-----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, L3mEt1DEHDtCiFA1m+q8kBsoOW9SwEmfNIwRHl70RPiEFBWP0k6kg9UDaDd1cQ2w f/uuGx9+vf8Yzeew0x1X4A== 0000930661-99-000667.txt : 19990402 0000930661-99-000667.hdr.sgml : 19990402 ACCESSION NUMBER: 0000930661-99-000667 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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: 99581072 BUSINESS ADDRESS: STREET 1: 303 N OREGON ST CITY: EL PASO STATE: TX ZIP: 79901 BUSINESS PHONE: 9155435711 10-K405 1 FORM 10-K405 ================================================================================ 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, 1998 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____ to ____ Commission file number 0-296 El Paso Electric Company (Exact name of registrant as specified in its charter) TEXAS 74-0607870 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
KAYSER CENTER, 100 NORTH STANTON, EL PASO, TEXAS 79901 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (915) 543-5711 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock, No Par Value American Stock Exchange Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 OR 15(D) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES X NO ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 16, 1999, the aggregate market value of the voting stock held by non-affiliates of the registrant was $439,496,557. As of March 16, 1999, there were outstanding 60,405,083 shares of common stock, no par value. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement for the 1999 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 Texas 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 Texas 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 or its successor, New Mexico Public Regulation Commission New Mexico Settlement.............. Stipulation and Settlement Agreement dated as of July 15, 1998, between the Company, the New Mexico Attorney General, the New Mexico Commission staff and most other parties to the Company's rate proceedings, excluding the City of Las Cruces, before the New Mexico Commission providing for a 30-month moratorium on rate increases or decreases and other matters NRC................................ Nuclear Regulatory Commission OPC................................ Texas Office of Public Utility Counsel Palo Verde......................... Palo Verde Nuclear Generating Station Palo Verde 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 Reorganization..................... Reorganization and the emergence from bankruptcy by the Company pursuant to the Plan
(i)
Abbreviations, Acronyms or Defined Terms Terms ------------------------- ----- 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 Texas 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 Texas Settlement Agreement......... Settlement Agreement, filed with the Texas Commission on March 22, 1999, between the Company, the City of El Paso and various parties TNP................................ Texas-New Mexico Power Company
(ii) 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 7A Quantitative and Qualitative Disclosures About Market Risk................ 35 8 Financial Statements and Supplementary Data............................... 38 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................ 86 PART III 10 Directors and Executive Officers of the Registrant........................ 86 11 Executive Compensation.................................................... 86 12 Security Ownership of Certain Beneficial Owners and Management............ 86 13 Certain Relationships and Related Transactions............................ 86 PART IV 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K........... 86
(iii) 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, 1998, the Company's energy sources consisted of approximately 52% nuclear fuel, 35% natural gas, 7% coal and 6% purchased power. The Company serves approximately 291,000 residential, commercial, industrial and wholesale customers. The Company distributes electricity to retail customers principally in El Paso, Texas and the City of Las Cruces ("Las Cruces"), New Mexico (representing approximately 56% and 8%, respectively, of the Company's revenues for the twelve months ended December 31, 1998). In addition, the Company sells electricity to wholesale customers, including Texas- New Mexico Power Company and the Imperial Irrigation District (a southern California electric power agency). Through 1998, the Company also made wholesale sales to 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 26, 1999, the Company had approximately 1,100 employees, approximately 30% of whom are covered by a collective bargaining agreement that expires in June 2000. FACILITIES The Company's net installed generating capacity of approximately 1,500 MW consists of approximately 600 MW from Palo Verde Units 1, 2 and 3, 482 MW from its Newman Power Station, 246 MW from its Rio Grande Power Station, 104 MW from Four Corners Units 4 and 5, and 68 MW from its Copper Power Station. PALO VERDE STATION The Company owns a 15.8% interest in each of the three nuclear generating units and Common Facilities at Palo Verde, located west of Phoenix, Arizona. The Palo Verde Participants include the Company and six other utilities: APS, Southern California Edison Company, PNM, Southern California Public Power Authority, Salt River Project Agricultural Improvement and Power District and the Los Angeles Department of Water and Power. APS serves as operating agent for Palo Verde. The NRC has granted facility operating licenses and full power operating licenses for all three units at Palo Verde for terms of 40 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 participant is required to fund its proportionate share of fuel, other operation, maintenance and capital costs. The Company's total monthly share of these costs was approximately $6.7 million in 1998. 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 each Palo Verde unit over the estimated service life of 40 years. The Company's funding requirements are determined periodically based upon engineering cost estimates performed by outside engineers retained by the ANPP. In December 1998, the Palo Verde Participants approved an updated decommissioning study. The 1998 study determined that the Company will have to fund approximately $280.5 million (stated in 1998 dollars) to cover its share of decommissioning costs. Cost estimates for decommissioning have increased with each study. The previous cost estimate from a 1995 study determined that the Company would have to fund approximately $229 million (stated in 1995 dollars). The 1998 estimate reflects a 22% increase from the previous 1995 estimate primarily due to increases in estimated costs for spent fuel storage after operations have ceased. See "Spent Fuel Storage" below. Although the 1998 study was based on the latest available information, there can be no assurance that decommissioning cost estimates will not continue to increase in the future or that regulatory requirements will not change. In addition, until a new low-level radioactive waste repository opens and operates for a number of years, estimates of the cost to dispose of low-level radioactive waste are subject to significant uncertainty. The decommissioning study is updated every three years and a new study will be completed in 2001. See "Disposal of Low-Level Radioactive Waste" below. The rate freeze under the Texas Rate Stipulation and the rate reduction under the Texas Settlement Agreement would preclude the Company from seeking a rate increase in Texas to recover increases in decommissioning cost estimates. The New Mexico Settlement would preclude the Company from seeking a rate increase to recover increases in decommissioning cost estimates during the 30- month moratorium. Additionally, there can be no assurance that the Company could increase its wholesale power rates to recover such increased costs. See also 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. APS has undertaken an ongoing investigation and analysis and has performed corrective actions designed to mitigate further degradation. Corrective actions have included changes in operational procedures designed to lower the operating temperatures of the units, chemical cleaning and the implementation of other technical improvements. APS has stated that it believes its remedial actions have slowed the rate of tube degradation. The projected service lives of the units' steam generators are reassessed by APS periodically in conjunction with inspections made during 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 2 spare steam generators for delivery in September 2002. The Company's share of the cost is approximately $12.9 million. Palo Verde Participants have unanimously approved funding pre-installation activities through 1999. 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. The costs for the construction and shipping of the spare steam generators are expected to be incurred through 2002. Installation costs would be expected to be incurred between 1999 and 2003, subject to unanimous approval of Palo Verde Participants, 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 $40 million. The Company cannot predict whether the Palo Verde Participants will agree to install the replacement steam generators at Unit 2. 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 Texas Rate Stipulation precludes the Company from seeking a rate increase 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. Additionally, there can be no assurance that the Company could increase its wholesale power rates to recover such capital costs. See also Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Operational Prospects and Challenges." 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 into 2003. Alternative on-site storage facilities are currently being constructed to supplement existing facilities. Spent fuel will be removed from the original facilities as necessary and placed in special storage casks which will be stored at the new facilities until accepted by the DOE for permanent disposal. The alternative facilities will be built in stages to accommodate casks on an as needed basis and are expected to be available for use by 2003. 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, and it can not currently be estimated when spent fuel shipments to the DOE's permanent disposal site will commence. The 1998 decommissioning study assumes that only 14 of 333 spent fuel casks will have been removed from Palo Verde by 2037 when title to the remaining spent fuel is assumed to be transferred to the DOE. In January 1997, the Texas Commission established a project to evaluate what, if any, action it should take with regard to payments made to the DOE for funding of the DOE's obligation to start accepting spent nuclear fuel by January 31, 1998. After receiving initial comments, no further action has been taken on the project. 3 In July 1998, APS filed, on behalf of all Palo Verde Participants, a Petition for Review with the United States Court of Appeals for the District of Columbia Circuit regarding the DOE's failure to comply with its obligation to begin accepting spent nuclear fuel. APS is continuing, on behalf of the Palo Verde Participants, to pursue remedies under the contractual terms in place with the DOE. The Company is unable to predict the outcome of this matter at this time. Disposal of Low-Level Radioactive Waste. Congress has established requirements for the disposal by each state of radioactive waste generated within its borders. Arizona, California, North Dakota and South Dakota have entered into a compact (the "Southwestern Compact") for the disposal of low- level radioactive waste. California will act as the first host state of the Southwestern Compact, and Arizona will serve as the second host state. The construction and opening of the California low-level radioactive waste disposal site in Ward Valley has been delayed due to extensive public hearings, disputes over environmental issues and review of technical issues related to the proposed site. Palo Verde is projected to undergo decommissioning during the period in which Arizona will act as host for the Southwestern Compact. However, the opposition, delays, uncertainty and costs experienced in California demonstrate possible roadblocks that may be encountered when Arizona seeks to open its own waste repository. Liability and Insurance Matters. The Palo Verde Participants have public liability insurance against nuclear energy hazards up to the full limit of liability under federal law. The insurance consists of $200 million of primary liability insurance provided by commercial insurance carriers, with the balance being provided by an industry-wide retrospective assessment program, pursuant to which industry participants would be required to pay an assessment to cover any loss in excess of $200 million. Effective August 1998, the maximum assessment per reactor for each nuclear incident is approximately $88.1 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 $41.8 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. NRC Actions. On December 21, 1998, the NRC issued a Notice of Violation and Proposed Imposition of Civil Penalty in the amount of $55,000 relating to occurrences at Palo Verde which began in May 1992 and extended through May 1998. Beginning in 1992, improper check valve assembly methods resulted in reverse flow conditions through high pressure safety injection pump discharge check valves. In the required response to the NRC, APS acknowledged that the violations had occurred and paid the penalty. The Company's portion of the penalty was approximately $8,700. 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. 4 RIO GRANDE POWER STATION The Company's Rio Grande Power Station, located in Sunland Park, New Mexico, adjacent to El Paso, Texas, consists of three steam-electric generating units with an aggregate capacity of 246 MW. The units operate primarily on natural gas, but can also operate on fuel oil. FOUR CORNERS STATION The Company owns 7% of Units 4 and 5 at Four Corners, located in northwestern New Mexico. The two coal-fired generating units each have a generating capacity of 739 MW. The Company shares power entitlements and certain allocated costs of the two units with APS (the Four Corners operating agent) and the other participants. Four Corners is located on land held on easements from the federal government and a lease from the Navajo Nation that expires in 2016. Certain of the facilities associated with Four Corners, including transmission lines and almost all of the contracted coal sources, are also located on Navajo land. Units 4 and 5 are located adjacent to a surface-mined supply of coal. COPPER POWER STATION The Company's Copper Power Station, located in El Paso, Texas, consists of a 68 MW combustion turbine used primarily to meet peak demands. The unit operates primarily on natural gas, but can also operate on fuel oil. The Company leases the combustion turbine and other generation equipment at the station under a lease that expires in July 2005, with an extension option for two additional years. TRANSMISSION AND DISTRIBUTION LINES AND AGREEMENTS The Company owns or has significant ownership interests in four major 345 kV transmission lines, three 500 kV lines in Arizona and owns the distribution network within its retail service area. The Company is also a party to various transmission and power exchange agreements that, together with its owned transmission lines, enable the Company to obtain its energy entitlements from its remote generation sources at Palo Verde and Four Corners. Pursuant to standards established by North American Electric Reliability Council, the Company operates its transmission system in a way that allows it to maintain complete system integrity in the event of any one of these transmission lines being out of service. Springerville-Diablo Line. The Company owns a 310-mile, 345 kV transmission line from 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 primary delivery point for the Company's generation entitlement from Four Corners, which is transmitted to the West Mesa Substation over approximately 150 miles of transmission lines owned by PNM. 5 Greenlee-Newman Line. As a participant in the Southwest New Mexico Transmission Project Participation Agreement, the Company owns 40% of a 60-mile, 345 kV transmission line from TEP's Greenlee Substation in Arizona to the Hidalgo Substation near Lordsburg, New Mexico, 57.2% of a 50-mile, 345 kV transmission line between the Hidalgo Substation and the Luna Substation near Deming, New Mexico, and 100% of an 86-mile, 345 kV transmission line between the Luna Substation and the Newman Power Station. These lines provide an interconnection with TEP for delivery of the Company's entitlements from Palo Verde and, if necessary, Four Corners. AMRAD-Eddy County Line. The Company owns 66.7% of a 125-mile, 345 kV transmission line from the AMRAD Substation near Oro Grande, New Mexico, to the Company's and TNP's high voltage direct current terminal at the Eddy County Substation near Artesia, New Mexico. This terminal enables the Company to connect its transmission system to that of SPS, providing the Company with access to emergency power from SPS and power markets to the east. Palo Verde Transmission. The Company owns 18.7% of two 45-mile, 500 kV lines from Palo Verde to the Westwing Substation and a 75-mile, 500 kV line from Palo Verde to the Kyrene Substation. These lines provide the Company with a transmission path for delivery of power from Palo Verde. ENVIRONMENTAL MATTERS The Company is subject to regulation with respect to air, soil and water quality, solid waste disposal and other environmental matters by federal, state and local authorities. These authorities govern current facility operations and exercise continuing jurisdiction over facility modifications. Environmental regulations can change rapidly and are difficult to predict. Because construction of new facilities is subject to standards imposed by environmental regulation, substantial expenditures may be required to comply with such regulation. 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 (the "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"). PTI discontinued operations, and the EPA determined that PTI's abandoned facilities required remediation. The Company and the PTI Steering Committee, which consists of the largest generators of the PCBs sent to PTI, executed a settlement agreement. In consideration for the payment by the Company 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. CONSTRUCTION PROGRAM The Company has no current plans to construct any new generating facilities to serve retail customers through at least 2004. Utility construction expenditures reflected in the table below consist primarily of expanding and updating the electric transmission and distribution systems and the cost of improvements at and the purchase of new steam generators for Palo Verde. The Company's estimated cash construction costs for 1999 through 2002 are approximately $229 million. Actual costs may vary 6 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) ------------------------------------- -------------------------------------- 1999........................ $ 59 Production (1)....... $ 58 2000........................ 57 Transmission........ 21 2001........................ 55 Distribution........ 106 2002........................ 58 General........... 44 ------- ------- Total..................... $ 229 Total............ $ 229 ======= =======
_________________ (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 1998 1997 1996 ------------ ------------ ------------ Nuclear fuel............................................. 52% 53% 53% Natural gas.............................................. 35 34 32 Coal..................................................... 7 6 7 Purchased power.......................................... 6 7 8 ------ ------ ------ Total.................................................. 100% 100% 100% ====== ====== ======
Fuel and purchased power costs are generally passed through directly to customers in Texas pursuant to applicable regulations. Historical fuel costs and revenues are reconciled periodically in proceedings before the Texas Commission to determine whether a refund or surcharge based on such historical costs and revenues is necessary. Prior to the New Mexico Settlement, the Company was required to make annual filings reconciling the revenues collected under its New Mexico fixed fuel factor with its New Mexico fuel and purchased power expenses. As a result of the New Mexico Settlement, the fixed fuel factor has been incorporated into base rates. See "Regulation - Texas Rate Matters" and "- New Mexico Rate Matters." NUCLEAR FUEL The Company has contracts for uranium concentrates which should be sufficient to meet the Company's share of Palo Verde's operational requirements through 2002. The Palo Verde Participants have contracted for substantially all conversion services through 2002. APS, as agent for Palo Verde, expects to purchase any additional conversion services needed on the spot market. The Palo Verde 7 Participants have an enrichment services contract which runs through 2002, with an option for five additional years. Nuclear Fuel Financing. Pursuant to the ANPP Participation Agreement, the Company owns an undivided interest in nuclear fuel purchased in connection with Palo Verde. The Company has available a total of $100 million under a credit facility that provides for both working capital and up to $70 million for the financing of nuclear fuel. At December 31, 1998, approximately $49.3 million had been drawn to finance nuclear fuel. This financing is effectuated 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 1998, the Company's natural gas requirements at the Rio Grande Power Station were met with both short-term and long-term natural gas purchases from various suppliers. Interstate gas is delivered under a firm ten-year transportation agreement, which expires in 2001 with extension provisions through 2005. Based on the current availability of economical and reliable market natural gas supplies, the Company anticipates it will continue to purchase natural gas at market prices on a monthly basis for a portion of the fuel needs for the Rio Grande Power Station for the near term. To complement these monthly purchases in 1999, the Company has entered into a one-year fixed- price gas supply contract and a partial-year fixed-price gas supply contract (April through October 1999). The Company will continue to evaluate the availability of short-term natural gas supplies versus long-term supplies to maintain a reliable and economical supply for the Rio Grande Power Station. In 1998, natural gas for the Newman and Copper Power Stations was supplied pursuant to a five-year intrastate natural gas contract which became effective January 1, 1997 and expires December 31, 2001. To supplement this contract, the Company entered into a second natural gas supply agreement, which also runs through 2001. To complement these long-term contracts, the Company will evaluate and procure short-term natural gas supplies at market prices to maintain a reliable and economical supply to the Newman and Copper Power Stations. COAL APS, as operating agent for Four Corners, purchases Four Corners' coal requirements from a supplier with a long-term lease of coal reserves owned by the Navajo Nation. Based upon information from APS, the Company believes that Four Corners has sufficient reserves of coal to meet the plant's operational requirements for its useful life. PURCHASED POWER To supplement its own generation and operating reserves, the Company engages in firm and non-firm power purchase arrangements which may vary in duration and amount based on evaluation of the Company's resource needs and economics of the transactions. 8 OPERATING STATISTICS
DECEMBER 31, -------------------------------------------------------- 1998 1997 1996 (A) ------------- ------------- -------------- Operating revenues (In thousands): Retail: Residential................................................. $ 173,215 $ 172,917 $ 163,742 Commercial and industrial, small............................ 174,729 173,318 163,875 Commercial and industrial, large............................ 62,450 64,468 59,041 Sales to public authorities................................. 82,360 82,278 81,185 ---------- ---------- ---------- Total retail............................................ 492,754 492,981 467,843 Wholesale sales for resale.................................... 84,224 85,558 96,067 ---------- ---------- ---------- 576,978 578,539 563,910 Economy sales................................................. 20,167 10,612 11,032 Other......................................................... 5,076 4,887 3,981 ---------- ---------- ---------- Total operating revenues................................ $ 602,221 $ 594,038 $ 578,923 ========== ========== ========== Number of customers (End of year): Residential................................................... 260,356 254,348 250,209 Commercial and industrial, small.............................. 26,396 25,900 25,304 Commercial and industrial, large.............................. 117 115 102 Other......................................................... 3,867 3,811 3,711 ---------- ---------- ---------- Total................................................... 290,736 284,174 279,326 ========== ========== ========== Average annual kWh use per residential customer................. 6,291 6,285 6,238 ========== ========== ========== Energy supplied, net, kWh (In thousands): Generated..................................................... 8,586,098 8,186,187 7,920,675 Purchased and interchanged.................................... 478,396 617,651 711,791 ---------- ---------- ---------- Total................................................... 9,064,494 8,803,838 8,632,466 ========== ========== ========== Energy sales, kWh (In thousands): Retail: Residential................................................. 1,621,436 1,587,733 1,545,274 Commercial and industrial, small............................ 1,891,703 1,834,953 1,779,986 Commercial and industrial, large............................ 1,314,428 1,271,449 1,216,941 Sales to public authorities................................. 1,120,654 1,090,312 1,110,706 ---------- ---------- ---------- Total retail................................................ 5,948,221 5,784,447 5,652,907 Wholesale: Sales for resale............................................ 1,757,880 1,897,885 1,753,553 Economy sales............................................... 888,708 640,017 757,999 ---------- ---------- ---------- Total sales............................................. 8,594,809 8,322,349 8,164,459 Losses and Company use........................................ 469,685 481,489 468,007 ---------- ---------- ---------- Total................................................... 9,064,494 8,803,838 8,632,466 ========== ========== ========== Native system: Peak load, kW................................................. 1,167,000 1,122,000 1,105,000 Net generating capacity for peak, kW.......................... 1,500,000 1,500,000 1,500,000 Load factor................................................... 63.1% 64.0% 63.4% ========== ========== ========== Total system: Peak load, kW................................................. 1,439,000 1,442,000 1,387,000 Net generating capacity for peak, kW.......................... 1,500,000 1,500,000 1,500,000 Load factor................................................... 64.3% 64.0% 64.2% ========== ========== ==========
__________________ (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. 9 REGULATION GENERAL The electric utility industry faces increasing pressure to become more competitive as legislative, regulatory, economic and technological changes occur. Federal and state legislative and regulatory initiatives, including proposals advanced in Texas and New Mexico, are designed to 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 diminish the ability of the Company to fully recover its investment in generation assets. This issue is particularly important to the Company because its rates are significantly higher than national and regional averages. In the face of increased competition, the Company may not be able to sustain retail rates at the levels established by the Texas Settlement Agreement and New Mexico Settlement discussed below through the periods specified by those agreements and, therefore, the Company's results of operations and cash flow may be adversely affected. 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 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. 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. In January of each odd-numbered year, the Texas Commission is required to report to the Texas Legislature on the scope of competition in electric markets and the effect of competition and industry restructuring on customers in both competitive and noncompetitive markets. In its January 1997 report, the Texas Commission 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. In its January 1999 report, the Texas Commission, while not making a specific recommendation regarding restructuring legislation, reaffirmed its continued support for the timely move to a competitive retail market that provides adequate protections for customers and the opportunity for all market participants to benefit. Also, in 1998 the Texas Commission reported revised "excess of cost over market" ("ECOM") estimates, which is a means of measuring stranded costs for all Texas utilities. 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. 10 In 1997, the Texas Lieutenant Governor appointed a special interim committee to study the various issues involved in a possible transition to a competitive retail market. The committee held public hearings across the state receiving testimony from various parties, including investor-owned utilities, electric cooperatives, public power entities, power marketers, consumer advocates, environmental advocates and the public. On behalf of all investor- owned utilities, including the Company, the Association of Electric Companies of Texas 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. In January 1999, the special interim committee submitted its final report without specific legislative recommendations. The final report addresses various issues specifically associated with the development of a competitive retail electric market, particularly the structure of the market, stranded costs and market power concerns. The report states that competition in the electric power market has the potential to benefit all Texans, but restructuring the industry should only be undertaken with the utmost caution. The report also includes a summary of the state and local tax issues from a report by the Texas Comptroller of Public Accounts, which concludes that market-based revaluation of generation assets, unbundling and possible divestiture of assets and other aspects of restructuring will have an impact on local and state tax bases and revenues. Three comprehensive restructuring bills have been introduced in the 1999 Texas biennial legislative session, one of which was co-sponsored by several of the senators comprising the special interim committee, including the chairman of that committee. The Company cannot assure that any legislation will specifically recognize and accommodate the substantial benefits bargained for by the Company and the various parties to the Texas Rate Stipulation and the Texas Settlement Agreement discussed below. Any legislation that does not permit the Company to recover the costs reflected in rates under the Texas Rate Stipulation and the Texas Settlement Agreement could have a material adverse impact on the Company's financial condition, results of operations and cash flow. Texas Rate Stipulation and Texas Settlement Agreement. The Company's rates for its Texas customers are governed by a rate order entered by the Texas Commission adopting the Texas Rate Stipulation and Agreed Order. The Agreed Order implemented certain provisions of the Texas Rate Stipulation and set rates consistent with the Texas Rate Stipulation. Among other things, under the Texas Rate Stipulation: (i) the Company's base rates for most customers in Texas were fixed for the ten-year Freeze Period which began in August 1995; (ii) the City of El Paso granted the Company a new franchise that extends through the Freeze Period; (iii) the Company will retain 75% during the first five years of the Freeze Period and 50% during the remainder of the Freeze Period of (a) the revenues generated by providing third-party transmission services and (b) profit margins from certain off-system power sales; (iv) the Company's reacquisition of the Palo Verde leased assets was deemed to be in the public interest; and (v) all appeals of Texas Commission orders concerning the Company and all outstanding Texas Commission dockets concerning the Company's rates were resolved. Neither the Texas Rate Stipulation nor the Agreed Order deprives the Texas regulatory authorities of their jurisdiction over the Company during the Freeze Period. However, the Texas Commission determined in the Agreed Order that the rate freeze is in the public interest and results in just and reasonable rates. Further, the signatories to the Texas Rate Stipulation (other than the 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 11 service will support rates at or above the freeze level throughout the Freeze Period and, therefore, does not believe any attempt to reduce the Company's rates would be successful. However, during the Freeze Period, the Company is precluded from seeking rate increases in Texas, even in the event of increased operating or capital costs. In the event of a merger, the parties to the Texas Rate Stipulation retain all rights provided in the Texas Rate Stipulation, 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. Following the New Mexico Settlement (see "New Mexico Rate Matters - New Mexico Settlement," below), the Company offered to enter into a comparable agreement in Texas. Based upon that offer, the Company entered into the Texas Settlement Agreement providing for: (i) a total annual jurisdictional base revenue reduction of approximately $15.4 million; (ii) reconciliation of the Company's fuel expenses through December 31, 1998, with no disallowance; and (iii) an agreement to use 50% of all Palo Verde performance rewards related to evaluation periods after 1997, when collected, for low-income assistance and for Demand-Side Management ("DSM") programs, primarily focused on small business customers, through the end of the Freeze Period. See "Integrated Resource Plan" below. The parties have executed the Texas Settlement Agreement and filed it with the Texas Commission, the City of El Paso and all other municipalities having jurisdiction. The Company anticipates the Texas Commission will consider and approve the Texas Settlement Agreement in the near future. Fuel. Pursuant to Texas Commission rules, the Company must periodically make a filing to reconcile the revenues collected from Texas customers under its fixed fuel factor with the actual fuel and purchased power expenses incurred. Differences between revenues collected and expenses incurred during the reconciliation period are subject to a refund (in the case of an overrecovery of fuel costs) or surcharge (in the case of an underrecovery of fuel costs). The Texas Commission staff, local regulatory authorities such as the City of El Paso, and customers are entitled to intervene in a fuel reconciliation proceeding and to challenge the prudence of fuel and purchased power expenses. The Company's fuel expenses for its most recent reconciliation period of July 1995 through December 1998 were approved, without disallowance, as part of the Texas Settlement Agreement. 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 Texas Rate Stipulation and the Texas Settlement Agreement. The removal of Palo Verde from rate base could have a significant negative impact on the Company's revenues and financial condition. Performance rewards and penalties for the evaluation periods ending in 1995, 1996 and 1997, as well as agreement regarding disposition of any future awards, have been resolved in the Texas Settlement Agreement and the Integrated Resource Plan ("IRP") stipulation. Integrated Resource Plan. Under Texas law and regulations of the Texas Commission, the Company was required to file its first IRP in June 1998. An IRP is to be filed every three years and covers a ten-year planning period. The Company's IRP was the culmination of a lengthy planning process involving the Company, its customers, the Texas Commission, consumer advocates and various special interest groups. The purpose of integrated resource planning is to ensure acquisition of the lowest cost, adequate 12 resources necessary to meet the varied needs of the Company and its customers, and to ensure the equitable allocation and distribution of the benefits of such resource acquisitions and other system benefits to all customer classes. The Company entered into an agreement with all parties with respect to all IRP issues, and a Texas Commission order adopting the agreement was issued in January 1999. Pursuant to the agreement, the Company will meet its resource needs through a combination of short-term purchased power and a DSM program. Pursuant to the IRP, the Company expects to incur DSM expenditures annually of approximately $1.0 million through 2001. Additionally, in response to interest expressed by its customers and encouragement from the Texas Commission and environmental advocates, the Company has committed to the development of renewable resources. Pursuant to the stipulation settling the IRP, the Company has pledged $3.6 million of Palo Verde performance rewards expected to be collected by the Company as a result of the Texas Settlement Agreement as initial financing for the development of renewable resources. Finally, the Company has committed to fund low-income DSM programs for a three-year period beginning in 1999. The amount of the Company's DSM commitment totals approximately $1.0 million over the three-year period. The Company does not believe the IRP agreement will cause it to incur net costs materially in excess of those that would have been incurred in the absence of its IRP. Nevertheless, because of the Texas Rate Stipulation and the Texas Settlement Agreement, the Company will not be able to increase its rates to recover any increase in net costs actually experienced as a result of its IRP. 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. In January 1999, pursuant to a state constitutional amendment passed in 1996, the three- member appointed commission was replaced by an elected commission from five single-member districts, with regulatory responsibility for electricity, gas, water, telecommunications, insurance and securities activities within the state. The Company's New Mexico service area falls entirely within one district. The largest city in the Company's New Mexico service territory is Las Cruces, which in 1998 accounted for approximately 8% of the Company's total revenue. See Item 3, "Legal Proceedings--Litigation with Las Cruces." Since 1995, the New Mexico Commission has conducted hearings and facilitated debate regarding competition and the restructuring of regulation of the electric industry. Although these efforts failed to result in 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. In addition to efforts by the New Mexico Commission, the Interim Water and Natural Resources Committee, a joint legislative committee with oversight responsibility for the regulation of public utilities, has conducted public meetings and taken testimony regarding the potential effects of industry restructuring in New Mexico. The chairman of this committee has introduced a comprehensive restructuring bill in the 1999 New Mexico legislative session. Under this bill, retail customer choice 13 would begin January 1, 2001, for public post-secondary educational institutions and public schools and for residential and small business customers. Retail customer choice would begin January 1, 2002, for all other customers. Utilities would be allowed to recover no less than 50% of its stranded costs with up to 100% recovery allowed if the New Mexico Commission determines that additional recovery is in the public interest, is necessary to maintain the utility's financial integrity or is necessary to continue adequate and reliable service and will not cause an increase in rates to residential and small business customers. Utilities would also be required to file transition plans addressing the various restructuring issues, including the recovery of stranded costs, by March 1, 2000. The New Mexico Commission could delay implementation of retail customer choice for up to one year. The chairman's bill passed both houses of the legislature before the end of the session and is currently awaiting the signature of the governor to become law. The Company cannot predict whether the governor will sign or veto the restructuring legislation, nor whether the implementation of such legislation, if signed into law, will impact the Company's revenues and recovery of costs contemplated under the New Mexico Settlement, discussed below. New Mexico Settlement. In October 1996, the New Mexico Commission issued an order requiring the Company to answer certain ratepayer complaints and to file a rate filing package, including cost of service data and supporting testimony. On July 15, 1998, the Company entered into the New Mexico Settlement with certain parties to its pending New Mexico rate case, including the New Mexico Commission staff and the New Mexico Attorney General, but not Las Cruces. Following a hearing on the New Mexico Settlement, and after considering Las Cruces' opposition, the New Mexico Commission issued an order adopting (with some modification) the New Mexico Settlement on September 24, 1998. The New Mexico Settlement provides for (i) a total annual jurisdictional base revenue reduction of $4.6 million; (ii) a 30-month moratorium on rate increases or decreases in New Mexico; (iii) the elimination of the need for future fuel reconciliations in New Mexico by incorporating the existing fixed fuel factor into rates; (iv) an increased degree of ratemaking certainty for the future achieved by an agreement among the signatories reducing the net value of certain assets by approximately $40 million on a New Mexico jurisdictional basis for ratemaking purposes (but with no effect on book values), while establishing the signatories' agreement that the Company is entitled to 100% recovery of such revalued assets; and (v) the ability to enter into long-term rate contracts with commercial and industrial customers in New Mexico. The New Mexico Settlement became effective on October 26, 1998. Additionally, as a result of the New Mexico Settlement, the Company will contribute $0.4 million annually ($1.0 million over the term of the moratorium period) to a social services agency in Dona Ana County providing assistance to low-income individuals. Although the New Mexico Settlement was structured to allow recovery of previously underrecovered fuel balances, the order adopting the New Mexico Settlement does not support the recognition of this asset in the Company's financial statements under existing accounting standards. The Company wrote off the book value of undercollected fuel revenues in its New Mexico jurisdiction as of September 30, 1998, which amounted to $3.8 million, net of tax, although the Company believes that, based on current estimates of future fuel prices and operating costs, it will recover 100% of these amounts. The Company negotiated the New Mexico Settlement so as to substantially reduce the likelihood of additional rate reductions during the moratorium period. However, in light of the national emphasis on competition, there can be no assurance that the Company will be able to maintain its rates at the new levels. Fuel. Prior to the New Mexico Settlement, the Company was required to make annual filings reconciling the revenues collected under its New Mexico fixed fuel factor with its New Mexico fuel and purchased power expenses, along with the results of the application of Palo Verde performance standards. As a result of the New Mexico Settlement, outstanding fuel issues from filings in 1997 and 14 1998 were satisfactorily resolved with no disallowance of fuel and purchased power costs or the performance rewards and with the existing fixed fuel factor incorporated into base rates. Palo Verde Performance Standards. As a result of the New Mexico Settlement, the Palo Verde performance standards, which had been in place since 1986, were eliminated. Consequently, the Company is no longer entitled to a reward or exposed to a penalty in New Mexico resulting from the operations of Palo Verde. The performance standards report filed with the New Mexico Commission in January 1998 was the final such report and entitled the Company to a reward of $1.1 million, which is included in the underrecovered fuel balance added to the Company's base rates and amortized over a 60-month period. 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. In April 1996, the FERC issued its Order No. 888, requiring all public utilities owning, operating or controlling facilities used for transmitting electricity in interstate commerce to allow access to their transmission facilities under minimum terms and conditions of non-discriminatory service, including transmission service for their own new wholesale sales and purchases of electric energy. Additionally, Order No. 888 permits public utilities to seek recovery of legitimate, prudent and verifiable stranded costs and provides a mechanism for the recovery of such costs. Order No. 888 also provides for recovery of stranded costs associated with former power customers and new municipally-owned entities becoming transmission-only customers as a result of a utility's 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, which requires all public utilities owning, operating or controlling facilities used for transmitting electricity in interstate commerce to develop and maintain an Open Access Same-Time Information System that will give existing and potential transmission users access to transmission-related information on a basis consistent with that available to a utility's employees engaged in the buying and selling of power. Order No. 889 further requires public utilities to separate their transmission and generation marketing functions and adopt standards of conduct ensuring that all open access transmission customers are treated in a non-discriminatory manner. Pursuant to Order No. 888, the Company filed its non-discriminatory open access transmission tariffs with the FERC in July 1996. The Company reached a settlement with the various parties regarding rates for transmission and ancillary services under these tariffs. However, the settlement, which was filed with the FERC in March 1997 and approved by the FERC in June 1998, did not resolve issues that had been raised with respect to the manner in which the Company will determine the amount of transmission capacity that is available for use by third parties desiring to use its transmission system. In August 1998, a FERC administrative law judge issued an Initial Decision in which he concluded that the manner in which the Company determines the amount of transmission capacity that is available for use 15 by third parties is reasonable and consistent with FERC policies. The judge also concluded that the Company has no obligation under Order No. 888 to provide back-up generation services to third parties using its transmission system. Certain parties, including the Company, have filed exceptions to the Initial Decision. The Company cannot predict when the FERC will render a final decision on these issues. The Company does not expect a material financial impact to result from this 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." In order to procure a firm supply of electric power to serve its proposed municipal electric system, Las Cruces filed a request with the FERC in November 1998 for an order requiring the Company to sell wholesale power to Las Cruces pursuant to Section 202(b) of the Federal Power Act from July 1999 until such time as Las Cruces is able to secure firm transmission service and back-up generation service required to enable it to obtain reliable service from SPS. In January 1999, the FERC required the Company to sell electric energy to Las Cruces at a cost-based wholesale rate from July 1, 1999 until the earlier of the time Las Cruces begins receiving its power from a different supplier or one year. The Company submitted a proposed cost-based rate for the sale of electricity at wholesale to Las Cruces in compliance with the FERC's order in February 1999. The FERC has asked that all comments on the Company's compliance filing be submitted by April 2, 1999. The Company has also filed with the FERC a request for rehearing of the FERC's order and a motion for a stay of that order pending consideration of its request for rehearing. Both of these matters are currently pending before the FERC. Upon final FERC action, the Company may appeal the FERC's order to a United States Court of Appeals. 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. The DOE has determined that all such exports over international transmission lines shall be made in accordance with Order No. 888. The DOE is also 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." 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. WHOLESALE CUSTOMERS The Company provides IID with 100 MW of firm capacity and associated energy and 50 MW of system contingent capacity and associated energy pursuant to a 17- year agreement which expires April 30, 2002. The Company also provides TNP with up to 75 MW of firm power and associated energy through December 31, 2002. The contract amount for 1999 is 25 MW. The Company's one-year 1998 sales agreement for firm capacity and associated energy to the CFE terminated on December 31, 1998. Revenues under the contract totaled $34.6 million, 16 representing approximately 5.7% of the Company's total revenues. The Company does not expect to provide similar services in 1999 since the CFE's Samalayuca II generation project went into service in 1998. The Company cannot predict when, or if, future power sales opportunities to the CFE will materialize, or whether, in the event such opportunities do materialize, the Company would be the provider. 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." On December 14, 1998, the Bankruptcy Case was closed by order of the United States Bankruptcy Court for the Western District of Texas, Austin Division. Under the Plan after a certain period of time, any funds designated for the payment of preconfirmation claims pursuant to the Plan which remained unclaimed and undistributed became the property of the Reorganized Company. Such funds amounted to approximately $3.3 million, net of tax, which was received by the Company in January 1999. Because of the unusual nature and infrequent occurrence of this transaction, the Company has reported this amount in its financial statements as an extraordinary item in the fourth quarter of 1998. 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 Haines.................. 52 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.......... 43 Senior Vice President - Energy Services since January 1999; Senior Vice President - Customer and Corporate Services from August 1996 to January 1999; Senior Vice President since January 1994; Vice President from April 1992 to January 1994; General Counsel from 1988 to August 1996; Secretary from January 1989 to January 1994. Terry Bassham................. 38 Vice President and General Counsel since January 1999; General Counsel since August 1996; Shareholder with Clark, Thomas & Winters, P.C. from May 1993 to August 1996. J. Frank Bates................ 48 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............. 43 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............... 44 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................. 50 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. Helen Williams Knopp, APR..... 56 Vice President - Customer and Public Affairs effective April 30, 1999; Executive Director Rio Grande Girl Scout Council, El Paso, Texas since September 1991. Earnest A. Lehman............. 46 Vice President - Energy Services Business Group since January 1999; Director of Rates of Western Resources, Inc. from January 1998 to January 1999; Director of Wholesale Rates of Western Resources, Inc. from January 1997 to January 1998; Vice President - Consumer Sales of Westar Consumer Services from March 1996 to January 1997; Executive Director of Marketing of Western Resources, Inc. from December 1994 to March 1996. Robert C. McNiel.............. 52 Vice President - New Mexico Affairs since December 1997; Vice President - Public Affairs and Marketing from August 1996 to December 1997; Vice President - New Mexico Division from December 1989 to August 1996. Guillermo Silva, Jr........... 45 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 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. 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 the city limits and a territory extending five miles beyond the municipal boundary. In February 1998, the New Mexico Supreme Court ruled that the subsequent legislation rendered moot the certified question before the Supreme Court. In May 1998, the Company filed a complaint before the United States Federal District Court of New Mexico requesting that the Court find the new law unconstitutional. The Company's request is based upon its belief that the law is unconstitutional "special legislation" because it only applies to Las Cruces and the Company's property. The Company's claims are based on violations of the equal protection clauses of the New Mexico and federal Constitutions and violation of the prohibition against special legislation of the New Mexico Constitution. A trial on the merits has not yet been scheduled by the Court. On February 26, 1999, Las Cruces filed its Petition for Condemnation and Application for Immediate Possession. In its Petition for Condemnation, Las Cruces seeks to condemn the Company's distribution system within the Las Cruces city limits and other real and personal property owned by the Company used in or for the benefit of its distribution system. In its Application for Immediate Possession, Las Cruces seeks possession of the Company's distribution property in phases beginning on or about July 1, 1999. On March 9, 1999, the Company removed the Las Cruces petition and application to federal district court in New Mexico. Following a hearing on a motion for remand filed by Las Cruces, the federal court ruled the condemnation matter will stay in federal court. At this time no 19 hearing on the immediate possession matter has been set. 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. 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 negotiated purchase of the Company's electrical distribution assets within and adjacent to the Las Cruces city limits. 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 while receiving certain transmission services from the Company. Las Cruces subsequently filed a request at the FERC for a summary 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. An evidentiary hearing was held before an administrative law judge of the FERC in February 1998 on the issues of (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 submitted evidence in that proceeding showing that it was entitled to recover stranded generation costs from Las Cruces of $101 million. In contrast, the FERC staff recommended that the Company be permitted to recover stranded costs of $31.8 million, and Las Cruces claimed that its stranded cost obligation was in the range of $0 to $17.4 million. In June 1998, an administrative law judge of the FERC issued an Initial Decision recommending that Las Cruces pay to the Company $30.4 million for stranded costs if Las Cruces chose to leave the Company's system as of July 1, 1998. The amount recommended by the administrative law judge would decline over time based on when, if ever, Las Cruces leaves the Company's system, and would be reduced to zero if Las Cruces leaves the Company's system after December 31, 2002. The administrative law judge's Initial Decision is not binding on the FERC. The Company believes the administrative law judge's Initial Decision is inconsistent with the intent and policy of Order No. 888, which establishes the right to full recovery of a utility's stranded generation cost. The Company continues to believe it is entitled to full compensation for the costs it incurred with the expectation of continuing to serve Las Cruces. The Company has sought review of the administrative law judge's Initial Decision by the FERC and, if necessary, will contest any final FERC decision on appeal. The Company cannot predict when the FERC will render a final decision on this issue. 20 The Company continues to believe 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. In fact, the New Mexico Settlement includes a reduction in rates and settlement of all issues in New Mexico, excluding Las Cruces. 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. In October 1995, the Navajo Nation and the Four Corners participants agreed to stay the proceedings indefinitely so the parties may attempt to resolve the dispute without litigation. This matter remains inactive and the Company is unable to predict the outcome of this case. WATER CASES San Juan River System. The Four Corners participants are among the defendants in a suit filed by the State of New Mexico in 1975 in state district court in New Mexico against the United States of America, the City of Farmington, New Mexico, the Secretary of the Interior as Trustee for the Navajo Nation and other Indian tribes and certain other defendants (State of New Mexico ex rel. S. E. Reynolds, New Mexico State Engineer v. United States of America, et al., Eleventh Judicial District Court, County of San Juan, State of New Mexico, Cause No. 75-184). The suit seeks adjudication of the water rights of the San Juan River Stream System in New Mexico, which, among other things, supplies the water used at Four Corners. An agreement reached with the Navajo Nation in 1985 provides that if Four Corners loses a portion of its water rights in the adjudication, the tribe will provide sufficient water from its allocation to offset the loss. The case has been inactive for many years and the Company is unable to predict the outcome of this case. Gila River System. In connection with the construction and operation of Palo Verde, APS entered into contracts with certain municipalities granting APS the right to purchase effluent for cooling purposes at Palo Verde. In 1986, a summons was served on APS that required all water claimants in the Lower Gila River Watershed in Arizona to assert any claims to water in an action pending in Maricopa County Superior Court, titled In re The General Adjudication of All Rights to Use Water in the Gila River System and Source. Palo Verde is located within the geographic area subject to the summons and the rights of the 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 Company is unable to predict the outcome of this case. OTHER LEGAL PROCEEDINGS The Company is a party to various other claims, legal actions and complaints. In many of these matters, the Company has excess casualty liability insurance which is applicable. Based upon a review of these claims and applicable insurance coverage, the Company believes that none of these claims will have a material adverse effect on the financial position, results of operations and cash flow 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 ---------- --------- 1998 - ---- First Quarter.................................... $ 8 13/16 $ 6 3/8 Second Quarter................................... 10 3/8 8 9/16 Third Quarter.................................... 9 15/16 7 9/16 Fourth Quarter................................... 9 3/4 8 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
At March 16, 1999, there were 5,870 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 the financing arrangements entered into pursuant to the Reorganization. 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 ("S&P") or Moody's Investors Service, Inc. ("Moody's"), 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 any shares of common stock 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 with respect to 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 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 and the terms of the amended and restated credit facility agreement for working capital and fuel financing, the same limitation contained in 23 the First and Second Supplemental Indentures on the declaration of dividends would apply to the Company. On March 1, 1999, after obtaining required consents of holders of certain of the Company's outstanding debt securities, the Company used cash on hand to pay for the early redemption of the Series A Preferred Stock. The Company paid the redemption price, accrued cash dividends and premium aggregating $148.9 million, plus $1.4 million for fees and costs of securing the consents. See Part II, Item 8, "Financial Statements and Supplementary Data - Note E of Notes to Financial Statements" for information regarding preferred stock. 24 ITEM 6. SELECTED FINANCIAL DATA As of and for the following periods (In thousands except for share data):
Period From | Period From February 12 | January 1 to | to Years Ended December 31, December 31, | February 11, Years Ended December 31, ------------------------- | ---------------------------- 1998 1997 1996 | 1996 1995 1994 ----------- ------------ ------------ | ------------ ------------ ------------ | Operating revenues.......................... $ 602,221 $ 594,038 $ 523,974 | $ 54,949 $ 504,617 $ 536,760 Operating income............................ 162,539 161,667 144,491 | 1,639 49,874 54,997 Income (loss) before extraordinary items.... 57,073 54,568 41,919 | 118,198 (33,319) (28,153) Extraordinary gain on discharge of debt, | net of income tax expense.................. 3,343 - - | 264,273 - - Extraordinary loss on repurchases of debt, | net of federal income tax benefit.......... - (2,775) - | - - - Net income (loss) applicable to common | stock...................................... 45,709 38,649 31,431 | 382,471 (33,319) (28,153) Basic earnings (loss) per common share: | Income (loss) before extraordinary items... 0.704 0.689 0.523 | 3.325 (0.937) (0.792) Extraordinary gain on discharge of debt, | net of income tax expense................. 0.056 - - | 7.435 - - Extraordinary loss on repurchases of debt, | net of federal income tax benefit......... - (0.046) - | - - - Net income (loss).......................... 0.760 0.643 0.523 | 10.760 (0.937) (0.792) Weighted average number of common | shares outstanding......................... 60,168,234 60,128,505 60,073,808 | 35,544,330 35,544,330 35,544,330 Diluted earnings (loss) per common share: | Income (loss) before extraordinary items... 0.699 0.685 0.523 | 3.325 (0.937) (0.792) Extraordinary gain on discharge of debt, | net of income tax expense................. 0.055 - - | 7.435 - - Extraordinary loss on repurchases of debt, | net of federal income tax benefit......... - (0.046) - | - - - Net income (loss).......................... 0.754 0.639 0.523 | 10.760 (0.937) (0.792) Weighted average number of common shares | and dilutive potential common shares | outstanding................................ 60,633,298 60,437,632 60,116,709 | 35,544,330 35,544,330 35,544,330 Additions to utility property, plant | and equipment.............................. 54,790 48,837 35,980 | 4,892 71,473 49,404 Total assets................................ 1,891,219 1,812,613 1,846,190 1,910,354 | 1,809,891 1,730,851 Long-term debt and financing and capital | lease obligations.......................... 897,062 966,810 1,046,173 1,164,328 | - - Debt and obligations subject to compromise.. - - - - | 1,608,091 1,537,303 Preferred stock............................. 135,744 121,319 108,426 100,000 | 81,464 81,464 Common stock equity (deficit)............... 417,278 369,640 331,257 300,000 | (418,763) (385,966) =========== =========== =========== =========== |========== ===========
_______________ The selected financial data should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Item 8, "Financial Statements and Supplementary Data." 25 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statements in this document, other than statements of historical information, are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, as well as other oral and written forward-looking statements made by or on behalf of the Company from time to time, including statements contained in the Company's filings with the Securities and Exchange Commission and its reports to shareholders, involve known and unknown risks and other factors which may cause the Company's actual results in future periods to differ materially from those expressed in any forward-looking statements. Any such statement is qualified by reference to the risks and factors discussed below under the headings "Operational Prospects and Challenges," "Liquidity and Capital Resources" and "Year 2000 Preparedness," as well as in the Company's filings with the Securities and Exchange Commission, which are available from the Securities and Exchange Commission or which may be obtained upon request from the Company. The Company cautions that the risks and factors discussed below and in such filings are not exclusive. The Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company. OPERATIONAL PROSPECTS AND CHALLENGES The Texas Rate Stipulation has provided the Company with a stable base of retail revenues in Texas during a period in which the Company has substantially reduced its fixed obligations. The New Mexico Settlement provides a similar level of certainty in the Company's New Mexico rates, although of shorter duration. As discussed below, the New Mexico Settlement includes an annual base revenue reduction of $4.6 million, exclusive of the Company's annual $0.4 million contribution for low-income assistance in New Mexico. The Company and all signatories to the Texas Settlement Agreement have reached an agreement, subject to Texas Commission approval, providing for comparable annual revenue reductions in Texas of approximately $15.4 million and approval of all Company fuel expenses for the 42-month period currently subject to reconciliation. In return for these rate reductions, the Company believes that it will have achieved in both Texas and New Mexico a new period of revenue stability at levels that will permit it to further reduce its debt while continuing to address issues raised by industry restructuring and competition. During this 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 New Mexico Settlement provides for (i) a total annual jurisdictional base revenue reduction of $4.6 million; (ii) a 30-month moratorium on rate increases or decreases in New Mexico; (iii) the elimination of the need for future fuel reconciliations in New Mexico by incorporating the existing fixed fuel factor into rates; (iv) an increased degree of ratemaking certainty for the future achieved by an agreement among the signatories reducing the net value of certain assets by approximately $40 million 26 on a New Mexico jurisdictional basis for ratemaking purposes (but with no effect on book values), while establishing the signatories' agreement that the Company is entitled to 100% recovery of such revalued assets; and (v) the ability to enter into long-term rate contracts with commercial and industrial customers in New Mexico. The New Mexico Settlement became effective on October 26, 1998. Additionally, as a result of the New Mexico Settlement, the Company will contribute $0.4 million annually ($1.0 million over the term of the moratorium period) to a social services agency in Dona Ana County providing assistance to low-income individuals. Although the New Mexico Settlement was structured to allow recovery of previously underrecovered fuel balances, the order adopting the New Mexico Settlement does not support the recognition of this asset in the Company's financial statements under existing accounting standards. The Company wrote off the book value of undercollected fuel revenues in its New Mexico jurisdiction as of September 30, 1998, which amounted to $3.8 million, net of tax, although the Company believes that, based on current estimates of future fuel prices and operating costs, it will recover 100% of these amounts. The Company negotiated the New Mexico Settlement so as to substantially reduce the likelihood of additional rate reductions during the moratorium period. However, in light of the regulatory framework in New Mexico and the movement toward competition, there can be no assurance that the Company will be able to maintain its rates at the new levels. Following the New Mexico Settlement, the Company offered to enter into a comparable agreement in Texas. Based upon that offer, the Company entered into the Texas Settlement Agreement providing for: (i) a total annual jurisdictional base revenue reduction of approximately $15.4 million; (ii) reconciliation of the Company's fuel expenses through December 31, 1998, with no disallowance; and (iii) an agreement to use 50% of all Palo Verde performance rewards related to evaluation periods after 1997, when collected, for low-income assistance and for Demand-Side Management ("DSM") programs, primarily focused on small business customers, through the end of the Freeze Period. The parties have executed the Texas Settlement Agreement and filed it with the Texas Commission, the City of El Paso and all other municipalities having jurisdiction. The Company anticipates the Texas Commission will consider and approve the Texas Settlement Agreement in the near future. The Company faces a number of challenges which could negatively impact its operations and financial results. 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. At the same time, the Company's revenues, which will be reduced from current levels as a result of the New Mexico Settlement and the Texas Settlement Agreement, are effectively capped. There can be no assurance that the Company's revenues will be sufficient to recover any increased costs, 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. 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 power, including co- generation of electric power. For example, a 504 MW combined-cycle generating plant located in Samalayuca, Chihuahua, Mexico, which became fully operational at the end of 1998, gave the CFE the current capacity to supply electricity to portions of northern Chihuahua, including the 27 geographic area previously served by the Company. In addition, the New Mexico State Legislature has passed legislation which purportedly gives Las Cruces the authority to condemn the Company's distribution system and related assets located within its city limits, and on February 26, 1999, Las Cruces filed its eminent domain proceeding. If Las Cruces succeeds in its efforts, the Company could lose its Las Cruces customer base, which currently represents approximately 8% of annual operating revenues, although the Company would receive "just compensation" as established by the court. 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. 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 represent approximately 3% of annual operating revenues. The Company signed a contract with Ft. Bliss in December 1998, under which Ft. Bliss will take service from the Company through December 2008. The Company has a contract to provide retail electric service to Holloman for a ten- year term which began in December 1995. In 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. The Army will provide the Company written notice of termination of such contract not less than one year in advance of the termination date. 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 Texas. In New Mexico, a comprehensive restructuring bill has been introduced in the 1999 New Mexico legislative session. The bill passed both houses of the legislature and is currently awaiting the signature of the governor to become law. The Company cannot predict whether the governor will sign or veto the restructuring legislation, nor whether the implementation of such legislation, if signed into law, will impact the Company's revenues and recovery of costs contemplated under the New Mexico Settlement. 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 and principal 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 and payment of interest on and retirement of debt. The Company has no current plans to 28 construct any new generating capacity to serve retail load through at least 2004. Utility construction expenditures will consist primarily of expanding and updating the transmission and distribution systems and the cost of capital improvements and replacements at Palo Verde and other generating facilities. The Company anticipates that internally generated funds will be sufficient to meet its construction requirements, provide for the retirement of debt and enable the Company to meet other contingencies that may exist, such as compliance with environmental regulation, pending litigation, any claims for indemnification and Year 2000 remediation. At December 31, 1998, the Company had approximately $229.2 million in cash and cash equivalents. On February 8, 1999, the Company renewed the $100 million revolving credit facility, which now provides up to $70 million for nuclear fuel purchases and up to $50 million (depending on the amount of borrowings outstanding for nuclear fuel purchases) for working capital needs. At December 31, 1998, approximately $49.3 million had been drawn for nuclear fuel purchases. No amounts have been drawn on this facility for working capital needs. The Company has a high debt to capitalization ratio and significant debt service obligations. Due to the Texas Rate Stipulation, the Texas Settlement Agreement, the New Mexico Settlement and competitive pressures, the Company does not expect to be able to raise its base rates in the event of increases in non- fuel costs, increases in fuel costs in New Mexico or loss of revenues. Accordingly, as described below, debt reduction is a high priority for the Company in order to gain additional financial flexibility to address the evolving competitive market. During 1998, the Company temporarily suspended its repurchases of first mortgage bonds to accumulate cash. On March 1, 1999, after obtaining required consents of holders of certain of the Company's outstanding debt securities, the Company used cash on hand to pay for the early redemption of the Series A Preferred Stock. The Company paid the redemption price, accrued cash dividends and premium, aggregating $148.9 million, plus $1.4 million for fees and costs of securing the consents. As a result of the early redemption of the Series A Preferred Stock, the Company will avoid additional cash dividends of approximately $2.7 million that would have occurred through May 1, 1999, and $4.0 million quarterly thereafter until mandatory redemption in 2008. The Company will report the premium and other costs related to the preferred stock redemption as a reduction of net income applicable to common stock in the first quarter of 1999 which will result in a one-time decrease in diluted earnings per common share of $0.15. The preferred stock had an annual dividend rate of 11.40%, which was paid through the issuance of additional shares of preferred stock for the first three years. The Company has significantly reduced its long-term debt following its emergence from bankruptcy in 1996. From June 1, 1996 through March 15, 1999, the Company repurchased approximately $231.3 million of first mortgage bonds as part of an aggressive deleveraging program and repaid the remaining $36.0 million of Series A First Mortgage Bonds at their maturity on February 1, 1999. The foregoing, together with the early redemption of Series A Preferred Stock have reduced the Company's annual interest expense and annual cash dividend requirements by approximately $20.6 million and $15.9 million, respectively. Long-term indebtedness as a percentage of capitalization was reduced from 74% at June 30, 1996 to 62% at December 31, 1998. Had the redemption of the Series A Preferred Stock occurred as of December 31, 1998, the Company's long-term indebtedness as a percentage of capitalization would have increased to 68% due to the significant reduction of the Company's total capitalization resulting from the preferred stock redemption. 29 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. 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 and (ii) 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, 1998, 1997 and 1996 are based on the results of operations of the Reorganized Company for the years ended December 31, 1998 and December 31, 1997 and the 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.
Period From February 12 Years Ended to December 31, December 31, ----------------------------- 1998 1997 1996 -------------- -------------- ----------------- Net Income Applicable to Common Stock Before Extraordinary Items (In thousands)............................... $ 42,366 $ 41,424 $ 31,431 Diluted Earnings Per Common Share Before Extraordinary Items................... 0.699 0.685 0.523
Operating revenues net of energy expenses increased $11.7 million in 1998 compared to 1997 primarily due to increased volume of economy sales at higher margins. Operating revenues net of energy expenses increased $4.7 million in 1997 compared to 1996 primarily due to increased retail and wholesale kWh sales, partially offset by reduced revenue per kWh from the CFE. 30 Comparisons of kWh sales and operating revenues are shown below (In thousands):
Increase/(Decrease) ---------------------- Years Ended December 31: 1998 1997 Amount Percent - ------------------------ ---- ---- ------ ------- Electric kWh Sales: Retail Customers........................ 5,948,221 5,784,447 163,774 2.8% Other Utilities......................... 1,757,880 1,897,885 (140,005) (7.4) ---------- ---------- --------- Total.................................. 7,706,101 7,682,332 23,769 0.3 ========== ========== ========= Operating Revenues: Retail Customers........................ $ 497,830 $ 497,868 $ (38) (0.0)% Other Utilities......................... 104,391 96,170 8,221 8.5 ---------- ---------- --------- Total.................................. $ 602,221 $ 594,038 $ 8,183 1.4 ========== ========== =========
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 ========== ========== ========
Other operations and maintenance expense increased $2.5 million in 1998 compared to 1997 primarily due to increased operations expense of $2.3 million. This increase was primarily due to (i) increased costs of the all employee bonus of $2.8 million; (ii) increased professional fees related to regulatory issues of $2.1 million; and (iii) a curtailment gain of $1.9 million on discontinued employee benefits recorded in 1997 with no corresponding event in 1998. These increases were partially offset by (i) decreased outside services costs of $3.8 million; and (ii) decreased workers' compensation expense of $1.0 million. Other operations and maintenance expense decreased $12.0 million in 1997 compared to 1996 primarily due to decreased Palo Verde costs of approximately $8.7 million 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. The New Mexico Settlement charge of $6.3 million represents the write-off of the book value of undercollected fuel revenues in the Company's New Mexico jurisdiction. 31 Depreciation and amortization expense increased $1.1 million in 1998 compared to 1997 due to an increase in depreciable plant balances. Depreciation and amortization expense increased $2.4 million in 1997 compared to 1996. The effect of an increase in depreciable plant balances following the reacquisition in the Reorganization of a portion of Palo Verde and the depreciation of such amounts over the period of the Texas Rate Stipulation was partially offset by a 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 Texas 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. In accordance with 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 increased $1.0 million in 1998 compared to 1997 primarily due to increases in Texas property taxes and revenue related taxes resulting from an increase in revenues in 1998. These increases were partially offset by a decrease in Arizona property taxes due to a decrease in the assessment ratio in 1998. The decrease of $1.2 million in 1997 compared to 1996 was primarily due to decreased Arizona property taxes resulting from a decrease in taxable nuclear plant. Other income decreased $3.1 million in 1998 compared to 1997 primarily due to a favorable litigation settlement in 1997 of $7.5 million, net of legal fees and expenses, partially offset by an increase in investment income of $5.4 million in 1998 resulting from the investment of higher levels of cash. The increase in other income of $3.8 million in 1997 compared to 1996 was also due to a favorable litigation settlement in 1997 of $7.5 million, net of legal fees and expenses, and an increase in investment income of $1.3 million in 1997 resulting from the investment of higher levels of cash. These increases were partially offset by a gain on sale of investment of $3.8 million and a favorable settlement of bankruptcy professional fees of $2.3 million in 1996. Interest charges decreased $4.7 million in 1998 compared to 1997, primarily due to a reduction in outstanding debt as a result of open market purchases of the Company's first mortgage bonds. The decrease of $8.9 million in 1997 compared to 1996 was 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. Income tax expense was essentially unchanged for 1998 compared to 1997 primarily due to changes in pre-tax income which were offset by permanent differences such as bankruptcy fee settlements and tax-exempt income. Income tax expense, excluding income tax benefits of $1.5 million related to the extraordinary 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. The reorganization items benefit recorded by the Predecessor Company upon emergence from bankruptcy consisted of the effects of the Texas Rate Stipulation and deferred income tax benefits related to the Reorganization. These benefits were partially offset by (i) the adjustments of assets to their 32 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 1998 or 1997. Extraordinary gain on discharge of debt of $3.3 million in 1998, net of income tax expense of $2.1 million, represents unclaimed and undistributed funds designated for the payment of preconfirmation claims which reverted to the Company pursuant to the Plan. Extraordinary gain on discharge of debt for the Predecessor Company for the period January 1, 1996 to February 11, 1996 represents forgiven indebtedness resulting from the Reorganization, primarily related to the extinguishment of Palo Verde Lease obligations. Extraordinary loss on repurchases of debt of $2.8 million in 1997, net of federal income tax benefit of $1.5 million, represents the payment of premiums on debt repurchased and the recognition of unamortized issuance expenses on that debt with no comparable amounts in 1998 or 1996. Allowance for doubtful accounts decreased $3.4 million as of December 31, 1998 compared to December 31, 1997 primarily due to the write-off of previously reserved receivable amounts related to the bankruptcy settlements of two large industrial customers. The Company has an Energy Services Business Unit (the "ESBU") which began developing energy efficient products and services in 1997. The ESBU offers customers pricing options, as well as value-added products and services that give them greater value for the kWh purchased from the Company. The revenues and expenses related to the operations of the ESBU have not been material to date. 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 1998, the Company implemented SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which did not have 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. YEAR 2000 PREPAREDNESS The Company faces the same concerns relating to the Year 2000 ("Y2K") problem as other companies that use computers. The problem is that many computer programs use only the last two digits to refer to a year. Consequently, these programs may not recognize a year that begins with "20" instead of the familiar "19". Therefore, applications that are date sensitive may not function properly. Problems may arise in the Company's information technology ("IT") systems, including those that allow the Company to operate generation, transmission and distribution facilities, manage customer billing accounts and conduct other functions needed to operate the Company's business. Affected non-IT systems (containing embedded chips that are date sensitive) can include electric meters, security systems, substation generators, communication systems and many other devices. 33 The Company has defined "mission critical" systems as those that could affect service to its customers or could otherwise result in a permanent and significant financial loss to the Company, if they fail to function properly. The Company's goal is that all mission critical systems and applications be suitable for continued use into the year 2000 ("Y2K ready") by June 30, 1999, and that all systems and applications will be Y2K ready by December 31, 1999. The Company began addressing the Y2K problem during the last quarter of 1996 with a program consisting of four major phases: inventory, assessment, remediation and testing for Y2K readiness. The Company started the inventory phase for its IT systems in October 1996 and for its non-IT systems in February 1998. Each has now been completed. The Company will, however, continue to update the information as appropriate, such as when the Company purchases new software or hardware. The Company has substantially completed the assessment phase on its IT systems. Assessment of non-IT systems is currently in progress. The assessment phase is complete for substantially all mission critical systems. As the Company purchases new software and other products in 1999, additional readiness assessments will be performed. The third phase of the Y2K program is remediation. While the Company is employing remediation procedures generally accepted as standard, there are no guarantees such efforts will be entirely successful. At this point, the Company believes it has completed remediation on more than half of its IT and non-IT systems. The Company expects to have completed the remediation phase for substantially all mission critical systems by June 30, 1999. The Company will continue to test for Y2K readiness throughout 1999. With respect to IT systems, the Company estimates that more than half of the planned testing has already been completed. Testing for non-IT systems is currently underway. The Company intends to test substantially all of its IT systems and to utilize representative sample testing with respect to some non-IT systems. The Company may also rely on vendor representations and reports of tests conducted by other parties with respect to certain IT and non-IT systems. The Company expects to have completed testing on substantially all mission critical systems by June 30, 1999. Because of the integrated nature of the Company's business with other utilities and its jointly-owned facilities operated by other utilities, the Company is inquiring about and reviewing the activities of the other utilities that comprise the integrated system. In addition, the Company is assessing the activities of its financial institutions and major suppliers and customers to determine their readiness for Y2K issues. The successful operation of Palo Verde and other energy sources, water companies, gas suppliers and other suppliers will be critical to the Company's ability to limit the impact of any Y2K problems that may arise. Given the complex nature of this problem and the potential impacts on the Company of non-Y2K ready systems beyond its control, the Company cannot assure that it will not experience some outages or operational failures during the Y2K transition period. In December 1998, the Company retained the services of an independent consulting firm to review the Company's Y2K program, assess the remediation and testing procedures, and advise the 34 Company on the best way to proceed in the time remaining before January 1, 2000. As a result of the independent review, the Company in February 1999 reassigned the personnel in charge of its Y2K program and instituted various procedural and process modifications to improve the program. The Company has expensed substantially all costs of its Y2K program. As of December 31, 1998, the Company's expenditures on the Y2K program totaled approximately $1.4 million and were predominantly related to internal labor, diagnostic tools and server upgrades. Future expenses, to be incurred through 1999, are not expected to substantially exceed an additional $3.0 million and will include costs for remediation, consultation, independent verification, participation in North American Electric Reliability Council drills and contingency planning. Approximately half of all Y2K program expenses are expected to be internal labor costs. The Company has been advised by APS, operating agent for Palo Verde, that APS has inventoried and assessed essentially all mission critical IT and non-IT systems and equipment. APS's remediation and testing is expected to be completed by June 30, 1999, for all mission critical systems, except for those items that can only be completed during maintenance outages at Palo Verde, which will be completed for the last unit, which is substantially identical to the other two units, during the last half of 1999. APS has an internal audit/quality review team that is periodically reviewing the individual Y2K projects and their Y2K readiness. Failure by the Company to meet the challenges of the Y2K problem could have serious consequences. A malfunction in a system affecting the generation, transmission or distribution of energy to the Company's customers, whether caused by a problem with one of the Company's IT or non-IT systems or a system operated by a third party, could result in a disruption of service. The severity and cost of the problem would depend on numerous factors, including the scope and duration of any such disruption. If the disruption is severe enough, the Company's operations and financial condition could be adversely affected, the extent of which cannot be predicted. There are no guarantees that all vendor representations obtained by the Company will prove to be entirely accurate or that testing and remediation procedures employed by the Company will identify and correct 100% of potential Y2K-related problems. There remains a chance that on January 1, 2000 there will be some system failures. Therefore, the Company is also preparing contingency and continuity plans. The Company has always prepared for unexpected outages of its facilities (resulting from storms and other natural disasters) and, therefore, pre-existing emergency response plans form the core of the Company's electric system contingency plan. Procedures to deal with a wide array of difficulties resulting from the singular or simultaneous failure(s) of elements or systems related specifically to the Y2K transition period are also being developed based on the Company's basic contingency model. A draft of the Company's contingency plan was completed in December 1998, and the Company expects to complete the contingency plan by June 1999. The Company is also developing a business continuity plan for its business systems and processes that it expects to complete by December 31, 1999. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following discussion regarding the Company's market-risk sensitive instruments contains forward-looking information involving risks and uncertainties. The statements regarding potential gains and losses are only estimates of what could occur in the future. Actual future results may differ 35 materially from those estimates presented due to the characteristics of the risks and uncertainties involved. The Company is exposed to market risk due to changes in interest rates, equity prices and commodity prices. Substantially all financial instruments and positions held by the Company described below are held for purposes other than trading. INTEREST RATE RISK The Company's interest rate risk relates primarily to debt financing issued to fund capital and nuclear fuel requirements. Currently, the Company does not have a plan to issue long-term debt within the next five years. The Company's long-term debt obligations are all fixed-rate obligations with varying maturities, except for the pollution control revenue bonds which are variable- rate bonds and nuclear fuel financing which is based on current commercial paper rates. The Company's variable-rate pollution control revenue bonds have an aggregate principal amount of $193.1 million. The near-term losses from reasonably possible near-term increases in interest rates would not be material to the Company's financial position, results of operations and cash flow. The interest rate risk related to the nuclear fuel financing is substantially mitigated through the operation of the Company's fuel and purchased power cost recovery clauses ("fuel clauses") in its Texas and wholesale rates. Under these fuel clauses, fuel expenses, including interest expense on the nuclear fuel financing, are passed through to the customers. Pursuant to the New Mexico Settlement, fuel costs are recovered through the Company's base rates and are not subject to periodic reconciliation for fluctuations in fuel costs. The interest rate risk related to the nuclear fuel financing for New Mexico fuel costs are not expected to be material to the Company's financial position, results of operations and cash flow. The Company's decommissioning trust funds consist of municipal bonds and equity securities in 1998 and only municipal bonds in 1997, carried at their market value. The Company faces interest rate risk related to the municipal bonds which are valued at $23.0 million and $38.4 million as of December 31, 1998 and 1997, respectively. A hypothetical 10% increase in the rates quoted by the bond market would result in $2.3 million and $3.8 million reduction in that fair value, respectively. EQUITY PRICE RISK Beginning in 1998, the Company's decommissioning trust funds include marketable equity securities of approximately $23.7 million at December 31, 1998. A hypothetical 10% decrease in the prices quoted by stock exchanges would result in a $2.4 million reduction in fair value. COMMODITY PRICE RISK The Company utilizes contracts of various durations for the purchase of natural gas and uranium concentrates to effectively manage its available fuel portfolio. These agreements contain fixed-priced and variable-priced provisions and are settled by physical delivery. The contracts with variable-pricing provisions are exposed to fluctuations in prices due to unpredictable factors, such as weather, which impacts supply and demand. However, the Company's exposure to fuel price risk is substantially mitigated through the operation of its fuel clauses for Texas and wholesale customers as described above. 36 Pursuant to the New Mexico Settlement, fuel costs are recovered through the Company's base rates and are not subject to periodic reconciliation for fluctuations in fuel costs. The near-term losses from reasonably possible near- term changes in market prices as they relate to the commodity price risk exposure for New Mexico fuel costs are not expected to be material to the Company's financial position, results of operations and cash flow. In the normal course of business, the Company utilizes contracts of various duration for the forward sale and purchases of electricity to effectively manage its available generating capacity. Such contracts include forward contracts for wholesale sales of generating capacity and energy during periods when the Company's available power resources are expected to exceed the requirements of its native load and wholesale customers. It may also include forward contracts for the purchase of wholesale capacity and energy during periods when the market price of electricity is below the Company's expected incremental power production costs. At December 31, 1998, there were no material open positions in these activities. 37 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report................................................................. 39 Balance Sheets at December 31, 1998 and 1997................................................. 40 Statements of Operations for the years ended December 31, 1998, December 31, 1997, the period from February 12 to December 31, 1996, and the period from January 1 to February 11, 1996........................................................................................ 42 Statements of Comprehensive Operations for the years ended December 31, 1998, December 31, 1997, the period from February 12 to December 31, 1996, and the period from January 1 to February 11, 1996........................................................................... 43 Statements of Changes in Common Stock Equity (Deficit) for the period from January 1 to February 11, 1996, the period from February 12 to December 31, 1996, the year ended December 31, 1997 and the year ended December 31, 1998...................................... 44 Statements of Cash Flows for the years ended December 31, 1998, December 31, 1997, the period from February 12 to December 31, 1996, and the period from January 1 to February 11, 1996........................................................................................ 45 Notes to Financial Statements................................................................ 46
38 INDEPENDENT AUDITORS' REPORT The Shareholders and Board of Directors El Paso Electric Company We have audited the accompanying balance sheets of El Paso Electric Company as of December 31, 1998 and 1997 and the related statements of operations, comprehensive operations, changes in common stock equity (deficit), and cash flows for the years ended December 31, 1998 and 1997, the period February 12, 1996 to December 31, 1996, and the period January 1, 1996 to February 11, 1996. 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, the Company emerged from bankruptcy on February 12, 1996. 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, 1998 and 1997, and the results of its operations and its cash flows for the years ended December 31, 1998 and 1997, the period February 12, 1996 to December 31, 1996, and the period January 1, 1996 to February 11, 1996, in conformity with generally accepted accounting principles. KPMG LLP El Paso, Texas February 5, 1999 39 EL PASO ELECTRIC COMPANY BALANCE SHEETS
ASSETS DECEMBER 31, ----------------------------------------- (IN THOUSANDS) 1998 1997 ------------------ ------------------ UTILITY PLANT: Electric plant in service........................................ $ 1,599,207 $ 1,538,572 Less accumulated depreciation and amortization................... 243,405 164,283 ------------------ ------------------ Net plant in service.......................................... 1,355,802 1,374,289 Construction work in progress.................................... 54,641 43,761 Nuclear fuel; includes fuel in process of $8,031 and $9,910, respectively.......................................... 89,784 86,609 Less accumulated amortization.................................... 45,691 40,142 ------------------ ------------------ Net nuclear fuel.............................................. 44,093 46,467 ------------------ ------------------ Net utility plant........................................... 1,454,536 1,464,517 ------------------ ------------------ CURRENT ASSETS: Cash and temporary investments................................... 229,150 111,227 Accounts receivable, principally trade, net of allowance for doubtful accounts of $1,738 and $5,124, respectively.......... 64,735 58,960 Inventories, at cost............................................. 27,537 27,130 Net undercollection of fuel revenues............................. - 13,870 Prepayments and other............................................ 16,896 6,930 ------------------ ------------------ Total current assets........................................ 338,318 218,117 ------------------ ------------------ LONG-TERM CONTRACT RECEIVABLE...................................... 23,139 27,659 ------------------ ------------------ DEFERRED CHARGES AND OTHER ASSETS: Accumulated deferred income taxes, net........................... 10,518 43,208 Decommissioning trust funds...................................... 46,725 38,438 Other............................................................ 17,983 20,674 ------------------ ------------------ Total deferred charges and other assets..................... 75,226 102,320 ------------------ ------------------ TOTAL ASSETS................................................ $ 1,891,219 $ 1,812,613 ================== ==================
See accompanying notes to financial statements. 40 EL PASO ELECTRIC COMPANY BALANCE SHEETS (CONTINUED)
CAPITALIZATION AND LIABILITIES DECEMBER 31, -------------------------------- (IN THOUSANDS EXCEPT FOR SHARE DATA) 1998 1997 ------------- ----------------- CAPITALIZATION: Common stock, stated value $1 per share, 100,000,000 shares authorized, 60,122,377 and 60,060,034 shares issued and outstanding; and 147,985 and 196,404 restricted shares, respectively............................................ $ 60,270 $ 60,256 Capital in excess of stated value............................................................... 241,325 241,222 Unearned compensation - restricted stock awards................................................. (611) (1,138) Retained earnings............................................................................... 115,193 69,484 Accumulated other comprehensive income (loss) (unrealized gains (losses) on marketable securities), net of tax........................................................ 1,101 (184) ----------- -------------- Common stock equity......................................................................... 417,278 369,640 Preferred stock, cumulative, no par value, 2,000,000 shares authorized: Redemption required - 1,357,444 and 1,213,188 shares issued and outstanding, respectively; at liquidation preference.......................................... 135,744 121,319 Long-term debt.................................................................................. 872,213 938,562 Financing and capital lease obligations......................................................... 24,849 28,248 ----------- -------------- Total capitalization...................................................................... 1,450,084 1,457,769 ----------- -------------- CURRENT LIABILITIES: Current maturities of long-term debt and financing and capital lease obligations.................................................................................. 63,817 28,463 Accounts payable, principally trade............................................................. 31,135 24,957 Taxes accrued other than federal income taxes................................................... 20,316 19,292 Interest accrued................................................................................ 20,412 21,172 Net overcollection of fuel revenues............................................................. 2,632 - Other........................................................................................... 19,359 17,439 ----------- -------------- Total current liabilities................................................................. 157,671 111,323 ----------- -------------- DEFERRED CREDITS AND OTHER LIABILITIES: Decommissioning................................................................................. 129,750 94,917 Accrued postretirement benefit liability........................................................ 80,477 75,531 Accrued pension liability....................................................................... 33,880 33,909 Other........................................................................................... 39,357 39,164 ----------- -------------- Total deferred credits and other liabilities.............................................. 283,464 243,521 ----------- -------------- COMMITMENTS AND CONTINGENCIES TOTAL CAPITALIZATION AND LIABILITIES...................................................... $ 1,891,219 $ 1,812,613 =========== ==============
See accompanying notes to financial statements. 41 EL PASO ELECTRIC COMPANY STATEMENTS OF OPERATIONS (In thousands except for share data)
PERIOD FROM | PERIOD FROM FEBRUARY 12 | JANUARY 1 TO | TO YEARS ENDED DECEMBER 31, DECEMBER 31, | FEBRUARY 11, ------------------------------- | 1998 1997 1996 | 1996 ----------- ----------- ----------- | ----------- | OPERATING REVENUES.............................................. $ 602,221 $ 594,038 $ 523,974 | $ 54,949 ----------- ----------- ----------- | ----------- ENERGY EXPENSES: | Fuel.......................................................... 109,450 113,457 92,899 | 10,125 Purchased and interchanged power.............................. 20,610 20,130 17,821 | 2,282 ----------- ----------- ----------- | ----------- 130,060 133,587 110,720 | 12,407 ----------- ----------- ----------- | ----------- OPERATING REVENUES NET OF ENERGY EXPENSES....................... 472,161 460,451 413,254 | 42,542 ----------- ----------- ----------- | ----------- OTHER OPERATING EXPENSES: | Other operations.............................................. 134,250 131,916 115,742 | 23,559 Maintenance................................................... 34,955 34,782 34,702 | 4,743 New Mexico Settlement charge.................................. 6,272 - - | - Depreciation and amortization................................. 89,813 88,735 79,772 | 6,577 Taxes other than income taxes................................. 44,332 43,351 38,547 | 6,024 ----------- ----------- ----------- | ----------- 309,622 298,784 268,763 | 40,903 ----------- ----------- ----------- | ----------- OPERATING INCOME................................................ 162,539 161,667 144,491 | 1,639 ----------- ----------- ----------- | ----------- OTHER INCOME (DEDUCTIONS): | Investment income............................................. 11,506 6,095 4,796 | - Litigation settlement, net.................................... - 7,500 - | - Settlement of bankruptcy professional fees.................... 1,261 362 2,305 | - Gain on sale of investment.................................... - - 3,844 | - Other, net.................................................... (1,730) 162 (681) | 50 ----------- ----------- ----------- | ----------- 11,037 14,119 10,264 | 50 ----------- ----------- ----------- | ----------- INCOME BEFORE INTEREST CHARGES.................................. 173,576 175,786 154,755 | 1,689 ----------- ----------- ----------- | ----------- INTEREST CHARGES (CREDITS): | Interest on long-term debt.................................... 80,967 86,117 85,633 | - Other interest................................................ 7,198 6,200 5,722 | - Interest during reorganization................................ - - - | 9,569 Interest capitalized and deferred............................. (6,400) (5,875) (5,189) | (412) ----------- ----------- ----------- | ----------- 81,765 86,442 86,166 | 9,157 ----------- ----------- ----------- | ----------- INCOME (LOSS) BEFORE INCOME TAXES............................... 91,811 89,344 68,589 | (7,468) INCOME TAX EXPENSE (BENEFIT).................................... 34,738 34,776 26,670 | (3,415) ----------- ----------- ----------- | ----------- INCOME (LOSS) BEFORE REORGANIZATION ITEMS | AND EXTRAORDINARY ITEMS....................................... 57,073 54,568 41,919 | (4,053) REORGANIZATION ITEMS, NET OF INCOME TAX BENEFIT................. - - - | 122,251 ----------- ----------- ----------- | ----------- INCOME BEFORE EXTRAORDINARY ITEMS............................... 57,073 54,568 41,919 | 118,198 ----------- ----------- ----------- | ----------- EXTRAORDINARY ITEMS: | Extraordinary gain on discharge of debt, net of | income tax expense......................................... 3,343 - - | 264,273 Extraordinary loss on repurchases of debt, net of | federal income tax benefit................................. - (2,775) - | - ----------- ----------- ----------- | ----------- 3,343 (2,775) - | 264,273 ----------- ----------- ----------- | ----------- NET INCOME...................................................... 60,416 51,793 41,919 | 382,471 PREFERRED STOCK DIVIDEND REQUIREMENTS........................... 14,707 13,144 10,488 | - ----------- ----------- ----------- | ----------- NET INCOME APPLICABLE TO COMMON STOCK........................... $ 45,709 $ 38,649 $ 31,431 | $ 382,471 =========== =========== =========== | =========== BASIC EARNINGS PER COMMON SHARE: | Income before extraordinary items............................. $ 0.704 $ 0.689 $ 0.523 | $ 3.325 Extraordinary gain on discharge of debt, net of | income tax expense......................................... 0.056 - - | 7.435 Extraordinary loss on repurchases of debt, net of | federal income tax benefit................................. - (0.046) - | - ----------- ----------- ----------- | ----------- Net income................................................. $ 0.760 $ 0.643 $ 0.523 | $ 10.760 =========== =========== =========== | =========== DILUTED EARNINGS PER COMMON SHARE: | Income before extraordinary items............................. $ 0.699 $ 0.685 $ 0.523 | $ 3.325 Extraordinary gain on discharge of debt, net of | income tax expense......................................... 0.055 - - | 7.435 Extraordinary loss on repurchases of debt, net of | federal income tax benefit................................. - (0.046) - | - ----------- ----------- ----------- | ----------- Net income................................................. $ 0.754 $ 0.639 $ 0.523 | $ 10.760 =========== =========== =========== | =========== | WEIGHTED AVERAGE NUMBER OF COMMON SHARES | OUTSTANDING................................................... 60,168,234 60,128,505 60,073,808 | 35,544,330 =========== =========== =========== | =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND | DILUTIVE POTENTIAL COMMON SHARES OUTSTANDING.................. 60,633,298 60,437,632 60,116,709 | 35,544,330 =========== =========== =========== | ===========
See accompanying notes to financial statements. 42 EL PASO ELECTRIC COMPANY STATEMENTS OF COMPREHENSIVE OPERATIONS (In thousands)
PERIOD FROM | PERIOD FROM FEBRUARY 12 | JANUARY 1 TO | TO YEARS ENDED DECEMBER 31, DECEMBER 31, | FEBRUARY 11, ------------------------- | 1998 1997 1996 | 1996 ----------- ---------- ------------ | ----------- | NET INCOME...................................................... $ 60,416 $ 51,793 $ 41,919 | $ 382,471 OTHER COMPREHENSIVE INCOME (LOSS): | Net unrealized gain (loss) on marketable securities, net | of federal income tax (expense) benefit of $(690), | $223, $(125) and $ - , respectively....................... 1,285 (416) 232 | - Reclassification adjustment included in net | income, net of federal income tax benefit of $93........... - - - | (172) ---------- ----------- ----------- | ----------- COMPREHENSIVE INCOME............................................ 61,701 51,377 42,151 | 382,299 PREFERRED STOCK DIVIDEND REQUIREMENTS........................... 14,707 13,144 10,488 | - ----------- ----------- ------------ | ----------- COMPREHENSIVE INCOME APPLICABLE TO COMMON STOCK................. $ 46,994 $ 38,233 $ 31,663 | $ 382,299 ========== =========== ============ | ===========
See accompanying notes to financial statements. 43 EL PASO ELECTRIC COMPANY STATEMENTS OF CHANGES IN COMMON STOCK EQUITY (DEFICIT) (IN THOUSANDS EXCEPT FOR SHARE DATA)
UNEARNED COMPENSATION- ACCUMULATED CAPITAL IN RESTRICTED RETAINED OTHER COMMON STOCK EXCESS OF STOCK EARNINGS COMPREHENSIVE ------------------------ SHARES AMOUNT STATED VALUE AWARDS (DEFICIT) INCOME (LOSS) ------------ ---------- ------------- -------------- ----------- -------------- BALANCES AT DECEMBER 31, 1995.......... 35,544,330 $ 339,097 $ - $ - $(758,032) $ 172 Net income............................ 382,471 Elimination of predecessor equity accounts............................ (35,544,330) (339,097) 339,097 Effects of fresh-start reporting adjustment to common stock equity... 36,464 (172) ----------- --------- ------------ ------------- --------- ----------- BALANCES AT FEBRUARY 11, 1996.......... - - - - - - - ------------------------------------------------------------------------------------------------------------------------------- Issuance of common stock upon reorganization...................... 59,999,981 60,000 240,000 Capital stock expense................. (596) Grants of restricted common stock............................... 180,000 180 768 (948) Amortization of unearned compensation........................ 190 Preferred stock dividends............. (10,488) Net income............................ 41,919 Other comprehensive income............ 232 ----------- --------- ------------ ------------- --------- ----------- BALANCES AT DECEMBER 31, 1996.......... 60,179,981 60,180 240,768 (758) 30,835 232 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............. (13,144) Net income............................ 51,793 Other comprehensive loss.............. (416) ----------- --------- ------------ ------------- --------- ----------- BALANCES AT DECEMBER 31, 1997.......... 60,256,438 60,256 241,222 (1,138) 69,484 (184) Grants of restricted common stock............................... 26,675 27 169 (196) Amortization of unearned compensation........................ 709 Repurchase of unrestricted common stock........................ (10,843) (11) (54) Forfeitures of restricted common stock............................... (1,908) (2) (12) 14 Preferred stock dividends............. (14,707) Net income............................ 60,416 Other comprehensive income............ 1,285 ----------- --------- ------------ ------------- --------- ----------- BALANCES AT DECEMBER 31, 1998.......... 60,270,362 $ 60,270 $ 241,325 $ (611) $ 115,193 $ 1,101 =========== ========= ============ ============= ========= =========== TOTAL COMMON STOCK EQUITY (DEFICIT) ----------- BALANCES AT DECEMBER 31, 1995.......... $ (418,763) Net income............................ 382,471 Elimination of predecessor equity accounts............................ - Effects of fresh-start reporting adjustment to common stock equity... 36,292 ---------- BALANCES AT FEBRUARY 11, 1996.......... - - --------------------------------------------------- Issuance of common stock upon reorganization...................... 300,000 Capital stock expense................. (596) Grants of restricted common stock............................... - Amortization of unearned compensation........................ 190 Preferred stock dividends............. (10,488) Net income............................ 41,919 Other comprehensive income............ 232 ---------- BALANCES AT DECEMBER 31, 1996.......... 331,257 Grants of restricted common stock............................... - Amortization of unearned compensation........................ 195 Repurchase of unrestricted common stock........................ (45) Preferred stock dividends............. (13,144) Net income............................ 51,793 Other comprehensive loss.............. (416) ---------- BALANCES AT DECEMBER 31, 1997.......... 369,640 Grants of restricted common stock............................... - Amortization of unearned compensation........................ 709 Repurchase of unrestricted common stock........................ (65) Forfeitures of restricted common stock............................... - Preferred stock dividends............. (14,707) Net income............................ 60,416 Other comprehensive income............ 1,285 ---------- BALANCES AT DECEMBER 31, 1998.......... $ 417,278 ==========
See accompanying notes to financial statements. 44 EL PASO ELECTRIC COMPANY STATEMENTS OF CASH FLOWS (IN THOUSANDS)
PERIOD FROM | PERIOD FROM FEBRUARY 12 | JANUARY 1 TO | TO YEARS ENDED DECEMBER 31, DECEMBER 31, | FEBRUARY 11, -------------------------- | 1998 1997 1996 | 1996 ----------- ----------- ------------- | ------------- | CASH FLOWS FROM OPERATING ACTIVITIES: | Net income........................................................ $ 60,416 $ 51,793 $ 41,919 | $ 382,471 Adjustments to reconcile net income to net cash provided | by operating activities: | Depreciation and amortization................................... 113,259 111,622 99,355 | 8,246 Deferred income taxes and investment tax credit, net............ 29,854 32,394 41,341 | (3,116) New Mexico Settlement charge.................................... 6,272 - - | - Other operating activities...................................... 3,919 2,552 2,487 | (805) Extraordinary gain on discharge of debt, net of | income tax expense............................................ (3,343) - - | (264,273) 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) Change in: | Accounts receivable............................................. (5,775) (1,373) 3,513 | 5,429 Federal income tax receivable................................... - 20,713 (20,713) | - Inventories..................................................... (407) 1,192 (32) | 90 Prepayments and other........................................... (4,479) 1,797 (1,974) | 34 Long-term contract receivable................................... 4,520 3,398 2,333 | 293 Accounts payable................................................ 6,178 (12,258) (4,038) | (6,859) Interest accrued................................................ (760) (1,978) 23,034 | - Net under/overcollection of fuel revenues....................... 10,230 (11,945) (12,709) | 417 Other current liabilities....................................... 2,906 386 (1,242) | (152) Deferred charges and credits.................................... 10,445 5,520 (1,117) | 1,994 Obligations subject to compromise............................... - - - | 9,430 Revenues subject to refund...................................... - - - | 2,785 -------- -------- --------- | ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES..................... 233,235 206,588 168,313 | 13,733 -------- -------- --------- | ----------- CASH FLOWS FROM INVESTING ACTIVITIES: | Cash additions to utility property, plant and equipment........... (49,787) (46,467) (33,926) | (4,724) Cash additions to nuclear fuel.................................... (15,409) (22,539) (14,123) | (3,040) Interest capitalized to utility property, plant and | equipment and nuclear fuel...................................... (6,400) (5,875) (5,189) | (412) Investment in decommissioning trust funds......................... (6,312) (6,023) (5,960) | (553) Other investing activities........................................ (2,623) (550) (108) | - Proceeds from sale of investment.................................. - - 20,183 | - -------- -------- --------- | ----------- NET CASH USED FOR INVESTING ACTIVITIES........................ (80,531) (81,454) (39,123) | (8,729) -------- -------- --------- | ----------- CASH FLOWS FROM FINANCING ACTIVITIES: | Repurchases of and payments on long-term debt..................... (30,698) (86,771) (117,528) | - Net (repayments of) proceeds from financing obligations........... (2,683) 5,369 3,320 | 43,309 Redemption of capital lease obligations........................... (1,400) (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) -------- -------- --------- | ----------- NET CASH USED FOR FINANCING ACTIVITIES........................ (34,781) (82,674) (115,168) | (212,766) -------- -------- --------- | ----------- NET INCREASE (DECREASE) IN CASH AND TEMPORARY INVESTMENTS........... 117,923 42,460 14,022 | (207,762) CASH AND TEMPORARY INVESTMENTS AT BEGINNING OF PERIOD............... 111,227 68,767 54,745 | 262,507 -------- -------- --------- | ----------- CASH AND TEMPORARY INVESTMENTS AT END OF PERIOD..................... $229,150 $111,227 $ 68,767 | $ 54,745 ======== ======== ========= | ===========
See accompanying notes to financial statements. 45 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General. El Paso Electric Company (the "Company") is a public utility engaged in the generation, transmission and distribution of electricity in an area of approximately 10,000 square miles in west Texas and southern New Mexico. The Company also serves wholesale customers in Texas, New Mexico, California and Mexico. Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Bankruptcy Reorganization. On February 12, 1996 (the "Effective Date"), the Company emerged from a bankruptcy proceeding which it instituted in January 1992. As a result of the Company's emergence from bankruptcy (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 Predecessor Company's voluntary petition for reorganization (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 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, the Company applied "fresh-start" 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 46 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS 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. Certain gains and losses that are not recognized currently in the statements of operations are reported as other comprehensive income in accordance with SFAS No. 130, "Reporting Comprehensive Income." Utility Plant. Upon adoption of fresh-start reporting, the Company revalued its utility plant. As of the Effective Date, 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 the Effective Date are reported at historical cost. Depreciation is provided on a straight-line basis over the estimated remaining lives of the assets (ranging from 5 years to 31 years), except for approximately $384 million of reorganization value allocated to net transmission, distribution and general plant in service. This amount is being depreciated over the ten-year period of a rate settlement (the "Texas Rate Stipulation"). Amortization of intangible plant (software) is provided on a straight-line basis over the estimated useful life of the asset (primarily three years). The Company charges the cost of repairs and minor replacements to the appropriate operating expense accounts and capitalizes the cost of renewals and betterments. Gains or losses resulting from retirements or other dispositions of operating property in the normal course of business are credited or charged to the accumulated provision for depreciation. The Company recorded a liability for the present value of the estimated decommissioning costs for the Company's interest in Palo Verde using 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 kWh generated. 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. 47 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS 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 equity securities and municipal bonds in trust funds established for decommissioning of its interest in Palo Verde which had a fair market value of approximately $46.7 million at December 31, 1998. Such marketable securities are classified as "available-for-sale" securities and as such unrealized gains and losses are included in accumulated other comprehensive income as a separate component of common stock equity. Inventories. Inventories, primarily parts, materials and supplies are stated at average cost not to exceed recoverable cost. Operating Revenues Net of Energy Expenses. The Company accrues revenues for services rendered but unbilled. Energy expenses are stated at actual cost incurred. The Company's Texas retail customers are presently being billed under fixed fuel factors approved by the Texas Commission. Rate tariffs currently applicable to certain FERC jurisdictional customers contain appropriate fuel and purchased power cost adjustment provisions designed to recover the Company's fuel and purchased power costs. Any difference between fuel cost and cash recovered from the Company's Texas and FERC jurisdictional customers is reflected as net over/undercollection of fuel revenues in the balance sheets. Federal Income Taxes. The Company accounts for federal income taxes under the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized for the estimated future tax consequences of "temporary differences" by applying enacted statutory tax rates for each taxable jurisdiction applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The Company records a valuation allowance to reduce its deferred tax assets to the extent it is more likely than not that such deferred tax assets will not be realized. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. Earnings per Share. In 1997, the Company adopted the provisions of SFAS No. 128, "Earnings per Share," which establishes standards for computing and presenting earnings per share. All per share amounts for prior periods presented have been restated to conform to the new standard. Basic earnings per common share is computed by dividing net income, after deducting the preferred stock dividend requirements, by the weighted average number of common shares outstanding. Diluted earnings per common share is computed by dividing net income, after deducting the preferred stock dividend requirements, by the weighted average number of common shares and dilutive potential common shares outstanding. Benefit Plans. See Note J for accounting policies regarding the Company's retirement plans and postretirement benefits. 48 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS Stock Options and Restricted Stock. The Company has a long-term incentive plan which reserves shares of common stock for issuance to officers, key employees and non-employee directors through the award or grant of stock options and restricted stock. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). Accordingly, compensation expense is recognized for the intrinsic value, if any, of option grants at measurement date ratably over the vesting period of the options. Compensation expense for the restricted stock awards is recognized for the fair value of the shares at the award date ratably over the restriction period. Unearned compensation related to restricted stock awards is shown as a reduction of common stock equity. Reclassifications. Certain amounts in the financial statements for 1997 and 1996 have been reclassified to conform with the 1998 presentation. 49 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS SUPPLEMENTAL STATEMENTS OF CASH FLOW DISCLOSURES (IN THOUSANDS)
PERIOD FROM | PERIOD FROM FEBRUARY 12 | JANUARY 1 YEARS ENDED TO | TO DECEMBER 31, DECEMBER 31, | FEBRUARY 11, ----------------------------------- | 1998 1997 1996 | 1996 -------------- --------------- ------------ | ------------ | Cash paid (refunded) for: | Income taxes paid............................ $ 2,900 $ 2,901 $ 353 | $ - Income taxes refunded........................ - (20,713) (2,857) | - Interest on long-term debt................... 74,537 81,293 57,288 | 8,580 Reorganization items - professional | fees and other............................. 4,310 3,264 8,910 | 2,279 | Non-cash investing and financing activities: | Issuance of preferred stock for | pay-in-kind dividends.................... 14,425 12,893 8,426 | - Grants of restricted shares of | common stock............................... 196 575 948 | - 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 GENERAL The electric utility industry faces increasing pressure to become more competitive as legislative, regulatory, economic and technological changes occur. Federal and state legislative and regulatory initiatives, including proposals advanced in Texas and New Mexico, are designed to 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 diminish the ability of the Company to fully recover its 50 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS investment in generation 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, the Company may not be able to sustain retail rates at the levels established by the Texas Settlement Agreement and New Mexico Settlement discussed below through the periods specified by those agreements and, therefore, the Company's results of operations and cash flow may be adversely affected. 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 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. 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. In January of each odd-numbered year, the Texas Commission is required to report to the Texas Legislature on the scope of competition in electric markets and the effect of competition and industry restructuring on customers in both competitive and noncompetitive markets. In its January 1997 report, the Texas Commission 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. In its January 1999 report, the Texas Commission, while not making a specific recommendation regarding restructuring legislation, reaffirmed its continued support for the timely move to a competitive retail market that provides adequate protections for customers and the opportunity for all market participants to benefit. Also, in 1998 the Texas Commission reported revised "excess of cost over market" ("ECOM") estimates, which is a means of measuring stranded costs for all Texas utilities. 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. In 1997, the Texas Lieutenant Governor appointed a special interim committee to study the various issues involved in a possible transition to a competitive retail market. The committee held public hearings across the state receiving testimony from various parties, including investor-owned utilities, electric cooperatives, public power entities, power marketers, consumer advocates, environmental advocates and the public. On behalf of all investor- owned utilities, including the Company, the Association of Electric Companies of Texas 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. In January 1999, 51 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS the special interim committee submitted its final report without specific legislative recommendations. The final report addresses various issues specifically associated with the development of a competitive retail electric market, particularly the structure of the market, stranded costs and market power concerns. The report states that competition in the electric power market has the potential to benefit all Texans, but restructuring the industry should only be undertaken with the utmost caution. The report also includes a summary of the state and local tax issues from a report by the Texas Comptroller of Public Accounts, which concludes that market-based revaluation of generation assets, unbundling and possible divestiture of assets and other aspects of restructuring will have an impact on local and state tax bases and revenues. Three comprehensive restructuring bills have been introduced in the 1999 Texas biennial legislative session, one of which was co-sponsored by several of the senators comprising the special interim committee, including the chairman of that committee. The Company cannot assure that any legislation will specifically recognize and accommodate the substantial benefits bargained for by the Company and the various parties to the Texas Rate Stipulation and the Texas Settlement Agreement discussed below. Any legislation that does not permit the Company to recover the costs reflected in rates under the Texas Rate Stipulation and the Texas Settlement Agreement could have a material adverse impact on the Company's financial condition, results of operations and cash flow. Texas Rate Stipulation and Texas Settlement Agreement. The Company's rates for its Texas customers are governed by a rate order entered by the Texas Commission adopting the Texas Rate Stipulation and Agreed Order. The Agreed Order implemented certain provisions of the Texas Rate Stipulation and set rates consistent with the Texas Rate Stipulation. Among other things, under the Texas Rate Stipulation: (i) the Company's base rates for most customers in Texas were fixed for the ten-year Freeze Period which began in August 1995; (ii) the City of El Paso granted the Company a new franchise that extends through the Freeze Period; (iii) the Company will retain 75% during the first five years of the Freeze Period and 50% during the remainder of the Freeze Period of (a) the revenues generated by providing third-party transmission services and (b) profit margins from certain off-system power sales; (iv) the Company's reacquisition of the Palo Verde leased assets was deemed to be in the public interest; and (v) all appeals of Texas Commission orders concerning the Company and all outstanding Texas Commission dockets concerning the Company's rates were resolved. Neither the Texas Rate Stipulation nor the Agreed Order deprives the Texas regulatory authorities of their jurisdiction over the Company during the Freeze Period. However, the Texas Commission determined in the Agreed Order that the rate freeze is in the public interest and results in just and reasonable rates. Further, the signatories to the Texas Rate Stipulation (other than the Texas Commission, 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 Texas Rate Stipulation retain all rights provided in the Texas 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. 52 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS Following the New Mexico Settlement (see "New Mexico Rate Matters - New Mexico Settlement," below), the Company offered to enter into a comparable agreement in Texas. Based upon that offer, the Company entered into the Texas Settlement Agreement providing for: (i) a total annual jurisdictional base revenue reduction of approximately $15.4 million; (ii) reconciliation of the Company's fuel expenses through December 31, 1998, with no disallowance; and (iii) an agreement to use 50% of all Palo Verde performance rewards related to evaluation periods after 1997, when collected, for low-income assistance and for Demand-Side Management ("DSM") programs, primarily focused on small business customers, through the end of the Freeze Period. See "Integrated Resource Plan" below. The parties have executed the Texas Settlement Agreement and filed it with the Texas Commission, the City of El Paso and all other municipalities having jurisdiction. The Company anticipates the Texas Commission will consider and approve the Texas Settlement Agreement in the near future. Fuel. Pursuant to Texas Commission rules, the Company must periodically make a filing to reconcile the revenues collected from Texas customers under its fixed fuel factor with the actual fuel and purchased power expenses incurred. Differences between revenues collected and expenses incurred during the reconciliation period are subject to a refund (in the case of an overrecovery of fuel costs) or surcharge (in the case of an underrecovery of fuel costs). The Texas Commission staff, local regulatory authorities such as the City of El Paso, and customers are entitled to intervene in a fuel reconciliation proceeding and to challenge the prudence of fuel and purchased power expenses. The Company's fuel expenses for its most recent reconciliation period of July 1995 through December 1998 were approved, without disallowance, as part of the Texas Settlement Agreement. 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 Texas Rate Stipulation and the Texas Settlement Agreement. The removal of Palo Verde from rate base could have a significant negative impact on the Company's revenues and financial condition. Performance rewards and penalties for the evaluation periods ending in 1995, 1996 and 1997, as well as agreement regarding disposition of any future awards, have been resolved in the Texas Settlement Agreement and the Integrated Resource Plan ("IRP") stipulation. Integrated Resource Plan. Under Texas law and regulations of the Texas Commission, the Company was required to file its first IRP in June 1998. An IRP is to be filed every three years and covers a ten-year planning period. The Company's IRP was the culmination of a lengthy planning process involving the Company, its customers, the Texas Commission, consumer advocates and various special interest groups. The purpose of integrated resource planning is to ensure acquisition of the lowest cost, adequate resources necessary to meet the varied needs of the Company and its customers, and to ensure the equitable allocation and distribution of the benefits of such resource acquisitions and other system benefits to all customer classes. The Company entered into an agreement with all parties with respect to all IRP issues, and a Texas Commission order adopting the agreement was issued in January 1999. Pursuant to the agreement, the Company will meet its resource needs through a combination of short- 53 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS term purchased power and a DSM program. Pursuant to the IRP, the Company expects to incur DSM expenditures annually of approximately $1.0 million through 2001. Additionally, in response to interest expressed by its customers and encouragement from the Texas Commission and environmental advocates, the Company has committed to the development of renewable resources. Pursuant to the stipulation settling the IRP, the Company has pledged $3.6 million of Palo Verde performance rewards expected to be collected by the Company as a result of the Texas Settlement Agreement as initial financing for the development of renewable resources. Finally, the Company has committed to fund low-income DSM programs for a three-year period beginning in 1999. The amount of the Company's DSM commitment totals approximately $1.0 million over the three-year period. The Company does not believe the IRP agreement will cause it to incur net costs materially in excess of those that would have been incurred in the absence of its IRP. Nevertheless, because of the Texas Rate Stipulation and the Texas Settlement Agreement, the Company will not be able to increase its rates to recover any increase in net costs actually experienced as a result of its IRP. 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. In January 1999, pursuant to a state constitutional amendment passed in 1996, the three- member appointed commission was replaced by an elected commission from five single-member districts, with regulatory responsibility for electricity, gas, water, telecommunications, insurance and securities activities within the state. The Company's New Mexico service area falls entirely within one district. The largest city in the Company's New Mexico service territory is the City of Las Cruces ("Las Cruces"), which in 1998 accounted for approximately 8% of the Company's total revenue. Since 1995, the New Mexico Commission has conducted hearings and facilitated debate regarding competition and the restructuring of regulation of the electric industry. Although these efforts failed to result in 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. In addition to efforts by the New Mexico Commission, the Interim Water and Natural Resources Committee, a joint legislative committee with oversight responsibility for the regulation of public utilities, has conducted public meetings and taken testimony regarding the potential effects of industry restructuring in New Mexico. The chairman of this committee has introduced a comprehensive restructuring bill in the 1999 New Mexico legislative session. Under this bill, retail customer choice would begin January 1, 2001, for public post-secondary educational institutions and public schools and for residential and small business customers. Retail customer choice would begin January 1, 2002, for all other customers. Utilities would be allowed to recover no less than 50% of its stranded costs with up to 100% recovery allowed if the New Mexico Commission determines that additional recovery is in the public interest, is necessary to maintain the utility's financial integrity or is necessary to continue 54 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS adequate and reliable service and will not cause an increase in rates to residential and small business customers. Utilities would also be required to file transition plans addressing the various restructuring issues, including the recovery of stranded costs, by March 1, 2000. The New Mexico Commission could delay implementation of retail customer choice for up to one year. The chairman's bill passed both houses of the legislature before the end of the session and is currently awaiting the signature of the governor to become law. The Company cannot predict whether the governor will sign or veto the restructuring legislation, nor whether the implementation of such legislation, if signed into law, will impact the Company's revenues and recovery of costs contemplated under the New Mexico Settlement, discussed below. New Mexico Settlement. In October 1996, the New Mexico Commission issued an order requiring the Company to answer certain ratepayer complaints and to file a rate filing package, including cost of service data and supporting testimony. On July 15, 1998, the Company entered into the New Mexico Settlement with certain parties to its pending New Mexico rate case, including the New Mexico Commission staff and the New Mexico Attorney General, but not Las Cruces. Following a hearing on the New Mexico Settlement, and after considering Las Cruces' opposition, the New Mexico Commission issued an order adopting (with some modification) the New Mexico Settlement on September 24, 1998. The New Mexico Settlement provides for (i) a total annual jurisdictional base revenue reduction of $4.6 million; (ii) a 30-month moratorium on rate increases or decreases in New Mexico; (iii) the elimination of the need for future fuel reconciliations in New Mexico by incorporating the existing fixed fuel factor into rates; (iv) an increased degree of ratemaking certainty for the future achieved by an agreement among the signatories reducing the net value of certain assets by approximately $40 million on a New Mexico jurisdictional basis for ratemaking purposes (but with no effect on book values), while establishing the signatories' agreement that the Company is entitled to 100% recovery of such revalued assets; and (v) the ability to enter into long-term rate contracts with commercial and industrial customers in New Mexico. The New Mexico Settlement became effective on October 26, 1998. Additionally, as a result of the New Mexico Settlement, the Company will contribute $0.4 million annually ($1.0 million over the term of the moratorium period) to a social services agency in Dona Ana County providing assistance to low-income individuals. Although the New Mexico Settlement was structured to allow recovery of previously underrecovered fuel balances, the order adopting the New Mexico Settlement does not support the recognition of this asset in the Company's financial statements under existing accounting standards. The Company wrote off the book value of undercollected fuel revenues in its New Mexico jurisdiction as of September 30, 1998, which amounted to $3.8 million, net of tax, although the Company believes that, based on current estimates of future fuel prices and operating costs, it will recover 100% of these amounts. The Company negotiated the New Mexico Settlement so as to substantially reduce the likelihood of additional rate reductions during the moratorium period. However, in light of the national emphasis on competition, there can be no assurance that the Company will be able to maintain its rates at the new levels. Fuel. Prior to the New Mexico Settlement, the Company was required to make annual filings reconciling the revenues collected under its New Mexico fixed fuel factor with its New Mexico fuel and purchased power expenses, along with the results of the application of Palo Verde performance standards. As a result of the New Mexico Settlement, outstanding fuel issues from filings in 1997 and 1998 were satisfactorily resolved with no disallowance of fuel and purchased power costs or the performance rewards and with the existing fixed fuel factor incorporated into base rates. 55 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS Palo Verde Performance Standards. As a result of the New Mexico Settlement, the Palo Verde performance standards, which had been in place since 1986, were eliminated. Consequently, the Company is no longer entitled to a reward or exposed to a penalty in New Mexico resulting from the operations of Palo Verde. The performance standards report filed with the New Mexico Commission in January 1998 was the final such report and entitled the Company to a reward of $1.1 million, which is included in the underrecovered fuel balance added to the Company's base rates and amortized over a 60-month period. 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. In April 1996, the FERC issued its Order No. 888, requiring all public utilities owning, operating or controlling facilities used for transmitting electricity in interstate commerce to allow access to their transmission facilities under minimum terms and conditions of non-discriminatory service, including transmission service for their own new wholesale sales and purchases of electric energy. Additionally, Order No. 888 permits public utilities to seek recovery of legitimate, prudent and verifiable stranded costs and provides a mechanism for the recovery of such costs. Order No. 888 also provides for recovery of stranded costs associated with former power customers and new municipally-owned entities becoming transmission-only customers as a result of a utility's 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, which requires all public utilities owning, operating or controlling facilities used for transmitting electricity in interstate commerce to develop and maintain an Open Access Same-Time Information System that will give existing and potential transmission users access to transmission-related information on a basis consistent with that available to a utility's employees engaged in the buying and selling of power. Order No. 889 further requires public utilities to separate their transmission and generation marketing functions and adopt standards of conduct ensuring that all open access transmission customers are treated in a non-discriminatory manner. Pursuant to Order No. 888, the Company filed its non-discriminatory open access transmission tariffs with the FERC in July 1996. The Company reached a settlement with the various parties regarding rates for transmission and ancillary services under these tariffs. However, the settlement, which was filed with the FERC in March 1997 and approved by the FERC in June 1998, did not resolve issues that had been raised with respect to the manner in which the Company will determine the amount of transmission capacity that is available for use by third parties desiring to use its transmission system. In August 1998, a FERC administrative law judge issued an Initial Decision in which he concluded that the manner in which the Company determines the amount of transmission capacity that is available for use by third parties is reasonable and consistent with FERC policies. The judge also concluded that the 56 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS Company has no obligation under Order No. 888 to provide back-up generation services to third parties using its transmission system. Certain parties, including the Company, have filed exceptions to the Initial Decision. The Company cannot predict when the FERC will render a final decision on these issues. The Company does not expect a material financial impact to result from this 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. In order to procure a firm supply of electric power to serve its proposed municipal electric system, Las Cruces filed a request with the FERC in November 1998 for an order requiring the Company to sell wholesale power to Las Cruces pursuant to Section 202(b) of the Federal Power Act from July 1999 until such time as Las Cruces is able to secure firm transmission service and back-up generation service required to enable it to obtain reliable service from Southwestern Public Service Company ("SPS"). In January 1999, the FERC required the Company to sell electric energy to Las Cruces at a cost-based wholesale rate from July 1, 1999 until the earlier of the time Las Cruces begins receiving its power from a different supplier or one year. The Company submitted a proposed cost-based rate for the sale of electricity at wholesale to Las Cruces in compliance with the FERC's order in February 1999. The FERC has asked that all comments on the Company's compliance filing be submitted by April 2, 1999. The Company has also filed with the FERC a request for rehearing of the FERC's order and a motion for a stay of that order pending consideration of its request for rehearing. Both of these matters are currently pending before the FERC. Upon final FERC action, the Company may appeal the FERC's order to a United States Court of Appeals. Department of Energy. The DOE regulates the Company's exports of power to the Comision Federal de Electricidad de Mexico ("CFE"), the national electric utility of Mexico, pursuant to a license granted by the DOE and a presidential permit. The DOE has determined that all such exports over international transmission lines shall be made in accordance with Order No. 888. The DOE is also 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. 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. WHOLESALE CUSTOMERS The Company provides Imperial Irrigation District ("IID") with 100 megawatts ("MW") of firm capacity and associated energy and 50 MW of system contingent capacity and associated energy pursuant to a 17-year agreement which expires April 30, 2002. The Company also provides Texas-New Mexico Power Company with up to 75 MW of firm power and associated energy through December 31, 2002. The contract amount for 1999 is 25 MW. 57 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS The Company's one-year 1998 sales agreement for firm capacity and associated energy to the CFE terminated on December 31, 1998. Revenues under the contract totaled $34.6 million, representing approximately 5.7% of the Company's total revenues. The Company does not expect to provide similar services in 1999 since the CFE's Samalayuca II generation project went into service in 1998. The Company cannot predict when, or if, future power sales opportunities to the CFE will materialize, or whether, in the event such opportunities do materialize, the Company would be the provider. C. PALO VERDE AND OTHER JOINTLY-OWNED UTILITY PLANT The Company owns a 15.8% interest in each of the three nuclear generating units and common facilities at Palo Verde. The Palo Verde Participants include the Company, five other utilities and Arizona Public Service Company ("APS"), which serves as operating agent for Palo Verde. The operation of Palo Verde and the relationship among the Palo Verde Participants is governed by the Arizona Nuclear Power Project Participation Agreement (the "ANPP Participation Agreement"). Other jointly-owned utility plant includes 7% of Units 4 and 5 at Four Corners Generating Station ("Four Corners") and certain other transmission facilities. A summary of the Company's investment in jointly-owned utility plant, excluding fuel, at December 31, 1998 and 1997 is as follows (In thousands):
DECEMBER 31, 1998 DECEMBER 31, 1997 ---------------------------- -------------------------------- PALO VERDE PALO VERDE STATION OTHER STATION OTHER -------------- ----------- -------------- --------------- Electric plant in service........... $602,061 $180,185 $573,218 $180,815 Accumulated depreciation............ (64,595) (40,959) (46,589) (27,078) Construction work in progress....... 14,084 2,710 12,545 2,249
Pursuant to the ANPP Participation Agreement, the Palo Verde Participants share costs and generating entitlements in the same proportion as their percentage interests in the generating units, and each participant is required to fund its proportionate share of fuel, other operation, maintenance and capital costs, which, except capital costs, are included in the corresponding expense captions in the statements of operations. The Company's total monthly share of these costs was approximately $6.7 million in 1998. 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 each Palo Verde unit over the estimated service life of 40 years. The Company's funding requirements are determined periodically based upon engineering cost estimates performed by outside engineers retained by the ANPP. In December 1998, the Palo Verde Participants approved an updated decommissioning study. The 1998 study determined that the Company will have to fund approximately $280.5 million (stated in 1998 dollars) to cover its share of decommissioning costs. Cost estimates for decommissioning have 58 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS increased with each study. The previous cost estimate from a 1995 study determined that the Company would have to fund approximately $229 million (stated in 1995 dollars). The 1998 estimate reflects a 22% increase from the previous 1995 estimate primarily due to increases in estimated costs for spent fuel storage after operations have ceased. See "Spent Fuel Storage" below. Although the 1998 study was based on the latest available information, there can be no assurance that decommissioning cost estimates will not continue to increase in the future or that regulatory requirements will not change. In addition, until a new low-level radioactive waste repository opens and operates for a number of years, estimates of the cost to dispose of low-level radioactive waste are subject to significant uncertainty. The decommissioning study is updated every three years and a new study will be completed in 2001. See "Disposal of Low-Level Radioactive Waste" below. The rate freeze under the Texas Rate Stipulation and the rate reduction under the Texas Settlement Agreement would preclude the Company from seeking a rate increase in Texas to recover increases in decommissioning cost estimates. The New Mexico Settlement would preclude the Company from seeking a rate increase to recover increases in decommissioning cost estimates during the 30- month moratorium. Additionally, there can be no assurance that the Company could increase its wholesale power rates 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, 1998, the fair market value of the trust funds was approximately $46.7 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. APS has undertaken an ongoing investigation and analysis and has performed corrective actions designed to mitigate further degradation. Corrective actions have included changes in operational procedures designed to lower the operating temperatures of the units, chemical cleaning and the implementation of other technical improvements. APS has stated that it believes its remedial actions have slowed the rate of tube degradation. The projected service lives of the units' steam generators are reassessed by APS periodically in conjunction with inspections made during 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 September 2002. The Company's share of the cost is approximately $12.9 million. Palo Verde Participants have unanimously approved funding pre-installation activities through 1999. 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. The costs for the construction and shipping of the spare steam generators are expected to be incurred through 2002. Installation costs would be expected to be incurred between 1999 and 2003, subject to unanimous approval of Palo Verde Participants, 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 $40 million. The Company cannot predict whether the Palo Verde Participants will agree to install the 59 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS replacement steam generators at Unit 2. 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 Texas Rate Stipulation precludes the Company from seeking a rate increase 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. Additionally, there can be no assurance that the Company could increase its wholesale power rates to recover such capital costs. 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 into 2003. Alternative on-site storage facilities are currently being constructed to supplement existing facilities. Spent fuel will be removed from the original facilities as necessary and placed in special storage casks which will be stored at the new facilities until accepted by the DOE for permanent disposal. The alternative facilities will be built in stages to accommodate casks on an as needed basis and are expected to be available for use by 2003. 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, and it can not currently be estimated when spent fuel shipments to the DOE's permanent disposal site will commence. The 1998 decommissioning study assumes that only 14 of 333 spent fuel casks will have been removed from Palo Verde by 2037 when title to the remaining spent fuel is assumed to be transferred to the DOE. In January 1997, the Texas Commission established a project to evaluate what, if any, action it should take with regard to payments made to the DOE for funding of the DOE's obligation to start accepting spent nuclear fuel by January 31, 1998. After receiving initial comments, no further action has been taken on the project. In July 1998, APS filed, on behalf of all Palo Verde Participants, a Petition for Review with the United States Court of Appeals for the District of Columbia Circuit regarding the DOE's failure to comply with its obligation to begin accepting spent nuclear fuel. APS is continuing, on behalf of the Palo Verde Participants, to pursue remedies under the contractual terms in place with the DOE. The Company is unable to predict the outcome of this matter at this time. Disposal of Low-Level Radioactive Waste. Congress has established requirements for the disposal by each state of radioactive waste generated within its borders. Arizona, California, North Dakota and South Dakota have entered into a compact (the "Southwestern Compact") for the disposal of low- level radioactive waste. California will act as the first host state of the Southwestern Compact, and Arizona will serve as the second host state. The construction and opening of the California low-level radioactive 60 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS waste disposal site in Ward Valley has been delayed due to extensive public hearings, disputes over environmental issues and review of technical issues related to the proposed site. Palo Verde is projected to undergo decommissioning during the period in which Arizona will act as host for the Southwestern Compact. However, the opposition, delays, uncertainty and costs experienced in California demonstrate possible roadblocks that may be encountered when Arizona seeks to open its own waste repository. Liability and Insurance Matters. The Palo Verde Participants have public liability insurance against nuclear energy hazards up to the full limit of liability under federal law. The insurance consists of $200 million of primary liability insurance provided by commercial insurance carriers, with the balance being provided by an industry-wide retrospective assessment program, pursuant to which industry participants would be required to pay an assessment to cover any loss in excess of $200 million. Effective August 1998, the maximum assessment per reactor for each nuclear incident is approximately $88.1 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 $41.8 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. 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. The Company's ability to pay dividends on the common stock for the next several years will be limited by the financing arrangements entered into pursuant to the Reorganization. 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 ("S&P") or Moody's Investors Service, Inc. ("Moody's"), 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 any shares of common stock 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 with respect to 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 61 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS securities; plus (iii) $10 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 and the terms of the amended and restated credit facility agreement for working capital and fuel financing, the same limitation contained in the First and Second Supplemental Indentures on the declaration of dividends would apply to the Company. 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 earlier by the Board of Directors. The following table summarizes the transactions of the Company's stock options for 1996, 1997 and 1998:
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 Options granted..................................... 585,000 7.71 Options exercised................................... - - Options forfeited................................... - - --------- Unexercised options outstanding at December 31, 1998..... 2,535,000 6.17 =========
62 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS Stock option awards provide for vesting periods of up to five years. Stock options outstanding at December 31, 1998 are as follows:
EXERCISE NUMBER REMAINING NUMBER PRICE OUTSTANDING LIFE, IN YEARS EXERCISABLE -------- ----------- ------------------ ------------- $ 5.32 800,000 7.3 480,000 5.56 800,000 7.4 440,000 6.56 50,000 8.3 50,000 7.00 300,000 7.4 300,000 7.50 525,000 9.0 - 9.50 60,000 9.4 60,000 --------- --------- 2,535,000 1,330,000 ========= =========
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 expense has been recognized. Had compensation expense for the plan been determined based on the fair value at the grant date, consistent with the provisions of SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts presented below:
PERIOD FROM FEBRUARY 12 TO YEARS ENDED DECEMBER 31, DECEMBER 31, --------------------------------- 1998 1997 1996 ---------------- --------------- ------------ Net income applicable to common stock (In thousands): As reported.............................. $ 45,709 $ 38,649 $ 31,431 Pro forma................................ 44,913 38,093 30,337 Basic earnings per share: As reported.............................. 0.760 0.643 0.523 Pro forma................................ 0.746 0.634 0.505 Diluted earnings per share: As reported.............................. 0.754 0.639 0.523 Pro forma................................ 0.742 0.630 0.505
63 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS The fair value for these options was estimated at the grant date using the Black-Scholes option pricing model. Weighted average assumptions and grant-date fair value for 1998, 1997 and 1996 are presented below:
1998 1997 1996 --------- ---------- ---------- Risk-free interest rate 5.82% 6.76% 6.85% Expected life, in years 10 10 10 Expected volatility 7.47% 10.86% 4.24% Expected dividend yield - - - Fair value $2.97 $ 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. The market value of the restricted stock at the time of grant is recorded as unearned compensation as a separate component of common stock equity and is amortized to expense over the restriction period. During 1998, 1997 and 1996, approximately $0.5 million, $0.5 million and $0.2 million, respectively, related to restricted stock awards was charged to expense. The following table summarizes the vested and unvested restricted stock awards for 1998, 1997 and 1996:
VESTED UNVESTED TOTAL ---------------- ---------------- ---------------- Restricted shares outstanding at February 12, 1996.... - - - Restricted stock awards............................ 80,000 100,000 180,000 Lapsed restrictions and vesting.................... - - - ------- ------- ------- Restricted shares outstanding at December 31, 1996... 80,000 100,000 180,000 Restricted stock awards............................ 47,440 36,815 84,255 Lapsed restrictions and vesting.................... (40,488) (27,363) (67,851) ------- ------- ------- Restricted shares outstanding at December 31, 1997... 86,952 109,452 196,404 Restricted stock awards............................ - 26,675 26,675 Lapsed restrictions and vesting.................... (40,488) (32,698) (73,186) Forfeitures........................................ - (1,908) (1,908) ------- ------- ------- Restricted shares outstanding at December 31, 1998... 46,464 101,521 147,985 ======= ======= =======
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. 64 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:
YEAR ENDED DECEMBER 31, 1998 --------------------------------------------- PER COMMON INCOME SHARES SHARE -------------- ------------- ------------ (IN THOUSANDS) Income before extraordinary items............. $ 57,073 Less: Preferred stock dividends............. 14,707 ---------- Basic earnings per common share: Income applicable to common stock............ 42,366 60,168,234 $ 0.704 ========= Effect of dilutive securities: Stock options................................ - 434,755 Unvested restricted stock.................... - 30,309 ---------- ---------- Diluted earnings per common share: Income applicable to common stock............ $ 42,366 60,633,298 $ 0.699 ========== ========== ========= 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: Stock options................................ - 293,086 Unvested restricted stock.................... - 16,041 ---------- ---------- Diluted earnings per common share: Income applicable to common stock............ $ 41,424 60,437,632 $ 0.685 ========== ========== ========
65 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS
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: Stock options................................ - 38,989 Unvested restricted stock.................... - 3,912 ---------- ---------- Diluted earnings per common share: Income applicable to common stock............ $ 31,431 60,116,709 $ 0.523 ========== ========== =========
Options that have been excluded from the computation of diluted earnings per common share because the options' exercise price was greater than the average market price of the common shares for the period are listed below: 1) 300,000 options granted June 11, 1996, at an exercise price of $7.00 have been excluded for the second through fourth quarters of 1997 and 1996; 2) 525,000 options granted January 2, 1998, at an exercise price of $7.50 have been excluded for the first quarter of 1998; and 3) 60,000 options granted May 29, 1998, at an exercise price of $9.50 have been excluded for the second through fourth quarters of 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. 66 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS E. PREFERRED STOCK The Company issued one million shares of new Series A Preferred Stock on February 12, 1996. On March 1, 1999, after obtaining required consents of holders of certain of the Company's outstanding debt securities, the Company redeemed the Series A Preferred Stock. The Company paid $148.9 million for the redemption price, accrued cash dividends and premium plus $1.4 million for fees and costs of securing the consents. The preferred stock had an annual dividend rate of 11.40%, which was paid through the issuance of additional shares of preferred stock for the first three years. 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, 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 dividend............................. 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 - - Issuance of dividends............................ 144,256 14,425 - - --------- --------- -------------- ------------- Balance at December 31, 1998....................... 1,357,444 $ 135,744 - $ - ========= ========= ============== =============
67 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS F. LONG-TERM DEBT AND FINANCING AND CAPITAL LEASE OBLIGATIONS Outstanding long-term debt and financing and capital lease obligations are as follows:
DECEMBER 31, ----------------------------- 1998 1997 ------------ ------------ (IN THOUSANDS) LONG-TERM DEBT: First Mortgage Bonds (1): 7.25% Series A, issued 1996, due 1999.................................. $ 36,034 $ 66,261 7.75% Series B, issued 1996, due 2001.................................. 62,698 62,698 8.25% Series C, issued 1996, due 2003.................................. 119,292 119,292 8.90% Series D, issued 1996, due 2006.................................. 223,132 223,132 9.40% Series E, issued 1996, due 2011.................................. 273,398 273,398 Pollution Control Bonds (2): Secured by First Mortgage Collateral Series Bonds: Variable rate bonds, due 2014........................................ 63,500 63,500 Variable rate refunding bonds, due 2013.............................. 33,300 33,300 Variable rate refunding bonds, due 2014.............................. 37,100 37,100 Variable rate refunding bonds, due 2015.............................. 59,235 59,235 Promissory note, due 2007 ($88,000 due in 1999) (3)........................ 646 730 --------- ---------- Total long-term debt............................................... 908,335 938,646 --------- ---------- FINANCING AND CAPITAL LEASE OBLIGATIONS: Nuclear fuel ($25,973,000 due in 1999) (4)................................. 49,316 51,999 Turbine lease ($1,722,000 due in 1999) (5)................................. 3,228 4,628 --------- ---------- Total financing and capital lease obligations...................... 52,544 56,627 --------- ---------- Total long-term debt and financing and capital lease obligations................................................ 960,879 995,273 CURRENT MATURITIES (amount due within one year).............................. (63,817) (28,463) --------- ---------- $ 897,062 $ 966,810 ========= ==========
___________________ (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. 68 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 1998, 1997 and 1996 are as follows (In thousands):
PERIOD FROM FEBRUARY 12 TO YEARS ENDED DECEMBER 31, DECEMBER 31, -------------------------------------- 1998 1997 1996 --------------- -------------- ------------ 7.25% Series A..................... $ 30,227 $ 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............................ $ 30,227 $ 83,102 $ 117,951 ========== ========== ==========
The Company repaid the remaining $36.0 million of Series A First Mortgage Bonds at their maturity on February 1, 1999. (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 5.95% at December 31, 1998. 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) Nuclear Fuel Financing The Company has available a $100 million credit facility that provides for up to $70 million for the financing of nuclear fuel and up to $50 million, depending on the balance of nuclear fuel financings, for working capital. This financing is effectuated 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. 69 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (5) Capitalized Lease Obligation, Copper Turbine The Company leases a turbine and certain other related equipment under a lease which is currently accounted for as a capital lease and expires in July 2000. Semiannual lease payments, including interest, are approximately $0.9 million through July 2000. The effective annual interest rate implicit in this lease is calculated to be 9.6%. The Company has renewed the lease through July 2005, with an extension option for two additional years. The renewal lease will be accounted for as an operating lease and requires semiannual lease payments of approximately $0.4 million. The letter of credit reimbursement agreements which enhance the Company's Pollution Control Bonds and the $100 million credit facility require compliance with certain total debt and interest coverage ratios. The Company maintained the required compliance throughout 1998. Scheduled maturities of long-term debt and financing and capital lease obligations at December 31, 1998 are as follows (In thousands): 1999...................................... $ 63,817 2000...................................... 25,157 2001...................................... 62,797 2002...................................... 104 2003...................................... 119,402
The table above does not reflect nuclear fuel purchase commitments and related obligations and maturities. 70 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, 1998 and 1997 are presented below (In thousands):
DECEMBER 31, ----------------------- 1998 1997 ---------- ----------- DEFERRED TAX ASSETS: Reorganization expenses financed with bonds................. $ 15,777 $ 18,308 Capital leases.............................................. 2,349 2,633 Benefits of tax loss carryforwards.......................... 171,977 222,764 Investment tax credit carryforward.......................... 20,410 20,410 Alternative minimum tax credit carryforward................. 14,719 11,954 Other (including state deferred taxes)...................... 86,078 82,929 --------- --------- Total gross deferred tax assets.......................... 311,310 358,998 --------- --------- Less valuation allowance: Federal.................................................. 12,661 12,661 State.................................................... 16,314 17,149 --------- --------- Total valuation allowance.............................. 28,975 29,810 --------- --------- Net deferred tax assets............................. 282,335 329,188 --------- --------- DEFERRED TAX LIABILITIES: Plant, principally due to differences in depreciation and basis differences.................................... (264,175) (275,531) Other....................................................... (7,642) (10,449) --------- --------- Total gross deferred tax liabilities..................... (271,817) (285,980) --------- --------- Net accumulated deferred income taxes............... $ 10,518 $ 43,208 ========= =========
The deferred tax asset valuation allowance decreased by approximately $0.8 million in 1998, $0.8 million in 1997 and $226.7 million in 1996. The decreases in 1998 and 1997 were 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 Texas 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. Based on the average annual book income before taxes for the prior three years, the Company believes that the net deferred tax assets will be fully realized at current levels of book and taxable income. Prior to the Effective Date, the Predecessor Company did not assume future taxable income for the utilization of NOL carryforwards. Approximately $26.5 million of the Company's valuation allowance at December 31, 1998, if subsequently recognized as a tax benefit, would be credited directly to capital in excess of stated value in accordance with SOP 90-7. 71 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 YEARS ENDED TO | TO DECEMBER 31, DECEMBER 31, | FEBRUARY 11, ---------------------------- | 1998 1997 1996 | 1996 ------------ ---------- ------------ | ------------ | INCOME TAX EXPENSE (BENEFIT): | FEDERAL: | Current.......................................... $ 2,884 $ 2,382 $ (17,203) | $ - Deferred......................................... 27,412 28,087 38,828 | (2,340) Investment tax credit amortization............... - - - | (325) --------- --------- ---------- | --------- Subtotal current operations..................... 30,296 30,469 21,625 | (2,665) Deferred tax expense (benefit) on | extraordinary items............................. 1,800 (1,494) - | - Adjustment of assets to reorganization value | and liabilities to fair value (elimination | of accumulated deferred investment | tax credits).................................... - - - | (77,950) Deferred included in reorganization items........ - - - | (172,899) Income tax expense on interest income | during bankruptcy............................... - - - | 583 --------- --------- ---------- | --------- Total......................................... $ 32,096 $ 28,975 $ 21,625 | $(252,931) ========= ========= ========== | ========= | STATE: | Current.......................................... $ - $ - $ 278 | $ 116 Deferred......................................... 4,442 4,307 4,767 | (866) --------- --------- ---------- | --------- Subtotal current operations..................... 4,442 4,307 5,045 | (750) Deferred included in extraordinary items......... 344 - - | - Deferred included in reorganization items........ - - - | (17,494) --------- --------- ---------- | --------- Total......................................... $ 4,786 $ 4,307 $ 5,045 | $ (18,244) ========= ========= ========== | =========
The current federal income tax expense for 1998 and 1997 results primarily from the accrual of alternative minimum tax ("AMT"). Deferred federal income tax includes an offsetting AMT benefit of approximately $2.8 million and $2.4 million for 1998 and 1997, respectively. The current federal income tax benefit for 1996 results 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 for 1996 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. 72 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 before federal income tax as follows (In thousands):
PERIOD FROM | PERIOD FROM FEBRUARY 12 | JANUARY 1 YEARS ENDED TO | TO DECEMBER 31, DECEMBER 31, | FEBRUARY 11, --------------------- | 1998 1997 1996 | 1996 --------- --------- ------------- | ------------- | Federal income tax expense computed | on income at statutory rate..................... $32,379 $28,269 $22,240 | $ 45,339 Difference due to: | ITC amortization (net of deferred taxes)........ - - - | (211) Nondeductible bankruptcy costs.................. - - - | 3,604 Federal valuation allowance..................... - - - | (204,848) Adjustment of assets to reorganization value | and liabilities to fair value (elimination of | accumulated deferred ITC's).................... - - - | (77,950) Reorganization costs (including the | nontaxable extraordinary gain on | discharge of debt)............................. - - - | (27,745) Other........................................... (283) 706 (615) | 8,880 ------- ------- ------- | --------- Total federal income tax expense | (benefit)..................................... $32,096 $28,975 $21,625 | $(252,931) ======= ======= ======= | ========= Effective federal income tax rate............... 34.7% 35.9% 34.0% | (195.3)% ======= ======= ======= | =========
The Company had approximately $491.4 million of federal tax NOL carryforwards, approximately $20.4 million of ITC carryforwards and approximately $14.7 million of AMT credit carryforwards as of December 31, 1998. 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 Company had approximately $468.9 million of state NOL carryforwards which if unused, would expire at the end of the year 2001. The differences between book and taxable income are primarily due to depreciation, plant basis differences and deferred fuel costs. 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. 73 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS 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 claims by the lessor, regarding the income tax treatment of the sale/leaseback transactions. The lessor held a meeting with the IRS in 1998 to discuss these issues. However, these issues are still pending with the IRS. 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 regulation. 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 (the "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"). PTI discontinued operations, and the EPA determined that PTI's abandoned facilities required remediation. The Company and the PTI Steering Committee, which consists of the largest generators of the PCBs sent to PTI, executed a settlement agreement. In consideration for the payment by the Company 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. 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. 74 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS In April 1995, Las Cruces filed a complaint against the Company 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. 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 the city limits and a territory extending five miles beyond the municipal boundary. In February 1998, the New Mexico Supreme Court ruled that the subsequent legislation rendered moot the certified question before the Supreme Court. In May 1998, the Company filed a complaint before the United States Federal District Court of New Mexico requesting that the Court find the new law unconstitutional. The Company's request is based upon its belief that the law is unconstitutional "special legislation" because it only applies to Las Cruces and the Company's property. The Company's claims are based on violations of the equal protection clauses of the New Mexico and federal Constitutions and violation of the prohibition against special legislation of the New Mexico Constitution. A trial on the merits has not yet been scheduled by the Court. On February 26, 1999, Las Cruces filed its Petition for Condemnation and Application for Immediate Possession. In its Petition for Condemnation, Las Cruces seeks to condemn the Company's distribution system within the Las Cruces city limits and other real and personal property owned by the Company used in or for the benefit of its distribution system. In its Application for Immediate Possession, Las Cruces seeks possession of the Company's distribution property in phases beginning on or about July 1, 1999. On March 9, 1999, the Company removed the Las Cruces petition and application to federal district court in New Mexico. Following a hearing on a motion for remand filed by Las Cruces, the court ruled the condemnation matter will stay in federal court. At this time no hearing on the immediate possession matter has been set. 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. 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 negotiated purchase of the Company's electrical distribution assets within and adjacent to the Las Cruces city limits. 75 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS 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 while receiving certain transmission services from the Company. Las Cruces subsequently filed a request at the FERC for a summary 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. An evidentiary hearing was held before an administrative law judge of the FERC in February 1998 on the issues of (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 submitted evidence in that proceeding showing that it was entitled to recover stranded generation costs from Las Cruces of $101 million. In contrast, the FERC staff recommended that the Company be permitted to recover stranded costs of $31.8 million, and Las Cruces claimed that its stranded cost obligation was in the range of $0 to $17.4 million. In June 1998, an administrative law judge of the FERC issued an Initial Decision recommending that Las Cruces pay to the Company $30.4 million for stranded costs if Las Cruces chose to leave the Company's system as of July 1, 1998. The amount recommended by the administrative law judge would decline over time based on when, if ever, Las Cruces leaves the Company's system, and would be reduced to zero if Las Cruces leaves the Company's system after December 31, 2002. The administrative law judge's Initial Decision is not binding on the FERC. The Company believes the administrative law judge's Initial Decision is inconsistent with the intent and policy of Order No. 888, which establishes the right to full recovery of a utility's stranded generation cost. The Company continues to believe it is entitled to full compensation for the costs it incurred with the expectation of continuing to serve Las Cruces. The Company has sought review of the administrative law judge's Initial Decision by the FERC and, if necessary, will contest any final FERC decision on appeal. The Company cannot predict when the FERC will render a final decision on this issue. The Company continues to believe 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. In fact, the New Mexico Settlement includes a reduction in rates and settlement of all issues in New Mexico, excluding Las Cruces. 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 76 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS judgment that (i) the Four Corners leases and federal easements preclude the application of the Acts to the operation of Four Corners; and (ii) the Navajo Nation and its agencies and courts lack adjudicatory jurisdiction to determine the enforceability of the Acts as applied to Four Corners. In October 1995, the Navajo Nation and the Four Corners participants agreed to stay the proceedings indefinitely so the parties may attempt to resolve the dispute without litigation. This matter remains inactive and the Company is unable to predict the outcome of this case. WATER CASES San Juan River System. The Four Corners participants are among the defendants in a suit filed by the State of New Mexico in 1975 in state district court in New Mexico against the United States of America, the City of Farmington, New Mexico, the Secretary of the Interior as Trustee for the Navajo Nation and other Indian tribes and certain other defendants (State of New Mexico ex rel. S. E. Reynolds, New Mexico State Engineer v. United States of America, et al., Eleventh Judicial District Court, County of San Juan, State of New Mexico, Cause No. 75-184). The suit seeks adjudication of the water rights of the San Juan River Stream System in New Mexico, which, among other things, supplies the water used at Four Corners. An agreement reached with the Navajo Nation in 1985 provides that if Four Corners loses a portion of its water rights in the adjudication, the tribe will provide sufficient water from its allocation to offset the loss. The case has been inactive for many years and the Company is unable to predict the outcome of this case. Gila River System. In connection with the construction and operation of Palo Verde, APS entered into contracts with certain municipalities granting APS the right to purchase effluent for cooling purposes at Palo Verde. In 1986, a summons was served on APS that required all water claimants in the Lower Gila River Watershed in Arizona to assert any claims to water in an action pending in Maricopa County Superior Court, titled In re The General Adjudication of All Rights to Use Water in the Gila River System and Source. Palo Verde is located within the geographic area subject to the summons and the rights of the Palo Verde Participants to the use of groundwater and effluent at Palo Verde is potentially at issue in this action. APS, as operating agent, filed claims that dispute the Court's jurisdiction over the Palo Verde Participants' groundwater rights and their contractual rights to effluent relating to Palo Verde and, alternatively, seek confirmation of such rights. In 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 Company is unable to predict the outcome of this case. OTHER LEGAL PROCEEDINGS The Company is a party to various other claims, legal actions and complaints. In many of these matters, the Company has excess casualty liability insurance which is applicable. Based upon a review of these claims and applicable insurance coverage, the Company believes that none of these claims will have a material adverse effect on the financial position, results of operations, and cash flow of the Company. 77 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS J. EMPLOYEE BENEFITS RETIREMENT PLANS The Company's Retirement Income Plan (the "Retirement Plan") covers employees who have completed one year of service with the Company, are 21 years of age and work at least a minimum number of hours each year. The Retirement Plan is a qualified noncontributory defined benefit plan. Upon retirement or death of a vested plan participant, assets of the Retirement Plan are used to pay benefit obligations under the Retirement Plan. Contributions from the Company are based on the minimum funding amounts required by the Department of Labor and IRS under provisions of the Retirement Plan, as actuarially calculated. The assets of the Retirement Plan are invested in equity securities, fixed income instruments and cash equivalents and are managed by professional investment managers appointed by the Company. The Company's Non-Qualified Retirement Income Plan is a non-funded defined benefit plan which covers certain former employees of the Company. The benefit cost for the Non-Qualified Retirement Income Plan is based on substantially the same actuarial methods and economic assumptions as those used for the Retirement Plan. 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. The Company accounts for the Retirement Plan and the Non-Qualified Retirement Income Plan under SFAS No. 87, "Employers' Accounting for Pensions," ("SFAS No. 87"). In 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," ("SFAS No. 132") which supercedes the disclosure requirements of SFAS No. 87. 78 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS The amounts recognized in the Company's balance sheets and the funded status of the plans at December 31, 1998 and 1997 are presented below (In thousands):
DECEMBER 31, ---------------------------------------------------- 1998 1997 ------------------------ ------------------------ NON- NON- QUALIFIED QUALIFIED RETIREMENT RETIREMENT RETIREMENT RETIREMENT INCOME INCOME INCOME INCOME PLAN PLAN PLAN PLAN ---------- ----------- ----------- ----------- CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year......... $(83,812) $(19,324) $(72,951) $(18,171) Service cost.................................... (2,879) - (2,402) - Interest cost................................... (5,861) (1,304) (5,386) (1,351) Actuarial loss.................................. (4,796) (559) (6,118) (1,494) Benefits paid................................... 3,208 1,692 3,045 1,692 -------- -------- -------- -------- Benefit obligation at end of year............. (94,140) (19,495) (83,812) (19,324) -------- -------- -------- -------- CHANGE IN FAIR VALUE OF PLAN ASSETS: Fair value of plan assets at beginning of year.. 74,114 - 61,460 - Actual return on plan assets.................... 5,603 - 12,579 - Employer contribution........................... 3,120 1,692 3,120 1,692 Benefits paid................................... (3,208) (1,692) (3,045) (1,692) -------- -------- -------- -------- Fair value of plan assets at end of year...... 79,629 - 74,114 - -------- -------- -------- -------- Funded status..................................... (14,511) (19,495) (9,698) (19,324) Unrecognized net (gain) loss...................... 126 559 (4,887) 162 Balance of additional liability................... - (559) - (162) -------- -------- -------- -------- Accrued benefit cost............................ $(14,385) $(19,495) $(14,585) $(19,324) ======== ======== ======== ========
Weighted average actuarial assumptions used in determining the actuarial present value of the benefit obligations are as follows:
1998 1997 ------------------------ ------------------------ NON- NON- QUALIFIED QUALIFIED RETIREMENT RETIREMENT RETIREMENT RETIREMENT INCOME INCOME INCOME INCOME PLAN PLAN PLAN PLAN ----------- ----------- ----------- ----------- Discount rate................................... 6.75% 6.75% 7.00% 7.00% Expected return on plan assets.................. 8.50% N/A 8.50% N/A Rate of compensation increase................... 5.00% N/A 5.00% N/A
79 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS Net periodic benefit cost is made up of the components listed below as determined using the projected unit credit actuarial cost method (In thousands):
PERIOD FROM | PERIOD FROM FEBRUARY 12 | JANUARY 1 YEARS ENDED TO | TO DECEMBER 31, DECEMBER 31, | FEBRUARY 11, ----------------------- | 1998 1997 1996 | 1996 ---------- ---------- ------------ | ------------ | COMPONENTS OF NET PERIODIC | BENEFIT COST: | Service cost........................... $ 2,879 $ 2,402 $ 2,148 | $ 354 Interest cost.......................... 7,165 6,737 5,774 | 749 Expected return on plan assets......... (5,820) (5,094) (4,177) | (457) Recognition of previously | unrecognized items................... - - - | 21,738 ------- ------- ------- | ------- Net periodic benefit cost............ $ 4,224 $ 4,045 $ 3,745 | $22,384 ======= ======= ======= | =======
Weighted average actuarial assumptions used in determining the net periodic benefit costs are as follows:
1998 1997 1996 ---------- ---------- --------- Discount rate.............................. 7.00% 7.50% 7.25% Expected return on plan assets............. 8.50% 8.50% 8.50% Rate of compensation increase.............. 5.00% 5.00% 5.00%
The net periodic 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 $21.7 million. OTHER POSTRETIREMENT BENEFITS The Company provides certain health care benefits for retired employees and their eligible dependents and life insurance benefits for retired employees only. Substantially all of the Company's employees may become eligible for those benefits if they reach retirement age while working for the Company. Those benefits are accounted for under SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," ("SFAS No. 106"). In 1998, the Company adopted SFAS No. 132 which supercedes the disclosure requirements of SFAS No. 106. Contributions from the Company are based on the funding amounts required by the Texas Commission in the Texas Rate Stipulation. The assets of the Other Postretirement Benefits Plan are invested in fixed income instruments and cash equivalents and are managed by professional investment managers appointed by the Company. 80 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS The amounts recognized in the Company's balance sheets and the funded status of the plan at December 31, 1998 and 1997 are presented below (In thousands):
DECEMBER 31, ---------------------------------- 1998 1997 --------------- --------------- CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year...... $(83,973) $(77,599) Service cost................................. (2,818) (2,538) Interest cost................................ (5,822) (5,254) Actuarial loss............................... (3,438) (1,779) Retirees' contributions...................... (202) (164) Benefits paid................................ 1,595 1,695 Curtailments................................. - 1,666 -------- -------- Benefit obligation at end of year.......... (94,658) (83,973) -------- -------- CHANGE IN FAIR VALUE OF PLAN ASSETS: Fair value of plan assets at beginning of year.......................... 8,822 8,050 Actual return on plan assets................. 403 202 Employer contribution........................ 3,422 570 Retirees' contributions...................... 202 - Benefits paid................................ (1,595) - -------- -------- Fair value of plan assets at end of year... 11,254 8,822 -------- -------- Funded status................................. (83,404) (75,151) Unrecognized net (gain) loss.................. 2,927 (380) -------- -------- Accrued benefit cost......................... $(80,477) $(75,531) ======== ========
Net periodic benefit cost is made up of the components listed below (In thousands):
PERIOD | PERIOD FROM | FROM FEBRUARY 12 | JANUARY 1 YEARS ENDED TO | TO DECEMBER 31, DECEMBER 31, | FEBRUARY 11, ---------------------- | 1998 1997 1996 | 1996 ---------- ---------- ------------- | ------------ | COMPONENTS OF NET PERIODIC | BENEFIT COST: | Service cost...................................... $2,818 $2,538 $2,209 | $ 279 Interest cost..................................... 5,822 5,254 4,723 | 607 Expected return on plan assets.................... (271) (250) (146) | - Amortization of unrecognized transition | obligation..................................... - - - | 263 Recognition of previously unrecognized | items.......................................... - - - | 52,340 Recognized (gain) loss............................ - (7) - | 60 ------ ------ ------ | ------- Net periodic benefit cost.................... $8,369 $7,535 $6,786 | $53,549 ====== ====== ====== | =======
81 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS Weighted average assumptions are as follows:
1998 1997 1996 ------ ------ ------ Discount rate......................................... 6.75% 7.00% 7.50% Expected return on plan assets........................ 4.50% 4.50% 4.50% Rate of compensation increase......................... 5.00% 5.00% 5.00%
The net periodic 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. For measurement purposes, a 10.2% 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 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. The effect of a 1% change in these assumed health care cost trend rates would increase or decrease the benefit obligation by $11.9 million or $10.6 million, respectively. In addition, such a 1% change would increase or decrease the aggregate service and interest cost components of net periodic benefit cost by $1.3 million or $1.2 million, respectively. ALL EMPLOYEE CASH BONUS PLAN The All Employee Cash Bonus Plan (the "Bonus Plan"), introduced in early 1997, was established to reward employees for their contribution in helping the Company attain its corporate goals. Eligible employees below manager level would receive a cash bonus if the Company attained established levels of safety, customer satisfaction and cash flow during 1998. The cash flow goal had to be met before any bonus amounts would be paid and improvement in cash flow must be greater than any bonus amounts paid. The Company was able to surpass the required minimum levels of improvement in all of the performance measures. As a result of the Company's success, the Company distributed approximately $4.3 million in cash bonuses to all eligible employees in February 1999. The bonus was expensed in 1998. The Company has renewed the Bonus Plan in 1999 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. The New Mexico legislature has 82 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS passed legislation which purports to give Las Cruces the authority to condemn the 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 represent approximately 3% of annual operating revenues. The Company signed a contract with Ft. Bliss in December 1998, under which Ft. Bliss will take service from the Company through December 2008. The Company has a contract to provide retail electric service to Holloman for a ten-year term which began in December 1995. In 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. The Army will provide the Company written notice of termination of such contract 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, financing obligations 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. 83 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS The fair values of the Company's long-term debt and financing obligations, including the current portion thereof, and preferred stock, are based on estimated market prices for similar issues at December 31, 1998 and 1997 and are presented in the table below (In thousands):
1998 1997 ---------------------------- ---------------------------- ESTIMATED ESTIMATED CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------------ ----------- ------------ ----------- First Mortgage Bonds (1)...................... $714,554 $ 810,258 $744,781 $ 814,857 Pollution Control Bonds....................... 193,135 193,135 (2) 193,135 193,135 (2) Nuclear Fuel Financing(1)..................... 49,316 49,316 (3) 51,999 51,999 (3) -------- ----------- -------- ----------- Total..................................... $957,005 $ 1,052,709 $989,915 $ 1,059,991 ======== =========== ======== =========== Preferred Stock............................... $135,744 $ 148,896 (4) $121,319 $ 131,752 ======== =========== ======== ===========
_______________ (1) Includes current maturities. (2) The interest rate on the Company's pollution control bonds is reset weekly to reflect current market rates. Consequently, the carrying value approximates fair value. (3) The interest rate on the Company's financing for nuclear fuel purchases is reset every quarter to reflect current market rates. Consequently, the carrying value approximates fair value. (4) Represents amount paid on March 1, 1999 for the early redemption of the Series A Preferred Stock, accrued cash dividends and premium. See Note E. 84 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS M. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1998 QUARTERS 1997 QUARTERS -------------------------------------- ---------------------------------------- 4TH(1) 3RD 2ND 1ST 4TH(1) 3RD 2ND 1ST -------- -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS EXCEPT FOR SHARE DATA) Operating revenues.............................. $141,980 $176,893 $146,403 $136,945 $143,766 $170,140 $144,275 $135,857 Operating income................................ 29,031 58,850 40,718 33,940 31,210 59,179 40,045 31,233 Income before extraordinary items............... 6,814 26,049 13,695 10,515 8,743 23,988 16,245 5,592 Extraordinary gain on discharge of debt, net of income tax expense............................. 3,343 - - - - - - - Extraordinary loss on repurchases of debt, net of federal income tax benefit.................. - - - - (35) (69) (427) (2,244) Net income applicable to common stock........... 6,324 22,322 10,071 6,992 5,282 20,588 12,580 199 Basic earnings per common share: Income before extraordinary items.............. 0.049 0.371 0.167 0.116 0.089 0.343 0.216 0.040 Extraordinary gain on discharge of debt, net of income tax expense............................ 0.056 - - - - - - - Extraordinary loss on repurchases of debt, net of federal income tax benefit................. - - - - (0.001) (0.001) (0.007) (0.037) Net income..................................... 0.105 0.371 0.167 0.116 0.088 0.342 0.209 0.003 Diluted earnings per common share: Income before extraordinary items.............. 0.049 0.368 0.166 0.116 0.088 0.343 0.216 0.040 Extraordinary gain on discharge of debt, net of income tax expense............................ 0.055 - - - - - - - Extraordinary loss on repurchases of debt, net of federal income tax benefit................. - - - - (0.001) (0.001) (0.007) (0.037) Net income..................................... 0.104 0.368 0.166 0.116 0.087 0.342 0.209 0.003
___________ (1) Includes an all employee bonus. See Note J. 85 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 1999 Annual Meeting of Shareholders (the "1999 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 1999 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference from the 1999 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated herein by reference from the 1999 Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as a part of this report:
Page ---- 1. Financial Statements: See Index to Financial Statements....................... 38 2. Financial Statement Schedules: All schedules are omitted as the required information is not applicable or is included in the financial statements or related notes thereto. 3. Exhibits
Certain of the following documents are filed herewith. Certain other of the following exhibits have heretofore been filed with the Securities and Exchange Commission, and, pursuant to Rule 12b-32 and Regulation 201.24, are incorporated herein by reference. 86 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) 87 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) 88 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) 89 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) 90 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) 91 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) 92 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. (Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997) 10.19 - Power Sales Agreement No. 2, dated December 2, 1986, between the Company and Imperial Irrigation District, and Amendment No. 1 thereto. (Exhibit 10.19 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 10.20 - Arizona Nuclear Power Project Transmission Project Westwing Switchyard Amended Interconnection Agreement, dated August 14, 1986, between The United States of America; Arizona Public Service Company; Department of Water and Power of the City of Los Angeles; Nevada Power Company; Public Service Company of New Mexico; Salt River Project Agricultural Improvement and Power District; Tucson Electric Power Company; and the Company. (Exhibit 10.72 to the Company's Annual Report on Form 10-K for the year ended December 31, 1986) 10.21 - Power Sales Agreement, dated April 29, 1987, between the Company and Texas-New Mexico Power Company, and Amendment No. 1 thereto. (Exhibit 10.21 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 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) 93 *10.24 - Credit Agreement, dated as of February 12, 1996, as amended and restated as of February 8, 1999, between the Company, Chase Manhattan Bank, as agent, and Chase Bank of Texas, National Association, as Trustee. *10.24-01 - Amendment Agreement, dated as of February 8, 1999, 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) 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) 94 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) *10.38 - Employment Agreement for Earnest A. Lehman, dated January 5, 1999. * Exhibit 11 - Statement re Computation of Per Share Earnings Exhibit 23 - Consent of Experts: *23.01 - Consent of KPMG LLP (set forth on page 101 of this report). Exhibit 24 - Power of Attorney: *24.01 - Power of Attorney (set forth on page 100 of this report). *24.02 - Certified copy of resolution authorizing signatures pursuant to power of attorney. * Exhibit 27 - Financial Data Schedule (EDGAR filing only) Exhibit 99 - Additional Exhibits: 99.01 - Agreed Order, entered August 30, 1995, by the Public Utility Commission of Texas. (Exhibit 99.31 to Registration Statement No. 33-99744 on Form S-1) 99.02 - Restricted Stock Award Agreement, dated as of January 17, 1997, with James S. Haines, Jr. (Exhibit 99.02 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996) 99.03 - Stock Option Agreement, dated as of January 17, 1997, with James S. Haines, Jr. (Exhibit 99.03 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996) 99.03-01 - Amendment No. 1, dated April 30, 1997, to Exhibit 99.03. (Exhibit 99.03-01 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997) 99.04 - Stock Option Agreement, dated as of January 17, 1997, with David H. Wiggs, Jr. (Exhibit 99.04 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996) 99.05 - Directors' Restricted Stock Award Agreement, dated as of January 17, 1997, with George H. Edwards, Jr. (Exhibit 99.05 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996) 95 99.06 - Form of Directors' Restricted Stock Award Agreement between the Company and certain directors of the Company. (Exhibit 99.06 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996) 99.07 - Form of Stock Option Agreement between the Company and certain key officers of the Company. (Exhibit 99.07 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996) 99.08 - Form of Restricted Stock Award Agreement between the Company and certain key officers of the Company. (Exhibit 99.08 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997) 99.09 - Restricted Stock Award Agreement, dated as of June 9, 1997, with Eduardo A. Rodriguez. (Exhibit 99.09 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997) 99.10 - Restricted Stock Award Agreement, dated as of June 15, 1997, with Robert C. McNiel. (Exhibit 99.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997) 99.11 - Restricted Stock Award Agreement, dated as of June 16, 1997, with Guillermo Silva, Jr. (Exhibit 99.12 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997) 99.12 - Restricted Stock Award Agreement, dated as of June 16, 1997, with Pedro Serrano, Jr. (Exhibit 99.13 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997) 99.13 - Restricted Stock Award Agreement, dated as of June 16, 1997, with Thomas L. Newsom. (Exhibit 99.14 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997) 99.14 - Restricted Stock Award Agreement, dated as of June 16, 1997, with John A. Whitacre. (Exhibit 99.15 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997) 99.15 - Restricted Stock Award Agreement, dated as of June 9, 1997, with Terry D. Bassham. (Exhibit 99.16 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997) 99.16 - Form of Stock Option Agreement between the Company and certain directors of the Company. (Exhibit 99.17 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997) 99.17 - Directors' Restricted Stock Award Agreement, dated as of November 13, 1997, with George H. Edwards, Jr. (Exhibit 99.18 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997) 99.18 - Form of Stock Option Agreement between the Company and certain key officers of the Company. (Exhibit 99.01 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998) 96 99.19 - Stock Option Agreement, dated as of January 3, 1998, with Terry D. Bassham. (Exhibit 99.02 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998) 99.20 - Stock Option Agreement, dated as of January 3, 1998, with John C. Horne. (Exhibit 99.03 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998) 99.21 - Form of Restricted Stock Award Agreement between the Company and certain key officers of the Company. (Exhibit 99.04 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998) 99.22 - Restricted Stock Award Agreement, dated as of April 6, 1998, with Robert C. McNiel. (Exhibit 99.05 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998) 99.23 - Restricted Stock Award Agreement, dated as of April 6, 1998, with Guillermo Silva, Jr. (Exhibit 99.07 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998) 99.24 - Restricted Stock Award Agreement, dated as of March 23, 1998, with Pedro Serrano, Jr. (Exhibit 99.08 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998) 99.25 - Restricted Stock Award Agreement, dated as of March 24, 1998, with Thomas L. Newsom. (Exhibit 99.09 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998) 99.26 - Restricted Stock Award Agreement, dated as of March 19, 1998, with John A. Whitacre. (Exhibit 99.10 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998) 99.27 - Restricted Stock Award Agreement, dated as of March 25, 1998, with Terry D. Bassham. (Exhibit 99.11 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998) 99.28 - Restricted Stock Award Agreement, dated as of March 30, 1998, with Eduardo A. Rodriguez . (Exhibit 99.12 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998) 99.29 - Restricted Stock Award Agreement, dated as of March 20, 1998, with Gary R. Hedrick. (Exhibit 99.13 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998) 99.30 - Restricted Stock Award Agreement, dated as of March 25, 1998, with John C. Horne. (Exhibit 99.14 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998) *99.31 - Final Order, entered September 24, 1998, by the New Mexico Public Utility Commission. 97 * Filed herewith. (b) Reports on Form 8-K: The following reports on Form 8-K were filed during the last quarter of 1998: FINANCIAL STATEMENTS DATE OF REPORT ITEM NUMBER REQUIRED TO BE FILED -------------- ----------- -------------------- None 98 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. 99 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 30th day of March 1999. 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 March 30, 1999 /s/ JAMES S. HAINES (Principal Executive Officer) and Director - --------------------------------------- (James S. Haines) Vice President, Chief Financial Officer and Treasurer March 30, 1999 /s/ GARY R. HEDRICK (Principal Financial Officer and Principal Accounting Officer) - --------------------------------------- (Gary R. Hedrick) /s/ WILSON K. CADMAN Director March 30, 1999 - --------------------------------------- (Wilson K. Cadman) /s/ JAMES A. CARDWELL Director March 30, 1999 - --------------------------------------- (James A. Cardwell) /s/ JAMES W. CICCONI Director March 30, 1999 - --------------------------------------- (James W. Cicconi) /s/ GEORGE W. EDWARDS, JR. Director March 30, 1999 - --------------------------------------- (George W. Edwards, Jr.) /s/ RAMIRO GUZMAN Director March 30, 1999 - --------------------------------------- (Ramiro Guzman) /s/ JAMES W. HARRIS Director March 30, 1999 - --------------------------------------- (James W. Harris) /s/ KENNETH R. HEITZ Director March 30, 1999 - --------------------------------------- (Kenneth R. Heitz) /s/ PATRICIA Z. HOLLAND-BRANCH Director March 30, 1999 - --------------------------------------- (Patricia Z. Holland-Branch) /s/ MICHAEL K. PARKS Director March 30, 1999 - --------------------------------------- (Michael K. Parks) /s/ ERIC B. SIEGEL Director March 30, 1999 - --------------------------------------- (Eric B. Siegel) /s/ STEPHEN WERTHEIMER Director March 30, 1999 - --------------------------------------- (Stephen Wertheimer) /s/ CHARLES A. YAMARONE Director March 30, 1999 - --------------------------------------- (Charles A. Yamarone)
100 EX-10.24 2 CREDIT AGREEMENT EXHIBIT 10.24 - -------------------------------------------------------------------------------- EXHIBIT A - CONFORMED COPY El Paso Electric Company Chase Bank of Texas, National Association not in its individual capacity, but solely in its capacity as trustee of the Rio Grande Resources Trust II $ 100,000,000 Credit Agreement dated as of February 12, 1996, as amended and restated as of February 8, 1999, THE CHASE MANHATTAN BANK AS ADMINISTRATIVE AGENT, COLLATERAL AGENT AND ISSUING BANK UNION BANK OF CALIFORNIA, N.A. AS DOCUMENTATION AGENT BARCLAYS BANK PLC, NEW YORK BRANCH AS SYNDICATION AGENT ______________ CHASE SECURITIES INC. AS BOOK MANAGER AND LEAD ARRANGER - -------------------------------------------------------------------------------- TABLE OF CONTENTS Page ---- ARTICLE I. Definitions SECTION 1.01. Defined Terms........................................... 1 SECTION 1.02. Terms Generally......................................... 17 ARTICLE II. The Credits SECTION 2.01. Commitments............................................. 17 SECTION 2.02. Loans................................................... 17 SECTION 2.03. Borrowing Procedure..................................... 19 SECTION 2.04. Evidence of Debt; Repayment of Loans.................... 19 SECTION 2.05. Fees.................................................... 20 SECTION 2.06. Interest on Loans....................................... 20 SECTION 2.07. Default Interest........................................ 21 SECTION 2.08. Alternate Rate of Interest.............................. 21 SECTION 2.09. Termination and Reduction of Commitments................ 21 SECTION 2.10. Conversion and Continuation of Borrowings.............. 21 SECTION 2.11. Optional Prepayment..................................... 22 SECTION 2.12. Reserve Requirements; Change in Circumstances........... 23 SECTION 2.13. Change in Legality...................................... 24 SECTION 2.14. Indemnity............................................... 25 SECTION 2.15. Pro Rata Treatment...................................... 25 SECTION 2.16. Sharing of Setoffs...................................... 25 SECTION 2.17. Payments................................................ 26 SECTION 2.18. Taxes................................................... 26 SECTION 2.19. Assignment of Commitments Under Certain Circumstances; Duty to Mitigate........................................ 28 SECTION 2.20. Letters of Credit....................................... 29 SECTION 2.21. Extension of Maturity Date.............................. 32 ARTICLE III. Representations and Warranties SECTION 3.01. Organization; Powers.................................... 33 SECTION 3.02. Authorization........................................... 33 SECTION 3.03. Enforceability.......................................... 33 SECTION 3.04. Governmental Approvals.................................. 33 SECTION 3.05. Financial Statements.................................... 34 SECTION 3.06. No Material Adverse Change.............................. 34 SECTION 3.07. Title to Properties; Possession Under Leases............ 34 SECTION 3.08. Subsidiaries............................................ 34 SECTION 3.09. Litigation; Compliance with Laws........................ 34 SECTION 3.10. Agreements.............................................. 34 SECTION 3.11. Federal Reserve Regulations............................. 35 SECTION 3.12. Investment Company Act; Public Utility Holding Company Act............................................ 35 SECTION 3.13. Use of Proceeds......................................... 35 SECTION 3.14. Tax Returns............................................. 35 SECTION 3.15. No Material Misstatements............................... 35 SECTION 3.16. Employee Benefit Plans.................................. 35 SECTION 3.17. Environmental Matters................................... 35 SECTION 3.18. Insurance............................................... 36 SECTION 3.19. Security Documents...................................... 36 SECTION 3.20. Labor Matters........................................... 37 SECTION 3.21. Solvency................................................ 37 SECTION 3.22. Capitalization.......................................... 37 SECTION 3.23. Year 2000............................................... 37 ARTICLE IV. Conditions of Lending SECTION 4.01. All Credit Events....................................... 38 SECTION 4.02. Restatement Closing Date................................ 38 ARTICLE V. Affirmative Covenants SECTION 5.01. Existence; Businesses and Properties.................... 40 Contents, p. 2 Page ---- SECTION 5.02. Insurance............................................... 40 SECTION 5.03. Obligations and Taxes................................... 41 SECTION 5.04. Financial Statements, Reports, etc...................... 41 SECTION 5.05. Litigation and Other Notices............................ 42 SECTION 5.06. Employee Benefits....................................... 42 SECTION 5.07. Maintaining Records; Access to Properties and Inspections........................................... 42 SECTION 5.08. Use of Proceeds......................................... 42 SECTION 5.09. Compliance with Environmental Laws...................... 42 SECTION 5.10. Further Assurances...................................... 42 ARTICLE VI. Negative Covenants SECTION 6.01. Indebtedness............................................ 43 SECTION 6.02. Liens................................................... 44 SECTION 6.03. Sale and Lease-Back Transactions........................ 46 SECTION 6.04. Investments, Loans and Advances......................... 46 SECTION 6.05. Mergers, Consolidations and Sales of Assets and Acquisitions.......................................... 46 SECTION 6.06. Dividends and Distributions............................. 46 SECTION 6.07. Transactions with Affiliates............................ 47 SECTION 6.08. Businesses of Borrowers and Subsidiaries................ 47 SECTION 6.09. Other Indebtedness and Agreements....................... 47 SECTION 6.10. Prohibition of Prepayments, Redemptions and Repurchases of Indebtedness......................................... 48 SECTION 6.11. Release of Collateral................................... 48 SECTION 6.12. Net Debt Ratio.......................................... 48 SECTION 6.13. Interest Coverage Ratio................................. 48 SECTION 6.14. Consolidated Capital Expenditures....................... 48 SECTION 6.15. Fiscal Year............................................. 48 ARTICLE VII. Events of Default...................................................... 48 ARTICLE VIII. The Administrative Agent and the Collateral Agent...................... 50 ARTICLE IX. Guarantee SECTION 9.01. Guarantee............................................... 52 SECTION 9.02. Obligations Not Waived.................................. 53 SECTION 9.03. Security................................................ 53 SECTION 9.04. Guarantee of Payment.................................... 53 SECTION 9.05. No Discharge or Diminishment of Guarantee............... 53 SECTION 9.06. Defenses of the Trustee Waived.......................... 53 SECTION 9.07. Agreement to Pay; Subrogation........................... 54 SECTION 9.08. Information............................................. 54 SECTION 9.09. Termination............................................. 54 ARTICLE X. Security SECTION 10.01. First Mortgage Bonds................................... 54 SECTION 10.02. Application of Funds................................... 55 SECTION 10.03. Rights of Bondholders.................................. 55 ARTICLE XI. Miscellaneous SECTION 11.01. Notices................................................ 56 SECTION 11.02. Survival of Agreement.................................. 56 SECTION 11.03. Binding Effect......................................... 56 SECTION 11.04. Successors and Assigns................................. 57 SECTION 11.05. Expenses; Indemnity.................................... 59 SECTION 11.06. Right of Setoff........................................ 60 SECTION 11.07. Applicable Law......................................... 60 SECTION 11.08. Waivers; Amendment..................................... 60 SECTION 11.09. Interest Rate Limitation............................... 61 SECTION 11.10. Entire Agreement....................................... 61 Contents, p. 3 Page ---- SECTION 11.11. Waiver of Jury Trial................................... 61 SECTION 11.12. Severability........................................... 62 SECTION 11.13. Counterparts........................................... 62 SECTION 11.14. Headings............................................... 62 SECTION 11.15. Jurisdiction; Consent to Service of Process............ 62 SECTION 11.16. Confidentiality........................................ 62 SECTION 11.17. Texas Revolving Credit Statute......................... 63 SECTION 11.18. No Recourse............................................ 63 SECTION 11.19. Limited Representations, Warranties and Covenants of Trustee........................................... 63 Contents, p. 4 Page ---- SCHEDULES Schedule 2.01 Commitments Schedule 3.04 Governmental Approvals Schedule 3.09 Litigation and Compliance with Laws Schedule 3.17 Environmental Matters Schedule 3.18 Insurance Schedule 4.02(a) Local Regulatory Counsel Schedule 6.01 Indebtedness Schedule 6.02 Liens Schedule 6.04 Certain Investments EXHIBITS Exhibit A Form of Administrative Questionnaire Exhibit B Form of Assignment and Acceptance Exhibit C Form of Borrowing Request Exhibit D Security Agreement Exhibit E-1 Form of Opinion of Counsel for El Paso Exhibit E-2 Form of Opinion of Counsel for the Trustee Exhibit E-3 Form of Opinion of Federal Regulatory Counsel Exhibit E-4 Form of Opinion of State Regulatory Counsel Exhibit E-5 Form of Opinion of General Counsel of El Paso CREDIT AGREEMENT dated as of February 12, 1996, as amended and restated as of February 8, 1999, among EL PASO ELECTRIC COMPANY, a Texas corporation ("El Paso"), CHASE BANK OF TEXAS, 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"; each of El Paso and the Trustee is referred to individually herein as a "Borrower" and collectively as the "Borrowers"), the Lenders (as defined in Article I), THE CHASE MANHATTAN BANK, as issuing bank (in such capacity, the "Issuing Bank"), as administrative agent (in such capacity, the "Administrative Agent") and as collateral agent (in such capacity, the "Collateral Agent") for the Lenders, UNION BANK OF CALIFORNIA, N.A., as documentation agent (in such capacity, the "Documentation Agent") and BARCLAYS BANK PLC, NEW YORK BRANCH, as syndication agent (in such capacity, the "Syndication Agent"). The Borrowers, the lenders party thereto, the Issuing Bank, the Collateral Agent and the Administrative Agent are parties to a Credit Agreement dated as of February 12, 1996, as amended as of February 12, 1996 and July 31, 1997 (the "Original Credit Agreement"), pursuant to which (a) the Lenders agreed to extend credit in the form of Loans (such term and each other capitalized term used but not defined herein having the meaning given it in Article I) at any time and from time to time prior to the Original Maturity Date, in an aggregate principal amount at any time outstanding not in excess of $100,000,000 less the L/C Exposure at such time and (b) the Issuing Bank agreed to issue letters of credit, in an aggregate face amount at any time outstanding not in excess of $60,000,000, to support payment obligations incurred in the ordinary course of business by the Trustee in respect of the purchase of Nuclear Fuel in accordance with the Trust Agreement and the Purchase Contract and to provide backup liquidity for commercial paper issued to finance such purchases. The Borrowers have requested that the Original Credit Agreement be amended and restated in the form hereof, and the Lenders and the Issuing Bank are willing to so amend and restate the Original Credit Agreement. The proceeds of the Loans are to be used (a) by El Paso solely for general corporate purposes in the ordinary course of El Paso's business and (b) by the Trustee solely (i) to finance the purchase of Nuclear Fuel by the Trustee in accordance with the Trust Agreement and the Purchase Contract, (ii) to provide backup liquidity for commercial paper issued pursuant to the CP Program to finance such purchases and (iii) to pay interest and other amounts payable hereunder by the Trustee as needed. The Letters of Credit shall be issued, if for the account of El Paso, solely for general corporate purposes incurred in the ordinary course of business, and, if for the account of the Trustee, solely to support obligations incurred in the ordinary course of business by the Trustee in respect of the purchase of Nuclear Fuel in accordance with the Trust Agreement and the Purchase Contract and to provide backup liquidity for commercial paper issued to finance such purchases. Accordingly, the parties hereto agree as follows: ARTICLE I Definitions SECTION 1.01. Defined Terms. As used in this Agreement, the following terms shall have the meanings specified below: "ABR Borrowing" shall mean a Borrowing comprised of ABR Loans. 2 "ABR Loan" shall mean any Loan bearing interest at a rate determined by reference to the Alternate Base Rate in accordance with the provisions of Article II. "ABR Spread" shall mean (a) for any day prior to the Restatement Closing Date, 1.50% and (b) for the Restatement Closing Date and each day thereafter, the Applicable Spread in effect for such day for ABR Loans. "ACC" shall mean the Arizona Corporation Commission or any Governmental Authority succeeding to any or all of such Commission's authority. "Administrative Agent Fees" shall have the meaning assigned to such term in Section 2.05(b). "Administrative Questionnaire" shall mean an Administrative Questionnaire in the form of Exhibit A, or such other form as shall be approved by the Administrative Agent. "Affiliate" shall mean, when used with respect to a specified person, another person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the person specified. "Aggregate Credit Exposure" shall mean the aggregate amount of the Lenders' Credit Exposures. "Alternate Base Rate" shall mean, for any day, a rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Base CD Rate in effect on such day plus 1% and (c) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. If for any reason the Administrative Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Base CD Rate or the Federal Funds Effective Rate or both for any reason, including the inability or failure of the Administrative Agent to obtain sufficient quotations in accordance with the terms of the definition thereof, the Alternate Base Rate shall be determined without regard to clause (b) or (c), or both, of the preceding sentence, as appropriate, until the circumstances giving rise to such inability no longer exist. Any change in the Alternate Base Rate due to a change in the Prime Rate, the Base CD Rate or the Federal Funds Effective Rate shall be effective on the effective date of such change in the Prime Rate, the Base CD Rate or the Federal Funds Effective Rate, respectively. The term "Prime Rate" shall mean the rate of interest per annum publicly announced from time to time by the Administrative Agent as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective on the date such change is publicly announced as being effective. The term "Base CD Rate" shall mean the sum of (a) the product of (i) the Three-Month Secondary CD Rate and (ii) Statutory Reserves and (b) the Assessment Rate. The term "Federal Funds Effective Rate" shall mean, for any day, the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for the day for such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "Applicable Percentage" of any Lender at any time shall mean the percentage of the Total Commitment represented by such Lender's Commitment. In the event the Commitments shall have expired or been terminated, the Applicable Percentages shall be determined on the basis of the Commitments most recently in effect. "Applicable Spread" shall mean, for any day, with respect to any ABR Loan or Eurodollar Loan, or with respect to the Commitment Fees, as the case may be, the applicable percentage set forth below under the caption "ABR Spread", "LIBOR Spread" or "Fee Percentage", as the case may be, based upon the lower of the ratings published by S&P and Moody's for the series of First Mortgage Bonds having the longest maturity (the "Long Series"): 3 ABR LIBOR Fee Category S&P Moody's Spread Spread Percentage - -------------------------------------------------------------------------------- 1 *BB- *Ba3 1.500% 2.500% 0.750% - -------------------------------------------------------------------------------- 2 BB- Ba3 1.000% 2.000% 0.500% - -------------------------------------------------------------------------------- 3 BB Ba2 0.625% 1.625% 0.375% - -------------------------------------------------------------------------------- 4 BB+ Ba1 0.250% 1.250% 0.350% - -------------------------------------------------------------------------------- 5 **BB+ **Ba1 0.000% 0.750% 0.300% - -------------------------------------------------------------------------------- * Less than ** Greater than Notwithstanding the foregoing (x) if both S&P and Moody's cease to provide current ratings for the Long Series, the Applicable Spread shall correspond to the percentages listed in Category 1; and (y) at any time after the occurrence and during the continuation of an Event of Default, the Applicable Spread shall correspond to the percentages listed in Category 1. "Arizona Public Utility Act" shall mean Chapter 2, Title 40 of the Arizona Revised Statutes and the rules and regulations promulgated thereunder, as amended from time to time. "Assessment Rate" shall mean for any date the annual rate (rounded upwards, if necessary, to the next 1/100 of 1%) most recently estimated by the Administrative Agent as the then current net annual assessment rate that will be employed in determining amounts payable by the Administrative Agent to the Federal Deposit Insurance Corporation (or any successor thereto) for insurance by such Corporation (or such successor) of time deposits made in dollars at the Administrative Agent's domestic offices. "Assigned Agreements" shall mean (a) each agreement listed on Schedule I to the Security Agreement, (b) each agreement assigned by El Paso to the Trustee after the Original Closing Date (including any such agreements assigned after the Restatement Closing Date) pursuant to the Purchase Contract and (c) each Assignment Agreement (as defined in the Purchase Contract) related to an agreement referred to in clause (a) or (b) above, in each case as amended, supplemented or otherwise modified from time to time. "Assignment and Acceptance" shall mean an assignment and acceptance entered into by a Lender and an assignee, and accepted by the Administrative Agent, in the form of Exhibit B or such other form as shall be approved by the Administrative Agent. "Atomic Energy Act" shall mean the Atomic Energy Act of 1954, 42 U.S.C. (S)(S) 2011 et seq. and the rules and regulations promulgated thereunder, as amended from time to time. "Board" shall mean the Board of Governors of the Federal Reserve System of the United States of America. "Borrowing" shall mean a group of Loans of a single Type made by the Lenders to the same Borrower on a single date and as to which a single Interest Period is in effect. "Borrowing Request" shall mean a request by a Borrower in accordance with the terms of Section 2.03 and substantially in the form of Exhibit C. 4 "Business Day" shall mean any day other than a Saturday, Sunday or day on which banks in New York City are authorized or required by law to close; provided, however, that when used in connection with a Eurodollar Loan, the term "Business Day" shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market. "Capital Lease Obligations" of any person shall mean the obligations of such person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP. "CBT" shall mean Chase Bank of Texas, National Association, a national banking association, together with its successors and assigns. A "Change in Control" shall be deemed to have occurred if (a) any person or group (within the meaning of Rule 13d-5 of the Securities Exchange Act of 1934 as in effect on the date hereof) shall own directly or indirectly, beneficially or of record, shares representing more than 50% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of El Paso; (b) a majority of the members of the Board of Directors of El Paso are not Continuing Directors; (c) any change in control (or similar event, however denominated) with respect to El Paso shall occur under and as defined in the Indenture or any indenture supplemental thereto. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Collateral" shall mean (i) $100,000,000 principal amount of First Mortgage Bonds - Collateral Series H, which First Mortgage Bonds are secured by the lien of the Indenture in the Mortgaged Property in favor of the Indenture Trustee and (ii) all the "Collateral" as defined in the Security Agreement. "Commitment" shall mean, with respect to each Lender, the commitment of such Lender to make Loans hereunder as set forth on Schedule 2.01, or in the Assignment and Acceptance pursuant to which such Lender assumed its Commitment, as applicable, as the same may be (a) reduced from time to time pursuant to Section 2.09 or pursuant to Section 2.19 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 11.04. "Commitment Fee" shall have the meaning assigned to such term in Section 2.05(a). "Common Stock" shall have the meaning assigned to such term in Section 3.22. "Confidential Information Package" shall mean the Confidential Information Package of El Paso dated January, 1998. "Consolidated Capital Expenditures" shall mean, for any period, the sum of (a) the aggregate of all expenditures (whether paid in cash or other consideration or accrued as a liability) by El Paso or any of the Subsidiaries during such period that, in accordance with GAAP, are or should be included in "additions to property, plant and equipment" or similar items reflected in the consolidated statement of cash flows of El Paso and the Subsidiaries for such period (including the amount of assets leased in connection with any Capital Lease Obligation), and (b) to the extent not included pursuant to clause (a) above, the aggregate of all expenditures (whether paid in cash or other consideration or accrued as a liability) by El Paso or any Subsidiary to acquire, by purchase or otherwise, the business, property or fixed assets of, or stock or other evidence of beneficial ownership of, any person. Notwithstanding the foregoing, any purchase of Nuclear 5 Fuel by the Trustee pursuant to the Purchase Contract shall not be deemed to be a capital expenditure for the purpose of determining, for any period, the Consolidated Capital Expenditures. "Consolidated Cash Flow" shall mean, for any period, the Consolidated Net Income for such period plus (i) an amount equal to any extraordinary loss plus any net loss realized in connection with a sale of assets (to the extent such losses were deducted in computing such Consolidated Net Income), plus (ii) provision for taxes based on income or profits of El Paso and the Subsidiaries for such period, to the extent that such provision for taxes was included in computing Consolidated Net Income, plus (iii) Consolidated Interest Expense for such period, whether paid or accrued and whether or not capitalized (including, without limitation, amortization of original issue discount, non-cash interest payments, the interest component of all payments associated with Capital Lease Obligations, imputed interest with respect to any sale and leaseback transaction, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments (if any) pursuant to hedging transactions, but excluding, however, the interest component of any deferred payment obligations), to the extent that any such expense was deducted in computing Consolidated Net Income, plus (iv) depreciation, amortization (including amortization of goodwill and other intangibles but excluding amortization of prepaid cash expenses that were paid in a prior period) and other non-cash charges (excluding any such non-cash charge to the extent that it represents an accrual of or reserve for cash charges in any future period or amortization of a prepaid cash expense that was paid in a prior period) of El Paso and the Subsidiaries for such period to the extent that such depreciation, amortization and other non-cash charges were deducted in computing Consolidated Net Income, minus (v) cash payments made on any deferred payment obligations in such period, in each case, on a consolidated basis and determined in accordance with GAAP. Notwithstanding the foregoing, the provision for taxes on the income or profits of, and the depreciation and amortization and other non-cash charges of, a Subsidiary shall be added to Consolidated Net Income to compute Consolidated Cash Flow only to the extent (and in the same proportion) that the net income of such Subsidiary was included in calculating Consolidated Net Income. "Consolidated EBITDA" shall mean, for any period, Consolidated Net Income for such period, plus, to the extent deducted in computing such Consolidated Net Income, (a) the sum of (i) all Federal, state, local and foreign taxes, (ii) total interest expense (excluding the interest component of any deferred payment obligation) and (iii) depreciation, depletion, amortization of intangibles and other non-cash charges or non-cash losses, minus, to the extent added in computing such Consolidated Net Income, (b) the sum of (i) any interest income and (ii) any non-cash income or non-cash gains, all as determined on a consolidated basis with respect to El Paso and the Subsidiaries in accordance with GAAP. "Consolidated Interest Coverage Ratio" shall mean, for any period, the ratio for such period of (a) Consolidated EBITDA to (b) Consolidated Interest Expense. "Consolidated Interest Expense" shall mean, for any period, the gross interest expense of El Paso and the Subsidiaries for such period determined on a consolidated basis in accordance with GAAP, (a) including (i) the amortization of debt discounts, (ii) the amortization of all fees (including fees with respect to Rate Protection Agreements) payable in connection with the incurrence of Indebtedness to the extent included in interest expense in accordance with GAAP and (iii) the portion of any payments or accruals with respect to Capital Lease Obligations that are allocable to interest expense in accordance with GAAP and (b) excluding the interest component of any deferred payment obligation. For purposes of the foregoing, gross interest expense shall be determined after giving effect to any net payments made or received by the Borrower or any Subsidiary with respect to Rate Protection Agreements. "Consolidated Net Income" shall mean, for any period, net income or loss of El Paso and the Subsidiaries for such period determined on a consolidated basis in accordance with GAAP; provided that there shall be excluded (a) the income of any person in which any other person (other than El Paso or any of its Wholly Owned Subsidiaries or any director holding qualifying shares in accordance with applicable 6 law) has a joint interest, except to the extent of the amount of dividends or other distributions actually paid to El Paso or any Wholly Owned Subsidiary by such person during such period, (b) the income (or loss) of any person accrued prior to the date it becomes a Subsidiary of El Paso or is merged into or consolidated with El Paso or any of the Subsidiaries or the date such person's assets are acquired by El Paso or any of the Subsidiaries, (c) the income of any Subsidiary of El Paso to the extent that the declaration or payment of dividends or similar distributions by such Subsidiary of such income is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to such Subsidiary and (d) any after tax gains or losses attributable to sales of assets out of the ordinary course of business. "Continuing Directors" shall mean, as of any date of determination, any member of the board of directors of El Paso who (i) was a member of such board of directors on the Restatement Closing Date or (ii) was nominated for election or elected to such board of directors with the approval of a majority of Continuing Directors who were members of such board at the time of such nomination or election. "Control" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a person, whether through the ownership of voting securities, by contract or otherwise, and "Controlling" and "Controlled" shall have meanings correlative thereto. "CP Program" shall mean a commercial paper program established by the Trustee pursuant to documentation satisfactory to the Required Lenders for the purpose of financing the purchase of Nuclear Fuel. "Credit Event" shall have the meaning assigned to such term in Section 4.01. "Credit Exposure" shall mean, with respect to any Lender at any time, the aggregate principal amount at such time of all outstanding Loans of such Lender plus the aggregate amount at such time of such Lender's L/C Exposure. "Default" shall mean any event or condition which upon notice, lapse of time or both would constitute an Event of Default. "dollars" or "$" shall mean lawful money of the United States of America. "El Paso L/C Exposure" shall mean that part of the L/C Exposure attributable to all Letters of Credit issued for the account of El Paso. "El Paso Obligations" shall have the meaning assigned to such term in Section 10.01. "environment" shall mean ambient air, surface water and groundwater (including potable water, navigable water and wetlands), the land surface or subsurface strata, the workplace or as otherwise defined in any Environmental Law. "Environmental Claim" shall mean any written accusation, allegation, notice of violation, claim, demand, order, directive, consent decree, cost recovery action or other cause of action by, or on behalf of, any Governmental Authority or any person for damages, injunctive or equitable relief, personal injury (including sickness, disease or death), Remedial Action costs, tangible or intangible property damage, natural resource damages, nuisance, pollution, any adverse effect on the environment caused by any Hazardous Material, or for fines, penalties or restrictions, resulting from or based upon: (a) the existence, or the continuation of the existence, of a Release (including sudden or non-sudden, accidental or non-accidental Releases); (b) exposure to any Hazardous Material; (c) the presence, use, handling, 7 transportation, storage, treatment or disposal of any Hazardous Material; or (d) the violation or alleged violation of any Environmental Law or Environmental Permit. "Environmental Law" shall mean any and all applicable present and future treaties, laws, rules, regulations, codes, ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated or entered into by any Governmental Authority, relating in any way to the environment, preservation or reclamation of natural resources, the management, Release or threatened Release of any Hazardous Material or to health and safety matters, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C. (S)(S) 9601 et seq. (collectively "CERCLA"), the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976 and Hazardous and Solid Waste Amendments of 1984, 42 U.S.C. (S)(S) 6901 et seq., the Federal Water Pollution Control Act, as amended by the Clean Water Act of 1977, 33 U.S.C. (S)(S) 1251 et seq., the Clean Air Act of 1970, 42 U.S.C. (S)(S) 7401 et seq., as amended, the Toxic Substances Control Act of 1976, 15 U.S.C. (S)(S) 2601 et seq., the Occupational Safety and Health Act of 1970, as amended by 29 U.S.C. (S)(S) 651 et seq., the Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C. (S)(S) 11001 et seq., the Safe Drinking Water Act of 1974, as amended by 42 U.S.C. (S)(S) 300(f) et seq., the Hazardous Materials Transportation Act, 49 U.S.C. (S)(S) 5101 et seq., the Atomic Energy Act and Low-Level Radioactive Waste Policy Act, 42 U.S.C. (S)(S) 2014 et seq., as amended, and any similar or implementing state or local law, and all amendments or regulations promulgated thereunder. "Environmental Permit" shall mean any permit, approval, authorization, certificate, license, variance, filing or permission required by or from any Governmental Authority pursuant to any Environmental Law. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as the same may be amended from time to time. "ERISA Affiliate" shall mean any trade or business (whether or not incorporated) that, together with El Paso, is treated as a single employer under Section 414(b) or (c) of the Code, or solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code. "ERISA Event" shall mean (a) any "reportable event", as defined in Section 4043 of ERISA or the regulations issued thereunder, with respect to a Plan; (b) the adoption of any amendment to a Plan that would require the provision of security pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA; (c) the existence with respect to any Plan of an "accumulated funding deficiency" (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (d) the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (e) the incurrence of any liability under Title IV of ERISA with respect to the termination of any Plan or the withdrawal or partial withdrawal of El Paso or any of its ERISA Affiliates from any Plan or Multiemployer Plan; (f) the receipt by El Paso or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to the intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan; (g) the receipt by El Paso or any ERISA Affiliate of any notice concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA; (h) the occurrence of a "prohibited transaction" with respect to which El Paso or any of the Subsidiaries is a "disqualified person" (within the meaning of Section 4975 of the Code) or with respect to which El Paso or any such Subsidiary could otherwise be liable; and (i) any other event or condition with respect to a Plan or Multiemployer Plan that could reasonably be expected to result in liability of El Paso. "Eurodollar Borrowing" shall mean a Borrowing comprised of Eurodollar Loans. 8 "Eurodollar Loan" shall mean any Loan bearing interest at a rate determined by reference to the LIBO Rate in accordance with the provisions of Article II. "Event of Default" shall have the meaning assigned to such term in Article VII. "Excess Cash" shall mean, as of any date of determination, the sum of (a) cash and (b) the fair market value of all Permitted Investments as shown on El Paso's consolidated balance sheet on such date minus $25,000,000; provided, however, that in no event shall "Excess Cash" be deemed to be less than zero. "Farmington Loan Agreements" shall mean, individually and collectively, (a) the Installment Sale Agreement dated as of November 1, 1983, between the City of Farmington, New Mexico and El Paso and (b) the Amended and Restated Installment Sale Agreement dated as of November 1, 1994, between the City of Farmington, New Mexico and El Paso, in each case as amended from time to time in accordance with the terms hereof and thereof. "Farmington Reimbursement Agreement" shall have the meaning assigned to such term in the Indenture. "Federal Power Act" shall mean the Federal Power Act of 1920, 16 U.S.C. (S)(S) 791a et seq., and the rules and regulations promulgated thereunder, as amended from time to time. "Fee Letter" shall mean the Fee Letter dated December 14, 1998, among El Paso, the Administrative Agent and Chase Securities Inc. "Fees" shall mean the Commitment Fees, the Administrative Agent's Fees, the L/C Participation Fees and the Issuing Bank Fees. "FERC" shall mean the Federal Energy Regulatory Commission, or any Governmental Authority succeeding to any or all of such Commission's authority. "Financial Officer" of any corporation shall mean the chief financial officer, principal accounting officer, treasurer, controller or other vice president with financial planning responsibilities of such corporation. "Finsub" shall mean a corporation organized under the laws of a state of the United States of America which is a special purpose wholly-owned subsidiary of El Paso formed solely for the purpose of engaging in the Receivables Program. "First Mortgage Bonds" shall mean each of the Series A, Series B, Series C, Series D, Series E, Collateral Series H, Collateral Series I and Collateral Series J First Mortgage Bonds of El Paso issued pursuant to the Indenture. "First Mortgage Bonds - Collateral Series H" shall mean the Collateral Series H First Mortgage Bonds. "First Supplemental Indenture" shall mean the First Supplemental Indenture dated as of February 1, 1996, to the Indenture, as the same may be amended, supplemented or otherwise modified from time to time in accordance with the provisions thereof and hereof. 9 "Fixed Charge Coverage Ratio" shall mean, for any period, the ratio of Consolidated Cash Flow for such period to Fixed Charges for such period. In the event that El Paso or any of the Subsidiaries incurs, assumes, Guarantees or redeems any Indebtedness (other than Indebtedness created hereunder) or issues any series of preferred stock subsequent to the commencement of the period for which the Fixed Charge Coverage Ratio is being calculated but prior to the date on which the event for which the calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect to such incurrence, assumption, Guarantee or redemption of Indebtedness, or such issuance or redemption of any series of preferred stock, as if the same had occurred at the beginning of the applicable four-quarter reference period. For purposes of making the computation referred to above, (i) acquisitions that have been made by El Paso or any of the Subsidiaries, including through mergers or consolidations and including any related financing transactions, during the four-quarter reference period or subsequent to such reference period and on or prior to the Calculation Date shall be deemed to have occurred on the first day of the four-quarter reference period, and (ii) Consolidated Cash Flow attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of prior to the Calculation Date, shall be excluded, but only to the extent that the obligations giving rise to such Fixed Charges shall not be obligations of El Paso or any of the Subsidiaries following the Calculation Date. "Fixed Charges" shall mean, for any period, the sum of (i) Consolidated Interest Expense for such period, whether paid or accrued (including, without limitation, amortization of original issue discount, non-cash interest payments, the interest component of all payments associated with Capital Lease Obligations, imputed interest with respect to any sale and leaseback transactions, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments (if any) pursuant to hedging transactions, but excluding, however, the interest component of any deferred payment obligations), (ii) Consolidated Interest Expense that was capitalized during such period, (iii) any interest expense on Indebtedness of another person that is Guaranteed by El Paso or one of the Subsidiaries or secured by a Lien on assets of El Paso or one of the Subsidiaries (whether or not such Guarantee or Lien is called upon), and (iv) all cash dividend payments on any series of preferred stock, in each case, on a consolidated basis and in accordance with GAAP. "GAAP" shall mean generally accepted accounting principles in the United States of America applied on a consistent basis. "Governmental Authority" shall mean any Federal, state, local or foreign court or governmental agency, authority, instrumentality or regulatory body. "Guarantee" of or by any person shall mean any obligation, contingent or otherwise, of such person guaranteeing or having the economic effect of guaranteeing any Indebtedness of any other person (the "primary obligor") in any manner, whether directly or indirectly, and including any obligation of such person, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such Indebtedness, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness of the payment of such Indebtedness or (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness; provided, however, that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. "Hazardous Materials" shall mean all explosive or radioactive substances or wastes, hazardous or toxic substances or wastes, pollutants, solid, liquid or gaseous wastes, including petroleum or petroleum distillates, asbestos or asbestos-containing materials, polychlorinated biphenyls ("PCBs") or PCB- containing materials or equipment, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law. 10 "Inactive Subsidiary" shall mean, at any time, any Subsidiary that (a) has assets at such time of $25,000 or less and (b) has not conducted any business activity during the prior six-month period. "Indebtedness" of any person shall mean, without duplication, (a) all obligations of such person for borrowed money or with respect to deposits or advances of any kind, (b) all obligations of such person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such person upon which interest charges are customarily paid, (d) all obligations of such person under conditional sale or other title retention agreements relating to property or assets purchased by such person, (e) all obligations of such person issued or assumed as the deferred purchase price of property or services (excluding trade accounts payable and accrued obligations incurred in the ordinary course of business), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such person, whether or not the obligations secured thereby have been assumed, (g) all Guarantees by such person of Indebtedness of others, (h) all Capital Lease Obligations of such person, (i) all obligations of such person in respect of interest rate protection agreements, foreign currency exchange agreements or other interest or exchange rate hedging arrangements and (j) all obligations of such person as an account party in respect of letters of credit and bankers' acceptances. The Indebtedness of any person shall include the Indebtedness of any partnership in which such person is a general partner. "Indenture" shall mean the General Mortgage Indenture and Deed of Trust dated as of February 1, 1996, by El Paso to the Indenture Trustee, as supplemented by the First Supplemental Indenture, the Second Supplemental Indenture and the Third Supplemental Indenture and as the same may be further supplemented, amended or otherwise modified from time to time in accordance with the provisions thereof and hereof. "Indenture Trustee" shall mean the State Street Bank and Trust Company, as trustee under the Indenture, together with its successors and assigns in such capacity. "Interest Payment Date" shall mean, with respect to any Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Eurodollar Borrowing with an Interest Period of more than three months' duration, each day that would have been an Interest Payment Date had successive Interest Periods of three months' duration been applicable to such Borrowing, and, in addition, the date of any prepayment of such Borrowing or conversion of such Borrowing to a Borrowing of a different Type. "Interest Period" shall mean (a) as to any Eurodollar Borrowing, the period commencing on the date of such Borrowing and ending on the numerically corresponding day (or, if there is no numerically corresponding day, on the last day) in the calendar month that is 1, 2, 3 or 6 months thereafter, as the applicable Borrower may elect and (b) as to any ABR Borrowing, the period commencing on the date of such Borrowing and ending on the earliest of (i) the next succeeding January 31, April 30, July 31 or October 31 and (ii) the Maturity Date; provided, however, that if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless, in the case of a Eurodollar Borrowing only, such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day. Interest shall accrue from and including the first day of an Interest Period to but excluding the last day of such Interest Period. "Issuing Bank Fees" shall have the meaning assigned to such term in Section 2.05(c). "Investment Grade Rating" shall mean a rating of BBB- or better by S&P or Baa3 or better by Moody's. 11 "L/C Commitment" shall mean the commitment of the Issuing Bank to issue Letters of Credit pursuant to Section 2.20. "L/C Disbursement" shall mean a payment or disbursement made by the Issuing Bank pursuant to a Letter of Credit. "L/C Exposure" shall mean at any time the sum of (a) the aggregate undrawn amount of all outstanding Letters of Credit at such time plus (b) the aggregate principal amount of all L/C Disbursements that have not yet been reimbursed at such time. The L/C Exposure of any Lender at any time shall mean its Applicable Percentage of the aggregate L/C Exposure at such time. "L/C Participation Fee" shall have the meaning assigned to such term in Section 2.05(c). "Lenders" shall mean (a) the financial institutions listed on Schedule 2.01 (other than any such financial institution that has ceased to be a party hereto pursuant to an Assignment and Acceptance) and (b) any financial institution that has become a party hereto pursuant to an Assignment and Acceptance. "Letter of Credit" shall mean any letter of credit issued pursuant to Section 2.20. "LIBO Rate" shall mean, with respect to any Eurodollar Borrowing for any Interest Period, the rate appearing on Page 3750 of the Telerate Service (or on any successor or substitute page of such Service, or any successor to or substitute for such Service, providing rate quotations comparable to those currently provided on such page of such Service, as determined by the Administrative Agent from time to time for purposes of providing quotations of interest rates applicable to dollar deposits in the London interbank market) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, as the rate for dollar deposits with a maturity comparable to such Interest Period. In the event that such rate is not available at such time for any reason, then the "LIBO Rate" with respect to such Eurodollar Borrowing for such Interest Period shall be the rate at which dollar deposits of $5,000,000 and for a maturity comparable to such Interest Period are offered by the principal London office of the Administrative Agent in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period. "LIBOR Spread" shall mean (a) for all periods or portions thereof prior to the Restatement Closing Date, 2.50% and (b) for all periods or portions thereof on or after the Restatement Closing Date, the Applicable Spread in effect for such day for Eurodollar Loans. "Lien" shall mean, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, encumbrance, charge or security interest in or on such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities. "Loan Documents" shall mean this Agreement, the Letters of Credit and the Security Agreement. "Loan Parties" shall mean the Borrowers and any Subsidiary that shall become a guarantor of the El Paso Obligations pursuant to Section 5.10. "Loans" shall mean the loans made by the Lenders to the Borrowers pursuant to Section 2.01. Each Loan shall be a Eurodollar Loan or an ABR Loan. 12 "Margin Stock" shall have the meaning assigned to such term in Regulation U. "Maricopa Loan Agreements" shall mean, individually and collectively, (a) the Loan Agreement dated as of December 1, 1983, between Maricopa County, Arizona Pollution Control Corporation ("Maricopa") and El Paso, (b) the Loan Agreement dated as of July 1, 1994, between Maricopa and El Paso, (c) the Loan Agreement dated as of December 1, 1984, between Maricopa and El Paso, and (d) the Loan Agreement dated as of August 1, 1985, between Maricopa and El Paso, in each case as amended from time to time in accordance with the provisions hereof and thereof. "Maricopa Reimbursement Agreement" shall have the meaning assigned to such term in the Indenture. "Material Adverse Effect" shall mean (a) a materially adverse effect on the business, assets, operations, prospects or condition, financial or otherwise, of El Paso and the Subsidiaries, taken as a whole, (b) material impairment of the ability of the Trustee, El Paso or any other Loan Party to perform any of its obligations under any Transaction Document to which it is or will be a party or (c) material impairment of the rights of the Lenders under any Transaction Document. "Maturity Date" shall mean (a) the third anniversary of the Restatement Closing Date or (b) such later date to which the final maturity of the Loans and Commitments shall have been extended pursuant to the provisions of Section 2.21. "Moody's" shall mean Moody's Investors Service, Inc., and its successors. "Mortgaged Property" shall have the meaning assigned to such term in the Indenture. "Multiemployer Plan" shall mean a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "Net Debt" shall mean, as of any date of determination, Total Debt minus Excess Cash. "New Mexico Public Utility Act" shall mean the New Mexico Public Utility Act, N.M. Stat. Ann. (S)(S) 62-13-1 et seq., and the rules and regulations promulgated thereunder, as amended from time to time. "NMPUC" shall mean the New Mexico Public Utilities Commission or any Governmental Authority succeeding to any or all of such Commission's authority. "NRC" shall mean the Nuclear Regulatory Commission or any Governmental Authority succeeding to any or all of such Commission's authority. "Nuclear Fuel" shall have the meaning assigned to such term in the Purchase Contract. "Nuclear Waste Act" shall mean the Nuclear Waste Policy Act of 1982, 42 U.S.C. (S)(S) 10101 et seq., the Nuclear Waste Policy Amendments Act of 1987, 42 U.S.C. (S)(S) 10172, 10172a et seq., and the rules and regulations promulgated thereunder, as amended from time to time. "Original Closing Date" shall mean February 12, 1996. "Original Maturity Date" shall mean February 12, 1999. "Obligations" shall mean, collectively, the Trust Obligations and the El Paso Obligations. 13 "PBGC" shall mean the Pension Benefit Guaranty Corporation referred to and defined in ERISA. "Permitted Investments" shall mean: (a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States of America), in each case maturing within one year from the date of acquisition thereof, and repurchase obligations with a term of not more than seven days for underlying securities of the type described in this clause (a) (without regard to their maturity) entered into with financial institutions with the minimum amount of capital and surplus specified in clause (c) below; (b) investments in commercial paper maturing within 270 days from the date of acquisition thereof and having, at such date of acquisition, the highest credit rating obtainable from S&P or Moody's; (c) investments in certificates of deposit, banker's acceptances and time deposits maturing within one year from the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, any domestic office of any commercial bank (including the Trustee) organized under the laws of the United States of America or any state thereof which has a combined capital and surplus and undivided profits of not less than $250,000,000; and (d) other investment instruments approved in writing by the Required Lenders and offered by financial institutions which have a combined capital and surplus and undivided profits of not less than $250,000,000. "person" shall mean any natural person, corporation, business trust, joint venture, association, company, partnership or government, or any agency or political subdivision thereof. "Plan" shall mean any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 307 of ERISA, and in respect of which the Borrower or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "Preferred Stock" shall have the meaning assigned to such term in Section 3.22. "PUCT" shall mean the Public Utility Commission of Texas or any Governmental Authority succeeding to any or all of such Commission's authority. "Purchase Contract" shall mean the Purchase Contract dated as of February 12, 1996, between the Trustee and El Paso, as the same may be amended, supplemented or otherwise modified from time to time in accordance with the provisions thereof and hereof. "Purchase Contract Default" shall have the meaning assigned to the term "Event of Default" in Section 19(a) of the Purchase Contract. "Rate Protection Agreements" shall mean any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement or similar agreement or arrangement designed to protect El Paso against fluctuations in interest rates and not for speculation. "Rating Agency" shall mean S&P and Moody's. 14 "Receivables Program" shall mean, collectively, (a) the sale of, or transfer of interests in, account receivables and related contract rights ("Receivables") of El Paso to Finsub and (b) the transfer of such Receivables by Finsub to a special purpose trust or corporation which is not an Affiliate of El Paso or Finsub; provided, that all terms and conditions (including, without limitation, any terms or conditions providing for recourse to El Paso or any of the Subsidiaries (other than Finsub)) of, and all documentation relating to, the Receivables Program shall be subject to the prior written approval of the Required Lenders (it being understood and agreed that certain amendments to Article VI and the other provisions of this Agreement may be required in connection with the implementation of the Receivables Program). "Receivables Program Documents" shall mean all agreements, in form and substance reasonably satisfactory to the Required Lenders, that may from time to time be entered into by El Paso or a Subsidiary in connection with any Receivables Program, as such agreements may be amended, supplemented or otherwise modified from time to time in accordance with the provisions thereof and hereof. "Register" shall have the meaning given such term in Section 11.04(d). "Regulation T" shall mean Regulation T of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Regulation U" shall mean Regulation U of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Regulation X" shall mean Regulation X of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Release" shall mean any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, disposing, depositing, dispersing, emanating or migrating of any Hazardous Material in, into, onto or through the environment. "Remedial Action" shall mean (i) "remedial action" as such term is defined in CERCLA, 42 U.S.C. (S) 9601(24), and (ii) all other actions required by any Governmental Authority or voluntarily undertaken to: (x) cleanup, remove, treat, abate or in any other way address any Hazardous Material in the environment; (y) prevent the Release or threat of Release, or minimize the further Release of any Hazardous Material so it does not migrate or endanger or threaten to endanger public health, welfare or the environment; or (z) perform studies and investigations in connection with, or as a precondition to, (x) or (y) above. "Required Lenders" shall mean, at any time, Lenders having Loans, L/C Exposure and unused Commitments representing more than 50% of the sum of all Loans outstanding, L/C Exposure and unused Commitments at such time. "Responsible Officer" of any corporation shall mean any executive officer or Financial Officer of such corporation and any other officer or similar official thereof responsible for the administration of the obligations of such corporation in respect of this Agreement. "Restatement Closing Date" shall mean February 11, 1999. "Rio Grande Resources Trust II" shall mean the trust created by the Trust Agreement. 15 "Second Supplemental Indenture" shall mean the Second Supplemental Indenture dated as of August 19, 1997, to the Indenture, as the same may be amended, supplemented or otherwise modified from time to time in accordance with the provisions thereof and hereof. "Secured Parties" shall have the meaning assigned to such term in the Security Agreement. "Securities Act" shall mean the Securities Act of 1933, as amended from time to time. "Securities Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. "Security Agreement" shall mean the Security Agreement and Assignment of Contracts dated as of the Original Closing Date between the Trustee and the Collateral Agent for the benefit of the Secured Parties, a copy of which is attached hereto as Exhibit D. "S&P" shall mean Standard & Poor's Rating Services and its successors. "Statutory Reserves" shall mean a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board and any other banking authority, domestic or foreign, to which the Administrative Agent or any Lender (including any branch, Affiliate, or other fronting office making or holding a Loan) is subject for new negotiable nonpersonal time deposits in dollars of over $100,000 with maturities approximately equal to three months. Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "Stockholders' Equity" shall mean, as at any date of determination, the stockholders' equity at such date of El Paso, as determined in accordance with GAAP. "Subordinated Indebtedness" shall mean Indebtedness of El Paso that is subordinated to the payment in full of the Obligations and containing terms and conditions (including with respect to amount, rate, tenor and subordination) reasonably satisfactory to the Required Lenders. "subsidiary" shall mean, with respect to any person (herein referred to as the "parent"), any corporation, partnership, association or other business entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or more than 50% of the general partnership interests are, at the time any determination is being made, owned, controlled or held, or (b) that is, at the time any determination is made, otherwise Controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. "Subsidiary" shall mean any subsidiary of El Paso. "Texas Public Utility Regulatory Act" shall mean the Texas Public Utility Regulatory Act of 1995, and the rules and regulations promulgated thereunder, as amended from time to time. "Third Supplemental Indenture" shall mean the Third Supplemental Indenture dated as of January 29, 1999, to the Indenture, as the same may be amended, supplemented or otherwise modified from time to time in accordance with the provisions thereof and hereof. "Three-Month Secondary CD Rate" shall mean, for any day, the secondary market rate for three-month certificates of deposit reported as being in effect on such day (or, if such day shall not be a Business Day, the next preceding Business Day) by the Board through the public information telephone 16 line of the Federal Reserve Bank of New York (which rate will, under the current practices of the Board, be published in Federal Reserve Statistical Release H.15(519) during the week following such day), or, if such rate shall not be so reported on such day or such next preceding Business Day, the average of the secondary market quotations for three-month certificates of deposit of major money center banks in New York City received at approximately 10:00 a.m., New York City time, on such day (or, if such day shall not be a Business Day, on the next preceding Business Day) by the Administrative Agent from three New York City negotiable certificate of deposit dealers of recognized standing selected by it. "Total Capital" shall mean, as at any date of determination, the sum of Total Debt on such date and Stockholders' Equity at such date. "Total Commitment" shall mean, at any time, the aggregate amount of the Commitments, as in effect at such time. The Total Commitment as of the Restatement Closing Date is $100,000,000. "Total Debt" shall mean, as of any date of determination, all Indebtedness (excluding Indebtedness of the type described in clauses (i) and (j) of the definition of the term "Indebtedness") of El Paso at such date. "Transaction Documents" shall mean the Loan Documents, the Indenture and the First Mortgage Bonds - Collateral Series H. "Transactions" shall have the meaning assigned to such term in Section 3.02. "Trust Agreement" shall mean the Trust Agreement dated as of February 12, 1996, between the Trustee and El Paso, providing for the creation of the Rio Grande Resources Trust II, as the same may be amended, supplemented or otherwise modified from time to time in accordance with the provisions thereof and hereof. "Trust Indenture Act" shall mean the Trust Indenture Act of 1939, and the rules and regulations promulgated thereunder, as amended from time to time. "Trust Obligations" shall have the meaning assigned to such term in Section 9.01. "Trust Termination Date" shall mean the date of any termination of the Purchase Contract. "Trustee L/C Exposure" shall mean that part of the L/C Exposure attributable to all Letters of Credit issued for the account of the Trustee. "Trustee's Liens" shall have the meaning assigned to such term in the Purchase Contract. "Type", when used in respect of any Loan or Borrowing, shall refer to the Rate by reference to which interest on such Loan or on the Loans comprising such Borrowing is determined. For purposes hereof, the term "Rate"shall include the LIBO Rate and the Alternate Base Rate. "Wholly Owned Subsidiary" of any person (the "Parent") shall mean a subsidiary of the Parent of which securities (except for directors' qualifying shares) or other ownership interests representing 100% of the equity or 100% of the ordinary voting power or 100% of the general partnership interests are, at the time any determination is being made, owned, controlled or held by the Parent and/or one or more Wholly Owned Subsidiaries of the Parent. 17 "Withdrawal Liability" shall mean liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. SECTION 1.02. Terms Generally. The definitions in Section 1.01 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation" All references herein to Articles, Sections, Exhibits and Schedules shall be deemed references to Articles and Sections of, and Exhibits and Schedules to, this Agreement unless the context shall otherwise require. Except as otherwise expressly provided herein, (a) any reference in this Agreement to any Loan Document shall mean such document as amended, restated, supplemented or otherwise modified from time to time and (b) all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided, however, that for purposes of determining compliance with the covenants contained in Article VI, all accounting terms herein shall be interpreted and all accounting determinations hereunder shall be made in accordance with GAAP as in effect on the date of this Agreement and applied on a basis consistent with the application used in the financial statements referred to in Section 3.05. ARTICLE II The Credits SECTION 2.01. Commitments. Subject to the terms and conditions and relying upon the representations and warranties herein set forth, each Lender agrees, severally and not jointly, to make Loans to the Trustee or El Paso, at any time and from time to time on or after the date hereof, and until the earlier of the Maturity Date and the termination of the Commitment of such Lender in accordance with the terms hereof, in an aggregate principal amount at any time outstanding that will not result in such Lender's Credit Exposure exceeding such Lender's Commitment; provided, however, that at no time shall the sum of (x) the aggregate principal amount of Loans outstanding to the Trustee and (y) the Trustee L/C Exposure exceed $70,000,000. Within the limits set forth in the preceding sentence and subject to the terms, conditions and limitations set forth herein, the Borrowers may borrow, pay or prepay and reborrow Loans. SECTION 2.02. Loans. (a) Each Loan shall be made as part of a Borrowing consisting of Loans made by the Lenders ratably in accordance with their respective Commitments; provided, however, that the failure of any Lender to make any Loan shall not in itself relieve any other Lender of its obligation to lend hereunder (it being understood, however, that no Lender shall be responsible for the failure of any other Lender to make any Loan required to be made by such other Lender). Except for Loans deemed made pursuant to Section 2.02(f), the Loans comprising any Borrowing shall be in an aggregate principal amount that is (i)(A) with respect to any Eurodollar Borrowing, an integral multiple of $1,000,000 and not less than $5,000,000 or (B) with respect to any ABR Borrowing, an integral multiple of $1,000 and not less than $100,000 or (ii) equal to the remaining available balance of the Commitments. (b) Subject to Sections 2.08 and 2.13, each Borrowing shall be comprised entirely of ABR Loans or Eurodollar Loans as the applicable Borrower may request pursuant to Section 2.03. Each Lender may at its option make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement. Borrowings of more than one Type may be outstanding at the same time; provided, however, that the Borrowers shall not be entitled to request any Borrowing that, if made, would result in more than seven Eurodollar Borrowings outstanding hereunder at any time. For purposes of the foregoing, Borrowings having different Interest Periods, regardless of whether they commence on the same date, shall be considered separate Borrowings. 18 (c) Each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds to such account in New York City as the Administrative Agent may designate not later than 11:00 a.m., New York City time, and the Administrative Agent shall by 12:00 (noon), New York City time, credit the amounts so received to an account in the name of the applicable Borrower maintained with the Administrative Agent and designated by such Borrower in the applicable Borrowing Request or, if a Borrowing shall not occur on such date because any condition precedent herein specified shall not have been met, return the amounts so received to the respective Lenders. (d) Unless the Administrative Agent shall have received notice from a Lender prior to the date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender's portion of such Borrowing, the Administrative Agent may assume that such Lender has made such portion available to the Administrative Agent on the date of such Borrowing in accordance with paragraph (c) above and the Administrative Agent may, in reliance upon such assumption, make available to the applicable Borrower on such date a corresponding amount. If the Administrative Agent shall have so made funds available then, to the extent that such Lender shall not have made such portion available to the Administrative Agent, such Lender and the applicable Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the applicable Borrower until the date such amount is repaid to the Administrative Agent at (i) in the case of either Borrower, the interest rate applicable at the time to the Loans comprising such Borrowing and (ii) in the case of such Lender, the Federal Funds Effective Rate. If such Lender shall repay to the Administrative Agent such corresponding amount, such amount shall constitute such Lender's Loan as part of such Borrowing for purposes of this Agreement. (e) Notwithstanding any other provision of this Agreement, (i) neither Borrower shall be entitled to request any Borrowing if the Interest Period requested with respect thereto would end after the Maturity Date and (ii) the Trustee shall not be entitled to request any Borrowing on or after the Trust Termination Date. (f) If the Issuing Bank shall not have received from the Trustee or El Paso, as the case may be, the payment required to be made by Section 2.20(e) within the time specified in such Section, the Issuing Bank will promptly notify the Administrative Agent of the L/C Disbursement and the Administrative Agent will promptly notify each Lender of such L/C Disbursement and its Applicable Percentage thereof. Each Lender shall pay by wire transfer of immediately available funds to the Administrative Agent not later than 2:00 p.m., New York City time, on such date (or, if such Lender shall have received such notice later than 12:00 (noon), New York City time, on any day, not later than 10:00 a.m., New York City time, on the immediately following Business Day), an amount equal to such Lender's Applicable Percentage of such L/C Disbursement (it being understood that such amount shall be deemed to constitute an ABR Loan of such Lender and such payment shall be deemed to have reduced the L/C Exposure by such amount), and the Administrative Agent will promptly pay to the Issuing Bank amounts so received by it from the Lenders. The Administrative Agent will promptly pay to the Issuing Bank any amounts received by it from the Trustee or El Paso, as the case may be, pursuant to Section 2.20(e) prior to the time that any Lender makes any payment pursuant to this paragraph (f); any such amounts received by the Administrative Agent thereafter will be promptly remitted by the Administrative Agent to the Lenders that shall have made such payments and to the Issuing Bank, as their interests may appear. If any Lender shall not have made its Applicable Percentage of such L/C Disbursement available to the Administrative Agent as provided above, such Lender and the Trustee or El Paso, as the case may be, severally agree to pay interest on such amount, for each day from and including the date such amount is required to be paid in accordance with this paragraph to but excluding the date such amount is paid, to the Administrative Agent at (i) in the case of the Trustee or El Paso, as the case may be, a rate per annum equal to the interest rate 19 applicable to ABR Loans pursuant to Section 2.06(a), and (ii) in the case of such Lender, for the first such day, the Federal Funds Effective Rate, and for each day thereafter, the Alternate Base Rate. SECTION 2.03. Borrowing Procedure. In order to request a Borrowing (other than a deemed Borrowing pursuant to Section 2.02(f), as to which this Section 2.03 shall not apply), the applicable Borrower shall hand deliver or telecopy to the Administrative Agent a duly completed Borrowing Request (a) in the case of a Eurodollar Borrowing, not later than 11:00 a.m., New York City time, three Business Days before a proposed Borrowing, and (b) in the case of an ABR Borrowing, not later than 12:00 noon, New York City time, one Business Day before a proposed Borrowing. Each Borrowing Request shall be irrevocable, shall be signed by or on behalf of the applicable Borrower and shall specify the following information: (i) whether the Borrowing then being requested is to be a Eurodollar Borrowing or an ABR Borrowing; (ii) the date of such Borrowing (which shall be a Business Day); (iii) the number and location of the account to which funds are to be disbursed (which shall be an account that complies with the requirements of Section 2.02(c)); (iv) the amount of such Borrowing; and (v) if such Borrowing is to be a Eurodollar Borrowing, the Interest Period with respect thereto; provided, however, that, notwithstanding any contrary specification in any Borrowing Request, each requested Borrowing shall comply with the requirements set forth in Section 2.02. If no election as to the Type of Borrowing is specified in any such notice, then the requested Borrowing shall be an ABR Borrowing. If no Interest Period with respect to any Eurodollar Borrowing is specified in any such notice, then the applicable Borrower shall be deemed to have selected an Interest Period of one month's duration. The Administrative Agent shall promptly advise the Lenders of any notice given pursuant to this Section 2.03 (and the contents thereof), and of each Lender's portion of the requested Borrowing. SECTION 2.04. Evidence of Debt; Repayment of Loans. (a) Each Borrower hereby unconditionally promises to pay to the Administrative Agent for the account of each Lender the then unpaid principal amount of each Loan made to such Borrower on the Maturity Date; provided, however, that if the Purchase Contract shall terminate prior to the Maturity Date, the Trustee shall repay the unpaid principal amount of each Loan made to it on the earlier of (i) the Maturity Date, (ii) the 150th day following the Trust Termination Date, (iii) if any Event of Default that is not a Purchase Contract Default shall be in existence on the Trust Termination Date or shall thereafter occur, the 10th day following the later to occur of the Trust Termination Date or such Event of Default or (iv) if a Purchase Contract Default shall have occurred, on (A) the date of such occurrence or (B) such later date as the Administrative Agent may elect. (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of each Borrower to such Lender resulting from each Loan made by such Lender from time to time, including the amounts of principal and interest payable and paid such Lender from time to time under this Agreement. (c) The Administrative Agent shall maintain accounts in which it will record (i) the amount of each Loan made hereunder, the Type thereof and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from each Borrower to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder from each Borrower and each Lender's share thereof. (d) The entries made in the accounts maintained pursuant to paragraphs (b) and (c) above shall be prima facie evidence of the existence and amounts of the obligations therein recorded; provided, however, that the failure of any Lender or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligations of the Borrowers to repay the Loans in accordance with their terms. 20 (e) Notwithstanding any other provision of this Agreement, in the event any Lender shall request and receive a promissory note payable to such Lender and its registered assigns, the interests represented by such note shall at all times (including after any assignment of all or part of such interests pursuant to Section 11.04) be represented by one or more promissory notes payable to the payee named therein or its registered assigns. SECTION 2.05. Fees. (a) The Borrowers agree, jointly and severally, to pay to each Lender, through the Administrative Agent, on the Restatement Closing Date and on the last day of January, April, July and October in each year and on each date on which the Commitment of such Lender shall expire or be terminated as provided herein, a commitment fee (a "Commitment Fee") of (a) for any such period ending on or before the Restatement Closing Date, 0.50% per annum and (b) for all periods thereafter, the Applicable Spread in effect at the beginning of such period, in each case on the average daily unused amount of the Commitment of such Lender during the preceding quarter (or other period commencing on the Restatement Closing Date or ending on the Restatement Closing Date, the Maturity Date or the date on which the Commitments of such Lender shall expire or be terminated). All Commitment Fees shall be computed on the basis of the actual number of days elapsed in a year of 360 days. (b) The Borrowers agree, jointly and severally, to pay to the Administrative Agent the fees set forth in the Fee Letter at the times and in the amounts specified therein (the "Administrative Agent Fees"). (c) The Borrowers agree, jointly and severally, to pay (i) to each Lender, through the Administrative Agent, on the Restatement Closing Date and on the last day of January, April, July and October of each year and on the date on which the Commitment of such Lender shall be terminated as provided herein, a fee (an "L/C Participation Fee") calculated on such Lender's Applicable Percentage of the average daily aggregate L/C Exposure (excluding the portion thereof attributable to unreimbursed L/C Disbursements) during the preceding quarter (or shorter period commencing on the Restatement Closing Date or ending on the Restatement Closing Date, the Maturity Date or the date on which all Letters of Credit have been canceled or have expired and the Commitments of all Lenders shall have been terminated) at a rate equal to (a) for any such period ending on or before the Restatement Closing Date, 2.25% per annum, and (b) for all periods thereafter, the LIBOR Spread and (ii) to the Issuing Bank with respect to each Letter of Credit the fronting fees set forth in the Fee Letter (the "Issuing Bank Fees"). All L/C Participation Fees and Issuing Bank Fees shall be computed on the basis of the actual number of days elapsed in a year of 360 days. (d) All Fees shall be paid on the dates due, in immediately available funds, to the Administrative Agent for distribution, if and as appropriate, among the Lenders, except that the Issuing Bank Fees shall be paid directly to the Issuing Bank. Once paid, none of the Fees shall be refundable under any circumstances. SECTION 2.06. Interest on Loans. (a) Subject to the provisions of Section 2.07, the Loans comprising each ABR Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as the case may be, when the Alternate Base Rate is determined by reference to the Prime Rate and over a year of 360 days at all other times) at a rate per annum equal to the Alternate Base Rate plus the ABR Spread. (b) Subject to the provisions of Section 2.07, the Loans comprising each Eurodollar Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360 days) at a rate per annum equal to the LIBO Rate for the Interest Period in effect for such Borrowing plus the LIBOR Spread in effect for such Borrowing. (c) Interest on each Loan shall be payable on the Interest Payment Dates applicable to such Loan except as otherwise provided in this Agreement. The applicable Alternate Base Rate, LIBO Rate, ABR 21 Spread and LIBOR Spread for each Interest Period or day within an Interest Period, as the case may be, shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error. SECTION 2.07. Default Interest. If either Borrower shall default in the payment of the principal of or interest on any Loan or any other amount becoming due hereunder, by acceleration or otherwise, or under any other Loan Document, such Borrower shall on demand from time to time pay interest, to the extent permitted by law, on such defaulted amount to but excluding the date of actual payment (after as well as before judgment) (a) in the case of overdue principal, at the rate otherwise applicable to such Loan pursuant to Section 2.06 plus 2.00% per annum and (b) in all other cases, at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as the case may be, when determined by reference to the Prime Rate and over a year of 360 days at all other times) equal to the sum of the Alternate Base Rate plus 2.00%. SECTION 2.08. Alternate Rate of Interest. In the event, and on each occasion, that on the day two Business Days prior to the commencement of any Interest Period for a Eurodollar Borrowing the Administrative Agent shall have determined that dollar deposits in the principal amounts of the Loans comprising such Borrowing are not generally available in the London interbank market, or that the rates at which such dollar deposits are being offered will not adequately and fairly reflect the cost to any Lender of making or maintaining its Eurodollar Loan during such Interest Period, or that reasonable means do not exist for ascertaining the LIBO Rate, the Administrative Agent shall, as soon as practicable thereafter, give written or telecopy notice of such determination to the Borrowers and the Lenders. In the event of any such determination, until the Administrative Agent shall have advised the Borrowers and the Lenders that the circumstances giving rise to such notice no longer exist, any request by either Borrower for a Eurodollar Borrowing pursuant to Section 2.03 shall be deemed to be a request for an ABR Borrowing. Each determination by the Administrative Agent hereunder shall be conclusive absent manifest error. SECTION 2.09. Termination and Reduction of Commitments. (a) The Commitments and the L/C Commitment shall automatically terminate on the Maturity Date. (b) Upon at least three Business Days' prior irrevocable written or telecopy notice to the Administrative Agent, the Borrowers may at any time in whole permanently terminate, or from time to time in part permanently reduce, the Commitments; provided, however, that (i) each partial reduction of the Commitments shall be in an integral multiple of $1,000,000 and in a minimum amount of $5,000,000 and (ii) the Total Commitment shall not be reduced to an amount that is less than the Aggregate Credit Exposure at the time. (c) Each reduction in the Commitments hereunder shall be made ratably among the Lenders in accordance with their respective Commitments. The Borrowers shall pay to the Administrative Agent for the account of the applicable Lenders, on the date of each termination or reduction, the Commitment Fees on the amount of the Commitments so terminated or reduced accrued to but excluding the date of such termination or reduction. SECTION 2.10. Conversion and Continuation of Borrowings. The applicable Borrower shall have the right at any time upon prior irrevocable notice to the Administrative Agent (a) not later than 12:00 (noon), New York City time, one Business Day prior to conversion, to convert any Eurodollar Borrowing into an ABR Borrowing, (b) not later than 10:00 a.m., New York City time, three Business Days prior to conversion or continuation, to convert any ABR Borrowing into a Eurodollar Borrowing or to continue any Eurodollar Borrowing as a Eurodollar Borrowing for an additional Interest Period, and (c) not later than 10:00 a.m., New York City time, three Business Days prior to conversion, to convert the Interest Period with respect to any Eurodollar Borrowing to another permissible Interest Period, subject in each case to the following: 22 (i) each conversion or continuation shall be made pro rata among the Lenders in accordance with the respective principal amounts of the Loans comprising the converted or continued Borrowing; (ii) if less than all the outstanding principal amount of any Borrowing shall be converted or continued, then each resulting Borrowing shall satisfy the limitations specified in Sections 2.02(a) and 2.02(b) regarding the principal amount and maximum number of Borrowings of the relevant Type; (iii) each conversion shall be effected by each Lender and the Administrative Agent by recording for the account of such Lender the new Loan of such Lender resulting from such conversion and reducing the Loan (or portion thereof) of such Lender being converted by an equivalent principal amount; accrued interest on any Eurodollar Loan (or portion thereof) being converted shall be paid by such Borrower at the time of conversion; (iv) if any Eurodollar Borrowing is converted at a time other than the end of the Interest Period applicable thereto, such Borrower shall pay, upon demand, any amounts due to the Lenders pursuant to Section 2.14; (v) any portion of a Borrowing maturing in less than one month may not be converted into or continued as a Eurodollar Borrowing; (vi) any portion of a Eurodollar Borrowing that cannot be converted into or continued as a Eurodollar Borrowing by reason of the immediately preceding clause shall be automatically converted at the end of the Interest Period in effect for such Borrowing into an ABR Borrowing; and (vii) upon notice to the Borrowers from the Administrative Agent given at the request of the Required Lenders, after the occurrence and during the continuance of a Default or Event of Default, no outstanding Loan may be converted into, or continued as, a Eurodollar Loan. Each notice pursuant to this Section 2.10 shall be irrevocable and shall refer to this Agreement and specify (w) the identity and amount of the Borrowing that the applicable Borrower requests be converted or continued, (x) whether such Borrowing is to be converted to or continued as a Eurodollar Borrowing or an ABR Borrowing, (y) if such notice requests a conversion, the date of such conversion (which shall be a Business Day) and (z) if such Borrowing is to be converted to or continued as a Eurodollar Borrowing, the Interest Period with respect thereto. If no Interest Period is specified in any such notice with respect to any conversion to or continuation as a Eurodollar Borrowing, the applicable Borrower shall be deemed to have selected an Interest Period of one month's duration. The Administrative Agent shall advise the Lenders of any notice given pursuant to this Section 2.10 and of each Lender's portion of any converted or continued Borrowing. If a Borrower shall not have given notice in accordance with this Section 2.10 to continue any Borrowing into a subsequent Interest Period (and shall not otherwise have given notice in accordance with this Section 2.10 to convert such Borrowing), such Borrowing shall, at the end of the Interest Period applicable thereto (unless repaid pursuant to the terms hereof), automatically be continued into a new Interest Period as an ABR Borrowing. SECTION 2.11. Optional Prepayment. (a) Each Borrower shall have the right at any time and from time to time to prepay any Borrowing, in whole or in part, upon written or telecopy notice (or telephone notice promptly confirmed by written or telecopy notice) to the Administrative Agent before 12:00 (noon), New York City time (i) in the case of any prepayment of a Eurodollar Borrowing, at least three Business Days prior to the date designated for such prepayment or (ii) in the case of any prepayment 23 of an ABR Borrowing, at least one Business Day prior to the date designated for such prepayment; provided, however, that each partial prepayment shall be in an amount that is (x) in the case of any partial prepayment of a Eurodollar Borrowing, an integral multiple of $1,000,000 and not less than $5,000,000 or (y) in the case of any partial prepayment of an ABR Borrowing, an integral multiple of $1,000 and not less than $100,000. (b) In the event of any termination of all the Commitments, each Borrower shall repay or prepay all its outstanding Borrowings on the date of such termination, together with accrued interest to but excluding the date of such payment. In the event of any partial reduction of the Commitments, then (i) at or prior to the effective date of such reduction or termination, the Administrative Agent shall notify the Borrowers and the Lenders of the Aggregate Credit Exposure after giving effect thereto and (ii) if the Aggregate Credit Exposure would exceed the Total Commitment after giving effect to such reduction or termination, then the Borrowers shall, on the date of such reduction or termination, repay or prepay Borrowings in an amount sufficient to eliminate such excess. (c) Each notice of prepayment shall specify the prepayment date and the principal amount of each Borrowing (or portion thereof) to be prepaid, shall be irrevocable and shall commit the applicable Borrower to prepay such Borrowing by the amount stated therein on the date stated therein. All prepayments under this Section 2.11 shall be subject to Section 2.14 but otherwise without premium or penalty. All prepayments under this Section 2.11 (other than prepayments of ABR Loans prior to the Maturity Date) shall be accompanied by accrued interest on the principal amount being prepaid to the date of payment. SECTION 2.12. Reserve Requirements; Change in Circumstances. (a) Notwithstanding any other provision of this Agreement, if after the date of this Agreement, but prior to the first date on which the events described in clauses (w), (x), (y) and (z) of subsection (d) of this Section 2.12 shall have occurred (the "Obligation Termination Date"), any change in applicable law or regulation or in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof (whether or not having the force of law) shall impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of or credit extended by any Lender or the Issuing Bank or shall impose on such Lender or the Issuing Bank or the London interbank market any other condition affecting this Agreement or Eurodollar Loans made by such Lender or any Letter of Credit or participation therein, and the result of any of the foregoing shall be to increase the cost to such Lender or the Issuing Bank of making or maintaining any Eurodollar Loan or increase the cost to any Lender or the Issuing Bank of issuing or maintaining any Letter of Credit or purchasing or maintaining a participation therein or to reduce the amount of any sum received or receivable by such Lender or the Issuing Bank hereunder (whether of principal, interest or otherwise) by an amount deemed by such Lender or the Issuing Bank to be material, then the applicable Borrower will pay to such Lender or the Issuing Bank, as the case may be, upon demand such additional amount or amounts as will compensate such Lender or the Issuing Bank, as the case may be, for such additional costs incurred or reduction suffered. (b) If any Lender or the Issuing Bank shall have determined that the adoption after the date hereof, but prior to the Obligation Termination Date, of any law, rule, regulation, agreement or guideline regarding capital adequacy, or any change after the date hereof, but prior to the Obligation Termination Date, in any such law, rule, regulation, agreement or guideline (whether such law, rule, regulation, agreement or guideline has been adopted) or in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof, or compliance by any Lender (or any lending office of such Lender) or the Issuing Bank or any Lender's or the Issuing Bank's holding company with any request or directive regarding capital adequacy (whether or not having the force of law) of any Governmental Authority has or would have the effect of reducing the rate of return on such Lender's or the Issuing Bank's capital or on the capital of such Lender's or the Issuing Bank's holding 24 company, if any, as a consequence of this Agreement or the Loans made or participation in Letters of Credit purchased by such Lender pursuant hereto or the Letters of Credit issued by the Issuing Bank pursuant hereto to a level below that which such Lender or the Issuing Bank or such Lender's or the Issuing Bank's holding company could have achieved but for such applicability, adoption, change or compliance (taking into consideration such Lender's or the Issuing Bank's policies and the policies of such Lender's or the Issuing Bank's holding company with respect to capital adequacy) by an amount deemed by such Lender or the Issuing Bank to be material, then from time to time the applicable Borrower shall pay to such Lender or the Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or the Issuing Bank or such Lender's or the Issuing Bank's holding company for any such reduction suffered. (c) A certificate of a Lender or the Issuing Bank setting forth the amount or amounts necessary to compensate such Lender or the Issuing Bank or its holding company, as applicable, as specified in paragraph (a) or (b) above shall be delivered to the applicable Borrower and shall be conclusive absent manifest error. The applicable Borrower shall pay such Lender or the Issuing Bank the amount shown as due on any such certificate delivered by it within 10 days after its receipt of the same. (d) Failure or delay on the part of any Lender or the Issuing Bank to demand compensation for any increased costs or reduction in amounts received or receivable or reduction in return on capital shall not constitute a waiver of such Lender's or the Issuing Bank's right to demand such compensation under this Section 2.12 for any costs incurred or reduction suffered with respect to any date so long as such Lender or the Issuing Bank, as applicable, shall have notified the applicable Borrower that it will demand compensation for such costs or reduction under paragraph (c) above, not more than 90 days after the later of (i) such date and (ii) the date on which such Lender or the Issuing Bank, as applicable, shall have become aware of such costs or reduction. Notwithstanding the foregoing, no notification contemplated by the preceding sentence shall in any event be made more than 30 days after the date that (w) all the Obligations have been indefeasibly paid in full, (x) the Lenders have no further commitment to lend to either of the Borrowers under this Agreement, (y) the L/C Exposure has been reduced to zero and (z) the Issuing Bank has no further obligation to issue Letters of Credit under this Agreement. The protection of this Section 2.12 shall be available to each Lender and the Issuing Bank regardless of any possible contention of the invalidity or inapplicability of the law, rule, regulation, agreement, guideline or other change or condition that shall have occurred or been imposed. SECTION 2.13. Change in Legality. (a) Notwithstanding any other provision of this Agreement, if, after the date hereof, any change in any law or regulation or in the interpretation thereof by any Governmental Authority charged with the administration or interpretation thereof shall make it unlawful for any Lender to make or maintain any Eurodollar Loan or to give effect to its obligations as contemplated hereby with respect to any Eurodollar Loan, then, by written notice to the Borrowers and to the Administrative Agent: (i) such Lender may declare that Eurodollar Loans will not thereafter (for the duration of such unlawfulness) be made by such Lender hereunder (or be continued for additional Interest Periods and ABR Loans will not thereafter (for such duration) be converted into Eurodollar Loans), whereupon any request for a Eurodollar Borrowing (or to convert an ABR Borrowing to a Eurodollar Borrowing or to continue a Eurodollar Borrowing for an additional Interest Period) shall, as to such Lender only, be deemed a request for an ABR Loan (or a request to continue an ABR Loan as such for an additional Interest Period or to convert a Eurodollar Loan into an ABR Loan, as the case may be), unless such declaration shall be subsequently withdrawn; and (ii) such Lender may require that all outstanding Eurodollar Loans made by it be converted to ABR Loans, in which event all such Eurodollar Loans shall be automatically converted to ABR Loans as of the effective date of such notice as provided in paragraph (b) below. 25 In the event any Lender shall exercise its rights under (i) or (ii) above, all payments and prepayments of principal that would otherwise have been applied to repay the Eurodollar Loans that would have been made by such Lender or the converted Eurodollar Loans of such Lender shall instead be applied to repay the ABR Loans made by such Lender in lieu of, or resulting from the conversion of, such Eurodollar Loans. (b) For purposes of this Section 2.13, a notice to the Borrowers by any Lender shall be effective as to each Eurodollar Loan made by such Lender, if lawful, on the last day of the Interest Period currently applicable to such Eurodollar Loan; in all other cases such notice shall be effective on the date of receipt by the Borrowers. SECTION 2.14. Indemnity. Each Borrower shall indemnify each Lender against any loss or expense that such Lender may sustain or incur as a consequence of (a) any event, other than a default by such Lender in the performance of its obligations hereunder, which results in (i) such Lender receiving or being deemed to receive any amount on account of the principal of any Eurodollar Loan to such Borrower prior to the end of the Interest Period in effect therefor, (ii) the conversion of any Eurodollar Loan to such Borrower to an ABR Loan, or the conversion of the Interest Period with respect to any Eurodollar Loan to such Borrower, in each case other than on the last day of the Interest Period in effect therefor, or (iii) any Eurodollar Loan to be made by such Lender to such Borrower (including any Eurodollar Loan to be made pursuant to a conversion or continuation under Section 2.10) not being made after notice of such Loan shall have been given by such Borrower hereunder (any of the events referred to in this clause (a) being called a "Breakage Event") or (b) any default by such Borrower in the making of any payment or prepayment required to be made hereunder. In the case of any Breakage Event, such loss shall include an amount equal to the excess, as reasonably determined by such Lender, of (i) its cost of obtaining funds for the Eurodollar Loan that is the subject of such Breakage Event for the period from the date of such Breakage Event to the last day of the Interest Period in effect (or that would have been in effect) for such Loan over (ii) the amount of interest likely to be realized by such Lender in redeploying the funds released or not utilized by reason of such Breakage Event for such period. A certificate of any Lender setting forth any amount or amounts which such Lender is entitled to receive pursuant to this Section 2.14 shall be delivered to the applicable Borrower and shall be conclusive absent manifest error. SECTION 2.15. Pro Rata Treatment. Except as required under Section 2.13, each Borrowing, each payment or prepayment of principal of any Borrowing, each payment of interest on the Loans, each payment of the Commitment Fees and the L/C Participation Fees, each reduction of the Commitments and each conversion of any Borrowing to or continuation of any Borrowing as a Borrowing of any Type shall be allocated pro rata among the Lenders in accordance with their respective applicable Commitments (or, if such Commitments shall have expired or been terminated, in accordance with the respective principal amounts of their outstanding Loans). Each Lender agrees that in computing such Lender's portion of any Borrowing to be made hereunder, the Administrative Agent may, in its discretion, round each Lender's percentage of such Borrowing to the next higher or lower whole dollar amount. SECTION 2.16. Sharing of Setoffs. Each Lender agrees that if it shall, through the exercise of a right of banker's lien, setoff or counterclaim against either Borrower, or pursuant to a secured claim under Section 506 of Title 11 of the United States Code or other security or interest arising from, or in lieu of, such secured claim, received by such Lender under any applicable bankruptcy, insolvency or other similar law or otherwise, or by any other means, obtain payment (voluntary or involuntary) in respect of any Loan or Loans or L/C Disbursement as a result of which the unpaid principal portion of its Loans and participation in L/C Disbursements shall be proportionately less than the unpaid principal portion of the Loans and participation in L/C Disbursements of any other Lender, it shall be deemed simultaneously to have purchased from such other Lender at face value, and shall promptly pay to such other Lender the purchase price for, a participation in the Loans and L/C Exposure of such other Lender, so that the 26 aggregate unpaid principal amount of the Loans and L/C Exposure and participation in Loans and L/C Exposure held by each Lender shall be in the same proportion to the aggregate unpaid principal amount of all Loans and L/C Exposure then outstanding as the principal amount of its Loans and L/C Exposure prior to such exercise of banker's lien, setoff or counterclaim or other event was to the principal amount of all Loans and L/C Exposure outstanding prior to such exercise of banker's lien, setoff or counterclaim or other event; provided, however, that if any such purchase or purchases or adjustments shall be made pursuant to this Section 2.16 and the payment giving rise thereto shall thereafter be recovered, such purchase or purchases or adjustments shall be rescinded to the extent of such recovery and the purchase price or prices or adjustment restored without interest. Each Borrower expressly consents to the foregoing arrangements and agrees that any Lender holding a participation in a Loan or L/C Disbursement deemed to have been so purchased may exercise any and all rights of banker's lien, setoff or counterclaim with respect to any and all moneys owing by such Borrower to such Lender by reason thereof as fully as if such Lender had made a Loan directly to such Borrower in the amount of such participation. SECTION 2.17. Payments. (a) Each Borrower shall make each payment (including principal of or interest on any Borrowing or any L/C Disbursement or any Fees or other amounts) hereunder and under any other Loan Document not later than 12:00 (noon), New York City time, on the date when due in immediately available dollars, without setoff, defense or counterclaim. Each such payment (other than Issuing Bank Fees, which shall be paid directly to the Issuing Bank if other than the Administrative Agent) shall be made to the Administrative Agent at its offices at One Chase Manhattan Plaza, New York, New York. (b) Whenever any payment (including principal of or interest on any Borrowing or any Fees or other amounts) hereunder or under any other Loan Document shall become due, or otherwise would occur, on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of interest or Fees, if applicable. SECTION 2.18. Taxes. (a) Any and all payments by or on behalf of either Borrower hereunder and under any other Loan Document shall be made, in accordance with Section 2.17, free and clear of and without deduction for any and all current or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding (i) income taxes imposed on the net income of the Administrative Agent, any Lender or the Issuing Bank (or any transferee or assignee thereof, including a participation holder (any such entity a "Transferee") and (ii) franchise taxes imposed on the net income of the Administrative Agent, any Lender or the Issuing Bank (or Transferee), in each case by the jurisdiction under the laws of which the Administrative Agent, such Lender or the Issuing Bank (or Transferee) is organized or any political subdivision thereof (all such nonexcluded taxes, levies, imposts, deductions, charges, withholdings and liabilities, collectively or individually, being called "Taxes". If a Borrower shall be required to deduct any Taxes from or in respect of any sum payable hereunder or under any other Loan Document to the Administrative Agent, any Lender or the Issuing Bank (or any Transferee), (i) the sum payable shall be increased by the amount (an "additional amount") necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.18) the Administrative Agent, such Lender or the Issuing Bank (or Transferee), as the case may be, shall receive an amount equal to the sum it would have received had no such deductions been made, (ii) such Borrower shall make such deductions and (iii) such Borrower shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law. (b) In addition, each Borrower agrees to pay to the relevant Governmental Authority in accordance with applicable law any current or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies that arise from any payment made hereunder or under any other Loan Document or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or any other Loan Document ("Other Taxes"). 27 (c) The Borrowers jointly and severally agree to indemnify the Administrative Agent, each Lender and the Issuing Bank (or Transferee) for the full amount of Taxes and Other Taxes paid by the Administrative Agent, such Lender or the Issuing Bank (or Transferee), as the case may be, and any liability (including penalties, interest and expenses (including reasonable attorney's fees, charges and disbursements)) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability prepared by the Administrative Agent, a Lender or the Issuing Bank (or Transferee), or the Administrative Agent on its behalf, absent manifest error, shall be final, conclusive and binding for all purposes. Such indemnification shall be made within 30 days after the date the Administrative Agent, any Lender or the Issuing Bank (or Transferee), as the case may be, makes written demand therefor. (d) As soon as practicable after the date of any payment of Taxes or Other Taxes by either Borrower to the relevant Governmental Authority, such Borrower will deliver to the Administrative Agent, at its address referred to in Section 11.01, the original or a certified copy of a receipt issued by such Governmental Authority evidencing payment thereof. (e) Each Lender (or Transferee) that is organized under the laws of a jurisdiction other than the United States, any State thereof or the District of Columbia (a "Non-U.S. Lender") shall deliver to the Borrowers and the Administrative Agent two copies of either United States Internal Revenue Service Form 1001 or Form 4224, or, in the case of a Non-U.S. Lender claiming exemption from U.S. Federal withholding tax under Section 871(h) or 881(c) of the Code with respect to payments of "portfolio interest", a Form W-8, or any subsequent versions thereof or successors thereto (and, if such Non-U.S. Lender delivers a Form W-8, a certificate representing that such Non-U.S. Lender is not a bank for purposes of Section 881(c) of the Code, is not a 10-percent shareholder (within the meaning of Section 871(h)(3)(B) of the Code) of either Borrower and is not a controlled foreign corporation related to either Borrower (within the meaning of Section 864(d)(4) of the Code)), properly completed and duly executed by such Non-U.S. Lender claiming complete exemption from, or reduced rate of, U.S. Federal withholding tax on payments by the Borrowers under this Agreement and the other Loan Documents. Such forms shall be delivered by each Non-U.S. Lender on or before the date it becomes a party to this Agreement (or, in the case of a Transferee that is a participation holder, on or before the date such participation holder becomes a Transferee hereunder) and on or before the date, if any, such Non-U.S. Lender changes its applicable lending office by designating a different lending office (a "New Lending Office"). In addition, each Non-U.S. Lender shall deliver such forms promptly upon the obsolescence or invalidity of any form previously delivered by such Non-U.S. Lender. Notwithstanding any other provision of this Section 2.18(e), a Non-U.S. Lender shall not be required to deliver any form pursuant to this Section 2.18(e) that such Non-U.S. Lender is not legally able to deliver. (f) Neither Borrower shall be required to indemnify any Non-U.S. Lender or to pay any additional amounts to any Non-U.S. Lender, in respect of United States Federal withholding tax pursuant to paragraph (a) or (c) above to the extent that (i) the obligation to withhold amounts with respect to United States Federal withholding tax existed on the date such Non-U.S. Lender became a party to this Agreement (or, in the case of a Transferee that is a participation holder, on the date such participation holder became a Transferee hereunder) or, with respect to payments to a New Lending Office, the date such Non-U.S. Lender designated such New Lending Office with respect to a Loan; provided, however, that this paragraph (f) shall not apply (x) to any Transferee or New Lending Office that becomes a Transferee or New Lending Office as a result of an assignment, participation, transfer or designation made at the request of the Borrowers and (y) to the extent the indemnity payment or additional amounts any Transferee, or any Lender (or Transferee), acting through a New Lending Office, would be entitled to receive (without regard to this paragraph (f)) do not exceed the indemnity payment or additional amounts that the person making the assignment, participation or transfer to such Transferee, or Lender (or Transferee) making the designation of such New Lending Office, would have been entitled to receive in the absence of such 28 assignment, participation, transfer or designation or (ii) the obligation to pay such additional amounts would not have arisen but for a failure by such Non-U.S. Lender to comply with the provisions of paragraph (e) above. (g) Nothing contained in this Section 2.18 shall require any Lender or the Issuing Bank (or any Transferee) or the Administrative Agent to make available any of its tax returns (or any other information that it deems to be confidential or proprietary). SECTION 2.19. Assignment of Commitments Under Certain Circumstances; Duty to Mitigate. (a) In the event (i) any Lender or the Issuing Bank delivers a certificate requesting compensation pursuant to Section 2.12, (ii) any Lender or the Issuing Bank delivers a notice described in Section 2.13 or (iii) either Borrower is required to pay any additional amount to any Lender or the Issuing Bank or any Governmental Authority on account of any Lender or the Issuing Bank pursuant to Section 2.18, the Borrowers may, at their sole expense and effort (including with respect to the processing and recordation fee referred to in Section 11.04(b)), upon notice to such Lender or the Issuing Bank and the Administrative Agent, require such Lender or the Issuing Bank to transfer and assign, without recourse (in accordance with and subject to the restrictions contained in Section 11.04), all of its interests, rights and obligations under this Agreement to an assignee that shall assume such assigned obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that (x) such assignment shall not conflict with any law, rule or regulation or order of any court or other Governmental Authority having jurisdiction, (y) except in connection with an assignment to another Lender or an Affiliate thereof, the Borrowers shall have received the prior written consent of the Administrative Agent and the Issuing Bank, which consent shall not unreasonably be withheld, and (z) the Borrowers or such assignee shall have paid to the affected Lender or the Issuing Bank in immediately available funds an amount equal to the sum of the principal of and interest accrued to the date of such payment on the outstanding Loans or L/C Disbursements of such Lender or the Issuing Bank, respectively, plus all Fees and other amounts accrued for the account of such Lender or the Issuing Bank hereunder (including any amounts under Section 2.12 and Section 2.14); provided further that, if prior to any such transfer and assignment the circumstances or event that resulted in such Lender's or the Issuing Bank's claim for compensation under Section 2.12 or notice under Section 2.13 or the amounts paid pursuant to Section 2.18, as the case may be, cease to cause such Lender or the Issuing Bank to suffer increased costs or reductions in amounts received or receivable or reduction in return on capital, or cease to have the consequences specified in Section 2.13, or cease to result in amounts being payable under Section 2.18, as the case may be (including as a result of any action taken by such Lender or the Issuing Bank pursuant to paragraph (b) below), or if such Lender or the Issuing Bank shall waive its right to claim further compensation under Section 2.12 in respect of such circumstances or event or shall withdraw its notice under Section 2.13 or shall waive its right to further payments under Section 2.18 in respect of such circumstances or event, as the case may be, then such Lender or the Issuing Bank shall not thereafter be required to make any such transfer and assignment hereunder. (b) If (i) any Lender or the Issuing Bank shall request compensation under Section 2.12, (ii) any Lender or the Issuing Bank delivers a notice described in Section 2.13 or (iii) either Borrower is required to pay any additional amount to any Lender or the Issuing Bank or any Governmental Authority on account of any Lender or the Issuing Bank pursuant to Section 2.18, then such Lender or the Issuing Bank shall use reasonable efforts (which shall not require such Lender or the Issuing Bank to incur an unreimbursed loss or unreimbursed cost or expense or otherwise take any action inconsistent with its internal policies or legal or regulatory restrictions or suffer any disadvantage or burden deemed by it to be significant) (x) to file any certificate or document reasonably requested in writing by the Borrowers or (y) to assign its rights and delegate and transfer its obligations hereunder to another of its offices, branches or affiliates, if such filing or assignment would reduce its claims for compensation under Section 2.12 or enable it to withdraw its notice pursuant to Section 2.13 or would reduce amounts payable pursuant to Section 2.18, as the case may be, in the future. The Borrowers hereby agree, jointly and severally, to pay all reasonable costs and 29 expenses incurred by any Lender or the Issuing Bank in connection with any such filing or assignment, delegation and transfer. SECTION 2.20. Letters of Credit. (a) General. Each of the Borrowers may request the issuance of a Letter of Credit, in a form reasonably acceptable to the Administrative Agent and the Issuing Bank, appropriately completed, for the account of such Borrower, at any time and from time to time while the Commitments remain in effect and the Trust Termination Date has not occurred. This Section 2.20 shall not be construed to impose an obligation upon the Issuing Bank to issue any Letter of Credit that is inconsistent with the terms and conditions of this Agreement. (b) Notice of Issuance, Amendment, Renewal, Extension; Certain Conditions. In order to request the issuance of a Letter of Credit (or to amend, renew or extend an existing Letter of Credit), the requesting Borrower shall hand deliver or telecopy to the Issuing Bank and the Administrative Agent (reasonably in advance of the requested date of issuance, amendment, renewal or extension) a notice requesting the issuance of a Letter of Credit, or identifying the Letter of Credit to be amended, renewed or extended, the date of issuance, amendment, renewal or extension, the date on which such Letter of Credit is to expire (which shall comply with paragraph (c) below), the amount of such Letter of Credit, the name and address of the beneficiary thereof and such other information as shall be necessary to prepare such Letter of Credit. A Letter of Credit shall be issued, amended, renewed or extended for the account of the Trustee, only if, and upon issuance, amendment, renewal or extension of each Letter of Credit for the account of the Trustee, the Trustee shall be deemed to represent and warrant that, after giving effect to such issuance, amendment, renewal or extension (A) the sum of (i) the aggregate principal amount of the Loans outstanding to the Trustee and (ii) the Trustee L/C Exposure shall not exceed $70,000,000 and (B) the Aggregate Credit Exposure shall not exceed the Total Commitment. A Letter of Credit shall be issued, amended, renewed or extended for the account of El Paso only if, and upon issuance, amendment, renewal or extension of each Letter of Credit for the account of El Paso, El Paso shall be deemed to represent and warrant that, after giving effect to such issuance, amendment, renewal or extension (A) the El Paso L/C Exposure shall not exceed $20,000,000 and (B) the Aggregate Credit Exposure shall not exceed the Total Commitment. (c) Expiration Date. Each Letter of Credit shall expire at the close of business on the earlier of the date one year after the date of the issuance of such Letter of Credit and the date that is five Business Days prior to the Maturity Date, unless such Letter of Credit expires by its terms on an earlier date. Each Letter of Credit may, upon the request of the Trustee, include a provision whereby such Letter of Credit shall be renewed automatically for additional consecutive periods of 12 months or less (but not beyond the date that is five Business Days prior to the Maturity Date) unless the Issuing Bank notifies the beneficiary thereof at least 30 days prior to the then-applicable expiry date that such Letter of Credit will not be renewed. (d) Participation. By the issuance of a Letter of Credit and without any further action on the part of the Issuing Bank or the Lenders, the Issuing Bank hereby grants to each Lender, and each such Lender hereby acquires from the applicable Issuing Bank, a participation in such Letter of Credit equal to such Lender's Applicable Percentage of the aggregate amount available to be drawn under such Letter of Credit, effective upon the issuance of such Letter of Credit. In consideration and in furtherance of the foregoing, each Lender hereby absolutely and unconditionally agrees to pay to the Administrative Agent, for the account of the Issuing Bank, such Lender's Applicable Percentage of each L/C Disbursement made by the Issuing Bank and not reimbursed by the Trustee or El Paso, as the case may be, forthwith on the date due as provided in Section 2.02(f). Each Lender acknowledges and agrees that its obligation to acquire participations pursuant to this paragraph in respect of Letters of Credit is absolute and unconditional and shall not be affected by any circumstance whatsoever, including the occurrence and continuance of a Default or an Event of Default, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. 30 (e) Reimbursement. If the Issuing Bank shall make any L/C Disbursement in respect of a Letter of Credit, the Trustee or El Paso, as the case may be, shall pay to the Administrative Agent an amount equal to such L/C disbursement not later than 4:00 p.m., New York City time on the Business Day on which the Trustee or El Paso, as the case may be, shall have received notice from the Issuing Bank that payment of such draft will be made, or, if the Trustee or El Paso, as the case may be, shall have received such notice later than 10:00 a.m., New York City time, on any Business Day, not later than 1:00 p.m., New York City time, on the immediately following Business Day. Any failure by the Trustee or El Paso, as the case may be, to make a payment under this Section 2.20(e) shall not constitute a Default or an Event of Default if the Issuing Bank shall have been reimbursed for such L/C disbursement out of the proceeds of a deemed Borrowing pursuant to Section 2.02(f). (f) Obligations Absolute. The obligations of the Trustee or El Paso, as the case may be, to reimburse L/C Disbursements as provided in paragraph (e) above shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement, under any and all circumstances whatsoever, and irrespective of: (i) any lack of validity or enforceability of any Letter of Credit or any other Transaction Document, or any term or provision therein; (ii) any amendment or waiver of or any consent to departure from all or any of the provisions of any Letter of Credit or any other Transaction Document; (iii) the existence of any claim, setoff, defense or other right that the Trustee, El Paso or any other party guaranteeing, or otherwise obligated with, the Trustee or El Paso, as the case may be, any Subsidiary or other Affiliate thereof or any other person may at any time have against the beneficiary under any Letter of Credit, the Issuing Bank, the Administrative Agent or any Lender or any other person, whether in connection with this Agreement, any other Transaction Document or any other related or unrelated agreement or transaction; (iv) any draft or other document presented under a Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (v) payment by the Issuing Bank under a Letter of Credit against presentation of a draft or other document that does not comply with the terms of such Letter of Credit; and (vi) any other act or omission to act or delay of any kind of the Issuing Bank, the Lenders, the Administrative Agent or any other person or any other event or circumstance whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Section 2.20, constitute a legal or equitable discharge of the obligations of the Trustee or El Paso, as the case may be, hereunder. Without limiting the generality of the foregoing, it is expressly understood and agreed that the absolute and unconditional obligation of the Trustee or El Paso, as the case may be, hereunder to reimburse L/C Disbursements will not be excused by the gross negligence or willful misconduct of the Issuing Bank. However, the foregoing shall not be construed to excuse the Issuing Bank from liability to the Trustee or El Paso, as the case may be, to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by the Trustee or El Paso, as the case may be, to the extent permitted by applicable law) suffered by the Trustee or El Paso, as the case may be, that are caused by the Issuing Bank's gross negligence or willful misconduct in determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof; it is understood that the Issuing Bank 31 may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary and, in making any payment under any Letter of Credit (i) the Issuing Bank's exclusive reliance on the documents presented to it under such Letter of Credit as to any and all matters set forth therein, including reliance on the amount of any draft presented under such Letter of Credit, whether or not the amount due to the beneficiary thereunder equals the amount of such draft and whether or not any document presented pursuant to such Letter of Credit proves to be insufficient in any respect, if such document on its face appears to be in order, and whether or not any other statement or any other document presented pursuant to such Letter of Credit proves to be forged or invalid or any statement therein proves to be inaccurate or untrue in any respect whatsoever and (ii) any noncompliance in any immaterial respect of the documents presented under such Letter of Credit with the terms thereof shall, in each case, be deemed not to constitute willful misconduct or gross negligence of the Issuing Bank. (g) Disbursement Procedures. The Issuing Bank shall, promptly following its receipt thereof, examine all documents purporting to represent a demand for payment under a Letter of Credit. The Issuing Bank shall as promptly as possible give telephonic notification, confirmed by telecopy, to the Administrative Agent and the Trustee or El Paso, as the case may be, of such demand for payment and whether the Issuing Bank has made or will make an L/C Disbursement thereunder; provided that any failure to give or delay in giving such notice shall not relieve the Trustee or El Paso, as the case may be, of its obligation to reimburse the Issuing Bank and the Lenders with respect to any such L/C Disbursement. The Administrative Agent shall promptly give each Lender notice thereof. (h) Interim Interest. If the Issuing Bank shall make any L/C Disbursement in respect of a Letter of Credit, then, unless the Trustee or El Paso, as the case may be, shall reimburse such L/C Disbursement in full on such date, the unpaid amount thereof shall bear interest for the account of the Issuing Bank, for each day from and including the date of such L/C Disbursement, to but excluding the earlier of the date of payment by the Trustee or El Paso, as the case may be, or the date on which the Issuing Bank is reimbursed by the Lenders pursuant to Section 2.02(f), at the rate per annum that would apply to such amount if such amount were an ABR Loan. (i) Resignation or Removal of the Issuing Bank. The Issuing Bank may resign at any time by giving 180 days' prior written notice to the Administrative Agent, the Lenders and the Borrowers, and may be removed at any time by the Borrowers by notice to the Issuing Bank, the Administrative Agent and the Lenders. Subject to the next succeeding paragraph, upon the acceptance of any appointment as the Issuing Bank hereunder by a Lender that shall agree to serve as successor Issuing Bank, such successor shall succeed to and become vested with all the interests, rights and obligations of the retiring Issuing Bank and the retiring Issuing Bank shall be discharged from its obligations to issue additional Letters of Credit hereunder. At the time such removal or resignation shall become effective, the Borrowers shall pay all accrued and unpaid fees pursuant to Section 2.05(c)(ii). The acceptance of any appointment as the Issuing Bank hereunder by a successor Lender shall be evidenced by an agreement entered into by such successor, in a form satisfactory to the Borrowers and the Administrative Agent, and, from and after the effective date of such agreement, (i) such successor Lender shall have all the rights and obligations of the previous Issuing Bank under this Agreement and the other Loan Documents and (ii) references herein and in the other Loan Documents to the term "Issuing Bank" shall be deemed to refer to such successor or to any previous Issuing Bank, or to such successor and all previous Issuing Banks, as the context shall require. After the resignation or removal of the Issuing Bank hereunder, the retiring Issuing Bank shall remain a party hereto and shall continue to have all the rights and obligations of an Issuing Bank under this Agreement and the other Loan Documents with respect to Letters of Credit issued by it prior to such resignation or removal, but shall not be required to issue additional Letters of Credit. (j) Cash Collateralization. If any Event of Default shall occur and be continuing or the Trust Termination Date shall occur, the Trustee or El Paso, as the case may be, shall, on the Business Day it 32 receives notice from the Administrative Agent or the Required Lenders thereof and of the amount to be deposited, deposit in an account with the Collateral Agent, for the benefit of the Lenders, an amount in cash equal to the Trustee L/C Exposure or the El Paso L/C Exposure, as the case may be, as of such date. Such deposit shall be held by the Collateral Agent as collateral for the payment and performance of the Obligations. The Collateral Agent shall have exclusive dominion and control, including the exclusive right of withdrawal, over such account. Other than any interest earned on the investment of such deposits in Permitted Investments, which investments shall be made at the option and sole discretion of the Collateral Agent, such deposits shall not bear interest. Interest or profits, if any, on such investments shall accumulate in such account. Moneys in such account shall (i) automatically be transferred to the Administrative Agent and be applied by the Administrative Agent to reimburse the Issuing Bank for L/C Disbursements for which it has not been reimbursed, (ii) be held for the satisfaction of the reimbursement obligations of the Trustee or El Paso, as the case may be, for the Trustee L/C Exposure or the El Paso L/C Exposure, as the case may be, at such time and (iii) if the maturity of the Loans has been accelerated, be transferred to the Administrative Agent and be applied to satisfy the Obligations (of both the Trustee and El Paso). If the Trustee or El Paso, as the case may be, is required to provide an amount of cash collateral hereunder as a result of the occurrence of an Event of Default, (x) such amount (to the extent not applied as aforesaid) shall be returned to the Trustee or El Paso, as the case may be, within three Business Days after all Events of Default have been cured or waived and (y) at any time that the amount of such cash collateral exceeds the Trustee L/C Exposure or El Paso L/C Exposure, as the case may be, the amount of such excess shall be promptly returned to the Trustee or El Paso, as the case may be. SECTION 2.21. Extension of Maturity Date. (a) At least 60 days but not more than 180 days before the Maturity Date, the Borrowers may, by giving written notice to the Administrative Agent, request the Lenders to extend the Maturity Date for a period of not more than one year from the then-applicable Maturity Date, specifying the terms and conditions, including applicable fees, to be applicable to such extension (each such request, an "Extension Request"). The Administrative Agent shall promptly furnish a copy of the Extension Request to each Lender, and no later than 30 days from the date on which the Administrative Agent shall have received such Extension Request, the Administrative Agent shall notify the Borrowers of the consent or non-consent of the Lenders to such Extension Request (and Lenders not responding to such Extension Request within such 30-day period shall be deemed not to have consented to such Extension Request). No Extension Request shall be effective without the consent of all the Lenders, and each Lender shall, in its sole and exclusive discretion, determine whether to give such consent. The Lenders' consent to an Extension Request shall be conditional upon (i) the preparation, execution and delivery of legal documentation in form and substance satisfactory to the Lenders and their counsel incorporating the terms and conditions set forth in the Extension Request (as the same may be modified by agreement between the Borrowers and the Lenders) and (ii) the delivery by the Borrowers of such certificates, documents and opinions of counsel as the Administrative Agent or the Lenders may reasonably request. Notwithstanding anything to the contrary contained herein, the Maturity Date may be extended pursuant to this Section 2.21 for a maximum of two additional one-year periods. (b) It shall be a condition to any extension pursuant to this Section 2.21 of the Maturity Date that the First Mortgage Bonds held by the Collateral Agent as collateral for the payment and performance of the El Paso Obligations shall be replaced with an equivalent amount of new mortgage bonds of equal priority of El Paso pursuant to one or more indentures reasonably satisfactory in form and substance to the Lenders. 33 ARTICLE III Representations and Warranties Each of El Paso and, subject to Section 11.19, the Trustee represents and warrants to the Administrative Agent, the Collateral Agent, the Issuing Bank and each of the Lenders that as of the Restatement Closing Date and thereafter on each date as required by Section 4.01(b): SECTION 3.01. Organization; Powers. (a) El Paso (i) is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Texas, (ii) has all requisite power and authority to own its property and assets and to carry on its business as now conducted and as proposed to be conducted, (iii) is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required, except where the failure so to qualify could not reasonably be expected to result in a Material Adverse Effect, and (iv) has the corporate power and authority to execute, deliver and perform its obligations under each of the Transaction Documents to which it is or will be a party and each other agreement or instrument contemplated hereby to which it is or will be a party and to borrow hereunder. (b) CBT is a national banking association duly organized, validly existing and in good standing under the Federal laws of the United States of America, and in its capacity as Trustee, (i) has all requisite power and authority to own its property and assets and to carry on its business as now conducted and as proposed to be conducted and (ii) has all requisite power and authority to execute, deliver and perform its obligations under each of the Loan Documents and each other agreement or instrument contemplated hereby to which it is or will be a party and to borrow hereunder. SECTION 3.02. Authorization. (a) The execution, delivery and performance by it of each of the Transaction Documents, the Trust Agreement, the Purchase Contract and the Assigned Agreements to which it is or will be a party and (b) the Borrowings by it hereunder, the issuance of Letters of Credit, the use by it of the proceeds of the Loans and the Letters of Credit and the creation of the security interests contemplated hereby and by the other Transaction Documents (collectively, the "Transactions"), (x) have been duly authorized by all requisite corporate, trust and, if required, stockholder action and (y) will not (i) violate (A) any provision of law, statute, rule or regulation, or of the articles of incorporation or other constitutive documents or by-laws of El Paso or of the Trust Agreement, as applicable, (B) any order of any Governmental Authority or (C) any provision of any indenture, agreement or other instrument to which it is a party or by which it or any of its property is or may be bound, (ii) be in conflict with, result in a breach of or constitute (alone or with notice or lapse of time or both) a default under, or give rise to any right to accelerate or to require the prepayment, repurchase or redemption of any obligation under any such indenture, agreement or other instrument or (iii) result in the creation or imposition of any Lien upon or with respect to any property or assets now owned or hereafter acquired by it (other than any Lien created hereunder, under the Security Agreement or under the Indenture). SECTION 3.03. Enforceability. Each of the Transaction Documents has been duly executed and delivered by it and constitutes its legal, valid and binding obligation enforceable against it in accordance with such document's terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). SECTION 3.04. Governmental Approvals. Except as set forth on Schedule 3.04, (i) no action, consent or approval of, registration or filing with or any other action by, any Governmental Authority is or will be required in connection with the Transactions, except for such as have been made or obtained, are in full force and effect and are not subject to any appeal or stay and (ii) no action, consent or approval of, registration or filing with or any other action by any Governmental Authority relating to the Securities Act, the Securities Exchange Act, the Trust Indenture Act, the Federal Power Act, the Atomic Energy Act, the 34 Nuclear Waste Act, the Public Utility Holding Company Act of 1935, the New Mexico Public Utility Act, the Texas Public Utility Regulatory Act, the Arizona Public Utility Act, energy or nuclear matters, public utilities, the environment, health and safety is or will be required in connection with the participation by the Administrative Agent, the Collateral Agent or any Lender in any of the transactions contemplated by this Agreement or the other Transaction Documents, except as have been made or obtained, are in full force and effect and shall not be subject to any appeal or stay. SECTION 3.05. Financial Statements. El Paso has heretofore furnished to the Lenders its consolidated balance sheets and related statements of operations, shareholders' equity and cash flows (a) as of and for the fiscal year ended December 31, 1997, audited by and accompanied by the opinion of KPMG Peat Marwick, independent public accountants, and (b) as of and for the fiscal quarter and the portion of the fiscal year ended September 30, 1998, certified by a Financial Officer. Such financial statements present fairly the financial condition and results of operations and cash flows of El Paso and its consolidated Subsidiaries as of such dates and for such periods. Such balance sheets and the notes thereto disclose all material liabilities, direct or contingent, of El Paso and its consolidated Subsidiaries as of the dates thereof. Such financial statements were prepared in accordance with GAAP applied on a consistent basis (except as approved by such accountants or officer, as the case may be, and disclosed therein). SECTION 3.06. No Material Adverse Change. There has been no material adverse change in the business, assets, operations, prospects, condition, financial or otherwise, or material agreements of El Paso and the Subsidiaries, taken as a whole, since September 30, 1998. SECTION 3.07. Title to Properties; Possession Under Leases. (a) Each of El Paso and the Subsidiaries has good and marketable title to, or valid leasehold interests in, all its material properties and assets, except for minor defects in title that do not interfere with its ability to conduct its business as currently conducted or to utilize such properties and assets for their intended purposes. All such material properties and assets are free and clear of Liens, other than Liens expressly permitted by Section 6.02. (b) Each of El Paso and the Subsidiaries has complied with all obligations under all material leases to which it is a party and all such leases are in full force and effect. Each of El Paso and the Subsidiaries enjoys peaceful and undisturbed possession under all such material leases. SECTION 3.08. Subsidiaries. As of the Restatement Closing Date, El Paso has no Subsidiaries other than Inactive Subsidiaries. SECTION 3.09. Litigation; Compliance with Laws. (a) Except as set forth on Schedule 3.09, there are no actions, suits or proceedings at law or in equity or by or before any Governmental Authority now pending or, to its knowledge, threatened against or affecting it or, in the case of El Paso, the Subsidiaries or any business, property or rights of any such person (i) that involve any Transaction Document or the Transactions or (ii) that, if adversely determined, could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect. (b) Except as set forth on Schedule 3.09, neither it nor, in the case of El Paso, any of the Subsidiaries or any of their respective material properties or assets is in violation of, nor will the continued operation of their material properties and assets as currently conducted violate, any law, rule or regulation, or is in default with respect to any judgment, writ, injunction, decree or order of any Governmental Authority, where such violation or default could reasonably be expected to result in a Material Adverse Effect. SECTION 3.10. Agreements. (a) Neither it nor, in the case of El Paso, any of the Subsidiaries is a party to any agreement or instrument or subject to any corporate restriction that has resulted or could reasonably be expected to result in a Material Adverse Effect. 35 (b) Neither it nor, in the case of El Paso, any of the Subsidiaries is in default in any manner under any provision of any indenture or other agreement or instrument evidencing Indebtedness, or any other material agreement or instrument to which it is a party or by which it or any of its properties or assets are or may be bound, where such default could reasonably be expected to result in a Material Adverse Effect. SECTION 3.11. Federal Reserve Regulations. (a) Neither it nor, in the case of El Paso, any of the Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of buying or carrying Margin Stock. (b) No part of the proceeds of any Loan made to it or any Letter of Credit issued for its benefit will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately, for any purpose that entails a violation of, or that is inconsistent with, the provisions of the Regulations of the Board, including Regulation T, U or X. SECTION 3.12. Investment Company Act; Public Utility Holding Company Act. Neither it nor, in the case of El Paso, any of the Subsidiaries is (a) an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940 or (b) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. SECTION 3.13. Use of Proceeds. It will use the proceeds of the Loans and will request the issuance of Letters of Credit only for the purposes specified in the preamble to this Agreement. SECTION 3.14. Tax Returns. Each of El Paso and the Subsidiaries has filed or caused to be filed all Federal, state, local and foreign tax returns or materials required to have been filed by it and has paid or caused to be paid all taxes due and payable by it and all assessments received by it, except taxes that are being contested in good faith by appropriate proceedings and for which El Paso or such Subsidiary, as applicable, shall have set aside on its books adequate reserves. SECTION 3.15. No Material Misstatements. The Confidential Information Package, taken as a whole, does not contain any material misstatement of fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they are made, not misleading; provided that to the extent any part of such information was based upon or constitutes a forecast or projection, El Paso represents only that it acted in good faith and utilized reasonable assumptions and due care in the preparation of such information. SECTION 3.16. Employee Benefit Plans. El Paso and its ERISA Affiliates are in compliance in all material respects with the applicable provisions of ERISA and the Code and the regulations and published interpretations thereunder. No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other such ERISA Events, could reasonably be expected to result in a Material Adverse Effect. Schedule B to the most recent annual report filed with the United States Internal Revenue Service with respect to each Plan is complete and accurate. Since the date of the Schedule B in effect on the Restatement Closing Date, there has been no material adverse change in the funded status of any Plan. None of El Paso or any of its ERISA Affiliates has incurred any liability as a result of a Plan termination which remains outstanding which would subject El Paso or any of its ERISA Affiliates to a liability in excess of $5,000,000. SECTION 3.17. Environmental Matters. Except as set forth in Schedule 3.17: 36 (a) The properties owned or operated by El Paso and the Subsidiaries (the "Properties") do not contain any Hazardous Materials in amounts or concentrations which (i) constitute or constituted a violation of, or (ii) could reasonably be expected to give rise to liability under, Environmental Laws, which violations and liabilities, in the aggregate, could reasonably be expected to result in a Material Adverse Effect; (b) All Environmental Permits have been obtained and are in effect with respect to the Properties and operations of El Paso and the Subsidiaries, and the Properties and all operations of El Paso and the Subsidiaries are in compliance with all Environmental Laws and all necessary Environmental Permits, except to the extent that such non- compliance or failure to obtain any necessary permits, in the aggregate, could not reasonably be expected to result in a Material Adverse Effect; (c) There have been no Releases or threatened Releases at, from, under or proximate to the Properties or otherwise in connection with the operations of El Paso or the Subsidiaries, which Releases or threatened Releases, in the aggregate, could reasonably be expected to result in a Material Adverse Effect; (d) None of El Paso and the Subsidiaries has received any notice of an Environmental Claim in connection with the Properties or the operations of El Paso or the Subsidiaries or with regard to any person whose liabilities for environmental matters El Paso or any Subsidiary has retained or assumed, in whole or in part, contractually, by operation of law or otherwise, which, in the aggregate, could reasonably be expected to result in a Material Adverse Effect, nor do El Paso or the Subsidiaries have reason to believe that any such notice will be received or is being threatened; and (e) Hazardous Materials have not been transported from the Properties, nor have Hazardous Materials been generated, treated, stored or disposed of at, on or under any of the Properties in a manner that could reasonably be expected to give rise to liability under any Environmental Law which could reasonably be expected to result in a Material Adverse Effect, nor have El Paso or the Subsidiaries retained or assumed any liability, contractually, by operation of law or otherwise, with respect to the generation, treatment, storage or disposal of Hazardous Materials, which transportation, generation, treatment, storage or disposal, or retained or assumed liabilities, in the aggregate, could result in a Material Adverse Effect. SECTION 3.18. Insurance. Schedule 3.18 sets forth a true, complete and correct description of all insurance maintained by El Paso as of the Restatement Closing Date. Such insurance is in full force and effect and all premiums have been duly paid. El Paso and the Subsidiaries have insurance in such amounts and covering such risks and liabilities as are in accordance with normal industry practice. SECTION 3.19. Security Documents. (a) In the case of El Paso, the Security Agreement is effective to create in favor of the Collateral Agent, for the ratable benefit of the Secured Parties, a legal, valid and enforceable security interest in the Collateral (as defined in the Security Agreement), and, when combined with the financing statements (or utility filings, as appropriate) already filed, the Security Agreement constitutes a fully perfected Lien on, and security interest in, all right, title and interest of the Trustee in such Collateral, in each case prior and superior in right to any other person, other than with respect to Liens expressly permitted by Section 6.02. (b) In the case of the Trustee, the Collateral is free and clear of all Trustee's Liens and, other than pursuant to the Security Agreement, the Trustee has not granted or created a Lien on any of the Collateral. 37 (c) In the case of El Paso, the Indenture creates in favor of the Indenture Trustee for the ratable benefit of the holders of the First Mortgage Bonds a legal, valid and enforceable security interest in the Mortgaged Property and constitutes a fully perfected Lien on and security interest in all such Mortgaged Property. SECTION 3.20. Labor Matters. As of the Restatement Closing Date, there are no strikes, lockouts or slowdowns against El Paso or the Subsidiaries pending or, to the knowledge of El Paso, threatened. The hours worked by and payments made to employees of El Paso and the Subsidiaries have not been in violation of the Fair Labor Standards Act or any other applicable Federal, state, local or foreign law dealing with such matters, except where any such violation could not reasonably be expected to result in a Material Adverse Effect. All payments due from El Paso or any Subsidiary, or for which any claim may be made against El Paso or any Subsidiary, on account of wages and employee health and welfare insurance and other benefits, have been paid in the ordinary course of business or accrued as a liability on the books of El Paso or such Subsidiary. The consummation of the Transactions will not give rise to any right of termination or right of renegotiation on the part of any union under any collective bargaining agreement to which El Paso is bound. SECTION 3.21. Solvency. As of the Restatement Closing Date, (a) the fair value of the assets of El Paso, at a fair valuation, will exceed its debts and liabilities, subordinated, contingent or otherwise; (b) the present fair saleable value of the property of El Paso will be greater than the amount that will be required to pay the probable liability of its debts and other liabilities, subordinated, contingent or otherwise, as such debts and other liabilities become absolute and matured; (c) El Paso will be able to pay its debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured; and (d) El Paso will not have unreasonably small capital with which to conduct the business in which it is engaged as such business is now conducted and is proposed to be conducted following the Restatement Closing Date. SECTION 3.22. Capitalization. The authorized capital stock of El Paso consists of 100,000,000 shares of common stock, no par value (the "Common Stock"), and 2,000,000 shares of preferred stock, no par value with a liquidation preference of $100 per share. As of the Restatement Closing Date, up to 60,500,000 shares of Common Stock and up to 1,400,000 shares of 11.40% Series A Preferred Stock, no par value with a liquidation preference of $100 per share (the "Preferred Stock"), will be issued and outstanding. All such shares of El Paso have been duly and validly issued, and are fully paid and nonassessable. El Paso has no outstanding securities convertible into or exchangeable for its capital stock or outstanding any rights to subscribe for or to purchase, or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, its capital stock, except for options to purchase shares of Common Stock in connection with option and other stock incentive or benefit plans for the benefit of employees, officers and directors of El Paso. SECTION 3.23. Year 2000. Other than in the case of minor and immaterial computer systems and programs, El Paso's current planning schedule anticipates completion of all of the reprogramming required to permit the proper functioning, in and following the year 2000, of (a) the computer systems of El Paso and (b) equipment containing embedded microchips (including systems and equipment supplied by others or with which El Paso's systems interface) and the testing of all such systems and equipment, as so reprogrammed, prior to June 30, 1999. The cost to El Paso of such reprogramming and testing will not result in a Material Adverse Effect, and the cost to El Paso of the reasonably foreseeable consequences of the year 2000 (including reprogramming errors and the failure of others' systems or equipment) are unlikely to result in a Material Adverse Effect. 38 ARTICLE IV Conditions of Lending The obligations of the Lenders to make Loans and of the Issuing Bank to issue Letters of Credit hereunder are subject to the satisfaction of the following conditions: SECTION 4.01. All Credit Events. On the date of each Borrowing, including on the date of each issuance, amendment, renewal or extension of a Letter of Credit (each such event being called a "Credit Event"): (a) The Administrative Agent shall have received a notice of such Borrowing as required by Section 2.03 (or such notice shall have been deemed given in accordance with Section 2.03) or, in the case of the issuance, amendment, renewal or extension of a Letter of Credit, the Issuing Bank and the Administrative Agent shall have received a notice requesting the issuance, amendment, renewal or extension of such Letter of Credit as required by Section 2.20(b). (b) Except in the case of a Borrowing that does not increase the aggregate principal amount of Loans outstanding of any Lender, the representations and warranties set forth herein and in the other Loan Documents shall be true and correct in all material respects on and as of the date of such Credit Event with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date. (c) Each Borrower shall be in compliance with all the terms and provisions set forth herein and in each other Loan Document on its part to be observed or performed, and at the time of and immediately after such Credit Event, no Event of Default or Default shall have occurred and be continuing. Each Credit Event shall be deemed to constitute a representation and warranty by each Borrower on the date of such Credit Event as to the matters specified in paragraphs (b) (except as aforesaid) and (c) of this Section 4.01. SECTION 4.02. Restatement Closing Date. On the Restatement Closing Date: (a) The Administrative Agent shall have received, on behalf of itself, the Lenders, the Documentation Agent, the Syndication Agent and the Issuing Bank, a favorable written opinion of (i) Sidley & Austin, counsel for El Paso, substantially to the effect set forth in Exhibit E-1, (ii) Scott, Hulse, Marshall, Feuille, Finger & Thurmond, counsel for the Trustee, substantially to the effect set forth in Exhibit E-2, (iii) Thelen, Reid & Preist LLP, Federal regulatory counsel for the Borrowers, substantially to the effect set forth in Exhibit E-3, (iv) each local regulatory counsel listed on Schedule 4.02(a), substantially to the effect set forth in Exhibit E-4, and (v) the General Counsel of El Paso substantially to the effect set forth in Exhibit E-5, in each case (A) dated the Restatement Closing Date, (B) addressed to the Issuing Bank, the Administrative Agent, the Collateral Agent, the Documentation Agent, the Syndication Agent and the Lenders, and (C) covering such other matters relating to the Loan Documents and the Transactions as the Administrative Agent shall reasonably request, and the Borrowers hereby request such counsel to deliver such opinions. (b) The Administrative Agent shall have received (i) a certificate of the Secretary or Assistant Secretary of El Paso dated the Restatement Closing Date and certifying (A) that attached thereto is a true and complete copy of the certificate or articles of incorporation of El Paso filed with the Secretary of State of Texas on or prior to the Restatement Closing Date and as in effect on the Restatement Closing Date, (B) that attached thereto is a true and complete copy of the by-laws of El Paso as in effect on the 39 Restatement Closing Date and at all times since a date prior to the date of the resolutions described in clause (C) below, (C) that attached thereto is a true and complete copy of resolutions duly adopted by the Board of Directors of El Paso authorizing the execution, delivery and performance of this Agreement and the borrowings hereunder, and that such resolutions have not been modified, rescinded or amended and are in full force and effect, (D) that the Trust Agreement has not been modified, rescinded or amended and is in full force and effect, (E) as to the incumbency and specimen signature of each officer executing this Agreement or any other document delivered in connection herewith on behalf of El Paso; (ii) a certificate of another officer of El Paso as to the incumbency and specimen signature of the Secretary or Assistant Secretary executing the certificate pursuant to clause (i) above; (iii) a certificate of the Secretary or Assistant Secretary of CBT dated the Restatement Closing Date and certifying as to the incumbency and specimen signature of each officer executing this Agreement or any other document delivered in connection herewith on behalf of the Trustee; (iv) a certificate of another officer of the Trustee as to the incumbency and specimen signature of the Secretary or Assistant Secretary executing the certificate pursuant to clause (iii) above; and (v) such other documents as the Lenders, the Issuing Bank or Cravath, Swaine & Moore, counsel for the Administrative Agent and the Collateral Agent, may reasonably request. (c) The Administrative Agent shall have received a certificate, dated the Restatement Closing Date and signed by a Financial Officer of El Paso, confirming compliance with the conditions precedent set forth in paragraphs (b) and (c) of Section 4.01. (d) The Administrative Agent shall have received all Fees and other amounts due and payable on or prior to the Restatement Closing Date, including, to the extent invoiced, reimbursement or payment of all out-of-pocket expenses required to be reimbursed or paid by the Borrowers hereunder or under any other Loan Document. (e) The Security Agreement shall be in full force and effect on such date and each document (including each Uniform Commercial Code financing statement) required by law or reasonably requested by the Administrative Agent to be filed, registered or recorded in order to create in favor of the Collateral Agent for the benefit of the Secured Parties a valid, legal and perfected first-priority security interest in and lien on the Collateral (subject to any Lien expressly permitted by Section 6.02) described in such agreement shall have been delivered to the Collateral Agent. (f) All requisite Governmental Authorities shall have approved or consented to the Transactions to the extent required (and such approvals shall be in full force and effect) and there shall be no action, actual or threatened, before any Governmental Authority or arbitrator that (a) has a reasonable likelihood of restraining, preventing or imposing burdensome conditions on the Transactions or (b) could reasonably be expected to result in a Material Adverse Effect. (g) (i) El Paso shall have outstanding no Indebtedness for borrowed money or preferred stock other than (A) Indebtedness permitted pursuant to Schedule 6.01, (B) any Loans made hereunder and (C) Preferred Stock; and (ii) the Trustee shall have outstanding no Indebtedness or other obligations (contingent or otherwise) other than (A) any Loans made or Letters of Credit issued hereunder, (B) commercial paper issued pursuant to the CP Program and backed by Letters of Credit issued hereunder and (C) obligations under the Purchase Contract or the Assigned Agreements. (h) The Lenders shall be reasonably satisfied as to the amount and nature of any contingent liabilities of the Borrowers, including, but not limited to, environmental and health and safety liabilities, and the plans of the Borrowers with respect thereto. (i) The Lenders shall be satisfied with the sufficiency of amounts available under the Facility to meet the ongoing working capital requirements of the Borrowers following the transactions contemplated hereby. 40 (j) The Lenders shall not have received notice of any actual or proposed negative change in the debt rating of any of the First Mortgage Bonds, or any notice that El Paso or any First Mortgage Bonds shall be placed on "CreditWatch" or "WatchList" or any similar list maintained by either Rating Agency, in each case with negative implications. ARTICLE V Affirmative Covenants Each of El Paso and, subject to Section 11.19, the Trustee covenants and agrees with each Lender that so long as this Agreement shall remain in effect and until the Commitments have been terminated and the principal of and interest on each Loan, all Fees and all other expenses or amounts payable under any Loan Document shall have been paid in full and all Letters of Credit have been canceled or have expired and all amounts drawn thereunder have been reimbursed in full (or sufficient cash collateral has been deposited with the Collateral Agent in an amount equal to the then outstanding L/C Exposure), unless the Required Lenders shall otherwise consent in writing, each of the Borrowers will, and El Paso will cause each of the Subsidiaries to: SECTION 5.01. Existence; Businesses and Properties. (a) Do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence. (b) Do or cause to be done all things necessary to obtain, preserve, renew, extend and keep in full force and effect the rights, licenses, permits, franchises, authorizations, patents, copyrights, trademarks and trade names material to the conduct of its business; maintain and operate such business in substantially the manner in which it is presently conducted and operated; comply in all material respects with all applicable laws, rules, regulations and decrees and orders of any Governmental Authority, whether now in effect or hereafter enacted; and at all times maintain and preserve all property material to the conduct of such business and keep such property in good repair, working order and condition and from time to time make, or cause to be made, all needful and proper repairs, renewals, additions, improvements and replacements thereto necessary in order that the business carried on in connection therewith may be properly conducted at all times; except in each case where the failure to do so could not reasonably be expected to result in a Material Adverse Effect. SECTION 5.02. Insurance. (a) With respect to El Paso, keep its insurable properties and the insurable properties of the Trustee adequately insured at all times by financially sound and reputable insurers; maintain such other insurance, to such extent and against such risks, including nuclear hazard, fire and other risks insured against by extended coverage, as is customary with companies in the same or similar businesses operating in the same or similar locations, including public liability insurance (including against nuclear energy hazards to the full limit of liability under Federal law) against claims for personal injury or death or property damage occurring upon, in, about or in connection with the use of any properties owned, occupied or controlled by it; and maintain such other insurance as may be required by law. (b) In the event that El Paso at any time or times shall fail to obtain or maintain any of the policies of insurance required hereby or to pay any premium in whole or part relating thereto, the Collateral Agent may, after giving written notice thereof to El Paso, without waiving or releasing any obligation or liability of El Paso hereunder or any Event of Default, in its sole discretion, obtain and maintain such policies of insurance and pay such premiums and take any other actions with respect thereto as the Collateral Agent deems advisable. All sums disbursed by the Collateral Agent in connection with this Section 5.02(b), including reasonable attorneys' fees, costs, expenses and other charges relating thereto, 41 shall be payable, upon demand, by El Paso to the Collateral Agent and shall be additional El Paso Obligations. SECTION 5.03. Obligations and Taxes. Pay its Indebtedness and other obligations promptly and in accordance with their terms and pay and discharge promptly when due all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or in respect of its property, before the same shall become delinquent or in default, as well as all lawful claims for labor, materials and supplies or otherwise that, if unpaid, might give rise to a Lien upon such properties or any part thereof; provided, however, that such payment and discharge shall not be required with respect to any such tax, assessment, charge, levy or claim so long as the validity or amount thereof shall be contested in good faith by appropriate proceedings and the applicable Borrower shall have set aside on its books adequate reserves with respect thereto in accordance with GAAP and such contest operates to suspend collection of the contested obligation, tax, assessment or charge and enforcement of a Lien. SECTION 5.04. Financial Statements, Reports, etc. Furnish to the Administrative Agent and each Lender: (a) with respect to El Paso, within 120 days after the end of each fiscal year, its consolidated balance sheet and related statements of operations, stockholders' equity and cash flows showing its financial condition as of the close of such fiscal year and the results of its operations during such year, all audited by KPMG Peat Marwick or other independent public accountants of recognized national standing and accompanied by an opinion of such accountants (which shall not be qualified in any material respect) to the effect that such consolidated financial statements fairly present its financial condition and results of operations in accordance with GAAP consistently applied; (b) with respect to El Paso, within 60 days after the end of each of the first three fiscal quarters of each fiscal year, its consolidated balance sheet and related statements of operations, stockholders' equity, and cash flows showing its financial condition as of the close of such fiscal quarter and the results of its operations during such fiscal quarter and the then elapsed portion of the fiscal year, all certified by one of its Financial Officers, as fairly presenting its financial condition and results of operations on a consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments; (c) with respect to El Paso, concurrently with any delivery of financial statements under sub-paragraph (a) or (b) above, a certificate of a Financial Officer certifying that no Event of Default or Default has occurred or, if such an Event of Default or Default has occurred, specifying the nature and extent thereof and any corrective action taken or proposed to be taken with respect thereto; (d) with respect to El Paso, promptly after the same become publicly available, copies of all periodic and other reports, definitive proxy statements filed by it or any Subsidiary with the Securities and Exchange Commission, or any Governmental Authority succeeding to any or all of the functions of said Commission, or with any national securities exchange, or distributed to its shareholders; (e) with respect to the Trustee, concurrently with the delivery thereof to El Paso, copies of its periodic trust reports; (f) with respect to El Paso, promptly after El Paso shall have received notice thereof, notice of any actual or proposed change in the debt rating of any of the First Mortgage Bonds, or any notice that El Paso or any First Mortgage Bonds shall be placed on "CreditWatch" or "WatchList" 42 or any similar list maintained by either Rating Agency, in each case with negative implications; and (g) promptly, from time to time, such other information regarding the operations, business affairs and financial condition of such Borrower or any Subsidiary, or compliance with the terms of any Loan Document, as the Administrative Agent or any Lender may reasonably request. SECTION 5.05. Litigation and Other Notices. Furnish to the Administrative Agent prompt written notice of the following: (a) any Event of Default or Default, specifying the nature and extent thereof and the corrective action (if any) taken or proposed to be taken with respect thereto; (b) the filing or commencement of any action, suit or proceeding, whether at law or in equity or by or before any Governmental Authority, against it or, in the case of El Paso, any Subsidiary that, if adversely determined, could reasonably be expected to result in a Material Adverse Effect; and (c) any development that has resulted in, or could reasonably be expected to result in, a Material Adverse Effect. SECTION 5.06. Employee Benefits. With respect to El Paso, (a) comply in all material respects with the applicable provisions of ERISA and the Code and (b) furnish to the Administrative Agent (i) as soon as possible after, and in any event within 10 days after any Responsible Officer of El Paso or any ERISA Affiliate knows or has reason to know that, any ERISA Event has occurred that, alone or together with any other ERISA Event could reasonably be expected to result in liability of El Paso in an aggregate amount exceeding $5,000,000 or requiring payments exceeding $1,000,000 in any year, a statement of a Financial Officer of El Paso setting forth details as to such ERISA Event and the action, if any, that El Paso proposes to take with respect thereto. SECTION 5.07. Maintaining Records; Access to Properties and Inspections. Keep proper books of record and account in which full, true and correct entries in conformity with GAAP and all requirements of law are made of all dealings and transactions in relation to its business and activities. Each Borrower will, and El Paso will cause each Subsidiary to, permit any representatives designated by the Administrative Agent or any Lender to visit and inspect the financial records and the properties of such Borrower or such Subsidiary upon reasonable notice and at reasonable times and as often as reasonably requested and to make extracts from and copies of such financial records, and permit any representatives designated by the Administrative Agent or any Lender to discuss the affairs, finances and condition of such Borrower or such Subsidiary with the officers thereof and independent accountants therefor. SECTION 5.08. Use of Proceeds. Use the proceeds of the Loans made to it and request the issuance of Letters of Credit only for the purposes set forth in the preamble to this Agreement. SECTION 5.09. Compliance with Environmental Laws. With respect to El Paso, comply, and use commercially reasonable efforts to cause all lessees and other persons occupying its Properties to comply, in all material respects with all Environmental Laws and Environmental Permits applicable to its operations and Properties; obtain and renew all material Environmental Permits necessary for its operations and Properties; and conduct any Remedial Action in substantial compliance with Environmental Laws. SECTION 5.10. Further Assurances. Execute any and all further documents, financing statements, agreements and instruments, and take all further action (including filing Uniform Commercial Code and other financing statements) that may be required under applicable law, or that the Required 43 Lenders, the Administrative Agent or the Collateral Agent may reasonably request, in order to effectuate the transactions contemplated by the Loan Documents and in order to grant, preserve, protect and perfect the validity and first priority of the security interests created or intended to be created herein, by the Security Agreement or by the Indenture. El Paso shall (a) cause any subsequently acquired or organized Subsidiary (other than any Inactive Subsidiary) and any Inactive Subsidiary that after the date hereof no longer qualifies as an Inactive Subsidiary to execute a guarantee of all the El Paso Obligations and (b) cause the capital stock of any such Subsidiary referred to in clause (a) above to be pledged to the Collateral Agent for the ratable benefit of the Secured Parties to secure the El Paso Obligations, in each case pursuant to documentation in form and substance reasonably satisfactory to the Administrative Agent. Each Borrower agrees to provide such evidence as the Collateral Agent shall reasonably request as to the perfection and priority status of each such security interest and Lien. ARTICLE VI Negative Covenants Each of El Paso and, subject to Section 11.19, the Trustee covenants and agrees with each Lender that, so long as this Agreement shall remain in effect and until the Commitments have been terminated and the principal of and interest on each Loan, all Fees and all other expenses or amounts payable under any Loan Document have been paid in full and all Letters of Credit have been canceled or have expired and all amounts drawn thereunder have been reimbursed in full (or sufficient cash collateral has been deposited with the Collateral Agent in an amount equal to the then outstanding L/C Exposure), unless the Required Lenders shall otherwise consent in writing, neither Borrower will, nor will El Paso permit any Subsidiary to: SECTION 6.01. Indebtedness. Incur, create, assume or permit to exist (collectively, "incur") any Indebtedness; provided, however, that El Paso may incur any Indebtedness if the Fixed Charge Coverage Ratio for El Paso's most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional Indebtedness is incurred would have been at least 2.50 to 1.00 determined on a pro forma basis (including giving a pro forma effect to the incurrence thereof and the application of the net proceeds therefrom), as if such additional Indebtedness had been incurred at the beginning of such four-quarter period. Notwithstanding the foregoing, the following Indebtedness may be incurred: (a) the First Mortgage Bonds issued and outstanding on the Restatement Closing Date, and any refinancing thereof (in whole or in part) by El Paso, provided that (i) any such refinancing Indebtedness is in an aggregate principal amount not greater than the aggregate principal amount of the First Mortgage Bonds being refinanced plus the amount of any premiums required to be paid thereon and fees and expenses associated therewith, (ii) such refinancing Indebtedness has a later or equal final maturity and a longer or equal weighted average life than the First Mortgage Bonds being refinanced, (iii) the interest rate borne by such refinancing Indebtedness shall be less than or equal to the interest rate borne by the First Mortgage Bonds being refinanced and (iv) each of the other covenants, events of default and other provisions of such refinancing Indebtedness shall be no less favorable to the Lenders and El Paso than those contained in the First Mortgage Bonds being refinanced unless each of such provisions is approved in writing by the Required Lenders; (b) Indebtedness of El Paso existing on the Restatement Closing Date and set forth in Schedule 6.01 and any extensions, renewals, refundings or replacements of such Indebtedness, provided that any such extension, renewal, refunding or replacement is (i) in an aggregate principal amount not greater than the principal amount of such Indebtedness so extended, 44 renewed, refunded or replaced plus the amount of accrued interest and premiums, if any, thereon and the reasonable expenses incurred in connection therewith and (ii) on terms no less favorable to the Lenders and El Paso than the terms of such Indebtedness so extended, renewed, refunded or replaced; (c) Indebtedness under the Maricopa Reimbursement Agreement, the Farmington Reimbursement Agreement, the Maricopa Loan Agreements and the Farmington Loan Agreements, and any extensions, renewals, refundings or replacements of any such Indebtedness, provided that any such extension, renewal, refunding or replacement is in an aggregate principal amount not greater than the principal amount of such Indebtedness so extended, renewed, refunded or replaced plus (A) the amount of accrued interest and premiums, if any, thereon and the reasonable expenses incurred in connection therewith and (B) with respect to any extension, renewal, refunding or replacement of the Farmington Reimbursement Agreement or the Maricopa Reimbursement Agreement, the amount of interest coverage then required, based on the determination of a Rating Agency, to be included in such Indebtedness; (d) Indebtedness created hereunder; (e) Commercial paper of the Trustee issued pursuant to the CP Program in an aggregate principal amount not to exceed $70,000,000 at any time outstanding; (f) Indebtedness of El Paso and Finsub incurred pursuant to the Receivables Program Documents; (g) Rate Protection Agreements, in form and with parties reasonably acceptable to the Administrative Agent; (h) Indebtedness of El Paso or any Subsidiary represented by Capital Lease Obligations, mortgage financings or purchase money obligations, in each case incurred for the purpose of financing all or any part of the purchase price or cost of construction or improvement of property used in the business of El Paso or the Subsidiaries, and Indebtedness incurred to refinance such Capital Lease Obligations, mortgage financings or purchase money obligations, in an aggregate principal amount not to exceed $15,000,000 at any time outstanding; provided that such Indebtedness shall initially be incurred within 180 days of the acquisition or construction of such property; (i) any other unsecured Indebtedness of El Paso or any Subsidiary in an aggregate principal amount not to exceed $15,000,000; and (j) Indebtedness between and among El Paso and any of its Wholly Owned Subsidiaries that guarantee the Obligations. SECTION 6.02. Liens. Create, incur, assume or permit to exist any Lien on any property or assets (including stock or other securities of any person, including any Subsidiary) now owned or hereafter acquired by it or on any income or revenues or rights in respect of any thereof, except: (a) Liens on property or assets of El Paso existing on the date hereof and set forth in Schedule 6.02; provided that such Liens shall secure only those obligations which they secure on the date hereof; (b) any Lien created under the Loan Documents; 45 (c) any Lien existing on any property or asset prior to the acquisition thereof by El Paso or any Subsidiary; provided that (i) such Lien is not created in contemplation of or in connection with such acquisition and (ii) such Lien does not apply to any other property or assets of either Borrower or any Subsidiary; (d) Liens for taxes or assessments by any Governmental Authority not yet due or which are being contested in compliance with Section 5.03; (e) carriers', warehousemen's, mechanics', materialmen's, repairmen's, landlords', licensors' or other like Liens arising in the ordinary course of business and securing obligations that are not due and payable or which are being contested in compliance with Section 5.03; (f) pledges and deposits made in the ordinary course of El Paso's business in compliance with workmen's compensation, unemployment insurance and other social security laws or regulations; (g) deposits by El Paso to secure the performance of bids, trade contracts (other than for Indebtedness), leases (other than Capital Lease Obligations), statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (h) zoning restrictions, easements, rights-of-way, restrictions on use of real property or permit or license requirements and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount and do not materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the businesses of the Borrowers or any Subsidiary; (i) purchase money security interests in real property, improvements thereto or equipment hereafter acquired (or, in the case of improvements, constructed) by El Paso; provided that (i) such security interests secure Indebtedness permitted by Section 6.01(b) or Section 6.01(i), (ii) the Indebtedness secured thereby does not exceed 85% of the lesser of the cost or the fair market value of such real property, improvements or equipment at the time of the incurrence of such Indebtedness and (iii) such security interests do not apply to any other property or assets of El Paso or any Subsidiary; (j) the Lien of the Indenture; (k) Liens on the property of Finsub incurred pursuant to the Receivables Program Documents and Liens in favor of Finsub granted by El Paso with respect to Receivables purportedly sold to Finsub by El Paso pursuant to the Receivables Program; (l) the Lien in favor of the Indenture Trustee created by the Indenture and securing the payment of its fees and expenses; (m) one or more attachments or other similar Liens on assets of El Paso arising in connection with court proceedings (i) in an aggregate principal amount not in excess of $10,000,000 (so long as El Paso has set aside adequate reserves therefor) or (ii) the execution of which has been stayed or which has been appealed and secured, if necessary, by an appeal bond; provided that in each case no Event of Default shall result therefrom; 46 (n) any Lien arising by operation of law on the assets of El Paso in favor of any Governmental Authority with respect to any franchise, grant, license, permit or contract that affects any Mortgaged Property; and (o) any other Liens that, in the reasonable judgment of the Required Lenders, do not individually or in the aggregate materially impair the Liens of each of the Security Agreement, this Agreement and the Indenture, or the security afforded thereby for the benefit of the Secured Parties. SECTION 6.03. Sale and Lease-Back Transactions. Enter into any arrangement, directly or indirectly, with any person whereby it shall sell or transfer any property, real or personal, used or useful in its business, whether now owned or hereafter acquired, and thereafter rent or lease such property or other property which it intends to use for substantially the same purpose or purposes as the property being sold or transferred (a "Sale Lease-Back Transaction"), except for Sale Lease-Back Transactions of real property and tangible personal property with an aggregate fair market value not to exceed $20,000,000 at any time. SECTION 6.04. Investments, Loans and Advances. Purchase, hold or acquire any capital stock, evidences of indebtedness or other securities of, make or permit to exist any loans or advances to, or make or permit to exist any investment or any other interest in, any other person, except: (a) investments by El Paso in the capital stock of Subsidiaries; provided that for each such Subsidiary, El Paso shall comply with Section 5.10; (b) Permitted Investments; (c) Investments of El Paso existing on the Restatement Closing Date and set forth on Schedule 6.04; (d) Investments received in connection with the bankruptcy or reorganization of customers and suppliers and in settlement of delinquent obligations of, and other disputes with, customers and suppliers arising in the ordinary course of business; and (e) Investments in intercompany loans permitted pursuant to Section 6.01(j). SECTION 6.05. Mergers, Consolidations and Sales of Assets and Acquisitions. Merge into or consolidate with any other person, or permit any other person to merge into or consolidate with it, or sell, transfer, lease or otherwise dispose of (in one transaction or in a series of transactions) all or any substantial part of its assets (whether now owned or hereafter acquired) or any capital stock of any Subsidiary, or purchase, lease or otherwise acquire (in one transaction or a series of transactions) all or any substantial part of the assets of any other person except that (i) the Trustee may purchase and sell Nuclear Fuel in accordance with the provisions of the Purchase Contract and (ii) El Paso and Finsub may sell Receivables pursuant to the Receivables Program. SECTION 6.06. Dividends and Distributions. Declare or pay, directly or indirectly, any dividend or make any other distribution (by reduction of capital or otherwise), whether in cash, property, securities or a combination thereof, with respect to any shares of its capital stock or directly or indirectly redeem, purchase, retire or otherwise acquire for value (or permit any Subsidiary to purchase or acquire) any shares of any class of its capital stock or set aside any amount for any such purpose, except: (a) at any time the First Mortgage Bonds of the series having the longest maturity then outstanding shall have attained and shall maintain an Investment Grade Rating (and shall not have been placed on a "watch list" for possible downgrading below Investment Grade Rating by each 47 Rating Agency that provided the Investment Grade Rating and was so identified in a certificate by an officer of El Paso and delivered to the Indenture Trustee) and 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 pay dividends in cash on Preferred Stock and Common Stock; (b) 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 (i) with respect to Preferred Stock, make payments of dividends in additional shares of Preferred Stock, make payments of dividends in cash and/or redeem or make open market purchases of shares of Preferred Stock, and (ii) with respect to Common Stock, make payments of dividends in cash in an aggregate amount not to exceed the sum of (A) 50% of Consolidated Net Income (minus the sum of (x) dividends, whether in cash or in kind, paid in respect of Preferred Stock or Common Stock and (y) the amount of cash used to redeem or make open market purchases of shares of Common Stock) from the Original Closing Date, (B) $10,000,000 and (C) the aggregate net cash proceeds received by El Paso from the issuance or sale of Common Stock since the Original Closing Date; (c) any Subsidiary may declare and pay dividends or make other distributions to El Paso or to any other Wholly Owned Subsidiary; and (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 the 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 the Subsidiaries. SECTION 6.07. Transactions with Affiliates. Sell or transfer any property or assets to, or purchase or acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates (other than its Wholly Owned Subsidiaries), except that El Paso or any Subsidiary may engage in any of the foregoing transactions in the ordinary course of business at prices and on terms and conditions not less favorable to El Paso or such Subsidiary than could be obtained on an arm's-length basis from unrelated third parties. SECTION 6.08. Businesses of Borrowers and Subsidiaries. Engage at any time in any business or business activity other than (a) with respect to El Paso and the Subsidiaries, the business currently conducted by them and business activities reasonably incidental thereto, including in the case of Finsub the activities contemplated in the Receivables Program, and (b) with respect to the Trustee, purchasing, holding title to, making payments with respect to and selling Nuclear Fuel pursuant to, and on the terms set forth in, the Trust Agreement and the Purchase Contract. SECTION 6.09. Other Indebtedness and Agreements. (a) Except as expressly permitted pursuant to Section 6.01, permit any waiver, supplement, modification, amendment, termination or release of any indenture, instrument or agreement pursuant to which any Indebtedness or preferred stock of either Borrower or any Subsidiary is outstanding in an aggregate outstanding principal amount in excess of $5,000,000, to the extent that any such waiver, supplement, modification, amendment, termination or release would be adverse to the Lenders in any material respect. (b) Permit any waiver, supplement, modification, amendment, termination or release of the Indenture to the extent that any such waiver, supplement, modification, amendment, termination or release 48 would, in the reasonable judgment of the Required Lenders, be adverse to the interests of the Lenders in any material respect, without the consent of the Required Lenders. (c) Permit any waiver, supplement, modification, amendment, termination or release of (i) the Trust Agreement, the Purchase Contract or the Assigned Agreements, (ii) the documents constituting the CP Program or (iii) the Receivables Program Documents, in each case to the extent that any such waiver, supplement, modification, amendment, termination or release would be adverse to the Lenders in any material respect. SECTION 6.10. Prohibition of Prepayments, Redemptions and Repurchases of Indebtedness. Make any distribution, whether in cash, property, securities or a combination thereof, other than scheduled (or with respect to senior Indebtedness held by a person that is not an Affiliate of the obligor, mandatory) payments of principal and interest as and when due (to the extent not prohibited by applicable subordination provisions), in respect of, or pay, or offer or commit to pay, or directly or indirectly redeem, repurchase, retire or otherwise acquire for consideration, or set apart any sum for the aforesaid purposes, any Indebtedness for borrowed money of either Borrower or any Subsidiary in an outstanding principal amount exceeding $1,000,000, except for (i) optional or mandatory redemptions of First Mortgage Bonds pursuant to the terms of the Indenture or open market purchases of First Mortgage Bonds, (ii) commercial paper pursuant to the CP Program, (iii) the Loans or (iv) in connection with refinancings, refundings or replacements of Indebtedness permitted pursuant to Section 6.01. SECTION 6.11. Release of Collateral. El Paso shall not effect or seek the release of any of the Mortgaged Property from the lien of the Indenture unless such release would have been permitted by the Indenture as in effect on the Restatement Closing Date without the consent of any holder of First Mortgage Bonds. SECTION 6.12. Net Debt Ratio. Permit the ratio of (i) Net Debt to (ii) Total Capital as of the last day of any fiscal quarter to be in excess of 0.70 to 1.00. SECTION 6.13. Interest Coverage Ratio. Permit the Consolidated Interest Coverage Ratio for any period of four consecutive fiscal quarters to be less than 2.50 to 1.00. SECTION 6.14. Consolidated Capital Expenditures. In the case of El Paso and the Subsidiaries, incur Consolidated Capital Expenditures in any fiscal year in an aggregate amount in excess $70,000,000. SECTION 6.15. Fiscal Year. Change the end of its fiscal year from December 31 to any other date. ARTICLE VII Events of Default In case of the happening of any of the following events ("Events of Default"): (a) any representation or warranty made or deemed made in or in connection with any Loan Document or the borrowings or issuances of Letters of Credit hereunder, or any representation, warranty, statement or information contained in any report, certificate, financial statement or other instrument furnished pursuant to any Loan Document, shall prove to have been false or misleading in any material respect when so made, deemed made or furnished; 49 (b) default shall be made in the payment of any principal of any Loan or the reimbursement with respect to any L/C Disbursement when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or by acceleration thereof or otherwise; (c) default shall be made in the payment of any interest on any Loan or any Fee or L/C Disbursement or any other amount (other than an amount referred to in (b) above) due under any Loan Document, when and as the same shall become due and payable, and such default shall continue unremedied for a period of five Business Days; (d) default in any material manner shall be made in the due observance or performance by either Borrower or any Subsidiary of any covenant, condition or agreement contained in Section 5.01(a), 5.05 or 5.08 or in Article VI; (e) default shall be made in the due observance or performance by either Borrower or any Subsidiary of any covenant, condition or agreement contained in any Loan Document (other than those specified in (b), (c) or (d) above) and such default shall continue unremedied for a period of 30 days after notice thereof from the Administrative Agent or any Lender to the Borrowers; (f) either Borrower or any Subsidiary shall (i) fail to pay any principal or interest, regardless of amount, due in respect of any Indebtedness in a principal amount in excess of $10,000,000, when and as the same shall become due and payable, or (ii) fail to observe or perform any other term, covenant, condition or agreement contained in any agreement or instrument evidencing or governing any such Indebtedness if the effect of any failure referred to in this clause (ii) is to cause, or to permit the holder or holders of such Indebtedness or a trustee on its or their behalf (with or without the giving of notice, the lapse of time or both) to cause, such Indebtedness to become due prior to its stated maturity; (g) an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief in respect of either Borrower or any Subsidiary (other than an Inactive Subsidiary) or of a substantial part of the property or assets of either Borrower or any such Subsidiary, under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal, state or foreign bankruptcy, insolvency, receivership or similar law, (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for either Borrower or any Subsidiary (other than an Inactive Subsidiary) or for a substantial part of the property or assets of either Borrower or any such Subsidiary or (iii) the winding-up or liquidation of either Borrower or any Subsidiary (other than an Inactive Subsidiary); and such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered; (h) either Borrower or any Subsidiary (other than an Inactive Subsidiary) shall (i) voluntarily commence any proceeding or file any petition seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal, state or foreign bankruptcy, insolvency, receivership or similar law, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or the filing of any petition described in (g) above, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for either Borrower or any such Subsidiary or for a substantial part of the property or assets of either Borrower or any such Subsidiary, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors, (vi) become unable, admit in writing its inability or fail generally to pay its debts as they become due or (vii) take any action for the purpose of effecting any of the foregoing; (i) one or more judgments for the payment of money in an aggregate amount in excess of $10,000,000 shall be rendered against either Borrower or any Subsidiary and the same shall remain undischarged for a period of 30 consecutive days during which execution shall not be effectively stayed, or 50 any action shall be legally taken by a judgment creditor to levy upon assets or properties of either Borrower or any Subsidiary to enforce any such judgment; (j) an ERISA Event shall have occurred that, in the opinion of the Required Lenders, when taken together with all other such ERISA Events, could reasonably be expected to result in liability of El Paso and its ERISA Affiliates in an aggregate amount exceeding $10,000,000 or requires payments exceeding $5,000,000 in any year; (k) any security interest purported to be created hereby or by the Security Agreement shall cease to be, or shall be asserted by either Borrower not to be, a valid, perfected, first priority (except as otherwise expressly provided in this Agreement or the Security Agreement) security interest in the assets or properties covered thereby; (l) there shall have occurred a Change in Control; (m) a Purchase Contract Default shall have occurred and be continuing; then, and in every such event (other than an event with respect to either Borrower described in paragraph (g) or (h) above), and at any time thereafter during the continuance of such event, the Administrative Agent may, and at the request of the Required Lenders shall, by notice to the Borrowers, take either or both of the following actions, at the same or different times: (i) terminate forthwith the Commitments and (ii) declare the Loans then outstanding to be forthwith due and payable in whole or in part, whereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of each Borrower accrued hereunder and under any other Loan Document, shall become forthwith due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by each Borrower, anything contained herein or in any other Loan Document to the contrary notwithstanding; and in any event with respect to either Borrower described in paragraph (g) or (h) above, the Commitments shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of each Borrower accrued hereunder and under any other Loan Document, shall automatically become due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by each Borrower, anything contained herein or in any other Loan Document to the contrary notwithstanding. ARTICLE VIII The Administrative Agent and the Collateral Agent In order to expedite the transactions contemplated by this Agreement, The Chase Manhattan Bank is hereby appointed to act as Administrative Agent and Collateral Agent on behalf of the Lenders and the Issuing Bank (for purposes of this Article VIII, the Administrative Agent and the Collateral Agent are referred to collectively as the "Agents"). Each of the Lenders and each assignee of any such Lender hereby irrevocably authorizes the Agents to take such actions on behalf of such Lender or assignee or the Issuing Bank and to exercise such powers as are specifically delegated to the Agents by the terms and provisions hereof and of the other Loan Documents, together with such actions and powers as are reasonably incidental thereto. The Administrative Agent is hereby expressly authorized by the Lenders and the Issuing Bank, without hereby limiting any implied authority, (a) to receive on behalf of the Lenders and the Issuing Bank all payments of principal of and interest on the Loans, all payments in respect of L/C Disbursements and all other amounts due to the Lenders hereunder, and promptly to distribute to each Lender or the Issuing Bank its proper share of each payment so received; (b) to give notice on behalf of each of the Lenders to the Borrowers of any Event of Default specified in this Agreement of which the 51 Administrative Agent has actual knowledge acquired in connection with its agency hereunder; and (c) to distribute to each Lender copies of all notices, financial statements and other materials delivered by either Borrower pursuant to this Agreement or the other Loan Documents as received by the Administrative Agent. Without limiting the generality of the foregoing, the Agents are hereby expressly authorized to execute any and all documents (including releases) with respect to the Collateral and the rights of the Secured Parties with respect thereto, as contemplated by and in accordance with the provisions of this Agreement and the Security Agreement. Neither the Agents nor any of their respective directors, officers, employees or agents shall be liable as such for any action taken or omitted by any of them except for its or his own gross negligence or willful misconduct, or be responsible for any statement, warranty or representation herein or the contents of any document delivered in connection herewith, or be required to ascertain or to make any inquiry concerning the performance or observance by each Borrower or any other Loan Party of any of the terms, conditions, covenants or agreements contained in any Transaction Document. The Agents shall not be responsible to the Lenders for the due execution, genuineness, validity, enforceability or effectiveness of this Agreement, any other Transaction Document, or any other document, instrument or agreement. The Agents shall in all cases be fully protected in acting, or refraining from acting, in accordance with written instructions signed by the Required Lenders and, except as otherwise specifically provided herein, such instructions and any action or inaction pursuant thereto shall be binding on all the Lenders. Each Agent shall, in the absence of knowledge to the contrary, be entitled to rely on any instrument or document believed by it in good faith to be genuine and correct and to have been signed or sent by the proper person or persons. Neither the Agents nor any of their respective directors, officers, employees or agents shall have any responsibility to either Borrower on account of the failure of or delay in performance or breach by any Lender or the Issuing Bank of any of its obligations hereunder or to any Lender or the Issuing Bank on account of the failure of or delay in performance or breach by any other Lender or the Issuing Bank or either Borrower of any of their respective obligations hereunder or under any other Loan Document or in connection herewith or therewith. Each of the Agents may execute any and all duties hereunder by or through agents or employees and shall be entitled to rely upon the advice of legal counsel selected by it with respect to all matters arising hereunder and shall not be liable for any action taken or suffered in good faith by it in accordance with the advice of such counsel. The Lenders hereby acknowledge that neither Agent shall be under any duty to take any discretionary action permitted to be taken by it pursuant to the provisions of this Agreement unless it shall be requested in writing to do so by the Required Lenders. Subject to the appointment and acceptance of a successor Agent as provided below, either Agent may resign at any time by notifying the Lenders and the Borrowers. Upon any such resignation, the Required Lenders shall have the right to appoint a successor reasonably satisfactory to Borrower. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Agent gives notice of its resignation, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent which shall be a bank with an office in New York, New York, having a combined capital and surplus of at least $500,000,000 or an Affiliate of any such bank. Upon the acceptance of any appointment as Agent hereunder by a successor bank, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent and the retiring Agent shall be discharged from its duties and obligations hereunder. After the Agent's resignation hereunder, the provisions of this Article and Section 11.05 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Agent. With respect to the Loans made by it hereunder, each Agent in its individual capacity and not as Agent shall have the same rights and powers as any other Lender and may exercise the same as though it were not an Agent, and the Agents and their Affiliates may accept deposits from, lend money to and 52 generally engage in any kind of business with either Borrower or any Subsidiary or other Affiliates thereof as if it were not an Agent. Each Lender agrees (a) to reimburse the Agents, on demand, in the amount of its pro rata share (based on its Commitment hereunder) of any expenses incurred for the benefit of the Lenders by the Agents, including counsel fees and compensation of agents and employees paid for services rendered on behalf of the Lenders, that shall not have been reimbursed by the Borrowers and (b) to indemnify and hold harmless each Agent and any of its directors, officers, employees or agents, on demand, in the amount of such pro rata share, from and against any and all liabilities, taxes, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be imposed on, incurred by or asserted against it in its capacity as Agent or any of them in any way relating to or arising out of this Agreement or any other Transaction Document or any action taken or omitted by it or any of them under this Agreement or any other Transaction Document, to the extent the same shall not have been reimbursed by the Borrowers, provided that no Lender shall be liable to an Agent or any such other indemnified person for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements that are determined by a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of such Agent or any of its directors, officers, employees or agents. Each Lender acknowledges that it has, independently and without reliance upon the Agents or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Agents or any other Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement or any other Loan Document, any related agreement or any document furnished hereunder or thereunder. ARTICLE IX Guarantee As a result of the arrangements contemplated by the Trust Agreement and the Purchase Contract for the financing by the Trustee of Nuclear Fuel, El Paso acknowledges that it will derive substantial benefit from the commitments of the Lenders to make Loans to the Trustee and the commitment of the Issuing Bank to issue Letters of Credit for the account of the Trustee. To induce the Lenders to make the Loans and the Issuing Bank to issue Letters of Credit and to enter into this Agreement, El Paso agrees with each Lender, the Issuing Bank, the Administrative Agent and the Collateral Agent (each such person, together with its successors and assigns, a "Guaranteed Party") as follows: SECTION 9.01. Guarantee. El Paso unconditionally guarantees, as a primary obligor and not merely as a surety, (a) the due and punctual payment of (i) the principal of and premium, if any, and interest (including interest accruing during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding) on the Loans made to the Trustee, when and as due, whether at maturity, by acceleration, upon one or more dates set for prepayment or otherwise, (ii) each payment required to be made by the Trustee under this Agreement in respect of any Letter of Credit, when and as due, including payments in respect of reimbursement of disbursements, interest thereon and obligations to provide cash collateral and (iii) all other monetary obligations, including fees, costs, expenses and indemnities, whether primary, secondary, direct, contingent, fixed or otherwise (including monetary obligations incurred during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding), of the Trustee to the Guaranteed Parties under this Agreement and the other 53 Loan Documents and (b) the due and punctual performance of all covenants, agreements, obligations and liabilities of the Trustee under or pursuant to this Agreement and the other Loan Documents (all the monetary and other obligations referred to in the preceding clauses (a) and (b) being collectively called the "Trust Obligations"). El Paso further agrees that the Trust Obligations may be extended or renewed, in whole or in part, without notice to or further assent from it, and that it will remain bound upon its guarantee notwithstanding any extension or renewal of any Trust Obligation. SECTION 9.02. Obligations Not Waived. To the fullest extent permitted by applicable law, El Paso waives presentment to, demand of payment from and protest to the Trustee of any of the Trust Obligations, and also waives notice of acceptance of its guarantee and notice of protest for nonpayment. To the fullest extent permitted by applicable law, the obligations of El Paso hereunder shall not be affected by (a) the failure of the Collateral Agent or any other Guaranteed Party to assert any claim or demand or to enforce or exercise any right or remedy against the Trustee, (b) any rescission, waiver, amendment or modification of, or any release from any of the terms or provisions of this Agreement, any other Transaction Document, any Guarantee or any other agreement, including with respect to any other guarantor of the Obligations, or (c) the failure to perfect any security interest in, or the release of, any of the security held by or on behalf of the Collateral Agent or any other Guaranteed Party. SECTION 9.03. Security. El Paso authorizes the Collateral Agent and each of the other Guaranteed Parties to (a) take and hold security for the payment of this guarantee and the Trust Obligations and exchange, enforce, waive and release any such security, (b) apply such security and direct the order or manner of sale thereof as they in their sole discretion may determine and (c) release or substitute any one or more endorsees, other guarantors or other obligors. SECTION 9.04. Guarantee of Payment. El Paso further agrees that its guarantee constitutes a guarantee of payment when due and not of collection, and waives any right to require that any resort be had by the Collateral Agent or any other Guaranteed Party to any of the security held for payment of the Trust Obligations or to any balance of any deposit account or credit on the books of the Collateral Agent or any other Guaranteed Party in favor of the Trustee or any other person. SECTION 9.05. No Discharge or Diminishment of Guarantee. The obligations of El Paso hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason (other than the payment in full in cash of the Trust Obligations), including any claim of waiver, release, surrender, alteration or compromise of any of the Trust Obligations, and shall not be subject to any defense or setoff, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality or unenforceability of the Trust Obligations or otherwise. Without limiting the generality of the foregoing, the obligations of El Paso hereunder shall not be discharged or impaired or otherwise affected by the failure of the Collateral Agent or any other Guaranteed Party to assert any claim or demand or to enforce any remedy under this Agreement, any other Transaction Document or any other agreement, by any waiver or modification of any provision of any thereof, by any default, failure or delay, willful or otherwise, in the performance of the Trust Obligations, or by any other act or omission that may or might in any manner or to any extent vary the risk of El Paso or that would otherwise operate as a discharge of El Paso as a matter of law or equity (other than the payment in full in cash of all the Trust Obligations). SECTION 9.06. Defenses of the Trustee Waived. To the fullest extent permitted by applicable law, El Paso waives any defense based on or arising out of any defense of the Trustee or the unenforceability of the Trust Obligations or any part thereof from any cause, or the cessation from any cause of the liability of the Trustee, other than the payment in full in cash of the Trust Obligations. The Collateral Agent and the other Guaranteed Parties may, at their election, foreclose on any security held by one or more of them by one or more judicial or nonjudicial sales, accept an assignment of any such security in lieu of foreclosure, compromise or adjust any part of the Trust Obligations, make any other accommodation with the Trustee or any other guarantor or exercise any other right or remedy available to 54 them against the Trustee or any other guarantor, without affecting or impairing in any way the liability of El Paso hereunder except to the extent the Trust Obligations have been fully, finally paid in cash. To the fullest extent permitted by applicable law, El Paso waives any defense arising out of any such election even though such election operates, pursuant to applicable law, to impair or to extinguish any right of reimbursement or subrogation or other right or remedy of El Paso against the Trustee or any other guarantor, as the case may be, or any security. SECTION 9.07. Agreement to Pay; Subrogation. In furtherance of the foregoing and not in limitation of any other right that the Collateral Agent or any other Guaranteed Party has at law or in equity against El Paso by virtue hereof, upon the failure of the Trustee to pay any Trust Obligation when and as the same shall become due, whether at maturity, by acceleration, after notice of prepayment or otherwise, El Paso hereby promises to and will forthwith pay, or cause to be paid, to the Collateral Agent or such other Guaranteed Party as designated thereby in cash the amount of such unpaid Trust Obligations. Upon payment by El Paso of any sums to the Collateral Agent or any Guaranteed Party as provided above, all rights of El Paso against the Trustee arising as a result thereof by way of right of subrogation, contribution, reimbursement, indemnity or otherwise shall in all respects be subordinate and junior in right of payment to the prior payment in full in cash of all the Trust Obligations. In addition, any indebtedness of the Trustee now or hereafter held by El Paso is hereby subordinated in right of payment to the prior payment in full of the Trust Obligations. If any amount shall erroneously be paid to El Paso on account of (i) such subrogation, contribution, reimbursement, indemnity or similar right or (ii) any such indebtedness of the Trustee, such amount shall be held in trust for the benefit of the Guaranteed Parties and shall forthwith be paid to the Collateral Agent to be credited against the payment of the Trust Obligations, whether matured or unmatured, in accordance with the terms of the Loan Documents. SECTION 9.08. Information. El Paso assumes all responsibility for being and keeping itself informed of the Trustee's financial condition and assets, and of all other circumstances bearing upon the risk of nonpayment of the Trust Obligations and the nature, scope and extent of the risks that El Paso assumes and incurs hereunder, and agrees that none of the Collateral Agent or the other Guaranteed Parties will have any duty to advise El Paso of information known to it or any of them regarding such circumstances or risks. SECTION 9.09. Termination. The guarantee made hereunder (a) shall terminate when all the Trust Obligations have been indefeasibly paid in full and the Lenders have no further commitment to lend to the Trustee under this Agreement, the Trustee L/C Exposure has been reduced to zero and the Issuing Bank has no further obligation to issue Letters of Credit under this Agreement and (b) shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of any Trust Obligation is rescinded or must otherwise be restored by any Guaranteed Party or El Paso upon the bankruptcy or reorganization of the Trustee, El Paso or otherwise. ARTICLE X Security SECTION 10.01. First Mortgage Bonds. As security for the payment and performance of (i) the due and punctual payment of (A) the principal of and premium, if any, and interest (including interest accruing during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding) on the Loans made to El Paso, when and as due, whether at maturity, by acceleration, upon one or more dates set for prepayment or otherwise, (B) all monetary obligations of El Paso pursuant to the Guarantee in Article IX hereof, (C) each payment required to be made by El Paso under this Agreement in respect of any Letter of Credit, when and as due, including payments in respect of reimbursement of disbursements, interest thereon and obligations to provide cash 55 collateral and (D) all other monetary obligations, including fees, costs, expenses and indemnities, whether primary, secondary, direct, contingent, fixed or otherwise (including monetary obligations incurred during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding), of El Paso to the Administrative Agent, the Collateral Agent and the Lenders under this Agreement and the other Loan Documents and (ii) the due and punctual performance of all covenants, agreements, obligations and liabilities of El Paso under or pursuant to this Agreement and the other Loan Documents (all the monetary and other obligations referred to in the preceding clauses (i) and (ii) being collectively called the "El Paso Obligations"), El Paso has delivered to the Collateral Agent, for the ratable benefit of the Secured Parties, $100,000,000 principal amount of First Mortgage Bonds - Collateral Series H, duly executed and issued by El Paso and authenticated by the Indenture Trustee and entitling the Collateral Agent and the Secured Parties to the benefits of the Indenture with respect to the El Paso Obligations. SECTION 10.02. Application of Funds. The Collateral Agent shall remit any funds received on account of the First Mortgage Bonds - Collateral Series H to the Administrative Agent for application against the El Paso Obligations as well as any Collateral consisting of cash, as follows: FIRST, to the payment of all costs and expenses incurred by the Administrative Agent or the Collateral Agent (in its capacity as such hereunder or under any other Loan Document) in connection with such collection or sale or otherwise in connection with this Agreement or any of the El Paso Obligations, including all court costs and the reasonable fees and expenses of its agents and legal counsel, the repayment of all advances made by the Collateral Agent or the Administrative Agent hereunder or under any other Loan Document and any other reasonable costs or expenses incurred in connection with the exercise of any right or remedy hereunder or under any other Loan Document; SECOND, to the payment in full of the El Paso Obligations (the amounts so applied to be distributed among the Secured Parties pro rata in accordance with the amounts of the El Paso Obligations owed to them on the date of any such distribution); and THIRD, to El Paso, its successors or assigns, or as a court of competent jurisdiction may otherwise direct. The Administrative Agent shall have absolute discretion as to the time of application of any such proceeds, moneys or balances in accordance with this Agreement. To the extent that funds recovered under the First Mortgage Bonds - Collateral Series H are insufficient to pay in full the El Paso Obligations, El Paso shall remain liable under the terms of this Agreement and the other Loan Documents for any such deficiency. SECTION 10.03. Rights of Bondholders. The Collateral Agent, as the holder on behalf of the Secured Parties of the First Mortgage Bonds - Collateral Series H, shall have only such rights with respect thereto as provided in the Indenture. 56 ARTICLE XI Miscellaneous SECTION 11.01. Notices. Notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy, as follows: (a) if to either Borrower, to it in care of El Paso Electric Company, Kayser Bldg., 100 N. Stanton, El Paso, Texas 79901, Attention of: Gary R. Hedrick, Chief Financial Officer (Telecopy No. (915) 521-4728)); (b) if to the Administrative Agent, to The Chase Manhattan Bank Loan and Agency Services Group, One Chase Manhattan Plaza, New York, New York 10081, Attention of Daniel Fischer (Telecopy No. (212) 552-5777), with a copy to The Chase Manhattan Bank, at 270 Park Avenue, New York, New York 10017, Attention of Mr. Peter Bickford (Telecopy No. (212) 270-2101); and (c) if to a Lender, to it at its address (or telecopy number) set forth on Schedule 2.01 or in the Assignment and Acceptance pursuant to which such Lender shall have become a party hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt if delivered by hand or overnight courier service or sent by telecopy or on the date five Business Days after dispatch by certified or registered mail if mailed, in each case delivered, sent or mailed (properly addressed) to such party as provided in this Section 11.01 or in accordance with the latest unrevoked direction from such party given in accordance with this Section 11.01. SECTION 11.02. Survival of Agreement. All covenants, agreements, representations and warranties made by each Borrower herein and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement or any other Loan Document shall be considered to have been relied upon by the Lenders and the Issuing Bank and shall survive the making by the Lenders of the Loans and the issuance of Letters of Credit by the Issuing Bank, regardless of any investigation made by the Lenders or the Issuing Bank or on their behalf, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any Fee or any other amount payable under this Agreement or any other Loan Document is outstanding and unpaid or any Letter of Credit is outstanding (for which sufficient cash collateral has not been deposited with the Collateral Agent) and so long as the Commitments have not been terminated. The provisions of Sections 2.12 (except as expressly limited therein), 2.14, 2.18 and 11.05 shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Loans, the expiration of the Commitments, the expiration of any Letter of Credit, the invalidity or unenforceability of any term or provision of this Agreement or any other Transaction Document, or any investigation made by or on behalf of the Administrative Agent, the Collateral Agent, any Lender or the Issuing Bank. SECTION 11.03. Binding Effect. This Agreement shall become effective when it shall have been executed by each Borrower and the Administrative Agent and when the Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective permitted successors and assigns. 57 SECTION 11.04. Successors and Assigns. (a) Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the permitted successors and assigns of such party; and all covenants, promises and agreements by or on behalf of each Borrower, the Administrative Agent, the Issuing Bank or the Lenders that are contained in this Agreement shall bind and inure to the benefit of their respective successors and assigns. (b) Each Lender may assign to one or more assignees all or a portion of its interests, rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it); provided, however, that (i) except in the case of an assignment to a Lender or an Affiliate of such Lender, (x) each Borrower and the Administrative Agent (and, in the case of any assignment of a Commitment, the Issuing Bank) must give their prior written consent to such assignment (which consent shall not be unreasonably withheld) and (y) the amount of the Commitment of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent) shall not be less than $5,000,000 (or, if less, the entire remaining amount of such Lender's Commitment), provided further that during the continuation of an Event of Default, the consent of the Borrowers shall not be required for such assignment, (ii) each such assignment shall be of a constant, and not a varying, percentage of all the assigning Lender's rights and obligations under this Agreement, (iii) the parties to each such assignment shall execute and deliver to the Administrative Agent an Assignment and Acceptance, together with a processing and recordation fee of $3,500, and (iv) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire. Upon acceptance and recording pursuant to paragraph (e) of this Section 11.04, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five Business Days after the execution thereof, (A) the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement and (B) the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.12 (except as expressly limited therein), 2.14, 2.18 and 11.05, as well as to any Fees accrued for its account and not yet paid). (c) By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the assignee thereunder shall be deemed to confirm to and agree with each other and the other parties hereto as follows: (i) such assigning Lender warrants that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim and that its Commitment, and the outstanding balance of its Loans, in each case without giving effect to assignments thereof which have not become effective, are as set forth in such Assignment and Acceptance, (ii) except as set forth in (i) above, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement, or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement, any other Loan Document or any other instrument or document furnished pursuant hereto, or the financial condition of the Borrowers or the performance or observance by either Borrower of any of its obligations under this Agreement, any other Loan Document or any other instrument or document furnished pursuant hereto; (iii) such assignee represents and warrants that it is legally authorized to enter into such Assignment and Acceptance; (iv) such assignee confirms that it has received a copy of this Agreement, together with copies of the most recent financial statements referred to in Section 3.05 or delivered pursuant to Section 5.04 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (v) such assignee will independently and without reliance upon the Administrative Agent, the Collateral Agent, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (vi) such assignee appoints and authorizes the Administrative Agent and the Collateral Agent to take such action as agent on its behalf and 58 to exercise such powers under this Agreement as are delegated to the Administrative Agent and the Collateral Agent, respectively, by the terms hereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all the obligations which by the terms of this Agreement are required to be performed by it as a Lender. (d) The Administrative Agent, acting for this purpose as an agent of the Borrowers, shall maintain at one of its offices in The City of New York a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and principal amount of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive and the Borrowers, the Administrative Agent, the Issuing Bank, the Collateral Agent and the Lenders may treat each person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by each Borrower, the Issuing Bank, the Collateral Agent and any Lender, at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Lender and an assignee, an Administrative Questionnaire completed in respect of the assignee (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) above and, if required, the written consent of each Borrower, the Issuing Bank and the Administrative Agent to such assignment, the Administrative Agent shall (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Lenders and the Issuing Bank. No assignment shall be effective unless it has been recorded in the Register as provided in this paragraph (e). (f) Each Lender may without the consent of the Borrowers, the Issuing Bank or the Administrative Agent sell participation interests to one or more banks or other entities in all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it); provided, however, that (i) such Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the participating banks or other entities shall be entitled to the benefit of the cost protection provisions contained in Sections 2.12, 2.14 and 2.18 to the same extent as if they were Lenders, provided, however, the right of each holder of a participation to receive payment under such sections shall be limited to the lesser of (a) the amounts actually incurred by such holder for which payment is provided under said sections and (b) the amounts that would have been payable under said sections by the applicable Borrower to the Lender granting the participation to such holder had such participation not been granted, and (iv) the Borrowers, the Administrative Agent, the Issuing Bank and the Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement, and such Lender shall retain the sole right to enforce the obligations of the Borrowers relating to the Loans or L/C Disbursements and to approve any amendment, modification or waiver of any provision of this Agreement (other than amendments, modifications or waivers decreasing any fees payable hereunder or the amount of principal of or the rate at which interest is payable on the Loans, extending any scheduled principal payment date or date fixed for the payment of interest on the Loans or increasing or extending the Commitments). (g) Any Lender or participant may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 11.04, disclose to the assignee or participant or proposed assignee or participant any information relating to the Borrowers furnished to such Lender by or on behalf of the Borrowers; provided that, prior to any such disclosure of information designated by the Borrowers as confidential, each such assignee or participant or proposed assignee or participant shall execute an agreement whereby such assignee or participant shall agree (subject to customary exceptions) to 59 preserve the confidentiality of such confidential information on terms no less restrictive than those applicable to the Lenders pursuant to Section 11.16. (h) Any Lender may at any time assign all or any portion of its rights under this Agreement to a Federal Reserve Bank to secure extensions of credit by such Federal Reserve Bank to such Lender; provided that no such assignment shall release a Lender from any of its obligations hereunder or substitute any such Bank for such Lender as a party hereto. In order to facilitate such an assignment to a Federal Reserve Bank, each Borrower shall, at the request of the assigning Lender, duly execute and deliver to the assigning Lender a promissory note or notes evidencing the Loans made to such Borrower by the assigning Lender hereunder. (i) Neither Borrower shall assign or delegate any of its rights or duties hereunder without the prior written consent of the Administrative Agent, the Issuing Bank and each Lender, and any attempted assignment without such consent shall be null and void. (j) In the event that S&P, Moody's and Thompson's BankWatch (or InsuranceWatch Ratings Service, in the case of Lenders that are insurance companies (or Best's Insurance Reports, if such insurance company is not rated by Insurance Watch Ratings Service)) shall, after the date that any Lender becomes a Lender, downgrade the long-term certificate of deposit ratings of such Lender, and the resulting ratings shall be below BBB-, Baa3 and C (or BB, in the case of a Lender that is an insurance company (or B, in the case of an insurance company not rated by InsuranceWatch Ratings Service)), then the Issuing Bank shall have the right, but not the obligation, at its own expense, upon notice to such Lender and the Administrative Agent, to replace (or to request the Borrowers to use their reasonable efforts to replace) such Lender with an assignee (in accordance with and subject to the restrictions contained in paragraph (b) above), and such Lender hereby agrees to transfer and assign without recourse (in accordance with and subject to the restrictions contained in paragraph (b) above) all its interests, rights and obligations in respect of its Commitment to such assignee; provided, however, that (i) no such assignment shall conflict with any law, rule and regulation or order of any Governmental Authority and (ii) the Issuing Bank or such assignee, as the case may be, shall pay to such Lender in immediately available funds on the date of such assignment the principal of and interest accrued to the date of payment on the Loans made by such Lender hereunder and all other amounts accrued for such Lender's account or owed to it hereunder. SECTION 11.05. Expenses; Indemnity. (a) Each Borrower jointly and severally agrees to pay all reasonable out-of-pocket expenses incurred by the Administrative Agent, the Collateral Agent and the Issuing Bank in connection with the syndication of the credit facilities provided for herein and the preparation and administration of this Agreement and the other Loan Documents or in connection with any amendments, modifications or waivers of the provisions hereof or thereof (whether or not the transactions hereby or thereby contemplated shall be consummated) or incurred by the Administrative Agent, the Collateral Agent or any Lender in connection with the enforcement or protection of its rights in connection with this Agreement and the other Loan Documents or in connection with the Loans made or Letters of Credit issued hereunder, including the reasonable fees, charges and disbursements of Cravath, Swaine & Moore, counsel for the Administrative Agent and the Collateral Agent, and, in connection with any such enforcement or protection, the reasonable fees, charges and disbursements of any other counsel for the Administrative Agent, the Collateral Agent or any Lender. (b) Each Borrower jointly and severally agrees to indemnify the Administrative Agent, the Collateral Agent, each Lender and the Issuing Bank, each Affiliate of any of the foregoing persons and each of their respective directors, officers, employees and agents (each such person being called an "Indemnitee") against, and to hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including reasonable counsel fees, charges and disbursements, incurred by or asserted against any Indemnitee arising out of, in any way connected with, or as a result of (i) the execution or delivery of this Agreement or any other Loan Document or any agreement or instrument 60 contemplated thereby, the performance by the parties thereto of their respective obligations thereunder or the consummation of the Transactions and the other transactions contemplated thereby, (ii) the use of the proceeds of the Loans or issuance of Letters of Credit, (iii) any claim, litigation, investigation or proceeding relating to any of the foregoing, whether or not any Indemnitee is a party thereto, (iv) any actual or alleged presence or Release of Hazardous Materials on any property owned or operated by either Borrower or any Subsidiary, or any Environmental Claim related in any way to either Borrower or any Subsidiary or (v) any strict liability or liability without fault or other liability of an owner or vendor relating in any way to the Nuclear Fuel, whether arising out of statute, judicial decision or otherwise; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of such Indemnitee. (c) The provisions of this Section 11.05 shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Loans, the expiration of the Commitments, the expiration of any Letter of Credit, the invalidity or unenforceability of any term or provision of this Agreement or any other Transaction Document, or any investigation made by or on behalf of the Administrative Agent, the Collateral Agent, any Lender or the Issuing Bank. All amounts due under this Section 11.05 shall be payable on written demand therefor. SECTION 11.06. Right of Setoff. If an Event of Default shall have occurred and be continuing, each Lender is hereby authorized at any time and from time to time, to the extent not prohibited by applicable law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of either Borrower against any of and all the Obligations now or hereafter existing under this Agreement and the other Loan Documents held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement or such other Loan Document and although such obligations may be unmatured. The rights of each Lender under this Section 11.06 are in addition to other rights and remedies (including other rights of setoff) which such Lender may have. SECTION 11.07. Applicable Law. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (OTHER THAN LETTERS OF CREDIT) SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. EACH LETTER OF CREDIT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED IN ACCORDANCE WITH, THE LAWS OR RULES DESIGNATED IN SUCH LETTER OF CREDIT, OR IF NO SUCH LAWS OR RULES ARE DESIGNATED, THE UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS (1993 REVISION), INTERNATIONAL CHAMBER OF COMMERCE, PUBLICATION NO. 500 (THE "UNIFORM CUSTOMS") AND, AS TO MATTERS NOT GOVERNED BY THE UNIFORM CUSTOMS, THE LAWS OF THE STATE OF NEW YORK. SECTION 11.08. Waivers; Amendment. (a) No failure or delay of the Administrative Agent, the Collateral Agent, any Lender or the Issuing Bank in exercising any power or right hereunder or under any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agent, the Collateral Agent, the Issuing Bank and the Lenders hereunder and under the other Loan Documents are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of this Agreement or any other Loan Document or consent to any departure by either Borrower therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) below, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice or demand on the Borrowers in any case shall entitle either Borrower to any other or further notice or demand in similar or other circumstances. 61 (b) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Borrowers and the Required Lenders; provided, however, that no such agreement shall (i) decrease the principal amount of, or extend the maturity of or any scheduled principal payment date or date for the payment of any interest on any Loan or any date for reimbursement of an L/C Disbursement, or waive or excuse any such payment or any part thereof, or decrease the rate of interest on any Loan or L/C Disbursement, without the prior written consent of each Lender affected thereby, (ii) increase or extend the Commitment of any Lender without the prior written consent of such Lender, (iii) decrease the Commitment Fees or L/C Participation Fees of any Lender, or extend the date of payment of such fees, without the prior written consent of such Lender or (iv) amend or modify the pro rata sharing requirements of Section 2.15, the provisions of this Section 11.08 or Section 11.04(i), the definition of the term "Required Lenders", release El Paso from its guarantee hereunder, release any Subsidiary from any guarantee that such Subsidiary shall execute, after the date hereof, pursuant to Section 5.10, or release all or any substantial part of the Collateral, without the prior written consent of each Lender; provided further, however, that no such agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent, the Collateral Agent or the Issuing Bank hereunder or under any other Loan Document without the prior written consent of the Administrative Agent, the Collateral Agent or the Issuing Bank, respectively. SECTION 11.09. Interest Rate Limitation. Notwithstanding anything herein to the contrary, if at any time the interest rate applicable to any Loan or L/C Disbursement, together with all fees, charges and other amounts which are treated as interest on such Loan or L/C Disbursement under applicable law (collectively the "Charges"), shall exceed the maximum lawful rate (the "Maximum Rate") which may be contracted for, charged, taken, received or reserved by the Lender holding such Loan or the Issuing Bank in accordance with applicable law, the rate of interest payable in respect of such Loan or L/C Disbursement hereunder, together with all Charges payable in respect thereof, shall be limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have been payable in respect of such Loan or L/C Disbursement but were not payable as a result of the operation of this Section 11.09 shall be cumulated and the interest and Charges payable to such Lender in respect of other Loans or L/C Disbursements or periods shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon at the Federal Funds Effective Rate to the date of repayment, shall have been received by such Lender; provided that at any time Texas law shall establish the Maximum Rate, the Maximum Rate shall be the "indicated rate ceiling" (as defined in Chapter One of the Texas Credit Code, V.T.C.S. Art. 5069-1.04 et seq.) as in effect from time to time. SECTION 11.10. Entire Agreement. THIS AGREEMENT, THE FEE LETTER AND THE OTHER LOAN DOCUMENTS CONSTITUTE THE ENTIRE CONTRACT BETWEEN THE PARTIES RELATIVE TO THE SUBJECT MATTER HEREOF. ANY OTHER PREVIOUS AGREEMENT AMONG THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF IS SUPERSEDED BY THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. NOTHING IN THIS AGREEMENT OR IN THE OTHER LOAN DOCUMENTS, EXPRESSED OR IMPLIED, IS INTENDED TO CONFER UPON ANY PARTY OTHER THAN THE PARTIES HERETO AND THERETO ANY RIGHTS, REMEDIES, OBLIGATIONS OR LIABILITIES UNDER OR BY REASON OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS. SECTION 11.11. Waiver of Jury Trial. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND 62 (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, AS APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 11.11. SECTION 11.12. Severability. In the event any one or more of the provisions contained in this Agreement or in any other Loan Document should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby (it being understood that the invalidity of a particular provision in a particular jurisdiction shall not in and of itself affect the validity of such provision in any other jurisdiction). The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. SECTION 11.13. Counterparts. This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original but all of which when taken together shall constitute a single contract, and shall become effective as provided in Section 11.03. Delivery of an executed signature page to this Agreement by facsimile transmission shall be as effective as delivery of a manually signed counterpart of this Agreement. SECTION 11.14. Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Agreement. SECTION 11.15. Jurisdiction; Consent to Service of Process. (a) Each Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the other Loan Documents, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Administrative Agent, the Collateral Agent, the Issuing Bank or any Lender may otherwise have to bring any action or proceeding relating to this Agreement or the other Loan Documents against either Borrower or its respective properties in the courts of any jurisdiction. (b) Each Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the other Loan Documents in any New York State or Federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (c) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 11.01. Nothing in this Agreement or any other Loan Document will affect the right of any party to this Agreement to serve process in any other manner permitted by law. SECTION 11.16. Confidentiality. The Administrative Agent, the Collateral Agent, the Issuing Bank and each of the Lenders agrees to keep confidential (and to use its best efforts to cause its respective agents and representatives to keep confidential) the Information (as defined below) and all copies thereof, extracts therefrom and analyses or other materials based thereon, except that the Administrative Agent, the 63 Collateral Agent, the Issuing Bank or any Lender shall be permitted to disclose Information (a) to such of its respective officers, directors, employees, agents, affiliates and representatives as need to know such Information, (b) to the extent requested by any regulatory authority, (c) to the extent otherwise required by applicable laws and regulations or by any subpoena or similar legal process, (d) in connection with any suit, action or proceeding relating to the enforcement of its rights hereunder or under the other Loan Documents, (e) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section 11.16 or (ii) becomes available to the Administrative Agent, the Issuing Bank, any Lender or the Collateral Agent on a nonconfidential basis from a source other than the Borrowers, or (f) to the extent permitted by Section 11.04(g). For the purposes of this Section 11.16, "Information" shall mean all financial statements, certificates, reports, agreements and information (including all analyses, compilations and studies prepared by the Administrative Agent, the Collateral Agent, the Issuing Bank or any Lender based on any of the foregoing) that are received from the Borrowers and related to the Borrowers, any shareholder of El Paso or any employee, customer or supplier of either Borrower, other than any of the foregoing that were available to the Administrative Agent, the Collateral Agent, the Issuing Bank or any Lender on a nonconfidential basis prior to its disclosure thereto by either Borrower, and which are in the case of Information provided after the date hereof, clearly identified at the time of delivery as confidential. The provisions of this Section 11.16 shall remain operative and in full force and effect regardless of the expiration and term of this Agreement. SECTION 11.17. Texas Revolving Credit Statute. If, notwithstanding the provisions of Section 11.07, Texas law shall be applied by any Governmental Authority to this Agreement, the other Loan Documents or the obligations of either Borrower hereunder or thereunder, each Borrower hereby agrees that, pursuant to Tex. Rev. Civ. Stat. Ann. art. 5069-15.10(b), Chapter 15 of Title 79 of the Revised Civil Statutes of Texas, as amended, shall not govern or in any manner apply to its obligations hereunder or thereunder. SECTION 11.18. No Recourse. CBT has entered into this Agreement and the other Loan Documents solely in its capacity as Trustee and not in its individual capacity. CBT shall not be liable for the obligations or liabilities of the Trustee hereunder or under any other Loan Document, except to the extent such obligations or liabilities result from CBT's gross negligence or willful misconduct. SECTION 11.19. Limited Representations, Warranties and Covenants of Trustee. With respect to representations and warranties contained in Article III, the affirmative covenants contained in Article V and the negative covenants contained in Article VI, it is understood and agreed that (a) the Trustee has made no independent inquiry as to (i) the assets placed in trust into the Rio Grande Resources Trust II, (ii) any facts concerning El Paso and the Subsidiaries or as to the status or condition of any of their assets or any disclosures made by them or (iii) the existence of any Liens on the Collateral in existence before the Trustee became or becomes the owner of such property pursuant to the Purchase Contract and (b) the Trustee's representations, warranties and covenants are limited to itself and those matters within its control. The Trustee has no actual knowledge of any facts that would indicate that any such representations or warranties by El Paso or the Subsidiaries are untrue. 64 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. El PASO ELECTRIC COMPANY, by /s/ Gary R. Hedrick ------------------------------------------- Name: Gary R. Hedrick Title: Vice President, Treasurer, and Chief Financial Officer CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, not in its individual capacity, but solely in its capacity as Trustee, by /s/ Kathryn M. Houston -------------------------------------------- Name: Kathryn M. Houston Title: Vice President THE CHASE MANHATTAN BANK, individually and as Administrative Agent, Collateral Agent and Issuing Bank, by /s/ Robert W. Mathews ------------------------------------------ Name: Robert W. Mathews Title: Vice President UNION BANK OF CALIFORNIA, N.A., individually and as Documentation Agent, by /s/ David Musicant -------------------------------------------- Name: David Musicant Title: Vice President BARCLAYS BANK PLC, NEW YORK BRANCH, individually and as Syndication Agent, by /s/ Sydney G. Dennis -------------------------------------------- Name: Sydney G. Dennis Title: Director 65 ABN AMRO BANK N.V., by /s/ Kevin S. McFadden ------------------------------------------- Name: Kevin S. McFadden Title: Vice President and Director by /s/ Kris A. Grosshans -------------------------------------------- Name: Kris A. Grosshans Title: Vice President and Director BANKBOSTON, N.A., by /s/ Michael Kane -------------------------------------------- Name: Michael Kane Title: Managing Director CREDIT LYONNAIS NEW YORK BRANCH, by /s/ Robert Ivosevich -------------------------------------------- Name: Robert Ivosevich Title: Senior Vice President GUARANTY BANK, F.S.B., by /s/ Mark L. Wayne -------------------------------------------- Name: Mark L. Wayne Title: Vice President EX-10.24.01 3 AMENDED AGREEMENT TO THE CREDIT AGREEMENT EXHIBIT 10.24-01 - -------------------------------------------------------------------------------- El Paso Electric Company Chase Bank of Texas, National Association not in its individual capacity, but solely in its capacity as trustee of the Rio Grande Resources Trust II Amendment Agreement dated as of February 8, 1999, to the $100,000,000 Credit Agreement dated as of February 12, 1996, as amended and restated as of February 8, 1999, The Chase Manhattan Bank as Administrative Agent, Collateral Agent and Issuing Bank Union Bank of California, N.A. as Documentation Agent Barclays Bank PLC, New York Branch as Syndication Agent ______________ Chase Securities Inc. as Book Manager and Lead Arranger - -------------------------------------------------------------------------------- CHASE CONFORMED COPY AMENDMENT AGREEMENT dated as of February 8, 1999 (this "Amendment Agreement"), among EL PASO ELECTRIC COMPANY, a Texas corporation ("El Paso"), CHASE BANK OF TEXAS, 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"; each of El Paso and the Trustee are referred to individually herein as a "Borrower" and collectively as the "Borrowers"), the lenders listed on the signature pages hereof under the captions "Departing Lenders" (the "Departing Lenders"), "Continuing Lenders" (the "Continuing Lenders") and "Additional Lenders" (the "Additional Lenders", and, together with the Continuing Lenders, the "Lenders"), THE CHASE MANHATTAN BANK, a New York banking corporation ("Chase"), as issuing bank (in such capacity, the "Issuing Bank"), as administrative agent (in such capacity, the "Administrative Agent") and as collateral agent (in such capacity, the "Collateral Agent") for the Lenders, UNION BANK OF CALIFORNIA, N.A., as documentation agent (the "Documentation Agent"), and BARCLAYS BANK PLC, NEW YORK BRANCH, as syndication agent (the "Syndication Agent"). A. The Borrowers, the Departing Lenders, the Continuing Lenders, the Administrative Agent, the Collateral Agent and the Issuing Bank are parties to a Credit Agreement dated as of February 12, 1996, as amended as of February 12, 1996 and July 31, 1997 (the "Original Credit Agreement"). B. The Departing Lenders and certain Continuing Lenders wish to assign all or a portion of their interests in (i) the outstanding Loans and (ii) the outstanding Letters of Credit under the Original Credit Agreement to the Additional Lenders and certain other Continuing Lenders, and the Additional Lenders and such Continuing Lenders are willing to accept such assignments. C. The Borrowers have requested, and the other parties hereto have agreed, upon the terms and subject to the conditions set forth or referred to herein, that the Original Credit Agreement be amended and restated upon the effectiveness of the assignments referred to in paragraph B above in the form of the Amended and Restated Credit Agreement set forth as Exhibit A hereto (the "Restated Credit Agreement"). D. Accordingly, in consideration of the mutual agreements herein contained and other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, the parties hereto hereby agree as follows: SECTION 1. Defined Terms. Capitalized terms used and not defined herein shall have the meanings assigned to such terms in the Restated Credit Agreement. SECTION 2. Assignments. (a) On and as of the Restatement Closing Date, subject to the conditions set forth in Section 7 hereof, each of the Departing Lenders, Continuing Lenders and Additional Lenders shall sell, assign and transfer, or purchase and assume, as the case may be, such interests in (i) the Commitments (as defined in the Original Credit Agreement), (ii) the outstanding Loans (as defined in the Original Credit Agreement), and (iii) the participations in the Letters of Credit outstanding as of the Restatement Closing Date (the "Existing Letters of Credit"), in each case as shall be necessary in order that, after giving effect to all such assignments and purchases, the Commitments, the Loans and the participations in the Existing Letters of Credit will be held by the Continuing Lenders and Additional Lenders ratably in accordance with their Commitments as set forth in Schedule 2.01 to the Restated Credit 2 Agreement. Each Lender purchasing interests of any type under this Section 2 shall be deemed to have purchased such interests from each Departing Lender and Continuing Lender selling interests of such type ratably in accordance with the amounts of such interests sold by them. The assignments and purchases provided for in this Section 2 shall be without recourse, warranty or representation, except that each assigning Lender shall be deemed to have represented that it is the legal and beneficial owner of the interests assigned by it and that such interests are free and clear of any adverse claim, and the purchase price for each such assignment and purchase shall equal the principal amount of the Loans purchased. Concurrently with the effectiveness of the assignments and purchases provided for above, the Departing Lenders shall cease to be parties to the Original Credit Agreement and shall be released from all further obligations thereunder and shall have no further rights to or interest in any of the Collateral (as defined in the Original Credit Agreement); provided, however, that the Departing Lenders shall continue to be entitled to the benefits of Sections 2.12, 2.14, 2.18 and 11.05 of the Original Credit Agreement as in effect immediately prior to the Restatement Closing Date. (b) On the Restatement Closing Date, (i) each Additional Lender and each Continuing Lender that is purchasing interests in the Commitments and the outstanding Loans pursuant to paragraph (a) above shall pay the purchase price for the interests purchased by it pursuant to such paragraph (a) by wire transfer of immediately available funds to the Administrative Agent in New York, New York, not later than 12:00 (noon), New York City time, and (ii) the Administrative Agent shall pay to each Departing Lender and each Continuing Lender that is assigning interests in outstanding Loans pursuant to paragraph (a) above, out of the amounts received by the Administrative Agent from each Additional Lender and Continuing Lender pursuant to clause (i) of this paragraph (b), the purchase price for the interests assigned by it pursuant to such paragraph (a) by wire transfer of immediately available funds not later than 3:00 p.m., New York City time. (c) Each of the parties hereto hereby consents to the assignments and purchases provided for in paragraphs (a) and (b) above and agrees that (i) each Additional Lender and each Continuing Lender that is purchasing interests in the Commitments and the outstanding Loans pursuant to paragraph (a) above are assignees of the Departing Lenders and certain Continuing Lenders permitted under Section 11.04 of the Original Credit Agreement and (ii) each Additional Lender and each Continuing Lender shall have all the rights and obligations of a Lender under the Restated Credit Agreement with respect to the interests purchased by it pursuant to such paragraphs. The Borrowers further agree that if any Lender shall default in the payment of any amount due from it under paragraph (b) above, the Borrowers shall promptly pay the defaulted amount to the Administrative Agent by wire transfer of immediately available funds, together with interest on such amount at the Alternate Base Rate from the Restatement Closing Date to the date of payment. Upon any such payment by the Borrowers, (i) the Borrowers shall be subrogated to all rights of the assigning Lender against the defaulting Lender and (ii) the Borrowers shall have the right, at the defaulting Lender's expense, upon notice to the defaulting Lender and to the Administrative Agent, to require such defaulting Lender to transfer and assign without recourse all its interests, rights and obligations under the Restated Credit Agreement to another financial institution which shall assume such interests, rights and obligations; provided that (A) no such assignment shall conflict with any law, rule or regulation or order of any Governmental Authority, (B) the assignee shall pay to the defaulting Lender, in immediately available funds on the date of such assignment, the outstanding principal of and interest accrued to the date of payment on the Loans made or deemed made by such defaulting Lender under the Restated Credit Agreement, if any, and all other amounts accrued for such defaulting Lender's account or owed to it under the Restated Credit Agreement and (C) if the defaulting Lender shall not have reimbursed the Borrowers for the defaulted amount paid by the Borrowers pursuant to paragraph (b) above, the assignee shall pay to the Borrowers, in immediately available funds on the date of such assignment, the amount of and interest accrued to the date of payment on, such defaulted amount. SECTION 3. Amendment and Restatement of the Original Credit Agreement. (a) The Borrowers, the Additional Lenders, the Continuing Lenders, the Issuing Bank, the Administrative Agent, the Collateral 3 Agent, the Documentation Agent and the Syndication Agent agree that the Original Credit Agreement (including all Exhibits and Schedules thereto) is hereby amended and restated, effective as of the Restatement Closing Date, to read in its entirety as set forth in Exhibit A hereto. As used in the Restated Credit Agreement, the terms "Agreement", "this Agreement", "herein", "hereinafter", "hereto", "hereof" and words of similar import shall, unless the context otherwise requires and except as provided above, mean the Original Credit Agreement as amended and restated by this Amendment Agreement. (b) On the Restatement Closing Date, upon the effectiveness of the Restated Credit Agreement, (i) each Loan outstanding under the Original Credit Agreement shall be deemed to be a Loan under the Restated Credit Agreement and (ii) each Existing Letter of Credit shall be deemed to be a Letter of Credit issued under the Restated Credit Agreement, and the amount of the unused Commitments shall be adjusted accordingly. (c) Schedule I hereto sets forth the principal amount and type of each Loan held by each Lender on the Restatement Closing Date, after giving effect to the transactions contemplated by Section 2 above and this Section 3. The Borrowers shall cause all Borrowings outstanding immediately prior to the Restatement Closing Date to be ABR Borrowings. SECTION 4. Amendment of the Purchase Contract. The Additional Lenders and the Continuing Lenders hereby consent to the amendment of the Purchase Contract as set forth in Exhibit B hereto. SECTION 5. Representations and Warranties. The Borrowers hereby make to each of the other parties hereto, on the date hereof and on the Restatement Closing Date, each of the representations and warranties contained in Article III of the Restated Credit Agreement, and each of such representations and warranties is hereby incorporated by reference herein. SECTION 6. Fees; Interest. (a) On the Restatement Closing Date, simultaneously with the making of the assignments provided for in Section 2, the Borrowers shall pay (i) to the Administrative Agent, for the accounts of the Departing Lenders and Continuing Lenders, the fees payable pursuant to Section 2.05 of the Original Credit Agreement which have accrued for the period from the last date such fees were paid to but excluding the Restatement Closing Date and (ii) for the account of the Administrative Agent and the Lenders entitled thereto, the fees and expenses referred to in Section 4.02(d) of the Restated Credit Agreement. The fees and expenses described in this Section 6 shall be payable in immediately available funds. Once paid, such fees shall not be refundable under any circumstances. (b) On the Restatement Closing Date, simultaneously with the making of the assignments provided for in Section 2, the Borrowers shall pay to the Administrative Agent, for the accounts of the Departing Lenders and the Continuing Lenders, all unpaid interest accrued to but excluding the Restatement Closing Date on the Loans (as defined in the Original Credit Agreement) of each such Lender. SECTION 7. Conditions Precedent. The obligation of each Continuing Lender and each Additional Lender to purchase the assignments provided for in Section 2 hereof, the amendment and restatement of the Original Credit Agreement provided for in Section 3 hereof and the consent to the amendment of the Purchase Agreement provided for in Section 4 hereof on the Restatement Closing Date shall be subject to the satisfaction of all of the conditions precedent contained in Article IV of the Restated Credit Agreement, and each of such conditions precedent is hereby incorporated by reference herein. SECTION 8. Applicable Law. THIS AMENDMENT AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. 4 SECTION 9. No Novation. Neither this Amendment Agreement nor the execution, delivery or effectiveness of the Restated Credit Agreement shall extinguish the obligations for the payment of money outstanding under the Original Credit Agreement or discharge or release the Lien or priority of any security agreement, any pledge agreement or any other security therefor. Nothing herein contained shall be construed as a substitution or novation of the Obligations outstanding under the Original Credit Agreement or instruments securing the same, which shall remain in full force and effect, except as modified hereby or by instruments executed concurrently herewith. Nothing expressed or implied in this Amendment Agreement, the Restated Credit Agreement or any other document contemplated hereby or thereby shall be construed as a release or other discharge of either of the Borrowers under the Original Credit Agreement or any Guarantor under any Loan Document (as defined in the Original Credit Agreement) from any of its obligations and liabilities thereunder. Each of the Original Credit Agreement and the other Loan Documents (as defined in the Original Credit Agreement) shall remain in full force and effect, until and except as modified hereby or thereby in connection herewith or therewith. This Amendment Agreement shall constitute a Loan Document for all purposes of the Original Credit Agreement and the Restated Credit Agreement. SECTION 10. Notices. All notices hereunder shall be given in accordance with the provisions of Section 11.01 of the Restated Credit Agreement and in the case of the Departing Lenders to the addresses referred to in Section 11.01 of the Original Credit Agreement. SECTION 11. Counterparts. This Amendment Agreement may be executed in two or more counterparts, each of which when taken together shall constitute but one contract, and shall become effective as provided in Section 13 hereof. Delivery of an executed signature page to this Amendment Agreement by facsimile transmission shall be as effective as delivery of a manually signed counterpart hereof. SECTION 12. Headings. The headings of this Amendment Agreement are for convenience of reference only, are not part of this Amendment Agreement and are not to be taken into consideration in interpreting this Amendment Agreement. SECTION 13. Effectiveness; Amendment. Subject to the conditions of Section 7 hereof, this Amendment Agreement shall become effective on the Restatement Closing Date if (a) it shall have been executed by each Borrower and the Administrative Agent and (b) the Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the parties hereto. This Amendment Agreement may not be amended nor may any provision hereof be waived except pursuant to a writing signed by each of the parties hereto. 5 IN WITNESS WHEREOF, the parties hereto have caused this Amendment Agreement to be duly executed by their duly authorized officers, all as of the date and year first above written. El PASO ELECTRIC COMPANY, by /s/ Gary R. Hedrick ----------------------------------------- Name: Gary R. Hedrick Title: Vice President, Treasurer, and Chief Financial Officer CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, not in its individual capacity, but solely in its capacity as Trustee, by /s/ Kathryn M. Houston ----------------------------------------- Name: Kathryn M. Houston Title: Vice President THE CHASE MANHATTAN BANK, individually and as Administrative Agent, Collateral Agent and Issuing Bank, by /s/ Robert W. Mathews ----------------------------------------- Name: Robert W. Mathews Title: Vice President UNION BANK OF CALIFORNIA, N.A., individually and as Documentation Agent, by /s/ David Musicant ----------------------------------------- Name: David Musicant Title: Vice President BARCLAYS BANK PLC, NEW YORK BRANCH, individually and as Syndication Agent, by /s/ Sydney G. Dennis ----------------------------------------- Name: Sydney G. Dennis Title: Director 6 Continuing Lenders ------------------ CREDIT LYONNAIS NEW YORK BRANCH, by /s/ Robert Ivosevich ----------------------------------------- Name: Robert Ivosevich Title: Senior Vice President GUARANTY BANK, F.S.B., by /s/ Mark L. Wayne ----------------------------------------- Name: Mark L. Wayne Title: Vice President Additional Lenders ------------------ ABN AMRO BANK N.V., by /s/ Kevin S. McFadden ----------------------------------------- Name: Kevin S. McFadden Title: Vice President and Director by /s/ Kris A. Grosshans ----------------------------------------- Name: Kris A. Grosshans Title: Vice President and Director BANKBOSTON, N.A., by /s/ Michael Kane ----------------------------------------- Name: Michael Kane Title: Managing Director Departing Lenders ----------------- COMMERCIAL LOAN FUNDING TRUST I, by Lehman Commercial Paper Inc., not in its individual capacity but solely as administrative agent, by /s/ Michele Swanson ----------------------------------------- Name: Michele Swanson Title: Authorized Signatory 7 OCTAGON LOAN TRUST, by /s/ Joyce C. DeLucca ----------------------------------------- Name: Joyce C. DeLucca Title: Managing Director SPS SWAPS, by /s/ Anna Maria Beissel ---------------------------------------- Name: Anna Maria Beissel Title: Vice President Schedule I
Loans =================================================================================== Lender Type of Loan Principal Amount =================================================================================== The Chase Manhattan Bank ABR Loan $7,223,520.00 - ----------------------------------------------------------------------------------- Barclays Bank PLC, New York Branch ABR Loan $7,223,520.00 - ----------------------------------------------------------------------------------- Union Bank of California, N.A. ABR Loan $7,223,520.00 - ----------------------------------------------------------------------------------- ABN AMRO Bank ABR Loan $7,223,520.00 - ----------------------------------------------------------------------------------- Credit Lyonnais, New York Branch ABR Loan $5,417,640.00 - ----------------------------------------------------------------------------------- Guaranty Federal Bank, F.S.B ABR Loan $5,417,640.00 - ----------------------------------------------------------------------------------- BankBoston, N.A. ABR Loan $5,417,640.00 ===================================================================================
EX-10.38 4 EMPLOYMENT AGREEMENT - ERNEST LEHMAN EXHIBIT 10.38 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT (this "Agreement"), effective as of January 11, 1999, by and between El Paso Electric Company, a Texas corporation ("Company"), and Earnest A. Lehman ("Executive"). WITNESSETH: ----------- WHEREAS, the Board of Directors of the Company desires to employ Executive as its Vice President - Energy Services Business Unit; and WHEREAS, Executive is willing, on the terms and subject to the conditions provided in this Agreement, to undertake the management responsibilities contemplated herein, to furnish services to Company as provided herein, and to be subject to certain employment restrictions and obligations; NOW, THEREFORE, in consideration of the premises and the covenants herein contained and other good, valuable, and binding consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: Article I. Employment ---------- 1.1 Responsibilities and Authority. Company hereby employs Executive to ------------------------------ serve as its Vice President - Energy Services Business Unit. The duties of Executive shall be those duties which can reasonably be expected to be performed by a person with the title of Vice President - Energy Services Business Unit. Executive shall report directly to the Senior Vice President - Customer & Corporate Services of the Company and shall perform such other duties as may be assigned to him by the Senior Vice President - Customer & Corporate Services or the Board of Directors as are not inconsistent with Executive's position as Vice President - Energy Services Business Unit. 1.2 Acceptance of Employment. Executive accepts employment by Company on ------------------------ the terms and conditions herein provided and agrees, subject to the terms of this Agreement, to devote substantially all of his business time to advance the business of the Company. Nothing contained in this Agreement shall be construed so as to prevent Executive from investing his personal assets in such a manner and otherwise engaging in business transactions that are not inconsistent with the interests of the Company and that will not require a substantial portion of Executive's business time or otherwise interfere with the performance of his duties hereunder. 1.3 Employment Term. Company hereby employs Executive for an employment --------------- term of two years, beginning January 11, 1999 -and terminating on January 10, 2001 (the "Employment Term"). 1.4 Termination. This Agreement may be terminated, subject to the ----------- provisions of Article V below, at the option of either party upon the giving of at least thirty (30) days written notice to the other party. Article II. Compensation and Incentives --------------------------- As compensation for his services hereunder, Executive shall be paid the following: 2.1 Base Compensation. Commencing on January 11, 1999, Company shall pay ----------------- Executive a base cash salary at the aggregate initial rate of $130,000.00 per annum. Thereafter, the base salary amount will be reviewed annually by the Board of Directors, which may, in its discretion, make appropriate annual merit increases, provided, however, Executive's base cash salary shall never be less than $130,000.00 per annum. The compensation paid to Executive pursuant to this Section 2.1 is hereinafter referred to as "Base Compensation." The Base Compensation shall be paid to Executive in accordance with the Company's existing payroll policy. 2.2 Options. (a) As additional inducement for Executive to enter into ------- this Agreement, Company hereby grants to Executive nontransferable Options to purchase 100,000 shares of Common Stock (the "Options") for an amount per share equal to the closing price of the Common Stock on the American Stock Exchange on January 8, 1999. The Options will be issued under the El Paso Electric Company 1996 Long-Term Incentive Plan and will be evidenced by a separate Stock Option Agreement (the "Stock Option Agreement") between Executive and the Company which agreement will provide that the maximum number of Options will be incentive stock options (the "Qualified Options") and the remainder of the Options will be non-qualified stock options (the "Non-Qualified Options"). (b) The Stock Option Agreement will provide that twenty per cent (20%) of the Qualified Options and twenty per cent (20%) of the Non-Qualified Options shall vest in Executive each year for five (5) successive years beginning on January 2, 2000, and continuing each and every January 2 thereafter, until all such are fully vested on January 2, 2004; provided, however, that all such shall vest immediately in the event of a Triggering Event (as described in Section 6.3 below). Executive (or his legal representative) may exercise such Options any time after vesting subject to such reasonable terms and conditions as are contained in the Stock Option Agreement. All Options granted and not earlier exercised shall expire ten years from the date of the grant. Article III. Relocation Expenses ------------------- 3.1 Residence. For so long as this Agreement shall remain in effect, --------- Executive shall reside within the Company's retail electric service territory. 3.2 Purchase of Topeka Residence. (a) In order to facilitate Executive's ---------------------------- move from Topeka, Kansas to the Company's retail electric service territory, Company hereby 2 agrees, subject to the provisions of this Section 3.2, to purchase (through a relocation firm or otherwise) Executive's residence located at 3517 SW Avalon Lane, Topeka, Kansas 66604-2503 (the "Topeka Residence", the legal description of which is contained on Exhibit 3.2 attached hereto and made a part hereof for its "Appraised Value," determined in accordance with Section 3.2(b) below. Company understands that Executive has listed the Topeka Residence for sale with Prudential Realty Company, Topeka, Kansas, which listing arrangement will be honored by the Company in connection with this Section 3.2. Executive shall use his best efforts to sell the Topeka Residence during the period up to and including the date ninety (90) days from the date of execution of this Agreement (the 'Listing Period'). If the Topeka Residence is sold by Executive during the Listing Period, Company shall pay all reasonable commissions payable to Prudential Realty pursuant to the listing arrangement referenced above. If the Topeka Residence is not sold by Executive during the Listing Period, the Appraised Value shall be paid to Executive in cash, as soon as reasonably practicable after the conclusion of the Listing Period. Simultaneously with such payment, Executive agrees to convey the Topeka Residence to Company free of all mortgages and liens and to execute and deliver such title documents and instruments of transfer as the Company may reasonably require in connection with the disposition of the Topeka Residence. (b) The Appraised Value of the Topeka Residence shall be the average of two appraisals, each submitted by a certified real estate appraiser acceptable to both Company and Executive, if, and only if, the higher of the two appraisals does not exceed 110% of the value of the lower appraisal. If the two appraisals differ by more than this permitted amount, a third certified real estate appraiser acceptable to both the Company and Executive shall submit an appraisal and the Appraised Value of the Topeka Residence shall be equal to the median value of the three appraisals. 3.3 Reimbursement of Moving Costs. Company shall reimburse Executive for ----------------------------- all reasonable costs incurred by Executive in moving household furnishings and related personal property from his Topeka Residence, to his new residence within the Company's retail electric service territory. Executive shall submit a written estimate of the cost of such move to Mr. Michael Blough, Vice President - - Administration, for prior approval. Company shall promptly reimburse Executive for all such costs upon submission by Executive of a final expense report detailing such expenses. 3.4 Lease of Corporate Apartment. Upon Executive's relocation to the ---------------------------- Company's retail electric service territory, Company shall reimburse Executive for the cost of a stay (up to sixty days) in a corporate apartment acceptable to Company and Executive, if it is necessary for Executive to utilize such a service. Article IV. Benefits -------- 4.1 Benefits. In addition to the Base Compensation required to be paid to -------- Executive hereunder, Executive shall receive the benefits (the "Benefits") described on Exhibit 4.1 attached hereto and made a part hereof for all purposes. 3 4.2 Beneficiaries. Executive shall have the absolute right to designate ------------- the beneficiary or beneficiaries to receive all payments and employee benefits described in this Agreement which may be payable or available in the event of Executive's death. 4.3 Reimbursement of Expenses. Executive will be promptly reimbursed by ------------------------- Company for all reasonable and necessary expenses incurred by Executive on behalf of, and in connection with, the business of Company. Article V. Termination ----------- 5.1 Acceleration of Payments. In the event of the occurrence of a ------------------------ "Triggering Event" (as defined in Section 6.3 below), Company shall pay to Executive upon the fifth business day after the giving of written demand from the Executive to Company, a lump sum cash payment equal to the sum of (i) the greater of (x) the balance of the Base Compensation due to Executive for the remainder of the Employment Term and (y) the product obtained by multiplying Executive's then current monthly Base Compensation by six (6) (including in each case, without limitation, accrued but unused vacation time), plus (ii) earned but unpaid bonuses, plus (iii) any other payments due to Executive pursuant to any Benefits. Executive will forfeit the unvested Options described in Section 2.2 above, and Executive will have not less than 90 days to exercise the vested Qualified Options and not less than 120 days to exercise the vested Non- Qualified Options. 5.2 Continuation of Benefits. In the event of any termination of this ------------------------ Agreement, except voluntary termination by Executive which is not for "Good Reason" prior to January 11, 2001, for a period of two years from the date of such termination the Company shall maintain full coverage for Executive and his surviving spouse, if any, under all group medical and dental plans in which Executive was entitled to participate immediately prior to the termination, provided that his continued participation is possible under the general terms and provisions of such plans. In the event that Executive's participation in any such plan or program is barred, Company shall arrange to provide Executive and such surviving spouse with benefits substantially similar to those which they are entitled to receive under such plans. While Executive continues to participate in any such plan or receive any such benefit, he shall continue to pay employee premiums at the level of such premiums in force at the time of such termination. Executive and Company hereby expressly acknowledge that all eligibility periods under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") shall run from the termination of this Agreement and provision of benefits by the Company during the two year period following termination shall not extend the period during which Executive can elect to participate under COBRA. 5.3 Termination Upon Death. In the event of Executive's death, this ---------------------- Agreement will terminate upon the first day of the month following Executive's date of death, and his surviving spouse, if any, shall be entitled to the benefits described in Section 5.2 above and to all other benefits described in this Agreement or otherwise available to Executive which may be payable or available in the event of Executive's death. Any unvested 4 Options described in Section 2.2 above shall be forfeited, and Executive's surviving spouse or legal representative shall have not less than 90 days to exercise the vested Qualified Options and not less than 120 days to exercise vested Non-Qualified Options. 5.4 Termination Upon Total Disability. (a) Company may terminate this --------------------------------- Agreement by reason of Executive's "Total Disability" upon at least 30 days' written notice to Executive, in which event Company shall pay Executive the amounts set forth in Section 5.1 above and, subject to the standards and restrictions governing employee disabilities in general under the Company's medical plans, Executive shall be entitled to the benefits set forth in Section 5.2 above. As used herein, "Total Disability" means illness or other physical or mental disability of Executive which shall continue for a period aggregating at least six months during any 12-month period, which such illness or disability shall make it impossible or impracticable for Executive to substantially perform his duties and responsibilities hereunder with whatever reasonable accommodation may be required by applicable law. If a disagreement arises between Executive and Company as to whether Executive is suffering from "Total Disability," as defined herein, the question of Executive's disability shall be determined by a physician designated by a majority of the Board of Directors. (b) In the event of a termination of this Agreement by Company pursuant to subparagraph (a) above, Executive will forfeit any right to unvested Options described in Section 2.2 above, and Executive will be paid those benefits provided by Company's disability insurance coverage as described on Exhibit 4.1. Executive shall have not less than 90 days to exercise vested Qualified Options and not less than 120 days to exercise vested Non-Qualified Options. 5.5 Constructive Termination by Company. As used herein, "constructive ----------------------------------- termination" shall mean any one or more of the events constituting "Good Reason" if not remedied by Company within 15 business days after receipt by Company of written notice from Executive of such event of constructive termination. Executive's continued employment with Company shall not constitute consent to, or a waiver of rights with respect to, any circumstances constituting constructive termination hereunder. 5.6 Termination by Company for Cause. Pursuant to the procedure set forth -------------------------------- in the definition of "Cause" in Section 6.1 below, Company shall be entitled to terminate Executive's employment for Cause, in which event Executive will no longer be entitled to his Base Compensation, will forfeit the unvested Options as described in Section 2.2 above, and, if such termination occurs before July 11, 1999, will forfeit the benefits described in Section 5.2 above. Notwithstanding the foregoing, if Executive disputes such termination for Cause, Executive may require the Company to resolve the dispute pursuant to the procedure set forth in Article VII of this Agreement. As provided in Section 7.4 below, Executive's Base Compensation, the grant of Options described in Section 2.2 above, and all Benefits to which Executive would otherwise be entitled, including but not limited to group medical and dental coverage, shall continue to be made currently available to Executive pending final resolution of the dispute. 5 Article VI. Definitions ----------- For purposes of this Agreement and in addition to any other defined terms herein, the following terms shall have the indicated meanings: 6.1 Cause. (a) "Cause" shall mean any act of dishonesty, commission of a ----- felony, significant activities harmful to the reputation of the Company, repeated refusal to perform or substantial disregard of duties properly assigned by the Senior Vice President - Customer & Corporate Services or the Board of Directors (following notice thereof to the Executive), or significant violation of any statutory or common law duty of loyalty to the Company. (b) Notwithstanding the foregoing and subject to the resolution of any disputes pursuant to Articles V and VII, the Executive shall in no event be deemed to have been terminated for Cause unless and until there shall have been delivered to him a termination notice in the form of a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board of Directors specifying the reason for such termination at a meeting of such Board duly called and held. 6.2 Good Reason. "Good Reason" shall mean the occurrence of any of the ----------- following events without Executive's express written consent: (a) A substantial and adverse change in the Executive's duties, control, authority, status or position, or the assignment to the Executive of any duties or responsibilities which are inconsistent with such status or position, or a reduction in the duties and responsibilities previously exercised by the Executive, or a loss of title, loss of office, relocation of Executive's office to a location more than 100 miles from Executive's original office with Company, loss of significant authority, power or control, or any removal of him from or any failure to reappoint or reelect him to such positions, except in connection with the termination of his employment for "Cause" (as defined in Section 6.1 (a)) or "Total Disability" (as defined in Section 5.4), or as a result of his death; (b) A reduction by Company for any reason in Executive's Base Compensation or in the grants of Options described in section 2.2 above, or a substantial and adverse change in Executive's Benefits; or (c) Any material breach by Company of any provisions of this Agreement. 6.3 Triggering Event. "Triggering Event" shall mean the termination by ---------------- Executive of Executive's employment hereunder after the occurrence of Good Reason; or the actual or constructive termination of this Agreement by the Company for any other reason other than: (a) Executive's voluntary termination (except a voluntary termination for "Good Reason" as defined in Section 6.2 above); or 6 (b) Termination of employment in the event of Executive' s death (under Section 5.3 above); or in the event of Executive's "Total Disability" under Section 5.4 above; or (c) Termination of employment for "Cause" as defined in Section 6.1 above. Article VII. Arbitration and Mediation ------------------------- 7.1 Mediation. Any dispute arising hereunder between Executive and --------- Company (including any dispute over whether Company has properly terminated Executive for Cause) which cannot be resolved by them to their mutual satisfaction within a period of fourteen days, unless mutually extended, shall first be submitted to mediation in El Paso, Texas, to a mediator selected pursuant to the rules of the American Arbitration Association ("AAA"). All costs of mediation incurred by Executive will be paid by the Company. 7.2 Arbitration. If such mediation shall not result in an agreed ----------- settlement between the parties, the dispute will be promptly submitted to binding arbitration (conducted in El Paso, Texas, by a panel of three arbitrators) in accordance with the rules of the AAA then in effect. The results of such arbitration shall be binding and conclusive upon the parties hereto, and judgment on the award may be entered at the instance of either party in any court of competent jurisdiction. The dispute resolution procedure set forth in this Section 7.2 may be initiated by either party upon five business days prior written notice to the other and after failure to resolve the dispute after the expiration of the 14 day time period referred to in Section 7.l. 7.3 Proceedings. Unless otherwise expressly agreed in writing by the ----------- parties to the arbitration proceedings: (a) The arbitration proceedings shall be conducted in accordance with the Commercial Arbitration Rules of the AAA, as amended from time to time; (b) Any procedural issues not determined under the arbitral rules selected pursuant to item (a) above shall be determined by the law of the place of arbitration, other than those laws which would refer the matter to another jurisdiction; (c) All costs of the arbitration proceedings incurred by Executive (including the fees of attorneys and expert witnesses and all other costs) shall be borne by the Company regardless of the outcome of the proceeding; and (d) The decision of the arbitrators shall be reduced to writing; final and binding without the right of appeal; the sole and exclusive remedy regarding any claims, counterclaims, issues or accounting presented to the arbitrators; made and promptly paid 7 in United States dollars free of any deduction or offset; and any costs or fees incident to enforcing the award shall, to the maximum extent permitted by law, be charged against the party resisting such enforcement. 7.4 Continuation of Payments/Benefits. Until final resolution of any --------------------------------- dispute between Company and Executive, the Company shall continue to pay to Executive the Base Compensation under Section 2.1, and the Options shall continue to vest in Executive pursuant to Section 2.2 above. 7.5 Acknowledgement of Parties. Each party acknowledges that he or -------------------------- it has voluntarily and knowingly entered into an agreement to arbitration under this Section by executing this Agreement. Article VIII. Miscellaneous ------------- 8.1 Notices. Any notice, demand or request to be given hereunder to ------- either party hereto shall be deemed given and effective only if in writing and either (1) delivered personally to Executive or (in case of a notice to Company) to the Secretary of the Company, or (2) sent by certified or registered mail, postage prepaid, to the addresses set forth on the signature page hereof or to such other address as either party may hereafter specify to the other by notice similarly served. 8.2 Governing Law. This Agreement shall be construed and enforced in ------------- accordance with the laws of the State of Texas. 8.3 Modification. No modification or waiver of any provision hereof ------------ shall be made unless it be in writing and signed by both of the parties hereto. 8.4 Scope of Agreement. This Agreement constitutes the whole of the ------------------ agreement between the parties on the subject matter, superseding all prior oral and written conversations, negotiations, understandings, and agreements in effect as of the date of this Agreement. 8.5 Indemnification. The Company shall provide Executive with the --------------- same indemnification and insurance protection provided by Company from time to time to all of its officers and directors, whether pursuant to that Indemnity Agreement attached hereto as Exhibit 8.5 or otherwise. 8.6 Tax Payments, Withholdings and Reporting. Executive recognizes ---------------------------------------- that the payments and benefits provided under this Agreement may result in taxable income to him which Company and its affiliates will report to the appropriate taxing authorities. Company shall have the right to deduct from any payment made under this Agreement to Executive, any federal, state, local or foreign income, employment or other taxes it determines are required by law to be withheld with respect to such payments or benefits 8 provided thereunder or to require payment from Executive which he agrees to pay upon demand, for the purpose of satisfying any such withholding requirement. 8.7 Separate Counsel. Executive acknowledges that he has been ---------------- advised by Company that before he signs this Agreement he should consult with an attorney. 8.8 Successors and Assigns. The terms and provisions of this ---------------------- Agreement shall inure to the benefit of and be binding upon the successors and assigns of the Company. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on ____________________, _______________. EL PASO ELECTRIC COMPANY 123 W. Mills St. El Paso, Texas 79901 By: ------------------------- Authorized Officer COMPANY EARNEST A. LEHMAN 3517 SW Avalon Lane Topeka, Kansas 66604-2503 ---------------------------- EXECUTIVE 9 EXHIBIT 4.1 SCHEDULE OF BENEFITS FOR EARNEST A. LEHMAN . Participation in the El Paso Electric Company Retirement Income Plan, as amended from time to time and other qualified plans covering executive officers of the Company from time to time. . All other insurance coverages, including without limitations, any disability, life and accident coverage, extended to non-bargaining employees from time to time. . Annual physical coverage as previously structured for senior management of the Company. . Waiver of waiting periods for health insurance coverage for Executive and Executive's family. . Annual paid vacation of four (4) weeks per year or such greater vacation benefits as may be provided generally to executive officers of the company. . Personal use of cellular phone and related service. . Car allowance of $250 per month. . All other benefits to which executive officers of the company are entitled from time to time. EL PASO ELECTRIC COMPANY EARNEST A. LEHMAN By: --------------------- ----------------- Authorized Officer COMPANY EXECUTIVE EX-11 5 COMPUTATION OF EARNINGS PER SHARE
EXHIBIT 11 El Paso Electric Company Computation of Earnings Per Share (In Thousands Except for Share Data) Period From | Period From February 12 | January 1 Year Ended December 31, to | to ------------------------ December 31, | February 11, 1998 1997 1996 | 1996 ----------- ----------- ----------- | ----------- | Net income applicable to common stock: | Income before extraordinary items............................. $ 42,366 $ 41,424 $ 31,431 | $ 118,198 Extraordinary gain on discharge of debt, net of income | tax expense................................................. 3,343 - - | 264,273 Extraordinary loss on repurchases of debt, net of federal | income tax benefit.......................................... - (2,775) - | - ----------- ----------- ------------ | ------------ Net income applicable to common stock....................... $ 45,709 $ 38,649 $ 31,431 | $ 382,471 =========== =========== =========== | =========== | Basic earnings per common share: | Weighted average number of common shares | outstanding................................................. 60,168,234 60,128,505 60,073,808 | 35,544,330 =========== =========== =========== | =========== | Net income per common share: | Income before extraordinary items........................... $ 0.704 $ 0.689 $ 0.523 | $ 3.325 Extraordinary gain on discharge of debt, net of | income tax expense........................................ 0.056 - - | 7.435 Extraordinary loss on repurchases of debt, net of | federal income tax benefit................................ - (0.046) - | - ----------- ----------- ------------ | ------------ Net income................................................ $ 0.760 $ 0.643 $ 0.523 | $ 10.760 =========== =========== =========== | =========== | Diluted earnings per common share: | Weighted average number of common shares | outstanding................................................. 60,168,234 60,128,505 60,073,808 | 35,544,330 ----------- ----------- ----------- | ----------- Effect of dilutive potential common stock options based on | the treasury stock method using average market price: | Quarter ended March 31.................................... 65,750 90,200 - | - Quarter ended June 30..................................... 134,746 72,847 4,564 | Quarter ended September 30................................ 114,476 55,103 16,826 | - Quarter ended December 31................................. 119,783 74,936 17,599 | - Effect of dilutive potential restricted common stock based | on the treasury stock method using average market price: | Quarter ended March 31.................................... 3,624 4,773 - | - Quarter ended June 30..................................... 7,960 3,985 563 | - Quarter ended September 30................................ 8,867 3,159 1,651 | - Quarter ended December 31................................. 9,858 4,124 1,698 | - ----------- ----------- ----------- | ------------ Net effect of dilutive potential common stock............ 465,064 309,127 42,901 | - ----------- ----------- ----------- | ------------ Weighted average number of common shares and dilutive | potential common shares outstanding......................... 60,633,298 60,437,632 60,116,709 | 35,544,330 =========== =========== =========== | =========== | Net income per common share: | Income before extraordinary items........................... $ 0.699 $ 0.685 $ 0.523 | $ 3.325 Extraordinary gain on discharge of debt, net of | income tax expense........................................ 0.055 - - | 7.435 Extraordinary loss on repurchases of debt, net of | federal income tax benefit................................ - (0.046) - | - ----------- ----------- ------------ | ------------ Net income................................................ $ 0.754 $ 0.639 $ 0.523 | $ 10.760 =========== =========== =========== | ===========
EX-23.01 6 CONSENT OF KPMG 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 5, 1999, relating to the balance sheets of El Paso Electric Company as of December 31, 1998 and 1997 and the related statements of operations, comprehensive operations, changes in common stock equity (deficit), and cash flows for the years ended December 31, 1998 and 1997, the period February 12, 1996 to December 31, 1996, and the period January 1, 1996 to February 11, 1996, which report appears in the December 31, 1998 annual report on the Form 10-K of El Paso Electric Company. KPMG LLP El Paso, Texas March 26, 1999 101 EX-24.02 7 CERTIFICATE OF RESOLUTION 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 1998 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 28, 1999. IN WITNESS WHEREOF, I have hereunto set my hand and have affixed the seal of the Company this 19th day March, 1999. /s/ GUILLERMO SILVA, JR. -------------------------- Guillermo Silva, Jr. Secretary (Corporate Seal) EL PASO ELECTRIC COMPANY BOARD OF DIRECTORS RESOLUTION JANUARY 28, 1999 FURTHER RESOLVED, that James S. Haines, Jr., Eduardo A. Rodriguez, Gary R. Hedrick, Terry 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, 1998 (the "1998 Form 10-K"), and in any and all amendments thereto, and to file such 1998 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 FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET OF EL PASO ELECTRIC COMPANY AS OF DECEMBER 31, 1998 AND THE RELATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 PER-BOOK 1,454,536 0 338,318 75,226 23,139 1,891,219 60,270 240,714 116,294 417,278 135,744 0 872,213 0 0 0 36,122 0 24,849 27,695 377,318 1,891,219 602,221 31,225 439,682 470,907 131,314 7,524 138,838 81,765 60,416 14,707 45,709 0 74,398 233,235 0.760 0.754 Net Income includes an extraordinary gain on discharge of debt (net of income tax expense) of $3,343. Primary and Fully Diluted Earnings Per Share are no longer being calculated. The amounts shown represent Basic and Diluted Earnings per Share, respectively, per SFAS No. 128.
EX-99.31 9 FINAL ORDER EXHIBIT 99.31 BEFORE THE NEW MEXICO PUBLIC UTILITY COMMISSION IN THE MATTER OF THE COMPLAINTS OF ) J. DERALD MORGAN AND JOE LUJAN ) AGAINST EL PASO ELECTRIC COMPANY ) AND THE INVESTIGATION OF EL PASO ) ELECTRIC COMPANY'S RATES, ) ) Case No. 2722 EL PASO ELECTRIC COMPANY, ) ) Respondent. ) ) FINAL ORDER THIS MATTER comes before the New Mexico Public Utility Commission ("NMPUC" or "Commission") upon the Stipulation and Settlement Agreement ("Stipulation") filed by El Paso Electric Company ("EPE"), the Large Power Users Coalition ("LPUC"), the Attorney General of the State of New Mexico ("Attorney General"), the Department of Defense ("DOD") and Commission Advocacy Staff ("Staff") on July 15, 1998, the statement in opposition filed July 20, 1998, by the City of Las Cruces ("CLC"), the agreements in support of the Stipulation filed by Dona Ana County on July 22, 1998 and Complainants J. Derald Morgan and Joe Lujan on August 7, 1998, the non-objection filed by Plains Electric Generation and Transmission Cooperative, Inc. ("Plains") on August 18, 1998, and the Hearing on Stipulation conducted by the Commission on September 2, 1998. Having reviewed the pleadings and the testimony presented at hearing, and being fully informed of the premises, the Commission issues this Final Order. STATEMENT OF THE CASE The Commission adopts the Statement of the Case set forth in the Commission's Interim Order issued June 1, 1998. After the issuance of our Interim Order, the Hearing Examiner set a procedural schedule to hear this matter on the merits. During the course of that schedule, some of the parties and Staff entered into settlement negotiations which culminated in the filing of a Stipulation and Settlement Agreement by EPE, LPUC, the AG, DOD and Staff on July 15, 1998. The Stipulation was opposed by the City of Las Cruces. On July 22, 1998, Dona Ana County ("County") filed an Agreement to Stipulation and Settlement indicating its agreement to and acceptance of the Stipulation, even though the County never formally intervened in this proceeding. The County's filing was accompanied by Resolution No. 98-35 of the Board of County Commissioners of the County, dated July 15, 1998. On August 7, 1998, Messrs. Morgan and Lujan filed a statement in support of the Stipulation dated July 31, 1998. Plains filed its non-objection to the Stipulation on August 18, 1998. Thereafter, the Commission revoked its appointment of the Hearing Examiner, and set a procedural schedule for a hearing on the merits of the Stipulation. Pursuant to the Commission's Procedural Order Regarding Stipulation issued July 23, 1998, the parties and Staff filed summary statements of pre-stipulation positions and summaries of the Stipulation, together with pre-filed testimony and legal positions regarding various issues raised by the Stipulation. On September 2, 1998, the Commission presided at hearings on the Stipulation. Prior to the commencement of the evidentiary portion of the hearing, public comments in support of the Stipulation were presented by the following: Mr. John Shaefer, Diana 2 Final Order Case No. 2722 Bustamante-Barrios, Lorenzo Dorado and Ruben Nunez of the Colonias Development Council; Mayor Gilbert Bartlett and Trustee Joe Lewis of the Village of Hatch; and Joseph Beedler of the Greater Las Cruces Chamber of Commerce. Other written comments presented at the hearing are included in the transcript of proceedings. Additionally, written comments supporting the Stipulation were filed with the Commission by the following: the Greater Las Cruces Chamber of Commerce, the Berino Mutual Domestic Water Consumers Association, the Desert Sands Mutual Domestic Water Consumers Association, the Board of Trustees of the Town of Mesilla (Resolution No. 98-09), members of the Board of Directors and of the Staff of the Ben Archer Health Center (Hatch Facility), the patients of the Ben Archer Health Center (Dona Ana/Hill facility), Lake Section Water Company, Las Cruces Home Builders Association, the Board of County Commissioners of Sierra County (Resolution No. 87-007), the Board of Directors of the Rincon Water Users Cooperative, the Brazito Mutual Domestic Water Consumers Association, the Dona Ana Mutual Domestic Water Consumers Association, and the New Mexico Farm and Livestock Bureau. During the evidentiary proceedings on September 2, 1998, the following appearances were entered at hearing: For EPE David S. Cohen, Esq.; For CLC: Nann Houliston, Esq; For LPCC: Steven Michael, Esq.; 3 Final Order Case No. 2722 For Attorney General: Charles Noble, Esq; Department of Army David A. McCormick, Esq.; For Staff: Maryanne Reilly, Esq. The following witnesses testified at hearing in support of the Stipulation: Gary R. Hedrick on behalf of EPE and, John E. Curl and Gary L. Brenner on behalf of Staff. Testimony opposing the Stipulation was presented by Robert E. Pender on behalf of CLC. STIPULATION SUMMARY For ease of reference, the Commission provides the following summarization of the substance of the Stipulation. For the actual language agreed upon, the record proper contains not only the Stipulation but each Signatory's summary thereof. The Stipulation contemplates a five million-dollar rate reduction, beginning the first full billing cycle after September 30, 1998 or 30 days after entry of a final order in this case. The Signatories have agreed to a $3,295,000 reduction for the residential class, including a Low Income Rider ("LIR") under which $400,000 of that class reduction will be used to waive the customer charge for customers eligible for food stamps. Stipulation, Paragraph 1. The Signatories have provided that in the event the LIR is determined to be illegal, EPE will commit to fund an equal annual amount during the 30 month Moratorium Period to an agreed upon social services agency in Dona Ana County. Paragraph 18. The Military Research and Development ("MR&D") class would 4 Final Order Case No. 2722 receive a $500,000 rate reduction. Paragraph 1. All other rate classes would get a $1,205,000 reduction, distributed pro rata. Id. In addition, EPE will offer interruptible services comparable to those offered in Texas. EPE will be allowed to enter into special rate contracts with individual customers (such as that for Sara Lee Hosiery already approved by the Commission in NMPUC Case No. 2841), subject to approval by the Commission. In future rate cases, EPE will have the burden of proving why revenue shortfalls from such rates should be allocated to other customers. Id. If the Commission requires unbundling of rates during the Moratorium Period, the Commission will set them in a manner so as to recover the same revenues as provided in the Stipulation. Paragraph 17. The rates set by the Stipulation will be fixed for a Moratorium Period of 30 months. Paragraph 2. EPE and the Signatories may file to modify tariffs, riders and terms of existing rate schedules or add new tariffs or riders, so long as there is no increase or reduction to the stipulated rates. Id. Unless otherwise agreed to, the Signatories will not institute any proceedings requesting a change in EPE's rates which would take effect before the end of the Moratorium Period. If a non-signatory files a complaint to reduce rates, the Signatories will support enforcement of the Stipulation. If the Commission institutes an investigation or other proceeding that directly or indirectly would review the reasonableness of EPE's rates and seek a change in those rates during the Moratorium Period, the Signatories agree that EPE's rate base will include the generating assets at the specified Original Cost Less Depreciation values (less additional depreciation to date) rather than the revalued amounts agreed to in the Stipulation. If the Commission reduces EPE's rates during the Moratorium, the 5 Final Order Case No. 2722 agreement to permanently revalue EPE's assets will be void; however, EPE cannot seek to retroactively recover any of the reduced revenues from the rate reduction. The Signatories also support excluding EPE from any "legislatively proposed rate decrease" during the Moratorium Period and support crediting the five million-dollar rate decrease against any decrease the legislature in fact mandates. The revaluation provisions provide for permanent revaluation for jurisdictional ratemaking purposes of Palo Verde Nuclear Generating Station ("PVNGS") downward and of other generation serving New Mexico upward. Paragraph 4. The plant will thereafter be depreciated on a straight-line basis over the specified remaining lives of the plants. In the event that a retail competitive market develops which would otherwise prevent full recovery or provide for over recovery, EPE would be entitled to 100% recovery of its investment in the revalued assets. Economic used and useful issues, plus prudence issues, relating to EPE's existing generation investments as of the date of the Stipulation, are also resolved. Paragraph 5. However, future plant investment is subject to Commission review, and the Signatories have not waived any rights to argue operational used and usefulness. The Signatories' intent is to have the Stipulation preclude further revaluations based on differences between the revalued asset values and market or replacement costs or other economic used and useful theories and resolve all issues relating to value of existing generation for ratemaking now and in the future. Stipulation, para. 7. In the event of "legislative or administrative restructuring," the Stipulation evidences the Signatories' support of EPE's right to I 00% recovery and their opposition to any 6 Final Order Case No. 2722 restructuring that does not protect EPE's recovery per the Stipulation. Id. EPE further agrees to support any reasonable legislative or administrative restructuring. Paragraph 9 essentially replaces the NMPUC Case No. 2009 Stipulation with an agreement that PVNGS Unit 3 and related commons shall be excluded from cost of service and rate base. It further provides for decertification and abandonment of Unit 3; however, EPE would be permitted to provide capacity or energy from Unit 3 to meet jurisdictional needs, with such capacity or energy priced at the lowest equivalent firm capacity and energy available to EPE. Similarly, any additional firm capacity or energy acquired by EPE would be included in rates at the lowest market price available to EPE. The prudence of EPE's PVNGS investment to date is permanently resolved by the Stipulation, subject to permanent exclusion of Unit 3. Paragraph 10. EPE reserves its right to seek inclusion in rates of Capital Betterments and Improvements associated with EPE's investment in other generation. Paragraph 11 terminates EPE's FPPCAC and PVNGS performance incentives collected thereunder. EPE's pending request in NMPUC Case No. 2802 for a FPPCAC of 24.5 mills will be reduced by 22% to 19.49 mills and rolled into base rates, and fuel costs will be collected through base rates until retail generation competition is implemented. EPE would be allowed to enter into fuel purchase hedging transactions, but is required to give notice to the Commission and to prove the reasonableness of hedging costs if they are to be included in rates after the Moratorium Period. Paragraph 12 allows EPE to create a regulatory asset in the amount of $6,991,000 to collect its current FPPCAC under-recovery through a cost of service amortization over 60 months from the date of the final order approving this Stipulation. Paragraph 13 7 Final Order Case No. 2722 provides that NMPUC Case No. 2802 will be dismissed and purchased power and fuel practices will be deemed just and reasonable from January 1, 1997, through time that current rates are replaced by Stipulation rates. The Signatories agreed to a schedule of decommissioning costs to be allowed in EPE's cost of service through 2025, subject to adjustments in future rate cases to reflect the higher of NRC established decommissioning costs or ANPP adopted costs. Paragraph 14. Subsequent to implementation of retail generation competition, recovery of decommissioning costs shall be governed by applicable law and regulation. EPE agrees to find such amounts pursuant to its contractual obligations under the ANPP agreement. The Stipulation would also eliminate the investment restrictions set in NMPUC Case No. 1833 and implement a "prudent investor" standard. EPE will file an agreed-upon proposed "Voluntary Renewable Energy Tariff," subject to Commission approval, which not require EPE to acquire renewable resources before subscription by customers. Paragraph 15. In acquiring future long-term capacity and energy, EPE shall give preference to New Mexico renewable resources if priced comparably to non-renewable resources. Pricing for renewable energy shall include in any premium the fixed cost of existing revalued jurisdictional generation to the extent not recoverable from non- jurisdictional customers, and EPE shall be allowed to market renewable energy under tariff as a utility function within the utility. Paragraph 16. EPE also commits to separate its transmission and distribution from other aspects of its business, through divestiture or lease/purchase to independent entity, consistent with the other investor owned electric utilities in the state by the time that (a) all customers of investor-owned utilities have open access to the transmission and 8 Final Order Case No. 2722 distribution systems; (b) all such customers may choose their power suppliers in a competitive energy market; and (3) the investor-owned utilities either agree or are required by law to divest or otherwise separate transmission and distribution from other aspects of their businesses. Paragraph 16. In the event of these prerequisites, EPE will have the discretion to decide which parts of the business it retains, and that consummation of divestiture may depend upon approvals of EPE's bondholders, shareholders and the Texas commission. If those approval cannot be obtained, EPE will make reasonable efforts to divest, lease/purchase or spin off assets to ensure transmission and distribution assets are not connected with EPE's non-transmission and distribution assets. DISCUSSION The New Mexico Supreme Court has repeatedly recognized that the Commission may accept resolution of disputes through stipulation among the parties to a case and Staff. Attorney General v. Public Service Comm'n, 111 N.M. 636, 808 P.2d 606 (1991); New Mexico Indus. Energy Consumers v. New Mexico Pub. Serv. Comm'n, 104 N.M. 565, 725 P.2d 244 (1986). The Commission appreciates the diligent efforts of the parties in transforming a lengthy, contentious proceeding into a cooperative resolution of complex disputes for the benefit of ratepayers. The Commission also appreciates the thoughtful public comments it has received in the course of these proceedings. The Commission must determine whether the Stipulation, which is contested by the City of Las Cruces, resolves the disputes in a way that is fair, just and reasonable and in the public interest. See 111 N.M. at 640, 808 P.2d at 610. The parties must present the Commission with sufficient evidence and legal argument to allow the Commission to 9 Final Order Case No. 2722 approve a contested stipulation. NMPUC Rule 110.85(d). In determining whether a stipulation which encompasses a change in rates should be approved, the Commission specifically must meet its statutory obligations to fix just and reasonable rates. See NMSA 1978, (S)62-8-7(D) (I 993). The Commission has determined that the Stipulation, in most instances, should be approved. We find that there is substantial evidence in the record to support most of the provisions in the Stipulation. We also find that the City of Las Cruces has not provided substantial evidence in the record of this proceeding to conclude that the Stipulation generally is not fair, just and reasonable and not in the public interest. However, in some instances the Commission has determined that the Stipulation may be construed as an improper attempt to bind future Commissions. We will discuss only those portions of the Stipulation which we are not approving. Low Income Rate Rider First, the Signatories have agreed to commit $400,000 of the rate reduction for residential customers to an LIR, to be used to waive the customer charge for customers eligible for food stamps. Stipulation, Paragraph 1. The Signatories have tacitly acknowledged that the proposed LIR tariff may be legally deficient, because the Stipulation provides that in the event the LIR is determined to be illegal, EPE will commit to fund an equal annual amount during the 30 month Moratorium Period to an agreed upon social services agency in Dona Ana County. Stipulation, Paragraph 18. The evidence in support of the LIR attempts to circumvent the legal roadblock raised by Mountain States Legal Foundation v. New Mexico State Corporation Commission, 101 N.M. 657, 687 P.2d 92 (1984), by providing testimony that the program is voluntary 10 Final Order Case No. 2722 and the funds would not otherwise be applied to further reduce residential rates. EPE Exhibit 1, Testimony of Gary R. Hedrick, pages 11-12. The Commission does not find that the Signatories have adequately answered the Court's holding in Mountain States Legal Foundation that establishing a rate program "Which differentiates between economically needy individuals who receive the same service is unjustly discriminatory." 101 N.M. at 659, 687 P.2d at 94. The proposed LIR asks the Commission to create a special, preferential rate for a sub-group of the residential class of customers which the Signatories believe to be deserving, in direct contravention of the Court's decision. Id. The Commission lacks the authority to effect this social agenda through its rate making process. Id. Therefore, we will not approve the proposed Low Income Rider. Staff's Authority to Lobby Several of the provisions in the Stipulation relate to actions or positions the Signatories will undertake in relation to the State Legislature and legislative activities. For example, in Paragraph 2(e), the Signatories support excluding EPE from any legislatively proposed rate decrease and support legislation that provides a rate decrease credit against a legislative decrease. Similar provisions requiring the Signatories to take specific positions relating to legislative restructuring appear in Paragraph 7. The Staff of the Commission has signed the Stipulation within its capacity to appear in proceedings before the Commission. Attorney General v. Public Service Comm'n, supra; NMPUC Rule 110.85. However, the duties conferred by the Commission upon its Staff are not solely restricted to appearances in matters adjudicated before the Commission. NMSA 1978, 11 Final Order Case No. 2722 Section 62-5-8 (I 993). Staff's autonomy does not extend to legislative policy or other lobbying positions. Only the Commission may take such positions, which we decline to do in this instance. The Commission disapproves all portions of the Stipulation which commit Staff to take. or withhold from taking specific actions or positions under the Stipulation with regard to the Legislature or legislative activities. Binding Effect on Future Commissions At hearing and in pleadings filed in support of the Stipulation, the parties have expressed their opinions regarding their intent (in some instances, their hope) to have this Commission bind future Commissions through the approval of the Stipulation. The Commission is expressly authorized to change past practices or procedures in making determinations involving the rates or service of utility, provided that substantial evidence on the record justifies its decision. NMSA 1978, Section 62-6-14(C) (I 993); Cf Hobbs Gas Company v. Public Service Comm'n, 115 N.M. 678, 858 P.2d 54 (1993). We can not and will not approve any terms which attempt to restrict the Commission's lawful jurisdiction, nor which seek to interfere with the Commission fulfilling its obligations as required by law. Further, to the extent that the Signatories are seeking protection from the Legislature or legislative activity through our final approval of the Stipulation, we can not prospectively place the Commission at odds with future legislative policy-making actions. Unless the Commission explicitly provides otherwise, the approval of a stipulation does not constitute Commission approval of or establish precedent regarding any principle or issue in the proceeding. NMPUC Rule 110.87. We decline to so rule otherwise and disapprove any agreed-to provisions by the Signatories which attempt to bind future Commissions through our approval of this Stipulation. 12 Final Order Case No. 2722 THE COMMISSION FINDS AND CONCLUDES: 1. The foregoing Statement of the Case, Stipulation Summary, Discussion, and all findings and conclusions contained therein, whether or not numbered or designated as such, are incorporated herein as findings of fact and conclusions of law. 2. EPE is a public utility as defined by NMSA 1978, Section 62-3-3(G) (1993) and is subject to the jurisdiction of the Commission pursuant to the Public Utility Act, NMSA 1978, Sections 62-1-1 et seq., (1993 and 1997). -- ---- 3. The Commission has jurisdiction over the parties to this case and the subject matter thereof. 4. Reasonable, proper and adequate notice of this case has been given. 5. Certain parties and Staff filed a Stipulation in this case which proposes to resolve all outstanding matters in this Docket, in accordance with NMPUC Rule 110.85(a). 6. The City of Las Cruces timely filed its Statement in Opposition to the Stipulation in accordance with NNTUC Rule 110.85(b). 7. A hearing on the Stipulation was conducted by the Commission pursuant to NMSA 1978, Section 62-10-1 et seq. and NMPUC Rule 110.85 on September 2, 199, and record of the hearing was made pursuant to NMSA 1978, Section 62-10-15. 8. The proponents of the Stipulation have met their burden of supporting the Stipulation with sufficient evidence and legal argument to allow the Commission to approve the Stipulation to the extent set forth in the Discussion above. 13 Final Order Case No. 2722 9. Substantial evidence in the record as a whole supports the approval of the Stipulation by the Commission, consistent with the findings and conclusions, whether or not numbered, contained in this Order. 10. The City of Las Cruces did not present substantial evidence in the record as a whole to refute a finding that the Stipulation is fair, just and reasonable and in the public interest, as determined by the Commission in the Discussion above. 11. It is in the public interest for the Commission to disapprove or reserve its determinations on certain portions of the Stipulation as directed in the Discussion above. 12. The Commission should approve the Stipulation, except where inconsistent with this Order. 13. The proposed Low Income Rate Rider should not be approved, based on the Commission's application of Mountain States Legal Foundation v. New Mexico State Corporation Commission, 101 N.M. 657,687 P.2d 92 (1984). 14. EPE should be required to file rates consistent with this Order, effective for the first available billing cycle no later than the November billing cycle, which are consistent with the Stipulation and Proof of Revenue Analysis attached thereto, subject to review by Staff and the Commission for compliance with this Order. 15. The Commission's approval of this Stipulation as set forth in this Order should not constitute Commission approval of or establish precedent regarding any principle or issue in the proceeding. 16. The City of Las Cruces' Motion for Expedited Discovery filed on September 10, 1998, is untimely and not well taken and should be denied. 14 Final Order Case No. 2722 17. EPE's pending fuel and purchased power clause case, docketed as NMPUC Case No. 2802, should be dismissed pursuant to the Stipulation and this Order. 18. Staffs request for further investigation of EPE's rates pending in NMPUC Case No. 2846 is rendered moot by this Order and should be dismissed without prejudice. IT IS THEREFORE ORDERED: A. The findings, conclusions, decisions, rulings and determinations made and contained herein, whether or not numbered, contained in the Discussion and Findings and Conclusions above are adopted as the orders of the Commission. B. The Stipulation is hereby approved, except where otherwise inconsistent with this Order. C. On or before September 30, 1998, EPE shall file an Advice Notice containing the rates approved in this Order, subject to review by Staff and the Commission for compliance with this Order, to be effective beginning with EPE's next available billing cycle, and no later than its November billing cycle. D. The proposed Low Income Rider is disapproved. E. Approval of the Stipulation and Amendment to Stipulation does not constitute Commission approval of or precedent regarding any principle or issue in this proceeding. F. The City of Las Cruces' Motion for Expedited Discovery is denied. G. NMPUC Case Nos. 2802 and 2846 shall be dismissed in accordance with the determinations contained in this Order. 15 Final Order Case No. 2722 H. Any outstanding matter not specifically ruled on is disposed of consistent with this Order. I. Copies of this Order shall be mailed to all persons listed on the official service list for this case and for NMPUC Case Nos. 2802 and 2846. J. This Order is effective immediately. K. This Docket is closed. ISSUED under the Seal of the Commission at Santa Fe, New Mexico, this 24th day of September, 1998. NEW MEXICO PUBLIC UTILITY COMMISSION /s/ WAYNE SHIRLEY --------------------------------------- WAYNE SHIRLEY, CHAIRMAN /s/ BEATRIZ RIVERA --------------------------------------- BEATRIZ RIVERA, COMMISSIONER /s/ ROBERT M. SCHWARTZ --------------------------------------- ROBERT M. SCHWARTZ, COMMISSONER 16 BEFORE THE NEW MEXICO PUBLIC UTILITY COMMISSION IN THE MATTER OF THE COMPLAINTS OF ) J. DERALD MORGAN AND JOE LUJAN ) AGAINST EL PASO ELECTRIC COMPANY ) AND THE INVESTIGATION OF EL PASO ) ELECTRIC COMPANY'S RATES, ) ) Case No. 2722 EL PASO ELECTRIC COMPANY, ) ) Respondent. ) ) CERTIFICATE OF SERVICE I HEREBY CERTIFY that a true and correct copy of the foregoing Final Order, issued September 24, 1998, was mailed first-class mail, postage prepaid, to each of the following: David S. Cohen, Esq. Mr. Thomas L. Newsom Cohen & Cohen., P.A. El Paso Electric Company 121 Sandoval Street, Suite 300 P.O. Box 982 Santa Fe, NM 87501-2140 El Paso, TX 79901 Mr. J. Derald Morgan Mr. Joe Lujan 2425 Janet Ann Lane 1200 Lujan-Hill Road Las Cruces, NM 88005 Las Cruces, NM 88005 Charles F. Noble, Esq. Mr. Michael Dirineier Assistant Attorney General Georgetown Consulting Group P.O. Drawer 1508 456 Main Street Santa Fe, NM 87504-1508 Ridgefield, CT 06877 Steven S. Michel, Esq. Mr. Ray Stanley 320 Galisteo Street, Suite 301 R.J. Stanley & Associates Santa Fe, NM 87501 1750 N. Collins Blvd., Suite 209 Richardson, TX 75080-3625 Nann Houliston, Esq. City of Las Cruces Mr. Jerry Trojan Utility Counsel Assistant City Manager P.O. Box 2248 P.O. Box 20000 Albuquerque, NM 87103 Las Cruces, NM 88004 Peter Q. Nyce, Jr., Esq. Mr. I. David Rosenstein General Attorney, Regulatory Law Office Lundberg, Marshall & Associates U.S. Army Legal Services Agency P.O. Box 429349 Department of the Army Cincinnati, OH 45242-9349 901 N. Stuart St., Suite 713 Arlington, VA 22203-1837 Mr. Jeffrey D. Rudolph Manager of Rates and Regulatory Mr. John Schaefer Affairs 2605 South Espina Plains Electric Generation & Las Cruces, NM 88005 Transmission Cooperative, Inc. Randy E. Lovato, Esq. P.O. Box 6551 Staff Counsel Albuquerque, NM 87197-6551 Plains Electric Generation & Transmission Cooperative, Inc. Richard N. Carpenter, Esq. P.O. Box 6551 Carpenter & Nixon, LLP Albuquerque, NM 87197-6551 P.O. Box 1837 Santa Fe, NM 87504-1837 Mr. Joseph A. Biedron President/CEO Thomas A. Figart, Esq. Great Las Cruces Chamber of Commerce Assistant County Attorney Post Office Drawer 519 County of Dona Ana Las Cruces, NM 88004-0519 180 W. Amador Las Cruces, NM 88001 and hand-delivered to: Maryanne Reilly, Esq. Staff Counsel NMPUC 224 East Palace Avenue Santa Fe, NM 87501 DATED this 24th day of September, 1998. NEW MEXICO PUBLIC UTILITY COMMISSION /s/ STACEY J. GOODWIN -------------------------------------- Stacey J. Goodwin Commission Counsel 2 Certificate of Service Case No. 2722 BEFORE THE NEW MEXICO PUBLIC UTILITY COMMISSION IN THE MATTER OF THE COMPLAINTS OF ) J. DERALD MORGAN AND JOE LUJAN ) AGAINST EL PASO ELECTRIC COMPANY ) AND THE INVESTIGATION OF EL PASO ) ELECTRIC COMPANY'S RATES, ) ) EL PASO ELECTRIC COMPANY, ) ) Respondent. ) Case No. 2722 ) STIPULATION AND SETTLEMENT AGREEMENT WHEREAS, on July 10, 1996, J. Derald Morgan and on August 9, 1996, Joe Lujan filed complaints with the New Mexico Public Utility Commission ("NMPUC") against El Paso Electric Company ("EPE" or "Company") ; and WHEREAS, pursuant to the NMPUC's Order Docketing Formal Complaint Proceeding, issued October 7, 1996, and subsequent Orders of the NMPUC, EPE made its Compliance Filing in the above-styled and numbered proceeding on March 3, 1997; and WHEREAS, on August 1, 1997, the NMPUC issued its Order requiring EPE to make a Continuation Filing pursuant to NMPUC Rules 550.12 and 550.13 docketed as NMPUC Case No. 2802; and WHEREAS, on November 24, 1997, the NMPUC issued its Order Suspending Fuel Clause in NMPUC Case No. 2802, under which the Company's existing Fuel and Purchased Power Cost Adjustment Clause ("FPPCAC") was to remain in effect until further order of the NMPUC; and WHEREAS, on January 30, 1998, the Company made its 1997 Fuel Reconciliation and Palo Verde Performance Evaluation filing which was consolidated by the NMPUC with NMPUC Case No. 2802; and WHEREAS, on June 1, 1998, the NMPUC issued its Phase I Order in NMPUC Case No. 2722 making Findings of Fact and Conclusions of Law by the NMPUC regarding the effect and interpretation of the Stipulation and Final Order in NMPUC Case No. 2009; and WHEREAS, the Company filed its Notice of Appeal with the New Mexico Supreme Court on the NMPUC's Phase I order which was docketed as Case No. 25,259; and WHEREAS, the NMPUC Staff filed Staff's Petition for Investigation of Rates on June 12, 1998, in NMPUC Case No. 2846; and WHEREAS, the Signatories desire to resolve the above-referenced regulatory matters and appeals on a comprehensive basis; and -2- WHEREAS, the Signatories' intent by entering into this Stipulation is to serve the public interest because the Stipulation provides, based upon revaluation of EPE's generating assets, for the immediate implementation of lower rates for all customer classes that are just and reasonable for the Company and its New Mexico customers, provides EPE rate certainty for thirty months, provides for present and future benefits resulting from lower asset values agreed to in this Stipulation, promotes the adequate and efficient provision of electric service, provides a transition to electric restructuring for EPE and its customers, provides power from renewable resources located in New Mexico, eliminates EPE's fuel and purchase power cost adjustment clause and is in accordance with applicable law; and WHEREAS, it is the intent of the Signatories that in the event that retail competition restructuring legislation is enacted by the New Mexico State Legislature, the provisions of this Stipulation constitute a partial plan for accommodating the Company's transition to competition; and WHEREAS, resolution on a stipulated basis of the matters set forth herein would conserve resources, avoid the uncertainties inherent in future litigation, and reduce rate case expenses now and in the future; NOW, THEREFORE, in consideration of the mutual agreements and covenants herein contained, the parties (the "Signatories") to this Stipulation and Settlement -3- Agreement (the "Stipulation"), through their undersigned authorized representatives, stipulate and agree as follows: 1. (a) The Company will implement a Five Million Dollar ($5,000,000) annual base rate reduction effective pursuant to Paragraph 1. (b) herein. NMPUC Case No. 2722 shall serve as the vehicle for implementation and approval of the rate terms of this Stipulation, and NMPUC Case No. 2846 shall be dismissed. Rate design for the revenue decrease included in this Stipulation shall be implemented pursuant to Paragraph 1.(c) below. (b) The Signatories agree that the Company shall implement rates consistent with this Stipulation effective with the first full billing cycle occurring after September 30, 1998, or thirty (30) days after entry of a final order in NMPUC Case No. 2722 approving this Stipulation, whichever is later. (c) Except as otherwise specifically provided in this subparagraph, the Signatories agree that the rate design and cost allocation for EPE's rate decrease shall remain consistent with the Company's current tariffs. (i) The Company's Residential Rate Schedule No. 01 shall receive a Three Million Two Hundred Ninety-Five Thousand Dollar ($3,295,000) rate reduction. This reduction shall include Four Hundred Thousand Dollars ($400,000) for the implementation of a -4- Low Income Rider ("LIR"), similar to the LIR in place for Texas customers. Low income customers who qualify for food stamps under New Mexico law shall be eligible to receive a waiver of the Company's customer charge. The remaining reduction shall be applied to all residential customers. The Company shall use its best efforts to inform its customers of the availability of the LIR and will coordinate its implementation with the appropriate New Mexico state agency. Within thirty (30) days after entry of a final order approving this Stipulation, EPE shall file with and obtain approval from the NMPUC or its successor ("Commission") of an LIR tariff. (ii) The Company shall offer its New Mexico Military Research and Development ("MR&D") customers an interruptible rate similar to that offered its Texas military installation, as described in Paragraph 1.(d)(i), and a reduction in the annual revenue allocation associated with the Company's MR&D rate of Five Hundred Thousand Dollars ($500,000). (iii) All remaining rate classes not addressed in Paragraphs 1.(c)(i) or 1.(c)(ii) shall receive a reduction of One Million Two Hundred Five Thousand Dollars ($1,205,000), to be allocated to the classes on a pro rata basis as shown on Exhibit 1 to this Stipulation. -5- (d) In addition to the rate reduction provided in Paragraph 1.(c) above, the Company shall offer the following: (i) The Company shall offer interruptible service to qualified customers in New Mexico comparable to the interruptible service offered by the Company to its Texas customers. Within thirty (30) days after entry of a final order approving this Stipulation, EPE shall file with and obtain approval from the Commission for interruptible rate schedules consistent with this Stipulation. (ii) The Company shall be allowed to enter into mutually agreeable special rate contracts with its nonresidential customers. Each contract shall include a term of up to three (3) years or the effective date of open access, whichever is later. This contract term limitation shall not apply to the MR&D rate class. All contracts executed pursuant to this provision shall be filed with and approved by the Commission before they become effective. This Stipulation and the Signatories' support for the Stipulation is contingent upon the Commission's granting of the Motion to Approve Load Retention Contract on an Expedited Basis and Dismiss Complaint filed in NMPUC Case No. 2841 on or before the date a final order approving this Stipulation is entered. In any future rate proceeding to review the Company's rates effective after the Moratorium Period (as described in Paragraph 2.(a)), EPE shall have the burden of -6- proof to demonstrate why any revenue shortfall resulting from special contracts should be allocated to other customers. 2. (a) Subject to the terms of this Stipulation, during the thirty (30) months immediately following implementation of rates consistent with this Stipulation (the "Moratorium Period") , the Company' s New Mexico rates shall be fixed and will not increase or decrease. During the Moratorium Period, the Company's rates shall be deemed to fully recover its cost of service. (b) During the Moratorium Period, and to the extent consistent with rates established by the final order in NMPUC Case No. 2722, the Company and Signatories may make filings, subject to Commission approval, that: (i) modify tariffs, riders and terms and conditions of existing rate schedules, or (ii) add new tariffs or riders, and terms and conditions to address competitive conditions or secure additional load so long as there is no increase or reduction to the rates reflected in the New Mexico retail rate schedules charged any rate class and implemented pursuant to this Stipulation. Miscellaneous tariff filings, such as for incentive and load retention rates or special services, are not subject to the rate moratorium, but are subject to Commission approval. Nothing in this paragraph shall be construed as a predetermination of the appropriate ratemaking treatment of any such changes. -7- (c) Except as otherwise provided in Paragraphs 2.(b) and 2.(f) herein, neither the Company nor any successor in interest or assignee may request from its New Mexico regulatory authorities or support an increase in rates above the level established by the final order in NMPUC Case No. 2722 which would take effect prior to the expiration of the Moratorium Period. (d) Except as otherwise provided in Paragraphs 2.(b) and 2.(f) herein, the Signatories agree not to institute on their own motion or encourage or condone another to seek or institute during the Moratorium Period any proceeding requesting a change in the Company's rates which would take effect prior to the end of the Moratorium Period. This provision does not prohibit any party from filing a rate change request with the Commission during the Moratorium Period which is not to take effect until after the Moratorium Period. If a complaint is filed with the Commission or any other New Mexico regulatory authority requesting an inquiry into the reasonableness of the Company's rates, and the Commission or any other regulatory authority institutes such an inquiry, the Signatories commit to support the provisions of this Stipulation. In the course of any such investigation or proceeding, the Company shall be entitled to defend against a rate reduction in any manner necessary and appropriate under the terms of this Stipulation. -8- (e) All Signatories understand and agree that it is the reasonable expectation and intention of the Signatories that during the Moratorium Period the Company's rates will not be changed regardless of any circumstances that could otherwise increase or decrease rates. By entering into and executing this Stipulation, the Signatories express their support for: (i) Excluding EPE from any legislatively proposed rate decrease effective during the Moratorium Period; and (ii) The legislature providing credit for the rate decrease in this Stipulation against any decrease provided for by the legislature during the Moratorium Period. The Signatories understand and agree that the support referred to herein is limited to support prior to legislative enactment and no Signatory is obligated to violate or actively oppose the terms of enacted legislation as a result of this Stipulation. (f) The Signatories agree that in the event any Commission investigation or other Commission proceeding is instituted during the Moratorium Period, directly or indirectly, both to review the reasonableness of the Company's rates and to seek a change in those rates that would become effective prior to the expiration of the Moratorium Period, the Company's rate base -9- shall include, for determination in that case, instead of the revalued assets otherwise agreed to in this Stipulation, the original cost less depreciation ("OCLD") asset values depicted on Exhibit 2 less the additional applicable straight-line depreciation accumulated for those assets. If in such a proceeding the Commission does not order a rate change effective prior to the termination of the Moratorium Period, then the revalued asset values, as contained in this Stipulation, shall be employed for rate making purposes. If the Company's rates are reduced by the Commission effective at any time prior to the end of the Moratorium Period, then the Signatories agree that the Company's agreement to the revaluation of these assets is void and the asset values will revert to their OCLD values for the remainder of the Moratorium Period, after which this Stipulation shall no longer govern the Company's generation asset values. The Company agrees that it cannot seek retroactive recovery of any portion of the reduced revenues resulting from the rate decrease provided for in Paragraph 1.(a) of this Stipulation. 3. The Company has given valuable consideration and assumed substantial business risks in exchange for the expectation and assurances contained in this Stipulation that its rates will not be reduced during the Moratorium Period. 4. The Signatories agree that the Company shall, within thirty (30) days after a final order approving this Stipulation, for New Mexico jurisdictional ratemaking -10- purposes only, and subject to Paragraph 2.(f) , permanently revalue its investment in its existing generating assets dedicated to New Mexico public service as detailed on Exhibit 2. The revalued plant investment shall be depreciated on a straight-line basis over the applicable remaining useful life of each asset in order to reflect the Signatories' intent and agreement and the Company's reasonable expectation by means of this Stipulation, to recover its remaining investment in those assets over the assets' useful lives. In the event that a retail competitive generation market develops in New Mexico which otherwise prevents full recovery, or would provide for over-recovery, over the remaining useful lives of those assets listed in Exhibit 2, the Signatories agree that EPE shall be entitled to receive 100% recovery, no more and no less, of the remaining undepreciated balance of its revalued generating assets as determined or projected by the Commission or as otherwise required by applicable law or regulation. In the event of over-recovery, EPE agrees that ratepayers are entitled to receive the benefits of any recovery above the revalued jurisdictional generation investment, net of applicable depreciation. The Signatories acknowledge and agree that this revaluation of EPE's New Mexico jurisdictional assets represents a significant reduction from the New Mexico jurisdictional OCLD value of these assets and represents a significant regulatory write-off of strandable costs. Subject to Paragraph 2.(f) , EPE agrees to forbear and relinquish any of its rights to seek cost of service ratemaking treatment of this revaluation write-down now or in the future. The Signatories agree to forbear and relinquish any and all of their rights to seek any further revaluation of these -11- assets for any reason including changed circumstances. The Signatories further acknowledge and agree that the revaluation of EPE's assets on a New Mexico jurisdictional basis is intended to irrevocably establish EPE's right to 100% recovery of its revalued investment in existing generating assets, net of applicable depreciation, as detailed in Exhibit 2, now and in the future, notwithstanding any future differences between the revalued assets and the replacement costs of the assets, the market price of the assets or any other valuation methodologies or economic used and useful arguments or theories. 5. The Signatories agree that all economic used and useful and prudence issues related to EPE's existing generation investments as of the date of this Stipulation, consistent with Paragraph 7 herein, are hereby settled. Future investments in generation shall be subject to Commission review consistent with Commission rules, precedent and applicable law. The Signatories do not agree pursuant to this Stipulation to waive any rights to argue operational used and usefulness consistent with Commission rules, precedent and applicable law. 6. Nothing contained in this Stipulation shall have any precedential effect on any party in any state or federal proceeding related to any attempt to acquire the distribution assets of EPE. This Stipulation is not intended in any way to effect or otherwise impact any party's rights or abilities in the previously filed and currently pending stranded cost case brought in Docket No. SC97-2-000 before the -12- Federal Energy Regulatory Commission or in any existing or future condemnation lawsuit instituted concerning EPE's distribution property. 7. The Signatories agree that the revaluation satisfies and settles any and all issues related to the value of EPE's existing generating assets for New Mexico jurisdictional ratemaking purposes now and in the future. In the event of legislative or administrative restructuring in New Mexico, the Stipulation herein evidences the Signatories' support for protection of EPE's right to 100% recovery of EPE's revalued investment in generating assets, net of applicable depreciation, as detailed on Exhibit 2, and their opposition to any legislative or administrative restructuring which does not protect EPE's recovery agreed to under this Stipulation. EPE agrees to support any legislative or administrative restructuring which EPE believes will result in a reasonable restructuring of the retail electric market in New Mexico. 8. Subject to the rate moratorium provisions of this Stipulation, the Signatories agree that EPE shall maintain an appropriate capacity reserve margin and that EPE shall be allowed to recover in rates the prudently incurred costs of that appropriate reserve margin capacity. During the Moratorium Period, EPE shall be deemed to have recovered all its reserve margin capacity costs through the rates set by this Stipulation. -13- 9. A final order approving this Stipulation shall supersede the NMPUC Case No. 2009 Stipulation and Final order and that Stipulation and Final Order shall be of no further force and effect. EPE shall, within five (5) days of a non-appealable Commission final order approving this Stipulation, move to withdraw its appeal to the New Mexico Supreme Court in Case No. 25,259, of the NMPUC Phase I Order entered by the Commission in this proceeding on June 1, 1998. The Signatories agree that Palo Verde Unit No. 3 and one- third of the related Common Facilities and any other costs associated with Unit No. 3, shall continue to be excluded from EPE's cost of service and/or rate base or for any other cost of service purpose during the remaining life of that generating plant, and that Palo Verde Unit No. 3 shall be decertified and EPE's investment in Palo Verde Unit No. 3 shall be abandoned. Provided, however, EPE in its discretion may use Palo Verde Unit No. 3 to provide capacity or energy needed to serve EPE's New Mexico customers, including reserve margins as provided in Paragraph 7, and to the extent Palo Verde Unit No. 3 is so used, such firm capacity and energy shall be valued at the market price for the lowest equivalent firm capacity and related energy available to EPE. In such event, EPE shall be allowed to recover the equivalent market price for firm capacity and related energy in base rates as a purchase power expense. Such use of Palo Verde Unit 3 in no way commits any party to its continuing use, nor does such use preclude EPE from entering into any agreement or contract which otherwise makes the capacity and energy related to Palo Verde Unit 3 unavailable to EPE's New Mexico jurisdictional customers. Subject to Paragraph 14 of this Stipulation, the -14- Signatories further agree that any additional firm capacity or energy acquired by EPE to serve New Mexico customers, if not provided by Palo Verde Unit No. 3, shall be included in EPE's rates at the lowest market price available to EPE. To the extent any such additional firm capacity or energy is obtained during the Moratorium Period, EPE's rates as established by this Stipulation shall be deemed to have recovered the cost of such firm capacity and energy. 10. The Signatories agree that, subject to the provision of this Stipulation which permanently excludes Palo Verde Unit No. 3 from rate base and authorizes the abandonment of EPE's investment in Palo Verde Unit 3, the prudence of EPE's Palo Verde investment to the date of this Stipulation is permanently resolved and can no longer be the basis for rate disallowance or penalties except as reflected by the agreement excluding Palo Verde Unit No. 3. The Signatories recognize that there are likely to be Capital Betterments and Improvements ("CBI") associated with EPE's investment in generation assets. Except for CBI's associated with plant that is excluded from rate base and abandoned pursuant to this Stipulation, EPE preserves its right to request, and the Signatories preserve their right to oppose, that CBI's associated with generating plant be allowed into rate base consistent with New Mexico law. 11. The Signatories agree that EPE's FPPCAC approved in NMPUC Case No. 1833, and the performance standards contained therein, shall become inapplicable for all future ratemaking purposes. EPE agrees to cancel and eliminate its -15- FPPCAC. Prior to the implementation of retail generation competition in New Mexico, EPE's fuel and purchased power costs shall be collected exclusively as part of the Company's base rates. Subsequent to the implementation of retail generation competition in New Mexico, recovery of such costs shall be governed by applicable law and regulation. For purposes of rates established by this Stipulation, and subject to Paragraph 11, EPE shall reduce its currently proposed FPPCAC of 24.5 mills, requested in NMPUC Case No. 2802, by 22% and EPE's existing New Mexico composite FPPCAC factor of 19.49 mills shall be rolled into the base rates established by this Stipulation and allocated to each customer class as shown in Exhibit 4. The Signatories agree that EPE shall be authorized by the Commission in the final order approving the Stipulation to enter into fuel purchase hedging transactions in order to limit the financial risk to EPE of eliminating its FPPCAC. In the event EPE enters into any hedging transactions, EPE shall file notice of the transaction with the Commission and the Signatories with an affidavit from a duly authorized officer attesting that the transaction complies with the statutory requirements of the New Mexico Public Utility Act or its successor. In any proceeding to review EPE's rates that would become effective after the Moratorium Period, EPE shall have the burden of proof to affirmatively establish the reasonableness of any costs associated with such hedging transactions before they are included in rates. 12. The Signatories further acknowledge and agree that EPE is entitled to fully collect from its New Mexico jurisdictional customers the remaining -16- undercollection resulting from its existing FPPCAC, estimated to be Six Million Nine Hundred Ninety-one Thousand Dollars ($6,991,000) as of September 30, 1998. EPE shall be allowed to create a regulatory asset in that amount which shall be included in its cost of service and EPE shall amortize the remaining balance over a sixty (60) month period from the date of a final order approving this Stipulation. It is expressly recognized that a revenue stream equal to a sixty (60) month amortization, with return at EPE's actual debt cost, is allocated to the recovery of this asset and includable in any subsequent cost of service calculation. In the event any future rate proceeding is docketed within this sixty (60) month period, EPE shall be entitled to collect any remaining unamortized balance of this regulatory asset in its rates. 13. NMPUC Case No. 2802 shall be dismissed upon entry of a final order approving this Stipulation and EPE's purchased power and fuel costs and purchasing practices for the period of January 1, 1997 to the end of the month preceding the month of the implementation of rates pursuant to Paragraph 1.(b) are deemed to have been just and reasonable. 14. The Signatories agree that the amounts of decommissioning expense allowed on an annual basis in the Company's cost of service shall be as described in Exhibit 3. Prior to the implementation of retail generation competition in New Mexico, such amounts shall be adjusted in any future rate proceeding or earnings monitoring report as necessary to reflect the higher of the then current -17- Nuclear Regulatory Commission or any successor agency ("NRC") established decommissioning cost for Palo Verde, exclusive of Palo Verde Unit 3 and related Common Facilities, or the most recent decommissioning study adopted by the Palo Verde Participants, if such costs are approved by the Commission, and to enable the Company to secure an exemption pursuant to (S)468A of the Internal Revenue Code of 1986 from federal income tax liability in connection with its nuclear decommissioning trusts. Subsequent to the implementation of retail generation competition in New Mexico, recovery of such costs shall be governed by applicable law and regulation. The Company agrees to fund such amounts pursuant to its contractual obligations under the Arizona Nuclear Power Project Participation Agreement. In no event will such funding be below the minimum amounts established by the NRC. Such decommissioning expense shall be recognized as a reasonable and necessary expense in any rate proceeding or earnings monitoring report initiated during the Moratorium Period and, during such period, no Signatory shall contest the inclusion of such amounts in the Company's cost of service. The decommissioning investment restrictions established in NMPUC Case No. 1833 are hereby rescinded. With respect to investment limitations, the Decommissioning Fund's Investment Manager must exercise the standard of care, whether in investing or otherwise, that a prudent investor would use in the same circumstances. The term "prudent investor" means a prudent investor as described in RESTATEMENT (THIRD) OF TRUSTS (S)227 (1992). -18- 15. (a) Within sixty (60) days after a final order approving this Stipulation, EPE shall, in cooperation with Staff and other interested persons, file a "Voluntary Renewable Energy Tariff," subject to Commission approval, establishing among other items, procedures for determining pricing and availability of capacity or energy from renewable resources. The tariff shall include options for wind power only, solar power only, geothermal power only, and a blend of renewable resources. Preference shall be given to New Mexico resources. Provided, however, nothing herein shall require EPE to acquire resources prior to the subscription by customers of any available resource. For purposes of the Stipulation and the tariff to be filed by EPE, renewable energy resources shall be defined as solar, wind and geothermal, but shall exclude hydropower. Pricing for renewable energy shall include in any premium the fixed cost of existing revalued jurisdictional generation to the extent not otherwise recoverable from nonjurisdictional customers. EPE shall be allowed to market renewable energy under the tariff within the utility as a utility function. Nothing contained herein shall be construed as a prior determination by any Signatory as to the prudency or reasonableness of the marketing costs incurred by EPE. (b) In acquiring future long term capacity and energy to meet its jurisdictional customer's load requirements, EPE shall prefer the acquisition of capacity and energy from renewable resources within New Mexico if that capacity -19- and energy is comparably priced on a net levelized capacity cost basis for equivalent non-renewable resource capacity. Nothing contained herein shall limit the ability of EPE to purchase capacity or energy from renewable resources at comparable prices for the equivalent capacity or energy from non-renewable resources as part of EPE's capacity and energy procurement obligations for its jurisdictional customers. 16. EPE commits to separate its transmission and distribution assets and operations from all other EPE entities involved in non-transmission and non-distribution aspects of the utility business, either through divestiture or lease/purchase to an independent entity, in a manner consistent with other investor owned utilities doing business in New Mexico, by the time that: (a) all customers of all such investor owned public utilities doing business in New Mexico have open access to the transmission and distribution systems of such entities, and, (b) all such customers may choose their source of electric power suppliers in a competitive energy market, and (c) all investor owned public utilities, not having entered into a commitment to separate assets when other utilities have committed to separate their assets, as of the date of a final order approving this Stipulation, agree or are required by law to divest, or separate by lease/purchase to an independent entity, such assets from their non-transmission and non-distribution assets. EPE shall have the sole discretion as to which segment of its business to retain so long as there is separation of the regulated and non-regulated business functions. The Signatories acknowledge that in such an event, EPE may be -20- required to seek the approval of its shareholders and bondholders, and the Public Utility Commission of Texas (the "PUCT") to undertake such divestiture and that the ability to consummate such divestiture, and the terms and conditions and timing of such divestiture, may be subject to approval by its shareholders and bondholders and the PUCT. In the event EPE is not able to obtain a required approval of its shareholders, bondholders or the PUCT, or is unable to obtain such approval at the time of the foregoing required divestiture in New Mexico, EPE shall make reasonable efforts to divest, lease/purchase or spin-off assets such that the New Mexico transmission and distribution assets are not directly or indirectly connected with any non-transmission and non-distribution assets of EPE. 17. The Signatories agree that if during the Moratorium Period the Commission orders the unbundling of rates to accomplish the separation of assets as described in Paragraph 15 above, the components of the rates to the Company' s customers will be set at levels which will collect neither more nor less than the rates established pursuant to this Stipulation notwithstanding the unbundling. 18. The Signatories agree that they will use their best efforts to obtain expeditious implementation of this Stipulation by the entry of appropriate final orders in NMPUC Case Nos. 2722, 2802, 2846, and, if necessary, 2841. This Stipulation assumes the legality and enforceability of the rates, methodologies, and agreements set forth in this Stipulation. Should any rate, methodology, or -21- agreement set forth in this Stipulation be rejected, modified or is directly or indirectly rendered inoperable by either the Commission, a court, or by an act of the New Mexico legislature, any Signatory who is a party to Case No. 2722 shall have the right to withdraw from this Stipulation and declare this Stipulation void. However, the Signatories agree to negotiate in good faith to substitute a rate, methodology, or agreement with the same economic effect as that rejected, modified or is directly or indirectly rendered inoperable by the Commission, a Court, or the New Mexico Legislature. In the event that the Stipulation is not approved in its entirety by the Commission, this Stipulation shall be voidable by any Signatory who is a party to NMPUC Case No. 2722. However, the Signatories agree that in the event that the LIR is determined to be illegal, EPE will commit to fund an equal annual amount over the Moratorium Period to a social services agency in Dona Ana County acceptable to the Signatories. 19. It is recognized and agreed by the Signatories that this Stipulation is made and filed solely in connection with the compromise and settlement of rate matters related to the Company and is subject to the specific approval of the Commission of the matters herein stipulated. It is the result of a unique fact situation, and its resolution is special to the circumstances presented. This Stipulation shall not prejudice, bind, or affect any Signatory, or be viewed as an admission, except to the extent necessary to give effect to or enforce the terms of this Stipulation or unless otherwise specifically stated herein. In the event this Stipulation is not approved by the Commission and implemented, nothing in the Stipulation or -22- negotiations leading up to its execution shall be construed as an admission of a Signatory's position on any issue and shall not be used or offered into evidence in this or any other proceeding. 20. Other Signatories may agree to the terms of this Stipulation through the execution of a separate signature page. DATED this 15th day of July, 1998. /s/ GARY R. HEDRICK /s/ DAVID A. MCCORMICK - ------------------------------- --------------------------------- EL PASO ELECTRIC COMPANY DEPARTMENT OF DEFENSE /s/ CHARLES F. NOBLE /s/ MARYANNE REILLY, ESQ. - ------------------------------- --------------------------------- ATTORNEY GENERAL COMMISSION STAFF /s/ STEVEN S. MICHEL - ------------------------------- LARGE POWER USERS COALITION (LPUC) / NEW MEXICO INDUSTRIAL ENERGY CONSUMERS (NMIEC) -23- BEFORE THE NEW MEXICO PUBLIC UTILITY COMMISSION IN THE MATTER OF THE COMPLAINTS OF ) J. DERALD MORGAN AND JOE LUJAN ) AGAINST EL PASO ELECTRIC COMPANY ) AND THE INVESTIGATION OF EL PASO ) ELECTRIC COMPANY'S RATES, ) ) EL PASO ELECTRIC COMPANY, ) ) Respondent. ) Case No. 2722 ) CERTIFICATE OF SERVICE I HEREBY CERTIFY that on July 15, 1998 a true and correct copy of the foregoing Stipulation and Settlement Agreement was mailed first class, postage prepaid, or hand delivered as indicated, or faxed as indicated, to each of the following: David S. Cohen Mr. Thomas L. Newsom Cohen & Cohen, P.A. El Paso Electric Company 121 Sandoval, Suite 300 123 W. Mills Santa Fe, NM 87501 El Paso, TX 79901 Mr. J. Derald Morgan Mr. Joe Lujan 2426 Janet Ann Lane 1200 Lujan-Hill Road Las Cruces NM 88005 Las Cruces, NM 88005 Charles F. Noble, Esq. Mr. Robert J. Henkes Assistant Attorney General Georgetown Consulting Group P.O. Drawer 1508 456 Main Street Santa Fe, NM 87504-1508 Ridgefield, CT 06877 Steven S. Michel Mr. Ray Stanley 320 Galisteo Street, R.J. Stanley & Associates Suite 301 1750 N. Collins Blvd., Suite 209 Santa Fe, NM 87501 Richardson, TX 75080-3625 Nann Houliston, Esq. Mr. Jeffrey D. Rudolph City of Las Cruces Manager of Rates and Utility Counsel Regulatory Affairs P.O. Box 2248 Plains Electric Generation Albuquerque, NM 87103 & Transmission Cooperative P.O. Box 6551 Albuquerque, NM 87197-6551 Peter Q. Nyce Jr. Esq. Mr. Jerry Trojan General Attorney Assistant City Manager Regulatory Law Office P.O. Box 20000 U.S. Army Legal Services Agency Las Cruces, NM 88004 Department of the Army 901 N. Stuart St., Suite 713 Arlington, VA 22203-1837 Richard N. Carpenter Carpenter & Nixon Randy E. Lovato, Esq. P.O. Box 1837 Staff Counsel Santa Fe, NM 87504-1837 Plains Electric Generation & Transmission Cooperative Charles Johnson P.O. Box 6551 1338 Foothill Drive #234 Albuquerque, NM 87197-6551 Salt Lake City, UT 84018 David A. McCormick Mr. I. David Rosenstein Department of the Army Lundberg Marshall & Associate U.S. Army Legal Services Agency P.O. Box 429349 901 N. Stuart Street Cincinnati, OH 45242-9349 Arlington, VA 22203-1837 HAND DELIVERY HAND DELIVERY Michael Barlow Maryanne Reilly, Esq. Hearing Examiner Steve Hattenbach, Esq. NMPUC NMPUC 224 East Palace 224 East Palace Ave. Santa Fe, NM 87501 Santa Fe, NM 87501 HAND DELIVERY John Curl NMPUC 224 East Palace Ave. Santa Fe, NM 87501 -2- Respectfully submitted, COHEN & COHEN, P.A. /s/ RANDALL W. CHILDRESS ------------------------------ David S. Cohen Jane C. Cohen Randall W. Childress 121 Sandoval, Suite 300 Santa Fe, NM 87501 (505) 983-9277 (505) 986-9663 [fax] ATTORNEYS FOR EL PASO ELECTRIC COMPANY New Mexico Jurisdictional Base Revenues Exhibit 1 Twelve Months Ended May 1998 Rate Current Base Dollar Adjusted Schedule Revenues Reduction Base Revenues - -------- ------------ ------------ ------------- 01 Residential $ 32,950,971 $ 3,295,097 $ 29,655,874 02 Water Heating 1,764,575 56,084 1,708,491 03 Small Commercial 9,602,033 305,185 9,296,848 04 General Service 8,252,719 262,299 7,990,420 05 Irrigation Service 1,240,616 39,431 1,201,185 07 City/County 3,604,270 114,556 3,489,714 08 Municipal Pumping 1,110,767 35,304 1,075,463 09 Large Power 8,837,969 280,901 8,557,068 10 M, R&D 8,521,830 500,000 8,021,830 11 Municipal Lighting 459,054 14,590 444,464 12 Private Area Lighting 562,353 17,873 544,480 14 Subdivision Lighting 2,018 64 1,954 19 Seasonal Agriculture 308,167 9,795 298,372 25 Recreational Lighting 35,867 1,140 34,727 26 NMSU 2,129,457 67,681 2,061,776 ------------ ------------ ------------ Total Base Revenues $ 79,382,666 $ 5,000,000 $ 74,382,666 ============ ============ ============ Exhibit 2 Revaluation Of Generation Assets
Average Years ($000) ($000) ($000) Of Remaining OCLD Dollars Per Revaluation Revalued Basis Dollars Per Service Life Description mW (b) 9/30/96 Installed kW Adjustment 9/30/96 Installed kW 9/30/96 - ----------- ----- ------- ------------ ---------- --------- ------------ ------- Nuclear: - ------- PVNGS Unit 1 200 $ 347,194 $ 1,735.97 $ (174,055) $ 173,139 $ 865.70 28.67 PVNGS Unit 2 200 431,711 2,158.56 (216,426) 215,285 1,076.43 29.58 ---- --------- ---------- ----------- --------- ---------- Total Nuclear (a) 400 778,905 1,947.26 (390,481) 388,424 971.06 Non-Nuclear: - ----------- Newman 482 46,192 95.83 28,237 74,429 154.42 21.65 Rio Grande 246 10,030 40.77 1,642 11,672 47.45 18.55 Copper 68 14,415 211.99 1,858 16,273 239.31 10.95 Four Corners 104 36,178 347.87 68,138 104,316 1,003.04 13.05 ---- --------- ---------- ----------- --------- ----------- Total Non-Nuclear 900 106,815 118.68 99,875 206,690 229.66 ---- --------- ---------- ----------- --------- ----------- Total Generation - NM Basis 1300 $ 885,720 $ 681.32 $ (290,606) $ 595,114 $ 457.78 ==== ========= ========== =========== ========= ===========
The rate base effect of the net write down in plant values as of September 30, 1996, reflecting values established at February 12, 1996 upon emergence from bankruptcy, is offset by deferred federal income taxes of $101,712 (in thousands) reflecting EPE's intention of avoiding a normalization violation of the U.S. Internal Revenue Code. The Signatories have accepted the ADFIT adjustment in this particular case without precedent as part of the settlement in this case. Notes: (a) Including asociated common facilities (b) Nominal name plate rating EL PASO ELECTRIC COMPANY EXHIBIT 3 NEW MEXICO CASE NO. 2722 COMPLIANCE FILING PROOF OF REVENUE ANALYSIS FOR THE MONTH ENDED MAY, 1998
-------------------------------------------------------- VOLTAGE UNIT RATES RATE ADJUSTED INCLUDING LINE DESCRIPTION DESIGN FUEL FACTOR FUEL ------- ------------------------------------------------ -------------------------------------------------- 1 RATE 01 - RESIDENTIAL SERVICE 2 Customer Charge $6.00 $6.00 3 Energy Charge (KWH) $0.07198 $0.01975 $0.09173 4 Energy Over 650 (Nov-April) $0.04085 $0.01975 $0.06060 5 TOTAL WATER HEATING 6 Meters $1.50 $1.50 7 Total KWH 8 Residential KWH $0.04472 $0.01975 $0.06447 9 Small Commercial KWH $0.04472 $0.01975 $0.06447 10 General Service KWH 11 RATE 03 - SMALL COMMERCIAL SERVICE 12 Customer Charge 11.50 $11.50 13 Energy Charge (KWH) 14 First Block (0-150 Hrs.) $0.02841 $0.01975 $0.04816 15 Second Block (151-300 Hrs.) $0.02157 $0.01975 $0.04132 16 Third Block (Above 300 Hrs.) $0.01145 $0.01975 $0.03120 17 Demand Charge (KW) 12.70 $12.70 18 Alternate: Customer Charge 11.50 $11.50 19 First Block (0-1500 KWH) $0.09054 $0.01975 $0.11029 20 Second Block (Above 1500 KWH) $0.07103 $0.01975 $0.09078
EL PASO ELECTRIC COMPANY EXHIBIT 3 NEW MEXICO CASE NO. 2722 COMPLIANCE FILING PROOF OF REVENUE ANALYSIS FOR THE MONTH ENDED MAY, 1998
-------------------------------------------------------- VOLTAGE UNIT RATES RATE ADJUSTED INCLUDING LINE DESCRIPTION DESIGN FUEL FACTOR FUEL ------- ------------------------------------------------ -------------------------------------------------- 21 RATE 04 - GENERAL SERVICE 22 Customer Charge $ 26.22 $26.22 23 Energy Charge (KWH) 24 Demand Charge (KW) $ 10.87 $10.87 25 First Block Primary $0.04521 $0.01883 $0.06404 26 Second Block Primary $0.01881 $0.01883 $0.03764 27 Third Block Primary $0.00582 $0.01883 $0.02465 28 First Block Secondary $0.04521 $0.01975 $0.06496 29 Second Block Secondary $0.01881 $0.01975 $0.03856 30 Third Block Secondary $0.00582 $0.01975 $0.02557 31 RATE 05 - IRRIGATION SERVICE 32 Customer Charge $15.00 $15.00 33 Energy Charge (KWH) 34 Summer Block (May-Oct) 35 First Block (0-75 Hrs.) $0.07567 $0.01975 $0.09542 36 Second Block (76-150 Hrs.) $0.06327 $0.01975 $0.08302 37 Third Block (Above 150 Hrs.) $0.05245 $0.01975 $0.07220 38 Winter Block (Nov-April) $0.02749 $0.01975 $0.04724 39 RATE 07 - CITY & COUNTY SERVICE 40 Customer Charge $18.00 $18.00 41 Demand Charge (KW) $15.00 $15.00 42 Energy Charge (KWH) $0.00102 $0.01975 $0.02077 43 RATE 08 - MUNICIPAL PUMPING 44 Customer Charge $15.75 $15.75 45 Energy Charge (KWH) Total $0.05853 46 KWH (Primary) $0.05853 $0.01883 $0.07736 47 KWH (Secondary) $0.05853 $0.01975 $0.07828
EL PASO ELECTRIC COMPANY EXHIBIT 3 NEW MEXICO CASE NO. 2722 COMPLIANCE FILING PROOF OF REVENUE ANALYSIS FOR THE MONTH ENDED MAY, 1998
-------------------------------------------------------- VOLTAGE UNIT RATES RATE ADJUSTED INCLUDING LINE DESCRIPTION DESIGN FUEL FACTOR FUEL ------- ------------------------------------------------ -------------------------------------------------- 48 RATE 09 - LARGE POWER 49 Customer Charge $0.00 $0.00 50 Demand Charge (KW) $19.30 $19.30 51 Energy Charge (KWH) Total $0.00828 52 KWH (Primary) $0.00828 $0.01883 $0.02711 53 KWH (Secondary) $0.00828 $0.01975 $0.02803 54 RATE 10 - MILITARY RESEARCH & DEVELOPMENT 55 Customer Charge $510.00 $510.00 56 Demand Charge (KW) $19.50 $19.50 57 Energy Charge (KWH) $0.00257 $0.01854 $0.02111 58 O&M Charges $0.00257 $0.00257 59 RATE 11 - MUNICIPAL STREET LIGHTING 60 7000 L-MV 195 Watts $12.97 $0.01975 $14.29 61 11000 L-MV 275 Watts $15.19 $0.01975 $17.05 62 20000 L-MV 450 Watts $19.05 $0.01975 $22.09 63 20000 L-MV-DBL 900 Watts $29.06 $0.01975 $35.15 64 60000 L-MV 1050 Watts $32.97 $0.01975 $40.07 65 14400 L-SV 175 Watts $14.83 $0.01975 $16.01 66 23200 L-SV 300 Watts $16.99 $0.01975 $19.02 67 45000 L-SV 475 Watts $23.06 $0.01975 $26.27 68 45000 L-SV 475 Watts $38.59 $0.01975 $41.80 69 11000 L-MV 275 Watts $42.43 $0.01975 $44.29 70 23200 L-MV 300 Watts $44.09 $0.01975 $46.12 71 7000 L-MV 195 Watts $3.94 $0.01975 $5.26 72 11000 L-MV 275 Watts $5.31 $0.01975 $5.97 73 20000 L-MV 450 Watts $8.31 $0.01975 $11.35 74 14400 L-SV 175 Watts $3.60 $0.01975 $4.78 75 19800 L-SV 250 Watts $4.88 $0.01975 $5.49 76 23200 L-SV 300 Watts $5.73 $0.01975 $7.76 77 33000 L-SV 365 Watts $6.86 $0.01975 $7.71 78 45000 L-SV 475 Watts $8.74 $0.01975 $11.95
EL PASO ELECTRIC COMPANY EXHIBIT 3 NEW MEXICO CASE NO. 2722 COMPLIANCE FILING PROOF OF REVENUE ANALYSIS FOR THE MONTH ENDED MAY, 1998
-------------------------------------------------------- VOLTAGE UNIT RATES RATE ADJUSTED INCLUDING LINE DESCRIPTION DESIGN FUEL FACTOR FUEL ------- ------------------------------------------------ -------------------------------------------------- 79 RATE 12 - PRIVATE AREA LIGHTING 80 7000 L-MV 195 Watts $13.14 $0.01975 $14.49 81 11000 L-MV 275 Watts $14.72 $0.01975 $16.62 82 20000 L-MV 430 Watts $19.03 $0.01975 $21.99 83 8500 L-HPSV 124 Watts $13.07 $0.01975 $13.92 84 23200 L-HPSV 313 Watts $17.52 $0.01975 $19.68 85 7000 L-MV 195 Watts (exst pl) $6.02 $0.01975 $7.37 86 11000 L-MV 275 Watts (exst pl) $7.46 $0.01975 $9.36 87 20000 L-MV 430 Watts (exst pl) $11.32 $0.01975 $14.28 88 8500 L-HPSV 124 Watts (exst pl) $5.32 $0.01975 $6.17 89 23200 L-HPSV 313 Watts (exst pl) $9.66 $0.01975 $11.82 90 RATE 14 - PRIV. RESD. SUBD. LIGHT 91 14400 L-SV 193 Watts $8.14 $0.01975 $9.50 92 RATE 19 - SEASONAL AGRICULTURAL 93 Customer Charge $7.25 $7.25 94 Energy Charge (KWH) 95 First Block (0-50 Hrs.) $0.11604 $0.01975 $0.13579 96 Second Block (51-150 Hrs.) $0.10490 $0.01975 $0.12465 97 Third Block (Above 150 Hrs.) $0.05054 $0.01975 $0.07029 98 RATE 25 - OUTDOOR RECREATIONAL LIGHTING 99 Customer Charge $18.00 $18.00 100 Energy Charge (KWH) $0.05518 $0.01975 $0.07493
EL PASO ELECTRIC COMPANY EXHIBIT 3 NEW MEXICO CASE NO. 2722 COMPLIANCE FILING PROOF OF REVENUE ANALYSIS FOR THE MONTH ENDED MAY, 1998
-------------------------------------------------------- VOLTAGE UNIT RATES RATE ADJUSTED INCLUDING LINE DESCRIPTION DESIGN FUEL FACTOR FUEL ------- ------------------------------------------------ -------------------------------------------------- 101 RATE 26 - STATE UNIVERSITY 102 Cogeneration - Applicable Rate (Rate 26) 103 KVAR and Primary Voltage Discounts 104 Demand Charge (KW) 105 Energy Charge (KWH) 106 Cogeneration - Applicable Rate (Rate 09) 107 Customer Charge $100.00 $0.00 108 Energy Charge (KWH) $0.00828 $0.01883 $0.02711 109 Energy Charge (Maintenance Only) 110 Demand Charge (KW) $19.30 $19.30 111 Monthly Reservation Fee (KW*10%/month) $19.30 $19.30
EL PASO ELECTRIC COMPANY EXHIBIT 4 NM DECOMMISSIONING COS ASSUMPTIONS: EARNINGS: 5.8900% ESCALATION: 4.3000% COST STUDY: 1995
-------------------------- -------------------------------------------- Total 1/3 Unit 1 1/3 Total Spent Fuel Spent Fuel Decommissioning Spent Fuel Unit 1 -------------------------- -------------------------------------------- Projected: 1997 822,891 274,297 2,152,009 274,297 2,426,306 1998 822,891 274,297 2,152,009 274,297 2,426,306 1999 822,891 274,297 2,152,009 274,297 2,426,306 2000 822,891 274,297 2,152,009 274,297 2,426,306 2001 822,891 274,297 2,152,009 274,297 2,426,306 2002 822,891 274,297 2,152,009 274,297 2,426,306 2003 822,891 274,297 2,152,009 274,297 2,426,306 2004 822,891 274,297 2,152,009 274,297 2,426,306 2005 822,891 274,297 2,152,009 274,297 2,426,306 2006 822,891 274,297 2,152,009 274,297 2,426,306 2007 822,891 274,297 2,152,009 274,297 2,426,306 2008 822,891 274,297 2,152,009 274,297 2,426,306 2009 822,891 274,297 2,152,009 274,297 2,426,306 2010 822,891 274,297 2,152,009 274,297 2,426,306 2011 822,891 274,297 2,152,009 274,297 2,426,306 2012 822,891 274,297 2,152,009 274,297 2,426,306 2013 822,891 274,297 2,152,009 274,297 2,426,306 2014 822,891 274,297 2,152,009 274,297 2,426,306 2015 822,891 274,297 2,152,009 274,297 2,426,306 2016 822,891 274,297 2,152,009 274,297 2,426,306 2017 822,891 274,297 2,152,009 274,297 2,426,306 2018 822,891 274,297 2,152,009 274,297 2,426,306 2019 822,891 274,297 2,152,009 274,297 2,426,306 2020 822,891 274,297 2,152,009 274,297 2,426,306 2021 822,891 274,297 2,152,009 274,297 2,426,306 2022 822,891 274,297 2,152,009 274,297 2,426,306 2023 822,891 274,297 2,152,009 274,297 2,426,306 2024 822,891 274,297 2,152,009 274,297 2,426,306 2025 - - - - - 2026 - - - - - 2027 - - - - - ----------- ---------- ----------- ---------- ----------- 23,040,948 7,680,316 60,256,252 7,680,316 67,936,568 =========== ========== =========== ========== ===========
--------------------------------------------------------------- ------------------------ Unit 2 1/3 Total TOTAL Decommissioning Spent Fuel Unit 2 DECOMMISSIONING --------------------------------------------------------------- ------------------------ Projected: 1997 2,211,285 274,297 2,485,582 4,911,888 1998 2,211,285 274,297 2,485,582 4,911,888 1999 2,211,285 274,297 2,485,582 4,911,888 2000 2,211,285 274,297 2,485,582 4,911,888 2001 2,211,285 274,297 2,485,582 4,911,888 2002 2,211,285 274,297 2,485,582 4,911,888 2003 2,211,285 274,297 2,485,582 4,911,888 2004 2,211,285 274,297 2,485,582 4,911,888 2005 2,211,285 274,297 2,485,582 4,911,888 2006 2,211,285 274,297 2,485,582 4,911,888 2007 2,211,285 274,297 2,485,582 4,911,888 2008 2,211,285 274,297 2,485,582 4,911,888 2009 2,211,285 274,297 2,485,582 4,911,888 2010 2,211,285 274,297 2,485,582 4,911,888 2011 2,211,285 274,297 2,485,582 4,911,888 2012 2,211,285 274,297 2,485,582 4,911,888 2013 2,211,285 274,297 2,485,582 4,911,888 2014 2,211,285 274,297 2,485,582 4,911,888 2015 2,211,285 274,297 2,485,582 4,911,888 2016 2,211,285 274,297 2,485,582 4,911,888 2017 2,211,285 274,297 2,485,582 4,911,888 2018 2,211,285 274,297 2,485,582 4,911,888 2019 2,211,285 274,297 2,485,582 4,911,888 2020 2,211,285 274,297 2,485,582 4,911,888 2021 2,211,285 274,297 2,485,582 4,911,888 2022 2,211,285 274,297 2,485,582 4,911,888 2023 2,211,285 274,297 2,485,582 4,911,888 2024 2,211,285 274,297 2,485,582 4,911,888 2025 2,211,285 - 2,211,285 2,211,285 2026 - - - - 2027 - - - - ----------- ---------- ---------- ------------ 64,127,265 7,680,316 71,807,581 139,744,149 =========== ========== ========== ============
EL PASO ELECTRIC COMPANY EXHIBIT 5 TYPICAL BILL COMPARISON RESIDENTIAL SERVICE RATE 1
Case No 2279 Case No 2722 Percent Line Consumption (KWH) Rates Rates Decrease - ------ ----------------- ----------------- ------------------ ---------------- 1 Customer $6.00 $6.00 2 KWH $0.08117 $0.09173 3 KWH Fuel $0.01975 4 100 $16.09 $15.17 5.71% 5 200 $26.18 $24.35 7.02% 6 300 $36.28 $33.52 7.60% 7 400 $46.37 $42.69 7.93% 8 500 $56.46 $51.87 8.14% 9 600 $66.55 $61.04 8.29% 10 700 $76.64 $70.21 8.39% 11 800 $86.74 $79.38 8.48% 12 900 $96.83 $88.56 8.54% 13 1,000 $106.92 $97.73 8.60% 14 1,500 $157.38 $143.60 8.76% 15 2,000 $207.84 $189.46 8.84% 16 2,500 $258.30 $235.33 8.89% 17 3,000 $308.76 $281.19 8.93% 18 3,500 $359.22 $327.06 8.95% 19 4,000 $409.68 $372.92 8.97% 20 4,500 $460.14 $418.79 8.99% 21 5,000 $510.60 $464.65 9.00%
EL PASO ELECTRIC COMPANY EXHIBIT 5 TYPICAL BILL COMPARISON RESIDENTIAL SERVICE RATE 1 WITH LOW INCOME RIDER
Case No 2279 Case No 2722 Percent Line Consumption (KWH) Rates Rates Decrease - ------ ----------------- ----------------- ------------------ ---------------- 1 Customer $6.00 $0.00 2 KWH $0.08117 $0.09173 3 KWH Fuel $0.01975 4 100 $16.09 $9.17 43.00% 5 200 $26.18 $18.35 29.93% 6 300 $36.28 $27.52 24.14% 7 400 $46.37 $36.69 20.87% 8 500 $56.46 $45.87 18.77% 9 600 $66.55 $55.04 17.30% 10 700 $76.64 $64.21 16.22% 11 800 $86.74 $73.38 15.39% 12 900 $96.83 $82.56 14.74% 13 1,000 $106.92 $91.73 14.21% 14 1,500 $157.38 $137.60 12.57% 15 2,000 $207.84 $183.46 11.73% 16 2,500 $258.30 $229.33 11.22% 17 3,000 $308.76 $275.19 10.87% 18 3,500 $359.22 $321.06 10.62% 19 4,000 $409.68 $366.92 10.44% 20 4,500 $460.14 $412.79 10.29% 21 5,000 $510.60 $458.65 10.17%
EL PASO ELECTRIC COMPANY EXHIBIT 5 TYPICAL BILL COMPARISON SMALL COMMERCIAL SERVICE RATE 3
Case No 2279 | Case No 2722 Line Unit Type Units Rates Extended | Rates Extended - --------- -------------------- ---------------- ---------------- ---------------- | --------------------- --------------------- | ALTERNATE RATE | 100% Load Factor | 1 Customer 1 $11.50 $11.50 | $11.50 $11.50 2 KWH Total 18,250 | 3 KWH 1 1,500 $0.09364 $140.46 | $0.11029 $165.43 4 KWH 2 16,750 $0.07413 $1,241.68 | $0.09078 $1,520.56 5 KW 25 $0.00 $0.00 | $0.00 $0.00 6 KWH Fuel 18,250 $0.01975 $360.44 | $0.00000 $0.00 ---------- | ---------- --------------- | Load Factor 100% | --------------- | 7 Total Bill $1,754.08 | $1,697.49 ========== | ========== | Decrease -3.23% | ========== | 75 % Load Factor | 8 Customer 1 $11.50 $11.50 | $11.50 $11.50 9 KWH Total 13,688 | 10 KWH 1 1,500 $0.09364 $140.46 | $0.11029 $165.43 11 KWH 2 12,188 $0.07413 $903.46 | $0.09078 $1,106.37 12 KW 25 $0.00 $0.00 | $0.00 $0.00 13 KWH Fuel 13,688 $0.01975 $270.33 | $0.00000 $0.00 ---------- | ---------- --------------- | Load Factor 75% | --------------- | 14 Total Bill $1,325.75 | $1,283.31 ========== | ========== | Decrease -3.20% | ========== 50% Load Factor | 15 Customer 1 $11.50 $11.50 | $11.50 $11.50 16 KWH Total 9,125 | 17 KWH 1 1,500 $0.09364 $140.46 | $0.11029 $165.43 18 KWH 2 7,625 $0.07413 $565.24 | $0.09078 $692.19 19 KW 25 $0.00 $0.00 | $0.00 $0.00 20 KWH Fuel 9,125 $0.01975 $180.22 | $0.00000 $0.00 ---------- | ---------- --------------- | Load Factor 50% | --------------- | 21 Total Bill $897.42 | $869.13 ========== | ========== | Decrease -3.15% | ========== 25% Load Factor | 22 Customer 1 $11.50 $11.50 | $11.50 $11.50 23 KWH Total 4,563 | 24 KWH 1 1,500 $0.09364 $140.46 | $0.11029 $165.43 25 KWH 2 3,063 $0.07413 $227.02 | $0.09078 $278.01 26 KW 25 $0.00 $0.00 | $0.00 $0.00 27 KWH Fuel 4,563 $0.01975 $90.11 | $0.00000 $0.00 ---------- | ---------- --------------- | Load Factor 25% | --------------- | 28 Total Bill $469.09 | $454.95 ========== | ========== | Decrease -3.02% | ==========
EL PASO ELECTRIC COMPANY EXHIBIT 5 TYPICAL BILL COMPARISON SMALL COMMERCIAL SERVICE RATE 3
Case No 2279 | Case No 2722 Line Unit Type Units Rates Extended | Rates Extended - --------- --------------------- ---------------- ---------------- ---------------- | --------------------- --------------------- | | 100% Load Factor | 1 Customer 1 $11.50 $11.50 | $11.50 $11.50 2 KWH Total 18,250 | 3 KWH 1 3,750 $0.03087 $115.76 | $0.04816 $180.61 4 KWH 2 3,750 $0.02403 $90.11 | $0.04132 $154.96 5 KWH 3 10,750 $0.01391 $149.53 | $0.03120 $335.44 6 KW 25 $12.75 $318.75 | $12.70 $317.50 7 KWH Fuel 18,250 $0.01975 $360.44 | $0.00000 $0.00 ---------- | ----------- --------------- | 8 Load Factor 100% | --------------- | 9 Total Bill $1,046.10 | $1,000.01 ========== | =========== | Decrease -4.41% | =========== 75% Load Factor | 10 Customer 1 $11.50 $11.50 | $11.50 $11.50 11 KWH Total 13,688 | 12 KWH 1 3,750 $0.03087 $115.76 | $0.04816 $180.61 13 KWH 2 3,750 $0.02403 $90.11 | $0.04132 $154.96 14 KWH 3 6,188 $0.01391 $86.07 | $0.03120 $193.07 15 KW 25 $12.75 $318.75 | $12.70 $317.50 16 KWH Fuel 13,688 $0.01975 $270.33 | $0.00000 $0.00 ---------- | ----------- --------------- | 17 Load Factor 75% | --------------- | 18 Total Bill $892.52 | $857.65 ========== | =========== | Decrease -3.91% | =========== 50% Load Factor | 19 Customer 1 $11.50 $11.50 | $11.50 $11.50 20 KWH Total 9,125 | 21 KWH 1 3,750 $0.03087 $115.76 | $0.04816 $180.61 22 KWH 2 3,750 $0.02403 $90.11 | $0.04132 $154.96 23 KWH 3 1,625 $0.01391 $22.60 | $0.03120 $50.71 24 KW 25 $12.75 $318.75 | $12.70 $317.50 25 KWH Fuel 9,125 $0.01975 $180.22 | $0.00000 $0.00 ---------- | ----------- --------------- | 26 Load Factor 50% | --------------- | 27 Total Bill $738.95 | $715.28 ========== | =========== | Decrease -3.20% | =========== 25% Load Factor | 28 Customer 1 $11.50 $11.50 | $11.50 $11.50 29 KWH Total 4,563 | 30 KWH 1 3,750 $0.03087 $115.76 | $0.04816 $180.61 31 KWH 2 813 $0.02403 $19.52 | $0.04132 $33.58 32 KWH 3 0 $0.01391 $0.00 | $0.03120 $0.00 33 KW 25 $12.75 $318.75 | $12.70 $317.50 34 KWH Fuel 4,563 $0.01975 $90.11 | $0.00000 $0.00 ---------- | ----------- --------------- | 35 Load Factor 25% | --------------- | 36 Total Bill $555.65 | $543.19 ========== | =========== | Decrease -2.24% ===========
EL PASO ELECTRIC COMPANY EXHIBIT 5 TYPICAL BILL COMPARISON GENERAL SERVICE RATE CLASS RATE 4
Case No 2279 | Case No 2722 Line Unit Type Units Rates Extended | Rates Extended - ----------- ------------------- ----------------- ------------------- ------------------- | ---------------- ------------------- | 1 Customer 1 $26.22 $26.22 | $26.22 $26.22 2 KWH Total 146,000 | 3 KWH 1 30,000 $0.04434 $1,330.20 | $0.06496 $1,948.80 4 KWH 2 30,000 $0.02606 $781.80 | $0.03856 $1,156.80 5 KWH 3 86,000 $0.00581 $499.66 | $0.02557 $2,199.02 6 KW 200 $10.87 $2,174.00 | $10.87 $2,174.00 7 KWH Fuel 146,000 $0.01975 $2,883.50 | $0.00000 $0.00 ------------ | ----------- ---------------- | 8 Load Factor 100.00% | ---------------- | 9 Total Bill $7,695.38 | $7,504.84 ============ | =========== | Decrease 2.48% | =========== | 10 Customer 1 $26.22 $26.22 | $26.22 $26.22 11 KWH Total 109,500 | 12 KWH 1 30,000 $0.04434 $1,330.20 | $0.06496 $1,948.80 13 KWH 2 30,000 $0.02606 $781.80 | $0.03856 $1,156.80 14 KWH 3 49,500 $0.00581 $287.60 | $0.02557 $1,265.72 15 KW 200 $10.87 $2,174.00 | $10.87 $2,174.00 16 KWH Fuel 109,500 $0.01975 $2,162.63 | $0.00000 $0.00 ------------ | ----------- ---------------- | 17 Load Factor 75.00% | ---------------- | 18 Total Bill $6,762.44 | $6,571.54 ============ | =========== | Decrease 2.82% | =========== | 19 Customer 1 $26.22 $26.22 | $26.22 $26.22 20 KWH Total 73,000 | 21 KWH 1 30,000 $0.04434 $1,330.20 | $0.06496 $1,948.80 22 KWH 2 30,000 $0.02606 $781.80 | $0.03856 $1,156.80 23 KWH 3 13,000 $0.00581 $75.53 | $0.02557 $332.41 24 KW 200 $10.87 $2,174.00 | $10.87 $2,174.00 25 KWH Fuel 73,000 $0.01975 $1,441.75 | $0.00000 $0.00 ------------ | ----------- ---------------- | 26 Load Factor 50.00% | ---------------- | 27 Total Bill $5,829.50 | $5,638.23 ============ | =========== | Decrease 3.28% | =========== | 28 Customer 1 $26.22 $26.22 | $26.22 $26.22 29 KWH Total 36,500 | 30 KWH 1 30,000 $0.04434 $1,330.20 | $0.06496 $1,948.80 31 KWH 2 6,500 $0.02606 $169.39 | $0.03856 $250.64 32 KWH 3 0 $0.00581 $0.00 | $0.02557 $0.00 33 KW 200 $10.87 $2,174.00 | $10.87 $2,174.00 34 KWH Fuel 36,500 $0.01975 $720.88 | $0.00000 $0.00 ------------ | ----------- ---------------- | 35 Load Factor 25.00% | ---------------- | 36 Total Bill $4,420.69 | $4,399.66 ============ | =========== | Decrease 0.48% | ===========
EXHIBIT 5 EL PASO ELECTRIC COMPANY TYPICAL BILL COMPARISON CITY COUNTY RATE 7
Typical New Mexico Consumption Case No 2279 | Case No 2722 Line Unit Type Units Rates Extended | Rates Extended - -------- ------------------ --------- ------------ --------- | ------------------------- | 1 Customer 1 $18.00 $18.00 | $18.00 $18.00 2 KWH Total 8,278 $0.00291 $24.09 | $0.02077 $171.94 3 KW 27 $15.00 $405.00 | $15.00 $405.00 4 KWH Fuel 8,278 $0.01975 $163.49 | --------- --------- | --------- 5 Load Factor 42% | --------- | 6 Total Bill $610.58 | $594.94 ========= | ========= | | ========= 7 Percent Decrease | 2.56% | ========= | | Typical New Mexico Consumption | Case No 2279 | Case No 2722 Line Unit Type Units Rates Extended | Rates Extended - -------- ------------------ --------- ------------ --------- | ------------------------- | 8 Customer 1 $18.00 $18.00 | $18.00 $18.00 9 KWH Total 19,710 $0.00291 $57.36 | $0.02077 $409.38 10 KW 27 $15.00 $405.00 | $15.00 $405.00 11 KWH Fuel 19,710 $0.01975 $389.27 | ---------- | --------- --------- | 12 Load Factor 100% | --------- | 13 Total Bill $869.63 | $832.38 ========= | ========= | | ========= 14 Percent Decrease | 4.28% | ========= | Case No 2279 | Case No 2722 Line Unit Type Units Rates Extended | Rates Extended - -------- ------------------ --------- ------------ --------- | ------------------------- | 15 Customer 1 $18.00 $18.00 | $18.00 $18.00 16 KWH Total 14,783 $0.00291 $43.02 | $0.02077 $307.03 17 KW 27 $15.00 $405.00 | $15.00 $405.00 18 KWH Fuel 14,783 $0.01975 $291.95 | --------- --------- | --------- 19 Load Factor 75% | --------- | 20 Total Bill $757.97 | $730.03 ========= | ========= | | ========= 21 Percent Decrease | 3.69% | ========= | | Case No 2279 | Case No 2722 Line Unit Type Units Rates Extended | Rates Extended - -------- ------------------- -------- ------------ --------- | ------------------------- | 22 Customer 1 $18.00 $18.00 | $18.00 $18.00 23 KWH Total 9,855 $0.00291 $28.68 | $0.02077 $204.69 24 KW 27 $15.00 $405.00 | $15.00 $405.00 25 KWH Fuel 9,855 $0.01975 $194.64 | --------- | --------- --------- | 26 Load Factor 50% | --------- | 27 Total Bill $646.31 | $627.69 ========= | ========= | | ========= 28 Percent Decrease | 2.88% | ========= | | Case No 2279 | Case No 2722 Line Unit Type Units Rates Extended | Rates Extended - -------- ------------------ --------- ------------ --------- | ------------------------- | 29 Customer 1 $18.00 $18.00 | $18.00 $18.00 30 KWH Total 4,928 $0.00291 $14.34 | $0.02077 $102.34 31 KW 27 $15.00 $405.00 | $15.00 $405.00 32 KWH Fuel 4,928 $0.01975 $97.32 | --------- | --------- --------- | 33 Load Factor 25% | --------- | 34 Total Bill $534.66 | $525.34 ========= | ========= | | ========= 35 Percent Decrease | 1.74% | =========
EL PASO ELECTRIC COMPANY EXHIBIT 5 TYPICAL BILL COMPARISON LARGE POWER SERVICE RATE 9
Typical New Mexico Consumption Case No 2279 | Case No 2722 Line Unit Type Units Rates Extended | Rates Extended - --------- ------------------ ------------------ ---------------- ------------------| ------------------------------------ | 1 Customer 1 $100.00 $100.00 | $0.00 $0.00 2 KWH Total 322,899 $0.01000 $3,228.99 | $0.02803 $9,050.86 3 KW 684 $19.30 $13,201.20 | $19.30 $13,201.20 4 KWH Fuel 322,899 $0.01975 $6,377.26 | -------------- | --------------- 5 Load Factor 65% | 6 Total Bill $22,907.45 | $22,252.06 ============== | =============== 7 Percent Decrease | 2.86% | =============== | Typical New Mexico Consumption | Case No 2279 | Case No 2722 Line Unit Type Units Rates Extended | Rates Extended - --------- ------------------ ------------------ ---------------- ------------------| ------------------------------------ | 8 Customer 1 $100.00 $100.00 | $0.00 $0.00 9 KWH Total 499,320 $0.01000 $4,993.20 | $0.02803 $13,995.94 10 KW 684 $19.30 $13,201.20 | $19.30 $13,201.20 11 KWH Fuel 499,320 $0.01975 $9,861.57 | -------------- | --------------- ------------------ | 12 Load Factor 100% | ------------------ | 13 Total Bill $28,155.97 | $27,197.14 ============== | =============== 14 Percent Decrease | 3.41% | =============== | Case No 2279 | Case No 2722 Line Unit Type Units Rates Extended | Rates Extended - --------- ------------------ ------------------ ---------------- ------------------| ------------------------------------ | 15 Customer 1 $100.00 $100.00 | $0.00 $0.00 16 KWH Total 374,490 $0.01000 $3,744.90 | $0.02803 $10,496.95 17 KW 684 $19.30 $13,201.20 | $19.30 $13,201.20 18 KWH Fuel 374,490 $0.01975 $7,396.18 | -------------- | --------------- ------------------ | 19 Load Factor 75% | ------------------ | 20 Total Bill $24,442.28 | $23,698.15 ============== | =============== 21 Percent Decrease | 3.04% | =============== | Case No 2279 | Case No 2722 Line Unit Type Units Rates Extended | Rates Extended - --------- ------------------ ------------------ ---------------- ------------------| ------------------------------------ | 22 Customer 1 $100.00 $100.00 | $0.00 $0.00 23 KWH Total 249,660 $0.01000 $2,496.60 | $0.02803 $6,997.97 24 KW 684 $19.30 $13,201.20 | $19.30 $13,201.20 25 KWH Fuel 249,660 $0.01975 $4,930.79 | -------------- | --------------- ------------------ | 26 Load Factor 50% | ------------------ | 27 Total Bill $20,728.59 | $20,199.17 ============== | =============== 28 Percent Decrease | 2.55% | =============== | Case No 2279 | Case No 2722 Line Unit Type Units Rates Extended | Rates Extended - --------- ------------------ ------------------ ---------------- ------------------| ------------------------------------ | 29 Customer 1 $100.00 $100.00 | $0.00 $0.00 30 KWH Total 124,830 $0.01000 $1,248.30 | $0.02803 $3,498.98 31 KW 684 $19.30 $13,201.20 | $19.30 $13,201.20 32 KWH Fuel 124,830 $0.01975 $2,465.39 | -------------- | --------------- ------------------ | 33 Load Factor 25% | ------------------ | 34 Total Bill $17,014.89 | $16,700.18 ============== | =============== 35 Percent Decrease | 1.85% | ===============
EL PASO ELECTRIC COMPANY EXHIBIT 5 TYPICAL BILL COMPARISON MILITARY RESEARCH AND DEVELOPMENT RATE 10
Case No 2279 | Case No 2722 Line Unit Type Units Rates Extended | Rates Extended - --------- ----------------------- ---------------- --------------- --------------------- | ------------ ----------------- | 1 Customer 1 $510.00 $510.00 | $510.00 $510.00 2 KWH 5,051,000 $0.00400 $20,204.00 | $0.02111 $106,626.61 3 KWH O & M 5,051,000 $0.00400 $20,204.00 | $0.00257 $12,981.07 4 KW 10,424 $19.50 $203,268.00 | $19.50 $203,268.00 5 KWH Fuel 5,051,000 $0.01854 $93,645.54 | -------------- | ----------- 6 Load Factor 66% | | 7 Total Bill $337,831.54 | $323,385.68 ============== | =========== 8 Total Percent Decrease | 4.28% | ===========
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