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, 1997
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 13,127,377 shares of common stock outstanding as of
October 28, 1997.
- --------------------------------------------------------------------------------
Commission File Number: 2-97230
TEXAS-NEW MEXICO POWER COMPANY
(Exact name of registrant as specified in its charter)
Texas 75-0204070
(State of incorporation) (I.R.S. employer identification number)
4100 International Plaza, P. O. Box 2943, Fort Worth, Texas 76113
(Address and zip code of principal executive offices)
Registrant's telephone number, including area code 817-731-0099
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes \X\ No \ \
TNP Enterprises, Inc. holds all 10,705 outstanding common shares of Texas-New
Mexico Power Company.
TNP Enterprises, Inc. And Subsidiaries
Texas New-Mexico Power Company And Subsidiaries
Combined Quarterly Report on Form 10-Q for the periods ended September 30, 1997
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, 1997, and 1996 3
Consolidated Statements of Cash Flows
Nine Month Periods Ended September 30, 1997, and 1996 4
Consolidated Balance Sheets
September 30, 1997, and December 31, 1996 5
Texas-New Mexico Power Company (TNMP) and Subsidiaries:
Consolidated Statements of Income
Three and Nine Month Periods Ended September 30, 1997, and 1996 6
Consolidated Statements of Cash Flows
Nine Month Periods Ended September 30, 1997, and 1996 7
Consolidated Balance Sheets
September 30, 1997, and December 31, 1996 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 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
(a) Exhibit Index 14
(b) Reports on Form 8-K 14
Signature page 15
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------------------------------
1997 1996 1997 1996
---------------- ---------------- ---------------- ----------------
(In thousands except per share amounts)
OPERATING REVENUES $ 197,558 $ 159,280 $ 461,981 $ 381,127
---------------- ---------------- ---------------- ----------------
OPERATING EXPENSES:
Purchased power 81,372 63,904 194,591 137,865
Fuel 15,398 15,167 35,251 38,404
Other operating and maintenance 36,660 23,468 87,286 65,986
Depreciation 9,860 9,580 29,307 28,584
Taxes other than income taxes 9,710 9,634 25,676 25,109
Income taxes 10,173 7,790 15,444 12,329
---------------- ---------------- ---------------- ----------------
Total operating expenses 163,173 129,543 387,555 308,277
---------------- ---------------- ---------------- ----------------
NET OPERATING INCOME 34,385 29,737 74,426 72,850
---------------- ---------------- ---------------- ----------------
OTHER INCOME:
Other income and deductions, net 511 905 956 852
Income taxes (22) 864 1 910
---------------- ---------------- ---------------- ----------------
Other income, net of taxes 489 1,769 957 1,762
---------------- ---------------- ---------------- ----------------
INCOME BEFORE INTEREST CHARGES 34,874 31,506 75,383 74,612
---------------- ---------------- ---------------- ----------------
INTEREST CHARGES:
Interest on long-term debt 13,075 16,256 39,989 49,380
Other interest and amortization of
debt-related costs 1,105 958 3,159 2,547
---------------- ---------------- ---------------- ----------------
Total interest charge 14,180 17,214 43,148 51,927
---------------- ---------------- ---------------- ----------------
NET INCOME 20,694 14,292 32,235 22,685
Dividends on preferred stock 40 42 120 126
---------------- ---------------- ---------------- ----------------
INCOME APPLICABLE TO COMMON STOCK $ 20,654 $ 14,250 $ 32,115 $ 22,559
================ ================ ================ ================
EARNINGS PER SHARE OF COMMON STOCK $ 1.57 $ 1.29 $ 2.44 $ 2.05
================ ================ ================ ================
DIVIDENDS PER SHARE OF COMMON STOCK $ 0.245 $ 0.245 $ 0.735 $ 0.685
================ ================ ================ ================
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 13,188 11,080 13,164 11,029
================ ================ ================ ================
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,
----------------------------------------
1997 1996
----------------- -------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 438,252 $ 374,529
Purchased power (183,025) (138,326)
Fuel costs paid (29,367) (37,292)
Cash paid for payroll and to other suppliers (82,066) (63,226)
Interest paid, net of amounts capitalized (46,345) (62,137)
Income taxes paid (3,698) (11,596)
Other taxes paid (26,870) (23,777)
Other operating cash receipts and payments, net 1,636 2,579
----------------- -------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 68,517 40,754
----------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant (20,100) (20,563)
Additions to other property and nonregulated investments (2,017) -
----------------- -------------------
NET CASH USED IN INVESTING ACTIVITIES (22,117) (20,563)
----------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on preferred and common stocks (9,733) (7,644)
Common stock issuances 3,212 1,410
Borrowings from (repayments to) revolving credit
facilities - net 64,000 (10,000)
Redemptions:
Other long-term debt (161) 835
Obligation - FWI investment aquisition (300) -
First mortgage bonds (100,800) (10,550)
----------------- -------------------
NET CASH USED IN FINANCING ACTIVITIES (43,782) (25,949)
----------------- -------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 2,618 (5,758)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,387 21,105
----------------- -------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,005 $ 15,347
================= ===================
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income $ 32,235 $ 22,685
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 29,307 28,566
Amortization of debt-related costs and other
deferred charges 2,861 3,390
Allowance for borrowed funds used during
construction (30) (78)
Deferred income taxes 9,187 4,711
Investment tax credits (1,509) 926
Cash flows impacted by changes in current assets
and liabilities:
Deferred purchased power and fuel costs 7,234 (6,859)
Accounts payable 15,709 8,893
Accrued interest (6,028) (7,739)
Accrued taxes 2,875 (4,468)
Changes in other current assets and liabilities (20,683) (8,721)
Other, net (2,641) (552)
----------------- -------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 68,517 $ 40,754
================= ===================
The accompanying notes are an integral part of these consolidated financial statements.
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1997 December 31,
(Unaudited) 1996
--------------- ----------------
(In thousands)
ASSETS
UTILITY PLANT:
Electric plant $ 1,230,228 $ 1,215,355
Construction work in progress 1,250 906
--------------- ----------------
Total 1,231,478 1,216,261
Less accumulated depreciation 306,508 282,322
--------------- ----------------
Net utility plant 924,970 933,939
--------------- ----------------
OTHER PROPERTY AND INVESTMENTS, at cost 5,736 3,927
--------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents 11,005 8,387
Receivables:
Customer 27,487 16,362
Other 13,715 594
Inventories, at lower of average cost or market:
Fuel 519 367
Materials and supplies 5,048 6,384
Deferred purchased power and fuel costs - 3,565
Accumulated deferred income taxes 1,831 1,937
Other current assets 2,008 527
--------------- ----------------
Total current assets 61,613 38,123
--------------- ----------------
DEFERRED CHARGES 27,917 30,795
--------------- ----------------
$ 1,020,236 $ 1,006,784
=============== ================
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common shareholders' equity:
Common stock - no par value per share.
Authorized 50,000,000 shares; issued
13,126,477 shares in 1997 and
13,006,492 in 1996 $ 186,983 $ 183,771
Retained earnings 117,204 94,703
--------------- ----------------
Total common shareholders' equity 304,187 278,474
Preferred stock 3,420 3,420
Long-term debt, less current maturities 497,041 533,964
--------------- ----------------
Total capitalization 804,648 815,858
--------------- ----------------
CURRENT LIABILITIES:
Current maturities of long-term debt 100 138
Accounts payable 44,155 28,446
Accrued interest 4,851 10,879
Accrued taxes 21,708 18,833
Customers' deposits 3,179 2,662
Deferred purchased power and fuel costs 3,669 -
Other current liabilities 11,117 11,797
--------------- ----------------
Total current liabilities 88,779 72,755
--------------- ----------------
REGULATORY TAX LIABILITIES 1,006 10,963
ACCUMULATED DEFERRED INCOME TAXES 87,801 74,844
ACCUMULATED DEFERRED INVESTMENT TAX CREDITS 24,305 19,734
DEFERRED CREDITS 13,697 12,630
COMMITMENTS AND CONTINGENCIES (Notes 2 and 4)
--------------- ----------------
$ 1,020,236 $ 1,006,784
=============== ================
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,
---------------------------------------------------------------------
1997 1996 1997 1996
---------------- --------------- --------------- ---------------
(In thousands)
OPERATING REVENUES $ 187,035 $ 157,453 $ 445,619 $ 379,300
---------------- --------------- --------------- ---------------
OPERATING EXPENSES:
Purchased power 81,372 63,904 194,591 137,865
Fuel 15,398 15,167 35,251 38,404
Other operating and maintenance 21,155 20,139 61,373 62,657
Depreciation of utility plant 9,764 9,562 29,099 28,566
Taxes other than income taxes 9,541 9,195 25,149 24,670
Income taxes 11,771 8,249 18,808 12,788
---------------- --------------- --------------- ---------------
Total operating expenses 149,001 126,216 364,271 304,950
---------------- --------------- --------------- ---------------
NET OPERATING INCOME 38,034 31,237 81,348 74,350
---------------- --------------- --------------- ---------------
OTHER INCOME:
Other income and deductions, net 322 226 674 584
Income taxes (22) 1,008 1 910
---------------- --------------- --------------- ---------------
Other income, net of taxes 300 1,234 675 1,494
---------------- --------------- --------------- ---------------
INCOME BEFORE INTEREST CHARGES 38,334 32,471 82,023 75,844
---------------- --------------- --------------- ---------------
INTEREST CHARGES:
Interest on long-term debt 13,075 16,256 39,989 49,380
Other interest and amortization of
debt-related costs 1,103 958 3,157 2,547
---------------- --------------- --------------- ---------------
Total interest charges 14,178 17,214 43,146 51,927
---------------- --------------- --------------- ---------------
NET INCOME 24,156 15,257 38,877 23,917
Dividends on preferred stock 40 42 120 126
---------------- --------------- --------------- ---------------
INCOME APPLICABLE TO COMMON STOCK $ 24,116 $ 15,215 $ 38,757 $ 23,791
================ =============== =============== ===============
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,
-----------------------------------
1997 1996
----------------- ---------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 428,961 $ 376,235
Purchased power (183,025) (138,326)
Fuel costs paid (29,367) (37,292)
Cash paid for payroll and to other suppliers (58,413) (64,594)
Interest paid, net of amounts capitalized (46,343) (57,247)
Income taxes paid (3,187) (10,538)
Other taxes paid (26,845) (24,887)
Other operating cash receipts and payments, net 1,354 (349)
----------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 83,135 43,002
----------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant (20,083) (20,563)
Withdrawal from escrow account 1,670 -
----------------- ---------------
CASH FLOWS USED IN INVESTING ACTIVITIES (18,413) (20,563)
----------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on preferred and common stocks (30,420) (7,626)
Borrowings from (repayments to) revolving credit
facilities - net 64,000 (10,000)
First mortgage bond redemption (100,900) (10,550)
----------------- ---------------
NET CASH USED IN FINANCING ACTIVITIES (67,320) (28,176)
----------------- ---------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (2,598) (5,737)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,115 14,450
----------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,517 $ 8,713
================= ===============
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income $ 38,877 $ 23,917
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of utility plant 29,099 28,566
Amortization of debt-related costs and other
deferred charges 2,861 3,390
Allowance for borrowed funds used during construction (30) (78)
Deferred income taxes 10,538 4,787
Investment tax credits (1,510) 947
Cash flows impacted by changes in current assets and liabilities:
Deferred purchased power and fuel costs 7,234 (6,859)
Accounts payable 15,016 8,077
Accrued interest (6,028) (7,739)
Accrued taxes 5,014 (4,415)
Changes in other current assets and liabilities (15,200) (7,415)
Other, net (2,736) (176)
----------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 83,135 $ 43,002
================= ===============
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, 1997 December 31,
(Unaudited) 1996
--------------- ----------------
(In thousands)
ASSETS
UTILITY PLANT:
Electric plant $ 1,230,211 $ 1,215,355
Construction work in progress 1,250 906
--------------- ----------------
Total 1,231,461 1,216,261
Less accumulated depreciation 306,508 282,322
--------------- ----------------
Net utility plant 924,953 933,939
--------------- ----------------
OTHER PROPERTY AND INVESTMENTS, at cost 214 1,884
--------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents 2,517 5,115
Receivables:
Customer 19,869 15,521
Other 14,023 1,196
Inventories, at lower of average cost or market:
Fuel 519 367
Materials and supplies 5,048 6,384
Deferred purchased power and fuel costs - 3,565
Accumulated deferred income taxes 1,831 1,937
Other current assets 678 128
--------------- ----------------
Total current assets 44,485 34,213
--------------- ----------------
DEFERRED CHARGES 29,057 32,121
--------------- ----------------
$ 998,709 $ 1,002,157
=============== ================
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 222,133 222,133
Retained earnings 73,765 65,308
--------------- ----------------
Total common shareholder's equity 296,005 287,548
Redeemable cumulative preferred stock 3,420 3,420
Long-term debt, less current maturities 496,900 533,800
--------------- ----------------
Total capitalization 796,325 824,768
--------------- ----------------
CURRENT LIABILITIES:
Current maturities of long-term debt 100 100
Accounts payable 42,270 27,254
Accrued interest 4,851 10,879
Accrued taxes 21,915 16,901
Customers' deposits 3,179 2,662
Deferred purchased power and fuel costs 3,669 -
Other current liabilities 7,794 10,993
--------------- ----------------
Total current liabilities 83,778 68,789
--------------- ----------------
REGULATORY TAX LIABILITIES 1,006 10,963
ACCUMULATED DEFERRED INCOME TAXES 79,948 65,860
ACCUMULATED DEFERRED INVESTMENT TAX CREDITS 23,955 19,164
DEFERRED CREDITS 13,697 12,613
COMMITMENTS AND CONTINGENCIES (Notes 2 and 4)
--------------- ----------------
$ 998,709 $ 1,002,157
=============== ================
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 1996 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. Income Taxes
As indicated in the 1996 Combined Annual Report on Form 10-K, an Internal
Revenue Service (IRS) revenue agent involved in auditing TNP's 1990 and 1991
consolidated fedIeral income tax returns recommended, in March 1995, that a
private letter ruling concerning eligibility of the TNP One generating plant for
investment tax credit (ITC) be revoked retroactively. On July 29, 1997, TNP
received notification from the IRS that revoked the private letter ruling.
However, the IRS has granted full relief from the effects of this revocation and
has allowed TNP to rely on the private letter ruling as issued. The current
ruling will have no material effect on the amount of ITC previously recognized.
Note 3. Regulatory Matters
Texas Rate Filing and Transition to Competition Plan
In December 1996, certain cities in the Texas gulf coast area (Gulf Coast
Cities) served by TNMP passed resolutions requiring TNMP to file complete rate
information with those cities. On July 31, 1997, TNMP filed the required
traditional rate information, based on the test year ended December 31, 1996,
with the Gulf Coast Cities. Agreements with the cities provide that any rate
reduction resulting from the city ordinances requiring the traditional rate
filing will be placed into effect retroactive to May 15, 1997. Based on its
analysis, TNMP believes the filing supports the reasonableness of TNMP's current
rates.
Simultaneous with the Gulf Coast Cities rate filing, the company filed a
transition to competition plan with the PUCT and all of its Texas cities. The
transition to competition plan proposes a five year transition period, with a
series of rate reductions for residential, commercial and municipal customers
beginning in 1998. At the end of the transition period, TNMP's Texas customers
would be allowed to choose their energy supplier. The plan provides the
opportunity for TNMP to recover an estimate of its stranded costs during the
transition period, and establishes a Competitive Transition Charge (CTC) to
recover any stranded cost that remains at the end of the transition period over
the subsequent five years.
TNMP does not expect a final resolution of the Gulf Coast Cities rate
filing or the transition to competition plan before the first quarter of 1998.
Texas Transmission Access
During 1996, the PUCT passed a wholesale transmission access rule which
established a regional method of transmission pricing, terms, and conditions.
The purpose of this rule is to increase competition in wholesale energy sales
within Texas and establish an Independent System Operator for the Electric
Reliability Council of Texas transmission system. The new transmission fee
structure was scheduled to start in early 1997. However, during the first
quarter of 1997 several Texas utilities unsuccessfully petitioned the PUCT to
revise the new transmission rules, and subsequently filed an appeal in a state
district court. During the second quarter of 1997, TNMP implemented the new
rules upon the PUCT's approval of tariffs. Implementation has resulted in a
favorable earnings impact as reported under "MD&A - Results Of Operations".
Fuel Reconciliation Filing
On June 30, 1997, TNMP filed a reconciliation of fuel expenses for the
period September 30, 1993, to December 31, 1996, with the PUCT. At the beginning
of the reconciliation period TNMP had a cumulative under-recovery of $11
million, and had a $4.4 million under-recovery as of the end of the
reconciliation period. TNMP believes that the total fuel costs incurred during
the reconciliation period were reasonable and necessary to provide reliable
electric service. In the filing, TNMP proposed no change to the fixed fuel
factor, and plans to collect the under-recovery that existed as of the end of
the reconciliation period through the existing fixed fuel factor.
Note 4. Accounting for the Effects of Regulation
TNP's and TNMP's consolidated financial statements reflect the application
of certain accounting standards, including Statement of Financial Accounting
Standard (SFAS) 71, "Accounting for the Effects of Certain Types of Regulation,"
which provide for recognition of the economic effects of rate regulation. On May
1, 1997, TNMP placed into effect its transition to competition plan in New
Mexico. On July 31, 1997, TNMP filed a new plan for transition to competition
with the PUCT. Additional information regarding these two transition plans is
provided under "MD&A--Regulatory Matters." Continued applicability of SFAS 71 to
TNP's and 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. Management believes that as of September 30, 1997, and for the
foreseeable future, TNP and TNMP satisfy the criteria for accounting in
accordance with SFAS 71.
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.
TNP is a holding company, in which TNMP currently represents most of TNP's
operations. Additionally, Facility Works Inc., (Facility Works) is a wholly
owned subsidiary of TNP, that began operations in early 1996. Facility Works
provides facility-related services and products to commercial and institutional
customers. The following discussion focuses on TNMP's operations except where
otherwise noted.
Results Of Operations
Overall Results
TNP's income applicable to common stock was $20.7 million and $32.1 million
for the three and nine months ended September 30, 1997, respectively. TNP's
income applicable to common stock increased $6.4 million for the three months
ended September 30, 1997, and increased $9.6 million for the nine months ended
September 30, 1997, when compared to the same periods of last year.
TNMP's income applicable to common stock was $24.1 million for the three
months ended September 30, 1997, an increase of $8.9 million when compared to
the same period of last year, due to increased base revenues, as detailed below,
in addition to a reduction in interest expense. Facility Works incurred net
operating losses of $3.0 million during the three months ended September 30,
1997, compared to losses of $0.9 million for the same period last year. In
addition, TNP's earnings per share were reduced due to a 19 percent increase in
the number of weighted average common shares outstanding, that resulted from the
issuance of two million shares of common stock in October 1996.
TNMP's income applicable to common stock was $38.8 million for the nine
months ended September 30, 1997, an increase of $15.0 million due to a reduction
in interest expense, increased base revenues as detailed below, and the benefits
from the implementation in August 1996 of a control area. Facility Works
incurred $5.5 million of net operating losses during the nine months ended
September 30, 1997, compared to $1.0 million of losses for the corresponding
period last year. Weighted average common shares increased 19 percent for the
nine months ended September 30, 1997, which reduced TNP's earnings per share.
Operating Revenues
TNMP's operating revenues increased $29.6 million for the third quarter of
1997, and $66.3 million for the nine months ended September 30, 1997, when
compared to the corresponding periods of 1996. Third quarter base revenues
increased $12.2 million, while year-to-date base revenues increased $15.0
million.
The components of TNMP's operating and base revenues are summarized in the
following tables (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------------------- -------------------------------------------------
Increase Increase
1997 1996 (Decrease) 1997 1996 (Decrease)
------------ ------------ ------------- ------------ -------------- --------------
Operating revenues $ 187,035 $ 157,453 $ 29,582 $ 445,619 $ 379,300 $ 66,319
Less pass-through items 95,770 78,372 17,398 227,897 176,577 51,320
------------ ------------ ------------- ------------ -------------- --------------
Base revenues $ 91,265 $ 79,081 $ 12,184 $ 217,722 $ 202,723 $ 14,999
============ ============ ============= ============ ============== ==============
Base Revenues
Weather related $ 2,455 $ (3,063)
Price - sales mix and other 41 317
Customer growth 1,250 3,042
Industrial - economy rate sales 896 5,016
Industrial - firm rate sales (960) (2,350)
Unbilled revenue 4,535 2,283
Non industrial standby revenues 247 1,882
Transmission revenue 2,598 6,724
Other electric revenue 1,122 1,148
------------- --------------
$ 12,184 $ 14,999
============= ==============
Pass-through items are the portion of operating revenues that recover the
costs of purchased power, fuel, and standby power from customers. These items
affect customer rates but do not affect operating income. Explanations for the
third quarter and year-to-date variances are discussed under "Results of
Operations -- Operating Expenses."
The components of GWH sales are summarized in the following table:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------------------- -------------------------------------------
Increase Increase
GWH Sales 1997 1996 (Decrease) 1997 1996 (Decrease)
------------ ----------- ------------ ----------- ------------ ------------
Residential 797 749 48 1,741 1,764 (23)
Commercial 538 516 22 1,339 1,315 24
Industrial
Firm 315 309 6 869 1,010 (141)
Economy 1,115 696 419 3,260 1,475 1,785
Other (including off-system) 296 28 268 389 87 302
------------ ----------- ------------ ----------- ------------ ------------
Total GWH Sales 3,061 2,298 763 7,598 5,651 1,947
============ =========== ============ =========== ============ ============
The increases in the three and nine month ended periods September 30, 1997,
resulted primarily from increased industrial economy sales and off-system sales.
Economy industrial sales increased due to contractual agreements entered into
with two existing cogeneration customers in mid-1996, whereby TNMP purchases the
output from those cogeneration facilities and resells the power to those
customers. Three month ended sales also reflect increases in residential and
commercial GWH due to customer growth and the favorable impact of hotter weather
when compared to the same period in 1996. Nine month ended sales increases are
offset in part by weather-related sales reductions to residential and commercial
customers during the second quarter of 1997, and reductions in firm industrial
sales. Over the last several years, cogeneration projects developed or
considered by certain industrial customers resulted in TNMP offering economy
rates to qualifying customers. Economy rates are generally low margin, high
volume and short term in nature. Previously, those industrial customers had paid
firm rates. The economy rates are designed to retain such customers and to
compete for and develop new loads.
Beginning in mid-1997 TNMP significantly increased the resale of
electricity to off-system customers. These sales are generally made at low
margins.
Operating Expenses
Total operating expenses increased $22.8 million and $59.3 million for the
three and nine months ended September 30, 1997, as compared to the same periods
of last year due primarily to an increase in pass-through expenses. The
components of TNMP's operating expenses are summarized in the following table
(in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------------------- -----------------------------------------------
Increase Increase
1997 1996 (Decrease) 1997 1996 (Decrease)
------------- --------------- -------------------------- ----------- -------------
Pass-through expenses
Purchased power $ 81,192 $ 63,904 $ 17,288 $ 194,411 $ 137,865 $ 56,546
Standby power - 336 (336) - 3,108 (3,108)
Fuel 14,578 14,132 446 33,486 35,604 (2,118)
------------- --------------- ----------- ------------ ----------- -------------
Total pass-through items 95,770 78,372 17,398 227,897 176,577 51,320
Other operating expenses 31,919 30,400 1,519 92,417 90,915 1,502
Income and other taxes 21,312 17,444 3,868 43,957 37,458 6,499
------------- --------------- ----------- ------------ ----------- -------------
Operating expenses $ 149,001 $ 126,216 $ 22,785 $ 364,271 $ 304,950 $ 59,321
============= =============== =========== ============ =========== =============
Pass-through Expenses
Pass-through expenses consist of purchased power, standby power, and
certain fuel costs. Current quarter and year-to-date pass-through expenses
increased due to higher purchased power costs.
Purchased Power. Purchased power costs, including standby, increased by
$17.0 million and $53.4 million for the three and nine months ended September
30, 1997, when compared to the same periods of 1996, due primarily to increased
power requirements to meet higher economy sales to industrial customers and
increased levels of off-system sales. During the first quarter of 1996,
purchased power supplier refunds of $6.7 million were passed through to Texas
customers, which reduced purchased power expense for the nine months ended
September 30, 1996.
Fuel. Fuel expense increased slightly for the three months ended September
30, 1997, due to increases in GWH sales in all rate classes. For the nine months
ended September 30, 1997, fuel expense decreased slightly due primarily to lower
industrial firm sales when compared to the same period in 1996. No fuel cost
recovery is included in industrial economy rate sales. 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. See Note 3, for
information regarding the June 30, 1997, fuel reconciliation filing with the
PUCT.
Other Operating Expenses, Income and Other Tax Expenses
TNMP's other operating expenses for the three and nine months ended
September 30, 1997, were slightly higher due in part to increased transmission
costs associated with the transmission rules discussed in Note 3. Transmission
expenses increased $0.8 million and $1.7 million respectively, when compared to
the same periods last year.
TNP's other operating expenses increased significantly for the three and
nine months ended September 30, 1997, when compared to the same periods last
year, due to the inclusion of Facility Works operations during 1997. Facility
Works had virtually no activity during the first three quarters of 1996.
TNP's and TNMP's income and other tax expenses increased for the three and
nine months ended September 30, 1997, due to higher pre-tax income and
additional gross receipts taxes.
Interest Expense
Interest charges decreased $3.0 million and $8.8 million for the three and
nine months ended September 30, 1997. The decrease is attributed to reduced
long-term debt levels and refinancing of debt at lower levels. Borrowings under
the revolving credit facilities and an equity contribution from TNP in late
1996, resulting from a common stock sale, were used to redeem TNMP's higher
interest rate bonds.
Financial Condition
Liquidity
The main sources of liquidity for TNMP are cash flow from operations and
borrowings from credit facilities. TNMP's cash flow from operations increased by
$40.1 million for the nine months ended September 30, 1997, compared to the nine
months ended September 30, 1996, due to higher receipts from customers, net of
fuel and purchased power payments, and lower interest payments. As previously
discussed, during the first quarter of 1996, TNMP refunded $6.7 million to
customers. TNP's consolidated cash flow from operations also improved for the
nine months ended September 30, 1997, for the same reasons as discussed above;
however, they were offset somewhat by $12.2 million of cash used by Facility
Works in its operations. Currently, TNP's primary source of cash is dividends
from TNMP.
TNMP has two credit facilities with a total commitment of $250 million -
the 1995 Facility ($150 million) and the 1996 Facility ($100 million). As of
September 30, 1997, available unused credit under the 1995 Facility was $131
million, subject to interest coverage and capitalization tests. Under the 1995
Facility, TNMP can borrow up to $81 million of the unused commitment with no
additional collateral and borrow the remainder of the unused commitment ($50
million) by pledging first mortgage bonds (FMBs) equal to the principal amount
of such borrowings.
There is currently no available credit under the $100 million 1996
Facility. The interest rates under both facilities are based on the London
Interbank Offered Rate (LIBOR). The interest rate margins on both facilities
will decrease as the ratings on TNMP's FMBs improve.
In January, TNMP used the credit facilities to retire $100.8 million of
11.25% Series T FMBs.
TNMP has sufficient liquidity to satisfy the possibility of existing known
contingencies. Management believes cash flow from operations and periodic
borrowings under its two revolving credit facilities should be sufficient to
meet working capital requirements and planned capital expenditures at least
through 1998.
Regulatory Matters
Community Choice R
New Mexico. On May 1, 1997, TNMP implemented Community Choice, its plan for
transition to competition for its New Mexico service territory. The plan
provides TNMP's customers the right to choose their energy provider after a
three-year transition period. The plan freezes rates (including the recovery of
purchased power) during the transition period, and allows for customer
aggregation based on market forces. TNMP believes the plan will allow it to
recover most, if not all, of its potential stranded costs in New Mexico;
however, the actual recovery of stranded costs will depend on the future market
and price for energy through May 1, 2000.
Transition to Competition
Texas. On July 31, 1997, TNMP filed a new plan for transition to
competition with the PUCT and the communities within the company's service
territory in Texas. TNMP does not expect a final resolution of the transition to
competition plan before the first quarter of 1998, however, due to the numerous
issues involved, no assurance can be provided as to the timing or outcome of the
new transition to competition plan in Texas. As discussed previously in Note 3 -
Texas Rate Filing and Transition to Competition Plan, TNMP has filed traditional
rate information with certain cities served by the company in the Texas gulf
coast area, due to their request, in order to determine the reasonableness of
TNMP's current rates.
New Accounting Standards
The Financial Accounting Standards Board has issued SFAS 128, Earnings per
Share, which will become effective for financial statements ending December 31,
1997. SFAS 128 requires the calculation of basic and diluted earnings per share.
Basic earnings per share is computed by dividing income applicable to common
stock by the weighted average number of common shares outstanding during the
period. Diluted earnings per share is computed by dividing income applicable to
common stock by the weighted average number of common shares outstanding and
common stock equivalents. SFAS 128 will not materially change TNP's reported
earnings per share.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 3 for information regarding the rate filing with the Texas Gulf
Coast Cities, the transition to competition plan filed with the PUCT and the
fuel reconciliation with the PUCT.
TNMP is the defendant in a suit styled Clear Lake Cogeneration Limited
Partnership vs. Texas-New Mexico Power Company, filed in the 234th District
Court of Harris County, Texas on October 2, 1997, and served on TNMP on October
21. The suit has arisen from disagreements between Clear Lake Limited
Partnership (Clear Lake) and TNMP over the interpretation of certain provisions
of a purchased power agreement between Clear Lake and TNMP under which TNMP
purchases cogenerated electricity from Clear Lake. Clear Lake disputes several
charges for which TNMP has billed Clear Lake, alleges that TNMP has failed to
abide by contractual language concerning several issues, and seeks an
unspecified level of damages. TNMP has not yet answered this lawsuit and is
currently evaluating its legal position. TNMP expects, however, that it will
vigorously contest the lawsuit.
TNMP is the defendant in a suit styled Phillips Petroleum Company vs.
Texas-New Mexico Power Company, filed in the 149th State District Court of
Brazoria County, Texas on October 1, 1997, and served on TNMP on October 21. The
suit is based on events surrounding an interruption of electricity to a
petroleum refinery and related facilities that occurred in May 1997. Phillips is
seeking the recovery of damages arising from the interruption. TNMP has not yet
answered this lawsuit and is currently evaluating its legal position. TNMP
expects, however, that it will vigorously contest this lawsuit.
TNMP is the defendant in a lawsuit styled El Paso Electric Company vs.
Texas-New Mexico Power Company, filed in the Third Judicial District of Dona Ana
County, New Mexico. The suit was filed on August 29, 1997, after TNMP commenced
proceedings before the New Mexico Public Utility Commission to seek a
certificate of convenience and necessity to serve portions of proposed real
estate developments adjacent to and near an international border crossing at
Santa Theresa, New Mexico, located near El Paso, Texas. El Paso Electric Company
("EPE"), which has also intervened in the regulatory proceeding, has alleged, in
this suit, that TNMP has tortiously interfered with EPE's contract to provide
electrical service to a Santa Theresa real estate development. EPE did not
specify a damage amount. TNMP is vigorously contesting this lawsuit, and has
filed a motion to dismiss the suit. The suit is in the discovery phase.
Item 5. Other Information
On September 16, 1997, the board of directors appointed Larry G. Wheeler to
the board of TNP and TNMP effective October 1, 1997. Mr. Wheeler fills the
position vacated by the resignation of Dwight R. Spurlock on May 1, 1997.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed with this report;
27(a) Financial Data Schedule for TNP.
27(b) Financial Data Schedule for TNMP.
(b) Reports on Form 8-K - None
Statement Regarding Forward Looking Information
The discussions in this document that are not historical facts, including,
but not limited to, the outcome of current and future rate/regulatory
proceedings, the continued application of regulatory accounting principles,
future cash flows and the potential recovery of stranded costs, are based upon
current expectations. Actual results may differ materially. Among the facts that
could cause the results to differ materially from expectations are the
following: legislation in the states TNMP serves affecting the regulation of
TNMP's business; changes in regulations affecting TNP and TNMP's businesses;
results of regulatory proceedings affecting TNP and TNMP's operations; future
acquisitions or strategic partnerships; general business and economic
conditions; negotiations regarding TNMP's proposal regarding transition to
competition; and other factors described from time to time in TNP 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
Date: October 31, 1997 By \s\ MANJIT S. CHEEMA
-------------------------------------------------
Manjit S. Cheema
Senior Vice President and Chief Financial Officer
Date: October 31, 1997 By \s\ SCOTT FORBES
-------------------------------------------------
Scott Forbes
Controller and as Chief Accounting Officer