-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UfY3+kMNrQrqEqYGzPGZUCoN3TyEQIXpz6ZSEfhgh3EQ1AdKkVXUeEF5+48+5SGA LHBnvFu8OfFeByR1kVuScw== 0000930661-98-000619.txt : 19980330 0000930661-98-000619.hdr.sgml : 19980330 ACCESSION NUMBER: 0000930661-98-000619 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 20 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: EL PASO ELECTRIC CO /TX/ CENTRAL INDEX KEY: 0000031978 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 740607870 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-00296 FILM NUMBER: 98575876 BUSINESS ADDRESS: STREET 1: 303 N OREGON ST CITY: EL PASO STATE: TX ZIP: 79901 BUSINESS PHONE: 9155435711 10-K405 1 FORM 10-K (FYE 12-31-97) ================================================================================ 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, 1997 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____ TO ____ COMMISSION FILE NUMBER 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 ------------------- ----------------------------------------- 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. [X] AS OF MARCH 13, 1998, THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT WAS $399,107,460. AS OF MARCH 13, 1998, THERE WERE OUTSTANDING 60,276,784 SHARES OF COMMON STOCK, NO PAR VALUE. DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE 1998 ANNUAL MEETING OF ITS SHAREHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III OF THIS REPORT. ================================================================================ 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 United States Bankruptcy Court for the Western District of Texas, Austin Division, as Case No. 92-10148-FM CFE................................... Comision Federal de Electricidad de Mexico, the national electric utility of Mexico Common Plant or Common Facilities..... Facilities at or related to Palo Verde that are common to all three Palo Verde Units Company............................... El Paso Electric Company DOE................................... United States Department of Energy Effective Date........................ February 12, 1996, the date the Reorganization became effective FERC.................................. Federal Energy Regulatory Commission Four Corners.......................... Four Corners Generating Station Freeze Period......................... Ten-year period beginning August 2, 1995, during which base rates for most Texas retail customers are expected to remain frozen pursuant to the Rate Stipulation IID................................... Imperial Irrigation District, an irrigation district in Southern California KV.................................... Kilovolt(s) KW.................................... Kilowatt(s) KWH................................... Kilowatt-hour(s) 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 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 SPS................................... Southwestern Public Service Company Texas Commission...................... Public Utility Commission of Texas TNP................................... Texas-New Mexico Power Company (i) TABLE OF CONTENTS Item Description Page - ---- ----------- ---- PART I 1 Business............................................. 1 2 Properties........................................... 19 3 Legal Proceedings.................................... 19 4 Submission of Matters to a Vote of Security Holders.. 22 PART II 5 Market for Registrant's Common Equity and Related Stockholder Matters................................. 23 6 Selected Financial Data.............................. 25 7 Management's Discussion and Analysis of Financial Condition and Results of Operations................. 26 8 Financial Statements and Supplementary Data.......... 33 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................. 82 PART III 10 Directors and Executive Officers of the Registrant... 82 11 Executive Compensation............................... 82 12 Security Ownership of Certain Beneficial Owners and Management.......................................... 82 13 Certain Relationships and Related Transactions....... 82 PART IV 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................... 82 (ii) PART I ITEM 1. BUSINESS GENERAL El Paso Electric Company is a public utility engaged in the generation, transmission and distribution of electricity in an area of approximately 10,000 square miles in west Texas and southern New Mexico. The Company also serves wholesale customers in Texas, New Mexico, California and Mexico. The Company owns or has significant ownership interests in five electrical generating facilities providing it with a total capacity of approximately 1,500 MW. For the twelve months ended December 31, 1997, the Company's energy sources consisted of approximately 53% nuclear fuel, 34% natural gas, 6% coal and 7% purchased power. The Company serves approximately 284,000 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 58% and 8%, respectively, of the Company's revenues for the twelve months ended December 31, 1997). 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 February 23, 1998, the Company had approximately 1,100 employees, approximately 31% of whom are covered by a collective bargaining agreement that expires in June 2000. FACILITIES 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 from its Newman Power Station, 246 MW from its Rio Grande Power Station, 104 MW from Four Corners Units 4 and 5, and 68 MW from its Copper Power Station. PALO VERDE STATION The Company owns a 15.8% interest in each of the three 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, PNM, Southern California Public Power Authority, Salt River Project Agricultural Improvement and Power District and the Los Angeles Department of Water and Power. APS serves as operating agent for Palo Verde. The NRC has granted facility operating licenses and full power operating licenses for 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. 1 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 $7.3 million in 1997. The ANPP Participation Agreement provides that, if a participant fails to meet its payment obligations, each non- defaulting participant shall pay its proportionate share of the payments owed by the defaulting participant. Decommissioning. Pursuant to the ANPP Participation Agreement and federal law, the Company 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 determined periodically based upon engineering cost estimates performed by outside engineers retained by the ANPP. In December 1995, the Palo Verde Participants approved a decommissioning study performed by an outside engineering firm. The 1995 study determined that the Company will have to fund approximately $229 million (stated in 1995 dollars) to cover its share of decommissioning costs. The 1995 study assumed 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); (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 will be reduced from all spent fuel assemblies to the final core plus fuel assemblies from approximately three refuelings. See "Spent Fuel Storage" below. Cost estimates for decommissioning have increased with each study. The previous cost estimate from a 1993 study determined that the Company would have to fund approximately $221 million (stated in 1993 dollars). The 1993 estimate, however, reflected an 84% increase from the previous estimate made in 1989, primarily related to increases in estimated costs for low-level radioactive waste disposal. Although the 1995 study was based on the latest available information, there can be no assurance that decommissioning cost estimates will not continue to increase in the future or that regulatory requirements will not change. In addition, until a new low-level radioactive waste repository opens and operates for a number of years, estimates of the cost to dispose of low-level radioactive waste are subject to significant uncertainty. The decommissioning study is updated every three years and a new study will be completed in 1998. 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 Part II, 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, while less common than other types, has also been seen at other United States 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 2 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. Steam generator tubes in each of the Palo Verde units have 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. APS has determined that it will be economically desirable to replace the Unit 2 steam generators, which have been the most affected by tube cracking. In 1997, the Palo Verde Participants unanimously approved the purchase of one set of spare steam generators for delivery in May 2002. The Company's share of the cost is approximately $12.9 million. APS has indicated that in 1998 it will request that the participants approve installation of the spare generators in Unit 2 in 2003. The Company believes that such installation would require the unanimous approval of the Palo Verde Participants. The Company will continue to analyze 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 the Palo Verde Participants will agree to replace the Unit 2 steam generators. The costs for the construction and shipping of the spare steam generators are expected to be incurred between 1998 and 2002. Installation costs, if they are approved, would be expected to be incurred between 1999 and 2003, with the bulk of the expenditures after 2000. The Company's portion of total costs associated with construction and potential installation of new steam generators in Unit 2, including replacement power costs and costs that would otherwise have been expended through the operation and maintenance budget, is currently estimated not to exceed $36 million. APS has also stated that, based on the latest available data, it estimates that the steam generators in Units 1 and 3 should operate for their designated lives of 40 years (to 2025 and 2027, respectively). APS will reassess the expected lives of these steam generators periodically. The Rate Stipulation precludes the Company from seeking a rate increase in Texas during the Freeze Period to recover capital costs associated with such replacement of steam generators. 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 Part II, 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. 3 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. On January 16, 1998, the Department of the Interior announced that further scientific drilling had been approved for the Ward Valley site with testing to be performed by the federal government first, followed by testing by the State of California. No dates for the commencement of federal government testing have been established. Although Palo Verde is projected 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 when Arizona seeks to open its own waste repository. 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 three Palo Verde units through at least 1999. APS anticipates requesting approval from the NRC to use more of the space in the existing spent fuel storage facilities to extend the available storage capacity through 2001. Alternative on-site storage facilities are expected to be constructed by 2001 to supplement the existing facilities. Pursuant to the Nuclear Waste Policy Act of 1982, as amended in 1987 (the "Waste Act"), 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 accordance with the Waste Act, the DOE entered into a spent nuclear fuel contract with the Company and all other Palo Verde Participants. In November 1989, the DOE reported that its spent nuclear fuel disposal facilities would not be in operation until 2010. Subsequent judicial decisions required the DOE to start accepting spent nuclear fuel no later than January 31, 1998. The DOE did not meet that 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's 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. APS's recommendation is to establish an on-site facility initially capable of storing approximately one-fourth of the total amount of spent fuel expected to be produced by Palo Verde, utilizing a dual purpose (storage and transport) dry storage system. The facility will be designed to be expandable in phases to accommodate additional amounts of spent fuel as needed. This facility is planned to be completed by May 2001. In January 1997, the Texas Commission established a project to evaluate what, if any, action it should take with regard to payments made to the DOE for funding of the DOE's obligation to start accepting spent nuclear fuel by January 31, 1998. After receiving initial comments, no further action has been taken in the project. Liability and Insurance Matters. The Palo Verde Participants have public liability insurance against nuclear energy hazards up to the full limit of liability under federal law. The insurance consists of $200 million of primary liability insurance provided by commercial insurance carriers, with the balance being provided by an industry-wide retrospective assessment program, pursuant to which industry participants would be required to pay an assessment to cover any loss in excess of $200 million. 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 for all three units with an annual payment limitation of approximately $4.7 million. 4 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 which must first be applied to stabilization and decontamination. Finally, the Company has obtained insurance against a portion of any increased cost of generation or purchased power which may result from an accidental outage of any of the three Palo Verde units if the outage exceeds 23 weeks. NEWMAN POWER STATION The Company's Newman Power Station, located in El Paso, Texas, consists of four generating units with an aggregate capacity of 482 MW. The units operate primarily on natural gas, but can also operate on fuel oil. RIO GRANDE POWER STATION The Company's Rio Grande Power Station, located in Sunland Park, New Mexico, adjacent to El Paso, Texas, consists of three steam-electric generating units with an aggregate capacity of 246 MW. The units operate primarily on natural gas, but can also operate on fuel oil. FOUR CORNERS STATION The Company owns 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. See "Environmental Matters-Coal Mine Reclamation" below. COPPER POWER STATION The Company's Copper Power Station, located in El Paso, Texas, consists of a 68 MW combustion turbine used primarily to meet peak demands. The unit operates primarily on natural gas, but can also operate on fuel oil. The Company leases the combustion turbine and other generation equipment at the station under a lease that expires in July 2000, with renewal options for up to seven additional years. 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. 5 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 Corners, which 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 an undivided interest 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 SPS, providing the Company with access to power markets to the east. Issues Regarding Operation of Transmission System. As previously reported, the Company experienced four system-wide outages between September 1995 and March 1996. As a result of remedial actions begun in November 1995, however, the Company has not experienced a system outage since March 1996. The remedial actions included relay equipment replacements, transmission structure reconfigurations and implementation of load-shedding schemes designed to limit the extent of system instability under certain atypical conditions. The Company continues to import normal amounts of power over its transmission system and believes that it has identified and corrected the root causes of the outages to such a degree as to preclude, to the extent possible, similar future occurrences. 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, unforeseen expenses associated with compliance could have a material adverse effect on the future operations and financial condition of the Company. 6 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 and Missouri, which had been operated by PCB Treatment, Inc. ("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 by the Company to the Steering Committee and indemnifies the Company for any liabilities to other parties as may be asserted in the future. On September 16, 1997, the EPA sent the Company a "general notice of liability" wherein the agency formally notified the Company that it was considered a Potentially Responsible Party at the sites. The Company believes any liability it may face at the sites is covered by the settlement agreement. Accordingly, the Company immediately notified the Steering Committee and demanded it defend and indemnify the Company as provided in the settlement agreement. The Steering Committee informed the Company that it intends to honor this indemnity obligation. 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. The Company believes it 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 for Four Corners, is performing an analysis to establish an appropriate revised cost estimate. Based on preliminary estimates from APS and the coal provider, the Company recorded a liability of approximately $12 million in 1996 which reflects the present value of the estimated future costs of reclamation for its share of the coal mine reclamation obligation. 7 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 and purchases of new steam generators at Palo Verde. The Company's estimated cash construction costs for 1998 through 2001 are approximately $220 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) - ------------------------------------- ------------------------------------- 1998........................ $ 51 Production (1)............... $ 57 1999........................ 57 Transmission................. 22 2000........................ 56 Distribution................. 105 2001........................ 56 General...................... 36 ---- ---- Total..................... $220 Total........................ $220 ==== ====
- ------------------- (1) Does not include acquisition costs for nuclear fuel. See "Energy Sources--Nuclear Fuel." ENERGY SOURCES GENERAL The following table summarizes the percentage contribution of nuclear fuel, natural gas, coal and purchased power to the total KWH energy mix of the Company:
YEARS ENDED DECEMBER 31, -------------------------------------------- POWER SOURCE 1997 1996 1995 ------------ ------------ ------------ Nuclear Fuel............................................. 53% 53% 53% Natural Gas.............................................. 34 32 30 Coal..................................................... 6 7 9 Purchased Power.......................................... 7 8 8 ---- --- ---- 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" and "-New Mexico Rate Matters-Fuel." 8 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. The Company made spot purchases of uranium during 1997 to take advantage of low market prices. Additional spot purchases may 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. Nuclear Fuel Financing. Pursuant to the ANPP Participation Agreement, the Company owns an undivided interest in nuclear fuel purchased in connection with Palo Verde. The Company has available a $100 million credit facility that provides for working capital and up to $60 million for the financing of nuclear fuel. At December 31, 1997, approximately $52.0 million had been drawn to finance nuclear fuel. This financing is effected through a trust that borrows under the facility to acquire and process the nuclear fuel. The Company is obligated to repay the trust's borrowings, and has secured this obligation with First Mortgage Collateral Series Bonds. In the Company's financial statements, the assets and liabilities of the trust are reported as assets and liabilities of the Company. NATURAL GAS In 1997, 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 economical and reliable spot natural gas, the Company anticipates it will continue to purchase spot natural gas for a portion of the fuel needs for the Rio Grande Power Station for the near term. To complement the spot purchases in 1998, the Company has entered into a one-year fixed-price gas supply contract. In addition, the Company has entered into a partial-year gas supply contract (April through October 1998). 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 1997, natural gas for the Newman and Copper Power Stations was supplied pursuant to an intrastate natural gas contract which became effective January 1, 1997 and which expires December 31, 2001. To supplement this contract, the Company entered into a second natural gas supply agreement, 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. The Company, based upon information from the operating agent, 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 and operating reserves, the Company has a firm power purchase agreement with SPS for amounts ranging from 50 MW to 110 MW for 1998. 9 OPERATING STATISTICS
DECEMBER 31, ------------------------------------------------------- 1997 1996 (A) 1995 (B) ------------- ------------- ------------- Operating revenues (In thousands): Base revenues: Retail: Residential............................................... $ 146,412 $ 141,719 $ 128,295 Commercial and industrial, small.......................... 143,395 138,910 128,715 Commercial and industrial, large.......................... 45,581 43,483 40,870 Sales to public authorities............................... 64,328 65,534 59,613 ---------- ---------- ---------- Total retail............................................ 399,716 389,646 357,493 Wholesale sales for resale.................................. 59,263 71,254 74,557 ---------- ---------- ---------- Total base revenues..................................... 458,979 460,900 432,050 Fuel revenues and economy sales............................... 130,172 114,042 68,823 Other......................................................... 4,887 3,981 3,744 ---------- ---------- ---------- Total operating revenues................................ $ 594,038 $ 578,923 $ 504,617 ========== ========== ========== Number of customers (End of year): Residential................................................... 254,348 250,209 245,245 Commercial and industrial, small.............................. 25,900 25,304 24,615 Commercial and industrial, large.............................. 115 102 89 Other......................................................... 3,811 3,711 3,674 ---------- ---------- ---------- Total................................................... 284,174 279,326 273,623 ========== ========== ========== Average annual KWH use per residential customer................. 6,285 6,238 6,057 ========== ========== ========== Energy supplied, net, KWH (In thousands): Generated..................................................... 8,186,187 7,920,675 7,439,404 Purchased and interchanged.................................... 617,651 711,791 584,853 ---------- ---------- ---------- Total................................................... 8,803,838 8,632,466 8,024,257 ========== ========== ========== Energy sales, KWH (In thousands): Retail: Residential................................................. 1,587,733 1,545,274 1,473,349 Commercial and industrial, small............................ 1,834,953 1,779,986 1,754,176 Commercial and industrial, large............................ 1,271,449 1,216,941 1,121,329 Sales to public authorities................................. 1,090,312 1,110,706 1,068,048 ---------- ---------- ---------- 5,784,447 5,652,907 5,416,902 Wholesale: Sales for resale............................................ 1,897,885 1,753,553 1,646,357 Economy sales............................................... 640,017 757,999 538,102 ---------- ---------- ---------- Total sales............................................. 8,322,349 8,164,459 7,601,361 Losses and company use........................................ 481,489 468,007 422,896 ---------- ---------- ---------- Total................................................... 8,803,838 8,632,466 8,024,257 ========== ========== ========== Native system: Peak load, KW................................................. 1,122,000 1,105,000 1,088,000 Net generating capacity for peak, KW.......................... 1,500,000 1,500,000 1,500,000 Load factor................................................... 64.0% 63.4% 61.6% ========== ========== ========== Total system: Peak load, KW................................................. 1,442,000 1,387,000 1,374,000 Net generating capacity for peak, KW.......................... 1,500,000 1,500,000 1,500,000 Load factor................................................... 64.0% 64.2% 62.0% ========== ========== ==========
(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. 10 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 other activities of the Company. The decisions of the Texas Commission are subject to judicial review. Rate Stipulation and Agreed Order. The Company's rates for its Texas customers are governed by a rate order entered by the Texas Commission in Docket 12700 adopting a Rate Stipulation and Agreed Order entered into by the Company, the Texas Commission staff, the City of El Paso and virtually all other intervenors in the case. 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's base rates for most customers in Texas were fixed for the ten-year Freeze Period which began in August 1995; (ii) the City of El Paso granted the Company a new franchise that extends through the Freeze Period; (iii) the Company will retain 75% during the first five years of the Freeze Period and 50% during the remainder of the Freeze Period of (A) the net revenues generated by providing third-party transmission services and (B) profit margins from certain off-system power sales; (iv) the Company's reacquisition of the Palo Verde leased assets was deemed to be in the public interest; and (v) all appeals of Texas Commission orders concerning the Company and all outstanding Texas Commission dockets concerning the Company's rates were resolved. Neither the 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, and the right to pursue a reduction in rates below the freeze level to the extent of post-merger synergy savings. Fuel. Pursuant to Texas Commission rules, the Company periodically must make a filing reconciling the revenues collected from Texas customers under its fixed fuel factor with the fuel and purchased power expenses actually incurred for the period covered by the reconciliation. A fuel and purchased power reconciliation must include not less than twelve months nor more than thirty-six months of reconcilable data. The Company has not filed a reconciliation for any period since June 1995. 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 Texas Commission staff, local regulatory authorities such as the City of El Paso, and 11 customers are entitled to intervene in a fuel reconciliation proceeding and to challenge the recovery of fuel and purchased power expenses. Higher than expected natural gas prices were experienced in December 1996, continued in the first quarter of 1997 and remained at higher levels through the remainder of 1997 compared to 1996. These higher natural gas prices have increased the Company's underrecovered fuel costs, which will be reviewed in the next Texas fuel reconciliation. A significant disallowance of fuel costs in this reconciliation could have an adverse effect on the Company's financial results. In January 1998, the Company filed a request with the Texas Commission to increase its Texas fixed fuel factor and implement a surcharge, subject to reconciliation, of its underrecovered fuel costs. The Company entered into a stipulation with all parties to the docket to implement the surcharge and a new fixed fuel factor. Both the fixed fuel factor and surcharge are expected to go into effect in April 1998. Palo Verde Performance Standards. The Texas Commission has established performance standards for the operation of Palo Verde, pursuant to which each Palo Verde unit is evaluated annually to determine whether its three-year rolling average capacity factor entitles the Company to a reward or subjects it to a penalty. There are five performance bands based around a target capacity factor of 70%. The capacity factor is calculated as the ratio of actual generation to maximum possible generation. If the capacity factor, as measured on a station-wide basis for any consecutive 24-month period, should fall below 35%, the Texas Commission could reconsider the rate treatment of Palo Verde, regardless of the provisions of the Rate Stipulation. The removal of Palo Verde from rate base could have a significant negative impact on the Company's revenues and financial condition. For the three-year rolling average period ended December 31, 1997, Palo Verde Units 1, 2 and 3 achieved capacity factors of 83.75%, 83.04% and 88.70%, respectively. These capacity factors result in the Company's entitlement to a combined reward of $2.8 million pursuant to the formula established by the Texas Commission for the Palo Verde units. NEW MEXICO RATE MATTERS The New Mexico Commission has jurisdiction over the Company's rates and services in New Mexico and over certain other activities of the Company, including prior approval of the issuance, assumption or guarantee of securities. The New Mexico Commission's decisions are subject to judicial review. Current base rates in New Mexico were established in 1990 and have not increased since. 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. The largest city in the Company's New Mexico service territory is Las Cruces, which in 1997 accounted for 8% of the Company's total revenue. See Item 3, "Legal Proceedings-Litigation with Las Cruces." 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 with the New Mexico Commission all of the rate filing package data required by the Commission's order. 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 New Mexico Commission could order a rate reduction or, alternatively, in response to economic factors and regulatory, political and competitive pressures, the Company could agree to a rate reduction as part of an overall settlement of all issues in New Mexico. Prosecution of the rate case before the New Mexico 12 Commission is expected to be completed before the end of 1998. The Company is unable at this time to predict the outcome of this proceeding. Fuel. The Company is required to make annual filings with the New Mexico Commission to reconcile the revenues collected under its fixed fuel factor with its fuel and purchased power expenses actually incurred, and to report the results of Palo Verde performance standards. These reports are due by January 31 of each year for the preceding calendar year, and are filed along with the Company's request to revise its fixed fuel factor to reflect current projections of fuel and purchased power costs and to include the over or underrecovery reflected in the reconciliation report and the reward or penalty reflected in the performance standards report. On October 31, 1997, the Company filed testimony and evidence supporting its continued use of the methodology and manner of collecting fuel and purchased power costs reflected in its tariffs. A hearing on this filing is scheduled for July 1998. The Company's 1998 annual filing reflects a significant increase in the monthly fuel charge. This increase is necessary because of (i) significant increases in the spot price of natural gas and (ii) the delayed implementation of the 1997 change, effective with bills rendered on or after August 1, 1997, which has caused the Company to underrecover its fuel costs in New Mexico by approximately $5.3 million for the year ended December 31, 1997. The recovery of this amount, coupled with continued higher gas costs for 1998, results in an increase in the proposed 1998 fixed fuel factor of approximately 24% over the present factor. The Company believes it has fully justified its fuel and purchased power costs and recovery methodology. In March 1998, the New Mexico Commission consolidated the 1998 annual filing and the October 1997 filing for hearing in July 1998. There can be no assurance that the New Mexico Commission will accept the Company's proposed fixed fuel factor. As in Texas, interested parties are allowed to intervene and challenge the recoverability of fuel expenses. A significant disallowance of fuel costs could have an 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 reward or subjects it to a penalty. There are five performance bands based around a target capacity factor of 67.5%. Because Unit 3 is not included in the Company's New Mexico rate base, any penalty or reward calculated on a total station basis is limited to two-thirds of such penalty or reward. 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 Units 1 and 2. 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, 1997, the Palo Verde station capacity factor was 88.43%. This capacity factor results in the Company's entitlement to a reward of $1.1 million, pursuant to the formula established by the New Mexico Commission for the Palo Verde units. 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 13 generally provides for level sales prices over the life of the agreement. The Company also 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) (the "Open Access Case"), in compliance with FERC 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 of 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 rate issues related to the Open Access Case. 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 one of the wholesale power marketers that submitted a bid in 1996 to the CFE. See "Department of Energy" below. Intervenors in the Open Access Case also raised certain issues relating to the criteria by which the Company will determine the amount of transmission capacity that is available for use by third parties desiring to use its transmission system. Hearings related to these issues were conducted before a FERC administrative law judge in January 1998. A final decision from the FERC on these issues is not expected until the fourth quarter of 1998. The Company does not expect a material financial impact to result from a FERC ruling. In July 1996, Las Cruces exercised its right under Order No. 888 to request that the Company calculate Las Cruces' stranded cost obligation should it leave the Company's system and operate its own municipal utility. For a discussion of this proceeding, see Item 3, "Legal Proceedings-Litigation with Las Cruces." Department of Energy. The DOE 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's uranium enrichment facilities and for the ultimate costs of disposal of spent nuclear fuel. See "Facilities-Palo Verde Station-Spent Fuel Storage." In September 1996, one of the wholesale power marketers that submitted a bid in 1996 to the CFE in connection with renewal of the interchange agreement for the supply of power during 1997 to Ciudad Juarez, Mexico, filed a complaint against the Company with the FERC. The complaint sought emergency relief and requested the FERC to direct the Company to enter into an agreement to provide firm point-to-point transmission service to the CFE under the Company's open access transmission tariff. In October 1996, the FERC issued an order requiring the Company to provide point-to-point transmission service over the Company's transmission system to substation facilities near the United States/Mexico 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. The DOE subsequently issued a Notice of Delegation and Assignment which delegated 14 to the FERC the DOE's authority to carry out its duties in this case. The FERC has docketed the Delegation and Assignment and the process is expected to continue throughout 1998. 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 term of the Company's previous one-year 1997 sales agreement for firm capacity and associated energy to the CFE terminated December 31, 1997. Pursuant to a bidding process, the Company was selected by the CFE to provide varying amounts of power during 1998 ranging from 90 to 200 MW. The price is stable throughout the twelve-month term of the agreement and includes charges for capacity and energy as well as transmission and any required ancillary services. Under the new agreement, the Company's revenues in 1998 related to power sales to the CFE are expected to be similar to 1997 revenues. There can be no assurance that the CFE will remain a customer after 1998. The agreement requires payment in United States dollars. 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 and state legislation, regulatory initiatives, and proposed initiatives in Texas and New Mexico encourage competition in the industry, and ultimately in the Company's service area. 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 could 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 national and regional averages. In the face of increased competition, there can be no assurance that the future operations, cash flows and financial condition of the Company will not be adversely affected, 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 "stranded costs," or 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. There is substantial discussion and debate on this issue on both a national and state level and, 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 commissions and legislatures are engaged in various activities which are attempting to address the issue of stranded cost recovery from customers subject to their jurisdictions. FERC. In April 1996, the FERC issued its Order No. 888, requiring all public utilities owning, operating or controlling facilities used for transmitting electricity in interstate commerce to (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 15 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 transmission users access to transmission-related information on a basis consistent with that available to a utility's employees engaged in the buying and selling of power. Order No. 889 further requires public utilities to separate their transmission and generation marketing functions and adopt standards of conduct ensuring that all open access transmission customers are treated in a non-discriminatory manner. Texas. During 1996, the Texas Commission conducted projects to evaluate the (i) scope of competition in the electric industry in Texas and (ii) potential stranded investment, procedures for allocating stranded costs, and acceptable methods of stranded cost recovery. The Texas Commission's report, which was issued in January 1997, recommended a careful and deliberate approach to continued expansion of competition in the Texas electric market, ultimately leading to retail competition with certain safeguards, and recommended against any legislation that would introduce broad-based retail competition before 2000. The Texas Commission also quantified the potential retail "excess of cost over market" ("ECOM") under several scenarios. In February 1998, the Texas Commission requested all Texas utilities to revise the ECOM estimates based on certain updated assumptions. Using the Texas Commission's revised model inputs, the Company's revised ECOM estimates range from a high of $1.5 billion to a low of $843 million, with an expected value of $1.2 billion, assuming full retail access in 1999. Although several pieces of legislation were offered during the 1997 Texas legislative session, no significant deregulation legislation was passed. In August 1997, the Lieutenant Governor appointed seven senators to serve on a special interim committee to study the various issues involved in a possible transition to a competitive electric market. The committee is receiving testimony from various parties, including environmental advocates, consumer advocates, power marketers, public power entities, electric cooperatives and investor-owned utilities, as well as testimony and comments from the public at large, and is holding public hearings across the state on various aspects of the electric industry restructuring debate. The Association of Electric Companies of Texas (the "AECT") testified on behalf of all investor-owned utilities in Texas, including the Company. The AECT testified that it would support retail competition that provides benefits to all consumers, maintains electric system reliability, provides for equitable treatment of all competitors and provides for the preservation of prior regulatory commitments. The committee is expected to file a final report in late 1998. Recently, the Lieutenant Governor asked the Texas Comptroller of Public Accounts to initiate a study to review the impact of a deregulated electric market on state and local tax systems. 16 New Mexico. In 1995, the New Mexico Commission initiated a notice of inquiry regarding competition and the restructuring of regulation of the electric industry. 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. The New Mexico Commission also commenced a collaborative process with the assistance of facilitators in an attempt to reach consensus. Although that collaborative process failed to reach a consensus around which restructuring legislation could be drafted, the New Mexico investor-owned utilities, including the Company, have agreed to support legislation that would permit retail competition provided: (i) all customers have the opportunity to benefit, (ii) reliability of electric service is maintained, (iii) all energy suppliers are subject to the same laws and regulations, (iv) the price of electric generating capacity and electric energy is determined solely by market forces, (v) unbundled transmission and distribution functions remain subject to regulation, and (vi) each electric utility must have a reasonable opportunity to recover its stranded costs. The 1998 legislative session concluded without the passage of any significant deregulation legislation. REORGANIZATION UNDER CHAPTER 11 OF THE UNITED STATES BANKRUPTCY CODE 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 $212 million cash and newly issued debt and equity securities of the Reorganized Company consisting of $1,189 million of long-term bonds and financing and capital lease obligations, $100 million of redeemable preferred stock and $255 million of common stock. Under the Plan, all of the Predecessor Company's common and preferred stock was canceled and the holders of such securities received approximately $45 million (15%) of the Reorganized Company's common stock and the right to receive certain potential litigation recoveries which ultimately amounted to $20 million. In addition, on the Effective Date, the Palo Verde Leases were terminated and the Company reacquired such interests. See Part II, Item 8, "Financial Statements and Supplementary Data-Note H of Notes to Financial Statements." The Reorganized Company's financial statements for periods after February 12, 1996 are not comparable to the Predecessor Company's financial statements for periods before February 12, 1996. A vertical line is shown in the accompanying selected financial data and financial statements to separate the Reorganized Company from the Predecessor Company because the respective financial information has not been prepared on a consistent basis of accounting. 17
EXECUTIVE OFFICERS OF THE COMPANY Current Position and Name Age Business Experience ---- --- --------------------- James S. Haines..................... 51 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................ 42 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...................... 47 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................... 42 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..................... 43 Vice President, Chief Financial Officer and Treasurer since August 1996; Treasurer since March 1996; Vice President - Financial Planning and Rate Administration from September 1990 to August 1996. John C. Horne....................... 49 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.................... 51 Vice President - New Mexico Affairs since December 1997; Vice President - Public Affairs and Marketing from August 1996 to December 1997; Vice President - New Mexico Division from December 1989 to August 1996. Terry Bassham....................... 37 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. Guillermo Silva, Jr................. 44 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. 18 ITEM 2. PROPERTIES The principal properties of the Company are described in Item 1, "Business," and such descriptions are incorporated herein by reference. Transmission lines are located either on private rights-of-way, easements or on streets or highways by public consent. See Part II, Item 8, "Financial Statements and Supplementary Data-Note F of Notes to Financial Statements" for information regarding encumbrances against the principal properties of the Company. ITEM 3. LEGAL PROCEEDINGS LITIGATION WITH LAS CRUCES Las Cruces is attempting to replace the Company as the electric service provider in Las Cruces by acquiring, through condemnation or a negotiated purchase, the distribution assets and other facilities used to provide electric service to customers in Las Cruces. Sales to customers in Las Cruces represent approximately 8% of the Company's operating revenues. In April 1995, Las Cruces filed a complaint against the Company in New Mexico state court, 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. In May 1995, the Company removed the case to federal district court in New Mexico. Following a trial on the merits, the Federal Magistrate granted the Company's motion to certify to the New Mexico Supreme Court the question of 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. Prior to a ruling by the New Mexico Supreme Court, the New Mexico legislature enacted a bill which purports to give Las Cruces the authority to condemn the Company's distribution system within its city limits and a territory extending five miles beyond the municipal boundary. On February 11, 1998, the New Mexico Supreme Court ruled that the subsequent legislation rendered moot the certified question before the Supreme Court. On February 26, 1998, the Company received notice from Las Cruces of its intent to file a condemnation action in New Mexico district court. At this time the Company is unable to predict the outcome of this litigation. 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 be entitled to receive "just compensation" as established by the court under New Mexico law. "Just compensation" is generally defined as the amount of money that would fairly compensate the party whose property is condemned. It is the Company's opinion that 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. See Item 1, "Business-Regulation-Federal Regulatory Matters" for a full discussion of stranded costs. Las Cruces has taken several actions to position itself to acquire portions of the Company's distribution system and certain related facilities. 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 sold approximately $73 million in revenue bonds in October 1995 to provide funding to finance the acquisition by condemnation or 19 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. In addition, the New Mexico Commission is investigating the agreement between SPS and Las Cruces which, under certain circumstances, would grant Las Cruces an option to sell to SPS electric utility assets acquired through condemnation. 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 as those imposed on 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 Company filed an appeal with the New Mexico Court of Appeals and Las Cruces requested an expedited ruling from the Court of Appeals. In August 1997, the New Mexico Court of Appeals certified to the New Mexico Supreme Court the issues related to Las Cruces' authority to issue the revenue bonds. Oral argument before the Supreme Court was held in November 1997. In July 1996, Las Cruces exercised its right under Order No. 888 to request that the Company calculate Las Cruces' stranded cost obligation should it leave the Company's system and operate its own municipal utility. The Company's initial non-binding calculation was provided within the statutory period. Las Cruces subsequently filed a request at the FERC for a determination that Las Cruces would have no stranded cost obligation to the Company or, in the alternative, that the FERC convene a hearing to establish the amount of any stranded costs. In August 1997, the FERC issued an order denying Las Cruces' request for a determination that Las Cruces would have no stranded cost obligation, and providing for evidentiary hearings on the following stranded costs issues: (i) whether the Company has met the "reasonable expectation" standard so as to justify recovery of stranded costs from Las Cruces; and (ii) if so, the amount of stranded costs that the Company may recover from Las Cruces. The Company filed testimony in support of its recovery and calculation of stranded costs, calculated pursuant to the FERC formula. After removal of all distribution and transmission related expenses, the Company's testimony reflects a generation stranded cost request of approximately $101 million. In November 1997, Las Cruces filed testimony which takes the position that the Company is entitled to stranded costs in the range of $0 to $19 million. On December 19, 1997, the FERC staff filed testimony estimating the Company's stranded cost to be $29.4 million. Hearings of all issues were conducted at the FERC in February 1998. A final decision from the FERC is not expected before late 1998 or early 1999. In April 1997, Las Cruces announced its plan to build a substation and distribution lines to serve a new customer in a city-owned industrial park. Las Cruces stated that SPS would construct, operate and maintain the new substation facility, and that the rates for this new customer would be significantly lower than the Company's current rates. Las Cruces has approved a contract with SPS to provide operation and maintenance services for the proposed Las Cruces electric distribution system, substations and associated transmission facilities. 20 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. A negotiated settlement of the Company's pending rate case in New Mexico could include a reduction in rates and settlement of all issues in New Mexico, which would be likely to create increased political and economic pressure on the Company to reduce rates in Texas. The Company is unable to predict the outcome of Las Cruces' 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. 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 stay the proceedings indefinitely so the parties may attempt to resolve the dispute without litigation. This matter remains inactive and the Company is unable to predict the outcome of this case. WATER CASES San Juan River System. The Four Corners participants are among the defendants in a suit filed by the State of New Mexico in 1975 in state district court in New Mexico against the United States of America, the City of Farmington, New Mexico, the Secretary of the Interior as Trustee for the Navajo Nation and other Indian tribes and certain other defendants (State of New Mexico ex rel. S. E. Reynolds, New Mexico State Engineer v. United States of America, et al., Eleventh Judicial District Court, County of San Juan, State of New Mexico, Cause No. 75-184). The suit seeks adjudication of the water rights of the San Juan River Stream System in New Mexico, which, among other things, supplies the water used at Four Corners. An agreement reached with the Navajo Nation in 1985 provides that if Four Corners loses a portion of its water rights in the adjudication, the tribe will provide sufficient water from its allocation to offset the loss. The case has been inactive for many years and the Company is unable to predict the outcome of this case. Gila River System. In connection with the construction and operation of Palo Verde, APS entered into contracts with certain municipalities granting APS the right to purchase effluent for cooling purposes at Palo Verde. In 1986, a summons was served on APS that required all water claimants in the Lower Gila River Watershed in Arizona to assert any claims to water in an action pending in Maricopa County Superior Court, titled In re The General Adjudication of All Rights to Use Water in the Gila River System and Source. Palo Verde is located within the geographic area subject to the summons and the rights of the 21 Palo Verde Participants to the use of groundwater and effluent at Palo Verde is potentially at issue in this action. APS, as operating agent, filed claims that dispute the Court's jurisdiction over the Palo Verde Participants' groundwater rights and their contractual rights to effluent relating to Palo Verde and, alternatively, seek confirmation of such rights. In December 1992, the Arizona Supreme Court heard oral argument on certain issues in this matter that are pending on interlocutory appeal. Issues important to the Palo Verde Participants' claims were remanded to the trial court for further action and the trial court certified its decision for another interlocutory appeal to the Arizona Supreme Court. The Arizona Supreme Court will hear argument on these issues in October 1998 and subsequently render a decision. The Company is unable to predict the outcome of this case. OTHER LEGAL PROCEEDINGS The Company is a party to various other claims, legal actions and complaints. In many of these matters, the Company has excess casualty liability insurance which is applicable. Based upon a review of these claims and applicable insurance coverage, the Company believes that none of these claims will have a material adverse effect on the operations, financial position or cash flows of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 22 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's common stock 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 --------- ----------- 1997 - ---- First Quarter................................ $7 15/16 $5 7/8 Second Quarter............................... 7 5/8 5 1/2 Third Quarter................................ 7 1/16 5 13/16 Fourth Quarter............................... 7 1/2 5 1/2 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 17, 1998, there were 6,141 holders of record 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 by the financing arrangements entered into pursuant to the Reorganization. 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. Pursuant to the First and Second Supplemental Indentures, so long as the Company's First Mortgage Bonds, 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 with respect to 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 contained in the First and Second Supplemental 23 Indentures on the declaration of dividends would apply to the Company. In addition to the restriction contained in the mortgage indenture, the credit agreement for the working capital and fuel financing facility limits 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. 24 ITEM 6. SELECTED FINANCIAL DATA As of and for the following periods (In thousands except for share data):
PERIOD FROM | PERIOD FROM YEAR FEBRUARY 12 | JANUARY ENDED TO | TO DECEMBER 31, DECEMBER 31, | FEBRUARY 11, YEARS ENDED DECEMBER 31, | -------------------------------------- 1997 1996 | 1996 1995 1994 1993 ------------ ------------ | ----------- ------------- ------------ --------- | Operating revenues.......................... $ 594,038 $ 523,974 | $ 54,949 $ 504,617 $ 536,760 $ 543,594 Operating income............................ 161,667 144,491 | 1,639 49,874 54,997 57,035 Income (loss) before extraordinary items | and cumulative effect of a change | in accounting principle.................... 54,568 41,919 | 118,198 (33,319) (28,153) (41,855) Extraordinary loss on repurchases of debt, | net of federal income tax benefit.......... (2,775) - | - - - - 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...................................... 38,649 31,431 | 382,471 (33,319) (28,153) (137,899) Basic earnings per common share: | Income (loss) before extraordinary items | and cumulative effect of a change in | accounting principle...................... 0.689 0.523 | 3.325 (0.937) (0.792) (1.178) Extraordinary loss on repurchases of debt, | net of federal income tax benefit......... (0.046) - | - - - - Extraordinary gain on discharge of debt.... - - | 7.435 - - - Cumulative effect of a change in | accounting principle...................... - - | - - - (2.702)(1) | Net income (loss).......................... 0.643 0.523 | 10.760 (0.937) (0.792) (3.880) Weighted average number of common | shares outstanding......................... 60,128,505 60,073,808 | 35,544,330 35,544,330 35,544,330 35,539,480 Diluted earnings per common share: | Income (loss) before extraordinary items | and cumulative effect of a change in | accounting principle...................... 0.685 0.523 | 3.325 (0.937) (0.792) (1.178) Extraordinary loss on repurchases of debt, | net of federal income tax benefit......... (0.046) - | - - - - Extraordinary gain on discharge of debt.... - - | 7.435 - - - Cumulative effect of a change in | accounting principle...................... - - | - - - (2.702)(1) | Net income (loss).......................... 0.639 0.523 | 10.760 (0.937) (0.792) (3.880) Weighted average number of common shares | and common share equivalents outstanding... 60,437,632 60,116,709 | 35,544,330 35,544,330 35,544,330 35,539,480 Additions to utility plant.................. 75,431 53,346 | 8,176 87,937 59,976 57,806 Total assets................................ 1,812,613 1,846,190 1,910,354 | 1,809,891 1,730,851 1,715,406 Long-term debt and financing and capital | lease obligations.......................... 966,810 1,046,173 1,164,328 | - - - Debt and obligations subject to compromise.. - - - | 1,608,091 1,537,303 1,495,315 Preferred stock............................. 121,319 108,426 100,000 | 81,464 81,464 81,464 Common stock equity (deficit)............... 369,640 331,257 300,000 | (418,763) (385,966) (357,463) ========= ========= ======== | ========= ========= =========
_______________ (1) Reflects the change in accounting for income taxes due to the implementation of SFAS No. 109, "Accounting for Income Taxes." The selected financial data should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Item 8, "Financial Statements and Supplementary Data." 25 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statements in this document, other than statements of historical information, are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, as well as other oral and written forward-looking statements made by or on behalf of the Company from time to time, including statements contained in the Company's filings with the Securities and Exchange Commission and its reports to 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. During the Freeze Period, the Company's strategic goals include (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) enhancing long-term relationships with its largest retail customers; (iv) continuing to reduce operating costs; and (v) developing an energy-related services business. 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 possible 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 December 1996 and the first quarter of 1997, rapid escalation in natural gas prices 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 have, in varying degrees, additional alternate sources of economical 26 power, including co-generation of electric power. For example, a 504 MW combined-cycle generating plant located in Samalayuca, Chihuahua, which is scheduled to be fully operational by the end of 1998, will give the CFE the current capacity to supply electricity to portions of northern Chihuahua, including the geographic area currently served by the Company. 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. The New Mexico State Legislature has passed legislation which gives Las Cruces the apparent legal authority to condemn the Company's distribution system and related assets located within its city limits, and the Company has received notice from Las Cruces of its intent to file an eminent domain proceeding. 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 Part I, Item 3, "Legal Proceedings-Litigation with Las Cruces." 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 $19.6 million or 3% of operating revenues for the year ended December 31, 1997. The Company signed a new contract with Ft. Bliss in August 1996, under which Ft. Bliss will take service from the Company through 1999, with the right thereafter to continue service on a year-to-year basis for an additional two years. The Company has a contract to provide retail electric service to Holloman for a ten-year term which began in December 1995. In August 1996, the Army advised the Company White Sands would continue to purchase retail electric service from the Company pursuant to the existing retail service contract for an indefinite period. The Army will provide the Company written notice of termination of such contract 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 in March 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 New Mexico Commission could, after hearing, order a rate reduction or, alternatively, in response to regulatory, political and competitive pressures, the Company could agree to a rate reduction as part of an overall settlement of all issues in New Mexico, which would be likely to create increased political and economic pressure on the Company to reduce rates in Texas. Prosecution of the case before the New Mexico Commission is expected to be completed in 1998. The Company is unable at this time to predict with certainty the outcome of this proceeding currently pending before the New Mexico Commission. See Part I, Item 1, "Business-Regulation-New Mexico Rate Matters." The Company faces the same concerns as most other companies that use computers relating to the Year 2000 problem. The problem is that many computer applications do not correctly differentiate a one year difference between the years 1999 and 2000. Applications that are date sensitive may not properly calculate information or may not function. The Company began working on the Year 2000 computer concern during the last quarter of 1996 and is attempting to either revise current computer systems to be Year 2000 compliant, or replace 27 systems with new ones that are Year 2000 compliant by the end of 1998, to allow adequate time for additional testing and correction. Incremental costs of the project are anticipated to be immaterial as the Company is using internal resources to modify and test programs. The Company anticipates spending approximately $1.8 million on this project and is expensing such amount as incurred over the life of the project. Because of the integrated nature of the Company's business with other utilities and its joint facilities operated by other utilities, the Company is inquiring about and reviewing the activities of the other utilities which comprise the integrated system. In addition, the Company is inquiring about and reviewing the activities of its financial institutions and major suppliers to determine their compliance with Year 2000 issues. Given the complex nature of this problem and the potential overlap with systems beyond the Company's control, the Company cannot assure that it will not experience some difficulty relating to the Year 2000 problem. 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 have conducted proceedings related to industry restructuring and stranded cost recovery; however, restructuring legislation has yet to be passed in either state. See Part I, Item 1, "Business-Regulation-Recent Changes in Utility Regulation." 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 interest payments 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. Long-term capital requirements of the Company will consist primarily of 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, 1997, the Company had approximately $111.2 million in cash and cash equivalents. 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 28 December 31, 1997, approximately $52.0 million had been drawn for nuclear fuel purchases. No amounts have been drawn on this facility for working capital needs. The Company has a high debt to capitalization ratio and significant debt service obligations. Due to the Rate Stipulation and competitive pressures, the Company does not expect to be able to raise its base rates in the event of increases in non-fuel costs or loss of revenues. Accordingly, soon after its emergence from bankruptcy, the Company established debt reduction as a high priority in order to gain additional financial flexibility to address the evolving competitive market. The Company has significantly reduced its long-term debt following the Reorganization. From June 1, 1996 through March 18, 1998, the Company repurchased approximately $230.3 million of first mortgage bonds as part of an aggressive deleveraging program and has reduced its annual interest expense by approximately $17.9 million. Long-term indebtedness as a percentage of capitalization was reduced from 74% at June 30, 1996 to 66% at December 31, 1997. The Company continues to believe that the orderly reduction of debt with a goal of achieving a capital structure that is more typical in the electric utility industry and, ultimately, an investment grade rating, is a significant component of long-term shareholder value creation. Accordingly, the Company will regularly evaluate market conditions and, when appropriate, use a portion of its available cash to reduce its fixed obligations through open market purchases of first mortgage bonds. However, the significant amount of debt reduction that the Company has achieved since the Reorganization, and the need for cash both to meet upcoming bond maturities and, if appropriate, to redeem early the Series A Preferred Stock, may result in a lower volume of repurchases in the future. Accordingly, the Company may experience a net increase in cash as it evaluates the comparative economic value of using excess cash for purposes other than open market purchases of its first mortgage bonds. The degree to which the Company is leveraged could have important consequences on the Company's liquidity, including (i) the Company's ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate or other purposes could be limited in the 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 and, if appropriate, the early redemption of its Series A Preferred Stock; and (iii) the Company's substantial leverage may place the Company at a competitive disadvantage by limiting its financial flexibility to respond to the demands of the competitive market and make it more vulnerable to adverse economic or business changes. HISTORICAL RESULTS OF OPERATIONS Financial comparisons herein for the years ended December 31, 1997, 1996 and 1995 are based on the results of operations of the Reorganized Company for the year ended December 31, 1997, combined results of the Reorganized Company for the period February 12, 1996 to December 31, 1996 and the Predecessor Company for the period January 1, 1996 to February 11, 1996, and results of the Predecessor Company for the year ended December 31, 1995. Net income applicable to common stock before extraordinary item in 1997 was approximately $41.4 million, or $0.69 per diluted common share, compared with combined net income applicable to common stock before reorganization items and extraordinary item of $27.4 million for the same period a 29 year ago, and net loss before reorganization items of $23.3 million, or $0.66 per diluted common share in 1995. Operating revenues net of energy expenses increased $4.7 million in 1997 compared to 1996, primarily due to increased KWH sales, partially offset by reduced revenue per KWH from the CFE. Operating revenues net of energy expenses increased $43.8 million in 1996 compared to 1995, primarily due to an increase in Texas base rates associated with the implementation of the Rate Stipulation and increased KWH sales. Comparisons of KWH sales and operating revenues are shown below (In thousands):
INCREASE/(DECREASE) ------------------------- YEARS ENDED DECEMBER 31: 1997 1996 AMOUNT PERCENT - ------------------------ ---- ---- --------- ----------- Electric KWH Sales: Retail Customers..................... 5,784,447 5,652,907 131,540 2.3% Other Utilities...................... 1,897,885 1,753,553 144,332 8.2 ---------- ---------- ----------- Total............................... 7,682,332 7,406,460 275,872 3.7 ========== ========== =========== Operating Revenues: Retail Customers..................... $ 497,868 $ 471,824 $ 26,044 5.5% Other Utilities...................... 96,170 107,099 (10,929) (10.2) ---------- ---------- ----------- Total............................... $ 594,038 $ 578,923 $ 15,115 2.6 ========== ========== =========== INCREASE/(DECREASE) ------------------------ YEARS ENDED DECEMBER 31: 1996 1995 AMOUNT PERCENT - ------------------------ ---- ---- --------- ----------- Electric KWH Sales: Retail Customers..................... 5,652,907 5,416,902 236,005 4.4% Other Utilities...................... 1,753,553 1,646,357 107,196 6.5 ---------- ---------- ----------- Total............................... 7,406,460 7,063,259 343,201 4.9 ========== ========== =========== Operating Revenues: Retail Customers..................... $ 471,824 $ 405,316 $ 66,508 16.4% Other Utilities...................... 107,099 99,301 7,798 7.9 ---------- ---------- ----------- Total............................... $ 578,923 $ 504,617 $ 74,306 14.7 ========== ========== ===========
Other operations and maintenance expense decreased $12.0 million in 1997 compared to 1996, and $73.1 million in 1996 compared to 1995. The decreases were primarily the result of a reduction in Palo Verde costs of approximately $8.7 million and $67.3 million, respectively, due to the lease accruals by the Predecessor Company, with no corresponding accrual by the Reorganized Company as a result of the reacquisition of the leased portion of Palo Verde in the Reorganization. Depreciation expense increased $2.4 million to $88.7 million in 1997 compared to $86.3 million in 1996. The effect of an increase in depreciable plant following the reacquisition in the Reorganization of a portion of Palo Verde and the depreciation of such amounts over the period of the Rate Stipulation 30 was partially offset by the decrease in the book value of depreciable plant from fresh-start reporting adjustments. Combined depreciation expense increased $29.5 million to $86.3 million in 1996 compared to $56.8 million in 1995. The effect of an increase in depreciable plant following the reacquistion 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 reporting 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, which was 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. Taxes other than income taxes decreased $1.2 million in 1997 compared to 1996 and $9.0 million in 1996 compared to 1995, due to reduced Arizona property taxes. The decreases in Arizona property taxes resulted from a decrease in taxable nuclear plant based on plant reductions on the Company's regulatory books in 1997 and a new state property tax law which reduced the Company's property taxes by approximately $8.8 million in 1996. Other income increased $3.8 million in 1997 compared to 1996 due to the favorable litigation settlement in 1997 of $7.5 million, net of legal fees and expenses, partially offset by a gain on sale of investment of $3.8 million and an additional $2.3 million due to favorable settlement of bankruptcy professional fees in 1996. There was no comparable activity in 1995. Also, in 1996, investment income was classified as Other Income, whereas investment income in 1995 was included in Reorganization Items (Expense) for the Predecessor Company. Investment income decreased $6.9 million in 1996 compared to 1995 due to reduced levels of cash resulting from repurchases of debt and the payment of bankruptcy-related claims. Interest charges decreased $8.9 million in 1997 compared to 1996, primarily due to a reduction in outstanding debt as a result of open market purchases of the Company's first mortgage bonds and the extinguishment of certain debt in conjunction with the Reorganization. Interest charges increased $7.2 million in 1996 compared to 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 increased 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. Income tax expense, excluding income tax benefits of $1.5 million related to the loss on repurchases of debt, increased $11.5 million in 1997 compared to 1996, primarily due to changes in pre-tax income, including a favorable litigation settlement and certain permanent differences. Income tax expense, excluding the deferred income tax effects of fresh-start reporting, reorganization items and income taxes on interest income during bankruptcy, increased $39.1 million in 1996 compared to 1995, primarily due to changes in pre-tax income and certain differences in book and taxable income. The reorganization items benefit recorded by the Predecessor Company upon the emergence from bankruptcy consisted of the effects of the Rate Stipulation and deferred income tax benefits related to the Reorganization. These benefits were partially offset by (i) the adjustments of assets to their 31 reorganization value and liabilities to their fair market values; (ii) provisions for settlement of claims; and (iii) professional fees and other expenses. There were no comparable amounts in 1997. Extraordinary loss on repurchases of debt represents the payment of premiums on debt repurchased and the recognition of unamortized issuance expenses on that debt of $2.8 million, net of federal income tax benefits of $1.5 million, with no comparable amounts in 1996. Extraordinary gain on discharge of debt for the Predecessor Company for the period January 1, 1996 to February 11, 1996 consisted of forgiven indebtedness upon the Reorganization, primarily related to the extinguishment of Palo Verde lease obligations with no comparable amounts in 1997. For the last several years, inflation has been relatively low and, therefore, has had little impact on the Company's results of operations and financial condition. In 1997, the Company implemented SFAS No. 128, "Earnings Per Share," SFAS No. 129, "Disclosure of Information about Capital Structure," and SFAS No. 130, "Reporting Comprehensive Income," none of which had a material effect on the Company's financial statements. See Item 8, "Financial Statements and Supplementary Data-Note A of Notes to Financial Statements." There are no new accounting standards pending implementation by the Company which would have a material effect on the Company's financial statements. 32 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
PAGE ------ Independent Auditors' Report................................................................. 35 Balance Sheets at December 31, 1997 and 1996................................................. 36 Statements of Operations for the year ended December 31, 1997, the period from February 12 to December 31, 1996, the period from January 1 to February 11, 1996 and the year ended December 31, 1995........................................................................... 38 Statements of Comprehensive Operations for the year ended December 31, 1997, the period from February 12 to December 31, 1996, the period from January 1 to February 11, 1996 and the year ended December 31, 1995................................................................ 39 Statements of Changes in Common Stock Equity (Deficit) for the year ended December 31, 1995, the period from January 1 to February 11, 1996, the period from February 12 to December 31, 1996 and the year ended December 31, 1997................................................... 40 Statements of Cash Flows for the year ended December 31, 1997, the period from February 12 to December 31, 1996, the period from January 1 to February 11, 1996 and the year ended December 31, 1995........................................................................... 41 Notes to Financial Statements................................................................ 42
33 This page left blank intentionally. 34 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, 1997 and 1996 and the related statements of operations, comprehensive operations, changes in common stock equity (deficit), and cash flows for the year ended December 31, 1997, the period February 12, 1996 to December 31, 1996, the period January 1, 1996 to February 11, 1996, and the year 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. As discussed in Note A 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 of February 12, 1996. 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. 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, 1997 and 1996, and the results of its operations and its cash flows for the year ended December 31, 1997, the period February 12, 1996 to December 31, 1996, the period January 1, 1996 to February 11, 1996, and the year ended December 31, 1995 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP El Paso, Texas February 6, 1998 35 EL PASO ELECTRIC COMPANY BALANCE SHEETS
ASSETS DECEMBER 31, (IN THOUSANDS) ------------------------- 1997 1996 ---------- ---------- UTILITY PLANT (Notes A, B, C and F ) Electric plant in service........................................ $1,538,572 $1,492,737 Less accumulated depreciation and amortization................... 164,283 77,976 ---------- ---------- Net plant in service.......................................... 1,374,289 1,414,761 Construction work in progress.................................... 43,761 44,432 Nuclear fuel; includes fuel in process of $9,910 and $5,084, respectively.......................................... 86,609 60,014 Less accumulated amortization.................................... 40,142 18,651 ---------- ---------- Net nuclear fuel.............................................. 46,467 41,363 ---------- ---------- Net utility plant........................................... 1,464,517 1,500,556 ---------- ---------- CURRENT ASSETS: Cash and temporary investments................................... 111,227 68,767 Accounts receivable, principally trade, net of allowance for doubtful accounts of $5,124 and $6,161, respectively.......... 58,960 57,587 Federal income tax receivable.................................... - 20,713 Inventories, at cost............................................. 27,130 28,322 Net undercollection of fuel revenues............................. 13,870 1,925 Prepayments and other............................................ 6,930 8,727 ---------- ---------- Total current assets........................................ 218,117 186,041 ---------- ---------- LONG-TERM CONTRACT RECEIVABLE (Note B)............................. 27,659 31,057 ---------- ---------- DEFERRED CHARGES AND OTHER ASSETS: Accumulated deferred income taxes, net (Note G).................. 43,208 73,884 Decommissioning trust fund (Note C).............................. 38,438 33,054 Other............................................................ 20,674 21,598 ---------- ---------- Total deferred charges and other assets..................... 102,320 128,536 ---------- ---------- TOTAL ASSETS................................................ $1,812,613 $1,846,190 ========== ==========
See accompanying notes to financial statements. 36 EL PASO ELECTRIC COMPANY BALANCE SHEETS (CONTINUED)
CAPITALIZATION AND LIABILITIES DECEMBER 31, (IN THOUSANDS EXCEPT FOR SHARE DATA) ---------------------------- 1997 1996 ---------- ---------- CAPITALIZATION (Notes D and E): Common stock, stated value $1 per share, 100,000,000 shares authorized, 60,060,034 and 59,999,981 shares issued and outstanding; and 196,404 and 180,000 restricted shares, respectively....................... $ 60,256 $ 60,180 Capital in excess of stated value........................................... 241,222 240,768 Unearned compensation - restricted stock awards............................. (1,138) (758) Accumulated earnings........................................................ 69,484 30,835 Accumulated other comprehensive income (loss) (unrealized gains (losses) on marketable securities)................................................ (184) 232 ---------- ---------- Common stock equity..................................................... 369,640 331,257 Preferred stock, cumulative, no par value, 2,000,000 shares authorized: Redemption required - 1,213,188 and 1,084,264 shares issued and outstanding, respectively; at liquidation preference...................... 121,319 108,426 Long-term debt (Note F)..................................................... 938,562 1,021,749 Financing and capital lease obligations (Note F)............................ 28,248 24,424 ---------- ---------- Total capitalization.................................................. 1,457,769 1,485,856 ---------- ---------- CURRENT LIABILITIES: Current maturities of financing and capital lease obligations (Note F)...... 28,463 28,333 Accounts payable, principally trade......................................... 24,957 37,215 Taxes accrued other than federal income taxes............................... 19,292 21,296 Interest accrued............................................................ 21,172 23,150 Other....................................................................... 17,439 15,000 ---------- ---------- Total current liabilities............................................. 111,323 124,994 ---------- ---------- DEFERRED CREDITS AND OTHER LIABILITIES: Decommissioning (Note C).................................................... 94,917 89,544 Accrued postretirement benefit liability (Note J)........................... 75,531 71,313 Accrued pension liability (Note J).......................................... 33,909 34,550 Other....................................................................... 39,164 39,933 ---------- ---------- Total deferred credits and other liabilities.......................... 243,521 235,340 ---------- ---------- COMMITMENTS AND CONTINGENCIES (Notes B, C, H, I and J) TOTAL CAPITALIZATION AND LIABILITIES.................................. $1,812,613 $1,846,190 ========== ==========
See accompanying notes to financial statements. 37 EL PASO ELECTRIC COMPANY STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT FOR SHARE DATA)
PERIOD FROM | PERIOD FROM YEAR FEBRUARY 12 | JANUARY 1 YEAR ENDED TO | TO ENDED DECEMBER 31, DECEMBER 31, | FEBRUARY 11, DECEMBER 31, 1997 1996 | 1996 1995 ------------ ------------ | ------------ ------------ | OPERATING REVENUES: | Base revenues................................................ $ 458,979 $ 416,221 | $ 44,679 $ 432,050 Fuel revenues and economy sales.............................. 130,172 104,193 | 9,849 68,823 Other........................................................ 4,887 3,560 | 421 3,744 ----------- ----------- | ----------- ----------- 594,038 523,974 | 54,949 504,617 ----------- ----------- | ----------- ----------- ENERGY EXPENSES: | Fuel......................................................... 113,457 92,899 | 10,125 76,005 Purchased and interchanged power............................. 20,130 17,821 | 2,282 16,568 ----------- ----------- | ----------- ----------- 133,587 110,720 | 12,407 92,573 ----------- ----------- | ----------- ----------- OPERATING REVENUES NET OF ENERGY EXPENSES...................... 460,451 413,254 | 42,542 412,044 ----------- ----------- | ----------- ----------- OTHER OPERATING EXPENSES: | Other operations............................................. 131,916 115,742 | 23,559 208,445 Maintenance.................................................. 34,782 34,702 | 4,743 43,412 Depreciation and amortization................................ 88,735 79,772 | 6,577 56,762 Taxes other than income taxes................................ 43,351 38,547 | 6,024 53,551 ----------- ----------- | ----------- ----------- 298,784 268,763 | 40,903 362,170 ----------- ----------- | ----------- ----------- OPERATING INCOME............................................... 161,667 144,491 | 1,639 49,874 ----------- ----------- | ----------- ----------- OTHER INCOME (DEDUCTIONS): | Litigation settlement, net................................... 7,500 - | - - Investment income............................................ 6,095 4,796 | - - Gain on sale of investment................................... - 3,844 | - - Settlement of bankruptcy professional fees................... 362 2,305 | - - Other, net................................................... 162 (681) | 50 (910) ----------- ----------- | ----------- ----------- 14,119 10,264 | 50 (910) ----------- ----------- | ----------- ----------- INCOME BEFORE INTEREST CHARGES................................. 175,786 154,755 | 1,689 48,964 ----------- ----------- | ----------- ----------- INTEREST CHARGES (CREDITS): | Interest on long-term debt................................... 86,117 85,633 | - - Other interest............................................... 6,200 5,722 | - - Interest during reorganization............................... - - | 9,569 91,923 Interest capitalized and deferred............................ (5,875) (5,189) | (412) (3,820) ----------- ----------- | ----------- ----------- 86,442 86,166 | 9,157 88,103 ----------- ----------- | ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES.............................. 89,344 68,589 | (7,468) (39,139) INCOME TAX EXPENSE (BENEFIT) (Note G).......................... 34,776 26,670 | (3,415) (15,798) ----------- ----------- | ----------- ----------- INCOME (LOSS) BEFORE REORGANIZATION ITEMS | (EXPENSE) AND EXTRAORDINARY ITEMS............................ 54,568 41,919 | (4,053) (23,341) REORGANIZATION ITEMS (EXPENSE), NET OF INCOME | TAX BENEFIT (EXPENSE)........................................ - - | 122,251 (9,978) ----------- ----------- | ----------- ----------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS....................... 54,568 41,919 | 118,198 (33,319) ----------- ----------- | ----------- ----------- EXTRAORDINARY ITEMS: | Extraordinary loss on repurchases of debt, net of | federal income tax benefit................................ (2,775) - | - - Extraordinary gain on discharge of debt...................... - - | 264,273 - ----------- ----------- | ----------- ----------- (2,775) - | 264,273 - ----------- ----------- | ----------- ----------- NET INCOME (LOSS).............................................. 51,793 41,919 | 382,471 (33,319) PREFERRED STOCK DIVIDEND REQUIREMENTS.......................... 13,144 10,488 | - - ----------- ----------- | ----------- ----------- NET INCOME (LOSS) APPLICABLE TO COMMON STOCK................... $ 38,649 $ 31,431 | $ 382,471 $ (33,319) =========== =========== | =========== =========== | BASIC EARNINGS PER COMMON SHARE (Note A): | Income (loss) before extraordinary items..................... $ 0.689 $ 0.523 | $ 3.325 $ (0.937) Extraordinary loss on repurchases of debt, net of | federal income tax benefit................................ (0.046) - | - - Extraordinary gain on discharge of debt...................... - - | 7.435 - ----------- ----------- | ----------- ----------- Net income (loss)......................................... $ 0.643 $ 0.523 | $ 10.760 $ (0.937) =========== =========== | =========== =========== DILUTED EARNINGS PER COMMON SHARE (Note A): | Income (loss) before extraordinary items..................... $ 0.685 $ 0.523 | $ 3.325 $ (0.937) Extraordinary loss on repurchases of debt, net of | federal income tax benefit................................ (0.046) - | - - Extraordinary gain on discharge of debt...................... - - | 7.435 - ----------- ----------- | ----------- ----------- Net income (loss)......................................... $ 0.639 $ 0.523 | $ 10.760 $ (0.937) =========== =========== | =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES | OUTSTANDING.................................................. 60,128,505 60,073,808 | 35,544,330 35,544,330 =========== =========== | =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES | AND COMMON SHARE EQUIVALENTS OUTSTANDING..................... 60,437,632 60,116,709 | 35,544,330 35,544,330 =========== =========== | =========== ===========
See accompanying notes to financial statements. 38 EL PASO ELECTRIC COMPANY STATEMENTS OF COMPREHENSIVE OPERATIONS (IN THOUSANDS)
PERIOD FROM | PERIOD FROM YEAR FEBRUARY 12 | JANUARY 1 YEAR ENDED TO | TO ENDED DECEMBER 31, DECEMBER 31, | FEBRUARY 11, DECEMBER 31, 1997 1996 | 1996 1995 ------------ ------------ | ------------ ------------ | | NET INCOME (LOSS)............................................... $ 51,793 $ 41,919 | $382,471 $(33,319) OTHER COMPREHENSIVE INCOME (LOSS) (Note A): | Net unrealized gain (loss) on marketable securities, less | applicable income tax benefit (expense) of $223, | $(125), $ - and $(282), respectively..................... (416) 232 | - 522 Reclassification adjustment included in net | income, net of income tax of $93........................... - - | (172) - -------- -------- | -------- -------- COMPREHENSIVE INCOME (LOSS)..................................... 51,377 42,151 | 382,299 (32,797) PREFERRED STOCK DIVIDEND REQUIREMENTS........................... 13,144 10,488 | - - | -------- -------- | -------- -------- COMPREHENSIVE INCOME (LOSS) APPLICABLE TO COMMON STOCK.......... $ 38,233 $ 31,663 | $382,299 $(32,797) ======== ======== | ======== ========
See accompanying notes to financial statements. 39 EL PASO ELECTRIC COMPANY STATEMENTS OF CHANGES IN COMMON STOCK EQUITY (DEFICIT) (IN THOUSANDS EXCEPT FOR SHARE DATA)
UNEARNED COMPENSATION- COMMON STOCK CAPITAL IN RESTRICTED --------------------------- EXCESS OF STOCK SHARES AMOUNT STATED VALUE AWARDS ----------- ----------- ------------ ------------ BALANCES AT DECEMBER 31, 1994.......... 35,544,330 $ 339,097 $ - $ - Net loss.............................. Other comprehensive income............ ----------- ----------- ----------- ----------- BALANCES AT DECEMBER 31, 1995.......... 35,544,330 339,097 - - Net income............................ Elimination of predecessor equity accounts............................ (35,544,330) (339,097) Effects of fresh-start reporting adjustment to common stock equity... ----------- ----------- ----------- ----------- BALANCES AT FEBRUARY 11, 1996.......... - - - - - ------------------------------------------------------------------------------------------------------- Issuance of common stock upon reorganization...................... 59,999,981 60,000 240,000 Capital stock expense................. Grants of restricted common stock............................... 180,000 180 768 (948) Amortization of unearned compensation........................ 190 Preferred stock dividends............. Net income............................ Other comprehensive income............ ----------- ----------- ----------- ----------- BALANCES AT DECEMBER 31, 1996.......... 60,179,981 60,180 240,768 (758) Grants of restricted common stock............................... 84,255 84 491 (575) Amortization of unearned compensation........................ 195 Repurchase of unrestricted common stock........................ (7,798) (8) (37) Preferred stock dividends............. Net income............................ Other comprehensive loss.............. ----------- ----------- ----------- ----------- BALANCES AT DECEMBER 31, 1997.......... 60,256,438 $ 60,256 $ 241,222 $ (1,138) =========== =========== =========== ============
TOTAL ACCUMULATED COMMON ACCUMULATED OTHER STOCK EARNINGS COMPREHENSIVE EQUITY (DEFICIT) INCOME (LOSS) (DEFICIT) ----------- ------------- ----------- BALANCES AT DECEMBER 31, 1994.......... $ (724,713) $ (350) $ (385,966) Net loss.............................. (33,319) (33,319) Other comprehensive income............ 522 522 ----------- ----------- ----------- BALANCES AT DECEMBER 31, 1995.......... (758,032) 172 (418,763) Net income............................ 382,471 382,471 Elimination of predecessor equity accounts............................ 339,097 - Effects of fresh-start reporting adjustment to common stock equity... 36,464 (172) 36,292 ----------- ----------- ----------- BALANCES AT FEBRUARY 11, 1996.......... - - - - -------------------------------------------------------------------------------------- Issuance of common stock upon reorganization...................... 300,000 Capital stock expense................. (596) (596) Grants of restricted common stock............................... - Amortization of unearned compensation........................ 190 Preferred stock dividends............. (10,488) (10,488) Net income............................ 41,919 41,919 Other comprehensive income............ 232 232 ----------- ----------- ----------- BALANCES AT DECEMBER 31, 1996.......... 30,835 232 331,257 Grants of restricted common stock............................... - Amortization of unearned compensation........................ 195 Repurchase of unrestricted common stock........................ (45) Preferred stock dividends............. (13,144) (13,144) Net income............................ 51,793 51,793 Other comprehensive loss.............. (416) (416) ----------- ----------- ----------- BALANCES AT DECEMBER 31, 1997.......... $ 69,484 $ (184) $ 369,640 =========== =========== ===========
See accompanying notes to financial statements. 40 EL PASO ELECTRIC COMPANY STATEMENTS OF CASH FLOWS (IN THOUSANDS)
PERIOD FROM | PERIOD FROM YEAR FEBRUARY 12 | JANUARY 1 YEAR ENDED TO | TO ENDED DECEMBER 31, DECEMBER 31, | FEBRUARY 11, DECEMBER 31, 1997 1996 | 1996 1995 ------------- ------------- | ------------- ------------- | CASH FLOWS FROM OPERATING ACTIVITIES: | Net income (loss)......................................... $ 51,793 $ 41,919 | $ 382,471 $ (33,319) Adjustments to reconcile net income (loss) to net cash | provided by operating activities: | Depreciation and amortization........................... 111,622 99,355 | 8,246 69,444 Deferred income taxes and investment tax credit, net.... 32,394 41,341 | (3,116) (26,744) Other operating activities.............................. 2,552 2,487 | (805) (6,795) Extraordinary loss on repurchases of debt, net of | federal income tax benefit............................ 2,775 - | - - Gain on sale of investment.............................. - (3,844) | - - Reorganization items, net of income tax benefit......... - - | (122,251) - Extraordinary gain on discharge of debt................. - - | (264,273) - Change in: | Accounts receivable..................................... (1,373) 3,513 | 5,429 (4,866) Federal income tax receivable........................... 20,713 (20,713) | - - Inventories............................................. 1,192 (32) | 90 1,590 Prepayments and other................................... 1,797 (1,974) | 34 2,214 Long-term contract receivable........................... 3,398 2,333 | 293 (80) Accounts payable........................................ (12,258) (4,038) | (6,859) 11,885 Interest accrued........................................ (1,978) 23,034 | - - Net under/overcollection of fuel revenues............... (11,945) (12,709) | 417 16,581 Other current liabilities............................... 386 (1,242) | (152) 1,027 Deferred charges and credits............................ 5,520 (1,117) | 1,994 21,187 Obligations subject to compromise....................... - - | 9,430 71,839 Revenues subject to refund.............................. - - | 2,785 24,107 -------- --------- | ----------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES............. 206,588 168,313 | 13,733 148,070 -------- --------- | ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: | Additions to utility plant................................ (75,431) (53,346) | (8,176) (87,937) Investment in decommissioning trust fund.................. (6,023) (5,960) | (553) (5,159) Proceeds from sale of investment.......................... - 20,183 | - - -------- --------- | ----------- ---------- NET CASH USED FOR INVESTING ACTIVITIES................ (81,454) (39,123) | (8,729) (93,096) -------- --------- | ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: | Repurchases of and payments on long-term debt............. (86,771) (117,528) | - - Net proceeds from financing obligations................... 5,369 3,320 | 43,309 - Redemption of capital lease obligations................... (1,272) (364) | - - Capital stock expense..................................... - (596) | - - 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) -------- --------- | ----------- ---------- NET CASH USED FOR FINANCING ACTIVITIES................ (82,674) (115,168) | (212,766) (1,051) -------- --------- | ----------- ---------- NET INCREASE (DECREASE) IN CASH AND TEMPORARY INVESTMENTS... 42,460 14,022 | (207,762) 53,923 | CASH AND TEMPORARY INVESTMENTS AT BEGINNING OF PERIOD....... 68,767 54,745 | 262,507 208,584 -------- --------- | ----------- ---------- CASH AND TEMPORARY INVESTMENTS AT END OF PERIOD............. $111,227 $ 68,767 | $ 54,745 $ 262,507 ======== ========= | =========== ==========
See accompanying notes to financial statements. 41 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General. El Paso Electric Company (the "Company") is a public utility engaged in the generation, transmission and distribution of electricity in an area of approximately 10,000 square miles in west Texas and southern New Mexico. The Company also serves wholesale customers in Texas, New Mexico, California and Mexico. 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. Bankruptcy Reorganization. On February 12, 1996 (the "Effective Date"), the Company emerged (the "Reorganization") from a bankruptcy proceeding which it instituted in January 1992 (the "Bankruptcy Case"). As a result of the Reorganization, the Company significantly reduced its debt and simplified its capital structure. The Company prior to the Reorganization (the "Predecessor Company") had total obligations subject to compromise of $2,007 million (including obligations related to leases on portions of the Palo Verde Nuclear Generating Station ("Palo Verde") (the "Palo Verde Leases"), which represented $700 million of allowed claims in the Bankruptcy Case). Under the Company's Fourth Amended Plan of Reorganization (the "Plan"), this debt and the Palo Verde Lease obligations were extinguished and the creditors received a combination of $212 million cash and newly issued debt and equity securities of the Company following the Reorganization (the "Reorganized Company") consisting of $1,189 million of long-term bonds and financing and capital lease obligations, $100 million of redeemable preferred stock and $255 million of common stock. Under the Plan, all of the Predecessor Company's common and preferred stock was canceled and the holders of such securities received approximately $45 million (15%) of the Reorganized Company's common stock and the right to receive certain potential litigation recoveries which ultimately amounted to $20 million. In addition, on the Effective Date, the Palo Verde Leases were terminated and the Company reacquired such interests. See Note H. Basis of Presentation. The Company maintains its accounts in accordance with the Uniform System of Accounts prescribed by the Federal Energy Regulatory Commission (the "FERC"). The Company had determined that it does not meet the criteria for the application of Statement of Financial Accounting Standards ("SFAS") No. 71, "Accounting for the Effects of Certain Types of Regulation," and accordingly does not report the effects of certain actions of regulators as assets or liabilities unless such actions result in assets or liabilities under generally accepted accounting principles for commercial enterprises in general. The Company accounted for all transactions related to its Reorganization in accordance with Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). As of the Effective Date of the Reorganization, the Company applied "fresh-start" 42 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS reporting in accordance with SOP 90-7 resulting in the creation of a new reporting entity having no retained earnings or accumulated deficit. In applying fresh-start reporting, the Company determined its reorganization value, which was allocated to the Company's assets, and recorded its liabilities at fair value. Reorganization value was determined as the value of the Company's capital structure, based on management's estimates of future operating results, less operational liabilities. Because of the effects of fresh-start reporting, the Reorganized Company's financial statements for periods after February 12, 1996 are not comparable to the Predecessor Company's financial statements for periods before February 12, 1996. A vertical line is shown in the accompanying financial statements to separate the Reorganized Company from the Predecessor Company because the respective financial statements have not been prepared on a consistent basis of accounting. Comprehensive Income. In 1997, the Company implemented SFAS No. 130, "Reporting Comprehensive Income." Under this standard, certain gains and losses that are not recognized currently in the statement of operations are reported as other comprehensive income. Utility Plant. Upon adoption of fresh-start reporting, the Company 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 was based on the Company's estimate of the replacement cost less depreciation ("RCLD") and was 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. Additions to utility plant subsequent to February 12, 1996 are reported at historical cost. Depreciation is provided on a straight-line basis over the estimated remaining lives of the assets (ranging from 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 a rate settlement (the "Rate Stipulation") dated July 27, 1995 among the Company and substantially all of the other parties to Docket No. 12700. The Company charges the cost of repairs and minor replacements to the appropriate operating expense accounts and capitalizes the cost of renewals and betterments. Gains or losses resulting from retirements or other dispositions of operating property in the normal course of business are credited or charged to the accumulated provision for depreciation. The Company accrued a liability for the present value of the estimated decommissioning costs for the Company's interest in Palo Verde using an escalation rate of 3% and a discount rate of 6%. Accretion of the decommissioning liability is charged to interest charges in the statements 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 Department of Energy (the "DOE") for disposal cost of approximately one-tenth of one cent on each kilowatt hour generated. 43 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS Impairment of Long-Lived Assets. The Company evaluates impairment of its long-lived assets and certain intangible assets whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. An asset is deemed impaired if the sum of the expected future cash flows is less than the carrying amount of the asset. Capitalized Interest. The Company capitalizes, to construction work in progress, 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 had a fair market value of approximately $38.4 million at December 31, 1997. Such marketable securities are classified as "available-for-sale" securities and as such unrealized gains and losses are included in accumulated other comprehensive income as a separate component of capitalization. Inventories. Inventories, primarily parts, materials and supplies are stated at average cost not to exceed recoverable cost. Operating Revenues. The Company accrues revenues for services rendered but unbilled. The regulations of the Public Utility Commission of Texas (the "Texas Commission"), the New Mexico Public Utility Commission (the "New Mexico Commission") and the 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 (ii) revenues from third-party transmission services, which are credited to customers. Economy sales relate to spot market sales and are 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 the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized for the estimated future tax consequences of "temporary differences" by applying enacted statutory tax rates for each taxable jurisdiction applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The Company records a valuation allowance to reduce its deferred tax assets to the extent it is more likely than not that such deferred tax assets will not be realized. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. Earnings per Share. The Company adopted the provisions of SFAS No. 128, "Earnings per Share," which establishes standards for computing and presenting earnings per share, for the year ended 44 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS December 31, 1997. All per share amounts reported in prior periods presented have been restated to conform to the new standard. Basic 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 outstanding. Diluted 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 shares outstanding. Benefit Plans. See Note J for accounting policies regarding the Company's retirement plans and postretirement benefits. Stock Options and Restricted Stock. The Company has a long-term incentive plan which reserves shares of common stock for issuance to officers, key employees and non-employee directors through the award or grant of stock options and restricted stock. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). Accordingly, compensation expense is recognized for the intrinsic value, if any, of option grants at measurement date ratably over the vesting period of the options. Compensation expense for the restricted stock awards is recognized for the fair value of the shares at the award date ratably over the restriction period. Unearned compensation related to stock options and restricted stock awards is shown as a reduction of common stock equity. Reclassifications. Certain amounts in the financial statements for 1996 and 1995 have been reclassified to conform with the 1997 presentation. 45 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS SUPPLEMENTAL STATEMENTS OF CASH FLOW DISCLOSURES (IN THOUSANDS)
PERIOD FROM | PERIOD FROM YEAR FEBRUARY 12 | JANUARY 1 YEAR ENDED TO | TO ENDED DECEMBER 31, DECEMBER 31, | FEBRUARY 11, DECEMBER 31, 1997 1996 | 1996 1995 ----------- ----------- | ----------- ----------- | Cash (refunded) paid for: | Income taxes, net............................ $(17,812) $ (2,504) | $ - $ 12,950 Interest..................................... 76,477 53,000 | 8,580 80,688 Reorganization items - professional | fees and other............................. 3,264 8,910 | 2,279 15,207 | Non-cash investing and financing activities: | Issuance of preferred stock for | pay-in-kind dividends...................... 12,893 8,426 | - - Grants of restricted shares of | common stock............................... 575 948 | - - 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 compromise.............................. - - | 151,834 - Plant in service reacquired through | incurring obligation subject to | compromise................................. - - | 227,656 -
B. RATE MATTERS 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 46 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS jurisdiction over certain other activities of the Company. The decisions of the Texas Commission are subject to judicial review. Rate Stipulation and Agreed Order. The Company's rates for its Texas customers are governed by a rate order entered by the Texas Commission in Docket 12700 (the "Agreed Order") adopting a Rate Stipulation. The Agreed Order and Rate Stipulation were entered into by the Company, the Texas Commission staff, the City of El Paso and virtually all other intervenors in the case. 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's base rates for most customers in Texas were fixed for ten years beginning in August 1995 (the "Freeze Period"); (ii) the City of El Paso granted the Company a new franchise that extends through the Freeze Period; (iii) 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 net revenues generated by providing third-party transmission services and (B) profit margins from certain off-system power sales; (iv) the Company's reacquisition of the Palo Verde leased assets was deemed to be in the public interest; and (v) all appeals of Texas Commission orders concerning the Company and all outstanding Texas Commission dockets concerning the Company's rates were resolved. Neither the 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, the Texas Office of Public Utility Counsel 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, and the right to pursue a reduction in rates below the freeze level to the extent of post-merger synergy savings. Fuel. Pursuant to Texas Commission rules, the Company periodically must make a filing reconciling the revenues collected from Texas customers under its fixed fuel factor with the fuel and purchased power expenses actually incurred for the period covered by the reconciliation. A fuel and purchased power reconciliation must include not less than twelve months nor more than thirty-six months of reconcilable data. The Company has not filed a reconciliation for any period since June 1995. 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 Texas Commission staff, local regulatory authorities such as the City of El Paso, and customers are entitled to intervene in a fuel reconciliation proceeding and to challenge the recovery of fuel and purchased power expenses. 47 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS Higher than expected natural gas prices were experienced in December 1996, continued in the first quarter of 1997 and remained at higher levels through the remainder of 1997 compared to 1996. These higher natural gas prices have increased the Company's underrecovered fuel costs, which will be reviewed in the next Texas fuel reconciliation. A significant disallowance of fuel costs in this reconciliation could have an adverse effect on the Company's financial results. In January 1998, the Company filed a request with the Texas Commission to increase its Texas fixed fuel factor and implement a surcharge, subject to reconciliation, of its underrecovered fuel costs. The Company entered into a stipulation with all parties to the docket to implement the surcharge and a new fixed fuel factor. Both the fixed fuel factor and surcharge are expected to go into effect in April 1998. Palo Verde Performance Standards. The Texas Commission has established performance standards for the operation of Palo Verde, pursuant to which each Palo Verde unit is evaluated annually to determine whether its three-year rolling average capacity factor entitles the Company to a reward or subjects it to a penalty. There are five performance bands based around a target capacity factor of 70%. The capacity factor is calculated as the ratio of actual generation to maximum possible generation. If the capacity factor, as measured on a station-wide basis for any consecutive 24-month period, should fall below 35%, the Texas Commission could reconsider the rate treatment of Palo Verde, regardless of the provisions of the Rate Stipulation. The removal of Palo Verde from rate base could have a significant negative impact on the Company's revenues and financial condition. For the three-year rolling average period ended December 31, 1997, Palo Verde Units 1, 2 and 3 achieved capacity factors of 83.75%, 83.04% and 88.70%, respectively. These capacity factors result in the Company's entitlement to a combined reward of $2.8 million pursuant to the formula established by the Texas Commission for the Palo Verde units. NEW MEXICO RATE MATTERS The New Mexico Commission has jurisdiction over the Company's rates and services in New Mexico and over certain other activities of the Company, including prior approval of the issuance, assumption or guarantee of securities. The New Mexico Commission's decisions are subject to judicial review. Current base rates in New Mexico were established in 1990 and have not increased since. 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. The largest city in the Company's New Mexico service territory is Las Cruces, which in 1997 accounted for 8% of the Company's total revenue. See Note I. 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 with the New Mexico Commission all of the rate filing package data required by the Commission's order. 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 New Mexico Commission could order a rate reduction or, alternatively, in response to economic factors 48 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS and regulatory, political and competitive pressures, the Company could agree to a rate reduction as part of an overall settlement of all issues in New Mexico. Prosecution of the rate case before the New Mexico Commission is expected to be completed before the end of 1998. The Company is unable at this time to predict the outcome of this proceeding. Fuel. The Company is required to make annual filings with the New Mexico Commission to reconcile the revenues collected under its fixed fuel factor with its fuel and purchased power expenses actually incurred, and to report the results of Palo Verde performance standards. These reports are due by January 31 of each year for the preceding calendar year, and are filed along with the Company's request to revise its fixed fuel factor to reflect current projections of fuel and purchased power costs and to include the over or underrecovery reflected in the reconciliation report and the reward or penalty reflected in the performance standards report. On October 31, 1997, the Company filed testimony and evidence supporting its continued use of the methodology and manner of collecting fuel and purchased power costs reflected in its tariffs. A hearing on this filing is scheduled for July 1998. The Company's 1998 annual filing reflects a significant increase in the monthly fuel charge. This increase is necessary because of (i) significant increases in the spot price of natural gas and (ii) the delayed implementation of the 1997 change, effective with bills rendered on or after August 1, 1997, which has caused the Company to underrecover its fuel costs in New Mexico by approximately $5.3 million for the year ended December 31, 1997. The recovery of this amount, coupled with continued higher gas costs for 1998, results in an increase in the proposed 1998 fixed fuel factor of approximately 24% over the present factor. The Company believes it has fully justified its fuel and purchased power costs and recovery methodology. In March 1998, the New Mexico Commission consolidated the 1998 annual filing and the October 1997 filing for hearing in July 1998. There can be no assurance that the New Mexico Commission will accept the Company's proposed fixed fuel factor. As in Texas, interested parties are allowed to intervene and challenge the recoverability of fuel expenses. A significant disallowance of fuel costs could have an 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 reward or subjects it to a penalty. There are five performance bands based around a target capacity factor of 67.5%. Because Unit 3 is not included in the Company's New Mexico rate base, any penalty or reward calculated on a total station basis is limited to two-thirds of such penalty or reward. 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 Units 1 and 2. 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, 1997, the Palo Verde station capacity factor was 88.43%. This capacity factor results in the Company's entitlement to a reward of $1.1 million, pursuant to the formula established by the New Mexico Commission for the Palo Verde units. 49 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS 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 Imperial Irrigation District ("IID") providing for the sale of 100 megawatts ("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 also has a firm power sales agreement with Texas-New Mexico Power Company ("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) (the "Open Access Case"), in compliance with FERC 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 the City of Las Cruces, New Mexico ("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 of and costs related to, certain facilities making access to the Comision Federal de Electricidad de Mexico ("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 rate issues related to the Open Access Case. 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 one of the wholesale power marketers that submitted a bid in 1996 to the CFE. See "Department of Energy" below. Intervenors in the Open Access Case also raised certain issues relating to the criteria by which the Company will determine the amount of transmission capacity that is available for use by third parties desiring to use its transmission system. Hearings related to these issues were conducted before a FERC administrative law judge in January 1998. A final decision from the FERC on these issues is not expected until the fourth quarter of 1998. The Company does not expect a material financial impact to result from a FERC ruling. In July 1996, Las Cruces exercised its right under Order No. 888 to request that the Company calculate Las Cruces' stranded cost obligation should it leave the Company's system and operate its own municipal utility. For a discussion of this proceeding, see Note I. Department of Energy. The DOE 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 50 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS to assess operators of nuclear generating facilities for a share of the costs of decommissioning the DOE's uranium enrichment facilities and for the ultimate costs of disposal of spent nuclear fuel. In September 1996, one of the wholesale power marketers that submitted a bid in 1996 to the CFE in connection with renewal of the interchange agreement for the supply of power during 1997 to Ciudad Juarez, Mexico, filed a complaint against the Company with the FERC. The complaint sought emergency relief and requested the FERC to direct the Company to enter into an agreement to provide firm point-to-point transmission service to the CFE under the Company's open access transmission tariff. In October 1996, the FERC issued an order requiring the Company to provide point-to-point transmission service over the Company's transmission system to substation facilities near the United States/Mexico 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. The DOE subsequently issued a Notice of Delegation and Assignment which delegated to the FERC the DOE's authority to carry out its duties in this case. The FERC has docketed the Delegation and Assignment and the process is expected to continue throughout 1998. Nuclear Regulatory Commission. The 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 term of the Company's previous one-year 1997 sales agreement for firm capacity and associated energy to the CFE terminated December 31, 1997. Pursuant to a bidding process, the Company was selected by the CFE to provide varying amounts of power during 1998 ranging from 90 to 200 MW. The price is stable throughout the twelve-month term of the agreement and includes charges for capacity and energy as well as transmission and any required ancillary services. Under the new agreement, the Company's revenues in 1998 related to power sales to the CFE are expected to be similar to 1997 revenues. There can be no assurance that the CFE will remain a customer after 1998. The agreement requires payment in United States dollars. 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 and state legislation, regulatory initiatives, and proposed initiatives in Texas and New Mexico encourage competition in the industry, and ultimately in the Company's service area. 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 could 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 national and regional averages. In the face of 51 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS increased competition, there can be no assurance that the future operations, cash flows and financial condition of the Company will not be adversely affected, 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 "stranded costs," or 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. There is substantial discussion and debate on this issue on both a national and state level and, 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 commissions and legislatures are engaged in various activities which are attempting to address the issue of stranded cost recovery from customers subject to their jurisdictions. FERC. In April 1996, the FERC issued its Order No. 888, requiring all public utilities owning, operating or controlling facilities used for transmitting electricity in interstate commerce to (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 transmission users access to transmission-related information on a basis consistent with that available to a utility's employees engaged in the buying and selling of power. Order No. 889 further requires public utilities to separate their transmission and generation marketing functions and adopt standards of conduct ensuring that all open access transmission customers are treated in a non-discriminatory manner. Texas. During 1996, the Texas Commission conducted projects to evaluate the (i) scope of competition in the electric industry in Texas and (ii) potential stranded investment, procedures for allocating stranded costs, and acceptable methods of stranded cost recovery. The Texas Commission's report, which was issued in January 1997, recommended a careful and deliberate approach to continued expansion of competition in the Texas electric market, ultimately leading to retail competition with 52 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS certain safeguards, and recommended against any legislation that would introduce broad-based retail competition before 2000. The Texas Commission also quantified the potential retail "excess of cost over market" ("ECOM") under several scenarios. In February 1998, the Texas Commission requested all Texas utilities to revise the ECOM estimates based on certain updated assumptions. Using the Texas Commission's revised model inputs, the Company's revised ECOM estimates range from a high of $1.5 billion to a low of $843 million, with an expected value of $1.2 billion, assuming full retail access in 1999. Although several pieces of legislation were offered during the 1997 Texas legislative session, no significant deregulation legislation was passed. In August 1997, the Lieutenant Governor appointed seven senators to serve on a special interim committee to study the various issues involved in a possible transition to a competitive electric market. The committee is receiving testimony from various parties, including environmental advocates, consumer advocates, power marketers, public power entities, electric cooperatives and investor-owned utilities, as well as testimony and comments from the public at large, and is holding public hearings across the state on various aspects of the electric industry restructuring debate. The Association of Electric Companies of Texas (the "AECT") testified on behalf of all investor-owned utilities in Texas, including the Company. The AECT testified that it would support retail competition that provides benefits to all consumers, maintains electric system reliability, provides for equitable treatment of all competitors and provides for the preservation of prior regulatory commitments. The committee is expected to file a final report in late 1998. Recently, the Lieutenant Governor asked the Texas Comptroller of Public Accounts to initiate a study to review the impact of a deregulated electric market on state and local tax systems. New Mexico. In 1995, the New Mexico Commission initiated a notice of inquiry regarding competition and the restructuring of regulation of the electric industry. 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. The New Mexico Commission also commenced a collaborative process with the assistance of facilitators in an attempt to reach consensus. Although that collaborative process failed to reach a consensus around which restructuring legislation could be drafted, the New Mexico investor-owned utilities, including the Company, have agreed to support legislation that would permit retail competition provided: (i) all customers have the opportunity to benefit, (ii) reliability of electric service is maintained, (iii) all energy suppliers are subject to the same laws and regulations, (iv) the price of electric generating capacity and electric energy is determined solely by market forces, (v) unbundled transmission and distribution functions remain subject to regulation, and (vi) each electric utility must have a reasonable opportunity to recover its stranded costs. The 1998 legislative session concluded without the passage of any significant deregulation legislation. C. PALO VERDE AND OTHER JOINTLY-OWNED UTILITY PLANT The Company has a 15.8% undivided interest in the three nuclear generating units at Palo Verde. The Palo Verde Participants include the Company, five other utilities and Arizona Public 53 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS Service Company ("APS"), which serves as the operating agent for Palo Verde. The operation of Palo Verde and the relationship among the Palo Verde Participants is governed by the Arizona Nuclear Power Project Participation Agreement (the "ANPP Participation Agreement"). Other jointly-owned utility plant includes a 7% undivided interest in Units 4 and 5 of Four Corners Generating Station ("Four Corners") and certain other transmission facilities. A summary of the Company's investment in jointly-owned utility plant, excluding fuel, at December 31, 1997 and 1996 is as follows (In thousands):
DECEMBER 31, 1997 DECEMBER 31, 1996 ---------------------- ---------------------- PALO VERDE PALO VERDE STATION OTHER STATION OTHER ---------------------- ---------------------- Electric plant in service........... $573,218 $180,815 $568,957 $180,366 Accumulated depreciation............ (46,589) (27,078) (22,162) (12,747) Construction work in progress....... 12,545 2,249 8,545 985
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 $7.3 million in 1997. The ANPP Participation Agreement provides that if a participant fails to meet its payment obligations, each non-defaulting participant shall pay its proportionate share of the payments owed by the defaulting participant. Decommissioning. Pursuant to the ANPP Participation Agreement and federal law, the Company 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 determined periodically based upon engineering cost estimates performed by outside engineers retained by the ANPP. In December 1995, the Palo Verde Participants approved a decommissioning study performed by an outside engineering firm. The 1995 study determined that the Company will have to fund approximately $229 million (stated in 1995 dollars) to cover its share of decommissioning costs. The 1995 study assumed 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); (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 will be 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. The previous cost estimate from a 1993 study determined that the Company would have to fund approximately $221 million (stated 54 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS in 1993 dollars). The 1993 estimate, however, reflected an 84% increase from the previous estimate made in 1989, primarily related to increases in estimated costs for low-level radioactive waste disposal. Although the 1995 study was based on the latest available information, there can be no assurance that decommissioning cost estimates will not continue to increase in the future or that regulatory requirements will not change. In addition, until a new low-level radioactive waste repository opens and operates for a number of years, estimates of the cost to dispose of low-level radioactive waste are subject to significant uncertainty. The decommissioning study is updated every three years and a new study will be completed in 1998. 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, 1997, the aggregate balance of the trust funds was approximately $38.4 million, which is reflected in the Company's balance sheets in deferred charges and other assets. 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, while less common than other types, has also been seen at other United States 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. Steam generator tubes in each of the Palo Verde units have 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. APS has determined that it will be economically desirable to replace the Unit 2 steam generators, which have been the most affected by tube cracking. In 1997, the Palo Verde Participants unanimously approved the purchase of one set of spare steam generators for delivery in May 2002. The Company's share of the cost is approximately $12.9 million. APS has indicated that in 1998 it will request that the participants approve installation of 55 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS the spare generators in Unit 2 in 2003. The Company believes that such installation would require the unanimous approval of the Palo Verde Participants. The Company will continue to analyze 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 the Palo Verde Participants will agree to replace the Unit 2 steam generators. The costs for the construction and shipping of the spare steam generators are expected to be incurred between 1998 and 2002. Installation costs, if they are approved, would be expected to be incurred between 1999 and 2003, with the bulk of the expenditures after 2000. The Company's portion of total costs associated with construction and potential installation of new steam generators in Unit 2, including replacement power costs and costs that would otherwise have been expended through the operation and maintenance budget, is currently estimated not to exceed $36 million. APS has also stated that, based on the latest available data, it estimates that the steam generators in Units 1 and 3 should operate for their designated lives of 40 years (to 2025 and 2027, respectively). APS will reassess the expected lives of these steam generators periodically. The Rate Stipulation precludes the Company from seeking a rate increase in Texas during the Freeze Period to recover capital costs associated with such replacement of steam generators. 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 under federal law. The insurance consists of $200 million of primary liability insurance provided by commercial insurance carriers, with the balance being provided by an industry-wide retrospective assessment program, pursuant to which industry participants would be required to pay an assessment to cover any loss in excess of $200 million. 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 for all three units with an annual payment limitation of approximately $4.7 million. The Palo Verde Participants maintain "all risk" (including nuclear hazards) insurance for property damage to, and decontamination of, property at Palo Verde in the aggregate amount of $2.7 billion, a substantial portion of which must first be applied to stabilization and decontamination. Finally, the Company has obtained insurance against a portion of any increased cost of generation or purchased power which may result from an accidental outage of any of the three Palo Verde units if the outage exceeds 23 weeks. 56 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS D. COMMON STOCK OVERVIEW The Company issued approximately 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. 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 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 with respect to 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 credit agreement for the working capital and fuel financing facility limits 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. 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. Stock Options. Stock options have been granted at prices equal to or greater than the market value of the shares at the date of grant. The options expire ten years from the date of grant unless terminated 57 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS earlier by the Board of Directors. The following table summarizes the transactions of the Company's stock options for 1996 and 1997:
WEIGHTED AVERAGE NUMBER OF EXERCISE SHARES PRICE ----------- ---------- Unexercised options outstanding at February 12, 1996..... - $ - Options granted..................................... 1,900,000 5.69 Options exercised................................... - - Options forfeited................................... - - --------- Unexercised options outstanding at December 31, 1996..... 1,900,000 5.69 Options granted..................................... 55,000 6.56 Options exercised................................... - - Options forfeited................................... (5,000) 6.56 --------- Unexercised options outstanding at December 31, 1997..... 1,950,000 5.71 =========
Certain stock options awarded vest ratably over a four or five-year period. Stock options outstanding at December 31, 1997 are as follows:
EXERCISE NUMBER REMAINING NUMBER PRICE OUTSTANDING LIFE, IN YEARS EXERCISABLE -------- ----------- -------------- ----------- $ 5.32 800,000 8.3 320,000 5.56 800,000 8.4 320,000 6.56 50,000 9.3 50,000 7.00 300,000 8.4 300,000 --------- ------- 1,950,000 990,000 ========= =======
The Company has adopted the disclosure-only provisions of SFAS No. 123. Accordingly, because the stock option grants had no intrinsic value at the measurement date, no compensation cost has been recognized. Had compensation cost for the plan been determined based on the fair value at 58 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS the grant date, consistent with the provisions of SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts presented below:
PERIOD FROM FEBRUARY 12 TO DECEMBER 31, DECEMBER 31, 1997 1996 ------------- ------------ Net income applicable to common stock (In thousands): As reported......................................... $38,649 $31,431 Pro forma........................................... 38,093 30,337 Basic earnings per share: As reported......................................... 0.643 0.523 Pro forma........................................... 0.634 0.505 Diluted earnings per share: As reported......................................... 0.639 0.523 Pro forma........................................... 0.630 0.505
The fair value for these options was estimated at the grant date using the Black-Scholes option pricing model. Weighted average assumptions and grant-date fair value for 1997 and 1996 are presented below:
1997 1996 ------ ------ Risk-free interest rate 6.76% 6.85% Expected life, in years 10 10 Expected volatility 10.86% 4.24% Expected dividend yield - - Fair value $ 3.24 $2.60
Restricted Stock. The Company has awarded vested and unvested restricted stock awards under the 1996 Plan. Restrictions from resale generally lapse, and unvested awards vest, over periods of four to five years. During 1997 and 1996, approximately $0.5 million and $0.2 million, respectively, relating to 59 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS restricted stock awards were charged to expense. The following table summarizes the vested and unvested restricted stock awards for 1997 and 1996:
VESTED UNVESTED TOTAL ---------------- ---------------- ---------------- Restricted shares outstanding at February 12, 1996.... - - - Restricted stock awards............................ 80,000 100,000 180,000 Lapsed restrictions................................ - - - --------------- --------------- --------------- Restricted shares outstanding at December 31, 1996... 80,000 100,000 180,000 Restricted stock awards............................ 47,440 36,815 84,255 Lapsed restrictions and vesting.................... (40,488) (27,363) (67,851) --------------- --------------- --------------- Restricted shares outstanding at December 31, 1997... 86,952 109,452 196,404 =============== =============== ===============
The holder of a restricted stock award has rights as a shareholder of the Company, including the right to vote and, if applicable, receive cash dividends on restricted stock, except that certain restricted stock awards require any cash dividend on restricted stock to be delivered to the Company in exchange for additional shares of restricted stock of equivalent market value. 60 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS RECONCILIATION OF BASIC AND DILUTED EARNINGS PER COMMON SHARE The reconciliation of basic and diluted earnings per common share before extraordinary items is presented below:
FOR THE YEAR ENDED DECEMBER 31, 1997 ---------------------------------------------------- PER COMMON INCOME SHARES SHARE ---------------- ----------------- --------------- (IN THOUSANDS) Income before extraordinary items............. $54,568 Less: Preferred stock dividends............. 13,144 ------- Basic earnings per common share: Income applicable to common stock............ 41,424 60,128,505 $0.689 ========= Effect of dilutive securities: Unvested restricted stock.................... - 16,041 Stock options................................ - 293,086 ------- ---------- Diluted earnings per common share: Income applicable to common stock............ $41,424 60,437,632 $0.685 ======= ========== =========
PERIOD FROM FEBRUARY 12 TO DECEMBER 31, 1996 ---------------------------------------------------- PER COMMON INCOME SHARES SHARE ---------------- ----------------- --------------- (IN THOUSANDS) Income before extraordinary items............. $41,919 Less: Preferred stock dividends............. 10,488 ------- Basic earnings per common share: Income applicable to common stock............ 31,431 60,073,808 $0.523 ====== Effect of dilutive securities: Unvested restricted stock.................... - 3,912 Stock options................................ - 38,989 ------- ---------- Diluted earnings per common share: Income applicable to common stock............ $31,431 60,116,709 $0.523 ======= ========== ======
Options to purchase 300,000 shares of common stock at $7.00 per share were outstanding during 1997 and the second half of 1996 but were excluded from the computation of diluted earnings per common share for all periods except the first quarter of 1997 because the options' exercise price was greater than the average market price of the common shares for those periods. The options, which expire on June 11, 2006, were still outstanding at the end of 1997. Also excluded from the computation 61 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS of diluted earnings per common share were options to purchase 525,000 shares of common stock at $7.50 per share, granted on January 2, 1998. The reconciliation of basic and diluted earnings per common share for the Predecessor Company are not presented herein as there were no reconciling items for periods prior to February 12, 1996. E. PREFERRED STOCK The Company issued one million shares of new Series A 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. The Company issued a total of 213,188 additional shares between November 1, 1996 and December 31, 1997 to satisfy pay- in-kind dividends. Also, on January 22, 1998, the Company's Board of Directors declared a scheduled pay-in-kind dividend which was paid on February 1, 1998, through the issuance of 34,559 additional shares to shareholders of record as of January 22, 1998. Following is a summary of the changes in the preferred stock of the Predecessor and Reorganized Company:
REDEMPTION REQUIRED REDEMPTION NOT REQUIRED -------------------------------- -------------------------------- SHARES AMOUNT SHARES AMOUNT ------------ --------------- ------------ --------------- (IN THOUSANDS) (IN THOUSANDS) Balance at December 31, 1994 and 1995.............. 639,600 $ 67,266 142,450 $ 14,198 Redemption of Predecessor preferred stock........ (639,600) (67,266) (142,450) (14,198) Issuance of Reorganized preferred stock.......... 1,000,000 100,000 - - Issuance of dividends............................ 84,264 8,426 - - --------- -------- --------- ------------ Balance at December 31, 1996....................... 1,084,264 108,426 - - Issuance of dividends............................ 128,924 12,893 - - --------- -------- --------- ------------ Balance at December 31, 1997....................... 1,213,188 $121,319 - $ - ========= ======== ========= ============
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 62 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS 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. 63 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS F. LONG-TERM AND FINANCING AND CAPITAL LEASE OBLIGATIONS Outstanding long-term and financing and capital lease obligations are as follows:
DECEMBER 31, -------------------------------- 1997 1996 --------------- --------------- (IN THOUSANDS) Long-Term Obligations: - ---------------------- First Mortgage Bonds (1): 7.25% Series A, issued 1996, due 1999.................................. $ 66,261 $ 78,266 7.75% Series B, issued 1996, due 2001.................................. 62,698 78,771 8.25% Series C, issued 1996, due 2003.................................. 119,292 148,989 8.90% Series D, issued 1996, due 2006.................................. 223,132 235,957 9.40% Series E, issued 1996, due 2011.................................. 273,398 285,900 Pollution Control Bonds (2): Secured by First Mortgage Collateral Series Bonds: Variable rate bonds, due 2014........................................ 63,500 63,500 Variable rate refunding bonds, due 2013.............................. 33,300 33,300 Variable rate refunding bonds, due 2014.............................. 37,100 37,100 Variable rate refunding bonds, due 2015.............................. 59,235 59,235 Promissory note due 2007 ($84,000 due in 1998) (3)......................... 730 958 -------- ---------- Total long-term obligations........................................ 938,646 1,021,976 -------- ---------- Financing and Capital Lease Obligations: - ---------------------------------------- Turbine lease ($1,722,000 due in 1998) (4)................................. 4,628 5,900 Nuclear fuel ($26,657,000 due in 1998) (5)................................. 51,999 46,630 -------- ---------- Total financing and capital lease obligations...................... 56,627 52,530 -------- ---------- Total long-term and financing and capital lease obligations........ 995,273 1,074,506 Current maturities (Amount due within one year).............................. (28,463) (28,333) -------- ---------- $966,810 $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) 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. 64 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. Repurchases of First Mortgage Bonds made during 1997 and 1996 are as follows (In thousands):
PERIOD FROM FEBRUARY 12 YEAR ENDED TO DECEMBER 31, DECEMBER 31, 1997 1996 ------------ ------------ 7.25% Series A............................ $12,005 $ 46,726 7.75% Series B............................ 16,073 71,217 8.25% Series C............................ 29,697 8 8.90% Series D............................ 12,825 - 9.40% Series E............................ 12,502 - ------- -------- Total................................... $83,102 $117,951 ======= ========
(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 effective annual interest rate on the bonds is calculated to be 5.65% at December 31, 1997. The bonds may be required to be repurchased at the holder's option or are subject to mandatory redemption upon the occurrence of certain events, and are redeemable at the option of the Company under certain circumstances. (3) Promissory Note The note has an annual interest rate of 5.5% and is secured by certain furniture and fixtures. (4) Capitalized Lease Obligation, Copper Turbine The Company leases a turbine and certain other related equipment under a lease which expires in July 2000, with renewal options for up to seven additional years. Semiannual lease payments, including interest, are approximately $0.9 million through July 2000. The effective annual interest rate implicit in this lease is calculated to be 9.6%. 65 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (5) Nuclear Fuel Financing The Company has available a $100 million credit facility that provides for working capital and up to $60 million for the financing of nuclear fuel. This financing is effected through a trust that borrows under the facility to acquire and process the nuclear fuel. The Company is obligated to repay the trust's borrowings, and has secured this obligation with Collateral Series Bonds. In the Company's financial statements, the assets and liabilities of the trust are reported as assets and liabilities of the Company. The letter of credit reimbursement agreements which enhance the Company's Pollution Control Bonds and the $100 million credit facility require compliance with certain total debt and interest coverage ratios. The Company maintained the required compliance throughout 1997. Scheduled maturities of long-term and financing and capital lease obligations at December 31, 1997 are as follows (In thousands): 1998.............................................. $28,463 1999.............................................. 93,412 2000.............................................. 1,815 2001.............................................. 62,797 2002.............................................. 104
The table above does not reflect nuclear fuel purchase commitments and related obligations and maturities. 66 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS G. INCOME TAXES The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1997 and 1996 are presented below (In thousands):
DECEMBER 31, DECEMBER 31, 1997 1996 ------------ ------------ Deferred tax assets: Reorganization expenses financed with bonds............ $ 18,308 $ 22,526 Capital leases......................................... 2,633 2,873 Benefits of tax loss carryforwards..................... 222,764 256,510 Investment tax credit carryforward..................... 20,410 20,410 Alternative minimum tax credit carryforward............ 11,954 9,627 Other (including state deferred taxes)................. 82,929 92,643 --------- --------- Total gross deferred tax assets..................... 358,998 404,589 --------- --------- Less valuation allowance: Federal............................................. 12,661 12,661 State............................................... 17,149 17,941 --------- --------- Total valuation allowance......................... 29,810 30,602 --------- --------- Net deferred tax assets........................ 329,188 373,987 --------- --------- Deferred tax liabilities: Plant, principally due to differences in depreciation and basis differences............................... (275,531) (288,416) Other.................................................. (10,449) (11,687) --------- --------- Total gross deferred tax liabilities................ (285,980) (300,103) --------- --------- Net accumulated deferred income taxes.......... $ 43,208 $ 73,884 ========= =========
The deferred tax asset valuation allowance decreased by approximately $0.8 million in 1997, $226.7 million in 1996 and $4.5 million in 1995. The decrease in 1997 was due to a reduction of unused state net operating loss ("NOL") carryforward benefits, which had valuation allowances recorded against them. 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 NOL carryforward benefits that had valuation allowances recorded against them. The Company believes that the net deferred tax assets would be fully realized at current levels of taxable income. 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, 1997, if subsequently recognized as a tax benefit, would be credited directly to capital in excess of stated value in accordance with SOP 90-7. 67 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS The Company recognized income taxes as follows (In thousands):
PERIOD FROM | PERIOD FROM FEBRUARY 12 | JANUARY 1 YEAR ENDED TO | TO YEAR ENDED DECEMBER 31, DECEMBER 31, | FEBRUARY 11, DECEMBER 31, 1997 1996 | 1996 1995 ------------- ------------- | ------------- ------------- | Income tax expense (benefit): | Federal: | Current......................................... $ 2,382 $(17,203) | $ - $ 13,757 Deferred........................................ 28,087 38,828 | (2,340) (21,703) Investment tax credit amortization.............. - - | (325) (2,828) --------- -------- | ------------ -------- Subtotal current operations................... 30,469 21,625 | (2,665) (10,774) Deferred tax benefit on extraordinary loss...... (1,494) - | - - Adjustment of assets to reorganization value | and liabilities to fair value (eliminatio | of accumulated deferred investment | tax credits).................................. - - | (77,950) - Deferred included in reorganization items....... - - | (172,899) (1,194) Income tax expense on interest income | during bankruptcy............................. - - | 583 4,633 --------- -------- | ------------ -------- Total....................................... $28,975 $ 21,625 | $(252,931) $ (7,335) ========= ======== | ============ ======== | State: | Current......................................... $ - $ 278 | $ 116 $ 935 Deferred........................................ 4,307 4,767 | (866) (5,959) --------- -------- | ------------ -------- Subtotal current operations................... 4,307 5,045 | (750) (5,024) Deferred included in reorganization items....... - - | (17,494) - --------- -------- | ------------ -------- Total....................................... $ 4,307 $ 5,045 | $ (18,244) $ (5,024) ========= ======== | ============ ========
The current federal income tax expense for 1997 results primarily from the accrual of alternative minimum tax ("AMT") for 1997. Deferred federal income tax includes an offsetting AMT benefit of approximately $2.4 million. The current federal income tax benefit for 1996 resulted primarily from the carryback of 1996 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. The current federal income tax expense for 1995 results primarily from the accrual of AMT expense. The deferred federal income tax benefit recorded in 1995 includes offsetting AMT credits of approximately $18.3 million. ITC utilized of approximately $4.6 million was recorded as a reduction to current tax and included as a deferred tax expense. 68 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS Federal income tax provisions differ from amounts computed by applying the statutory rate of 35% to book income (loss) before federal income tax as follows (In thousands):
PERIOD FROM | PERIOD FROM FEBRUARY 12 | JANUARY 1 YEAR ENDED TO | TO YEAR ENDED DECEMBER 31, DECEMBER 31, | FEBRUARY 11, DECEMBER 31, 1997 1996 | 1996 1995 ----------------- --------------- | ------------ ----------- | Federal income tax expense (benefit) computed | on income (loss) at statutory rate................ $28,269 $ 22,240 | $ 45,339 $(14,229) Difference due to: | ITC amortization (net of deferred taxes).......... - - | (211) (1,838) Nondeductible bankruptcy costs.................... - - | 3,604 5,925 Federal valuation allowance....................... - - | (204,848) (4,461) Adjustment of assets to reorganization value | and liabilities to fair value (elimination | of accumulated deferred ITCs)................... - - | (77,950) - Reorganization costs (including the nontaxable | extraordinary gain on discharge of debt)........ - - | (27,745) - Other............................................. 706 (615) | 8,880 7,268 ------- -------- | --------- -------- Total federal income tax expense (benefit)...... $28,975 $ 21,625 | $(252,931) $ (7,335) ======= ======== | ========= ======== Effective federal income tax rate................. 35.9% 34.0% | (195.3)% 18.0% ======= ======== | ========= ========
The Company had approximately $636.5 million of tax NOL carryforwards, approximately $20.4 million of ITC carryforwards and approximately $12.0 million of AMT credit carryforwards as of December 31, 1997. If unused, the NOL carryforwards would expire at the end of the year 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 statutory rate of 35%. H. COMMITMENTS AND CONTINGENCIES SALE/LEASEBACK INDEMNIFICATION OBLIGATIONS Pursuant to the Palo Verde sale/leaseback participation agreements and leases, if the lessors incur additional tax liability or other loss as a result of federal or state tax assessments related to the sale/leaseback transactions, the lessors may have claims against the Company for indemnification. Pursuant to settlement agreements entered into under the Plan, certain of these indemnity 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 Internal Revenue Service ("IRS") has raised issues, primarily related to ITC 69 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS 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. 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, unforeseen 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 and Missouri, which had been operated by PCB Treatment, Inc. ("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 by the Company to the Steering Committee and indemnifies the Company for any liabilities to other parties as may be asserted in the future. On September 16, 1997, the EPA sent the Company a "general notice of liability" wherein the agency formally notified the Company that it was considered a Potentially Responsible Party at the sites. The Company believes any liability it may face at the sites is covered by the settlement agreement. Accordingly, the Company immediately notified the Steering Committee and demanded it defend and indemnify the Company as provided in the settlement agreement. The Steering Committee informed the Company that it intends to honor this indemnity obligation. 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 70 transferred from the first site. The Company's records do not indicate any deliveries of PCBs to this third site. The Company believes it 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 for Four Corners, is performing an analysis to establish an appropriate revised cost estimate. Based on preliminary estimates from APS and the coal provider, the Company recorded a liability of approximately $12 million in 1996 which reflects the present value of the estimated future costs of reclamation for its share of the coal mine reclamation obligation. I. LITIGATION LITIGATION WITH LAS CRUCES Las Cruces is attempting to replace the Company as the electric service provider in Las Cruces by acquiring, through condemnation or a negotiated purchase, the distribution assets and other facilities used to provide electric service to customers in Las Cruces. Sales to customers in Las Cruces represent approximately 8% of the Company's operating revenues. In April 1995, Las Cruces filed a complaint against the Company in New Mexico state court, 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. In May 1995, the Company removed the case to federal district court in New Mexico. Following a trial on the merits, the Federal Magistrate granted the Company's motion to certify to the New Mexico Supreme Court the question of 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. Prior to a ruling by the New Mexico Supreme Court, the New Mexico legislature enacted a bill which purports to give Las Cruces the authority to condemn the Company's distribution system within its city limits and a territory extending five miles beyond the municipal boundary. On February 11, 1998, the New Mexico Supreme Court ruled that the subsequent legislation rendered moot the certified question before the Supreme Court. On February 26, 1998, the Company received notice from Las Cruces of its intent to file a condemnation action in New Mexico district court. At this time the Company is unable to predict the outcome of this litigation. 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 be entitled to receive "just compensation" as established by the court under New Mexico law. "Just compensation" is generally defined as the amount of money that would fairly compensate the party whose property is condemned. It is the Company's opinion that 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. See Note B for a full discussion of stranded costs. 71 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS Las Cruces has taken several actions to position itself to acquire portions of the Company's distribution system and certain related facilities. In August 1994, Southwestern Public Service Company ("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 sold approximately $73 million in revenue bonds in October 1995 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. In addition, the New Mexico Commission is investigating the agreement between SPS and Las Cruces which, under certain circumstances, would grant Las Cruces an option to sell to SPS electric utility assets acquired through condemnation. 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 as those imposed on 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 Company filed an appeal with the New Mexico Court of Appeals and Las Cruces requested an expedited ruling from the Court of Appeals. In August 1997, the New Mexico Court of Appeals certified to the New Mexico Supreme Court the issues related to Las Cruces' authority to issue the revenue bonds. Oral argument before the Supreme Court was held in November 1997. In July 1996, Las Cruces exercised its right under Order No. 888 to request that the Company calculate Las Cruces' stranded cost obligation should it leave the Company's system and operate its own municipal utility. The Company's initial non-binding calculation was provided within the statutory period. Las Cruces subsequently filed a request at the FERC for a determination that Las Cruces would have no stranded cost obligation to the Company or, in the alternative, that the FERC convene a hearing to establish the amount of any stranded costs. In August 1997, the FERC issued an order denying Las Cruces' request for a determination that Las Cruces would have no stranded cost obligation, and providing for evidentiary hearings on the following stranded costs issues: (i) whether the Company has met the "reasonable expectation" standard so as to justify recovery of stranded costs from Las Cruces; and (ii) if so, the amount of stranded costs that the Company may recover from Las Cruces. The Company filed testimony in support of its recovery and calculation of stranded costs, calculated pursuant to the FERC formula. After removal of all distribution and transmission related expenses, the Company's testimony reflects a generation stranded cost request of approximately $101 million. In November 1997, Las Cruces filed testimony which takes the position that the Company is entitled to stranded costs in the range of $0 to $19 million. On December 19, 1997, the FERC staff filed testimony estimating the Company's stranded cost to be $29.4 million. Hearings of all issues were conducted at the 72 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS FERC in February 1998. A final decision from the FERC is not expected before late 1998 or early 1999. In April 1997, Las Cruces announced its plan to build a substation and distribution lines to serve a new customer in a city-owned industrial park. Las Cruces stated that SPS would construct, operate and maintain the new substation facility, and that the rates for this new customer would be significantly lower than the Company's current rates. Las Cruces has approved a contract with SPS to provide operation and maintenance services for the proposed Las Cruces electric distribution system, substations and associated transmission facilities. 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. A negotiated settlement of the Company's pending rate case in New Mexico could include a reduction in rates and settlement of all issues in New Mexico, which would be likely to create increased political and economic pressure on the Company to reduce rates in Texas. The Company is unable to predict the outcome of Las Cruces' 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. 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 stay the proceedings indefinitely so the parties may attempt to resolve the dispute without litigation. This matter remains inactive and the Company is unable to predict the outcome of this case. WATER CASES San Juan River System. The Four Corners participants are among the defendants in a suit filed by the State of New Mexico in 1975 in state district court in New Mexico against the United States of America, the City of Farmington, New Mexico, the Secretary of the Interior as Trustee for the Navajo Nation and other Indian tribes and certain other defendants (State of New Mexico ex rel. S. E. Reynolds, 73 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS New Mexico State Engineer v. United States of America, et al., Eleventh Judicial District Court, County of San Juan, State of New Mexico, Cause No. 75-184). The suit seeks adjudication of the water rights of the San Juan River Stream System in New Mexico, which, among other things, supplies the water used at Four Corners. An agreement reached with the Navajo Nation in 1985 provides that if Four Corners loses a portion of its water rights in the adjudication, the tribe will provide sufficient water from its allocation to offset the loss. The case has been inactive for many years and the Company is unable to predict the outcome of this case. Gila River System. In connection with the construction and operation of Palo Verde, APS entered into contracts with certain municipalities granting APS the right to purchase effluent for cooling purposes at Palo Verde. In 1986, a summons was served on APS that required all water claimants in the Lower Gila River Watershed in Arizona to assert any claims to water in an action pending in Maricopa County Superior Court, titled In re The General Adjudication of All Rights to Use Water in the Gila River System and Source. Palo Verde is located within the geographic area subject to the summons and the rights of the Palo Verde Participants to the use of groundwater and effluent at Palo Verde is potentially at issue in this action. APS, as operating agent, filed claims that dispute the Court's jurisdiction over the Palo Verde Participants' groundwater rights and their contractual rights to effluent relating to Palo Verde and, alternatively, seek confirmation of such rights. In December 1992, the Arizona Supreme Court heard oral argument on certain issues in this matter that are pending on interlocutory appeal. Issues important to the Palo Verde Participants' claims were remanded to the trial court for further action and the trial court certified its decision for another interlocutory appeal to the Arizona Supreme Court. The Arizona Supreme Court will hear argument on these issues in October 1998 and subsequently render a decision. The Company is unable to predict the outcome of this case. OTHER LEGAL PROCEEDINGS The Company is a party to various other claims, legal actions and complaints. In many of these matters, the Company has excess casualty liability insurance which is applicable. Based upon a review of these claims and applicable insurance coverage, the Company believes that none of these claims will have a material adverse effect on the operations, financial position or cash flows of the Company. J. EMPLOYEE BENEFITS 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 and IRS under provisions of the Retirement Plan, as actuarially calculated. The assets of the Retirement Plan are invested in equity 74 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS securities, fixed income instruments and cash equivalents and are managed by professional investment managers appointed by the Company. The Company's Non-Qualified Retirement Income Plan is a non-funded defined benefit plan which covers certain former employees of the Company. The pension cost for the Non-Qualified Retirement Income Plan is based on substantially the same actuarial methods and economic assumptions as those used for the Retirement Plan. During 1996, as part of the Reorganization, the Company terminated the Non- Qualified Retirement Income Plan 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 Non-Qualified Retirement Income Plan 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 Non-Qualified Retirement Income Plan 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):
PERIOD FROM | PERIOD FROM YEAR FEBRUARY 12 | JANUARY 1 YEAR ENDED TO | TO ENDED DECEMBER 31, DECEMBER 31, | FEBRUARY 11, DECEMBER 31, 1997 1996 | 1996 1995 ------------------ ----------------- | ----------------- ----------------- | Service costs for benefits earned during the | period........................................... $ 2,402 $ 2,148 | $ 354 $ 2,011 Interest costs on projected benefit obligation.... 6,737 5,774 | 749 5,157 Actual return on plan assets...................... (12,469) (5,019) | (570) (9,267) Net amortization and deferral..................... 7,375 842 | 113 6,008 Recognition of previously unrecognized items...... - - | 21,738 - -------- ------- | ------- ------- Net periodic pension cost recognized............ $ 4,045 $ 3,745 | $22,384 $ 3,909 ======== ======= | ======= =======
The assumed annual discount rates used in determining the net periodic pension cost were 7.50%, 7.25% and 8.50% for 1997, 1996 and 1995, 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. 75 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, 1997 and 1996 are presented below (In thousands):
DECEMBER 31, ---------------------------------------------------------------------- 1997 1996 --------------------------------- ---------------------------------- NON- NON- QUALIFIED QUALIFIED RETIREMENT RETIREMENT RETIREMENT RETIREMENT INCOME INCOME INCOME INCOME PLAN PLAN PLAN PLAN ------------- ------------- ------------- ------------- Actuarial present value of benefit obligations: Vested benefit obligation........................... $(65,523) $(19,324) $(57,366) $(18,171) ======== ======== ======== ======== Accumulated benefit obligation...................... $(68,481) $(19,324) $(59,883) $(18,171) ======== ======== ======== ======== Projected benefit obligation........................ $(83,812) $(19,324) $(72,951) $(18,171) Plan assets at fair value............................. 74,114 - 61,460 - -------- -------- -------- -------- Projected benefit obligation in excess of plan assets. (9,698) (19,324) (11,491) (18,171) Unrecognized net (gain) loss from past experience..... (4,887) 162 (3,520) (1,368) Adjustment required to recognize minimum liability.... - (162) - - -------- -------- -------- -------- Accrued pension liability........................... $(14,585) $(19,324) $(15,011) $(19,539) ======== ======== ======== ========
Actuarial assumptions used in determining the actuarial present value of projected benefit obligations are as follows:
1997 1996 --------- --------- Discount rate............................................ 7.00% 7.50% 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. 76 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS 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. Net periodic postretirement benefit cost is made up of the components listed below (In thousands):
PERIOD | PERIOD FROM | FROM YEAR FEBRUARY 12 | JANUARY 1 YEAR ENDED TO | TO ENDED DECEMBER 31, DECEMBER 31, | FEBRUARY 11, DECEMBER 31, 1997 1996 | 1996 1995 --------------- --------------- | -------------- --------------- | Service costs for benefits earned during | the period................................... $2,538 $2,209 | $ 279 $1,603 Interest costs on accumulated postretirement | benefit obligation........................... 5,254 4,723 | 607 4,046 Actual return on plan assets.................. (250) (146) | - - Amortization of transition obligations........ - - | 263 2,363 Amortization of (gain) loss................... (7) - | 60 (54) Recognition of previously unrecognized | items........................................ - - | 52,340 - ------ ------ | ------- ------ Net periodic postretirement benefit cost | recognized................................. $7,535 $6,786 | $53,549 $7,958 ====== ====== | ======= ======
The funded status of the plan and amount recognized in the Company's balance sheets at December 31, 1997 and 1996 are presented below (In thousands):
DECEMBER 31, ------------------------------- 1997 1996 -------- -------- Accumulated postretirement benefit obligation: Retirees................................................................ $(35,846) $(29,908) Active participants: Fully eligible....................................................... (10,171) (10,964) Other................................................................ (37,956) (36,727) -------- -------- (83,973) (77,599) Plan assets at fair value................................................. 8,822 8,050 -------- -------- Accumulated postretirement benefit obligation in excess of plan assets.... (75,151) (69,549) Unrecognized net gain from past experience different from that assumed.... (380) (1,764) -------- -------- Accrued postretirement benefit liability................................ $(75,531) $(71,313) ======== ========
For measurement purposes, a 10.9% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1998; the rate was assumed to decrease gradually to 6% for 2004 77 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS 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, 1997 by $10.5 million and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 1997 by $1.2 million. Actuarial assumptions used in determining the actuarial present value of accumulated postretirement benefit obligations are as follows:
1997 1996 ----------- ----------- Discount rate..................................... 7.00% 7.50% Rate of increase in compensation levels........... 5.00% 5.00% Rate of return on plan assets..................... 4.50% 4.50%
ALL EMPLOYEE CASH BONUS PLAN The All Employee Cash Bonus Plan (the "Bonus Plan"), introduced in early 1997, was established to reward employees for their contribution in helping the Company attain its corporate goals. Eligible employees below officer level would receive a cash bonus if the Company attained established levels of safety, customer satisfaction and deleveraging (or cash flow) during 1997. The cash flow goal had to be met before any bonus amounts would be paid, and improvement in cash flow must be greater than any bonus amounts paid. The Company was able to surpass the required minimum levels of improvement in two out of the three performance measures. As a result of the Company's success, the Company distributed approximately $2.3 million in cash bonuses to all eligible employees in early February 1998. The bonus was expensed in the fourth quarter of 1997. The Company has renewed the Bonus Plan in 1998 with similar goals. K. FRANCHISES AND SIGNIFICANT CUSTOMERS CITY OF EL PASO FRANCHISE The Company's major franchise is with the City of El Paso, Texas. The franchise agreement provides an arrangement for the Company's utilization of public rights-of-way necessary to serve its retail customers within the City of El Paso. The franchise with the City of El Paso extends through August 1, 2005. LAS CRUCES FRANCHISE The Company's franchise with Las Cruces expired in March 1994. The Company has continued to provide electric service to customers within Las Cruces; however, Las Cruces is attempting to replace the Company as the electric service provider in Las Cruces. Recently, the New Mexico legislature has passed legislation which purports to give Las Cruces the authority to condemn the 78 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS Company's distribution system and related assets. If Las Cruces succeeds in its efforts to condemn the Company's distribution system, the Company could lose its Las Cruces customer base. See Note I. 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 $19.6 million or 3% of operating revenues in 1997. 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 an additional two years. The Company has a contract for service to Holloman for a ten-year term which began 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 existing retail service contract for an indefinite period, until written termination of such contract by the Army not less than one year in advance of the termination date. L. FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosure about Fair Value of Financial Instruments," requires the Company to disclose estimated fair values for its financial instruments. The Company has determined that cash and temporary investments, accounts receivable, long-term contract receivable, 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. 79 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS 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 at December 31, 1997 and 1996 and are presented in the table below (In thousands):
1997 1996 ------------------------------- -------------------------------- ESTIMATED ESTIMATED CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ----------- ---------------- ------------ ---------------- First Mortgage Bonds...................... $744,781 $ 814,857 $ 827,883 $ 864,047 Pollution Control Bonds................... 193,135 193,135 (2) 193,135 193,135 (2) Nuclear Fuel Financing(1)................. 51,999 51,999 (3) 46,630 46,630 (3) -------- ----------- ---------- ----------- Total................................. $989,915 $ 1,059,991 $1,067,648 $ 1,103,812 ======== =========== ========== =========== Preferred Stock........................... $121,319 $ 131,752 $ 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. 80 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS M. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1997 QUARTERS 1996 QUARTERS -------------------------------------------------- ------------------------------------ 4th(1) 3rd 2nd 1st 4th 3rd 2nd -------- -------- ---------- ---------- --------- --------- -------- (IN THOUSANDS EXCEPT FOR SHARE DATA) Operating revenues.................. $143,766 $170,140 $144,275 $135,857 $143,023 $166,656 $144,388 Operating income.................... 31,210 59,179 40,045 31,233 29,958 57,964 40,730 Income (loss) before reorganization items and extraordinary items...... 8,743 23,988 16,245 5,592 7,960 22,770 9,500 Reorganization items, net of income tax benefit........................ - - - - - - - Extraordinary loss on repurchases of debt, net of federal income tax benefit.. (35) (69) (427) (2,244) - - - Extraordinary gain on discharge of debt............................... - - - - - - - Net income applicable to common stock.............................. 5,282 20,588 12,580 199 4,898 19,793 6,603 Basic earnings per common share: Income before extraordinary items.. 0.089 0.343 0.216 0.040 0.082 0.329 0.110 Extraordinary loss on repurchases of debt, net of federal income tax benefit........................... (0.001) (0.001) (0.007) (0.037) - - - Extraordinary gain on discharge of debt.............................. - - - - - - - Net income......................... 0.088 0.342 0.209 0.003 0.082 0.329 0.110 Diluted earnings per common share: Income before extraordinary items.. 0.088 0.342 0.216 0.040 0.081 0.329 0.110 Extraordinary loss on repurchases of debt, net of federal income tax benefit........................... (0.001) (0.001) (0.007) (0.037) - - - Extraordinary gain on discharge of debt.............................. - - - - - - - Net income......................... 0.087 0.341 0.209 0.003 0.081 0.329 0.110
PERIOD FROM | PERIOD FROM FEBRUARY 12 | JANUARY 1 TO | TO MARCH 31, | FEBRUARY 11, 1996 | 1996 ----------- | ------------- | Operating revenues.................. $69,907 | $ 54,949 Operating income.................... 15,839 | 1,639 Income (loss) before reorganization | items and extraordinary items...... 1,689 | (4,053) Reorganization items, net of income | tax benefit........................ - | 122,251 Extraordinary loss on repurchases | of debt, | net of federal income tax benefit.. - | - Extraordinary gain on discharge of | debt............................... - | 264,273 (2) Net income applicable to common | stock.............................. 137 | 382,471 Basic earnings per common share: | Income before extraordinary items.. 0.002 | 3.325 Extraordinary loss on repurchases | of debt, net of federal income tax | benefit........................... - | - Extraordinary gain on discharge of | debt.............................. - | 7.435 (2) Net income......................... 0.002 | 10.760 Diluted earnings per common share: | Income before extraordinary items.. 0.002 | 3.325 Extraordinary loss on repurchases | of debt, net of federal income tax | benefit........................... - | - Extraordinary gain on discharge of | debt.............................. - | 7.435 (2) Net income......................... 0.002 | 10.760
- ------------ (1) Includes an all employee cash bonus. See Note J. (2) Reflects the discharge of obligations subject to compromise for less than their recorded amounts. 81 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 1998 Annual Meeting of Shareholders (the "1998 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 1998 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference from the 1998 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated herein by reference from the 1998 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......... 33 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. 82 INDEX TO EXHIBITS Exhibit Number Title ------ ----- Exhibit 2 - Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession: 2.01 - Fourth Amended Plan of Reorganization, dated November 7, 1995. (Exhibit 2.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995) 2.02 - Disclosure Statement to Fourth Amended Plan of Reorganization of El Paso Electric Company. (Exhibit 2.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995) Exhibit 3 - Articles of Incorporation and Bylaws: 3.01 - Restated Articles of Incorporation of the Company, dated February 7, 1996 and effective February 12, 1996. (Exhibit 3.01 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 3.01-01 - Statement of Resolution Establishing Series of Preferred Stock, dated February 7, 1996 and effective February 12, 1996, amending Exhibit 3.01. (Exhibit 3.01-01 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 3.02 - Bylaws of the Company, dated February 6, 1996. (Exhibit 3.02 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) Exhibit 4 - Instruments Defining the Rights of Security Holders, including Indentures: 4.01 - General Mortgage Indenture and Deed of Trust, dated as of February 1, 1996, and First Supplemental Indenture, dated as of February 1, 1996, including form of Series A through H First Mortgage Bonds. (Exhibit 4.01 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 4.01-01 - Second Supplemental Indenture, dated as of August 19, 1997, to Exhibit 4.01. (Exhibit 4.01 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997) 4.02 - Statement of Resolution Establishing Series of Preferred Stock, dated February 7, 1996 and effective February 12, 1996. (Exhibit 4.02 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 4.03 - Indenture of Trust, dated as of July 1, 1994, between Maricopa County, Arizona Pollution Control Corporation and Texas Commerce Bank National Association, as Trustee, related to $63,500,000 principal amount of Maricopa County, Arizona Pollution Control Corporation Adjustable Tender Pollution Control Revenue Bonds, 1994 Series A (El Paso Electric Company Palo Verde Project). (Exhibit 4.01 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994) 83 4.03-01 - Supplemental Indenture of Trust No. 1, dated as of December 12, 1995, related to Exhibit 4.03, including form of bond. (Exhibit 4.03-01 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 4.04 - Loan Agreement, dated as of July 1, 1994, between Maricopa County, Arizona Pollution Control Corporation and the Company, related to the Pollution Control Bonds referred to in Exhibit 4.03. (Exhibit 4.02 to the Company's Quarterly Report on Form 10- Q for the quarter ended September 30, 1994) 4.04-01 - Supplemental Loan Agreement No. 1, dated as of February 12, 1996, related to Exhibit 4.04. (Exhibit 4.04-01 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 4.05 - Remarketing Agreement, dated as of July 1, 1994, between the Company and Smith Barney Inc., related to the Pollution Control Bonds referred to in Exhibit 4.03. (Exhibit 4.04 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994) 4.06 - Tender Agreement, dated as of July 1, 1994, between the Company and Smith Barney Inc., related to the Pollution Control Bonds referred to in Exhibit 4.03. (Exhibit 4.05 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994) 4.07 - Ordinance No. 94-1018 adopted by the City Council of the City of Farmington, New Mexico, on October 18, 1994, authorizing and providing for the issuance by the City of Farmington, New Mexico, of $33,300,000 principal amount of its Adjustable Tender Pollution Control Revenue Refunding Bonds, 1994 Series A (El Paso Electric Company Four Corners Project). (Exhibit 4.07 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994) 4.07-01 - Ordinance No. 96-1035 adopted by the City Council of the City of Farmington, New Mexico, on January 23, 1996 as Supplemental Ordinance No. 1, related to Exhibit 4.07. (Exhibit 4.07-01 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 4.08 - Resolution No. 94-798 adopted by the City Council of the City of Farmington, New Mexico, on October 18, 1994, relating to the issuance of the Pollution Control Bonds referred to in Exhibit 4.07. (Exhibit 4.08 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994) 4.09 - Amended and Restated Installment Sale Agreement, dated as of November 1, 1994, between the Company and the City of Farmington, New Mexico, relating to the Pollution Control Bonds referred to in Exhibit 4.07. (Exhibit 4.09 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994) 4.10 - Representation and Indemnity Agreement, dated as of October 31, 1994, between the Company, the City of Farmington, New Mexico, and Smith Barney Inc., relating to the Pollution Control Bonds referred to in Exhibit 4.07. (Exhibit 4.10 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994) 84 4.11 - Remarketing Agreement, dated as of November 1, 1994, between the Company and Smith Barney Inc., relating to the Pollution Control Bonds referred to in Exhibit 4.07. (Exhibit 4.11 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994) 4.12 - Tender Agreement, dated as of November 1, 1994, between the Company and Smith Barney Inc., relating to the Pollution Control Bonds referred to in Exhibit 4.07. (Exhibit 4.12 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994) 4.13 - Letter of Credit and Reimbursement Agreement dated as of August 27, 1997, between the Company, the Creditors named therein, Barclays Bank PLC, New York Branch, as Issuing Bank and Agent for the Creditors, and Union Bank of California, N.A., as Documentation Agent, relating to the Pollution Control Bonds referred to in Exhibit 4.07. (Exhibit 4.03 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997) 4.14 - 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) 85 4.16 - Indexing Agent's Agreement among Maricopa County, Arizona Pollution Control Corporation, the Company and Smith Barney, Harris Upham & Co., Incorporated, relating to the Pollution Control Refunding Revenue Bonds referred to in Exhibit 4.14. (Exhibit 4.27-03 to the Company's Annual Report on Form 10-K for the year ended December 31, 1984) 4.17 - Remarketing Agent Agreement, dated as of May 6, 1994, between Smith Barney Shearson Inc., and the Company, relating to the Pollution Control Refunding Revenue Bonds referred to in Exhibit 4.14. (Exhibit 4.02 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994) 4.18 - Loan Agreement, dated as of February 12, 1996, between Maricopa County, Arizona Pollution Control Corporation and the Company, relating to $59,235,000 principal amount of Maricopa County, Arizona Pollution Control Corporation Pollution Control Refunding Revenue Bonds, 1985 Series A (El Paso Electric Company Palo Verde Project). (Exhibit 4.18 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 4.19 - Indenture of Trust, dated as of February 12, 1996, by and between Maricopa County, Arizona Pollution Control Corporation and Texas Commerce Bank National Association, as Trustee, relating to the Pollution Control Refunding Revenue Bonds referred to in Exhibit 4.18. (Exhibit 4.19 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 4.20 - Tender Agent Agreement, dated as of February 12, 1996, between the Company and Smith Barney Inc., relating to the Pollution Control Refunding Revenue Bonds referred to in Exhibit 4.18. (Exhibit 4.20 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 4.21 - Remarketing Agent Agreement, dated as of February 12, 1996, between the Company and Smith Barney Inc., relating to the Pollution Control Refunding Revenue Bonds referred to in Exhibit 4.18. (Exhibit 4.21 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 4.22 - Letter of Credit and Reimbursement Agreement, dated as of August 27, 1997, between the Company, the Creditors named therein, Barclays Bank PLC, New York Branch, as Issuing Bank and Agent for the Creditors, and Union Bank of California, N.A., as Documentation Agent, relating to the Pollution Control Bonds referred to in Exhibits 4.03, 4.14 and 4.18. (Exhibit 4.02 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997) 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) 86 10.02 - Supplemental and Additional Indenture of Lease, dated May 27, 1966, including amendments and supplements to original Lease Four Corners Units 1, 2 and 3, between the Navajo Tribe of Indians and Arizona Public Service Company, and including new Lease Four Corners Units 4 and 5, between the Navajo Tribe of Indians and Arizona Public Service Company, the Company, Public Service Company of New Mexico, Salt River Project Agricultural Improvement and Power District, Southern California Edison Company and Tucson Gas & Electric Company. (Exhibit 4-e to Registration Statement No. 2-28692 on Form S-9) 10.02-01 - Amendment and Supplement No. 1, dated March 21, 1985, to Exhibit 10.02. (Exhibit 19.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1985) 10.03 - El Paso Electric Company 1996 Long-Term Incentive Plan (Exhibit 4.1 to Registration Statement No. 333-17971 on Form S-8) 10.04 - Four Corners Project Operating Agreement, dated May 15, 1969, between Arizona Public Service Company, the Company, Public Service Company of New Mexico, Salt River Project Agricultural Improvement and Power District, Southern California Edison Company and Tucson Gas & Electric Company, and Amendments 1 through 10 thereto. (Exhibit 10.04 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 10.04-01 - Amendment No. 11, dated May 23, 1997, to Exhibit 10.04. (Exhibit 10.04-01 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997) 10.05 - Arizona Nuclear Power Project Participation Agreement, dated August 23, 1973, between Arizona Public Service Company, Public Service Company of New Mexico, Salt River Project Agricultural Improvement and Power District, Tucson Gas & Electric Company and the Company, describing the respective participation ownerships of the various utilities having undivided interests in the Arizona Nuclear Power Project and in general terms defining the respective ownerships, rights, obligations, major construction and operating arrangements of the Parties, and Amendments No. 1 through 13 thereto. (Exhibit 10.05 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 10.06 - ANPP Valley Transmission System Participation Agreement, dated August 20, 1981, and Amendments No. 1 and 2 thereto. APS Contract No. 2253-419.00. (Exhibit 10.06 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 10.07 - Arizona Nuclear Power Project High Voltage Switchyard Participation Agreement, dated August 20, 1981. APS Contract No. 2252-419.00. (Exhibit 20.14 to the Company's Annual Report on Form 10-K for the year ended December 31, 1981) 10.07-01 - Amendment No. 1, dated November 20, 1986, to Exhibit 10.07. (Exhibit 10.11-01 to the Company's Annual Report on Form 10-K for the year ended December 31, 1986) 87 10.08 - Firm Palo Verde Nuclear Generating Station Transmission Service Agreement, between Salt River Project Agricultural Improvement and Power District and the Company, dated October 18, 1983. (Exhibit 19.12 to the Company's Annual Report on Form 10-K for the year ended December 31, 1983) 10.09 - Trust Agreement, dated as of May 1, 1980, between The Bank of New York, as Beneficiary, and First Security Bank of Utah, N.A., and Robert S. Clark, as Owner Trustees, establishing a trust designated as El Paso Electric Company (1980) Equipment Trust No. 2. (Exhibit 5-p-1 to Registration Statement No. 2-68414 on Form S-7) 10.10 - Trust Indenture, dated as of May 1, 1980, between The Connecticut Bank and Trust Company, as Indenture Trustee, and First Security Bank of Utah, N.A., and Robert S. Clark, Owner Trustees. (Exhibit 5-p-2 to Registration Statement No. 2-68414 on Form S-7) 10.11 - Lease Agreement, dated as of May 1, 1980, between First Security Bank of Utah, N.A., and Robert S. Clark, the Owner Trustees, as Lessor, and the Company, as Lessee, providing for the lease of a combustion turbine and related generation equipment. (Exhibit 5-p-3 to Registration Statement No. 2-68414 on Form S-7) 10.12 - Participation Agreement, dated as of May 1, 1980, among the Company, as Lessee, The Bank of New York, as Beneficiary, First Security Bank of Utah, N.A., and Robert S. Clark, as Owner Trustees, The Connecticut Bank and Trust Company, as Indenture Trustee, Franklin Life Insurance Company, Woodmen of the World Life Insurance Society, Minnesota Mutual Life Insurance Company, MacCabees Mutual Life Insurance Company and Mutual Service Insurance Company, as Lenders, pertaining to Exhibit 10.11. (Exhibit 5-p-4 to Registration Statement No. 2-68414 on Form S-7) 10.13 - Interconnection Agreement, as amended, dated December 8, 1981, between the Company and Southwestern Public Service Company, and Service Schedules A through F thereto. (Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 10.13-01 - Letter Agreement, dated December 19, 1996, modifying Service Schedule E, relating to Exhibit 10.13. (Exhibit 10.13-01 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996) 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) 88 10.16 - Southwest New Mexico Transmission Project Participation Agreement, dated April 11, 1977, between Public Service Company of New Mexico, Community Public Service Company and the Company, and Amendments 1 through 5 thereto. (Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 10.17 - Tucson-El Paso Power Exchange and Transmission Agreement, dated April 19, 1982, between Tucson Electric Power Company and the Company. (Exhibit 19.26 to the Company's Annual Report on Form 10-K for the year ended December 31, 1982) *10.18 - Southwest Reserve Sharing Group Participation Agreement, dated January 1, 1998, between the Company, Arizona Electric Power Cooperative, Arizona Public Service Company, City of Farmington, Los Alamos County, Nevada Power Company, Plains Electric G&T Cooperative, Inc., Public Service Company of New Mexico, Tucson Electric Power and Western Area Power Administration. 10.19 - Power Sales Agreement No. 2, dated December 2, 1986, between the Company and Imperial Irrigation District, and Amendment No. 1 thereto. (Exhibit 10.19 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 10.20 - Arizona Nuclear Power Project Transmission Project Westwing Switchyard Amended Interconnection Agreement, dated August 14, 1986, between The United States of America; Arizona Public Service Company; Department of Water and Power of the City of Los Angeles; Nevada Power Company; Public Service Company of New Mexico; Salt River Project Agricultural Improvement and Power District; Tucson Electric Power Company; and the Company. (Exhibit 10.72 to the Company's Annual Report on Form 10-K for the year ended December 31, 1986) 10.21 - Power Sales Agreement, dated April 29, 1987, between the Company and Texas-New Mexico Power Company, and Amendment No. 1 thereto. (Exhibit 10.21 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 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.] 89 *10.23-02 - Contract for the Purchase, Sale or Exchange of Economy Energy, executed December 19, 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) *10.24-02 - Amendment No. 2, dated as of July 31, 1997, to Exhibit 10.24. 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) 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) 90 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 the Company, Fidelity Management & Research Company and Fidelity Management Trust Company. (Exhibit 10.01 to Registration Statement 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 on Form S-1) 99.02 - Restricted Stock Award Agreement, dated as of January 17, 1997, with James S. Haines, Jr. (Exhibit 99.02 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996) 99.03 - Stock Option Agreement, dated as of January 17, 1997, with James S. Haines, Jr. (Exhibit 99.03 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996) *99.03-01 - Amendment No. 1, dated April 30, 1997, to Exhibit 99.03. 91 99.04 - Stock Option Agreement, dated as of January 17, 1997, with David H. Wiggs, Jr. (Exhibit 99.04 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996) 99.05 - Directors' Restricted Stock Award Agreement, dated as of January 17, 1997, with George H. Edwards, Jr. (Exhibit 99.05 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996) 99.06 - Form of Directors' Restricted Stock Award Agreement between the Company and certain directors of the Company. (Exhibit 99.06 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996) 99.07 - Form of Stock Option Agreement between the Company and certain key officers of the Company. (Exhibit 99.07 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996) *+99.08 - Form of Restricted Stock Award Agreement between the Company and certain key officers of the Company. *99.09 - Restricted Stock Award Agreement, dated as of June 9, 1997, with Eduardo A. Rodriguez. *99.10 - Restricted Stock Award Agreement, dated as of June 15, 1997, with Robert C. McNiel. *99.11 - Restricted Stock Award Agreement, dated as of June 12, 1997, with Susanne M. Sickles. *99.12 - Restricted Stock Award Agreement, dated as of June 16, 1997, with Guillermo Silva, Jr. *99.13 - Restricted Stock Award Agreement, dated as of June 16, 1997, with Pedro Serrano, Jr. *99.14 - Restricted Stock Award Agreement, dated as of June 16, 1997, with Thomas L. Newsom. *99.15 - Restricted Stock Award Agreement, dated as of June 16, 1997, with John A. Whitacre. *99.16 - Restricted Stock Award Agreement, dated as of June 9, 1997, with Terry D. Bassham. *++99.17 - Form of Stock Option Agreement between the Company and certain directors of the Company. *99.18 - Directors' Restricted Stock Award Agreement, dated as of November 13, 1997, with George H. Edwards, Jr. * Filed herewith. + Four agreements, substantially identical in all material respects to this Exhibit, have been entered into with J. Frank Bates; Michael L. Blough; Gary R. Hedrick; and John C. Horne, officers of the Company. 92 ++ Eleven agreements, substantially identical in all material respects to this Exhibit, have been entered into with George W. Edwards, Jr.; Ramiro Guzman; James W. Harris; Kenneth R. Heitz; Edward C. Houghton; Michael K. Parks; Eric B. Siegel; Stephen Wertheimer; Charles A. Yamarone; James A. Cardwell; and Wilson K. Cadman, directors of the Company. (b) Reports on Form 8-K: The following reports on Form 8-K were filed during the last quarter of 1997: FINANCIAL STATEMENTS DATE OF REPORT ITEM NUMBER REQUIRED TO BE FILED -------------- ----------- -------------------- None 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 this report and any and all amendments to this report, and to file each such amendment to this report, with all exhibits thereto, and any and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as it, he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 26th day of March 1998. 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 --------- ------ ---- Chief Executive Officer, President | /s/ JAMES S. HAINES (Principal Executive Officer) and Director | - --------------------------------------- | (James S. Haines) | Vice President, Chief Financial Officer and Treasurer | /s/ GARY R. HEDRICK (Principal Financial Officer and Principal Accounting | - --------------------------------------- Officer) | (Gary R. Hedrick) | | /s/ WILSON K. CADMAN Director | - --------------------------------------- | (Wilson K. Cadman) | | /s/ JAMES A. CARDWELL Director | - --------------------------------------- | (James A. Cardwell) | | /s/ JAMES W. CICCONI Director | - --------------------------------------- | (James W. Cicconi) | | /s/ GEORGE W. EDWARDS, JR. Director | - --------------------------------------- | (George W. Edwards, Jr.) | | /s/ RAMIRO GUZMAN Director } March 26, 1998 - --------------------------------------- | (Ramiro Guzman) | | /s/ JAMES W. HARRIS Director | - --------------------------------------- | (James W. Harris) | | /s/ KENNETH R. HEITZ Director | - --------------------------------------- | (Kenneth R. Heitz) | | /s/ PATRICIA Z. HOLLAND-BRANCH Director | - --------------------------------------- | (Patricia Z. Holland-Branch) | | /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 EX-10.18 2 SW RESERVE SHARING GRP PARTICIPATION AGREEMENT EXHIBIT 10.18 LETTER OF UNDERSTANDING This Letter of Understanding (Letter) is entered into by and between ARIZONA ELECTRIC POWER COOPERATIVE, INC., an incorporated cooperative association organized and existing under the laws of the State of Arizona; ARIZONA PUBLIC SERVICE COMPANY, an Arizona corporation; CITY OF FARMINGTON, an incorporated municipality existing as a political subdivision under the laws of the State of New Mexico; EL PASO ELECTRIC COMPANY, a Texas corporation; INCORPORATED, COUNTY OF LOS ALAMOS, a political subdivision of the State of New Mexico; NEVADA POWER COMPANY, a Nevada corporation; PLAINS ELECTRIC GENERATION AND TRANSMISSION COOPERATIVE, INC., an incorporated cooperative association organized and existing under the laws of the State of New Mexico; PUBLIC SERVICE COMPANY OF NEW MEXICO, a New Mexico corporation; SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT, an agricultural improvement district organized and existing under the laws of the State of Arizona; TUCSON ELECTRIC POWER COMPANY, an Arizona corporation; and THE UNITED STATES OF AMERICA, WESTERN AREA POWER ADMINISTRATION, DESERT SOUTHWEST REGION represented by the officer executing this Agreement, a duly appointed successor or a duly authorized representative, pursuant to the Acts of Congress dated June 17, 1902 (32 Stat. 388), and August 4, 1977 (91 Stat. 565), and acts amendatory thereof or supplementary thereto. The entities listed above are hereinafter referred to collectively as "Parties" and individually as "Party." IN CONSIDERATION OF THE MUTUAL COVENANTS AND PROMISES HEREIN SET FORTH, THE PARTIES AGREE AS FOLLOWS: In accordance with Section 5.1 of the Southwest Reserve Sharing Group (SRSG) Participation Agreement, the Parties agree to shorten the notice period required to withdraw from the SRSG Participation Agreement from one (1) year to thirty (30) days advance written Southwest Reserve Sharing Group Letter of Understanding Page 2 notice. This interim notice requirement shall apply to the period of January 1, 1998 through June 30, 1998. The Parties agree to direct the Operating Committee to create an Operating Procedure to address penalties associated with non-compliance of the SRSG Participation Agreement by April 1, 1998. In the event the Operating Committee is unsuccessful in creating such Operating Procedure by April 1, 1998, the Operating Committee shall recommend to the Executive Committee a list of options. The Executive Committee shall make a final determination relating to penalties prior to May 1, 1998. The final determination of the Operating or Executive Committee shall be binding on all Parties. In any event, any and all penalty assessments shall be waived for the period of January 1, 1998 through June 30, 1998. Upon the execution of this Letter, the Parties agree that the following Operating Procedures, issued November 3, 1997, shall become effective January 1, 1998: * Resource Reserve Qualification * Data Submittals * After the Fact Hourly Reserve Calculations * Activation of Reserves for Emergency Assistance * Emergency Communication Procedure * Suspension or Termination of Membership The terms and conditions of this Letter of Understanding shall terminate on July 1, 1998. \\\ \\\ \\\ Southwest Reserve Sharing Group Letter of Understanding Page 3 Each Party hereto represents and warrants that the person executing this Letter has been duly authorized to act on its behalf. ARIZONA ELECTRIC POWER COOPERATIVE, INC. By: /s/ MILES H. OLDFATHER ------------------------------------ TITLE: Board Vice President --------------------------------- DATE: November 11, 1997 --------------------------------- ARIZONA PUBLIC SERVICE COMPANY By: /s/ JACK DAVIS ------------------------------------ TITLE: Executive V.P. Commercial --------------------------------- Operations --------------------------------- DATE: November 7, 1997 --------------------------------- CITY OF FARMINGTON ATTEST: By: /s/ MAUDE GRANTHAM RICHARDS ------------------------------------ TITLE: Electric Utility Director --------------------------------- - ---------------------------------- DATE: November 14, 1997 --------------------------------- EL PASO ELECTRIC COMPANY By: /s/ JOHN A. WHITACRE ------------------------------------ TITLE: Assistant VP-System Operations --------------------------------- DATE: November 24, 1997 --------------------------------- Southwest Reserve Sharing Group Letter of Understanding Page 4 INCORPORATED COUNTY OF LOS ALAMOS By: /s/ D. CHRISTOPHER ORTEGA ------------------------------------ TITLE: Utilities Manager --------------------------------- DATE: November 13, 1997 --------------------------------- NEVADA POWER COMPANY By: /s/ MATT H. DAVIS ------------------------------------ TITLE: Division Director, System --------------------------------- Planning & Operations --------------------------------- DATE: November 6, 1997 --------------------------------- PLAINS ELECTRIC GENERATION AND TRANSMISSION COOPERATIVE, INC. ATTEST: By: /s/ MICHAEL S. McINNES ------------------------------------ TITLE: Executive VP/General Manager --------------------------------- - ---------------------------------- DATE: November 10, 1997 Assistant Secretary --------------------------------- PUBLIC SERVICE COMPANY OF NEW MEXICO By: /s/ R. FLYNN ------------------------------------ TITLE: Sr. Vice President, Electric --------------------------------- Services --------------------------------- DATE: November 10, 1997 --------------------------------- Southwest Reserve Sharing Group Letter of Understanding Page 5 SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT By: /s/ MARK B. BONSALL ------------------------------------ TITLE: Associate General Manager --------------------------------- Marketing, Customer Service, --------------------------------- Finance and Planning --------------------------------- DATE: November 13, 1997 --------------------------------- TUCSON ELECTRIC POWER COMPANY By: /s/ N. A. DELAWDER ------------------------------------ TITLE: Vice President --------------------------------- DATE: November 12, 1997 --------------------------------- WESTERN AREA POWER ADMINISTRATION DESERT SOUTHWEST REGION By: /s/ J. T. CARLSON ------------------------------------ TITLE: Regional Manager --------------------------------- DATE: November 17, 1997 --------------------------------- SOUTHWEST RESERVE SHARING GROUP PARTICIPATION AGREEMENT Execution Copy SOUTHWEST RESERVE SHARING GROUP ------------------------------- PARTICIPATION AGREEMENT ----------------------- TABLE OF CONTENTS ----------------- SECTION TITLE PAGE - ------- ----- ---- 1. PARTIES........................................................ 1 2. RECITALS....................................................... 2 3. AGREEMENT...................................................... 3 4. DEFINITIONS.................................................... 3 4.1 Administrative Costs..................................... 3 4.2 Administrator Site System................................ 3 4.3 Agreement................................................ 3 4.4 Agreement Developmental Fee.............................. 3 4.5 Area Control Error (ACE)................................. 3 4.6 Capacity................................................. 3 4.7 Capital Expenditures..................................... 4 4.8 Contingency Reserve...................................... 4 4.9 Control Area............................................. 4 4.10 Developmental Costs...................................... 4 4.11 Disturbance.............................................. 4 4.12 Emergency................................................ 4 4.13 Emergency Assistance..................................... 5 4.14 Energy................................................... 5 4.15 Executive Committee...................................... 5 4.16 Exhibits................................................. 5 4.17 Firm Commitment.......................................... 5 4.18 Firm Load................................................ 5 4.19 Funding Agreement No. 2.................................. 5 4.20 Interim Funding Agreement No. 1.......................... 5 4.21 Load..................................................... 5 4.22 Most Severe Single Contingency........................... 5 4.23 NERC Disturbance Control Standard (DCS).................. 6 4.24 Non-Spinning Reserve..................................... 6 4.25 Operating Committee...................................... 6 4.26 Operating Procedure...................................... 6 4.27 Operating Reserve........................................ 6 4.28 Peak Commitment.......................................... 6 4.29 Service Schedule......................................... 6 4.30 Single Contingency....................................... 6 4.31 Spinning Reserve......................................... 7 4.32 SRSG..................................................... 7 4.33 SRSG Administrator....................................... 7 4.34 SRSG Emergency Assistance Matrices....................... 7 4.35 SRSG Firm Deliveries..................................... 7 i 4.36 SRSG Firm Receipts....................................... 7 4.37 System................................................... 7 4.38 WSCC Minimum Operating Reliability Criteria.............. 7 5. EFFECTIVE DATE AND TERM........................................ 7 6. RESOLUTION OF CONFLICTS........................................ 8 7. PARTY OBLIGATIONS.............................................. 8 8. ORGANIZATION AND ADMINISTRATION................................ 10 8.1 SRSG Administrator........................................ 10 8.2 Executive Committee....................................... 12 8.3 Operating Committee....................................... 14 8.4 General................................................... 15 9. MEMBERSHIP ELIGIBILITY AND CERTIFICATION....................... 16 10. COST RESPONSIBILITIES.......................................... 18 11. DISBURSEMENT OF FUNDS.......................................... 19 11.1 Application Fees......................................... 19 11.2 Entrance Fees............................................ 19 11.3 Penalty Funds............................................ 19 11.4 Administrative Costs..................................... 19 12. VOTING AND APPROVALS........................................... 19 12.1 Amendments............................................... 20 12.2 Operating Procedures..................................... 20 12.3 Committee Voting......................................... 20 13. BILLING AND PAYMENTS........................................... 21 14. AUDITS......................................................... 23 15. DISPUTE RESOLUTION............................................. 24 16. UNCONTROLLABLE FORCES.......................................... 26 17. WAIVERS........................................................ 27 18. NOTICES........................................................ 27 19. APPROVALS...................................................... 28 20. TRANSFER OF INTEREST IN AGREEMENT.............................. 29 ii 21. SEVERABILITY................................................... 30 22. RELATIONSHIPS OF PARTIES....................................... 30 23. NO DEDICATION OF FACILITIES.................................... 30 24. THIRD PARTY BENEFICIARIES...................................... 30 25. LIABILITY...................................................... 31 26. DEFAULTS....................................................... 31 27. OTHER AGREEMENTS............................................... 33 28. PROPRIETARY INFORMATION........................................ 33 29. PARTICIPATION BY THE UNITED STATES............................. 33 30. CONTINGENT UPON APPROPRIATIONS................................. 34 31. OFFICIALS NOT TO BENEFIT....................................... 34 32. EXECUTION BY COUNTERPART....................................... 34 33. SIGNATURE CLAUSE............................................... 35 EXHIBITS - -------- A. Official Mailing Titles and Addresses of the Parties..........Ex A-1 B. Official Billing Addresses................................... Ex B-1 C Agreement Developmental Fee.................................. Ex C-1 SERVICE SCHEDULES - ----------------- A. RESERVE OBLIGATIONS............................................ A-1 B. ACTIVATION OF RESERVES FOR EMERGENCY ASSISTANCE................ B-1 iii SOUTHWEST RESERVE SHARING GROUP PARTICIPATION AGREEMENT 1. PARTIES: The Parties to this SOUTHWEST RESERVE SHARING GROUP PARTICIPATION AGREEMENT are: ARIZONA ELECTRIC POWER COOPERATIVE, INC., an incorporated cooperative association organized and existing under the laws of the State of Arizona (hereinafter called "AEPC"); ARIZONA PUBLIC SERVICE COMPANY, an Arizona corporation (hereinafter called "APS"); CITY OF FARMINGTON, an incorporated municipality existing as a political subdivision under the laws of the State of New Mexico (hereinafter called "FARM"); EL PASO ELECTRIC COMPANY, a Texas corporation (hereinafter called "EPE"); INCORPORATED COUNTY OF LOS ALAMOS, a political subdivision of the State of New Mexico (hereinafter called "LAC"); NEVADA POWER COMPANY, a Nevada corporation (hereinafter called "NEVP"); PLAINS ELECTRIC GENERATION AND TRANSMISSION COOPERATIVE, INC., an incorporated cooperative association organized and existing under the laws of the State of New Mexico (hereinafter called "PEGT"); PUBLIC SERVICE COMPANY OF NEW MEXICO, a New Mexico corporation (hereinafter called "PNM"); SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT, an agricultural improvement district organized and existing under the laws of the State of Arizona (hereinafter called "SRP"); TUCSON ELECTRIC POWER COMPANY, an Arizona corporation (hereinafter called "TEP"); and THE UNITED STATES OF AMERICA, WESTERN AREA POWER ADMINISTRATION, DESERT SOUTHWEST REGION represented by the officer executing this Agreement, a duly appointed successor or a duly authorized representative, pursuant to the Acts of Congress dated June 17, 1902 (32 Stat. 388), and August 4, 1977 (91 Stat. 565), and acts amendatory thereof or supplementary 1 thereto (hereinafter called "WALC"). The entities listed above are hereinafter referred to collectively as "Parties" and individually as "Party." 2. RECITALS: 2.1 Parties from Arizona, Nevada, New Mexico, and West Texas have developed a conceptual framework for a regional reserve sharing group that for some Parties will replace their Inland Power Pool membership when the Amended and Restated Inland Power Pool Agreement expires on December 31, 1997. 2.2 The Southwest Reserve Sharing Group (SRSG) will allow for sharing of Contingency Reserves among the Parties in order to realize a more efficient and economic power system operation while maintaining the reliability of the interconnected system. Any other reserve obligation necessary to meet North American Electric Reliability Council (NERC) and Western Systems Coordinating Council (WSCC) criteria will continue to be the responsibility of each Party. 2.3 It is the intent of the Parties to meet or exceed all WSCC and NERC reliability criteria, as such criteria may be amended, modified, or revised. 2.4 The Parties believe that this Agreement will yield important benefits to their respective customers or members. Such benefits include the following: 2.4.1 The combined Loads of the Parties can be supplied and protected with less aggregate Contingency Reserve resulting in a net savings in operating expenses. 2.4.2 Emergency conditions can be met with less likelihood of curtailment or impairment of electric service to customers or members of the Parties. 2.4.3 The Parties can promote, facilitate, and coordinate the operation of the respective Systems of the Parties, to the benefit of the interconnected system. 2 2.5 Each Party is willing to utilize its respective electric generation and transmission systems to the extent of its respective obligations which are set forth in this Agreement. 3. AGREEMENT: IN CONSIDERATION OF THE MUTUAL COVENANTS AND PROMISES HEREIN SET FORTH, THE PARTIES AGREE AS FOLLOWS: 4. DEFINITIONS: The following terms, whether in the singular or in the plural, when initially capitalized in this Agreement, shall have the meanings specified: 4.1 Administrative Costs - Costs incurred by the SRSG Administrator in -------------------- performing ongoing administrative functions assigned pursuant to Section 8.1 herein. 4.2 Administrator Site System - A computer application system, operated ------------------------- and maintained by the SRSG Administrator, that (i) contains the data provided by each Party, (ii) provides tools for the maintenance of such data, and (iii) provides a means to determine and allocate reserve quotas, Emergency Assistance, reserve penalties and settlements to each Party. 4.3 Agreement - This Southwest Reserve Sharing Group Participation --------- Agreement, together with the Service Schedules, attachments thereto, and Exhibits. 4.4 Agreement Developmental Fee - A fee charged to new members which --------------------------- reflects costs incurred by the Parties in the formation of the SRSG. Such fee shall be determined in accordance with Exhibit C attached hereto. 4.5 Area Control Error (ACE) - The instantaneous difference between ------------------------ actual and scheduled interchange, taking into account the effects of frequency bias (and time error or unilateral inadvertent interchange if automatic correction for either is part of the system's automatic generation control). 4.6 Capacity - The rated continuous load-carrying ability, expressed in -------- megawatts. 3 (MW) or megavoltamperes (MVA) of generation, transmission, or other electrical equipment. 4.7 Capital Expenditures - All capital costs incurred by the SRSG in -------------------- association with making enhancements to, or the replacement of, the initial hardware and software system of the SRSG. 4.8 Contingency Reserve - A portion of Operating Reserve, sufficient to ------------------- reduce ACE to meet the NERC Disturbance Control Standard following the Most Severe Single Contingency. Contingency Reserve consists of both Spinning Reserve and Non-Spinning Reserve; however, at least fifty percent (50%) of this Contingency Reserve shall be Spinning Reserve. Any Spinning Reserve in excess of a Party's Spinning Reserve quota may count towards its remaining Contingency Reserve quota. 4.9 Control Area - An area comprised of an electrical system or systems, ------------ bound by interconnection metering and telemetry, capable of controlling generation to maintain its interchange schedule with other Control Areas and contributing to frequency regulation of the interconnection. 4.10 Developmental Costs - All costs incurred in the initial development ------------------- of the hardware and software systems associated with the Administrator Site System. 4.11 Disturbance - The sudden loss of a Party's transmission or generation ----------- Capacity that causes an ACE of a magnitude that requires immediate action to meet NERC performance criteria. 4.12 Emergency - An abnormal system condition which requires immediate --------- manual or automatic action to prevent loss of Firm Load, equipment damage, or to prevent tripping of system elements that could adversely affect the reliability of the electric system. 4 4.13 Emergency Assistance - Energy furnished to a Party under Emergency -------------------- conditions when power supply to the Party's Firm Commitments is threatened or curtailed. 4.14 Energy - The accumulated amount of power delivered over a stated time ------ interval; usually expressed in megawatt hours (MWh). 4.15 Executive Committee - That committee established pursuant to Section 8 ------------------- herein. 4.16 Exhibits - Exhibits A, B, and C attached hereto, as they may be -------- amended, modified, or revised. 4.17 Firm Commitment - The Load associated with wholesale and retail power --------------- customers on whose behalf the Party, by statute, franchise, regulatory requirement, or contract, has undertaken an obligation to operate the Party's system to meet the reliable electric needs of such customers. For SRSG purposes, Firm Commitment shall be calculated as the sum of Firm Load, plus SRSG Firm Deliveries, less SRSG Firm Receipts. 4.18 Firm Load - Power and Energy requirements (including system losses) of --------- customers which a Party is obligated to supply at all times. 4.19 Funding Agreement No. 2 - The Southwest Reserve Sharing Group Funding ----------------------- Agreement No. 2 executed by the Parties on July 2, 1997. 4.20 Interim Funding Agreement No. 1 - The Southwest Reserve Sharing Group ------------------------------- Interim Funding Agreement No. 1 executed by the Parties on February 28, 1997. 4.21 Load - An end-use device or customer that receives power from the ---- electric system. 4.22 Most Severe Single Contingency - That Single Contingency which ------------------------------ results in the most adverse system performance under any operating condition or 5 anticipated mode of operation. 4.23 NERC Disturbance Control Standard (DCS) - The NERC Disturbance Control --------------------------------------- Standard established in accordance with NERC Policy 1, as it may be amended, modified, or revised. 4.24 Non-Spinning Reserve - That portion of Operating Reserve not -------------------- connected to the system but capable of serving demand within ten (10) minutes, or interruptible Load that can be removed from the system within ten (10) minutes. 4.25 Operating Committee - That committee established pursuant to Section 8 ------------------- herein. 4.26 Operating Procedure - Written procedures, developed and approved by ------------------- the Operating Committee pursuant to Section 8 herein, to implement specific provisions of this Agreement. 4.27 Operating Reserve - That capability above firm system demand required ----------------- to provide for regulation, Load forecasting error, forced and scheduled outages, and local area protection. Operating Reserve consists of Spinning Reserve and Non-Spinning Reserve. 4.28 Peak Commitment - The highest hourly Firm Commitment during a --------------- designated time period. 4.29 Service Schedule - A specific written agreement among the Parties for ---------------- the purposes of dictating or specifying methods of coordination, operation, maintenance, or planning of the respective Systems, for improving the reliability of power supply and achieving economics for the customers or members served by the Parties. 4.30 Single Contingency - The loss of a single system element under any ------------------ operating condition or anticipated mode of operation. 6 4.31 Spinning Reserve - Unloaded generation which is synchronized and ---------------- ready to serve additional demand. 4.32 SRSG - The Southwest Reserve Sharing Group. ---- 4.33 SRSG Administrator - That Party or entity designated to perform ------------------ duties as provided for in Section 8 herein. 4.34 SRSG Emergency Assistance Matrices - Those matrices depicting the ---------------------------------- allocation of Emergency Assistance among the Parties. 4.35 SRSG Firm Deliveries - Deliveries which are not recallable in less -------------------- than ten (10) minutes. 4.36 SRSG Firm Receipts - Receipts which are not recallable in less than ------------------ sixty (60) minutes. 4.37 System - The integrated electrical facilities, which may include ------ generation, transmission and distribution facilities, that are controlled by one organization. 4.38 WSCC Minimum Operating Reliability Criteria - WSCC Minimum Operating ------------------------------------------- Reliability Criteria dated March 11, 1997, as such criteria may be amended, modified, or revised. 5. EFFECTIVE DATE AND TERM: 5.1 This Agreement shall become effective on the later of: (i) when duly executed by all Parties, (ii) when filed with the Federal Energy Regulatory Commission for acceptance, or (iii) January 1, 1998. This Agreement shall continue in effect for a period of ten (10) years from said effective date and thereafter on a year to year basis until terminated by the Parties; provided, however, that any Party may withdraw its participation at any time after the effective date of this Agreement by providing written notice to the Executive Committee at least one (1) year in advance of its effective date of withdrawal, unless a shorter period of time is agreed to by all Parties. 7 5.2 As of the effective date of withdrawal, the withdrawing Party shall have no further rights or obligations under this Agreement, except payment of amounts then or previously due. Such amounts shall include any financial obligation incurred hereunder prior to the effective date of withdrawal and any amounts incurred by the SRSG Administrator in processing the withdrawal of such Party. 5.3 Neither expiration, termination nor voiding of this Agreement shall relieve a Party of its obligation to make payment of amounts due hereunder. 5.4 No Party shall oppose before any regulatory agencies having jurisdiction, a Party's withdrawal from this Agreement, so long as the provisions of Sections 5.1 and 5.2 herein have been met. 6. RESOLUTION OF CONFLICTS: In the event of a conflict between the terms and conditions of this Agreement and a Service Schedule, the terms and conditions of the Service Schedule shall prevail. 7. PARTY OBLIGATIONS: 7.1 It is the intent of the Parties to meet or exceed the WSCC Minimum Operating Reliability Criteria and the NERC Control Performance And Disturbance Control Standards, as they may be adopted, modified, or revised. 7.2 The SRSG has been formed for the purpose of sharing Contingency Reserves. Each Party shall maintain, or cause to be maintained, an amount of Contingency Reserve equal to or greater than its Contingency Reserve requirement, as such requirement shall be determined in accordance with Service Schedules A and B attached hereto. 7.3 Each Party shall activate and provide its Contingency Reserves to other Parties, as requested, in accordance with Service Schedule B attached hereto. 8 7.4 Each Party shall operate its System continuously in parallel; provided, however, that each Party shall have the right to temporarily separate the facilities of its System from the System of any other Party when, in the judgment of the separating Party, abnormal operating conditions exist which require such separation to prevent damage to its facilities, injuries to personnel or impairment of service to its customers or members; and for necessary inspection, maintenance, repair or replacement of its facilities, or additional construction. 7.5 Each Party shall exercise reasonable efforts to construct, operate and maintain its System to avoid the likelihood of a Disturbance originating within its System causing an impairment of service in the Systems of other Parties and to minimize the exposure to damage resulting from Disturbances on the System of other Parties. 7.6 The Parties shall comply with all SRSG Operating Procedures. 7.7 Any Party within a Control Area may make arrangements with the host Control Area to provide or share reserve responsibilities between themselves or third parties, to include billings for reserve deficiency, or any other services rendered, so long as the total reserve responsibility is accommodated. 7.8 Each Party shall be responsible to provide and maintain hardware and software which is compatible with the Administrator Site System for complying with the reporting requirements of this Agreement. 7.9 Each Party is responsible for any financial obligation derived from its membership herein. 7.10 Each Party shall be responsible for its share of costs and expenses attributable to the SRSG Administrator performing its functions pursuant to this Agreement. 9 7.11 Each Party shall cooperate with the SRSG Administrator and provide the SRSG Administrator information necessary for the performance of its duties herein. 8. ORGANIZATION AND ADMINISTRATION: As a means of securing effective and timely cooperation within the activities of the SRSG and a means of facilitating the administration, coordination, operations and problem solving, the Parties hereby establish (i) the role of a SRSG Administrator, (ii) an Executive Committee, and (iii) an Operating Committee. 8.1 SRSG Administrator ------------------ 8.1.1 The SRSG Administrator shall be designated by the Operating Committee from among the Parties of the SRSG; provided, however, that the Operating Committee, with the approval of the Executive Committee, may designate an entity other than a Party to serve as SRSG Administrator. 8.1.2 The SRSG Administrator may resign by providing written notice to both the Executive Committee and the Operating Committee at least one (1) year in advance of the effective date of its resignation, unless a shorter period of time is agreed to by all Parties. 8.1.3 The SRSG Administrator may be removed at any time by the Executive Committee, with or without cause. 8.1.4 Upon resignation or removal of the SRSG Administrator pursuant to Section 8.1.2 or Section 8.1.3 herein, the outgoing SRSG Administrator shall: 8.1.4.1 Transfer and provide technical training regarding all hardware, software, and all other material owned by the SRSG or owned on behalf of the SRSG to the new SRSG Administrator; and 10 8.1.4.2 Settle all outstanding financial obligations corresponding with its term as SRSG Administrator and transfer any remaining SRSG funds to the new SRSG Administrator. 8.1.5 The SRSG Administrator shall be responsible for performing its assigned duties in accordance with Operating Procedures established by the Operating Committee. Such duties shall include, but not be limited to the following: 8.1.5.1 Data - Data collection, data monitoring, and data ---- processing. 8.1.5.2 Preparation and Consolidation of Reports ---------------------------------------- 8.1.5.2.1 Maintenance and preservation of all records (including both the Executive Committee and Operating Committee meeting minutes and Operating Procedures) reasonably necessary for the performance of the duties hereunder. 8.1.5.2.2 Submission of an annual budget to the Operating Committee and the tracking of SRSG related expenses. 8.1.5.2.3 Preparation and distribution of SRSG reports required by NERC, WSCC, and the Operating Committee. 8.1.5.3 Administrator Site System - The SRSG Administrator ------------------------- shall be responsible for the procurement, operation, maintenance, and the coordination of the Administrator Site System. 8.1.5.4 Payments - The SRSG Administrator shall be -------- responsible for the payment of invoices and the distribution of funds in accordance with this Agreement. 11 8.1.5.5 Other Duties as Assigned - Such other duties shall ------------------------ include but not be limited to the following: 8.1.5.5.1 Training and consulting for the Parties in association with questions or problems relating to SRSG reserves and SRSG data reporting; 8.1.5.5.2 Certify that an applicant has met all membership eligibility criteria as set forth in Section 9 herein; 8.1.5.5.3 Notify the Executive Committee and all Parties that an applicant has met all membership criteria and is now a Party to the SRSG; 8.1.5.5.4 Notify all Parties when an existing Party(ies) is not in compliance with this Agreement. 8.1.5.5.5 Bill each Party for its share of expenses incurred pursuant to Section 13 herein. 8.1.5.5.6 Cooperate with an audit request of the Operating Committee pursuant to Section 14 herein. 8.1.5.5.7 Make available during its normal business hours all the records and accounts maintained by the SRSG Administrator pertaining to the requesting Party(ies) and pursuant to activities and responsibilities hereunder. Such records shall be made available in a timely manner and at the requesting Party's expense. 8.2 Executive Committee ------------------- The Executive Committee shall consist of one representative from each Party designated pursuant to Section 8.4 herein. The responsibilities of the 12 Executive Committee are as follows: 8.2.1 To establish additional subcommittees as it may from time to time deem necessary; 8.2.2 To review at least annually the activities of all committees to ensure their activities are coordinated and consistent with the spirit and intent of this Agreement; 8.2.3 To review unresolved disputes which may arise within the SRSG and resolve the disputes pursuant to Section 15 herein; 8.2.4 To review and approve the annual budget of the SRSG; 8.2.5 To review and recommend to the Parties for approval additions or amendments to this Agreement; 8.2.6 To receive, review, and process an applicant's written request to become a Party, in accordance with Section 9 herein and where applicable, notify entities of their SRSG eligibility in accordance with Section 10.2 herein; 8.2.7 To establish, review, approve, and maintain procedures for the determination and recertification of creditworthiness for new applicants and existing members respectively; 8.2.8 To establish procedures for the allocation to and payment by any new Party to the existing Parties for the past, current and future cost of facilities, equipment, services, or other costs such as software that are of benefit to all Parties; 8.2.9 To review and process, in accordance with Section 5 herein, the notice by a Party to withdraw as a Party to this Agreement; 8.2.10 To review and process the termination of a Party's rights and obligations under this Agreement; 13 8.2.11 To provide minutes for all Executive Committee meetings and distribute copies of such minutes to all committee members and to the SRSG Administrator; and 8.2.12 To do such other things and carry out such duties as specifically required or authorized by this Agreement. 8.3 Operating Committee ------------------- The Operating Committee shall consist of one representative from each Party designated pursuant to Section 8.4 herein. The responsibilities of the Operating Committee are as follows: 8.3.1 To establish Operating Procedures for the sharing of Contingency Reserves such that the SRSG will meet or exceed the WSCC Minimum Operating Reliability Criteria and NERC's Disturbance Control Standards relative to Contingency Reserves, as they may be amended, modified, or revised; 8.3.2 To establish, review, approve, and modify Operating Procedures, consistent with the provisions herein, for the guidance of operating employees in the Parties' Systems as to matters affecting the ability to maintain Contingency Reserves, the delivery and receipt of Emergency Assistance, and other similar operating matters; 8.3.3 To establish, review, approve, and modify Operating Procedures for determining the ratings of the generating facilities of the Parties; 8.3.4 To establish, review, approve and modify Operating Procedures for calculating Contingency Reserves within the SRSG; 8.3.5 To establish, review, approve, and modify Operating Procedures relating to Contingency Reserve deficiencies; 8.3.6 To establish, review, approve, and modify Operating Procedures 14 relating to suspension or termination of a Party from this Agreement; 8.3.7 To establish a "Disturbance Review" task force to review all SRSG Disturbances to ensure that all SRSG and individual Party reliability obligations are being met; 8.3.8 To ensure the proper level and location of reserves; 8.3.9 To designate a SRSG Administrator to function under the direction of the Operating Committee; 8.3.10 To review and recommend, as necessary, the types and arrangement of equipment and associated communication facilities needed for SRSG operations; 8.3.11 To review and recommend approval of the annual budget, prepared by the SRSG Administrator, to the Executive Committee; 8.3.12 To develop, review, approve, and recommend changes to the SRSG Emergency Assistance Matrices; 8.3.13 To review and process the suspension of all benefits of reserve sharing and applicable reserve sharing obligations of a Party; 8.3.14 To recommend the termination of a Party from the Agreement to the Executive Committee; 8.3.15 To provide minutes for all Operating Committee meetings and distribute copies of such minutes to all committee members and to the SRSG Administrator; and 8.3.16 To do such other things and carry out such duties as specifically required or authorized by this Agreement. 8.4 General ------- 8.4.1 Each Party shall designate, in accordance with Section 18 herein, its representative and alternate representative (to act in the absence of 15 the designated representative) on each committee within thirty (30) days after the execution of this Agreement. Notice of any change of representation shall be given by written notice to the other Parties and the SRSG Administrator. Each Party's designated representatives or alternate representatives will be authorized to act on its behalf with respect to those committee responsibilities provided herein. 8.4.2 Each committee shall meet at least annually. 8.4.3 Each committee will elect a chairperson and establish a meeting protocol at its first meeting. 8.4.4 Each committee shall elect a new chairperson at least every two (2) years thereafter, provided, that a succeeding chairperson may not be from the same Party. 8.4.5 No committee shall have the authority to amend this Agreement. 9. MEMBERSHIP ELIGIBILITY AND CERTIFICATION: An entity may apply and become a Party to this Agreement by submitting to the Executive Committee a written request for membership to the SRSG, accompanied by a non-refundable application fee of five thousand dollars ($5,000), and by demonstrating to the satisfaction of the Executive Committee that the entity can continuously meet the criteria and certification requirements set forth below: 9.1 It is eligible to file a request for transmission service pursuant to Section 211 of the Federal Power Act. 9.2 It can maintain, provide and receive reserves, by contractual arrangement or otherwise, as required pursuant to this Agreement, and is able to deliver and receive Energy associated with these reserves at one or more of the following high voltage switchyards: (a) Four Corners 230 kV or 345 kV Switchyards; 16 (b) Navajo 500 kV Switchyard; (c) Palo Verde 500 kV Switchyard; (d) San Juan 345 kV Switchyard; (e) Westwing 500 kV Switchyard; (f) Shiprock 345 kV Switchyard; (g) Mead 230 kV, 345 kV, or 500 kV Switchyards; (h) Greenlee 345kV Switchyard; (i) West Mesa 345kV, Switchyard; (j) Other switchyards as may be determined by the Operating Committee. 9.3 It has established appropriate creditworthiness consistent with the criteria established in accordance with Section 8.2.7 herein. 9.4 It has the ability to provide documentation of an ACE or ACE equivalent measurement. The SRSG will operate using all individual Party's ACE data for Disturbance evaluation. 9.5 It has the ability to comply with all applicable terms and conditions established pursuant to Service Schedules A and B hereto. 9.6 Upon demonstrating to the satisfaction of the Executive Committee that such entity meets the criteria set forth in Sections 9.1 through 9.5 herein, the entity shall be deemed eligible to become a Party. 9.7 Once the entity has been deemed eligible to become a Party, the Executive Committee shall direct the SRSG Administrator to begin the certification process. 9.8 The certification process shall consist of the following: (i) execution of this Agreement or a counterpart hereof; (ii) verification from the SRSG Administrator that such entity is current with all its payment obligations relative 17 to the SRSG, and (iii) verification from the SRSG Administrator that such entity has provided the required data to the SRSG Administrator and has in place the required facilities to effectively transmit and receive data with the Administrator Site System. 9.9 Upon successful completion of the certification process, the entity shall be deemed a Party and the SRSG Administrator shall provide notification to the Executive Committee and all Parties. 10. COST RESPONSIBILITIES: 10.1 The costs of the SRSG shall be allocated as follows: 10.1.1 All Developmental Costs and Capital Expenditures, approved by the Executive Committee, will be allocated equally among all Parties. Payments made by a Party pursuant to the Interim Funding Agreement No. 1 and the Funding Agreement No. 2 shall be credited towards such Party's share of Developmental Costs. 10.1.2 Annual Administrative Costs, as set forth in the annual operating budget, will be allocated to the Parties as follows: 10.1.2.1 One-half (1/2) of the on-going Administrative Costs incurred shall be allocated equally among all Parties; 10.1.2.2 One-half (1/2) of the on-going Administrative Costs incurred shall be allocated to each Party in accordance with the ratio of its Firm Commitments to the total Firm Commitments of the SRSG at the time of the SRSG annual coincident Peak Commitment for the previous calendar year. 10.2 Each entity eligible to become a Party shall be notified by the Executive Committee and shall, as a condition of the certification process, pay, within thirty (30) calendar days following such notification, an entrance fee equal to 18 the sum of: 10.2.1 Its share of Developmental Costs and Capital Expenditures in accordance with Section 10.1.1 herein; plus 10.2.2 An Agreement Developmental Fee determined in accordance with Exhibit C attached hereto; plus 10.2.3 Administrative Costs for incorporating the entity into the SRSG. 10.3 A new Party shall begin incurring its share of ongoing Administrative Costs upon completion of the certification process set forth in Section 9.8 herein. 11. DISBURSEMENT OF FUNDS: 11.1 Application Fees - Application fees received from applicants pursuant ---------------- to Section 9 herein, shall be utilized to offset the SRSG Administrator's expenses incurred in processing the application. 11.2 Entrance Fees - Entrance fees received pursuant to Section 10.2 ------------- herein, shall be allocated equally to all Parties with the exception that the new Party shall not participate in the allocated disbursement. 11.3 Penalty Funds - Penalty funds assessed by the SRSG Administrator ------------- shall be allocated among the Parties using the same methodology utilized to allocate Administrative Costs, with the exception that the penalized Party or Parties shall not participate in the allocated disbursement of such penalty funds. 11.4 Administrative Costs - The initial payment of Administrative Costs -------------------- received from a new Party pursuant to Section 10.3 herein, shall be allocated among the existing Parties using the same methodology utilized to allocate Administrative Costs. 12. VOTING AND APPROVALS: All matters requiring approval as provided in this Agreement, shall be approved through the following procedures: 19 12.1 Amendments - Any amendments to this Agreement shall be approved by ---------- unanimous vote of the Parties. Unless otherwise specified, amendments to this Agreement shall become effective when all Party signatures have been received subject to the provisions of Section 19 herein. The Executive Committee chairperson shall be responsible for circulating the appropriate signature pages to each Party, receiving executed counterparts, notifying the Parties when all signatures have been received, distributing executed originals to all Parties and the SRSG Administrator, and ensuring that appropriate regulatory filings are made. 12.2 Operating Procedures - Modification of an Operating Procedure -------------------- developed under this Agreement, which has been expressly granted to a committee shall become effective and apply to all Parties when the necessary affirmative votes have been received. 12.3 Committee Voting - Unless otherwise stated in this Agreement, all ---------------- matters requiring committee approval shall be approved by a three- quarters (75%) majority vote of committee representatives present at a meeting of the appropriate committee; provided, that a quorum of at least seventy percent (70%) of the respective representatives or their alternates are in attendance, in person or represented by proxy. Provided further, that written notice be given by the committee chairperson to each Party's designated committee representative(s) at least two (2) weeks in advance of the meeting unless otherwise agreed. Such notice shall include an agenda of the meeting. 12.3.1 A Party casting an abstention vote shall be deemed in attendance for purposes of determining whether a quorum exists; provided, however, that determination of whether a three-quarter (75%) majority agreement of the Parties exists with respect to any issue shall be made 20 by counting the votes of only the non-abstaining Parties. 12.3.2 If a vote is taken by telephone or other direct communication at the direction of the committee chairperson, all committee representatives or alternate(s) shall be contacted and given an opportunity to vote. A three-quarters (75%) majority vote shall be required for approval and the results documented in writing by the committee chairperson. A record of all such votes shall be distributed to all designated committee representative(s) and the SRSG Administrator. 13. BILLING AND PAYMENTS: All billing and payments associated with this Agreement, shall be in accordance with this Section 13, and as set forth in the applicable Operating Procedure(s). 13.1 The accounting and billing period associated with all charges shall be for one (1) calendar month, unless otherwise specified herein, or agreed to by the Parties in writing. Each bill shall include an itemized list of expenses. Bills sent to any Party shall be sent to the official billing address specified in Exhibit B. 13.2 Charges associated with this Agreement are listed below, but are not limited to: 13.2.1 Administrative Costs - Administrative Costs shall be billed -------------------- on an annual basis to each Party by the SRSG Administrator. 13.2.2 Capital Expenditures - Capital Expenditures shall be billed -------------------- monthly to the Parties by the SRSG Administrator, or as otherwise agreed to by the Operating Committee. 13.2.3 Emergency Assistance - Emergency Assistance shall be billed -------------------- between the Parties on a monthly basis, or as otherwise agreed to among the Parties in writing. 21 13.3 Bills issued by any Party, or the SRSG Administrator, shall be issued within the first ten (10) days of the month following the month(s) in which services were furnished. Payments for amounts billed shall be due and payable on or before the close of business on the twentieth (20) calendar day after the date of receipt of the bill. 13.4 Payments shall be made by electronic transfer to a bank designated by the Party to which payment is due, or any other method which provides immediately available funds on the date payment is due. Payments shall be considered paid when payment is received by the billing Party. 13.5 Bills not paid in full on or before the due date shall thereafter accrue an interest charge equal to the prime rate of interest plus two percent (2%) per annum, or the maximum interest rate permitted by law, if any, whichever is less, prorated daily from the date due to the date the amount due is paid in full. The prime rate shall be as established by the Bank of America, or any other institution mutually agreed to by the Parties in writing, on the last business day of the month for which the bill was submitted. 13.6 In case any portion of any bill is in dispute, the entire bill shall be paid in full when due. Any excess amount, which as a result of a dispute may have been overpaid, shall be returned by the owing Party upon determination of the correct amount, with interest accrued at the rate specified in Section 13.5 herein, prorated by the number of days from the date of overpayment to the date of refund. 13.7 There shall be no interest accrued on overpayments resulting from inadvertent errors in payment. Refunds on overpayments shall be limited to a period of time not to exceed two (2) years from the date payment is received by the billing Party. 22 14. AUDITS: 14.1 Each Party, at reasonable times and at its normal places of business, shall at no charge make available its records and supporting documentation of any cost, payment, settlement, or data submittal, not subject to a confidentiality agreement with a third party, pertaining to any bill rendered to a Party hereunder for the inspection of that Party for a period of time not to exceed two (2) years from the date such bills were rendered, unless such data is the subject of an ongoing audit. 14.1.1 A Party requesting to review another Party's records will give such Party sufficient notice of its intent, but in no event less than thirty (30) days prior to the date of the review. 14.1.2 The requesting Party, using personnel from its own staff or its agent, may perform this review. 14.1.3 All costs incurred in performing this review will be at the requesting Party's expense. 14.1.4 The Party performing the review shall not release the other Party's records or disclose any information contained therein to any other Party or third party without written consent of the Party whose records were reviewed, unless otherwise required by law. 14.2 The Operating Committee, at reasonable times and at its normal places of business, may audit a Party's records and supporting documentation of any information submitted to the Administrator Site System, and Disturbance data when applicable. Unless such data is subject to an ongoing audit, no Party shall be required to maintain its records and supporting documentation for any data submitted hereunder for a period of time in excess of two (2) years from the date such data was submitted. Audits shall be limited to a period of time 23 not to exceed two (2) years from the date of the audit request. 15. DISPUTE RESOLUTION: 15.1 Any controversy, dispute or claim arising out of, in connection with, or relating to the interpretation of this Agreement, or the alleged breach hereof, shall: 15.1.1 First be submitted to the Operating Committee for resolution. If the Operating Committee representatives are unable to reach resolution within three (3) calendar months or if the aggrieved Party is not satisfied with the resolution of the Operating Committee, such dispute, controversy or claim shall be forwarded to the Executive Committee. 15.1.2 Upon receipt of a dispute, controversy or claim forwarded in accordance with Section 15.1.1 herein, the Executive Committee shall meet or confer within thirty (30) days (or such other period of time as mutually agreed upon by the representatives of the Executive Committee) to discuss and attempt to reach a resolution of the dispute controversy or claim. If the Executive Committee cannot resolve the dispute, controversy or claim within thirty (30) days after its initial meeting or conference (or within such other period of time mutually agreed upon by the representatives of the Executive Committee) or if the aggrieved Party is not satisfied with the resolution of the Executive Committee, the aggrieved Party may request and file a petition for arbitration within thirty (30) days. 15.2 If all Parties to the controversy, dispute or claim consent to arbitration, such arbitration shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The Parties agree to cooperate and use best efforts to arbitrate in a 24 timely manner. The arbitration is subject to the following: 15.2.1 The arbitration shall be heard by one arbitrator. Such arbitrator shall have experience in the electric utility industry, shall not be a customer of any Party involved in the dispute, and shall not have any current or past substantial business or financial relationships with any Party involved in the dispute. 15.2.2 The arbitrator shall have the discretion to order a pre- hearing exchange of information by the Parties involved in the dispute, including, without limitation, production of requested documents, exchange of summaries of testimony of proposed witnesses, and examination by deposition of Parties involved in the dispute. 15.2.3 The arbitration shall be conducted in accordance with the American Arbitration Association's Commercial Arbitration Rules ("Rules") in effect at the time of the arbitration. 15.2.4 The arbitrator shall have the authority to award any remedy or relief that a state or federal court which would have jurisdiction over the dispute could grant. 15.2.5 The arbitration award shall be in writing and shall specify the factual and legal basis for the award. The award shall be final and binding upon the Parties involved in the dispute except with respect to issues over which FERC, RUS, or other entities having jurisdictional authority have retained ultimate authority to resolve, in which case, an aggrieved Party may appeal the decision of the arbitrator to that entity having jurisdiction for review. 15.2.6 No Party nor the arbitrator may disclose the existence, content, or results of any arbitration hereunder without the prior written consent of 25 all Parties involved in the dispute, unless otherwise required by law. 15.2.7 Each Party involved in the dispute shall pay for an equal share of the arbitrator's fee including travel and lodging. 15.2.8 The arbitration shall be governed by the Federal Arbitration Act ("FAA"). If terms and conditions of this Section 15 conflict with the FAA, then the FAA shall prevail. 15.2.9 The prevailing Party in an arbitration proceeding shall be entitled to reasonable attorneys' fees, expert witness fees, and other incidental costs incurred in the proceeding, as determined by the arbitrator. 15.3 In the event that all such Parties do not consent to arbitration, any one or more of such Parties shall be free to seek resolution of the controversy, dispute or claim in such manner as may be provided by law, or in equity. 15.4 To the extent a dispute, controversy or claim involves the SRSG Administrator, this Agreement, and the rights and obligations hereunder shall be construed in accordance with the applicable federal laws and laws of the state in which the SRSG Administrator's principal headquarters is located. 16. UNCONTROLLABLE FORCES: No Party shall be considered to be in default in performance of any of its obligations under this Agreement, except to pay amounts due under this Agreement, when a failure of performance is due to an uncontrollable force. The term "uncontrollable force" means any cause beyond the control of the Party affected, including but not restricted to flood, drought, earthquake, storm, fire, lightning, epidemic, war, riot, civil disturbance or disobedience, labor dispute, sabotage, changes in law or regulation, restraint by court order or public authority and action or non-action by or failure to obtain the necessary authorizations or approvals from any governmental agency or authority which by exercise of due diligence such Party could not reasonably have 26 been expected to avoid and which by exercise of due diligence it has been unable to overcome. No Party shall, however, be relieved of liability for failure of performance if such failure is due to causes arising out of its own gross negligence or willful misconduct or due to removable or remediable causes which it fails to remove or remedy within a reasonable time period. Nothing contained herein shall be construed to require a Party to settle any strike or labor dispute in which it may be involved. A Party rendered unable to fulfill its obligations under this Agreement by reason of an uncontrollable force shall give prompt written notice of such fact to the other Parties and shall exercise due diligence to remove such inability within a reasonable time period. Nothing contained herein shall excuse a Party from all or any portion of its obligations to maintain Contingency Reserve hereunder, so long as such Party is serving Load. 17. WAIVERS: A Party's waiver of its rights with respect to a default hereunder, or any other matter hereunder, shall not be deemed a waiver with respect to any subsequent default of the same or any other matter. 18. NOTICES: 18.1 A formal notice, demand or request provided for in this Agreement, shall be in writing and shall be properly served, given or made if delivered in person, or sent by either registered or certified mail, postage prepaid, or prepaid telegram or facsimile or E-mail followed by a written original, to the persons specified in Exhibit A attached hereto and hereby made a part of this Agreement. 18.2 The designation of any person specified in either Exhibit A or Exhibit B, or the address of any such person, may be changed at any time with ten (10) days prior written notice to the other Parties and to the SRSG Administrator given in the same manner as provided in Section 18.1 herein, for other notices. 27 18.3 Notices and requests of a routine nature in connection with delivery or receipt of power or Energy or in connection with operation of facilities shall be given in such manner as the committees from time to time shall prescribe. 19. APPROVALS: 19.1 This Agreement is subject to valid laws, orders, rules and regulations of duly constituted authorities having jurisdiction. Nothing contained in this Agreement shall be construed as a grant of jurisdiction over any Party by a state, federal, or regulatory agency not otherwise having jurisdiction by law. 19.2 This Agreement requires execution by the Parties, acceptance for filing by the Federal Energy Regulatory Commission (FERC), or other regulatory bodies having jurisdiction thereof, and with respect to any Party subject to the jurisdiction of the Rural Utility Services (RUS), is subject to the approval of the RUS. If a regulatory body having jurisdiction, grants or orders a hearing or orders changes or modifications to this Agreement, then the Parties shall negotiate in good faith to change or modify the Agreement, so as to be acceptable to the Parties, the FERC, the RUS, or other regulatory bodies having jurisdiction. 19.3 An amendment or change in rates established pursuant to this Agreement and which is subject to the FERC, the RUS, or other regulatory bodies having jurisdiction with regard to any Party, shall become effective hereunder upon execution by the Parties. If a regulatory body having jurisdiction, grants or orders a hearing or orders changes or modifications to such amendment or change in rates, then the Parties shall negotiate in good faith to change or modify such amendment, so as to be acceptable to the Parties, the FERC, the RUS, or other regulatory bodies having jurisdiction. 19.4 Nothing contained herein shall be construed as affecting in any way the right 28 of the Parties furnishing service under this Agreement, to unilaterally make application to the FERC for a change in rates, charges, classifications, or service, or in any rule, regulation, contract, or provision of any appendix relating thereto under Section 205 of the Federal Power Act and pursuant to the FERC's rules and regulations promulgated thereunder. Provided, however, that the Party making application to the FERC shall give the other Parties to the Agreement at least sixty (60) days advance written notice of its intent to initiate such filing so that the Parties can, if possible, reach a mutually acceptable change to the Agreement through the negotiation of the Parties. 20. TRANSFER OF INTEREST IN AGREEMENT: No voluntary transfer of interest, rights, or obligations of any Party under this Agreement, shall be made without the written consent and approval of all other Parties except to a successor in operation of the System, or any component thereof. Written approval when required shall not be unreasonably withheld. Any successor or assignee of the rights of any Party, whether by voluntary transfer, judicial or foreclosure sale or otherwise, shall be subject to all the provisions and conditions of this Agreement, to the same extent as though such successor or assignee were the original Party hereunder, and no assignment or transfer of any rights hereunder shall be effective unless and until the assignee or transferee agrees in writing to assume all of the obligations of the assignor or transferor and to be bound by all of the provisions and conditions of this Agreement; provided, that the execution of a mortgage or trust deed or a judicial or foreclosure sale made thereunder, or if through the disposition by the Administrator of the RUS, shall not be deemed a voluntary transfer within the meaning of this Section 20. If, due to reorganization, sale/purchase, or other means, a Party changes its relationship to the SRSG, its membership(s) will be evaluated by the Executive Committee and any appropriate change in representation will be 29 subject to approval of the Executive Committee. 21. SEVERABILITY: In the event that any of the terms, covenants or conditions of this Agreement, or the application of any such term, covenant, or condition, shall be held invalid as to any person or circumstance by any court having jurisdiction, all other terms, covenants, or conditions of this Agreement, and their application shall not be affected thereby, but shall remain in force and effect unless a court holds that the provisions are not separable from all other provisions of this Agreement. 22. RELATIONSHIP OF PARTIES: 22.1 Nothing contained herein shall be construed to create an association, joint venture, trust, or partnership, or impose a trust, partnership, covenant, obligation, or liability on or with regard to any one or more of the Parties. Each Party shall be individually responsible for its own covenants, obligations, and liabilities under this Agreement. 22.2 All rights of the Parties are several, not joint. No Party shall be under the control of or shall be deemed to control another Party. Except as expressly provided in this Agreement, no Party shall have a right or power to bind another Party without its express written consent. 23. NO DEDICATION OF FACILITIES: Any undertaking by one Party to another Party under any provision of this Agreement, shall not constitute the dedication of the System or any portion thereof of the undertaking Party to the public or to the other Party, and it is understood and agreed that any such undertaking, by a Party shall cease upon the termination of such Party's obligations under this Agreement. 24. THIRD PARTY BENEFICIARIES: This Agreement shall not be construed to create rights in, or to grant remedies to, any 30 third party as a beneficiary of this Agreement, or of any duty, obligation or undertaking established herein. 25. LIABILITY: 25.1 Subject to any applicable state and federal law which specifically prevents a Party from complying with the provisions hereof, and except for the obligation to pay amounts due in accordance with Section 13 herein, no Party, its directors, members of its governing bodies, officers or employees, shall be liable to any other Party or Parties for loss or damage to property, loss of earnings or revenues, personal injury, or any other direct, indirect, or consequential damages or injury which may occur or result from the performance or non- performance of this Agreement, including any negligence arising hereunder, unless actions or claims and resulting liability, judgments and costs were caused by or resulted from action taken or not taken by a Party or Parties at the direction of its or their directors, members of its governing bodies, officers or employees with management or administrative responsibility affecting its or their performance under this Agreement, which is knowingly or intentionally taken or not taken with conscious indifference to the consequences thereof or with the intent that injury or damage would result or would probably result therefrom. For the purposes of this Section 25 herein, a "Party" shall include the SRSG Administrator; if the SRSG Administrator is a Party to this Agreement. 25.2 The benefits of Section 25.1 herein, shall not extend to a Party prevented by state or federal law from complying with the provisions thereof. 26. DEFAULTS: 26.1 A Party shall be in default in payment when payment is not received within ten (10) days after its final due date. A default by any Party in its payment 31 obligations under this Agreement, shall be cured by payment of all overdue amounts together with interest accrued at the rate set forth in Section 13.5 herein, prorated daily from the due date to the date the payment curing the default is made. 26.2 Notwithstanding Section 25 herein, a defaulting Party shall be liable to the non-defaulting Parties for all costs, including costs of collection and reasonable attorney fees incurred by such non- defaulting Parties, plus interest as provided in Section 26.1 hereof. The proceeds paid by a defaulting Party to remedy any such default shall be distributed to the non-defaulting Parties in proportion to the additional costs and expenses actually paid by the non-defaulting Parties as a result of the default. 26.3 The rights of a Party who is in default of any of its payment or other material obligations herein, may be suspended by a vote of the non- defaulting Parties' representatives on the Operating Committee or terminated by a vote of the non-defaulting Parties' representatives on the Executive Committee. This provision allowing the non-defaulting Parties to suspend or terminate such rights is in addition to any other remedies provided in this Agreement, at law, or in equity, and shall in no way limit the non-defaulting Parties' ability to seek judicial enforcement of the defaulting Party's obligations under this Agreement. Upon the effective date of such suspension or termination of rights, all rights of the defaulting Party and all obligations of non-defaulting Parties to the defaulting Party imposed by this Agreement, except payment obligations, shall immediately be suspended or terminated. 26.4 Upon suspension or termination of the rights of a defaulting Party under this Agreement, the Operating Committee shall review reserve responsibility and cost allocations of the non-defaulting Parties and make adjustments thereto as 32 it deems necessary. 27. OTHER AGREEMENTS: No provision of this Agreement, shall preclude a Party from entering into other agreements or conducting transactions under existing agreements with other Parties or third parties. This Agreement, shall not be deemed to modify or change any rights or obligations under any prior contracts or agreements between or among any of the Parties. 28. PROPRIETARY INFORMATION: All material of any nature originated or developed hereunder by the committees, SRSG Administrator, or any Party including, but not limited to, reports and computer printouts, shall remain the sole property of the Parties despite distribution, if any, to participating Parties or third parties. It is hereby agreed that such material shall be deemed to contain confidential or proprietary information and shall not be released by any Party to any other Party or third party without the originating Party's consent, unless required by law, or such material has subsequently been made available to the public by the Party owning such material. Prior to releasing such records, to the extent applicable law allows, at least ten (10) working days notice shall be given to the Party whose records are being released. 29. PARTICIPATION BY THE UNITED STATES: The participation by the United States in this Agreement is subject in all respects to acts of Congress and to lawful and valid regulations established thereunder and rate schedules promulgated by the delegates of the Secretary of Energy thereunder. Reference to any Federal statute, regulation or executive order in this Agreement, shall be for the purpose of identification only and all Parties agree that performance by the United States will require compliance with all current laws, regulations, or executive orders. Updates, revisions, reissuances, or a new enactment of law, regulation, or executive order may also be applicable by the terms of such law, 33 regulation, or executive order to performance by the United States hereunder. 30. CONTINGENT UPON APPROPRIATIONS: The United States shall make every effort to obtain appropriations as necessary for continued participation in this Agreement; however, it is understood that the participation of the United States is contingent upon obtaining the necessary appropriations and, if such necessary appropriations are not obtained from Congress, then the other Parties hereby agree to release and discharge the United States from any financial liability or responsibility in connection with the continued participation and associated rights in this Agreement; provided, that if the United States is unable to continue participation as a result of non- appropriation of funds, the United States will, at the time sufficient funds are appropriated, make payment to the appropriate Party or Parties equal to the amount plus interest calculated pursuant to Section 13.5 herein, which become due under this Agreement, if funds had been timely appropriated. Payment by the United States shall constitute performance by the United States as if funds had been appropriated and payment made as scheduled. Full reinstatement of the United States under the terms of this Agreement shall be granted only if funds are appropriated in amounts to cover any obligations which might arise by virtue of the application of Section 26 herein. 31. OFFICIALS NOT TO BENEFIT: No Member of or Delegate to Congress or Resident Commissioner shall be admitted to any share or part of this Agreement, or to any benefit that may arise herefrom, but this restriction shall not be construed to extend to this Agreement if made with a corporation or company for its general benefit. 32. EXECUTION BY COUNTERPART: This Agreement may be executed in any number of counterparts, and upon execution 34 of this Agreement by all Parties, each executed counterpart shall be binding, and all executed counterparts shall together have the same force and effect as an original instrument as if all Parties had signed the same instrument. Any signature page of this Agreement may be detached from any counterpart of this Agreement without impairing the legal effect of any signature thereon, and may be attached to another counterpart of this Agreement identical in form hereto but having attached to it one or more signature pages. 33. SIGNATURE CLAUSE: Each Party hereto represents and warrants that the person executing this Agreement has been duly authorized to act on its behalf. ARIZONA ELECTRIC POWER COOPERATIVE, INC. BY: /s/ MILES H. OLDFATHER ------------------------------------------- TITLE: Board Vice President ---------------------------------------- DATE: November 11, 1997 ----------------------------------------- ARIZONA PUBLIC SERVICE COMPANY BY: /s/ JACK DAVIS -------------------------------------------- TITLE: Executive V.P. Commercial Operations ----------------------------------------- DATE: November 7, 1997 ------------------------------------------ 35 CITY OF FARMINGTON ATTEST: BY: /s/ MAUDE GRANTHAM RICHARDS -------------------------------------------- TITLE: Electric Utility Director - ------------------------ -------------------------------------------- DATE: November 14, 1997 -------------------------------------------- EL PASO ELECTRIC COMPANY BY: /s/ JOHN A. WHITACRE -------------------------------------------- TITLE: Assistant VP-System Operations ----------------------------------------- DATE: November 24, 1997 ------------------------------------------ INCORPORATED COUNTY OF LOS ALAMOS ATTEST: BY: /s/ D. CHRISTOPHER ORTEGA -------------------------------------------- TITLE: Utilities Manager - ------------------------ ----------------------------------------- DATE: November 13, 1997 ------------------------------------------ NEVADA POWER COMPANY BY: /s/ MATT H. DAVIS -------------------------------------------- TITLE: Division Director, System Planning & Operations ----------------------------------------- DATE: November 6, 1997 ------------------------------------------ 36 PLAINS ELECTRIC GENERATION AND TRANSMISSION COOPERATIVE, INC. ATTEST: BY: /s/ MICHAEL S. McINNES -------------------------------------------- TITLE: Executive VP/General Manager - ------------------------ ----------------------------------------- Assistant Secretary DATE: November 10, 1997 ------------------------------------------ PUBLIC SERVICE COMPANY OF NEW MEXICO BY: /s/ R. FLYNN -------------------------------------------- TITLE: Sr. Vice President, Electric Services ----------------------------------------- DATE: November 10, 1997 ------------------------------------------ SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT BY: /s/ MARK B. BONSALL -------------------------------------------- TITLE: Associated General Manager ----------------------------------------- Marketing, Customer Service, Finance ----------------------------------------- and Planning ----------------------------------------- DATE: November 13, 1997 ------------------------------------------ TUCSON ELECTRIC POWER COMPANY BY: /s/ N. A. DELAWDER -------------------------------------------- TITLE: Vice President ----------------------------------------- DATE: November 12, 1997 ------------------------------------------ 37 WESTERN AREA POWER ADMINISTRATION DESERT SOUTHWEST REGION BY: /s/ J. T. CARLSON -------------------------------------------- TITLE: Regional Manager ----------------------------------------- DATE: November 17, 1997 ------------------------------------------ 38 SOUTHWEST RESERVE SHARING GROUP ------------------------------- PARTICIPATION AGREEMENT ----------------------- EXHIBIT A --------- Official Mailing Titles and Addresses ------------------------------------- of the Parties -------------- Arizona Electric Power Cooperative ---------------------------------- c/o Executive Vice President and General Manager P. O. Box 670 Benson, AZ 85602 Arizona Public Service Company ------------------------------ c/o Secretary of the Company Arizona Public Service Company P. O. Box 53999 Phoenix, AZ 85072-3999 City of Farmington ------------------ c/o Electric Utility Director 800 Municipal Drive Farmington, NM 87401 El Paso Electric Company ------------------------ c/o Secretary P. O. Box 982 El Paso, TX 79960 Incorporated County of Los Alamos --------------------------------- c/o Manager, Department of Public Utilities P. O. Drawer 1030 Los Alamos, NM 87544 Nevada Power Company -------------------- c/o Division Director, System Planning and Operations 6226 West Sahara Avenue (89102) P.O. Box 230 Las Vegas, NV 89151 Plains Electric Generation and Transmission Cooperative, Inc. ------------------------------------------------------------- P. O. Box 6551 Albuquerque, NM 87197 Public Service Company of New Mexico ------------------------------------ c/o Secretary Alvarado Square Albuquerque, NM 87158 Ex A-1 Salt River Project Agricultural Improvement and Power District -------------------------------------------------------------- c/o Secretary P. O. Box 52025 Phoenix, AZ 85072-2025 SRSG Administrator ------------------ c/o SRSG Administrator - Mail Sta: POB013 P.O. Box 52025 Phoenix, AZ 85072-2025 Tucson Electric Power Company ----------------------------- c/o Secretary P. O. Box 711 Tucson, AZ 85702 Western Area Power Administration - Desert Southwest Region ----------------------------------------------------------- c/o Regional Manager Western Area Power Administration P. O. Box 6457 (615 S. 43/rd/ Avenue) Phoenix, AZ 85005-6457 Ex A-2 SOUTHWEST RESERVE SHARING GROUP ------------------------------- PARTICIPATION AGREEMENT ----------------------- EXHIBIT B --------- Official Billing Addresses -------------------------- Arizona Electric Power Cooperative - ---------------------------------- Attn: Randall Welker P.O. Box 670 Benson, AZ 85602 Phone: (520) 586-5241 FAX: (520) 586-5279 Arizona Public Service Company - ------------------------------ Attn: Marceline Otondo P.O. Box 53999, ms 2208 Phoenix, AZ 85072-3999 Phone: (602) 250-1268 FAX: (602) 250-1127 City of Farmington - ------------------ Attn: Dean Chirigos 501 McCormick School Road Farmington, NM 87401 Phone: (505) 324-3401 FAX: (505) 326-2315 El Paso Electric Company - ------------------------ Attn: AVP - System Operations, m/s 751 P.O. Box 982 El Paso, TX 79960 Phone: (915) 543-5888 FAX: (915) 521-4763 Incorporated County of Los Alamos - --------------------------------- Department of Public Utilities Attn: Holly Brown P.O. Drawer 1030 Los Alamos, NM 87544 Phone: (505) 662-8004 FAX: (505) 662-8005 Nevada Power Company - -------------------- Attn: Barbara Sztabnik, M/S 20 6226 West Sahara Avenue (89102) P.O. Box 230 Las Vegas, NV 89151 Phone: (702) 227-2476 FAX: (702) 367-5096 Ex B-1 Plains Electric Generation and Transmission - ------------------------------------------- Attn: Dorothy Reyes 2401 Aztec Road NE P.O. Box 6551 Albuquerque, NM 87197-6551 Phone: (505) 889-7200 FAX: (505) 889-7430 Public Service Company of New Mexico - ------------------------------------ Alvarado Square Albuquerque, NM, 87158 ATTN: Supervisor, Energy Analysis, MS-EP11 Phone: (505) 241-2400 FAX: (505) 241-6891 Salt River Project Agricultural Improvement and Power District - -------------------------------------------------------------- Attn: Manager of Power Generation - Mail Sta. POB004 P.O. Box 52025 Phoenix, AZ 85072-2025 Phone: (602) 236-3965 FAX: (602) 236-3961 Tucson Electric Power Company - ----------------------------- Energy Accounting - SC209 Tucson Electric Power P.O. Box 711 Tucson, AZ 85702 Phone: (520) 745-7173 FAX: (520) 745-3348 Western Area Power Administration - Desert Southwest Region - ----------------------------------------------------------- Manager, Billing and Scheduling 615 S. 43/rd/ Ave. P.O. Box 6457 Phoenix, AZ 85009-6457 Phone: (602) 352-2555 FAX: (602) 352-2569 Ex B-2 SOUTHWEST RESERVE SHARING GROUP ------------------------------- PARTICIPATION AGREEMENT ----------------------- EXHIBIT C --------- Agreement Developmental Fee --------------------------- The Agreement Developmental Fee allocated to new members shall be determined as follows: (Agreement Development Costs) ----------------------------- (Number of Parties) = Agreement Developmental Fee Where: - ----- Agreement Development Cost = [Labor Cost + Travel Cost] X [(Number of Meetings) X (Number of attendees) X (8-hours/day)] Number of Meetings = Total number of meetings held in regards to the initial formation and development of the SRSG. Labor Cost = Average labor cost per man-hour ($50/man-hour), this average includes labor and overheads Travel Cost = Average cost per man-hour ($25/man-hour), this is based on an average of $200 per person per day for travel, room, and meals. From July, 1996 through October 23, 1997, the Agreement Developmental Fee is: ($405,600) ---------- (11) = $36,873 Ex C-1 SERVICE SCHEDULE A RESERVE OBLIGATIONS SERVICE SCHEDULE A ------------------ RESERVE OBLIGATIONS ------------------- A-1. PARTIES: This Service Schedule A is agreed upon as part of the Agreement. A-2. GENERAL: A-2.1 The purpose of this Service Schedule A is to define the aggregate reserve requirements of the SRSG and to specify the apportionment thereof among the Parties. Specific reserve requirements of the individual Parties are described and settlement provisions for reserve deficiencies are also established herein. A-2.2 All reserve requirement calculations derived herein shall be rounded up to the nearest whole Megawatt. A-2.3 It is the intent of the Parties to meet or exceed the WSCC Minimum Operating Reliability Criteria, and the NERC control performance and disturbance control standards, as they may be adopted, modified, or revised. A-2.4 The SRSG has been formed for the purpose of sharing Contingency Reserves only. Any reserve obligation necessary to meet NERC and WSCC criteria for regulation, interruptible imports, and on-demand contracts will continue to be the responsibility of each Party. A.3. TERM: This Service Schedule A shall continue in effect concurrently with the Agreement unless and until terminated by the Parties in accordance with the provisions of Section 5 of the Agreement. A-4. SRSG CONTINGENCY RESERVE REQUIREMENT: A-4.1 Consistent with this Agreement, the Parties shall ensure the proper level and location of the Contingency Reserves. The scheduling of these Contingency A-1 Reserves shall be in accordance with Operating Procedures established by the Operating Committee. A-4.2 The amount of Contingency Reserve to be maintained jointly for the SRSG shall be the greater of either: A-4.2.1 The loss of generating Capacity due to forced outage of generation or transmission equipment that would result from the Most Severe Single Contingency of the SRSG (at least half of which must be Spinning Reserve); or A-4.2.2 The sum of five percent (5%) of the aggregate Firm Commitment responsibility served by the Parties with hydro generation, plus seven percent (7%) of the aggregate Firm Commitment responsibility served by the Parties with thermal generation (at least half of which must be Spinning Reserve). A graphic representation of the SRSG Contingency Reserve calculation is depicted in Attachment 1 to this Service Schedule A. A-5. SRSG SPINNING RESERVE REQUIREMENT: The amount of Spinning Reserve to be maintained jointly for the SRSG shall be equal to fifty percent (50%) of the SRSG Contingency Reserve requirement determined in accordance with Section A-4.2 herein. All SRSG Spinning Reserve shall be responsive to WSCC frequency deviations. A-6. RESERVE RESPONSIBILITY VALUE/RESERVE RESPONSIBILITY RATIO: A-6.1 Reserve Responsibility Value (RRV) ---------------------------------- A Party's RRV is equal to twenty-five percent (25%) of its Firm Commitment, plus one-hundred percent (100%) of the number of megawatts associated with its Most Severe Single Contingency. \\\ A-2 A-6.2 Reserve Responsibility Ratio (RRR) ---------------------------------- A Party's RRR is equal to its RRV divided by the sum of the RRV's for each Party. Graphic representations of the Reserve Responsibility Value and Reserve Responsibility Ratio calculations are depicted in Attachment 2 to this Service Schedule A. A-7. PARTY RESERVE QUOTAS: Each Party is responsible for supplying its quota for Contingency Reserve, which is made up of Spinning Reserve and Non-Spinning Reserve, for all hours based on the following reserve quotas. Contingency Reserves activated due to the occurrence of any event shall be restored by the affected Party or Parties in as short a period of time as possible, but not longer than sixty (60) minutes from the start of the event, unless and until the Operating Committee shall establish a different time period. A-7.1 Contingency Reserve -The hourly Contingency Reserve quota for a ------------------- Party shall be equal to the product of the SRSG Contingency Reserve requirement for that hour, as determined in accordance with Section A-4.2 herein, multiplied by its RRR, as determined in accordance with Section A-6.2 herein; provided, however, each Party shall maintain at least 5 MW of Contingency Reserve at all times. A-7.2 Spinning Reserve - The hourly Spinning Reserve quota for a Party ---------------- shall be equal to fifty percent (50%) of its hourly Contingency Reserve quota, as determined in accordance with Section A-7.1 herein; provided, however, each Party shall maintain at least 3 MW of Spinning Reserve at all times. Graphic representations of the Party's Contingency Reserve and Spinning Reserve calculations are depicted in Attachment 3 to this Service Schedule A. A-8. PENALTIES: A-8.1 At the end of each hour, the SRSG Administrator shall compare the actual A-3 amount of Contingency Reserve and Spinning Reserve carried by each Party to that Party's respective reserve quotas. A Party shall be deficient in Contingency Reserve if the actual amount of reserve carried by the Party is less than that Party's respective reserve quotas. If a Party is deficient in the amount of Contingency Reserve, the deficient Party shall be assessed a penalty as set forth in the applicable Operating Procedure(s). A-8.2 Penalties imposed by NERC or WSCC on the SRSG for failure to carry required Contingency Reserves shall be applied only to the Party(ies) that caused the Contingency Reserve deficiency in proportion to which such Party(ies) contributed to the Contingency Reserve deficiency. A-9. BILLING AND PAYMENT All billings and payments associated with this Service Schedule A shall be made in accordance with Section 13 of the Agreement. A-4 ATTACHMENT 1 TO SERVICE SCHEDULE A ---------------------------------- CALCULATION OF -------------- SRSG CONTINGENCY RESERVE REQUIREMENTS ------------------------------------- ------------------------------------ 7% of aggregate Firm Commitment served by thermal generation Plus 5% of aggregate Firm Commitment served by hydro generation ------------------------------------ ---------------------------- SRSG Contingency Reserve Greater of Requirement ---------------------------- ------------------------------------ SRSG's Most Severe Single Contingency (Largest Hazard) ------------------------------------ Where: ---------------------------- SRSG Contingency Reserve Requirement ---------------------------- ---------------------------- ---------------------------- SRSG Spinning Reserve SRSG Non-Spinning Reserve ---------------------------- ---------------------------- ---------------------------- ---------------------------- SRSG Contingency Reserve 50% of SRSG Contingency Reserve Less Requirement ---------------------------- SRSG Spinning Reserve ----------------------------- A-5 ATTACHMENT 2 TO SERVICE SCHEDULE A ---------------------------------- CALCULATION OF -------------- RESERVE RESPONSIBILITY RATIO (RRR) ---------------------------------- AND --- RESERVE RESPONSIBILITY VALUE (RRV) ---------------------------------- -------------------------------- Party's RRV ------------- Party's RRR Divided By ------------- Sum of RRV for All Parties -------------------------------- Where: ------------------------------------------ 25% Hourly Integrated Firm Commitment Plus 100% Largest Thermal Hazard ------------------------------------------ ------------------------------------------ 25% Hourly Integrated Firm Commitment ------------- Party's RRV Greater of Plus ------------- 100% Largest Hydro Hazard ------------------------------------------ ------------------------------------------ 25% Hourly Integrated Firm Commitment Plus 100% Largest Transmission Hazard ------------------------------------------ A-6 ATTACHMENT 3 TO SERVICE SCHEDULE A ---------------------------------- CALCULATION OF -------------- PARTY'S CONTINGENCY AND SPINNING RESERVE REQUIREMENTS ----------------------------------------------------- ----------------------------- SRSG Contingency Reserve Requirement Multiplied by Party's RRR ----------------------------- ---------------------- Party's Contingency Greater of Reserve Requirement ---------------------- ------------- 5 MW -------------- ----------------------------- 50% of Party's Contingency Reserve Requirement ----------------------------- ---------------------- Party's Spinning Greater of Reserve Requirement ---------------------- ------------- 3 MW ------------- A-7 SERVICE SCHEDULE B ACTIVATION OF RESERVES FOR EMERGENCY ASSISTANCE SERVICE SCHEDULE B ------------------ ACTIVATION OF RESERVES FOR EMERGENCY ASSISTANCE ----------------------------------------------- B-1. PARTIES: This Service Schedule B is agreed upon as part of the Agreement. B-2. GENERAL: The purpose of this Service Schedule B is to define the terms and conditions under which a Party is obligated to activate its reserves for another Party requesting Emergency Assistance. B-3. TERM: This Service Schedule B shall continue in effect concurrently with the Agreement unless and until terminated by the Parties in accordance with provisions of Section 5 of the Agreement. B-4. PARTY OBLIGATIONS: Each Party is responsible for the activation of reserves as follows: B-4.1 Party Experiencing a Disturbance -------------------------------- The Party experiencing a Disturbance shall immediately activate its own Contingency Reserves and initiate a system disturbance message (which shall include a request for Emergency Assistance if required), in accordance with Operating Procedures established by the Operating Committee. B-4.2 Party Supplying Emergency Assistance ------------------------------------ A Party supplying Emergency Assistance shall activate its reserves in accordance with Operating Procedures established by the Operating Committee. B-4.3 All Parties ----------- B-4.3.1 Each Party shall be required to complete the activation of its reserves within ten (10) minutes from the time of the Disturbance. B-1 B-4.3.2 When supplying Emergency Assistance a Party has no obligation to supply more than its Contingency Reserve quota. B-4.3.3 A Party has no obligation to supply Emergency Assistance to another Party beyond a period of sixty (60) minutes from the time of the Disturbance. B-4.4 Pursuant to WSCC and NERC criteria, each Party shall maintain sufficient transmission to support the activation of its own Contingency Reserves and its Emergency Assistance obligations in accordance with the Agreement. B-4.4.1 The amount of non-recallable transmission required to predetermined points of delivery shall be determined using matrices for all major contingencies specifying the transmission paths necessary to deliver SRSG reserves in accordance with the applicable Operating Procedures as established by the Operating Committee. B-5. SETTLEMENT FOR EMERGENCY ASSISTANCE: B-5.1 Transmission - Charges associated with the transmission utilized in ------------ accordance with Section B-4.4 herein, shall be the responsibility of the Party reserving such transmission. B-5.2 Capacity - There shall be no Capacity (demand) charge associated -------- with the supply or receipt of Emergency Assistance. B-5.3 Energy - The Party receiving Emergency Assistance shall pay the ------ supplying Party or Parties for the Energy received at a rate of one- hundred percent (100%) of the supplying Party's cost incurred. For the purpose of this Agreement, the term "cost incurred" shall mean the expense incurred by the supplying Party in supplying Emergency Assistance, as such cost is determined in accordance with the applicable Operating Procedures as established by the Operating Committee. Such costs shall include, but not be B-2 limited to, the following: B-5.3.1 The cost of fuel which was consumed in generating Energy for Emergency Assistance; plus B-5.3.2 Startup and incremental cost of unit operation and maintenance. B-6. PENALTIES: Penalties imposed by NERC or WSCC on the SRSG for failure to recover from a Disturbance shall be applied only to the Party(ies) that caused such failure. B-7. BILLING AND PAYMENT All billings and payments associated with this Service Schedule B shall be made in accordance with Section 13 of the Agreement. B-3 EX-10.23-02 3 CONTRACT FOR PURCHASE - ECONOMY ENERGY EXHIBIT 10.23-02 CONTRACT FOR THE PURCHASE, SALE OR EXCHANGE OF ECONOMY ENERGY BETWEEN COMISION FEDERAL DE ELECTRICIDAD AND EL PASO ELECTRIC COMPANY LEGEND: PORTIONS OF THIS DOCUMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND SUCH OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION Pag. 1 de 19 CONTRACT FOR THE PURCHASE OF FIRM CAPACITY AND ASSOCIATED POWER ENTERED INTO BY COMISION FEDERAL DE ELECTRICIDAD, HEREINAFTER REFERRED TO AS "CFE", REPRESENTED BY LIC. LUIS R. ALMEIDA DURAN AND BY ING. RAYMUNDO CAMPOS MILAN IN THEIR CAPACITY AS PROGRAMMING SUBDIRECTOR; AND TRANSMISSION, TRANSFORMATION AND CONTROL SUBDIRECTOR RESPECTIVELY AND BY "EL PASO ELECTRIC COMPANY", HEREINAFTER REFERRED TO AS "EPE", REPRESENTED BY JOHN C. HORNE, IN HIS CAPACITY AS VICE PRESIDENT-POWER GENERATION, PURSUANT TO THE FOLLOWING RECITALS AND CLAUSES. R E C I T A L S I. CFE STATES THAT: I.1 It is a decentralized organization of the Federal Public Administration of the United Mexican States, possessing its own legal personality and assets, and regulated by the Electric Power Public Service Law, published in the Official Federal Daily Journal on December 22, 1975. I.2 Part of its objective is the import of electric power, exclusively for the provision of public service. I.3 Its objective also includes the execution of agreements or contracts with private entities, to carry out acts related to the provision of public service of electric power, as well as to carry out the acts and execute the contracts necessary for the fulfillment of its objective. I.4 It is currently authorized by the Federal Department of Energy to import *SEE LEGEND ON FIRST PAGE OF EXHIBIT* electric power monthly from the United States of America. Copies of the permits are included as Attachment I. I.5 Award of the present CONTRACT was the result of competition through direct invitation, as for by Constitutional article 134th; 9th, Pag. 3 de 19 Section III of the Electric Power Public Service Law, and Article 7th of the Regulation of said law. A copy of the decision of the competition held, appears in Attachment I-BIS. I.6 This CONTRACT is not subject to the dispositions of the North American Free Trade Agreement, insofar as it refers to acts that lead to the provision of electric power public service, pursuant to the provisions contained in appendix 1001.1B-2, section B Mexico list, section 2, and in official document No. 202'94'90 dated June 29, 1994 by the General Direction of International Institutions Headquarters of the Federal Department of Commerce and Industrial Promotion. I.7 It possesses the necessary funds, authorized by the Federal Department of the Treasury, to effect the disbursements arising from this CONTRACT. I.8 Lic. Luis Almeida and Ing. Raymundo Campos Milan have the necessary authority to represent it in this act, same as has not been revoked to date. I.9 It is domiciled at Don Manuelito No. 32, Col. Olivar de los Padres 01780 Mexico, D.F. Mexico, being this the same given for all legal purposes pertaining to this CONTRACT. II. EPE STATES THAT: II.1 It is a company constituted and existing pursuant to the laws of the State of Texas of the United States of North America as evidenced by the legal documents added to the present CONTRACT as Attachment II. II.2 Its purpose consists of the generation, purchase, sale and transmission of electric power in the United States of America, in accordance with that established in Attachment II. II.3 It received the direct invitation sent to it by CFE to participate in the competition for the purchase of FIRM CAPACITY and ASSOCIATED pag. 4 de 19 POWER, agreeing to participate in the competition, for which reason it submitted its offer. II.4 It has the legal status to contract, and meets the technical and economic conditions to obligate itself pursuant to the terms of the present CONTRACT. II.5 It is familiar with the contents of the Electric Power Public Service Law and its Regulations. II.6 Its representative Mr. John C. Horne verifies his capacity and authority to appear at this act by means of a certified copy of the protocolized power granted him, which is added to this CONTRACT as Attachment III. II.4 It is domiciled at 123 West Mills, El Paso, Texas 79901-1341 being this the same given for all legal purposes pertaining to this CONTRACT. III. THE PARTIES STATE THAT: III.1 Hereinafter, CFE and EPE may also be individually called "PARTY" or jointly called "PARTIES". The foregoing having been declared, the PARTIES execute the following: CLAUSES FIRST.- SUBJECT MATTER OF THE CONTRACT The subject matter of the present CONTRACT is to establish the terms and conditions pursuant to which EPE commits to sell and deliver to CFE, and the latter commits to purchase and receive FIRM, CAPACITY and ASSOCIATED POWER, as provided for in this CONTRACT. Pag.5 de 19 SECOND.- DEFINITIONS For the purpose of the present CONTRACT the PARTIES agree to establish the following conventional definitions, which shall be used with no distinction in singular or plural. The terms defined shall be written in bold type and upper case letters. 2.1 CONTRACTED CAPACITY The amount of FIRM CAPACITY in MW, that EPE commits to have at the disposal of CFE at the POINT OF DELIVERY. Period Demand (MW) ------ ----------- 98/01/01 - 98/03/31 *SEE 98/04/01 - 98/04/30 LEGEND 98/05/01 - 98/08/31 ON FIRST 98/09/01 - 98/12/31 PAGE OF EXHIBIT* 2.2 CAPACITY CHARGE The monthly charge in dollars of the United States of America for each kW with CONTRACT CAPACITY, specified in the Fifth Clause of this CONTRACT. 2.3 TRANSMISSION CHARGE The monthly charge in dollars of the United States of America for each of CONTRACT CAPACITY associated with the use of the transmission system of EPE or with third parties and specified in the Fifth Clause of this CONTRACT. 2.4 ASSOCIATED POWER CHARGE The charge in dollars of the United States of America for each kW of ASSOCIATED POWER, specified in the Fifth Clause of this CONTRACT. Pag. 6 de 19 2.5 FORTUITOUS CASES AND FORCE MAJEURE CAUSES As established in the Twelfth Clause, section 12.3 2.6 CFE-JUAREZ Is the electric system property of CFE which supplies the northern part of the state of Chihuahua and adjoins the border of the United States of America, and interconnects with the rest of the SINAL at the Moctezuma Substation. 2.7 EMERGENCY The loss or interruption of generating capacity or TRANSMISSION CAPACITY in the system of either of the PARTIES, which degrades system safety to the point of placing service in risk to its native users or the integrity of the system, as a result of any other cause other than: (1) scheduled maintenance or; (2) an expected shortage in the fuel supply. 2.8 ASSOCIATED POWER The energy delivery to CFE expressed in kWh, associated with CONTRACTED CAPACITY. 2.9 POINT OF DELIVERY. Point at which the electric power transmission lines which connect the Azcarate and Diablo Substations, property of EPE, with the Riverena and Insurgentes Substations, property of CFE, cross the international border of the United States of America and the United Mexican States. Pag. 7 de 19 2.10 SERVICE RESTRICTIONS Partial or total interruption of the supply of electric power to CFE. 2.11 NATIONAL INTERCONNECTED SYSTEM (SINAL) CFE'S principal electric power system, of which CFE-JUAREZ is a part. 2.12 WESTERN SYSTEMS COORDINATING COUNCIL (WSCC) Is an organization made up of different interconnected electric power companies, located in the western part of the United States of America and Canada, and of which EPE is a member. THIRD.- TERM This CONTRACT shall take effect on the date on which it is signed by the PARTIES; the services to be provided pursuant to same shall commence on January 1st of 1998 and conclude on December the 31st of 1998. The present CONTRACT shall take effect under the condition that CFE obtains the budgetary authorization mentioned in statement 1.7. FOURTH.- TECHNICAL ASPECTS 4.1 INTERCONNECTION The INTERCONNECTION between the CFE-JUAREZ and EPE systems is by means of two 115 kV connections in the border which connect the Riverena and Insurgentes substations, property of CFE, with the Azcarate and Diablo substations, property of EPE. CFE shall receive the power of EPE via these lines at the POINT OF DELIVERY Pag. 8 de 19 Transmission of power up to the POINT OF DELIVERY will be the exclusive responsibility of EPE. 4.2 TRANSFERRED LOAD Both PARTIES acknowledge that the reception of energy is not practical or convenient during the time the CFE-JUAREZ is interconnected to the SINAL of CFE. For the above stated, in order for an exchange of electric power to take place between the PARTIES, they agree to separate a part of the CFE-JUAREZ system, and to continue applying the procedures established, between the PARTIES, for that purpose. 4.3 DELIVERY CONDITIONS EPE may not interrupt the delivery of ASSOCIATED POWER, except under EMERGENCY conditions, FORTUITOUS CASES or FORCE MAJEURE CAUSES. 4.4 OPERATING PROCEDURES Both PARTIES agree to continue operating, during the term of this CONTRACT, according to *SEE LEGEND ON FIRST PAGE OF EXHIBIT* 4.5 MEASUREMENTS For billing purposes, the measurements of energy demand and supply by EPE to CFE will be taken by the Azcarate and Diablo Substations, property of EPE, according to the operating procedures established for that purpose between the PARTIES. Pag. 9 de 19 FIFTH.- BASIS FOR THE DETERMINATION OF BENEFITS 5.1 PRICES EPE shall supply the CONTRACTED CAPACITY and ASSOCIATED POWER to CFE which shall pay to EPE in dollars of the United States of America, during the term this CONTRACT is in effect, the prices offered by EPE in the bidding process, and which are stated as follows: *SEE LEGEND ON FIRST PAGE OF EXHIBIT* 5.2 BILLING Monthly billing for the services will be the sum of the Billing for CONTRACTED CAPACITY, Billing for Transmission, plus the Billing for ASSOCIATED POWER, and the Billing for Other Charges, as stated below: *SEE LEGEND ON FIRST PAGE OF EXHIBIT* Pag. 10 de 19 5.3 PRICE CHARACTERISTICS The prices established in Section 5.1 of this Clause, represent the total payment required from CFE, up to the POINT OF DELIVERY, and include all taxes, duties and other fiscal contributions or payments, arising in the United States of America, consequently, EPE may not claim, for any reason, greater benefits other than those agreed and described in Section 5.1 CFE shall be responsible for the payment of all taxes, duties and other fiscal contributions, arising in the United Mexican States arising by the import of electric power. SIXTH.- BILLING AND PAYMENT 6.1 INVOICE The invoice which EPE presents to CFE *SEE LEGEND ON FIRST PAGE OF EXHIBIT*. Pag. 11 de 19 6.2 PERIOD FOR BILLING EPE shall present CFE within 10 calendar days subsequent to the end of each month, the invoices to be charged, in dollars of the United States of America, for the sales made pursuant to this CONTRACT, for the months in which such sales take place. The monthly invoices presented shall be paid by CFE to EPE, within the 20 calendar days subsequent to the date the invoice was received. 6.3 BILLING DISCREPANCIES In the event of a discrepancy between the PARTIES, regarding the amount stated in an invoice, the invoice must be paid entirely within the period agreed, in the understanding that the amount subject to dispute between the PARTIES, is being paid under protest. If it is determined that any part of the protested amount charged is incorrect, EPE must reimburse CFE the amount of the overcharge, including a 1% monthly interest, calculated as of the day on which the overcharge was paid until the amount and its interest are reimbursed. 6.4 ACCOUNTS FOR PAYMENTS All payments made by CFE to EPE shall be made in dollars of the United States of America, by electronic means, in a Banking Institution outside the United Mexican States, designated by EPE. SEVENTH.- TAXES AND DUTIES The taxes and duties legally arising as a consequence of this CONTRACT in the United States of America and in the United Mexican States, shall be paid respectively by EPE and CFE, as set forth in their respective fiscal regulations. Pag. 12 de 19 EIGHT.- REPRESENTATION Within thirty calendar days commencing as of the date on which the present CONTRACT is executed, each PARTY shall designate a representative and an alternate, and shall notify the other PARTY in writing, within the same period, their names and duties. The representatives of the PARTIES shall basically have the function of contributing to the satisfactory performance of the operational aspects arising out of this CONTRACT, as well as to serve as a liaison between the PARTIES, in order to achieve an adequate implementation of it. The PARTIES may change their representatives at any time, subject to prior notification there of by one PARTY to the other. All decisions taken by the representatives of the PARTIES must be recorded in minutes which must be signed by them. The representatives, however, are not authorized to modify what has been agreed to in this CONTRACT. The salaries and expenses of these representatives shall be borne by the represented PARTY. NINTH.- DEFAULT 9.1 EVENT OF DEFAULT In the Event of Default or breach, the conforming PARTY shall notify the other PARTY, in writing, of such event, the non complying PARTY shall explain and remedy the non-compliance or otherwise prove that no event of Default has occurred. Once the PARTY has been notified of the non-compliance, if there were such non-compliance, the PARTY in non-compliance shall correct its fault, as soon as reasonably Pag. 13 de 19 possible without exceeding three (3) calendar days commencing on the date in which notification took place. If due to its nature it were not possible to remedy the situation within three (3) calendar days, the non-complying PARTY shall submit, within such period, a schedule of activities which fully satisfies the other PARTY, to remedy the non-compliance. If no agreement is reached by the PARTIES, they shall submit the disputed issues to arbitration, as established in the Fifteenth Clause of the present CONTRACT. The PARTIES shall abide by the arbitral verdict, which shall be definitive. 9.2 RESCISSION The present CONTRACT may be rescinded due to serious or repeated non-compliances of either of the PARTIES, regarding the obligations provided in the present CONTRACT. TENTH.- PENALTIES When EPE fails to make the CONTRACTED CAPACITY partially or totally available to CFE, and this not be due to an EMERGENCY, a FORTUITOUS CASE OR FORCE MAJEURE CAUSE, or caused by CFE, EPE must pay the positive difference, duly documented by CFE, between the cost to CFE for the amount of energy not supplied and the contracted price with EPE, CFE shall not pay the charge for CONTRACTED CAPACITY and the charge for TRANSMISSION CAPACITY in proportion to the amount and time of the non-compliance. ELEVENTH.-RESPONSIBILITIES Each of the PARTIES shall indemnify and hold the other PARTY harmless from any responsibility, loss, damage or destruction of property as a result of dolus, fault or negligence of its officers, advisors, employees, workers and other personnel. Pag. 14 de 19 Claims or indemnifications of employees or workers of either PARTY as a result of work accidents shall be the sole liability of that PARTY. Each PARTY shall assume responsibility to its consumers, for claims caused by interruptions or deficiencies of service. Each PARTY agrees to hold the other PARTY safe and harmless if a consumer of one of the PARTIES files suit against the other PARTY. TWELFTH.- GENERAL MATTERS 12.1 NOTIFICATIONS Any notification, petition or request relative to this CONTRACT, shall be deemed duly delivered to CFE, if it is sent by certified mail with return receipt requested, by messenger service, or by fax, obtaining confirmations of its reception by the Jefe del Area de Control Norte at Guanacevi No. 131, Parque Industrial Lagunero, Gomez Palacio, Dgo. C.P. 35078, Mexico; if the notification is to EPE, it must be sent to the Assistant Vice President of Resource and Planning Department at 123 West Mills, El Paso, Texas 79901. The designation of the person to whom notifications shall be sent, or the address of said person may be changed at any time by means of written notification. Every notification and request related to the delivery or reception of electric power or to the operation of facilities, shall be deemed valid if it is transmitted by telephone and recorded in the system operators logs of both PARTIES. 12.2 SUCCESSORS AND ASSIGNEES The present CONTRACT shall be effective in benefit of and binding on the successors and assignees of both PARTIES; however it shall not be transferable by either of the PARTIES without prior written consent from the other, which shall not be denied without just cause. Pag. 15 de 19 12.3 FORTUITOUS CASE OR FORCE MAJEURE CAUSE Neither EPE nor CFE shall be liable for default in their obligations arising out of the present CONTRACT, when said default is due to a FORTUITOUS CASE or FORCE MAJEURE CAUSE, provided that the PARTY which finds itself unable to comply has not contributed or given cause to the occurrence of said FORTUITOUS CASE or FORCE MAJEURE CAUSE. A FORTUITOUS CASE or FORCE MAJEURE CAUSE shall be understood to mean any natural phenomenon or human act that is unexpected or unavoidable, even when proceeding with due diligence, and that prevents fulfillment of any of its obligations arising out of this CONTRACT. Included among but not limited to FORTUITOUS CASES or FORCE MAJEURE CAUSES are the following: Flooding, earthquake, storm, fire, lightning, epidemic, war, revolt, strike, not attributable to the affected PARTY, acts by authorities not promoted or caused by the affected PARTY. When a FORTUITOUS CASE or FORCE MAJEURE CAUSE occurs, the PARTY subjected to it must notify and confirm its existence to the other PARTY. The PARTY subjected to a FORTUITOUS CASE or FORCE MAJEURE CAUSE shall indicate to the other PARTY how long it is expected to last and the measures it is taking to resolve it. 12.4 PARTIAL INVALIDITY The invalidity or nullity of any part of this CONTRACT, provided said invalidity or nullity does not affect essential elements of same, allowing it to remain in effect, shall not affect the validity of any other provision contained herein. 12.5 DISPUTES Any dispute arising out this CONTRACT, shall be discussed and resolved by the representatives of the Pag. 16 de 19 PARTIES, who shall make their best efforts to resolve said dispute in a friendly and opportune manner. If they are unable to resolve such disputes, they shall submit them for consideration and resolution by their respective superior executives, without prejudice to the provisions contained in the Fifteenth Clause. THIRTEENTH.- AUTHORIZATIONS All authorizations required by either PARTY for the execution of this CONTRACT, whether in their own country or any country, shall be obtained by the PARTY and be in effect at the time of this CONTRACT is to be signed. FOURTEENTH.- LANGUAGE The PARTIES signing this CONTRACT do so in two (2) originals in Spanish and (2) two originals in English. It is agreed that the two versions in Spanish and English of this CONTRACT are valid and binding. In the event of any discrepancy in the interpretation of either of these versions, the version in Spanish shall prevail. FIFTEENTH.-ARBITRATION In the event of disputes of a technical or economic nature related to this CONTRACT, which the PARTIES are unable to overcome within a period of thirty (30) calendar days, said dispute shall be resolved by means of arbitration. The arbitration procedure shall be subject to the Rules of Conciliation and Arbitration of the International Chamber of Commerce of Paris. The arbitral tribunal must be comprised by three arbiters selected according to said Rule, unless the PARTIES agree to appoint only one arbiter. The arbitration shall take place in Mexico City, in the Spanish language. The costs and expenses which arise by reason of the arbitration shall be paid by the losing PARTY. The arbitral veredict shall be unappealable and definitive. If during the course of the arbitration Pag. 17 de 19 proceeding it is determined that the dispute in question is not of a technical or economic nature, said dispute shall be submitted to the jurisdiction of the Federal Tribunals indicated in the Sixteenth Clause. SIXTEENTH.-REGULATORY LAW The present CONTRACT shall be governed by and interpreted pursuant to the federal laws of the United Mexican States, therefore, the PARTIES agree that whatever disputes may arise from the present CONTRACT, other than those indicated in clause Fifteenth, shall be of the competency of the Federal Tribunals, and for the purpose, the PARTIES submit to the jurisdiction of said Tribunals in Mexico City, D.F. therefore they waive any forum which might pertain to them by reason of their current or future address or any other reason. This CONTRACT is executed in Mexico city, Distrito Federal in two issues in English and two issues in Spanish on the 19th day of December of the year 1997. Pag. 18 de 19 COMISION FEDERAL DE EL PASO ELECTRIC ELECTRICIDAD COMPANY /s/ LUIS R. ALMEIDA /s/ JOHN C. HORNE - -------------------------------------- --------------------------------------- Lic. Luis R. Almeida John C. Horne Programming Subdirector Vice President-Power Generation /s/ RAYMUNDO CAMPOS MILAN - -------------------------------------- Ing. Raymundo Campos Milan Transmission, Transformation and Control Subdirector Revised in its Legal Aspects /s/ EMILIO REYES LAGUNES - -------------------------------------- Lic. Emilio Reyes Lagunes Legal Business Department Manager The above signatures correspond to the Contract for the Purchase of Firm Capacity and Associated Power entered into by Comision Federal de Electricidad and El Paso Electric Company. I, Josefina Sosa Santos Interpreter and Translator, duly certified by the Superior Court of Justice of the State of Baja California, do herby certify that the foregoing text is a true and correct translation from Spanish into English. Mexicali, B.C. December 16, 1997 /s/ JOSEFINA SOSA SANTOS Josefina Sosa Santos. Pag. 19 de 19 EX-10.24-02 4 AMENDMENT 2 TO FEB. 12, 1996 CREDIT AGREEMENT EXHIBIT 10.24-02 Execution Copy AMENDMENT No. 2 dated as of July 31, 1997 (the "Amendment"), to the CREDIT AGREEMENT dated as of February ------------ 12, 1996 (the "Credit Agreement"), among EL PASO ELECTRIC ------------------- COMPANY, a Texas corporation ("El Paso"), TEXAS COMMERCE ----------- BANK NATIONAL ASSOCIATION, a national banking association, not in its individual capacity, but solely in its capacity as trustee of the Rio Grande Resources Trust II (the "Trustee"; El Paso and the Trustee are referred to --------- collectively herein as the "Borrowers"), the financial ----------- institutions party thereto (the "Lenders") and THE CHASE --------- MANHATTAN BANK, a New York banking corporation, as issuing bank, administrative agent (in such capacity, the "Administrative Agent") and collateral agent for the ---------------------- Lenders. The Borrowers have requested that restrictions on acquisitions of El Paso's capital stock contained in Section 6.06 be modified to allow the purchase or acquisition of shares of El Paso's capital stock by El Paso from members of management in amounts not exceeding $250,000 in the aggregate for any twelve- month period, and the Required Lenders are willing so to amend the Credit Agreement. Capitalized terms used but not defined herein shall have the meanings assigned to them in the Credit Agreement. Accordingly, in consideration of the mutual agreements contained herein and other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. Amendment to Section 6.06 of the Credit Agreement. ------------------------------------------------- Section 6.06 of the Credit Agreement is hereby amended by adding after the existing paragraph (c) thereof a new paragraph (d) that reads as follows: (d) so long as no Default or Event of Default shall have occurred and be continuing or would occur as a result thereof, El Paso may repurchase, redeem or otherwise acquire or retire for value any shares of any class of the capital stock of El Paso or any Subsidiary of El Paso held by any member of El Paso's (or any of its Subsidiaries') management; provided, however, that the aggregate price paid for all -------- -------- such repurchased, redeemed, acquired or retired capital stock shall not exceed $250,000 in any twelve-month period, plus the aggregate cash proceeds received by El Paso during such twelve-month period from the reissuance of shares of any class of the capital stock by El Paso to members of management of El Paso and its Subsidiaries. SECTION 2. Conditions to Effectiveness. This Amendment shall become --------------------------- effective as of the date first written above on the date that the Administrative Agent shall have received counterparts of this Amendment which, when taken together, bear the signatures of the Required Lenders and the Borrowers. SECTION 3. Effect of Amendment. Except as expressly set forth ------------------- herein, this Amendment shall not by implication or otherwise limit, impair, constitute a waiver of, or otherwise affect the rights and remedies of the Lenders, the Administrative Agent, the Collateral Agent or the Issuing Bank under the Credit Agreement or any other Loan Document, and shall not alter, modify, amend or in any way affect any of the terms, conditions, obligations, covenants or agreements contained in the Credit Agreement or any other Loan Document, all of which are ratified and affirmed in all respects and shall continue in full force and effect. Nothing herein shall be deemed to entitle the Borrowers to a consent to, or waiver, amendment, modification or other change of, any of the terms, conditions, obligations, covenants or agreements contained in the Credit Agreement or any other Loan Document in similar or different circumstances. This Amendment shall apply and be effective only with respect to the provision of the Credit Agreement specifically referred to herein. SECTION 4. Counterparts. This Amendment may be executed in any ------------ number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same contract. Delivery of an executed counterpart of a signature page of this Amendment by facsimile transmission shall be as effective as delivery of a manually executed counterpart hereof. SECTION 5. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND -------------- CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SECTION 6. Headings. The headings of this Amendment are for purposes -------- of reference only and shall not limit or otherwise affect the meaning hereof. -2- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their duly authorized officers, all as of the date first above written. EL PASO ELECTRIC COMPANY By: /s/ GARY R. HEDRICK ------------------------------------------ Name: Gary R. Hedrick Title: VP-Treasurer & CFO TEXAS COMMERCE BANK NATIONAL ASSOCIATION, not in its individual capacity, but solely in its capacity as Trustee, By: /s/ SARAH WILSON ------------------------------------------ Name: Sarah Wilson Title: Vice President THE CHASE MANHATTAN BANK, individually and as Administrative Agent, Collateral Agent and Issuing Bank By: /s/ PAUL V. FARRELL ------------------------------------------ Name: Paul V. Farrell Title: Vice President OCTAGON CREDIT INVESTORS LOAN PORTFOLIO, a unit of The Chase Manhattan Bank By: /s/ JOYCE C. DELUCCA ------------------------------------------ Name: Joyce C. Delucca Title: Managing Director -3- GUARANTY FEDERAL BANK By: /s/ MARK L. WAYNE ------------------------------------------ Name: Mark L. Wayne Title: Vice President CREDIT LYONNAIS NEW YORK BRANCH By: /s/ ROBERT IVOSEVICH ------------------------------------------ Name: Robert Ivosevich Title: Sr. Vice President -4- EX-11 5 STATEMENT RE COMPUTATION EPS El Paso Electric Company Computation of Earnings Per Share (In Thousands Except for Share Data) EXHIBIT 11
Period From | Period From Year February 12 | January 1 Year Ended to | to Ended December 31, December 31, | February 11, December 31, 1997 1996 | 1996 1995 ------------- -------------- | ------------- ------------- | Net income (loss) applicable to common stock: | Income (loss) before extraordinary items $ 41,424 $ 31,431 | $ 118,198 $ (33,319) Extraordinary loss on repurchases of debt, | net of federal income tax benefit (2,775) - | - - Extraordinary gain on discharge of debt - - | 264,273 - ------------- -------------- | ------------- ------------- Net income (loss) applicable to common stock $ 38,649 $ 31,431 | $ 382,471 $ (33,319) ============= ============== | ============= ============= | Basic earnings per common share: | Weighted average number of common | shares outstanding 60,128,505 60,073,808 | 35,544,330 35,544,330 ============= ============== | ============= ============= | Net income (loss) per common share: | Income (loss) before extraordinary items $ 0.689 $ 0.523 | $ 3.325 $ (0.937) Extraordinary loss on repurchases of debt, | net of federal income tax benefit (0.046) - | - - Extraordinary gain on discharge of debt - - | 7.435 - ------------- -------------- | ------------- ------------- Net income (loss) $ 0.643 $ 0.523 | $ 10.760 $ (0.937) ============= ============== | ============= ============= | Diluted earnings per common share: | Weighted average number of common | shares outstanding 60,128,505 60,073,808 | 35,544,330 35,544,330 ------------- -------------- | ------------- ------------- Effect of potential dilutive common stock options | based on the treasury stock method using | average market price: | First quarter 90,200 - | - - Second quarter 72,847 4,564 | - - Third quarter 55,103 16,826 | - - Fourth quarter 74,936 17,599 | - - Effect of potential dilutive restricted common stock | based on the treasury stock method using | average market price: | First quarter 4,773 - | - - Second quarter 3,985 563 | - - Third quarter 3,159 1,651 | - - Fourth quarter 4,124 1,698 | - - ------------- -------------- | ------------- ------------- Total effect of potential dilutive | common stock 309,127 42,901 | - - ------------- -------------- | ------------- ------------- Weighted average number of common shares | and common share equivalents outstanding 60,437,632 60,116,709 | 35,544,330 35,544,330 ============= ============== | ============= ============= | Net income (loss) per common share: | Income (loss) before extraordinary items $ 0.685 $ 0.523 | $ 3.325 $ (0.937) Extraordinary loss on repurchases of debt, | net of federal income tax benefit (0.046) - | - - Extraordinary gain on discharge of debt - - | 7.435 - ------------- -------------- | ------------- ------------- Net income (loss) $ 0.639 $ 0.523 | $ 10.760 $ (0.937) ============== ============== | ============= ==============
EX-23.01 6 CONSENT OF KPMG PEAT MARWICK EXHIBIT 23.01 CONSENT OF INDEPENDENT AUDITORS The Board of Directors El Paso Electric Company: We consent to incorporation by reference in the registration statement (No. 333- 17971) on Form S-8 of El Paso Electric Company of our report dated February 6, 1998, relating to the balance sheets of El Paso Electric Company as of December 31, 1997 and 1996 and the related statements of operations, comprehensive operations, changes in common stock equity (deficit), and cash flows for the year ended December 31, 1997, the period February 12, 1996 to December 31, 1996, the period January 1, 1996 to February 11, 1996, and the year ended December 31, 1995, which report appears in the December 31, 1997 annual report on Form 10-K of El Paso Electric Company. KPMG Peat Marwick LLP El Paso, Texas March 25, 1998 96 EX-24.02 7 RESOLUTION AUTHORIZING SIGNATURES EXHIBIT 24.02 EL PASO ELECTRIC COMPANY CERTIFICATE OF RESOLUTION I, Guillermo Silva, Jr., Secretary of El Paso Electric Company, a Texas corporation (the "Company"), do hereby certify that attached hereto is a true, correct and complete copy of the resolution authorizing signatures pursuant to the Power of Attorney for the 1997 Form 10-K, duly adopted by the Board of Directors of the Company at a meeting of said Board duly convened and held on January 22, 1998. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of the Company this 23rd day of March 1998. /s/ GUILLERMO SILVA, JR. ------------------------ Guillermo Silva, Jr. Secretary (Corporate Seal) EL PASO ELECTRIC COMPANY BOARD OF DIRECTORS RESOLUTION JANUARY 22, 1998 FURTHER RESOLVED, that James S. Haines, Eduardo A. Rodriguez, Gary R. Hedrick, Terry D. Bassham and Guillermo Silva, Jr. are each hereby duly appointed the Company's and its Officers' and Directors', true and lawful attorneys-in-fact and agents, for its place and stead, in any and all capacities, with full power to act alone, to sign the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (the "1997 Form 10-K"), and any and all amendments thereto, and to file such 1997 Form 10-K and each such amendment, with all exhibits thereto, and any and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto each of the said attorneys-in-fact and agents, 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 he 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. EX-27 8 ARTICLE UT - FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET OF EL PASO ELECTRIC COMPANY AS OF DECEMBER 31, 1997 AND THE RELATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 PER-BOOK 1,464,517 0 218,117 102,320 27,659 1,812,613 60,256 240,084 69,300 369,640 121,319 0 938,562 0 0 0 84 0 28,248 28,379 326,381 1,812,613 594,038 29,206 432,371 461,577 132,461 8,549 141,010 86,442 51,793 13,144 38,649 0 76,015 206,588 0.643 0.639 NET INCOME IS NET OF EXTRAORDINARY LOSS ON REPURCHASES OF DEBT (NET OF FEDERAL INCOME TAX BENEFIT) OF ($2,775). PRIMARY AND FULLY DILUTED EARNINGS PER SHARE ARE NO LONGER BEING CALCULATED, PER SFAS NO. 128. THE AMOUNTS SHOWN REPRESENT BASIC AND DILUTED EARNINGS PER SHARE, RESPECTIVELY.
EX-99.03-01 9 AMENDMENT 1 TO STOCK OPTION AGREEMENT EXHIBIT 99.03-01 AMENDMENT NO. 1 TO STOCK OPTION AGREEMENT This Amendment No. 1 to that certain Stock Option Agreement dated as of January 17, 1997 (the "Agreement") between El Paso Electric Company, a Texas corporation (the "Company") and James S. Haines, Jr. (the "Optionee"). WITNESSETH: WHEREAS, the parties have heretofore entered into the Agreement; WHEREAS, the Company has requested the Optionee to accept certain modifications to the Agreement in order to address issues that have been raised by the Company's auditors regarding the accounting treatment of the Agreement; and WHEREAS, the Optionee is willing to accept the modifications requested by the Company. NOW, THEREFORE, the parties hereto agree as follows: 1. Section 2.5 of the Agreement shall be deleted in its entirety and replaced with the following: "2.5. Dividend Equivalents. The Company hereby grants to Optionee -------------------- 706,045 dividend equivalents (the "Dividend Equivalents"). Each Dividend Equivalent shall entitle Optionee to receive a cash payment on each dividend payment date after May 1, 1996 equal to the product of (i) of the amount any dividend declared with respect to a share of Stock and (ii) the number of shares of Stock subject to unexercised Non-Qualified Options hereunder that have not expired or terminated on the date of payment of such dividend." 2. Except as modified by this Amendment No. 1, the Agreement shall remain in full force and effect with no other modifications. The Compensation/Benefits Committee of the Board of Directors has approved this Amendment No. 1. 3. This Amendment No. 1 shall be effective as of January 17, 1997. IN WITNESS WHEREOF, the parties hereto have executed this Agreement No. 1 on the date set forth below. Date: April 30, 1997 EL PASO ELECTRIC COMPANY /s/ KENNETH R. HEITZ ------------------------------------------ By: Kenneth R. Heitz Title: Chairman, Compensation/Benefits Committee of the Board of Directors OPTIONEE /s/ JAMES S. HAINES, JR. ------------------------------------------ James S. Haines, Jr. -2- EX-99.08 10 FORM OF RESTRICTED STOCK AGRMNT - CO./KEY OFFICERS EXHIBIT 99.08 EL PASO ELECTRIC COMPANY RESTRICTED STOCK AWARD AGREEMENT EL Paso Electric Company, a Texas corporation (the 'Company'), hereby grants to ___________________ (the "Holder"), pursuant to the provisions of the El Paso Electric Company 1996 Long-Term Incentive Plan (the "Plan"), a restricted stock award (the "Award") of 4,395 shares of the Company's Common Stock, no par value ("Stock"), upon and subject to the restrictions, terms and conditions set forth below. Capitalized terms not defined herein shall have the meanings specified in the Plan. 1. Award Subject to Acceptance of Agreement. The Award shall be null and ---------------------------------------- void unless the Holder shall accept this Agreement by executing it in the space provided below and returning it to the Company and execute and return one or more irrevocable stock powers. As soon as practicable after the Holder has executed this Agreement and such stock power or powers and returned the same to the Company, the Company shall cause to be issued in the Holder's name a stock certificate or certificates representing the total number of shares of Stock subject to the Award. 2. Rights as a Stockholder. Holder shall have the right to vote the ----------------------- shares of Stock subject to the Award. During the Restriction Period as to any shares of Stock, cash dividends which would otherwise be payable on any such shares of will be credited to the Holder in the form of additional unvested shares of Stock as if the dividend had purchased additional shares at the closing market price on the date such dividend is paid, and such additional shares (including shares received as stock dividend or stock split), shall be delivered to the Company (and the Holder shall, if requested by the Company, execute and return one or more irrevocable stock powers related thereto) and shall be subject to the same restrictions as the shares of Stock with respect to which such dividend or other distribution was made. 3. Custody and Delivery of Certificates Representing Shares. The Company -------------------------------------------------------- shall hold the certificate or certificates representing the shares of Stock subject to the Award until the restrictions on such Award shall have lapsed, in whole or in part, pursuant to Section 4 hereof, and the Company shall as soon thereafter as practicable, subject to Section 5.3, deliver the certificate or certificates for such shares to the Holder and destroy the stock power or powers relating to such shares. If such stock power or powers also relates to shares as to which restrictions remain in effect, the Company may require, as a condition precedent to delivery of any certificate pursuant to this Section 3, the execution and delivery to the Company of one or more stock powers relating to such shares. 4. Restriction Period and Vesting. (a) The restrictions on the Award shall ------------------------------ lapse on the earliest of the following: (i) with respect to one-fifth of the aggregate number of shares of Stock subject to the Award on March 12, 1997 and as to an additional one-fifth of such aggregate number of shares on each anniversary thereof during the years 1998 through 2001, inclusive, or (ii) in accordance with Section 6.8 of the Plan (the "Restriction Period"). (b) If the Holder's employment with the Company is terminated by the Company during the Restriction Period or by reason of the Holder's "Permanent and Total Disability" (as such term is defined in the Plan), or by reason of the Holder's voluntary resignation or retirement or his death, then any shares of Stock as to which restrictions have not lapsed shall be forfeited. 5. Additional Terms and Conditions of Award. ---------------------------------------- 5.1. Nontransferability of Award. During the Restriction Period, the --------------------------- shares of Stock subject to the Award as to which restrictions remain in effect may not be transferred by the Holder other than by will, the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Company. Except to the extent permitted by the foregoing, during the Restriction Period, the shares of Stock subject to the Award as to which restrictions remain in effect may not be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process. Upon any attempt to so sell, transfer, assign, pledge, hypothecate or encumber, or otherwise dispose of such shares, the Award shall immediately become null and void. 5.2. Investment Representation. The Holder hereby represents and covenants ------------------------- that (a) any share of Stock acquired upon the lapse of restrictions will be acquired for investment and not with a view to the distribution thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), unless such acquisition has been registered under the Securities Act and any applicable state securities law; (b) any subsequent sale of any such shares shall be made either pursuant to an effective registration statement under the Securities Act and any applicable state securities laws, or pursuant to an exemption from registration under the Securities Act and such state securities laws; and (c) if requested by the Company, the Holder shall submit a written statement, in form satisfactory to the Company, to the effect that such representation (x) is true and correct as of the date of acquisition of any shares hereunder or (y) is true and correct as of the date of any sale of any such shares, as applicable. As a further condition precedent to the delivery to the Holder of any shares subject to the Award, the Holder shall comply with all regulations and requirements of any regulatory authority having control of or supervision over the issuance of the shares and, in connection therewith, shall execute any documents which the Board or any committee authorized by the Board shall in its sole discretion deem necessary or advisable. -2- 5.3. WITHHOLDING TAXES. (a) As a condition precedent to the delivery to ----------------- the Holder of any shares of Stock subject to the Award, the Holder may, upon request by the Company, pay to the Company such amount of cash as the Company may be required, under all applicable federal, state, local or other laws or regulations, to withhold and pay over as income or other withholding taxes (the "Required Tax Payments") with respect to the Award. If the Holder shall fail to advance the Required Tax Payments after request by the Company, the Company may, in its discretion, deduct any Required Tax Payments from any amount then or thereafter payable by the Company to the Holder. (b) The Holder may elect to satisfy his or her obligation to advance the Required Tax Payments by any of the following means: (1) a cash payment to the Company pursuant to Section 5.3(a), (2) delivery to the Company of previously owned whole shares of Stock (which the Holder has held for at least six months prior to the delivery of such shares or which the Holder purchased on the open market and for which the Holder has good title, free and clear of all liens and encumbrances) having a Fair Market Value, determined as of the date the obligation to withhold or pay taxes first arises in connection with the Award (the "Tax Date"), equal to the Required Tax Payments, (3) authorizing the Company to withhold from the shares of Stock otherwise to be delivered to the Holder pursuant to the Award, a number of whole shares of Stock having a Fair Market Value, determined as of the Tax Date, equal to the Required Tax Payments, (4) a cash payment by a broker-dealer acceptable to the Company through whom the Holder has sold the shares with respect to which the Required Tax Payments have arisen or (5) any combination of (1), (2) and (3). The Committee may disapprove an election pursuant to any of clauses (2)-(5) if the Committee determines, based on the opinion of recognized securities counsel, that the method so elected would result in liability to the Optionee under Section 16(b) of the Securities Exchange Act of 1934, as amended, or the regulations promulgated thereunder. Shares of Stock to be delivered or withheld may have a Fair Market Value in excess of the minimum amount of the Required Tax Payments, but not in excess of the amount determined by applying the Holder's maximum marginal tax rate. Any fraction of a share of Stock which would be required to satisfy such an obligation shall be disregarded and the remaining amount due shall be paid in cash by the Holder. No certificate representing a share of Stock shall be delivered until the Required Tax Payments have been satisfied in full. 5.4. Adjustment. In the event of any stock split, stock dividend, ---------- recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitalization or event, or any distribution to holders of Stock other than a regular cash dividend, the number and class of securities subject to the Award shall be appropriately adjusted by the Committee. If any adjustment -3- would result in a fractional security being subject to the Award, the Company shall pay the Holder in connection with the vesting, if any, of such fractional security, an amount in cash determined by multiplying (i) such fraction (rounded to the nearest hundredth) by (ii) the Fair Market Value on the vesting date. The decision of the Committee regarding any such adjustment shall be final, binding and conclusive. 5.5. Compliance with Applicable Law. Award is subject to the condition ------------------------------ that if the listing, registration or qualification of the shares subject to the Award upon any securities exchange or under any law, or the consent or approval of any governments body, or the taking of any other action is necessary or desirable as a condition of, or in connection with, the vesting or delivery of shares hereunder, the shares of Stock subject to the Award may not be delivered, in whole or in part, unless such listing, registration, qualification, consent or approval shall have been effected or obtained, free of any conditions not acceptable to the Company. The Company agrees to use reasonable efforts to effect or obtain any such listing, registration, qualification, consent or approval. 5.6. Agreement Subject to the Plan. This Agreement is subject to the ----------------------------- provisions of the Plan and shall be interpreted in accordance therewith. The Holder hereby acknowledges receipt of a copy of the Plan. 6. Miscellaneous Provisions. ------------------------ 6.1. Successors. This Agreement shall be binding upon and inure to the ---------- benefit of any successor or successors of the Company and any person or persons who shall, upon the death of the Holder, acquire any rights hereunder in accordance with this Agreement or the Plan. 6.2. Notices. All notices, requests or other communications provided for ------- in this Agreement shall be made, if to the Company, to Kayser Building, 100 North Stanton, El Paso, Texas 79901, Attention: Corporate Secretary, and if to the Holder, to ___________________________________. All notices, requests or other communications provided for in this Agreement shall be made in writing either (a) by personal delivery to the party entitled thereto, (b) by facsimile with confirmation of receipt, (c) by mailing in the United States mails to the last known address of the party entitled thereto or (d) by express courier service. The notice, request or other communication shall be deemed to be received upon personal delivery, upon confirmation of receipt of facsimile transmission, or upon receipt by the party entitled thereto if by United States mail or express courier service; provided, however, that if a notice, request or other communication is not received during regular business hours, it shall be deemed to be received on the next succeeding business day of the Company. -4- 6.3. Governing Law. This Agreement, the Award and all determinations made ------------- and actions taken pursuant hereto and thereto, to the extent not otherwise governed by the laws of the United States shall be governed by the laws of the State of Texas and construed in accordance therewith without giving effect to conflicts of laws principles. 6.4. Counterparts. This Agreement may be executed in two counterpart each ------------ of which shall be deemed an original and both of which together shall constitute one and the same instrument. EL PASO ELECTRIC COMPANY By: /s/ KENNETH R. HEITZ -------------------------------------------- NAME: KENNETH R. HEITZ TITLE: DIRECTOR ACCEPTANCE DATE: JUNE 17, 1997 ----------------- - --------------------------------- -5- EX-99.09 11 RESTRICTED STOCK AGREEMENT - E. RODRIGUEZ EXHIBIT 99.09 EL PASO ELECTRIC COMPANY RESTRICTED STOCK AWARD AGREEMENT El Paso Electric Company, a Texas corporation (the 'Company'), hereby grants to Eduardo A. Rodriguez (the "Holder"), pursuant to the provisions of the El Paso Electric Company 1996 Long-Term Incentive Plan (the "Plan"), a restricted stock award (the "Award") of 6,705 shares of the Company's Common Stock, no par value ("Stock"), upon and subject to the restrictions, terms and conditions set forth below. Capitalized terms not defined herein shall have the meanings specified in the Plan. 1. Award Subject to Acceptance of Agreement. The Award shall be null and ---------------------------------------- void unless the Holder shall accept this Agreement by executing it in the space provided below and returning it to the Company and execute and return one or more irrevocable stock powers. As soon as practicable after the Holder has executed this Agreement and such stock power or powers and returned the same to the Company, the Company shall cause to be issued in the Holder's name a stock certificate or certificates representing the total number of shares of Stock subject to the Award. 2. Rights as a Stockholder. Holder shall have the right to vote the ----------------------- shares of Stock subject to the Award. During the Restriction Period as to any shares of Stock, cash dividends which would otherwise be payable on any such shares of will be credited to the Holder in the form of additional unvested shares of Stock as if the dividend had purchased additional shares at the closing market price on the date such dividend is paid, and such additional shares (including shares received as stock dividend or stock split), shall be delivered to the Company (and the Holder shall, if requested by the Company, execute and return one or more irrevocable stock powers related thereto) and shall be subject to the same restrictions as the shares of Stock with respect to which such dividend or other distribution was made. 3. Custody and Delivery of Certificates Representing Shares. The Company -------------------------------------------------------- shall hold the certificate or certificates representing the shares of Stock subject to the Award until the restrictions on such Award shall have lapsed, in whole or in part, pursuant to Section 4 hereof, and the Company shall as soon thereafter as practicable, subject to Section 5.3, deliver the certificate or certificates for such shares to the Holder and destroy the stock power or powers relating to such shares. If such stock power or powers also relates to shares as to which restrictions remain in effect, the Company may require, as a condition precedent to delivery of any certificate pursuant to this Section 3, the execution and delivery to the Company of one or more stock powers relating to such shares. 4. Restriction Period and Vesting. (a) The restrictions on the Award ------------------------------ shall lapse on the earliest of the following: (i) with respect to one-fifth of the aggregate number of shares of Stock subject to the Award on March 12, 1997 and as to an additional one-fifth of such aggregate number of shares on each anniversary thereof during the years 1998 through 2001, inclusive, or (ii) in accordance with Section 6.8 of the Plan (the "Restriction Period"). (b) If the Holder's employment with the Company is terminated by the Company during the Restriction Period or by reason of the Holder's "Permanent and Total Disability" (as such term is defined in the Plan), or by reason of the Holder's voluntary resignation or retirement or his death, then any shares of Stock as to which restrictions have not lapsed shall be forfeited. 5. Additional Terms and Conditions of Award. ---------------------------------------- 5.1. Nontransferability of Award. During the Restriction Period, the --------------------------- shares of Stock subject to the Award as to which restrictions remain in effect may not be transferred by the Holder other than by will, the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Company. Except to the extent permitted by the foregoing, during the Restriction Period, the shares of Stock subject to the Award as to which restrictions remain in effect may not be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process. Upon any attempt to so sell, transfer, assign, pledge, hypothecate or encumber, or otherwise dispose of such shares, the Award shall immediately become null and void. 5.2. Investment Representation. The Holder hereby represents and ------------------------- covenants that (a) any share of Stock acquired upon the lapse of restrictions will be acquired for investment and not with a view to the distribution thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), unless such acquisition has been registered under the Securities Act and any applicable state securities law; (b) any subsequent sale of any such shares shall be made either pursuant to an effective registration statement under the Securities Act and any applicable state securities laws, or pursuant to an exemption from registration under the Securities Act and such state securities laws; and (c) if requested by the Company, the Holder shall submit a written statement, in form satisfactory to the Company, to the effect that such representation (x) is true and correct as of the date of acquisition of any shares hereunder or (y) is true and correct as of the date of any sale of any such shares, as applicable. As a further condition precedent to the delivery to the Holder of any shares subject to the Award, the Holder shall comply with all regulations and requirements of any regulatory authority having control of or supervision over the issuance of the shares and, in connection therewith, shall execute any documents which the Board or any committee authorized by the Board shall in its sole discretion deem necessary or advisable. -2- 5.3. Withholding Taxes. (a) As a condition precedent to the delivery to ----------------- the Holder of any shares of Stock subject to the Award, the Holder may, upon request by the Company, pay to the Company such amount of cash as the Company may be required, under all applicable federal, state, local or other laws or regulations, to withhold and pay over as income or other withholding taxes (the "Required Tax Payments") with respect to the Award. If the Holder shall fail to advance the Required Tax Payments after request by the Company, the Company may, in its discretion, deduct any Required Tax Payments from any amount then or thereafter payable by the Company to the Holder. (b) The Holder may elect to satisfy his or her obligation to advance the Required Tax Payments by any of the following means: (1) a cash payment to the Company pursuant to Section 5.3(a), (2) delivery to the Company of previously owned whole shares of Stock (which the Holder has held for at least six months prior to the delivery of such shares or which the Holder purchased on the open market and for which the Holder has good title, free and clear of all liens and encumbrances) having a Fair Market Value, determined as of the date the obligation to withhold or pay taxes first arises in connection with the Award (the "Tax Date"), equal to the Required Tax Payments, (3) authorizing the Company to withhold from the shares of Stock otherwise to be delivered to the Holder pursuant to the Award, a number of whole shares of Stock having a Fair Market Value, determined as of the Tax Date, equal to the Required Tax Payments, (4) a cash payment by a broker-dealer acceptable to the Company through whom the Holder has sold the shares with respect to which the Required Tax Payments have arisen or (5) any combination of (1), (2) and (3). The Committee may disapprove an election pursuant to any of clauses (2)-(5) if the Committee determines, based on the opinion of recognized securities counsel, that the method so elected would result in liability to the Optionee under Section 16(b) of the Securities Exchange Act of 1934, as amended, or the regulations promulgated thereunder. Shares of Stock to be delivered or withheld may have a Fair Market Value in excess of the minimum amount of the Required Tax Payments, but not in excess of the amount determined by applying the Holder's maximum marginal tax rate. Any fraction of a share of Stock which would be required to satisfy such an obligation shall be disregarded and the remaining amount due shall be paid in cash by the Holder. No certificate representing a share of Stock shall be delivered until the Required Tax Payments have been satisfied in full. 5.4. Adjustment . In the event of any stock split, stock dividend, ---------- recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitalization or event, or any distribution to holders of Stock other than a regular cash dividend, the number and class of securities subject to the Award shall be appropriately adjusted by the Committee. If any adjustment -3- would result in a fractional security being subject to the Award, the Company shall pay the Holder in connection with the vesting, if any, of such fractional security, an amount in cash determined by multiplying (i) such fraction (rounded to the nearest hundredth) by (ii) the Fair Market Value on the vesting date. The decision of the Committee regarding any such adjustment shall be final, binding and conclusive. 5.5. Compliance with Applicable Law. Award is subject to the condition ------------------------------ that if the listing, registration or qualification of the shares subject to the Award upon any securities exchange or under any law, or the consent or approval of any governments body, or the taking of any other action is necessary or desirable as a condition of, or in connection with, the vesting or delivery of shares hereunder, the shares of Stock subject to the Award may not be delivered, in whole or in part, unless such listing, registration, qualification, consent or approval shall have been effected or obtained, free of any conditions not acceptable to the Company. The Company agrees to use reasonable efforts to effect or obtain any :such listing, registration, qualification, consent or approval. 5.6. Agreement Subject to the Plan. This Agreement is subject to the ----------------------------- provisions of the Plan and shall be interpreted in accordance therewith. The Holder hereby acknowledges receipt of a copy of the Plan. 6. Miscellaneous Provisions. ------------------------ 6.1. Successors. This Agreement shall be binding upon and inure to the ---------- benefit of any successor or successors of the Company and any person or persons who shall, upon the death of the Holder, acquire any rights hereunder in accordance with this Agreement or the Plan. 6.2. Notices. All notices, requests or other communications provided for ------- in this Agreement shall be made, if to the Company, to Kayser Building, 100 North Stanton, El Paso, Texas 79901, Attention: Corporate Secretary, and if to the Holder, to 6404 Los Altos, El Paso, Texas 79912. All notices, requests or other communications provided for in this Agreement shall be made in writing either (a) by personal delivery to the party entitled thereto, (b) by facsimile with confirmation of receipt, (c) by mailing in the United States mails to the last known address of the party entitled thereto or (d) by express courier service. The notice, request or other communication shall be deemed to be received upon personal delivery, upon confirmation of receipt of facsimile transmission, or upon receipt by the party entitled thereto if by United States mail or express courier service; provided, however, that if a notice, request or other communication is not received during regular business hours, it shall be deemed to be received on the next succeeding business day of the Company. -4- 6.3. Governing Law. This Agreement, the Award and all determinations made ------------- and actions taken pursuant hereto and thereto, to the extent not otherwise governed by the laws of the United States, shall be governed by the laws of the State of Texas and construed in accordance therewith without giving effect to conflicts of laws principles. 6.4. Counterparts. This Agreement may be executed in two counterpart each ------------ of which shall be deemed an original and both of which together shall constitute one and the same instrument. EL PASO ELECTRIC COMPANY By: /s/ KENNETH R. HEITZ -------------------------------------------- Name: Kenneth R. Heitz Title: Director Acceptance Date: June 9, 1997 ----------------- /s/ EDUARDO A. RODRIGUEZ - --------------------------------- Eduardo A. Rodriguez -5- EX-99.10 12 RESTRICTED STOCK AGREEMENT - R. MCNEIL EXHIBIT 99.10 EL PASO ELECTRIC COMPANY RESTRICTED STOCK AWARD AGREEMENT El Paso Electric Company, a Texas corporation (the 'Company'), hereby grants to Robert C. McNiel (the "Holder"), pursuant to the provisions of the El Paso Electric Company 1996 Long-Term Incentive Plan (the "Plan"), a restricted stock award (the "Award") of 3,660 shares of the Company's Common Stock, no par value ("Stock"), upon and subject to the restrictions, terms and conditions set forth below. Capitalized terms not defined herein shall have the meanings specified in the Plan. 1. Award Subject to Acceptance of Agreement. The Award shall be null and ---------------------------------------- void unless the Holder shall accept this Agreement by executing it in the space provided below and returning it to the Company and execute and return one or more irrevocable stock powers. As soon as practicable after the Holder has executed this Agreement and such stock power or powers and returned the same to the Company, the Company shall cause to be issued in the Holder's name a stock certificate or certificates representing the total number of shares of Stock subject to the Award. 2. Rights as a Stockholder. Holder shall have the right to vote the ----------------------- shares of Stock subject to the Award. During the Restriction Period as to any shares of Stock, cash dividends which would otherwise be payable on any such shares of will be credited to the Holder in the form of additional unvested shares of Stock as if the dividend had purchased additional shares at the closing market price on the date such dividend is paid, and such additional shares (including shares received as stock dividend or stock split), shall be delivered to the Company (and the Holder shall, if requested by the Company, execute and return one or more irrevocable stock powers related thereto) and shall be subject to the same restrictions as the shares of Stock with respect to which such dividend or other distribution was made. 3. Custody and Delivery of Certificates Representing Shares. The Company -------------------------------------------------------- shall hold the certificate or certificates representing the shares of Stock subject to the Award until the restrictions on such Award shall have lapsed, in whole or in part, pursuant to Section 4 hereof, and the Company shall as soon thereafter as practicable, subject to Section 5.3, deliver the certificate or certificates for such shares to the Holder and destroy the stock power or powers relating to such shares. If such stock power or powers also relates to shares as to which restrictions remain in effect, the Company may require, as a condition precedent to delivery of any certificate pursuant to this Section 3, the execution and delivery to the Company of one or more stock powers relating to such shares. 4. Restriction Period and Vesting. (a) The restrictions on the Award ------------------------------ shall lapse on the earliest of the following: (i) with respect to one-fifth of the aggregate number of shares of Stock subject to the Award on March 12, 1997 and as to an additional one-fifth of such aggregate number of shares on each anniversary thereof during the years 1998 through 2001, inclusive, or (ii) in accordance with Section 6.8 of the Plan (the "Restriction Period"). (b) If the Holder's employment with the Company is terminated by the Company during the Restriction Period or by reason of the Holder's "Permanent and Total Disability" (as such term is defined in the Plan), or by reason of the Holder's voluntary resignation or retirement or his death, then any shares of Stock as to which restrictions have not lapsed shall be forfeited. 5. Additional Terms and Conditions of Award. ---------------------------------------- 5.1. Nontransferability of Award. During the Restriction Period, the --------------------------- shares of Stock subject to the Award as to which restrictions remain in effect may not be transferred by the Holder other than by will, the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Company. Except to the extent permitted by the foregoing, during the Restriction Period, the shares of Stock subject to the Award as to which restrictions remain in effect may not be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process. Upon any attempt to so sell, transfer, assign, pledge, hypothecate or encumber, or otherwise dispose of such shares, the Award shall immediately become null and void. 5.2. Investment Representation. The Holder hereby represents and ------------------------- covenants that (a) any share of Stock acquired upon the lapse of restrictions will be acquired for investment and not with a view to the distribution thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), unless such acquisition has been registered under the Securities Act and any applicable state securities law; (b) any subsequent sale of any such shares shall be made either pursuant to an effective registration statement under the Securities Act and any applicable state securities laws, or pursuant to an exemption from registration under the Securities Act and such state securities laws; and (c) if requested by the Company, the Holder shall submit a written statement, in form satisfactory to the Company, to the effect that such representation (x) is true and correct as of the date of acquisition of any shares hereunder or (y) is true and correct as of the date of any sale of any such shares, as applicable. As a further condition precedent to the delivery to the Holder of any shares subject to the Award, the Holder shall comply with all regulations and requirements of any regulatory authority having control of or supervision over the issuance of the shares and, in connection therewith, shall execute any documents which the Board or any committee authorized by the Board shall in its sole discretion deem necessary or advisable. -2- 5.3. Withholding Taxes. (a) As a condition precedent to the delivery to ----------------- the Holder of any shares of Stock subject to the Award, the Holder may, upon request by the Company, pay to the Company such amount of cash as the Company may be required, under all applicable federal, state, local or other laws or regulations, to withhold and pay over as income or other withholding taxes (the "Required Tax Payments") with respect to the Award. If the Holder shall fail to advance the Required Tax Payments after request by the Company, the Company may, in its discretion, deduct any Required Tax Payments from any amount then or thereafter payable by the Company to the Holder. (b) The Holder may elect to satisfy his or her obligation to advance the Required Tax Payments by any of the following means: (1) a cash payment to the Company pursuant to Section 5.3(a), (2) delivery to the Company of previously owned whole shares of Stock (which the Holder has held for at least six months prior to the delivery of such shares or which the Holder purchased on the open market and for which the Holder has good title, free and clear of all liens and encumbrances) having a Fair Market Value, determined as of the date the obligation to withhold or pay taxes first arises in connection with the Award (the "Tax Date"), equal to the Required Tax Payments, (3) authorizing the Company to withhold from the shares of Stock otherwise to be delivered to the Holder pursuant to the Award, a number of whole shares of Stock having a Fair Market Value, determined as of the Tax Date, equal to the Required Tax Payments, (4) a cash payment by a broker-dealer acceptable to the Company through whom the Holder has sold the shares with respect to which the Required Tax Payments have arisen or (5) any combination of (1), (2) and (3). The Committee may disapprove an election pursuant to any of clauses (2)-(5) if the Committee determines, based on the opinion of recognized securities counsel, that the method so elected would result in liability to the Optionee under Section 16(b) of the Securities Exchange Act of 1934, as amended, or the regulations promulgated thereunder. Shares of Stock to be delivered or withheld may have a Fair Market Value in excess of the minimum amount of the Required Tax Payments, but not in excess of the amount determined by applying the Holder's maximum marginal tax rate. Any fraction of a share of Stock which would be required to satisfy such an obligation shall be disregarded and the remaining amount due shall be paid in cash by the Holder. No certificate representing a share of Stock shall be delivered until the Required Tax Payments have been satisfied in full. 5.4. Adjustment. In the event of any stock split, stock dividend, ---------- recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitalization or event, or any distribution to holders of Stock other than a regular cash dividend, the number and class of securities subject to the Award shall be appropriately adjusted by the Committee. If any adjustment -3- would result in a fractional security being subject to the Award, the Company shall pay the Holder in connection with the vesting, if any, of such fractional security, an amount in cash determined by multiplying (i) such fraction (rounded to the nearest hundredth) by (ii) the Fair Market Value on the vesting date. The decision of the Committee regarding any such adjustment shall be final, binding and conclusive. 5.5. Compliance with Applicable Law. Award is subject to the condition ------------------------------ that if the listing, registration or qualification of the shares subject to the Award upon any securities exchange or under any law, or the consent or approval of any governments body, or the taking of any other action is necessary or desirable as a condition of, or in connection with, the vesting or delivery of shares hereunder, the shares of Stock subject to the Award may not be delivered, in whole or in part, unless such listing, registration, qualification, consent or approval shall have been effected or obtained, free of any conditions not acceptable to the Company. The Company agrees to use reasonable efforts to effect or obtain any :such listing, registration, qualification, consent or approval. 5.6. Agreement Subject to the Plan. This Agreement is subject to the ----------------------------- provisions of the Plan and shall be interpreted in accordance therewith. The Holder hereby acknowledges receipt of a copy of the Plan. 6. Miscellaneous Provisions. ------------------------ 6.1. Successors. This Agreement shall be binding upon and inure to the ---------- benefit of any successor or successors of the Company and any person or persons who shall, upon the death of the Holder, acquire any rights hereunder in accordance with this Agreement or the Plan. 6.2. Notices. All notices, requests or other communications provided for ------- in this Agreement shall be made, if to the Company, to Kayser Building, 100 North Stanton, El Paso, Texas 79901, Attention: Corporate Secretary, and if to the Holder, to 4860 Sage Road, Las Cruces, New Mexico 88001. All notices, requests or other communications provided for in this Agreement shall be made in writing either (a) by personal delivery to the party entitled thereto, (b) by facsimile with confirmation of receipt, (c) by mailing in the United States mails to the last known address of the party entitled thereto or (d) by express courier service. The notice, request or other communication shall be deemed to be received upon personal delivery, upon confirmation of receipt of facsimile transmission, or upon receipt by the party entitled thereto if by United States mail or express courier service; provided, however, that if a notice, request or other communication is not received during regular business hours, it shall be deemed to be received on the next succeeding business day of the Company. -4- 6.3. Governing Law. This Agreement, the Award and all determinations made ------------- and actions taken pursuant hereto and thereto, to the extent not otherwise governed by the laws of the United States, shall be governed by the laws of the State of Texas and construed in accordance therewith without giving effect to conflicts of laws principles. 6.4. Counterparts. This Agreement may be executed in two counterpart each ------------ of which shall be deemed an original and both of which together shall constitute one and the same instrument. EL PASO ELECTRIC COMPANY By: /s/ KENNETH R. HEITZ -------------------------------------------- Name: Kenneth R. Heitz Title: Director Acceptance Date: June 15, 1997 ----------------- /s/ ROBERT C. MCNIEL - --------------------------------- Robert C. McNiel -5- EX-99.11 13 RESTRICTED STOCK AGREEMENT - S. SICKLES EXHIBIT 99.11 EL PASO ELECTRIC COMPANY RESTRICTED STOCK AWARD AGREEMENT El Paso Electric Company, a Texas corporation (the 'Company'), hereby grants to Susanne M. Sickles (the "Holder"), pursuant to the provisions of the El Paso Electric Company 1996 Long-Term Incentive Plan (the "Plan"), a restricted stock award (the "Award") of 1,700 shares of the Company's Common Stock, no par value ("Stock"), upon and subject to the restrictions, terms and conditions set forth below. Capitalized terms not defined herein shall have the meanings specified in the Plan. 1. Award Subject to Acceptance of Agreement. The Award shall be null and ---------------------------------------- void unless the Holder shall accept this Agreement by executing it in the space provided below and returning it to the Company and execute and return one or more irrevocable stock powers. As soon as practicable after the Holder has executed this Agreement and such stock power or powers and returned the same to the Company, the Company shall cause to be issued in the Holder's name a stock certificate or certificates representing the total number of shares of Stock subject to the Award. 2. Rights as a Stockholder. Holder shall have the right to vote the ----------------------- shares of Stock subject to the Award. During the Restriction Period as to any shares of Stock, cash dividends which would otherwise be payable on any such shares of will be credited to the Holder in the form of additional unvested shares of Stock as if the dividend had purchased additional shares at the closing market price on the date such dividend is paid, and such additional shares (including shares received as stock dividend or stock split), shall be delivered to the Company (and the Holder shall, if requested by the Company, execute and return one or more irrevocable stock powers related thereto) and shall be subject to the same restrictions as the shares of Stock with respect to which such dividend or other distribution was made. 3. Custody and Delivery of Certificates Representing Shares. The Company -------------------------------------------------------- shall hold the certificate or certificates representing the shares of Stock subject to the Award until the restrictions on such Award shall have lapsed, in whole or in part, pursuant to Section 4 hereof, and the Company shall as soon thereafter as practicable, subject to Section 5.3, deliver the certificate or certificates for such shares to the Holder and destroy the stock power or powers relating to such shares. If such stock power or powers also relates to shares as to which restrictions remain in effect, the Company may require, as a condition precedent to delivery of any certificate pursuant to this Section 3, the execution and delivery to the Company of one or more stock powers relating to such shares. 4. Restriction Period and Vesting. (a) The restrictions on the Award ------------------------------ shall lapse on the earliest of the following: (i) with respect to one-fifth of the aggregate number of shares of Stock subject to the Award on March 12, 1997 and as to an additional one-fifth of such aggregate number of shares on each anniversary thereof during the years 1998 through 2001, inclusive, or (ii) in accordance with Section 6.8 of the Plan (the "Restriction Period"). (b) If the Holder's employment with the Company is terminated by the Company during the Restriction Period or by reason of the Holder's "Permanent and Total Disability" (as such term is defined in the Plan), or by reason of the Holder's voluntary resignation or retirement or his death, then any shares of Stock as to which restrictions have not lapsed shall be forfeited. 5. Additional Terms and Conditions of Award. ---------------------------------------- 5.1. Nontransferability of Award. During the Restriction Period, the --------------------------- shares of Stock subject to the Award as to which restrictions remain in effect may not be transferred by the Holder other than by will, the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Company. Except to the extent permitted by the foregoing, during the Restriction Period, the shares of Stock subject to the Award as to which restrictions remain in effect may not be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process. Upon any attempt to so sell, transfer, assign, pledge, hypothecate or encumber, or otherwise dispose of such shares, the Award shall immediately become null and void. 5.2. Investment Representation. The Holder hereby represents and ------------------------- covenants that (a) any share of Stock acquired upon the lapse of restrictions will be acquired for investment and not with a view to the distribution thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), unless such acquisition has been registered under the Securities Act and any applicable state securities law; (b) any subsequent sale of any such shares shall be made either pursuant to an effective registration statement under the Securities Act and any applicable state securities laws, or pursuant to an exemption from registration under the Securities Act and such state securities laws; and (c) if requested by the Company, the Holder shall submit a written statement, in form satisfactory to the Company, to the effect that such representation (x) is true and correct as of the date of acquisition of any shares hereunder or (y) is true and correct as of the date of any sale of any such shares, as applicable. As a further condition precedent to the delivery to the Holder of any shares subject to the Award, the Holder shall comply with all regulations and requirements of any regulatory authority having control of or supervision over the issuance of the shares and, in connection therewith, shall execute any documents which the Board or any committee authorized by the Board shall in its sole discretion deem necessary or advisable. -2- 5.3. Withholding Taxes. (a) As a condition precedent to the delivery to ----------------- the Holder of any shares of Stock subject to the Award, the Holder may, upon request by the Company, pay to the Company such amount of cash as the Company may be required, under all applicable federal, state, local or other laws or regulations, to withhold and pay over as income or other withholding taxes (the "Required Tax Payments") with respect to the Award. If the Holder shall fail to advance the Required Tax Payments after request by the Company, the Company may, in its discretion, deduct any Required Tax Payments from any amount then or thereafter payable by the Company to the Holder. (b) The Holder may elect to satisfy his or her obligation to advance the Required Tax Payments by any of the following means: (1) a cash payment to the Company pursuant to Section 5.3(a), (2) delivery to the Company of previously owned whole shares of Stock (which the Holder has held for at least six months prior to the delivery of such shares or which the Holder purchased on the open market and for which the Holder has good title, free and clear of all liens and encumbrances) having a Fair Market Value, determined as of the date the obligation to withhold or pay taxes first arises in connection with the Award (the "Tax Date"), equal to the Required Tax Payments, (3) authorizing the Company to withhold from the shares of Stock otherwise to be delivered to the Holder pursuant to the Award, a number of whole shares of Stock having a Fair Market Value, determined as of the Tax Date, equal to the Required Tax Payments, (4) a cash payment by a broker-dealer acceptable to the Company through whom the Holder has sold the shares with respect to which the Required Tax Payments have arisen or (5) any combination of (1), (2) and (3). The Committee may disapprove an election pursuant to any of clauses (2)-(5) if the Committee determines, based on the opinion of recognized securities counsel, that the method so elected would result in liability to the Optionee under Section 16(b) of the Securities Exchange Act of 1934, as amended, or the regulations promulgated thereunder. Shares of Stock to be delivered or withheld may have a Fair Market Value in excess of the minimum amount of the Required Tax Payments, but not in excess of the amount determined by applying the Holder's maximum marginal tax rate. Any fraction of a share of Stock which would be required to satisfy such an obligation shall be disregarded and the remaining amount due shall be paid in cash by the Holder. No certificate representing a share of Stock shall be delivered until the Required Tax Payments have been satisfied in full. 5.4. Adjustment . In the event of any stock split, stock dividend, ---------- recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitalization or event, or any distribution to holders of Stock other than a regular cash dividend, the number and class of securities subject to the Award shall be appropriately adjusted by the Committee. If any adjustment -3- would result in a fractional security being subject to the Award, the Company shall pay the Holder in connection with the vesting, if any, of such fractional security, an amount in cash determined by multiplying (i) such fraction (rounded to the nearest hundredth) by (ii) the Fair Market Value on the vesting date. The decision of the Committee regarding any such adjustment shall be final, binding and conclusive. 5.5. Compliance with Applicable Law. Award is subject to the condition ------------------------------ that if the listing, registration or qualification of the shares subject to the Award upon any securities exchange or under any law, or the consent or approval of any governments body, or the taking of any other action is necessary or desirable as a condition of, or in connection with, the vesting or delivery of shares hereunder, the shares of Stock subject to the Award may not be delivered, in whole or in part, unless such listing, registration, qualification, consent or approval shall have been effected or obtained, free of any conditions not acceptable to the Company. The Company agrees to use reasonable efforts to effect or obtain any :such listing, registration, qualification, consent or approval. 5.6. Agreement Subject to the Plan. This Agreement is subject to the ----------------------------- provisions of the Plan and shall be interpreted in accordance therewith. The Holder hereby acknowledges receipt of a copy of the Plan. 6. Miscellaneous Provisions. ------------------------ 6.1. Successors. This Agreement shall be binding upon and inure to the ---------- benefit of any successor or successors of the Company and any person or persons who shall, upon the death of the Holder, acquire any rights hereunder in accordance with this Agreement or the Plan. 6.2. Notices. All notices, requests or other communications provided for ------- in this Agreement shall be made, if to the Company, to Kayser Building, 100 North Stanton, El Paso, Texas 79901, Attention: Corporate Secretary, and if to the Holder, to Rt. 1, Box 1021, Anthony, New Mexico 88021. All notices, requests or other communications provided for in this Agreement shall be made in writing either (a) by personal delivery to the party entitled thereto, (b) by facsimile with confirmation of receipt, (c) by mailing in the United States mails to the last known address of the party entitled thereto or (d) by express courier service. The notice, request or other communication shall be deemed to be received upon personal delivery, upon confirmation of receipt of facsimile transmission, or upon receipt by the party entitled thereto if by United States mail or express courier service; provided, however, that if a notice, request or other communication is not received during regular business hours, it shall be deemed to be received on the next succeeding business day of the Company. -4- 6.3. Governing Law. This Agreement, the Award and all determinations made ------------- and actions taken pursuant hereto and thereto, to the extent not otherwise governed by the laws of the United States, shall be governed by the laws of the State of Texas and construed in accordance therewith without giving effect to conflicts of laws principles. 6.4. Counterparts. This Agreement may be executed in two counterpart each ------------ of which shall be deemed an original and both of which together shall constitute one and the same instrument. EL PASO ELECTRIC COMPANY By: /s/ KENNETH R. HEITZ -------------------------------------------- Name: Kenneth R. Heitz Title: Director Acceptance Date: June 12, 1997 ----------------- /s/ SUSANNE M. SICKLES - --------------------------------- Susanne M. Sickles -5- EX-99.12 14 RESTRICTED STOCK AGREEMENT - G. SILVA EXHIBIT 99.12 EL PASO ELECTRIC COMPANY RESTRICTED STOCK AWARD AGREEMENT El Paso Electric Company, a Texas corporation (the 'Company'), hereby grants to Guillermo Silva, Jr. (the "Holder"), pursuant to the provisions of the El Paso Electric Company 1996 Long-Term Incentive Plan (the "Plan"), a restricted stock award (the "Award") of 1,660 shares of the Company's Common Stock, no par value ("Stock"), upon and subject to the restrictions, terms and conditions set forth below. Capitalized terms not defined herein shall have the meanings specified in the Plan. 1. Award Subject to Acceptance of Agreement. The Award shall be null and ---------------------------------------- void unless the Holder shall accept this Agreement by executing it in the space provided below and returning it to the Company and execute and return one or more irrevocable stock powers. As soon as practicable after the Holder has executed this Agreement and such stock power or powers and returned the same to the Company, the Company shall cause to be issued in the Holder's name a stock certificate or certificates representing the total number of shares of Stock subject to the Award. 2. Rights as a Stockholder. Holder shall have the right to vote the ----------------------- shares of Stock subject to the Award. During the Restriction Period as to any shares of Stock, cash dividends which would otherwise be payable on any such shares of will be credited to the Holder in the form of additional unvested shares of Stock as if the dividend had purchased additional shares at the closing market price on the date such dividend is paid, and such additional shares (including shares received as stock dividend or stock split), shall be delivered to the Company (and the Holder shall, if requested by the Company, execute and return one or more irrevocable stock powers related thereto) and shall be subject to the same restrictions as the shares of Stock with respect to which such dividend or other distribution was made. 3. Custody and Delivery of Certificates Representing Shares. The Company -------------------------------------------------------- shall hold the certificate or certificates representing the shares of Stock subject to the Award until the restrictions on such Award shall have lapsed, in whole or in part, pursuant to Section 4 hereof, and the Company shall as soon thereafter as practicable, subject to Section 5.3, deliver the certificate or certificates for such shares to the Holder and destroy the stock power or powers relating to such shares. If such stock power or powers also relates to shares as to which restrictions remain in effect, the Company may require, as a condition precedent to delivery of any certificate pursuant to this Section 3, the execution and delivery to the Company of one or more stock powers relating to such shares. 4. Restriction Period and Vesting. (a) The restrictions on the Award ------------------------------ shall lapse on the earliest of the following: (i) with respect to one-fifth of the aggregate number of shares of Stock subject to the Award on March 12, 1997 and as to an additional one-fifth of such aggregate number of shares on each anniversary thereof during the years 1998 through 2001, inclusive, or (ii) in accordance with Section 6.8 of the Plan (the "Restriction Period"). (b) If the Holder's employment with the Company is terminated by the Company during the Restriction Period or by reason of the Holder's "Permanent and Total Disability" (as such term is defined in the Plan), or by reason of the Holder's voluntary resignation or retirement or his death, then any shares of Stock as to which restrictions have not lapsed shall be forfeited. 5. Additional Terms and Conditions of Award. ---------------------------------------- 5.1. Nontransferability of Award. During the Restriction Period, the --------------------------- shares of Stock subject to the Award as to which restrictions remain in effect may not be transferred by the Holder other than by will, the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Company. Except to the extent permitted by the foregoing, during the Restriction Period, the shares of Stock subject to the Award as to which restrictions remain in effect may not be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process. Upon any attempt to so sell, transfer, assign, pledge, hypothecate or encumber, or otherwise dispose of such shares, the Award shall immediately become null and void. 5.2. Investment Representation. The Holder hereby represents and ------------------------- covenants that (a) any share of Stock acquired upon the lapse of restrictions will be acquired for investment and not with a view to the distribution thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), unless such acquisition has been registered under the Securities Act and any applicable state securities law; (b) any subsequent sale of any such shares shall be made either pursuant to an effective registration statement under the Securities Act and any applicable state securities laws, or pursuant to an exemption from registration under the Securities Act and such state securities laws; and (c) if requested by the Company, the Holder shall submit a written statement, in form satisfactory to the Company, to the effect that such representation (x) is true and correct as of the date of acquisition of any shares hereunder or (y) is true and correct as of the date of any sale of any such shares, as applicable. As a further condition precedent to the delivery to the Holder of any shares subject to the Award, the Holder shall comply with all regulations and requirements of any regulatory authority having control of or supervision over the issuance of the shares and, in connection therewith, shall execute any documents which the Board or any committee authorized by the Board shall in its sole discretion deem necessary or advisable. -2- 5.3. Withholding Taxes. (a) As a condition precedent to the delivery to ----------------- the Holder of any shares of Stock subject to the Award, the Holder may, upon request by the Company, pay to the Company such amount of cash as the Company may be required, under all applicable federal, state, local or other laws or regulations, to withhold and pay over as income or other withholding taxes (the "Required Tax Payments") with respect to the Award. If the Holder shall fail to advance the Required Tax Payments after request by the Company, the Company may, in its discretion, deduct any Required Tax Payments from any amount then or thereafter payable by the Company to the Holder. (b) The Holder may elect to satisfy his or her obligation to advance the Required Tax Payments by any of the following means: (1) a cash payment to the Company pursuant to Section 5.3(a), (2) delivery to the Company of previously owned whole shares of Stock (which the Holder has held for at least six months prior to the delivery of such shares or which the Holder purchased on the open market and for which the Holder has good title, free and clear of all liens and encumbrances) having a Fair Market Value, determined as of the date the obligation to withhold or pay taxes first arises in connection with the Award (the "Tax Date"), equal to the Required Tax Payments, (3) authorizing the Company to withhold from the shares of Stock otherwise to be delivered to the Holder pursuant to the Award, a number of whole shares of Stock having a Fair Market Value, determined as of the Tax Date, equal to the Required Tax Payments, (4) a cash payment by a broker-dealer acceptable to the Company through whom the Holder has sold the shares with respect to which the Required Tax Payments have arisen or (5) any combination of (1), (2) and (3). The Committee may disapprove an election pursuant to any of clauses (2)-(5) if the Committee determines, based on the opinion of recognized securities counsel, that the method so elected would result in liability to the Optionee under Section 16(b) of the Securities Exchange Act of 1934, as amended, or the regulations promulgated thereunder. Shares of Stock to be delivered or withheld may have a Fair Market Value in excess of the minimum amount of the Required Tax Payments, but not in excess of the amount determined by applying the Holder's maximum marginal tax rate. Any fraction of a share of Stock which would be required to satisfy such an obligation shall be disregarded and the remaining amount due shall be paid in cash by the Holder. No certificate representing a share of Stock shall be delivered until the Required Tax Payments have been satisfied in full. 5.4. Adjustment. In the event of any stock split, stock dividend, ---------- recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitalization or event, or any distribution to holders of Stock other than a regular cash dividend, the number and class of securities subject to the Award shall be appropriately adjusted by the Committee. If any adjustment -3- would result in a fractional security being subject to the Award, the Company shall pay the Holder in connection with the vesting, if any, of such fractional security, an amount in cash determined by multiplying (i) such fraction (rounded to the nearest hundredth) by (ii) the Fair Market Value on the vesting date. The decision of the Committee regarding any such adjustment shall be final, binding and conclusive. 5.5. Compliance with Applicable Law. Award is subject to the condition ------------------------------ that if the listing, registration or qualification of the shares subject to the Award upon any securities exchange or under any law, or the consent or approval of any governments body, or the taking of any other action is necessary or desirable as a condition of, or in connection with, the vesting or delivery of shares hereunder, the shares of Stock subject to the Award may not be delivered, in whole or in part, unless such listing, registration, qualification, consent or approval shall have been effected or obtained, free of any conditions not acceptable to the Company. The Company agrees to use reasonable efforts to effect or obtain any :such listing, registration, qualification, consent or approval. 5.6. Agreement Subject to the Plan. This Agreement is subject to the ----------------------------- provisions of the Plan and shall be interpreted in accordance therewith. The Holder hereby acknowledges receipt of a copy of the Plan. 6. Miscellaneous Provisions. ------------------------ 6.1. Successors. This Agreement shall be binding upon and inure to the ---------- benefit of any successor or successors of the Company and any person or persons who shall, upon the death of the Holder, acquire any rights hereunder in accordance with this Agreement or the Plan. 6.2. Notices. All notices, requests or other communications provided for ------- in this Agreement shall be made, if to the Company, to Kayser Building, 100 North Stanton, El Paso, Texas 79901, Attention: Corporate Secretary, and if to the Holder, to 4629 R.T. Cassidy, El Paso, Texas 79904. All notices, requests or other communications provided for in this Agreement shall be made in writing either (a) by personal delivery to the party entitled thereto, (b) by facsimile with confirmation of receipt, (c) by mailing in the United States mails to the last known address of the party entitled thereto or (d) by express courier service. The notice, request or other communication shall be deemed to be received upon personal delivery, upon confirmation of receipt of facsimile transmission, or upon receipt by the party entitled thereto if by United States mail or express courier service; provided, however, that if a notice, request or other communication is not received during regular business hours, it shall be deemed to be received on the next succeeding business day of the Company. -4- 6.3. Governing Law. This Agreement, the Award and all determinations made ------------- and actions taken pursuant hereto and thereto, to the extent not otherwise governed by the laws of the United States, shall be governed by the laws of the State of Texas and construed in accordance therewith without giving effect to conflicts of laws principles. 6.4. Counterparts. This Agreement may be executed in two counterpart each ------------ of which shall be deemed an original and both of which together shall constitute one and the same instrument. EL PASO ELECTRIC COMPANY By: /s/ KENNETH R. HEITZ -------------------------------------------- Name: Kenneth R. Heitz Title: Director Acceptance Date: June 16, 1997 ----------------- /s/ GUILLERMO SILVA, JR. - --------------------------------- Guillermo Silva, Jr. -5- EX-99.13 15 RESTRICTED STOCK AGREEMENT - P. SERRANO EXHIBIT 99.13 EL PASO ELECTRIC COMPANY RESTRICTED STOCK AWARD AGREEMENT El Paso Electric Company, a Texas corporation (the 'Company'), hereby grants to Pedro Serrano, Jr. (the "Holder"), pursuant to the provisions of the El Paso Electric Company 1996 Long-Term Incentive Plan (the "Plan"), a restricted stock award (the "Award") of 1,565 shares of the Company's Common Stock, no par value ("Stock"), upon and subject to the restrictions, terms and conditions set forth below. Capitalized terms not defined herein shall have the meanings specified in the Plan. 1. Award Subject to Acceptance of Agreement. The Award shall be null and ---------------------------------------- void unless the Holder shall accept this Agreement by executing it in the space provided below and returning it to the Company and execute and return one or more irrevocable stock powers. As soon as practicable after the Holder has executed this Agreement and such stock power or powers and returned the same to the Company, the Company shall cause to be issued in the Holder's name a stock certificate or certificates representing the total number of shares of Stock subject to the Award. 2. Rights as a Stockholder. Holder shall have the right to vote the ----------------------- shares of Stock subject to the Award. During the Restriction Period as to any shares of Stock, cash dividends which would otherwise be payable on any such shares of will be credited to the Holder in the form of additional unvested shares of Stock as if the dividend had purchased additional shares at the closing market price on the date such dividend is paid, and such additional shares (including shares received as stock dividend or stock split), shall be delivered to the Company (and the Holder shall, if requested by the Company, execute and return one or more irrevocable stock powers related thereto) and shall be subject to the same restrictions as the shares of Stock with respect to which such dividend or other distribution was made. 3. Custody and Delivery of Certificates Representing Shares. The Company -------------------------------------------------------- shall hold the certificate or certificates representing the shares of Stock subject to the Award until the restrictions on such Award shall have lapsed, in whole or in part, pursuant to Section 4 hereof, and the Company shall as soon thereafter as practicable, subject to Section 5.3, deliver the certificate or certificates for such shares to the Holder and destroy the stock power or powers relating to such shares. If such stock power or powers also relates to shares as to which restrictions remain in effect, the Company may require, as a condition precedent to delivery of any certificate pursuant to this Section 3, the execution and delivery to the Company of one or more stock powers relating to such shares. 4. Restriction Period and Vesting. (a) The restrictions on the Award ------------------------------ shall lapse on the earliest of the following: (i) with respect to one-fifth of the aggregate number of shares of Stock subject to the Award on March 12, 1997 and as to an additional one-fifth of such aggregate number of shares on each anniversary thereof during the years 1998 through 2001, inclusive, or (ii) in accordance with Section 6.8 of the Plan (the "Restriction Period"). (b) If the Holder's employment with the Company is terminated by the Company during the Restriction Period or by reason of the Holder's "Permanent and Total Disability" (as such term is defined in the Plan), or by reason of the Holder's voluntary resignation or retirement or his death, then any shares of Stock as to which restrictions have not lapsed shall be forfeited. 5. Additional Terms and Conditions of Award. ---------------------------------------- 5.1. Nontransferability of Award. During the Restriction Period, the --------------------------- shares of Stock subject to the Award as to which restrictions remain in effect may not be transferred by the Holder other than by will, the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Company. Except to the extent permitted by the foregoing, during the Restriction Period, the shares of Stock subject to the Award as to which restrictions remain in effect may not be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process. Upon any attempt to so sell, transfer, assign, pledge, hypothecate or encumber, or otherwise dispose of such shares, the Award shall immediately become null and void. 5.2. Investment Representation. The Holder hereby represents and ------------------------- covenants that (a) any share of Stock acquired upon the lapse of restrictions will be acquired for investment and not with a view to the distribution thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), unless such acquisition has been registered under the Securities Act and any applicable state securities law; (b) any subsequent sale of any such shares shall be made either pursuant to an effective registration statement under the Securities Act and any applicable state securities laws, or pursuant to an exemption from registration under the Securities Act and such state securities laws; and (c) if requested by the Company, the Holder shall submit a written statement, in form satisfactory to the Company, to the effect that such representation (x) is true and correct as of the date of acquisition of any shares hereunder or (y) is true and correct as of the date of any sale of any such shares, as applicable. As a further condition precedent to the delivery to the Holder of any shares subject to the Award, the Holder shall comply with all regulations and requirements of any regulatory authority having control of or supervision over the issuance of the shares and, in connection therewith, shall execute any documents which the Board or any committee authorized by the Board shall in its sole discretion deem necessary or advisable. -2- 5.3. Withholding Taxes. (a) As a condition precedent to the delivery to ----------------- the Holder of any shares of Stock subject to the Award, the Holder may, upon request by the Company, pay to the Company such amount of cash as the Company may be required, under all applicable federal, state, local or other laws or regulations, to withhold and pay over as income or other withholding taxes (the "Required Tax Payments") with respect to the Award. If the Holder shall fail to advance the Required Tax Payments after request by the Company, the Company may, in its discretion, deduct any Required Tax Payments from any amount then or thereafter payable by the Company to the Holder. (b) The Holder may elect to satisfy his or her obligation to advance the Required Tax Payments by any of the following means: (1) a cash payment to the Company pursuant to Section 5.3(a), (2) delivery to the Company of previously owned whole shares of Stock (which the Holder has held for at least six months prior to the delivery of such shares or which the Holder purchased on the open market and for which the Holder has good title, free and clear of all liens and encumbrances) having a Fair Market Value, determined as of the date the obligation to withhold or pay taxes first arises in connection with the Award (the "Tax Date"), equal to the Required Tax Payments, (3) authorizing the Company to withhold from the shares of Stock otherwise to be delivered to the Holder pursuant to the Award, a number of whole shares of Stock having a Fair Market Value, determined as of the Tax Date, equal to the Required Tax Payments, (4) a cash payment by a broker-dealer acceptable to the Company through whom the Holder has sold the shares with respect to which the Required Tax Payments have arisen or (5) any combination of (1), (2) and (3). The Committee may disapprove an election pursuant to any of clauses (2)-(5) if the Committee determines, based on the opinion of recognized securities counsel, that the method so elected would result in liability to the Optionee under Section 16(b) of the Securities Exchange Act of 1934, as amended, or the regulations promulgated thereunder. Shares of Stock to be delivered or withheld may have a Fair Market Value in excess of the minimum amount of the Required Tax Payments, but not in excess of the amount determined by applying the Holder's maximum marginal tax rate. Any fraction of a share of Stock which would be required to satisfy such an obligation shall be disregarded and the remaining amount due shall be paid in cash by the Holder. No certificate representing a share of Stock shall be delivered until the Required Tax Payments have been satisfied in full. 5.4. Adjustment . In the event of any stock split, stock dividend, ---------- recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitalization or event, or any distribution to holders of Stock other than a regular cash dividend, the number and class of securities subject to the Award shall be appropriately adjusted by the Committee. If any adjustment -3- would result in a fractional security being subject to the Award, the Company shall pay the Holder in connection with the vesting, if any, of such fractional security, an amount in cash determined by multiplying (i) such fraction (rounded to the nearest hundredth) by (ii) the Fair Market Value on the vesting date. The decision of the Committee regarding any such adjustment shall be final, binding and conclusive. 5.5. Compliance with Applicable Law. Award is subject to the condition ------------------------------ that if the listing, registration or qualification of the shares subject to the Award upon any securities exchange or under any law, or the consent or approval of any governments body, or the taking of any other action is necessary or desirable as a condition of, or in connection with, the vesting or delivery of shares hereunder, the shares of Stock subject to the Award may not be delivered, in whole or in part, unless such listing, registration, qualification, consent or approval shall have been effected or obtained, free of any conditions not acceptable to the Company. The Company agrees to use reasonable efforts to effect or obtain any :such listing, registration, qualification, consent or approval. 5.6. Agreement Subject to the Plan. This Agreement is subject to the ----------------------------- provisions of the Plan and shall be interpreted in accordance therewith. The Holder hereby acknowledges receipt of a copy of the Plan. 6. Miscellaneous Provisions. ------------------------ 6.1. Successors. This Agreement shall be binding upon and inure to the ---------- benefit of any successor or successors of the Company and any person or persons who shall, upon the death of the Holder, acquire any rights hereunder in accordance with this Agreement or the Plan. 6.2. Notices. All notices, requests or other communications provided for ------- in this Agreement shall be made, if to the Company, to Kayser Building, 100 North Stanton, El Paso, Texas 79901, Attention: Corporate Secretary, and if to the Holder, to 4115 Bliss, El Paso, Texas 79903. All notices, requests or other communications provided for in this Agreement shall be made in writing either (a) by personal delivery to the party entitled thereto, (b) by facsimile with confirmation of receipt, (c) by mailing in the United States mails to the last known address of the party entitled thereto or (d) by express courier service. The notice, request or other communication shall be deemed to be received upon personal delivery, upon confirmation of receipt of facsimile transmission, or upon receipt by the party entitled thereto if by United States mail or express courier service; provided, however, that if a notice, request or other communication is not received during regular business hours, it shall be deemed to be received on the next succeeding business day of the Company. -4- 6.3. Governing Law. This Agreement, the Award and all determinations made ------------- and actions taken pursuant hereto and thereto, to the extent not otherwise governed by the laws of the United States, shall be governed by the laws of the State of Texas and construed in accordance therewith without giving effect to conflicts of laws principles. 6.4. Counterparts. This Agreement may be executed in two counterpart each ------------ of which shall be deemed an original and both of which together shall constitute one and the same instrument. EL PASO ELECTRIC COMPANY By: /s/ KENNETH R. HEITZ -------------------------------------------- Name: Kenneth R. Heitz Title: Director Acceptance Date: June 16, 1997 ----------------- /s/ PEDRO SERRANO, JR. - --------------------------------- Pedro Serrano, Jr. -5- EX-99.14 16 RESTRICTED STOCK AGREEMENT - T. NEWSOM EXHIBIT 99.14 EL PASO ELECTRIC COMPANY RESTRICTED STOCK AWARD AGREEMENT El Paso Electric Company, a Texas corporation (the 'Company'), hereby grants to Thomas L. Newsom (the "Holder"), pursuant to the provisions of the El Paso Electric Company 1996 Long-Term Incentive Plan (the "Plan"), a restricted stock award (the "Award") of 1,625 shares of the Company's Common Stock, no par value ("Stock"), upon and subject to the restrictions, terms and conditions set forth below. Capitalized terms not defined herein shall have the meanings specified in the Plan. 1. Award Subject to Acceptance of Agreement. The Award shall be null and ---------------------------------------- void unless the Holder shall accept this Agreement by executing it in the space provided below and returning it to the Company and execute and return one or more irrevocable stock powers. As soon as practicable after the Holder has executed this Agreement and such stock power or powers and returned the same to the Company, the Company shall cause to be issued in the Holder's name a stock certificate or certificates representing the total number of shares of Stock subject to the Award. 2. Rights as a Stockholder. Holder shall have the right to vote the ----------------------- shares of Stock subject to the Award. During the Restriction Period as to any shares of Stock, cash dividends which would otherwise be payable on any such shares of will be credited to the Holder in the form of additional unvested shares of Stock as if the dividend had purchased additional shares at the closing market price on the date such dividend is paid, and such additional shares (including shares received as stock dividend or stock split), shall be delivered to the Company (and the Holder shall, if requested by the Company, execute and return one or more irrevocable stock powers related thereto) and shall be subject to the same restrictions as the shares of Stock with respect to which such dividend or other distribution was made. 3. Custody and Delivery of Certificates Representing Shares. The Company -------------------------------------------------------- shall hold the certificate or certificates representing the shares of Stock subject to the Award until the restrictions on such Award shall have lapsed, in whole or in part, pursuant to Section 4 hereof, and the Company shall as soon thereafter as practicable, subject to Section 5.3, deliver the certificate or certificates for such shares to the Holder and destroy the stock power or powers relating to such shares. If such stock power or powers also relates to shares as to which restrictions remain in effect, the Company may require, as a condition precedent to delivery of any certificate pursuant to this Section 3, the execution and delivery to the Company of one or more stock powers relating to such shares. 4. Restriction Period and Vesting. (a) The restrictions on the Award ------------------------------ shall lapse on the earliest of the following: (i) with respect to one-fifth of the aggregate number of shares of Stock subject to the Award on March 12, 1997 and as to an additional one-fifth of such aggregate number of shares on each anniversary thereof during the years 1998 through 2001, inclusive, or (ii) in accordance with Section 6.8 of the Plan (the "Restriction Period"). (b) If the Holder's employment with the Company is terminated by the Company during the Restriction Period or by reason of the Holder's "Permanent and Total Disability" (as such term is defined in the Plan), or by reason of the Holder's voluntary resignation or retirement or his death, then any shares of Stock as to which restrictions have not lapsed shall be forfeited. 5. Additional Terms and Conditions of Award. ---------------------------------------- 5.1. Nontransferability of Award. During the Restriction Period, the --------------------------- shares of Stock subject to the Award as to which restrictions remain in effect may not be transferred by the Holder other than by will, the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Company. Except to the extent permitted by the foregoing, during the Restriction Period, the shares of Stock subject to the Award as to which restrictions remain in effect may not be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process. Upon any attempt to so sell, transfer, assign, pledge, hypothecate or encumber, or otherwise dispose of such shares, the Award shall immediately become null and void. 5.2. Investment Representation. The Holder hereby represents and ------------------------- covenants that (a) any share of Stock acquired upon the lapse of restrictions will be acquired for investment and not with a view to the distribution thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), unless such acquisition has been registered under the Securities Act and any applicable state securities law; (b) any subsequent sale of any such shares shall be made either pursuant to an effective registration statement under the Securities Act and any applicable state securities laws, or pursuant to an exemption from registration under the Securities Act and such state securities laws; and (c) if requested by the Company, the Holder shall submit a written statement, in form satisfactory to the Company, to the effect that such representation (x) is true and correct as of the date of acquisition of any shares hereunder or (y) is true and correct as of the date of any sale of any such shares, as applicable. As a further condition precedent to the delivery to the Holder of any shares subject to the Award, the Holder shall comply with all regulations and requirements of any regulatory authority having control of or supervision over the issuance of the shares and, in connection therewith, shall execute any documents which the Board or any committee authorized by the Board shall in its sole discretion deem necessary or advisable. -2- 5.3. Withholding Taxes. (a) As a condition precedent to the delivery to ----------------- the Holder of any shares of Stock subject to the Award, the Holder may, upon request by the Company, pay to the Company such amount of cash as the Company may be required, under all applicable federal, state, local or other laws or regulations, to withhold and pay over as income or other withholding taxes (the "Required Tax Payments") with respect to the Award. If the Holder shall fail to advance the Required Tax Payments after request by the Company, the Company may, in its discretion, deduct any Required Tax Payments from any amount then or thereafter payable by the Company to the Holder. (b) The Holder may elect to satisfy his or her obligation to advance the Required Tax Payments by any of the following means: (1) a cash payment to the Company pursuant to Section 5.3(a), (2) delivery to the Company of previously owned whole shares of Stock (which the Holder has held for at least six months prior to the delivery of such shares or which the Holder purchased on the open market and for which the Holder has good title, free and clear of all liens and encumbrances) having a Fair Market Value, determined as of the date the obligation to withhold or pay taxes first arises in connection with the Award (the "Tax Date"), equal to the Required Tax Payments, (3) authorizing the Company to withhold from the shares of Stock otherwise to be delivered to the Holder pursuant to the Award, a number of whole shares of Stock having a Fair Market Value, determined as of the Tax Date, equal to the Required Tax Payments, (4) a cash payment by a broker-dealer acceptable to the Company through whom the Holder has sold the shares with respect to which the Required Tax Payments have arisen or (5) any combination of (1), (2) and (3). The Committee may disapprove an election pursuant to any of clauses (2)-(5) if the Committee determines, based on the opinion of recognized securities counsel, that the method so elected would result in liability to the Optionee under Section 16(b) of the Securities Exchange Act of 1934, as amended, or the regulations promulgated thereunder. Shares of Stock to be delivered or withheld may have a Fair Market Value in excess of the minimum amount of the Required Tax Payments, but not in excess of the amount determined by applying the Holder's maximum marginal tax rate. Any fraction of a share of Stock which would be required to satisfy such an obligation shall be disregarded and the remaining amount due shall be paid in cash by the Holder. No certificate representing a share of Stock shall be delivered until the Required Tax Payments have been satisfied in full. 5.4. Adjustment. In the event of any stock split, stock dividend, ---------- recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitalization or event, or any distribution to holders of Stock other than a regular cash dividend, the number and class of securities subject to the Award shall be appropriately adjusted by the Committee. If any adjustment -3- would result in a fractional security being subject to the Award, the Company shall pay the Holder in connection with the vesting, if any, of such fractional security, an amount in cash determined by multiplying (i) such fraction (rounded to the nearest hundredth) by (ii) the Fair Market Value on the vesting date. The decision of the Committee regarding any such adjustment shall be final, binding and conclusive. 5.5. Compliance with Applicable Law. Award is subject to the condition ------------------------------ that if the listing, registration or qualification of the shares subject to the Award upon any securities exchange or under any law, or the consent or approval of any governments body, or the taking of any other action is necessary or desirable as a condition of, or in connection with, the vesting or delivery of shares hereunder, the shares of Stock subject to the Award may not be delivered, in whole or in part, unless such listing, registration, qualification, consent or approval shall have been effected or obtained, free of any conditions not acceptable to the Company. The Company agrees to use reasonable efforts to effect or obtain any :such listing, registration, qualification, consent or approval. 5.6. Agreement Subject to the Plan. This Agreement is subject to the ----------------------------- provisions of the Plan and shall be interpreted in accordance therewith. The Holder hereby acknowledges receipt of a copy of the Plan. 6. Miscellaneous Provisions. ------------------------ 6.1. Successors. This Agreement shall be binding upon and inure to the ---------- benefit of any successor or successors of the Company and any person or persons who shall, upon the death of the Holder, acquire any rights hereunder in accordance with this Agreement or the Plan. 6.2. Notices. All notices, requests or other communications provided for ------- in this Agreement shall be made, if to the Company, to Kayser Building, 100 North Stanton, El Paso, Texas 79901, Attention: Corporate Secretary, and if to the Holder, to 6883 Orizaba, El Paso, Texas 79912. All notices, requests or other communications provided for in this Agreement shall be made in writing either (a) by personal delivery to the party entitled thereto, (b) by facsimile with confirmation of receipt, (c) by mailing in the United States mails to the last known address of the party entitled thereto or (d) by express courier service. The notice, request or other communication shall be deemed to be received upon personal delivery, upon confirmation of receipt of facsimile transmission, or upon receipt by the party entitled thereto if by United States mail or express courier service; provided, however, that if a notice, request or other communication is not received during regular business hours, it shall be deemed to be received on the next succeeding business day of the Company. -4- 6.3. Governing Law. This Agreement, the Award and all determinations made ------------- and actions taken pursuant hereto and thereto, to the extent not otherwise governed by the laws of the United States, shall be governed by the laws of the State of Texas and construed in accordance therewith without giving effect to conflicts of laws principles. 6.4. Counterparts. This Agreement may be executed in two counterpart each ------------ of which shall be deemed an original and both of which together shall constitute one and the same instrument. EL PASO ELECTRIC COMPANY By: /s/ KENNETH R. HEITZ -------------------------------------------- Name: Kenneth R. Heitz Title: Director Acceptance Date: June 16, 1997 ----------------- /s/ THOMAS L. NEWSOM - --------------------------------- Thomas L. Newsom -5- EX-99.15 17 RESTRICTED STOCK AGREEMENT - J. WHITACRE EXHIBIT 99.15 EL PASO ELECTRIC COMPANY RESTRICTED STOCK AWARD AGREEMENT El Paso Electric Company, a Texas corporation (the 'Company'), hereby grants to John A. Whitacre (the "Holder"), pursuant to the provisions of the El Paso Electric Company 1996 Long-Term Incentive Plan (the "Plan"), a restricted stock award (the "Award") of 1,595 shares of the Company's Common Stock, no par value ("Stock"), upon and subject to the restrictions, terms and conditions set forth below. Capitalized terms not defined herein shall have the meanings specified in the Plan. 1. Award Subject to Acceptance of Agreement. The Award shall be null and ---------------------------------------- void unless the Holder shall accept this Agreement by executing it in the space provided below and returning it to the Company and execute and return one or more irrevocable stock powers. As soon as practicable after the Holder has executed this Agreement and such stock power or powers and returned the same to the Company, the Company shall cause to be issued in the Holder's name a stock certificate or certificates representing the total number of shares of Stock subject to the Award. 2. Rights as a Stockholder. Holder shall have the right to vote the ----------------------- shares of Stock subject to the Award. During the Restriction Period as to any shares of Stock, cash dividends which would otherwise be payable on any such shares of will be credited to the Holder in the form of additional unvested shares of Stock as if the dividend had purchased additional shares at the closing market price on the date such dividend is paid, and such additional shares (including shares received as stock dividend or stock split), shall be delivered to the Company (and the Holder shall, if requested by the Company, execute and return one or more irrevocable stock powers related thereto) and shall be subject to the same restrictions as the shares of Stock with respect to which such dividend or other distribution was made. 3. Custody and Delivery of Certificates Representing Shares. The Company -------------------------------------------------------- shall hold the certificate or certificates representing the shares of Stock subject to the Award until the restrictions on such Award shall have lapsed, in whole or in part, pursuant to Section 4 hereof, and the Company shall as soon thereafter as practicable, subject to Section 5.3, deliver the certificate or certificates for such shares to the Holder and destroy the stock power or powers relating to such shares. If such stock power or powers also relates to shares as to which restrictions remain in effect, the Company may require, as a condition precedent to delivery of any certificate pursuant to this Section 3, the execution and delivery to the Company of one or more stock powers relating to such shares. 4. Restriction Period and Vesting. (a) The restrictions on the Award ------------------------------ shall lapse on the earliest of the following: (i) with respect to one-fifth of the aggregate number of shares of Stock subject to the Award on March 12, 1997 and as to an additional one-fifth of such aggregate number of shares on each anniversary thereof during the years 1998 through 2001, inclusive, or (ii) in accordance with Section 6.8 of the Plan (the "Restriction Period"). (b) If the Holder's employment with the Company is terminated by the Company during the Restriction Period or by reason of the Holder's "Permanent and Total Disability" (as such term is defined in the Plan), or by reason of the Holder's voluntary resignation or retirement or his death, then any shares of Stock as to which restrictions have not lapsed shall be forfeited. 5. Additional Terms and Conditions of Award. ---------------------------------------- 5.1. Nontransferability of Award. During the Restriction Period, the --------------------------- shares of Stock subject to the Award as to which restrictions remain in effect may not be transferred by the Holder other than by will, the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Company. Except to the extent permitted by the foregoing, during the Restriction Period, the shares of Stock subject to the Award as to which restrictions remain in effect may not be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process. Upon any attempt to so sell, transfer, assign, pledge, hypothecate or encumber, or otherwise dispose of such shares, the Award shall immediately become null and void. 5.2. Investment Representation. The Holder hereby represents and ------------------------- covenants that (a) any share of Stock acquired upon the lapse of restrictions will be acquired for investment and not with a view to the distribution thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), unless such acquisition has been registered under the Securities Act and any applicable state securities law; (b) any subsequent sale of any such shares shall be made either pursuant to an effective registration statement under the Securities Act and any applicable state securities laws, or pursuant to an exemption from registration under the Securities Act and such state securities laws; and (c) if requested by the Company, the Holder shall submit a written statement, in form satisfactory to the Company, to the effect that such representation (x) is true and correct as of the date of acquisition of any shares hereunder or (y) is true and correct as of the date of any sale of any such shares, as applicable. As a further condition precedent to the delivery to the Holder of any shares subject to the Award, the Holder shall comply with all regulations and requirements of any regulatory authority having control of or supervision over the issuance of the shares and, in connection therewith, shall execute any documents which the Board or any committee authorized by the Board shall in its sole discretion deem necessary or advisable. -2- 5.3. Withholding Taxes. (a) As a condition precedent to the delivery to ----------------- the Holder of any shares of Stock subject to the Award, the Holder may, upon request by the Company, pay to the Company such amount of cash as the Company may be required, under all applicable federal, state, local or other laws or regulations, to withhold and pay over as income or other withholding taxes (the "Required Tax Payments") with respect to the Award. If the Holder shall fail to advance the Required Tax Payments after request by the Company, the Company may, in its discretion, deduct any Required Tax Payments from any amount then or thereafter payable by the Company to the Holder. (b) The Holder may elect to satisfy his or her obligation to advance the Required Tax Payments by any of the following means: (1) a cash payment to the Company pursuant to Section 5.3(a), (2) delivery to the Company of previously owned whole shares of Stock (which the Holder has held for at least six months prior to the delivery of such shares or which the Holder purchased on the open market and for which the Holder has good title, free and clear of all liens and encumbrances) having a Fair Market Value, determined as of the date the obligation to withhold or pay taxes first arises in connection with the Award (the "Tax Date"), equal to the Required Tax Payments, (3) authorizing the Company to withhold from the shares of Stock otherwise to be delivered to the Holder pursuant to the Award, a number of whole shares of Stock having a Fair Market Value, determined as of the Tax Date, equal to the Required Tax Payments, (4) a cash payment by a broker-dealer acceptable to the Company through whom the Holder has sold the shares with respect to which the Required Tax Payments have arisen or (5) any combination of (1), (2) and (3). The Committee may disapprove an election pursuant to any of clauses (2)-(5) if the Committee determines, based on the opinion of recognized securities counsel, that the method so elected would result in liability to the Optionee under Section 16(b) of the Securities Exchange Act of 1934, as amended, or the regulations promulgated thereunder. Shares of Stock to be delivered or withheld may have a Fair Market Value in excess of the minimum amount of the Required Tax Payments, but not in excess of the amount determined by applying the Holder's maximum marginal tax rate. Any fraction of a share of Stock which would be required to satisfy such an obligation shall be disregarded and the remaining amount due shall be paid in cash by the Holder. No certificate representing a share of Stock shall be delivered until the Required Tax Payments have been satisfied in full. 5.4. Adjustment. In the event of any stock split, stock dividend, ---------- recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitalization or event, or any distribution to holders of Stock other than a regular cash dividend, the number and class of securities subject to the Award shall be appropriately adjusted by the Committee. If any adjustment -3- would result in a fractional security being subject to the Award, the Company shall pay the Holder in connection with the vesting, if any, of such fractional security, an amount in cash determined by multiplying (i) such fraction (rounded to the nearest hundredth) by (ii) the Fair Market Value on the vesting date. The decision of the Committee regarding any such adjustment shall be final, binding and conclusive. 5.5. Compliance with Applicable Law. Award is subject to the condition ------------------------------ that if the listing, registration or qualification of the shares subject to the Award upon any securities exchange or under any law, or the consent or approval of any governments body, or the taking of any other action is necessary or desirable as a condition of, or in connection with, the vesting or delivery of shares hereunder, the shares of Stock subject to the Award may not be delivered, in whole or in part, unless such listing, registration, qualification, consent or approval shall have been effected or obtained, free of any conditions not acceptable to the Company. The Company agrees to use reasonable efforts to effect or obtain any :such listing, registration, qualification, consent or approval. 5.6. Agreement Subject to the Plan. This Agreement is subject to the ----------------------------- provisions of the Plan and shall be interpreted in accordance therewith. The Holder hereby acknowledges receipt of a copy of the Plan. 6. Miscellaneous Provisions. ------------------------ 6.1. Successors. This Agreement shall be binding upon and inure to the ---------- benefit of any successor or successors of the Company and any person or persons who shall, upon the death of the Holder, acquire any rights hereunder in accordance with this Agreement or the Plan. 6.2. Notices. All notices, requests or other communications provided for ------- in this Agreement shall be made, if to the Company, to Kayser Building, 100 North Stanton, El Paso, Texas 79901, Attention: Corporate Secretary, and if to the Holder, to 333 Kingswood, El Paso, Texas 79932. All notices, requests or other communications provided for in this Agreement shall be made in writing either (a) by personal delivery to the party entitled thereto, (b) by facsimile with confirmation of receipt, (c) by mailing in the United States mails to the last known address of the party entitled thereto or (d) by express courier service. The notice, request or other communication shall be deemed to be received upon personal delivery, upon confirmation of receipt of facsimile transmission, or upon receipt by the party entitled thereto if by United States mail or express courier service; provided, however, that if a notice, request or other communication is not received during regular business hours, it shall be deemed to be received on the next succeeding business day of the Company. -4- 6.3. Governing Law. This Agreement, the Award and all determinations made ------------- and actions taken pursuant hereto and thereto, to the extent not otherwise governed by the laws of the United States, shall be governed by the laws of the State of Texas and construed in accordance therewith without giving effect to conflicts of laws principles. 6.4. Counterparts. This Agreement may be executed in two counterpart each ------------ of which shall be deemed an original and both of which together shall constitute one and the same instrument. EL PASO ELECTRIC COMPANY By: /s/ KENNETH R. HEITZ -------------------------------------------- Name: Kenneth R. Heitz Title: Director Acceptance Date: June 16, 1997 ----------------- /s/ JOHN A. WHITACRE - --------------------------------- John A. Whitacre -5- EX-99.16 18 RESTRICTED STOCK AGREEMENT - T. BASSHAM EXHIBIT 99.16 EL PASO ELECTRIC COMPANY RESTRICTED STOCK AWARD AGREEMENT El Paso Electric Company, a Texas corporation (the 'Company'), hereby grants to Terry D. Bassham (the "Holder"), pursuant to the provisions of the El Paso Electric Company 1996 Long-Term Incentive Plan (the "Plan"), a restricted stock award (the "Award") of 725 shares of the Company's Common Stock, no par value ("Stock"), upon and subject to the restrictions, terms and conditions set forth below. Capitalized terms not defined herein shall have the meanings specified in the Plan. 1. Award Subject to Acceptance of Agreement. The Award shall be null and ---------------------------------------- void unless the Holder shall accept this Agreement by executing it in the space provided below and returning it to the Company and execute and return one or more irrevocable stock powers. As soon as practicable after the Holder has executed this Agreement and such stock power or powers and returned the same to the Company, the Company shall cause to be issued in the Holder's name a stock certificate or certificates representing the total number of shares of Stock subject to the Award. 2. Rights as a Stockholder. Holder shall have the right to vote the ----------------------- shares of Stock subject to the Award. During the Restriction Period as to any shares of Stock, cash dividends which would otherwise be payable on any such shares of will be credited to the Holder in the form of additional unvested shares of Stock as if the dividend had purchased additional shares at the closing market price on the date such dividend is paid, and such additional shares (including shares received as stock dividend or stock split), shall be delivered to the Company (and the Holder shall, if requested by the Company, execute and return one or more irrevocable stock powers related thereto) and shall be subject to the same restrictions as the shares of Stock with respect to which such dividend or other distribution was made. 3. Custody and Delivery of Certificates Representing Shares. The Company -------------------------------------------------------- shall hold the certificate or certificates representing the shares of Stock subject to the Award until the restrictions on such Award shall have lapsed, in whole or in part, pursuant to Section 4 hereof, and the Company shall as soon thereafter as practicable, subject to Section 5.3, deliver the certificate or certificates for such shares to the Holder and destroy the stock power or powers relating to such shares. If such stock power or powers also relates to shares as to which restrictions remain in effect, the Company may require, as a condition precedent to delivery of any certificate pursuant to this Section 3, the execution and delivery to the Company of one or more stock powers relating to such shares. 4. Restriction Period and Vesting. (a) The restrictions on the Award ------------------------------ shall lapse on the earliest of the following: (i) with respect to one-fifth of the aggregate number of shares of Stock subject to the Award on March 12, 1997 and as to an additional one-fifth of such aggregate number of shares on each anniversary thereof during the years 1998 through 2001, inclusive, or (ii) in accordance with Section 6.8 of the Plan (the "Restriction Period"). (b) If the Holder's employment with the Company is terminated by the Company during the Restriction Period or by reason of the Holder's "Permanent and Total Disability" (as such term is defined in the Plan), or by reason of the Holder's voluntary resignation or retirement or his death, then any shares of Stock as to which restrictions have not lapsed shall be forfeited. 5. Additional Terms and Conditions of Award. ---------------------------------------- 5.1. Nontransferability of Award. During the Restriction Period, the --------------------------- shares of Stock subject to the Award as to which restrictions remain in effect may not be transferred by the Holder other than by will, the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Company. Except to the extent permitted by the foregoing, during the Restriction Period, the shares of Stock subject to the Award as to which restrictions remain in effect may not be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process. Upon any attempt to so sell, transfer, assign, pledge, hypothecate or encumber, or otherwise dispose of such shares, the Award shall immediately become null and void. 5.2. Investment Representation. The Holder hereby represents and ------------------------- covenants that (a) any share of Stock acquired upon the lapse of restrictions will be acquired for investment and not with a view to the distribution thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), unless such acquisition has been registered under the Securities Act and any applicable state securities law; (b) any subsequent sale of any such shares shall be made either pursuant to an effective registration statement under the Securities Act and any applicable state securities laws, or pursuant to an exemption from registration under the Securities Act and such state securities laws; and (c) if requested by the Company, the Holder shall submit a written statement, in form satisfactory to the Company, to the effect that such representation (x) is true and correct as of the date of acquisition of any shares hereunder or (y) is true and correct as of the date of any sale of any such shares, as applicable. As a further condition precedent to the delivery to the Holder of any shares subject to the Award, the Holder shall comply with all regulations and requirements of any regulatory authority having control of or supervision over the issuance of the shares and, in connection therewith, shall execute any documents which the Board or any committee authorized by the Board shall in its sole discretion deem necessary or advisable. -2- 5.3. Withholding Taxes. (a) As a condition precedent to the delivery to ----------------- the Holder of any shares of Stock subject to the Award, the Holder may, upon request by the Company, pay to the Company such amount of cash as the Company may be required, under all applicable federal, state, local or other laws or regulations, to withhold and pay over as income or other withholding taxes (the "Required Tax Payments") with respect to the Award. If the Holder shall fail to advance the Required Tax Payments after request by the Company, the Company may, in its discretion, deduct any Required Tax Payments from any amount then or thereafter payable by the Company to the Holder. (b) The Holder may elect to satisfy his or her obligation to advance the Required Tax Payments by any of the following means: (1) a cash payment to the Company pursuant to Section 5.3(a), (2) delivery to the Company of previously owned whole shares of Stock (which the Holder has held for at least six months prior to the delivery of such shares or which the Holder purchased on the open market and for which the Holder has good title, free and clear of all liens and encumbrances) having a Fair Market Value, determined as of the date the obligation to withhold or pay taxes first arises in connection with the Award (the "Tax Date"), equal to the Required Tax Payments, (3) authorizing the Company to withhold from the shares of Stock otherwise to be delivered to the Holder pursuant to the Award, a number of whole shares of Stock having a Fair Market Value, determined as of the Tax Date, equal to the Required Tax Payments, (4) a cash payment by a broker-dealer acceptable to the Company through whom the Holder has sold the shares with respect to which the Required Tax Payments have arisen or (5) any combination of (1), (2) and (3). The Committee may disapprove an election pursuant to any of clauses (2)-(5) if the Committee determines, based on the opinion of recognized securities counsel, that the method so elected would result in liability to the Optionee under Section 16(b) of the Securities Exchange Act of 1934, as amended, or the regulations promulgated thereunder. Shares of Stock to be delivered or withheld may have a Fair Market Value in excess of the minimum amount of the Required Tax Payments, but not in excess of the amount determined by applying the Holder's maximum marginal tax rate. Any fraction of a share of Stock which would be required to satisfy such an obligation shall be disregarded and the remaining amount due shall be paid in cash by the Holder. No certificate representing a share of Stock shall be delivered until the Required Tax Payments have been satisfied in full. 5.4. Adjustment. In the event of any stock split, stock dividend, ---------- recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitalization or event, or any distribution to holders of Stock other than a regular cash dividend, the number and class of securities subject to the Award shall be appropriately adjusted by the Committee. If any adjustment -3- would result in a fractional security being subject to the Award, the Company shall pay the Holder in connection with the vesting, if any, of such fractional security, an amount in cash determined by multiplying (i) such fraction (rounded to the nearest hundredth) by (ii) the Fair Market Value on the vesting date. The decision of the Committee regarding any such adjustment shall be final, binding and conclusive. 5.5. Compliance with Applicable Law. Award is subject to the condition ------------------------------ that if the listing, registration or qualification of the shares subject to the Award upon any securities exchange or under any law, or the consent or approval of any governments body, or the taking of any other action is necessary or desirable as a condition of, or in connection with, the vesting or delivery of shares hereunder, the shares of Stock subject to the Award may not be delivered, in whole or in part, unless such listing, registration, qualification, consent or approval shall have been effected or obtained, free of any conditions not acceptable to the Company. The Company agrees to use reasonable efforts to effect or obtain any :such listing, registration, qualification, consent or approval. 5.6. Agreement Subject to the Plan. This Agreement is subject to the ----------------------------- provisions of the Plan and shall be interpreted in accordance therewith. The Holder hereby acknowledges receipt of a copy of the Plan. 6. Miscellaneous Provisions. ------------------------ 6.1. Successors. This Agreement shall be binding upon and inure to the ---------- benefit of any successor or successors of the Company and any person or persons who shall, upon the death of the Holder, acquire any rights hereunder in accordance with this Agreement or the Plan. 6.2. Notices. All notices, requests or other communications provided for ------- in this Agreement shall be made, if to the Company, to Kayser Building, 100 North Stanton, El Paso, Texas 79901, Attention: Corporate Secretary, and if to the Holder, to 365 La Mirada, El Paso, Texas 79932. All notices, requests or other communications provided for in this Agreement shall be made in writing either (a) by personal delivery to the party entitled thereto, (b) by facsimile with confirmation of receipt, (c) by mailing in the United States mails to the last known address of the party entitled thereto or (d) by express courier service. The notice, request or other communication shall be deemed to be received upon personal delivery, upon confirmation of receipt of facsimile transmission, or upon receipt by the party entitled thereto if by United States mail or express courier service; provided, however, that if a notice, request or other communication is not received during regular business hours, it shall be deemed to be received on the next succeeding business day of the Company. -4- 6.3. Governing Law. This Agreement, the Award and all determinations made ------------- and actions taken pursuant hereto and thereto, to the extent not otherwise governed by the laws of the United States, shall be governed by the laws of the State of Texas and construed in accordance therewith without giving effect to conflicts of laws principles. 6.4. Counterparts. This Agreement may be executed in two counterpart each ------------ of which shall be deemed an original and both of which together shall constitute one and the same instrument. EL PASO ELECTRIC COMPANY By: /s/ KENNETH R. HEITZ -------------------------------------------- Name: Kenneth R. Heitz Title: Director Acceptance Date: June 9, 1997 ----------------- /s/ TERRY D. BASSHAM - --------------------------------- Terry D. Bassham -5- EX-99.17 19 FORM OF STOCK OPTION AGRMNT - CO./CERTAIN DIRECTRS EXHIBIT 99.17 EL PASO ELECTRIC COMPANY STOCK OPTION AGREEMENT FOR NON-EMPLOYEE DIRECTORS (NON-QUALIFIED STOCK OPTIONS) El Paso Electric Company, a Texas corporation (the "Company"), hereby ------- grants to ______________________ (the "Optionee") as of May 8, 1997 (the "Option ------ Date"), pursuant to the provisions of the El Paso Electric Company 1996 Long- - ---- Term Incentive Plan (the "Plan"), a non-qualified option (the "Option") to ---- purchase from the Company 5,000 shares of its Common Stock, no par value ("Stock") at the price of $6.56 per share, upon and subject to the terms and ----- conditions set forth below. 1. Options Subject to Acceptance of Agreement. The Options shall be ------------------------------------------ null and void unless the Optionee shall accept this Agreement by executing it in the space provided below and returning such original execution copy to the Company. 2. Time and Manner of Exercise of Option. ------------------------------------- 2.1. Maximum Term of Option. In no event may the Options be ---------------------- exercised, in whole or in part, after May 8, 2007 (the "Expiration Date"). --------------- 2.2. Exercise of Options. (a) The Options are fully exercisable ------------------- from and after the date hereof. (b) If the Optionee shall cease for any reason to serve as a Director of the Company, the Options may thereafter be exercised by the Optionee or the Optionee's Legal Representative or Permitted Transferees, as the case may be, until and including the earliest to occur of (i) the date which is 120 days after the termination of such person's service on the Board and (ii) the Expiration Date. 2.3 Method of Exercise. Subject to the limitations set forth in ------------------ this Agreement, the Options may be exercised by the Optionee (1) by giving written notice to the Company specifying the Option or Options being exercised, and the number of whole shares of Stock to be purchased and accompanied by payment therefor in full (or arrangement made for such payment to the Company's satisfaction) either (i) in cash, (ii) by delivery of previously owned whole shares of Stock (which the Optionee has held for at least six months prior to the delivery of such shares or which the Optionee purchased on the open market and for which the Optionee has good title, free and clear of all liens and encumbrances) having a Fair Market Value, determined as of the date of exercise, equal to the aggregate purchase price payable pursuant to the Option by reason of such exercise, (iii) in cash by a broker-dealer acceptable to the Company to whom the Optionee has submitted an irrevocable notice of exercise, (iv) a combination of (i) and (ii), and (2) by executing such documents as the Company may reasonably request. The Committee may disapprove an election pursuant to any of clauses (ii) - (iv) if the Committee determines, based on the opinion of recognized securities counsel, that the method of exercise so elected would result in liability to the Optionee under Section 16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or the regulations promulgated thereunder. Any fraction of a share of Stock which would be required to pay such purchase price shall be disregarded and the remaining amount due shall be paid in cash by the Optionee. No certificate representing a share of Stock shall be delivered until the full purchase price therefor has been paid. 2.4 Termination of Options. (a) In no event may an Option be ---------------------- exercised after it terminates as set forth in this Section 2.4. The Option shall terminate, to the extent not exercised pursuant to Section 2.3 or earlier terminated pursuant to Section 2.2, on the Expiration Date. (b) In the event that rights to purchase all or a portion of the shares of Stock subject to the Option expire or are exercised, cancelled or forfeited, the Optionee shall, upon the Company's request, promptly return this Agreement to the Company for full or partial cancellation, as the case may be. Such cancellation shall be effective regardless of whether the Optionee returns this Agreement. If the Optionee continues to have rights to purchase shares of Stock hereunder, the Company shall, within 10 days of the Optionee's delivery of this Agreement to the Company, either (i) mark this Agreement to indicate the extent to which the Option has expired or been exercised, cancelled or forfeited or (ii) issue to the Optionee a substitute option agreement applicable to such rights, which agreement shall otherwise be substantially similar to this Agreement in form and substance. 3. Additional Terms and Conditions of Option. ----------------------------------------- 3.1. Nontransferability of Options. The Options may not be ----------------------------- transferred by the Optionee other than (i) by will or the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Company or (ii) as otherwise permitted under Rule 16b-3 under the Exchange Act as may be set forth in an amendment to this Agreement. Except to the extent permitted by the foregoing sentence, during the Optionee's lifetime the Options are exercisable only by the Optionee or the Optionee's Legal Representative. Except to the extent permitted by the foregoing, the Options may not be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process. Upon any attempt to so sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose of an Option, the Option and all rights hereunder shall immediately become null and void. 3.2. Investment Representation. The Optionee hereby represents and ------------------------- covenants that (a) any share of Stock purchased upon exercise of the Option will be purchased for investment and not with a view to the distribution thereof within the meaning of the Securities Act of 1933, as amended (the "Securities ---------- Act"), unless such purchase has been registered under the Securities Act and any - --- applicable state securities laws; (b) any subsequent sale of any such shares shall be made either pursuant to an effective registration statement under the Securities Act and any -2- applicable state securities laws, or pursuant to an exemption from registration under the Securities Act and such state securities laws; and (c) if requested by the Company, the Optionee shall submit a written statement, in form satisfactory to the Company, to the effect that such representation (x) is true and correct as of the date of purchase of any shares hereunder or (y) is true and correct as of the date of any sale of any such shares, as applicable. As a further condition precedent to any exercise of the Option, the Optionee shall comply with all regulations and requirements of any regulatory authority having control of or supervision over the issuance or delivery of the shares and, in connection therewith, shall execute any documents which the Board or the Committee shall in its sole discretion deem necessary or advisable. 3.3. Withholding Taxes. (a) As a condition precedent to the ----------------- delivery of Stock upon exercise of the Option, the Optionee may, upon request by the Company, pay to the Company in addition to the purchase price of the shares, such amount of cash as the Company may be required, under all applicable federal, state, local or other laws or regulations, to withhold and pay over as income or other withholding taxes (the "Required Tax Payments") with respect to --------------------- such exercise of the Option. If the Optionee shall fail to advance the Required Tax Payments after request by the Company, the Company may, in its discretion, deduct any Required Tax Payments from any amount then or thereafter payable by the Company to the Optionee. (b) The Optionee may elect to satisfy his or her obligation to advance the Required Tax Payments by any of the following means: (1) a cash payment to the Company pursuant to Section 3.3(a), (2) delivery to the Company of previously owned whole shares of Stock (which the Optionee has held for at least six months prior to the delivery of such shares or which the Optionee purchased on the open market and for which the Optionee has good title, free and clear of all liens and encumbrances) having a Fair Market Value, determined as of the date the obligation to withhold or pay taxes first arises in connection with the Option (the "Tax Date"), equal to the Required Tax Payments, (3) -------- authorizing the Company to withhold whole shares of Stock which would otherwise be delivered to the Optionee upon exercise of the Option having a Fair Market Value, determined as of the Tax Date, equal to the Required Tax Payments, (4) a cash payment by a broker-dealer acceptable to the Company to whom the Optionee has submitted an irrevocable notice of exercise or (5) any combination of (1), (2) and (3). The Committee may disapprove an election pursuant to any of clauses (2)-(5) if the Committee determines, based on the opinion of recognized securities counsel, that the method so elected would result in liability to the Optionee under Section 16(b) of the Exchange Act or the regulations promulgated thereunder. Shares of Stock to be delivered or withheld may not have a Fair Market Value in excess of the minimum amount of the Required Tax Payments. Any fraction of a share of Stock which would be required to satisfy any such obligation shall be disregarded and the remaining amount due shall be paid in cash by the Optionee. No certificate representing a share of Stock shall be delivered until the Required Tax Payments have been satisfied in full. -3- 3.4 Adjustment. In the event of any stock split, stock dividend, ---------- recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitalization or event, or any distribution to holders of Stock other than a regular cash dividend, the number and class of securities subject to the Options and the purchase price per security shall be appropriately adjusted by the Committee without an increase in the aggregate purchase price. If any adjustment would result in a fractional security being subject to the Options, the Company shall pay the Optionee, in connection with the first exercise of the Option, in whole or in part, occurring after such adjustment, an amount in cash determined by multiplying (i) the fraction of such security (rounded to the nearest hundredth) by (ii) the excess, if any, of (A) the Fair Market Value on the exercise date over (B) the exercise price of the Option. The decision of the Committee regarding any such adjustment shall be final, binding and conclusive. 3.5. Compliance with Applicable Law. The Options is subject to ------------------------------ the condition that if the listing, registration or qualification of the shares subject to the Option upon any securities exchange or under any law, or the consent or approval of any governmental body, or the taking of any other action is necessary or desirable as a condition of, or in connection with, the purchase or delivery of shares hereunder, the Options may not be exercised, in whole or in part, unless such listing, registration, qualification, consent or approval shall have been effected or obtained, free of any conditions not acceptable to the Company. The Company agrees to use reasonable efforts to effect or obtain any such listing, registration, qualification, consent or approval. 3.6. Delivery of Certificates. Upon the exercise of the Option, ------------------------ in whole or in part, the Company shall deliver or cause to be delivered one or more certificates representing the number of shares purchased against full payment therefor. The Company shall pay all original issue or transfer taxes and all fees and expenses incident to such delivery, except as otherwise provided in Section 3.3. 3.7. Options Confer No Rights as Stockholder. The Optionee shall --------------------------------------- not be entitled to any privileges of ownership with respect to shares of Stock subject to the Option unless and until purchased and delivered upon the exercise of an Option, in whole or in part, and the Optionee becomes a stockholder of record with respect to such delivered shares; and the Optionee shall not be considered a stockholder of the Company with respect to any such shares not so purchased and delivered. 3.8. Company to Reserve Shares. The Company shall at all times ------------------------- prior to the expiration or termination of the Options reserve and keep available, either in its treasury or out of its authorized but unissued shares of Stock, the full number of shares subject to the Options from time to time. 3.9. Agreement Subject to the Plan. This Agreement is subject to ----------------------------- the provisions of the Plan and shall be interpreted in accordance therewith. The Optionee hereby acknowledges receipt of a copy of the Plan. -4- 4. Miscellaneous Provisions. ------------------------ 4.1. Designation as Stock Option. The Option is hereby designated --------------------------- as not constituting an "incentive stock option" within meaning of Section 422 of the Internal Revenue Code of 1986, as amended. This Agreement shall be interpreted and treated consistently with such designation. 4.2. Meaning of Certain Terms. As used herein, the term "Legal ------------------------ ----- Representative" shall include an executor, administrator, legal representative, - -------------- guardian or similar person and the term "Permitted Transferee" shall include any -------------------- transferee (i) pursuant to a transfer permitted under Section 6.4 of the Plan and Section 3.1 hereof or (ii) designated pursuant to beneficiary designation procedures approved by the Company. 4.3. Successors. This Agreement shall be binding upon and inure ---------- to the benefit of any successor or successors of the Company and any person or persons who shall, upon the death of the Optionee, acquire any rights hereunder in accordance with this Agreement or the Plan. 4.4. Notices. All notices, requests or other communications ------- provided for in this Agreement shall be made, if to the Company, to Kayser Building, 100 North Stanton, El Paso, Texas 79901, Attention: Corporate Secretary, and if to the Optionee, to ________________________________________. All notices, requests or other communications provided for in this Agreement shall be made in writing either (a) by personal delivery to the party entitled thereto, (b) by facsimile with confirmation of receipt, (c) by mailing in the United States mails to the last known address of the party entitled thereto or (d) by express courier service. The notice, request or other communication shall be deemed to be received upon personal delivery, upon confirmation of receipt of facsimile transmission or upon receipt by the party entitled thereto if by United States mail or express courier service; provided, however, that if a notice, request or other communication is not received during regular business hours, it shall be deemed to be received on the next succeeding business day of the Company. 4.5. Governing Law. This Agreement, the Option and all ------------- determinations made and actions taken pursuant hereto and thereto, to the extent not governed by the laws of the United States, shall be governed by the laws of the State of Texas and construed in accordance therewith without giving effect to principles of conflicts of laws. -5- 4.6. Counterparts. This Agreement may be executed in two ------------ counterparts each of which shall be deemed an original and both of which together shall constitute one and the same instrument. EL PASO ELECTRIC COMPANY By: /s/ KENNETH R. HEITZ --------------------------- Name: Kenneth R. Heitz Title: Director Accepted this 8th day of May, 1997 - ------------------------------------- -6- EX-99.18 20 DIRECTORS STOCK AWARD AGREEMENT - G. EDWARDS EXHIBIT 99.18 EL PASO ELECTRIC COMPANY DIRECTORS' RESTRICTED STOCK AWARD AGREEMENT El Paso Electric Company, a Texas corporation (the "Company"), hereby grants to George W. Edwards, Jr. (the "Holder"), pursuant to the provisions of the El Paso Electric Company 1996 Long-Term Incentive Plan (the "Plan"), a restricted stock award (the "Award") of 25,000 shares of the Company's Common Stock, no par value ("Stock"), upon and subject to the restrictions, terms and conditions set forth below. Capitalized terms not defined herein shall have the meanings specified in the Plan. 1. Award Subject to Acceptance of Agreement. The Award shall be null ---------------------------------------- and void unless the Holder shall (a) accept this Agreement by executing it in the space provided below and returning it to the Company and (b) execute and return one or more irrevocable stock powers. As soon as practicable after the Holder has executed this Agreement and such stock power or powers and returned the same to the Company, the Company shall cause to be issued in the Holder's name a stock certificate or certificates representing the total number of shares of Stock subject to the Award. 2. Rights as a Stockholder. The Holder shall have the right to vote ----------------------- the shares of Stock subject to the Award and to receive dividends and other distributions thereon; provided, however, that a dividend or other distribution with respect to shares of Stock (including, without limitation, a stock dividend or stock split), other than a regular cash dividend, shall be delivered to the Company (and the Holder shall, if requested by the Company, execute and return one or more irrevocable stock powers related thereto) and shall be subject to the same restrictions as the shares of Stock with respect to which such dividend or other distribution was made. 3. Custody and Delivery of Certificates Representing Shares. The -------------------------------------------------------- Company shall hold the certificate or certificates representing the shares of Stock subject to the Award until the restrictions on such Award shall have lapsed, in whole or in part, pursuant to Paragraph 4 hereof, and the Company shall as soon thereafter as practicable, subject to Section 5.3, deliver the certificate or certificates for such shares to the Holder and destroy the stock power or powers relating to such shares. If such stock power or powers also relates to shares as to which restrictions remain in effect, the Company may require, as a condition precedent to delivery of any certificate pursuant to this Section 3, the execution and delivery to the Company of one or more stock powers relating to such shares. 4. Restriction Period and Vesting. The restrictions on the Award ------------------------------ shall lapse (i) with respect to all of the shares of Stock subject to the Award at the earlier of May 31, 1998 and the conclusion of the 1998 Annual Meeting of Shareholders of the Company, or (ii) earlier in accordance with Section 6.8 of the Plan (the "Restriction Period"). 5. Additional Terms and Conditions of Award. ---------------------------------------- 5.1. Nontransferability of Award. During the Restriction Period, the --------------------------- shares of Stock subject to the Award as to which restrictions remain in effect may not be transferred by the Holder other than by will, the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Company. Except to the extent permitted by the foregoing, during the Restriction Period, the shares of Stock subject to the Award as to which restrictions remain in effect may not be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process. Upon any attempt to so sell, transfer, assign, pledge, hypothecate or encumber, or otherwise dispose of such shares, the Award shall immediately become null and void. 5.2. Investment Representation. The Holder hereby represents and ------------------------- covenants that (a) any share of Stock acquired upon the lapse of restrictions will be acquired for investment and not with a view to the distribution thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), unless such acquisition has been registered under the Securities Act and any applicable state securities law; (b) any subsequent sale of any such shares shall be made either pursuant to an effective registration statement under the Securities Act and any applicable state securities laws, or pursuant to an exemption from registration under the Securities Act and such state securities laws; and (c) if requested by the Company, the Holder shall submit a written statement, in form satisfactory to the Company, to the effect that such representation (x) is true and correct as of the date of acquisition of any shares hereunder or (y) is true and correct as of the date of any sale of any such shares, as applicable. As a further condition precedent to the delivery to the Holder of any shares subject to the Award, the Holder shall comply with all regulations and requirements of any regulatory authority having control of or supervision over the issuance of the shares and, in connection therewith, shall execute any documents which the Board or any committee authorized by the Board shall in its sole discretion deem necessary or advisable. 5.3. Withholding Taxes. (a) As a condition precedent to the ----------------- delivery to the Holder of any shares of Stock subject to the Award, the Holder may, upon request by the Company, pay to the Company such amount of cash as the Company may be required, under all applicable federal, state, local or other laws or regulations, to withhold and pay over as income or other withholding taxes (the "Required Tax Payments") with respect to the Award. If the Holder shall fail to advance the Required Tax Payments after request by the Company, the Company may, in its discretion, deduct any Required Tax Payments from any amount then or thereafter payable by the Company to the Holder. (b) The Holder may elect to satisfy his or her obligation to advance the Required Tax Payments by any of the following means: (1) a cash payment to the Company pursuant to Section 5.3(a), (2) delivery to the Company of previously owned -2- whole shares of Stock (which the Holder has held for at least six months prior to the delivery of such shares or which the Holder purchased on the open market and for which the Holder has good title, free and clear of all liens and encumbrances) having a Fair Market Value, determined as of the date the obligation to withhold or pay taxes first arises in connection with the Award (the "Tax Date"), equal to the Required Tax Payments, (3) authorizing the Company to withhold from the shares of Stock otherwise to be delivered to the Holder pursuant to the Award, a number of whole shares of Stock having a Fair Market Value, determined as of the Tax Date, equal to the Required Tax Payments, (4) a cash payment by a broker-dealer acceptable to the Company through whom the Holder has sold the shares with respect to which the Required Tax Payments have arisen or (5) any combination of (1), (2) and (3). The Committee may disapprove an election pursuant to any of clauses (2)-(5) if the Committee determines, based on the opinion of recognized securities counsel, that the method so elected would result in liability to the Optionee under Section 16(b) of the Securities Exchange Act of 1934, as amended, or the regulations promulgated thereunder. Shares of Stock to be delivered or withheld may have a Fair Market Value in excess of the minimum amount of the Required Tax Payments, but not in excess of the amount determined by applying the Holder's maximum marginal tax rate. Any fraction of a share of Stock which would be required to satisfy such an obligation shall be disregarded and the remaining amount due shall be paid in cash by the Holder. No certificate representing a share of Stock shall be delivered until the Required Tax Payments have been satisfied in full. 5.4. Adjustment. In the event of any stock split, stock dividend, ---------- recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitalization or event, or any distribution to holders of Stock other than a regular cash dividend, the number and class of securities subject to the Award shall be appropriately adjusted by the Committee. If any adjustment would result in a fractional security being subject to the Award, the Company shall pay the Holder in connection with the vesting, if any, of such fractional security, an amount in cash determined by multiplying (i) such fraction (rounded to the nearest hundredth) by (ii) the Fair Market Value on the vesting date. The decision of the Committee regarding any such adjustment shall be final, binding and conclusive. 5.5. Compliance with Applicable Law. The Award is subject to the ------------------------------ condition that if the listing, registration or qualification of the shares subject to the Award upon any securities exchange or under any law, or the consent or approval of any governmental body, or the taking of any other action is necessary or desirable as a condition of, or in connection with, the vesting or delivery of shares hereunder, the shares of Stock subject to the Award may not be delivered, in whole or in part, unless such listing, registration, qualification, consent or approval shall have been effected or obtained, free of any conditions not acceptable to the Company. The Company agrees to use reasonable efforts to effect or obtain any such listing, registration, qualification, consent or approval. -3- 5.6. Decisions of Board or Committee. The Board or the Committee ------------------------------- shall have the right to resolve all questions which may arise in connection with the Award. Any interpretation, determination or other action made or taken by the Board or the Committee regarding the Plan or this Agreement shall be final, binding and conclusive. 5.7. Agreement Subject to the Plan. This Agreement is subject to the ----------------------------- provisions of the Plan and shall be interpreted in accordance therewith. The Holder hereby acknowledges receipt of a copy of the Plan. 6. Miscellaneous Provisions. ------------------------ 6.1. Successors. This Agreement shall be binding upon and inure to ---------- the benefit of any successor or successors of the Company and any person or persons who shall, upon the death of the Holder, acquire any rights hereunder in accordance with this Agreement or the Plan. 6.2. Notices. All notices, requests or other communications provided ------- for in this Agreement shall be made, if to the Company, to Kayser Building, 100 North Stanton, El Paso, Texas 79901, Attention: Corporate Secretary, and if to the Holder, to 4651 Gulf Shore Boulevard North, Vistas #906, Naples, Florida 33940. All notices, requests or other communications provided for in this Agreement shall be made in writing either (a) by personal delivery to the party entitled thereto, (b) by facsimile with confirmation of receipt, (c) by mailing in the United States mails to the last known address of the party entitled thereto or (d) by express courier service. The notice, request or other communication shall be deemed to be received upon personal delivery, upon confirmation of receipt of facsimile transmission, or upon receipt by the party entitled thereto if by United States mail or express courier service; provided, however, that if a notice, request or other communication is not received during regular business hours, it shall be deemed to be received on the next succeeding business day of the Company. 6.3. Governing Law. This Agreement, the Award and all determinations ------------- made and actions taken pursuant hereto and thereto, to the extent not otherwise governed by the laws of the United States, shall be governed by the laws of the State of Texas and construed in accordance therewith without giving effect to conflicts of laws principles. -4- 6.4. Counterparts. This Agreement may be executed in two ------------ counterparts each of which shall be deemed an original and both of which together shall constitute one and the same instrument. EL PASO ELECTRIC COMPANY By: /s/ KENNETH R. HEITZ -------------------------- Name: Kenneth R. Heitz Title: Director Accepted this 13th day of November, 1997 /s/ GEORGE W. EDWARDS, JR. -------------------------- Holder -5- -----END PRIVACY-ENHANCED MESSAGE-----