Item 1. BUSINESS.
Introduction
TNP was organized as a holding company in 1983 and transacts business through its subsidiaries. TNMP is a public utility engaged in generating, purchasing, transmitting, distributing, and selling electricity to customers in Texas and New Mexico. TNMP's predecessor was organized in 1925. TNMP has two subsidiaries, TGC and TGC II, both of which were organized to facilitate TNMP's acquisitions of TNP One, Unit 1 and Unit 2, in 1990 and 1991, respectively.
FWI is a wholly owned subsidiary of TNP that began operations in 1996. 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 3.
TNP, TNMP, TGC, TGC II and FWI are all Texas corporations. Their executive offices are located at 4100 International Plaza, P.O. Box 2943, Fort Worth, Texas 76113 and the telephone number is (817) 731-0099. Unless otherwise indicated, all financial information in this report is presented on a consolidated basis.
TNMP's Service Areas
TNMP provides electric service to 85 Texas and New Mexico municipalities and adjacent rural areas with more than 228,000 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 region's economy is primarily dependent upon mining and agriculture. Copper mines are the major industrial customers in this region. This region also includes the area in far west Texas between Midland and El Paso. The economy in this area is based primarily on oil and gas production, agriculture, and food processing.
TNMP's revenues in all regions come primarily from retail customers. TNMP's other sales represent resale of electricity to customers outside TNMP's system. Revenues contributed by each operating sector and its percentage of total operating revenues in 1998, 1997, and 1996, respectively, are set forth in the following table. No single customer accounted for more than 10% of operating revenues during the years presented in the table.
Franchises and Certificates of Public Convenience and Necessity
TNMP holds 83 franchises with terms ranging from 20 to 50 years and two franchises with indefinite terms from the 85 municipalities to which it provides electric service. These franchises will expire on various dates from 1999 to 2039. Three Texas franchises, comprising 27% of total company revenues, are scheduled to expire in 1999. However, Texas law does not require an electric utility to execute a franchise agreement with a Texas municipality to be entitled to provide or continue to provide electrical service within the municipality. A franchise agreement documents the mutually agreeable terms under which the service will be provided. TNMP intends to negotiate and execute new or amended franchise agreements to be effective before existing franchises expire.
TNMP also holds PUCT certificates of public convenience and necessity covering all Texas areas that TNMP serves. These certificates include terms that are customary in the public utility industry. TNMP generally has not been required to have certificates of public convenience and necessity to provide electric power in New Mexico.
Seasonality of Business
TNMP experiences increased sales and operating revenues during the summer months as a result of increased air conditioner usage in hot weather. In 1998, approximately 41% 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 1998, 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 the 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, 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 power within a specified minimum and maximum range. Purchases on the spot market are primarily made in lieu of firm contract options 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 of a shorter term. This 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. For example, TNMP incurred higher purchased power costs in the summer of 1998, when the spot market price ofpurchased power increased sharply.
The following table illustrates the composition of TNMP's sources of electric energy in 1998.
Recovering Purchased Power and Fuel Costs
During 1998, fuel costs and the energy portion of purchased power costs in the Texas jurisdiction were recovered from TNMP customers through the fuel adjustment clause authorized by the PUCT. With the implementation of the Transition Plan, the demand portion of purchased power costs, which had been previously passed through to customers, are now being recovered through base rates. The fixed fuel recovery factor and the related fuel reconciliation filed with the PUCT are described in Note 2. In New Mexico, TNMP recovered purchased power costs as specified by Community ChoiceR, which was effective May 1, 1997. This plan froze rates (including the recovery of purchased power) for a three-year transition period, beginning on the effective date.
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."
In addition to regulation as a utility, TNMP's facilities are regulated by the Environmental Protection Agency and Texas and New Mexico environmental agencies. TNP One uses environmentally superior circulating fluidized bed technology that eliminates the need for expensive scrubbers. TNMP was allotted sufficient emission allowances to comply with the Clean Air Act of 1990 through the year 2000. After 2000, TNMP expects to institute further controls or purchase emission credits. During 1998, 1997, and 1996, TNMP incurred expenses related to air, water, and solid waste pollution abatement (including ash removal) of approximately $4.0 million, $5.0 million, and $6.1 million, respectively.
Employees and Executive Officers
At December 31, 1998, TNMP had 823 employees, FWI had 58 employees, and TNP had 4 employees. The employees are not represented by a union or covered by a collective bargaining agreement. Management believes relations with its employees are good.
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 52 Chairman, President, & Chief Executive Officer Jack V. Chambers, Jr. 49 Senior Vice President Manjit S. Cheema 44 Senior Vice President & Chief Financial Officer John P. Edwards 56 Senior Vice President Ralph Johnson 55 Senior Vice President W. Douglas Hobbs 55 Vice President R. Michael Matte 45 Vice President John A. Montgomery 37 Vice President Michael D. Blanchard 48 Vice President & General Counsel Patrick L. Bridges 40 Treasurer Michael J. Ricketts 40 Controller Paul W. Talbot 42 Secretary
Name Age Position with TNMP
Kevern R. Joyce 52 Chairman, President, & Chief Executive Officer Jack V. Chambers, Jr. 49 Senior Vice President & Chief Customer Officer Manjit S. Cheema 44 Senior Vice President & Chief Financial Officer John P. Edwards 56 Senior Vice President - Corporate Relations Ralph Johnson 55 Senior Vice President - Power Resources Dennis R. Cash 45 Vice President & Regional Customer Officer Allan B. Davis 61 Vice President & Regional Customer Officer Larry W. Dillon 44 Vice President & Regional Customer Officer John A. Montgomery 37 Vice President - Marketing Melissa D. Davis 41 Vice President - Human Resources Michael D. Blanchard 48 Vice President & General Counsel Patrick L. Bridges 40 Treasurer Scott Forbes 41 Chief Information Officer Michael J. Ricketts 40 Controller Paul W. Talbot 42 Secretary
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. He was TNMP's Sector Vice President - Revenue Production from 1990 to 1994.
Manjit S. Cheema joined TNMP in June 1994. He was Treasurer of TNMP from June 1994 until September 1995. In December 1994, he became Vice President & Chief Financial Officer of TNP and TNMP. He became Senior Vice President & Chief Financial Officer of TNMP in July 1996 and became Senior Vice President & Chief Financial Officer of TNP in May 1997.
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 was appointed Treasurer of TNP and TNMP in September 1995. 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.
Allan B. Davis has been a TNMP Vice President and Regional Customer Officer since 1994.
Larry W. Dillon has been a TNMP Vice President and Regional Customer Officer since 1994.
W. Douglas Hobbs was appointed as Vice President - Business Development of TNP in May 1997. He was Vice President - Business Development of TNMP from February 1997 to May 1997. He was a TNMP Vice President and Regional Customer Officer from 1994 to February 1997.
John A. Montgomery was elected Vice President - Marketing of TNMP in November 1998 and became Vice President of TNP in April 1996. 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.
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.
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.
Item 2. PROPERTIES.
Substantially all of TNMP's real and personal property secures its FMBs. Substantially TNMP's entire real and personal property in Texas also secures its Series A, 10.75% secured debentures. TNMP's long-term debt is described in Note 6.
Generating Facilities
TNP One is a two-unit, lignite-fueled generating plant, located in Robertson County, Texas. TNP One generates power for TNMP's Texas service areas and operates as a base load facility.
Transmission and Distribution Facilities
Management believes that TNMP's transmission and distribution facilities are of sufficient capacity to serve existing customers adequately and can be extended and expanded to serve customer growth for the foreseeable future. These facilities primarily consist of overhead and underground lines, substations, transformers, and meters. TNMP generally constructs its transmission and distribution facilities on easements or public rights of way and not on real property held in fee simple.
Administrative and Service Facilities
TNP's, TNMP's and FWI's corporate headquarters are located in an office building in Fort Worth, Texas. Space in this building is leased through 2003.
TNMP owns or leases local offices in 39 of the municipalities that it serves. TNMP owns 14 construction/service centers in Texas and New Mexico.
Item 3.
Item 3. LEGAL PROCEEDINGS.
TNMP and Clear Lake Limited Partnership ("Clear Lake") agreed in March 1999 to settle the lawsuit styled Clear Lake Cogeneration Limited Partnership vs. Texas-New Mexico Power Company, pending in the 234th District court of Harris County, Texas, and the parallel proceeding pending before the PUCT. These proceedings arose out of disagreements between TNMP and Clear Lake over the interpretation of certain terms of an agreement under which TNMP purchases cogenerated electricity from Clear Lake. The settlement, which must be approved by the PUCT, resolves all outstanding issues raised in these proceedings.
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. The key elements of the revised contract are:
- The capacity rate under which TNMP will purchase capacity from Clear Lake is significantly reduced. The energy rate is virtually unchanged.
- Clear Lake will be able to provide 250 MW of capacity from multiple sources. Except for power plants named in the agreement, TNMP retains certain rights of prior approval as to other sources of power and energy.
- TNMP will pay for the cost of transmitting power from the existing Clear Lake power plant to TNMP's load centers in the Gulf Coast Region pursuant to new PUCT rules. Clear Lake will reimburse TNMP for any excess transmission costs that TNMP would incur as a result of delivery from points other than the Clear Lake Plant.
- Clear Lake will no longer pay for nor receive standby power, but will generally guarantee 100% availability of capacity and energy. Clear Lake may request that TNMP obtain or generate replacement power at a negotiated fixed cost under certain limited conditions.
- Future disputes shall be resolved through consultation and arbitration.
The settlement also provides that TNMP will pay Clear Lake $8 million when the PUCT has approved the overall settlement and revised purchased power contract. The settlement calls for regulatory recovery by TNMP of all payments to be made by TNMP for power and energy, as well as the $8 million settlement payment. TNMP does not expect this settlement to have a material adverse impact on its financial position or results of operations.
TNMP is the defendant in a suit styled Phillips Petroleum Company vs. Texas-New Mexico Power Company. This lawsuit was filed on October 1, 1997 and is pending in the 149th Judicial District Court of Brazoria County, Texas. In this matter, Phillips Petroleum Company contends that it sustained economic losses of approximately $36 million following a one and one-half hour interruption in its electrical service on May 17, 1997. TNMP claims that most, if not all of Phillips Petroleum alleged damages are barred by limitations contained within our tariff approved by the PUCT. The lawsuit is in the initial discovery stage. In regard to this matter, TNMP believes that it has insurance coverage on most claims of Phillips Petroleum up to a total of $31 million, with a $500,000 self-retention.
Information regarding additional regulatory and legal matters is provided in Notes 2 and 9.
Item 4.
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 1998.
PART II
Item 5.
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 1998 and 1997 were as follows:
As of January 31, 1999, there were approximately 3,481 record holders of TNP common stock.
TNP holds all 10,705 outstanding common shares of TNMP. During 1998 and 1997, TNMP paid common dividends to TNP as follows (in thousands):
QUARTER 1998 1997 ------- ---- ---- First $ 10,000 $ 9,000 Second 3,600 11,800 Third 5,500 9,500 Fourth - 14,000 --------- --------- Total $ 19,100 $ 44,300 ========= =========
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
SIGNIFICANT EVENTS AND KNOWN TRENDS AFFECTING TNP AND TNMP
Competitive Conditions
The electric utility industry continues its transition toward an environment of increased competition. TNMP expects the portions of operations pertaining to transmission and distribution to continue to be regulated. Pressures that underlie the movement toward increasing competition are numerous and complex. They include legislative and regulatory changes, technological advances, consumer demands, greater availability of natural gas, environmental needs, and other factors. The increasingly competitive environment presents opportunities to compete for new customers, as well as the risk of loss of existing customers.
The most significant effect of competition on TNMP, as well as other utilities, will be the ability to recover potential stranded costs. "Stranded costs" is the difference between what it costs TNMP to provide energy and what a customer would be willing to pay for energy in a competitive market. The inability to recover a significant portion of stranded costs would adversely impact TNP's and TNMP's financial condition. In Texas, TNMP's potential stranded cost relates to TNP One, its 300 MW generating unit, and could potentially be more than $270 million. In New Mexico, TNMP's potential stranded cost relates to its fixed purchased power contracts. As of December 31, 1998, TNMP had reserved $3.4 million for its potential stranded costs in New Mexico. Additional stranded costs could potentially be zero to $7 million, depending on the market price of purchased power at the onset of competition.
Legislators in both Texas and New Mexico have introduced bills that propose to open the business to competition. The bills also address recovery of stranded costs. In Texas, TNMP's Transition Plan includes provisions for modifying the plan so that it conforms to subsequently enacted legislation
The following discusses TNMP's strategy to transition to competition and to provide TNMP the ability to recover its potential stranded costs in Texas and New Mexico. Although the recoverability and amount of stranded costs is uncertain, management realizes there is some risk that shareholders may be required to share the financial burden of stranded costs with customers.
Texas Transition Plan
On July 22, 1998, the PUCT approved TNMP's Transition Plan, and issued a final order documenting its approval on November 7, 1998. The Transition Plan includes a number of provisions that impact TNMP's financial results. They are:
- TNMP will implement a series of residential and commercial rate reductions totaling 9% and 3%, respectively, during a five-year transition period. The first rate reductions for residential and commercial customers of 3% and 1%, respectively, were implemented retroactive to January 1, 1998. The remaining reductions will be effective in January of 2000 and 2001.
- TNMP's earnings on its Texas operations are capped at an 11.25% return on equity less assumed discounts on industrial rates, which, for 1998, were $4.1 million. In 1999, the discounts are expected to be approximately $2.9 million. TNMP will apply Texas earnings in excess of the cap to recover stranded costs related to its generation investment (TNP One) or will refund them to customers, according to PUCT guidelines.
- The Plan includes a cap on allowed operating and maintenance expenses applicable to TNMP's Texas operations based on cost incurred per customer in 1996.
- TNMP will record $15 million of additional depreciation annually during 1999-2002 to recover stranded costs.
- Finally, the manner in which TNMP recovers the cost of purchased power from its customers has changed. In the past, all of these costs were passed directly through to TNMP's customers via adjustment factors that could change as often as monthly. Under this methodology, purchased power expense had no impact on operating income. Effective with the new rates under the Transition Plan, only the energy-related portion of purchased power will be passed through directly to customers via the fuel adjustment clause. The demand-related portion of purchased power will be 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, will affect operating income.
Absent legislation implementing retail competition, at the end of the five-year transition period, TNMP shall file with the PUCT a proposal to voluntarily implement retail access, contingent upon the approval of an appropriate mechanism for recovery of any remaining stranded costs. The PUCT has committed to full recovery of stranded costs if they are quantified using a market-based methodology, TNMP offers retail access, and stranded costs are allocated fairly to all customers.
During the year ended December 31, 1998, the Transition Plan reduced TNMP's operating income as summarized in the table below (amounts in thousands except per share items):
The combination of the one-time customer refund and implementing the rate structure change reduced operating revenue by $11.4 million (pre-tax). TNMP's earnings for the year ended December 31, 1998 did not exceed the earnings cap imposed by the Transition Plan. The Transition Plan includes a provision that allows the PUCT to review TNMP's earnings and the related earnings cap.
New Mexico Community Choice
On April 11, 1997, the NMPUC approved TNMP's plan for transition to competition in its New Mexico service territory, called Community Choice. TNMP implemented Community Choice effective May 1, 1997. Community Choice provides TNMP's customers the right to choose their electricity provider after a three-year transition period. The plan freezes rates (including the recovery of purchased power) during the transition period, and allows for customer aggregation based on market forces. As of December 31, 1998, TNMP had reserved $3.4 million for its potential stranded costs in New Mexico.
Impact of Competition on TNMP
In addition to pursuing the satisfactory resolution of the stranded cost issue, 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 and new services.
As noted above, the Transition Plan changes the way TNMP recovers the demand component of purchased power. The change increases the risk that TNMP will have to absorb increases in the demand cost of purchased power, while at the same time it allows TNMP 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 it power supply portfolio.
Results of Operations
Overall Results
Income applicable to common stock was $19.3 million for 1998, compared to $29.5 million in 1997. The 1998 results included the effect of FWI's discontinued operations of $12.7 million, and costs to implement the transition plan of $3.0 million. The 1997 results included a $12.9 million loss associated with FWI's discontinued operations. Exclusive of one-time items, the 1998 earnings were $35.0 million, a $7.4 million decrease as compared to the 1997 earnings of $42.4 million.
Income applicable to common stock was $22.9 million in 1996. Results for 1996 included a $3.1 million loss associated with FWI's discontinued operations, and a $1.3 million after tax charge for the settlement of litigation associated with the Series T FMB retirement in 1995. Excluding the one-time items, 1997 earnings were $15.1 million higher than 1996 earnings of $27.3 million.
The following table sets forth results of operations for 1998, 1997, and 1996 and the impact of one-time items:
Beginning in 1996, FWI's operations included construction and service activities. In late 1997, management reevaluated FWI's strategy and adopted a revised strategy to concentrate on service and maintenance activities and to discontinue the construction segment. In 1998, TNP elected to discontinue all remaining operations of FWI. See Note 3 for additional information regarding the discontinued operations.
The operations of TNMP currently represent most of TNP's operations. The following discussion focuses on TNMP's operations, except where stated otherwise.
Operating Revenues
The following table summarizes the components of operating revenues (in thousands).
Purchased power & fuel expenses are discussed in "Results of Operations--Operating Expenses."
The following table summarizes the components of the base revenues increase (decrease) from 1998 to 1997 and from 1997 to 1996 (in thousands).
The base revenue decrease of $8.4 million during 1998 resulted primarily from the implementation of the Texas Transition Plan and the loss of a significant industrial customer (see Note 9). As discussed in Note 2, the Transition Plan had the effect of reducing base rate revenues and reducing recovery of demand purchased power costs. Offsetting the base revenue decrease were increased sales due to hotter than normal weather during the summer, and customer growth in the residential and commercial classes.
The base revenue increase of $18.9 million during 1997 resulted primarily from implementing the new transmission access rules during 1997, growth in residential and commercial customers, and a full year of operation of its control area in Texas that TNMP implemented on July 31, 1996. The control area is an electrical system that enables TNMP to instantaneously balance its system resources with loads. Implementation of the control area enabled TNMP to enhance its industrial economy rate sales, non-industrial standby revenues, and power marketing sales. The control area also permitted TNMP to replace standby power for TNP One with the purchase of planning reserves.
The components of GWH sales for 1998 and 1997 are summarized in the following table:
1998 sales decreased 307 GWHs (or 3%), from 1997 levels, due to the movement of a significant industrial customer to self-generation and decreased off-system sales. This decrease was partially offset by increased residential and commercial sales due to hotter-than-normal weather and customer growth.
As discussed in "Competitive Conditions--Texas Transition Plan" and Note 2, the PUCT approved the Texas Transition Plan during 1998. The Transition Plan includes a five-year transition period, with a series of rate reductions for residential and commercial customers beginning in 1998. The agreement provides for TNMP to recover a portion of its potential stranded costs during the transition period. Also, TNMP's earnings on Texas operations are capped at 11.25% return on equity less assumed discounts on industrial rates, which, for 1998, were $4.1 million. Texas earnings in excess of the cap will be applied by TNMP to recover stranded costs related to its generation investment (TNP One) or refunded to customers. During 1998, TNMP did not have any excess earnings on its Texas operations. This was primarily due to higher than expected demand purchased power costs as discussed in "Operating Expenses - Purchased Power & Fuel."
As discussed in "Competitive Conditions--New Mexico Community Choice" and Note 2, TNMP implemented its Community Choice plan in New Mexico on May 1, 1997. The plan provides TNMP's customers the right to choose their energy provider after a three-year transition period and freezes rates (including the recovery of purchased power) during the transition period. The rates represent a slight reduction as compared to rates in effect prior to May 1997. The reduced rates have not had a material adverse effect on TNP's or TNMP's financial condition.
A significant industrial customer in Texas left TNMP's system in February 1998 and replaced the power previously provided by TNMP with power from a cogeneration plant built by a third party wholesale power producer. This customer provided sales of 629 GWH and annual revenues of $28.3 million in 1997 ($10.1 million in base revenues). Purchases by this customer in 1998 were 74 GWH, providing total revenues of $3.1 million and base revenues of $0.9 million.
During late 1997, TNMP renegotiated with a large industrial customer in New Mexico to continue providing full service until the end of the New Mexico Community Choice transition period (April 30, 2000). Effective January 1, 1999, this customer reduced its firm purchased power commitment by 55%. After the end of the transition period, TNMP will provide firm transmission service to this customer, and this customer can purchase its KWH requirements on the open market. Currently, TNMP is this customer's lowest cost U.S. electric supplier. This customer provided sales of 1,101 GWH and revenues of $39.9 million in 1998 ($11.9 million in base revenues).
Operating Expenses
Operating expenses for 1998 were $18.1 million higher than in 1997, due primarily to higher purchased power expenses.
Operating expenses for 1997 were $72.4 million higher than in 1996, due primarily to higher purchased power expenses stemming from increased sales requirements under agreements with two cogeneration customers and income taxes.
Purchased Power & Fuel Expenses
The following table summarizes the components of purchased power and fuel expenses (in thousands).
During 1998, purchased power and fuel expenses increased by $14.1 million 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. As discussed in Note 2, the Transition Plan changes the method of recovering purchased power expenses from customers. Effective January 1, 1998, only the energy-related portion of purchased power is passed through directly to customers via the fixed fuel recovery factor. The demand-related portion of purchased power will be recovered through base rates. Therefore, any difference between the amount of demand-related purchased power recovered through TNMP's rates and the actual costs will affect operating income. Texas demand charges are $98.3 million of the $121.3 million shown above as non pass-through purchased power. Firm purchased power costs in New Mexico account for the remainder. Recovery of demand purchased power in Texas amounted to $90.8 million in 1998, resulting in a reduction of $7.5 million in pre-tax operating income. Prior to January 1, 1998, the majority of purchased power costs were recoverable from customers via a recovery clause.
During 1997, purchased power and fuel expenses increased by $59.1 million primarily due to additional MWHs purchased to meet increased sales requirements from the agreements negotiated with the two cogeneration customers during the second quarter of 1996.
Other Operating Expenses
Other operating expenses in 1998 increased by $6.9 million compared to 1997. This resulted from additional transmission expenses of $3.1 million as compared to 1997, and the $3.3 million write-off of deferred costs related to the Transition Plan, as discussed in "Competitive Conditions--Texas Transition Plan" and Note 2.
Other operating expenses in 1997 were comparable to 1996. Cost savings from reduced standby expenses resulting from implementation of the control area offset a $2.0 million increase in the Texas transmission expenses.
Interest Charges
During 1998, interest charges decreased $3.2 million due primarily to reduced borrowings and lower interest rates on the credit facilities.
During 1997, interest charges decreased $12.5 million due primarily to the retirement of Series T FMBs in January 1997 and applying cash flow from operations to reduce debt levels. The 11.25% Series T FMBs were retired with lower cost borrowings from the credit facilities and an equity contribution from TNP in late 1996, resulting from its common stock sale.
In January 1999, TNMP retired its 12.5% secured debentures when they matured. It also issued $175 million of 6.25% Senior Notes due in 2009. Interest charges are expected to continue to decrease during 1999 due to the lower interest rate on the Senior Notes and reduced borrowings against the credit facilities.
Liquidity and Capital Resources
Sources of Liquidity
The main sources of liquidity for TNP are cash flow from operations, borrowings from credit facilities and sale of additional common stock.
TNP's cash flow from operations totaled $72.9 million, $103.9 million and $65.2 million in 1998, 1997 and 1996. 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. Cash flow from operations increased in 1997 from 1996 due to factoring unbilled receivables and increased base revenues. The changes in TNMP's cash flow from operations mirrored those of TNP.
TNMP has two existing credit facilities with a total of $100 million of unused borrowings available, as of December 31, 1998. In January 1999, TNMP entered into a third credit facility that provides $35 million of borrowing capacity through April 1999.
In November 1998, TNP entered into a new credit facility with a total commitment of $50 million, and unused borrowing capacity of $41 million at December 31, 1998. Borrowings under this facility can be used for investing in TNP's subsidiaries, payment of dividends to TNP's shareholders, investing in nonregulated businesses, and other general corporate purposes.
TNP reserved one million shares of common stock for issuance through a direct stock purchase plan that began in 1997. The plan is designed to provide investors with a convenient method to purchase shares of TNP's common stock directly from the company and to reinvest cash dividends. The plan has replaced TNP's prior dividend reinvestment plan. As of December 31, 1998, the remaining reserve for direct stock purchase plan was 946,000 shares.
Capital Resources
TNP's and TNMP's capital structure continued to improve during 1998, as TNMP was able to reduce debt due to continued strong earnings for the year. The equity portion of TNP's capital structure increased from 38.3% at December 31, 1997, to 40.0% at December 31, 1998. Conversely, the long-term debt ratio decreased from 61.3% to 59.6% for the same period. TNMP experienced similar results with its capital ratios.
TNMP's capital requirements through 2003 are projected to be as follows (amounts in millions):
TNMP believes that cash flow from operations, borrowings in the capital markets, and periodic borrowings under the credit facilities will be sufficient to meet working capital requirements and planned capital requirements through the foreseeable future.
Other Matters
Application of SFAS 71
As a result of the Energy Policy Act of 1992 and actions of regulatory commissions, the electric utility industry is moving toward a combination of competition and a modified regulatory environment. TNMP's financial statements currently reflect assets and costs based on current cost-based ratemaking regulations in accordance with SFAS 71, Accounting for the Effects of Certain Types of Regulation. Continued applicability of SFAS 71 to TNMP's financial statements requires that rates set by an independent regulator on a cost-of-service basis can actually be charged to and collected from customers.
In the event that all or a portion of a utility's operations cease to meet those criteria for various reasons, including deregulation, a change in the method of regulation, or a change in the competitive environment for the utility's regulated service, the utility will have to discontinue SFAS 71 for that portion of operations. That discontinuation would be reported by the write-off of unrecoverable regulatory assets and liabilities.
As discussed in Note 2, as a result of the Community Choice program in New Mexico, TNMP discontinued the application of SFAS 71 to its generation/power supply operations in New Mexico during 1997. The discontinuing of regulatory accounting principles had no effect on TNMP's financial condition. Also, as discussed in "Competitive Conditions--Texas Transition Plan" and Note 2, on July 22, 1998, the PUCT approved TNMP's Transition Plan, and issued a final order documenting its approval on November 7, 1998. The PUCT has committed to full recovery of stranded costs if they are quantified using a market-based methodology, TNMP offers retail access, and stranded costs are allocated fairly to all customers. Rates under the Transition Plan continue to be cost-based, and TNMP will continue to apply SFAS 71 to its Texas generation/power supply operations until it requests, and the PUCT approves authority to implement retail competition.
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 and 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 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. TNP 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. TNP One personnel are consulting with the manufacturers of the Plant Control Computer which provides for most of the computerized operations of the boiler and turbine controls, as well as the Continuous Emissions Monitoring System. Integrated testing of the Plant Control Computer was completed on Unit 1 in early February 1999. The integrated testing on Unit 1 detected no Y2K problems. Testing will be done on Unit 2 while the plant is down for a maintenance outage this spring. Tests of the Continuous Emissions Monitoring System determined that only non-critical Y2K issues were detected. Upgrades to that software are currently underway. An extensive list of other minor suspect devices has been compiled and is also in the process of being tested.
As of March 1, 1999, the TNP One generation plant has completed the assessment of all mission-critical facilities, and is approximately 52 percent complete with the testing and remediation of those facilities. All testing and remediation is expected to be complete by June 1999.
Distribution System. TNMP is primarily a distribution company. Over 600 suspect distribution system devices have been identified and are being tested. TNMP is currently testing the devices that have external clock functions. Devices that have no external clock function are being checked with the manufacturer and TNMP is reviewing their testing of those devices. All of TNMP's critical distribution substations have designs which contain redundant relaying or bypass switching schemes to remove failed devices and equipment for normal operations, allowing for quick restoration of power to customers.
As of March 1, 1999, TNMP is 84 percent complete on the assessment of all Distribution System mission-critical facilities, and is approximately 53 percent complete with the testing and remediation of those facilities. All testing and remediation is expected to be complete by June 1999.
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 is participating on ERCOT's Year 2000 Technical Task Force and on the Year 2000 Operational Preparedness and Planning Task Force. TNMP will be participating in all testing, drills and contingency planning done by the Independent System Operator.
Testing of transmission line electronic protective devices by TNMP personnel is underway with completion anticipated by June 1999.
Supervisory Control and Data Acquisition Systems (SCADA) and Energy Management Systems. TNMP has three SCADA systems in Texas. A SCADA system reports on the status on 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. TNMP is in the process of replacing the SCADA system in New Mexico, which is not Year 2000 compliant.
As of March 1, 1999, TNMP is 93 percent complete on the assessment of all SCADA and Energy Management Systems mission-critical facilities, and is approximately 22 percent complete with the testing and remediation of those facilities. All testing and remediation is expected to be complete by June 1999, except for the New Mexico SCADA system that will be complete in August 1999.
Information Technology Systems. As of March 1, 1999, approximately 90% of TNMP's infrastructure supporting its business systems has been tested and verified as Y2K compliant. TNMP expects to have the remaining infrastructure Y2K compliant by the end of the first quarter of 1999. TNMP has completed the upgrade of its financial and accounting system to a Y2K compliant version. Integrated testing of the upgraded financial system will be done in April 1999. A new customer information system is expected to be implemented and tested during the third quarter of 1999 and other corporate information systems directly related to TNMP's operations are expected to be 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 the total cost is to upgrade or replace various information technology systems, as discussed above, as well as improve the infrastructure to support those systems. TNMP does not expect these costs to have a material impact on its financial position or results of operations. TNMP continues to work with key software vendors and outside consultants to validate its Y2K compliance project. To date, TNMP has spent approximately $4.3 million on Y2K remediation. TNMP has in the past used, and expects to continue to use, cash flow from operations to fund costs associated with Y2K.
Third-Party Vendors. In addition to its own mitigation plan, TNMP is actively working with its key vendors and other third parties with which TNMP has a material relationship to assist such parties in achieving compliance with respect to Y2K in those systems affecting TNMP's operations. Such parties include electric power providers in Texas and New Mexico; the fuel, ash disposal, and limestone contractors at TNP One; transmission and distribution material suppliers; and banking partners. Although TNMP believes that such persons are working diligently to properly address Y2K, TNMP cannot guarantee that these third-party systems will be timely converted, or that a failure to convert by another company or a conversion that is incompatible with TNMP's systems, would not have a material adverse effect on TNMP.
Contingency Plans. The primary operating processes of TNMP's business (e.g., the production, transmission, and distribution of electric power) are subject to contingencies related to weather, equipment failure, and other factors. TNMP has drafted Y2K contingency plans by adapting previously existing contingency plans. TNMP will complete the Y2K contingency plan by June 1999.
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.
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.
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, 1998 and 1997, and the related consolidated statements of income, common shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1998 and 1997, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Fort Worth, Texas February 12, 1999
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, 1998 and 1997, and the related consolidated statements of income, common shareholder's equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1998 and 1997, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Fort Worth, Texas February 12, 1999
Independent Auditor's Report
The Board of Directors and Shareholders TNP Enterprises, Inc.:
We have audited the accompanying consolidated statements of income, common shareholders' equity, and cash flows of TNP Enterprises, Inc. and subsidiaries for the year ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of TNP Enterprises, Inc. and subsidiaries for the year ended December 31, 1996, in conformity with generally accepted accounting principles.
KPMG LLP
Fort Worth, Texas January 30, 1997
Independent Auditor's Report
The Board of Directors Texas-New Mexico Power Company:
We have audited the accompanying consolidated statements of income, common shareholder's equity, and cash flows of Texas-New Mexico Power Company (a wholly owned subsidiary of TNP Enterprises, Inc.) and subsidiaries for the year ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Texas-New Mexico Power Company and subsidiaries for the year ended December 31, 1996, in conformity with generally accepted accounting principles.
KPMG LLP
Fort Worth, Texas January 30, 1997
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
PREFERRED STOCK Redeemable cumulative preferred stock with $100 par value Authorized shares - 1,000,000
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 1998 financial statements.
Accounting for the Effects of Regulation
Electric utilities operate in a highly regulated environment. TNP's and TNMP's consolidated financial statements reflect the application of certain accounting standards, including SFAS 71, "Accounting for the Effects of Certain Types of Regulation," which provide for recognition of the economic effects of rate regulation. Among these effects are the recognition of regulatory assets and liabilities. Regulatory assets represent revenues associated with certain costs that 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, 1998 and 1997.
As discussed in Note 2, TNMP has two plans - the Texas Transition Plan and the New Mexico Community Choice plan - approved by the regulatory commissions in the respective jurisdictions. Based on these plans, management believes it probable that TNMP will continue, for the foreseeable future, to meet the criteria for continued application of SFAS 71 to its transmission and distribution portions of its business, and the generation/power supply portion of its business in Texas. Also, the Texas Transition Plan allows TNMP to recover from customers the regulatory assets included in the table above.
Utility Plant
Utility plant is stated at the historical cost of construction, which includes labor, materials, indirect charges for such items as engineering and administrative costs, and AFUDC. Property repairs and replacement of minor items are charged to operating expenses; major replacements and improvements are capitalized to utility plant.
AFUDC is a non-cash item designed to enable a utility to capitalize interest costs during periods of construction. Established regulatory practices enable TNMP to recover these costs from customers. The composite rate used for AFUDC was 6.0% in each of the years 1998, 1997, and 1996.
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 3.2%, 3.3%, and 3.2% in 1998, 1997, and 1996, respectively. As explained in Note 2, TNMP will record $15 million of additional depreciation annually during 1999-2002 to recover stranded costs, and may record additional amounts of depreciation based on operation of the earnings cap, due to implementation of the Transition Plan.
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
As discussed in Note 2, TNMP has two plans - the Texas Transition Plan and the New Mexico Community Choice plan - approved by the regulatory commissions in the respective jurisdictions.
In Texas, as of January 1, 1998, the recovery of the demand-related portion of purchased power costs has changed pursuant to the Texas Transition Plan as discussed in Note 2. There are no changes to the recovery of the energy-related portion of purchased power costs and fuel costs.
In New Mexico, as of May 1, 1997, the recovery of purchased power costs changed pursuant to the New Mexico Community Choice plan discussed in Note 2.
Prior to the implementation of both plans, differences between amounts collected and allowable costs were generally recovered either as purchased power subject to refund or deferred purchased power and fuel costs in accordance with regulatory ratemaking policy.
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 $164,000 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, 1998, no such amounts have been received or paid.
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.
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 TNMP's financial instruments are as follows:
Common Stock
At December 31, 1998, 81,999 shares of TNP's common stock were reserved for issuance to TNMP's 401(k) plan, and 1,198,356 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 (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.
Stock-Based Compensation
As discussed in Note 4, 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 effect on the amount of expense associated with TNP's stock-based compensation.
Reclassification
Certain items in 1996 and 1997 were reclassified to conform to the 1998 presentation.
Note 2. Regulatory Matters
As the electric utility industry continues its transition toward an environment of increased competition, the most significant effect of competition on TNMP, as well as many other utilities, will be the ability to recover potential stranded costs. "Stranded costs" is the difference between what it currently costs TNMP to provide electricity and what a customer would be willing to pay for such service in a competitive market. The inability to recover a significant portion of stranded costs would adversely impact TNP's and TNMP's financial condition. In Texas, TNMP's potential stranded cost relates to TNP One, its 300 MW generating unit, and could potentially be more than $270 million. As of December 31, 1998, TNMP had reserved $3.4 million for its potential stranded costs in New Mexico. Additional stranded costs could potentially be zero to $7 million, depending on the market price of purchased power at the onset of competition.
The following discusses TNMP's strategy to transition to competition and to recover its potential stranded costs in Texas and New Mexico.
Texas Transition Plan
On July 22, 1998, the PUCT approved TNMP's transition-to-competition plan (Transition Plan), and issued a final order documenting its approval on November 7, 1998. The Transition Plan includes a number of provisions that impact TNMP's financial results. They are:
- TNMP will implement a series of residential and commercial rate reductions totaling 9% and 3%, respectively, during a five-year transition period. The first rate reductions for residential and commercial customers of 3% and 1%, respectively, were implemented retroactive to January 1, 1998. The remaining reductions will be effective in January of 2000 and 2001.
- TNMP's earnings on its Texas operations are capped at an 11.25% return on equity less assumed discounts on industrial rates, which, for 1998, were $4.1 million. In 1999, the discounts are expected to be approximately $2.9 million. TNMP will apply Texas earnings in excess of the cap to recover stranded costs related to its generation investment (TNP One) or will refund them to customers, according to PUCT guidelines.
- The Plan includes a cap on allowed operating and maintenance expenses applicable to TNMP's Texas operations based on cost incurred per customer in 1996.
- TNMP will record $15 million of additional depreciation annually during 1999-2002 to recover stranded costs.
- Finally, the manner in which TNMP recovers the cost of purchased power from its customers has changed. In the past, all of these costs were passed directly through to TNMP's customers via adjustment factors that could change as often as monthly. Under this methodology, purchased power expense had no impact on operating income. Effective with the new rates under the Transition Plan, only the energy-related portion of purchased power will be passed through directly to customers via the fuel adjustment clause. The demand-related portion of purchased power will be 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, will affect operating income.
Absent legislation implementing retail competition prior to the end of the five-year transition period, TNMP shall file with the PUCT, at the end of the transition period, a proposal to voluntarily implement retail access, contingent upon the approval of an appropriate mechanism for recovery of any remaining stranded costs. The PUCT has committed to full recovery of stranded costs if they are quantified using a market-based methodology, TNMP offers retail access, and stranded costs are allocated fairly to all customers. Rates under the Transition Plan continue to be cost-based, and TNMP will continue to apply SFAS 71 to its Texas generation/power supply operations until it requests, and the PUCT approves authority to implement retail competition.
Implementation of the Transition Plan reduced operating revenue by $11.4 million (pre-tax). The base rate reductions accounted for $9.9 million of the change, and a one-time customer refund accounted for the remaining $1.5 million. TNMP's earnings for the year ended December 31, 1998, did not exceed the earnings cap imposed by the Transition Plan.
New Mexico Community Choice
Following NMPUC approval on April 11, 1997, TNMP implemented Community Choice, its plan for transition to competition for its New Mexico service territory effective May 1, 1997. The plan provides TNMP's customers the right to choose their electricity provider after a three-year transition period. The plan freezes rates (including the recovery of purchased power) during the transition period, and allows for customer aggregation based on market forces. As of December 31, 1998, TNMP had reserved $3.4 million for its potential stranded costs in New Mexico.
As a result of the New Mexico Community Choice plan, the power supply portion of TNMP's New Mexico operations no longer qualifies for the application of SFAS 71. Accordingly, in 1997, TNMP discontinued regulatory accounting principles for the New Mexico power supply operations. The discontinuation of SFAS 71 had no effect on TNMP's financial statements in the period of adoption. The transmission and distribution operations in New Mexico will continue to follow SFAS 71.
Fuel Reconciliation
TNMP's fixed fuel factor in Texas remains constant until changed as part of a general rate case or fuel reconciliation, or until the PUCT orders a reconciliation for any over or under collections of fuel costs. TNMP filed a reconciliation of fuel costs in June 1997, for the period of October 1993 through December 1996. In January 1998, TNMP reached a stipulated agreement with the staff of the PUCT and several other interested parties. The agreement, which was approved by the PUCT on April 21, 1998, specified that all fuel costs incurred during the reconciliation period were reasonable and necessary. Also, the agreement did not propose a change to the fixed fuel factor.
Note 3. 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 are a few jobs not completed at December 31, 1998. TNP expects the jobs to be completed during 1999.
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 4. Employee Benefit Plans
Pension and Postretirement Benefits Plan TNMP has a defined benefit pension plan covering substantially all of its employees. Benefits are based on an employee's years of service and compensation. TNMP's funding policy is to contribute the minimum amount required by federal funding standards. 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.
TNMP amended its pension and postretirement benefit plans effective October 1, 1997. The amendments were recognized at January 1, 1998, for the pension plan, and at October 1, 1997, for the postretirement benefit plan.
The assumed health care cost trend rate used to measure the expected cost of benefits was 5.3% for 1998 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):
Incentive Plans
TNP and TNMP have several incentive compensation plans. All employees participate in one or more of these plans. Incentive compensation is based on meeting key financial and operational performance goals such as cash value added or earnings per share, operations and maintenance costs per KWH, and system reliability measures. Operating expenses for 1998, 1997, and 1996 included costs for the various cash and equity plans of $5.9 million, $6.0 million, and $4.8 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.
TNMP has employment contracts with certain members of management and other key personnel. The contracts provide for lump sum compensation payments and other rights in the event of termination of employment or other adverse treatment of such persons following a "change in control" of TNP or TNMP. Such event is defined to include, among other things, substantial changes in the corporate structure, ownership, or board of directors of either entity.
An excess benefit plan has been provided for certain key personnel and retired employees. The payment of benefits under the excess benefit plan is partially provided under an insurance policy arrangement for paying the benefits that generally would have been provided by the pension and thrift plans except for federal limitations.
Note 5. Income Taxes
Components of income taxes were as follows:
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:
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, 1998, and 1997, are presented below.
Federal tax carryforwards as of December 31, 1998, were as follows:
Note 6. Long-Term Debt
First Mortgage Bonds
FMBs issued under the Bond Indenture are secured by substantially all utility plant owned directly by TNMP. The Bond Indenture restricts cash dividend payments on TNMP common stock as discussed in Note 7.
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, previuosly redeemed FMBs, and cash deposited with the trustee. As of December 31, 1998, the collateral requirement was more restrictive than the interest coverage requirement, and TNMP could therefore issue up to $267 million of additional FMBs. After the issuance of $175 million of FMBs in January 1999 to secure the Senior Notes, TNMP could issue an additional $92 million of FMBs.
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. TNMP's 12.5% secured debentures ($130 million) were retired at maturity in January 1999.
Senior Notes
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. 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 will be released, and they will 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 31,1998:
The composite average borrowing rates under TNMP's credit facilities were 6.99% and 7.15% for 1998 and 1997, respectively. The interest rate margins on the 1996 and 1995 facilities have decreased by 0.50% since the ratings on TNMP's FMBs have been upgraded by the rating agencies.
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 Series A, 10.75% Secured Debentures and the 9.25% FMBs. 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 has sufficient liquidity to satisfy the possibility of any known contingencies. Management believes cash flow from operations, the new debt described above, and periodic borrowings under its two credit facilities should be sufficient to meet working capital requirements and planned capital expenditures at least through 1999.
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, 1998, FMB and secured debenture maturities and sinking fund requirements for the five years following 1998 are as follows:
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 of $140 million are callable at par on September 15, 2000.
Note 7. Capital Stock and Dividends
TNP
In November 1998, TNP increased its quarterly dividend from $0.27 to $0.29 per share.
In October 1996, TNP issued 2 million shares of common stock in a public offering, with net proceeds of approximately $47,170,000. The net proceeds were transferred to TNMP as an equity contribution and used to retire debt.
TNMP
The 1995 and 1996 TNMP Credit Facilities restrict the payment of cash dividends by TNMP. As of December 31, 1998, $14.7 million of unrestricted retained earnings were available for dividends.
Note 8. Segment and Related Information
During 1998, TNP adopted FASB Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information". TNP has two reportable segments. The primary segment is TNMP, which provides regulated electric service in Texas and New Mexico. The other reportable segment is FWI, which before operations were discontinued, provided integrated mechanical, electrical, plumbing and other maintenance and repair services to commercial customers in Texas metropolitan areas. TNP manages the segments separately to respond to the unique distinctions between regulated and unregulated businesses.
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):
Note 9. 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 1998, TU was TNMP's largest wholesaler of electricity. In 1998, TU supplied approximately 32% of TNMP's Texas capacity and 23% of its Texas energy requirements. During 1995, pursuant to terms of the contract, TNMP notified TU of its intent to cease purchasing electricity at 19 of the 20 points of delivery served by TU, effective January 1, 1999. The nineteen points of delivery account for approximately 70% of the electricity delivered to TNMP from TU. At that time, the TU Agreement required TNMP to continue purchasing electricity at the remaining point of delivery through May of 2010. In late 1997, TNMP and TU modified the agreement to change the termination date of the contract from May 2010 to June 2002. Therefore, TNMP currently has no obligation to purchase electricity from TU beyond June 2002.
At December 31, 1998, 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):
Significant Customer
A significant industrial customer in Texas left TNMP's system in February 1998 and replaced the power previously provided by TNMP with power from a cogeneration plant built by a third party wholesale power producer. This customer provided sales of 629 GWH and annual revenues of $28.3 million in 1997 ($10.1 million in base revenues). Purchases by this customer in 1998 were 74 GWH, providing total revenues of $3.1 million and base revenues of $0.9 million.
Legal Actions
TNMP and Clear Lake Limited Partnership ("Clear Lake") agreed in March 1999 to settle the lawsuit styled Clear Lake Cogeneration Limited Partnership vs. Texas-New Mexico Power Company, pending in the 234th District court of Harris County, Texas, and the parallel proceeding pending before the PUCT. These proceedings arose out of disagreements between TNMP and Clear Lake over the interpretation of certain terms of an agreement under which TNMP purchases cogenerated electricity from Clear Lake. The settlement, which must be approved by the PUCT, resolves all outstanding issues raised in these proceedings.
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. The key elements of the revised contract are:
- The capacity rate under which TNMP will purchase capacity from Clear Lake is significantly reduced. The energy rate is virtually unchanged.
- Clear Lake will be able to provide 250 MW of capacity from multiple sources. Except for power plants named in the agreement, TNMP retains certain rights of prior approval as to other sources of power and energy.
- TNMP will pay for the cost of transmitting power from the existing Clear Lake power plant to TNMP's load centers in the Gulf Coast Region pursuant to new PUCT rules. Clear Lake will reimburse TNMP for any excess transmission costs that TNMP would incur as a result of delivery from points other than the Clear Lake Plant.
- Clear Lake will no longer pay for nor receive standby power, but will generally guarantee 100% availability of capacity and energy. Clear Lake may request that TNMP obtain or generate replacement power at a negotiated fixed cost under certain limited conditions.
- Future disputes shall be resolved through consultation and arbitration.
The settlement also provides that TNMP will pay Clear Lake $8 million when the PUCT has approved the overall settlement and revised purchased power contract. The settlement calls for regulatory recovery by TNMP of all payments to be made by TNMP for power and energy, as well as the $8 million settlement payment. TNMP does not expect this settlement to have a material adverse impact on its financial position or results of operations.
Phillips Petroleum. TNMP is the defendant in a suit styled Phillips Petroleum Company vs. Texas-New Mexico Power Company. This lawsuit was filed on October 1, 1997 and is pending in the 149th Judicial District Court of Brazoria County, Texas. In this matter, Phillips Petroleum Company contends that it sustained economic losses of approximately $36 million following a one and one-half hour interruption in its electrical service on May 17, 1997. TNMP claims that most, if not all of Phillips Petroleum alleged damages are barred by limitations contained within our tariff approved by the PUCT. The lawsuit is in the initial discovery stage. In regard to this matter, TNMP believes that it has insurance coverage on most claims of Phillips Petroleum up to a total of $31 million, with a $500,000 self-retention.
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 will not have a material adverse effect on TNMP's and TNP's consolidated financial position or results of operations.
TNP ENTERPRISES, INC. AND SUBSIDIARIES Selected Quarterly Consolidated Financial Data
* The 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 fourth quarter of 1997, and 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, fourth quarters of 1998.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors
The information required by this item is incorporated by reference to "Election of Directors" and "Security Ownership of Management and Certain Beneficial Owners" in the proxy statement relating to the 1999 Annual Meeting of TNP Common Shareholders.
Executive Officers
The information set forth under "Employees and Executives" in Part I is incorporated here by reference.
Item 11. EXECUTIVE COMPENSATION.*
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.*
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.*
* The information required by Items 11, 12, and 13 is incorporated by reference to "Compensation of Executive Officers," "Election of Directors - Direct Compensation," and "Security Ownership of Management and Certain Beneficial Owners" in the proxy statement relating to the 1999 Annual Meeting of TNP Common Shareholders.
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.................................... 20 Independent Auditors' Reports................................................ 22
TNP Consolidated Statements of Income, Three Years Ended December 31, 1998....... 24 Consolidated Statements of Cash Flows, Three Years Ended December 31, 1998... 25 Consolidated Balance Sheets, December 31, 1998, and 1997..................... 26 Consolidated Statements of Capitalization, December 31, 1998, and 1997....... 27 Consolidated Statements of Common Shareholders' Equity, Three Years Ended December 31, 1998.................................................... 28
TNMP Consolidated Statements of Income, Three Years Ended December 31, 1998....... 29 Consolidated Statements of Cash Flows, Three Years Ended December 31, 1998... 30 Consolidated Balance Sheets, December 31, 1998, and 1997..................... 31 Consolidated Statements of Capitalization, December 31, 1998, and 1997....... 32 Consolidated Statements of Common Shareholder's Equity, Three Years Ended December 31, 1998.................................................... 33 Notes to Consolidated Financial Statements................................... 34 Selected Quarterly Consolidated Financial Data - TNP......................... 46
(b) TNP and TNMP filed a Form 8-K relating to TNP's amended Shareholders' Rights Plan on October 9, 1998.
(c) The Exhibit Index on pages 49 - 54 is incorporated here by reference.
(d) All financial statement schedules are omitted, as the required information is not applicable or the information is presented in the consolidated financial statements or related Notes.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized.
TNP ENTERPRISES, INC. AND TEXAS-NEW MEXICO POWER COMPANY
Date: March 19, 1999 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.
EXHIBIT INDEX
Exhibits filed with this report are denoted by "*."
Exhibit No. Description - ------- ------------- TNP incorporates the following exhibits by reference to the exhibits and filings noted in parenthesis.
3(a) - Articles of Incorporation and Amendments through March 6, 1984 (Exhibit 3(a) to TNP 1984 Form S-14, File No. 2-89800).
3(b) - Amendment to Articles of Incorporation filed September 25, 1984 (Exhibit 3(b) to TNP 1984 Form 10-K, File No. 1-8847).
3(c) - Amendment to Articles of Incorporation filed August 29, 1985 (Exhibit 3(a) to TNP 1985 Form 10-K, File No. 1-8847).
3(d) - Amendment to Articles of Incorporation filed June 2, 1986 (Exhibit 3(a) to TNP 1986 Form 10-K, File No. 1-8847).
3(e) - Amendment to Articles of Incorporation filed May 10, 1988 (Exhibit 3(e) to TNP 1988 Form 10-K, File No. 1-8847).
3(f) - Amendment to Articles of Incorporation filed May 10, 1988 (Exhibit 3(f) to TNP 1988 Form 10-K, File No. 1-8847).
3(g) - Amendment to Articles of Incorporation filed December 27, 1988 (Exhibit 3(g) to TNP 1988 Form 10-K, File No. 1-8847).
3(h) - Bylaws, as amended (Exhibit 3(h) to joint 1994 Form 10-K, File Nos. 1-8847 and 2-97230).
4(u) - Amended and Restated Rights Agreement between TNP Enterprises, Inc. and Bank of New York, as Rights Agent, dated August 11, 1998and Form of Right Certificate, effective August 11, 1998 (Exhibit 10 to TNP Form 8-K filed October 9, 1998, File No. 1-8847).
*23 - Independent Public Accountants' Consent - Arthur Andersen LLP. Independent Auditors' Consent - KPMG LLP.
*27 - Financial Data Schedule for TNP.
TNMP incorporates the following exhibits by reference to the exhibits and filings noted in parenthesis.
3(i) - Restated Articles of Incorporation. (Exhibit 3(i) to TNMP 1996 10-K, File No. 2-97230)
3(ii)- Bylaws, as amended November 15, 1994 (Exhibit 3(hh) to TNMP 1994 Form 10-K, File No. 2-97230).
*27 - Financial Data Schedule for TNMP.
TNP and TNMP incorporate the following exhibits by reference to the exhibits and filings noted in parenthesis.
4(a) - Indenture of Mortgage and Deed of Trust dated as of November 1, 1944 (Exhibit 2(d) to Community Public Service Co. ("CPS") 1978 Form S-7, File No. 2-61323).
4(b) - Seventh Supplemental Indenture dated as of May 1, 1963 (Exhibit 2(k) to CPS Form S-7, File No. 2-61323).
4(c) - Eighth Supplemental Indenture dated as of July 1, 1963 (Exhibit 2(1), to CPS Form S-7, File No. 2-61323).
4(d) - Ninth Supplemental Indenture dated as of August 1, 1965 (Exhibit 2(m), to CPS Form S-7, File No. 2-61323).
4(e) - Tenth Supplemental Indenture dated as of May 1, 1966 (Exhibit 2(n), to CPS Form S-7, File No. 2-61323).
4(f) - Eleventh Supplemental Indenture dated as of October 1, 1969 (Exhibit 2(o), to CPS Form S-7, File No. 2-61323).
4(g) - Twelfth Supplemental Indenture dated as of May 1, 1971 (Exhibit 2(p), to CPS Form S-7, File No. 2-61323).
4(h) - Thirteenth Supplemental Indenture dated as of July 1, 1974 (Exhibit 2(q), to CPS Form S-7, File No. 2-61323).
4(i) - Fourteenth Supplemental Indenture dated as of March 1, 1975 (Exhibit 2(r), to CPS Form S-7, File No. 2-61323).
4(j) - Fifteenth Supplemental Indenture dated as of September 1, 1976 (Exhibit 2(e), File No. 2-57034).
4(k) - Sixteenth Supplemental Indenture dated as of November 1, 1981 (Exhibit 4(x), File No. 2-74332).
4(l) - Seventeenth Supplemental Indenture dated as of December 1, 1982 (Exhibit 4(cc), File No. 2-80407).
4(m)- Eighteenth Supplemental Indenture dated as of September 1, 1983 (Exhibit (a) to Form 10-Q of TNMP for the quarter ended September 30, 1983, File No. 1-4756).
4(n)- Nineteenth Supplemental Indenture dated as of May 1, 1985 (Exhibit 4(v), File No. 2-97230).
4(o) - Twentieth Supplemental Indenture dated as of July 1, 1987 (Exhibit 4(o) to Form 10-K of TNMP for the year ended December 31, 1987, File No. 2-97230).
4(p) - Twenty-First Supplemental Indenture dated as of July 1, 1989 (Exhibit 4(p) to Form 10-Q of TNMP for the quarter ended June 30, 1989, File No. 2-97230).
4(q)- Twenty-Second Supplemental Indenture dated as of January 15, 1992 (Exhibit 4(q) to Form 10-K of TNMP for the year ended December 31, 1991, File No. 2-97230).
4(r)- Twenty-Third Supplemental Indenture dated as of September 15, 1993 (Exhibit 4(r) to Form 10-K of TNMP for the year ended December 31, 1993, File No. 2-97230).
4(s)- Twenty-Fourth Supplemental Indenture dated as of November 3, 1995 (Exhibit 4(s) to Form 10-K of TNMP for the year ended December 31, 1993, File No. 2-97230).
4(t)- Twenty-Fifth Supplemental Indenture dated as of September 10, 1996 (Exhibit 4(t) to Form 10-Q of TNMP for the quarter ended September 30, 1996, File No. 2-97230).
4(u)*- Twenty-Sixth Supplemental Indenture dated January 1, 1999.
4(v) - Indenture and Security Agreement for 10 3/4% Secured Debentures dated as of September 15, 1993 (Exhibit 4(t) to TNMP 1993 Form 10-K, File No. 2-97230).
4(w)*- Indenture dated as of January 1, 1999 between TNMP and the Chase Bank of Texas, N. A.
4(x)*- First Supplemental Indenture dated as of January 1, 1999 to Indenture dated as of January 1, 1999 between TNMP and the Chase Bank of Texas, N. A.
Contracts Relating to TNP One
10(a)- Fuel Supply Agreement, dated November 18, 1987, between Phillips Coal Company and TNMP(Exhibit 10(j) to TNMP 1987 Form 10-K, File No. 2-97230).
10(a)1-Amendment No. 1, dated as of April 1, 1988, to Fuel Supply Agreement dated November 18, 1987, between Phillips Coal Company and TNMP (Exhibit 10(a)1 to Joint 1994 Form 10-K, File Nos. 1-8847 and 2-97230).
10(a)2 - Amendment No. 2, dated as of November 29, 1994, between Walnut Creek Mining Company and TNMP, to Fuel Supply Agreement dated November 18, 1987, between Phillips Coal Company and TNMP, (Exhibit 10(a)2 to joint 1994 Form 10-K, File Nos. 1-8847 and 2-97230).
10(b) - Unit 1 First Amended and Restated Project Loan and Credit Agreement, dated as of January 8, 1992 (the "Unit 1 Credit Agreement"), among TNMP, TGC, certain banks (the "Unit 1 Banks") and Chase Manhattan Bank (National Association), as Agent for the Unit 1 Banks (the "Unit 1 Agent"), (Exhibit 10(c) to TNMP 1991 Form 10-K, File No. 2-97230).
10(b)1 - Participation Agreement, dated as of January 8, 1992, among certain banks, Participants, and the Unit 1 Agent (Exhibit 10(c)1 to TNMP 1991 Form 10-K, File No. 2-97230).
10(b)2 - Amendment No. 1, dated as of September 21, 1993, to the Unit 1 Credit Agreement (Exhibit 10(b)2 to TNMP 1993 Form 10-K , File No. 2-97230).
10(c) - Assignment and Security Agreement, dated as of January 8, 1992, among TGC and the Unit 1 Agent (Exhibit 10(d) to TNMP 1991 Form 10-K, File No. 2-97230).
10(d) - Amended and Restated Subordination Agreement, dated as of October 1, 1988, among TNMP, Continental Illinois National Bank and Trust Company of Chicago and the Unit 1 Agent (Exhibit 10(uu) to TNMP 1988 Form 10-K, File No. 2-97230).
10(e) - Unit 1 Mortgage and Deed of Trust, dated as of December 1, 1987, (Exhibit 10(ee) to TNMP 1987 Form 10-K, File No. 2-97230).
10(e)1 - Supplemental Unit 1 Mortgage and Deed of Trust executed on January 27, 1992, (Exhibit 10(g)4 to TNMP 1991 Form 10-K , File No. 2-97230).
10(e)2 - First TGC Modification and Extension Agreement, dated as of January 24, 1992, among the Unit 1 Banks, the Unit 1 Agent, TNMP, and TGC (Exhibit 10(g)1 to TNMP 1991 Form 10-K, File No. 2-97230).
10(e)3 - Second TGC Modification and Extension Agreement, dated as of January 27, 1992, among the Unit 1 Banks, the Unit 1 Agent, TNMP, and TGC (Exhibit 10(g)2 to TNMP 1991 Form 10-K, File No. 2-97230).
10(e)4 - Third TGC Modification and Extension Agreement, dated as of January 27, 1992, among the Unit 1 Banks, the Unit 1 Agent, TNMP, and TGC (Exhibit 10(g)3 to TNMP 1991 Form 10-K, File No. 2-97230).
10(e)5 - Fourth TGC Modification and Extension Agreement, dated as of September 29, 1993, among the Unit 1 Banks, the Unit 1 Agent, TNMP, and TGC (Exhibit 10(f)5 to TNMP 1993 Form 10-K, File No. 2-97230).
10(e)6 - Fifth TGC Modification and Extension Agreement, dated as of September 29, 1993, among the Unit 1 Banks, the Unit 1 Agent, TNMP, and TGC (Exhibit 10(f)6 to TNMP 1993 Form 10-K, File No. 2-97230).
10(f) - Indemnity Agreement dated December 1, 1987, by Westinghouse, CE and Zachry, (Exhibit 10(ff) to TNMP 1987 Form 10-K, File No. 2-97230).
10(g) - Unit 1 Second Lien Mortgage and Deed of Trust dated as of December 1, 1987, (Exhibit 10(jj) to TNMP 1987 Form 10-K, File No. 2-97230).
10(g)1 - Correction Second Lien Mortgage and Deed of Trust, dated as of December 1, 1987, (Exhibit 10(vv) to TNMP 1988 Form 10-K, File No. 2-97230).
10(g)2 - Second Lien Mortgage and Deed of Trust Modification, Extension and Amendment Agreement, dated as of January 8, 1992 (Exhibit 10(i)2 to TNMP 1991 Form 10-K, File No. 2-97230).
10(g)3 - TNMP Second Lien Mortgage Modification No. 2, dated as of September 21, 1993 (Exhibit 10(h)3 to TNMP 1993 Form 10-K, File No. 2-97230).
10(h) - Agreement for Conveyance and Partial Release of Liens, dated as of December 1, 1987, by PFC and the Unit 1 Agent (Exhibit 10(kk) to TNMP 1987 Form 10-K, File No. 2-97230).
10(i) - Inducement and Consent Agreement, dated as of June 15, 1988, among Phillips Coal Company, Kiewit Texas Mining Company, TNMP, Phillips Petroleum Company, and Peter Kiewit Son's, Inc. (Exhibit 10(nn) to TNMP 1988 Form 10-K, File No. 2-97230).
10(j) - Assumption Agreement, dated as of October 1, 1988, by TGC, in favor of certain banks, the Unit 1 Agent, and the Depositary, as defined therein (Exhibit 10(ww) to TNMP 1988 Form 10-K, File No. 2-97230).
10(k) - Guaranty, dated as of October 1, 1988, by TNMP of TGC obligations under Unit 1 Credit Agreement (Exhibit 10(xx) to TNMP 1988 Form 10-K of TNMP, File No. 2-97230).
10(l) - First Amended and Restated Facility Purchase Agreement dated as of January 8, 1992, between TNMP and TGC (Exhibit 10(n) to TNMP 1991 Form 10-K, 1991, File No. 2-97230).
10(m) - Operating Agreement, dated as of October 1, 1988, between TNMP and TGC (Exhibit 10(zz) to TNMP 1988 Form 10-K, File No. 2-97230).
10(n) - Unit 2 First Amended and Restated Project Loan and Credit Agreement, dated as of January 8, 1992 (the "Unit 2 Credit Agreement"), among TNMP, TGC II, certain banks (the "Unit 2 Banks") and The Chase Manhattan Bank (National Association), as Agent for the Unit 2 Banks (the "Unit 2 Agent") (Exhibit 10(q) to TNMP 1991 Form 10-K, File No. 2-97230).
10(n)1 - Amendment No. 1, dated as of September 21, 1993, to the Unit 2 Credit Agreement (Exhibit 10(o)1 to TNMP 1993 Form 10-K, File No. 2-97230).
10(o) - Assignment and Security Agreement, dated as of January 8, 1992, among TGC II and the Unit 2 Agent (Exhibit 10(r) to TNMP 1991 Form 10-K, File No. 2-97230).
10(p) - Assignment and Security Agreement dated as of October 1, 1988, by TNMP to the Unit 2 Agent (Exhibit 10(jjj) to TNMP 1988 Form 10-K, File No. 2-97230).
10(q) - Subordination Agreement, dated as of October 1, 1988, among TNMP, Continental Illinois National Bank and Trust Company of Chicago, and the Unit 2 Agent (Exhibit 10(mmm) to TNMP 1988 Form 10-K, File No. 2-97230).
10(r) - Unit 2 Mortgage and Deed of Trust dated as of October 1, 1988 (Exhibit 10(uuu) to TNMP 1988 Form 10-K, File No. 2-97230).
10(r)1 - First TGC II Modification and Extension Agreement, dated as of January 24, 1992, among the Unit 2 Banks, the Unit 2 Agent, TNMP, and TGC II (Exhibit 10(u)1 to TNMP 1991 Form 10-K, File No. 2-97230).
10(r)2 - Second TGC II Modification and Extension Agreement, dated as of January 27, 1992, among the Unit 2 Banks, the Unit 2 Agent, TNMP and TGC II (Exhibit 10(u)2 to TNMP 1991 Form 10-K, File No. 2-97230).
10(r)3 - Third TGC II Modification and Extension Agreement, dated as of January 27, 1992, among the Unit 2 Banks, the Unit 2 Agent, TNMP, and TGC II (Exhibit 10(u)3 to TNMP 1991 Form 10-K, File No. 2-97230).
10(r)4 - Fourth TGC II Modification and Extension Agreement, dated as of September 29, 1993, among the Unit 2 Banks, the Unit 2 Agent, TNMP, and TGC II (Exhibit 10(s)4 to TNMP 1993 Form 10-K, File No. 2-97230).
10(r)5 - Fifth TGC II Modification and Extension Agreement, dated as of June 15, 1994, among the Unit 2 Banks, the Unit 2 Agent, TNMP, and TGC II (Exhibit 10(s)5 to TNMP Form 10-Q for quarter ended June 30, 1994, File No. 2-97230).
10(s) - Release and Waiver of Liens and Indemnity Agreement, dated October 1, 1988, by Westinghouse, CE, and Zachry (Exhibit 10(vvv) to TNMP 1988 Form 10-K, File No. 2-97230).
10(t) - Second Lien Mortgage and Deed of Trust, dated as of October 1, 1988, (Exhibit 10(www) to TNMP 1988 Form 10-K, File No. 2-97230).
10(t)1 - Second Lien Mortgage and Deed of Trust Modification, Extension and Amendment Agreement, dated as of January 8, 1992, (Exhibit 10(w)1 to TNMP 1991 Form 10-K, File No. 2-97230).
10(t)2 - TNMP Second Lien Mortgage Modification No. 2, dated as of September 21, 1993, (Exhibit 10(u)2 to TNMP 1993 Form 10-K, File No. 2-97230).
10(u) - Intercreditor and Nondisturbance Agreement, dated as of October 1, 1988, among PFC, Texas PFC, Inc., TNMP, certain creditors, as defined therein, and the Collateral Agent, as defined therein (Exhibit 10(xxx) to TNMP 1988 Form 10-K, File No. 2-97230).
10(u)1 - Amendment No. 1, dated as of January 8, 1992, to Intercreditor and Nondisturbance Agreement, (Exhibit 10(x)1 to TNMP 1991 Form 10-K, File No. 2-97230).
10(u)2 - Amendment No. 2, dated as of September 21, 1993, to Intercreditor and Nondisturbance Agreement, (Exhibit 10(v)2 to TNMP 1993 Form 10-K of TNMP, File No. 2-97230).
10(v) - Grant of Reciprocal Easements and Declaration of Covenants Running with the Land, dated October 1, 1988, between PFC and Texas PFC, Inc. (Exhibit 10(yyy) to TNMP 1988 Form 10-K, File No. 2-97230).
10(w) - Non-Partition Agreement, dated as of May 30, 1990, among TNMP, TGC, and the Unit 1 Agent (Exhibit 10(ss) to TNMP 1990 Form 10-K of TNMP, File No. 2-97230).
10(x) - Assumption Agreement, dated as of May 31, 1991, by TGC II in favor of certain banks, the Unit 2 Agent, and the Depositary, as defined therein (Exhibit 10(kkk) to Amendment No. 1 to File No. 33-41903).
10(y) - Guaranty, dated as of May 31, 1991, by TNMP, for TGC II obligations under the Unit 2 Credit Agreement (Exhibit 10(lll) to Amendment No. 1 to File No. 33-41903).
10(z) - First Amended and Restated Facility Purchase Agreement dated as of January 8, 1992, between TNMP, and TGC II (Exhibit 10(dd) to TNMP 1991 Form 10-K, File No. 2-97230).
10(z)1 - Amendment No. 1 to the Unit 2 First Amended and Restated Facility Purchase Agreement, dated as of September 21, 1993, between TNMP and TGC II (Exhibit 10(aa)1 to TNMP 1993 Form 10-K, File No. 2-97230).
10(aa) - Operating Agreement, dated as of May 31, 1991, between TNMP and TGC II (Exhibit 10(nnn) to Amendment No. 1 to File No. 33-41903).
10(bb) - Non-Partition Agreement, dated as of May 31, 1991, among TNMP, TGC II, and the Unit 2 Agent (Exhibit 10(ppp) to Amendment No. 1 to File No. 33-41903).
10(cc) - Revolving Credit Facility Agreement, dated as of November 3, 1995, among TNMP, certain lenders, and Chemical Bank, as Administrative Agent and Collateral Agent. (Exhibit 10(cc) to Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230).
10(cc)1- Form of Guarantee and Pledge Agreement, dated as of November 3, 1995, between TGC II, and Chemical Bank, as collateral agent (Exhibit D to Revolving Credit Facility Agreement). (Exhibit 10(cc)1 to Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230).
10(cc)2- Form of Bond Agreement, dated as of November 3, 1995, between TNMP and Chemical Bank, as Collateral Agent (Exhibit E to Revolving Credit Facility Agreement). (Exhibit 10(cc)2 to Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230).
10(cc)3- Form of Note Pledge Agreement, dated as of November 3, 1995, between TNMP and Chemical Bank, as collateral agent (Exhibit F to Revolving Credit Facility Agreement). (Exhibit 10(cc)3 to Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230).
10(cc)4- Form of Sixth TGC II Modification and Extension Agreement, dated as of November 3, 1995, among the Unit 2 Banks, The Chase Manhattan Bank, as agent, TNMP, and TGC II (Exhibit H to the Revolving Credit Facility Agreement). (Exhibit 10(cc)4 to Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230).
10(cc)5- Form of Second Lien Mortgage and Deed of Trust Modification, Extension and Amendment Agreement No. 3, dated as of November 3, 1995 (Exhibit I to the Revolving Credit Facility Agreement). (Exhibit 10(cc)5 to Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230).
10(cc)6- Form of Assignment and Amendment Agreement, dated as of November 3, 1995, among TNMP, TGC II, and Chemical Bank, as administrative agent and collateral agent (Exhibit J to the Revolving Credit Facility Agreement). (Exhibit 10(cc)6 to Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230).
10(cc)7- Form of Assignment of TGC II Mortgage Lien, dated as of November 3, 1995, by The Chase Manhattan Bank as agent to Chemical Bank (Exhibit K to the Revolving Credit Facility Agreement). (Exhibit 10(cc)7 to Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230).
10(cc)8- Form of Collateral Transfer of Notes, Rights and Interests, dated as of November 3, 1995, between TNMP and Chemical Bank, as Administrative Agent and as Collateral Agent (Exhibit L to the Revolving Credit Facility Agreement). (Exhibit 10(cc)8 to Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230).
10(cc)9- Form of Assignment of Second Lien Mortgage and Deed of Trust, dated as of November 3, 1995, between the Chase Manhattan Bank, as Agent, and Chemical Bank, as agent (Exhibit M to the Revolving Credit Facility Agreement). (Exhibit 10(cc)9 to Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230).
10(cc)10- Form of Collateral Transfer of Notes, Rights and Interests, dated as of November 3, 1995, between TNMP and Chemical Bank, as Administrative Agent and as Collateral Agent (Exhibit N to the Revolving Credit Facility Agreement). (Exhibit 10(cc)10 to Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230).
10(cc)11- Form of Amendment No. 1, dated as of November 3, 1995, to the Assignment and Security Agreement between TNMP, and The Chase Manhattan Bank, as agent (Exhibit O to the Revolving Credit Agreement). (Exhibit 10(cc)11 to Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230).
10(cc)12- Amendment No. 1 dated October 28, 1998 to Revolving Credit Facility Agreement dated as of November 3, 1995 among TNMP, certain lenders, and Chase Bank, N.A. (successor by merger to Chemical Bank) as Administrative Agent and Collateral Agent (Exhibit 10(a) to Form 10Q of TNP and TNMP for quarter ended September 30, 1998. (File Nos. 1-8847 and 2-97230.)
Power Supply Contracts
10(dd) - Contract dated May 12, 1976, between TNMP and Houston Lighting & Power Company (Exhibit 5(a), File No. 2-69353).
10(dd)1- Amendment, dated January 4, 1989, to contract between TNMP and Houston Lighting & Power Company (Exhibit 10(cccc) to TNMP 1988 Form 10-K, File No. 2-97230).
10(ee) - Amended and Restated Agreement for Electric Service dated May 14, 1990, between TNMP and Texas Utilities Electric Company (Exhibit 10(vv) to TNMP 1990 Form 10-K, File No. 2-97230).
10(ee)1- Amendment, dated April 19, 1993, to Amended and Restated Agreement for Electric Service, between TNMP and Texas Utilities Electric Company (Exhibit 10(ii)1 to 1993 Form S-2, Registration Statement, File No. 33-66232).
10(ff) - Contract dated April 27, 1977, between TNMP and West Texas Utilities Company, as amended (Exhibit 10(e) of Form 8 applicable to TNMP 1986 Form 10-K, File No. 2-97230).
10(gg) - Contract dated April 29, 1987, between TNMP and El Paso Electric Company (Exhibit 10(f) of Form 8 applicable to TNMP 1986 Form 10-K, File No. 2-97230).
10(hh) - Amended and Restated Contract for Electric Service, dated April 29, 1988, between TNMP and Public Service Company of New Mexico (Exhibit 10(zz)3 to Amendment No. 1 to File No. 33-41903).
10(ii) - Contract dated December 8, 1981, between TNMP and SPS as amended (Exhibit 10(h) of Form 8 applicable to TNMP 1986 Form 10-K, File No. 2-97230).
10(ii)1- Amendment, dated December 12, 1988, to contract between TNMP and SPS (Exhibit 10(llll) to TNMP 1988 Form 10-K, File No. 2-97230).
10(ii)2- Amendment, dated December 12, 1990, to contract between TNMP and SPS (Exhibit 19(t) to TNMP 1990 Form 10-K, File No. 2-97230).
10(jj) - Contract dated August 31, 1983, between TNMP and Capitol Cogeneration Company, Ltd. (Exhibit 10(i) of Form 8 applicable to TNMP 1986 Form 10-K, File No. 2-97230).
10(jj)1- Agreement Substituting a Party, dated May 3, 1988, among Capitol Cogeneration Company, Ltd., Clear Lake Cogeneration Limited Partnership and TNMP (Exhibit 10(nnnn) to TNMP 1988 Form 10-K, File No. 2-97230).
10(jj)2- Letter Agreements, dated May 30, 1990, and August 28, 1991, between Clear Lake Cogeneration Limited Partnership and TNMP (Exhibit 10(oo)2 to TNMP 1992 Form 10-K, File No. 2-97230).
10(jj)3- Notice of Extension Letter, dated August 31, 1992, between Clear Lake Cogeneration Limited Partnership and TNMP (Exhibit 10(oo)3 to TNMP 1992 Form 10-K, File No. 2-97230).
10(jj)4- Scheduling Agreement, dated September 15, 1992, between Clear Lake Cogeneration Limited Partnership and TNMP (Exhibit 10(oo)4 to TNMP 1992 Form 10-K, File No. 2-97230).
10(kk) - Interconnection Agreement between TNMP and Plains Electric Generation and Transmission Cooperative, Inc. dated July 19, 1984 (Exhibit 10(j) of Form 8 applicable to TNMP 1986 Form 10-K, File No. 2-97230).
10(ll) - Interchange Agreement between TNMP and El Paso Electric Company dated April 29, 1987 (Exhibit 10(l) of Form 8 applicable to TNMP 1986 Form 10-K, File No. 2-97230). 10(mm) - Amendment No. 1, dated November 21, 1994, to Interchange Agreement between TNMP and El Paso Electric Company (Exhibit 10(nn)1 to joint 1994 Form 10-K, File Nos. 1-8847 and 2-97230).
10(nn) - DC Terminal Participation Agreement between TNMP and El Paso Electric Company dated December 8, 1981 as amended (Exhibit 10(m) of Form 8 applicable to TNMP 1986 Form 10-K, File No. 2-97230).
10(oo) - Agreement for Purchase and Sale of Energy effective as of May 1, 1996 among TNMP, Amoco Chemical Company and Amoco Oil Company (Exhibit 10 (pp) to joint 1997 Form 10-K, File Nos. 1-8847 and 2-97230).
10(pp) - Agreement dated December 30, 1994 between TNMP and Union Carbide Corporation ("UCC") for Purchase of Capacity and Energy from UCC (Exhibit 10(qq) to joint 1997 Form 10-K, File Nos. 1-8847 and 2-97230).
10(qq) Letter agreement dated November 24, 1997 between TNMP and Texas Utilities Electric Company (Exhibit 10(qq) to joint 1998 Form 10-K, File Nos. 1-8447 and 2-97230.
Management Contracts
10(rr) - Form of TNMP Executive Agreement for Severance Compensation Upon Change in Control and schedule of substantially identical agreements (Exhibit 10(rr) to joint 1998 Form 10-K, File Nos. 1-8447and 2-97230).
10(ss) - Agreement dated March 25, 1994 between Kevern Joyce and TNP and TNMP (Exhibit 10(tt) to TNP and TNMP 1994 Form 10-Q, File Nos. 1-8847 and 2-97230).
10(tt) - Amendment dated February 16, 1998 to Agreement dated March 25, 1994 between Kevern Joyce and TNP and TNMP (Exhibit 10(rr) to joint 1998 Form 10-K, File Nos. 1-8447and 2-97230).
10(uu) - Agreement dated February 16, 1998 between John Edwards and TNMP (Exhibit 10(rr) to joint 1998 Form 10-K, File Nos. 1-8447and 2-97230).
10(vv) - Agreement dated February 16, 1998 between Ralph S. Johnson and TNMP (Exhibit 10(rr) to joint 1998 Form 10-K, File Nos. 1-8447and 2-97230).
*10(ww)- Form of TNP Incentive Compensation Award Agreement and schedule of substantially identical agreements.
*21 - Subsidiaries of the Registrants.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
SIGNIFICANT EVENTS AND KNOWN TRENDS AFFECTING TNP AND TNMP
Competitive Conditions
The electric utility industry continues its transition toward an environment of increased competition. TNMP expects the portions of operations pertaining to transmission and distribution to continue to be regulated. Pressures that underlie the movement toward increasing competition are numerous and complex. They include legislative and regulatory changes, technological advances, consumer demands, greater availability of natural gas, environmental needs, and other factors. The increasingly competitive environment presents opportunities to compete for new customers, as well as the risk of loss of existing customers.
The most significant effect of competition on TNMP, as well as other utilities, will be the ability to recover potential stranded costs. "Stranded costs" is the difference between what it costs TNMP to provide energy and what a customer would be willing to pay for energy in a competitive market. The inability to recover a significant portion of stranded costs would adversely impact TNP's and TNMP's financial condition. In Texas, TNMP's potential stranded cost relates to TNP One, its 300 MW generating unit, and could potentially be more than $270 million. In New Mexico, TNMP's potential stranded cost relates to its fixed purchased power contracts. As of December 31, 1998, TNMP had reserved $3.4 million for its potential stranded costs in New Mexico. Additional stranded costs could potentially be zero to $7 million, depending on the market price of purchased power at the onset of competition.
Legislators in both Texas and New Mexico have introduced bills that propose to open the business to competition. The bills also address recovery of stranded costs. In Texas, TNMP's Transition Plan includes provisions for modifying the plan so that it conforms to subsequently enacted legislation
The following discusses TNMP's strategy to transition to competition and to provide TNMP the ability to recover its potential stranded costs in Texas and New Mexico. Although the recoverability and amount of stranded costs is uncertain, management realizes there is some risk that shareholders may be required to share the financial burden of stranded costs with customers.
Texas Transition Plan
On July 22, 1998, the PUCT approved TNMP's Transition Plan, and issued a final order documenting its approval on November 7, 1998. The Transition Plan includes a number of provisions that impact TNMP's financial results. They are:
- TNMP will implement a series of residential and commercial rate reductions totaling 9% and 3%, respectively, during a five-year transition period. The first rate reductions for residential and commercial customers of 3% and 1%, respectively, were implemented retroactive to January 1, 1998. The remaining reductions will be effective in January of 2000 and 2001.
- TNMP's earnings on its Texas operations are capped at an 11.25% return on equity less assumed discounts on industrial rates, which, for 1998, were $4.1 million. In 1999, the discounts are expected to be approximately $2.9 million. TNMP will apply Texas earnings in excess of the cap to recover stranded costs related to its generation investment (TNP One) or will refund them to customers, according to PUCT guidelines.
- The Plan includes a cap on allowed operating and maintenance expenses applicable to TNMP's Texas operations based on cost incurred per customer in 1996.
- TNMP will record $15 million of additional depreciation annually during 1999-2002 to recover stranded costs.
- Finally, the manner in which TNMP recovers the cost of purchased power from its customers has changed. In the past, all of these costs were passed directly through to TNMP's customers via adjustment factors that could change as often as monthly. Under this methodology, purchased power expense had no impact on operating income. Effective with the new rates under the Transition Plan, only the energy-related portion of purchased power will be passed through directly to customers via the fuel adjustment clause. The demand-related portion of purchased power will be 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, will affect operating income.
Absent legislation implementing retail competition, at the end of the five-year transition period, TNMP shall file with the PUCT a proposal to voluntarily implement retail access, contingent upon the approval of an appropriate mechanism for recovery of any remaining stranded costs. The PUCT has committed to full recovery of stranded costs if they are quantified using a market-based methodology, TNMP offers retail access, and stranded costs are allocated fairly to all customers.
During the year ended December 31, 1998, the Transition Plan reduced TNMP's operating income as summarized in the table below (amounts in thousands except per share items):
The combination of the one-time customer refund and implementing the rate structure change reduced operating revenue by $11.4 million (pre-tax). TNMP's earnings for the year ended December 31, 1998 did not exceed the earnings cap imposed by the Transition Plan. The Transition Plan includes a provision that allows the PUCT to review TNMP's earnings and the related earnings cap.
New Mexico Community Choice
On April 11, 1997, the NMPUC approved TNMP's plan for transition to competition in its New Mexico service territory, called Community Choice. TNMP implemented Community Choice effective May 1, 1997. Community Choice provides TNMP's customers the right to choose their electricity provider after a three-year transition period. The plan freezes rates (including the recovery of purchased power) during the transition period, and allows for customer aggregation based on market forces. As of December 31, 1998, TNMP had reserved $3.4 million for its potential stranded costs in New Mexico.
Impact of Competition on TNMP
In addition to pursuing the satisfactory resolution of the stranded cost issue, 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 and new services.
As noted above, the Transition Plan changes the way TNMP recovers the demand component of purchased power. The change increases the risk that TNMP will have to absorb increases in the demand cost of purchased power, while at the same time it allows TNMP 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 it power supply portfolio.
Results of Operations
Overall Results
Income applicable to common stock was $19.3 million for 1998, compared to $29.5 million in 1997. The 1998 results included the effect of FWI's discontinued operations of $12.7 million, and costs to implement the transition plan of $3.0 million. The 1997 results included a $12.9 million loss associated with FWI's discontinued operations. Exclusive of one-time items, the 1998 earnings were $35.0 million, a $7.4 million decrease as compared to the 1997 earnings of $42.4 million.
Income applicable to common stock was $22.9 million in 1996. Results for 1996 included a $3.1 million loss associated with FWI's discontinued operations, and a $1.3 million after tax charge for the settlement of litigation associated with the Series T FMB retirement in 1995. Excluding the one-time items, 1997 earnings were $15.1 million higher than 1996 earnings of $27.3 million.
The following table sets forth results of operations for 1998, 1997, and 1996 and the impact of one-time items:
Beginning in 1996, FWI's operations included construction and service activities. In late 1997, management reevaluated FWI's strategy and adopted a revised strategy to concentrate on service and maintenance activities and to discontinue the construction segment. In 1998, TNP elected to discontinue all remaining operations of FWI. See Note 3 for additional information regarding the discontinued operations.
The operations of TNMP currently represent most of TNP's operations. The following discussion focuses on TNMP's operations, except where stated otherwise.
Operating Revenues
The following table summarizes the components of operating revenues (in thousands).
Purchased power & fuel expenses are discussed in "Results of Operations--Operating Expenses."
The following table summarizes the components of the base revenues increase (decrease) from 1998 to 1997 and from 1997 to 1996 (in thousands).
The base revenue decrease of $8.4 million during 1998 resulted primarily from the implementation of the Texas Transition Plan and the loss of a significant industrial customer (see Note 9). As discussed in Note 2, the Transition Plan had the effect of reducing base rate revenues and reducing recovery of demand purchased power costs. Offsetting the base revenue decrease were increased sales due to hotter than normal weather during the summer, and customer growth in the residential and commercial classes.
The base revenue increase of $18.9 million during 1997 resulted primarily from implementing the new transmission access rules during 1997, growth in residential and commercial customers, and a full year of operation of its control area in Texas that TNMP implemented on July 31, 1996. The control area is an electrical system that enables TNMP to instantaneously balance its system resources with loads. Implementation of the control area enabled TNMP to enhance its industrial economy rate sales, non-industrial standby revenues, and power marketing sales. The control area also permitted TNMP to replace standby power for TNP One with the purchase of planning reserves.
The components of GWH sales for 1998 and 1997 are summarized in the following table:
1998 sales decreased 307 GWHs (or 3%), from 1997 levels, due to the movement of a significant industrial customer to self-generation and decreased off-system sales. This decrease was partially offset by increased residential and commercial sales due to hotter-than-normal weather and customer growth.
As discussed in "Competitive Conditions--Texas Transition Plan" and Note 2, the PUCT approved the Texas Transition Plan during 1998. The Transition Plan includes a five-year transition period, with a series of rate reductions for residential and commercial customers beginning in 1998. The agreement provides for TNMP to recover a portion of its potential stranded costs during the transition period. Also, TNMP's earnings on Texas operations are capped at 11.25% return on equity less assumed discounts on industrial rates, which, for 1998, were $4.1 million. Texas earnings in excess of the cap will be applied by TNMP to recover stranded costs related to its generation investment (TNP One) or refunded to customers. During 1998, TNMP did not have any excess earnings on its Texas operations. This was primarily due to higher than expected demand purchased power costs as discussed in "Operating Expenses - Purchased Power & Fuel."
As discussed in "Competitive Conditions--New Mexico Community Choice" and Note 2, TNMP implemented its Community Choice plan in New Mexico on May 1, 1997. The plan provides TNMP's customers the right to choose their energy provider after a three-year transition period and freezes rates (including the recovery of purchased power) during the transition period. The rates represent a slight reduction as compared to rates in effect prior to May 1997. The reduced rates have not had a material adverse effect on TNP's or TNMP's financial condition.
A significant industrial customer in Texas left TNMP's system in February 1998 and replaced the power previously provided by TNMP with power from a cogeneration plant built by a third party wholesale power producer. This customer provided sales of 629 GWH and annual revenues of $28.3 million in 1997 ($10.1 million in base revenues). Purchases by this customer in 1998 were 74 GWH, providing total revenues of $3.1 million and base revenues of $0.9 million.
During late 1997, TNMP renegotiated with a large industrial customer in New Mexico to continue providing full service until the end of the New Mexico Community Choice transition period (April 30, 2000). Effective January 1, 1999, this customer reduced its firm purchased power commitment by 55%. After the end of the transition period, TNMP will provide firm transmission service to this customer, and this customer can purchase its KWH requirements on the open market. Currently, TNMP is this customer's lowest cost U.S. electric supplier. This customer provided sales of 1,101 GWH and revenues of $39.9 million in 1998 ($11.9 million in base revenues).
Operating Expenses
Operating expenses for 1998 were $18.1 million higher than in 1997, due primarily to higher purchased power expenses.
Operating expenses for 1997 were $72.4 million higher than in 1996, due primarily to higher purchased power expenses stemming from increased sales requirements under agreements with two cogeneration customers and income taxes.
Purchased Power & Fuel Expenses
The following table summarizes the components of purchased power and fuel expenses (in thousands).
During 1998, purchased power and fuel expenses increased by $14.1 million 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. As discussed in Note 2, the Transition Plan changes the method of recovering purchased power expenses from customers. Effective January 1, 1998, only the energy-related portion of purchased power is passed through directly to customers via the fixed fuel recovery factor. The demand-related portion of purchased power will be recovered through base rates. Therefore, any difference between the amount of demand-related purchased power recovered through TNMP's rates and the actual costs will affect operating income. Texas demand charges are $98.3 million of the $121.3 million shown above as non pass-through purchased power. Firm purchased power costs in New Mexico account for the remainder. Recovery of demand purchased power in Texas amounted to $90.8 million in 1998, resulting in a reduction of $7.5 million in pre-tax operating income. Prior to January 1, 1998, the majority of purchased power costs were recoverable from customers via a recovery clause.
During 1997, purchased power and fuel expenses increased by $59.1 million primarily due to additional MWHs purchased to meet increased sales requirements from the agreements negotiated with the two cogeneration customers during the second quarter of 1996.
Other Operating Expenses
Other operating expenses in 1998 increased by $6.9 million compared to 1997. This resulted from additional transmission expenses of $3.1 million as compared to 1997, and the $3.3 million write-off of deferred costs related to the Transition Plan, as discussed in "Competitive Conditions--Texas Transition Plan" and Note 2.
Other operating expenses in 1997 were comparable to 1996. Cost savings from reduced standby expenses resulting from implementation of the control area offset a $2.0 million increase in the Texas transmission expenses.
Interest Charges
During 1998, interest charges decreased $3.2 million due primarily to reduced borrowings and lower interest rates on the credit facilities.
During 1997, interest charges decreased $12.5 million due primarily to the retirement of Series T FMBs in January 1997 and applying cash flow from operations to reduce debt levels. The 11.25% Series T FMBs were retired with lower cost borrowings from the credit facilities and an equity contribution from TNP in late 1996, resulting from its common stock sale.
In January 1999, TNMP retired its 12.5% secured debentures when they matured. It also issued $175 million of 6.25% Senior Notes due in 2009. Interest charges are expected to continue to decrease during 1999 due to the lower interest rate on the Senior Notes and reduced borrowings against the credit facilities.
Liquidity and Capital Resources
Sources of Liquidity
The main sources of liquidity for TNP are cash flow from operations, borrowings from credit facilities and sale of additional common stock.
TNP's cash flow from operations totaled $72.9 million, $103.9 million and $65.2 million in 1998, 1997 and 1996. 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. Cash flow from operations increased in 1997 from 1996 due to factoring unbilled receivables and increased base revenues. The changes in TNMP's cash flow from operations mirrored those of TNP.
TNMP has two existing credit facilities with a total of $100 million of unused borrowings available, as of December 31, 1998. In January 1999, TNMP entered into a third credit facility that provides $35 million of borrowing capacity through April 1999.
In November 1998, TNP entered into a new credit facility with a total commitment of $50 million, and unused borrowing capacity of $41 million at December 31, 1998. Borrowings under this facility can be used for investing in TNP's subsidiaries, payment of dividends to TNP's shareholders, investing in nonregulated businesses, and other general corporate purposes.
TNP reserved one million shares of common stock for issuance through a direct stock purchase plan that began in 1997. The plan is designed to provide investors with a convenient method to purchase shares of TNP's common stock directly from the company and to reinvest cash dividends. The plan has replaced TNP's prior dividend reinvestment plan. As of December 31, 1998, the remaining reserve for direct stock purchase plan was 946,000 shares.
Capital Resources
TNP's and TNMP's capital structure continued to improve during 1998, as TNMP was able to reduce debt due to continued strong earnings for the year. The equity portion of TNP's capital structure increased from 38.3% at December 31, 1997, to 40.0% at December 31, 1998. Conversely, the long-term debt ratio decreased from 61.3% to 59.6% for the same period. TNMP experienced similar results with its capital ratios.
TNMP's capital requirements through 2003 are projected to be as follows (amounts in millions):
TNMP believes that cash flow from operations, borrowings in the capital markets, and periodic borrowings under the credit facilities will be sufficient to meet working capital requirements and planned capital requirements through the foreseeable future.
Other Matters
Application of SFAS 71
As a result of the Energy Policy Act of 1992 and actions of regulatory commissions, the electric utility industry is moving toward a combination of competition and a modified regulatory environment. TNMP's financial statements currently reflect assets and costs based on current cost-based ratemaking regulations in accordance with SFAS 71, Accounting for the Effects of Certain Types of Regulation. Continued applicability of SFAS 71 to TNMP's financial statements requires that rates set by an independent regulator on a cost-of-service basis can actually be charged to and collected from customers.
In the event that all or a portion of a utility's operations cease to meet those criteria for various reasons, including deregulation, a change in the method of regulation, or a change in the competitive environment for the utility's regulated service, the utility will have to discontinue SFAS 71 for that portion of operations. That discontinuation would be reported by the write-off of unrecoverable regulatory assets and liabilities.
As discussed in Note 2, as a result of the Community Choice program in New Mexico, TNMP discontinued the application of SFAS 71 to its generation/power supply operations in New Mexico during 1997. The discontinuing of regulatory accounting principles had no effect on TNMP's financial condition. Also, as discussed in "Competitive Conditions--Texas Transition Plan" and Note 2, on July 22, 1998, the PUCT approved TNMP's Transition Plan, and issued a final order documenting its approval on November 7, 1998. The PUCT has committed to full recovery of stranded costs if they are quantified using a market-based methodology, TNMP offers retail access, and stranded costs are allocated fairly to all customers. Rates under the Transition Plan continue to be cost-based, and TNMP will continue to apply SFAS 71 to its Texas generation/power supply operations until it requests, and the PUCT approves authority to implement retail competition.
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 and 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 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. TNP 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. TNP One personnel are consulting with the manufacturers of the Plant Control Computer which provides for most of the computerized operations of the boiler and turbine controls, as well as the Continuous Emissions Monitoring System. Integrated testing of the Plant Control Computer was completed on Unit 1 in early February 1999. The integrated testing on Unit 1 detected no Y2K problems. Testing will be done on Unit 2 while the plant is down for a maintenance outage this spring. Tests of the Continuous Emissions Monitoring System determined that only non-critical Y2K issues were detected. Upgrades to that software are currently underway. An extensive list of other minor suspect devices has been compiled and is also in the process of being tested.
As of March 1, 1999, the TNP One generation plant has completed the assessment of all mission-critical facilities, and is approximately 52 percent complete with the testing and remediation of those facilities. All testing and remediation is expected to be complete by June 1999.
Distribution System. TNMP is primarily a distribution company. Over 600 suspect distribution system devices have been identified and are being tested. TNMP is currently testing the devices that have external clock functions. Devices that have no external clock function are being checked with the manufacturer and TNMP is reviewing their testing of those devices. All of TNMP's critical distribution substations have designs which contain redundant relaying or bypass switching schemes to remove failed devices and equipment for normal operations, allowing for quick restoration of power to customers.
As of March 1, 1999, TNMP is 84 percent complete on the assessment of all Distribution System mission-critical facilities, and is approximately 53 percent complete with the testing and remediation of those facilities. All testing and remediation is expected to be complete by June 1999.
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 is participating on ERCOT's Year 2000 Technical Task Force and on the Year 2000 Operational Preparedness and Planning Task Force. TNMP will be participating in all testing, drills and contingency planning done by the Independent System Operator.
Testing of transmission line electronic protective devices by TNMP personnel is underway with completion anticipated by June 1999.
Supervisory Control and Data Acquisition Systems (SCADA) and Energy Management Systems. TNMP has three SCADA systems in Texas. A SCADA system reports on the status on 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. TNMP is in the process of replacing the SCADA system in New Mexico, which is not Year 2000 compliant.
As of March 1, 1999, TNMP is 93 percent complete on the assessment of all SCADA and Energy Management Systems mission-critical facilities, and is approximately 22 percent complete with the testing and remediation of those facilities. All testing and remediation is expected to be complete by June 1999, except for the New Mexico SCADA system that will be complete in August 1999.
Information Technology Systems. As of March 1, 1999, approximately 90% of TNMP's infrastructure supporting its business systems has been tested and verified as Y2K compliant. TNMP expects to have the remaining infrastructure Y2K compliant by the end of the first quarter of 1999. TNMP has completed the upgrade of its financial and accounting system to a Y2K compliant version. Integrated testing of the upgraded financial system will be done in April 1999. A new customer information system is expected to be implemented and tested during the third quarter of 1999 and other corporate information systems directly related to TNMP's operations are expected to be 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 the total cost is to upgrade or replace various information technology systems, as discussed above, as well as improve the infrastructure to support those systems. TNMP does not expect these costs to have a material impact on its financial position or results of operations. TNMP continues to work with key software vendors and outside consultants to validate its Y2K compliance project. To date, TNMP has spent approximately $4.3 million on Y2K remediation. TNMP has in the past used, and expects to continue to use, cash flow from operations to fund costs associated with Y2K.
Third-Party Vendors. In addition to its own mitigation plan, TNMP is actively working with its key vendors and other third parties with which TNMP has a material relationship to assist such parties in achieving compliance with respect to Y2K in those systems affecting TNMP's operations. Such parties include electric power providers in Texas and New Mexico; the fuel, ash disposal, and limestone contractors at TNP One; transmission and distribution material suppliers; and banking partners. Although TNMP believes that such persons are working diligently to properly address Y2K, TNMP cannot guarantee that these third-party systems will be timely converted, or that a failure to convert by another company or a conversion that is incompatible with TNMP's systems, would not have a material adverse effect on TNMP.
Contingency Plans. The primary operating processes of TNMP's business (e.g., the production, transmission, and distribution of electric power) are subject to contingencies related to weather, equipment failure, and other factors. TNMP has drafted Y2K contingency plans by adapting previously existing contingency plans. TNMP will complete the Y2K contingency plan by June 1999.
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.
Item 7A.
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.
Item 8.
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, 1998 and 1997, and the related consolidated statements of income, common shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1998 and 1997, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Fort Worth, Texas February 12, 1999
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, 1998 and 1997, and the related consolidated statements of income, common shareholder's equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1998 and 1997, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Fort Worth, Texas February 12, 1999
Independent Auditor's Report
The Board of Directors and Shareholders TNP Enterprises, Inc.:
We have audited the accompanying consolidated statements of income, common shareholders' equity, and cash flows of TNP Enterprises, Inc. and subsidiaries for the year ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of TNP Enterprises, Inc. and subsidiaries for the year ended December 31, 1996, in conformity with generally accepted accounting principles.
KPMG LLP
Fort Worth, Texas January 30, 1997
Independent Auditor's Report
The Board of Directors Texas-New Mexico Power Company:
We have audited the accompanying consolidated statements of income, common shareholder's equity, and cash flows of Texas-New Mexico Power Company (a wholly owned subsidiary of TNP Enterprises, Inc.) and subsidiaries for the year ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Texas-New Mexico Power Company and subsidiaries for the year ended December 31, 1996, in conformity with generally accepted accounting principles.
KPMG LLP
Fort Worth, Texas January 30, 1997
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
PREFERRED STOCK Redeemable cumulative preferred stock with $100 par value Authorized shares - 1,000,000
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 1998 financial statements.
Accounting for the Effects of Regulation
Electric utilities operate in a highly regulated environment. TNP's and TNMP's consolidated financial statements reflect the application of certain accounting standards, including SFAS 71, "Accounting for the Effects of Certain Types of Regulation," which provide for recognition of the economic effects of rate regulation. Among these effects are the recognition of regulatory assets and liabilities. Regulatory assets represent revenues associated with certain costs that 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, 1998 and 1997.
As discussed in Note 2, TNMP has two plans - the Texas Transition Plan and the New Mexico Community Choice plan - approved by the regulatory commissions in the respective jurisdictions. Based on these plans, management believes it probable that TNMP will continue, for the foreseeable future, to meet the criteria for continued application of SFAS 71 to its transmission and distribution portions of its business, and the generation/power supply portion of its business in Texas. Also, the Texas Transition Plan allows TNMP to recover from customers the regulatory assets included in the table above.
Utility Plant
Utility plant is stated at the historical cost of construction, which includes labor, materials, indirect charges for such items as engineering and administrative costs, and AFUDC. Property repairs and replacement of minor items are charged to operating expenses; major replacements and improvements are capitalized to utility plant.
AFUDC is a non-cash item designed to enable a utility to capitalize interest costs during periods of construction. Established regulatory practices enable TNMP to recover these costs from customers. The composite rate used for AFUDC was 6.0% in each of the years 1998, 1997, and 1996.
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 3.2%, 3.3%, and 3.2% in 1998, 1997, and 1996, respectively. As explained in Note 2, TNMP will record $15 million of additional depreciation annually during 1999-2002 to recover stranded costs, and may record additional amounts of depreciation based on operation of the earnings cap, due to implementation of the Transition Plan.
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
As discussed in Note 2, TNMP has two plans - the Texas Transition Plan and the New Mexico Community Choice plan - approved by the regulatory commissions in the respective jurisdictions.
In Texas, as of January 1, 1998, the recovery of the demand-related portion of purchased power costs has changed pursuant to the Texas Transition Plan as discussed in Note 2. There are no changes to the recovery of the energy-related portion of purchased power costs and fuel costs.
In New Mexico, as of May 1, 1997, the recovery of purchased power costs changed pursuant to the New Mexico Community Choice plan discussed in Note 2.
Prior to the implementation of both plans, differences between amounts collected and allowable costs were generally recovered either as purchased power subject to refund or deferred purchased power and fuel costs in accordance with regulatory ratemaking policy.
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 $164,000 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, 1998, no such amounts have been received or paid.
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.
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 TNMP's financial instruments are as follows:
Common Stock
At December 31, 1998, 81,999 shares of TNP's common stock were reserved for issuance to TNMP's 401(k) plan, and 1,198,356 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 (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.
Stock-Based Compensation
As discussed in Note 4, 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 effect on the amount of expense associated with TNP's stock-based compensation.
Reclassification
Certain items in 1996 and 1997 were reclassified to conform to the 1998 presentation.
Note 2. Regulatory Matters
As the electric utility industry continues its transition toward an environment of increased competition, the most significant effect of competition on TNMP, as well as many other utilities, will be the ability to recover potential stranded costs. "Stranded costs" is the difference between what it currently costs TNMP to provide electricity and what a customer would be willing to pay for such service in a competitive market. The inability to recover a significant portion of stranded costs would adversely impact TNP's and TNMP's financial condition. In Texas, TNMP's potential stranded cost relates to TNP One, its 300 MW generating unit, and could potentially be more than $270 million. As of December 31, 1998, TNMP had reserved $3.4 million for its potential stranded costs in New Mexico. Additional stranded costs could potentially be zero to $7 million, depending on the market price of purchased power at the onset of competition.
The following discusses TNMP's strategy to transition to competition and to recover its potential stranded costs in Texas and New Mexico.
Texas Transition Plan
On July 22, 1998, the PUCT approved TNMP's transition-to-competition plan (Transition Plan), and issued a final order documenting its approval on November 7, 1998. The Transition Plan includes a number of provisions that impact TNMP's financial results. They are:
- TNMP will implement a series of residential and commercial rate reductions totaling 9% and 3%, respectively, during a five-year transition period. The first rate reductions for residential and commercial customers of 3% and 1%, respectively, were implemented retroactive to January 1, 1998. The remaining reductions will be effective in January of 2000 and 2001.
- TNMP's earnings on its Texas operations are capped at an 11.25% return on equity less assumed discounts on industrial rates, which, for 1998, were $4.1 million. In 1999, the discounts are expected to be approximately $2.9 million. TNMP will apply Texas earnings in excess of the cap to recover stranded costs related to its generation investment (TNP One) or will refund them to customers, according to PUCT guidelines.
- The Plan includes a cap on allowed operating and maintenance expenses applicable to TNMP's Texas operations based on cost incurred per customer in 1996.
- TNMP will record $15 million of additional depreciation annually during 1999-2002 to recover stranded costs.
- Finally, the manner in which TNMP recovers the cost of purchased power from its customers has changed. In the past, all of these costs were passed directly through to TNMP's customers via adjustment factors that could change as often as monthly. Under this methodology, purchased power expense had no impact on operating income. Effective with the new rates under the Transition Plan, only the energy-related portion of purchased power will be passed through directly to customers via the fuel adjustment clause. The demand-related portion of purchased power will be 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, will affect operating income.
Absent legislation implementing retail competition prior to the end of the five-year transition period, TNMP shall file with the PUCT, at the end of the transition period, a proposal to voluntarily implement retail access, contingent upon the approval of an appropriate mechanism for recovery of any remaining stranded costs. The PUCT has committed to full recovery of stranded costs if they are quantified using a market-based methodology, TNMP offers retail access, and stranded costs are allocated fairly to all customers. Rates under the Transition Plan continue to be cost-based, and TNMP will continue to apply SFAS 71 to its Texas generation/power supply operations until it requests, and the PUCT approves authority to implement retail competition.
Implementation of the Transition Plan reduced operating revenue by $11.4 million (pre-tax). The base rate reductions accounted for $9.9 million of the change, and a one-time customer refund accounted for the remaining $1.5 million. TNMP's earnings for the year ended December 31, 1998, did not exceed the earnings cap imposed by the Transition Plan.
New Mexico Community Choice
Following NMPUC approval on April 11, 1997, TNMP implemented Community Choice, its plan for transition to competition for its New Mexico service territory effective May 1, 1997. The plan provides TNMP's customers the right to choose their electricity provider after a three-year transition period. The plan freezes rates (including the recovery of purchased power) during the transition period, and allows for customer aggregation based on market forces. As of December 31, 1998, TNMP had reserved $3.4 million for its potential stranded costs in New Mexico.
As a result of the New Mexico Community Choice plan, the power supply portion of TNMP's New Mexico operations no longer qualifies for the application of SFAS 71. Accordingly, in 1997, TNMP discontinued regulatory accounting principles for the New Mexico power supply operations. The discontinuation of SFAS 71 had no effect on TNMP's financial statements in the period of adoption. The transmission and distribution operations in New Mexico will continue to follow SFAS 71.
Fuel Reconciliation
TNMP's fixed fuel factor in Texas remains constant until changed as part of a general rate case or fuel reconciliation, or until the PUCT orders a reconciliation for any over or under collections of fuel costs. TNMP filed a reconciliation of fuel costs in June 1997, for the period of October 1993 through December 1996. In January 1998, TNMP reached a stipulated agreement with the staff of the PUCT and several other interested parties. The agreement, which was approved by the PUCT on April 21, 1998, specified that all fuel costs incurred during the reconciliation period were reasonable and necessary. Also, the agreement did not propose a change to the fixed fuel factor.
Note 3. 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 are a few jobs not completed at December 31, 1998. TNP expects the jobs to be completed during 1999.
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 4. Employee Benefit Plans
Pension and Postretirement Benefits Plan TNMP has a defined benefit pension plan covering substantially all of its employees. Benefits are based on an employee's years of service and compensation. TNMP's funding policy is to contribute the minimum amount required by federal funding standards. 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.
TNMP amended its pension and postretirement benefit plans effective October 1, 1997. The amendments were recognized at January 1, 1998, for the pension plan, and at October 1, 1997, for the postretirement benefit plan.
The assumed health care cost trend rate used to measure the expected cost of benefits was 5.3% for 1998 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):
Incentive Plans
TNP and TNMP have several incentive compensation plans. All employees participate in one or more of these plans. Incentive compensation is based on meeting key financial and operational performance goals such as cash value added or earnings per share, operations and maintenance costs per KWH, and system reliability measures. Operating expenses for 1998, 1997, and 1996 included costs for the various cash and equity plans of $5.9 million, $6.0 million, and $4.8 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.
TNMP has employment contracts with certain members of management and other key personnel. The contracts provide for lump sum compensation payments and other rights in the event of termination of employment or other adverse treatment of such persons following a "change in control" of TNP or TNMP. Such event is defined to include, among other things, substantial changes in the corporate structure, ownership, or board of directors of either entity.
An excess benefit plan has been provided for certain key personnel and retired employees. The payment of benefits under the excess benefit plan is partially provided under an insurance policy arrangement for paying the benefits that generally would have been provided by the pension and thrift plans except for federal limitations.
Note 5. Income Taxes
Components of income taxes were as follows:
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:
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, 1998, and 1997, are presented below.
Federal tax carryforwards as of December 31, 1998, were as follows:
Note 6. Long-Term Debt
First Mortgage Bonds
FMBs issued under the Bond Indenture are secured by substantially all utility plant owned directly by TNMP. The Bond Indenture restricts cash dividend payments on TNMP common stock as discussed in Note 7.
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, previuosly redeemed FMBs, and cash deposited with the trustee. As of December 31, 1998, the collateral requirement was more restrictive than the interest coverage requirement, and TNMP could therefore issue up to $267 million of additional FMBs. After the issuance of $175 million of FMBs in January 1999 to secure the Senior Notes, TNMP could issue an additional $92 million of FMBs.
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. TNMP's 12.5% secured debentures ($130 million) were retired at maturity in January 1999.
Senior Notes
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. 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 will be released, and they will 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 31,1998:
The composite average borrowing rates under TNMP's credit facilities were 6.99% and 7.15% for 1998 and 1997, respectively. The interest rate margins on the 1996 and 1995 facilities have decreased by 0.50% since the ratings on TNMP's FMBs have been upgraded by the rating agencies.
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 Series A, 10.75% Secured Debentures and the 9.25% FMBs. 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 has sufficient liquidity to satisfy the possibility of any known contingencies. Management believes cash flow from operations, the new debt described above, and periodic borrowings under its two credit facilities should be sufficient to meet working capital requirements and planned capital expenditures at least through 1999.
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, 1998, FMB and secured debenture maturities and sinking fund requirements for the five years following 1998 are as follows:
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 of $140 million are callable at par on September 15, 2000.
Note 7. Capital Stock and Dividends
TNP
In November 1998, TNP increased its quarterly dividend from $0.27 to $0.29 per share.
In October 1996, TNP issued 2 million shares of common stock in a public offering, with net proceeds of approximately $47,170,000. The net proceeds were transferred to TNMP as an equity contribution and used to retire debt.
TNMP
The 1995 and 1996 TNMP Credit Facilities restrict the payment of cash dividends by TNMP. As of December 31, 1998, $14.7 million of unrestricted retained earnings were available for dividends.
Note 8. Segment and Related Information
During 1998, TNP adopted FASB Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information". TNP has two reportable segments. The primary segment is TNMP, which provides regulated electric service in Texas and New Mexico. The other reportable segment is FWI, which before operations were discontinued, provided integrated mechanical, electrical, plumbing and other maintenance and repair services to commercial customers in Texas metropolitan areas. TNP manages the segments separately to respond to the unique distinctions between regulated and unregulated businesses.
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):
Note 9. 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 1998, TU was TNMP's largest wholesaler of electricity. In 1998, TU supplied approximately 32% of TNMP's Texas capacity and 23% of its Texas energy requirements. During 1995, pursuant to terms of the contract, TNMP notified TU of its intent to cease purchasing electricity at 19 of the 20 points of delivery served by TU, effective January 1, 1999. The nineteen points of delivery account for approximately 70% of the electricity delivered to TNMP from TU. At that time, the TU Agreement required TNMP to continue purchasing electricity at the remaining point of delivery through May of 2010. In late 1997, TNMP and TU modified the agreement to change the termination date of the contract from May 2010 to June 2002. Therefore, TNMP currently has no obligation to purchase electricity from TU beyond June 2002.
At December 31, 1998, 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):
Significant Customer
A significant industrial customer in Texas left TNMP's system in February 1998 and replaced the power previously provided by TNMP with power from a cogeneration plant built by a third party wholesale power producer. This customer provided sales of 629 GWH and annual revenues of $28.3 million in 1997 ($10.1 million in base revenues). Purchases by this customer in 1998 were 74 GWH, providing total revenues of $3.1 million and base revenues of $0.9 million.
Legal Actions
TNMP and Clear Lake Limited Partnership ("Clear Lake") agreed in March 1999 to settle the lawsuit styled Clear Lake Cogeneration Limited Partnership vs. Texas-New Mexico Power Company, pending in the 234th District court of Harris County, Texas, and the parallel proceeding pending before the PUCT. These proceedings arose out of disagreements between TNMP and Clear Lake over the interpretation of certain terms of an agreement under which TNMP purchases cogenerated electricity from Clear Lake. The settlement, which must be approved by the PUCT, resolves all outstanding issues raised in these proceedings.
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. The key elements of the revised contract are:
- The capacity rate under which TNMP will purchase capacity from Clear Lake is significantly reduced. The energy rate is virtually unchanged.
- Clear Lake will be able to provide 250 MW of capacity from multiple sources. Except for power plants named in the agreement, TNMP retains certain rights of prior approval as to other sources of power and energy.
- TNMP will pay for the cost of transmitting power from the existing Clear Lake power plant to TNMP's load centers in the Gulf Coast Region pursuant to new PUCT rules. Clear Lake will reimburse TNMP for any excess transmission costs that TNMP would incur as a result of delivery from points other than the Clear Lake Plant.
- Clear Lake will no longer pay for nor receive standby power, but will generally guarantee 100% availability of capacity and energy. Clear Lake may request that TNMP obtain or generate replacement power at a negotiated fixed cost under certain limited conditions.
- Future disputes shall be resolved through consultation and arbitration.
The settlement also provides that TNMP will pay Clear Lake $8 million when the PUCT has approved the overall settlement and revised purchased power contract. The settlement calls for regulatory recovery by TNMP of all payments to be made by TNMP for power and energy, as well as the $8 million settlement payment. TNMP does not expect this settlement to have a material adverse impact on its financial position or results of operations.
Phillips Petroleum. TNMP is the defendant in a suit styled Phillips Petroleum Company vs. Texas-New Mexico Power Company. This lawsuit was filed on October 1, 1997 and is pending in the 149th Judicial District Court of Brazoria County, Texas. In this matter, Phillips Petroleum Company contends that it sustained economic losses of approximately $36 million following a one and one-half hour interruption in its electrical service on May 17, 1997. TNMP claims that most, if not all of Phillips Petroleum alleged damages are barred by limitations contained within our tariff approved by the PUCT. The lawsuit is in the initial discovery stage. In regard to this matter, TNMP believes that it has insurance coverage on most claims of Phillips Petroleum up to a total of $31 million, with a $500,000 self-retention.
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 will not have a material adverse effect on TNMP's and TNP's consolidated financial position or results of operations.
TNP ENTERPRISES, INC. AND SUBSIDIARIES Selected Quarterly Consolidated Financial Data
* The 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 fourth quarter of 1997, and 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, fourth quarters of 1998.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors
The information required by this item is incorporated by reference to "Election of Directors" and "Security Ownership of Management and Certain Beneficial Owners" in the proxy statement relating to the 1999 Annual Meeting of TNP Common Shareholders.
Executive Officers
The information set forth under "Employees and Executives" in Part I is incorporated here by reference.
Item 11.
Item 11. EXECUTIVE COMPENSATION.*
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.*
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.*
* The information required by Items 11, 12, and 13 is incorporated by reference to "Compensation of Executive Officers," "Election of Directors - Direct Compensation," and "Security Ownership of Management and Certain Beneficial Owners" in the proxy statement relating to the 1999 Annual Meeting of TNP Common Shareholders.
PART IV
Item 14.
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.................................... 20 Independent Auditors' Reports................................................ 22
TNP Consolidated Statements of Income, Three Years Ended December 31, 1998....... 24 Consolidated Statements of Cash Flows, Three Years Ended December 31, 1998... 25 Consolidated Balance Sheets, December 31, 1998, and 1997..................... 26 Consolidated Statements of Capitalization, December 31, 1998, and 1997....... 27 Consolidated Statements of Common Shareholders' Equity, Three Years Ended December 31, 1998.................................................... 28
TNMP Consolidated Statements of Income, Three Years Ended December 31, 1998....... 29 Consolidated Statements of Cash Flows, Three Years Ended December 31, 1998... 30 Consolidated Balance Sheets, December 31, 1998, and 1997..................... 31 Consolidated Statements of Capitalization, December 31, 1998, and 1997....... 32 Consolidated Statements of Common Shareholder's Equity, Three Years Ended December 31, 1998.................................................... 33 Notes to Consolidated Financial Statements................................... 34 Selected Quarterly Consolidated Financial Data - TNP......................... 46
(b) TNP and TNMP filed a Form 8-K relating to TNP's amended Shareholders' Rights Plan on October 9, 1998.
(c) The Exhibit Index on pages 49 - 54 is incorporated here by reference.
(d) All financial statement schedules are omitted, as the required information is not applicable or the information is presented in the consolidated financial statements or related Notes.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized.
TNP ENTERPRISES, INC. AND TEXAS-NEW MEXICO POWER COMPANY
Date: March 19, 1999 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.
EXHIBIT INDEX
Exhibits filed with this report are denoted by "*."
Exhibit No. Description - ------- ------------- TNP incorporates the following exhibits by reference to the exhibits and filings noted in parenthesis.
3(a) - Articles of Incorporation and Amendments through March 6, 1984 (Exhibit 3(a) to TNP 1984 Form S-14, File No. 2-89800).
3(b) - Amendment to Articles of Incorporation filed September 25, 1984 (Exhibit 3(b) to TNP 1984 Form 10-K, File No. 1-8847).
3(c) - Amendment to Articles of Incorporation filed August 29, 1985 (Exhibit 3(a) to TNP 1985 Form 10-K, File No. 1-8847).
3(d) - Amendment to Articles of Incorporation filed June 2, 1986 (Exhibit 3(a) to TNP 1986 Form 10-K, File No. 1-8847).
3(e) - Amendment to Articles of Incorporation filed May 10, 1988 (Exhibit 3(e) to TNP 1988 Form 10-K, File No. 1-8847).
3(f) - Amendment to Articles of Incorporation filed May 10, 1988 (Exhibit 3(f) to TNP 1988 Form 10-K, File No. 1-8847).
3(g) - Amendment to Articles of Incorporation filed December 27, 1988 (Exhibit 3(g) to TNP 1988 Form 10-K, File No. 1-8847).
3(h) - Bylaws, as amended (Exhibit 3(h) to joint 1994 Form 10-K, File Nos. 1-8847 and 2-97230).
4(u) - Amended and Restated Rights Agreement between TNP Enterprises, Inc. and Bank of New York, as Rights Agent, dated August 11, 1998and Form of Right Certificate, effective August 11, 1998 (Exhibit 10 to TNP Form 8-K filed October 9, 1998, File No. 1-8847).
*23 - Independent Public Accountants' Consent - Arthur Andersen LLP. Independent Auditors' Consent - KPMG LLP.
*27 - Financial Data Schedule for TNP.
TNMP incorporates the following exhibits by reference to the exhibits and filings noted in parenthesis.
3(i) - Restated Articles of Incorporation. (Exhibit 3(i) to TNMP 1996 10-K, File No. 2-97230)
3(ii)- Bylaws, as amended November 15, 1994 (Exhibit 3(hh) to TNMP 1994 Form 10-K, File No. 2-97230).
*27 - Financial Data Schedule for TNMP.
TNP and TNMP incorporate the following exhibits by reference to the exhibits and filings noted in parenthesis.
4(a) - Indenture of Mortgage and Deed of Trust dated as of November 1, 1944 (Exhibit 2(d) to Community Public Service Co. ("CPS") 1978 Form S-7, File No. 2-61323).
4(b) - Seventh Supplemental Indenture dated as of May 1, 1963 (Exhibit 2(k) to CPS Form S-7, File No. 2-61323).
4(c) - Eighth Supplemental Indenture dated as of July 1, 1963 (Exhibit 2(1), to CPS Form S-7, File No. 2-61323).
4(d) - Ninth Supplemental Indenture dated as of August 1, 1965 (Exhibit 2(m), to CPS Form S-7, File No. 2-61323).
4(e) - Tenth Supplemental Indenture dated as of May 1, 1966 (Exhibit 2(n), to CPS Form S-7, File No. 2-61323).
4(f) - Eleventh Supplemental Indenture dated as of October 1, 1969 (Exhibit 2(o), to CPS Form S-7, File No. 2-61323).
4(g) - Twelfth Supplemental Indenture dated as of May 1, 1971 (Exhibit 2(p), to CPS Form S-7, File No. 2-61323).
4(h) - Thirteenth Supplemental Indenture dated as of July 1, 1974 (Exhibit 2(q), to CPS Form S-7, File No. 2-61323).
4(i) - Fourteenth Supplemental Indenture dated as of March 1, 1975 (Exhibit 2(r), to CPS Form S-7, File No. 2-61323).
4(j) - Fifteenth Supplemental Indenture dated as of September 1, 1976 (Exhibit 2(e), File No. 2-57034).
4(k) - Sixteenth Supplemental Indenture dated as of November 1, 1981 (Exhibit 4(x), File No. 2-74332).
4(l) - Seventeenth Supplemental Indenture dated as of December 1, 1982 (Exhibit 4(cc), File No. 2-80407).
4(m)- Eighteenth Supplemental Indenture dated as of September 1, 1983 (Exhibit (a) to Form 10-Q of TNMP for the quarter ended September 30, 1983, File No. 1-4756).
4(n)- Nineteenth Supplemental Indenture dated as of May 1, 1985 (Exhibit 4(v), File No. 2-97230).
4(o) - Twentieth Supplemental Indenture dated as of July 1, 1987 (Exhibit 4(o) to Form 10-K of TNMP for the year ended December 31, 1987, File No. 2-97230).
4(p) - Twenty-First Supplemental Indenture dated as of July 1, 1989 (Exhibit 4(p) to Form 10-Q of TNMP for the quarter ended June 30, 1989, File No. 2-97230).
4(q)- Twenty-Second Supplemental Indenture dated as of January 15, 1992 (Exhibit 4(q) to Form 10-K of TNMP for the year ended December 31, 1991, File No. 2-97230).
4(r)- Twenty-Third Supplemental Indenture dated as of September 15, 1993 (Exhibit 4(r) to Form 10-K of TNMP for the year ended December 31, 1993, File No. 2-97230).
4(s)- Twenty-Fourth Supplemental Indenture dated as of November 3, 1995 (Exhibit 4(s) to Form 10-K of TNMP for the year ended December 31, 1993, File No. 2-97230).
4(t)- Twenty-Fifth Supplemental Indenture dated as of September 10, 1996 (Exhibit 4(t) to Form 10-Q of TNMP for the quarter ended September 30, 1996, File No. 2-97230).
4(u)*- Twenty-Sixth Supplemental Indenture dated January 1, 1999.
4(v) - Indenture and Security Agreement for 10 3/4% Secured Debentures dated as of September 15, 1993 (Exhibit 4(t) to TNMP 1993 Form 10-K, File No. 2-97230).
4(w)*- Indenture dated as of January 1, 1999 between TNMP and the Chase Bank of Texas, N. A.
4(x)*- First Supplemental Indenture dated as of January 1, 1999 to Indenture dated as of January 1, 1999 between TNMP and the Chase Bank of Texas, N. A.
Contracts Relating to TNP One
10(a)- Fuel Supply Agreement, dated November 18, 1987, between Phillips Coal Company and TNMP(Exhibit 10(j) to TNMP 1987 Form 10-K, File No. 2-97230).
10(a)1-Amendment No. 1, dated as of April 1, 1988, to Fuel Supply Agreement dated November 18, 1987, between Phillips Coal Company and TNMP (Exhibit 10(a)1 to Joint 1994 Form 10-K, File Nos. 1-8847 and 2-97230).
10(a)2 - Amendment No. 2, dated as of November 29, 1994, between Walnut Creek Mining Company and TNMP, to Fuel Supply Agreement dated November 18, 1987, between Phillips Coal Company and TNMP, (Exhibit 10(a)2 to joint 1994 Form 10-K, File Nos. 1-8847 and 2-97230).
10(b) - Unit 1 First Amended and Restated Project Loan and Credit Agreement, dated as of January 8, 1992 (the "Unit 1 Credit Agreement"), among TNMP, TGC, certain banks (the "Unit 1 Banks") and Chase Manhattan Bank (National Association), as Agent for the Unit 1 Banks (the "Unit 1 Agent"), (Exhibit 10(c) to TNMP 1991 Form 10-K, File No. 2-97230).
10(b)1 - Participation Agreement, dated as of January 8, 1992, among certain banks, Participants, and the Unit 1 Agent (Exhibit 10(c)1 to TNMP 1991 Form 10-K, File No. 2-97230).
10(b)2 - Amendment No. 1, dated as of September 21, 1993, to the Unit 1 Credit Agreement (Exhibit 10(b)2 to TNMP 1993 Form 10-K , File No. 2-97230).
10(c) - Assignment and Security Agreement, dated as of January 8, 1992, among TGC and the Unit 1 Agent (Exhibit 10(d) to TNMP 1991 Form 10-K, File No. 2-97230).
10(d) - Amended and Restated Subordination Agreement, dated as of October 1, 1988, among TNMP, Continental Illinois National Bank and Trust Company of Chicago and the Unit 1 Agent (Exhibit 10(uu) to TNMP 1988 Form 10-K, File No. 2-97230).
10(e) - Unit 1 Mortgage and Deed of Trust, dated as of December 1, 1987, (Exhibit 10(ee) to TNMP 1987 Form 10-K, File No. 2-97230).
10(e)1 - Supplemental Unit 1 Mortgage and Deed of Trust executed on January 27, 1992, (Exhibit 10(g)4 to TNMP 1991 Form 10-K , File No. 2-97230).
10(e)2 - First TGC Modification and Extension Agreement, dated as of January 24, 1992, among the Unit 1 Banks, the Unit 1 Agent, TNMP, and TGC (Exhibit 10(g)1 to TNMP 1991 Form 10-K, File No. 2-97230).
10(e)3 - Second TGC Modification and Extension Agreement, dated as of January 27, 1992, among the Unit 1 Banks, the Unit 1 Agent, TNMP, and TGC (Exhibit 10(g)2 to TNMP 1991 Form 10-K, File No. 2-97230).
10(e)4 - Third TGC Modification and Extension Agreement, dated as of January 27, 1992, among the Unit 1 Banks, the Unit 1 Agent, TNMP, and TGC (Exhibit 10(g)3 to TNMP 1991 Form 10-K, File No. 2-97230).
10(e)5 - Fourth TGC Modification and Extension Agreement, dated as of September 29, 1993, among the Unit 1 Banks, the Unit 1 Agent, TNMP, and TGC (Exhibit 10(f)5 to TNMP 1993 Form 10-K, File No. 2-97230).
10(e)6 - Fifth TGC Modification and Extension Agreement, dated as of September 29, 1993, among the Unit 1 Banks, the Unit 1 Agent, TNMP, and TGC (Exhibit 10(f)6 to TNMP 1993 Form 10-K, File No. 2-97230).
10(f) - Indemnity Agreement dated December 1, 1987, by Westinghouse, CE and Zachry, (Exhibit 10(ff) to TNMP 1987 Form 10-K, File No. 2-97230).
10(g) - Unit 1 Second Lien Mortgage and Deed of Trust dated as of December 1, 1987, (Exhibit 10(jj) to TNMP 1987 Form 10-K, File No. 2-97230).
10(g)1 - Correction Second Lien Mortgage and Deed of Trust, dated as of December 1, 1987, (Exhibit 10(vv) to TNMP 1988 Form 10-K, File No. 2-97230).
10(g)2 - Second Lien Mortgage and Deed of Trust Modification, Extension and Amendment Agreement, dated as of January 8, 1992 (Exhibit 10(i)2 to TNMP 1991 Form 10-K, File No. 2-97230).
10(g)3 - TNMP Second Lien Mortgage Modification No. 2, dated as of September 21, 1993 (Exhibit 10(h)3 to TNMP 1993 Form 10-K, File No. 2-97230).
10(h) - Agreement for Conveyance and Partial Release of Liens, dated as of December 1, 1987, by PFC and the Unit 1 Agent (Exhibit 10(kk) to TNMP 1987 Form 10-K, File No. 2-97230).
10(i) - Inducement and Consent Agreement, dated as of June 15, 1988, among Phillips Coal Company, Kiewit Texas Mining Company, TNMP, Phillips Petroleum Company, and Peter Kiewit Son's, Inc. (Exhibit 10(nn) to TNMP 1988 Form 10-K, File No. 2-97230).
10(j) - Assumption Agreement, dated as of October 1, 1988, by TGC, in favor of certain banks, the Unit 1 Agent, and the Depositary, as defined therein (Exhibit 10(ww) to TNMP 1988 Form 10-K, File No. 2-97230).
10(k) - Guaranty, dated as of October 1, 1988, by TNMP of TGC obligations under Unit 1 Credit Agreement (Exhibit 10(xx) to TNMP 1988 Form 10-K of TNMP, File No. 2-97230).
10(l) - First Amended and Restated Facility Purchase Agreement dated as of January 8, 1992, between TNMP and TGC (Exhibit 10(n) to TNMP 1991 Form 10-K, 1991, File No. 2-97230).
10(m) - Operating Agreement, dated as of October 1, 1988, between TNMP and TGC (Exhibit 10(zz) to TNMP 1988 Form 10-K, File No. 2-97230).
10(n) - Unit 2 First Amended and Restated Project Loan and Credit Agreement, dated as of January 8, 1992 (the "Unit 2 Credit Agreement"), among TNMP, TGC II, certain banks (the "Unit 2 Banks") and The Chase Manhattan Bank (National Association), as Agent for the Unit 2 Banks (the "Unit 2 Agent") (Exhibit 10(q) to TNMP 1991 Form 10-K, File No. 2-97230).
10(n)1 - Amendment No. 1, dated as of September 21, 1993, to the Unit 2 Credit Agreement (Exhibit 10(o)1 to TNMP 1993 Form 10-K, File No. 2-97230).
10(o) - Assignment and Security Agreement, dated as of January 8, 1992, among TGC II and the Unit 2 Agent (Exhibit 10(r) to TNMP 1991 Form 10-K, File No. 2-97230).
10(p) - Assignment and Security Agreement dated as of October 1, 1988, by TNMP to the Unit 2 Agent (Exhibit 10(jjj) to TNMP 1988 Form 10-K, File No. 2-97230).
10(q) - Subordination Agreement, dated as of October 1, 1988, among TNMP, Continental Illinois National Bank and Trust Company of Chicago, and the Unit 2 Agent (Exhibit 10(mmm) to TNMP 1988 Form 10-K, File No. 2-97230).
10(r) - Unit 2 Mortgage and Deed of Trust dated as of October 1, 1988 (Exhibit 10(uuu) to TNMP 1988 Form 10-K, File No. 2-97230).
10(r)1 - First TGC II Modification and Extension Agreement, dated as of January 24, 1992, among the Unit 2 Banks, the Unit 2 Agent, TNMP, and TGC II (Exhibit 10(u)1 to TNMP 1991 Form 10-K, File No. 2-97230).
10(r)2 - Second TGC II Modification and Extension Agreement, dated as of January 27, 1992, among the Unit 2 Banks, the Unit 2 Agent, TNMP and TGC II (Exhibit 10(u)2 to TNMP 1991 Form 10-K, File No. 2-97230).
10(r)3 - Third TGC II Modification and Extension Agreement, dated as of January 27, 1992, among the Unit 2 Banks, the Unit 2 Agent, TNMP, and TGC II (Exhibit 10(u)3 to TNMP 1991 Form 10-K, File No. 2-97230).
10(r)4 - Fourth TGC II Modification and Extension Agreement, dated as of September 29, 1993, among the Unit 2 Banks, the Unit 2 Agent, TNMP, and TGC II (Exhibit 10(s)4 to TNMP 1993 Form 10-K, File No. 2-97230).
10(r)5 - Fifth TGC II Modification and Extension Agreement, dated as of June 15, 1994, among the Unit 2 Banks, the Unit 2 Agent, TNMP, and TGC II (Exhibit 10(s)5 to TNMP Form 10-Q for quarter ended June 30, 1994, File No. 2-97230).
10(s) - Release and Waiver of Liens and Indemnity Agreement, dated October 1, 1988, by Westinghouse, CE, and Zachry (Exhibit 10(vvv) to TNMP 1988 Form 10-K, File No. 2-97230).
10(t) - Second Lien Mortgage and Deed of Trust, dated as of October 1, 1988, (Exhibit 10(www) to TNMP 1988 Form 10-K, File No. 2-97230).
10(t)1 - Second Lien Mortgage and Deed of Trust Modification, Extension and Amendment Agreement, dated as of January 8, 1992, (Exhibit 10(w)1 to TNMP 1991 Form 10-K, File No. 2-97230).
10(t)2 - TNMP Second Lien Mortgage Modification No. 2, dated as of September 21, 1993, (Exhibit 10(u)2 to TNMP 1993 Form 10-K, File No. 2-97230).
10(u) - Intercreditor and Nondisturbance Agreement, dated as of October 1, 1988, among PFC, Texas PFC, Inc., TNMP, certain creditors, as defined therein, and the Collateral Agent, as defined therein (Exhibit 10(xxx) to TNMP 1988 Form 10-K, File No. 2-97230).
10(u)1 - Amendment No. 1, dated as of January 8, 1992, to Intercreditor and Nondisturbance Agreement, (Exhibit 10(x)1 to TNMP 1991 Form 10-K, File No. 2-97230).
10(u)2 - Amendment No. 2, dated as of September 21, 1993, to Intercreditor and Nondisturbance Agreement, (Exhibit 10(v)2 to TNMP 1993 Form 10-K of TNMP, File No. 2-97230).
10(v) - Grant of Reciprocal Easements and Declaration of Covenants Running with the Land, dated October 1, 1988, between PFC and Texas PFC, Inc. (Exhibit 10(yyy) to TNMP 1988 Form 10-K, File No. 2-97230).
10(w) - Non-Partition Agreement, dated as of May 30, 1990, among TNMP, TGC, and the Unit 1 Agent (Exhibit 10(ss) to TNMP 1990 Form 10-K of TNMP, File No. 2-97230).
10(x) - Assumption Agreement, dated as of May 31, 1991, by TGC II in favor of certain banks, the Unit 2 Agent, and the Depositary, as defined therein (Exhibit 10(kkk) to Amendment No. 1 to File No. 33-41903).
10(y) - Guaranty, dated as of May 31, 1991, by TNMP, for TGC II obligations under the Unit 2 Credit Agreement (Exhibit 10(lll) to Amendment No. 1 to File No. 33-41903).
10(z) - First Amended and Restated Facility Purchase Agreement dated as of January 8, 1992, between TNMP, and TGC II (Exhibit 10(dd) to TNMP 1991 Form 10-K, File No. 2-97230).
10(z)1 - Amendment No. 1 to the Unit 2 First Amended and Restated Facility Purchase Agreement, dated as of September 21, 1993, between TNMP and TGC II (Exhibit 10(aa)1 to TNMP 1993 Form 10-K, File No. 2-97230).
10(aa) - Operating Agreement, dated as of May 31, 1991, between TNMP and TGC II (Exhibit 10(nnn) to Amendment No. 1 to File No. 33-41903).
10(bb) - Non-Partition Agreement, dated as of May 31, 1991, among TNMP, TGC II, and the Unit 2 Agent (Exhibit 10(ppp) to Amendment No. 1 to File No. 33-41903).
10(cc) - Revolving Credit Facility Agreement, dated as of November 3, 1995, among TNMP, certain lenders, and Chemical Bank, as Administrative Agent and Collateral Agent. (Exhibit 10(cc) to Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230).
10(cc)1- Form of Guarantee and Pledge Agreement, dated as of November 3, 1995, between TGC II, and Chemical Bank, as collateral agent (Exhibit D to Revolving Credit Facility Agreement). (Exhibit 10(cc)1 to Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230).
10(cc)2- Form of Bond Agreement, dated as of November 3, 1995, between TNMP and Chemical Bank, as Collateral Agent (Exhibit E to Revolving Credit Facility Agreement). (Exhibit 10(cc)2 to Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230).
10(cc)3- Form of Note Pledge Agreement, dated as of November 3, 1995, between TNMP and Chemical Bank, as collateral agent (Exhibit F to Revolving Credit Facility Agreement). (Exhibit 10(cc)3 to Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230).
10(cc)4- Form of Sixth TGC II Modification and Extension Agreement, dated as of November 3, 1995, among the Unit 2 Banks, The Chase Manhattan Bank, as agent, TNMP, and TGC II (Exhibit H to the Revolving Credit Facility Agreement). (Exhibit 10(cc)4 to Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230).
10(cc)5- Form of Second Lien Mortgage and Deed of Trust Modification, Extension and Amendment Agreement No. 3, dated as of November 3, 1995 (Exhibit I to the Revolving Credit Facility Agreement). (Exhibit 10(cc)5 to Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230).
10(cc)6- Form of Assignment and Amendment Agreement, dated as of November 3, 1995, among TNMP, TGC II, and Chemical Bank, as administrative agent and collateral agent (Exhibit J to the Revolving Credit Facility Agreement). (Exhibit 10(cc)6 to Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230).
10(cc)7- Form of Assignment of TGC II Mortgage Lien, dated as of November 3, 1995, by The Chase Manhattan Bank as agent to Chemical Bank (Exhibit K to the Revolving Credit Facility Agreement). (Exhibit 10(cc)7 to Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230).
10(cc)8- Form of Collateral Transfer of Notes, Rights and Interests, dated as of November 3, 1995, between TNMP and Chemical Bank, as Administrative Agent and as Collateral Agent (Exhibit L to the Revolving Credit Facility Agreement). (Exhibit 10(cc)8 to Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230).
10(cc)9- Form of Assignment of Second Lien Mortgage and Deed of Trust, dated as of November 3, 1995, between the Chase Manhattan Bank, as Agent, and Chemical Bank, as agent (Exhibit M to the Revolving Credit Facility Agreement). (Exhibit 10(cc)9 to Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230).
10(cc)10- Form of Collateral Transfer of Notes, Rights and Interests, dated as of November 3, 1995, between TNMP and Chemical Bank, as Administrative Agent and as Collateral Agent (Exhibit N to the Revolving Credit Facility Agreement). (Exhibit 10(cc)10 to Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230).
10(cc)11- Form of Amendment No. 1, dated as of November 3, 1995, to the Assignment and Security Agreement between TNMP, and The Chase Manhattan Bank, as agent (Exhibit O to the Revolving Credit Agreement). (Exhibit 10(cc)11 to Form 10-K of TNP and TNMP for 1996, File Nos. 1-8847 and 2-97230).
10(cc)12- Amendment No. 1 dated October 28, 1998 to Revolving Credit Facility Agreement dated as of November 3, 1995 among TNMP, certain lenders, and Chase Bank, N.A. (successor by merger to Chemical Bank) as Administrative Agent and Collateral Agent (Exhibit 10(a) to Form 10Q of TNP and TNMP for quarter ended September 30, 1998. (File Nos. 1-8847 and 2-97230.)
Power Supply Contracts
10(dd) - Contract dated May 12, 1976, between TNMP and Houston Lighting & Power Company (Exhibit 5(a), File No. 2-69353).
10(dd)1- Amendment, dated January 4, 1989, to contract between TNMP and Houston Lighting & Power Company (Exhibit 10(cccc) to TNMP 1988 Form 10-K, File No. 2-97230).
10(ee) - Amended and Restated Agreement for Electric Service dated May 14, 1990, between TNMP and Texas Utilities Electric Company (Exhibit 10(vv) to TNMP 1990 Form 10-K, File No. 2-97230).
10(ee)1- Amendment, dated April 19, 1993, to Amended and Restated Agreement for Electric Service, between TNMP and Texas Utilities Electric Company (Exhibit 10(ii)1 to 1993 Form S-2, Registration Statement, File No. 33-66232).
10(ff) - Contract dated April 27, 1977, between TNMP and West Texas Utilities Company, as amended (Exhibit 10(e) of Form 8 applicable to TNMP 1986 Form 10-K, File No. 2-97230).
10(gg) - Contract dated April 29, 1987, between TNMP and El Paso Electric Company (Exhibit 10(f) of Form 8 applicable to TNMP 1986 Form 10-K, File No. 2-97230).
10(hh) - Amended and Restated Contract for Electric Service, dated April 29, 1988, between TNMP and Public Service Company of New Mexico (Exhibit 10(zz)3 to Amendment No. 1 to File No. 33-41903).
10(ii) - Contract dated December 8, 1981, between TNMP and SPS as amended (Exhibit 10(h) of Form 8 applicable to TNMP 1986 Form 10-K, File No. 2-97230).
10(ii)1- Amendment, dated December 12, 1988, to contract between TNMP and SPS (Exhibit 10(llll) to TNMP 1988 Form 10-K, File No. 2-97230).
10(ii)2- Amendment, dated December 12, 1990, to contract between TNMP and SPS (Exhibit 19(t) to TNMP 1990 Form 10-K, File No. 2-97230).
10(jj) - Contract dated August 31, 1983, between TNMP and Capitol Cogeneration Company, Ltd. (Exhibit 10(i) of Form 8 applicable to TNMP 1986 Form 10-K, File No. 2-97230).
10(jj)1- Agreement Substituting a Party, dated May 3, 1988, among Capitol Cogeneration Company, Ltd., Clear Lake Cogeneration Limited Partnership and TNMP (Exhibit 10(nnnn) to TNMP 1988 Form 10-K, File No. 2-97230).
10(jj)2- Letter Agreements, dated May 30, 1990, and August 28, 1991, between Clear Lake Cogeneration Limited Partnership and TNMP (Exhibit 10(oo)2 to TNMP 1992 Form 10-K, File No. 2-97230).
10(jj)3- Notice of Extension Letter, dated August 31, 1992, between Clear Lake Cogeneration Limited Partnership and TNMP (Exhibit 10(oo)3 to TNMP 1992 Form 10-K, File No. 2-97230).
10(jj)4- Scheduling Agreement, dated September 15, 1992, between Clear Lake Cogeneration Limited Partnership and TNMP (Exhibit 10(oo)4 to TNMP 1992 Form 10-K, File No. 2-97230).
10(kk) - Interconnection Agreement between TNMP and Plains Electric Generation and Transmission Cooperative, Inc. dated July 19, 1984 (Exhibit 10(j) of Form 8 applicable to TNMP 1986 Form 10-K, File No. 2-97230).
10(ll) - Interchange Agreement between TNMP and El Paso Electric Company dated April 29, 1987 (Exhibit 10(l) of Form 8 applicable to TNMP 1986 Form 10-K, File No. 2-97230). 10(mm) - Amendment No. 1, dated November 21, 1994, to Interchange Agreement between TNMP and El Paso Electric Company (Exhibit 10(nn)1 to joint 1994 Form 10-K, File Nos. 1-8847 and 2-97230).
10(nn) - DC Terminal Participation Agreement between TNMP and El Paso Electric Company dated December 8, 1981 as amended (Exhibit 10(m) of Form 8 applicable to TNMP 1986 Form 10-K, File No. 2-97230).
10(oo) - Agreement for Purchase and Sale of Energy effective as of May 1, 1996 among TNMP, Amoco Chemical Company and Amoco Oil Company (Exhibit 10 (pp) to joint 1997 Form 10-K, File Nos. 1-8847 and 2-97230).
10(pp) - Agreement dated December 30, 1994 between TNMP and Union Carbide Corporation ("UCC") for Purchase of Capacity and Energy from UCC (Exhibit 10(qq) to joint 1997 Form 10-K, File Nos. 1-8847 and 2-97230).
10(qq) Letter agreement dated November 24, 1997 between TNMP and Texas Utilities Electric Company (Exhibit 10(qq) to joint 1998 Form 10-K, File Nos. 1-8447 and 2-97230.
Management Contracts
10(rr) - Form of TNMP Executive Agreement for Severance Compensation Upon Change in Control and schedule of substantially identical agreements (Exhibit 10(rr) to joint 1998 Form 10-K, File Nos. 1-8447and 2-97230).
10(ss) - Agreement dated March 25, 1994 between Kevern Joyce and TNP and TNMP (Exhibit 10(tt) to TNP and TNMP 1994 Form 10-Q, File Nos. 1-8847 and 2-97230).
10(tt) - Amendment dated February 16, 1998 to Agreement dated March 25, 1994 between Kevern Joyce and TNP and TNMP (Exhibit 10(rr) to joint 1998 Form 10-K, File Nos. 1-8447and 2-97230).
10(uu) - Agreement dated February 16, 1998 between John Edwards and TNMP (Exhibit 10(rr) to joint 1998 Form 10-K, File Nos. 1-8447and 2-97230).
10(vv) - Agreement dated February 16, 1998 between Ralph S. Johnson and TNMP (Exhibit 10(rr) to joint 1998 Form 10-K, File Nos. 1-8447and 2-97230).
*10(ww)- Form of TNP Incentive Compensation Award Agreement and schedule of substantially identical agreements.
*21 - Subsidiaries of the Registrants.