-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TcESV3beF9QMUf+bx4G/O/e5sOHqcZXh1f8IZPLaxyD6QquIOuESd6RJLU2W1xAt tw/XwNBcNm4z/yxJdNFndw== 0000741612-98-000009.txt : 19980319 0000741612-98-000009.hdr.sgml : 19980319 ACCESSION NUMBER: 0000741612-98-000009 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980318 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TNP ENTERPRISES INC CENTRAL INDEX KEY: 0000741612 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 751907501 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-08847 FILM NUMBER: 98567956 BUSINESS ADDRESS: STREET 1: 4100 INTERNATIONAL PLZ STREET 2: PO BOX 2943 CITY: FORT WORTH STATE: TX ZIP: 76113 BUSINESS PHONE: 8177310099 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEXAS NEW MEXICO POWER CO CENTRAL INDEX KEY: 0000022767 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 750204070 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 002-97230 FILM NUMBER: 98567957 BUSINESS ADDRESS: STREET 1: 4100 INTERNATIONAL PLZ STREET 2: PO BOX 2943 CITY: FORT WORTH STATE: TX ZIP: 76113 BUSINESS PHONE: 8177310099 MAIL ADDRESS: STREET 1: 4100 INTERNATIONAL PLAZA STREET 2: PO BOX 2943 CITY: FORT WORTH STATE: TX ZIP: 76113 FORMER COMPANY: FORMER CONFORMED NAME: COMMUNITY PUBLIC SERVICE CO DATE OF NAME CHANGE: 19810617 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ___________ FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (X) COMBINED ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to __________ ________________________________________________________________________________ TNP ENTERPRISES, INC. (Exact name of registrant as specified in its charter) 4100 International Plaza, P. O. Box 2943, Commission File Texas Fort Worth, Texas 76113 Number: 1-8847 ----------- --------------------------- -------------- (State of (Address and zip code of incorporation) principal executive offices) Telephone number, including area code: 817-731-0099 75-1907501 ------------ ---------- (I.R.S. employer identification no.) Securities registered pursuant to Section 12(b) of the Act: Shares Outstanding Name of each exchange Title of each class on January 30, 1998 on which registered - --------------------- ------------------- --------------------- Common stock, no par value 13,184,489 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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 \ \ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. \X\ The aggregate market value of TNP Enterprises, Inc. common stock held by nonaffiliates on January 30, 1998, was $435,870,418 based on the common stock's closing price on the New York Stock Exchange on the same date of $33.44 per share. ______________________________________________________ TEXAS-NEW MEXICO POWER COMPANY (Exact name of registrant as specified in its charter) 4100 International Plaza, P. O. Box 2943, Commission File Texas Fort Worth, Texas 76113 Number: 2-97230 ---------- ------------------------ --------------- (State of (Address and zip code of incorporation) principal executive offices) Telephone number, including area code: 817-731-0099 75-0204070 ------------ ---------- (I.R.S. employer identification no.) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Name of each exchange Title of each class on which registered - ------------------- -------------------- First mortgage bonds: Series M, 8.7% due 2006 and Series U, 9.25% due 2000 None Secured debentures: 12.5% due 1999; Series A, 10.75% due 2003 None 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 \ \ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. \X\ TNP Enterprises, Inc. holds all 10,705 outstanding common shares of Texas-New Mexico Power Company. ________________________________________________________________________________ DOCUMENTS INCORPORATED BY REFERENCE Document Part Where Incorporated -------- ----------------------- Proxy Statement for 1998 Annual Meeting of Holders of TNP Enterprises, Inc. Common Stock III TNP ENTERPRISES INC. AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES Combined Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1997 This combined annual report on Form 10-K is filed separately by TNP Enterprises, Inc. and Texas-New Mexico Power Company. Information contained in this report relating to Texas-New Mexico Power Company is filed by TNP Enterprises, Inc. and separately by Texas-New Mexico Power Company on its own behalf. Texas-New Mexico Power Company makes no representation as to information relating to TNP Enterprises, Inc. or to any other affiliate or subsidiary of TNP Enterprises, Inc., except as it may relate to Texas-New Mexico Power Company. TABLE OF CONTENTS Glossary of Terms........................................................... 3 Part I Item 1. BUSINESS.......................................................... 4 Introduction...................................................... 4 TNMP's Service Areas.............................................. 4 Seasonality of Business........................................... 5 Sources of Energy................................................. 5 Government Regulation............................................. 6 Employees and Executive Officers.................................. 6 Item 2. PROPERTIES........................................................ 8 Generating Facilities............................................. 8 Transmission and Distribution Facilities.......................... 8 Administrative and Service Facilities............................. 8 Item 3. LEGAL PROCEEDINGS................................................. 8 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 8 Part II Item 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................................... 9 Item 6. SELECTED FINANCIAL DATA........................................... 10 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................... 12 Competitive Conditions............................................ 12 Results of Operations............................................. 13 Liquidity and Capital Resources................................... 16 Other Matters..................................................... 17 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........ 17 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................... 18 TNP Enterprises, Inc. and Subsidiaries............................ 22 Texas-New Mexico Power Company and Subsidiaries................... 27 Notes to Consolidated Financial Statements........................ 32 Selected Quarterly Consolidated Financial Data.................... 43 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............................... 43 Part III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................ 44 Directors......................................................... 44 Executive Officers................................................ 44 Item 11. EXECUTIVE COMPENSATION............................................ 44 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.... 44 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................... 44 Part IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K... 44 TNP ENTERPRISES INC. AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES Combined Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1997 Glossary of Terms As used in this combined report, the following abbreviations, acronyms, or capitalized terms have the meanings set forth below: Abbreviation, Acronym, or Capitalized Term Meaning - ---------------------- ------- AFUDC ............ Allowance for borrowed funds used during construction Bond Indenture ... Document pursuant to which FMBs are issued Clear Lake ....... Clear Lake Cogeneration Limited Partnership EPE .............. El Paso Electric Company EPS .............. Earnings (loss) per share of common stock ERCOT ............ Electric Reliability Council of Texas FWI .............. Facility Works, Inc., a wholly owned subsidiary of TNP FERC ............. Federal Energy Regulatory Commission FMB(s) ........... One or more First Mortgage Bonds issued by TNMP GWH .............. Gigawatt-Hours IRS .............. Internal Revenue Service ITC .............. Investment Tax Credits KWH .............. Kilowatt-Hours MW ............... Megawatts MWH .............. Megawatt-Hours NMPUC ............ New Mexico Public Utility Commission PPM .............. PPM America, Inc. PUCT ............. Public Utility Commission of Texas SPS .............. Southwestern Public Service Company SFAS ............. Statement of Financial Accounting Standards TEP .............. Tucson Electric Power Company TGC .............. Texas Generating Company, a wholly owned subsidiary of TNMP TGC II ........... Texas Generating Company II, a wholly owned subsidiary of TNMP TNP One .......... A two-unit, lignite-fueled, circulating fluidized-bed generating plant located in Robertson County, Texas TNMP ............. Texas-New Mexico Power Company, a wholly owned subsidiary of TNP TNP .............. TNP Enterprises, Inc. TU ............... Texas Utilities Electric Company Unit 1 ........... The first electric generating unit of TNP One Unit 2 ........... The second electric generating unit of TNP One Statement Regarding Forward Looking Information The discussions in this document that are not historical facts, including, but not limited to, the outcome of current and future rate/regulatory proceedings, the continued application of regulatory accounting principles, future cash flows and the potential recovery of stranded costs, are based upon current expectations. Actual results may differ materially. Among the facts that could cause the results to differ materially from expectations are the following: legislation in the states TNMP serves affecting the regulation of TNMP's business; changes in regulations affecting TNP and TNMP's businesses; results of regulatory proceedings affecting TNP and TNMP's operations; future acquisitions or strategic partnerships; general business and economic conditions; negotiations regarding TNMP's proposal regarding transition to competition in its Texas service area; and other factors described from time to time in TNP's and TNMP's reports filed with the Securities and Exchange Commission. TNP and TNMP wish to caution readers not to place undue reliance on any such forward looking statements, which are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. PART I ------ Item 1. BUSINESS. Introduction TNP was organized as a holding company in 1983 and transacts business through its subsidiaries. TNMP is a public utility engaged in generating, purchasing, transmitting, distributing, and selling electricity to customers in Texas and New Mexico. TNMP's predecessor was organized in 1925. TNMP has two subsidiaries, TGC and TGC II, both of which were organized to facilitate TNMP's acquisitions of TNP One, Unit 1 and Unit 2, in 1990 and 1991, respectively. FWI is a wholly owned subsidiary of TNP that began operations in 1996. FWI provides integrated mechanical, electrical, plumbing, and other maintenance and repair services to commercial customers in Texas metropolitan areas. FWI was engaged in construction activities in 1996 and 1997; however, this segment was discontinued in late 1997. The impact of these discontinued operations to TNP's results of operations are described in Item 7, "Results of Operations--Overall Results," and Note 4. TNP, TNMP, TGC, TGC II and FWI are all Texas corporations. Their executive offices are located at 4100 International Plaza, P.O. Box 2943, Fort Worth, Texas 76113 and the telephone number is (817) 731-0099. Unless otherwise indicated, all financial information in this report is presented on a consolidated basis. TNMP's Service Areas TNMP provides electric service to 85 Texas and New Mexico municipalities and adjacent rural areas with more than 222,000 customers. TNMP's service areas are organized into three operating regions: the Gulf Coast Region, the North-Central Region, and the Mountain Region. In addition, power marketing activities represent an emerging opportunity for TNMP. Additional information regarding power marketing sales is provided in Item 7, "Results of Operations--Operating Revenues." Gulf Coast Region The Gulf Coast Region includes the area along the Texas Gulf Coast between Houston and Galveston. The oil and petrochemical industries, agricultural industry and general commercial activity in the Houston area support the economy of this area. North-Central Region The North-Central Region extends from Lewisville, Texas, which is 10 miles north of Dallas-Fort Worth International Airport, to municipalities along the Red River. TNMP provides electric service to a variety of commercial, agricultural and petroleum industry customers in this area. This region also includes municipalities and communities south and west of Fort Worth. This area's economy depends largely on agriculture and, to a lesser extent, tourism and oil production. Mountain Region The Mountain Region includes areas in southwest and south-central New Mexico. This region's economy is primarily dependent upon mining and agriculture. Copper mines are the major industrial customers in this region. This region also includes the area in far west Texas between Midland and El Paso. The economy in this area is based primarily on oil and gas production, agriculture, and food processing. TNMP's sales in all regions are primarily to retail customers. TNMP's power marketing sales represent resale of electricity to customers outside TNMP's system. Revenues contributed by each operating sector and its percentage of total operating revenues in 1997, 1996, and 1995, respectively, are set forth in the following table. No single customer accounted for more than 10% of operating revenues during the years presented in the table.
Operating Revenues ($000s) Sector 1997 1996 1995 --------------- -------------------- ----------------------- ----------------------- Gulf Coast $ 315,596 54.3% $ 269,535 53.6% $ 250,165 51.5% North-Central 144,098 24.8 134,236 26.7 130,200 26.8 Panhandle - - - - 7,322 1.5 Mountain 107,243 18.5 98,966 19.7 98,136 20.2 Power Marketing 13,756 2.4 - - - - ---------- ------ ---------- ------ ---------- ------ Total $ 580,693 100.0% $ 502,737 100.0% $ 485,823 100.0% ========== ====== ========== ====== ========== ======
Franchises and Certificates of Public Convenience and Necessity TNMP holds 83 franchises with terms ranging from 20 to 50 years and two franchises with indefinite terms from the 85 municipalities to which it provides electric service. These franchises will expire on various dates from 1998 to 2039. Three Texas franchises, composing 28% of total company revenues, are scheduled to expire in 1998 and 1999. However, Texas law does not require an electric utility to execute a franchise agreement with a Texas municipality to be entitled to provide or continue to provide electrical service within the municipality. A franchise agreement documents the mutually agreeable terms under which the service will be provided. TNMP intends to negotiate and execute new or amended franchise agreements to be effective before existing franchises expire. TNMP also holds PUCT certificates of public convenience and necessity covering all Texas areas that TNMP serves. These certificates include terms that are customary in the public utility industry. TNMP generally has not been required to have certificates of public convenience and necessity to provide electric power in New Mexico. Seasonality of Business TNMP experiences increased sales and operating revenues during the summer months as a result of increased air conditioner usage in hot weather. In 1997, approximately 42% of annual revenues were recorded in June, July, August, and September. Sources of Energy TNMP owns one 300 MW lignite-fueled generating facility, TNP One. During 1997, TNP One provided approximately 20% of TNMP's total energy requirements. Power generated at TNP One is transmitted over TNMP's own transmission lines to other utilities' transmission systems for delivery to TNMP's Texas service area systems. To maintain a reliable power supply for its customers and to coordinate interconnected operations, TNMP is a member of the ERCOT and the Western Systems Coordinating Council. TNMP purchases the remainder of its electricity from various suppliers with diversified fuel sources. During 1997, approximately 81% of the purchases of power were made under firm contracts, while 19% was purchased through short-term spot market purchases. The availability and cost of purchased power to TNMP is subject to changes in supplier costs, regulations and laws, fuel costs, and other factors. TNMP continues to pursue various opportunities to reduce purchased power costs. The following table sets forth certain information concerning TNMP's sources of electric energy in 1997.
Year Contract Percent of Expires Energy Provided ------------- --------------- TEXAS ----- Generation TNP One.................................... - 26% Purchased Power Texas Utilities (1)........................ 2002 20 Clear Lake Cogeneration L.P................ 2004 16 Other (primarily cogenerators)............. Various 38 ---- Total 100% ==== NEW MEXICO ---------- Purchased Power Public Service Co. of New Mexico(2)........ 1999 12% El Paso Electric Co........................ 2002 12 New Century Energy Co. .................... 2001 15 Other (primarily short-term contracts) (3). - 61 ---- Total 100% ====
(1) During December 1997, TNMP executed a new agreement with TU as described in Note 10. (2) TNMP has notified PNM of its intent to cease purchasing full power and energy requirements effective January 1, 1999, under the existing agreement. (3) Suppliers under the short-term contracts include Tucson Electric Power Co., Public Service Co. of New Mexico, El Paso Electric Co. and New Century Energy Co. Management believes that current supply arrangements and available capacities on the wholesale market are adequate to satisfy TNMP's foreseeable power requirements. Recovering Purchased Power and Fuel Costs During 1997, a significant portion of purchased power costs in the Texas jurisdiction was recovered from TNMP customers through a power cost recovery adjustment clause authorized by the PUCT. The clause enables TNMP to recover this significant component of operating expenses within two months of billing by its suppliers. In New Mexico, a similar clause was used to recover purchased power costs through April 1997. As explained in Item 7, "Competitive Conditions", TNMP implemented Community ChoiceR in New Mexico effective May 1, 1997. This plan freezes rates (including the recovery of purchased power) during the succeeding three-year transition period. Fuel costs are recovered from TNMP's Texas customers through a fixed fuel recovery factor approved by the PUCT. The fixed fuel recovery factor and the related fuel reconciliation filed with the PUCT are described in Item 7, "Pass-Through Expenses--Fuel," and Note 2, respectively. Government Regulation TNMP is subject to PUCT and NMPUC regulation. Some of its activities, such as issuing securities, are also subject to FERC regulation. Recent regulatory developments are changing competitive conditions in the electric utility industry. These changes are discussed in Item 7, "Competitive Conditions." In addition to regulation as a utility, TNMP's facilities are regulated by the Environmental Protection Agency and Texas and New Mexico environmental agencies. TNP One uses environmentally superior circulating fluidized bed technology that eliminates the need for expensive scrubbers. TNMP was allotted sufficient emission allowances to comply with the Clean Air Act of 1990 through the year 2000. During 1997, 1996, and 1995, TNMP incurred expenses related to air, water, and solid waste pollution abatement (including ash removal) of approximately $5.0 million, $6.1 million, and $5.5 million, respectively. Employees And Executive Officers At December 31, 1997, TNMP had 811 employees and FWI had 494 employees. The employees are not represented by a union or covered by a collective bargaining agreement. Management believes relations with its employees are good. During 1998, FWI's employee count is expected to decrease significantly due to its discontinued construction segment as explained in Note 4. Executive officers of TNP and TNMP, who are elected annually by the respective boards of directors and serve at the discretion of the boards, are as follows: Name Age Position with TNP ---- --- ----------------- Kevern R. Joyce 51 Chairman, President, & Chief Executive Officer Jack V. Chambers, Jr. 48 Senior Vice President Manjit S. Cheema 43 Senior Vice President & Chief Financial Officer John P. Edwards 55 Senior Vice President Ralph Johnson 54 Senior Vice President W. Douglas Hobbs 54 Vice President - Business Development John A. Montgomery 36 Vice President Michael D. Blanchard 47 Vice President & General Counsel Patrick L. Bridges 39 Treasurer Scott Forbes 40 Controller Paul W. Talbot 41 Corporate Secretary Name Age Position with TNMP ---- --- ------------------ Kevern R. Joyce 51 Chairman, President, & Chief Executive Officer Jack V. Chambers, Jr. 48 Senior Vice President & Chief Customer Officer Manjit S. Cheema 43 Senior Vice President & Chief Financial Officer John P. Edwards 55 Senior Vice President - Corporate Relations Ralph Johnson 54 Senior Vice President - Power Resources Dennis R. Cash 44 Vice President - Human Resources Allan B. Davis 60 Vice President & Regional Customer Officer Melissa D. Davis 40 Vice President & Regional Customer Officer Larry W. Dillon 43 Vice President & Regional Customer Officer Michael D. Blanchard 47 Vice President & General Counsel Patrick L. Bridges 39 Treasurer Scott Forbes 40 Controller Paul W. Talbot 41 Corporate Secretary Kevern R. Joyce joined TNP and TNMP in April 1994 as President and Chief Executive Officer. He became Chairman in April 1995. From 1992 until April 1994, Mr. Joyce served as Senior Vice President and Chief Operating Officer of TEP. Jack V. Chambers has served as Senior Vice President and Chief Customer Officer of TNMP since 1994 and as Senior Vice President of TNP since April 1996. He was TNMP's Sector Vice President - Revenue Production from 1990 to 1994. Manjit S. Cheema joined TNMP in June 1994. He was Treasurer of TNMP from June 1994 until September 1995. In December 1994, he became Vice President & Chief Financial Officer of TNP and TNMP. He became Senior Vice President & Chief Financial Officer of TNMP in July 1996 and became Senior Vice President & Chief Financial Officer of TNP in May 1997. From March 1990 until he joined TNP and TNMP, Mr. Cheema was Assistant Treasurer and Manager of Financial Planning and Budgeting for TEP. John P. Edwards joined TNMP and TNP in July 1996 as Senior Vice President - Corporate Relations. From October 1994 until joining TNMP and TNP, he was Senior Vice President/Customer Group and Special Assistant to the Chief Operating Officer, Tennessee Valley Authority. His primary responsibilities were general administrative in nature for TVA's transmission operations, customer relationships, rate and regulatory affairs. From July 1990 until October 1994, he was President/CEO of Old Dominion Electric Cooperative and the Virginia-Maryland-Delaware Association of Electric Cooperatives. Ralph Johnson joined TNMP and TNP as Vice President in January 1995 as a consultant and became Vice President in February 1995. In July 1996, he was named Senior Vice President - Power Resources of TNMP. In May 1997, he was appointed Senior Vice President at TNP. From March 1991 until he joined TNMP and TNP, Mr. Johnson was Assistant General Manager for Tri-State Generation and Transmission Cooperative in Denver, Colorado, which sells power to rural electric cooperatives. W. Douglas Hobbs was appointed as Vice President - Business Development of TNP in May 1997. He was Vice President - Business Development of TNMP from February 1997 to May 1997. He was a TNMP Vice President and Regional Customer Officer from April 1994 to February 1997. He served as TNP One Plant Manager from April 1992 to 1994. John A. Montgomery became President of FWI in April 1996. From December 1995 to January 1997, he served as TNMP's Vice President - Marketing. He became Vice President of TNP in April 1996. From February 1994 until he joined TNMP, he served as Director of Marketing and Regional Marketing Director of Greyhound Lines, Inc., a bus transportation company. From August 1990 to February 1994, Mr. Montgomery was President of Viva Brands International, Inc., a tropical fruit beverage company that he founded. Michael D. Blanchard became Vice President and General Counsel of TNMP and TNP in February 1998. He was Corporate Secretary and General Counsel of TNMP and TNP from 1987 to February 1998. Patrick L. Bridges was appointed Treasurer of TNP and TNMP in September 1995. He served as TNMP's Director - Finance from 1994 to September 1995, and served as the Assistant Treasurer from 1993 to September 1995. Scott Forbes was appointed Controller of TNMP in February 1997 and appointed Controller of TNP in May 1997. From September 1996 to February 1997, he was Manager - Financial Systems and Reporting. From January 1994 to September 1996 he was Manager - Financial Reporting and Accounting Policy with Entergy Services, Inc. From 1991 to 1993 he was Manager - Regulatory and Financial Reporting with Gulf States Utilities Company. Paul W. Talbot was elected Corporate Secretary of TNP and TNMP in February 1998. He has been Senior Counsel of TNMP since August 1996. Before joining TNMP, he was in the private practice of law in Dallas, Texas for more than ten years. Dennis R. Cash has served TNMP as Vice President - Human Resources since 1994. From 1990 until 1994 he was General Manager - or Manager - Human Resources. Allan B. Davis has been a TNMP Vice President and Regional Customer Officer since 1994. From 1991 to 1994, he was TNMP's Vice President - Chief Engineer, Chief Engineer, or Assistant Chief Engineer. Melissa D. Davis became a TNMP Vice President and Regional Customer Officer in February 1997. From September 1995 to February 1997 she was TNMP's Controller. From 1994 to September 1995, she was Director - Financial Accounting and Assistant Controller of TNMP. She served as Division Accounting Manager from 1991 to 1994. Larry W. Dillon has been a TNMP Vice President and Regional Customer Officer since 1994. From 1993 to 1994, he was TNMP's Vice President - Operations. Item 2. PROPERTIES. Substantially all of TNMP's real and personal property secures its FMBs. Substantially all of TNMP's real and personal property in Texas also secures its revolving credit facilities and debentures. TNMP's long-term debt is described in Note 7. Generating Facilities TNP One is a two-unit, lignite-fueled generating plant, located in Robertson County, Texas. TNP One generates power for TNMP's Texas service areas and operates as a base load facility. Transmission and Distribution Facilities Management believes that TNMP's transmission and distribution facilities are of sufficient capacity to serve existing customers adequately and can be extended and expanded to serve customer growth for the foreseeable future. These facilities primarily consist of overhead and underground lines, substations, transformers, and meters. TNMP generally constructs its transmission and distribution facilities on easements or public rights of way and not on real property held in fee simple. Administrative and Service Facilities TNP's, TNMP's and FWI's corporate headquarters are located in an office building in Fort Worth, Texas. Space in this building is leased through 2003. TNMP owns or leases local offices in 37 of the municipalities that it serves. TNMP owns 14 construction/service centers in Texas and New Mexico. Item 3. LEGAL PROCEEDINGS. TNMP is the defendant in a suit styled Clear Lake Cogeneration Limited Partnership vs. Texas-New Mexico Power Company, pending in the 234th District Court of Harris County, Texas. This lawsuit and a parallel proceeding pending before the PUCT arose out of disagreements between the limited partnership (Clear Lake) and TNMP over the interpretation of certain provisions of a purchased power agreement under which TNMP purchases cogenerated electricity from Clear Lake. Clear Lake disputes several charges for which TNMP has billed Clear Lake, alleges that TNMP has failed to abide by contractual language concerning several issues, and seeks in the lawsuit approximately $15 million in damages. TNMP has moved for summary judgment in the lawsuit, which is in the discovery phase. TNMP is vigorously contesting the lawsuit and the PUCT proceeding. The ultimate disposition is not expected to have a material effect on TNMP's results of operations. TNMP is the defendant in a suit styled Phillips Petroleum Company vs. Texas-New Mexico Power Company, pending in the 149th State District Court of Brazoria County, Texas. The suit is based on events surrounding an interruption of electricity to a petroleum refinery and related facilities that occurred in May 1997. Phillips is seeking the recovery of approximately $36 million in damages arising from the interruption. TNMP is vigorously contesting this lawsuit, which is in the discovery phase. The ultimate disposition is not expected to have a material effect on TNMP's results of operations. The lawsuit in a state district court in New Mexico styled El Paso Electric Company vs. Texas-New Mexico Power Company has been dismissed. Information regarding additional regulatory and legal matters is provided in Notes 2 and 10. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders in the fourth quarter of 1997. PART II ------- Item 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. TNP's common stock is traded on the New York Stock Exchange under the symbol "TNP." The high and low prices of, and the amount of dividends declared and paid on, TNP's common stock during each quarter in 1997 and 1996 were as follows: TNP Market Price Range Dividends -------------------------------------- Paid 1997 1996 ------------------- ----------------- -------------- Quarter high low high low 1997 1996 ------- --------- --------- ------- ------- ------ ------- First $27 3/4 $21 3/8 $23 1/4 $18 1/2 $0.245 $ 0.22 Second 24 18 7/8 28 5/8 22 0.245 0.22 Third 25 15/16 22 15/16 28 1/8 23 0.245 0.245 Fourth 33 3/4 24 7/16 28 1/8 24 1/2 0.27 0.245 ------ ------- $1.005 $ 0.930 ====== ======= As of January 31, 1998, there were approximately 4,830 record holders of TNP common stock. TNP holds all 10,705 outstanding common shares of TNMP. During 1997 and 1996, TNMP paid common dividends to TNP as follows: TNMP Dividends Paid ($000's) ---------------------------- Quarter 1997 1996 ------- --------- --------- First $ 9,000 $ 2,400 Second 11,800 2,400 Third 9,500 2,700 Fourth 14,000 3,200 --------- --------- Total $ 44,300 $ 10,700 ========= =========
Item 6. SELECTED FINANCIAL DATA. The following table sets forth selected financial data of TNP and TNMP for 1993 through 1997. 1997 1996 1995 1994 1993 -------------- ------------- ------------- ------------- -------------- TNP ENTERPRISES, INC. (In thousands except per share amounts and percentages) Consolidated results Operating revenues $ 585,234 $ 502,737 $ 485,823 $ 477,989 $ 474,242 Income (loss) from continuing operations before the cumulative effect of change in accounting $ 40,455 $ 26,150 $ 33,060 $ (17,441) $ 11,605 Net income (loss) $ 29,678 $ 23,053 $ 41,505 $ (17,441) $ 11,605 Total assets $ 991,926 $ 1,006,784 $ 1,030,433 $ 1,054,488 $ 1,086,938 Common shares outstanding Weighted average 13,083 11,465 10,901 10,750 10,641 End of year 13,133 13,006 10,920 10,866 10,696 Per share of common stock Earnings (loss) from continuing operations before the cumulative effect of change in accounting $ 3.08 $ 2.27 $ 2.98 $ (1.70) $ 1.01 Earnings (loss) $ 2.26 $ 2.00 $ 3.75 $ (1.70) $ 1.01 Cash dividends declared $ 1.005 $ 0.93 $ 0.82 $ 1.22 $ 1.63 Book value $ 22.71 $ 21.41 $ 19.91 $ 17.01 $ 19.97 Capitalization Common shareholders' equity $ 298,241 $ 278,474 $ 217,457 $ 184,869 $ 213,627 Preferred stock 3,240 3,420 3,600 8,680 9,560 Long-term debt, less current maturities 478,041 533,964 611,925 682,832 678,994 -------------- ------------- ------------- ------------- -------------- Total capitalization $ 779,522 $ 815,858 $ 832,982 $ 876,381 $ 902,181 ============== ============= ============= ============= ============== Capitalization ratios Common shareholders' equity 38.3% 34.1% 26.1% 21.1% 23.7% Preferred stock 0.4 0.4 0.4 1.0 1.1 Long-term debt, less current maturities 61.3 65.5 73.5 77.9 75.2 -------------- ------------- ------------- ------------- -------------- Total capitalization 100.0% 100.0% 100.0% 100.0% 100.0% ============== ============= ============= ============= ============== TEXAS-NEW MEXICO POWER COMPANY Consolidated results Operating revenues $ 580,693 $ 502,737 $ 485,823 $ 477,989 $ 474,242 Income (loss) before the cumulative effect of change in accounting $ 43,918 $ 26,862 $ 33,364 $ (16,634) $ 11,523 Net income (loss) $ 43,918 $ 26,862 $ 41,809 $ (16,634) $ 11,523 Total assets $ 967,006 $ 1,002,157 $ 1,024,943 $ 1,043,178 $ 1,076,820 Capitalization Common shareholder's equity $ 287,021 $ 287,548 $ 224,351 $ 185,777 $ 214,184 Preferred stock 3,240 3,420 3,600 8,680 9,560 Long-term debt, less current maturities 477,900 533,800 611,925 682,832 678,994 -------------- ------------- ------------- ------------- -------------- Total capitalization $ 768,161 $ 824,768 $ 839,876 $ 877,289 $ 902,738 ============== ============= ============= ============= ============== Capitalization ratios Common shareholder's equity 37.4% 34.9% 26.7% 21.2% 23.7% Preferred stock 0.4 0.4 0.4 1.0 1.1 Long-term debt, less current maturities 62.2 64.7 72.9 77.8 75.2 -------------- ------------- ------------- ------------- -------------- Total capitalization 100.0% 100.0% 100.0% 100.0% 100.0% ============== ============= ============= ============= ==============
TEXAS-NEW MEXICO POWER COMPANY SELECTED OPERATING STATISTICS 1997 1996 1995 1994 1993 -------------- --------------- --------------- --------------- --------------- Operating revenues (in thousands): Residential $ 211,398 $ 206,748 $ 200,455 $ 194,933 $ 193,484 Commercial 155,539 150,034 148,908 141,886 138,680 Industrial 170,169 129,972 113,728 122,714 124,474 Other 29,831 15,983 22,732 18,456 17,604 Power Marketing 13,756 - - - - -------------- --------------- --------------- --------------- --------------- Total $ 580,693 $ 502,737 $ 485,823 $ 477,989 $ 474,242 ============== =============== =============== =============== =============== Sales (MWH): Residential 2,251,119 2,230,558 2,141,553 2,085,621 2,047,360 Commercial 1,772,591 1,725,650 1,681,130 1,618,840 1,567,083 Industrial 5,523,907 3,797,776 2,704,159 2,652,844 2,567,552 Other 107,847 108,039 113,985 114,190 104,882 Power Marketing 494,705 - - - - -------------- --------------- --------------- --------------- --------------- Total 10,150,169 7,862,023 6,640,827 6,471,495 6,286,877 ============== =============== =============== =============== =============== Number of customers (at year end): Residential 192,005 187,796 183,863 185,364 181,298 Commercial 30,289 29,864 29,361 30,624 30,235 Industrial 139 135 136 142 141 Other 222 224 244 237 237 Power Marketing 16 - - - - -------------- --------------- --------------- --------------- --------------- Total 222,671 218,019 213,604 216,367 211,911 ============== =============== =============== =============== =============== Revenue statistics: Average annual use per residential customer (KWH) 11,835 11,973 11,476 11,354 11,362 Average annual revenue per residential customer (dollars) 1,111 1,110 1,074 1,061 1,067 Average revenue per KWH sold per residential customer (cents) 9.39 9.27 9.36 9.35 9.45 Average revenue per KWH sold total sales (cents) 5.72 6.39 7.32 7.39 7.54 Net generation and purchases (MWH): Generated 2,089,448 2,296,056 2,351,000 2,336,830 2,363,493 Purchased 8,443,990 5,769,173 4,612,186 4,472,306 4,385,697 -------------- --------------- --------------- --------------- --------------- Total 10,533,438 8,065,229 6,963,186 6,809,136 6,749,190 ============== =============== =============== =============== =============== Average cost per KWH purchased (cents) 3.09 3.51 3.87 4.35 4.56 Employees (year-end) Texas-New Mexico Power Company 811 819 858 894 1,051 Facility Works 494 116 - - -
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. SIGNIFICANT EVENTS AND KNOWN TRENDS AFFECTING TNP AND TNMP Competitive Conditions The electric utility industry continues its transition toward an environment of increased competition for energy generation. The portions of operations pertaining to transmission and distribution are expected to continue to be regulated. Pressures that underlie the movement toward increasing competition are numerous and complex. They include legislative and regulatory changes, technological advances, consumer demands, greater availability of natural gas, environmental needs, and other factors. The increasingly competitive environment presents opportunities to compete for new customers, as well as the risk of loss of existing customers. The most significant effect of competition on TNMP, as well as other utilities, will be the ability to recover potential stranded costs. "Stranded costs" is the difference between what it costs TNMP to provide energy and what a customer would be willing to pay for energy in a competitive market. The inability to recover a significant portion of stranded costs would adversely impact TNP's and TNMP's financial condition. In Texas, TNMP's potential stranded cost relates to TNP One, its 300 MW generating unit, and could potentially be more than $270 million. In New Mexico, TNMP's potential stranded cost relates to its fixed purchased power contracts and could potentially be $3 million to $9 million. The following discusses TNMP's strategy to transition to competition and to provide TNMP the ability to recover its potential stranded costs in Texas and New Mexico. Although the final resolution and magnitude of this issue is uncertain, management realizes it is possible that shareholders may share the financial burden of stranded costs with customers. Texas Rate Filing and Transition to Competition Plan In December 1996, certain cities in the Texas Gulf Coast area (Gulf Coast Cities) served by TNMP passed resolutions requiring TNMP to file complete rate information with those cities. On July 31, 1997, TNMP filed the required traditional rate information with the Gulf Coast Cities based on the test year ended December 31, 1996. Agreements with the cities provide that any rate reduction resulting from the traditional rate filing required by the city ordinances will be placed into effect retroactive to May 15, 1997. Based on its analysis, TNMP believes the filing supports the reasonableness of TNMP's current rates. Simultaneous with the Gulf Coast Cities rate filing, TNMP filed a transition to competition plan with the PUCT and all of its Texas cities. On December 22, 1997, TNMP and the staff of the PUCT, along with other signatories, reached an agreement on TNMP's proposed transition to competition plan. The agreement proposes a five-year transition period, with a series of rate reductions for residential and commercial customers beginning in 1998. At the end of the transition period, TNMP's Texas customers would be allowed to choose their energy supplier. The agreement provides the opportunity for TNMP to recover a portion of its stranded costs during the transition period by using accelerated recovery of its investment in TNP One. Also, the agreement specifies an earnings cap mechanism that provides earnings in excess of the earnings cap to be applied by TNMP to recover stranded costs or refunded to customers. Also, the agreement establishes a competitive transition charge to recover any stranded cost that remains at the end of the transition period over the subsequent five years. TNMP will continue working with other interested parties to obtain their approval before forwarding this agreement to the PUCT for their approval. PUCT approval is expected by mid-1998. New Mexico Community Choice Following NMPUC approval on April 11, 1997, TNMP implemented Community Choice, its plan for transition to competition for its New Mexico service territory effective May 1, 1997. The plan provides TNMP's customers the right to choose their energy provider after a three-year transition period. The plan freezes rates (including the recovery of purchased power) during the transition period, and allows for customer aggregation based on market forces. TNMP believes the plan will allow it to recover its potential stranded costs in New Mexico; however, the actual recovery and amount of potential stranded costs will depend on the future market and price for energy through May 1, 2000. Impact of Competition on TNMP In addition to pursuing the satisfactory resolution of the stranded costs issue, TNMP is pursuing strategies to retain and attract new customers. TNMP believes that current competitive developments on the wholesale market are benefiting TNMP and its customers. Because TNMP purchases much of its power, TNMP can take advantage of lower overall wholesale power pricing , additional market flexibility, and new options in obtaining purchased power. TNMP's competitive position has been strengthened with the PUCT open access to transmission rule. Management believes TNMP's revenue growth opportunities are through an increased customer base and new services. TNMP serves a market niche of smaller to medium sized communities. Only two of the 85 communities in TNMP's service area have populations in excess of 50,000. Texas Transmission Access During 1996, the PUCT passed a wholesale transmission access rule, which went into effect on January 1, 1997, in order to increase competition in wholesale energy sales within Texas. The new rule established an Independent System Operator for the ERCOT transmission system, and a regional method of transmission pricing, terms and conditions. As discussed in "MD&A - Results of Operations," the new rule had a favorable impact on TNMP's earnings. Unregulated Operations TNP also plans to address the effects of competition on the traditional utility business by expanding earnings through unregulated operations. During 1998, FWI, TNP's unregulated wholly owned subsidiary, intends to establish itself in the maintenance and repair services business and focus on commercial customers in Texas metropolitan areas. Through the end of 1997, TNP has made modest investments in unregulated activities, in addition to FWI, and will continue to evaluate unregulated investment and joint venture opportunities in additional energy-related businesses. Results of Operations Overall Results Income applicable to common stock was $29.5 million for 1997, compared to $22.9 million in 1996. The 1997 results included the effect of FWI's discontinued operations of $10.8 million. The 1996 results included a $3.1 million loss associated with FWI's discontinued operations and a $1.3 million after tax charge for the settlement of litigation associated with the Series T FMB retirement in 1995. Exclusive of one-time items, the 1997 earnings were $40.3 million, a $13.0 million improvement as compared to the 1996 earnings of $27.3 million. Income applicable to common stock was $40.9 million in 1995. Results for 1995 included a number of one-time items consisting of the cumulative effect of the change in accounting for unbilled revenues of $8.4 million (see Note 3), a gain on sale of the Texas Panhandle properties of $9.5 million, and recognition of deferred revenues related to a favorable IRS private letter ruling of $3.0 million. Excluding the one-time items, 1996 earnings were $7.4 million higher than 1995 earnings of $19.9 million. The following table sets forth results of operations for 1997, 1996, and 1995 and the impact of one-time items:
1997 1996 1995 ----------------- --------------------- ------------------ Amount EPS Amount EPS Amount EPS --------- ------- ---------- --------- --------- ------- (In thousands except per share amounts) Income applicable to common stock before one-time items.................. $ 40,297 $ 3.08 $ 27,283 $ 2.38 $ 19,908 $ 1.83 --------- -------- ---------- --------- --------- ------- One-time items, net of income taxes: Discontinued operations of FWI............... (10,777) (0.82) (3,097) (0.27) - - Series T litigation settlement............... - - (1,300) (0.11) - - Cumulative effect of change in accounting.... - - - - 8,445 0.77 Gain on sale of Texas Panhandle properties... - - - - 9,479 0.87 Recognition of deferred revenues............ - - - - 3,018 0.28 --------- -------- ---------- --------- --------- ------- Total one-time items, net................ (10,777) (0.82) (4,397) (0.38) 20,942 1.92 --------- -------- ---------- --------- --------- ------- Income applicable to common stock............... $ 29,520 $ 2.26 $ 22,886 $ 2.00 $ 40,850 $ 3.75 ========= ======== ========== ========= ========= =======
During 1997 and 1996, FWI's operations included construction and service activities. In late 1997, management reevaluated FWI's strategy and adopted a revised strategy to concentrate on service and maintenance activities and to discontinue the construction segment. Management believes this course of action should improve FWI's competitive position within its industry and improve FWI's financial strength. See Note 4 for additional information regarding the discontinued operations. The operations of TNMP currently represent most of TNP's operations. The following discussion focuses on TNMP's operations, except where stated otherwise. Operating Revenues The following table summarizes the components of operating revenues (in thousands).
Increase (Decrease) ------------------- 1997 1996 1995 '97 v. '96 '96 v. '95 ---------- ---------- ----------- ---------- ----------- Operating revenues $ 580,693 $ 502,737 $ 485,823 $ 77,956 $ 16,914 Effect of recognizing deferred revenue from private letter ruling - - (4,128) - 4,128 ---------- ---------- ----------- ---------- ----------- Subtotal 580,693 502,737 481,695 77,956 21,042 Pass-through items 299,281 244,889 228,903 54,392 15,986 ---------- ---------- ----------- ---------- ----------- Base revenues $ 281,412 $ 257,848 $ 252,792 $ 23,564 $ 5,056 ========== ========== =========== ========== ===========
Pass-through items are the portion of operating revenues that recover from customers the costs of purchased power, fuel, and standby power. These items affect customer rates but do not affect operating income. Annual variances are discussed in "Results of Operations--Operating Expenses." The following table summarizes the components of the base revenues increase from 1996 to 1997 (in thousands).
Customer growth $ 3,905 Price - sales mix and other 400 Weather related (360) Industrial - economy rate sales 5,950 Industrial - firm rate sales (2,359) Power marketing sales 2,307 Non industrial standby revenues 1,845 Transmission revenue 8,251 Unbilled revenue and other 3,625 --------------- Base revenues increase $ 23,564 ===============
The base revenue increase of $23.6 million during 1997 resulted primarily from implementing the new transmission access rules during 1997, growth in residential and commercial customers, and a full year benefit from operation of the control area. TNMP implemented a control area in Texas on July 31, 1996. The control area is an electrical system that enables TNMP to instantaneously balance its system resources with loads. Implementation of the control area enabled TNMP to enhance its industrial economy rate sales, non-industrial standby revenues, and power marketing sales. The control area also permitted TNMP to replace standby power for TNP One with the purchase of planning reserves. The base revenue increase of $5.1 million during 1996 was attributable to increased residential, commercial, and economy rate industrial sales, and additional base revenues provided by the control area. The overall increase was partially offset by a reduction in firm rate industrial sales and lower margins on the industrial economy rate sales. The components of GWH sales for 1997 and 1996 are summarized in the following table:
1997 1996 Variance % ----- ----- -------- ---- Residential 2,251 2,230 21 0.9 Commercial 1,772 1,726 46 2.7 Industrial: Firm 1,080 1,295 (215) (16.6) Economy 4,444 2,503 1,941 77.5 Power marketing 495 - 495 * Other 108 108 - - ------ ----- ----- ----- Total GWH sales 10,150 7,862 2,288 29.1 ====== ===== ===== ===== * Variance greater than 100%
The increase in GWH sales resulted primarily from a substantial increase in industrial economy sales. During the second quarter of 1996, TNMP entered into new sales agreements with two cogeneration customers. The new economy rate sales are at significantly lower margins than traditional firm rate industrial sales. The 1997 sales results reflect a full year impact from the two cogeneration customers. Also contributing to the sales increase were increased sales to residential and commercial customers, and the addition of power marketing sales. Residential and commercial sales increased during 1997 due to steady customer growth. TNMP significantly increased the resale of electricity to off-system customers beginning in mid-1997. These power marketing sales are generally made at low margins. TNMP views power marketing as a new business opportunity and expects its sales to grow in 1998. Currently, TNMP may not increase its base rates in Texas prior to March 1999 except in certain extraordinary circumstances pursuant to a rate case settlement approved by the PUCT in October 1994. As discussed in "Competitive Conditions--Texas Rate Filing and Transition to Competition Plan" and Note 2, TNMP reached an agreement with the staff of the PUCT and other signatories on December 22, 1997, regarding TNMP's proposed transition to competition plan. The agreement proposes a five year transition period, with a series of rate reductions for residential and commercial customers beginning in 1998. The agreement provides for TNMP to recover a portion of its potential stranded costs during the transition period and to recover the remainder through a competitive transition charge at the end of the transition period over the subsequent five years. This agreement is subject to approval by the PUCT. As discussed in "Competitive Conditions--New Mexico Community Choice" and Note 2, TNMP implemented its Community Choice plan in New Mexico on May 1, 1997. The plan provides TNMP's customers the right to choose their energy provider after a three-year transition period and freezes rates (including the recovery of purchased power) during the transition period. The rates represent a slight reduction as compared to rates in effect at December 1997. Management believes the implemented rates will not have a material adverse effect on TNP's and TNMP's financial condition. As of February 1, 1998, TNMP received notification that a significant customer in Texas will replace the power previously provided by TNMP with power from a cogeneration plant built by a third party wholesale power producer. The plant is scheduled to commence operations in the first quarter of 1998. This customer provided sales of 629 GWH and annual revenues of $28.3 million in 1997 ($10.1 million in base revenues). TNMP has an agreement with the wholesale power producer to continue providing certain services to the cogeneration plant. The base revenues from this agreement are expected to be $0.5 million annually. TNMP had received notice from a large industrial customer in New Mexico to terminate its contract. This customer provided sales of 1,098 GWH and annual revenues of $34.7 million in 1997 ($8.1 million in base revenues). TNMP renegotiated with this customer to continue providing full service until the end of the New Mexico Community Choice transition period (April 30, 2000). After the end of the transition period, TNMP will provide firm transmission service to this customer, and this customer can purchase its KWH requirements on the open market. Currently, TNMP is this customer's lowest cost U.S. electric supplier. Operating Expenses Operating expenses for 1997 were $79.7 million higher than in 1996, due primarily to higher pass-through expenses and income taxes. Operating expenses for 1996 were $20.7 million higher than in 1995, due primarily to higher pass-through expenses, property taxes and franchise taxes. Pass-Through Expenses The following table summarizes the components of pass-through expenses (in thousands).
Increase (Decrease) ------------------- 1997 1996 1995 '97 v. '96 '96 v. '95 ---------- ------------ ----------- ----------- ------------- Pass-through expenses: Purchased power $ 259,605 $ 196,481 $ 178,465 $ 63,124 $ 18,016 Fuel 39,676 45,300 44,828 (5,624) 472 Standby power - 3,108 5,610 (3,108) (2,502) ---------- ------------ ----------- ----------- ------------- Total $ 299,281 $ 244,889 $ 228,903 $ 54,392 $ 15,986 ========== ============ =========== =========== =============
Purchased Power. During 1997, purchased power expense increased by $63.1 million due to additional MWH's purchased to meet increased sales requirements from the agreements negotiated with the two cogeneration customers during the second quarter of 1996. During 1996, purchased power expense increased by $18 million due to the increased purchases to meet increased sales requirements, primarily for the two cogeneration customers. Purchased power costs represent TNMP's largest operating expense. Based on current contracts, TU continues as TNMP's largest supplier of purchased power in Texas and is TNMP's highest priced supplier. As described in Note 10, TNMP entered into a new agreement to continue purchasing power from TU through June 30, 2002. TNMP expects a $22.4 million reduction in purchased power expense over the remaining life of this new agreement as compared to the existing agreement. Management expects, as a result of the developing competition within the wholesale power market, to enter into other new arrangements for such capacity and energy on terms that are more favorable for its customers. Fuel. Fuel expense in 1997 decreased $5.6 million, excluding amounts of non pass-through fuel expenditures, as compared to 1996. The decrease resulted from an extended planned outage at TNP One and increased economy sales. No fuel cost recovery is included in industrial economy rate sales. Fuel expense is directly related to the fixed fuel recovery factor last approved by the PUCT in connection with the 1994 Texas rate case settlement. The majority of TNMP's fuel expense is recovered in revenues and any difference from actual costs is deferred until a new factor is established. On June 30, 1997, TNMP filed a reconciliation of fuel expenses for the period from September 30, 1993 to December 31, 1996, with the PUCT. At the beginning of the reconciliation period, TNMP had a cumulative under-recovery of $11 million, and had a $4.4 million under-recovery as of the end of the reconciliation period. As of December 31, 1997, the under-recovered fuel amount was $0.1 million. The related fuel reconciliation filed with the PUCT is described in Note 2. Other Operating Expenses Other operating expenses in 1997 were comparable to 1996. Cost savings from reduced standby expenses resulting from implementation of the control area offset a $2.0 increase in the Texas transmission expenses. Other operating expenses were $2.0 million higher in 1996 than in 1995. The increase is due to higher payroll and payroll related items, incentive compensation and the reserve associated with the settlement of Series T FMB litigation. These increases were offset in part by reduced standby power costs resulting from the implementation of the control area in July 1996, as discussed in "Operating Revenues." Interest Charges During 1997, interest charges decreased $12.5 million due primarily to the retirement of Series T FMBs in January 1997 and applying strong cash flow from operations to reduce debt levels. The 11.25% Series T FMBs were retired with lower cost borrowings from the credit facilities and an equity contribution from TNP in late 1996, resulting from its common stock sale. During 1996 interest charges decreased $4.6 million due to the reduction in the amount of debt and lower interest rates on the credit facilities. During 1996 TNMP retired $91.7 million of FMBs and reduced the average amount outstanding under the credit facilities. Partially offsetting the reductions discussed above were interest charges of $1.3 million payable to the IRS associated with the resolution of outstanding tax audits for the years 1990 through 1994. Interest charges are expected to continue to decrease during 1998 due to reduced levels of overall long-term debt and reduced interest rate margins on the credit facilities. Liquidity and Capital Resources Sources of Liquidity The main sources of liquidity for TNP are cash flow from operations, borrowings from credit facilities and sale of additional common stock. TNP's cash flow from operations totaled $103.9 million, $65.2 million and $88.4 million in 1997, 1996, and 1995. Cash flow from operations continues to be strong, and increased in 1997 due to increased base revenues as described in "Results of Operations--Operating Revenues," and the one-time factoring of unbilled accounts receivables, which contributed $20.5 million to 1997 cash flow. Cash flow from operations had decreased in 1996 due to increased income tax payments. TNMP's cash flow from operations mirrored that of TNP. TNMP has two existing credit facilities with $150 million of unused borrowings available, as of December 31, 1997. TNP reserved 1 million shares of common stock for issuance through a direct stock purchase plan which began in 1997. The plan is designed to provide investors with a convenient method to purchase shares of TNP's common stock directly from the company and to reinvest cash dividends. The plan has replaced TNP's prior dividend reinvestment plan. As of January 26, 1998, the remaining reserve for direct stock purchase plan was 967,000 shares. Capital Resources TNP's and TNMP's capital structure continued to improve during 1997 as TNMP was able to reduce debt due to continued strong earnings for the year. The equity portion of TNP's capital structure increased from 34.1% at December 31, 1996, to 38.3% at December 31, 1997. Conversely, the long-term debt ratio decreased from 65.5% to 61.3% for the same period. TNMP experienced similar results with its capital ratios. TNMP's capital requirements through 2002 are projected to be as follows (amounts in millions):
1998 1999 2000 2001 2002 ------- -------- -------- ------- ------- FMB and secured debenture maturities (see Note 7) $ .1 $ 130.1 $ 100.1 $ .1 $ .1 Capital expenditures 32.1 36.4 36.5 37.4 39.0 ------- -------- -------- ------- ------- Total capital requirements $ 32.2 $ 166.5 $ 136.6 $ 37.5 $ 39.1 ======= ======== ======== ======= =======
TNMP believes that cash flow from operations and periodic borrowings under the credit facilities will be sufficient to meet working capital requirements and planned capital requirements through 1998. Other Matters Application of SFAS 71 As a result of the Energy Policy Act of 1992 and actions of regulatory commissions, the electric utility industry is moving toward a combination of competition and a modified regulatory environment. TNMP's financial statements currently reflect assets and costs based on current cost-based ratemaking regulations in accordance with SFAS 71, Accounting for the Effects of Certain Types of Regulation. Continued applicability of SFAS 71 to TNMP's financial statements requires that rates set by an independent regulator on a cost-of-service basis can actually be charged to and collected from customers. In the event that all or a portion of a utility's operations cease to meet those criteria for various reasons, including deregulation, a change in the method of regulation, or a change in the competitive environment for the utilities regulated service, the utility will have to discontinue SFAS 71 for that portion of operations. That discontinuation would be reported by the write-off of unrecoverable regulatory assets and liabilities. As discussed in Note 2, as a result of the Community Choice program in New Mexico, TNMP discontinued the application of SFAS 71 to its generation/power supply operations in New Mexico during 1997. The discontinuing of regulatory accounting principles had no effect on TNMP's financial condition. Also, as discussed in Note 2, TNMP has reached an agreement with the staff of the PUCT and other signatories regarding TNMP's proposed transition to competition plan. This agreement, subject to PUCT approval, would result in TNMP discontinuing the application of SFAS 71 to its generation/power supply operations in Texas. If the plan is approved without significant modification, the discontinuing of regulatory accounting principles is not expected to have a material effect on TNMP's financial condition. Management believes that, as of December 31, 1997, and for the foreseeable future, TNMP's transmission and distribution operations continue to follow SFAS 71. Earnings Per Share The Financial Accounting Standards Board issued SFAS 128, Earnings per Share, which became effective for financial statements ending December 31, 1997. SFAS 128 requires the calculation of basic and diluted earnings per share. Basic earnings per share is computed by dividing income applicable to common stock by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing income applicable to common stock by the weighted average number of common shares outstanding and common stock equivalents. The difference in current year basic and diluted earnings per share for TNP is immaterial, and, therefore, diluted earnings per share information is not presented. The application of SFAS 128 resulted in 1996 earnings per share to be increased by $0.02. Year 2000 Impact to Systems TNP has conducted extensive studies to analyze the impact of Year 2000 to all computerized systems. Based on these studies, it has devised, and is in the early stages of implementing, a plan to address the affected systems. The plan incorporates replacing outdated systems, upgrading to new vendor releases, and purchasing additional hardware during the next two years. The expected costs to implement this plan during the next two years are $7.2 million. TNP does not expect these expenditures to have a material impact on its results of operations. TNP expects to address the most critical systems during 1998. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. TNP's and TNMP's involvement in the trading of market risk sensitive instruments is minimal and does not have a material impact to either company's financial condition or results of operations. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Report of Independent Public Accountants ---------------------------------------- To the Shareholders and Board of Directors of TNP Enterprises, Inc.: We have audited the accompanying consolidated balance sheet of TNP Enterprises, Inc. (the "Company") (a Texas corporation) as of December 31, 1997, and the related consolidated statements of income, shareholders' investment and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Arthur Andersen LLP Fort Worth, Texas February 13, 1998 Report of Independent Public Accountants ---------------------------------------- To the Shareholder and Board of Directors of Texas-New Mexico Power Company: We have audited the accompanying consolidated balance sheet of Texas-New Mexico Power Company (the "Company") (a Texas corporation) as of December 31, 1997, and the related consolidated statements of income, shareholder's investment and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Arthur Andersen LLP Fort Worth, Texas February 13, 1998 Independent Auditors' Report ---------------------------- The Board of Directors and Shareholders TNP Enterprises, Inc.: We have audited the accompanying consolidated balance sheet and statement of capitalization of TNP Enterprises, Inc. and subsidiaries as of December 31, 1996, and the related consolidated statements of income, common shareholders' equity and cash flows for each of the years in the two-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TNP Enterprises, Inc. and subsidiaries as of December 31, 1996, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 1996, in conformity with generally accepted accounting principles. As discussed in Note 3 to the consolidated financial statements, the Company changed its method of accounting for operating revenues in 1995. KPMG Peat Marwick LLP Fort Worth, Texas January 30, 1997 Independent Auditors' Report ---------------------------- The Board of Directors Texas-New Mexico Power Company: We have audited the accompanying consolidated balance sheet and statement of capitalization of Texas-New Mexico Power Company (a wholly owned subsidiary of TNP Enterprises, Inc.) and subsidiaries as of December 31, 1996, and the related consolidated statements of income, common shareholder's equity and cash flows for each of the years in the two-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Texas-New Mexico Power Company and subsidiaries as of December 31, 1996, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 1996, in conformity with generally accepted accounting principles. As discussed in Note 3 to the consolidated financial statements, the Company changed its method of accounting for operating revenues in 1995. KPMG Peat Marwick LLP Fort Worth, Texas January 30, 1997
TNP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 1997 1996 1995 ----------------- ----------------- ----------------- (In thousands except per share amounts) OPERATING REVENUES $ 585,234 $ 502,737 $ 485,823 ----------------- ----------------- ----------------- OPERATING EXPENSES: Purchased power 261,043 196,481 178,465 Fuel 41,730 47,201 48,898 Other operating and maintenance 94,075 84,417 82,833 Depreciation 38,936 38,172 37,850 Taxes other than income taxes 33,696 33,256 28,865 Income taxes 20,108 10,375 12,317 ----------------- ----------------- ----------------- Total operating expenses 489,588 409,902 389,228 ----------------- ----------------- ----------------- NET OPERATING INCOME 95,646 92,835 96,595 ----------------- ----------------- ----------------- OTHER INCOME: Gain on sale of Texas Panhandle properties - - 14,583 Other income and deductions, net 1,466 1,956 1,245 Income taxes 257 722 (5,403) ----------------- ----------------- ----------------- Other income, net of taxes 1,723 2,678 10,425 ----------------- ----------------- ----------------- INCOME BEFORE INTEREST CHARGES 97,369 95,513 107,020 ----------------- ----------------- ----------------- INTEREST CHARGES: Interest on long-term debt 52,557 64,654 70,544 Other interest and amortization of debt-related costs 4,357 4,709 3,416 ----------------- ----------------- ----------------- Total interest charges 56,914 69,363 73,960 ----------------- ----------------- ----------------- INCOME FROM CONTINUING OPERATIONS BEFORE THE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 40,455 26,150 33,060 Loss from discontinued nonregulated operations, net of taxes (note 4) 10,777 3,097 - ----------------- ----------------- ----------------- INCOME BEFORE THE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING 29,678 23,053 33,060 Cumulative effect of change in accounting for unbilled revenues, net of taxes (note 3) - - 8,445 ----------------- ----------------- ----------------- NET INCOME 29,678 23,053 41,505 Dividends on preferred stock 158 167 655 ----------------- ----------------- ----------------- INCOME APPLICABLE TO COMMON STOCK $ 29,520 $ 22,886 $ 40,850 ================= ================= ================= EARNINGS PER SHARE OF COMMON STOCK: Earnings from continuing operations before the cumulative effect of accounting change $ 3.08 $ 2.27 $ 2.98 Loss from discontinued nonregulated operations (0.82) (0.27) - Earnings from cumulative effect of change in accounting - - 0.77 ----------------- ----------------- ----------------- EARNINGS PER SHARE $ 2.26 $ 2.00 $ 3.75 ================= ================= ================= DIVIDENDS PER SHARE OF COMMON STOCK $ 1.005 $ 0.93 $ 0.82 ================= ================= ================= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 13,083 11,465 10,901 ================= ================= ================= The accompanying notes are an integral part of these consolidated financial statements.
TNP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1997 1996 1995 ---------------- ------------------ ----------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from sales to customers $ 625,032 $ 505,307 $ 481,470 Purchased power (262,107) (198,696) (172,486) Fuel costs paid (37,447) (45,576) (44,781) Cash paid for payroll and to other suppliers (125,188) (75,138) (76,735) Interest paid, net of amounts capitalized (57,337) (69,247) (68,484) Income taxes paid (9,089) (15,684) (1,095) Other taxes paid (32,990) (32,243) (30,556) Other operating cash receipts and payments, net 2,979 (3,522) 1,043 ---------------- ------------------ ----------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 103,853 65,201 88,376 ---------------- ------------------ ----------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to utility plant (28,232) (28,006) (28,689) Additions to other property and nonregulated investments (1,777) (2,771) - Net proceeds from sale of Texas Panhandle properties - - 29,009 Maturities of temporary investments - - 5,590 ---------------- ------------------ ----------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (30,009) (30,777) 5,910 ---------------- ------------------ ----------------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid on preferred and common stocks (13,305) (10,866) (9,616) Common stock issuances 3,392 48,798 856 Borrowings from (repayments to) revolving credit facilities - net 45,000 12,000 (42,272) Other long-term debt issuances - 202 - Deferred expenses associated with financings - (588) (2,096) Redemptions: Obligation - FWI investment aquisition (300) - - Other long-term debt (61) - - Preferred stock (180) (180) (5,080) First mortgage bonds (100,900) (96,508) (30,270) ---------------- ------------------ ----------------- NET CASH USED IN FINANCING ACTIVITIES (66,354) (47,142) (88,478) ---------------- ------------------ ----------------- NET CHANGE IN CASH AND CASH EQUIVALENTS 7,490 (12,718) 5,808 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,387 21,105 15,297 ---------------- ------------------ ----------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15,877 $ 8,387 $ 21,105 ================ ================== ================= RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net income $ 29,678 $ 23,053 $ 41,505 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of change in accounting for unbilled revenues, net of taxes - - (8,445) Gain on sale of Texas Panhandle properties - - (14,583) Recognition of deferred revenues - - (4,782) Depreciation 38,936 38,170 37,850 Amortization of debt-related costs and other deferred charges 3,184 3,329 4,952 Allowance for borrowed funds used during construction (47) (99) (162) Deferred income taxes 9,064 (193) 5,256 Investment tax credits (1,813) (380) 1,679 Cash flows impacted by changes in current assets and liabilities: Deferred purchased power and fuel costs 995 5,696 5,997 Accrued interest (3,556) (3,103) 2,289 Accrued taxes (1,244) (7,372) 8,483 Changes in other current assets and liabilities 25,099 (1,507) 8,826 Other, net 3,557 7,607 (489) ---------------- ------------------ ----------------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 103,853 $ 65,201 $ 88,376 ================ ================== ================= The accompanying notes are an integral part of these consolidated financial statements.
TNP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1997 1996 --------------- ---------------- (In thousands) ASSETS UTILITY PLANT: Electric plant $ 1,235,257 $ 1,215,355 Construction work in progress 2,281 906 --------------- ---------------- Total 1,237,538 1,216,261 Less accumulated depreciation 314,270 282,322 --------------- ---------------- Net utility plant 923,268 933,939 --------------- ---------------- OTHER PROPERTY AND INVESTMENTS, at cost 5,704 3,927 --------------- ---------------- CURRENT ASSETS: Cash and cash equivalents 15,877 8,387 Receivables: Customer 7,380 16,362 Other 1,205 594 Inventories, at lower of average cost or market: Fuel 483 367 Materials and supplies 4,440 6,384 Deferred purchased power and fuel costs 2,570 3,565 Accumulated deferred income taxes 1,707 1,937 Other current assets 982 527 --------------- ---------------- Total current assets 34,644 38,123 --------------- ---------------- DEFERRED CHARGES 28,310 30,795 --------------- ---------------- $ 991,926 $ 1,006,784 =============== ================ CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common shareholders' equity: Common stock - no par value per share. Authorized 50,000,000 shares; issued 13,132,821 shares in 1997 and 13,006,492 in 1996 $ 187,163 $ 183,771 Retained earnings 111,078 94,703 --------------- ---------------- Total common shareholders' equity 298,241 278,474 Preferred stock 3,240 3,420 Long-term debt, less current maturities 478,041 533,964 --------------- ---------------- Total capitalization 779,522 815,858 --------------- ---------------- CURRENT LIABILITIES: Current maturities of long-term debt 100 138 Accounts payable 27,035 28,446 Accrued interest 7,323 10,879 Accrued taxes 17,589 18,833 Customers' deposits 3,249 2,662 Other current liabilities 26,665 11,797 --------------- ---------------- Total current liabilities 81,961 72,755 --------------- ---------------- REGULATORY TAX LIABILITIES 6,318 10,963 ACCUMULATED DEFERRED INCOME TAXES 85,250 74,844 ACCUMULATED DEFERRED INVESTMENT TAX CREDITS 21,149 19,734 DEFERRED CREDITS 17,726 12,630 COMMITMENTS AND CONTINGENCIES (Notes 1, 2, and 10) --------------- ---------------- $ 991,926 $ 1,006,784 =============== ================ The accompanying notes are an integral part of these consolidated financial statements.
TNP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CAPITALIZATION December 31, 1997 1996 -------------- --------------- (In thousands) COMMON SHAREHOLDERS' EQUITY - --------------------------- Common stock with no par value per share Authorized shares - 50,000,000 Outstanding shares - 13,132,821 in 1997 and 13,006,492 in 1996 $ 187,163 $ 183,771 Retained earnings 111,078 94,703 -------------- --------------- Total common shareholders' equity 298,241 278,474 -------------- --------------- PREFERRED STOCK - --------------- Preferred stock with no par value Authorized shares - 5,000,000 Outstanding shares - None Redeemable cumulative preferred stock of TNMP with $100 par value Authorized shares - 1,000,000 Redemption price at TNMP's Outstanding shares option 1997 1996 ------ ---- ---- Series B 4.65% $ 100.00 20,400 21,600 2,040 2,160 Series C 4.75% 100.00 12,000 12,600 1,200 1,260 --------- ---------- -------------- --------------- Total redeemable cumulative preferred stock 32,400 34,200 3,240 3,420 --------- ---------- -------------- --------------- LONG-TERM DEBT - -------------- FIRST MORTGAGE BONDS Series M 8.7 due 2006 8,000 8,100 Series T 11.2 due 1997 - 100,800 Series U 9.2 due 2000 100,000 100,000 SECURED DEBENTURES 12.50% due 1999 130,000 130,000 Series A 10.75% due 2003 140,000 140,000 REVOLVING CREDIT FACILITIES 1995 Facility - - 1996 Facility 100,000 55,000 OTHER 141 202 -------------- --------------- Total long-term debt 478,141 534,102 Less current maturities (100) (138) -------------- --------------- Total long-term debt, less current maturities 478,041 533,964 -------------- --------------- TOTAL CAPITALIZATION $ 779,522 $ 815,858 ============== =============== The accompanying notes are an integral part of these consolidated financial statements.
TNP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY For the Years Ended December 31, Common Shareholders' Equity ------------------------------------------------------------ Common Stock Retained Shares Amount Earnings Total ------------ ------------- ------------- -------------- (In thousands) YEAR ENDED DECEMBER 31, 1995 Balance at January 1, 1995 10,866 $ 134,117 $ 50,752 $ 184,869 Net income - - 41,505 41,505 Dividends on preferred stock - - (655) (655) Dividends on common stock - $0.82 per share - - (8,938) (8,938) Sale of common stock 54 856 - 856 Retirement of preferred stock - - (180) (180) ------------ ------------- -------------- -------------- Balance at December 31, 1995 10,920 134,973 82,484 217,457 YEAR ENDED DECEMBER 31, 1996 Net income - - 23,053 23,053 Dividends on preferred stock - - (167) (167) Dividends on common stock - $0.93 per share - - (10,699) (10,699) Sale of common stock 2,086 48,798 - 48,798 Retirement of preferred stock - - 32 32 ------------ ------------- -------------- -------------- Balance at December 31, 1996 13,006 183,771 94,703 278,474 YEAR ENDED DECEMBER 31, 1997 Net income - - 29,678 29,678 Dividends on preferred stock - - (158) (158) Dividends on common stock - $1.005 per share - - (13,158) (13,158) Sale of common stock 127 3,392 - 3,392 Retirement of preferred stock - - 13 13 ------------ ------------- -------------- -------------- Balance at December 31, 1997 13,133 $ 187,163 $ 111,078 $ 298,241 ============ ============= ============== ============== The accompanying notes are an integral part of these consolidated financial statements.
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of TNP Enterprises, Inc.) CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 1997 1996 1995 ---------------- ---------------- ---------------- (In thousands) OPERATING REVENUES $ 580,693 $ 502,737 $ 485,823 ---------------- ---------------- ---------------- OPERATING EXPENSES: Purchased power 261,043 196,481 178,465 Fuel 41,730 47,201 48,898 Other operating and maintenance 84,294 83,948 82,833 Depreciation of utility plant 38,851 38,170 37,850 Taxes other than income taxes 33,260 32,727 28,865 Income taxes 22,062 10,333 12,317 ---------------- ---------------- ---------------- Total operating expenses 481,240 408,860 389,228 ---------------- ---------------- ---------------- NET OPERATING INCOME 99,453 93,877 96,595 ---------------- ---------------- ---------------- OTHER INCOME: Gain on sale of Texas Panhandle properties - - 14,583 Other income and deductions, net 1,120 1,626 1,470 Income taxes 257 722 (5,324) ---------------- ---------------- ---------------- Other income, net of taxes 1,377 2,348 10,729 ---------------- ---------------- ---------------- INCOME BEFORE INTEREST CHARGES 100,830 96,225 107,324 ---------------- ---------------- ---------------- INTEREST CHARGES: Interest on long-term debt 52,557 64,654 70,544 Other interest and amortization of debt-related costs 4,355 4,709 3,416 ---------------- ---------------- ---------------- Total interest charges 56,912 69,363 73,960 ---------------- ---------------- ---------------- INCOME BEFORE THE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING 43,918 26,862 33,364 Cumulative effect of change in accounting for unbilled revenues, net of taxes (note 3) - - 8,445 ---------------- ---------------- ---------------- NET INCOME 43,918 26,862 41,809 Dividends on preferred stock 158 167 655 ---------------- ---------------- ---------------- INCOME APPLICABLE TO COMMON STOCK $ 43,760 $ 26,695 $ 41,154 ================ ================ ================ The accompanying notes are an integral part of these consolidated financial statements.
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of TNP Enterprises, Inc.) CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1997 1996 1995 ---------------- -------------- --------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from sales to customers $ 606,803 $ 502,954 $ 481,470 Purchased power (262,107) (198,696) (172,486) Fuel costs paid (37,447) (45,576) (44,781) Cash paid for payroll and to other suppliers (86,607) (75,807) (76,793) Interest paid, net of amounts capitalized (57,331) (69,236) (68,484) Income taxes paid (8,464) (14,242) (1,199) Other taxes paid (32,980) (31,219) (30,054) Other operating cash receipts and payments, net 2,600 1,135 639 ---------------- -------------- --------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 124,467 69,313 88,312 ---------------- -------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to utility plant (27,942) (28,006) (28,689) Net proceeds from sale of Texas Panhandle properties - - 29,009 Withdrawals from (deposits to) escrow account 1,670 (1,669) - ---------------- -------------- --------------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES (26,272) (29,675) 320 ---------------- -------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid on preferred and common stocks (44,458) (10,867) (3,078) Equity contribution from TNP Enterprises - 47,170 - Borrowings from (repayments to) revolving credit facilities - net 45,000 12,000 (42,272) Deferred expenses associated with financings - (588) (2,096) Redemptions: First mortgage bonds (100,900) (96,508) (30,270) Preferred stock (180) (180) (5,080) ---------------- -------------- --------------- NET CASH USED IN FINANCING ACTIVITIES (100,538) (48,973) (82,796) ---------------- -------------- --------------- NET CHANGE IN CASH AND CASH EQUIVALENTS (2,343) (9,335) 5,836 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,115 14,450 8,614 ---------------- -------------- --------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,772 $ 5,115 $ 14,450 ================ ============== =============== RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net income $ 43,918 $ 26,862 $ 41,809 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of change in accounting for unbilled revenues, net of taxes - - (8,445) Gain on sale of Texas Panhandle properties - - (14,583) Recognition of deferred revenues - - (4,782) Depreciation of utility plant 38,851 38,170 37,850 Amortization of debt-related costs and other deferred charges 3,184 3,329 4,952 Allowance for borrowed funds used during construction (47) (99) (162) Deferred income taxes (excluding the effect of change in accounting) 14,584 1,140 5,132 Investment tax credits (1,813) (111) 1,691 Cash flows impacted by changes in current assets and liabilities: Deferred purchased power and fuel costs 995 5,696 5,997 Accrued interest (3,556) (3,103) 2,289 Accrued taxes 850 (8,429) 8,432 Changes in other current assets and liabilities 24,751 786 8,862 Other, net 2,750 5,072 (730) ---------------- -------------- --------------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 124,467 $ 69,313 $ 88,312 ================ ============== =============== The accompanying notes are an integral part of these consolidated financial statements.
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of TNP Enterprises, Inc.) CONSOLIDATED BALANCE SHEETS December 31, 1997 1996 --------------- ---------------- (In thousands) ASSETS UTILITY PLANT: Electric plant $ 1,235,239 $ 1,215,355 Construction work in progress 2,281 906 --------------- ---------------- Total 1,237,520 1,216,261 Less accumulated depreciation 314,270 282,322 --------------- ---------------- Net utility plant 923,250 933,939 --------------- ---------------- OTHER PROPERTY AND INVESTMENTS, at cost 214 1,884 --------------- ---------------- CURRENT ASSETS: Cash and cash equivalents 2,772 5,115 Receivables: Customer 460 15,521 Other 1,882 1,196 Inventories, at lower of average cost or market: Fuel 483 367 Materials and supplies 4,440 6,384 Deferred purchased power and fuel costs 2,570 3,565 Accumulated deferred income taxes 1,707 1,937 Other current assets 222 128 --------------- ---------------- Total current assets 14,536 34,213 --------------- ---------------- DEFERRED CHARGES 29,006 32,121 --------------- ---------------- $ 967,006 $ 1,002,157 =============== ================ CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common shareholder's equity: Common stock, $10 par value per share Authorized 12,000,000 shares; issued 10,705 shares $ 107 $ 107 Capital in excess of par value 222,146 222,133 Retained earnings 64,768 65,308 --------------- ---------------- Total common shareholder's equity 287,021 287,548 Redeemable cumulative preferred stock 3,240 3,420 Long-term debt, less current maturities 477,900 533,800 --------------- ---------------- Total capitalization 768,161 824,768 --------------- ---------------- CURRENT LIABILITIES: Current maturities of long-term debt 100 100 Accounts payable 24,859 27,254 Accrued interest 7,323 10,879 Accrued taxes 17,751 16,901 Customers' deposits 3,249 2,662 Other current liabilities 19,148 10,993 --------------- ---------------- Total current liabilities 72,430 68,789 --------------- ---------------- REGULATORY TAX LIABILITIES 6,318 10,963 ACCUMULATED DEFERRED INCOME TAXES 81,085 65,860 ACCUMULATED DEFERRED INVESTMENT TAX CREDITS 21,286 19,164 DEFERRED CREDITS 17,726 12,613 COMMITMENTS AND CONTINGENCIES (Notes 1, 2, and 10) --------------- ---------------- $ 967,006 $ 1,002,157 =============== ================ The accompanying notes are an integral part of these consolidated financial statements.
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of TNP Enterprises, Inc.) CONSOLIDATED STATEMENTS OF CAPITALIZATION December 31, 1997 1996 --------------- ---------------- (In thousands) COMMON SHAREHOLDER'S EQUITY - --------------------------- Common stock, $10 par value per share Authorized shares - 12,000,000 Outstanding shares - 10,705 $ 107 $ 107 Capital in excess of par value 222,146 222,133 Retained earnings 64,768 65,308 --------------- ---------------- Total common shareholder's equity 287,021 287,548 --------------- ---------------- PREFERRED STOCK - --------------- Redeemable cumulative preferred stock with $100 par value Authorized shares - 1,000,000 Redemption price at TNMP's Outstanding shares option 1997 1996 ------ ---- ---- Series B 4.65% $ 100.00 20,400 21,600 2,040 2,160 Series C 4.75% 100.00 12,000 12,600 1,200 1,260 ---------- ----------- --------------- ---------------- Total redeemable cumulative preferred stock 32,400 34,200 3,240 3,420 ---------- ----------- --------------- ---------------- LONG-TERM DEBT - -------------- FIRST MORTGAGE BONDS Series M 8.7 due 2006 8,000 8,100 Series T 11.2 due 1997 - 100,800 Series U 9.2 due 2000 100,000 100,000 SECURED DEBENTURES 12.50% due 1999 130,000 130,000 Series A 10.75% due 2003 140,000 140,000 REVOLVING CREDIT FACILITIES 1995 Facility - - 1996 Facility 100,000 55,000 --------------- ---------------- Total long-term debt 478,000 533,900 Less current maturities (100) (100) --------------- ---------------- Total long-term debt, less current maturities 477,900 533,800 --------------- ---------------- TOTAL CAPITALIZATION $ 768,161 $ 824,768 =============== ================ The accompanying notes are an integral part of these consolidated financial statements.
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of TNP Enterprises, Inc.) CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDER'S EQUITY For the Years Ended December 31, Common Shareholder's Equity ----------------------------------------------------------------------- Capital in Common Stock Excess of Retained Shares Amount Par Value Earnings Total ------------ ------------- ------------- ------------- ------------- (In thousands) YEAR ENDED DECEMBER 31, 1995 Balance at January 1, 1995 11 $ 107 $ 175,111 $ 10,559 $ 185,777 Net income - - - 41,809 41,809 Dividends on preferred stock - - - (655) (655) Dividends on common stock - - - (2,400) (2,400) Retirement of preferred stock - - (180) - (180) ------------ ------------- ------------- ------------- ------------- Balance at December 31, 1995 11 107 174,931 49,313 224,351 YEAR ENDED DECEMBER 31, 1996 Net income - - - 26,862 26,862 Dividends on preferred stock - - - (167) (167) Dividends on common stock - - - (10,700) (10,700) Equity contribution from TNP Enterprises - - 47,170 - 47,170 Retirement of preferred stock - - 32 - 32 ------------ ------------- ------------- ------------- ------------- Balance at December 31, 1996 11 107 222,133 65,308 287,548 YEAR ENDED DECEMBER 31, 1997 Net income - - - 43,918 43,918 Dividends on preferred stock - - - (158) (158) Dividends on common stock - - - (44,300) (44,300) Retirement of preferred stock - - 13 - 13 ------------ ------------- ------------- ------------- ------------- Balance at December 31, 1997 11 $ 107 $ 222,146 $ 64,768 $ 287,021 ============ ============= ============= ============= ============= The accompanying notes are an integral part of these consolidated financial statements.
TNP ENTERPRISES, INC. AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies General Information The consolidated financial statements of TNP and subsidiaries include the accounts of TNP and its wholly owned subsidiaries, TNMP, FWI, and TNP Operating Company. The consolidated financial statements of TNMP and subsidiaries include the accounts of TNMP and its wholly owned subsidiaries, TGC and TGC II. All intercompany transactions and balances have been eliminated in consolidation. TNMP is TNP's principal operating subsidiary. TNMP is a public utility engaged in generating, purchasing, transmitting, distributing, and selling electricity in Texas and New Mexico. TNMP is subject to PUCT and NMPUC regulation. Some of TNMP's activities, including the issuance of securities, are subject to FERC regulation, and its accounting records are maintained in accordance with FERC's Uniform System of Accounts. The use of estimates is required to prepare TNP's and TNMP's consolidated financial statements in conformity with generally accepted accounting principles. Management believes that estimates are essential and will not materially differ from actual results. However, adjustments may be necessary in the future to the extent that future estimates or actual results are different from the estimates used in the 1997 financial statements. Accounting for the Effects of Regulation Electric utilities operate in a highly regulated environment. TNP's and TNMP's consolidated financial statements reflect the application of certain accounting standards, including SFAS 71, "Accounting for the Effects of Certain Types of Regulation," which provide for recognition of the economic effects of rate regulation. Among these effects are the recognition of regulatory assets and liabilities. Regulatory assets represent revenues associated with certain costs that are expected to be recovered from customers in future rates. Regulatory liabilities are costs previously collected from customers or other amounts that reduce future rates. The following table summarizes TNP's and TNMP's regulatory assets and liabilities as of December 31, 1997 and 1996.
1997 1996 ---- ---- (In thousands) Regulatory Assets: Deferred purchased power and fuel costs $ 2,570 $ 3,565 Deferred charges: Losses on reacquired debt 8,621 10,000 Rate case expenses 3,638 3,743 Deferred accounting amounts 4,026 4,157 -------- --------- Total $ 18,855 $ 21,465 ======== ========= Regulatory Liabilities: Income tax related $ 6,318 $ 10,963 ======== =========
Federal and state legislators and regulatory authorities have adopted or are considering a number of changes that are significantly impacting competitive conditions in the electric utility industry, such as the emergence of independent power producers, wholesale transmission access, and retail wheeling. If recovery of costs through rates becomes uncertain or unlikely, whether due to legislative or regulatory changes, competition, or otherwise, accounting standards such as SFAS 71 may no longer apply to TNP and TNMP. As a result, TNP and TNMP could be required to write off all or a portion of their regulatory assets and liabilities. Moreover, to the extent that future rates are insufficient to recover costs, additional write downs could be required. Management of TNP and TNMP are currently unable to predict the ultimate outcome of changes in the electric utility industry and whether the outcome will have a significant effect on their consolidated financial position and results of operations. However, based upon current regulatory conditions in the states in which TNMP operates, management believes it probable that TNMP will continue, for the foreseeable future, to meet the criteria for continued application of SFAS 71 to its transmission and distribution portions of its business. See Note 2 for information regarding the Texas transition to competition plan and the New Mexico Community Choice plan. Based on those plans it is probable that TNMP will recover from customers the regulatory assets included in the table above. Utility Plant Utility plant is stated at the historical cost of construction which includes labor, materials, indirect charges for such items as engineering and administrative costs, and AFUDC. Property repairs and replacement of minor items are charged to operating expenses; major replacements and improvements are capitalized to utility plant. AFUDC is a noncash item designed to enable a utility to capitalize interest costs during periods of construction. Established regulatory practices enable TNMP to recover these costs from ratepayers. The composite rates used for AFUDC were 6.0%, 6.0%, and 8.0% in 1997, 1996, and 1995, respectively. The costs of depreciable units of plant retired or disposed of in the normal course of business are eliminated from utility plant accounts and such costs plus removal expenses less salvage are charged to accumulated depreciation. When complete operating units are disposed of, appropriate adjustments are made to accumulated depreciation, and the resulting gains or losses, if any, are recognized. Depreciation is provided on a straight-line method based on the estimated lives of the properties as indicated by periodic depreciation studies. A portion of depreciation of transportation equipment used in construction is charged to utility plant accounts in accordance with the equipment's use. Depreciation as a percentage of average depreciable cost was 3.3%, 3.2%, and 3.3% in 1997, 1996, and 1995, respectively. Cash Equivalents All highly liquid debt instruments with maturities of three months or less when purchased are considered cash equivalents. Customer Receivables and Operating Revenues TNMP accrues estimated revenues for energy delivered since the latest billing. Prior to January 1, 1995, TNMP recognized revenue when billed. See Note 3 for the effects of the change in recognizing revenues from cycle billing to the accrual method in 1995. TNMP sells customer receivables to an unaffiliated company on a nonrecourse basis. Purchased Power and Fuel Costs Electric rates include estimates of purchased power and fuel costs incurred by TNMP in purchasing or generating electricity. In TNMP's Texas jurisdiction, differences between amounts collected and allowable costs are generally recorded either as purchased power subject to refund or deferred purchased power and fuel costs in accordance with regulatory ratemaking policy. See Note 2 for changes in the recovery of purchased power costs, resulting from the implementation of New Mexico Community Choice. Deferred Charges Expenses incurred in issuing long-term debt and related discount and premium are amortized on a straight-line basis over the lives of the respective issues. Included in deferred charges are other assets that are expected to benefit future periods and certain costs that are deferred for ratemaking purposes and amortized over periods allowed by regulatory authorities. Derivatives Premiums paid for an interest rate collar will be amortized over the term of the related agreement. Unamortized premiums are included in Deferred Charges in the consolidated balance sheets. Amounts to be received or paid under the agreement will be recognized on the accrual basis as a component of interest expense. Income Taxes TNP files a consolidated federal income tax return that includes the consolidated operations of TNMP and its subsidiaries. The amounts of income taxes recognized in TNMP's accompanying consolidated financial statements were computed as if TNMP and its subsidiaries filed a separate consolidated federal income tax return. ITC amounts utilized in the federal income tax return are deferred and amortized to earnings ratably over the estimated service lives of the related assets. Fair Values of Financial Instruments Fair values of cash equivalents, temporary investments, and customer receivables approximated the carrying amounts because of the short maturities of those instruments. The estimated fair values of long-term debt and preferred stock were based on quoted market prices of the same or similar issues. The estimated fair values of long-term debt and preferred stock were as follows:
December 31, 1997 December 31, 1996 ----------------------------- ------------------------------ Carrying Amount Fair Values Carrying Amount Fair Values --------------- ----------- --------------- ----------- (In thousands) Long-term debt $ 478,000 $505,400 $ 533,900 $ 564,000 Preferred stock 3,240 2,653 3,420 1,500 Interest rate collar 262 235 295 180
Common Stock At December 31, 1997, 170,495 shares of TNP's common stock were reserved for issuance to TNMP's 401(k) plan. Additionally, at January 26, 1998, 1,224,056 shares of TNP's common stock were reserved for subsequent issuance under other stock compensation or shareholder plans. Shareholder Rights Plan TNP has a shareholder rights plan that is designed to protect TNP's shareholders from coercive takeover tactics and inadequate or unfair takeover bids. The rights plan provides for the distribution of one right for each share of TNP's common stock currently outstanding or issued until the close of business on November 4, 1998. Upon the occurrence of certain events, each right entitles a shareholder to elect to purchase one share of common stock at $45 per share or, under certain circumstances, shares of common stock at half the then-current market price or to receive TNP common stock or other securities having an aggregate value equal to the excess of (i) the value of the common stock or other securities on the date the rights are exercised over (ii) the cash payment that would have been payable upon exercise of the rights if cash payment had been elected. Until certain triggering events occur, the rights will trade together with TNP's common stock and separate rights certificates will not be issued. Among the triggering events are the acquisition by a person or group of 10% or more of TNP's outstanding common stock or the commencement of a tender or exchange offer that, upon consummation, would result in a person or group of persons owning 15% or more of TNP's outstanding common stock. The rights expire November 4, 1998, unless earlier redeemed or exchanged by TNP, and have had no effect on EPS. Stock-Based Compensation As discussed in Note 5, TNP has an equity based incentive compensation plan that awards stock-based compensation. In 1995 the FASB issued SFAS 123, Accounting for Stock-Based Compensation, that changes the method for calculating expenses associated with stock-based compensation. SFAS 123, which became effective for 1996, also allows companies to retain the approach as set forth in APB Opinion 25, Accounting for Stock Issued to Employees, for measuring expense for its stock-based compensation. TNMP has elected to continue to apply the provisions of APB Opinion 25 in calculating stock-based compensation. The application of SFAS 123 would have had no effect on the amount of expense associated with its stock-based compensation. Reclassification Certain amounts in 1996 were restated to conform with the 1997 method of presentation. In accordance with SFAS 128, 1996 earnings per share was restated and resulted in an increase of $0.02 per share. Note 2. Regulatory Matters As the electric utility industry continues its transition toward an environment of increased competition, the most significant effect of competition on TNMP, as well as other utilities, will be the ability to recover potential stranded costs. "Stranded costs" is the difference between what it currently costs TNMP to provide energy and what a customer would be willing to pay for such service in a competitive market. The inability to recover a significant portion of stranded costs would adversely impact TNP's and TNMP's financial condition. In Texas, TNMP's potential stranded cost relates to TNP One, its 300 MW generating unit, and could potentially be more than $270 million. In New Mexico, TNMP's potential stranded cost relates to its fixed purchased power contracts and could potentially be $3 million to $9 million. The following discusses TNMP's strategy to transition to competition and provides TNMP the ability to recover its potential stranded costs in Texas and New Mexico. Texas Rate Filing and Transition to Competition Plan In December 1996, certain cities in the Texas Gulf Coast area (Gulf Coast Cities) served by TNMP passed resolutions requiring TNMP to file complete rate information with those cities. On July 31, 1997, TNMP filed the required traditional rate information, based on the test year ended December 31, 1996, with the Gulf Coast Cities. Agreements with the cities provide that any rate reduction resulting from the city ordinances requiring the traditional rate filing will be placed into effect retroactive to May 15, 1997. Based on its analysis, TNMP believes the filing supports the reasonableness of TNMP's current rates. Simultaneous with the Gulf Coast Cities rate filing, TNMP filed a transition to competition plan with the PUCT and all of its Texas cities. On December 22, 1997, TNMP and the staff of the PUCT, along with other signatories reached an agreement on TNMP's proposed transition to competition plan. The agreement proposes a five-year transition period, with a series of rate reductions for residential and commercial customers beginning in 1998. At the end of the transition period, TNMP's Texas customers would be allowed to choose their energy supplier. The agreement provides the opportunity for TNMP to recover a portion of its stranded costs during the transition period by using additional depreciation on TNP One and applying a portion of earnings in excess of an earnings cap amount. Also, the agreement establishes a competitive transition charge to recover any stranded cost that remains at the end of the transition period over the subsequent five years. TNMP will continue working with other interested parties to obtain their approval before forwarding this agreement to PUCT for their approval. PUCT approval is expected by mid-1998. This agreement, subject to PUCT approval, would result in TNMP discontinuing the application of SFAS 71 to its generation/power supply operations in Texas. If the plan is approved without significant modification, the discontinuation of regulatory accounting principles is not expected to have a material effect on TNMP's financial condition. The transmission and distribution operations in Texas will continue to follow SFAS 71. New Mexico Community Choice Following NMPUC approval on April 11, 1997, TNMP implemented Community Choice, its plan for transition to competition for its New Mexico service territory effective May 1, 1997. The plan provides TNMP's customers the right to choose their energy provider after a three-year transition period. The plan freezes rates (including the recovery of purchased power) during the transition period, and allows for customer aggregation based on market forces. TNMP believes the plan will allow it to recover its potential stranded costs in New Mexico. As a result of the New Mexico Community Choice plan, the power supply portion of TNMP's New Mexico operations no longer qualifies for the application of SFAS 71. Accordingly, in 1997, TNMP discontinued regulatory accounting principles for the New Mexico power supply operations. The discontinuation of SFAS 71 had no effect on TNMP's financial statements as of December 31, 1997. The transmission and distribution operations in New Mexico will continue to follow SFAS 71. Fuel Reconciliation TNMP's fixed fuel factor remains constant until changed as part of a general rate case or fuel reconciliation, or until the PUCT orders a reconciliation for any over or under collections of fuel costs. TNMP filed a reconciliation of fuel costs in June 1997, for the period of October 1993 through December 1996. In January 1998, TNMP reached a stipulated agreement with the staff of the PUCT and several other interested parties. The agreement, which is subject to approval by the PUCT, specifies all fuel costs incurred during the reconciliation period should be approved as reasonable and necessary costs. Also, the agreement does not propose a change to the fixed fuel factor; however, it specifies the fuel factor is expected to be addressed in the "Texas Rate Filing and Transition to Competition Plan" described above. Note 3. Change in Accounting for Unbilled Revenues Effective January 1, 1995, TNMP changed its method of accounting for operating revenues from cycle billing to the accrual method. The change was made in order to more closely match revenues and expenses and more closely conforms to common utility industry practice. The cumulative effect of this change was to recognize $12,993,000 of additional revenues ($8,445,000, net of taxes, or $0.77 per share). Note 4. Discontinued Nonregulated Operations Management, with approval from the Board of Directors, authorized a plan to discontinue the construction activities of FWI in late 1997. FWI will continue to operate its service and maintenance segment of its business. The pre-tax loss on discontinued operations recognized in 1997 of $16.3 million ($10.8 million, net of taxes, or $0.82 per share) includes the net loss on the construction segment and costs to satisfy remaining contractual obligations related to its discontinued construction operations of $9.5 million, net of taxes, as well as disposal costs of $1.3 million, net of taxes. Since the costs to dispose of the construction segment are not significant, this amount has been included in the 1997 loss on discontinued operations. The construction segment is expected to be fully disposed of within one year. During 1996, FWI had incurred a net loss from construction segment of $3.1 million, or $0.27 per share. Note 5. Employee Benefit Plans Pension Plan TNMP has a defined benefit pension plan covering substantially all of its employees. Benefits are based on an employee's years of service and compensation. TNMP's funding policy is to contribute the minimum amount required by federal funding standards. The following table sets forth the plan's funded status and amounts recognized in the consolidated balance sheets at December 31, 1997, and 1996.
1997 1996 -------- ---------- (In thousands) Actuarial present value of benefit obligations: Vested benefit obligation $ 66,061 $ 58,466 Unvested benefit obligation 4,803 4,539 -------- ---------- Accumulated benefit obligation $ 70,864 $ 63,005 ======== ========== Projected benefit obligation $ 76,316 $ 66,406 Unrecognized net asset 59 83 Unrecognized prior service cost 1,434 1,588 Unrecognized net gain from past experience 24,779 21,484 -------- ---------- 102,588 89,561 Plan assets (principally marketable securities) at estimated fair value 95,751 82,771 -------- ---------- Accrued pension costs (included in deferred credits in the consolidated balance sheets) $ 6,837 $ 6,790 ======== ========== Net pension costs were comprised of the following components as determined using the projected unit credit actuarial method: 1997 1996 1995 --------- ----------- ----------- (In thousands) Service cost $ 1,371 $ 1,425 $ 1,071 Interest cost on projected benefit obligation 5,074 4,841 4,762 Adjustment for actual return on plan assets (17,788) (12,398) (13,797) Net amortization and deferral 11,390 6,207 7,607 --------- ----------- ----------- Net pension costs $ 47 $ 75 $ (357) ========= =========== ===========
Assumptions used in accounting for the pension plan as of December 31, 1997, and 1996 were as follows: 1997 1996 ---- ---- Discount rates 7.0% 7.75% Rates of increase in compensation levels 4.0% 4.0% Expected long-term rate of return on assets 9.5% 9.5% Postretirement Benefit Plan TNMP sponsors a health care plan that provides postretirement medical and death benefits to retirees who satisfied minimum age and service requirements during employment. TNMP recognizes the costs of postretirement benefits on the accrual basis during the periods that employees render service to earn the benefits in accordance with SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." TNMP has been permitted to recover through rates the additional costs resulting from the adoption of SFAS 106. TNMP has a trust fund dedicated to paying these postretirement benefits. The following table sets forth the plan's funded status and amounts recognized in the consolidated balance sheets at December 31, 1997, and 1996.
1997 1996 ---------- ---------- (In thousands) Accumulated postretirement benefit obligation: Retirees and dependents $ 7,615 $ 13,060 Active employees 3,036 4,244 ---------- ---------- Total benefits earned 10,651 17,304 Plan assets (principally marketable securities) at estimated fair value 8,274 6,975 ---------- ---------- Accumulated postretirement benefit obligation in excess of plan assets 2,377 10,329 Unrecognized transition obligation (12,864) (13,721) Unrecognized net gain from past experience 14,168 6,998 ---------- ---------- Accrued postretirement benefit costs (included in deferred credits in the consolidated balance sheets) $ 3,681 $ 3,606 ========== ========== Net postretirement benefit costs were comprised of the following components: 1997 1996 1995 --------- --------- -------- (In thousands) Service cost $ 467 $ 524 $ 374 Interest cost on postretirement benefit obligation 1,253 1,259 1,265 Reduction for actual return on plan assets (1,037) (708) (956) Net amortization and deferral 1,056 922 1,145 --------- --------- -------- Net postretirement benefit costs $ 1,739 $ 1,997 $ 1,828 ========= ========= ========
The transition obligation is being amortized over a 20-year period that began in 1993. The assumed health care cost trend rate used to measure the expected cost of benefits was 5.5% for 1997 and is assumed to trend downward slightly each year to 4.3% for 2003 and thereafter. That assumed rate has an effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1997, by $47,000 and the aggregate of the service and interest cost components of net postretirement benefit cost for 1997 by $274,000. Additional assumptions used in accounting for the postretirement benefit plan as of December 31, 1997, and 1996, were as follows: 1997 1996 -------- -------- Discount rates 7.0% 7.75% Expected rate of return on assets (net of taxes) 5.25% 5.7% Incentive Plans TNP and TNMP have several incentive compensation plans. All employees participate in one or more of these plans. Incentive compensation is based on meeting key financial and operational performance goals such as cash value added or earnings per share, operations and maintenance costs per KWH, and system reliability measures. Operating expenses for 1997, 1996, and 1995 included costs for the various cash and equity plans of $6.0 million, $4.8 million, and $2.0 million, respectively. Other Employee Benefits TNMP has a 401(k) plan designed to enhance the other retirement plans available to its employees. Employees may invest their contributions in fixed income securities, mutual funds, or TNP common stock. TNMP's contributions are used to purchase TNP common stock, which employees may later convert into investments in other investment options. TNMP has employment contracts with certain members of management and other key personnel. The contracts provide for lump sum compensation payments and other rights in the event of termination of employment or other adverse treatment of such persons following a "change in control" of TNP or TNMP. Such event is defined to include, among other things, substantial changes in the corporate structure, ownership, or board of directors of either entity. An excess benefit plan has been provided for certain key personnel and retired employees. The payment of benefits under the excess benefit plan is partially provided under an insurance policy arrangement for paying the benefits that generally would have been provided by the pension and thrift plans except for federal limitations.
Note 6. Income Taxes Components of income taxes were as follows: TNP TNMP ------------------------------------- ------------------------------------ 1997 1996 1995 1997 1996 1995 --------- ----------- ----------- --------- ----------- ----------- (In thousands) Taxes on net operating income: Federal - current $ 10,730 $ 10,240 $ 3,108 $ 9,140 $ 8,596 $ 3,108 State - current 428 86 507 428 86 507 Federal - deferred 7,134 49 6,700 9,963 1,381 6,700 ITC adjustments 1,816 - 2,002 2,531 270 2,002 --------- ----------- ----------- --------- ----------- ----------- 20,108 10,375 12,317 22,062 10,333 12,317 Taxes on other income (loss): Federal - current (534) (100) 7,170 (534) (100) 7,203 Federal - deferred 687 (241) (1,444) 687 (241) (1,568) ITC adjustments (410) (381) (323) (410) (381) (311) --------- ----------- ----------- --------- ----------- ----------- (257) (722) 5,403 (257) (722) 5,324 --------- ----------- ----------- --------- ----------- ----------- Taxes on loss from discontinued nonregulated operations (Note 4) (5,526) (1,658) - - - - Taxes on cumulative effect of change in accounting, federal-deferred (Note 3) - - 4,548 - - 4,548 --------- ----------- ----------- --------- ----------- ----------- Total income taxes $ 14,325 $ 7,995 $ 22,268 $ 21,805 $ 9,611 $ 22,189 ========= =========== =========== ========= =========== =========== The amounts for total income taxes differ from the amounts computed by applying the appropriate federal income tax rate to earnings (loss) before income taxes for the following reasons: TNP TNMP ---------------------------------- --------------------------------- 1997 1996 1995 1997 1996 1995 ---------- ---------- ---------- --------- ----------- --------- (In thousands) Tax at statutory tax rate $ 15,252 $ 10,850 $ 17,595 $ 22,854 $ 12,735 $ 17,674 Amortization of accumulated deferred ITC (1,403) (1,323) (1,079) (1,403) (1,323) (1,079) Amortization of excess deferred taxes (141) (143) (160) (141) (143) (318) State income taxes 428 86 507 428 86 507 ITC related to disallowance (410) (191) (312) (410) (191) (312) ITC adjustment - (760) - - - - Taxes on cumulative effect of change in accounting, federal- deferred (Note 3) - - 4,548 - - 4,548 Other, net 599 (524) 1,169 477 (1,553) 1,169 ---------- ---------- ---------- --------- ----------- --------- Actual income taxes $ 14,325 $ 7,995 $ 22,268 $ 21,805 $ 9,611 $ 22,189 ========== ========== ========== ========= =========== =========
The tax effects of temporary differences that gave rise to significant portions of net current and net noncurrent deferred income taxes as of December 31, 1997, and 1996, are presented below.
TNP TNMP --------------------------- --------------------------- 1997 1996 1997 1996 ------------ ------------ ------------ ------------ (In thousands) Current deferred income taxes: Deferred tax assets: Unbilled revenues $ 2,905 $ 2,470 $ 2,905 $ 2,470 Other - 663 663 ------------ ------------ ------------ ------------ 2,905 3,133 2,905 3,133 Deferred tax liability: Deferred purchased power and fuel costs (1,198) (1,196) (1,198) (1,196) ------------ ------------ ------------ ------------ Current deferred income taxes, net $ 1,707 $ 1,937 $ 1,707 $ 1,937 ============ ============ ============ ============ Noncurrent deferred income taxes: Deferred tax assets: Minimum tax credit carryforwards $ 27,414 $ 27,445 $ 34,377 $ 34,703 Federal regular tax net operating loss carryforwards - - - 1,724 ITC carryforwards 6,608 11,255 6,472 11,823 Regulatory related items 17,135 16,844 17,135 16,844 Accrued employee benefit costs 3,195 3,486 3,195 3,486 Other 3,449 1,263 700 696 ------------ ------------ ------------ ------------ 57,801 60,293 61,879 69,276 ------------ ------------ ------------ ------------ Deferred tax liabilities: Utility plant, principally due to depreciation and basis differences (128,913) (115,823) (128,912) (115,823) Deferred charges (6,101) (5,565) (6,101) (5,565) Regulatory related items (8,037) (13,749) (7,951) (13,748) ------------ ------------ ------------ ------------ (143,051) (135,137) (142,964) (135,136) ------------ ------------ ------------ ------------ Noncurrent deferred income taxes, net $ (85,250) $ (74,844) $ (81,085) $ (65,860) ============ ============ ============ ============ Federal tax carryforwards as of December 31, 1997, were as follows: TNP TNMP -------- --------- (In thousands) Minimum tax credits Amount $ 27,414 $ 34,377 Expiration period None None Investment tax credit Amount $ 6,608 $ 6,472 Expiration period 2005 2005
An Internal Revenue Service (IRS) revenue agent involved in auditing TNP's 1990 and 1991 consolidated federal income tax returns recommended, in March 1995, that a private letter ruling concerning eligibility of the TNP One generating plant for investment tax credit (ITC) be revoked retroactively. On July 29, 1997, TNP received notification from the IRS that revoked the private letter ruling. However, the IRS simultaneously granted full relief from the effects of this revocation and has allowed TNP to rely on the private letter ruling as issued. The current ruling will have no material effect on the amount of ITC previously recognized. Note 7. Long-Term Debt First Mortgage Bonds FMBs issued under the Bond Indenture are secured by substantially all utility plant owned directly by TNMP. The Bond Indenture restricts cash dividend payments on TNMP common stock as discussed in Note 9. TNMP has the ability to issue additional FMBs based on certain financial tests, or based on previously retired FMBs. As of December 31, 1997, TNMP could not issue any additional FMBs based on the required financial tests. However, TNMP also has the ability to issue additional FMBs against previously retired FMBs, as limited by an earnings test. As of December 31, 1997, TNMP could issue up to $91 million of FMBs. Secured Debentures TNMP's Series A, 10.75% secured debentures and 12.5% secured debentures are secured with a first lien on a portion of Unit 1. The 12.5% secured debentures are also secured by a first lien on a portion of Unit 2. TNMP's secured debenture holders are also secured by second liens on substantially all utility plant in Texas owned directly by TNMP. The secured debentures also contain restrictions on dividends and asset dispositions. Revolving Credit Facilities TNMP has two credit facilities, the 1996 Facility and the 1995 Facility. The 1996 Facility provides for a total commitment of $100 million, while the 1995 Facility provides for a total commitment of $150 million. The 1996 Facility commitment expires September 2001. The 1995 Facility commitment will reduce to $125 million on November 3, 1998, and to $100 million on November 3, 1999, and will expire on November 3, 2000. The collateral securing the 1996 Facility is $100 million of non-interest bearing (except upon default) FMBs. Collateral securing the 1995 Facility is generally a first lien on a portion of TNP One, a second lien on TNMP's first mortgage bond trust estate located in Texas, and $30 million of non-interest bearing FMBs. This collateral secures borrowings up to $100 million. Before increasing borrowings above $100 million, TNMP must pledge additional non-interest bearing FMBs in an amount equal to the borrowings over $100 million. Associated with the 1996 Facility, TNMP has a $50 million interest rate collar to mitigate exposure to variable interest rates. The collar sets floor and ceiling rates on the 90-day LIBOR rate at 5.25% and 7.50%, respectively. The term of the interest rate collar is September 1997 through September 2000. TNMP has sufficient liquidity to satisfy the possibility of any known contingencies. Management believes cash flow from operations and periodic borrowings under its two credit facilities should be sufficient to meet working capital requirements and planned capital expenditures at least through 1998. At December 31, 1997, interest rate on borrowings under the 1996 Facility was 7.11% and would have been 7.26% on the 1995 Facility. The composite average borrowing rates under TNMP's credit facilities were 7.15% and 7.32% for 1997 and 1996, respectively. The interest rate margins on both facilities will decrease as the ratings on TNMP's FMBs improve. Under specified conditions, TNMP's credit facilities restrict the payment of cash dividends on TNMP common stock. The credit facilities also prohibit the sale, lease, transfer, or other disposition of assets other than in the ordinary course of business. Maturities As of December 31, 1997, FMB and secured debenture maturities and sinking fund requirements for the five years following 1997 are as follows: Secured Total FMBs and Year FMBs Debentures Secured Debentures ---- ---------- -------------- ------------------ (In thousands) 1998 $ 100 $ - $ 100 1999 100 130,000 130,100 2000 100,100 - 100,100 2001 100 - 100 2002 100 - 100 At the end of 1997, $100 million was outstanding under the 1996 Facility, which matures in 2001. TNMP had available borrowing capacity of $150 million under the 1995 Facility. As of December 31, 1997, FWI had $141,000 of debt associated with the purchase of vehicles. Note 8. Redeemable Cumulative Preferred Stock If TNMP liquidates voluntarily or involuntarily, holders of preferred stock have preferences equal to amounts payable on redemption or par, respectively, plus accrued dividends. TNMP's charter provides that additional shares of preferred stock may not be issued unless certain tests are met. As of December 31, 1997, $188 million of additional preferred stock could be issued. Note 9. Capital Stock and Dividends TNP In November 1997, TNP increased its quarterly dividend from $0.245 to $0.27 per share. In October 1996, TNP issued 2 million shares of common stock in a public offering, with net proceeds of approximately $47,170,000. The net proceeds were transferred to TNMP as an equity contribution. TNMP The Bond Indenture prohibits TNMP from paying cash dividends on its common stock to TNP unless unrestricted retained earnings are available. As of December 31, 1997, $56.8 million of unrestricted retained earnings were available for dividends. Note 10. Commitments and Contingencies Fuel Supply Agreement TNMP has an agreement with the Walnut Creek Mining Company for the purchase of lignite through the remaining life of TNP One. Walnut Creek Mining Company is jointly owned by Phillips Coal Company and Peter Kiewit Sons', Inc. Wholesale Purchased Power Agreements TNMP purchases a significant portion of its electric requirements from various wholesale suppliers. These contracts are scheduled to expire in various years through 2005. TU is TNMP's largest wholesaler of energy. In 1997, TU supplied approximately 39% of TNMP's Texas capacity and 20% of the Texas energy requirements. During 1995 TNMP notified TU of its intent to cease purchasing a significant portion of the full requirements power and energy from TU effective January 1, 1999. The TU Agreement provided for certain purchases through 2010. Since 1995, TNMP and TU have been involved in various legal and regulatory appeals regarding various terms of the TU Agreement. In late 1997, TNMP and TU entered into an agreement that resolves the appeals. The agreement, effective January 1, 1999, shortens the term of the previous agreement, which now ends in June 2002, instead of May 2010, and reduces the expected 1999 minimum contractual commitments by 80% of the projected 1998 levels. This is expected to result in a $22.4 million reduction in purchased power expense over the remaining life of the agreement as compared to the existing agreement. At December 31, 1997, TNMP had various outstanding commitments for take or pay agreements, including the fuel supply agreement discussed above. Detailed below are the fixed and determinable portion of the obligations (amounts in millions): 1998 1999 2000 2001 2002 ------ ------ ------ ------ ------- Purchased power agreements $ 65.7 $ 24.4 $ 24.1 $ 13.9 $ 5.4 Fuel supply agreements 30.2 30.2 30.2 30.2 30.2 ------ ------ ------ ------ ------ Total $ 95.9 $ 54.6 $ 54.3 $ 44.1 $ 35.6 ====== ====== ====== ====== ====== Significant Customer TNMP has received notification that a significant customer in Texas will replace the power previously provided by TNMP with power from a cogeneration plant built by a third party wholesale power producer. The plant is scheduled to commence operations in the first quarter of 1998. This customer provided sales of 629 GWH and annual revenues of $28.3 million in 1997 ($10.1 million in base revenues). TNMP has an agreement with the wholesale power producer to continue providing certain services to the cogeneration plant. The base revenues from this agreement are expected to be $0.5 million annually. Legal Actions TNMP is the defendant in a suit styled Clear Lake Cogeneration Limited Partnership vs. Texas-New Mexico Power Company, pending in the 234th District Court of Harris County, Texas. This lawsuit and a parallel proceeding also pending before the PUCT arose out of disagreements between the limited partnership (Clear Lake) and TNMP over the interpretation of certain provisions of a purchased power agreement under which TNMP purchases cogenerated electricity from Clear Lake. Clear Lake disputes several charges for which TNMP has billed Clear Lake, alleges that TNMP has failed to abide by contractual language concerning several issues, and seeks in the lawsuit approximately $15 million in damages. TNMP has moved for summary judgment in the lawsuit, which is in the discovery phase. TNMP is vigorously contesting the lawsuit and the PUCT proceeding. The ultimate disposition is not expected to have a material effect on TNMP's results of operations. TNMP is the defendant in a suit styled Phillips Petroleum Company vs. Texas-New Mexico Power Company, pending in the 149th State District Court of Brazoria County, Texas. The suit is based on events surrounding an interruption of electricity to a petroleum refinery and related facilities that occurred in May 1997. Phillips is seeking the recovery of approximately $36 million in damages arising from the interruption. TNMP is vigorously contesting this lawsuit, which is in the discovery phase. The ultimate disposition is not expected to have a material effect on TNMP's results of operations. See Note 2 for information regarding the rate filing with the Texas Gulf Coast Cities, the transition to competition plan filed with the PUCT and the fuel reconciliation with the PUCT. TNMP is involved in various claims and other legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on TNMP's and TNP's consolidated financial position or results of operations.
TNP ENTERPRISES, INC. AND SUBSIDIARIES Selected Quarterly Consolidated Financial Data The following selected quarterly consolidated financial data for TNP is unaudited, and, in the opinion of TNP's management, is a fair summary of the results of operations for such periods: March 31 June 30 Sept. 30 Dec. 31 ---------- ---------- ---------- ---------- (In thousands except per share amounts) 1997 Operating revenues........................................ $ 126,847 $ 133,338 $ 189,339 $ 135,710 Net operating income...................................... 19,348 23,049 36,486 16,763 Income from continuing operations......................... 5,040 8,871 22,736 3,808 Net income................................................ 4,110 7,431 20,694 (2,557) Earnings per share of common stock from continuing operations.................................. 0.38 0.68 1.73 0.29 Earnings per share of common stock *...................... 0.31 0.56 1.57 (0.20) Dividends per share of common stock....................... $ 0.245 $ 0.245 $ 0.245 $ 0.27 Weighted average common shares outstanding................ 13,025 13,069 13,092 13,128 1996 Operating revenues........................................ $ 99,827 $ 122,020 $ 157,453 $ 123,437 Net operating income...................................... 17,638 25,143 31,050 19,004 Income from continuing operations......................... 559 7,956 15,152 2,483 Net income................................................ 562 7,831 14,292 368 Earnings per share of common stock from continuing operations *................................ 0.05 0.72 1.37 0.19 Earnings per share of common stock *...................... 0.05 0.71 1.29 0.03 Dividends per share of common stock....................... $ 0.22 $ 0.22 $ 0.245 $ 0.245 Weighted average common shares outstanding................ 10,936 10,994 11,015 12,955
* The individual quarters may not add to the yearly totals since the per share amounts are based upon the average number of shares outstanding during each quarter. Generally, the variations between quarters reflect the seasonal fluctuations of TNMP's business. Also, the fourth quarter of 1996 results reflect a $1.3 million after tax charge for the settlement of litigation associated with the Series T FMB retirement in 1995. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III -------- Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Directors The information required by this item is incorporated by reference to "Election of Directors" and "Security Ownership of Management and Certain Beneficial Owners" in the proxy statement relating to the 1998 Annual Meeting of Holders of TNP Common Stock. Executive Officers The information set forth under "Employees and Executives" in Part I is incorporated here by reference. Item 11. EXECUTIVE COMPENSATION.* Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.* Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.* * The information required by Items 11, 12, and 13 is incorporated by reference to "Compensation of Executive Officers," "Election of Directors - Direct Compensation," and "Security Ownership of Management and Certain Beneficial Owners" in the proxy statement relating to the 1998 Annual Meeting of Holders of TNP Common Stock.
PART IV ------- Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) The following financial statements are filed as part of this report: Page Reports of Independent Public Accountants.......................................................... 18 Independent Auditors' Reports...................................................................... 20 TNP Consolidated Statements of Income, Three Years Ended December 31, 1997............................. 22 Consolidated Statements of Cash Flows, Three Years Ended December 31, 1997......................... 23 Consolidated Balance Sheets, December 31, 1997, and 1996........................................... 24 Consolidated Statements of Capitalization, December 31, 1997, and 1996............................. 25 Consolidated Statements of Common Shareholders' Equity, Three Years Ended December 31, 1997.......................................................................... 26 TNMP Consolidated Statements of Income, Three Years Ended December 31, 1997............................. 27 Consolidated Statements of Cash Flows, Three Years Ended December 31, 1997......................... 28 Consolidated Balance Sheets, December 31, 1997, and 1996........................................... 29 Consolidated Statements of Capitalization, December 31, 1997, and 1996............................. 30 Consolidated Statements of Common Shareholder's Equity, Three Years Ended December 31, 1997.......................................................................... 31 Notes to Consolidated Financial Statements......................................................... 32 Selected Quarterly Consolidated Financial Data - TNP............................................... 43 (b) No reports on Form 8-K were filed during the last quarter of 1997. (c) The Exhibit Index on pages 46 - 51 is incorporated here by reference. (d) All financial statement schedules are omitted, as the required information is not applicable or the information is presented in the consolidated financial statements or related Notes.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized. TNP ENTERPRISES, INC. AND TEXAS-NEW MEXICO POWER COMPANY Date: March 18, 1998 By: \s\ Manjit. S. Cheema --------------------------------------- Manjit S. Cheema, Senior Vice President & Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrants and in the capacities and on the dates indicated.
Title Date ----- ---- By \s\ Kevern R. Joyce Chairman, President, & Chief Executive Officer 3/18/98 ---------------------------- ------ Kevern R. Joyce By \s\ Manjit. S. Cheema Senior Vice President & Chief Financial Officer 3/18/98 ---------------------------- of TNMP and TNP ------ Manjit S. Cheema By \s\ Scott Forbes Controller of TNMP & TNP 3/18/98 ---------------------------- ------ Scott Forbes By \s\ R. Denny Alexander Director 3/18/98 ---------------------------- ------ R. Denny Alexander By \s\ John A. Fanning Director 3/18/98 ---------------------------- ------ John A. Fanning By \s\ Sidney M. Gutierrez Director 3/18/98 ---------------------------- ------ Sidney M. Gutierrez By \s\ J. R. Holland, Jr. Director 3/18/98 ---------------------------- ------ J. R. Holland, Jr. By \s\ Harris L. Kempner, Jr. Director 3/18/98 ---------------------------- ------ Harris L. Kempner, Jr. By \s\ Dr. Carol D. Smith Surles Director 3/18/98 ---------------------------- ------ Dr. Carol D. Smith Surles By \s\ Larry G. Wheeler Director 3/18/98 ---------------------------- ------ Larry G. Wheeler By \s\ Dennis H. Withers Director 3/18/98 ---------------------------- ------ Dennis H. Withers
EXHIBIT INDEX ------------- Exhibits filed with this report are denoted by "*." Exhibit No. Description - ------- ----------- TNP incorporates the following exhibits by reference to the exhibits and filings noted in parenthesis. 3(a) - Articles of Incorporation and Amendments through March 6, 1984 (Exhibit 3(a) to TNP 1984 Form S-14, File No. 2-89800). 3(b) - Amendment to Articles of Incorporation filed September 25, 1984 (Exhibit 3(b) to TNP 1984 Form 10-K, File No. 1-8847). 3(c) - Amendment to Articles of Incorporation filed August 29, 1985 (Exhibit 3(a) to TNP 1985 Form 10-K, File No. 1-8847). 3(d) - Amendment to Articles of Incorporation filed June 2, 1986 (Exhibit 3(a) to TNP 1986 Form 10-K, File No. 1-8847). 3(e) - Amendment to Articles of Incorporation filed May 10, 1988 (Exhibit 3(e) to TNP 1988 Form 10-K, File No. 1-8847). 3(f) - Amendment to Articles of Incorporation filed May 10, 1988 (Exhibit 3(f) to TNP 1988 Form 10-K, File No. 1-8847). 3(g) - Amendment to Articles of Incorporation filed December 27, 1988 (Exhibit 3(g) to TNP 1988 Form 10-K, File No. 1-8847). 3(h) - Bylaws, as amended (Exhibit 3(h) to joint 1994 Form 10-K, File Nos. 1-8847 and 2-97230). 4(u) - Rights Agreement and Form of Right Certificate, as amended, effective November 13, 1990 (Exhibit 2.1 to TNP Form 8-A, File No. 1-8847). *23 - Independent Public Accountants' Consent - Arthur Andersen LLP. Independent Auditors' Consent - KPMG Peat Marwick LLP. *27 - Financial Data Schedule for TNP. TNMP incorporates the following exhibits by reference to the exhibits and filings noted in parenthesis. 3(i) - Restated Articles of Incorporation. (Exhibit 3(i) to TNMP 1996 10-K, File No. 2-97230) 3(ii)- Bylaws, as amended November 15, 1994 (Exhibit 3(hh) to TNMP 1994 Form 10-K, File No. 2-97230). *27 - Financial Data Schedule for TNMP. TNP and TNMP incorporate the following exhibits by reference to the exhibits and filings noted in parenthesis. 4(a) - Indenture of Mortgage and Deed of Trust dated as of November 1, 1944 (Exhibit 2(d) to Community Public Service Co. ("CPS") 1978 Form S-7, File No. 2-61323). 4(b) - Seventh Supplemental Indenture dated as of May 1, 1963 (Exhibit 2(k) to CPS Form S-7, File No. 2-61323). 4(c) - Eighth Supplemental Indenture dated as of July 1, 1963 (Exhibit 2(1), to CPS Form S-7, File No. 2-61323). 4(d) - Ninth Supplemental Indenture dated as of August 1, 1965 (Exhibit 2(m), to CPS Form S-7, File No. 2-61323). 4(e) - Tenth Supplemental Indenture dated as of May 1, 1966 (Exhibit 2(n), to CPS Form S-7, File No. 2-61323). 4(f) - Eleventh Supplemental Indenture dated as of October 1, 1969 (Exhibit 2(o), to CPS Form S-7, File No. 2-61323). 4(g) - Twelfth Supplemental Indenture dated as of May 1, 1971 (Exhibit 2(p), to CPS Form S-7, File No. 2-61323). 4(h) - Thirteenth Supplemental Indenture dated as of July 1, 1974 (Exhibit 2(q), to CPS Form S-7, File No. 2-61323). 4(i) - Fourteenth Supplemental Indenture dated as of March 1, 1975 (Exhibit 2(r), to CPS Form S-7, File No. 2-61323). 4(j) - Fifteenth Supplemental Indenture dated as of September 1, 1976 (Exhibit 2(e), File No. 2-57034). 4(k) - Sixteenth Supplemental Indenture dated as of November 1, 1981 (Exhibit 4(x), File No. 2-74332). 4(l) - Seventeenth Supplemental Indenture dated as of December 1, 1982 (Exhibit 4(cc), File No. 2-80407). 4(m) - Eighteenth Supplemental Indenture dated as of September 1, 1983 Exhibit (a) to Form 10-Q of TNMP for the quarter ended September 30, 1983, File No. 1-4756). 4(n) - Nineteenth Supplemental Indenture dated as of May 1, 1985 (Exhibit 4(v), File No. 2-97230). 4(o) - Twentieth Supplemental Indenture dated as of July 1, 1987 (Exhibit 4(o) to Form 10-K of TNMP for the year ended December 31, 1987, File No. 2-97230). 4(p) - Twenty-First Supplemental Indenture dated as of July 1, 1989 (Exhibit 4(p) to Form 10-Q of TNMP for the quarter ended June 30, 1989, File No. 2-97230). 4(q) - Twenty-Second Supplemental Indenture dated as of January 15, 1992 (Exhibit 4(q) to Form 10-K of TNMP for the year ended December 31, 1991, File No. 2-97230). 4(r) - Twenty-Third Supplemental Indenture dated as of September 15, 1993 (Exhibit 4(r) to Form 10-K of TNMP for the year ended December 31, 1993, File No. 2-97230). 4(s) - Twenty-Fourth Supplemental Indenture dated as of November 3, 1995 (Exhibit 4(s) to Form 10-K of TNMP for the year ended December 31, 1993, File No. 2-97230). 4(t) - Twenty-Fifth Supplemental Indenture dated as of September 10, 1996 (Exhibit 4(t) to Form 10-Q of TNMP for the quarter ended September 30, 1996, File No. 2-97230). 4(u) - Indenture and Security Agreement for 12 1/2% Secured Debentures dated as of January 15, 1992 (Exhibit 4(r) to TNMP 1991 Form 10-K, File No. 2-97230). 4(v) - Indenture and Security Agreement for 10 3/4% Secured Debentures dated as of September 15, 1993 (Exhibit 4(t) to TNMP 1993 Form 10-K, File No. 2-97230). Contracts Relating to TNP One ----------------------------- 10(a)- Fuel Supply Agreement, dated November 18, 1987, between Phillips Coal Company and TNMP (Exhibit 10(j) to TNMP 1987 Form 10-K, File No.2-97230). 10(a)1 - Amendment No. 1, dated as of April 1, 1988, to Fuel Supply Agreement dated November 18, 1987, between Phillips Coal Company and TNMP (Exhibit 10(a)1 to Joint 1994 Form 10-K, File Nos. 1-8847 and 2-97230). 10(a)2 - Amendment No. 2, dated as of November 29, 1994, between Walnut Creek Mining Company and TNMP, to Fuel Supply Agreement dated November 18, 1987, between Phillips Coal Company and TNMP, (Exhibit 10(a)2 to joint 1994 Form 10-K, File Nos. 1-8847 and 2-97230). 10(b)- Unit 1 First Amended and Restated Project Loan and Credit Agreement, dated as of January 8, 1992 (the "Unit 1 Credit Agreement"), among TNMP, TGC, certain banks (the "Unit 1 Banks") and Chase Manhattan Bank (National Association), as Agent for the Unit 1 Banks (the "Unit 1 Agent"), (Exhibit 10(c) to TNMP 1991 Form 10-K , File No. 2-97230). 10(b)1 - Participation Agreement, dated as of January 8, 1992, among certain banks, Participants, and the Unit 1 Agent (Exhibit 10(c)1 to TNMP 1991 Form 10-K, File No. 2-97230). 10(b)2 - Amendment No. 1, dated as of September 21, 1993, to the Unit 1 Credit Agreement (Exhibit 10(b)2 to TNMP 1993 Form 10-K , File No. 2-97230). 10(c)- Assignment and Security Agreement, dated as of January 8, 1992, among TGC and the Unit 1 Agent (Exhibit 10(d) to TNMP 1991 Form 10-K , File No. 2-97230). 10(d)- Amended and Restated Subordination Agreement, dated as of October 1, 1988, among TNMP, Continental Illinois National Bank and Trust Company of Chicago and the Unit 1 Agent(Exhibit 10(uu) to TNMP 1988 Form 10-K, File No. 2-97230). 10(e)- Unit 1 Mortgage and Deed of Trust, dated as of December 1, 1987, (Exhibit 10(ee) to TNMP 1987 Form 10-K , File No. 2-97230). 10(e)1 - Supplemental Unit 1 Mortgage and Deed of Trust executed on January 27, 1992, (Exhibit 10(g)4 to TNMP 1991 Form 10-K , File No. 2-97230). 10(e)2 - First TGC Modification and Extension Agreement, dated as of January 24, 1992, among the Unit 1 Banks, the Unit 1 Agent, TNMP, and TGC (Exhibit 10(g)1 to TNMP 1991 Form 10-K, File No. 2-97230). 10(e)3 - Second TGC Modification and Extension Agreement, dated as of January 27, 1992, among the Unit 1 Banks, the Unit 1 Agent, TNMP, and TGC (Exhibit 10(g)2 to TNMP 1991 Form 10-K, File No. 2-97230). 10(e)4 - Third TGC Modification and Extension Agreement, dated as of January 27, 1992, among the Unit 1 Banks, the Unit 1 Agent, TNMP, and TGC (Exhibit 10(g)3 to TNMP 1991 Form 10-K, File No. 2-97230). 10(e)5 - Fourth TGC Modification and Extension Agreement, dated as of September 29, 1993, among the Unit 1 Banks, the Unit 1 Agent, TNMP, and TGC (Exhibit 10(f)5 to TNMP 1993 Form 10-K, File No. 2-97230). 10(e)6 - Fifth TGC Modification and Extension Agreement, dated as of September 29, 1993, among the Unit 1 Banks, the Unit 1 Agent, TNMP, and TGC (Exhibit 10(f)6 to TNMP 1993 Form 10-K, File No. 2-97230). 10(f)- Indemnity Agreement, dated December 1, 1987, by Westinghouse, CE and Zachry, (Exhibit 10(ff) to TNMP 1987 Form 10-K, File No. 2-97230). 10(g)- Unit 1 Second Lien Mortgage and Deed of Trust dated as of December 1, 1987, (Exhibit 10(jj) to TNMP 1987 Form 10-K, File No. 2-97230). 10(g)1 - Correction Second Lien Mortgage and Deed of Trust, dated as of December 1, 1987, (Exhibit 10(vv) to TNMP 1988 Form 10-K, File No. 2-97230). 10(g)2 - Second Lien Mortgage and Deed of Trust Modification, Extension and Amendment Agreement, dated as of January 8, 1992 (Exhibit 10(i)2 to TNMP 1991 Form 10-K, File No. 2-97230). 10(g)3 - TNMP Second Lien Mortgage Modification No. 2, dated as of September 21, 1993 (Exhibit 10(h)3 to TNMP 1993 Form 10-K, File No. 2-97230). 10(h) - Agreement for Conveyance and Partial Release of Liens, dated as of December 1, 1987, by PFC and the Unit 1 Agent (Exhibit 10(kk) to TNMP 1987 Form 10-K, File No. 2-97230). 10(i)- Inducement and Consent Agreement, dated as of June 15, 1988, among Phillips Coal Company, Kiewit Texas Mining Company, TNMP, Phillips Petroleum Company, and Peter Kiewit Son's, Inc. (Exhibit 10(nn) to TNMP 1988 Form 10-K, File No. 2-97230). 10(j)- Assumption Agreement, dated as of October 1, 1988, by TGC, in favor of certain banks, the Unit 1 Agent, and the Depositary, as defined therein (Exhibit 10(ww) to TNMP 1988 Form 10-K, File No. 2-97230). 10(k)- Guaranty, dated as of October 1, 1988, by TNMP of TGC obligations under Unit 1 Credit Agreement (Exhibit 10(xx) to TNMP 1988 Form 10-K of TNMP, File No. 2-97230). 10(l)- First Amended and Restated Facility Purchase Agreement, dated as of January 8, 1992, between TNMP and TGC (Exhibit 10(n) to TNMP 1991 Form 10-K, 1991, File No. 2-97230). 10(m)- Operating Agreement, dated as of October 1, 1988, between TNMP and TGC (Exhibit 10(zz) to TNMP 1988 Form 10-K, File No. 2-97230). 10(n)- Unit 2 First Amended and Restated Project Loan and Credit Agreement, dated as of January 8, 1992 (the "Unit 2 Credit Agreement"), among TNMP, TGC II, certain banks (the "Unit 2 Banks") and The Chase Manhattan Bank (National Association), as Agent for the Unit 2 Banks (the "Unit 2 Agent") (Exhibit 10(q) to TNMP 1991 Form 10-K, File No. 2-97230). 10(n)1 - Amendment No. 1, dated as of September 21, 1993, to the Unit 2 Credit Agreement (Exhibit 10(o)1 to TNMP 1993 Form 10-K, File No. 2-97230). 10(o)- Assignment and Security Agreement, dated as of January 8, 1992, among TGC II and the Unit 2 Agent (Exhibit 10(r) to TNMP 1991 Form 10-K, File No. 2-97230). 10(p)- Assignment and Security Agreement, dated as of October 1, 1988, by TNMP to the Unit 2 Agent (Exhibit 10(jjj) to TNMP 1988 Form 10-K, File No. 2-97230). 10(q)- Subordination Agreement, dated as of October 1, 1988, among TNMP, Continental Illinois National Bank and Trust Company of Chicago, and the Unit 2 Agent (Exhibit 10(mmm) to TNMP 1988 Form 10-K, File No. 2-97230). 10(r)- Unit 2 Mortgage and Deed of Trust dated as of October 1, 1988 (Exhibit 10(uuu) to TNMP 1988 Form 10-K, File No. 2-97230). 10(r)1 - First TGC II Modification and Extension Agreement, dated as of January 24, 1992, among the Unit 2 Banks, the Unit 2 Agent, TNMP, and TGC II (Exhibit 10(u)1 to TNMP 1991 Form 10-K, File No. 2-97230). 10(r)2 - Second TGC II Modification and Extension Agreement, dated as of January 27, 1992, among the Unit 2 Banks, the Unit 2 Agent, TNMP and TGC II (Exhibit 10(u)2 to TNMP 1991 Form 10-K, File No. 2-97230). 10(r)3 - Third TGC II Modification and Extension Agreement, dated as of January 27, 1992, among the Unit 2 Banks, the Unit 2 Agent, TNMP, and TGC II (Exhibit 10(u)3 to TNMP 1991 Form 10-K, File No. 2-97230). 10(r)4 - Fourth TGC II Modification and Extension Agreement, dated as of September 29, 1993, among the Unit 2 Banks, the Unit 2 Agent, TNMP, and TGC II (Exhibit 10(s)4 to TNMP 1993 Form 10-K, File No. 2-97230). 10(r)5 - Fifth TGC II Modification and Extension Agreement, dated as of June 15, 1994, among the Unit 2 Banks, the Unit 2 Agent, TNMP, and TGC II (Exhibit 10(s)5 to TNMP Form 10-Q for quarter ended June 30, 1994, File No. 2-97230). 10(s)- Release and Waiver of Liens and Indemnity Agreement, dated October 1, 1988, by Westinghouse, CE, and Zachry (Exhibit 10(vvv) to TNMP 1988 Form 10-K, File No. 2-97230). 10(t)- Second Lien Mortgage and Deed of Trust, dated as of October 1, 1988, (Exhibit 10(www) to TNMP 1988 Form 10-K, File No. 2-97230). 10(t)1 - Second Lien Mortgage and Deed of Trust Modification, Extension and Amendment Agreement, dated as of January 8, 1992, (Exhibit 10(w)1 to TNMP 1991 Form 10-K, File No. 2-97230). 10(t)2 - TNMP Second Lien Mortgage Modification No. 2, dated as of September 21, 1993, (Exhibit 10(u)2 to TNMP 1993 Form 10-K, File No. 2-97230). 10(u)- Intercreditor and Nondisturbance Agreement, dated as of October 1, 1988, among PFC, Texas PFC, Inc., TNMP, certain creditors, as defined therein, and the Collateral Agent, as defined therein (Exhibit 10(xxx) to TNMP 1988 Form 10-K, File No. 2-97230). 10(u)1 - Amendment No. 1, dated as of January 8, 1992, to Intercreditor and Nondisturbance Agreement, (Exhibit 10(x)1 to TNMP 1991 Form 10-K, File No. 2-97230). 10(u)2 - Amendment No. 2, dated as of September 21, 1993, to Intercreditor and Nondisturbance Agreement, (Exhibit 10(v)2 to TNMP 1993 Form 10-K of TNMP, File No. 2-97230). 10(v)- Grant of Reciprocal Easements and Declaration of Covenants Running with the Land, dated October 1, 1988, between PFC and Texas PFC, Inc. (Exhibit 10(yyy) to TNMP 1988 Form 10-K, File No. 2-97230). 10(w)- Non-Partition Agreement, dated as of May 30, 1990, among TNMP, TGC, and the Unit 1 Agent (Exhibit 10(ss) to TNMP 1990 Form 10-K of TNMP, File No. 2-97230). 10(x)- Assumption Agreement, dated as of May 31, 1991, by TGC II in favor of certain banks, the Unit 2 Agent, and the Depositary, as defined therein (Exhibit 10(kkk) to Amendment No. 1 to File No. 33-41903). 10(y)- Guaranty, dated as of May 31, 1991, by TNMP, for TGC II obligations under the Unit 2 Credit Agreement (Exhibit 10(lll) to Amendment No. 1 to File No. 33-41903). 10(z)- First Amended and Restated Facility Purchase Agreement, dated as of January 8, 1992, between TNMP, and TGC II (Exhibit 10(dd) to TNMP 1991 Form 10-K, File No. 2-97230). 10(z)1 - Amendment No. 1 to the Unit 2 First Amended and Restated Facility Purchase Agreement, dated as of September 21, 1993, between TNMP and TGC II (Exhibit 10(aa)1 to TNMP 1993 Form 10-K, File No. 2-97230). 10(aa) - Operating Agreement, dated as of May 31, 1991, between TNMP and TGC II (Exhibit 10(nnn) to Amendment No. 1 to File No. 33-41903). 10(bb) - Non-Partition Agreement, dated as of May 31, 1991, among TNMP, TGC II, and the Unit 2 Agent (Exhibit 10(ppp) to Amendment No. 1 to File No. 33-41903). Contracts Relating to TNP One ----------------------------- 10(cc) - Revolving Credit Facility Agreement, dated as of November 3, 1995, among TNMP, certain lenders, and Chemical Bank, as Administrative Agent and Collateral Agent. (Exhibit 10(cc) to Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230). 10(cc)1- Form of Guarantee and Pledge Agreement, dated as of November 3, 1995, between TGC II, and Chemical Bank, as collateral agent (Exhibit D to Revolving Credit Facility Agreement). (Exhibit 10(cc)1 to Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230). 10(cc)2- Form of Bond Agreement, dated as of November 3, 1995, between TNMP and Chemical Bank, as Collateral Agent (Exhibit E to Revolving Credit Facility Agreement). (Exhibit 10(cc)2 to Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230). 10(cc)3- Form of Note Pledge Agreement, dated as of November 3, 1995, between TNMP and Chemical Bank, as collateral agent (Exhibit F to Revolving Credit Facility Agreement). (Exhibit 10(cc)3 to Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230). 10(cc)4- Form of Sixth TGC II Modification and Extension Agreement, dated as of November 3, 1995, among the Unit 2 Banks, The Chase Manhattan Bank, as agent, TNMP, and TGC II (Exhibit H to the Revolving Credit Facility Agreement). (Exhibit 10(cc)4 to Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230). 10(cc)5- Form of Second Lien Mortgage and Deed of Trust Modification, Extension and Amendment Agreement No. 3, dated as of November 3, 1995 (Exhibit I to the Revolving Credit Facility Agreement). (Exhibit 10(cc)5 to Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230). 10(cc)6- Form of Assignment and Amendment Agreement, dated as of November 3, 1995, among TNMP, TGC II, and Chemical Bank, as administrative agent and collateral agent (Exhibit J to the Revolving Credit Facility Agreement). (Exhibit 10(cc)6 to Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230). 10(cc)7- Form of Assignment of TGC II Mortgage Lien, dated as of November 3, 1995, by The Chase Manhattan Bank as agent to Chemical Bank (Exhibit K to the Revolving Credit Facility Agreement). (Exhibit 10(cc)7 to Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230). 10(cc)8- Form of Collateral Transfer of Notes, Rights and Interests, dated as of November 3, 1995, between TNMP and Chemical Bank, as Administrative Agent and as Collateral Agent (Exhibit L to the Revolving Credit Facility Agreement). (Exhibit 10(cc)8 to Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230). 10(cc)9- Form of Assignment of Second Lien Mortgage and Deed of Trust, dated as of November 3, 1995, between the Chase Manhattan Bank, as Agent, and Chemical Bank, as agent (Exhibit M to the Revolving Credit Facility Agreement). (Exhibit 10(cc)9 to Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230). 10(cc)10-Form of Collateral Transfer of Notes, Rights and Interests, dated as of November 3, 1995, between TNMP and Chemical Bank, as Administrative Agent and as Collateral Agent (Exhibit N to the Revolving Credit Facility Agreement). (Exhibit 10(cc)10 to Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230). 10(cc)11-Form of Amendment No. 1, dated as of November 3, 1995, to the Assignment and Security Agreement between TNMP, and The Chase Manhattan Bank, as agent (Exhibit O to the Revolving Credit Agreement). (Exhibit 10(cc)11 to Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230). Power Supply Contracts ---------------------- 10(dd) - Contract dated May 12, 1976, between TNMP and Houston Lighting & Power Company (Exhibit 5(a), File No. 2-69353). 10(dd)1- Amendment, dated January 4, 1989, to contract between TNMP and Houston Lighting & Power Company (Exhibit 10(cccc) to TNMP 1988 Form 10-K, File No.2-97230). 10(ee) - Amended and Restated Agreement for Electric Service dated May 14, 1990, between TNMP and Texas Utilities Electric Company (Exhibit 10(vv) to TNMP 1990 Form 10-K, File No. 2-97230). 10(ee)1- Amendment, dated April 19, 1993, to Amended and Restated Agreement for Electric Service, between TNMP and Texas Utilities Electric Company (Exhibit 10(ii)1 to 1993 Form S-2, Registration Statement, File No. 33-66232). 10(ff) - Contract dated April 27, 1977, between TNMP and West Texas Utilities Company, as amended (Exhibit 10(e) of Form 8 applicable to TNMP 1986 Form 10-K, File No. 2-97230). 10(gg) - Contract dated April 29, 1987, between TNMP and El Paso Electric Company (Exhibit 10(f) of Form 8 applicable to TNMP 1986 Form 10-K, File No. 2-97230). 10(hh) - Amended and Restated Contract for Electric Service, dated April 29, 1988, between TNMP and Public Service Company of New Mexico (Exhibit 10(zz)3 to Amendment No. 1 to File No. 33-41903). 10(ii) - Contract dated December 8, 1981, between TNMP and SPS as amended (Exhibit 10(h) of Form 8 applicable to TNMP 1986 Form 10-K, File No. 2-97230). 10(ii)1- Amendment, dated December 12, 1988, to contract between TNMP and SPS (Exhibit 10(llll) to TNMP 1988 Form 10-K, File No. 2-97230). 10(ii)2- Amendment, dated December 12, 1990, to contract between TNMP and SPS (Exhibit 19(t) to TNMP 1990 Form 10-K, File No. 2-97230). 10(jj) - Contract dated August 31, 1983, between TNMP and Capitol Cogeneration Company, Ltd. (Exhibit 10(i) of Form 8 applicable to TNMP 1986 Form 10-K, File No. 2-97230). 10(jj)1- Agreement Substituting a Party, dated May 3, 1988, among Capitol Cogeneration Company, Ltd., Clear Lake Cogeneration Limited Partnership and TNMP (Exhibit 10(nnnn) to TNMP 1988 Form 10-K, File No. 2-97230). 10(jj)2- Letter Agreements, dated May 30, 1990, and August 28, 1991, between Clear Lake Cogeneration Limited Partnership and TNMP (Exhibit 10(oo)2 to TNMP 1992 Form 10-K, File No. 2-97230). 10(jj)3- Notice of Extension Letter, dated August 31, 1992, between Clear Lake Cogeneration Limited Partnership and TNMP (Exhibit 10(oo)3 to TNMP 1992 Form 10-K, File No. 2-97230). 10(jj)4- Scheduling Agreement, dated September 15, 1992, between Clear Lake Cogeneration Limited Partnership and TNMP (Exhibit 10(oo)4 to TNMP 1992 Form 10-K, File No. 2-97230). 10(kk) - Interconnection Agreement between TNMP and Plains Electric Generation and Transmission Cooperative, Inc. dated July 19, 1984 (Exhibit 10(j) of Form 8 applicable to TNMP 1986 Form 10-K, File No. 2-97230). 10(ll) - Interchange Agreement between TNMP and El Paso Electric Company dated April 29, 1987 (Exhibit 10(l) of Form 8 applicable to TNMP 1986 Form 10-K, File No. 2-97230). 10(mm) - Amendment No. 1, dated November 21, 1994, to Interchange Agreement between TNMP and El Paso Electric Company (Exhibit 10(nn)1 to joint 1994 Form 10-K, File Nos. 1-8847 and 2-97230). 10(nn) - DC Terminal Participation Agreement between TNMP and El Paso Electric Company dated December 8, 1981 as amended (Exhibit 10(m) of Form 8 applicable to TNMP 1986 Form 10-K, File No. 2-97230). 10(oo) - Agreement for Purchase and Sale of Energy effective as of May 1, 1996 among TNMP, Amoco Chemical Company and Amoco Oil Company(Exhibit 10 (pp) to joint 1997 Form 10-K, File Nos. 1-8847 and 2-97230). 10(pp) - Agreement dated December 30, 1994 between TNMP and Union Carbide Corporation ("UCC") for Purchase of Capacity and Energy from UCC (Exhibit 10(qq) to joint 1997 Form 10-K, File Nos. 1-8847 and 2-97230). *10(qq) Letter agreement dated November 24, 1997 between TNMP and Texas Utilities Electric Company. Management Contracts -------------------- *10(rr)- Form of TNMP Executive Agreement for Severance Compensation Upon Change in Control and schedule of substantially identical agreements. 10(ss) - Agreement dated March 25, 1994 between Kevern Joyce and TNP and TNMP (Exhibit 10(tt) to TNP and TNMP 1994 Form 10-Q, File Nos. 1-8847 and 2-97230). *10(tt)- Amendment dated February 16, 1998 to Agreement dated March 25, 1994 between Kevern Joyce and TNP and TNMP. *10(uu)- Agreement dated February 16, 1998 between John Edwards and TNMP. *10(vv)- Agreement dated February 16, 1998 between Ralph S. Johnson and TNMP. *10(ww)- Form of TNP Incentive Compensation Award Agreement and schedule of substantially identical agreements. *21 - Subsidiaries of the Registrants. Exhibit 21 ---------- SUBSIDIARIES OF THE REGISTRANTS ------------------------------- Name State of Incorporation - ---- ---------------------- TNP - --- Texas-New Mexico Power Company Texas Facility Works, Inc. Texas TNP Operating Company Texas TNMP - ---- Texas Generating Company Texas Texas Generating Company II Texas Exhibit 23 TNP ENTERPRISES, INC. AND SUBSIDIARIES -------------------------------------- Independent Public Accountants' Consent --------------------------------------- The Board of Directors TNP Enterprises, Inc.: As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into TNP Enterprises, Inc.'s previously filed Registration Statements on Form S-8 (File nos. 2-93265 and 33-58897) and Registration Statement on Form S-3 (No. 333-17835) Arthur Andersen LLP Fort Worth, Texas March 18, 1998 Exhibit 23 TNP ENTERPRISES, INC. AND SUBSIDIARIES -------------------------------------- Independent Auditors' Consent ----------------------------- The Board of Directors TNP Enterprises, Inc.: We consent to incorporation by reference in the Registration Statement (No. 333-17835) on Form S-3 and in the Registration Statements (Nos. 2-93265 and 33-58897) on Form S-8 of TNP Enterprises, Inc. of our report dated January 30, 1997, relating to the consolidated balance sheet and statement of capitalization of TNP Enterprises, Inc. and subsidiaries as of December 31, 1996, and the related consolidated statements of income, common shareholders' equity, and cash flows for each of the years in the two-year period ended December 31, 1996, which report appears in the December 31, 1997, annual report on Form 10-K of TNP Enterprises, Inc. Our report refers to a change in the method of accounting for operating revenues in 1995. KPMG Peat Marwick LLP Fort Worth, Texas March 18, 1998 EX-10 2 EXH_10QQ Texas-New Mexico 4100 International Plaza Power Company Fort Worth, Texas 75109 P.O. Box 2943 Ralph S. Johnson Fort Worth Texas, 76113-2943 Senior Vice President - (817) 737-5566 Power Resources Fax (817) 737-1384 November 24, 1997 Mr. Steven M. Philley Director, Power Supply TU Electric Energy Plaza 1601 Bryan Street Dallas, Texas 75201-3411 Dear Mr. Philley: Thank you for taking the time to discuss the various alternatives for Power Supply at the Lewisville Point of Delivery under our Amended and Restated Agreement for Electric Service between Texas-New Mexico Power Company (TNMP) and Texas Utilities Electric (TUE) Company (Contract). In order to resolve the issues that have been discussed and to allow TNMP further discussion of its transition to competition plan, we propose the following: 1) TNMP's obligation to TUE shall be the equivalent of being full requirements customer at the Lewisville Point of Delivery (LPOD) through June 30, 2002. 2) The term of the above contract shall be adjusted to terminate with our obligation at LPOD. 3) Agreement in Principle on these (Items 1 & 2) with good faith commitment to amend the contract is required November 24, 1997. 4) At any time prior to June 30, 2002, TNMP will not intervene in any proceeding before the Public Utility Commission of Texas in which TUE's rates are to be determined, except for the sole and limited purpose of intervention in the Rate Design phase of any such proceeding. I appreciate your willingness to consider our changing needs and look forward to a mutually beneficial relationship. I look forward to hearing from you and remain available to meet you in our office at any time. Sincerely, /S/ Ralph S. Johnson Agreed: Date: 11/24/97 /s/ Steven M Philley Signature EX-10 3 EXH_10RR TEXAS-NEW MEXICO POWER COMPANY EXECUTIVE AGREEMENT FOR SEVERANCE COMPENSATION UPON CHANGE IN CONTROL This Texas-New Mexico Power Company Executive Agreement for Severance Compensation Upon Change in Control ("Agreement") dated ___________________, is by and between Texas-New Mexico Power Company ("Company") and _______________ ("Executive"). Witnesseth That: WHEREAS, the Company considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of the Company and its shareholders; and WHEREAS, the Company has determined that in order to best establish and maintain such sound and vital management it is appropriate to establish certain means for reinforcing and encouraging the continued attention and dedication of the Executive as a part of the management of the Company such that they may continue their assigned duties in a proper and efficient manner without distraction because of the possibility of a Change in Control of the Company; and WHEREAS, the Executive is willing to continue to serve the Company but is concerned about the possible effects any Change in Control might have on his duties and responsibility and status as an Executive: NOW, THEREFORE, in consideration of the promises and the mutual agreements herein contained, the Company and Executive hereby enter into this Agreement setting forth the severance compensation and extended benefits which the Company agrees it will pay to the Executive if the Executive's employment with the Company terminates under the circumstances described herein: 1) Company's Right to Terminate Prior to a Change in Control of the Company as herein defined, this Agreement shall terminate if Executive shall resign or retire voluntarily, become disabled, or die. Except as provided in paragraph 3)a)(vi) hereof, this Agreement shall also terminate if Executive's employment by the Company shall be terminated, with or without Cause, as herein defined, prior to any Change in Control of the Company by action of either the Board of Directors or Chief Executive Officer of the Company, as applicable. 2) Term (a) The term of this Agreement (the "Term") shall commence as of the date of this Agreement and shall expire as of the earliest of (i) the third annual anniversary of the date hereof; provided that the Board of Directors, by resolution duly adopted, may extend the Term of this Agreement from time to time, or (ii) termination of the Executive's employment because of death, Disability, voluntary termination or retirement by the Executive for other than Good Reason, or Cause (as those terms may be herein defined); (b) Any obligation which has vested under the terms of the Agreement and remains unpaid as of the date the Agreement expires or is terminated shall survive such expiration or termination and be enforceable under the terms of the Agreement. 3) Change in Control of the Company (a) For the purposes of this Agreement, a Change in Control of the Company is defined as the occurrence of any one of the following events: (i) there shall be consummated any consolidation or merger of the Company into or with another corporation or other legal person, and as a result of such consolidation or merger less than a majority of the combined voting power of the then-outstanding securities of such corporation or person immediately after such transactions are held in the aggregate by holders of Voting Stock, as herein defined, of the Company immediately prior to such transactions; or (ii) any sale, lease, exchange or other transfer, whether in one transaction or any series of related transactions, of all or significant portions of the assets of the Company to any other corporation or other legal person, less than a majority of the combined voting power of the then-outstanding securities of such corporation or person immediately after such sale, lease, exchange, or transfer is held in the aggregate by the holders of Voting Stock of the Company immediately prior to such sale, lease, exchange, or transfer; or (iii) the shareholders of the Company approve any plan for the liquidation or dissolution of the Company; or (iv) any person (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), becomes, either directly or indirectly, the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of securities representing 15% or more of the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors of the Company ("Voting Stock"); provided that the Trustee of the Thrift Plan shall not be deemed such a person for the purposes of this Section 3(iv); or (v) if at any time during a fiscal year a majority of the Board of Directors of the Company shall be replaced by persons who were not recommended for those positions by at least two-thirds of the directors of the Company who were directors of the Company at the beginning of the fiscal year; or (vi) the Executive's employment is terminated for other than Cause or the Executive is removed from office or position with the Company in either case following commencement by one or more representatives of the Company of discussions (authorized by the Board of Directors or Chief Executive Officer of the Company) with a third party that ultimately results in the occurrence of an event described in clauses (i), (ii), (iii), (iv), or (v) herein, regardless of whether such third party is a party to such occurrence, in which event, for the purposes of this Agreement, the date of the authorization of such discussions is deemed to be the date of the Change in Control of the Company; (b) For all purposes of this paragraph 3), the term Company, as previously defined herein, shall include TNP Enterprises, Inc., the parent of Texas-New Mexico Power Company. 4) Termination Following Change in Control of the Company (a) Termination If a Change in Control of the Company shall have occurred while the Executive is still an employee of the Company, the Executive shall be entitled to the compensation provided in paragraph 5 upon the subsequent termination of the Executive's employment with the Company by the Executive or by the Company unless such termination is the result of (i) the Executive's death, (ii) the Executive's Disability, (iii) the Executive's decision voluntarily to terminate his employment or retire, but only if Good Reason does not exist, or (iv) the Executive's termination for Cause. Notwithstanding anything in this Agreement to the contrary, termination of the Executive shall not have been for Cause if termination occurred because of (i) bad judgment or negligence on the part of the Executive unless it is demonstrable from historical events that the Executive's bad judgment or negligence shall have been of such an extensive and ongoing nature that it rendered the Executive unable adequately to perform his duties; or (ii) an act or omission believed by the Executive in good faith to have been in, or at least not opposed to, the Company's best interests. For the purposes of this paragraph a), no act, or failure to act, shall be considered "willful" unless done, or omitted to be done, by the Executive without good faith. Good faith shall be based upon a reasonable belief that the action or omission was in, or at least not opposed to, the best interests of the Company. (b) Disability For the purposes of this Agreement, Disability shall mean that the Executive is incapacitated due to physical or mental illness or injury and shall have been unable to perform his duties for the Company on a full time basis for six months and, within 30 days after written Notice of Termination is thereafter given by the Company, the Executive shall not have returned to the full time performance of his duties. (c) Cause For the purposes of this Agreement, Cause shall mean (i) the willful and continued failure by the Executive substantially to perform his duties with the Company (excluding any failure resulting from Disability), after a written demand for substantial performance is delivered to the Executive by the Chief Executive Officer of the Company setting forth the manner in which the Executive has not been substantially performing his duties and providing the Executive an opportunity to appear before the Board of Directors of the Company with counsel in order to respond to such notice; (ii) the performance by the Executive of any act or acts constituting a felony involving moral turpitude and which results or is intended to result in damage or harm to the Company, whether monetary or otherwise, or which results in or is intended to result in improper gain or personal enrichment; and (iii) violations of the Company's Personnel Policy Manual, as constituted at any time prior to a Change in Control, concerning personal conduct; provided, that the Company must follow its disciplinary procedures as set forth therein. (d) Good Reason The Executive may terminate the Executive's employment with the Company and retain his rights to benefits hereunder if Good Reason exists at any time following a Change in Control of the Company. For the purposes of this Agreement, Good Reason shall mean any of the following, unless the Executive has expressly consented in writing otherwise: (i) within six months after a Change in Control of the Company occurs, the Executive, at his discretion, determines that he will not be able to work in a harmonious and effective manner in the performance of his duties on behalf of the Company; provided that, notwithstanding anything in this Agreement to the contrary, the six month period set forth above does not commence until the satisfaction of all conditions precedent to and the closing of the transactions contemplated in paragraph 3)a) (i), (ii), (iii), (iv), or (v) of this Agreement; (ii) the Executive is assigned by the Company to a position or duties which are inconsistent with or materially different from the Executive's duties or position with the Company immediately prior to the Change in Control of the Company; (iii)the Company removes the Executive from or fails to re-elect the Executive to any positions or offices held by the Executive immediately prior to the Change in Control of the Company, unless such action is for Disability, Cause, the Executive's death or the Executive's voluntary termination or retirement if Good Reason does not exist prior to such termination or retirement; (iv) the Executive's base salary or total compensation in effect immediately prior to the Change in Control of the Company is reduced by the Company; (v) the Company fails to increase the Executive's base salary and total compensation after the Change in Control of the Company by the average percentage increase in base salary and total compensation of other persons holding similar positions and titles within the Company; (vi) any failure by the Company to continue in effect any benefit plan or arrangement, or related trust, in which the Executive is participating or in which he may participate at the time of a Change in Control of the Company. Such plans, arrangements, or related trusts (collectively "Plans"), include, but are not limited to, Texas-New Mexico Power Company's Thrift Plan for Employees and Trust Agreement ("Thrift Plan"), Texas-New Mexico Power Company's Pension Plan ("Pension Plan"), Excess Benefit Plan, group life insurance plan, medical, dental, accident and disability plans and any other plans and related trusts which might exist at the time of a Change in Control of the Company; the Company's obligation hereunder to continue in effect any benefit plan or arrangement includes the obligation to irrevocably fund such Plans to the fullest extent allowed by any applicable rules and regulations, within 90 days of the occurrence of a Change in Control of the Company, and to maintain such funding thereafter; (vii)any action taken by the Company which would adversely affect the Executive's participation in or reduce the Executive's benefits received from any Plan; (viii) any action requiring the Executive to relocate outside the county in which he was officed prior to the Change in Control of the Company, except for travel required in the performance of his duties for the Company to an extent substantially consistent with the Executive's travel obligations immediately prior to a Change in Control of the Company; (ix) any failure by the Company to provide an automobile of similar style, class and size which was provided to the Executive by the Company immediately prior to a Change in Control of the Company; (x) any failure by the Company to provide the Executive with the number of paid vacation days to which the Executive was entitled immediately prior to a Change in Control of the Company; (xi) any material breach by the Company of any provision of this Agreement following a Change in Control of the Company; (xii)any failure by the Company to obtain the assumption of this Agreement by any successor or assign of the Company; (xiii) any purported termination by the Company not in compliance with the Notice of Termination provision in paragraph 4)e) below following a Change in Control of the Company; and (xiv)after a Change in Control of the Company, the Company gives notice to the Executive that the term of this Agreement shall not be extended as provided in paragraph 2)a)(i). (e) Notice of Termination Any termination of the Executive by the Company pursuant to paragraphs 4)b) or 4)c) for Disability or Cause shall be communicated by a Notice of Termination in substantial compliance with the provisions of paragraph 8). For the purpose of this Agreement, a Notice of Termination shall mean a written notice which shall indicate the specific provisions in this Agreement relied upon for termination of Executive's employment and which sets forth in reasonable detail the facts and circumstances claimed to provide a basis for such termination. For the purposes of this Agreement, no purported termination by the Company shall be effective without such Notice of Termination. (f) Effective Date of Termination Any termination of the Executive for Disability or Cause pursuant to paragraphs 4)b) or 4)c) shall be effective 30 calendar days after the Notice of Termination is delivered to the Executive; provided that, in the event the termination is for Disability as set out in paragraph 4)b), the Executive has not returned to full time performance of his duties within the 30-day period. All other terminations subject to the terms of this Agreement, whether by the Company or the Executive, shall be effective immediately upon the giving of the Notice of Termination. 5) Severance Compensation upon Termination of Employment If, during the period commencing upon a Change in Control of the Company and ending two years following the satisfaction of all conditions precedent to and consummation of an event described in clauses (i), (ii), (iii), (iv), or (v) of paragraph 3), the Company shall terminate the Executive's employment for any reason other than as a result of the Executive's death or the reasons set out in paragraphs 4)b) or 4)c) in full compliance of the requirements for notice set out in paragraph 4)e) or if the Executive shall terminate his employment with the Company when Good Reason exists, then the Company shall provide for and pay to the Executive the following compensation: (a) severance pay in a lump sum, in cash, no later than the fifth calendar day following the date of termination, an amount equal to three times the annual base salary as calculated by reference to the Executive's rate of pay set forth in the Company's payroll records and in effect for the Executive immediately prior to a Change in Control of the Company; (b) incentive compensation under the Company's several incentive compensation plans in existence immediately prior to the Change in Control for which Executive has been granted an award and to the extent an agreement exists between Executive and the Company addressing a Change in Control, such agreement shall control the manner and amount of payment, otherwise payments of incentive compensation shall be determined as if the goals required to be met for payment had been attained at target and shall be made in the same manner as payments under paragraph 5)(a) above; (c) medical, dental, disability and life insurance and other employee benefits upon the same terms and conditions and at the same cost to the Executive that existed immediately prior to the Change in Control of the Company for the lesser of three years or until substantially similar employee benefits are available through other employment; (d) if the Executive is fifty years of age or older and has at least fifteen years of service with the Company, the Company, in addition to the foregoing benefits, shall pay to the Executive, as an early retirement incentive, an amount, on a monthly basis for the remainder of his life, that is equal to what the Executive's retirement pay would be, calculated using the applicable formula set forth in the Company's Pension Plan as supplemented by the Excess Benefit Plan based upon the base salary earned by the Executive for the necessary number of years immediately prior to the Change in Control of the Company and the number of service credits that the Executive would accumulate if he continued his employment until age 62; provided that to the extent that the Executive would be entitled to retire on the date of termination or upon his achieving an age upon which the Executive could retire pursuant to the Company's Pension Plan as supplemented by the Excess Benefit Plan, and receive payments pursuant to said Pension Plan and Excess Benefit Plan, the Company's obligation to make monthly payments shall be equal to the difference between the amount actually received by the Executive under the Pension Plan as supplemented by the Excess Benefit Plan and the amount required to be paid by the Company as set forth above; provided further that if the Executive becomes entitled to any of the benefits set forth in paragraph 5)(c) as a retiree under the Company's Pension Plan on or after the date of termination, then the benefits provided under said Pension Plan and Excess Benefit Plan shall be substituted for and take the place of the benefits that the Company would otherwise be required to provide; and further provided that to the extent any payment or obligation to pay under this paragraph 5)(d) is determined by the Internal Revenue Service to be subject to taxation upon the net present value of the stream of payments for which the Company is obligated to pay, then the Company shall pay to the Executive within 30 days of such determination, a lump sum equal to the amount determined by the Internal Revenue Service to be subject to taxation; further, provided that if the Executive has an employment agreement that provides for treatment of pension benefits, then the amount of compensation payable hereunder shall be determined by the terms of the employment agreement; (e) without limiting the generality or effect of any other provision hereof, employee benefit plan, arrangement, or related trust referred to in paragraph 4)d)(vi), the Company shall fully fund each Plan in which the Executive is a participant or is otherwise entitled to payments or benefits within 5 calendar days of the termination of the Executive's employment; (f) any excise tax payable pursuant to Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), as a result of the payment of the amounts described in this paragraph 5); and (g) any additional federal, state, or local income tax liability (calculated at the highest effective rate applicable to individuals) and excise tax liability (under Section 4999 of the Code) attributable to payments related to any incremental payment for excise taxes. 6) No Obligation to Mitigate Damages; No Effect on Other Contractual Rights (a) The Company hereby acknowledges that it will be difficult, and may be impossible, for the Executive to find reasonably comparable employment following the date of termination. In addition, the Company acknowledges that its severance pay plans applicable in general to its salaried employees do not provide for mitigation, offset, or reduction of any severance payment received thereunder. Accordingly, the parties hereto expressly agree that the payment of the severance compensation by the Company to the Executive in accordance with the terms of this Agreement will be liquidated damages, and that the Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall any profits, income, earnings, or other benefits from any source whatsoever create any mitigation, offset, reduction, or any other obligation on the part of the Executive hereunder or otherwise; (b) The provisions of this Agreement, and any payment provided for hereunder, shall not reduce any amounts otherwise payable, or in any way diminish the Executive's existing rights, or rights which would accrue solely as a result of the passage of time, under any benefit plan, incentive plan or securities plan, employment agreement or other contract, plan or arrangement. 7) Successor to the Company (a) The Company will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to the Executive, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Any failure of the Company to obtain such agreement prior to the effectiveness of any such succession or assignment shall be a material breach of this Agreement and shall entitle the Executive to terminate the Executive's employment for Good Reason. As used in this paragraph 7, Company shall have the same meaning as hereinbefore defined and shall include any successor or assign to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this paragraph 7 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. If at any time during the term of this Agreement, the Executive is employed by any corporation a majority of the voting securities of which is then owned by the Company, the Company as used in paragraphs 3, 4, 5, 12, and 13 hereof shall in addition include such employer. In such event, the Company shall pay or shall cause such employer to pay any amount owed to the Executive pursuant to paragraph 5 hereof; (b) This Agreement shall inure to the benefit of and be enforceable by the Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts are still payable to him hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee or, if there be no such designee, to the Executive's estate; (c) This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign, transfer, or delegate this Agreement or any rights or obligations hereunder except as expressly provided in paragraph 7)(a) above. Without limiting the generality of the foregoing, the Executive's right to receive payments hereunder shall not be assignable, transferable, or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by his or her will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this paragraph 7)(c), the Company shall have no liability to pay any amount so attempted to be assigned, transferred, or delegated; (d) The Company and the Executive recognize that each party will have no adequate remedy at law for breach by the other of any of the agreements contained herein and, in the event of any such breach, the Company and the Executive hereby agree and consent that the other shall be entitled to a decree of specific performance, mandamus, or other appropriate remedy to enforce performance of this Agreement. 8) Notice For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, as follows: If to the Company: Texas-New Mexico Power Company 4100 International Plaza, Tower II Fort Worth, Texas 76109 If to the Executive: _________________________________________________ _________________________________________________ or such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 9) Miscellaneous No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. 10) Validity The invalidity or unenforceability of any provision or any part of a provision of this Agreement shall not affect the validity or enforceability of the remaining provisions of this Agreement, which shall remain in full force and effect. 11) Counterparts This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 12) Legal Fees and Expenses The Company is aware that the Board of Directors or a shareholder of the Company or the Company's parent may then cause or attempt to cause the Company to refuse to comply with its obligations under this Agreement, or may cause or attempt to cause the Company or the Company's parent to institute, or may institute, litigation seeking to have this Agreement declared unenforceable, or may take, or attempt to take other action to deny the Executive the benefits intended under this Agreement. In these circumstances, the purpose of this Agreement could be frustrated. It is the intent of the Company that the Executive not be required to incur the expenses associated with the enforcement of his rights under this Agreement by litigation or other legal action because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Executive hereunder, nor be bound to negotiate any settlement of his rights hereunder under threat of incurring such expenses. Accordingly, if it should appear to the Executive that the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes any action to declare this Agreement void or unenforceable, or institutes any litigation or other legal action designed to deny, diminish or to recover from the Executive the benefits intended to be provided to the Executive hereunder, the Company irrevocably authorizes the Executive from time to time to retain counsel of his choice at the expense of the Company as provided in this paragraph 12, to represent the Executive in connection with the initiation or defense of any litigation or other legal action, whether by or against the Company or any Director, officer, shareholder or other person affiliated with the Company, in any jurisdiction. Notwithstanding any existing or prior attorney-client relationship between the Company and such counsel, the Company irrevocably consents to the Executive entering into an attorney-client relationship with such counsel, and in that connection the Company and Executive agree that a confidential relationship shall exist between the Executive and such counsel. The Company shall pay or cause to be paid and shall be solely responsible for any and all attorneys' and related fees and expenses incurred by the Executive as a result of the Company's failure to perform this Agreement or any provision hereof or as a result of the Company or any person contesting the validity or enforceability of this Agreement or any provision hereof. Such fees and expenses shall be paid or reimbursed to the Executive by the Company on a regular, periodic basis, within thirty days following receipt by the Company of statements of such counsel in accordance with such counsel's customary practice. In no event shall the Executive be required to reimburse the Company for attorneys' fees or expenses previously paid on behalf of the Executive or reimbursed to the Executive, or for any attorneys' fees or expenses incurred by the Company in connection with any contest of validity or enforceability of this Agreement or any provisions hereof; provided, however, that any litigation by the Executive, whether as plaintiff or defendant, shall be in good faith. 13) Confidentiality The Executive shall retain in confidence any and all confidential information known to the Executive concerning the Company and its business so long as such information is not otherwise publicly disclosed. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. TEXAS-NEW MEXICO POWER COMPANY By:___________________________ Name: Kevern R. Joyce Title: Chairman, President & Chief Executive Officer By:___________________________ Name: Title: ATTEST: __________________________________ Secretary EX-10 4 EXH_10RR SCHEDULE Schedule of Executives Party to Executive Severance Compensation Agreements Kevern R. Joyce Jack V. Chambers Manjit S. Cheema Ralph S. Johnson John P. Edwards Larry Dillon Melissa Davis Allan Davis Dennis R. Cash Michael D. Blanchard Paul W. Talbot Patrick Bridges Scott Forbes Mark Coulson Robert Castillo W. Douglas Hobbs John Montgomery EX-10 5 EXH_10TT On March 28, 1994 you entered into a final version of a letter agreement which provided in paragraph 4. a method to credit you additional years of service should you work until age 65 and set forth the manner for calculating the retirement benefit. Since the date of the letter agreement the Company has amended its Pension Plan and the Excess Benefit Plan to institute a Cash Balance Plan. This plan resulted in a significant adverse change to the benefits available to you under the original letter agreement. In order to continue the benefit as it existed at the time of the March 28 offer letter the Company will use the use the then existing pension formula as the basis to determine your supplemental retirement benefits previously discussed. This formula is being added to the pension formula as Supplement A, a copy of which is attached hereto. The Company therefore offers to you the following benefit in full and complete satisfaction of its commitment to you in its offer letter of March 28, 1994: In the event you are still employed by the Company at age 65, your retirement benefits payable from TNMP's Excess Benefit Plan will be calculated using the Supplement A formula. In the case of a "Change-in-Control", you will become fully vested in this supplemental pension benefit. The benefit will be accrued and vested as of the date of the change-in-control or the date at which the executive would have been age 62, whichever benefit is greater. "Change of Control" is defined as that term is defined in the Executive Severance Compensation Agreement which you have executed previously with the Company . If you agree with the foregoing please sign in the space provided below. /s/ John Fanning Dated February 16, 1998 John Fanning, Chairman - Compensation Committee Texas-New Mexico Power Company /s/ Kevern R. Joyce Dated February 16, 1998 Kevern Joyce, Chairman, President & CEO TNP Board of Directors SUPPLEMENT A In the event the executive is still employed by the Company at age 65, their retirement benefits payable from Texas-New Mexico Power Company's Excess Benefit Plan will be calculated using the Supplement A formula. FORMULA: 1.3% of career average compensation times 30 years of service, plus 0.4% of the excess of career average compensation over one-half of the Social Security maximum wage base in the year of retirement times 30 years of service. If the executive retires prior to age 65 (but not earlier than age 55 and 5 years of service) the 30 years of service used in the formula will be reduced by one year for each year that the retirement precedes age 65. If the executive retires before age 65 and requests a monthly benefit payment, the amount of the monthly payment will be the actuarial equivalent of the benefit payable at age 65. If the executive retires prior to age 55 and 5 years of service, no benefit would be provided under the terms of the employment contract (except in the case of a change-in-control). This benefit will be reduced by the benefits that are provided by the Texas-New Mexico Power Company Pension Plan (qualified plan) and the retirement benefits provided by previous employers under their qualified and non-qualified plans. EX-10 6 EXH_10UU On May 14, 1996 you were offered the position of Senior Vice-President for Texas-New Mexico Power Company. The offer letter from Kevern Joyce commits "to work out a retirement benefit using the Excess Benefit Plan, to credit you for years of experience from which you gained no vested benefits, assuming you work until age 65." Since you were employed, the company has revised the Pension Plan to a Cash Balance Plan. The Cash Balance Plan determines retirement in a much different manner than the plan that was in place at the time of your offer letter and has affected the Company's prior efforts to honor its commitment in the May 14 letter. In order to continue the benefit as it existed at the time of the May 14 offer the Company will use the use the then existing pension formula as the basis to determine your supplemental retirement benefits previously discussed. This formula is being added to the pension formula as Supplement A, a copy of which is attached hereto. The Company therefore offers to you the following benefit in full and complete satisfaction of its commitment to you in its offer letter of May 14, 1996: In the event you are still employed by the Company at age 65, your retirement benefits payable from TNMP's Excess Benefit Plan will be calculated using the Supplement A formula. In the case of a "Change-in-Control", you will become fully vested in this supplemental pension benefit. The benefit will be accrued and vested as of the date of the change-in-control or the date at which the executive would have been age 62, whichever benefit is greater. "Change of Control" is defined as that term is defined in the Executive Severance Compensation Agreement which you have executed previously with the Company . If you agree with the foregoing please sign in the space provided below. /s/ Kevern R. Joyce Dated February 16, 1998 Kevern Joyce, Chairman, President & CEO Texas-New Mexico Power Company I agree with the foregoing: /s/ John Edwards Dated February 16, 1998 John Edwards, Sr. Vice President SUPPLEMENT A In the event the executive is still employed by the Company at age 65, their retirement benefits payable from Texas-New Mexico Power Company's Excess Benefit Plan will be calculated using the Supplement A formula. FORMULA: 1.3% of career average compensation times 30 years of service, plus 0.4% of the excess of career average compensation over one-half of the Social Security maximum wage base in the year of retirement times 30 years of service. If the executive retires prior to age 65 (but not earlier than age 55 and 5 years of service) the 30 years of service used in the formula will be reduced by one year for each year that the retirement precedes age 65. If the executive retires before age 65 and requests a monthly benefit payment, the amount of the monthly payment will be the actuarial equivalent of the benefit payable at age 65. If the executive retires prior to age 55 and 5 years of service, no benefit would be provided under the terms of the employment contract (except in the case of a change-in-control). This benefit will be reduced by the benefits that are provided by the Texas-New Mexico Power Company Pension Plan (qualified plan) and the retirement benefits provided by previous employers under their qualified and non-qualified plans. EX-10 7 EXH_10VV On December 15, 1994 you were offered the position of Vice-President for Texas-New Mexico Power Company. The offer letter from Kevern Joyce commits "to develop a method to give you some credit for non-vested service with other employers should you ultimately retire from TNP." Since you were employed, the company has revised the Pension Plan to a Cash Balance Plan. The Cash Balance Plan determines retirement in a much different manner than the plan that was in place at the time of your offer letter and has affected the Company's prior efforts to honor its commitment in the original offer letter. In order to continue the benefit as it existed at the time of the December 15 offer the Company will use the use the then existing pension formula as the basis to determine your supplemental retirement benefits previously discussed. This formula is being added to the pension formula as Supplement A, a copy of which is attached hereto. The Company therefore offers to you the following benefit in full and complete satisfaction of its commitment to you in its offer letter of December 15, 1994: In the event you are still employed by the Company at age 65, your retirement benefits payable from TNMP's Excess Benefit Plan will be calculated using the Supplement A formula. In the case of a Change-in-Control, you will become fully vested in this supplemental pension benefit. The benefit will be accrued and vested as of the date of the change-in-control or the date at which the executive would have been age 62, whichever benefit is greater. Change of Control is defined as that term is defined in the Executive Severance Compensation Agreement which you have executed previously with the Company . If you agree with the foregoing please sign in the space provided below. /s/ Kevern R. Joyce Dated February 16, 1998 - --------------------------------------- Kevern Joyce, Chairman, President & CEO Texas-New Mexico Power Company I agree with the foregoing: /s/ Ralph Johnson Dated February 16, 1998 - --------------------------------- Ralph Johnson, Sr. Vice President SUPPLEMENT A ------------ In the event the executive is still employed by the Company at age 65, their retirement benefits payable from Texas-New Mexico Power Company's Excess Benefit Plan will be calculated using the Supplement A formula. FORMULA: 1.3% of career average compensation times 30 years of service, plus 0.4% of the excess of career average compensation over one-half of the Social Security maximum wage base in the year of retirement times 30 years of service. If the executive retires prior to age 65 (but not earlier than age 55 and 5 years of service) the 30 years of service used in the formula will be reduced by one year for each year that the retirement precedes age 65. If the executive retires before age 65 and requests a monthly benefit payment, the amount of the monthly payment will be the actuarial equivalent of the benefit payable at age 65. If the executive retires prior to age 55 and 5 years of service, no benefit would be provided under the terms of the employment contract (except in the case of a change-in-control). This benefit will be reduced by the benefits that are provided by the Texas-New Mexico Power Company Pension Plan (qualified plan) and the retirement benefits provided by previous employers under their qualified and non-qualified plans. EX-10 8 EXH_WW Incentive Compensation Award Agreement for Short- and Long-Term Awards This Agreement is dated and effective as of January 1, 1998, and is between ___________________________________ ("Participant"), Texas-New Mexico Power Company (the "Company") and TNP Enterprises, Inc. ("TNPE"). RECITALS A Committee appointed by and having full authority to act on behalf of the Board of Directors of the Company and TNPE, respectively, (collectively, the "Compensation Committee") adopted the following incentive compensation plans: A. Texas-New Mexico Power Company Management Short-Term Incentive Plan ("Management Plan"); and B. TNP Enterprises, Inc. Equity Incentive Plan ("Equity Plan"). On April 28, 1995, the Shareholders approved the adoption by the Board of Directors of the Equity Plan. The Management Plan provides for the payment of cash if certain incentive goals are achieved. The Equity Plan provides for the delivery of stock options, stock, and performance units upon the achievement of certain incentive goals which may be short-term and/or long-term goals. On February 16, 1998, the Compensation Committee (the "Committee") established the performance goals to be achieved in order to earn incentive compensation under the plans. The Participant has been selected to receive awards under each plan subject to the terms of each applicable plan and the Participant signing this Award Agreement. The Participant and the Company agree that this Agreement does not affect Participant's status as an employee at will and further agree that either party may terminate Participant's employment at any time with or without cause. The Committee reserves, in its sole discretion, the right to interpret the terms and conditions of any award and this agreement and to resolve any disagreements or disputes concerning this Award Agreement and any decision is binding upon all parties. In consideration of the Recitals and mutual covenants and agreements below, the Participant and the Company desire to and by their respective signatures do hereby agree to the terms and conditions set forth below. AGREEMENT SHORT-TERM AWARDS Short-Term Cash Award: Participant is hereby granted _____% of the control point for Participant's salary range as established by the Compensation Committee at the beginning of each plan year. The cash award is subject to the 1998 short-term goals for the Management Plan being met as such goals are set forth on Exhibit A attached hereto and made a part hereof for all purposes. Such award may be adjusted between 50% and 150% on a straight line basis depending upon where the performance related to each goal occurs within the range established for each goal. No award payment will be made for performance below the established minimum for each goal set forth in Exhibit A. The cash award shall be paid no later than March 15th following the end of the plan year. The parties agree that no portion of the cash award is due or payable regardless of whether any Corporate Operational Goal or Departmental/Individual Goals are met unless the minimum Corporate Financial Goal is met. Further, the Committee reserves the right to make year-end adjustments which may account for any unusual or unforeseen events that impact the attainability of any goal. Allocation of Awards: Participant agrees that the total amount of the cash award will be allocated among the Corporate Financial Goal, Corporate Operational Goals, and Departmental/Individual Performance Goals applicable to such Participant as is set forth in Exhibit B which is attached hereto and made a part hereof for all purposes. Participant agrees that to the extent any amount of the total award is allocated to the Departmental/Individual Performance Goals, such amount will be due and payable only to the extent the performance of the Participant, as determined by the officer executing this Agreement on behalf of the Company in such officer's sole discretion (or, if Participant is the Chief Executive Officer, then as determined by the Committee in its sole discretion), falls within the Performance Rating range set forth in Exhibit C which is attached hereto and made a part hereof for all purposes. LONG-TERM AWARD Long-Term Stock Award: Participant is hereby granted a stock award equal to _____% of the control point for Participant's salary range as established by the Compensation Committee as of the beginning of the long-term plan cycle. Such long-term plan cycle award opportunity granted pursuant to the Equity Plan being met is subject to the goals set forth on Exhibit D which is attached hereto and made a part hereof for all purposes. Such award may be adjusted between 50% and 150% on a straight line basis, depending upon where the performance related to each goal occurs within the range established for each goal. No award payment will be made for performance below the established minimum for each goal set forth in Exhibit D. Any stock award earned shall be paid no later than March 15th following the end of the 1998 long-term plan cycle. The 1998 Plan year cycle will be a period of three years beginning January 1, 1998. Allocation of Award: Participant agrees that the total amount awarded under the Equity Plan will be allocated 35% to the goal established for Total Shareholder Return in comparison to the S&P 500, and 65% to the goal established for Total Shareholder Return in comparison to the S&P Electrical Utility Group. The amounts allocated to each set of goals will be due and payable only to the extent each such goal shall be met as set forth in Exhibit D. GENERAL TERMS Dividend Equivalents: Participant shall have the right to receive, at the time any stock awards are paid, cash in an amount equal in value to the dividends declared on each Share on each record date occurring during the applicable performance period established for each plan. Dividend equivalents will not include any dividends on the dividend equivalents accrued during the applicable performance periods. Pro-Ration of Awards: If a Participant begins employment or Participant's employment is terminated due to retirement, death, or disability during a plan year or the 1998 long-term performance cycle, any award earned shall be prorated based on the number of months of participation within the plan year or long-term plan cycle. The prorated award will be based upon performance determined at year or cycle end and will be paid at the same time as all other awards are paid from each of the plans under which awards are made. Termination of Employment: If employment is terminated for any reason other than retirement, death, or disability, any award opportunity granted under either plan shall be forfeited, provided that the Committee may waive such forfeiture upon the CEO's recommendation, provided that if the Change in Control paragraph is applicable that paragraph shall control. Change in Control: In the event a Change in Control occurs as that term is defined in the Executive Agreement for Severance Compensation, then performance under this Agreement will be deemed to have been at target. To the extent any payment of an award would have been in stock, such award shall be deemed converted to a cash award in an amount equal to the value of the stock as of the day the Change in Control event occurs. Provided that Participant is not terminated for Cause, as that term is defined in the Executive Agreement for Severance compensation, the Participant shall be entitled to receive payment of the awards granted herein no later than the fifth calendar day following the date of termination or 30 days following the Change in Control event, whichever first occurs. Valuation of Shares: Shares issued under the Equity Plan pursuant to having been earned under the plan and the terms of this Agreement shall be valued by averaging the high and low prices of the stock on the first trading day of the plan performance period (the "Share Value"). The Share Value shall be applied to the dollar value of the award to arrive at the equivalent number of shares awarded. The awarded shares shall be adjusted for the average of the high and low stock price on the last trading day of the plan year. Tax Treatment: Payments are taxable to the Participant in the year of receipt. The Company will have the right to deduct any federal, state, or local taxes required by law to be withheld. In regard to any award made hereunder, a Participant, at Participant's option, may elect to have the Company withhold sufficient stock, to the extent payable, to pay the taxes then due on such award. Provisions Consistent with Plan: This Agreement shall be construed consistent with the provisions of the applicable plan under which any award may be made. Where matters are not addressed in this Award Agreement, but are addressed in the Management Plan or Equity Plan, then such terms are deemed a part of this Award Agreement and shall apply equally to all awards granted herein, except for where such terms obviously apply solely to one of the plans. If there is a conflict between the provisions of this Agreement and such plan, the provisions of the applicable plan control. Unless otherwise noted to the contrary, the definition of terms in each Plan also apply in this Agreement. Attorney Fees: In the event either party is required to bring a cause of action against the other to enforce the terms of this Agreement, then such party, to the extent such party is successful in such action, shall be entitled to reasonable attorney fees. Governing Law: This Agreement shall be governed by the laws of the State of Texas. Venue for any cause of action shall be Tarrant County, Texas. Texas-New Mexico Power Company Participant: By: ____________________ By: ____________________ Kevern R. Joyce President & Chief Executive Officer TNP Enterprises, Inc. Participant By:_____________________ By:_____________________ Kevern R. Joyce President & Chief Executive Officer
EXHIBIT A TNP ENTERPRISES, INC. TEXAS-NEW MEXICO POWER COMPANY Short-Term Incentive Corporate Goals - -------------------------------------------- ---------------------------- --------------------------------------------- 1997 Goals Measurement Objective Minimum Target Maximum ---------------- ------------- -------------- Financial 1. Cash Value Added Improve Financial 4.05 4.40 4.75 Condition Corporate Threshold 4.05 - -------------------------------------------- ---------------------------- ---------------- ------------- -------------- - -------------------------------------------- ---------------------------- ---------------- ------------- -------------- Operational 2. Customer Satisfaction Rating Improve Customer 79 82 85 (Use CSI instead of overall Service favorability in 1997) 3. O&M Costs/KWH Sales (cents per KWH) Reduce Operating Costs 4.15 3.95 3.75 4. Equivalent Forced Outage Rate (Moved Improve TNP One's to Plant Specific Goals in 1997) Reliability 4.7 4.5 4.3 5. Injury Frequency Ratio Reduce Employee Accidents 5.05 4.44 3.82 49 43 37 6. System Reliability A) Average Minutes of Outage per Reduce Outage Time 86 76 66 customer B) Average Number of Outages per Reduce No. of customer Customers Interrupted 1.40 1.25 1.10 - -------------------------------------------- ---------------------------- ---------------- ------------- --------------
EXHIBIT B TEXAS-NEW MEXICO POWER COMPANY Short-Term Incentive Plan Weighting of 1997 Goals for Texas-New Mexico Power Company Participants Corporate Financial Corporate Operational Cash Customer O&M Avg. Avg. Value Satisfaction Costs/per Minutes of Number of Departmental/ Added Rating KWH IFR Outage Outages EFOR Individual Total ------- ------------- ----------- ---- --------- ---------- ------ ------------ -------- CEO 60 5 5 5 5 5 5 10 100% SR VP CCO 60 10 5 5 5 5 10 100% RCOs 50 5 5 5 2.5 2.5 30 100% Key Employees 50 5 5 5 2.5 2.5 30 100% SR VP Power Resources 60 5 5 5 25 100% Asst. Res. Acq. 60 5 5 30 100% Asst. VP Ind. Mkt. 60 5 5 30 100% Key Participants 60 5 5 30 100% Plant Mgr. & Key Participants 60 5 5 * 30 100% SR VP CFO 60 5 5 30 100% Controller 60 5 5 30 100% Treasurer 60 5 5 30 100% Key Employees 60 5 5 30 100% SR VP Corporate Relations 60 5 5 5 25 100% VP HR 60 5 5 5 25 100% Sec Gen Counsel 60 5 5 30 100% Key Employees 60 5 5 30 100% * 1/3 of TNP One's Departmental Goal will be EFOR.
EXHIBIT C DEPARTMENTAL/INDIVIDUAL PERFORMANCE TARGET GOALS Individual Performance as a % of Performance Rating Target Award 4 -- Greatly exceeded expectations for objective(s) 150% (maximum) 3 -- Exceeded expectations for objective(s) 125% 2 -- Achieved expectations for objective(s) (target) 100% 1 -- Almost achieved expectations for objective(s) 50% (minimum) 0 -- Improvement needed, failed to meet objective(s) 0%
EXHIBIT D LONG-TERM STOCK AWARD GOALS Total Shareholder Return Payout on the basis of matrix reflecting total shareholder return in relation to each of the S&P 500 and the S&P Electric Utility Index. TSR to S&P 500 (35% weighting) Performance Ranking % of Target Shares Earned Maximum =>75th percentile 150% Target =>55th percentile 100% Minimum =>35th percentile 50% Below Minimum <=35th percentile 0% TSR to S&P Electric Utility Index (65% weighting) Performance Ranking % of Target Shares Earned Maximum =>75th percentile 150% Target =>55th percentile 100% Minimum =>35th percentile 50% Below Minimum <=35th percentile 0%
EX-10 9 EXH_10WW SCHEDULE Schedule of Executives and Key Employees Party to Incentive Compensation Award Agreements For Short-and Long-Term Awards Kevern R. Joyce, Chairman, President & CEO Jack V. Chambers, Senior Vice President and Chief Customer Officer Manjit S. Cheema, Senior Vice President and Chief Financial Officer Ralph S. Johnson, Senior Vice President - Power Resources John P. Edwards, Senior Vice President - Corporate Relations W. Douglas Hobbs, Vice President - Business Development Larry Dillon, Vice President - Regional Customer Officer Melissa Davis, Vice President - Regional Customer Officer Allan Davis, Vice President - Regional Customer Officer John Montgomery, President, Facility Works, Inc. Michael D. Blanchard, , Vice President - General Counsel Dennis R. Cash, Vice President - Human Resources Patrick Bridges, Treasurer Scott Forbes, Controller Paul W. Talbot, Corporate Secretary Robert Castillo, Assistant Vice President - New Mexico Mark Coulson, Assistant Vice President - Industrial Marketing Larry Gunderson, Director Regulatory and Government Affairs Cathy Means, Director - Information Services Thomas Houle, Director - Power Planning and Supply Mark Wilson, TNP One Plant Manager EX-27 10
UT 0000741612 TNP ENTERPRISES, INC. 1,000 12-MOS DEC-31-1997 DEC-31-1997 PER-BOOK 923,268 5,704 34,644 28,310 0 991,926 187,163 0 111,078 298,241 0 3,240 478,041 0 0 0 100 0 0 0 212,304 991,926 585,234 20,108 469,480 489,588 95,646 1,723 97,369 56,914 29,678 158 29,520 13,147 52,557 103,853 2.26 2.26
EX-27 11
UT 0000022767 TEXAS-NEW MEXICO POWER CO. 1,000 12-MOS DEC-31-1997 DEC-31-1997 PER-BOOK 923,250 214 14,536 29,006 0 967,006 107 222,146 64,768 287,021 0 3,240 477,900 0 0 0 100 0 0 0 198,745 967,006 580,693 22,062 459,178 481,240 99,453 1,377 100,830 56,912 43,918 158 43,760 44,300 52,557 124,467 0 0
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