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Proc-Type: 2001,MIC-CLEAR
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (Mark One) (X) COMBINED QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________to ____________ Commission File Number: 1-8847 TNP ENTERPRISES, INC. (Exact name of registrant as specified in its charter) Texas 75-1907501 (State of incorporation) (I.R.S. employer identification number) 4100 International Plaza, P. O. Box 2943, Fort Worth, Texas 76113 (Address and zip code of principal executive offices) Registrant's telephone number, including area code 817-731-0099 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes \X\ No \ \ TNP Enterprises, Inc. has no publicly traded shares of common stock outstanding. Commission File Number: 2-97230 TEXAS-NEW MEXICO POWER COMPANY (Exact name of registrant as specified in its charter) Texas 75-0204070 (State of incorporation) (I.R.S. employer identification number) 4100 International Plaza, P. O. Box 2943, Fort Worth, Texas 76113 (Address and zip code of principal executive offices) Registrant's telephone number, including area code 817-731-0099 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes \X\ No \ \ TNP Enterprises, Inc. holds all 10,705 outstanding common shares of Texas-New Mexico Power Company. TNP Enterprises, Inc. And Subsidiaries Texas-New Mexico Power Company and Subsidiaries Combined Quarterly Report on Form 10-Q for the period ended June 30, 2000 This Combined Quarterly Report on Form 10-Q is filed separately by TNP Enterprises, Inc., and Texas-New Mexico Power Company. Texas-New Mexico Power Company makes no representation as to information
relating to TNP Enterprises, Inc., except as it may relate to Texas-New Mexico Power Company, or to any other affiliate or subsidiary of TNP Enterprises, Inc. TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements. TNP Enterprises, Inc. (TNP) and Subsidiaries: Consolidated Statements of Income (Loss) Three Month Periods Ended June 30, 2000, and 1999 3 Consolidated Statements of Income (Loss) Six Month Periods Ended June 30, 2000, and 1999 4 Consolidated Statements of Cash Flows Six Month Periods Ended June 30, 2000, and 1999 5 Consolidated Balance Sheets June 30, 2000, and December 31, 1999 6 Texas-New Mexico Power Company (TNMP) and Subsidiaries: Consolidated Statements of Income Three and Six Month Periods Ended June 30, 2000, and 1999 7 Consolidated Statements of Cash Flows Six Month Periods Ended June 30, 2000, and 1999 8 Consolidated Balance Sheets June 30, 2000, and December 31, 1999 9 Notes to Consolidated Financial Statements 10 Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings. 21 Item 6. Exhibits and Reports on Form 8-K. 21 (a) Exhibit Index 21 (b) Reports on Form 8-K 21 Statement Regarding Forward Looking Information 21 Signature page 21 TNP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (LOSS) (Unaudited) Predecessor Three Months Ended Three Months Ended June 30, 2000 June 30, 1999 (In thousands) 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 The accompanying notes are an integral part of these consolidated financial statements. TNP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (LOSS) (Unaudited) Predecessor Three Months Ended Three Months Ended Six Months Ended June 30, 2000 March 31, 2000 June 30, 1999 (In thousands) 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 COMMON STOCK $ (2,782) $ 3,848 $ 15,594 The accompanying notes are an integral part of these consolidated financial statements. TNP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Predecessor Three Three Six Months Ended Months Ended Months Ended June 30, 2000 March 31, 2000 June 30, 1999 (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from sales to customers $ 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 capitalized (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 payments, 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) revolving 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 discount 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 EQUIVALENTS 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 PERIOD $ 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 adjustment - (2,425) - Amortization of debt-related costs and other deferred charges 2,129 957 2,370 Allowance for funds used during construction (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 current 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 The accompanying notes are an integral part of these consolidated financial statements. TNP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 2000 Predecessor (Unaudited) December 31, 1999 ASSETS (In thousands) 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 The accompanying notes are an integral part of these consolidated financial statements. TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of TNP Enterprises, Inc.) CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended June 30, Six Months Ended June 30, 2000 1999 2000 1999 (In thousands) (In thousands) 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 other 18 (94) 23 (58) INCOME APPLICABLE TO COMMON STOCK $ 11,185 $ 14,290 $ 18,943 $ 18,068 The accompanying notes are an integral part of these consolidated financial statements. TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of TNP Enterprises, Inc.) CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30 2000 1999 (In thousands) 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 The accompanying notes are an integral part of these consolidated financial statements. TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of TNP Enterprises, Inc.) CONSOLIDATED BALANCE SHEETS June 30, 2000 December 31, (Unaudited) 1999 (In thousands) 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 The accompanying notes are an integral part of these consolidated financial statements. 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 shareholders' 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. 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 Section 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. 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 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 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. 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 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 senior preferred stock under a bridge preferred stock commitment. In May 2000, TNP
replaced the bridge 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. Three Months Ended June 30, Six Months Ended June 30, 2000 1999 2000 1999 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 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 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 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 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. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A). 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 quarterly and 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
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 in Note 3 - 1998 Excess Earnings.
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):
Three Months |
Six Months |
|
Ended |
Ended |
|
June 30, 2000 |
June 30, 2000 |
|
Factors affecting TNMP: |
||
Changes in base revenues |
$ 1.9 |
$ 3.4 |
Non-pass through purchased power and fuel expenses |
(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 ) |
TNMP Operating Revenues
The components of TNMP's base revenues are summarized in the following tables (in thousands).
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||
Increase |
Increase |
|||||
2000 |
1999 |
(Decrease) |
2000 |
1999 |
(Decrease) |
|
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 |
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."
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).
Three Months |
Six Months |
|
Ended June 30, |
Ended June 30, |
|
2000 v. 1999 |
2000 v. 1999 |
|
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 |
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.
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||
Increase |
Increase |
|||||
2000 |
1999 |
(Decrease) |
2000 |
1999 |
(Decrease) |
|
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 |
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.
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).
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||
Increase |
Increase |
|||||
2000 |
1999 |
(Decrease) |
2000 |
1999 |
(Decrease) |
|
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 |
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 as described in Note 3 - 1998 Excess Earnings.
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 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
As discussed in Note 4, TNP issued preferred stock under a bridge commitment, and subsequently replaced the bridge preferred stock with senior redeemable preferred stock, to finance the Merger. 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.
As discussed in Note 4, 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. 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.
PART II - OTHER INFORMATION
See Note 6 for information regarding material legal proceedings.
Item 6. Exhibits and Reports on Form 8-K.
The following exhibits are filed with this report:
27(a) Financial Data Schedule for TNP.
27(b) Financial Data Schedule for TNMP.
(b) Reports on Form 8-K: None.
Statement Regarding Forward Looking Information
The discussions in this document that are not historical facts, including, but not limited to, the continued application of regulatory accounting principles, future cash flows and the potential recovery of stranded costs, are based upon current expectations. Actual results may differ materially. Among the facts that could cause the results to differ materially from expectations are the following: our ability to adapt to open market competition enacted by our legislators and regulators; the effects of accounting pronouncements that may be issued periodically; changes in regulations affecting TNP's and TNMP's businesses; insurance coverage available for claims made in litigation; the effect of a Texas Supreme Court decision on the limitations of any actual damages awarded in currently ongoing litigation;
future acquisitions or strategic partnerships; general business and economic conditions, and price fluctuations in the electric power market; and other factors described from time to time in TNP's and TNMP's reports filed with the Securities and Exchange Commission. TNP and TNMP wish to caution readers not to place undue reliance on any such forward looking statements, which are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made.Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant) |
TNP ENTERPRISES, INC. |
Date: August 11, 2000 |
By \s\ THEODORE A. BABCOCK |
Theodore A. Babcock |
|
Chief Financial Officer |
|
TEXAS-NEW MEXICO POWER COMPANY |
|
Date: August 11, 2000 |
By \s\ MANJIT S. CHEEMA |
Manjit S. Cheema |
|
Senior Vice President and Chief Financial Officer |
|
Date: August 11, 2000 |
By \s\ SCOTT FORBES |
Scott Forbes |
|
Chief Accounting Officer |