-----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, Vi5ZW2hn+LGN+Q0yqP1pXMXNIOL1mbRDQa5VWobNFBpwG5PNPU6zDqih1t7UEUIi TjhYd4ogcPhGyu/J9tNl1g== 0000741612-99-000021.txt : 19990812 0000741612-99-000021.hdr.sgml : 19990812 ACCESSION NUMBER: 0000741612-99-000021 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990811 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-Q SEC ACT: SEC FILE NUMBER: 001-08847 FILM NUMBER: 99683924 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-Q SEC ACT: SEC FILE NUMBER: 002-97230 FILM NUMBER: 99683925 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-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (Mark One) (X) COMBINED QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to ___________ - -------------------------------------------------------------------------------- Commission File Number: 1-8847 TNP ENTERPRISES, INC. (Exact name of registrant as specified in its charter) Texas 75-1907501 (State of incorporation) (I.R.S. employer identification number) 4100 International Plaza, P. O. Box 2943, Fort Worth, Texas 76113 (Address and zip code of principal executive offices) Registrant's telephone number, including area code 817-731-0099 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes \X\ No \ \ TNP Enterprises, Inc. had 13,415,566 shares of common stock outstanding as of August 3, 1999. - -------------------------------------------------------------------------------- Commission File Number: 2-97230 TEXAS-NEW MEXICO POWER COMPANY (Exact name of registrant as specified in its charter) Texas 75-0204070 (State of incorporation) (I.R.S. employer identification number) 4100 International Plaza, P. O. Box 2943, Fort Worth, Texas 76113 (Address and zip code of principal executive offices) Registrant's telephone number, including area code 817-731-0099 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes \X\ No \ \ TNP Enterprises, Inc. holds all 10,705 outstanding common shares of Texas-New Mexico Power Company. TNP Enterprises, Inc. And Subsidiaries Texas-New Mexico Power Company and Subsidiaries Combined Quarterly Report on Form 10-Q for the period ended June 30, 1999 This Combined Quarterly Report on Form 10-Q is filed separately by TNP Enterprises, Inc., and Texas-New Mexico Power Company. Texas-New Mexico Power Company makes no representation as to information relating to TNP Enterprises, Inc., except as it may relate to Texas-New Mexico Power Company, or to any other affiliate or subsidiary of TNP Enterprises, Inc. TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements. TNP Enterprises, Inc. (TNP) and Subsidiaries: Consolidated Statements of Income Three and Six Month Periods Ended June 30, 1999, and 1998 3 Consolidated Statements of Cash Flows Six Month Periods Ended June 30, 1999, and 1998 4 Consolidated Balance Sheets June 30, 1999, and December 31, 1998 5 Texas-New Mexico Power Company (TNMP) and Subsidiaries: Consolidated Statements of Income Three and Six Month Periods Ended June 30, 1999, and 1998 6 Consolidated Statements of Cash Flows Six Month Periods Ended June 30, 1999, and 1998 7 Consolidated Balance Sheets June 30, 1999, and December 31, 1998 8 Notes to Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings. 19 Item 6. Exhibits and Reports on Form 8-K. 19 (a) Exhibit Index 19 (b) Reports on Form 8-K 19 Statement Regarding Forward Looking Information 19 Signature page 19
TNP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended Six Months Ended June 30, June 30, --------------------------------------------------------------------- 1999 1998 1999 1998 -------------- -------------- --------------- --------------- (In thousands except per share amounts) OPERATING REVENUES $ 144,027 $ 142,099 $ 262,153 $ 268,036 -------------- -------------- --------------- --------------- OPERATING EXPENSES: Purchased power and fuel 66,982 74,558 124,354 141,383 Other operating and maintenance 28,608 25,485 52,432 45,869 Depreciation 9,513 9,005 19,487 18,877 Charge for recovery of stranded plant (Note 3) 1,903 1,160 5,653 1,160 Taxes other than income taxes 8,285 8,850 16,285 16,576 Income taxes 6,561 3,940 7,274 6,579 -------------- -------------- --------------- --------------- Total operating expenses 121,852 122,998 225,485 230,444 -------------- -------------- --------------- --------------- NET OPERATING INCOME 22,175 19,101 36,668 37,592 -------------- -------------- --------------- --------------- OTHER INCOME: Other income and deductions, net 777 104 939 468 Income taxes 180 221 298 55 -------------- -------------- --------------- --------------- Other income, net of taxes 957 325 1,237 523 -------------- -------------- --------------- --------------- INCOME BEFORE INTEREST CHARGES 23,132 19,426 37,905 38,115 -------------- -------------- --------------- --------------- INTEREST CHARGES: Interest on long-term debt 9,688 12,542 19,912 25,039 Other interest and amortization of debt-related costs 1,041 1,053 2,457 2,115 -------------- -------------- --------------- --------------- Total interest charges 10,729 13,595 22,369 27,154 -------------- -------------- --------------- --------------- INCOME FROM CONTINUING OPERATIONS 12,403 5,831 15,536 10,961 Loss from discontinued nonregulated operations (Note 4) - 6,598 - 7,102 -------------- -------------- --------------- --------------- NET INCOME (LOSS) 12,403 (767) 15,536 3,859 Dividends on preferred stock and other (94) 38 (58) 76 -------------- -------------- --------------- --------------- INCOME (LOSS) APPLICABLE TO COMMON STOCK $ 12,497 $ (805) $ 15,594 $ 3,783 ============== ============== =============== =============== EARNINGS (LOSS) PER SHARE OF COMMON STOCK Earnings from continuing operations $ 0.93 $ 0.44 $ 1.17 $ 0.83 Loss from discontinued nonregulated operations - (0.50) - (0.54) -------------- -------------- --------------- --------------- EARNINGS (LOSS) PER SHARE $ 0.93 $ (0.06) $ 1.17 $ 0.29 ============== ============== =============== =============== DIVIDENDS PER SHARE OF COMMON STOCK $ 0.29 $ 0.27 $ 0.58 $ 0.54 ============== ============== =============== =============== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 13,398 13,240 13,372 13,214 ============== ============== =============== =============== The accompanying notes are an integral part of these consolidated financial statements.
TNP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30 ------------------------------- 1999 1998 -------------- -------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: $ 235,599 $ 279,467 Purchased power (108,928) (119,963) Fuel costs paid (16,373) (17,549) Cash paid for payroll and to other suppliers (51,345) (64,098) Interest paid, net of amounts capitalized (16,507) (26,162) Income taxes refunded (paid) 3,391 (1,788) Other taxes paid (22,886) (21,496) Other operating cash receipts and payments, net (7) 506 -------------- -------------- NET CASH FROM OPERATING ACTIVITIES 22,944 28,917 -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to utility plant (21,277) (17,066) Additions to other property and nonregulated investments - 300 Withdrawals from (deposits to) escrow account 1,952 - -------------- -------------- NET CASH USED IN INVESTING ACTIVITIES (19,325) (16,766) -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid on preferred and common stocks (7,817) (7,221) Common stock issuances 3,956 3,957 Borrowings from (repayments to) revolving credit facilities - net (43,500) - Issuances: Senior notes, net of discount 174,164 - Deferred expenses associated with financings (1,577) - Redemptions: Preferred stock, net of gain (1,100) - Secured debentures (130,000) - Other long-term debt - (104) -------------- -------------- NET CASH USED IN FINANCING ACTIVITIES (5,874) (3,368) -------------- -------------- NET CHANGE IN CASH AND CASH EQUIVALENTS (2,255) 8,782 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,216 15,877 -------------- -------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,961 $ 24,659 ============== ============== RECONCILIATION OF NET INCOME TO NET CASH FROM OPERATING ACTIVITIES: $ 15,536 $ 3,859 Adjustments to reconcile net income to net cash from operating activities: Depreciation 19,487 18,877 Charge for recovery of stranded plant 5,653 1,160 Amortization of debt-related costs and other deferred charges 2,370 1,881 Allowance for funds used during construction (382) (15) Deferred income taxes (1,896) 2,382 Investment tax credits 3,599 (363) Cash flows impacted by changes in current assets and liabilities: Deferred fuel costs (4,830) (223) Accounts payable (1,862) (794) Accrued interest 3,648 (4,837) Accrued taxes 856 4,424 Reserve for customer refund (10,725) 5,416 Changes in other current assets and liabilities (8,921) (2,386) Other, net 411 (464) -------------- -------------- NET CASH FROM OPERATING ACTIVITIES $ 22,944 $ 28,917 ============== ============== The accompanying notes are an integral part of these consolidated financial statements.
TNP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 1999 December 31, (Unaudited) 1998 ---------------- ---------------- (In thousands) UTILITY PLANT: Electric plant $ 1,263,813 $ 1,260,147 Construction work in progress 11,372 6,294 ---------------- ---------------- Total 1,275,185 1,266,441 Less accumulated depreciation 349,862 343,562 ---------------- ---------------- Net utility plant 925,323 922,879 ---------------- ---------------- OTHER PROPERTY AND INVESTMENTS, at cost 8,916 10,384 ---------------- ---------------- CURRENT ASSETS: Cash and cash equivalents 9,961 12,216 Accounts receivable 5,646 5,955 Inventories, at lower of average cost or market: Fuel 513 677 Materials and supplies 4,702 4,567 Deferred fuel costs 6,506 1,676 Accumulated deferred income taxes 384 2,235 Other current assets 3,986 4,403 ---------------- ---------------- Total current assets 31,698 31,729 ---------------- ---------------- REGULATORY TAX ASSETS 2,405 - DEFERRED CHARGES 26,924 28,773 ---------------- ---------------- $ 995,266 $ 993,765 ================ ================ CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common shareholders' equity: Common stock - no par value per share. Authorized 50,000,000 shares; issued 13,412,615 shares in 1999 and 13,293,996 in 1998 $ 196,473 $ 192,518 Retained earnings 123,614 115,776 ---------------- ---------------- Total common shareholders' equity 320,087 308,294 Preferred stock 1,844 3,060 Long-term debt, less current maturities 459,702 459,000 ---------------- ---------------- Total capitalization 781,633 770,354 ---------------- ---------------- CURRENT LIABILITIES: Accounts payable 26,149 28,011 Accrued interest 8,668 5,020 Accrued taxes 15,146 14,290 Customers' deposits 3,972 3,609 Reserve for customer refunds 246 10,971 Other current liabilities 15,163 25,202 ---------------- ---------------- Total current liabilities 69,344 87,103 ---------------- ---------------- REGULATORY TAX LIABILITIES - 957 ACCUMULATED DEFERRED INCOME TAXES 101,850 97,346 ACCUMULATED DEFERRED INVESTMENT TAX CREDITS 21,523 20,916 DEFERRED CREDITS (Note 3) 20,916 17,089 COMMITMENTS AND CONTINGENCIES (Note 6) ---------------- ---------------- $ 995,266 $ 993,765 ================ ================ The accompanying notes are an integral part of these consolidated financial statements.
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of TNP Enterprises, Inc.) CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended Six Months Ended June 30, June 30, -------------------------- ------------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- (In thousands) OPERATING REVENUES $ 144,014 $ 142,085 $ 262,125 $ 268,016 ---------- ---------- ---------- ---------- OPERATING EXPENSES: Purchased power and fuel 66,982 74,558 124,354 141,383 Other operating and maintenance 26,321 24,538 49,344 43,809 Depreciation 9,513 9,004 19,487 18,876 Charge for recovery of stranded plant (Note 3) 1,903 1,160 5,653 1,160 Taxes other than income taxes 8,172 8,738 16,052 17,122 Income taxes 7,540 4,143 8,584 6,946 ---------- ---------- ---------- ---------- Total operating expenses 120,431 122,141 223,474 229,296 ---------- ---------- ---------- ---------- NET OPERATING INCOME 23,583 19,944 38,651 38,720 ---------- ---------- ---------- ---------- OTHER INCOME: Other income and deductions, net 1,026 (25) 1,100 170 Income taxes 90 221 232 128 ---------- ---------- ---------- ----------- Other income, net of taxes 1,116 196 1,332 298 ---------- ---------- ---------- ----------- INCOME BEFORE INTEREST CHARGES 24,699 20,140 39,983 39,018 ---------- ---------- ---------- ----------- INTEREST CHARGES: Interest on long-term debt 9,462 12,542 19,516 25,039 Other interest and amortization of debt-related costs 1,041 1,053 2,457 2,115 ---------- ---------- ---------- ----------- Total interest charges 10,503 13,595 21,973 27,154 ---------- ---------- ---------- ----------- NET INCOME 14,196 6,545 18,010 11,864 Dividends on preferred stock and other (94) 38 (58) 76 ---------- ---------- ---------- ----------- INCOME APPLICABLE TO COMMON STOCK $ 14,290 $ 6,507 $ 18,068 $ 11,788 ========== ========== ========== ========== The accompanying notes are an integral part of these consolidated financial statements.
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of TNP Enterprises, Inc.) CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30 -------------------------------- 1999 1998 -------------- -------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from customers $ 233,573 $ 265,989 Purchased power (108,928) (119,963) Fuel costs paid (16,373) (17,549) Cash paid for payroll and to other suppliers (41,398) (38,279) Interest paid, net of amounts capitalized (16,166) (26,154) Income taxes refunded (paid) 3,391 2,206 Other taxes paid (22,409) (21,963) Other operating cash receipts and payments, net (36) 173 -------------- -------------- NET CASH FROM OPERATING ACTIVITIES 31,654 44,460 -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to utility plant (21,051) (16,955) Withdrawal from (deposits to) escrow account 1,903 - -------------- -------------- CASH FLOWS USED IN INVESTING ACTIVITIES (19,148) (16,955) -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid on preferred and common stocks (61) (13,676) Borrowings from (repayments to) revolving credit facilities, net (54,000) - Issuances: Senior notes, net of discount 174,164 - Deferred expenses associated with financings (1,577) - Redemptions: Preferred stock, net of gain (1,100) - Secured debentures (130,000) - -------------- -------------- NET CASH PROVIDED BY FINANCING ACTIVITIES (12,574) (13,676) -------------- -------------- NET CHANGE IN CASH AND CASH EQUIVALENTS (68) 13,829 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,977 2,772 -------------- -------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,909 $ 16,601 ============== ============== RECONCILIATION OF NET INCOME TO NET CASH FROM OPERATING ACTIVITIES: Net income $ 18,010 $ 11,864 Adjustments to reconcile net income to net cash from operating activities: Depreciation of utility plant 19,487 18,876 Charge for recovery of stranded plant 5,653 1,160 Amortization of debt-related costs and other deferred 2,370 1,881 Allowance for funds used during construction (382) (15) Deferred income taxes (289) 4,032 Investment tax credits 3,543 (363) Cash flows impacted by changes in current assets and liabilities: Deferred fuel costs (4,830) (223) Accounts payable (1,258) 5,622 Accrued interest 3,593 (795) Accrued taxes 2,707 (897) Reserve for customer refund (10,725) 5,416 Changes in other current assets and liabilities (4,822) (4,386) Other, net (1,403) 2,288 -------------- -------------- NET CASH FROM OPERATING ACTIVITIES $ 31,654 $ 44,460 ============== ============== The accompanying notes are an integral part of these consolidated financial statements.
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of TNP Enterprises, Inc.) CONSOLIDATED BALANCE SHEETS June 30, 1999 December 31, (Unaudited) 1998 ---------------- ---------------- (In thousands) ASSETS UTILITY PLANT: Electric plant $ 1,263,744 $ 1,260,099 Construction work in progress 11,372 6,294 ---------------- ---------------- Total 1,275,116 1,266,393 Less accumulated depreciation 349,862 343,562 ---------------- ---------------- Net utility plant 925,254 922,831 ---------------- ---------------- OTHER PROPERTY AND INVESTMENTS, at cost 213 2,116 ---------------- ---------------- CURRENT ASSETS: Cash and cash equivalents 7,909 7,977 Accounts receivable 1,981 923 Inventories, at lower of average cost or market: Fuel 513 677 Materials and supplies 4,702 4,567 Deferred fuel costs 6,506 1,676 Other current assets 3,571 4,093 ---------------- ---------------- Total current assets 25,182 19,913 ---------------- ---------------- REGULATORY TAX ASSETS 2,405 - DEFERRED CHARGES 26,831 28,706 ---------------- ---------------- $ 979,885 $ 973,566 ================ ================ CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common shareholder's equity: Common stock, $10 par value per share. Authorized 12,000,000 shares; issued 10,705 shares $ 107 $ 107 Capital in excess of par value 222,149 222,149 Retained earnings 97,907 79,840 ---------------- ---------------- Total common shareholder's equity 320,163 302,096 Redeemable cumulative preferred stock 1,844 3,060 Long-term debt, less current maturities 440,202 450,000 ---------------- ---------------- Total capitalization 762,209 755,156 ---------------- ---------------- CURRENT LIABILITIES: Accounts payable 25,630 26,888 Accrued interest 8,597 5,004 Accrued taxes 23,156 20,449 Customers' deposits 3,972 3,609 Accumulated deferred income taxes 1,295 649 Reserve for customer refunds 246 10,971 Other current liabilities 12,398 17,076 ---------------- ---------------- Total current liabilities 75,294 84,646 ---------------- ---------------- REGULATORY TAX LIABILITIES - 957 ACCUMULATED DEFERRED INCOME TAXES 97,190 93,378 ACCUMULATED DEFERRED INVESTMENT TAX CREDITS 24,860 22,729 DEFERRED CREDITS (Note 3) 20,332 16,700 COMMITMENTS AND CONTINGENCIES (Note 6) ---------------- ---------------- $ 979,885 $ 973,566 ================ ================ The accompanying notes are an integral part of these consolidated financial statements.
TNP Enterprises Inc. and Subsidiaries (TNP) Texas-New Mexico Power Company and Subsidiaries (TNMP) Notes to Consolidated Financial Statements Note 1. Interim Financial Statements The interim consolidated financial statements of TNP and subsidiaries, and TNMP and subsidiaries are unaudited, and contain all adjustments (consisting primarily of normal recurring accruals) necessary for a fair statement of the results for the interim periods presented. Results for interim periods are not necessarily indicative of results to be expected for a full year or for previously reported periods due in part to seasonal revenue fluctuations. It is suggested that these consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto included in TNP's and TNMP's 1998 Combined Annual Report on Form 10-K. Prior period statements have been reclassified in order to be consistent with current period presentation. The reclassification had no effect on net income or common shareholders equity. Note 2. Acquisition TNP, SW Acquisition, L.P. (SW), a limited partnership organized and existing under the laws of Texas, and ST Acquisition Corp. (ST Corp.), a Texas corporation wholly owned by SW, have entered into an Agreement and Plan of Merger, dated as of May 24, 1999 (the Merger Agreement), which provides for a merger of TNP with and into ST Corp., with TNP being the surviving corporation (the Merger). Under the terms of the Merger Agreement, which was unanimously approved by TNP's board of directors, each issued and outstanding share of common stock of TNP will be canceled and converted automatically into the right to receive $44.00 in cash. The Merger will convert TNP from a listed public corporation to a privately owned corporation. TNP expects the Merger to close by the end of the first quarter of 2000. The Merger Agreement is subject to financing, and requires approval by TNP shareholders and approval or regulatory review by the Federal Energy Regulatory Commission (FERC), the Department of Justice, and state regulators in Texas and New Mexico. A special meeting of shareholders has been called for September 22, 1999. The purpose of the meeting is to consider and vote on the Merger Agreement. The record date for this meeting is August 3, 1999. The proxy statement related to the special meeting will be mailed to shareholders the week of August 9. On July 9, 1999, TNMP and SW filed a joint application with the FERC seeking approval of the Merger. Simultaneously, TNMP filed an application with the FERC seeking approval of a Backstop Credit Facility (Credit Facility). As a result of the Merger, TNMP must offer to repurchase certain existing debt. Should holders of this debt accept TNMP's repurchase offer, proceeds from the Credit Facility would fund the repurchase. On July 15, 1999, TNP and TNMP filed an application with the Public Utility Commission of Texas (PUCT) seeking a determination that the Merger is consistent with the public interest. Also on July 15, TNMP filed an application with the New Mexico Public Regulation Commission (NMPRC) seeking to obtain all approvals and authorizations necessary to consummate the Merger. Note 3. Regulatory Matters Texas New Legislation. On June 18, 1999, new legislation that establishes competition in the Texas electric utility industry became law, retroactive to January 1, 1999. The new legislation will implement retail competition for customers in most areas of Texas on January 1, 2002. Among other provisions, the new legislation: * Freezes base rates through December 31, 2001, based on the levels in effect on September 1, 1999 adjusted for changes in the fixed fuel factor which passes through fuel and purchased power energy costs to customers. * Allows a utility to recover 100% of its verifiable stranded costs via several methods, including: * Redirection of depreciation - During 1998 - 2001, a utility may redirect all or a part of the depreciation related to transmission and distribution assets to its generation assets. * Application of earnings in excess of an allowed rate of return - During the freeze period, utilities' earnings are capped by the cost of capital approved in the utility's most recent rate proceeding before the PUCT. For TNMP, the cap is 10.53% return on rate base. Earnings in excess of the cap will be used to reduce the net book value of generation assets. * Securitization - At any time after the start of the freeze period, a utility may securitize 100% of its regulatory assets and up to 75% of its estimated stranded costs, and recover those costs from its customers through a transition charge approved by the PUCT. * Assessing a competition transition charge - After the freeze period, stranded costs that have not been recovered by one of the methods above will be recovered through a competition transition charge levied upon all retail customers within a utility's geographical certificated service area as it existed on May 1, 1999. * Establishes four alternatives for quantifying the final amount of stranded costs to be used in establishing the competition transition charge, and provides a framework for reconciling estimated stranded costs to the actual stranded costs quantified using those methods. * Requires utilities to disaggregate into three distinct businesses: generation, transmission and distribution, and retail energy provider. * Provides that once customer choice begins on January 1, 2002, residential and small commercial customers who do not choose an alternative provider will continue to be served by TNMP's affiliate retail energy provider at a price which is 6% lower than the rate in effect on January 1, 1999, adjusted to reflect a fuel factor that the PUCT shall determine as of December 31, 2001. Prior to the new legislation, TNMP had been operating under a transition-to-competition plan (Transition Plan) approved by the PUCT in 1998. The Transition Plan provides that it will be modified to conform to any legislation enacting competition in the electric utility industry. There are provisions of the new legislation that conflict with provisions of the Transition Plan. In such instances, management believes the new legislation supercedes the Transition Plan. TNMP will make a filing with the PUCT during August 1999 that sets out its position regarding the effect of the new legislation on the Transition Plan. Management believes that any changes to the Transition Plan to reflect the new legislation will have a minimal effect on rates. However, such an outcome is subject to the PUCT resolving significant uncertainties regarding the new legislation. TNP's and TNMP's consolidated financial statements reflect the application of SFAS 71, "Accounting for the Effects of Certain Types of Regulation," which provides for recognition of the economic effects of rate regulation. The passage of the new legislation raises the issue of whether SFAS 71 should continue to be applied to the generation/power supply portion of TNMP's Texas business. EITF 97-4, "Deregulation of the Pricing of Electricity - Issues Related to the Application of SFAS Statements No. 71 and 101," states that application of SFAS 71 should stop "when deregulatory legislation is passed or when a rate order (whichever is necessary to effect the change in the jurisdiction) that contains sufficient detail for the enterprise to reasonably determine how the transition plan will affect the separable portion of its business whose pricing is being deregulated is issued." While the new legislation provides the framework as to how competition will be implemented, it delegates significant authority to the PUCT to resolve uncertainties regarding implementation of competition. As a result, currently TNMP cannot reasonably determine how the new legislation will affect the generation/power supply portion of its Texas business, and it will continue to apply SFAS 71 to that portion of its business until a reasonable determination of the impact of the new legislation can be made. Management has calculated excess earnings for the six months ended June 30, 1999, based on the provisions of the new legislation. The calculation resulted in a reduction to pre-tax operating income of $5.7 million ($0.26 per share). The amounts previously recorded in the first quarter for stranded cost recovery under the Transition Plan have been reclassified, and along with the excess earnings, are displayed in the income statement under the caption "Charge for recovery of stranded plant" and included in the balance sheet as a regulatory liability under the caption "Deferred Credits". Earnings Monitoring Report. On May 17, 1999, TNMP filed its Electric Investor-Owned Utilities Earnings Report (Earnings Report) with the PUCT. Simultaneously, TNMP filed an Addendum to the Earnings Report (Addendum) detailing TNMP's calculation of excess earnings under the Transition Plan for the twelve months ended December 31, 1998. The Addendum showed that TNMP had not earned in excess of the 11.25% return on equity cap established in the Transition Plan. The Staff of the PUCT and the Office of Public Utility Counsel are reviewing the Addendum. The Transition Plan provides that persons may challenge the Addendum by filing a written contest within 90 days of TNMP's filing with the PUCT. If no such contests are filed, the Addendum shall be deemed approved. Should a party contest the Addendum, the PUCT will establish a schedule allowing a Final Order to be entered within 90 days of the filing of the contest. New Mexico The New Mexico Legislature opened New Mexico's electric power market to consumer choice with the passage of the Electric Utility Industry Restructuring Act of 1999 (the Act) in April 1999. The Act provides for the phase-in of retail choice beginning January 1, 2001, requires utilities to disaggregate their regulated business activities from those that will be subject to competition, and guarantees recovery of at least 50% of a utility's stranded costs over a five-year period. On June 8, 1999, the NMPRC entered a Final Order terminating TNMP's Community Choice(R) transition plan. By terminating Community Choice, the NMPRC placed TNMP on the same timetable as other New Mexico utilities with regard to retail competition and restored the pass-through of purchased power costs to customers. Under the Act, utilities are guaranteed recovery from customers of at least 50% of their stranded costs over a five-year period. Community Choice did not define stranded costs, nor their recovery. In addition, the Act delays competition to January 1, 2001. Community Choice had specified May 1, 2000, for the beginning of retail choice. As a result, TNMP has reduced its accrual for potential stranded costs in New Mexico from $3.4 million as of December 31, 1998, to $2.1 million as of June 30, 1999. Community Choice provided for the filing of a rate case by TNMP on June 1, 1999. Notwithstanding the termination of Community Choice, TNMP and the NMPRC Staff agreed that TNMP would file information that would allow the Staff to review the reasonableness of TNMP's rates. Settlement talks between the parties began, with the intent of reaching a settlement without the necessity of filing a rate case. The parties have reached a tentative settlement that resolves the issues between the parties, and are preparing to submit the settlement to the NMPRC for approval. The settlement calls for a decrease in TNMP's base rates of $1.8 million, or 6%. TNMP expects the NMPRC to act on the proposed settlement during the second half of 1999. Note 4. Discontinued Nonregulated Operations As discussed in TNP's and TNMP's 1998 Combined Annual Report on Form 10-K, management discontinued the remaining operations of Facility Works Inc. (FWI), TNP's wholly owned unregulated subsidiary, in late 1998. All losses incurred by FWI during 1998 have been reclassified as losses from discontinued operations. Note 5. Segment and Related Information In TNP's and TNMP's 1998 Combined Annual Report on Form 10-K, TNP reported two segments, TNMP, which provides regulated electric service in Texas and New Mexico, and FWI, which before operations were discontinued, provided integrated mechanical, electrical, plumbing and other maintenance and repair services to commercial customers in Texas metropolitan areas. The operations of TNMP have been separated into two segments, Texas and New Mexico. TNP manages the segments separately to respond to the differing operational and regulatory climates in the two states. The following tables present information about profits, losses and assets of TNP's reportable segments (in thousands). In the tables below, "Total assets" for Texas and New Mexico includes only net utility plant. All other assets are included in All Other and Eliminations.
Three Months Ended June 30, Six Months Ended June 30, 1999 1998 1999 1998 ------ ------ ------ ------ Texas Operating revenues $ 122,152 $ 122,394 $ 221,146 $ 227,494 Net income (loss) 11,438 5,761 14,633 9,278 Total assets at June 30, 1999 and December 31, 1998 841,697 839,771 841,697 839,771 New Mexico Operating revenues $ 21,861 $ 19,691 $ 40,979 $ 40,522 Net income (loss) 2,758 784 3,377 2,586 Total assets at June 30, 1999 and December 31, 1998 83,557 82,623 83,557 82,623 Three Months Ended June 30, Six Months Ended June 30, 1999 1998 1999 1998 ------ ------ ------ ------ All Other and Eliminations Operating revenues $ 14 $ 14 $ 28 $ 20 Net income (loss) (1,793) (7,312) (2,474) (8,005) Total assets at June 30, 1999 and December 31, 1998 70,012 71,371 70,012 71,371 Consolidated Operating revenues $ 144,027 $ 142,099 $ 262,153 $ 268,036 Net income (loss) 12,403 (767) 15,536 3,859 Total assets at June 30, 1999 and December 31, 1998 995,266 993,765 995,266 993,765
Note 6. Commitments and Contingencies Legal Proceedings Clear Lake. TNMP and Clear Lake Limited Partnership ("Clear Lake") agreed in March 1999 to settle the lawsuit styled Clear Lake Cogeneration Limited Partnership vs. Texas-New Mexico Power Company, pending in the 234th District Court of Harris County, Texas, and the parallel proceeding pending before the PUCT. These proceedings arose out of disagreements between TNMP and Clear Lake over the interpretation of certain terms of an agreement under which TNMP purchases cogenerated electricity from Clear Lake. Under the settlement, TNMP, Clear Lake, and Calpine Power Services Company (an affiliate of Clear Lake) have entered into a revised purchased power contract effective as of October 1, 1998, governing energy and capacity transactions between the parties. In addition, TNMP agreed to pay Clear Lake $8 million, subject to PUCT approval of the settlement. On July 15, 1999, the PUCT approved the settlement. The PUCT order ensures that TNMP's customers will realize the savings associated with the revised purchased power contract between TNMP and Clear Lake. The order also requires TNMP to defer recognition of the $8 million payment that TNMP will make to Clear Lake as part of the settlement, and include amortization of the payment in its calculation of excess earnings over the life of the revised purchased power contract. TNMP expects the $8 million payment to occur in the third quarter of 1999. Phillips Petroleum. TNMP is the defendant in a suit styled Phillips Petroleum Company vs. Texas-New Mexico Power Company, filed on October 1, 1997 and pending in the 149th State District Court of Brazoria County, Texas. The suit is based on events surrounding an interruption of electricity to a petroleum refinery and related facilities that occurred in May 1997. Phillips Petroleum Company is seeking the recovery of damages arising from the interruption and in May 1999 demanded payment in the amount of $47.1 million. TNMP's tariff approved by the PUCT contains limitations against recovery of the great majority of Phillip's alleged actual damages. The Texas Supreme Court, in another matter, has recently upheld the enforceability of such tariff limitations in litigation of this type; TNMP believes the ruling will operate to substantially limit any recovery of actual damages by Phillips, in the event that any are awarded in this matter. In May 1999, TNMP filed a Third Party Petition naming Sweeny Cogeneration Limited Partnership as a defendant. The lawsuit is in the discovery stage. TNMP believes that it has insurance coverage on most of Phillips' claims up to a total of $31 million, with a $500,000 self-retention that has been charged to earnings. Other. TNMP is involved in various claims and other legal proceedings arising in the ordinary course of business. In the opinion of management, the ultimate dispositions of these matters will not have a material adverse effect on TNMP's and TNP's consolidated financial position or results of operations. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A). The following discussion should be read in conjunction with the related interim consolidated financial statements and notes. Results of Operations As discussed in Note 3, new legislation that establishes competition in the Texas electric utility industry became law in the second quarter of 1999. The new legislation includes a number of provisions that management believes supercede provisions of the Transition Plan. The impact of those provisions on TNMP's financial results will be noted as necessary in the following discussion. Overall Results TNP had income applicable to common stock of $12.5 million for the quarter ended June 30, 1999 (current quarter) as compared to a loss of $0.8 million for the quarter ended June 30, 1998. Earnings for the second quarter of 1998 included a one-time charge for costs related to implementing the Transition Plan ($3.1 million) and the loss on FWI's discontinued operations. Excluding those unusual items, earnings for the second quarter of 1998 were $8.9 million. TNP had income applicable to common stock of $15.6 million for the six months ended June 30, 1999 (year-to-date), as compared to $3.8 million for the six months ended June 30, 1998. Excluding the unusual items noted above, earnings for the six months ended June 30, 1998, were $13.9 million. Since the operations of TNMP (the principal subsidiary) currently represent most of TNP's operations, the following discussion focuses on TNMP's operations unless noted otherwise. Under the new legislation, TNMP's earnings on its Texas operations are capped at a 10.53% return on rate base. TNMP will apply Texas earnings in excess of the cap to recover stranded plant. For the six months ended June 30, 1999, TNMP recorded pre-tax excess earnings of $5.7 million ($0.26 per share). Amounts recorded in the first quarter of 1999 for recovery of stranded plant under the Transition Plan have been reclassified as described in Note 3. The charge results from TNMP's calculation of excess earnings for the six months ended June 30, 1999, based on the provisions of the new legislation. In the corresponding period of 1998 TNMP recorded pre-tax excess earnings under the Transition Plan of $2.3 million ($0.11 per share). The $2.3 million was applied equally between additional depreciation and provision for rate refund, according to PUCT guidelines. The portion of 1998 excess earnings applied to additional depreciation has been reclassified as "Charge for recovery of stranded plant". TNMP's income applicable to common stock was $14.3 million for the quarter ended June 30, 1999, as compared to $6.5 million for the quarter ended June 30, 1998. Excluding the effect of the 1998 Transition Plan costs discussed earlier, earnings for the second quarter of 1998 were $9.6 million. For the six months ended June 30, TNMP's income applicable to common stock was $18.1 million in 1999 as compared to $11.8 million in 1998. Excluding the effect of the 1998 Transition Plan costs discussed earlier, earnings for the second quarter of 1998 were $14.9 million. The changes in TNMP's earnings for the quarter and the year-to-date are attributable to the factors listed below (in millions):
Three Months Six Months Ended Ended 6/30/99 6/30/99 --------- --------- New Mexico stranded cost adjustment $ 1.9 $ 1.3 Other changes in base revenues 0.9 (3.3) Non-pass through purchased power and fuel expenses 5.1 11.6 Transmission expenses (3.1) (5.1) Depreciation expenses (0.5) (0.6) Charge for recovery of stranded plant (0.7) (4.5) Interest 3.1 5.2 All other (including income tax effects on the items above) (2.0) (1.4) ------------ ------------- Earnings increase excluding one-time items 4.7 3.2 One-time Transition Plan costs (including tax effects) 3.1 3.1 ------------ ------------- Earnings increase including one-time items $ 7.8 $ 6.3 ============ =============
Operating Revenues The components of TNMP's base revenues are summarized in the following tables (in thousands). Three Months Ended June 30, Six Months Ended June 30, Increase Increase 1999 1998 (Decrease) 1999 1998 (Decrease) -------- --------- ---------- --------- --------- ---------- Operating revenues $ 144,014 $ 142,085 $ 1,929 $ 262,125 $ 268,016 $ (5,891) Pass-through expenses 43,961 46,399 (2,438) 82,273 87,750 (5,477) --------- ---------- --------- ---------- --------- --------- Base revenues $ 100,053 $ 95,686 $ 4,367 $ 179,852 $ 180,266 $ (414) ========= ========== ========= ========== ========= =========
Pass-through expenses in Texas include fuel and the energy-related portion of purchased power. In New Mexico, the composition of pass-through expenses changed on July 1, 1999, as described in Note 3. Details of pass-through expenses are discussed under "Results of Operations -- Operating Expenses." The following table summarizes the components of the changes in base revenues in 1999 compared to 1998 (in thousands). Base revenues Weather related $ (1,803) $ (1,737) Customer growth 1,851 2,798 1998 Transition Plan excess earnings 1,160 1,160 Industrial - firm rate sales (367) (1,948) Clear Lake standby revenue (818) (1,635) Other 894 (1,928) --------- --------- Other changes in base revenue 917 (3,290) New Mexico stranded cost adjustment 1,888 1,314 --------- --------- Base revenues increase (decrease) before one-time items 2,805 (1,976) One-time Transition Plan refund 1,562 1,562 --------- --------- Base revenues increase (decrease) $ 4,367 $ (414) ========= =========
Base revenues increased $4.4 million in the current quarter due to Texas rate refunds accrued in 1998 pursuant to the Transition Plan, the reversal of accrued stranded costs in New Mexico as discussed in Note 3, and customer growth. Those factors were partially offset by milder weather in the second quarter as compared to 1998, and the absence of standby revenue payments resulting from the Clear Lake settlement. Year-to-date base revenues decreased $0.4 million from the same period in 1998. The base revenues increase in the second quarter was offset by decreases as a result of the Transition Plan, loss of a significant industrial customer, and lower revenues from a second significant industrial customer. The following table summarizes the components of gigawatt-hour (GWH) sales. Three Months Ended June 30, Six Months Ended June 30, Increase Increase 1999 1998 (Decrease) 1999 1998 (Decrease) -------- --------- --------- ---------- --------- ---------- GWH sales: Residential 549 542 7 1,041 1,020 21 Commercial 472 464 8 874 846 28 Industrial: Firm 132 124 8 244 299 (55) Economy 1,153 1,167 (14) 2,197 2,228 (31) Power marketing 26 156 (130) 48 269 (221) Other 27 29 (2) 53 54 (1) -------- --------- -------- ---------- ------- ----------- Total GWH sales 2,359 2,482 (123) 4,457 4,716 (259) ======== ========= ======== ========== ======= ===========
Current quarter and year-to-date sales decreased 123 GWHs (or 5%) and 259 GWHs (or 5%), respectively, as compared to the corresponding 1998 periods. The current quarter decrease resulted primarily from reduced off-system sales. This was partially offset by increased commercial and residential sales as customer growth offset the effects of milder weather. Year-to-date sales decreased for the same reasons, and due to the loss of a significant customer. Operating Expenses The following table summarizes the components of TNMP's total operating expenses (in thousands). Three Months Ended June 30, Six Months Ended June 30, Increase Increase 1999 1998 (Decrease) 1999 1998 (Decrease) -------- --------- ---------- ----------- ---------- ---------- Purchased power and fuel expenses: Pass through expenses: Purchased power $ 35,749 $ 36,524 $ (775) $ 67,099 $ 70,103 $ (3,004) Fuel 8,212 9,875 (1,663) 15,174 17,647 (2,473) --------- ---------- --------- ---------- ---------- --------- 43,961 46,399 (2,438) 82,273 87,750 (5,477) --------- ---------- --------- ---------- ---------- --------- Non-pass through expenses: Purchased power 22,632 27,671 (5,039) 41,444 52,850 (11,406) Fuel 389 488 (99) 637 783 (146) --------- ---------- --------- ---------- ---------- --------- 23,021 28,159 (5,138) 42,081 53,633 (11,552) --------- ---------- --------- ---------- ---------- --------- Total 66,982 74,558 (7,576) 124,354 141,383 (17,029) Transmission expense 5,801 2,694 3,107 10,406 5,288 5,118 Depreciation expense 9,513 9,004 509 19,487 18,876 611 Charge for recovery of stranded plant 1,903 1,160 743 5,653 1,160 4,493 Other operating expenses 20,520 21,844 (1,324) 38,938 38,521 417 Income and other tax expenses 15,712 12,881 2,831 24,636 24,068 568 --------- ---------- --------- ---------- ---------- --------- Operating expenses $ 120,431 $ 122,141 $ (1,710) $ 223,474 $ 229,296 $ (5,822) ========= ========== ========= ========== ========== ========= Overall, current quarter and year-to-date operating expenses decreased by $1.7 million and $5.8 million, respectively. The decrease reflects lower purchased power costs partially offset by higher transmission expenses and the charge for recovery of stranded plant discussed in Note 3.
Purchased Power and Fuel Expenses As discussed in Note 3, the NMPRC terminated Community Choice in the second quarter. Under Community Choice, rates for recovery of New Mexico purchased power costs were frozen, except those charged to certain industrial customers. The NMPRC order terminating Community Choice required TNMP to pass through to all customers New Mexico purchased power costs as of July 1, 1999. Therefore, operating income will not be affected by changes in purchased power costs, beginning July 1, 1999. In the second quarter of 1999, purchased power and fuel expenses decreased $7.6 million from the level incurred during the second quarter of 1998. For the year-to-date, purchased power and fuel expenses decreased $17.0 million as compared to 1998. Pass-through expenses accounted for $2.4 million and $5.5 million of the decrease for the quarter and year-to-date, respectively, while non pass-through expenses accounted for the remaining $5.2 million for the quarter and $11.5 million for the year-to-date. The decrease reflects lower overall GWH requirements due to lower sales, and lower energy costs due to increased purchases of spot market power in 1999 as compared to 1998. In the first six months of 1999, the cost of energy purchased in the spot market was significantly less than the cost of energy available from alternative sources of supply. In addition, demand costs have decreased, due to the replacement of purchases from TXU with purchases from lower cost providers. Demand costs have also decreased because the rate under which TNMP purchases capacity from Clear Lake has been significantly reduced under the Clear Lake settlement. Transmission Expenses Transmission expenses increased $3.1 million for the quarter and $5.1 million for the six months ended June 30, 1999, as compared to the same periods in 1998. The higher expenses were due to discontinued reimbursements in accordance with the Clear Lake settlement, and a true up for the first half of 1999 based on a recently approved allocation of transmission costs by the PUCT. The increased transmission expense approved by the PUCT resulted from the termination of the majority of the TXU purchased power contract at the beginning of 1999. Terminating the contract has produced purchased power savings, but its effects have been partially offset by the higher transmission payments approved by the PUCT. Depreciation Expenses Depreciation expense increased by $0.5 million and $0.6 million for the quarter and six months ended June 30, 1999, respectively, compared to 1998. The increases are due to additions to depreciable plant partially offset by lower depreciation rates established under the Transition Plan. Charge for Recovery of Stranded Plant Please see Note 3 and the section "Overall Results" for a discussion of the excess earnings calculation under the new legislation in Texas. Other Operating Expenses, Income and Other Tax Expenses Other operating expenses for TNMP decreased by $1.3 million for the current quarter as compared to the corresponding 1998 period. The decrease resulted from the inclusion in 1998 of $3.1 million of costs related to the original adoption of the Transition Plan. Other operating expenses for the six months ended June 30, 1999, were comparable to corresponding 1998 period. Current quarter income and other tax expenses for TNMP increased $2.8 million compared to the corresponding 1998 period, and increased $0.6 million during the six months ended June 30, 1999, over the same period in 1999. The increases are due to higher pre-tax income. Other operating expenses for TNP include $1.5 million and $1.8 million of costs related to the acquisition discussed in Note 2 for the quarter and year-to-date, respectively. Interest Expense Interest charges decreased by $3.1 million for the quarter and $5.2 million for the year-to-date from 1998 levels due to TNMP's January 1999 issuance of $175 million of 6.25% senior notes, which replaced $130 million of 12.5% secured debentures, and reduced debt levels of the credit facilities. Financial Condition Liquidity Currently, the main sources of liquidity for TNP are cash flow from operations and borrowings from credit facilities. TNP's cash flow from operations was lower for the current year-to-date than during the same period in 1998 due to lower receipts from customers. This decrease was offset somewhat by lower payments for purchased power and interest costs. The changes in TNMP's cash flow from operations mirrored those of TNP. In January 1999, TNMP issued $175 million of 6.25% Senior Notes due in 2009 and used the proceeds to retire its 12.5% secured debentures and reduce outstanding borrowings under the credit facilities, as discussed in TNP's and TNMP's 1998 Combined Annual Report on Form 10-K. During the second quarter, TNMP cancelled its 1995 Credit Facility, which had a total commitment of $100 million, and was scheduled to expire in November 2000. TNMP has sufficient liquidity to satisfy any known contingencies. Management believes cash flow from operations, the new debt described above, and periodic borrowings under its remaining revolving credit facility should be sufficient to meet working capital requirements and planned capital expenditures at least through 1999. Year 2000 TNMP is actively addressing the Year 2000 issue (Y2K) throughout its operating and office environments. Many existing computer programs were designed and developed to use only two digits to identify a year in the date field. If not addressed, these computer systems could fail, with possible material adverse effects on TNMP's operations. In mid-1997 TNMP's information technology staff began to identify and assess corporate software applications, equipment and operating systems. In early 1998, the project was expanded to include professionals from throughout the company to identify and assess embedded systems. TNMP's project to analyze Y2K has included the following phases: identification, assessment, remediation/ implementation and testing. In its analysis to identify and assess the Y2K impact on company systems, TNMP has conducted extensive studies to analyze the impact of Y2K on all operating systems. As a result of these studies, TNMP has developed a Y2K mitigation plan. The plan requires TNMP to amend, replace, or upgrade most of its primary corporate information systems, some of which were already being replaced or upgraded pursuant to a previously approved plan to replace or upgrade such systems. The following is a brief summary of the renovation and validation, and implementation progress for the critical business areas of TNMP - generation, transmission, distribution, energy management, and corporate information systems. Generating Units. TNMP owns one power plant, TNP One, which is located in Robertson County, Texas. TNP One has two units that burn lignite as the primary fuel source to generate power. The total lignite supply is provided from a mine adjacent to the power plant. TNMP plans to increase the coal supply to provide for an additional six-week supply prior to January 1, 2000. The plant is also capable of burning natural gas, as well as various waste products. As of June 30, 1999, the TNP One generation plant has completed the assessment, testing and remediation of all mission-critical facilities. Such facilities include the Plant Control Computer, which provides for most of the computerized operations of the boiler and turbine controls, and the Continuous Emissions Monitoring System. Integrated testing of the Plant Control Computer at TNP One was completed on Unit 1 in February 1999 and on Unit 2 in April 1999. The integrated testing of the Plant Control Computer detected no Y2K problems. In late 1998, tests of the Continuous Emissions Monitoring System determined that only non-critical Y2K issues existed. In April 1999, TNMP completed upgrades to the Continuous Emissions Monitoring System software. Subsequent testing of the Continuous Emissions Monitoring System detected no Y2K issues. Distribution System. TNMP is primarily a distribution company. Over 600 suspect distribution system devices have been identified and are being tested. As of June 30, 1999, TNMP has completed the assessment, testing, and remediation of all mission-critical distribution system devices. TNMP is currently testing the remaining devices, and anticipates completing that testing by September 30, 1999. TNMP is testing the devices that have external clock functions. Devices that have no external clock function are being checked with the manufacturer and TNMP is reviewing their testing of those devices. All of TNMP's critical distribution substations have designs which contain redundant relaying or bypass switching schemes to remove failed devices and equipment for normal operations, allowing for quick restoration of power to customers. Transmission System. TNMP has transmission lines which are a part of the transmission grid comprised within the Electric Reliability Council of Texas (ERCOT). The transmission grid within ERCOT is operated by member utilities in conjunction with an Independent System Operator. TNMP has transmission lines in New Mexico which are part of the Western Systems Coordinating Council (WSCC). TNMP is participating on ERCOT's Year 2000 Technical Task Force and on the Year 2000 Operational Preparedness and Planning Task Force. TNMP is also participating in all testing, drills and contingency planning done by ERCOT, the Independent System Operator and the WSCC. As of June 30, 1999, TNMP has completed the testing and remediation of all transmission line electronic protective devices. Supervisory Control and Data Acquisition Systems (SCADA) and Energy Management Systems. TNMP has three SCADA systems in Texas and one in New Mexico. A SCADA system reports on the status of protective devices, allows for the remote control of these same devices, and reports and tracks critical power flow information on the transmission and distribution grids. These systems are new, having been upgraded in 1997 and 1998. As of June 30, 1999, TNMP has completed the assessment, testing and remediation on two of the Texas SCADA systems. TNMP has scheduled integrated testing of the third Texas SCADA system by the vendor for mid-August. TNMP is in the process of replacing the SCADA system in New Mexico, which is not Year 2000 compliant, with a Year 2000 compliant system. This replacement is scheduled for completion by September 30, 1999. Information Technology Systems. As of June 30, 1999, 100 percent of TNMP's infrastructure supporting its business systems has been tested and verified as Y2K ready. TNMP has completed the upgrade of its financial and accounting system to a Y2K compliant version. Integrated testing of the upgraded financial system was completed in May 1999, and the testing confirmed that the system was Year 2000 compliant. TNMP expects to implement and test a new customer information system during the third quarter of 1999, and other corporate information systems directly related to TNMP's operations by September 1999. TNMP incorporates unit testing, system testing, integration testing and acceptance testing into the verification methodology. Y2K Remediation Cost. The costs associated with TNMP's Y2K efforts are expected to be approximately $10.2 million. Approximately $9 million of that amount is to upgrade or replace various information technology systems, as discussed above, as well as improve the infrastructure to support those systems. As of July 31, 1999, TNMP had spent approximately $8.9 million on Y2K remediation. TNMP does not expect these costs to have a material impact on its financial position or results of operations. TNMP has in the past used, and expects to continue to use, cash flow from operations to fund costs associated with Y2K. Third-Party Vendors. In addition to its own mitigation plan, TNMP is actively working with its key vendors and other third parties with which TNMP has a material relationship to assist such parties in achieving compliance with respect to Y2K in those systems affecting TNMP's operations. Such parties include electric power providers in Texas and New Mexico; the fuel, ash disposal, and limestone contractors at TNP One; transmission and distribution material suppliers; and banking partners. Although TNMP believes that such persons are working diligently to properly address Y2K, TNMP cannot guarantee that these third-party systems will be timely converted, or that a failure to convert by another company or a conversion that is incompatible with TNMP's systems, would not have a material adverse effect on TNMP. Contingency Plans. The primary operating processes of TNMP's business (e.g., the production, transmission, and distribution of electric power) are subject to contingencies related to weather, equipment failure, and other factors. TNMP has completed Y2K contingency plans by adapting previously existing contingency plans. The Risks of the Company's Year 2000 Issues. Based upon its current assessment and testing of the Y2K issue, TNMP believes the reasonably likely worst-case Y2K scenarios would have the following impacts upon it and its operations. With respect to its ability to provide energy to its customers, TNMP believes that the reasonably likely worst-case scenario is for small, localized interruptions of electrical service that are restored in a time frame that is within normal service levels. With respect to services that are essential to TNMP's operations, such as customer service, business operations, supplies and emergency response capabilities, the reasonably likely worst-case scenario is for minor disruptions of essential services with rapid recovery and all essential information and processes ultimately recovered. While risks related to the third parties' lack of Y2K readiness could materially and adversely affect TNMP's business, results of operations and financial condition, TNMP expects its Y2K readiness efforts to reduce significantly its level of uncertainty about the impact of third party Y2K issues on both its IT systems and non-IT systems. PART II - OTHER INFORMATION Item 1. Legal Proceedings. See Note 6 for information regarding material legal proceedings. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits The following exhibits are filed with this report: 27(a) Financial Data Schedule for TNP. 27(b) Financial Data Schedule for TNMP. (b) Reports on Form 8-K: * TNP filed a report on Form 8-K dated June 7, 1999, to disclose the proposed acquisition of TNP by SW and ST Corp. * TNP filed a report on Form 8-K dated August 10, 1999, to disclose an amendment to the Merger Agreement and provide documentation related to financing agreements for the Merger. Statement Regarding Forward Looking Information The discussions in this document that are not historical facts, including, but not limited to, the continued application of regulatory accounting principles, future cash flows and the potential recovery of stranded costs, are based upon current expectations. Actual results may differ materially. Among the facts that could cause the results to differ materially from expectations are the following: interpretation of the legislation enacted in Texas, and its effects on TNMP's business and rates; the effects of recently passed legislation in New Mexico on the regulation of TNMP's business; changes in regulations affecting TNP's and TNMP's businesses; insurance coverage available for claims made in litigation; the effect of a recent Texas Supreme Court decision on the limitations of any actual damages awarded in currently ongoing litigation; future acquisitions or strategic partnerships; general business and economic conditions, and price fluctuations in the electric power market; the effectiveness of TNMP's Y2K mitigation plan, and the timely Y2K compliance by TNP's and TNMP's vendors; 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. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. (Registrant) TNP ENTERPRISES, INC. AND TEXAS-NEW MEXICO POWER COMPANY By \s\ MANJIT S. CHEEMA ------------------------------------------------- Manjit S. Cheema Date: August 11, 1999 Senior Vice President and Chief Financial Officer By \s\ MICHAEL J. RICKETTS ------------------------------------------------- Michael J. Ricketts Date: August 11, 1999 Controller and as Chief Accounting Officer EX-27 2 FDS -- TNP ENTERPRISES
UT 0000741612 TNP Enterprises, Inc. 1000 3-Mos DEC-31-1998 JAN-01-1999 MAR-31-1999 PER-BOOK 921,142 8,537 26,216 27,629 686 984,210 195,608 0 115,003 310,611 0 3,060 475,681 0 0 0 0 0 0 0 194,858 984,210 118,125 712 102,921 103,633 14,492 281 14,773 11,641 3,132 36 3,096 3,870 10,224 (10,166) 0.23 0.23
EX-27 3 FDS -- TEXAS-NEW MEXICO POWER COMPANY
UT 0000022767 Texas-New Mexico Power Company 1000 3-Mos DEC-31-1998 JAN-01-1999 MAR-31-1999 PER-BOOK 921,094 214 16,824 27,437 686 966,255 107 222,149 83,617 305,873 0 3,060 463,181 0 0 0 0 0 0 0 194,141 966,255 118,111 1,044 101,998 103,042 15,069 215 15,284 11,471 3,813 36 3,777 0 10,054 (5,404) 0 0
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