 56,884 71,105 85,326 99,547 110,922
200,000 49,038 65,384 81,730 98,076 114,422 127,422
250,000 61,788 82,384 102,980 123,576 144,172 160,422
300,000 74,538 99,384 124,230 149,076 173,922 193,422
350,000 87,288 116,384 145,480 174,576 203,672 226,422
400,000 100,038 133,384 166,730 200,076 233,422 259,422
450,000 112,788 159,384 187,980 225,576 263,172 292,422
500,000 125,538 167,384 209,230 251,076 292,922 325,422
<F1>
(1) Benefits shown do not take into account limits under Section 415 of the
Internal Revenue Code of 1986, as amended (the "Tax Code") or the $160,000
salary cap in effect after 1996, resulting from Tax Code Section 401(a)(17)
limits. Consequently, a portion of the benefits would be paid from the Excess
Benefit Plan (as defined below).
</TABLE>
The amended Pension Plan bases its benefits on an employee's account
balance when he or she retires or leaves the company. Each employee's initial
account balance was based on the accrued pension benefits under the
pre-amendment plan. The account balance will grow as TNMP adds benefit credits
consisting of a percentage of compensation and interest credits based on 1-year
Treasury bill rates. All employees are eligible to participate in the Pension
Plan. All Named Executive Officers will participate in the Pension Plan.
Annual contributions to the pre-amendment Pension Plan are computed on an
actuarial basis and cannot be calculated readily on a per person basis. Benefits
for each eligible employee under the old formula are based on the employee's
years of service computed through the month of the employee's retirement,
multiplied by a specified percentage of his or her average monthly compensation
for each full calendar year of service completed after 1992. TNMP made no
contribution to the Pension Plan for 1997.
Pension Plan benefits are not subject to reduction for Social Security
benefits, but are subject to reduction for retirement prior to age 62.
Highly compensated employees whose pensions are subject to being reduced to
an amount below what the Pension Plan otherwise would provide as a result of
compliance with Tax Code Sections 415 and 401(a)(17), and whom the board of
directors designate as eligible, may also participate in TNP's "Excess Benefit
Plan." As of the date of this proxy statement, the board has designated 22
active or retired employees 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. Amounts paid as long-term incentive
compensation pursuant to the TNP Equity Incentive Plan or other plans will be
included in the remuneration base for Pension and Excess Benefit Plan purposes.
TNMP owns policies insuring the lives of the Excess Benefit Plan participants;
policy proceeds are payable to TNMP to reimburse it for its payments to the
retirees.
<PAGE>
As of December 31, 1997, the Named Executive Officers were credited with
the years of service set forth in the following table. Executive pension
benefits are computed actuarially.
Name Years of Credited Service
Kevern R. Joyce 16 years(1)
Jack V. Chambers 18 years, 11 months
Manjit S. Cheema 3 years, 6 months
John P. Edwards 20 years(1)
Ralph S. Johnson 19 years(1)
- ---------------------------------
(1) This table reflects TNMP's agreements to credit each of Messrs. Joyce,
Edwards and Johnson with additional years of service, including years
before joining TNP and TNMP, for purposes of determining their retirement
benefits under the TNMP Excess Benefit Plan. Under these agreements, each
who is employed by TNP or TNMP at age 65 will be credited with a total of
30 years of service; this number will be reduced by one year for each year
that his retirement precedes age 65. Each was or will be vested in these
benefits upon three years of employment with TNP and TNMP. Excess Benefit
Plan benefits that each receives will be reduced by the amount of any
retirement payments that he receives from the TNMP Pension Plan and from
other employers. Any who retires before age 55 and five years of service
will receive no benefits under this agreement, unless there is a change in
control of TNP or TNMP. If there is a change in control, the benefits to
each will be fully vested and accrued as of either the date of the change
in control or as of his 62nd birthday, whichever date provides the greater
benefit.
Severance Agreements
Employment severance contracts between TNMP 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 TNP or TNMP 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 TNP or TNMP. 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 TNMP 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, acting through its Compensation Committee,
last reviewed the contracts in February 1998. The current contracts of the Named
Executive Officers expire in February 2001.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires TNP's and
TNMP's directors and executive officers to file reports of beneficial ownership
and changes in ownership of TNP's equity securities with the Securities and
Exchange Commission and the NYSE. To TNP's knowledge, based solely on a review
of copies of such reports provided to TNP and written representations that no
such reports were required, Patrick Bridges, the Treasurer of TNP and TNMP,
filed one Form 4 reporting a sale of TNP common stock late. TNP and TNMP
directors and executive officers made all other required filings on time.
<PAGE>
Compensation Committee Report on Executive Compensation
The Compensation Committee of the board of directors (the "Committee") is
made up of five directors who are not current or former employees of TNP. The
Committee sets TNP's overall compensation principles and annually reviews the
compensation program and its overall effectiveness; evaluates the Chief
Executive Officer's performance and reviews the performances of all officers who
report to him; sets executive officers' compensation; reviews the terms and
conditions of all employee benefit plans; designates participants in the
incentive compensation plans; and evaluates board compensation. The Committee
has considered the advice of management and an outside consultant in determining
the appropriate compensation level and design. All components of executive
compensation, however, are matters of Committee discretion.
Compensation Philosophy and Strategy
TNP's executive compensation policy reflects the Committee's belief that
TNP's success 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. The Committee believes
that executive officers' compensation should be competitive with other companies
in the electric utility industry and that officers should be rewarded when TNP's
operations and financial returns reflect above-average performance and
continuing improvement in customer satisfaction and shareholder value.
Executive officer compensation consists of base salary and short-term and
long-term incentive compensation. When determining officers' compensation, the
Committee reviews and considers compensation data of other electric utilities
with annual revenues comparable to TNP. These other electric utilities are not
the same as those that comprise the S&P Electric Company 500 Index used in the
performance graph included in this proxy statement. The Committee has
established officer salary grades as guidelines in setting each executive's
compensation. The midpoint for each salary grade is generally set at around the
fiftieth percentile of the base salary of comparable positions in other
companies.
Base Salary
Base salaries for all officers are based on salary data for comparable
positions at certain other electric utilities and other companies with whom we
compare compensation levels. Individual officers' salaries are set within the
salary grade and are based on an evaluation of several factors, including the
officer's performance during the past year in view of 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. The Chief Executive
Officer annually reviews the other executive officers' base salaries, and the
Committee acts after considering his recommendations.
Incentive Compensation
Each year TNP and its subsidiaries provide their officers and key employees
with opportunities to earn incentive compensation. Incentive compensation awards
are based on the company's achievement of specific annual financial and
operational goals, and consist of a balance of long-term awards of stock and
short-term awards of cash and stock.
Long-Term Incentive Compensation. Long-term incentive compensation awards
are granted for a three-year performance period. Awards are expressed as a
percentage of the individual's salary range midpoint and, if earned, are paid in
TNP stock at the end of the period. At the beginning of the period, the
Committee approves a payout schedule based on prescribed financial performance.
Currently, the performance targets are a total shareholder return that exceeds
the 55th percentile of both the S&P 500 Index and the S&P Electric Company 500
Index. If both target levels are reached, payout will equal 100 percent of the
amount granted at the beginning of the period. Performance above or below pays
more or less than the target amount, based on the schedule. The maximum amount
payable is 150 percent of the amount granted, and the minimum is 0 percent.
Award recipients do not receive any portion of an award
<PAGE>
related to a particular objective unless a minimum threshold for that objective
has been achieved. Recipients also receive dividend equivalents, payable in
cash, for the stock that they earn.
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 balances the short-term emphasis inherent in
short-term awards, described below. 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.
The payout for awards made for the first performance period (1995-1997)
occurred in January 1998. The exemplary shareholder return relative to the S&P
500 and S&P Electric Company 500 Indices during that period resulted in the
maximum possible payout. That return, 154 percent, exceeded all companies in the
S&P Electric Company 500 Index and was in the 77th percentile of companies in
the S&P 500 Index. The performance criteria for this initial performance period
also included the relative improvement in TNMP's competitive position in terms
of retail rate comparison; TNMP exceeded the maximum target for such
improvement.
Short-Term Incentive Compensation. Each year, TNP awards short-term
incentive opportunities to executive officers and other key management
employees. These opportunities are designed to align executive pay with TNP's
annual financial and operational performance and to reward the achievement of
departmental and individual objectives. The Committee establishes aggressive
performance goals and a payout schedule at the beginning of each year, and
determines at year-end whether awards have been earned. TNP pays out the awards,
which have been payable three-fourths in cash and one-fourth in TNP stock, as
soon as practicable after the Committee's determination. As with the long-term
incentives, if target levels are reached, payout will equal 100 percent of the
amount granted at the beginning of the period; performance above or below the
target amount pays more or less than the target amount, based on the schedule.
Award recipients do not receive any portion of an award related to a particular
goal unless a minimum threshold for that goal is achieved.
In 1997, performance criteria for the short-term incentive awards were (i)
cash value added and (ii) factors developed to measure operations and
maintenance costs, customer satisfaction, system reliability and safety.
Officers were awarded target short-term incentive opportunities of between 10
percent to 25 percent of their salary range midpoints. Target awards to other
management employees were between 5 percent and 10 percent of their salary range
midpoints.
Because of the superior achievement of the 1997 performance goals,
executive officers received short-term incentive awards ranging from 19 percent
to 36 percent of their respective salary midpoints. They also received dividend
equivalents, paid in cash, on the stock portion of their awards.
Recipients of company stock awarded as short-term incentive compensation
may not sell or transfer the stock 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
employees of TNMP and its subsidiaries, including all executive officers. The
performance criteria for these awards was the same as for the short-term
incentive awards. The target level for all employees, including executive
officers, was 4 percent of their respective base salaries paid during the year.
Because of the extent to which 1997 performance goals applicable to them were
received, executive officers received awards ranging from 5.1 percent to 5.8
percent of their 1997 base salary.
401(k) Retirement Plan Incentive Matching. In 1997, a portion of TNMP's
matching contribution to its 401(k) retirement plan for employees was contingent
upon meeting the cash value added performance goal. Because the maximum
incentive matching goals were attained for 1997, TNMP made an incentive matching
contribution equal to approximately 50 percent of the eligible contributions (up
to 6 percent of eligible pay) of eligible participants, including executive
officers, in addition to its regular matching contribution for the 1997 plan
year.
<PAGE>
Internal Revenue Code Section 162(m)
Section 162(m) of the Internal Revenue Code limits tax deductions for
executive compensation to $1 million. There are several exemptions to Section
162(m), including one for qualified performance-based compensation. To be
qualified, performance-based compensation must meet various requirements,
including shareholder approval. Total compensation paid to executive officers
did not exceed the deductibility limits of Internal Revenue Code Section 162(m)
in 1997. Assuming current compensation polices and philosophy remain in place,
TNMP does not expect any executive's total compensation to exceed Section 162(m)
limits in the near future.
Chief Executive Officer Compensation
In 1997, TNP's most highly compensated officer was Kevern R. Joyce,
Chairman of the Board, President and Chief Executive Officer. Mr. Joyce's 1997
compensation was based upon the policies and plans described above.
Each year, Mr. Joyce agrees on a set of personal and strategic company
objectives with the board of directors. The Committee and other non-employee
directors review Mr. Joyce's performance against those objectives at year end.
The review includes a detailed analysis of the short- and long-term financial
results as well as progress towards TNP's strategic objectives. The Committee
oversees this review and makes appropriate adjustments to Mr. Joyce's
compensation.
The Committee increased Mr. Joyce's base salary from $345,000 to $357,100,
effective March 1, 1997, and to $375,000, effective March 1, 1998. In setting
Mr. Joyce's salary, the Committee, with the participation of all outside
directors, determined that critical goals were achieved and that the results for
TNP for the year were outstanding.
Mr. Joyce's 1997 short-term incentive compensation plan awards were
calculated in the same manner as awards for all other officers. Since the
Company significantly exceeded the target cash value added objective and
operations objectives for 1997, Mr. Joyce's incentive compensation was paid
above his target level. Based on the performance goals being exceeded, and upon
the Committee's assessment of his performance, Mr. Joyce was awarded a
short-term incentive compensation bonus of $125,475.
The amount of Mr. Joyce's cash award under the all-employee short-term
incentive plan was determined by achievement of the corporate financial and
operational goals that applied to all other employees. He received $20,575 under
the all-employee plan.
In January 1998, Mr. Joyce received a payout of 12,407 shares of TNP common
stock and dividend equivalents of $34,181 under the long-term incentive plan for
the 1995-1997 long-term incentive performance period. This payout reflected
strong TNP shareholder return relative to the S&P 500 and S&P Electric Company
500 Indices, and was at the maximum possible payout for that period.
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 TNP specifically incorporates the information by
reference.
<PAGE>
Five Year Comparison of Cumulative Total Return
The graph below shows TNP's performance relative to the S&P Electric
Company 500 Index (formerly called the S&P Electric Companies Index) and the S&P
500 Index. The graph spans TNP's last five years, assumes that $100 is invested
at the close of trading on December 31, 1992, and is calculated assuming
quarterly reinvestment of dividends and quarterly weighting by market
capitalization.
[Performance Graph reflecting the tabular data set forth below.]
<TABLE>
- ---------------------------------------- --------- -------- -------- -------- -------- --------
<CAPTION>
1992 1993 1994 1995 1996 1997
- ---------------------------------------- --------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
TNP Enterprises, Inc. 100 95 93 122 185 231
S&P 500 Index 100 110 111 153 187 249
S&P Electric Company 500 Index 100 118 111 142 171 213
- ---------------------------------------- --------- -------- -------- -------- -------- --------
</TABLE>
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information regarding the beneficial
ownership of TNP's common stock as of March 16, 1998, for (i) each incumbent
director and each nominee for director, (ii) the Named Executive Officers, (iii)
all directors and officers of TNP and TNMP as a group, and (iv) persons known to
management to beneficially own more than 5 percent of TNP's common stock. Except
as otherwise noted, each named individual or family member has sole voting and
investment power with respect to such shares.
Amount and Nature Percent of
Name of Beneficial Owner of Beneficial Ownership Class
R. Denny Alexander 2,075 *
John A. Fanning 1,975 *
Sidney M. Gutierrez 1,684 *
J. R. Holland, Jr. 1,050 *
Kevern R. Joyce 20,275 *
Harris L. Kempner, Jr. 1,975(1) *
Carol D. Surles 1,050 *
Larry G. Wheeler --
Dennis H. Withers 2,075 *
Jack V. Chambers 32,623 *
Manjit S. Cheema 7,185(2) *
John P. Edwards 3,620 *
Ralph S. Johnson 10,556 *
All directors and officers
as a group (23 persons) 144,057 1.1 percent
The Vanguard Group(3) 1,285,492 9.7 percent
First Union Corporation(4) 893,150 6.8 percent
Putnam Investments, Inc.(5) 777,700 5.9 percent
________________________
*Less than 1 percent
(1) Includes 200 shares that Mr. Kempner's wife owns, beneficial ownership of
which Mr. Kempner disclaims.
(2) Includes 1,462 shares held by Mr. Cheema's wife, beneficial ownership of
which he disclaims.
(3) The address of The Vanguard Group is P.O. Box 2900, Valley Forge,
Pennsylvania 19482. The Vanguard Group holds all shares included in the
table as trustee of the TNMP and Facility Works, Inc. 401(k) plans.
(4) 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 863,100 shares, shared voting power with
respect to the remaining 30,500 shares, sole dispositive power with respect
to 859,100 shares and shared dispositive power with respect to 31,050
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, and of First
Union Bank. The securities reported by investment adviser subsidiaries are
beneficially owned by such mutual funds or other clients. First Union Bank
holds its TNP shares in a fiduciary capacity for customers. The information
included in the table and this note is derived from First Union
Corporation's amended report on Schedule 13G dated February 11, 1998, 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.
(5) 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
<PAGE>
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 770,700 shares, and PAC has shared
dispositive power with respect to 7,000 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 16, 1998, filed with the Securities and Exchange
Commission.
OTHER MATTERS
Change of Certifying Accountants
On February 18, 1997, the board of directors, upon the recommendation of
its Audit Committee, approved the engagement of Andersen as the Company's new
independent accountants. The previous independent accountants, KPMG Peat Marwick
LLP ("KPMG") were dismissed as the Company's independent accountants effective
March 7, 1997, the date of the filing of the 1996 Annual Report on Form 10-K.
This change of certifying accountants occurred after an analysis and review of
existing services, and the receipt of competitive proposals for external
auditing services.
KPMG's reports on the Company's consolidated financial statements for 1996
contained no adverse opinions or disclaimers of opinion, and were not qualified
as to uncertainty, audit scope or accounting principles. During 1996 and through
the date of KPMG's dismissal, there were, other than as described below, no
disagreements between the Company and KPMG on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedures that, if not resolved to KPMG's satisfaction, would have caused it to
make a reference in connection with its reports to the subject matter of the
disagreements. A disagreement occurred in early February 1997 that arose out of
senior-level discussions regarding when the Company should report the accounting
effect of the tentative settlement, reached January 30, 1997, of litigation
between TNMP and Jackson National Life Insurance Company. The Audit Committee
discussed the subject matter of the disagreement with KPMG, and the issue was
resolved to KPMG's satisfaction.
During discussions on 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 with
Andersen, in anticipation of their appointment as TNMP's auditors for 1997, but
relied upon a TNMP staff member's previous experience 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 taken steps to correct this weakness.
Except as described in the preceding paragraph, during 1996 and through the
date of its dismissal, 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 KPMG's satisfaction. 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 had come
to its attention that had 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
<PAGE>
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 had come to
its attention and that it had concluded that the new information materially
impacted the fairness or reliability of either a previously issued audit report
or the underlying financial statements, or the 1996 financial statements.
TNP and TNMP authorized KPMG to respond fully to inquiries of Andersen
concerning the subject matter of the disagreement described above.
Copies of Annual Report
Copies of TNP and TNMP'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.
Shareholder Proposals
Any proposal by a shareholder for presentation at the 1999 Annual Meeting
must be received at TNP's executive offices not later than November 30, 1998.
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 TNP 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 30, 1998
<PAGE>
APPENDIX
1997 ANNUAL REPORT TO SHAREHOLDERS
<PAGE>
<TABLE>
<CAPTION>
TNP ENTERPRISES INC. AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
Combined Annual Report for the Fiscal Year Ended December 31, 1997
TABLE OF CONTENTS
<S> <C>
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
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TNP Enterprises, Inc. and Subsidiaries................................................................ A-9
Texas-New Mexico Power Company and Subsidiaries.......................................................A-10
INDEPENDENT AUDITORS' REPORT
TNP Enterprises, Inc. and Subsidiaries................................................................A-11
Texas-New Mexico Power Company and Subsidiaries.......................................................A-12
TNP ENTERPRISES, INC. AND SUBSIDIARIES
Consolidated Statements of Income, Three Years Ended December 31, 1997................................A-13
Consolidated Statements of Cash Flows, Three Years Ended December 31, 1997............................A-14
Consolidated Balance Sheets, December 31, 1997, and 1996..............................................A-15
Consolidated Statements of Capitalization, December 31, 1997, and 1996................................A-16
Consolidated Statements of Common Shareholders' Equity, Three Years Ended December 31, 1997...........A-17
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
Consolidated Statements of Income, Three Years Ended December 31, 1997................................A-18
Consolidated Statements of Cash Flows, Three Years Ended December 31, 1997............................A-19
Consolidated Balance Sheets, December 31, 1997, and 1996..............................................A-20
Consolidated Statements of Capitalization, December 31, 1997, and 1996................................A-21
Consolidated Statements of Common Shareholder's Equity, Three Years Ended December 31, 1997...........A-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................................................................A-23
SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA - TNP........................................................A-24
</TABLE>
A-1
<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
Clear Lake ....... Clear Lake Cogeneration Limited Partnership
EPE .............. El Paso Electric Company
EPS .............. Earnings (loss) per share of common stock
ERCOT ............ Electric Reliability Council of Texas
FWI .............. Facility Works, Inc., a wholly owned subsidiary of TNP
FERC ............. Federal Energy Regulatory Commission
FMB(s) ........... One or more First Mortgage Bonds issued by TNMP
GWH .............. Gigawatt-Hours
IRS .............. Internal Revenue Service
ITC .............. Investment Tax Credits
KWH .............. Kilowatt-Hours
MW ............... Megawatts
MWH .............. Megawatt-Hours
NMPUC ............ New Mexico Public Utility Commission
PPM .............. PPM America, Inc.
PUCT ............. Public Utility Commission of Texas
SPS .............. Southwestern Public Service Company
SFAS ............. Statement of Financial Accounting Standards
TEP .............. Tucson Electric Power Company
TGC .............. Texas Generating Company, a wholly owned subsidiary of TNMP
TGC II ........... Texas Generating Company II, a wholly owned subsidiary of
TNMP
TNP One .......... A two-unit, lignite-fueled, circulating fluidized-bed
generating plant located in Robertson County, Texas
TNMP ............. Texas-New Mexico Power Company, a wholly owned subsidiary of
TNP
TNP .............. TNP Enterprises, Inc.
TU ............... Texas Utilities Electric Company
Unit 1 ........... The first electric generating unit of TNP One
Unit 2 ........... The second electric generating unit of TNP One
Statement Regarding Forward Looking Information
The discussions in this document that are not historical facts, including,
but not limited to, the outcome of current and future rate/regulatory
proceedings, the continued application of regulatory accounting principles,
future cash flows and the potential recovery of stranded costs, are based upon
current expectations. Actual results may differ materially. Among the facts that
could cause the results to differ materially from expectations are the
following: legislation in the states TNMP serves affecting the regulation of
TNMP's business; changes in regulations affecting TNP and TNMP's businesses;
results of regulatory proceedings affecting TNP and TNMP's operations; future
acquisitions or strategic partnerships; general business and economic
conditions; negotiations regarding TNMP's proposal regarding transition to
competition in its Texas service area; and other factors described from time to
time in TNP's and TNMP's reports filed with the Securities and Exchange
Commission. TNP and TNMP wish to caution readers not to place undue reliance on
any such forward looking statements, which are made pursuant to the Private
Securities Litigation Reform Act of 1995 and, as such, speak only as of the date
made.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
SIGNIFICANT EVENTS AND KNOWN TRENDS AFFECTING TNP AND TNMP
Competitive Conditions
The electric utility industry continues its transition toward an
environment of increased competition for energy generation. The portions of
operations pertaining to transmission and distribution are expected to continue
to be regulated. Pressures that underlie the movement toward increasing
competition are numerous and complex. They include legislative and regulatory
changes, technological advances, consumer demands, greater availability of
natural gas, environmental needs, and other factors. The increasingly
competitive environment presents opportunities to compete for new customers, as
well as the risk of loss of existing customers.
The most significant effect of competition on TNMP, as well as other
utilities, will be the ability to recover potential stranded costs. "Stranded
costs" is the difference between what it costs TNMP to provide energy and what a
customer would be willing to pay for energy in a competitive market. The
inability to recover a significant portion of stranded costs would adversely
impact TNP's and TNMP's financial condition. In Texas, TNMP's potential stranded
cost relates to TNP One, its 300 MW generating unit, and could potentially be
more than $270 million. In New Mexico, TNMP's potential stranded cost relates to
its fixed purchased power contracts and could potentially be $3 million to $9
million.
The following discusses TNMP's strategy to transition to competition and to
provide TNMP the ability to recover its potential stranded costs in Texas and
New Mexico. Although the final resolution and magnitude of this issue is
uncertain, management realizes it is possible that shareholders may share the
financial burden of stranded costs with customers.
Texas Rate Filing and Transition to Competition Plan
In December 1996, certain cities in the Texas Gulf Coast area (Gulf Coast
Cities) served by TNMP passed resolutions requiring TNMP to file complete rate
information with those cities. On July 31, 1997, TNMP filed the required
traditional rate information with the Gulf Coast Cities based on the test year
ended December 31, 1996. Agreements with the cities provide that any rate
reduction resulting from the traditional rate filing required by the city
ordinances will be placed into effect retroactive to May 15, 1997. Based on its
analysis, TNMP believes the filing supports the reasonableness of TNMP's current
rates.
Simultaneous with the Gulf Coast Cities rate filing, TNMP filed a
transition to competition plan with the PUCT and all of its Texas cities. On
December 22, 1997, TNMP and the staff of the PUCT, along with other signatories,
reached an agreement on TNMP's proposed transition to competition plan. The
agreement proposes a five-year transition period, with a series of rate
reductions for residential and commercial customers beginning in 1998. At the
end of the transition period, TNMP's Texas customers would be allowed to choose
their energy supplier. The agreement provides the opportunity for TNMP to
recover a portion of its stranded costs during the transition period by using
accelerated recovery of its investment in TNP One. Also, the agreement specifies
an earnings cap mechanism that provides earnings in excess of the earnings cap
to be applied by TNMP to recover stranded costs or refunded to customers. Also,
the agreement establishes a competitive transition charge to recover any
stranded cost that remains at the end of the transition period over the
subsequent five years. TNMP will continue working with other interested parties
to obtain their approval before forwarding this agreement to the PUCT for their
approval. PUCT approval is expected by mid-1998.
New Mexico Community Choice
Following NMPUC approval on April 11, 1997, TNMP implemented Community
Choice, its plan for transition to competition for its New Mexico service
territory effective May 1, 1997. The plan provides TNMP's customers the right to
choose their energy provider after a three-year transition period. The plan
freezes rates (including the recovery of purchased power) during the transition
period, and allows for customer aggregation based on market forces. TNMP
believes the plan will allow it to recover its potential stranded costs in New
Mexico; however, the actual recovery and amount of potential stranded costs will
depend on the future market and price for energy through May 1, 2000.
Impact of Competition on TNMP
In addition to pursuing the satisfactory resolution of the stranded costs
issue, TNMP is pursuing strategies to retain and attract new customers. TNMP
believes that current competitive developments on the wholesale market are
benefiting TNMP and its customers. Because TNMP purchases much of its power,
TNMP can take advantage of lower overall wholesale power pricing , additional
market flexibility, and new options in obtaining purchased power. TNMP's
competitive position has been strengthened with the PUCT open access to
transmission rule. Management believes TNMP's revenue growth opportunities are
through an increased customer base and new services.
TNMP serves a market niche of smaller to medium sized communities. Only two
of the 85 communities in TNMP's service area have populations in excess of
50,000.
Texas Transmission Access
During 1996, the PUCT passed a wholesale transmission access rule, which
went into effect on January 1, 1997, in order to increase competition in
wholesale energy sales within Texas. The new rule established an Independent
System Operator for the ERCOT transmission system, and a regional method of
transmission pricing, terms and conditions. As discussed in "MD&A - Results of
Operations," the new rule had a favorable impact on TNMP's earnings.
<PAGE>
Unregulated Operations
TNP also plans to address the effects of competition on the traditional
utility business by expanding earnings through unregulated operations. During
1998, FWI, TNP's unregulated wholly owned subsidiary, intends to establish
itself in the maintenance and repair services business and focus on commercial
customers in Texas metropolitan areas. Through the end of 1997, TNP has made
modest investments in unregulated activities, in addition to FWI, and will
continue to evaluate unregulated investment and joint venture opportunities in
additional energy-related businesses.
Results of Operations
Overall Results
Income applicable to common stock was $29.5 million for 1997, compared to
$22.9 million in 1996. The 1997 results included the effect of FWI's
discontinued operations of $10.8 million. The 1996 results included a $3.1
million loss associated with FWI's discontinued operations and a $1.3 million
after tax charge for the settlement of litigation associated with the Series T
FMB retirement in 1995. Exclusive of one-time items, the 1997 earnings were
$40.3 million, a $13.0 million improvement as compared to the 1996 earnings of
$27.3 million.
Income applicable to common stock was $40.9 million in 1995. Results for
1995 included a number of one-time items consisting of the cumulative effect of
the change in accounting for unbilled revenues of $8.4 million (see Note 3), a
gain on sale of the Texas Panhandle properties of $9.5 million, and recognition
of deferred revenues related to a favorable IRS private letter ruling of $3.0
million. Excluding the one-time items, 1996 earnings were $7.4 million higher
than 1995 earnings of $19.9 million.
The following table sets forth results of operations for 1997, 1996, and
1995 and the impact of one-time items:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ---------------------
- ------------------
Amount EPS Amount EPS Amount EPS
--------- ------- ---------- --------- --------- -------
(In thousands except per share amounts)
Income applicable to common
<S> <C> <C> <C> <C> <C> <C>
stock before one-time items.................. $ 40,297 $ 3.08 $ 27,283 $ 2.38 $ 19,908 $1.83
--------- -------- ---------- --------- -------- ------
One-time items, net of income taxes:
Discontinued operations of FWI............... (10,777) (0.82) (3,097) (0.27) - -
Series T litigation settlement............... - - (1,300) (0.11) - -
Cumulative effect of change in accounting.... - - - - 8,445 0.77
Gain on sale of Texas Panhandle properties... - - - - 9,479 0.87
Recognition of deferred revenues............ - - - - 3,018 0.28
--------- -------- ---------- --------- --------- ------
Total one-time items, net................ (10,777) (0.82) (4,397) (0.38) 20,942 1.92
--------- -------- ---------- --------- --------- ------
Income applicable to common stock............... $ 29,520 $ 2.26 $ 22,886 $ 2.00 $ 40,850 $3.75
========= ======== ========== ========= ========= ======
</TABLE>
During 1997 and 1996, FWI's operations included construction and service
activities. In late 1997, management reevaluated FWI's strategy and adopted a
revised strategy to concentrate on service and maintenance activities and to
discontinue the construction segment. Management believes this course of action
should improve FWI's competitive position within its industry and improve FWI's
financial strength. See Note 4 for additional information regarding the
discontinued operations.
The operations of TNMP currently represent most of TNP's operations. The
following discussion focuses on TNMP's operations, except where stated
otherwise.
Operating Revenues
The following table summarizes the components of operating revenues (in
thousands).
<TABLE>
<CAPTION>
Increase (Decrease)
-------------------
1997 1996 1995 '97 v. '96 '96 v. '95
---------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 580,693 $ 502,737 $ 485,823 $ 77,956 $ 16,914
Effect of recognizing deferred
revenue from private letter ruling - - (4,128) - 4,128
---------- ---------- ----------- ---------- -----------
Subtotal 580,693 502,737 481,695 77,956 21,042
Pass-through items 299,281 244,889 228,903 54,392 15,986
---------- ---------- ----------- ---------- -----------
Base revenues $ 281,412 $ 257,848 $ 252,792 $ 23,564 $ 5,056
========== ========== =========== ========== ===========
</TABLE>
<PAGE>
Pass-through items are the portion of operating revenues that recover from
customers the costs of purchased power, fuel, and standby power. These items
affect customer rates but do not affect operating income. Annual variances are
discussed in "Results of Operations--Operating Expenses."
The following table summarizes the components of the base revenues increase
from 1996 to 1997 (in thousands).
<TABLE>
<CAPTION>
<S> <C>
Customer growth $ 3,905
Price - sales mix and other 400
Weather related (360)
Industrial - economy rate sales 5,950
Industrial - firm rate sales (2,359)
Power marketing sales 2,307
Non industrial standby revenues 1,845
Transmission revenue 8,251
Unbilled revenue and other 3,625
---------------
Base revenues increase $ 23,564
===============
</TABLE>
The base revenue increase of $23.6 million during 1997 resulted primarily
from implementing the new transmission access rules during 1997, growth in
residential and commercial customers, and a full year benefit from operation of
the control area. TNMP implemented a control area in Texas on July 31, 1996. The
control area is an electrical system that enables TNMP to instantaneously
balance its system resources with loads. Implementation of the control area
enabled TNMP to enhance its industrial economy rate sales, non-industrial
standby revenues, and power marketing sales. The control area also permitted
TNMP to replace standby power for TNP One with the purchase of planning
reserves.
The base revenue increase of $5.1 million during 1996 was attributable to
increased residential, commercial, and economy rate industrial sales, and
additional base revenues provided by the control area. The overall increase was
partially offset by a reduction in firm rate industrial sales and lower margins
on the industrial economy rate sales.
The components of GWH sales for 1997 and 1996 are summarized in the
following table:
<TABLE>
<CAPTION>
1997 1996 Variance %
----- ----- -------- ----
<S> <C> <C> <C> <C>
Residential 2,251 2,230 21 0.9
Commercial 1,772 1,726 46 2.7
Industrial:
Firm 1,080 1,295 (215) (16.6)
Economy 4,444 2,503 1,941 77.5
Power marketing 495 - 495 *
Other 108 108 - -
------ ----- ----- -----
Total GWH sales 10,150 7,862 2,288 29.1
====== ===== ===== =====
* Variance greater than 100%
</TABLE>
The increase in GWH sales resulted primarily from a substantial increase in
industrial economy sales. During the second quarter of 1996, TNMP entered into
new sales agreements with two cogeneration customers. The new economy rate sales
are at significantly lower margins than traditional firm rate industrial sales.
The 1997 sales results reflect a full year impact from the two cogeneration
customers. Also contributing to the sales increase were increased sales to
residential and commercial customers, and the addition of power marketing sales.
Residential and commercial sales increased during 1997 due to steady customer
growth. TNMP significantly increased the resale of electricity to off-system
customers beginning in mid-1997. These power marketing sales are generally made
at low margins. TNMP views power marketing as a new business opportunity and
expects its sales to grow in 1998.
Currently, TNMP may not increase its base rates in Texas prior to March
1999 except in certain extraordinary circumstances pursuant to a rate case
settlement approved by the PUCT in October 1994. As discussed in "Competitive
Conditions--Texas Rate Filing and Transition to Competition Plan" and Note 2,
TNMP reached an agreement with the staff of the PUCT and other signatories on
December 22, 1997, regarding TNMP's proposed transition to competition plan. The
agreement proposes a five year transition period, with a series of rate
reductions for residential and commercial customers beginning in 1998. The
agreement provides for TNMP to recover a portion of its potential stranded costs
during the transition period and to recover the remainder through a competitive
transition charge at the end of the transition period over the subsequent five
years. This agreement is subject to approval by the PUCT.
As discussed in "Competitive Conditions--New Mexico Community Choice" and
Note 2, TNMP implemented its Community Choice plan in New Mexico on May 1, 1997.
The plan provides TNMP's customers the right to choose their energy provider
after a three-year transition period and freezes rates (including the recovery
of purchased power) during the transition period. The rates
<PAGE>
represent a slight reduction as compared to rates in effect at December 1997.
Management believes the implemented rates will not have a material adverse
effect on TNP's and TNMP's financial condition.
As of February 1, 1998, TNMP received notification that a significant
customer in Texas will replace the power previously provided by TNMP with power
from a cogeneration plant built by a third party wholesale power producer. The
plant is scheduled to commence operations in the first quarter of 1998. This
customer provided sales of 629 GWH and annual revenues of $28.3 million in 1997
($10.1 million in base revenues). TNMP has an agreement with the wholesale power
producer to continue providing certain services to the cogeneration plant. The
base revenues from this agreement are expected to be $0.5 million annually.
TNMP had received notice from a large industrial customer in New Mexico to
terminate its contract. This customer provided sales of 1,098 GWH and annual
revenues of $34.7 million in 1997 ($8.1 million in base revenues). TNMP
renegotiated with this customer to continue providing full service until the end
of the New Mexico Community Choice transition period (April 30, 2000). After the
end of the transition period, TNMP will provide firm transmission service to
this customer, and this customer can purchase its KWH requirements on the open
market. Currently, TNMP is this customer's lowest cost U.S. electric supplier.
Operating Expenses
Operating expenses for 1997 were $79.7 million higher than in 1996, due
primarily to higher pass-through expenses and income taxes.
Operating expenses for 1996 were $20.7 million higher than in 1995, due
primarily to higher pass-through expenses, property taxes and franchise taxes.
Pass-Through Expenses
The following table summarizes the components of pass-through expenses (in
thousands).
<TABLE>
<CAPTION>
Increase (Decrease)
-------------------
1997 1996 1995 '97 v. '96 '96 v. '95
---------- ------------ ----------- ----------- -------------
Pass-through expenses:
<S> <C> <C> <C> <C> <C>
Purchased power $ 259,605 $ 196,481 $ 178,465 $ 63,124 $ 18,016
Fuel 39,676 45,300 44,828 (5,624) 472
Standby power - 3,108 5,610 (3,108) (2,502)
---------- ------------ ----------- ----------- -------------
Total $ 299,281 $ 244,889 $ 228,903 $ 54,392 $ 15,986
========== ============ =========== =========== =============
</TABLE>
Purchased Power. During 1997, purchased power expense increased by $63.1
million due to additional MWH's purchased to meet increased sales requirements
from the agreements negotiated with the two cogeneration customers during the
second quarter of 1996.
During 1996, purchased power expense increased by $18 million due to the
increased purchases to meet increased sales requirements, primarily for the two
cogeneration customers.
Purchased power costs represent TNMP's largest operating expense. Based on
current contracts, TU continues as TNMP's largest supplier of purchased power in
Texas and is TNMP's highest priced supplier. As described in Note 10, TNMP
entered into a new agreement to continue purchasing power from TU through June
30, 2002. TNMP expects a $22.4 million reduction in purchased power expense over
the remaining life of this new agreement as compared to the existing agreement.
Management expects, as a result of the developing competition within the
wholesale power market, to enter into other new arrangements for such capacity
and energy on terms that are more favorable for its customers.
Fuel. Fuel expense in 1997 decreased $5.6 million, excluding amounts of non
pass-through fuel expenditures, as compared to 1996. The decrease resulted from
an extended planned outage at TNP One and increased economy sales. No fuel cost
recovery is included in industrial economy rate sales.
Fuel expense is directly related to the fixed fuel recovery factor last
approved by the PUCT in connection with the 1994 Texas rate case settlement. The
majority of TNMP's fuel expense is recovered in revenues and any difference from
actual costs is deferred until a new factor is established. On June 30, 1997,
TNMP filed a reconciliation of fuel expenses for the period from September 30,
1993 to December 31, 1996, with the PUCT. At the beginning of the reconciliation
period, TNMP had a cumulative under-recovery of $11 million, and had a $4.4
million under-recovery as of the end of the reconciliation period. As of
December 31, 1997, the under-recovered fuel amount was $0.1 million. The related
fuel reconciliation filed with the PUCT is described in Note 2.
<PAGE>
Other Operating Expenses
Other operating expenses in 1997 were comparable to 1996. Cost savings from
reduced standby expenses resulting from implementation of the control area
offset a $2.0 increase in the Texas transmission expenses.
Other operating expenses were $2.0 million higher in 1996 than in 1995. The
increase is due to higher payroll and payroll related items, incentive
compensation and the reserve associated with the settlement of Series T FMB
litigation. These increases were offset in part by reduced standby power costs
resulting from the implementation of the control area in July 1996, as discussed
in "Operating Revenues."
Interest Charges
During 1997, interest charges decreased $12.5 million due primarily to the
retirement of Series T FMBs in January 1997 and applying strong cash flow from
operations to reduce debt levels. The 11.25% Series T FMBs were retired with
lower cost borrowings from the credit facilities and an equity contribution from
TNP in late 1996, resulting from its common stock sale.
During 1996 interest charges decreased $4.6 million due to the reduction in
the amount of debt and lower interest rates on the credit facilities. During
1996 TNMP retired $91.7 million of FMBs and reduced the average amount
outstanding under the credit facilities. Partially offsetting the reductions
discussed above were interest charges of $1.3 million payable to the IRS
associated with the resolution of outstanding tax audits for the years 1990
through 1994.
Interest charges are expected to continue to decrease during 1998 due to
reduced levels of overall long-term debt and reduced interest rate margins on
the credit facilities.
Liquidity and Capital Resources
Sources of Liquidity
The main sources of liquidity for TNP are cash flow from operations,
borrowings from credit facilities and sale of additional common stock.
TNP's cash flow from operations totaled $103.9 million, $65.2 million and
$88.4 million in 1997, 1996, and 1995. Cash flow from operations continues to be
strong, and increased in 1997 due to increased base revenues as described in
"Results of Operations--Operating Revenues," and the one-time factoring of
unbilled accounts receivables, which contributed $20.5 million to 1997 cash
flow. Cash flow from operations had decreased in 1996 due to increased income
tax payments. TNMP's cash flow from operations mirrored that of TNP.
TNMP has two existing credit facilities with $150 million of unused
borrowings available, as of December 31, 1997.
TNP reserved 1 million shares of common stock for issuance through a direct
stock purchase plan which began in 1997. The plan is designed to provide
investors with a convenient method to purchase shares of TNP's common stock
directly from the company and to reinvest cash dividends. The plan has replaced
TNP's prior dividend reinvestment plan. As of January 26, 1998, the remaining
reserve for direct stock purchase plan was 967,000 shares.
Capital Resources
TNP's and TNMP's capital structure continued to improve during 1997 as TNMP
was able to reduce debt due to continued strong earnings for the year. The
equity portion of TNP's capital structure increased from 34.1% at December 31,
1996, to 38.3% at December 31, 1997. Conversely, the long-term debt ratio
decreased from 65.5% to 61.3% for the same period. TNMP experienced similar
results with its capital ratios.
TNMP's capital requirements through 2002 are projected to be as follows
(amounts in millions):
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002
------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
FMB and secured debenture maturities (see Note 7) $ .1 $ 130.1 $ 100.1 $ .1 $ .1
Capital expenditures 32.1 36.4 36.5 37.4 39.0
------- -------- -------- ------- -------
Total capital requirements $ 32.2 $ 166.5 $ 136.6 $ 37.5 $ 39.1
======= ======== ======== ======= =======
</TABLE>
TNMP believes that cash flow from operations and periodic borrowings under
the credit facilities will be sufficient to meet working capital requirements
and planned capital requirements through 1998.
<PAGE>
Other Matters
Application of SFAS 71
As a result of the Energy Policy Act of 1992 and actions of regulatory
commissions, the electric utility industry is moving toward a combination of
competition and a modified regulatory environment. TNMP's financial statements
currently reflect assets and costs based on current cost-based ratemaking
regulations in accordance with SFAS 71, Accounting for the Effects of Certain
Types of Regulation. Continued applicability of SFAS 71 to TNMP's financial
statements requires that rates set by an independent regulator on a
cost-of-service basis can actually be charged to and collected from customers.
In the event that all or a portion of a utility's operations cease to meet
those criteria for various reasons, including deregulation, a change in the
method of regulation, or a change in the competitive environment for the
utilities regulated service, the utility will have to discontinue SFAS 71 for
that portion of operations. That discontinuation would be reported by the
write-off of unrecoverable regulatory assets and liabilities.
As discussed in Note 2, as a result of the Community Choice program in New
Mexico, TNMP discontinued the application of SFAS 71 to its generation/power
supply operations in New Mexico during 1997. The discontinuing of regulatory
accounting principles had no effect on TNMP's financial condition. Also, as
discussed in Note 2, TNMP has reached an agreement with the staff of the PUCT
and other signatories regarding TNMP's proposed transition to competition plan.
This agreement, subject to PUCT approval, would result in TNMP discontinuing the
application of SFAS 71 to its generation/power supply operations in Texas. If
the plan is approved without significant modification, the discontinuing of
regulatory accounting principles is not expected to have a material effect on
TNMP's financial condition. Management believes that, as of December 31, 1997,
and for the foreseeable future, TNMP's transmission and distribution operations
continue to follow SFAS 71.
Earnings Per Share
The Financial Accounting Standards Board issued SFAS 128, Earnings per
Share, which became effective for financial statements ending December 31, 1997.
SFAS 128 requires the calculation of basic and diluted earnings per share. Basic
earnings per share is computed by dividing income applicable to common stock by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed by dividing income applicable to common
stock by the weighted average number of common shares outstanding and common
stock equivalents. The difference in current year basic and diluted earnings per
share for TNP is immaterial, and, therefore, diluted earnings per share
information is not presented. The application of SFAS 128 resulted in 1996
earnings per share to be increased by $0.02.
Year 2000 Impact to Systems
TNP has conducted extensive studies to analyze the impact of Year 2000 to
all computerized systems. Based on these studies, it has devised, and is in the
early stages of implementing, a plan to address the affected systems. The plan
incorporates replacing outdated systems, upgrading to new vendor releases, and
purchasing additional hardware during the next two years. The expected costs to
implement this plan during the next two years are $7.2 million. TNP does not
expect these expenditures to have a material impact on its results of
operations. TNP expects to address the most critical systems during 1998.
<PAGE>
Report of Independent Public Accountants
----------------------------------------
To the Shareholders and Board of Directors of TNP Enterprises, Inc.:
We have audited the accompanying consolidated balance sheet of TNP
Enterprises, Inc. (the "Company") (a Texas corporation) as of December 31, 1997,
and the related consolidated statements of income, shareholders' investment and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1997, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Fort Worth, Texas
February 13, 1998
<PAGE>
Report of Independent Public Accountants
----------------------------------------
To the Shareholder and Board of Directors of Texas-New Mexico Power Company:
We have audited the accompanying consolidated balance sheet of Texas-New
Mexico Power Company (the "Company") (a Texas corporation) as of December 31,
1997, and the related consolidated statements of income, shareholder's
investment and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1997, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Fort Worth, Texas
February 13, 1998
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors and Shareholders
TNP Enterprises, Inc.:
We have audited the accompanying consolidated balance sheet and statement of
capitalization of TNP Enterprises, Inc. and subsidiaries as of December 31,
1996, and the related consolidated statements of income, common shareholders'
equity and cash flows for each of the years in the two-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of TNP Enterprises,
Inc. and subsidiaries as of December 31, 1996, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 3 to the consolidated financial statements, the Company
changed its method of accounting for operating revenues in 1995.
KPMG Peat Marwick LLP
Fort Worth, Texas
January 30, 1997
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors
Texas-New Mexico Power Company:
We have audited the accompanying consolidated balance sheet and statement of
capitalization of Texas-New Mexico Power Company (a wholly owned subsidiary of
TNP Enterprises, Inc.) and subsidiaries as of December 31, 1996, and the related
consolidated statements of income, common shareholder's equity and cash flows
for each of the years in the two-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Texas-New Mexico
Power Company and subsidiaries as of December 31, 1996, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 3 to the consolidated financial statements, the Company
changed its method of accounting for operating revenues in 1995.
KPMG Peat Marwick LLP
Fort Worth, Texas
January 30, 1997
<PAGE>
<TABLE>
<CAPTION>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31,
1997 1996 1995
----------------- ----------------- -----------------
(In thousands except per share amounts)
<S> <C> <C> <C>
OPERATING REVENUES $ 585,234 $ 502,737 $ 485,823
----------------- ----------------- -----------------
OPERATING EXPENSES:
Purchased power 261,043 196,481 178,465
Fuel 41,730 47,201 48,898
Other operating and maintenance 94,075 84,417 82,833
Depreciation 38,936 38,172 37,850
Taxes other than income taxes 33,696 33,256 28,865
Income taxes 20,108 10,375 12,317
----------------- ----------------- -----------------
Total operating expenses 489,588 409,902 389,228
----------------- ----------------- -----------------
NET OPERATING INCOME 95,646 92,835 96,595
----------------- ----------------- -----------------
OTHER INCOME:
Gain on sale of Texas Panhandle properties - - 14,583
Other income and deductions, net 1,466 1,956 1,245
Income taxes 257 722 (5,403)
----------------- ----------------- -----------------
Other income, net of taxes 1,723 2,678 10,425
----------------- ----------------- -----------------
INCOME BEFORE INTEREST CHARGES 97,369 95,513 107,020
----------------- ----------------- -----------------
INTEREST CHARGES:
Interest on long-term debt 52,557 64,654 70,544
Other interest and amortization of debt-related
costs 4,357 4,709 3,416
----------------- ----------------- -----------------
Total interest charges 56,914 69,363 73,960
----------------- ----------------- -----------------
INCOME FROM CONTINUING OPERATIONS BEFORE
THE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 40,455 26,150 33,060
Loss from discontinued nonregulated operations,
net of taxes (note 4) 10,777 3,097 -
----------------- ----------------- -----------------
INCOME BEFORE THE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING 29,678 23,053 33,060
Cumulative effect of change in accounting for
unbilled revenues, net of taxes (note 3) - - 8,445
----------------- ----------------- -----------------
NET INCOME 29,678 23,053 41,505
Dividends on preferred stock 158 167 655
----------------- ----------------- -----------------
INCOME APPLICABLE TO COMMON STOCK $ 29,520 $ 22,886 $ 40,850
================= ================= =================
EARNINGS PER SHARE OF COMMON STOCK:
Earnings from continuing operations before the
cumulative effect of accounting change $ 3.08 $ 2.27 $ 2.98
Loss from discontinued nonregulated operations (0.82) (0.27) -
Earnings from cumulative effect of change in
accounting - - 0.77
----------------- ----------------- -----------------
EARNINGS PER SHARE $ 2.26 $ 2.00 $ 3.75
================= ================= =================
DIVIDENDS PER SHARE OF COMMON STOCK $ 1.005 $ 0.93 $ 0.82
================= ================= =================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 13,083 11,465 10,901
================= ================= =================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
1997 1996 1995
---------------- ------------------ -----------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Cash received from sales to customers $ 625,032 $ 505,307 $ 481,470
Purchased power (262,107) (198,696) (172,486)
Fuel costs paid (37,447) (45,576) (44,781)
Cash paid for payroll and to other suppliers (125,188) (75,138) (76,735)
Interest paid, net of amounts capitalized (57,337) (69,247) (68,484)
Income taxes paid (9,089) (15,684) (1,095)
Other taxes paid (32,990) (32,243) (30,556)
Other operating cash receipts and payments, net 2,979 (3,522) 1,043
---------------- ------------------ -----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 103,853 65,201 88,376
---------------- ------------------ -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant (28,232) (28,006) (28,689)
Additions to other property and nonregulated
investments (1,777) (2,771) -
Net proceeds from sale of Texas Panhandle
properties - - 29,009
Maturities of temporary investments - - 5,590
---------------- ------------------ -----------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES (30,009) (30,777) 5,910
---------------- ------------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on preferred and common stocks (13,305) (10,866) (9,616)
Common stock issuances 3,392 48,798 856
Borrowings from (repayments to) revolving
credit facilities - net 45,000 12,000 (42,272)
Other long-term debt issuances - 202 -
Deferred expenses associated with financings - (588) (2,096)
Redemptions:
Obligation - FWI investment aquisition (300) - -
Other long-term debt (61) - -
Preferred stock (180) (180) (5,080)
First mortgage bonds (100,900) (96,508) (30,270)
---------------- ------------------ -----------------
NET CASH USED IN FINANCING ACTIVITIES (66,354) (47,142) (88,478)
---------------- ------------------ -----------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 7,490 (12,718) 5,808
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,387 21,105 15,297
---------------- ------------------ -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15,877 $ 8,387 $ 21,105
================ ================== =================
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income $ 29,678 $ 23,053 $ 41,505
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of change in accounting
for unbilled revenues, net of taxes - - (8,445)
Gain on sale of Texas Panhandle properties - - (14,583)
Recognition of deferred revenues - - (4,782)
Depreciation 38,936 38,170 37,850
Amortization of debt-related costs and
other deferred charges 3,184 3,329 4,952
Allowance for borrowed funds used during
construction (47) (99) (162)
Deferred income taxes 9,064 (193) 5,256
Investment tax credits (1,813) (380) 1,679
Cash flows impacted by changes in current assets
and liabilities:
Deferred purchased power and fuel costs 995 5,696 5,997
Accrued interest (3,556) (3,103) 2,289
Accrued taxes (1,244) (7,372) 8,483
Changes in other current assets and
liabilities 25,099 (1,507) 8,826
Other, net 3,557 7,607 (489)
---------------- ------------------ -----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 103,853 $ 65,201 $ 88,376
================ ================== =================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
1997 1996
--------------- ----------------
(In thousands)
ASSETS
UTILITY PLANT:
<S> <C> <C>
Electric plant $ 1,235,257 $ 1,215,355
Construction work in progress 2,281 906
--------------- ----------------
Total 1,237,538 1,216,261
Less accumulated depreciation 314,270 282,322
--------------- ----------------
Net utility plant 923,268 933,939
--------------- ----------------
OTHER PROPERTY AND INVESTMENTS, at cost 5,704 3,927
--------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents 15,877 8,387
Receivables:
Customer 7,380 16,362
Other 1,205 594
Inventories, at lower of average cost or market:
Fuel 483 367
Materials and supplies 4,440 6,384
Deferred purchased power and fuel costs 2,570 3,565
Accumulated deferred income taxes 1,707 1,937
Other current assets 982 527
--------------- ----------------
Total current assets 34,644 38,123
--------------- ----------------
DEFERRED CHARGES 28,310 30,795
--------------- ----------------
$ 991,926 $ 1,006,784
=============== ================
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common shareholders' equity:
Common stock - no par value per share.
Authorized 50,000,000
shares; issued 13,132,821 shares
in 1997 and 13,006,492 in 1996 $ 187,163 $ 183,771
Retained earnings 111,078 94,703
--------------- ----------------
Total common shareholders' equity 298,241 278,474
Preferred stock 3,240 3,420
Long-term debt, less current maturities 478,041 533,964
--------------- ----------------
Total capitalization 779,522 815,858
--------------- ----------------
CURRENT LIABILITIES:
Current maturities of long-term debt 100 138
Accounts payable 27,035 28,446
Accrued interest 7,323 10,879
Accrued taxes 17,589 18,833
Customers' deposits 3,249 2,662
Other current liabilities 26,665 11,797
--------------- ----------------
Total current liabilities 81,961 72,755
--------------- ----------------
REGULATORY TAX LIABILITIES 6,318 10,963
ACCUMULATED DEFERRED INCOME TAXES 85,250 74,844
ACCUMULATED DEFERRED INVESTMENT TAX CREDITS 21,149 19,734
DEFERRED CREDITS 17,726 12,630
COMMITMENTS AND CONTINGENCIES (Notes 1, 2,
and 10) --------------- ----------------
$ 991,926 $ 1,006,784
=============== ================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31,
1997 1996
-------------- ---------------
(In thousands)
COMMON SHAREHOLDERS' EQUITY
- ---------------------------
Common stock with no par value per share
Authorized shares - 50,000,000
Outstanding shares - 13,132,821 in
<S> <C> <C>
1997 and 13,006,492 in 1996 $ 187,163 $ 183,771
Retained earnings 111,078 94,703
-------------- ---------------
Total common shareholders' equity 298,241 278,474
-------------- ---------------
PREFERRED STOCK
- ---------------
Preferred stock with no par value
Authorized shares - 5,000,000
Outstanding shares - None
Redeemable cumulative preferred stock of TNMP with $100 par value
Authorized shares - 1,000,000
Redemption
price at TNMP's Outstanding shares
option 1997 1996
------ ---- ----
<S> <C> <C> <C> <C>
Series B 4.65% $ 100.00 20,400 21,600 2,040 2,160
Series C 4.75% 100.00 12,000 12,600 1,200 1,260
--------- ---------- -------------- ---------------
Total redeemable cumulative preferred stock 32,400 34,200 3,240 3,420
--------- ---------- -------------- ---------------
LONG-TERM DEBT
- --------------
FIRST MORTGAGE BONDS
<S> <C> <C>
Series M 8.7 due 2006 8,000 8,100
Series T 11.2 due 1997 - 100,800
Series U 9.2 due 2000 100,000 100,000
SECURED DEBENTURES
12.50% due 1999 130,000 130,000
Series A 10.75% due 2003 140,000 140,000
REVOLVING CREDIT FACILITIES
1995 Facility - -
1996 Facility 100,000 55,000
OTHER 141 202
-------------- --------------
Total long-term debt 478,141 534,102
Less current maturities (100) (138)
-------------- --------------
Total long-term debt, less current maturities 478,041 533,964
-------------- --------------
TOTAL CAPITALIZATION $ 779,522 $ 815,858
============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
For the Years Ended December 31,
Common Shareholders' Equity
- ------------------------------------------------------------
Common Stock Retained
Shares Amount Earnings Total
------------ ------------- ------------- --------------
(In thousands)
YEAR ENDED DECEMBER 31, 1995
<S> <C> <C> <C> <C>
Balance at January 1, 1995 10,866 $ 134,117 $ 50,752 $ 184,869
Net income - - 41,505 41,505
Dividends on preferred stock - - (655) (655)
Dividends on common stock - $0.82 per share - - (8,938) (8,938)
Sale of common stock 54 856 - 856
Retirement of preferred stock - - (180) (180)
------------ ------------- -------------- --------------
Balance at December 31, 1995 10,920 134,973 82,484 217,457
YEAR ENDED DECEMBER 31, 1996
Net income - - 23,053 23,053
Dividends on preferred stock - - (167) (167)
Dividends on common stock - $0.93 per share - - (10,699) (10,699)
Sale of common stock 2,086 48,798 - 48,798
Retirement of preferred stock - - 32 32
------------ ------------- -------------- --------------
Balance at December 31, 1996 13,006 183,771 94,703 278,474
YEAR ENDED DECEMBER 31, 1997
Net income - - 29,678 29,678
Dividends on preferred stock - - (158) (158)
Dividends on common stock - $1.005 per share - - (13,158) (13,158)
Sale of common stock 127 3,392 - 3,392
Retirement of preferred stock - - 13 13
------------ ------------- -------------- --------------
Balance at December 31, 1997 13,133 $ 187,163 $ 111,078 $ 298,241
============ ============= ============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of TNP Enterprises, Inc.)
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31,
1997 1996 1995
---------------- ---------------- ----------------
(In thousands)
<S> <C> <C> <C>
OPERATING REVENUES $ 580,693 $ 502,737 $ 485,823
---------------- ---------------- ----------------
OPERATING EXPENSES:
Purchased power 261,043 196,481 178,465
Fuel 41,730 47,201 48,898
Other operating and maintenance 84,294 83,948 82,833
Depreciation of utility plant 38,851 38,170 37,850
Taxes other than income taxes 33,260 32,727 28,865
Income taxes 22,062 10,333 12,317
---------------- ---------------- ----------------
Total operating expenses 481,240 408,860 389,228
---------------- ---------------- ----------------
NET OPERATING INCOME 99,453 93,877 96,595
---------------- ---------------- ----------------
OTHER INCOME:
Gain on sale of Texas Panhandle properties - - 14,583
Other income and deductions, net 1,120 1,626 1,470
Income taxes 257 722 (5,324)
---------------- ---------------- ----------------
Other income, net of taxes 1,377 2,348 10,729
---------------- ---------------- ----------------
INCOME BEFORE INTEREST CHARGES 100,830 96,225 107,324
---------------- ---------------- ----------------
INTEREST CHARGES:
Interest on long-term debt 52,557 64,654 70,544
Other interest and amortization of debt-related costs 4,355 4,709 3,416
---------------- ---------------- ----------------
Total interest charges 56,912 69,363 73,960
---------------- ---------------- ----------------
INCOME BEFORE THE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING 43,918 26,862 33,364
Cumulative effect of change in accounting for
unbilled revenues, net of taxes (note 3) - - 8,445
---------------- ---------------- ----------------
NET INCOME 43,918 26,862 41,809
Dividends on preferred stock 158 167 655
---------------- ---------------- ----------------
INCOME APPLICABLE TO COMMON STOCK $ 43,760 $ 26,695 $ 41,154
================ ================ ================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of TNP Enterprises, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
1997 1996 1995
---------------- -------------- ---------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Cash received from sales to customers $ 606,803 $ 502,954 $481,470
Purchased power (262,107) (198,696) (172,486)
Fuel costs paid (37,447) (45,576) (44,781)
Cash paid for payroll and to other suppliers (86,607) (75,807) (76,793)
Interest paid, net of amounts capitalized (57,331) (69,236) (68,484)
Income taxes paid (8,464) (14,242) (1,199)
Other taxes paid (32,980) (31,219) (30,054)
Other operating cash receipts and payments, net 2,600 1,135 639
---------------- -------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 124,467 69,313 88,312
---------------- -------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant (27,942) (28,006) (28,689)
Net proceeds from sale of Texas Panhandle properties - - 29,009
Withdrawals from (deposits to) escrow account 1,670 (1,669) -
---------------- -------------- ---------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES (26,272) (29,675) 320
---------------- -------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on preferred and common stocks (44,458) (10,867) (3,078)
Equity contribution from TNP Enterprises - 47,170 -
Borrowings from (repayments to) revolving credit facilities - net 45,000 12,000 (42,272)
Deferred expenses associated with financings - (588) (2,096)
Redemptions:
First mortgage bonds (100,900) (96,508) (30,270)
Preferred stock (180) (180) (5,080)
---------------- -------------- ---------------
NET CASH USED IN FINANCING ACTIVITIES (100,538) (48,973) (82,796)
---------------- -------------- ---------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (2,343) (9,335) 5,836
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,115 14,450 8,614
---------------- -------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,772 $ 5,115 $ 14,450
================ ============== ===============
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income $ 43,918 $ 26,862 $ 41,809
Adjustments to reconcile net income to net cash provided by
operating activities:
Cumulative effect of change in accounting for unbilled
revenues, net of taxes - - (8,445)
Gain on sale of Texas Panhandle properties - - (14,583)
Recognition of deferred revenues - - (4,782)
Depreciation of utility plant 38,851 38,170 37,850
Amortization of debt-related costs and other deferred charges 3,184 3,329 4,952
Allowance for borrowed funds used during construction (47) (99) (162)
Deferred income taxes (excluding the effect of change in
accounting) 14,584 1,140 5,132
Investment tax credits (1,813) (111) 1,691
Cash flows impacted by changes in current assets and liabilities:
Deferred purchased power and fuel costs 995 5,696 5,997
Accrued interest (3,556) (3,103) 2,289
Accrued taxes 850 (8,429) 8,432
Changes in other current assets and liabilities 24,751 786 8,862
Other, net 2,750 5,072 (730)
---------------- -------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 124,467 $ 69,313 $ 88,312
================ ============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of TNP Enterprises, Inc.)
CONSOLIDATED BALANCE SHEETS
December 31,
1997 1996
--------------- ----------------
(In thousands)
ASSETS
UTILITY PLANT:
<S> <C> <C>
Electric plant $ 1,235,239 $ 1,215,355
Construction work in progress 2,281 906
--------------- ----------------
Total 1,237,520 1,216,261
Less accumulated depreciation 314,270 282,322
--------------- ----------------
Net utility plant 923,250 933,939
--------------- ----------------
OTHER PROPERTY AND INVESTMENTS, at cost 214 1,884
--------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents 2,772 5,115
Receivables:
Customer 460 15,521
Other 1,882 1,196
Inventories, at lower of average cost or market:
Fuel 483 367
Materials and supplies 4,440 6,384
Deferred purchased power and fuel costs 2,570 3,565
Accumulated deferred income taxes 1,707 1,937
Other current assets 222 128
--------------- ----------------
Total current assets 14,536 34,213
--------------- ----------------
DEFERRED CHARGES 29,006 32,121
--------------- ----------------
$ 967,006 $ 1,002,157
=============== ================
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common shareholder's equity:
Common stock, $10 par value per share
Authorized 12,000,000 shares; issued 10,705
shares $ 107 $ 107
Capital in excess of par value 222,146 222,133
Retained earnings 64,768 65,308
--------------- ----------------
Total common shareholder's equity 287,021 287,548
Redeemable cumulative preferred stock 3,240 3,420
Long-term debt, less current maturities 477,900 533,800
--------------- ----------------
Total capitalization 768,161 824,768
--------------- ----------------
CURRENT LIABILITIES:
Current maturities of long-term debt 100 100
Accounts payable 24,859 27,254
Accrued interest 7,323 10,879
Accrued taxes 17,751 16,901
Customers' deposits 3,249 2,662
Other current liabilities 19,148 10,993
--------------- ----------------
Total current liabilities 72,430 68,789
--------------- ----------------
REGULATORY TAX LIABILITIES 6,318 10,963
ACCUMULATED DEFERRED INCOME TAXES 81,085 65,860
ACCUMULATED DEFERRED INVESTMENT TAX CREDITS 21,286 19,164
DEFERRED CREDITS 17,726 12,613
COMMITMENTS AND CONTINGENCIES (Notes 1, 2, and 10)
--------------- ----------------
$ 967,006 $ 1,002,157
=============== ================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of TNP Enterprises, Inc.)
CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31,
1997 1996
--------------- ----------------
(In thousands)
COMMON SHAREHOLDER'S EQUITY
- ---------------------------
<S> <C> <C>
Common stock, $10 par value per share
Authorized shares - 12,000,000
Outstanding shares - 10,705 $ 107 $ 107
Capital in excess of par value 222,146 222,133
Retained earnings 64,768 65,308
--------------- ----------------
Total common shareholder's equity 287,021 287,548
--------------- ----------------
PREFERRED STOCK
- ---------------
Redeemable cumulative preferred stock with $100 par value
Authorized shares - 1,000,000
Redemption
price at TNMP's Outstanding shares
option 1997 1996
------ ---- ----
<S> <C> <C> <C> <C> <C> <C>
Series B 4.65% $ 100.00 20,400 21,600 2,040 2,160
Series C 4.75% 100.00 12,000 12,600 1,200 1,260
---------- ----------- --------------- ----------------
Total redeemable cumulative preferred stock 32,400 34,200 3,240 3,420
---------- ----------- --------------- ----------------
LONG-TERM DEBT
- --------------
FIRST MORTGAGE BONDS
<S> <C> <C> <C>
Series M 8.7 due 2006 8,000 8,100
Series T 11.2 due 1997 - 100,800
Series U 9.2 due 2000 100,000 100,000
SECURED DEBENTURES
12.50% due 1999 130,000 130,000
Series A 10.75% due 2003 140,000 140,000
REVOLVING CREDIT FACILITIES
1995 Facility - -
1996 Facility 100,000 55,000
--------------- ----------------
Total long-term debt 478,000 533,900
Less current maturities (100) (100)
--------------- ----------------
Total long-term debt, less current maturities 477,900 533,800
--------------- ----------------
TOTAL CAPITALIZATION $ 768,161 $ 824,768
=============== ================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of TNP Enterprises, Inc.)
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDER'S EQUITY
For the Years Ended December 31,
Common Shareholder's Equity
- -----------------------------------------------------------------------
Capital in
Common Stock Excess of Retained
Shares Amount Par Value Earnings Total
------------ ------------- ------------- ------------- -------------
(In thousands)
YEAR ENDED DECEMBER 31, 1995
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 11 $ 107 $ 175,111 $ 10,559 $ 185,777
Net income - - - 41,809 41,809
Dividends on preferred stock - - - (655) (655)
Dividends on common stock - - - (2,400) (2,400)
Retirement of preferred stock - - (180) - (180)
------------ ------------- ------------- ------------- -------------
Balance at December 31, 1995 11 107 174,931 49,313 224,351
YEAR ENDED DECEMBER 31, 1996
Net income - - - 26,862 26,862
Dividends on preferred stock - - - (167) (167)
Dividends on common stock - - - (10,700) (10,700)
Equity contribution from TNP Enterprises - - 47,170 - 47,170
Retirement of preferred stock - - 32 - 32
------------ ------------- ------------- ------------- -------------
Balance at December 31, 1996 11 107 222,133 65,308 287,548
YEAR ENDED DECEMBER 31, 1997
Net income - - - 43,918 43,918
Dividends on preferred stock - - - (158) (158)
Dividends on common stock - - - (44,300) (44,300)
Retirement of preferred stock - - 13 - 13
------------ ------------- ------------- ------------- -------------
Balance at December 31, 1997 11 $ 107 $ 222,146 $ 64,768 $ 287,021
============ ============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
General Information
The consolidated financial statements of TNP and subsidiaries include the
accounts of TNP and its wholly owned subsidiaries, TNMP, FWI, and TNP Operating
Company. The consolidated financial statements of TNMP and subsidiaries include
the accounts of TNMP and its wholly owned subsidiaries, TGC and TGC II. All
intercompany transactions and balances have been eliminated in consolidation.
TNMP is TNP's principal operating subsidiary. TNMP is a public utility
engaged in generating, purchasing, transmitting, distributing, and selling
electricity in Texas and New Mexico. TNMP is subject to PUCT and NMPUC
regulation. Some of TNMP's activities, including the issuance of securities, are
subject to FERC regulation, and its accounting records are maintained in
accordance with FERC's Uniform System of Accounts.
The use of estimates is required to prepare TNP's and TNMP's consolidated
financial statements in conformity with generally accepted accounting
principles. Management believes that estimates are essential and will not
materially differ from actual results. However, adjustments may be necessary in
the future to the extent that future estimates or actual results are different
from the estimates used in the 1997 financial statements.
Accounting for the Effects of Regulation
Electric utilities operate in a highly regulated environment. TNP's and
TNMP's consolidated financial statements reflect the application of certain
accounting standards, including SFAS 71, "Accounting for the Effects of Certain
Types of Regulation," which provide for recognition of the economic effects of
rate regulation. Among these effects are the recognition of regulatory assets
and liabilities. Regulatory assets represent revenues associated with certain
costs that are expected to be recovered from customers in future rates.
Regulatory liabilities are costs previously collected from customers or other
amounts that reduce future rates. The following table summarizes TNP's and
TNMP's regulatory assets and liabilities as of December 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
---- ----
(In thousands)
Regulatory Assets:
<S> <C> <C>
Deferred purchased power and fuel costs $ 2,570 $ 3,565
Deferred charges:
Losses on reacquired debt 8,621 10,000
Rate case expenses 3,638 3,743
Deferred accounting amounts 4,026 4,157
-------- ---------
Total $ 18,855 $ 21,465
======== =========
Regulatory Liabilities:
Income tax related $ 6,318 $ 10,963
======== =========
</TABLE>
Federal and state legislators and regulatory authorities have adopted or
are considering a number of changes that are significantly impacting competitive
conditions in the electric utility industry, such as the emergence of
independent power producers, wholesale transmission access, and retail wheeling.
If recovery of costs through rates becomes uncertain or unlikely, whether due to
legislative or regulatory changes, competition, or otherwise, accounting
standards such as SFAS 71 may no longer apply to TNP and TNMP. As a result, TNP
and TNMP could be required to write off all or a portion of their regulatory
assets and liabilities. Moreover, to the extent that future rates are
insufficient to recover costs, additional write downs could be required.
Management of TNP and TNMP are currently unable to predict the ultimate outcome
of changes in the electric utility industry and whether the outcome will have a
significant effect on their consolidated financial position and results of
operations. However, based upon current regulatory conditions in the states in
which TNMP operates, management believes it probable that TNMP will continue,
for the foreseeable future, to meet the criteria for continued application of
SFAS 71 to its transmission and distribution portions of its business. See Note
2 for information regarding the Texas transition to competition plan and the New
Mexico Community Choice plan. Based on those plans it is probable that TNMP will
recover from customers the regulatory assets included in the table above.
<PAGE>
Utility Plant
Utility plant is stated at the historical cost of construction which
includes labor, materials, indirect charges for such items as engineering and
administrative costs, and AFUDC. Property repairs and replacement of minor items
are charged to operating expenses; major replacements and improvements are
capitalized to utility plant.
AFUDC is a noncash item designed to enable a utility to capitalize interest
costs during periods of construction. Established regulatory practices enable
TNMP to recover these costs from ratepayers. The composite rates used for AFUDC
were 6.0%, 6.0%, and 8.0% in 1997, 1996, and 1995, respectively.
The costs of depreciable units of plant retired or disposed of in the
normal course of business are eliminated from utility plant accounts and such
costs plus removal expenses less salvage are charged to accumulated
depreciation. When complete operating units are disposed of, appropriate
adjustments are made to accumulated depreciation, and the resulting gains or
losses, if any, are recognized.
Depreciation is provided on a straight-line method based on the estimated
lives of the properties as indicated by periodic depreciation studies. A portion
of depreciation of transportation equipment used in construction is charged to
utility plant accounts in accordance with the equipment's use. Depreciation as a
percentage of average depreciable cost was 3.3%, 3.2%, and 3.3% in 1997, 1996,
and 1995, respectively.
Cash Equivalents
All highly liquid debt instruments with maturities of three months or less
when purchased are considered cash equivalents.
Customer Receivables and Operating Revenues
TNMP accrues estimated revenues for energy delivered since the latest
billing. Prior to January 1, 1995, TNMP recognized revenue when billed. See Note
3 for the effects of the change in recognizing revenues from cycle billing to
the accrual method in 1995.
TNMP sells customer receivables to an unaffiliated company on a nonrecourse
basis.
Purchased Power and Fuel Costs
Electric rates include estimates of purchased power and fuel costs incurred
by TNMP in purchasing or generating electricity. In TNMP's Texas jurisdiction,
differences between amounts collected and allowable costs are generally recorded
either as purchased power subject to refund or deferred purchased power and fuel
costs in accordance with regulatory ratemaking policy. See Note 2 for changes in
the recovery of purchased power costs, resulting from the implementation of New
Mexico Community Choice.
Deferred Charges
Expenses incurred in issuing long-term debt and related discount and
premium are amortized on a straight-line basis over the lives of the respective
issues.
Included in deferred charges are other assets that are expected to benefit
future periods and certain costs that are deferred for ratemaking purposes and
amortized over periods allowed by regulatory authorities.
Derivatives
Premiums paid for an interest rate collar will be amortized over the term
of the related agreement. Unamortized premiums are included in Deferred Charges
in the consolidated balance sheets. Amounts to be received or paid under the
agreement will be recognized on the accrual basis as a component of interest
expense.
Income Taxes
TNP files a consolidated federal income tax return that includes the
consolidated operations of TNMP and its subsidiaries. The amounts of income
taxes recognized in TNMP's accompanying consolidated financial statements were
computed as if TNMP and its subsidiaries filed a separate consolidated federal
income tax return.
ITC amounts utilized in the federal income tax return are deferred and
amortized to earnings ratably over the estimated service lives of the related
assets.
<PAGE>
Fair Values of Financial Instruments
Fair values of cash equivalents, temporary investments, and customer
receivables approximated the carrying amounts because of the short maturities of
those instruments.
The estimated fair values of long-term debt and preferred stock were based
on quoted market prices of the same or similar issues. The estimated fair values
of long-term debt and preferred stock were as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------------------- ------------------------------
Carrying Amount Fair Values Carrying Amount Fair Values
--------------- ----------- --------------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Long-term debt $ 478,000 $505,400 $ 533,900 $ 564,000
Preferred stock 3,240 2,653 3,420 1,500
Interest rate collar 262 235 295 180
</TABLE>
Common Stock
At December 31, 1997, 170,495 shares of TNP's common stock were reserved
for issuance to TNMP's 401(k) plan. Additionally, at January 26, 1998, 1,224,056
shares of TNP's common stock were reserved for subsequent issuance under other
stock compensation or shareholder plans.
Shareholder Rights Plan
TNP has a shareholder rights plan that is designed to protect TNP's
shareholders from coercive takeover tactics and inadequate or unfair takeover
bids. The rights plan provides for the distribution of one right for each share
of TNP's common stock currently outstanding or issued until the close of
business on November 4, 1998.
Upon the occurrence of certain events, each right entitles a shareholder to
elect to purchase one share of common stock at $45 per share or, under certain
circumstances, shares of common stock at half the then-current market price or
to receive TNP common stock or other securities having an aggregate value equal
to the excess of (i) the value of the common stock or other securities on the
date the rights are exercised over (ii) the cash payment that would have been
payable upon exercise of the rights if cash payment had been elected.
Until certain triggering events occur, the rights will trade together with
TNP's common stock and separate rights certificates will not be issued. Among
the triggering events are the acquisition by a person or group of 10% or more of
TNP's outstanding common stock or the commencement of a tender or exchange offer
that, upon consummation, would result in a person or group of persons owning 15%
or more of TNP's outstanding common stock. The rights expire November 4, 1998,
unless earlier redeemed or exchanged by TNP, and have had no effect on EPS.
Stock-Based Compensation
As discussed in Note 5, TNP has an equity based incentive compensation plan
that awards stock-based compensation. In 1995 the FASB issued SFAS 123,
Accounting for Stock-Based Compensation, that changes the method for calculating
expenses associated with stock-based compensation. SFAS 123, which became
effective for 1996, also allows companies to retain the approach as set forth in
APB Opinion 25, Accounting for Stock Issued to Employees, for measuring expense
for its stock-based compensation. TNMP has elected to continue to apply the
provisions of APB Opinion 25 in calculating stock-based compensation. The
application of SFAS 123 would have had no effect on the amount of expense
associated with its stock-based compensation.
Reclassification
Certain amounts in 1996 were restated to conform with the 1997 method of
presentation. In accordance with SFAS 128, 1996 earnings per share was restated
and resulted in an increase of $0.02 per share.
Note 2. Regulatory Matters
As the electric utility industry continues its transition toward an
environment of increased competition, the most significant effect of competition
on TNMP, as well as other utilities, will be the ability to recover potential
stranded costs. "Stranded costs" is the difference between what it currently
costs TNMP to provide energy and what a customer would be willing to pay for
such service in a competitive market. The inability to recover a significant
portion of stranded costs would adversely impact TNP's and TNMP's financial
condition. In Texas, TNMP's potential stranded
<PAGE>
cost relates to TNP One, its 300 MW generating unit, and could potentially be
more than $270 million. In New Mexico, TNMP's potential stranded cost relates to
its fixed purchased power contracts and could potentially be $3 million to $9
million.
The following discusses TNMP's strategy to transition to competition and
provides TNMP the ability to recover its potential stranded costs in Texas and
New Mexico.
Texas Rate Filing and Transition to Competition Plan
In December 1996, certain cities in the Texas Gulf Coast area (Gulf Coast
Cities) served by TNMP passed resolutions requiring TNMP to file complete rate
information with those cities. On July 31, 1997, TNMP filed the required
traditional rate information, based on the test year ended December 31, 1996,
with the Gulf Coast Cities. Agreements with the cities provide that any rate
reduction resulting from the city ordinances requiring the traditional rate
filing will be placed into effect retroactive to May 15, 1997. Based on its
analysis, TNMP believes the filing supports the reasonableness of TNMP's current
rates.
Simultaneous with the Gulf Coast Cities rate filing, TNMP filed a
transition to competition plan with the PUCT and all of its Texas cities. On
December 22, 1997, TNMP and the staff of the PUCT, along with other signatories
reached an agreement on TNMP's proposed transition to competition plan. The
agreement proposes a five-year transition period, with a series of rate
reductions for residential and commercial customers beginning in 1998. At the
end of the transition period, TNMP's Texas customers would be allowed to choose
their energy supplier. The agreement provides the opportunity for TNMP to
recover a portion of its stranded costs during the transition period by using
additional depreciation on TNP One and applying a portion of earnings in excess
of an earnings cap amount. Also, the agreement establishes a competitive
transition charge to recover any stranded cost that remains at the end of the
transition period over the subsequent five years. TNMP will continue working
with other interested parties to obtain their approval before forwarding this
agreement to PUCT for their approval. PUCT approval is expected by mid-1998.
This agreement, subject to PUCT approval, would result in TNMP discontinuing the
application of SFAS 71 to its generation/power supply operations in Texas. If
the plan is approved without significant modification, the discontinuation of
regulatory accounting principles is not expected to have a material effect on
TNMP's financial condition. The transmission and distribution operations in
Texas will continue to follow SFAS 71.
New Mexico Community Choice
Following NMPUC approval on April 11, 1997, TNMP implemented Community
Choice, its plan for transition to competition for its New Mexico service
territory effective May 1, 1997. The plan provides TNMP's customers the right to
choose their energy provider after a three-year transition period. The plan
freezes rates (including the recovery of purchased power) during the transition
period, and allows for customer aggregation based on market forces. TNMP
believes the plan will allow it to recover its potential stranded costs in New
Mexico.
As a result of the New Mexico Community Choice plan, the power supply
portion of TNMP's New Mexico operations no longer qualifies for the application
of SFAS 71. Accordingly, in 1997, TNMP discontinued regulatory accounting
principles for the New Mexico power supply operations. The discontinuation of
SFAS 71 had no effect on TNMP's financial statements as of December 31, 1997.
The transmission and distribution operations in New Mexico will continue to
follow SFAS 71.
Fuel Reconciliation
TNMP's fixed fuel factor remains constant until changed as part of a
general rate case or fuel reconciliation, or until the PUCT orders a
reconciliation for any over or under collections of fuel costs. TNMP filed a
reconciliation of fuel costs in June 1997, for the period of October 1993
through December 1996. In January 1998, TNMP reached a stipulated agreement with
the staff of the PUCT and several other interested parties. The agreement, which
is subject to approval by the PUCT, specifies all fuel costs incurred during the
reconciliation period should be approved as reasonable and necessary costs.
Also, the agreement does not propose a change to the fixed fuel factor; however,
it specifies the fuel factor is expected to be addressed in the "Texas Rate
Filing and Transition to Competition Plan" described above.
Note 3. Change in Accounting for Unbilled Revenues
Effective January 1, 1995, TNMP changed its method of accounting for
operating revenues from cycle billing to the accrual method. The change was made
in order to more closely match revenues and expenses and more closely conforms
to common utility industry practice. The cumulative effect of this change was to
recognize $12,993,000 of additional revenues ($8,445,000, net of taxes, or $0.77
per share).
Note 4. Discontinued Nonregulated Operations
Management, with approval from the Board of Directors, authorized a plan to
discontinue the construction activities of FWI in late 1997. FWI will continue
to operate its service and maintenance segment of its business.
<PAGE>
The pre-tax loss on discontinued operations recognized in 1997 of $16.3
million ($10.8 million, net of taxes, or $0.82 per share) includes the net loss
on the construction segment and costs to satisfy remaining contractual
obligations related to its discontinued construction operations of $9.5 million,
net of taxes, as well as disposal costs of $1.3 million, net of taxes. Since the
costs to dispose of the construction segment are not significant, this amount
has been included in the 1997 loss on discontinued operations. The construction
segment is expected to be fully disposed of within one year. During 1996, FWI
had incurred a net loss from construction segment of $3.1 million, or $0.27 per
share.
Note 5. Employee Benefit Plans
Pension Plan
TNMP has a defined benefit pension plan covering substantially all of its
employees. Benefits are based on an employee's years of service and
compensation. TNMP's funding policy is to contribute the minimum amount required
by federal funding standards. The following table sets forth the plan's funded
status and amounts recognized in the consolidated balance sheets at December 31,
1997, and 1996.
<TABLE>
<CAPTION>
1997 1996
-------- ----------
(In thousands)
Actuarial present value of benefit obligations:
<S> <C> <C>
Vested benefit obligation $ 66,061 $ 58,466
Unvested benefit obligation 4,803 4,539
-------- ----------
Accumulated benefit obligation $ 70,864 $ 63,005
======== ==========
Projected benefit obligation $ 76,316 $ 66,406
Unrecognized net asset 59 83
Unrecognized prior service cost 1,434 1,588
Unrecognized net gain from past experience 24,779 21,484
-------- ----------
102,588 89,561
Plan assets (principally marketable securities)
at estimated fair value 95,751 82,771
-------- ----------
Accrued pension costs (included in deferred
credits in the consolidated balance sheets) $ 6,837 $ 6,790
======== ==========
</TABLE>
Net pension costs were comprised of the following components as determined
using the projected unit credit actuarial method:
<TABLE>
<CAPTION>
1997 1996 1995
--------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
Service cost $ 1,371 $ 1,425 $ 1,071
Interest cost on projected benefit obligation 5,074 4,841 4,762
Adjustment for actual return on plan assets (17,788) (12,398) (13,797)
Net amortization and deferral 11,390 6,207 7,607
--------- ----------- -----------
Net pension costs $ 47 $ 75 $ (357)
========= =========== ===========
</TABLE>
Assumptions used in accounting for the pension plan as of December 31,
1997, and 1996 were as follows:
1997 1996
---- ----
Discount rates 7.0% 7.75%
Rates of increase in compensation levels 4.0% 4.0%
Expected long-term rate of return on assets 9.5% 9.5%
Postretirement Benefit Plan
TNMP sponsors a health care plan that provides postretirement medical and
death benefits to retirees who satisfied minimum age and service requirements
during employment. TNMP recognizes the costs of postretirement benefits on the
accrual basis during the periods that employees render service to earn the
benefits in accordance with SFAS 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." TNMP has been permitted to recover through rates
the additional costs resulting from the adoption of SFAS 106. TNMP has a trust
fund dedicated to paying these postretirement benefits.
<PAGE>
The following table sets forth the plan's funded status and amounts
recognized in the consolidated balance sheets at December 31, 1997, and 1996.
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(In thousands)
Accumulated postretirement benefit obligation:
<S> <C> <C>
Retirees and dependents $ 7,615 $ 13,060
Active employees 3,036 4,244
---------- ----------
Total benefits earned 10,651 17,304
Plan assets (principally marketable securities)
at estimated fair value 8,274 6,975
---------- ----------
Accumulated postretirement benefit
obligation in excess of plan assets 2,377 10,329
Unrecognized transition obligation (12,864) (13,721)
Unrecognized net gain from past experience 14,168 6,998
---------- ----------
Accrued postretirement benefit costs (included in
deferred credits in the consolidated balance sheets) $ 3,681 $ 3,606
========== ==========
Net postretirement benefit costs were comprised of the following
components:
1997 1996 1995
--------- --------- --------
(In thousands)
<S> <C> <C> <C>
Service cost $ 467 $ 524 $ 374
Interest cost on postretirement benefit obligation 1,253 1,259 1,265
Reduction for actual return on plan assets (1,037) (708) (956)
Net amortization and deferral 1,056 922 1,145
--------- --------- --------
Net postretirement benefit costs $ 1,739 $ 1,997 $ 1,828
========= ========= ========
</TABLE>
The transition obligation is being amortized over a 20-year period that
began in 1993. The assumed health care cost trend rate used to measure the
expected cost of benefits was 5.5% for 1997 and is assumed to trend downward
slightly each year to 4.3% for 2003 and thereafter. That assumed rate has an
effect on the amounts reported. For example, increasing the assumed health care
cost trend rates by one percentage point in each year would increase the
accumulated postretirement benefit obligation as of December 31, 1997, by
$47,000 and the aggregate of the service and interest cost components of net
postretirement benefit cost for 1997 by $274,000.
Additional assumptions used in accounting for the postretirement benefit
plan as of December 31, 1997, and 1996, were as follows:
1997 1996
-------- --------
Discount rates 7.0% 7.75%
Expected rate of return on assets (net of taxes) 5.25% 5.7%
Incentive Plans
TNP and TNMP have several incentive compensation plans. All employees
participate in one or more of these plans. Incentive compensation is based on
meeting key financial and operational performance goals such as cash value added
or earnings per share, operations and maintenance costs per KWH, and system
reliability measures. Operating expenses for 1997, 1996, and 1995 included costs
for the various cash and equity plans of $6.0 million, $4.8 million, and $2.0
million, respectively.
Other Employee Benefits
TNMP has a 401(k) plan designed to enhance the other retirement plans
available to its employees. Employees may invest their contributions in fixed
income securities, mutual funds, or TNP common stock. TNMP's contributions are
used to purchase TNP common stock, which employees may later convert into
investments in other investment options.
TNMP has employment contracts with certain members of management and other
key personnel. The contracts provide for lump sum compensation payments and
other rights in the event of termination of employment or other adverse
treatment of such persons following a "change in control" of TNP or TNMP. Such
event is defined to include, among other things, substantial changes in the
corporate structure, ownership, or board of directors of either entity.
An excess benefit plan has been provided for certain key personnel and
retired employees. The payment of benefits under the excess benefit plan is
partially provided under an insurance policy arrangement for paying the benefits
that generally would have been provided by the pension and thrift plans except
for federal limitations.
<PAGE>
<TABLE>
<CAPTION>
Note 6. Income Taxes
Components of income taxes were as follows:
TNP TNMP
------------------------------------- ------------------------------------
1997 1996 1995 1997 1996 1995
--------- ----------- ----------- --------- ----------- -----------
(In thousands)
Taxes on net operating income:
<S> <C> <C> <C> <C> <C> <C>
Federal - current $ 10,730 $ 10,240 $ 3,108 $ 9,140 $ 8,596 $ 3,108
State - current 428 86 507 428 86 507
Federal - deferred 7,134 49 6,700 9,963 1,381 6,700
ITC adjustments 1,816 - 2,002 2,531 270 2,002
--------- ----------- ----------- --------- ----------- -----------
20,108 10,375 12,317 22,062 10,333 12,317
Taxes on other income (loss):
Federal - current (534) (100) 7,170 (534) (100) 7,203
Federal - deferred 687 (241) (1,444) 687 (241) (1,568)
ITC adjustments (410) (381) (323) (410) (381) (311)
--------- ----------- ----------- --------- ----------- -----------
(257) (722) 5,403 (257) (722) 5,324
--------- ----------- ----------- --------- ----------- -----------
Taxes on loss from discontinued
nonregulated operations (Note 4) (5,526) (1,658) - - - -
Taxes on cumulative effect
of change in accounting,
federal-deferred (Note 3) - - 4,548 - - 4,548
--------- ----------- ----------- --------- ----------- -----------
Total income taxes $ 14,325 $ 7,995 $ 22,268 $ 21,805 $ 9,611 $ 22,189
========= =========== =========== ========= =========== ===========
The amounts for total income taxes differ from the amounts computed by
applying the appropriate federal income tax rate to earnings (loss) before
income taxes for the following reasons:
TNP TNMP
---------------------------------- ---------------------------------
1997 1996 1995 1997 1996 1995
---------- ---------- ---------- --------- ----------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory tax rate $ 15,252 $ 10,850 $ 17,595 $ 22,854 $ 12,735 $ 17,674
Amortization of
accumulated deferred ITC (1,403) (1,323) (1,079) (1,403) (1,323) (1,079)
Amortization of
excess deferred taxes (141) (143) (160) (141) (143) (318)
State income taxes 428 86 507 428 86 507
ITC related to disallowance (410) (191) (312) (410) (191) (312)
ITC adjustment - (760) - - - -
Taxes on cumulative effect
of change in accounting,
federal- deferred (Note 3) - - 4,548 - - 4,548
Other, net 599 (524) 1,169 477 (1,553) 1,169
---------- ---------- ---------- --------- ----------- ---------
Actual income taxes $ 14,325 $ 7,995 $ 22,268 $ 21,805 $ 9,611 $ 22,189
========== ========== ========== ========= =========== =========
</TABLE>
<PAGE>
The tax effects of temporary differences that gave rise to significant
portions of net current and net noncurrent deferred income taxes as of December
31, 1997, and 1996, are presented below.
<TABLE>
<CAPTION>
TNP TNMP
--------------------------- ---------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
(In thousands)
Current deferred income taxes:
Deferred tax assets:
<S> <C> <C> <C> <C>
Unbilled revenues $ 2,905 $ 2,470 $ 2,905 $ 2,470
Other - 663 663
------------ ------------ ------------ ------------
2,905 3,133 2,905 3,133
Deferred tax liability:
Deferred purchased power and fuel costs (1,198) (1,196) (1,198) (1,196)
------------ ------------ ------------ ------------
Current deferred income taxes, net $ 1,707 $ 1,937 $ 1,707 $ 1,937
============ ============ ============ ============
Noncurrent deferred income taxes:
Deferred tax assets:
Minimum tax credit carryforwards $ 27,414 $ 27,445 $ 34,377 $ 34,703
Federal regular tax net operating
loss carryforwards - - - 1,724
ITC carryforwards 6,608 11,255 6,472 11,823
Regulatory related items 17,135 16,844 17,135 16,844
Accrued employee benefit costs 3,195 3,486 3,195 3,486
Other 3,449 1,263 700 696
------------ ------------ ------------ ------------
57,801 60,293 61,879 69,276
------------ ------------ ------------ ------------
Deferred tax liabilities:
Utility plant, principally due to
depreciation and basis differences (128,913) (115,823) (128,912) (115,823)
Deferred charges (6,101) (5,565) (6,101) (5,565)
Regulatory related items (8,037) (13,749) (7,951) (13,748)
------------ ------------ ------------ ------------
(143,051) (135,137) (142,964) (135,136)
------------ ------------ ------------ ------------
Noncurrent deferred income taxes, net $ (85,250) $ (74,844) $ (81,085) $ (65,860)
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Federal tax carryforwards as of December 31, 1997, were as follows:
TNP TNMP
-------- ---------
(In thousands)
Minimum tax credits
<S> <C> <C>
Amount $ 27,414 $ 34,377
Expiration period None None
Investment tax credit
Amount $ 6,608 $ 6,472
Expiration period 2005 2005
</TABLE>
An Internal Revenue Service (IRS) revenue agent involved in auditing TNP's
1990 and 1991 consolidated federal income tax returns recommended, in March
1995, that a private letter ruling concerning eligibility of the TNP One
generating plant for investment tax credit (ITC) be revoked retroactively. On
July 29, 1997, TNP received notification from the IRS that revoked the private
letter ruling. However, the IRS simultaneously granted full relief from the
effects of this revocation and has allowed TNP to rely on the private letter
ruling as issued. The current ruling will have no material effect on the amount
of ITC previously recognized.
Note 7. Long-Term Debt
First Mortgage Bonds
FMBs issued under the Bond Indenture are secured by substantially all
utility plant owned directly by TNMP. The Bond Indenture restricts cash dividend
payments on TNMP common stock as discussed in Note 9.
<PAGE>
TNMP has the ability to issue additional FMBs based on certain financial
tests, or based on previously retired FMBs. As of December 31, 1997, TNMP could
not issue any additional FMBs based on the required financial tests. However,
TNMP also has the ability to issue additional FMBs against previously retired
FMBs, as limited by an earnings test. As of December 31, 1997, TNMP could issue
up to $91 million of FMBs.
Secured Debentures
TNMP's Series A, 10.75% secured debentures and 12.5% secured debentures are
secured with a first lien on a portion of Unit 1. The 12.5% secured debentures
are also secured by a first lien on a portion of Unit 2. TNMP's secured
debenture holders are also secured by second liens on substantially all utility
plant in Texas owned directly by TNMP. The secured debentures also contain
restrictions on dividends and asset dispositions.
Revolving Credit Facilities
TNMP has two credit facilities, the 1996 Facility and the 1995 Facility.
The 1996 Facility provides for a total commitment of $100 million, while the
1995 Facility provides for a total commitment of $150 million. The 1996 Facility
commitment expires September 2001. The 1995 Facility commitment will reduce to
$125 million on November 3, 1998, and to $100 million on November 3, 1999, and
will expire on November 3, 2000. The collateral securing the 1996 Facility is
$100 million of non-interest bearing (except upon default) FMBs. Collateral
securing the 1995 Facility is generally a first lien on a portion of TNP One, a
second lien on TNMP's first mortgage bond trust estate located in Texas, and $30
million of non-interest bearing FMBs. This collateral secures borrowings up to
$100 million. Before increasing borrowings above $100 million, TNMP must pledge
additional non-interest bearing FMBs in an amount equal to the borrowings over
$100 million.
Associated with the 1996 Facility, TNMP has a $50 million interest rate
collar to mitigate exposure to variable interest rates. The collar sets floor
and ceiling rates on the 90-day LIBOR rate at 5.25% and 7.50%, respectively. The
term of the interest rate collar is September 1997 through September 2000.
TNMP has sufficient liquidity to satisfy the possibility of any known
contingencies. Management believes cash flow from operations and periodic
borrowings under its two credit facilities should be sufficient to meet working
capital requirements and planned capital expenditures at least through 1998.
At December 31, 1997, interest rate on borrowings under the 1996 Facility
was 7.11% and would have been 7.26% on the 1995 Facility. The composite average
borrowing rates under TNMP's credit facilities were 7.15% and 7.32% for 1997 and
1996, respectively. The interest rate margins on both facilities will decrease
as the ratings on TNMP's FMBs improve.
Under specified conditions, TNMP's credit facilities restrict the payment
of cash dividends on TNMP common stock. The credit facilities also prohibit the
sale, lease, transfer, or other disposition of assets other than in the ordinary
course of business.
Maturities
As of December 31, 1997, FMB and secured debenture maturities and sinking
fund requirements for the five years following 1997 are as follows:
Secured Total FMBs and
Year FMBs Debentures Secured Debentures
---- ---------- -------------- ------------------
(In thousands)
1998 $ 100 $ - $ 100
1999 100 130,000 130,100
2000 100,100 - 100,100
2001 100 - 100
2002 100 - 100
At the end of 1997, $100 million was outstanding under the 1996 Facility,
which matures in 2001. TNMP had available borrowing capacity of $150 million
under the 1995 Facility.
As of December 31, 1997, FWI had $141,000 of debt associated with the
purchase of vehicles.
<PAGE>
Note 8. Redeemable Cumulative Preferred Stock
If TNMP liquidates voluntarily or involuntarily, holders of preferred stock
have preferences equal to amounts payable on redemption or par, respectively,
plus accrued dividends. TNMP's charter provides that additional shares of
preferred stock may not be issued unless certain tests are met. As of December
31, 1997, $188 million of additional preferred stock could be issued.
Note 9. Capital Stock and Dividends
TNP
In November 1997, TNP increased its quarterly dividend from $0.245 to $0.27
per share.
In October 1996, TNP issued 2 million shares of common stock in a public
offering, with net proceeds of approximately $47,170,000. The net proceeds were
transferred to TNMP as an equity contribution.
TNMP
The Bond Indenture prohibits TNMP from paying cash dividends on its common
stock to TNP unless unrestricted retained earnings are available. As of December
31, 1997, $56.8 million of unrestricted retained earnings were available for
dividends.
Note 10. Commitments and Contingencies
Fuel Supply Agreement
TNMP has an agreement with the Walnut Creek Mining Company for the purchase
of lignite through the remaining life of TNP One. Walnut Creek Mining Company is
jointly owned by Phillips Coal Company and Peter Kiewit Sons', Inc.
Wholesale Purchased Power Agreements
TNMP purchases a significant portion of its electric requirements from
various wholesale suppliers. These contracts are scheduled to expire in various
years through 2005.
TU is TNMP's largest wholesaler of energy. In 1997, TU supplied
approximately 39% of TNMP's Texas capacity and 20% of the Texas energy
requirements. During 1995 TNMP notified TU of its intent to cease purchasing a
significant portion of the full requirements power and energy from TU effective
January 1, 1999. The TU Agreement provided for certain purchases through 2010.
Since 1995, TNMP and TU have been involved in various legal and regulatory
appeals regarding various terms of the TU Agreement. In late 1997, TNMP and TU
entered into an agreement that resolves the appeals. The agreement, effective
January 1, 1999, shortens the term of the previous agreement, which now ends in
June 2002, instead of May 2010, and reduces the expected 1999 minimum
contractual commitments by 80% of the projected 1998 levels. This is expected to
result in a $22.4 million reduction in purchased power expense over the
remaining life of the agreement as compared to the existing agreement.
At December 31, 1997, TNMP had various outstanding commitments for take or
pay agreements, including the fuel supply agreement discussed above. Detailed
below are the fixed and determinable portion of the obligations (amounts in
millions):
1998 1999 2000 2001 2002
------ ------ ------ ------ -------
Purchased power agreements $ 65.7 $ 24.4 $ 24.1 $ 13.9 $ 5.4
Fuel supply agreements 30.2 30.2 30.2 30.2 30.2
------ ------ ------ ------ ------
Total $ 95.9 $ 54.6 $ 54.3 $ 44.1 $ 35.6
====== ====== ====== ====== ======
<PAGE>
Significant Customer
TNMP has received notification that a significant customer in Texas will
replace the power previously provided by TNMP with power from a cogeneration
plant built by a third party wholesale power producer. The plant is scheduled to
commence operations in the first quarter of 1998. This customer provided sales
of 629 GWH and annual revenues of $28.3 million in 1997 ($10.1 million in base
revenues). TNMP has an agreement with the wholesale power producer to continue
providing certain services to the cogeneration plant. The base revenues from
this agreement are expected to be $0.5 million annually.
Legal Actions
TNMP is the defendant in a suit styled Clear Lake Cogeneration Limited
Partnership vs. Texas-New Mexico Power Company, pending in the 234th District
Court of Harris County, Texas. This lawsuit and a parallel proceeding also
pending before the PUCT arose out of disagreements between the limited
partnership (Clear Lake) and TNMP over the interpretation of certain provisions
of a purchased power agreement under which TNMP purchases cogenerated
electricity from Clear Lake. Clear Lake disputes several charges for which TNMP
has billed Clear Lake, alleges that TNMP has failed to abide by contractual
language concerning several issues, and seeks in the lawsuit approximately $15
million in damages. TNMP has moved for summary judgment in the lawsuit, which is
in the discovery phase. TNMP is vigorously contesting the lawsuit and the PUCT
proceeding. The ultimate disposition is not expected to have a material effect
on TNMP's results of operations.
TNMP is the defendant in a suit styled Phillips Petroleum Company vs.
Texas-New Mexico Power Company, pending in the 149th State District Court of
Brazoria County, Texas. The suit is based on events surrounding an interruption
of electricity to a petroleum refinery and related facilities that occurred in
May 1997. Phillips is seeking the recovery of approximately $36 million in
damages arising from the interruption. TNMP is vigorously contesting this
lawsuit, which is in the discovery phase. The ultimate disposition is not
expected to have a material effect on TNMP's results of operations.
See Note 2 for information regarding the rate filing with the Texas Gulf
Coast Cities, the transition to competition plan filed with the PUCT and the
fuel reconciliation with the PUCT.
TNMP is involved in various claims and other legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on TNMP's
and TNP's consolidated financial position or results of operations.
<PAGE>
<TABLE>
<CAPTION>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
Selected Quarterly Consolidated Financial Data
The following selected quarterly consolidated financial data for TNP is
unaudited, and, in the opinion of TNP's management, is a fair summary of the
results of operations for such periods:
March 31 June 30 Sept. 30 Dec. 31
---------- ---------- ---------- ----------
(In thousands except per share amounts)
1997
<S> <C> <C> <C> <C>
Operating revenues........................................ $ 126,847 $ 133,338 $ 189,339 $ 135,710
Net operating income...................................... 19,348 23,049 36,486 16,763
Income from continuing operations......................... 5,040 8,871 22,736 3,808
Net income................................................ 4,110 7,431 20,694 (2,557)
Earnings per share of common stock from
continuing operations.................................. 0.38 0.68 1.73 0.29
Earnings per share of common stock *...................... 0.31 0.56 1.57 (0.20)
Dividends per share of common stock....................... $ 0.245 $ 0.245 $ 0.245 $ 0.27
Weighted average common shares outstanding................ 13,025 13,069 13,092 13,128
1996
Operating revenues........................................ $ 99,827 $ 122,020 $ 157,453 $ 123,437
Net operating income...................................... 17,638 25,143 31,050 19,004
Income from continuing operations......................... 559 7,956 15,152 2,483
Net income................................................ 562 7,831 14,292 368
Earnings per share of common stock from
continuing operations *................................ 0.05 0.72 1.37 0.19
Earnings per share of common stock *...................... 0.05 0.71 1.29 0.03
Dividends per share of common stock....................... $ 0.22 $ 0.22 $ 0.245 $ 0.245
Weighted average common shares outstanding................ 10,936 10,994 11,015 12,955
</TABLE>
* The individual quarters may not add to the yearly totals since the per
share amounts are based upon the average number of shares outstanding
during each quarter.
Generally, the variations between quarters reflect the seasonal
fluctuations of TNMP's business. Also, the fourth quarter of 1996 results
reflect a $1.3 million after tax charge for the settlement of litigation
associated with the Series T FMB retirement in 1995.
<PAGE>
[FORM OF PROXY CARD]
TNP ENTERPRISES, INC.
ANNUAL MEETING OF HOLDERS OF COMMON STOCK - MAY 4, 1998
This Proxy is Solicited on Behalf of TNP Enterprises, Inc. and Its Board of
Directors.
PROXY The undersigned shareholder, revoking all proxies, hereby appoints
KEVERN R. JOYCE, MANJIT S. CHEEMA, and MICHAEL D. BLANCHARD, and any one or more
of them, as proxies, each with full power of substitution, and authorizes them
to represent and vote as designated below all shares of TNP Enterprises, Inc.
("TNP") common stock that the undersigned has the power to vote at TNP's Annual
Meeting of Holders of Common Stock on Monday, May 4, 1998, in Fort Worth, Texas
and at any adjournment of the Annual Meeting, on the proposals set forth on the
reverse side of this card.
1. ELECTION OF THREE DIRECTORS FOR THREE-YEAR TERMS AND ONE DIRECTOR TO FILL
UNEXPIRED TERM: R. Denny Alexander, Sidney M. Gutierrez, Kevern R. Joyce
and Larry G. Wheeler.
--------- --------
FOR All Nominees WITHHOLD AUTHORITY
(Except as Marked to to Vote for all Nominees
the Contrary Below) Listed Above
--------- --------
INSTRUCTION: To withhold authority to vote for any nominees listed, write
the nominee's name on the line below.
- --------------------------------------------------------------------------------
2. RATIFICATION OF APPOINTMENT OF ARTHUR ANDERSEN LLP as Independent
Auditors for 1998.
- -------- -------- --------
FOR AGAINST ABSTAIN
- -------- -------- --------
3. In their discretion, the proxies are authorized to vote upon any other
business that properly comes before the Annual Meeting, subject to
limitations set forth in applicable regulations under the Securities
Exchange Act of 1934.
(Continued and to be voted and signed on the reverse side.)
<PAGE>
(Continued from reverse side.)
When properly executed, this proxy will be voted in the manner directed on this
card by the undersigned holder of common stock. If no direction is made, then
this proxy will be voted FOR Proposals 1 and 2.
Please sign exactly as the shareholder's name appears on this proxy card. When
shares are held by joint tenants, both should sign. When signing as attorney,
executor, administrator, trustee, guardian, officer, partner, or similar
fiduciary or authority, please state the capacity in which you are signing.
DATED: ----------------------------, 1998
-----------------------------------------------------------
Signature(s)
-----------------------------------------------------------
Signature(s)
- ----------------------------
PLEASE MARK, SIGN, DATE, AND
RETURN THIS PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.
<PAGE>
