-----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, OOuKyath2Tb1/uroEfDV9tGYeHbRhpIo94Rk3t6GEnuZAKbDbD9ksbOp734s/u4F 7A+4GQ48TrR0Pp4odcq1nw== 0000930661-00-000422.txt : 20000228 0000930661-00-000422.hdr.sgml : 20000228 ACCESSION NUMBER: 0000930661-00-000422 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000225 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: 553508 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: 553509 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 FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 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, 1999 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)
Texas 4100 International Plaza, P. O. Box 2943, Fort Worth, Texas 76113 Commission File - --------------- ----------------------------------------------------------------- Number: 1-8847 (State of (Address and zip code of principal executive offices) ------ incorporation) 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 February 15, 2000 on which registered - -------------------------- -------------------- ----------------------- Common stock, no par value 13,445,494 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 February 15, 2000, was $566,024,406 based on the common stock's closing price on the New York Stock Exchange on the same date of $42.75 per share. ------------------------------------------------------------ TEXAS-NEW MEXICO POWER COMPANY (Exact name of registrant as specified in its charter)
Texas 4100 International Plaza, P. O. Box 2943, Fort Worth, Texas 76113 Commission File - -------------- ----------------------------------------------------------------- Number: 2-97230 (State of (Address and zip code of principal executive offices) ------- incorporation) 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 U, 9.25% due 2000 None Secured debentures: Series A, 10.75% due 2003 None Senior notes: 6.25% due 2009 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. - ------------------------------------------------------------------------------- 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, 1999 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..................................................... 4 Part I Item 1. BUSINESS................................................... 6 Introduction............................................... 6 Acquisition................................................ 6 TNMP's Service Areas....................................... 6 Seasonality of Business.................................... 7 Sources of Energy.......................................... 7 Government Regulation...................................... 8 Employees and Executive Officers........................... 8 Item 2. PROPERTIES................................................. 10 Generating Facilities...................................... 10 Transmission and Distribution Facilities................... 10 Administrative and Service Facilities...................... 10 Item 3. LEGAL PROCEEDINGS.......................................... 10 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 11 Part II Item 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................ 11 Item 6. SELECTED FINANCIAL DATA.................................... 12 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................ 14 Acquisition................................................ 14 Competitive Conditions..................................... 14 Results of Operations...................................... 17 Liquidity and Capital Resources............................ 20 Other Matters.............................................. 21 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................................ 21 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 22 TNP Enterprises, Inc. and Subsidiaries..................... 24 Texas-New Mexico Power Company and Subsidiaries............ 29 Notes to Consolidated Financial Statements................. 34 Selected Quarterly Consolidated Financial Data............. 48 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........................ 48 Part III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......... 49 Directors.................................................. 49 Committees and Meetings.................................... 50 Director Compensation...................................... 50 Compensation Committee Interlocks and Insider Participation.............................................. 50 Executive Officers......................................... 50 Item 11. EXECUTIVE COMPENSATION..................................... 50 Long-Term Incentive Compensation........................... 52 Pension Plan............................................... 52 -2- Severance Agreements and Arrangements...................... 53 Section 16(a) Beneficial Ownership Reporting Compliance.... 54 Compensation Committee Report on Executive Compensation.... 54 Compensation Committee..................................... 56 Five Year Comparison of Cumulative Total Return............ 57 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................. 58 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 59 Part IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K........................................ 59 -3- 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, 1999 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 funds used during construction Bond Indenture............................ Document pursuant to which FMBs are issued BSP....................................... Business Separation Plan filed January 10, 2000 Clear Lake................................ Clear Lake Cogeneration Limited Partnership Community Choice(R)....................... TNMP's transition-to-competition plan in New Mexico, which existed prior to June 8, 1999 CTC....................................... Competition transition charge 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 FTC....................................... Federal Trade Commission FMB(s).................................... One or more series of First Mortgage Bonds issued by TNMP GWH....................................... Gigawatt-Hours IRS....................................... Internal Revenue Service ITC....................................... Investment Tax Credits KWH....................................... Kilowatt-Hours Merger.................................... Merger of ST Corp. with and into TNP with TNP as surviving corporation Merger Agreement.......................... Agreement and Plan of Merger, dated as of May 24, 1999, between TNP, SW, and ST Corp. MW........................................ Megawatts MWH....................................... Megawatt-Hours NMPRC..................................... New Mexico Public Regulation Commission ORA....................................... Office of Regulatory Affairs-PUCT PR Group.................................. Power Resource Group, Inc. PUCT...................................... Public Utility Commission of Texas SFAS...................................... Statement of Financial Accounting Standards ST Corp. ................................. ST Acquisition Corp., a Texas corporation wholly owned by SW SW........................................ SW Acquisition, L.P, a limited partnership organized and existing under the laws of Texas TGC....................................... Texas Generating Company, a wholly owned subsidiary of TNMP TGC II.................................... Texas Generating Company II, a wholly owned subsidiary of TNMP TNP One................................... A two-unit, lignite-fueled, circulating fluidized-bed generating plant located in Robertson County, Texas TNMP...................................... Texas-New Mexico Power Company, a wholly owned subsidiary of TNP TNP....................................... TNP Enterprises, Inc. Transition Plan........................... TNMP's transition-to-competition plan in Texas that began January 1, 1998, and was superceded by legislation passed in 1999 TXU....................................... Texas Utilities Electric Company Unit 1.................................... The first electric generating unit of TNP One Unit 2.................................... The second electric generating unit of TNP One Y2K....................................... The Year 2000 Issue
-4- 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: electrical deregulation legislation and regulations in Texas and New Mexico; our ability to adapt to open market competition enacted by our legislators and regulators; the effects of accounting pronouncements that may be issued periodically; changes in regulations affecting TNP's and TNMP's businesses; insurance coverage available for claims made in litigation; the effect of a 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; 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. -5- 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 was a wholly owned subsidiary of TNP that began operations in 1996. TNP discontinued the construction operations of FWI in the late 1997, and discontinued all remaining operations in the third quarter of 1998. 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. Acquisition TNP, SW Acquisition, L.P., and ST Acquisition Corp. have entered into a Merger Agreement, dated as of May 24, 1999, which provides for a merger of ST Corp. with and into TNP, with TNP being the surviving corporation. Under the terms of the Merger Agreement, each issued and outstanding share of common stock of TNP will be canceled and converted automatically into the right to receive $44.00 in cash. The Merger will convert TNP from a listed public corporation to a privately owned corporation. TNP expects the Merger to close early in the second quarter of 2000. The Merger Agreement requires various approvals. To date, approvals have been obtained from TNP's shareholders, the Federal Trade Commission, FERC, the PUCT, and the NMPRC. Approvals are final in all jurisdictions except Texas. Approval by the PUCT is expected to be final in March 2000. Further information regarding the Merger can be found in Note 2. TNMP's Service Areas TNMP provides electric service to 85 Texas and New Mexico municipalities and adjacent rural areas with more than 233,000 customers. 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. TNMP's service areas are organized into three operating regions: the Gulf Coast Region, the North- Central Region, and the Mountain Region. 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 area's economy is primarily dependent upon mining and agriculture. Copper mines are the major industrial customers in this area. The Mountain 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. -6- Franchises and Certificates of Public Convenience and Necessity 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 does, however, document the mutually agreeable terms under which the service will be provided within a municipality. TNMP holds 82 franchises with terms ranging from 20 to 50 years, one franchise with a five-year term, and two franchises with indefinite terms from the 85 municipalities to which it provides electric service. These franchises will expire on various dates from 2000 to 2039. One Texas franchise, comprising 2% of total company revenues, is scheduled to expire in 2000. 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 1999, approximately 43% 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 1999, TNP One provided approximately 20% of TNMP's system wide 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 ERCOT and the Western Systems Coordinating Council. TNMP purchases the remainder of its electricity from various suppliers with diversified fuel sources. The availability and cost of purchased power to TNMP is subject to changes in supplier costs, market forces, regulations and laws, fuel costs, and other factors. TNMP has adequate resources through its firm contracts to serve its entire customer load. These contracts allow TNMP the option to purchase amounts of power within a specified minimum and maximum range. Generally, TNMP makes purchases on the spot market in lieu of firm contract options primarily when the spot market price represents savings to TNMP's customers. In recent years TNMP has reduced its reliance upon long-term power supply contracts in favor of contracts with shorter terms. This practice enhances TNMP's ability to achieve greater purchased power savings during periods of decreasing power costs, but exposes TNMP to greater risk in the presence of rising costs. The following table illustrates the composition of TNMP's sources of electric energy in 1999.
Year Contract Percent of Expires Energy Provided ------- --------------- Generation TNP One............................... - 20% Purchased Power Firm contracts expiring in 2000....... - 6 Firm contracts expiring in 2001-2005 Clear Lake Cogeneration L.P.......... 2004 12 Texas Utilities...................... 2002 7 Others............................... Various 9 Buy-sell agreements................... - 26 Spot market purchases................. - 20 --- Total 100% ===
Recovering Purchased Power and Fuel Costs In Texas, fuel costs and the energy-related portion of purchased power costs are recovered from TNMP customers through the fuel adjustment clause authorized by the PUCT. The demand-related portion of purchased power costs is recovered through base rates. At any point in time, TNMP may have recovered more or less from customers through the fuel adjustment clause than its allowable costs under the fuel adjustment clause. At December 31, 1999, TNMP's underrecovered balance was $21.8 million. PUCT rules require TNMP to reconcile its fuel costs at least every three years. TNMP expects to file a fuel reconciliation for the three- year period ended December 31, 1999, in mid-2000. TNMP will also file a request for a new fuel factor, which will take into account the expected cost of fuel and purchased energy. -7- Management believes the ultimate outcome of this fuel reconciliation will not have a material adverse effect on TNP's or TNMP's consolidated financial position. In New Mexico, TNMP recovers all purchased power costs through the fuel and purchased power adjustment clause authorized by the NMPRC. The purchased power recovery factor changes monthly to reflect over or under collections of purchased power costs. Prior to July 1, 1999, the recovery of purchased power had been frozen in base rates in accordance with Community Choice. Government Regulation TNMP is subject to PUCT and NMPRC regulation. Some of its activities, such as issuing securities, are also subject to FERC regulation. Utility industry regulation continues to change both in reaction to, and as a primary force behind, a more competitive industry. These changes are discussed in Item 7, "Competitive Conditions" and Note 3. 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. Phase II of the Clean Air Act of 1990 became effective January 1, 2000 and requires a 30% reduction in sulfur dioxide emissions. TNP One is able to comply with this requirement without capital additions or a significant increase in operating costs. The Texas Natural Resources Conservation Commission (TNRCC) is proposing a rule change that would lower allowable nitrous oxide emissions beginning in 2003. TNMP is investigating the cost of compliance at TNP One. TNMP expects that expenditures necessary to achieve these reductions would not have a material impact on TNMP's financial condition. During 1999, 1998, and 1997, TNMP incurred expenses related to air, water, and solid waste pollution abatement (including ash removal) of approximately $4.2 million, $4.0 million, and $5.0 million, respectively. Employees and Executive Officers At December 31, 1999, TNP and TNMP had 823 employees. The employees are not represented by a union or covered by a collective bargaining agreement. Management believes relations with its employees are excellent. 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 53 Chairman, President, & Chief Executive Officer Jack V. Chambers, Jr. 50 Senior Vice President Manjit S. Cheema 45 Senior Vice President & Chief Financial Officer John P. Edwards 57 Senior Vice President Ralph Johnson 56 Senior Vice President Michael D. Blanchard 49 Vice President & General Counsel Patrick L. Bridges 41 Vice President & Treasurer R. Michael Matte 46 Vice President Michael J. Ricketts 41 Controller Paul W. Talbot 43 Secretary Name Age Position with TNP ---- --- ----------------- Kevern R. Joyce 53 Chairman, President, & Chief Executive Officer Jack V. Chambers, Jr. 50 Senior Vice President & Chief Customer Officer Manjit S. Cheema 45 Senior Vice President & Chief Financial Officer John P. Edwards 57 Senior Vice President - Corporate Relations Ralph Johnson 56 Senior Vice President - Power Resources Michael D. Blanchard 49 Vice President & General Counsel Patrick L. Bridges 41 Vice President & Treasurer Dennis R. Cash 46 Vice President & Regional Customer Officer Robert Castillo 46 Vice President & Regional Customer Officer W. Douglas Hobbs 56 Vice President & Regional Customer Officer Melissa D. Davis 42 Vice President - Human Resources Larry W. Dillon 45 Vice President - Power Resources John A. Montgomery 38 Vice President - Marketing Scott Forbes 42 Chief Information Officer Michael J. Ricketts 41 Controller Paul W. Talbot 43 Secretary
-8- Kevern R. Joyce joined TNP and TNMP in April 1994 as President and Chief Executive Officer. He became Chairman in April 1995 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. 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. 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 administration of TVA's transmission operations, customer relationships, and regulatory affairs. Ralph Johnson joined TNMP and TNP 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. 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 has served as Vice President and Treasurer of TNMP and TNP since November 1999. He served as Treasurer of TNMP and TNP from September 1995 until November 1999. He served as TNMP's Director - Finance from 1994 to September 1995 and as Assistant Treasurer from 1993 to September 1995. Dennis R. Cash became a TNMP Vice President and Regional Customer Officer effective March 1999. He served as Vice President - Human Resources of TNMP from 1994 until March 1999. Larry W. Dillon became Vice President - Power Resources effective March 1999. He had served as TNMP Vice President and Regional Customer Officer from 1994 until March 1999. W. Douglas Hobbs was appointed as Vice President - Regional Customer Officer of TNMP effective March 1999. He served as Vice President - Business Development of TNP from May 1997 until May 1999. 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 1994 to February 1997. John A. Montgomery was elected Vice President - Marketing of TNMP in November 1998 and served as Vice President of TNP from April 1996 until May 1999. He served as President of FWI from April 1996 until May 1998. From December 1995 to January 1997, he served as TNMP's Vice President - Marketing. 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. Melissa D. Davis was appointed Vice President - Human Resources of TNMP effective March 1999. She served as a TNMP Vice President and Regional Customer Officer from February 1997 until March 1999. 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. Robert Castillo became Vice President - Regional Customer Officer of TNMP effective September 1999. He had served as TNMP Assistant Vice President - New Mexico from January 1998 until September 1999. From 1991 until he joined TNMP, he was executive vice president and general manager for the New Mexico Rural Electric Cooperative Association. Scott Forbes was elected Chief Information Officer of TNMP in June 1998. He was Controller of TNMP from February 1997 to June 1998 and was Controller of TNP from May 1997 to June 1998. 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. -9- 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. R. Michael Matte became President of FWI in May 1998 and became Vice President-Business Development of TNP effective November 1998. From January 1997 until joining FWI in May 1998, he was an independent management and utility services consultant in Atlanta, Georgia. From March 1996 to January 1997, he served as Regional Vice President Operations for ADT Security Services, an electronic services company, and from January 1991 to March 1996, he served as Regional General Manager of ADT. Michael J. Ricketts was elected Controller of TNMP and TNP in June 1998. From November 1996 to June 1998, he was Manager - Accounting Projects and from 1994 to November 1996, he was Supervisor - Accounting Support of TNMP. 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 secure its Series A, 10.75% Secured 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 have 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 and TNMP'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. Clear Lake. TNMP and Clear Lake Limited Partnership ("Clear Lake") agreed in March 1999 to settle the lawsuit styled Clear Lake Cogeneration Limited Partnership vs. Texas-New Mexico Power Company, pending in the 234th District Court of Harris County, Texas, and the parallel proceeding pending before the PUCT. The PUCT approved the settlement on July 15, 1999. These proceedings arose out of disagreements between TNMP and Clear Lake over the interpretation of certain terms of an agreement under which TNMP purchases cogenerated electricity from Clear Lake. Under the settlement, TNMP, Clear Lake, and Calpine Power Services Company (an affiliate of Clear Lake) have entered into a revised purchased power contract effective as of October 1, 1998, governing energy and capacity transactions between the parties. In addition, TNMP paid Clear Lake $8 million, which TNMP expects to recover through customer rates. Phillips Petroleum Company. TNMP is the defendant in a suit styled Phillips Petroleum Company vs. Texas-New Mexico Power Company, filed on October 1, 1997 and pending in the 149th State District Court of Brazoria County, Texas. The suit, which is in the discovery stage, is based on events surrounding an interruption of electricity to a petroleum refinery and related facilities that occurred in May 1997. Phillips Petroleum Company is seeking the recovery of damages arising from the interruption and in May 1999 demanded payment in the amount of $47.1 million. TNMP's tariff approved by the PUCT contains limitations against recovery of the great majority of Phillip's alleged damages. The Texas Supreme Court, in another matter, has upheld the enforceability of such tariff limitations in litigation of this type; TNMP believes the ruling will operate to substantially limit any recovery by Phillips to the cost of its electrical equipment, in the -10- event that any are awarded in this matter. Discovery has not sufficiently progressed to quantify any damages to Phillips' electrical equipment; however, Phillips has previously reported to the SEC that it incurred costs of approximately $2.0 million in this interruption. In May 1999, TNMP filed a Third Party Petition naming Sweeny Cogeneration Limited Partnership, the operator of cogeneration and related facilities at the Phillips refinery, as a defendant. TNMP has previously charged to earnings the deductible amount of its insurance coverage, $500,000. Power Resource Group. TNMP is a defendant in a suit styled Power Resource Group, Inc. v. Public Utility Commission of Texas and Texas-New Mexico Power Company, pending in the 345th District Court of Travis County, Texas. This lawsuit, which was originally filed on May 21, 1999, appeals the PUCT's dismissal of a regulatory case that Power Resource Group, Inc. had filed against TNMP. PR Group is a developer of electric generating plants that are intended to be qualifying cogeneration facilities. This lawsuit and the regulatory case it appeals both stem from discontinued negotiations for power supply. PR Group alleged that TNMP was required to buy power to be generated from an as-yet- unbuilt cogeneration facility. TNMP filed its original answer with the court on June 28, 1999. In an amended petition filed January 13, 2000, PR Group asserts a claim of damages of at least $158,000,000. It bases its claim on the assertion that it was damaged when TNMP refused to execute an agreement after the aforementioned discontinued negotiations, that TNMP profited significantly from PR Group's work, that TNMP is in error when it relies on a PUCT order dismissing PR Group's petition before the PUCT on substantially the same facts, and that TNMP misrepresented that it would enter into a contract with PR Group to purchase energy and capacity at rates equal to or below TNMP's avoided costs. TNMP believes that PR Group's claims are without merit and intends to contest this claim vigorously. Information regarding additional regulatory and legal matters is provided in Notes 3 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 1999. 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 1999 and 1998 were as follows:
MARKET PRICE RANGE TNP ------------------------------------- DIVIDENDS 1999 1998 PAID ------------- --------------- --------------- QUARTER HIGH LOW HIGH LOW 1999 1998 ------- ---- --- ---- --- ---- ---- First $38 1/16 $28 5/16 $33 7/8 $31 5/16 $ 0.29 $ 0.27 Second 40 9/16 28 34 1/32 30 11/16 0.29 0.27 Third 39 1/8 36 1/4 34 15/16 29 0.29 0.27 Fourth 42 1/8 38 9/16 38 11/16 31 3/8 0.29 0.29 ------ ------ $ 1.16 $ 1.10 ====== ======
As of January 31, 2000, there were approximately 3,161 record holders of TNP common stock. TNP holds all 10,705 outstanding common shares of TNMP. During 1999 and 1998, TNMP paid common dividends to TNP as follows (in thousands):
QUARTER 1999 1998 ------- ---- ---- First $ - $10,000 Second - 3,600 Third 25,000 5,500 Fourth 4,000 - ------ ------- Total $29,000 $19,100 ======= =======
-11- Item 6. SELECTED FINANCIAL DATA. The following table sets forth selected financial data of TNP and TNMP for 1995 through 1999.
1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- TNP ENTERPRISES, INC (In thousands except per share amounts and percentages) - -------------------- Consolidated results Operating revenues $ 576,150 $ 585,941 $ 578,534 $ 502,737 $ 485,823 Income from continuing operations before the cumulative effect of change in accounting $ 30,167 $ 32,134 $ 42,561 $ 26,150 $ 33,060 Net income $ 30,167 $ 19,424 $ 29,678 $ 23,053 $ 41,505 Total assets $1,001,199 $ 993,765 $ 991,926 $1,006,784 $1,030,433 Common shares outstanding Weighted average 13,394 13,244 13,083 11,465 10,901 End of year 13,417 13,294 13,133 13,006 10,920 Per share of common stock Earnings from continuing operations before the cumulative effect of change in accounting $ 2.25 $ 2.42 $ 3.24 $ 2.27 $ 2.98 Earnings $ 2.25 $ 1.46 $ 2.26 $ 2.00 $ 3.75 Cash dividends declared $ 1.16 $ 1.10 $ 1.005 $ 0.93 $ 0.82 Book value $ 24.38 $ 23.19 $ 22.71 $ 21.41 $ 19.91 Capitalization Common shareholders' equity $ 327,110 $ 308,294 $ 298,241 $ 278,474 $ 217,457 Preferred stock 1,664 3,060 3,240 3,420 3,600 Long-term debt, including current maturities 440,244 459,000 478,141 534,102 612,995 ---------- ---------- ---------- ---------- ---------- Total capitalization $ 769,018 $ 770,354 $ 779,622 $ 815,996 $ 834,052 ========== ========== ========== ========== ========== Capitalization ratios Common shareholders' equity 42.5% 40.0% 38.3% 34.1% 26.1% Preferred stock 0.2 0.4 0.4 0.4 0.4 Long-term debt, including current maturities 57.3 59.6 61.3 65.5 73.5 ---------- ---------- ---------- ---------- ---------- Total capitalization 100.0% 100.0% 100.0% 100.0% 100.0% ========== ========== ========== ========== ========== TEXAS-NEW MEXICO POWER COMPANY - ------------------------------ Consolidated results Operating revenues $ 576,093 $ 585,892 $ 578,534 $ 502,737 $ 485,823 Income before the cumulative effect of change in accounting $ 39,443 $ 34,321 $ 43,918 $ 26,862 $ 33,364 Net income $ 39,443 $ 34,321 $ 43,918 $ 26,862 $ 41,809 Total assets $ 984,395 $ 973,566 $ 967,006 $1,002,157 $1,024,943 Capitalization Common shareholder's equity $ 312,558 $ 302,096 $ 287,021 $ 287,548 $ 224,351 Preferred stock 1,664 3,060 3,240 3,420 3,600 Long-term debt, including current maturities 440,244 450,000 478,000 533,900 612,995 ---------- ---------- ---------- ---------- ---------- Total capitalization $ 754,466 $ 755,156 $ 768,261 $ 824,868 $ 840,946 ========== ========== ========== ========== ========== Capitalization ratios Common shareholder's equity 41.4% 40.0% 37.4% 34.9% 26.7% Preferred stock 0.2 0.4 0.4 0.4 0.4 Long-term debt, including current maturities 58.4 59.6 62.2 64.7 72.9 ---------- ---------- ---------- ---------- ---------- Total capitalization 100.0% 100.0% 100.0% 100.0% 100.0% ========== ========== ========== ========== ==========
TEXAS-NEW MEXICO POWER COMPANY SELECTED OPERATING STATISTICS
1999 1998 1997 1996 1995 ----------- ----------- ----------- ----------- ----------- Operating revenues (in thousands): Residential* $ 216,374 $ 225,870 $ 211,398 $ 206,748 $ 200,455 Commercial* 163,248 164,800 155,539 150,034 148,908 Industrial* 147,110 150,883 170,169 129,972 113,728 Other* 45,695 33,178 27,672 15,983 22,732 Power Marketing 3,666 11,161 13,756 -- -- ----------- ----------- ----------- ----------- ----------- Total $ 576,093 $ 585,892 $ 578,534 $ 502,737 $ 485,823 =========== =========== =========== =========== =========== Sales (MWH): Residential 2,420,512 2,439,478 2,251,119 2,230,558 2,141,553 Commercial 1,921,614 1,883,422 1,772,591 1,725,650 1,681,130 Industrial 4,799,146 4,981,773 5,523,907 3,797,776 2,704,159 Other 108,547 113,535 107,847 108,039 113,985 Power Marketing 119,344 425,216 494,705 -- -- ----------- ----------- ----------- ----------- ----------- Total 9,369,163 9,843,424 10,150,169 7,862,023 6,640,827 =========== =========== =========== =========== =========== Number of customers (at year end): Residential 199,617 197,155 192,005 187,796 183,863 Commercial 33,127 30,884 30,289 29,864 29,361 Industrial 116 138 139 135 136 Other 799 227 222 224 244 Power Marketing 8 16 16 -- -- ----------- ----------- ----------- ----------- ----------- Total 233,667 228,420 222,671 218,019 213,604 =========== =========== =========== =========== =========== Revenue statistics: Average annual use per residential customer (KWH) 12,130 12,491 11,835 11,973 11,476 Average annual revenue per residential customer (dollars) 1,084 1,157 1,111 1,110 1,074 Average revenue per KWH sold per residential customer (cents) 8.94 9.26 9.39 9.27 9.36 Average revenue per KWH sold total sales (cents) 6.15 5.95 5.70 6.39 7.32 Net generation and purchases (MWH): Generated 1,912,673 2,062,958 2,089,448 2,296,056 2,351,000 Purchased 7,716,856 8,256,857 8,443,990 5,769,173 4,612,186 ----------- ----------- ----------- ----------- ----------- Total 9,629,529 10,319,815 10,533,438 8,065,229 6,963,186 =========== =========== =========== =========== =========== Average cost per KWH purchased (cents) 3.18 3.39 3.13 3.51 3.87 Employees (year-end) 823 827 811 819 858
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. SIGNIFICANT EVENTS AND KNOWN TRENDS AFFECTING TNP AND TNMP Acquisition TNP, SW Acquisition, L.P., and ST Acquisition Corp. have entered into a Merger Agreement, dated as of May 24, 1999, which provides for a merger of ST Corp. with and into TNP, with TNP being the surviving corporation. Under the terms of the Merger Agreement, each issued and outstanding share of common stock of TNP will be canceled and converted automatically into the right to receive $44.00 in cash. The Merger will convert TNP from a listed public corporation to a privately owned corporation. TNP expects the Merger to close early in the second quarter of 2000. The Merger Agreement requires various approvals. To date, approvals have been obtained from TNP's shareholders, the Federal Trade Commission, FERC, the PUCT, and the NMPRC. Approvals are final in all jurisdictions except Texas. Approval by the PUCT is expected to be final in March 2000. Further information regarding the Merger can be found in Note 2. Competitive Conditions The electric utility industry continues its transition toward increased competition. During 1999, legislation was passed in both Texas and New Mexico that establishes retail competition for generation operations. Retail competition is scheduled to begin in New Mexico and Texas on January 1, 2001, and January 1, 2002, respectively. The legislation in both states provides for recovery of "stranded costs", the difference between the regulatory value of TNMP's investments in generation assets and purchased power contracts, and the market price for energy in a competitive market. The increasingly competitive environment presents opportunities to compete for new customers, as well as the risk of loss of existing customers. TNMP expects the portions of operations pertaining to transmission and distribution to continue to be regulated. The following discusses the legislation in Texas and New Mexico, the effects of the legislation on TNMP's operating results, and the relationship of the legislation in Texas to the Transition Plan. Texas Legislation. On September 1, 1999, legislation that establishes competition in the generation portion of the Texas electric utility industry went into effect. The legislation will implement retail competition in generation for customers in most areas of Texas on January 1, 2002. Among other provisions, the legislation: . Requires utilities to provide service according to the base rate tariffs in effect at September 1, 1999, until December 31, 2001. The legislation does not prohibit changes in the fixed fuel factor that passes through fuel and purchased power energy costs to customers. . Allows a utility to recover 100% of its verifiable stranded costs via several methods, including: . Redirection of depreciation - A utility may redirect all or a part of the depreciation related to transmission and distribution assets to its generation assets for the periods 1998 through 2001. . Application of earnings in excess of an allowed rate of return - During the freeze period (January 1, 1999 through December 31, 2001), utilities' earnings are capped by the cost of capital approved in the utility's most recent rate proceeding before the PUCT. For TNMP, the cap is a 10.53% return on rate base. Earnings in excess of the cap will be used to reduce stranded costs. . Securitization - A utility may securitize 100% of its regulatory assets and up to 75% of its estimated stranded costs, and recover those costs from its customers through a charge approved by the PUCT. . Assessment of a competition transition charge - After the freeze period, stranded costs that have not been recovered by one of the methods above will be recovered through a competition transition charge levied upon all retail customers within a utility's geographical certificated service area as it existed on May 1, 1999. . Establishes four alternatives for quantifying the final amount of stranded costs, and provides a framework for reconciling estimated stranded costs to the actual stranded costs quantified using those methods. Reconciliation will occur sometime after January 10, 2004, according to a schedule to be established by the PUCT. . Requires utilities to disaggregate, on or before January 1, 2002, into three distinct businesses: generation, transmission and distribution, and retail electric provider. A retail electric provider is an entity that sells electric energy to retail customers in Texas. Such an entity cannot own or operate generation assets. -14- . 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 the utility's affiliate retail energy provider at a "price-to-beat" which is 6% lower than the rate in effect on January 1, 1999, adjusted to reflect a fuel factor that the PUCT shall determine as of December 31, 2001. This "price to beat" must be offered by the utility until the earlier of 36 months after customer choice is offered or when it loses 40% or more of its residential sales within its certified service area. Prior to the legislation, TNMP had been operating under a voluntary Transition Plan approved by the PUCT in 1998. The Transition Plan covered a five-year period, and had provided for rate reductions, sharing of earnings in excess of 11.25% return on equity and recovery of stranded costs. It also included a provision requiring that TNMP conform the Plan to any legislation enacting competition in the electric utility industry. There are provisions of the legislation that conflict with provisions of the Transition Plan. In such instances, including the calculation and subsequent application of excess earnings, Management believes the legislation supercedes the Transition Plan. Management has calculated excess earnings for the twelve months ended December 31, 1999, based on the provisions of the legislation. The calculation resulted in a reduction to 1999 pre-tax operating income of $23.4 million ($1.09 per share). The $23.4 million of excess earnings are displayed in the income statement under the caption "Charge for recovery of stranded plant." TNMP did not have excess earnings under the Transition Plan in 1998. 1998 Earnings Monitoring Report and Transition Plan Conformance. On May 17, 1999, TNMP filed its Electric Investor-Owned Utilities Earnings Report (Earnings Report) with the PUCT. Simultaneously, TNMP filed an Addendum to the Earnings Report (Addendum) detailing TNMP's calculation of excess earnings under the Transition Plan for the twelve months ended December 31, 1998. The Addendum showed that TNMP had not earned in excess of the 11.25% return on equity cap established in the Transition Plan. After reviewing the Addendum, the Office of Regulatory Affairs (ORA) of the PUCT filed a contest to TNMP's earnings report on August 16, 1999, asserting errors in TNMP's calculation of excess earnings. ORA's petition did not quantify the amount of the alleged errors. In addition, the ORA proposed to use the Earnings Report contest as a means for conforming the Transition Plan to the legislation. The PUCT hearing examiner assigned to the Earnings Report is considering the issues related to TNMP's calculation of excess earnings for 1998. The ORA is the only party contesting TNMP's calculation of excess earnings. In a letter to the hearing examiner on November 1, 1999, TNMP reported that TNMP and ORA had not yet resolved the Earnings Report issues. On January 25, 2000, TNMP filed a Motion for Dismissal or Summary Decision, asking the PUCT to reject ORA's contest, and approve TNMP's 1998 Earnings Report. TNMP believes the issues relating to its calculation of excess earnings can be disposed of as a matter of law without a factual hearing. TNMP does not expect resolution of this matter to have a material effect on its financial condition. Regarding the conformance of the Transition Plan to the legislation, TNMP filed a Conformed Stipulation with the PUCT on October 6, 1999. The Conformed Stipulation identifies all of the provisions in the Transition Plan that TNMP believes must be changed in order for the Transition Plan to comply with the legislation. On December 6, 1999, the PUCT issued a Declaratory Order stating that TNMP was required "to give effect to base rate reductions reflected in" the Transition Plan. Accordingly, TNMP reduced base rates for residential and commercial customers by 3% and 1%, respectively, effective January 1, 2000. Similar rate reductions will take effect January 1, 2001. As a result, operating revenues are estimated to decrease in 2000 and 2001 by $6.7 million and $13.9 million, respectively. The order also established that the base rate reductions would offset the 6% rate reduction required by the legislation, as previously described in the section "Texas - Legislation." The order is interim in nature, and can be appealed. Uncertainties exist as to the application of the legislation to other provisions of the Transition Plan. Such uncertainties will not be resolved until TNMP reports to the PUCT regarding its efforts to conform the Transition Plan to the legislation. That report will be the subject of a PUCT review that will occur in 2001. Discontinuing SFAS 71. Historically, TNP's and TNMP's consolidated financial statements reflect the application of SFAS 71, "Accounting for the Effects of Certain Types of Regulation," which provides for recognition of the economic effects of rate regulation. EITF 97-4, "Deregulation of the Pricing of Electricity - Issues Related to the Application of SFAS Statements No. 71 and 101," states that application of SFAS 71 should stop "when deregulatory legislation is passed or when a rate order (whichever is necessary to effect the change in the jurisdiction) that contains sufficient detail for the enterprise to reasonably determine how the transition plan will affect the separable portion of its business whose pricing is being deregulated is issued." With the passage of the legislation, TNMP discontinued the application of SFAS 71 to the generation/power supply portion of its Texas business during the fourth quarter of 1999. As a direct result of discontinuing SFAS 71 and in accordance with the legislation, TNMP has reclassified net regulatory assets (regulatory assets less liabilities) of $19.3 million that pertain to these deregulated operations as Recoverable Stranded Costs. TNMP believes the $19.3 million represents verifiable stranded costs and intends to recover them from customers pursuant to the methods discussed under "Texas -Legislation." In conjunction with the discontinuance of SFAS 71, TNMP is required to determine if its generating plant asset, TNP One, is impaired under SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Based on TNMP's undiscounted cash flow analysis over the estimated useful life of TNP One, there is no impairment of TNP One, as defined by SFAS 121, as of December 31, 1999. TNMP's impairment analysis includes reasonable estimates of future market -15- prices, capacity factors, operating costs, the effects of competition, and many other factors over the life of TNP One. TNMP's impairment analysis is highly dependent on these estimates. As of December 31, 1999, the net book value of TNP One is $435 million. Business Separation Plan. As noted above, the legislation requires utilities to disaggregate, on or before January 1, 2002, into three distinct businesses: generation, transmission and distribution, and retail electric provider. On January 10, 2000, TNMP filed its Business Separation Plan with the PUCT. The BSP details TNMP's plans for complying with the legislation, which include creating three new affiliated companies, and establishing a timeline for accomplishing the separation. Unbundled Cost of Service Filing. The legislation also requires TNMP to file a rate case that will set rates for the transmission and distribution company that will provide regulated services once competition begins in 2002. The filing must be made no later than March 31, 2000. The rates will be composed of a transmission and distribution charge; a competition transition charge for stranded cost recovery, which may include securitization; and a system benefits charge. The CTC is designed to recover stranded costs related to TNMP's generation assets and purchased power contracts, as determined by a PUCT- established model. The PUCT will also use this proceeding to review and approve the BSP. Annual Report. The legislation requires TNMP to file a report prior to March 30, 2000 that will allow the PUCT to review TNMP's calculation of excess earnings for the year ended December 31, 1999. Fuel Reconciliation. At December 31, 1999, TNMP had an underrecovered balance of fuel and the energy-related portion of purchased power costs of $21.8 million. PUCT rules require TNMP to reconcile its fuel costs at least every three years. TNMP expects to file a fuel reconciliation for the three-year period ended December 31, 1999, in mid-2000. TNMP will also file a request for a new fuel factor, which will take into account the expected cost of fuel and purchased energy. Management believes the ultimate outcome of this fuel reconciliation will not have a material adverse effect on TNP's or TNMP's consolidated financial position. New Mexico The New Mexico Legislature opened the state's electric power market to consumer choice with the passage of the Electric Utility Industry Restructuring Act of 1999 (the Act) in April 1999. The Act provides for the phase-in of retail choice beginning January 1, 2001, requires utilities to disaggregate their regulated transmission and distribution business activities from their generation operations, that will be subject to competition, and guarantees recovery of at least 50% of a utility's stranded costs over a five-year period. Prior to the passage of the Act, TNMP had been operating under Community Choice. Community Choice did not define stranded costs, or their recovery, and had specified May 1, 2000, for the beginning of retail choice. As a result, TNMP has reduced its accrual for potential stranded costs related to its purchased power contracts in New Mexico from $3.4 million as of December 31, 1998, to $2.1 million as of December 31, 1999. Stranded costs in New Mexico could ultimately be in a range from zero to $6 million, depending on the market price of purchased power at the onset of competition. TNMP is required to file its plan for complying with the Act by June 1, 2000. On June 8, 1999, the NMPRC entered a Final Order terminating Community Choice. By terminating Community Choice, the NMPRC placed TNMP on the same timetable as other New Mexico utilities with regard to retail competition and restored the pass-through of purchased power costs to customers effective July 1, 1999. Under Community Choice, purchased power costs were a fixed component of base rates. Therefore, the difference between the actual amounts recovered from customers and actual purchased power costs affected operating income. Community Choice provided for the filing of a rate case by TNMP on June 1, 1999. TNMP and the NMPRC Staff have reached a settlement, and have submitted the settlement to the NMPRC for approval. The settlement calls for a decrease in TNMP's base rates of $1.8 million, or 6%, effective October 1, 1999. TNMP has reflected the base rate reductions in its fourth quarter revenues. TNMP expects the NMPRC to act on the proposed settlement during the second quarter of 2000. Impact of Competition on TNMP TNMP is pursuing strategies to retain and attract new customers. TNMP's competitive position has been strengthened with the PUCT open access to transmission rule. Management believes TNMP's revenue growth opportunities are through an increased customer base. However, increased competition could result in losses of existing customers. As noted in "Recovering Purchased Power and Fuel Costs," TNMP recovers the demand component of purchased power in base rates. As such, TNMP is exposed to the risk of increases in the demand component of purchased power. At the same time, TNMP has the opportunity to retain the benefit of savings realized from lowering these costs. TNMP is actively managing its resources to optimize the rewards and diminish the risks in its power supply portfolio. -16- The legislation establishing competition in both states provides for recovery of stranded costs. The actual amount of stranded cost recovery is subject to regulatory review and approval. Results of Operations As discussed in "Competitive Conditions--Texas," legislation that establishes competition in the Texas electric utility industry became law in the second quarter of 1999. The 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 Income applicable to common stock was $30.2 million for 1999, compared to $19.3 million in 1998. The 1999 results included the effect of a $2.8 million charge to write off certain nonregulated business ventures and legal and outside consultant fees of $4.1 million associated with the Merger. The 1998 results included a $12.7 million loss associated with FWI's discontinued operations, and costs to implement the Transition Plan of $3.0. Exclusive of one-time items, the 1999 earnings were $37.1 million, a $2.1 million increase as compared to the 1998 earnings of $35.0 million. Income applicable to common stock was $29.5 million in 1997. Results for 1997 included a $12.9 million loss associated with FWI's discontinued operations. Excluding the one-time items, 1998 earnings were $7.4 million lower than 1997 earnings of $42.4 million. The following table sets forth results of operations for 1999, 1998, and 1997 and the impact of one-time items:
1999 1998 1997 -------------------- ------------------- ------------------ Amount EPS Amount EPS Amount EPS ------ --- ------ --- ------ --- (In thousands except per share amounts) Income applicable to common stock before one-time items.......... $ 37,127 $ 2.77 $ 34,969 $ 2.65 $ 42,403 $ 3.24 -------- ------- -------- ------ -------- ------ One-time items, net of income taxes: Discontinued operations of FWI....... - - (12,710) (0.96) (12,883) (0.98) Transition plan costs................ - - (2,985) (0.23) - - Charge for nonregulated ventures..... (2,829) (0.21) - - - - Acquisition charges.................. (4,112) (0.31) - - - - -------- ------- -------- ------ -------- ------ Total one-time items, net.......... (6,941) (0.52) (15,695) (1.19) (12,883) (0.98) -------- ------- -------- ------ -------- ------ Income applicable to common stock..... $ 30,186 $ 2.25 $ 19,274 $ 1.46 $ 29,520 $ 2.26 ======== ======= ======== ====== ======== ======
In late 1997, management discontinued the construction segment of FWI. In 1998, TNP elected to discontinue all remaining operations of FWI. 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. Under the 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 its stranded costs. Based on the provisions of the legislation, TNMP recorded pre-tax excess earnings of $23.4 million ($1.09 per share) in 1999. TNMP did not have excess earnings in 1998. TNMP's income applicable to common stock was $39.5 million in 1999 as compared to $34.2 million in 1998. The $5.3 million earnings improvement is due to decreases in purchased power and interest costs. These cost savings allowed TNMP to generate the excess earnings described above. Operating Revenues The following table summarizes the components of revenues (in thousands).
Increase (Decrease) ----------------------- 1999 1998 1997 `99 v. `98 `98 v. `97 --------- --------- --------- ---------- ---------- Operating revenues $ 576,093 $ 585,892 $ 578,534 $ (9,799) $ 7,358 Pass-through expenses 199,939 193,016 188,971 6,923 4,045 --------- --------- --------- ---------- ---------- Base revenues $ 376,154 $ 392,876 $ 389,563 $ (16,722) $ 3,313 ========= ========= ========= ========== ==========
-17- Pass-through expenses in Texas include fuel and the energy-related portion of purchased power. In New Mexico, pass-through expenses include all purchased power costs effective July 1, 1999. Prior to July 1, 1999, purchased power costs were recovered from customers as discussed under "Results of Operations-- Operating Expenses." The following table summarizes the components of the changes in base revenues from 1999 to 1998 and from 1998 to 1997 (in thousands). `99 v. `98 `98 v. `97 ---------- ---------- Base revenues ------------- Weather related $ (3,979) $11,711 Customer growth 5,064 4,896 New Mexico purchased power recovery effects from termination of Community Choice (10,192) 1,416 Industrial - firm rate sales (3,325) (9,020) Clear Lake standby revenue (2,453) - Other (3,534) (5,307) -------- ------- Other changes in base revenues (18,419) 3,696 New Mexico stranded cost adjustment 1,697 (383) -------- ------- Base revenues increase (decrease) $(16,722) $ 3,313 ======== ======= The primary reason for the $16.7 million base revenue decrease in 1999 was a change in the classification of New Mexico purchased power recovery revenues from base revenues to pass-through revenues. The $10.2 million decrease in New Mexico base revenues was offset by a $10.2 million increase in pass-through revenues. Other factors contributing to the base revenue decrease were a renegotiated contract with a large industrial customer and the absence of standby revenue payments resulting from the Clear Lake settlement. Overall, the combined base revenues from residential and commercial customers increased due to growth in these customer classes. This increase was offset by milder weather as compared to 1998. The base revenue increase of $3.3 million during 1998 resulted primarily from hotter than normal weather and growth in residential and commercial customers. The increase was partially offset by the loss of a significant industrial customer. The components of GWH sales for 1999 and 1998 are summarized in the following table: 1999 1998 Variance % ----- ----- --------- ------ Residential 2,420 2,440 (20) (0.8) Commercial 1,922 1,883 39 2.0 Industrial: Firm 516 505 11 2.2 Economy 4,283 4,476 (193) (4.3) Power marketing 119 425 (306) (72.0) Other 109 114 (5) (4.4) ----- ----- ---- ----- Total GWH sales 9,369 9,843 (474) (4.8) ===== ===== ==== ===== 1999 sales decreased 474 GWHs (or 5%), from 1998 levels, due to the reduced sales to a large industrial customer and decreased power marketing sales. As discussed in "Competitive Conditions--New Mexico," the NMPRC terminated Community Choice and, as of July 1, 1999, restored the pass-through of purchased power costs to TNMP's New Mexico customers. Under Community Choice, the difference between purchased power recovery and actual purchased power costs affected operating income. The termination of Community Choice limits purchased power recovery to actual purchased power costs incurred and does not affect operating income. Effective January 1, 1999, a large industrial customer in New Mexico reduced its firm purchased power commitment by 55%. During 1999, TNMP renegotiated with this customer to continue providing full service until the customer is allowed to choose suppliers under the legislation described in "Competitive Conditions-- New Mexico". When competition begins, TNMP will provide firm transmission service to this customer, and this customer can purchase its KWH requirements on the open market. This customer provided sales of 1,142 GWH and revenues of $40.0 million in 1999 ($8.4 million in base revenues). Operating Expenses Operating expenses for 1999 were $3.1 million lower than in 1998, due primarily to lower purchased power expenses, offset by the charge for recovery of stranded plant and higher transmission expenses. -18- Operating expenses for 1998 were $19.7 million higher than in 1997, due primarily to higher purchased power expenses and higher other operating and maintenance expenses. The following table summarizes the components of TNMP's total operating expenses (in thousands).
Increase (Decrease) ------------------ 1999 1998 1997 `99 v. `98 `98 v. `97 ----- ------ ------ ---------- ---------- Purchased power and fuel expenses: Pass-through expenses Purchased power $ 167,637 $ 158,330 $ 154,940 $ 9,307 $ 3,390 Fuel 32,302 34,686 34,031 (2,384) 655 --------- ---------- --------- --------- -------- 199,939 193,016 188,971 6,923 4,045 --------- ---------- --------- --------- -------- Non pass-through expenses: Purchased power 78,043 121,287 109,588 (43,244) 11,699 Fuel 1,605 1,646 2,055 (41) (409) --------- ---------- --------- --------- -------- 79,648 122,933 111,643 (43,285) 11,290 --------- ---------- --------- --------- -------- Total 279,587 315,949 300,614 (36,362) 15,335 Transmission expense 19,788 12,749 10,316 7,039 2,433 Depreciation expense 39,295 38,054 38,851 1,241 (797) Charge for recovery of stranded plant 23,376 - - 23,376 - Other operating expenses 79,602 78,914 73,978 688 4,936 Income and other tax expenses 54,095 53,161 55,322 934 (2,161) --------- ---------- --------- --------- -------- Operating Expenses $ 495,743 $ 498,827 $ 479,081 $ (3,084) $ 19,746 ========= ========== ========= ========= ========
Purchased Power and Fuel Expenses In 1999, purchased power and fuel expenses decreased $36.4 million from the level incurred during 1998. Non pass-through expenses decreased $43.3 million, reflecting lower demand costs resulting from the replacement of purchases from TXU with purchases from lower cost providers, significant reductions of the rate under which TNMP purchases capacity from Clear Lake, and effects of the termination of Community Choice. The decreases in non-pass through costs were partially offset by increases in pass-through expenses of $6.9 million. Pass- through expenses increased because of price increases in the spot market during the third quarter's extreme weather. As discussed in "Competitive Conditions--New Mexico", 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. As a result, $11.4 million of New Mexico purchased power costs incurred in the third and fourth quarter were recorded as pass-through expenses. Those costs would have been recorded as non pass-through expenses under Community Choice. During 1998, purchased power and fuel expenses increased by $15.3 million primarily due to increased purchased power expenses during the hotter than normal summer weather, recognition of expenses in compliance with the Transition Plan, and settlement of a billing dispute. Transmission Expenses Transmission expenses increased $7.0 million in 1999, from the same period in 1998. The higher expenses were due to discontinued reimbursements in accordance with the Clear Lake settlement, and a new allocation of transmission costs that the PUCT approved in July 1999. 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. While terminating the contract has produced purchased power savings, these savings have been partially offset by these higher transmission payments. A second PUCT action in September 1999 partially offset these increases. In accordance with the legislation discussed in "Competitive Conditions--Texas", the PUCT approved a change in the method of allocating transmission costs effective September 1, 1999. This change resulted in TNMP's transmission expenses in the fourth quarter of 1999 being $1.7 million lower than they would have been without the change. -19- During 1998, transmission expenses were $2.4 million higher than in 1997 due to the effects of the Clear Lake settlement described above. Charge for Recovery of Stranded Plant TNMP recorded a charge for recovery of stranded plant of $23.4 million as discussed in "Competitive Conditions--Texas" and the section "Overall Results." Other Operating Expenses Other operating expenses in 1999 increased slightly, by $0.7 million, compared to 1998. Other operating expenses increased in 1998 by $4.9 million compared to 1997, reflecting the write-off of $3.3 million of deferred costs related to the Transition Plan. Interest Charges During 1999, interest charges decreased $10.6 million from 1998 levels due to the issuance of $175 million of 6.25% senior notes, which replaced $130 million of 12.5% secured debentures and borrowings against the credit facilities. During 1998, interest charges decreased $3.2 million due primarily to reduced borrowings and lower interest rates on the credit facilities. Liquidity and Capital Resources Sources of Liquidity The main sources of liquidity for TNP are cash flow from operations and borrowings from credit facilities. TNP's cash flow from operations totaled $74.6 million, $72.9 million and $103.9 million in 1999, 1998 and 1997, respectively. Cash flow from operations increased slightly in 1999 due to reduced expenditures for nonregulated activities. Cash flow from operations decreased in 1998 due to increases in purchased power costs and expenses for nonregulated activities. In addition, 1997 cash flow included $20.5 million from the one-time factoring of unbilled accounts receivables. TNMP's cash flow decreased in 1999 due to a $10.3 million Transition Plan refund and higher income tax payments caused by increased intra- company funding to TNP. Lower payments for purchased power and interest partially offset the cash flow decrease at TNMP. TNMP's cash flow in 1998 mirrored that of TNP. In the second quarter of 1999, TNMP cancelled its 1995 Credit Facility, which had a total commitment of $100 million, and was scheduled to expire in November 2000. TNMP's remaining credit facility, which expires in September 2001, had a total of $54 million of unused borrowings available as of December 31, 1999. In November 1998, TNP entered into a new credit facility with a total commitment of $50 million, and unused borrowing capacity of $50 million at December 31, 1999. TNP can use borrowings under this facility to invest in TNP's subsidiaries, pay dividends to its shareholders, invest in nonregulated businesses, and for other general corporate purposes. The facility expires in November 2003. At December 31 1999, TNP had approximately 933,000 shares reserved for issuance under its direct stock purchase plan. 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. Capital Resources TNP's and TNMP's capital structure continued to improve during 1999, as TNMP was able to reduce debt due to continued strong cash generation for the year. The equity portion of TNP's capital structure increased from 40.0% at December 31, 1998, to 42.5% at December 31, 1999. Conversely, the long-term debt ratio decreased from 59.6% to 57.3% for the same period. TNMP experienced similar results with its capital ratios. -20- TNMP's capital requirements through 2004 are projected to be as follows (amounts in millions):
2000 2001 2002 2003 2004 ----- ---- ---- ----- ---- FMB and secured debenture maturities (see Note 7) $ 100.0 $ - $ - $ 140.0 $ - Capital expenditures 41.9 41.1 42.4 43.7 45.1 ------- ------- ------- -------- ------- Total capital requirements $ 141.9 $ 41.1 $ 42.4 $ 183.7 $ 45.1 ======== ======= ======= ======== =======
TNMP believes that cash flow from operations, borrowings in the capital markets, and periodic borrowings under the credit facilities will be sufficient to retire or refinance $100 million of 9.25%, Series U, FMBs and meet its other capital requirements through the end of 2000. Other Matters Year 2000 TNMP actively addressed the Year 2000 issue (Y2K) throughout its operating and office environments. It conducted extensive studies to analyze the impact of Y2K on all operating systems. As a result of these studies, TNMP developed a Y2K mitigation plan that required 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. As a result of its planning and preparation, TNMP experienced no disruption of service or any other material effect in any of its computer systems in any of its critical business areas - generation, transmission, distribution, energy management and corporate information systems. In addition, TNMP experienced no material event or disruption caused by a failure of any of its key vendors or other third parties to achieve Y2K compliance in those systems affecting TNMP's operations. The costs associated with TNMP's Y2K efforts were approximately $10.7 million. Approximately $9.9 million of that amount was to upgrade or replace various information technology systems, and to improve the infrastructure to support those systems. TNMP does not expect any future material effects to arise from the Y2K issue. 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. As noted in Item 1, "Sources of Energy," TNMP's exposure to changes in the prevailing market price of power has increased. This exposure is due to TNMP's greater reliance on shorter term contracts and, as discussed in Item 7, "Competitive Conditions," the fact that TNMP no longer passes the demand component of purchased power costs directly through to its customers. As a result, TNMP is exposed to the risk of executing new purchased power contracts at market prices. Conversely, TNMP has the opportunity to benefit from a favorable market for purchased power. -21- Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of TNP Enterprises, Inc.: We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of TNP Enterprises, Inc. (a Texas corporation) (the "Company") as of December 31, 1999 and 1998, and the related consolidated statements of income, common shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the years ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Fort Worth, Texas February 16, 2000 -22- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholder and Board of Directors of Texas-New Mexico Power Company: We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of Texas-New Mexico Power Company (a Texas corporation) (the "Company") as of December 31, 1999 and 1998, and the related consolidated statements of income, common shareholder's equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the years ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Fort Worth, Texas February 16, 2000 -23- TNP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31,
1999 1998 1997 --------- --------- --------- (In thousands except per share amounts) OPERATING REVENUES $ 576,150 $ 585,941 $ 578,534 --------- --------- --------- OPERATING EXPENSES: Purchased power and fuel 279,587 315,949 300,614 Other operating and maintenance 106,634 95,661 86,385 Depreciation 39,295 38,056 38,853 Charge for recovery of stranded plant (Note 3) 23,376 -- -- Taxes other than income taxes 33,746 36,014 33,667 Income taxes 19,120 15,480 21,242 --------- --------- --------- Total operating expenses 501,758 501,160 480,761 --------- --------- --------- NET OPERATING INCOME 74,392 84,781 97,773 --------- --------- --------- OTHER INCOME (LOSS): Other income and deductions, net (2,348) 1,363 1,443 Income taxes 1,866 (125) 257 --------- --------- --------- Other income (loss), net of taxes (482) 1,238 1,700 --------- --------- --------- INCOME BEFORE INTEREST CHARGES 73,910 86,019 99,473 --------- --------- --------- INTEREST CHARGES: Interest on long-term debt 38,538 48,393 52,557 Other interest and amortization of debt-related costs 5,205 5,492 4,355 --------- --------- --------- Total interest charges 43,743 53,885 56,912 --------- --------- --------- INCOME FROM CONTINUING OPERATIONS 30,167 32,134 42,561 Loss from discontinued nonregulated operations, net of taxes (Note 4) -- 12,710 12,883 --------- --------- --------- NET INCOME 30,167 19,424 29,678 Dividends on preferred stock and other (19) 150 158 --------- --------- --------- INCOME APPLICABLE TO COMMON STOCK $ 30,186 $ 19,274 $ 29,520 ========= ========= ========= EARNINGS PER SHARE OF COMMON STOCK: Earnings from continuing operations $ 2.25 $ 2.42 $ 3.24 Loss from discontinued nonregulated operations -- (0.96) (0.98) ========= ========= ========= EARNINGS PER SHARE $ 2.25 $ 1.46 $ 2.26 ========= ========= ========= DIVIDENDS PER SHARE OF COMMON STOCK $ 1.16 $ 1.10 $ 1.005 ========= ========= ========= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 13,394 13,244 13,083 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. -24- TNP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31,
1999 1998 1997 --------- --------- --------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from sales to customers $ 532,237 $ 600,596 $ 625,032 Purchased power and fuel costs paid (291,384) (318,616) (299,554) Cash paid for payroll and to other suppliers (89,455) (116,852) (125,188) Interest paid, net of amounts capitalized (35,527) (51,592) (57,337) Income taxes paid (7,527) (6,825) (9,089) Other taxes paid (34,140) (35,089) (32,990) Other operating cash receipts and payments, net 353 1,250 2,979 --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 74,557 72,872 103,853 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to utility plant (41,144) (37,534) (28,232) Additions to other property and nonregulated investments 100 (1,020) (1,777) Withdrawals from (deposits to) escrow account 1,902 (1,902) -- --------- --------- --------- NET CASH USED IN INVESTING ACTIVITIES (39,142) (40,456) (30,009) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid on preferred and common stocks (15,640) (14,729) (13,305) Common stock issuances 4,167 5,355 3,392 Borrowings from (repayments to) revolving credit facilities - net (63,000) (11,000) 45,000 Issuances: Senior notes, net of discount 174,164 -- -- Deferred expenses associated with financings (1,588) (7,382) -- Redemptions: First mortgage bonds -- (8,000) (100,900) Secured debentures (130,000) -- -- Preferred stock (1,396) (180) (180) Other 118 (141) (361) --------- --------- --------- NET CASH USED IN FINANCING ACTIVITIES (33,175) (36,077) (66,354) --------- --------- --------- NET CHANGE IN CASH AND CASH EQUIVALENTS 2,240 (3,661) 7,490 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,216 15,877 8,387 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,456 $ 12,216 $ 15,877 ========= ========= ========= RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net income $ 30,167 $ 19,424 $ 29,678 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 39,295 38,056 38,853 Charge for recovery of stranded plant 23,376 -- -- Amortization of debt-related costs and other deferred charges 8,044 7,390 5,633 Allowance for funds used during construction (933) (228) (47) Deferred income taxes 6,535 4,722 7,434 Investment tax credits 2,205 1,281 1,406 Deferred purchased power and fuel costs (20,425) 894 995 Cash flows impacted by changes in current assets and liabilities: Accounts payable (7,711) 976 (1,411) Accrued interest 3,400 (2,303) (3,556) Accrued taxes (1,472) (3,299) (1,244) Reserve for customer refund (10,289) 10,971 -- Changes in other current assets and liabilities 8,862 (2,215) 25,099 Clear Lake settlement payment (8,000) -- -- Other, net 1,503 (2,797) 1,013 --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 74,557 $ 72,872 $ 103,853 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. -25- TNP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31,
1999 1998 ---------- ---------- (In thousands) ASSETS - ------ UTILITY PLANT: Electric plant $1,288,104 $1,260,147 Construction work in progress 2,501 6,294 ---------- ---------- Total 1,290,605 1,266,441 Less accumulated depreciation 382,627 343,562 ---------- ---------- Net utility plant 907,978 922,879 ---------- ---------- OTHER PROPERTY AND INVESTMENTS, at cost 4,243 10,384 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents 14,456 12,216 Accounts receivable 8,384 5,955 Inventories, at lower of average cost or market: Fuel 575 677 Materials and supplies 3,834 4,567 Deferred purchased power and fuel costs 304 -- Accumulated deferred income taxes -- 2,235 Other current assets 635 4,403 ---------- ---------- Total current assets 28,188 30,053 ---------- ---------- LONG-TERM AND OTHER ASSETS: Recoverable stranded costs (Note 3) 19,256 -- Deferred purchased power and fuel costs (Note 3) 21,797 1,676 Deferred charges 19,737 28,773 ---------- ---------- Total long-term and other assets 60,790 30,449 ---------- ---------- $1,001,199 $ 993,765 ========== ========== CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common shareholders' equity: Common stock - no par value per share. Authorized 50,000,000 shares; issued 13,416,556 shares in 1999 and 13,293,996 in 1998 $ 196,685 $ 192,518 Retained earnings 130,425 115,776 ---------- ---------- Total common shareholders' equity 327,110 308,294 Redeemable cumulative preferred stock 1,664 3,060 Long-term debt, less current maturities 340,244 459,000 ---------- ---------- Total capitalization 669,018 770,354 ---------- ---------- CURRENT LIABILITIES: Current maturities of long-term debt 100,000 -- Accounts payable 20,300 28,011 Accrued interest 8,420 5,020 Accrued taxes 12,818 14,290 Customers' deposits 3,786 3,609 Accumulated deferred income taxes 7,543 -- Reserve for customer refund (Note 3) 682 10,971 Other current liabilities 29,720 25,202 ---------- ---------- Total current liabilities 183,269 87,103 ---------- ---------- LONG-TERM AND OTHER LIABILITIES: Regulatory tax liabilities 6,633 957 Accumulated deferred income taxes 97,196 97,346 Accumulated deferred investment tax credits 23,978 20,916 Deferred credits 21,105 17,089 ---------- ---------- Total long-term and other liabilities 148,912 136,308 ---------- ---------- COMMITMENTS AND CONTINGENCIES (Note 10) ---------- ---------- $1,001,199 $ 993,765 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. -26- TNP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CAPITALIZATION December 31,
1999 1998 --------- ---------- (In thousands) COMMON SHAREHOLDERS' EQUITY - --------------------------- Common stock with no par value per share Authorized shares - 50,000,000 Outstanding shares - 13,416,556 in 1999 and 13,293,996 in 1998 $ 196,685 $ 192,518 Retained earnings 130,425 115,776 --------- --------- Total common shareholders' equity 327,110 308,294 --------- --------- PREFERRED STOCK - --------------- Preferred stock with no par value Authorized shares - 5,000,000 Outstanding shares - None Redeemable cumulative preferred stock of TNMP with $100 par value Authorized shares - 1,000,000 Redemption price at TNMP's Outstanding shares option 1999 1998 ------ ------- ------- Series B 4.65% $ 100.00 8,390 19,200 839 1,920 Series C 4.75% 100.00 8,250 11,400 825 1,140 ------- ------- --------- --------- Total redeemable cumulative preferred stock 16,640 30,600 1,664 3,060 ------- ------- --------- --------- LONG-TERM DEBT FIRST MORTGAGE BONDS Series U 9.25% due 2000 100,000 100,000 SENIOR NOTES 6.25% due 2009 175,000 -- Unamortized discount (756) -- SECURED DEBENTURES 12.50% due 1999 -- 130,000 Series A 10.75% due 2003 140,000 140,000 REVOLVING CREDIT FACILITIES 1996 Facility 26,000 80,000 1998 Facility -- 9,000 --------- --------- Total long-term debt 440,244 459,000 Less current maturities (100,000) -- --------- --------- Total long-term debt, less current maturities 340,244 459,000 --------- --------- TOTAL CAPITALIZATION $ 669,018 $ 770,354 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. -27- 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, 1997 Balance at January 1, 1997 13,006 $ 183,771 $ 94,703 $ 278,474 Net income -- -- 29,678 29,678 Dividends on preferred stock -- -- (158) (158) Dividends on common stock - $1.005 per share -- -- (13,158) (13,158) Sale of common stock 127 3,392 -- 3,392 Retirement of preferred stock -- -- 13 13 --------- --------- --------- --------- Balance at December 31, 1997 13,133 187,163 111,078 298,241 YEAR ENDED DECEMBER 31, 1998 Net income -- -- 19,424 19,424 Dividends on preferred stock -- -- (150) (150) Dividends on common stock - $1.10 per share -- -- (14,579) (14,579) Sale of common stock 161 5,355 -- 5,355 Retirement of preferred stock -- -- 3 3 --------- --------- --------- --------- Balance at December 31, 1998 13,294 192,518 115,776 308,294 YEAR ENDED DECEMBER 31, 1999 Net income -- -- 30,167 30,167 Dividends on preferred stock -- -- (99) (99) Dividends on common stock - $1.16 per share -- -- (15,537) (15,537) Sale of common stock 123 4,167 -- 4,167 Retirement of preferred stock -- -- 118 118 --------- --------- --------- --------- Balance at December 31, 1999 13,417 $ 196,685 $ 130,425 $ 327,110 ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. -28- 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,
1999 1998 1997 --------- --------- --------- (In thousands) OPERATING REVENUES $ 576,093 $ 585,892 $ 578,534 --------- --------- --------- OPERATING EXPENSES: Purchased power and fuel 279,587 315,949 300,614 Other operating and maintenance 99,390 91,663 84,294 Depreciation of utility plant 39,295 38,054 38,851 Charge for recovery of stranded plant (Note 3) 23,376 -- -- Taxes other than income taxes 33,296 36,298 33,260 Income taxes 20,799 16,863 22,062 --------- --------- --------- Total operating expenses 495,743 498,827 479,081 --------- --------- --------- NET OPERATING INCOME 80,350 87,065 99,453 --------- --------- --------- OTHER INCOME: Other income and deductions, net 1,940 1,035 1,120 Income taxes 277 (52) 257 --------- --------- --------- Other income, net of taxes 2,217 983 1,377 --------- --------- --------- INCOME BEFORE INTEREST CHARGES 82,567 88,048 100,830 --------- --------- --------- INTEREST CHARGES: Interest on long-term debt 37,919 48,342 52,557 Other interest and amortization of debt-related costs 5,205 5,385 4,355 --------- --------- --------- Total interest charges 43,124 53,727 56,912 --------- --------- --------- NET INCOME 39,443 34,321 43,918 Dividends on preferred stock and other (19) 150 158 --------- --------- --------- INCOME APPLICABLE TO COMMON STOCK $ 39,462 $ 34,171 $ 43,760 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. -29- 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,
1999 1998 1997 --------- --------- --------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from sales to customers $ 528,552 $ 579,482 $ 606,803 Purchased power and fuel costs paid (291,384) (318,616) (299,554) Cash paid for payroll and to other suppliers (74,372) (72,590) (86,607) Interest paid, net of amounts capitalized (34,924) (51,545) (57,331) Income taxes paid (17,592) (2,786) (8,464) Other taxes paid (33,540) (35,492) (32,980) Other operating cash receipts and payments, net 99 864 2,600 --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 76,840 99,317 124,467 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to utility plant (40,911) (37,506) (27,942) Withdrawals from (deposits to) escrow account 1,902 (1,902) 1,670 --------- --------- --------- CASH FLOWS USED IN INVESTING ACTIVITIES (39,009) (39,408) (26,272) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid on preferred and common stocks (29,102) (19,249) (44,458) Borrowings from (repayments to) revolving credit facilities - net (54,000) (20,000) 45,000 Issuances: Senior notes, net of discount 174,164 -- -- Deferred expenses associated with financings (1,588) (7,275) -- Redemptions: First mortgage bonds -- (8,000) (100,900) Secured debentures (130,000) -- -- Preferred stock (1,396) (180) (180) Other 118 -- -- --------- --------- --------- NET CASH USED IN FINANCING ACTIVITIES (41,806) (54,704) (100,538) --------- --------- --------- NET CHANGE IN CASH AND CASH EQUIVALENTS (3,975) 5,205 (2,343) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,977 2,772 5,115 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,002 $ 7,977 $ 2,772 ========= ========= ========= RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net income $ 39,443 $ 34,321 $ 43,918 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of utility plant 39,295 38,054 38,851 Charge for recovery of stranded plant 23,376 -- -- Amortization of debt-related costs and other deferred charges 8,044 7,281 5,633 Allowance for funds used during construction (933) (228) (47) Deferred income taxes 6,716 9,559 10,650 Investment tax credits 2,149 1,173 2,121 Deferred purchased power and fuel costs (20,425) 894 995 Cash flows impacted by changes in current assets and liabilities: Accounts payable (6,814) 2,029 (2,395) Accrued interest 3,384 (2,319) (3,556) Accrued taxes (6,260) 2,698 850 Reserve for customer refund (10,289) 10,971 -- Changes in other current assets and liabilities 10,264 (4,485) 24,751 Clear Lake settlement payment (8,000) -- -- Other, net (3,110) (631) 2,696 -------- -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 76,840 $ 99,317 $124,467 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. -30- TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of TNP Enterprises, Inc.) CONSOLIDATED BALANCE SHEETS December 31,
1999 1998 ---------- ---------- (In thousands) ASSETS - ------ UTILITY PLANT: Electric plant $1,288,080 $1,260,099 Construction work in progress 2,501 6,294 ---------- ---------- Total 1,290,581 1,266,393 Less accumulated depreciation 382,627 343,562 ---------- ---------- Net utility plant 907,954 922,831 ---------- ---------- OTHER PROPERTY AND INVESTMENTS, at cost 213 2,116 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents 4,002 7,977 Accounts receivable 6,347 923 Inventories, at lower of average cost or market: Fuel 575 677 Materials and supplies 3,834 4,567 Deferred purchased power and fuel costs 304 -- Other current assets 356 4,093 ---------- ---------- Total current assets 15,418 18,237 ---------- ---------- LONG-TERM AND OTHER ASSETS: Recoverable stranded costs (Note 3) 19,256 -- Deferred purchased power and fuel costs (Note 3) 21,797 1,676 Deferred charges 19,757 28,706 ---------- ---------- Total long-term and other assets 60,810 30,382 ---------- ---------- $ 984,395 $ 973,566 ========== ========== CAPITALIZATION AND LIABILITIES - ------------------------------ CAPITALIZATION: Common shareholder's equity: Common stock, $10 par value per share Authorized 12,000,000 shares; issued 10,705 shares $ 107 $ 107 Capital in excess of par value 222,149 222,149 Retained earnings 90,302 79,840 ---------- ---------- Total common shareholder's equity 312,558 302,096 Redeemable cumulative preferred stock 1,664 3,060 Long-term debt, less current maturities 340,244 450,000 ---------- ---------- Total capitalization 654,466 755,156 ---------- ---------- CURRENT LIABILITIES: Current maturities of long-term debt 100,000 -- Accounts payable 20,074 26,888 Accrued interest 8,388 5,004 Accrued taxes 14,189 20,449 Customers' deposits 3,786 3,609 Accumulated deferred income taxes 8,434 649 Reserve for customer refund (Note 3) 682 10,971 Other current liabilities 28,015 17,076 ---------- ---------- Total current liabilities 183,568 84,646 ---------- ---------- LONG-TERM AND OTHER LIABILITIES: Regulatory tax liabilities 6,633 957 Accumulated deferred income taxes 95,165 93,378 Accumulated deferred investment tax credits 23,978 22,729 Deferred credits 20,585 16,700 ---------- ---------- Total long-term and other liabilities 146,361 133,764 ---------- ---------- COMMITMENTS AND CONTINGENCIES (Note 10) ---------- ---------- $ 984,395 $ 973,566 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. -31- TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of TNP Enterprises, Inc.) CONSOLIDATED STATEMENTS OF CAPITALIZATION December 31,
1999 1998 --------- --------- (In thousands) COMMON SHAREHOLDER'S EQUITY - --------------------------- Common stock, $10 par value per share Authorized shares - 12,000,000 Outstanding shares - 10,705 $ 107 $ 107 Capital in excess of par value 222,149 222,149 Retained earnings 90,302 79,840 ---------- ----------- Total common shareholder's equity 312,558 302,096 ---------- ----------- PREFERRED STOCK - --------------- Redeemable cumulative preferred stock with $100 par value Authorized shares - 1,000,000 Redemption price at TNMP's Outstanding shares option 1999 1998 ------ ---- ---- Series B 4.65% $ 100.00 8,390 19,200 839 1,920 Series C 4.75% 100.00 8,250 11,400 825 1,140 --------- --------- --------- ---------- Total redeemable cumulative preferred stock 16,640 30,600 1,664 3,060 --------- --------- --------- ---------- LONG-TERM DEBT - -------------- FIRST MORTGAGE BONDS Series U 9.25% due 2000 100,000 100,000 SENIOR NOTES 6.25% due 2009 175,000 - Unamortized discount (756) - SECURED DEBENTURES 12.50% due 1999 - 130,000 Series A 10.75% due 2003 140,000 140,000 REVOLVING CREDIT FACILITIES 1996 Facility 26,000 80,000 ---------- ----------- Total long-term debt 440,244 450,000 Less current maturities (100,000) - ---------- ----------- Total long-term debt, less current maturities 340,244 450,000 ---------- ----------- TOTAL CAPITALIZATION $ 654,466 $ 755,156 ========== ===========
The accompanying notes are an integral part of these consolidated financial statements. -32- 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, 1997 Balance at January 1, 1997 11 107 $ 222,133 $ 65,308 $ 287,548 Net income -- -- -- 43,918 43,918 Dividends on preferred stock -- -- -- (158) (158) Dividends on common stock -- -- -- (44,300) (44,300) Retirement of preferred stock -- -- 13 -- 13 --------- --------- --------- ---------- ---------- Balance at December 31, 1997 11 107 222,146 64,768 287,021 YEAR ENDED DECEMBER 31, 1998 Net income -- -- -- 34,321 34,321 Dividends on preferred stock -- -- -- (150) (150) Dividends on common stock -- -- -- (19,099) (19,099) Retirement of preferred stock -- -- 3 -- 3 --------- --------- --------- ---------- ---------- Balance at December 31, 1998 11 107 222,149 79,840 302,096 YEAR ENDED DECEMBER 31, 1999 Net income -- -- -- 39,443 39,443 Dividends on preferred stock -- -- -- (99) (99) Dividends on common stock -- -- -- (29,000) (29,000) Retirement of preferred stock -- -- -- 118 118 --------- --------- --------- ---------- ---------- Balance at December 31, 1999 11 107 $ 222,149 $ 90,302 $ 312,558 ========= ========= ========= ========== ==========
TNP ENTERPRISES, INC. AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies General Information The consolidated financial statements of TNP and subsidiaries include the accounts of TNP and its wholly owned subsidiaries, TNMP, FWI, and TNP Operating Company. The consolidated financial statements of TNMP and subsidiaries include the accounts of TNMP and its wholly owned subsidiaries, TGC and TGC II. All intercompany transactions and balances have been eliminated in consolidation. TNMP is TNP's principal operating subsidiary. TNMP is a public utility engaged in generating, purchasing, transmitting, distributing, and selling electricity in Texas and New Mexico. TNMP is subject to PUCT and NMPRC regulation. Some of TNMP's activities, including the issuance of securities, are subject to FERC regulation, and its accounting records are maintained in accordance with FERC's Uniform System of Accounts. The use of estimates is required to prepare TNP's and TNMP's consolidated financial statements in conformity with generally accepted accounting principles. Management believes that estimates are essential and will not materially differ from actual results. However, adjustments may be necessary in the future to the extent that future estimates or actual results are different from the estimates used in the 1999 financial statements. Accounting for the Effects of Regulation As discussed in Note 3, legislation that establishes competition became effective during 1999 in Texas and New Mexico. As a result, SFAS 71, "Accounting for the Effects of Certain Types of Regulation," is no longer applied to the generation/power supply portion of TNMP's operations in Texas and New Mexico. Based on the legislation, TNMP believes that SFAS 71 continues to apply to the transmission and distribution portion of its operations in both states. SFAS 71 allows TNMP to recognize the economic effects of rate regulation in the transmission and distribution portion of its business. Among these effects are the recognition of regulatory assets and liabilities. Regulatory assets represent revenues associated with certain costs that TNMP expects to recover from customers in future rates. Regulatory liabilities are costs previously collected from customers or other amounts that reduce future rates. The following table summarizes TNP's and TNMP's regulatory assets and liabilities as of December 31, 1999 and 1998. 1999 1998 ------ ------ (In thousands) Regulatory Assets: Deferred purchased power and fuel costs $ 22,101 $ 1,676 Deferred charges: Losses on reacquired debt 2,837 6,494 Rate case expenses 201 1,396 Recoverable stranded costs 19,256 - Deferred accounting amounts - 3,221 --------- --------- Total $ 44,395 $ 12,787 ========= ========= Regulatory Liabilities: Income tax related, net $ 6,633 $ 957 ========= ========= As a result of discontinuing SFAS 71 to the generation/power supply Texas operations, the following accounting policy changes will be effective January 1, 2000: . Allowance for funds used during construction will no longer be accrued to generation-related construction projects. Interest will be capitalized to these projects in accordance with SFAS 34, "Capitalization of Interest Cost." . Under SFAS 71, TNMP deferred the gains or losses that arose when long-term debt was redeemed prior to maturity, and amortized those costs over the life of the new debt. Effective January 1, 2000, gains or losses incurred for the early retirement of debt attributable to TNMP's generation/power supply operations will be recorded in accordance with SFAS 4, "Reporting Gains and Losses from Extinguishment of Debt." -34- Utility Plant Utility plant is stated at the historical cost of construction, which includes labor, materials, indirect charges for such items as engineering and administrative costs, and AFUDC. Property repairs and replacement of minor items are charged to operating expenses; major replacements and improvements are capitalized to utility plant. AFUDC is a non-cash item designed to enable a utility to capitalize financing costs during periods of construction. Established regulatory practices enable TNMP to recover these costs from customers. The composite rate used for AFUDC was 10.6% in 1999 and 6% in both 1998 and 1997. The costs of depreciable units of plant retired or disposed of in the normal course of business are eliminated from utility plant accounts and such costs plus removal expenses less salvage are charged to accumulated depreciation. When complete operating units are disposed of, appropriate adjustments are made to accumulated depreciation, and the resulting gains or losses, if any, are recognized. Depreciation is provided on a straight-line method based on the estimated lives of the properties as indicated by periodic depreciation studies. A portion of depreciation of transportation equipment used in construction is charged to utility plant accounts in accordance with the equipment's use. Depreciation as a percentage of average depreciable cost was 3.1%, 3.2%, and 3.3% in 1999, 1998, and 1997, respectively. Cash Equivalents All highly liquid debt instruments with maturities of three months or less when purchased are considered cash equivalents. Customer Receivables and Operating Revenues TNMP accrues estimated revenues for electricity delivered since the latest billing. TNMP, under a factoring arrangement with an unaffiliated company, sells its customer receivables on a nonrecourse basis. Amounts estimated to have been delivered, but remaining unbilled, are also sold in connection with this agreement. Purchased Power and Fuel Costs In Texas, fuel and the energy-related portion of purchased power costs are recovered from customers through the fuel adjustment clause authorized by the PUCT. The demand-related portion of purchased power is recovered through base rates and is not subject to adjustment or future reconciliation. Therefore, any difference between the amount of demand-related purchased power recovered through TNMP's rates and the actual cost of such affects operating income. In New Mexico, TNMP recovers all purchased power costs through the fuel and purchased power adjustment clause authorized by the NMPRC. The purchased power recovery factor changes monthly to reflect over or under collections of purchased power costs. Prior to July 1, 1999, the recovery of purchased power had been frozen in base rates in accordance with Community Choice. Deferred Charges Expenses incurred in issuing long-term debt and related discount and premium are amortized on a straight-line basis over the lives of the respective issues. Included in deferred charges are other assets that are expected to benefit future periods and certain costs that are deferred for ratemaking purposes and amortized over periods allowed by regulatory authorities. Derivatives The initial cost of an interest rate collar is being amortized over the term of the related agreement. Unamortized premiums of $66,000 are included in Deferred Charges in the consolidated balance sheets. Amounts to be received or paid under the agreement, if any, will be recognized when they occur as a component of interest expense. As of December 31, 1999, TNMP had neither an obligation to pay, nor the right to receive any amounts under the agreement. Income Taxes TNP files a consolidated federal income tax return that includes its subsidiaries and the consolidated operations of TNMP. The amounts of income taxes recognized in TNMP's accompanying consolidated financial statements were computed as if TNMP and its subsidiaries filed a separate consolidated federal income tax return. ITC amounts utilized in the federal income tax return are generally deferred and amortized to earnings ratably over the estimated service lives of the related assets. -35- Fair Values of Financial Instruments Fair values of cash equivalents, temporary investments, and customer receivables approximated the carrying amounts because of the short maturities of those instruments. The estimated fair values of long-term debt and preferred stock were based on quoted market prices of the same or similar issues. The estimated fair values of TNP's financial instruments are as follows:
December 31, 1999 December 31, 1998 ---------------------------- ----------------------------- Carrying Amount Fair Values Carrying Amount Fair Values --------------- ----------- --------------- ------------ (In thousands) Assets ------ Interest rate collars $ 66 $ 3,578 $ 164 $ (333) Capitalization and Liabilities ------------------------------ Long-term debt 441,000 420,731 459,000 475,189 Preferred stock 1,664 1,664 3,060 1,978
Common Stock At December 31, 1999, 519,304 shares of TNP's common stock were reserved for issuance to TNMP's 401(k) plan, and 1,738,491 shares of TNP's common stock were reserved for subsequent issuance under other stock compensation or shareholder plans. Shareholder Rights Plan TNP has a shareholder rights plan that is designed to protect TNP's shareholders from coercive takeover tactics and inadequate or unfair takeover bids. The rights plan provides for the distribution of one right for each share of TNP's common stock currently outstanding or issued until the close of business on August 11, 2008. Upon the occurrence of certain events, each right entitles a shareholder to elect to purchase one share of common stock at $100 per share or, under certain circumstances, shares of common stock at half the then-current market price, or to receive TNP common stock or other securities having an aggregate value equal to the excess of (i) the value of the common stock or other securities on the date the rights are exercised over or (ii) the cash payment that would have been payable upon exercise of the rights if cash payment had been elected. Until certain triggering events occur, the rights will trade together with TNP's common stock and separate rights certificates will not be issued. Among the triggering events are the acquisition by a person or group of 10% or more of TNP's outstanding common stock or the commencement of a tender or exchange offer that, upon consummation, would result in a person or group of persons owning 15% or more of TNP's outstanding common stock. The rights expire August 11, 2008, unless earlier redeemed or exchanged by TNP, and have had no effect on EPS. On June 4, 1999, TNP amended its shareholder rights plan to exempt the Merger discussed in Note 2 from the provisions of the shareholder rights plan. Stock-Based Compensation As discussed in Note 5, TNP has an equity-based incentive compensation plan that awards stock-based compensation. In 1995 the FASB issued SFAS 123, "Accounting for Stock-Based Compensation", that changes the method for calculating expenses associated with stock-based compensation. SFAS 123, which became effective for 1996, also allows companies to retain the approach as set forth in APB Opinion 25, "Accounting for Stock Issued to Employees", for measuring expense for its stock-based compensation. TNP has elected to continue to apply the provisions of APB Opinion 25 in calculating stock-based compensation. The application of SFAS 123 would have had no significant effect on the amount of expense associated with TNP's stock-based compensation. Reclassification Certain items in 1997 and 1998 were reclassified to conform to the 1999 presentation. -36- Note 2. Acquisition TNP, SW Acquisition, L.P., and ST Acquisition Corp. have entered into a Merger Agreement, dated as of May 24, 1999, which provides for a merger of ST Corp. with and into TNP, with TNP being the surviving corporation. Under the terms of the Merger Agreement, each issued and outstanding share of common stock of TNP will be canceled and converted automatically into the right to receive $44.00 in cash. The Merger will convert TNP from a listed public corporation to a privately owned corporation. TNP expects the Merger to close early in the second quarter of 2000. The Merger Agreement requires various approvals. To date, approvals have been obtained from TNP's shareholders, the Federal Trade Commission, FERC, the PUCT, and the NMPRC. Approvals are final in all jurisdictions except Texas. Information regarding the approval status in each jurisdiction is as follows: Shareholder Approval. A special meeting of TNP shareholders was held September 22, 1999, at which shareholders approved the Merger, with more than 98 percent of the votes cast favoring the transaction. The affirmative votes represented approximately 81 percent of the outstanding shares of TNP. FERC. On July 9, 1999, TNMP and SW filed a joint application with the FERC seeking approval of the Merger. Simultaneously, TNMP filed an application with the FERC seeking approval of a Backstop Credit Facility (Credit Facility). As a result of the Merger, TNMP must offer to repurchase certain existing debt. Should holders of this debt accept TNMP's repurchase offer, proceeds from the Credit Facility would fund the repurchase. On September 29, 1999, the FERC issued an order approving the Merger, concluding that the Merger would be consistent with the public interest. The FERC issued an order approving the Credit Facility on September 30, 1999. FTC. On September 3, 1999, TNMP filed an application with the FTC seeking approval of the Merger, as required under the Hart-Scott-Rodino Act. The FTC approved the application on September 21, 1999. Texas. On July 15, 1999, TNP and TNMP filed an application with the PUCT seeking a determination that the Merger is consistent with the public interest. On November 10, 1999, TNMP and the staff of the PUCT agreed to a settlement that resolves all issues between the two parties. At a hearing held November 12, 1999, the remaining parties joined the settlement, withdrew from the case, or waived their rights to hearing and did not oppose the settlement. In late December 1999, the administrative law judge assigned to the case issued a draft order approving the Merger. On February 10, 2000, the PUCT voted unanimously to approve the Merger. Approval by the PUCT is expected to be final in March 2000. Approval by the PUCT requires TNMP to honor certain financial and operational commitments, including a guaranteed level of stranded cost mitigation equal to $59 million less base rate reductions in 2000 and 2001. The subject base rate reductions are described in Note 3. New Mexico. Also on July 15, TNMP filed an application with the NMPRC seeking to obtain all approvals and authorizations necessary to consummate the Merger, including approval of the Credit Facility described above. On October 8, 1999, the Staff of the NMPRC filed testimony recommending approval of the Merger, subject to certain financial and operational commitments of TNMP. On October 18, 1999, TNMP filed testimony agreeing to make the proposed commitments. No other parties opposed the Merger. Hearings before the NMPRC were held October 25 and 26, 1999. On January 18, 2000, the NMPRC voted to approve the Merger. The decision became final on February 17, 2000. Note 3. Regulatory Matters The electric utility industry continues its transition toward increased competition. During 1999, legislation was passed in both Texas and New Mexico that establishes retail competition for generation operations. Retail competition is scheduled to begin in New Mexico and Texas on January 1, 2001, and January 1, 2002, respectively. The legislation in both states provides for recovery of "stranded costs", the difference between the regulatory value of TNMP's investments in generation assets and purchased power contracts and the market price for energy in a competitive market. The increasingly competitive environment presents opportunities to compete for new customers, as well as the risk of loss of existing customers. TNMP expects the portions of operations pertaining to transmission and distribution to continue to be regulated. The following discusses the legislation in Texas and New Mexico, the effects of the legislation on TNMP's operating results, and the relationship of the legislation in Texas to the Transition Plan. Texas Legislation. On September 1, 1999, legislation that establishes competition in the generation portion of the Texas electric utility industry went into effect. The legislation will implement retail competition in generation for customers in most areas of Texas on January 1, 2002. Among other provisions, the legislation: . Requires utilities to provide service according to the base rate tariffs in effect at September 1, 1999, until December 31, 2001. The legislation does not prohibit changes in the fixed fuel factor that passes through fuel and purchased power energy costs to customers. -37- . Allows a utility to recover 100% of its verifiable stranded costs via several methods, including: . Redirection of depreciation - A utility may redirect all or a part of the depreciation related to transmission and distribution assets to its generation assets for the periods 1998 through 2001. . Application of earnings in excess of an allowed rate of return - During the freeze period (January 1, 1999 through December 31, 2001), utilities' earnings are capped by the cost of capital approved in the utility's most recent rate proceeding before the PUCT. For TNMP, the cap is a 10.53% return on rate base. Earnings in excess of the cap will be used to reduce stranded costs. . Securitization - A utility may securitize 100% of its regulatory assets and up to 75% of its estimated stranded costs, and recover those costs from its customers through a charge approved by the PUCT. . Assessment of a competition transition charge - After the freeze period, stranded costs that have not been recovered by one of the methods above will be recovered through a competition transition charge levied upon all retail customers within a utility's geographical certificated service area as it existed on May 1, 1999. . Establishes four alternatives for quantifying the final amount of stranded costs, and provides a framework for reconciling estimated stranded costs to the actual stranded costs quantified using those methods. Reconciliation will occur sometime after January 10, 2004, according to a schedule to be established by the PUCT. . Requires utilities to disaggregate, on or before January 1, 2002, into three distinct businesses: generation, transmission and distribution, and retail electric provider. A retail electric provider is an entity that sells electric energy to retail customers in Texas. Such an entity cannot own or operate generation assets. . Provides that once customer choice begins on January 1, 2002, residential and small commercial customers who do not choose an alternative provider will continue to be served by TNMP's affiliate retail energy provider at a "price-to-beat" which is 6% lower than the rate in effect on January 1, 1999, adjusted to reflect a fuel factor that the PUCT shall determine as of December 31, 2001. This "price to beat" must be offered by the utility until the earlier of 36 months after customer choice is offered or when it loses 40% or more of its residential sales within its certified service area. Prior to the legislation, TNMP had been operating under a voluntary Transition Plan approved by the PUCT in 1998. The Transition Plan covered a five-year period, and had provided for rate reductions, sharing of earnings in excess of 11.25% return on equity and recovery of stranded costs. It also included a provision requiring that TNMP conform the Plan to any legislation enacting competition in the electric utility industry. There are provisions of the legislation that conflict with provisions of the Transition Plan. In such instances, including the calculation and subsequent application of excess earnings, Management believes the legislation supercedes the Transition Plan. Management has calculated excess earnings for the twelve months ended December 31, 1999, based on the provisions of the legislation. The calculation resulted in a reduction to 1999 pre-tax operating income of $23.4 million ($1.09 per share). The $23.4 million of excess earnings are displayed in the income statement under the caption "Charge for recovery of stranded plant." TNMP did not have excess earnings under the Transition Plan in 1998. 1998 Earnings Monitoring Report and Transition Plan Conformance. On May 17, 1999, TNMP filed its Electric Investor-Owned Utilities Earnings Report (Earnings Report) with the PUCT. Simultaneously, TNMP filed an Addendum to the Earnings Report (Addendum) detailing TNMP's calculation of excess earnings under the Transition Plan for the twelve months ended December 31, 1998. The Addendum showed that TNMP had not earned in excess of the 11.25% return on equity cap established in the Transition Plan. After reviewing the Addendum, the Office of Regulatory Affairs (ORA) of the PUCT filed a contest to TNMP's earnings report on August 16, 1999, asserting errors in TNMP's calculation of excess earnings. ORA's petition did not quantify the amount of its alleged errors. In addition, the ORA proposed to use the Earnings Report contest as a means for conforming the Transition Plan to the legislation. The PUCT hearing examiner assigned to the Earnings Report is considering the issues related to TNMP's calculation of excess earnings for 1998. The ORA is the only party contesting TNMP's calculation of excess earnings. In a letter to the hearing examiner on November 1, 1999, TNMP reported that TNMP and ORA had not yet resolved the Earnings Report issues. On January 25, 2000, TNMP filed a Motion for Dismissal or Summary Decision, asking the PUCT to reject ORA's contest, and approve TNMP's 1998 Earnings Report. TNMP believes the issues relating to its calculation of excess earnings can be disposed of as a matter of law without a factual hearing. TNMP does not expect resolution of this matter to have a material effect on its financial condition. Regarding the conformance of the Transition Plan to the legislation, TNMP filed a Conformed Stipulation with the PUCT on October 6, 1999. The Conformed Stipulation identifies all of the provisions in the Transition Plan that TNMP believes must be changed in order for the Transition Plan to comply with the legislation. On December 6, 1999, the PUCT issued a Declaratory Order stating that TNMP was required "to give effect to base rate reductions reflected in" the Transition Plan. Accordingly, TNMP reduced base rates for residential and commercial customers by 3% and 1%, respectively, effective January 1, 2000. Similar rate reductions will take effect January 1, 2001. As a result, operating revenues are estimated to decrease in 2000 and 2001 by $6.7 -38- million and $13.9 million, respectively. The order also established that the base rate reductions would offset the 6% rate reduction required by the legislation, as previously described in the section "Texas - Legislation." The order is interim in nature, and can be appealed. Uncertainties exist as to the application of the legislation to other provisions of the Transition Plan. Such uncertainties will not be resolved until TNMP reports to the PUCT regarding its efforts to conform the Transition Plan to the legislation. That report will be the subject of a PUCT review that will occur in 2001. Discontinuing SFAS 71. Historically, TNP's and TNMP's consolidated financial statements reflect the application of SFAS 71, "Accounting for the Effects of Certain Types of Regulation," which provides for recognition of the economic effects of rate regulation. EITF 97-4, "Deregulation of the Pricing of Electricity - Issues Related to the Application of SFAS Statements No. 71 and 101," states that application of SFAS 71 should stop "when deregulatory legislation is passed or when a rate order (whichever is necessary to effect the change in the jurisdiction) that contains sufficient detail for the enterprise to reasonably determine how the transition plan will affect the separable portion of its business whose pricing is being deregulated is issued." With the passage of the legislation, TNMP discontinued the application of SFAS 71 to the generation/power supply portion of its Texas business during the fourth quarter of 1999. As a direct result of discontinuing SFAS 71, and in accordance with the legislation, TNMP has reclassified net regulatory assets (regulatory assets less liabilities) of $19.3 million that pertain to these deregulated operations as Recoverable Stranded Costs. TNMP believes the $19.3 million represents verifiable stranded costs and intends to recover them from customers pursuant to the methods discussed under "Texas - Legislation." In conjunction with the discontinuance of SFAS 71, TNMP is required to determine if its generating plant asset, TNP One, is impaired under SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Based on TNMP's undiscounted cash flow analysis over the estimated useful life of TNP One, there is no impairment of TNP One, as defined by SFAS 121, as of December 31, 1999. TNMP's impairment analysis includes reasonable estimates of future market prices, capacity factors, operating costs, the effects of competition, and many other factors over the life of TNP One. TNMP's impairment analysis is highly dependent on these estimates. As of December 31, 1999, the net book value of TNP One is $435 million. Business Separation Plan. As noted above, the legislation requires utilities to disaggregate, on or before January 1, 2002, into three distinct businesses: generation, transmission and distribution, and retail electric provider. On January 10, 2000, TNMP filed its Business Separation Plan with the PUCT. The BSP details TNMP's plans for complying with the legislation, which include creating three new affiliated companies, and establishing a timeline for accomplishing the separation. Unbundled Cost of Service Filing. The legislation also requires TNMP to file a rate case that will set rates for the transmission and distribution company that will provide regulated services once competition begins in 2002. The filing must be made no later than March 31, 2000. The rates will be composed of a transmission and distribution charge; a competition transition charge for stranded cost recovery, which may include securitization; and a system benefits charge. The CTC is designed to recover stranded costs related to TNMP's generation assets and purchased power contracts, as determined by a PUCT- established model. The PUCT will also use this proceeding to review and approve the BSP. Annual Report. The legislation requires TNMP to file a report prior to March 30, 2000 that will allow the PUCT to review TNMP's calculation of excess earnings for the year ended December 31, 1999. Fuel Reconciliation. At December 31, 1999, TNMP had an underrecovered balance of fuel and the energy-related portion of purchased power costs of $21.8 million. PUCT rules require TNMP to reconcile its fuel costs at least every three years. TNMP expects to file a fuel reconciliation for the three-year period ended December 31, 1999, in mid-2000. TNMP will also file a request for a new fuel factor, which will take into account the expected cost of fuel and purchased energy. Management believes the ultimate outcome of this fuel reconciliation will not have a material adverse effect on TNP's or TNMP's consolidated financial position. New Mexico The New Mexico Legislature opened the state's electric power market to consumer choice with the passage of the Electric Utility Industry Restructuring Act of 1999 (the Act) in April 1999. The Act provides for the phase-in of retail choice beginning January 1, 2001, requires utilities to disaggregate their regulated transmission and distribution business activities from their generation operations, that will be subject to competition, and guarantees recovery of at least 50% of a utility's stranded costs over a five-year period. Prior to the passage of the Act, TNMP had been operating under Community Choice. Community Choice did not define stranded costs, or their recovery, and had specified May 1, 2000, for the beginning of retail choice. As a result, TNMP has reduced its accrual for potential stranded costs related to its purchased power contracts in New Mexico from $3.4 million as of December 31, 1998, to $2.1 million as of December 31, 1999. Stranded costs in New Mexico could ultimately be in a range from zero to $6 million, depending on the market price of purchased power at the onset of competition. -39- TNMP is required to file its plan for complying with the Act by June 1, 2000. On June 8, 1999, the NMPRC entered a Final Order terminating Community Choice. By terminating Community Choice, the NMPRC placed TNMP on the same timetable as other New Mexico utilities with regard to retail competition and restored the pass-through of purchased power costs to customers effective July 1, 1999. Under Community Choice, purchased power costs were a fixed component of base rates. Therefore, the difference between the actual amounts recovered from customers and actual purchased power costs affected operating income. Community Choice provided for the filing of a rate case by TNMP on June 1, 1999. TNMP and the NMPRC Staff have reached a settlement, and have submitted the settlement to the NMPRC for approval. The settlement calls for a decrease in TNMP's base rates of $1.8 million, or 6%, effective October 1, 1999. TNMP has reflected the base rate reductions in its fourth quarter revenues. TNMP expects the NMPRC to act on the proposed settlement during the second quarter of 2000. Note 4. Discontinued Nonregulated Operations Management, with approval from the Board of Directors, authorized a plan to discontinue the construction activities of FWI in late 1997. During the third quarter of 1998, TNP elected to discontinue all remaining operations of FWI. The pre-tax loss on discontinued operations recognized in 1998 was $19.6 million ($12.7 million, net of taxes, or $0.96 per share). The 1998 pre-tax loss resulted from construction delays, a shortage of skilled labor, and job site performance problems. Due to these reasons, there were a few jobs not completed at December 31, 1999. TNP expects the jobs to be completed during early 2000. The pre-tax loss on discontinued operations recognized in 1997 was $19.8 million ($12.9 million, net of taxes, or $0.98 per share). All losses incurred by FWI, both construction and service, incurred in 1997 have been reclassified as losses from discontinued operations. Note 5. Employee Benefit Plans Pension and Postretirement Benefits Plans TNMP has a defined benefit pension plan covering substantially all of its employees. Benefits are based on an employee's years of service and compensation. TNMP's funding policy is to contribute the minimum amount required by federal funding standards. TNMP also sponsors a health care plan that provides postretirement medical and death benefits to retirees who satisfied minimum age and service requirements during employment.
Pension Benefits Postretirement Benefits ----------------- ----------------------- 1999 1998 1999 1998 ---- ---- ---- ---- (In thousands) Change in projected benefit obligation: Benefit obligation at beginning of year $76,395 $76,316 $10,875 $10,651 Service cost 1,705 1,439 362 309 Interest cost 5,010 5,055 722 736 Participant contributions - - 179 183 Plan amendments - (873) - - Actuarial (gain) or loss, including changes in discount rate (7,540) 1,366 (1,468) 442 Benefits paid (6,926) (6,908) (1,701) (1,446) ------- ------- ------- ------- Benefit obligation at end of year $68,644 $76,395 $ 8,969 $10,875 ======= ======= ======= =======
-40-
Pension Benefits Postretirement Benefits ---------------- ----------------------- 1999 1998 1999 1998 ---- ---- ---- ---- (In thousands) Change in plan assets: Fair value of plan assets at beginning of year $ 97,714 $ 95,751 $ 9,936 $ 8,274 Actual return on plan assets, net of expenses 13,409 8,871 (198) 1,105 Employer contributions - - 618 1,597 Participant contributions - - 179 183 Benefits paid (6,926) (6,908) (1,680) (1,223) -------- -------- ------- ------- Fair value of plan assets at end of year $104,197 $ 97,714 $ 8,855 $ 9,936 ======== ======== ======= ======= Reconciliation of funded status: Funded status $ 35,553 $ 21,319 $ (113) $ (938) Unrecognized actuarial gain (39,551) (25,620) (6,560) (6,216) Unrecognized transition (asset) or obligation (11) (35) 4,216 4,540 Unrecognized prior service cost (1,996) (2,152) - - -------- -------- ------- ------- Prepaid (accrued) benefit cost $ (6,005) $ (6,488) $(2,457) $(2,614) ======== ======== ======= ======= Components of net periodic benefit cost: Service cost $ 1,705 $ 1,439 $ 362 $ 309 Interest cost 5,010 5,055 722 736 Expected return on plan assets (7,018) (6,664) (583) (484) Amortization of prior service cost (156) (156) - - Amortization of transitional (asset) or obligation (24) (24) 325 325 Recognized actuarial gain - - (344) (326) -------- -------- ------- ------- Net periodic benefit cost $ (483) $ (350) $ 482 $ 560 ======== ======== ======= ======= Weighted-average assumptions as of December 31: Discount rate 8.00% 6.75% 8.00% 6.75% Expected long-term rate of return on plan assets 9.50% 9.50% 5.25% 5.25% Average rate of compensation increase 4.00% 4.00% N/A N/A
The assumed health care cost trend rate used to measure the expected cost of benefits was 5.2% for 1999 and is assumed to trend downward slightly each year to 4.3% for 2003 and thereafter. Assumed health care cost trend rates could have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects (in thousands):
One-Percentage-Point One-Percentage-Point Increase Decrease -------- -------- Effect on total of service and interest cost components for 1999 $ 1 $ (3) Effect on year-end 1999 postretirement benefit obligation 27 (32)
Incentive Plans TNP and TNMP have several incentive compensation plans. All employees participate in one or more of these plans. Incentive compensation is based on meeting key financial and operational performance goals such as cash value added, customer satisfaction, and system reliability measures. Operating expenses for 1999, 1998, and 1997 included costs for the various cash and equity plans of $5.3 million, $5.9 million, and $6.0 million, respectively. Other Employee Benefits TNMP has a 401(k) plan designed to enhance the other retirement plans available to its employees. Employees may invest their contributions in fixed income securities, mutual funds, or TNP common stock. TNMP's contributions are used to purchase TNP common stock, which employees may later convert to other investment options. -41- TNMP has change in control severance agreements with certain members of management and other key personnel. The contracts provide for lump sum compensation payments and other rights in the event of termination of employment or other adverse treatment of such persons following a "change in control" of TNP or TNMP. Such event is defined to include, among other things, substantial changes in the corporate structure, ownership, or board of directors of either entity. The Merger described in Note 2 is considered a "change in control" event. The Merger Agreement requires that employment contracts be accepted by four specific employees, and by at least six of a group of 11 other employees. An excess benefit plan has been provided for certain key personnel and retired employees, whose benefits are restricted by federal law. The payment of benefits under the excess benefit plan is partially funded under an insurance policy arrangement. Note 6. Income Taxes Components of income taxes were as follows:
TNP TNMP ----------------------------------- --------------------------------- 1999 1998 1997 1999 1998 1997 ------- ------- ------- ------- ------- ------- (In thousands) Taxes on net operating income: Federal - current $ 10,161 $ 9,751 $ 12,251 $ 11,652 $ 6,299 $ 9,140 State - current 582 164 428 645 197 428 Federal - deferred 5,849 3,962 6,747 6,029 8,872 9,963 ITC adjustments 2,528 1,603 1,816 2,473 1,495 2,531 --------- --------- --------- --------- --------- --------- 19,120 15,480 21,242 20,799 16,863 22,062 --------- --------- --------- --------- --------- --------- Taxes on other income (loss): Federal - current (2,229) (313) (534) (640) (313) (534) Federal - deferred 687 760 687 687 687 687 ITC adjustments (324) (322) (410) (324) (322) (410) --------- --------- --------- --------- --------- --------- (1,866) 125 (257) (277) 52 (257) --------- --------- --------- --------- --------- --------- Tax benefit from discontinued nonregulated operations (Note 4) - (6,843) (6,660) - - - --------- --------- --------- --------- --------- --------- Total income taxes $ 17,254 $ 8,762 $ 14,325 $ 20,522 $ 16,915 $ 21,805 ========= ========= ========= ========= ========= =========
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 ----------------------------------- --------------------------------- 1999 1998 1997 1999 1998 1997 ------- ------- ------- ------- ------- ------- (In thousands) Tax at statutory tax rate $ 16,393 $ 9,796 $ 15,252 $ 20,762 $ 17,864 $ 22,854 Amortization of accumulated deferred ITC (1,632) (1,525) (1,403) (1,632) (1,525) (1,403) Amortization of excess deferred taxes (141) (141) (141) (141) (141) (141) State income taxes 1,044 197 428 1,107 197 428 ITC related to 1995 PUCT disallowance (324) (322) (410) (324) (322) (410) Other, net 1,914 757 599 750 842 477 --------- --------- --------- --------- --------- --------- Actual income taxes $ 17,254 $ 8,762 $ 14,325 $ 20,522 $ 16,915 $ 21,805 ========= ========= ========= ========= ========= ========
-42- The tax effects of temporary differences that gave rise to significant portions of net current and net noncurrent deferred income taxes as of December 31, 1999, and 1998, are presented below.
TNP TNMP -------------------------- ---------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- (In thousands) Current deferred income taxes: Deferred tax assets: Unbilled revenues $ 673 $ 91 $ 673 $ 91 Other 2,273 2,999 1,382 115 ---------- ---------- ---------- ---------- 2,946 3,090 2,055 206 Deferred tax liability: Recoverable stranded costs (2,648) - (2,648) - Deferred purchased power and fuel costs (7,841) (855) (7,841) (855) ---------- ---------- ---------- ---------- Current deferred income taxes, net $ (7,543) $ 2,235 $ (8,434) $ (649) ========== ========== ========== ========== Noncurrent deferred income taxes: Deferred tax assets: Minimum tax credit carryforwards $ 29,624 $ 30,241 $ 33,365 $ 34,437 ITC carryforwards 1,482 5,018 - 3,206 Regulatory related items 13,493 12,731 13,493 12,731 Accrued employee benefit costs 3,109 3,330 3,109 3,330 Excess earnings 7,825 - 7,825 - Other 1,384 (890) 1,156 694 ---------- ---------- ---------- ---------- 56,917 50,430 58,948 54,398 ---------- ---------- ---------- ---------- Deferred tax liabilities: Utility plant, principally due to depreciation and basis differences (135,973) (135,870) (135,973) (135,870) Deferred charges (12,257) (4,611) (12,257) (4,611) Recoverable stranded costs (noncurrent) (4,455) - (4,455) Regulatory related items (1,428) (7,295) (1,428) (7,295) ---------- ---------- ---------- ---------- (154,113) (147,776) (154,113) (147,776) ---------- ---------- ---------- ---------- Noncurrent deferred income taxes, net $ (97,196) $ (97,346) $ (95,165) $ (93,378) ========== ========== ========== ==========
Federal tax carryforwards as of December 31, 1999, were as follows:
TNP TNMP --- ---- (In thousands) Minimum tax credits Amount $ 29,624 $ 33,365 Expiration period None None Investment tax credit Amount $ 1,482 $ - Expiration period 2005
Note 7. Long-Term Debt First Mortgage Bonds FMBs issued under the Bond Indenture are secured by substantially all utility plant owned directly by TNMP. The Bond Indenture restricts cash dividend payments on TNMP common stock. The maximum amount of any additional FMBs that TNMP can issue is determined by both a collateral requirement and by an interest coverage requirement. The collateral requirement is a function of property additions, previously redeemed FMBs, and cash deposited with the trustee. As of December 31, 1999, the collateral requirement was more restrictive than the interest coverage requirement, and TNMP could therefore issue up to $96 million of additional FMBs. -43- Secured Debentures TNMP's Series A, 10.75% secured debentures ($140 million) are secured with a first lien on a portion of Unit 1, and by second liens on substantially all utility plant in Texas owned directly by TNMP. The secured debentures also contain restrictions on dividends and asset dispositions. Senior Notes In January 1999, TNMP issued $175 million of 6.25% Senior Notes due in 2009 and used the proceeds to retire $130 million of its 12.5% Secured Debentures and reduce outstanding borrowings under the credit facilities. The Senior Notes were issued under a new indenture that allows the issuance of unsecured debt. The new notes are initially secured by FMBs. However, when TNMP repays its existing FMBs and secured debentures, the collateral securing the Senior Notes can be released. The Senior Notes would become unsecured, but will remain the senior debt obligations of TNMP. Revolving Credit Facilities The following table summarizes the terms of TNP's and TNMP's revolving credit facilities at December 31,1999:
Total Amount Commitment 1999 Average Commitment Outstanding Expires Interest Rate Security ---------- ----------- ------- ------------- -------- (in thousands) 1998 TNP Facility $ 50,000 $ - November 2003 5.49% Unsecured 1996 TNMP Facility 80,000 26,000 September 2001 6.11% Unsecured
The composite average borrowing rates under TNMP's credit facilities were 6.11% and 6.99% for 1999 and 1998, respectively. TNMP has a $50 million interest rate collar to mitigate exposure to variable interest rates. The collar sets floor and ceiling rates on the 90-day LIBOR rate at 5.25% and 7.50%, respectively. The term of the interest rate collar is September 1997 through September 2000. TNMP also has a $100 million interest rate collar to mitigate the risk of refinancing the debt that matures or is callable in 2000. The collar sets floor and ceiling rates on the 10-year U. S. Treasury bond at 4.91% and 6.25%, respectively. The collar expires, and is exercisable only on, September 15, 2000. TNMP believes that cash flow from operations, borrowings in the capital markets, and periodic borrowings under the credit facilities will be sufficient to retire or refinance $100 million of its 9.25%, Series U, FMBs, and meet its other capital requirements through the end of 2000. Under specified conditions, TNMP's credit facilities restrict the payment of cash dividends on TNMP common stock. The credit facilities also prohibit the sale, lease, transfer, or other disposition of assets other than in the ordinary course of business. Maturities As of December 31, 1999, scheduled maturities of long-term debt for the five years following 1999 are as follows:
Credit Secured Year FMBs Facilities Debentures Total ---- ---- ---------- ---------- ----- (In thousands) 2000 $ 100,000 $ - $ - $ 100,000 2001 - 26,000 - 26,000 2002 - - - - 2003 - - 140,000 140,000 2004 - - - -
In January 1999, TNMP retired upon their maturity, $130 million of 12.5% secured debentures, and issued $175 million of 6.25% Senior Notes due in 2009. TNMP's Series A, 10.75% Secured Debentures due 2003 of $140 million are callable at par on September 15, 2000. -44- Note 8. Capital Stock and Dividends TNP In November 1998, TNP increased its quarterly dividend from $0.27 to $0.29 per share. TNMP The 1996 TNMP Credit Facility restricts the payment of cash dividends by TNMP. As of December 31, 1999, $27.7 million of unrestricted retained earnings were available for dividends. Note 9. Segment and Related Information During 1998, TNP adopted FASB Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information". In 1998, TNP reported two segments, TNMP, which provides regulated electric service in Texas and New Mexico, and FWI, which before operations were discontinued, provided integrated mechanical, electrical, plumbing and other maintenance and repair services to commercial customers in Texas metropolitan areas. The operations of TNMP have been separated into two segments, Texas and New Mexico. TNP manages the segments separately to respond to the differing operational and regulatory climates in the two states. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Intersegment revenues are not material. 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.
Twelve Months Ended ------------------- December 31, ------------ 1999 1998 1997 ---- ---- ---- Texas ----- Operating revenues $ 492,535 $ 500,556 $ 499,978 Depreciation and amortization 35,754 37,370 34,416 Charge for recovery of stranded plant 23,376 - - Income taxes 17,719 13,938 19,323 Interest revenue 601 829 1,315 Total interest charges 39,936 50,253 53,247 Income from continuing operations 34,819 29,008 38,323 Loss from discontinued nonregulated operations - - - Net income 34,819 29,008 38,323 Total assets 821,160 840,258 846,482 Property additions 36,710 33,774 25,193 New Mexico ---------- Operating revenues $ 83,558 $ 85,337 $ 78,556 Depreciation and amortization 5,368 4,791 4,566 Charge for recovery of stranded plant - - - Income taxes 3,080 2,925 2,739 Interest revenue 106 115 182 Total interest charges 3,188 3,473 3,665 Income from continuing operations 4,624 5,313 5,595 Loss from discontinued nonregulated operations - - - Net income 4,624 5,313 5,595 Total assets 86,541 82,574 76,768 Property additions 4,202 3,732 2,749
-45-
Twelve Months Ended ------------------- December 31, ------------ 1999 1998 1997 ---- ---- ---- All Other and Eliminations -------------------------- Operating revenues $ 57 $ 48 $ - Depreciation and amortization - 2 2 Charge for recovery of stranded plant - - - Income taxes (1,679) (1,383) (820) Interest revenue 253 391 326 Total interest charges 619 159 - Income (loss) from continuing operations (9,276) (2,187) (1,357) Loss from discontinued nonregulated operations - 12,710 12,883 Net income (loss) (9,276) (14,897) (14,240) Total assets 93,498 70,933 68,676 Property additions 132 1,048 2,067 Consolidated ------------ Operating revenues $ 576,150 $585,941 $578,534 Depreciation and amortization 41,122 42,163 38,984 Charge for recovery of stranded plant 23,376 - - Income taxes 19,120 15,480 21,242 Interest revenue 960 1,335 1,823 Total interest charges 43,743 53,885 56,912 Income (loss) from continuing operations 30,167 32,134 42,561 Loss from discontinued nonregulated operations - 12,710 12,883 Net income 30,167 19,424 29,678 Total assets 1,001,199 993,765 991,926 Property additions 41,044 38,554 30,009
Note 10. Commitments and Contingencies Fuel Supply Agreement TNMP has an agreement with the Walnut Creek Mining Company to purchase lignite for TNP One through at least 2017. Depending on the output of TNP one, the contract could supply the plant for several years beyond 2017. Phillips Coal Company and Peter Kiewit Sons' jointly own Walnut Creek Mining Company, Inc. Wholesale Purchased Power Agreements TNMP purchases approximately 80% of its electricity requirements from various wholesale suppliers. These contracts are scheduled to expire in various years through 2005. In 1999, Clear Lake was TNMP's largest wholesale supplier of electricity. In 1999, Clear Lake supplied approximately 23% of TNMP's Texas capacity and 16% of its Texas energy requirements. At December 31, 1999, TNMP had various outstanding commitments for take or pay agreements, including the fuel supply agreement discussed above. Detailed below are the fixed and determinable portion of the obligations (amounts in millions):
2000 2001 2002 2003 2004 ----- ---- ---- ---- ---- Purchased power agreements $ 76.1 $ 66.6 $ 36.7 $ 22.7 $ 11.5 Fuel supply agreements 32.4 31.6 30.7 31.5 32.3 -------- ------- ------- ------- ------- Total $ 108.5 $ 98.2 $ 67.4 $ 54.2 $ 43.8 ======== ======= ======= ======= =======
-46- Legal Actions Clear Lake. TNMP and Clear Lake Limited Partnership ("Clear Lake") agreed in March 1999 to settle the lawsuit styled Clear Lake Cogeneration Limited Partnership vs. Texas-New Mexico Power Company, pending in the 234th District Court of Harris County, Texas, and the parallel proceeding pending before the PUCT. The PUCT approved the settlement on July 15, 1999. These proceedings arose out of disagreements between TNMP and Clear Lake over the interpretation of certain terms of an agreement under which TNMP purchases cogenerated electricity from Clear Lake. Under the settlement, TNMP, Clear Lake, and Calpine Power Services Company (an affiliate of Clear Lake) have entered into a revised purchased power contract effective as of October 1, 1998, governing energy and capacity transactions between the parties. In addition, TNMP paid Clear Lake $8 million, which TNMP expects to recover through customer rates. Phillips Petroleum. TNMP is the defendant in a suit styled Phillips Petroleum Company vs. Texas-New Mexico Power Company, filed on October 1, 1997 and pending in the 149th State District Court of Brazoria County, Texas. The suit, which is in the discovery stage, is based on events surrounding an interruption of electricity to a petroleum refinery and related facilities that occurred in May 1997. Phillips Petroleum Company is seeking the recovery of damages arising from the interruption and in May 1999 demanded payment in the amount of $47.1 million. TNMP's tariff approved by the PUCT contains limitations against recovery of the great majority of Phillip's alleged damages. The Texas Supreme Court, in another matter, has recently upheld the enforceability of such tariff limitations in litigation of this type; TNMP believes the ruling will operate to substantially limit any recovery by Phillips to the cost of its electrical equipment, in the event that any are awarded in this matter. Discovery has not sufficiently progressed to quantify any damages to Phillips' electrical equipment; however, Phillips has previously reported to the SEC that it incurred costs of approximately $2.0 million in this interruption. In May 1999, TNMP filed a Third Party Petition naming Sweeny Cogeneration Limited Partnership, the operator of cogeneration and related facilities at the Phillips refinery, as a defendant. TNMP has previously charged to earnings the deductible amount of its insurance coverage, $500,000. Power Resource Group. TNMP is a defendant in a suit styled Power Resource Group, Inc. v. Public Utility Commission of Texas and Texas-New Mexico Power Company, pending in the 345th District Court of Travis County, Texas. This lawsuit, which was originally filed on May 21, 1999, appeals the PUCT's dismissal of a regulatory case that Power Resource Group, Inc. had filed against TNMP. PR Group is a developer of electric generating plants that are intended to be qualifying cogeneration facilities. This lawsuit and the regulatory case it appeals both stem from discontinued negotiations for power supply. PR Group alleged that TNMP was required to buy power to be generated from an as-yet- unbuilt cogeneration facility. TNMP filed its original answer with the court on June 28, 1999. In an amended petition filed January 13, 2000, PR Group asserts a claim of damages of at least $158,000,000. It bases its claim on the assertion that it was damaged when TNMP refused to execute an agreement after the aforementioned discontinued negotiations, that TNMP profited significantly from PR Group's work, that TNMP is in error when it relies on a PUCT order dismissing PR Group's petition before the PUCT on substantially the same facts, and that TNMP misrepresented that it would enter into a contract with PR Group to purchase energy and capacity at rates equal to or below TNMP's avoided costs. TNMP believes that PR Group's claims are without merit and intends to contest this claim vigorously. TNMP is involved in various claims and other legal actions arising in the ordinary course of business. In the opinion of management, the ultimate dispositions of these matters, as well as those described above, will not have a material adverse effect on TNMP's and TNP's consolidated financial position or results of operations. -47- 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) 1999 - ---- Operating revenues.............................. $ 118,125 $ 144,027 $ 190,570 $ 123,428 Net operating income............................ 14,492 22,175 25,611 12,114 Income (loss) from continuing operations........ 3,132 12,403 15,047 (414) Net income (loss)............................... 3,132 12,403 15,047 (414) Earnings (loss) per share of common stock from continuing operations*......................... 0.23 0.93 1.12 (0.03) Earnings (loss) per share of common stock*...... 0.23 0.93 1.12 (0.03) Dividends per share of common stock............. $ 0.29 $ 0.29 $ 0.29 $ 0.29 Weighted average common shares outstanding...... 13,346 13,398 13,416 13,417 1998 - ---- Operating revenues.............................. $ 125,938 $ 142,099 $ 188,566 $ 129,338 Net operating income............................ 18,492 19,101 33,076 14,112 Income from continuing operations............... 5,130 5,831 20,890 283 Net income (loss)............................... 4,625 (767) 18,561 (2,995) Earnings per share of common stock from continuing operations*......................... 0.39 0.44 1.58 0.02 Earnings (loss) per share of common stock*...... 0.35 (0.06) 1.40 (0.23) Dividends per share of common stock............. $ 0.27 $ 0.27 $ 0.27 $ 0.29 Weighted average common shares outstanding...... 13,188 13,240 13,263 13,283
* The individual quarters do not add to the yearly totals since the per share amounts are based upon the average number of shares outstanding during each quarter. Generally, the variations between quarters reflect the seasonal fluctuations of TNMP's business. Provisions for losses related to discontinuing operations at FWI's construction segment account for the decreases in operating results reported in the second and fourth quarters of 1998. Discontinuing operations of FWI's service segment caused the decreased operating results shown in the third quarter of 1998. Implementation of the Texas Transition Plan also had a negative impact on operating results in the second, third, and fourth quarters of 1998. Operating results in 1999 reflect the effects of the new legislation described in Note 3. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. -48- PART III -------- Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Directors R. Denny Alexander, 54, has been a director of TNP and TNMP since 1989. Since 1978, he has owned and managed R. Denny Alexander & Company, an investment management firm, and has been the Managing Partner of OPNB Building Joint Venture, a real estate investment partnership. He became a director of Cullen/Frost Bankers, Inc., a bank holding company, and Frost National Bank, a national bank, in 1998 following the acquisition by Frost of Overton Bancshares, Inc., and Overton Bank and Trust, N.A., of which he had been a director and Chairman since 1984. Mr. Alexander is Chairman of the Board of Trustees of W. I. Cook Foundation, Cook Children's Health Care System, and Cook Children's Medical Center in Fort Worth. He is also on the Board of Trustees of Texas Christian University in Fort Worth. John A. Fanning, 60, has been a director of TNP and TNMP since 1984. He was Executive Vice President of Snyder Oil Corporation from March 1990 to November 1995, and a director of Snyder from 1981 to 1995. Since November 1995, he has been involved in private investments in oil, gas and manufacturing. From February to April 1997, he was Interim President, Chief Executive Officer and a director of Heartland Wireless Communications, Inc., which sells wireless cable television services. Sidney M. Gutierrez, 48, has been a director of TNP and TNMP since November 1994. From 1984 to 1994, he was a NASA astronaut serving as Space Shuttle Mission Commander. From 1991 to 1994, he was also an Air Force officer serving in the rank of Colonel. Since his retirement from NASA and the Air Force in 1994, Mr. Gutierrez has served in various management capacities at Sandia National Laboratories, a prime contractor for the Department of Energy. He serves on the Board of Regents of New Mexico Institute of Mining and Technology and is a member of the Board of Directors of Goodwill Industries of New Mexico and the New Mexico Space Commission. He serves as a consultant to the National Aerospace Advisory Panel. J. R. Holland, Jr., 56, was elected as a director of TNP and TNMP in May 1996. He has been President and Chief Executive Officer of Unity Hunt, Inc., a large international private holding company with interests in technology, entertainment, telecommunications, retail, investments, real estate, natural resources and energy businesses, since 1991. He is a director of Optical Security Group, Inc., Placid Refining Company, and Texas Capital Bancshares, Inc. Kevern R. Joyce, 53, was appointed Chief Executive Officer, President, and director of TNP and TNMP in April 1994 and was elected Chairman of the Board of both companies in April 1995. He is a director of Aztec Manufacturing Co., an electrical products manufacturer for the industrial market, a provider of galvanizing services and oil field tubular products. Harris L. Kempner, Jr., 60, has been a TNP director since 1984, and a TNMP director since 1980. He has been President of Kempner Capital Management, an investment advisory firm, since 1981; a Trustee of H. Kempner Trust Association, which engages in investments, since 1964; Chairman Emeritus and Advisor to the board of United States National Bank, Galveston, Texas, since 1992; a director of Balmorhea Ranches, a ranching/farming operation, and Imperial Holly Corp., a sugar products company, since 1982; and a director or advisory director of Cullen/Frost Bankers, Inc., a bank holding company, since 1982. Dr. Carol Diann Smith Surles, 53, became a director of TNP and TNMP in September 1995. She became President of Eastern Illinois University, Charleston, Illinois, in March 1999. She was President of Texas Woman's University, Denton, Texas, from August 1994 until March 1999. Larry G. Wheeler, 53, has been a director of TNP and TNMP since October 1997. In February 1999, he was named Chief Executive Officer of Granny Goose Foods, Inc., Oakland, California, a snack food manufacturer and marketer. Beginning in May 1995, he was president and chief executive officer of Mrs. Baird's Bakeries, Inc., Fort Worth, Texas, presiding over the sale of that company in May 1998. He was president of Alpo Pet Foods, Inc. from September 1993 until May 1995. Mrs. Baird's Bakeries filed bankruptcy under Chapter 11 of the U.S. Bankruptcy Code in March 1996, and exited the Chapter 11 proceedings in September 1996. In February 2000, he became a director of Horizon Food Group, a privately held food company. Dennis H. Withers, 54, became a director of TNP and TNMP in August 1995, after serving as an advisory director from December 1994. He has been Chairman of Trinity Forge, Inc., a metal forging and manufacturing company, since 1997, its President since 1979, and a director since 1972. He was a director of Overton Bancshares, Inc., a bank holding company, from 1985 until its acquisition by Cullen/Frost Bankers, Inc. in 1998. He was an advisory director of the North Texas Division of Frost National Bank in 1998 and 1999, and was a director of Overton Bank and Trust, N. A. from 1993 until 1998. In October 1999, he became a manager partner in CECA, LLC, a cold steel extrusion company. -49- Committees and Meetings. TNP's Board of Directors maintains the following four standing committees. . Audit Committee. This committee meets with management to consider the adequacy of the internal controls and the objectivity of financial reporting; meets with the independent auditors and with appropriate financial personnel and internal auditors regarding these matters and regarding the scope of internal and independent audits; and determines and reviews internal and external audit staff qualifications and recommends to the full board the appointment of the independent auditors. Messrs. Alexander, Gutierrez, Wheeler, and Dr. Surles comprised the Audit Committee in 1999. . Compensation Committee. This committee evaluates the Chief Executive Officer's performance and reviews the performance of officers who report to him; reviews the terms and conditions of all employee benefit plans; establishes performance goals for all incentive compensation plans and designates participants in incentive compensation plans for management; sets compensation for officers; and makes recommendations to the full board with respect to directors' compensation. Messrs. Fanning, Gutierrez, Holland, Kempner, and Withers comprised the Compensation Committee in 1999. . Financial Committee. This committee reviews and approves dividend policy, securities offerings and capital budgets; reviews strategic, financial and other plans; and reports and recommends in its discretion to the full board on internal financial affairs. Messrs. Kempner, Alexander, Joyce, Withers, and Dr. Surles comprised the Financial Committee in 1999. . Nominating Committee. This committee evaluates and recommends to the full board candidates for board positions whose terms are expiring or that have become vacant, and recommends persons for election or re-election as officers. Messrs. Joyce, Fanning, Kempner, and Alexander comprised the Nominating Committee in 1999. TNP's board of directors held eight meetings during 1999, and acted by unanimous consent twice. TNMP's board of directors held four meetings during 1999, and acted by unanimous consent once. The committees held the following number of meetings: Audit Committee, two; Compensation Committee, five, and took one action by unanimous written consent; Financial Committee, five; and Nominating Committee, three. All directors attended at least 75% of all the meetings of the Board of Directors and committees on which they served during 1999. Director Compensation Each non-employee director receives an annual retainer of 525 shares of TNP common stock from TNP and $8,000 from TNMP, and a fee of $1,000 for each meeting of the TNP and TNMP boards and committees that he or she attends. TNP and TNMP split the $1,000 cost when their boards of directors or committees hold combined meetings. Directors and committee members are also reimbursed for travel and other incidental expenses incurred in connection with their duties. Directors who are employees receive no additional compensation for serving as directors. The shares of TNP common stock paid to the non-employee directors are issued under the TNP Non-employee Director Stock Plan. Compensation Committee Interlocks and Insider Participation No Compensation Committee member is a director of or serves on the compensation committee of an entity that has an executive officer serving on TNP's Board of Directors or Compensation Committee. Executive Officers The information set forth under "Employees and Executives" in Part I is incorporated here by reference. Item 11. EXECUTIVE COMPENSATION. The following table summarizes the compensation paid to the Chief Executive Officer and each of the four other most highly compensated executive officers of TNP and its subsidiaries (the "Named Executive Officers") for services rendered in all capacities to TNP and its subsidiaries during 1999, 1998 and 1997. -50- SUMMARY COMPENSATION TABLE
LTIP All Other Name & Principal Position Year Salary Bonus(1) Payouts(3) Compensation(3) - ------------------------- ---- ------ -------- ---------- --------------- Kevern R. Joyce, President and 1999 $391,146 $278,466 $304,714 $19,174 Chief Executive Officer 1998 370,525 340,822 418,151 25,367 1997 355,083 147,000 449,816 25,944 Jack V. Chambers, Senior Vice 1999 $233,294 $ 99,826 $175,666 $11,143 President 1998 223,819 129,092 249,893 14,347 1997 215,733 77,597 268,831 14,794 Manjit S. Cheema, Senior Vice 1999 $204,898 $ 94,413 $158,229 $10,246 President & Chief Financial 1998 195,239 118,488 213,756 12,775 Officer 1997 183,750 68,378 205,835 12,837 John P. Edwards, Senior Vice 1999 $207,633 $ 86,861 $158,229 $12,315 President 1998 199,202 111,476 187,634 16,352 1997 192,000 68,900 121,128 18,242 Ralph S. Johnson, Senior Vice 1999 $197,327 $ 85,091 $158,229 $10,927 President 1998 189,314 107,586 210,240 13,870 1997 182,333 68,212 197,110 13,153
________________________ (1) The 1999 amounts shown in this column are the following awards relating to 1999 and paid in 2000: (a) cash awards under the Management and Broad-Based Short-Term Incentive Plans; and (b) the second installment of an incentive and retention bonus. The Compensation Committee awarded the incentive and retention bonuses as additional compensation to reflect contributions during 1998 and prior years to the improvement in TNP's value to its shareholders. These incentive and retention bonuses are being paid in five equal annual installments; the first installment was paid in 1999. Subsequent installments are subject to the named officer being employed by TNP or TNMP on the scheduled date of the payment. See "Merger", below. The total amounts of the bonuses to be paid over the five year period are Mr. Joyce -$850,000; Mr. Chambers - $235,000; Mr. Cheema - $235,000; Mr. Edwards -$200,000; and Mr. Johnson - $200,000. (2) The 1999 amounts in this column are the value of shares issued and dividend equivalents paid in 2000 under the TNP Long-Term Incentive Compensation Plan for the 1997-1999 performance period. These amounts represent the value of the following numbers of shares, at $41.22 per share, the average of the high and low prices of TNP stock on December 31, 1999, and dividend equivalents of $3.26 per share: Mr. Joyce - 6,850; Mr. Chambers - 3,949; Mr. Cheema - 3,557; Mr. Edwards - 3,557; and Mr. Johnson - 3,557. This payout reflects TNP's performance under criteria established at the beginning of the performance period as follows: TNP's shareholder return relative to the S&P 500 was at 134.5% of the target; TNP's shareholder return relative to the S&P Electric Utility Index exceeded the maximum level of 150% of the target. This performance is also described in "Compensation Committee Report on Executive Compensation - Long Term Incentive Compensation." Awards for the 1999-2001 performance period are described below under "Long-Term Incentive Compensation." (3) The 1999 amounts in this column and the table below consist of the following items earned or paid in 1999: (a) company contributions to TNMP's 401(k) plan; (b) company contributions to the TNMP Deferred Compensation Plan, an unfunded benefit plan that allows eligible employees, including the Named Executive Officers, to defer receipt of salary and bonuses and receive matching Company contributions and interest credits, whenever and to the extent that Internal Revenue Code restrictions limit their participation in the 401(k) plan; (c) premiums for group life insurance paid by the Company (none of the Named Executive Officers has any cash value rights related to such insurance); and (d) the amounts shown for the 401(k) and Deferred Compensation Plans include incentive matching contributions for 1999 paid in 2000.
401(k) Plan Deferred Compensation Plan Life Insurance Premiums ----------- -------------------------- ----------------------- Mr. Joyce $6,468 $9,344 $2,982 Mr. Chambers 6,468 2,963 1,712 Mr. Cheema 6,212 2,070 1,964 Mr. Edwards 6,468 1,925 3,922 Mr. Johnson 6,468 1,509 2,950
-51- Long-Term Incentive Compensation The following table contains information about awards made in 1999 of long- term stock incentive opportunities made under the TNP Equity Incentive Plan to the Named Executive Officers for the 1999-2001 performance period. EQUITY INCENTIVE PLAN - LONG-TERM INCENTIVE AWARDS IN 1999
Estimated Payout at End of Period/(2)/ -------------------------------------------------------------- Performance Name Period until Payout Threshold Target/(1)/ Maximum --------------------------- ------------------------- ------------------- ----------------- --------------------- Kevern R. Joyce 1999-2001 3,270 shares 6,540 shares 12,900 shares Jack V. Chambers 1999-2001 1,385 shares 2,769 shares 5,538 shares Manjit S. Cheema 1999-2001 1,248 shares 2,495 shares 4,990 shares John P. Edwards 1999-2001 1,248 shares 2,495 shares 4,990 shares Ralph S. Johnson 1999-2001 1,248 shares 2,495 shares 4,990 shares
(1) The target number of shares was based on (i) the following percentages of the Named Executive Officers' respective base salary midpoints: Mr. Joyce - 70%; Messrs. Chambers, Cheema, Edwards and Johnson - 45%. and (ii) the average of the high and low prices of TNP common stock on the NYSE on January 4, 1999, $37 7/8. (2) The awards listed in the table relate to the performance period from January 1, 1999 through December 31, 2001. Payouts are scheduled to occur in early 2002 and will be based on the level of attainment of a performance goal measuring the total return during the performance period of TNP common stock relative to the Redwood Small Cap Utility Index. Payouts can range from 0% (if the minimum performance goal is not achieved) to 200% of the target number of shares. At payout, plan participants will receive the stock awards and dividend equivalents, paid in cash. Based on dividends paid in 1999 and assuming that the current quarterly dividend rate will remain in effect for the remainder of the performance period, plan participants would receive dividend equivalent payments of $3.48 per share of stock awarded at payout. See "Compensation Committee Report on Executive Compensation - Incentive Compensation." Pension Plan Effective October 1, 1997, TNMP amended its pension plan to change it to a cash balance retirement plan. As amended, the pension plan provides benefits based on an account balance rather than a formula-based benefit. Before that date, the pension plan was a noncontributory defined benefit plan. Employees who, as of October 1, 1997, were at least 50 years of age and had at least 10 years of service, can be "grandfathered" in the prior pension plan, and will receive benefits under the plan that provides the better retirement payments. The amended pension plan bases its benefits on an employee's account balance when he or she retires or leaves the company. An employee's initial account balance was based on his or her accrued pension benefits under the pre-amendment plan. The account balance will grow as TNMP adds benefit credits consisting of a percentage of compensation and interest credits based on one-year Treasury bill rates. All employees are eligible to participate in the pension plan. All Named Executive Officers will participate in the pension plan. The following table sets forth information concerning annual benefits payable upon normal retirement at age 65 to TNP and TNMP employees under the pre-amendment pension plan, and reflects the "grandfathered" benefit formula for individuals retiring in 1999 with the years of service indicated. PENSION PLAN TABLE
Years of Service --------------------------------------------------------------------- Remuneration/(1)/ 15 20 25 30 35 40 - ----------------------- --------- --------- ---------- ---------- ---------- ---------- $125,000 $ 27,519 $ 36,692 $ 45,865 $ 55,038 $ 64,219 $ 72,336 150,000 33,894 45,192 56,490 67,788 79,086 88,836 175,000 40,269 53,692 67,115 80,538 93,961 105,336 200,000 46,644 62,192 77,740 93,288 108,836 121,836 250,000 59,394 79,192 98,990 118,788 138,586 154,836 300,000 72,144 96,192 120,240 144,288 168,336 187,836 350,000 84,894 113,192 141,490 169,788 198,086 220,836 400,000 97,644 133,192 162,740 195,288 227,836 253,836 450,000 110,394 147,192 183,990 220,788 257,586 286,836 500,000 123,144 164,192 205,240 246,288 287,336 319,836
-52- (1) Benefits shown do not take into account limits under (S)415 of the Internal Revenue Code of 1986, as amended (the "Tax Code") or the $160,000 salary cap in effect after 1996, resulting from Tax Code (S)401(a)(17) limits. Consequently, a portion of the benefits would be paid from the Excess Benefit Plan (as defined below). Annual contributions to the pre-amendment pension plan are computed on an actuarial basis and cannot be calculated readily on a per person basis. Benefits for each eligible employee under the old formula are based on his or her years of service computed through the month of his or her retirement, multiplied by a specified percentage of his or her average monthly compensation for each full calendar year of service completed after 1992. TNMP made no contribution to the pension plan for 1999. Pension plan benefits are not subject to reduction for Social Security benefits, but are subject to reduction for retirement prior to age 62. Highly compensated employees whose pensions are subject to being reduced to an amount below what the pension plan otherwise would provide as a result of compliance with Tax Code (S)(S)415 and 401(a)(17), and whom the Board of Directors designate as eligible, may also participate in TNP's "Excess Benefit Plan." The Board has designated 24 active or retired employees as eligible to participate in the Excess Benefit Plan, including the Named Executive Officers and three retired employees now receiving excess benefit payments. Amounts paid as long-term incentive compensation pursuant to the TNP Equity Incentive Plan or other plans will be included in the remuneration base for pension and Excess Benefit Plan purposes. TNMP owns policies insuring the lives of the Excess Benefit Plan participants; policy proceeds are payable to TNMP to reimburse it for its payments to the retirees. As of December 31, 1999, the Named Executive Officers were credited with the years of service set forth in the following table. Executive pension benefits are computed actuarially.
Name Years of Credited Service ---- ------------------------- Kevern R. Joyce 18 years/(1)/ Jack V. Chambers 20 years, 11 months Manjit S. Cheema 5 years, 6 months John P. Edwards 22 years/(1)/ Ralph S. Johnson 21 years/(1)/
________________________ (1) TNMP has credited each of Messrs. Joyce, Edwards and Johnson with additional years of service, including years served with other employers prior to joining TNP and TNMP, for purposes of determining their retirement benefits under the TNMP Excess Benefit Plan. The credit for prior years service were required in order to retain the services of the Executives. Each who is employed by TNP or TNMP at age 65 will be credited with a total of 30 years of service; this number will be reduced by one year for each year that his retirement precedes age 65. Excess Benefit Plan benefits that each receives will be reduced by the amount of any retirement payments that he receives from the TNMP pension plan and from other employers. Any who retires before age 55 and five years of service will receive no benefits, unless there is a change in control of TNP or TNMP. If there is a change in control, the benefits to each will be fully vested and accrued as of either the date of the change in control or as of the date at which the executive would have been age 62, whichever date provides the greater benefit. Severance Agreements and Arrangements TNMP has entered into employment severance contracts with its officers and other key personnel. The principal purpose of these contracts is to encourage retention of management and other key personnel required for the orderly conduct of TNP's business during any threatened or pending acquisition of TNP or TNMP and during any ownership transition. Agreements between TNP and its officers under which TNP has made its incentive compensation plan awards also contain provisions relating to payment of incentive plan awards in the event the employee is terminated in connection with a change of control of TNP. The agreements between the Named Executive Officers and the Company provide that an officer will receive severance compensation if, following a change of control of TNP or TNMP, his employment is terminated or he suffers other adverse treatment. A change in control includes, among other things, certain substantial changes in the corporate structure, ownership, assets, existence, or Board of Directors of either entity. The Named Executive Officers' employment severance contracts provide for lump sum compensation payments equal to three times their current annual salaries and other rights. Their incentive plan award agreements provide for payment of long-term and short-term incentive awards at the target level. In addition to payments under these agreements, the Named Executive Officers, upon involuntary termination, would receive any remaining unpaid balance of the incentive and retention bonus awarded in early 1999. The TNMP officers' employment severance contracts have three-year terms; those of other key personnel have two-year terms. TNMP's Board of Directors periodically reviews the contracts and determines whether to extend them for an additional year, in effect returning them to their original three- or two-year term with each review. TNMP's Board of Directors, acting through its Compensation Committee, last reviewed the contracts in February 1998. The current contracts of the Named Executive Officers expire in February 2001. -53- The incentive plan award agreements are awarded annually and expire when the awards under the agreements are paid out. The agreements between TNMP and the Named Executive Officers have three-year terms. Merger In connection with the Merger, TNMP expects to enter into employment agreements with each of the Named Executive Officers. The acceptance of the employment agreements by Messrs. Joyce, Chambers, Cheema, and Larry W. Dillon, TNMP's Vice President - Power Resources, are conditions to the Merger. These employment agreements are expected to provide that the Named Executive Officer will continue to perform duties consistent with the Officer's current duties at a minimum level of compensation over the next three years consisting of: . An annual base salary and an annual bonus payable in a lump sum on each of the first, second and third anniversary of the new agreement, provided the Named Executive Officer is still employed by TNMP; . An annual incentive bonus ranging from 0% to 37.5% of the Named Executive Officer's base salary based on his attainment of certain pre-established financial and operational goals, and subject to employment through the end of the relevant year; and . An additional bonus equal to the shortfall from a minimum predetermined compensation including base salary, bonus and incentive bonus. The new employment agreements will supersede the employment severance agreements, the incentive compensation agreements, and the retention bonus payments. They will compensate the Named Executive Officers for forgoing payments to which they would otherwise be entitled under the employment severance and incentive compensation agreements as a result of the Merger. Similar agreements are also required to be accepted by six of eleven other officers. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires TNP's and TNMP's directors and executive officers to file reports of beneficial ownership and changes in ownership of TNP's equity securities with the Securities and Exchange Commission and the NYSE. All such reports were filed on time. Compensation Committee Report on Executive Compensation The Compensation Committee furnishes the following report on executive compensation for 1999. Compensation Philosophy and Strategy. The Committee believes that executives' compensation should be competitive with other companies in the electric utility industry, and that executives should be rewarded when TNP's operations and financial returns reflect above-average performance and continuing improvement in operations, customer satisfaction and shareholder value. The main components of executives' regular compensation are a base salary, annual incentive compensation and long-term incentive compensation. The compensation package enables TNP to meet the requirements of the competitive market in which it operates, while ensuring that the executives are compensated in a way that advances both the short-term and long-term interests of shareholders. Under this approach, a high proportion of these officers' compensation is "at risk," namely, the short-term and long-term incentive compensation. The Committee relates total compensation levels for TNP's executive officers to the total compensation paid to similarly situated executives of a peer group of companies, both within and outside of the electric utility industry, that are of a similar size and have performance characteristics similar to TNP. TNP has selected the executive compensation Peer Group under an outside consulting firm's counsel. Some of these companies are also included in the S&P Electric Company Index found under the caption "Performance Graph," below. Total compensation is targeted to approximate the median of the peer group. Because of the performance-oriented nature of the incentive programs, total compensation may exceed market norms when TNP exceeds its targeted performance goals, and lag the market when it does not. The Committee also reviews the Company's longer-term performance as compared to the average performance of the peer group, and, where appropriate, takes such relative performance into account in determining future compensation levels. Base Salary. The Committee determines salaries for all officers annually, based on the review of each executive's level of responsibility, experience, expertise, sustained corporate performance and, in the case of officers other than the Chief Executive Officer, upon the recommendation of the Chief Executive Officer. Based on competitive market data supplied by an independent consultant, executive salaries approximate the Peer Group median level. -54- Annual Incentive Compensation. Executive officers and key employees participate in the TNP Short-Term Incentive Compensation program and, along with all other full-time employees, the TNP Broad-Based Incentive Compensation Plan. They can receive annual cash incentive awards under both plans if certain specified objectives are met. Awards for 1999 under both plans were paid in early 2000, and were based on: . financial measures of cash value added and excess earnings under the TNMP transition plan; . operational performance measures of customer satisfaction, system reliability and safety, and other measures of individual and departmental performance. These measures were weighted depending upon the executive officer's area of responsibility. The operational performance measures of system reliability and safety exceeded the maximum goals for the year. Customer satisfaction measures were slightly below the target goal. The financial measures were both below the minimum goal. The Compensation Committee elected, however, to award Short-Term Incentive Compensation and Broad-Based Incentive Compensation at the minimum level because of the strong performance of the operating measures, and because unanticipated, acquisition-related transactions were significant factors in the failure of the Company to meet the minimum financial goals. In 1999, a portion of TNP's matching contribution to its 401(k) retirement plan for employees was based on the same financial performance measures used in the Short-Term and Broad-Based Incentive Compensation Plans. Although the cash value added and excess earnings per share goals fell short of the minimum goal for any payment, the Committee decided to make the matching contributions to the 401(k) retirement plans at the minimum level, for the reasons described in the preceding paragraph. Accordingly, TNP made an incentive matching contribution to the 401(k) accounts of eligible participants, including executive officers, equal to approximately 33.3% of the total amount that TNP matched during 1999 as part of its regular employee benefits. Long-Term Incentive Compensation. Long-term incentive compensation awards are granted for a three-year performance period. Awards are expressed as a percentage of the individual's salary range midpoint and, if earned, are paid in TNP stock at the end of the period. At the beginning of the period, the Committee approves a payout schedule based on prescribed financial performance. Performance targets for the 1999 - 2001 performance cycle are a total shareholder return that exceeds the 62.5th percentile of the Redwood Small Cap Utility Index. If the target level is reached, payout will equal 100% of the amount granted at the beginning of the period. Performance above or below pays more or less than the target amount, based on the schedule. The maximum amount payable is 200% of the amount granted, and the minimum is 0%. Award recipients do not receive any portion of an award related to the objective unless the minimum threshold for the objective has been achieved. Recipients also receive dividend equivalents, payable in cash, for the stock that they earn. The payout for awards made for the 1997-1999 performance period occurred in January 2000. The strong shareholder return relative to the S&P 500 and S&P Electric Company Indices during that period resulted in a payout of 142.3% of target. Special Incentive and Retention Bonus. In early 1999 the Compensation Committee voted to award a special incentive and retention bonus to officers and certain key employees as additional compensation to reflect their contributions to the improvement in TNP's value to its shareholders during 1998 and previous years. For the officers named in the Executive Compensation Table elsewhere in this report, the bonus consists of five equal annual installments, the first two of which were paid in January 1999 and January 2000. The remaining installments are expected to be replaced with new compensation arrangements in connection with the Merger. If the Merger does not occur, the payment of the remaining installments is subject to such officers' continuing employment by TNP at the anniversary date of the Compensation Committee's vote to award the special bonus. An officer would receive the unpaid balance of the bonus if he or she were terminated after a change in control of the company. The amount of such bonuses was calculated based on competitive market data supplied by an independent consultant. Compensation of Chairman and Chief Executive Officer. Mr. Joyce participates in the same executive compensation plans that cover the other executive officers, determined according to the same compensation philosophy and principles. Each year, Mr. Joyce and the Board of Directors agree on a set of personal and strategic company objectives. The Committee reviews Mr. Joyce's performance against those objectives at year end. The review includes a detailed analysis of the short- and long-term financial results as well as progress towards TNP's strategic objectives. The Committee oversees this review and makes appropriate adjustments to Mr. Joyce's compensation. The Committee, with the participation of most outside directors, determined that the results for 1999 were outstanding. The Committee increased Mr. Joyce's base salary from $375,000 to $395,000, effective March 1, 1999. In setting Mr. Joyce's salary, the Committee, with the participation of all outside directors, determined that critical goals were achieved and that the results for TNP for the preceding year were outstanding. For 1999, Mr. Joyce's short-term incentive award was, like other participants in the Short-Term Incentive Plan, paid at the minimum level. He was awarded a short-term incentive compensation bonus of $96,614 and received $11,852 under the all-employee plan. -55- In January 2000, Mr. Joyce received a payout of 6,850 shares of TNP common stock and dividend equivalents of $22,365 under the long-term incentive plan for the 1997-1999 long-term incentive performance period. This payout reflected strong TNP shareholder return relative to the S&P 500 and the S&P Electric Company Indices, and was at 142.3% of the target payout for that period. In January 1999, Mr. Joyce received $170,000 as the first of five annual installments of the special incentive and retention bonus awarded by the Compensation Committee, relating to his performance in 1998 and previous years; he received a second installment for the same amount in January 2000. The total amount of the bonus awarded is $850,000. Internal Revenue Code (S)162(m). Internal Revenue Code Section 162(m) limits tax deductions for executive compensation to $1 million. There are several exemptions to Section 162(m), including one for qualified performance-based compensation. To be qualified, performance-based compensation must meet various requirements, including shareholder approval. The Committee's policy with respect to the deductibility limit of Section 162(m) generally is to preserve the federal income tax deductibility of compensation paid when it is appropriate and is in the best interests of TNP and its shareholders. However, the Committee reserves the right to authorize the payment of nondeductible compensation if it deems that is appropriate. Compensation Committee John A. Fanning Sidney M. Gutierrez J. R. Holland, Jr. Harris L. Kempner, Jr. Dennis H. Withers The Compensation Committee Report on Executive Compensation and the performance graph that follows will not be deemed incorporated by reference by any general statement incorporating this report by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that TNP specifically incorporates the information by reference. -56- Five Year Comparison of Cumulative Total Return The graph below shows TNP's performance relative to the S&P Electric Company Index and the S&P 500 Index. The graph spans TNP's last five years, assumes that $100 is invested at the close of trading on December 31, 1994, and is calculated assuming quarterly reinvestment of dividends. [PERFORMANCE GRAPH]
- -------------------------------------------------------------------------------- 1994 1995 1996 1997 1998 1999 - -------------------------------------------------------------------------------- TNP Enterprises, Inc. 100 132 201 254 300 337 S&P 500 Index 100 138 169 226 290 351 S&P Electric Index 100 131 131 165 191 154 - --------------------------------------------------------------------------------
-57- Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information regarding the beneficial ownership of TNP's common stock as of February 1, 2000, for (i) each director, (ii) the Named Executive Officers, (iii) all directors and officers of TNP and TNMP as a group, and (iv) persons known to management to beneficially own more than 5% of TNP's common stock. Except as otherwise noted, each named individual or family member has sole voting and investment power with respect to such shares. Amount and Nature Percent of ----------------- ---------- Name of Beneficial Owner of Beneficial Ownership Class ------------------------ ----------------------- ----- R. Denny Alexander 3,125 * John A. Fanning 3,025 * Sidney M. Gutierrez 2,787 * J. R. Holland, Jr. 2,100 * Kevern R. Joyce 26,829 * Harris L. Kempner, Jr. 3,025(1) * Carol D. Surles 2,100 * Larry G. Wheeler 1,088 * Dennis H. Withers 3,125 * Jack V. Chambers 34,949 * Manjit S. Cheema 14,845(2) * John P. Edwards 8,817 * Ralph S. Johnson 17,474 * All directors and officers as a group (25 persons) 205,542 1.5% The Vanguard Group/(3)/ 1,437,321 10.7% First Union Corporation/(4)/ 775,356 5.8% Taunus Corporation/(5)/ 979,400 7.3% _______ ________________________ *Less than 1%. (1) Includes 200 shares that Mr. Kempner's wife owns, beneficial ownership of which Mr. Kempner disclaims. (2) Includes 1,463 shares held by Mr. Cheema's wife, beneficial ownership of which he disclaims. (3) This amount is as of February 1, 2000. The address of The Vanguard Group is 14321 North Northsight Blvd., Scottsdale, AZ 85260. The Vanguard Group holds all shares included in the table as trustee of the TNMP 401(k) plan. (4) The address of First Union Corporation is One First Union Center, Charlotte, North Carolina 28288-0137. First Union is the parent holding company of Evergreen Asset Management Corporation, Lieber & Company, Evergreen Asset Management Company and First Union National Bank. Evergreen Asset Management Corporation, Lieber & Company and Evergreen Investment Management Company are investment advisors for mutual funds and other clients. First Union National Bank holds securities in a fiduciary capacity for its respective customers. First Union Corporation or its subsidiaries have sole voting power with respect to 764,656 shares, shared voting power with respect to 10,000 shares, sole dispositive power with respect to 763,456 shares, and shared dispositive power with respect to 11,000 shares. The information included in the table and in this note is derived from a report on Schedule 13G dated February 14, 2000 filed with the Securities and Exchange Commission. (5) The address of Taunus Corporation is 31 West 52nd Street, New York, NY 10019. Taunus is the parent holding company of Deutsche Bank Securities, Inc. ("DBSI"). DBSI and Taunus each have sole voting and dispositive power with respect to 824,000 shares, and Taunus Corporation has sole voting power over an additional 73,000 shares and sole dispositive power over an additional 155,400 shares. Bankers Trust Company and DB Alex. Brown LLC are indirect wholly owned subsidiaries of Taunus. Omitted from the ownership structure are certain intermediate and/or indirect holding companies of Taunus which do not exercise voting or investment discretion with respect to these shares. The information included in the table and in this note is derived from a joint report on Schedule 13G dated February 11, 2000, filed with the Securities and Exchange Commission. -58- Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. None. 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................................... 22 TNP --- Consolidated Statements of Income, Three Years Ended December 31, 1999...... 24 Consolidated Statements of Cash Flows, Three Years Ended December 31, 1999.. 25 Consolidated Balance Sheets, December 31, 1999, and 1998.................... 26 Consolidated Statements of Capitalization, December 31, 1999, and 1998...... 27 Consolidated Statements of Common Shareholders' Equity, Three Years Ended December 31, 1999.................................................... 28 TNMP ---- Consolidated Statements of Income, Three Years Ended December 31, 1999...... 29 Consolidated Statements of Cash Flows, Three Years Ended December 31, 1999.. 30 Consolidated Balance Sheets, December 31, 1999, and 1998.................... 31 Consolidated Statements of Capitalization, December 31, 1999, and 1998...... 32 Consolidated Statements of Common Shareholder's Equity, Three Years Ended December 31, 1999.................................................... 33 Notes to Consolidated Financial Statements.................................. 34 Selected Quarterly Consolidated Financial Data - TNP........................ 48
(b) Report 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 date August 10, 1999, to disclose an amendment to the Merger Agreement and provide documentation related to financing agreements for the Merger. (c) The Exhibit Index on pages 61 - 64 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. -59- 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: February 25, 2000 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 2/25/00 ------------------------------------ ------- Kevern R. Joyce By \s\ Manjit S. Cheema Senior Vice President & Chief Financial Officer 2/25/00 ------------------------------------ ------- Manjit S. Cheema of TNMP and TNP By \s\ Michael J. Ricketts Controller of TNMP & TNP 2/25/00 ------------------------------------ ------- Michael J. Ricketts By \s\ R. Denny Alexander Director 2/25/00 ------------------------------------ ------- R. Denny Alexander By \s\ John A. Fanning Director 2/25/00 ------------------------------------ ------- John A. Fanning By \s\ Sidney M. Gutierrez Director 2/25/00 ------------------------------------ ------- Sidney M. Gutierrez By \s\ J. R. Holland, Jr. Director 2/25/00 ------------------------------------ ------- J. R. Holland, Jr. By \s\ Harris L. Kempner, Jr. Director 2/25/00 ------------------------------------ ------- Harris L. Kempner, Jr. By \s\ Dr. Carol D. Smith Surles Director 2/25/00 ------------------------------------ ------- Dr. Carol D. Smith Surles By \s\ Larry G. Wheeler Director 2/25/00 ------------------------------------ ------- Larry G. Wheeler By \s\ Dennis H. Withers Director 2/25/00 ------------------------------------ ------- Dennis H. Withers
-60- Exhibit No. Description - ------ ----------- 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. 2(a) Agreement and Plan of Merger, dated May 24, 1999, by and among SW Acquisition, L.P., ST Acquisition Corp. and TNP (Ex. 2, TNP Form 8-K filed June 7, 1999). 2(b) First Amendment to Agreement and Plan of Merger, by and among SW Acquisition, L.P., ST Acquisition Corp. and TNP, dated Aug. 9, 1999 (Ex. 99.10, TNP Form 8-K filed Aug. 10, 1999). 3(a) Articles of Incorporation and Amendments through March 6, 1984 (Ex. 3(a), TNP 1984 Form S-14, File No. 2-89800). 3(b) Amendment to Articles of Incorporation filed Sept. 25, 1984 (Ex. 3(b), TNP 1984 Form 10-K). 3(c) Amendment to Articles of Incorporation filed Aug. 29, 1985 (Ex. 3(a), TNP 1985 Form 10-K). 3(d) Amendment to Articles of Incorporation filed June 2, 1986 (Ex. 3(a), TNP 1986 Form 10-K). 3(e) Amendment to Articles of Incorporation filed May 10, 1988 (Ex. 3(e), TNP 1988 Form 10-K). 3(f) Amendment to Articles of Incorporation filed May 10, 1988 (Ex. 3(f), TNP 1988 Form 10-K). 3(g) Amendment to Articles of Incorporation filed Dec. 27, 1988 (Ex. 3(g), TNP 1988 Form 10-K). 3(h) Bylaws, as amended (Ex. 3(h), TNP 1994 Form 10-K). 4(x) Amended and Restated Rights Agreement between TNP Enterprises, Inc. and Bank of New York, as Rights Agent, dated Aug. 11, 1998and Form of Right Certificate, effective Aug. 11, 1998 (Ex. 10, TNP Form 8-K filed Oct. 9, 1998). 4(y) Amendment No. 1, dated May 24, 1999, to the Amended and Restated Rights Agreement between TNP Enterprises, Inc. and Bank of New York. (Ex. 4.2, TNP Form 8-A/A filed June 7, 1999). *23 Independent Public Accountants' Consent - Arthur Andersen LLP. *27 Financial Data Schedule for TNP. 99(a) General Partner Subscription Agreement for SW Acquisition, L.P. (Ex. 99.01, TNP Form 8-K filed Aug. 10, 1999) 99(b) Subscription Agreement for SW Acquisition, L.P. (Ex. 99.02, TNP Form 8-K filed Aug. 10, 1999) 99(c) Bridge Loan Commitment Letter from CIBC World Markets Corp. and The Chase Manhattan Bank to SW Acquisition, L.P., dated May 24, 1999. (Ex. 99.03, TNP Form 8-K filed Aug. 10, 1999) 99(d) Amendment to Bridge Loan Commitment Letter from CIBC World Markets Corp. and The Chase Manhattan Bank to SW Acquisition, L.P., dated July 9, 1999. (Ex. 99.04, TNP Form 8-K filed Aug. 10, 1999) 99(e) Bridge Preferred Commitment Letter from CIBC World Markets Corp., The Chase Manhattan Bank, Continental Casualty Company and Laurel Hill Capital Partners LLC to SW Acquisition, L.P., dated May 24, 1999. (Ex. 99.05, TNP Form 8-K filed Aug. 10, 1999) 99(f) Senior Secured Credit Facilities Commitment Letter from Canadian Imperial Bank of Commerce, CIBC World Markets Corp., The Chase Manhattan Bank and Chase Securities Inc. to SW Acquisition Corp., dated May 24, 1999. (Ex. 99.06, TNP Form 8-K filed Aug. 10, 1999) 99(g) First Amendment to Senior Secured Credit Facilities Commitment Letter from Canadian Imperial Bank of Commerce, CIBC World Markets Corp., The Chase Manhattan Bank and Chase Securities Inc. to SW Acquisition Corp., dated July 13, 1999. (Ex. 99.07, TNP Form 8-K filed Aug. 10, 1999) 99(h) Second Amendment to Senior Backstop Credit Facility Commitment Letter from Canadian Imperial Bank of Commerce, CIBC World Markets Corp., The Chase Manhattan Bank and Chase Securities Inc. to SW Acquisition Corp., dated July 21, 1999. (Ex. 99.08, TNP Form 8-K filed Aug. 10, 1999). 99(i) Senior Backstop Credit Facility Commitment Letter from Canadian Imperial Bank of Commerce, CIBC World Markets Corp., The Chase Manhattan Bank and Chase Securities Inc. to SW Acquisition Corp., dated May 24, 1999 (Ex. 99.09, TNP Form 8-K filed Aug. 10, 1999). TNMP incorporates the following Exhibits by reference to the Exhibits and filings noted in parenthesis. 3(i) Restated Articles of Incorporation. (Ex. 3(i), TNMP 1996 10-K, File No. 2-97230) 3(ii) Bylaws, as amended Nov. 15, 1994 (Ex. 3(hh), TNMP 1994 Form 10-K). *27 Financial Data Schedule for TNMP. TNP and TNMP incorporate the following Exhibits by reference to the Exhibits and filings noted in parenthesis.
-61-
4(a) Indenture of Mortgage and Deed of Trust dated Nov. 1, 1944 (Ex. 2(d), Community Public Service Co. ("CPS") 1978 Form S-7, File No. 2-61323). 4(b) Seventh Supplemental Indenture dated May 1, 1963 (Ex. 2(k), CPS Form S-7, File No. 2-61323). 4(c) Eighth Supplemental Indenture dated July 1, 1963 (Ex. 2(1), CPS Form S-7, File No. 2-61323). 4(d) Ninth Supplemental Indenture dated Aug. 1, 1965 (Ex. 2(m), CPS Form S-7, File No. 2-61323). 4(e) Tenth Supplemental Indenture dated May 1, 1966 (Ex. 2(n), CPS Form S-7, File No. 2-61323). 4(f) Eleventh Supplemental Indenture dated Oct. 1, 1969 (Ex. 2(o), CPS Form S-7, File No. 2-61323). 4(g) Twelfth Supplemental Indenture dated May 1, 1971 (Ex. 2(p), CPS Form S-7, File No. 2-61323). 4(h) Thirteenth Supplemental Indenture dated July 1, 1974 (Ex. 2(q), CPS Form S-7, File No. 2-61323). 4(i) Fourteenth Supplemental Indenture dated March 1, 1975 (Ex. 2(r), CPS Form S-7, File No. 2-61323). 4(j) Fifteenth Supplemental Indenture dated Sept. 1, 1976 (Ex. 2(e), File No. 2-57034). 4(k) Sixteenth Supplemental Indenture dated as of Nov. 1, 1981 (Ex. 4(x), File No. 2-74332). 4(l) Seventeenth Supplemental Indenture dated Dec. 1, 1982 (Ex. 4(cc), File No. 2-80407). 4(m) Eighteenth Supplemental Indenture dated Sept. 1, 1983 (Ex. (a), TNMP Form 10-Q, quarter ended Sept. 30, 1983). 4(n) Nineteenth Supplemental Indenture dated May 1, 1985 (Ex. 4(v), TNMP Form 10-Q, quarter ended June 30, 1985). 4(o) Twentieth Supplemental Indenture dated July 1, 1987 (Ex. 4(o), TNMP 1987 Form 10-K). 4(p) Twenty-First Supplemental Indenture dated July 1, 1989 (Ex. 4(p), TNMP Form 10-Q, quarter ended June 30, 1989). 4(q) Twenty-Second Supplemental Indenture dated Jan. 15, 1992 (Ex. 4(q), TNMP 1991 Form 10-K). 4(r) Twenty-Third Supplemental Indenture dated Sept. 15, 1993 (Ex. 4(r), TNMP 1993 Form 10-K). 4(s) Twenty-Fourth Supplemental Indenture dated Nov. 3, 1995 (Ex. 4(s), TNMP 1993 Form 10-K). 4(t) Twenty-Fifth Supplemental Indenture dated Sept. 10, 1996 (Ex. 4(t), TNMP Form 10-Q, quarter ended Sept. 30, 1996). 4(u) Twenty-Sixth Supplemental Indenture dated Jan. 1, 1999. (Ex. 4(u), TNMP 1998 Form 10-K). 4(v) Indenture and Security Agreement for 10 3/4% Secured Debentures dated Sep. 15, 1993 (Ex. 4(t), TNMP 1993 Form 10-K). 4(w) Indenture dated Jan. 1, 1999 between TNMP and the Chase Bank of Texas, N. A. (Ex. 4(w), TNMP 1998 Form 10-K). 4(x) First Supplemental Indenture dated Jan. 1, 1999 to Indenture dated Jan. 1, 1999 between TNMP and the Chase Bank of Texas, N. A. (Ex. 4(x), TNMP 1998 Form 10-K). Contracts Relating to TNP One 10(a) Fuel Supply Agreement, dated Nov. 18, 1987, between Phillips Coal Company and TNMP (Ex. 10(j), TNMP 1987 Form 10-K). 10(a)1 Amendment No. 1, dated April 1, 1988, to Fuel Supply Agreement dated Nov. 18, 1987, between Phillips Coal Company and TNMP (Ex. 10(a)1, TNP and TNMP 1994 Form 10-K). 10(a)2 Amendment No. 2, dated Nov. 29, 1994, between Walnut Creek Mining Company and TNMP, to Fuel Supply Agreement dated Nov. 18, 1987, between Phillips Coal Company and TNMP, (Ex. 10(a)2, TNP and TNMP 1994 Form 10-K). 10(b) Unit 1 First Amended and Restated Project Loan and Credit Agreement, dated Jan. 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"), (Ex. 10(c), TNMP 1991 Form 10-K). 10(b)1 Participation Agreement, dated Jan. 8, 1992, among certain banks, Participants, and the Unit 1 Agent (Ex. 10(c)1, TNMP 1991 Form 10-K). 10(b)2 Amendment No. 1, dated Sep. 21, 1993, to the Unit 1 Credit Agreement (Ex. 10(b)2, TNMP 1993 Form 10-K ). 10(c) Assignment and Security Agreement, dated Jan. 8, 1992, among TGC and the Unit 1 Agent (Ex. 10(d), TNMP 1991 Form 10-K). 10(d) Amended and Restated Subordination Agreement, dated Oct. 1, 1988, among TNMP, Continental Illinois National Bank and Trust Company of Chicago and the Unit 1 Agent (Ex. 10(uu), TNMP 1988 Form 10-K). 10(e) Unit 1 Mortgage and Deed of Trust, dated Dec. 1, 1987 (Ex. 10(ee), TNMP 1987 Form 10-K). 10(e)1 Supplemental Unit 1 Mortgage and Deed of Trust executed on Jan. 27, 1992, (Ex. 10(g)4, TNMP 1991 Form 10-K). 10(e)2 First TGC Modification and Extension Agreement, dated Jan. 24, 1992, among the Unit 1 Banks, the Unit 1 Agent, TNMP, and TGC (Ex. 10(g)1, TNMP 1991 Form 10-K). 10(e)3 Second TGC Modification and Extension Agreement, dated Jan. 27, 1992, among the Unit 1 Banks, the Unit 1 Agent, TNMP, and TGC (Ex. 10(g)2, TNMP 1991 Form 10-K). 10(e)4 Third TGC Modification and Extension Agreement, dated Jan. 27, 1992, among the Unit 1 Banks, the Unit 1 Agent, TNMP, and TGC (Ex. 10(g)3, TNMP 1991 Form 10-K). 10(e)5 Fourth TGC Modification and Extension Agreement, dated Sept. 29, 1993, among the Unit 1 Banks, the Unit 1 Agent, TNMP, and TGC (Ex. 10(f)5, TNMP 1993 Form 10-K).
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10(e)6 Fifth TGC Modification and Extension Agreement, dated Sept. 29, 1993, among the Unit 1 Banks, the Unit 1 Agent, TNMP, and TGC (Ex. 10(f)6, TNMP 1993 Form 10-K). 10(f) Indemnity Agreement dated Dec. 1, 1987 by Westinghouse, GE and Zachry (Ex. 10(ff) TNMP 1987 Form 10-K). 10(g) Unit 1 Second Lien Mortgage and Deed of Trust dated Dec. 1, 1987 (Ex. 10(jj), TNMP 1987 Form 10-K). 10(g)1 Correction Second Lien Mortgage and Deed of Trust, dated Dec. 1, 1987 (Ex. 10(vv), TNMP 1988 Form 10-K). 10(g)2 Second Lien Mortgage and Deed of Trust Modification, Extension and Amendment Agreement, dated Jan. 8, 1992 (Ex. 10(i)2, TNMP 1991 Form 10-K). 10(g)3 TNMP Second Lien Mortgage Modification No. 2, dated Sept. 21, 1993 (Ex. 10(h)3, TNMP 1993 Form 10-K). 10(h) Agreement for Conveyance and Partial Release of Liens, dated Dec. 1, 1987, by PFC and the Unit 1 Agent (Ex. 10(kk), TNMP 1987 Form 10-K). 10(i) Inducement and Consent Agreement, dated June 15, 1988, among Phillips Coal Company, Kiewit Texas Mining Company, TNMP, Phillips Petroleum Company, and Peter Kiewit Son's, Inc. (Ex. 10(nn) TNMP 1988 Form 10-K). 10(j) Assumption Agreement, dated Oct. 1, 1988, by TGC, in favor of certain banks, the Unit 1 Agent, and the Depositary, as defined therein (Ex. 10(ww), TNMP 1988 Form 10-K). 10(k) Guaranty dated Oct. 1, 1988, by TNMP of TGC obligations under Unit 1 Credit Agreement (Ex. 10(xx), TNMP 1988 Form 10-K of TNMP). 10(l) First Amended and Restated Facility Purchase Agreement dated Jan. 8, 1992, between TNMP and TGC (Ex. 10(n), TNMP 1991 Form 10-K). 10(m) Operating Agreement dated Oct. 1, 1988, between TNMP and TGC (Ex. 10(zz), TNMP 1988 Form 10-K). 10(n) Unit 2 First Amended and Restated Project Loan and Credit Agreement, dated Jan. 8, 1992 (the "Unit 2 Credit Agreement"), among TNMP, TGC II, certain banks (the "Unit 2 Banks") and The Chase Manhattan Bank, N.A., as Agent for the Unit 2 Banks (the "Unit 2 Agent") (Ex. 10(q), TNMP 1991 Form 10-K). 10(n)1 Amendment No. 1, dated Sep. 21, 1993, the Unit 2 Credit Agreement (Ex. 10(o)1, TNMP 1993 Form 10-K). 10(o) Assignment and Security Agreement, dated Jan. 8, 1992, among TGC II and the Unit 2 Agent (Ex. 10(r), TNMP 1991 Form 10-K). 10(p) Assignment and Security Agreement dated Oct. 1, 1988, by TNMP to the Unit 2 Agent (Ex. 10(jjj), TNMP 1988 Form 10-K). 10(q) Subordination Agreement, dated Oct. 1, 1988, among TNMP, Continental Illinois National Bank and Trust Company of Chicago, and the Unit 2 Agent (Ex. 10(mmm), TNMP 1988 Form 10-K). 10(r) Unit 2 Mortgage and Deed of Trust dated Oct. 1, 1988 (Ex. 10(uuu), TNMP 1988 Form 10-K). 10(r)1 First TGC II Modification and Extension Agreement, dated Jan. 24, 1992, among the Unit 2 Banks, the Unit 2 Agent, TNMP, and TGC II (Ex. 10(u)1, TNMP 1991 Form 10-K). 10(r)2 Second TGC II Modification and Extension Agreement, dated Jan. 27, 1992, among the Unit 2 Banks, the Unit 2 Agent, TNMP and TGC II (Ex. 10(u)2, TNMP 1991 Form 10-K). 10(r)3 Third TGC II Modification and Extension Agreement, dated Jan. 27, 1992, among the Unit 2 Banks, the Unit 2 Agent, TNMP, and TGC II (Ex. 10(u)3, TNMP 1991 Form 10-K). 10(r)4 Fourth TGC II Modification and Extension Agreement, dated Sept. 29, 1993, among the Unit 2 Banks, the Unit 2 Agent, TNMP, and TGC II (Ex. 10(s)4, TNMP 1993 Form 10-K). 10(r)5 Fifth TGC II Modification and Extension Agreement, dated June 15, 1994, among the Unit 2 Banks, the Unit 2 Agent, TNMP, and TGC II (Ex. 10(s)5, TNMP Form 10-Q for quarter ended June 30, 1994). 10(s) Release and Waiver of Liens and Indemnity Agreement, dated Oct. 1, 1988, by Westinghouse, CE, and Zachry (Ex. 10(vvv), TNMP 1988 Form 10-K). 10(t) Second Lien Mortgage and Deed of Trust, dated Oct. 1, 1988, (Ex. 10(www), TNMP 1988 Form 10-K). 10(t)1 Second Lien Mortgage and Deed of Trust Modification, Extension and Amendment Agreement, dated Jan. 8, 1992, (Ex. 10(w)1, TNMP 1991 Form 10-K). 10(t)2 TNMP Second Lien Mortgage Modification No. 2, dated Sep. 21, 1993, (Ex. 10(u)2, TNMP 1993 Form 10-K). 10(u) Intercreditor and Nondisturbance Agreement, dated Oct. 1, 1988, among PFC, Texas PFC, Inc., TNMP, certain creditors and the Collateral Agent, each as defined therein (Ex. 10(xxx), TNMP 1988 Form 10-K). 10(u)1 Amendment No. 1, dated Jan. 8, 1992, to Intercreditor and Nondisturbance Agreement, (Ex. 10(x)1, TNMP 1991 Form 10-K). 10(u)2 Amendment No. 2, dated Sept. 21, 1993, to Intercreditor and Nondisturbance Agreement, (Ex. 10(v)2, TNMP 1993 Form 10-K). 10(v) Grant of Reciprocal Easements and Declaration of Covenants Running with the Land, dated Oct. 1, 1988, between PFC and Texas PFC, Inc. (Ex. 10(yyy), TNMP 1988 Form 10-K).
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10(w) Non-Partition Agreement, dated May 30, 1990, among TNMP, TGC, and the Unit 1 Agent (Ex. 10(ss), TNMP 1990 Form 10-K of TNMP). 10(x) Assumption Agreement, dated May 31, 1991, by TGC II in favor of certain banks, the Unit 2 Agent, and the Depositary, as defined therein (Ex. 10(kkk), Amendment No. 1 to File No. 33-41903). 10(y) Guaranty, dated May 31, 1991, by TNMP, for TGC II obligations under the Unit 2 Credit Agreement (Ex. 10(lll), Amendment No. 1 to File No. 33-41903). 10(z) First Amended and Restated Facility Purchase Agreement dated Jan. 8, 1992, between TNMP, and TGC II (Ex. 10(dd), TNMP 1991 Form 10-K). 10(z)1 Amendment No. 1 to the Unit 2 First Amended and Restated Facility Purchase Agreement, dated Sept. 21, 1993, between TNMP and TGC II (Ex. 10(aa)1, TNMP 1993 Form 10-K). 10(aa) Operating Agreement, dated May 31, 1991, between TNMP and TGC II (Ex. 10(nnn), Amendment No. 1 to File No. 33-41903). 10(bb) Non-Partition Agreement, dated May 31, 1991, among TNMP, TGC II, and the Unit 2 Agent (Ex. 10(ppp), Amendment No. 1 to File No. 33-41903). Power Supply Contracts 10(dd) Contract dated May 12, 1976, between TNMP and Houston Lighting & Power Company (Ex. 5(a), TNMP 1976 Form 10-K). 10(dd)1 Amendment, dated Jan. 4, 1989, to contract between TNMP and Houston Lighting & Power Company (Ex. 10(cccc), TNMP 1988 Form 10-K). 10(ee) Amended and Restated Agreement for Electric Service dated May 14, 1990, between TNMP and Texas Utilities Electric Company (Ex. 10(vv), TNMP 1990 Form 10-K). 10(ee)1 Amendment dated April 19, 1993 to Amended and Restated Agreement for Electric Service between TNMP and Texas Utilities Electric Company (Ex. 10(ii)1, 1993 Form S-2, Registration Statement, File No. 33-66232). 10(ee)2 Letter agreement dated Nov. 24, 1997 between TNMP and Texas Utilities Electric Company (Ex. 10(qq), TNMP 1998 Form 10-K). 10(ff) Contract dated April 27, 1977, between TNMP and West Texas Utilities Company, as amended (Ex. 10(e), Form 8 applicable to TNMP 1986 Form 10-K). 10(gg) Contract dated April 29, 1987, between TNMP and El Paso Electric Company (Ex. 10(f), Form 8 applicable to TNMP 1986 Form 10-K). 10(hh) Contract dated Dec. 8, 1981, between TNMP and SPS as amended (Ex. 10(h), Form 8 applicable to TNMP 1986 Form 10-K). 10(hh)1 Amendment, dated Dec. 12, 1988, to contract between TNMP and SPS (Ex. 10(llll), TNMP 1988 Form 10-K). 10(hh)2 Amendment, dated Dec. 12, 1990, to contract between TNMP and SPS (Ex. 19(t), TNMP 1990 Form 10-K). 10(ii) Interconnection Agreement between TNMP and Plains Electric Generation and Transmission Cooperative, Inc. dated July 19, 1984 (Ex. 10(j), Form 8 applicable to TNMP 1986 Form 10-K). 10(jj) Interchange Agreement between TNMP and El Paso Electric Company dated April 29, 1987 (Ex. 10(l), Form 8 applicable to TNMP 1986 Form 10-K). 10(kk) Amendment No. 1, dated Nov. 21, 1994, to Interchange Agreement between TNMP and El Paso Electric Company (Ex. 10(nn)1, TNP and TNMP 1994 Form 10-K). 10(ll) DC Terminal Participation Agreement between TNMP and El Paso Electric Company dated Dec. 8, 1981 as amended (Ex. 10(m), Form 8 applicable to TNMP 1986 Form 10-K). 10(mm) Agreement for Purchase and Sale of Energy effective May 1, 1996 among TNMP, Amoco Chemical Company and Amoco Oil Company (Ex. 10 (pp), TNP and TNMP 1997 Form 10-K). 10(nn) Agreement dated Dec. 30, 1994 between TNMP and Union Carbide Corporation for Purchase of Capacity and Energy from UCC (Ex. 10(qq), TNP and TNMP 1997 Form 10-K). Management Contracts 10(rr) Form of TNMP Executive Agreement for Severance Compensation Upon Change in Control and schedule of substantially identical agreements (Ex. 10(rr), TNP and TNMP 1998 Form 10-K). 10(ss) Agreement dated March 25, 1994 between Kevern Joyce and TNP and TNMP (Ex. 10(tt), TNP and TNMP 1994 Form 10-K.) 10(tt) Amendment dated Feb. 16, 1998 to Agreement dated March 25, 1994 between Kevern Joyce and TNP and TNMP (Ex. 10(rr), TNP and TNMP Form 10-K for 1998.) 10(uu) Agreement dated Feb. 16, 1998 between John Edwards and TNMP (Ex. 10(rr), TNP and TNMP 1998 Form 10-K) 10(vv) Agreement dated Feb. 16, 1998 between Ralph S. Johnson and TNMP (Ex. 10(rr), TNP and TNMP 1998 Form 10-K). *21 Subsidiaries of the Registrants.
-64- EX-21 2 SUBSIDIARIES OF THE REGISTRANTS SUBSIDIARIES OF THE REGISTRANTS Exhibit 21 ------------------------------- ---------- 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 EX-23 3 CONSENT OF ARTHUR ANDERSEN LLP TNP ENTERPRISES, INC. AND SUBSIDIARIES Exhibit 23 -------------------------------------- Consent of Independent Public Accountants ----------------------------------------- The Board of Directors TNP Enterprises, Inc.: As independent public accountants, we hereby consent to the incorporation by reference 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). It should be noted that we have not audited any financial statements of the company subsequent to December 31, 1999 or performed any audit procedures subsequent to the date of our report. Arthur Andersen LLP Fort Worth, Texas February 16, 2000 EX-27.(A) 4 ARTICLE UT FINANCIAL DATA SCHEDULE FOR TNP
UT 0000741612 TNP ENTERPRISES 12-MOS DEC-31-1999 DEC-31-1999 PER-BOOK 907,978 4,243 28,188 60,790 0 1,001,199 196,685 0 130,425 327,110 0 1,664 340,244 0 0 0 100,000 0 0 0 232,181 1,001,199 576,150 19,120 482,638 501,758 74,392 (482) 73,910 43,743 30,167 (19) 30,186 15,537 38,538 74,557 2.25 2.24
EX-27.(B) 5 ARTICLE UT FINANCIAL DATA SCHEDULE FOR TNMP
UT 0000022767 TEXAS-NEW MEXICO POWER COMPANY 12-MOS DEC-31-1999 DEC-31-1999 PER-BOOK 907,954 213 15,418 60,810 0 984,395 107 222,149 90,302 312,558 0 1,664 340,244 0 0 0 100,000 0 0 0 229,929 984,395 576,093 20,799 474,944 495,743 80,350 2,217 82,567 43,124 39,443 (19) 39,462 29,000 37,919 76,840 0 0
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