Attached files
file | filename |
---|---|
EX-23.3 - EXHIBIT 23.3 10-K/A 2008 - TEXAS NEW MEXICO POWER CO | exh23-3_011510.htm |
EX-31.6 - EXHIBIT 31.6 10-K/A 2008 - TEXAS NEW MEXICO POWER CO | exh31-6_011510.htm |
EX-31.5 - EXHIBIT 31.5 10-K/A 2008 - TEXAS NEW MEXICO POWER CO | exh31-5_011510.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-K/A
(Amendment No. 1)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2008
Commission
File Number |
Name of Registrant, State of Incorporation,
Address and Telephone Number |
I.R.S. Employer
Identification No. | ||
002-97230 |
Texas-New Mexico Power Company
(A Texas Corporation)
577 N. Garden Ridge Blvd.
Lewisville, TX 75067
(972) 420-4189 |
75-0204070 |
Indicate by check mark whether registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Texas-New Mexico Power Company (“TNMP”) |
YES |
NO ü |
Indicate by check mark if registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
TNMP |
YES ü |
NO |
Indicate by check mark whether TNMP (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 NO ü (NOTE: As a voluntary filer,
not subject to the filing requirements, TNMP filed all reports under Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months.)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants’ knowledge, in definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. ü
Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Act).
Large accelerated filer |
Accelerated filer |
Non-accelerated filer |
Smaller Reporting Company | ||||
TNMP |
|
|
ü |
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES NO ü
As of February 20, 2009, shares of common stock outstanding were.
TNMP |
9,615 |
EXPLANATORY NOTE REGARDING AMENDMENT NO. 1
This Amendment No. 1 to the Annual Report on Form 10-K (“Amendment No. 1”) amends TNMP’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, initially filed with the Securities and Exchange Commission ("SEC") on March 2, 2009 (the “Original Filing”).
The Certifications of TNMP’s Chief Executive Officer and Principal Financial Officer, included as Exhibits 31.5 and 31.6 of the Original Filing inadvertently omitted certain language concerning internal controls over financial reporting. TNMP is filing Amendment No. 1 to its Annual Report on Form 10-K for the fiscal year
ended December 31, 2008 to include the correct form of Certifications of its Chief Executive Officer and Principal Financial Officer, which are included as Exhibits 31.5 and 31.6 to Amendment No. 1. In accordance with the requirements of the SEC, this Amendment No. 1 also includes Part II – Item 8 – Financial Statements and Supplementary Data and Item 9A – Controls and Procedures. In addition, Item 9A has been amended to clarify management’s evaluation
of disclosure controls and procedures and changes in internal controls over financial reporting.
The Original Filing was a combined filing of TNMP along with its ultimate parent, PNM Resources, Inc. (“PNMR”), and Public Service Company of New Mexico (“PNM”), another wholly owned subsidiary of PNMR. Amendment No. 1 is being filed only by TNMP because no information about PNMR or PNM is being amended. Accordingly,
the Consolidated Financial Statements included in Item 8 are presented for TNMP only and not on a combined basis with PNMR and PNM. The Notes to the Consolidated Financial Statements and cross references thereto have not been renumbered from the Original Filing. Where an entire note was eliminated because it contained no information pertinent to TNMP, the note number was retained with an indication that the note was omitted. The elimination of information concerning PNMR and PNM
that is not necessary for TNMP’s financial statements necessitated minor grammatical and contextual changes in information from that included in the Original Filing. However, there have been no substantive changes and no numerical changes in this Amendment No. 1 from TNMP’s financial statements included in the Original Filing. With the exception of the minor corrections described above, Amendment No. 1 sets forth the financial statements of TNMP as contained in the Original Filing
in their entirety. Amendment No. 1 has been signed as of a current date and certifications of the TNMP’s Chief Executive Officer and Principal Financial Officer attached as exhibits hereto are given as of a current date. This Amendment No. 1 does not reflect events occurring after the filing of the Original Filing or modify or update the Original Filing in any way other than to correct the items described above.
TNMP MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS (I) (1) (a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION (I) (2).
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
INDEX | ||
Page | ||
GLOSSARY | A-2 | |
PART II | ||
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
B-1 | |
ITEM 9A. CONTROLS AND PROCEDURES | C-1 | |
PART IV | ||
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES | D-1 | |
SIGNATURES | E-1 | |
A-1
Definitions: |
||||
Afton |
Afton Generating Station |
|||
AG |
New Mexico Attorney General |
|||
ALJ |
Administrative Law Judge |
|||
Altura |
Optim Energy Twin Oaks, LP; formerly known as Altura Power L.P. |
|||
Altura Cogen |
Optim Energy Altura Cogen, LLC; formerly known as Altura Cogen, LLC (the CoGen Lyondell Power Generation Facility) |
|||
AOCI |
Accumulated Other Comprehensive Income |
|||
APS |
Arizona Public Service Company, which is the operator and a co-owner of PVNGS and Four Corners |
|||
APB |
Accounting Principles Board |
|||
APBO |
Accumulated Postretirement Benefit Obligation |
|||
ARO |
Asset Retirement Obligation |
|||
Avistar |
Avistar, Inc., a wholly-owned subsidiary of PNMR |
|||
BART |
Best Available Retrofit Technology |
|||
BLM |
Bureau of Land Management |
|||
Board |
Board of Directors of PNMR |
|||
BTU |
British Thermal Unit |
|||
CAIR |
Clean Air Interstate Rule |
|||
Cal PX |
California Power Exchange |
|||
Cal ISO |
California Independent System Operator |
|||
Cascade |
Cascade Investment, L.L.C. |
|||
Continental |
Continental Energy Systems, L.L.C. |
|||
Constellation |
Constellation Energy Commodities Group, Inc. |
|||
CRHC |
Cap Rock Holding Corporation, a subsidiary of Continental |
|||
CTC |
Competition Transition Charge |
|||
Decatherm |
Million BTUs |
|||
Delta |
Delta-Person Limited Partnership |
|||
DOE |
Department of Energy |
|||
ECJV |
ECJV Holdings, LLC |
|||
EEI |
Edison Electric Institute |
|||
EIP |
Eastern Interconnection Project |
|||
EITF |
Emerging Issues Task Force |
|||
EnergyCo |
EnergyCo, LLC, a limited liability corporation, owned 50% by each of PNMR and ECJV; now known as Optim Energy |
|||
EPA |
United States Environmental Protection Agency |
|||
EPE |
El Paso Electric |
|||
ERCOT |
Electric Reliability Council of Texas |
|||
ESPP |
Employee Stock Purchase Plan |
|||
FASB |
Financial Accounting Standards Board |
|||
FERC |
Federal Energy Regulatory Commission |
|||
FCPSP |
First Choice Power Special Purpose, L.P. |
|||
FIN |
FASB Interpretation Number |
|||
FIP |
Federal Implementation Plan |
|||
First Choice |
First Choice Power, L. P. and Subsidiaries |
|||
Four Corners |
Four Corners Power Plant |
|||
FPL |
FPL Energy New Mexico Wind, LLC |
|||
FPPAC |
Fuel and Purchased Power Adjustment Clause |
|||
GAAP |
Generally Accepted Accounting Principles in the United States of America |
|||
GEaR |
Gross Earnings at Risk |
|||
GHG |
Greenhouse Gas Emissions |
|||
GWh |
Gigawatt hours |
|||
IBEW |
International Brotherhood of Electrical Workers, Local 611 |
|||
IRS |
Internal Revenue Service |
|||
ISO |
Independent System Operator |
|||
KWh |
Kilowatt Hour |
A-2
LBB |
Lehman Brothers Bank, FSB, a subsidiary of LBH |
|||
LBCS |
Lehman Brothers Commodity Services, a subsidiary of LBH |
|||
LBH |
Lehman Brothers Holdings Inc. |
|||
LCC |
Lyondell Chemical Company |
|||
LIBOR |
London Interbank Offered Rate |
|||
Lordsburg |
Lordsburg Generating Station |
|||
Luna |
Luna Energy Facility |
|||
MD&A |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|||
Moody’s |
Moody’s Investor Services, Inc. |
|||
MW |
Megawatt |
|||
MWh |
Megawatt Hour |
|||
Navajo Acts |
Navajo Nation Air Pollution Prevention and Control Act, the Navajo Nation Safe Drinking Water Act, and the Navajo Nation Pesticide Act |
|||
NDT |
Nuclear Decommissioning Trusts for PVNGS |
|||
Ninth Circuit |
United States Court of Appeals for the Ninth Circuit |
|||
NMGC |
New Mexico Gas Company, a subsidiary of Continental |
|||
NMED |
New Mexico Environment Department |
|||
NMPRC |
New Mexico Public Regulation Commission |
|||
NOPR |
Notice of Proposed Rulemaking |
|||
NOX |
Nitrogen Oxides |
|||
NOI |
Notice of Inquiry |
|||
NRC |
United States Nuclear Regulatory Commission |
|||
NSPS |
New Source Performance Standards |
|||
NSR |
New Source Review |
|||
NYMEX |
New York Mercantile Exchange |
|||
OASIS |
Open Access Same Time Information System |
|||
OATT |
Open Access Transmission Tariff |
|||
O&M |
Operations and Maintenance |
|||
OPEB |
Other Post Employment Benefits |
|||
Optim Energy |
Optim Energy, LLC, a limited liability corporation, owned 50% by each of PNMR and ECJV; formerly known as EnergyCo |
|||
PBO |
Projected Benefit Obligation |
|||
PCRBs |
Pollution Control Revenue Bonds |
|||
PGAC |
Purchased Gas Adjustment Clause |
|||
PG&E |
Pacific Gas and Electric Co. |
|||
PM |
Particulate Matter |
|||
PNM |
Public Service Company of New Mexico and Subsidiaries |
|||
PNM Facility |
PNM’s $400 Million Unsecured Revolving Credit Facility |
|||
PNMR |
PNM Resources, Inc. and Subsidiaries |
|||
PNMR Facility |
PNMR’s $600 Million Unsecured Revolving Credit Facility |
|||
PPA |
Power Purchase Agreement |
|||
PRP |
Potential Responsible Party |
|||
PSA |
Power Supply Agreement |
|||
PSD |
Prevention of Significant Deterioration |
|||
PUCT |
Public Utility Commission of Texas |
|||
PVNGS |
Palo Verde Nuclear Generating Station |
|||
Pyramid |
Tri-State Pyramid Unit 4 |
|||
RCRA |
Resource Conservation and Recovery Act |
|||
REC |
Renewable Energy Certificates |
|||
REP |
Retail Electricity Provider |
|||
RFP |
Request for Proposal |
|||
Reimbursement Agreement |
PNM’s $100 Million Letter of Credit Facility |
|||
RMC |
Risk Management Committee |
|||
RTO |
Regional Transmission Organization |
|||
SCE |
Southern Cal Edison Company |
|||
SCPPA |
Southern California Public Power Authority |
|||
SDG&E |
San Diego Gas and Electric Company |
|||
SEC |
United States Securities and Exchange Commission |
A-3
SFAS |
FASB Statement of Financial Accounting Standards |
|||
SJCC |
San Juan Coal Company |
|||
SJGS |
San Juan Generating Station |
|||
SOAH |
State Office of Administrative Hearings |
|||
SO2 |
Sulfur Dioxide |
|||
SPS |
Southwestern Public Service Company |
|||
SRP |
Salt River Project |
|||
S&P |
Standard and Poor’s Ratings Services |
|||
TCEQ |
Texas Commission of Environmental Quality |
|||
TECA |
Texas Electric Choice Act |
|||
Term Loan Agreement |
PNM’s $300 Million Unsecured Delayed Draw Term Loan Facility |
|||
TNMP Bridge Facility |
TNMP’s $100 Million Bridge Term Loan Credit Agreement |
|||
TNMP Facility |
TNMP’s $200 Million Unsecured Revolving Credit Facility |
|||
Throughput |
Volumes of gas delivered, whether or not owned |
|||
TNMP |
Texas-New Mexico Power Company and Subsidiaries |
|||
TNP |
TNP Enterprises, Inc. and Subsidiaries |
|||
Tri-State |
Tri-State Generation and Transmission Association, Inc. |
|||
Tucson |
Tucson Electric Power Company |
|||
Twin Oaks |
Assets of Twin Oaks Power, L.P. and Twin Oaks Power III, L.P. |
|||
UAMPS |
Utah Associated Municipal Power System |
|||
USFS |
United States Forest Service |
|||
Valencia |
Valencia Energy Facility |
|||
VaR |
Value at Risk |
|||
WSPP |
Western Systems Power Pool |
|||
Accounting Pronouncements (as amended and interpreted): | |||
APB 25 |
Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” | ||
EITF 02-3 |
EITF Issue No. 02-3 “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities” | ||
EITF 03-11 |
EITF Issue No. 03-11 “Reporting Realized Gains and Losses on Derivative Instruments that are Subject to FASB Statement No. 133 and Not Held for Trading Purposes” | ||
EITF 03-13 |
EITF Issue No. 03-13 “Applying the Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report Discontinued Operations“ | ||
FIN 46R |
FIN 46R “Consolidation of Variable Interest Entities an Interpretation of ARB No. 51” | ||
FIN 47 |
FIN No. 47 “Accounting for Conditional Asset Retirement Obligations an Interpretation of FASB Statement No. 143” | ||
FIN 48 |
FIN No. 48 “Accounting for Uncertainty in Income Taxes” | ||
FSP FIN 39-1 |
FSP FIN No. 39-1 “Amendment of FASB Interpretation No. 39” | ||
FSP FAS 157-3 |
FSP FAS No. 157-3 “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” | ||
SFAS 5 |
SFAS No. 5 “Accounting for Contingencies” | ||
SFAS 34 |
SFAS No. 34 “Capitalization of Interest Cost” | ||
SFAS 57 |
SFAS No. 57 “Related Party Disclosures” | ||
SFAS 71 |
SFAS No. 71 “Accounting for Effects of Certain Types of Regulation” | ||
SFAS 87 |
SFAS No. 87 “Employers' Accounting for Pensions” | ||
SFAS 106 |
SFAS No. 106 “Employers' Accounting for Postretirement Benefits Other Than Pensions” | ||
SFAS 109 |
SFAS No. 109 “Accounting for Income Taxes” | ||
SFAS 112 |
SFAS No. 112 “Employers’ Accounting for Postemployment Benefits – an amendment of FASB Statements No. 5 and 43” | ||
SFAS 115 |
SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities” | ||
SFAS 123R |
SFAS No. 123R “Share Based Payment” | ||
SFAS 128 |
SFAS No. 128 “Earnings per Share” | ||
SFAS 131 |
SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information” | ||
SFAS 133 |
SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” | ||
SFAS 141 |
SFAS No. 141 “Business Combinations” | ||
SFAS 142 |
SFAS No. 142 “Goodwill and Other Intangible Assets” |
A-4
SFAS 143 |
SFAS No. 143 “Accounting for Asset Retirement Obligations” | ||
SFAS 144 |
SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” | ||
SFAS 154 |
SFAS No. 154 “Accounting Changes and Error Corrections” | ||
SFAS 157 |
SFAS No. 157 “Fair Value Measurements” | ||
SFAS 158 |
SFAS No. 158 “Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)” | ||
SFAS 159 |
SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115” |
Note: The above Glossary has not been updated from that included in the Original Filing and, therefore, contains defined terms and definitions that are not referred to in this Amendment No. 1.
A-5
PART II |
ITEM 8. |
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
INDEX
Page | |
Management’s Annual Report on Internal Control Over Financial Reporting |
B-2 |
Report of Independent Registered Public Accounting Firm |
B-3 |
Financial Statements: |
|
Texas-New Mexico Power Company and Subsidiaries |
|
Consolidated Statements of Earnings (Loss) |
B-4 |
Consolidated Balance Sheets |
B-5 |
Consolidated Statements of Cash Flows |
B-7 |
Consolidated Statements of Changes in Common Stockholder’s Equity |
B-9 |
Consolidated Statements of Comprehensive Income (Loss) |
B-10 |
Notes to Consolidated Financial Statements |
B-11 |
Supplementary Data: |
|
Report of Independent Registered Public Accounting Firm on Schedule |
B-39 |
Schedule II Valuation and Qualifying Accounts |
B-40 |
B-1
Management’s Annual Report on Internal Control Over Financial Reporting
Management of Texas-New Mexico Power Company and subsidiaries (“TNMP”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended.
Management assessed the effectiveness of TNMP’s internal control over financial reporting based on the Internal Control – Integrated Framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the assessment performed,
management concludes that TNMP’s internal control over financial reporting was effective as of December 31, 2008.
This annual report does not include an attestation report of the TNMP's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the TNMP's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit
the company to provide only management's report in this annual report.
/s/ Patricia K. Collawn
Patricia K. Collawn,
President and
Chief Executive Officer
/s/ Thomas G. Sategna
Thomas G. Sategna
Vice President and Controller
B-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of
Texas-New Mexico Power Company
Fort Worth, Texas
We have audited the accompanying consolidated balance sheets of Texas-New Mexico Power Company and subsidiaries (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of earnings (loss), statements of changes in common stockholder’s equity, comprehensive income (loss), and cash flows for
each of the three years in the period ended December 31, 2008. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Texas-New Mexico Power Company and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity
with accounting principles generally accepted in the United States of America.
As discussed in Notes 13 and 12, respectively, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment and Statement of Financial Accounting Standards No. 158, Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132R in 2006. As discussed in Note 11 to the consolidated financial statements, the Company adopted Financial Accounting Standards Board Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes in 2007.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
March 2, 2009
B-3
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
Year Ended December 31, |
||||||||||||
2008 |
2007 |
2006 |
||||||||||
(In thousands) |
||||||||||||
Electric Operating Revenues |
$ | 190,282 | $ | 180,421 | $ | 157,869 | ||||||
Operating Expenses: |
||||||||||||
Cost of energy sold |
32,671 | 29,529 | 27,613 | |||||||||
Administrative and general |
27,354 | 29,113 | 26,733 | |||||||||
Impairment of goodwill |
34,456 | - | - | |||||||||
Depreciation and amortization |
38,695 | 30,401 | 25,557 | |||||||||
Transmission and distribution costs |
21,069 | 18,616 | 16,450 | |||||||||
Taxes, other than income taxes |
18,587 | 20,092 | 23,249 | |||||||||
Total operating expenses |
172,832 | 127,751 | 119,602 | |||||||||
Operating income |
17,450 | 52,670 | 38,267 | |||||||||
Other Income and Deductions: |
||||||||||||
Interest income |
63 | 85 | 922 | |||||||||
Other income |
3,333 | 1,615 | 790 | |||||||||
Carrying charges on regulatory assets |
- | - | 6,993 | |||||||||
Other deductions |
(171 | ) | (147 | ) | (155 | ) | ||||||
Net other income (deductions) |
3,225 | 1,553 | 8,550 | |||||||||
Interest Charges: |
||||||||||||
Interest on long-term debt |
12,416 | 22,364 | 25,728 | |||||||||
Other interest charges |
5,924 | 2,804 | 3,184 | |||||||||
Net interest charges |
18,340 | 25,168 | 28,912 | |||||||||
Earnings Before Income Taxes |
2,335 | 29,055 | 17,905 | |||||||||
Income Taxes |
11,128 | 10,647 | 5,787 | |||||||||
Earnings (Loss) from Continuing Operations |
(8,793 | ) | 18,408 | 12,118 | ||||||||
Discontinued Operations, net of Income Taxes |
||||||||||||
of $0, $0, and $1,548 |
- | - | 3,581 | |||||||||
Net Earnings (Loss) |
$ | (8,793 | ) | $ | 18,408 | $ | 15,699 |
The accompanying notes are an integral part of these financial statements.
B-4
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, |
||||||||
2008 |
2007 |
|||||||
(In thousands) |
||||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 124 | $ | 187 | ||||
Special deposits |
50 | 50 | ||||||
Accounts receivable |
11,457 | 8,789 | ||||||
Unbilled revenues |
6,421 | 4,392 | ||||||
Other receivables |
480 | 1,063 | ||||||
Affiliate accounts receivable |
7,110 | 8,005 | ||||||
Materials and supplies |
1,625 | 1,425 | ||||||
Income taxes receivable |
9 | 881 | ||||||
Other current assets |
958 | 501 | ||||||
Total current assets |
28,234 | 25,293 | ||||||
Other Property and Investments: |
||||||||
Other investments |
550 | 554 | ||||||
Non-utility property |
2,111 | 2,111 | ||||||
Total other property and investments |
2,661 | 2,665 | ||||||
Utility Plant: |
||||||||
Electric plant in service |
815,588 | 781,355 | ||||||
Common plant in service and plant held for future use |
488 | 488 | ||||||
816,076 | 781,843 | |||||||
Less accumulated depreciation and amortization |
291,228 | 274,128 | ||||||
524,848 | 507,715 | |||||||
Construction work in progress |
30,948 | 22,493 | ||||||
Net utility plant |
555,796 | 530,208 | ||||||
Deferred Charges and Other Assets: |
||||||||
Regulatory assets |
134,660 | 133,154 | ||||||
Goodwill |
226,665 | 261,121 | ||||||
Pension asset |
- | 14,919 | ||||||
Other deferred charges |
23,982 | 5,432 | ||||||
Total deferred charges and other assets |
385,307 | 414,626 | ||||||
$ | 971,998 | $ | 972,792 |
The accompanying notes are an integral part of these financial statements.
B-5
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, |
||||||||
2008 |
2007 |
|||||||
(In thousands, except share information) |
||||||||
LIABILITIES AND STOCKHOLDER’S EQUITY |
||||||||
Current Liabilities: |
||||||||
Short-term debt |
$ | 150,000 | $ | - | ||||
Short-term debt – affiliate |
14,100 | 3,404 | ||||||
Current installments of long-term debt |
167,690 | 148,882 | ||||||
Accounts payable |
11,846 | 5,666 | ||||||
Affiliate accounts payable |
1,238 | 3,456 | ||||||
Accrued interest and taxes |
35,118 | 35,204 | ||||||
Other current liabilities |
3,111 | 1,785 | ||||||
Total current liabilities |
383,103 | 198,397 | ||||||
Long-term Debt |
- | 167,609 | ||||||
Deferred Credits and Other Liabilities: |
||||||||
Accumulated deferred income taxes |
111,193 | 120,274 | ||||||
Accumulated deferred investment tax credits |
- | 191 | ||||||
Regulatory liabilities |
35,028 | 46,590 | ||||||
Asset retirement obligations |
711 | 662 | ||||||
Accrued pension liability and postretirement benefit cost |
16,453 | 3,922 | ||||||
Other deferred credits |
1,820 | 1,699 | ||||||
Total deferred credits and other liabilities |
165,205 | 173,338 | ||||||
Total liabilities |
548,308 | 539,344 | ||||||
Commitments and Contingencies (See Note 16) |
||||||||
Common Stockholder’s Equity: |
||||||||
Common stock outstanding ($10 par value, 12,000,000 shares authorized: |
||||||||
issued and outstanding 6,358 shares) |
64 | 64 | ||||||
Paid-in-capital |
427,320 | 427,320 | ||||||
Accumulated other comprehensive income, net of income tax |
(142 | ) | 823 | |||||
Retained earnings (deficit) |
(3,552 | ) | 5,241 | |||||
Total common stockholder’s equity |
423,690 | 433,448 | ||||||
$ | 971,998 | $ | 972,792 |
The accompanying notes are an integral part of these financial statements.
B-6
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, |
||||||||||||
2008 |
2007 |
2006 |
||||||||||
(In thousands) |
||||||||||||
Cash Flows From Operating Activities: |
||||||||||||
Net earnings (loss) |
$ | (8,793 | ) | $ | 18,408 | $ | 15,699 | |||||
Adjustments to reconcile net earnings (loss) to |
||||||||||||
net cash flows from operating activities: |
||||||||||||
Depreciation and amortization |
42,418 | 35,383 | 33,194 | |||||||||
Impairment of goodwill |
34,456 | - | - | |||||||||
Deferred income tax expense (benefit) |
(7,714 | ) | (8,727 | ) | 4,055 | |||||||
Other, net |
(2,649 | ) | (2,931 | ) | (13,615 | ) | ||||||
Changes in certain assets and liabilities: |
||||||||||||
Accounts receivable and unbilled revenues |
(4,697 | ) | (10,092 | ) | 408 | |||||||
Materials and supplies |
(200 | ) | (46 | ) | (31 | ) | ||||||
Other current assets |
449 | 3,565 | 1,758 | |||||||||
Other assets |
(33,434 | ) | (257 | ) | (6,443 | ) | ||||||
Accounts payable |
6,181 | (2,844 | ) | 4,431 | ||||||||
Accrued interest and taxes |
938 | 52,924 | (4,554 | ) | ||||||||
Other current liabilities |
1 | (13,706 | ) | 17,912 | ||||||||
Other liabilities |
14,639 | (461 | ) | (19,025 | ) | |||||||
Net cash flows from operating activities |
41,595 | 71,216 | 33,789 | |||||||||
Cash Flows From Investing Activities: |
||||||||||||
Utility plant additions |
(51,116 | ) | (42,725 | ) | (47,659 | ) | ||||||
Other, net |
- | - | 93 | |||||||||
Net cash flows from investing activities |
(51,116 | ) | (42,725 | ) | (47,566 | ) |
The accompanying notes are an integral part of these financial statements.
B-7
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, |
||||||||||||
2008 |
2007 |
2006 |
||||||||||
(In thousands) |
||||||||||||
Cash Flow From Financing Activities: |
||||||||||||
Short-term borrowings |
150,000 | - | - | |||||||||
Short-term borrowings (repayments), net- affiliate |
10,696 | 3,404 | - | |||||||||
Repayment of long-term debt |
(148,935 | ) | (100,500 | ) | - | |||||||
Equity contribution by parent |
- | 101,249 | - | |||||||||
Dividends paid |
- | (35,000 | ) | - | ||||||||
Other, net |
(2,303 | ) | 1 | 91 | ||||||||
Net cash flows from financing activities |
9,458 | (30,846 | ) | 91 | ||||||||
Change in Cash and Cash Equivalents |
(63 | ) | (2,355 | ) | (13,686 | ) | ||||||
Cash and Cash Equivalents at Beginning of Period |
187 | 2,542 | 16,228 | |||||||||
Cash and Cash Equivalents at End of Period |
$ | 124 | $ | 187 | $ | 2,542 | ||||||
Supplemental Cash Flow Disclosures: |
||||||||||||
Interest paid, net of capitalized interest |
17,246 | $ | 23,625 | $ | 25,573 | |||||||
Income taxes paid, (refunded) net |
$ | 16,613 | $ | (15,529 | ) | $ | 7,003 | |||||
Supplemental schedule of noncash investing and financing activities: |
||||||||||||
As of January 1, 2007, TNMP transferred its New Mexico operational assets and liabilities to PNMR through a redemption of TNMP’s common stock. PNMR contemporaneously contributed the TNMP New Mexico operational assets and liabilities to PNM. See Note 23. |
||||||||||||
Current assets |
$ | 15,444 | ||||||||||
Other property and investments |
10 | |||||||||||
Utility plant, net |
96,468 | |||||||||||
Goodwill |
102,775 | |||||||||||
Deferred charges |
1,377 | |||||||||||
Total assets transferred to PNM |
216,074 | |||||||||||
Current liabilities |
17,313 | |||||||||||
Long-term debt |
1,065 | |||||||||||
Deferred credits and other liabilities |
30,673 | |||||||||||
Total liabilities transferred to PNM |
49,051 | |||||||||||
Net assets transferred – common stock redeemed |
$ | 167,023 |
The accompanying notes are an integral part of these financial statements.
B-8
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDER’S EQUITY
Accumulated |
Total |
|||||||||||||||||||||||
Common Stock |
Other |
Retained |
Common |
|||||||||||||||||||||
Number of |
Aggregate |
Paid-in |
Comprehensive |
Earnings |
Stockholder’s |
|||||||||||||||||||
Shares |
Value |
Capital |
Income |
(Deficit) |
Equity |
|||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Balance at December 31, 2005 |
9,615 | $ | 96 | $ | 494,287 | $ | (29 | ) | $ | 5,450 | $ | 499,804 | ||||||||||||
Net earnings |
- | - | - | - | 15,699 | 15,699 | ||||||||||||||||||
Total other comprehensive income (loss) |
- | - | - | (13 | ) | - | (13 | ) | ||||||||||||||||
SFAS 158 transition adjustment |
- | - | - | 604 | - | 604 | ||||||||||||||||||
Income taxes on goodwill adjustment |
- | - | (1,475 | ) | - | - | (1,475 | ) | ||||||||||||||||
Balance at December 31, 2006 |
9,615 | 96 | 492,812 | 562 | 21,149 | 514,619 | ||||||||||||||||||
Redemption of common stock |
(3,257 | ) | (32 | ) | (166,991 | ) | - | - | (167,023 | ) | ||||||||||||||
Equity contribution from parent |
- | - | 101,249 | - | - | 101,249 | ||||||||||||||||||
Adoption of FIN 48 |
- | - | - | - | 684 | 684 | ||||||||||||||||||
Income taxes on goodwill adjustment |
- | - | 250 | - | - | 250 | ||||||||||||||||||
Net earnings |
- | - | - | - | 18,408 | 18,408 | ||||||||||||||||||
Total other comprehensive income |
- | - | - | 261 | - | 261 | ||||||||||||||||||
Dividends on common stock |
- | - | - | - | (35,000 | ) | (35,000 | ) | ||||||||||||||||
Balance at December 31, 2007 |
6,358 | 64 | 427,320 | 823 | 5,241 | 433,448 | ||||||||||||||||||
Net earnings (loss) |
- | - | - | - | (8,793 | ) | (8,793 | ) | ||||||||||||||||
Total other comprehensive income (loss) |
- | - | - | (965 | ) | - | (965 | ) | ||||||||||||||||
Balance at December 31, 2008 |
6,358 | $ | 64 | $ | 427,320 | $ | (142 | ) | $ | (3,552 | ) | $ | 423,690 |
The accompanying notes are an integral part of these financial statements.
B-9
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Year Ended December 31, |
||||||||||||
2008 |
2007 |
2006 |
||||||||||
(In thousands) |
||||||||||||
Net Earnings (Loss) |
$ | (8,793 | ) | $ | 18,408 | $ | 15,699 | |||||
Other Comprehensive Income (Loss): |
||||||||||||
Pension liability adjustment |
||||||||||||
net of income tax (expense) benefit of $520, $(161), and $8, |
(965 | ) | 261 | (13 | ) | |||||||
Total Other Comprehensive Income (Loss) |
(965 | ) | 261 | (13 | ) | |||||||
Comprehensive Income (Loss) |
$ | (9,758 | ) | $ | 18,669 | $ | 15,686 |
The accompanying notes are an integral part of these financial statements.
B-10
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(1) |
Summary of the Business and Significant Accounting Policies |
Nature of Business
PNMR is an investor-owned holding company of energy and energy-related businesses. PNMR’s primary subsidiaries are PNM, TNMP, and First Choice. PNMR acquired TNMP and First Choice in 2005. PNM is a public utility with regulated operations primarily engaged in the generation, transmission and distribution
of electricity. PNM began service to TNMP’s New Mexico customers effective January 1, 2007. TNMP (the “Company”) is a regulated utility operating in Texas and through December 31, 2006 in New Mexico. In Texas, TNMP provides regulated transmission and distribution services. First Choice is a competitive retail electric provider operating in Texas.
Financial Statement Preparation
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could ultimately differ from those estimated.
Principles of Consolidation
The Consolidated Financial Statements of TNMP include its accounts and those of subsidiaries in which it owns a majority voting interest.
PNMR shared services administrative and general expenses, which represent costs that are primarily driven by corporate level activities, are charged to TNMP at cost. Other significant intercompany transactions between TNMP and its affiliates include energy purchases and sales as well as transmission and distribution services. All
intercompany transactions and balances have been eliminated. See Note 20.
Presentation
Certain amounts in the 2007 and 2006 Consolidated Financial Statements and Notes thereto have been reclassified to conform to the 2008 financial statement presentation.
Accounting for the Effects of Certain Types of Regulation
The Company maintains its accounting records in accordance with the uniform system of accounts prescribed by the FERC and adopted by the NMPRC and PUCT.
The Company's operations are regulated by the PUCT and, through December 31, 2006, the NMPRC and the provisions of SFAS 71 are applied to its regulated operations. Regulators may assign costs to accounting periods that differ from accounting methods applied by nonregulated utilities.
When it is probable that regulators will permit recovery of costs through future rates, costs are deferred as regulatory assets that otherwise would be expensed. Likewise, regulatory liabilities are recognized when it is probable that regulators will require refunds through future rates or when revenue is collected for expenditures that have not yet been incurred. Regulatory assets and liabilities are amortized into earnings over the authorized recovery period. In accordance with
SFAS 71, the Company has deferred certain costs and recorded certain liabilities pursuant to the rate actions of the NMPRC and the PUCT. Information on “regulatory assets” and “regulatory liabilities” is contained in Note 4.
B-11
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
Cash and Cash Equivalents
Investments in highly liquid investments with original maturities of three months or less at the date of purchase are considered cash equivalents.
Utility Plant
Utility plant is stated at cost, which includes capitalized payroll-related costs such as taxes, pension and other fringe benefits, administrative costs and an allowance for funds used during construction where authorized by rate regulation.
Repairs, including major maintenance activities, and minor replacements of property are expensed when incurred, except as required by regulators for ratemaking purposes. Major replacements are charged to utility plant. Gains or losses resulting from retirements or other dispositions of regulated property in the normal
course of business are credited or charged to the accumulated provision for depreciation.
Allowance For Funds Used During Construction
As provided by the FERC uniform systems of accounts, an allowance for funds used during construction is charged to utility plant for construction projects included in rate base. This allowance is a non-cash item designed to enable a utility to capitalize financing costs during periods of construction of property subject to rate
regulation. It represents the cost of borrowed funds (allowance for borrowed funds used during construction) and a return on other funds (allowance for equity funds used during construction).
In 2008, 2007, and 2006, TNMP recorded $1.0 million, $0.4 million, and $0.5 million of allowance for funds used during construction on certain projects.
Carrying Charges on Stranded Costs
TNMP’s estimate of allowable carrying charges on stranded costs that it may recover from its transmission and distribution customers is based on a Texas Supreme Court ruling, and the PUCT’s application of that ruling.
Materials and Supplies
Materials and supplies relate to transmission and distribution assets. Materials and supplies are charged to inventory when purchased and are expensed or capitalized as appropriate when issued. Materials and supplies are valued using an average costing method. Obsolete materials and supplies are expensed
when identified.
Inventories consisted of the following at December 31:
TNMP |
||||||||
2008 |
2007 |
|||||||
(In thousands) | ||||||||
Materials and supplies |
$ | 1,625 | $ | 1,425 |
Goodwill Assets
Under the provisions of SFAS 142, the Company does not amortize goodwill. Goodwill is evaluated for impairment annually, or more frequently if events and circumstances indicate that the goodwill might be impaired. An impairment recorded in 2008 is discussed in Note 25.
B-12
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
Asset Impairment
Tangible long-lived assets are evaluated in relation to the future undiscounted cash flows to assess recoverability in accordance with SFAS 144 when events and circumstances indicate that the assets might be impaired.
Revenue Recognition
TNMP records electric operating revenues in the period of delivery, which includes estimated amounts for service rendered but unbilled at the end of each accounting period.
The determination of the energy sales by TNMP to ultimate individual customers is based on the reading of their meters, which occurs on a systematic basis throughout the month. At the end of each month, amounts of energy delivered to customers since the date of the last meter reading and the corresponding unbilled revenue are
estimated. Unbilled electric revenue is estimated based on the daily generation volumes, estimated customer usage by class, weather factors, line losses and applicable customer rates based on regression analyses reflecting historical trends and experience.
Depreciation and Amortization
TNMP’s provision for depreciation and amortization of utility plant is based upon straight-line rates approved by the PUCT and, through December 31, 2006, by the NMPRC. Depreciation of non-utility property is computed based on the straight-line method. The provision for depreciation of certain equipment is allocated
between depreciation expense and construction projects based on the use of the equipment. Average rates used are as follows:
2008 |
2007 |
2006 |
||||||||||
TNMP |
||||||||||||
Electric plant and common plant |
3.44 | % | 3.48 | % | 3.53 | % |
Amortization of Debt Acquisition Costs
Discount, premium and expense related to the issuance of long-term debt are amortized over the lives of the respective issues. Gains and losses incurred upon the early retirement of long-term debt are recognized in other income or deductions, except for amounts attributable to NMPRC or PUCT regulation, which are amortized over
the lives of the respective issues.
Pension and Other Postretirement Benefits
See Note 12 for a discussion of pension and postretirement benefits expense, including a discussion of the actuarial assumptions.
Stock-Based Compensation
See Note 13 for a discussion of stock-based compensation expense.
Income Taxes
Income taxes are accounted for in accordance with the provisions of SFAS 109, which uses the asset and liability method for accounting for income taxes. Under SFAS 109, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying
value of existing assets and liabilities and their respective tax basis. Current PUCT approved rates include the tax effects of the majority of these differences. SFAS 109 requires that rate-regulated enterprises record deferred income taxes for temporary differences accorded flow-through treatment at the direction of a regulatory commission. The
B-13
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
resulting deferred tax assets and liabilities are recorded at the expected cash flow to be reflected in future rates. Because the PUCT has consistently permitted the recovery of tax effects previously flowed-through earnings, the Company has established regulatory liabilities and assets offsetting such deferred tax assets
and liabilities. Items accorded flow-through treatment under rate orders, deferred income taxes and the future ratemaking effects of such taxes, as well as corresponding regulatory assets and liabilities, are recorded in the financial statements.
In July 2006, the FASB issued FIN 48, which requires that the Company recognize only the impact of tax positions that, based on their merits, are more likely than not to be sustained upon an IRS audit. See Note 11 for the impacts of FIN 48.
Excise Taxes
The Company pays certain fees or taxes which are either considered to be an excise tax or similar to an excise tax. Substantially all of these taxes are recorded on a net basis in the Consolidated Statements of Earnings.
(2) |
[omitted because not applicable] |
(3) |
Segment Information |
TNMP
TNMP is an electric utility operating in Texas and, through December 31, 2006, in New Mexico. TNMP’s operations are subject to traditional rate regulation by the PUCT. TNMP provides regulated transmission and distribution services in Texas under the TECA. TNMP operates in only one reportable segment.
Through December 31, 2006, TNMP provided integrated electric services that included the transmission, distribution, purchase and sale of electricity to its New Mexico customers as well as transmission to third parties and to PNM. Effective January 1, 2007 TNMP’s New Mexico business was transferred to PNM. PNM
was TNMP’s sole supplier for TNMP’s load in New Mexico prior to the transfer of assets to PNM.
Major Customers
First Choice is a customer of TNMP and accounted for 29% of its operating revenues from continuing operations in 2008, 39% in 2007, and 44% in 2006. One unaffiliated customer of TNMP accounted for 22% of its operating revenues from continuing operations in 2008, 18% in 2007, and 14% in 2006.
(4) |
Regulatory Assets and Liabilities |
Certain of the Company's operations are regulated by the PUCT and the provisions of SFAS 71 are applied to its regulated operations. Regulatory assets represent probable future recovery of previously incurred costs, which will be collected from customers through the
ratemaking process. Regulatory liabilities represent probable future reductions in revenues associated with amounts that are to be credited to customers through the ratemaking process. Regulatory assets and liabilities reflected in the Consolidated Balance Sheets are presented below.
B-14
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
TNMP
December 31, |
||||||||
2008 |
2007 |
|||||||
(In thousands) |
||||||||
Assets: |
||||||||
Non-Current: |
||||||||
Stranded costs |
$ | 112,008 | $ | 123,864 | ||||
Deferred income taxes |
4,665 | 5,162 | ||||||
Pension and OPEB |
16,003 | 28 | ||||||
Loss on reacquired debt |
- | 434 | ||||||
Rate case expense |
1,984 | 3,666 | ||||||
Total regulatory assets |
$ | 134,660 | $ | 133,154 | ||||
Liabilities: |
||||||||
Non-Current: |
||||||||
Cost of removal |
$ | (31,345 | ) | $ | (30,057 | ) | ||
Energy efficiency credit |
(2,106 | ) | (2,214 | ) | ||||
Pension and OPEB |
(1,577 | ) | (14,319 | ) | ||||
Total regulatory liabilities |
$ | (35,028 | ) | $ | (46,590 | ) |
The Company’s regulatory assets and regulatory liabilities are reflected in rates charged to customers or have been addressed in a regulatory proceeding. The Company generally receives or pays a rate of return on these regulatory assets and regulatory liabilities.
The Company is permitted, under rate regulation, to accrue and record a regulatory liability for the estimated cost of removal and salvage associated with certain of its assets through depreciation expense. With the issuance of SFAS 158, actuarial losses and prior service costs are required to be recorded in AOCI; however, the
amortization of these items is recoverable through the Company’s rates. For information related to TNMP’s stranded costs, see Note 17.
Based on a current evaluation of the various factors and conditions that are expected to impact future cost recovery, the Company believes that future recovery of its regulatory assets are probable.
(5) |
Stockholder’s Equity |
Common Stock
As described in Note 23, the New Mexico customers of TNMP were transferred to PNM effective January 1, 2007. In connection with the transfer, TNMP transferred those operations to TNP by redeeming a portion of its common stock. TNP then transferred those operations to PNMR, which transferred them to PNM.
Dividends on Common Stock
TNMP paid cash dividends to PNMR of $35.0 million in 2007. TNMP did not pay any cash dividends to PNMR in 2008 and 2006.
Preferred Stock
TNMP has no preferred stock outstanding. The number of authorized shares of TNMP cumulative preferred stock is 1 million shares.
B-15
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(6) |
Financing |
Financing Activities
Effective June 15, 2007, TNMP redeemed $100.0 million of its 6.125% senior notes due 2008 at a redemption price of 100.5% of the principal amount redeemed, plus accrued interest. To facilitate the redemption, PNMR made a cash contribution, recorded as equity, of $101.2 million to TNP, which then made an equity contribution to TNMP in the
same amount. On March 7, 2008, TNMP entered into a $150.0 million short-term bank loan agreement with two lenders. TNMP borrowed $150.0 million under this agreement on April 9, 2008 and used the proceeds to redeem the remaining $148.9 million of its 6.125% senior unsecured notes prior to the maturity date of June 1, 2008. The $150.0 million borrowing under this agreement was repaid in October 2008, through
borrowing $150.0 million under the TNMP Facility described under Short-term Debt below.
On May 15, 2008, TNMP entered into a credit agreement with eight lenders for the TNMP Facility, which matures on May 13, 2009. The TNMP Facility provides TNMP with a revolving credit facility for up to $200.0 million. In connection with entering into the TNMP Facility, TNMP withdrew as a borrower under the PNMR Facility
and is no longer a party under the PNMR Facility.
On October 31, 2008, TNMP entered into a $100.0 million term loan credit agreement with two lenders (the “TNMP Bridge Facility”) to provide an additional source of funds to repay TNMP’s $167.7 million of senior unsecured notes that matured January 15, 2009. The TNMP Bridge Facility includes a covenant
to maintain a maximum consolidated debt-to-consolidated capitalization ratio. On January 14, 2009, TNMP borrowed $100.0 million under the TNMP Bridge Facility, which is due on March 30, 2009. On January 15, 2009, TNMP repaid the entire principal and interest due on the $167.7 million principal amount outstanding of 6.25% senior unsecured notes utilizing the proceeds from the TNMP Bridge Facility and inter-company borrowings from PNMR.
Borrowing Arrangements Between PNMR and its Subsidiaries
PNMR has a $50.0 million, one-year non reciprocal intercompany loan agreement with TNMP. Interest charged to the subsidiaries is equivalent to interest paid on the PNMR Facility. As of December 31, 2008 and 2007, TNMP had outstanding borrowings of $14.1 million and $3.4 million from PNMR under its intercompany loan
agreement. On January 8, 2009, TNMP entered into an agreement for an additional $50.0 million borrowing from PNMR that is subordinated to the TNMP Bridge Facility described above. On January 13, 2009, TNMP borrowed $50.0 million from PNMR under the subordinated agreement. At February 20, 2009, TNMP has borrowed a total of $91.6 million from PNMR under these agreements.
On February 26, 2009, the Finance Committee of the PNMR Board authorized PNMR to provide support for the debt of TNMP by approving one or more additional loans to TNMP as a contingency in the event TNMP is unable to obtain external financing sufficient to pay amounts borrowed under the TNMP Facility and the TNMP Bridge
Facility when they come due.
Short-term Debt
TNMP has a revolving credit facility for borrowings up to $200.0 million under the TNMP Facility that expires May 13, 2009.
B-16
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
At December 31, 2008, the weighted average interest rate was 3.75% for the TNMP Facility.
December 31, |
December 31, |
|||||||
Short-term Debt |
2008 |
2007 |
||||||
(In thousands) |
||||||||
TNMP |
||||||||
Revolving credit facility |
$ | 150,000 | - | |||||
Bridge facility |
- | - | ||||||
$ | 150,000 | $ | - |
In addition to the above borrowings, TNMP had letters of credit outstanding of $1.5 million at December 31, 2008 that reduce the available capacity under its revolving credit facility.
At February 20, 2009, TNMP had $48.5 million of availability under its revolving credit facility, including reductions of availability due to outstanding letters of credit. TNMP also had availability of $8.4 million under its intercompany borrowing agreement with PNMR. At February 20, 2009, TNMP had no cash and cash
equivalents.
Long-Term Debt
Information concerning long-term debt outstanding is as follows:
December 31, |
||||||||
Long-term Debt |
2008 |
2007 |
||||||
(In thousands) |
||||||||
TNMP Debt |
||||||||
Senior Notes: |
||||||||
6.125% due 2008 |
$ | - | $ | 148,935 | ||||
6.25% due 2009 |
167,690 | 167,690 | ||||||
Other, including unamortized discounts |
- | (134 | ) | |||||
167,690 | 316,491 | |||||||
Less current maturities |
167,690 | 148,882 | ||||||
|
||||||||
$ | - | $ | 167,609 |
As discussed above, the TNMP 6.25% senior notes were paid at maturity on January 15, 2009.
(7) |
Lease Commitments |
TNMP leases radio tower antenna space, office buildings, vehicles and other equipment under operating leases.
Operating lease expense was:
TNMP |
||||
(In thousands) |
||||
2008 |
$ | 2,121 | ||
2007 |
$ | 3,233 | ||
2006 |
$ | 1,408 |
B-17
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
Future minimum operating lease payments at December 31, 2008 are:
TNMP |
||||
(In thousands) |
||||
2009 |
$ | 1,639 | ||
2010 |
1,633 | |||
2011 |
1,633 | |||
2012 |
1,633 | |||
2013 |
1,631 | |||
Later years |
- | |||
8,169 | ||||
Future payments under non-cancelable subleases |
- | |||
Total minimum lease payments |
$ | 8,169 |
(8) |
Fair Value of Financial Instruments |
Effective January 1, 2008, the Company adopted SFAS 157 and SFAS 159. SFAS 157 defines fair value, establishes a framework for measuring fair value under GAAP, and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FSP 157-2 delayed the effective date of SFAS 157 for certain nonfinancial assets and nonfinancial liabilities measured on a nonrecurring basis, primarily goodwill, and the Company has not elected to early adopt SFAS 157 for these items. SFAS 159 allows an entity the irrevocable option to elect fair value for the initial
and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. On October 10, 2008, the FASB issued FSP FAS 157-3 to clarify the application of SFAS 157 when a market for a financial instrument is not active. FSP FAS 157-3 has no impact on the Company’s current methodologies for assessing fair value.
The carrying amounts reflected on the Consolidated Balance Sheets approximate fair value for cash, temporary investments, receivables, and payables due to the short period of maturity. The carrying amount and fair value of other financial instruments (including current maturities) are:
December 31, 2008 |
December 31, 2007 | ||||||
Carrying |
Carrying |
||||||
Amount |
Fair Value |
Amount |
Fair Value | ||||
(In thousands) | |||||||
TNMP |
|||||||
Long-term debt |
$ 167,690 |
$ 167,690 |
$ 316,491 |
$ 319,714 |
(9) |
[omitted because not applicable] |
(10) |
[omitted because not applicable] |
B-18
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(11) |
Income Taxes |
TNMP
TNMP’s income taxes from continuing operations consist of the following components:
Year Ended December 31, |
||||||||||||
2008 |
2007 |
2006 |
||||||||||
(In thousands) |
||||||||||||
Current federal income tax |
$ | 17,233 | $ | 18,716 | $ | 1,532 | ||||||
Current state income tax |
1,609 | 973 | 411 | |||||||||
Deferred federal income tax |
11,285 | (9,162 | ) | 5,013 | ||||||||
Deferred state income tax |
(18,808 | ) | 538 | (462 | ) | |||||||
Amortization of accumulated investment |
||||||||||||
tax credits |
(191 | ) | (418 | ) | (707 | ) | ||||||
Total income taxes |
$ | 11,128 | $ | 10,647 | $ | 5,787 |
TNMP’s provision for income taxes from continuing operations differed from the federal income tax computed at the statutory rate for each of the periods shown. The differences are attributable to the following factors:
Year Ended December 31, |
||||||||||||
2008 |
2007 |
2006 |
||||||||||
(In thousands) |
||||||||||||
Federal income tax at statutory rates |
$ | 817 | $ | 10,169 | $ | 6,267 | ||||||
Impairment of goodwill |
12,059 | - | - | |||||||||
Investment tax credits |
(191 | ) | (418 | ) | (707 | ) | ||||||
Reversal of deferred income taxes accrued |
||||||||||||
at prior tax rates |
(141 | ) | (141 | ) | (216 | ) | ||||||
Allowance for funds used during construction |
(10 | ) | (45 | ) | (94 | ) | ||||||
State income tax |
1,045 | 985 | 387 | |||||||||
Texas margin tax and related deferred tax adjustments |
(2,494 | ) | - | - | ||||||||
Other |
43 | 97 | 150 | |||||||||
Total income taxes |
$ | 11,128 | $ | 10,647 | $ | 5,787 | ||||||
Effective tax rate |
476.65 | % | 36.64 | % | 32.32 | % |
B-19
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
The components of TNMP’s net accumulated deferred income tax liability at December 31 were:
December 31, |
||||||||
2008 |
2007 |
|||||||
(In thousands) |
||||||||
Deferred Tax Assets: |
||||||||
Regulatory liabilities related to income taxes |
$ | 7,105 | $ | 8,556 | ||||
Deferred Tax Assets – other |
29,043 | 8,091 | ||||||
Total deferred tax assets |
36,148 | 16,647 | ||||||
Deferred Tax Liabilities: |
||||||||
Depreciation and plant related |
(94,682 | ) | (74,638 | ) | ||||
Stranded costs |
(39,203 | ) | (47,197 | ) | ||||
Regulatory assets related to income taxes |
(11,765 | ) | (15,086 | ) | ||||
Other |
(1,691 | ) | (191 | ) | ||||
Total deferred tax liabilities |
(147,341 | ) | (137,112 | ) | ||||
Net accumulated deferred income tax liabilities |
$ | (111,193 | ) | $ | (120,465 | ) |
The following table reconciles the change in TNMP’s net accumulated deferred income tax liability to the deferred income tax benefit included in the Consolidated Statement of Earnings:
Year Ended |
||||
December 31, 2008 |
||||
(In thousands) |
||||
Net change in deferred income tax liability per above table |
$ | (9,272 | ) | |
Change in tax effects of income tax related regulatory assets and liabilities |
(112 | ) | ||
Tax effect of excess pension liability |
520 | |||
FIN48 adjustments |
541 | |||
Other |
609 | |||
Deferred income tax (benefit) |
$ | (7,714 | ) |
In July 2006, the FASB issued FIN 48, which requires that the Company recognize only the impact of tax positions that, based on their technical merits, are more likely than not to be sustained upon an audit by the taxing authority. FIN 48 also specifies standards for recognizing interest income and expense related to income
taxes.
The Company adopted the provisions of FIN 48 on January 1, 2007. As a result, TNMP established no liability under FIN 48, recorded interest receivable of $3.3 million, increased the January 1, 2007 balance of retained earnings by $0.7 million, increased deferred tax liabilities by $1.3 million, and decreased goodwill by $1.3
million.
B-20
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
As of January 1, 2007 under FIN 48, TNMP had no unrecognized tax benefits. A reconciliation of unrecognized tax benefits (expenses) is as follows:
TNMP |
||||
(In thousands) |
||||
Balance at January 1, 2007 |
$ | - | ||
Additions based on tax positions related to 2007 |
- | |||
Reductions for tax positions of prior years |
- | |||
Settlements |
- | |||
Balance at December 31, 2007 |
- | |||
Additions based on tax positions related to 2008 |
541 | |||
Reductions for tax positions of prior years |
- | |||
Settlements |
- | |||
Balance at December 31, 2008 |
$ | 541 |
None of TNMP’s unrecognized tax liabilities at December 31, 2008 would affect the effective tax rate if recognized.
Estimated interest income related to refunds the Company expects to receive is included in Other Income and estimated interest expense and penalties related to potential cash settlements are included in Interest Expense in the Consolidated Statements of Operations. For the year ended December 31, 2007, interest expense under
FIN 48 was $0.1 million for TNMP. At December 31, 2007, TNMP had accumulated interest payable of $0.6 million. Interest income under FIN 48 for the year ended December 31, 2008 was $0.5 million for TNMP. At December 31, 2008, TNMP had accumulated accrued interest payable of $0.1 million.
The Company is included in the federal consolidated and several consolidated state income tax returns filed by PNMR. The tax years prior to 2001 are closed to examination by either federal or state taxing authorities. 2001 and 2002 are open for examination only for certain items. Tax year 2004 is closed
to examination by federal taxing authorities, but open for some states. Other tax years are open to examination by federal and state taxing authorities.
(12) Pension and Other Postretirement Benefits
TNMP maintains a qualified defined benefit pension plan, a postretirement benefit plan providing medical and dental benefits, and an executive retirement program (“TNMP Plans”). PNMR maintains the legal obligation for the benefits owed to participants under these plans.
Participants in the TNMP Plans include eligible employees and retirees of TNMP, First Choice and other subsidiaries of TNP. The TNMP pension plan was frozen at December 31, 2005 with regard to new participants, salary levels and benefits.
In September 2006, the FASB issued SFAS 158, which requires a plan sponsor to (a) recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status; (b)
measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year; and (c) recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Such changes are to be reported in other comprehensive income. SFAS 158 became effective as of December 31, 2006.
SFAS 158 also requires unrecognized prior service costs and unrecognized gains or losses to be recorded in AOCI and subsequently amortized. The amortization of these incurred costs will ultimately be included in SFAS 87 or SFAS 106 expenses in subsequent years. To the extent the amortization of these items will ultimately be recovered
in future rates as SFAS 87 and SFAS 106 expenses, TNMP records the costs as a regulatory asset or regulatory liability.
B-21
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
The Company has in place, for the TNMP Plans, a policy that defines the investment objectives, establishes performance goals of the asset managers and provides procedures for the manner in which investments are to be reviewed. The plans implement investment strategies to achieve the following objectives:
· |
Maximize the return on assets, commensurate with the risk that the Corporate Investment Committee deems appropriate to: meet the obligations of the pension plans and other postretirement benefits plans; minimize the volatility of expense; and account for contingencies; and |
· |
Generate a rate of return for the total portfolio that equals or exceeds the actuarial investment rate assumption. |
Management is responsible for the determination of the asset target mix and the expected rate of return. The target asset allocations are determined based on consultations with external investment advisors. Under SFAS 87 and SFAS 106, as amended by
SFAS 158, the expected long-term rate of return on pension and postretirement plan assets is calculated on the market-related value of assets. SFAS 87 and SFAS 106 require that actual gains and losses on pension and postretirement plan assets be recognized in the market-related value of assets equally over a period of not more than five years, which reduces year-to-year volatility. For the TNMP Plans, the market-related value of assets is equal to the prior year’s market related value of assets adjusted
for contributions, benefit payments and investment gains and losses that lie within a corridor of plus or minus 4.0% around the expected return on market value. Gains and losses that lie outside the corridor are amortized over five years. This market-related valuation recognizes the portion of return that is outside the range over a five-year period from the year in which the return occurs. As such, the future value of assets will be impacted as previously deferred returns are recorded.
Pension Plan
For defined benefit pension plans, including the executive retirement plan, the PBO represents the actuarial present value of all benefits attributed by the pension benefit formula to employee service rendered prior to that date using assumptions regarding future compensation levels. The accumulated benefit obligation represents the PBO
without considering future compensation levels. Since the plans are frozen, the PBO and accumulated benefit obligation are equal. The following table presents information about the PBO, fair value of plan assets, and funded status of the plans:
TNMP Plan |
||||||||
Year Ended December 31, |
||||||||
2008 |
2007 |
|||||||
(In thousands) |
||||||||
PBO at beginning of year |
$ | 66,619 | $ | 72,963 | ||||
Service cost |
- | - | ||||||
Interest cost |
4,243 | 4,229 | ||||||
Actuarial (gain) loss |
279 | (2,821 | ) | |||||
Benefits paid |
(7,113 | ) | (7,752 | ) | ||||
PBO at end of year |
64,028 | 66,619 | ||||||
Fair value of plan assets at beginning of year |
81,538 | 81,816 | ||||||
Actual return on plan assets |
(21,001 | ) | 7,474 | |||||
Benefits paid |
(7,113 | ) | (7,752 | ) | ||||
Fair value of plan assets at end of year |
53,424 | 81,538 | ||||||
Funded status-asset (liability) for pension benefits |
$ | (10,604 | ) | $ | 14,919 |
B-22
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
The following table presents information about prior service cost and net actuarial (gain) loss in AOCI as of December 31, 2008.
TNMP Plan |
||||
December 31, 2008 |
||||
Net actuarial (gain) loss |
||||
(In thousands) |
||||
Amounts in AOCI not yet recognized in net periodic cost (income) at beginning of year |
$ | (1,087 | ) | |
Experience loss (gain) |
27,915 | |||
Regulatory asset (liability) adjustment |
(26,542 | ) | ||
Amortization recognized in net periodic cost |
8 | |||
Amounts in AOCI not yet recognized in net periodic cost (income) at end of year |
$ | 294 | ||
Amortization expected to be recognized in AOCI in 2009 |
$ | - |
The following table presents the components of net periodic cost (income) recognized in the Consolidated Statements of Earnings:
Year Ended December 31, |
||||||||||||
2008 |
2007 |
2006 |
||||||||||
(In thousands) |
||||||||||||
TNMP Plan |
||||||||||||
Service cost |
$ | - | $ | - | $ | - | ||||||
Interest cost |
4,243 | 4,229 | 4,339 | |||||||||
Long-term rate of return on plan assets |
(6,635 | ) | (6,840 | ) | (7,018 | ) | ||||||
Amortization of net (gain) loss |
(146 | ) | (7 | ) | - | |||||||
Amortization of prior service cost |
- | - | - | |||||||||
Net periodic benefit (income) cost |
$ | (2,538 | ) | $ | (2,618 | ) | $ | (2,679 | ) |
The following significant weighted-average assumptions were used to determine the projected benefit obligation and net periodic cost (income):
Year Ended December 31, |
||||||||||||
2008 |
2007 |
2006 |
||||||||||
TNMP Plan |
||||||||||||
Discount rate for determining projected benefit obligation |
||||||||||||
at December 31 |
7.25 | % | 6.72 | % | 6.10 | % | ||||||
Discount rate for determining net periodic cost (income) |
6.72 | % | 6.10 | % | 5.75 | % | ||||||
Long-term rate of return on plan assets |
8.50 | % | 8.75 | % | 9.00 | % | ||||||
Rate of compensation increase |
N/A | N/A | N/A |
The assumed discount rate for determining the PBO was determined based on a review of long-term high-grade bonds and management’s expectations. The change in discount rate resulted in a decrease in the TNMP PBO of $2.6 million at December 31, 2008. Should actual experience differ from actuarial assumptions, the PBO and
net periodic cost (income) would be affected.
The expected long-term rate of return on plan assets reflects the average rate of earnings expected on the funds invested, or to be invested, to provide for the benefits included in the PBO. Factors that are considered
B-23
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
include, but are not limited to, historic returns on plan assets, current market information on long-term returns (e.g., long-term bond rates) and current and target asset allocations between asset categories. The expected long-term rate of return assumption for the TNMP pension plan compares to the actual return (loss) of (26.9)%
for the year ended December 31, 2008. If all other factors were to remain unchanged, a 1% decrease in the expected long-term rate of return would cause TNMP’s 2009 net periodic cost to decrease $0.7 million (analogous changes would result from a 1% increase).
The following table outlines the asset allocations for the pension plans:
TNMP Plan |
||||||||
December 31, |
||||||||
2008 |
2007 |
|||||||
Equity securities |
42 | % | 50 | % | ||||
Fixed income |
23 | % | 23 | % | ||||
Alternative investments |
35 | % | 27 | % | ||||
100 | % | 100 | % |
The pension plans target the following asset allocations:
TNMP |
||||
Plan |
||||
Equity securities |
57.5 | % | ||
Fixed income |
22.5 | % | ||
Alternative investments |
20.0 | % | ||
100 | % |
Alternative investments include real estate, private equity, and hedge funds. The private equity and hedge fund investments are limited partner structures that are multi-manager multi-strategy funds. Real estate investments are with a private real estate investment trust that invests in a diversified portfolio of real estate, mortgages,
and other real estate related assets. This investment approach gives broad diversification and minimizes risk compared to a direct investment in any one component of the funds.
The following pension benefit payments, which reflect expected future service, are expected to be paid:
TNMP |
||||
Plan |
||||
(In thousands) |
||||
2009 |
$ | 6,786 | ||
2010 |
$ | 6,458 | ||
2011 |
$ | 6,466 | ||
2012 |
$ | 6,508 | ||
2013 |
$ | 6,005 | ||
Years 2014 – 2018 |
$ | 27,943 |
There has been a significant decline in the general price levels of marketable equity securities held by the pension plan in late 2008 and in early 2009. The impacts of this decline on future funding and expense will not be quantified until the funding and expense valuations for 2009 are performed. Although, there are no contributions
to the plan expected in 2009, it is likely that increased levels of funding will be required thereafter and additional amounts will be recorded as expense.
B-24
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
Other Postretirement Benefits
For the postretirement benefit plan, the APBO is the actuarial present value as of a date of all future benefits attributed under the terms of the postretirement benefit plan to employee service rendered to that date.
The following table presents information about the APBO, the fair value of plan assets, and the funded status of the plan:
TNMP Plan |
||||||||
Year Ended December 31, |
||||||||
2008 |
2007 |
|||||||
(In thousands) |
||||||||
APBO at beginning of year |
$ | 10,779 | $ | 11,197 | ||||
Service cost |
284 | 394 | ||||||
Interest cost |
715 | 661 | ||||||
Participant contributions |
348 | 160 | ||||||
Actuarial (gain) loss |
(869 | ) | (1,180 | ) | ||||
Benefits paid |
(692 | ) | (453 | ) | ||||
APBO at end of year |
10,565 | 10,779 | ||||||
Fair value of plan assets at beginning of year |
7,907 | 7,162 | ||||||
Actual return on plan assets |
(2,299 | ) | 661 | |||||
Employer contributions |
428 | 377 | ||||||
Participant contributions |
348 | 160 | ||||||
Benefits paid |
(692 | ) | (453 | ) | ||||
Fair value of plan assets at end of year |
5,692 | 7,907 | ||||||
Funded status-APBO net (liability) |
$ | (4,873 | ) | $ | (2,872 | ) |
The following table presents information about prior service cost and net actuarial (gain) loss in AOCI as of December 31, 2008.
TNMP Plan |
||||||||
December 31, 2008 |
||||||||
Prior
service cost |
Net actuarial (gain)/loss |
|||||||
(In thousands) | ||||||||
Amount in AOCI not yet recognized in net periodic cost (income) at beginning of year |
$ | 18 | $ | (196 | ) | |||
Experience loss (gain) |
- | 1,916 | ||||||
Regulatory asset (liability) adjustment |
- | (1,822 | ) | |||||
Amortization recognized in net periodic cost |
(3 | ) | 13 | |||||
Amounts in AOCI not yet recognized in net periodic cost (income) at end of year |
$ | 15 | $ | (89 | ) | |||
Amortization expected to be recognized in AOCI in 2009 |
$ | (3 | ) | $ | 13 |
B-25
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
The following table presents the components of net periodic cost recognized in the Consolidated Statements of Earnings:
Year Ended December 31, |
||||||||||||
2008 |
2007 |
2006 |
||||||||||
(In thousands) |
||||||||||||
TNMP Plan |
||||||||||||
Service cost |
$ | 284 | $ | 394 | $ | 424 | ||||||
Interest cost |
716 | 661 | 710 | |||||||||
Long-term rate of return on plan assets |
(486 | ) | (456 | ) | (456 | ) | ||||||
Amortization of prior service cost and regulatory asset |
60 | 60 | 60 | |||||||||
Amortization of net (gain) loss and regulatory asset |
(271 | ) | (156 | ) | - | |||||||
Net periodic benefit cost |
$ | 303 | $ | 503 | $ | 738 |
The following significant weighted-average assumptions were used to determine the accumulated postretirement benefit obligation and postretirement benefit cost:
Year Ended December 31, |
||||||||||||
2008 |
2007 |
2006 |
||||||||||
TNMP Plan |
||||||||||||
Discount rate for determining accumulated postretirement |
||||||||||||
benefit obligation at December 31 |
7.25 | % | 6.91 | % | 6.10 | % | ||||||
Discount rate for determining postretirement benefit cost |
6.91 | % | 6.10 | % | 5.75 | % | ||||||
Long-term rate of return on plan assets |
6.50 | % | 6.70 | % | 6.90 | % | ||||||
Rate of compensation increase |
N/A | N/A | N/A |
The assumed discount rate for determining the APBO was determined based on a review of long-term high-grade bonds and management’s expectations. The change in discount rate resulted in a decrease in the TNMP APBO obligation of $0.3 million. Should actual experience differ from actuarial assumptions, the APBO
and postretirement benefit cost would be affected.
The expected long-term rate of return on plan assets reflects the average rate of earnings expected on the funds invested, or to be invested, to provide for the benefits included in the APBO. Factors that are considered include, but are not limited to, historic returns on plan assets, current market information on long-term returns (e.g.,
long-term bond rates) and current and target asset allocations between asset categories. The expected long-term rate of return assumption for the postretirement benefit plan compares to the actual return (loss) of (28.9)% for the year ended December 31, 2008. If all other factors were to remain unchanged, a 1% decrease in the expected long-term rate of return would cause TNMP’s 2009 postretirement benefit cost to increase $0.1 million (analogous changes would result from a 1% increase).
TNMP’s exposure to cost increases in the postretirement benefit plan is minimized by a provision that limits TNMP’s share of costs under the plan. Costs of the plan in excess of the limit are wholly borne by the participants. TNMP reached the cost limit at the end of 2001. As a result, a one-percentage-point change in assumed
health care cost trend rates would have no effect on either the net periodic expense or the year-end APBO.
The following table outlines the asset allocation for the other postretirement benefits:
TNMP Plan |
||||||||
December 31, |
||||||||
2008 |
2007 |
|||||||
Equity securities |
58 | % | 71 | % | ||||
Debt securities |
42 | % | 29 | % | ||||
100 | % | 100 | % |
B-26
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
The Company is currently targeting an asset allocation of 70% equity securities and 30% debt securities for the TNMP other postretirement benefits plan.
TNMP expects to make contributions totaling $0.3 million to the TNMP postretirement benefit plan in 2009.
The following other postretirement benefit payments, which reflect expected future service, are expected to be paid:
TNMP |
||||
Plan |
||||
(In thousands) |
||||
2009 |
$ | 916 | ||
2010 |
$ | 895 | ||
2011 |
$ | 905 | ||
2012 |
$ | 894 | ||
2013 |
$ | 888 | ||
Years 2014 – 2018 |
$ | 4,693 |
Executive Retirement Program
For the executive retirement program, the following table presents information about the PBO and funded status of the plans:
TNMP Plan | |||||||||
Year Ended
December 31, | |||||||||
2008 |
2007 | ||||||||
(In thousands) |
|||||||||
PBO at beginning of year |
$ | 1,199 | $ | 1,325 | |||||
Service cost |
- | - | |||||||
Interest cost |
75 | 76 | |||||||
Actuarial gain |
14 | (39 | ) | ||||||
Benefits paid |
(163 | ) | (163 | ) | |||||
PBO at end of year-funded status (liability) |
$ | (1,125 | ) | $ | (1,199 | ) |
Due to the minimal amount, TNMP makes monthly disbursements to plan beneficiaries versus funding a trust.
B-27
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
The following table presents information about prior service cost and net actuarial loss in AOCI as of December 31, 2008.
TNMP Plan |
||||
December 31, 2008 |
||||
Net actuarial loss |
||||
(In thousands) |
||||
Amount in AOCI not yet recognized in net periodic cost (income) at beginning of year |
$ | - | ||
Experience loss (gain) |
(14 | ) | ||
Regulatory asset (liability) adjustment |
14 | |||
Amortization recognized in net periodic cost |
- | |||
Amount in AOCI not yet recognized in net periodic cost (income) at end of year |
$ | - | ||
Amortization expected to be recognized in AOCI in 2009 |
$ | - |
The following table presents the components of net periodic cost recognized in the Consolidated Statements of Earnings:
Pension Benefits |
||||||||||||
Year Ended December 31, |
||||||||||||
2008 |
2007 |
2006 |
||||||||||
(In thousands) |
||||||||||||
TNMP Plan |
||||||||||||
Service cost |
$ | - | $ | - | $ | - | ||||||
Interest cost |
75 | 76 | 76 | |||||||||
Amortization of actuarial loss |
- | - | - | |||||||||
Amortization of prior service cost |
- | - | - | |||||||||
Net periodic benefit cost |
$ | 75 | $ | 76 | $ | 76 |
The following significant weighted-average assumptions were used to determine the projected benefit obligation and net periodic cost (income):
Year Ended December 31, |
||||||||||||
2008 |
2007 |
2006 |
||||||||||
TNMP Plan |
||||||||||||
Discount rate for determining projected benefit obligation |
||||||||||||
at December 31 |
7.25 | % | 6.72 | % | 6.10 | % | ||||||
Discount rate for determining net periodic cost |
6.72 | % | 6.10 | % | 5.75 | % | ||||||
Long-term rate of return on plan assets |
N/A | N/A | N/A | |||||||||
Rate of compensation increase |
N/A | N/A | N/A |
The assumed discount rate for determining the PBO was determined based on a review of long-term high-grade bonds and management’s expectations. The change in discount rate resulted in a decrease in the TNMP PBO of less than $0.1 million at December 31, 2008. Should actual experience differ from actuarial assumptions, the projected
benefit obligation and net periodic cost would be affected.
B-28
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
The following executive retirement plan payments, which reflect expected future service, are expected:
TNMP |
||||
Plan |
||||
(In thousands) |
||||
2009 |
$ | 154 | ||
2010 |
$ | 146 | ||
2011 |
$ | 137 | ||
2012 |
$ | 129 | ||
2013 |
$ | 120 | ||
Years 2014 – 2018 |
$ | 489 |
Other Retirement Plans
PNMR sponsors a 401(k) defined contribution plan for eligible employees, including those of TNMP. Contributions to the 401(k) plan consist of a discretionary matching contribution equal to 75% of the first 6% of eligible compensation contributed by the employee on a before-tax basis. TNMP also makes a non-matching
contribution ranging from 3% to 10% of eligible compensation based on the eligible employee’s age. TNMP bears the cost of employer contributions for its direct employees and is allocated a portion of contributions for PNMR Services Company employees through billings for corporate services.
PNMR also provides executive deferred compensation benefits through an unfunded, non-qualified plan. The purpose of this plan is to permit certain key employees of PNMR who participate in the 401(k) defined contribution plan to defer compensation and receive credits without reference to the certain limitations on contributions. TNMP is
allocated a portion of the plan’s costs through billings for corporate services.
(13) Stock-Based Compensation Plans
PNMR has various types of stock-based compensation programs, including stock options, restricted stock and performance shares granted under the Performance Equity Plan (“PEP”). All stock-based compensation is granted through stock-based employee compensation plans maintained by PNMR. Although certain
TNMP employees participate in the PNMR plans, TNMP does not have a separate employee stock-based compensation plan.
Performance Equity Plan
The PEP provides for the granting of non-qualified stock options, restricted stock rights, performance shares performance units and stock appreciation rights to officers, key employees and non-employee board members. These options vest ratably over three years from the grant date of the award. Re-pricing of stock
options is prohibited unless specific shareholder approval is obtained.
SFAS 123R
Effective January 1, 2006, the Company adopted SFAS 123R, utilizing the modified prospective approach. Prior to the adoption of SFAS 123R, stock option grants, performance shares and ESPP issuances were accounted for in accordance with the intrinsic value method prescribed in APB 25, and accordingly, no compensation expense
was recognized for these awards. Restricted stock was also accounted for under APB 25 and compensation expense was recognized for restricted stock awards prior to the adoption of SFAS 123R. “Restricted stock” is the name of these awards provided for in the PEP and refers to awards of stock subject to vesting. It does not refer to restricted shares with contractual post-vesting restrictions as defined in SFAS 123R.
Under the modified prospective approach, SFAS 123R applies to all new awards and to awards that were outstanding on January 1, 2006 that are subsequently modified, repurchased or cancelled. Compensation expense recognized after January 1, 2006 includes compensation cost for all share-based payments granted prior to, but
not
B-29
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123 and compensation expense for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. Prior
periods were not restated to reflect the impact of adopting the new standard.
The unearned stock-based compensation related to stock options and restricted stock awards is being amortized to compensation expense over the requisite vesting period, which is generally equally over three years. However, plan provisions provide that upon retirement, participants become 100% vested in stock options and restricted
stock awards; therefore, in accordance with SFAS 123R, compensation expense for stock options and restricted stock awards to participants that are retirement eligible on the grant date is recognized immediately at the grant date and is not amortized over a period of time.
Total compensation expense for stock-based payment arrangements recognized by TNMP for the years ended December 31, 2008, 2007 and 2006 was $0.6 million, $1.1 million and $1.3 million.
Stock Options
The Company uses the Black-Scholes option pricing model to estimate the fair value of stock-based awards with the following weighted-average assumptions for the indicated periods:
2008 |
2007 |
2006 |
||||||||||
Dividend yield |
6.99 | % | 3.02 | % | 3.33 | % | ||||||
Expected volatility |
28.33 | % | 18.68 | % | 21.70 | % | ||||||
Risk-free interest rates |
2.69 | % | 4.72 | % | 4.37 | % | ||||||
Expected life (years) |
4.2 | 4.2 | 4.1 |
The assumptions above are based on multiple factors, including historical exercise patterns of employees in relatively homogeneous groups with respect to exercise and post-vesting employment termination behaviors, expected future exercising patterns for these same homogeneous groups and both the implied and historical volatility of PNMR’s
stock price.
Restricted Stock
The PEP allows for the issuance of restricted stock awards. As noted above, “restricted stock” is the name of these awards provided for in the PEP and refers to awards of stock subject to vesting. It does not refer to restricted shares with contractual post-vesting restrictions as defined in SFAS 123R. The
compensation expense for these awards was determined based on the market price of PNMR stock on the date of grant reduced by the present value of future dividends applied to the total number of shares that were anticipated to fully vest and then amortized over the vesting period.
The Company estimates the fair value of restricted stock awards based on the market price of PNMR common stock on the date of grant reduced by the present value of estimated future dividends with the following weighted-average assumptions for the indicated periods:
2008 |
2007 |
2006 | ||||
Expected quarterly dividends per share |
$0.23 |
$0.23 |
$0.20 | |||
Risk-free interest rate |
2.93% |
4.71% |
4.64% |
ESPP
Under the ESPP, employees were allowed to purchase shares of PNMR’s common stock at a 15% discount of the lower of the market price of stock at the beginning of the offering period and end of each purchase period for the
B-30
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
six months ended June 30, 2006. Under the provisions of SFAS 123R, the compensation expense for the shares issued under the ESPP was determined based on the fair value of PNMR’s common stock using the Black-Scholes model. Beginning July 1, 2006, the discount rate was changed to 5%, and the look-back feature
was eliminated; therefore, the plan is no longer considered compensatory.
(14) |
Construction Program |
TNMP does not participate in the ownership or operation of any generating plants, but incurred construction expenditures of $51.1 million during 2008.
Construction Program
The Company anticipates making substantial capital expenditures for the construction and acquisition of utility plant and other property and equipment. A summary of the budgeted construction expenditures is as follows:
2009 |
2010 |
2011 |
2012 |
2013 |
Total |
|||||||||||||||||||
(In millions) |
||||||||||||||||||||||||
TNMP |
$ | 61.6 | $ | 79.7 | $ | 79.1 | $ | 64.4 | $ | 54.1 | $ | 338.9 |
(15) |
Asset Retirement Obligations |
The ARO is recorded in accordance with SFAS 143 and is based on the determination of underlying assumptions, such as the Company’s discount rate, estimates of the future costs for decommissioning and the timing of the removal activities to be performed. Any
changes in these assumptions underlying the required calculations may require revisions to the estimated ARO when identified. A reconciliation of ARO is as follows:
TNMP |
||||
(In thousands) |
||||
Liability at December 31, 2005 |
$ | 639 | ||
Liabilities incurred |
- | |||
Liabilities settled |
(7 | ) | ||
Accretion expense |
54 | |||
Liability at December 31, 2006 |
686 | |||
Liabilities incurred |
- | |||
Liabilities settled |
(8 | ) | ||
Accretion expense |
52 | |||
Asset transferred with TNMP New Mexico asset transfer to PNM |
(68 | ) | ||
Liability at December 31, 2007 |
662 | |||
Liabilities incurred |
- | |||
Liabilities settled |
(7 | ) | ||
Accretion expense |
56 | |||
Liability at December 31, 2008 |
$ | 711 |
(16) |
Commitments and Contingencies |
There are various claims and lawsuits pending against the Company. The Company is also subject to federal, state and local environmental laws and regulations. In addition, the Company periodically enters into financial commitments in connection with its business operations. It is not possible at this time
for the Company to determine fully the effect of all litigation and other legal proceedings on its results of operations or financial position. It is the Company’s policy to accrue for expected costs in accordance with SFAS 5, when it is probable that a liability has
B-31
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
been incurred and the amount of expected costs of these items to be incurred is reasonably estimable. The Company is also involved in various legal proceedings in the normal course of its business. The legal costs for these matters are accrued when the legal expenses are incurred. The Company does not
expect that any known lawsuits, environmental costs and commitments will have a material adverse effect on its financial condition, results of operations or cash flows, although the outcome of litigation, investigations and other legal proceedings is inherently uncertain.
(17) |
Regulatory and Rate Matters |
TNMP
TNMP Competitive Transition Charge True-Up Proceeding
The purpose of the true-up proceeding was to quantify and reconcile the amount of stranded costs that TNMP may recover from its transmission and distribution customers. A 2004 PUCT decision established $87.3 million as TNMP’s stranded costs. TNMP and other parties have made a series of appeals on the ruling
and it is currently before the Texas Supreme Court. TNMP is unable to predict if the Texas Supreme Court will review the decision or the ultimate outcome of this matter.
Interest Rate for Calculating Carrying Charges on TNMP’s Stranded Cost
The PUCT approved an amendment to the true-up rule in 2006, which results in a lower interest rate that TNMP is allowed to collect on the unsecuritized true-up balance through a CTC. The PUCT concluded that the correct rate at which a utility should accrue carrying costs through a CTC is the weighted average of an adjusted form of its
marginal cost of debt and its unadjusted historical cost of debt, with the weighting based on the utility’s most recently authorized capital structure. The new rate affects TNMP by lowering the previously approved carrying cost rate of 10.93%. After regulatory proceedings, the PUCT issued an order approving the 8.31% rate proposed by TNMP and the PUCT staff. Various municipal intervenors (“Cities”) appealed the PUCT’s order to the District Court in Austin, Texas,
with TNMP as an intervenor. The District Court affirmed the PUCT’s decision and the Cities filed an appeal in the Texas 3rd Court of Appeals. Oral argument was held on February 26, 2009. TNMP is unable to predict the ultimate outcome of this matter.
Following the revision of the interest rate on TNMP’s carrying charge, TNMP filed a compliance tariff to implement the new 8.31% rate. TNMP’s filing proposed to put the new rates into effect on February 1, 2008. Intervenors asserted objections to the compliance filing. PUCT staff urged that the PUCT make
the new rate effective as of December 27, 2007 when the PUCT’s order establishing the correct rate became final. After regulatory proceedings, the PUCT issued an order making the new rate retroactive to July 20, 2006. TNMP filed an appeal of this order in the District Court in Austin, Texas. While there is inherent uncertainty in this type of proceeding, TNMP believes it will ultimately be successful in overturning any ruling that the effective date should be prior to December
27, 2007.
60-Day Rate Review
In 2005, TNMP made a required 60-day rate review filing. TNMP’s case establishes a CTC for recovery of the true-up balance. In 2006, the PUCT issued a signed order which would allow TNMP to begin collecting its true-up balance, which includes carrying charges, over a 14-year period. The order also
allows TNMP to collect expenses associated with several cases over a three-year period. TNMP began collecting its CTC and its rate case expenses on December 1, 2006. In January 2007, this proceeding was appealed by various Texas cities to the District Court, in Austin, Texas. TNMP has intervened. TNMP is unable to predict the ultimate outcome of this matter.
B-32
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
2008 Rate Case
On August 29, 2008, TNMP filed with the PUCT for an $8.7 million increase in revenues. If approved, new rates would go into effect in September 2009. In its request, TNMP also asked for permission to implement a catastrophe reserve fund similar to those approved for other transmission and distribution companies in
Texas. Catastrophe funds help pay for a utility system’s recovery from natural disasters and acts of terrorism. Once the rate case is finalized by the PUCT, TNMP may update its transmission rates annually to reflect changes in its invested capital. Updated rates would reflect the addition and retirement of transmission facilities, including appropriate depreciation, federal income tax and other associated taxes, and the approved rate of return on such facilities. On October 10, 2008,
the PUCT issued a preliminary order permitting TNMP to file supplemental testimony on costs caused by Hurricane Ike. These costs may be included in rates or captured as a regulatory asset for review and approval in a subsequent proceeding.
In December 2008, the parties in the TNMP rate case requested that the case be abated and the ALJ granted the request. The abatement suspends indefinitely all procedural deadlines and those dates will be rescheduled following the submittal of supplemental testimony by TNMP relating to costs incurred during Hurricane Ike and anticipated
financing costs. TNMP is unable to predict the ultimate outcome of this matter.
(18) |
Environmental Issues |
The normal course of operations of the Company necessarily involves activities and substances that expose the Company to potential liabilities under laws and regulations protecting the environment. Liabilities under these laws and regulations can be material and in some instances may be imposed without regard to fault, or may
be imposed for past acts, even though the past acts may have been lawful at the time they occurred. Sources of potential environmental liabilities include the Federal Comprehensive Environmental Response Compensation and Liability Act of 1980 and other similar statutes.
The Company records its environmental liabilities when site assessments or remedial actions are probable and a range of reasonably likely cleanup costs can be estimated. The Company reviews its sites and measures the liability quarterly, by assessing a range of reasonably likely costs for each identified site using currently
available information, including existing technology, presently enacted laws and regulations, experience gained at similar sites, and the probable level of involvement and financial condition of other potentially responsible parties. These estimates include costs for site investigations, remediation, operations and maintenance, monitoring and site closure. Unless there is a probable amount, the Company records the lower end of such reasonably likely range of costs (classified as other deferred credits
at undiscounted amounts).
The Company’s recorded liability estimated to remediate was as follows:
TNMP | ||||
December 31, | ||||
2008 |
2007 | |||
(In thousands) |
| |||
$ - |
$ - |
|
The Company expended the following for remediation:
Year Ended December 31, |
||||||||||||
2008 |
2007 |
2006 |
||||||||||
(In thousands) |
||||||||||||
TNMP |
$ | - | $ | - | $ | 246 |
B-33
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
The ultimate cost to clean up the Company’s identified sites may vary from its recorded liability due to numerous uncertainties inherent in the estimation process, such as the extent and nature of contamination, the scarcity of reliable data for identified sites, and the time periods over which site remediation is expected to occur. Future
environmental obligations are not expected to have a material impact on the results of operations or financial condition of the Company.
(19) |
Accumulated Other Comprehensive Income |
AOCI reports a measure for accumulated changes in equity that result from transactions and other economic events other than transactions with shareholders. The following table sets forth each component of AOCI, net of income taxes:
Mark-to- |
||||||||||||||||
Unrealized |
market for |
Accumulated |
||||||||||||||
gain (loss) |
Pension |
cash-flow |
other |
|||||||||||||
on |
liability |
hedge |
comprehensive |
|||||||||||||
securities |
adjustment |
transactions |
income (loss) |
|||||||||||||
(In thousands) |
||||||||||||||||
TNMP |
||||||||||||||||
Balance at December 31, 2007 |
$ | - | $ | 823 | $ | - | $ | 823 | ||||||||
Balance at December 31, 2008 |
$ | - | $ | (142 | ) | $ | - | $ | (142 | ) |
(20) |
Related Party Transactions |
PNMR, PNM, and TNMP are considered related parties as defined in SFAS 57. PNMR Services Company provides corporate services in accordance with shared services agreements. These services are billed on a monthly basis at cost.
PNMR files a consolidated federal income tax return with its affiliated companies. A tax allocation agreement exists between PNMR and TNMP. The agreement provides that TNMP will compute its taxable income on a stand-alone basis. If the result is a net tax liability, such amount shall be paid to PNMR. If
there are net operating losses and/or tax credits, TNMP shall receive payment for the tax savings from PNMR to the extent that PNMR is able to utilize those benefits.
See Note 6 for information on intercompany borrowing arrangements.
PNM and TNMP engaged in various affiliate transactions during 2006 to best utilize the resources held by both companies. Through December 31, 2006, PNM also sold electricity and energy-scheduling services to TNMP under a long-term wholesale power contract. Effective January 1, 2007, TNMP’s New Mexico customers
were transferred to PNM. TNMP sells transmission and distribution services to First Choice.
PNMR Services Company incurs capital expenditures related to buildings and software. These expenditures are normally reimbursed through management fee billings as the assets depreciate. In order to pay down line of credit borrowings, PNMR Services Company required capital expenditures to be reimbursed more timely. In
October 2006, all expenditures related to capital were billed to PNMR subsidiaries. The amount paid by TNMP is in a deferred asset account that will be relieved as the assets on PNMR Services Company depreciate.
See Note 23 for information concerning the transfer of operations from TNMP to PNM. The table below summarizes the nature and amount of related party transactions of TNMP:
B-34
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
Year Ended December 31, |
||||||||||||
2008 |
2007 |
2006 |
||||||||||
(In thousands) |
||||||||||||
Electricity, transmission and distribution related services billings: |
||||||||||||
PNM to TNMP |
$ | - | $ | 126 | $ | 50,817 | ||||||
TNMP to PNMR |
55,214 | 69,731 | 68,555 | |||||||||
Services billings: |
||||||||||||
PNMR to TNMP |
19,043 | 18,302 | 24,637 | |||||||||
PNM to TNMP |
1,672 | 261 | 554 | |||||||||
PNMR Services capital expenditures fees: |
||||||||||||
TNMP to PNMR |
- | 18 | 5,281 | |||||||||
Income tax sharing payments: |
||||||||||||
TNMP to PNMR |
15,079 | - | 7,001 | |||||||||
PNMR to TNMP |
- | (15,529 | ) | - | ||||||||
Interest payments: |
||||||||||||
TNMP to PNMR |
133 | 1,165 | - |
(21) |
New Accounting Pronouncements |
Information regarding recently issued accounting pronouncements, including those that have not been adopted by the Company could have a material impact, is set forth below.
SFAS 162 – The Hierarchy of Generally Accepted Accounting Principles
The current GAAP hierarchy had been set forth in the American Institute of Certified Public Accountants Statement on Auditing Standards No. 69. The FASB concluded that the GAAP hierarchy should reside in the accounting literature established by the FASB and issued SFAS 162, which establishes the current hierarchy of GAAP, including
making minor shifts in the hierarchy. This statement was effective November 15, 2008. The Company has reviewed the impact of SFAS 162 and does not believe it will result in a change in current practice.
FSP FAS 132R-1 – Employers’ Disclosures about Postretirement Benefit Plan Assets
In December 2008, the FASB released FSP FAS 132R-1, which is effective for years ending after December 15, 2009 and changes the disclosure requirements for plan assets in a defined benefit pension or other postretirement benefit plan. Entities are required to provide enhanced disclosures about (a) how investment allocation decisions
are made, including the factors that are pertinent to understanding investment policies and strategies, (b) the major categories of plan assets, (c) the inputs and valuation techniques used to measure the fair value of plan assets, (d) the level of fair value measurements using significant unobservable inputs and, (e) significant concentrations of risk within plan assets. The company is currently reviewing the requirements of FSP FAS 132R-1 and will implement the required disclosures at December 31,
2009.
FSP FAS 157-2 – Effective Date of FASB Statement No. 157
As discussed in Note 8, the Company adopted SFAS 157 as of January 1, 2008. On February 12, 2008, the FASB issued FSP FAS 157-2, which delays the effective date of SFAS 157 for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring
basis. The
B-35
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
Company will adopt FSP FAS 157-2 and will apply it to fair value determinations utilized by the Company in evaluating long-lived and intangible assets for potential impairment in 2009, although the Company does not anticipate it will have a significant impact.
(22) [omitted because not applicable]
(23) |
Discontinued Operations |
TNMP – New Mexico
In connection with the 2005 acquisition of TNP and its principal subsidiaries, TNMP and First Choice, the NMPRC stipulated that all TNMP’s New Mexico operations would transfer to the ownership of PNM. This transfer took place on January 1, 2007 when TNMP transferred its New Mexico operational assets and liabilities to
PNMR through redemption of TNMP’s common stock. PNMR contemporaneously contributed the TNMP New Mexico operational assets and liabilities to PNM.
In accordance with SFAS 144 and EITF 03-13, the Company determined that the New Mexico operations component of TNMP is required to be reported as discontinued operations in the TNMP Consolidated Statements of Operations for periods prior to January 1, 2007. Due to the fact the net assets were distributed to TNMP’s parent, PNMR, the
assets and liabilities were considered “held and used” up until the date of transfer. No gain or loss or impairments were recognized on the disposition due to the fact the transfer was among entities under common control. Furthermore, the TNMP New Mexico operations are subject to traditional rate of return regulation. Subsequent to the transfer, the NMPRC regulates these operations in the same manner as prior to the transfer. Under SFAS 71, the assets and
liabilities were recorded by PNM at TNMP’s carrying amounts, which represent their fair value within the regulatory environment.
The following table summarizes the results classified as discontinued operations in TNMP’s Consolidated Statements of Earnings:
Year Ended | ||||
December 31, | ||||
2006 | ||||
(In thousands) | ||||
Operating revenues |
$ | 99,121 | ||
Operating expenses and other income |
93,992 | |||
Earnings from discontinued operations before income tax |
5,129 | |||
Income tax expense |
1,548 | |||
Earnings from discontinued operations |
$ | 3,581 |
B-36
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
The following table summarizes the TNMP New Mexico assets and liabilities transferred to PNM:
January 1, |
||||
2007 |
||||
(In thousands) |
||||
Current assets |
$ | 15,444 | ||
Other property and investments |
10 | |||
Utility plant, net |
96,468 | |||
Goodwill |
102,775 | |||
Deferred charges |
1,377 | |||
Total assets transferred to PNM |
216,074 | |||
Current liabilities |
17,313 | |||
Long-term debt |
1,065 | |||
Deferred credits and other liabilities |
30,673 | |||
Total liabilities transferred to PNM |
49,051 | |||
Net assets transferred between entities |
$ | 167,023 |
(24) |
Business Improvement Plan |
In 2007, the Company began a business improvement process that included a comprehensive cost structure analysis of its operations and a benchmarking analysis to similar-sized utilities. During 2007 and 2008, the Company implemented a series of initiatives designed to manage future operational costs, maintain financial strength
and strengthen its regulated utilities. The multi-phase process includes a business improvement plan to streamline internal processes and reduce the Company’s work force. The utility-related process enhancements are designed to improve and centralize business functions.
The Company has existing plans providing severance benefits to employees who are involuntarily terminated due to elimination of their positions. Under SFAS 112, the severance benefits payable under the Company’s existing plans are recorded when it is probable that a liability has been incurred and the amount can
be reasonably estimated. At December 31, 2008 and 2007, the Company assessed the status of the business improvement plan process and the positions that were probable of being eliminated as determined at that time. The Company calculated the severance benefits associated with those positions and recorded pre-tax expense in 2008 and 2007 of $0.1 million and $0.6 million. As additional phases of the business improvement plan are developed, the associated costs will be analyzed
and recorded as specified by GAAP.
(25) |
Goodwill; Impairments |
The excess purchase price over the fair value of the assets acquired and the liabilities assumed by PNMR for its June 6, 2005 acquisition of TNP was recorded as goodwill and was pushed down to the businesses acquired. In 2007, the TNMP assets that were included in
its New Mexico operations, including goodwill of $102.8 million, were transferred to PNM. See Note 23.
Under the provisions of SFAS 142, the Company evaluates its goodwill for impairment annually at the reporting unit level or more frequently if circumstances indicate that the goodwill may be impaired. Application of the impairment test requires judgment, including the identification of reporting units, assignment of assets and
liabilities to reporting units and determination of the fair value of each reporting unit. The fair value of each reporting unit is estimated using a discounted cash flow methodology. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of long-term growth rates for the business and determination of appropriate weighted average cost of capital for each reporting unit. Changes in these estimates
and assumptions could materially affect the determination of fair value and the conclusion of impairment for each reporting unit.
B-37
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
For goodwill, the first step of the impairment test requires that the Company compare the fair value of each reporting unit with its carrying value, including goodwill. If as a result of this analysis, the Company concludes there is an indication of impairment in a reporting unit having goodwill, the Company is required to perform
the second step of the SFAS 142 impairment analysis, determining the amount of goodwill impairment to be recorded. The amount is calculated by comparing the implied fair value of the goodwill to its carrying amount. This exercise requires the Company to allocate the fair value determined in step one to the individual assets and liabilities of the reporting unit. Any remaining fair value would be the implied fair value of goodwill on the testing date. To the extent the
recorded amount of goodwill of a reporting unit exceeds the implied fair value determined in step two, an impairment loss is reflected in results of operations.
The market capitalization of PNMR’s common stock has been significantly below book value during 2008, which is an indicator that intangible assets may be impaired. The Company performed its annual testing of intangible assets as of April 1, 2008. As a result of this analysis, the Company concluded there was
an indication of impairment of goodwill. The impairments of goodwill have no income tax effects. The impairments do not impact the Company’s cash flows.
The changes in the carrying amount of goodwill for the years ended December 31, 2008, 2007 and 2006 were as follows:
TNMP Electric |
||||
(In thousands) | ||||
Balance as of December 31, 2005 |
$ | 367,245 | ||
Adjustments during 2006 |
(3,481 | ) | ||
Balance as of December 31, 2006 |
363,764 | |||
Adjustments during 2007 |
(102,643 | ) | ||
Balance as of December 31, 2007 |
261,121 | |||
Impairments |
(34,456 | ) | ||
Balance as of December 31, 2008 |
$ | 226,665 |
(26) |
Quarterly Operating Results (Unaudited) |
Unaudited operating results by quarters for 2008 and 2007 are presented below. In the opinion of management of the Company, all adjustments (consisting of normal recurring accruals) necessary for a fair statement of the results of operations for such periods have been included.
Quarter Ended |
||||||||||||||||
March 31 |
June 30 |
September 30 |
December 31 |
|||||||||||||
(In thousands, except per share amounts) |
||||||||||||||||
TNMP |
||||||||||||||||
2008 |
||||||||||||||||
Operating revenues |
$ | 42,228 | $ | 47,118 | $ | 51,097 | $ | 49,839 | ||||||||
Operating income (loss) |
10,583 | (21,563 | ) | 15,506 | 12,924 | |||||||||||
Net earnings (loss) |
3,730 | (28,753 | ) | 8,093 | 8,137 | |||||||||||
2007 |
||||||||||||||||
Operating revenues |
40,928 | 43,536 | 52,680 | 43,277 | ||||||||||||
Operating Income |
8,107 | 11,555 | 21,062 | 11,946 | ||||||||||||
Net earnings |
938 | 4,234 | 10,228 | 3,008 | ||||||||||||
B-38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of
Texas-New Mexico Power Company
Fort Worth, Texas
We have audited the consolidated financial statements of Texas-New Mexico Power Company and subsidiaries (collectively, the “Company”) as of December 31, 2008 and 2007, and for each of the three years in the period ended December 31, 2008, and have issued our reports thereon dated March 2, 2009 (which report expresses an unqualified
opinion and includes an explanatory paragraph relating to the adoption of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment and Statement of Financial Accounting Standards No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132R in 2006 and the adoption of Financial Accounting
Standards Board Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes in 2007); such consolidated financial statements and report are included elsewhere in this Form 10-K. Our audit also included the financial statement schedule of the Company listed in Item 15. The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based
on our audit. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
March 2, 2009
Dallas, Texas
B-39
SCHEDULE II
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.
VALUATION AND QUALIFYING ACCOUNTS
Additions |
Deductions |
|||||||||||||||||||
Balance at |
Charged to |
Charged to |
||||||||||||||||||
beginning of |
costs and |
other |
Balance at |
|||||||||||||||||
Description |
year |
expenses |
accounts |
Write-offs |
end of year |
|||||||||||||||
(In thousands) |
||||||||||||||||||||
Allowance for doubtful accounts, |
||||||||||||||||||||
year ended December 31: |
||||||||||||||||||||
2006 |
$ | 100 | $ | 25 | $ | - | $ | 94 | $ | 31 | ||||||||||
2007 |
$ | 31 | $ | 3 | $ | - | $ | 34 | $ | - | ||||||||||
2008 |
$ | - | $ | 144 | $ | - | $ | 144 | $ | - |
B-40
ITEM 9. |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A. |
CONTROLS AND PROCEDURES |
TNMP
(a) Evaluation of disclosure controls and procedures.
As of the end of the period covered by this annual report, TNMP conducted an evaluation under the supervision and with the participation of TNMP’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures (as defined
in Regulation 13A, Sections 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the disclosure controls and procedures are effective.
(b) Management’s report on internal control over financial reporting.
“Management’s Annual Report on Internal Control Over Financial Reporting” appears on page B-2. This report is incorporated by reference herein.
(c) Changes in internal controls over financial reporting.
There has been one change in TNMP’s internal controls over financial reporting (as defined in Regulation 13A, Sections 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934) during the quarter ended December 31, 2008, that has materially affected, or is reasonably likely to materially affect, TNMP’s internal control over
financial reporting.
TNMP has selected Cognizant to provide application maintenance and support services, on an outsource basis, for selected applications related to customer service, complex billing, electronic data interchange, and ancillary applications that were previously performed internally. These services include development of additional application
functionality, research and repair of code defects, table data maintenance, and installation and configuration of patches and upgrades. The data processed by these applications is integral to the accounts receivable and revenue recognition processes and their related line items on the registrant’s financial statements.
C-1
|
PART IV |
ITEM 15. |
EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
|
(a) - 1. |
See Index to Financial Statements under Item 8. |
|
(a) - 2. |
Financial Statement Schedules for the years 2008, 2007, and 2006 are omitted for the reason that they are not required or the information is otherwise supplied under Item 8. |
(a) - 3-A. Exhibits Filed:
Exhibit
No. |
Description | |
23.3 |
TNMP |
Consent of Deloitte & Touche LLP for Texas-New Mexico Power Company |
31.5 |
TNMP |
Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.6 |
TNMP |
Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
D-1
SIGNATURE
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.
TEXAS-NEW MEXICO POWER COMPANY | ||
(Registrant) | ||
Date: January 15, 2010 |
By |
/s/ Thomas G. Sategna
|
Thomas G. Sategna
| ||
Vice President and | ||
Controller |
E-1