Texas New Mexico Power 10-Q 2002 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-Q

(Mark One)

(X)   COMBINED ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period endedJune 30, 2002

or

(  )   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
        

For the transition period from          to          

 

____________________________________________________________________________________________________________

Commission File Number: 1-8847

	TNP ENTERPRISES, INC. (Exact name of registrant as specified in its charter)
Texas       (State of Incorporation)		75-1907501              (I.R.S. employer identification number)
	4100 International Plaza, P. O. Box 2943, Fort Worth, Texas 76113 (Address and zip code of principal executive offices)
	Registrant's telephone number, including area code:817-731-0099
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes \X\  No \  \
TNP Enterprises, Inc. has no publicly traded shares of common stock outstanding.
______________________________________________________________________________________________________________
	Commission File Number:2-97230
	TEXAS-NEW MEXICO POWER COMPANY (Exact name of registrant as specified in its charter)
Texas       (State of Incorporation)		75-0204070              (I.R.S. employer identification number)
	4100 International Plaza, P. O. Box 2943, Fort Worth, Texas 76113 (Address and zip code of principal executive offices)
	Registrant's telephone number, including area code:817-731-0099
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes \X\  No \  \
TNP Enterprises, Inc. holds all 10,705 outstanding common shares of Texas-New Mexico Power Company.

TNP Enterprises, Inc. and Subsidiaries
Texas-New Mexico Power Company and Subsidiaries
Combined Quarterly Report on Form 10-Q for the Period Ended June 30, 2002

        This Combined Quarterly Report on Form 10-Q is filed separately by TNP Enterprises, Inc. and Texas-New Mexico Power Company. Texas-New Mexico Power Company makes no representation as to information relating to TNP Enterprises, Inc., except as it may relate to Texas-New Mexico Power Company, or to any other affiliate or subsidiary of TNP Enterprises, Inc.

TABLE OF CONTENTS
PART 1.   FINANCIAL STATEMENTS
Item 1.	Financial Statements
	TNP Enterprises, Inc. (TNP) and Subsidiaries:
	Consolidated Statements of Income (Loss)
	Three and Six Month Periods Ended June 30, 2002 and 2001	3
	Consolidated Statements of Cash Flows
	Six Month Periods Ended June 30, 2002 and 2001	4
	Consolidated Balance Sheets
	June 30, 2002, and December 31, 2001	5
	Texas-New Mexico Power Company (TNMP) and Subsidiaries:
	Consolidated Statements of Income
	Three and Six Month Periods Ended June 30, 2002 and 2001	6
	Consolidated Statements of Cash Flows
	Six Month Periods Ended June 30, 2002 and 2001	7
	Consolidated Balance Sheets
	June 30, 2002, and December 31, 2001	8
	Notes to Consolidated Financial Statements	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15
PART 2.    OTHER INFORMATION
Item 1.	Legal Proceedings	21
Item 5.	Other Items	21
Item 6.	Exhibits and Reports on Form 8-K	21
	(a) Exhibit Index	21
	(b) Reports on Form 8-K	21
Statement Regarding Forward Looking Information		22
Signature Page		22

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TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
			Three Months Ended June 30,		Six Months Ended June 30,
			2002	2001	2002	2001
				(In thousands)
OPERATING REVENUES			$    173,376	$    161,335	$    294,041	$    329,689
OPERATING EXPENSES:
	Purchased power and fuel		87,598	90,735	141,853	195,311
	Other operating and maintenance		41,722	27,486	71,053	52,545
	Depreciation and amortization		7,026	13,418	14,048	26,929
	Charge for recovery of stranded plant		-	2,657	(733)	5,768
	Taxes other than income taxes		7,739	8,622	15,807	17,041
		Total operating expenses	144,085	142,918	242,028	297,594
OPERATING INCOME			29,291	18,417	52,013	32,095
Other income and deductions, net			185	581	287	1,060
INCOME BEFORE INTEREST CHARGES
	AND INCOME TAXES		29,476	18,998	52,300	33,155
INTEREST CHARGES:
	Interest on long-term debt		13,725	16,804	27,444	34,566
	Other interest and amortization of debt-related costs		1,326	1,148	2,602	2,281
		Total interest charges	15,051	17,952	30,046	36,847
INCOME (LOSS) BEFORE INCOME TAXES			14,425	1,046	22,254	(3,692)
Income taxes			5,210	932	7,870	(664)
INCOME (LOSS) BEFORE CUMULATIVE
	EFFECT OF CHANGE IN ACCOUNTING		9,215	114	14,384	(3,028)
Cumulative effect of change in accounting for
	major maintenance costs, net of taxes (Note 3)		-	-	-	(1,170)
NET INCOME (LOSS)			9,215	114	14,384	(4,198)
Dividends on preferred stock and other			4,808	4,195	9,299	8,113
INCOME (LOSS) APPLICABLE TO COMMON STOCK			$       4,407	$      (4,081)	$       5,085	$    (12,311)
The accompanying notes are an integral part of these consolidated financial statements.

-3-

TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
			Six Months Ended June 30,
			2002		2001
				(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
	Cash received from sales to customers		$    202,867		$    363,322
	Purchased power and fuel costs paid		(138,283)		(197,305)
	Cash paid for payroll and to other suppliers		(57,649)		(50,900)
	Interest paid, net of amounts capitalized		(28,707)		(33,507)
	Income taxes paid		(3,292)		(844)
	Other taxes paid		(21,997)		(22,075)
	Other operating cash receipts and payments, net		(71)		81
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES			(47,132)		58,772
CASH FLOWS FROM INVESTING ACTIVITIES:
	Additions to utility plant		(14,827)		(16,539)
	Other investing activities		-		(913)
NET CASH USED IN INVESTING ACTIVITIES			(14,827)		(17,452)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Borrowings from (repayments to) revolving credit facilities - net
		TNMP/FCP $325 million facility	67,000		(37,000)
	Other		(5,839)		-
	Financing costs		-		(109)
	Redemptions:
		TNP term loan	(800)		(800)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES			60,361		(37,909)
NET CHANGE IN CASH AND CASH EQUIVALENTS			(1,598)		3,411
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			14,145		8,110
CASH AND CASH EQUIVALENTS AT END OF PERIOD			$    12,547		$    11,521
RECONCILIATION OF NET INCOME (LOSS) TO NET
	CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss)			$    14,384		$    (4,198)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
	Cumulative effect of change in accounting for major maintenance costs, net of taxes		-		1,170
	Depreciation and amortization		14,048		26,929
	Charge for recovery of stranded plant		(733)		5,768
	Amortization of debt-related costs and other deferred charges		2,111		2,089
	Allowance for funds used during construction		(161)		(102)
	Deferred income taxes		5,487		(5,915)
	Investment tax credits		(780)		549
	Deferred purchased power and fuel costs		10,641		19,783
Cash flows impacted by changes in current assets and liabilities:
	Accounts receivable		(84,605)		13,367
	Accounts payable		10,245		(5,966)
	Accrued interest		(1,077)		1,332
	Accrued taxes		(5,898)		186
	Changes in other current assets and liabilities		(10,631)		8,459
Other, net			(163)		(4,679)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES			$   (47,132)		$    58,772
The accompanying notes are an integral part of these consolidated financial statements.

-4-

TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
				June 30, 2002		December 31,
				(Unaudited)		2001
					(In thousands)
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents			$    12,547		$    14,145
	Accounts receivable, net			94,142	��	9,537
	Materials and supplies, at lower of cost or market			1,035		1,109
	Deferred purchased power and fuel costs			2,872		1,852
	Accumulated deferred income taxes			230		1,622
	Assets held for sale			118,368		103,500
	Other current assets			1,720		651
			Total current assets	230,914		132,416
UTILITY PLANT:
	Electric plant			550,077		538,025
	Construction work in progress			6,157		3,147
			Total	556,234		541,172
	Less accumulated depreciation			60,869		46,821
			Net utility plant	495,365		494,351
LONG-TERM AND OTHER ASSETS:
	Other property and investments, at cost			3,763		3,763
	Goodwill			270,256		270,256
	Recoverable stranded costs			298,250		311,944
	Deferred charges			49,752		51,827
			Total long-term and other assets	622,021		637,790
				$ 1,348,300		$ 1,264,557
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
	Current maturities of long-term debt			$      1,600		$       1,600
	Accounts payable			43,846		33,601
	Accrued interest			12,762		13,839
	Accrued taxes			18,103		24,001
	Customers' deposits			6,258		5,780
	Other current liabilities			7,565		23,518
			Total current liabilities	90,134		102,339
LONG-TERM AND OTHER LIABILITIES:
	Deferred purchased power and fuel costs			22,326		10,665
	Accumulated deferred income taxes			118,212		113,748
	Accumulated deferred investment tax credits			20,012		20,792
	Deferred credits			37,976		38,000
			Total long-term and other liabilities	198,526		183,205
LONG-TERM DEBT, LESS CURRENT MATURITIES				845,253		779,011
SHAREHOLDERS' EQUITY:
	Common shareholder's equity:
		Common stock - no par value per share. Authorized 1,000,000
			shares; issued 100 shares	100,000		100,000
		Accumulated deficit		(16,103)		(21,189)
			Total common shareholder's equity	83,897		78,811
	Redeemable cumulative preferred stock			130,490		121,191
			Total shareholders' equity	214,387		200,002
COMMITMENTS AND CONTINGENCIES (Note 7)
				$ 1,348,300		$ 1,264,557
The accompanying notes are an integral part of these consolidated financial statements.

-5-

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of TNP Enterprises, Inc.)
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
			Three Months Ended June 30,		Six Months Ended June 30,
			2002	2001	2002	2001
				(In thousands)
OPERATING REVENUES			$    76,568	$   161,335	$   154,146	$   329,689
OPERATING EXPENSES:
	Purchased power and fuel		25,971	90,735	56,505	195,311
	Other operating and maintenance		18,661	24,889	36,831	48,317
	Depreciation of utility plant		6,966	10,492	13,930	21,082
	Charge for recovery of stranded plant		-	2,657	(733)	5,768
	Taxes other than income taxes		5,981	8,502	12,730	16,763
		Total operating expenses	57,579	137,275	119,263	287,241
OPERATING INCOME			18,989	24,060	34,883	42,448
Other income and deductions, net			197	529	255	936
INCOME BEFORE INTEREST CHARGES
	AND INCOME TAXES		19,186	24,589	35,138	43,384
INTEREST CHARGES:
	Interest on long-term debt		4,719	6,654	9,303	13,924
	Other interest and amortization of debt-related costs		859	733	1,741	1,450
		Total interest charges	5,578	7,387	11,044	15,374
INCOME BEFORE INCOME TAXES			13,608	17,202	24,094	28,010
Income taxes			4,574	5,936	7,935	8,858
INCOME BEFORE CUMULATIVE EFFECT
	OF CHANGE IN ACCOUNTING		9,034	11,266	16,159	19,152
Cumulative effect of change in accounting for
	major maintenance costs, net of taxes (Note 3)		-	-	-	(1,170)
NET INCOME			$     9,034	$    11,266	$    16,159	$    17,982
The accompanying notes are an integral part of these consolidated financial statements.

-6-

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of TNP Enterprises, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
			Six Months Ended June 30,
			2002	2001
			(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
	Cash received from sales to customers		$    103,045	$    363,304
	Purchased power and fuel costs paid		(75,354)	(197,305)
	Cash paid for payroll and to other suppliers		(32,333)	(48,282)
	Interest paid, net of amounts capitalized		(9,765)	(13,619)
	Income taxes paid		(3,626)	(9,174)
	Other taxes paid		(21,887)	(21,623)
	Other operating cash receipts and payments, net		(106)	(40)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES			(40,026)	73,261
CASH FLOWS FROM INVESTING ACTIVITIES:
	Additions to utility plant		(14,514)	(16,147)
	Additions to other property		-	(128)
NET CASH USED IN INVESTING ACTIVITIES			(14,514)	(16,275)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Dividends paid on common stocks		(14,000)	(19,000)
	Borrowings from (repayments to) revolving credit facilities - net
		$325 million facility	73,000	(37,000)
	Deferred expenses associated with financings		130	1,923
	Capitalization of First Choice Power		(23,000)	-
	Intercompany note payable		19,000	-
	Other		(5,839)	-
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES			49,291	(54,077)
NET CHANGE IN CASH AND CASH EQUIVALENTS			(5,249)	2,909
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			5,634	2,613
CASH AND CASH EQUIVALENTS AT END OF PERIOD			$           385	$        5,522
RECONCILIATION OF NET INCOME TO NET
		CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
	Net income		$    16,159	$    17,982
	Adjustments to reconcile net income to net cash provided by (used in) operating activities:
		Cumulative effect of change in accounting for major maintenance costs, net of taxes	-	1,170
		Depreciation of utility plant	13,930	21,082
		Charge for recovery of stranded plant	(733)	5,768
		Amortization of debt-related costs and other deferred charges	1,146	1,255
		Allowance for funds used during construction	(161)	(99)
		Deferred income taxes	5,911	(1,167)
		Investment tax credits	(780)	(796)
		Deferred purchased power and fuel costs	10,641	19,783
Cash flows impacted by changes in current assets and liabilities:
		Accounts receivable	(41,948)	13,348
		Accounts payable	(19,278)	(5,898)
		Accrued interest	(173)	579
		Accrued taxes	(9,582)	(3,403)
		Changes in other current assets and liabilities	(16,483)	8,643
	Other, net		1,325	(4,986)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES			$    (40,026)	$    73,261
The accompanying notes are an integral part of these consolidated financial statements.

-7-

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of TNP Enterprises, Inc.)
CONSOLIDATED BALANCE SHEETS
				June 30, 2002	December 31,
				(Unaudited)	2001
				(In thousands)
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents			$         385	$         5,634
	Accounts receivable, net			47,536	5,588
	Materials and supplies, at lower of cost or market			1,035	1,109
	Deferred purchased power and fuel costs			2,872	1,852
	Accumulated deferred income taxes			177	1,570
	Assets held for sale			118,368	103,500
	Other current assets			1,298	520
			Total current assets	171,671	119,773
UTILITY PLANT:
	Electric plant			762,048	757,230
	Construction work in progress			6,157	3,147
			Total	768,205	760,377
	Less accumulated depreciation			275,525	266,728
			Net utility plant	492,680	493,649
LONG-TERM AND OTHER ASSETS:
	Other property and investments, at cost			333	334
	Recoverable stranded costs			298,250	311,944
	Deferred charges			12,540	15,099
			Total long-term and other assets	311,123	327,377
				$    975,474	$    940,799
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
	Accounts payable			$    12,674	$    31,952
	Accrued interest			5,353	5,526
	Accrued taxes			12,631	22,213
	Customers' deposits			1,088	5,776
	Other current liabilities			6,380	28,310
			Total current liabilities	38,126	93,777
LONG-TERM AND OTHER LIABILITIES:
	Deferred purchased power and fuel costs			22,326	10,665
	Accumulated deferred income taxes			129,775	124,889
	Accumulated deferred investment tax credits			20,012	20,792
	Deferred credits			10,724	10,854
			Total long-term and other liabilities	182,837	167,200
LONG-TERM DEBT, LESS CURRENT MATURITIES				434,453	342,411
COMMON SHAREHOLDER'S EQUITY:
	Common stock, $10 par value per share
		Authorized 12,000,000 shares; issued 10,705 shares		107	107
	Capital in excess of par value			197,637	222,149
	Retained earnings			122,844	115,685
	Accumulated other comprehensive loss			(530)	(530)
			Total common shareholder's equity	320,058	337,411
COMMITMENTS AND CONTINGENCIES (Note 7)
				$    975,474	$    940,799
The accompanying notes are an integral part of these consolidated financial statements.

-8-

TNP Enterprises Inc. and Subsidiaries
Texas-New Mexico Power Company and Subsidiaries
Notes to Consolidated Financial Statements

Note 1.    Interim Financial Statements

      The interim consolidated financial statements of TNP and subsidiaries, and TNMP and subsidiaries, are unaudited, and contain all adjustments (consisting primarily of normal recurring accruals) necessary for a fair statement of the results for the interim periods presented. Results for interim periods are not necessarily indicative of results to be expected for a full year or for previously reported periods due in part to seasonal revenue fluctuations. It is suggested that these consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto included in TNP's and TNMP's 2001Combined Annual Report on Form 10-K.

      Prior period statements have been reclassified in order to be consistent with current period presentation. The reclassification had no effect on net income or common shareholder's equity.

Note 2.   Regulatory Matters

   Texas

      Retail Competition.As reported in the 2001 Combined Annual Report on Form 10-K, retail competition began under the provisions of the legislation (Senate Bill 7) that established retail competition in Texas on January 1, 2002. In accordance with Senate Bill 7, TNMP separated its Texas utility operations into three components. First Choice Power (First Choice), TNMP's affiliated retail electric provider, assumed the activities related to the sale of electricity to retail customers in Texas, Texas Generating Company (TGC) became the unregulated entity performing generation activities and TNMP continues to operate its regulated transmission and distribution business in Texas. The operations of First Choice are included in the consolidated financial statements of TNP and the operations of TGC are included in the consolidated finanial statements of both TNP and TNMP.

      First Choice must offer former TNMP customers whose loads are less than 1 megawatt a regulated price, commonly called the "price-to-beat." The price-to-beat will be offered through December 31, 2006, and First Choice cannot offer former TNMP customers any other rate before the loss of 40 percent of its price-to-beat customers or December 31, 2004, whichever occurs first.

      The beginning of retail competition affected the methods by which companies recover their purchased power and fuel costs. Prior to December 31, 2001, TNMP recovered fuel and the energy-related portion of purchased power costs from customers through the fuel adjustment clause authorized by the Public Utility Commission of Texas (PUCT). The demand-related portion of purchased power was recovered through base rates and, unlike the fuel and energy-related portion, was not subject to adjustment or future reconciliation. Effective January 1, 2002, First Choice assumed the energy supply activities related to the sale of electricity to retail customers in Texas. Senate Bill 7 created a competitive retail electricity market in Texas and contains no provisions for the specific recovery of fuel and purchased power costs, although First Choice can request that the PUCT change the price-to-beat to recognize changes in natural gas prices. The rates charged to new customers acquired by First Choice outside of TNMP's service territory are not regulated by the PUCT, but are negotiated with each customer. As a result, changes in fuel and purchased power costs will affect First Choice's operating results.

      As of June 30, 2002, TNMP had an over-recovered balance of fuel and energy-related purchased power costs of $22.3 million. TNMP will carry its over-recovered balance of fuel and energy related purchased power costs to the 2003 final fuel reconciliation. This proceeding will reconcile fuel and energy-related purchased power costs incurred between January 1, 2000, and December 31, 2001, in accordance with the provisions of Senate Bill 7. TNMP's over-recovered balance of fuel and energy-related purchased power costs from the final fuel reconciliation will be included in the true-up of stranded costs that will occur in 2004. Subject to the results of the final fuel reconciliation, the over-recovered balance would reduce the amount of stranded costs TNMP would be entitled to recover from its transmission and distribution customers. See Note 4 for additional discussion of TNMP's stranded costs.

      Clawback. Senate Bill 7 includes a provision, commonly known as the "clawback" that would require First Choice to credit TNMP the difference between the price-to-beat and the market price of electricity during the years 2002 and 2003. TNMP will include the credit, if any, in the true-up proceeding that will occur in 2004. The maximum credit to TNMP is limited to $150 multiplied by the difference between the number of First Choice price-to-beat customers and the number of First Choice competitively acquired residential and small commercial customers as of January 1, 2004. First Choice and TNMP are currently unable to predict the actual amount of the clawback. However, based on current expectations, the clawback could range between $0 and $18.4 million.

-9-

      2001 Excess Earnings. In March 2002, TNMP filed its Annual Report with the PUCT. The Annual Report detailed TNMP's calculation of excess earnings under the provisions of Senate Bill 7. The Annual Report showed that TNMP had no excess earnings for the year ended December 31, 2001. Accordingly, TNMP's financial results for the six months ended June 30, 2002, reflect the reversal of $0.7 million of excess earnings that had been estimated and accrued as of December 31, 2001.

      Merger Commitments. As conditions for approval of TNP's acquisition by SW Acquisition, L.P. (the Merger), TNMP made a number of commitments to both the PUCT and New Mexico Public Regulation Commission. The commitments cover a wide range of financial, operational, electric reliability, and other standards that TNMP agreed to honor. TNMP made 55 commitments in New Mexico and Texas, of which 47 are currently in effect. TNMP monitors compliance on a monthly basis and could be subject to financial penalties for non-compliance with certain commitments. During the year ended December 31, 2001, TNMP was not in compliance with certain commitments regarding electric reliability standards in Texas. TNMP estimates that penalties for non-compliance with these commitments will be approximately $0.1 million and expects resolution of this matter in the second half of 2002.

      Price-to-Beat Fuel Factor. As discussed inRetail Competition, above, First Choice can request that the PUCT change the price-to-beat to recognize changes in natural gas prices. In May 2002, First Choice filed a request with the PUCT to increase its price-to-beat fuel fator by approximately 25 percent. On July 2, 2002, the Administrative Law Judge assigned to the case issued a Proposal for Decision that recommended approval of First Choice's requested increase. On July 11, 2002, the PUT remanded the price-to-beat fuel factor request back to the State Offie of Administrative Hearings for clarification of issues that were approved in a previous rule making. First Choice does not expect a final deicsion from the PUCT before the end of the third quarter of 2002.

       In late July 2002, TNMP filed suit in District Court against the PUCT. TNMP asked the Court for an injunction ordering the PUCT to stop the remand of the price-to-beat fuel factor to the State Office of Administrative Hearings, and to direct the PUCT to proceed to a final order on First Choice's request to increase the price-to-beat fuel factor. Four other affiliated retail electric providers have filed lawsuists against the PUCT challenging similar PUCT action in their respective requests to increase their price-to-beat fuel factors. TNMP cannot predict what action the District Court may take on its suit.

      Provider of Last Resort Rulemaking. Senate Bill 7 included a provision establishing providers of last resort, entities which ensure that customers who cannot otherwise procure electric service in the competitive market have access to such service. First Choice, using the Certain Energy brand, is currently the provider of last resort for customers in West Texas who reside in the transmission and distribution service area of TXU Electric Company (now named Oncor). The PUCT has proposed a new rule governing the activities of providers of last resort that is scheduled to become effective on January 1, 2003.

       Under the new rule, First Choice would be the provider of last resort for customers in TNMP's transmission and distribution service territory, and would no longer be the provider of last resort for the customers in Oncor's West Texas transmission and distribution service territory. In addition, First Choice would have the right to disconnect customers for non-payment. Under current rules, First Choice cannot disconnect non-provider of last resort customers for non-payment. Its only rememdy for such customers is to transfer the customer to the designated provider of last resort. Following such transfer, First Choice pursues collection of the amounts owed to it by the transferred customers.

       A number of interested parties, including First Choice, have commented on various provisions of the proposed rule. The Staff of the PUCT has scheduled publication of the final rule in August 2002, after which the PUCT will consider the proposed rule for adoption, along with any applicable transition provisions.

Note 3.    Accounting Developments

   Accounting for Goodwill and Other Intangible Assets

      In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," which TNP adopted on January 1, 2002. SFAS 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. TNP stopped amortizing goodwill recorded as a result of the Merger upon adoption of SFAS 142. For the three and six months ended June 30, 2001, goodwill amortization was $2.9 million and $5.8 million, respectively. In conjunction with the adoption of SFAS 142, TNP tested the goodwill related to the Merger for impairment and concluded that the fair value of the goodwill exceeded its carrying value. Accordingly, TNP made no adjustment to goodwill upon the adoption of SFAS 142. TNP will test the goodwill for impairment on an annual basis, or more frequently if certain circumstances require.

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      In accordance with SFAS 142, the effect of this accounting standard was applied prospectively. Supplemental comparative disclosure as if the change had been retroactively applied to the prior year is as follows (in thousands):

		For the Three Months Ended		For the Six Months Ended
		June 30, 2002	June 30, 2001	June 30, 2002	June 30, 2001
Net income (loss) before cumulative
	effect of change in accounting	$      9,215	$         114	$      14,384	$      (3,028)
Net income (loss)		9,215	114	14,384	(4,198)
Add: Goodwill amortization, net of tax		-	1,888	-	3,774
Adjusted net income before cumulative
	effect of change in accounting	9,215	2,002	14,384	746
Adjusted net income (loss)		$      9,215	$      2,002	$      14,384	$      (424)