-----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, WnSKAZlKq+Ehz0dNU4Gtuar0ijO0oDJ91D520Fyn08Yf75JGbuvfSWVHG2U0tmkR yVTitDrQ9GE6URBFKKT6LA== 0000930661-99-002560.txt : 19991115 0000930661-99-002560.hdr.sgml : 19991115 ACCESSION NUMBER: 0000930661-99-002560 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TNP ENTERPRISES INC CENTRAL INDEX KEY: 0000741612 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 751907501 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08847 FILM NUMBER: 99746805 BUSINESS ADDRESS: STREET 1: 4100 INTERNATIONAL PLZ STREET 2: PO BOX 2943 CITY: FORT WORTH STATE: TX ZIP: 76113 BUSINESS PHONE: 8177310099 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEXAS NEW MEXICO POWER CO CENTRAL INDEX KEY: 0000022767 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 750204070 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 002-97230 FILM NUMBER: 99746806 BUSINESS ADDRESS: STREET 1: 4100 INTERNATIONAL PLZ STREET 2: PO BOX 2943 CITY: FORT WORTH STATE: TX ZIP: 76113 BUSINESS PHONE: 8177310099 MAIL ADDRESS: STREET 1: 4100 INTERNATIONAL PLAZA STREET 2: PO BOX 2943 CITY: FORT WORTH STATE: TX ZIP: 76113 FORMER COMPANY: FORMER CONFORMED NAME: COMMUNITY PUBLIC SERVICE CO DATE OF NAME CHANGE: 19810617 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (Mark One) (X) COMBINED QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 ------------------ or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----- ----- - -------------------------------------------------------------------------------- Commission File Number: 1-8847 TNP ENTERPRISES, INC. ----------------------- (Exact name of registrant as specified in its charter) Texas 75-1907501 --------------- -------------------------------------- (State of incorporation) (I.R.S. employer identification number) 4100 International Plaza, P. O. Box 2943, Fort Worth, Texas 76113 ----------------------------------------------------------------- (Address and zip code of principal executive offices) Registrant's telephone number, including area code 817-731-0099 ------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes \X\ No \ \ TNP Enterprises, Inc. had 13,416,566 shares of common stock outstanding as of November 5, 1999. - -------------------------------------------------------------------------------- Commission File Number: 2-97230 TEXAS-NEW MEXICO POWER COMPANY ---------------------------------- (Exact name of registrant as specified in its charter) Texas 75-0204070 ----- --------------------------------------- (State of incorporation) (I.R.S. employer identification number) 4100 International Plaza, P. O. Box 2943, Fort Worth, Texas 76113 ----------------------------------------------------------------- (Address and zip code of principal executive offices) Registrant's telephone number, including area code 817-731-0099 ------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes \X\ No \ \ TNP Enterprises, Inc. holds all 10,705 outstanding common shares of Texas-New Mexico Power Company. TNP Enterprises, Inc. And Subsidiaries Texas-New Mexico Power Company and Subsidiaries Combined Quarterly Report on Form 10-Q for the period ended September 30, 1999 This Combined Quarterly Report on Form 10-Q is filed separately by TNP Enterprises, Inc., and Texas-New Mexico Power Company. Texas-New Mexico Power Company makes no representation as to information relating to TNP Enterprises, Inc., except as it may relate to Texas-New Mexico Power Company, or to any other affiliate or subsidiary of TNP Enterprises, Inc. TABLE OF CONTENTS PART I. FINANCIAL INFORMATION ------------------------------ Item 1. Financial Statements. TNP Enterprises, Inc. (TNP) and Subsidiaries: Consolidated Statements of Income Three and Nine Month Periods Ended September 30, 1999, and 1998 3 Consolidated Statements of Cash Flows Nine Month Periods Ended September 30, 1999, and 1998 4 Consolidated Balance Sheets September 30, 1999, and December 31, 1998 5 Texas-New Mexico Power Company (TNMP) and Subsidiaries: Consolidated Statements of Income Three and Nine Month Periods Ended September 30, 1999, and 1998 6 Consolidated Statements of Cash Flows Nine Month Periods Ended September 30, 1999, and 1998 7 Consolidated Balance Sheets September 30, 1999, and December 31, 1998 8 Notes to Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 14 PART II. OTHER INFORMATION --------------------------- Item 1. Legal Proceedings. 21 Item 4. Submission of Matters to a Vote of Securities Holders. 21 Item 6. Exhibits and Reports on Form 8-K. 21 (a) Exhibit Index 21 (b) Reports on Form 8-K 21 Statement Regarding Forward Looking Information 21 Signature page 21 -2-
TNP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ---------------------- 1999 1998 1999 1998 -------- -------- ------- -------- (In thousands except per share amounts) OPERATING REVENUES $190,570 $188,566 $452,722 $456,603 --------- -------- -------- -------- OPERATING EXPENSES: Purchased power and fuel 92,081 103,674 216,435 245,057 Other operating and maintenance 27,959 22,869 80,392 68,738 Depreciation 9,688 9,540 29,175 28,416 Charge for recovery of stranded plant (Note 3) 17,264 (584) 22,917 577 Taxes other than income taxes 9,627 10,913 25,912 27,489 Income taxes 8,340 9,078 15,613 15,657 --------- -------- -------- -------- Total operating expenses 164,959 155,490 390,444 385,934 --------- -------- -------- -------- NET OPERATING INCOME 25,611 33,076 62,278 70,669 --------- -------- -------- -------- OTHER INCOME: Other income and deductions, net 428 434 1,367 902 Income taxes (2) 407 296 462 --------- -------- -------- -------- Other income, net of taxes 426 841 1,663 1,364 --------- -------- -------- -------- INCOME BEFORE INTEREST CHARGES 26,037 33,917 63,941 72,033 --------- -------- -------- -------- INTEREST CHARGES: Interest on long-term debt 9,298 11,835 29,210 36,875 Other interest and amortization of debt-related costs 1,692 1,192 4,149 3,306 --------- -------- -------- -------- Total interest charges 10,990 13,027 33,359 40,181 --------- -------- -------- -------- INCOME FROM CONTINUING OPERATIONS 15,047 20,890 30,582 31,852 Loss from discontinued nonregulated operations (Note 4) - 2,329 - 9,432 --------- -------- -------- -------- NET INCOME 15,047 18,561 30,582 22,420 Dividends on preferred stock and other 25 38 (33) 114 --------- -------- -------- -------- INCOME APPLICABLE TO COMMON STOCK $ 15,022 $ 18,523 $ 30,615 $ 22,306 ========= ======== ======== ======== EARNINGS PER SHARE OF COMMON STOCK Earnings from continuing operations $1.12 $1.58 $2.29 $2.40 Loss from discontinued nonregulated operations - (0.18) - (0.71) --------- -------- -------- -------- EARNINGS PER SHARE $1.12 $1.40 $2.29 $1.69 ========= ======== ======== ======== DIVIDENDS PER SHARE OF COMMON STOCK $0.29 $0.27 $0.87 $0.81 ========= ======== ======== ======== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 13,416 13,263 13,387 13,231 ========= ======== ======== ======== The accompanying notes are an integral part of these consolidated financial statements.
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TNP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30 ---------------------------- 1999 1998 -------- -------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from customers $ 412,894 $ 467,232 Purchased power (195,179) (210,270) Fuel costs paid (25,963) (26,953) Cash paid for payroll and to other suppliers (68,362) (89,771) Interest paid, net of amounts capitalized (31,126) (42,232) Income taxes refunded (paid) 414 (3,000) Other taxes paid (28,047) (28,032) Other operating cash receipts and payments, net 99 1,002 --------- --------- NET CASH FROM OPERATING ACTIVITIES 64,730 67,976 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to utility plant (31,285) (27,324) Additions to other property and nonregulated investments - (554) Withdrawals from (deposits to) escrow account 1,952 - --------- --------- NET CASH USED IN INVESTING ACTIVITIES (29,333) (27,878) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid on preferred and common stocks (11,729) (10,841) Common stock issuances 4,168 4,647 Borrowings from (repayments to) revolving credit facilities - net (62,000) (38,000) Issuances: Senior notes, net of discount 174,164 - Deferred expenses associated with financings (1,580) - Redemptions: Preferred stock, net of gain (1,100) - Secured debentures (130,000) First mortgage bonds - (100) Other long-term debt - (104) --------- --------- NET CASH USED IN FINANCING ACTIVITIES (28,077) (44,398) --------- --------- NET CHANGE IN CASH AND CASH EQUIVALENTS 7,320 (4,300) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,216 15,877 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,536 $ 11,577 ========= ========= RECONCILIATION OF NET INCOME TO NET CASH FROM OPERATING ACTIVITIES: Net income $ 30,582 $ 22,420 Adjustments to reconcile net income to net cash from operating activities: Depreciation 29,175 28,416 Charge for recovery of stranded plant 22,917 577 Amortization of debt-related costs and other deferred charges 4,115 2,749 Allowance for funds used during construction (735) (99) Deferred income taxes (3,486) 4,525 Investment tax credits 4,688 (133) Deferred fuel costs (18,838) 765 Cash flows impacted by changes in current assets and liabilities: Accounts payable 1,573 11,453 Accrued interest (1,603) (4,669) Accrued taxes 12,110 2,711 Reserve for customer refund (10,723) 9,982 Changes in other current assets and liabilities 2,838 (10,798) Other, net (7,883) 77 --------- --------- NET CASH FROM OPERATING ACTIVITIES $ 64,730 $ 67,976 ========= ========= The accompanying notes are an integral part of these consolidated financial statements.
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TNP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 1999 December 31, (Unaudited) 1998 ------------------ ------------ (In thousands) ASSETS - ------ UTILITY PLANT: Electric plant $1,275,321 $1,260,147 Construction work in progress 6,760 6,294 ---------- ---------- Total 1,282,081 1,266,441 Less accumulated depreciation 356,103 343,562 ---------- ---------- Net utility plant 925,978 922,879 ---------- ---------- OTHER PROPERTY AND INVESTMENTS, at cost 9,006 10,384 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents 19,536 12,216 Accounts receivable 3,224 5,955 Inventories, at lower of average cost or market: Fuel 608 677 Materials and supplies 3,767 4,567 Accumulated deferred income taxes 1,100 2,235 Other current assets 2,008 4,403 ---------- ---------- Total current assets 30,243 30,053 ---------- ---------- REGULATORY TAX ASSETS 1,757 - DEFERRED FUEL COSTS 20,514 1,676 DEFERRED CHARGES 32,754 28,773 ---------- ---------- $1,020,252 $ 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 $ 196,686 $ 192,518 Retained earnings 134,745 115,776 ---------- ---------- Total common shareholders' equity 331,431 308,294 Preferred stock 1,844 3,060 Long-term debt, less current maturities 341,222 459,000 ---------- ---------- Total capitalization 674,497 770,354 ---------- ---------- CURRENT LIABILITIES: Current maturities of long-term debt 100,000 - Accounts payable 29,584 28,011 Accrued interest 3,417 5,020 Accrued taxes 26,400 14,290 Customers' deposits 3,900 3,609 Reserve for customer refunds 248 10,971 Other current liabilities 21,754 25,202 ---------- ---------- Total current liabilities 185,303 87,103 ---------- ---------- REGULATORY TAX LIABILITIES - 957 ACCUMULATED DEFERRED INCOME TAXES 96,769 97,346 ACCUMULATED DEFERRED INVESTMENT TAX CREDITS 25,050 20,916 DEFERRED CREDITS (Note 3) 38,633 17,089 COMMITMENTS AND CONTINGENCIES (Note 6) ---------- ---------- $1,020,252 $ 993,765 ========== ========== The accompanying notes are an integral part of these consolidated financial statements.
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TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of TNP Enterprises, Inc.) CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ----------------------- 1999 1998 1999 1998 (In thousands) OPERATING REVENUES $190,554 $188,553 $452,678 $456,569 -------- -------- -------- -------- OPERATING EXPENSES: Purchased power and fuel 92,081 103,674 216,435 245,057 Other operating and maintenance 25,386 21,871 74,730 65,679 Depreciation 9,688 9,540 29,175 28,416 Charge for recovery of stranded plant (Note 3) 17,264 (584) 22,917 577 Taxes other than income taxes 9,498 10,812 25,549 27,934 Income taxes 9,620 9,676 18,204 16,622 -------- -------- -------- -------- Total operating expenses 163,537 154,989 387,010 384,285 -------- -------- -------- -------- NET OPERATING INCOME 27,017 33,564 65,668 72,284 -------- -------- -------- -------- OTHER INCOME: Other income and deductions, net 352 397 1,451 566 Income taxes (2) 407 230 535 -------- -------- -------- -------- Other income, net of taxes 350 804 1,681 1,101 -------- -------- -------- -------- INCOME BEFORE INTEREST CHARGES 27,367 34,368 67,349 73,385 -------- -------- -------- -------- INTEREST CHARGES: Interest on long-term debt 9,107 11,835 28,622 36,875 Other interest and amortization of debt-related costs 1,692 1,192 4,149 3,306 -------- -------- -------- -------- Total interest charges 10,799 13,027 32,771 40,181 -------- -------- -------- -------- NET INCOME 16,568 21,341 34,578 33,204 Dividends on preferred stock and other 25 38 (33) 114 -------- -------- -------- -------- INCOME APPLICABLE TO COMMON STOCK $ 16,543 $ 21,303 $ 34,611 $ 33,090 ======== ======== ======== ======== The accompanying notes are an integral part of these consolidated financial statements.
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TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of TNP Enterprises, Inc.) CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30 ------------------------- 1999 1998 ------------------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from customers $ 409,929 $ 448,945 Purchased power (195,179) (210,270) Fuel costs paid (25,963) (26,953) Cash paid for payroll and to other suppliers (55,775) (53,959) Interest paid, net of amounts capitalized (30,556) (42,222) Income taxes refunded (paid) (9,535) 1,039 Other taxes paid (27,484) (28,452) Other operating cash receipts and payments, net (5) 611 --------- --------- NET CASH FROM OPERATING ACTIVITIES 65,432 88,739 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to utility plant (31,104) (27,221) Withdrawal from (deposits to) escrow account 1,903 - --------- --------- CASH FLOWS USED IN INVESTING ACTIVITIES (29,201) (27,221) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid on preferred and common stocks (25,082) (17,296) Borrowings from (repayments to) revolving credit facilities - net (53,000) (38,000) Issuances: Senior notes, net of discount 174,164 - Deferred expenses associated with financings (1,580) - Redemptions: Preferred stock, net of gain (1,100) - Secured debentures (130,000) First mortgage bonds - (100) --------- --------- NET CASH USED IN FINANCING ACTIVITIES (36,598) (55,396) --------- --------- NET CHANGE IN CASH AND CASH EQUIVALENTS (367) 6,122 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,977 2,772 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,610 $ 8,894 ========= ========= RECONCILIATION OF NET INCOME TO NET CASH FROM OPERATING ACTIVITIES: Net income $ 34,578 $ 33,204 Adjustments to reconcile net income to net cash from operating activities: Depreciation of utility plant 29,175 28,416 Charge for recovery of stranded plant 22,917 577 Amortization of debt-related costs and other deferred charges 4,115 2,749 Allowance for funds used during construction (735) (99) Deferred income taxes (1,199) 8,282 Investment tax credits 4,632 (224) Deferred fuel costs (18,838) 765 Cash flows impacted by changes in current assets and liabilities: Accounts payable 2,346 12,902 Accrued interest (1,621) (4,669) Accrued taxes 4,375 8,044 Reserve for customer refund (10,723) 9,982 Changes in other current assets and liabilities 6,123 (1,215) Other, net (9,713) (9,975) --------- --------- NET CASH FROM OPERATING ACTIVITIES $ 65,432 $ 88,739 ========= ========= The accompanying notes are an integral part of these consolidated financial statements.
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TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of TNP Enterprises, Inc.) CONSOLIDATED BALANCE SHEETS September 30, 1999 December 31, (Unaudited) 1998 ------------------ ------------ (In thousands) ASSETS - ------ UTILITY PLANT: Electric plant $1,275,297 $1,260,099 Construction work in progress 6,761 6,294 ---------- ---------- Total 1,282,058 1,266,393 Less accumulated depreciation 356,103 343,562 ---------- ---------- Net utility plant 925,955 922,831 ---------- ---------- OTHER PROPERTY AND INVESTMENTS, at cost 213 2,116 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents 7,610 7,977 Accounts receivable 413 923 Inventories, at lower of average cost or market: Fuel 608 677 Materials and supplies 3,767 4,567 Other current assets 1,653 4,093 ---------- ---------- Total current assets 14,051 18,237 ---------- ---------- REGULATORY TAX ASSETS 1,757 - DEFERRED FUEL COSTS 20,514 1,676 DEFERRED CHARGES 32,755 28,706 ---------- ---------- $ 995,245 $ 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 89,451 79,840 ---------- ---------- Total common shareholder's equity 311,707 302,096 Redeemable cumulative preferred stock 1,844 3,060 Long-term debt, less current maturities 341,223 450,000 ---------- ---------- Total capitalization 654,774 755,156 ---------- ---------- CURRENT LIABILITIES: Current maturities of long-term debt 100,000 - Accounts payable 29,234 26,888 Accrued interest 3,383 5,004 Accrued taxes 24,824 20,449 Customers' deposits 3,899 3,609 Accumulated deferred income taxes 802 649 Reserve for customer refunds 248 10,971 Other current liabilities 19,090 17,076 ---------- ---------- Total current liabilities 181,480 84,646 ---------- ---------- REGULATORY TAX LIABILITIES - 957 ACCUMULATED DEFERRED INCOME TAXES 96,154 93,378 ACCUMULATED DEFERRED INVESTMENT TAX CREDITS 25,050 22,729 DEFERRED CREDITS (Note 3) 37,787 16,700 COMMITMENTS AND CONTINGENCIES (Note 6) ---------- ---------- $ 995,245 $ 973,566 ========== ========== The accompanying notes are an integral part of these consolidated financial statements.
-8- TNP Enterprises Inc. and Subsidiaries (TNP) Texas-New Mexico Power Company and Subsidiaries (TNMP) Notes to Consolidated Financial Statements Note 1. Interim Financial Statements The interim consolidated financial statements of TNP and subsidiaries, and TNMP and subsidiaries, are unaudited and contain all adjustments (consisting primarily of normal recurring accruals) necessary for a fair statement of the results for the interim periods presented. Results for interim periods are not necessarily indicative of results to be expected for a full year or for previously reported periods due in part to seasonal revenue fluctuations. It is suggested that these consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto included in TNP's and TNMP's 1998 Combined Annual Report on Form 10-K. Prior period statements have been reclassified in order to be consistent with current period presentation. The reclassification had no effect on net income or common shareholders equity. Note 2. Acquisition TNP, SW Acquisition, L.P. (SW), a limited partnership organized and existing under the laws of Texas, and ST Acquisition Corp. (ST Corp.), a Texas corporation wholly owned by SW, have entered into an Agreement and Plan of Merger, dated as of May 24, 1999 (the Merger Agreement), which provides for a merger of TNP with and into ST Corp., with TNP being the surviving corporation (the Merger). Under the terms of the Merger Agreement, which TNP's board of directors unanimously approved, 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, subject to dissenting shareholders' rights under the Texas Business Corporation Act. The Merger will convert TNP from a listed public corporation to a privately owned corporation. TNP expects the Merger to close early in 2000. The Merger Agreement is subject to financing, and requires various approvals. To date, approvals have been obtained from TNP's shareholders, the Federal Trade Commission (FTC), and the Federal Energy Regulatory Commission (FERC). Approvals are still pending before the state regulators in Texas and New Mexico. 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. Federal Trade Commission (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 Public Utility Commission of Texas (PUCT) seeking a determination that the Merger is consistent with the public interest. The PUCT is considering TNMP's application. The staff of the PUCT filed testimony on October 22, 1999. A hearing before the PUCT held November 2, 1999, was recessed until November 12, 1999, to allow parties additional time to work toward a settlement in the case. On November 10, 1999, TNMP and the staff of the PUCT agreed to a settlement that resolves all issues between the two parties. The remaining parties will indicate their positions before hearings on the matter resume on November 12, 1999. TNMP expects the PUCT to issue its final decision early in 2000. New Mexico. Also on July 15, TNMP filed an application with the New Mexico Public Regulation Commission (NMPRC) seeking to obtain all approvals and authorizations necessary to consummate the Merger, 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. TNMP anticipates receiving an order from the NMPRC prior to the end of the year. -9- Note 3. Regulatory Matters Texas New Legislation. On September 1, 1999, new legislation that establishes competition in the Texas electric utility industry went into effect. The new legislation will implement retail competition for customers in most areas of Texas on January 1, 2002. Among other provisions, the new legislation: . Freezes base rates through December 31, 2001, based on the levels in effect on September 1, 1999 adjusted for changes in the fixed fuel factor which passes through fuel and purchased power energy costs to customers. . Allows a utility to recover 100% of its verifiable stranded costs via several methods, including: . Redirection of depreciation - 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, 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 the net book value of generation assets. . 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 competition transition charge approved by the PUCT. . Assessment of a competition transition charge - After the freeze period (January 1, 1999 through December 31, 2001), stranded costs that have not been recovered by one of the methods above will be recovered through a competition transition charge levied upon all retail customers within a utility's geographical certificated service area as it existed on May 1, 1999. . Establishes four alternatives for quantifying the final amount of stranded costs to be used in establishing the competition transition charge, and provides a framework for reconciling estimated stranded costs to the actual stranded costs quantified using those methods. 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 which is 6% lower than the rate in effect on January 1, 1999, adjusted to reflect a fuel factor that the PUCT shall determine as of December 31, 2001. Prior to the new legislation, TNMP had been operating under a transition-to-competition plan (Transition Plan) approved by the PUCT in 1998. The Transition Plan provides that it will be modified to conform to any legislation enacting competition in the electric utility industry. On October 6, 1999, TNMP filed a Conformed Stipulation with the PUCT. 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 new legislation. The PUCT is considering TNMP's Conformed Stipulation in concert with its consideration of a contest to TNMP's Earnings Report. Details of that proceeding are discussed below in the section titled "Earnings Monitoring Report". TNP's and TNMP's consolidated financial statements reflect the application of SFAS 71, "Accounting for the Effects of Certain Types of Regulation," which provides for recognition of the economic effects of rate regulation. The passage of the new legislation raises the issue of whether SFAS 71 should continue to be applied to the generation/power supply portion of TNMP's Texas business. EITF 97-4, "Deregulation of the Pricing of Electricity - Issues Related to the Application of SFAS Statements No. 71 and 101," states that application of SFAS 71 should stop "when deregulatory legislation is passed or when a rate order (whichever is necessary to effect the change in the jurisdiction) that contains sufficient detail for the enterprise to reasonably determine how the transition plan will affect the separable portion of its business whose pricing is being deregulated is issued." While the new legislation provides the framework as to how competition will be implemented, it delegates significant authority to the PUCT to resolve uncertainties regarding implementation of competition. As a result of this situation, and with the uncertainty regarding conforming the Transition Plan to the new legislation, currently TNMP cannot reasonably determine how the new legislation will affect the generation/power supply portion of its Texas business. Therefore, TNMP will continue to apply SFAS 71 to that portion of -10- its business until a reasonable determination of the impact of the new legislation can be made. TNMP is participating in a series of workshops sponsored by the PUCT that are designed to address numerous unresolved issues surrounding the implementation of competition. Management has calculated excess earnings for the three months ended September 30, 1999, based on the provisions of the new legislation. The calculation resulted in a reduction to third quarter pre-tax operating income of $17.3 million ($0.80 per share). For the nine months ended September 30, 1999, excess earnings reduced pre-tax operating income by $22.9 million ($1.06 per share). The amounts previously recorded in the first quarter for stranded cost recovery under the Transition Plan have been reclassified, and along with the excess earnings, are displayed in the income statement under the caption "Charge for recovery of stranded plant" and included in the balance sheet as a regulatory liability under the caption "Deferred Credits". Earnings Monitoring Report. On May 17, 1999, TNMP filed its Electric Investor-Owned Utilities Earnings Report (Earnings Report) with the PUCT. Simultaneously, TNMP filed an Addendum to the Earnings Report (Addendum) detailing TNMP's calculation of excess earnings under the Transition Plan for the twelve months ended December 31, 1998. The Addendum showed that TNMP had not earned in excess of the 11.25% return on equity cap established in the Transition Plan. 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. In addition, the ORA proposed to use the Earnings Report contest as a means for conforming the Transition Plan to the new legislation. The PUCT hearing examiner assigned to the Earnings Report agreed, and is considering both issues in one docket. The ORA is the only party contesting TNMP's calculation of excess earnings. TNMP and ORA met to discuss ORA's issues regarding the Earnings Report on October 14, 1999. 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. TNMP expects to continue discussions with ORA toward resolution of this matter. ORA and other parties are involved in determining how to conform the Transition Plan to the new legislation. The parties met on October 14, 1999. Thus far, the parties have been unable to resolve their differences concerning the interaction between the new legislation and the Transition Plan. 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 business activities from those that will be subject to competition, and guarantees recovery of at least 50% of a utility's stranded costs over a five-year period. TNMP's Community Choice transition plan 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 in New Mexico from $3.4 million as of December 31, 1998, to $2.1 million as of September 30, 1999. 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. Community Choice provided for the filing of a rate case by TNMP on June 1, 1999. Notwithstanding the termination of Community Choice, TNMP and the NMPRC Staff agreed that TNMP would file information that would allow the Staff to review the reasonableness of TNMP's rates. Settlement talks between the parties began, with the intent of reaching a settlement without the necessity of filing a rate case. The parties have reached a settlement that resolves the issues between the parties, and are preparing to submit the settlement to the NMPRC for approval. The settlement calls for a decrease in TNMP's base rates of $1.8 million, or 6%, effective October 1, 1999. TNMP expects the NMPRC to act on the proposed settlement during the fourth quarter of 1999. Note 4. Discontinued Nonregulated Operations As discussed in TNP's and TNMP's 1998 Combined Annual Report on Form 10-K, management discontinued the remaining operations of Facility Works Inc. (FWI), TNP's wholly owned unregulated subsidiary, in late 1998. All losses incurred by FWI during 1998 have been reclassified as losses from discontinued operations. -11- Note 5. Segment and Related Information In TNP's and TNMP's 1998 Combined Annual Report on Form 10-K, TNP reported two segments, TNMP, which provides regulated electric service in Texas and New Mexico, and FWI, which before operations were discontinued provided integrated mechanical, electrical, plumbing and other maintenance and repair services to commercial customers in Texas metropolitan areas. The operations of TNMP have been separated into two segments, Texas and New Mexico. TNP manages the segments separately to respond to the differing operational and regulatory climates in the two states. The following tables present information about profits, losses and assets of TNP's reportable segments (in thousands). In the tables below, "Total assets" for Texas and New Mexico includes only net utility plant. All other assets are included in All Other and Eliminations.
Three Months Ended Nine Months Ended ---------------------- ---------------------- September 30, September 30, ---------------------- ---------------------- 1999 1998 1999 1998 ----------- --------- ----------- --------- Texas - ------ Operating revenues $ 169,708 $ 164,166 $ 390,853 $ 391,660 Net income 16,247 19,389 30,880 28,666 Total assets at September 30, 1999 and December 31, 1998 839,916 839,771 839,916 839,771 New Mexico - ----------- Operating revenues $ 20,846 $ 24,387 $ 61,825 $ 64,909 Net income 321 1,952 3,698 4,538 Total assets at September 30, 1999 and December 31, 1998 86,039 82,623 86,039 82,623 All Other and Eliminations - --------------------------- Operating revenues $ 16 $ 13 $ 44 $ 34 Net loss (1,522) (2,780) (3,996) (10,784) Total assets at September 30, 1999 and December 31, 1998 94,297 71,371 94,297 71,371 Consolidated - ------------- Operating revenues $ 190,570 $ 188,566 $ 452,722 $ 456,603 Net income 15,046 18,561 30,582 22,420 Total assets at September 30, 1999 and December 31, 1998 1,020,252 993,765 1,020,252 993,765
-12- Note 6. Commitments and Contingencies Legal Proceedings Clear Lake. TNMP and Clear Lake Limited Partnership ("Clear Lake") agreed in March 1999 to settle the lawsuit styled Clear Lake Cogeneration Limited Partnership vs. Texas-New Mexico Power Company, pending in the 234th District Court of Harris County, Texas, and the parallel proceeding pending before the PUCT. 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 agreed to pay Clear Lake $8 million, subject to PUCT approval of the settlement. The PUCT order approving the settlement ensures that TNMP's customers will realize the savings associated with the revised purchased power contract between TNMP and Clear Lake. The order also requires TNMP to defer recognition of the $8 million payment that TNMP made to Clear Lake in September 1999 as part of the settlement, and include amortization of the payment in its calculation of excess earnings over the life of the revised purchased power contract. 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 damages are awarded in this matter. Discovery has not sufficiently progressed to quantify any damages to Phillips electrical equipment; however, Phillips has previously reported to the SEC that it incurred costs of approximately $2.0 million in this interruption. In May 1999, TNMP filed a Third Party Petition naming Sweeny Cogeneration Limited Partnership, the operator of cogeneration and related facilities at the Phillips refinery, as a defendant. TNMP has previously charged to earnings the deductible amount of its insurance coverage, $500,000. Other. TNMP is involved in various claims and other legal proceedings arising in the ordinary course of business. In the opinion of management, the ultimate dispositions of these matters will not have a material adverse effect on TNMP's and TNP's consolidated financial position or results of operations. -13- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A). The following discussion should be read in conjunction with the related interim consolidated financial statements and notes. Results of Operations As discussed in Note 3, new legislation that establishes competition in the Texas electric utility industry became law in the second quarter of 1999. The new legislation includes a number of provisions that management believes supercede provisions of the Transition Plan. The impact of those provisions on TNMP's financial results will be noted as necessary in the following discussion. Overall Results TNP had income applicable to common stock of $15.0 million for the quarter ended September 30, 1999 (current quarter) as compared to income of $18.5 million for the quarter ended September 30, 1998. Earnings for the third quarter of 1998 included the loss on FWI's discontinued operations. Excluding that unusual item, earnings for the third quarter of 1998 were $20.9 million. TNP had income applicable to common stock of $30.6 million for the nine months ended September 30, 1999 (year-to-date), as compared to $22.3 million for the nine months ended September 30, 1998. Excluding the unusual item noted above and a one time charge for Transition Plan implementation ($3.1 million), earnings for the nine months ended September 30, 1998, were $34.9 million. Since the operations of TNMP (the principal subsidiary) currently represent most of TNP's operations, the following discussion focuses on TNMP's operations unless noted otherwise. Under the new legislation, TNMP's earnings on its Texas operations are capped at a 10.53% return on rate base. TNMP will apply Texas earnings in excess of the cap to recover stranded plant. Based on the provisions of the new legislation, TNMP recorded pre-tax excess earnings of $17.3 million ($0.80 per share) for the three months ended September 30, 1999. In the third quarter of 1998, TNMP recorded negative excess earnings, based on the Transition Plan, of $0.8 million ($0.06 per share) due to resolution of a billing matter. Excess earnings for the nine months ended September 30, 1999 were $22.9 million ($1.06 per share) based on the new legislation. For the corresponding 1998 period, TNMP recorded excess earnings of $1.2 million ($.05 per share) under the Transition Plan. The $1.2 million was applied equally between additional depreciation and provision for rate refund, according to PUCT guidelines. The portion of 1998 excess earnings applied to additional depreciation has been reclassified as "Charge for recovery of stranded plant". TNMP's income applicable to common stock was $16.5 million for the quarter ended September 30, 1999, as compared to $21.3 million for the quarter ended September 30, 1998. For the nine months ended September 30, TNMP's income applicable to common stock was $34.6 million in 1999 as compared to $33.1 million in 1998. Excluding the effect of the 1998 Transition Plan costs discussed earlier, earnings for the third quarter of 1998 were $36.2 million. The changes in TNMP's earnings for the quarter and the year-to-date are attributable to the factors listed below (in millions):
Three Months Nine Months Ended Ended 9/30/99 9/30/99 -------- ------ New Mexico stranded cost adjustment (Note 3) $ - $ 1.3 Other changes in base revenues (6.8) (10.1) Non-pass through purchased power and fuel expenses 20.4 32.0 Transmission expenses (1.4) (6.5) Charge for recovery of stranded plant (17.8) (22.3) Interest 2.2 7.4 All other (including income tax effects on the items above) (1.4) (3.4) -------- ------ Earnings decrease excluding one-time items (4.8) (1.6) One-time Transition Plan costs (including tax effects) - 3.1 -------- ------ Earnings increase (decrease) including one-time items $ (4.8) $ 1.5 ======== ======
-14- Operating Revenues The components of TNMP's base revenues are summarized in the following tables (in thousands).
Three Months Ended September 30, Nine Months Ended September 30, --------------------------------- -------------------------------- Increase Increase 1999 1998 (Decrease) 1999 1998 (Decrease) --------- --------- ----------- --------- --------- ---------- Operating revenues $ 190,554 $ 188,553 $ 2,001 $ 452,678 $ 456,569 $ (3,891) Pass-through expenses 69,735 60,917 8,818 152,008 148,667 3,341 -------- -------- ------ -------- -------- ------- Base revenues $ 120,819 $ 127,636 $ (6,817) $ 300,670 $ 307,902 $ (7,232) ======== ======== ======= ======== ======== =======
Pass-through expenses in Texas include fuel and the energy-related portion of purchased power. In New Mexico, the composition of pass-through expenses changed on July 1, 1999, as described in Note 3. Details of pass-through expenses are discussed under "Results of Operations -- Operating Expenses." The following table summarizes the components of the changes in base revenues for the three and nine months ended September 30, 1999 compared to the same periods in 1998 (in thousands).
Base revenues ------------- Weather related $ (1,726) $ (3,101) Customer growth 2,004 4,439 New Mexico purchased power recovery effects from termination of Community Choice (5,255) (2,318) Industrial - firm rate sales (710) (2,658) Clear Lake standby revenue (818) (2,453) Other (312) (4,017) ------- -------- Other changes in base revenues (6,817) (10,108) New Mexico stranded cost adjustment - 1,314 ------- -------- Base revenues increase (decrease) before one-time items (6,817) (8,794) One-time Transition Plan refund - 1,562 ------- -------- Base revenues increase (decrease) $ (6,817) $ (7,232) ======= ========
Base revenues decreased $6.8 million in the current quarter due the absence of standby revenue payments resulting from the Clear Lake settlement and the reclassification of revenues received for the recovery of purchased power costs in New Mexico. In addition, base revenues decreased because even though combined commercial and residential sales were above normal, they did not reach the levels achieved during last year's hot summer. The decrease was partially offset by customer growth. As discussed in Note 3, 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. Year-to-date base revenues decreased $7.2 million from the same period in 1998. In addition to the factors cited for the third quarter decrease, year-to- date base revenues decreased due to the loss of a significant industrial customer and a renegotiated contract with a second significant industrial customer. -15- The following table summarizes the components of gigawatt-hour (GWH) sales.
Three Months Ended September 30, Nine Months Ended September 30, --------------------------------- -------------------------------- Increase Increase 1999 1998 (Decrease) 1999 1998 (Decrease) -------- -------- ------------- -------- -------- ------------ GWH sales: ---------- Residential 883 896 (13) 1,925 1,917 8 Commercial 595 589 6 1,469 1,435 34 Industrial: Firm 144 108 36 388 407 (19) Economy 1,059 1,155 (96) 3,256 3,383 (127) Power marketing 14 76 (62) 62 345 (283) Other 30 32 (2) 83 84 (1) ----- ----- ---- ----- ----- ---- Total GWH sales 2,725 2,856 (131) 7,183 7,571 (388) ===== ===== ==== ===== ===== ====
Current quarter and year-to-date sales decreased 131 GWHs (or 5%) and 388 GWHs (or 5%), respectively, as compared to the corresponding 1998 periods. The current quarter decrease resulted primarily from reduced sales to a significant industrial customer and reduced off-system sales. In addition, commercial and residential sales did not reach the levels experienced during last year's hot summer, even though those sales were higher than normal. The decrease was partially offset by customer growth in the commercial class. Year-to-date sales decreased for the same reasons and due to the loss of a significant customer. Operating Expenses The following table summarizes the components of TNMP's total operating expenses (in thousands).
Three Months Ended September 30, Nine Months Ended September 30, ---------------------------------- -------------------------------- Increase Increase 1999 1998 (Decrease) 1999 1998 (Decrease) --------- ---------- ----------- --------- --------- ---------- Purchased power and fuel expenses: Pass through expenses: Purchased power $ 61,580 $ 51,362 $ 10,218 $128,679 $121,465 $ 7,214 Fuel 8,155 9,555 (1,400) 23,329 27,202 (3,873) -------- -------- -------- -------- -------- -------- 69,735 60,917 8,818 152,008 148,667 3,341 -------- -------- -------- -------- -------- -------- Non-pass through expenses: Purchased power 21,821 42,297 (20,476) 63,265 95,147 (31,882) Fuel 525 460 65 1,162 1,243 (81) -------- -------- -------- -------- -------- -------- 22,346 42,757 (20,411) 64,427 96,390 (31,963) -------- -------- -------- -------- -------- -------- Total 92,081 103,674 (11,593) 216,435 245,057 (28,622) Transmission expense 4,650 3,268 1,382 15,056 8,556 6,500 Depreciation expense 9,688 9,540 148 29,175 28,416 759 Charge for recovery of stranded plant 17,264 (584) 17,848 22,917 577 22,340 Other operating expenses 20,736 18,603 2,133 59,674 57,123 2,551 Income and other tax expenses 19,118 20,488 (1,370) 43,753 44,556 (803) -------- -------- -------- -------- -------- -------- Operating expenses $163,537 $154,989 $ 8,548 $387,010 $384,285 $ 2,725 ======== ======== ======== ======== ======== ========
Overall, current quarter and year-to-date operating expenses increased by $8.5 million and $2.7 million, respectively. The increase reflects higher charges for recovery of stranded plant as discussed in Note 3 and higher transmission expenses partially offset by lower purchased power costs. -16- Purchased Power and Fuel Expenses As discussed in Note 3, the NMPRC terminated Community Choice in the second quarter. Under Community Choice, rates for recovery of New Mexico purchased power costs were frozen, except those charged to certain industrial customers. The NMPRC order terminating Community Choice required TNMP to pass through to all customers New Mexico purchased power costs as of July 1, 1999. As a result, $5.9 million of third quarter New Mexico purchased power costs were recorded as pass-through expenses. Those costs would have been recorded as non-pass through expenses under Community Choice. In the third quarter of 1999, purchased power and fuel expenses decreased $11.6 million from the level incurred during the third quarter of 1998. For the year-to-date, purchased power and fuel expenses decreased $28.6 million as compared to 1998. Non pass-through expenses decreased $20.4 million for the quarter and $32.0 million for the year-to-date, reflecting lower demand costs resulting from the replacement of purchases from TXU with purchases from lower cost providers and significant reductions of the rate under which TNMP purchases capacity from Clear Lake. The rate reductions are a component of the Clear Lake settlement. The decreases in non-pass through costs were partially offset by increases in pass-through expenses of $8.8 million and $3.3 million for the quarter and year-to date, respectively, due to increases in the cost of energy purchased in the spot market during the third quarter that were caused by the extreme weather this summer. Transmission Expenses Transmission expenses increased $1.4 million for the quarter and $6.5 million for the nine months ended September 30, 1999, as compared to the same periods in 1998. The higher expenses were due to discontinued reimbursements in accordance with the Clear Lake settlement, and a 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. Terminating the contract has produced purchased power savings, but its effects have been partially offset by the higher transmission payments approved by the PUCT. Partially offsetting these increases was a second action by the PUCT during September 1999. In accordance with the new legislation discussed in Note 3, the PUCT approved a change in the method of allocating transmission costs effective September 1, 1999. As a result of this change, TNMP expects transmission expenses in the fourth quarter of 1999 to be $1.5 million lower than they would have been without the change. However, this outcome is subject to further action by the PUCT in connection with a Texas utility's challenge to its September 1999 decision. Charge for Recovery of Stranded Plant Please see Note 3 and the section "Overall Results" for a discussion of the excess earnings calculation under the new legislation in Texas. Depreciation Expenses, Other Operating Expenses, Income and Other Tax Expenses Depreciation expense increased by $0.1 million and $0.8 million for the quarter and nine months ended September 30, 1999, respectively, compared to 1998. The increases are due to additions to depreciable plant partially offset by lower depreciation rates established under the Transition Plan. Other operating expenses for TNMP increased by $2.1 million for the current quarter, and $2.6 million for the year-to-date, as compared to the corresponding 1998 periods. The increase resulted primarily from higher costs associated with payroll, benefits, and outside services. Current quarter income and other tax expenses for TNMP decreased $1.3 million and 0.8 million for the nine months ended September 30, 1999, compared to the corresponding 1998 periods. The decrease for the quarter reflects lower payments for street rental and revenue related taxes. For the year to date, the decrease in the quarter is partially offset by higher income taxes due to higher pre-tax income. Other operating expenses for TNP include $1.5 million and $3.3 million of costs related to the acquisition discussed in Note 2 for the quarter and year- to-date, respectively. -17- Interest Expense Interest charges decreased by $2.2 million for the quarter and $7.4 million for the year-to-date from 1998 levels due to TNMP's January 1999 issuance of $175 million of 6.25% senior notes, which replaced $130 million of 12.5% secured debentures. Financial Condition Liquidity TNP's main sources of liquidity are cash flow from operations and borrowings from credit facilities. TNP's cash flow from operations was lower for the current year-to-date than during the same period in 1998 due to lower receipts from customers. This decrease was offset somewhat by lower payments for purchased power and interest costs. The changes in TNMP's cash flow from operations mirrored those of TNP. In January 1999, TNMP issued $175 million of 6.25% Senior Notes due in 2009 and used the proceeds to retire its 12.5% secured debentures and reduce outstanding borrowings under the credit facilities, as discussed in TNP's and TNMP's 1998 Combined Annual Report on Form 10-K. During the second quarter, TNMP cancelled its 1995 Credit Facility, which had a total commitment of $100 million, and was scheduled to expire in November 2000. As described in Note 2, the FERC has granted TNMP authority to issue a Backstop Credit Facility (Credit Facility), and the NMPPRC is considering such approval. Completion of the Merger will require that TNMP offer to repurchase certain existing debt. If holders of this debt accept TNMP's repurchase offer, proceeds from the Credit Facility would fund the repurchase. TNMP has sufficient liquidity to satisfy any known contingencies. Management believes cash flow from operations, the new debt described above, and periodic borrowings under its remaining revolving credit facility should be sufficient to meet working capital requirements and planned capital expenditures at least through the fall of 2000. Year 2000 TNMP is actively addressing the Year 2000 issue (Y2K) throughout its operating and office environments. Many existing computer programs were designed and developed to use only two digits to identify a year in the date field. If not addressed, these computer systems could fail, with possible material adverse effects on TNMP's operations. In mid-1997 TNMP's information technology staff began to identify and assess corporate software applications, equipment and operating systems. In early 1998, the project was expanded to include professionals from throughout the company to identify and assess embedded systems. TNMP's project to analyze Y2K has included the following phases: identification, assessment, remediation/implementation and testing. In its analysis to identify and assess the Y2K impact on company systems, TNMP has conducted extensive studies to analyze the impact of Y2K on all operating systems. As a result of these studies, TNMP has developed a Y2K mitigation plan. The plan requires TNMP to amend, replace, or upgrade most of its primary corporate information systems, some of which were already being replaced or upgraded pursuant to a previously approved plan to replace or upgrade such systems. The following is a brief summary of the renovation and validation, and implementation progress for the critical business areas of TNMP - generation, transmission, distribution, energy management, and corporate information systems. Generating Units. TNMP owns one power plant, TNP One, which is located in Robertson County, Texas. TNP One has two units that burn lignite as the primary fuel source to generate power. The total lignite supply is provided from a mine adjacent to the power plant. TNMP plans to increase the coal supply to provide for an additional six-week supply prior to January 1, 2000. The plant is also capable of burning natural gas, as well as various waste products. As of June 30, 1999, the TNP One generation plant completed the assessment, testing and remediation of all mission-critical facilities. Integrated testing of the Plant Control Computer at TNP One was completed on Unit 1 in February 1999 and on Unit 2 in April 1999. The integrated testing of the Plant Control Computer detected no Y2K problems. -18- In late 1998, tests of the Continuous Emissions Monitoring System determined that only non-critical Y2K issues existed. In April 1999, TNMP completed upgrades to the Continuous Emissions Monitoring System software. Subsequent testing of the Continuous Emissions Monitoring System detected no Y2K issues. Distribution System. TNMP is primarily a distribution company. Over 600 suspect distribution system devices have been identified and are being tested. As of June 30, 1999, TNMP completed the assessment, testing, and remediation of all mission-critical distribution system facilities. TNMP has tested the devices that have external clock functions. Devices that have no external clock function have been checked with the manufacturer and TNMP has reviewed their testing of those devices. All of TNMP's critical distribution substations have designs which contain redundant relaying or bypass switching schemes to remove failed devices and equipment for normal operations, allowing for quick restoration of power to customers. Transmission System. TNMP has transmission lines which are a part of the transmission grid comprised within the Electric Reliability Council of Texas (ERCOT). The transmission grid within ERCOT is operated by member utilities in conjunction with an Independent System Operator. TNMP has transmission lines in New Mexico which are part of the Western Systems Coordinating Council (WSCC). TNMP is participating on ERCOT's Year 2000 Technical Task Force and on the Year 2000 Operational Preparedness and Planning Task Force. TNMP is also participating in all testing, drills and contingency planning done by ERCOT, the Independent System Operator and the WSCC. As of June 30, 1999, TNMP completed the testing and remediation of all transmission line electronic protective devices. Supervisory Control and Data Acquisition Systems (SCADA) and Energy Management Systems. TNMP has three SCADA systems in Texas and one in New Mexico. A SCADA system reports on the status of protective devices, allows for the remote control of these same devices, and reports and tracks critical power flow information on the transmission and distribution grids. These systems are new, having been upgraded in 1997 and 1998. As of August 30, 1999, TNMP completed the assessment, testing and remediation of the three Texas SCADA systems. On November 1, 1999, TNMP completed the process of replacing the SCADA system in New Mexico, which is not Year 2000 compliant, with a Year 2000 compliant system. Information Technology Systems. As of June 30, 1999, 100 percent of TNMP's infrastructure supporting its business systems has been tested and verified as Y2K ready. TNMP has completed the upgrade of its financial and accounting system to a Y2K compliant version. Integrated testing of the upgraded financial system was completed in May 1999, and the testing confirmed that the system was Year 2000 compliant. A new customer information system, which has been Y2K tested, was implemented in August 1999. Other corporate information systems directly related to TNMP's operations were installed and tested by September 1999. TNMP incorporates unit testing, system testing, integration testing and acceptance testing into the verification methodology. Y2K Remediation Cost. The costs associated with TNMP's Y2K efforts are expected to be approximately $10.2 million. Approximately $9 million of that amount is to upgrade or replace various information technology systems, as discussed above, as well as improve the infrastructure to support those systems. As of September 30, 1999, TNMP had spent approximately $9.9 million on Y2K remediation. TNMP does not expect these costs to have a material impact on its financial position or results of operations. TNMP has in the past used, and expects to continue to use, cash flow from operations to fund costs associated with Y2K. Third-Party Vendors. In addition to its own mitigation plan, TNMP is actively working with its key vendors and other third parties with which TNMP has a material relationship to assist such parties in achieving compliance with respect to Y2K in those systems affecting TNMP's operations. Such parties include electric power providers in Texas and New Mexico; the fuel, ash disposal, and limestone contractors at TNP One; transmission and distribution material suppliers; and banking partners. Although TNMP believes that such persons are working diligently to properly address Y2K, TNMP cannot guarantee that these third-party systems will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with TNMP's systems, would not have a material adverse effect on TNMP. -19- Contingency Plans. The primary operating processes of TNMP's business (e.g., the production, transmission, and distribution of electric power) are subject to contingencies related to weather, equipment failure, and other factors. TNMP has completed Y2K contingency plans by adapting previously existing contingency plans. The Risks of the Company's Year 2000 Issues. Based upon its current assessment and testing of the Y2K issue, TNMP believes the reasonably likely worst-case Y2K scenarios would have the following impacts upon it and its operations. With respect to its ability to provide energy to its customers, TNMP believes that the reasonably likely worst-case scenario is for small, localized interruptions of electrical service that are restored in a time frame that is within normal service levels. With respect to services that are essential to TNMP's operations, such as customer service, business operations, supplies and emergency response capabilities, the reasonably likely worst-case scenario is for minor disruptions of essential services with rapid recovery and all essential information and processes ultimately recovered. While risks related to the third parties' lack of Y2K readiness could materially and adversely affect TNMP's business, results of operations and financial condition, TNMP expects its Y2K readiness efforts to reduce significantly its level of uncertainty about the impact of third party Y2K issues on both its IT systems and non-IT systems. -20- PART II - OTHER INFORMATION --------------------------- Item 1. Legal Proceedings. See Note 6 for information regarding material legal proceedings. Item 4. Submission of Matters to a Vote of Securities Holders. At the special meeting of the Company's shareholders on September 22, 1999, the shareholders approved the adoption of the Agreement and Plan of Merger and approved the merger. The vote was 10,893,305 shares for; 107,777 shares against; and 36,721 shares abstaining. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits The following exhibits are filed with this report: 27(a) Financial Data Schedule for TNP. 27(b) Financial Data Schedule for TNMP. (b) Reports on Form 8-K - None. Statement Regarding Forward Looking Information The discussions in this document that are not historical facts, including, but not limited to, the continued application of regulatory accounting principles, future cash flows and the potential recovery of stranded costs, are based upon current expectations. Actual results may differ materially. Among the facts that could cause the results to differ materially from expectations are the following: interpretation of the legislation enacted in Texas, and its effects on TNMP's business and rates; the effects of recently passed legislation in New Mexico on the regulation of TNMP's business; changes in regulations affecting TNP's and TNMP's businesses; PUCT and NMPRC action on the proposed acquisition; insurance coverage available for claims made in litigation; the effect of a recent Texas Supreme Court decision on the limitations of any actual damages awarded in currently ongoing litigation; future acquisitions or strategic partnerships; general business and economic conditions, and price fluctuations in the electric power market; the effectiveness of TNMP's Y2K mitigation plan, and the timely Y2K compliance by TNP's and TNMP's vendors; and other factors described from time to time in TNP's and TNMP's reports filed with the Securities and Exchange Commission. TNP and TNMP wish to caution readers not to place undue reliance on any such forward looking statements, which are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. (Registrant) TNP ENTERPRISES, INC. AND TEXAS-NEW MEXICO POWER COMPANY By \s\ MANJIT S. CHEEMA -------------------- Manjit S. Cheema Date: November 11, 1999 Senior Vice President and Chief Financial Officer By \s\ MICHAEL J. RICKETTS ----------------------- Michael J. Ricketts Date: November 11, 1999 Controller and as Chief Accounting Officer -21- EX-27.(A) 2 FINANCIAL DATA SCHEDULE
UT 0000741612 TNP ENTERPRISES, INC. 1000 3-MOS DEC-31-1999 SEP-30-1999 PER-BOOK 925,978 9,006 30,243 32,754 22,271 1,020,252 196,686 0 134,745 331,431 0 1,844 341,222 0 0 0 100,000 0 0 0 245,755 1,020,252 190,570 8,340 156,619 164,959 25,611 426 26,037 10,990 15,047 25 15,022 11,704 9,298 64,730 1.12 1.12
EX-27.(B) 3 FINANCIAL DATA SCHEDULE
UT 0000022767 TEXAS-NEW MEXICO POWER COMPANY 1000 3-MOS DEC-31-1999 SEP-30-1999 PER-BOOK 925,955 213 14,051 32,755 22,271 995,245 107 222,149 89,451 311,707 0 1,844 341,223 0 0 0 100,000 0 0 0 240,471 995,245 190,554 9,620 153,917 163,537 27,017 350 27,367 10,799 16,568 25 16,543 25,057 9,107 65,432 0 0
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