<PAGE>
As filed with the Securities and Exchange Commission on October 20, 2000
Registration No. 333-42116
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 1
To
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
TNP ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Texas 4911 75-1907501
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
4100 International Plaza
Fort Worth, Texas 76113
(817) 731-0099
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Theodore A. Babcock
2 Robbins Lane
Suite 201
Jericho, New York 11753
(516) 933-3100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
M. Douglas Dunn, Esq.
Roland Hlawaty, Esq.
Milbank, Tweed, Hadley & McCloy LLP
1 Chase Manhattan Plaza
New York, NY 10005
(212) 530-5000
---------------
Approximate Date of Commencement of Proposed Sale to the Public: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Maximum Proposed Maximum
Title Of Amount To Be Offering Price Per Aggregate Offering Amount Of
Each Class Of Securities To Be Registered Registered (1) Unit Price Registration Fee
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
14 1/2% Senior Redeemable Preferred Stock,
Series D........................................ 105,075 shares $1,000 $105,075,000 $27,739.80 (2)
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</TABLE>
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(1) Plus such indeterminable number of additional shares of Preferred Stock
which may be issued as dividends in accordance with the terms of the
Preferred Stock.
(2) $26,400 was previously paid in connection with the filing of the S-4 on
July 24, 2000.
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
PROSPECTUS
$105,075,000
TNP Enterprises, Inc.
Offer to Exchange
14 1/2% Senior Redeemable Preferred Stock, Series D,
for any and all outstanding
14 1/2% Senior Redeemable Preferred Stock, Series C
This prospectus and accompanying letter of transmittal relate to our
proposed offer to exchange up to $105,075,000 aggregate initial liquidation
preference of new 14 1/2% Senior Redeemable Preferred Stock, Series D (the
"registered senior preferred stock"), which will be freely transferable, for
any and all outstanding 14 1/2% Senior Redeemable Preferred Stock, Series C,
issued on May 26, 2000 (the "old senior preferred stock"), which have transfer
restrictions.
. The exchange offer expires at 5:00 p.m., New York City time, on November
22, 2000, unless extended.
. The terms of the registered senior preferred stock are substantially
identical to the old senior preferred stock, including the liquidation
preference and dividend rate.
. All old senior preferred stock that are validly tendered and not validly
withdrawn will be exchanged.
. Tenders of old senior preferred stock may be withdrawn at any time prior
to expiration of the exchange offer.
. We do not intend to apply for listing of the registered senior preferred
stock on any securities exchange or to arrange for it to be quoted on
any quotation system.
. The only conditions to completing the exchange offer are that the
exchange offer not violate applicable law or any applicable
interpretation of the staff of the Securities and Exchange Commission
and no injunction, order or decree has been issued which would prohibit,
prevent or materially impair our ability to proceed with the exchange
offer.
----------------
Please see "Risk Factors" beginning on page 11 for a discussion of factors
you should consider in connection with the exchange offer.
----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the registered senior preferred
stock, or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The date of this prospectus is October 23, 2000.
<PAGE>
TABLE OF CONTENTS
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Page
----
<S> <C>
WHERE TO FIND MORE INFORMATION............................................. i
FORWARD-LOOKING STATEMENTS................................................. iii
SPECIAL NOTE REGARDING PRIVATE PLACEMENT INFORMATION....................... iv
PROSPECTUS SUMMARY......................................................... 1
RISK FACTORS............................................................... 11
RECENT EVENTS.............................................................. 19
RATIO OF COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS TO EARNINGS........ 20
THE EXCHANGE OFFER......................................................... 21
USE OF PROCEEDS............................................................ 31
CAPITALIZATION............................................................. 32
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA........................... 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................................... 35
BUSINESS................................................................... 48
MANAGEMENT................................................................. 59
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS............................ 64
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS....................... 65
DESCRIPTION OF CERTAIN INDEBTEDNESS AND PREFERRED EQUITY................... 66
DESCRIPTION OF THE EXCHANGE SENIOR PREFERRED STOCK......................... 71
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS........................... 102
PLAN OF DISTRIBUTION....................................................... 106
LEGAL MATTERS.............................................................. 106
INDEPENDENT ACCOUNTANTS.................................................... 106
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
</TABLE>
<PAGE>
WHERE TO FIND MORE INFORMATION
In connection with the exchange offer, we have filed with the Securities and
Exchange Commission (the "SEC") a registration statement under the Securities
Act of 1933, as amended (the "Securities Act"), relating to the registered
shares of senior preferred stock to be issued in the exchange offer. As
permitted by SEC rules, this prospectus omits information included in the
registration statement. For a more complete understanding of this exchange
offer, you should refer to the registration statement, including its exhibits.
We file annual, quarterly and current reports as well as other information
with the SEC. The public may read and copy any reports or other information
that we file with the SEC at the SEC's public reference room, Room 1024 at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, or at the
SEC's regional offices located at 7 World Trade Center, 13th Floor, New York,
New York 10048, and Suite 1400, 500 West Madison Street, Chicago, Illinois
60661. The public may obtain information on the operation of the public
reference room by calling the SEC at 1-800-SEC-0330. Our SEC filings are also
available to the public from commercial document retrieval services and at the
web site maintained by the SEC at http://www.sec.gov.
We have applied to the SEC for deregistration of the common stock of TNP
Enterprises, Inc. under the Exchange Act. We have agreed that, whether or not
we are required to do so by the rules and regulations of the SEC, for so long
as any of the shares of senior preferred stock remain outstanding, we will
furnish to the holders of the shares of senior preferred stock and file with
the SEC (unless the SEC will not accept such a filing): (i) all quarterly and
annual financial information that would be required to be contained in a filing
with the SEC on Forms 10-Q and 10-K if we were required to file such forms,
including a "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and, with respect to the annual information only, a
report thereon by our certified independent accountants and (ii) all reports
that would be required to be filed with the SEC on Form 8-K if we were required
to file such reports. In addition, for so long as any of the shares of senior
preferred stock remain outstanding, we have agreed to make available to any
prospective purchaser of the shares of senior preferred stock or beneficial
owner of the shares of senior preferred stock in connection with any sale
thereof the information required by Rule 144A(d)(4) under the Securities Act.
We are "incorporating by reference" information into this prospectus. This
means that we are disclosing important information by referring to another
document filed separately with the SEC. The information incorporated by
reference is deemed to be part of this prospectus, except for any information
superseded by information in this prospectus. This prospectus incorporates by
reference the documents set forth below that we have previously filed with the
SEC and any future filings made with the SEC under Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
thereafter. These documents contain important information about us.
SEC Filing (File No. 001-08847) Period/Date
Annual Report on Form 10-K Year ended December 31, 1999
Current Report on Form 8-K Filed with the SEC on April 21, 2000
Current Report on Form 8-K Filed with the SEC on May 2, 2000
Current Report on Form 8-K Filed with the SEC on August 17, 2000
Quarterly Report on Form 10-Q For the Quarter Ended March 31, 2000
Quarterly Report on Form 10-Q For the Quarter Ended June 30, 2000
Proxy Statement Filed with the SEC on August 12, 1999
i
<PAGE>
You may also obtain a copy of these filings and the exchange offer
registration statement at no cost by writing or telephoning us at the following
address:
TNP Enterprises, Inc.
4100 International Plaza
PO Box 2943
Fort Worth, Texas 76109
(817) 731-0099
Attention: Corporate Secretary
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
information that is different from this information.
ii
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus may contain statements regarding our assumptions,
projections, expectations, intentions or beliefs about future events. We intend
these statements to be "forward-looking statements" under the Private
Securities Litigation Reform Act of 1995 and for purposes of the safe harbor
provided by Section 21E of the Exchange Act, and Section 27A of the Securities
Act. We caution that these statements may and often do vary from actual results
and the differences between these statements and actual results can be
material. Accordingly, we cannot assure you that actual results will not differ
materially from those expressed or implied by the forward-looking statements.
Some of the factors that could cause actual events to differ materially from
those expressed or implied in any forward-looking statement are:
. our ability to recover stranded costs;
. state and federal legislative and regulatory initiatives or proceedings
that affect the recovery of our investments or that have an impact on
rate structures and our results of operations and cash flow;
. the weather and other natural phenomena;
. the timing and extent of changes in costs of labor and prices of natural
resources and commodities;
. interest rates;
. changes in environmental and other laws and regulations to which we and
our subsidiaries are subject or other external factors over which we
have no control;
. the results of financing efforts;
. expansion and other growth opportunities;
. our ability to adapt to the transition to open market competition
enacted by our legislators and regulators;
. technology advances in energy supply and distribution; and
. the effect of accounting policies issued periodically by accounting
standard-setting bodies.
We discuss these factors more completely in our filings with the SEC,
including our annual report on Form 10-K for the year ended December 31, 1999,
and the quarterly reports on Form 10-Q for the Quarters ended March 31, 2000
and June 30, 2000, all of which are incorporated by reference into this
prospectus.
iii
<PAGE>
SPECIAL NOTE REGARDING PRIVATE PLACEMENT INFORMATION
In connection with the financing of the merger of ST Acquisition Corp. with
and into TNP Enterprises, Inc., we pursued private placements of our preferred
equity and some existing limited partners pursued a sale of their rights to
acquire partnership interests in SW Acquisition, L.P. These efforts continued
subsequent to the closing of the merger. In connection with such efforts, we
distributed Private Placement Memoranda and made projections available upon
request (together with the Private Placement Memoranda, the "Private Placement
Information") to a limited number of prospective institutional investors
including to persons that may be existing holders of the shares of senior
preferred stock or our 10.25% senior subordinated notes due 2010 or purchasers
in the secondary market of the senior preferred stock or the senior
subordinated notes. Because the financial information contained in an offering
memorandum pursuant to Rule 144A such as the offering memorandum relating to
the old senior preferred stock is customarily more limited than that contained
in a traditional private placement made to institutional investors who are
expected to conduct their own comprehensive due diligence review of the issuer,
the Private Placement Information contained certain five-year projections and
forecasts that were not included or incorporated by reference in the offering
memorandum supplement relating to our senior preferred stock or the offering
memorandum relating to our senior subordinated notes and are not included or
incorporated by reference in this prospectus.
These forecasts have not been and are not expected to be made public and we
do not intend to update or otherwise revise the forecasts to reflect events or
circumstances after the date of the forecasts or to reflect the occurrence of
unanticipated events. As with all projected financial information, these
forecasts are subject to numerous uncertainties, many of which are beyond our
control and contain assumptions that may not be attainable. These forecasts and
actual results may vary and these variations may be material. THIS PROSPECTUS
IS INTENDED TO SUPERSEDE AND REPLACE THE PRIVATE PLACEMENT INFORMATION AND
HOLDERS OF THE OLD SHARES OF SENIOR PREFERRED STOCK AND PROSPECTIVE INVESTORS
ARE CAUTIONED THAT, IN MAKING THEIR INVESTMENT DECISION, THEY SHOULD NOT RELY,
AND WILL BE DEEMED NOT TO HAVE RELIED, UPON ANY INFORMATION CONTAINED IN THE
PRIVATE PLACEMENT INFORMATION THAT IS NOT CONTAINED OR EXPRESSLY INCORPORATED
BY REFERENCE IN THIS PROSPECTUS.
iv
<PAGE>
PROSPECTUS SUMMARY
The following summary contains basic information about the offering. It
likely does not contain all the information that is important to you. For a
more complete understanding of the offering, we encourage you to read this
entire document. As used in this prospectus, unless the context indicates
otherwise, all references to (i) "we", "our" and "us" collectively are to TNP
Enterprises, Inc. and its subsidiaries, (ii) "TNMP" are to Texas-New Mexico
Power Company, (iii) "TNP" are only to TNP Enterprises, Inc. and not to any of
its subsidiaries.
The Company
TNP is a holding company whose primary operating subsidiary is TNMP, a
regulated public utility engaged in generating, purchasing, transmitting and
selling electricity to approximately 235,000 residential, commercial and
industrial customers in Texas and New Mexico. TNMP's operations consist
primarily of the transmission and distribution of electricity from various
third-party power plants to end users of electricity. For the year ended
December 31, 1999, our customers in Texas and New Mexico accounted for
approximately 86% and 14% of our operating revenues, respectively. For the six
months ended June 30, 2000, Texas and New Mexico customers accounted for 84%
and 16% of our operating revenues, respectively. Also, for the year ended
December 31, 1999, we generated revenues of $576.2 million, and for the six
months ended June 30, 2000, we generated revenues of $280.5 million.
TNMP serves a diverse group of residential and commercial customers as well
as a variety of industrial customers, including petrochemical, agricultural,
mining and petroleum firms. Our base revenues (operating revenues less certain
costs that we are permitted to pass through directly to our customers) are
generated primarily from residential and commercial customers. In 1999, these
customers accounted for 49% and 35% of our base revenues, respectively.
Industrial customers, who primarily pay us for the delivery of electricity,
generate the remaining 16% of our base revenues. For the six months ended June
30, 2000, residential and commercial customers accounted for 45% and 38% of our
base revenues, while industrial customers accounted for 15% of base revenues.
We generate approximately 20% of the electricity we sell and we purchase the
remaining 80% from various third party power suppliers. Our self-generated
electricity is provided by TNP One, a 300-megawatt electric power plant located
in Robertson County, Texas. For the balance of our electricity requirements we
have entered into purchased power agreements with various third party
suppliers.
Our utility operations are subject to regulation by the Public Utility
Commission of Texas, or PUCT, and the New Mexico Public Regulation Commission,
or NMPRC. Some of our activities are also under the jurisdiction of the Federal
Energy Regulatory Commission, or FERC. We are also subject to legislation in
the states in which we operate. As the result of recent legislation in Texas
and New Mexico deregulating the electric utility industries in those states, we
will be required to restructure our operations. See the "Industry" and
"Business--Government Regulations--Regulatory Matters" sections of this
prospectus.
Business Strategy
We seek to position ourselves as a strong competitor in the increasingly
deregulated utility industry in the regions we serve. Key elements of this
strategy include the following:
. Focus on transmission and distribution segments of the utility business
which will continue to be regulated.
. Provide electric service to residential and commercial customers in
small and medium-sized communities.
. Expand industrial sales.
. Manage purchased power costs.
. Continue to seek to increase our flexibility to take advantage of
favorable pricing and new capacity additions in the marketplace by
shortening the average life of our power contracts.
1
<PAGE>
Recent Events
On April 7, 2000, ST Acquisition Corp., a Texas corporation, merged with and
into TNP. TNP is the surviving corporation in the merger. Upon closing, each
outstanding share of TNP's common stock that was outstanding at the effective
time of the merger was automatically converted into the right to receive $44.00
in cash. Prior to the merger, TNP's common stock was traded on the New York
Stock Exchange. As a result of the merger, TNP is no longer publicly held. SW
Acquisition, L.P., or Parent, a Texas limited partnership and the parent of ST
Acquisition Corp., now holds all outstanding common stock of TNP.
The general partner of Parent is SW I Acquisition GP, L.P., a Texas limited
partnership, which is ultimately controlled by Dr. William J. Catacosinos, the
former chairman and chief executive officer of Long Island Lighting Company, or
LILCO. The limited partners in Parent are affiliates of CIBC World Markets
Corp., or CIBC, Caravelle Investment Fund, L.L.C., or Caravelle, Continental
Casualty Company, and Laurel Hill Capital Partners, LLC, or Laurel Hill.
The total financing for the merger was approximately $838.0 million, $591.6
million of which was required to pay the merger consideration.
On April 7, 2000, we issued in a private placement $275.0 million in
aggregate principal amount of our 10.25% senior subordinated notes due 2010. On
May 26, 2000, we redeemed $100.0 million of our senior redeemable preferred
stock issued in connection with the merger with the net proceeds from the sale
of units by TNP and Parent consisting of senior preferred stock and 100,000
warrants to purchase limited partnership interests in Parent, together with
cash on hand and drawings under the revolving portion of our senior secured
credit facility.
On June 1, 2000, TNMP closed its offer to repurchase its Series U first
mortgage bonds and its Series A secured debentures pursuant to their respective
change of control provisions that were triggered by the merger. TNMP
repurchased approximately $90.5 million of its first mortgage bonds and $112.8
million of secured debentures pursuant to its tender offer to the holders of
those securities with drawings under its backstop credit facility.
On September 15, 2000, TNMP redeemed the remaining $27.2 million of Series A
secured debentures and $9.5 million of Series U first mortgage bonds. TNMP
financed the redemption by drawing $36.0 million from its existing bank
facility as well as using cash on hand, to pay principal and accrued interest.
The Exchange Offer
We entered into a registration rights agreement with the initial purchasers
of shares of the old senior preferred stock in which we agreed to deliver to
you this prospectus and to complete the exchange offer on or prior to
November 22, 2000. You are entitled to exchange your old senior preferred stock
in the exchange offer for the applicable registered senior preferred stock with
substantially identical terms. We believe that the registered shares to be
issued in the exchange offer may be resold by you without compliance with the
registration and prospectus delivery requirements of the Securities Act,
subject to certain limited conditions. You should read the discussion under the
headings "The Exchange Offer" and "Description of the Exchange Senior Preferred
Stock" for further information regarding the registered senior preferred stock.
2
<PAGE>
The Exchange Offer
The Exchange Offer..........
TNP Enterprises, Inc is offering to exchange
$1,000 initial liquidation preference of 14 1/2%
senior redeemable preferred stock, Series D,
which have been registered under the Securities
Act, for each $1,000 initial liquidation
preference of 14 1/2% senior redeemable preferred
stock, Series C, which were issued either on
May 26, 2000 in a private placement under Rule
144A of the Securities Act or on October 2, 2000
as dividends on the outstanding senior preferred
stock.
The terms of the registered senior preferred
stock and the old senior preferred stock are
substantially identical, except that the
registered senior preferred stock will be freely
transferable and issued free of any covenants
regarding exchange and registration rights.
In order to be exchanged, a share of old senior
preferred stock must be properly tendered and
accepted. We will exchange all shares of old
senior preferred stock validly tendered and not
validly withdrawn.
As of this date, there is $105.075 million
aggregate initial liquidation preference of old
senior preferred stock outstanding. We will issue
shares of the registered senior preferred stock
promptly after the expiration of the exchange
offer.
Registration Rights......... You are entitled under a registration rights
agreement to exchange the old senior preferred
stock that you now hold for registered senior
preferred stock with substantially identical
terms. This exchange offer is intended to satisfy
these rights. After the exchange offer is
complete, you will no longer be entitled to any
exchange or registration rights with respect to
your senior preferred stock. See "The Exchange
Offer".
Expiration Date.............
The exchange offer expires at 5:00 p.m., New York
time on November 22, 2000 unless we extend
it, and we will consummate the exchange on the
next business day.
Resales of Registered
Senior Preferred Stock..... Based on SEC no action letters, we believe that
after the exchange offer you may offer and sell
the registered senior preferred stock without
registration under the Securities Act so long as:
. you are acquiring the registered senior
preferred stock issued in the exchange offer
in the ordinary course of your business;
. when the exchange offer begins you do not have
an arrangement with another person to
participate in a distribution of the
registered senior preferred stock; and
. you are not engaged in a distribution of, nor
do you intend to distribute, the registered
senior preferred stock.
3
<PAGE>
When you tender the old senior preferred stock we
will ask you to represent to us that:
. you will acquire the registered senior
preferred stock in the ordinary course of
business;
. you are not our "affiliate", as defined under
Rule 405 of the Securities Act; and
. when the exchange offer begins you are not
engaged in nor do you have plans with another
person to be engaged in a distribution of the
registered senior preferred stock.
If you are unable to make these representations,
you will be required to comply with the
registration and prospectus delivery requirements
under the Securities Act in connection with any
secondary resale transaction.
If you are a broker-dealer and receive registered
senior preferred stock for your own account, you
may be deemed to be an "underwriter" within the
meaning of the Securities Act, and you must
acknowledge that you will deliver a prospectus if
you resell the registered senior preferred stock.
By acknowledging your intent and delivering a
prospectus you will not be deemed to admit that
your are an "underwriter" under the Securities
Act. For a period of 180 days after the exchange
offer is consummated or until the old senior
preferred stock is resold, whichever comes first,
we will make this prospectus available to any
broker-dealer in connection with such a resale.
See "Plan of Distribution."
If necessary, we will cooperate with you to
register and qualify the registered senior
preferred stock for offer or sale without any
restrictions or limitations under state "blue
sky" laws.
Transfer Restrictions on
the Senior Preferred You may incur liability under the Securities Act
Stock...................... if:
. any of the representations listed above are
not true; or
. you transfer any registered senior preferred
stock issued to you in the exchange without:
(1) delivering a prospectus meeting the
requirements of the Securities Act, or
(2) qualifying for an exemption under the
Securities Act's requirements to register
your registered senior preferred stock.
TNP does not assume or indemnify you against that
liability. Each broker-dealer that receives
registered senior preferred stock for its own
account in exchange for old senior preferred
stock, where old senior preferred stock was
acquired by that broker-dealer as a result of
market-making or other trading activities, must
acknowledge that it will deliver a prospectus in
connection with any resale of registered senior
preferred stock. A broker-dealer may use this
prospectus for an offer to resell or to otherwise
transfer these registered shares of senior
preferred stock.
4
<PAGE>
Conditions.................. The only conditions to completing the exchange
offer are that the exchange offer not violate
applicable law or any applicable interpretation
of the staff of the SEC and no injunction, order
or decree has been issued which would prohibit,
prevent or materially impair our ability to
proceed with the exchange offer. See "The
Exchange Offer--Conditions of the Exchange
Offer".
Procedures for Tendering
Old Senior Preferred The shares of old senior preferred stock were
Stock...................... issued as global securities in fully registered
form without coupons. Beneficial interests in the
shares of old senior preferred stock that direct
or indirect participants in The Depository Trust
Company or DTC hold through certificateless
depositary interests are shown on records
maintained in book-entry form by DTC with respect
to its participants, and transfers of the shares
of old senior preferred stock can be made only
through such records. If you are a holder of a
share of senior preferred stock held in the form
of a book-entry interest and you wish to tender
your share of old senior preferred stock for
exchange pursuant to the exchange offer, you must
transmit to The Bank of New York, as exchange
agent, on or prior to the expiration of the
exchange offer either:
(1) a written or facsimile copy of a properly
completed and executed letter of
transmittal and all other required
documents to the address set forth on the
cover page of the letter of transmittal;
or
(2) a computer-generated message transmitted
by means of DTC's Automated Tender Offer
Program system and forming a part of a
confirmation of book-entry transfer in
which you acknowledge and agree to be
bound by the terms of the letter of
transmittal.
The exchange agent must also receive on or prior
to the expiration of the exchange offer either:
. a timely confirmation of book-entry transfer
of your old shares of old senior preferred
stock into the exchange agent's account at DTC
in accordance with the procedure for book-
entry transfers described in this prospectus
under the heading "The Exchange Offer--Book-
Entry Transfer", or
. the documents necessary for compliance with
the guaranteed delivery procedures described
below.
A letter of transmittal accompanies this
prospectus. By executing the letter of
transmittal or delivering a computer-generated
message through DTC's Automated Tender Offer
Program system, you will represent to us, among
other things, all the items listed below:
. you are acquiring the shares of registered
senior preferred stock issued in the exchange
offer in the ordinary course of your business;
5
<PAGE>
. you are not participating, do not intend to
participate and have no arrangement or
understanding with any person to participate
in the distribution of the shares of
registered senior preferred stock to be issued
to you in the exchange offer;
. you are not an initial purchaser who acquired
shares of old senior preferred stock directly
from TNP in the initial offering to resell
pursuant to Rule 144A, Regulation S or any
other available exemption under the Securities
Act; and
. you are not our "affiliate", as defined under
Rule 405 of the Securities Act.
Failure to Exchange Will
Affect You Adversely....... If you do not exchange your old senior preferred
stock for the registered senior preferred stock
pursuant to the exchange offer you will still be
subject to the restrictions on transfer of your
old senior preferred stock as contained in the
legend on the old senior preferred stock. In
general, you may not offer to sell or sell the
old senior preferred stock, except pursuant to a
registration statement under the Securities Act
or any exemption from registration thereunder and
in compliance with applicable state securities
laws.
Special Procedure for
Beneficial Owner........... If you beneficially own shares of old senior
preferred stock and they are registered in the
name of a broker, dealer, commercial bank, trust
company or other nominee, and you wish to tender
your shares of old senior preferred stock in the
exchange offer, you should promptly contact such
registered holder and instruct that person to
tender on your behalf. If you wish to tender on
your own behalf, you must, before completing and
executing the letter of transmittal for the
exchange offer and delivering your shares of old
senior preferred stock, either arrange to have
your shares of old senior preferred stock
registered in your name or obtain a properly
completed share power from the registered holder.
The transfer of registered ownership may take
considerable time.
Guaranteed Delivery If you wish to tender your old senior preferred
Procedures................. stock and:
. you cannot complete the procedure for book-
entry transfer on a timely basis,
. you cannot deliver the old senior preferred
stock or any other documents required by the
letter of transmittal to the exchange agent
prior to the expiration date of the exchange
offer, or
. your old senior preferred stock is not
immediately available, you may still tender
your old senior preferred stock in accordance
with the guaranteed delivery procedures
detailed in the letter of transmittal. See
"The Exchange Offer--Guaranteed Delivery
Procedures".
Withdrawal.................. You may withdraw the tender of your old senior
preferred stock at any time before the offer
expires by providing a written withdrawal notice
to the exchange agent which must be received by
the
6
<PAGE>
Exchange Agent prior to 5:00 p.m. on the
expiration date. TNP will return to you any
shares of old senior preferred stock not accepted
for exchange for any reason without expense to
you as soon as practicable after withdrawal.
Exchange Agent.............. The Bank of New York is the exchange agent for
the exchange offer.
Federal Income Tax The exchange of the old senior preferred stock
Consequences............... will not be a taxable event for United States
federal income tax purposes. You will not
recognize any taxable gain or loss or any
interest income as a result of such exchange. See
"Tax Considerations".
Terms of the Registered Senior Preferred Stock
Securities Offered........
$105,075,000 aggregate liquidation preference of
registered 14 1/2% senior redeemable preferred
stock, Series D.
Liquidation Preference.... $1,000 per share.
Dividends................. We will pay dividends at the rate of 14 1/2% per
annum when, as and if declared by our board of
directors out of funds legally available for the
payment of dividends on each April 1 and October 1,
beginning on October 1, 2000.
On or prior to April 1, 2005, we will pay dividends
by issuing additional shares of senior preferred
stock having an aggregate liquidation preference
equal to the amount of the dividend to be paid.
Thereafter, we may pay dividends at our option
either in cash or by issuing additional shares of
senior preferred stock having an aggregate
liquidation preference equal to the amount of the
dividend to be paid.
Mandatory Redemption...... We must redeem the registered senior preferred
stock at a price equal to its liquidation
preference, plus accumulated dividends, on April 1,
2011.
Optional Redemption....... Except in the case of certain public equity
offerings by us, or in the event of a change of
control, we cannot choose to redeem the registered
senior preferred stock prior to April 1, 2005.
At any time from and after that date (which may be
more than once), we can choose to redeem some or
all of the registered senior preferred stock at
specified prices, plus accumulated dividends.
Optional Redemption after
Public Equity
Offerings................ At any time before April 1, 2003, we can choose to
buy back all but not less than all of the
outstanding registered senior preferred stock with
money that we raise in one or more public equity
offerings, as long as:
. we pay 114.5% of the liquidation preference of
the registered senior preferred stock bought,
plus accumulated and unpaid dividends; and
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<PAGE>
. we buy the registered senior preferred stock
within 90 days of completing the public equity
offering.
Change of Control......... Before April 1, 2005, we can buy back all but not
less than all of the registered senior preferred
stock at the price specified herein, plus
accumulated dividends, in the event of a change of
control. If we experience a change of control, and
if we do not exercise our right to redeem the
registered senior preferred stock, we must give
holders of the senior preferred stock the
opportunity to sell us their registered senior
preferred stock at 110% of their liquidation
preference, plus accumulated and unpaid dividends.
We may not be able to pay you the required price
for registered senior preferred stock you present
to us at the time of a change of control, because:
. we might not have enough funds at that time; or
. the terms of our senior debt or senior
subordinated notes may prevent us from paying
such amount.
Voting.................... The registered senior preferred stock will be non-
voting, except as otherwise required by law and
except in certain circumstances described herein,
including:
. amending certain rights of the holders of the
registered senior preferred stock; and
. the issuance of any class of equity securities
that ranks equal with or senior to the
registered senior preferred stock.
In addition, if we:
. fail to make a mandatory redemption or fail to
either repurchase or make an offer to purchase
upon a change of control; or
. fail to comply with certain covenants,
holders of a majority of the shares of the
registered senior preferred stock, voting as a
class, will be entitled to elect the lesser of two
directors or that number of directors constituting
at least 25% of our board of directors.
Certain Restrictive The statement of resolution governing the
Provisions................ registered senior preferred stock of TNP will limit
what we may do. However, our regulated
subsidiaries, which currently consist of TNMP, the
principal operating subsidiary of TNP, and its
subsidiaries, will not be subject to some of these
limitations. The provisions of the statement of
resolution of TNP will limit our ability to:
. incur more debt;
. pay dividends and make distributions;
. issue preferred stock of subsidiaries;
. make certain investments;
8
<PAGE>
. repurchase stock;
. restrict the ability of our subsidiaries to make
payments to us;
. enter into transactions with affiliates;
. merge or consolidate; and
. amend or modify the certificate of designation.
These covenants are subject to a number of
important exceptions, including that the statement
of resolution will not limit the ability of our
regulated subsidiaries to:
. incur more debt; and
. issue preferred stock.
Ranking................... When we issue the registered senior preferred stock
it will, with respect to dividend and liquidation
rights, be our most senior class or series of
capital stock. We may not issue any capital stock
which ranks equal or senior to the registered
senior preferred stock in terms of dividend and
liquidation rights without the approval of holders
of at least a majority of the shares of outstanding
senior preferred stock.
For more complete information about the registered senior preferred stock,
see the "Description of the Exchange Senior Preferred Stock" section of this
prospectus.
Risk Factors
Before making an investment in the registered senior preferred stock, you
should consider carefully the information included in the "Risk Factors"
section of this prospectus, as well as other information contained in this
prospectus.
Principal Executive Office
Our principal executive office is located at 4100 International Plaza, Forth
Worth, Texas 76113 and our telephone number is (817) 731-0099. Our web site is
http://www.tnpe.com. The information found on our web site is not a part of
this prospectus.
9
<PAGE>
Summary Historical Financial and Other Data
(Dollars in thousands)
The following table sets forth summary historical and other data. The
summary historical financial data in this table should be read in conjunction
with, and is qualified in its entirety by, our audited financial statements,
the notes to our audited financial statements, our "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and our "Selected
Historical Financial and Operating Data" included elsewhere in this prospectus.
The historical financial data as of the end of and for each of the three years
in the period ended December 31, 1999, are derived from our audited
consolidated financial statements incorporated by reference herein. The
historical financial data as of and for the six months ended June 30, 1999, the
three months ended March 31, 2000, and the three months ended June 30, 2000 are
derived from our unaudited financial statements which, in the opinion of our
management, contain all adjustments necessary for a fair presentation of the
information presented.
<TABLE>
<CAPTION>
Predecessor
-------------------------------
Year Ended Six Months Three Months Three Months
December 31, Ended Ended Ended
-------------------------- ------------- ----------------- ------------
June 30,
1997 1998 1999 June 30, 1999 March 31, 2000(1) 2000
-------- -------- -------- ------------- ----------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Statement of Income
Data:
Operating revenues..... $578,534 $585,941 $576,150 $262,153 $124,526 $155,931
Total operating
expenses(2)........... 480,761 501,160 501,758 225,485 110,493 133,925
Net operating
income(3)............. 97,773 84,781 74,392 36,668 14,033 22,006
Other income (net)..... 1,700 1,238 (482) 1,237 334 252
Interest expense....... 56,912 53,885 43,743 22,369 10,514 21,726
Income from continuing
operations............ 42,561 32,134 30,167 15,536 3,853 532
Other Data:
EBITDA(4).............. $161,134 $142,252 $161,342 $ 71,369 $ 28,233 $ 40,227
Depreciation and
amortization.......... 40,676 40,628 65,483 26,488 11,990 16,498
Preferred dividends and
other................. 158 150 (19) (58) 5 3,314
Capital
expenditures(5)....... 28,232 37,534 41,144 21,327 9,200 10,588
Number of customers (at
end of period)........ 222,671 228,420 233,667 231,765 235,173 236,748
Gigawatt-hours sold to
residential
and commercial
customers............. 4,024 4,323 4,342 1,915 936 1,104
Total gigawatt-hours
sold.................. 10,151 9,843 9,369 4,457 2,180 2,321
Average revenue per
kilowatt-hour sold
(cents)............... 5.70 5.95 6.15 5.88 5.71 6.72
Financial Ratios:
Ratio of total debt to EBITDA............. 2.7x
Ratio of total debt and preferred equity
to EBITDA................................ 2.7x
Ratio of EBITDA to interest expense....... 3.7x
Ratio of EBITDA to interest expense and
preferred dividends...................... 3.7x
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of June 30,
1999 2000
------------------ --------------
<S> <C> <C>
Balance Sheet Data:
Total assets............................... $1,001,199 $1,305,376
Total debt................................. 440,244 882,603
Preferred stock subject to mandatory
redemption................................ 1,664 98,269
Common shareholders' equity................ 327,110 93,973
</TABLE>
--------
(1) Includes a net-of-tax charge of approximately $3.4 million for pre-merger
severance and retirement benefits recorded between April 1, 2000 and April
7, 2000.
(2) Total operating expenses include purchased power, fuel, other operating and
maintenance expenses, depreciation and amortization, charge for recovery of
stranded plant, taxes other than income taxes and income taxes.
(3) Net operating income is operating revenue less total operating expenses.
(4) EBITDA represents income from continuing operations before interest
expense, income tax expense, charge for recovery of stranded plant,
depreciation and amortization expenses and non-cash charges of $2.8 million
net of taxes and taxes on other income in 1999. EBITDA is not intended to
represent cash flow from operations as defined by generally accepted
accounting principles and should not be used as an alternative to operating
income or income from continuing operations as an indicator of our
operating performance or cash flow as a measure of liquidity.
(5)Represents additions to utility plant. Excludes additions to other property
and unregulated investments.
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<PAGE>
RISK FACTORS
Before you invest in the senior preferred stock, you should carefully
consider these risk factors as well as the other information contained in this
prospectus. The risks described below are not the only ones we face. Additional
risks not presently known to us or that we currently believe are unimportant
may also hurt our business operations.
Factors Relating to TNP and its Subsidiaries
Our substantial indebtedness could adversely affect our financial condition
and prevent TNP from fulfilling its redemption obligations under the senior
preferred stock. The following chart shows certain important information about
our leverage and represents the completion of the merger and the application of
the proceeds.
<TABLE>
<CAPTION>
As of June 30, 2000
As Adjusted
---------------------
(Dollars in millions)
<S> <C>
Total debt........................................... $882.2
Shareholders' equity and mandatorily redeemable
preferred stock..................................... 195.8
Debt to shareholders' equity and mandatorily
redeemable preferred stock ratio.................... 4.5x
</TABLE>
Our substantial indebtedness could have important consequences to you. For
example, it could:
. make it more difficult for us to meet our redemption obligations with
respect to the senior preferred stock;
. increase our vulnerability to general adverse economic and industry
conditions;
. limit our ability to fund future working capital, capital expenditures
and other general corporate requirements;
. limit our ability to pay cash dividends on the senior preferred stock;
. require a substantial portion of our cash flow from operations for debt
payments;
. limit our flexibility to plan for, or react to, changes in the business
and the industry in which we operate;
. place us at a competitive disadvantage compared to our competitors that
have relatively less debt; and
. limit our ability to borrow additional funds.
Any of the above listed factors could materially adversely affect us.
Despite current indebtedness levels, we may still be able to incur
substantially more debt. As part of the merger TNP issued $275.0 million of
senior subordinated notes pursuant to an indenture. The terms of the indenture
do not fully prohibit TNP or any of its future, non-regulated subsidiaries from
incurring substantial additional indebtedness in the future. TNP's regulated
subsidiaries, including TNMP, are not restricted under the terms of the
indenture from incurring additional indebtedness. As of June 30, 2000, TNP had
additional borrowing availability under its senior secured credit facility of
up to $25.0 million and TNMP had additional borrowing availability under its
credit facilities and indentures of up to $282.0 million, subject to covenant
compliance, and any such borrowing would be senior to the senior preferred
stock. If we incur additional debt, the related risks that we now face could
increase.
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<PAGE>
To service our indebtedness, we will need a significant amount of cash. Our
ability to generate cash depends on many factors beyond our control. Our
ability to make payments on and to refinance any of our indebtedness and to
fund planned capital expenditures will depend on our ability to generate cash
in the future. Our ability to generate cash, to a certain extent, is subject to
competitive, regulatory and other factors that are beyond our control. Based on
our current level of operations, we believe that we have sufficient liquidity
to satisfy any known contingencies and meet our expected future working capital
requirements and planned capital expenditures. We cannot assure you, however,
that our business will generate sufficient cash flow from operations, or that
future borrowings will be available to TNP or its subsidiaries under their
respective revolving credit facilities in a sufficient amount to enable them to
pay their indebtedness or to fund their other liquidity needs. TNP or its
subsidiaries may need to refinance all or a portion of its indebtedness on or
before their stated maturity. However, they might not be able to refinance any
of their indebtedness on commercially reasonable terms or at all.
The terms of TNP's indebtedness limits its ability to pay cash dividends on
the senior preferred stock. Dividends on the senior preferred stock may, at the
option of TNP, be paid in cash commencing October 1, 2005. The senior secured
credit facility and the indenture governing the senior subordinated notes limit
the amount of cash available for dividends and distributions on TNP's capital
stock. We cannot assure you that TNP's existing or future financing
arrangements will permit TNP to pay cash dividends on the senior preferred
stock.
TNP is a holding company and depends entirely on the earnings of its primary
operating subsidiary, TNMP, which has no obligation on certain indebtedness of
TNP and may not be permitted to distribute its earnings to us. TNP operates
primarily through its subsidiaries and other affiliates. TNP's cash flow, and
its ability to service its indebtedness, and make any distributions on the
senior preferred stock, depends primarily on the earnings of TNMP and the
distribution of those earnings to us. There are several restrictions on the
ability of TNMP to distribute its earnings to TNP. TNMP must provide for its
own obligations, such as operating expenses, debt service and reserves, and it
has also entered into indentures and credit agreements that restrict its
ability to make distributions or pay dividends to TNP. In addition, TNMP has
made certain commitments to the PUCT and the NMPRC that may affect its ability
to make distributions to TNP. These commitments include:
. a limitation on the payment of dividends to TNP unless certain financial
tests are satisfied;
. a restriction on taking any action that would prevent TNMP from
providing reasonable and proper service at fair and just rates;
. a restriction on lending or transferring funds or issuing securities of
TNMP to, or purchasing debt instruments of, or guaranteeing or assuming
liabilities of, affiliated entities without state regulatory approval;
and
. a restriction on pledging TNMP's assets to secure the payment or
guarantee the debt of any TNMP affiliate without state regulatory
approval.
Finally, TNMP and TNP's other subsidiaries are separate legal entities from
TNP, and, are not obligated to repay any amounts due on TNP's indebtedness or
to give TNP any funds whether as dividends, loans or payments. In case of
liquidation or reorganization of a subsidiary of TNP, TNP is effectively
subordinated to the creditors of such subsidiary in the receipt of its assets
or proceeds. At the closing of the merger, the articles of incorporation of TNP
and TNMP included provisions designed to ensure that TNP and TNMP will maintain
separate and independent operations. These provisions include:
. a requirement that TNMP have at all times at least one independent
director appointed by the shareholders, whose consent shall be required
for TNMP to amend its articles of incorporation, consolidate or merge
with any person, sell all or substantially all of its assets or to
institute
12
<PAGE>
bankruptcy or insolvency proceedings, and who shall be required to
consider only the interest of TNMP and its creditors in voting on any
such transactions;
. a prohibition on TNMP using its credit to satisfy the debts or
obligations of any other person; and
. a prohibition on TNMP lending to any person or buying or holding any
indebtedness or other obligations issued by any other person, except for
cash and cash equivalents.
TNP's regulated subsidiaries, including TNMP and its subsidiaries, are not
subject to many of the restrictive covenants imposed on TNP under the statement
of resolution for the senior preferred stock. TNP's regulated subsidiaries,
which currently consist of TNMP, the principal operating subsidiary of TNP, and
its subsidiaries, are not subject to many of the restrictive covenants imposed
on TNP under the statement of resolution for the senior preferred stock. The
statement of resolution will not limit the ability of TNP's regulated
subsidiaries to incur more debt, issue preferred stock, create liens, enter
into sale-leaseback transactions or transfer and sell assets. TNP's regulated
restricted subsidiaries, on whom it is dependent to meet its debt service
obligations and distributions on the registered senior preferred stock,
therefore will not be restricted in their ability to take certain actions that
could make it more difficult for them to make distributions to TNP.
The articles of incorporation of TNP and TNMP restrict TNP's ability to
cause TNMP to file for bankruptcy. TNP's and TNMP's articles of incorporation
both contain provisions which prevent TNP from taking any action that would
cause TNMP to file for bankruptcy or seek liquidation or reorganization under
the federal bankruptcy laws. Under certain circumstances, TNP's inability to
cause TNMP to file for bankruptcy or seek liquidation or reorganization could
make it difficult for TNP to satisfy its obligations to creditors, or to
holders of the registered senior preferred stock including receiving all or
part of your $1,000 initial liquidation preference per share, in the event of
TNP's bankruptcy, liquidation or reorganization.
We operate in an increasingly competitive market. The electric utility
industry continues its transition toward an increasingly competitive
environment. Many states, including Texas and New Mexico, have passed
legislation to open the generation and sale of electricity to competition.
Texas law includes provisions which are designed to encourage competitors to
provide electricity to customers in our markets. These same provisions will,
until December 31, 2006, limit our ability to respond to competitors until
these competitors have gained significant market share. The increasingly
competitive environment presents the risk of loss of existing customers. We
cannot assure you that we will be able to compete successfully in this new
unregulated environment.
Certain equityholders of Parent may have interests which conflict with your
interests and have affiliates that acted as initial purchasers of the senior
preferred stock, the senior subordinated notes and lenders under credit
facilities of TNP and TNMP. Upon completion of the merger, Parent, whose owners
include affiliates of CIBC, Continental Casualty Company, Caravelle, an
investment fund managed by an affiliate of certain employees of CIBC, and Dr.
Catacosinos, owned 100% of TNP's outstanding common stock. Parent is able to
elect all of TNP's directors, appoint new management and approve any action
requiring the approval of TNP's shareholders, including amendment of its
articles of incorporation and mergers or sales of substantially all of TNP's
assets. The directors elected by Parent will be able to make decisions
affecting TNP's capital structure, including decisions to issue additional
capital stock, implement stock repurchase programs and declare dividends. The
interests of Parent could conflict with your interests. Under certain
circumstances, the interests of CIBC's affiliates, as holders of limited
partnership interests in Parent and CIBC's affiliate's interest as a lender
under the senior secured credit facility and TNMP's credit facility and CIBC's
interests as an initial purchaser of and a market-maker in the senior
subordinated notes, may conflict with CIBC's interests as an initial purchaser
of and market-maker in the senior preferred stock. For information concerning
the composition of TNP's management team and its board of directors, see the
"Management" section of this prospectus. For information on rights of
equityholders of Parent, see the "Certain Relationships and Related Party
Transactions" section of this prospectus.
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<PAGE>
Our historical seasonality could impair the value of the senior preferred
stock. Because we experience increased sales and operating revenues during the
summer months as a result of increased air conditioner usage in hot weather,
our business is highly seasonal. Approximately 43% of our annual operating
revenues occur in the months of June, July, August and September. In addition,
unusual temperature fluctuations in our high season and unpredictable changes
in the weather may adversely affect our net sales and operating revenues in
those months. Our working capital needs, and correspondingly, our borrowings,
peak during the second quarter. If cash on hand and borrowing availability are
insufficient to cover payments due under our current indebtedness, this
seasonality could adversely affect TNP's ability to make payments as required
by our current debt instruments thereby adversely affecting our ability to make
redemptions on the senior preferred stock.
We depend on third-party suppliers to fulfill over three-quarters of our
system wide energy requirements. We purchase approximately 80% of our
electricity from various third party electric power suppliers with diversified
fuel sources. The availability and cost of purchased power to TNMP is subject
to changes in supplier costs, regulations and laws, market forces, fuel costs
and other factors. TNMP regularly enters into firm contracts with these third
parties to assure service to its entire customer load. These contracts allow
TNMP the option to purchase power within a specified minimum and maximum range.
Purchases on the spot market are primarily made instead of firm contract
options when the spot market price represents savings to TNMP's customers. In
recent years TNMP has increasingly relied on contracts of a shorter term. In
this way TNMP may achieve greater purchased power savings during periods of
decreasing power costs. However, these shorter term contracts increase our risk
during periods of rising costs. During 1998 and 1999 we experienced higher
energy costs due to demand associated with abnormally warm summers. Over the
next five years, TNMP will have to replace power purchase contracts that
represent approximately 77% of our estimated energy requirements. We cannot
assure you that TNMP will be able to continue to renew its firm contracts on a
favorable basis, or be able to adequately protect itself against a long period
of rising costs. If TNMP cannot renew its firm option contracts, it will be
forced to rely on the spot market for its purchased power energy needs. In a
period of high spot market prices, this reliance would adversely affect TNMP's
operating revenues and TNP's ability to make redemptions on the senior
preferred stock.
Because our Texas operations are located within the ERCOT system we are
limited in our ability to obtain power to sell to our customers in Texas from
outside ERCOT if needed or if available at a lower cost. We generate
approximately 20% of our total electricity requirements and purchase the
remainder from other electric utilities and third-party power providers. Over
the next several years we will have to replace several long-term power supply
agreements as they expire. We are located within the ERCOT system and depend on
it for the electricity we obtain from third party providers to serve our
customers in Texas. The ERCOT system is a self contained electrical grid with
very limited interconnection with other grids. Therefore, our Texas operations,
which generated 86% of our 1999 operating revenues, are subject to price
fluctuations and availability of electricity within ERCOT and may not be able
to obtain power from outside ERCOT should it become scarce within the system or
available at cheaper prices or better terms from suppliers outside the ERCOT
system.
Our success depends in large part on our senior management personnel. Our
success depends in large part upon the abilities and continued service of our
senior management personnel. The loss of certain members of senior management
could seriously affect our business prospects. We do not maintain key man life
insurance on any of our senior management personnel. See the "Management"
section of this prospectus.
Factors Relating to the Regulatory Environment
We are regulated at both the state and federal levels in a changing
regulatory environment. We are regulated in virtually all aspects of our
utility business by various federal and state agencies. At the state level, we
are subject to comprehensive regulation primarily by the PUCT and NMPRC. The
electrical utility industry is in the process of transition to a competitive
market. Both Texas and New Mexico have recently enacted legislation to open the
generation and retail supply of electricity to competition, and PUCT and NMPRC
are enacting regulations that will govern that transition. Our business
prospects could be adversely affected by the
14
<PAGE>
adoption of new laws, policies or regulations that change the regulatory
environment in effect at the time. We cannot predict how future legislative or
regulatory changes will affect the future regulatory framework of our industry.
At the federal level we are regulated by, among others, the FERC and the
SEC. We are subject to the Federal Power Act and the Public Utility Holding
Company Act of 1935, as amended ("PUHCA"). Because TNP owns a utility
subsidiary, it falls under PUHCA's definition of a holding company. However,
TNP is currently exempt, under Section 3(a)(1) of PUHCA, from all provisions of
PUHCA except for Section 9(a)(2), which relates to the acquisition of
securities of public utility affiliates.
The application of certain accounting rules could cause extraordinary
charges. Statement of Financial Accounting Standards No. 71, "Accounting for
the effects of certain Types of Regulation," or SFAS 71, allows regulated
entities like TNMP, in appropriate circumstances, to establish regulatory
assets and liabilities, and thereby defer the income statement impact of
certain costs and revenues that are expected to be realized in future rates.
As a result of the Community Choice(R) 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. Community
Choice(R) was TNMP's plan for transition to competition for its New Mexico
service territory that was in effect from May 1, 1997, until the NMPRC
terminated it on June 8, 1999. By terminating Community Choice(R), the NMPRC
placed TNMP on the same timetable as other New Mexico utilities with regard to
retail competition and restored the pass-through of purchased power costs to
customers.
In Texas, prior to the passage of the new legislation, TNMP had been
operating under a transition plan (the "Transition Plan") approved by the PUCT
in 1998. EITF 97-4, "Deregulation of the Pricing of Electricity--Issues Related
to the Application of SFAS Statements No. 71 and 101," states that application
of SFAS 71 should stop "when deregulatory legislation is passed or when a rate
order (whichever is necessary to effect the change in the jurisdiction) that
contains sufficient detail for the enterprise to reasonably determine how the
transition plan will affect the separable portion of its business whose pricing
is being deregulated is issued." With the passage of the legislation, TNMP
discontinued the application of SFAS 71 to the generation and power supply
portion of its Texas business during the fourth quarter of 1999. As a direct
result of discontinuing SFAS 71 and in accordance with the legislation, TNMP
has reclassified net regulatory assets (regulatory assets less liabilities) of
$15.5 million that pertain to these deregulated operations as recoverable
stranded costs, as of June 30, 2000. We believe that the $15.5 million
represents verifiable stranded costs and intend to have TNMP recover them from
customers pursuant to the methods specified in the Texas legislation.
In conjunction with the discontinuance of SFAS 71, TNMP is required to
determine if its generating plant asset, TNP One, is impaired under SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of." Based on TNMP's undiscounted cash flow analysis over the
estimated useful life of TNP One, there is no impairment of TNP One, as defined
by SFAS 121, as of June 30, 2000. TNMP's impairment analysis includes
reasonable estimates of future market prices, capacity factors, operating
costs, the effects of competition and many other factors over the life of TNP
One. TNMP's impairment analysis is highly dependent on these estimates. As of
June 30, 2000, the net book value of TNP One was $431.9 million.
The merger was accounted for under the purchase method of accounting. In
accordance with the purchase method of accounting, the purchase price was
allocated to the acquired assets and assumed liabilities based on their fair
values and the unallocated amount was recorded as goodwill. The process of
determining the fair value of assets and liabilities continues, and the final
results will not be completed until certain information about pre-acquisition
contingencies is fully assessed. The most significant items to be determined
include the appropriate value to assign to TNP's sole generating plant and the
amount of regulatory assets to be recorded for recovery of stranded costs as
permitted by Texas legislation.
15
<PAGE>
We may be adversely affected by environmental regulations. In recent years,
public concern for the environment has resulted in increased governmental
regulation of environmental matters. Our subsidiaries are subject to these
regulations in the licensing and operation of the generation, transmission and
distribution facilities in which they have an interest, as well as the
licensing and operation of the facilities in which they are a co-licensee.
These environmental requirements are administered by local, state and federal
regulatory authorities and concern the impact of our generation, transmission,
distribution, transportation and waste handling facilities on air, water, land,
aesthetic qualities and natural resources.
TNMP must comply with a number of statutes and regulations relating to
protection of the environment and to the safety and health of the public and of
the personnel in operating plants and believes it is in substantial compliance
with these requirements. Such statutes and regulations, which historically have
changed from time to time, include regulation of hazardous materials associated
with each plant, limitations on air, water and noise emissions from the plants,
safety and health standards and requirements relating to the storage, treatment
and disposal of wastes. In addition, TNMP could become liable for the
investigation and removal of any hazardous materials that may be found on its
current or formerly owned or operated property regardless of the sources of
such hazardous materials. Failure to comply with environmental requirements of
such statutes or regulations could result in civil or criminal liability,
imposition of cleanup liens and fines and large expenditures to bring such
property into compliance. TNMP has owned and operated and currently owns and
operates industrial facilities where hazardous substances were and are used. We
cannot assure you that those costs will not be incurred in the future and that
they will not be material.
Factors Relating to the Senior Preferred Stock
The senior preferred stock will be junior in right of payment to all of our
debt and structurally junior in right of payment to TNP's subsidiaries'
preferred stock. The senior preferred stock will be junior in right of payment
to all of our debt. In addition, the terms of our indebtedness and the senior
preferred stock permit us to incur additional debt, if certain conditions are
met. In the event of TNP's insolvency, liquidation, reorganization, dissolution
or other winding-up or upon a default in payment with respect to, or the
acceleration of, any indebtedness, the holders of indebtedness must be paid in
full before the holders of the senior preferred stock may be paid. The terms of
TNP's indebtedness, including its senior secured credit facility and the
indenture governing the senior subordinated notes, limit the ability of TNP to
pay cash dividends or make redemptions on the senior preferred stock under
certain circumstances. All preferred stock of TNP's subsidiaries will be
effectively senior in right of payment to the senior preferred stock. As of
June 30, 2000, TNP's subsidiaries had approximately $98.3 million of preferred
stock issued and outstanding. For more information about the terms of certain
of our other indebtedness and preferred stock of TNMP, see the "Description of
Certain Indebtedness and Preferred Equity" section of this prospectus.
If any or all of TNP's subsidiaries become subject to bankruptcy proceedings
before payment on the senior preferred stock, we do not expect holders of the
senior preferred stock to have claims in such proceedings. Only after such
subsidiaries' creditors and holders of preferred stock and TNP's creditors are
fully paid would any remaining value of the subsidiaries' assets be available
to TNP's holders of preferred stock, including holders of the senior preferred
stock.
TNP may not be able to finance the change of control offer required by the
statement of resolution governing the senior preferred stock. If a Change of
Control, as described in the "Description of the Exchange Senior Preferred
Stock--Change of Control Offer" section of this prospectus occurs, unless TNP
exercises its right to repurchase the senior preferred stock, you have the
right to require TNP to repurchase any or all of the senior preferred stock you
own at a price equal to 110% of the liquidation preference thereof, plus
accumulated dividends. Upon a Change of Control, TNP may be required
immediately to repay the outstanding amounts owed by it under the senior
secured credit facility, the senior subordinated notes and other indebtedness
or preferred stock then outstanding. We cannot assure you that TNP will be able
to repay the amounts outstanding under the senior secured credit facility, the
senior subordinated notes or the principal
16
<PAGE>
amount outstanding of its other indebtedness or the liquidation preference of
preferred stock, if applicable, or to obtain the necessary consents to purchase
the senior preferred stock. Any requirement to offer to purchase any
outstanding senior preferred stock may result in TNP having to refinance its
outstanding indebtedness or preferred stock, which it may not be able to do. In
addition, even if TNP were able to refinance such indebtedness or preferred
stock, such financing may be on terms unfavorable to it.
We are subject to a number of restrictions imposed by the terms of the
statement of resolution governing the senior preferred stock. The statement of
resolution governing the senior preferred stock will have covenants which will
limit what we may do. Those covenants, in general, limit our ability to:
. incur more debt;
. pay dividends and make distributions;
. issue preferred stock of subsidiaries;
. make certain investments;
. repurchase stock;
. restrict the ability of TNP's subsidiaries to make payments to TNP;
. enter into transactions with affiliates;
. merge or consolidate; and
. amend or modify the amended and restated articles of incorporation.
If we do not comply with these covenants, a voting rights triggering event
could occur. See the "Description of the Exchange Senior Preferred Stock--
Voting Rights" section of this prospectus.
You cannot be sure that an active trading market will develop for the
registered senior preferred stock. There is currently no trading market for the
registered senior preferred stock. We do not intend to apply for listing of the
registered senior preferred stock on any securities exchange or for quotation
through the Nasdaq National Market. The liquidity of any market for the
registered senior preferred stock will depend upon the number of holders of the
registered senior preferred stock, the interest of securities dealers in making
a market in the registered senior preferred stock and other factors.
Accordingly, we cannot assure you as to the development or liquidity of any
market for the registered senior preferred stock, and holders of registered
senior preferred stock may not be able to sell the registered senior preferred
stock, or may not be able to sell it at profitable prices. An active market for
the senior preferred stock may not develop during or after the consummation of
the exchange offer.
Historically, the market for non-investment grade equity has been subject to
disruptions that have caused substantial volatility in the prices of securities
similar to the registered senior preferred stock. There can be no assurance
that the market, if any, for the registered senior preferred stock will not be
subject to similar disruptions. Any such disruptions may have an adverse effect
on the holders of the registered senior preferred stock.
Holders of old senior preferred stock who do not participate in the exchange
offer will hold restricted securities without registration rights. TNP issued
the old senior preferred stock in a private offering exempt from the
registration requirements of the Securities Act. Therefore, holders of old
senior preferred stock may not offer, sell or otherwise transfer their old
senior preferred stock except in compliance with the registration requirements
of the Securities Act and applicable state securities laws or pursuant to
exceptions from, or in transactions not subject to, such registration
requirements. Holders of old senior preferred stock who do not exchange their
old senior preferred stock for registered senior preferred stock in the
exchange offer will continue to be subject to these transfer restrictions after
completion of the exchange offer.
In addition, after completion of the exchange offer, holders of old senior
preferred stock who do not tender their old senior preferred stock in the
exchange offer will no longer be entitled to any exchange or registration
17
<PAGE>
rights under the registration rights agreements, except under limited
circumstances. To the extent that old senior preferred stock is tendered and
accepted in the exchange offer, the liquidity of the trading market for
untendered old senior preferred stock could be adversely affected.
If you fail to follow the exchange offer procedures, your old senior
preferred stock may not be accepted for exchange. Each holder of old senior
preferred stock wishing to accept the exchange offer must deliver the letter of
transmittal, together with the old shares of senior preferred stock to be
exchanged and any other required documentation, to the exchange agent, or
effect a tender of old senior preferred stock by book-entry transfer into the
exchange agent's account, in each case in compliance with the instructions
provided in "The Exchange Offer" section of this prospectus and in the letter
of transmittal.
The method of delivery of old senior preferred stock and the letter of
transmittal and all other required documentation is at the election and risk of
the holders of the old senior preferred stock. Although we intend to notify
tendering holders of any defects or irregularities with respect to their
tenders of old senior preferred stock, neither TNP, the exchange agent nor any
other person shall be under any duty to give notification of defects or
irregularities with respect to tenders of old senior preferred stock, nor shall
any of them incur any liability for failure to give such notification. Tenders
of old senior preferred stock will not be deemed to have been made until such
irregularities have been cured or waived.
18
<PAGE>
RECENT EVENTS
The Merger
On May 24, 1999, ST Acquisition Corp. agreed to merge with and into TNP.
Upon closing, each share of TNP's common stock that was outstanding at the
effective time of the merger was automatically converted into the right to
receive $44.00 in cash. On April 7, 2000, ST Acquisition Corp. was merged with
and into TNP, with TNP surviving the merger. At that time, TNP ceased to be
publicly held, and its common stock is no longer traded on the New York Stock
Exchange. On April 25, 2000, in connection with the merger, we dismissed Arthur
Andersen LLP as our independent accountants and engaged Deloitte & Touche LLP
to replace Arthur Andersen LLP. We filed a Current Report on Form 8-K with the
SEC with respect to this change of accountants on May 2, 2000.
Financing for the Merger
The total financing for the merger was approximately $838.0 million, $591.6
million of which was required to pay the merger consideration. The balance of
the financing was used, to refinance certain indebtedness of TNMP that TNMP was
required to repurchase as a result of the change of control of TNP contemplated
by the merger, and to pay costs and expenses related to the merger. The
financing for the merger consisted of: (i) a $200.0 million equity investment
comprised of (x) $100.0 million of proceeds from the issuance by ST Acquisition
Corp. of senior preferred stock (the "Preferred Equity") and (y) a $100.0
million contribution from Parent to ST Acquisition Corp., and (ii) $638.0
million of debt financing, comprised of (x) up to $160.0 million of borrowings
under a senior secured credit facility, (y) $275.0 million from the issuance of
the senior subordinated notes and (z) $203.0 million of borrowings by TNMP
under a backstop credit facility to refinance debt of TNMP that was required to
be repurchased as a result of the change of control of TNP resulting from the
merger.
On May 26, 2000, we issued, together with Parent, $100.0 million in units,
each unit consisting of one share of 14 1/2% senior redeemable preferred stock
of TNP with an initial liquidation preference of $1,000 per share and one
warrant to purchase a limited partnership interest in Parent. We used the
proceeds from the issuance of units, together with cash on hand and a drawing
under the revolving portion of our senior secured credit facility to redeem our
$100.0 million of senior preferred stock issued in connection with the merger,
pursuant to a private placement.
On June 1, 2000, TNMP closed its offer to repurchase its Series U first
mortgage bonds and its Series A secured debentures pursuant to their respective
change of control provisions that were triggered by the merger. Approximately
$90.5 million of first mortgage bonds and $112.8 million of secured debentures
were tendered for redemption. TNMP borrowed from the backstop credit facility
to refinance the tendered debt and created new series of first mortgage bonds
and of secured debentures as collateral for this borrowing.
The following table sets forth the sources and uses of funds in connection
with the financing of the merger on April 7, 2000 and the unit offering as
consummated on May 26, 2000 (in millions):
<TABLE>
<CAPTION>
Sources of Funds:
<S> <C>
Senior secured credit facility(1)................................ $160.0
10.25% Senior Subordinated Notes................................. 275.0
Senior preferred stock offered hereby(2)......................... 100.0
Equity contribution by Parent.................................... 100.0
Cash on hand..................................................... 5.3
------
Total.......................................................... $640.3
======
Uses of Funds:
Merger consideration(3).......................................... $591.6
Estimated fees and expenses...................................... 48.7
------
Total.......................................................... $640.3
======
</TABLE>
-------
(1) The senior secured credit facility consists of (i) the $25.0 million
revolving credit facility, of which no borrowings under this facility, are
outstanding as of the date of this prospectus, and (ii) the $160.0 million
term loan. See the "Description of Certain Indebtedness and Preferred
Equity" section of this offering memorandum.
(2) Excluding the 5,075 shares of senior preferred stock, representing an
aggregate liquidation preference of $5,075,000, that were issued as
dividends on October 2, 2000.
(3) The merger consideration consists of $44.00 per share of TNP common stock
outstanding immediately prior to the closing of the merger.
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<PAGE>
RATIO OF COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS TO EARNINGS
The following table sets forth the unaudited consolidated ratios of combined
fixed charges and preferred dividends to earnings for TNP on a historical
basis:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1995 1996 1997 1998 1999
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Ratio of combined fixed charges and
preferred dividends to earnings........... 1.7x 1.5x 2.1x 1.9x 2.1x
<CAPTION>
For the Twelve Months ended June
30, 2000
----------------------------------
<S> <C> <C> <C> <C> <C>
Ratio of combined fixed charges and
preferred dividends to earnings........... 1.6x
Pro Forma Ratio of combined fixed charges
and preferred dividends to earnings(1).... 1.0x
</TABLE>
--------
(1) On a pro forma basis to give effect to the financing of the merger and the
application of the proceeds therefrom.
For purposes of this calculation, earnings are defined as income from
continuing operations plus income taxes plus fixed charges. Fixed charges
consist of total interest; amortization of debt discount, premium, and expense,
and the portion of interest implicit in rentals. Preferred dividends consist of
the amount of pre-tax earnings that is required to pay the dividends on
outstanding preferred securities, (computed as the amount of the dividend
divided by 1 minus the effective income tax rate applicable to continuing
operations).
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<PAGE>
THE EXCHANGE OFFER
We issued the old senior preferred stock on May 26, 2000 (the "Closing
Date") to the initial purchasers in an offering to qualified institutional
buyers under Rule 144A under the Securities Act. As a condition to the sale of
the old senior preferred stock, TNP and the initial purchasers entered into a
registration rights agreement on the Closing Date. The registration statement,
of which this prospectus is part, is intended to satisfy our obligation to
conduct an exchange offer under the registration rights agreement summarized
below. This summary of provisions of the registration rights agreement does not
purport to be complete and reference is made to the provisions of the
registration rights agreement which has been filed as an exhibit to the
registration statement and a copy of which is available as set forth in the
"Where to Find More Information" section of this prospectus.
Pursuant to the registration rights agreement, we agreed to file with the
SEC an exchange offer registration statement on the appropriate form under the
Securities Act with respect to the registered senior preferred stock. Upon the
effectiveness of the exchange offer registration statement, we will offer to
the holders of old senior preferred stock who are able to make specified
representations the opportunity to exchange their old senior preferred stock
for the registered senior preferred stock. If we are not permitted to
consummate the exchange offer because the exchange offer is not permitted by
applicable law or SEC policy, or any shareholder notifies us within the
specified time period that it:
. is prohibited by law or SEC policy from participating in the exchange
offer;
. may not resell the registered senior preferred stock acquired by it in
the exchange offer to the public without delivering a prospectus and the
prospectus contained in the exchange offer registration statement is not
appropriate or available for such resales by such shareholder; or
. is a broker-dealer and holds old senior preferred stock acquired
directly from us or an affiliate of ours,
we will use our reasonable best efforts to file with the SEC a shelf
registration statement to cover resales of the old senior preferred stock by
the shareholders who satisfy conditions relating to the provision of
information in connection with the shelf registration statement. The
registration rights agreement provides that we will:
. commence the exchange offer and use our reasonable best efforts to issue
on or prior to 30 business days after the date on which the exchange
offer registration statement was declared effective by the SEC,
registered senior preferred stock in exchange for all old senior
preferred stock tendered prior thereto in the exchange offer; and
. if obligated, to use our reasonable best efforts to file a shelf
registration statement with the SEC as promptly as reasonably
practicable after such filing obligation arises and to cause the shelf
registration statement to be declared effective by the SEC on or prior
to 90 days after we are required to file such shelf registration
statement.
If:
. we fail to consummate the exchange offer on or prior to the date
specified with respect to the exchange offer registration statement; or
. any registration statement required by the registration rights agreement
is filed and declared effective but thereafter ceases to be effective or
usable for its intended purpose;
(each such event referred to in the clauses above a "Registration Default"),
then we will be assessed additional dividends as follows: the per annum
dividend rate on the senior preferred stock will increase by 50 basis points,
and the per annum dividend rate will increase by an additional 25 basis points
for each subsequent 90-day period during which the Registration Default remains
uncured, up to a maximum additional dividend rate of 200 basis points per annum
in excess of the dividend rate on the cover of this prospectus. All additional
dividends will be payable to holders of the senior preferred stock in cash on
each dividend payment date, commencing with the first such date occurring after
any such additional dividends commences to accumulate,
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<PAGE>
until such Registration Default is cured. After the date on which such
Registration Default is cured, the dividend rate on the senior preferred stock
will revert to the dividend rate originally borne by the senior preferred stock
.
For purposes of the foregoing, transfer restricted securities means:
each share of old senior preferred stock until:
. the date on which such share of old senior preferred stock is exchanged
for a share of registered senior preferred stock which is entitled to be
resold to the public by such shareholder without complying with the
prospectus delivery requirements of the Securities Act;
. the date on which such old senior preferred stock has been disposed of
in accordance with a shelf registration statement; or
. the date on which such old senior preferred stock is sold pursuant to
Rule 144 under the Securities Act;
and each share of registered senior preferred stock held by a broker-dealer
until the date on which such registered senior preferred stock is disposed of
by a broker-dealer as set forth under the "Plan of Distribution" section of
this prospectus.
Terms of the Exchange Offer
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept any and all of the old senior
preferred stock validly tendered and not withdrawn prior to the expiration date
of the exchange offer. As of the date of this prospectus, $105.075 million
aggregate initial liquidation preference of the old senior preferred stock is
outstanding and no registered senior preferred stock is outstanding. This
prospectus, together with the letter of transmittal, is first being sent on or
about October 23, 2000, to all shareholders known to us. Our obligation to
accept the old senior preferred stock for exchange pursuant to the exchange
offer is subject to the conditions as set forth under "--Certain Conditions to
the Exchange Offer" below. We will issue $1,000 initial liquidation preference
shares of registered senior preferred stock in exchange for each $1,000 initial
liquidation preference of outstanding old senior preferred stock accepted in
the exchange offer. Shareholders may tender some or all of their old senior
preferred stock pursuant to the exchange offer. See "--Consequences of Failure
to Exchange." However, the old senior preferred stock may be tendered only in
integral multiples of $1,000.
The registered senior preferred stock will evidence the same equity as the
old senior preferred stock for which it is exchanged, and is entitled to the
benefits of the statement of resolution. The form and terms of the registered
senior preferred stock are the same as the form and terms of the old senior
preferred stock, except that the registered shares have been registered under
the Securities Act. Therefore, the registered senior preferred stock will not
bear legends restricting its transfer.
Shareholders do not have any appraisal or dissenters' rights under the
statement of resolution in connection with the exchange offer. We intend to
conduct the exchange offer in accordance with the applicable requirements of
Regulation 14E under the Exchange Act.
We shall be deemed to have accepted validly tendered old senior preferred
stock when, as, and if we have given verbal or written notice of our acceptance
to the exchange agent. The exchange agent will act as agent for the tendering
shareholders for the purpose of receiving the registered senior preferred
stock.
If any tendered shares of old senior preferred stock are not accepted for
exchange because of an invalid tender, or the failure to satisfy other
conditions to the exchange offer or otherwise, we will return such unaccepted
tenders of shares of old senior preferred stock without expense to the
shareholder of such shares, as promptly as practicable after the expiration
date of the exchange offer.
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<PAGE>
Shareholders whose old senior preferred stock is not tendered or is tendered
but not accepted in the exchange offer will continue to hold such old senior
preferred stock and will be entitled to all the rights and preferences and
subject to the limitations applicable to the old senior preferred stock under
the statement of resolution. Following completion of the exchange offer, the
shareholders will continue to be subject to the existing restrictions upon
transfer of the old senior preferred stock and we will have no further
obligation to those shareholders to provide for the registration under the
Securities Act of the old senior preferred stock held by them. To the extent
that old senior preferred stock is tendered and accepted in the exchange offer,
the trading market for untendered, and tendered but unaccepted, old senior
preferred stock could be adversely affected.
Shareholders who tender old senior preferred stock in the exchange offer
will not be required to pay brokerage commissions or fees or, subject to the
instructions in the letter of transmittal, transfer taxes with respect to the
exchange of old senior preferred stock pursuant to the exchange offer. We will
pay all charges and expenses, other than applicable taxes, in connection with
the exchange offer. See "--Fees and Expenses; Solicitation of Tenders."
Expiration Date; Extensions; Amendments
The term expiration date shall mean 5:00 p.m., New York City time on
November 22, 2000 unless we extend the exchange offer. If we do extend the
exchange offer, the term expiration date shall mean the date and time to which
the exchange offer is extended. In order to extend the expiration date of the
exchange offer, we will notify the exchange agent of any extension by verbal or
written notice, mail to the registered shareholders an announcement of that
notice, and will make a release to the Dow Jones News Services prior to 9:00
a.m., New York City time, on the next business day after the previously
scheduled expiration date of the exchange offer.
We reserve the right at our sole discretion:
. to delay accepting any old senior preferred stock;
. to extend the exchange offer;
. to terminate the exchange offer and not accept the old senior preferred
stock not previously accepted if any of the conditions set forth below
under "--Certain Conditions to the Exchange Offer" shall have occurred
and shall not have been waived by us, by giving oral or written notice
of such delay, extension or termination to the exchange agent; and
. to amend the terms of the exchange offer in any manner. Any such delay
in acceptance, extension, termination or amendment will be followed as
promptly as practicable by oral or written notice thereof to the
shareholders.
If the exchange offer is amended in a manner determined by us to constitute
a material change, we will promptly disclose such amendment by means of a
prospectus supplement that will be distributed to all shareholders, and we will
extend the exchange offer for a period of five to ten business days, depending
upon the significance of the amendment and the manner of disclosure to
shareholders, if the exchange offer would otherwise expire during such five to
ten business day period. During any extension of the expiration date of the
exchange offer, all old senior preferred stock previously tendered will remain
subject to the exchange offer and may be accepted for exchange by us.
We will have no obligation to publish, advertise, or otherwise communicate
any such public announcement, other than by making a timely release to the Dow
Jones News Service.
Procedures for Tendering the Old Senior Preferred Stock
When a beneficial owner of old senior preferred stock tenders it to us as
set forth below and we accept the old senior preferred stock, the beneficial
owner of the old senior preferred stock and us will be deemed to
23
<PAGE>
have entered into a binding agreement upon the terms and subject to the
conditions set forth in this prospectus and the letter of transmittal.
Except as set forth below, if you wish to tender the old senior preferred
stock for exchange pursuant to the exchange offer, we must receive a properly
completed and duly executed letter of transmittal, including all other
documents required by such letter of transmittal, to the exchange agent at one
of the addresses set forth below under "Exchange Agent" on or prior to the
expiration date of the exchange offer. In addition:
. the exchange agent must receive certificates for such old senior
preferred stock along with the letter of transmittal;
. the exchange agent must receive prior to the expiration date of the
exchange offer a timely confirmation of a book-entry transfer of such
old senior preferred stock into the exchange agent's account at the
Depository Trust Company pursuant to the procedure for book-entry
transfer described below; or
. the shareholder must comply with the guaranteed delivery procedures
described below.
THE METHOD OF DELIVERY OF OLD SENIOR PREFERRED STOCK, LETTERS OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE
SHAREHOLDER. IF SUCH DELIVERY IS BY MAIL, WE RECOMMEND THAT REGISTERED MAIL,
PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, YOU
SHOULD ALLOW SUFFICIENT TIME TO ASSURE TIMELY DELIVERY. YOU SHOULD NOT SEND
LETTERS OF TRANSMITTAL OR OLD SENIOR PREFERRED STOCK TO US.
Each signature on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the old senior preferred stock
surrendered for exchange pursuant thereto are tendered:
. by a registered shareholder who has not completed the box entitled
"Special Issuance Instructions" or the box entitled "Special Delivery
Instructions" in the letter of transmittal; or
. for the account of an Eligible Institution (as defined below).
In the event that a signature on a letter of transmittal or a notice of
withdrawal, as the case may be, is required to be guaranteed, such guarantee
must be by a firm which is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc. or
by a commercial bank or trust company having an office or correspondent in the
United States or otherwise be an "eligible guarantor institution" within the
meaning of Rule 17Ad-15 under the Exchange Act (collectively, "Eligible
Institutions"). If the old senior preferred stock is registered in the name of
a person other than the person signing the letter of transmittal, the old
senior preferred stock certificates surrendered for exchange must be endorsed
by, or be accompanied by, a written instrument or instruments of transfer or
exchange, in satisfactory form as determined by us in our sole discretion, duly
executed by the registered shareholder with the signature thereon guaranteed by
an Eligible Institution. If the letter of transmittal is signed by a person or
persons other than the registered shareholder or shareholders, the old senior
preferred stock certificates must either be endorsed by the registered
shareholder with signature guaranteed by an Eligible Institution or accompanied
by appropriate powers of attorney with signature guaranteed by an Eligible
Institution. In either case, the old senior preferred stock certificates must
be signed exactly as the name or names of the registered shareholder or
shareholders that appear on the old senior preferred stock certificates.
If a trustee, executor, administrator, guardian, attorney-in-fact, officer
of a corporation or another acting in a fiduciary or representative capacity
signs the letter of transmittal or any old senior preferred stock or powers of
attorney, the person signing should indicate in which capacity he or she is
signing and, unless waived by us, submit proper evidence satisfactory to us of
his or her authority to sign with the letter of transmittal.
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<PAGE>
By tendering, each shareholder will represent to us that, among other
things:
. the registered senior preferred stock acquired pursuant to the exchange
offer is being acquired in the ordinary course of business of the person
receiving such registered senior preferred stock, whether or not that
person is the shareholder; neither the shareholder nor any such other
person has an arrangement or understanding with any person to
participate in the distribution of such registered senior preferred
stock;
. if the shareholder is not a broker-dealer, or is a broker-dealer but
will not receive registered senior preferred stock for its own account
in exchange for the old senior preferred stock, neither the shareholder
nor any such other person is engaged in or intends to participate in the
distribution of such registered senior preferred stock; and neither the
shareholder nor any such other person is an "affiliate" of ours, as
defined under Rule 405 of the Securities Act. If the tendering
shareholder is a broker-dealer that will receive registered senior
preferred stock for its own account in exchange for old senior preferred
stock that were acquired as a result of market-making activities or
other trading activities, the shareholder may be deemed to be an
"underwriter" within the meaning of the Securities Act and will be
required to acknowledge that it will deliver a prospectus in connection
with any resale of such registered senior preferred stock. The letter of
transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
DELIVERY OF DOCUMENTS TO US OR THE DEPOSITORY TRUST COMPANY DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
We will determine in our sole discretion all questions as to the validity,
form, eligibility (including time of receipt) and acceptance of the old senior
preferred stock tendered for exchange, which determination shall be final and
binding. We reserve the absolute right to reject any and all tenders of any
particular old senior preferred stock not properly tendered or to not accept
any particular old senior preferred stock which acceptance might, in our
judgment or our counsel, be unlawful. We also reserve the absolute right in our
sole discretion to waive any defects or irregularities or conditions of the
exchange offer as to any particular old senior preferred stock either before or
after the expiration date of the exchange offer (including the right to waive
the ineligibility of any shareholder who seeks to tender old senior preferred
stock in the exchange offer). The interpretation of the terms and conditions of
the exchange offer as to any particular old senior preferred stock either
before or after the expiration date of the exchange offer (including the letter
of transmittal and its instructions) by us shall be final and binding on all
parties. Unless waived, any defects or irregularities in connection with the
tenders of old senior preferred stock for exchange must be cured within a
reasonable period of time as we shall determine. Neither the Company, the
exchange agent nor any other person shall be under any duty to give
notification of any defect or irregularity with respect to any tender of old
senior preferred stock for exchange, nor shall any of them incur any liability
for failure to give such notification.
Acceptance of the Old Senior Preferred Stock for Exchange; Delivery of the
Registered Senior Preferred Stock
Upon satisfaction or waiver of all of the conditions to the exchange offer,
we will accept, promptly after the expiration date of the exchange offer, all
shares of old senior preferred stock properly tendered and will issue the
registered senior preferred stock promptly after acceptance of the shares of
old senior preferred stock. See "--Certain Conditions to the Exchange Offer"
below. For purposes of the exchange offer, we shall be deemed to have accepted
properly tendered shares of old senior preferred stock for exchange when, and
if we have given verbal or written notice of our acceptance to the exchange
agent. In all cases, issuance of the registered senior preferred stock for the
shares of old senior preferred stock that are accepted for exchange pursuant to
the exchange offer will be made only after timely receipt by the exchange agent
of the following:
. certificates for such old senior preferred stock or a timely
confirmation of a book-entry transfer of such old senior preferred stock
into the exchange agent's account at the Depository Trust Company
pursuant to the book-entry transfer procedures described below;
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<PAGE>
. a properly completed and duly executed letter of transmittal; and
. all other required documents.
If any tendered old senior preferred stock are not accepted for any reason set
forth in the terms and conditions of the exchange offer or if certificates
representing the old senior preferred stock are submitted for a greater
principal amount than the shareholder desires to exchange, those unaccepted or
non-exchanged old senior preferred stock will be returned without expense to
the tendering shareholder thereof (or, in the case of old senior preferred
stock tendered by book-entry transfer into the exchange agent's account at the
Depository Trust Company pursuant to the book-entry transfer procedures
described below, those non-exchanged old senior preferred stock will be
credited to an account maintained with the Depository Trust Company) as
promptly as practicable after the expiration or termination of the exchange
offer.
Book-Entry Transfer
The exchange agent will make a request to establish an account with respect
to the old senior preferred stock at the Depository Trust Company for purposes
of the exchange offer promptly after the date of this prospectus. Any financial
institution that is a participant in the Depository Trust Company's systems may
make book-entry delivery of the old senior preferred stock by causing the
Depository Trust Company to transfer such old senior preferred stock into the
exchange agent's account at the Depository Trust Company in accordance with the
Depository Trust Company's Automated Tender Offer Program ("ATOP") procedures
for transfer. However, the exchange for the old senior preferred stock so
tendered will only be made after timely confirmation of such book-entry
transfer of old senior preferred stock into the exchange agent's account, and
timely receipt by the exchange agent of an Agent's Message (as such term is
defined in the next sentence) and any other documents required by the letter of
transmittal on or prior to the expiration date of the exchange offer or
pursuant to the guaranteed delivery procedures described below. The term
"Agent's Message" means a message, transmitted by the Depository Trust Company
and received by the exchange agent and forming a part of a timely confirmation
of a book-entry transfer, which states that the Depository Trust Company has
received an express acknowledgement from a shareholder tendering old senior
preferred stock that are the subject of such timely confirmation of a book-
entry transfer that such shareholder has received and agrees to be bound by the
terms of the letter of transmittal, and that we may enforce such agreement
against such shareholder.
Guaranteed Delivery Procedures
If a registered shareholder of the old senior preferred stock desires to
tender such old senior preferred stock and the old senior preferred stock are
not immediately available, or time will not permit such shareholder's old
senior preferred stock or other required documents to reach the exchange agent
before the expiration date of the exchange offer, or the procedure for book-
entry transfer cannot be completed on a timely basis, a tender may be effected
if:
. the tender is made through an Eligible Institution;
. prior to the expiration date of the exchange offer, the exchange agent
receives from such Eligible Institution a properly completed and duly
executed letter of transmittal (or a facsimile thereof) and Notice of
Guaranteed Delivery, substantially in the form provided by us (by
telegram, telex, facsimile transmission, registered or certified mail or
hand delivery), setting forth the name and address of the shareholder
and the amount of old senior preferred stock tendered, stating that the
tender is being made thereby and guaranteeing that within three New York
Stock Exchange ("NYSE") trading days after the date of execution of the
Notice of Guaranteed Delivery, the certificates of all physically
tendered old senior preferred stock, in proper form for transfer, or a
timely confirmation of a book-entry transfer, as the case may be, and
any other documents required by the letter of transmittal will be
deposited by the Eligible Institution with the exchange agent; and
26
<PAGE>
. the certificates for all physically tendered old senior preferred stock,
in proper form for transfer, or a timely confirmation of a book-entry
transfer, as the case may be, and all other documents required by the
letter of transmittal, are received by the exchange agent within three
NYSE trading days after the date of execution of the Notice of
Guaranteed Delivery.
Withdrawal Rights
You may withdraw your tender of the old senior preferred stock at any time
prior to the expiration date of the exchange offer.
For a withdrawal to be effective, the exchange agent must receive a written
notice of withdrawal at the applicable address set forth below under "Exchange
Agent." Any such notice of withdrawal must:
. specify the name of the person having tendered the old senior preferred
stock to be withdrawn;
. identify the old senior preferred stock to be withdrawn (including the
liquidation preference of such old senior preferred stock); and
. (where certificates for old senior preferred stock have been
transmitted) specify the name in which such old senior preferred stock
are registered, if different from that of the withdrawing shareholder.
If certificates for old senior preferred stock have been delivered or otherwise
identified to the exchange agent, then, prior to the release of such
certificates, the withdrawing shareholder must also submit the serial numbers
of the particular certificates to be withdrawn and a signed notice of
withdrawal with signatures guaranteed by an Eligible Institution unless such
shareholder is an Eligible Institution. If old senior preferred stock have been
tendered pursuant to the procedure for book-entry transfer described above, any
note of withdrawal must specify the name and number of the account at the
Depository Trust Company to be credited with the withdrawn old senior preferred
stock and otherwise comply with the procedures of such facility. We will
determine all questions as to the validity, form and eligibility (including
time of receipt) of such notices, which shall be final and binding on all
parties. Any old senior preferred stock so withdrawn will be deemed not to have
been validly tendered for exchange for purposes of the exchange offer. Old
senior preferred stock which have been tendered for exchange but which are not
exchanged for any reason will be returned to the shareholder thereof without
cost to such shareholder (or, in the case of old senior preferred stock
tendered by book-entry transfer procedures described above, such old senior
preferred stock will be credited to an account maintained with the Depository
Trust Company for the old senior preferred stock) as soon as practicable after
withdrawal, rejection of tender or termination of the exchange offer. You may
retender your properly withdrawn old senior preferred stock by following one of
the procedures described under "Procedures for Tendering the old senior
preferred stock" above at any time on or prior to the expiration date of the
exchange offer.
Certain Conditions to the Exchange Offer
Notwithstanding any other provision of the exchange offer, we shall not be
required to accept for exchange, or to issue registered senior preferred stock
in exchange for, any old senior preferred stock and may terminate or amend the
exchange offer, if at any time before the acceptance of such old senior
preferred stock for exchange or the exchange of the registered senior preferred
stock for such old senior preferred stock, there shall be threatened,
instituted or pending any action or proceeding before, or any injunction, order
or decree shall have been issued by, any court or governmental agency or other
governmental regulatory or administrative agency or commission:
(1) seeking to restrain or prohibit the making or consummation of the
exchange offer or any other transaction contemplated by the exchange
offer, or assessing or seeking any damages as a result thereof; or
(2) resulting in a material delay in our ability to accept for exchange or
exchange some or all of the old senior preferred stock pursuant to the
exchange offer; or
27
<PAGE>
(3) any statute, rule, regulation, order or injunction shall be sought,
proposed, introduced, enacted, promulgated or deemed applicable to the
exchange offer or any of the transactions contemplated by the exchange
offer by any government or governmental authority, domestic or
foreign; or
(4) any action shall have been taken, proposed or threatened, by any
government, governmental authority, agency or court, domestic or
foreign;
that in our sole judgment might directly or indirectly result in any of the
consequences referred to in (1) or (2) above or, in our sole judgment, might
result in the holders of registered senior preferred stock having obligations
with respect to resales and transfers of registered senior preferred stock
which exceed those described in this prospectus, or would otherwise make it
inadvisable to proceed with the exchange offer. If we determine in good faith
that any of the conditions are not met, we may:
. refuse to accept any old senior preferred stock and return all tendered
old senior preferred stock to exchanging shareholders;
. extend the exchange offer and retain all old senior preferred stock
tendered prior to the expiration of the exchange offer, subject,
however, to the rights of shareholders to withdraw such old senior
preferred stock (see "--Withdrawal Rights"); or
. waive some of the unsatisfied conditions with respect to the exchange
offer and accept all properly tendered old senior preferred stock which
have not been withdrawn or revoked. If such waiver constitutes a
material change to the exchange offer, we will promptly disclose such
waiver by means of a prospectus supplement that will be distributed to
all shareholders.
Shareholders have specified rights and remedies against us under the
registration rights agreement, including specified liquidated damages, should
we fail to consummate the exchange offer within a specified period of time,
notwithstanding a failure due to the occurrence of any of the conditions stated
above. Such conditions are not intended to modify those rights or remedies in
any respect. The foregoing conditions are for our benefit and may be asserted
by us in good faith regardless of the circumstances giving rise to such
condition or may be waived by us in whole or in part at any time and from time
to time in our discretion. The failure by us at any time to exercise the
foregoing rights shall not be deemed a wavier of any such right and each such
right shall be deemed an ongoing right which may be asserted at any time and
from time to time.
Exchange Agent
The Bank of New York has been appointed as exchange agent for the exchange
offer. You should direct your questions and requests for assistance, requests
for additional copies of this prospectus or of the letter of transmittal to the
exchange agent addressed as follows:
<TABLE>
<C> <S>
By overnight courier or by hand: By registered or certified mail:
The Bank of New York The Bank of New York
Corporate Trust Service Window 101 Barclay Street 12W
Ground Level New York, NY 10286
101 Barclay Street Attention: William Powers
New York, NY 10286 Telephone: (212) 815-8188
Attention: William Powers Facsimile: (212) 815-3201
Corporate Trust Division, 12 West
Telephone: (212) 815-8188
Facsimile: (212) 815-3201
</TABLE>
IF YOU DELIVER TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMIT
INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE, IT WILL NOT BE A
VALID DELIVERY.
28
<PAGE>
Fees and Expenses; Solicitation of Tenders
We will bear the expenses of soliciting tenders. The principal solicitation
is being made by mail; however, additional solicitation may be made by
telegraph, telephone or in person by our officers, regular employees,
affiliates or agents.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to brokers, dealers or others soliciting
acceptances of the exchange offer. We, however, will pay the exchange agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses in connection with the exchange offer. The
cash expenses to be incurred in connection with the exchange offer will be paid
by us and include fees and expenses of the exchange agent and Trustee plus
accounting and legal fees.
We will pay all transfer taxes, if any, applicable to the exchange of the
old senior preferred stock pursuant to the exchange offer. If, however,
certificates representing the registered senior preferred stock or the old
senior preferred stock for principal amounts not tendered or accepted for
exchange are to be delivered to, or are to be registered or issued in the name
of, any person other than the registered shareholders tendered, or if a
transfer tax is imposed for any reason other than the exchange of the old
senior preferred stock pursuant to the exchange offer, then the tendering
shareholder must pay the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons). If a tendering shareholder does
not submit satisfactory evidence of payment of such taxes or exemption
therefrom to the exchange agent, the amount of such transfer taxes will be
billed directly to such tendering shareholder.
We have not authorized anyone to give any information or to make any
representations in connection with the exchange offer other than those
contained in this prospectus. If given or made, such information or
representations should not be relied upon as having been authorized by us.
Neither the delivery of this prospectus nor any exchange made hereunder shall,
under any circumstances, create any implication that there has been no change
in our affairs since the respective dates as of which information is given in
this prospectus. The exchange offer is not being made to (nor will tenders be
accepted from or on behalf of) shareholders in any jurisdiction in which the
making of the exchange offer or the acceptance of this prospectus would not be
in compliance with the laws of such jurisdiction.
Accounting Treatment
We will record the registered senior preferred stock at the same carrying
value as the old senior preferred stock. Accordingly, no gain or loss for
accounting purposes will be recognized.
Consequences of Failure to Exchange
If you do not exchange your old senior preferred stock for registered senior
preferred stock pursuant to the exchange offer, you will continue to be subject
to the restrictions on transfer of such old senior preferred stock as set forth
in the legend on the old senior preferred stock. In general, you may not offer
to sell or sell the old senior preferred stock, unless registered under the
Securities Act, except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state securities laws. We do not
intend to register the old senior preferred stock under the Securities Act. We
believe that, based upon interpretations contained in no-action letters issued
to third parties by the staff of the SEC, any shareholder may offer for resale,
resell or otherwise transfer the registered senior preferred stock issued
pursuant to the exchange offer in exchange for the old senior preferred stock
(unless the shareholder is an "affiliate" of ours within the meaning of Rule
405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that:
. the shareholder acquires the registered senior preferred stock in the
ordinary course of its business;
. the shareholder has no arrangement with any person to participate in the
distribution of such old senior preferred stock; and
29
<PAGE>
. each broker-dealer that receives registered senior preferred stock for
its own account in exchange for old senior preferred stock must
acknowledge that it will deliver a prospectus in connection with any
resale of such registered senior preferred stock. See the "Plan of
Distribution" section of this prospectus.
If any shareholder (other than a broker-dealer described in the preceding
sentence) has any arrangement or understanding with respect to the distribution
of the registered senior preferred stock to be acquired pursuant to the
exchange offer, such shareholder could not rely on the applicable
interpretations of the staff of the SEC and must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with
any resale transaction. In addition, to comply with the securities laws of
various jurisdictions, if applicable, you may not offer or sell the registered
senior preferred stock unless they have been registered or qualified for sale
in such jurisdiction or an exemption from registration or qualification is
available and is complied with.
30
<PAGE>
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the registered
senior preferred stock. As consideration for the registered senior preferred
stock, we will receive in exchange an equivalent liquidation preference of
outstanding old senior preferred stock, the terms of which are substantially
identical to the terms of the registered senior preferred stock, except that
the registered senior preferred stock will be freely transferable and issued
free of any covenants regarding exchange and registration rights.
We will retire and cancel the old senior preferred stock surrendered in
exchange for the registered senior preferred stock. Accordingly, the issuance
of registered senior preferred stock under the exchange offer will not result
in any changes in our outstanding equity. We used the net proceeds of the
offering of old senior preferred stock in conjunction with cash on hand to
redeem our $100.0 million of senior redeemable preferred stock that was issued
in connection with the merger, pursuant to a private placement.
31
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of TNP and its
subsidiaries on an unaudited, actual basis as of June 30, 2000, adjusted for
the redemption of $27.2 million of Series A secured debentures and $9.5 million
of Series U first mortgage bonds.
You should read the information contained in the following table in
conjunction with the "Recent Events," "Use of Proceeds," and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
sections of this prospectus and the consolidated financial statements and notes
thereto of TNP included elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of June 30, 2000 (Unaudited)
----------------------------------------
As
Actual Adjustments Adjusted
---------- ----------- ----------
(in thousands)
<S> <C> <C> <C>
Cash and cash equivalents........... $ 12,131 $ (4,172) $ 7,959
========== ======== ==========
Common shareholders' equity......... $ 93,973 $ -- $ 93,973
---------- -------- ----------
Preferred stock subject to mandatory
redemption......................... 98,269 3,541 (A)(B) 101,810
---------- -------- ----------
Long-term debt (including current
maturities)
TNMP revolving credit facilities.. 237,000 36,000 (C) 273,000
9 1/4% first mortgage bonds,
Series U......................... 9,494 (9,494)(C) --
6 1/4% senior notes............... 175,000 -- 175,000
Unamortized discount.............. (715) 347 (C) (368)
10 3/4% secured debentures, Series
A................................ 27,224 (27,224)(C) --
Senior secured revolving credit
facility......................... -- -- --
Senior secured term loan.......... 159,600 -- 159,600
10.25% senior subordinated notes.. 275,000 -- 275,000
---------- -------- ----------
Total debt...................... 882,603 (371) 882,232
---------- -------- ----------
Total capitalization................ $1,074,845 $ 3,170 $1,078,015
========== ======== ==========
</TABLE>
--------
(A) On September 15, 2000, TNMP redeemed the remaining $0.8 million and $0.7
million of its Series B and C redeemable cumulative preferred stock,
respectively.
(B) On August 15, 2000, TNP declared a dividend on its Senior Redeemable
Preferred stock of $50.75 per share, payable in additional shares of
preferred stock.
(C) On September 15, 2000, TNMP redeemed the remaining $27.2 million of Series
A secured debentures and $9.5 million of Series U first mortgage bonds.
TNMP financed the redemption by drawing $36.0 million from its existing
bank facility, which it used to pay principal and interest.
32
<PAGE>
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
(Dollars in thousands)
The following tables set forth selected historical financial data of TNP and
selected operating data for TNMP for the years ended December 31, 1995 through
1999 which have been derived from the audited statements of TNP for those
periods, and for the six months ended June 30, 1999, the three months ended
March 31, 2000, and the three months ended June 30, 2000, which have been
derived from the unaudited financial statements of TNP which, in the opinion of
management, contain all adjustments necessary for a fair presentation of the
information presented. As the information presented below is only a summary and
does not provide all of the information contained in the financial statements
of TNP, you should read "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and notes thereto of TNP included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Year Ended December 31, Predecessor
--------------------------------------------------- -----------------------
Six Months Three Months Three Months
Ended Ended Ended
June 30, March 31, June 30,
1995 1996 1997 1998 1999 1999 2000(/1/) 2000
--------- --------- -------- -------- --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of operations
data:
Operating revenues...... $ 485,823 $ 502,737 $578,534 $585,941 $ 576,150 $262,153 $124,526 $ 155,931
--------- --------- -------- -------- --------- -------- -------- ----------
Operating expenses
Purchased power and
fuel.................. 227,363 243,682 300,614 315,949 279,587 124,354 59,550 81,314
Other operating and
maintenance........... 82,833 84,417 86,385 95,661 106,634 52,432 29,398 25,703
Depreciation........... 37,850 38,172 38,853 38,056 39,295 19,487 10,230 12,975
Charge for recovery of
stranded plant........ -- -- -- -- 23,376 5,653 1,629 3,396
Taxes other than income
taxes................. 28,865 33,256 33,667 36,014 33,746 16,285 7,941 9,142
Income taxes........... 12,317 10,375 21,242 15,480 19,120 7,274 1,745 1,395
--------- --------- -------- -------- --------- -------- -------- ----------
Total operating
expenses............... 389,228 409,902 480,761 501,160 501,758 225,485 110,493 133,925
--------- --------- -------- -------- --------- -------- -------- ----------
Net operating income.... 96,595 92,835 97,773 84,781 74,392 36,668 14,033 22,006
Other income (net)...... 10,425 2,678 1,700 1,238 (482) 1,237 334 252
Interest expenses....... 73,960 69,363 56,912 53,885 43,743 22,369 10,514 21,726
--------- --------- -------- -------- --------- -------- -------- ----------
Income from continuing
operations............. 33,060 26,150 42,561 32,134 30,167 15,536 3,853 532
Loss from discontinued
nonregulated
operations, net of
taxes.................. -- 3,097 12,883 12,710 -- -- -- --
Cumulative effect of
change in accounting
for unbilled revenues,
net of taxes........... 8,445 -- -- -- -- -- -- --
--------- --------- -------- -------- --------- -------- -------- ----------
Net income.............. 41,505 23,053 29,678 19,424 30,167 15,536 3,853 532
Dividends on preferred
stock and other........ 655 167 158 150 (19) (58) 5 3,314
--------- --------- -------- -------- --------- -------- -------- ----------
Net income applicable to
common................. $ 40,850 $ 22,886 $ 29,520 $ 19,274 $ 30,186 $ 15,594 $ 3,848 $ (2,782)
========= ========= ======== ======== ========= ======== ======== ==========
Other financial data and
ratios:
EBITDA(2)............... $ 149,599 $ 145,366 $161,134 $142,252 $ 161,342 $ 71,369 $ 28,233 $ 40,227
Ratio of EBITDA to
consolidated interest
expense................ 2.0x 2.1x 2.8x 2.6x 3.7x 3.2x 2.7x 1.9x
Ratio of total debt to
EBITDA................. 4.1x 3.7x 3.0x 3.2x 2.7x N/A N/A N/A
Ratio of total debt and
preferred equity to
EBITDA................. 4.1x 3.7x 3.0x 3.2x 2.7x N/A N/A N/A
Ratio of combined fixed
charges and preferred
dividends(3)........... 1.7x 1.5x 2.1x 1.9x 2.1x N/A N/A N/A
Balance sheet data:
Cash and cash
equivalents............ $ 21,105 $ 8,387 $ 15,877 $ 12,216 $ 14,456 $ 9,960 N/A $ 12,131
Property, plant and
equipment, net......... 944,004 933,939 923,268 922,879 907,978 925,323 N/A 642,486
Total assets............ 1,030,433 1,006,784 991,926 993,765 1,001,199 995,265 N/A 1,305,376
Total debt.............. 612,995 534,102 478,141 459,000 440,244 459,702 N/A 882,603
Preferred Stock subject
to mandatory
redemption............. 3,600 3,420 3,240 3,060 1,664 1,844 N/A 98,269
Common shareholders'
equity................. 217,457 278,474 298,241 308,294 327,110 320,087 N/A 93,973
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended
--------------------------------------------------- ---------------------
June 30, June 30,
1995 1996 1997 1998 1999 1999 2000
--------- --------- ---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
TNMP Operating Revenues:
Residential............ $ 200,455 $ 206,748 $ 211,398 $ 225,870 $ 216,374 $ 91,611 $ 92,822
Commercial............. 148,908 150,034 155,539 164,800 163,248 74,888 78,652
Industrial............. 113,728 129,972 170,169 150,883 147,110 73,440 74,417
Other.................. 22,732 15,983 27,672 33,178 45,695 20,677 31,338
Power Marketing........ -- -- 13,756 11,161 3,666 1,509 3,201
--------- --------- ---------- ---------- --------- ---------- ----------
Total................ $ 485,823 $ 502,737 $ 578,534 $ 585,892 $ 576,093 $ 262,125 $ 280,430
========= ========= ========== ========== ========= ========== ==========
Sales (megawatt-hours):
Residential............ 2,141,553 2,230,558 2,251,119 2,439,478 2,420,512 1,041,023 1,090,342
Commercial............. 1,681,130 1,725,650 1,772,591 1,883,422 1,921,614 873,711 949,509
Industrial............. 2,704,159 3,797,776 5,523,907 4,981,773 4,799,146 2,440,514 2,313,117
Other.................. 113,985 108,039 107,847 113,535 108,547 53,457 48,458
Power Marketing........ -- -- 494,705 425,216 119,344 48,972 100,117
--------- --------- ---------- ---------- --------- ---------- ----------
Total................ 6,640,827 7,862,023 10,150,169 9,843,424 9,369,163 4,457,677 4,501,543
========= ========= ========== ========== ========= ========== ==========
Number of Customers (at
end of period):
Residential............ 183,863 187,796 192,005 197,155 199,617 200,069 201,747
Commercial............. 29,361 29,864 30,289 30,884 33,127 31,319 34,072
Industrial............. 136 135 139 138 116 138 117
Other.................. 244 224 222 227 799 229 797
Power Marketing........ -- -- 16 16 8 10 15
--------- --------- ---------- ---------- --------- ---------- ----------
Total................ 213,604 218,019 222,671 228,420 233,667 231,765 236,748
========= ========= ========== ========== ========= ========== ==========
Revenue Statistics:
Average use per
residential customer
(kilowatt-hours)...... 11,476 11,973 11,835 12,491 12,130 5,239 5,432
Average revenue per
residential customer
(dollars)............. 1,074 1,110 1,111 1,157 1,084 461 462
Average revenue per
kilowatt-hour sold
per residential
customer (cents)...... 9.36 9.27 9.39 9.26 8.94 8.80 8.51
Average revenue per
kilowatt-hour sold
total sales (cents)... 7.32 6.39 5.70 5.95 6.15 5.88 6.23
Net Generation and
Purchases (megawatt-
hours):
Generated.............. 2,351,000 2,296,056 2,089,448 2,062,958 1,912,673 894,656 1,028,560
Purchased.............. 4,612,186 5,769,173 8,443,990 8,256,857 7,716,856 3,685,922 3,631,487
--------- --------- ---------- ---------- --------- ---------- ----------
Total................ 6,963,186 8,065,229 10,533,438 10,319,815 9,629,529 4,580,578 4,660,047
========= ========= ========== ========== ========= ========== ==========
Average Cost per
Kilowatt-hour Purchased
(cents):............... 3.87 3.51 3.13 3.39 3.18 2.70 3.01
</TABLE>
--------
(1) Includes a net-of-tax charge of approximately $3.4 million for pre-merger
severance and retirement benefits recorded between April 1, 2000 and April
7, 2000.
(2) EBITDA represents income from continuing operations before interest
expense, income tax expense, charge for recovery of stranded plant,
depreciation and amortization and non-cash charges of $2.8 million net of
taxes and taxes on other income in 1999 and gain on sale of assets of $9.5
million in 1995 net of taxes. EBITDA is not intended to represent cash flow
from operations as defined by generally accepted accounting principals and
should not be used as an alternative to operating income or income from
continuing operations as an indicator of our operating performance or cash
flow as a measure of liquidity.
(3) For purposes of this calculation, earnings are defined as earnings from
income from continuing operations plus income taxes plus fixed charges.
Fixed charges consist of total interest charges and the portion of interest
implicit in rentals. Preferred dividends consist of the amount of pre-tax
earnings that is required to pay preferred dividends (computed as the
amount of the dividend divided by 1 minus the effective income tax rate
applicable to continuing operations).
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
TNP is a holding company whose primary operating subsidiary is TNMP, a
regulated public utility engaged in generating, purchasing, transmitting and
selling electricity to approximately 235,000 residential, commercial and
industrial customers in Texas and New Mexico. TNMP's operations consist
primarily of the transmission and distribution of electricity from its
generation facility (TNP One) and various third-party power plants to end users
of electricity. For the year ended December 31, 1999, our transmission and
distribution network, which consists of approximately 1,500 miles of
transmission lines, served customers in 90 municipalities and adjacent suburban
and rural areas throughout our three distinct operating regions. Our operating
regions include suburbs of Houston, Dallas and Galveston and rural areas
throughout central, north and west Texas and southern New Mexico. Our customers
in Texas and New Mexico account for 86% and 14% of our operating revenues,
respectively.
We generate approximately 20% of the electricity we sell and purchase the
remaining 80% from various third party suppliers. We have entered into
purchased power agreements with suppliers of energy and have adequate resources
through firm contracts to serve our entire customer base.
Our operations are subject to regulation by the PUCT and NMPRC as well as
several federal regulatory bodies. New legislation in both Texas and New Mexico
that establishes competition in each state's electric utility industry became
law in 1999. The impact of this legislation on TNMP's financial results will be
noted as necessary in the following discussion.
The following discussion of our historical results of operation and
financial condition should be read in conjunction with the consolidated
financial statements and notes thereto of TNP included elsewhere in this
prospectus.
Results of Operations
The following table sets forth the percentage relationships of certain items
in our income statement to operating revenues.
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended
------------------------- ---------------------------
1997 1998 1999 June 30, 1999 June 30, 2000
------- ------- ------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Operating revenues...... 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses
Purchased power and
fuel................. 52.0% 53.9% 48.5% 47.5% 50.2%
Other operating and
maintenance.......... 14.9% 16.3% 18.5% 20.0% 19.6%
Depreciation and
amortization......... 6.7% 6.5% 6.8% 7.4% 8.3%
Charge for recovery of
stranded plant....... -- -- 4.1% 2.1% 1.8%
Taxes other than
income taxes......... 5.8% 6.2% 5.9% 6.2% 6.1%
Income taxes.......... 3.7% 2.6% 3.3% 2.8% 1.1%
------- ------- ------- ----- -----
Total operating
expenses............... 83.1% 85.5% 87.1% 86.0% 87.1%
------- ------- ------- ----- -----
Net operating income.... 16.9% 14.5% 12.9% 14.0% 12.9%
Other income (net)...... 0.3% 0.2% (0.1)% 0.4% 0.2%
Interest expense........ 9.8% 9.2% 7.6% 8.5% 11.5%
------- ------- ------- ----- -----
Income from continuing
operations............. 7.4% 5.5% 5.2% 5.9% 1.6%
======= ======= ======= ===== =====
</TABLE>
35
<PAGE>
Three and Six Months Ended June 30, 2000 Compared to Three and Six Months Ended
June 30, 1999.
The following discussion should be read in conjunction with the related
interim consolidated financial statements and notes.
The merger was accounted for under the purchase method of accounting;
accordingly, purchase accounting adjustments have been reflected in the
financial statements of TNP for all periods subsequent to March 31, 2000.
Financial statements for periods prior to that date were prepared using TNP's
historical basis of accounting and are designated as "predecessor." For
purposes of the discussion of year-to-date operating results provided herein,
the pre-merger financial information of the predecessor has been combined with
the post-merger financial information. The business operations of TNP were not
significantly changed as a result of the merger, and post-merger and pre-merger
operating results, except as noted in the discussion, are comparable.
Results of Operations
Overall Results
TNP
TNP incurred a loss applicable to common stock of $2.8 million for the
quarter ended June 30, 2000 (current quarter) as compared to earnings of $12.5
million for the quarter ended June 30, 1999. TNP's reduced earnings reflect
goodwill amortization, interest expense and preferred dividends related to the
merger.
TNP had earnings applicable to common stock of $1.1 million for the six
months ended June 30, 2000 (year-to-date), as compared to $15.6 million for the
six months ended June 30, 1999. Income declined for the same reasons cited
above for the quarter in addition to one-time charges associated with the
merger.
TNMP
TNMP's earnings applicable to common stock were $11.2 million for the
quarter ended June 30, 2000, as compared to $14.3 million for the quarter ended
June 30, 1999. For the six months ended June 30, TNMP's earnings applicable to
common stock were $18.9 million in 2000 as compared to $18.1 million in 1999.
Under legislation passed in 1999, TNMP's earnings on its Texas operations
are capped at a 10.53% return on rate base adjusted for discounted rates to
industrial customers, which are expected to be approximately $2.7 million in
2000. TNMP will apply Texas earnings in excess of the cap to recover its
stranded costs. TNMP recorded pre-tax excess earnings of $3.6 million ($2.2
million after tax) and $5.6 million ($3.5 million after tax) for the three and
six months ended June 30, 2000. Those amounts included an adjustment to the
excess earnings recorded in 1998 and 1999 due to the resolution of a purchased
power dispute discussed under "Results of Operations--Operating Expenses."
36
<PAGE>
The changes in TNP's and TNMP's earnings for the quarter and the year-to-
date are attributable to the factors listed below (in millions):
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
2000 2000
------------ ----------
<S> <C> <C>
Factors affecting TNMP:
Changes in base revenues....................... $ 1.9 $ 3.4
Non-pass through purchased power and fuel ex-
penses........................................ (4.3) (1.6)
Transmission expenses.......................... 2.8 4.0
Other operating expenses....................... (0.6) (2.3)
Charge for recovery of stranded plant.......... (1.5) 0.6
All other (including income tax effects on the
items above).................................. (1.4) (3.3)
------ ------
TNMP earnings increase (decrease)............ (3.1) 0.8
Factors affecting TNP:
Other operating expenses....................... 0.7 (4.3)
Depreciation and amortization.................. (2.7) (2.7)
Interest....................................... (10.4) (10.3)
Dividends on preferred stock................... (3.3) (3.3)
All other (including income tax effects on the
items above).................................. 3.5 5.3
------ ------
TNP earnings decrease........................ (12.2) (15.3)
------ ------
Consolidated earnings decrease............... $(15.3) $(14.5)
====== ======
</TABLE>
TNMP Operating Revenues
The components of TNMP's base revenues are summarized in the following
tables (in thousands).
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
Increase Increase
2000 1999 (Decrease) 2000 1999 (Decrease)
-------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues...... $155,918 $144,014 $11,904 $280,430 $262,125 $18,305
Pass-through expenses... 60,175 50,154 10,021 108,070 93,187 14,883
-------- -------- ------- -------- -------- -------
Base revenues........... $ 95,743 $ 93,860 $ 1,883 $172,360 $168,938 $ 3,422
======== ======== ======= ======== ======== =======
</TABLE>
Pass-through expenses in Texas include fuel and the energy-related portion
of purchased power. In New Mexico, pass-through expenses include all purchased
power costs. Details of pass-through expenses are discussed under "Results of
Operations--Operating Expenses."
37
<PAGE>
The following table summarizes the components of the changes in base
revenues for the three and six months ended June 30, 2000 compared to the same
period in 1999 (in thousands).
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
2000 v. 1999 2000 v. 1999
-------------- --------------
<S> <C> <C>
Base revenues
Weather related........................... $ 6,568 $ 8,439
Customer growth........................... 906 1,788
Price/sales mix (includes base rate
reductions).............................. (4,798) (7,216)
Transmission revenue...................... 893 2,235
Industrial sales.......................... (2,012) (2,235)
Other..................................... 326 411
------- -------
Base revenues increase.................. $ 1,883 $ 3,422
======= =======
</TABLE>
Current quarter base revenues increased $1.9 million, or 2.0%, compared to
the corresponding 1999 period. The increase resulted from higher weather-
related sales in the residential and commercial classes, higher transmission
revenues, and growth in the number of residential and commercial customers.
These increases were offset in part by a rate reduction in Texas pursuant to
the Transition Plan and reduced sales to industrial customers.
Transmission revenues increased due to a change in the method of allocating
Texas transmission costs that the PUCT approved as of September 1, 1999. The
PUCT adopted the new method to comply with the restructuring legislation passed
in 1999.
Effective January 1, 2000, TNMP implemented base rate reductions of 3% and
1% for residential and commercial customers, respectively, under the terms of a
Declaratory Order issued by the PUCT on December 6, 1999. Similar rate
reductions will take effect January 1, 2001.
Year-to-date base revenues increased $3.4 million, or 2.0% from the same
period in 1999. The same factors discussed above for the current quarter
affected year-to-date base revenues.
The following table summarizes the components of gigawatt-hour (GWH) sales.
<TABLE>
<CAPTION>
Six Months Ended June
Three Months Ended June 30, 30,
-------------------------------------------------------
Increase Increase
2000 1999 (Decrease) 2000 1999 (Decrease)
--------- --------- ------------------ ----- ----------
<S> <C> <C> <C> <C> <C> <C>
GWH sales:
Residential............. 588 549 39 1,090 1,041 49
Commercial.............. 516 472 44 950 874 76
Industrial:
Firm.................. 152 132 20 282 244 38
Economy............... 1,008 1,153 (145) 2,031 2,197 (166)
Power marketing......... 32 27 5 100 48 52
Other................... 25 26 (1) 48 53 (5)
--------- --------- -------- ----- ----- ----
Total GWH sales..... 2,321 2,359 (38) 4,501 4,457 44
========= ========= ======== ===== ===== ====
</TABLE>
Current quarter sales decreased 38 GWHs (or 2%) as compared to the
corresponding quarter of 1999. The current quarter decrease resulted primarily
from reduced sales to a significant industrial customer under an economy sales
arrangement. This was partially offset by higher weather-related sales to
commercial and residential customers and growth in the number of commercial and
residential customers. Year-to-date sales increased 44 GWHs (or 1%) as compared
to the corresponding 1999 period. Higher off-system sales combined with the
factors noted for the quarter accounted for the increase.
38
<PAGE>
Operating Expenses
Factors Affecting TNMP
TNMP incurred operating expenses of $133.8 million in the quarter ended June
30, 2000, an increase of $13.4 million over the amount incurred during the
corresponding period of 1999. The increase reflects higher costs for purchased
power and fuel, and increased charges for the recovery of stranded plant
partially offset by lower transmission expenses. For the six months ended June
30, 2000, TNMP incurred operating expenses of $240.2 million, an increase of
$16.7 million over 1999 levels. The year-to-date increase reflects higher costs
for purchased power, fuel, and other operating expenses partially offset by
lower transmission expenses.
Purchased Power and Fuel Expenses
The following table summarizes the components of TNMP's purchased power and
fuel expenses (in thousands).
<TABLE>
<CAPTION>
Three Months Ended June
30, Six Months Ended June 30,
-------------------------- ----------------------------
Increase Increase
2000 1999 (Decrease) 2000 1999 (Decrease)
------- ------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Purchased power and fuel
expenses:
Pass through expenses:
Purchased power..... $50,772 $41,942 $ 8,830 $ 90,183 $ 78,013 $12,170
Fuel................ 9,403 8,212 1,191 17,887 15,174 2,713
------- ------- ------- -------- -------- -------
60,175 50,154 10,021 108,070 93,187 14,883
------- ------- ------- -------- -------- -------
Non-pass through
expenses:
Texas purchased
power.............. 20,750 16,437 4,313 31,965 30,529 1,436
Fuel................ 389 391 (2) 829 638 191
------- ------- ------- -------- -------- -------
21,139 16,828 4,311 32,794 31,167 1,627
------- ------- ------- -------- -------- -------
Total purchased power
and fuel............. $81,314 $66,982 $14,332 $140,864 $124,354 $16,510
======= ======= ======= ======== ======== =======
</TABLE>
In the second quarter of 2000, purchased power and fuel expenses increased
$14.3 million from the level incurred during the second quarter of 1999. Pass-
through expenses increased $10.0 million, reflecting increased purchases caused
by higher sales overall and price increases in New Mexico. Non pass-through
expenses increased $4.3 million due to higher costs incurred on sales to an
industrial customer under a replacement power contract.
For the six months ended June 30, 2000, purchased power and fuel expenses
increased $16.5 million from the level incurred during the same period of 1999.
Pass-through expenses increased $14.9 million for the reasons cited above for
the quarter. Non pass-through expenses increased $1.6 million due to higher
costs incurred on sales to an industrial customer under a replacement power
contract, partially offset by the deferral of a $2.4 million payment made in
1998 to resolve a billing dispute. The $2.4 million deferral resulted from a
PUCT decision that ordered TNMP to defer a $4.8 million purchase power dispute
payment it made in 1998, and to amortize it over a four-year period, beginning
in 1998 and ending in 2001. Accordingly, in March 2000 TNMP recorded a
regulatory asset of $2.4 million, the unamortized balance of the $4.8 million
payment, and a corresponding reduction to purchased power expense.
Transmission Expenses
Transmission expenses decreased by $2.8 million and $4.0 million for the
three and six months ended June 30, 2000, respectively, compared to the
corresponding periods in 1999, due to the change in cost allocation described
in "Operating Revenues," above.
Other Operating Expenses
Other operating expenses were $0.6 million and $2.3 million higher for the
current quarter and year-to-date periods, respectively, than in the same
periods of 1999. This increase is primarily due to higher payroll
39
<PAGE>
costs, an increase in the proportion of total payroll charged to operating
expenses, and a payment to the Texas Department of Housing for programs to
assist low-income customers.
Charge for Recovery of Stranded Plant
Charge for recovery of stranded plant increased $1.5 million in the second
quarter of 2000 compared to the same period in 1999. During the second quarter
of 2000, TNMP recorded a charge for recovery of stranded plant of $3.4
million. In the second quarter of 1999, TNMP recorded $1.9 million in charges
for recovery of stranded plant, including adjustments to reflect the adoption
of Texas Senate Bill 7, the 1999 retail competition legislation.
For the year-to-date, charges for recovery of stranded plant are comparable
to amounts recorded in 1999.
Factors Affecting TNP
Other Operating Expenses
Other operating expenses for the current quarter were comparable to 1999.
Year-to-date other operating expenses were $4.3 million higher than in the
same period of 1999. This increase is primarily due to a one-time charge of
approximately $5.6 million for severance and retirement benefits due to the
change in control resulting from the merger.
Depreciation and Amortization
Beginning in the second quarter of 2000, TNP began amortizing goodwill
associated with the merger over 25 years. Goodwill amortization was $2.7
million for both the three and six months ended June 30, 2000.
Interest Expense
TNP incurred interest expense of $10.7 million in both the three and six
months ended June 30, 2000 on the debt issued in connection with the merger.
Those amounts increased by $10.4 and $10.3 million compared to amounts
incurred in the three and six months ended June 30, 1999, respectively.
Dividends on Preferred Stock
In connection with the merger, on April 7, 2000, TNP issued $100 million of
senior redeemable preferred stock in a private placement. In May 2000, TNP
replaced the senior redeemable preferred stock with $100 million of old senior
preferred stock. Dividends on the preferred stock issues were $3.3 million in
both the second quarter and year-to-date periods of 2000.
Financial Condition
TNMP Liquidity
The main sources of liquidity for TNMP are cash flow from operations and
borrowings from its credit facility. TNMP's cash flow from operations was $7.3
million lower for the first six months of 2000 as compared to the same period
1999 due to higher payments for fuel and purchased power costs, payments of
interest on debt repurchases related to the merger, and funding to TNP under a
tax sharing agreement between TNP and TNMP. Lower cash flows from the factors
above were partially offset by higher receipts from customers.
In connection with the merger, TNMP entered into a Backstop Credit Facility
(Backstop Facility) in the amount of $240 million on April 17, 2000, so that
it could repurchase up to $100 million of its 9.25 percent Series U First
Mortgage Bonds and up to $140 million of its 10.75 percent Series A Secured
Debentures. As required by its first mortgage bond and secured debenture
indentures, TNMP was required to offer to repurchase this debt at 101 percent
of par value due to a change in control of TNP resulting from the merger.
40
<PAGE>
On June 1, 2000, TNMP repurchased approximately $112.8 million of its Series
A Secured Debentures and approximately $90.5 million of its Series U First
Mortgage bonds during the second quarter of 2000, using funds from the Backstop
Facility and an existing bank facility. Commitments associated with the unused
portion of the Backstop Facility terminated on June 1, 2000 and are no longer
available to TNMP. The Backstop Facility matures on May 1, 2001, and bears
interest at a variable rate based on LIBOR. TNMP intends to establish a new
credit facility that will enable it to refinance the amounts outstanding on the
secured debentures, first mortgage bonds, Backstop Facility, and existing bank
facility. At June 30, 2000, the amount outstanding on those obligations was
approximately $273.7 million, of which approximately $246.5 million is due
within one year. TNMP expects to close the new credit facility by the end of
2000.
TNMP has sufficient liquidity to satisfy the possibility of any known
contingencies. Management believes cash flow from operations and periodic
borrowings under the planned credit facility described above should be
sufficient to meet working capital requirements at least through 2001.
TNP Liquidity
TNP's main sources of liquidity, and its ability to service the debt issued
to finance the merger, depend primarily on the earnings of TNMP and the
distribution of those earnings in the form of cash dividends, as well as tax
payments from TNMP due under a tax sharing agreement between TNP and TNMP. TNP
has a $25 million revolving credit facility that will be used to provide
working capital and meet other requirements. The revolving credit facility was
put in place at the time of the merger. As of June 30, 2000, TNP had no
borrowings against the revolving credit facility, and the entire $25 million
was available to TNP.
Cash dividends from TNMP to TNP are limited by restrictions included in
TNMP's debt indentures and bank agreements. In addition, the regulatory orders
from the PUCT and the NMPRC approving the merger contain additional
restrictions on TNMP's ability to pay cash dividends to TNP. During the second
quarter of 2000, TNMP paid a dividend of $7.5 million to TNP.
During the first six months of 2000, TNP's cash flow from operations was
$4.7 million lower than in the first six months of 1999 due to TNMP's lower
cash flow from operations as discussed above, offset by reduced expenditures
for non-regulated activities and tax payments from TNMP under the tax sharing
agreement described above.
Management believes that dividends from TNMP, payments from TNMP under the
tax sharing agreement, and periodic borrowings under its revolving credit
facility should be sufficient to meet TNP's working capital requirements at
least through 2001.
1999 compared to 1998
The following table summarizes the components of gigawatt-hour sales and
provides a comparison of 1999 to 1998.
<TABLE>
<CAPTION>
Year Ended
December 31,
------------- Percent
1999 1998 Variance Change
------ ------ -------- -------
<S> <C> <C> <C> <C>
Residential.................................. 2,420 2,440 (20) (0.8)%
Commercial................................... 1,922 1,883 39 2.0%
Industrial................................... 4,799 4,981 (182) (3.7)%
Other........................................ 228 539 (311) (57.7)%
------ ------ ---- -----
Total gigawatt-hour sales.................. 9,369 9,843 (474) (4.8)%
====== ====== ==== =====
</TABLE>
In 1999 sales decreased 5%, or 474 gigawatt-hours, from 1998 levels,
primarily due to reduced sales to a large industrial customer whose contract
was renegotiated (see "Operating revenues") and decreased power marketing
sales.
41
<PAGE>
The following table summarizes the average prices paid per kilowatt-hour by
customer class and provides a comparison of 1999 to 1998.
<TABLE>
<CAPTION>
Year Ended
December 31,
------------- Percent
1999 1998 Change
------ ------ -------
<S> <C> <C> <C>
Average Revenue per Kilowatt-hour (cents):
Residential......................................... 8.94 9.26 (3.5)%
Commercial.......................................... 8.50 8.75 (2.9)%
Industrial.......................................... 3.07 3.03 1.3%
</TABLE>
Average revenue per kilowatt-hour sold to residential and commercial
customers decreased as a result of changes, mandated by the Transition Plan, in
the calculation of the fuel factor (the portion of a customer's energy costs
representing our cost for fuel and purchased power). The Transition Plan
changed the calculation of the fuel factor from variable factor to fixed. TNMP
implemented the approved fuel factor in late 1998. Average revenue per
kilowatt-hour sold to industrial customers increased due to a standby contract
entered into in 1999 with a cogeneration customer. Under this contract, we
receive revenues for providing backup power services. This contract does not
require kilowatt-hour sales unless the cogeneration plant suffers a service
interruption. Excluding this contract, the two periods would be comparable.
Operating revenues: Operating revenues decreased 2% to $576.1 million for
1999 compared to $585.9 million for 1998. Operating revenues consist of two
components: (i) base revenues and (ii) pass-through expenses. Pass-through
expenses in Texas include fuel and the energy-related portion of purchased
power while pass-through expenses in New Mexico were redefined as of July 1,
1999 to include all fuel and purchased power expenses.
The components of TNMP's base revenues (revenues net of pass-through
expenses) are summarized in the following tables (in thousands).
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------------
1999 1998 Increase/(Decrease)
-------- -------- ------------------
<S> <C> <C> <C>
Operating revenues..................... $576,093 $585,892 $ (9,799)
Pass-through expenses.................. 199,939 193,016 6,923
-------- -------- --------
Base revenues.......................... $376,154 $392,876 $(16,722)
======== ======== ========
</TABLE>
Base revenues decreased 4% or $16.7 million from $392.9 million in 1998 to
$376.2 million in 1999. The following table summarizes the components of the
base revenues decrease (in thousands).
<TABLE>
<S> <C>
Base Revenues:
Weather related.................................................. $ (3,979)
Customer growth.................................................. 5,064
New Mexico purchased power recovery effects from termination of
Community Choice(R)............................................. (10,192)
Industrial--firm rate sales...................................... (3,325)
Clear Lake standby revenue....................................... (2,453)
New Mexico stranded cost adjustment.............................. 1,697
Other changes in base revenues................................... (3,534)
--------
Base revenues decrease......................................... $(16,722)
========
</TABLE>
The base revenues decrease resulted primarily from a change in the
classification of New Mexico purchased power recovery revenues from base to
pass-through. This reclassification resulted from the
42
<PAGE>
NMPRC's termination of Community Choice(R) which restored the pass-through of
purchased power costs to TNMP's New Mexico customers as of July 1, 1999.
Effective July 1, 1999, pass-through expenses include all purchased power costs
while prior to July 1, 1999, purchased power costs were recovered from
customers in base rates. Under Community Choice(R), the difference between
purchased power recovery and actual purchased power costs affected operating
income. The termination of Community Choice(R) limits purchased power recovery
to actual purchased power costs and thus purchased power recovery does not
affect operating income. This reclassification resulted in a $10.2 million
decrease in New Mexico base revenues which was offset by a $10.2 million
increase in pass-through revenues.
Other factors contributing to the base revenues decrease were a renegotiated
contract with a large industrial customer who reduced its firm purchased power
commitment by 55%, the settlement of litigation with Clear Lake Cogeneration
Limited Partnership ("Clear Lake"), which resulted in the loss of standby
revenue payments and milder weather compared to 1998. The decrease was
partially offset by residential and commercial customer growth.
Operating expenses: Operating expenses increased to $501.8 million for 1999
from $501.2 million in 1998. The increase of $0.6 million resulted from the
charge for recovery of stranded plant and increased other operating and
maintenance expenses offset by a decrease in purchase power and fuel expense
and taxes other than income taxes.
The following table summarizes the components of TNMP's purchased power and
fuel expenses (in thousands).
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 Increase/(Decrease)
----------- ----------- ------------------
<S> <C> <C> <C>
Pass-through expenses.......... $ 199,939 $ 193,016 $ 6,923
Non pass-through expenses...... 79,648 122,933 (43,285)
----------- ----------- --------
Purchased power and fuel
expenses...................... $ 279,587 $ 315,949 $(36,362)
=========== =========== ========
</TABLE>
In 1999, purchased power and fuel expenses decreased 12% or $36.4 million
from the $315.9 million in 1998 to $279.6 million in 1999. Non pass-through
expenses decreased $43.3 million, reflecting lower demand costs resulting from
the replacement of purchases from TXU Electric Company Inc. ("TXU") with
purchases from lower cost providers, significant reductions of the rate under
which TNMP purchases capacity from Clear Lake, and effects of the termination
of New Mexico Community Choice(R). The decreases in non pass-through costs were
partially offset by increases in pass-through expenses of $6.9 million. Pass-
through expenses increased because of increased costs of electricity purchased
in the spot market during the third quarter's extreme weather.
The NMPRC terminated Community Choice(R) in the second quarter. Under
Community Choice(R), rates for recovery of New Mexico purchased power costs
were frozen, except those charged to certain industrial customers. The NMPRC
order terminating Community Choice(R) required TNMP to pass through to all
customers New Mexico purchased power costs as of July 1, 1999. As a result,
$11.4 million of New Mexico purchased power costs incurred in the third and
fourth quarter were recorded as pass-through expenses. Those costs would have
been recorded as non pass-through expenses under Community Choice(R).
Under the Texas legislation, we are allowed to apply earnings in excess of
our maximum allowed return on equity to accelerate the amortization of our
stranded costs (charge for recovery of stranded plant). In 1999, based on
provisions of the legislation, we earned $23.4 million in excess of our maximum
allowed return on equity. These excess earnings were used to increase our
amortization of plant and equipment resulting in a reduction to 1999 pre-tax
operating income.
Other operating and maintenance expenses increased 11% or $11.0 million to
$106.6 million in 1999 from $95.7 million in 1998 primarily due to increased
transmission costs and legal and outside consultant fees
43
<PAGE>
associated with the merger ($4.1 million). Transmission expenses increased $7.0
million in 1999, from the same period in 1998, due to discontinued
reimbursements in accordance with the Clear Lake settlement, and a new
allocation of transmission costs approved by the PUCT in July 1999. The
increased transmission expenses approved by the PUCT resulted from our
termination of a majority of the TXU purchased power contract at the beginning
of 1999. While terminating the contract has produced purchased power savings,
the savings were partially offset by increased transmission payments. A second
PUCT action in September 1999 partially offset these increases when, in
accordance with the Texas legislation, the PUCT approved a change in the method
of allocating transmission costs effective September 1, 1999. This change
resulted in a $1.7 million reduction in TNMP's transmission expenses in the
fourth quarter of 1999 compared to what they would have been without the
change.
Taxes other than income taxes decreased 6.4% or $2.3 million from $36.0
million in 1998 to $33.7 million in 1999 due to reduced property taxes and
lower revenue related taxes.
Operating income: Due to the factors discussed above in operating revenues
and expenses, net operating income decreased 12% from $84.8 million in 1998 to
$74.4 million in 1999.
Interest Expense: Interest charges decreased 19% or $10.2 million from $53.9
million in 1998 to $43.7 million in 1999 due to the issuance of $175.0 million
of 6.25% senior notes, the proceeds of which were used to retire our $130.0
million senior secured debentures and reduce outstanding borrowings under our
credit facility.
1998 compared to 1997
The following table summarizes the components of gigawatt-hour sales and
provides a comparison of 1998 to 1997.
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
1998 1997 Variance Percent Change
----- ------ -------- --------------
<S> <C> <C> <C> <C>
Residential............................. 2,440 2,251 189 8.4%
Commercial.............................. 1,883 1,772 111 6.3%
Industrial.............................. 4,981 5,524 (543) (9.8)%
Other................................... 539 603 (64) (10.6)%
----- ------ ---- -----
Total gigawatt-hour sales............. 9,843 10,150 (307) (3.0)%
===== ====== ==== =====
</TABLE>
In 1998, gigawatt-hour sales decreased 3% or 307 gigawatt-hours 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 increased demand resulting
from hotter-than-normal weather and customer growth.
The following table summarizes the average prices paid per kilowatt-hour by
customer class and provides a comparison of 1998 to 1997.
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------
1998 1997 Percent Change
------ ------ --------------
<S> <C> <C> <C>
Average Revenue per Kilowatt-hour (cents):
Residential................................... 9.26 9.39 (1.4)%
Commercial.................................... 8.75 8.77 (0.2)%
Industrial.................................. 3.03 3.08 (1.6)%
</TABLE>
Average revenue per kilowatt-hour sold to residential and commercial
customers decreased primarily due to rate reductions mandated by the Transition
Plan. The Transition Plan specified base rate reduction, effective
44
<PAGE>
January 1, 1998, for residential and commercial customers of 3% and 1%
respectively. These mandated rate reductions were offset by a higher pass-
through of fuel and purchased power. The average revenue per kilowatt-hour sold
to industrial customers decreased due to the loss of major customers.
Operating revenues: Operating revenues increased 1% or $7.4 million to
$585.9 million for 1998 from $578.5 million in 1997. Operating revenues consist
of two components: (i) base revenues and (ii) pass-through expenses. Pass-
through expenses in Texas include fuel and the energy-related portion of
purchased power while in New Mexico, the composition of pass-through expenses
changed in 1997, as described in the "Operating expenses" section below.
The components of TNMP's base revenues (revenues net of pass-through
expenses) are summarized in the following tables (in thousands).
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
<S> <C> <C> <C>
<CAPTION>
1998 1997 Increase/(Decrease)
----------- ----------- ------------------
<S> <C> <C> <C>
Operating revenues.............. $ 585,892 $578,534 $7,358
Pass through expenses........... 193,016 188,971 4,045
----------- ----------- ------
Base revenues................. $ 392,876 $389,563 $3,313
=========== =========== ======
</TABLE>
The following table summarizes the components of the base revenues increase
from 1997 to 1998 (in thousands).
<TABLE>
<S> <C>
Base Revenues:
Weather related................................................. $11,711
Customer growth................................................. 4,896
New Mexico purchased power recovery effects from termination of
Community Choice(R)............................................ 1,416
Industrial--firm rate sales..................................... (9,020)
New Mexico stranded costs adjustment............................ (383)
Other changes in base revenues.................................. (5,307)
-------
Base revenues increase........................................ $ 3,313
=======
</TABLE>
Base revenues increased 1% or $3.3 million to $392.9 million in 1998 from
$389.6 million in 1997 primarily from increased sales due to hotter-than-normal
weather during the summer and customer growth in the residential and commercial
classes. These increases were partially offset by the loss of a major
industrial customer and other miscellaneous decreases.
Operating expenses: Operating expenses increased 4% or $20.4 million to
$501.2 million in 1998 from $480.8 million in 1997. The increase in operating
expenses was due primarily to increased purchased power and other operating and
maintenance expenses and taxes other than income. Increases in those items were
offset by a decrease in income tax expense.
The following table summarizes the components of TNMP's purchased power and
fuel expenses (in thousands).
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 Increase/(Decrease)
----------- ----------- ------------------
<S> <C> <C> <C>
Pass-through expenses.......... $ 193,016 $ 188,971 $ 4,045
Non pass-through expenses...... 122,933 111,643 11,290
----------- ----------- -------
Purchased power and fuel
expenses.................... $ 315,949 $ 300,614 $15,335
=========== =========== =======
</TABLE>
45
<PAGE>
Purchased power and fuel expenses increased by 5% or $15.3 million in 1998
to $315.9 million from $300.6 million in 1997 due to increased purchased power
expenses during the hotter-than-normal summer weather, recognition of expenses
in compliance with the Texas Transition and the New Mexico Community Choice
plans (both since superseded by legislation) and settlement of a billing
dispute. In Texas, the Transition Plan changed the method of recovering
purchased power expenses from customers. Effective January 1, 1998, only the
energy-related portion of purchased power was 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
were $98.3 million in 1998. 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. The
Community Choice(R) plan froze the component of recovering purchased power
costs in base rates charged to New Mexico firm customers (primarily residential
and commercial). Therefore, differences between actual costs and the amount
recovered in base rates impacted operating income. During 1998, TNMP was
underrecovered by $3.2 million as compared to 1997.
Other operating expenses increased 11% or $9.3 million to $95.7 million in
1998 from $86.4 million in 1997. The majority of this increase 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.
Taxes other than income taxes increased 7% or $2.3 million to $36.0 million
in 1998 from $33.7 million in 1997 due to higher revenue-related taxes.
Operating income: Due to the factors discussed above in operating revenues
and expenses, net operating income decreased from $97.8 million to $84.8
million.
Interest expense: Interest charges decreased 5% or $3.0 million from $56.9
million in 1997 to $53.9 million in 1998 due primarily to reduced borrowings
and lower interest rates on our credit facilities.
Liquidity and Capital Resources
Historically, we have utilized internally generated funds to meet ongoing
working capital and capital expenditure requirements. As a result of the
merger, we have significantly increased our cash requirements for debt service.
As of March 31, 2000, as adjusted, TNP had long term debt outstanding of $435.0
million and up to $25.0 million available under the revolving portion of the
senior secured credit facility and TNMP had debt outstanding of $467.6 million
and up to $248.3 million available under its credit facility and indentures. We
will rely on internally generated funds and, to the extent necessary,
borrowings under our revolving credit facilities to meet our liquidity needs.
TNP's senior secured credit facility consists of: (i) a $25.0 million
revolving credit facility, under which no amounts are currently outstanding and
(ii) a $160.0 million term loan. The revolving portion and the term loan
portion of the senior secured credit facility mature three years and six years,
respectively, from the closing date of the senior secured credit facility.
Borrowings under the senior secured credit facility are subject to covenants
including maximum ratios of senior debt to EBITDA and total debt to EBITDA, a
minimum interest coverage ratio (including indebtedness of TNMP) and a minimum
fixed charge coverage ratio.
TNP's principal liquidity requirements will be for debt service requirements
under the 10.25% senior subordinated notes, the senior secured credit facility,
other indebtedness and for working capital needs and capital expenditures.
Historically, TNP has funded its capital and operating requirements from cash
flow from operations primarily generated from its subsidiary, TNMP. Net cash
flow from operations provided $74.6 million, $72.9 million and $103.9 million
in 1999, 1998 and 1997, respectively. Net cash flow from operations in 1999
approximated those in 1998. The decrease in net cash flow from operations in
1998 resulted mainly from $20.5 million factoring of unbilled accounts
receivables in 1997.
46
<PAGE>
Net cash used in investing activities was $39.1 million, $40.5 million and
$30.0 million in 1999, 1998 and 1997, respectively. Net cash used in investing
activities in 1999 approximated those in 1998. The increase in net cash used in
investing activities in 1998 reflects an increase in capital expenditures.
Capital expenditures are generally related to the construction of new
facilities for customer growth, maintenance of our existing facilities and
improvements in computer information systems. Capital expenditures amounted to
$41.4 million, $37.5 million and $28.2 million in 1999, 1998 and 1997,
respectively. The increase in capital expenditures reflects new construction to
facilitate customer growth and system upgrades associated with Y2K.
Net cash used in financing activities was $33.2 million, $36.1 million and
$66.4 million in 1999, 1998 and 1997, respectively. The net cash used in
financing activities in 1997 is higher than the other two years due to the
redemption of $100.9 million in first mortgage notes in 1997.
Based on our current operations, we believe that our cash flow from
operations, together with available borrowings under the senior secured credit
facility will be adequate to meet our anticipated requirements for working
capital, capital expenditures and interest payments for the next few years.
However, we cannot ensure that we will generate sufficient cash flow from
operations to repay the notes and amounts outstanding under the senior secured
credit facility. See the "Description of Certain Indebtedness and Preferred
Equity" section of this prospectus.
47
<PAGE>
BUSINESS
Introduction
TNP is a holding company whose primary operating subsidiary is TNMP, a
regulated public utility engaged in generating, purchasing, transmitting and
selling electricity to approximately 235,000 residential, commercial and
industrial customers in Texas and New Mexico. TNMP's operations consist
primarily of the transmission and distribution of electricity from various
third-party power plants to end users of electricity. For the year ended
December 31, 1999, our transmission and distribution network, which consists of
over 1,500 miles of transmission lines, served customers in 90 municipalities
and adjacent suburban and rural areas throughout our three distinct operating
regions. Our operating regions include suburbs of Houston, Dallas and Galveston
and rural areas throughout central, north and west Texas and southern New
Mexico. For the year ended December 31, 1999, our customers in Texas and New
Mexico accounted for 86% and 14% of our operating revenues, respectively. Also,
for the year ended December 31, 1999, we generated revenues of $576.2 million.
TNMP serves a diverse group of residential and commercial customers as well
as a variety of industrial customers, including petrochemical, agricultural,
mining and petroleum firms. Our base revenues (operating revenues less certain
costs that we are permitted to pass through directly to our customers) are
generated primarily from residential and commercial customers. In 1999, these
customers accounted for 49% and 35% of our base revenues, respectively. Our
primary point of contact with our residential and commercial customers is
through our network of 38 local offices, where approximately 50% of our
residential customers regularly pay their bills in person. We have
differentiated ourselves from other utilities by focusing more of our resources
on customer service which we believe results in high customer satisfaction.
Industrial customers, who primarily pay us for the delivery of electricity,
generate the remaining 16% of our base revenues.
We generate approximately 20% of the electricity we sell and we purchase the
remaining 80% from various third party power suppliers. Our self-generated
electricity is provided by TNP One, a 300-megawatt electric power plant located
in Robertson County, Texas. For the balance of our electricity requirements we
have entered into purchased power agreements with various third party
suppliers. The rates we charge our customers are set by state regulators to
allow us to recover our fuel and purchased power costs. Under our current
regulation approximately 72% of these costs are subject to adjustment clauses
which alter our rates to provide for the recovery of the actual costs of fuel
and purchased energy.
Our utility operations are subject to regulation by the PUCT and the NMPRC.
Some of our activities are also under the jurisdiction of the FERC. We are also
subject to legislation in the states in which we operate. As the result of
recent legislation in Texas and New Mexico deregulating the electric utility
industries in those states, we will be required to restructure our operations.
See the "Industry" and "Business--Government Regulations--Regulatory Matters"
sections of this prospectus.
In Texas we will be required to disaggregate our current operations into
three separate businesses by January 1, 2002. Our operations will be separated
into: a company engaged in the transmission and distribution of electricity to
customers, a company engaged in the generation of electricity, and a retail
electric provider ("REP") which will act as a wholesale purchaser of
electricity for retail sale to customers. In New Mexico, we will be required to
disaggregate our regulated transmission and distribution business activities
from our generation and power supply operations, which will be subject to
competition.
Under both states' legislation, the transmission and distribution company
will continue to be regulated in much the same way as it is now and generally
will not be subject to competition. The remaining portions of our business will
be subject to competition, but will also be subject to limited regulation. In
Texas, the REP will be subject to restrictions on the rates it can charge and
will be required to maintain certain financial, technical and performance
standards. In both states, the competitive portions of our business will be
subject to regulations governing their transactions and communications with
their affiliated transmission and distribution business.
48
<PAGE>
Operating Strengths
Stable Cash Flow. Electricity is a necessary product with little sales
cyclicality, especially among the residential and small business customers that
make up the bulk of our sales. Until the end of the Competition Period the
rates we charge our customers will be subject to regulatory oversight with
legislation in place that provides a specific rate path for the next several
years. Although both Texas and New Mexico have passed legislation providing for
a transition to competition in the sale of electricity, a significant portion
of our operations will remain regulated and not subject to competition. We
believe our focus on customer service in the relatively small markets we serve
will help us retain our customers as deregulation allows them to choose their
energy providers.
Transmission and Distribution System. Our operations are focused on the
transmission and distribution of electricity, a natural monopoly. Our
transmission and distribution network consists of approximately 1,500 miles of
transmission lines and a network of distribution lines that carry electricity
from our energy suppliers to our customers. Under the recently enacted
legislation in both Texas and New Mexico, transmission and distribution
operations will not be subject to competition and will continue to be
regulated. As a result, we expect stable and consistent cash flows from these
operations.
Stable Customer Base. Residential customers and commercial customers account
for 49% and 35% of our total base revenues, respectively. Our primary point of
contact with our residential and commercial customers is our network of 38
local offices, where approximately 50% of our residential customers regularly
pay their bills in person. We have differentiated ourselves from other
utilities by focusing more of our resources on customer service, which we
believe results in high customer satisfaction. We believe that our residential
and commercial customer base positions us to compete effectively in a
deregulated market. Additionally, if in a newly deregulated environment a
customer decides to purchase electricity from another REP, we will continue to
receive revenues for the use of our transmission and distribution system to
transfer that electricity from the supplier to the end user.
Experienced Management. TNMP's management team has significant experience in
operating utilities and maintaining positive relationships with regulators. Key
members of the management team have on average 24 years of experience within
the electric utility industry and 11 years of experience with us. Most members
of TNMP's management team continued their employment with TNMP after the
merger. The existing management team has successfully negotiated regulatory
plans with the PUCT and the NMPRC on various occasions that have benefited both
us and our customers. Under the leadership of existing management, TNMP's
financial condition has improved markedly over the past few years, resulting in
the achievement by TNMP of an investment grade rating on its senior debt.
At the closing of the merger of ST Acquisition Corp. with and into TNP, Dr.
William J. Catacosinos joined our management team as Chairman and Chief
Executive Officer of TNP and a member of TNMP's board of directors. Dr.
Catacosinos has had 15 years of experience in the electric utility industry as
Chairman and Chief Executive Officer of LILCO.
Business Strategy
Our strategy is to focus on the transmission and distribution of
electricity, market electricity in our service territories, expand our customer
base and manage our cost of power. We believe that this strategy, as described
in more detail below, will effectively position us as a strong competitor in
the increasingly deregulated utility industry.
Focus on Transmission and Distribution. We seek to maximize our operating
profits and minimize the volatility of our earnings by focusing on the
transmission and distribution segments of the utility business, which will
continue to be regulated. The transmission and distribution of electricity is a
natural monopoly that provides stable and consistent cash flows.
49
<PAGE>
Provide Local Customer Service. Our principal focus is on providing electric
service to residential and commercial customers in small and medium-sized
communities. We believe that this demographic focus, combined with the customer
service we provide through our network of local offices, will allow us to
retain our current customers and increase our customer base as the communities
we serve grow. This strategy differentiates us from other electric utilities
that have closed their offices in small and medium-sized communities and become
more centralized and focused on urban areas. We believe that, by maintaining a
local presence in the communities we serve, we will continue to be recognized
as a valuable member of those communities. After the disaggregation of our
operations required by legislation, we expect that our local recognition and
reputation for customer service will provide our REP with an important
advantage in the retention of customers in the newly deregulated energy market.
We believe that our localized customer service also provides us with a platform
to expand our distribution of electricity to customers in areas neighboring our
current service territories.
Expand Industrial Sales. While TNMP's role as a turnkey power supplier to
industrial customers will become more price sensitive as markets deregulate, we
intend to offset this exposure by expanding sales of secondary services such as
standby power. TNMP also plans to focus on selling to self-generating
industrial customers through innovative power arrangements such as buying and
managing a customer's self-generation which is then sold back at a premium.
These arrangements provide such customers with the advantage of TNMP's power
resource expertise and the reliability of receiving power from the grid rather
than relying solely on their own generation resources.
Managing Purchased Power Costs. We generate only about 20% of our total
electricity requirements and purchase the remainder from other electric
utilities and third-party power providers. This allows us to purchase
electricity from the most efficient available provider and distribute that
electricity to our customers over our transmission and distribution facilities.
Over the next several years we will have the opportunity to replace several
long-term power supply agreements as they expire, and we expect to enter into
new agreements that we expect will lower our cost of electricity.
Electricity Generation and Supply. Since we purchase approximately 80% of
our electricity from third party power providers, we have sought and will
continue to seek to increase our flexibility to take advantage of favorable
pricing and new capacity additions in the marketplace by shortening the average
life of our power contracts. We believe that this better positions us for the
implementation of the new regulatory initiatives. In addition, we are
evaluating the possible sale of TNP One which would enable the regulated
recovery of any stranded costs associated with TNP One. At the time of any sale
we would likely enter into an outsourcing agreement for the management of our
remaining power supply activities with a full service power supply provider.
TNMP's Service Territories
Our service territories are organized into three operating regions: the Gulf
Coast Region, the North Central Region and the Mountain Region. In all of our
regions, the majority of our revenues come from residential and commercial
customers. A description of each operating region is provided below.
Gulf Coast Region. Our Gulf Coast Region includes the area along the Texas
Gulf Coast between Houston and Galveston and in Brazoria County, south of
Houston. The region encompasses 14 municipalities that in 1998 had an estimated
combined population of 214,632, an increase of approximately 14% from its 1990
population of 187,648. The region's economic activity is supported by oil,
petrochemical and agricultural industries as well as general commercial
activity in the Houston area. More of the company's industrial customers are
located in this region than in any other, primarily in the cities of Texas City
and LaMarque. Other communities that TNMP serves, such as League City,
Friendswood and Pearland, are suburban communities experiencing vigorous
growth. For the last year ended December 31, 1999, we generated $299.0 million
in operating revenues, $127.3 million in base revenues and $35.6 million in
operating income from the
50
<PAGE>
Gulf Coast Region. The following table highlights customer and financial
information for the Gulf Coast Region over the past five years.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Residential customers............. 76,283 77,616 78,543 80,583 81,652
Commercial customers.............. 9,648 9,866 9,917 10,127 11,060
Industrial customers.............. 60 62 67 66 57
Other customers................... 46 44 38 46 362
-------- -------- -------- -------- --------
Total customers................. 86,037 87,588 88,565 90,822 93,131
======== ======== ======== ======== ========
Operating revenues ($000s)........ $250,165 $269,535 $314,423 $295,301 $299,023
</TABLE>
North Central Region. The North Central Region includes areas north and
northeast of Dallas and an area south and west of Fort Worth. The region
encompasses 58 municipalities and had a combined estimated population in 1998
of 185,315, an increase of approximately 63% from the 1990 population of
113,492. Communities in this region that TNMP serves include Lewisville, a city
of approximately 75,000, whose recent significant growth is due in part to its
location near the Dallas/Fort Worth airport and within a rapidly growing part
of the Dallas/Fort Worth Metroplex. The diversified commercial, trade and
industrial activity of the Dallas/Fort Worth area supports Lewisville's
economic activity. The rest of the North Central Region's economic activity is
supported by agricultural activities and, to a lesser extent, tourism and oil
production. For the year ended December 31, 1999, we generated $158.8 million
in operating revenues, $83.6 million in base revenues and $22.3 million in
operating income in the North Central Region. The following table highlights
key demographic, customer and financial information for the North Central
Region over the past five years.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1995(1) 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Residential customers............ 58,560 60,420 63,258 65,668 66,857
Commercial customers............. 10,702 10,861 11,081 11,314 11,886
Industrial customers............. 28 29 30 31 28
Other customers.................. 159 141 146 143 328
-------- -------- -------- -------- --------
Total customers................ 69,449 71,451 74,515 77,156 79,099
======== ======== ======== ======== ========
Operating revenues ($000s)....... $137,522 $134,236 $143,562 $162,750 $158,843
</TABLE>
--------
(1) On September 15, 1995, TNP sold certain properties in the Texas Panhandle
which served 7,350 customers. Operating revenues from these properties for
the portion of the year prior to the sale were $7.4 million.
Mountain Region. The Mountain Region includes areas in southwest and south
central New Mexico and West Texas. The region encompasses 18 municipalities,
with a combined estimated population in 1998 of 90,487, an increase of
approximately 8% from the 1990 population of 84,010. The region's economic
activity is supported by mining and agricultural industries and oil and gas
production. In New Mexico, communities TNMP serves include Silver City,
Alamogordo and Ruidoso. Silver City's economy is anchored by copper mining, but
the community's favorable climate has helped attract many retirees to the area
in recent years. In West Texas, communities TNMP serves include Pecos and Fort
Stockton. For the year ended December 31, 1999, we generated $114.4 million in
operating revenues, $47.5 million in base revenues and $14.2 million in
operating income in the Mountain Region. The following table highlights
customer and financial information for the Mountain Region over the past five
years.
51
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
<S> <C> <C> <C> <C> <C>
<CAPTION>
1995 1996 1997 1998 1999
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Residential customers............... 49,020 49,760 50,204 50,904 51,108
Commercial customers................ 9,011 9,137 9,291 9,443 10,181
Industrial customers................ 48 44 42 41 31
Other customers..................... 39 39 38 38 109
------- ------- -------- -------- --------
Total customers................... 58,118 58,980 59,575 60,426 61,429
======= ======= ======== ======== ========
Operating revenues ($000s).......... $98,136 $98,966 $106,844 $117,419 $114,385
</TABLE>
Sources of Energy
We generate approximately 20% of the electricity we sell and we purchase the
remaining 80% from various third party power suppliers. TNMP contracts for
virtually all of its purchased power commitments. Most of TNMP's purchased
power contracts allow TNMP to purchase power on the open market if the open
market price is below the contracted price. These purchases are reflected as
spot market purchases in the table below which outlines our sources of energy
for 1999:
<TABLE>
<CAPTION>
Year Percent of
Contract Expires Energy Provided
---------------- ---------------
<S> <C> <C>
TNP One.................................... -- 20.0%
Purchased power
Firm contracts expiring in 2000.......... -- 6.0%
Firm contracts expiring in 2001-2005.....
TXU.................................... 2002 7.0%
Clear Lake............................. 2004 12.0%
Others................................. Various 9.0%
Buy sell agreements........................ -- 26.0%
Spot market purchases...................... -- 20.0%
-----
Total.................................... 100.0%
=====
</TABLE>
TNP One Generating Facility
TNP One consists of two 150 megawatt lignite-fired Westinghouse/Mitsubishi
TCF-25 steam turbines for a total of 300 megawatts of generation. Commercial
operation began for Unit 1 in September 1990 and Unit 2 in 1991. Plant
availability in 1999 was approximately 88% and its equivalent forced outage
rate, which measures the amount of time that a generating plant is offline
because of equipment malfunction or failure, has been consistently below the
industry average.
The primary fuel source for TNP One is Texas lignite supplied from a surface
mine located adjacent to the plant site. Natural gas is used for start-up and
supplemental firing. A 24p pipeline owned by TXU crosses the TNP One plant site
and is the plant's current source of natural gas. Both Units 1 and 2 are
capable of full load operation on 100% natural gas. Additionally, the proven
ability of the TNP One units to burn alternative fuels has been well
communicated to the PUCT. Ability to burn materials such as chipped tires and
oil filter paper offer the potential to successfully mitigate environmental
issues facing Texas and surrounding states.
The TNP One facility is located on approximately 500 acres located in
Robertson County, Texas. An additional 2,200 acres are available for expansion
of the site. The plant site was designed to accommodate four identical plants
with up to eight additional units. The 345 kilovolt double-circuit line
transmitting from TNP One can handle approximately 1,200 megawatts of capacity
without modification, leaving 900 megawatts of available transmission capacity.
The transmission line interconnects with the ERCOT system at TXU's Twin Oaks
Substation, approximately 18 miles from TNP One. An interconnection to the
Southwestern Power Pool
52
<PAGE>
is less than 40 miles from TNP One, greatly expanding the potential markets for
electricity generated by TNP One. Water supply is provided from four water
wells near the site and is sufficient for significant expansion of the
facility. Electricity from TNP One is used to serve our customers in Texas.
During 1999 TNP One generated approximately 1,912,673 megawatt-hours of
electricity.
Government Regulations; Regulatory Matters
Industry. The electric utility industry--one of the largest remaining
regulated industries in the United States--is in the process of transition to a
competitive market. Traditionally vertically integrated, the industry is
becoming segmented into its three component parts: the generation of
electricity, its transmission to a local market, and its distribution to the
end user. Consumers, primarily industrial customers, who want the right to
choose the electricity supplier that meets their needs most economically,
reliably and efficiently, are driving change in the industry. The federal
government, as well as the PUCT within the boundaries of the ERCOT, regulates
the transmission of electricity between utilities while state governments
regulate the distribution of electricity to customers. At the federal level,
FERC has implemented change by encouraging wholesale competition through its
issuance in July 1996 of Orders 888 and 889. All 50 states and the District of
Columbia have enacted or are evaluating reforms to introduce competition to
generation and related electric service. Both Texas and New Mexico enacted
legislation during 1999 to open the generation and retail supply of electricity
to competition.
Texas. In June 1999, Texas Governor George W. Bush signed Senate Bill 7,
which implements competition in Texas retail electric markets. Under Senate
Bill 7, utilities will be able to recover 100% of their net verifiable stranded
costs through accelerated depreciation and CTCs. Stranded costs represent the
excess of an asset's book value over its market value. CTCs are charges that
utilities will be permitted to include in customers' bills beginning in 2002.
The actual amount of the CTCs will be subject to the approval by the PUCT.
Senate Bill 7 also permits utilities to securitize regulatory assets and up to
75% of their stranded costs, enabling them to accelerate their recovery of
stranded costs. Under the legislation, electric utilities are required to
prepare for competition from January 1, 1999 to December 31, 2001. Actual
competition will be initiated and encouraged from January 1, 2002 to December
31, 2006. After December 31, 2006, retail electric services and generation will
be openly competitive.
By January 1, 2002, utilities in Texas must separate, or "unbundle," their
utility operation into three separate, affiliated entities: a transmission and
distribution company, a retail electric provider, and an electricity generating
company. After the Competition Period, the actual price of electricity will be
determined by the market, however transmission and distribution rates are
expected to continue to be regulated by the PUCT.
The new legislation will implement retail competition for customers in most
areas of Texas on January 1, 2002. Among other provisions, the new legislation:
. Requires utilities to provide service according to the rates in effect
at September 1, 1999, until December 31, 2001. The legislation does not
prohibit changes in the fixed fuel factor that passes through fuel and
purchased power energy costs to customers.
. Allows a utility to recover 100% of its verifiable stranded costs via
several methods, including:
1. Redirection of depreciation--During 1998-2001, a utility may
redirect all or a part of the depreciation related to transmission
and distribution assets to its generation assets.
2. Application of earnings in excess of an allowed rate of return--
During the freeze period, utilities' earnings are capped by the cost
of capital approved in the utility's most recent rate proceeding
before the PUCT. For TNMP, the cap is 10.53% return on rate base.
Rate base is the value established by a regulatory authority upon
which the utility is permitted to earn a specified rate of return.
Earnings in excess of the cap will be used to reduce the net book
value of generation assets.
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<PAGE>
3. Securitization--At any time after the start of the freeze period, a
utility may securitize 100% of its regulatory assets. A utility may
securitize up to 75% of its estimated stranded costs, and recover
those costs from its customers through a transition charge approved
by the PUCT after a lengthy regulatory approval process.
4. Assessing a CTC--After the freeze period, stranded costs that have
not been recovered by one of the methods above will be recovered
through a CTC levied upon all retail customers within a utility's
geographical certificated service area as it existed on May 1, 1999.
. Establishes four alternatives for quantifying the final amount of
stranded costs to be used in establishing the CTC, and provides a
framework for reconciling estimated stranded costs to the actual
stranded costs quantified using those methods.
. Requires utilities to disaggregate into three distinct businesses:
generation, transmission and distribution, and an REP.
. Provides that once customer choice begins on January 1, 2002,
residential and small commercial customers who do not choose an
alternative REP will continue to be served by the utility's affiliate
REP at a "price-to-beat" which is 6% lower than the rate in effect on
January 1, 1999, adjusted to reflect a fuel factor that the PUCT shall
determine as of December 31, 2001. This "price-to-beat" must be offered
by the utility until December 31, 2006. However, after the earlier of 36
months after customer choice is offered or when it loses 40% or more of
its residential sales within its certified service area TNMP may also
offer a different rate.
Prior to the new legislation, TNMP had been operating under its own
transition plan that the PUCT approved in 1998. The Transition Plan provided
that it will be modified to conform to any legislation enacting competition in
the electric utility industry. On October 6, 1999, TNMP filed a Conformed
Stipulation with the PUCT that identifies all of the provisions that TNMP
believes must be changed to conform the Transition Plan to comply with the new
legislation. On December 6, 1999, the PUCT held that TNMP was required to
implement the base rate reductions reflected in its tariffs that were filed in
compliance with its Transition Plan proceedings and approved on November 25,
1998. Accordingly, TNMP reduced base rates for residential and commercial
customers by 3% and 1%, respectively, effective January 1, 2000. Similar rate
reductions will take effect January 1, 2001. As a result, operating revenues
are estimated to decrease in 2000 and 2001 by $6.7 million and $13.9 million,
respectively. The PUCT's order also established that the base rate reductions
would offset the 6% rate reduction required by the new legislation to take
effect on January 1, 2002. The order is interim in nature and can be appealed.
The PUCT postponed consideration of any other impacts of the legislation on the
Transition Plan until 2001.
Historically, TNP's and TNMP's consolidated financial statements reflect the
application of SFAS 71, "Accounting for the Effects of Certain Types of
Regulation," which provides for recognition of the economic effects of rate
regulation. EITF 97-4, "Deregulation of the Pricing of Electricity--Issues
Related to the Application of SFAS Statements No. 71 and 101," states that
application of SFAS 71 should stop "when deregulatory legislation is passed or
when a rate order (whichever is necessary to effect the change in the
jurisdiction) that contains sufficient detail for the enterprise to reasonably
determine how the transition plan will affect the separable portion of its
business whose pricing is being deregulated is issued." With the passage of the
legislation, TNMP discontinued the application of SFAS 71 to the generation and
power supply portion of its Texas business during the fourth quarter of 1999.
As a direct result of discontinuing SFAS 71 and in accordance with the
legislation, TNMP has reclassified net regulatory assets (regulatory assets
less liabilities) of $19.3 million that pertain to these deregulated operations
as Recoverable Stranded Costs. We believe that the $19.3 million represents
verifiable stranded costs and intend to have TNMP recover them from customers
pursuant to the methods specified in the Texas legislation.
In conjunction with the discontinuance of SFAS 71, TNMP is required to
determine if its generating plant asset, TNP One, is impaired under SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for
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<PAGE>
Long-Lived Assets to be Disposed Of." Based on TNMP's undiscounted cash flow
analysis over the estimated useful life of TNP One, there was no impairment of
TNP One, as defined by SFAS 121, as of December 31, 1999. TNMP's impairment
analysis includes reasonable estimates of future market prices, capacity
factors, operating costs, the effects of competition, and many other factors
over the life of TNP One. TNMP's impairment analysis is highly dependent on
these estimates. As of December 31, 1999, the net book value of TNP One was
$434.6 million.
On May 17, 1999, TNMP filed its Electric Investor-Owned Utilities Earnings
Report ("Earnings Report") with the PUCT. Simultaneously, TNMP filed an
Addendum to the Earnings Report ("Addendum") detailing TNMP's calculation of
excess earnings under the Transition Plan for the twelve months ended December
31, 1998. The Addendum showed that TNMP had not earned in excess of the 11.25%
return on equity cap established in the Transition Plan. The Staff of the PUCT,
through the PUCT's Office of Regulatory Affairs ("ORA"), filed a contest to
TNMP's earnings report on August 16, 1999, asserting errors in TNMP's
calculation of excess earnings. ORA's petition did not quantify the amount of
the alleged errors. In addition, ORA proposed to use the Earnings Report
contest as a means for conforming the Transition Plan to the legislation.
ORA is the only party contesting TNMP calculation of excess earnings. On
March 27, 2000, the hearings examiner, in accordance with statements from the
Commissioners at an open meeting on matters of law raised by ORA, filed a
proposed order which has the effect of eliminating ORA's claim that there are
any excess earnings. TNMP will urge the Commission to adopt the proposed order.
We believe this matter will have no material adverse effect on TNMP's financial
condition. On March 30, 2000, TNMP filed its 1999 Annual Report pursuant to
Section 39.257 of the Texas Public Utility Regulatory Act (the "1999 Annual
Report") for 1999. On September 26, 2000, ORA filed a notice with the PUCT that
it disagreed with TNMP's calculation of excess earnings in the 1999 Annual
Report by $0.6 million. A meeting to discuss the 1999 Annual Report has been
scheduled with ORA during the fourth quarter. Management believes that the
dispute with the 1999 Annual Report will be resolved with no material changes
to its original calculation.
New Mexico. In April 1999, New Mexico Governor Gary Johnson signed The
Electric Utility Industry Restructuring Act of 1999, which opened the state's
electricity market to competition. The 1999 Act, pursuant to the rules adopted
by the NMPRC on May 17, 2000, allows residential customers, small business
customers and schools the opportunity to choose among competing electricity
suppliers beginning January 1, 2002. Competition will be expanded to include
all customers by July 1, 2002. Residential and small business customers who do
not choose a competitive power supplier will continue to be served by their
existing utility under a standard offer contract. There is no mandatory rate
reduction included in the legislation. The 1999 Act allows electric utilities
to recover at least 50% of their stranded costs through a charge to customers.
On June 8, 1999, the NMPRC entered a final order terminating TNMP's Community
Choice(R) transition plan. By terminating Community Choice(R), the NMPRC placed
TNMP on the same timetable as other New Mexico utilities with regard to retail
competition and restored the pass-through of purchased power costs to
customers.
Under the 1999 Act, utilities are guaranteed recovery from customers of at
least 50% of their stranded costs over a five-year period. TNMP's Community
Choice(R) program, which has been terminated, did not define stranded costs,
nor their recovery. In addition, the 1999 Act, pursuant to the rules adopted by
the NMPRC on May 17, 2000, delays competition to January 1, 2002 for
residential, small commercial and schools and beginning July 1, 2002 for all
other customers. Community Choice(R) had specified May 1, 2000 for the
beginning of retail choice. As a result, TNMP has reduced its accrual for
potential stranded costs in New Mexico from $3.4 million as of December 31,
1998, to $2.1 million as of December 31, 1999. During the second quarter of
2000, as a result of the delay in the start of Customer Choice, TNMP reduced
its accrual further, from $2.1 million to $0.9 million.
Community Choice(R) provided for the filing of a rate case by TNMP on June
1, 1999. TNMP and the NMPRC Staff have reached a settlement, and have submitted
the settlement to the NMPRC for approval. The settlement calls for a decrease
in TNMP's base rates of $1.8 million, or 6%, effective October 1, 1999. TNMP
55
<PAGE>
has reflected the base rate reductions in its fourth quarter revenues. The
NMPRC approved the settlement on August 15, 2000. TNMP will make refunds of
$1.7 million to New Mexico customers in late 2000 or early in 2001. The refunds
cover the period from October 1, 1999 to September 1, 2000.
Agreements with the Regulators. During the hearings conducted by the NMPRC
and the PUCT, we gave assurances that were primarily designed to ensure that
TNP and TNMP would be operated as separate entities following the merger, and
that the assets of TNMP would not be used, to the detriment of rate payers, to
satisfy the obligations of TNP.
Before the PUCT, TNP committed that TNMP would:
. commit to a guaranteed level of stranded cost mitigation equal to $59.0
million less base rate reductions in 2000 and 2001 (estimated to be $6.7
million and $13.9 million, respectively);
. strive to maintain its investment grade rating while placing a high
priority on maintaining the financial integrity of its utility
operations;
. strive to maintain a 65% maximum debt to total capitalization ratio
through December 31, 2001, and with respect to its transmission and
distribution businesses, a 70% maximum debt to total capitalization
ratio through January 1, 2004; and
. limit its payments of dividends to TNP unless certain financial tests
are satisfied, including limiting dividends to the cumulative amount of
cash flow from operations less cash flow from investing before January
1, 2004.
Additionally, TNP agreed that, in connection with any future borrowings, it
would require acknowledgements from its lenders, as long as TNMP has rated debt
outstanding, that:
. TNMP and TNP will be operated as separate corporate and legal entities;
. by agreeing to make new loans, those lenders are relying solely on the
credit worthiness of TNP and not TNMP; and
. TNP will not be permitted to take any steps for the purposes of
procuring the appointment of a receiver or institute a bankruptcy,
reorganization, insolvency, wind-up, or liquidation of TNMP.
Before the NMPRC, we made similar and additional commitments with respect to
TNMP, including committing that TNMP would:
. not pay excessive dividends to TNP;
. furnish a notice of TNMP's declaration to pay a dividend to TNP,
specifying the amount of the dividends to be paid, the cumulative amount
of the dividends for the calendar year, and the net income and the
payout ratio for the two preceding calendar years;
. not purchase debt instruments or any affiliated interests or guarantee
or assume liabilities of affiliated interests without state regulatory
approval;
. not purchase power (not applicable to economy energy purchases) from an
affiliate without receiving prior NMPRC approval;
. not lend or transfer funds or securities or similar assets to affiliated
interests without state regulatory approval;
. not obstruct, hinder, diminish, impair or unduly complicate its
supervision and regulation;
. if required by the NMPRC, have a management audit performed by a
consulting firm chosen by and under the direction of the NMPRC to
determine whether there are any adverse effects of affiliate
transactions upon TNMP, and have an allocation study of transactions
between TNMP and its affiliates performed by a consulting firm chosen by
and under the direction of the regulatory authorities;
56
<PAGE>
. hold its customers harmless from any and all negative impacts of the
affiliate transactions involved in the acquisition of TNP's stock; and
. will keep its books and records separately from those of its non-
regulated businesses and in accordance with the Uniform System of
Accounts.
We also committed to the NMPRC that TNP would:
. not take any action that would have a material adverse effect on TNMP's
ability to provide reasonable and proper service at fair and just rates;
. ensure that no TNP debt would contain provisions which are inconsistent
with TNP and TNMP being operated as separate corporate and legal
entities, and a recognition that TNP's creditors are relying solely on
the creditworthiness of TNP; and
. ensure that no TNP debt would contain provisions allowing TNP's
creditors to take any steps for the purpose of procuring the appointment
of an administrative receiver or the making of an administrative order
for instituting any bankruptcy, reorganization, insolvency, wind up or
liquidation or any like proceeding under applicable law in respect of
TNMP or any of its subsidiaries.
Additionally, TNP and TNMP have committed that the assets of TNMP will not
be pledged to pay or guarantee the debt of any TNMP affiliate without prior
approval of the PUCT and the NMPRC.
Regulatory Approval of Certain Transactions. In addition to the agreements
described above, TNMP is also subject to additional regulation in New Mexico
with respect to certain transactions, particularly those with affiliated
companies. These may restrict the ability of TNP to receive funds from TNMP.
For example:
. proceeds from the issuance of debt by TNMP will generally only be
available for the acquisition of utility property, the construction,
completion, extension or improvement of its facilities, the improvement
or maintenance of service, the discharge or lawful refunding of its
obligations or the reimbursement of money actually expended for the
foregoing;
. prior approval is required for the transfer of utility assets or for the
abandonment of any service;
. cross-subsidization and improper cost allocation between TNMP and its
affiliates is prohibited;
. any adverse impact on reasonable costs and service as a result of the
formation of a holding company is prohibited and, accordingly, some
financing alternatives may not be available to TNP;
. prior notice of any sale, lease or provision of real property, water
rights or other goods or services to an affiliate is required, and the
NMPRC may issue orders on any such transactions to ensure reliable
service at fair, just and reasonable rates; and
. prior approval is required for any acquisition of TNMP stock or
consolidation with TNMP, or any transactions that results in control or
exercise of control of TNMP.
Amendments to TNP and TNMP's Articles of Incorporation
In addition to the assurances given by TNP and TNMP to the state regulatory
authorities, at the closing of the merger TNP and TNMP amended their articles
of incorporation to include provisions designed to ensure that TNP and TNMP
will maintain separate and independent operations in the future. These
provisions include:
. requirements for each of TNP and TNMP to conduct themselves as separate
legal entities in all formalities, including, but not limited to:
maintaining separate books and financial records; observing all
appropriate corporate procedures and formalities; not commingling any
assets, funds, liabilities or business functions; holding themselves out
as separate entities; not merging or consolidating with any other person
or entering into guarantees for any other person;
. a requirement that TNMP have at all times at least one independent
director appointed by the shareholders, whose consent shall be required
for TNMP to amend its articles of incorporation,
57
<PAGE>
consolidate or merge with any person, sell all or substantially all of
its assets or institute bankruptcy or insolvency proceedings, and who
shall be required to consider only the interest of TNMP and its
creditors in voting on any such transactions;
. a prohibition on TNMP using its credit to satisfy the debts or
obligations of any other person; and
. a prohibition on TNMP lending to any person or buying or holding any
indebtedness or other obligations issued by any other person, except for
cash and cash equivalents.
Employees
At December 31, 1999, TNMP and TNP collectively had 823 employees. No
employees are represented by a union or covered by a collective bargaining
agreement. Management believes relations with its employees are good.
Legal Proceedings
Phillips Petroleum. TNMP is the defendant in a suit styled Phillips
Petroleum Company vs. Texas-New Mexico Power Company, filed on October 1, 1997
and pending in the 149th State District Court of Brazoria County, Texas. The
suit, which is in the discovery stage, is based on events surrounding an
interruption of electricity to a petroleum refinery and related facilities
that occurred in May 1997. Phillips Petroleum Company ("Phillips") is seeking
the recovery of damages arising from the interruption and in May 1999 demanded
payment in the amount of $47.1 million. TNMP's tariff approved by the PUCT
contains limitations against recovery of the great majority of Phillips'
alleged actual damages. The Texas Supreme Court, in another matter, has
recently upheld the enforceability of such tariff limitations in litigation of
this type; we believe the ruling will operate to substantially limit any
recovery by Phillips to the cost of its electrical equipment in the event that
any damages are awarded in this matter. Discovery has not sufficiently
progressed to quantify any damages to Phillips' electrical equipment; however,
Phillips has previously reported to the SEC that it incurred costs of
approximately $2.0 million in this interruption. In May 1999, TNMP filed a
Third Party Petition naming Sweeny Cogeneration Limited Partnership, the
operator of cogeneration and related facilities at the Phillips refinery, as a
defendant. The lawsuit is in the discovery stage. We believe that TNMP has
insurance coverage on most of Phillips' claims up to a total of $31.0 million.
TNMP has previously charged to earnings the deductible amount of its insurance
coverage, $0.5 million.
Power Resource Group, Inc. TNMP is a defendant in a suit styled Power
Resource Group, Inc. v. Public Utility Commission of Texas and Texas-New
Mexico Power Company, pending in the 345th District Court of Travis County,
Texas. This lawsuit, which was originally filed on May 21, 1999, appeals the
PUCT's dismissal of a regulatory case that Power Resource Group, Inc. ("PR
Group") had filed against TNMP. PR Group is a developer of electric generating
plants that are intended to be qualifying cogeneration facilities. This
lawsuit and the regulatory case it appeals both stem from discontinued
negotiations for power supply. PR Group alleged that TNMP was required to buy
power to be generated from an as-yet-unbuilt cogeneration facility. TNMP filed
its original answer with the court on June 28, 1999.
In an amended petition filed January 13, 2000, PR Group asserts a claim of
damages of at least $158.0 million. It bases its claim on the assertion that
it was damaged when TNMP refused to execute an agreement after the
aforementioned discontinued negotiations, that TNMP profited significantly
from PR Group's work, that TNMP is in error when it relies on a PUCT order
dismissing PR Group's petition before the PUCT on substantially the same
facts, and that TNMP misrepresented that it would enter into a contract with
PR Group to purchase energy and capacity at rates equal to or below TNMP's
avoided costs. We believe that PR Group's claims are without merit and we
intend to have TNMP contest this claim vigorously.
Other. TNMP is involved in various claims and other legal proceedings
arising in the ordinary course of business. In the opinion of management, the
ultimate dispositions of these matters, as well as those described above, will
not have a material adverse effect on TNMP's or our consolidated financial
position or results of operations.
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MANAGEMENT
Our and TNMP's directors, executive officers and key employees, their
positions and their ages are as follows:
<TABLE>
<CAPTION>
Name Age* Position
---- ---- --------
<S> <C> <C>
William J. Catacosinos........... 69 Chairman, President and Chief Executive Officer of
TNP, Director of TNMP
Theodore A. Babcock.............. 45 Chief Financial Officer of TNP
Kevern R. Joyce.................. 53 Chairman, President and Chief Executive Officer of
TNMP and director of TNP
Jack V. Chambers, Jr. ........... 50 Senior Vice President and Chief Customer Officer of
TNMP
Manjit S. Cheema................. 45 Senior Vice President, Chief Financial Officer of
TNMP and Treasurer of TNP
Larry W. Dillon.................. 45 Vice President of Power Resources of TNMP
Leeam Lowin...................... 54 Director of TNP and TNMP
James T. Flynn................... 66 Director of TNMP
Preston M. Geren III............. 47 Director of TNP and TNMP
</TABLE>
--------
* As of December 31, 1999.
William J. Catacosinos joined TNP upon the closing of the merger as
Chairman, President and Chief Executive Officer. He also serves on TNMP's board
of directors. Since 1998, Dr. Catacosinos has served as Managing Partner of
Laurel Hill. Dr. Catacosinos served as Chairman and Chief Executive Officer of
LILCO from 1984 to 1998.
Theodore A. Babcock joined TNP upon the closing of the merger as Chief
Financial Officer. Since 1998, Mr. Babcock has been a Managing Director of
Laurel Hill. From 1996 to 1998, Mr. Babcock served as Vice President and
Treasurer of LILCO. Mr. Babcock served as Treasurer of LILCO from 1994 to 1996.
Kevern R. Joyce has served as Chairman of TNMP since April 1995, and was
also Chairman of TNP until the closing of the merger. Mr. Joyce joined TNP and
TNMP in April 1994 as President and Chief Executive Officer.
Jack V. Chambers, Jr. has served as Senior Vice President and Chief Customer
Officer of TNMP since 1994. Mr. Chambers was Senior Vice President of TNP from
April 1996 until the closing of the merger.
Manjit S. Cheema has served as Senior Vice President and Chief Financial
Officer of TNMP since July 1996 and was elected Treasurer of TNP in May 2000.
Mr. Cheema was Senior Vice President and Chief Financial Officer of TNP from
May 1997 until the closing of the merger. Prior to that, Mr. Cheema was Vice
President and Chief Financial Officer of TNP and TNMP since December 1994 and
Treasurer of TNMP from June 1994 until September 1995.
Larry W. Dillon has served as TNMP's Vice President of Power Resources since
March 1999. Mr. Dillon was Vice President and Regional Customer Officer of TNMP
from November 1994 until March 1999.
Leeam Lowin became a director of both TNP and TNMP at the closing of the
merger. For the past 33 years, Mr. Lowin has been an investment manager for
private accounts. From 1984 to 1998, Mr. Lowin served as a consultant to LILCO.
From 1992 to 1996, he was a member of the board of directors of AEL Industries
and managed the sale of that company to Tracor.
James T. Flynn became a director of TNMP at the closing of the merger. Mr.
Flynn, prior to his retirement, was President and Chief Operating Officer of
LILCO from 1996 to 1998. From 1994 to 1996, Mr. Flynn was Executive Vice
President and Chief Operating Officer of LILCO.
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<PAGE>
Preston M. Geren III became a director of both TNP and TNMP at the closing
of the merger. Mr. Geren, currently manages personal business interests in real
estate, oil and gas and securities. Mr. Geren currently serves on the Board of
Directors of Union Pacific Resources (NYSE) and Cullen Frost Bankers (NYSE).
Mr. Geren also is Vice Chairman of the Board of Directors of Dallas-Fort Worth
International Airport. Previously Mr. Geren worked as a management consultant
with Public Strategies, Inc., a Texas-based public affairs firm from 1997 to
1998. He was a member of the United States Congress for four terms, from 1989
until 1997. Previous corporate board experience includes service as an advisory
director of TXU.
Executive Compensation
The following table summarizes the compensation paid to the Chief Executive
Officer and each of the four other most highly compensated executive officers
of TNP and its subsidiaries (the "named executive officers") for services
rendered in all capacities to TNP and its subsidiaries during 1999, 1998 and
1997.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
---------------------------------
LTIP All Other
Name and Principal Position Year Salary Bonus(1) Payouts(2) Compensation(3)
--------------------------- ---- -------- -------- --------- --------------
<S> <C> <C> <C> <C> <C>
Kevern R. Joyce............. 1999 $391,146 $278,466 $304,714 $19,174
President and Chief 1998 370,525 340,822 418,151 25,367
Executive Officer 1997 355,083 147,000 449,816 25,944
Jack V. Chambers, Jr., ..... 1999 $233,294 $ 99,826 $175,666 $11,143
Senior Vice President 1998 223,819 129,092 249,893 14,347
1997 215,733 77,597 268,831 14,794
Manjit S. Cheema............ 1999 $204,898 $ 94,413 $158,229 $10,246
Senior Vice President and 1998 195,239 118,488 213,756 12,775
Chief Financial Officer 1997 183,750 68,378 205,835 12,837
John P. Edwards(4).......... 1999 $207,633 $ 86,861 $158,229 $12,315
Senior Vice President 1998 199,202 111,476 187,634 16,352
1997 192,000 68,900 121,128 18,242
Ralph S. Johnson(4)......... 1999 $197,327 $ 85,091 $158,229 $10,927
Senior Vice President 1998 189,314 107,586 210,240 13,870
1997 182,333 68,212 197,110 13,153
</TABLE>
--------
(1) The 1999 amounts shown in this column are the following awards relating to
1999 and paid in 2000: (a) cash awards under the Management and Broad-Based
Short-Term Incentive Plans; and (b) the second installment of an incentive
and retention bonus. The Compensation Committee awarded the incentive and
retention bonuses as additional compensation to reflect contributions
during 1998 and prior years to the improvement in TNP's value to its
shareholders. These incentive and retention bonuses are being paid in five
equal annual installments; the first installment was paid in 1999.
Subsequent installments are subject to the named officer being employed by
TNP or TNMP on the scheduled date of the payment. They were replaced by
arrangements set forth in new employment agreements that were put in place
in connection with the merger. See the "Change-in-Control Arrangements"
section below. The total amounts of the bonuses to be paid over the five
year period are Mr. Joyce--$850,000; Mr. Chambers-- $235,000; Mr. Cheema--
$235,000; Mr. Edwards--$200,000; and Mr. Johnson--$200,000.
(2) The 1999 amounts in this column are the value of shares issued and dividend
equivalents paid in 2000 under the TNP Long-Term Incentive Compensation
Plan for the 1997-1999 performance period. These amounts represent the
value of the following numbers of shares, at $41.22 per share, the average
of the high and low prices of TNP stock on December 31, 1999, and dividend
equivalents of $3.26 per share:
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<PAGE>
Mr. Joyce--6,850; Mr. Chambers--3,949; Mr. Cheema--3,557; Mr. Edwards--
3,557; and Mr. Johnson--3,557. This payout reflects that TNP met the
performance measures set at the beginning of the performance period as
follows: TNP's shareholder return relative to the S&P 500 was at
approximately 135% of the target; TNP's shareholder return relative to the
S&P Electric Utility Index exceeded the maximum goal.
(3) The 1999 amounts in this column and the table below consist of the
following items earned or paid in 1999: (a) company contributions to TNMP's
401(k) plan; (b) company contributions to the TNMP Deferred Compensation
Plan, an unfunded benefit plan that allows eligible employees, including
the Named Executive Officers, to defer receipt of salary and bonuses and
receive matching Company contributions and interest credits, whenever and
to the extent that Internal Revenue Code restrictions limit their
participation in the 401(k) plan; (c) premiums for group life insurance
paid by the Company (none of the Named Executive Officers has any cash
value rights related to such insurance). The amounts shown for the 401(k)
and Deferred Compensation Plans include incentive matching contributions
for 1999 paid in 2000.
<TABLE>
<CAPTION>
Deferred
401(k) Plan Compensation Plan Life Insurance
----------- ----------------- --------------
<S> <C> <C> <C>
Kevern R. Joyce............... $6,468 $9,344 $2,982
Jack V. Chambers, Jr.......... 6,468 2,963 1,712
Manjit S. Cheema.............. 6,212 2,070 1,964
John P. Edwards............... 6,468 1,925 3,922
Ralph S. Johnson.............. 6,468 1,509 2,950
</TABLE>
(4) Messrs. Edwards and Johnson left TNP and TNMP at the closing of the merger.
Dr. Catacosinos Employment Agreement
In connection with the merger, TNP entered into a three year renewable
employment agreement with Dr. Catacosinos to serve as Chairman, President and
Chief Executive Officer of TNP and a member of the board of TNMP. Dr.
Catacosinos agreed to devote a sufficient amount of his time to enable him to
fulfill his obligations under the employment agreement. For his services, he
receives cash compensation commensurate with his position as a chief executive
officer of a utility company and participates in retirement, savings, incentive
and welfare benefit plans on the same terms enjoyed by our present senior
officers. The employment agreement contains provisions relating to termination,
death and disability which will result in different periods for which salary
and benefits continue to be paid, the longest of which is 18 months.
Compensation Arrangements
In connection with the merger, TNMP entered into employment agreements with
certain members of TNMP's senior management. These employment agreements
provide that the executive continues to hold his present position with TNMP and
will receive a minimum level of compensation over the next three years
consisting of:
. an annual base salary and an annual bonus payable in a lump sum on each
of the first, second and third anniversary of the new agreement,
provided the executive is still employed by TNMP;
. an annual incentive bonus of up to 37.5% of the executive's base salary
based on his attainment of certain pre-established financial and
operational goals, and subject to employment through the end of the
relevant year; and
. an additional bonus equal to the shortfall from a minimum predetermined
compensation including base salary, bonus and incentive bonus.
The new employment agreements supersede the severance agreements and the
incentive compensation agreements that existed prior to the merger.
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<PAGE>
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 a employee's account balance
when he or she retires or leaves the company. An employee's initial account
balance was based on his or her accrued pension benefits under the pre-
amendment plan. The account balance will grow as TNMP adds benefit credits
consisting of a percentage of compensation and interest credits based on one-
year Treasury bill rates. All employees are eligible to participate in the
pension plan. All named executive officers will participate in the pension
plan.
The following table sets forth information concerning annual benefits
payable upon normal retirement at age 65 to TNP and TNMP employees under the
pre-amendment pension plan, and reflects the "grandfathered" benefit formula
for individuals retiring in 1999 with the years of service indicated.
Pension Plan Table
<TABLE>
<CAPTION>
Years of Service
-----------------------------------------------------
Remuneration(1) 15 20 25 30 35 40
--------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$125,000 $ 27,519 $ 36,692 $ 45,865 $ 55,038 $ 64,219 $ 72,336
150,000 33,894 45,192 56,490 67,788 79,086 88,836
175,000 40,269 53,692 67,115 80,538 93,961 105,336
200,000 46,644 62,192 77,740 93,288 108,836 121,836
250,000 59,394 79,192 98,990 118,788 138,586 154,836
300,000 72,144 96,192 120,240 144,288 168,336 187,836
350,000 84,894 113,192 141,490 169,788 198,086 220,836
400,000 97,644 133,192 162,740 195,288 227,836 253,836
450,000 110,394 147,192 183,990 220,788 257,586 286,836
500,000 123,144 164,192 205,240 246,288 287,336 319,836
</TABLE>
--------
(1) Benefits shown do not take into account limits under Section 415 of the
Internal Revenue Code of 1986, as amended (the "Code"), or the $160,000
salary cap in effect after 1996, resulting from Code Section 401(a)(17)
limits. Consequently, a portion of the benefits would be paid from the
Excess Benefit Plan (as defined below).
Annual contributions to the pre-amendment pension plan are computed on an
actuarial basis and cannot be calculated readily on a per person basis.
Benefits for each eligible employee under the old formula are based on his or
her years of service computed through the month of his or her retirement,
multiplied by a specified percentage of his or her average monthly compensation
for each full calendar year of service completed after 1992. TNMP made no
contribution to the pension plan for 1999.
Pension plan benefits are not subject to reduction for Social Security
benefits, but are subject to reduction for retirement prior to age 62.
Highly compensated employees whose pensions are subject to being reduced to
an amount below what the pension plan otherwise would provide as a result of
compliance with Code Sections 415 and 401(a)(17), and whom the board of
directors designate as eligible, may also participate in TNP's "Excess Benefit
Plan." TNP's board of directors 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
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<PAGE>
other plans will be included in the remuneration base for pension and Excess
Benefit Plan purposes. TNMP owns policies insuring the lives of the Excess
Benefit Plan participants; policy proceeds are payable to TNMP to reimburse it
for its payments to the retirees.
As of December 31, 1999, the named executive officers were credited with the
years of service set forth in the following table. Executive pension benefits
are computed actuarially.
<TABLE>
<CAPTION>
Name Years of Credited Service
---- -------------------------
<S> <C>
Kevern R. Joyce.................................. 18 years(1)
Jack V. Chambers, Jr............................. 20 years, 11 months
Manjit S. Cheema................................. 5 years, 6 months
John P. Edwards.................................. 22 years(1)
Ralph S. Johnson................................. 21 years(1)
</TABLE>
--------
(1) TNMP has credited each of Messrs. Joyce, Edwards and Johnson with
additional years of service, including years before joining TNP and TNMP,
for purposes of determining their retirement benefits under the TNMP
Excess Benefit Plan. The credits for prior years service were required in
order to retain the services of these executives. Each such executive who
is employed by TNP or TNMP at age 65 will be credited with a total of 30
years of service; this number will be reduced by one year for each year
that his retirement precedes age 65. Excess Benefit Plan benefits that
each receives will be reduced by the amount of any retirement payments
that he receives from the TNMP pension plan and from other employers. Any
who retires before age 55 and five years of service will receive no
benefits, unless there is a change in control of TNP or TNMP. If there is
a change in control, the benefits to each will be fully vested and accrued
as of either the date of the change in control or as of his 62nd birthday,
whichever date provides the greater benefit.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
SW Acquisition, L.P. owns 100% of our equity interests. The following table
sets forth the beneficial ownership of TNP Enterprises, Inc. as of the date of
this prospectus:
<TABLE>
<CAPTION>
Percentage
Beneficially
Name of Beneficial Owner Owned
------------------------ ------------
<S> <C>
SW Acquisition, L.P.(1)..................................... 100.0%
William J. Catacosinos(2)................................... 100.0%
Kevern R. Joyce(3).......................................... 0.0%
Leeam Lowin(3).............................................. 0.0%
Preston M. Geren III(3)..................................... 0.0%
Theodore A. Babcock(4)...................................... 0.0%
All directors and executive officers as a group(2).......... 100.0%
</TABLE>
--------
(1) The business address of S.W. Acquisition, L.P. is 2 Robbins Lane, Suite
201, Jericho, New York 11753.
(2) Dr. William J. Catacosinos who controls SW I Acquisition GP, L.P., the
general partner of SW Acquisition, L.P., may also be deemed to have
beneficial ownership of the equity interests reported in the table. The
business address of Dr. Catacosinos is 2 Robbins Lane, Suite 201, Jericho,
NY 11753.
(3) The addresses for Messrs. Joyce, Lowin and Geren is c/o TNP Enterprises,
Inc., 4100 International Plaza, Fort Worth, Texas 76113.
(4) The addresses for Mr. Babcock is c/o Laurel Hill Capital Partners LLC, 2
Robbins Lane, Suite 201, Jericho, New York 11753.
64
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Transactions with CIBC, Laurel Hill, Continental Casualty and their affiliates
We have entered into and agreed to enter into certain transactions with
CIBC, Laurel Hill, Continental Casualty and certain of their affiliates in
connection with the merger:
. CIBC and its affiliates structured, arranged and syndicated a senior
secured credit facility in an aggregate amount of $185.0 million,
pursuant to which CIBC or its affiliates acted as co-arranger and lender
under our senior secured credit facility and administrative agent. An
affiliate of CIBC received certain fees in connection with our senior
secured credit facility.
. CIBC and its affiliates have acted to structure, and arrange and
syndicate a backstop credit facility in an aggregate amount of $203.0
million, in order to repay outstanding debt which became due and payable
as a result of the merger. CIBC or its affiliates acted as co-arranger
and lender under the backstop credit facility and as administrative
agent.
. CIBC was an initial purchaser of our 10.25% senior subordinated notes
due 2010 and received certain fees in connection therewith.
. CIBC, Laurel Hill and Continental Casualty purchased senior preferred
stock with a liquidation preference of $32.5 million, $2.5 million and
$32.5 million, respectively, issued concurrently with the issue of
$275.0 million of senior subordinated notes and received customary
commitment and funding fees in connection therewith.
. CIBC was an initial purchaser in the issue of our senior preferred stock
and warrants to purchase limited partnership interests in Parent, used
to redeem the senior preferred stock issued in connection with the
merger, and received certain fees in connection therewith.
. Pursuant to the limited partnership agreement of Parent, CIBC or its
affiliates may receive annual advisory fees for certain consulting and
advisory services provided from time to time to TNP.
. Pursuant to a management services advisory agreement, TNP may pay Laurel
Hill an annual fee for certain consulting and advisory services provided
from time to time. In addition, TNP will pay Laurel Hill customary
investment banking fees in the future for advisory services in
connection with merger, acquisition, or purchase or sale of asset
transactions.
. TNMP intends to establish a new credit facility, the proceeds of which
will be used to retire the backstop credit facility and TNMP's existing
credit facility. It is anticipated that this new facility will be
available before the end of 2000. We expect an affiliate of CIBC to be a
lender under this facility.
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<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS AND PREFERRED EQUITY
Upon completion of the exchange, in addition to the old senior preferred
stock, if any, and the registered senior preferred stock, we will have the
following indebtedness and preferred equity outstanding:
TNP
Senior Secured Credit Facility
General. As part of the merger TNP entered into a senior secured credit
facility with Canadian Imperial Bank of Commerce, as administrative agent, and
CIBC and Chase Securities, Inc. ("Chase") as co-arrangers, and co-book
managers, and the lenders party thereto. The senior secured credit facility
provides for a $160.0 million term loan and revolving loans for up to $25.0
million. Subject to certain restrictions, the senior secured credit facility
may be used to finance the merger and for working capital and general corporate
purposes, including transaction fees and expenses. The obligation of the
lenders to provide the initial advances under the senior secured credit
facility will be subject to the satisfaction of certain conditions.
Repayment. The revolving loan must be repaid on or before the third
anniversary of closing of the merger. Prior to that time the revolving loan may
be borrowed, repaid and reborrowed, without premium or penalty subject to the
satisfaction of certain conditions on the date of any such borrowing. The term
loan is required to be amortized in quarterly installments on March 31, June
30, September 30, and December 31 of each fiscal year beginning on June 30,
2000 as set forth below:
<TABLE>
<CAPTION>
Year Amortization
---- ------------
<S> <C>
2000...................................... $ 1,200,000
2001...................................... 1,600,000
2002...................................... 1,600,000
2003...................................... 1,600,000
2004...................................... 1,600,000
2005...................................... 76,800,000
2006...................................... 75,600,000
</TABLE>
Interest. All borrowings under the senior secured credit facility will bear
interest, at TNP's option, at a rate per annum equal to either:
(a) the "ABR" (which is the higher of (i) the rate of interest publicly
announced by Canadian Imperial Bank of Commerce as its prime rate in
effect at its principal office in New York City and (ii) the federal
funds effective rate from time to time plus 0.5%) plus 1.75%, or
(b) the "eurodollar rate" (which is the rate (adjusted for statutory
reserve requirements for eurocurrency liabilities) for eurodollar
deposits for a period equal to one, two, three or six months (as
selected by us) appearing on Page 3750 of the Dow Jones Markets screen)
plus 2.75%.
Fees. A commitment fee calculated at the rate of 0.50% per annum on the
average daily unused portion of the revolving loan, will be payable quarterly
in arrears.
Covenants.
The senior secured credit facility contains financial covenants, including:
. maximum consolidated leverage ratio;
. maximum senior debt leverage ratio;
. minimum interest coverage ratio; and
. maximum ratio of consolidated TNMP debt to TNMP total capitalization.
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<PAGE>
The senior secured credit facility also contains negative covenants that
restrict TNP's ability to, among other things:
. borrow money;
. create liens;
. guarantee indebtedness of others;
. sell certain assets or merge with or into other companies;
. consolidate, liquidate or dissolve;
. enter into leases;
. pay dividends on, or make other payments in respect of, capital stock;
. make capital expenditures;
. make investments, loans or advancements;
. make optional payments in respect of, or modify the terms of,
subordinated and other debt instruments;
. enter into transactions with affiliates;
. enter into sale and leaseback transactions;
. make changes in the fiscal year;
. enter into negative pledge clauses or clauses restricting subsidiary
distributions;
. make changes in the lines of business; and
. make changes in our passive holding company status.
Events of Default: The senior secured credit facility contains events of
default including, without limitation:
. failure to make payments when due;
. breach of representations and warranties;
. breach of covenants (subject, in the case of certain affirmative
covenants, to a grace period);
. cross-default to other indebtedness;
. bankruptcy events;
. certain ERISA events;
. material judgments;
. actual or asserted invalidity of any guarantee, security document,
security interest or subordination provision; and
. a change of control (as defined in the senior secured credit facility).
The Senior Subordinated Notes
General. As part of the merger TNP issued $275,000,000 principal amount of
10.25% senior subordinated notes maturing on April 1, 2010. The senior
subordinated notes pay interest on each April 1 and October 1, beginning on
October 1, 2000.
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<PAGE>
Ranking. The senior subordinated notes are not secured by any collateral.
The senior subordinated notes rank below all TNP's senior debt and equal to
TNP's other senior subordinated debt.
Optional Redemption. Except in the case of certain public equity offerings
by TNP, we cannot redeem the senior subordinated notes prior to April 1, 2005.
At any time from and after that date (which may be more than once), we can
redeem some or all of the senior subordinated notes at specified prices, plus
accrued interest.
Optional Redemption after Public Equity Offerings. At any time (which may be
more than once) before April 1, 2003, we can choose to buy back up to 35% of
the outstanding senior subordinated notes with money that we raise in one or
more public equity offerings, as long as:
. we pay 110.25% of the face amount of the senior subordinated notes
bought, plus accrued and unpaid interest;
. we buy the senior subordinated notes within 90 days of completing the
public equity offering; and
. at least 65% of the senior subordinated notes originally issued remain
outstanding afterwards.
Change of Control Offer. If we experience a change in control, we must give
holders of the senior subordinated notes the opportunity to sell us their
senior subordinated notes at 101% of their face amount, plus accrued and unpaid
interest.
Asset Sale Proceeds. We may have to use the cash proceeds from selling
assets and, to the extent distributed to us, cash proceeds from selling assets
of TNMP and its subsidiaries, to offer to buy back senior subordinated notes at
their face amount, plus accrued interest.
Certain Restrictive Provisions. The indenture governing the senior
subordinated notes has covenants which limit what we may do. However, our
regulated subsidiaries, which currently consist of TNMP, the principal
operating subsidiary of TNP, and its subsidiaries, are not subject to many of
these limitations. The provisions of the indenture limit our ability to:
. incur more debt;
. pay dividends and make distributions;
. create liens
. issue capital stock of subsidiaries;
. make certain investments;
. repurchase stock;
. restrict the ability of our subsidiaries to make payments to us;
. enter into transactions with affiliates;
. make asset sales
. merge or consolidate; and
. amend or modify the statement of resolution.
TNMP
Revolving Credit Facility
In August 1996, TNMP entered into a revolving credit facility with First
National Bank of Chicago to support its working capital requirements. The First
Chicago credit facility originally had a $100.0 million commitment which TNMP
voluntarily reduced to $80.0 million. The interest rate on this credit facility
is
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<PAGE>
currently LIBOR plus 0.75% and is based on a pricing grid tied to the note
ratings of TNMP. The credit facility has a 0.375% unused fee. The credit
facility is unsecured and matures in December 2000. The credit facility is
subject to terminations by the vote of two thirds of the holders of the
commitments upon a future change of control. The terms of the revolving credit
facility limit dividends that TNMP may pay to cumulative net income over the
previous twenty-four months, less dividends paid over that same period. As of
June 30, 2000, TNMP had $38.8 million of undistributed net income available for
distribution according to this test.
First Mortgage Bonds
In September 1993, TNMP issued $100.0 million of 9.25% Series U First
Mortgage Bonds concurrent with the refinancing of bank borrowings that were
used to build TNP One. The first mortgage bonds are secured by substantially
all tangible utility property owned directly by TNMP, including all tangible
utility property acquired by TNMP in the future. The maximum amount of any
additional first mortgage bonds that TNMP can issue is determined by both a
collateral requirement and by an interest coverage requirement. The collateral
requirement is a function of property additions, previously redeemed first
mortgage bonds, and cash deposited with the trustee. As of December 31, 1999,
the collateral requirement was more restrictive than the interest coverage
requirement, and TNMP could issue up to $96.3 million of additional first
mortgage bonds. The first mortgage bonds mature in September 2000.
The terms of the first mortgage bonds indenture limit dividends that TNMP
may pay to $1.5 million plus cumulative net income from 1969, less dividends
paid and all payments on preferred stock. As of June 30, 2000, TNMP had $91.9
million of undistributed net income available for distribution according to
this test.
On June 1, 2000, TNMP closed its offer to repurchase the first mortgage
bonds pursuant to change of control provisions following the merger.
Approximately $90.5 million of first mortgage bonds were tendered for
redemption. TNMP borrowed from the backstop credit facility to refinance the
tendered debt and created a new series of first mortgage bonds to secure the
borrowing.
On September 15, 2000, TNMP redeemed the remaining $9.5 million of first
mortgage bonds. TNMP borrowed funds from its existing bank facility to finance
the redemption.
Secured Debentures
In September 1993, TNMP issued $140.0 million of Series A 10.75% Secured
Debentures concurrent with refinancing of its bank borrowings that were used to
build TNP One. The secured debentures are collateralized by a first lien on a
portion of TNP One, and by second liens on substantially all utility plants in
Texas owned directly by TNMP. The secured debentures contain restrictive
covenants on dividends and asset dispositions and are callable at the
outstanding principal amount beginning on September 15, 2000. On June 1, 2000,
TNMP closed its tender offer to repurchase the secured debentures pursuant to
their change of control provisions following the merger. TNMP repurchased
$112.8 million of secured debentures tendered with proceeds from its backstop
credit facility and created a new series of secured debentures to secure its
borrowing under the backstop credit facility.
On September 15, 2000, TNMP redeemed the remaining $27.2 million of secured
debentures, using funds borrowed from its existing bank facility.
Senior Notes
In January 1999, TNMP issued $175.0 million of 6.25% Senior Notes due 2009
and used the proceeds to retire $130.0 million of its 12.5% Secured Debentures
and reduce outstanding borrowings under TNMP's credit facilities. The senior
notes are initially secured by first mortgage notes; however, when TNMP repays
its existing first mortgage notes and secured debentures, the collateral
securing the senior notes can be released and the senior notes may become
unsecured obligations of TNMP.
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<PAGE>
Preferred Equity
In 1963, TNMP issued Series B Preferred Stock. At December 31, 1999, there
were shares with an aggregate stated value of $839,000 outstanding. The Series
B Preferred Stock pays cash dividends semi-annually at a rate of 4.65% and has
a mandatory repurchase requirement of $120,000 per year.
On September 15, 2000, TNMP redeemed the remaining $839,000 of Series B
Preferred Stock.
In 1965, TNMP issued Series C Preferred Stock. At December 31, 1999, there
were shares with an aggregate stated value of $825,000 outstanding. The Series
C Preferred Stock pays cash dividends semi-annually at a rate of 4.75% and has
a mandatory repurchase requirement of $60,000 per year.
On September 15, 2000, TNMP redeemed the remaining $695,000 of Series C
Preferred Stock.
Backstop Credit Facility
As a result of the merger, we were required to make an offer to repurchase
the first mortgage bonds and the debentures at 101% of the outstanding
principal amount. As part of the merger, we put in place a backstop credit
facility of $240.0 million to fund the purchase of any debt that we are
required to repurchase under the change of control provisions. On June 1, 2000
TNMP closed the tender offer process for its Series U First Mortgage Bonds and
its 10.75% secured debentures, and drew a total of $203.0 million under the
backstop credit facility to repurchase $90.5 million tendered under its Series
U First Mortgage Bonds and $112.8 million tendered under its 10.75% Secured
Debentures. Commitments associated with the unused portion of the backstop
credit facility terminated on June 1, 2000, and are no longer available to
TNMP. The backstop credit facility is secured by a new series of first mortgage
bonds and a new series of secured debentures, each on the same amount of the
securities that were purchased pursuant to the tender offer. The interest rate
on the backstop credit facility was initially LIBOR plus 1.25%. The backstop
credit facility matures 364 days after closing of the acquisition. CIBC and
Chase act as co-lead arrangers and co-book managers for this credit facility.
The New 2000 Proposed Credit Facility
TNMP intends to establish a new credit facility, the proceeds of which will
be used to retire the backstop credit facility and TNMP's existing credit
facility. It is anticipated that this new facility will be available prior to
the end of 2000. We expect an affiliate of CIBC to be a lender under this
facility.
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<PAGE>
DESCRIPTION OF THE EXCHANGE SENIOR PREFERRED STOCK
You can find the definitions of certain terms used in this description under
the subheading "-- Certain Definitions." All references to the "Company", "we",
"us" and "our" in this description refer only to TNP Enterprises, Inc. and not
to any of its Subsidiaries. As used in this section, the term "Senior Preferred
Stock" means the old senior preferred stock and the registered senior preferred
stock, unless otherwise indicated.
The form and terms of the registered senior preferred stock are
substantially identical to the form and terms of the old senior preferred
stock, except that the registered senior preferred stock:
. will be registered under the Securities Act,
. will not bear legends containing transfer restrictions, and
. are immediately separable from the warrants issued as units together
with the old senior preferred stock.
The Board of Directors of the Company, by resolution unanimously adopted on
May 23, 2000, established the Senior Preferred Stock as a new series of
preferred stock and, in connection therewith, designated one million shares of
the Company's authorized preferred stock as that new series. The designations,
preferences, limitations and relative rights of the Senior Preferred Stock are
set forth in a statement of resolution (the "Statement of Designation"), filed
by the Company with the Secretary of State of Texas on May 25, 2000. Of the one
million authorized shares of Senior Preferred Stock, 100,000 shares were issued
in the offering, 5,075 shares were issued as dividends on October 2, 2000, and
the balance have been reserved for issuance as dividends on the Senior
Preferred Stock prior to October 1, 2005 and, thereafter, in the event the
Company elects to pay dividends on the Senior Preferred Stock by issuing
additional shares of senior preferred stock. See "-- Dividends" below. The
Senior Preferred Stock, when issued, will be fully paid and nonassessable, and
the holders thereof will not have any subscription or preemptive rights.
The following description is a summary of the material provisions of the
registered Senior Preferred Stock to be issued in the offering. It does not
restate those provisions in their entirety. We urge you to read the Statement
of Designation because it, and not this description, defines your rights as
holders of the registered Senior Preferred Stock. We will provide you with a
copy of the Statement of Designation if you request one.
Ranking
The Senior Preferred Stock will, with respect to dividend distributions and
distributions upon the liquidation, winding-up or dissolution of the Company,
rank
(i) senior to the extent described below to all classes of Common Stock of
the Company, and to each other class of capital stock or series of
Preferred Stock established after the date of this offering memorandum
supplement by the Board of Directors of the Company the terms of which
do not expressly provide that it ranks senior to or on a parity with
the Senior Preferred Stock as to dividend distributions and
distributions upon the liquidation, winding-up or dissolution of the
Company (collectively referred to with the Common Stock of the Company
as "Junior Securities");
(ii) subject to certain conditions, equally with any class of capital
stock or series of Preferred Stock issued by the Company established
after the date of this offering memorandum supplement by the Board of
Directors of the Company the terms of which expressly provide that
such class will rank equally with the Senior Preferred Stock as to
dividend distributions and distributions upon the liquidation,
winding-up or dissolution of the Company (collectively referred to as
"Parity Securities"); and
(iii) subject to certain conditions, junior to each other class of capital
stock or series of Preferred Stock issued by the Company established
after the date of this offering memorandum supplement by the Board
of Directors of the Company the terms of which expressly provide
that such class or series will
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<PAGE>
rank senior to the Senior Preferred Stock as to dividend distributions
and distributions upon the liquidation, winding-up or dissolution of the
Company (collectively, referred to as "Senior Securities").
The Senior Preferred Stock will be subject to the issuance of series of
Junior Securities, Parity Securities and Senior Securities; provided that the
Company may not issue any new class of Parity Securities (other than the
issuance of additional shares of Senior Preferred Stock to satisfy dividend
payments on outstanding shares of Senior Preferred Stock) or Senior Securities
(or amend the provisions of any existing class of capital stock to make such
class of capital stock Parity Securities or Senior Securities) without the
approval of the holders of at least a majority of the shares of Senior
Preferred Stock then outstanding, voting or consenting, as the case may be,
together as one class.
No full dividends may be declared or paid on any Parity Securities for any
period unless full cumulative dividends shall have been or contemporaneously
are declared and paid (or are deemed declared and paid) in full or declared
and, if payable in cash, a sum in cash sufficient for such payment set apart
for such payment on the Senior Preferred Stock. If full dividends are not paid,
the Senior Preferred Stock will share dividends pro rata with the Parity
Securities. No dividends may be paid on any Junior Securities (except dividends
on Junior Securities payable in additional shares of Junior Securities) and no
Junior Securities may be repurchased, redeemed or otherwise retired (except in
exchange for Junior Securities) if full cumulative dividends have not been paid
in full (or deemed paid) on the Senior Preferred Stock for all full semi-annual
dividend periods ended prior to the date of such payment in respect of Junior
Securities as may be further restricted as provided under "--Certain
Covenants--Limitation on Restricted Payments" below.
Dividends
Holders of the Senior Preferred Stock will be entitled to receive, when, as
and if declared by the Board of Directors of the Company, out of funds legally
available therefor, dividends on the Senior Preferred Stock at a rate per annum
equal to 14 1/2% of the liquidation preference per share of Senior Preferred
Stock, payable semi-annually. All dividends will accumulate on a daily basis
whether or not earned or declared from the Issue Date and will be payable semi-
annually in arrears on April 1 and October 1 of each year (each, a "Dividend
Payment Date"), commencing on October 1, 2000, to holders of record on March 15
and September 15 immediately preceding the relevant Dividend Payment Date. All
unpaid dividends will compound on a semi-annual basis. Dividends will be paid
by the issuance of additional shares of Senior Preferred Stock (including
fractional shares) having an aggregate liquidation preference equal to the
amount of such dividends on any Dividend Payment Date occurring on or prior to
April 1, 2005. Thereafter, dividends may be paid, at the Company's option, on
any Dividend Payment Date either in cash or by the issuance of additional
shares of Senior Preferred Stock (including fractional shares) having an
aggregate liquidation preference equal to the amount of such dividends. If, at
any time, any of the events described in clauses (i) or (ii) of the definition
of the "Voting Rights Triggering Event" shall have occurred, the per annum
dividend rate will be increased by 2% from such Dividend Payment Date or during
the continuance of any such Voting Rights Triggering Event, as the case may be.
After the date on which such Voting Rights Triggering Event ceases to exist,
the dividend rate will revert to the rate originally borne by the Senior
Preferred Stock.
The Senior Credit Facility and the Indenture restrict the Company's ability
to pay cash dividends on the Senior Preferred Stock. See the "Description of
Certain Indebtedness and Preferred Equity" section in the prospectus.
Unpaid dividends accumulating after April 1, 2005 on the Senior Preferred
Stock for any past dividend period and dividends in connection with any
optional redemption may be declared and paid at any time, without reference to
any regular dividend payment date, to holders of record on such date, not more
than 60 days prior to the payment thereof, as may be fixed by the Board of
Directors of the Company.
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<PAGE>
Optional Redemption
The Company may redeem the Senior Preferred Stock at its option, in whole at
any time or in part from time to time (subject to contractual and other
restrictions with respect thereto and to the legal availability of funds
therefor) on or after April 1, 2005 at the following redemption prices
(expressed as percentages of the liquidation preference thereof), plus, without
duplication, an amount in cash equal to all accumulated and unpaid dividends
(including an amount in cash equal to a prorated dividend for the period from
the Dividend
Payment Date immediately prior to the redemption date to the redemption date)
if redeemed during the twelve-month period beginning on April 1 of each year
listed below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2005......................................... 110.000%
2006......................................... 107.500%
2007......................................... 105.000%
2008......................................... 102.500%
2009 and thereafter.......................... 100.000%
</TABLE>
Notwithstanding the foregoing, the Company may redeem all but not less than
all of the outstanding shares of Senior Preferred Stock at any time prior to
April 1, 2003 at a redemption price equal to 114.5% of the liquidation
preference thereof, plus, without duplication, an amount in cash equal to all
accumulated and unpaid dividends (including an amount in cash equal to a
prorated dividend for the period from the Dividend Payment Date immediately
prior to the redemption date to the redemption date) to the redemption date out
of the Net Proceeds of a Public Equity Offering; provided, that any such
redemption occurs within 90 days following the closing of any such Public
Equity Offering.
At any time prior to April 1, 2005, the Senior Preferred Stock may also be
redeemed, in whole but not in part, at the option of the Company upon the
occurrence of a Change of Control, upon not less than 30 nor more than 60 days'
prior notice (but in no event may any such redemption occur more than 90 days
after the occurrence of such Change of Control) mailed by first-class mail to
each holder's registered address, at a redemption price equal to 100% of the
liquidation preference thereof plus the Applicable Premium as of, and
accumulated and unpaid dividends (including an amount in cash equal to a
prorated dividend for the period from the Dividend Payment Date immediately
prior to the redemption date to the redemption date) and Additional Dividends,
if any, to the date of redemption.
In the event of partial redemptions of Senior Preferred Stock, the shares to
be redeemed will be determined pro rata, except that the Company may redeem all
shares held by any holders of fewer than ten shares (or shares held by holders
who would hold less than ten shares as a result of such redemption), as may be
determined by the Company. No optional redemption may be made unless prior
thereto or simultaneously therewith all accumulated and unpaid dividends on the
Senior Preferred Stock shall have been paid in cash or a sum set apart for such
payment.
The Indenture and the Senior Credit Facility restrict the ability of the
Company to redeem the Senior Preferred Stock. See the "Description of Certain
Indebtedness and Preferred Equity" section of this prospectus.
Mandatory Redemption
The registered Senior Preferred Stock will also be subject to mandatory
redemption (subject to contractual and other restrictions with respect thereto
and to the legal availability of funds therefor) in whole on April 1, 2011 at a
price equal to the liquidation preference thereof, plus, without duplication,
all accumulated and unpaid dividends to the date of redemption. The Indenture
and the Senior Credit Facility restrict the ability of the Company to redeem
the Senior Preferred Stock and will prohibit any such redemption in certain
instances and other future agreements or certificates of designation with
respect to Senior Securities or Parity Securities may contain similar
restrictions and/or prohibitions. See the "Description of Certain Indebtedness
and Preferred Equity" section of the prospectus.
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Procedure for Redemption
On and after a redemption date, unless the Company defaults in the payment
of the applicable redemption price, dividends will cease to accrue on shares of
Senior Preferred Stock called for redemption and all rights of
holders of such shares will terminate except for the right to receive the
redemption price, without interest. If a notice of redemption shall have been
given as provided in the succeeding sentence and the funds necessary for
redemption (including an amount in respect of all dividends that will accrue to
the redemption date) shall have been segregated and irrevocably set apart by
the Company in trust for the benefit of the holders of the shares called for
redemption, then dividends shall cease to accumulate on the redemption date on
the shares to be redeemed and, at the close of business on the day when such
funds are segregated and set apart, the holders of the shares to be redeemed
shall cease to be stockholders of the Company and shall be entitled only to
receive the redemption price for such shares. The Company will send a written
notice of redemption by first class mail to each holder of record of shares of
Senior Preferred Stock, not less than 30 days nor more than 60 days prior to
the date fixed for such redemption. Shares of Senior Preferred Stock issued and
reacquired will, upon compliance with the applicable requirements of Texas law,
have the status of authorized but unissued shares of Preferred Stock of the
Company undesignated as to series and may with any and all other authorized but
unissued shares of Preferred Stock of the Company be designated or redesignated
and issued or reissued, as the case may be, as part of any series of Preferred
Stock of the Company.
Liquidation Preference
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
the Company, holders of the Senior Preferred Stock will be entitled to receive,
out of the assets of the Company available for distribution, $1,000 per share,
plus an amount in cash equal to accumulated and unpaid dividends thereon to the
date fixed for liquidation, dissolution or winding-up (including an amount
equal to a prorated dividend for the period from the last Dividend Payment Date
to the date fixed for liquidation, dissolution or winding-up), and no more,
before any distribution is made on any Junior Securities, including, without
limitation, Common Stock of the Company. If upon any voluntary or involuntary
liquidation, dissolution or winding-up of the Company, the amounts payable with
respect to the Senior Preferred Stock and all other Parity Securities are not
paid in full, the holders of the Senior Preferred Stock and the Parity
Securities will share equally and ratably in any distribution of assets of the
Company first in proportion to the full liquidation preference to which each is
entitled until such preferences are paid in full, and then in proportion to
their respective amounts of accumulated but unpaid dividends. After payment of
the full amount of the liquidation preferences and accumulated and unpaid
dividends to which they are entitled, the holders of shares of Senior Preferred
Stock will not be entitled to any further participation in any distribution of
assets of the Company. However, neither the sale, conveyance, exchange or
transfer (for cash, shares of stock, securities or other consideration) of all
or substantially all of the property or assets of the Company nor the
consolidation or merger of the Company with one or more entities shall be
deemed to be a liquidation, dissolution or winding-up of the Company.
The Statement of Designation does not contain any provision requiring funds
to be set aside to protect the liquidation preference of the Senior Preferred
Stock, although such liquidation preference will be substantially in excess of
the par value of such shares of Senior Preferred Stock. In addition, the
Company is not aware of any provision of Texas law or any controlling decision
of the courts of the State of Texas (the state of incorporation of the Company)
that requires a restriction upon the surplus of the Company solely because the
liquidation preference of the Senior Preferred Stock will exceed its par value.
Consequently, there will be no restriction upon the surplus of the Company
solely because the liquidation preference of the Senior Preferred Stock will
exceed the par value and there will be no remedies available to holders of the
Senior Preferred Stock before or after the payment of any dividend, other than
in connection with the liquidation of the Company, solely by reason of the fact
that such dividend would reduce the surplus of the Company to an amount less
than the difference between the liquidation preference of the Senior Preferred
Stock and its par value.
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Voting Rights
Holders of the Senior Preferred Stock will have no voting rights with
respect to general corporate matters except as provided by Texas law or as set
forth in the Statement of Designation. The Statement of Designation provides
that if
(i) the Company fails to redeem the Senior Preferred Stock on or before
April 1, 2011 or fails to discharge any redemption obligation with
respect to the Senior Preferred Stock or
(ii) the Company fails to make a Change of Control Offer if such an offer
is required by the provisions set forth under "-- Change of Control
Offer" below or fails to purchase shares of Senior Preferred Stock
from holders who elect to have such shares purchased pursuant to the
Change of Control Offer or
(iii) a breach or violation of any of the provisions described under the
caption "-- Certain Covenants", "Merger, Consolidation or Sale of
Assets" or "Reports to Holders" below occurs and the breach or
violation continues for a period of 60 days or more after the
Company receives notice thereof specifying the breach of violation
from the holders of at least 25% of the shares of Senior Preferred
Stock then outstanding,
then the holders of a majority of the then outstanding shares of Senior
Preferred Stock, voting separately and as a class, will have the right to elect
the lesser of two directors and that number of directors constituting 25% of
the members of the Board of Directors of the Company. Such voting rights will
continue until such time as, in the case of a dividend default, all accumulated
and unpaid dividends on the Senior Preferred Stock are paid in full in cash
and, in all other cases, any failure, breach or default giving rise to such
voting rights is remedied, cured or waived by the holders of at least a
majority of the shares of Senior Preferred Stock then outstanding, at which
time the term of any directors elected pursuant to the provisions of this
paragraph shall terminate. Each such event described in clauses (i) through
(iii) above is referred to herein as a "Voting Rights Triggering Event." The
voting rights provided herein shall be a holder's exclusive remedy at law or in
equity. If requested by the Company upon the advise of counsel, each holder
agrees to use its best efforts in cooperation with the Company to avoid any
violation of United States federal laws and regulations relating to foreign
ownership or control of the Company which may occur as a result of the maturity
of the voting rights provided for herein upon the occurrence of any Voting
Rights Triggering Event.
The Statement of Designation provides that the Company will not authorize
any additional shares of Senior Preferred Stock or any class of Senior
Securities or Parity Securities without the affirmative vote or consent of
holders of at least 66 2/3% of the shares of Senior Preferred Stock of the
Company then outstanding which are entitled to vote thereon, voting or
consenting, as the case may be, as one class. The Statement of Designation also
provides that the Company may not amend the Statement of Designation so as to
affect materially and adversely the specified rights, preferences, privileges
or voting rights of the holders of shares of Senior Preferred Stock, or
authorize the issuance of any shares of Senior Preferred Stock in addition to
the two million authorized (one million reserved for issuance as exchange
preferred stock), without the affirmative vote or consent of the holders of at
least a majority of the then outstanding shares of Senior Preferred Stock which
are entitled to vote thereon, voting or consenting, as the case may be, as one
class. The Statement of Designation also provides that, except as set forth
above,
(a) the creation, authorization or issuance of any shares of Junior
Securities, Parity Securities or Senior Securities or
(b) the increase or decrease in the amount of authorized capital stock
of any class, including any Preferred Stock,
shall not require the consent of the holders of Senior Preferred Stock and
shall not be deemed to affect adversely the rights, preferences, privileges or
voting rights of holders of shares of Senior Preferred Stock.
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Under Texas law, the holders of preferred stock of a corporation will be
entitled to vote as a class upon a proposed amendment to its articles of
incorporation, whether or not entitled to vote thereon by the provisions of the
articles of incorporation if the amendment would
(a) increase or decrease the par value of the shares of such class or
(b) alter or change the powers, preferences or special rights of the
shares of such class so as to affect them adversely,
unless such amendment is undertaken pursuant to the authority expressly vested
in the board of directors in the articles of incorporation in accordance with
Article 2.13 of the Business Corporation Act of the State of Texas.
Change of Control Offer
Upon the occurrence of a Change of Control, unless the Company has elected
to redeem the Senior Preferred Stock in connection with such Change of Control,
the Company will be obligated to make an offer to purchase (the "Change of
Control Offer") the outstanding Senior Preferred Stock at a purchase price
equal to 110% of the liquidation preference thereof plus, without duplication,
an amount in cash equal to all accumulated and unpaid dividends thereon
(including an amount in cash equal to a prorated dividend for the period from
the immediately preceding Dividend Payment Date to the Change of Control
Payment Date (such applicable purchase price being hereinafter referred to as
(the "Change of Control Purchase Price")) in accordance with the procedures set
forth below.
Within 30 days of the occurrence of a Change of Control the Company shall
(i) cause a notice of the Change of Control Offer to be sent at least once to
the Dow Jones News Service or similar business news service in the United
States and (ii) send by first-class mail, postage prepaid, to each holder of
Senior Preferred Stock, at the address appearing in the register maintained by
the Transfer Agent, a notice stating:
(1) that the Change of Control Offer is being made pursuant to this
covenant and that all Senior Preferred Stock tendered will be accepted
for payment, and otherwise subject to the terms and conditions set
forth herein;
(2) the Change of Control Purchase Price and the purchase date (which
shall be a Business Day no earlier than 30 Business Days nor more than
60 Business Days from the date such notice is mailed (the "Change of
Control Payment Date"));
(3) that any Senior Preferred Stock not tendered will continue to
accumulate dividends;
(4) that, unless the Company defaults in the payment of the Change of
Control Purchase Price, any Senior Preferred Stock accepted for
payment pursuant to the Change of Control Offer shall cease to
accumulate dividends after the Change of Control Payment Date;
(5) that holders accepting the offer to have their Senior Preferred Stock
purchased pursuant to a Change of Control Offer will be required to
surrender their certificates representing the Senior Preferred Stock
to the Company at the address specified in the notice prior to the
close of business on the Business Day preceding the Change of Control
Payment Date;
(6) that holders will be entitled to withdraw their acceptance if the
Company receives, not later than the close of business on the third
Business Day preceding the Change of Control Payment Date, a telegram,
telex, facsimile transmission or letter setting forth the name of the
holder, the number of shares delivered for purchase, and a statement
that such holder is withdrawing his election to have such Senior
Preferred Stock purchased;
(7) that holders whose Senior Preferred Stock are being purchased only in
part will be issued new Senior Preferred Stock equal to the
unpurchased portion of the Senior Preferred Stock surrendered,
provided that each share purchased and each such new certificate for
Senior Preferred Stock issued shall be in an original liquidation
preference in denominations of $1,000 and integral multiples thereof;
and
(8) any other procedures that a holder must follow to accept a Change of
Control Offer or effect withdrawal of such acceptance.
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On the Change of Control Payment Date, the Company shall, to the extent
lawful,
(1) accept for payment Senior Preferred Stock or portions thereof tendered
pursuant to the Change of Control Offer,
(2) promptly mail to each holder of Senior Preferred Stock so accepted
payment in an amount equal to the purchase price for such Senior
Preferred Stock, and
(3) execute and issue a new certificate representing Senior Preferred
Stock equal to any unpurchased shares represented by a certificate
surrendered.
The Statement of Designation requires that if the purchase of the Senior
Preferred Stock would violate or constitute a default under any outstanding
Indebtedness, then, at the time of the occurrence of a Change of Control, prior
to the mailing of the notice to holders described in the second preceding
paragraph, but in any event within 30 days following any Change of Control, the
Company covenants to
(1) repay in full all obligations and terminate all commitments under or
in respect of such Indebtedness and terminate all commitments under or
in respect of such Indebtedness and repay the Indebtedness owed to
each such lender who has accepted such offer or
(2) obtain the requisite consents under such Indebtedness to permit the
repurchase of the Senior Preferred Stock as described above.
The Company must first comply with the covenant described in the preceding
sentence before it shall be required to purchase shares of Senior Preferred
Stock in the event of a Change of Control; provided that the Company's failure
to consummate a Change of Control Offer in accordance with the provisions of
this covenant due to the covenant described in the immediately preceding
sentence shall constitute a Voting Rights Triggering Event described in clause
(3) of the definition of "Voting Rights Triggering Event" if not cured within
30 days of the last date on which the Company would have been required to
consummate the Change of Control Offer without giving effect to the covenant
described in the immediately preceding sentence. As a result of the foregoing,
a holder of shares of Senior Preferred Stock may not be able to compel the
Company to purchase its shares of Senior Preferred Stock unless the Company is
able at the time to refinance all of the obligations under or in respect of
such Indebtedness or obtain requisite consents under such Indebtedness.
Notwithstanding the preceding paragraphs of this covenant, the Company will
not be required to make a Change of Control Offer upon a Change of Control if a
third party makes an offer to purchase the Senior Preferred Stock in the
manner, at the times and otherwise in substantial compliance with the
requirements set forth in the Statement of Designation applicable to a Change
of Control Offer and purchases all shares of Senior Preferred Stock validly
tendered and not withdrawn under such Change of Control Offer.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of shares of Senior Preferred Stock pursuant to a Change of Control
Offer. To the extent that the provisions of any securities laws or regulations
conflict with the "Change of Control" provisions of the Statement of
Designation, the Company shall comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations under the
"Change of Control" provisions of the Statement of Designation by virtue
thereof.
None of the provisions in the Statement of Designation relating to a
repurchase upon a Change of Control may be waived by the Board of Directors of
the Company.
The definition of Change of Control includes a phrase relating to the sale,
lease, exchange or other transfer of "all or substantially all" of the assets
of the Company or TNMP. Although there is a limited body of case
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law interpreting the phrase "substantially all," there is no precise
established definition of the phrase under applicable law. Accordingly, the
ability of a holder of Senior Preferred Stock to require the Company to
purchase Senior Preferred Stock as a result of a sale, lease, exchange or other
transfer, of less than all of the assets of the Company to another person or
group may be uncertain.
Certain Covenants
Set forth below are certain covenants contained in the Statement of
Designation. During any period of time that (i) the ratings assigned to the
Notes (or, if the Notes are no longer outstanding, a similar debt issuance of
the Company) by both of the Rating Agencies are Investment Grade Ratings and
(ii) no Voting Rights Triggering Event has occurred and is continuing, the
Company and its Restricted Subsidiaries will not be subject to the provisions
of the Statement of Designation described below under "-- Limitation on
Additional Indebtedness," "-- Limitation on Restricted Payments," "--
Limitation on Transactions with Affiliates" and clause (3) of "-- Merger,
Consolidation and Sale of Assets" (collectively, the "Suspended Covenants"). In
the event that the Company and its Restricted Subsidiaries are not subject to
the Suspended Covenants with respect to the Senior Preferred Stock for any
period of time as a result of the preceding sentence and, subsequently, one or
both Rating Agencies withdraw their ratings or downgrade the ratings assigned
to such Notes below the required Investment Grade Ratings, then the Company and
each of its Restricted Subsidiaries (except to the extent that any such
Restricted Subsidiary is not subject to such covenant pursuant to the terms
thereof) will thereafter again be subject to the Suspended Covenants for the
benefit of such Senior Preferred Stock and compliance with the Suspended
Covenants with respect to Restricted Payments made after the time of such
withdrawal or downgrade will be calculated in accordance with the terms of the
covenant described below under "-- Limitation on Restricted Payments" as if
such covenant had been in effect during the entire period of time from the date
of the Statement of Designation.
Limitation on Additional Indebtedness
The Company will not, and will not permit any of its Restricted Subsidiaries
(other than any Regulated Restricted Subsidiary) to, directly or indirectly,
incur (as defined) any Indebtedness (including Acquired Indebtedness); provided
that if no Voting Rights Triggering Event has occurred and is continuing at the
time or as a consequence of the incurrence of such Indebtedness, the Company or
any of its Restricted Subsidiaries may incur Indebtedness (including Acquired
Indebtedness) if after giving effect to the incurrence of such Indebtedness and
the receipt and application of the proceeds thereof, the Company's Consolidated
Fixed Charge Coverage Ratio is at least 2.0 to 1 if the Indebtedness is
incurred on or prior to December 31, 2001 and 2.25 to 1 if the Indebtedness is
incurred thereafter.
Notwithstanding the foregoing, the Company and its Restricted Subsidiaries
may incur Permitted Indebtedness.
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the types of
Indebtedness which the Company and any Restricted Subsidiary are permitted to
issue, the Company and such Restricted Subsidiary, as the case may be, will
have the right, in the Company's sole discretion, to classify such item of
Indebtedness at the time of its issuance and from time to time thereafter and
will only be required to include the amount and type of such Indebtedness under
the clause permitting the Indebtedness as so classified.
Limitation on Restricted Payments
The Company will not make, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, make, any Restricted Payment, unless:
(1) no Voting Rights Triggering Event has occurred and is continuing at
the time of or immediately after giving effect to such Restricted
Payment;
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(2) immediately after giving pro forma effect to such Restricted
Payment, the Company could incur $1.00 of additional Indebtedness
(other than Permitted Indebtedness) under "-- Limitation on
Additional Indebtedness" above; and
(3) immediately after giving effect to such Restricted Payment, the
aggregate of all Restricted Payments made after the Issue Date does
not exceed the sum of
(a) 50% of the Company's Cumulative Consolidated Net Income (or
minus 100% of any cumulative deficit in Consolidated Net Income
during such period);
(b) 100% of the aggregate Net Proceeds received by the Company from
the issue or sale after the Issue Date of Capital Stock (other
than Disqualified Capital Stock or Capital Stock of the Company
issued to any Subsidiary of the Company) of the Company or any
Indebtedness or other securities of the Company convertible into
or exercisable or exchangeable for Capital Stock (other than
Disqualified Capital Stock) of the Company which have been so
converted, exercised or exchanged, as the case may be;
(c) without duplication of any amounts included in clause (3)(b)
above, 100% of the aggregate Net Proceeds received by the
Company from any equity contribution from a holder of the
Company's Capital Stock, excluding any Net Proceeds from a
Public Equity Offering to the extent used to redeem the Notes;
and
(d) without duplication, the sum of:
(i) the aggregate amount returned in cash on or with respect to
an Investment (other than a Permitted Investment) in any
Person made subsequent to the Issue Date whether through
interest payments, principal payments, dividends or other
distributions; and
(ii) the net cash proceeds received by the Company or any of its
Restricted Subsidiaries from the disposition (other than to
the Company or a Subsidiary of the Company), retirement or
redemption of all or any portion of an Investment described
in clause (3)(d)(i);
provided, however, that, with respect to an Investment in any Person,
the sum of clauses (i) and (ii) above with respect to the Investment in
such Person may not exceed the aggregate amount of all Investments made
in such Person subsequent to the Issue Date; and
(e) $5.0 million.
For purposes of determining under clause (3) above, the amount expended for
Restricted Payments, cash distributed will be valued at the face amount thereof
and property other than cash will be valued at its fair market value.
The provisions of this covenant will not prohibit
(1) the payment of any distribution within 60 days after the date of
declaration thereof, if at such date of declaration such payment
would comply with the provisions of the Statement of Designation;
(2) the repurchase, redemption or other acquisition or retirement of
any shares of Capital Stock of the Company by conversion into, or
by or in exchange for, shares of Capital Stock of the Company
(other than Disqualified Capital Stock), or out of the Net Proceeds
of the substantially concurrent sale (other than to a Subsidiary of
the Company) of other shares of Capital Stock of the Company (other
than Disqualified Capital Stock);
(3) distributions to SW Acquisition, L.P. by the Company for the
purpose of (a) enabling the partners of SW Acquisition, L.P. to pay
their tax liabilities and (b) enabling SW Acquisition, L.P.
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to pay management, consulting and financial advisory fees and
reimburse expenses in an amount in the case of this clause (b) not to
exceed $2.0 million in the aggregate in any fiscal year;
(4) the repurchase, redemption or other acquisition or retirement of any
shares of Disqualified Capital Stock out of the Net Proceeds of the
substantially concurrent sale (other than to a Subsidiary of the
Company) of other shares of Disqualified Capital Stock; provided,
however, that the amounts of the redemption obligations of the
Disqualified Capital Stock being issued shall not exceed the amounts of
the redemption obligations of, and such Disqualified Capital Stock
shall have redemption obligations no earlier than those required by,
the Disqualified Capital Stock being refinanced;
(5) the repurchase, redemption, retirement or acquisition of Capital
Stock of the Company from employees or directors of the Company upon
such employees' or directors' death, retirement or termination of
employment or otherwise in accordance with any employment agreement,
employee or director stock option plan or agreement or employee or
director equity subscription agreement, in an aggregate amount not
to exceed $2.0 million in any calendar year, plus the aggregate cash
proceeds received by the Company during such calendar year from any
issuance of such Capital Stock to employees or directors of the
Company, plus the portion of such $2.0 million which remains unused
at the end of the prior calendar year, but in no event to exceed
$3.0 million in any calendar year; provided, that the cancellation
of Indebtedness owing to the Company from employees or directors in
connection with a repurchase of Capital Stock of the Company will
not be deemed to constitute a Restricted Payment; and
(6) investments constituting Restricted Payments made as a result of the
receipt of non-cash consideration from any Asset Sale.
In calculating the aggregate amount of Restricted Payments made subsequent
to the Issue Date for purposes of clause (3) of the first paragraph above,
amounts expended pursuant to clauses (1), (2) and (5) of the immediately
preceding paragraph will be included in such calculation.
Limitation on Transactions with Affiliates
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into any transaction or series
of related transactions (including, without limitation, the sale, purchase,
exchange or lease of assets, property or services) with or for the benefit of
any Affiliate (each an "Affiliate Transaction") or extend, renew, waive or
otherwise amend or modify the terms of any Affiliate Transaction entered into
prior to the Issue Date unless
(1) such Affiliate Transaction is between or among the Company and one
or more of its Wholly Owned Subsidiaries; or
(2) the terms of such Affiliate Transaction are at least as favorable as
the terms which could be obtained by the Company or such Restricted
Subsidiary, as the case may be, in a comparable transaction made on
an arm's-length basis between unaffiliated parties.
In any Affiliate Transaction (or any series of related Affiliate
Transactions which are similar or part of a common plan) involving an amount
or having a fair market value in excess of $2.0 million which is not permitted
under clause (1) above, the Company must obtain a board resolution of the
Board of Directors of the Company (and approved by at least a majority of the
disinterested directors) certifying that such Affiliate Transaction complies
with clause (2) above. In any Affiliate Transaction (or any series of related
Affiliate Transactions which are similar or part of a common plan) involving
an amount or having a fair market value in excess of $5.0 million which is not
permitted under clause (1) above, the Company must obtain a favorable written
opinion as to the fairness of such transaction or transactions, as the case
may be, from an Independent Financial Advisor.
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The foregoing provisions will not apply to
(1) any Restricted Payment that is not prohibited by the provisions
described under "-- Limitation on Restricted Payments" above;
(2) fees and compensation paid to, indemnity provided on behalf of, and
employee benefit arrangements for, officers, directors or employees of
the Company or any Restricted Subsidiary of the Company, as determined
in good faith by the Company's Board of Directors or senior management;
(3) any transactions with and any reasonable fees paid to Laurel Hill
Capital Partners, LLC and its Affiliates and CIBC World Markets
Corp. and its Affiliates relating to advisory, banking and
investment banking services provided to the Company or any
Restricted Subsidiary of the Company, subject to approval by the
Company's Board of Directors;
(4) distributions to SW Acquisition, L.P. by the Company for the
purpose of (a) enabling the partners of SW Acquisition, L.P. to pay
their tax liabilities and (b) enabling SW Acquisition, L.P. to pay
management, consulting and financial advisory fees and reimburse
expenses in an amount in the case of this clause (b) not to exceed
$2.0 million in the aggregate in any fiscal year;
(5) loans or advances to employees of the Company or any Restricted
Subsidiary in the ordinary course of business, but in any event not
to exceed $2.0 million in the aggregate outstanding at any time;
(6) any employment agreement entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business approved
in good faith by the Company's Board of Directors; or
(7) any agreement as in effect as of the Issue Date or any amendment
thereto or any transaction contemplated thereby (including pursuant
to any amendment thereto) in any replacement agreement thereto so
long as any such amendment or replacement agreement is not more
disadvantageous to the holders in any material respect than the
original agreement as in effect on the Issue Date.
Limitation on Preferred Stock of Restricted Subsidiaries
The Company will not permit any of its Restricted Subsidiaries (other than
any Regulated Restricted Subsidiary) to issue any Preferred Stock (except
Preferred Stock issued to the Company or a Wholly Owned Subsidiary of the
Company) or permit any Person (other than the Company or a Wholly Owned
Subsidiary of the Company) to hold any such Preferred Stock unless such
Restricted Subsidiary would be entitled to incur or assume Indebtedness (other
than Permitted Indebtedness) in compliance with "-- Limitation on Additional
Indebtedness" above in the aggregate principal amount equal to the aggregate
liquidation value of the Preferred Stock to be issued.
Payments for Consent
The Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly, pay or cause to be paid any consideration, whether by
way of interest, fee or otherwise, to any holder of Senior Preferred Stock for
or as an inducement to any consent, waiver or amendment of any of the terms or
provisions of the Statement of Designation or the Senior Preferred Stock
unless such consideration is offered to be paid or agreed to be paid to all
holders of Senior Preferred Stock that so consent, waive or agree to amend in
the time frame set forth in solicitation documents relating to such consent,
waiver or amendment.
Merger, Consolidation or Sale of Assets
Without the affirmative vote of the holders of a majority of the issued and
outstanding shares of Senior Preferred Stock, voting or consenting, as the
case may be, as a separate class, the Company will not, in a single
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transaction or series of related transactions, (1) consolidate with or merge
with or into, or (2) sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of its assets to, another Person unless:
(1) the Company is the continuing Person, or the Person (if other than
the Company) formed by such consolidation or into which the Company
is merged or to which the assets of the Company are sold, assigned,
transferred, leased, conveyed or otherwise disposed of must be a
corporation organized and existing under the laws of the United States
or any State thereof or the District of Columbia and must expressly
assume all of the obligations of the Company under the Statement of
Designation and the obligations thereunder will remain in full force and
effect;
(2) the Senior Preferred Stock shall be converted into or exchanged for
and shall become shares of such successor, transferee or resulting
Person, having in respect of such successor, transferee or resulting
Person the same powers, preferences and relative participating,
optional or other special rights and the qualifications, limitations
or restrictions thereon that the Senior Preferred Stock had
immediately prior to such transaction;
(3) immediately after giving effect to such transaction on a pro forma
basis the Company or such Person will be able to incur at least
$1.00 of additional Indebtedness (other than Permitted Indebtedness)
under "-- Certain Covenants -- Limitation on Additional
Indebtedness" above; and
(4) immediately after giving effect to such transaction (including any
Indebtedness incurred or anticipated to be incurred in connection
with the transaction), no Voting Rights Triggering Event has
occurred and is continuing;
provided, however, that any such transaction effected solely for the purpose
of changing the Company's jurisdiction of incorporation need not comply with
the foregoing clauses (3) and (4).
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of related transactions) of all
or substantially all of the properties and assets of one or more Restricted
Subsidiaries of the Company, the Capital Stock of which constitutes all or
substantially all of the properties and assets of the Company, will be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company.
Reports to Holders
Whether or not required by the SEC, so long as any shares of Senior
Preferred Stock are outstanding, the Company will furnish to the holders of
Senior Preferred Stock, within 15 days of the time periods specified in the
SEC's rules and regulations:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the SEC on Forms 10-Q and
10-K if the Company were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and, with respect to the annual information
only, a report on the annual financial statements by the Company's
certified independent accountants; and
(2) all current reports that would be required to be filed with the SEC
on Form 8-K if the Company were required to file such reports.
If the Company has designated any of its Subsidiaries as Unrestricted
Subsidiaries, then the quarterly and annual financial information required by
the preceding paragraph will include a reasonably detailed presentation,
either on the face of the financial statements or in the footnotes thereto,
and in a management's discussion and analysis of financial condition and
results of operations, of the financial condition and results of operations of
the Company and its Restricted Subsidiaries separate from the financial
condition and results of operations of the Unrestricted Subsidiaries of the
Company.
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In addition, whether or not required by the SEC, the Company will file a
copy of all of the information and reports referred to in clauses (1) and (2)
above with the SEC for public availability within 15 days of the time periods
specified in the SEC's rules and regulations (unless the SEC will not accept
such a filing) and make such information available to prospective investors
upon request. The Company will also furnish to holders of Senior Preferred
Stock and prospective investors upon request the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
No Personal Liability of Officers, Directors, Employees and Stockholders
No officer, employee, director or stockholder of the Company or any
Subsidiary of the Company shall have any liability for any obligations of the
Company or any Subsidiary of the Company under the Senior Preferred Stock or
the Statement of Designation, or for any claim based on or in respect of, or
by reason of, such obligations or the creation or any such obligation. Each
holder of the Senior Preferred Stock by accepting a share of Senior Preferred
Stock waives and releases all such liability, and such waiver and release is
part of the consideration for the issuance of the Senior Preferred Stock. The
foregoing waiver may not be effective to waive liabilities under the federal
securities laws and the SEC is of the view that such a waiver is against
public policy.
Transfer Agent and Registrar
The Bank of New York is the transfer agent (the "Transfer Agent") and
registrar for the Senior Preferred Stock.
Certain Definitions
Set forth below is a summary of certain of the defined terms used in the
Statement of Designation. We refer you to the Statement of Designation for the
full definition of all such terms as well as any other capitalized terms used
herein for which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person (including an
Unrestricted Subsidiary) existing at the time such Person becomes a Restricted
Subsidiary or is merged into or consolidated with any other Person or which is
assumed in connection with the acquisition of assets from such Person and, in
each case, whether or not incurred by such Person in connection with, or in
anticipation or contemplation of, such Person becoming a Restricted Subsidiary
or such merger, consolidation or acquisition.
"Additional Dividends" has the meaning set forth in the "Exchange Offer;"
section of this prospectus.
"Affiliate" means, with respect to any specific Person, any other Person
that directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. For the
purposes of this definition, "control" (including, with correlative meanings,
the terms "controlling," "controlled by," and "under common control with"), as
used with respect to any Person, means the possession, directly or indirectly,
of the power to direct or cause the direction of the management or policies of
such Person, whether through the ownership of voting securities, by agreement
or otherwise; provided that, for purposes of the covenant described under "--
Certain Covenants -- Limitation on Transactions with Affiliates" beneficial
ownership of at least 10% of the voting securities of a Person, either
directly or indirectly, will be deemed to be control.
"Applicable Premium" means, with respect to any Senior Preferred Stock on
its redemption date, the greater of
(1) 10.0% of the liquidation preference of such Senior Preferred Stock
and
(2) the excess of
(a) the present value at such redemption date of
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(i) the redemption price of such Senior Preferred Stock at April
1, 2005 (such redemption price being set forth in the table
above under the applicable caption "Optional Redemption")
plus
(ii) all required dividend payments on the Senior Preferred Stock
(whether payable in cash or in-kind) through April 1, 2005
computed using a discount rate equal to the Treasury Rate
plus 50 basis points over
(b) the liquidation preference of such Senior Preferred Stock.
"Asset Acquisition" means
(1) an Investment by the Company or any Restricted Subsidiary of the
Company in any other Person pursuant to which such Person becomes a
Restricted Subsidiary of the Company or is merged with or into the
Company or any Restricted Subsidiary of the Company; or
(2) the acquisition by the Company or any Restricted Subsidiary of the
Company of the assets of any Person (other than a Restricted
Subsidiary of the Company) which constitute all or substantially all
of the assets of such Person or comprise any division or line of
business of such Person or any other properties or assets of such
Person other than in the ordinary course of business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
assignment, transfer, lease or other disposition (including any sale and
lease-back transaction), other than to the Company or any of its Wholly Owned
Subsidiaries, in any single transaction or series of related transactions of
(1) any Capital Stock of or other equity interest in any Restricted
Subsidiary of the Company; or
(2) any other property or assets of the Company or of any Restricted
Subsidiary thereof;
provided that Asset Sales do not include
(1) a transaction or series of related transactions that involves assets
having a fair market value or for which the Company or its
Restricted Subsidiaries receive aggregate consideration of less than
$1.0 million;
(2) sales of inventory and vehicles in the ordinary course of business
and consistent with past practices;
(3) the sale, lease, conveyance, disposition or other transfer of all or
substantially all of the assets of the Company as permitted under
"-- Merger, Consolidation or Sale of Assets" above;
(4) a disposition of obsolete, worn-out, damaged or otherwise unsuitable
or unnecessary equipment or other obsolete assets;
(5) dispositions with respect to sales of excess energy, capacity and
rights of use in the Company's distribution network in the ordinary
course of the electricity transmission and distribution business and
the electricity generation business;
(6) a sale-leaseback of assets within one year of the acquisition of
such assets; and
(7) a transaction or series of transactions that results in a Change of
Control.
"Attributable Indebtedness" in respect of a Sale and Lease-Back Transaction
means, as at the time of determination, the present value (discounted at the
rate of interest implicit in such transaction, determined in accordance with
GAAP) of the total obligations of the lessee for rental payments during the
remaining term of the lease included in such Sale and Lease-Back Transaction
(including any period for which such lease has been extended).
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"Board of Directors" means, as to any Person, the board of directors of such
Person (or, if such Person is a partnership, the board of directors or other
governing body of the general partner (or, if there is more than one general
partner of such person, the general partner or general partners which may take
the applicable action pursuant to the partnership agreement of such Person) of
such Person or, if such Person is a limited liability company, the board of
managers of such company) or similar governing body or any duly authorized
committee thereof.
"Business Day" means a day that is not a Legal Holiday. A "Legal Holiday" is
a Saturday, a Sunday or other day on which (i) commercial banks in The City of
New York are authorized or required by law to close or (ii) the New York Stock
Exchange is not open for trading.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated and whether
or not voting) of corporate stock, partnership or limited liability company
interests or any other participation, right or other interest in the nature of
an equity interest in such Person including, without limitation, Common Stock
and Preferred Stock of such Person, or any option, warrant or other security
convertible into any of the foregoing.
"Capitalized Lease Obligations" means with respect to any Person,
Indebtedness represented by obligations under a lease that is required to be
capitalized for financial reporting purposes in accordance with GAAP, and the
amount of such Indebtedness will be the capitalized amount of such obligations
determined in accordance with GAAP.
"Cash Equivalents" means
(1) marketable direct obligations issued by, or unconditionally
guaranteed by, the United States Government or issued by any agency
or instrumentality thereof and backed by the full faith and credit
of the United States, in each case maturing within one year from
the date of acquisition thereof;
(2) marketable direct obligations issued by any state of the United
States of America or any political subdivision of any such state or
any public instrumentality thereof maturing within one year from
the date of acquisition thereof and, at the time of acquisition,
having one of the two highest ratings obtainable from either
Standard & Poor's Corporation ("S&P") or Moody's Investors Service,
Inc. ("Moody's");
(3) commercial paper maturing no more than one year from the date of
creation thereof and, at the time of acquisition, having a rating
of at least A-1 from S&P or at least P-1 from Moody's;
(4) certificates of deposit or bankers' acceptances maturing within one
year from the date of acquisition thereof issued by any bank
organized under the laws of the United States of America or any
state thereof or the District of Columbia or any U.S. branch of a
foreign bank having at the date of acquisition thereof combined
capital and surplus of not less than $500.0 million;
(5) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (1) above
entered into with any bank meeting the qualifications specified in
clause (4) above; and
(6) investments in money market funds which invest substantially all
their assets in securities of the types described in clauses (1)
through (5) above.
A "Change of Control" of the Company will be deemed to have occurred at such
time as
(1) any Person or group of related Persons for purposes of Section
13(d) of the Exchange Act (a "Group"), other than a Permitted
Holder, becomes the beneficial owner (as defined under Rule 13d-3
or any successor rule or regulation promulgated under the Exchange
Act, except that a Person will be deemed to have "beneficial
ownership" of all securities that such Person has the
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right to acquire, whether such right is exercisable immediately or
only after the passage of time) of more than 50% of the total voting
power of the Company's Capital Stock;
(2) there is consummated any sale, lease, exchange or other transfer (in
one transaction or a series of related transactions) of all or
substantially all of the assets of the Company or TNMP to any Person
or Group, together with any Affiliates thereof (whether or not
otherwise in compliance with the provisions of the Statement of
Designation);
(3) there is consummated any consolidation or merger of the Company or
TNMP in which the Company or TNMP, as the case may be, is not the
continuing or surviving Person or pursuant to which the Common Stock
of the Company or TNMP, as the case may be, would be converted into
cash, securities or other property, other than a merger or
consolidation of the Company in which the holders of the Capital
Stock of the Company outstanding immediately prior to the
consolidation or merger hold, directly or indirectly, at least a
majority of the Capital Stock of the surviving corporation
immediately after such consolidation or merger;
(4) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of the
Company or TNMP (together with any new directors whose election by
such Board of Directors or whose nomination for election by the
shareholders of the Company or TNMP, as the case may be, has been
approved by 66 2/3% of the directors then still in office who either
were directors at the beginning of such period or whose election or
recommendation for election was previously so approved) cease for
any reason to constitute a majority of the Board of Directors of the
Company or TNMP, as the case may be, then in office;
(5) the approval by the holders of Capital Stock of the Company or TNMP
of any plan or proposal for the liquidation or dissolution of the
Company or TNMP, as the case may be (whether or not otherwise in
compliance with the provisions of the Indenture); or
(6) any order, judgment or decree shall be entered against the Company
or TNMP decreeing the dissolution or split-up of the Company or
TNMP, as the case may be; provided that any sale, assignment,
conveyance, transfer or other disposition of TNMP's assets to
another Restricted Subsidiary in connection with the Company's
compliance with Texas Senate Bill 7 shall not be deemed to be a
Change of Control hereunder.
"Common Stock" of any Person means all Capital Stock of such Person that is
generally entitled to
(1) vote in the election of directors of such Person; or
(2) if such Person is not a corporation, vote or otherwise participate
in the selection of the governing body, partners, managers or others
that will control the management and policies of such Person.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, the ratio of EBITDA of such Person during the four full fiscal
quarters (the "Four Quarter Period") ending on or prior to the date of the
transaction giving rise to the need to calculate the Consolidated Fixed Charge
Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of such
Person for the Four Quarter Period. In addition to and without limitation of
the foregoing, for purposes of this definition, "EBITDA" and "Consolidated
Fixed Charges" will be calculated after giving effect on a pro forma basis for
the period of such calculation to
(1) the incurrence or repayment of any Indebtedness of such Person or
any of its Restricted Subsidiaries or the issuance or redemption or
other repayment of Preferred Stock of any such Restricted Subsidiary
(and the application of the proceeds thereof) giving rise to the
need to make such calculation and any incurrence or repayment of
other Indebtedness and, in the case of any Restricted Subsidiary,
the issuance or redemption or other repayment of Preferred Stock
(and the application of the proceeds thereof), other than the
incurrence or repayment of Indebtedness in the ordinary course of
business for working capital purposes pursuant to working capital
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facilities, occurring during the Four Quarter Period or at any time
subsequent to the last day of the Four Quarter Period and on or prior
to the Transaction Date, as if such incurrence or repayment or
issuance or redemption or other repayment, as the case may be (and
the application of the proceeds thereof), occurred on the first day
of the Four Quarter Period; and
(2) any Asset Sales or Asset Acquisitions (including, without
limitation, any Asset Acquisition giving rise to the need to make
such calculation as a result of such Person or one of its Restricted
Subsidiaries (including any Person who becomes a Restricted Subsidiary
as a result of the Asset Acquisition) incurring, assuming or otherwise
being liable for Acquired Indebtedness and also including any EBITDA
(provided that such EBITDA will be included only to the extent that
Consolidated Net Income would be includable pursuant to the definition
of "Consolidated Net Income") (including any pro forma expense and cost
reductions calculated on a basis consistent with Regulation S-X of the
Exchange Act) attributable to the assets which are the subject of the
Asset Acquisition or Asset Sale during the Four Quarter Period)
occurring during the Four Quarter Period or at any time subsequent to
the last day of the Four Quarter Period and on or prior to the
Transaction Date, as if such Asset Sale or Asset Acquisition (including
the incurrence, assumption or liability for any such Acquired
Indebtedness) occurred on the first day of the Four Quarter Period.
If such Person or any of its Restricted Subsidiaries directly or indirectly
guarantees Indebtedness of a third Person, the preceding sentence will give
effect to the incurrence of such guaranteed Indebtedness as if such Person or
any Restricted Subsidiary of such Person had directly incurred or otherwise
assumed such guaranteed Indebtedness. Furthermore, in calculating
"Consolidated Fixed Charges" for purposes of determining the denominator (but
not the numerator) of this "Consolidated Fixed Charge Coverage Ratio,"
(1) interest on outstanding Indebtedness determined on a fluctuating
basis as of the Transaction Date and which will continue to be so
determined thereafter will be deemed to have accrued at a fixed rate
per annum equal to the rate of interest on such Indebtedness in
effect on the Transaction Date;
(2) if interest on any Indebtedness actually incurred on the Transaction
Date may optionally be determined at an interest rate based upon a
factor of a prime or similar rate, a eurocurrency interbank offered
rate, or other rates, then the interest rate in effect on the
Transaction Date will be deemed to have been in effect during the
Four Quarter Period; and
(3) notwithstanding clause (1) above, interest on Indebtedness
determined on a fluctuating basis, to the extent such interest is
covered by one or more agreements in respect of Hedging Obligations,
will be deemed to accrue at the rate per annum resulting after
giving effect to the operation of such agreements.
"Consolidated Fixed Charges" means, with respect to any Person, for any
period, the sum, without duplication, of
(1) Consolidated Interest Expense, plus
(2) the product of
(a) the amount of all dividend payments (whether or not in cash) on
any series of Preferred Stock of such Person and its Restricted
Subsidiaries (other than dividends paid in Capital Stock (other
than Disqualified Capital Stock)) paid, accrued or scheduled to
be paid or accrued during such period times
(b) a fraction, the numerator of which is one and the denominator of
which is one minus the then current effective consolidated
federal, state and local tax rate of such Person, expressed as a
decimal.
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"Consolidated Interest Expense" means, with respect to any Person, for any
period, the aggregate amount of interest expense which, in conformity with
GAAP, would be set forth opposite the caption "interest expense" or any like
caption on an income statement for such Person and its Restricted Subsidiaries
on a consolidated basis including, but not limited to,
(1) imputed interest included in Capitalized Lease Obligations and
Attributable Indebtedness;
(2) all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing;
(3) the net payment obligations associated with Hedging Obligations;
(4) amortization of financing fees and expenses and the write-off of
deferred financing costs;
(5) the interest portion of any deferred payment obligation;
(6) amortization of discount or premium, if any;
(7) all non-cash interest expense (other than interest amortized to
cost of sales);
(8) all capitalized interest for such period; and
(9) all interest incurred or paid under any guarantee of Indebtedness
(including a guarantee of principal, interest or any combination
thereof) of any Person.
"Consolidated Leverage Ratio" means, with respect to any Person, the ratio
of
(1) the sum of the aggregate outstanding amount of Indebtedness of such
Person and its Restricted Subsidiaries and Preferred Stock of any
such Restricted Subsidiary issued in accordance with "--Certain
Covenants--Limitation on Preferred Stock of Restricted
Subsidiaries" as of the date of calculation (the "Transaction
Date") on a consolidated basis determined in accordance with GAAP
to
(2) such Person's EBITDA for the four full fiscal quarters (the "Four
Quarter Period") ending on or prior to the date of determination
for which financial statements are available.
For purposes of this definition, clauses (1) and (2) above will be
calculated after giving effect on a pro forma basis to
(1) any incurrence or repayment of Indebtedness and, in the case of any
Restricted Subsidiary, the issuance or redemption or other
repayment of Preferred Stock (and the application of the proceeds
thereof), other than the incurrence or repayment of Indebtedness in
the ordinary course of business for working capital purposes
pursuant to working capital facilities, occurring during the Four
Quarter Period or at any time subsequent to the last day of the
Four Quarter Period and on or prior to the Transaction Date, as if
such incurrence or repayment or issuance or redemption or other
repayment, as the case may be (and the application of the proceeds
thereof), occurred on the first day of the Four Quarter Period; and
(2) any Asset Sales or Asset Acquisitions (including any EBITDA
(provided that such EBITDA will be included only to the extent that
Consolidated Income would be includable pursuant to the definition
of "Consolidated Net Income") (including any pro forma expense and
cost reductions calculated on a basis consistent with Regulation S-
X of the Exchange Act) attributable to the assets which are the
subject of the Asset Acquisition or Asset Sale during the Four
Quarter Period) occurring during the Four Quarter Period or at any
time subsequent to the last day of the Four Quarter Period and on
or prior to the Transaction Date, as if such Asset Sale or Asset
Acquisition (including the incurrence, assumption or liability for
any Acquired Indebtedness) occurred on the first day of the Four
Quarter Period.
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If such Person or any of its Restricted Subsidiaries directly or indirectly
guarantees Indebtedness of a third Person, the preceding sentence will give
effect to the incurrence of such guaranteed Indebtedness as if such Person or
any Restricted Subsidiary or such Person had directly incurred or otherwise
assumed such guaranteed Indebtedness.
"Consolidated Net Income" means, with respect to any Person, for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided, however, that
(1) the portion of Net Income of any Person, other than a Restricted
Subsidiary of the referent Person, will be included only to the
extent of the amount of dividends or distributions paid to the
referent Person or a Restricted Subsidiary of such referent Person;
(2) the Net Income of any Restricted Subsidiary of the Person in
question that is subject to any restriction or limitation on the
payment of dividends or the making of other distributions will be
excluded to the extent of, and for only the period of time that,
such restriction or limitation actually prohibits the payment of
such dividends or the making of such other distributions;
(3) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition
will be excluded;
(4) any net gain (but not loss) resulting from an Asset Sale by the
Person in question or any of its Restricted Subsidiaries other than
in the ordinary course of business will be excluded;
(5) extraordinary gains and losses will be excluded;
(6) income or loss attributable to discontinued operations (including,
without limitation, operations disposed of during such period
whether or not such operations were classified as discontinued)
will be excluded; and
(7) in the case of a successor to the referent Person by consolidation
or merger or as a transferee of the referent Person's assets, any
earnings of the successor corporation prior to such consolidation,
merger or transfer of assets will be excluded.
"Cumulative Consolidated Net Income" means, with respect to any Person, as
of any date of determination, the Consolidated Net Income of such Person from
April 1, 2000 to the end of such Person's must recently ended full fiscal
quarter prior to such date, taken as a single accounting period.
"Disqualified Capital Stock" means any Capital Stock of a Person or a
Restricted Subsidiary thereof which, by its terms (or by the terms of any
security into which it is convertible or for which it is exchangeable at the
option of the holder), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof, in whole or in part, on or
prior to the mandatory redemption date of the Senior Preferred Stock, for cash
or securities constituting Indebtedness. Without limitation of the foregoing,
Disqualified Capital Stock will be deemed to include any Preferred Stock of a
Person or a Restricted Subsidiary of such Person, with respect to either of
which, under the terms of such Preferred Stock, by agreement or otherwise, such
Person or Restricted Subsidiary is obligated to pay current dividends or
distributions in cash during the period prior to the mandatory redemption date
of the Senior Preferred Stock; provided, however, that Preferred Stock of a
Person or any Restricted Subsidiary thereof that is issued with the benefit of
provisions requiring a change of control offer to be made for such Preferred
Stock in the event of a change of control of such Person or Restricted
Subsidiary which provisions have substantially the same effect as the
provisions described under "-- Change of Control Offer" above, will not be
deemed to be Disqualified Capital Stock solely by virtue of such provisions.
Without limitation of the foregoing, Disqualified Capital Stock shall be deemed
to include any Senior Securities and Parity Securities.
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"EBITDA" means, with respect to any Person and its Restricted Subsidiaries,
for any period, an amount equal to
(1) the sum of
(a) Consolidated Net Income for such period, plus
(b) the provision for taxes for such period based on income or profits
to the extent such income or profits were included in computing
Consolidated Net Income and any provision for taxes utilized in
computing net loss under clause (a) hereof, plus
(c) Consolidated Interest Expense for such period, plus
(d) depreciation for such period on a consolidated basis, plus
(e) amortization of intangibles for such period on a consolidated
basis, plus
(f) any other non-cash items reducing Consolidated Net Income for such
period, other than non-cash items that represent accruals of, or
reserves for, cash disbursements to be made in any future period;
minus
(2) all non-cash items increasing Consolidated Net Income (other than
any non-cash items that were accrued in the ordinary course of
business) for such period,
all for such Person and its Restricted Subsidiaries determined on a
consolidated basis in accordance with GAAP; provided, however, that, for
purposes of calculating EBITDA during any fiscal quarter, cash income from a
particular Investment (other than a Restricted Subsidiary) of such Person will
be included only
(1) if cash income has been received by such Person with respect to
such Investment during each of the previous four fiscal quarters,
or
(2) if the cash income derived from such Investment is attributable to
Cash Equivalents.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations of the SEC promulgated thereunder.
"fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for
cash, between a willing seller and a willing and able buyer, neither of whom is
under undue pressure or compulsion to complete the transaction. Fair market
value will be determined by the Board of Directors of the Company acting
reasonably and in good faith and shall be evidenced by a board resolution of
such Board of Directors.
"GAAP" means generally accepted accounting principles consistently applied
as in effect in the United States from time to time.
"Hedging Obligations" means, with respect to any Person, the net payment
obligations of such Person under (a) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements and (b) other
agreements or arrangements entered into in order to protect such Person against
fluctuations in commodity, electricity or fuel prices, interest rates or
currency exchange rates.
"incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), assume,
guarantee or otherwise become liable in respect of such Indebtedness or other
obligation or the recording, as required pursuant to GAAP or otherwise, of any
such Indebtedness or other obligation on the balance sheet of such Person (and
"incurrence," "incurred," "incurable," and "incurring" will have meanings
correlative to the foregoing); provided that a change in GAAP that results in
an obligation of such Person that exists at such time becoming Indebtedness
will not be deemed an incurrence of such Indebtedness.
"Indebtedness" means (without duplication), with respect to any Person, any
indebtedness at any time outstanding, secured or unsecured, contingent or
otherwise, which is for borrowed money (whether or not the recourse of the
lender is to the whole of the assets of such Person or only to a portion
thereof), or evidenced by bonds, notes, debentures or similar instruments or
representing the balance deferred and unpaid of the purchase
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price of any property if and to the extent any of the foregoing indebtedness
would appear as a liability upon a balance sheet of such Person prepared in
accordance with GAAP, and will also include, to the extent not otherwise
included,
(1) any Capitalized Lease Obligations of such Person;
(2) obligations secured by a lien to which the property or assets owned
or held by such Person is subject, whether or not the obligation or
obligations secured thereby have been assumed;
(3) guarantees of (or obligations with respect to letters of credit
supporting) items of other Persons which would be included within
this definition for such other Persons (whether or not such items
would appear upon the balance sheet of the guarantor);
(4) all obligations for the reimbursement of any obligor on any letter
of credit, banker's acceptance or similar credit transaction;
(5) Disqualified Capital Stock of such Person or any Restricted
Subsidiary thereof and any Preferred Stock of a Restricted
Subsidiary of such Person incurred under "-- Certain Covenants --
Limitation on Preferred Stock of Restricted Subsidiaries" above;
and
(6) hedging obligations of any such Person applicable to any of the
foregoing (if and to the extent such hedging obligations would
appear as a liability upon a balance sheet of such Person prepared
in accordance with GAAP).
The amount of Indebtedness of any Person at any date will be the outstanding
balance at such date of all unconditional obligations as described above and,
with respect to contingent obligations, the maximum liability upon the
occurrence of the contingency giving rise to the obligation; provided that
(1) the amount outstanding at any time of any Indebtedness issued with
original issue discount is the principal amount of such
Indebtedness less the remaining unamortized portion of the original
issue discount of such Indebtedness at such time as determined in
conformity with GAAP; and
(2) Indebtedness will not include
(a) any liability for federal, state, local or other taxes, and
(b) any accounts payable, trade payables and other accrued liabilities
arising from the purchase of goods or materials or for services
obtained in the ordinary course of business.
"Indenture" means the indenture governing the Notes.
"Independent Financial Advisor" means an investment banking firm of national
reputation in the United States
(1) which does not, and whose directors, officers and employees or
Affiliates do not, have a direct or indirect financial interest in
the Company, and
(2) which, in the judgment of the Board of Directors of the Company,
is otherwise independent and qualified to perform the task for
which it is to be engaged.
Notwithstanding the foregoing, CIBC World Markets Corp. and its Affiliates
shall be deemed to be Independent Financial Advisors.
"Investment Grade Rating" means a rating equal to or higher than Baa3 (or
the equivalent) and BBB- (or the equivalent) by Moody's Investors Service, Inc.
(or any successor to the rating agency business thereof) and Standard & Poor's
Ratings Service, a division of McGraw Hill, Inc. (or any successor to the
rating agency business thereof), respectively.
"Investments" means, with respect of any Person, directly or indirectly, any
advance, account receivable (other than an account receivable arising in the
ordinary course of business of such Person), loan or capital contribution to
(by means of transfers of property to others, payments for property or services
for the account
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or use of others or otherwise), the purchase of any Capital Stock, bonds,
notes, debentures, partnership or joint venture interests or other securities
of, the acquisition, by purchase or otherwise, of all or substantially all of
the business or assets or stock or other evidence of beneficial ownership of,
any Person or the making of any investment in any Person. Investments exclude
(1) extensions of trade credit on commercially reasonable terms in
accordance with normal trade practices of such Person; and
(2) the repurchase of securities of any Person by such Person.
For the purposes of the "Limitation on Restricted Payments" covenant, (1)
"Investments" (a) include and are valued at the fair market value of the net
assets of any Restricted Subsidiary at the time that such Restricted Subsidiary
is designated an Unrestricted Subsidiary and (b) exclude the fair market value
of the net assets of any Unrestricted Subsidiary at the time that such
Unrestricted Subsidiary is designated a Restricted Subsidiary, provided, that,
in no event may such amount exceed the net amount of any Investments
constituting Restricted Payments made in such Subsidiary after the Issue Date
and (2) the amount of any Investment will be the original cost of such
Investment plus the cost of all additional Investments by the Company or any of
its Restricted Subsidiaries, without any adjustments for increases or decreases
in value, or write-ups, write-downs or write-offs with respect to such
Investment, reduced by the (i) amount returned in cash with respect to such
Investment whether through interest payments, principal payments, dividends or
other distributions and (ii) proceeds received by the Company or any of its
Restricted Subsidiaries from the disposition, retirement or redemption of all
or any portion of such Investment; provided that the aggregate of all such
reductions may not exceed the amount of such initial Investment plus the cost
of all additional Investments; provided, further, that no such payment of
distributions or receipt of any such other amounts may reduce the amount of any
Investment if such payment of distributions or receipt of any such amounts
would be included in Consolidated Net Income. If the Company or any Restricted
Subsidiary of the Company sells or otherwise disposes of any Common Stock of
any direct or indirect Restricted Subsidiary of the Company such that, after
giving effect to any such sale or disposition, the Company no longer owns,
directly or indirectly, 100% of the outstanding Common Stock of such Restricted
Subsidiary, the Company will be deemed to have made an Investment on the date
of any such sale or disposition equal to the fair market value of the Common
Stock of such Restricted Subsidiary not sold or disposed of.
"Issue Date" means May 26, 2000.
"Net Income" means, with respect to any Person, for any period, the net
income (loss) of such Person determined in accordance with GAAP.
"Net Proceeds" means
(1) in the case of any sale of Capital Stock by or equity contribution
to any Person, the aggregate net cash proceeds received by such
Person, after payment of expenses, commissions and the like
incurred in connection therewith;
(2) in the case of any exchange, exercise, conversion or surrender of
outstanding securities of any kind for or into shares of Capital
Stock of the Company which is not Disqualified Capital Stock, the
net book value of such outstanding securities on the date of such
exchange, exercise, conversion or surrender (plus any additional
amount required to be paid by the holder to such Person upon such
exchange, exercise, conversion or surrender, less any and all
payments made to the holders, e.g., on account of fractional shares
and less all expenses incurred by such Person in connection
therewith); and
(3) in the case of any issuance of any Indebtedness by the Company or
any Restricted Subsidiary, the aggregate net cash proceeds received
by such Person after the payment of expenses, commissions,
underwriting discounts and the like incurred in connection
therewith.
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"NMPRC" means the New Mexico Public Regulation Commission.
"Notes" means $275.0 million aggregate principal amount of 10.25% senior
subordinated notes due 2010 of the Company issued on April 7, 2000 and any
exchange notes issued pursuant to the registration rights agreement relating
thereto.
"Permitted Holders" means Laurel Hill Capital Partners, LLC, Caravelle
Investment Fund, L.L.C., CIBC WG Argosy Merchant Fund 2, L.L.C., Co-Investment
Merchant Fund 3, L.L.C., Continental Casualty Company and their respective
affiliates, other than their portfolio companies.
"Permitted Indebtedness" means:
(1) Indebtedness of the Company or any Restricted Subsidiary arising
under or in connection with the Senior Credit Facility in an
aggregate principal amount not to exceed $185.0 million at any time
outstanding less any mandatory prepayment actually made thereunder
(to the extent, in the case of payments of revolving credit
borrowings, that the corresponding commitments have been
permanently reduced) or scheduled payments actually made
thereunder;
(2) Indebtedness under the Notes and the Indenture;
(3) Indebtedness not covered by any other clause of this definition
which is outstanding on the Issue Date reduced by the amount of any
mandatory prepayments, permanent reductions or scheduled payments
actually made thereunder;
(4) Indebtedness of the Company to any Wholly Owned Subsidiary and
Indebtedness of any Wholly Owned Subsidiary to the Company or
another Wholly Owned Subsidiary;
(5) Purchase Money Indebtedness and Capitalized Lease Obligations
incurred to acquire property in the ordinary course of business
which Purchase Money Indebtedness and Capitalized Lease Obligations
do not in the aggregate exceed $10.0 million at any one time
outstanding;
(6) Indebtedness of the Company or any Restricted Subsidiary arising
from the honoring by a bank or other financial institution of a
check, draft or similar instrument inadvertently (except in the
case of daylight overdrafts) drawn against insufficient funds in
the ordinary course of business;
(7) the incurrence by the Company or any Restricted Subsidiary of
Hedging Obligations that are incurred in the ordinary course of
business of the Company or such Restricted Subsidiary and not for
speculative purposes; provided that, in the case of any Hedging
Obligation that relates to
(a) interest rate risk, the notional principal amount of such
Hedging Obligation does not exceed the principal amount of the
Indebtedness to which such Hedging Obligation relates and
(b) currency risk, such Hedging Obligation does not increase the
Indebtedness of the Company and its Restricted Subsidiaries
outstanding other than as a result of fluctuations in foreign
currency exchange rates or by reason of fees, indemnities and
compensation payable thereunder;
(8) Indebtedness of a Restricted Subsidiary (other than any Regulated
Restricted Subsidiary) of the Company assumed by the Company to the
extent such Indebtedness was permitted to be incurred by such
Restricted Subsidiary at the time of incurrence thereof;
(9) Refinancing Indebtedness;
(10) Indebtedness arising from agreements of the Company or a Restricted
Subsidiary of the Company providing for indemnification, adjustment of
purchase price, earn out or other similar obligations, in each case,
incurred or assumed in connection with the disposition of any business,
assets or a Restricted Subsidiary of the Company, other than guarantees
of Indebtedness incurred by any Person acquiring all or any portion of
such business, assets or Restricted Subsidiary for
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the purpose of financing such acquisition; provided that the maximum
assumable liability in respect of all such Indebtedness shall at no
time exceed the gross proceeds actually received by the Company and
its Restricted Subsidiaries in connection with such disposition;
(11) Indebtedness consisting of performance and other similar bonds and
reimbursement obligations incurred by the Company in the ordinary
course of business securing the performance of contractual,
franchise, license or other obligations of the Company or a
Restricted Subsidiary;
(12) Indebtedness of a Receivables Subsidiary that is not recourse to
the Company or any other Restricted Subsidiary (other than with
respect to Standard Securitization Undertakings) in connection
with a Qualified Receivables Transaction;
(13) Indebtedness of the Company or any of its Restricted Subsidiaries
constituting reimbursement obligations with respect to bankers'
acceptances and letters of credit issued in the ordinary course of
business in respect of workers' compensation claims or self-
insurance, or other Indebtedness with respect to reimbursement
type obligations regarding workers' compensation claims; provided,
however, that obligations arising upon the drawing of such letters
of credit or the incurrence of such Indebtedness are reimbursed
within 30 days following such drawing or incurrence;
(14) the accrual of interest, the issuance of additional Indebtedness
in the form of additional promissory notes or otherwise in lieu of
the payment of cash interest and the accretion of accreted value;
and
(15) additional Indebtedness of the Company and its Restricted
Subsidiaries (other than its Regulated Restricted Subsidiaries)
not to exceed $25.0 million in aggregate principal amount at any
one time outstanding (which may be, but shall not be required to
be, in the form of additional Indebtedness under the Senior Credit
Facility).
"Permitted Investments" means Investments made on or after the Issue Date
consisting of
(1) Investments by the Company, or by a Restricted Subsidiary thereof,
in the Company or a Wholly Owned Subsidiary;
(2) Investments by the Company, or by a Restricted Subsidiary thereof,
in a Person, if as a result of such Investment
(a) such Person becomes a Wholly Owned Subsidiary of the Company or
(b) such Person is merged, consolidated or amalgamated with or into,
or transfers or conveys substantially all of its assets to, or
is liquidated into, the Company or a Wholly Owned Subsidiary
thereof;
(3) Investments in cash and Cash Equivalents;
(4) reasonable and customary loans made to employees not to exceed $2.0
million in the aggregate at any one time outstanding;
(5) an Investment that is made by the Company or a Restricted
Subsidiary thereof in the form of any Capital Stock, bonds, notes,
debentures, partnership or joint venture interests or other
securities that are issued by a third party to the Company or such
Restricted Subsidiary solely as partial consideration for the
consummation of an Asset Sale;
(6) Investments in securities of trade creditors or customers received
pursuant to any plan of reorganization or similar arrangement upon
the bankruptcy or insolvency of such trade creditors or customers;
(7) Hedging Obligations entered into in the ordinary course of the
Company's or its Restricted Subsidiaries' business and not for
speculative purposes;
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(8) any Investment solely in exchange for the issuance of equity
interests (other than Disqualified Capital Stock) of the Company;
(9) any Investment constituting Permitted Securities of a Person issued
in exchange for trade or other claims against such Person in
connection with a financial reorganization or restructuring of such
Person or as a result of a foreclosure by the Company or any
Restricted Subsidiary with respect to any secured Investment in
default;
(10) the contribution by the Company of any portion or all of the
undeveloped sites located on the 2,700 acres adjacent to TNP One to any
Person in exchange for an equity interest in such Person; provided that
such Person may not be a Subsidiary of the Company; provided, further,
that (a) at or prior to the time of such contribution, the Company
shall have received a minimum of $150 million of gross proceeds from
the sale of TNP One and (b) at the time of such contribution, the
Company's Consolidated Leverage Ratio is equal to or less than 4.5 to
1.0; and
(11) additional Investments not to exceed $10.0 million at any one time
outstanding.
"Permitted Securities" means equity securities or debt securities of the
Company as reorganized or readjusted or securities of the Company or any other
company, trust, corporation or partnership provided for by a plan of
reorganization or readjustment.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust,
unincorporated organization or government (including any agency or political
subdivision thereof).
"Preferred Stock" means any Capital Stock of a Person, however designated,
which entitles the holder thereof to a preference with respect to dividends,
distributions or liquidation proceeds of such Person over the holders of other
Capital Stock issued by such Person.
"Public Equity Offering" means a public offering by the Company of shares
of its Common Stock (however designated and whether voting or non-voting) and
any and all rights, warrants or options to acquire such Common Stock.
"PUCT" means the Public Utility Commission of Texas.
"Purchase Money Indebtedness" means Indebtedness of any Person incurred in
the normal course of business of such Person for the purpose of financing all
or any part of the purchase price, or the cost of installation, construction
or improvement of, any property or asset.
"Qualified Receivables Transaction" means any transaction or series of
transactions that may be entered into by the Company or any Restricted
Subsidiary pursuant to which the Company or any Restricted Subsidiary may
sell, convey or otherwise transfer to (a) a Receivables Subsidiary (in the
case of a transfer by the Company or any Restricted Subsidiary) and (b) any
other Person (in the case of a transfer by a Receivables Subsidiary), or may
grant a security interest in, any accounts receivable (whether now existing or
arising in the future) of the Company or any Restricted Subsidiary and any
asset related thereto, including, without limitation, all collateral securing
the accounts receivable, all contracts and all guarantees or other obligations
in respect of the accounts receivable, proceeds of the accounts receivable and
other assets which are customarily transferred, or in respect of which
security interests are customarily granted, in connection with asset
securitization transactions involving accounts receivable. In addition,
"Qualified Receivables Transaction" shall include any financing transaction by
the Company or any Restricted Subsidiary under Chapter 39, Subchapter G of the
Texas Public Utility Regulatory Act or any analogous law which the Company or
such Restricted Subsidiary is subject to.
"Rating Agencies" means Standard & Poor's Ratings Service, a division of
McGraw Hill, Inc., and Moody's Investors Service, Inc. or any successor to the
respective rating agency businesses thereof.
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"Receivables Subsidiary" means a Wholly Owned Subsidiary of the Company
which engages in no activities other than in connection with the financing of
accounts receivable and which is designated by a board resolution of the Board
of Directors of the Company (as provided below) as a Receivables Subsidiary:
(1) has no portion of the Indebtedness or any other Obligations
(contingent or otherwise) of which
(a) is guaranteed by the Company or any other Restricted Subsidiary
(excluding guarantees of obligations pursuant to Standard
Securitization Undertakings),
(b) is recourse to or obligates the Company or any other Restricted
Subsidiary in any way other than pursuant to Standard
Securitization Undertakings, or
(c) subjects any property or asset of the Company or any other
Restricted Subsidiary, directly or indirectly, contingently or
otherwise, to the satisfaction thereof, other than pursuant to
Standard Securitization Undertakings;
(2) with which neither the Company nor any other Restricted Subsidiary
of the Company has any material contract, agreement, arrangement or
understanding (except in connection with a Qualified Receivables
Transaction) other than on terms no less favorable to the Company
or such other Restricted Subsidiary of the Company than those that
might be obtained at the time from persons that are not Affiliates
of the Company, other than fees payable in the ordinary course of
business in connection with servicing accounts receivable; and
(3) to which neither the Company nor any Restricted Subsidiary of the
Company has any obligation to maintain or preserve such entity's
financial condition or cause such entity to achieve certain levels
of operating results.
"Refinancing Indebtedness" means Indebtedness that refunds, refinances or
extends any Indebtedness of the Company or any Restricted Subsidiary
outstanding on the Issue Date or other Indebtedness permitted to be incurred by
the Company or its Restricted Subsidiaries pursuant to the terms of the
Statement of Designation, but only to the extent that
(1) the Refinancing Indebtedness is scheduled to mature either
(a) no earlier than the Indebtedness being refunded, refinanced or
extended, or
(b) after April 1, 2010;
(2) such Refinancing Indebtedness is in an aggregate principal amount
that is equal to or less than the sum of
(a) the aggregate principal amount then outstanding under the
Indebtedness being refunded, refinanced or extended,
(b) the amount of accrued and unpaid interest, if any, and premiums
owed, if any, not in excess of preexisting prepayment provisions
on such Indebtedness being refunded, refinanced or extended, and
(c) the amount of customary fees, expenses and costs related to the
incurrence of such Refinancing Indebtedness; and
(3) such Refinancing Indebtedness is incurred by the same Person (or
its successor) that initially incurred the Indebtedness being
refunded, refinanced or extended.
"Regulated Restricted Subsidiary" means a Restricted Subsidiary that is
regulated or certified by the PUCT or the NMPRC or any successor thereto or any
analogous regulatory body of any state of the United States or the District of
Columbia.
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"Restricted Payment" means any of the following:
(1) the declaration or payment of any dividend or any other
distribution or payment on Capital Stock of the Company or any
Restricted Subsidiary of the Company or any payment made to the
direct or indirect holders (in their capacities as such) of Capital
Stock of the Company or any Restricted Subsidiary of the Company
(other than (a) dividends or distributions in respect of Senior
Securities of the Company, (b) dividends or distributions payable
solely in Capital Stock (other than Disqualified Capital Stock) or
in options, warrants or other rights to purchase such Capital Stock
(other than Disqualified Capital Stock), and (c) in the case of
Restricted Subsidiaries of the Company, dividends or distributions
payable to the Company or to a Restricted Subsidiary of the Company);
(2) the purchase, redemption or other acquisition or retirement for
value of any Capital Stock of the Company or any of its Restricted
Subsidiaries (other than (a) Senior Securities of the Company and
(b) Capital Stock owned by the Company or a Wholly Owned Subsidiary
of the Company, excluding Disqualified Capital Stock) or any
option, warrants or other rights to purchase such Capital Stock;
(3) the making of any Investment or guarantee of any Investment in any
Person other than a Permitted Investment;
(4) any designation of a Subsidiary as an Unrestricted Subsidiary
(valued at the fair market value of the net assets of such
Subsidiary on the date of designation); and
(5) the forgiveness of any Indebtedness of an Affiliate of the Company
to the Company or a Restricted Subsidiary of the Company.
"Restricted Subsidiary" means a Subsidiary of the Company other than an
Unrestricted Subsidiary and includes all of the Subsidiaries of the Company
existing as of the Issue Date. The Board of Directors of the Company may
designate any Unrestricted Subsidiary as a Restricted Subsidiary if immediately
after giving effect to such action (and treating any Acquired Indebtedness as
having been incurred at the time of such action),
(1) the Company could have incurred at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to "--
Certain Covenants -- Limitation on Additional Indebtedness" above;
and
(2) no Voting Rights Triggering Event has occurred and is continuing or
results therefrom.
"Sale and Lease-Back Transaction" means any arrangement with any Person
providing for the leasing by the Company or any Restricted Subsidiary of the
Company of any real or tangible personal property, which property has been or
is to be sold or transferred by the Company or such Restricted Subsidiary to
such Person in contemplation of such leasing.
"Securities Act" means the Securities Act of 1933, as amended, and the rules
and regulations of the SEC promulgated thereunder.
"Senior Credit Facility" means the Credit Agreement dated as of April 7,
2000, among the Company, the lenders party thereto in their capacities as
lenders thereunder, Canadian Imperial Bank of Commerce, as administrative
agent, and CIBC World Markets Corp. and Chase Securities Inc., as co-arrangers
and co-book managers, together with the related documents thereto (including,
without limitation, any guarantee agreements and security documents), in each
case as such agreements may be amended (including any amendment and restatement
thereof), supplemented or otherwise modified from time to time, including any
agreement extending the maturity of, refinancing, replacing or otherwise
restructuring (including increasing the amount of available borrowings
thereunder (provided that such increase in borrowings is permitted under "--
Certain Covenants -- Limitation on Additional Indebtedness" above) or adding
Restricted Subsidiaries of the Company
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as additional borrowers or guarantors thereunder) all or any portion of the
Indebtedness under such agreement or any successor or replacement agreement and
whether by the same or any other agent, lender or group of lenders.
"Standard Securitization Undertakings" means representations, warranties,
covenants and indemnities entered into by the Company or any Restricted
Subsidiary of the Company which are reasonably customary in an accounts
receivable securitization transaction.
"Subsidiary" of any specified Person means any corporation, partnership,
limited liability company, joint venture, association or other business entity,
whether now existing or hereafter organized or acquired,
(1) in the case of a corporation, of which more than 50% of the total
voting power of the Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of
directors, officers or trustees thereof is held by such first-named
Person or any of its Subsidiaries; or
(2) in the case of a partnership, limited liability company, joint
venture, association or other business entity, with respect to
which such first-named Person or any of its Subsidiaries has the
power to direct or cause the direction of the management and
policies of such entity by contract or otherwise or if in
accordance with GAAP such entity is consolidated with the first-
named Person for financial statement purposes.
"Texas Senate Bill 7" means Senate Bill 7 of the State of Texas signed in
June 1999 by Texas Governor George W. Bush which implements competition in
Texas retail electric markets.
"Treasury Rate" means, as of any redemption date, the yield to maturity as
of such redemption date of United States Treasury securities with a constant
maturity (as compiled and published in the most recent Federal Reserve
Statistical Release H.15 (519) that has become publicly available at least two
Business Days prior to the redemption date (or, if such Statistical Release is
no longer published, any publicly available source of similar market date))
most nearly equal to the period from the redemption date to April 1, 2005;
provided, however, that if the period from the redemption date to April 1, 2005
is less than one year, the weekly average yield on actually traded United
States Treasury securities adjusted to a constant maturity of one year shall be
used.
"Unrestricted Subsidiary" means
(1) any Subsidiary of an Unrestricted Subsidiary; and
(2) any Subsidiary of the Company which is designated after the Issue
Date as an Unrestricted Subsidiary by a board resolution of the
Board of Directors of the Company;
provided that a Subsidiary may be so designated as an Unrestricted Subsidiary
only if
(a) such designation is in compliance with "-- Certain Covenants --
Limitation on Restricted Payments" above; and
(b) neither the Company nor any Restricted Subsidiary will at any
time
(i) provide a guarantee of, or similar credit support to, any
Indebtedness of such Subsidiary (including any undertaking,
agreement or instrument evidencing such Indebtedness),
(ii) be directly or indirectly liable for any Indebtedness of
such Subsidiary or
(iii) be directly or indirectly liable for any other
Indebtedness which provides that the holder thereof may
(upon notice, lapse of time or both) declare a default
thereon (or
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cause the payment thereof to be accelerated or payable prior
to its final scheduled maturity) upon the occurrence of a
default with respect to any other Indebtedness that is
Indebtedness of such Subsidiary (including any corresponding
right to take enforcement action against such Subsidiary),
except in the case of clause (i) or (ii) to the extent
(i) that the Company or such Restricted Subsidiary could
otherwise provide such a guarantee or incur such
Indebtedness (other than as Permitted Indebtedness) pursuant
to "-- Certain Covenants -- Limitation on Additional
Indebtedness" above and
(ii) the provision of such guarantee and the incurrence of such
Indebtedness otherwise would be permitted under "-- Certain
Covenants -- Limitation on Restricted Payments" above.
"Wholly Owned Subsidiary" means any Restricted Subsidiary, all of the
outstanding voting securities (other than directors' qualifying shares and, in
the case of TNMP, other than shares of preferred stock outstanding on the Issue
Date) of which are owned, directly or indirectly, by the Company.
Book-Entry, Delivery And Form
The registered senior preferred stock will initially be issued in the form
of one or more permanent global certificates in definitive, fully registered
form (the "Global Shares"). The Global Shares will be deposited on the date of
the closing of this exchange offering with, or on behalf of, the Depository
Trust Company ("DTC") and registered in the name of a nominee of such
depositary (such nominee being referred to herein as the "Global Shareholder").
Shares of registered senior preferred stock that are issued as described
below under "--Certificated Shares" will be issued in the form of registered
definitive certificates (the "Certificated Shares"). Upon the transfer of
Certificated Shares, Certificated Shares may, unless all Global Shares have
previously been exchanged for Certificated Shares, be exchanged for an interest
in the Global Share representing the initial liquidation preference of
registered shares being transferred.
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic book-
entry changes in accounts of its Participants. The Participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and other organizations. Access to DTC's system is also available to other
entities such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly (collectively, the "Indirect Participants"). Persons who are not
Participants may beneficially own securities held by or on behalf of DTC only
through the Participants or the Indirect Participants. The ownership interests
in, and transfers of ownership interests in, each security held by or on behalf
of DTC are recorded on the records of the Participants and Indirect
Participants.
DTC has also advised the Company that, pursuant to procedures established by
it:
(1) upon deposit of the Global Shares, DTC will credit the accounts of
Participants designated by the Initial Purchasers with portions of the
principal amount of the Global Shares; and
(2) ownership of these interests in the Global Shares will be shown on,
and the transfer of ownership thereof will be effected only through,
records maintained by DTC, with respect to the Participants, or by the
Participants and the Indirect Participants, with respect to other
owners of beneficial interest in the Global Shares.
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So long as the Global Shareholder is the registered owner of any registered
senior preferred stock, the Global Shareholder will be considered the sole
holder under the Statement of Designation of any registered senior preferred
stock evidenced by the Global Shares. Beneficial owners of registered senior
preferred stock evidenced by the Global Shares will not be considered the
owners or holders thereof under the Statement of Designation for any purpose,
including with respect to the giving of any directions, instructions or
approvals to the Transfer Agent thereunder. Neither the Company nor the
Transfer Agent will have any responsibility or liability for any aspect of the
records of DTC or for maintaining, supervising or reviewing any records of DTC
relating to the registered senior preferred stock.
Payments in respect of the principal of, and interest and premium on a
Global Share registered in the name of the Global Shareholder on the applicable
record date will be payable by the Transfer Agent to or at the direction of the
Global Shareholder in its capacity as the registered holder under the Statement
of Designation. Under the terms of the Statement of Designation, the Company
and the Transfer Agent will treat the Persons in whose names the registered
senior preferred stock, including the Global Shares, are registered as the
owners thereof for the purpose of receiving payments and for all other
purposes. Consequently, neither the Company, the Transfer Agent nor any agent
of the Company or the Transfer Agent has or will have any responsibility or
liability for:
(1) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of
beneficial ownership interest in the Global Shares or for maintaining,
supervising or reviewing any of DTC's records or any Participant's or
Indirect Participant's records relating to the beneficial ownership
interests in the Global Shares; or
(2) any other matter relating to the actions and practices of DTC or any
of its Participants or Indirect Participants.
DTC has advised the Company that its current practice, upon receipt of any
payment in respect of securities such as the registered senior preferred stock,
is to credit the accounts of the relevant Participants with the payment on the
payment date unless DTC has reason to believe it will not receive payment on
such payment date. Each relevant Participant is credited with an amount
proportionate to its beneficial ownership of an interest in the liquidation
preference of the relevant security as shown on the records of DTC. Payments by
the Participants and the Indirect Participants to the beneficial owners of
registered senior preferred stock will be governed by standing instructions and
customary practices and will be the responsibility of the Participants or the
Indirect Participants and will not be the responsibility of DTC, the Transfer
Agent or the Company. Neither the Company nor the Transfer Agent will be liable
for any delay by DTC or any of its Participants in identifying the beneficial
owners of the registered senior preferred stock, and the Company and the
Transfer Agent may conclusively rely on and will be protected in relying on
instructions from DTC or its nominee for all purposes.
Certificated Registered Senior Preferred Stock
Subject to specified conditions, any Person having a beneficial interest in
a Global Share may, upon prior written request to the Transfer Agent, exchange
such beneficial interest for registered senior preferred stock in the form of
certificated registered senior preferred stock. Upon any such issuance, the
Transfer Agent is required to register such certificated registered senior
preferred stock in the name of, and cause the same to be delivered to, such
Person or Persons (or the nominee of any thereof). In addition, if:
(1) DTC (a) notifies the Company that it is unwilling or unable to
continue as depositary for the Global Shares and the Company fails to
appoint a successor depositary or (b) has ceased to be a clearing
agency registered under the Exchange Act; or
(2) the Company, at its option, notifies the Transfer Agent in writing
that it elects to cause the issuance of certificated registered senior
preferred stock in lieu of a Global Share;
100
<PAGE>
then, upon surrender by the Global Shareholder of its Global Share, registered
senior preferred stock in such form will be issued to each person that the
Global Shareholder and DTC identify as being the beneficial owner of the
related registered senior preferred stock.
Neither the Company nor the Transfer Agent will be liable for any delay by
the Global Shareholder or DTC in identifying the beneficial owners of
registered senior preferred stock and the Company and the Transfer Agent may
conclusively rely on, and will be protected in relying on, instructions from
the Global Shareholder or DTC for all purposes.
Same Day Settlement and Payment
The Company will make payments in respect of the registered senior preferred
stock represented by the Global Shares (including principal, premium, if any,
and interest) by wire transfer of immediately available funds to the accounts
specified by the Global Shareholder. The Company will make all redemption
payments or payments of dividends, if any, with respect to certificated
registered senior preferred stock by wire transfer of immediately available
funds to the accounts specified by the Holders thereof holding more than $1.0
million of registered senior preferred stock or, if no such account is
specified, or if such Holder of certificated registered senior preferred stock
holds $1.0 million or less of registered senior preferred stock, by mailing a
check to each such Holder's registered address. The registered senior preferred
stock represented by the Global Shares are expected to trade in DTC's Same-Day
Funds Settlement System, and any permitted secondary market trading activity in
such registered senior preferred stock will, therefore, be required by DTC to
be settled in immediately available funds. The Company expects that secondary
trading in any certificated registered senior preferred stock will also be
settled in immediately available funds.
101
<PAGE>
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
The following is a general discussion of the principal U.S. federal income
tax consequences of the ownership and disposition of registered senior
preferred stock to a holder who acquired the old senior preferred stock at the
initial offering for the original offering price. This discussion is based on
current provisions of the U.S. Internal Revenue Code of 1986, as amended (the
"Code"), regulations, and current administrative rulings and court decisions
all of which are subject to change. This discussion is limited to investors who
hold registered senior preferred stock as capital assets. Furthermore, this
discussion does not address federal alternative minimum tax consequences and
does not address all aspects of U.S. federal income taxation that may be
applicable to investors in light of their particular circumstances, or to
investors subject to special treatment under U.S. federal income tax law such
as certain financial institutions, insurance companies, tax-exempt entities,
dealers in securities or persons who have acquired senior preferred stock as
part of a straddle, hedge, conversion transaction or other integrated
investments.
Generally you are a "U.S. holder" if you hold registered senior preferred
stock and you are:
. a citizen or resident of the U.S.,
. a corporation or partnership created or organized in or under the laws of
the U.S. or of any political subdivision thereof,
. an estate the income of which is subject to U.S. federal income taxation
regardless of its source, or
. a trust if a U.S. court is able to exercise primary supervision over the
administration of such trust and one or more U.S. persons have the
authority to control all substantial decisions of such trust.
A "non-U.S. holder" means any holder of registered senior preferred stock
that is not a U.S. holder.
You should consult, and should depend on, your own tax advisor in analyzing
the particular federal, state, local and foreign tax consequences to you of the
ownership and disposition of the registered senior preferred stock.
102
<PAGE>
Senior Preferred Stock
Consequences of Exchange Offer
Holders of old senior preferred stock will not recognize gain or loss on the
exchange of old senior preferred stock for registered senior preferred stock.
U.S. Holders
The following discussion of the material U.S. federal income tax
consequences of ownership of shares applies to you if you are a U.S. holder as
defined above.
Distributions on Registered Senior Preferred Stock. Distributions on the
registered senior preferred stock, whether paid in cash, in additional
registered senior preferred stock or as constructive distributions as discussed
below under "Redemption Premium" will be taxable as ordinary income to the
extent that the amount of cash or the fair market value of any registered
senior preferred stock distributed does not exceed the portion of our current
and accumulated earnings and profits, as determined for federal income tax
purposes, attributable to those distributions. To the extent that the amount of
the distributions paid on the registered senior preferred stock exceeds our
earnings and profits, those distributions will be treated first as a return of
capital, reducing your adjusted tax basis in the registered senior preferred
stock, with the amount of any distribution in excess of your tax basis being a
capital gain.
That capital gain will be long-term capital gain if your holding period for
the registered senior preferred stock exceeds one year. In the case of holders
who are individuals and certain trusts and estates, that long term capital gain
will be subject to a maximum U.S. federal income tax rate of 20%. Corporate
holders will generally be taxed on capital gains at a U.S. federal income tax
rate of 35%. For purposes of the remainder of this discussion, unless the
context indicates otherwise, the term "dividend" refers to a distribution taxed
as ordinary income as described above.
Your initial tax basis in any additional shares of registered senior
preferred stock we distribute will be equal to their fair market value on the
date of distribution. Your holding period for these additional shares will
commence on their distribution and will not include your holding period for the
shares with respect to which the additional shares were distributed.
Subject to various limitations, including holding period requirements, "debt
financed portfolio stock" rules and limitations based on a holder's taxable
income, dividends received by a corporate holder which owns less than 20% of
our stock, by vote or value, generally will be eligible for a 70% dividends-
received deduction. In addition, the Code may require some corporate holders to
reduce their tax basis, but not below zero, in the registered senior preferred
stock by the amount of the dividends-received deduction resulting from any
"extraordinary dividend" on the shares. Those corporate holders would
immediately recognize capital gain to the extent their tax basis would have
been reduced below zero as a result of this rule. The term "extraordinary
dividend" is broadly defined and may include a redemption of registered senior
preferred stock that is treated as a dividend, without regard to the size of
the redemption or the length of time a holder has held the registered senior
preferred stock. Corporate holders should consult their own tax advisors
regarding the availability of the dividends-received deduction and application
of the extraordinary dividend rules.
Redemption Premium. If the redemption price of the old senior preferred
stock exceeded its issue price (which should equal the portion of your purchase
price for the old senior preferred stock and warrant allocable to the old
senior preferred stock) by more than a de minimis amount, that excess may be
treated as a constructive distribution on the old and registered senior
preferred stock, includible in your income as a dividend to the extent of our
current or accumulated earnings and profits, on a constant yield method over
the combined terms of the old senior preferred stock and the registered senior
preferred stock. A constructive distribution will generally be subject to the
same rules as described in "Distributions on Registered Senior Preferred
Stock." Any registered senior preferred stock distributed in lieu of cash
dividends on the preferred stock will also be subject to these rules, if the
issue price of the shares of additional registered senior preferred stock is
less than its redemption price by more than a de minimis amount. The issue
price of shares of additional preferred stock will be equal to the fair market
value on their distribution date.
103
<PAGE>
Constructive distributions on the registered senior preferred stock also may
arise due to the optional redemption provisions, but only if, based on all of
the facts and circumstances as of the issuance date, optional redemption was
more likely than not to occur. Even if redemption were more likely than not to
occur, however, constructive distribution treatment would not result if the
redemption premium were solely in the nature of a penalty for premature
redemption. A redemption premium is solely in the nature of a penalty for
premature redemption if paid as a result of changes in economic or market
conditions over which neither the issuer nor the holder has control, such as
changes in prevailing dividend rates. Applicable regulations also provide a
safe harbor pursuant to which constructive distribution treatment will not
result from the optional redemption provisions if the issuer and the holder are
unrelated, there are not arrangements that effectively require us to redeem the
registered senior preferred stock and exercise of the option to redeem would
not reduce the yield of the registered senior preferred stock.
Although the issue is not free from doubt, we believe that the optional
redemption provisions will not give rise to a constructive distribution,
because one or more of the following positions may apply:
. the optional redemption provisions would not be treated as more likely
than not to be exercised under these rules,
. the redemption premium is in the nature of a penalty for premature
redemption, or
. the safe harbor would apply.
In addition, your right to require a redemption of the registered senior
preferred stock upon the occurrence of a contingency, such as a change of
control of us, could under certain circumstances result in constructive
distributions, although we do not believe this result should apply to the
registered senior preferred stock.
Redemption or Sale of Registered Senior Preferred Stock. You will generally
recognize taxable gain or loss upon the sale or disposition (other than a
redemption) of registered senior preferred stock equal to the difference
between the amount of cash or the fair market value of property you receive and
your tax basis in the registered senior preferred stock (which in the aggregate
will initially equal the portion of your purchase price for the old senior
preferred stock and warrant allocable to the old senior preferred stock as
increased for any distribution of senior preferred stock on the old senior
preferred stock treated as a dividend). This capital gain will be long-term
gain or loss if your holding period for the registered senior preferred stock
exceeds one year. This long-term capital gain or loss will be subject to the
capital gains rates discussed above.
Our redemption of the registered senior preferred stock should be treated as
a dividend to the extent that the amount of cash does not exceed our current or
accumulated earnings and profits, as determined for federal tax purposes,
unless that redemption:
. results in a "complete termination" of your stock interest in us,
. is "substantially disproportionate" to you or
. is "not essentially equivalent to a dividend" to you under the Code.
In determining whether any of these tests have been met, you must take into
account not only our stock which you actually own, but also stock which you
constructively own under the attribution rules of the Code (including the rule
that a partner in a partnership is deemed to own its share of any stock owned
by a partnership). If you are treated as having received a dividend upon a
redemption of registered senior preferred stock, your tax basis in the
registered senior preferred stock should be transferred to your remaining
stockholdings in us. If you do not retain any direct stock ownership in us but
are deemed to own shares under the constructive ownership rules, you may lose
this tax basis entirely. If any of the tests described in the three bullet
points above are met, a redemption generally should be treated in the same
manner as a sale of shares described above.
104
<PAGE>
Non-U.S. Holders
The following discussion of the material U.S. federal income tax
consequences of ownership of shares of registered senior preferred stock
applies to you if you are a non-U.S. holder, as defined above.
Distributions on the Registered Senior Preferred Stock. Dividends on the
registered senior preferred stock (including dividends in the form of
additional shares of registered senior preferred stock and constructive
dividends) actually or deemed paid to you that are not effectively connected
with a trade or business carried on by you in the U.S. generally are subject to
a 30% U.S. withholding tax. The rate of withholding may be reduced to the
extent provided by a tax treaty to which the U.S. is a party if you are
entitled to the benefits of the treaty. Dividends we pay to you that are
effectively connected with a U.S. trade or business conducted by you will be
exempt from U.S. withholding tax, but generally will be taxed at the same
graduated rates applicable to U.S. persons. If you seek a reduction in the rate
of withholding under an income tax treaty or on dividends effectively connected
with a trade or business carried on by you in the U.S., you will be required to
comply with certain certification and other requirements.
If you are a corporation, in addition to the graduated tax described above,
dividends received by you that are effectively connected with a U.S. trade or
business conducted by you also may be subject to a branch profits tax at a rate
of 30% or such lower rate as may be specified by an applicable tax treaty.
Redemption or Sale of the Registered Senior Preferred Stock. Generally, you
will not be subject to U.S. federal income tax on any gain realized upon the
sale or disposition of shares of registered senior preferred stock (including a
redemption of registered senior preferred stock that is not treated as a
dividend) unless (i) the gain is effectively connected with a U.S. trade or
business conducted by you within the U.S. (in which case the gain will be
subject to tax at the rates and in the manner applicable to U.S. persons and,
if you are a foreign corporation, the branch profits tax described above also
may apply), (ii) you are an individual who holds shares of registered senior
preferred stock as capital assets and who is present in the U.S. for 183 or
more days in the taxable year in which the sale or disposition occurs and
certain other conditions are met, (iii) you are subject to tax pursuant to the
provisions of the U.S. federal income tax laws applicable to certain U.S.
expatriates, or (iv) we are or have been a "United States real property holding
corporation" for federal income tax purposes at any time within the shorter of
the 5-year period preceding your disposition or your holding period. We may be,
or may subsequently become, a United States real property holding corporation
for United States federal income tax purposes because of our ownership of
substantial real estate assets in the U.S. If we were to be treated as a United
States real property holding corporation, a non-U.S. holder may be subject to
U.S. federal income taxation on any gain realized from the sale or disposition
(including a redemption of registered senior preferred stock that is not
treated as a dividend) of the stock, unless an exemption is provided under an
applicable treaty. If we are a United States real property holding corporation,
the tax described in the preceding sentence generally is enforced by way of a
10% withholding tax that the transferee of senior preferred stock would be
required to collect. If we are a United States real property holding
corporation and you dispose of shares of registered senior preferred stock
(including in an exchange in which no gain or loss is recognized), you
generally will be required to file a United States income tax return to reflect
your disposition of registered senior preferred stock; and generally will be
(i) entitled to a refund from the Internal Revenue Service if the amount
withheld (if any) exceeds your actual tax liability on the transfer of
registered senior preferred stock or (ii) required to make a payment to the
Internal Revenue Service in the amount by which the amount withheld (if any) is
less than your actual tax liability on the transfer of registered senior
preferred stock.
Backup Withholding
Backup withholding at a rate of 31% may apply to payments of dividends on
registered senior preferred stock and to payments of the proceeds of a sale of
registered senior preferred stock that is made to a non-corporate holder if you
fail to provide a correct taxpayer identification number or otherwise comply
with applicable certification requirements of the backup withholding rules. The
backup withholding tax is not an additional tax and may be credited against
your U.S. federal income tax liability provided that correct information is
provided to the Internal Revenue Service.
105
<PAGE>
PLAN OF DISTRIBUTION
This prospectus, as it may be amended or supplemented from time to time, may
be used by a Broker-Dealer in connection with the resale of the shares of
registered senior preferred stock received in exchange for the old senior
preferred stock where such shares of old senior preferred stock were acquired
for its own account as a result of market-making activities or other trading
activities (other than where acquired directly from the Company or any
"Affiliate," as defined in Rule 144 of the Securities Act). Each such Broker-
Dealer that participates in the exchange offer that receives the registered
senior preferred stock for its own account pursuant to the exchange offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such registered senior preferred stock. We have agreed that for a period of 180
days after the exchange offer is consummated or until the shares of old senior
preferred stock are resold, whichever comes first, we will use our best efforts
to make this prospectus, as amended or supplemented, available to any such
Broker-Dealer for use in connection with any such resale.
We will not receive any proceeds from any sale of registered senior
preferred stock by Participating Broker-Dealers. Registered senior preferred
stock received by Broker-Dealers for their own account pursuant to the exchange
offer may be sold from time to time in one or more transactions in the over-
the-counter market, in negotiated transactions, through the writing of options
on the registered senior preferred stock or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such Broker-
Dealer and/or the purchasers of any such registered senior preferred stock. Any
Broker-Dealer that resells shares of registered senior preferred stock that
were received by it for its own account pursuant to the exchange offer and any
broker or dealer that participates in a distribution of such registered senior
preferred stock may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of registered senior preferred
stock and any commissions or concessions received by any such persons may be
deemed to be underwriting compensation under the Securities Act. The letter of
transmittal states that by acknowledging that it will deliver and by delivering
a prospectus, a Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. For a period of 180
days after the expiration date of the exchange offer, we will promptly send
additional copies of this prospectus and any amendment or supplement to this
prospectus to any Broker-Dealer that requests such documents in the letter of
transmittal.
This prospectus has been prepared for use in connection with the exchange
offer and may be used by the initial purchasers in connection with the offers
and sales related to market-making transactions in the registered senior
preferred stock. The initial purchasers may act as principals or agents in such
transactions. Such sales will be made at prices related to prevailing market
prices at the time of sale. We will not receive any of the proceeds of such
sales. The initial purchasers have no obligation to make a market in the
registered senior preferred stock and may discontinue their market-making
activities at any time without notice, at their sole discretion.
LEGAL MATTERS
The validity of the registered senior preferred stock offered in this
prospectus will be passed upon for us by Milbank, Tweed, Hadley & McCloy LLP,
New York, New York.
INDEPENDENT ACCOUNTANTS
The consolidated financial statements of TNP as of December 31, 1999 and
1998, and for each of the three years in the period ended December 31, 1999
included in this prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as stated in their reports appearing in this
prospectus. Following the merger, TNP dismissed Arthur Andersen LLP as its
independent accountants and engaged Deloitte & Touche LLP to replace Arthur
Andersen LLP.
106
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS................................... F-2
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME........................................ F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS.................................... F-5
CONSOLIDATED BALANCE SHEETS.............................................. F-6
CONSOLIDATED STATEMENTS OF CAPITALIZATION................................ F-7
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY................... F-8
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME........................................ F-9
CONSOLIDATED STATEMENTS OF CASH FLOWS.................................... F-10
CONSOLIDATED BALANCE SHEETS.............................................. F-11
CONSOLIDATED STATEMENTS OF CAPITALIZATION................................ F-12
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDER'S EQUITY................... F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................. F-14
</TABLE>
INDEX TO UNAUDITED FINANCIAL STATEMENTS
TNP ENTERPRISES, INC. AND SUBSIDIARIES
<TABLE>
<S> <C>
CONSOLIDATED STATEMENTS OF INCOME (LOSS)--FOR THE THREE MONTHS ENDED
JUNE 30, 2000 AND 1999................................................. F-33
CONSOLIDATED STATEMENTS OF INCOME (LOSS)--FOR THE SIX MONTHS ENDED JUNE
30, 2000 AND 1999...................................................... F-34
CONSOLIDATED STATEMENTS OF CASH FLOWS--FOR THE SIX MONTHS ENDED JUNE 30,
2000 AND 1999.......................................................... F-35
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2000 AND DECEMBER 31, 1999... F-36
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME--FOR THE SIX MONTHS ENDED JUNE 30,
2000 AND 1999.......................................................... F-37
CONSOLIDATED STATEMENTS OF CASH FLOWS--FOR THE SIX MONTHS ENDED JUNE 30,
2000 AND 1999.......................................................... F-38
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2000 AND DECEMBER 31, 1999... F-39
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS............................ F-40
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of TNP Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets and
consolidated statements of capitalization of TNP Enterprises, Inc. (a Texas
corporation) (the "Company") as of December 31, 1999 and 1998, and the related
consolidated statements of income, common shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those Standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 1999 and 1998, and the results of its operations and its
cash flows for each of the years ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
February 16, 2000
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder and Board of Directors of Texas-New Mexico Power Company:
We have audited the accompanying consolidated balance sheets and
consolidated statements of capitalization of Texas-New Mexico Power Company (a
Texas corporation) (the "Company") as of December 31, 1999 and 1998, and the
related consolidated statements of income, common shareholder's equity and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those Standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 1999 and 1998, and the results of its operations and its
cash flows for each of the years ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
February 16, 2000
F-3
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
(In thousands except per share amounts)
<S> <C> <C> <C>
OPERATING REVENUES............... $ 576,150 $ 585,941 $ 578,534
------------- ------------- -------------
OPERATING EXPENSES:
Purchased power and fuel....... 279,587 315,949 300,614
Other operating and mainte-
nance......................... 106,634 95,661 86,385
Depreciation................... 39,295 38,056 38,853
Charge for recovery of stranded
plant (Note 3)................ 23,376 -- --
Taxes other than income taxes.. 33,746 36,014 33,667
Income taxes................... 19,120 15,480 21,242
------------- ------------- -------------
Total operating expenses..... 501,758 501,160 480,761
------------- ------------- -------------
NET OPERATING INCOME............. 74,392 84,781 97,773
------------- ------------- -------------
OTHER INCOME (LOSS):
Other income and deductions,
net........................... (2,348) 1,363 1,443
Income taxes................... 1,866 (125) 257
------------- ------------- -------------
Other income (loss), net of
taxes....................... (482) 1,238 1,700
------------- ------------- -------------
INCOME BEFORE INTEREST CHARGES... 73,910 86,019 99,473
------------- ------------- -------------
INTEREST CHARGES:
Interest on long-term debt..... 38,538 48,393 52,557
Other interest and amortization
of debt-related costs......... 5,205 5,492 4,355
------------- ------------- -------------
Total interest charges....... 43,743 53,885 56,912
------------- ------------- -------------
INCOME FROM CONTINUING OPERA-
TIONS........................... 30,167 32,134 42,561
Loss from discontinued nonregu-
lated operations, net of taxes
(Note 4)........................ -- 12,710 12,883
------------- ------------- -------------
NET INCOME....................... 30,167 19,424 29,678
Dividends on preferred stock and
other........................... (19) 150 158
------------- ------------- -------------
INCOME APPLICABLE TO COMMON
STOCK........................... $ 30,186 $ 19,274 $ 29,520
============= ============= =============
EARNINGS PER SHARE OF COMMON
STOCK:
Earnings from continuing opera-
tions......................... $ 2.25 $ 2.42 $ 3.24
Loss from discontinued nonregu-
lated operations.............. -- (0.96) (0.98)
------------- ------------- -------------
EARNINGS PER SHARE............... $ 2.25 $ 1.46 $ 2.26
============= ============= =============
DIVIDENDS PER SHARE OF COMMON
STOCK........................... $ 1.16 $ 1.10 $ 1.005
============= ============= =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING..................... 13,394 13,244 13,083
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from sales to customers........ $ 532,237 $ 600,596 $ 625,032
Purchased power and fuel costs paid.......... (291,384) (318,616) (299,554)
Cash paid for payroll and to other
suppliers................................... (89,455) (116,852) (125,188)
Interest paid, net of amounts capitalized.... (35,527) (51,592) (57,337)
Income taxes paid............................ (7,527) (6,825) (9,089)
Other taxes paid............................. (34,140) (35,089) (32,990)
Other operating cash receipts and payments,
net......................................... 353 1,250 2,979
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES..... 74,557 72,872 103,853
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant................... (41,144) (37,534) (28,232)
Additions to other property and nonregulated
investments................................. 100 (1,020) (1,777)
Withdrawals from (deposits to) escrow
account..................................... 1,902 (1,902) --
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES......... (39,142) (40,456) (30,009)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on preferred and common
stocks...................................... (15,640) (14,729) (13,305)
Common stock issuances....................... 4,167 5,355 3,392
Borrowings from (repayments to) revolving
credit facilities--net...................... (63,000) (11,000) 45,000
Issuances:
Senior notes, net of discount.............. 174,164 -- --
Deferred expenses associated with
financings.................................. (1,588) (7,382) --
Redemptions:
First mortgage bonds....................... -- (8,000) (100,900)
Secured debentures......................... (130,000) -- --
Preferred stock............................ (1,396) (180) (180)
Other...................................... 118 (141) (361)
--------- --------- ---------
NET CASH USED IN FINANCING ACTIVITIES......... (33,175) (36,077) (66,354)
--------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS....... 2,240 (3,661) 7,490
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD....................................... 12,216 15,877 8,387
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.... $ 14,456 $ 12,216 $ 15,877
========= ========= =========
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income................................... $ 30,167 $ 19,424 $ 29,678
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation............................... 39,295 38,056 38,853
Charge for recovery of stranded plant...... 23,376 -- --
Amortization of debt-related costs and
other deferred charges.................... 8,044 7,390 5,633
Allowance for funds used during
construction.............................. (933) (228) (47)
Deferred income taxes...................... 6,535 4,722 7,434
Investment tax credits..................... 2,205 1,281 1,406
Deferred purchased power and fuel costs.... (20,425) 894 995
Cash flows impacted by changes in current
assets and liabilities:
Accounts payable........................... (7,711) 976 (1,411)
Accrued interest........................... 3,400 (2,303) (3,556)
Accrued taxes.............................. (1,472) (3,299) (1,244)
Reserve for customer refund................ (10,289) 10,971 --
Changes in other current assets and
liabilities............................... 8,862 (2,215) 25,099
Clear Lake settlement payment................ (8,000) -- --
Other, net................................... 1,503 (2,797) 1,013
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES..... $ 74,557 $ 72,872 $ 103,853
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(In thousands)
<S> <C> <C>
ASSETS
UTILITY PLANT:
Electric plant.......................................... $1,288,104 $1,260,147
Construction work in progress........................... 2,501 6,294
---------- ----------
Total............................................... 1,290,605 1,266,441
Less accumulated depreciation........................... 382,627 343,562
---------- ----------
Net utility plant................................... 907,978 922,879
---------- ----------
OTHER PROPERTY AND INVESTMENTS, at cost.................. 4,243 10,384
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents............................... 14,456 12,216
Accounts receivable..................................... 8,384 5,955
Inventories, at lower of average cost or market:
Fuel.................................................. 575 677
Materials and supplies................................ 3,834 4,567
Deferred purchased power and fuel costs................. 304 --
Accumulated deferred income taxes....................... -- 2,235
Other current assets.................................... 635 4,403
---------- ----------
Total current assets................................ 28,188 30,053
---------- ----------
LONG-TERM AND OTHER ASSETS:
Recoverable stranded costs (Note 3)..................... 19,256 --
Deferred purchased power and fuel costs (Note 3)........ 21,797 1,676
Deferred charges........................................ 19,737 28,773
---------- ----------
Total long-term and other assets.................... 60,790 30,449
---------- ----------
$1,001,199 $ 993,765
========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common shareholders' equity:
Common stock--no par value per share. Authorized
50,000,000 shares;
issued 13,416,556 shares in 1999 and 13,293,996 in
1998................................................. $ 196,685 $ 192,518
Retained earnings..................................... 130,425 115,776
---------- ----------
Total common shareholders' equity................... 327,110 308,294
Redeemable cumulative preferred stock................... 1,664 3,060
Long-term debt, less current maturities................. 340,244 459,000
---------- ----------
Total capitalization................................ 669,018 770,354
---------- ----------
CURRENT LIABILITIES:
Current maturities of long-term debt.................... 100,000 --
Accounts payable........................................ 20,300 28,011
Accrued interest........................................ 8,420 5,020
Accrued taxes........................................... 12,818 14,290
Customers' deposits..................................... 3,786 3,609
Accumulated deferred income taxes....................... 7,543 --
Reserve for customer refund (Note 3).................... 682 10,971
Other current liabilities............................... 29,720 25,202
---------- ----------
Total current liabilities........................... 183,269 87,103
---------- ----------
LONG-TERM AND OTHER LIABILITIES:
Regulatory tax liabilities.............................. 6,633 957
Accumulated deferred income taxes....................... 97,196 97,346
Accumulated deferred investment tax credits............. 23,978 20,916
Deferred credits........................................ 21,105 17,089
---------- ----------
Total long-term and other liabilities............... 148,912 136,308
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 10)
---------- ----------
$1,001,199 $ 993,765
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31,
<TABLE>
<CAPTION>
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
COMMON SHAREHOLDERS' EQUITY
Common stock with no par value per share
Authorized shares--50,000,000............................
Outstanding shares--13,416,556 in 1999 and 13,293,996 in
1998.................................................... $196,685 $192,518
Retained earnings.......................................... 130,425 115,776
-------- --------
Total common shareholders' equity...................... 327,110 308,294
-------- --------
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>
<TABLE>
<CAPTION>
Redemption
price at Outstanding
TNMP's shares
option 1999 1998
------------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Series B....................... 4.65% $100.00 8,390 19,200 839 1,920
Series C....................... 4.75% 100.00 8,250 11,400 825 1,140
------ ------ ------ --------
Total redeemable cumulative preferred
stock..................................... 16,640 30,600 1,664 3,060
------ ------ ------ --------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
LONG-TERM DEBT
FIRST MORTGAGE BONDS
Series U, 9.25% due 2000............................... 100,000 100,000
SENIOR NOTES
6.25% due 2009......................................... 175,000 --
Unamortized discount................................... (756) --
SECURED DEBENTURES
12.50% due 1999........................................ -- 130,000
Series A, 10.75% due 2003.............................. 140,000 140,000
REVOLVING CREDIT FACILITIES
1996 Facility.......................................... 26,000 80,000
1998 Facility.......................................... -- 9,000
--------- --------
Total long-term debt................................. 440,244 459,000
Less current maturities.............................. (100,000) --
--------- --------
Total long-term debt, less current maturities........ 340,244 459,000
--------- --------
TOTAL CAPITALIZATION....................................... $ 669,018 $770,354
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
For the Years Ended December 31,
<TABLE>
<CAPTION>
Common Shareholders' Equity
----------------------------------
Common Stock
--------------- Retained
Shares Amount Earnings Total
------ -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Balance at January 1, 1997............... 13,006 $183,771 $ 94,703 $278,474
Net income............................... -- -- 29,678 29,678
Dividends on preferred stock............. -- -- (158) (158)
Dividends on common stock--$1.005 per
share................................... -- -- (13,158) (13,158)
Sale of common stock..................... 127 3,392 -- 3,392
Retirement of preferred stock............ -- -- 13 13
------ -------- -------- --------
Balance at December 31, 1997........... 13,133 187,163 111,078 298,241
YEAR ENDED DECEMBER 31, 1998
Net income............................... -- -- 19,424 19,424
Dividends on preferred stock............. -- -- (150) (150)
Dividends on common stock--$1.10 per
share................................... -- -- (14,579) (14,579)
Sale of common stock..................... 161 5,355 -- 5,355
Retirement of preferred stock............ -- -- 3 3
------ -------- -------- --------
Balance at December 31, 1998........... 13,294 192,518 115,776 308,294
YEAR ENDED DECEMBER 31, 1999
Net income............................... -- -- 30,167 30,167
Dividends on preferred stock............. -- -- (99) (99)
Dividends on common stock--$1.16 per
share................................... -- -- (15,537) (15,537)
Sale of common stock..................... 123 4,167 -- 4,167
Retirement of preferred stock............ -- -- 118 118
------ -------- -------- --------
Balance at December 31, 1999........... 13,417 $196,685 $130,425 $327,110
====== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of TNP Enterprises, Inc.)
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
OPERATING REVENUES................................ $576,093 $585,892 $578,534
-------- -------- --------
OPERATING EXPENSES:
Purchased power and fuel........................ 279,587 315,949 300,614
Other operating and maintenance................. 99,390 91,663 84,294
Depreciation of utility plant................... 39,295 38,054 38,851
Charge for recovery of stranded plant (Note 3).. 23,376 -- --
Taxes other than income taxes................... 33,296 36,298 33,260
Income taxes.................................... 20,799 16,863 22,062
-------- -------- --------
Total operating expenses...................... 495,743 498,827 479,081
-------- -------- --------
NET OPERATING INCOME.............................. 80,350 87,065 99,453
-------- -------- --------
OTHER INCOME:
Other income and deductions, net................ 1,940 1,035 1,120
Income taxes.................................... 277 (52) 257
-------- -------- --------
Other income, net of taxes.................... 2,217 983 1,377
-------- -------- --------
INCOME BEFORE INTEREST CHARGES.................... 82,567 88,048 100,830
-------- -------- --------
INTEREST CHARGES:
Interest on long-term debt...................... 37,919 48,342 52,557
Other interest and amortization of debt-related
costs.......................................... 5,205 5,385 4,355
-------- -------- --------
Total interest charges........................ 43,124 53,727 56,912
-------- -------- --------
NET INCOME........................................ 39,443 34,321 43,918
Dividends on preferred stock and other............ (19) 150 158
-------- -------- --------
INCOME APPLICABLE TO COMMON STOCK................. $ 39,462 $ 34,171 $ 43,760
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of TNP Enterprises, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from sales to customers........ $ 528,552 $ 579,482 $ 606,803
Purchased power and fuel costs paid.......... (291,384) (318,616) (299,554)
Cash paid for payroll and to other
suppliers................................... (74,372) (72,590) (86,607)
Interest paid, net of amounts capitalized.... (34,924) (51,545) (57,331)
Income taxes paid............................ (17,592) (2,786) (8,464)
Other taxes paid............................. (33,540) (35,492) (32,980)
Other operating cash receipts and payments,
net......................................... 100 864 2,600
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES..... 76,840 99,317 124,467
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant................... (40,911) (37,506) (27,942)
Withdrawals from (deposits to) escrow
account..................................... 1,902 (1,902) 1,670
--------- --------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES....... (39,009) (39,408) (26,272)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on preferred and common
stocks...................................... (29,102) (19,249) (44,458)
Borrowings from (repayments to) revolving
credit facilities--net ..................... (54,000) (20,000) 45,000
Issuances:
Senior notes, net of discount............... 174,164 -- --
Deferred expenses associated with
financings.................................. (1,590) (7,275) --
Redemptions:
First mortgage bonds....................... -- (8,000) (100,900)
Secured debentures......................... (130,000) -- --
Preferred stock............................ (1,396) (180) (180)
Other...................................... 118 -- --
--------- --------- ---------
NET CASH USED IN FINANCING ACTIVITIES......... (41,806) (54,704) (100,538)
--------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS....... (3,975) 5,205 (2,343)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD....................................... 7,977 2,772 5,115
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.... $ 4,002 $ 7,977 $ 2,772
========= ========= =========
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income................................... $ 39,443 $ 34,321 $ 43,918
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of utility plant.............. 39,295 38,054 38,851
Charge for recovery of stranded plant...... 23,376 -- --
Amortization of debt-related costs and
other deferred charges.................... 8,044 7,281 5,633
Allowance for funds used during
construction.............................. (933) (228) (47)
Deferred income taxes...................... 6,716 9,559 10,650
Investment tax credits..................... 2,149 1,173 2,121
Deferred purchased power and fuel costs.... (20,425) 894 995
Cash flows impacted by charges in current
assets and liabilities:
Accounts payable........................... (6,814) 2,029 (2,395)
Accrued interest........................... 3,384 (2,319) (3,556)
Accrued taxes.............................. (6,260) 2,698 850
Reserve for customer refund................ (10,289) 10,971 --
Changes in other current assets and
liabilities............................... 10,264 (4,485) 24,751
Clear Lake settlement payment................ (8,000) -- --
Other, net................................... (3,110) (631) 2,696
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES..... $ 76,840 $ 99,317 $ 124,467
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE>
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of TNP Enterprises, Inc.)
CONSOLIDATED BALANCE SHEETS
December 31,
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(In thousands)
<S> <C> <C>
ASSETS
UTILITY PLANT:
Electric plant.......................................... $1,288,080 $1,260,099
Construction work in progress........................... 2,501 6,294
---------- ----------
Total............................................... 1,290,581 1,266,393
Less accumulated depreciation........................... 382,627 343,562
---------- ----------
Net utility plant................................... 907,954 922,831
---------- ----------
OTHER PROPERTY AND INVESTMENTS, at cost.................. 213 2,116
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents............................... 4,002 7,977
Accounts receivable..................................... 6,347 923
Inventories, at lower of average cost or market:
Fuel.................................................. 575 677
Materials and supplies................................ 3,834 4,567
Deferred purchased power and fuel costs................. 304 --
Other current assets.................................... 356 4,093
---------- ----------
Total current assets................................ 15,418 18,237
---------- ----------
LONG-TERM AND OTHER ASSETS:
Recoverable stranded costs (Note 3)..................... 19,256 --
Deferred purchased power and fuel costs (Note 3)........ 21,797 1,676
Deferred charges........................................ 19,757 28,706
---------- ----------
Total long-term and other assets.................... 60,810 30,382
---------- ----------
$ 984,395 $ 973,566
========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common shareholder's equity:
Common stock, $10 par value per share
Authorized 12,000,000 shares; issued 10,705 shares... $ 107 $ 107
Capital in excess of par value........................ 222,149 222,149
Retained earnings..................................... 90,302 79,840
---------- ----------
Total common shareholder's equity................... 312,558 302,096
Redeemable cumulative preferred stock................... 1,664 3,060
Long-term debt, less current maturities................. 340,244 450,000
---------- ----------
Total capitalization................................ 654,466 755,156
---------- ----------
CURRENT LIABILITIES:
Current maturities of long-term debt.................... 100,000 --
Accounts payable........................................ 20,074 26,888
Accrued interest........................................ 8,388 5,004
Accrued taxes........................................... 14,189 20,449
Customers' deposits..................................... 3,786 3,609
Accumulated deferred income taxes....................... 8,434 649
Reserve for customer refund (Note 3).................... 682 10,971
Other current liabilities............................... 28,015 17,076
---------- ----------
Total current liabilities........................... 183,568 84,646
---------- ----------
LONG-TERM AND OTHER LIABILITIES:
Regulatory tax liabilities.............................. 6,633 957
Accumulated deferred income taxes....................... 95,165 93,378
Accumulated deferred investment tax credits............. 23,978 22,729
Deferred credits........................................ 20,585 16,700
---------- ----------
Total long-term and other liabilities............... 146,361 133,764
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 10)
---------- ----------
$ 984,395 $ 973,566
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
<PAGE>
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of TNP Enterprises, Inc.)
CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31,
<TABLE>
<CAPTION>
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
COMMON SHAREHOLDERS' EQUITY
Common stock, $10 par value per share
Authorized shares--12,000,000.............................
Outstanding shares--10,705................................ $ 107 $ 107
Capital in excess of par value.............................. 222,149 222,149
Retained earnings........................................... 90,302 79,840
-------- --------
Total common shareholders' equity....................... 312,558 302,096
-------- --------
PREFERRED STOCK
Redeemable cumulative preferred stock with $100 par value
Authorized shares--1,000,000..............................
</TABLE>
<TABLE>
<CAPTION>
Redemption
price at Outstanding
TNMP's shares
option 1999 1998
------------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Series B....................... 4.65% $100.00 8,390 19,200 839 1,920
Series C....................... 4.75% 100.00 8,250 11,400 825 1,140
------ ------ ------ --------
Total redeemable cumulative preferred
stock..................................... 16,640 30,600 1,664 3,060
------ --------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
LONG-TERM DEBT
FIRST MORTGAGE BONDS
Series U, 9.25% due 2000................................ 100,000 100,000
SENIOR NOTES
6.25% due 2009.......................................... 175,000 --
Unamortized discount.................................... (756) --
SECURED DEBENTURES
12.50% due 1999......................................... -- 130,000
Series A, 10.75% due 2003............................... 140,000 140,000
REVOLVING CREDIT FACILITIES
1996 Facility........................................... 26,000 80,000
-------- --------
Total long-term debt.................................. 440,244 450,000
Less current maturities............................... (100,000) --
-------- --------
Total long-term debt, less current maturities......... 340,244 450,000
-------- --------
TOTAL CAPITALIZATION........................................ $654,466 $755,156
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
<PAGE>
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of TNP Enterprises, Inc.)
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDER'S EQUITY
For the Years Ended December 31,
<TABLE>
<CAPTION>
Common Shareholder's Equity
-------------------------------------------
Common Stock Excess of
------------- Capital in Retained
Shares Amount Par Value Earnings Total
------ ------ ---------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Balance at January 1, 1997........ 11 $107 $222,133 $65,308 $287,548
Net income........................ -- -- -- 43,918 43,918
Dividends on preferred stock...... -- -- -- (158) (158)
Dividends on common stock......... -- -- -- (44,300) (44,300)
Retirement of preferred stock..... -- -- 13 -- 13
--- ---- -------- ------- --------
Balance at December 31, 1997.... 11 107 222,146 64,768 287,021
YEAR ENDED DECEMBER 31, 1998
Net income........................ -- -- -- 34,321 34,321
Dividends on preferred stock...... -- -- -- (150) (150)
Dividends on common stock......... -- -- -- (19,099) (19,099)
Retirement of preferred stock..... -- -- 3 -- 3
--- ---- -------- ------- --------
Balance at December 31, 1998.... 11 107 222,149 79,840 302,096
YEAR ENDED DECEMBER 31, 1999
Net income........................ -- -- -- 39,443 39,443
Dividends on preferred stock...... -- -- -- (99) (99)
Dividends on common stock......... -- -- -- (29,000) (29,000)
Retirement of preferred stock..... -- -- -- 118 118
--- ---- -------- ------- --------
Balance at December 31, 1999.... 11 $107 $222,149 $90,302 $312,558
=== ==== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-13
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
General Information
The consolidated financial statements of TNP and subsidiaries include the
accounts of TNP and its wholly owned subsidiaries, TNMP, FWI, and TNP Operating
Company. The consolidated financial statements of TNMP and subsidiaries include
the accounts of TNMP and its wholly owned subsidiaries, TGC and TGC II. All
intercompany transactions and balances have been eliminated in consolidation.
TNMP is TNP's principal operating subsidiary. TNMP is a public utility
engaged in generating, purchasing, transmitting, distributing, and selling
electricity in Texas and New Mexico. TNMP is subject to PUCT and NMPRC
regulation. Some of TNMP's activities, including the issuance of securities,
are subject to FERC regulation, and its accounting records are maintained in
accordance with FERC's Uniform System of Accounts.
The use of estimates is required to prepare TNP's and TNMP's consolidated
financial statements in conformity with generally accepted accounting
principles. Management believes that estimates are essential and will not
materially differ from actual results. However, adjustments may be necessary in
the future to the extent that future estimates or actual results are different
from the estimates used in the 1999 financial statements.
Accounting for the Effects of Regulation
As discussed in Note 3, legislation that establishes competition became
effective during 1999 in Texas and New Mexico. As a result, SFAS 71,
"Accounting for the Effects of Certain Types of Regulation," is no longer
applied to the generation/power supply portion of TNMP's operations in Texas
and New Mexico. Based on the legislation, TNMP believes that SFAS 71 continues
to apply to the transmission and distribution portion of its operations in both
states.
SFAS 71 allows TNMP to recognize the economic effects of rate regulation in
the transmission and distribution portion of its business. Among these effects
are the recognition of regulatory assets and liabilities. Regulatory assets
represent revenues associated with certain costs that TNMP expects to recover
from customers in future rates. Regulatory liabilities are costs previously
collected from customers or other amounts that reduce future rates. The
following table summarizes TNP's and TNMP's regulatory assets and liabilities
as of December 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
------- -------
(In thousands)
<S> <C> <C>
Regulatory Assets:
Deferred purchased power and fuel costs...................... $22,101 $ 1,676
Deferred charges:
Losses on reacquired debt.................................. 2,837 6,494
Rate case expenses......................................... 201 1,396
Recoverable stranded costs................................. 19,256 --
Deferred accounting amounts................................ -- 3,221
------- -------
Total.................................................... $44,395 $12,787
======= =======
Regulatory Liabilities:
Income tax related, net...................................... $ 6,633 $ 957
======= =======
</TABLE>
F-14
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As a result of discontinuing SFAS 71 to the generation/power supply Texas
operations, the following accounting policy changes will be effective January
1, 2000:
. Allowance for funds used during construction will no longer be accrued
to generation-related construction projects. Interest will be
capitalized to these projects in accordance with SFAS 34,
"Capitalization of Interest Cost."
. Under SFAS 71, TNMP deferred the gains or losses that arose when long-
term debt was redeemed prior to maturity, and amortized those costs over
the life of the new debt. Effective January 1, 2000, gains or losses
incurred for the early retirement of debt attributable to TNMP's
generation/power supply operations will be recorded in accordance with
SFAS 4, "Reporting Gains and Losses from Extinguishment of Debt."
Utility Plant
Utility plant is stated at the historical cost of construction, which
includes labor, materials, indirect charges for such items as engineering and
administrative costs, and AFUDC. Property repairs and replacement of minor
items are charged to operating expenses; major replacements and improvements
are capitalized to utility plant.
AFUDC is a non-cash item designed to enable a utility to capitalize
financing costs during periods of construction. Established regulatory
practices enable TNMP to recover these costs from customers. The composite rate
used for AFUDC was 10.6% in 1999 and 6% in both 1998 and 1997.
The costs of depreciable units of plant retired or disposed of in the normal
course of business are eliminated from utility plant accounts and such costs
plus removal expenses less salvage are charged to accumulated depreciation.
When complete operating units are disposed of, appropriate adjustments are made
to accumulated depreciation, and the resulting gains or losses, if any, are
recognized.
Depreciation is provided on a straight-line method based on the estimated
lives of the properties as indicated by periodic depreciation studies. A
portion of depreciation of transportation equipment used in construction is
charged to utility plant accounts in accordance with the equipment's use.
Depreciation as a percentage of average depreciable cost was 3.1%, 3.2%, and
3.3% in 1999, 1998, and 1997, respectively.
Cash Equivalents
All highly liquid debt instruments with maturities of three months or less
when purchased are considered cash equivalents.
Customer Receivables and Operating Revenues
TNMP accrues estimated revenues for electricity delivered since the latest
billing. TNMP, under a factoring arrangement with an unaffiliated company,
sells its customer receivables on a nonrecourse basis. Amounts estimated to
have been delivered, but remaining unbilled, are also sold in connection with
this agreement.
Purchased Power and Fuel Costs
In Texas, fuel and the energy-related portion of purchased power costs are
recovered from customers through the fuel adjustment clause authorized by the
PUCT. The demand-related portion of purchased power is recovered through base
rates and is not subject to adjustment or future reconciliation. Therefore, any
difference between the amount of demand-related purchased power recovered
through TNMP's rates and the actual cost of such affects operating income.
F-15
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In New Mexico, TNMP recovers all purchased power costs through the fuel and
purchased power adjustment clause authorized by the NMPRC. The purchased power
recovery factor changes monthly to reflect over or under collections of
purchased power costs. Prior to July 1, 1999, the recovery of purchased power
had been frozen in base rates in accordance with Community Choice.
Deferred Charges
Expenses incurred in issuing long-term debt and related discount and premium
are amortized on a straight-line basis over the lives of the respective issues.
Included in deferred charges are other assets that are expected to benefit
future periods and certain costs that are deferred for ratemaking purposes and
amortized over periods allowed by regulatory authorities.
Derivatives
The initial cost of an interest rate collar is being amortized over the term
of the related agreement. Unamortized premiums of $66,000 are included in
Deferred Charges in the consolidated balance sheets. Amounts to be received or
paid under the agreement, if any, will be recognized when they occur as a
component of interest expense. As of December 31, 1999, TNMP had neither an
obligation to pay, nor the right to receive any amounts under the agreement.
Income Taxes
TNP files a consolidated federal income tax return that includes its
subsidiaries and the consolidated operations of TNMP. The amounts of income
taxes recognized in TNMP's accompanying consolidated financial statements were
computed as if TNMP and its subsidiaries filed a separate consolidated federal
income tax return.
ITC amounts utilized in the federal income tax return are generally deferred
and amortized to earnings ratably over the estimated service lives of the
related assets.
Fair Values of Financial Instruments
Fair values of cash equivalents, temporary investments, and customer
receivables approximated the carrying amounts because of the short maturities
of those instruments.
The estimated fair values of long-term debt and preferred stock were based
on quoted market prices of the same or similar issues. The estimated fair
values of TNP's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
--------------------------- ---------------------------
Carrying Amount Fair Values Carrying Amount Fair Values
--------------- ----------- --------------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Assets
Interest rate
collars.............. $ 66 $ 3,578 $ 164 $ (333)
Capitalization and
Liabilities
Long-term debt........ 441,000 420,731 459,000 475,189
Preferred stock....... 1,664 1,664 3,060 1,978
</TABLE>
Common Stock
At December 31, 1999, 519,304 shares of TNP's common stock were reserved for
issuance to TNMP's 401(k) plan, and 1,738,491 shares of TNP's common stock were
reserved for subsequent issuance under other stock compensation or shareholder
plans.
F-16
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Shareholder Rights Plan
TNP has a shareholder rights plan that is designed to protect TNP's
shareholders from coercive takeover tactics and inadequate or unfair takeover
bids. The rights plan provides for the distribution of one right for each share
of TNP's common stock currently outstanding or issued until the close of
business on August 11, 2008.
Upon the occurrence of certain events, each right entitles a shareholder to
elect to purchase one share of common stock at $100 per share or, under certain
circumstances, shares of common stock at half the then-current market price, or
to receive TNP common stock or other securities having an aggregate value equal
to the excess of (i) the value of the common stock or other securities on the
date the rights are exercised over or (ii) the cash payment that would have
been payable upon exercise of the rights if cash payment had been elected.
Until certain triggering events occur, the rights will trade together with
TNP's common stock and separate rights certificates will not be issued. Among
the triggering events are the acquisition by a person or group of 10% or more
of TNP's outstanding common stock or the commencement of a tender or exchange
offer that, upon consummation, would result in a person or group of persons
owning 15% or more of TNP's outstanding common stock. The rights expire August
11, 2008, unless earlier redeemed or exchanged by TNP, and have had no effect
on EPS.
On June 4, 1999, TNP amended its shareholder rights plan to exempt the
Merger discussed in Note 2 from the provisions of the shareholder rights plan.
Stock-Based Compensation
As discussed in Note 5, TNP has an equity-based incentive compensation plan
that awards stock-based compensation. In 1995 the FASB issued SFAS 123,
"Accounting for Stock-Based Compensation", that changes the method for
calculating expenses associated with stock-based compensation. SFAS 123, which
became effective for 1996, also allows companies to retain the approach as set
forth in APB Opinion 25, "Accounting for Stock Issued to Employees", for
measuring expense for its stock-based compensation. TNP has elected to continue
to apply the provisions of APB Opinion 25 in calculating stock-based
compensation. The application of SFAS 123 would have had no significant effect
on the amount of expense associated with TNP's stock-based compensation.
Reclassification
Certain items in 1997 and 1998 were reclassified to conform to the 1999
presentation.
Note 2. Acquisition
TNP, SW Acquisition, L.P., and ST Acquisition Corp. have entered into a
Merger Agreement, dated as of May 24, 1999, which provides for a merger of ST
Corp. with and into TNP, with TNP being the surviving corporation. Under the
terms of the Merger Agreement, each issued and outstanding share of common
stock of TNP will be canceled and converted automatically into the right to
receive $44.00 in cash. The Merger will convert TNP from a listed public
corporation to a privately owned corporation.
TNP expects the Merger to close early in the second quarter of 2000. The
Merger Agreement requires various approvals. To date, approvals have been
obtained from TNP's shareholders, the Federal Trade Commission, FERC, the PUCT,
and the NMPRC. Approvals are final in all jurisdictions except Texas.
Information regarding the approval status in each jurisdiction is as follows:
F-17
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Shareholder Approval. A special meeting of TNP shareholders was held
September 22, 1999, at which shareholders approved the Merger, with more than
98 percent of the votes cast favoring the transaction. The affirmative votes
represented approximately 81 percent of the outstanding shares of TNP.
FERC. On July 9, 1999, TNMP and SW filed a joint application with the FERC
seeking approval of the Merger. Simultaneously, TNMP filed an application with
the FERC seeking approval of a Backstop Credit Facility (Credit Facility). As a
result of the Merger, TNMP must offer to repurchase certain existing debt.
Should holders of this debt accept TNMP's repurchase offer, proceeds from the
Credit Facility would fund the repurchase. On September 29, 1999, the FERC
issued an order approving the Merger, concluding that the Merger would be
consistent with the public interest. The FERC issued an order approving the
Credit Facility on September 30, 1999.
FTC. On September 3, 1999, TNMP filed an application with the FTC seeking
approval of the Merger, as required under the Hart-Scott-Rodino Act. The FTC
approved the application on September 21, 1999.
Texas. On July 15, 1999, TNP and TNMP filed an application with the PUCT
seeking a determination that the Merger is consistent with the public interest.
On November 10, 1999, TNMP and the staff of the PUCT agreed to a settlement
that resolves all issues between the two parties. At a hearing held November
12, 1999, the remaining parties joined the settlement, withdrew from the case,
or waived their rights to hearing and did not oppose the settlement. In late
December 1999, the administrative law judge assigned to the case issued a draft
order approving the Merger. On February 10, 2000, the PUCT voted unanimously to
approve the Merger. Approval by the PUCT is expected to be final in March 2000.
Approval by the PUCT requires TNMP to honor certain financial and operational
commitments, including a guaranteed level of stranded cost mitigation equal to
$59 million less base rate reductions in 2000 and 2001. The subject base rate
reductions are described in Note 3.
New Mexico. Also on July 15, TNMP filed an application with the NMPRC
seeking to obtain all approvals and authorizations necessary to consummate the
Merger, including approval of the Credit Facility described above. On October
8, 1999, the Staff of the NMPRC filed testimony recommending approval of the
Merger, subject to certain financial and operational commitments of TNMP. On
October 18, 1999, TNMP filed testimony agreeing to make the proposed
commitments. No other parties opposed the Merger. Hearings before the NMPRC
were held October 25 and 26, 1999. On January 18, 2000, the NMPRC voted to
approve the Merger. The decision became final on February 17, 2000.
Note 3. Regulatory Matters
The electric utility industry continues its transition toward increased
competition. During 1999, legislation was passed in both Texas and New Mexico
that establishes retail competition for generation operations. Retail
competition is scheduled to begin in New Mexico and Texas on January 1, 2001,
and January 1, 2002, respectively. The legislation in both states provides for
recovery of "stranded costs", the difference between the regulatory value of
TNMP's investments in generation assets and purchased power contracts and the
market price for energy in a competitive market. The increasingly competitive
environment presents opportunities to compete for new customers, as well as the
risk of loss of existing customers. TNMP expects the portions of operations
pertaining to transmission and distribution to continue to be regulated.
The following discusses the legislation in Texas and New Mexico, the effects
of the legislation on TNMP's operating results, and the relationship of the
legislation in Texas to the Transition Plan.
F-18
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Texas
Legislation. On September 1, 1999, legislation that establishes competition
in the generation portion of the Texas electric utility industry went into
effect. The legislation will implement retail competition in generation for
customers in most areas of Texas on January 1, 2002. Among other provisions,
the legislation:
. Requires utilities to provide service according to the base rate tariffs
in effect at September 1, 1999, until December 31, 2001. The legislation
does not prohibit changes in the fixed fuel factor that passes through
fuel and purchased power energy costs to customers.
. Allows a utility to recover 100% of its verifiable stranded costs via
several methods, including:
. Redirection of depreciation--A utility may redirect all or a part of
the depreciation related to transmission and distribution assets to
its generation assets for the periods 1998 through 2001.
. Application of earnings in excess of an allowed rate of return--
During the freeze period (January 1, 1999 through December 31,
2001), utilities' earnings are capped by the cost of capital
approved in the utility's most recent rate proceeding before the
PUCT. For TNMP, the cap is a 10.53% return on rate base. Earnings in
excess of the cap will be used to reduce stranded costs.
. Securitization--A utility may securitize 100% of its regulatory
assets and up to 75% of its estimated stranded costs, and recover
those costs from its customers through a charge approved by the
PUCT.
. Assessment of a competition transition charge--After the freeze
period, stranded costs that have not been recovered by one of the
methods above will be recovered through a competition transition
charge levied upon all retail customers within a utility's
geographical certificated service area as it existed on May 1, 1999.
. Establishes four alternatives for quantifying the final amount of
stranded costs, and provides a framework for reconciling estimated
stranded costs to the actual stranded costs quantified using those
methods. Reconciliation will occur sometime after January 10, 2004,
according to a schedule to be established by the PUCT.
. Requires utilities to disaggregate, on or before January 1, 2002, into
three distinct businesses: generation, transmission and distribution,
and retail electric provider. A retail electric provider is an entity
that sells electric energy to retail customers in Texas. Such an entity
cannot own or operate generation assets.
. Provides that once customer choice begins on January 1, 2002,
residential and small commercial customers who do not choose an
alternative provider will continue to be served by TNMP's affiliate
retail energy provider at a "price-to-beat" which is 6% lower than the
rate in effect on January 1, 1999, adjusted to reflect a fuel factor
that the PUCT shall determine as of December 31, 2001. This "price to
beat" must be offered by the utility until the earlier of 36 months
after customer choice is offered or when it loses 40% or more of its
residential sales within its certified service area.
Prior to the legislation, TNMP had been operating under a voluntary
Transition Plan approved by the PUCT in 1998. The Transition Plan covered a
five-year period, and had provided for rate reductions, sharing of earnings in
excess of 11.25% return on equity and recovery of stranded costs. It also
included a provision requiring that TNMP conform the Plan to any legislation
enacting competition in the electric utility industry. There are provisions of
the legislation that conflict with provisions of the Transition Plan. In such
instances, including the calculation and subsequent application of excess
earnings, Management believes the legislation supercedes the Transition Plan.
F-19
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Management has calculated excess earnings for the twelve months ended
December 31, 1999, based on the provisions of the legislation. The calculation
resulted in a reduction to 1999 pre-tax operating income of $23.4 million
($1.09 per share). The $23.4 million of excess earnings are displayed in the
income statement under the caption "Charge for recovery of stranded plant."
TNMP did not have excess earnings under the Transition Plan in 1998.
1998 Earnings Monitoring Report and Transition Plan Conformance. On May 17,
1999, TNMP filed its Electric Investor-Owned Utilities Earnings Report
(Earnings Report) with the PUCT. Simultaneously, TNMP filed an Addendum to the
Earnings Report (Addendum) detailing TNMP's calculation of excess earnings
under the Transition Plan for the twelve months ended December 31, 1998. The
Addendum showed that TNMP had not earned in excess of the 11.25% return on
equity cap established in the Transition Plan. After reviewing the Addendum,
the Office of Regulatory Affairs (ORA) of the PUCT filed a contest to TNMP's
earnings report on August 16, 1999, asserting errors in TNMP's calculation of
excess earnings. ORA's petition did not quantify the amount of its alleged
errors. In addition, the ORA proposed to use the Earnings Report contest as a
means for conforming the Transition Plan to the legislation. The PUCT hearing
examiner assigned to the Earnings Report is considering the issues related to
TNMP's calculation of excess earnings for 1998.
The ORA is the only party contesting TNMP's calculation of excess earnings.
In a letter to the hearing examiner on November 1, 1999, TNMP reported that
TNMP and ORA had not yet resolved the Earnings Report issues. On January 25,
2000, TNMP filed a Motion for Dismissal or Summary Decision, asking the PUCT to
reject ORA's contest, and approve TNMP's 1998 Earnings Report. TNMP believes
the issues relating to its calculation of excess earnings can be disposed of as
a matter of law without a factual hearing. TNMP does not expect resolution of
this matter to have a material effect on its financial condition.
Regarding the conformance of the Transition Plan to the legislation, TNMP
filed a Conformed Stipulation with the PUCT on October 6, 1999. The Conformed
Stipulation identifies all of the provisions in the Transition Plan that TNMP
believes must be changed in order for the Transition Plan to comply with the
legislation. On December 6, 1999, the PUCT issued a Declaratory Order stating
that TNMP was required "to give effect to base rate reductions reflected in"
the Transition Plan. Accordingly, TNMP reduced base rates for residential and
commercial customers by 3% and 1%, respectively, effective January 1, 2000.
Similar rate reductions will take effect January 1, 2001. As a result,
operating revenues are estimated to decrease in 2000 and 2001 by $6.7 million
and $13.9 million, respectively. The order also established that the base rate
reductions would offset the 6% rate reduction required by the legislation, as
previously described in the section "Texas--Legislation." The order is interim
in nature, and can be appealed.
Uncertainties exist as to the application of the legislation to other
provisions of the Transition Plan. Such uncertainties will not be resolved
until TNMP reports to the PUCT regarding its efforts to conform the Transition
Plan to the legislation. That report will be the subject of a PUCT review that
will occur in 2001.
Discontinuing SFAS 71. Historically, TNP's and TNMP's consolidated financial
statements reflect the application of SFAS 71, "Accounting for the Effects of
Certain Types of Regulation," which provides for recognition of the economic
effects of rate regulation. EITF 97-4, "Deregulation of the Pricing of
Electricity--Issues Related to the Application of SFAS Statements No. 71 and
101," states that application of SFAS 71 should stop "when deregulatory
legislation is passed or when a rate order (whichever is necessary to effect
the change in the jurisdiction) that contains sufficient detail for the
enterprise to reasonably determine how the transition plan will affect the
separable portion of its business whose pricing is being deregulated is
issued." With the passage of the legislation, TNMP discontinued the application
of SFAS 71 to the generation/power
F-20
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
supply portion of its Texas business during the fourth quarter of 1999. As a
direct result of discontinuing SFAS 71, and in accordance with the legislation,
TNMP has reclassified net regulatory assets (regulatory assets less
liabilities) of $19.3 million that pertain to these deregulated operations as
Recoverable Stranded Costs. TNMP believes the $19.3 million represents
verifiable stranded costs and intends to recover them from customers pursuant
to the methods discussed under "Texas--Legislation."
In conjunction with the discontinuance of SFAS 71, TNMP is required to
determine if its generating plant asset, TNP One, is impaired under SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of." Based on TNMP's undiscounted cash flow analysis over the
estimated useful life of TNP One, there is no impairment of TNP One, as defined
by SFAS 121, as of December 31, 1999. TNMP's impairment analysis includes
reasonable estimates of future market prices, capacity factors, operating
costs, the effects of competition, and many other factors over the life of TNP
One. TNMP's impairment analysis is highly dependent on these estimates. As of
December 31, 1999, the net book value of TNP One is $435 million.
Business Separation Plan. As noted above, the legislation requires utilities
to disaggregate, on or before January 1, 2002, into three distinct businesses:
generation, transmission and distribution, and retail electric provider. On
January 10, 2000, TNMP filed its Business Separation Plan with the PUCT. The
BSP details TNMP's plans for complying with the legislation, which include
creating three new affiliated companies, and establishing a timeline for
accomplishing the separation.
Unbundled Cost of Service Filing. The legislation also requires TNMP to file
a rate case that will set rates for the transmission and distribution company
that will provide regulated services once competition begins in 2002. The
filing must be made no later than March 31, 2000. The rates will be composed of
a transmission and distribution charge; a competition transition charge for
stranded cost recovery, which may include securitization; and a system benefits
charge. The CTC is designed to recover stranded costs related to TNMP's
generation assets and purchased power contracts, as determined by a PUCT-
established model. The PUCT will also use this proceeding to review and approve
the BSP.
Annual Report. The legislation requires TNMP to file a report prior to March
30, 2000 that will allow the PUCT to review TNMP's calculation of excess
earnings for the year ended December 31, 1999.
Fuel Reconciliation. At December 31, 1999, TNMP had an underrecovered
balance of fuel and the energy-related portion of purchased power costs of
$21.8 million. PUCT rules require TNMP to reconcile its fuel costs at least
every three years. TNMP expects to file a fuel reconciliation for the three-
year period ended December 31, 1999, in mid-2000. TNMP will also file a request
for a new fuel factor, which will take into account the expected cost of fuel
and purchased energy. Management believes the ultimate outcome of this fuel
reconciliation will not have a material adverse effect on TNP's or TNMP's
consolidated financial position.
New Mexico
The New Mexico Legislature opened the state's electric power market to
consumer choice with the passage of the Electric Utility Industry Restructuring
Act of 1999 (the Act) in April 1999. The Act provides for the phase-in of
retail choice beginning January 1, 2001, requires utilities to disaggregate
their regulated transmission and distribution business activities from their
generation operations, that will be subject to competition, and guarantees
recovery of at least 50% of a utility's stranded costs over a five-year period.
Prior to the passage of the Act, TNMP had been operating under Community
Choice. Community Choice did not define stranded costs, or their recovery, and
had specified May 1, 2000, for the beginning of retail choice. As a
F-21
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
result, TNMP has reduced its accrual for potential stranded costs related to
its purchased power contracts in New Mexico from $3.4 million as of December
31, 1998, to $2.1 million as of December 31, 1999. Stranded costs in New Mexico
could ultimately be in a range from zero to $6 million, depending on the market
price of purchased power at the onset of competition.
TNMP is required to file its plan for complying with the Act by June 1,
2000.
On June 8, 1999, the NMPRC entered a Final Order terminating Community
Choice. By terminating Community Choice, the NMPRC placed TNMP on the same
timetable as other New Mexico utilities with regard to retail competition and
restored the pass-through of purchased power costs to customers effective
July 1, 1999. Under Community Choice, purchased power costs were a fixed
component of base rates. Therefore, the difference between the actual amounts
recovered from customers and actual purchased power costs affected operating
income.
Community Choice provided for the filing of a rate case by TNMP on June 1,
1999. TNMP and the NMPRC Staff have reached a settlement, and have submitted
the settlement to the NMPRC for approval. The settlement calls for a decrease
in TNMP's base rates of $1.8 million, or 6%, effective October 1, 1999. TNMP
has reflected the base rate reductions in its fourth quarter revenues. TNMP
expects the NMPRC to act on the proposed settlement during the second quarter
of 2000.
Note 4. Discontinued Nonregulated Operations
Management, with approval from the Board of Directors, authorized a plan to
discontinue the construction activities of FWI in late 1997. During the third
quarter of 1998, TNP elected to discontinue all remaining operations of FWI.
The pre-tax loss on discontinued operations recognized in 1998 was $19.6
million ($12.7 million, net of taxes, or $0.96 per share). The 1998 pre-tax
loss resulted from construction delays, a shortage of skilled labor, and job
site performance problems. Due to these reasons, there were a few jobs not
completed at December 31, 1999. TNP expects the jobs to be completed during
early 2000.
The pre-tax loss on discontinued operations recognized in 1997 was $19.8
million ($12.9 million, net of taxes, or $0.98 per share). All losses incurred
by FWI, both construction and service, incurred in 1997 have been reclassified
as losses from discontinued operations.
F-22
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5. Employee Benefit Plans
Pension and Postretirement Benefits Plans
TNMP has a defined benefit pension plan covering substantially all of its
employees. Benefits are based on an employee's years of service and
compensation. TNMP's funding policy is to contribute the minimum amount
required by federal funding standards. TNMP also sponsors a health care plan
that provides postretirement medical and death benefits to retirees who
satisfied minimum age and service requirements during employment.
<TABLE>
<CAPTION>
Pension
Benefits Postretirement Benefits
---------------- ------------------------
1999 1998 1999 1998
------- ------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Change in projected benefit
obligation:
Benefit obligation at beginning
of year......................... $76,395 $76,316 $ 10,875 $ 10,651
Service cost................... 1,705 1,439 362 309
Interest cost.................. 5,010 5,055 722 736
Participant contributions...... -- -- 179 183
Plan amendments................ -- (873) -- --
Actuarial (gain) or loss,
including changes in discount
rate.......................... (7,540) 1,366 (1,468) 442
Benefits paid.................. (6,926) (6,908) (1,701) (1,446)
------- ------- ----------- -----------
Benefit obligation at end of
year............................ $68,644 $76,395 $ 8,969 $ 10,875
======= ======= =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
----------------- -----------------------
1999 1998 1999 1998
-------- ------- ----------- -----------
<S> <C> <C> <C> <C>
Change in plan assets:
Fair value of plan assets at
beginning of year.............. $ 97,714 $95,751 $ 9,936 $ 8,274
Actual return on plan assets,
net of expenses.............. 13,409 8,871 (198) 1,105
Employer contributions........ -- -- 618 1,597
Participant contributions..... -- -- 179 183
Benefits paid................. (6,926) (6,908) (1,680) (1,223)
-------- ------- ----------- -----------
Fair value of plan assets at end
of year........................ $104,197 $97,714 $ 8,855 $ 9,936
======== ======= =========== ===========
Reconciliation of funded status:
Funded status................... $ 35,553 $21,319 $ (113) $ (938)
Unrecognized actuarial gain..... (39,551) (25,620) (6,560) (6,216)
Unrecognized transition (asset)
or obligation.................. (11) (35) 4,216 4,540
Unrecognized prior service
cost........................... (1,996) (2,152) -- --
-------- ------- ----------- -----------
Prepaid (accrued) benefit
cost......................... $ (6,005) $(6,488) $ (2,457) $ (2,614)
======== ======= =========== ===========
Components of net periodic benefit
cost:
Service cost.................... $ 1,705 $ 1,439 $ 362 $ 309
Interest cost................... 5,010 5,055 722 736
Expected return on plan assets.. (7,018) (6,664) (583) (484)
Amortization of prior service
cost........................... (156) (156) -- --
Amortization of transitional
(asset) or obligation.......... (24) (24) 325 325
Recognized actuarial gain....... -- -- (344) (326)
-------- ------- ----------- -----------
Net periodic benefit cost..... $ (483) $ (350) $ 482 $ 560
======== ======= =========== ===========
Weighted-average assumptions as of
December 31:
Discount rate................... 8.00% 6.75% 8.00% 6.75%
Expected long-term rate of
return on plan assets.......... 9.50% 9.50% 5.25% 5.25%
Average rate of compensation
increase....................... 4.00% 4.00% N/A N/A
</TABLE>
F-23
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The assumed health care cost trend rate used to measure the expected cost of
benefits was 5.2% for 1999 and is assumed to trend downward slightly each year
to 4.3% for 2003 and thereafter. Assumed health care cost trend rates could
have a significant effect on the amounts reported for the health care plans. A
one-percentage-point change in assumed health care cost trend rates would have
the following effects (in thousands):
<TABLE>
<CAPTION>
One-Percentage-Point One-Percentage-Point
-------------------- --------------------
Increase Decrease
-------------------- --------------------
<S> <C> <C>
Effect on total of service and
interest cost components for
1999......................... $ 1 $ (3)
Effect on year-end 1999
postretirement benefit
obligation................... 27 (32)
</TABLE>
Incentive Plans
TNP and TNMP have several incentive compensation plans. All employees
participate in one or more of these plans. Incentive compensation is based on
meeting key financial and operational performance goals such as cash value
added, customer satisfaction, and system reliability measures. Operating
expenses for 1999, 1998, and 1997 included costs for the various cash and
equity plans of $5.3 million, $5.9 million, and $6.0 million, respectively.
Other Employee Benefits
TNMP has a 401(k) plan designed to enhance the other retirement plans
available to its employees. Employees may invest their contributions in fixed
income securities, mutual funds, or TNP common stock. TNMP's contributions are
used to purchase TNP common stock, which employees may later convert to other
investment options.
TNMP has change in control severance agreements with certain members of
management and other key personnel. The contracts provide for lump sum
compensation payments and other rights in the event of termination of
employment or other adverse treatment of such persons following a "change in
control" of TNP or TNMP. Such event is defined to include, among other things,
substantial changes in the corporate structure, ownership, or board of
directors of either entity. The Merger described in Note 2 is considered a
"change in control" event. The Merger Agreement requires that employment
contracts be accepted by four specific employees, and by at least six of a
group of 11 other employees.
An excess benefit plan has been provided for certain key personnel and
retired employees, whose benefits are restricted by federal law. The payment of
benefits under the excess benefit plan is partially funded under an insurance
policy arrangement.
F-24
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6. Income Taxes
Components of income taxes were as follows:
<TABLE>
<CAPTION>
TNP TNMP
------------------------ -------------------------
1999 1998 1997 1999 1998 1997
------- ------ ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Taxes on net operating
income:
Federal--current....... $10,161 $9,751 $12,251 $11,652 $ 6,299 $ 9,140
State--current......... 582 164 428 645 197 428
Federal--deferred...... 5,849 3,962 6,747 6,029 8,872 9,963
ITC adjustments........ 2,528 1,603 1,816 2,473 1,495 2,531
------- ------ ------- ------- ------- -------
19,120 15,480 21,242 20,799 16,863 22,062
------- ------ ------- ------- ------- -------
Taxes on other income
(loss):
Federal--current....... (2,229) (313) (534) (640) (313) (534)
Federal--deferred...... 687 760 687 687 687 687
ITC adjustments........ (324) (322) (410) (324) (322) (410)
------- ------ ------- ------- ------- -------
(1,866) 125 (257) (277) 52 (257)
------- ------ ------- ------- ------- -------
Tax benefit from
discontinued
nonregulated operations
(Note 4)................ -- (6,843) (6,660) -- -- --
------- ------ ------- ------- ------- -------
Total income taxes... $17,254 $8,762 $14,325 $20,522 $16,915 $21,805
======= ====== ======= ======= ======= =======
</TABLE>
The amounts for total income taxes differ from the amounts computed by
applying the appropriate federal income tax rate to earnings (loss) before
income taxes for the following reasons:
<TABLE>
<CAPTION>
TNP TNMP
------------------------ -------------------------
1999 1998 1997 1999 1998 1997
------- ------ ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory tax
rate..................... $16,393 $9,796 $15,252 $20,762 $17,864 $22,854
Amortization of
accumulated deferred
ITC.................... (1,632) (1,525) (1,403) (1,632) (1,525) (1,403)
Amortization of excess
deferred taxes......... (141) (141) (141) (141) (141) (141)
State income taxes...... 1,044 197 428 1,107 197 428
ITC related to 1995
PUCT disallowance....... (324) (322) (410) (324) (322) (410)
Other, net.............. 1,914 757 599 750 842 477
------- ------ ------- ------- ------- -------
Actual income taxes... $17,254 $8,762 $14,325 $20,522 $16,915 $21,805
======= ====== ======= ======= ======= =======
</TABLE>
F-25
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that gave rise to significant
portions of net current and net noncurrent deferred income taxes as of December
31, 1999, and 1998, are presented below.
<TABLE>
<CAPTION>
TNP TNMP
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Current deferred income taxes:
Deferred tax assets:
Unbilled revenues.............. $ 673 $ 91 $ 673 $ 91
Other.......................... 2,273 2,999 1,382 115
--------- --------- --------- ---------
2,946 3,090 2,055 206
Deferred tax liability:
Recoverable stranded costs..... (2,648) -- (2,648) --
Deferred purchased power and
fuel costs.................... (7,841) (855) (7,841) (855)
--------- --------- --------- ---------
Current deferred income
taxes, net.................. $ (7,543) $ 2,235 $ (8,434) $ (649)
========= ========= ========= =========
Noncurrent deferred income taxes:
Deferred tax assets:
Minimum tax credit
carryforwards................. $ 29,624 $ 30,241 $ 33,365 $ 34,437
ITC carryforwards.............. 1,482 5,018 -- 3,206
Regulatory related items....... 13,493 12,731 13,493 12,731
Accrued employee benefit
costs......................... 3,109 3,330 3,109 3,330
Excess earnings................ 7,825 -- 7,825 --
Other.......................... 1,384 (890) 1,156 694
--------- --------- --------- ---------
56,917 50,430 58,948 54,398
--------- --------- --------- ---------
Deferred tax liabilities:
Utility plant, principally due
to depreciation and basis
differences................... (135,973) (135,870) (135,973) (135,870)
Deferred charges............... (12,257) (4,611) (12,257) (4,611)
Recoverable stranded costs
(noncurrent).................. (4,455) -- (4,455) --
Regulatory related items....... (1,428) (7,295) (1,428) (7,295)
--------- --------- --------- ---------
(154,113) (147,776) (154,113) (147,776)
--------- --------- --------- ---------
Noncurrent deferred income
taxes, net.................. $ (97,196) $ (97,346) $ (95,165) $ (93,378)
========= ========= ========= =========
</TABLE>
Federal tax carryforwards as of December 31, 1999, were as follows:
<TABLE>
<CAPTION>
TNP TNMP
------- -------
(In thousands)
<S> <C> <C>
Minimum tax credits
Amount.................................................. $29,624 $33,365
Expiration period....................................... None None
Investment tax credit
Amount.................................................. $ 1,482 $ --
Expiration period....................................... 2005
</TABLE>
F-26
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7. Long-Term Debt
First Mortgage Bonds
FMBs issued under the Bond Indenture are secured by substantially all
utility plant owned directly by TNMP. The Bond Indenture restricts cash
dividend payments on TNMP common stock.
The maximum amount of any additional FMBs that TNMP can issue is determined
by both a collateral requirement and by an interest coverage requirement. The
collateral requirement is a function of property additions, previously redeemed
FMBs, and cash deposited with the trustee. As of December 31, 1999, the
collateral requirement was more restrictive than the interest coverage
requirement, and TNMP could therefore issue up to $96 million of additional
FMBs.
Secured Debentures
TNMP's Series A, 10.75% secured debentures ($140 million) are secured with a
first lien on a portion of Unit 1, and by second liens on substantially all
utility plant in Texas owned directly by TNMP. The secured debentures also
contain restrictions on dividends and asset dispositions.
Senior Notes
In January 1999, TNMP issued $175 million of 6.25% Senior Notes due in 2009
and used the proceeds to retire $130 million of its 12.5% Secured Debentures
and reduce outstanding borrowings under the credit facilities. The Senior Notes
were issued under a new indenture that allows the issuance of unsecured debt.
The new notes are initially secured by FMBs. However, when TNMP repays its
existing FMBs and secured debentures, the collateral securing the Senior Notes
can be released. The Senior Notes would become unsecured, but will remain the
senior debt obligations of TNMP.
Revolving Credit Facilities
The following table summarizes the terms of TNP's and TNMP's revolving
credit facilities at December 31,1999:
<TABLE>
<CAPTION>
1999 Average
Total Amount Commitment Interest
Commitment Outstanding Expires Rate Security
---------- ----------- -------------- ------------ ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
1998 TNP Facility....... $50,000 $ -- November 2003 5.49% Unsecured
1996 TNMP Facility...... 80,000 26,000 September 2001 6.11% Unsecured
</TABLE>
The composite average borrowing rates under TNMP's credit facilities were
6.11% and 6.99% for 1999 and 1998, respectively.
TNMP has a $50 million interest rate collar to mitigate exposure to variable
interest rates. The collar sets floor and ceiling rates on the 90-day LIBOR
rate at 5.25% and 7.50%, respectively. The term of the interest rate collar is
September 1997 through September 2000. TNMP also has a $100 million interest
rate collar to mitigate the risk of refinancing the debt that matures or is
callable in 2000. The collar sets floor and ceiling rates on the 10-year U. S.
Treasury bond at 4.91% and 6.25%, respectively. The collar expires, and is
exercisable only on, September 15, 2000.
F-27
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
TNMP believes that cash flow from operations, borrowings in the capital
markets, and periodic borrowings under the credit facilities will be sufficient
to retire or refinance $100 million of its 9.25%, Series U, FMBs, and meet its
other capital requirements through the end of 2000.
Under specified conditions, TNMP's credit facilities restrict the payment of
cash dividends on TNMP common stock. The credit facilities also prohibit the
sale, lease, transfer, or other disposition of assets other than in the
ordinary course of business.
Maturities
As of December 31, 1999, scheduled maturities of long-term debt for the five
years following 1999 are as follows:
<TABLE>
<CAPTION>
Credit Secured
Year FMBs Facilities Debentures Total
---- -------- ---------- ---------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
2000 $100,000 $ -- $ -- $100,000
2001 -- 26,000 -- 26,000
2002 -- -- -- --
2003 -- -- 140,000 140,000
2004 -- -- -- --
</TABLE>
In January 1999, TNMP retired upon their maturity, $130 million of 12.5%
secured debentures, and issued $175 million of 6.25% Senior Notes due in 2009.
TNMP's Series A, 10.75% Secured Debentures due 2003 of $140 million are
callable at par on September 15, 2000.
Note 8. Capital Stock and Dividends
TNP
In November 1998, TNP increased its quarterly dividend from $0.27 to $0.29
per share.
TNMP
The 1996 TNMP Credit Facility restricts the payment of cash dividends by
TNMP. As of December 31, 1999, $27.7 million of unrestricted retained earnings
were available for dividends.
Note 9. Segment and Related Information
During 1998, TNP adopted FASB Statement No. 131, "Disclosures about Segments
of an Enterprise and Related Information". In 1998, TNP reported two segments,
TNMP, which provides regulated electric service in Texas and New Mexico, and
FWI, which before operations were discontinued, provided integrated mechanical,
electrical, plumbing and other maintenance and repair services to commercial
customers in Texas metropolitan areas.
The operations of TNMP have been separated into two segments, Texas and New
Mexico. TNP manages the segments separately to respond to the differing
operational and regulatory climates in the two states.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Intersegment revenues are not
material.
F-28
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following tables present information about profits, losses and assets of
TNP's reportable segments (in thousands). In the tables below, "Total assets"
for Texas and New Mexico includes only net utility plant. All other assets are
included in All Other and Eliminations.
<TABLE>
<CAPTION>
Twelve Months Ended
December 31,
--------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Texas
-----
Operating revenues.................................. $492,535 $500,556 $499,978
Depreciation and amortization....................... 35,754 37,370 34,416
Charge for recovery of stranded plant............... 23,376 -- --
Income taxes........................................ 17,719 13,938 19,323
Interest revenue.................................... 601 829 1,315
Total interest charges.............................. 39,936 50,253 53,247
Income from continuing operations................... 34,819 29,008 38,323
Loss from discontinued nonregulated operations...... -- -- --
Net income.......................................... 34,819 29,008 38,323
Total assets........................................ 821,160 840,258 846,482
Property additions.................................. 36,710 33,774 25,193
New Mexico
Operating revenues.................................. $ 83,558 $ 85,337 $ 78,556
Depreciation and amortization....................... 5,368 4,791 4,566
Charge for recovery of stranded plant............... -- -- --
Income taxes........................................ 3,080 2,925 2,739
Interest revenue.................................... 106 115 182
Total interest charges.............................. 3,188 3,473 3,665
Income from continuing operations................... 4,624 5,313 5,595
Loss from discontinued nonregulated operations...... -- -- --
Net income.......................................... 4,624 5,313 5,595
Total assets........................................ 86,541 82,574 76,768
Property additions.................................. 4,202 3,732 2,749
</TABLE>
F-29
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Twelve Months Ended
December 31,
-----------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
All Other and
Eliminations
-------------
Operating revenues...... $ 57 $ 48 $ --
Depreciation and
amortization........... -- 2 2
Charge for recovery of
stranded plant......... -- -- --
Income taxes............ (1,679) (1,383) (820)
Interest revenue........ 253 391 326
Total interest charges.. 619 159 --
Income (loss) from
continuing operations.. (9,276) (2,187) (1,357)
Loss from discontinued
nonregulated
operations............. -- 12,710 12,883
Net income (loss)....... (9,276) (14,897) (14,240)
Total assets............ 93,498 70,933 68,676
Property additions...... 132 1,048 2,067
Consolidated
Operating revenues...... $ 576,150 $585,941 $578,534
Depreciation and
amortization........... 41,122 42,163 38,984
Charge for recovery of
stranded plant......... 23,376 -- --
Income taxes............ 19,120 15,480 21,242
Interest revenue........ 960 1,335 1,823
Total interest charges.. 43,743 53,885 56,912
Income (loss) from
continuing operations.. 30,167 32,134 42,561
Loss from discontinued
nonregulated
operations............. -- 12,710 12,883
Net income.............. 30,167 19,424 29,678
Total assets............ 1,001,199 993,765 991,926
Property additions...... 41,044 38,554 30,009
</TABLE>
Note 10. Commitments and Contingencies
Fuel Supply Agreement
TNMP has an agreement with the Walnut Creek Mining Company to purchase
lignite for TNP One through at least 2017. Depending on the output of TNP one,
the contract could supply the plant for several years beyond 2017. Phillips
Coal Company and Peter Kiewit Sons' jointly own Walnut Creek Mining Company,
Inc.
Wholesale Purchased Power Agreements
TNMP purchases approximately 80% of its electricity requirements from
various wholesale suppliers. These contracts are scheduled to expire in various
years through 2005.
In 1999, Clear Lake was TNMP's largest wholesale supplier of electricity. In
1999, Clear Lake supplied approximately 23% of TNMP's Texas capacity and 16% of
its Texas energy requirements.
F-30
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1999, TNMP had various outstanding commitments for take or
pay agreements, including the fuel supply agreement discussed above. Detailed
below are the fixed and determinable portion of the obligations (amounts in
millions):
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004
------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Purchased power agreements...................... $ 76.1 $66.6 $36.7 $22.7 $11.5
Fuel supply agreements.......................... 32.4 31.6 30.7 31.5 32.3
------ ----- ----- ----- -----
Total....................................... $108.5 $98.2 $67.4 $54.2 $43.8
====== ===== ===== ===== =====
</TABLE>
Legal Actions
Clear Lake. TNMP and Clear Lake Limited Partnership ("Clear Lake") agreed in
March 1999 to settle the lawsuit styled Clear Lake Cogeneration Limited
Partnership vs. Texas-New Mexico Power Company, pending in the 234th District
Court of Harris County, Texas, and the parallel proceeding pending before the
PUCT. The PUCT approved the settlement on July 15, 1999. These proceedings
arose out of disagreements between TNMP and Clear Lake over the interpretation
of certain terms of an agreement under which TNMP purchases cogenerated
electricity from Clear Lake.
Under the settlement, TNMP, Clear Lake, and Calpine Power Services Company
(an affiliate of Clear Lake) have entered into a revised purchased power
contract effective as of October 1, 1998, governing energy and capacity
transactions between the parties. In addition, TNMP paid Clear Lake $8 million,
which TNMP expects to recover through customer rates.
Phillips Petroleum. TNMP is the defendant in a suit styled Phillips
Petroleum Company vs. Texas-New Mexico Power Company, filed on October 1, 1997
and pending in the 149th State District Court of Brazoria County, Texas. The
suit, which is in the discovery stage, is based on events surrounding an
interruption of electricity to a petroleum refinery and related facilities that
occurred in May 1997. Phillips Petroleum Company is seeking the recovery of
damages arising from the interruption and in May 1999 demanded payment in the
amount of $47.1 million. TNMP's tariff approved by the PUCT contains
limitations against recovery of the great majority of Phillip's alleged
damages. The Texas Supreme Court, in another matter, has recently upheld the
enforceability of such tariff limitations in litigation of this type; TNMP
believes the ruling will operate to substantially limit any recovery by
Phillips to the cost of its electrical equipment, in the event that any are
awarded in this matter. Discovery has not sufficiently progressed to quantify
any damages to Phillips' electrical equipment; however, Phillips has previously
reported to the SEC that it incurred costs of approximately $2.0 million in
this interruption. In May 1999, TNMP filed a Third Party Petition naming Sweeny
Cogeneration Limited Partnership, the operator of cogeneration and related
facilities at the Phillips refinery, as a defendant. TNMP has previously
charged to earnings the deductible amount of its insurance coverage, $500,000.
Power Resource Group. TNMP is a defendant in a suit styled Power Resource
Group, Inc. v. Public Utility Commission of Texas and Texas-New Mexico Power
Company, pending in the 345th District Court of Travis County, Texas. This
lawsuit, which was originally filed on May 21, 1999, appeals the PUCT's
dismissal of a regulatory case that Power Resource Group, Inc. had filed
against TNMP. PR Group is a developer of electric generating plants that are
intended to be qualifying cogeneration facilities. This lawsuit and the
regulatory case it appeals both stem from discontinued negotiations for power
supply. PR Group alleged that TNMP was required to buy power to be generated
from an as-yet-unbuilt cogeneration facility. TNMP filed its original answer
with the court on June 28, 1999.
F-31
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In an amended petition filed January 13, 2000, PR Group asserts a claim of
damages of at least $158,000,000. It bases its claim on the assertion that it
was damaged when TNMP refused to execute an agreement after the aforementioned
discontinued negotiations, that TNMP profited significantly from PR Group's
work, that TNMP is in error when it relies on a PUCT order dismissing PR
Group's petition before the PUCT on substantially the same facts, and that TNMP
misrepresented that it would enter into a contract with PR Group to purchase
energy and capacity at rates equal to or below TNMP's avoided costs. TNMP
believes that PR Group's claims are without merit and intends to contest this
claim vigorously.
TNMP is involved in various claims and other legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
dispositions of these matters, as well as those described above, will not have
a material adverse effect on TNMP's and TNP's consolidated financial position
or results of operations.
F-32
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
<TABLE>
<CAPTION>
Predecessor
------------------
Three Months Ended Three Months Ended
June 30, 2000 June 30, 1999
------------------ ------------------
(In thousands)
<S> <C> <C>
OPERATING REVENUES....................... $155,931 $144,027
-------- --------
OPERATING EXPENSES:
Purchased power and fuel............... 81,314 66,982
Other operating and maintenance........ 25,703 28,608
Depreciation and amortization.......... 12,975 9,513
Charge for recovery of stranded plant.. 3,396 1,903
Taxes other than income taxes.......... 9,142 8,285
Income taxes........................... 1,395 6,561
-------- --------
Total operating expenses............. 133,925 121,852
-------- --------
NET OPERATING INCOME..................... 22,006 22,175
-------- --------
OTHER INCOME:
Other income and deductions, net....... 328 777
Income taxes........................... (76) 180
-------- --------
Other income, net of taxes........... 252 957
-------- --------
INCOME BEFORE INTEREST CHARGES........... 22,258 23,132
-------- --------
INTEREST CHARGES:
Interest on long-term debt............. 19,617 9,688
Other interest and amortization of
debt-related costs.................... 2,109 1,041
-------- --------
Total interest charges............... 21,726 10,729
-------- --------
NET INCOME............................... 532 12,403
Dividends on preferred stock and other... 3,314 (94)
-------- --------
INCOME (LOSS) APPLICABLE TO COMMON
STOCK................................... $ (2,782) $ 12,497
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
<TABLE>
<CAPTION>
Predecessor
-----------------------------------
Three Months Ended Three Months Ended Six Months Ended
June 30, 2000 March 31, 2000 June 30, 1999
------------------ ------------------ ----------------
(In thousands)
<S> <C> <C> <C>
OPERATING REVENUES...... $155,931 $124,526 $262,153
-------- -------- --------
OPERATING EXPENSES:
Purchased power and
fuel.................. 81,314 59,550 124,354
Other operating and
maintenance........... 25,703 29,398 52,432
Depreciation and
amortization.......... 12,975 10,230 19,487
Charge for recovery of
stranded plant........ 3,396 1,629 5,653
Taxes other than
income taxes.......... 9,142 7,941 16,285
Income taxes........... 1,395 1,745 7,274
-------- -------- --------
Total operating
expenses............ 133,925 110,493 225,485
-------- -------- --------
NET OPERATING INCOME.... 22,006 14,033 36,668
-------- -------- --------
OTHER INCOME:
Other income and
deductions, net....... 328 465 939
Income taxes........... (76) (131) 298
-------- -------- --------
Other income, net of
taxes............... 252 334 1,237
-------- -------- --------
INCOME BEFORE INTEREST
CHARGES................ 22,258 14,367 37,905
-------- -------- --------
INTEREST CHARGES:
Interest on long-term
debt.................. 19,617 9,626 19,912
Other interest and
amortization of debt-
related costs......... 2,109 888 2,457
-------- -------- --------
Total interest
charges............. 21,726 10,514 22,369
-------- -------- --------
NET INCOME.............. 532 3,853 15,536
Dividends on preferred
stock and other....... 3,314 5 (58)
-------- -------- --------
INCOME (LOSS) APPLICABLE
TO COMMON STOCK........ $ (2,782) $ 3,848 $ 15,594
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-34
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Predecessor
-------------------------
Three Three Six
Months Ended Months Ended Months Ended
June 30, March 31, June 30,
2000 2000 1999
------------ ------------ ------------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from sales to custom-
ers................................... $ 139,920 $ 102,091 $ 235,599
Purchased power and fuel costs paid.... (69,107) (63,613) (125,301)
Cash paid for payroll and to other
suppliers............................. (24,686) (24,234) (51,345)
Interest paid, net of amounts capital-
ized.................................. (8,954) (14,690) (16,507)
Income taxes (paid) refunded........... (801) 5,500 3,391
Other taxes paid....................... (6,083) (17,089) (22,886)
Other operating cash receipts and pay-
ments, net............................ (200) 147 (7)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES............................. 30,089 (11,888) 22,944
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Merger costs, net of cash acquired..... (604,968) -- --
Additions to utility plant............. (10,588) (9,200) (21,327)
Withdrawals from escrow account........ -- -- 1,902
Proceeds from other investments........ 702 -- 100
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES... (614,854) (9,200) (19,325)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on preferred and common
stocks................................ (1,826) (3,926) (7,817)
Borrowings from (repayments to) re-
volving credit facilities--net........ (13,000) 21,000 (43,500)
Issuances:
TNP senior subordinated notes........ 275,000 -- --
TNP term loan........................ 160,000 -- --
TNMP senior notes, net of discount... -- -- 174,164
TNMP backstop facility............... 203,000 -- --
TNP preferred stock, net of dis-
count............................... 99,000 -- --
TNP common stock..................... 100,000 1,202 3,956
Financing costs...................... (21,596) -- (1,577)
Redemptions:
TNMP secured debentures.............. (112,776) -- (130,000)
TNMP first mortgage bonds............ (90,506) -- --
TNP term loan........................ (400) -- --
TNMP preferred stock, net of gain.... -- (117) (1,100)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES............................. 596,896 18,159 (5,874)
--------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVA-
LENTS.................................. 12,131 (2,929) (2,255)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD.............................. -- 14,456 12,216
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PE-
RIOD................................... $ 12,131 $ 11,527 $ 9,961
========= ========= =========
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY
(USED IN) OPERATING ACTIVITIES:
Net income............................. $ 532 $ 3,853 $ 15,536
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization........ 12,975 10,230 19,487
Charge for recovery of stranded
plant............................... 3,396 1,629 5,653
Purchased power settlement adjust-
ment................................ -- (2,425) --
Amortization of debt-related costs
and other deferred charges.......... 2,129 957 2,370
Allowance for funds used during con-
struction........................... (96) (82) (382)
Deferred income taxes................ 551 2,541 (1,896)
Investment tax credits............... (400) (401) 3,599
Deferred purchased power and fuel
costs............................... (7,280) (2,535) (4,830)
Cash flows impacted by changes in cur-
rent assets and liabilities:
Accounts payable..................... 11,481 (2,740) (1,862)
Accrued interest..................... 10,787 (4,990) 3,648
Accrued taxes........................ 4,304 (3,825) 856
Reserve for customer refund.......... 639 838 (10,725)
Changes in other current assets and
liabilities......................... (6,511) (15,320) (8,921)
Other, net.............................. (2,418) 382 411
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES............................. $ 30,089 $ (11,888) $ 22,944
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-35
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Predecessor
------------
June 30, 2000 December 31,
(Unaudited) 1999
------------- ------------
(In thousands)
<S> <C> <C>
ASSETS
UTILITY PLANT:
Electric plant..................................... $ 645,499 $1,288,104
Construction work in progress...................... 4,866 2,501
---------- ----------
Total.......................................... 650,365 1,290,605
Less accumulated depreciation...................... 7,879 382,627
---------- ----------
Net utility plant.............................. 642,486 907,978
---------- ----------
OTHER PROPERTY AND INVESTMENTS, at cost............. 3,636 4,243
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents.......................... 12,131 14,456
Accounts receivable................................ 12,675 8,384
Inventories, at lower of average cost or market:
Fuel............................................. 1,123 575
Materials and supplies........................... 4,001 3,834
Other current assets............................... 2,177 939
---------- ----------
Total current assets........................... 32,107 28,188
---------- ----------
LONG-TERM AND OTHER ASSETS:
Goodwill........................................... 285,549 --
Recoverable stranded costs......................... 281,074 19,256
Deferred purchased power and fuel costs............ 31,612 21,797
Deferred charges................................... 28,912 19,737
---------- ----------
Total long-term and other assets............... 627,147 60,790
---------- ----------
$1,305,376 $1,001,199
========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common shareholders' equity:
Common stock, no par value per share--Authorized
1,000,000 and
50,000,000 shares, issued 100 and 13,416,556
shares.......................................... $ 100,000 $ 196,685
Other paid-in-capital............................ (3,245) --
Retained earnings (accumulated deficit).......... (2,782) 130,425
---------- ----------
Total common shareholders' equity.............. 93,973 327,110
Redeemable cumulative preferred stock.............. 98,269 1,664
Long-term debt, less current maturities............ 634,509 340,244
---------- ----------
Total capitalization........................... 826,751 669,018
---------- ----------
CURRENT LIABILITIES:
Current maturities of long-term debt............... 248,094 100,000
Accounts payable................................... 29,041 20,300
Accrued interest................................... 14,217 8,420
Accrued taxes...................................... 13,297 12,818
Customers' deposits................................ 4,214 3,786
Accumulated deferred income taxes.................. 10,315 7,543
Reserve for customer refund........................ 2,159 682
Other current liabilities.......................... 13,665 29,720
---------- ----------
Total current liabilities...................... 335,002 183,269
---------- ----------
LONG-TERM AND OTHER LIABILITIES:
Regulatory tax liabilities......................... 6,460 6,633
Accumulated deferred income taxes.................. 97,728 97,196
Accumulated deferred investment tax credits........ 23,177 23,978
Deferred credits................................... 16,258 21,105
---------- ----------
Total long-term and other liabilities.......... 143,623 148,912
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 6)
---------- ----------
$1,305,376 $1,001,199
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-36
<PAGE>
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of TNP Enterprises, Inc.)
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months Ended
Ended June 30, June 30,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES..................... $155,918 $144,014 $280,430 $262,125
-------- -------- -------- --------
OPERATING EXPENSES:
Purchased power and fuel............. 81,314 66,982 140,864 124,354
Other operating and maintenance...... 24,093 26,321 47,699 49,344
Depreciation of utility plant........ 10,281 9,513 20,512 19,487
Charge for recovery of stranded
plant............................... 3,396 1,903 5,025 5,653
Taxes other than income taxes........ 8,907 8,172 16,729 16,052
Income taxes......................... 5,787 7,540 9,414 8,584
-------- -------- -------- --------
Total operating expenses........... 133,778 120,431 240,243 223,474
-------- -------- -------- --------
NET OPERATING INCOME................... 22,140 23,583 40,187 38,651
-------- -------- -------- --------
OTHER INCOME:
Other income and deductions, net..... 198 1,026 528 1,100
Income taxes......................... (76) 90 (207) 232
-------- -------- -------- --------
Other income, net of taxes......... 122 1,116 321 1,332
-------- -------- -------- --------
INCOME BEFORE INTEREST CHARGES......... 22,262 24,699 40,508 39,983
-------- -------- -------- --------
INTEREST CHARGES:
Interest on long-term debt........... 9,333 9,462 18,927 19,516
Other interest and amortization of
debt-related costs.................. 1,726 1,041 2,615 2,457
-------- -------- -------- --------
Total interest charges............. 11,059 10,503 21,542 21,973
-------- -------- -------- --------
NET INCOME............................. 11,203 14,196 18,966 18,010
Dividends on preferred stock and
other................................. 18 (94) 23 (58)
-------- -------- -------- --------
INCOME APPLICABLE TO COMMON STOCK...... $ 11,185 $ 14,290 $ 18,943 $ 18,068
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-37
<PAGE>
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of TNP Enterprises, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
--------------------
2000 1999
--------- ---------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from sales to customers................... $ 241,932 $ 233,573
Purchased power and fuel costs paid..................... (132,720) (125,301)
Cash paid for payroll and to other suppliers............ (41,074) (41,398)
Interest paid, net of amounts capitalized............... (20,668) (16,166)
Income taxes (paid) refunded............................ (50) 3,391
Other taxes paid........................................ (22,731) (22,409)
Other operating cash receipts and payments, net......... (319) (36)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 24,370 31,654
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant.............................. (19,778) (21,050)
Withdrawal from escrow account.......................... -- 1,902
Proceeds from other investments......................... 102 --
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES.................. (19,676) (19,148)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on preferred and common stocks........... (7,536) (61)
Borrowings from (repayments to) revolving credit
facilities--net........................................ 8,000 (54,000)
Issuances:
Senior notes, net of discount......................... -- 174,164
Backstop facility..................................... 203,000 --
Deferred expenses associated with financings............ (3,048) (1,577)
Redemptions:............................................
Secured debentures.................................... (112,776) (130,000)
First mortgage bonds.................................. (90,506) --
Preferred stock, net of gain.......................... (117) (1,100)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES.................... (2,983) (12,574)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS.................. 1,711 (68)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......... 4,002 7,977
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............... $ 5,713 $ 7,909
========= =========
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net income.............................................. $ 18,966 $ 18,010
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of utility plant......................... 20,512 19,487
Charge for recovery of stranded plant................. 5,025 5,653
Purchased power settlement adjustment................. (2,425) --
Amortization of debt-related costs and other deferred
charges.............................................. 2,703 3,756
Allowance for funds used during construction.......... (178) (382)
Deferred income taxes................................. 5,494 (317)
Investment tax credits................................ (801) 3,543
Deferred purchased power and fuel costs............... (9,815) (4,830)
Cash flows impacted by changes in current assets and
liabilities:
Accounts payable...................................... 8,789 (1,258)
Accrued interest...................................... (1,543) 3,593
Accrued taxes......................................... (425) 2,707
Reserve for customer refund........................... 1,477 (10,725)
Changes in other current assets and liabilities....... (21,882) (4,822)
Other, net............................................... (1,527) (2,761)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES................ $ 24,370 $ 31,654
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-38
<PAGE>
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of TNP Enterprises, Inc.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 2000 December 31,
(Unaudited) 1999
------------- ------------
(In thousands)
<S> <C> <C>
ASSETS
UTILITY PLANT:
Electric plant..................................... $1,302,234 $1,288,080
Construction work in progress...................... 4,866 2,501
---------- ----------
Total.......................................... 1,307,100 1,290,581
Less accumulated depreciation...................... 399,054 382,627
---------- ----------
Net utility plant.............................. 908,046 907,954
---------- ----------
OTHER PROPERTY AND INVESTMENTS, at cost............. 206 213
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents.......................... 5,713 4,002
Accounts receivable................................ 10,689 6,347
Inventories, at lower of average cost or market:
Fuel............................................. 1,123 575
Materials and supplies........................... 4,001 3,834
Other current assets............................... 1,825 660
---------- ----------
Total current assets........................... 23,351 15,418
---------- ----------
LONG-TERM AND OTHER ASSETS:
Recoverable stranded costs......................... 15,481 19,256
Deferred purchased power and fuel costs............ 31,612 21,797
Deferred charges................................... 17,645 19,757
---------- ----------
Total long-term and other assets............... 64,738 60,810
---------- ----------
$ 996,341 $ 984,395
========== ==========
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
Other paid-in-capital............................ 222,149 222,149
Retained earnings................................ 101,746 90,302
---------- ----------
Total common shareholder's equity.............. 324,002 312,558
Redeemable cumulative preferred stock............ 1,534 1,664
Long-term debt, less current maturities.......... 201,509 340,244
---------- ----------
Total capitalization........................... 527,045 654,466
---------- ----------
CURRENT LIABILITIES:
Current maturities of long-term debt............... 246,494 100,000
Accounts payable................................... 28,863 20,074
Accrued interest................................... 6,845 8,388
Accrued taxes...................................... 13,764 14,189
Customers' deposits................................ 4,214 3,786
Accumulated deferred income taxes.................. 11,166 8,434
Reserve for customer refund........................ 2,159 682
Other current liabilities.......................... 11,927 28,015
---------- ----------
Total current liabilities...................... 325,432 183,568
---------- ----------
LONG-TERM AND OTHER LIABILITIES:
Regulatory tax liabilities......................... 6,460 6,633
Accumulated deferred income taxes.................. 98,100 95,165
Accumulated deferred investment tax credits........ 23,177 23,978
Deferred credits................................... 16,127 20,585
---------- ----------
Total long-term and other liabilities.......... 143,864 146,361
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 6)
---------- ----------
$ 996,341 $ 984,395
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-39
<PAGE>
TNP ENTERPRISES INC. AND SUBSIDIARIES (TNP)
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES (TNMP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Interim Financial Statements
The interim consolidated financial statements of TNP and subsidiaries, and
TNMP and subsidiaries, are unaudited, and contain all adjustments (consisting
primarily of normal recurring accruals) necessary for a fair statement of the
results for the interim periods presented. Results for interim periods are not
necessarily indicative of results to be expected for a full year or for
previously reported periods due in part to seasonal revenue fluctuations. It is
suggested that these consolidated financial statements be read in conjunction
with the audited consolidated financial statements and notes thereto included
in TNP's and TNMP's 1999 Combined Annual Report on Form 10-K.
Prior period statements have been reclassified in order to be consistent
with current period presentation. The reclassification had no effect on net
income or common shareholder's equity.
Note 2. Acquisition and Basis of Accounting
On April 7, 2000, pursuant to an Agreement and Plan of Merger dated May 24,
1999, between TNP, ST Acquisition Corp. (ST Corp.) and SW Acquisition, L.P. (SW
Acquisition), the parent of ST Corp., ST Corp. merged with and into TNP, the
parent of TNMP (the Merger). TNP is the surviving corporation in the Merger. SW
Acquisition now holds all outstanding common stock of TNP. Upon closing, each
outstanding share of TNP's common stock that was outstanding at the effective
time of the merger was automatically converted into the right to receive $44.00
in cash. Prior to the merger, TNP common stock was traded on the New York Stock
Exchange. As a result of the Merger, TNP is no longer publicly held.
SW Acquisition and ST Corp. funded the merger using a combination of debt
and equity financing. SW Acquisition contributed $100 million in equity funding
to ST Corp. ST Corp. secured financing for the merger through sales of debt and
equity securities as discussed in Note 4.
The Merger was accounted for under the purchase method of accounting, as
prescribed in Accounting Principles Board Opinion No. 16, "Business
Combinations" (APB 16). Accordingly, TNP allocated the purchase price of
approximately $591.6 million to the acquired assets and assumed liabilities
based on their fair values and recorded the unallocated amount of approximately
$288.2 million as goodwill. For convenience, purchase accounting has been
applied as of April 1, 2000. The consolidated financial statements of TNP for
the periods ended before April 1, 2000 were prepared using TNP's historical
basis of accounting and are designated as "predecessor." Predecessor TNP's
Consolidated Statement of Income (Loss) for the three months ended March 31,
2000 includes a net-of-tax charge of approximately $3.4 million for pre-merger
severance and retirement benefits recorded between April 1, 2000 and April 7,
2000. The comparability of the financial position and operating results of the
predecessor and the periods subsequent to the merger are affected by the
purchase accounting adjustments including the revaluation of TNP One (discussed
hereinafter) and amortization of goodwill over a period of twenty-five years.
If the Merger had occurred at the beginning of the six-month periods ended
June 30, 2000 and 1999, the pro forma loss applicable to common stock would
have been approximately $13.4 million and $11.4 million, respectively. However,
these results are not necessarily indicative of the results which would have
been obtained had the Merger actually taken place on the dates indicated.
Amounts shown in the consolidated financial statements of TNMP continue to
present the financial position and results of operations based on historical
cost.
The assets of TNP, with the exception of TNP One, its sole generating plant,
are accounted for under the provisions of Statement of Financial Accounting
Standards No. 71 (SFAS 71), "Accounting for the Effects of Certain Types of
Regulation." Based on the regulated nature of the business in which these
assets are employed, the historical cost of these assets is equal to their fair
value.
F-40
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES (TNP)
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES (TNMP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As discussed in TNP's 1999 Annual Report on Form 10-K, TNP One is no longer
accounted for under the provisions of SFAS 71. TNP, with the assistance of an
independent third party, has preliminarily estimated the fair value of TNP One
to be approximately $166.3 million. The difference between the fair value of
TNP One and its carrying amount is recoverable from TNMP's transmission and
distribution customers under the provisions of the Texas Senate Bill 7, which
established retail competition for generation operations. Accordingly, TNP has
recorded a regulatory asset for recoverable stranded costs associated with TNP
One of approximately $265.6 million.
The estimate of TNP One's fair value is dependent on a number of
assumptions, including the future price of energy, and the future supply and
demand for electricity. The amounts discussed above are the result of the
initial assessment of the fair values of TNP's assets and liabilities. The
process of determining the fair values of TNP's assets and liabilities
continues, and the final results will not be completed until certain
information about pre-acquisition contingencies is fully assessed. The most
significant items to be finalized include the appropriate value to assign to
TNP One and the appropriate amount of regulatory assets to record for stranded
cost recovery allowed under Texas Senate Bill 7.
Note 3. Regulatory Matters
During 1999, legislation was passed in both Texas and New Mexico that
establishes retail competition for generation operations. Retail competition is
scheduled to begin in both New Mexico and Texas on January 1, 2002. The
legislation in both states contains provisions that affect TNMP's operations,
as discussed below.
Texas
Excess Earnings. As discussed in TNMP's 1999 Annual Report on Form 10-K,
TNMP has operated since 1998 with an earnings cap that provided for excess
earnings to be used, in part, to recover stranded costs. During 1998, TNMP's
Transition Plan directed the method for sharing of excess earnings. In 1999,
legislation was passed in Texas, which also provides for stranded cost recovery
through use of earnings in excess of an allowed rate of return.
1998 Excess Earnings. In its original 1998 earnings report filing, TNMP
reported that it had not earned in excess of the 11.25% return on equity
established in the Transition Plan. On May 3, 2000, the Public Utility
Commission of Texas (PUCT) issued a final order resolving two issues raised by
the PUCT's Office of Regulatory Affairs on August 16, 1999. The PUCT held in
favor of TNMP that the effects of a 1999 refinancing should not be
retroactively applied to 1998, but should be applied starting with the 1999
earnings report. However, the PUCT ordered TNMP to defer a $4.8 million
purchased power dispute payment it made in 1998, and to amortize it over a
four-year period, beginning in 1998 and ending in 2001. Accordingly, in March
2000 TNMP recorded a regulatory asset of $2.4 million, the unamortized balance
of the $4.8 million payment and a corresponding reduction to purchased power
expense.
Based on the adjustment discussed above, TNMP earned $1.2 million more than
the earnings cap for 1998. In accordance with the Transition Plan, the excess
earnings will be shared equally between customer refunds and stranded cost
recovery.
1999 Excess Earnings. On March 30, 2000, TNMP filed its Annual Report
pursuant to (S)39.257 of the Public Utility Regulatory Act. The Annual Report
details TNMP's calculation of excess earnings under the provisions of the
legislation passed in 1999. The Annual Report showed that TNMP earned $22.0
million in excess of the 10.53% return on rate base established in the
legislation. That amount is $1.4 million lower than the $23.4 million TNMP had
accrued for excess earnings as of December 31, 1999. The difference is
attributable to the amortization of the 1998 purchased power settlement
described above.
F-41
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES (TNP)
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES (TNMP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2000 Excess Earnings. TNMP has recorded estimated excess earnings of $3.6
million and $5.6 million for the three and six months ended June 30, 2000,
respectively.
Unbundled Cost of Service Filing. The legislation required TNMP to file a
rate case that will set rates for the transmission and distribution company
that will provide regulated services once competition begins in 2002. On March
31, 2000, TNMP filed its Unbundled Cost of Service Filing (UCOS) with the PUCT.
The filing proposes tariffs under which Retail Electric Providers (REPs) will
be able to purchase transmission and distribution services after December 31,
2001, in TNMP's service area. The tariffs are based upon a projected cost of
service of $150.3 million. The cost of service includes TNMP's projected
reasonable and necessary expenses, and return on its transmission and
distribution rate base at a 9.11% weighted average cost of capital.
The filing also includes a proposed Competition Transition Charge (CTC), as
required by the legislation. The CTC is designed to recover stranded costs
related to TNMP's generation assets and purchased power contracts, as
determined by a PUCT-established model. In its filing, TNMP calculated Economic
Cost over Market (ECOM) in the amount of $194.4 million would remain at January
1, 2002. In addition, TNMP expects the PUCT to address certain issues related
to its January 2000 Business Separation Plan filing in the UCOS.
Fuel Reconciliation. At June 30, 2000, TNMP had an under-recovered balance
of fuel and the energy-related portion of purchased power costs of $31.6
million. PUCT rules require TNMP to reconcile its fuel and energy-related
purchased power costs at least every three years. On June 5, 2000, TNMP filed
applications with the PUCT seeking approval to 1) increase its fuel factor to
recover projected fuel and energy-related purchased power costs and 2)
implement an interim surcharge effective September 1, 2000 to recover under-
recovered fuel and energy-related purchased power costs of $24.7 million as of
March 31, 2000, including $1.0 million of interest on the under-recovered
balance through December 31, 2001. The interim surcharge would be effective
through December 31, 2001, the end of the surcharge period.
On June 30, 2000, TNMP also filed an application with the PUCT seeking to
reconcile its eligible fuel and energy-related purchased power expenses for the
three-year period ended December 31, 1999. Management believes the ultimate
outcome of this fuel reconciliation will not have a material adverse effect on
TNP's or TNMP's consolidated financial position.
As the result of a July 2000 hearing, TNMP implemented a new fuel factor
that is approximately 20 percent higher than its previous factor. In September
2000, TNMP will implement an interim surcharge to begin collecting its under-
recovered fuel and energy-related purchased power costs.
New Mexico
1999 Rate Case. TNMP and the NMPRC Staff reached a settlement in this case,
which was filed in June 1999, and have submitted the settlement to the NMPRC
for approval. The settlement calls for a decrease in TNMP's base rates of $1.8
million, or 6%, effective October 1, 1999. TNMP has reserved $1.3 million
related to the base rate reductions through June 30, 2000. TNMP expects the
NMPRC to act on the proposed settlement during the third quarter of 2000.
Restructuring. The New Mexico Legislature opened the states electric power
market to consumer choice with the passage of the Electric Utility Industry
Restructuring Act of 1999 (the Act) in April 1999. The Act guarantees recovery
of at least 50 percent of a utility's stranded costs over a five-year period,
and originally provided for the phase-in of retail choice beginning January 1,
2001. On May 17, 2000, the NMPRC delayed the date for retail electric
competition for residential, school, and small commercial customers by one year
to January 1, 2002. At the same time the NMPRC moved the date for open access
for large commercial and industrial customers back six months, from January 1,
2002 to July 1, 2002.
F-42
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES (TNP)
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES (TNMP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the second quarter of 2000, TNMP revised its reserve for stranded
costs associated with purchased power contracts, as a result of the NMPRC
action to delay the start of competition. The reserve was reduced by $1.2
million, from $2.1 million to $0.9 million.
The Act also requires utilities to disaggregate their regulated
transmission and distribution business activities from their generation
operations, which will be subject to competition. TNMP filed its plan for
complying with the Act on June 1, 2000. The filing explained TNMP's intention
to separate its New Mexico operations into a transmission and distribution
affiliate and a competitive power supply affiliate. The filing also contains a
timetable for achieving the various tasks necessary to comply with the Act.
Note 4. Financings
TNMP
In connection with the Merger, TNMP entered into a Backstop Credit Facility
(Backstop Facility) in the amount of $240 million on April 17, 2000 so that it
could repurchase up to $100 million of its 9.25 percent Series U First
Mortgage Bonds and up to $140 million of its 10.75 percent Series A Secured
Debentures. As required by its first mortgage bond and secured debenture
indentures, TNMP was required to offer to repurchase this debt at 101 percent
of par value due to the change in control of TNP resulting from the Merger.
On June 1, 2000, TNMP repurchased approximately $112.8 million of its
Series A Secured Debentures and approximately $90.5 million of its Series U
First Mortgage bonds at 101 percent of par plus accrued interest. TNMP
borrowed $203 million of the approximately $209.6 million needed to repurchase
the tendered securities from the Backstop Facility and obtained the remainder
from its existing bank facility. Commitments associated with the unused
portion of the Backstop Facility terminated on June 1, 2000, and are no longer
available to TNMP. The Backstop Facility is secured by a new series of first
mortgage bonds and a new series of secured debentures, each in the same amount
of the securities that were repurchased pursuant to the tender offer. The
Backstop Facility matures in May 2001, and bears interest at a variable rate
based on LIBOR. As of July 3, 2000, the interest rate on the Backstop Facility
was 7.895 percent.
TNMP incurred a loss of approximately $1.6 million associated with the
retirement of the Series U First Mortgage Bonds and Series A Secured
Debentures. In accordance with SFAS 71, TNMP deferred approximately $0.9
million of the loss and will amortize that amount in future periods.
Approximately $0.7 million of the loss, associated with the portion of TNMP's
business no longer accounted for under regulated accounting principles, was
expensed in the second quarter of 2000.
TNP
ST Corp. financed the merger through the sale of various debt and equity
securities, as discussed below.
Senior Subordinated Notes. On April 7, 2000, ST Corp. issued $275 million
of 10.25% senior subordinated notes (Notes) due 2010 in a private offering.
The Notes pay interest semi-annually, and are unsecured. TNP can redeem up to
35 percent of the Notes at specified prices before April 1, 2003, but cannot
otherwise redeem the Notes before April 1, 2005. In July 2000, TNP issued an
offer to exchange the privately placed Senior Subordinated Notes for
registered Senior Subordinated Notes with terms substantially identical to the
old notes except for transfer restrictions, registration rights and liquidated
damages.
Senior Secured Credit Facility. ST Corp. established a senior secured
credit facility (Senior Credit Facility) in the amount of $185 million. The
Senior Credit Facility consists of a $160 million term loan due 2006 and a $25
million revolving credit facility that expires in 2003. TNP may request that
the revolving credit
F-43
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES (TNP)
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES (TNMP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
facility be extended to 2006. As of June 30, 2000, the term loan had an
outstanding balance of $159.6 million, while no amounts were borrowed under the
revolving credit facility. The term loan bears interest at a variable rate that
was 9.385 percent as of June 30, 2000.
The Senior Credit Facility contains a number of financial covenants and
includes a number of covenants restricting various transactions. The Senior
Credit Facility is secured by a pledge of all TNMP common stock held by TNP.
Senior Redeemable Preferred Stock. On April 7, 2000, ST Corp. issued $100
million of Series A senior preferred stock in a private placement. On May 26,
2000, TNP replaced the Series A senior preferred stock with $100 million of
senior redeemable preferred stock (Preferred Stock) and 100,000 warrants to
purchase limited partnership interests of SW Acquisition, together comprising
100,000 units issued in a private placement. The Preferred Stock pays a
dividend of 14.50 percent and must be redeemed by April 1, 2011. Through April
1, 2005, dividends on the Preferred Stock will be paid by issuing additional
shares of Preferred Stock having an aggregate liquidation preference equal to
the amount of the dividends to be paid. After April 1, 2005, TNP has the option
to pay dividends in cash or by issuing additional shares of Preferred Stock as
previously described.
Before April 1, 2003, TNP can redeem all, but not less than all, of the
Preferred Stock at a specified price, plus accumulated dividends, out of the
net proceeds of a TNP common equity offering. Before April 1, 2005, TNP can
redeem all, but not less than all, of the Preferred Stock at a specified price,
plus accumulated dividends, in the event of a change in control. After April 1,
2005, TNP may redeem any amount of the Preferred Stock at specified prices.
The warrants issued as part of the units as described above had an aggregate
fair market value of approximately $3.8 million at issue. The warrants expire
on April 1, 2011.
The Preferred Stock has been recorded at its fair market value, which was
approximately $95.2 million at issue, reflecting the value of the warrants
described above and the issuance discount of $1 million. TNP will accrete the
Preferred Stock to its redemption value of $100 million, through periodic
charges against income applicable to common stock.
On July 24, 2000, TNP filed a registration statement with the Securities and
Exchange Commission which, when effective, will issue an offer to exchange the
privately placed preferred stock for registered preferred stock with terms
substantially identical to the Preferred stock except for transfer
restrictions, registration rights and liquidated damages. TNP filed the
registration statement to comply with terms of a registration rights agreement
that also would require TNP to pay dividends on the Preferred Stock at a higher
rate if the registration statement had not been timely filed, and if it is not
declared effective on or before October 22, 2000.
Note 5. Segment and Related Information
TNP's principal subsidiary, TNMP, has two reportable segments, Texas and New
Mexico. TNMP manages the segments separately to respond to the differing
operational and regulatory climates in the two states.
The following tables present information about profits, losses and assets of
TNMP's reportable segments (in thousands). In the tables below, "Total assets"
for Texas and New Mexico includes only net utility plant. All other assets are
included in All Other and Eliminations.
F-44
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES (TNP)
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES (TNMP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Texas
Operating revenues...... $ 130,261 $ 122,152 $ 234,710 $ 221,146
Net income.............. 10,367 11,438 17,473 14,633
Total assets at June 30,
2000 and December 31,
1999................... 823,700 823,565 823,700 823,565
New Mexico
Operating revenues...... $ 25,657 $ 21,862 $ 45,720 $ 40,979
Net income.............. 836 2,758 1,493 3,377
Total assets at June 30,
2000 and December 31,
1999................... 84,346 84,389 84,346 84,389
All Other and
Eliminations
Operating revenues...... $ -- $ -- $ -- $ --
Net income.............. -- -- -- --
Total assets at June 30,
2000 and December 31,
1999................... 88,295 76,441 88,295 76,441
TNMP Consolidated
Operating revenues...... $ 155,918 $ 144,014 $ 280,430 $ 262,125
Net income.............. 11,203 14,196 18,966 18,010
Total assets at June 30,
2000 and December 31,
1999................... 996,341 984,395 996,341 984,395
</TABLE>
Note 6. Commitments and Contingencies
Legal Actions
Phillips Petroleum. TNMP is the defendant in a suit styled Phillips
Petroleum Company vs. Texas-New Mexico Power Company, filed on October 1, 1997
and pending in the 149th State District Court of Brazoria County, Texas. The
suit, which is in the discovery stage, is based on events surrounding an
interruption of electricity to a petroleum refinery and related facilities that
occurred in May 1997. Phillips Petroleum Company is seeking the recovery of
damages arising from the interruption and in May 1999 demanded payment in the
amount of $47.1 million. TNMP's tariff approved by the PUCT contains
limitations against recovery of the great majority of Phillips' alleged
damages. The Texas Supreme Court, in another matter, has recently upheld the
enforceability of such tariff limitations in litigation of this type; TNMP
believes the ruling will operate to substantially limit any recovery by
Phillips to the cost of its electrical equipment, in the event that any damages
are awarded in this matter. Discovery has not sufficiently progressed to
quantify any damages to Phillips' electrical equipment; however, Phillips has
previously reported to the SEC that it incurred costs of approximately $2.0
million in this interruption. In May 1999, TNMP filed a Third Party Petition
naming Sweeny Cogeneration Limited Partnership, the operator of cogeneration
and related facilities at the Phillips refinery, as a defendant. TNMP has
previously charged to earnings the deductible amount of its insurance coverage,
$500,000.
Power Resource Group. TNMP is a defendant in a suit styled Power Resource
Group, Inc. v. Public Utility Commission of Texas and Texas-New Mexico Power
Company, pending in the 345th District Court of
F-45
<PAGE>
TNP ENTERPRISES, INC. AND SUBSIDIARIES (TNP)
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES (TNMP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Travis County, Texas. This lawsuit, which was originally filed on May 21, 1999,
challenges the PUCT's dismissal of a regulatory case that Power Resource Group,
Inc. (PR Group) had filed against TNMP. PR Group is a developer of electric
generating plants that are intended to be qualifying cogeneration facilities.
This lawsuit and the regulatory case it appeals both stem from discontinued
negotiations for power supply. PR Group alleged that TNMP was required to buy
power to be generated from an as-yet-unbuilt cogeneration facility. TNMP filed
its original answer with the court on June 28, 1999.
In an amended petition filed January 13, 2000, PR Group asserts a claim of
damages of at least $158 million. It bases its claim on the assertion that it
was damaged when TNMP refused to execute an agreement after the aforementioned
discontinued negotiations, that TNMP profited significantly from PR Groups
work, that TNMP is in error when it relies on a PUCT order dismissing PR
Group's petition before the PUCT on substantially the same facts, and that TNMP
misrepresented that it would enter into a contract with PR Group to purchase
energy and capacity at rates equal to or below TNMP's avoided costs. TNMP
believes that PR Group's claims are without merit and intends to contest this
claim vigorously.
TNMP is involved in various claims and other legal proceedings arising in
the ordinary course of business. In the opinion of management, the ultimate
dispositions of these matters will not have a material adverse effect on TNMP's
and TNP's consolidated financial position or results of operations.
F-46
<PAGE>
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We have not authorized any dealer, salesperson or other person to give any
information or represent anything to you other than the information contained
in this prospectus. You must not rely on unauthorized information or
representations.
This prospectus does not offer to sell or ask for offers to buy any of the
securities in any jurisdiction where it is unlawful, where the person making
the offer is not qualified to do so, or to any person who cannot legally be
offered the securities. The information in this prospectus is current only as
of the date on its cover, and may change after that date. For any time after
the date on the cover of this prospectus, we do not represent that our affairs
are the same as described or that the information in this prospectus is
correct--nor do we imply those things by delivering this prospectus or selling
securities to you.
---------------
Dealer Prospectus Delivery Obligation
Until April 22, 2001, all broker dealers that effect transactions in the
registered senior preferred stock, whether or not participating in the exchange
offer, may be required to deliver a prospectus. This is in addition to the
broker-dealers' obligation to deliver a prospectus when acting as underwriters
and with respect to any unsold allotments or subscriptions.
--------------------------------------------------------------------------------
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$105,075,000
[LOGO OF TNP ENTERPRISES, INC.]
Offer to exchange
14 1/2% Senior Redeemable Preferred Stock
------------
PROSPECTUS
------------
October 23, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 20. Indemnification of Directors and Officers
The Texas Business Corporation Act permits, and in some cases requires,
corporations to indemnify officers, directors, agents and employees who are or
have been a party to or are threatened to be made a party to litigation against
judgments, penalties (including excise and similar taxes), fines, settlements
and reasonable expenses under certain circumstances.
The Amended and Restated Articles of Incorporation of TNP, state that "no
director of the Corporation shall be liable to the Corporation or its
shareholders for monetary damages for an act or omission in the director's
capacity as a director, except that this article does not eliminate or limit
the liability of a director to the extent the director is found liable for: (a)
a breach of the director's duty of loyalty to the Corporation or its
shareholders; (b) an act or omission not in good faith that constitutes a
breach of duty of the director to the Corporation or an act or omission that
involves intentional misconduct or a knowing violation of the law; (c) a
transaction from which the director received an improper benefit, whether or
not the benefit resulted from an action taken within the scope of the
director's office; (d) an act or omission for which the liability of a director
is expressly provided for by an applicable statute."
The Amended and Restated Bylaws of TNP, state that the Company shall
indemnify every Director, officer, employee or former Director, officer or
employee of the Company, or any person who has served at the Company's request
as a Director, officer or employee of another Company in which the Company owns
shares of stock, against, and reimburse and advance to every Director, officer
and employee or former Director, officer or employee for, all liabilities,
costs and expenses incurred in connection with such directorship, office or
employment and any actions taken or omitted in such capacity to the greatest
extent permitted under the Texas Business Corporation Act and other applicable
laws at the time of such indemnification, reimbursement or advance payment."
Item 21. Exhibits and Financial Schedule Tables
(a) Exhibits:
A list of exhibits included as part of this registration statement is set
forth in the Exhibit Index that immediately precedes such exhibits and is
incorporated herein by reference.
(b) Financial Statement Schedules:
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted because
they are not required, are inapplicable or the required information has already
been provided elsewhere in the registration statement.
(c) Certain Reports, Opinions or Appraisals:
No such Reports, Opinions or Appraisals are applicable to this registration
statement.
Item 22. Undertakings
(a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d)of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-1
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to file an application for the
purpose of determining the eligibility of the Trustee to act under subsection
(a) of Section 310 of the Trust Indenture Act in accordance with the rules and
regulations prescribed by the Commission under Section 305(b)(2) of such Act.
(b) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this Form, within business one day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(c) The undersigned Registrant hereby undertakes to supply by means of a
post effective amendment all information concerning a transaction, and the
company being acquired involved herein, that was not subject of and included in
the registration statement when it became effective.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Fort
Worth, State of Texas, October 20, 2000.
TNP ENTERPRISES, INC.
/s/ Theodore A. Babcock
By: _________________________________
Theodore A. Babcock
Chief Financial Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes and appoints
Theodore A. Babcock as his or her attorney-in-fact, with full power of
substitution and resubstitution to sign and file on his or her behalf
individually and in each such capacity stated below any and all amendments and
post-effective amendments to this Registration Statement and any registration
statement of the company relating to registered senior preferred stock filed
after the date hereof pursuant to Rule 462(b) under the Securities Act of 1933,
as amended, as fully as such person could do in person, hereby verifying and
confirming all that said attorney-in-fact, or his substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ * President, Chief Executive October 20, 2000
____________________________________ Officer and Director
William J. Catacosinos (Principal Executive
Officer)
/s/ * Chief Financial Officer October 20, 2000
____________________________________ (Principal Financial
Theodore A. Babcock Officer)
/s/ * Director October 20, 2000
____________________________________
Kevern R. Joyce
/s/ * Director October 20, 2000
____________________________________
Leeam Lowin
/s/ * Director October 20, 2000
____________________________________
Preston M. Geren III
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1* Purchase Agreement, dated as of May 19, 2000, among TNP Enterprises,
Inc. and CIBC World Markets Corp. and Chase Securities Inc. (Exhibit
1.1, Form S-4, filed July 24, 2000).
2.1* Agreement and Plan of Merger, dated as of May 24, 1999, by and among
SW Acquisition, L.P., ST Acquisition Corp. and TNP Enterprises, Inc.
(Exhibit 2, Form 8-K filed June 7, 1999).
3.1* Amended and Restated Articles of Incorporation of TNP Enterprises,
Inc. (Exhibit 3(a)(i) in Form
10-Q filed May 12, 2000).
3.2* Amended and Restated Bylaws of TNP Enterprises, Inc. (Exhibit 3(a)(ii)
in Form 10-Q filed May 12, 2000).
4.1* Statement of Resolution Decreasing Series A Preferred Stock,
Eliminating Series B Preferred Stock and Establishing Two New Series
of Shares, filed with the Secretary of the State of Texas on May 25,
2000, by the Registrant (Exhibit 4.1, Form S-4, filed July 24, 2000).
4.3* Form of 14 1/2% Redeemable Preferred Stock of the Registrant.
(Included in Exhibit 4.1 hereto).
4.4* Registration Rights Agreement, dated as of May 26, 2000, among TNP
Enterprises, Inc., CIBC World Markets Corp. and Chase Securities Inc.
(Exhibit 4.4, Form S-4, filed July 24, 2000).
4.5* Unit Agreement, dated as of May 26, 2000, among TNP Enterprises, Inc.,
SW Acquisition, L.P. and The Bank of New York, as Unit Agent. (Exhibit
4.5, Form S-4, filed July 24, 2000).
4.6* Warrant Agreement, dated as of May 26, 2000, between SW Acquisition,
L.P. and The Bank of New York, as Warrant Agent (Exhibit 4.6, Form S-
4, filed July 24, 2000).
5.1 Legality Opinion of Milbank, Tweed, Hadley & McCloy LLP.
8.1 Opinion of Milbank, Tweed, Hadley & McCloy LLP regarding Tax Matters.
12.1 Statement Regarding Computation of Ratios of Combined Fixed Charges
and Preference Dividends to Earnings.
21.1* Subsidiaries of the Registrant (Exhibit 21.1, Amendment No. 1, Form S-
4, filed July 14, 2000).
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Milbank, Tweed, Hadley & McCloy LLP. (Included in Exhibit
5.1).
24.1 Power of Attorney (included in Part II of this Registration
Statement).
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
</TABLE>
--------
* Previously filed with the SEC.
