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.
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
-2-
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
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.
-10-
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)
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