UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
(X) COMBINED QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
- - --------------------------------------------------------------------------------
Commission File Number: 1-8847
TNP ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Texas 75-1907501
(State of incorporation) (I.R.S. employer identification number)
4100 International Plaza, P. O. Box 2943, Fort Worth, Texas 76113
(Address and zip code of principal executive offices)
Registrant's telephone number, including area code 817-731-0099
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes \X\ No \ \
TNP Enterprises, Inc. had 13,281,874 shares of common stock outstanding as
of November 4, 1998.
- - --------------------------------------------------------------------------------
TEXAS-NEW MEXICO POWER COMPANY
(Exact name of registrant as specified in its charter)
Texas 75-0204070
(State of incorporation) (I.R.S. employer identification number)
4100 International Plaza, P. O. Box 2943, Fort Worth, Texas 76113
(Address and zip code of principal executive offices)
Registrant's telephone number, including area code 817-731-0099
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes \X\ No \ \
TNP Enterprises, Inc. holds all 10,705 outstanding common shares of
Texas-New Mexico Power Company.
TNP Enterprises, Inc. And Subsidiaries
Texas-New Mexico Power Company And Subsidiaries
Combined Quarterly Report on Form 10-Q for the period ended September 30, 1998
This Combined Quarterly Report on Form 10-Q is filed separately by TNP
Enterprises, Inc., and Texas-New Mexico Power Company. Texas-New Mexico Power
Company makes no representation as to information relating to TNP Enterprises,
Inc., except as it may relate to Texas-New Mexico Power Company, or to any other
affiliate or subsidiary of TNP Enterprises, Inc.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
TNP Enterprises, Inc. (TNP) and Subsidiaries:
Consolidated Statements of Income
Three and Nine Month Periods Ended September 30, 1998, and 1997 3
Consolidated Statements of Cash Flows
Nine Month Periods Ended September 30, 1998, and 1997 4
Consolidated Balance Sheets
September 30, 1998, and December 31, 1997 5
Texas-New Mexico Power Company (TNMP) and Subsidiaries:
Consolidated Statements of Income
Three and Nine Month Periods Ended September 30, 1998, and 1997 6
Consolidated Statements of Cash Flows
Nine Month Periods Ended September 30, 1998, and 1997 7
Consolidated Balance Sheets
September 30, 1998, and December 31, 1997 8
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 14
Item 6. Exhibits and Reports on Form 8-K. 14
(a) Exhibit Index 14
(b) Reports on Form 8-K 14
Statement Regarding Forward Looking Information 15
Signatures 15
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ----------------------------------
1998 1997 1998 1997
-------------- ----------------- --------------- ----------------
(In thousands except per share
amounts)
OPERATING REVENUES (Note 3) $ 189,439 $ 187,034 $ 457,131 $ 445,619
-------------- ----------------- --------------- ----------------
OPERATING EXPENSES:
Purchased power 91,486 81,371 214,241 194,591
Fuel 13,467 15,398 31,751 35,251
Other operating and maintenance 22,419 21,749 68,287 63,016
Depreciation 8,957 9,765 28,994 29,100
Taxes other than income taxes 10,913 9,704 27,489 25,582
Income taxes 9,078 11,538 15,657 18,115
-------------- ----------------- --------------- ----------------
Total operating expenses 156,320 149,524 386,419 365,655
-------------- ----------------- --------------- ----------------
NET OPERATING INCOME 33,119 37,510 70,712 79,964
-------------- ----------------- --------------- ----------------
OTHER INCOME:
Other income and deductions, net 391 431 859 890
Income taxes 407 (22) 462 1
-------------- ----------------- --------------- ----------------
Other income, net of taxes 798 409 1,321 891
-------------- ----------------- --------------- ----------------
INCOME BEFORE INTEREST CHARGES 33,917 37,919 72,033 80,855
-------------- ----------------- --------------- ----------------
INTEREST CHARGES:
Interest on long-term debt 11,835 13,075 36,875 39,989
Other interest and amortization of
debt-related costs 1,192 1,103 3,306 3,157
-------------- ----------------- --------------- ----------------
Total interest charges 13,027 14,178 40,181 43,146
-------------- ----------------- --------------- ----------------
INCOME FROM CONTINUING OPERATIONS 20,890 23,741 31,852 37,709
Loss from discontinued nonregulated operations 2,329 3,047 9,432 5,474
(Note 2) -------------- ----------------- --------------- ----------------
NET INCOME 18,561 20,694 22,420 32,235
Dividends on preferred stock 38 40 114 120
-------------- ----------------- --------------- ----------------
INCOME APPLICABLE TO COMMON STOCK $ 18,523 $ 20,654 $ 22,306 $ 32,115
============== ================= =============== ================
EARNINGS PER SHARE OF COMMON STOCK
Earnings from continuing operations $ 1.58 $ 1.81 $ 2.40 $ 2.88
Loss from discontinued nonregulated operations (0.18) (0.23) (0.71) (0.42)
============== ================= =============== ================
EARNINGS PER SHARE $ 1.40 $ 1.58 $ 1.69 $ 2.46
============== ================= =============== ================
DIVIDENDS PER SHARE OF COMMON STOCK $ 0.27 $ 0.245 $ 0.81 $ 0.735
============== ================= =============== ================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 13,263 13,092 13,231 13,068
============== ================= =============== ================
The accompanying notes are an integral part of these consolidated financial
statements.
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
---------------------------------------------
1998 1997
-------------------- -----------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 467,232 $ 438,252
Purchased power (210,270) (183,025)
Fuel costs paid (26,953) (29,367)
Cash paid for payroll and to other suppliers (89,771) (82,066)
Interest paid, net of amounts capitalized (42,232) (46,345)
Income taxes paid (3,000) (3,698)
Other taxes paid (28,032) (26,870)
Other operating cash receipts and payments, net 1,002 1,636
-------------------- -----------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 67,976 68,517
-------------------- -----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant (27,324) (20,100)
Additions to other property and nonregulated investments (554) (2,017)
-------------------- -----------------------
NET CASH USED IN INVESTING ACTIVITIES (27,878) (22,117)
-------------------- -----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on preferred and common stocks (10,841) (9,733)
Common stock issuances 4,647 3,212
Borrowings from (repayments to) revolving credit facilities - net (38,000) 64,000
Other long-term debt (104) (61)
Obligation - FWI investment aquisition - (300)
First mortgage bonds (100) (100,900)
-------------------- -----------------------
NET CASH USED IN FINANCING ACTIVITIES (44,398) (43,782)
-------------------- -----------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (4,300) 2,618
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 15,877 8,387
-------------------- -----------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,577 $ 11,005
==================== =======================
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income $ 22,420 $ 32,235
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 28,994 29,307
Amortization of debt-related costs and other deferred charges 2,749 2,861
Allowance for borrowed funds used during construction (99) (30)
Deferred income taxes 4,525 9,187
Investment tax credits (133) (1,509)
Cash flows impacted by changes in current assets and liabilities:
Deferred fuel costs 765 6,239
Accounts payable 11,453 17,120
Accrued interest (4,669) (2,472)
Accrued taxes 2,711 4,119
Changes in other current assets and liabilities (816) (32,167)
Other, net 76 3,627
-------------------- -----------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 67,976 $ 68,517
==================== =======================
The accompanying notes are an integral part of these consolidated financial
statements.
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1998 December 31,
(Unaudited) 1997
------------------- ----------------------
(In thousands)
ASSETS
UTILITY PLANT:
Electric plant $ 1,249,247 $ 1,235,257
Construction work in progress 5,196 2,281
--------------------- ----------------------
Total 1,254,443 1,237,538
Less accumulated depreciation 332,315 314,270
--------------------- ----------------------
Net utility plant 922,128 923,268
--------------------- ----------------------
OTHER PROPERTY AND INVESTMENTS, at cost 5,913 5,704
--------------------- ----------------------
CURRENT ASSETS:
Cash and cash equivalents 11,577 15,877
Accounts receivable 6,745 8,585
Inventories, at lower of average cost or market:
Fuel 877 483
Materials and supplies 4,598 4,440
Deferred fuel costs 1,805 2,570
Accumulated deferred income taxes 3,095 1,707
Other current assets 5,518 982
--------------------- ----------------------
Total current assets 34,215 34,644
--------------------- ----------------------
REGULATORY TAX ASSETS 2,034 -
DEFERRED CHARGES 24,301 28,310
--------------------- ----------------------
$ 988,591 $ 991,926
===================== ======================
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common shareholders' equity:
Common stock - no par value per share. Authorized 50,000,000
shares; issued 13,274,866 shares in 1998 and 13,126,447 in 1997 $ 191,810 $ 187,163
Retained earnings 122,657 111,078
--------------------- ----------------------
Total common shareholders' equity 314,467 298,241
Preferred stock 3,240 3,240
Long-term debt, less current maturities 302,034 478,041
--------------------- ----------------------
Total capitalization 619,741 779,522
--------------------- ----------------------
CURRENT LIABILITIES:
Current maturities of long-term debt 137,900 100
Accounts payable 38,488 27,035
Accrued interest 2,654 7,323
Accrued taxes 20,300 17,589
Customers' deposits 3,598 3,249
Other current liabilities 28,748 26,665
--------------------- ----------------------
Total current liabilities 231,688 81,961
--------------------- ----------------------
REGULATORY TAX LIABILITIES - 6,318
ACCUMULATED DEFERRED INCOME TAXES 98,339 85,250
ACCUMULATED DEFERRED INVESTMENT TAX CREDITS 22,223 21,149
DEFERRED CREDITS 16,600 17,726
COMMITMENTS AND CONTINGENCIES (Notes 2, 4 and 5)
--------------------- ----------------------
$ 988,591 $ 991,926
===================== ======================
The accompanying notes are an integral part of these consolidated financial
statements.
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of TNP Enterprises, Inc.)
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------------- ----------------------------------------------
1998 1997 1998 1997
--------------------- -------------------- --------------------- -----------------------
(In thousands)
OPERATING REVENUES (Note 3) $ 189,425 $ 187,035 $ 457,097 $ 445,619
--------------------- -------------------- --------------------- -----------------------
OPERATING EXPENSES:
Purchased power 91,486 81,372 214,241 194,591
Fuel 13,467 15,398 31,751 35,251
Other operating and maintenance 21,420 21,155 65,229 61,373
Depreciation of utility plant 8,957 9,764 28,993 29,099
Taxes other than income taxes 10,812 9,541 27,934 25,149
Income taxes 9,676 11,771 16,622 18,808
--------------------- -------------------- --------------------- -----------------------
Total operating expenses 155,818 149,001 384,770 364,271
--------------------- -------------------- --------------------- -----------------------
NET OPERATING INCOME 33,607 38,034 72,327 81,348
--------------------- -------------------- --------------------- -----------------------
OTHER INCOME:
Other income and deductions, net 354 322 524 674
Income taxes 407 (22) 535 1
--------------------- -------------------- --------------------- -----------------------
Other income, net of taxes 761 300 1,059 675
--------------------- -------------------- --------------------- -----------------------
INCOME BEFORE INTEREST CHARGES 34,368 38,334 73,386 82,023
--------------------- -------------------- --------------------- -----------------------
INTEREST CHARGES:
Interest on long-term debt 11,835 13,075 36,875 39,989
Other interest and amortization
of debt-related costs 1,192 1,103 3,306 3,157
--------------------- -------------------- --------------------- -----------------------
Total interest charges 13,027 14,178 40,181 43,146
--------------------- -------------------- --------------------- -----------------------
NET INCOME 21,341 24,156 33,205 38,877
Dividends on preferred stock 38 40 114 120
--------------------- -------------------- --------------------- -----------------------
INCOME APPLICABLE TO COMMON STOCK $ 21,303 $ 24,116 $ 33,091 $ 38,757
===================== ==================== ===================== =======================
The accompanying notes are an integral part of these consolidated financial
statements.
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of TNP Enterprises, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
----------------------------------------------
1998 1997
---------------------- ---------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 448,945 $ 428,961
Purchased power (210,270) (183,025)
Fuel costs paid (26,953) (29,367)
Cash paid for payroll and to other suppliers (53,959) (58,413)
Interest paid, net of amounts capitalized (42,222) (46,343)
Income taxes paid 1,039 (3,187)
Other taxes paid (28,452) (26,845)
Other operating cash receipts and payments, net 611 1,354
---------------------- ---------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 88,739 83,135
---------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant (27,221) (20,083)
Withdrawal from escrow account - 1,670
---------------------- ---------------------
CASH FLOWS USED IN INVESTING ACTIVITIES ( 27,221) (18,413)
---------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on preferred and common stocks (17,296) (30,420)
Borrowings from (repayments to) revolving credit facilities - net (38,000) 64,000
First mortgage bond redemption (100) (100,900)
---------------------- ---------------------
NET CASH USED IN FINANCING ACTIVITIES (55,396) (67,320)
---------------------- ---------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 6,122 (2,598)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,772 5,115
---------------------- ---------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,894 $ 2,517
====================== =====================
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income $ 33,205 $ 38,877
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation of utility plant 28,993 29,099
Amortization of debt-related costs and other deferred charges 2,749 2,861
Allowance for borrowed funds used during construction (99) (30)
Deferred income taxes 8,282 10,538
Investment tax credits (224) (1,510)
Cash flows impacted by changes in current assets and liabilities:
Deferred fuel costs 765 7,234
Accounts payable 12,902 15,016
Accrued interest (4,669) (6,028)
Accrued taxes 8,044 5,014
Changes in other current assets and liabilities 8,767 (15,200)
Other, net (9,976) (2,736)
---------------------- ---------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 88,739 $ 83,135
====================== =====================
The accompanying notes are an integral part of these consolidated financial
statements.
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of TNP Enterprises,
Inc.)
CONSOLIDATED BALANCE SHEETS
September 30, 1998 December 31,
(Unaudited) 1997
---------------- -----------------
(In thousands)
ASSETS
UTILITY PLANT:
Electric plant $ 1,249,191 $ 1,235,239
Construction work in progress 5,196 2,281
---------------- -----------------
Total 1,254,387 1,237,520
Less accumulated depreciation 332,315 314,270
---------------- -----------------
Net utility plant 922,072 923,250
---------------- -----------------
OTHER PROPERTY AND INVESTMENTS, at cost 214 214
---------------- -----------------
CURRENT ASSETS:
Cash and cash equivalents 8,894 2,772
Accounts receivable 1,209 2,342
Inventories, at lower of average cost or market:
Fuel 877 483
Materials and supplies 4,598 4,440
Deferred fuel costs 1,805 2,570
Accumulated deferred income taxes 3,095 1,707
Other current assets 4,723 222
---------------- -----------------
Total current assets 25,201 14,536
---------------- -----------------
REGULATORY TAX ASSETS 2,034 -
DEFERRED CHARGES 22,756 29,006
---------------- -----------------
$ 972,277 $ 967,006
================ =================
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common shareholder's equity:
Common stock, $10 par value per share.
Authorized 12,000,000 shares; issued 10,705 shares $ 107 $ 107
Capital in excess of par value 222,146 222,146
Retained earnings 69,259 64,768
---------------- -----------------
Total common shareholder's equity 291,512 287,021
Redeemable cumulative preferred stock 3,240 3,240
Long-term debt, less current maturities 302,000 477,900
---------------- -----------------
Total capitalization 596,752 768,161
---------------- -----------------
CURRENT LIABILITIES:
Current maturities of long-term debt 137,900 100
Accounts payable 37,761 24,859
Accrued interest 2,654 7,323
Accrued taxes 25,795 17,751
Customers' deposits 3,598 3,249
Other current liabilities 31,486 19,148
---------------- -----------------
Total current liabilities 239,194 72,430
---------------- -----------------
REGULATORY TAX LIABILITIES - 6,318
ACCUMULATED DEFERRED INCOME TAXES 93,846 81,085
ACCUMULATED DEFERRED INVESTMENT TAX CREDITS 25,970 21,286
DEFERRED CREDITS 16,515 17,726
COMMITMENTS AND CONTINGENCIES (Notes 2, 4 and 5)
---------------- -----------------
$ 972,277 $ 967,006
================ =================
The accompanying notes are an integral part of these consolidated financial
statements.
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 1997 Combined Annual Report on Form 10-K.
Prior period statements have been reclassified in order to be
consistent with current period presentation. The reclassification had no effect
on net income or common shareholders equity.
Note 2. Discontinued Nonregulated Operations
During the third quarter of 1998, TNP elected to discontinue all
remaining operations of Facility Works Inc. (FWI), TNP's wholly owned
nonregulated subsidiary. TNP previously decided, in the fourth quarter of 1997,
to discontinue FWI's construction operations. TNP's results of operations for
the quarter ended September 30, 1998, include a charge of $3.6 million ($2.3
million, net of tax, or $0.18 per share). The charge (net of tax) includes a net
loss incurred by the service operations of $0.5 million, and a one-time loss of
$1.8 million, to satisfy remaining contractual obligations and costs to dispose
of the service operations. TNP expects that FWI service operations will be fully
discontinued within three to six months. In the quarter ended September 30,
1997, FWI, both service and construction segments, lost $4.4 million ($3.0
million, net of tax, or $0.23 per share).
For the nine months ended September 30, 1998, the loss on FWI's
discontinued operations was $14.5 million ($9.4 million, net of tax, or $0.71
per share), as compared to a loss of $8.1 million ($5.5 million, net of tax, or
$0.42 per share), in the corresponding 1997 period. All losses incurred by FWI,
both construction and service, for the first three quarters of 1997 have been
reclassified as losses from discontinued operations.
Note 3. Regulatory Matters
Texas Transition Plan
On September 4, 1998, the Public Utility Commission of Texas (PUCT)
issued a final order approving TNMP's transition-to-competition plan (Transition
Plan). On November 3, 1998, the PUCT issued an order on rehearing, clarifying
various provisions of its final order, but making no substantive changes to its
original order. The Transition Plan includes a number of provisions that impact
TNMP's financial results. First, 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, are effective retroactive to January 1,
1998. Second, 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,
are $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, according to guidelines set by the PUCT. Third, the Plan
includes a cap on operating and maintenance expenses applicable to TNMP's Texas
operations based on cost incurred per customer in 1996. Fourth, TNMP will record
$15 million of additional depreciation annually during 1999-2003 to recover
stranded costs. Finally, the manner in which TNMP recovers, from its customers,
the cost of fuel and purchased power 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, fuel and
purchased power expense had no impact on operating income. Effective with the
new rates under the Transition Plan, only the fuel costs of TNP One and the
energy-related portion of purchased power will be passed-through directly to
customers via an 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.
During the nine months ended September 30, 1998, the results of
operations are affected by both one-time and ongoing charges related to the
implementation of the Transition Plan. The effect of the Transition Plan reduced
TNMP earnings by $13.0 million or $0.98 per share. The one-time charges consist
of the write-off of previously deferred Transition Plan expenses of $2.2
million, net of taxes, ($0.17 per share), and customer refunds of $0.9 million,
net of taxes ($0.06 per share). The ongoing charges include the following net of
tax amounts:
- Effects of implementing the Transition Plan rate structure -
$5.2 million ($0.39 per share)
- Adjustments to demand purchased power expenses-$4.0 million,
($0.31 per share)
- Excess earnings calculated under the earnings cap - $0.7
million ($0.05 per share)
The combination of the one-time customer refund, implementing the
Transition Plan rate structure, and excess earnings, allocated to customer
refunds, reduced operating revenue by $10.0 million (pre-tax).
Note 4. Accounting for the Effects of Regulation
TNMP's financial statements reflect assets and costs based on current
cost-based ratemaking regulations in accordance with Statement of Financial
Accounting Standards No. 71 (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.
As discussed in TNP's and TNMP's 1997 Combined Annual Report on Form
10-K, TNMP discontinued the application of SFAS 71 to its generation/power
supply operations in New Mexico during 1997, following adoption of the Community
Choice(R) program. This discontinuation had no effect on TNMP's financial
condition. As discussed in Note 3, the PUCT issued a final order approving the
Transition Plan on September 4, 1998. Had the PUCT adopted TNMP's plan as
originally proposed, TNMP would have discontinued the application of SFAS 71 to
its generation/power supply operations in Texas. However, the PUCT modified
TNMP's filed plan to the extent that SFAS 71 remains applicable to TNMP's Texas
generation/power supply operations. 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, as described in Note 3.
Management believes that, as of September 30, 1998, and for the foreseeable
future, TNMP's transmission and distribution operations continue to follow SFAS
71.
Note 5. Commitments and Contingencies
Legal Actions
As discussed in TNP's and TNMP's 1997 Combined Annual Report on Form 10-K,
TNMP is the defendant in a suit styled Clear Lake Cogeneration Limited
Partnership vs. Texas-New Mexico Power Company, pending in the 234th District
Court in Harris County, Texas. The court heard motions for summary judgment
filed by both parties on October 12, 1998. On November 2, 1998, the court ruled
on these motions, granting TNMP's motion for summary judgment on certain issues,
denying motions by both parties relating to the material issues in the case, and
granting Clear Lake leave to amend its summary judgment motion with respect to
certain issues. The lawsuit is in an active discovery phase, and TNMP continues
to vigorously contest the remaining issues.
As discussed in TNP's and TNMP's 1997 Combined Annual Report on Form
10-K, TNMP is the defendant in a suit styled Phillips Petroleum Company vs.
Texas-New Mexico Power Company, pending in the 149th District Court in Brazoria
County, Texas. As of the date of this report, there have been no material
developments in this matter, which is in the discovery phase.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (MD&A).
The following discussion should be read in conjunction with the related
interim consolidated financial statements and notes.
Results Of Operations
Overall Results
TNP had earnings applicable to common stock of $18.5 million for the
quarter ended September 30, 1998 (current quarter), as compared to earnings of
$20.7 million for the quarter ended September 30, 1997. Excluding the effect of
discontinued operations at FWI, earnings for the current quarter were $20.8
million, as compared to $23.7 million for the corresponding 1997 quarter.
TNP had earnings applicable to common stock of $22.3 million for the
nine months ended September 30, 1998 (current nine months), as compared to $32.1
million for the nine months ended September 30, 1997. Excluding the effect of
discontinued operations at FWI, earnings for the current nine months were $31.7
million as compared to $37.6 million for the corresponding 1997 period.
Losses from FWI discontinued operations included in the quarters ended
September 30, 1998 and 1997 were $2.3 million and $3.0 million, respectively. In
the nine-month periods ended September 30, 1998 and 1997, losses from FWI
discontinued operations were $9.4 million and $5.5 million, respectively. Refer
to Note 2 for additional discussion of discontinued operations at FWI.
Since the operations of TNMP (the principal subsidiary) currently
represent most of TNP's operations, the following discussion focuses on TNMP's
operations unless noted otherwise.
Operating Revenues
The components of TNMP's operating revenues are summarized in the
following tables (in thousands).
Three Months Ended September 30, Nine Months Ended September 30,
Increase Increase
1998 1997 (Decrease) 1998 1997 (Decrease)
--------- ---------- --------- ----------- --------- ---------
Operating revenues $ 189,425 $ 187,035 $ 2,390 $ 457,097 $ 445,619 $ 11,478
========= ========== ========= =========== ========= =========
Operating revenues
------------------
Weather related $ 10,738 $ 20,948
Customer growth 2,880 6,325
Industrial - economy rate sales 4,034 7,239
Industrial - firm rate sales (8,212) (18,996)
Transmission revenue 626 626
Texas base rate reductions (4,566) (9,982)
Other revenue (3,110) 5,318
----------- -----------
Operating revenues increase $ 2,390 $ 11,478
========= =========
Current quarter and current nine months operating revenues increased
$2.4 million and $11.5 million, respectively as compared to the corresponding
1997 periods. Operating revenue increased due to hotter-than-normal weather,
increased economy industrial sales, customer growth, and increased prices for
recovery of purchased power passed through to customers. The loss of a
significant industrial customer to self-generation, decreased power marketing
sales in the third quarter, and the effects of the approved Transition Plan
partially offset the increase. The Transition Plan effects are identified above
as "Texas base rate reductions", and include $7.9 million recorded to implement
the Transition plan rate structure, $0.6 million to recognize excess earnings
under the earnings cap, and $1.5 million to provide for a one-time customer
refund.
The following table summarizes the components of gigawatt-hour (GWH)
sales.
Three Months Ended September 30, Nine Months Ended September 30,
Increase Increase
1998 1997 (Decrease) 1998 1997 (Decrease)
-------- --------- ---------- ---------- --------- ----------
GWH sales:
Residential 897 796 101 1,917 1,741 176
Commercial 590 538 52 1,435 1,339 96
Industrial:
Firm 108 315 (207) 406 869 (463)
Economy 1,155 1,115 40 3,384 3,260 124
Other 106 296 (190) 429 389 40
-------- --------- -------- ---------- ------- --------
Total GWH sales 2,856 3,060 (204) 7,571 7,598 (27)
======== ========= ======== ========== ======= ========
Current quarter sales decreased 204 GWHs (or 7%), 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. Sales for the current nine months were comparable to the same period in
1997.
Operating Expenses
The following table summarizes the components of TNMP's total operating
expenses (in thousands).
Three Months Ended September 30, Nine Months Ended September 30,
Increase Increase
1998 1997 (Decrease) 1998 1997 (Decrease)
--------- --------- ---------- ----------- ---------- ----------
Direct expenses:
Purchased power $ 91,486 $ 81,372 $ 10,114 $ 214,241 $ 194,591 $ 19,650
Fuel 13,005 14,577 (1,572) 30,507 33,486 (2,979)
--------- --------- ---------- ---------- ---------- ----------
Total direct items 104,491 95,949 8,542 244,748 228,077 16,671
Other operating expenses 30,839 31,740 (901) 95,466 92,237 3,229
Income and other tax expenses 20,488 21,312 (824) 44,556 43,957 599
----------- ------------ -------- ------------------------ ----------
Operating expenses $ 155,818 $ 149,001 $ 6,817 $ 384,770 $ 364,271 $ 20,499
========= ========== ========= ========== ========== ========
Overall, current quarter and current nine months operating expenses
increased by $6.8 million and $20.5 million, respectively, due primarily to
increased purchased power expenses.
Direct Expenses
Direct expenses consist of purchased power and pass-through fuel costs.
Purchased power costs include both demand and energy charges. Under the
Transition Plan, demand charges for purchased power are in base rates. See Note
3. Those demand charges are no longer passed directly through to customers.
Purchased Power. Purchased power costs increased by $10.1 million in
the current quarter, and by $19.7 million in the current nine months, as
compared to the same periods in 1997. The increases were due to increased
purchased power expenses during the hotter-than-normal summer weather,
recognition of demand expenses in compliance with the Transition Plan, and
settlement of a billing dispute. Effective with the new rates under the
Transition Plan, approximately half of the $214.2 million of purchased power for
the current nine months will be passed-through directly to customers via an
adjustment clause. The remaining half will be recovered through base rates and
is not subject to adjustment or future reconciliation. Therefore, any
difference, between the remaining half, and the amount recovered through TNMP's
rates related to it, has affected operating income.
Fuel. The majority of TNMP's monthly fuel costs are recovered in
revenues through a fixed fuel factor per KWH approved by the PUCT. TNMP records
as fuel expense the amount collected through this fixed fuel factor. Any
difference between the amount collected and actual cost is deferred for
collection/refund in future periods. Fuel expense for the current quarter was
$1.6 million lower as compared to the corresponding 1997 quarter due to lower
firm industrial sales, partially offset by increases in recovery from higher
residential and commercial sales. The decrease of $3.0 million in fuel expense
for the current nine months occurred for the same reasons.
Other Operating Expenses, Income and Other Tax Expenses
Other operating expenses for the current quarter decreased slightly as
compared to the prior year quarter. Other operating expenses for the current
nine months increased by $3.2 million due to the write-off in the second quarter
of previously deferred Transition Plan expenses of $3.3 million ($2.2 million,
net of taxes), and additional depreciation, recorded as a result of excess
earnings under the earnings cap, of $0.6 million ($0.4 million, net of tax). See
Note 3.
Current quarter income and other tax expenses were $0.8 million lower
than the corresponding 1997 period, due to greater utilization of investment tax
credits and larger tax deductions for dividends received. Income and other taxes
increased $0.6 million during the current nine months over the same period in
1997, due to higher state income taxes and franchise taxes.
Interest Expense
Interest charges decreased by $1.2 million for the quarter, and $3.0
million for the nine months ended September 30, 1998, due to reduced debt levels
under the credit facilities discussed below.
Financial Condition
Liquidity
Currently, the main sources of liquidity for TNMP are cash flow from
operations and borrowings from credit facilities. TNMP's cash flow from
operations was higher for the nine months ended September 30, 1998, as compared
to the corresponding 1997 period. Cash flow from operations increased due to
higher receipts from customers and lower payments for interest, offset by higher
payments for purchased power. TNP's consolidated cash flow from operations for
the current nine months was comparable to 1997, as increased expenses for
nonregulated activities offset increased cash flow from TNMP.
In November 1998, TNP entered into a new credit facility with a total
commitment of $50 million. 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.
TNMP has two credit facilities, which originally had a total commitment
of $250 million - the 1995 Facility ($150 million) and the 1996 Facility ($100
million). As of September 16, 1998, TNMP permanently reduced the commitments on
both facilities - the 1995 Facility commitment is $100 million and the 1996
Facility is $80 million. As of September 30, 1998, available unused credit under
the 1995 Facility was $100 million, subject to interest coverage and
capitalization tests. Available credit under the 1996 Facility is $18 million.
The interest rates under both facilities are based on the London Interbank
Offered Rate (LIBOR). The interest rate margins on both facilities have
decreased since the ratings on TNMP's First Mortgage Bonds have improved based
on recent announcements by the rating agencies.
TNMP has $130 million of secured debentures which mature in January
1999. TNMP has filed a shelf registration with the SEC authorizing TNMP to issue
up to $200 million of new debt. Management believes that this new debt, along
with cash flow from operations and periodic borrowings under its revolving
credit facilities, should be sufficient to meet working capital requirements and
planned capital expenditures at least through 1999.
Other Matters
Year 2000
TNP 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 TNP's operations.
TNP's information technology staff and a team of professionals from
throughout the company have been working for over a year to identify, assess,
correct, and test these software applications and embedded systems. TNP's
project to analyze Y2K has included the following phases: awareness, assessment,
renovation and validation, and implementation.
Awareness and Assessment. In its analysis to identify and assess Y2K
impact on company systems, TNP has conducted extensive studies to analyze the
impact of Y2K to all operating systems. As a result of these studies, TNP has
developed a Y2K mitigation plan. The plan requires TNP 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.
Renovation and Validation of Information Technology Systems. TNP is
currently implementing its Y2K mitigation plan. To date, approximately 75% of
TNP's infrastructure supporting its business systems has been tested and
verified as Y2K compliant. TNP expects to have the remaining infrastructure Y2K
compliant by the end of the first quarter of 1999. TNP expects the financial
management systems to be renovated, tested and implemented by the fourth quarter
of 1998. A new customer information system is expected to be implemented and
tested by mid-third quarter 1999 and other corporate information systems
directly related to TNP's operations are expected to be installed and tested by
September 1999. TNP incorporates unit testing, system testing, integration
testing and acceptance testing into the verification methodology.
Cost. The incremental cost of compliance of TNP's information
technology systems with respect to Y2K is approximately $8.7 million, but TNP
does not expect this incremental cost to have a material impact on its financial
position or results of operations. TNP continues to work with key software
vendors and outside consultants to validate its Y2K compliance project. To date,
TNP has spent approximately $2.7 million on Y2K remediation. With respect to its
information technology system, 5% of the cost to date was to repair software
systems and 95% was to replace non-compliant systems or hardware. TNP has in the
past used, and expects to continue to use, cash flow from operations to fund
costs associated with Y2K.
Non-information Technology Systems. TNP conducted an initial assessment
of its non-information technology systems in August 1998. The assessment
included those systems related to the production, transmission and distribution
of electric power. In October 1998, TNP hired an engineering consultant to
reassess all of its non-information technology systems. This reassessment will
ensure that TNP has identified all of its critical system components and will
determine the need for and the extent of any necessary modifications to such
systems. Until such studies have been completed, TNP cannot estimate the timing
of, or costs associated with, any potential future renovations, validations and
implementations.
Third Party Vendors. In addition to its own mitigation plan, TNP is
actively working with its key vendors and other third parties with which TNP has
a material relationship to assist such parties in achieving compliance with
respect to Y2K in those systems affecting TNP'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 TNP believes that such persons are
working diligently to properly address Y2K, TNP 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 TNP's systems, would
not have a material adverse effect on TNP.
Contingency Plans. The primary operating processes of TNP's business
(e.g., the production, transmission, and distribution of electric power) are
subject to contingencies related to weather, equipment failure, and other
factors. TNP has in place a number of contingency plans for dealing with these
circumstances, and believes that many of the plans are readily adaptable Y2K.
TNP expects to adapt those plans to Y2K by March 1999.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Regulatory Matters
See Note 3.
Legal Proceedings
See Note 5.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
The following exhibits are filed with this report:
10(a) Amendment No. 1, dated October 28, 1998, to Revolving
Credit Facility Agreement, dated as of November 3, 1995, among
TNMP, certain lenders, and The Chase National Bank (as
successor by merger to Chemical Bank), as Administrative Agent
and Collateral Agent.
10(b) Credit Agreement dated as of November 6, 1998, among TNP
Enterprises, Inc., NationsBank, N. A., as Administrative Agent
and a Lender, The First National Bank of Chicago as
Syndication Agent and a Lender, and Union Bank of California,
N. A., as a Lender.
27(a) Financial Data Schedule for TNP.
27(b) Financial Data Schedule for TNMP.
(b) Reports on Form 8-K: TNP filed a report on Form 8-K dated October 9,
1998, to disclose and file TNP's Amended & Restated Shareholder Rights
Plan.
Statement Regarding Forward-Looking Information
The discussions in this document that are not historical facts, including,
but not limited to, the continued application of regulatory accounting
principles, future cash flows, the potential recovery of stranded costs and
implementation of the transition plan, are based upon current expectations.
Actual results may differ materially. Among the facts that could cause the
results to differ materially from expectations are the following: legislation in
the states TNMP serves affecting the regulation of TNMP's business; changes in
regulations affecting TNP's and TNMP's businesses; results of regulatory
proceedings affecting TNP's and TNMP's operations; future acquisitions or
strategic partnerships; changes in general business and economic conditions,
particularly in the geographic areas in which TNMP does business; changes in
plans to refinance maturing debt; the effectiveness of TNP's Y2K mitigation
plan, and the timely Y2K compliance by TNP's and TNMP's vendors; changes in the
availability and pricing of purchased power supplies; and other factors
described from time to time in TNP's and TNMP's reports filed with the
Securities and Exchange Commission. TNP and TNMP wish to caution readers not to
place undue reliance on any such forward looking statements, which are made
pursuant to the Private Securities Litigation Reform Act of 1995 and, as such,
speak only as of the date made.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
(Registrant) TNP ENTERPRISES, INC. AND
TEXAS-NEW MEXICO POWER COMPANY
By \s\ MANJIT S. CHEEMA
Manjit S. Cheema
Date: November 13, 1998 Senior Vice President and Chief Financial Officer
By \s\ MICHAEL J. RICKETTS
Michael J. Ricketts
Date: November 13, 1998 Controller and as Chief Accounting Officer