Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|_| Preliminary Proxy Statement |_| Confidential, for Use of the
Commission Only (as permitted by Rule
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TNP ENTERPRISES, INC.
(Name of Registrant as Specified in Its Charter)
------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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|X| No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
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computed pursuant to Exchange Act Rule 0-11 (Set forth the
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|_| Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
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<PAGE>
TNP Enterprises, Inc.
4100 International Plaza
Fort Worth, Texas 76109
(817) 731-0099
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To be Held on May 3, 1999
The Annual Meeting of Shareholders of TNP Enterprises, Inc. will be held
on Monday, May 3, 1999, at 10:30 a.m., Central Time, at the International Plaza
Building, First Floor Auditorium, 4055 International Plaza, Fort Worth, Texas.
At the meeting, shareholders will act on the following matters:
1. Election of three Class 2 directors for three-year terms;
2. Ratify the appointment of Arthur Andersen LLP, Certified Independent
Public Accountants, as independent auditors for 1999; and
3. Amendments to the TNP Equity Incentive Plan.
In addition, the shareholders will 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 15, 1999, are
entitled to notice of and to vote at the annual meeting and any postponement or
adjournment.
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 International Plaza 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
----------------------------
Paul W. Talbot,
Secretary
Fort Worth, Texas
March 30, 1999
<PAGE>
TNP Enterprises, Inc.
4100 International Plaza
Fort Worth, Texas 76109
PROXY STATEMENT
For
ANNUAL MEETING OF SHAREHOLDERS
To be Held on May 3, 1999
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 1999 Annual Meeting of Shareholders and at any postponement or
adjournment thereof. The annual meeting will be held in the First Floor
Auditorium of the International Plaza Building, 4055 International Plaza, Fort
Worth, Texas on Monday, May 3, 1999, at 10:30 a.m., Central Time.
If you give a proxy prior to the meeting, you 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.
The information included in this proxy statement relates to the
proposals to be voted on at the annual meeting, the voting process, the
compensation of directors and our most highly paid officers, and certain other
required information. Our 1998 Summary Annual Report, which covers the
operations of TNP and Texas-New Mexico Power Company, its wholly owned electric
utility subsidiary ("TNMP") is also enclosed. You will find the Consolidated
Financial Statements of TNP and TNMP for 1998 following this proxy statement.
QUORUM AND VOTING
Record Date. Only shareholders of record at the close of business on
March 15, 1999 are entitled to notice of and to vote at the meeting.
Voting Stock. Only TNP common stock may be voted at the annual meeting.
At the close of business on the record date, there were 13,348,059 shares
outstanding and entitled to be voted at the meeting. The holders of those shares
will be entitled to one vote per share. Cumulative voting is not permitted.
Quorum. Holders of more than 50% of the shares entitled to vote must be
represented, either in person or by proxy, in order to conduct any business at
the annual meeting.
Required Vote. A plurality of the votes cast at the meeting is required
to elect directors. All other matters require a majority for passage.
Adjourned Meeting. If a quorum is not present at the scheduled meeting
time, the shareholders who are represented may adjourn the meeting until a
quorum is present. The time and place of the adjourned meeting will be announced
when the adjournment is taken; no other notice will be given. An adjournment
will have no effect on the business that may be conducted at the meeting.
Tabulation of Votes. The Company's transfer agent will tabulate and
certify the votes.
Voting by Street Name Holders. If you are the beneficial owner of
shares held in "street name" by a broker, the broker, as the record holder of
the shares, must vote those shares in accordance with your instructions. If you
do not give instructions to the broker, the broker will nevertheless be entitled
to vote the shares with respect to "discretionary" items but will not be
permitted to vote the shares with respect to "non-discretionary" items (in which
case, the shares will be treated as "broker non-votes").
Abstentions and Broker Non-votes. If you abstain from voting on one or
more proposals, your shares will nevertheless be included in the number of
shares represented for purposes of determining whether a quorum is present. If
you abstain from voting on Proposal 2 (Approval of Arthur Andersen as auditors)
or Proposal 3 (Amendment of TNP Equity Incentive Plan), your shares will also be
included in the number of shares voting on the proposal. Consequently, your
abstention will have the same practical effect as a vote against the proposal.
Because directors are elected by a plurality of the votes, an abstention would
have no effect on the outcome of the vote on Proposal 1 and, thus, is not
offered as a voting option for that proposal.
Default Voting. Unless you give other instructions on your proxy card,
the proxy holders will vote your shares in accordance with the Board of
Directors' recommendations. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH
PROPOSAL SUBMITTED TO SHAREHOLDERS AND DESCRIBED IN THIS PROXY STATEMENT. On any
other matter that properly comes before the annual meeting, the proxy holders
will vote as the Board of Directors recommends or, if no recommendation is
given, in their own discretion.
1. ELECTION OF DIRECTORS
The three-year terms of the Class 2 directors will expire at the
upcoming annual meeting. The Board of Directors has nominated John A. Fanning,
Larry G. Wheeler and Dennis H. Withers, all of whom currently serve as Class 2
directors, for reelection. Information regarding the business experience of each
nominee is provided below. If reelected, their new terms will expire at the
annual meeting of shareholders in 2002.
Our Board of Directors recommends a vote FOR the election to the Board
of each of the following nominees.
John A. Fanning has been involved in private investments in oil, gas
and manufacturing since November 1995. He was Executive Vice President of Snyder
Oil Corporation from March 1990 to November 1995, and a director of Snyder from
1981 to 1995. 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.
Larry G. Wheeler was named Chief Executive Officer of Granny Goose
Foods, Inc., an Oakland, California snack food manufacturer and marketer, in
February 1999. Beginning in May 1995, he was president and chief executive
officer of Mrs. Baird's Bakeries, Inc., Fort Worth, Texas, presiding over the
sale of that company in May 1998. He was president of Alpo Pet Foods, Inc. from
September 1993 until May 1995. He is a member of 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. Bankruptcy Code in March
1996, and exited the Chapter 11 proceedings in September 1996.
Dennis H. Withers has been Chairman of Trinity Forge, Inc., a metal
forging and manufacturing company, since 1997, its President since 1979, and a
director since 1972. He was a director of Overton Bancshares, Inc., a bank
holding company, from 1985 until its acquisition by Cullen/Frost Bankers, Inc.
in 1998. He has been an advisory director of the North Texas Division of Frost
National Bank since 1998 and was a director of Overton Bank and Trust, N. A.
from 1993 until 1998.
If a nominee becomes unable or unwilling to accept nomination or
election, the Board of Directors will select a substitute nominee. If you have
properly executed and returned a proxy and a substitute nominee is selected, the
holders of the proxy will vote your shares FOR the election of the substitute
nominee. 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.
Under TNP's bylaws, directors are elected by plurality of the votes of
shares represented and entitled to vote at the meeting. That means the three
nominees will be elected if they receive more affirmative votes than any other
nominees.
Continuing Directors
The Board of Directors is separated into three classes, and the
directors in each class are elected for three-year terms. The terms of the Class
1 directors expire at the annual meeting of shareholders to be held in 2001, and
those of the Class 3 directors expire at the annual meeting in 2000. Each TNP
director is also a director of TNMP.
The following is a list of TNP Directors for the next year, assuming
election of the nominees named above, and their ages, director class
designation, the year each was first elected to the Board and current committee
assignments.
<TABLE>
<CAPTION>
Director Year Elected to
Name Age Class Board Committees
<S> <C> <C> <C> <C>
Kevern R. Joyce 52 1 1994 Financial
R. Denny Alexander 53 1 1989 Audit, Financial, Nominating
John A. Fanning 59 2 1984 Compensation, Nominating
Sidney M. Gutierrez 47 1 1994 Audit, Compensation
J.R. Holland, Jr. 55 3 1996 Compensation
Harris L. Kempner, Jr. 59 3 1980 Compensation, Financial, Nominating
Carol Diann Smith Surles 52 3 1995 Audit, Financial
Larry G. Wheeler 52 2 1997 Audit
Dennis H. Withers 53 2 1995 Compensation, Financial
</TABLE>
Following is biographical information about each director, other than
Mr. Fanning, Mr. Wheeler and Mr. Withers, whose biographical information is
included under "Current Nominees" above.
R. Denny Alexander 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, since 1978. He
became a director of Cullen/Frost Bankers, Inc., a bank holding company, and
Frost National Bank, a national bank, in 1998 following the acquisition by Frost
of Overton Bancshares, Inc., and Overton Bank and Trust, N.A., of which he had
been a director and Chairman since 1984. Mr. Alexander is Chairman of the Board
of Trustees of W. I. Cook Foundation, Cook Children's Health Care System, and
Cook Children's Medical Center in Fort Worth. He is also on the Board of
Trustees of Texas Christian University in Fort Worth.
Sidney M. Gutierrez has served in various management capacities at
Sandia National Laboratories, a prime contractor for the Department of Energy
since 1994. From 1984 to 1994, he was a NASA astronaut serving as Space Shuttle
Mission Commander. From 1991 to 1994, he was also an Air Force officer serving
in the rank of Colonel. He is president of the Board of Regents of New Mexico
Institute of Mining and Technology and a member of the Board of Directors of
Goodwill Industries of New Mexico and the New Mexico Space Commission.
J. R. Holland, Jr. has been President and Chief Executive Officer of
Unity Hunt, Inc., a large international private holding company with interests
in technology, entertainment, telecommunications, retail, investments, real
estate, natural resources and energy businesses, since 1991. He is a director of
Optical Security Group, Inc., Placid Refining Company, and Texas Capital
Bancshares, Inc.
Kevern R. Joyce 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, and a provider of galvanizing services
and oil field tubular products.
Harris L. Kempner, Jr. has been President of Kempner Capital
Management, an investment advisory firm, since 1981; a Trustee of H. Kempner
Trust Association, which engages in investments, since 1964; Chairman Emeritus
and Advisor to the board of United States National Bank, Galveston, Texas, since
1992; a director of Balmorhea Ranches, a ranching/farming operation, and
Imperial Holly Corp., a sugar products company, since 1982; 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 became President of Eastern Illinois
University, Charleston, Illinois, in March 1999. She was President of Texas
Woman's University, Denton, Texas, from August 1994 until March 1999. 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.
Committees and Meetings.
TNP's Board of Directors maintains the following four standing
committees. The members of the committees are identified in the preceding table
of continuing directors.
- Audit Committee. This committee meets with management to consider the
adequacy of the internal controls and the objectivity of financial
reporting; meets with the independent auditors and with appropriate
financial personnel and internal auditors regarding these matters and
regarding the scope of internal and independent audits; and determines
and reviews internal and external audit staff qualifications and
recommends to the full board the appointment of the independent
auditors.
- Compensation Committee. This committee evaluates the Chief Executive
Officer's performance and reviews the performance of officers who
report to him; reviews the terms and conditions of all employee benefit
plans; establishes performance goals for all incentive compensation
plans and designates participants in incentive compensation plans for
management; sets compensation for officers; and makes recommendations
to the full board with respect to directors' compensation.
- Financial Committee. This committee reviews and approves dividend
policy, securities offerings and capital budgets; reviews strategic,
financial and other plans; and reports and recommends in its discretion
to the full board on internal financial affairs.
- Nominating Committee. This committee evaluates and recommends to the
full board candidates for board positions whose terms are expiring or
that have become vacant, and recommends persons for election or
re-election as officers. For information about suggesting candidates
for consideration as nominees for election to the Board of Directors,
see "Additional Information - Shareholder Recommendations of
Directors."
TNP's and TNMP's boards of directors each held four meetings during 1998,
and each acted by unanimous consent twice. The committees held the following
number of meetings: Audit Committee, two; Compensation Committee, six, including
one action by unanimous written consent; Finance Committee, four; and Nominating
Committee, two. All directors attended at least 75% of all the meetings of the
Board of Directors and committees on which they served during 1998.
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
No Compensation Committee member is a director of or serves on the
compensation committee of an entity that has an executive officer serving on
TNP's Board of Directors or Compensation Committee. During 1998, Compensation
Committee members were John A. Fanning, Sidney M. Gutierrez, J. R. Holland, Jr.,
Harris L. Kempner, Jr., and Dennis H. Withers.
2. SELECTION OF AUDITORS
The Board of Directors has appointed Arthur Andersen LLP, Certified
Independent Public Accountants ("Arthur Andersen"), to serve as independent
auditors for the current year, subject to shareholder approval. Arthur Andersen
served as the independent auditors for 1998. A representative of Arthur 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 1999.
3. PROPOSAL TO AMEND THE TNP EQUITY INCENTIVE PLAN
At the annual meeting, you will be asked to approve amendments to the
TNP Equity Incentive Plan (the "Incentive Plan"). The proposed amendments (1)
amend Section 4.1 of the Incentive Plan to increase the number of shares of
common stock issuable under the Incentive Plan from 300,000 to 900,000 and to
increase the maximum number of shares that may be paid out in awards intended to
qualify to the performance-based exception under Sec.162(m) of the Internal
Revenue Code; and (2) update references to the Compensation Committee and to
regulations under the Securities Exchange Act of 1934 to reflect changes since
the Incentive Plan's adoption in 1995.
The Board of Directors has approved these amendments. The holders of a
majority of the shares of TNP common stock present and entitled to vote at the
annual meeting must also approve the amendments.
The following is a summary of the Incentive Plan, subject to your
approval of the amendments. The Incentive Plan was filed electronically with the
proxy statement with the Securities and Exchange Commission, but is not included
in the printed version of this Proxy Statement. In addition, you may obtain a
copy of the actual plan document by writing to the Corporate Secretary at TNP's
principal offices in Fort Worth, Texas.
Description of the Plan
The Incentive Plan makes available a variety of stock and stock-based
incentive awards, such as performance shares, restricted stock awards, incentive
and non-qualified options to purchase TNP common stock. This variety gives TNP
flexibility in designing incentive compensation packages and permits it to
respond to its and its subsidiaries' changing needs and to reflect changes in
laws and rules affecting compensation and benefit plans, primarily tax laws,
accounting rules and securities regulations.
Purpose
The Incentive Plan is meant to link participants' personal interests to
those of TNP's shareholders and provide them with an incentive for outstanding
performance, and to provide TNP with flexibility in the design of compensation
packages.
Eligible Participants
All employees of TNP and its subsidiaries are eligible to participate
in the Incentive Plan. Awards are currently being made only to executive
officers and certain key employees.
Shares Subject to Awards
Up to 900,000 shares of TNP common stock have been reserved for
issuance in connection with Incentive Plan awards, of which approximately
700,000 shares remain. Up to 300,000 of these shares may be issued as awards of
restricted stock.
Administration
The Compensation Committee administers the Incentive Plan. It may:
- establish and change rules for administering the Incentive Plan;
- designate participants to whom awards will be made;
- determine award sizes, types, terms, conditions, and methods of
payment, whether dividend equivalents will be included with
awards, and participant rights upon termination of employment
(Under the Incentive Plan, "dividend equivalents" are contingent
rights to dividends declared on securities underlying Incentive
Plan awards);
- establish performance goals to be achieved for a participant to
earn nd receive any performance-based awards under the Incentive
Plan; and
- amend terms of outstanding awards subject to certain limitations.
The Compensation Committee may also permit or require participants
to defer cash and stock award payouts.
Compensation Committee decisions concerning the Incentive Plan and
related orders of the full board are final and binding. If the Compensation
Committee cancels outstanding awards, it cannot replace them with substitute
awards.
Awards
The Incentive Plan provides for several types of stock and stock-based
incentive awards.
Performance Shares and Units. Participants may earn awards of
performance shares or units, subject to the achievement of performance goals
that the Compensation Committee sets. The value of each performance share or
unit must equal the fair market value of one share of TNP common stock on the
grant date. The period during which performance goals may be achieved must
always exceed six months. Dividend equivalents can be paid on underlying
performance shares or units that are earned. All shares issued and award
opportunities awarded under the Incentive Plan since its inception have been
performance shares.
Stock Options. The Compensation Committee may grant incentive stock
options, nonqualified stock options, or a combination of these. The terms and
conditions of individual option agreements may vary, provided that the option
price per share is not less than the fair market value of a share of TNP common
stock on the grant date. The term of each option can be up to ten years from the
grant date. Dividend equivalents are not permitted on incentive stock options.
Cashless option exercises may be permitted. No stock options have been awarded
under the Incentive Plan.
Restricted Stock. The Compensation Committee may grant shares of
restricted stock to eligible employees in amounts that it determines, and
subject to transfer and such other restrictions that it may impose. During the
restriction period, participants may exercise all voting rights of and may be
credited with all dividends and distributions declared on their restricted
stock; dividends and distributions, other than cash dividends, are subject to
the same restrictions as the underlying restricted stock. To date, no restricted
stock awards have been made.
Other Stock-Based Awards. Other stock-based awards may be granted under
the Incentive Plan as the Compensation Committee may determine.
Performance Measures
Performance goals to be achieved for a participant to earn and receive
payment of any performance-based award will be selected from the following:
- Earnings per share;
- Measurements of cost control effectiveness such as the ratio of
operations and maintenance costs to kilowatt hour sales;
- Measurements of community involvement and customer satisfaction;
- Measurements of anticipation and resolution of environmental issues;
- Measurements of reliability such as the equivalent forced outage
rate, minutes of outage per customer served, and number of
customers interrupted per customer served;
- Measurements of employee safety;
- Measurements of long-term rate competitiveness;
- Total shareholder return compared to one or more groups
as determined by the Compensation
Committee; and
- Cash value added.
The Compensation Committee may establish a range of performance around
any predetermined goal; the range may have adjustments to the performance payout
within the range. The Compensation Committee may not make upward adjustments to
awards held by the Chief Executive Officer and four other most highly
compensated executive officers and that are designed to qualify for the
performance-based exception to Sec.162(m) of the Internal Revenue Code.
Effective Period of Incentive Plan
The Incentive Plan will remain in effect until all shares of TNP common
stock reserved for awards have been awarded or until the Board of Directors
terminates this plan. No awards may be made after January 1, 2005. Termination
of the Incentive Plan will not affect participants' rights under awards made
prior to termination.
Change in Control
If there is a change in control of TNP, then all outstanding options
will become exercisable immediately. With respect to awards made at least six
months previously, restrictions imposed on shares will lapse and performance
goals for restricted stock, performance shares and units and other stock-based
awards will be deemed to have been achieved at the target level as of the
effective date of the change in control. The Compensation Committee may make
other appropriate changes to outstanding awards before the change in control is
effective. Events constituting a "change in control" are defined in the employee
severance contracts described in "Compensation of Executive Officers--Severance
Agreements and Arrangements."
Transferability of Incentive Plan Awards and Underlying Stock
In general, unearned and unvested Incentive Plan awards are not
transferable, other than by will or the laws of descent and distribution.
Certificates representing awards or stock underlying awards will bear
appropriate legends referring to applicable restrictions on earning, vesting and
transfer.
TNP has registered its issuance of all stock currently reserved for
Incentive Plan awards under applicable federal and state securities laws and
will register the newly reserved stock after shareholder approval of this
proposed amendment. Such registration generally makes awarded stock freely
tradable on the open market, unless it is subject to earnout, vesting or
transfer restrictions.
The Company has adopted an insider trading policy applicable to all
employees that places additional restrictions on all employee stock sales. In
addition, all employee sales are subject to securities law prohibitions on
insider trading prohibitions.
Indemnification of Directors and Compensation Committee Members
The Incentive Plan requires TNP to indemnify Board and Compensation
Committee members against losses, costs, liabilities, expenses, TNP-approved
settlements, and judgments that they may incur in connection with claims or
proceedings involving actions or failures to act under the Incentive Plan.
Federal Income Tax Considerations
The following describes tax treatment of performance shares, restricted
stock awards and stock options. It describes the general tax treatment of such
items; the tax treatment may vary in individual circumstances. The discussion
does not purport to be complete, and the language and interpretation of
statutory provisions are subject to change.
Performance Shares and Units. The grant of performance shares or units
does not result in income tax consequences for the participant or TNP. When TNP
pays out cash, shares, or other property at the end of a performance period, the
participant will recognize ordinary income equal to the fair market value of the
asset received. TNP will be entitled to a deduction in the same amount when the
participant recognizes income.
Restricted Stock. A recipient of a restricted stock award will
recognize ordinary income when the award is made, in an amount equal to the
shares' fair market value on the award date, less any payment he or she has made
for the shares. TNP will be entitled to a deduction in the same amount, subject
to the requirements of ss.162(m) (as discussed further below) of the Internal
Revenue Code of 1986, as amended (the "Tax Code"). The participant will treat
any dividends received as dividend income in the year of payment; TNP cannot
deduct such dividends. If a participant subsequently forfeits the restricted
stock, then he or she will be entitled to treat any amount paid for the stock as
a short- or long-term capital loss, depending on his or her holding period. TNP
must then recognize as ordinary income the amount of its original deduction with
respect to the stock.
Incentive Stock Options. There will be no federal income tax
consequences to either TNP or a participant upon the grant or exercise of an
incentive stock option (other than the possible application of alternative
minimum tax). The participant will realize a long-term capital gain upon
disposition of shares acquired upon exercising the option if the participant
holds the shares until the later of (1) two years from the grant option date or
(2) one year from the option exercise date. Otherwise, the difference between
the option price and the stock's fair market value when exercised will be taxed
as ordinary income in the year of disposition. TNP will receive a deduction
equal to the ordinary income that the participant recognizes. Any additional
gain generally will be taxed as capital gains with no tax implications to TNP.
Incentive stock options having no more than $100,000 aggregate fair market value
(determined as of each option's grant date) may become exercisable for the first
time in any one year. Amounts exceeding $100,000 generally will be treated as
nonqualified options.
Nonqualified Stock Options. No federal income tax consequences will
result to either TNP or a participant upon a nonqualified stock option grant. A
participant will recognize ordinary income upon exercising a nonqualified stock
option to the extent that the fair market value of the shares acquired exceed
their option price. TNP will receive a corresponding deduction upon the
participant's exercise of the option. Any gain realized upon a subsequent
disposition of the shares will be treated either as a short- or long-term
capital gain, depending on the participant's holding period.
Section 162(m) of the Tax Code. TNP may not deduct compensation of more
than $1,000,000 that is paid to an individual who, on the last day of the
taxable year, is either TNP's chief executive officer or is among one of the
four other most highly-compensated officers for that year. The limitation on
deductions does not apply to certain types of compensation, including qualified
performance-based compensation. TNP believes that performance-based awards paid
to executives under the Incentive Plan will be exempt from the $1,000,000
limitation on deductible compensation.
Awards that are designed to comply with the performance-based
compensation exception are subject to the following maximum annual award amount
limitations: (i) 225,000 options and stock appreciation rights; (ii) 75,000
shares of restricted stock; (iii) 90,000 performance shares and units; (iv)
$900,000 cash payout with respect to performance shares and units and other
stock-based awards; and (v) 120,000 other stock-based award shares. While grants
of options and performance shares and units can be structured to qualify for the
performance-based compensation exception, restricted stock grants cannot. The
Compensation Committee intends to grant Incentive Plan awards designed, in most
cases, to qualify for the performance-based compensation exception, unless it
determines that noncomplying awards will best serve TNP's interests with respect
to a particular award or executive officer. The Board anticipates that tax
consequences resulting to TNP and its subsidiaries from nonqualifying
compensation, if any, will not be materially adverse. Termination of employment
generally will not affect vesting of restricted stock awards if the restricted
stock qualifies for tax deductibility under the performance-based exception.
1999 Estimated Benefits
The following table sets forth the estimated dollar value and number of
shares included in the Long-Term Incentive Compensation performance share awards
awarded in 1999 for the 1999-2001 performance period. This information is based
on participants' salary ranges on the award date and assumes achievement of all
pre-established performance goals at the target level and no changes in the
management employees participating in the Incentive Plan. The table does not
include cash awards made under other incentive plans. Actual awards earned can
range from 0% to 200% of the designated award level. The estimated dollar value
of plan awards is based on a $30 price per share of TNP common stock and
dividend equivalents expected to be $3.48 per share.
Name Dollar Value Number of Shares
Kevern R. Joyce $218,567 6,540
Jack V. Chambers 92,540 2,769
Manjit S. Cheema 83,383 2,495
John Edwards 83,383 2,495
Ralph S. Johnson 83,383 2,495
Executive Group (21 Persons) $1,216,287 36,394
The Board of Directors recommends a vote FOR approval of the amendments
to the Incentive Plan.
<PAGE>
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 1998,
1997 and 1996.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation
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 1998 $370,525 $340,822 -- $418,151 $25,367
Chief Executive Officer 1997 355,083 147,000 -- 449,816 25,944
1996 336,500 143,557 -- -- 24,698
Jack V. Chambers, Senior Vice 1998 $223,819 $129,092 -- $249,893 $14,347
President 1997 215,733 77,597 -- 268,831 14,794
1996 204,338 79,151 -- -- 13,554
Manjit S. Cheema, Senior Vice 1998 $195,239 $118,488 -- $213,756 $12,775
President & Chief Financial 1997 183,750 68,378 -- 205,835 12,837
Officer 1996 162,296 58,412 -- -- 11,133
John P. Edwards, Senior Vice 1998 $199,202 $111,476 -- $187,634 $16,352
President (5) 1997 192,000 68,900 -- 121,128 18,242
1996 81,827 56,903 $20,000 -- 5,365
Ralph S. Johnson, Senior Vice 1998 $189,314 $107,586 -- $210,240 $13,870
President 1997 182,333 68,212 -- 197,110 13,153
1996 156,730 55,344 -- -- 11,281
</TABLE>
- ------------------------
(1) The 1998 amounts shown in this column are the following awards relating to
1998 and paid in 1999: (a) cash awards under the Management and Broad-Based
Short-Term Incentive Plans; and (b) the first installment of an incentive
and retention bonus. The Compensation Committee awarded the incentive and
retention bonuses as additional compensation to reflect contributions
during 1998 and prior years to the improvement in TNP's value to its
shareholders. These incentive and retention bonuses are being paid in five
equal annual installments. Subsequent installments are subject to the named
officer being employed by TNP or TNMP on the scheduled date of
the payment. The total amounts of the bonuses to be paid over the five year
period are Mr. Joyce -$850,000; Mr. Chambers - $235,000; Mr. Cheema -
$235,000; Mr. Edwards - $200,000; and Mr. Johnson - $200,000.
(2) Other Annual Compensation consists primarily of relocation allowances. 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% of their respective total annual salaries and bonuses,
except as shown in the table.
(3) The 1998 amounts in this column are the value of shares issued and dividend
equivalents paid in 1999 under the TNP Long-Term Incentive Compensation
Plan for the 1996-1998 performance period. These amounts represent the
value of the following numbers of shares, at $37.84 per share, the average
of the high and low prices of TNP stock on December 31, 1998, and dividend
equivalents of $3.035 per share: Mr. Joyce - 10,229; Mr. Chambers - 6,113;
Mr. Cheema - 5,229; Mr. Edwards - 4,590; and Mr. Johnson - 5,143. This
payout reflects that TNP exceeded the maximum performance goals set at the
beginning of the performance period for total shareholder return relative
to the S&P 500 and S&P Electric Company Indices, as described in
"Compensation Committee Report on Executive Compensation - Long Term
Incentive Compensation." Awards for the 1998-2000 performance period are
described below under "Long-Term Incentive Compensation."
(4) The 1998 amounts in this column and the table below consist of the
following items earned or paid in 1998: (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 1998 paid in 1999.
<PAGE>
<TABLE>
<CAPTION>
401(k) Plan Deferred Compensation Plan Life Insurance Premiums
----------- -------------------------- -----------------------
<S> <C> <C> <C>
Mr. Joyce $9,275 $12,262 $3,830
Mr. Chambers 9,275 3,729 1,343
Mr. Cheema 9,089 2,272 1,414
Mr. Edwards 9,275 2,298 4,779
Mr. Johnson 9,275 1,724 2,871
</TABLE>
(5) Mr. Edwards joined TNP and its subsidiaries on July 1, 1996.
Long-Term Incentive Compensation
The following table contains information about awards made in 1998 of
long-term stock incentive opportunities made under the TNP Equity Incentive Plan
to the Named Executive Officers for the 1998-2000 performance period.
EQUITY INCENTIVE PLAN - LONG-TERM INCENTIVE AWARDS IN 1998
<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 1998-2000 2,072 shares 4,144 shares 6,216 shares
Jack V. Chambers 1998-2000 1,194 shares 2,389 shares 3,583 shares
Manjit S. Cheema 1998-2000 1,076 shares 2,152 shares 3,228 shares
John P. Edwards 1998-2000 1,076 shares 2,152 shares 3,228 shares
Ralph S. Johnson 1998-2000 1,076 shares 2,152 shares 3,228 shares
</TABLE>
(1) The target number of shares was based on (i) the following percentages of
the Named Executive Officers' respective base salary midpoints: Mr. Joyce -
40%; Messrs. Chambers, Cheema, Edwards and Johnson - 35%.; and (ii) the
average of the high and low prices of TNP common stock on the NYSE on
January 2, 1998, $33.16.
(2) The awards listed in the table relate to the performance period from
January 1, 1998 through December 31, 2000. Payouts will occur in early 2001
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
Indices. Payouts can range from 0% (if neither performance goal is
achieved) to 150% 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 1998 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 $3.42 per share of stock awarded at payout. See "Compensation
Committee Report on Executive Compensation - Incentive Compensation."
Pension Plan
Effective October 1, 1997, TNMP amended its pension plan to change it
to a cash balance retirement plan. As amended, the pension plan provides
benefits based on an account balance rather than a formula-based benefit. Before
that date, the pension plan was a noncontributory defined benefit plan.
Employees who, as of October 1, 1997, were at least 50 years of age and had at
least 10 years of service, can be "grandfathered" in the prior pension plan, and
will receive benefits under the plan that provides the better retirement
payments.
The amended pension plan bases its benefits on an employee's account
balance when he or she retires or leaves the company. An employee's initial
account balance was based on his or her accrued pension benefits under the
pre-amendment plan. The account balance will grow as TNMP adds benefit credits
consisting of a percentage of compensation and interest credits based on
one-year Treasury bill rates. All employees are eligible to participate in the
pension plan. All Named Executive Officers will participate in the pension plan.
The following table sets forth information concerning annual benefits
payable upon normal retirement at age 65 to TNP and TNMP employees under the
pre-amendment pension plan, and reflects the "grandfathered" benefit formula for
individuals retiring in 1998 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>
$125,000 $ 27,771 $ 37,028 $ 46,285 $ 55,542 $ 64,799 $ 72,924
150,000 34,146 45,528 56,910 68,292 79,674 89,424
175,000 40,521 54,028 67,535 81,042 94,549 105,924
200,000 46,896 62,528 78,160 93,792 109,424 122,424
250,000 59,646 79,528 99,410 119,292 139,174 155,424
300,000 72,396 96,528 120,660 144,792 168,924 188,424
350,000 85,146 113,528 141,910 170,292 198,674 221,424
400,000 97,896 133,528 163,160 195,792 228,424 254,424
450,000 110,646 147,528 184,410 221,292 258,174 287,424
500,000 123,396 164,528 205,660 246,792 287,924 320,424
</TABLE>
(1) Benefits shown do not take into account limits under Sec.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 Sec.401(a)(17)
limits. Consequently, a portion of the benefits would be paid from the
Excess Benefit Plan (as defined below).
Annual contributions to the pre-amendment pension plan are computed on
an actuarial basis and cannot be calculated readily on a per person basis.
Benefits for each eligible employee under the old formula are based on his or
her years of service computed through the month of his or her retirement,
multiplied by a specified percentage of his or her average monthly compensation
for each full calendar year of service completed after 1992. TNMP made no
contribution to the pension plan for 1998.
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 Secs. 415 and 401(a)(17), and whom the Board
of Directors designate as eligible, may also participate in TNP's "Excess
Benefit Plan." The Board has designated 24 active or retired employees as
eligible to participate in the Excess Benefit Plan, including the Named
Executive Officers and three retired employees now receiving excess benefit
payments. Amounts paid as long-term incentive compensation pursuant to the TNP
Equity Incentive Plan or other plans will be included in the remuneration base
for pension and Excess Benefit Plan purposes. TNMP owns policies insuring the
lives of the Excess Benefit Plan participants; policy proceeds are payable to
TNMP to reimburse it for its payments to the retirees.
As of December 31, 1998, 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 17 years(1)
Jack V. Chambers 19 years, 11 months
Manjit S. Cheema 4 years, 6 months
John P. Edwards 21 years(1)
Ralph S. Johnson 20 years(1)
- ------------------------
(1) TNMP has credited 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. 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 , 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 and Arrangements
TNMP has entered into employment severance contracts with its officers
and other key personnel. The principal purpose of these contracts is to
encourage retention of management and other key personnel required for the
orderly conduct of TNP's business during any threatened or pending acquisition
of TNP or TNMP and during any ownership transition. Agreements between TNP and
its officers under which TNP has made its incentive compensation plan awards
also contain provisions relating to payment of incentive plan awards in the
event the employee is terminated in connection with a change of control of TNP.
The agreements between the Named Executive Officers provide that a
Named Executive Officer will receive severance compensation if, following a
change of control of TNP or TNMP, his employment is terminated or he suffers
other adverse treatment. A change in control includes, among other things,
certain substantial changes in the corporate structure, ownership, assets,
existence, or Board of Directors of either entity. The Named Executive Officers'
employment severance contracts provide for lump sum compensation payments equal
to three times their current annual salaries and other rights. Their incentive
plan award agreements provide for payment of long-term and short-term incentive
awards at the target level. In addition to payments under these agreements, the
Named Executive Officers would receive any remaining unpaid balance of the
incentive and retention bonus awarded in early 1999 upon involuntary
termination.
The TNMP officers' employment severance 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.
The incentive plan award agreements are awarded annually and expire
when the awards under the agreements are paid out. The agreements between TNP
and the Named Executive Officers have three-year terms.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires TNP's and
TNMP's directors and executive officers to file reports of beneficial ownership
and changes in ownership of TNP's equity securities with the Securities and
Exchange Commission and the NYSE. All such reports were filed on time, except
for the Form 3 of Michael Matte, the Vice President of Business Development of
TNP, which was filed late.
Compensation Committee Report on Executive Compensation
The Compensation Committee furnishes the following report on executive
compensation for 1998.
Compensation Philosophy and Strategy. The Committee believes that
executives' compensation should be competitive with other companies in the
electric utility industry, and that executives should be rewarded when TNP's
operations and financial returns reflect above-average performance and
continuing improvement in operations, customer satisfaction and shareholder
value.
The key components of executives' regular compensation are a base
salary, annual incentive compensation and long-term incentive compensation. The
compensation package enables TNP to meet the requirements of the competitive
market in which it operates, while ensuring that the executives are compensated
in a way that advances both the short-term and long-term interests of
shareholders. Under this approach, compensation for these officers involve a
high proportion of pay that is "at risk," namely, the short-term and long-term
incentive compensation.
The Committee relates total compensation levels for TNP's executive
officers to the total compensation paid to similarly situated executives of a
peer group of companies, both within and outside of the electric utility
industry, that are of a similar size and have performance characteristics
similar to TNP. TNP has selected the executive compensation Peer Group under an
outside consulting firm's counsel. Some of these companies are also included in
the S&P Electric Company Index found under the caption "Performance Graph,"
below.
Total compensation is targeted to approximate the median of the peer
group. However, because of the performance-oriented nature of the incentive
programs, total compensation may exceed market norms when TNP exceeds its
targeted performance goals. Likewise, total compensation may lag the market when
TNP does not achieve its performance goals.
The Committee also reviews the Company's longer-term performance as
compared to the average performance of the peer group, and, where appropriate,
takes such relative performance into account in determining future compensation
levels.
Base Salary. The Committee determines salaries for all officers
annually, based on the review of each executive's level of responsibility,
experience, expertise, sustained corporate performance and, in the case of
officers other than the Chief Executive Officer, upon the recommendation of the
Chief Executive Officer. Based on competitive market data supplied by an
independent consultant, executive salaries approximate the Peer Group median
level.
Annual Incentive Compensation. Executive officers and key employees
participate in the TNP Short-Term Incentive Compensation program and are
eligible to receive annual cash incentive awards if certain specified objectives
are met. Awards for 1998, which were paid in early 1999, were based on financial
measures of cash value added and factors measuring customer satisfaction, system
reliability and safety, and other measures of individual and departmental
performance. These measures were weighted depending upon the executive officer's
area of responsibility. Compensation objectives were generally above target for
1998.
In addition, all full-time employees, including executive officers,
participate in the TNP Broad-Based Incentive Compensation Plan and are eligible
to receive annual cash incentive awards. The performance criteria for these
awards were the same as for the Short-Term Incentive Compensation awards.
Compensation objectives for this Plan were above target for 1998.
In 1998, a portion of TNP's matching contribution to its 401(k)
retirement plan for employees was related to the performance of the cash value
added goal. The cash value added performance achieved for 1998 was between the
target and maximum goals. Accordingly, TNP made an incentive matching
contribution to the 401(k) accounts of eligible participants, including
executive officers, equal to approximately 93% of the total amount that TNP
matched during 1998 as part of its regular employee benefits.
Long-Term Incentive Compensation. Long-term incentive compensation
awards are granted for a three-year performance period. Awards are expressed as
a percentage of the individual's salary range midpoint and, if earned, are paid
in TNP stock at the end of the period. At the beginning of the period, the
Committee approves a payout schedule based on prescribed financial performance.
Performance targets for awards made in 1998 for the 1998 - 2000 performance
cycle are a total shareholder return that exceeds the 55th percentile of both
the S&P 500 Index and the S&P Electric Company Index. If both target levels are
reached, payout will equal 100% of the amount granted at the beginning of the
period. Performance above or below pays more or less than the target amount,
based on the schedule. The maximum amount payable is 150% of the amount granted,
and the minimum is 0%. Award recipients do not receive any portion of an award
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.
The payout for awards made for the 1996-1998 performance period
occurred in January 1999. The exemplary shareholder return relative to the S&P
500 and S&P Electric Company Indices during that period resulted in the maximum
possible payout.
Special Incentive and Retention Bonus. In early 1999 the Compensation
Committee voted to award a special incentive and retention bonus to officers and
certain key employees as additional compensation to reflect their contributions
to the improvement in TNP's value to its shareholders during 1998 and previous
years. For the officers named in the Executive Compensation Table elsewhere in
this proxy statement, the bonus consists of five equal annual installments, the
first of which was paid in January 1999. The payment of the remaining
installments, which will occur during January of the four successive years, is
subject to such officers' continuing employment by TNP at the anniversary date
of the Compensation Committee's vote to award the special bonus. An officer
would receive the unpaid balance of the bonus if he or she is terminated after a
change in control of the company. The amount of such bonuses was calculated
based on competitive market data supplied by an independent consultant.
Compensation of Chairman and Chief Executive Officer. Mr. Joyce
participates in the same executive compensation plans that cover the other
executive officers, determined according to the same compensation philosophy and
principles.
Each year, Mr. Joyce and the Board of Directors agree on a set of
personal and strategic company objectives. The Committee reviews Mr. Joyce's
performance against those objectives at year end. The review includes a detailed
analysis of the short- and long-term financial results as well as progress
towards TNP's strategic objectives. The Committee oversees this review and makes
appropriate adjustments to Mr. Joyce's compensation. For 1998, the Committee,
with the participation of all outside directors, determined that the results for
TNP for the year were outstanding.
The Committee increased Mr. Joyce's base salary from $357,100 to
$375,000, effective March 1, 1998. It has increased his base salary to $395,000,
effective March 1, 1999. In setting Mr. Joyce's salary, the Committee, with the
participation of all outside directors, determined that critical goals were
achieved and that the results for TNP for the year were outstanding.
For 1998, Mr. Joyce's short-term incentive award was paid above his
target level because the Company significantly exceeded the target cash value
added objective and operations objectives for 1998. He was awarded a short-term
incentive compensation bonus of $151,700 and received $19,200 under the
all-employee plan.
In January 1999, Mr. Joyce received a payout of 10,229 shares of TNP
common stock and dividend equivalents of $31,045 under the long-term incentive
plan for the 1996-1998 long-term incentive performance period. This payout
reflected strong TNP shareholder return relative to the S&P 500 and the S&P
Electric Company Indices, and was at the maximum possible payout for that
period.
In January 1999, Mr. Joyce received $170,000 as the first installment
of the special incentive and retention bonus awarded by the Compensation
Committee, relating to his performance in 1998. The total amount of the bonus
awarded is $850,000. Mr. Joyce will receive the remaining four installments in
January of the next four years, subject to his being employed by TNP at the
anniversary date of the Compensation Committee's action awarding the bonus.
Internal Revenue Code Sec.162(m). Internal Revenue Code Section 162(m)
limits tax deductions for executive compensation to $1 million. There are
several exemptions to Section 162(m), including one for qualified
performance-based compensation. To be qualified, performance-based compensation
must meet various requirements, including shareholder approval. The Committee's
policy with respect to the deductibility limit of Section 162(m) generally is to
preserve the federal income tax deductibility of compensation paid when it is
appropriate and is in the best interests of TNP and its shareholders. However,
the Committee reserves the right to authorize the payment of nondeductible
compensation if it deems that is appropriate.
Compensation Committee
John A. Fanning Sidney M. Gutierrez
J. R. Holland, Jr. Harris L. Kempner, Jr.
Dennis H. Withers
The Compensation Committee Report on Executive Compensation and the
performance graph that follows will not be deemed incorporated by reference by
any general statement incorporating this 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 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, 1993, and
is calculated assuming quarterly reinvestment of dividends.
(Performance Graph reflecting tabular data set forth below)
<TABLE>
<CAPTION>
- ----------------------------------------- -------- -------- -------- -------- -------- --------
1993 1994 1995 1996 1997 1998
- ----------------------------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
TNP Enterprises, Inc. 100 98 129 196 248 292
S&P 500 Index 100 100 139 171 229 294
S&P Electric Company Index 100 81 107 106 134 155
- ----------------------------------------- -------- -------- -------- -------- -------- --------
</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 15, 1999, 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% 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.
<TABLE>
<CAPTION>
Amount and Nature Percent of
Name of Beneficial Owner of Beneficial Ownership Class
<S> <C> <C>
R. Denny Alexander 2,600 *
John A. Fanning 2,500 *
Sidney M. Gutierrez 2,262 *
J. R. Holland, Jr. 1,575 *
Kevern R. Joyce 22,480 *
Harris L. Kempner, Jr. 2,500(1) *
Carol D. Surles 1,575 *
Larry G. Wheeler 534 *
Dennis H. Withers 2,600 *
Jack V. Chambers 31,485 *
Manjit S. Cheema 11,782(2) *
John P. Edwards 6,638 *
Ralph S. Johnson 14,776 *
All directors and officers
as a group (25 persons) 180,410 1.3%
The Vanguard Group(3) 1,198,972 9.0%
Putnam Investments, Inc.(4) 859,000 6.4%
Scudder Kemper Investments, Inc. (5) 732,235 5.5%
</TABLE>
- ------------------------
*Less than 1%.
(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) This amount is as of January 31, 1999. 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 Putnam Investments, Inc. ("PI") is One Post Office Square,
Boston, Massachusetts 10036. PI is the parent holding company of Putnam
Investment Management, Inc. ("PIM") and The Putnam Advisory Company, Inc.
("PAC"), both of which are investment advisers registered under the
Investment Advisers Act of 1940, and both of whose addresses are One Post
Office Square, Boston, Massachusetts 10036. Neither PI, PIM nor PAC have
any voting or sole dispositive power over the shares included in the table.
PI has shared dispositive power over all the shares. PIM has shared
dispositive power with respect to 851,000 shares, and PAC has shared
dispositive power with respect to 8,000 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 February 11, 1999, filed with the Securities and
Exchange Commission.
(4) The address of Scudder Kemper Investments, Inc. ("SKI") is 345 Park Avenue,
New York, New York. SKI has sole voting power over 432,595 shares, shared
voting power over 283,000 shares, and sole dispositive power over all the
shares. SKI is an investment adviser registered under the Investment
Advisers Act of 1940. The information included in the table and this note
is derived from a joint report on Schedule 13G dated February 11, 1999,
filed with the Securities and Exchange Commission.
<PAGE>
OTHER MATTERS
Proxy Solicitation. The Company will bear all costs of proxy
solicitation. Proxies may be solicited by mail, in person or by telephone or
facsimile transmission by officers, directors and regular employees of the
Company. The Company may also reimburse brokerage firms, custodians, nominees
and fiduciaries for their expenses to forward proxy materials to beneficial
owners.
Shareholder list. TNP will maintain a list of the shareholders entitled
to vote at the annual meeting at its corporate offices at 4100 International
Plaza, Fort Worth, Texas. The list will be open for examination by any
shareholder, during regular business hours, for a period of 10 days prior to the
annual meeting. The list will also be available during the meeting itself.
Annual Report. TNP is sending its 1998 Summary Annual Report to
Shareholders with this Proxy Statement. The 1998 Summary Annual Report is not
part of the proxy solicitation material. It covers operations of TNP and Texas
New-Mexico Power Company, its wholly owned electric utility subsidiary. You may
obtain a copy of TNP's Annual Report on Form 10-K (without exhibits) for the
year ended December 31, 1998, at no charge by writing Sheryl Lewis, Investor
Relations, TNP Enterprises, Inc., 4100 International Plaza, Fort Worth, Texas.
In addition, TNP's Annual Report on Form 10-K is available via the Internet at
its World Wide Web site (www.tnpe.com), and at the World Wide Web site of the
Securities and Exchange Commission (www.sec.gov).
Change of Certifying Accountants. On February 18, 1997, the Board of
Directors, upon the recommendation of its Audit Committee, approved the
engagement of Arthur 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 Arthur 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 Arthur 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 took 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 TNP, would be: (1) KPMG advising TNP that internal
controls necessary for the Company to develop reliable financial statements do
not exist; (2) KPMG advising TNP 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 TNP 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 TNP's
financial statements, and (b) due to KPMG's dismissal, or for any other reason,
KPMG did not so expand the scope of its audit or conduct such further
investigation; and (4) KPMG advising TNP 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 Arthur
Andersen concerning the subject matter of the disagreement described above.
Shareholder Recommendations of Directors. If a shareholder wishes to
formally nominate a candidate for the Board, 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.
Shareholder Proposals. Any TNP shareholder who desires to present a
proposal for consideration at next year's annual meeting must deliver the
proposal to TNP's principal executive offices no later than November 30, 1999,
unless TNP notifies the shareholders otherwise. Only those proposals that are
proper for shareholder action may be included in TNP's proxy statement. Written
requests for inclusion should be addressed to Corporate Secretary, TNP
Enterprises, Inc. 4100 International Plaza, Fort Worth, Texas 76109.
Kevern R. Joyce,
President and Chief Executive Officer
Fort Worth, Texas
March 30, 1999
<PAGE>
APPENDIX
1998 ANNUAL REPORT TO SHAREHOLDERS
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
Combined Annual Report for the Fiscal Year Ended December 31, 1998
TABLE OF CONTENTS
GLOSSARY OF TERMS ......................................................... A-2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................................ A-3
Competitive Conditions..................................................... A-3
Results of Operations...................................................... A-4
Liquidity and Capital Resources............................................ A-7
Other Matters.............................................................. A-8
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TNP Enterprises, Inc. and Subsidiaries................................ A-11
Texas-New Mexico Power Company and Subsidiaries....................... A-12
INDEPENDENT AUDITORS' REPORT
TNP Enterprises, Inc. and Subsidiaries................................ A-13
Texas-New Mexico Power Company and Subsidiaries....................... A-14
TNP ENTERPRISES, INC. AND SUBSIDIARIES
Consolidated Statements of Income, Three Years Ended December 31,
1998................................................................. A-15
Consolidated Statements of Cash Flows, Three Years Ended December 31,
1998................................................................. A-16
Consolidated Balance Sheets, December 31, 1998, and 1997.............. A-17
Consolidated Statements of Capitalization, December 31, 1998,
and 1997............................................................. A-18
Consolidated Statements of Common Shareholders' Equity, Three Years
Ended December 31, 1998......................................... A-19
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
Consolidated Statements of Income, Three Years Ended December 31,
1998................................................................ A-20
Consolidated Statements of Cash Flows, Three Years Ended December 31,
1998................................................................ A-21
Consolidated Balance Sheets, December 31, 1998, and 1997............. A-22
Consolidated Statements of Capitalization, December 31, 1998,
and 1997............................................................ A-23
Consolidated Statements of Common Shareholders' Equity, Three Years
Ended December 31, 1998...............................................A-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................ A-25
SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA - TNP...................... A-38
<PAGE>
TNP ENTERPRISES INC. AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
Combined Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1998
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
NMPRC.................. New Mexico Public Regulation Commission
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.
Transition Plan........ TNMP's transition-to-competition plan in Texas
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
Y2K .................. The Year 2000 Issue
<PAGE>
Item 7. 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. TNMP expects the portions of operations
pertaining to transmission and distribution 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. As of December 31, 1998, TNMP had reserved
$3.4 million for its potential stranded costs in New Mexico. Additional stranded
costs could potentially be zero to $7 million, depending on the market price of
purchased power at the onset of competition.
Legislators in both Texas and New Mexico have introduced bills that propose
to open the business to competition. The bills also address recovery of stranded
costs. In Texas, TNMP's Transition Plan includes provisions for modifying the
plan so that it conforms to subsequently enacted legislation
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 recoverability and amount of stranded costs is
uncertain, management realizes there is some risk that shareholders may be
required to share the financial burden of stranded costs with customers.
Texas Transition Plan
On July 22, 1998, the PUCT approved TNMP's Transition Plan, and issued a
final order documenting its approval on November 7, 1998. The Transition Plan
includes a number of provisions that impact TNMP's financial results. They are:
- TNMP will implement a series of residential and commercial
rate reductions totaling 9% and 3%, respectively, during a
five-year transition period. The first rate reductions for
residential and commercial customers of 3% and 1%,
respectively, were implemented retroactive to January 1, 1998.
The remaining reductions will be effective in January of 2000
and 2001.
- TNMP's earnings on its Texas operations are capped at an
11.25% return on equity less assumed discounts on industrial
rates, which, for 1998, were $4.1 million. In 1999, the
discounts are expected to be approximately $2.9 million. TNMP
will apply Texas earnings in excess of the cap to recover
stranded costs related to its generation investment (TNP One)
or will refund them to customers, according to PUCT
guidelines.
- The Plan includes a cap on allowed operating and maintenance
expenses applicable to TNMP's Texas operations based on cost
incurred per customer in 1996.
- TNMP will record $15 million of additional depreciation
annually during 1999-2002 to recover stranded costs.
- Finally, the manner in which TNMP recovers the cost of
purchased power from its customers has changed. In the past,
all of these costs were passed directly through to TNMP's
customers via adjustment factors that could change as often as
monthly. Under this methodology, purchased power expense had
no impact on operating income. Effective with the new rates
under the Transition Plan, only the energy-related portion of
purchased power will be passed through directly to customers
via the fuel adjustment clause. The demand-related portion of
purchased power will be recovered through base rates and is
not subject to adjustment or future reconciliation. Therefore,
any difference, between the amount of demand-related purchased
power recovered through TNMP's rates and the actual cost of
such, will affect operating income.
Absent legislation implementing retail competition, at the end of the
five-year transition period, TNMP shall file with the PUCT a proposal to
voluntarily implement retail access, contingent upon the approval of an
appropriate mechanism for recovery of any remaining stranded costs. The PUCT has
committed to full recovery of stranded costs if they are quantified using a
market-based methodology, TNMP offers retail access, and stranded costs are
allocated fairly to all customers.
During the year ended December 31, 1998, the Transition Plan reduced TNMP's
operating income as summarized in the table below (amounts in thousands except
per share items):
<TABLE>
<CAPTION>
Pre-tax amounts Per share
<S> <C> <C>
One-time charges:
Costs to implement the plan $ 3,300 $ 0.17
One-time customer refund 1,447 0.06
-------- ------
Subtotal 4,747 0.23
-------- ------
1998 impacts:
Rate structure change 9,940 0.49
Lower recovery of demand
purchased power expenses 7,548 0.37
-------- ------
Subtotal $17,488 0.86
------- ------
Total effect of the plan $22,235 $ 1.09
======== ======
</TABLE>
The combination of the one-time customer refund and implementing the rate
structure change reduced operating revenue by $11.4 million (pre-tax). TNMP's
earnings for the year ended December 31, 1998 did not exceed the earnings cap
imposed by the Transition Plan. The Transition Plan includes a provision that
allows the PUCT to review TNMP's earnings and the related earnings cap.
New Mexico Community Choice
On April 11, 1997, the NMPUC approved TNMP's plan for transition to
competition in its New Mexico service territory, called Community Choice. TNMP
implemented Community Choice effective May 1, 1997. Community Choice provides
TNMP's customers the right to choose their electricity 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. As of December 31, 1998, TNMP had reserved
$3.4 million for its potential stranded costs in New Mexico.
Impact of Competition on TNMP
In addition to pursuing the satisfactory resolution of the stranded cost
issue, TNMP is pursuing strategies to retain and attract new customers. TNMP's
competitive position has been strengthened with the PUCT open access to
transmission rule. Management believes TNMP's revenue growth opportunities are
through an increased customer base and new services.
As noted above, the Transition Plan changes the way TNMP recovers the
demand component of purchased power. The change increases the risk that TNMP
will have to absorb increases in the demand cost of purchased power, while at
the same time it allows TNMP to retain the benefit of savings realized from
lowering these costs. TNMP is actively managing its resources to optimize the
rewards and diminish the risks in it power supply portfolio.
Results of Operations
Overall Results
Income applicable to common stock was $19.3 million for 1998, compared to
$29.5 million in 1997. The 1998 results included the effect of FWI's
discontinued operations of $12.7 million, and costs to implement the transition
plan of $3.0 million. The 1997 results included a $12.9 million loss associated
with FWI's discontinued operations. Exclusive of one-time items, the 1998
earnings were $35.0 million, a $7.4 million decrease as compared to the 1997
earnings of $42.4 million.
Income applicable to common stock was $22.9 million in 1996. Results for
1996 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. Excluding the one-time items, 1997
earnings were $15.1 million higher than 1996 earnings of $27.3 million.
The following table sets forth results of operations for 1998, 1997, and
1996 and the impact of one-time items:
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------- -----------
Amount EPS Amount EPS Amount EPS
------- ------- --------- --------- --------- -------
(In thousands except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Income applicable to common
stock before one-time items.................. $ 34,969 $ 2.65 $ 42,403 $ 3.24 $ 27,283 $ 2.38
--------- -------- ---------- ---------- --------- ------
One-time items, net of income taxes:
Discontinued operations of FWI............... (12,710) (0.96) (12,883) (0.98) (3,097) (0.27)
Transition plan costs........................ (2,985) (0.23) - - - -
Series T litigation settlement............... - - - - (1,300) (0.11)
--------- -------- ---------- --------- ---------- ------
Total one-time items, net................ (15,695) (1.19) (12,883) (0.98) (4,397) (0.38)
--------- -------- ---------- --------- --------- ------
Income applicable to common stock............... $ 19,274 $1.46 $ 29,520 $ 2.26 $ 22,886 $ 2.00
========= ======== ========== ========== ========== ======
</TABLE>
Beginning in 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. In 1998, TNP elected to discontinue all
remaining operations of FWI. See Note 3 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)
1998 1997 1996 `98 v. `97 `97 v. `96
---------- --------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 586,445 $ 580,693 $ 502,737 $ 5,752 $ 77,956
Purchased power & fuel expenses 316,911 302,773 243,682 14,138 59,091
---------- --------- ---------- --------- ---------
Base revenues $ 269,534 $ 277,920 $ 259,055 $ (8,386) $ 18,865
========== ========= ========== ========= =========
</TABLE>
Purchased power & fuel expenses are discussed in "Results of
Operations--Operating Expenses."
The following table summarizes the components of the base revenues
increase (decrease) from 1998 to 1997 and from 1997 to 1996 (in thousands).
<TABLE>
<CAPTION>
`98 v. `97 `97 v. `96
---------- ----------
<S> <C> <C>
Weather related $11,711 $ (332)
Customer growth 4,896 4,053
Reserve for Texas customer refunds (10,971) -
Lower recovery of Texas demand purchased power costs (7,548) -
Industrial - firm rate sales (9,020) (2,448)
Industrial - Texas economy rate sales 148 5,331
Transmission revenue 831 8,251
Unbilled revenue and other 1,567 4,010
--------- ---------
Base revenues increase (decrease) $ (8,386) $18,865
========= =======
</TABLE>
The base revenue decrease of $8.4 million during 1998 resulted primarily
from the implementation of the Texas Transition Plan and the loss of a
significant industrial customer (see Note 9). As discussed in Note 2, the
Transition Plan had the effect of reducing base rate revenues and reducing
recovery of demand purchased power costs. Offsetting the base revenue decrease
were increased sales due to hotter than normal weather during the summer, and
customer growth in the residential and commercial classes.
The base revenue increase of $18.9 million during 1997 resulted primarily
from implementing the new transmission access rules during 1997, growth in
residential and commercial customers, and a full year of operation of its
control area in Texas that TNMP implemented 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 components of GWH sales for 1998 and 1997 are summarized in the
following table:
<TABLE>
<CAPTION>
1998 1997 Variance %
---- ---- -------- -----
<S> <C> <C> <C> <C>
Residential 2,440 2,251 189 8.4
Commercial 1,883 1,772 111 6.3
Industrial:
Firm 505 1,080 (575) (53.2)
Economy 4,476 4,444 32 0.7
Power marketing 425 495 (70) (14.1)
Other 114 108 6 5.6
------ ------- ------- -----
Total GWH sales 9,843 10,150 (307) (3.0)
===== ======= ======= =====
</TABLE>
1998 sales decreased 307 GWHs (or 3%), from 1997 levels, due to the
movement of a significant industrial customer to self-generation and decreased
off-system sales. This decrease was partially offset by increased residential
and commercial sales due to hotter-than-normal weather and customer growth.
As discussed in "Competitive Conditions--Texas Transition Plan" and Note 2,
the PUCT approved the Texas Transition Plan during 1998. The Transition Plan
includes 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. Also, TNMP's earnings on Texas operations are capped at
11.25% return on equity less assumed discounts on industrial rates, which, for
1998, were $4.1 million. Texas earnings in excess of the cap will be applied by
TNMP to recover stranded costs related to its generation investment (TNP One) or
refunded to customers. During 1998, TNMP did not have any excess earnings on its
Texas operations. This was primarily due to higher than expected demand
purchased power costs as discussed in "Operating Expenses - Purchased Power &
Fuel."
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 represent a slight
reduction as compared to rates in effect prior to May 1997. The reduced rates
have not had a material adverse effect on TNP's or TNMP's financial condition.
A significant industrial customer in Texas left TNMP's system in February
1998 and replaced the power previously provided by TNMP with power from a
cogeneration plant built by a third party wholesale power producer. This
customer provided sales of 629 GWH and annual revenues of $28.3 million in 1997
($10.1 million in base revenues). Purchases by this customer in 1998 were 74
GWH, providing total revenues of $3.1 million and base revenues of $0.9 million.
During late 1997, TNMP renegotiated with a large industrial customer in New
Mexico to continue providing full service until the end of the New Mexico
Community Choice transition period (April 30, 2000). Effective January 1, 1999,
this customer reduced its firm purchased power commitment by 55%. 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.
This customer provided sales of 1,101 GWH and revenues of $39.9 million in 1998
($11.9 million in base revenues).
Operating Expenses
Operating expenses for 1998 were $18.1 million higher than in 1997, due
primarily to higher purchased power expenses.
Operating expenses for 1997 were $72.4 million higher than in 1996, due
primarily to higher purchased power expenses stemming from increased sales
requirements under agreements with two cogeneration customers and income taxes.
Purchased Power & Fuel Expenses
The following table summarizes the components of purchased power and fuel
expenses (in thousands).
<PAGE>
<TABLE>
<CAPTION>
Increase (Decrease)
1998 1997 1996 `98 v. `97 `97 v. `96
---------- ---------- ---------- ---------- ---------
Pass-through expenses
<S> <C> <C> <C> <C> <C>
Purchased power $ 155,679 $ 259,605 $ 196,481 $ (103,926) $ 63,124
Fuel 38,299 39,676 45,300 (1,377) (5,624)
---------- ---------- ---------- ---------- ---------
Subtotal 193,978 299,281 241,781 (105,303) 57,500
Non pass-through purchased power 121,287 1,438 - 119,849 1,438
Other 1,646 2,054 1,901 (408) 153
---------- ---------- ---------- ---------- ---------
Total $ 316,911 $ 302,773 $ 243,682 $ 14,138 $ 59,091
========== ========== ========== ========== =========
</TABLE>
During 1998, purchased power and fuel expenses increased by $14.1 million
due to increased purchased power expenses during the hotter-than-normal summer
weather, recognition of expenses in compliance with the Transition Plan, and
settlement of a billing dispute. As discussed in Note 2, the Transition Plan
changes the method of recovering purchased power expenses from customers.
Effective January 1, 1998, only the energy-related portion of purchased power is
passed through directly to customers via the fixed fuel recovery factor. The
demand-related portion of purchased power will be recovered through base rates.
Therefore, any difference between the amount of demand-related purchased power
recovered through TNMP's rates and the actual costs will affect operating
income. Texas demand charges are $98.3 million of the $121.3 million shown above
as non pass-through purchased power. Firm purchased power costs in New Mexico
account for the remainder. Recovery of demand purchased power in Texas amounted
to $90.8 million in 1998, resulting in a reduction of $7.5 million in pre-tax
operating income. Prior to January 1, 1998, the majority of purchased power
costs were recoverable from customers via a recovery clause.
During 1997, purchased power and fuel expenses increased by $59.1 million
primarily due to additional MWHs purchased to meet increased sales requirements
from the agreements negotiated with the two cogeneration customers during the
second quarter of 1996.
Other Operating Expenses
Other operating expenses in 1998 increased by $6.9 million compared to
1997. This resulted from additional transmission expenses of $3.1 million as
compared to 1997, and the $3.3 million write-off of deferred costs related to
the Transition Plan, as discussed in "Competitive Conditions--Texas Transition
Plan" and Note 2.
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 million increase in the Texas transmission expenses.
Interest Charges
During 1998, interest charges decreased $3.2 million due primarily to
reduced borrowings and lower interest rates on the credit facilities.
During 1997, interest charges decreased $12.5 million due primarily to the
retirement of Series T FMBs in January 1997 and applying 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.
In January 1999, TNMP retired its 12.5% secured debentures when they
matured. It also issued $175 million of 6.25% Senior Notes due in 2009. Interest
charges are expected to continue to decrease during 1999 due to the lower
interest rate on the Senior Notes and reduced borrowings against 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 $72.9 million, $103.9 million and
$65.2 million in 1998, 1997 and 1996. Cash flow from operations decreased in
1998 due to increases in purchased power costs and expenses for nonregulated
activities. In addition, 1997 cash flow included $20.5 million from the one-time
factoring of unbilled accounts receivables. Cash flow from operations increased
in 1997 from 1996 due to factoring unbilled receivables and increased base
revenues. The changes in TNMP's cash flow from operations mirrored those of TNP.
TNMP has two existing credit facilities with a total of $100 million of
unused borrowings available, as of December 31, 1998. In January 1999, TNMP
entered into a third credit facility that provides $35 million of borrowing
capacity through April 1999.
In November 1998, TNP entered into a new credit facility with a total
commitment of $50 million, and unused borrowing capacity of $41 million at
December 31, 1998. Borrowings under this facility can be used for investing in
TNP's subsidiaries, payment of dividends to TNP's shareholders, investing in
nonregulated businesses, and other general corporate purposes.
TNP reserved one million shares of common stock for issuance through a
direct stock purchase plan that 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 December 31, 1998, the remaining
reserve for direct stock purchase plan was 946,000 shares.
Capital Resources
TNP's and TNMP's capital structure continued to improve during 1998, 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 38.3% at December 31,
1997, to 40.0% at December 31, 1998. Conversely, the long-term debt ratio
decreased from 61.3% to 59.6% for the same period. TNMP experienced similar
results with its capital ratios.
TNMP's capital requirements through 2003 are projected to be as follows
(amounts in millions):
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
FMB and secured debenture maturities (see Note 6) $ - $ 100.0 $ - $ - $ 140.0
Capital expenditures 37.7 33.5 33.8 35.3 36.5
------- -------- -------- ------- -------
Total capital requirements $ 37.7 $ 133.5 $ 33.8 $ 35.3 $ 176.5
======= ======== ======== ======= =======
</TABLE>
TNMP believes that cash flow from operations, borrowings in the capital
markets, and periodic borrowings under the credit facilities will be sufficient
to meet working capital requirements and planned capital requirements through
the foreseeable future.
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
utility's 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 "Competitive Conditions--Texas Transition Plan" and Note 2, on July
22, 1998, the PUCT approved TNMP's Transition Plan, and issued a final order
documenting its approval on November 7, 1998. The PUCT has committed to full
recovery of stranded costs if they are quantified using a market-based
methodology, TNMP offers retail access, and stranded costs are allocated fairly
to all customers. Rates under the Transition Plan continue to be cost-based, and
TNMP will continue to apply SFAS 71 to its Texas generation/power supply
operations until it requests, and the PUCT approves authority to implement
retail competition.
Year 2000
TNMP is actively addressing the Year 2000 Issue (Y2K) throughout its
operating and office environments. Many existing computer programs were designed
and developed to use only two digits to identify a year in the date field. If
not addressed, these computer systems could fail, with possible material adverse
effects on TNMP's operations.
In mid-1997 TNMP's information technology staff began to identify and
assess corporate software applications, equipment and operating systems. In
early 1998, the project was expanded to include professionals from throughout
the company and to identify and assess embedded systems. TNMP's project to
analyze Y2K has included the following phases: identification, assessment,
remediation/implementation and testing.
In its analysis to identify and assess Y2K impact on company systems, TNMP
has conducted extensive studies to analyze the impact of Y2K on all operating
systems. As a result of these studies, TNMP has developed a Y2K mitigation plan.
The plan requires TNMP to amend, replace, or upgrade most of its primary
corporate information systems, some of which were already being replaced or
upgraded pursuant to a previously approved plan to replace or upgrade such
systems.
The following is a brief summary of the renovation and validation, and
implementation progress for the critical business areas of TNMP - generation,
transmission, distribution, energy management, and corporate information
systems.
Generating Units. TNMP owns one power plant, TNP One, which is located in
Robertson County, Texas. TNP One has two units that burn lignite as the primary
fuel source to generate power. The total lignite supply is provided from a mine
adjacent to the power plant. TNP plans to increase the coal supply to provide
for an additional six-week supply prior to January 1, 2000. The plant is also
capable of burning natural gas, as well as various waste products. TNP One
personnel are consulting with the manufacturers of the Plant Control Computer
which provides for most of the computerized operations of the boiler and turbine
controls, as well as the Continuous Emissions Monitoring System. Integrated
testing of the Plant Control Computer was completed on Unit 1 in early February
1999. The integrated testing on Unit 1 detected no Y2K problems. Testing will be
done on Unit 2 while the plant is down for a maintenance outage this spring.
Tests of the Continuous Emissions Monitoring System determined that only
non-critical Y2K issues were detected. Upgrades to that software are currently
underway. An extensive list of other minor suspect devices has been compiled and
is also in the process of being tested.
As of March 1, 1999, the TNP One generation plant has completed the
assessment of all mission-critical facilities, and is approximately 52 percent
complete with the testing and remediation of those facilities. All testing and
remediation is expected to be complete by June 1999.
Distribution System. TNMP is primarily a distribution company. Over 600
suspect distribution system devices have been identified and are being tested.
TNMP is currently testing the devices that have external clock functions.
Devices that have no external clock function are being checked with the
manufacturer and TNMP is reviewing their testing of those devices. All of TNMP's
critical distribution substations have designs which contain redundant relaying
or bypass switching schemes to remove failed devices and equipment for normal
operations, allowing for quick restoration of power to customers.
As of March 1, 1999, TNMP is 84 percent complete on the assessment of all
Distribution System mission-critical facilities, and is approximately 53 percent
complete with the testing and remediation of those facilities. All testing and
remediation is expected to be complete by June 1999.
Transmission System. TNMP has transmission lines which are a part of the
transmission grid comprised within the Electric Reliability Council of Texas
(ERCOT). The transmission grid within ERCOT is operated by member utilities in
conjunction with an Independent System Operator. TNMP is participating on
ERCOT's Year 2000 Technical Task Force and on the Year 2000 Operational
Preparedness and Planning Task Force. TNMP will be participating in all testing,
drills and contingency planning done by the Independent System Operator.
Testing of transmission line electronic protective devices by TNMP
personnel is underway with completion anticipated by June 1999.
Supervisory Control and Data Acquisition Systems (SCADA) and Energy
Management Systems. TNMP has three SCADA systems in Texas. A SCADA system
reports on the status on protective devices, allows for the remote control of
these same devices, and reports and tracks critical power flow information on
the transmission and distribution grids. These systems are new, having been
upgraded in 1997 and 1998. TNMP is in the process of replacing the SCADA system
in New Mexico, which is not Year 2000 compliant.
As of March 1, 1999, TNMP is 93 percent complete on the assessment of all
SCADA and Energy Management Systems mission-critical facilities, and is
approximately 22 percent complete with the testing and remediation of those
facilities. All testing and remediation is expected to be complete by June 1999,
except for the New Mexico SCADA system that will be complete in August 1999.
Information Technology Systems. As of March 1, 1999, approximately 90% of
TNMP's infrastructure supporting its business systems has been tested and
verified as Y2K compliant. TNMP expects to have the remaining infrastructure Y2K
compliant by the end of the first quarter of 1999. TNMP has completed the
upgrade of its financial and accounting system to a Y2K compliant version.
Integrated testing of the upgraded financial system will be done in April 1999.
A new customer information system is expected to be implemented and tested
during the third quarter of 1999 and other corporate information systems
directly related to TNMP's operations are expected to be installed and tested by
September 1999. TNMP incorporates unit testing, system testing, integration
testing and acceptance testing into the verification methodology.
Y2K Remediation Cost. The costs associated with TNMP's Y2K efforts are
expected to be approximately $10.2 million. Approximately $9 million of the
total cost is to upgrade or replace various information technology systems, as
discussed above, as well as improve the infrastructure to support those systems.
TNMP does not expect these costs to have a material impact on its financial
position or results of operations. TNMP continues to work with key software
vendors and outside consultants to validate its Y2K compliance project. To date,
TNMP has spent approximately $4.3 million on Y2K remediation. TNMP has in the
past used, and expects to continue to use, cash flow from operations to fund
costs associated with Y2K.
Third-Party Vendors. In addition to its own mitigation plan, TNMP is
actively working with its key vendors and other third parties with which TNMP
has a material relationship to assist such parties in achieving compliance with
respect to Y2K in those systems affecting TNMP's operations. Such parties
include electric power providers in Texas and New Mexico; the fuel, ash
disposal, and limestone contractors at TNP One; transmission and distribution
material suppliers; and banking partners. Although TNMP believes that such
persons are working diligently to properly address Y2K, TNMP cannot guarantee
that these third-party systems will be timely converted, or that a failure to
convert by another company or a conversion that is incompatible with TNMP's
systems, would not have a material adverse effect on TNMP.
Contingency Plans. The primary operating processes of TNMP's business
(e.g., the production, transmission, and distribution of electric power) are
subject to contingencies related to weather, equipment failure, and other
factors. TNMP has drafted Y2K contingency plans by adapting previously existing
contingency plans. TNMP will complete the Y2K contingency plan by June 1999.
The Risks of the Company's Year 2000 Issues. Based upon its current
assessment and testing of the Y2K issue, TNMP believes the reasonably likely
worst-case Y2K scenarios would have the following impacts upon it and its
operations. With respect to its ability to provide energy to its customers, TNMP
believes that the reasonably likely worst-case scenario is for small, localized
interruptions of electrical service that are restored in a time frame that is
within normal service levels. With respect to services that are essential to
TNMP's operations, such as customer service, business operations, supplies and
emergency response capabilities, the reasonably likely worst-case scenario is
for minor disruptions of essential services with rapid recovery and all
essential information and processes ultimately recovered.
While risks related to the third parties' lack of Y2K readiness could
materially and adversely affect TNMP's business, results of operations and
financial condition, TNMP expects its Y2K readiness efforts to reduce
significantly its level of uncertainty about the impact of third party Y2K
issues on both its IT systems and non-IT systems.
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of TNP Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets and consolidated
statements of capitalization of TNP Enterprises, Inc. (a Texas corporation) (the
"Company") as of December 31, 1998 and 1997, and the related consolidated
statements of income, common shareholders' equity and cash flows for the years
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 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 the Company as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Fort Worth, Texas
February 12, 1999
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder and Board of Directors of
Texas-New Mexico Power Company:
We have audited the accompanying consolidated balance sheets and consolidated
statements of capitalization of Texas-New Mexico Power Company (a Texas
corporation) (the "Company") as of December 31, 1998 and 1997, and the related
consolidated statements of income, common shareholder's equity and cash flows
for the years 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 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 the Company as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Fort Worth, Texas
February 12, 1999
<PAGE>
Independent Auditor's Report
The Board of Directors and Shareholders
TNP Enterprises, Inc.:
We have audited the accompanying consolidated statements of income, common
shareholders' equity, and cash flows of TNP Enterprises, Inc. and subsidiaries
for the year 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
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
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 consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
TNP Enterprises, Inc. and subsidiaries for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
KPMG LLP
Fort Worth, Texas
January 30, 1997
<PAGE>
Independent Auditor's Report
The Board of Directors
Texas-New Mexico Power Company:
We have audited the accompanying consolidated statements of income, common
shareholder's equity, and cash flows of Texas-New Mexico Power Company (a wholly
owned subsidiary of TNP Enterprises, Inc.) and subsidiaries for the year 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 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
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 consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Texas-New Mexico Power Company and subsidiaries for the year ended December 31,
1996, in conformity with generally accepted accounting principles.
KPMG 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,
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
(In thousands except per share amounts)
OPERATING REVENUES (Note 2) $ 586,493 $ 580,693 $ 502,737
---------------- ---------------- ----------------
OPERATING EXPENSES:
Purchased power and fuel 316,911 302,773 243,682
Other operating and maintenance 95,168 86,385 84,417
Depreciation 38,056 38,853 38,172
Taxes other than income taxes 36,014 33,667 33,256
Income taxes 15,480 21,242 10,375
---------------- ---------------- ----------------
Total operating expenses 501,629 482,920 409,902
---------------- ---------------- ----------------
NET OPERATING INCOME 84,864 97,773 92,835
---------------- ---------------- ----------------
OTHER INCOME:
Other income and deductions, net 1,280 1,443 1,956
Income taxes (125) 257 722
---------------- ---------------- ----------------
Other income, net of taxes 1,155 1,700 2,678
---------------- ---------------- ----------------
INCOME BEFORE INTEREST CHARGES 86,019 99,473 95,513
---------------- ---------------- ----------------
INTEREST CHARGES:
Interest on long-term debt 48,393 52,557 64,654
Other interest and amortization of debt-related costs 5,492 4,355 4,709
---------------- ---------------- ----------------
Total interest charges 53,885 56,912 69,363
---------------- ---------------- ----------------
INCOME FROM CONTINUING OPERATIONS 32,134 42,561 26,150
Loss from discontinued nonregulated operations, net of taxes
(Note 3) 12,710 12,883 3,097
---------------- ---------------- ----------------
NET INCOME 19,424 29,678 23,053
Dividends on preferred stock 150 158 167
---------------- ---------------- ----------------
INCOME APPLICABLE TO COMMON STOCK $ 19,274 $ 29,520 $ 22,886
================ ================ ================
EARNINGS PER SHARE OF COMMON STOCK:
Earnings from continuing operations $ 2.42 $ 3.24 $ 2.27
Loss from discontinued nonregulated operations (0.96) (0.98) (0.27)
---------------- ---------------- ----------------
EARNINGS PER SHARE $ 1.46 $ 2.26 2.00
================ ================ ================
DIVIDENDS PER SHARE OF COMMON STOCK $ 1.10 $ 1.005 $ 0.93
================ ================ ================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 13,244 13,083 11,465
================ ================ ================
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,
1998 1997 1996
---------------- ------------------ -----------------
<S> <C> <C> <C>
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from sales to customers $ 600,596 $ 625,032 $ 505,307
Purchased power and fuel costs paid (318,616) (299,554) (244,272)
Cash paid for payroll and to other suppliers (116,852) (125,188) (75,138)
Interest paid, net of amounts capitalized (51,592) (57,337) (69,247)
Income taxes paid (6,825) (9,089) (15,684)
Other taxes paid (35,089) (32,990) (32,243)
Other operating cash receipts and payments, net 1,250 2,979 (3,522)
---------------- ------------------ -----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 72,872 103,853 65,201
---------------- ------------------ -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant (37,534) (28,232) (28,006)
Additions to other property and nonregulated investments (1,020) (1,777) (2,771)
Withdrawals from (deposits to) escrow account (1,902) - -
---------------- ------------------ -----------------
NET CASH USED IN INVESTING ACTIVITIES (40,456) (30,009) (30,777)
---------------- ------------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on preferred and common stocks (14,729) (13,305) (10,866)
Common stock issuances 5,355 3,392 48,798
Borrowings from (repayments to) revolving credit facilities - net (11,000) 45,000 12,000
Other long-term debt issuances - - 202
Deferred expenses associated with financings (7,382) - (588)
Redemptions:
First mortgage bonds (8,000) (100,900) (96,508)
Obligation - FWI investment acquisition - (300) -
Other long-term debt (141) (61) -
Preferred stock (180) (180) (180)
---------------- ------------------ -----------------
NET CASH USED IN FINANCING ACTIVITIES (36,077) (66,354) (47,142)
---------------- ------------------ -----------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (3,661) 7,490 (12,718)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 15,877 8,387 21,105
---------------- ------------------ -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,216 $ 15,877 $ 8,387
================ ================== =================
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income $ 19,424 $ 29,678 $ 23,053
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 38,056 38,853 38,170
Amortization of debt-related costs and other deferred charges 4,819 3,810 3,329
Allowance for borrowed funds used during construction (228) (47) (99)
Deferred income taxes 4,722 7,434 (193)
Investment tax credits 1,281 1,406 (380)
Cash flows impacted by changes in current assets and liabilities:
Deferred purchased power and fuel costs 894 995 5,696
Accounts payable 976 (1,411) 6,406
Accrued interest (2,303) (3,556) (3,103)
Accrued taxes (3,299) (1,244) (7,372)
Reserve for customer refund 10,971 - -
Changes in other current assets and liabilities (2,215) 25,099 (1,507)
Other, net (226) 2,836 1,201
---------------- ------------------ -----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 72,872 $ 103,853 $ 65,201
================ ================== =================
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,
1998 1997
-------------------- -------------------
<S> <C> <C>
(In thousands)
ASSETS
UTILITY PLANT:
Electric plant $ 1,260,147 $ 1,235,257
Construction work in progress 6,294 2,281
-------------------- -------------------
Total 1,266,441 1,237,538
Less accumulated depreciation 343,562 314,270
-------------------- -------------------
Net utility plant 922,879 923,268
-------------------- -------------------
OTHER PROPERTY AND INVESTMENTS, at cost 10,384 5,704
-------------------- -------------------
CURRENT ASSETS:
Cash and cash equivalents 12,216 15,877
Accounts receivable 5,955 8,585
Inventories, at lower of average cost or market:
Fuel 677 483
Materials and supplies 4,567 4,440
Deferred purchased power and fuel costs 1,676 2,570
Accumulated deferred income taxes 2,235 1,707
Other current assets 4,403 982
-------------------- -------------------
Total current assets 31,729 34,644
-------------------- -------------------
DEFERRED CHARGES 28,773 28,310
-------------------- -------------------
$ 993,765 $ 991,926
==================== ===================
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common shareholders' equity:
Common stock - no par value per share. Authorized 50,000,000
shares; issued 13,293,996 shares in 1998 and 13,132,821 in 1997 $ 192,518 $ 187,163
Retained earnings 115,776 111,078
-------------------- -------------------
Total common shareholders' equity 308,294 298,241
Preferred stock 3,060 3,240
Long-term debt, less current maturities 459,000 478,041
-------------------- -------------------
Total capitalization 770,354 779,522
-------------------- -------------------
CURRENT LIABILITIES:
Current maturities of long-term debt - 100
Accounts payable 28,011 27,035
Accrued interest 5,020 7,323
Accrued taxes 14,290 17,589
Customers' deposits 3,609 3,249
Reserve for customer refund 10,971 -
Other current liabilities 25,202 26,665
-------------------- -------------------
Total current liabilities 87,103 81,961
-------------------- -------------------
REGULATORY TAX LIABILITIES 957 6,318
ACCUMULATED DEFERRED INCOME TAXES 97,346 85,250
ACCUMULATED DEFERRED INVESTMENT TAX CREDITS 20,916 21,149
DEFERRED CREDITS 17,089 17,726
COMMITMENTS AND CONTINGENCIES (Notes 2 and 9)
-------------------- -------------------
$ 993,765 $ 991,926
==================== ===================
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,
1998 1997
----------------- -------------------
<S> <C> <C>
(In thousands)
COMMON SHAREHOLDERS' EQUITY
Common stock with no par value per share
Authorized shares - 50,000,000
Outstanding shares - 13,293,996 in 1998 and 13,132,821 in 1997 $ 192,518 $ 187,163
Retained earnings 115,776 111,078
----------------- -------------------
Total common shareholders' equity 308,294 298,241
----------------- -------------------
</TABLE>
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
<TABLE>
<CAPTION>
Redemption
price at TNMP's Outstanding shares
option 1998 1997
------ --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Series B 4.65% $ 100.00 19,200 20,400 1,920 2,040
Series C 4.75% 100.00 11,400 12,000 1,140 1,200
--------- --------- ----------------- -------------------
Total redeemable cumulative preferred stock 30,600 32,400 3,060 3,240
--------- --------- ----------------- -------------------
</TABLE>
<TABLE>
<CAPTION>
LONG-TERM DEBT
FIRST MORTGAGE BONDS
<S> <C> <C>
Series M 8.70% due 2006 - 8,000
Series U 9.25% 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 80,000 100,000
1998 Facility 9,000 -
OTHER
- 141
----------------- -------------------
Total long-term debt 459,000 478,141
Less current maturities - (100)
----------------- -------------------
Total long-term debt, less current maturities 459,000 478,041
----------------- -------------------
TOTAL CAPITALIZATION $ 770,354 $ 779,522
================= ===================
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)
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Balance at January 1, 1996 10,920 $ 134,973 $ 82,484 $ 217,457
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
YEAR ENDED DECEMBER 31, 1998
Net income - - 19,424 19,424
Dividends on preferred stock - - (150) (150)
Dividends on common stock - $1.10 per share - - (14,579) (14,579)
Sale of common stock 161 5,355 - 5,355
Retirement of preferred stock - - 3 3
------------------ ---------------- ---------------- ----------------
Balance at December 31, 1998 13,294 $192,518 $ 115,776 $ 308,294
================== ================ ================ ================
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,
1998 1997 1996
------------------- ------------------ ------------------
<S> <C> <C> <C>
(In thousands)
OPERATING REVENUES (Note 2) $ 586,445 $ 580,693 $ 502,737
------------------- ------------------ ------------------
OPERATING EXPENSES:
Purchased power and fuel 316,911 302,773 243,682
Other operating and maintenance 91,171 84,294 83,948
Depreciation of utility plant 38,054 38,851 38,170
Taxes other than income taxes 36,298 33,260 32,727
Income taxes 16,863 22,062 10,333
------------------- ------------------ ------------------
Total operating expenses 499,297 481,240 408,860
------------------- ------------------ ------------------
NET OPERATING INCOME 87,148 99,453 93,877
------------------- ------------------ ------------------
OTHER INCOME:
Other income and deductions, net 952 1,120 1,626
Income taxes (52) 257 722
------------------- ------------------ ------------------
Other income, net of taxes 900 1,377 2,348
------------------- ------------------ ------------------
INCOME BEFORE INTEREST CHARGES 88,048 100,830 96,225
------------------- ------------------ ------------------
INTEREST CHARGES:
Interest on long-term debt 48,342 52,557 64,654
Other interest and amortization of debt-related costs 5,385 4,355 4,709
------------------- ------------------ ------------------
Total interest charges 53,727 56,912 69,363
------------------- ------------------ ------------------
NET INCOME 34,321 43,918 26,862
Dividends on preferred stock 150 158 167
------------------- ------------------ ------------------
INCOME APPLICABLE TO COMMON STOCK $ 34,171 $ 43,760 $ 26,695
=================== ================== ==================
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,
1998 1997 1996
------------------- ------------------ -------------------
<S> <C> <C> <C>
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from sales to customers $ 579,482 $ 606,803 $ 502,954
Purchased power and fuel costs paid (318,616) (299,554) (244,272)
Cash paid for payroll and to other suppliers (72,590) (86,607) (75,807)
Interest paid, net of amounts capitalized (51,545) (57,331) (69,236)
Income taxes paid (2,786) (8,464) (14,242)
Other taxes paid (35,492) (32,980) (31,219)
Other operating cash receipts and payments, net 864 2,600 1,135
------------------- ------------------ -------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 99,317 124,467 69,313
------------------- ------------------ -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant (37,506) (27,942) (28,006)
Withdrawals from (deposits to) escrow account (1,902) 1,670 (1,669)
------------------- ------------------ -------------------
CASH FLOWS USED IN INVESTING ACTIVITIES (39,408) (26,272) (29,675)
------------------- ------------------ -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on preferred and common stocks (19,249) (44,458) (10,867)
Equity contribution from TNP Enterprises - - 47,170
Borrowings from (repayments to) revolving credit facilities-net (20,000) 45,000 12,000
Deferred expenses associated with financings (7,275) - (588)
Redemptions:
First mortgage bonds (8,000) (100,900) (96,508)
Preferred stock (180) (180) (180)
------------------- ------------------ -------------------
NET CASH USED IN FINANCING ACTIVITIES (54,704) (100,538) (48,973)
------------------- ------------------ -------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 5,205 (2,343) (9,335)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,772 5,115 14,450
------------------- ------------------ -------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,977 $ 2,772 $ 5,115
=================== ================== ===================
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income $ 34,321 $ 43,918 $ 26,862
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation of utility plant 38,054 38,851 38,170
Amortization of debt-related costs and other deferred charges 4,710 3,810 3,329
Allowance for borrowed funds used during construction (228) (47) (99)
Deferred income taxes 9,559 10,650 1,140
Investment tax credits 1,173 2,121 (111)
Cash flows impacted by changes in current assets and liabilities:
Deferred purchased power and fuel costs 894 995 5,696
Accounts payable 2,029 (2,395) 5,214
Accrued interest (2,319) (3,556) (3,103)
Accrued taxes 2,698 850 (8,429)
Reserve for customer refund 10,971 - -
Changes in other current assets and liabilities (4,485) 24,751 786
Other, net 1,940 4,519 (142)
------------------- ------------------ -------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 99,317 $ 124,467 $ 69,313
=================== ================== ===================
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,
1998 1997
---------------- ------------------
<S> <C> <C>
(In thousands)
ASSETS
UTILITY PLANT:
Electric plant $ 1,260,099 $ 1,235,239
Construction work in progress 6,294 2,281
---------------- ------------------
Total 1,266,393 1,237,520
Less accumulated depreciation 343,562 314,270
---------------- ------------------
Net utility plant 922,831 923,250
---------------- ------------------
OTHER PROPERTY AND INVESTMENTS, at cost 2,116 214
---------------- ------------------
CURRENT ASSETS:
Cash and cash equivalents 7,977 2,772
Accounts receivable 923 2,342
Inventories, at lower of average cost or market:
Fuel 677 483
Materials and supplies 4,567 4,440
Deferred purchased power and fuel costs 1,676 2,570
Accumulated deferred income taxes - 1,707
Other current assets 4,093 222
---------------- ------------------
Total current assets 19,913 14,536
---------------- ------------------
DEFERRED CHARGES 28,706 29,006
---------------- ------------------
$ 973,566 $ 967,006
================ ==================
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common shareholder's equity:
Common stock, $10 par value per share
Authorized 12,000,000 shares; issued 10,705 shares $ 107 $ 107
Capital in excess of par value 222,149 222,146
Retained earnings 79,840 64,768
---------------- ------------------
Total common shareholder's equity 302,096 287,021
Redeemable cumulative preferred stock 3,060 3,240
Long-term debt, less current maturities 450,000 477,900
---------------- ------------------
Total capitalization 755,156 768,161
---------------- ------------------
CURRENT LIABILITIES:
Current maturities of long-term debt - 100
Accounts payable 26,888 24,859
Accrued interest 5,004 7,323
Accrued taxes 20,449 17,751
Customers' deposits 3,609 3,249
Accumulated deferred income taxes 649 -
Reserve for customer refund 10,971 -
Other current liabilities 17,076 19,148
---------------- ------------------
Total current liabilities 84,646 72,430
---------------- ------------------
REGULATORY TAX LIABILITIES 957 6,318
ACCUMULATED DEFERRED INCOME TAXES 93,378 81,085
ACCUMULATED DEFERRED INVESTMENT TAX CREDITS 22,729 21,286
DEFERRED CREDITS 16,700 17,726
COMMITMENTS AND CONTINGENCIES (Notes 2 and 9)
---------------- ------------------
$ 973,566 $ 967,006
================ ==================
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,
1998 1997
----------------- ------------------
<S> <C> <C>
(In thousands)
COMMON SHAREHOLDER'S EQUITY
Common stock, $10 par value per share
Authorized shares - 12,000,000
Outstanding shares - 10,705 $ 107 $ 107
Capital in excess of par value 222,149 222,146
Retained earnings 79,840 64,768
----------------- ------------------
Total common shareholder's equity 302,096 287,021
----------------- ------------------
</TABLE>
PREFERRED STOCK
Redeemable cumulative preferred stock with $100 par value
Authorized shares - 1,000,000
<TABLE>
<CAPTION>
Redemption
price at TNMP's Outstanding shares
option 1998 1997
------ ---- ----
<S> <C> <C> <C> <C> <C> <C>
Series B 4.65% $ 100.00 19,200 20,400 1,920 2,040
Series C 4.75% 100.00 11,400 12,000 1,140 1,200
------------- ------------- ----------------- ------------------
Total redeemable cumulative preferred stock 30,600 32,400 3,060 3,240
------------- ------------- ----------------- ------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
LONG-TERM DEBT
FIRST MORTGAGE BONDS
Series M 8.70% due 2006 - 8,000
Series U 9.25% 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 80,000 100,000
----------------- ------------------
Total long-term debt 450,000 478,000
Less current maturities - (100)
----------------- ------------------
Total long-term debt, less current maturities 450,000 477,900
----------------- ------------------
TOTAL CAPITALIZATION $ 755,156 $ 768,161
================= ==================
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)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Balance at January 1, 1996 11 $ 107 $ 174,931 $ 49,313 $ 224,351
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
YEAR ENDED DECEMBER 31, 1998
Net income - - - 34,321 34,321
Dividends on preferred stock - - - (150) (150)
Dividends on common stock - - - (19,099) (19,099)
Retirement of preferred stock - - 3 - 3
---------- --------------- --------------- ------------- -----------------
Balance at December 31, 1998 11 $ 107 $ 222,149 $ 79,840 $ 302,096
========== =============== =============== ============= =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
General Information
The consolidated financial statements of TNP and subsidiaries include the
accounts of TNP and its wholly owned subsidiaries, TNMP, FWI, and TNP Operating
Company. The consolidated financial statements of TNMP and subsidiaries include
the accounts of TNMP and its wholly owned subsidiaries, TGC and TGC II. All
intercompany transactions and balances have been eliminated in consolidation.
TNMP is TNP's principal operating subsidiary. TNMP is a public utility
engaged in generating, purchasing, transmitting, distributing, and selling
electricity in Texas and New Mexico. TNMP is subject to PUCT and NMPRC
regulation. Some of TNMP's activities, including the issuance of securities, are
subject to FERC regulation, and its accounting records are maintained in
accordance with FERC's Uniform System of Accounts.
The use of estimates is required to prepare TNP's and TNMP's consolidated
financial statements in conformity with generally accepted accounting
principles. Management believes that estimates are essential and will not
materially differ from actual results. However, adjustments may be necessary in
the future to the extent that future estimates or actual results are different
from the estimates used in the 1998 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 TNMP expects to recover from customers in future rates. Regulatory
liabilities are costs previously collected from customers or other amounts that
reduce future rates. The following table summarizes TNP's and TNMP's regulatory
assets and liabilities as of December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
---------- ---------
(In thousands)
<S> <C> <C>
Regulatory Assets:
Deferred purchased power and fuel costs $ 1,676 $ 2,570
Deferred charges:
Losses on reacquired debt 6,494 8,621
Rate case expenses 1,396 3,638
Deferred accounting amounts 3,221 4,026
---------- ---------
Total $ 12,787 $ 18,855
========== =========
Regulatory Liabilities:
Income tax related $ 957 $ 6,318
========== =========
</TABLE>
As discussed in Note 2, TNMP has two plans - the Texas Transition Plan and
the New Mexico Community Choice plan - approved by the regulatory commissions in
the respective jurisdictions. Based on these plans, 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, and the generation/power supply portion
of its business in Texas. Also, the Texas Transition Plan allows TNMP to recover
from customers the regulatory assets included in the table above.
Utility Plant
Utility plant is stated at the historical cost of construction, which
includes labor, materials, indirect charges for such items as engineering and
administrative costs, and AFUDC. Property repairs and replacement of minor items
are charged to operating expenses; major replacements and improvements are
capitalized to utility plant.
AFUDC is a non-cash item designed to enable a utility to capitalize
interest costs during periods of construction. Established regulatory practices
enable TNMP to recover these costs from customers. The composite rate used for
AFUDC was 6.0% in each of the years 1998, 1997, and 1996.
The costs of depreciable units of plant retired or disposed of in the
normal course of business are eliminated from utility plant accounts and such
costs plus removal expenses less salvage are charged to accumulated
depreciation. When complete operating units are disposed of, appropriate
adjustments are made to accumulated depreciation, and the resulting gains or
losses, if any, are recognized.
Depreciation is provided on a straight-line method based on the estimated
lives of the properties as indicated by periodic depreciation studies. A portion
of depreciation of transportation equipment used in construction is charged to
utility plant accounts in accordance with the equipment's use. Depreciation as a
percentage of average depreciable cost was 3.2%, 3.3%, and 3.2% in 1998, 1997,
and 1996, respectively. As explained in Note 2, TNMP will record $15 million of
additional depreciation annually during 1999-2002 to recover stranded costs, and
may record additional amounts of depreciation based on operation of the earnings
cap, due to implementation of the Transition Plan.
Cash Equivalents
All highly liquid debt instruments with maturities of three months or less
when purchased are considered cash equivalents.
Customer Receivables and Operating Revenues
TNMP accrues estimated revenues for electricity delivered since the latest
billing. TNMP, under a factoring arrangement with an unaffiliated company, sells
its customer receivables on a nonrecourse basis. Amounts estimated to have been
delivered, but remaining unbilled, are also sold in connection with this
agreement.
Purchased Power and Fuel Costs
As discussed in Note 2, TNMP has two plans - the Texas Transition Plan and
the New Mexico Community Choice plan - approved by the regulatory commissions in
the respective jurisdictions.
In Texas, as of January 1, 1998, the recovery of the demand-related portion
of purchased power costs has changed pursuant to the Texas Transition Plan as
discussed in Note 2. There are no changes to the recovery of the energy-related
portion of purchased power costs and fuel costs.
In New Mexico, as of May 1, 1997, the recovery of purchased power costs
changed pursuant to the New Mexico Community Choice plan discussed in Note 2.
Prior to the implementation of both plans, differences between amounts
collected and allowable costs were generally recovered either as purchased power
subject to refund or deferred purchased power and fuel costs in accordance with
regulatory ratemaking policy.
Deferred Charges
Expenses incurred in issuing long-term debt and related discount and
premium are amortized on a straight-line basis over the lives of the respective
issues.
Included in deferred charges are other assets that are expected to benefit
future periods and certain costs that are deferred for ratemaking purposes and
amortized over periods allowed by regulatory authorities.
Derivatives
The initial cost of an interest rate collar is being amortized over the
term of the related agreement. Unamortized premiums of $164,000 are included in
Deferred Charges in the consolidated balance sheets. Amounts to be received or
paid under the agreement, if any, will be recognized when they occur as a
component of interest expense. As of December 31, 1998, no such amounts have
been received or paid.
Income Taxes
TNP files a consolidated federal income tax return that includes its
subsidiaries and the consolidated operations of TNMP. The amounts of income
taxes recognized in TNMP's accompanying consolidated financial statements were
computed as if TNMP and its subsidiaries filed a separate consolidated federal
income tax return.
ITC amounts utilized in the federal income tax return are generally
deferred and amortized to earnings ratably over the estimated service lives of
the related assets.
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 TNMP's financial instruments are as follows:
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
------------------------------ -----------------------------
Carrying Amount Fair Values Carrying Amount Fair Values
--------------- ----------- --------------- -----------
(In thousands)
Assets
<S> <C> <C> <C> <C>
Interest rate collar $ 164 $ (333) $ 262 $ 235
Capitalization and Liabilities
Long-term debt 459,000 475,189 478,000 505,400
Preferred stock 3,060 1,978 3,240 2,653
</TABLE>
Common Stock
At December 31, 1998, 81,999 shares of TNP's common stock were reserved for
issuance to TNMP's 401(k) plan, and 1,198,356 shares of TNP's common stock were
reserved for subsequent issuance under other stock compensation or shareholder
plans.
Shareholder Rights Plan
TNP has a shareholder rights plan that is designed to protect TNP's
shareholders from coercive takeover tactics and inadequate or unfair takeover
bids. The rights plan provides for the distribution of one right for each share
of TNP's common stock currently outstanding or issued until the close of
business on August 11, 2008.
Upon the occurrence of certain events, each right entitles a shareholder to
elect to purchase one share of common stock at $100 per share or, under certain
circumstances, shares of common stock at half the then-current market price or
to receive TNP common stock or other securities having an aggregate value equal
to the excess of (i) the value of the common stock or other securities on the
date the rights are exercised over (ii) the cash payment that would have been
payable upon exercise of the rights if cash payment had been elected.
Until certain triggering events occur, the rights will trade together with
TNP's common stock and separate rights certificates will not be issued. Among
the triggering events are the acquisition by a person or group of 10% or more of
TNP's outstanding common stock or the commencement of a tender or exchange offer
that, upon consummation, would result in a person or group of persons owning 15%
or more of TNP's outstanding common stock. The rights expire August 11, 2008,
unless earlier redeemed or exchanged by TNP, and have had no effect on EPS.
Stock-Based Compensation
As discussed in Note 4, TNP has an equity based incentive compensation plan
that awards stock-based compensation. In 1995 the FASB issued SFAS 123,
"Accounting for Stock-Based Compensation", that changes the method for
calculating expenses associated with stock-based compensation. SFAS 123, which
became effective for 1996, also allows companies to retain the approach as set
forth in APB Opinion 25, "Accounting for Stock Issued to Employees", for
measuring expense for its stock-based compensation. TNP has elected to continue
to apply the provisions of APB Opinion 25 in calculating stock-based
compensation. The application of SFAS 123 would have had no effect on the amount
of expense associated with TNP's stock-based compensation.
Reclassification
Certain items in 1996 and 1997 were reclassified to conform to the 1998
presentation.
<PAGE>
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 many other utilities, will be the ability to recover
potential stranded costs. "Stranded costs" is the difference between what it
currently costs TNMP to provide electricity 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 cost relates to TNP
One, its 300 MW generating unit, and could potentially be more than $270
million. As of December 31, 1998, TNMP had reserved $3.4 million for its
potential stranded costs in New Mexico. Additional stranded costs could
potentially be zero to $7 million, depending on the market price of purchased
power at the onset of competition.
The following discusses TNMP's strategy to transition to competition and to
recover its potential stranded costs in Texas and New Mexico.
Texas Transition Plan
On July 22, 1998, the PUCT approved TNMP's transition-to-competition plan
(Transition Plan), and issued a final order documenting its approval on November
7, 1998. The Transition Plan includes a number of provisions that impact TNMP's
financial results. They are:
- TNMP will implement a series of residential and commercial
rate reductions totaling 9% and 3%, respectively, during a
five-year transition period. The first rate reductions for
residential and commercial customers of 3% and 1%,
respectively, were implemented retroactive to January 1, 1998.
The remaining reductions will be effective in January of 2000
and 2001.
- TNMP's earnings on its Texas operations are capped at an
11.25% return on equity less assumed discounts on industrial
rates, which, for 1998, were $4.1 million. In 1999, the
discounts are expected to be approximately $2.9 million. TNMP
will apply Texas earnings in excess of the cap to recover
stranded costs related to its generation investment (TNP One)
or will refund them to customers, according to PUCT
guidelines.
- The Plan includes a cap on allowed operating and maintenance
expenses applicable to TNMP's Texas operations based on cost
incurred per customer in 1996.
- TNMP will record $15 million of additional depreciation
annually during 1999-2002 to recover stranded costs.
- Finally, the manner in which TNMP recovers the cost of
purchased power from its customers has changed. In the past,
all of these costs were passed directly through to TNMP's
customers via adjustment factors that could change as often as
monthly. Under this methodology, purchased power expense had
no impact on operating income. Effective with the new rates
under the Transition Plan, only the energy-related portion of
purchased power will be passed through directly to customers
via the fuel adjustment clause. The demand-related portion of
purchased power will be recovered through base rates and is
not subject to adjustment or future reconciliation. Therefore,
any difference, between the amount of demand-related purchased
power recovered through TNMP's rates and the actual cost of
such, will affect operating income.
Absent legislation implementing retail competition prior to the end of the
five-year transition period, TNMP shall file with the PUCT, at the end of the
transition period, a proposal to voluntarily implement retail access, contingent
upon the approval of an appropriate mechanism for recovery of any remaining
stranded costs. The PUCT has committed to full recovery of stranded costs if
they are quantified using a market-based methodology, TNMP offers retail access,
and stranded costs are allocated fairly to all customers. Rates under the
Transition Plan continue to be cost-based, and TNMP will continue to apply SFAS
71 to its Texas generation/power supply operations until it requests, and the
PUCT approves authority to implement retail competition.
Implementation of the Transition Plan reduced operating revenue by $11.4
million (pre-tax). The base rate reductions accounted for $9.9 million of the
change, and a one-time customer refund accounted for the remaining $1.5 million.
TNMP's earnings for the year ended December 31, 1998, did not exceed the
earnings cap imposed by the Transition Plan.
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 electricity 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. As of
December 31, 1998, TNMP had reserved $3.4 million for 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 in the period of adoption.
The transmission and distribution operations in New Mexico will continue to
follow SFAS 71.
Fuel Reconciliation
TNMP's fixed fuel factor in Texas 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
was approved by the PUCT on April 21, 1998, specified that all fuel costs
incurred during the reconciliation period were reasonable and necessary. Also,
the agreement did not propose a change to the fixed fuel factor.
Note 3. Discontinued Nonregulated Operations
Management, with approval from the Board of Directors, authorized a plan to
discontinue the construction activities of FWI in late 1997. During the third
quarter of 1998, TNP elected to discontinue all remaining operations of FWI.
The pre-tax loss on discontinued operations recognized in 1998 was $19.6
million ($12.7 million, net of taxes, or $0.96 per share). The 1998 pre-tax loss
resulted from construction delays, a shortage of skilled labor, and job site
performance problems. Due to these reasons, there are a few jobs not completed
at December 31, 1998. TNP expects the jobs to be completed during 1999.
The pre-tax loss on discontinued operations recognized in 1997 was $19.8
million ($12.9 million, net of taxes, or $0.98 per share). All losses incurred
by FWI, both construction and service, incurred in 1997 have been reclassified
as losses from discontinued operations.
<PAGE>
Note 4. Employee Benefit Plans
Pension and Postretirement Benefits 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. TNMP also sponsors a health care plan that
provides postretirement medical and death benefits to retirees who satisfied
minimum age and service requirements during employment.
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
---------------- -----------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
(In thousands)
Change in projected benefit obligation:
<S> <C> <C> <C> <C>
Benefit obligation at beginning of year $ 76,316 $ 66,406 $ 10,651 $ 16,805
Service cost 1,439 1,371 309 467
Interest cost 5,055 5,074 736 1,253
Participant contributions - - 183 92
Plan amendments (873) - - (8,000)
Actuarial (gain) or loss, including changes
in discount rate 1,366 8,273 442 1,436
Benefits paid (6,908) (4,808) (1,446) (1,402)
--------- ---------- ----------- -----------
Benefit obligation at end of year $ 76,395 $ 76,316 $ 10,875 $ 10,651
======== ========= ========== ==========
</TABLE>
TNMP amended its pension and postretirement benefit plans effective October
1, 1997. The amendments were recognized at January 1, 1998, for the pension
plan, and at October 1, 1997, for the postretirement benefit plan.
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
---------------- -----------------------
1998 1997 1998 1997
-------- --------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Change in plan assets:
Fair value of plan assets at beginning of year $ 95,751 $ 82,771 $ 8,274 $ 6,975
Actual return on plan assets, net of expenses 8,871 17,788 1,105 861
Employer contributions - - 1,597 1,624
Participant contributions - - 183 92
Benefits paid (6,908) (4,808) (1,223) (1,278)
-------- --------- ---------- ----------
Fair value of plan assets at end of year $ 97,714 $ 95,751 $ 9,936 $ 8,274
======== ========= ========== ==========
Reconciliation of funded status:
Funded status $ 21,319 $ 19,435 $ (938) $ (2,377)
Unrecognized actuarial gain (25,620) (24,779) (6,216) (6,168)
Unrecognized transition (asset) or obligation (35) (59) 4,540 12,864
Unrecognized prior service cost (2,152) (1,434) - (8,000)
--------- ---------- ----------- -----------
Prepaid (accrued) benefit cost $ (6,488) $ (6,837) $ (2,614) $ (3,681)
======== ========= ========== ==========
Components of net periodic benefit cost:
Service cost $ 1,439 $ 1,371 $ 309 $ 468
Interest cost 5,055 5,074 736 1,253
Expected return on plan assets (6,664) (6,219) (484) (434)
Amortization of prior service cost (156) (154) - -
Amortization of transitional (asset) or obligation (24) (24) 325 857
Recognized actuarial gain - - (326) (405)
--------- ---------- ----------- -----------
Net periodic benefit cost $ (350) $ 48 $ 560 $ 1,739
======== ========= ========== ==========
Weighted-average assumptions as of December 31:
Discount rate 6.75% 7.00% 6.75% 7.00%
Expected long-term rate of return on plan assets 9.50% 9.50% 5.25% 5.25%
Average rate of compensation increase 4.00% 4.00% N/A N/A
</TABLE>
<PAGE>
The assumed health care cost trend rate used to measure the expected cost
of benefits was 5.3% for 1998 and is assumed to trend downward slightly each
year to 4.3% for 2003 and thereafter. Assumed health care cost trend rates could
have a significant effect on the amounts reported for the health care plans. A
one-percentage-point change in assumed health care cost trend rates would have
the following effects (in thousands):
<TABLE>
One-Percentage-Point One-Percentage-Point
Increase Decrease
-------------------- --------------------
<S> <C> <C>
Effect on total of service and interest cost
components for 1998 $ 3 $ (4)
Effect on year-end 1998 postretirement
benefit obligation 48 (61)
</TABLE>
Incentive Plans
TNP and TNMP have several incentive compensation plans. All employees
participate in one or more of these plans. Incentive compensation is based on
meeting key financial and operational performance goals such as cash value added
or earnings per share, operations and maintenance costs per KWH, and system
reliability measures. Operating expenses for 1998, 1997, and 1996 included costs
for the various cash and equity plans of $5.9 million, $6.0 million, and $4.8
million, respectively.
Other Employee Benefits
TNMP has a 401(k) plan designed to enhance the other retirement plans
available to its employees. Employees may invest their contributions in fixed
income securities, mutual funds, or TNP common stock. TNMP's contributions are
used to purchase TNP common stock, which employees may later convert to other
investment options.
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.
Note 5. Income Taxes
Components of income taxes were as follows:
<TABLE>
<CAPTION>
TNP TNMP
---------------------------------- ------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
(In thousands)
Taxes on net operating income:
<S> <C> <C> <C> <C> <C> <C>
Federal - current $ 9,751 $ 12,251 $ 10,240 $ 6,299 $ 9,140 $ 8,596
State - current 164 428 86 197 428 86
Federal - deferred 3,962 6,747 49 8,872 9,963 1,381
ITC adjustments 1,603 1,816 - 1,495 2,531 270
-------- ---------- ---------- --------- ---------- ----------
15,480 21,242 10,375 16,863 22,062 10,333
-------- ---------- ---------- --------- ---------- ----------
Taxes on other income (loss):
Federal - current (313) (534) (100) (313) (534) (100)
Federal - deferred 760 687 (241) 687 687 (241)
ITC adjustments (322) (410) (381) (322) (410) (381)
-------- ---------- ---------- --------- ---------- ----------
125 (257) (722) 52 (257) (722)
-------- ---------- ---------- --------- ---------- ----------
Tax benefit from discontinued
nonregulated operations (Note 3) (6,843) (6,660) (1,658) - - -
-------- ---------- ---------- --------- ---------- ----------
Total income taxes $ 8,762 $ 14,325 $ 7,995 $ 16,915 $ 21,805 $ 9,611
======== ========== ========== ========= ========== ==========
</TABLE>
The amounts for total income taxes differ from the amounts computed by
applying the appropriate federal income tax rate to earnings (loss) before
income taxes for the following reasons:
<TABLE>
<CAPTION>
TNP TNMP
--------------------------------- ---------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory tax rate $ 9,796 $ 15,252 $ 10,850 $ 17,864 $ 22,854 $ 12,735
Amortization of
accumulated deferred ITC (1,525) (1,403) (1,323) (1,525) (1,403) (1,323)
Amortization of
excess deferred taxes (141) (141) (143) (141) (141) (143)
State income taxes 197 428 86 197 428 86
ITC related to 1995
PUCT disallowance (322) (410) (191) (322) (410) (191)
ITC adjustment - - (760) - - -
Other, net 757 599 (524) 842 477 (1,553)
-------- -------- --------- -------- -------- --------
Actual income taxes $ 8,762 $ 14,325 $ 7,995 $ 16,915 $ 21,805 $ 9,611
======== ======== ========= ======== ======== ========
</TABLE>
The tax effects of temporary differences that gave rise to significant
portions of net current and net noncurrent deferred income taxes as of December
31, 1998, and 1997, are presented below.
<TABLE>
<CAPTION>
TNP TNMP
-------------------------- ----------------
1998 1997 1998 1997
---- ---- ---- ----
(In thousands)
Current deferred income taxes:
<S> <C> <C> <C> <C>
Deferred tax assets:
Unbilled revenues $ 91 $ 2,905 $ 91 $ 2,905
Other 2,999 - 115
----------- ----------- --------- -----------
3,090 2,905 206 2,905
Deferred tax liability:
Deferred purchased power and fuel costs (855) (1,198) (855) (1,198)
----------- ----------- ----------- -----------
Current deferred income taxes, net $ 2,235 $ 1,707 $ (649) $ 1,707
=========== =========== =========== ===========
Noncurrent deferred income taxes:
Deferred tax assets:
Minimum tax credit carryforwards $ 30,241 $ 27,414 $ 34,437 $ 34,377
ITC carryforwards 5,018 6,608 3,206 6,472
Regulatory related items 12,731 17,135 12,731 17,135
Accrued employee benefit costs 3,330 3,195 3,330 3,195
Other (890) 3,449 694 787
----------- ----------- ----------- -----------
50,430 57,801 54,398 61,966
----------- ----------- ----------- -----------
Deferred tax liabilities:
Utility plant, principally due to
depreciation and basis differences (135,870) (128,913) (135,870) (128,913)
Deferred charges (4,611) (6,101) (4,611) (6,101)
Regulatory related items (7,295) (8,037) (7,295) (8,037)
----------- ----------- ----------- -----------
(147,776) (143,051) (147,776) (143,051)
----------- ----------- ----------- -----------
Noncurrent deferred income taxes, net $ (97,346) $ (85,250) $ (93,378) $ (81,085)
=========== =========== =========== ===========
</TABLE>
Federal tax carryforwards as of December 31, 1998, were as follows:
<TABLE>
<CAPTION>
TNP TNMP
--- ----
(In thousands)
Minimum tax credits
<S> <C> <C>
Amount $ 30,241 $ 34,437
Expiration period None None
Investment tax credit
Amount $ 5,018 $ 3,206
Expiration period 2005 2005
</TABLE>
<PAGE>
Note 6. 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 7.
The maximum amount of any additional FMBs that TNMP can issue is determined
by both a collateral requirement and by an interest coverage requirement. The
collateral requirement is a function of property additions, previuosly redeemed
FMBs, and cash deposited with the trustee. As of December 31, 1998, the
collateral requirement was more restrictive than the interest coverage
requirement, and TNMP could therefore issue up to $267 million of additional
FMBs. After the issuance of $175 million of FMBs in January 1999 to secure the
Senior Notes, TNMP could issue an additional $92 million of FMBs.
Secured Debentures
TNMP's Series A, 10.75% secured debentures ($140 million) are secured with
a first lien on a portion of Unit 1, and by second liens on substantially all
utility plant in Texas owned directly by TNMP. The secured debentures also
contain restrictions on dividends and asset dispositions. TNMP's 12.5% secured
debentures ($130 million) were retired at maturity in January 1999.
Senior Notes
In January 1999, TNMP issued $175 million of 6.25% Senior Notes due in 2009
and used the proceeds to retire its 12.5% secured debentures and reduce
outstanding borrowings under the credit facilities. The Senior Notes were issued
under a new indenture that allows the issuance of unsecured debt. The new notes
are initially secured by FMBs. However, when TNMP repays its existing FMBs and
secured debentures, the collateral securing the Senior Notes will be released,
and they will become unsecured, but will remain the senior debt obligations of
TNMP.
Revolving Credit Facilities
The following table summarizes the terms of TNP's and TNMP's revolving
credit facilities at December 31,1998:
<TABLE>
<CAPTION>
Total Amount Commitment 1998 Average
Commitment Outstanding Expires Interest Rate Security
(in thousands)
<S> <C> <C> <C> <C> <C>
1998 TNP Facility $ 50,000 $ 9,000 November 2003 5.62% Unsecured
1995 TNMP Facility 100,000 - November 2000 7.45% Unsecured
1996 TNMP Facility 80,000 80,000 September 2001 6.96% Unsecured
Interim TNMP Facility 35,000 - April 1999 N/A Unsecured
</TABLE>
The composite average borrowing rates under TNMP's credit facilities were
6.99% and 7.15% for 1998 and 1997, respectively. The interest rate margins on
the 1996 and 1995 facilities have decreased by 0.50% since the ratings on TNMP's
FMBs have been upgraded by the rating agencies.
TNMP has a $50 million interest rate collar to mitigate exposure to
variable interest rates. The collar sets floor and ceiling rates on the 90-day
LIBOR rate at 5.25% and 7.50%, respectively. The term of the interest rate
collar is September 1997 through September 2000. TNMP also has a $100 million
interest rate collar to mitigate the risk of refinancing the Series A, 10.75%
Secured Debentures and the 9.25% FMBs. The collar sets floor and ceiling rates
on the 10-year U. S. Treasury bond at 4.91% and 6.25%, respectively. The collar
expires, and is exercisable only on, September 15, 2000.
TNMP has sufficient liquidity to satisfy the possibility of any known
contingencies. Management believes cash flow from operations, the new debt
described above, and periodic borrowings under its two credit facilities should
be sufficient to meet working capital requirements and planned capital
expenditures at least through 1999.
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, 1998, FMB and secured debenture maturities and sinking
fund requirements for the five years following 1998 are as follows:
<PAGE>
<TABLE>
<CAPTION>
Credit Secured
Year FMBs Facilities Debentures Total
---- ---- ---------- ---------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
1999 $ - $ - $ - $ -
2000 100,000 - - 100,000
2001 - 80,000 - 80,000
2002 - - - -
2003 - 9,000 140,000 149,000
</TABLE>
In January 1999, TNMP retired upon their maturity, $130 million of 12.5%
secured debentures, and issued $175 million of 6.25% Senior Notes due in 2009.
TNMP's Series A, 10.75% Secured Debentures of $140 million are callable at par
on September 15, 2000.
Note 7. Capital Stock and Dividends
TNP
In November 1998, TNP increased its quarterly dividend from $0.27 to $0.29
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 and used to retire debt.
TNMP
The 1995 and 1996 TNMP Credit Facilities restrict the payment of cash
dividends by TNMP. As of December 31, 1998, $14.7 million of unrestricted
retained earnings were available for dividends.
Note 8. Segment and Related Information
During 1998, TNP adopted FASB Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information". TNP has two reportable
segments. The primary segment is TNMP, which provides regulated electric service
in Texas and New Mexico. The other reportable segment is FWI, which before
operations were discontinued, provided integrated mechanical, electrical,
plumbing and other maintenance and repair services to commercial customers in
Texas metropolitan areas. TNP manages the segments separately to respond to the
unique distinctions between regulated and unregulated businesses.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Intersegment revenues are not
material.
The following tables present information about profits, losses and assets
of TNP's reportable segments (in thousands):
<TABLE>
<CAPTION>
1998
-----
TNMP FWI All Other Eliminations Consolidated
---- --- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 586,445 $ - $ 48 $ - $ 586,493
Depreciation and amortization 42,161 - 2 - 42,163
Income taxes 16,863 - (1,383) - 15,480
Interest revenue 944 - 391 - 1,335
Total interest charges 53,727 - 158 - 53,885
Income (loss) from continuing operations 34,321 - (2,187) - 32,134
Loss from discontinued nonregulated
operations - 12,710 - - 12,710
Net income (loss) 34,321 (12,710) (2,187) - 19,424
Total assets 973,566 10,081 10,344 (226) 993,765
Property additions 37,506 - 1,048 - 38,554
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1997
---- TNMP FWI All Other Eliminations Consolidated
---- --- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 580,693 $ - $ - $ - $ 580,693
Depreciation and amortization 40,169 - 2 - 40,171
Income taxes 22,062 - (820) - 21,242
Interest revenue 1,497 - 326 - 1,823
Total interest charges 56,912 - - - 56,912
Income (loss) from continuing operations 43,918 - (1,357) - 42,561
Loss from discontinued nonregulated
operations - 12,883 - - 12,883
Net income (loss) 43,918 (12,883) (1,357) - 29,678
Total assets 967,006 10,239 11,748 2,933 991,926
Property additions 27,942 - 2,067 - 30,009
</TABLE>
<TABLE>
<CAPTION>
1996
---- TNMP FWI All Other Eliminations Consolidated
---- --- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 502,737 $ - $ - $ - $ 502,737
Depreciation and amortization 39,488 - 2 - 39,490
Income taxes 10,333 - 42 - 10,375
Interest revenue 1,250 - 326 - 1,576
Total interest charges 69,363 - - - 69,363
Income (loss) from continuing operations 26,862 - (712) - 26,150
Loss from discontinued nonregulated
operations - 3,097 - - 3,097
Net income (loss) 26,862 (3,097) (712) - 23,053
Total assets 1,002,157 2,361 7,836 (5,570) 1,006,784
Property additions 28,006 - 2,771 - 30,777
</TABLE>
Note 9. Commitments and Contingencies
Fuel Supply Agreement
TNMP has an agreement with the Walnut Creek Mining Company to purchase
lignite for TNP One through at least 2017. Depending on the output of TNP one,
the contract could supply the plant for several years beyond 2017. Phillips Coal
Company and Peter Kiewit Sons' jointly own Walnut Creek Mining Company, Inc.
Wholesale Purchased Power Agreements
TNMP purchases approximately 80% of its electricity requirements from
various wholesale suppliers. These contracts are scheduled to expire in various
years through 2005.
In 1998, TU was TNMP's largest wholesaler of electricity. In 1998, TU
supplied approximately 32% of TNMP's Texas capacity and 23% of its Texas energy
requirements. During 1995, pursuant to terms of the contract, TNMP notified TU
of its intent to cease purchasing electricity at 19 of the 20 points of delivery
served by TU, effective January 1, 1999. The nineteen points of delivery account
for approximately 70% of the electricity delivered to TNMP from TU. At that
time, the TU Agreement required TNMP to continue purchasing electricity at the
remaining point of delivery through May of 2010. In late 1997, TNMP and TU
modified the agreement to change the termination date of the contract from May
2010 to June 2002. Therefore, TNMP currently has no obligation to purchase
electricity from TU beyond June 2002.
At December 31, 1998, TNMP had various outstanding commitments for take or
pay agreements, including the fuel supply agreement discussed above. Detailed
below are the fixed and determinable portion of the obligations (amounts in
millions):
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Purchased power agreements $ 74.3 $ 53.3 $ 58.9 $ 26.9 $ 17.3
Fuel supply agreements 32.0 32.8 33.6 34.4 35.3
------- -------- -------- ------- -------
Total $ 106.3 $ 86.1 $ 92.5 $ 61.3 $ 52.6
======= ======== ======== ======= =======
</TABLE>
Significant Customer
A significant industrial customer in Texas left TNMP's system in February
1998 and replaced the power previously provided by TNMP with power from a
cogeneration plant built by a third party wholesale power producer. This
customer provided sales of 629 GWH and annual revenues of $28.3 million in 1997
($10.1 million in base revenues). Purchases by this customer in 1998 were 74
GWH, providing total revenues of $3.1 million and base revenues of $0.9 million.
Legal Actions
TNMP and Clear Lake Limited Partnership ("Clear Lake") agreed in March 1999
to settle the lawsuit styled Clear Lake Cogeneration Limited Partnership vs.
Texas-New Mexico Power Company, pending in the 234th District court of Harris
County, Texas, and the parallel proceeding pending before the PUCT. These
proceedings arose out of disagreements between TNMP and Clear Lake over the
interpretation of certain terms of an agreement under which TNMP purchases
cogenerated electricity from Clear Lake. The settlement, which must be approved
by the PUCT, resolves all outstanding issues raised in these proceedings.
Under the settlement, TNMP, Clear Lake and Calpine Power Services Company
(an affiliate of Clear Lake) have entered into a revised purchased power
contract, effective as of October 1, 1998, governing energy and capacity
transactions between the parties. The key elements of the revised contract are:
- The capacity rate under which TNMP will purchase capacity from Clear
Lake is significantly reduced. The energy rate is virtually
unchanged.
- Clear Lake will be able to provide 250 MW of capacity from multiple
sources. Except for power plants named in the agreement, TNMP retains
certain rights of prior approval as to other sources of power and
energy.
- TNMP will pay for the cost of transmitting power from the existing
Clear Lake power plant to TNMP's load centers in the Gulf Coast Region
pursuant to new PUCT rules. Clear Lake will reimburse TNMP for any
excess transmission costs that TNMP would incur as a result of
delivery from points other than the Clear Lake Plant.
- Clear Lake will no longer pay for nor receive standby power, but will
generally guarantee 100% availability of capacity and energy. Clear
Lake may request that TNMP obtain or generate replacement power at a
negotiated fixed cost under certain limited conditions.
- Future disputes shall be resolved through consultation and
arbitration.
The settlement also provides that TNMP will pay Clear Lake $8 million when
the PUCT has approved the overall settlement and revised purchased power
contract. The settlement calls for regulatory recovery by TNMP of all payments
to be made by TNMP for power and energy, as well as the $8 million settlement
payment. TNMP does not expect this settlement to have a material adverse impact
on its financial position or results of operations.
Phillips Petroleum. TNMP is the defendant in a suit styled Phillips
Petroleum Company vs. Texas-New Mexico Power Company. This lawsuit was filed on
October 1, 1997 and is pending in the 149th Judicial District Court of Brazoria
County, Texas. In this matter, Phillips Petroleum Company contends that it
sustained economic losses of approximately $36 million following a one and
one-half hour interruption in its electrical service on May 17, 1997. TNMP
claims that most, if not all of Phillips Petroleum alleged damages are barred by
limitations contained within our tariff approved by the PUCT. The lawsuit is in
the initial discovery stage. In regard to this matter, TNMP believes that it has
insurance coverage on most claims of Phillips Petroleum up to a total of $31
million, with a $500,000 self-retention.
TNMP is involved in various claims and other legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
dispositions of these matters will not have a material adverse effect on TNMP's
and TNP's consolidated financial position or results of operations.
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
Selected Quarterly Consolidated Financial Data
<TABLE>
<CAPTION>
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)
1998
<S> <C> <C> <C> <C>
Operating revenues........................................ $ 124,581 $ 143,111 $ 189,439 $ 129,362
Net operating income...................................... 18,491 19,101 33,119 14,153
Income from continuing operations......................... 5,130 5,832 20,890 282
Net income (loss)......................................... 4,626 (767) 18,561 (2,996)
Earnings per share of common stock from
continuing operations*................................. 0.39 0.44 1.58 0.02
Earnings (loss) per share of common stock................. 0.35 (0.06) 1.40 (0.23)
Dividends per share of common stock....................... $ 0.27 $ 0.27 $ 0.27 $ 0.29
Weighted average common shares outstanding................ 13,188 13,240 13,263 13,283
1997
Operating revenues........................................ $ 126,222 $ 132,361 $ 187,035 $ 135,075
Net operating income...................................... 19,430 23,023 37,510 17,810
Income from continuing operations......................... 5,120 8,847 23,741 4,853
Net income (loss)......................................... 4,110 7,431 20,694 (2,557)
Earnings per share of common stock from
continuing operations*................................. 0.39 0.68 1.81 0.37
Earnings (loss) per share of common stock *............... 0.31 0.56 1.58 (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
</TABLE>
* The individual quarters do not add to the yearly totals since the per share
amounts are based upon the average number of shares outstanding during each
quarter.
Generally, the variations between quarters reflect the seasonal
fluctuations of TNMP's business. Provisions for losses related to discontinuing
operations at FWI's construction segment account for the decreases in operating
results reported in the fourth quarter of 1997, and the second and fourth
quarters of 1998. Discontinuing operations of FWI's service segment caused the
decreased operating results shown in the third quarter of 1998. Implementation
of the Texas Transition Plan also had a negative impact on operating results in
the second, third, fourth quarters of 1998.
<PAGE>
(FORM OF PROXY CARD)
TNP ENTERPRISES, INC.
ANNUAL MEETING OF HOLDERS OF COMMON STOCK - MAY 3, 1999
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 PAUL W. TALBOT, 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 3, 1999, 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: John A. Fanning, Larry G.
Wheeler and Dennis H. Withers.
--------- --------
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 1999.
-------- -------- --------
FOR AGAINST ABSTAIN
-------- -------- --------
3. AMENDMENT of TNP Equity Incentive Plan.
-------- -------- --------
FOR AGAINST ABSTAIN
-------- -------- --------
4. 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, 2, and 3.
Please sign exactly as the shareholder's name appears on this proxy card. When
joint tenants hold shares, 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: --------------------------, 1999
---------------------------------------
Signature(s)
---------------------------------------
Signature(s)
- -----------------------------
PLEASE MARK, SIGN, DATE, AND
RETURN THIS PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.
EXHIBIT A
TNP ENTERPRISES, INC. EQUITY INCENTIVE PLAN
Article 1. Establishment, Purpose, and Duration
1.1 Establishment of the Plan. TNP Enterprises, Inc., a Texas corporation
(hereinafter referred to as the "Company"), hereby establishes an incentive
compensation plan to be known as the "TNP Enterprises, Inc. Equity Incentive
Plan" (hereinafter referred to as the "Plan"), as set forth in this document.
The Plan permits the grant of Nonqualified Stock Options, Incentive Stock
Options, Restricted Stock, Performance Units, Performance Shares, and Other
Stock-Based Awards.
Subject to approval by the Company's shareholders, the Plan shall become
effective as of January 1, 1995 (the "Effective Date"), and shall remain in
effect as provided in Section 1.3 herein.
1.2 Purpose of the Plan. The purpose of the Plan is to promote the success
and enhance the value of the Company by linking the personal interests of
Participants to those of Company shareholders, and by providing Participants
with an incentive for outstanding performance.
The Plan is further intended to provide flexibility to the Company in its
ability to motivate, attract, and retain the services of Participants upon whose
judgment, interest, and special effort the successful conduct of its operation
largely is dependent.
1.3 Duration of the Plan. The Plan shall commence on the Effective Date, as
described in Section 1.1 herein, and shall remain in effect, subject to the
right of the Board of Directors to terminate the Plan at any time pursuant to
Article 15 herein, until all Shares subject to it shall have been purchased or
acquired according to the Plan's provisions. However, in no event may an Award
be granted under the Plan on or after January 1, 2005.
Article 2. Definitions
Whenever used in the Plan, the following terms shall have the meanings set
forth below and, when the meaning is intended, the initial letter of the word is
capitalized:
(a) "Award" means, individually or collectively, a grant under this Plan
of Nonqualified Stock Options, Incentive Stock Options, Restricted
Stock, Performance Units, Performance Shares, or Other Stock-Based
Awards.
(b) "Award Agreement" means an agreement entered into by each Participant
and the Company, setting forth the terms and provisions applicable to
Awards granted to Participants under this Plan.
(c) "Beneficial Owner" shall have the meaning ascribed to such term in
Rule 13d-3 of the General Rules and Regulations under the Exchange
Act.
(d) "Board" or "Board of Directors" means the Board of Directors of the
Company.
(e) "Cause" means the admission by or the conviction of the Participant of
an act of fraud, embezzlement, theft, or other criminal act
constituting a felony under laws involving moral turpitude. The Board
of Directors, by majority vote, shall make the determination of
whether Cause exists.
(f) "Change in Control" shall have the meaning ascribed to such term in
the Texas-New Mexico Power Company Executive Agreement for Severance
Compensation Upon Change in Control.
(g) "Code" means the Internal Revenue Code of 1986, as amended from time to
time.
(h) "Committee" means the committee, as specified in Article 3, appointed
by the Board to administer the Plan.
(i) "Company" means TNP Enterprises, Inc., a Texas corporation, and the
Company's subsidiaries, as well as any successor thereto as provided
in Article 18 herein.
(j) "Director" means any individual who is a member of the Board of
Directors of the Company.
(k) "Disability" shall have the meaning ascribed to such term in the
Participants' governing long-term disability plan.
(l) "Dividend Equivalent" means a contingent right to be paid dividends
declared with respect to outstanding Awards, pursuant to the terms of
Sections 6.5 and 8.3 herein.
(m) "Employee" means any full-time, nonunion employee of the Company or of
the Company's Subsidiaries. Directors who are not otherwise employed
by the Company shall not be considered Employees under this Plan.
(n) "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, or any successor Act thereto.
(o) "Fair Market Value" means the Fair Market Value of the Shares
determined by such methods or procedures as shall be established from
time to time by the Committee; provided, however, that so long as the
Shares are traded in a public market, Fair Market Value means the
average of the high and low prices of a Share in the principal market
for the Shares on the specified date (or, if no sales occurred on such
date, the last preceding date on which sales occurred).
(p) "Incentive Stock Option" or "ISO" means an option to purchase Shares,
granted under Article 6 herein, which is designated as an Incentive
Stock Option and is intended to meet the requirements of Section 422
of the Code, or any successor provision thereto.
(q) "Insider" shall mean an Employee who is, on the relevant date,
an officer, director, or ten percent (10%) Beneficial Owner of any
class of the Company's equity securities that is registered pursuant
to Section 12 of the Exchange Act, all as defined under Section 16 of
the Exchange Act.
(r) "Named Executive Officer" means a Participant who, as of the date of
vesting and/or payout of an Award, as applicable, is one of the group
of "covered employees," as defined in the regulations promulgated
under Code Section 162(m), or any successor statute.
(s) "Nonqualified Stock Option" or "NQSO" means an option to purchase
Shares, granted under Article 6 herein, which is not intended to be an
Incentive Stock Option.
(t) "Option" means an Incentive Stock Option or a Nonqualified Stock
Option.
(u) "Option Price" means the price at which a Share may be purchased by a
Participant pursuant to an Option, as determined by the Committee.
(v) "Other Stock-Based Award" means an Award granted pursuant to Article 9
hereof.
(w) "Participant" means an Employee of the Company who has
outstanding an Award granted under the Plan.
(x) "Performance-Based Exception" means the performance-based exception
from the tax deductibility limitations of Code Section 162(m).
(y) "Performance Unit" means an Award granted to an Employee, as described
in Article 8 herein.
(z) "Performance Share" means an Award granted to an Employee, as described
in Article 8 herein.
(aa) "Period of Restriction" means the period during which the transfer of
Shares of Restricted Stock is limited in some way (based on the
passage of time, the achievement of performance goals, or upon the
occurrence of other events as determined by the Committee, at its
discretion), and the Shares are subject to a substantial risk of
forfeiture, as provided in Article 7 herein.
(ab) "Person" shall have the meaning ascribed to such term in Section
3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d)
thereof, including a "group" as defined in Section 13(d).
(ac) "Restricted Stock" means an Award granted to a Participant pursuant to
Article 7 herein.
(ad) "Retirement" shall have the meaning ascribed to such term in the
Participants' governing Company-sponsored Retirement plan.
(ae) "Shares" means Shares of common stock of the Company.
(af) "Subsidiary" means any corporation in which the Company owns directly,
or indirectly through subsidiaries, at least fifty percent (50%) of
the total combined voting power of all classes of stock, or any other
entity (including, but not limited to, partnerships and joint
ventures) in which the Company owns at least fifty percent (50%) of
the combined equity thereof.
(ag) "Window Period" means the period beginning on the third business day
following the date of public release of the Company's quarterly sales
and earnings information, and ending on the twelfth (12th) business
day following such date.
Article 3. Administration
3.1 The Committee. The Plan shall be administered by the Compensation
Committee of the Board or by any other Committee appointed by the Board
consisting of not less than two (2) Directors. The members of the Committee
shall be appointed from time to time by, and shall serve at the discretion of,
the Board of Directors.
The Committee shall be comprised solely of Directors who are Non-Employee
Directors, as defined in Rule 16b-3under the Exchange Act, as such Rule is
amended or changed from time to time.
3.2 Authority of the Committee. The Committee shall have full power except
as limited by law or by the Articles of Incorporation or Bylaws of the Company,
and subject to the provisions herein, to designate employees to be Participants
in the Plan; to determine the size and types of Awards; to determine the terms
and conditions of such Awards in a manner consistent with the Plan; to determine
whether, to what extent, and under what circumstances, Awards granted to
Participants may be settled or exercised in cash, Shares or other property; to
construe and interpret the Plan and any agreement or instrument entered into
under the Plan; to establish, amend, or waive rules and regulations for the
Plan's administration; and (subject to the provisions of Article 15 herein) to
amend the terms and conditions of any outstanding Award to the extent such terms
and conditions are within the discretion of the Committee as provided in the
Plan. Further, the Committee shall make all other determinations which may be
necessary or advisable for the administration of the Plan. As permitted by law,
the Committee may delegate its authorities as identified hereunder.
3.3 Decisions Binding. All determinations and decisions made by the
Committee pursuant to the provisions of the Plan and all related orders or
resolutions of the Board shall be final, conclusive, and binding on all persons,
including the Company, its shareholders, Employees, Participants, and their
estates and beneficiaries.
Article 4. Shares Subject to the Plan
4.1 Number of Shares Available for Grants. Subject to adjustment as
provided in section 4.3 herein, the number of Shares hereby reserved for
issuance to Participants under the Plan shall be six hundred thousand (900,000);
provided, however, that the maximum number of Shares of Restricted Stock granted
pursuant to Article 7 herein, shall be three hundred thousand (300,000).
Unless and until the Committee determines that an Award to a Named
Executive Officer shall not be designed to comply with the Performance-Based
Exception, the following rules shall apply to grants of such Awards to any Named
Executive Officer under the Plan:
(a) The maximum annual aggregate number of Options/SARs that may be
granted shall be two hundred twenty-five thousand (225,000); and
(b) The maximum annual aggregate number of Restricted Shares that may
be granted shall be seventy-five thousand (75,000); and
(c) The maximum annual aggregate number of Performance Shares that
may be granted shall be ninety thousand (90,000); and
(d) The maximum annual aggregate cash payout with respect to Awards
granted pursuant to Articles 8 and 9 herein which may be made to any
Named Executive Officer shall be four hundred fifty thousand dollars
($450,000); and
(e) The maximum annual aggregate number of Shares granted under Article
9 herein shall be one hundred twenty thousand (120,000).
4.2 Lapsed Awards. If any Award granted under this Plan is canceled,
terminates, expires, or lapses for any reason, any Shares subject to such Award
again shall be available for the grant of an Award under the Plan. However, in
the event that prior to the Award's cancellation, termination, expiration, or
lapse, the holder of the Award at any time received one or more "benefits of
ownership" pursuant to such Award (as defined by the Securities and Exchange
Commission, pursuant to any rule or interpretation promulgated under Section 16
of the Exchange Act), the Shares subject to such Award shall not be made
available for regrant under the Plan.
4.3 Adjustments in Authorized Shares. In the event of any merger,
reorganization, consolidation, recapitalization, separation, liquidation, stock
dividend, split-up, Share combination, or other change in the corporate
structure of the Company affecting the Shares, such adjustment shall be made in
the number and class of Shares which may be delivered under the Plan, and in the
number and class of and/or price of Shares subject to outstanding Awards granted
under the Plan, as may be determined to be appropriate and equitable by the
Committee, in its sole discretion, to prevent dilution or enlargement of rights;
and provided that the number of Shares subject to any Award shall always be a
whole number.
Article 5. Eligibility and Participation
5.1 Eligibility. Persons eligible to participate in this Plan include all
active Employees of the Company and its Subsidiaries, as determined by the
Committee, including Employees who are members of the Board, but excluding
Directors who are not Employees.
5.2 Actual Participation. Subject to the provisions of the Plan, the
Committee may, from time to time, select from all eligible Employees, those to
whom Awards shall be granted and shall determine the nature and amount of each
Award.
Article 6. Stock Options
6.1 Grant of Options. Subject to the terms and provisions of the Plan,
Options may be granted to Employees at any time and from time to time as shall
be determined by the Committee. The Committee shall have discretion in
determining the number of Shares subject to Options granted to each Participant.
The Committee may grant ISOs, NQSOs, or a combination thereof.
6.2 Award Agreement. Each Option grant shall be evidenced by an Award
Agreement that shall specify the Option Price, the duration of the Option, the
number of Shares to which the Option pertains, and such other provisions as the
Committee shall determine. The Award Agreement also shall specify whether the
Option is intended to be an ISO within the meaning of Section 422 of the Code,
or a NQSO whose grant is intended not to fall under the Code provisions of
Section 422.
6.3 Option Price. The Option Price for each grant of an Option under this
Section 6.3 shall be at least equal to one hundred percent (100%) of the Fair
Market Value of a Share on the date the Option is granted.
6.4 Duration of Options. Each Option shall expire at such time as the
Committee shall determine at the time of grant; provided, however, that no
Option shall be exercisable later than the tenth (10th) anniversary date of its
grant.
6.5 Dividend Equivalents. Simultaneous with the grant of a Nonqualified
Stock Option, the Participant receiving the Option may be granted, at no
additional cost, under any terms and conditions set forth by the Committee,
Dividend Equivalents. Each Dividend Equivalent shall entitle the Participant to
receive a contingent right to be paid an amount equal to the dividends declared
on a Share on all record dates occurring during the period between the grant
date of an Option and the date the Option is exercised.
The underlying value of each Dividend Equivalent shall accrue as a book
entry in the name of each Participant holding the Dividend Equivalent. Payout of
the accrued value of a Dividend Equivalent shall occur only in the event the
Option issued in tandem with the Dividend Equivalent is "in the money" (i.e.,
the Fair Market Value of Shares underlying the Option as of the exercise date
exceeds the Option Price) as of the exercise date. Payout of Dividend
Equivalents shall be made in cash or Shares, in one lump sum, within thirty (30)
days following the exercise of the corresponding Option, subject to such terms
and conditions as the Committee deems appropriate.
6.6 Exercise of Options. Options granted under the Plan shall be
exercisable at such times and be subject to such restrictions and conditions as
the Committee shall in each instance approve, which need not be the same for
each grant or for each Participant.
6.7 Payment. Options shall be exercised by the delivery of a written notice
of exercise to the Company, setting forth the number of Shares with respect to
which the Option is to be exercised, accompanied by full payment for the Shares.
The Option Price upon exercise of any Option shall be payable to the
Company in full either: (a) in cash or its equivalent, or (b) by tendering
previously acquired Shares having an aggregate Fair Market Value at the time of
exercise equal to the total Option Price (provided that the Shares which are
tendered must have been held by the Participant for at least six (6) months
prior to their tender to satisfy the Option Price), or (c) by a combination of
(a) and (b), as specified by the Committee.
The Committee also may allow cashless exercises as permitted under Federal
Reserve Board's Regulation T, subject to applicable securities law restrictions,
or by any other means which the Committee determines to be consistent with the
Plan's purpose and applicable law.
As soon as practicable after receipt of a written notification of exercise
and full payment, the Company shall deliver to the Participant, in the
Participant's name, Share certificates in an appropriate amount based upon the
number of Shares purchased under the Option(s).
6.8 Termination of Employment. Each Participant's Award Agreement shall set
forth the extent to which the Participant shall have the right to exercise the
Option following termination of the Participant's employment with the Company
and/or its Subsidiaries. Such provisions shall be determined in the sole
discretion of the Committee, shall be included in the Award Agreement entered
into with each Participant, need not be uniform among all Options issued
pursuant to this Article 6, and may reflect distinctions based on the reasons
for termination of employment.
6.9 Nontransferability of Options. No Option granted under the Plan may be
sold, transferred, pledged, assigned, or otherwise alienated or hypothecated,
other than by will or by the laws of descent and distribution. Further, all
Options granted to a Participant under the Plan shall be exercisable during his
or her lifetime only by such Participant, or, if permissible under applicable
law, by such Participant's guardian or legal representative.
Article 7. Restricted Stock
7.1 Grant of Restricted Stock. Subject to the terms and provisions of the
Plan, the Committee, at any time and from time to time, may grant Shares of
Restricted Stock to eligible Employees in such amounts as the Committee shall
determine.
7.2 Restricted Stock Agreement. Each Restricted Stock grant shall be
evidenced by an Award Agreement that shall specify the Period of Restriction, or
Periods, the number of Restricted Stock Shares granted, and such other
provisions as the Committee shall determine.
7.3 Transferability. Except as provided in this Article 7, the Shares of
Restricted Stock granted herein may not be sold, transferred, pledged, assigned,
or otherwise alienated or hypothecated until the end of the applicable Period of
Restriction established by the Committee and specified in the Award Agreement,
or upon earlier satisfaction of any other conditions, as specified by the
Committee in its sole discretion and set forth in the Award Agreement. All
rights with respect to the Restricted Stock granted to a Participant under the
Plan shall be available during his or her lifetime only to such Participant.
7.4 Other Restrictions. The Committee shall impose such other conditions
and/or restrictions on any Shares of Restricted Stock granted pursuant to the
Plan as it may deem advisable including, without limitation, a requirement that
Participants pay a stipulated purchase price for each Share of Restricted Stock,
restrictions based upon the achievement of specific performance goals
(Company-wide, divisional, and/or individual), and/or restrictions under
applicable Federal or state securities laws; and may legend the certificates
representing Restricted Stock to give appropriate notice of such restrictions.
7.5 Certificate Legend. In addition to any legends placed on certificates
pursuant to Section 7.4 herein, each certificate representing Shares of
Restricted Stock granted pursuant to the Plan may bear the following legend:
"The sale or other transfer of the Shares of stock represented by this
certificate, whether voluntary, involuntary, or by operation of law, is
subject to certain restrictions on transfer as set forth in the TNP
Enterprises, Inc. Equity Incentive Plan, and in an Award Agreement. A
copy of the Plan and such Award Agreement may be obtained from TNP
Enterprises, Inc."
The Company shall have the right to retain the certificates representing
Shares of Restricted Stock in the Company's possession until such time as all
conditions and/or restrictions applicable to such Shares have been satisfied.
7.6 Removal of Restrictions. Except as otherwise provided in this Article
7, Shares of Restricted Stock covered by each Restricted Stock grant made under
the Plan shall become freely transferable by the Participant after the last day
of the Period of Restriction. Once the Shares are released from the
restrictions, the Participant shall be entitled to have the legend required by
Section 7.5 removed from his or her Share certificate.
7.7 Voting Rights. During the Period of Restriction, Participants holding
Shares of Restricted Stock granted hereunder may exercise full voting rights
with respect to those Shares.
7.8 Dividends and Other Distributions. During the Period of Restriction,
Participants holding Shares of Restricted Stock granted hereunder may be
credited with all regular cash dividends paid with respect to all Shares while
they are so held. Except as provided in the succeeding sentence, all other cash
dividends and other distributions paid with respect to Shares of Restricted
Stock may be credited to Participants subject to the same restrictions on
transferability and forfeitability as the Shares of Restricted Stock with
respect to which they were paid. If any such dividends or distributions are paid
in Shares, the Shares shall be subject to the same restrictions on
transferability and forfeitability as the Shares of Restricted Stock with
respect to which they were paid. Subject to the succeeding paragraph, all
dividends credited to a Participant shall be paid to the Participant within
forty-five (45) days following the full vesting of the Shares of Restricted
Stock with respect to which such dividends were earned.
7.9 Termination of Employment. Each Award Agreement shall set forth the
extent to which the Participant shall have the right to receive unvested
Restricted Shares following termination of the Participant's employment with the
Company and/or its Subsidiaries. Such provisions shall be determined in the sole
discretion of the Committee, shall be included in the Award Agreement entered
into with each Participant, need not be uniform among all Shares of Restricted
Stock issued pursuant to the Plan, and may reflect distinctions based on the
reasons for termination of employment; provided, however, that except in the
cases of terminations connected with a Change in Control and terminations by
reason of death or Disability, the vesting of Shares of Restricted Stock which
qualify for the Performance-Based Exception and which are held by Named
Executive Officers shall occur at the time they otherwise would have, but for
the employment termination.
Article 8. Performance Units and Performance Shares
8.1 Grant of Performance Units/Shares. Subject to the terms of the Plan,
Performance Units and Performance Shares may be granted to eligible Employees at
any time and from time to time, as shall be determined by the Committee. The
Committee shall have complete discretion in determining the number of
Performance Units and Performance Shares granted to each Participant.
8.2 Award Agreement. Each Performance Share/Unit grant shall be evidenced
by an Award Agreement that shall specify the number of Performance Shares/Units
granted, the value of each Performance Share/Unit granted, the Performance
Period, the performance measures, and such other provisions as the Committee may
determine.
8.3 Value of Performance Units/Shares. Each Performance Unit shall have an
initial value that is established by the Committee at the time of grant. Each
Performance Share shall have an initial value equal to the Fair Market Value of
a Share on the date of grant. The Committee shall set performance goals in its
discretion which, depending on the extent to which they are met, will determine
the number and/or value of Performance Units/Shares that will be paid out to the
Participants. The time period during which the performance goals must be met
shall be called a "Performance Period." Performance Periods shall, in all cases,
exceed six (6) months in length.
8.4 Dividend Equivalents. Simultaneous with the grant of Performance
Units/Shares, the Participant receiving the Performance Units/Shares may be
granted, at no additional cost, Dividend Equivalents. Each Dividend Equivalent
shall entitle the Participant to receive a contingent right to be paid an amount
equal to the dividends declared on a Share on all record dates occurring during
the period between the grant of Performance Units/Shares and the date the
Performance Units/Shares are earned, subject to such terms and conditions as the
Committee deems appropriate.
The underlying value of each Dividend Equivalent shall accrue as a book
entry in the name of each Participant holding the Dividend Equivalent. Payout of
the accrued value of a Dividend Equivalent may be contingent on the achievement
of performance goal(s) set by the Committee which, depending on the extent to
which they are met, will determine the number and/or value of Dividend
Equivalents that will be paid out to the Participants. Notwithstanding the
foregoing, the Company or Subsidiary performance measures to be used for
purposes of grants to Named Executive Officers shall be chosen from and subject
to the conditions specified in Article 10 hereof.
Payout of Dividend Equivalents shall be made in cash or Shares or a
combination thereof, as determined by the Committee, in one (1) lump sum, within
thirty (30) days following the payout of Performance Units/Shares.
8.5 Earning of Performance Units/Shares. After the applicable Performance
Period has ended, the holder of Performance Units/Shares shall be entitled to
receive payout on the number and value of Performance Units/Shares earned by the
Participant over the Performance Period, to be determined by the Committee as a
function of the extent to which the corresponding performance goals have been
achieved.
8.6 Form and Timing of Payment of Performance Units/Shares. Payment of
earned Performance Units/Shares shall be made in a single lump sum, within
seventy-five (75) calendar days following the close of the applicable
Performance Period. The Committee, in its sole discretion, may pay earned
Performance Units/Shares in the form of cash or in Shares (or in a combination
thereof), which have an aggregate Fair Market Value equal to the value of the
earned Performance Units/Shares at the close of the applicable Performance
Period. Such Shares may be granted subject to any restrictions deemed
appropriate by the Committee.
At the discretion of the Committee, Participants may be entitled to receive
any dividends declared with respect to Shares which have been earned in
connection with grants of Performance Units and/or Performance Shares which have
been earned, but not yet distributed to Participants. (Such dividends shall be
subject to the same accrual, forfeiture, and payout restrictions as apply to
dividends earned with respect to Shares of Restricted Stock, as set forth in
Section 7.8 herein.) In addition, Participants may, at the discretion of the
Committee, be entitled to exercise their voting rights with respect to such
Shares.
8.7 Termination of Employment Due to Death, Disability, Retirement, or
Involuntary Termination Without Cause. In the event the employment of a
Participant is terminated by reason of death, Disability, Retirement, or
involuntary termination without Cause during a Performance Period, the
Participant shall receive a prorated payout of the Performance Units/Shares. The
prorated payout shall be determined by the Committee, in its sole discretion,
and shall be based upon the length of time that the Participant held the
Performance Units/Shares during the Performance Period, and shall further be
adjusted based on the achievement of the preestablished performance goals.
Payment of earned Performance Units/Shares shall be made at the same time
payments are made to Participants who did not terminate employment during the
applicable Performance Period.
8.8 Termination of Employment for Other Reasons. In the event that a
Participant's employment terminates for any reason other than those reasons set
forth in Section 8.7 herein, all Performance Units/Shares shall be forfeited by
the Participant to the Company. The Committee, however, in its sole discretion,
shall have the right to make payment of Awards for any Performance Periods
coincident with terminations pursuant to this Section 8.8.
8.9 Nontransferability. Except as provided in a Participant's Award
Agreement, Performance Units/Shares may not be sold, transferred, pledged,
assigned, or otherwise alienated or hypothecated, other than by will or by the
laws of descent and distribution. Further, a Participant's rights under the Plan
shall be exercisable during the Participant's lifetime only by the Participant
or the Participant's legal representative.
Article 9. Other Stock-Based Awards
Subject to the terms of the Plan, Other Stock-Based Awards may be granted
to eligible Employees at any time and from time to time and in such amounts and
upon such terms as the Committee deems appropriate.
Article 10. Performance Measures
Unless and until the Committee proposes for shareholder vote and
shareholders approve a change in the general performance measures set forth in
this Article 10, the attainment of which may determine the degree of payout
and/or vesting with respect to Awards to Named Executive Officers which are
designed to qualify for the Performance-Based Exception, the performance
measure(s) to be used for purposes of such grants shall be chosen from among the
following alternatives:
-Earnings per share;
-Measurements of cost control effectiveness such as the ratio of operations
and maintenance costs to kilowatt hour sales;
-Measurements of community involvement and customer satisfaction;
-Measurements of anticipation and resolution of environmental issues;
-Measurements of reliability such as the equivalent forced outage rate,
minutes of outage per customer served, and number of customers interrupted
per customer served;
-Measurements of employee safety;
-Measurements of long-term rate competitiveness;
-Total shareholder return compared to one or more groups as determined by
the Incentive Plan Committee; and Cash value added.
The Committee shall have the discretion to adjust the determinations of the
degree of attainment of the preestablished performance goals; provided, however,
that Awards which are designed to qualify for the Performance-Based Exception,
and which are held by the Named Executive officers, may not be adjusted upward.
(The Committee shall retain the discretion to adjust such Awards downward.)
In the event that applicable tax and/or securities laws change to permit
Committee discretion to alter the governing performance measures without
obtaining shareholder approval of such changes, the Committee shall have sole
discretion to make such changes without obtaining shareholder approval. In
addition, in the event the Committee determines it is advisable to grant Awards
which shall not qualify for the Performance-Based Exception, the Committee may
make such grants without satisfying the requirements of Code Section 162(m).
Article 11. Beneficiary Designation
Each Participant under the Plan may, from time to time, name any
beneficiary or beneficiaries (who may be named contingently or successively) to
whom any benefit under the Plan is to be paid in case of his or her death before
he or she receives any or all of such benefit. Each such designation shall
revoke all prior designations by the same Participant, shall be in a form
prescribed by the Company, and will be effective only when filed by the
Participant in writing with the Company during the Participant's lifetime. In
the absence of any such designation, benefits remaining unpaid at the
Participant's death shall be paid to the Participant's estate.
The spouse of a married Participant domiciled in a community property
jurisdiction shall join in any designation of beneficiary or beneficiaries other
than the spouse.
Article 12. Deferrals
The Committee, in its sole discretion, may permit or require a Participant
to defer such Participant's receipt of the payment of cash or the delivery of
Shares that would otherwise be due to such Participant by virtue of the exercise
of an Option or the lapse or waiver of restrictions with respect to Restricted
Stock, or the satisfaction of any requirements or goals with respect to
Performance Units/Shares or Other Stock-Based Awards hereunder. If any such
deferral election is required or permitted, the Committee shall, in its sole
discretion, establish rules and procedures for such payment deferrals.
Article 13. Rights of Employees
13.1 Employment. Nothing in the Plan shall interfere with or limit in any
way the right of the Company to terminate any Participant's employment at any
time, nor confer upon any Participant any right to continue in the employ of the
Company.
For purposes of the Plan, transfer of employment of a Participant between
the Company and any one of its Subsidiaries, or vice-versa, (or between
Subsidiaries) shall not be deemed a termination of employment. Upon such a
transfer, the Committee may make such adjustments to outstanding Awards as it
deems appropriate to reflect the changed reporting relationships.
13.2 Participation. No Employee shall have the right to be selected to
receive an Award under this Plan, or, having been so selected, to be selected to
receive a future Award.
Article 14. Change in Control
Upon the occurrence of a Change in Control, unless otherwise specifically
prohibited by applicable law or by the rules and regulations of any governmental
agencies or national securities exchanges:
(a) Any and all Options granted hereunder shall become immediately
exercisable;
(b) Any Period of Restriction and restrictions imposed on Restricted
Shares shall lapse;
(c) The target payout opportunity attainable under all outstanding
Awards of Restricted Stock, Performance Units, Performance
Shares, and Other Stock-Based Awards shall be deemed to have been
fully earned for the entire Performance Period(s) as of the
effective date of the Change in Control. The vesting of all
Awards denominated in Shares shall be accelerated as of the
effective date of the Change in Control, and there shall be paid
out in cash to Participants within thirty (30) days following the
effective date of the Change in Control the full portion of such
target payout opportunity; provided, however, that if the
effective date of the Change in Control is within six months
after the grant of an Award of Restricted Stock, Performance
Units, Performance Shares, or Other Stock-Based Awards, then the
payout to a Participant shall not occur until the earlier of (i)
the scheduled payout or vesting date of such Award or (ii) upon
the actual or constructive termination of the Participant, if
such termination occurs during the two-year period following such
effective date; and
(d) Subject to Article 15 herein, the Committee shall have the authority
to make any modifications to the Awards as determined by the Committee
to be appropriate before the effective date of the Change in Control.
Article 15. Amendment, Modification, and Termination
15.1 Amendment, Modification, and Termination. The Board may, at any time,
and from time to time, alter, amend, suspend or terminate the Plan in whole or
in part; provided, that no amendment which requires shareholder approval in
order for the Plan to continue to comply with Rule 16b-3 under the Exchange Act,
including any successor to such Rule, shall be effective unless such amendment
shall be approved by the requisite vote of shareholders of the Company entitled
to vote thereon.
The Committee shall not have the authority to cancel outstanding Awards and
issue substitute Awards in replacement thereof.
15.2 Awards Previously Granted. No termination, amendment, or modification
of the Plan shall adversely affect in any material way any Award previously
granted under the Plan, without the written consent of the Participant holding
such Award.
15.3 Compliance With Code Section 162(m). At all times when Code Section
162(m) is applicable, all Awards granted under this Plan shall comply with the
requirements of Code Section 162(m); provided, however, that in the event the
Committee determines that such compliance is not desired with respect to any
Award or Awards available for grant under the Plan, then compliance with Code
Section 162(m) will not be required. In addition, in the event changes are made
to Code Section 162(m) to permit greater flexibility with respect to any Award
or Awards available under the Plan, the Committee may, subject to this Article
15, make any adjustments it deems appropriate.
Article 16. Withholding
16.1 Tax Withholding. The Company shall have the power and the right to
deduct or withhold, or require a Participant to remit to the Company, an amount
sufficient to satisfy Federal, state, and local taxes (including the
Participant's FICA obligation) required by law to be withheld with respect to
any taxable event arising or as a result of any Award to a Participant under
this Plan.
16.2 Share Withholding. With respect to withholding required upon the
exercise of Options, upon the lapse of restrictions on Restricted Stock, or upon
any other taxable event arising as a result of Awards granted hereunder,
Participants may elect, subject to the approval of the Committee, to satisfy the
withholding requirement, in whole or in part, by having the Company withhold
Shares having a Fair Market Value on the date the tax is to be determined equal
to the minimum statutory total tax which could be imposed on the transaction.
The Committee may establish such procedures as it deems appropriate for the
settling of withholding obligations with Shares, including, without limitation,
the establishment of such procedures as may be necessary to comply with the
requirements of Rule 16b-3, unless otherwise determined by the Committee.
Article 17. Indemnification
Each person who is or shall have been a member of the Committee, or of the
Board, shall be indemnified and held harmless by the Company against and from
any loss, cost, liability, or expense that may be imposed upon or reasonably
incurred by him or her in connection with or resulting from any claim, action,
suit, or proceeding to which he or she may be a party or in which he or she may
be involved by reason of any action taken or failure to act under the Plan and
against and from any and all amounts paid by him or her in settlement thereof,
with the Company's approval, or paid by him or her in satisfaction of any
judgment in any such action, suit, or proceeding against him or her, provided he
or she shall give the Company an opportunity, at its own expense, to handle and
defend the same before he or she undertakes to handle and defend it on his or
her own behalf. The foregoing right of indemnification shall not be exclusive of
any other rights of indemnification to which such persons may be entitled under
the Company's Articles of Incorporation or Bylaws, as a matter of law, or
otherwise, or any power that the Company may have to indemnify them or hold them
harmless.
Article 18. Successors
All obligations of the Company under the Plan, with respect to Awards
granted hereunder, shall be binding on any successor to the Company, whether the
existence of such successor is the result of a direct or indirect purchase,
merger, consolidation, or otherwise, of all or substantially all of the business
and/or assets of the Company.
Article 19. Restrictions on Share Transferability
In addition to any restrictions imposed pursuant to the Plan, all
certificates for Shares delivered under the Plan pursuant to any Award or the
exercise thereof shall be subject to such stop transfer orders and other
restrictions as the Committee may deem advisable under the Plan or the rules,
regulations, and other requirements of the Securities and Exchange Commission,
any stock exchange or market upon which such Shares are then listed or traded,
any applicable Federal or state securities laws, and the Committee may cause a
legend or legends to be put on any such certificates to make appropriate
reference to such restrictions.
Article 20. Legal Construction
20.1 Gender and Number. Except where otherwise indicated by the context,
any masculine term used herein also shall include the feminine; the plural shall
include the singular and the singular shall include the plural.
20.2 Severability. In the event any provision of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.
20.3 Requirements of Law. The granting of Awards and the issuance of Shares
under the Plan shall be subject to all applicable laws, rules, and regulations,
and to such approvals by any governmental agencies or national securities
exchanges as may be required.
20.4 Securities Law Compliance. With respect to Insiders, transactions
under this Plan are intended to comply with all applicable conditions or Rule
16b-3 or its successors under the 1934 Act. To the extent any provision of the
Plan or action by the Committee fails to so comply, it shall be deemed null and
void, to the extent permitted by law and deemed advisable by the Committee.
20.5 Governing Law. To the extent not preempted by Federal law, the Plan,
and all agreements hereunder, shall be construed in accordance with and governed
by the laws of the State of Texas.
