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Form 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 0-296
El Paso Electric Company
(Exact name of registrant as specified in its charter)
Texas 74-0607870
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
Kayser Center, 100 North Stanton, El Paso, Texas 79901
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (915) 543-5711
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, No Par Value American Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO _____
-----
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES X NO _____
-----
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 registrant's 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. [_]
As of March 10, 2000, the aggregate market value of the voting stock
held by non-affiliates of the registrant was $522,578,682.
As of March 10, 2000, there were 54,778,810 shares of the Company's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 2000 annual
meeting of its shareholders are incorporated by reference into Part III of this
report.
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DEFINITIONS
The following abbreviations, acronyms or defined terms used in this
report are defined below:
Abbreviations,
Acronyms or Defined Terms Terms
------------------------- -----
Agreed Order.............................. Agreed Order of the Texas Commission entered August 30, 1995
implementing certain provisions of the Texas Rate Stipulation
ANPP Participation Agreement.............. Arizona Nuclear Power Project Participation Agreement dated August 23,
1973, as amended
APS....................................... Arizona Public Service Company
CFE....................................... Comision Federal de Electricidad de Mexico, the national electric
utility of Mexico
Common Plant or Common Facilities......... Facilities at or related to Palo Verde that are common to all three
Palo Verde Units
Company................................... El Paso Electric Company
DOE....................................... United States Department of Energy
DSM....................................... Demand-Side Management
ESBG...................................... The Company's Energy Services Business Group
FERC...................................... Federal Energy Regulatory Commission
Four Corners.............................. Four Corners Generating Station
Freeze Period............................. Ten-year period beginning August 2, 1995, during which base rates for
most Texas retail customers are expected to remain frozen pursuant to
the Texas Rate Stipulation
IID....................................... Imperial Irrigation District, an irrigation district in southern
California
IRP....................................... Integrated Resource Plan
kV........................................ Kilovolt(s)
kW........................................ Kilowatt(s)
kWh....................................... Kilowatt-hour(s)
Las Cruces................................ City of Las Cruces, New Mexico
MW........................................ Megawatt(s)
MWh....................................... Megawatt-hour(s)
New Mexico Commission..................... New Mexico Public Utility Commission or its successor, New Mexico
Public Regulation Commission
New Mexico Restructuring Law.............. New Mexico Electric Utility Industry Restructuring Act of 1999
New Mexico Settlement Agreement........... Stipulation and Settlement Agreement in Case No. 2722, between the
Company, the New Mexico Attorney General, the New Mexico Commission
staff and most other parties to the Company's rate proceedings,
excluding Las Cruces, before the New Mexico Commission providing for
a 30-month moratorium on rate increases or decreases and other
matters
NRC....................................... Nuclear Regulatory Commission
OPC....................................... Texas Office of Public Utility Counsel
Palo Verde................................ Palo Verde Nuclear Generating Station
Palo Verde Participants................... Those utilities who share in power and energy entitlements, and bear
certain allocated costs, with respect to Palo Verde pursuant to the
ANPP Participation Agreement
PNM....................................... Public Service Company of New Mexico
SFAS...................................... Statement of Financial Accounting Standards
SPS....................................... Southwestern Public Service Company
TEP....................................... Tucson Electric Power Company
Texas Commission.......................... Public Utility Commission of Texas
Texas Rate Stipulation.................... Stipulation and Settlement Agreement in Texas Docket 12700, between the
Company, the City of El Paso, the OPC and most other parties to the
Company's rate proceedings before the Texas Commission providing for
a ten-year rate freeze and other matters
Texas Restructuring Law................... Texas Public Utility Regulatory Act Chapter 39, Restructuring of the
Electric Utility Industry
Texas Settlement Agreement................ Settlement Agreement in Texas Docket 20450, between the Company, the
City of El Paso and various parties providing for a reduction of the
Company's jurisdictional base revenue and other matters
TNP....................................... Texas-New Mexico Power Company
(i)
TABLE OF CONTENTS
Item Description Page
- ---- ----------- ----
PART I
1 Business......................................................... 1
2 Properties....................................................... 20
3 Legal Proceedings................................................ 20
4 Submission of Matters to a Vote of Security Holders.............. 22
PART II
5 Market for Registrant's Common Equity and Related Stockholder
Matters....................................................... 23
6 Selected Financial Data.......................................... 25
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 26
7A Quantitative and Qualitative Disclosures About Market Risk....... 33
8 Financial Statements and Supplementary Data...................... 35
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................... 77
PART III
10 Directors and Executive Officers of the Registrant............... 77
11 Executive Compensation........................................... 77
12 Security Ownership of Certain Beneficial Owners and Management... 77
13 Certain Relationships and Related Transactions................... 77
PART IV
14 Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 77
(ii)
PART I
Item 1. Business
General
El Paso Electric Company is a public utility engaged in the generation,
transmission and distribution of electricity in an area of approximately 10,000
square miles in west Texas and southern New Mexico. The Company also serves
wholesale customers in Texas, New Mexico, California and Mexico. The Company
owns or has significant ownership interests in five electrical generating
facilities providing it with a total capacity of approximately 1,500 MW. For the
year ended December 31, 1999, the Company's energy sources consisted of
approximately 55% nuclear fuel, 33% natural gas, 8% coal and 4% purchased power.
The Company serves approximately 298,000 residential, commercial,
industrial and wholesale customers. The Company distributes electricity to
retail customers principally in El Paso, Texas and Las Cruces, New Mexico
(representing approximately 58% and 8%, respectively, of the Company's revenues
for the year ended December 31, 1999). In addition, the Company sells
electricity to wholesale customers, including Texas-New Mexico Power Company and
the Imperial Irrigation District. Through 1998, the Company also made wholesale
sales to the Comision Federal de Electricidad de Mexico. Principal industrial
and other large customers of the Company include steel production, copper and
oil refining, garment manufacturing concerns and United States military
installations, including the United States Army Air Defense Center at Fort Bliss
in Texas and White Sands Missile Range and Holloman Air Force Base in New
Mexico.
The Company's Energy Services Business Group began developing energy
efficient products and services in 1997. The ESBG offers customers value-added
products and services that give them greater value for the kWh purchased from
the Company.
The Company's principal offices are located at Kayser Center, 100 North
Stanton, El Paso, Texas 79901 (telephone 915-543-5711). The Company was
incorporated in Texas in 1901. As of February 25, 2000, the Company had
approximately 1,000 employees, 30% of whom are covered by a collective
bargaining agreement. The collective bargaining agreement between the Company
and the International Brotherhood of Electrical Workers Local 960 ("Local 960")
expires on June 15, 2000. Local 960 represents approximately 300 of the
Company's employees working primarily in the power plants, substations and line
crews. The parties will exchange proposals as early as April 15, 2000 and will
begin contract negotiations in May 2000. The Company cannot predict the outcome
of these negotiations.
Facilities
The Company's net installed generating capacity of approximately 1,500 MW
consists of approximately 600 MW from Palo Verde Units 1, 2 and 3, 482 MW from
its Newman Power Station, 246 MW from its Rio Grande Power Station, 104 MW from
Four Corners Units 4 and 5, and 68 MW from its Copper Power Station.
1
Palo Verde Station
The Company owns a 15.8% interest in each of the three nuclear generating
units and Common Facilities at Palo Verde, located west of Phoenix, Arizona. The
Palo Verde Participants include the Company and six other utilities: APS,
Southern California Edison Company, PNM, Southern California Public Power
Authority, Salt River Project Agricultural Improvement and Power District and
the Los Angeles Department of Water and Power. APS serves as operating agent for
Palo Verde.
The NRC has granted facility operating licenses and full power operating
licenses for Palo Verde Units 1, 2 and 3, which expire in 2024, 2025 and 2027,
respectively. In addition, the Company is separately licensed by the NRC to own
its proportionate share of Palo Verde.
Pursuant to the ANPP Participation Agreement, the Palo Verde Participants
share costs and generating entitlements in the same proportion as their
percentage interests in the generating units, and each participant is required
to fund its proportionate share of fuel, other operations, maintenance and
capital costs. The Company's total monthly share of these costs was
approximately $6.9 million in 1999. The ANPP Participation Agreement provides
that if a participant fails to meet its payment obligations, each non-defaulting
participant shall pay its proportionate share of the payments owed by the
defaulting participant.
Decommissioning. Pursuant to the ANPP Participation Agreement and federal
law, the Company must fund its share of the estimated costs to decommission Palo
Verde Units 1, 2 and 3, including the Common Facilities, over their estimated
useful lives of 40 years (to 2024, 2025 and 2027, respectively). The Company's
funding requirements are determined periodically based upon engineering cost
estimates performed by outside engineers retained by APS.
In December 1998, the Palo Verde Participants approved an updated
decommissioning study. The 1998 study determined that the Company will have to
fund approximately $280.5 million (stated in 1998 dollars) to cover its share of
decommissioning costs. Cost estimates for decommissioning have increased with
each study. The previous cost estimate from a 1995 study determined that the
Company would have to fund approximately $229 million (stated in 1995 dollars).
The 1998 estimate reflects a 22% increase from the 1995 estimate primarily due
to increases in estimated costs for spent fuel storage after operations have
ceased. See "Spent Fuel Storage" below.
Although the 1998 study was based on the latest available information,
there can be no assurance that decommissioning cost estimates will not continue
to increase in the future or that regulatory requirements will not change. In
addition, until a new low-level radioactive waste repository opens and operates
for a number of years, estimates of the cost to dispose of low-level radioactive
waste are subject to significant uncertainty. The decommissioning study is
updated every three years and a new study is expected to be completed in 2001.
See "Disposal of Low-Level Radioactive Waste" below.
The Company will recover its current decommissioning cost estimates through
its existing rates during the Freeze Period, and thereafter under the provisions
of the Texas Restructuring Law. The rate freeze under the Texas Rate Stipulation
and the rate reduction under the Texas Settlement Agreement preclude the Company
from seeking a rate increase in Texas to recover increases in decommissioning
cost estimates during the Freeze Period. See "Regulation - Texas Regulatory
Matters - Deregulation" for further discussion.
2
Prior to the start of competition in New Mexico, the Company will continue
to collect 100% of its decommissioning cost estimates under the New Mexico
Settlement Agreement. Under the New Mexico Restructuring Law, however, the New
Mexico Commission could effectively reduce the Company's recovery of its
decommissioning costs. See " Regulation - New Mexico Regulatory Matters -
Deregulation" for further discussion.
Steam Generators. Palo Verde has experienced degradation in the steam
generator tubes of each unit. APS has undertaken an ongoing investigation and
analysis and has performed corrective actions designed to mitigate further
degradation. Corrective actions have included changes in operational procedures
designed to lower the operating temperatures of the units, chemical cleaning and
the implementation of other technical improvements. APS has stated that it
believes its remedial actions have slowed the rate of tube degradation.
The projected service lives of the units' steam generators are reassessed
by APS periodically in conjunction with inspections made during scheduled
outages of the Palo Verde units. In 1997, the Palo Verde Participants
unanimously approved the purchase of one set of spare steam generators for
delivery in September 2002. In December 1999, the Palo Verde Participants
unanimously approved installation of the new steam generators in Unit 2. The
Company's portion of total costs associated with construction and installation
of new steam generators in Unit 2, including replacement power costs, is
currently estimated not to exceed $44 million. APS has also stated that, based
on the latest available data, it estimates that the steam generators in Units 1
and 3 should operate for their designated lives of 40 years. However, APS is
reassessing whether it is economically desirable to replace the steam generators
in Units 1 and 3. Such replacements would also require the unanimous approval
of the Palo Verde Participants.
The Texas Rate Stipulation precludes the Company from seeking a rate
increase during the Freeze Period to recover additional capital costs associated
with the replacement of steam generators. The Company cannot recover these costs
through regulated rates in New Mexico since generation and power supply are
currently scheduled to become a competitive function in January 2001 under the
New Mexico Restructuring Law. Finally, the Company cannot assure that it will
be able to recover these capital costs through its wholesale power rates or its
competitive retail rates that become applicable after the start of competition.
See also Part II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Overview."
Spent Fuel Storage. In June 1999, APS requested approval from the NRC to
use more of the space in the existing spent fuel storage facilities at Palo
Verde. The NRC approved this request on March 2, 2000. As a result, the spent
fuel storage facilities will have sufficient capacity to store all fuel expected
to be discharged from normal operation of all three Palo Verde units through
2003. Alternative on-site storage facilities are currently being constructed to
supplement existing facilities. Spent fuel will be removed from the original
facilities as necessary and placed in special storage casks which will be stored
at the new facilities until accepted by the DOE for permanent disposal. The
alternative facilities will be built in stages to accommodate casks on an as
needed basis and are expected to be available for use by the end of 2002.
Pursuant to the Nuclear Waste Policy Act of 1982, as amended in 1987 (the
"Waste Act"), the DOE is legally obligated to accept and dispose of all spent
nuclear fuel and other high-level radioactive wastes generated by all domestic
power reactors. In accordance with the Waste Act, the DOE entered into a spent
nuclear fuel contract with the Company and all other Palo Verde Participants. In
3
November 1989, the DOE reported that its spent nuclear fuel disposal facilities
would not be in operation until 2010. Subsequent judicial decisions required the
DOE to start accepting spent nuclear fuel by January 31, 1998. The DOE did not
meet that deadline, and the Company cannot currently predict when spent fuel
shipments to the DOE's permanent disposal site will commence. The 1998
decommissioning study assumes that only 14 of 333 spent fuel casks will have
been removed from Palo Verde by 2037 when title to the remaining spent fuel is
assumed to be transferred to the DOE. In January 1997, the Texas Commission
established a project to evaluate what, if any, action it should take with
regard to payments made to the DOE for funding of the DOE's obligation to start
accepting spent nuclear fuel by January 31, 1998. After receiving initial
comments, no further action has been taken on the project.
In July 1998, APS filed, on behalf of all Palo Verde Participants, a
petition for review with the United States Court of Appeals for the District of
Columbia Circuit seeking confirmation that findings by the Circuit Court in a
prior case brought by Northern States Power regarding the DOE's failure to
comply with its obligation to begin accepting spent nuclear fuel would apply to
all spent nuclear fuel contract holders. The Circuit Court held APS' petition
in abeyance pending the United States Supreme Court's decision to review the
Northern States Power case. In November 1998, the Supreme Court denied review
of this case. The Circuit Court subsequently dismissed APS' petition after the
Circuit Court issued clarifying orders essentially granting the relief sought by
APS. APS is monitoring pending litigation between the DOE and other nuclear
operators before initiating further legal proceedings or other procedural
measures on behalf of the Palo Verde Participants to enforce the DOE's statutory
and contractual obligations. The Company is unable to predict the outcome of
these matters at this time.
The Company expects to incur significant spent fuel storage costs during
the life of Palo Verde that it believes are the responsibility of the DOE.
These costs will be expensed as incurred until an agreement is reached with the
DOE for recovery of these costs. However, the Company cannot predict when, if
ever, these additional costs will be recovered from the DOE.
Disposal of Low-Level Radioactive Waste. Congress has established
requirements for the disposal by each state of low-level radioactive waste
generated within its borders. Arizona, California, North Dakota and South Dakota
have entered into a compact (the "Southwestern Compact") for the disposal of
low-level radioactive waste. California will act as the first host state of the
Southwestern Compact, and Arizona will serve as the second host state. The
construction and opening of the California low-level radioactive waste disposal
site in Ward Valley has been delayed due to extensive public hearings, disputes
over environmental issues and review of technical issues related to the proposed
site. Palo Verde is projected to undergo decommissioning during the period in
which Arizona will act as host for the Southwestern Compact. However, the
opposition, delays, uncertainty and costs experienced in California demonstrate
possible roadblocks that may be encountered when Arizona seeks to open its own
waste repository.
Liability and Insurance Matters. The Palo Verde Participants have public
liability insurance against nuclear energy hazards up to the full limit of
liability under federal law. The insurance consists of $200 million of primary
liability insurance provided by commercial insurance carriers, with the balance
being provided by an industry-wide retrospective assessment program, pursuant to
which industry participants would be required to pay an assessment to cover any
loss in excess of $200 million. Effective August 1998, the maximum assessment
per reactor for each nuclear incident is approximately $90.7 million, subject to
an annual limit of $10 million per incident. Based upon the Company's 15.8%
4
interest in Palo Verde, the Company's maximum potential assessment per incident
is approximately $43.0 million for all three units with an annual payment
limitation of approximately $4.7 million.
The Palo Verde Participants maintain "all risk" (including nuclear hazards)
insurance for damage to, and decontamination of, property at Palo Verde in the
aggregate amount of $2.75 billion, a substantial portion of which must first be
applied to stabilization and decontamination. Finally, the Company has obtained
insurance against a portion of any increased cost of generation or purchased
power which may result from an accidental outage of any of the three Palo Verde
units if the outage exceeds 12 weeks.
Newman Power Station
The Company's Newman Power Station, located in El Paso, Texas, consists of
four generating units with an aggregate capacity of 482 MW. The units operate
primarily on natural gas, but can also operate on fuel oil.
Rio Grande Power Station
The Company's Rio Grande Power Station, located in Sunland Park, New
Mexico, adjacent to El Paso, Texas, consists of three steam-electric generating
units with an aggregate capacity of 246 MW. The units operate primarily on
natural gas, but can also operate on fuel oil.
Four Corners Station
The Company owns 7% of Units 4 and 5 at Four Corners, located in
northwestern New Mexico. The two coal-fired generating units each have a
generating capacity of 739 MW. The Company shares power entitlements and
certain allocated costs of the two units with APS (the Four Corners operating
agent) and the other participants.
Four Corners is located on land held on easements from the federal
government and a lease from the Navajo Nation that expires in 2016. Certain of
the facilities associated with Four Corners, including transmission lines and
almost all of the contracted coal sources, are also located on Navajo land.
Units 4 and 5 are located adjacent to a surface-mined supply of coal.
Copper Power Station
The Company's Copper Power Station, located in El Paso, Texas, consists of
a 68 MW combustion turbine used primarily to meet peak demands. The unit
operates primarily on natural gas, but can also operate on fuel oil. The
Company leases the combustion turbine and other generation equipment at the
station under a lease that expires in July 2005, with an extension option for
two additional years.
Transmission and Distribution Lines and Agreements
The Company owns or has significant ownership interests in four major 345
kV transmission lines, three 500 kV lines in Arizona, and owns the distribution
network within its retail service area. The Company is also a party to various
transmission and power exchange agreements that, together with its owned
transmission lines, enable the Company to obtain its energy entitlements from
its remote
5
generation sources at Palo Verde and Four Corners. Pursuant to standards
established by the North American Electric Reliability Council, the Company
operates its transmission system in a way that allows it to maintain complete
system integrity in the event of any one of these transmission lines being out
of service.
Springerville-Diablo Line. The Company owns a 310-mile, 345 kV
transmission line from TEP's Springerville Generating Plant near Springerville,
Arizona, to the Luna Substation near Deming, New Mexico, and to the Diablo
Substation near Sunland Park, New Mexico, providing an interconnection with TEP
for delivery of the Company's generation entitlements from Palo Verde and, if
necessary, Four Corners.
Arroyo-West Mesa Line. The Company owns a 202-mile, 345 kV transmission
line from the Arroyo Substation located near Las Cruces, New Mexico, to PNM's
West Mesa Substation located near Albuquerque, New Mexico. This is the primary
delivery point for the Company's generation entitlement from Four Corners, which
is transmitted to the West Mesa Substation over approximately 150 miles of
transmission lines owned by PNM.
Greenlee-Newman Line. As a participant in the Southwest New Mexico
Transmission Project Participation Agreement, the Company owns 40% of a 60-mile,
345 kV transmission line from TEP's Greenlee Substation in Arizona to the
Hidalgo Substation near Lordsburg, New Mexico, 57.2% of a 50-mile, 345 kV
transmission line between the Hidalgo Substation and the Luna Substation near
Deming, New Mexico, and 100% of an 86-mile, 345 kV transmission line between the
Luna Substation and the Newman Power Station. These lines provide an
interconnection with TEP for delivery of the Company's entitlements from Palo
Verde and, if necessary, Four Corners.
AMRAD-Eddy County Line. The Company owns 66.7% of a 125-mile, 345 kV
transmission line from the AMRAD Substation near Oro Grande, New Mexico, to the
Company's and TNP's high voltage direct current terminal at the Eddy County
Substation near Artesia, New Mexico. This terminal enables the Company to
connect its transmission system to that of SPS, providing the Company with
access to emergency power from SPS and power markets to the east.
Palo Verde Transmission. The Company owns 18.7% of two 45-mile, 500 kV
lines from Palo Verde to the Westwing Substation and a 75-mile, 500 kV line from
Palo Verde to the Kyrene Substation. These lines provide the Company with a
transmission path for delivery of power from Palo Verde.
Environmental Matters
The Company is subject to regulation with respect to air, soil and water
quality, solid waste disposal and other environmental matters by federal, state
and local authorities. These authorities govern current facility operations and
exercise continuing jurisdiction over facility modifications. Environmental
regulations can change rapidly and are difficult to predict. Substantial
expenditures may be required to comply with these regulations. The Company
analyzes the costs of its obligations arising from environmental matters on an
ongoing basis, and management believes it has made adequate provision in its
financial statements to meet such obligations. However, unforeseen expenses
associated with compliance could have a material adverse effect on the future
operations and financial condition of the Company.
6
Construction Program
The Company has no current plans to construct any new generating facilities
to serve retail customers through at least 2004. Utility construction
expenditures reflected in the following table consist primarily of expanding and
updating the electric transmission and distribution systems, and the cost of
improvements at and the purchase and installation of new steam generators for
Palo Verde. The Company's estimated cash construction costs for 2000 through
2003 are approximately $252 million. Actual costs may vary from the construction
program estimates shown. Such estimates are reviewed and updated periodically to
reflect changed conditions.
By Year (1) By Function
(In millions) (In millions)
------------------------------- -----------------------------
2000..................... $ 60 Production (1)......... $ 90
2001..................... 63 Transmission........... 16
2002..................... 64 Distribution........... 101
2003..................... 65 General................ 45
---- ----
Total.................. $252 Total................ $252
==== ====
_____________
(1) Does not include acquisition costs for nuclear fuel. See "Energy
Sources - Nuclear Fuel."
Energy Sources
General
The following table summarizes the percentage contribution of nuclear fuel,
natural gas, coal and purchased power to the total kWh energy mix of the
Company:
Years Ended December 31,
-------------------------------
Power Source 1999 1998 1997
-------- -------- --------
Nuclear fuel....................................... 55% 52% 53%
Natural gas........................................ 33 35 34
Coal............................................... 8 7 6
Purchased power.................................... 4 6 7
----- ----- -----
Total............................................ 100% 100% 100%
===== ===== =====
Allocated fuel and purchased power costs are generally passed through
directly to customers in Texas pursuant to applicable regulations. Historical
fuel costs and revenues are reconciled periodically in proceedings before the
Texas Commission to determine whether a refund or surcharge based on such
historical costs and revenues is necessary. Prior to the New Mexico Settlement
Agreement, the Company was required to make annual filings reconciling the
revenues collected under its New Mexico fixed fuel factor with its New Mexico
fuel and purchased power expenses. As a result of the New Mexico Settlement
Agreement, the fixed fuel factor has been incorporated into base rates. See
"Regulation - Texas Regulatory Matters" and "- New Mexico Regulatory Matters."
7
Nuclear Fuel
The Company has contracts for uranium concentrates which should be
sufficient to meet the Company's share of Palo Verde's operational requirements
through 2002. The Palo Verde Participants have contracted for sufficient
conversion services to provide for plant needs through 2000, but need to
contract for additional conversion services for 2001 and beyond. APS, as
operating agent for Palo Verde, expects that these services will be available on
the spot market or, alternatively, through long-term contract arrangements. The
Palo Verde Participants have an enrichment services contract which runs through
2002, with an option for five additional years.
Nuclear Fuel Financing. Pursuant to the ANPP Participation Agreement, the
Company owns an undivided interest in nuclear fuel purchased in connection with
Palo Verde. The Company has available a total of $100 million under a revolving
credit facility that provides for both working capital and up to $70 million for
the financing of nuclear fuel. At December 31, 1999, approximately $48.3
million had been drawn to finance nuclear fuel. This financing is accomplished
through a trust that borrows under the facility to acquire and process the
nuclear fuel. The Company is obligated to repay the trust's borrowings with
interest and has secured this obligation with First Mortgage Collateral Series
Bonds. In the Company's financial statements, the assets and liabilities of the
trust are reported as assets and liabilities of the Company.
Natural Gas
In 1999, the Company's natural gas requirements at the Rio Grande Power
Station were met with both short-term and long-term natural gas purchases from
various suppliers. Interstate gas is delivered under a firm ten-year
transportation agreement, which expires in 2001 with extension provisions
through 2005. Based on the current availability of economical and reliable
market natural gas supplies, the Company anticipates it will continue to
purchase natural gas at market prices on a monthly basis for a portion of the
fuel needs for the Rio Grande Power Station for the near term. To complement
these monthly purchases in 2000, the Company has entered into a one-year fixed-
price gas supply contract. The Company will continue to evaluate the
availability of short-term natural gas supplies versus long-term supplies to
maintain a reliable and economical supply for the Rio Grande Power Station.
In 1999, natural gas for the Newman and Copper Power Stations was supplied
primarily pursuant to a five-year intrastate natural gas contract which became
effective January 1, 1997 and expires December 31, 2001. Natural gas was also
provided to the Newman and Copper Power Stations pursuant to a similar long-term
interstate natural gas contract which supplements the intrastate contract and
also expires on December 31, 2001. To complement these long-term contracts, the
Company also evaluates and procures short-term natural gas supplies at market
prices to maintain a reliable and economical supply for the Newman and Copper
Power Stations.
Coal
APS, as operating agent for Four Corners, purchases Four Corners' coal
requirements from a supplier with a long-term lease of coal reserves owned by
the Navajo Nation. Based upon information from APS, the Company believes that
Four Corners has sufficient reserves of coal to meet the plant's operational
requirements for its useful life.
8
In 1999, upon final review of a study conducted by an outside engineering
firm, the Company reduced its estimated final reclamation and coal mine closure
liability related to the Company's interest in Four Corners from $14.8 million
to $8.2 million. The $6.6 million adjustment was recorded as a reduction of
energy expenses in the fourth quarter of 1999.
Purchased Power
To supplement its own generation and operating reserves, the Company
engages in firm and non-firm power purchase arrangements which may vary in
duration and amount based on evaluation of the Company's resource needs and
economics of the transactions.
9
Operating Statistics
Years Ended December 31,
-----------------------------------------
1999 1998 1997
---------- ---------- ----------
Operating revenues (In thousands):
Retail:
Residential................................................. $ 164,524 $ 173,215 $ 172,917
Commercial and industrial, small............................ 175,924 174,729 173,318
Commercial and industrial, large............................ 59,497 62,450 64,468
Sales to public authorities................................. 80,393 82,360 82,278
---------- ---------- ----------
Total retail.............................................. 480,338 492,754 492,981
---------- ---------- ----------
Wholesale:
Sales for resale............................................ 49,441 82,396 83,448
Economy sales............................................... 32,523 20,167 10,612
---------- ---------- ----------
Total wholesale........................................... 81,964 102,563 94,060
---------- ---------- ----------
Other......................................................... 8,167 6,506 4,980
---------- ---------- ----------
Total operating revenues................................ $ 570,469 $ 601,823 $ 592,021
========== ========== ==========
Number of customers (End of year):
Residential................................................... 266,627 260,356 254,348
Commercial and industrial, small.............................. 27,274 26,396 25,900
Commercial and industrial, large.............................. 124 117 115
Other......................................................... 3,957 3,867 3,811
---------- ---------- ----------
Total................................................... 297,982 290,736 284,174
========== ========== ==========
Average annual kWh use per residential customer................. 6,268 6,291 6,285
========== ========== ==========
Energy supplied, net, kWh (In thousands):
Generated..................................................... 8,392,890 8,586,098 8,186,187
Purchased and interchanged.................................... 328,225 478,396 617,651
---------- ---------- ----------
Total................................................... 8,721,115 9,064,494 8,803,838
========== ========== ==========
Energy sales, kWh (In thousands):
Retail:
Residential................................................. 1,653,859 1,621,436 1,587,733
Commercial and industrial, small............................ 1,943,120 1,891,703 1,834,953
Commercial and industrial, large............................ 1,133,751 1,314,428 1,271,449
Sales to public authorities................................. 1,135,438 1,120,654 1,090,312
---------- ---------- ----------
Total retail.............................................. 5,866,168 5,948,221 5,784,447
---------- ---------- ----------
Wholesale:
Sales for resale............................................ 905,975 1,757,880 1,897,885
Economy sales............................................... 1,497,880 888,708 640,017
---------- ---------- ----------
Total wholesale........................................... 2,403,855 2,646,588 2,537,902
---------- ---------- ----------
Total energy sales...................................... 8,270,023 8,594,809 8,322,349
Losses and Company use........................................ 451,092 469,685 481,489
---------- ---------- ----------
Total................................................... 8,721,115 9,064,494 8,803,838
========== ========== ==========
Native system:
Peak load, kW................................................. 1,159,000 1,167,000 1,122,000
Net generating capacity for peak, kW.......................... 1,500,000 1,500,000 1,500,000
Load factor................................................... 62.5% 63.1% 64.0%
========== ========== ==========
Total system:
Peak load, kW................................................. 1,287,000 1,439,000 1,442,000
Net generating capacity for peak, kW.......................... 1,500,000 1,500,000 1,500,000
Load factor................................................... 62.9% 64.3% 64.0%
========== ========== ==========
10
Regulation
General
In 1999, both Texas and New Mexico enacted electric utility industry
restructuring laws requiring competition in certain functions of the industry
and ultimately in the Company's service area. The New Mexico Restructuring Law
currently requires competition to begin on January 1, 2001. The Company
believes the New Mexico Commission may delay the start of competition, but
cannot predict the length of such delay, if any. Under the Texas Restructuring
Law, the Company's Texas service area is exempt from competition until the
expiration of the Freeze Period, currently scheduled to terminate in August
2005.
The Company is working to become more competitive in response to these new
restructuring laws as well as other regulatory, economic and technological
changes occurring throughout the industry. Deregulation of the production of
electricity and related services and increasing customer demand for lower priced
electricity and other energy services have accelerated the industry's movement
toward more competitive pricing and cost structures. These competitive
pressures could result in the loss of customers and diminish the ability of the
Company to fully recover its investment in generation assets. This issue is
particularly important to the Company because its rates are significantly higher
than national and regional averages. As a result of the initiation of
deregulation in New Mexico and other portions of Texas, the Company may face
increasing pressure on its retail rates and its rate freeze under the Texas Rate
Stipulation. The Company's results of operations and cash flows may be
adversely affected if it cannot maintain its current retail rates.
The Company is particularly concerned with the ultimate recoverability of
"stranded costs," or costs previously found by regulatory authorities to be
reasonable and prudent, but which are higher than would be recovered under
immediate, full competition. At the federal level, the FERC has announced,
through a formal rulemaking, its intention to allow 100% recovery of all
legitimate verifiable stranded costs attributable to FERC jurisdictional
customers. The Texas Restructuring Law exempts the Company's Texas service area
from retail competition, and preserves rates at their current levels, until the
end of its Freeze Period. The Company is prohibited from recovering stranded
costs or costs of transition to competition beyond the Freeze Period.
Under the New Mexico Restructuring Law, the New Mexico Commission may limit
the Company's recovery of its stranded costs. The New Mexico Restructuring Law
also allows for recovery of prudent costs related to transition to competition.
See "New Mexico Regulatory Matters - Deregulation" below.
Texas Regulatory Matters
The rates and services of the Company in Texas municipalities are regulated
by those municipalities, and in unincorporated areas by the Texas Commission.
The largest municipality in the Company's service area is the City of El Paso.
The Texas Commission has exclusive appellate jurisdiction to review municipal
orders and ordinances regarding rates and services in Texas and jurisdiction
over certain other activities of the Company. The decisions of the Texas
Commission are subject to judicial review.
11
Deregulation. The Texas Restructuring Law requires an electric utility to
separate its business activities into a power generation company, a retail
electric provider, and a transmission and distribution utility by January 1,
2002. The Texas Restructuring Law also requires a utility to separate its
customer energy services business from its regulated utility activities by
September 1, 2000. A utility may accomplish this separation through creation of
nonaffiliated companies, separate affiliated companies owned by a common holding
company, or through the sale of assets to third parties. Although the Company is
not subject to the Texas restructuring requirements until the expiration of the
Freeze Period, the Company is subject to the restructuring requirements of the
New Mexico Restructuring Law. See "New Mexico Regulatory Matters - Deregulation"
below.
The Texas Restructuring Law specifically recognizes and preserves the
substantial benefits the Company bargained for in its Texas Rate Stipulation and
Texas Settlement Agreement. The Texas Restructuring Law exempts the Company's
Texas service area from retail competition, and preserves rates at their current
levels until the end of its Freeze Period. At the end of the Freeze Period, the
Company will be subject to retail competition and will have no further claim for
recovery of stranded costs or costs of transition to competition. The Company
believes that its continued ability to provide bundled electric service at
current rates in its Texas service area will allow the Company to collect its
Texas jurisdictional stranded costs and costs of transition to competition.
Texas Rate Stipulation and Texas Settlement Agreement. The Company's rates
for its Texas customers are governed by a rate order entered by the Texas
Commission adopting the Texas Rate Stipulation and Agreed Order. The Agreed
Order implemented certain provisions of the Texas Rate Stipulation and set rates
consistent with the Texas Rate Stipulation. Among other things, under the Texas
Rate Stipulation: (i) the Company's base rates for most customers in Texas were
fixed for the ten-year Freeze Period which began in August 1995; (ii) the City
of El Paso granted the Company a new franchise that extends through the Freeze
Period; (iii) the Company retains 75% during the first five years of the Freeze
Period and 50% during the remainder of the Freeze Period of (a) the revenues
generated by providing third-party transmission services and (b) profit margins
from certain off-system power sales; (iv) the Company's reacquisition of the
Palo Verde leased assets was deemed to be in the public interest; and (v) all
appeals of Texas Commission orders concerning the Company and all outstanding
Texas Commission dockets concerning the Company's rates were resolved.
Neither the Texas Rate Stipulation nor the Agreed Order deprives the Texas
regulatory authorities of their jurisdiction over the Company during the Freeze
Period. However, the Texas Commission determined in the Agreed Order that the
rate freeze is in the public interest and results in just and reasonable rates.
Further, the signatories to the Texas Rate Stipulation (other than the OPC and
the State of Texas) agreed to not seek to initiate an inquiry into the
reasonableness of the Company's rates during the Freeze Period and to support
the Company's entitlement to rates at the freeze level throughout the Freeze
Period. The Company believes, but cannot assure, that its cost of service will
support rates at or above the freeze level throughout the Freeze Period and,
therefore, does not believe any attempt to reduce the Company's rates would be
successful. However, during the Freeze Period, the Company is precluded from
seeking rate increases in Texas, even in the event of increased operating or
capital costs. In the event of a merger, the parties to the Texas Rate
Stipulation retain all rights provided in the Texas Rate Stipulation, the right
to participate as a party in any proceeding related to the merger, and the right
to pursue a reduction in rates below the freeze level to the extent of post-
merger synergy savings.
12
Following the New Mexico Settlement Agreement (see "New Mexico Regulatory
Matters - New Mexico Settlement Agreement" below), the Company offered to enter
into a comparable agreement in Texas. Based upon that offer, the Company entered
into the Texas Settlement Agreement providing for: (i) a total annual
jurisdictional base rate reduction of approximately $15.4 million; (ii)
reconciliation of approximately $221.2 million of fuel revenues to fuel expenses
for the 42-month period ended December 31, 1998, with no disallowance; and (iii)
an agreement to use 50% of all Palo Verde performance rewards related to
evaluation periods after 1997, when collected, for low-income assistance and for
DSM programs, primarily focused on small business customers, through the end of
the Freeze Period. The Texas Settlement Agreement was filed with the Texas
Commission, the City of El Paso and all other municipalities having
jurisdiction. The Texas Commission approved the Texas Settlement Agreement in
June 1999.
Fuel. Pursuant to Texas Commission rules, the Company must periodically
make a filing to reconcile the revenues collected from Texas customers under its
fixed fuel factor with the actual fuel and purchased power expenses incurred.
Differences between revenues collected and expenses incurred during the
reconciliation period are subject to a refund (in the case of an overrecovery of
fuel costs) or surcharge (in the case of an underrecovery of fuel costs). The
Texas Commission staff, local regulatory authorities such as the City of El
Paso, and customers are entitled to intervene in a fuel reconciliation
proceeding and to challenge the prudence of fuel and purchased power expenses.
The Company's fuel expenses for its most recent reconciliation period of July
1995 through December 1998 were approved, with no disallowance, as part of the
Texas Settlement Agreement.
Palo Verde Performance Standards. The Texas Commission established
performance standards for the operation of Palo Verde, pursuant to which each
Palo Verde unit is evaluated annually to determine whether its three-year
rolling average capacity factor entitles the Company to a reward or subjects it
to a penalty. There are five performance bands based around a target capacity
factor of 70%. The capacity factor is calculated as the ratio of actual
generation to maximum possible generation. If the capacity factor, as measured
on a station-wide basis for any consecutive 24-month period, should fall below
35%, the Texas Commission could reconsider the rate treatment of Palo Verde,
regardless of the provisions of the Texas Rate Stipulation and the Texas
Settlement Agreement. The removal of Palo Verde from rate base could have a
significant negative impact on the Company's revenues and financial condition.
Performance rewards and penalties for the evaluation periods ending in 1997,
1996 and 1995, as well as an agreement regarding disposition of half of any
future rewards, were resolved in the Texas Settlement Agreement and the IRP
stipulation. The Company has calculated significant performance rewards for the
three-year periods ended December 31, 1999 and 1998. However, the ultimate
disposition of these rewards is subject to Texas Commission review during the
periodic fuel reconciliation proceedings discussed above. Performance rewards
are not recorded on the Company's books until a final determination has been
ordered by the Texas Commission in a fuel reconciliation proceeding. Performance
penalties are recorded when assessed as probable by the Company.
Integrated Resource Plan. Under Texas law and regulations of the Texas
Commission, the Company was required to file an IRP in June 1998. The Company's
IRP was the culmination of a lengthy planning process involving the Company, its
customers, the Texas Commission, consumer advocates and various special interest
groups. The purpose of integrated resource planning was to ensure acquisition of
the lowest cost, adequate resources necessary to meet the varied needs of the
Company and its customers, and to ensure the equitable allocation and
distribution of the benefits of such resource acquisitions and other system
benefits to all customer classes. The Company entered into an agreement with all
parties with respect to all IRP issues, and a Texas Commission order adopting
the agreement
13
was issued in January 1999. Pursuant to the agreement, the Company will meet its
resource needs through a combination of short-term purchased power and a DSM
program. Pursuant to the IRP, the Company expects to incur DSM expenditures
annually of approximately $1.0 million through 2001. Additionally, the Company
committed a total of approximately $1.0 million to fund a low-income
weatherization and energy efficiency program over a three-year period beginning
in 1999. Finally, in response to interest expressed by its customers and
encouragement from the Texas Commission and environmental advocates, the Company
has committed to the development of renewable resources. Pursuant to the
stipulation settling the IRP, the Company has pledged $3.6 million of prior Palo
Verde performance rewards, including related interest, collected by the Company
as a result of the Texas Settlement Agreement as initial financing for the
development of renewable resources. The Company does not believe the IRP
agreement will cause it to incur net costs materially in excess of those that
would have been incurred in the absence of its IRP. Nevertheless, because of the
Texas Rate Stipulation and the Texas Settlement Agreement, the Company will not
be able to increase its rates to recover any increase in net costs actually
experienced as a result of its IRP. Going forward, the Texas Restructuring Law
abolished the requirement for utilities to develop IRPs; therefore, the Company
will have no further IRP obligation after December 31, 2001.
New Mexico Regulatory Matters
The New Mexico Commission has jurisdiction over the Company's rates and
services in New Mexico and over certain other activities of the Company,
including prior approval of the issuance, assumption or guarantee of securities.
The New Mexico Commission's decisions are subject to judicial review. In January
1999, pursuant to a state constitutional amendment passed in 1996, the three-
member appointed commission was replaced by an elected commission from five
single-member districts, with regulatory responsibility for electricity, gas,
water, telecommunications, insurance and securities activities within the state.
The Company's New Mexico service area falls entirely within one district. The
largest city in the Company's New Mexico service territory is Las Cruces, which
in 1999 accounted for approximately 8% of the Company's total revenue.
Deregulation. The New Mexico Restructuring Law requires the Company to
reorganize its present corporate structure, separating its power generation and
energy services businesses, which will become competitive, from its transmission
and distribution business, which will remain regulated. Originally, utilities
were required to file transition plans addressing the various restructuring
issues, including the recovery of stranded costs, by March 1, 2000, which was
subsequently extended to June 1, 2000. On March 1, 2000, the Company filed the
first phase of its transition plan ("Transition Plan-Phase I") with the New
Mexico Commission, requesting approval of the Company's proposed corporate
reorganization under the New Mexico Restructuring Law. The Company filed its
Transition Plan-Phase I early to allow the Company to obtain regulatory and
other approvals necessary to complete its corporate separation by the January 1,
2001 deadline under the New Mexico Restructuring Law. The Company proposed to
separate its current operations into a power generation subsidiary, a
transmission and distribution subsidiary, and an energy services subsidiary, all
owned and controlled by a common holding company. The Company will file its
Transition Plan-Phase II by June 1, 2000, detailing the Company's proposed
processes and procedures to implement customer choice in New Mexico.
Under the New Mexico Restructuring Law, retail customer choice is currently
scheduled to begin January 1, 2001 for public post-secondary educational
institutions, public schools and residential and small business customers.
Retail customer choice is currently scheduled to begin January 1, 2002 for all
other customers. The New Mexico Restructuring Law allows a utility to recover at
least 50% of
14
its stranded costs with up to 100% recovery allowed if the New Mexico Commission
determines that additional recovery (i) is in the public interest, (ii) is
necessary to maintain the utility's financial integrity, (iii) is necessary to
continue adequate and reliable service, and (iv) will not cause an increase in
rates to residential and small business customers. The New Mexico Restructuring
Law, however, includes decommissioning costs as part of stranded costs. Because
the New Mexico Restructuring Law defines decommissioning costs as a stranded
cost, it is possible that the New Mexico Commission may allow only 50% recovery
of decommissioning costs. However, the New Mexico Restructuring Law also
specifically provides that nothing in the law should be interpreted as requiring
the New Mexico Commission to issue an order which would jeopardize the exclusive
use of the external sinking fund method for meeting decommissioning obligations
pursuant to federal guidelines. The Company believes this provision requires the
full recovery of New Mexico decommissioning requirements over the life of the
nuclear asset through a separate non-bypassable wires charge. The Company cannot
predict how the New Mexico Commission will ultimately treat this matter.
The New Mexico Restructuring Law allows the Company to recover reasonable,
prudent and unmitigated costs that the Company would not have incurred but for
its compliance with the New Mexico Restructuring Law. These transition costs do
not include stranded costs, costs the Company can collect under federally
approved rates or rates approved by the New Mexico Commission, or any costs the
Company would have incurred regardless of the New Mexico Restructuring Law. The
Company cannot predict whether the New Mexico Commission will allow the Company
to recover all of its transition costs.
The New Mexico Restructuring Law also allowed the New Mexico Commission to
review and either confirm, reject or modify the Company's New Mexico Settlement
Agreement. On November 30, 1999, the New Mexico Commission issued a final order
finding that the Company's New Mexico Settlement Agreement did not, under the
terms of the New Mexico Restructuring Law, constitute a plan or approval for
recovery of stranded costs. On December 30, 1999, the Company filed a motion for
rehearing requesting the New Mexico Commission to confirm that it would
determine the Company's stranded costs by using either (i) the stranded cost
recovery formula contained in the New Mexico Restructuring Law, applied to the
Company's generation asset values in effect prior to the rate base write-downs
contained in the New Mexico Settlement Agreement, or (ii) the Company's stranded
costs contained in the New Mexico Settlement Agreement. This would allow the
Company to either (i) preserve the stranded cost benefits obtained in the New
Mexico Settlement Agreement or (ii) be subject to the same stranded cost
provisions of the New Mexico Restructuring Law as every other electric utility
in New Mexico. On January 18, 2000, the New Mexico Commission issued an order
granting the Company's request.
New Mexico Settlement Agreement. In July 1998, the Company entered into
the New Mexico Settlement Agreement with certain parties, including the New
Mexico Commission staff and the New Mexico Attorney General, but not Las Cruces.
In September 1998, the New Mexico Commission issued an order adopting, with some
modification, the New Mexico Settlement Agreement. The New Mexico Settlement
Agreement became effective on October 26, 1998 and provides for (i) a total
annual jurisdictional base revenue reduction of $4.6 million; (ii) a 30-month
moratorium on rate increases or decreases in New Mexico; (iii) the elimination
of the need for future fuel reconciliations in New Mexico by incorporating the
existing fixed fuel factor into base rates; (iv) an increased degree of
ratemaking certainty for the future achieved by an agreement among the
signatories reducing the net value of certain assets by approximately $56
million on a New Mexico jurisdictional basis for ratemaking purposes (but with
no effect on book values), while establishing the signatories' agreement that
the
15
Company is entitled to 100% recovery of such revalued assets; and (v) the
ability to enter into long-term rate contracts with commercial and industrial
customers in New Mexico. Additionally, as a result of the New Mexico Settlement
Agreement, the Company will contribute $0.4 million annually ($1.0 million over
the term of the moratorium period) to a social services agency in Dona Ana
County providing assistance to low-income individuals. Although the New Mexico
Settlement Agreement was structured to allow recovery of previously
underrecovered fuel balances, the order adopting the New Mexico Settlement
Agreement does not support the recognition of this asset in the Company's
financial statements under existing accounting standards. The Company wrote off
the book value of undercollected fuel revenues in its New Mexico jurisdiction as
of September 30, 1998, which amounted to $3.8 million, net of tax, although the
Company believes that, based on current estimates of future fuel prices and
operating costs, it will recover 100% of these amounts.
Fuel. Prior to the New Mexico Settlement Agreement, the Company was
required to file annual reports reconciling the revenues collected under its New
Mexico fixed fuel factor with its New Mexico fuel and purchased power expenses,
along with the results of the application of Palo Verde performance standards.
As a result of the New Mexico Settlement Agreement, outstanding fuel issues from
filings in 1998 and 1997 were satisfactorily resolved with no disallowance of
fuel and purchased power costs or the performance rewards, and the existing
fixed fuel factor was incorporated into base rates.
Palo Verde Performance Standards. As a result of the New Mexico Settlement
Agreement, the Palo Verde performance standards, which had been in place since
1986, were eliminated. Consequently, the Company is no longer entitled to a
reward or exposed to a penalty in New Mexico resulting from the operations of
Palo Verde. The performance standards report filed with the New Mexico
Commission in January 1998 was the final such report and entitled the Company to
a reward of $1.1 million.
Federal Regulatory Matters
Federal Energy Regulatory Commission. The Company is subject to regulation
by the FERC in certain matters, including rates for wholesale power sales,
transmission of electric power and the issuance of securities.
On December 15, 1999, the FERC approved its final rule ("Order 2000") on
Regional Transmission Organizations ("RTOs"). Order 2000 strongly encourages,
but does not require, public utilities to form and join RTOs. Order 2000
establishes (i) the minimum characteristics and functions an RTO must satisfy to
obtain FERC acceptance; (ii) a collaborative process allowing public utilities
and non-public utilities that own, operate or control interstate transmission
facilities, consulting with state officials as appropriate, to consider and
develop RTOs; (iii) a proposal to consider transmission ratemaking returns on a
case-specific basis; (iv) opportunities for non-monetary regulatory benefits for
RTOs, including deference in dispute resolution and streamlined filing and
approval procedures; and (v) a time line for public utilities to make
appropriate filings with the FERC to initiate operation of RTOs. All public
utilities that own, operate or control interstate transmission facilities must
file, by October 15, 2000, either a proposal to participate in an RTO or an
alternative filing describing efforts and plans to participate in an RTO. Order
2000 also proposes RTO startup by December 15, 2001.
The Company is an active participant in the development of the Desert
Southwest Transmission and Reliability Operator ("Desert Star"). The Company
believes Desert Star will qualify as an RTO under Order 2000. The Company
intends, subject to the resolution of outstanding issues, to participate in
Desert Star. As a participating transmission owner, the Company will transfer
operations of its
16
transmission system to Desert Star. The Company believes the Desert Star
proposal will be submitted to the FERC by October 15, 2000. Desert Star is
currently scheduled to become operational by January 1, 2002. If Desert Star
fails to become operational, the Company intends to participate in another RTO
similar to Desert Star.
In April 1996, the FERC issued its Order No. 888, requiring all public
utilities owning, operating or controlling facilities used for transmitting
electricity in interstate commerce to allow access to their transmission
facilities under minimum terms and conditions of non-discriminatory service,
including transmission service for their own new wholesale sales and purchases
of electric energy. Additionally, Order No. 888 permits public utilities to seek
recovery of legitimate, prudent and verifiable stranded costs and provides a
mechanism for the recovery of such costs.
In April 1996, the FERC also issued Order No. 889, which requires all
public utilities owning, operating or controlling facilities used for
transmitting electricity in interstate commerce to develop and maintain an Open
Access Same-Time Information System that will give existing and potential
transmission users access to transmission-related information on a basis
consistent with that available to a utility's employees engaged in the buying
and selling of power. Order No. 889 further requires public utilities to
separate their transmission and generation marketing functions and adopt
standards of conduct ensuring that all open access transmission customers are
treated in a non-discriminatory manner.
Pursuant to Order No. 888, the Company filed its non-discriminatory open
access transmission tariffs with the FERC in July 1996. The Company reached a
settlement with the various parties regarding rates for transmission and
ancillary services under these tariffs. However, the settlement, which was filed
with the FERC in March 1997 and approved by the FERC in June 1998, did not
resolve issues that had been raised with respect to the manner in which the
Company will determine the amount of transmission capacity that is available for
use by third parties desiring to use its transmission system.
In May 1999, the FERC issued its opinion in a proceeding brought by SPS
regarding the use of the Company's transmission system to serve Las Cruces,
holding that once the Company's calculation of available transmission capacity
was adjusted to reflect the assumed discontinuation of service to Las Cruces and
CFE, the Company would have sufficient transmission capacity over the Eddy
County tie to meet SPS' request for firm transmission service. Although the
Company has filed a compliance filing as required by the FERC's order, the
filing reflects that the Company does not have sufficient transmission capacity
over the Eddy County tie to meet SPS' request for firm transmission service. The
Company filed a motion for rehearing of the FERC's decision. The FERC has
extended its time limit for ruling on this motion. The Company does not expect a
material financial impact from this FERC ruling. However, the Company is
concerned that of an adverse FERC ruling would result in impaired the
reliability of service to the Company's retail customers and increased costs.
This case will not be automatically dismissed under the settlement agreement
with Las Cruces because SPS, not Las Cruces, was the original complainant.
Although the SPS complaint was based upon the creation of a Las Cruces municipal
utility, the Company cannot predict whether the case will be dismissed as a
result of its settlement with Las Cruces.
On February 24, 2000, the Company and Las Cruces entered into a settlement
agreement ending Las Cruces' efforts to municipalize the Company's distribution
system in Las Cruces. Under the terms of the settlement agreement, all existing
litigation between the Company and Las Cruces,
17
including all litigation pending before the FERC, will be dismissed. For a
discussion of this settlement agreement, see Item 3, "Legal Proceedings -
Litigation with Las Cruces."
Department of Energy. The DOE regulates the Company's exports of power to
CFE in Mexico pursuant to a license granted by the DOE and a presidential
permit. The DOE has determined that all such exports over international
transmission lines shall be made in accordance with Order No. 888. The DOE is
authorized to assess operators of nuclear generating facilities for a share of
the costs of decommissioning the DOE's uranium enrichment facilities and for the
ultimate costs of disposal of spent nuclear fuel. See "Facilities - Palo Verde
Station - Spent Fuel Storage" for discussion of spent fuel storage and disposal
costs.
Nuclear Regulatory Commission. The NRC has jurisdiction over the Company's
licenses for Palo Verde and regulates the operation of nuclear generating
stations to protect the health and safety of the public from radiation hazards.
The NRC also has the authority to conduct environmental reviews pursuant to the
National Environmental Policy Act.
Wholesale Customers
The Company provides IID with 100 MW of firm capacity and associated energy
and 50 MW of system contingent capacity and associated energy pursuant to a 17-
year agreement which expires April 30, 2002. The Company also provides TNP with
up to 75 MW of firm power and associated energy pursuant to an agreement which
expires December 31, 2002. The contract allows TNP to specify a maximum annual
amount with one year's notice. TNP elected to receive up to 25 MW for 2000.
18
Executive Officers of the Company
Name Age Current Position and Business Experience
---- --- ----------------------------------------
James Haines.................. 53 Chief Executive Officer, President and Director since May 1996;
Executive Vice President and Chief Operating Officer of Western
Resources, Inc. from June 1995 to May 1996; Executive Vice
President and Chief Administrative Officer of Western Resources,
Inc. from April 1992 to June 1995.
Eduardo A. Rodriguez.......... 44 Senior Vice President - Energy Services since January 1999; Senior
Vice President - Customer and Corporate Services from August 1996
to January 1999; Senior Vice President since January 1994; General
Counsel from 1988 to August 1996.
Terry Bassham................. 39 Vice President and General Counsel since January 1999; General
Counsel since August 1996; Shareholder with Clark, Thomas &
Winters, P.C. from May 1993 to August 1996.
J. Frank Bates................ 49 Vice President - Transmission and Distribution since August 1996;
Vice President - Operations from May 1994 to August 1996.
Michael L. Blough............. 44 Vice President - Administration since August 1996; Vice President
since May 1995; Controller and Chief Accounting Officer from
November 1994 to August 1996.
Gary R. Hedrick............... 45 Vice President, Chief Financial Officer and Treasurer since August
1996; Treasurer since March 1996; Vice President - Financial
Planning and Rate Administration from September 1990 to August
1996.
John C. Horne................. 51 Vice President - Power Generation since August 1996; Vice President -
Power Supply from May 1994 to August 1996.
Helen Knopp................... 57 Vice President - Customer and Public Affairs since April 1999;
Executive Director of the Rio Grande Girl Scout Council from
September 1991 to April 1999.
Earnest A. Lehman............. 47 Vice President - Energy Services Business Group since January 1999;
Director of Rates of Western Resources, Inc. from January 1998 to
January 1999; Director of Wholesale Rates of Western Resources,
Inc. from January 1997 to January 1998; Vice President - Consumer
Sales of Westar Consumer Services from March 1996 to January 1997;
Executive Director of Marketing of Western Resources, Inc. from
December 1994 to March 1996.
Robert C. McNiel.............. 53 Vice President - New Mexico Affairs since December 1997; Vice
President -Public Affairs and Marketing from August 1996 to
December 1997; Vice President - New Mexico Division from December
1989 to August 1996.
Guillermo Silva, Jr........... 46 Secretary since January 1994.
The executive officers of the Company are elected annually and serve at the
discretion of the Board of Directors.
19
Item 2. Properties
The principal properties of the Company are described in Item 1,
"Business," and such descriptions are incorporated herein by reference.
Transmission lines are located either on private rights-of-way, easements or on
streets or highways by public consent. See Part II, Item 8, "Financial
Statements and Supplementary Data - Note F of Notes to Financial Statements" for
information regarding encumbrances against the principal properties of the
Company.
Item 3. Legal Proceedings
Litigation with Las Cruces
On February 24, 2000, the Company and Las Cruces entered into a settlement
agreement ending Las Cruces' efforts to municipalize the Company's distribution
assets and other facilities used to provide electric service to customers in Las
Cruces. Under the settlement agreement the Company will pay Las Cruces a one-
time lump sum payment of up to $21 million, $16.5 million of which was expensed
in the fourth quarter of 1999. The remaining $4.5 million relates to the
transfer of Las Cruces' West Mesa Substation and related facilities to the
Company. Las Cruces must substantiate the costs of building the West Mesa
Substation and related transmission and distribution facilities, subject to a
dollar for dollar offset against the $4.5 million purchase price for any amounts
not substantiated.
The settlement agreement also provides for Las Cruces and the Company to
enter into a seven-year franchise agreement with a 2% annual franchise fee
(approximately $0.8 million per year currently) for the provision of electric
distribution service. Las Cruces is prohibited during this seven-year period
from taking any action to condemn or otherwise attempt to acquire the Company's
distribution system, or attempt to operate or build its own electric
distribution system. Las Cruces will have a 90-day non-assignable option at the
end of the Company's seven-year franchise agreement to purchase the portion of
the Company's distribution system that serves Las Cruces at a purchase price of
130% of the Company's book value at that time. If Las Cruces exercises this
option, it is prohibited from reselling the distribution assets for two years.
If Las Cruces fails to exercise this option, the franchise and standstill
agreements will be extended for an additional two years.
Las Cruces also agreed that it will not contest the calculation of the
Company's stranded costs in New Mexico, provided the stranded costs charged to
Las Cruces customers do not exceed $52.9 million declining over time, which is
the amount initially ordered by the FERC in the Las Cruces stranded cost
proceeding. Las Cruces also agreed to assign all of its existing customer
contracts to the Company.
Under the terms of the settlement agreement, all existing litigation
between the Company and Las Cruces, including all litigation pending before the
FERC and the Federal District Court of New Mexico, will be dismissed. The
Company and Las Cruces are finalizing the written settlement agreement and
obtaining final approvals. The Company anticipates signing a definitive
agreement by the end of the first quarter of 2000.
20
Four Corners
In July 1995, the Navajo Nation enacted the Navajo Nation Air Pollution
Prevention and Control Act, the Navajo Nation Safe Drinking Water Act and the
Navajo Nation Pesticide Act (collectively, the "Acts"). In October 1995, the
Four Corners participants requested that the United States Secretary of the
Interior resolve their dispute with the Navajo Nation regarding whether the Acts
apply to operation of Four Corners. The Four Corners participants subsequently
filed a lawsuit in the District Court of the Navajo Nation, Window Rock
District, seeking, among other things, a declaratory judgment that (i) the Four
Corners leases and federal easements preclude the application of the Acts to the
operation of Four Corners and (ii) the Navajo Nation and its agencies and courts
lack adjudicatory jurisdiction to determine the enforceability of the Acts as
applied to Four Corners. In October 1995, the Navajo Nation and the Four Corners
participants agreed to stay the proceedings indefinitely so the parties may
attempt to resolve the dispute without litigation. This matter remains inactive
and the Company is unable to predict the outcome of this case.
Water Cases
San Juan River System. The Four Corners participants are among the
defendants in a suit filed by the State of New Mexico in 1975 in state district
court in New Mexico against the United States of America, the City of
Farmington, New Mexico, the Secretary of the Interior as Trustee for the Navajo
Nation and other Indian tribes and certain other defendants (State of New Mexico
ex rel. S. E. Reynolds, New Mexico State Engineer v. United States of America,
et al., Eleventh Judicial District Court, County of San Juan, State of New
Mexico, Cause No. 75-184). The suit seeks adjudication of the water rights of
the San Juan River Stream System in New Mexico, which, among other things,
supplies the water used at Four Corners. An agreement reached with the Navajo
Nation in 1985 provides that if Four Corners loses a portion of its water rights
in the adjudication, the tribe will provide sufficient water from its allocation
to offset the loss. The case has been inactive for many years and the Company is
unable to predict the outcome of this case.
Gila River System. In connection with the construction and operation of
Palo Verde, APS entered into contracts with certain municipalities granting APS
the right to purchase effluent for cooling purposes at Palo Verde. In 1986, a
summons was served on APS that required all water claimants in the Lower Gila
River Watershed in Arizona to assert any claims to water in an action pending in
Maricopa County Superior Court, titled In re The General Adjudication of All
Rights to Use Water in the Gila River System and Source. Palo Verde is located
within the geographic area subject to the summons and the rights of the Palo
Verde Participants to the use of groundwater and effluent at Palo Verde is
potentially at issue in this action. APS, as operating agent, filed claims that
dispute the Court's jurisdiction over the Palo Verde Participants' groundwater
rights and their contractual rights to effluent relating to Palo Verde and,
alternatively, seek confirmation of such rights. In November 1999, the Arizona
Supreme Court issued a decision confirming that certain groundwater rights may
be available to the federal government and Indian tribes. APS and other parties
have petitioned the United States Supreme Court for review of this decision. The
Company is unable to predict the outcome of this case.
21
Other Legal Proceedings
The Company is a party to various other claims, legal actions and
complaints. In many of these matters, the Company has excess casualty liability
insurance which is applicable. Based upon a review of these claims and
applicable insurance coverage, the Company believes that none of these claims
will have a material adverse effect on the financial position, results of
operations and cash flows of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
22
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock trades on the American Stock Exchange under the
symbol "EE." The high and low sales prices for the Company's common stock, as
reported in the consolidated reporting system of the American Stock Exchange,
for the periods indicated below, were as follows:
Sales Price
--------------------------
High Low
---------- -----------
1999
----
First Quarter........................ $ 8 15/16 $ 7
Second Quarter....................... 9 3/16 7 5/16
Third Quarter........................ 9 3/8 8 1/2
Fourth Quarter....................... 9 13/16 8 9/16
1998
----
First Quarter........................ $ 8 13/16 $ 6 3/8
Second Quarter....................... 10 3/8 8 9/16
Third Quarter........................ 9 15/16 7 9/16
Fourth Quarter....................... 9 3/4 8
As of March 13, 2000, there were 5,505 holders of record of the Company's
common stock.
Prior to September 1999, the Company's First and Second Supplemental
Indentures restricted the Company's ability to pay dividends on its common
stock. So long as the Company's First Mortgage Bonds are outstanding and the
series with the longest maturity was not rated "investment grade" by either
Standard & Poor's Rating Service ("S&P") or Moody's Investors Service, Inc.
("Moody's"), the Company was significantly limited in its ability to declare any
dividend on the common stock, other than in additional shares of common stock.
The Company's First Mortgage Bonds were upgraded to investment grade by S&P in
September 1999 and by Moody's in November 1999. While the First and Second
Supplemental Indentures do not currently restrict the Company's ability to pay
dividends on its common stock, the Company does not currently anticipate paying
dividends on its common stock in the near-term. The Company intends to continue
its deleveraging and stock repurchase programs with the goals of improving its
capital structure and using free cash flow to its highest economic advantage.
In May 1999, the Company's Board of Directors approved a stock repurchase
program allowing the Company to purchase outstanding shares of its common stock
from time to time, up to a total of six million shares. The Company will make
purchases primarily in the open market at prevailing prices and will also engage
in private transactions, if appropriate. The shares that the Company acquires
will be available for issuance under employee benefit and stock option plans or
may be retired. As of March 10, 2000, the Company had repurchased 5,747,995
shares of common stock at a cost of approximately $51.9 million, including
commissions.
23
In March 1999, after obtaining required consents of holders of certain of
the Company's outstanding debt securities, the Company redeemed its Series A
Preferred Stock. The Company paid the redemption price of approximately $139.6
million, accrued cash dividends of $1.3 million and premium, fees and costs of
securing the consents aggregating $9.6 million. See Part II, Item 8, "Financial
Statements and Supplementary Data - Note E of Notes to Financial Statements" for
additional information regarding preferred stock.
24
Item 6. Selected Financial Data
As of and for the following periods (In thousands except for share data):
Period From Period From
February 12 January 1
to to Year Ended
Years Ended December 31, December 31, February 11, December 31,
---------------------------------------
1999 1998 1997 1996 | 1996 1995
----------- ----------- ----------- ----------- | ----------- ------------
|
Operating revenues.......................... $ 570,469 $ 601,823 $ 592,021 $ 521,921 | $ 54,672 $ 502,213
Operating income............................ 157,336 159,717 159,636 142,438 | 1,362 47,470
Income (loss) before extraordinary items.... 43,809 57,073 54,568 41,919 | 118,198 (33,319)
Extraordinary loss on repurchases of debt, |
net of income tax benefit.................. (3,336) - (2,775) - | - -
Extraordinary gain on discharge of debt, |
net of income tax expense.................. - 3,343 - - | 264,273 -
Net income (loss) applicable to common |
stock...................................... 28,276 45,709 38,649 31,431 | 382,471 (33,319)
Basic earnings (loss) per common share: |
Income (loss) before extraordinary items... 0.533 0.704 0.689 0.523 | 3.325 (0.937)
Extraordinary loss on repurchases of debt, |
net of income tax benefit................. (0.057) - (0.046) - | - -
Extraordinary gain on discharge of debt, |
net of income tax expense................. - 0.056 - - | 7.435 -
Net income (loss).......................... 0.476 0.760 0.643 0.523 | 10.760 (0.937)
Weighted average number of common |
shares outstanding......................... 59,349,468 60,168,234 60,128,505 60,073,808 | 35,544,330 35,544,330
Diluted earnings (loss) per common share: |
Income (loss) before extraordinary items... 0.529 0.699 0.685 0.523 | 3.325 (0.937)
Extraordinary loss on repurchases of debt, |
net of income tax benefit................. (0.056) - (0.046) - | - -
Extraordinary gain on discharge of debt, |
net of income tax expense................. - 0.055 - - | 7.435 -
Net income (loss).......................... 0.473 0.754 0.639 0.523 | 10.760 (0.937)
Weighted average number of common shares |
and dilutive potential common shares |
outstanding................................ 59,731,649 60,633,298 60,437,632 60,116,709 | 35,544,330 35,544,330
Cash additions to utility property, plant |
and equipment.............................. 53,705 49,787 46,467 33,926 | 4,724 68,453
Total assets................................ 1,625,891 1,891,219 1,812,613 1,846,190 1,910,354 | 1,809,891
Long-term debt and financing and capital |
lease obligations.......................... 811,607 897,062 966,810 1,046,173 1,164,328 | -
Debt and obligations subject to compromise.. - - - - - | 1,608,091
Preferred stock............................. - 135,744 121,319 108,426 100,000 | 81,464
Common stock equity (deficit)............... 421,258 417,278 369,640 331,257 300,000 | (418,763)
=========== =========== =========== =========== =========== |============
On February 12, 1996, the Company emerged from a bankruptcy proceeding
which it instituted in January 1992. The Company's financial statements for
periods after February 12, 1996 are not comparable to the Company's financial
statements for periods before February 12, 1996 due to the application of
"fresh-start" reporting at that date. A vertical line is shown in the above
selected financial data to separate the respective financial information and
indicate that it has not been prepared on a consistent basis of accounting.
The selected financial data should be read in conjunction with Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and Item 8, "Financial Statements and Supplementary Data."
25
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Statements in this document, other than statements of historical
information, are forward-looking statements that are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements, as well as other oral and written forward-looking
statements made by or on behalf of the Company from time to time, including
statements contained in the Company's filings with the Securities and Exchange
Commission and its reports to shareholders, involve known and unknown risks and
other factors which may cause the Company's actual results in future periods to
differ materially from those expressed in any forward-looking statements. Any
such statement is qualified by reference to the risks and factors discussed
below under the headings "Overview" and "Liquidity and Capital Resources," as
well as in the Company's filings with the Securities and Exchange Commission,
which are available from the Securities and Exchange Commission or which may be
obtained upon request from the Company. The Company cautions that the risks and
factors discussed below and in such filings are not exclusive. The Company does
not undertake to update any forward-looking statement that may be made from time
to time by or on behalf of the Company.
Overview
El Paso Electric Company is an electric utility that serves retail
customers in west Texas and southern New Mexico and wholesale customers in
Texas, New Mexico, California and Mexico. The Company owns or has substantial
ownership interests in five electrical generating facilities providing it with a
total capacity of approximately 1,500 MW. The Company's energy sources consist
of nuclear fuel, natural gas, coal and purchased power. The Company owns or has
significant ownership interests in four major 345 kV transmission lines and
three 500 kV lines to provide power from Palo Verde, and owns the distribution
network within its retail service territory. The Company is subject to extensive
regulation by the Texas and New Mexico Commissions and, with respect to
wholesale power sales, transmission of electric power and the issuance of
securities, by the FERC.
The Company faces a number of risks and challenges that could negatively
impact its operations and financial results. The most significant of these risks
and challenges arise from the deregulation of the electric utility industry, the
possibility of increased costs, especially from Palo Verde, and the Company's
high level of debt.
The electric utility industry in general and the Company in particular are
facing significant challenges and increased competition as a result of changes
in federal provisions relating to third-party transmission services and
independent power production, as well as changes in state laws and regulatory
provisions relating to wholesale and retail service. Both Texas and New Mexico
recently passed legislation that requires the Company to separate its
transmission and distribution functions from its generation business and
mandates competition in the Company's retail service territory in the future.
The Company faces certain risks inherent in separating the Company into
affiliates, including the possible loss of operational and administrative
efficiencies. In addition to the operational challenges created by separating
functions that have historically operated within a single entity, there is
substantial uncertainty as to whether the New Mexico legislation will
effectively permit the Company to recover its stranded costs, including the
costs of decommissioning, in full. The potential effects of deregulation are
particularly important to the Company because its rates are significantly higher
than the national and
26
regional averages. In the face of increased competition, there can be no
assurance that this competition will not adversely affect the future operations,
cash flows and financial condition of the Company.
The changing regulatory environment and the advent of customer choice have
created a substantial risk that the Company will lose important customers. For
several years, the Company has been engaged in litigation with Las Cruces, which
accounted for approximately 8% of the Company's revenues in 1999, over Las
Cruces' attempts to create a municipal utility. The parties have settled the
litigation, but the risk of loss of customers remains. The Company's wholesale
and large retail customers already have, in varying degrees, additional
alternate sources of economical power, including co-generation of electric
power. For example, a 504 MW combined-cycle generating plant located in
Samalayuca, Chihuahua, Mexico, which became fully operational at the end of
1998, gave CFE the current capacity to supply electricity to portions of
northern Chihuahua and allowed CFE to eliminate substantially all purchases of
power from the Company in 1999. Additionally, American National Power, Inc., a
wholly-owned subsidiary of National Power PLC, has announced it is exploring the
possibility of building a generation plant in El Paso, Texas. If the Company
loses a significant portion of its retail customer base or wholesale sales, the
Company may not be able to replace such revenues through either the addition of
new customers or an increase in rates to remaining customers.
Another risk to the Company is potential increased costs, including the
risk of additional or unanticipated costs at Palo Verde resulting from (i)
increases in operation and maintenance expenses; (ii) the replacement of steam
generators; (iii) an extended outage of any of the Palo Verde units; (iv)
increases in estimates of decommissioning costs; (v) the storage of radioactive
materials; and (vi) compliance with the various requirements and regulations
governing commercial nuclear generating stations. At the same time, the
Company's rates, which have been reduced from previous levels as a result of the
New Mexico Settlement Agreement and the Texas Settlement Agreement, are
effectively capped through the rate freeze periods. Additionally, upon
initiation of competition, there will be competitive pressure on the Company's
power generation rates. There can be no assurance that the Company's revenues
will be sufficient to recover any increased costs, including any increased costs
in connection with Palo Verde or increases in other costs of operation, whether
as a result of higher than anticipated levels of inflation, changes in tax laws
or regulatory requirements, or other causes.
Liquidity and Capital Resources
The Company's principal liquidity requirements in the near-term are
expected to consist of interest and principal payments on the Company's
indebtedness, capital expenditures related to the Company's generating
facilities and transmission and distribution systems and the $21 million payment
required under the settlement agreement with Las Cruces. The Company expects
that cash flows from operations will be sufficient for such purposes, except
that it may be necessary to finance a portion of the Las Cruces payment in the
short-term by drawing on its line of credit.
Long-term capital requirements of the Company will consist primarily of
construction of electric utility plant and payment of interest on and retirement
of debt. The Company has no current plans to construct any new generating
capacity to serve retail load through at least 2004. Utility construction
expenditures will consist primarily of expanding and updating the transmission
and distribution systems and the cost of capital improvements and replacements
at Palo Verde and other generating facilities, including the replacement of the
Palo Verde Unit 2 steam generators.
27
At December 31, 1999, the Company had approximately $37.2 million in cash
and cash equivalents. In February 1999, the Company renewed its $100 million
revolving credit facility, which now provides up to $70 million for nuclear fuel
purchases and up to $50 million (depending on the amount of borrowings
outstanding for nuclear fuel purchases) for working capital needs. At December
31, 1999, approximately $48.3 million had been drawn for nuclear fuel purchases.
No amounts have been drawn on this facility for working capital needs.
The Company has a high debt to capitalization ratio and significant debt
service obligations. Due to the Texas Rate Stipulation, the Texas Settlement
Agreement, the New Mexico Settlement Agreement and competitive pressures, the
Company does not expect to be able to raise its base rates in the event of
increases in non-fuel costs, increases in fuel costs in New Mexico or loss of
revenues. Accordingly, as described below, debt reduction continues to be a high
priority for the Company in order to gain additional financial flexibility to
address the evolving competitive market. In March 1999, the Company used cash on
hand to pay for the early redemption of its Series A Preferred Stock, which
resulted in the avoidance of additional cash dividends of approximately $2.7
million that would have been payable through May 1, 1999, and $4.0 million
quarterly thereafter until mandatory redemption in 2008. The preferred stock had
an annual dividend rate of 11.40%, which was paid through the issuance of
additional shares of preferred stock for the first three years of the issue.
The Company has significantly reduced its long-term debt since its
emergence from bankruptcy in 1996. From June 1, 1996 through March 10, 2000, the
Company repurchased approximately $327.8 million of first mortgage bonds as part
of an aggressive deleveraging program and repaid the remaining $36.0 million of
Series A First Mortgage Bonds at their maturity in February 1999. The foregoing,
together with the early redemption of Series A Preferred Stock, have reduced the
Company's annual interest expense and annual cash dividend requirements by
approximately $28.9 million and $15.9 million, respectively. Common stock equity
as a percentage of capitalization, excluding current maturities of long-term
debt, has increased from 19% at June 30, 1996 to 34% at December 31, 1999. In
addition, the Company's bonds are now rated investment grade by all four major
credit rating agencies.
In May 1999, the Company's Board of Directors approved a stock repurchase
program allowing the Company to purchase outstanding shares of its common stock
from time to time, up to a total of six million shares. The Company will make
purchases primarily in the open market at prevailing prices and will also engage
in private transactions, if appropriate. The shares that the Company acquires
will be available for issuance under employee benefit and stock option plans or
may be retired. As of March 10, 2000, the Company had repurchased 5,747,995
shares of common stock at a cost of approximately $51.9 million, including
commissions.
The Company continues to believe that the orderly reduction of debt with a
goal of achieving a capital structure that is more typical in the electric
utility industry is a significant component of long-term shareholder value
creation. Accordingly, the Company will regularly evaluate market conditions
and, when appropriate, use a portion of its available cash to reduce its fixed
obligations through open market purchases of first mortgage bonds.
The degree to which the Company is leveraged could have important
consequences on the Company's liquidity, including (i) the Company's ability to
obtain additional financing for working capital, capital expenditures,
acquisitions, general corporate or other purposes could be limited in the
28
future and (ii) the Company's higher than average leverage may place the Company
at a competitive disadvantage by limiting its financial flexibility to respond
to the demands of the competitive market and make it more vulnerable to adverse
economic or business changes.
Historical Results of Operations
Years Ended December 31,
------------------------------------------
1999 1998 1997
------- ------ -------
Net income applicable to common stock
before extraordinary items (In thousands)............ $31,612 $42,366 $41,424
Diluted earnings per common share
before extraordinary items........................... 0.529 0.699 0.685
Results of operations for the year ended December 31, 1999 were affected by
unusual or infrequent items including (i) the recognition of certain items
arising from the Texas Settlement Agreement; (ii) a change in estimated fuel
cost reserves; (iii) an adjustment reducing fuel expense based on a reduction of
the Company's estimated coal mine reclamation liability; (iv) a charge to
earnings of $10.1 million, net of tax, as a result of the settlement agreement
with Las Cruces; (v) a one-time charge to earnings of $2.5 million, net of tax,
resulting from the write-off of interest capitalized prior to 1999 on postload
nuclear fuel; and (vi) the early redemption of the Company's 11.40% Series A
Preferred Stock. Results of operations for 1998 reflect a charge to earnings of
$3.8 million, net of tax, as a result of the New Mexico Settlement Agreement,
and 1997 results reflect a favorable litigation settlement of $4.6 million, net
of legal fees, expenses and tax.
Operating revenues net of energy expenses decreased $11.1 million in 1999,
compared to 1998 as follows (In thousands):
Years Ended December 31: 1999 1998 Increase/(Decrease)
- ------------------------ -------------- -------------- --------------------
Total operating revenues net of energy expenses. $ 460,672 $ 471,763 $ (11,091)
Less:
Texas Settlement Agreement:
Palo Verde performance reward................ 3,453 - 3,453
Retroactive base rate decrease............... (2,343) - (2,343)
Change in estimated fuel cost reserves......... 3,754 895 2,859
Coal mine reclamation adjustment............... 6,601 - 6,601
----------- ------------ -----------------
$ 449,207 $ 470,868 $ (21,661)
=========== ============ =================
Excluding the effects of the unusual or infrequent items shown above, the
decrease of $21.7 million was primarily due to the rate reductions in Texas and
New Mexico and the loss of sales to CFE. These decreases were partially offset
by increased economy sales.
Operating revenues net of energy expenses increased $13.3 million in 1998
compared to 1997 primarily due to increased economy sales at higher margins and
a $1.3 million increase in ESBG revenues.
29
Operating revenues from retail customers shown below include the effects of
the retroactive base rate decrease, the recognition of the Palo Verde
performance reward and the changes in estimated fuel cost reserves for the years
ended December 31, 1999 and 1998, as applicable. Comparisons of kWh sales and
operating revenues are shown below (In thousands):
Increase/(Decrease)
-------------------------
Years Ended December 31: 1999 1998 Amount Percent
- ------------------------ ------------- ------------- ----------- -----------
Electric kWh sales:
Retail.................................. 5,866,168 5,948,221 (82,053) (1.4)%
Sales for resale........................ 905,975 1,757,880 (851,905) (48.5) (1)
Economy sales........................... 1,497,880 888,708 609,172 68.5
---------- ---------- ---------
Total.................................. 8,270,023 8,594,809 (324,786) (3.8)
========== ========== =========
Operating revenues:
Retail.................................. $ 488,505 $ 499,260 $ (10,755) (2.2)%
Sales for resale........................ 49,441 82,396 (32,955) (40.0) (1)
Economy sales........................... 32,523 20,167 12,356 61.3
---------- ---------- ---------
Total.................................. $ 570,469 $ 601,823 $ (31,354) (5.2)
========== ========== =========
________________________
(1) The Company's one-year sales agreement for firm capacity and associated
energy sales to CFE terminated on December 31, 1998.
Increase/(Decrease)
-------------------------
Years Ended December 31: 1998 1997 Amount Percent
- ------------------------ ------------- ------------- ----------- -----------
Electric kWh sales:
Retail.................................. 5,948,221 5,784,447 163,774 2.8%
Sales for resale........................ 1,757,880 1,897,885 (140,005) (7.4)
Economy sales........................... 888,708 640,017 248,691 38.9
---------- ---------- ---------
Total.................................. 8,594,809 8,322,349 272,460 3.3
========== ========== =========
Operating revenues:
Retail.................................. $ 499,260 $ 497,961 $ 1,299 0.3%
Sales for resale........................ 82,396 83,448 (1,052) (1.3)
Economy sales........................... 20,167 10,612 9,555 90.0
---------- ---------- ---------
Total.................................. $ 601,823 $ 592,021 $ 9,802 1.7
========== ========== =========
30
Other operations and maintenance expense decreased $0.7 million in 1999
compared to 1998 due to decreased other operations expense of $2.1 million
partially offset by increased maintenance expense of $1.4 million, as follows
(In thousands):
Years Ended December 31: 1999 1998 Increase/(Decrease)
- ------------------------ -------------- -------------- ---------------------
Regulatory expense........................ $ 1,578 $ 6,043 $ (4,465)
Pensions and benefits expense............. 15,596 19,940 (4,344)
Customer accounts expense................. 5,014 3,132 1,882
Outside services expense.................. 9,790 8,008 1,782
Non-nuclear generation expense............ 5,199 3,672 1,527
Other..................................... 97,419 95,879 1,540
----------- ----------- ------------
Total other operations expense......... 134,596 136,674 (2,078)
Total maintenance expense................. 36,307 34,955 1,352
----------- ----------- ------------
Total other operations and
maintenance expense............... $ 170,903 $ 171,629 $ (726)
=========== =========== ============
Other operations and maintenance expense increased $4.9 million in 1998
compared to 1997 due to increased other operations expense of $4.7 million and
increased maintenance expense of $0.2 million, as follows (In thousands):
Years Ended December 31: 1998 1997 Increase/(Decrease)
- ------------------------ -------------- -------------- ---------------------
All employee bonus plan................... $ 5,000 $ 2,200 $ 2,800
Energy Services Business Group expense.... 2,424 14 2,410
Pensions and benefits expense............. 19,940 17,774 2,166
Regulatory expense........................ 6,043 3,918 2,125
Outside services expense.................. 8,008 11,814 (3,806)
Injuries and damages expense.............. 2,158 3,632 (1,474)
Other..................................... 93,101 92,578 523
----------- ----------- ------------
Total other operations expense......... 136,674 131,930 4,744
Total maintenance expense................. 34,955 34,782 173
----------- ----------- ------------
Total other operations and
maintenance expense................. $ 171,629 $ 166,712 $ 4,917
=========== =========== ============
The New Mexico Settlement charge of $6.3 million in 1998 represents the
write-off of the book value of undercollected fuel revenues in the Company's New
Mexico jurisdiction. See Part I, Item 1, "Business - Regulation - New Mexico
Regulatory Matters - New Mexico Settlement Agreement" for further discussion.
Depreciation and amortization expense increased $1.1 million in 1999
compared to 1998 and in 1998 compared to 1997 primarily due to increases in
depreciable plant balances.
Taxes other than income taxes decreased $2.8 million in 1999 compared to
1998 primarily due to (i) a $3.1 million reversal of sales tax reserves
established in prior years and (ii) a decrease in Arizona property taxes as a
result of depreciation and a decrease in the assessment ratio in 1999. The
decreases were partially offset by (i) an increase in Texas franchise tax
resulting from a refund in 1998 with no comparable amount in 1999 and (ii) a
1999 reclassification of payroll taxes related to the 1998 all
31
employee cash bonus. The increase of $1.0 million in 1998 compared to 1997 was
primarily due to (i) an increase in Texas property taxes and (ii) an increase in
revenue related taxes resulting from an increase in revenues in 1998. These
increases were partially offset by a decrease in Arizona property taxes due to a
decrease in the assessment ratio in 1998.
Other income decreased $20.7 million in 1999 compared to 1998 primarily due
to (i) the accrual in 1999 of the $16.5 million to be paid under the settlement
agreement with Las Cruces; (ii) a decrease in investment income of $6.4 million
resulting from the investment of lower levels of cash and the investment of a
portion of decommissioning trust funds in equity securities, the unrealized
gains and losses on which are reported as other comprehensive income; and (iii)
a favorable settlement of bankruptcy professional fees of $1.3 million in 1998
with no comparable amount in 1999. These decreases were partially offset by (i)
an adjustment of $1.7 million to the cash value of Company-owned life insurance
policies, which was not previously recognized due to the uncertainty of
recoverability from the insurer; and (ii) a gain realized on the disposition of
non-utility property of $2.4 million in 1999 compared to $0.7 million in 1998.
The decrease of $2.3 million in 1998 compared to 1997 was primarily due to a
favorable litigation settlement in 1997 of $7.5 million, net of legal fees and
expenses, partially offset by an increase in investment income of $5.1 million
resulting from the investment of higher levels of cash.
Interest charges decreased $0.7 million in 1999 compared to 1998 primarily
due to a reduction in outstanding debt as a result of open market purchases and
redemptions of the Company's first mortgage bonds. This decrease was partially
offset by adjustments to postload nuclear fuel to (i) write-off a portion of
accumulated interest capitalized prior to 1999 and (ii) discontinue capitalizing
interest in 1999. The decrease of $4.7 million in 1998 compared to 1997 was
primarily due to a reduction in outstanding debt as a result of open market
purchases of the Company's first mortgage bonds.
Income tax expense, excluding the tax effect of extraordinary items,
decreased $9.1 million in 1999 compared to 1998 primarily due to changes in
pretax income, including the payment under the settlement agreement with Las
Cruces, and certain permanent differences including an adjustment to the cash
value of Company-owned life insurance policies and tax-exempt income. Income
tax expense, excluding the tax effect of extraordinary items, was essentially
unchanged for 1998 compared to 1997 primarily due to changes in pretax income
which were offset by permanent differences such as bankruptcy fee settlements
and tax-exempt income.
Extraordinary loss on repurchases of debt of $3.3 million and $2.8 million
in 1999 and 1997, respectively, net of income tax benefit of $2.1 million and
$1.5 million, represents the payment of premiums on debt repurchased and the
recognition of unamortized issuance expenses on that debt with no comparable
amounts in 1998.
Extraordinary gain on discharge of debt of $3.3 million in 1998, net of
income tax expense of $2.1 million, represents unclaimed and undistributed funds
designated for the payment of preconfirmation bankruptcy claims which reverted
to the Company.
For the last several years, inflation has been relatively low and,
therefore, has had little impact on the Company's results of operations and
financial condition.
32
There are no new accounting standards pending implementation by the Company
which would have a material effect on the Company's financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The following discussion regarding the Company's market-risk sensitive
instruments contains forward-looking information involving risks and
uncertainties. The statements regarding potential gains and losses are only
estimates of what could occur in the future. Actual future results may differ
materially from those estimates presented due to the characteristics of the
risks and uncertainties involved.
The Company is exposed to market risk due to changes in interest rates,
equity prices and commodity prices. Substantially all financial instruments and
positions held by the Company described below are held for purposes other than
trading.
Interest Rate Risk
The Company's interest rate risk relates primarily to debt financing issued
to fund capital and nuclear fuel requirements. Currently, the Company does not
have a plan to issue long-term debt within the next five years. The Company's
long-term debt obligations are all fixed-rate obligations with varying
maturities, except for the pollution control revenue bonds which are variable-
rate bonds and nuclear fuel financing which is based on floating rates. The
Company's variable-rate pollution control revenue bonds have an aggregate
principal amount of $193.1 million. The near-term losses from reasonably
possible near-term increases in interest rates would not be material to the
Company's financial position, results of operations and cash flows. The
interest rate risk related to nuclear fuel financing is substantially mitigated
through the operation of the Company's fuel and purchased power cost recovery
clauses ("fuel clauses") in its Texas and wholesale rates. Under these fuel
clauses, fuel expenses, including interest expense on nuclear fuel financing,
are passed through to the customers. Pursuant to the New Mexico Settlement
Agreement, fuel costs are recovered through the Company's base rates and are not
subject to periodic reconciliation for fluctuations in fuel costs. The near-
term losses from reasonably possible near-term increases in interest rates
related to nuclear fuel financing for New Mexico fuel costs would not be
material to the Company's financial position, results of operations and cash
flows.
The Company's decommissioning trust funds consist of municipal bonds and
equity securities and are carried at their market value. The Company faces
interest rate risk related to the municipal bonds, which were valued at $24.2
million as of December 31, 1999. A hypothetical 10% increase in the rates
quoted by the bond market would result in a $2.4 million reduction in fair
value.
Equity Price Risk
The Company's decommissioning trust funds include marketable equity
securities of approximately $32.9 million at December 31, 1999. A hypothetical
20% decrease in the prices quoted by stock exchanges would result in a $6.6
million reduction in fair value.
33
Commodity Price Risk
The Company utilizes contracts of various durations for the purchase of
natural gas, uranium concentrates and coal to effectively manage its available
fuel portfolio. These agreements contain fixed-priced and variable-priced
provisions and are settled by physical delivery. The contracts with variable-
pricing provisions are exposed to fluctuations in prices due to unpredictable
factors, such as weather, which impacts supply and demand. However, the
Company's exposure to fuel price risk is substantially mitigated through the
operation of its fuel clauses for Texas and wholesale customers as described
above. Pursuant to the New Mexico Settlement Agreement, fuel costs are recovered
through the Company's base rates and are not subject to periodic reconciliation
for fluctuations in fuel costs. The near-term losses from reasonably possible
near-term increases in market prices as they relate to the commodity price risk
exposure for New Mexico fuel costs would not be material to the Company's
financial position, results of operations and cash flows.
In the normal course of business, the Company utilizes contracts of various
duration for the forward sale and purchases of electricity to effectively manage
its available generating capacity. Such contracts include forward contracts for
wholesale sales of generating capacity and energy during periods when the
Company's available power resources are expected to exceed the requirements of
its native load and wholesale customers. It may also include forward contracts
for the purchase of wholesale capacity and energy during periods when the market
price of electricity is below the Company's expected incremental power
production costs. At December 31, 1999, there were no material open positions
in these activities.
34
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Page
------
Independent Auditors' Report................................................................. 36
Balance Sheets at December 31, 1999 and 1998................................................. 37
Statements of Operations for the years ended December 31, 1999, 1998 and 1997................ 39
Statements of Comprehensive Operations for the years ended December 31, 1999, 1998 and
1997........................................................................................ 40
Statements of Changes in Common Stock Equity for the years ended December 31, 1999, 1998 and
1997........................................................................................ 41
Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997................ 42
Notes to Financial Statements................................................................ 43
35
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
El Paso Electric Company
We have audited the accompanying balance sheets of El Paso Electric Company as
of December 31, 1999 and 1998 and the related statements of operations,
comprehensive operations, changes in common stock equity, and cash flows for the
years ended December 31, 1999, 1998 and 1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. 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, the financial statements referred to above present fairly, in
all material respects, the financial position of El Paso Electric Company as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the years ended December 31, 1999, 1998 and 1997, in conformity with
generally accepted accounting principles.
KPMG LLP
El Paso, Texas
February 11, 2000
36
EL PASO ELECTRIC COMPANY
BALANCE SHEETS
ASSETS December 31,
---------------------------------
(In thousands) 1999 1998
---------- ----------
Utility plant:
Electric plant in service........................................ $1,626,224 $1,599,207
Less accumulated depreciation and amortization................... 329,165 243,405
---------- ----------
Net plant in service.......................................... 1,297,059 1,355,802
Construction work in progress.................................... 61,842 54,641
Nuclear fuel; includes fuel in process of $8,994 and
$8,031, respectively.......................................... 78,891 89,784
Less accumulated amortization.................................... 39,355 45,691
---------- ----------
Net nuclear fuel.............................................. 39,536 44,093
---------- ----------
Net utility plant........................................... 1,398,437 1,454,536
---------- ----------
Current assets:
Cash and temporary investments................................... 37,234 229,150
Accounts receivable, principally trade, net of allowance for
doubtful accounts of $2,429 and $1,738, respectively.......... 62,036 64,735
Inventories, at cost............................................. 25,963 27,537
Prepayments and other............................................ 8,832 16,896
---------- ----------
Total current assets........................................ 134,065 338,318
---------- ----------
Long-term contract receivable...................................... 17,237 23,139
---------- ----------
Deferred charges and other assets:
Decommissioning trust fund....................................... 57,117 46,725
Accumulated deferred income taxes, net........................... - 10,518
Other............................................................ 19,035 17,983
---------- ----------
Total deferred charges and other assets..................... 76,152 75,226
---------- ----------
Total assets................................................ $1,625,891 $1,891,219
========== ==========
See accompanying notes to financial statements.
37
EL PASO ELECTRIC COMPANY
BALANCE SHEETS (Continued)
CAPITALIZATION AND LIABILITIES December 31,
-----------------------------
(In thousands except for share data) 1999 1998
----------- -----------
Capitalization:
Common stock, stated value $1 per share, 100,000,000 shares
authorized, 60,200,921 and 60,122,377 shares issued, and
258,788 and 147,985 restricted shares, respectively....................... $ 60,460 $ 60,270
Capital in excess of stated value........................................... 242,702 241,325
Unearned compensation - restricted stock awards............................. (1,149) (611)
Retained earnings........................................................... 143,724 115,193
Accumulated other comprehensive income (net unrealized
gains on marketable securities), net of tax............................... 4,179 1,101
---------- ----------
449,916 417,278
Treasury stock, 3,199,927 shares; at cost................................... (28,658) -
---------- ----------
Common stock equity....................................................... 421,258 417,278
Preferred stock, redemption required, cumulative, no par value,
2,000,000 shares authorized, 1,357,444 shares issued and
outstanding; at liquidation preference.................................... - 135,744
Long-term debt.............................................................. 788,576 872,213
Financing and capital lease obligations..................................... 23,031 24,849
---------- ----------
Total capitalization.................................................. 1,232,865 1,450,084
---------- ----------
Current liabilities:
Current maturities of long-term debt and financing and
capital lease obligations................................................. 27,042 63,817
Accounts payable, principally trade......................................... 22,241 31,135
Litigation settlement payable............................................... 16,500 -
Taxes accrued other than federal income taxes............................... 17,617 20,316
Interest accrued............................................................ 17,022 20,412
Net overcollection of fuel revenues......................................... 2,640 2,632
Other....................................................................... 12,946 19,359
---------- ----------
Total current liabilities............................................. 116,008 157,671
---------- ----------
Deferred credits and other liabilities:
Decommissioning liability................................................... 120,875 129,750
Accrued postretirement benefit liability.................................... 81,176 80,477
Accrued pension liability................................................... 32,476 33,880
Accumulated deferred income taxes, net...................................... 12,503 -
Other....................................................................... 29,988 39,357
---------- ----------
Total deferred credits and other liabilities.......................... 277,018 283,464
---------- ----------
Commitments and contingencies
Total capitalization and liabilities.................................. $1,625,891 $1,891,219
========== ==========
See accompanying notes to financial statements.
38
EL PASO ELECTRIC COMPANY
STATEMENTS OF OPERATIONS
(In thousands except for share data)
Years Ended December 31,
----------------------------------------------
1999 1998 1997
----------- ----------- -----------
Operating revenues............................................. $ 570,469 $ 601,823 $ 592,021
----------- ----------- -----------
Energy expenses:
Fuel......................................................... 104,398 109,450 113,457
Coal mine reclamation adjustment............................. (6,601) - -
Purchased and interchanged power............................. 12,000 20,610 20,130
----------- ----------- -----------
109,797 130,060 133,587
----------- ----------- -----------
Operating revenues net of energy expenses...................... 460,672 471,763 458,434
----------- ----------- -----------
Other operating expenses:
Other operations............................................. 134,596 136,674 131,930
Maintenance.................................................. 36,307 34,955 34,782
New Mexico Settlement charge................................. - 6,272 -
Depreciation and amortization................................ 90,934 89,813 88,735
Taxes other than income taxes................................ 41,499 44,332 43,351
----------- ----------- -----------
303,336 312,046 298,798
----------- ----------- -----------
Operating income............................................... 157,336 159,717 159,636
----------- ----------- -----------
Other income (deductions):
Investment income............................................ 6,928 13,334 8,205
Litigation settlement........................................ (16,500) - 7,500
Settlement of bankruptcy professional fees................... - 1,261 362
Other, net................................................... 2,766 (736) 83
----------- ----------- -----------
(6,806) 13,859 16,150
----------- ----------- -----------
Income before interest charges................................. 150,530 173,576 175,786
----------- ----------- -----------
Interest charges (credits):
Interest on long-term debt................................... 76,634 80,967 86,117
Other interest............................................... 7,697 7,198 6,200
Interest capitalized and deferred............................ (3,242) (6,400) (5,875)
----------- ----------- -----------
81,089 81,765 86,442
----------- ----------- -----------
Income before income taxes..................................... 69,441 91,811 89,344
Income tax expense............................................. 25,632 34,738 34,776
----------- ----------- -----------
Income before extraordinary items.............................. 43,809 57,073 54,568
----------- ----------- -----------
Extraordinary items:
Extraordinary loss on repurchases of debt, net of
income tax benefit........................................ (3,336) - (2,775)
Extraordinary gain on discharge of debt, net of
income tax expense........................................ - 3,343 -
----------- ----------- -----------
Net income..................................................... 40,473 60,416 51,793
Preferred stock:
Dividend requirements........................................ 2,616 14,707 13,144
Redemption costs............................................. 9,581 - -
----------- ----------- -----------
Net income applicable to common stock.......................... $ 28,276 $ 45,709 $ 38,649
=========== =========== ===========
Basic earnings per common share:
Income before extraordinary items............................ $ 0.533 $ 0.704 $ 0.689
Extraordinary loss on repurchases of debt, net of
income tax benefit........................................ (0.057) - (0.046)
Extraordinary gain on discharge of debt, net of
income tax expense........................................ - 0.056 -
----------- ----------- -----------
Net income................................................ $ 0.476 $ 0.760 $ 0.643
=========== =========== ===========
Diluted earnings per common share:
Income before extraordinary items............................ $ 0.529 $ 0.699 $ 0.685
Extraordinary loss on repurchases of debt, net of
income tax benefit........................................ (0.056) - (0.046)
Extraordinary gain on discharge of debt, net of
income tax expense........................................ - 0.055 -
----------- ----------- -----------
Net income................................................ $ 0.473 $ 0.754 $ 0.639
=========== =========== ===========
Weighted average number of common shares
outstanding.................................................. 59,349,468 60,168,234 60,128,505
=========== =========== ===========
Weighted average number of common shares and
dilutive potential common shares outstanding................. 59,731,649 60,633,298 60,437,632
=========== =========== ===========
See accompanying notes to financial statements.
39
EL PASO ELECTRIC COMPANY
STATEMENTS OF COMPREHENSIVE OPERATIONS
(In thousands)
Years Ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------
Net income........................................................ $ 40,473 $ 60,416 $ 51,793
Other comprehensive income (loss):
Net unrealized gains (losses) on marketable securities, net
of income tax (expense) benefit of $(1,658), $(690) and
$223, respectively........................................... 3,078 1,285 (416)
-------- -------- --------
Comprehensive income.............................................. 43,551 61,701 51,377
Preferred stock:
Dividend requirements........................................... 2,616 14,707 13,144
Redemption costs................................................ 9,581 - -
-------- -------- --------
Comprehensive income applicable to common stock................... $ 31,354 $ 46,994 $ 38,233
======== ======== ========
See accompanying notes to financial statements.
40
EL PASO ELECTRIC COMPANY
STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
(In thousands except for share data)
Unearned
Capital Compensation Accumulated Total
in Excess - Restricted Other Common
Common Stock of Stated Stock Retained Comprehensive Treasury Stock
--------------------
Shares Amount Value Awards Earnings Income (Loss) Stock Equity
---------- -------- --------- ------------ -------- ------------- -------- --------
Balances at December 31, 1996..... 60,179,981 $60,180 $240,768 $ (758) $ 30,835 $ 232 $ - $331,257
Grants of restricted common
stock.......................... 84,255 84 491 (575) -
Amortization of unearned
compensation................... 195 195
Stock awards withheld for taxes.. (7,798) (8) (37) (45)
Preferred stock dividends........ (13,144) (13,144)
Net income....................... 51,793 51,793
Other comprehensive loss......... (416) (416)
---------- ------- -------- ------------ -------- ------------- -------- --------
Balances at December 31, 1997..... 60,256,438 60,256 241,222 (1,138) 69,484 (184) - 369,640
Grants of restricted common
stock.......................... 26,675 27 169 (196) -
Amortization of unearned
compensation................... 709 709
Stock awards withheld for taxes.. (10,843) (11) (54) (65)
Forfeitures of restricted common
stock.......................... (1,908) (2) (12) 14 -
Preferred stock dividends........ (14,707) (14,707)
Net income....................... 60,416 60,416
Other comprehensive income....... 1,285 1,285
---------- ------- -------- ------------ -------- ------------- -------- --------
Balances at December 31, 1998..... 60,270,362 60,270 241,325 (611) 115,193 1,101 - 417,278
Grants of restricted common
stock.......................... 210,744 211 1,505 (1,716) -
Amortization of unearned
compensation................... 1,167 1,167
Stock awards withheld for taxes.. (19,965) (20) (118) (138)
Forfeitures of restricted common
stock.......................... (1,432) (1) (10) 11 -
Preferred stock dividends........ (2,616) (2,616)
Preferred stock redemption....... (9,581) (9,581)
Capital stock adjustment......... 255 255
Net income....................... 40,473 40,473
Other comprehensive income....... 3,078 3,078
Treasury stock, 3,199,927 shares;
at cost........................ (28,658) (28,658)
---------- ------- -------- ------------ -------- ------------- -------- --------
Balances at December 31, 1999..... 60,459,709 $60,460 $242,702 $ (1,149) $143,724 $ 4,179 $(28,658) $421,258
========== ======= ======== ============ ======== ============= ======== ========
See accompanying notes to financial statements.
41
EL PASO ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
-------------------------------------------
1999 1998 1997
--------- --------- ---------
Cash Flows From Operating Activities:
Net income........................................................ $ 40,473 $ 60,416 $ 51,793
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization................................... 90,934 89,813 88,735
Amortization of nuclear fuel.................................... 17,658 21,804 21,490
Deferred income taxes, net...................................... 23,490 29,854 32,394
Coal mine reclamation adjustment................................ (6,601) - -
New Mexico Settlement charge.................................... - 6,272 -
Extraordinary loss on repurchases of debt, net of
income tax benefit............................................ 3,336 - 2,775
Extraordinary gain on discharge of debt, net of
income tax expense............................................ - (3,343) -
Other operating activities...................................... 9,291 5,561 3,949
Change in:
Accounts receivable............................................. 2,699 (5,775) (1,373)
Federal income tax receivable................................... - - 20,713
Inventories..................................................... 1,574 (407) 1,192
Prepayments and other........................................... 8,064 (4,479) 1,797
Long-term contract receivable................................... 5,902 4,520 3,398
Accounts payable................................................ (8,894) 6,178 (12,258)
Litigation settlement payable................................... 16,500 - -
Taxes accrued other than federal income taxes................... (2,699) 1,024 (2,003)
Interest accrued................................................ (3,390) (760) (1,978)
Net under/overcollection of fuel revenues....................... 8 10,230 (11,945)
Other current liabilities....................................... (3,833) 1,882 2,389
Deferred charges and credits.................................... (313) 10,445 5,520
--------- --------- ---------
Net cash provided by operating activities..................... 194,199 233,235 206,588
--------- --------- ---------
Cash Flows From Investing Activities:
Cash additions to utility property, plant and equipment........... (53,705) (49,787) (46,467)
Cash additions to nuclear fuel.................................... (16,593) (15,409) (22,539)
Interest capitalized:
Utility property, plant and equipment........................... (2,618) (2,380) (1,820)
Nuclear fuel.................................................... (624) (4,020) (4,055)
Investment in decommissioning trust fund.......................... (5,656) (6,312) (6,023)
Other investing activities........................................ (935) (2,623) (550)
--------- --------- ---------
Net cash used for investing activities........................ (80,131) (80,531) (81,454)
--------- --------- ---------
Cash Flows From Financing Activities:
Treasury stock.................................................... (28,658) - -
Repurchases of and payments on long-term debt..................... (124,272) (30,542) (86,492)
Nuclear fuel financing obligations:
Proceeds........................................................ 19,907 19,438 26,585
Payments........................................................ (20,930) (22,121) (21,216)
Redemption of preferred stock..................................... (148,937) - -
Preferred stock dividend payment.................................. (1,328) - -
Payments on capital lease obligations............................. (1,540) (1,400) (1,272)
Other financing activities........................................ (226) (156) (279)
--------- --------- ---------
Net cash used for financing activities........................ (305,984) (34,781) (82,674)
--------- --------- ---------
Net (decrease) increase in cash and temporary investments........... (191,916) 117,923 42,460
Cash and temporary investments at beginning of period............... 229,150 111,227 68,767
--------- --------- ---------
Cash and temporary investments at end of period..................... $ 37,234 $ 229,150 $ 111,227
========= ========= =========
See accompanying notes to financial statements.
42
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
A. Summary of Significant Accounting Policies
General. El Paso Electric Company (the "Company") is a public utility
engaged in the generation, transmission and distribution of electricity in an
area of approximately 10,000 square miles in west Texas and southern New Mexico.
The Company also serves wholesale customers in Texas, New Mexico, California and
Mexico.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and 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 differ from those estimates.
Basis of Presentation. The Company maintains its accounts in accordance
with the Uniform System of Accounts prescribed by the Federal Energy Regulatory
Commission (the "FERC"). The Company determined that it does not meet the
criteria for the application of Statement of Financial Accounting Standards
("SFAS") No. 71, "Accounting for the Effects of Certain Types of Regulation,"
and accordingly does not report the effects of certain actions of regulators as
assets or liabilities unless such actions result in assets or liabilities under
generally accepted accounting principles for commercial enterprises in general.
Comprehensive Income. Certain gains and losses that are not recognized
currently in the statements of operations are reported as other comprehensive
income in accordance with SFAS No. 130, "Reporting Comprehensive Income."
Utility Plant. Effective February 12, 1996, the Company applied "fresh-
start" reporting in accordance with Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7")
and revalued its utility plant. Additions to utility plant subsequent to
February 12, 1996 are reported at historical cost. Depreciation is provided on a
straight-line basis over the estimated remaining lives of the assets (ranging
from 5 years to 31 years), except for approximately $384 million of
reorganization value allocated to net transmission, distribution and general
plant in service. This amount is being depreciated over the ten-year period of a
rate settlement (the "Texas Rate Stipulation"). Amortization of intangible plant
(software) is provided on a straight-line basis over the estimated useful life
of the asset (primarily three years).
The Company charges the cost of repairs and minor replacements to the
appropriate operating expense accounts and capitalizes the cost of renewals and
betterments. Gains or losses resulting from retirements or other dispositions of
operating property in the normal course of business are credited or charged to
the accumulated provision for depreciation.
The Company recorded a liability for the present value of the estimated
decommissioning costs for the Company's interest in Palo Verde using a cost
inflation rate of 3% and a discount rate of 6%. Accretion of the decommissioning
liability is charged to other interest charges in the statements of operations.
43
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
The cost of nuclear fuel is amortized to fuel expense on a unit-of-
production basis. A provision for spent fuel disposal costs is charged to
expense based on requirements of the Department of Energy (the "DOE") for
disposal cost of approximately one-tenth of one cent on each kWh generated. The
Company is also expensing its share of costs, as incurred, associated with on
site spent fuel storage at Palo Verde. See Note C.
Impairment of Long-Lived Assets. The Company evaluates impairment of its
long-lived assets and certain intangible assets whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. An asset is deemed impaired if the sum of the expected future cash
flows is less than the carrying amount of the asset.
Capitalized Interest. The Company capitalizes, to construction work in
progress and nuclear fuel in process, interest cost calculated in accordance
with SFAS No. 34, "Capitalization of Interest Cost."
Cash and Cash Equivalents. All temporary cash investments with an original
maturity of three months or less are considered cash equivalents.
Investments. The Company's marketable securities, included in
decommissioning trust funds in the balance sheets, are reported at fair market
value and consist primarily of equity securities and municipal bonds in trust
funds established for decommissioning of its interest in Palo Verde which had a
fair market value of approximately $57.1 million at December 31, 1999. Such
marketable securities are classified as "available-for-sale" securities and, as
such, unrealized gains and losses are included in accumulated other
comprehensive income as a separate component of common stock equity.
Inventories. Inventories, primarily parts, materials and supplies are
stated at average cost not to exceed recoverable cost.
Operating Revenues Net of Energy Expenses. The Company accrues revenues for
services rendered, including unbilled revenues and revenues generated by the
Company's Energy Services Business Group (the "ESBG"). Energy expenses are
stated at actual cost incurred. The Company's Texas retail customers are
presently being billed under fixed fuel factors approved by the Texas
Commission. Rate tariffs currently applicable to certain FERC jurisdictional
customers contain appropriate fuel and purchased power cost adjustment
provisions designed to recover the Company's fuel and purchased power costs. Any
difference between fuel cost and fuel revenues charged to the Company's Texas
and FERC jurisdictional customers is reflected as net over/undercollection of
fuel revenues in the balance sheets.
Federal Income Taxes. The Company accounts for federal income taxes under
the asset and liability method of accounting for income taxes. Under this
method, deferred income taxes are recognized for the estimated future tax
consequences of "temporary differences" by applying enacted statutory tax rates
for each taxable jurisdiction applicable to future years to differences between
the financial statement carrying amounts and the tax bases of existing assets
and liabilities. The Company records a valuation allowance to reduce its
deferred tax assets to the extent it is more likely than not that such deferred
tax assets will not be realized. The effect on deferred tax assets and
liabilities of a change in tax rate is recognized in income in the period that
includes the enactment date.
44
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
Earnings per Share. In 1997, the Company adopted the provisions of SFAS No.
128, "Earnings per Share," which establishes standards for computing and
presenting earnings per share. Basic earnings per common share is computed by
dividing net income, after deducting the preferred stock dividend requirements,
by the weighted average number of common shares outstanding. Diluted earnings
per common share is computed by dividing net income, after deducting the
preferred stock dividend requirements, by the weighted average number of common
shares and dilutive potential common shares outstanding.
Benefit Plans. See Note J for accounting policies regarding the Company's
retirement plans and postretirement benefits.
Stock Options and Restricted Stock. The Company has a long-term incentive
plan which reserves shares of common stock for issuance to officers, key
employees and non-employee directors through the award or grant of stock options
and restricted stock. The Company has adopted the disclosure-only provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123").
Accordingly, compensation expense is recognized for the intrinsic value, if any,
of option grants at measurement date ratably over the vesting period of the
options. Compensation expense for the restricted stock awards is recognized for
the fair value of the shares at the award date ratably over the restriction
period. Unearned compensation related to restricted stock awards is shown as a
reduction of common stock equity.
Reclassifications. Certain amounts in the financial statements for 1998 and
1997 have been reclassified to conform with the 1999 presentation.
Supplemental Statements of Cash Flows Disclosures (In thousands)
Years Ended December 31,
---------------------------------------------------------
1999 1998 1997
-------- -------- ----------
Cash paid (refunded) for:
Income taxes paid.......................... $ 1,882 $ 2,900 $ 2,901
Income taxes refunded...................... - - (20,713)
Interest on long-term debt (1)............. 72,600 74,537 81,293
Other interest............................. 702 436 562
Reorganization items - professional
fees and other........................... - 4,310 3,264
Non-cash investing and financing activities:
Issuance of preferred stock for
pay-in-kind dividends.................... 3,867 14,425 12,893
Grants of restricted shares of
common stock............................. 1,716 196 575
_________________________
(1) Includes interest on bonds, letter of credit fees related to bonds, and
postload interest on nuclear fuel financing that was not capitalized.
45
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
B. Regulation
General
In 1999, both Texas and New Mexico enacted electric utility industry
restructuring laws requiring competition in certain functions of the industry
and ultimately in the Company's service area. The New Mexico Restructuring Law
currently requires competition to begin on January 1, 2001. The Company believes
the New Mexico Commission may delay the start of competition, but cannot predict
the length of such delay, if any. Under the Texas Restructuring Law, the
Company's Texas service area is exempt from competition until the expiration of
the Freeze Period, currently scheduled to terminate in August 2005.
The Company is working to become more competitive in response to these new
restructuring laws as well as other regulatory, economic and technological
changes occurring throughout the industry. Deregulation of the production of
electricity and related services and increasing customer demand for lower priced
electricity and other energy services have accelerated the industry's movement
toward more competitive pricing and cost structures. These competitive pressures
could result in the loss of customers and diminish the ability of the Company to
fully recover its investment in generation assets. This issue is particularly
important to the Company because its rates are significantly higher than
national and regional averages. As a result of the initiation of deregulation in
New Mexico and other portions of Texas, the Company may face increasing pressure
on its retail rates and its rate freeze under the Texas Rate Stipulation. The
Company's results of operations and cash flows may be adversely affected if it
cannot maintain its current retail rates.
The Company is particularly concerned with the ultimate recoverability of
"stranded costs," or costs previously found by regulatory authorities to be
reasonable and prudent, but which are higher than would be recovered under
immediate, full competition. At the federal level, the FERC has announced,
through a formal rulemaking, its intention to allow 100% recovery of all
legitimate verifiable stranded costs attributable to FERC jurisdictional
customers. The Texas Restructuring Law exempts the Company's Texas service area
from retail competition, and preserves rates at their current levels, until the
end of its Freeze Period. The Company is prohibited from recovering stranded
costs or costs of transition to competition beyond the Freeze Period.
Under the New Mexico Restructuring Law, the New Mexico Commission may limit
the Company's recovery of its stranded costs. The New Mexico Restructuring Law
also allows for recovery of prudent costs related to transition to competition.
See "New Mexico Regulatory Matters - Deregulation" below.
Texas Regulatory Matters
The rates and services of the Company in Texas municipalities are regulated
by those municipalities, and in unincorporated areas by the Texas Commission.
The largest municipality in the Company's service area is the City of El Paso.
The Texas Commission has exclusive appellate jurisdiction to review municipal
orders and ordinances regarding rates and services in Texas and jurisdiction
over certain other activities of the Company. The decisions of the Texas
Commission are subject to judicial review.
46
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
Deregulation. The Texas Restructuring Law requires an electric utility to
separate its business activities into a power generation company, a retail
electric provider, and a transmission and distribution utility by January 1,
2002. The Texas Restructuring Law also requires a utility to separate its
customer energy services business from its regulated utility activities by
September 1, 2000. A utility may accomplish this separation through creation of
nonaffiliated companies, separate affiliated companies owned by a common holding
company, or through the sale of assets to third parties. Although the Company is
not subject to the Texas restructuring requirements until the expiration of the
Freeze Period, the Company is subject to the restructuring requirements of the
New Mexico Restructuring Law. See "New Mexico Regulatory Matters - Deregulation"
below.
The Texas Restructuring Law specifically recognizes and preserves the
substantial benefits the Company bargained for in its Texas Rate Stipulation and
Texas Settlement Agreement. The Texas Restructuring Law exempts the Company's
Texas service area from retail competition, and preserves rates at their current
levels until the end of its Freeze Period. At the end of the Freeze Period, the
Company will be subject to retail competition and will have no further claim for
recovery of stranded costs or costs of transition to competition. The Company
believes that its continued ability to provide bundled electric service at
current rates in its Texas service area will allow the Company to collect its
Texas jurisdictional stranded costs and costs of transition to competition.
Texas Rate Stipulation and Texas Settlement Agreement. The Company's rates
for its Texas customers are governed by a rate order entered by the Texas
Commission adopting the Texas Rate Stipulation and Agreed Order. The Agreed
Order implemented certain provisions of the Texas Rate Stipulation and set rates
consistent with the Texas Rate Stipulation. Among other things, under the Texas
Rate Stipulation: (i) the Company's base rates for most customers in Texas were
fixed for the ten-year Freeze Period which began in August 1995; (ii) the City
of El Paso granted the Company a new franchise that extends through the Freeze
Period; (iii) the Company retains 75% during the first five years of the Freeze
Period and 50% during the remainder of the Freeze Period of (a) the revenues
generated by providing third-party transmission services and (b) profit margins
from certain off-system power sales; (iv) the Company's reacquisition of the
Palo Verde leased assets was deemed to be in the public interest; and (v) all
appeals of Texas Commission orders concerning the Company and all outstanding
Texas Commission dockets concerning the Company's rates were resolved.
Neither the Texas Rate Stipulation nor the Agreed Order deprives the Texas
regulatory authorities of their jurisdiction over the Company during the Freeze
Period. However, the Texas Commission determined in the Agreed Order that the
rate freeze is in the public interest and results in just and reasonable rates.
Further, the signatories to the Texas Rate Stipulation (other than the OPC and
the State of Texas) agreed to not seek to initiate an inquiry into the
reasonableness of the Company's rates during the Freeze Period and to support
the Company's entitlement to rates at the freeze level throughout the Freeze
Period. The Company believes, but cannot assure, that its cost of service will
support rates at or above the freeze level throughout the Freeze Period and,
therefore, does not believe any attempt to reduce the Company's rates would be
successful. However, during the Freeze Period, the Company is precluded from
seeking rate increases in Texas, even in the event of increased operating or
capital costs. In the event of a merger, the parties to the Texas Rate
Stipulation retain all rights provided in the Texas Rate Stipulation, the right
to participate as a party in any proceeding related to the merger, and the right
to pursue a reduction in rates below the freeze level to the extent of post-
merger synergy savings.
47
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
Following the New Mexico Settlement Agreement (see "New Mexico Regulatory
Matters - New Mexico Settlement Agreement" below), the Company offered to enter
into a comparable agreement in Texas. Based upon that offer, the Company entered
into the Texas Settlement Agreement providing for: (i) a total annual
jurisdictional base rate reduction of approximately $15.4 million; (ii)
reconciliation of approximately $221.2 million of fuel revenues to fuel expenses
for the 42-month period ended December 31, 1998, with no disallowance; and (iii)
an agreement to use 50% of all Palo Verde performance rewards related to
evaluation periods after 1997, when collected, for low-income assistance and for
DSM programs, primarily focused on small business customers, through the end of
the Freeze Period. The Texas Settlement Agreement was filed with the Texas
Commission, the City of El Paso and all other municipalities having
jurisdiction. The Texas Commission approved the Texas Settlement Agreement in
June 1999.
Fuel. Pursuant to Texas Commission rules, the Company must periodically
make a filing to reconcile the revenues collected from Texas customers under its
fixed fuel factor with the actual fuel and purchased power expenses incurred.
Differences between revenues collected and expenses incurred during the
reconciliation period are subject to a refund (in the case of an overrecovery of
fuel costs) or surcharge (in the case of an underrecovery of fuel costs). The
Texas Commission staff, local regulatory authorities such as the City of El
Paso, and customers are entitled to intervene in a fuel reconciliation
proceeding and to challenge the prudence of fuel and purchased power expenses.
The Company's fuel expenses for its most recent reconciliation period of July
1995 through December 1998 were approved, with no disallowance, as part of the
Texas Settlement Agreement.
Palo Verde Performance Standards. The Texas Commission established
performance standards for the operation of Palo Verde, pursuant to which each
Palo Verde unit is evaluated annually to determine whether its three-year
rolling average capacity factor entitles the Company to a reward or subjects it
to a penalty. There are five performance bands based around a target capacity
factor of 70%. The capacity factor is calculated as the ratio of actual
generation to maximum possible generation. If the capacity factor, as measured
on a station-wide basis for any consecutive 24-month period, should fall below
35%, the Texas Commission could reconsider the rate treatment of Palo Verde,
regardless of the provisions of the Texas Rate Stipulation and the Texas
Settlement Agreement. The removal of Palo Verde from rate base could have a
significant negative impact on the Company's revenues and financial condition.
Performance rewards and penalties for the evaluation periods ending in 1997,
1996 and 1995, as well as an agreement regarding disposition of half of any
future rewards, were resolved in the Texas Settlement Agreement and the IRP
stipulation. The Company has calculated significant performance rewards for the
three-year periods ended December 31, 1999 and 1998. However, the ultimate
disposition of these rewards is subject to Texas Commission review during the
periodic fuel reconciliation proceedings discussed above. Performance rewards
are not recorded on the Company's books until a final determination has been
ordered by the Texas Commission in a fuel reconciliation proceeding. Performance
penalties are recorded when assessed as probable by the Company.
Integrated Resource Plan. Under Texas law and regulations of the Texas
Commission, the Company was required to file an IRP in June 1998. The Company's
IRP was the culmination of a lengthy planning process involving the Company, its
customers, the Texas Commission, consumer advocates and various special interest
groups. The purpose of integrated resource planning was to ensure acquisition of
the lowest cost, adequate resources necessary to meet the varied needs of the
Company
48
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
and its customers, and to ensure the equitable allocation and distribution of
the benefits of such resource acquisitions and other system benefits to all
customer classes. The Company entered into an agreement with all parties with
respect to all IRP issues, and a Texas Commission order adopting the agreement
was issued in January 1999. Pursuant to the agreement, the Company will meet its
resource needs through a combination of short-term purchased power and a DSM
program. Pursuant to the IRP, the Company expects to incur DSM expenditures
annually of approximately $1.0 million through 2001. Additionally, the Company
committed a total of approximately $1.0 million to fund a low-income
weatherization and energy efficiency program over a three-year period beginning
in 1999. Finally, in response to interest expressed by its customers and
encouragement from the Texas Commission and environmental advocates, the Company
has committed to the development of renewable resources. Pursuant to the
stipulation settling the IRP, the Company has pledged $3.6 million of prior Palo
Verde performance rewards, including related interest, collected by the Company
as a result of the Texas Settlement Agreement as initial financing for the
development of renewable resources. The Company does not believe the IRP
agreement will cause it to incur net costs materially in excess of those that
would have been incurred in the absence of its IRP. Nevertheless, because of the
Texas Rate Stipulation and the Texas Settlement Agreement, the Company will not
be able to increase its rates to recover any increase in net costs actually
experienced as a result of its IRP. Going forward, the Texas Restructuring Law
abolished the requirement for utilities to develop IRPs; therefore, the Company
will have no further IRP obligation after December 31, 2001.
New Mexico Regulatory Matters
The New Mexico Commission has jurisdiction over the Company's rates and
services in New Mexico and over certain other activities of the Company,
including prior approval of the issuance, assumption or guarantee of securities.
The New Mexico Commission's decisions are subject to judicial review. In January
1999, pursuant to a state constitutional amendment passed in 1996, the three-
member appointed commission was replaced by an elected commission from five
single-member districts, with regulatory responsibility for electricity, gas,
water, telecommunications, insurance and securities activities within the state.
The Company's New Mexico service area falls entirely within one district. The
largest city in the Company's New Mexico service territory is Las Cruces, which
in 1999 accounted for approximately 8% of the Company's total revenue.
Deregulation. The New Mexico Restructuring Law requires the Company to
reorganize its present corporate structure, separating its power generation and
energy services businesses, which will become competitive, from its transmission
and distribution business, which will remain regulated. Originally, utilities
were required to file transition plans addressing the various restructuring
issues, including the recovery of stranded costs, by March 1, 2000, which was
subsequently extended to June 1, 2000. On March 1, 2000, the Company filed the
first phase of its transition plan ("Transition Plan-Phase I") with the New
Mexico Commission, requesting approval of the Company's proposed corporate
reorganization under the New Mexico Restructuring Law. The Company filed its
Transition Plan-Phase I early to allow the Company to obtain regulatory and
other approvals necessary to complete its corporate separation by the January 1,
2001 deadline under the New Mexico Restructuring Law. The Company proposed to
separate its current operations into a power generation subsidiary, a
transmission and distribution subsidiary, and an energy services subsidiary, all
owned and controlled by a common holding company. The Company will file its
Transition Plan-Phase II by June 1, 2000, detailing the Company's proposed
processes and procedures to implement customer choice in New Mexico.
49
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
Under the New Mexico Restructuring Law, retail customer choice is currently
scheduled to begin January 1, 2001 for public post-secondary educational
institutions, public schools and residential and small business customers.
Retail customer choice is currently scheduled to begin January 1, 2002 for all
other customers. The New Mexico Restructuring Law allows a utility to recover at
least 50% of its stranded costs with up to 100% recovery allowed if the New
Mexico Commission determines that additional recovery (i) is in the public
interest, (ii) is necessary to maintain the utility's financial integrity, (iii)
is necessary to continue adequate and reliable service, and (iv) will not cause
an increase in rates to residential and small business customers. The New Mexico
Restructuring Law, however, includes decommissioning costs as part of stranded
costs. Because the New Mexico Restructuring Law defines decommissioning costs as
a stranded cost, it is possible that the New Mexico Commission may allow only
50% recovery of decommissioning costs. However, the New Mexico Restructuring Law
also specifically provides that nothing in the law should be interpreted as
requiring the New Mexico Commission to issue an order which would jeopardize the
exclusive use of the external sinking fund method for meeting decommissioning
obligations pursuant to federal guidelines. The Company believes this provision
requires the full recovery of New Mexico decommissioning requirements over the
life of the nuclear asset through a separate non-bypassable wires charge. The
Company cannot predict how the New Mexico Commission will ultimately treat this
matter.
The New Mexico Restructuring Law allows the Company to recover reasonable,
prudent and unmitigated costs that the Company would not have incurred but for
its compliance with the New Mexico Restructuring Law. These transition costs do
not include stranded costs, costs the Company can collect under federally
approved rates or rates approved by the New Mexico Commission, or any costs the
Company would have incurred regardless of the New Mexico Restructuring Law. The
Company cannot predict whether the New Mexico Commission will allow the Company
to recover all of its transition costs.
The New Mexico Restructuring Law also allowed the New Mexico Commission to
review and either confirm, reject or modify the Company's New Mexico Settlement
Agreement. On November 30, 1999, the New Mexico Commission issued a final order
finding that the Company's New Mexico Settlement Agreement did not, under the
terms of the New Mexico Restructuring Law, constitute a plan or approval for
recovery of stranded costs. On December 30, 1999, the Company filed a motion for
rehearing requesting the New Mexico Commission to confirm that it would
determine the Company's stranded costs by using either (i) the stranded cost
recovery formula contained in the New Mexico Restructuring Law, applied to the
Company's generation asset values in effect prior to the rate base write-downs
contained in the New Mexico Settlement Agreement, or (ii) the Company's stranded
costs contained in the New Mexico Settlement Agreement. This would allow the
Company to either (i) preserve the stranded cost benefits obtained in the New
Mexico Settlement Agreement or (ii) be subject to the same stranded cost
provisions of the New Mexico Restructuring Law as every other electric utility
in New Mexico. On January 18, 2000, the New Mexico Commission issued an order
granting the Company's request.
New Mexico Settlement Agreement. In July 1998, the Company entered into the
New Mexico Settlement Agreement with certain parties, including the New Mexico
Commission staff and the New Mexico Attorney General, but not Las Cruces. In
September 1998, the New Mexico Commission issued an order adopting, with some
modification, the New Mexico Settlement Agreement. The
50
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
New Mexico Settlement Agreement became effective on October 26, 1998 and
provides for (i) a total annual jurisdictional base revenue reduction of $4.6
million; (ii) a 30-month moratorium on rate increases or decreases in New
Mexico; (iii) the elimination of the need for future fuel reconciliations in New
Mexico by incorporating the existing fixed fuel factor into base rates; (iv) an
increased degree of ratemaking certainty for the future achieved by an agreement
among the signatories reducing the net value of certain assets by approximately
$56 million on a New Mexico jurisdictional basis for ratemaking purposes (but
with no effect on book values), while establishing the signatories' agreement
that the Company is entitled to 100% recovery of such revalued assets; and (v)
the ability to enter into long-term rate contracts with commercial and
industrial customers in New Mexico. Additionally, as a result of the New Mexico
Settlement Agreement, the Company will contribute $0.4 million annually ($1.0
million over the term of the moratorium period) to a social services agency in
Dona Ana County providing assistance to low-income individuals. Although the New
Mexico Settlement Agreement was structured to allow recovery of previously
underrecovered fuel balances, the order adopting the New Mexico Settlement
Agreement does not support the recognition of this asset in the Company's
financial statements under existing accounting standards. The Company wrote off
the book value of undercollected fuel revenues in its New Mexico jurisdiction as
of September 30, 1998, which amounted to $3.8 million, net of tax, although the
Company believes that, based on current estimates of future fuel prices and
operating costs, it will recover 100% of these amounts.
Fuel. Prior to the New Mexico Settlement Agreement, the Company was
required to file annual reports reconciling the revenues collected under its New
Mexico fixed fuel factor with its New Mexico fuel and purchased power expenses,
along with the results of the application of Palo Verde performance standards.
As a result of the New Mexico Settlement Agreement, outstanding fuel issues from
filings in 1998 and 1997 were satisfactorily resolved with no disallowance of
fuel and purchased power costs or the performance rewards, and the existing
fixed fuel factor was incorporated into base rates.
Palo Verde Performance Standards. As a result of the New Mexico Settlement
Agreement, the Palo Verde performance standards, which had been in place since
1986, were eliminated. Consequently, the Company is no longer entitled to a
reward or exposed to a penalty in New Mexico resulting from the operations of
Palo Verde. The performance standards report filed with the New Mexico
Commission in January 1998 was the final such report and entitled the Company to
a reward of $1.1 million.
Federal Regulatory Matters
Federal Energy Regulatory Commission. The Company is subject to regulation
by the FERC in certain matters, including rates for wholesale power sales,
transmission of electric power and the issuance of securities.
On December 15, 1999, the FERC approved its final rule ("Order 2000") on
Regional Transmission Organizations ("RTOs"). Order 2000 strongly encourages,
but does not require, public utilities to form and join RTOs. Order 2000
establishes (i) the minimum characteristics and functions an RTO must satisfy to
obtain FERC acceptance; (ii) a collaborative process allowing public utilities
and non-public utilities that own, operate or control interstate transmission
facilities, consulting with state officials as appropriate, to consider and
develop RTOs; (iii) a proposal to consider transmission ratemaking returns on a
case-specific basis; (iv) opportunities for non-monetary regulatory benefits for
RTOs, including deference in dispute resolution and streamlined filing and
approval procedures; and
51
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(v) a time line for public utilities to make appropriate filings with the FERC
to initiate operation of RTOs. All public utilities that own, operate or control
interstate transmission facilities must file, by October 15, 2000, either a
proposal to participate in an RTO or an alternative filing describing efforts
and plans to participate in an RTO. Order 2000 also proposes RTO startup by
December 15, 2001.
The Company is an active participant in the development of the Desert
Southwest Transmission and Reliability Operator ("Desert Star"). The Company
believes Desert Star will qualify as an RTO under Order 2000. The Company
intends, subject to the resolution of outstanding issues, to participate in
Desert Star. As a participating transmission owner, the Company will transfer
operations of its transmission system to Desert Star. The Company believes the
Desert Star proposal will be submitted to the FERC by October 15, 2000. Desert
Star is currently scheduled to become operational by January 1, 2002. If Desert
Star fails to become operational, the Company intends to participate in another
RTO similar to Desert Star.
In April 1996, the FERC issued its Order No. 888, requiring all public
utilities owning, operating or controlling facilities used for transmitting
electricity in interstate commerce to allow access to their transmission
facilities under minimum terms and conditions of non-discriminatory service,
including transmission service for their own new wholesale sales and purchases
of electric energy. Additionally, Order No. 888 permits public utilities to seek
recovery of legitimate, prudent and verifiable stranded costs and provides a
mechanism for the recovery of such costs.
In April 1996, the FERC also issued Order No. 889, which requires all
public utilities owning, operating or controlling facilities used for
transmitting electricity in interstate commerce to develop and maintain an Open
Access Same-Time Information System that will give existing and potential
transmission users access to transmission-related information on a basis
consistent with that available to a utility's employees engaged in the buying
and selling of power. Order No. 889 further requires public utilities to
separate their transmission and generation marketing functions and adopt
standards of conduct ensuring that all open access transmission customers are
treated in a non-discriminatory manner.
Pursuant to Order No. 888, the Company filed its non-discriminatory open
access transmission tariffs with the FERC in July 1996. The Company reached a
settlement with the various parties regarding rates for transmission and
ancillary services under these tariffs. However, the settlement, which was filed
with the FERC in March 1997 and approved by the FERC in June 1998, did not
resolve issues that had been raised with respect to the manner in which the
Company will determine the amount of transmission capacity that is available for
use by third parties desiring to use its transmission system.
In May 1999, the FERC issued its opinion in a proceeding brought by SPS
regarding the use of the Company's transmission system to serve Las Cruces,
holding that once the Company's calculation of available transmission capacity
was adjusted to reflect the assumed discontinuation of service to Las Cruces and
CFE, the Company would have sufficient transmission capacity over the Eddy
County tie to meet SPS' request for firm transmission service. Although the
Company has filed a compliance filing as required by the FERC's order, the
filing reflects that the Company does not have sufficient transmission capacity
over the Eddy County tie to meet SPS' request for firm transmission service. The
Company filed a motion for rehearing of the FERC's decision. The FERC has
extended its time limit for ruling on this motion. The Company does not expect a
material financial impact from this FERC
52
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
ruling. However, the Company is concerned that an adverse FERC ruling would
result in impaired reliability of service to the Company's retail customers and
increased costs. This case will not be automatically dismissed under the
settlement agreement with Las Cruces because SPS, not Las Cruces, was the
original complainant. Although the SPS complaint was based upon the creation of
a Las Cruces municipal utility, the Company cannot predict whether the case will
be dismissed as a result of its settlement with Las Cruces.
On February 24, 2000, the Company and Las Cruces entered into a settlement
agreement ending Las Cruces' efforts to municipalize the Company's distribution
system in Las Cruces. Under the terms of the settlement agreement, all existing
litigation between the Company and Las Cruces, including all litigation pending
before the FERC, will be dismissed. For a discussion of this settlement
agreement, see Note I.
Department of Energy. The DOE regulates the Company's exports of power to
CFE in Mexico pursuant to a license granted by the DOE and a presidential
permit. The DOE has determined that all such exports over international
transmission lines shall be made in accordance with Order No. 888. The DOE is
authorized to assess operators of nuclear generating facilities for a share of
the costs of decommissioning the DOE's uranium enrichment facilities and for the
ultimate costs of disposal of spent nuclear fuel. See Note C for discussion of
spent fuel storage and disposal costs.
Nuclear Regulatory Commission. The NRC has jurisdiction over the Company's
licenses for Palo Verde and regulates the operation of nuclear generating
stations to protect the health and safety of the public from radiation hazards.
The NRC also has the authority to conduct environmental reviews pursuant to the
National Environmental Policy Act.
Wholesale Customers
The Company provides IID with 100 MW of firm capacity and associated energy
and 50 MW of system contingent capacity and associated energy pursuant to a 17-
year agreement which expires April 30, 2002. The Company also provides TNP with
up to 75 MW of firm power and associated energy pursuant to an agreement which
expires December 31, 2002. The contract allows TNP to specify a maximum annual
amount with one year's notice. TNP elected to receive up to 25 MW for 2000.
C. Palo Verde and Other Jointly-Owned Utility Plant
The Company owns a 15.8% interest in each of the three nuclear generating
units and common facilities at Palo Verde. The Palo Verde Participants include
the Company, five other utilities and Arizona Public Service Company ("APS"),
which serves as operating agent for Palo Verde. The operation of Palo Verde and
the relationship among the Palo Verde Participants is governed by the Arizona
Nuclear Power Project Participation Agreement (the "ANPP Participation
Agreement").
53
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
Other jointly-owned utility plant includes 7% of Units 4 and 5 at Four
Corners Generating Station ("Four Corners") and certain other transmission
facilities. A summary of the Company's investment in jointly-owned utility
plant, excluding fuel, at December 31, 1999 and 1998 is as follows (In
thousands):
December 31, 1999 December 31, 1998
------------------------------- -------------------------------
Palo Verde Palo Verde
Station Other Station Other
------------- ------------- ------------- --------------
Electric plant in service.............. $594,755 $180,196 $602,061 $180,185
Accumulated depreciation............... (88,004) (55,526) (64,595) (40,959)
Construction work in progress.......... 16,502 3,373 14,084 2,710
Pursuant to the ANPP Participation Agreement, the Palo Verde Participants
share costs and generating entitlements in the same proportion as their
percentage interests in the generating units, and each participant is required
to fund its proportionate share of fuel, other operations, maintenance and
capital costs, which, except capital costs, are included in the corresponding
expense captions in the statements of operations. The Company's total monthly
share of these costs was approximately $6.9 million in 1999. The ANPP
Participation Agreement provides that if a participant fails to meet its payment
obligations, each non-defaulting participant shall pay its proportionate share
of the payments owed by the defaulting participant.
Decommissioning. Pursuant to the ANPP Participation Agreement and federal
law, the Company must fund its share of the estimated costs to decommission Palo
Verde Units 1, 2 and 3, including the Common Facilities, over their estimated
useful lives of 40 years (to 2024, 2025 and 2027, respectively). The Company's
funding requirements are determined periodically based upon engineering cost
estimates performed by outside engineers retained by APS.
In December 1998, the Palo Verde Participants approved an updated
decommissioning study. The 1998 study determined that the Company will have to
fund approximately $280.5 million (stated in 1998 dollars) to cover its share of
decommissioning costs. Cost estimates for decommissioning have increased with
each study. The previous cost estimate from a 1995 study determined that the
Company would have to fund approximately $229 million (stated in 1995 dollars).
The 1998 estimate reflects a 22% increase from the 1995 estimate primarily due
to increases in estimated costs for spent fuel storage after operations have
ceased. See "Spent Fuel Storage" below.
Although the 1998 study was based on the latest available information,
there can be no assurance that decommissioning cost estimates will not continue
to increase in the future or that regulatory requirements will not change. In
addition, until a new low-level radioactive waste repository opens and operates
for a number of years, estimates of the cost to dispose of low-level radioactive
waste are subject to significant uncertainty. The decommissioning study is
updated every three years and a new study is expected to be completed in 2001.
See "Disposal of Low-Level Radioactive Waste" below.
The Company will recover its current decommissioning cost estimates through
its existing rates during the Freeze Period, and thereafter under the provisions
of the Texas Restructuring Law. The rate freeze under the Texas Rate Stipulation
and the rate reduction under the Texas Settlement Agreement
54
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
preclude the Company from seeking a rate increase in Texas to recover increases
in decommissioning cost estimates during the Freeze Period. See Note B.
Prior to the start of competition in New Mexico, the Company will continue
to collect 100% of its decommissioning cost estimates under the New Mexico
Settlement Agreement. Under the New Mexico Restructuring Law, however, the New
Mexico Commission could effectively reduce the Company's recovery of its
decommissioning costs. See Note B.
The Company has established external trusts with independent trustees,
which enable the Company to record a current deduction for federal income tax
purposes of a portion of amounts funded. As of December 31, 1999, the fair
market value of the trust funds was approximately $57.1 million, which is
reflected in the Company's balance sheet in deferred charges and other assets.
Steam Generators. Palo Verde has experienced degradation in the steam
generator tubes of each unit. APS has undertaken an ongoing investigation and
analysis and has performed corrective actions designed to mitigate further
degradation. Corrective actions have included changes in operational procedures
designed to lower the operating temperatures of the units, chemical cleaning and
the implementation of other technical improvements. APS has stated that it
believes its remedial actions have slowed the rate of tube degradation.
The projected service lives of the units' steam generators are reassessed
by APS periodically in conjunction with inspections made during scheduled
outages of the Palo Verde units. In 1997, the Palo Verde Participants
unanimously approved the purchase of one set of spare steam generators for
delivery in September 2002. In December 1999, the Palo Verde Participants
unanimously approved installation of the new steam generators in Unit 2. The
Company's portion of total costs associated with construction and installation
of new steam generators in Unit 2, including replacement power costs, is
currently estimated not to exceed $44 million. APS has also stated that, based
on the latest available data, it estimates that the steam generators in Units 1
and 3 should operate for their designated lives of 40 years. However, APS is
reassessing whether it is economically desirable to replace the steam generators
in Units 1 and 3. Such replacements would also require the unanimous approval of
the Palo Verde Participants.
The Texas Rate Stipulation precludes the Company from seeking a rate
increase during the Freeze Period to recover additional capital costs associated
with the replacement of steam generators. The Company cannot recover these costs
through regulated rates in New Mexico since generation and power supply are
currently scheduled to become a competitive function in January 2001 under the
New Mexico Restructuring Law. Finally, the Company cannot assure that it will be
able to recover these capital costs through its wholesale power rates or its
competitive retail rates that become applicable after the start of competition.
See also Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Overview."
Spent Fuel Storage. In June 1999, APS requested approval from the NRC to
use more of the space in the existing spent fuel storage facilities at Palo
Verde. The NRC approved this request on March 2, 2000. As a result, the spent
fuel storage facilities will have sufficient capacity to store all fuel expected
to be discharged from normal operation of all three Palo Verde units through
2003. Alternative on-site storage facilities are currently being constructed to
supplement existing facilities. Spent fuel will be
55
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
removed from the original facilities as necessary and placed in special storage
casks which will be stored at the new facilities until accepted by the DOE for
permanent disposal. The alternative facilities will be built in stages to
accommodate casks on an as needed basis and are expected to be available for use
by the end of 2002.
Pursuant to the Nuclear Waste Policy Act of 1982, as amended in 1987 (the
"Waste Act"), the DOE is legally obligated to accept and dispose of all spent
nuclear fuel and other high-level radioactive wastes generated by all domestic
power reactors. In accordance with the Waste Act, the DOE entered into a spent
nuclear fuel contract with the Company and all other Palo Verde Participants. In
November 1989, the DOE reported that its spent nuclear fuel disposal facilities
would not be in operation until 2010. Subsequent judicial decisions required the
DOE to start accepting spent nuclear fuel by January 31, 1998. The DOE did not
meet that deadline, and the Company cannot currently predict when spent fuel
shipments to the DOE's permanent disposal site will commence. The 1998
decommissioning study assumes that only 14 of 333 spent fuel casks will have
been removed from Palo Verde by 2037 when title to the remaining spent fuel is
assumed to be transferred to the DOE. In January 1997, the Texas Commission
established a project to evaluate what, if any, action it should take with
regard to payments made to the DOE for funding of the DOE's obligation to start
accepting spent nuclear fuel by January 31, 1998. After receiving initial
comments, no further action has been taken on the project.
In July 1998, APS filed, on behalf of all Palo Verde Participants, a
petition for review with the United States Court of Appeals for the District of
Columbia Circuit seeking confirmation that findings by the Circuit Court in a
prior case brought by Northern States Power regarding the DOE's failure to
comply with its obligation to begin accepting spent nuclear fuel would apply to
all spent nuclear fuel contract holders. The Circuit Court held APS' petition in
abeyance pending the United States Supreme Court's decision to review the
Northern States Power case. In November 1998, the Supreme Court denied review of
this case. The Circuit Court subsequently dismissed APS' petition after the
Circuit Court issued clarifying orders essentially granting the relief sought by
APS. APS is monitoring pending litigation between the DOE and other nuclear
operators before initiating further legal proceedings or other procedural
measures on behalf of the Palo Verde Participants to enforce the DOE's statutory
and contractual obligations. The Company is unable to predict the outcome of
these matters at this time.
The Company expects to incur significant spent fuel storage costs during
the life of Palo Verde that it believes are the responsibility of the DOE. These
costs will be expensed as incurred until an agreement is reached with the DOE
for recovery of these costs. However, the Company cannot predict when, if ever,
these additional costs will be recovered from the DOE.
Disposal of Low-Level Radioactive Waste. Congress has established
requirements for the disposal by each state of low-level radioactive waste
generated within its borders. Arizona, California, North Dakota and South Dakota
have entered into a compact (the "Southwestern Compact") for the disposal of
low-level radioactive waste. California will act as the first host state of the
Southwestern Compact, and Arizona will serve as the second host state. The
construction and opening of the California low-level radioactive waste disposal
site in Ward Valley has been delayed due to extensive public hearings, disputes
over environmental issues and review of technical issues related to the proposed
site. Palo Verde is projected to undergo decommissioning during the period in
which Arizona will act as host for the Southwestern Compact. However, the
opposition, delays, uncertainty and costs experienced in
56
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
California demonstrate possible roadblocks that may be encountered when Arizona
seeks to open its own waste repository.
Liability and Insurance Matters. The Palo Verde Participants have public
liability insurance against nuclear energy hazards up to the full limit of
liability under federal law. The insurance consists of $200 million of primary
liability insurance provided by commercial insurance carriers, with the balance
being provided by an industry-wide retrospective assessment program, pursuant to
which industry participants would be required to pay an assessment to cover any
loss in excess of $200 million. Effective August 1998, the maximum assessment
per reactor for each nuclear incident is approximately $90.7 million, subject to
an annual limit of $10 million per incident. Based upon the Company's 15.8%
interest in Palo Verde, the Company's maximum potential assessment per incident
is approximately $43.0 million for all three units with an annual payment
limitation of approximately $4.7 million.
The Palo Verde Participants maintain "all risk" (including nuclear hazards)
insurance for damage to, and decontamination of, property at Palo Verde in the
aggregate amount of $2.75 billion, a substantial portion of which must first be
applied to stabilization and decontamination. Finally, the Company has obtained
insurance against a portion of any increased cost of generation or purchased
power which may result from an accidental outage of any of the three Palo Verde
units if the outage exceeds 12 weeks.
Coal Reclamation. In 1999, upon final review of a study conducted by an
outside engineering firm, the Company reduced its estimated final reclamation
and coal mine closure liability related to the Company's interest in Four
Corners from $14.8 million to $8.2 million. The $6.6 million adjustment was
recorded as a reduction of energy expenses in the fourth quarter of 1999.
D. Common Stock
Overview
The Company's common stock has a stated value of $1 per share, with no
cumulative voting rights or preemptive rights. Holders of the common stock have
the right to elect the Company's directors and to vote on other matters.
Prior to September 1999, the Company's First and Second Supplemental
Indentures restricted the Company's ability to pay dividends on its common
stock. So long as the Company's First Mortgage Bonds are outstanding and the
series with the longest maturity was not rated "investment grade" by either
Standard & Poor's Rating Service ("S&P") or Moody's Investors Service, Inc.
("Moody's"), the Company was significantly limited in its ability to declare any
dividend on the common stock, other than in additional shares of common stock.
The Company's First Mortgage Bonds were upgraded to investment grade by S&P in
September 1999 and by Moody's in November 1999.
1996 and 1999 Long-Term Incentive Plans
The 1996 Long-Term Incentive Plan (the "1996 Plan") authorized the issuance
of up to 3,500,000 shares of common stock for the benefit of officers, key
employees and non-employee directors
57
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
through the award or grant of non-statutory stock options, incentive stock
options, stock appreciation rights, restricted stock, bonus stock and
performance stock.
In May 1999, the Company's shareholders approved the adoption of a stock-
based long-term incentive plan (the "1999 Plan"). Under the 1999 Plan,
directors, officers, managers, other employees and consultants are eligible to
receive non-statutory stock options, incentive stock options, stock appreciation
rights, restricted stock, bonus stock and performance shares covering up to two
million shares of common stock. In July 1999, the Company filed its Registration
Statement on Form S-8 registering the two million shares of common stock
reserved for issuance under the 1999 Plan. In August 1999, the FERC approved the
issuance of shares under the 1999 Plan.
Stock Options. Stock options have been granted at prices equal to or
greater than the market value of the shares at the date of grant. The options
expire ten years from the date of grant unless terminated earlier by the Board
of Directors. The following table summarizes the transactions of the Company's
stock options for 1999, 1998 and 1997:
Weighted
Average
Number of Exercise
Shares Price
--------- --------
Unexercised options outstanding at December 31, 1996.......... 1,900,000 $ 5.69
Options granted.......................................... 55,000 6.56
Options exercised........................................ - -
Options forfeited........................................ (5,000) 6.56
---------
Unexercised options outstanding at December 31, 1997.......... 1,950,000 5.71
Options granted.......................................... 585,000 7.71
Options exercised........................................ - -
Options forfeited........................................ - -
---------
Unexercised options outstanding at December 31, 1998.......... 2,535,000 6.17
---------
Options granted.......................................... 255,644 8.24
Options exercised........................................ - -
Options forfeited........................................ - -
---------
Unexercised options outstanding at December 31, 1999.......... 2,790,644 6.16
=========
58
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
Stock option awards provide for vesting periods of up to five years. Stock
options outstanding at December 31, 1999 are as follows:
Exercise Number Remaining Number
Price Outstanding Life, In Years Exercisable
-------- ----------- -------------- -----------
$ 5.32 800,000 6.3 640,000
5.56 800,000 6.4 560,000
6.56 50,000 7.3 50,000
7.00 300,000 6.4 300,000
7.50 525,000 8.0 105,000
9.50 60,000 8.4 60,000
8.75 100,000 9.0 -
7.38 50,000 9.3 50,000
8.13 100,000 9.0 -
8.94 2,703 9.6 2,703
9.00 2,941 9.9 2,941
--------- ---------
2,790,644 1,770,644
========= =========
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, because the stock option grants had no intrinsic value at the
measurement date, no compensation expense has been recognized. Had compensation
expense for the plan been determined based on the fair value at the grant date,
consistent with the provisions of SFAS No. 123, the Company's net earnings and
earnings per share would have been reduced to the pro forma amounts presented
below:
Years Ended December 31,
----------------------------------------------
1999 1998 1997
------- ------- -------
Net income applicable to common
stock (In thousands):
As reported.................................. $28,276 $45,709 $38,649
Pro forma.................................... 27,380 44,913 38,093
Basic earnings per share:
As reported.................................. 0.476 0.760 0.643
Pro forma.................................... 0.461 0.746 0.634
Diluted earnings per share:
As reported.................................. 0.473 0.754 0.639
Pro forma.................................... 0.458 0.742 0.630
59
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
The fair value for these options was estimated at the grant date using the
Black-Scholes option pricing model. Weighted average assumptions and grant-date
fair value for 1999, 1998 and 1997 are presented below:
1999 1998 1997
------ ------ ------
Risk-free interest rate 5.01% 5.82% 6.76%
Expected life, in years 10 10 10
Expected volatility 33.98% 7.47% 10.86%
Expected dividend yield - - -
Fair value $ 4.58 $2.97 $ 3.24
Restricted Stock. The Company has awarded vested and unvested restricted
stock awards under the 1996 Plan. Restrictions from resale generally lapse, and
unvested awards vest, over periods of four to five years. The market value of
the restricted stock at the time of grant is recorded as unearned compensation
as a separate component of common stock equity and is amortized to expense over
the restriction period. During 1999, 1998 and 1997, approximately $1.2 million,
$0.5 million and $0.5 million, respectively, related to restricted stock awards
was charged to expense. The following table summarizes the vested and unvested
restricted stock awards for 1999, 1998 and 1997:
Vested Unvested Total
------- -------- -------
Restricted shares outstanding at December 31, 1996... 80,000 100,000 180,000
Restricted stock awards............................ 47,440 36,815 84,255
Lapsed restrictions and vesting.................... (40,488) (27,363) (67,851)
------- ------- -------
Restricted shares outstanding at December 31, 1997... 86,952 109,452 196,404
Restricted stock awards............................ - 26,675 26,675
Lapsed restrictions and vesting.................... (40,488) (32,698) (73,186)
Forfeitures........................................ - (1,908) (1,908)
------- ------- -------
Restricted shares outstanding at December 31, 1998... 46,464 101,521 147,985
Restricted stock awards............................ 94,619 116,125 210,744
Lapsed restrictions and vesting.................... (40,488) (58,021) (98,509)
Forfeitures........................................ - (1,432) (1,432)
------- ------- -------
Restricted shares outstanding at December 31, 1999... 100,595 158,193 258,788
======= ======= =======
The holder of a restricted stock award has rights as a shareholder of the
Company, including the right to vote and, if applicable, receive cash dividends
on restricted stock, except that certain restricted stock awards require any
cash dividend on restricted stock to be delivered to the Company in exchange for
additional shares of restricted stock of equivalent market value.
Common Stock Repurchase Program
In May 1999, the Company's Board of Directors approved a stock repurchase
program allowing the Company to purchase outstanding shares of its common stock
from time to time, up to a total of six million shares. The Company will make
purchases primarily in the open market at prevailing prices and will also engage
in private transactions, if appropriate. The shares that the Company acquires
will be available for issuance under employee benefit and stock option plans or
may be retired. As of
60
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
December 31, 1999, the Company had repurchased 3,169,289 shares of common stock
at a cost of approximately $28.7 million, including commissions.
Reconciliation of Basic and Diluted Earnings Per Common Share
The reconciliation of basic and diluted earnings per common share before
extraordinary items is presented below:
Year Ended December 31, 1999
--------------------------------------------
Per
Common
Income Shares Share
-------- ------------ --------
(In thousands)
Income before extraordinary item.............. $43,809
Less:
Preferred stock:
Dividend requirements...................... 2,616
Redemption costs........................... 9,581
-------
Basic earnings per common share:
Net income applicable to common stock....... 31,612 59,349,468 $ 0.533
========
Effect of dilutive securities:
Unvested restricted stock................... - 32,729
Stock options............................... - 349,452
------- ------------
Diluted earnings per common share:
Net income applicable to common stock....... $31,612 59,731,649 $ 0.529
======= ============ ========
Year Ended December 31, 1998
--------------------------------------------
Per
Common
Income Shares Share
-------- ------------ --------
(In thousands)
Income before extraordinary item.............. $57,073
Less: Preferred stock dividend requirements 14,707
-------
Basic earnings per common share:
Net income applicable to common stock....... 42,366 60,168,234 $ 0.704
========
Effect of dilutive securities:
Unvested restricted stock................... - 30,309
Stock options............................... - 434,755
------- ------------
Diluted earnings per common share:
Net income applicable to common stock....... $42,366 60,633,298 $ 0.699
======= ============ ========
61
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
Year Ended December 31, 1997
--------------------------------------------
Per
Common
Income Shares Share
-------- ------------ --------
(In thousands)
Income before extraordinary item.............. $54,568
Less: Preferred stock dividend requirements 13,144
-------
Basic earnings per common share:
Net income applicable to common stock....... 41,424 60,128,505 $ 0.689
========
Effect of dilutive securities:
Unvested restricted stock................... - 16,041
Stock options............................... - 293,086
------- ------------
Diluted earnings per common share:
Net income applicable to common stock....... $41,424 60,437,632 $ 0.685
======= ============ ========
Options that were excluded from the computation of diluted earnings per
common share because the options' exercise price was greater than the average
market price of the common shares for the period are listed below:
1) 300,000 options granted June 11, 1996 at an exercise price of $7.00
were excluded for the second through fourth quarters of 1997.
2) 525,000 options granted January 2, 1998 at an exercise price of $7.50
were excluded for the first quarter of 1998.
3) 60,000 options granted May 29, 1998 at an exercise price of $9.50 were
excluded for the second through fourth quarters of 1998 and all of
1999.
4) 100,000 options granted January 11, 1999 at an exercise price of $8.75
were excluded for the first and second quarters of 1999.
E. Preferred Stock
In March 1999, after obtaining required consents of holders of certain of
the Company's outstanding debt securities, the Company redeemed its Series A
Preferred Stock. The Company paid the redemption price of approximately $139.6
million, accrued cash dividends of $1.3 million, and premium, fees and costs of
securing the consents aggregating $9.6 million. The preferred stock had an
annual dividend rate of 11.40%.
62
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
Following is a summary of the changes in the preferred stock for 1999, 1998
and 1997:
Shares Amount
---------- ---------
(In thousands)
Balance at December 31, 1996................... 1,084,264 $ 108,426
Issuance of dividends........................ 128,924 12,893
---------- ---------
Balance at December 31, 1997................... 1,213,188 121,319
Issuance of dividends........................ 144,256 14,425
---------- ---------
Balance at December 31, 1998................... 1,357,444 135,744
Issuance of dividends........................ 38,670 3,867
Redemption of preferred stock................ (1,396,114) (139,611)
---------- ---------
Balance at December 31, 1999................... - $ -
========== =========
F. Long-Term Debt and Financing and Capital Lease Obligations
Outstanding long-term debt and financing and capital lease
obligations are as follows:
December 31,
---------------------------
1999 1998
--------- ----------
(In thousands)
Long-Term Debt:
First Mortgage Bonds (1):
7.25% Series A, issued 1996, due 1999.................................. $ - $ 36,034
7.75% Series B, issued 1996, due 2001.................................. 38,571 62,698
8.25% Series C, issued 1996, due 2003.................................. 94,505 119,292
8.90% Series D, issued 1996, due 2006.................................. 211,402 223,132
9.40% Series E, issued 1996, due 2011.................................. 250,498 273,398
Pollution Control Bonds (2):
Secured by First Mortgage Collateral Series Bonds:
Variable rate bonds, due 2014........................................ 63,500 63,500
Variable rate refunding bonds, due 2013.............................. 33,300 33,300
Variable rate refunding bonds, due 2014.............................. 37,100 37,100
Variable rate refunding bonds, due 2015.............................. 59,235 59,235
Promissory note, due 2007 ($93,000 due in 2000) (3)........................ 558 646
--------- ---------
Total long-term debt............................................... 788,669 908,335
--------- ---------
Financing and Capital Lease Obligations:
Nuclear fuel ($25,261,000 due in 2000) (4)................................. 48,292 49,316
Turbine lease ($1,688,000 due in 2000) (5)................................. 1,688 3,228
--------- ---------
Total financing and capital lease obligations...................... 49,980 52,544
--------- ---------
Total long-term debt and financing and capital
lease obligations................................................ 838,649 960,879
Current maturities (amount due within one year).............................. (27,042) (63,817)
--------- ---------
$ 811,607 $ 897,062
========= =========
- --------------------
(1) First Mortgage Bonds
Substantially all of the Company's utility plant is subject to liens under the
First Mortgage Indenture.
63
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
The First Mortgage Indenture imposes certain limitations on the ability of
the Company to (i) declare or pay dividends on common stock; (ii) incur
additional indebtedness or liens on mortgaged property; and (iii) enter
into a consolidation, merger or sale of assets.
The Company repaid the remaining $36.0 million of Series A bonds at their
maturity on February 1, 1999. The Series B, C and D bonds may not be
redeemed by the Company prior to maturity. The Series E bonds may be
redeemed at the option of the Company, in whole or in part, on or after
February 1, 2006. The Company is not required to make mandatory redemption
or sinking fund payments with respect to the bonds prior to maturity.
Repurchases of First Mortgage Bonds made during 1999, 1998 and 1997 are as
follows (In thousands):
Years Ended December 31,
---------------------------------------------------------
1999 1998 1997
----------- ----------- -----------
7.25% Series A..................... $ - $ 30,227 $ 12,005
7.75% Series B..................... 24,127 - 16,073
8.25% Series C..................... 24,787 - 29,697
8.90% Series D..................... 11,730 - 12,825
9.40% Series E..................... 22,900 - 12,502
----------- ----------- -----------
Total............................ $ 83,544 $ 30,227 $ 83,102
=========== =========== ===========
(2) Pollution Control Bonds
The Company has four series of tax exempt Pollution Control Bonds in an
aggregate principal amount of approximately $193.1 million. The average
effective annual interest rate on the bonds is calculated to be 6.17% at
December 31, 1999. The bonds may be required to be repurchased at the
holder's option or are subject to mandatory redemption upon the occurrence
of certain events, and are redeemable at the option of the Company under
certain circumstances. Each of the tax exempt issues is enhanced by a
letter of credit. The Company's obligation to the issuing banks pursuant to
the letter of credit reimbursement agreements are secured by First Mortgage
Collateral Series Bonds (the "Collateral Series Bonds") issued pursuant to
the First Mortgage Indenture in the amount of the letters of credit.
(3) Promissory Note
The note has an annual interest rate of 5.5% and is secured by certain
furniture and fixtures.
(4) Nuclear Fuel Financing
The Company has available a $100 million credit facility that provides for
up to $70 million for the financing of nuclear fuel and up to $50 million,
depending on the balance of nuclear fuel financings, for working capital.
This financing is accomplished through a trust that borrows under the
facility to acquire and process the nuclear fuel. The Company is obligated
to repay the trust's borrowings with interest, and has secured this
obligation with the Collateral Series Bonds. In the Company's financial
statements, the assets and liabilities of the trust are reported as assets
and liabilities of the Company.
64
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(5) Copper Turbine Lease Obligation
The Company leases a turbine and certain other related equipment under a
lease which is currently accounted for as a capital lease and expires in
July 2000. Semiannual lease payments, including interest, are approximately
$0.9 million through July 2000. The effective annual interest rate implicit
in this lease is calculated to be 9.6%. The Company has renewed the lease
through July 2005, with an extension option for two additional years. The
renewal lease will be accounted for as an operating lease as of the
effective date of the lease renewal and requires semiannual lease payments
of approximately $0.4 million.
The letter of credit reimbursement agreements which enhance the Company's
Pollution Control Bonds and the $100 million credit facility require compliance
with certain total debt and interest coverage ratios. The Company maintained
the required compliance throughout 1999.
As of December 31, 1999, the scheduled maturities for the next five years
of long-term debt and financing and capital lease obligations are as follows (In
thousands):
2000............................................... $27,042
2001............................................... 61,701
2002............................................... 104
2003............................................... 94,615
2004............................................... 116
The table above does not reflect future obligations and maturities related to
nuclear fuel purchase commitments.
65
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
G. Income Taxes
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1999 and
1998 are presented below (In thousands):
December 31,
------------------------------------
1999 1998
------------ ------------
Deferred tax assets:
Benefits of tax loss carryforwards............................. $ 137,752 $ 171,977
Pensions and benefits.......................................... 45,341 45,380
Decommissioning................................................ 29,642 25,800
Investment tax credit carryforward............................. 20,410 20,410
Alternative minimum tax credit carryforward.................... 16,776 14,719
Reorganization expenses financed with bonds.................... 9,247 15,777
Capital leases................................................. 2,015 2,349
Other (including state deferred taxes)......................... 17,008 14,898
------------ ------------
Total gross deferred tax assets........................... 278,191 311,310
------------ ------------
Less valuation allowance:
Federal...................................................... 12,661 12,661
State....................................................... 15,659 16,314
------------ ------------
Total valuation allowance................................. 28,320 28,975
------------ ------------
Net deferred tax assets................................ 249,871 282,335
------------ ------------
Deferred tax liabilities:
Plant, principally due to depreciation
and basis differences........................................ (256,701) (264,175)
Other.......................................................... (5,673) (7,642)
------------ ------------
Total gross deferred tax liabilities...................... (262,374) (271,817)
------------ ------------
Net accumulated deferred income taxes.................. $ (12,503) $ 10,518
============ ============
The deferred tax asset valuation allowance decreased by $0.7 million, $0.8
million and $0.8 million in 1999, 1998 and 1997, respectively. These decreases
were due to a reduction of unused state net operating loss ("NOL") carryforward
benefits, which had valuation allowances recorded against them. Based on the
average annual book income before taxes for the prior three years, excluding the
effects of extraordinary and unusual or infrequent items, the Company believes
that the net deferred tax assets will be fully realized at current levels of
book and taxable income. Approximately $26.8 million of the Company's valuation
allowance at December 31, 1999, if subsequently recognized as a tax benefit,
would be credited directly to capital in excess of stated value in accordance
with SOP 90-7.
66
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
The Company recognized income taxes as follows (In thousands):
Years Ended December 31,
---------------------------------------------------
1999 1998 1997
---------------- --------------- ----------------
Income tax expense:
Federal:
Current............................................. $ 2,142 $ 2,884 $ 2,382
Deferred............................................ 20,415 27,412 28,087
--------------- --------------- ---------------
Total federal income tax from operations........... 22,557 30,296 30,469
Deferred included in extraordinary items............ (1,796) 1,800 (1,494)
--------------- --------------- ---------------
Total federal income tax expense................. $ 20,761 $ 32,096 $ 28,975
=============== =============== ===============
State:
Deferred............................................ $ 3,075 $ 4,442 $ 4,307
Deferred included in extraordinary items............ (331) 344 -
--------------- --------------- ---------------
Total state income tax expense................... $ 2,744 $ 4,786 $ 4,307
=============== =============== ===============
The current federal income tax expense for 1999, 1998 and 1997 results
primarily from the accrual of alternative minimum tax ("AMT"). Deferred federal
income tax includes an offsetting AMT benefit of $2.1 million, $2.8 million and
$2.4 million for 1999, 1998 and 1997, respectively.
Federal income tax provisions differ from amounts computed by applying the
statutory rate of 35% to book income before federal income tax as follows (In
thousands):
Years Ended December 31,
----------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
Federal income tax expense computed
on income at statutory rate......................... $ 21,432 $ 32,379 $ 28,269
Difference due to:
Adjustment to cash value of Company-owned
life insurance policies............................ (608) - -
Other............................................... (63) (283) 706
--------------- --------------- ----------------
Total federal income tax expense................... $ 20,761 $ 32,096 $ 28,975
=============== =============== ================
Effective federal income tax rate..................... 33.9% 34.7% 35.9%
=============== =============== ================
As of December 31, 1999, the Company had $393.6 million of federal tax NOL
carryforwards, $20.4 million of investment tax credit ("ITC") carryforwards and
$16.8 million of AMT credit carryforwards. If unused, the NOL carryforwards
would expire at the end of 2011, the ITC carryforwards would expire in 2001
through 2005, and the AMT credit carryforwards have an unlimited life. The
Company had $367.1 million of state NOL carryforwards which, if unused, would
expire at the end of 2001. These tax attributes are subject to audit by the
Internal Revenue Service ("IRS"). The IRS is in the preliminary stages of its
examination of the carryforwards and the 1996 through 1998 federal income tax
returns. The differences between book and taxable income were primarily due to
depreciation, plant basis differences and deferred fuel costs.
67
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
H. Commitments and Contingencies
Sale/Leaseback Indemnification Obligations
Pursuant to the Palo Verde sale/leaseback participation agreements and
leases, if the lessors incur additional tax liability or other loss as a result
of federal or state tax assessments related to the sale/leaseback transactions,
the lessors may have claims against the Company for indemnification.
One of the lessors in the sale/leaseback transactions related to Unit 2 of
Palo Verde notified the Company that the IRS raised issues, primarily related to
ITC claims by the lessor, regarding the income tax treatment of the
sale/leaseback transactions. Although the Company believes the lessor has
meritorious defenses to the IRS' position, the Company cannot predict the
outcome of this matter. The lessor has advised the Company that it held several
meetings with the IRS in 1999 and anticipates a final report from the IRS in
which these issues will be favorably resolved.
The Company estimates that the total amount of potential claims for
indemnification from all lessors related to the issues raised by the IRS could
approximate $10.0 million, exclusive of any applicable interest, if the IRS
prevails. The Company does not believe it is probable that a loss has been
incurred and, therefore, has made no provision in the accompanying financial
statements related to this matter.
Environmental Matters
The Company is subject to regulation with respect to air, soil and water
quality, solid waste disposal and other environmental matters by federal, state
and local authorities. These authorities govern current facility operations and
exercise continuing jurisdiction over facility modifications. Environmental
regulations can change rapidly and are difficult to predict. Substantial
expenditures may be required to comply with these regulations. The Company
analyzes the costs of its obligations arising from environmental matters on an
ongoing basis, and management believes it has made adequate provision in its
financial statements to meet such obligations. However, unforeseen expenses
associated with compliance could have a material adverse effect on the future
operations and financial condition of the Company.
I. Litigation
Litigation with Las Cruces
On February 24, 2000, the Company and Las Cruces entered into a settlement
agreement ending Las Cruces' efforts to municipalize the Company's distribution
assets and other facilities used to provide electric service to customers in Las
Cruces. Under the settlement agreement the Company will pay Las Cruces a one-
time lump sum payment of up to $21 million, $16.5 million of which was expensed
in the fourth quarter of 1999. The remaining $4.5 million relates to the
transfer of Las Cruces' West Mesa Substation and related facilities to the
Company. Las Cruces must substantiate the costs of building the West Mesa
Substation and related transmission and distribution facilities, subject to a
dollar for dollar offset against the $4.5 million purchase price for any amounts
not substantiated.
68
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
The settlement agreement also provides for Las Cruces and the Company to
enter into a seven-year franchise agreement with a 2% annual franchise fee
(approximately $0.8 million per year currently) for the provision of electric
distribution service. Las Cruces is prohibited during this seven-year period
from taking any action to condemn or otherwise attempt to acquire the Company's
distribution system, or attempt to operate or build its own electric
distribution system. Las Cruces will have a 90-day non-assignable option at the
end of the Company's seven-year franchise agreement to purchase the portion of
the Company's distribution system that serves Las Cruces at a purchase price of
130% of the Company's book value at that time. If Las Cruces exercises this
option, it is prohibited from reselling the distribution assets for two years.
If Las Cruces fails to exercise this option, the franchise and standstill
agreements will be extended for an additional two years.
Las Cruces also agreed that it will not contest the calculation of the
Company's stranded costs in New Mexico, provided the stranded costs charged to
Las Cruces customers do not exceed $52.9 million declining over time, which is
the amount initially ordered by the FERC in the Las Cruces stranded cost
proceeding. Las Cruces also agreed to assign all of its existing customer
contracts to the Company.
Under the terms of the settlement agreement, all existing litigation
between the Company and Las Cruces, including all litigation pending before the
FERC and the Federal District Court of New Mexico, will be dismissed. The
Company and Las Cruces are finalizing the written settlement agreement and
obtaining final approvals. The Company anticipates signing a definitive
agreement by the end of the first quarter of 2000.
Four Corners
In July 1995, the Navajo Nation enacted the Navajo Nation Air Pollution
Prevention and Control Act, the Navajo Nation Safe Drinking Water Act and the
Navajo Nation Pesticide Act (collectively, the "Acts"). In October 1995, the
Four Corners participants requested that the United States Secretary of the
Interior resolve their dispute with the Navajo Nation regarding whether the Acts
apply to operation of Four Corners. The Four Corners participants subsequently
filed a lawsuit in the District Court of the Navajo Nation, Window Rock
District, seeking, among other things, a declaratory judgment that (i) the Four
Corners leases and federal easements preclude the application of the Acts to the
operation of Four Corners and (ii) the Navajo Nation and its agencies and courts
lack adjudicatory jurisdiction to determine the enforceability of the Acts as
applied to Four Corners. In October 1995, the Navajo Nation and the Four Corners
participants agreed to stay the proceedings indefinitely so the parties may
attempt to resolve the dispute without litigation. This matter remains inactive
and the Company is unable to predict the outcome of this case.
Water Cases
San Juan River System. The Four Corners participants are among the
defendants in a suit filed by the State of New Mexico in 1975 in state district
court in New Mexico against the United States of America, the City of
Farmington, New Mexico, the Secretary of the Interior as Trustee for the Navajo
Nation and other Indian tribes and certain other defendants (State of New Mexico
ex rel. S. E. Reynolds, New Mexico State Engineer v. United States of America,
et al., Eleventh Judicial District Court, County of San Juan, State of New
Mexico, Cause No. 75-184). The suit seeks adjudication of the water rights of
the San Juan River Stream System in New Mexico, which, among other things,
supplies the water used at Four Corners. An agreement reached with the Navajo
Nation in 1985 provides that if Four Corners loses a portion of its water rights
in the adjudication, the tribe will provide sufficient water from its
69
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
allocation to offset the loss. The case has been inactive for many years and the
Company is unable to predict the outcome of this case.
Gila River System. In connection with the construction and operation of
Palo Verde, APS entered into contracts with certain municipalities granting APS
the right to purchase effluent for cooling purposes at Palo Verde. In 1986, a
summons was served on APS that required all water claimants in the Lower Gila
River Watershed in Arizona to assert any claims to water in an action pending in
Maricopa County Superior Court, titled In re The General Adjudication of All
Rights to Use Water in the Gila River System and Source. Palo Verde is located
within the geographic area subject to the summons and the rights of the Palo
Verde Participants to the use of groundwater and effluent at Palo Verde is
potentially at issue in this action. APS, as operating agent, filed claims that
dispute the Court's jurisdiction over the Palo Verde Participants' groundwater
rights and their contractual rights to effluent relating to Palo Verde and,
alternatively, seek confirmation of such rights. In November 1999, the Arizona
Supreme Court issued a decision confirming that certain groundwater rights may
be available to the federal government and Indian tribes. APS and other parties
have petitioned the United States Supreme Court for review of this decision. The
Company is unable to predict the outcome of this case.
Other Legal Proceedings
The Company is a party to various other claims, legal actions and
complaints. In many of these matters, the Company has excess casualty liability
insurance which is applicable. Based upon a review of these claims and
applicable insurance coverage, the Company believes that none of these claims
will have a material adverse effect on the financial position, results of
operations and cash flows of the Company.
J. Employee Benefits
Retirement Plans
The Company's Retirement Income Plan (the "Retirement Plan") covers
employees who have completed one year of service with the Company, are 21 years
of age and work at least a minimum number of hours each year. The Retirement
Plan is a qualified noncontributory defined benefit plan. Upon retirement or
death of a vested plan participant, assets of the Retirement Plan are used to
pay benefit obligations under the Retirement Plan. Contributions from the
Company are based on the minimum funding amounts required by the Department of
Labor and IRS under provisions of the Retirement Plan, as actuarially
calculated. The assets of the Retirement Plan are invested in equity securities,
fixed income instruments and cash equivalents and are managed by professional
investment managers appointed by the Company.
The Company's Non-Qualified Retirement Income Plan is a non-funded defined
benefit plan which covers certain former employees of the Company. During 1996,
as part of the Company's reorganization, the Company terminated the Non-
Qualified Retirement Income Plan with respect to all active employees. The
benefit cost for the Non-Qualified Retirement Income Plan is based on
substantially the same actuarial methods and economic assumptions as those used
for the Retirement Plan.
70
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
The Company accounts for the Retirement Plan and the Non-Qualified
Retirement Income Plan under SFAS No. 87, "Employers' Accounting for Pensions,"
("SFAS No. 87"). In accordance with SFAS No. 87, the 2000 net periodic benefit
cost will include amortization of the unrecognized net gain which exceeded 10%
of the benefit obligation at the beginning of the year. The amortization will
reflect the excess divided by the average remaining service period of active
employees expected to receive benefits. In 1998, the Company adopted SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits,"
("SFAS No. 132") which supercedes the disclosure requirements of SFAS No. 87.
The amounts recognized in the Company's balance sheets and the funded
status of the plans at December 31, 1999 and 1998 are presented below (In
thousands):
Years Ended December 31,
---------------------------------------------------
1999 1998
----------------------- -----------------------
Non- Non-
Qualified Qualified
Retirement Retirement Retirement Retirement
Income Income Income Income
Plan Plan Plan Plan
---------- ---------- ---------- ----------
Change in benefit obligation:
Benefit obligation at beginning of year.......... $ (94,140) $ (19,495) $ (83,812) $ (19,324)
Service cost..................................... (3,155) - (2,879) -
Interest cost.................................... (6,295) (1,271) (5,861) (1,304)
Actuarial gain (loss)............................ 12,517 (1) 1,366 (4,796) (559)
Benefits paid.................................... 3,346 1,687 3,208 1,692
---------- ---------- ---------- ----------
Benefit obligation at end of year.............. (87,727) (17,713) (94,140) (19,495)
---------- ---------- ---------- ----------
Change in fair value of plan assets:
Fair value of plan assets at beginning of year... 79,629 - 74,114 -
Actual return on plan assets..................... 7,050 - 5,603 -
Employer contribution............................ 3,120 1,687 3,120 1,692
Benefits paid.................................... (3,346) (1,687) (3,208) (1,692)
---------- ---------- ---------- ----------
Fair value of plan assets at end of year....... 86,453 - 79,629 -
---------- ---------- ---------- ----------
Funded status..................................... (1,274) (17,713) (14,511) (19,495)
Unrecognized net (gain) loss...................... (12,844) (645) 126 559
Balance of additional liability................... - - - (559)
---------- ---------- ---------- ----------
Accrued benefit liability........................ $ (14,118) $ (18,358) $ (14,385) $ (19,495)
========== ========== ========== ==========
_____________________________
(1) Represents a change in actuarial assumptions due to revised census data.
71
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
Weighted average actuarial assumptions used in determining the actuarial
present value of the benefit obligations are as follows:
1999 1998
------------------------------- --------------------------------
Non- Non-
Qualified Qualified
Retirement Retirement Retirement Retirement
Income Income Income Income
Plan Plan Plan Plan
---------- ------------ ------------ ------------
Discount rate.............................. 7.75% 7.75% 6.75% 6.75%
Expected return on plan assets............. 8.50% N/A 8.50% N/A
Rate of compensation increase.............. 5.00% N/A 5.00% N/A
Net periodic benefit cost is made up of the components listed below as
determined using the projected unit credit actuarial cost method (In thousands):
Years Ended December 31,
-----------------------------------------------
1999 1998 1997
--------- --------- ---------
Components of net periodic
benefit cost:
Service cost........................... $ 3,155 $ 2,879 $ 2,402
Interest cost.......................... 7,566 7,165 6,737
Expected return on plan assets......... (6,597) (5,820) (5,094)
--------- --------- ---------
Net periodic benefit cost............ $ 4,124 $ 4,224 $ 4,045
========= ========= =========
Weighted average actuarial assumptions used in determining the net periodic
benefit costs are as follows:
1999 1998 1997
------- ------- -------
Discount rate........................... 6.75% 7.00% 7.50%
Expected return on plan assets.......... 8.50% 8.50% 8.50%
Rate of compensation increase........... 5.00% 5.00% 5.00%
Other Postretirement Benefits
The Company provides certain health care benefits for retired employees and
their eligible dependents and life insurance benefits for retired employees
only. Substantially all of the Company's employees may become eligible for those
benefits if they reach retirement age while working for the Company. Those
benefits are accounted for under SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," ("SFAS No. 106"). In 1998, the
Company adopted SFAS No. 132 which supercedes the disclosure requirements of
SFAS No. 106. In accordance with SFAS No. 106, the 1999 net periodic benefit
cost includes amortization of the unrecognized net gain arising in 1999 which
exceeded 10% of the benefit obligation at the beginning of the year. The
amortization reflects the excess divided by the average remaining service period
of active employees expected to receive benefits. Contributions from the Company
are based on the funding amounts required by the Texas Commission in the Texas
Rate Stipulation. The assets of the Other Postretirement Benefits Plan are
invested in fixed income instruments and cash equivalents and are managed by
professional investment managers appointed by the Company.
72
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
The amounts recognized in the Company's balance sheets and the funded
status of the plan at December 31, 1999 and 1998 are presented below (In
thousands):
December 31,
-----------------------------------
1999 1998
----------- ----------
Change in benefit obligation:
Benefit obligation at beginning of year...... $ (94,658) $ (83,973)
Service cost................................. (2,226) (2,818)
Interest cost................................ (3,994) (5,822)
Actuarial gain (loss)........................ 45,314 (1) (3,438)
Retirees' contributions...................... (215) (202)
Benefits paid................................ 1,833 1,595
----------- ----------
Benefit obligation at end of year.......... (53,946) (94,658)
----------- ----------
Change in fair value of plan assets:
Fair value of plan assets at
beginning of year.......................... 11,254 8,822
Actual return on plan assets................. 467 403
Employer contribution........................ 3,422 3,422
Retirees' contributions...................... 215 202
Benefits paid................................ (1,833) (1,595)
----------- ----------
Fair value of plan assets at end of year... 13,525 11,254
----------- ----------
Funded status................................. (40,421) (83,404)
Unrecognized net (gain) loss.................. (40,755) 2,927
----------- ----------
Accrued benefit liability.................... $ (81,176) $ (80,477)
=========== ==========
__________________
(1) Represents a change in actuarial assumptions due to (i) a change
in Medicare credits; (ii) revised census data; and (iii) prior
experience benefit.
Net periodic benefit cost is made up of the components listed below (In
thousands):
Years Ended December 31,
-----------------------------
1999 1998 1997
------- ------ ------
Components of net periodic
benefit cost:
Service cost............................... $ 2,226 $2,818 $2,538
Interest cost.............................. 3,994 5,822 5,254
Expected return on plan assets............. (381) (271) (250)
Amortization of unrecognized gain.......... (1,719) - (7)
------- ------ ------
Net periodic benefit cost............. $ 4,120 $8,369 $7,535
======= ====== ======
73
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
Weighted average assumptions are as follows:
1999 1998 1997
------ ------ ------
Discount rate............................... 7.75% 6.75% 7.00%
Expected return on plan assets.............. 4.50% 4.50% 4.50%
Rate of compensation increase............... 5.00% 5.00% 5.00%
For measurement purposes, a 9.5% annual rate of increase in the per capital
cost of covered health care benefits was assumed for 1999; the rate was assumed
to decrease gradually to 6% for 2004 and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. The effect of a 1% change in these assumed
health care cost trend rates would increase or decrease the benefit obligation
by $6.8 million or $6.0 million, respectively. In addition, such a 1% change
would increase or decrease the aggregate service and interest cost components of
net periodic benefit cost by $1.0 million or $0.8 million, respectively.
All Employee Cash Bonus Plan
The All Employee Cash Bonus Plan (the "Bonus Plan"), introduced in early
1997, was established to reward employees for their contribution in helping the
Company attain its corporate goals. Eligible employees below manager level would
receive a cash bonus if the Company attained established levels of safety,
customer satisfaction and cash flow during 1999. The cash flow goal had to be
met before any bonus amounts would be paid and improvement in cash flow must be
greater than any bonus amounts paid. The Company was able to surpass the
required minimum levels of improvement in all of the performance measures. As a
result of the Company's success, the Company distributed approximately $4.5
million in cash bonuses, which were expensed in 1999, to all eligible employees
in March 2000. The Company has renewed the Bonus Plan in 2000 with similar
goals.
K. Franchises and Significant Customers
City of El Paso Franchise
The Company's major franchise is with the City of El Paso, Texas. The
franchise agreement provides an arrangement for the Company's utilization of
public rights-of-way necessary to serve its retail customers within the City of
El Paso. The franchise with the City of El Paso extends through August 1, 2005.
Las Cruces Franchise
The Company's franchise with Las Cruces expired in March 1994. The Company
has, however, continued to provide electric service to customers within Las
Cruces, pending resolution of a dispute with Las Cruces over its efforts to
condemn a portion of the Company's distribution assets and related facilities.
On February 24, 2000, the Company entered into a settlement agreement with Las
Cruces which, among other things, provides for a new seven-year franchise
agreement. See Note I for futher discussion.
74
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
Military Installations
The Company currently serves Holloman Air Force Base ("Holloman"), White
Sands Missile Range ("White Sands") and the United States Army Air Defense
Center at Fort Bliss ("Ft. Bliss"). The Company's sales to the military bases
represent approximately 3% of annual operating revenues. The Company currently
has long-term contracts with all three military bases that it serves. The
Company signed a contract with Ft. Bliss in December 1998, under which Ft. Bliss
will take service from the Company through December 2008. The Company has a
contract to provide retail electric service to Holloman for a ten-year term
which began in December 1995. In May 1999, the Army and the Company entered into
a new ten-year contract to provide retail electric service to White Sands.
L. Financial Instruments
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments,"
requires the Company to disclose estimated fair values for its financial
instruments. The Company has determined that cash and temporary investments,
accounts receivable, long-term contract receivable, decommissioning trust funds,
long-term debt and financing obligations, accounts payable, litigation
settlement payable and customer deposits meet the definition of financial
instruments. The carrying amounts of cash and temporary investments, accounts
receivable, accounts payable and customer deposits approximate fair value
because of the short maturity of these items. Based on prevailing interest
rates, the fair value of the long-term contract receivable approximates its
carrying value. Decommissioning trust funds are carried at market value.
The fair values of the Company's long-term debt and financing obligations,
including the current portion thereof, are based on estimated market prices for
similar issues at December 31, 1999 and 1998 and are presented in the table
below (In thousands):
1999 1998
----------------------------- ----------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- ----------
First Mortgage Bonds (1)...................... $594,976 $607,517 $714,554 $ 810,258
Pollution Control Bonds (2)................... 193,135 193,135 193,135 193,135
Nuclear Fuel Financing(1)(3).................. 48,292 48,292 49,316 49,316
-------- -------- -------- ----------
Total..................................... $836,403 $848,944 $957,005 $1,052,709
======== ======== ======== ==========
__________________
(1) Includes current maturities.
(2) The interest rate on the Company's pollution control bonds is reset weekly
to reflect current market rates. Consequently, the carrying value
approximates fair value.
(3) The interest rate on the Company's financing for nuclear fuel purchases is
reset every quarter to reflect current market rates. Consequently, the
carrying value approximates fair value.
75
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
M. Selected Quarterly Financial Data (Unaudited)
1999 Quarters 1998 Quarters
-------------------------------------- -------------------------------------
4th (1) 3rd 2nd 1st 4th (2) 3rd 2nd 1st
-------- -------- -------- -------- -------- -------- -------- --------
(In thousands except for share data)
Operating revenues................................ $137,409 $170,341 $133,167 $129,552 $141,769 $177,471 $146,026 $136,557
Operating income.................................. 36,426 59,790 28,446 32,674 28,334 58,286 39,780 33,317
Income before extraordinary items................. 1,075 26,224 7,048 9,462 6,814 26,049 13,695 10,515
Extraordinary loss on repurchases of debt, net
of income tax benefit.......................... (85) (2,068) (1,183) - - - - -
Extraordinary gain on discharge of debt, net of
income tax expense............................. - - - - 3,343 - - -
Net income (loss) applicable to common stock...... 990 24,156 5,855 (2,725) 6,324 22,322 10,071 6,992
Basic earnings (loss) per common share:
Income (loss) before extraordinary items.......... 0.019 0.443 0.117 (0.045) 0.049 0.371 0.167 0.116
Extraordinary loss on repurchases of debt, net
of income tax benefit........................... (0.002) (0.035) (0.020) - - - - -
Extraordinary gain on discharge of debt, net of
income tax expense.............................. - - - - 0.056 - - -
Net income (loss)................................. 0.017 0.408 0.097 (0.045) 0.105 0.371 0.167 0.116
Diluted earnings (loss) per common share:
Income (loss) before extraordinary items.......... 0.018 0.439 0.116 (0.045) 0.049 0.368 0.166 0.116
Extraordinary loss on repurchases of debt, net
of income tax benefit........................... (0.001) (0.034) (0.019) - - - - -
Extraordinary gain on discharge of debt, net of
income tax expense.............................. - - - - 0.055 - - -
Net income (loss)................................. 0.017 0.405 0.097 (0.045) 0.104 0.368 0.166 0.116
__________
(1) Includes an accrued loss pursuant to the settlement agreement with Las
Cruces, a coal mine reclamation adjustment, an all employee bonus, the
write-off of capitalized interest on postload nuclear fuel and a sales tax
liability adjustment, which resulted in an aggregate decrease in net
earnings applicable to common stock of approximately $9.3 million, net of
income tax benefit, or $0.16 diluted loss per common share.
(2) Includes an all employee bonus of approximately $3.1 million, net of income
tax benefit, or $0.05 diluted loss per common share.
76
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding directors is incorporated herein by reference from
the Company's definitive proxy statement for the 2000 Annual Meeting of
Shareholders (the "2000 Proxy Statement"). Information regarding executive
officers of the Company, included herein under the caption "Executive Officers
of the Registrant" in Part I, Item 1 above, is incorporated herein by reference.
Item 11. Executive Compensation
Incorporated herein by reference from the 2000 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated herein by reference from the 2000 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
Incorporated herein by reference from the 2000 Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as a part of this report:
Page
----
1. Financial Statements:
See Index to Financial Statements................... 35
2. Financial Statement Schedules:
All schedules are omitted as the required information is not
applicable or is included in the financial statements or related
notes thereto.
3. Exhibits
Certain of the following documents are filed herewith. Certain other of the
following exhibits have heretofore been filed with the Securities and Exchange
Commission, and, pursuant to Rule 12b-32 and Regulation 201.24, are incorporated
herein by reference.
77
INDEX TO EXHIBITS
Exhibit
Number Title
------- -----
Exhibit 2 - Plan of Acquisition, Reorganization, Arrangement, Liquidation or
Succession:
2.01 - Fourth Amended Plan of Reorganization, dated November 7, 1995.
(Exhibit 2.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1995)
2.02 - Disclosure Statement to Fourth Amended Plan of Reorganization of
El Paso Electric Company. (Exhibit 2.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1995)
Exhibit 3 - Articles of Incorporation and Bylaws:
3.01 - Restated Articles of Incorporation of the Company, dated
February 7, 1996 and effective February 12, 1996. (Exhibit 3.01
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995)
3.01-01 - Statement of Resolution Establishing Series of Preferred Stock,
dated February 7, 1996 and effective February 12, 1996, amending
Exhibit 3.01. (Exhibit 3.01-01 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995)
3.02 - Bylaws of the Company, dated February 6, 1996. (Exhibit 3.02 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1995)
Exhibit 4 - Instruments Defining the Rights of Security Holders, including
Indentures:
4.01 - General Mortgage Indenture and Deed of Trust, dated as of
February 1, 1996, and First Supplemental Indenture, dated as of
February 1, 1996, including form of Series A through H First
Mortgage Bonds. (Exhibit 4.01 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995)
4.01-01 - Second Supplemental Indenture, dated as of August 19, 1997, to
Exhibit 4.01. (Exhibit 4.01 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997)
4.02 - Statement of Resolution Establishing Series of Preferred Stock,
dated February 7, 1996 and effective February 12, 1996. (Exhibit
4.02 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995)
4.03 - Indenture of Trust, dated as of July 1, 1994, between Maricopa
County, Arizona Pollution Control Corporation and Texas Commerce
Bank National Association, as Trustee, related to $63,500,000
principal amount of Maricopa County, Arizona Pollution Control
Corporation Adjustable Tender Pollution Control Revenue Bonds,
1994 Series A (El Paso Electric Company Palo Verde Project).
(Exhibit 4.01 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1994)
78
4.03-01 - Supplemental Indenture of Trust No. 1, dated as of December 12,
1995, related to Exhibit 4.03, including form of bond. (Exhibit
4.03-01 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995)
4.04 - Loan Agreement, dated as of July 1, 1994, between Maricopa
County, Arizona Pollution Control Corporation and the Company,
related to the Pollution Control Bonds referred to in Exhibit
4.03. (Exhibit 4.02 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1994)
4.04-01 - Supplemental Loan Agreement No. 1, dated as of February 12,
1996, related to Exhibit 4.04. (Exhibit 4.04-01 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995)
4.05 - Remarketing Agreement, dated as of July 1, 1994, between the
Company and Smith Barney Inc., related to the Pollution Control
Bonds referred to in Exhibit 4.03. (Exhibit 4.04 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994)
4.06 - Tender Agreement, dated as of July 1, 1994, between the Company
and Smith Barney Inc., related to the Pollution Control Bonds
referred to in Exhibit 4.03. (Exhibit 4.05 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1994)
4.07 - Ordinance No. 94-1018 adopted by the City Council of the City of
Farmington, New Mexico, on October 18, 1994, authorizing and
providing for the issuance by the City of Farmington, New
Mexico, of $33,300,000 principal amount of its Adjustable Tender
Pollution Control Revenue Refunding Bonds, 1994 Series A (El
Paso Electric Company Four Corners Project). (Exhibit 4.07 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1994)
4.07-01 - Ordinance No. 96-1035 adopted by the City Council of the City of
Farmington, New Mexico, on January 23, 1996 as Supplemental
Ordinance No. 1, related to Exhibit 4.07. (Exhibit 4.07-01 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1995)
4.08 - Resolution No. 94-798 adopted by the City Council of the City of
Farmington, New Mexico, on October 18, 1994, relating to the
issuance of the Pollution Control Bonds referred to in Exhibit
4.07. (Exhibit 4.08 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1994)
4.09 - Amended and Restated Installment Sale Agreement, dated as of
November 1, 1994, between the Company and the City of
Farmington, New Mexico, relating to the Pollution Control Bonds
referred to in Exhibit 4.07. (Exhibit 4.09 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1994)
4.10 - Representation and Indemnity Agreement, dated as of October 31,
1994, between the Company, the City of Farmington, New Mexico,
and Smith Barney Inc., relating to the Pollution Control Bonds
referred to in Exhibit 4.07. (Exhibit 4.10 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1994)
79
4.11 - Remarketing Agreement, dated as of November 1, 1994, between the
Company and Smith Barney Inc., relating to the Pollution Control
Bonds referred to in Exhibit 4.07. (Exhibit 4.11 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994)
4.12 - Tender Agreement, dated as of November 1, 1994, between the
Company and Smith Barney Inc., relating to the Pollution Control
Bonds referred to in Exhibit 4.07. (Exhibit 4.12 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994)
4.13 - Letter of Credit and Reimbursement Agreement dated as of August
27, 1997, between the Company, the Creditors named therein,
Barclays Bank PLC, New York Branch, as Issuing Bank and Agent
for the Creditors, and Union Bank of California, N.A., as
Documentation Agent, relating to the Pollution Control Bonds
referred to in Exhibit 4.07. (Exhibit 4.03 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997)
4.13-01 - Amendment No. 1, dated as of February 1, 1999, to Exhibits 4.13
and 4.22. (Exhibit 4.01 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999)
4.14 - Loan Agreement, dated as of December 1, 1984, between Maricopa
County, Arizona Pollution Control Corporation and the Company,
relating to $37,100,000 principal amount of Maricopa County,
Arizona Pollution Control Corporation Pollution Control
Refunding Revenue Bonds, 1984 Series E (El Paso Electric Company
Palo Verde Project). (Exhibit 4.27 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1984)
4.14-01 - Supplemental Loan Agreement, dated as of June 1, 1986, to
Exhibit 4.14. (Exhibit 4.29-01 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1986)
4.14-02 - Supplemental Loan Agreement No. 3, dated as of February 12,
1996, to Exhibit 4.14. (Exhibit 4.14-02 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995)
4.15 - Trust Indenture, dated as of December 1, 1984, by and between
Maricopa County, Arizona Pollution Control Corporation and MBank
El Paso, National Association, as Trustee, securing the
Pollution Control Refunding Revenue Bonds referred to in Exhibit
4.14. (Exhibit 4.27-01 to the Company's Annual Report on Form
10-K for the year ended December 31, 1984)
4.15-01 - Supplemental Trust Indenture No. 2, dated as of June 1, 1986, to
Exhibit 4.15. (Exhibit 4.29-03 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1986)
4.15-02 - Supplemental Trust Indenture No. 3, dated as of May 6, 1994, to
Exhibit 4.15. (Exhibit 4.01 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1994)
80
4.15-03 - Supplemental Trust Indenture No. 4, dated as of November 30,
1995, to Exhibit 4.15, including form of bond. (Exhibit 4.15-03
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995)
4.16 - Indexing Agent's Agreement among Maricopa County, Arizona
Pollution Control Corporation, the Company and Smith Barney,
Harris Upham & Co., Incorporated, relating to the Pollution
Control Refunding Revenue Bonds referred to in Exhibit 4.14.
(Exhibit 4.27-03 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1984)
4.17 - Remarketing Agent Agreement, dated as of May 6, 1994, between
Smith Barney Shearson Inc., and the Company, relating to the
Pollution Control Refunding Revenue Bonds referred to in Exhibit
4.14. (Exhibit 4.02 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994)
4.18 - Loan Agreement, dated as of February 12, 1996, between Maricopa
County, Arizona Pollution Control Corporation and the Company,
relating to $59,235,000 principal amount of Maricopa County,
Arizona Pollution Control Corporation Pollution Control
Refunding Revenue Bonds, 1985 Series A (El Paso Electric Company
Palo Verde Project). (Exhibit 4.18 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995)
4.19 - Indenture of Trust, dated as of February 12, 1996, by and
between Maricopa County, Arizona Pollution Control Corporation
and Texas Commerce Bank National Association, as Trustee,
relating to the Pollution Control Refunding Revenue Bonds
referred to in Exhibit 4.18. (Exhibit 4.19 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995)
4.20 - Tender Agent Agreement, dated as of February 12, 1996, between
the Company and Smith Barney Inc., relating to the Pollution
Control Refunding Revenue Bonds referred to in Exhibit 4.18.
(Exhibit 4.20 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995)
4.21 - Remarketing Agent Agreement, dated as of February 12, 1996,
between the Company and Smith Barney Inc., relating to the
Pollution Control Refunding Revenue Bonds referred to in Exhibit
4.18. (Exhibit 4.21 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995)
4.22 - Letter of Credit and Reimbursement Agreement, dated as of August
27, 1997, between the Company, the Creditors named therein,
Barclays Bank PLC, New York Branch, as Issuing Bank and Agent
for the Creditors, and Union Bank of California, N.A., as
Documentation Agent, relating to the Pollution Control Bonds
referred to in Exhibits 4.03, 4.14 and 4.18. (Exhibit 4.02 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997)
81
Exhibit 10 - Material Contracts:
10.01 - Co-Tenancy Agreement, dated July 19, 1966, and Amendments No. 1
through 5 thereto, between the Participants of the Four Corners
Project, defining the respective ownerships, rights and
obligations of the Parties. (Exhibit 10.01 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995)
10.02 - Supplemental and Additional Indenture of Lease, dated May 27,
1966, including amendments and supplements to original Lease
Four Corners Units 1, 2 and 3, between the Navajo Tribe of
Indians and Arizona Public Service Company, and including new
Lease Four Corners Units 4 and 5, between the Navajo Tribe of
Indians and Arizona Public Service Company, the Company, Public
Service Company of New Mexico, Salt River Project Agricultural
Improvement and Power District, Southern California Edison
Company and Tucson Gas & Electric Company. (Exhibit 4-e to
Registration Statement No. 2-28692 on Form S-9)
10.02-01 - Amendment and Supplement No. 1, dated March 21, 1985, to Exhibit
10.02. (Exhibit 19.3 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1985)
10.03 - El Paso Electric Company 1996 Long-Term Incentive Plan. (Exhibit
4.1 to Registration Statement No. 333-17971 on Form S-8)
10.04 - Four Corners Project Operating Agreement, dated May 15, 1969,
between Arizona Public Service Company, the Company, Public
Service Company of New Mexico, Salt River Project Agricultural
Improvement and Power District, Southern California Edison
Company and Tucson Gas & Electric Company, and Amendments 1
through 10 thereto. (Exhibit 10.04 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995)
10.04-01 - Amendment No. 11, dated May 23, 1997, to Exhibit 10.04. (Exhibit
10.04-01 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997)
10.05 - Arizona Nuclear Power Project Participation Agreement, dated
August 23, 1973, between Arizona Public Service Company, Public
Service Company of New Mexico, Salt River Project Agricultural
Improvement and Power District, Tucson Gas & Electric Company
and the Company, describing the respective participation
ownerships of the various utilities having undivided interests
in the Arizona Nuclear Power Project and in general terms
defining the respective ownerships, rights, obligations, major
construction and operating arrangements of the Parties, and
Amendments No. 1 through 13 thereto. (Exhibit 10.05 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1995)
10.06 - ANPP Valley Transmission System Participation Agreement, dated
August 20, 1981, and Amendments No. 1 and 2 thereto. APS
Contract No. 2253-419.00. (Exhibit 10.06 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995)
82
10.07 - Arizona Nuclear Power Project High Voltage Switchyard
Participation Agreement, dated August 20, 1981. APS Contract No.
2252-419.00. (Exhibit 20.14 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1981)
10.07-01 - Amendment No. 1, dated November 20, 1986, to Exhibit 10.07.
(Exhibit 10.11-01 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1986)
10.08 - Firm Palo Verde Nuclear Generating Station Transmission Service
Agreement, between Salt River Project Agricultural Improvement
and Power District and the Company, dated October 18, 1983.
(Exhibit 19.12 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1983)
10.09 - Trust Agreement, dated as of May 1, 1980, between The Bank of
New York, as Beneficiary, and First Security Bank of Utah, N.A.,
and Robert S. Clark, as Owner Trustees, establishing a trust
designated as El Paso Electric Company (1980) Equipment Trust
No. 2. (Exhibit 5-p-1 to Registration Statement No. 2-68414 on
Form S-7)
10.10 - Trust Indenture, dated as of May 1, 1980, between The
Connecticut Bank and Trust Company, as Indenture Trustee, and
First Security Bank of Utah, N.A., and Robert S. Clark, Owner
Trustees. (Exhibit 5-p-2 to Registration Statement No. 2-68414
on Form S-7)
10.11 - Lease Agreement, dated as of May 1, 1980, between First Security
Bank of Utah, N.A., and Robert S. Clark, the Owner Trustees, as
Lessor, and the Company, as Lessee, providing for the lease of a
combustion turbine and related generation equipment. (Exhibit 5-
p-3 to Registration Statement No. 2-68414 on Form S-7)
10.12 - Participation Agreement, dated as of May 1, 1980, among the
Company, as Lessee, The Bank of New York, as Beneficiary, First
Security Bank of Utah, N.A., and Robert S. Clark, as Owner
Trustees, The Connecticut Bank and Trust Company, as Indenture
Trustee, Franklin Life Insurance Company, Woodmen of the World
Life Insurance Society, Minnesota Mutual Life Insurance Company,
MacCabees Mutual Life Insurance Company and Mutual Service
Insurance Company, as Lenders, pertaining to Exhibit 10.11.
(Exhibit 5-p-4 to Registration Statement No. 2-68414 on Form S-
7)
10.13 - Interconnection Agreement, as amended, dated December 8, 1981,
between the Company and Southwestern Public Service Company, and
Service Schedules A through F thereto. (Exhibit 10.13 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1995)
10.13-01 - Letter Agreement, dated December 19, 1996, modifying Service
Schedule E, relating to Exhibit 10.13. (Exhibit 10.13-01 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1996)
83
10.14 - Amrad to Artesia 345 KV Transmission System and DC Terminal
Participation Agreement, dated December 8, 1981, between the
Company and Texas-New Mexico Power Company, and the First
through Third Supplemental Agreements thereto. (Exhibit 10.14 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1995)
10.15 - Interconnection Agreement and Amendment No. 1, dated July 19,
1966, between the Company and Public Service Company of New
Mexico. (Exhibit 19.01 to the Company's Annual Report on Form
10-K for the year ended December 31, 1982)
10.16 - Southwest New Mexico Transmission Project Participation
Agreement, dated April 11, 1977, between Public Service Company
of New Mexico, Community Public Service Company and the Company,
and Amendments 1 through 5 thereto. (Exhibit 10.16 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1995)
10.16-01 - Amendment No. 6, dated as of June 17, 1999, to Exhibit 10.16.
(Exhibit 10.09 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999)
10.17 - Tucson-El Paso Power Exchange and Transmission Agreement, dated
April 19, 1982, between Tucson Electric Power Company and the
Company. (Exhibit 19.26 to the Company's Annual Report on Form
10-K for the year ended December 31, 1982)
10.18 - Southwest Reserve Sharing Group Participation Agreement, dated
January 1, 1998, between the Company, Arizona Electric Power
Cooperative, Arizona Public Service Company, City of Farmington,
Los Alamos County, Nevada Power Company, Plains Electric G&T
Cooperative, Inc., Public Service Company of New Mexico, Tucson
Electric Power and Western Area Power Administration. (Exhibit
10.18 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997)
10.19 - Power Sales Agreement No. 2, dated December 2, 1986, between the
Company and Imperial Irrigation District, and Amendment No. 1
thereto. (Exhibit 10.19 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995)
10.20 - Arizona Nuclear Power Project Transmission Project Westwing
Switchyard Amended Interconnection Agreement, dated August 14,
1986, between The United States of America; Arizona Public
Service Company; Department of Water and Power of the City of
Los Angeles; Nevada Power Company; Public Service Company of New
Mexico; Salt River Project Agricultural Improvement and Power
District; Tucson Electric Power Company; and the Company.
(Exhibit 10.72 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1986)
10.21 - Power Sales Agreement, dated April 29, 1987, between the Company
and Texas-New Mexico Power Company, and Amendment No. 1 thereto.
(Exhibit 10.21 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995)
84
10.22 - Form of Indemnity Agreement, between the Company and its
directors and officers. (Exhibit 10.22 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995)
10.23 - Interchange Agreement, executed April 14, 1982, between Comision
Federal de Electricidad and the Company. (Exhibit 19.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1991)
10.24 - Credit Agreement, dated as of February 12, 1996, as amended and
restated as of February 8, 1999, between the Company, Chase
Manhattan Bank, as agent, and Chase Bank of Texas, National
Association, as Trustee. (Exhibit 10.24 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998)
10.24-01 - Amendment Agreement, dated as of February 8, 1999, to Exhibit
10.24. (Exhibit 10.24-01 to the Company's Annual Report on Form
10-K for the year ended December 31, 1998)
10.25 - Amended and Restated Executive Services Agreement for David H.
Wiggs, Jr., dated February 27, 1996. (Exhibit 10.25 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1995)
10.26 - Employment Agreement for Eduardo A. Rodriguez, dated October 26,
1995. (Exhibit 10.28 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995)
10.27 - Employment Agreement for James S. Haines, Jr., dated April 30,
1996. (Exhibit 10.30 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996)
10.28 - Restatement of Decommissioning Trust Agreement, dated as of
February 12, 1996, between the Company and Boatmen's Trust
Company of Texas, as Decommissioning Trustee for Palo Verde Unit
1. (Exhibit 10.30 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995)
10.29 - Restatement of Decommissioning Trust Agreement, dated as of
February 12, 1996, between the Company and Boatmen's Trust
Company of Texas, as Decommissioning Trustee for Palo Verde Unit
2. (Exhibit 10.31 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995)
10.30 - Restatement of Decommissioning Trust Agreement, dated as of
February 12, 1996, between the Company and Boatmen's Trust
Company of Texas, as Decommissioning Trustee for Palo Verde Unit
3. (Exhibit 10.32 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995)
10.31 - Spent Fuel Trust Agreement, dated as of February 12, 1996,
between the Company and Boatmen's Trust Company of Texas, as
Spent Fuel Trustee. (Exhibit 10.33 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995)
85
10.32 - Trust Agreement, dated as of February 12, 1996, between the
Company and Texas Commerce Bank National Association, as Trustee
of the Rio Grande Resources Trust II. (Exhibit 10.34 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1995)
10.33 - Purchase Contract, dated as of February 12, 1996, between the
Company and Texas Commerce Bank National Association, as Trustee
of the Rio Grande Resources Trust II. (Exhibit 10.35 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1995)
10.34 - Registration Rights Agreement, dated as of February 12, 1996,
among the Company, Fidelity Management & Research Company and
Fidelity Management Trust Company. (Exhibit 10.01 to
Registration Statement No. 333-32030 on Form S-1)
10.35 - Employment Agreement for Earnest A. Lehman, dated January 5,
1999. (Exhibit 10.38 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998)
10.36 - Form of Change of Control Agreement between the Company and
certain key officers of the Company. (Exhibit 10.01 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999)
10.37 - Directors' Restricted Stock Award Agreement, dated as of January
28, 1999, with George W. Edwards, Jr. (Exhibit 10.02 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999)
10.38 - Stock Option Agreement, dated as of January 11, 1999, with
Earnest A. Lehman. (Exhibit 10.03 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999)
10.39 - Form of Restricted Stock Award Agreement between the Company and
certain key officers of the Company. (Exhibit 10.04 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999)
10.40 - Stock Option Agreement, dated as of April 26, 1999, with James
S. Haines, Jr. (Exhibit 10.05 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1999)
10.41 - Stock Option Agreement, dated as of May 28, 1999, with Helen
Knopp. (Exhibit 10.06 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999)
10.42 - Form of Directors' Restricted Stock Award Agreement between the
Company and certain directors of the Company. (Exhibit 10.07 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999)
10.43 - Stock Option Agreement, dated as of July 1, 1999, with Wilson K.
Cadman. (Exhibit 10.08 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999)
86
10.44 - Directors' Restricted Stock Award Agreement between the Company
and certain directors of the Company. (Exhibit 10.10 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999)
10.45 - Stock Option Agreement, dated as of October 1, 1999, with Wilson
K. Cadman. (Exhibit 10.11 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999)
*10.46 - Employment Agreement for Helen Knopp, dated April 30, 1999.
10.47 - Change of Control Agreement with Helen Knopp, dated April 30,
1999. (Identical in all material respects to Exhibit 10.01 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999)
10.48 - El Paso Electric Company 1999 Long-Term Incentive Plan. (Exhibit
4.1 to Registration Statement No. 333-82129 on Form S-8)
* Exhibit 11 - Statement re Computation of Per Share Earnings
Exhibit 23 - Consent of Experts:
*23.01 - Consent of KPMG LLP (set forth on page 92 of this report).
Exhibit 24 - Power of Attorney:
*24.01 - Power of Attorney (set forth on page 91 of this report).
*24.02 - Certified copy of resolution authorizing signatures pursuant to
power of attorney.
* Exhibit 27 - Financial Data Schedule (EDGAR filing only)
Exhibit 99 - Additional Exhibits:
99.01 - Agreed Order, entered August 30, 1995, by the Public Utility
Commission of Texas. (Exhibit 99.31 to Registration Statement
No. 33-99744 on Form S-1)
99.02 - Restricted Stock Award Agreement, dated as of January 17, 1997,
with James S. Haines, Jr. (Exhibit 99.02 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996)
99.03 - Stock Option Agreement, dated as of January 17, 1997, with James
S. Haines, Jr. (Exhibit 99.03 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996)
99.03-01 - Amendment No. 1, dated April 30, 1997, to Exhibit 99.03.
(Exhibit 99.03-01 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997)
99.04 - Stock Option Agreement, dated as of January 17, 1997, with David
H. Wiggs, Jr. (Exhibit 99.04 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996)
99.05 - Directors' Restricted Stock Award Agreement, dated as of January
17, 1997, with George W. Edwards, Jr. (Exhibit 99.05 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1996)
87
99.06 - Form of Directors' Restricted Stock Award Agreement between the
Company and certain directors of the Company. (Exhibit 99.06 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1996)
99.07 - Form of Stock Option Agreement between the Company and certain
key officers of the Company. (Exhibit 99.07 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996)
99.08 - Form of Restricted Stock Award Agreement between the Company and
certain key officers of the Company. (Exhibit 99.08 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1997)
99.09 - Restricted Stock Award Agreement, dated as of June 9, 1997, with
Eduardo A. Rodriguez. (Exhibit 99.09 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997)
99.10 - Restricted Stock Award Agreement, dated as of June 15, 1997,
with Robert C. McNiel. (Exhibit 99.10 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997)
99.11 - Restricted Stock Award Agreement, dated as of June 16, 1997,
with Guillermo Silva, Jr. (Exhibit 99.12 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997)
99.12 - Restricted Stock Award Agreement, dated as of June 9, 1997, with
Terry D. Bassham. (Exhibit 99.16 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1997)
99.13 - Form of Stock Option Agreement between the Company and certain
directors of the Company. (Exhibit 99.17 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997)
99.14 - Directors' Restricted Stock Award Agreement, dated as of
November 13, 1997, with George W. Edwards, Jr. (Exhibit 99.18 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1997)
99.15 - Form of Stock Option Agreement between the Company and certain
key officers of the Company. (Exhibit 99.01 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1998)
99.16 - Stock Option Agreement, dated as of January 3, 1998, with Terry
D. Bassham. (Exhibit 99.02 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998)
99.17 - Stock Option Agreement, dated as of January 3, 1998, with John
C. Horne. (Exhibit 99.03 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998)
99.18 - Form of Restricted Stock Award Agreement between the Company and
certain key officers of the Company. (Exhibit 99.04 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998)
88
99.19 - Restricted Stock Award Agreement, dated as of April 6, 1998,
with Robert C. McNiel. (Exhibit 99.05 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998)
99.20 - Restricted Stock Award Agreement, dated as of April 6, 1998,
with Guillermo Silva, Jr. (Exhibit 99.07 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1998)
99.21 - Restricted Stock Award Agreement, dated as of March 25, 1998,
with Terry D. Bassham. (Exhibit 99.11 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998)
99.22 - Restricted Stock Award Agreement, dated as of March 30, 1998,
with Eduardo A. Rodriguez. (Exhibit 99.12 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1998)
99.23 - Restricted Stock Award Agreement, dated as of March 20, 1998,
with Gary R. Hedrick. (Exhibit 99.13 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998)
99.24 - Restricted Stock Award Agreement, dated as of March 25, 1998,
with John C. Horne. (Exhibit 99.14 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998)
99.25 - Final Order, entered September 24, 1998, by the New Mexico
Public Utility Commission. (Exhibit 99.31 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998)
99.26 - Final Order, entered June 8, 1999, by the Public Utility
Commission of Texas. (Exhibit 99.01 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1999)
* Filed herewith.
(b) Reports on Form 8-K:
The following reports on Form 8-K were filed during the last
quarter of 1999:
Financial Statements
Date of Report Item Number Required to be Filed
-------------- ----------- --------------------
None
89
UNDERTAKING
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
90
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of El Paso Electric Company, a
Texas corporation, and the undersigned directors and officers of El Paso
Electric Company, hereby constitutes and appoints James Haines, Eduardo A.
Rodriguez, Gary R. Hedrick, Terry Bassham and Guillermo Silva, Jr., its, his or
her true and lawful attorneys-in-fact and agents, for it, him or her and its,
his or her name, place and stead, in any and all capacities, with full power to
act alone, to sign this report and any and all amendments to this report, and to
file each such amendment to this report, with all exhibits thereto, and any and
all documents in connection therewith, with the Securities and Exchange
Commission, hereby granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform any and all acts and things
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as it, he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, may lawfully do or cause to be done by virtue hereof.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 21st day of
March 2000.
EL PASO ELECTRIC COMPANY
By: /s/ JAMES HAINES
-------------------------------------
James Haines
Chief Executive Officer and President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
Chief Executive Officer, President
/s/ JAMES HAINES (Principal Executive Officer) and Director March 21, 2000
- ---------------------------------------
(James Haines)
Vice President, Chief Financial Officer and Treasurer
/s/ GARY R. HEDRICK (Principal Financial Officer and Principal Accounting Officer) March 21, 2000
- ---------------------------------------
(Gary R. Hedrick)
/s/ WILSON K. CADMAN Director March 21, 2000
- ---------------------------------------
(Wilson K. Cadman)
/s/ JAMES A. CARDWELL Director March 21, 2000
- ---------------------------------------
(James A. Cardwell)
/s/ JAMES W. CICCONI Director March 21, 2000
- ---------------------------------------
(James W. Cicconi)
/s/ GEORGE W. EDWARDS, JR. Director March 21, 2000
- ---------------------------------------
(George W. Edwards, Jr.)
/s/ RAMIRO GUZMAN Director March 21, 2000
- ---------------------------------------
(Ramiro Guzman)
/s/ JAMES W. HARRIS Director March 21, 2000
- ---------------------------------------
(James W. Harris)
/s/ KENNETH R. HEITZ Director March 21, 2000
- ---------------------------------------
(Kenneth R. Heitz)
/s/ PATRICIA Z. HOLLAND-BRANCH Director March 21, 2000
- ---------------------------------------
(Patricia Z. Holland-Branch)
/s/ MICHAEL K. PARKS Director March 21, 2000
- ---------------------------------------
(Michael K. Parks)
/s/ ERIC B. SIEGEL Director March 21, 2000
- ---------------------------------------
(Eric B. Siegel)
/s/ STEPHEN WERTHEIMER Director March 21, 2000
- ---------------------------------------
(Stephen Wertheimer)
/s/ CHARLES A. YAMARONE Director March 21, 2000
- ---------------------------------------
(Charles A. Yamarone)
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