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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, 1996
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 (I.R.S. Employer Identification No.)
incorporation or organization)
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
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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 20, 1997, THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT WAS $309,772,975.
AS OF MARCH 20, 1997, THERE WERE OUTSTANDING 60,239,236 SHARES OF COMMON
STOCK, NO PAR VALUE.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE 1997 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 Rate
Stipulation
ANPP Participation Agreement...... Arizona Nuclear Power Project
Participation Agreement dated August
23, 1973, as amended
APS............................... Arizona Public Service Company
Bankruptcy Case................... The case commenced January 8, 1992 by
El Paso Electric Company in the
Bankruptcy Court as Case No.
92-10148-FM
Bankruptcy Code................... United States Bankruptcy Code, 11
U. S. C. (S)101 et seq.
Bankruptcy Court.................. United States Bankruptcy Court for the
Western District of Texas, Austin
Division
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
Common Stock...................... Common stock, stated value $1 per
share, issued by the Company in the
Reorganization
Company........................... El Paso Electric Company
CSW............................... Central and South West Corporation
DOE............................... United States Department of Energy
Effective Date.................... February 12, 1996, the date the
Reorganization became effective
EPE............................... El Paso Electric Company
FERC.............................. Federal Energy Regulatory Commission
Four Corners...................... Four Corners Generating Station
FPA............................... Federal Power Act
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 Rate Stipulation
IID............................... Imperial Irrigation District, an
irrigation district in Southern
California
KV................................ Kilovolt(s)
KW................................ Kilowatt(s)
KWH............................... Kilowatt-hour(s)
Merger Agreement.................. Agreement and Plan of Merger dated as
of May 3, 1993 among the Company,
CSW and CSW Sub, as amended
MW................................ Megawatt(s)
MWH............................... Megawatt-hour(s)
New Mexico Commission............. New Mexico Public Utility Commission
NRC............................... Nuclear Regulatory Commission
OPC............................... Texas Office of Public Utility Counsel
Palo Verde........................ Palo Verde Nuclear Generating Station
Palo Verde Leases................. Leases and other documents entered
into in connection with a series of
sale and leaseback transactions in
1986 and 1987 involving a portion of
the Company's interest in Palo Verde
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
Plan.............................. The Company's Fourth Amended Plan of
Reorganization dated November 7,
1995, pursuant to which the Company
emerged from bankruptcy on the
Effective Date
(i)
Abbreviations,
Acronyms or Defined Terms Terms
------------------------- -----
PNM.............................. Public Service Company of New Mexico
Predecessor Company.............. The Company prior to the
Reorganization
Rate Stipulation................. Stipulation and Settlement Agreement
dated as of July 27, 1995, between
the Company, the City of El Paso,
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
Reorganization................... Reorganization and the emergence from
bankruptcy by the Company pursuant
to the Plan
Reorganized Company.............. The Company following the
Reorganization
SFAS............................. Statement of Financial Accounting
Standards
Texas Commission................. Public Utility Commission of Texas
TNP.............................. Texas-New Mexico Power Company
(ii)
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............ 23
PART II
5 Market for Registrant's Common Equity and
Related Stockholder Matters.................................. 25
6 Selected Financial Data........................................ 27
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 28
8 Financial Statements and Supplementary Data.................... 38
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 84
PART III
10 Directors and Executive Officers of the Registrant............. 84
11 Executive Compensation......................................... 84
12 Security Ownership of Certain Beneficial Owners
and Management............................................... 84
13 Certain Relationships and Related Transactions................. 84
PART IV
14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K...................................... 84
(iii)
PART I
ITEM 1. BUSINESS
GENERAL
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. The Company owns or has
significant ownership interests in five electrical generating facilities
providing it with a total capacity of approximately 1,500 megawatts. For the
twelve months ended December 31, 1996, the Company's energy sources consisted of
approximately 53% nuclear fuel, 32% natural gas, 7% coal and 8% purchased power.
The Company serves approximately 279,000 residential, commercial,
industrial and wholesale customers. The Company distributes electricity to
retail customers principally in El Paso, Texas and the City of Las Cruces ("Las
Cruces"), New Mexico (representing approximately 56% and 7%, respectively, of
the Company's revenues for the twelve months ended December 31, 1996). In
addition, the Company sells electricity to wholesale customers, including Texas-
New Mexico Power Company, the Imperial Irrigation District (a southern
California electric power agency), and the Comision Federal de Electricidad de
Mexico (the national electric utility of 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 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 March 3, 1997, the Company had
approximately 1,100 employees, approximately 30% of whom are covered by a
collective bargaining agreement that expires in June 1997.
REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
PLAN OF REORGANIZATION
On February 12, 1996, the Company emerged from a bankruptcy proceeding
which it instituted in January 1992.
As a result of the Reorganization, the Company significantly reduced its
debt and simplified its capital structure. The Company's total obligations
subject to compromise (including obligations related to the Palo Verde Leases,
which represented $700 million of allowed claims in the Bankruptcy Case) prior
to its Reorganization was $2,007 million. Under the Plan, this debt and the
Palo Verde Lease obligations were extinguished and the creditors received a
combination of cash and newly issued debt and equity securities of the
Reorganized Company. On December 31, 1996, the capital structure of the
Reorganized Company consisted of approximately $1,046 million of long-term debt,
including the long-term portion of financing and capital lease obligations,
approximately $108 million of redeemable preferred stock and approximately $331
million of common stock equity.
The Company has a $100 million revolving credit facility to finance nuclear
fuel purchases and to provide working capital. At December 31, 1996,
approximately $46.6 million of this revolving credit facility
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had been drawn to finance nuclear fuel, of which approximately $20.2 million is
included in the long-term debt described above. Under the Plan, all of the
Predecessor Company's common and preferred stock was canceled and the holders of
such securities received approximately 15% of the Reorganized Company's Common
Stock and the right to receive certain litigation recoveries, if any.
In addition, on the Effective Date, the Palo Verde Leases were terminated
and the Company reacquired such interests. The Company has agreed to indemnify
certain parties to the Palo Verde Lease transactions against certain possible
tax liabilities.
The Company's Common Stock began trading on the American Stock Exchange on
February 16, 1996 under the symbol "EE."
RATE STIPULATION
The Agreed Order entered on August 30, 1995 by the Texas Commission became
effective on the Effective Date. The Agreed Order implemented the Rate
Stipulation, dated July 27, 1995, among the Company and substantially all of the
other parties to a rate proceeding in Texas. Among other things, under the Rate
Stipulation, (i) the Company received a one-time annual increase in Texas retail
base rates of approximately $24.9 million; (ii) the Company's base rates for
most customers in Texas were fixed at this increased level for ten years
beginning August 2, 1995; (iii) the City of El Paso granted the Company a new
franchise that extends through the Freeze Period; and (iv) the Company will
retain 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. See "Regulation - Texas Rate Matters - Rate Stipulation and Agreed
Order."
ACCOUNTING TREATMENT
The Reorganization had significant impacts on the Company's financial
statements, including the creation of a new reporting entity upon emergence from
bankruptcy through the application of fresh-start reporting pursuant to
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code" ("SOP 90-7"). Accordingly, the Company's post-
Reorganization financial statements, which reflect the application of fresh-
start reporting, have not been prepared on a consistent basis with the pre-
Reorganization financial statements and are not comparable in all respects to
the financial statements prior to the Reorganization. The implementation of the
Rate Stipulation and fresh-start reporting resulted in (i) decreased operation
expense and increased depreciation expense due to the reacquisition of
previously sold and leased back generation facilities and due to accelerated
depreciation expense on a portion of the reorganization value assigned to
certain plant assets; (ii) increased interest expense due to the changes in the
Company's capital structure; and (iii) increased operating revenues related to a
rate increase in the Company's Texas jurisdiction. For accounting purposes, the
inception date of the Reorganized Company is deemed to be February 12, 1996. A
vertical line is shown in the financial statements to separate the Reorganized
Company from the Predecessor Company since the financial statements have not
been prepared on a consistent basis of accounting.
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FACILITIES
As described below, the Company currently has a net installed generating
capacity of approximately 1,500 MW, consisting of an entitlement of 600 MW from
Palo Verde Units 1, 2 and 3, 482 MW at its Newman Power Station, 246 MW at its
Rio Grande Power Station, an entitlement of 104 MW from Four Corners Units 4 and
5, and 68 MW at its Copper Power Station.
PALO VERDE STATION
The Company owns a 15.8% interest in each of the three 1,270 MW nuclear
generating units and Common Plant at Palo Verde, located west of Phoenix,
Arizona. The Palo Verde Participants include the Company and six other
utilities: APS, Southern California Edison Company ("SCE"), PNM, Southern
California Public Power Authority, Salt River Project Agricultural Improvement
and Power District ("SRP") 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 all three units at Palo Verde for terms of forty years each. 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 Palo Verde Participant is
required to fund its proportionate share of fuel, other operation, maintenance
and capital costs. The Company's total monthly share of these costs was
approximately $6.9 million in 1996. 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, as well as
pursuant to applicable law, the Company is required to fund its share of the
estimated costs to decommission Palo Verde over the estimated service life of
forty years. The Company's funding requirements are derived from periodic
engineering cost estimates.
In December 1995, the Palo Verde Participants approved a study by an
outside engineering firm of the cost of decommissioning Palo Verde. The 1995
study determined that the Company will have to fund approximately $229 million
(stated in 1995 dollars) to cover its share of such costs. The 1995 study
assumes that (i) maintenance expense for spent fuel storage will be incurred for
ten years after the shutdown of the last unit (estimated to be in 2024) rather
than the approximately 30 years utilized in a 1993 study; (ii) a national
interim spent fuel storage facility will be available; and (iii) as a result of
such national spent fuel storage facility, the amount of spent fuel stored on-
site is reduced from all spent fuel assemblies to the final core plus fuel
assemblies from approximately three refuelings. See "Energy Sources - Nuclear
Fuel - Spent Fuel Storage."
Cost estimates for decommissioning have increased with each study, although
the 1995 cost estimate is comparable to the previous cost estimate from a 1993
study (which determined that the Company would have to fund approximately $221
million, stated in 1993 dollars). The 1993 study was based on different
assumptions, primarily related to the decommissioning of spent fuel. The 1993
cost estimate included an estimated cost of approximately $50 million related to
on-site spent fuel storage facilities, while the 1995 study includes an
estimated cost of approximately $13 million related to spent fuel. This
difference in
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estimates is primarily due to the different timing assumptions discussed above.
The 1993 estimate reflected an 84% increase from the previous estimate made in
1989, primarily due to an increase in the estimated costs associated with the
permanent burial of low-level radioactive waste due to the uncertainty
surrounding the availability and cost of low-level radioactive waste
repositories, as discussed below.
Although the 1995 study is 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 may increase significantly. See "Disposal of Low-Level Radioactive Waste"
below.
The rate freeze under the Rate Stipulation would preclude the Company from
seeking a rate increase in Texas during the Freeze Period to recover increases
in decommissioning cost estimates. Additionally, there can be no assurance that
the Company could increase its rates in any of its other jurisdictions to
recover such increased costs. See Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Operational Prospects and
Challenges."
Steam Generators. Palo Verde has experienced degradation in the steam
generator tubes of each unit. The degradation includes axial tube cracking in
the upper regions of the two steam generators in Unit 2 and, to a lesser degree,
in Units 1 and 3. This form of steam generator tube degradation has recently
been seen at other U.S. nuclear generating stations. The units also have
experienced circumferential cracking at the tube sheet, a more common type of
tube cracking. The axial tube cracking was discovered following a steam
generator tube rupture in Unit 2 in March 1993. Since that time, 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.
Each of the Palo Verde units has been inspected during regularly scheduled
refueling outages and mid-cycle inspection outages. If tube cracks are detected
during an inspection, the affected tubes are taken out of service by plugging.
This may impair the performance of a unit if sufficient numbers of steam
generator tubes are affected.
The projected service lives of the units' steam generators are reassessed
by APS periodically in conjunction with inspections made during outages of the
Palo Verde units. In August 1995, APS announced that its ongoing analyses
indicated that it will be economically desirable to replace the Unit 2 steam
generators, which have been the most affected by tube cracking, in four to nine
years. APS further stated that it expects replacement of the steam generators
will be performed in conjunction with a normal refueling outage to limit
incremental outage time. APS also has stated that, based on the latest
available data, it estimates that the steam generators in Units 1 and 3 should
operate for their designated life of 40 years (to 2025 and 2027, respectively).
APS will continue to assess these steam generators periodically.
Steam generator replacement could be done through new steam generators
manufactured for Palo Verde or through the purchase of existing steam generators
that are compatible with Palo Verde's design. The Company believes replacement
of the steam generators would require the unanimous approval of the Palo Verde
Participants. The Company has not yet completed its analysis of the economic
feasibility of steam generator replacement, or other options that may be
available in connection with the operation of Unit 2. Also, the Company cannot
predict whether it or other Palo Verde Participants will agree to replace
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the Unit 2 steam generators. The Company expects that if the steam generators
in Unit 2 are replaced, most of such costs would be incurred between 1998 and
2005. The Company's portion of total costs associated with replacement of the
Unit 2 steam generators, including replacement power costs, is currently
estimated not to exceed $30 million.
The Rate Stipulation, however, precludes the Company from seeking a rate
increase in Texas during the Freeze Period to recover capital costs associated
with such replacement should it be necessary. It is uncertain whether the costs
associated with replacing the Unit 2 steam generators would be approved by the
New Mexico Commission and included in the Company's rate base in New Mexico.
See Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Operational Prospects and Challenges."
Disposal of Low-Level Radioactive Waste. Congress has established
requirements for the disposal of radioactive waste by each state 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. Despite being licensed by the State of California, the Department of the
Interior has not transferred the land to the state. Following a report by the
National Academy of Sciences, the Department of the Interior announced that if
certain environmental conditions were implemented prior to the transfer, it was
prepared to convey the land. The State of California is attempting to obtain
the land through the court system without the imposition of these environmental
restrictions. Although Palo Verde is estimated to undergo decommissioning
during the period in which Arizona will act as host for the Southwestern
Compact, the opposition, delays, uncertainty and costs experienced in California
demonstrate possible roadblocks that may be encountered in the future 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 of $200 million under federal law in the form of primary liability
insurance provided by commercial insurance carriers. Additionally, the Company
participates in an industry-wide retrospective assessment program, under which
industry participants would be required to pay an assessment to cover any loss
in excess of $200 million. The maximum assessment per reactor for each nuclear
incident is approximately $79.2 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 $37.6
million, with an annual payment limitation of approximately $4.7 million.
The Palo Verde Participants maintain "all risk" (including nuclear hazards)
insurance for property damage to, and decontamination of, property at Palo Verde
in the aggregate amount of $2.7 billion, a substantial portion of the proceeds
of which must first be applied to stabilization and decontamination. Finally,
the Company has insurance against a portion of any increased cost of generation
or purchased power which may result from the accidental outage of any of the
three Palo Verde units if the outage exceeds 21 weeks.
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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 are also capable of operating 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 are also capable of operating on fuel oil.
FOUR CORNERS STATION
The Company owns an undivided 7% interest in 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 under 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 is also capable of operating on fuel oil.
The combustion turbine and other generation equipment at the station were sold
and leased-back by the Company in 1980 pursuant to a twenty-year lease with an
option to renew for up to a seven-year period.
TRANSMISSION AND DISTRIBUTION LINES AND AGREEMENTS
The Company owns or has significant ownership interests in four major
transmission lines 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 generation at Palo Verde and
Four Corners.
Springerville-Diablo Line. The Company owns a 310-mile, 345 KV
transmission line from Tucson Electric Power Company's ("TEP") 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 delivery
point for the Company's generation entitlement from Four
6
Corners, which power is transmitted to the West Mesa Substation over
approximately 150 miles of transmission lines owned by PNM. This transmission
line also carries power from the region to the west and north of Four Corners,
where the Company has a major interconnection with the other Four Corners
Participants.
Greenlee-Newman Line. The Company owns undivided interests in a 196-mile,
345 KV transmission line from the Newman Power Station to TEP's Greenlee
Substation in Arizona. This line provides 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 an undivided 66.7% interest in 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 Southwestern Public
Service Company ("SPS"), providing the Company with access to power markets to
the east.
ISSUES REGARDING OPERATION OF TRANSMISSION SYSTEM
The Company experienced three system outages between September 19, 1995 and
October 21, 1995 and a fourth system outage on March 29, 1996. The four outages
were caused by different combinations of factors. The first three outages
involved faults on one of the Company's transmission lines, followed by relay
failures that resulted in the loss of a second Company transmission line and the
subsequent inability of the Company's load shedding programs to prevent general
system instability. The fourth outage was caused by a fault on a neighboring
utility's transmission line followed by relay failures on the Company's
transmission system that caused the loss of two of the Company's transmission
lines. Although the Company was able to stabilize its system for a brief period
of time following the loss of the two lines through a controlled load-reduction
scheme, a system outage occurred after a third Company line tripped out of
service.
In response to the outages, the Company has undertaken numerous remedial
measures, including the replacement of certain relay equipment, the
reconfiguration of structures that support certain high voltage wires and the
installation of two new load shedding systems, to lessen the likelihood that
future transmission faults will cause general system instability and widespread
outages. While performing these measures between mid-November 1995 and early
January 1996, the Company materially reduced the amount of power imported into
the El Paso load center in order to reduce stress on the system in the event of
a fault on these lines. Operation in this mode resulted in increased operating
costs of approximately $2.3 million due to the use of higher cost power from
local generating plants and the necessity of purchasing power from other
utilities to supply the Company's customers. While the Company can operate in
this mode during cool weather months when demand is low, the Company requires
its full allocation of power from its remote generating sources to meet the
normal demands of customers and contractual commitments to Mexico in the warmer
months.
The Company believes that its remedial efforts have solved the outage
problem, and the Company has continued to import normal amounts of power over
its transmission lines since January 1996. If the Company experiences further
difficulties with its system, it could be required to adopt costly operating
procedures until appropriate remedial efforts are implemented, and the Company
might not be able to deliver sufficient power to meets its contractual
obligations or to fulfill its statutory obligation to serve customers. In
addition, the Texas and the New Mexico Commissions, which have monitored the
7
Company's efforts to address the outages, could impose penalties or other
sanctions or deny the Company recovery of certain fuel and/or purchased power
costs related to the Company's decision to reduce power imports during the
period referenced above. The Company's capital expenditure budget does not
provide for major expenditures relating to the transmission system, and certain
of the Company's debt obligations restrict or prohibit major unanticipated
capital expenditures. In addition, the cost of constructing new transmission
facilities could not be charged to Texas retail customers under the Rate
Stipulation, and the Company cannot assure that it would be able to charge any
of its customers outside of Texas for such construction costs.
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. Because
construction of new facilities is subject to standards imposed by environmental
regulation, substantial expenditures may be required to comply with such
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, unforseen expenses associated with compliance could have a material
adverse effect on the future operations and financial condition of the Company.
See Part II, Item 8, "Financial Statements and Supplementary Data - Note J of
Notes to Financial Statements."
PCB Treatment, Inc. The Company received a request from the U.S.
Environmental Protection Agency ("EPA") to participate in the remediation of
polychlorinated biphenyls ("PCBs") at two facilities in Kansas City, Missouri,
which had been operated by PCB Treatment, Inc. ("PTI"). The Company's manifests
indicate that between 1982 and 1986, the Company sent 23 shipments of PCBs or
PCB-containing electric equipment ("PCB Equipment") to PTI, accounting for
approximately 2 to 3%, by weight, of the PCBs and PCB Equipment received at that
site by PTI. Presently, PTI has discontinued operations and the EPA has
determined that PTI's abandoned facilities require remediation.
The Company and the PTI Steering Committee, which consists of the largest
generators of the PCBs sent to PTI, have executed a settlement agreement. In
consideration for the payment of approximately $0.2 million, the settlement
agreement excuses any further liability to the Steering Committee by the Company
and indemnifies the Company for any liabilities to other parties as may be
asserted in the future.
The Company may still face liability for possible deliveries of PCBs by PTI
to a third site which is also subject to remedial action by the federal
authorities, except to the extent that those PCBs were transferred from the
first site. The Company's records do not indicate any deliveries of PCBs to
this third site. Management believes the Company is unlikely to face
substantial unindemnified liabilities associated with this third site.
Coal Mine Reclamation. The Company has been informed by APS that the
Company's estimated financial obligation for coal mine reclamation at Four
Corners is not being fully reflected in the costs for which the Company is
billed. APS, the operating agent of Four Corners, is performing an analysis to
establish an appropriate revised cost estimate. Based on preliminary estimates
from APS and the coal provider, the Predecessor Company recorded a liability of
approximately $12 million which reflects the present value of the estimated
future costs of reclamation at the Effective Date to reflect its share of the
coal mine reclamation obligation.
8
CONSTRUCTION PROGRAM
The Company has no current plans to construct any new generating facilities
through at least 2004. Utility construction expenditures reflected in the table
below consist primarily of expanding and updating the electric transmission and
distribution systems and the cost of improvements at Palo Verde. The Company's
estimated cash construction costs for 1997 through 2000 are approximately $206
million. Actual costs may vary from the construction program estimates set forth
below. Such estimates are reviewed and updated periodically to reflect changed
conditions.
BY YEAR (1) BY FUNCTION
(IN MILLIONS) (IN MILLIONS)
------------- -------------
1997....... $ 50 Production (1)... $ 53
1998....... 52 Transmission..... 20
1999....... 50 Distribution..... 102
2000....... 54 General.......... 31
---- ----
Total... $206 Total......... $206
==== ====
- -----------------
(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,
natural gas, coal, and purchased power to the total KWH energy mix of the
Company.
YEARS ENDED DECEMBER 31,
-----------------------
POWER SOURCE 1996 1995 1994
------- ------ ------
Nuclear........................ 53% 53% 45%
Natural Gas.................... 32 30 32
Coal........................... 7 9 9
Purchased Power................ 8 8 14
---- ---- ----
Total......................... 100% 100% 100%
==== ==== ====
Fuel and purchased power costs are generally passed through directly to
customers in Texas and New Mexico pursuant to currently applicable regulations.
Historical fuel costs and revenues are reconciled periodically in proceedings
before the appropriate commission to establish the applicable fuel rate to be
charged customers and to determine whether a refund or surcharge based on such
historical costs and revenues is necessary. See "Regulation -Texas Rate Matters
- -Fuel," " - New Mexico Rate Matters - Fuel" and Part II, Item 8, "Financial
Statements and Supplementary Data - Note C of Notes to Financial Statements."
9
NUCLEAR FUEL
The Palo Verde Participants have contracts for uranium concentrate which
should be sufficient to meet Palo Verde's operational requirements through at
least 2000. Spot purchases in the uranium market will also be made, as
appropriate. The Palo Verde Participants have contracted for up to 100% of
conversion services required through 2000. The Palo Verde Participants have an
enrichment services contract with the United States Enrichment Corporation
("USEC") which obligates USEC to furnish the enrichment services required for
the operation of the three Palo Verde units through 2002, with an option for
five additional years. A new contract provides fuel assembly fabrication
services for each Palo Verde unit through 2016.
Spent Fuel Storage. The spent fuel storage facilities at Palo Verde
have sufficient capacity to store all fuel expected to be discharged from normal
operation of all of the Palo Verde units through at least 1999. If necessary,
more spaces in the existing fuel pool may be approved for use by the NRC which
would extend storage capacity through 2001, or, if more economical, alternative
storage facilities can be constructed on-site.
Pursuant to the Nuclear Waste Policy Act of 1982, as amended in 1987,
the DOE is obligated to accept and dispose of all spent nuclear fuel and other
high-level radioactive wastes generated by all domestic power reactors. In
November 1989, the DOE reported that such disposal facilities will not be in
operation until 2010. Subsequent judicial decisions require the DOE to start
disposing of spent nuclear fuel no later than January 31, 1998, although the DOE
has told APS that it will not meet this deadline. As a result, under the DOE's
current criteria for shipping allocation rights, it is estimated that Palo Verde
could not ship spent fuel to the DOE permanent disposal facility until
approximately 2025. APS has indicated that alternative interim spent fuel
storage methods will be available on-site or off-site for use by Palo Verde to
allow its continued operation and to store spent fuel safely until shipments to
the DOE's permanent disposal facility begin. The Texas Commission is currently
evaluating what, if any, action it should take with regard to payments made by
the Company to the DOE for funding of the DOE's obligation to start accepting
spent nuclear fuel by January 31, 1998.
Nuclear Fuel Financing. Pursuant to the ANPP Participation Agreement,
the Company has an undivided interest in nuclear fuel purchased in connection
with Palo Verde. On the Effective Date, the Company and Texas Commerce Bank, as
trustee, entered into a $100 million credit facility with Chemical Bank that
includes a portion for working capital requirements and up to $60 million for
the financing of nuclear fuel. At December 31, 1996, approximately $46.6
million had been drawn to finance nuclear fuel. The Company also entered into a
purchase contract with the trustee related to the financing of nuclear fuel
purchases. Under the terms of the documents related to the nuclear fuel
financing, the trust borrows under the credit facility amounts sufficient to
purchase and prepare nuclear fuel for use. The Company is obligated to repay
borrowings by the trustee under the facility, which obligation is secured by
Collateral Series Bonds, and is required to make quarterly payments to the trust
for the heat energy produced by the nuclear fuel and used by the Company. For
financial reporting purposes, the Company reports the assets and liabilities of
the trust as its own.
NATURAL GAS
In 1996, the Company's natural gas requirements at the Rio Grande
Power Station were met solely with spot natural gas purchases from various
suppliers. Interstate gas is delivered under a firm ten year transportation
agreement, which expires in 2001. Based on the current availability of economic
and reliable
10
spot natural gas, the Company anticipates it will continue to purchase spot
natural gas for the Rio Grande Power Station for the near term. To complement
the spot purchases, the Company has entered into a one-year gas supply contract
with Cook Inlet for 1997. For the long term, the Company will evaluate the
availability of spot natural gas versus other supplies in obtaining a reliable
and economical supply for the Rio Grande Power Station.
In 1996, the natural gas requirements for the Newman and Copper Power
Stations were supplied and transported pursuant to an intrastate natural gas
contract which expired December 31, 1996. The Company has an agreement with KN-
Energy to supply gas to the Newman and Copper Power Stations beginning in 1997
through 2001. To augment this contract, the Company procured a second natural
gas supply agreement with U.S. Gas Transportation, Inc., which runs through
2001.
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. Management believes that Four Corners has sufficient
reserves of coal to meet the plant's operational requirements for its useful
life.
PURCHASED POWER
To supplement its own generation, the Company has a firm power
purchase agreement with SPS for a minimum of 35 MW for 1997.
11
OPERATING STATISTICS
DECEMBER 31,
------------------------------------------
1996 (A) 1995 (B) 1994 (B)
---------- ---------- ----------
Operating revenues (In thousands):
Base revenues:
Retail:
Residential........................................... $ 141,719 $ 128,295 $ 129,869
Commercial and industrial, small...................... 138,910 128,715 126,450
Commercial and industrial, large...................... 43,483 40,870 39,754
Sales to public authorities........................... 65,534 59,613 59,811
---------- ---------- ----------
Total retail...................................... 389,646 357,493 355,884
Wholesale sales for resale............................... 71,254 74,557 75,750
---------- ---------- ----------
Total base revenues............................... 460,900 432,050 431,634
Fuel revenues and economy sales............................ 114,042 68,823 101,076
Other...................................................... 3,981 3,744 4,050
---------- ---------- ----------
Total operating revenues.......................... $ 578,923 $ 504,617 $ 536,760
========== ========== ==========
Number of customers (End of year):
Residential........................................... 250,209 245,245 240,368
Commercial and industrial, small...................... 25,304 24,615 23,857
Commercial and industrial, large...................... 102 89 80
Other................................................. 3,711 3,674 3,470
---------- ---------- ----------
Total............................................. 279,326 273,623 267,775
========== ========== ==========
Average annual use and revenue per residential customer:
KWH................................................... 6,238 6,057 6,313
Revenue............................................... $ 661.04 $ 578.88 $ 644.82
========== ========== ==========
Average revenue per KWH (In cents):
Residential........................................... 10.60 9.56 10.21
Commercial and industrial, small...................... 9.21 8.15 8.88
Commercial and industrial, large...................... 4.85 4.34 5.01
========== ========== ==========
Energy supplied, net, KWH (In thousands):
Generated............................................. 7,920,675 7,439,404 7,018,423
Purchased and interchanged............................ 711,791 584,853 1,051,251
---------- ---------- ----------
Total............................................. 8,632,466 8,024,257 8,069,674
========== ========== ==========
Energy sales, KWH (In thousands):
Retail:
Residential........................................... 1,545,274 1,473,349 1,500,426
Commercial and industrial, small...................... 1,779,986 1,754,176 1,721,736
Commercial and industrial, large...................... 1,216,941 1,121,329 1,092,028
Sales to public authorities........................... 1,110,706 1,068,048 1,081,850
---------- ---------- ----------
5,652,907 5,416,902 5,396,040
Wholesale:
Sales for resale...................................... 1,753,553 1,646,357 1,925,671
Economy sales......................................... 757,999 538,102 320,026
---------- ---------- ----------
Total sales....................................... 8,164,459 7,601,361 7,641,737
Losses and company use................................ 468,007 422,896 427,937
---------- ---------- ----------
Total............................................. 8,632,466 8,024,257 8,069,674
========== ========== ==========
Native system:
Peak load, KW............................................ 1,105,000 1,088,000 1,093,000
Net generating capacity for peak, KW..................... 1,500,000 1,500,000 1,497,000
Load factor.............................................. 63.4 % 61.6 % 61.1 %
========== ========== ==========
Total system:
Peak load, KW............................................ 1,387,000 1,374,000 1,365,000
Net generating capacity for peak, KW..................... 1,500,000 1,500,000 1,497,000
Load factor.............................................. 64.2 % 62.0 % 63.7 %
========== ========== ==========
(A) Financial data is based on the combined results for the Predecessor Company
for the period January 1, 1996 to February 11, 1996 and the Reorganized
Company for the period February 12, 1996 to December 31, 1996.
(B) Predecessor Company.
12
REGULATION
TEXAS RATE 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 activities of the Company.
Rate Stipulation and Agreed Order. The Company's rates for its Texas
jurisdictional customers are governed by the Agreed Order, which became
effective on the Effective Date. The Agreed Order implemented certain
provisions of the Rate Stipulation and set rates consistent with the Rate
Stipulation. Among other things, under the Rate Stipulation: (i) the Company
received a one-time annual increase in Texas retail base rates of approximately
$24.9 million; (ii) the Company's base rates for most customers in Texas were
fixed at this increased level for the Freeze Period; (iii) the City of El Paso
granted the Company a new franchise that extends through the Freeze Period; (iv)
the Company will retain 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; (v) the Company's reacquisition of the Palo Verde leased
assets is deemed to be in the public interest; (vi) no refunds or surcharges
were made to customers with respect to fuel costs and revenues for the period
from July 1993 through June 1995; and (vii) all appeals of Texas Commission
orders concerning the Company and all outstanding Texas Commission dockets
concerning the Company's rates were resolved.
Neither the 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 Rate Stipulation (other than the General
Counsel, OPC and the State of Texas) agreed not to 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 Rate
Stipulation retain all rights provided in the Rate Stipulation, their rights to
participate as a party in any proceeding related to the merger, as well as the
right to pursue a reduction in rates below the freeze level to the extent of
post-merger synergy savings. See "Recent Changes in Utility Regulation."
Fuel. The Company must periodically reconcile its Texas fuel costs
pursuant to Texas Commission rules. The Company has not filed a reconciliation,
which must contain not less than twelve months nor more than thirty-six months
of reconcilable data for any period since June 1995. In a reconciliation,
revenues that the Company collected from Texas customers under its fixed fuel
factor are reconciled with the expenses for fuel and purchased power actually
incurred by the Company for the period covered by the reconciliation.
Differences between revenues collected and expenses incurred are subject to a
refund to customers (in the case of an overrecovery of fuel costs) or surcharge
(in the case of an underrecovery of fuel costs). The Commission staff, local
regulatory authorities such as the City of El Paso, and customers are
13
entitled to intervene in a fuel reconciliation proceeding and to challenge the
recovery of expenses on the basis of unreasonable or improper fuel and purchased
power costs.
Higher natural gas prices began in December 1996 and continued in the
first quarter of 1997. These higher natural gas prices will increase the
Company's underrecovered fuel costs, which will be reviewed in the next Texas
fuel reconciliation.
Palo Verde Performance Standards. The Texas Commission has
established performance standards for the operation of Palo Verde, pursuant to
which Palo Verde 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 Rate Stipulation. The removal of Palo Verde
from rate base could have a significant negative impact on the Company's
revenues and financial condition. Based upon the formula for calculating the
performance standards in Texas, the Company does not believe a performance
penalty will be assessed for the year ended December 31, 1996.
NEW MEXICO RATE MATTERS
The New Mexico Commission has jurisdiction over the Company's rates
and services in New Mexico and jurisdiction over certain 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. Current base rates in New Mexico were established in 1990 and have not
increased. The Company does not have an agreement with New Mexico regulatory
authorities or parties to past New Mexico regulatory proceedings comparable to
the Rate Stipulation.
Pending Rate Case. In October 1996, the New Mexico Commission issued
an order in Case No. 2722, requiring the Company to answer certain ratepayer
complaints and to file a rate filing package, including cost of service data and
supporting testimony. On March 3, 1997, the Company filed all of the rate
filing package data required by the Commission's order with the Commission.
Although the Company's filing demonstrates a revenue deficiency of approximately
$8.6 million under current rates, the Company did not request a rate change to
recover the deficiency. The Company cannot predict what action the New Mexico
Commission may take in this proceeding.
Fuel. The Company is required to file an annual fuel report and an
annual Palo Verde performance standards report, discussed below, with the New
Mexico Commission by January 31 of each year for the preceding calendar year.
The Company requested and received two extensions of time and filed these
reports on March 24, 1997. The Company's filing reflects a significant increase
in the monthly fuel charge to be effective with bills rendered on or after May
1, 1997. This increase is necessary because of significant increases in the
spot price of natural gas which have caused the Company to underrecover its fuel
costs in New Mexico by approximately $2.0 million for the year ended December
31, 1996. The recovery of this amount, coupled with projected higher gas costs
for 1997, results in an increase in the proposed 1997 fuel factor of
approximately 50% over the present factor. There can be no assurance that the
Commission will accept the Company's proposed fuel factor. As in Texas,
interested parties are allowed to intervene and challenge the recoverability of
expenses as unreasonable or imprudent. Any significant disallowance of recovery
could have a material adverse effect on the Company's financial results.
14
Palo Verde Performance Standards. The New Mexico Commission has
established performance standards for the operation of Palo Verde, pursuant to
which the entire Palo Verde station is evaluated annually to determine if its
achieved capacity factor allows the Company to claim a credit or subjects the
Company to a penalty. Because Unit 3 is not included in the Company's New
Mexico rate base, any penalty or credit calculated on a total station basis is
limited to two-thirds of such penalty or credit. The capacity factor is
calculated as the ratio of actual generation to maximum possible generation. If
the annual capacity factor is 35% or less, the New Mexico Commission is required
to initiate a proceeding to reconsider the rate base treatment of Palo Verde.
The removal of Palo Verde from rate base could have a significant negative
impact on the Company's revenues and financial condition. For the year ended
December 31, 1996, the Palo Verde station capacity factor was 86.20%. This
capacity factor resulted in the Company's entitlement to a credit. However, the
Company is voluntarily foregoing collection of this credit to partially mitigate
the increase in the proposed New Mexico fuel factor, discussed above.
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.
The Company has a long-term firm power sales agreement with IID
providing for the sale of 100 MW of firm capacity and 50 MW of contingent
capacity through April 2002. The agreement generally provides for level sales
prices over the life of the agreement. The Company has a firm power sales
agreement with TNP, providing for sales to TNP in the minimum amount of 25 MW
through 2002. Sales prices are essentially level for the remaining life of the
agreement. Rate tariffs currently applicable to IID and TNP contain fuel and
purchased power cost adjustment provisions designed to recover the Company's
fuel and purchased power costs.
In July 1996, the Company filed its open access transmission tariffs
(Docket No. OA96-200-000) in compliance with Order No. 888, Promoting Wholesale
Competition Through Open Access Non-Discriminatory Transmission Services by
Public Utilities; Recovery of Stranded Costs by Public Utilities and
Transmitting Utilities ("Order No. 888"), covering network and point-to-point
transmission services and the six specifically required ancillary services.
Several parties, including Las Cruces, other utilities and several wholesale
power marketers intervened and filed protests to the Company's tariffs. Issues
raised by the intervenors included rates and the terms and conditions of the
Company's tariffs, including the treatment and costs related to certain
facilities making access to the CFE more available to parties other than the
Company. In February 1997, the Company entered into a stipulated agreement among
the various parties settling all issues related to Docket No. OA96-200-000.
Under the settlement the Company will provide transmission service, to the
extent transmission capacity is available, to any party for firm or
interruptible service to the CFE until the earlier of the end of 1998 or the
date the FERC rules on the complaint filed by Enron. See Item 3, "Legal
Proceedings - Transmission Service to Mexico."
In December 1996, Las Cruces filed a request at the FERC for a
determination that Las Cruces would have no stranded cost obligation to the
Company in the event the city leaves the Company's system and operates its own
municipal utility. The Company calculated Las Cruces' stranded cost obligation
to be approximately $234 million. The FERC is expected to establish a
procedural schedule for discovery and hearings in this matter. The Company is
unable to predict the outcome of this proceeding or the impact it may have on
the Company. See Item 3, "Legal Proceedings - Litigation with Las Cruces."
Also in December 1996, SPS filed a request for the issuance of an
order by the FERC requiring the Company to accept as a "completed application"
for service under the Company's open access transmission tariff a September 1996
request by SPS for service that may be needed for SPS to deliver electricity to
a
15
newly-formed Las Cruces municipal electric system. The Company stated in
response to that request that SPS had failed to provide certain information
required to be submitted by persons seeking service under its open access
transmission tariff. The Company has asked that the proceedings initiated by
Las Cruces and by SPS, respectively, be consolidated. Both matters are
currently pending before the FERC.
Department of Energy. The DOE traditionally regulates the Company's
exports of power to the CFE in Mexico pursuant to a license granted by the DOE
and a presidential permit. In addition, the DOE is authorized to assess
operators of nuclear generating facilities for a share of the costs of
decommissioning the DOE uranium enrichment facilities.
In October 1996, the FERC issued an order requiring the Company to
provide Enron Power Marketing, Inc., a wholesale power marketer, with firm
point-to-point transmission service over the Company's transmission system to
substation facilities near the border. The FERC, however, concurred with the
Company's position that the FERC does not have jurisdiction to order
transmission across the border, suggesting that the DOE has such jurisdiction.
Promptly after the issuance of the FERC order, Enron asked the DOE to
exercise its authority over Presidential Permits relating to construction of
border-crossing transmission facilities and over export authorizations issued to
the Company and to Enron to require transmission access for delivery of
electricity to the CFE in Mexico. Pursuant to Enron's request, the DOE, on
October 30, 1996, issued a Notice and Delegation and Assignment which delegated
to the FERC its authority to carry out the DOE's duties with respect to
Presidential Permits and export authorizations issued to the Company. The
Company has filed responses to Enron's request at both the FERC and the DOE in
which it has asserted that the DOE has no authority to require transmission of
electric energy for delivery to the CFE. However, the Company agreed to provide
access, to the extent transmission capacity is available, to a winning bidder
during 1997, if someone other than the Company, pending resolution of this
jurisdictional dispute. The Company's agreement to provide such access in no
way prejudices the Company's position, which remains that under the current law
the provision of such access is not required. Neither the FERC nor the DOE has
taken any final action on this matter.
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 and has authority to conduct environmental reviews pursuant to
the National Environmental Policy Act.
OTHER WHOLESALE CUSTOMERS
The primary term of the Company's previous five year sales agreement
for firm capacity and associated energy to the CFE terminated December 31, 1996.
In September 1996, the CFE issued a request for proposals for replacement power
for 1997. The Company submitted a bid and was ultimately selected by the CFE to
provide varying amounts of power during 1997 ranging from 120 to 200 MW. Since
the CFE load provided by the Company will be isolated from the rest of the CFE
system, the Company is also providing the CFE with the flexibility to increase
its power deliveries up to 5% above its monthly contract capacity level in order
to meet its customer power requirements. The price is stable throughout the
term of the agreement and includes charges for capacity and energy as well as
transmission and any required ancillary services. Under the new agreement with
the CFE, revenues in 1997 related to power sales to the CFE are expected to be
lower than revenues recorded in 1996. The agreement requires payment in United
16
States dollars. See Item 3, "Legal Proceedings - Transmission Service to
Mexico" and Part II, Item 8, "Financial Statements and Supplementary Data - Note
M of Notes to Financial Statements."
RECENT CHANGES IN UTILITY REGULATION
General. The electric utility industry faces increasing pressure to
become more competitive as legislative, regulatory, economic and technological
changes occur. Federal legislation, as well as legislative and regulatory
initiatives in various states and proposed initiatives in Texas and New Mexico,
encourages competition in the Company's service area for electricity generation
among electric utility and non-utility power producers. Together with
increasing customer demand for lower-priced electricity and other energy
services, these measures have accelerated the industry's movement toward more
competitive pricing and cost structures. Such competitive pressures could
result in the loss of customers and diminish the ability of the Company to fully
recover its investment in generation assets, as well as the cost of operating
these assets. This issue is particularly important to the Company because its
rates are significantly higher than the national and regional averages. In the
face of increased competition, there can be no assurance that such competition
will not adversely affect the future operations, cash flows and financial
condition of the Company, or that the Company will be able to sustain retail
rates at the levels established by the Rate Stipulation during the Freeze
Period.
Of particular importance to the Company is the issue of ultimate
recoverability of costs previously found by regulatory authorities to be
reasonable and prudent, but which at the same time are higher than would be
recovered under immediate, full competition (i.e., stranded costs). Across the
industry, as well as at the state level, there is much discussion and debate on
this issue. At this time, there appears to be no clear solution. 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. Texas and New Mexico are engaged
in various activities, at the commission and legislative level, which are
attempting to address the issue of stranded cost recovery from customers subject
to state legislation.
FERC. In April 1996, pursuant to its authority under Sections 205 and
206 of the FPA, the FERC issued its Order No. 888. Order No. 888 requires all
public utilities owning, operating or controlling facilities used for
transmitting electricity in interstate commerce to (i) file open access
transmission tariffs containing minimum terms and conditions of non-
discriminatory service and (ii) take transmission service (including ancillary
services) for their own new wholesale sales and purchases of electric energy
under the open access tariffs. 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. Order No. 888 also
provides for recovery of costs associated with former power customers and new
municipally-owned entities becoming transmission-only customers as a result of
providing open access transmission if the utility had a reasonable expectation
of continuing to provide service to the departing customer. Order No. 888
established criteria under which stranded costs will be evaluated for contracts
entered into prior to July 11, 1994, and for stranded costs resulting from the
formation of any new municipal utilities. Recovery of stranded costs under
contracts entered into after July 10, 1994, will be governed by the terms of
those contracts.
In April 1996, the FERC also issued Order No. 889, Open Access Same-
Time Information System (formerly Real-Time Information Networks) and Standards
of Conduct ("Order No. 889"). Order No. 889 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
17
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
communications and adopt standards of conduct ensuring that all open access
transmission customers are treated in a non-discriminatory manner.
Texas. In February 1996, the Texas Commission adopted a rule
governing wholesale transmission access, as required by recent Texas
legislation. The Texas Commission does not have jurisdiction over the Company's
wholesale transactions. However, the rule required the Company to file its
FERC-approved open access transmission tariffs with the Texas Commission to
certify compliance with the Texas legislation.
During 1996, pursuant to the directives of the Texas Legislature in
legislation passed in 1995, the Texas Commission conducted projects to evaluate
the (i) scope of competition in the electric industry in Texas and (ii)
potential for stranded investment, procedures for allocating stranded costs and
acceptable methods of stranded cost recovery. The Texas Commission's report
consolidating the two projects was issued in January 1997. While it recommended
a careful and deliberate approach to continued expansion of competition in the
Texas electric market, ultimately leading to retail competition with certain
safeguards, it also recommended against any legislation that would introduce
broad based retail competition before 2000. The Texas Commission quantified the
potential "excess of cost over market" ("ECOM") at both wholesale and retail
levels under several scenarios. With respect to the Company's potential for
stranded costs, the Texas Commission estimated no wholesale ECOM, and estimated
retail ECOM ranging from a high of $1.3 billion to a low of $781.0 million, with
an expected value of $1.1 billion, assuming full retail access in 1998. The
Company cannot determine at this time the effects that would occur, including
any possible effects on the Rate Stipulation, as the result of any broad based
competition legislative action, if any, implemented in 1997.
New Mexico. The New Mexico Commission initiated a notice of inquiry
regarding competition and the restructuring of regulation of the electric
industry in 1996. The New Mexico Commission received comments from numerous
parties representing various interests and conducted workshops in an attempt to
arrive at a consensus with respect to the need for regulatory change, the nature
of such change and the timing/transition of any changes. No consensus was
reached by the participants. With respect to stranded costs, the New Mexico
Commission applied the same ECOM model that was developed for Texas. The
Company's New Mexico ECOM calculation ranged from a high of $248 million to a
low of $173 million. The Company also provided the New Mexico Commission with
its calculation of stranded costs for New Mexico pursuant to FERC Order No. 888,
which equaled $364 million.
18
EXECUTIVE OFFICERS OF THE COMPANY
Name Age Current Position and
Business Experience
---- --- --------------------
James S. Haines........... 50 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...... 41 Senior Vice President - Customer and Corporate
Services since August 1996; Senior Vice
President since January 1994; Vice President
from April 1992 to January 1994; General
Counsel from 1988 to August 1996; Secretary
from January 1989 to January 1994.
J. Frank Bates............ 46 Vice President - Transmission and Distribution
since August 1996; Vice President - Operations
from May 1994 to August 1996; Vice President -
Customer Services Texas Division from June
1989 to May 1994.
Michael L. Blough......... 41 Vice President - Administration since August
1996; Vice President since May 1995;
Controller and Chief Accounting Officer from
November 1994 to August 1996; Assistant Vice
President -Financial Planning from September
1990 to November 1994.
Gary R. Hedrick........... 42 Vice President, Treasurer and Chief Financial
Officer since August 1996; Treasurer since
March 1996; Vice President -Financial Planning
and Rate Administration from September 1990 to
August 1996.
John C. Horne............. 48 Vice President - Power Generation since August
1996; Vice President - Power Supply from May
1994 to August 1996; Vice President -
Transmission Systems Division from August 1989
to May 1994.
Robert C. McNiel.......... 50 Vice President - Public Affairs and Marketing
since August 1996; Vice President - New Mexico
Division from December 1989 to August 1996.
Terry Bassham............. 36 General Counsel since August 1996; Shareholder
with Clark, Thomas & Winters, P.C. from May
1993 to August 1996; Shareholder with Moreno,
Fry & Bassham from February 1992 to May 1993;
Shareholder with Kemp, Smith, Duncan &
Hammond, P.C. for more than one year prior to
February 1992.
Guillermo Silva, Jr....... 43 Secretary since January 1994; Assistant
Secretary from June 1989 to 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 H of Notes to Financial Statements" for
information regarding encumbrances against the principal properties of the
Company.
ITEM 3. LEGAL PROCEEDINGS
LITIGATION WITH CENTRAL AND SOUTH WEST CORPORATION
In May 1993, the Company entered into the Merger Agreement, pursuant
to which the Company would have been acquired by CSW. In June 1995, CSW
terminated the Merger Agreement. In response, the Company filed a complaint
against CSW in the 205th Judicial District Court of El Paso County, Texas,
alleging, among other claims, breach of contract, breach of duty of good faith
and fair dealing, breach of fiduciary duty, business disparagement, tortious
interference with contract and fraud in the inducement. The Company sought an
unspecified amount of damages, punitive damages, attorneys' fees and costs. In
June 1995, CSW filed an adversary proceeding against the Company in the
Bankruptcy Court seeking the recovery of termination fees of $25 million,
approximately $3.7 million in attorneys' fees and expenses that CSW claims it
advanced on behalf of the Company in certain regulatory proceedings, and $25
million for the alleged violation of the Merger Agreement's no-solicitation
provisions. All of the claims by both parties were tried in the Bankruptcy
Court. The trial concluded on January 30, 1997, and the matter has been taken
under advisement by the presiding judge. A ruling is expected in March 1997. The
Company cannot predict the outcome of this litigation. Pursuant to the terms of
the Reorganization, the first $20 million in proceeds, if any, to the Company
from this litigation will be distributed to the holders of preferred stock and
common stock of the Predecessor Company.
LITIGATION WITH LAS CRUCES
In the franchise fee action, Las Cruces is attempting to replace the
Company as its electric service provider by acquiring, through condemnation or
otherwise, the distribution assets and other facilities used to provide electric
service to customers in Las Cruces. Sales to customers in Las Cruces represented
approximately 7% of the Company's operating revenues in 1996. Las Cruces has two
actions pending against the Company in federal district court in New Mexico, one
seeking to recover franchise fees despite the expiration of the Company's Las
Cruces franchise in March 1994 and one seeking a declaratory judgment that Las
Cruces can proceed with a condemnation action against the Company. In addition,
the New Mexico State Legislature has recently passed a bill that would allow Las
Cruces to proceed with the condemnation.
Las Cruces is seeking the reasonable value of the Company's use, occupation
and rental of Las Cruces' rights-of-way or damages for trespass and an
unspecified amount of punitive damages. The Company has filed an answer denying
that it has any liability or continuing payment obligation to Las Cruces
regarding franchise fees or use of the Las Cruces rights-of-way, and also denies
that it has committed any trespass. The Company intends to vigorously defend the
lawsuit. The Company has also filed a counterclaim seeking to condemn, pursuant
to statutory authority, those Las Cruces rights-of-way currently used and
occupied by the Company. Las Cruces has filed an answer contesting the Company's
right to proceed with such a condemnation. In August 1996, the court severed the
Company's counterclaim from
20
Las Cruces' claims for all purposes, and stayed all proceedings on the Company's
counterclaim until further order of the court. The trial of Las Cruces' claims
is set for May 1997. The Company has reserved in its financial statements an
amount equal to the franchise fees under the expired agreement.
In April 1995, Las Cruces filed a Complaint for Declaratory Judgment
against the Company in the District Court for Dona Ana County, New Mexico,
seeking a declaratory judgment that Las Cruces has a right of eminent domain to
condemn the electric distribution system and related facilities owned and
operated by the Company within and adjacent to the city limits that provide or
assist in the provision of electricity within the municipal boundaries of Las
Cruces. In May 1995, the Company removed the case to the United States District
Court for the District of New Mexico. In October 1995, the Company's motion for
summary judgment was denied and the Court ruled that although Las Cruces lacks
express statutory authority to condemn the Company's assets, such express
authority is required only if the proposed condemnation would materially impair,
obliterate or destroy the existing use. Following a trial on the merits, the
federal magistrate issued an opinion holding that Las Cruces had not met its
burden of proof that its plan would not materially impair the public use of the
Company's property sought to be condemned. The magistrate also granted the
Company's motion to certify to the New Mexico Supreme Court the question as to
whether Las Cruces possesses the authority to condemn the Company's property for
use as a municipal utility when that property is already devoted to public use.
In February 1997, the New Mexico Supreme Court heard oral arguments and is
expected to issue its ruling in the near future.
In March 1997, the New Mexico House of Representatives and Senate passed a
bill that would give Las Cruces the authority to acquire and operate the
Company's distribution system within both the city limits and a territory within
five miles of the municipal boundary. If the Governor signs the bill, it would
become law immediately and most likely make the issues presented to the New
Mexico Supreme Court moot.
Las Cruces has taken several actions to position itself to acquire portions
of the Company's distribution system and certain related facilities in the event
it can proceed with condemnation. See Item 1, "Business - Regulation - Federal
Regulatory Matters" for discussion regarding Las Cruces' filing with the FERC
for determination of stranded cost. In June 1994, the Las Cruces City Council
approved a resolution selecting SPS to provide operation and maintenance
services for the proposed Las Cruces electric distribution system, substations
and associated transmission facilities and authorizing the staff of Las Cruces
to negotiate a contract with SPS related to such services. In August 1994, SPS
and Las Cruces entered into a fifteen-year contract granting SPS the right to
provide all of the electric power and energy required by Las Cruces during the
term of the contract. In addition, Las Cruces announced that, in October 1995,
it sold approximately $73 million in revenue bonds to provide funding to finance
the acquisition by condemnation or negotiated purchase of the Company's
electrical distribution assets within and adjacent to the Las Cruces city
limits.
The Company has filed a lawsuit in the Dona Ana County District Court and
is pursuing a complaint simultaneously before the New Mexico Commission
challenging the legality of the sale of the revenue bonds, and the New Mexico
Commission is investigating the agreement between SPS and Las Cruces which would
grant, in certain circumstances, Las Cruces an option to sell electric utility
assets acquired through condemnation to SPS. In August 1996, the Dona Ana County
District Court issued an opinion letter stating that Section 3-23-3 of the New
Mexico Municipal Code is inapplicable to home rule municipalities and Las
Cruces, therefore, was not required to acquire the New Mexico Commission's
approval before issuing revenue bonds to acquire utility property. However, the
Court did agree with the Company that the revenue bonds, in this case backed by
utility revenues, are subject to the same requirements of other revenue bonds
backed by gross receipts tax revenues. Therefore, if the Court's finding of the
applicability of Las Cruces' home rule authority is overturned on appeal, the
Company's position that the issuance of the bonds required prior approval could
be upheld. The Court's order was signed and entered in November 1996. The
Company has filed an appeal with the New Mexico Court of Appeals.
21
The Company continues to believe that it can provide lower cost electric
service to customers in Las Cruces than can be achieved through a municipal
takeover. Accordingly, the Company has stated its strong preference for a
resolution of its differences with Las Cruces through negotiation rather than
litigation and condemnation. The Company intends to vigorously pursue before the
FERC its right to recover stranded costs from Las Cruces in the event Las Cruces
succeeds in leaving the system.
If Las Cruces succeeds in its efforts to condemn the Company's distribution
system, the Company could lose its Las Cruces customer base, although the
Company would receive "just compensation" as established by the court under New
Mexico law. "Just compensation" is generally defined as the amount of money that
would compensate the party whose property is condemned. In the Company's case,
this amount would be the difference between the value of the Company's entire
system prior to the taking, as compared to the value of the entire system after
the taking. The Company is unable to predict the outcome of Las Cruces' efforts
or the effects it may have on the Company's financial position, results of
operations and cash flows.
TRANSMISSION SERVICE TO MEXICO
In September 1996, Enron, a wholesale power marketer and one of the
companies that submitted a bid to the CFE in connection with renewal of the
interchange agreement for the supply of power to Ciudad Juarez, Mexico, filed a
complaint against the Company with the FERC. Enron's complaint sought emergency
relief and requested the FERC to direct the Company to enter into an agreement
with Enron to provide Enron with firm point-to-point transmission service to the
CFE under its open access transmission tariff.
In October 1996, the FERC issued an order requiring the Company to provide
Enron with firm point-to-point transmission service over the Company's
transmission system to substation facilities near the border. The FERC, however,
concurred with the Company's position that the FERC does not have jurisdiction
to order transmission across the border, suggesting that the DOE has such
jurisdiction. Pursuant to an emergency application filed by Enron with the DOE,
on October 30, 1996, the DOE issued a Notice of Delegation and Assignment which
delegated to the FERC its authority to carry out the DOE's duties in this case.
In its response to the DOE's delegation of authority, the Company has asserted
that the DOE has no authority to require transmission access for delivery of
power to the CFE. However, the Company agreed to provide access, to the extent
transmission capacity is available, to a winning bidder in 1997, if the winning
bidder is someone other than the Company, pending resolution of this
jurisdictional dispute. The Company's agreement to provide such access in no way
prejudices the Company's position that, under current law, access is not
required. The FERC has docketed the Delegation and Assignment and the process is
expected to continue throughout 1997.
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
22
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. The case has been inactive for many
years. The Company cannot 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 the 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 December 1992, the Arizona
Supreme Court heard oral argument on certain issues in this matter that are
pending on interlocutory appeal. Issues important to Palo Verde Participants'
claims were remanded to the trial court for further action and the trial court
certified its decision for interlocutory appeal to the Arizona Supreme Court.
In September 1994, the Arizona Supreme Court granted review of the June 1994
trial court decision. No trial date has been set in the matter. The Company
cannot predict the outcome of this case.
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. On October 18, 1995, the Navajo Nation and the
Four Corners Participants agreed to indefinitely stay the proceedings referenced
above so that the parties may attempt to resolve the dispute without litigation.
The Company is unable to predict the outcome of this matter.
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, management is of the opinion that none of these
claims will have a material adverse effect on the operations or financial
position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 14, 1996, the Company held a Special Shareholders Meeting to
approve the Company's 1996 Long-Term Incentive Plan, which authorized the
issuance of up to 3,500,000 shares of common stock for the benefit of officers,
key employees and non-employee directors through the award or grant of non-
statutory stock options, incentive stock options, stock appreciation rights,
restricted stock, bonus
23
stock and performance stock. The total number of common shares outstanding at
this Special Meeting was 59,999,981, of which 46,078,152 were represented in
person or by proxy. Shares voted in favor of approving the plan were
38,325,050, and shares voted against were 7,308,727. There were 444,375
abstentions. Broker non-votes were not included in the determination of the
number of shares represented at the meeting for purposes of determining whether
a quorum was present and were not counted for purposes of determining whether
the proposal had been approved. See Part II, Item 8, "Financial Statements and
Supplementary Data - Note F of Notes to Financial Statements."
24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock began trading on the American Stock Exchange on
February 16, 1996 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
------ ------
1996
----
February 16 - March 31 $ 6 1/4 $ 4 3/4
Second Quarter 6 1/8 5
Third Quarter 6 1/8 5 1/4
Fourth Quarter 6 5/8 4 15/16
At March 20, 1997, there were 11,847 record holders of the Company's Common
Stock.
The Company's ability to pay dividends on the Common Stock for the next
several years will be limited by applicable law and, as explained below, by the
financing arrangements entered into pursuant to the Reorganization. All
distributions with respect to the Common Stock, including the declaration or
payment of dividends, are subject to the provisions of the Texas Business
Corporation Act, including provisions that prohibit any distribution that
exceeds the surplus of the Company. In addition, under Section 305 of the FPA,
it is unlawful for a director or officer of the Company to participate in the
making or payment of dividends from "any funds properly included in capital
account." As a result of Reorganization, the Company's first priority at this
time is debt retirement and deleveraging as opposed to paying dividends.
Pursuant to the resolutions creating the Company's Series A Preferred
Stock, no dividends can be paid on the Common Stock if there are dividends in
arrears on the Series A Preferred Stock. So long as the Company's First
Mortgage Bonds, Series A through H, are outstanding and the series with the
longest maturity is not rated "investment grade" by either Standard & Poor's
Rating Service or Moody's Investors Service, Inc., the Company may not declare
any dividend on the Common Stock, other than in additional shares of Common
Stock, or make any other distribution on, or acquire for value any shares of
Common Stock (with certain limited exceptions) unless, after giving effect
thereto, the aggregate of all such dividends, distributions and certain other
payments made by the Company since February 12, 1996 would be less than the sum
of (i) 50% of the consolidated net income (as defined in the mortgage indenture)
of the Company minus dividends paid in respect of the Series A Preferred Stock
for the period from February 13, 1996 to the most recently ended fiscal quarter
for which quarterly financial statements are available (or, if such consolidated
net income is a deficit, less 100% of such deficit), plus (ii) 100% of the
aggregate net proceeds received by the Company from the issuance or sale since
February 12, 1996 of equity securities or debt securities that have been
converted into equity securities, plus (iii) $10.0 million. Currently, the
Company's First Mortgage Bonds are not rated investment grade.
Pursuant to the terms of the reimbursement agreements related to four
letters of credit issued in respect to the four series of pollution control
revenue bonds, so long as a drawing is available under any of
25
the letters of credit, the same limitation on the declaration of dividends would
apply to the Company. In addition to the restriction contained in the mortgage
indenture, the reimbursement agreements limit to $15.0 million the aggregate
amount of dividends that can be paid on the Common Stock during the three years
after its initial issuance on February 12, 1996. The credit agreement for the
working capital and fuel financing facility contains the same limitations on the
payment of Common Stock dividends as the reimbursement agreements related to the
letters of credit on the pollution control revenue bonds.
26
ITEM 6. SELECTED FINANCIAL DATA
As of and for the following periods:
REORGANIZED
COMPANY PREDECESSOR COMPANY
----------- | --------------------------------------------------------------------
|
PERIOD FROM | PERIOD FROM
FEBRUARY 12 | JANUARY 1
TO | TO
DECEMBER 31, | FEBRUARY 11, YEARS ENDED DECEMBER 31,
| ------------------------------------------------------
|
1996 | 1996 1995 1994 1993 1992
------------ | ------------ ------------ ------------ ------------ ------------
|
| (IN THOUSANDS EXCEPT FOR SHARE DATA)
|
Operating revenues............................... $ 523,974 | $ 54,949 $ 504,617 $ 536,760 $ 543,594 $ 524,760
Operating income................................. 120,787 | 5,089 66,146 73,011 64,971 67,036
Income (loss) before extraordinary gain on |
discharge of debt and cumulative effect of a |
change in accounting principle................. 41,919 | 118,198 (33,319) (28,153) (41,855) (28,180)
|
Extraordinary gain on discharge of debt.......... - | 264,273 - - - -
Cumulative effect of a change in |
accounting principle........................... - | - - - (96,044)(1) -
Net income (loss) applicable to common stock.... 31,431 | 382,471 (33,319) (28,153) (137,899) (28,180)
|
Net income (loss) per common share: |
Income (loss) before extraordinary gain |
on discharge of debt and cumulative |
effect of a change in accounting principle. 0.52 | 3.33 (0.94) (0.79) (1.18) (0.79)
|
Extraordinary gain on discharge of debt...... - | 7.43 - - - -
Cumulative effect of a change |
in accounting principle.................... - | - - - (2.70)(1) -
Net income (loss) per common share........... 0.52 | 10.76 (0.94) (0.79) (3.88) (0.79)
|
Weighted average number of common shares and |
common share equivalents outstanding........... 60,181,494 | 35,544,330 35,544,330 35,544,330 35,539,480 35,530,264
Total assets..................................... 1,846,190 | 1,910,354 1,809,891 1,730,851 1,715,406 1,702,778
Additions to utility plant....................... 53,018 | 8,231 88,267 60,113 58,215 60,570
Long-term debt, financing and capital lease |
obligations.................................... 1,046,173 | 1,164,328 - - - -
Debt and obligations subject to compromise....... - | - 1,608,091 1,537,303 1,495,315 1,440,968
Preferred stock.................................. 108,426 | 100,000 81,464 81,464 81,464 81,464
Common stock equity (deficit).................... 331,257 | 300,000 (418,763) (385,966) (357,463) (220,508)
|
=========== | =========== =========== =========== =========== ===========
______________________
(1) Reflects the change in accounting for income taxes due to the
implementation of SFAS No. 109, "Accounting for Income Taxes" ("SFAS No.
109").
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," below.
27
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 (the
"1995 Act"). 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 stockholders, 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 "Operational Prospects and
Challenges" and "Liquidity and Capital Resources" and 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 foregoing list of important factors
is 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.
OPERATIONAL PROSPECTS AND CHALLENGES
While the Company prepares for a new era of deregulation and competition in
the electric utility industry, the Rate Stipulation provides a certain level of
stability in the rates that the Company currently charges the majority of its
customers. The Company intends to enhance its position during the Freeze Period
by (i) serving the growing need for electricity within its retail service
territory; (ii) continuing to focus on its strategic location on the border with
Mexico; (iii) executing long-term contracts to provide electricity to its
largest retail customers; and (iv) implementing operating cost reduction
programs.
The Company faces a number of challenges which could negatively impact its
operations during the Freeze Period. The primary challenge is the risk of
increased costs, including the risk of additional or unanticipated costs, at
Palo Verde resulting from (i) increases in operation and maintenance expenses;
(ii) the potential 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. There can be no assurance that the Company's revenues will be
sufficient to recover any increased costs incurred during the Freeze Period,
including any such 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.
In recent months, rapid escalation in fuel prices have increased concern
over price levels for energy, including electricity. The Company's recovery of
fuel expense is subject to challenges regarding reasonableness and prudence
through periodic fuel reconciliation proceedings. See Part I, Item 1, "Business
- - Regulation - Texas Rate Matters - Fuel" and "- Regulation - New Mexico Rate
Matters - Fuel."
Another risk to the Company's operations is the potential loss of
customers. The Company's wholesale and large retail customers currently have,
in varying degrees, and, in the future may have, additional alternate sources of
economical power, including co-generation of electric power. 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. Las Cruces has
begun litigation and the New Mexico State Legislature has passed
28
legislation which, if signed by the Governor, would give Las Cruces the legal
authority to condemn the Company's distribution system and related assets
located within its city limits. If Las Cruces succeeds in its efforts, the
Company could lose its Las Cruces customer base, although the Company would
receive "just compensation" as established by the court. See Item 8,
"Financial Statements and Supplementary Data - Note K of Notes to Financial
Statements." Further, there are state and federal legislative initiatives
related to deregulation which could affect Company operations.
In recent years, the United States has closed a large number of military
bases and there can be no assurance that Holloman Air Force Base ("Holloman"),
White Sands Missile Range ("White Sands") or the United States Army Air Defense
Center at Fort Bliss ("Ft. Bliss") will not be closed in the future or that the
Company will not lose all or some of its military base sales. The Company's
sales to the military bases represented approximately $20.0 million or 3% of
operating revenues for the year ended December 31, 1996. The Company signed a
new contract with Ft. Bliss in August 1996, which provides that Ft. Bliss will
take service from the Company through 1999, with the right thereafter to
continue service on a year to year basis for two years. The Company has a
contract for service to Holloman for a ten-year term beginning in December 1995.
In August 1996, the Army advised the Company that White Sands would continue to
purchase retail electric service from the Company pursuant to the retail service
contract which was set to expire on December 31, 1993, but which had previously
been unilaterally extended by the Army for an indefinite period, until written
termination of such contract by the Army not less than one year in advance of
the termination date.
The Company does not currently have an agreement with New Mexico regulatory
authorities or parties to past New Mexico regulatory proceedings comparable to
the Rate Stipulation. Pursuant to an order from the New Mexico Commission, the
Company filed rate data with the Commission on March 3, 1997. Although the
Company's filing demonstrates a revenue deficiency of approximately $8.6 million
under current rates, the Company did not request a rate change to recover the
deficiency. The Company cannot predict what action the New Mexico Commission
may take in this proceeding.
Finally, the electric utility industry in general is 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 potential changes in state regulatory provisions relating
to wholesale and retail service. Both the Texas and New Mexico Commissions are
conducting proceedings related to industry restructuring and stranded cost
recovery. See Part I, Item 1, "Business - Regulation - Recent Changes in
Utility Regulation." The Company cannot predict the outcome of these
proceedings. The potential effects of deregulation are particularly important to
the Company because its rates are significantly higher than the national and
regional averages. In the face of increased competition, there can be no
assurance that such competition will not adversely affect the future operations,
cash flow and financial condition of the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity requirements through the end of the
decade are expected to consist of the payment of interest on the Company's
indebtedness and capital expenditures related to the Company's generating
facilities and transmission and distribution systems. The Company expects that
cash flows from operations will be sufficient for such purposes.
29
Long-term capital requirements of the Company will consist primarily of
maintenance and construction of electric utility plant, payment of interest on
and retirement of debt and payment of dividends on and redemption of preferred
stock. The Company has no current plans to construct any new generating
capacity through at least 2004. Utility construction expenditures will consist
primarily of expanding and updating the transmission and distribution systems
and the cost of betterments and improvements to Palo Verde and other generating
facilities.
The Company anticipates that internally generated funds will be sufficient
to meet its construction requirements, provide for the retirement of debt at
maturity and enable the Company to meet other contingencies that may exist, such
as compliance with environmental regulation, pending litigation and any claims
for indemnification. At December 31, 1996, the Company had approximately $68.8
million in cash and cash equivalents, out of which approximately $9.1 million of
reorganization expenses are expected to be paid upon receipt of the Bankruptcy
Court's final order for allowable professional fees related to the Company's
bankruptcy proceedings. The Company also has a $100 million revolving credit
facility, which provides up to $60 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, 1996, approximately $46.6
million had been drawn for nuclear fuel purchases. No amounts have been drawn
on this facility for working capital needs.
The Company has substantial leverage and significant debt service
obligations and, primarily due to the Rate Stipulation, does not expect to be
able to raise its base rates in order to recover any future increases in non-
fuel costs or to replace any lost revenues. As of December 31, 1996, the
Company had total long-term indebtedness, including the long-term portion of
financing and capital lease obligations, of approximately $1,046 million and
redeemable preferred stock of $108 million. Long-term indebtedness as a
percentage of total capitalization totaled approximately 70%.
From June 1996 through March 20, 1997, the Company repurchased
approximately $168 million of its first mortgage bonds, which repurchases, net
of related issuance cost, did not result in a material net gain or loss. From
time to time, based on prevailing market conditions, the Company intends to
continue to use a portion of its available cash flow to reduce fixed obligations
by making 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 purposes or other purposes could be limited in
the future; (ii) a substantial portion of the Company's cash flow from
operations will be dedicated to the payment of principal and interest on its
indebtedness, thereby reducing the funds available to the Company for other
purposes; and (iii) the Company's substantial leverage may place the Company at
a competitive disadvantage, hinder its ability to adjust rapidly to changing
market conditions and make it more vulnerable in the event of a downturn in
general economic conditions or its business. As a result, any significant
reduction in revenues and/or significant increase in costs or expenditures could
adversely affect the Company's liquidity.
30
HISTORICAL RESULTS OF OPERATIONS
GENERAL
The Company derives revenue principally from the sale of power to retail
and wholesale customers, which accounted for 80.8% and 18.5%, respectively, of
the Reorganized and Predecessor Companies' combined revenues for the year ended
December 31, 1996, and 79.6% and 19.7%, respectively, of the Predecessor
Company's revenues for the year ended December 31, 1995. Revenues from the sale
of electricity include fuel revenues based upon fuel costs, which are generally
passed through directly to customers, and base revenues. Base revenues refers
to the Company's revenues from the sale of electricity excluding such fuel
revenues.
The Company's retail customers consist of residential customers, small
commercial and industrial customers, large commercial and industrial customers
and public authorities, which accounted for 36%, 36%, 11% and 17%, respectively,
of the Company's retail base revenues for the year ended December 31, 1996 and
36%, 36%, 11% and 17%, respectively, of the Company's retail base revenues for
the year ended December 31, 1995. Wholesale revenues consist of sales pursuant
to long-term power contracts, sales to CFE, and spot market sales, which
accounted for 51%, 36% and 13%, respectively, of the Company's wholesale base
revenues for the year ended December 31, 1996 and 56%, 36% and 8%, respectively,
of the Company's wholesale base revenues for the year ended December 31, 1995.
Sales to the Company's largest wholesale customer, IID, accounted for 7.5% and
8.8% of the Company's base revenues for the years ended December 31, 1996 and
1995, respectively. No retail customer accounted for more than 3% of the
Company's base revenues during such periods.
The Company's business is seasonal, with higher revenues generated during
the summer season. The following table sets forth the percentage of the
Company's revenues derived during each quarter of the periods presented.
YEARS ENDED DECEMBER 31,
-----------------------
1996 1995 1994
------- ------ ------
First Quarter...................... 21% 22% 23%
Second Quarter..................... 25 25 26
Third Quarter...................... 29 29 29
Fourth Quarter..................... 25 24 22
---- ---- ----
Total............................. 100% 100% 100%
==== ==== ====
Palo Verde, which provides approximately 40% of the Company's available net
generating capacity and provided approximately 53% of the Company's available
energy for the year ended December 31, 1996, is subject to performance standards
in New Mexico and Texas. If such performance standards are not met, the Company
is subject to a penalty. If standards are exceeded, the Company is entitled to a
reward. See Part I, Item 1, "Business - Regulation- New Mexico Rate Matters -
Palo Verde Performance Standards" and "- Regulation- Texas Rate Matters - Palo
Verde Performance Standards."
31
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
OPERATING REVENUES
Combined operating revenues for the Reorganized Company and Predecessor
Company increased 14.7% to $578.9 million in 1996 compared to $504.6 million in
1995 primarily due to (i) increased base revenues and (ii) increased fuel
revenues. The Company achieved record total system peak demand of 1,387 MW in
1996, representing a 0.9% increase over 1995's record peak of 1,374 MW.
Base Revenues. Combined base revenues increased 6.7% to $460.9 million in
1996 compared to $432.0 million in 1995, primarily due to an increase in Texas
base rates associated with the implementation of the Rate Stipulation and an
increase in KWH sales.
KWH sales increased 4.9% in 1996 compared to 1995 primarily due to (i) warm
weather and (ii) a 1.9% increase in the average number of customers served.
KWH SALES INCREASE
--------------------
1996 1995 (DECREASE)
--------- --------- ----------
(IN THOUSANDS)
Retail............... 5,652,907 5,416,902 4.4%
Wholesale............ 1,753,553 1,646,357 6.5%
--------- ---------
Total.............. 7,406,460 7,063,259 4.9%
========= =========
Fuel Revenues and Economy Sales. Regulations of the Texas and New Mexico
Commissions allow substantially all fuel and purchased and interchanged power
costs to be passed through directly to customers. These costs are reflected in
the Company's fuel revenues. Combined fuel revenues and economy sales increased
65.7% to $114.0 million in 1996 compared to $68.8 million in 1995 primarily due
to (i) increased fuel and purchased and interchanged power costs; (ii) increased
economy energy sales; and (iii) changes in the Texas fuel revenue calculation
associated with the implementation of the Rate Stipulation.
FUEL AND PURCHASED AND INTERCHANGED POWER EXPENSE
Combined fuel and purchased and interchanged power expense (substantially
all of which is expected to be recovered by the Company in fuel revenues as
described above) increased 33.0% to $123.1 million in 1996 compared to $92.6
million in 1995. Such increase was primarily due to increased cost of natural
gas and volume of fuel used in Company-owned generation and to increased volume
of higher cost purchased power resulting from (i) increased KWH sales in 1996
and (ii) the timing and duration of maintenance outages at Company-owned plants,
and refueling outages at Palo Verde in 1996 compared to 1995.
OTHER OPERATION AND MAINTENANCE EXPENSE
Combined other operation and maintenance expense decreased 29.0% to $178.7
million in 1996 compared to $251.9 million in 1995 due to decreased Palo Verde
costs of approximately $72.0 million. The reduction in Palo Verde costs
consisted of approximately $67.3 million associated with lease accruals recorded
in 1995, with no corresponding accrual in 1996 by the Reorganized Company as a
result of the reacquisition of the leased portion of Palo Verde in the
Reorganization, and approximately $4.7 million primarily from the timing and
duration of unit refuelings during the periods.
32
DEPRECIATION AND AMORTIZATION EXPENSE
Combined depreciation expense increased $29.6 million to $86.3 million in
1996 compared to $56.8 million in 1995. The effect of an increase in depreciable
plant following the reacquisition in the Reorganization of a portion of Palo
Verde was partially offset by the decrease in the book value of depreciable
plant from fresh-start adjustments. The effect of the implementation of fresh-
start reporting and the accelerated depreciation of a portion of such amounts
over the period of the Rate Stipulation resulted in increased depreciation
expense of $37.2 million for the period February 12, 1996 to December 31, 1996
partially offset by decreased nuclear decommissioning amortization. As part of
the adoption of fresh-start reporting, the Company recognized the net present
value of estimated future expenditures for nuclear decommissioning of
approximately $84.9 million.
FEDERAL INCOME TAXES
Combined federal income tax expense, excluding the deferred income tax
effects of fresh-start reporting, reorganization items and income taxes on
interest income during bankruptcy, increased $29.8 million to $19.0 million in
1996 compared to a tax benefit of $10.8 million in 1995 primarily due to changes
in pretax income and certain differences in book and taxable income.
STATE INCOME TAXES
Combined state income tax expense, excluding deferred income taxes
recognized in reorganization items, increased $9.3 million to $4.3 million in
1996 compared to a state tax benefit of $5.0 million in 1995 primarily due to
changes in pretax income and certain differences in book and taxable income.
OTHER TAXES
Combined taxes other than income taxes decreased $9.0 million to $44.6
million in 1996 compared to $53.6 million in 1995 primarily due to (i) a
decrease in Arizona property tax resulting from a new state property tax law
which reduced the property taxes for 1996; (ii) a decrease in taxable property
base resulting from depreciation; and (iii) the elimination of Arizona sales tax
on lease payments due to reacquisition of leased property in February 1996. The
decrease was partially offset by an increase in revenue related tax. Under the
recently enacted law in Arizona, the Company's property taxes were approximately
$17.1 million for 1996, a reduction of approximately $8.8 million from 1995.
GAIN ON SALE OF INVESTMENT
In August 1996, the Company's warrant to buy up to 49.75% of the equity
interest in CAI Corporation was sold for $20.2 million. The sale resulted in a
pretax gain of $3.8 million based on a book value of $16.4 million.
INVESTMENT INCOME
Combined investment income on cash for the Reorganized Company is
classified as Other Income, whereas investment income on cash for the
Predecessor Company is included in Reorganization Items (Expense). Combined
investment income decreased 52.7% to $6.3 million in 1996 compared to $13.2
million in 1995 due to reduced levels of cash resulting from repurchases of debt
and the payment of bankruptcy related claims pursuant to the Plan.
33
SETTLEMENT OF BANKRUPTCY PROFESSIONAL FEES
The Company recorded a change in estimate of approximately $2.3
million related to accrued professional fees as a result of Bankruptcy Court
proceedings.
INTEREST CHARGES
Combined interest charges increased 8.1% to $95.3 million in 1996 compared
to $88.1 million in 1995 primarily due to (i) increased interest on mortgage
bonds due to a greater amount of bonds being outstanding subsequent to the
Reorganization, and (ii) accretion of the nuclear decommissioning liability as a
result of implementing fresh-start reporting. This increase was partially offset
by decreased interest charges due to the extinguishment of certain debt in
conjunction with the Reorganization.
REORGANIZATION ITEMS
Reorganization items for the Predecessor Company for the period January 1,
1996 to February 11, 1996 was a benefit of $122.2 million compared to an expense
of $10.0 million for the twelve months ended December 31, 1995. The benefits
recorded by the Predecessor Company upon the emergence from bankruptcy consisted
of deferred income tax benefits related to the Reorganization and the effects of
the Rate Stipulation. These benefits were offset by (i) the adjustments of
assets and liabilities to their fair market values; (ii) provisions for
settlement of claims; and (iii) professional fees and other expenses. The
reorganization expense recorded in 1995 consisted of professional fees partially
offset by interest earned on accumulated cash resulting from the Bankruptcy
Case. See Note B of Notes to Financial Statements.
EXTRAORDINARY GAIN ON DISCHARGE OF DEBT
Extraordinary gain on discharge of debt for the Predecessor Company for the
period January 1, 1996 to February 11, 1996 consisted of forgiveness of
indebtedness primarily related to the extinguishment of Palo Verde lease
obligations.
NET INCOME
The combined change in 1996 net income was primarily due to the
extraordinary gain on discharge of debt and reorganization items related to the
Company's emergence from bankruptcy, with no comparable activity in 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
OPERATING REVENUES
Operating revenues decreased 6.0% to $504.6 million in 1995 compared to
$536.8 million in 1994 primarily due to a decrease in fuel revenues.
Nonetheless, the Company achieved a then record total system peak demand of
1,374 MW in 1995, representing a 0.7% increase over 1994's record peak of 1,365
MW.
Base Revenues. Base revenues remained relatively unchanged at $432.0
million in 1995 compared to $431.6 million in 1994.
34
Total system firm energy sales decreased to 7,063,259 MWH in 1995 from
7,321,711 in 1994. Retail firm energy sales increased 20,862 MWH over the same
time period.
In July 1994, the Company implemented an increase in base rates for Texas
retail customers subject to refund and bond. Accordingly, the Company deferred
recognition of those revenues, which are not included in either 1995 or 1994
results. Revenues deferred for 1995 and 1994 were $24.1 million and $11.5
million, respectively, and total revenues subject to refund aggregated $35.6
million at December 31, 1995.
Fuel Revenues. Regulations of the Texas and New Mexico Commissions allow
substantially all changes in fuel and purchased and interchanged power costs to
be passed through directly to customers. These costs are reflected in the
Company's revenues. Fuel revenues decreased 31.9% to $68.8 million in 1995
compared to $101.1 million in 1994 primarily due to reduced cost of fuel for
Company-owned generation and changes in generation supply from higher cost
purchased power to Company-owned generation. During the fourth quarter of 1995,
the Company reserved $2.3 million against fuel revenues to reflect additional
fuel and purchased and interchanged power costs incurred related to operating
conditions during the initial remediation following the system outages.
If the provisions of the Rate Stipulation concerning fuel issues had been
implemented for 1995, fuel revenues would have been $16.3 million greater. Under
the Agreed Order, the Company retained fuel revenues in the amount of $46.1
million that had been accrued as a provision for refund in the financial
statements.
FUEL AND PURCHASED AND INTERCHANGED POWER EXPENSE
Fuel and purchased and interchanged power expense decreased 22.7% to $92.6
million in 1995 compared to $119.8 million in 1994. Such decrease was primarily
attributable to the reduced cost of fuel for Company-owned generation and
changes in the fuel mix from higher cost purchased power to nuclear fuel.
OTHER OPERATION AND MAINTENANCE EXPENSE
Other operation and maintenance expense decreased 0.8% to $251.9 million in
1995 compared to $253.8 million in 1994 as a result of (i) decreased Palo Verde
costs of $3.7 million; (ii) decreased rents of $1.2 million primarily related to
lease expenses for the Company's computer system; (iii) decreased general
maintenance costs at a Company-operated generation plant of $1.0 million; (iv)
decreased pension and benefit costs of $0.9 million primarily due to a change in
actuarial assumptions; and (v) decreased transmission costs of $0.8 million
primarily related to the installation of transmission equipment which eliminated
fees for transmission services. Such decreases were partially offset by (i)
increased outside service costs of $3.3 million primarily related to
condemnation and franchise issues for Las Cruces; and (ii) increased maintenance
costs of $2.2 million at a Company-operated generating plant.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense increased $2.9 million to $56.8
million in 1995 compared to $53.8 million in 1994 primarily due to increases in
depreciable plant balances and a $0.6 million inflation adjustment to the DOE's
assessment on Palo Verde related to a Decontamination and Decommissioning Fund
established by the Energy Policy Act.
35
FEDERAL INCOME TAXES
Federal income tax benefits decreased $9.5 million to $7.3 million in 1995
compared to $16.8 million in 1994 primarily due to changes in pretax income and
differences in book and taxable income.
STATE INCOME TAX
State income tax expense decreased $5.2 million to a tax benefit of $5.0
million in 1995 compared to $0.2 million expense in 1994 primarily due to a
decrease in pretax income and certain differences in book and taxable income.
OTHER TAXES
Taxes other than income taxes decreased $0.7 million to $53.6 million in
1995 compared to $54.3 million in 1994 due to a decrease in property taxes
resulting from a decrease in taxable base and a decrease in Arizona sales tax
resulting from an accrual in 1994 for prior years' taxes with no corresponding
accrual in 1995.
OTHER INCOME, NET
Other income, net decreased $4.3 million to a net deduction of $0.9 million
in 1995 compared to other income, net of $3.4 million in 1994 primarily due to
(i) a gain of $2.4 million on the sale of the Company's interest in Triangle
Electric Supply Company in 1994 with no comparable gain in 1995; and (ii) the
recording of $0.9 million of expense in 1995 compared to $0.5 million of income
in 1994 related to Company-owned life insurance policies.
INTEREST CHARGES
Interest charges decreased $6.9 million to $88.1 million in 1995 compared
to $95.0 million in 1994 primarily due to the Company's discontinuance of
interest accruals on unsecured debt pursuant to Bankruptcy Court order which was
offset partially by increased interest rates on interim payments to certain
secured and unsecured creditors.
REORGANIZATION ITEMS
Reorganization items expense increased 11.0% to $10.0 million in 1995
compared to $9.0 million in 1994. Such increase of reorganization items expense
was due to increased professional fees and other costs in 1995 partially offset
by increased interest earned on accumulated cash in 1995 due to higher cash
balances and investment interest rates.
NET LOSS
Net loss increased $5.2 million to $33.3 million in 1995 compared to
$28.2 million in 1994. The principal factors giving rise to the loss in 1995
were (i) that revenues were not sufficient to recover fully the Company's costs
of service and debt service; and (ii) reorganization expenses.
36
EFFECTS OF INFLATION
Over the recent past, inflation has been relatively low. As such, its
impact to the Company's results of operations and financial condition has not
been significant.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 128, "Earnings per Share" ("SFAS No. 128"), establishes standards
for computing and presenting earnings per share and applies to entities with
publicly held common stock. The effective date of SFAS No. 128 is for financial
statements issued for periods ending after December 15, 1997, including interim
periods; earlier application is not permitted. The Company has not performed an
analysis to determine what effect, if any, SFAS No. 128 will have on its
financial statements.
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report............................................ 39
Balance Sheets at December 31, 1996 and 1995............................ 40
Statements of Operations for the period from
February 12 to December 31, 1996, period
from January 1 to February 11, 1996 and the
years ended December 31, 1995 and 1994............................... 42
Statements of Accumulated Earnings (Deficit)
for the period from February 12 to December 31,
1996, period from January 1 to February 11, 1996
and the years ended December 31, 1995 and 1994....................... 43
Statements of Cash Flows for the period from
February 12 to December 31, 1996, period from
January 1 to February 11, 1996 and the years
ended December 31, 1995 and 1994..................................... 44
Notes to Financial Statements........................................... 45
38
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 (the
"Company") as of December 31, 1996 and 1995 and the related statements of
operations, accumulated earnings (deficit), and cash flows for the period
February 12, 1996 to December 31, 1996, the period January 1, 1996 to February
11, 1996 and for each of the years in the two-year period ended December 31,
1995. 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, 1996 and 1995, and the results of its operations and its cash flows
for the period February 12, 1996 to December 31, 1996, the period January 1,
1996 to February 11, 1996 and for each of the years in the two-year period ended
December 31, 1995 in conformity with generally accepted accounting principles.
As discussed in Notes A and B of Notes to Financial Statements, on February 12,
1996, the Company emerged from bankruptcy. The financial statements of the
reorganized Company reflect assets at reorganization value and liabilities at
fair value under fresh-start reporting. As a result, the financial statements
of the reorganized Company are presented on a different basis than those prior
to the reorganization and, therefore, are not comparable in all respects.
KPMG Peat Marwick LLP
El Paso, Texas
March 27, 1997
39
EL PASO ELECTRIC COMPANY
BALANCE SHEETS
REORGANIZED | PREDECESSOR
COMPANY | COMPANY
------------- | -------------
ASSETS DECEMBER 31, | DECEMBER 31,
(IN THOUSANDS) 1996 | 1995
------------- | -------------
|
UTILITY PLANT (Notes A, C, D, E and H): |
|
Electric plant in service.................. $1,492,737 | $1,744,468
Less accumulated depreciation and |
amortization............................. 77,976 | 465,311
---------- | ----------
|
Net plant in service....................... 1,414,761 | 1,279,157
Construction work in progress.............. 44,432 | 61,274
Nuclear fuel; includes fuel in process |
of $5,084 and $6,071, respectively...... 60,014 | 82,904
Less accumulated amortization.............. 18,651 | 43,599
---------- | ----------
Net nuclear fuel......................... 41,363 | 39,305
---------- | ----------
Net utility plant...................... 1,500,556 | 1,379,736
---------- | ----------
|
CURRENT ASSETS: |
Cash and temporary investments............. 68,767 | 262,507
Accounts receivable, principally trade, |
net of allowance for doubtful accounts |
of $6,161 and $6,031, respectively....... 57,587 | 59,233
Federal income tax receivable.............. 20,713 | -
Inventories, at cost....................... 28,322 | 32,737
Prepayments and other...................... 10,652 | 8,877
---------- | ----------
Total current assets..................... 186,041 | 363,354
---------- | ----------
|
LONG-TERM CONTRACT RECEIVABLE (Note C)...... 31,057 | 33,683
---------- | ----------
|
DEFERRED CHARGES AND OTHER ASSETS: |
Accumulated deferred income taxes, net |
(Note I).................................. 73,884 | -
Decommissioning trust fund (Note E)........ 33,054 | 26,183
Other...................................... 21,598 | 6,935
---------- | ----------
Total deferred charges and other assets.. 128,536 | 33,118
---------- | ----------
|
TOTAL ASSETS............................. $1,846,190 | $1,809,891
========== | ==========
See accompanying notes to financial statements.
40
EL PASO ELECTRIC COMPANY
BALANCE SHEETS (CONTINUED)
REORGANIZED | PREDECESSOR
COMPANY | COMPANY
------------- | -------------
CAPITALIZATION AND LIABILITIES DECEMBER 31, | DECEMBER 31,
(IN THOUSANDS EXCEPT FOR SHARE DATA) 1996 | 1995
------------- | -------------
|
CAPITALIZATION (Notes A, F and G): |
Common stock, stated value $1 per |
share, 100,000,000 shares authorized, |
59,999,981 shares issued and |
outstanding; and 180,000 restricted |
shares as of December 31, 1996........... $ 60,180 | $ -
Capital in excess of stated value......... 240,768 | -
Unearned compensation - restricted |
stock awards............................. (758) | -
Predecessor common stock, no par value, |
100,000,000 shares authorized, |
35,544,330 shares issued and |
outstanding as of December 31, 1995...... - | 339,097
Accumulated earnings (deficit)............ 30,835 | (758,032)
Net unrealized gain on marketable |
securities, less applicable |
income tax expense of $125 and $93, |
respectively............................. 232 | 172
----------- | -----------
|
Common stock equity (deficit).......... 331,257 | (418,763)
Preferred stock, cumulative, no par |
value, 2,000,000 shares authorized, |
Redemption required - 1,084,264 |
shares issued and outstanding; |
at liquidation preference............ 108,426 | -
Long-term debt (Note H)................... 1,021,749 | -
Financing and capital lease obligations |
(Note H)................................. 24,424 | -
Predecessor preferred stock, |
cumulative, no par value, 2,000,000 |
shares authorized: |
Redemption required.................... - | 67,266
Redemption not required................ - | 14,198
Obligations subject to compromise......... - | 1,608,091
---------- | ----------
Total capitalization................. 1,485,856 | 1,270,792
---------- | ----------
|
CURRENT LIABILITIES: |
Current maturities of financing and |
capital lease obligations (Note H)....... 28,333 | -
Accounts payable, principally trade....... 37,215 | 34,900
Taxes accrued other than federal income |
taxes.................................... 21,296 | 24,629
Interest accrued.......................... 23,150 | -
Net overcollection of fuel revenues |
(Note C)................................. - | 53,788
Revenues subject to refund (Note C)....... - | 35,582
Other..................................... 15,000 | 14,266
---------- | ----------
Total current liabilities.............. 124,994 | 163,165
---------- | ----------
|
DEFERRED CREDITS AND OTHER LIABILITIES: |
Decommissioning (Note E).................. 89,544 | 47,245
Accrued postretirement benefit |
liability (Note L)....................... 71,313 | 20,298
Accrued pension liability (Note L)........ 34,550 | 14,163
Other..................................... 39,933 | 17,465
Accumulated deferred income taxes (Note |
I)....................................... - | 70,010
Accumulated deferred investment tax |
credits (Note I)......................... - | 78,275
Deferred gain on sales and leasebacks..... - | 128,478
---------- | ----------
Total deferred credits and other |
liabilities.......................... 235,340 | 375,934
---------- | ----------
COMMITMENTS AND CONTINGENCIES |
(Notes A, B, C, E, J, K and L) |
|
TOTAL CAPITALIZATION AND |
LIABILITIES..................... $1,846,190 | $1,809,891
========== | ==========
See accompanying notes to financial statements.
41
EL PASO ELECTRIC COMPANY
STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT FOR SHARE DATA)
REORGANIZED |
COMPANY | PREDECESSOR COMPANY
-------- | -----------------------------------------
PERIOD FROM | PERIOD FROM
FEBRUARY 12 | JANUARY 1
TO | TO
DECEMBER 31, | FEBRUARY 11, YEARS ENDED DECEMBER 31,
| ------------------------
1996 | 1996 1995 1994
--------- | -------- -------- --------
|
OPERATING REVENUES: |
Base revenues........................... $416,221 | $ 44,679 $432,050 $431,634
Fuel revenues and economy sales......... 104,193 | 9,849 68,823 101,076
Other................................... 3,560 | 421 3,744 4,050
-------- | -------- -------- --------
523,974 | 54,949 504,617 536,760
-------- | -------- -------- --------
|
OPERATING EXPENSES: |
Operation: |
Fuel.................................. 92,899 | 10,125 76,005 89,893
Purchased and interchanged power...... 17,821 | 2,282 16,568 29,929
-------- | -------- -------- --------
110,720 | 12,407 92,573 119,822
Other................................. 115,742 | 23,559 208,445 209,814
Maintenance............................. 34,702 | 4,743 43,412 44,022
Depreciation and amortization........... 79,772 | 6,577 56,762 53,841
Taxes: |
Federal income tax expense (benefit) |
(Note I)............................. 18,659 | (2,700) (11,248) (18,234)
State income tax expense (benefit) |
(Note I)............................. 5,045 | (750) (5,024) 220
Other................................. 38,547 | 6,024 53,551 54,264
-------- | -------- -------- --------
403,187 | 49,860 438,471 463,749
-------- | -------- -------- --------
|
OPERATING INCOME........................... 120,787 | 5,089 66,146 73,011
-------- | -------- -------- --------
|
OTHER INCOME (DEDUCTIONS): |
Investment income......................... 4,796 | - - -
Gain on sale of investment................ 3,844 | - - -
Settlement of bankruptcy professional |
fees.................................... 2,305 | - - -
Other, net................................ (681) | 50 (910) 3,378
Federal income tax expense applicable |
to other income (Note I)................ (2,966) | (35) (474) (516)
-------- | -------- -------- --------
7,298 | 15 (1,384) 2,862
-------- | -------- -------- --------
|
INCOME BEFORE INTEREST CHARGES 128,085 | 5,104 64,762 75,873
-------- | -------- -------- --------
|
INTEREST CHARGES (CREDITS): |
Interest on long-term debt................ 85,633 | - - -
Other interest............................ 5,722 | - - -
Interest during reorganization............ - | 9,569 91,923 97,616
Interest capitalized and deferred......... (5,189) | (412) (3,820) (2,581)
-------- | -------- -------- --------
86,166 | 9,157 88,103 95,035
-------- | -------- -------- --------
|
INCOME (LOSS) BEFORE REORGANIZATION |
ITEMS (EXPENSE) AND EXTRAORDINARY |
GAIN ON DISCHARGE OF DEBT.................. 41,919 | (4,053) (23,341) (19,162)
|
REORGANIZATION ITEMS (EXPENSE), NET OF |
INCOME TAX BENEFIT (EXPENSE) (NOTE B)...... - | 122,251 (9,978) (8,991)
-------- | -------- -------- --------
|
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN |
ON DISCHARGE OF DEBT....................... 41,919 | 118,198 (33,319) (28,153)
|
EXTRAORDINARY GAIN ON DISCHARGE OF DEBT |
(NOTE B)................................... - | 264,273 - -
-------- | -------- -------- --------
|
NET INCOME (LOSS).......................... 41,919 | 382,471 (33,319) (28,153)
|
PREFERRED STOCK DIVIDEND REQUIREMENTS....... 10,488 | - - -
-------- | -------- -------- --------
|
NET INCOME (LOSS) APPLICABLE TO COMMON |
STOCK...................................... $ 31,431 | $382,471 $(33,319) $(28,153)
======== | ======== ======== ========
|
NET INCOME (LOSS) PER COMMON SHARE |
(NOTE D): |
Income (loss) before extraordinary gain |
on discharge of debt..................... $0.52 | $3.33 $(0.94) $(0.79)
Extraordinary gain on discharge of debt... - | 7.43 - -
-------- | -------- -------- --------
Net income (loss)....................... $0.52 | $10.76 $(0.94) $(0.79)
======== | ======== ======== ========
See accompanying notes to financial statements.
42
EL PASO ELECTRIC COMPANY
STATEMENTS OF ACCUMULATED EARNINGS (DEFICIT)
(IN THOUSANDS EXCEPT FOR SHARE DATA)
REORGANIZED |
COMPANY | PREDECESSOR COMPANY
-------------- | -------------------
PERIOD FROM | PERIOD FROM
FEBRUARY 12 | JANUARY 1
TO | TO YEARS ENDED DECEMBER 31,
DECEMBER 31, | FEBRUARY 11, ------------------------------
1996 | 1996 1995 1994
----------- | -------------- ------------- ------------
|
ACCUMULATED EARNINGS |
(DEFICIT) AT BEGINNING OF |
PERIOD............................... $ - | $ (758,032) $ (724,713) $ (696,560)
|
ADD: |
Net income (loss)................... 41,919 | 382,471 (33,319) (28,153)
Elimination of predecessor |
equity accounts (Note A)........... - | 375,561 - -
----------- | ------------ ------------ -----------
41,919 | 758,032 (33,319) (28,153)
----------- | ------------ ------------ -----------
|
DEDUCT: |
Cumulative preferred stock |
dividend requirement............... 10,488 | - - -
Capital stock expense............... 596 | - - -
----------- | ------------ ------------ -----------
11,084 | - - -
----------- | ------------ ------------ -----------
|
ACCUMULATED EARNINGS |
(DEFICIT) AT END OF PERIOD........... $ 30,835 | $ - $ (758,032) $ (724,713)
=========== | ============ ============ ===========
|
WEIGHTED AVERAGE NUMBER OF |
COMMON SHARES |
AND COMMON SHARE |
EQUIVALENTS OUTSTANDING.............. 60,181,494 | 35,544,330 35,544,330 35,544,330
=========== | ============ ============ ===========
See accompanying notes to financial statements.
43
EL PASO ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
REORGANIZED |
COMPANY | PREDECESSOR COMPANY
----------- | -----------------------------------------
PERIOD FROM | PERIOD FROM
FEBRUARY 12 | JANUARY 1
TO | TO YEARS ENDED DECEMBER 31,
DECEMBER 31, | FEBRUARY 11, -------------------------
1996 | 1996 1995 1994
--------- | ----------- -------- --------
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
Net income (loss)......................................... $ 41,919 | $ 382,471 $(33,319) $(28,153)
Adjustments to reconcile net income |
(loss) to net cash provided by |
operating activities: |
Depreciation and amortization......................... 99,355 | 8,246 69,444 67,189
Deferred income taxes and investment |
tax credit, net..................................... 41,341 | (3,116) (26,744) (17,990)
Reorganization items, net of income tax |
benefit............................................. - | (122,251) - -
Extraordinary gain on discharge of debt............... - | (264,273) - -
Gain on sale of investment............................ (3,844) | - - -
Other operating activities............................ 562 | (805) (6,795) (5,429)
Change in: |
Accounts receivable................................... 3,513 | 5,429 (4,866) 285
Federal income tax receivable......................... (20,713) | - - -
Inventories........................................... (32) | 90 1,590 268
Prepayments and other................................. (1,974) | 34 2,214 (1,056)
Long-term contract receivable......................... 2,333 | 293 (80) (1,183)
Obligations subject to compromise..................... - | 9,430 71,839 42,943
Accounts payable...................................... (4,038) | (6,859) 11,885 (14,017)
Interest accrued...................................... 23,034 | - - -
Net overcollection of fuel revenues................... (10,784) | 417 16,581 23,333
Revenues subject to refund............................ - | 2,785 24,107 11,475
Other current liabilities............................. (1,242) | (152) 1,027 1,897
Deferred charges and credits.......................... (1,117) | 1,994 21,187 13,885
--------- | ----------- -------- --------
NET CASH PROVIDED BY OPERATING 168,313 | 13,733 148,070 93,447
ACTIVITIES........................................ --------- | ----------- -------- --------
|
CASH FLOWS FROM INVESTING ACTIVITIES |
(NOTE B): |
Additions to utility plant................................ (53,018) | (8,231) (88,267) (60,113)
Proceeds from sale of investment.......................... 20,183 | - - -
Investment in decommissioning trust fund.................. (5,960) | (553) (5,159) (5,018)
Other investing activities................................ (328) | 55 330 137
--------- | ----------- -------- --------
NET CASH USED FOR INVESTING |
ACTIVITIES........................................ (39,123) | (8,729) (93,096) (64,994)
--------- | ----------- -------- --------
|
CASH FLOWS FROM FINANCING ACTIVITIES |
(NOTE B): |
Proceeds from issuance of preferred |
stock.................................................... - | 97,500 - -
Proceeds from issuance of long-term debt.................. - | 778,120 - -
Redemption of obligations subject to |
compromise............................................... - | (1,131,695) (1,051) (955)
Repurchase of long-term debt.............................. (117,522) | - - -
Principal payments on long-term note |
payable.................................................. (6) | - - -
Proceeds from financing and capital |
lease obligations........................................ 17,365 | 43,309 - -
Redemption of financing and capital |
lease obligations........................................ (14,409) | - - -
Capital stock expense..................................... (596) | - - -
--------- | ----------- -------- --------
NET CASH USED FOR FINANCING ACTIVITIES.............. (115,168) | (212,766) (1,051) (955)
--------- | ----------- -------- --------
|
NET INCREASE (DECREASE) IN CASH AND |
TEMPORARY INVESTMENTS..................................... 14,022 | (207,762) 53,923 27,498
|
CASH AND TEMPORARY INVESTMENTS AT |
BEGINNING OF PERIOD....................................... 54,745 | 262,507 208,584 181,086
--------- | ----------- -------- --------
|
CASH AND TEMPORARY INVESTMENTS AT END |
OF PERIOD................................................. $ 68,767 | $ 54,745 $262,507 $208,584
========= | =========== ======== ========
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW |
INFORMATION: |
Cash (refunded) paid for: |
Income taxes........................................... $ (2,504) | $ - $ 12,950 $ 4,700
Interest............................................... 53,000 | 8,580 80,688 92,474
Reorganization items - professional |
fees and other........................................ 8,682 | 2,279 15,207 26,406
========= | =========== ======== ========
See accompanying notes to financial statements.
- ------------------------------------------------------- --------------------------------------
44
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
A. FRESH-START REPORTING
On January 8, 1992 (the "Petition Date"), El Paso Electric Company (the
"Predecessor Company") filed a voluntary petition for reorganization (the
"Bankruptcy Case") under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the Western
District of Texas, Austin Division (the "Bankruptcy Court"). The Bankruptcy
Court entered an order dated January 9, 1996 confirming the Company's Fourth
Amended Plan of Reorganization (the "Plan"). On February 12, 1996, the Plan
became effective (the "Effective Date") and the Company emerged from bankruptcy
(the "Reorganization") as an independent investor-owned utility (the
"Reorganized Company" or the "Company").
In connection with the emergence from bankruptcy, the Company adopted
fresh-start reporting in accordance with the requirements of Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code" ("SOP 90-7"). The application of SOP 90-7 resulted in the
creation of a new reporting entity having no retained earnings or accumulated
deficit. Accordingly, the financial statements of the Reorganized Company for
post-bankruptcy periods, which reflect the application of fresh-start reporting,
are not comparable to the financial statements of the Predecessor Company.
In applying fresh-start reporting the Company determined its reorganization
value which was allocated to the Company's assets and recorded liabilities at
their fair values as of the Effective Date. The Company determined its
reorganization value by determining the value of its capital structure,
exclusive of operational liabilities, based on management's estimates of future
operating results. Debt securities and preferred stock were reflected at face
value which approximated fair value and common stockholders' equity was valued
at $300 million. The value of the capital structure plus operational
liabilities equaled reorganization value. Reorganization value necessarily
assumes that the Reorganized Company will achieve its estimated future operating
results in all material respects. If such results are not achieved, the value
of the Reorganized Company could be materially different.
Reorganization value was allocated first to those assets which have readily
determinable fair values, such as cash and investments, receivables and
inventories, or assets whose historic values generally approximate their fair
values. The remaining balance represents the value attributable to the
Company's integrated utility system. The Company determined that no value is
attributable to identifiable intangible assets. Such intangible assets do not
allow the Company to receive values in excess of what would otherwise be
obtained. Therefore, the entire remaining balance was allocated to utility
plant in service.
The significant effects of the Reorganization and adjustments made in
fresh-start reporting resulted in (i) decreased operation expense and increased
depreciation expense due to the reacquisition of previously sold and leased back
generation facilities and due to accelerated depreciation expense on a portion
of the reorganization value assigned to certain plant assets; (ii) increased
interest expense due to the changes in the Company's capital structure; and
(iii) increased operating revenues related to a rate increase in the Company's
Texas jurisdiction.
45
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
The effects of the Reorganization and fresh-start reporting on the
Company's balance sheet as of February 11, 1996 are as follows (In thousands):
PREDECESSOR (A) (B) (C) (D) REORGANIZED
COMPANY DISCHARGE SETTLEMENT COMPANY
FEBRUARY 11, REACQUISITION OF WITH FRESH-START FEBRUARY 11,
1996 OF PLANT DEBT STOCKHOLDERS ADJUSTMENTS 1996
---------- ------------- ---------- ------------ ----------- ------------
UTILITY PLANT:
Net plant in service....................... $1,278,617 $ 227,656 $ - $ - $(54,179) $1,452,094
Construction work in progress.............. 50,793 - - - - 50,793
Net nuclear fuel........................... 42,668 - - - - 42,668
---------- ---------- ----------- --------- -------- ----------
Net utility plant................... 1,372,078 227,656 - - (54,179) 1,545,555
CURRENT ASSETS:
Cash and temporary investments............. 266,442 - (211,697) - - 54,745
Accounts receivable........................ 55,362 - - - 5,738 61,100
Inventories................................ 32,647 - - - (4,357) 28,290
Prepayments and other...................... 6,753 - - - - 6,753
---------- ---------- ----------- --------- -------- ----------
Total current assets................ 361,204 - (211,697) - 1,381 150,888
LONG-TERM CONTRACT RECEIVABLE................ 33,390 - - - - 33,390
DEFERRED CHARGES AND OTHER ASSETS:
Accumulated deferred income taxes.......... - - - - 115,354 115,354
Decommissioning trust fund................. 26,736 - - - - 26,736
Other...................................... 7,851 - 14,241 - 16,339 38,431
---------- ---------- ----------- --------- -------- ----------
Total deferred charges
and other assets................. 34,587 - 14,241 - 131,693 180,521
---------- ---------- ----------- --------- -------- ----------
TOTAL ASSETS........................ $1,801,259 $ 227,656 $ (197,456) $ - $ 78,895 $1,910,354
========== ========== =========== ========= ======== ==========
CAPITALIZATION:
Common stock............................... $ - $ - $ 255,000 $ 45,000 $ - $ 300,000
Predecessor common stock................... 339,097 - - (339,097) - -
Accumulated earnings (deficit)............. (731,431) (6,783) 264,273 375,561 98,380 -
Net unrealized gain on marketable
securities, net of tax................. 172 - - - (172) -
---------- ---------- ----------- --------- -------- ----------
Common stock equity (deficit)....... (392,162) (6,783) 519,273 81,464 98,208 300,000
Preferred stock............................ - - 100,000 - - 100,000
Predecessor preferred stock................ 81,464 - - (81,464) - -
Obligations subject to compromise.......... 1,645,277 361,597 (2,006,874) - - -
Long-term debt and financing and
capital lease obligations.............. - - 1,164,328 - - 1,164,328
---------- ---------- ----------- --------- -------- ----------
Total capitalization................ 1,334,579 354,814 (223,273) - 98,208 1,564,328
CURRENT LIABILITIES:
Current maturities of financing and
capital lease obligations.............. - - 24,213 - - 24,213
Accounts payable........................... 41,253 - - - - 41,253
Taxes accrued other than federal
income taxes........................... 24,540 - - - (1,591) 22,949
Net overcollection of fuel revenues........ 13,327 - (3,255) - 712 10,784
Other...................................... 14,395 - 332 - (1,960) 12,767
---------- ---------- ----------- --------- -------- ----------
Total current liabilities........... 93,515 - 21,290 - (2,839) 111,966
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes.......... 67,803 - - - (67,803) -
Accumulated deferred investment
tax credits........................... 77,950 - - - (77,950) -
Deferred gain on sales and leasebacks...... 127,673 (127,158) - - (515) -
Decommissioning............................ 48,349 - - - 36,582 84,931
Accrued postretirement benefit liability... 21,500 - - - 52,340 73,840
Accrued pension liability.................. 7,941 - 5,575 - 21,738 35,254
Other...................................... 21,949 - (1,048) - 19,134 40,035
---------- ---------- ----------- --------- -------- ----------
Total deferred credits and
other liabilities................ 373,165 (127,158) 4,527 - (16,474) 234,060
---------- ---------- ----------- --------- -------- ----------
TOTAL CAPITALIZATION
AND LIABILITIES.................. $1,801,259 $ 227,656 $ (197,456) $ - $ 78,895 $1,910,354
========== ========== =========== ========= ======== ==========
46
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(a) To record, at fair value, the reacquisition of the previously sold and
leased-back generation facilities at the Palo Verde Nuclear Generating
Station ("Palo Verde") and the recognition of the related allowed claims in
excess of the amounts recorded on the Predecessor Company's balance sheet.
(b) To record the settlement with the Predecessor Company's creditors including
the issuance of $945.8 million of first mortgage bonds, $100 million of
preferred stock, a draw of $43.3 million on the revolving credit facility
related to the financing of nuclear fuel, the issuance of $255 million of
the Reorganized Company's common stock, and the carry forward of
approximately $206 million of pollution control revenue bonds and other
miscellaneous claims of the Predecessor Company.
(c) To record the settlement with the previous common and preferred stockholders
of the Predecessor Company including the cancellation of the Predecessor
Company's common and preferred stock and the issuance of approximately 3%
and 12%, respectively, of the Reorganized Company's common stock.
(d) To record the adjustments that allocate the reorganization value to assets
and reflect liabilities at their fair values and to adjust the accumulated
deficit to zero.
B. EMERGENCE FROM BANKRUPTCY
THE REORGANIZATION
The Reorganization became effective immediately prior to the consummation
of the sale by the Reorganized Company in an underwritten offering of $794
million of first mortgage bonds and $100 million of 11.4% preferred stock. The
net proceeds of approximately $875.6 million were distributed to the Predecessor
Company's creditors pursuant to the Plan. In addition, the Reorganized Company
issued $151.8 million aggregate principal amount of first mortgage bonds and
approximately 60 million shares of common stock, and paid approximately $150
million of cash (in addition to the net cash proceeds of the underwritten
offering) to holders of allowed claims and interests in the Reorganization. The
interest rates on the five series of First Mortgage Bonds range from 7.25% to
9.40% per annum and maturities range from three to fifteen years.
Under the Reorganization, the Predecessor Company's total obligations
subject to compromise of $2,007 million (including obligations related to leases
on portions of Palo Verde that represented $700 million of allowed claims in the
Bankruptcy Case) were extinguished and the creditors received a combination of
cash and newly issued debt and equity securities of the Reorganized Company.
The discharge of obligations subject to compromise for less than their recorded
amounts resulted in an extraordinary nontaxable gain on discharge of debt of
$264.3 million. Pursuant to the Plan, all of the Predecessor Company's Common
and Preferred Stock was cancelled and the holders of such securities received
approximately 15% of the Reorganized Company's Common Stock and the right to
receive certain litigation recoveries, if any.
In addition, in connection with the extinguishment of Palo Verde lease
obligations on the Effective Date, in accordance with Palo Verde license
amendments issued by the United States Nuclear Regulatory Commission,
arrangements pursuant to which the Predecessor Company sold and leased back
portions of
47
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
its interest in Palo Verde were terminated and the Reorganized Company
reacquired such interests. The Reorganized Company has agreed to indemnify
certain parties to the sale/leaseback transactions against possible tax
liabilities related thereto. See Note J.
A final order in Docket No. 12700 (the "Agreed Order") was entered on
August 30, 1995 by the Public Utility Commission of Texas (the "Texas
Commission") and became effective on the Effective Date. The Agreed Order
implemented certain provisions of a settlement (the "Rate Stipulation") dated
July 27, 1995 among the Company and substantially all of the other parties to
Docket No. 12700. Among other things, under the Rate Stipulation (i) the
Company received a one-time annual increase in Texas retail base rates of
approximately $24.9 million; (ii) the Company's base rates for most customers in
Texas were fixed at this increased level for ten years beginning August 2, 1995
(the "Freeze Period"); (iii) the City of El Paso granted the Company a new
franchise that extends through the Freeze Period; (iv) the Company will retain
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; (v) no refunds or surcharges were made to customers with respect to fuel
costs and revenues for the period from July 1993 through June 1995; and (vi) all
appeals of Texas Commission orders concerning the Company and all outstanding
Texas Commission dockets concerning the Company's rates were resolved.
The Reorganization also provided for many other matters, including the
satisfaction or disposition of various types of claims against the Predecessor
Company, the assumption of certain leases and agreements, the reconstitution of
the board of directors following the Effective Date and the entry into
employment and other arrangements with certain members of management.
Reorganization items (expense), net of income tax benefit (expense),
recorded by the Predecessor Company consisted of the following (In thousands):
Period From
January 1
to Years Ended December 31,
February 11, --------------------------
1996 1995 1994
------------- ------------ ------------
Adjustment of assets and liabilities
to fair value......................... $ (92,013) $ -- $ --
Rate Stipulation........................ 71,579 -- --
Provisions for settlement of claims..... (34,317) -- --
Deferred income tax benefit related to
Reorganization........................ 190,393 -- --
Professional fees and other expenses.... (14,348) (19,776) (15,866)
Interest earned on accumulated cash
resulting from Bankruptcy Case,
net of income tax expense............. 957 9,798 6,875
--------- -------- --------
$ 122,251 $ (9,978) $ (8,991)
========= ======== ========
48
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
Non-cash investing and financing activities recorded by the Company
consisted of the following (In thousands):
Reorganized |
Company | Predecessor Company
----------- | ---------------------------------------
Period From | Period From
February 12 | January 1
to | to Years Ended December 31,
December 31, | February 11, -------------------------
1996 | 1996 1995 1994
------------ | ------------ ------------ -----------
|
Issuance of preferred |
stock for pay-in-kind |
dividend.................. $8,426 | $ -- $ -- $ --
|
Property purchased through |
issuance of promissory |
note...................... 964 | -- -- --
|
Reorganized Common Stock |
exchanged for Predecessor |
Common and Preferred |
Stock..................... -- | 45,000 -- --
|
Reorganized Common Stock |
exchanged for settlement |
of obligations subject |
to compromise............. -- | 255,000 -- --
|
Long-term debt exchanged |
for settlement of |
obligations subject to -- | 151,834 -- --
compromise................ |
|
Plant in service reacquired |
through incurring |
obligation subject to |
compromise................ -- | 227,656 -- --
C. RATE MATTERS
OVERVIEW
Texas. 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 activities of the Company.
New Mexico. The New Mexico Public Utility Commission (the "New Mexico
Commission") has jurisdiction over the Company's rates and services in New
Mexico and jurisdiction over certain 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. Current base rates in
New Mexico were
49
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
established in 1990 and have not increased. The Company does not have an
agreement with New Mexico regulatory authorities or parties to past New Mexico
regulatory proceedings comparable to the Rate Stipulation.
Federal Energy Regulatory Commission. The Company is subject to regulation
by the Federal Energy Regulatory Commission (the "FERC") in certain matters,
including rates for wholesale power sales, transmission of electric power and
the issuance of securities.
Department of Energy. The Department of Energy (the "DOE") traditionally
regulates the Company's exports of power to the Comision Federal de Electricidad
(the "CFE") in Mexico pursuant to a license granted by the DOE and a
presidential permit. In addition, the DOE is authorized to assess operators of
nuclear generating facilities for a share of the costs of decommissioning the
DOE uranium enrichment facilities over a period of fifteen years.
Nuclear Regulatory Commission. The Nuclear Regulatory Commission (the
"NRC") has jurisdiction over the Company's licenses for Palo Verde, regulates
the operation of nuclear generating stations to protect the health and safety of
the public from radiation hazards and conducts environmental reviews.
TEXAS RATE MATTERS
Rate Stipulation and Agreed Order. The Company's rates for its Texas
jurisdictional customers are governed by the Agreed Order, which became
effective on the Effective Date. The Agreed Order implemented certain
provisions of the Rate Stipulation and set rates consistent with the Rate
Stipulation. Among other things, under the Rate Stipulation: (i) the Company
received a one-time annual increase in Texas retail base rates of approximately
$24.9 million; (ii) the Company's base rates for most customers in Texas were
fixed at this increased level for the Freeze Period; (iii) the City of El Paso
granted the Company a new franchise that extends through the Freeze Period; (iv)
the Company will retain 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; (v) the Company's reacquisition of the Palo Verde leased
assets is deemed to be in the public interest; (vi) no refunds or surcharges
were made to customers with respect to fuel costs and revenues for the period
from July 1993 through June 1995; and (vii) all appeals of Texas Commission
orders concerning the Company and all outstanding Texas Commission dockets
concerning the Company's rates were resolved.
Neither the 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 Rate Stipulation (other than the General
Counsel, OPC and the State of Texas) agreed not to 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
50
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
merger, the parties to the Rate Stipulation retain all rights provided in the
Rate Stipulation, their rights to participate as a party in any proceeding
related to the merger, as well as the right to pursue a reduction in rates below
the freeze level to the extent of post-merger synergy savings. See "Recent
Changes in Utility Regulation."
Fuel. The Company must periodically reconcile its Texas fuel costs
pursuant to Texas Commission rules. The Company has not filed a reconciliation,
which must contain not less than twelve months nor more than thirty-six months
of reconcilable data for any period since June 1995. In a reconciliation,
revenues that the Company collected from Texas customers under its fixed fuel
factor are reconciled with the expenses for fuel and purchased power actually
incurred by the Company for the period covered by the reconciliation.
Differences between revenues collected and expenses incurred are subject to a
refund to customers (in the case of an overrecovery of fuel costs) or surcharge
(in the case of an underrecovery of fuel costs). The 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 recovery
of expenses on the basis of unreasonable or improper fuel and purchased power
costs.
Higher natural gas prices began in December 1996 and continued in the first
quarter of 1997. These higher natural gas prices will increase the Company's
underrecovered fuel costs, which will be reviewed in the next Texas fuel
reconciliation.
Palo Verde Performance Standards. The Texas Commission has established
performance standards for the operation of Palo Verde, pursuant to which Palo
Verde 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 Rate Stipulation. The removal of Palo Verde from rate base
could have a significant negative impact on the Company's revenues and financial
condition. Based upon the formula for calculating the performance standards in
Texas, the Company does not believe a performance penalty will be assessed for
the year ended December 31, 1996.
NEW MEXICO RATE MATTERS
Pending Rate Case. In October 1996, the New Mexico Commission issued an
order in Case No. 2722, requiring the Company to answer certain ratepayer
complaints and to file a rate filing package, including cost of service data and
supporting testimony. On March 3, 1997, the Company filed all of the rate
filing package data required by the Commission's order with the Commission.
Although the Company's filing demonstrates a revenue deficiency of approximately
$8.6 million under current rates, the Company did not request a rate change to
recover the deficiency. The Company cannot predict what action the New Mexico
Commission may take in this proceeding.
Fuel. The Company is required to file an annual fuel report and an annual
Palo Verde performance standards report, discussed below, with the New Mexico
Commission by January 31 of each year for the preceding calendar year. The
Company requested and received two extensions of time and filed these
51
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
reports on March 24, 1997. The Company's filing reflects a significant increase
in the monthly fuel charge to be effective with bills rendered on or after May
1, 1997. This increase is necessary because of significant increases in the spot
price of natural gas which have caused the Company to underrecover its fuel
costs in New Mexico by approximately $2.0 million for the year ended December
31, 1996. The recovery of this amount, coupled with projected higher gas costs
for 1997, results in an increase in the proposed 1997 fuel factor of
approximately 50% over the present factor. There can be no assurance that the
Commission will accept the Company's proposed fuel factor. As in Texas,
interested parties are allowed to intervene and challenge the recoverability of
expenses as unreasonable or imprudent. Any significant disallowance of recovery
could have a material adverse effect on the Company's financial results.
Palo Verde Performance Standards. The New Mexico Commission has
established performance standards for the operation of Palo Verde, pursuant to
which the entire Palo Verde station is evaluated annually to determine if its
achieved capacity factor allows the Company to claim a credit or subjects the
Company to a penalty. Because Unit 3 is not included in the Company's New
Mexico rate base, any penalty or credit calculated on a total station basis is
limited to two-thirds of such penalty or credit. The capacity factor is
calculated as the ratio of actual generation to maximum possible generation. If
the annual capacity factor is 35% or less, the New Mexico Commission is required
to initiate a proceeding to reconsider the rate base treatment of Palo Verde.
The removal of Palo Verde from rate base could have a significant negative
impact on the Company's revenues and financial condition. For the year ended
December 31, 1996, the Palo Verde station capacity factor was 86.20%. This
capacity factor resulted in the Company's entitlement to a credit. However, the
Company is voluntarily foregoing collection of this credit to partially mitigate
the increase in the proposed New Mexico fuel factor, discussed above.
FEDERAL REGULATORY MATTERS
FERC. The Company has a long-term firm power sales agreement with IID
providing for the sale of 100 MW of firm capacity and 50 MW of contingent
capacity through April 2002. The agreement generally provides for level sales
prices over the life of the agreement. The Company has a firm power sales
agreement with TNP, providing for sales to TNP in the minimum amount of 25 MW
through 2002. Sales prices are essentially level for the remaining life of the
agreement. Rate tariffs currently applicable to IID and TNP contain fuel and
purchased power cost adjustment provisions designed to recover the Company's
fuel and purchased power costs.
In July 1996, the Company filed its open access transmission tariffs
(Docket No. OA96-200-000) in compliance with Order No. 888, Promoting Wholesale
Competition Through Open Access Non-Discriminatory Transmission Services by
Public Utilities; Recovery of Stranded Costs by Public Utilities and
Transmitting Utilities ("Order No. 888") covering network and point-to-point
transmission services and the six specifically required ancillary services.
Several parties, including Las Cruces, other utilities and several wholesale
power marketers intervened and filed protests to the Company's tariffs. Issues
raised by the intervenors included rates and the terms and conditions of the
Company's tariffs, including the treatment and costs related to certain
facilities making access to the CFE more available to parties other than the
Company. In February 1997, the Company entered into a stipulated agreement among
the various parties settling all issues related to Docket No. OA96-200-000.
Under the settlement the Company will provide transmission service, to the
extent transmission capacity is available, to any party for firm or
interruptible service to the CFE until the earlier of the end of 1998 or the
date the FERC rules on the complaint filed by Enron. See Note K.
52
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
In December 1996, Las Cruces filed a request at the FERC for a
determination that Las Cruces would have no stranded cost obligation to the
Company in the event the city leaves the Company's system and operates its own
municipal utility. The Company calculated Las Cruces' stranded cost obligation
to be approximately $234 million. The FERC is expected to establish a
procedural schedule for discovery and hearings in this matter. The Company is
unable to predict the outcome of this proceeding or the impact it may have on
the Company. See Note K.
Also in December 1996, Southwestern Public Service Company ("SPS") filed a
request for the issuance of an order by the FERC requiring the Company to accept
as a "completed application" for service under the Company's open access
transmission tariff a September 1996 request by SPS for service that may be
needed for SPS to deliver electricity to a newly-formed Las Cruces municipal
electric system. The Company stated in response to that request that SPS had
failed to provide certain information required to be submitted by persons
seeking service under its open access transmission tariff. The Company has
asked that the proceedings initiated by Las Cruces and by SPS, respectively, be
consolidated. Both matters are currently pending before the FERC.
Department of Energy. In October 1996, the FERC issued an order requiring
the Company to provide Enron Power Marketing, Inc., a wholesale power marketer,
with firm point-to-point transmission service over the Company's transmission
system to substation facilities near the border. The FERC, however, concurred
with the Company's position that the FERC does not have jurisdiction to order
transmission across the border, suggesting that the DOE has such jurisdiction.
Promptly after the issuance of the FERC order, Enron asked the DOE to
exercise its authority over Presidential Permits relating to construction of
border-crossing transmission facilities and over export authorizations issued to
the Company and to Enron to require transmission access for delivery of
electricity to the CFE in Mexico. Pursuant to Enron's request, the DOE, on
October 30, 1996, issued a Notice of Delegation and Assignment which delegated
to the FERC its authority to carry out the DOE's duties with respect to
Presidential Permits and export authorizations issued to the Company. The
Company has filed responses to Enron's request at both the FERC and the DOE in
which it has asserted that the DOE has no authority to require transmission of
electric energy for delivery to the CFE. However, the Company agreed to provide
access, to the extent transmission capacity is available, to a winning bidder
during 1997, if someone other than the Company, pending resolution of this
jurisdictional dispute. The Company's agreement to provide such access in no
way prejudices the Company's position, which remains that under the current law
the provision of such access is not required. Neither the FERC nor the DOE has
taken any final action on this matter.
OTHER WHOLESALE CUSTOMERS
The primary term of the Company's previous five year sales agreement for
firm capacity and associated energy to the CFE terminated December 31, 1996. In
September 1996, the CFE issued a request for proposals for replacement power for
1997. The Company submitted a bid and was ultimately selected by the CFE to
provide varying amounts of power during 1997 ranging from 120 to 200 MW. Since
the CFE load provided by the Company will be isolated from the rest of the CFE
system, the Company is also providing the CFE with the flexibility to increase
its power deliveries up to 5% above its monthly contract
53
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
capacity level in order to meet its customer power requirements. The price is
stable throughout the term of the agreement and includes charges for capacity
and energy as well as transmission and any required ancillary services. Under
the new agreement with the CFE, revenues in 1997 related to power sales to the
CFE are expected to be lower than revenues recorded in 1996. The agreement
requires payment in United States dollars. See Notes K and M.
RECENT CHANGES IN UTILITY REGULATION
General. The electric utility industry faces increasing pressure to become
more competitive as legislative, regulatory, economic and technological changes
occur. Federal legislation, as well as legislative and regulatory initiatives
in various states and proposed initiatives in Texas and New Mexico, encourages
competition in the Company's service area for electricity generation among
electric utility and non-utility power producers. Together with increasing
customer demand for lower-priced electricity and other energy services, these
measures have accelerated the industry's movement toward more competitive
pricing and cost structures. Such competitive pressures could result in the
loss of customers and diminish the ability of the Company to fully recover its
investment in generation assets, as well as the cost of operating these assets.
This issue is particularly important to the Company because its rates are
significantly higher than the national and regional averages. In the face of
increased competition, there can be no assurance that such competition will not
adversely affect the future operations, cash flows and financial condition of
the Company, or that the Company will be able to sustain retail rates at the
levels established by the Rate Stipulation during the Freeze Period.
Of particular importance to the Company is the issue of ultimate
recoverability of costs previously found by regulatory authorities to be
reasonable and prudent, but which at the same time are higher than would be
recovered under immediate, full competition (i.e., stranded costs). Across the
industry, as well as at the state level, there is much discussion and debate on
this issue. At this time, there appears to be no clear solution. 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. Texas and New Mexico are engaged
in various activities, at the commission and legislative level, which are
attempting to address the issue of stranded cost recovery from customers subject
to state legislation.
FERC. In April 1996, pursuant to its authority under Sections 205 and 206
of the FPA, the FERC issued its Order No. 888. Order No. 888 requires all public
utilities owning, operating or controlling facilities used for transmitting
electricity in interstate commerce to (i) file open access transmission tariffs
containing minimum terms and conditions of non-discriminatory service and (ii)
take transmission service (including ancillary services) for their own new
wholesale sales and purchases of electric energy under the open access tariffs.
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. Order No. 888 also provides for recovery of costs
associated with former power customers and new municipally-owned entities
becoming transmission-only customers as a result of providing open access
transmission if the utility had a reasonable expectation of continuing to
provide service to the departing customer. Order No. 888 established criteria
under which stranded costs will be evaluated for contracts entered into prior to
July 11, 1994, and for stranded costs
54
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
resulting from the formation of any new municipal utilities. Recovery of
stranded costs under contracts entered into after July 10, 1994, will be
governed by the terms of those contracts.
In April 1996, the FERC also issued Order No. 889, Open Access Same-Time
Information System (formerly Real-Time Information Networks) and Standards of
Conduct ("Order No. 889"). Order No. 889 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 communications and adopt standards of conduct ensuring
that all open access transmission customers are treated in a non-discriminatory
manner.
Texas. In February 1996, the Texas Commission adopted a rule governing
wholesale transmission access, as required by recent Texas legislation. The
Texas Commission does not have jurisdiction over the Company's wholesale
transactions. However, the rule required the Company to file its FERC-approved
open access transmission tariffs with the Texas Commission to certify compliance
with the Texas legislation.
During 1996, pursuant to the directives of the Texas Legislature in
legislation passed in 1995, the Texas Commission conducted projects to evaluate
the (i) scope of competition in the electric industry in Texas and (ii)
potential for stranded investment, procedures for allocating stranded costs and
acceptable methods of stranded cost recovery. The Texas Commission's report
consolidating the two projects was issued in January 1997. While it recommended
a careful and deliberate approach to continued expansion of competition in the
Texas electric market, ultimately leading to retail competition with certain
safeguards, it also recommended against any legislation that would introduce
broad based retail competition before 2000. The Texas Commission quantified the
potential "excess of cost over market" ("ECOM") at both wholesale and retail
levels under several scenarios. With respect to the Company's potential for
stranded costs, the Texas Commission estimated no wholesale ECOM, and estimated
retail ECOM ranging from a high of $1.3 billion to a low of $781.0 million, with
an expected value of $1.1 billion, assuming full retail access in 1998. The
Company cannot determine at this time the effects that would occur, including
any possible effects on the Rate Stipulation, as the result of any broad based
competition legislative action, if any, implemented in 1997.
New Mexico. The New Mexico Commission initiated a notice of inquiry
regarding competition and the restructuring of regulation of the electric
industry in 1996. The New Mexico Commission received comments from numerous
parties representing various interests and conducted workshops in an attempt to
arrive at a consensus with respect to the need for regulatory change, the nature
of such change and the timing/transition of any changes. No consensus was
reached by the participants. With respect to stranded costs, the New Mexico
Commission applied the same ECOM model that was developed for Texas. The
Company's New Mexico ECOM calculation ranged from a high of $248 million to a
low of $173 million. The Company also provided the New Mexico Commission with
its calculation of stranded costs for New Mexico pursuant to FERC Order No. 888,
which equaled $364 million.
55
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
D. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General. 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. As of December 31, 1996,
the Company served approximately 279,000 residential, commercial, industrial and
wholesale customers. The Company distributes electricity to retail customers
principally in El Paso, Texas and Las Cruces, New Mexico. The Company also
serves wholesale customers in Texas, New Mexico, California and Juarez, Mexico.
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.
The Company maintains its accounts in accordance with the Uniform System of
Accounts prescribed for electric utilities by the FERC. Prior to December 31,
1991, the Company reported its regulated utility operations pursuant to SFAS No.
71, "Accounting for the Effects of Certain Types of Regulation" ("SFAS No. 71").
The Company discontinued the application of SFAS No. 71 as of December 31, 1991.
As more fully discussed in Note A, the Company emerged from bankruptcy on
February 12, 1996. The Company has accounted for all transactions related to
the reorganization proceedings in accordance with SOP 90-7. The Reorganization
had significant impacts on the financial statements of the Reorganized Company,
including the creation of a new reporting entity upon emergence from bankruptcy
through the application of fresh-start reporting pursuant to SOP 90-7.
Accordingly, the Company's post-Reorganization balance sheets and the statement
of operations, which reflect the application of fresh-start reporting, have not
been prepared on a consistent basis with the pre-Reorganization financial
statements and are not comparable in all respects to the financial statements
prior to the Reorganization. For accounting purposes, the inception date of the
Reorganized Company is deemed to be February 12, 1996. A vertical line is shown
in the financial statements to separate the Reorganized Company from the
Predecessor Company, since the financial statements have not been prepared on a
consistent basis of accounting.
Utility Plant. As a result of adopting fresh-start reporting, as discussed
in Note A, the Company has revalued its utility plant. As of February 12, 1996,
the value allocated to the assets used in the Company's generation, transmission
and distribution operations is based on the Company's estimate of the
replacement cost less depreciation ("RCLD") and is derived from the value of the
Company as a going concern rather than on an appraisal or other professional
valuation of its assets. The RCLD of generation assets was calculated based on
estimates of the current cost of gas-fired combined-cycle and combustion turbine
power plants, adjusted for certain economic factors. Depreciation is provided
on a straight-line basis over the estimated remaining lives of the assets
(ranging from 11 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
the Rate Stipulation.
56
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
Prior to February 12, 1996, utility plant was stated at original cost, less
regulatory disallowances. Costs included labor, material, construction
overheads, and allowance for funds used during construction ("AFUDC") or
capitalized interest (see Capitalized Interest below). Depreciation was
provided on a straight-line basis at annual rates which amortized the
undepreciated cost of depreciable property over the estimated remaining service
lives, which ranged from 3 years to 49 years. Palo Verde was being amortized on
a straight-line basis over approximately 40 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.
In connection with the emergence from bankruptcy, the Company accrued a
liability for the present value of the estimated decommissioning costs for the
Company's interest in Palo Verde. Accretion of the decommissioning liability is
charged to interest charges in the statement of operations.
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 DOE for disposal cost of one-tenth of one
cent on each kilowatt hour generated.
Capitalized Interest. As a result of discontinuation of the application of
SFAS No. 71, the Company discontinued accruing AFUDC in 1992. In place of
AFUDC, the Company capitalizes to construction work in progress ("CWIP") 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 municipal bonds in trust funds established for
decommissioning of its interest in Palo Verde which have a fair market value of
approximately $33.1 million at December 31, 1996. Such marketable securities
are classified as "available-for-sale" securities and as such the difference
between cost and market value is shown as a separate component of
capitalization.
Inventories. Inventories, primarily parts, materials and supplies, are
stated at average cost not to exceed recoverable costs.
Operating Revenues. The Company accrues revenues for services rendered but
unbilled.
The regulations of the Texas Commission, New Mexico Commission and FERC and
the agreements with individual customers generally provide for fuel and
purchased and interchanged power expenses to be recovered from customers. Fuel
revenues reflect the Company's estimate of recoverable fuel and purchased and
interchanged power expenses net of a percentage of (i) profit margins from
certain off-system sales and
57
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(ii) revenues from third party transmission services, which is credited to
customers. Economy sales relate to spot market sales and is included in fuel
revenues. Base revenues refer to the Company's revenues from the sale of
electricity excluding such fuel revenues.
Federal Income Taxes. The Company accounts for federal income taxes under
SFAS No. 109, which requires the asset and liability method of accounting for
income taxes. Under the asset and liability 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. SFAS No. 109 requires the
Company to record 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. SFAS No. 109 recognizes the effect on deferred tax assets and
liabilities of a change in tax rate in income in the period that includes the
enactment date.
Benefit Plans. See Note L for accounting policies regarding the Company's
retirement plans and postretirement benefits.
Earnings per Share. Earnings (loss) per common share is computed by
dividing net income or loss, after deducting the preferred dividend
requirements, by the weighted average number of common shares and dilutive
common share equivalents outstanding.
For the Reorganized Company, for the period February 12 through December
31, 1996, the computation of fully-diluted earnings per share was immaterially
different from primary earnings per share.
For the Predecessor Company, there was no difference between primary and
fully-diluted earnings per share.
Stock Option Plans. The Company has an option plan which reserves shares
of common stock for issuance to officers. The Company has adopted the
disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Accordingly, compensation cost is recognized for the intrinsic
value, if any, of option grants at measurement date ratably over the vesting
period of the options.
Impairment of Long-Lived Assets. The Company adopted the provisions of SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," upon the emergence from bankruptcy. SFAS No. 121
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets. The Company's application of fresh-start reporting upon the
emergence from bankruptcy encompassed the adoption of SFAS No. 121 and as such
the Company's adoption of SFAS No. 121 did not have a significant impact on its
financial statements.
58
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
Reclassifications. Certain amounts in the financial statements for 1995
and 1994 have been reclassified to conform with the 1996 presentation.
E. PALO VERDE AND OTHER JOINTLY OWNED UTILITY PLANT
The Company has a 15.8% undivided interest in the three 1,270 MW nuclear
generating units at Palo Verde in which six other utilities (collectively, the
"Palo Verde Participants") have interests, including Arizona Public Service
Company ("APS"), who is the operating agent of Palo Verde. The operation of
Palo Verde and the relationship among the Palo Verde Participants is governed by
the ANPP Participation Agreement.
Pursuant to the Plan, the Predecessor Company's Palo Verde lease
obligations were extinguished on the Effective Date and the Reorganized Company
reacquired the previously sold and leased back portions of Palo Verde. In
accordance with fresh-start reporting the Reorganized Company recorded the
reacquired portions of Palo Verde at fair market value, which was approximately
$227.7 million and revalued the Company's interest in Palo Verde at RCLD. See
Note A and the Utility Plant portion of Note D for a discussion of the valuation
of the Company's utility plant. As of December 31, 1995, the Company's
investment, at cost, in Palo Verde in the amount of approximately $963.0
million, excludes amounts related to the Company's investment in Palo Verde
which was sold and leased back during 1986 and 1987 and for which the related
leases were accounted for as operating leases.
Other jointly owned utility plant includes a 7% undivided interest in Units
4 and 5 of the Four Corners Project ("Four Corners") and certain other
transmission facilities. A summary of the Company's investment in jointly owned
utility plant, excluding fuel, at December 31, 1996 and 1995 is as follows (In
thousands):
REORGANIZED COMPANY | PREDECESSOR COMPANY
-------------------------- | ----------------------------
DECEMBER 31, 1996 | DECEMBER 31, 1995
-------------------------- | ----------------------------
PALO VERDE | PALO VERDE
STATION OTHER | STATION OTHER
------------ ---------- | ------------- ----------
|
Electric plant in service...... $568,957 $173,409 | $ 952,310 $135,400
Accumulated depreciation....... (22,162) (10,607) | (155,749) (59,398)
Construction work in progress.. 8,545 985 | 10,653 1,661
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 Palo Verde Participant is
required to fund its proportionate share of fuel, other operation, 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 1996. 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.
59
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
Decommissioning. Prior to Reorganization, the Predecessor Company was
accruing its estimated decommissioning obligation over the remaining service
life (approximately 40 years) for the portion of its owned interest in Palo
Verde and over the term of the related leases (27 to 29 years) for the portions
of Palo Verde that were sold and leased back. Upon the adoption of fresh-start
reporting, the Company recorded the net present value of estimated future
expenditures for decommissioning, using a risk free rate of return of 6.00%, and
began accruing interest on the decommissioning liability. The Reorganized
Company's interest expense includes approximately $4.6 million related to the
accretion of the nuclear decommissioning liability. As of December 31, 1996, the
Company has accrued a liability of approximately $89.5 million for its estimated
decommissioning costs.
In December 1995, the Palo Verde Participants approved a study by an
outside engineering firm of the cost of decommissioning Palo Verde. The 1995
study determined that the Company will have to fund approximately $229 million
(stated in 1995 dollars) to cover its share of such costs beginning in 2024
through 2037. The 1995 study assumes that (i) maintenance expense for spent fuel
storage will be incurred for ten years after the shutdown of the last unit
(estimated to be in 2024) rather than the approximately 30 years utilized in a
1993 study; (ii) a national interim spent fuel storage facility will be
available; and (iii) as a result of such national spent fuel storage facility,
the amount of spent fuel stored on-site is reduced from all spent fuel
assemblies to the final core plus fuel assemblies from approximately three
refuelings.
Cost estimates for decommissioning have increased with each study, although
the 1995 cost estimate is comparable to the previous cost estimate from a 1993
study (which determined that the Company would have to fund approximately $221
million, stated in 1993 dollars). The 1993 study was based on different
assumptions, primarily related to the decommissioning of spent fuel. The 1993
cost estimate included an estimated cost of approximately $50 million related to
on-site spent fuel storage facilities, while the 1995 study includes an
estimated cost of approximately $13 million related to spent fuel. This
difference in estimates is primarily due to the different timing assumptions
discussed above. The 1993 estimate reflected an 84% increase from the previous
estimate made in 1989, primarily due to an increase in the estimated costs
associated with the permanent burial of low-level radioactive waste due to the
uncertainty surrounding the availability and cost of low-level radioactive waste
repositories, as discussed below.
Although the 1995 study is 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 may increase significantly.
The rate freeze under the Rate Stipulation would preclude the Company from
seeking a rate increase in Texas during the Freeze Period to recover increases
in decommissioning cost estimates. Additionally, there can be no assurance that
the Company could increase its rates in any of its other jurisdictions to
recover such increased costs.
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, 1996, the aggregate
balance of the trust funds was approximately $33.1 million, which is reflected
in the Company's balance sheets in deferred charges and other assets.
60
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
An industry-wide assessment has been made for decontamination of the DOE's
enrichment facilities. The total amount of this assessment has not yet been
finalized; however, APS estimates that the annual assessment for Palo Verde will
be approximately $3.0 million, plus increases for inflation, for the next
fifteen years. The Company has accrued $5.3 million which represents the present
value of its remaining portion of the estimated total assessment.
Steam Generators. Palo Verde has experienced degradation in the steam
generator tubes of each unit. The degradation includes axial tube cracking in
the upper regions of the two steam generators in Unit 2 and, to a lesser degree,
in Units 1 and 3. This form of steam generator tube degradation has recently
been seen at other U.S. nuclear generating stations. The units also have
experienced circumferential cracking at the tube sheet, a more common type of
tube cracking. The axial tube cracking was discovered following a steam
generator tube rupture in Unit 2 in March 1993. Since that time, 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.
Each of the Palo Verde units has been inspected during regularly scheduled
refueling outages and mid-cycle inspection outages. If tube cracks are detected
during an inspection, the affected tubes are taken out of service by plugging.
This may impair the performance of a unit if sufficient numbers of steam
generator tubes are affected.
The projected service lives of the units' steam generators are reassessed
by APS periodically in conjunction with inspections made during outages of the
Palo Verde units. In August 1995, APS announced that its ongoing analyses
indicated that it will be economically desirable to replace the Unit 2 steam
generators, which have been the most affected by tube cracking, in four to nine
years. APS further stated that it expects replacement of the steam generators
will be performed in conjunction with a normal refueling outage to limit
incremental outage time. APS also has stated that, based on the latest available
data, it estimates that the steam generators in Units 1 and 3 should operate for
their designated life of 40 years (to 2025 and 2027, respectively). APS will
continue to assess these steam generators periodically.
Steam generator replacement could be done through new steam generators
manufactured for Palo Verde or through the purchase of existing steam generators
that are compatible with Palo Verde's design. The Company believes replacement
of the steam generators would require the unanimous approval of the Palo Verde
Participants. The Company has not yet completed its analysis of the economic
feasibility of steam generator replacement, or other options that may be
available in connection with the operation of Unit 2. Also, the Company cannot
predict whether it or other Palo Verde Participants will agree to replace the
Unit 2 steam generators. The Company expects that if the steam generators in
Unit 2 are replaced, most of such costs would be incurred between 1998 and 2005.
The Company's portion of total costs associated with replacement of the Unit 2
steam generators, including replacement power costs, is currently estimated not
to exceed $30 million.
The Rate Stipulation, however, precludes the Company from seeking a rate
increase in Texas during the Freeze Period to recover capital costs associated
with such replacement should it be necessary.
61
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
It is uncertain whether the costs associated with replacing the Unit 2 steam
generators would be approved by the New Mexico Commission and included in the
Company's rate base in New Mexico.
Liability and Insurance Matters. The Palo Verde Participants have public
liability insurance against nuclear energy hazards up to the full limit of
liability of $200 million under federal law in the form of primary liability
insurance provided by commercial insurance carriers. Additionally, the Company
participates in an industry-wide retrospective assessment program, under which
industry participants would be required to pay an assessment to cover any loss
in excess of $200 million. The maximum assessment per reactor for each nuclear
incident is approximately $79.2 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 $37.6
million, with an annual payment limitation of approximately $4.7 million.
The Palo Verde Participants maintain "all risk" (including nuclear hazards)
insurance for property damage to, and decontamination of, property at Palo Verde
in the aggregate amount of $2.7 billion, a substantial portion of the proceeds
of which must first be applied to stabilization and decontamination. Finally,
the Company has insurance against a portion of any increased cost of generation
or purchased power which may result from the accidental outage of any of the
three Palo Verde units if the outage exceeds 21 weeks.
F. COMMON STOCK
OVERVIEW
The Company issued 60 million shares of new common stock on February 12,
1996. The 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.
The Company's ability to pay dividends on the Common Stock for the next
several years will be limited by the terms of applicable laws and financing
arrangements entered into pursuant to the Reorganization. All distributions with
respect to the Common Stock, including the declaration or payment of dividends,
are subject to the provisions of the Texas Business Corporation Act, including
provisions that prohibit any distribution that exceeds the surplus of the
Company. In addition, under Section 305 of the Federal Power Act, it is unlawful
for a director or officer of the Company to participate in the making or payment
of dividends from "any funds properly included in capital account." As a result
of Reorganization, the Company's first priority at this time is debt retirement
and deleveraging as opposed to paying dividends.
Pursuant to the resolutions creating the Series A Preferred Stock, no
dividends can be paid on the Common Stock if there are dividends in arrears on
the Series A Preferred Stock. So long as the Company's First Mortgage Bonds,
Series A through H, are outstanding and the series with the longest maturity is
not rated "investment grade" by either Standard & Poor's Rating Service or
Moody's Investors Service, Inc., the Company may not declare any dividend on the
Common Stock, other than in additional shares of common stock, or make any other
distribution on, or acquire for value any shares of common stock (with certain
limited exceptions) unless, after giving effect thereto, the aggregate of all
such dividends, distributions and
62
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
certain other payments made by the Company since February 12, 1996 would be less
than the sum of (i) 50% of the consolidated net income (as defined in the
mortgage indenture) of the Company minus dividends paid in respect of the Series
A Preferred Stock for the period from February 13, 1996 to the most recently
ended fiscal quarter for which quarterly financial statements are available (or,
if such consolidated net income is a deficit, less 100% of such deficit), plus
(ii) 100% of the aggregate net proceeds received by the Company from the
issuance or sale since February 12, 1996 of equity securities or debt securities
that have been converted into equity securities, plus (iii) $10.0 million.
Currently, the Company's First Mortgage Bonds are not rated investment grade.
Pursuant to the terms of the reimbursement agreements related to four
letters of credit issued in respect of the four series of pollution control
revenue bonds, so long as a drawing is available under any of the letters of
credit, the same limitation on the declaration of dividends would apply to the
Company. In addition to the restriction contained in the mortgage indenture, the
reimbursement agreements limit to $15.0 million the aggregate amount of
dividends that can be paid on the Common Stock during the three years after its
initial issuance on February 12, 1996. The credit agreement for the working
capital and fuel financing facility contains the same limitations on the payment
of Common Stock dividends as the reimbursement agreements related to the letters
of credit on the pollution control revenue bonds.
1996 LONG-TERM INCENTIVE PLAN
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 through the award or grant of non-statutory
stock options, incentive stock options, stock appreciation rights, restricted
stock, bonus stock and performance stock. During 1996, the Company granted
options covering 1,900,000 shares and awarded 180,000 restricted shares under
the 1996 Plan.
Stock Option Plans. At December 31, 1996, options were outstanding for the
purchase of 1,900,000 shares of common stock of which 660,000 were exercisable
as of December 31, 1996. No options were exercised in 1996. All options expire
five years from the date of grant unless terminated earlier by the Board of
Directors.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). Accordingly, because the stock option grants had
no intrinsic value at the measurement date, no compensation cost has been
recognized. Had compensation cost for the plan been determined based on the fair
value at the grant date
63
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
for the awards in 1996 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:
Period From
February 12
to
December 31,
1996
------------
Net income applicable to common stock
(In thousands):
As reported......................... $ 31,431
Pro forma........................... 30,262
Earnings per share:
As reported......................... 0.52
Pro forma........................... 0.50
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions: (i) risk-free rate of return is 6.65% for options awarded April 30,
1996 and 6.99% for options awarded June 11, 1996; and (ii) volatility is 4.09%
for options awarded on the April grant date and 4.35% for options awarded on the
June grant date, calculated using the standard deviation of the Company's Common
Stock from February 16, 1996 to the award date. The weighted-average grant-date
fair value of options granted during the year was $2.60 per option. The exercise
price is the market price on the date of award, which was $5.32 for 800,000
shares on the April grant date and $5.56 for 800,000 shares on the June grant
date, except for 300,000 options awarded to the former Chief Executive Officer
("CEO") of the Company with an exercise price of $7.00. All options vest over a
period of five years from the date of grant, subject to earlier vesting in
accordance with the current CEO's employment agreement, and except for options
awarded the former CEO which were fully vested on the date of grant.
Restricted Shares. At December 31, 1996, 180,000 shares of restricted stock
were awarded under the 1996 Plan. Restrictions from resale on 20,000 shares have
lapsed as of January 1, 1997.
The value of restricted shares is calculated by multiplying (i) 55,000
shares at $5.00 per share for shares awarded February 12, 1996; (ii) 100,000
shares at $5.32 per share for shares awarded on the April grant date; and (iii)
25,000 shares at $5.63 per share for shares awarded May 1, 1996. Restrictions
from resale will lapse over five years beginning December 31, 1996, except for
25,000 shares which restrictions will lapse on May 1, 1997.
Unearned compensation was charged for the value of the restricted shares as
these shares were issued in accordance with the 1996 Plan. The unearned
compensation is shown as a reduction of common stock equity in the accompanying
balance sheet and is being amortized ratably over the restricted period. During
1996, approximately $0.2 million relating to restricted stock was charged to
expense.
64
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
The holder of a restricted stock award will have 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.
Changes in common stock are as follows:
Unearned
Capital in Compensation-
Common Excess of Restricted
Stock Common Stated Stock
Shares Stock Value Awards
----------- ------------ ---------- ------------
(In thousands)
Balance December 31, 1993, 1994 and 1995....... 35,544,330 $ 339,097 $ -- $ --
Redemption of Predecessor Common Stock....... (35,544,330) (339,097) -- --
Issuance of Reorganized Common Stock......... 59,999,981 60,000 240,000 --
Restricted shares............................ 180,000 180 768 (948)
Restricted stock compensation accrued........ -- -- -- 190
----------- ----------- -------- ------
Balance December 31, 1996...................... 60,179,981 $ 60,180 $240,768 $ (758)
=========== =========== ======== ======
G. PREFERRED STOCK
The Company issued one million shares of new preferred stock on February
12, 1996. The Preferred Stock has a liquidation preference of $100 per share,
has no sinking fund requirements and must be redeemed by the Company in 2008.
The Preferred Stock has an annual dividend rate of 11.40%, which is to be paid
through the issuance of additional shares of preferred stock for the first three
years and in cash thereafter. On November 1, 1996, the Company paid the first
pay-in-kind dividend by issuing 84,264 shares to satisfy the dividend. Also, on
January 16, 1997, the Company's Board of Directors declared the second pay-in-
kind dividend which was paid on February 1, 1997 through the issuance of 30,886
additional shares to shareholders of record as of January 21, 1997.
PREFERRED STOCK, REDEMPTION REQUIRED
Following is a summary of the redemption of the Predecessor Company
Preferred Stock and the issued and outstanding Preferred Stock, redemption
required, of the Reorganized Company:
Shares Amount
---------- --------------
(In thousands)
Balance at December 31, 1993, 1994
and 1995............................... 639,600 $ 67,266
Redemption of Predecessor
Preferred Stock..................... (639,600) (67,266)
Issuance of Reorganized
Preferred Stock..................... 1,000,000 100,000
Issuance of Dividend.................. 84,264 8,426
--------- --------
Balance at December 31, 1996............ 1,084,264 $108,426
========= ========
65
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
Optional Redemption. The Series A Preferred Stock is not redeemable at the
Company's option prior to February 1, 1999; provided, however, that upon the
occurrence of a change of control on or prior to February 1, 1999, the Company
shall have the right to redeem the outstanding Series A Preferred Stock, in
whole or in part, no earlier than 30 days nor later than 60 days from the date
the change of control offer is mailed to the holders of Series A Preferred
Stock, in cash, at a price per share equal to the sum of (i) 108% of the
liquidation preference plus (ii) accrued and unpaid dividends (including an
amount equal to a prorated dividend from the immediately preceding dividend
accrual date), if any, to the redemption date. Thereafter, the outstanding
Series A Preferred Stock may be redeemed, in whole or in part, at the option of
the Company, in cash at the redemption prices set forth in the table below, plus
all accrued and unpaid dividends (including an amount equal to a prorated
dividend from the immediately preceding dividend accrual date to the date of
redemption), if any, if redeemed during the twelve-month period beginning on
February 1 of the years indicated below:
Optional
Redemption
Year Price
---- ----------
1999............................ 105.70%
2000............................ 104.56
2001............................ 103.42
2002............................ 102.28
2003............................ 101.14
2004 and thereafter............. 100.00
Mandatory Redemption. On February 1, 2008, the Company will be required to
redeem (subject to the legal availability of funds therefor) all outstanding
shares of Series A Preferred Stock at a price in cash equal to the sum of (i)
the liquidation preference thereof plus (ii) all accrued and unpaid dividends,
if any, to the date of redemption.
PREFERRED STOCK, REDEMPTION NOT REQUIRED
Following is a summary of the Predecessor Company Preferred Stock,
redemption not required:
Shares Amount
--------- --------------
(In thousands)
Balance at December 31, 1993, 1994
and 1995............................... 142,450 $ 14,198
Redemption of Predecessor
Preferred Stock..................... (142,450) (14,198)
-------- --------
Balance at December 31, 1996............ -- $ --
======== ========
66
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
H. LONG-TERM AND FINANCING AND CAPITAL LEASE OBLIGATIONS
Outstanding long-term and financing and capital lease obligations are as
follows:
DECEMBER 31,
1996
--------------
(IN THOUSANDS)
Long-Term Obligations:
- ---------------------
First Mortgage Bonds (1):
7.25% Series A, issued 1996, due 1999........................ $ 78,266
7.75% Series B, issued 1996, due 2001........................ 78,771
8.25% Series C, issued 1996, due 2003........................ 148,989
8.90% Series D, issued 1996, due 2006........................ 235,957
9.40% Series E, issued 1996, due 2011........................ 285,900
Pollution Control Bonds (2):
Secured by First Mortgage Collateral Bonds:
Variable rate bonds, due 2014.............................. 63,500
Variable rate refunding bonds, due 2013.................... 33,300
Variable rate refunding bonds, due 2014.................... 37,100
Variable rate refunding bonds, due 2015.................... 59,235
Promissory note due 2007 ($227,000 due in 1997) (3)............. 958
----------
Total long-term obligations.............................. 1,021,976
----------
Financing and Capital Lease Obligations:
- ---------------------------------------
Turbine lease ($1,721,000 due in 1997) (4)...................... 5,900
Nuclear fuel ($26,385,000 due in 1997) (5)...................... 46,630
----------
Total financing and capital lease obligations............. 52,530
---------
Total long-term and financing and capital lease
obligations.............................................. 1,074,506
Current maturities (Amount due within one year).................. (28,333)
----------
$1,046,173
==========
_____________________
(1) First Mortgage Bonds
Substantially all of the Company's utility plant is subject to liens under
the First Mortgage Indenture.
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) to enter
into a consolidation, merger or sale of assets.
Series A, B, C and D Bonds may not be redeemed by the Company prior to
maturity. Series E Bonds may be redeemed at the option of the Company, in
whole or in part, on or after February 1, 2006.
67
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the bonds prior to maturity.
During the period from February 12, 1996 through December 31, 1996, the
Company repurchased approximately $46.7 million of Series A Bonds, and
approximately $71.2 million of Series B Bonds.
(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. 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. The bonds bear interest at rates
that are repriced weekly (4.15% to 4.25% at December 31, 1996). The bonds
may be required to be repurchased at the holder's option and are subject to
mandatory redemption upon the occurrence of certain events and are
redeemable at the option of the Company under certain circumstances.
(3) Promissory Note
The secured note due 2007 has an annual interest rate of 5.5%.
(4) Capitalized Lease Obligation, Copper Turbine
In 1980, the Company sold and leased back a turbine and certain other
related equipment from the trust-lessor for a twenty-year period, with
renewal options for up to seven more years. Semiannual lease payments,
including interest, which began in January 1982, were approximately $0.7
million through January 1991, and are approximately $0.9 million thereafter
to July 2000. The effective annual interest rate implicit in this lease is
calculated to be 9.6%.
(5) Nuclear Fuel Financing
The Company entered into a lease arrangement with a third party grantor
trust, Rio Grande Resources Trust ("RGRT II"), with respect to nuclear fuel
purchases for Palo Verde. The Company accounts for the lease as a capital
lease and has a commitment for a three-year credit facility in the amount
of $100 million, which is secured by Collateral Series Bonds, to finance
nuclear fuel purchases. The credit facility provides up to $60 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 and may be extended for one year at the option of the Company.
Approximately $46.6 million has been drawn to finance nuclear fuel
(interest rate of 8.25%) at December 31, 1996. Quarterly lease payments
made are based on units of heat production.
68
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
Scheduled maturities of long-term and financing and capital lease
obligations at December 31, 1996 are as follows (In thousands):
1997...........................$28,333
1998........................... 22,050
1999........................... 80,076
2000........................... 954
2001........................... 78,869
The table above does not reflect future nuclear fuel purchases and related
obligations and maturities.
I. FEDERAL INCOME TAXES
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and December 31, 1995, are presented below (In thousands):
REORGANIZED | PREDECESSOR
COMPANY | COMPANY
----------- | -----------
DECEMBER 31, | DECEMBER 31,
1996 | 1995
----------- | -----------
|
Deferred tax assets: |
Letters of credit draws........................................ $ - | $ 100,946
Gain on sale and leaseback transactions........................ - | 46,410
Accrued lease expense, net of interim payments (Note B)........ - | 85,942
Reorganization expenses financed with bonds.................... 22,526 | -
Accumulated deferred investment tax credits.................... - | 27,396
Capital leases................................................. 2,873 | 25,100
Benefits of tax loss carryforwards............................. 256,510 | 3,582
Investment tax credit carryforward............................. 20,410 | 11,984
Alternative minimum tax credit carryforward.................... 9,627 | 35,964
Other.......................................................... 92,643 | 100,900
--------- | ---------
Total gross deferred tax assets............................. 404,589 | 438,224
--------- | ---------
Less valuation allowance: |
Federal.................................................... 12,661 | 217,509
State...................................................... 17,941 | 39,808
--------- | ---------
Total valuation allowance........................... 30,602 | 257,317
--------- | ---------
Net deferred tax assets..................... 373,987 | 180,907
--------- | ---------
Deferred tax liabilities: |
Plant, principally due to differences in depreciation and |
basis differences........................................... (288,416) | (235,181)
Other.......................................................... (11,687) | (15,736)
--------- | ---------
Total gross deferred tax liabilities................... (300,103) | (250,917)
--------- | ---------
Net accumulated deferred income taxes....... $ 73,884 | $ (70,010)
========= | =========
69
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
Upon adoption of SFAS No. 109, a valuation allowance was recorded for
deferred tax assets which may not be realized, including tax carryforwards that
the Company may not utilize before their expiration. The valuation allowance
decreased by approximately $226.7 million in 1996, $4.5 million in 1995 and $4.4
million in 1994. The decrease in 1996 was primarily due to the Company's belief
that, because of the Rate Stipulation, Reorganization, and other factors, it is
more likely than not that the Company will have sufficient taxable income in the
future to utilize most of the tax net operating loss ("NOL") carryforward
benefits. Prior to the effective date of the Reorganization, the Predecessor
Company did not assume future taxable income for the utilization of NOL
carryforwards. Approximately $27.1 million of the Company's valuation allowance
at December 31, 1996, if subsequently recognized as a tax benefit, would be
credited directly to capital in excess of stated value in accordance with SOP
90-7.
As discussed in Note D, the Company's income tax provision has been
calculated under SFAS No. 109. The Company recognized income taxes as follows
(In thousands):
REORGANIZED |
COMPANY | PREDECESSOR COMPANY
------------- | ---------------------------------------
PERIOD FROM | PERIOD FROM
FEBRUARY 12 | JANUARY 1
TO | TO YEARS ENDED DECEMBER 31,
DECEMBER 31, | FEBRUARY 11, ------------------------
1996 | 1996 1995 1994
------------- | ------------- ----------- -----------
|
Income tax expense (benefit): |
Federal: |
Current............................................... $ (17,203) |$ - $ 13,757 $ 6,320
Deferred.............................................. 38,828 | (2,340) (21,703) (21,200)
Investment tax credit amortization.................... - | (325) (2,828) (2,838)
------------- |------------- ----------- -----------
Subtotal current operations......................... 21,625 | (2,665) (10,774) (17,718)
Adjustment of assets and liabilities to fair |
value (elimination of accumulated deferred |
investment tax credits)............................. - | (77,950) - -
Deferred included in reorganization items............. - | (172,899) (1,194) (1,824)
Income tax expense on interest income |
during bankruptcy................................... - | 583 4,633 2,720
------------- |------------- ----------- -----------
Total............................................. $ 21,625 |$ (252,931) $ (7,335) $ (16,822)
============= |============= =========== ===========
|
State: |
Current............................................... $ 278 |$ 116 $ 935 $ 584
Deferred.............................................. 4,767 | (866) (5,959) (364)
------------- |------------- ----------- -----------
Subtotal current operations......................... 5,045 | (750) (5,024) 220
Deferred included in reorganization items............. - | (17,494) - -
------------- |------------- ----------- -----------
Total............................................. $ 5,045 |$ (18,244) $ (5,024) $ 220
============= |============= =========== ===========
The current federal income tax benefit for 1996 results primarily from the
carryback of 1996 alternative minimum tax ("AMT") NOL to the 1993, 1994 and 1995
tax years and decreased by an expense for the reduction of investment tax
credits ("ITC") utilized. Deferred federal income tax includes an offsetting
AMT deferred expense of approximately $24.0 million and a benefit for an
increase in ITC carryforward of approximately $6.8 million.
70
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
The current federal income tax expense for 1995 and 1994 results primarily
from the accrual of AMT expense. The deferred federal income tax benefit
recorded in 1995 and 1994 includes offsetting AMT credits of approximately $18.3
million and $8.4 million, respectively. For the years 1995 and 1994, ITC
utilized of approximately $4.6 million and $2.1 million, respectively, was
recorded as a reduction to current tax and included as a deferred tax expense.
Federal income tax provisions differ from amounts computed by applying the
statutory rate of 35% to the book loss before federal income tax as follows (In
thousands):
REORGANIZED |
COMPANY | PREDECESSOR COMPANY
------------- | ---------------------------------------
PERIOD FROM | PERIOD FROM
FEBRUARY 12 | JANUARY 1
TO | TO YEARS ENDED DECEMBER 31,
DECEMBER 31, | FEBRUARY 11, ------------------------
1996 | 1996 1995 1994
------------- | ------------- ----------- -----------
|
Federal income tax expense (benefit) computed on income |
(loss) at statutory rate.................................... $ 22,240 | $ 45,339 $ (14,229) $ (15,741)
Difference due to: |
ITC amortization (net of deferred taxes).................... - | (211) (1,838) (1,845)
Nondeductible bankruptcy costs.............................. - | 3,604 5,925 3,915
Federal valuation allowance................................. - | (204,848) (4,461) (1,927)
Adjustment of assets and liabilities to fair value |
(elimination of accumulated deferred ITCs)................ - | (77,950) - -
Reorganization costs (including the nontaxable |
extraordinary gain on the discharge of debt).............. - | (27,745) - -
Other....................................................... (615) | 8,880 7,268 (1,224)
------------ | ------------- ----------- -----------
Total federal income tax expense (benefit)................ $ 21,625 | $ (252,931) $ (7,335) $ (16,822)
============ | ============= =========== ===========
Effective federal income tax rate........................... 34.0%| (195.3)% 18.0% 37.4%
============ | ============= =========== ===========
The Company had approximately $733.0 million of tax NOL carryforwards,
approximately $20.4 million of ITC carryforwards and approximately $9.6 million
of AMT credit carryforwards as of December 31, 1996. If unused, the NOL
carryforwards would expire at the end of the years 2006 through 2011, the ITC
carryforwards would expire in the years 2001 through 2005 and the AMT credit
carryforwards have an unlimited life.
The Reorganization and the associated implementation of fresh-start
reporting gave rise to significant items of income and expense for financial
reporting purposes that are not included in taxable income. These reorganization
items resulted in an effective tax rate for the period from January 1 to
February 11, 1996 that is significantly different than the current U.S.
statutory rate of 35%.
The Bankruptcy Court entered an order on May 10, 1994 approving the terms
of a settlement with the Internal Revenue Service ("IRS") covering tax periods
prior to 1992, pursuant to which the Company paid approximately $6.2 million,
which primarily represents interest.
71
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
J. COMMITMENTS AND CONTINGENCIES
SALE/LEASEBACK INDEMNIFICATION OBLIGATIONS
Pursuant to the participation agreements and leases entered into in the
sale/leaseback transactions, 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. Pursuant to settlement agreements entered into between the
Company and the lessors under the Palo Verde Leases, certain of the Company's
indeminity obligations related to tax matters have continued after the Effective
Date.
One of the lessors in the sale/leaseback transactions related to Unit 2 of
Palo Verde has notified the Company that the IRS has raised issues, primarily
related to ITC claims by the lessor, regarding the income tax treatment of the
sale/leaseback transactions. 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. This matter is at a preliminary stage and,
although the Company believes the lessor has meritorious defenses to the IRS'
position, the Company cannot predict the outcome of the matter or the Company's
liability for any resulting claim for indemnification. 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. Because
construction of new facilities is subject to standards imposed by environmental
regulation, substantial expenditures may be required to comply with such
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, unforseen expenses associated with compliance could have a material,
adverse effect on the future operations and financial condition of the Company.
PCB Treatment, Inc. The Company received a request from the U.S.
Environmental Protection Agency ("EPA") to participate in the remediation of
polychlorinated biphenyls ("PCBs") at two facilities in Kansas City, Missouri,
which had been operated by PCB Treatment, Inc. ("PTI"). The Company's manifests
indicate that between 1982 and 1986, the Company sent 23 shipments of PCBs or
PCB-containing electric equipment ("PCB Equipment") to PTI, accounting for
approximately 2 to 3%, by weight, of the PCBs and PCB Equipment received at that
site by PTI. Presently, PTI has discontinued operations and the EPA has
determined that PTI's abandoned facilities require remediation.
The Company and the PTI Steering Committee, which consists of the largest
generators of the PCBs sent to PTI, have executed a settlement agreement. In
consideration for the payment of approximately
72
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
$0.2 million, the settlement agreement excuses any further liability to the
Steering Committee by the Company and indemnifies the Company for any
liabilities to other parties as may be asserted in the future.
The Company may still face liability for possible deliveries of PCBs by PTI
to a third site which is also subject to remedial action by the federal
authorities, except to the extent that those PCBs were transferred from the
first site. The Company's records do not indicate any deliveries of PCBs to
this third site. Management believes the Company is unlikely to face
substantial unindemnified liabilities associated with this third site.
Coal Mine Reclamation. The Company has been informed by APS that the
Company's estimated financial obligation for coal mine reclamation at Four
Corners is not being fully reflected in the costs for which the Company is
billed. APS, the operating agent of Four Corners, is performing an analysis to
establish an appropriate revised cost estimate. Based on preliminary estimates
from APS and the coal provider, the Predecessor Company recorded a liability of
approximately $12 million which reflects the present value of the estimated
future costs of reclamation at the Effective Date to reflect its share of the
coal mine reclamation obligation.
K. LITIGATION
LITIGATION WITH CENTRAL AND SOUTH WEST CORPORATION
In May 1993, the Company entered into the Merger Agreement, pursuant to
which the Company would have been acquired by CSW. In June 1995, CSW terminated
the Merger Agreement. In response, the Company filed a complaint against CSW in
the 205th Judicial District Court of El Paso County, Texas, alleging, among
other claims, breach of contract, breach of duty of good faith and fair dealing,
breach of fiduciary duty, business disparagement, tortious interference with
contract and fraud in the inducement. The Company sought an unspecified amount
of damages, punitive damages, attorneys' fees and costs. In June 1995, CSW filed
an adversary proceeding against the Company in the Bankruptcy Court seeking the
recovery of termination fees of $25 million, approximately $3.7 million in
attorneys' fees and expenses that CSW claims it advanced on behalf of the
Company in certain regulatory proceedings, and $25 million for the alleged
violation of the Merger Agreement's no-solicitation provisions. All of the
claims by both parties were tried in the Bankruptcy Court. The trial concluded
on January 30, 1997, and the matter has been taken under advisement by the
presiding judge. A ruling is expected in March 1997. The Company cannot predict
the outcome of this litigation, but 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 the litigation between the Company and CSW.
Pursuant to the terms of the Reorganization, the first $20 million in proceeds,
if any, to the Company from this litigation will be distributed to the holders
of preferred stock and common stock of the Predecessor Company.
LITIGATION WITH LAS CRUCES
Las Cruces is attempting to replace the Company as its electric service
provider by acquiring, through condemnation or otherwise, the distribution
assets and other facilities used to provide electric service to customers in Las
Cruces. Sales to customers in Las Cruces represented approximately 7% of the
73
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
Company's operating revenues in 1996. Las Cruces has two actions pending
against the Company in federal district court in New Mexico, one seeking to
recover franchise fees despite the expiration of the Company's Las Cruces
franchise in March 1994 and one seeking a declaratory judgment that Las Cruces
can proceed with a condemnation action against the Company. In addition, the
New Mexico State Legislature has recently passed a bill that would allow Las
Cruces to proceed with the condemnation.
In the franchise fee action, Las Cruces is seeking the reasonable value of
the Company's use, occupation and rental of Las Cruces' rights-of-way or damages
for trespass and an unspecified amount of punitive damages. The Company has
filed an answer denying that it has any liability or continuing payment
obligation to Las Cruces regarding franchise fees or use of the Las Cruces
rights-of-way, and also denies that it has committed any trespass. The Company
intends to vigorously defend the lawsuit. The Company has also filed a
counterclaim seeking to condemn, pursuant to statutory authority, those Las
Cruces rights-of-way currently used and occupied by the Company. Las Cruces has
filed an answer contesting the Company's right to proceed with such a
condemnation. In August 1996, the court severed the Company's counterclaim from
Las Cruces' claims for all purposes, and stayed all proceedings on the Company's
counterclaim until further order of the court. The trial of Las Cruces' claims
is set for May 1997. The Company has reserved in its financial statements an
amount equal to the franchise fees under the expired agreement.
In April 1995, Las Cruces filed a Complaint for Declaratory Judgment
against the Company in the District Court for Dona Ana County, New Mexico,
seeking a declaratory judgment that Las Cruces has a right of eminent domain to
condemn the electric distribution system and related facilities owned and
operated by the Company within and adjacent to the city limits that provide or
assist in the provision of electricity within the municipal boundaries of Las
Cruces. In May 1995, the Company removed the case to the United States District
Court for the District of New Mexico. In October 1995, the Company's motion for
summary judgment was denied and the Court ruled that although Las Cruces lacks
express statutory authority to condemn the Company's assets, such express
authority is required only if the proposed condemnation would materially impair,
obliterate or destroy the existing use. Following a trial on the merits, the
federal magistrate issued an opinion holding that Las Cruces had not met its
burden of proof that its plan would not materially impair the public use of the
Company's property sought to be condemned. The magistrate also granted the
Company's motion to certify to the New Mexico Supreme Court the question as to
whether Las Cruces possesses the authority to condemn the Company's property for
use as a municipal utility when that property is already devoted to public use.
In February 1997, the New Mexico Supreme Court heard oral arguments and is
expected to issue its ruling in the near future.
In March 1997, the New Mexico House of Representatives and Senate passed a
bill that would give Las Cruces the authority to acquire and operate the
Company's distribution system within both the city limits and a territory within
five miles of the municipal boundary. If the Governor signs the bill, it would
become law immediately and most likely make the issues presented to the New
Mexico Supreme Court moot.
Las Cruces has taken several actions to position itself to acquire portions
of the Company's distribution system and certain related facilities in the event
it can proceed with condemnation. See Note C for discussion regarding Las
Cruces' filing with the FERC for determination of stranded cost. In June 1994,
the Las Cruces City Council approved a resolution selecting SPS to provide
operation and maintenance services for the proposed Las Cruces electric
distribution system, substations and associated transmission facilities and
authorizing the staff of Las Cruces to negotiate a contract with SPS related to
such services. In August 1994, SPS and Las Cruces entered into a fifteen-year
contract granting SPS the right to provide all of the electric power and energy
required by Las Cruces during the term of the contract. In addition, Las Cruces
announced that, in October 1995, it sold approximately $73 million in revenue
bonds to provide funding to finance the acquisition by
74
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
condemnation or negotiated purchase of the Company's electrical distribution
assets within and adjacent to the Las Cruces city limits.
The Company has filed a lawsuit in the Dona Ana County District Court and
is pursuing a complaint simultaneously before the New Mexico Commission
challenging the legality of the sale of the revenue bonds, and the New Mexico
Commission is investigating the agreement between SPS and Las Cruces which would
grant, in certain circumstances, Las Cruces an option to sell electric utility
assets acquired through condemnation to SPS. In August 1996, the Dona Ana County
District Court issued an opinion letter stating that Section 3-23-3 of the New
Mexico Municipal Code is inapplicable to home rule municipalities and Las
Cruces, therefore, was not required to acquire the New Mexico Commission's
approval before issuing revenue bonds to acquire utility property. However, the
Court did agree with the Company that the revenue bonds, in this case backed by
utility revenues, are subject to the same requirements of other revenue bonds
backed by gross receipts tax revenues. Therefore, if the Court's finding of the
applicability of Las Cruces' home rule authority is overturned on appeal, the
Company's position that the issuance of the bonds required prior approval could
be upheld. The Court's order was signed and entered in November 1996. The
Company has filed an appeal with the New Mexico Court of Appeals.
The Company continues to believe that it can provide lower cost electric
service to customers in Las Cruces than can be achieved through a municipal
takeover. Accordingly, the Company has stated its strong preference for a
resolution of its differences with Las Cruces through negotiation rather than
litigation and condemnation. The Company intends to vigorously pursue before
the FERC its right to recover stranded costs from Las Cruces in the event Las
Cruces succeeds in leaving the system.
If Las Cruces succeeds in its efforts to condemn the Company's distribution
system, the Company could lose its Las Cruces customer base, although the
Company would receive "just compensation" as established by the court under New
Mexico law. "Just compensation" is generally defined as the amount of money that
would compensate the party whose property is condemned. In the Company's case,
this amount would be the difference between the value of the Company's entire
system prior to the taking, as compared to the value of the entire system after
the taking. The Company is unable to predict the outcome of Las Cruces'
litigation or its efforts to replace the Company as its electric service
provider or the effects it may have on the Company's financial position, results
of operations and cash flows. 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 these matters.
TRANSMISSION SERVICE TO MEXICO
In September 1996, Enron, a wholesale power marketer and one of the
companies that submitted a bid to the CFE in connection with renewal of the
interchange agreement for the supply of power to Ciudad Juarez, Mexico, filed a
complaint against the Company with the FERC. Enron's complaint sought emergency
relief and requested the FERC to direct the Company to enter into an agreement
with Enron
75
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
to provide Enron with firm point-to-point transmission service to the CFE under
its open access transmission tariff.
In October 1996, the FERC issued an order requiring the Company to provide
Enron with firm point-to-point transmission service over the Company's
transmission system to substation facilities near the border. The FERC,
however, concurred with the Company's position that the FERC does not have
jurisdiction to order transmission across the border, suggesting that the DOE
has such jurisdiction. Pursuant to an emergency application filed by Enron with
the DOE, on October 30, 1996, the DOE issued a Notice of Delegation and
Assignment which delegated to the FERC its authority to carry out the DOE's
duties in this case. In its response to the DOE's delegation of authority, the
Company has asserted that the DOE has no authority to require transmission
access for delivery of power to the CFE. However, the Company agreed to provide
access, to the extent transmission capacity is available, to a winning bidder in
1997, if the winning bidder is someone other than the Company, pending
resolution of this jurisdictional dispute. The Company's agreement to provide
such access in no way prejudices the Company's position that, under current law,
access is not required. The FERC has docketed the Delegation and Assignment and
the process is expected to continue throughout 1997.
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. The case has been inactive for many
years. Although the outcome of this case and the possible effects on the
Company cannot be determined at this time, 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 for this matter.
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 the 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 December 1992, the Arizona
Supreme Court heard oral argument on certain issues in this matter that are
pending on interlocutory appeal. Issues important to Palo Verde Participants'
claims were remanded to the trial court for further action and the trial court
certified its decision for interlocutory appeal to the Arizona Supreme Court. In
September 1994, the Arizona Supreme Court granted review of the June 1994 trial
court decision. No trial date has been set in the matter. Although the outcome
of this case and
76
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
the possible effects on the Company cannot be determined at this time, 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 for
this matter.
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. On October 18, 1995, the Navajo Nation and the
Four Corners Participants agreed to indefinitely stay the proceedings referenced
above so that the parties may attempt to resolve the dispute without litigation.
Although the outcome of this case and the possible effects on the Company cannot
be determined at this time, 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 for this matter.
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, management is of the opinion that none of these
claims will have a material adverse effect on the operations or financial
position of the Company. However, these actions and claims in the aggregate seek
substantial damages against the Company and are subject to the uncertainties
inherent in any litigation. The Company is defending itself vigorously in all
these matters.
L. BENEFIT PLANS
PENSION PLAN
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 ("DOL") 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.
77
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
The Company's Supplemental Retirement and Survivor Income Plan for Key
Employees (the "SERP") is a non-qualified, non-funded defined benefit plan which
covers certain former employees of the Company. The pension cost for the SERP is
based on substantially the same actuarial methods and economic assumptions as
those used for the Retirement Plan. As part of the Reorganization, the Company
terminated the SERP with respect to all active employees resulting in a
curtailment gain of approximately $2.0 million. In conjunction therewith, the
Company entered into retirement agreements with ten officers who had been
participants in the SERP resulting in an increase in the accumulated benefit
obligation of approximately $10.2 million. This increase in the accumulated
benefit obligation and the curtailment gain were recognized as reorganization
items by the Predecessor Company.
Net periodic pension cost for the Retirement Plan and the SERP under SFAS
No. 87, "Employers' Accounting for Pensions," is made up of the components
listed below as determined using the projected unit credit actuarial cost method
(In thousands):
REORGANIZED |
COMPANY | PREDECESSOR COMPANY
----------- | --------------------------------------
PERIOD FROM | PERIOD FROM
FEBRUARY 12 | JANUARY 1
TO | TO
DECEMBER 31, | FEBRUARY 11, YEARS ENDED DECEMBER 31,
| -----------------------
1996 | 1996 1995 1994
----------- | ----------- ----------- -----------
|
Service costs for benefits earned during the period.... $ 2,148 | $ 354 $ 2,011 $ 2,453
Interest costs on projected benefit obligation......... 5,774 | 749 5,157 4,896
Actual return on plan assets........................... (5,019) | (570) (9,267) 378
Net amortization and deferral.......................... 842 | 113 6,008 (3,383)
Recognition of previously unrecognized items........... - | 21,738 - -
---------- | ---------- --------- --------
Net periodic pension cost recognized................ $ 3,745 | $ 22,384 $ 3,909 $ 4,344
========== | ========== ========= ========
The assumed annual discount rates used in determining the net periodic
pension cost were 7.25%, 8.50% and 7.25% for 1996, 1995 and 1994, respectively.
The pension cost includes amortization of unrecognized items. In the
application of fresh-start reporting, the Company recorded the then existing
unrecognized items as of February 11, 1996 in the amount of approximately $21.7
million.
78
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
The funded status of the plans and amount recognized in the Company's
balance sheets at December 31, 1996 and 1995 are presented below (In thousands):
REORGANIZED COMPANY | PREDECESSOR COMPANY
---------------------- | -----------------------
DECEMBER 31, 1996 | DECEMBER 31, 1995
---------------------- | -----------------------
RETIREMENT | RETIREMENT
INCOME | INCOME
PLAN SERP | PLAN SERP
---------- --------- | ----------- ----------
|
Actuarial present value of benefit obligations: |
|
Vested benefit obligation............................ $(57,366) $(18,171) | $(55,591) $ (9,559)
======== ======== | ======== ========
Accumulated benefit obligation....................... $(59,883) $(18,171) | $(57,844) $(11,570)
======== ======== | ======== ========
Projected benefit obligation......................... $(72,951) $(18,171) | $(70,958) $(13,441)
Plan assets at fair value............................... 61,460 - | 53,512 -
-------- -------- | -------- --------
Projected benefit obligation in excess of plan assets... (11,491) (18,171) | (17,446) (13,441)
Unrecognized net (gain) loss from past experience....... (3,520) (1,368) | 11,562 2,648
Unrecognized prior service cost......................... - - | 212 (407)
Unrecognized transition obligation...................... - - | 2,449 260
-------- -------- | -------- --------
Accrued pension liability............................ $(15,011) $(19,539) | $ (3,223) $(10,940)
======== ======== | ======== ========
Actuarial assumptions used in determining the actuarial present value of
projected benefit obligations are as follows:
1996 1995
------- -------
Discount rate..................................... 7.50% 7.25%
Rate of increase in compensation levels........... 5.00% 5.00%
Expected long-term rate of return on plan assets.. 8.50% 8.50%
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." Contributions from the Company are
based on the funding amounts required by the Texas Commission in the 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.
The benefit cost includes amortization of unrecognized items. In the
application of fresh-start reporting, the Company recorded the then existing
unrecognized items as of February 11, 1996 in the amount of approximately $52.3
million.
79
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
Net periodic postretirement benefit cost is made up of the components
listed below (In thousands):
REORGANIZED |
COMPANY | PREDECESSOR COMPANY
------------- | -------------------------------------
PERIOD FROM | PERIOD FROM
FEBRUARY 12 | JANUARY 1
TO | TO
DECEMBER 31, | FEBRUARY 11, YEARS ENDED DECEMBER 31,
| ------------------------
1996 | 1996 1995 1994
------------ | ----------- ---------- -----------
|
Service costs for benefits earned during |
the period...................................... $ 2,209 | $ 279 $1,603 $2,064
Interest costs on accumulated postretirement |
benefit obligation.............................. 4,723 | 607 4,046 3,909
Actual return on plan assets...................... (146) | - - -
Amortization of transition obligations............ - | 263 2,363 2,172
Amortization of (gain) loss....................... - | 60 (54) 103
Recognition of previously unrecognized items...... - | 52,340 - -
---------- | ------- ------ ------
Net periodic postretirement benefit |
cost recognized.............................. $ 6,786 | $53,549 $7,958 $8,248
========== | ======= ====== ======
The funded status of the plan and amount recognized in the Company's
balance sheet at December 31, 1996 and 1995 are presented below (In thousands):
REORGANIZED | PREDECESSOR
COMPANY | COMPANY
------------- | -------------
DECEMBER 31, | DECEMBER 31,
1996 | 1995
------------- | -------------
|
Actuarial present value of postretirement benefit obligation: |
Accumulated postretirement benefit obligation: |
Retirees........................................................... $(29,908) | $(32,656)
Active participants................................................ (47,691) | (40,831)
-------- | --------
(77,599) | (73,487)
Plan assets at fair value................................................. 8,050 | -
-------- | --------
Accumulated postretirement benefit obligation in excess of plan assets.... (69,549) | (73,487)
Unrecognized net (gain) loss from past experience......................... (1,764) | 15,182
Unrecognized transition obligation........................................ - | 38,007
-------- | --------
Accrued postretirement benefit liability............................... $(71,313) | $(20,298)
======== | ========
For measurement purposes, a 10.9% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1997; the rate was assumed
to decrease gradually to 6% for 2004 and remain at that level thereafter. The
health care cost trend rate assumption has a significant effect on the amounts
reported. To illustrate, increasing the assumed health care cost trend rates by
one percentage point in each year would increase the accumulated postretirement
benefit obligation as of December 31, 1996 by $9.4 million and the aggregate of
the service and interest cost components of net periodic postretirement benefit
cost for the year ended December 31, 1996 by $1.3 million.
80
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
Actuarial assumptions used in determining the actuarial present value of
accumulated postretirement benefit obligation are as follows:
1996 1995
------ ------
Discount rate............................ 7.50% 7.25%
Rate of increase in compensation levels.. 5.00% 5.00%
M. 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. Under the Stipulation, the new 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 continued to provide electric service to customers within Las Cruces and
expects and intends to continue to do so. See Note K.
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
represented approximately $20.0 million or 3% of operating revenues in 1996. The
Company signed a new contract with Ft. Bliss in August 1996, which provides that
Ft. Bliss will take service from the Company through 1999, with the right
thereafter to continue service on a year to year basis for two years. The
Company has a contract for service to Holloman for a ten year term beginning on
December 27, 1995. In August 1996, the Army advised the Company that White Sands
would continue to purchase retail electric service from the Company pursuant to
the retail service contract which was set to expire on December 31, 1993, but
which had previously been unilaterally extended by the Army for an indefinite
period, until written termination of such contract by the Army not less than one
year in advance of the termination date.
SIGNIFICANT CUSTOMERS
In 1996, 1995 and 1994, IID, a wholesale customer, accounted for
approximately $41.6 million, $43.3 million and $51.1 million or 7.2%, 8.6% and
9.5%, respectively, of operating revenues. During 1996, 1995 and 1994, the
Company recorded revenues pursuant to its contract with the CFE in the amount of
approximately $43.9 million, $39.4 million and $42.7 million, respectively.
Under the new agreement with
81
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
the CFE, revenues in 1997 related to power sales to the CFE are expected to be
lower than revenues recorded in 1996. See Note C.
N. 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, accounts payable, customer
deposits, decommissioning trust funds, long-term debt, and preferred stock 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, including the current
portion thereof, and preferred stock, are based on estimated market prices for
similar issues and are presented in the table below:
ESTIMATED
CARRYING FAIR
AMOUNT VALUE
----------- -----------
(IN THOUSANDS)
First Mortgage Bonds......................................... $ 827,883 $ 864,047
Pollution Control Bonds...................................... 193,135 193,135(2)
Nuclear Fuel Financing (1)................................... 46,630 46,630(3)
Capitalized Lease Obligations, Copper Turbine and Other (1).. 6,858 6,858(4)
---------- ----------
Total..................................................... $1,074,506 $1,110,670
========== ==========
Preferred Stock.............................................. $ 108,426 $ 119,377
========== ==========
__________________
(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 and capital lease obligations
for nuclear fuel purchases is reset every quarter to reflect current market
rates. Consequently, the carrying value approximates fair value.
(4) Based on prevailing interest rates the estimated fair value of the Copper
Turbine lease and other approximate their carrying value.
82
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
O. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
PREDECESSOR |
COMPANY | REORGANIZED COMPANY PREDECESSOR COMPANY
------------ | ----------------------------------------- ---------------------------------------------
PERIOD | PERIOD
FROM | FROM
JANUARY 1 | FEBRUARY 12
TO | TO
FEBRUARY 11, | MARCH 31, 1996 QUARTERS 1995 QUARTERS
| ------------------------------- --------------------------------------------
1996 | 1996 2ND 3RD 4TH 1ST 2ND 3RD 4TH
-------- | -------- --------- -------- --------- --------- --------- ---------- ---------
| (IN THOUSANDS EXCEPT FOR SHARE DATA)
|
Operating revenues...... $ 54,949 | $69,907 $144,388 $166,656 $143,023 $112,389 $124,683 $148,177 $119,368
Operating income........ 5,089 | 14,748 34,096 44,363 27,580 11,950 17,851 31,175 5,170
Income (loss) before |
reorganization |
items (expense) and |
extraordinary gain |
on discharge of debt... (4,053) | 1,689 9,500 22,770 7,960 (14,449) (7,130) 12,258 (14,020)
Reorganization items |
(expense), net of |
income tax benefit |
(expense).............. 122,251 | - - - - (1,999) (2,472) (658) (4,849)
Extraordinary gain on |
discharge |
of debt................ 264,273(1)| - - - - - - - -
Net income (loss) |
applicable to common |
stock.................. 382,471 | 137 6,603 19,793 4,898 (16,448) (9,602) 11,600 (18,869)
Net income (loss) per |
common share: |
Income (loss) before |
extraordinary gain on |
discharge of debt.... 3.33 | 0.00 0.11 0.33 0.08 (0.46) (0.27) 0.33 (0.54)
Extraordinary gain on |
discharge of debt.... 7.43(1)| - - - - - - - -
|
Net income (loss)....... 10.76 | 0.00 0.11 0.33 0.08 (0.46) (0.27) 0.33 (0.54)
- ----------
(1) Reflects the discharge of obligations subject to compromise for less than
their recorded amounts.
83
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 1997 Annual Meeting of
Shareholders (the "1997 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 1997 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the 1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the 1997 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..... 38
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.
84
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)
4.02 - 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)
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)
85
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)
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)
86
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 February
12, 1996, between the Company and Citibank, N.A., relating to the
Pollution Control Bonds referred to in Exhibit 4.07. (Exhibit 4.13
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995)
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)
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)
87
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 February
12, 1996, among the Company, Citibank, N.A., as agent for the
Creditors named therein related to the pollution control revenue
bonds referred to in Exhibits 4.03, 4.14 and 4.18. (Exhibit 4.22
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995)
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 No. 2-28692)
88
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 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)
10.05 - 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)
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, Exhibit 10.07 to
(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 No. 2-68414)
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 No. 2-68414)
89
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 No. 2-68414)
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 10.17.
(Exhibit 5-p-4 to Registration No. 2-684414).
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.
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, 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)
10.17 - Tucson-El Paso Power Exchange and Transmission Agreement, dated
April 19, 1982. (Exhibit 19.26 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1982)
10.18 - Revised Inland Power Pool Agreement, dated November 23, 1983.
(Exhibit 19.11 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1983)
10.19 - Power Sales Agreement No. 2, dated December 2, 1986, between El
Paso Electric 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. (Exhibit 10.72 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1986)
90
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)
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)
10.23-01 - Interchange Service D Agreement Firm Capacity, executed April 3,
1991, to Exhibit 10.23. (Exhibit 19.2-04 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1991)
[At the Company's request, confidential treatment has been granted
by the Securities and Exchange Commission to portions of this
document.]
*10.23-02 - Energy Purchase Contract, executed February 20, 1997, between
Comision Federal de Electricidad and the Company. [The Company has
requested confidential treatment from the Securities and Exchange
Commission for certain portions of this document.]
10.24 - Credit Agreement, dated as of February 12, 1996, between the
Company, Chemical Bank, as agent, and Texas Commerce Bank National
Association, as Trustee. (Exhibit 10.24 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995)
10.24-01 - Amendment No. 1, dated as of February 12, 1996, to Exhibit 10.24.
(Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996)
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 - Retirement Agreement for Curtis L. Hoskins, dated October 26,
1995. (Exhibit 10.26 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995)
10.27 - Retirement Agreement for John E. Droubay, dated February 22, 1996.
(Exhibit 10.27 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995)
10.28 - 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)
10.29 - Employment Agreement for Gary R. Hedrick, dated February 12, 1996.
(Exhibit 10.29 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995)
10.30 - 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)
10.31 - 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)
91
10.32 - 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)
10.33 - 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)
10.34 - 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)
10.35 - 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)
10.36 - 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)
10.37 - Registration Rights Agreement, dated as of February 12, 1996,
among El Paso Electric Company, Fidelity Management & Research
Company and Fidelity Management Trust Company. (Exhibit 10.01 to
Registration No. 333-32030 on Form S-1)
* Exhibit 11 - Statement re Computation of Per Share Earnings
Exhibit 23 - Consent of Experts:
*23.01 - Consent of KPMG Peat Marwick LLP (set forth on page 96 of this
report).
Exhibit 24 - Power of Attorney:
*24.01 - Powers of Attorney (set forth on page 95 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)
*99.02 - Restricted Stock Award Agreement, dated as of January 17,
1997, with James S. Haines, Jr.
*99.03 - Stock Option Agreement, dated as of January 17, 1997, with James
S. Haines, Jr.
*99.04 - Stock Option Agreement, dated as of January 17, 1997, with David
H. Wiggs, Jr.
*99.05 - Directors' Restricted Stock Award Agreement, dated as of January
17, 1997, with George H. Edwards, Jr.
92
*+99.06 - Form of Directors' Restricted Stock Award Agreement between the
Company and certain directors of the Company.
*++99.07 - Form of Stock Option Agreement between the Company and certain
key officers of the Company.
________________
* Filed herewith.
+ Ten additional documents, substantially identical in all material
respects to this Exhibit, have been entered into with Ramiro
Guzman; James W. Harris; Kenneth R. Heitz; Edward C. Houghton,
IV; Michael K. Parks; Eric B. Siegel; Stephen Wertheimer; and
Charles A. Yamarone, Directors of the Company.
++ Five additional documents, substantially identical in all
material respects to this Exhibit, have been entered into with J.
Frank Bates; Michael L. Blough; Gary R. Hedrick; John C. Horne;
and Robert C. McNiel, Officers of the Company.
(b) Reports on Form 8-K:
The following reports on Form 8-K were filed during the last
quarter of 1996:
Financial Statements
Date of Report Item Number Required to be Filed
-------------- ----------- --------------------
November 7, 1996 5 Not Applicable
93
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.
94
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 S. Haines, Eduardo A.
Rodriguez, Gary R. Hedrick, Terry D. 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 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 27th day of
March 1997.
EL PASO ELECTRIC COMPANY
BY: /S/ JAMES S. HAINES
---------------------------------
James S. 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
--------- ----- ----
/s/ JAMES S. HAINES Chief Executive Officer,
- --------------------------- President (Principal
(James S. Haines) Executive Officer) and
Director
/s/ GARY R. HEDRICK Vice President, Chief
- --------------------------- Financial Officer and
(Gary R. Hedrick) Treasurer (Principal
Financial Officer and
Principal Accounting
Officer)
/s/ WILSON K. CADMAN Director
- ---------------------------
(Wilson K. Cadman)
/s/ JAMES A. CARDWELL Director
- ---------------------------
(James A. Cardwell)
/s/ GEORGE W. EDWARDS, JR. Director
- ---------------------------
(George W. Edwards, Jr.)
/s/ RAMIRO GUZMAN Director
- ---------------------------
(Ramiro Guzman)
/s/ JAMES W. HARRIS Director
- ---------------------------
(James W. Harris) March 27, 1997
/s/ KENNETH R. HEITZ Director
- ---------------------------
(Kenneth R. Heitz)
/s/ EDWARD C. HOUGHTON, IV Director
- ---------------------------
(Edward C. Houghton, IV)
/s/ MICHAEL K. PARKS Director
- ---------------------------
(Michael K. Parks)
/s/ ERIC B. SIEGEL Director
- ---------------------------
(Eric B. Siegel)
/s/ STEPHEN WERTHEIMER Director
- ---------------------------
(Stephen Wertheimer)
/s/ CHARLES A. YAMARONE Director
- ---------------------------
(Charles A. Yamarone)
95