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 June 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 13,262,850 shares of common stock outstanding as of
August 12, 1998.
- - --------------------------------------------------------------------------------
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 period ended June 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 Six Month Periods Ended June 30, 1998, and 1997 3
Consolidated Statements of Cash Flows
Six Month Periods Ended June 30, 1998, and 1997 4
Consolidated Balance Sheets
June 30, 1998, and December 31, 1997 5
Texas-New Mexico Power Company (TNMP) and Subsidiaries:
Consolidated Statements of Income
Three and Six Month Periods Ended June 30, 1998, and 1997 6
Consolidated Statements of Cash Flows
Six Month Periods Ended June 30, 1998, and 1997 7
Consolidated Balance Sheets
June 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 4. Submission of Matters to a Vote of Security Holders. 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 14
Signature page 15
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
--------------- ---------------- --------------- ---------------
(In thousands except per share amounts)
OPERATING REVENUES $ 143,951 $ 133,338 $ 269,350 $ 260,185
--------------- ---------------- --------------- ---------------
OPERATING EXPENSES:
Purchased power 65,245 54,873 122,755 113,220
Fuel 10,325 9,884 18,284 19,853
Other operating and general expenses 26,939 23,156 48,908 42,894
Depreciation 10,179 9,742 20,056 19,369
Taxes other than income taxes 8,851 7,965 16,581 15,904
Income taxes 3,720 4,669 6,086 6,548
--------------- ---------------- --------------- ---------------
Total operating expenses 125,259 110,289 232,670 217,788
--------------- ---------------- --------------- ---------------
NET OPERATING INCOME 18,692 23,049 36,680 42,397
--------------- ---------------- --------------- ---------------
OTHER INCOME:
Other income and deductions, net 104 255 468 459
Income taxes 221 24 55 23
--------------- ---------------- --------------- ---------------
Other income, net of taxes 325 279 523 482
--------------- ---------------- --------------- ---------------
INCOME BEFORE INTEREST CHARGES 19,017 23,328 37,203 42,879
--------------- ---------------- --------------- ---------------
INTEREST CHARGES:
Interest on long-term debt 12,541 13,408 25,039 26,914
Other interest and amortization of debt-related costs 1,055 1,049 2,117 2,054
--------------- ---------------- --------------- ---------------
Total interest charges 13,596 14,457 27,156 28,968
--------------- ---------------- --------------- ---------------
INCOME FROM CONTINUING OPERATIONS 5,421 8,871 10,047 13,911
Loss from discontinued operations, net of taxes (Note 2) 6,188 1,440 6,188 2,370
--------------- ---------------- --------------- ---------------
NET INCOME (LOSS) (767) 7,431 3,859 11,541
Dividends on preferred stock 38 40 76 80
--------------- ---------------- --------------- ---------------
INCOME (LOSS) APPLICABLE TO COMMON STOCK (805) 7,391 3,783 11,461
=============== ================ =============== ===============
EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Earnings from continuing operations $ 0.41 $ 0.67 $ 0.76 $ 1.07
Loss from discontinued nonregulated operations (0.47) (0.11) (0.47) (0.19)
=============== ================ =============== ===============
EARNING PER SHARE $ (0.06) $ 0.56 $ 0.29 $ 0.88
=============== ================ =============== ===============
DIVIDENDS PER SHARE OF COMMON STOCK $ 0.27 $ 0.245 $ 0.54 $ 0.49
=============== ================ =============== ===============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 13,240 13,069 13,214 13,047
=============== ================ =============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
----------------------------------------
1998 1997
----------------- -------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 279,467 $ 263,391
Purchased power (119,963) (110,338)
Fuel costs paid (17,549) (18,513)
Cash paid for payroll and to other suppliers (64,098) (61,068)
Interest paid, net of amounts capitalized (26,162) (31,875)
Income taxes paid (1,788) (705)
Other taxes paid (21,496) (21,237)
Other operating cash receipts and payments, net 506 1,126
----------------- -------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 28,917 20,781
----------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant (17,066) (13,068)
Additions to other property and nonregulated investments 300 (2,015)
----------------- -------------------
NET CASH USED IN INVESTING ACTIVITIES (16,766) (15,083)
----------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on preferred and common stocks (7,221) (6,482)
Borrowings under revolving credit facilities - 108,000
Common stock issuances 3,957 2,633
Redemptions:
Other long-term debt (104) (61)
Obligation - FWI investment aquisition - (300)
First mortgage bonds - (100,800)
----------------- -------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (3,368) 2,990
----------------- -------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 8,782 8,688
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 15,877 8,387
----------------- -------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 24,659 $ 17,075
================= ===================
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income $ 3,859 $ 11,541
activities:
Depreciation 20,056 19,447
Amortization of debt-related costs and other deferred charges 1,881 1,926
Allowance for borrowed funds used during construction (15) (23)
Deferred income taxes 2,382 2,727
Investment tax credits (363) 19
Cash flows impacted by changes in current assets and liabilities:
Deferred purchased power and fuel costs (223) 1,540
Accrued interest (794) (4,810)
Accrued taxes (4,837) (3,472)
Accounts payable 4,424 3,570
Revenues subject to refund 5,416 -
Changes in other current assets and liabilities (2,386) (10,996)
Other, net (483) (688)
----------------- -------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 28,917 $ 20,781
================= ===================
The accompanying notes are an integral part of these consolidated financial
statements.
TNP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1998 December 31,
(Unaudited) 1997
----------------------- -------------------
(In thousands)
ASSETS
UTILITY PLANT:
Electric plant $ 1,240,461 1,235,257
Construction work in progress 4,540 2,281
----------------------- -------------------
Total 1,245,001 1,237,538
Less accumulated depreciation 323,613 314,270
----------------------- -------------------
Net utility plant 921,388
923,268
----------------------- -------------------
OTHER PROPERTY AND INVESTMENTS, at cost 5,258 5,704
----------------------- -------------------
CURRENT ASSETS:
Cash and cash equivalents 24,659 15,877
Accounts receivable 8,395 8,585
Inventories, at lower of average cost or market:
Fuel 713 483
Materials and supplies 4,424 4,440
Deferred purchased power and fuel costs 2,793 2,570
Accumulated deferred income taxes 1,346 1,707
Other current assets 1,304 982
----------------------- -------------------
Total current assets 43,634 34,644
----------------------- -------------------
DEFERRED CHARGES 24,950 28,310
----------------------- -------------------
$ 995,230 $ 991,926
======================= ===================
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common shareholders' equity:
Common stock - no par value per share. Authorized 50,000,000
shares; issued 13,255,215 shares in 1998 and 13,132,821 in 1997 $ 191,120 $ 187,163
Retained earnings 107,716 111,078
----------------------- -------------------
Total common shareholders' equity 298,836 298,241
Preferred stock 3,240 3,240
Long-term debt, less current maturities 347,936 478,041
----------------------- -------------------
Total capitalization 650,012 779,522
----------------------- -------------------
CURRENT LIABILITIES:
Current maturities of long-term debt 130,100 100
Accounts payable 31,459 27,035
Accrued interest 6,529 7,323
Accrued taxes 12,752 17,589
Customers' deposits 3,620 3,249
Revenues subject to refund (Note 3) 5,416 -
Other current liabilities 24,254 26,665
----------------------- -------------------
Total current liabilities 214,130 81,961
----------------------- -------------------
REGULATORY TAX LIABILITIES 3,216 6,318
ACCUMULATED DEFERRED INCOME TAXES 89,248 85,250
ACCUMULATED DEFERRED INVESTMENT TAX CREDITS 20,700 21,149
DEFERRED CREDITS 17,924 17,726
COMMITMENTS AND CONTINGENCIES (Notes 3, 4 and 5)
----------------------- -------------------
$ 995,230 $ 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 Six Months Ended
June 30, June 30,
-------------------------------------- --------------------------------------
(In thousands)
1998 1997 1998 1997
----------------- ------------------ ------------------ -----------------
OPERATING REVENUES $ 143,097 $ 132,361 $ 267,672 $ 258,584
----------------- ------------------ ------------------ -----------------
OPERATING EXPENSES:
Purchased power 65,245 54,873 122,755 113,219
Fuel 10,325 9,884 18,284 19,853
Other operating and general expenses 24,538 21,447 43,809 40,217
Depreciation of utility plant 10,164 9,725 20,036 19,335
Taxes other than income taxes 8,738 7,813 17,122 15,608
Income taxes 4,143 4,972 6,946 7,037
----------------- ------------------ ------------------ -----------------
Total operating expenses 123,153 108,714 228,952 215,269
----------------- ------------------ ------------------ -----------------
NET OPERATING INCOME 19,944 23,647 38,720 43,315
----------------- ------------------ ------------------ -----------------
OTHER INCOME:
Other income and deductions, net (26) 192 170 351
Income taxes 221 25 128 23
----------------- ------------------ ------------------ -----------------
Other income, net of taxes 195 217 298 374
----------------- ------------------ ------------------ -----------------
INCOME BEFORE INTEREST CHARGES 20,139 23,864 39,018 43,689
----------------- ------------------ ------------------ -----------------
INTEREST CHARGES:
Interest on long-term debt 12,541 13,408 25,039 26,914
Other interest and amortization of
debt-related costs 1,053 1,049 2,115 2,054
----------------- ------------------ ------------------ -----------------
Total interest charges 13,594 14,457 27,154 28,968
----------------- ------------------ ------------------ -----------------
NET INCOME 6,545 9,407 11,864 14,721
Dividends on preferred stock 38 40 76 80
----------------- ------------------ ------------------ -----------------
INCOME APPLICABLE TO COMMON STOCK $ 6,507 $ 9,367 $ 11,788 $ 14,641
================= ================== ================== =================
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)
Six Months Ended
June 30,
-------------------------------------------------
1998 1997
---------------------- ---------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers 265,989 259,545
Purchased power (119,963) (110,338)
Fuel costs paid (17,549) (18,513)
Cash paid for payroll and to other suppliers (38,279) (49,221)
Interest paid, net of amounts capitalized (26,154) (31,875)
Income taxes paid
2,206 (79)
Other taxes paid (21,963) (21,360)
Other operating cash receipts and payments, net 1,036
173
---------------------- ---------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 29,195
44,460
---------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant (16,955) (13,068)
Withdrawal from escrow account - 1,670
---------------------- ---------------------
CASH FLOWS USED IN INVESTING ACTIVITIES (16,955) (11,398)
---------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on preferred and common stocks (13,676) (20,880)
Borrowings under revolving credit facilities - 108,000
First mortgage bond redemption - (100,800)
---------------------- ---------------------
NET CASH USED IN FINANCING ACTIVITIES (13,676) (13,680)
---------------------- ---------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 13,829 4,117
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,772 5,115
---------------------- ---------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,601 $ 9,232
====================== =====================
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income $ 11,864 $ 14,721
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of utility plant 20,026 19,335
Amortization of debt-related costs and other deferred charges 1,881 1,926
Allowance for borrowed funds used during construction (15) (23)
Deferred income taxes 4,032 3,697
Investment tax credits (363) 216
Cash flows impacted by changes in current assets and liabilities:
Deferred purchased power and fuel costs (223) (1,552)
Accounts payable 5,622 5,622
Accrued interest (795) (795)
Accrued taxes (897) (897)
Revenues subject to refund 5,416 -
Changes in other current assets and liabilities (4,386) 3,106
Other, net 2,288 (16,161)
---------------------- ---------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 44,460 $ 29,195
====================== =====================
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
June 30, 1998 December 31,
(Unaudited) 1997
---------------- -----------------
(In thousands)
ASSETS
UTILITY PLANT:
Electric plant 1,240,375 1,235,239
Construction work in progress 4,540 2,281
--------------- -----------------
Total 1,244,915 1,237,520
Less accumulated depreciation 323,613 314,270
--------------- -----------------
Net utility plant 921,302 923,250
--------------- -----------------
OTHER PROPERTY AND INVESTMENTS, at cost 214 214
--------------- -----------------
CURRENT ASSETS:
Cash and cash equivalents 16,601 2,772
Accounts receivable 1,845 2,342
Inventories, at lower of average cost or market:
Fuel 713 483
Materials and supplies 4,424 4,440
Deferred purchased power and fuel costs 2,793 2,570
Accumulated deferred income taxes 1,346 1,707
Other current assets 412 222
--------------- -----------------
Total current assets 28,134 14,536
--------------- -----------------
DEFERRED CHARGES 23,797 29,006
--------------- -----------------
973,447 967,006
=============== =================
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 62,956 64,768
--------------- -----------------
Total common shareholder's equity 285,209 287,021
Redeemable cumulative preferred stock 3,240 3,240
Long-term debt, less current maturities 347,900 477,900
--------------- -----------------
Total capitalization 636,349 768,161
--------------- -----------------
CURRENT LIABILITIES:
Current maturities of long-term debt 130,100 100
Accounts payable 30,481 24,859
Accrued interest 6,528 7,323
Accrued taxes 16,854 17,751
Customers' deposits 3,620 3,249
Revenues subject to refund (Note 3) 5,416 -
Other current liabilities 14,298 19,148
--------------- -----------------
Total current liabilities 207,297 72,430
--------------- -----------------
REGULATORY TAX LIABILITIES 3,216 6,318
ACCUMULATED DEFERRED INCOME TAXES 86,901 81,085
ACCUMULATED DEFERRED INVESTMENT TAX CREDITS 21,786 21,286
DEFERRED CREDITS 17,898 17,726
COMMITMENTS AND CONTINGENCIES (Notes 3, 4, and 5)
--------------- -----------------
973,447 967,006
=============== =================
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
As discussed in TNP's and TNMP's 1997 Combined Annual Report on Form
10-K, TNP discontinued the construction segment of Facility Works Inc. (FWI),
TNP's wholly owned unregulated subsidiary, in late 1997. TNP's 1997 results of
operations included a $10.8 million loss, net of taxes, related to discontinuing
FWI's construction operations. This amount included both actual 1997 losses and
$4.5 million of losses that were projected to occur in 1998 as FWI phased out
its construction activities. Actual 1998 losses have been greater than the
original projections. Therefore, FWI has reassessed the costs to complete the
remaining construction jobs. In the second quarter of 1998, FWI recognized an
additional loss of $6.2 million, net of taxes, or $0.47 per share, related to
the discontinuance of its construction activities.
FWI is continuing to operate the service and maintenance segment of its
business. The losses incurred by FWI's construction segment during the first two
quarters of 1997 have been reclassified as losses from discontinued operations.
Note 3. Regulatory Matters
Texas Transition Plan
On July 22, 1998, the Public Utility Commission of Texas (PUCT)
approved TNMP's proposed transition to competition plan (Texas Transition Plan).
A written order documenting the PUCT's approval is expected by the end of
August. The plan includes a number of provisions that will impact the 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, became effective retroactive to January 1,
1998. Second, TNMP's earnings on its Texas operations are capped at 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 its Texas
operations based on cost incurred per customer in 1996. Fourth, TNMP will record
$15 million additional depreciation annually during 1999-2002 to mitigate
stranded costs. Finally, the fixed fuel factor has been increased to include the
energy-related portion of purchased power costs, at annualized 1996 levels. The
demand portion of purchased power costs has been included in base rates. As a
result of this change, the demand portion of purchased power costs will no
longer be passed directly through to TNMP's customers. The difference between
purchased power demand costs incurred by TNMP, and demand costs recovered from
customers will be reflected in TNMP's 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 six months ended June 30, 1998, the results of operations
are affected by one-time charges of $3.2 million, or $0.24 per share, related to
the implementation of the Texas Transition Plan. The charges consist of the
write-off of previously deferred transition plan expenses of $2.2 million, net
of taxes, and customer refunds of $1.0 million, net of taxes. Earnings were also
reduced by $1.4 million, or $0.11 per share, due to the implementation of the
earnings cap. TNMP accounted for this reduction by equally applying amounts
toward additional depreciation and provision for rate refund, following the
guidelines set by the PUCT.
Note 4. Accounting for the Effects of Regulation
TNMP's financial statements currently 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 approved the Texas Transition Plan
on July 22, 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 June 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. A hearing on Motions for Summary Judgment filed
by both parties is scheduled for August 24, 1998.
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 incurred a loss applicable to common stock of $0.8 million for the
quarter ended June 30, 1998 (current quarter) as compared to earnings of $7.4
million for the quarter ended June 30, 1997. Excluding the effect of two
one-time items discussed below, earnings for the current quarter were $8.6
million as compared to $8.8 million for the corresponding 1997 quarter.
The current quarter includes the effect of two one-time items
consisting of charges of $3.2 million related to the recent approval by the PUCT
of TNMP's transition plan and an additional loss of $6.2 million recognized as
FWI continues to exit the construction business. FWI incurred discontinued
construction activity losses of $1.4 million and $2.4 million for the three and
six months ended June 30, 1997, respectively.
TNP had earnings applicable to common stock of $3.8 million for the six
months ended June 30, 1998 (current six months), as compared to $11.5 million
for the six months ended June 30, 1997. Excluding the one-time items previously
discussed, earnings for the current six months were $13.2 million as compared to
$13.9 for the corresponding 1997 period.
As discussed in Note 2, FWI adopted a revised strategy in late 1997 to
concentrate on service and maintenance activities and discontinue its
construction segment. For the current quarter, FWI's service segment incurred a
net loss of $0.4 million on revenues of $0.8 million as compared to the 1997
second quarter earnings of $24 thousand on revenues of $1.0 million. For the
current six months, FWI's service segment incurred net losses of $0.9 million on
revenues of $1.7 million as compared to a net loss of $0.1 million on revenues
of $1.6 million for the corresponding 1997 period.
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 and base revenues are summarized in
the following tables (in thousands).
Three Months Ended June 30, Six Months Ended June 30,
Increase Increase
1998 1997 (Decrease) 1998 1997 (Decrease)
-------- --------- ---------- --------- --------- ----------
Operating revenues $ 143,097 $ 132,361 $ 10,736 $ 267,672$ 258,584 $ 9,088
Less direct costs 75,083 64,585 10,498 140,258 132,127 8,131
-------- --------- -------- --------- ------- --------
Base revenues $ 68,014 $ 67,776 $ 238 $ 127,414$ 126,457 $ 957
======== ========= ======== ========= ======= ========
Base revenues
Weather related $ 7,355 $ 6,758
Reserve for rate refund (4,637) (5,416)
Customer growth 1,041 1,951
Industrial - economy rate sales 487 869
Industrial - firm rate sales (1,714) (2,474)
Transmission revenue (2,119) (5)
Price / sales mix and other (175) (726)
-------- --------
Base revenues increase $ 238 $ 957
======== ========
Direct costs include purchased power and fuel costs. Explanations for
the second quarter and year-to-date variances are discussed under "Results of
Operations -- Operating Expenses."
Current quarter and year-to-date base revenues increased $0.2 million
and $1.0 million as compared to the corresponding 1997 periods. Current quarter
base revenues increased due to warmer weather than in 1997 and to customer
growth. Offsetting this increase was the loss of a significant customer to
self-generation, and impacts of approval of the Texas Transition Plan, which
include increasing the reserve for customer refunds and implementation of the
earnings cap, as discussed in Note 3.
Another item that reduced current quarter base revenue, relative to the
second quarter of 1997 was transmission revenue. The PUCT passed a wholesale
transmission access rule effective January 1997. Due to the appeal of the rule
by other utilities, TNMP did not begin recording its transmission revenues and
expense in accordance with the new rules until the second quarter of 1997.
Therefore, the second quarter of 1997 includes six months of transmission
revenues. Current six-month transmission revenue is comparable to the
corresponding 1997 period.
The following table summarizes the components of gigawatt-hour (GWH)
sales.
Three Months Ended June 30, Six Months Ended June 30,
Increase Increase
1998 1997 (Decrease) 1998 1997 (Decrease)
-------- --------- ---------- ---------- --------- ----------
GWH sales:
Residential 542 450 92 1,020 944 76
Commercial 464 421 43 846 801 45
Industrial:
Firm 124 287 (163) 299 554 (255)
Economy 1,167 1,084 83 2,228 2,145 83
Other 185 38 147 323 93 230
-------- --------- -------- ---------- ------- --------
Total GWH sales 2,482 2,280 202 4,716 4,537 179
======== ========= ======== ========== ======= ========
Current quarter and year-to-date sales increased 202 GWHs (or 9%) and
179 GWHs (or 4%), respectively, as compared to the corresponding 1997 periods.
Residential and commercial sales increased due to warmer weather during the
current quarter. Also contributing to the overall sales increase were sales from
power marketing activities, which began in mid-1997. The movement of a
significant industrial customer to self-generation was the primary reason for
decreased firm industrial sales.
Operating Expenses
The following table summarizes the components of TNMP's total operating
expenses (in thousands).
Three Months Ended June 30, Six Months Ended June 30,
Increase Increase
1998 1997 (Decrease) 1998 1997 (Decrease)
-------- --------- ---------- ----------- ---------- ----------
Direct expenses:
Purchased power $ 65,245 $ 54,873 $ 10,372 $ 122,755 $ 113,219 $ 9,536
Fuel 9,838 9,713 125 17,503 18,908 (1,405)
------- -------- -------- --------- --------- -------
Total direct items 75,083 64,586 10,498 140,258 132,127 8,131
Other operating expenses 35,190 31,344 3,846 64,626 60,498 4,128
Income and other tax expenses 12,881 12,785 96 24,068 22,645 1,423
-------- --------- -------- --------- --------- -------
Operating expenses $ 123,154 $ 108,714 $ 14,440 $ 228,952 $ 215,270 $ 13,682
======== ======= ======== ========= ========= =======
Overall, current quarter and year-to-date operating expenses increased
by $14.4 million and $13.7 million, respectively, due to increases to purchased
power expense and other operating expenses.
Direct Expenses
Direct expenses consist of purchased power and pass-through fuel costs.
Purchased power costs include both demand and energy charges. The Texas
Transition Plan, discussed in Note 3, includes demand charges for purchased
power in base rates. Those demand charges are no longer passed through directly
to customers. At June 30, 1998, the difference between demand purchased power
incurred and recovered did not have a material effect on TNMP's financial
condition.
Purchased Power. Purchased power costs increased by $10.4 million in
the current quarter, and by $9.5 million in the six months ended June 30, 1998,
as compared to the same periods in 1997. The increases were due primarily to
increased power requirements to meet higher GWH sales as explained above.
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 costs for the current quarter were
slightly higher as compared to the corresponding 1997 quarter. Increased
recovery of fuel costs from higher residential and commercial sales were offset
by reduced firm industrial sales. The decrease of $1.4 million in fuel costs for
the six months ended June 30, 1998, was caused primarily by reduced firm
industrial sales.
Other Operating Expenses, Income and Other Tax Expenses
Other operating expenses for the current quarter and year-to-date
increased by $3.8 million and $4.1 million, respectively, as compared to the
corresponding 1997 periods. The increase resulted from the write-off of
previously deferred transition plan expenses of $3.3 million ($2.2 million, net
of taxes), as discussed in Note 3.
Current quarter income and other tax expenses were comparable to the
corresponding 1997 period. Income and other taxes increased $1.4 million during
the six months ended June 30, 1998, over the same period in 1997. The increases
are due to higher pre-tax income, higher state income taxes, and franchise
taxes.
Interest Expense
Interest charges decreased by $0.9 million for the quarter, and $1.8.
million for the six months ended June 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 six months ended June 30, 1998, as compared to the
corresponding 1997 period. Cash flow from operations increased due to higher
receipts from customers and lower interest payments. TNP's consolidated cash
flow from operations also was higher for the six months ended June 30, 1998, for
the same reasons, partially offset by increased expenses for non-regulated
activities. 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
June 30, 1998, available unused credit under the 1995 Facility was $150 million,
subject to interest coverage and capitalization tests. Under the 1995 Facility,
TNMP can borrow up to $100 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 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.
TNMP has $130 million of secured debentures due in January 1999. TNMP
plans to refinance this debt with a combination of borrowings under the credit
facilities and new debt issuances.
TNMP has sufficient liquidity to satisfy the possibility of any 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.
Other Matters
Year 2000
As has been widely reported, the Year 2000 issue (Y2K) could be
materially disruptive to business and could adversely impact customers in ways
which cannot be determined at this time.
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. Critical systems such as the financial management system, the customer
information system, and other corporate information systems directly related to
company operations are expected to be installed and compliant by the third
quarter of 1999. TNP has begun testing on many of the operational systems
throughout the company. Following testing, TNP will develop contingency plans
for all high impact components. The incremental cost of compliance for the Y2K
issues is at least $9.8 million, but TNP does not expect the incremental cost to
have a material impact on the company's financial results.
In addition to its own mitigation plan, TNP is actively working with
its key vendors to assist in achieving Y2K compliance in those systems affecting
TNP's operations. Although TNP currently believes that its key vendors are
working diligently to properly address the Y2K issues, TNP cannot assure that
these third party systems will be converted to Y2K compliance, 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 impact on TNP.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Regulatory Matters
See Note 3 for information regarding the PUCT's approval of TNMP's
proposed transition to competition plan on July 22, 1998.
Legal Proceedings
See Note 5 for information regarding material legal proceedings.
Item 4. Submission of Matters to a Vote of Securities Holders.
At the annual meeting of the Company's shareholders on May 4, 1998, the
shareholders (i) elected R. Denny Alexander, Kevern R. Joyce, and Sidney M.
Gutierrez as Class 1 directors, and Larry G. Wheeler as Class 2 director, all
for three-year terms; and (ii) ratified the appointment of Arthur Andersen LLP,
Certified Independent Public Accountants, as independent auditors for 1998.
The vote in the election of directors was as follows:
R. Denny Alexander: For: 11,058,812 Withheld: 122,139
Kevern R. Joyce: For: 11,043,953 Withheld: 136,998
Sidney M. Gutierrez: For: 11,048,758 Withheld: 132,193
Larry G. Wheeler: For: 11,043,965 Withheld: 136,986
The vote in the ratification of Arthur Andersen LLP, Certified
Independent Public Accountants, as independent auditors was 11,093,894 for,
52,269 against, and 34,788 abstaining.
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 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's and TNMP's businesses; results of regulatory proceedings affecting TNP's
and TNMP's operations; future acquisitions or strategic partnerships; general
business and economic conditions; 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; 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.
TNP ENTERPRISES, INC. AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
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: August 13, 1998 Senior Vice President and as Chief Financial Officer
By \s\ MICHAEL J. RICKETTS
---------------------------------------------------
Michael J. Ricketts
Date: August 13, 1998 Controller and as Chief Accounting Officer