-----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, PIW9k6nOk3yoTb02xkB/KxeQ47ficXN+aBhAqqof4pxBfMXeVlePtXN6QBDOtxuf LpG8IXwm8EMGJes78+dWYg== 0000930661-00-001271.txt : 20000516 0000930661-00-001271.hdr.sgml : 20000516 ACCESSION NUMBER: 0000930661-00-001271 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 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-Q SEC ACT: SEC FILE NUMBER: 000-00296 FILM NUMBER: 630678 BUSINESS ADDRESS: STREET 1: 303 N OREGON ST CITY: EL PASO STATE: TX ZIP: 79901 BUSINESS PHONE: 9155435711 10-Q 1 FORM 10-Q =============================================================================== Form 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------ (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000 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)
(915) 543-5711 (Registrant's telephone number, including area code) 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 Sections 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 --- --- As of May 5, 2000, there were 54,625,946 shares of the Company's no par value common stock outstanding. ================================================================================ EL PASO ELECTRIC COMPANY INDEX TO FORM 10-Q
Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets - March 31, 2000 and December 31, 1999.................... 1 Statements of Operations - Three Months and Twelve Months Ended March 31, 2000 and 1999............................................ 3 Statements of Comprehensive Operations - Three Months and Twelve Months Ended March 31, 2000 and 1999.............................. 4 Statements of Cash Flows - Three Months Ended March 31, 2000 and 1999................................................................. 5 Notes to Financial Statements............................................ 6 Independent Accountants' Review Report................................... 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................... 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 20 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................................. 21 Item 6. Exhibits and Reports on Form 8-K.................................. 21
i PART I. FINANCIAL INFORMATION Item 1. Financial Statements EL PASO ELECTRIC COMPANY BALANCE SHEETS
ASSETS March 31, (In thousands) 2000 December 31, (Unaudited) 1999 --------------- --------------- Utility plant: Electric plant in service............................................ $ 1,642,218 $ 1,626,224 Less accumulated depreciation and amortization....................... 349,861 329,165 --------------- --------------- Net plant in service............................................... 1,292,357 1,297,059 Construction work in progress........................................ 60,284 61,842 Nuclear fuel; includes fuel in process of $2,959 and $8,994, respectively............................................... 80,534 78,891 Less accumulated amortization........................................ 43,868 39,355 --------------- --------------- Net nuclear fuel................................................... 36,666 39,536 --------------- --------------- Net utility plant................................................ 1,389,307 1,398,437 --------------- --------------- Current assets: Cash and temporary investments....................................... 31,852 37,234 Accounts receivable, principally trade, net of allowance for doubtful accounts of $2,336 and $2,429, respectively............... 54,205 62,036 Inventories, at cost................................................. 25,548 25,963 Prepayments and other................................................ 7,083 8,832 --------------- --------------- Total current assets............................................. 118,688 134,065 --------------- --------------- Long-term contract receivable.......................................... 15,649 17,237 --------------- --------------- Deferred charges and other assets: Decommissioning trust fund........................................... 59,257 57,117 Other................................................................ 18,245 19,035 --------------- --------------- Total deferred charges and other assets.......................... 77,502 76,152 --------------- --------------- Total assets..................................................... $ 1,601,146 $ 1,625,891 =============== ===============
See accompanying notes to financial statements. 1 EL PASO ELECTRIC COMPANY BALANCE SHEETS (Continued)
CAPITALIZATION AND LIABILITIES March 31, (In thousands except for share data) 2000 December 31, (Unaudited) 1999 ------------ ----------- Capitalization: Common stock, stated value $1 per share, 100,000,000 shares authorized, 60,265,533 and 60,200,921 shares issued, and 272,522 and 258,788 restricted shares, respectively................... $ 60,538 $ 60,460 Capital in excess of stated value........................................... 243,358 242,702 Unearned compensation - restricted stock awards............................. (1,597) (1,149) Retained earnings........................................................... 151,731 143,724 Accumulated other comprehensive income (net unrealized gains on marketable securities), net of tax............................... 4,744 4,179 ------------ ----------- 458,774 449,916 Treasury stock, 5,917,433 and 3,199,927 shares, respectively; at cost....... (53,291) (28,658) ------------ ----------- Common stock equity....................................................... 405,483 421,258 Long-term debt.............................................................. 775,553 788,576 Financing and capital lease obligations..................................... 23,420 23,031 ------------ ----------- Total capitalization.................................................. 1,204,456 1,232,865 ------------ ----------- Current liabilities: Current maturities of long-term debt and financing and capital lease obligations................................................. 23,321 27,042 Accounts payable, principally trade......................................... 21,482 22,241 Litigation settlements payable.............................................. 17,500 16,500 Taxes accrued other than federal income taxes............................... 15,997 17,617 Interest accrued............................................................ 16,367 17,022 Net overcollection of fuel revenues......................................... 4,514 2,640 Other....................................................................... 14,040 12,946 ------------ ----------- Total current liabilities............................................. 113,221 116,008 ------------ ----------- Deferred credits and other liabilities: Decommissioning liability................................................... 122,679 120,875 Accrued postretirement benefit liability.................................... 81,309 81,176 Accrued pension liability................................................... 32,370 32,476 Accumulated deferred income taxes, net...................................... 17,478 12,503 Other....................................................................... 29,633 29,988 ------------ ----------- Total deferred credits and other liabilities.......................... 283,469 277,018 ------------ ----------- Commitments and contingencies Total capitalization and liabilities.................................. $ 1,601,146 $ 1,625,891 ============ =========== See accompanying notes to financial statements.
2 EL PASO ELECTRIC COMPANY STATEMENTS OF OPERATIONS (Unaudited) (In thousands except for share data)
Three Months Ended Twelve Months Ended March 31, March 31, ------------------------------ ----------------------------- 2000 1999 2000 1999 ------------ ----------- ----------- ----------- Operating revenues.................................. $ 138,045 $ 129,552 $ 578,962 $ 594,817 ----------- ----------- ----------- ----------- Energy expenses: Fuel.............................................. 27,110 22,062 109,446 106,030 Coal mine reclamation adjustment.................. - - (6,601) - Purchased and interchanged power.................. 3,489 752 14,737 18,198 ----------- ----------- ----------- ----------- 30,599 22,814 117,582 124,228 ----------- ----------- ----------- ----------- Operating revenues net of energy expenses........... 107,446 106,738 461,380 470,589 ----------- ----------- ----------- ----------- Other operating expenses: Other operations.................................. 33,561 31,065 137,092 134,934 Maintenance....................................... 8,343 8,914 35,736 35,667 New Mexico Settlement charge...................... - - - 6,272 Depreciation and amortization..................... 21,789 22,805 89,918 90,391 Taxes other than income taxes..................... 10,961 11,280 41,180 44,252 ----------- ----------- ----------- ----------- 74,654 74,064 303,926 311,516 ----------- ----------- ----------- ----------- Operating income.................................... 32,792 32,674 157,454 159,073 ----------- ----------- ----------- ----------- Other income (deductions): Investment income................................. 781 3,079 4,630 13,291 Litigation settlements............................ (1,000) - (17,500) - Settlement of bankruptcy professional fees........ - - - 885 Other, net........................................ (863) (563) 2,466 (1,408) ----------- ----------- ----------- ----------- (1,082) 2,516 (10,404) 12,768 ----------- ----------- ----------- ----------- Income before interest charges...................... 31,710 35,190 147,050 171,841 ----------- ----------- ----------- ----------- Interest charges (credits): Interest on long-term debt........................ 16,572 19,155 74,051 79,786 Other interest.................................... 1,810 2,037 7,470 7,470 Interest capitalized.............................. (881) (1,704) (2,419) (6,483) ----------- ----------- ----------- ----------- 17,501 19,488 79,102 80,773 ----------- ----------- ----------- ----------- Income before income taxes.......................... 14,209 15,702 67,948 91,068 Income tax expense.................................. 5,649 6,240 25,041 35,048 ----------- ----------- ----------- ----------- Income before extraordinary items................... 8,560 9,462 42,907 56,020 ----------- ----------- ----------- ----------- Extraordinary items: Extraordinary loss on repurchases of debt, net of income tax benefit............................. (553) - (3,889) - Extraordinary gain on discharge of debt, net of income tax expense............................. - - - 3,343 ----------- ----------- ----------- ----------- Net income.......................................... 8,007 9,462 39,018 59,363 Preferred stock: Dividend requirements............................. - 2,616 - 13,800 Redemption costs.................................. - 9,571 10 9,571 ----------- ----------- ----------- ----------- Net income (loss) applicable to common stock........ $ 8,007 $ (2,725) $ 39,008 $ 35,992 =========== =========== =========== =========== Basic earnings (loss) per common share: Income (loss) before extraordinary items.......... $ 0.155 $ (0.045) $ 0.740 $ 0.542 Extraordinary loss on repurchases of debt, net of income tax benefit............................. (0.010) - (0.067) - Extraordinary gain on discharge of debt, net of income tax expense............................. - - - 0.056 ----------- ----------- ----------- ----------- Net income (loss).............................. $ 0.145 $ (0.045) $ 0.673 $ 0.598 =========== =========== =========== =========== Diluted earnings (loss) per common share: Income (loss) before extraordinary items.......... $ 0.153 $ (0.045) $ 0.733 $ 0.539 Extraordinary loss on repurchases of debt, net of income tax benefit............................. (0.010) - (0.066) - Extraordinary gain on discharge of debt, net of income tax expense............................. - - - 0.055 ----------- ----------- ----------- ----------- Net income (loss).............................. $ 0.143 $ (0.045) $ 0.667 $ 0.594 =========== =========== =========== =========== Weighted average number of common shares outstanding....................................... 55,299,922 60,209,960 57,994,205 60,179,129 =========== =========== =========== =========== Weighted average number of common shares and dilutive potential common shares outstanding...... 55,812,310 60,209,960 58,504,483 60,574,819 =========== =========== =========== ===========
See accompanying notes to financial statements. 3 EL PASO ELECTRIC COMPANY STATEMENTS OF COMPREHENSIVE OPERATIONS (Unaudited) (In thousands)
Three Months Ended Twelve Months Ended March 31, March 31, ----------------------------- ----------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- Net income.............................. $ 8,007 $ 9,462 $ 39,018 $ 59,363 Other comprehensive income: Net unrealized gains on marketable securities, less applicable income tax expense of $304, $344, $1,618 and $821, respectively............... 565 638 3,005 1,526 ----------- ----------- ----------- ----------- Comprehensive income.................... 8,572 10,100 42,023 60,889 Preferred stock: Dividend requirements.................. - 2,616 - 13,800 Redemption costs....................... - 9,571 10 9,571 ----------- ----------- ----------- ----------- Comprehensive income (loss) applicable to common stock........................ $ 8,572 $ (2,087) $ 42,013 $ 37,518 =========== =========== =========== ===========
See accompanying notes to financial statements. 4 EL PASO ELECTRIC COMPANY STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Three Months Ended March 31, -------------------------------- 2000 1999 -------- -------- Cash Flows From Operating Activities: Net income........................................................ $ 8,007 $ 9,462 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................................... 21,789 22,805 Amortization of nuclear fuel.................................... 4,513 5,502 Deferred income taxes, net...................................... 5,023 5,678 Provision for rate refund....................................... - 5,855 Extraordinary loss on repurchases of debt, net of income tax benefit........................................... 553 - Other operating activities...................................... 1,441 1,428 Change in: Accounts receivable............................................. 7,831 12,964 Inventories..................................................... 415 511 Prepayments and other........................................... 1,749 9,029 Long-term contract receivable................................... 1,588 1,436 Accounts payable................................................ (759) (14,633) Taxes accrued other than federal income taxes................... (1,620) (1,312) Interest accrued................................................ (655) (1,345) Net overcollection of fuel revenues............................. 1,874 (450) Other current liabilities....................................... 2,094 (1,422) Deferred charges and credits.................................... 1,521 44 ---------- ------------ Net cash provided by operating activities..................... 55,364 55,552 ---------- ------------ Cash Flows From Investing Activities: Cash additions to utility property, plant and equipment........... (15,250) (14,506) Cash additions to nuclear fuel.................................... (1,488) (2,114) Interest capitalized: Utility property, plant and equipment........................... (726) (801) Nuclear fuel.................................................... (155) (903) Investment in decommissioning trust fund.......................... (1,271) (1,305) Other investing activities........................................ 57 (141) ---------- ------------ Net cash used for investing activities........................ (18,833) (19,770) ---------- ------------ Cash Flows From Financing Activities: Treasury stock purchases.......................................... (24,633) - Repurchases of and payments on long-term debt..................... (13,734) (36,034) Nuclear fuel financing obligations: Proceeds........................................................ 2,308 3,017 Payments........................................................ (4,800) (5,223) Redemption of preferred stock..................................... - (148,927) Preferred stock dividend payment.................................. - (1,328) Payments on capital lease obligations............................. (841) (803) Other financing activities........................................ (213) (90) ---------- ------------ Net cash used for financing activities........................ (41,913) (189,388) ---------- ------------ Net decrease in cash and temporary investments...................... (5,382) (153,606) Cash and temporary investments at beginning of period............... 37,234 229,150 ---------- ------------ Cash and temporary investments at end of period..................... $ 31,852 $ 75,544 ========== ============
See accompanying notes to financial statements. 5 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENT (Unaudited) A. Principles of Preparation Pursuant to the rules and regulations of the Securities and Exchange Commission, certain financial information has been condensed and certain footnote disclosures have been omitted. Such information and disclosures are normally included in financial statements prepared in accordance with generally accepted accounting principles. These condensed financial statements should be read in conjunction with the financial statements and notes thereto in the Annual Report of El Paso Electric Company (the "Company") on Form 10-K for the year ended December 31, 1999 (the "1999 Form 10-K"). Capitalized terms used in this report and not defined herein have the meaning ascribed for such terms in the 1999 Form 10-K. In the opinion of management of the Company, the accompanying financial statements contain all adjustments necessary to present fairly the financial position of the Company at March 31, 2000 and December 31, 1999; the results of operations for the three and twelve months ended March 31, 2000 and 1999; and cash flows for the three months ended March 31, 2000 and 1999. The results of operations for the three and twelve months ended March 31, 2000 and the cash flows for the three months ended March 31, 2000, are not necessarily indicative of the results to be expected for the full calendar year. Based on a provision in the Texas Restructuring Law allowing recovery of nuclear decommissioning costs over the lives of nuclear plants, the Company changed the estimated useful life of the plant investment related to the decommissioning of Palo Verde. Previously, this decommissioning portion of Palo Verde plant costs had been depreciated over 10 years. The change in the estimated useful life for the Texas jurisdiction resulted in a decrease in depreciation expense and an increase in net income of $0.8 million, net of tax, or $0.01 diluted earnings per common share for the quarter ended March 31, 2000. Supplemental Cash Flow Disclosures (In thousands)
Three Months Ended March 31, ------------------------------------ 2000 1999 ---------------- --------------- Cash paid for: Interest on long-term debt (1)................... $ 16,507 $ 19,339 Other interest................................... 28 470 Non-cash investing and financing activities: Grants of restricted shares of common stock................................. 924 1,123 Issuance of preferred stock for pay-in-kind dividend......................... - 3,867
- -------------------- (1) Includes interest on bonds, letter of credit fees related to bonds, and interest on nuclear fuel financing net of amounts capitalized. 6 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (Unaudited) 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:
Three Months Ended March 31, -------------------------------------------------------------------------- 2000 1999 ---------------------------------- ------------------------------------- Per Per Common Income Common Income Shares Share (Loss) Shares Share ------------- ---------- ------- ------------- ---------- --------- (In thousands) (In thousands) Income before extraordinary item..... $ 8,560 $ 9,462 Less: Preferred stock: Dividend requirements............ - 2,616 Redemption costs................. - 9,571 ------------- ------------- Basic earnings per common share: Income (loss) before extraordinary item applicable to common stock.............................. 8,560 55,299,922 $ 0.155 (2,725) 60,209,960 $ (0.045) ======= ========= Effect of dilutive securities: Unvested restricted stock........... - 20,116 - - Stock options....................... - 492,272 - - ------------- ---------- ------------- ---------- Diluted earnings per common share: Income (loss) before extraordinary item applicable to common stock.............................. $ 8,560 55,812,310 $ 0.153 $ (2,725) 60,209,960 $ (0.045) ============= ========== ======= ============= ========== =========
Twelve Months Ended March 31, -------------------------------------------------------------------------- 2000 1999 ---------------------------------- ------------------------------------- Per Per Common Common Income Shares Share Income Shares Share ------------- ---------- ------- ------------- ---------- --------- (In thousands) (In thousands) Income before extraordinary items.... $ 42,907 $ 56,020 Less: ------------- Preferred stock: Dividend requirements............ - 13,800 Redemption costs................. 10 9,571 ------------- ------------- Basic earnings per common share: Income before extraordinary items applicable to common stock.............................. 42,897 57,994,205 $ 0.740 32,649 60,179,129 $ 0.542 ======= ========= Effect of dilutive securities: Unvested restricted stock........... - 37,758 - 26,685 Stock options....................... - 472,520 - 369,005 ------------- ---------- ------------- ---------- Diluted earnings per common share: Income before extraordinary items applicable to common stock.............................. $ 42,897 58,504,483 $ 0.733 $ 32,649 60,574,819 $ 0.539 ============= ========== ======= ============= ========== =========
7 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (Unaudited) Options that were excluded from the computation of diluted earnings per common share because the options' exercise price was greater than the average market price of the common shares for the period are listed below: 1) 60,000 options granted May 29, 1998 at an exercise price of $9.50 were excluded for the second through fourth quarters of 1998, all of 1999 and the first quarter of 2000. 2) 100,000 options granted January 11, 1999 at an exercise price of $8.75 were excluded for the first and second quarters of 1999. 3) 42,432 options granted January 1, 2000 at an exercise price of $9.81 were excluded for the first quarter of 2000. 4) 50,000 options granted March 15, 2000 at an exercise price of $9.50 were excluded for the first quarter of 2000. B. Regulation For a full discussion of the Company's regulatory matters, see Note B of Notes to Financial Statements in the 1999 Form 10-K. Texas Regulatory Matters The Texas Restructuring Law specifically recognizes and preserves the substantial benefits the Company bargained for in its Texas Rate Stipulation and Texas Settlement Agreement. The Texas Restructuring Law exempts the Company's Texas service area from retail competition, and preserves rates at their current levels until the end of the Company's Freeze Period. At the end of the Freeze Period, the Company will be subject to retail competition and will have no further claim for recovery of stranded costs or costs of transition to competition. The Company believes that its continued ability to provide bundled electric service at current rates in its Texas service area will allow the Company to collect its Texas jurisdictional stranded costs and costs of transition to competition. The Company will recover its current decommissioning cost estimates through its existing rates during the Freeze Period, and thereafter under the provisions of the Texas Restructuring Law. The rate freeze under the Texas Rate Stipulation and the rate reduction under the Texas Settlement Agreement preclude the Company from seeking a rate increase in Texas to recover increases in the decommissioning cost estimates during the Freeze Period. Although the Company is not subject to the Texas restructuring requirements until the expiration of the Freeze Period, the Company is subject to the restructuring requirements of the New Mexico Restructuring Law. See "New Mexico Regulatory Matters" below. New Mexico Regulatory Matters The New Mexico Restructuring Law requires the Company to reorganize its present corporate structure, separating its power generation and energy services businesses, which will become competitive, 8 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (Unaudited) from its transmission and distribution business, which will remain regulated. On March 1, 2000, the Company filed the first phase of its transition plan ("Transition Plan-Phase I") with the New Mexico Commission, requesting approval of the Company's proposed corporate reorganization under the New Mexico Restructuring Law. The Company initially proposed to separate its current operations into a power generation subsidiary, a transmission and distribution subsidiary, and an energy services subsidiary, all owned and controlled by a common holding company. On May 2, 2000, the Company filed an amendment to its Transition Plan-Phase I with the New Mexico Commission, requesting approval to create a separate administrative and corporate support services subsidiary, which will also be owned and controlled by the common holding company. The Company will file its Transition Plan-Phase II by June 1, 2000, detailing the Company's proposed processes and procedures to implement customer choice, including the Company's proposal for recovery of stranded costs, in New Mexico. Under the New Mexico Restructuring Law, retail customer choice is currently scheduled to begin January 1, 2001 for public post-secondary educational institutions, public schools and residential and small business customers. The Company believes the New Mexico Commission may delay the start of competition, but cannot predict the length of such delay, if any. C. Common Stock Repurchase Program In May 1999, the Company's Board of Directors approved a stock repurchase program allowing the Company to purchase up to six million of its outstanding shares of common stock. As of March 31, 2000, the Company had repurchased approximately 5.9 million shares of common stock for approximately $53.3 million, including commissions. On March 23, 2000, the Company's Board of Directors authorized a new stock repurchase program under which the Company may purchase up to an additional six million shares. The Company will make purchases primarily in the open market at prevailing prices and will also engage in private transactions, if appropriate. As with the initial program, any repurchased shares will be available for issuance under employee benefit and stock option plans, or may be retired. D. Commitments and Contingencies For a full discussion of commitments and contingencies, including environmental matters related to the Company, see Note H of Notes to Financial Statements in the 1999 Form 10-K. In addition, see Note C of Notes to Financial Statements in the 1999 Form 10-K regarding matters related to Palo Verde, including decommissioning, spent fuel storage, disposal of low-level radioactive waste and liability and insurance matters. Environmental Matters The Company is subject to regulation with respect to air, soil and water quality, solid waste disposal and other environmental matters by federal, state and local authorities. These authorities govern current facility operations and exercise continuing jurisdiction over facility modifications. Environmental regulations can change rapidly and are difficult to predict. Substantial expenditures may 9 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (Unaudited) be required to comply with these regulations. The Company analyzes the costs of its obligations arising from environmental matters on an ongoing basis, and management believes it has made adequate provision in its financial statements to meet such obligations. However, unforeseen expenses associated with compliance could have a material adverse effect on the future operations and financial condition of the Company. E. Litigation Litigation with Las Cruces On February 24, 2000, the Company and Las Cruces entered into a settlement agreement ending Las Cruces' efforts to municipalize the Company's distribution assets and other facilities used to provide electric service to customers in Las Cruces. On May 3, 2000, the Company and Las Cruces signed the final written settlement agreement. On May 4, 2000, the Company paid Las Cruces a one-time lump sum payment of $21 million, $16.5 million of which was expensed in the fourth quarter of 1999. The remaining $4.5 million related to the transfer of Las Cruces' West Mesa Substation and related facilities to the Company. The Company financed a portion of the payment by a draw of $10 million on its line of credit. Under the settlement agreement, Las Cruces and the Company entered into a seven-year franchise agreement with a 2% annual franchise fee (approximately $0.8 million per year currently) for the provision of electric distribution service. This franchise agreement will expire on April 30, 2007. Las Cruces is prohibited during this seven-year period from taking any action to condemn or otherwise attempt to acquire the Company's distribution system, or attempt to operate or build its own electric distribution system. Las Cruces will have a 90-day non-assignable option at the end of the Company's seven-year franchise agreement to purchase the portion of the Company's distribution system that serves Las Cruces at a purchase price of 130% of the Company's book value of those facilities at that time. If Las Cruces exercises this option, it is prohibited from reselling the distribution assets for two years. If Las Cruces does not exercise this option, the franchise and standstill agreements are automatically extended for an additional two years. Las Cruces also agreed that it will not contest the calculation of the Company's stranded costs in New Mexico, to the extent that the stranded costs charged to Las Cruces customers do not exceed the $52.9 million amount declining over time, as initially ordered by the FERC in the Las Cruces stranded cost proceeding. Las Cruces also assigned all of its existing customer contracts to the Company on May 3, 2000. Under the terms of the settlement agreement, all existing litigation between the Company and Las Cruces, including all litigation pending before the FERC and the Federal District Court of New Mexico, will be dismissed. 10 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (Unaudited) Four Corners In July 1995, the Navajo Nation enacted the Navajo Nation Air Pollution Prevention and Control Act, the Navajo Nation Safe Drinking Water Act and the Navajo Nation Pesticide Act (collectively, the "Acts"). In October 1995, the Four Corners participants requested that the United States Secretary of the Interior resolve their dispute with the Navajo Nation regarding whether the Acts apply to operation of Four Corners. The Four Corners participants subsequently filed a lawsuit in the District Court of the Navajo Nation, Window Rock District, seeking, among other things, a declaratory judgment that (i) the Four Corners leases and federal easements preclude the application of the Acts to the operation of Four Corners and (ii) the Navajo Nation and its agencies and courts lack adjudicatory jurisdiction to determine the enforceability of the Acts as applied to Four Corners. In October 1995, the Navajo Nation and the Four Corners participants agreed to stay the proceedings indefinitely so the parties may attempt to resolve the dispute without litigation. This matter remains inactive and the Company is unable to predict the outcome of this case. Water Cases San Juan River System. The Four Corners participants are among the defendants in a suit filed by the State of New Mexico in 1975 in state district court in New Mexico against the United States of America, the City of Farmington, New Mexico, the Secretary of the Interior as Trustee for the Navajo Nation and other Indian tribes and certain other defendants (State of New Mexico ex rel. S. E. Reynolds, New Mexico State Engineer v. United States of America, et al., Eleventh Judicial District Court, County of San Juan, State of New Mexico, Cause No. 75-184). The suit seeks adjudication of the water rights of the San Juan River Stream System in New Mexico, which, among other things, supplies the water used at Four Corners. An agreement reached with the Navajo Nation in 1985 provides that if Four Corners loses a portion of its water rights in the adjudication, the tribe will provide sufficient water from its allocation to offset the loss. The case has been inactive for many years and the Company is unable to predict the outcome of this case. Gila River System. In connection with the construction and operation of Palo Verde, APS entered into contracts with certain municipalities granting APS the right to purchase effluent for cooling purposes at Palo Verde. In 1986, a summons was served on APS that required all water claimants in the Lower Gila River Watershed in Arizona to assert any claims to water in an action pending in Maricopa County Superior Court, titled In re The General Adjudication of All Rights to Use Water in the Gila River System and Source. Palo Verde is located within the geographic area subject to the summons and the rights of the Palo Verde Participants to the use of groundwater and effluent at Palo Verde is potentially at issue in this action. APS, as operating agent, filed claims that dispute the Court's jurisdiction over the Palo Verde Participants' groundwater rights and their contractual rights to effluent relating to Palo Verde and, alternatively, seek confirmation of such rights. In November 1999, the Arizona Supreme Court issued a decision confirming that certain groundwater rights may be available to the federal government and Indian tribes. APS and other parties have petitioned the United States Supreme Court for review of this decision. The Company is unable to predict the outcome of this case. 11 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (Unaudited) Other Legal Proceedings Subsequent to March 31, 2000, the Company settled two personal injury lawsuits requiring the Company to pay $0.5 million in each case. In one of the cases, however, the Company is seeking to recover its $0.5 million payment from a co-defendant in this case. The Company is a party to various other claims, legal actions and complaints. In many of these matters, the Company has excess casualty liability insurance which is applicable. Based upon a review of these claims and applicable insurance coverage, the Company believes that none of these claims will have a material adverse effect on the financial position, results of operations and cash flows of the Company. 12 Independent Accountants' Review Report -------------------------------------- The Shareholders and the Board of Directors El Paso Electric Company: We have reviewed the accompanying condensed balance sheet of El Paso Electric Company (the Company) as of March 31, 2000, the related condensed statements of operations and comprehensive operations for the three months and twelve months ended March 31, 2000 and 1999, and the related condensed statements of cash flows for the three months ended March 31, 2000 and 1999. These condensed financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet of El Paso Electric Company as of December 31, 1999, and the related statements of operations, comprehensive operations, changes in common stock equity and cash flows for the year then ended (not presented herein); and in our report dated February 11, 2000, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed balance sheet as of December 31, 1999, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. KPMG LLP El Paso, Texas May 4, 2000 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The information contained in this Item 2 updates, and should be read in conjunction with, the information set forth in Part II, Item 7 of the Company's 1999 Form 10-K. Statements in this document, other than statements of historical information, are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, as well as other oral and written forward-looking statements made by or on behalf of the Company from time to time, including statements contained in the Company's filings with the Securities and Exchange Commission and its reports to shareholders, involve known and unknown risks and other factors which may cause the Company's actual results in future periods to differ materially from those expressed in any forward-looking statements. Any such statement is qualified by reference to the risks and factors discussed below under the headings "Overview" and "Liquidity and Capital Resources," as well as in the Company's other filings with the Securities and Exchange Commission, which are available from the Securities and Exchange Commission or which may be obtained upon request from the Company. The Company cautions that the risks and factors discussed below and in such filings are not exclusive. The Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company. Overview El Paso Electric Company is an electric utility that serves retail customers in west Texas and southern New Mexico and wholesale customers in Texas, New Mexico, California and Mexico. The Company owns or has substantial ownership interests in five electrical generating facilities providing it with a total capacity of approximately 1,500 MW. The Company's energy sources consist of nuclear fuel, natural gas, coal and purchased power. The Company owns or has significant ownership interests in four major 345 kV transmission lines and three 500 kV lines to provide power from Palo Verde, and owns the distribution network within its retail service territory. The Company is subject to extensive regulation by the Texas and New Mexico Commissions and, with respect to wholesale power sales, transmission of electric power and the issuance of securities, by the FERC. The Company faces a number of risks and challenges that could negatively impact its operations and financial results. The most significant of these risks and challenges arise from the deregulation of the electric utility industry, the possibility of increased costs, especially from Palo Verde, and the Company's high level of debt. The electric utility industry in general and the Company in particular are facing significant challenges and increased competition as a result of changes in federal provisions relating to third-party transmission services and independent power production, as well as changes in state laws and regulatory provisions relating to wholesale and retail service. In 1999 both Texas and New Mexico passed legislation requiring the Company to separate its transmission and distribution functions from its generation business and mandating competition in the Company's retail service territory in the future. The Company faces certain risks inherent in separating the Company into affiliates, including the possible loss of operational and administrative efficiencies. In addition to the operational challenges created by separating functions that have historically operated within a single entity, there is substantial uncertainty as to whether the New Mexico legislation will effectively permit the Company to recover its 14 stranded costs, including the costs of decommissioning, in full. The potential effects of deregulation are particularly important to the Company because its rates are significantly higher than the national and regional averages. In the face of increased competition, there can be no assurance that this competition will not adversely affect the future operations, cash flows and financial condition of the Company. The changing regulatory environment and the advent of customer choice have created a substantial risk that the Company will lose important customers. The Company's wholesale and large retail customers already have, in varying degrees, additional alternate sources of economical power, including co-generation of electric power. For example, a 504 MW combined-cycle generating plant located in Samalayuca, Chihuahua, Mexico, which became fully operational at the end of 1998, gave CFE the capacity to supply electricity to portions of northern Chihuahua and allowed CFE to eliminate substantially all purchases of power from the Company in 1999 and the first quarter of 2000. However, the CFE recently agreed to purchase from the Company firm capacity and associated energy sales of up to 80 MW from June 1, 2000 to August 31, 2000 and firm capacity and associated energy sales of up to 100 MW from May 1, 2001 to September 30, 2001. Additionally, American National Power, Inc., a wholly-owned subsidiary of National Power PLC, has announced it is exploring the possibility of building a generation plant in El Paso, Texas. If the Company loses a significant portion of its retail customer base or wholesale sales, the Company may not be able to replace such revenues through either the addition of new customers or an increase in rates to remaining customers. Another risk to the Company is potential increased costs, including the risk of additional or unanticipated costs at Palo Verde resulting from (i) increases in operation and maintenance expenses; (ii) the replacement of steam generators; (iii) an extended outage of any of the Palo Verde units; (iv) increases in estimates of decommissioning costs; (v) the storage of radioactive materials; and (vi) compliance with the various requirements and regulations governing commercial nuclear generating stations. At the same time, the Company's rates, which have been reduced from previous levels as a result of the New Mexico Settlement Agreement and the Texas Settlement Agreement, are effectively capped through the rate freeze periods. Additionally, upon initiation of competition, there will be competitive pressure on the Company's power generation rates. The Company cannot assure that its revenues will be sufficient to recover any increased costs, including any increased costs in connection with Palo Verde or other operations, whether as a result of higher than anticipated levels of inflation, changes in tax laws or regulatory requirements, or other causes. Liquidity and Capital Resources The Company's principal liquidity requirements in the near-term are expected to consist of interest and principal payments on the Company's indebtedness, capital expenditures related to the Company's generating facilities and transmission and distribution systems, and include the $21 million payment made under the settlement agreement with Las Cruces. The Company expects that cash flows from operations will generally be sufficient for such purposes, except that it has drawn $10 million on its line of credit to finance a portion of the Las Cruces payment in the short-term. Long-term capital requirements of the Company will consist primarily of construction of electric utility plant and payment of interest on and retirement of debt. The Company has no current plans to construct any new generating capacity to serve retail load through at least 2004. Utility construction expenditures will consist primarily of expanding and updating the transmission and distribution systems and the cost of capital improvements and replacements at Palo Verde and other generating facilities, including the replacement of the Palo Verde Unit 2 steam generators. 15 At March 31, 2000, the Company had approximately $31.9 million in cash and cash equivalents. The Company also has a $100 million revolving credit facility, which 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 March 31, 2000, approximately $45.8 million had been drawn for nuclear fuel purchases. On May 2, 2000, $10 million was drawn to pay a portion of the Las Cruces settlement payment. Otherwise no amounts have ever been drawn on this facility for working capital needs. The Company anticipates repaying the $10 million drawn on the facility by the end of the second quarter. The Company has a high debt to capitalization ratio and significant debt service obligations. Due to the Texas Rate Stipulation, the Texas Settlement Agreement, the New Mexico Settlement Agreement and competitive pressures, the Company does not expect to be able to raise its base rates in the event of increases in non-fuel costs, increases in fuel costs in New Mexico or loss of revenues. Accordingly, as described below, debt reduction continues to be a high priority for the Company in order to gain additional financial flexibility to address the evolving competitive market. The Company has significantly reduced its long-term debt since its emergence from bankruptcy in 1996. From June 1, 1996 through May 5, 2000, the Company repurchased approximately $337.8 million of first mortgage bonds as part of an aggressive deleveraging program. Common stock equity as a percentage of capitalization, excluding current maturities of long-term debt, has increased from 19% at June 30, 1996 to 34% at March 31, 2000. In addition, the Company's bonds are now rated investment grade by all four major credit rating agencies. In May 1999, the Company's Board of Directors approved a stock repurchase program allowing the Company to purchase up to six million of its outstanding shares of common stock. As of May 5, 2000, the Company had repurchased approximately 5.9 million shares of common stock for approximately $53.9 million, including commissions. On March 23, 2000, the Company's Board of Directors authorized a new stock repurchase program under which the Company may purchase up to an additional six million shares. The Company will make purchases primarily in the open market at prevailing prices and will also engage in private transactions, if appropriate. As with the initial program, any repurchased shares will be available for issuance under employee benefit and stock option plans or may be retired. The Company continues to believe that the orderly reduction of debt with a goal of achieving a capital structure that is more typical in the electric utility industry is a significant component of long-term shareholder value creation. Accordingly, the Company will regularly evaluate market conditions and, when appropriate, use a portion of its available cash to reduce its fixed obligations through open market purchases of first mortgage bonds. The degree to which the Company is leveraged could have important consequences on the Company's liquidity, including (i) the Company's ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate or other purposes could be limited in the future and (ii) the Company's higher than average leverage may place the Company at a competitive disadvantage by limiting its financial flexibility to respond to the demands of the competitive market and make it more vulnerable to adverse economic or business changes. 16 Historical Results of Operations
Income (Loss) Diluted Earnings Before Extraordinary (Loss) Before Items Applicable to Extraordinary Items Common Stock Per Common Share -------------------------- -------------------------- 2000 1999 2000 1999 ---------- --------- ---------- --------- (In thousands) Three Months Ended March 31................... $ 8,560 $ (2,725) $ 0.153 $ (0.045) Twelve Months Ended March 31.................. 42,897 32,649 0.733 0.539
Results of operations for the twelve months ended March 31, 2000 were affected by the following unusual or infrequent items: (i) an adjustment of $4.0 million, net of tax, reducing fuel expense based on a reduction of the Company's estimated coal mine reclamation liability; (ii) a charge to earnings of $10.1 million, net of tax, as a result of the settlement agreement with Las Cruces; and (iii) a one-time charge to earnings of $2.5 million, net of tax, resulting from the write-off of interest capitalized prior to 1999 on postload nuclear fuel. Results of operations for the three and twelve months ended March 31, 1999 were affected by the following unusual or infrequent items: (i) the recognition of certain items arising from the Texas Settlement Agreement; (ii) a change in estimated fuel cost reserves; and (iii) the early redemption of the Company's 11.40% Series A Preferred Stock. The results of operations for the twelve months ended March 31, 1999 were also affected by a charge to earnings of $3.8 million, net of tax, as a result of the New Mexico Settlement Agreement. Operating revenues net of energy expenses increased $0.7 million and decreased $9.2 million for the three and twelve months ended March 31, 2000, respectively, compared to the same periods last year, as follows (in thousands):
Three Months Ended March 31: 2000 1999 Increase/(Decrease) - ---------------------------- ---- ---- ------------------- Operating revenues net of energy expenses before the effects of the Texas Settlement Agreement and a change in estimated fuel cost reserves...................... $ 107,446 $ 101,874 $ 5,572 Texas Settlement Agreement: Palo Verde performance reward........... - 3,453 (3,453) Retroactive base rate decrease.......... - (2,343) 2,343 Change in estimated fuel cost reserves.... - 3,754 (3,754) ---------- ---------- ---------- Total operating revenues net of energy expenses.................. $ 107,446 $ 106,738 $ 708 ========== ========== ==========
Twelve Months Ended March 31: 2000 1999 Increase/(Decrease) - ----------------------------- ---- ---- ------------------- Operating revenues net of energy expenses before the effects of the Texas Settlement Agreement, a change in estimated fuel cost reserves and coal mine reclamation adjustment.............................. $ 454,779 $ 462,487 $ (7,708) Texas Settlement Agreement: Palo Verde performance reward........... - 3,453 (3,453) Change in estimated fuel cost reserves.... - 4,649 (4,649) Coal mine reclamation adjustment.......... 6,601 - 6,601 ---------- ---------- ---------- Total operating revenues net of energy expenses.................. $ 461,380 $ 470,589 $ (9,209) ========== ========== =========
17 Excluding the effects of the unusual or infrequent items shown above, the three month increase of $5.6 million was primarily due to increased kWh sales and increased economy sales at higher margins. Excluding the effects of the unusual or infrequent items shown above, the twelve month decrease of $7.7 million was primarily due to the rate reductions in Texas and New Mexico and the December 1998 termination of the sales agreement with CFE. These decreases were partially offset by increased economy sales at higher margins and increased ESBG revenues. Operating revenues from retail customers shown below include the effects of the Texas Settlement Agreement and a change in estimated fuel cost reserves for the three and twelve month periods ended March 31, 1999. Comparisons of kWh sales and operating revenues are shown below (in thousands):
Three Months Ended March 31: 2000 1999 Increase/(Decrease) - ---------------------------- ---- ---- ------------------- Amount Percent ------ ------- Electric kWh sales: Retail.................................. 1,340,181 1,322,512 17,669 1.3% Sales for resale........................ 271,730 147,260 124,470 84.5 (1) Economy sales........................... 605,882 466,976 138,906 29.7 (2) ---------- ---------- -------- Total.................................. 2,217,793 1,936,748 281,045 14.5 ========== ========== ======== Operating revenues: Retail.................................. $ 110,365 $ 110,829 (3) $ (464) (0.4)% Sales for resale........................ 12,911 10,645 2,266 21.3 (1) Economy sales........................... 14,769 8,078 6,691 82.8 (2) ---------- ---------- --------- Total.................................. $ 138,045 $ 129,552 $ 8,493 6.6 ========== ========== =========
Twelve Months Ended March 31: 2000 1999 Increase/(Decrease) - ----------------------------- ---- ---- ------------------- Amount Percent ------ ------- Electric kWh sales: Retail.................................. 5,883,837 5,944,659 (60,822) (1.0)% Sales for resale........................ 1,030,445 1,445,806 (415,361) (28.7) (4) Economy sales........................... 1,636,786 1,148,583 488,203 42.5 (2) ---------- ---------- --------- Total.................................. 8,551,068 8,539,048 12,020 0.1 ========== ========== ========= Operating revenues: Retail.................................. $ 488,041 $ 499,250 (3) $ (11,209) (2.2)% Sales for resale........................ 51,707 70,697 (18,990) (26.9) (4) Economy sales........................... 39,214 24,870 14,344 57.7 (2) ---------- ---------- --------- Total.................................. $ 578,962 $ 594,817 $ (15,855) (2.7) ========== ========== =========
- -------------------- (1) Due to increased kWh sales to IID. (2) During the first quarter the Company entered into a firm purchase power contract which ends December 2000, in anticipation of a major generating plant overhaul in the summer. The increase in economy sales is partially due to the sale of power purchased under this contract which was not needed to serve native load in the first quarter. (3) Includes the effects of the Texas Settlement Agreement and changes in estimated fuel cost reserves of $4,864 and $8,102 for the three and twelve months ended March 31, 1999, respectively. (4) Due to the December 1998 termination of the sales agreement with CFE partially offset by increased kWh sales to IID. 18 The CFE recently agreed to purchase from the Company firm capacity and associated energy sales of up to 80 MW from June 1, 2000 to August 31, 2000 and firm capacity and associated energy sales of up to 100 MW from May 1, 2001 to September 30, 2001. Other operations and maintenance expense increased $1.9 million for the three months ended March 31, 2000 compared to the same period last year, as follows (in thousands):
Three Months Ended March 31: 2000 1999 Increase/(Decrease) - ---------------------------- ---- ---- ------------------- Palo Verde................................ $ 11,793 $ 10,575 $ 1,218 ESBG activity............................. 1,186 432 754 Regulatory and outside services........... 2,595 1,880 715 Pensions and benefits..................... 4,264 5,183 (919) (1) Other..................................... 22,066 21,909 157 ---------- ---------- ---------- Total other operations and maintenance expense................. $ 41,904 $ 39,979 $ 1,925 ========== ========== ==========
Other operations and maintenance expense increased $2.2 million for the twelve months ended March 31, 2000 compared to the same period last year, as follows (in thousands):
Twelve Months Ended March 31: 2000 1999 Increase/(Decrease) - ----------------------------- ---- ---- ------------------- Palo Verde................................ $ 50,122 $ 47,776 $ 2,346 Customer accounts expense................. 5,006 3,200 1,806 (2) ESBG activity............................. 3,760 2,622 1,138 Pensions and benefits..................... 14,678 19,770 (5,092) (1) Other..................................... 99,262 97,233 2,029 ---------- ---------- --------- Total other operations and maintenance expense................. $ 172,828 $ 170,601 $ 2,227 ========== ========== =========
- -------------------- (1) Due to an actuarial gain resulting from a change in actuarial assumptions due to (i) a change in Medicare credits; (ii) revised census data; and (iii) prior experience benefit. (2) Due to an increase in the uncollectible reserve related to a disputed charge with a large industrial customer in 2000 and the 1999 payments by two large industrial customers for amounts previously expensed. Depreciation and amortization expense decreased $1.0 million and $0.5 million for the three and twelve months ended March 31, 2000, respectively, compared to the same periods last year due to a change in the estimated useful life of the decommissioning portion of Palo Verde. Taxes other than income taxes decreased $0.3 million and $3.1 million for the three and twelve months ended March 31, 2000, respectively, compared to the same periods last year. The twelve month decrease was primarily due to a $3.1 million reversal of sales tax reserves established in prior years. Other income, decreased $3.6 million and $23.2 million for the three and twelve months ended March 31, 2000, respectively, compared to the same periods last year due to (i) decreased investment income of $2.3 million and $8.7 million, respectively, resulting from the investment of lower levels of cash and a change in investment strategy into equity securities for decommissioning trust funds; (ii) litigation settlements of $1.0 million for the three and twelve months ended March 31, 2000 (see Item 1 "Notes to Financial Statements - Note E - - Litigation - Other Legal Proceedings"); and 19 (iii) the accrual of the $16.5 million settlement agreement payment to Las Cruces for the twelve months ended March 31, 2000. Interest charges decreased $2.0 million and $1.7 million for the three and twelve months ended March 31, 2000, respectively, compared to the same periods last year, primarily due to a reduction in outstanding debt as a result of open market purchases and redemptions of the Company's first mortgage bonds. This decrease was partially offset for the twelve months ended March 31, 2000, by adjustments to postload nuclear fuel to (i) write-off a portion of accumulated interest capitalized prior to 1999 and (ii) discontinue capitalizing interest in 1999. Income tax expense, excluding the tax effect of extraordinary items, decreased $0.6 million for the three months ended March 31, 2000, primarily due to a decrease in pretax income. Income tax expense, excluding the tax effect of extraordinary items, decreased $10.0 million for the twelve months ended March 31, 2000, primarily due to changes in pretax income, including the accrual for the settlement agreement payment to Las Cruces, and certain permanent differences including an adjustment to the cash value of Company-owned life insurance policies and tax-exempt income. Extraordinary loss on repurchases of debt of $0.6 million and $3.9 million for the three and twelve months ended March 31, 2000, respectively, net of income tax benefit of $0.4 million and $2.5 million, represents the payment of premiums on debt repurchased and the recognition of unamortized issuance expenses on that debt with no comparable amounts for the same periods ended in 1999. Extraordinary gain on discharge of debt of $3.3 million for the twelve months ended March 31, 1999, net of income tax expense of $2.1 million, represents unclaimed and undistributed funds designated for the payment of preconfirmation bankruptcy claims which reverted to the Company. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to market risk due to changes in interest rates, equity prices and commodity prices. See the Company's 1999 Form 10-K, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," for a complete discussion of the market risks faced by the Company and the Company's market risk sensitive assets and liabilities. As of March 31, 2000, there have been no material changes in the market risks faced by the Company or the fair values of assets and liabilities disclosed in Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," in the Company's 1999 Form 10-K. 20 PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company hereby incorporates by reference the information set forth in Part I of this report under Note E of Notes to Financial Statements. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: See Index to Exhibits incorporated herein by reference. (b) Reports on Form 8-K: None 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EL PASO ELECTRIC COMPANY By: /s/ Gary R. Hedrick ------------------- Gary R. Hedrick Vice President, Chief Financial Officer and Treasurer (Duly Authorized Officer and Principal Financial Officer) Dated: May 12, 2000 22 EL PASO ELECTRIC COMPANY INDEX TO EXHIBITS
Exhibit Number Exhibit ------- ------- 10.01 Settlement Agreement, dated as of February 24, 2000, with the City of Las Cruces. 10.02 Franchise Agreement, dated April 3, 2000, between the Company and the City of Las Cruces. 10.03 Stock Option Agreement, dated as of March 15, 2000, with James S. Haines, Jr. (Identical in all material respects to Exhibit 10.05 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999) +10.04 Form of Restricted Stock Award Agreement between the Company and certain key officers of the Company. (Identical in all material respects to Exhibit 10.04 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999) ++10.05 Form of Stock Option Agreement between the Company and certain key officers of the Company. (Identical in all material respects to Exhibit 10.06 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999) +++10.06 Form of Directors' Restricted Stock Award Agreement between the Company and certain directors of the Company. (Identical in all material respects to Exhibit 10.07 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999) 10.07 Stock Option Agreements, dated as of January 1, 2000 and April 1, 2000, with Wilson K. Cadman. (Identical in all material respects to Exhibit 10.08 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999) 11 Statement re Computation of Per Share Earnings 15 Letter re Unaudited Interim Financial Information 27 Financial Data Schedule (EDGAR filing only) + Ten agreements, dated as of February 28, 2000, substantially identical in all material respects to this Exhibit, except for the number of shares, have been entered into with Terry D. Bassham; J. Frank Bates; Michael L. Blough; Gary R. Hedrick; John C. Horne; Helen Williams Knopp; Earnest A. Lehman; Robert C. McNiel; Eduardo A. Rodriguez; and Guillermo Silva; officers of the Company.
EL PASO ELECTRIC COMPANY INDEX TO EXHIBITS
Exhibit Number Exhibit - ------- ------- ++ Two agreements, dated as of January 3, 2000, substantially identical in all material respects to this Exhibit, except for the number of options, have been entered into with Terry D. Bassham and John C. Horne; officers of the Company. +++ In lieu of non-employee director compensation, four agreements, dated as of January 1, 2000 and April 1, 2000, substantially identical in all material respects to this Exhibit have been entered into with Patricia Z. Holland-Branch and Charles Yamarone; directors of the Company.
EX-10.01 2 SETTLEMENT AGREEMENT - FEB. 24, 2000 EXHIBIT 10.01 SETTLEMENT AGREEMENT This Settlement Agreement, dated as of February 24, 2000, is entered into between the City of Las Cruces, New Mexico ("City") and El Paso Electric Company ("EPE") (collectively, "the Parties"). WHEREAS, EPE has provided electric service in and around Las Cruces for many years; WHEREAS, the City has undertaken an effort to condemn EPE's distribution system in Las Cruces in order to complete the establishment of its municipal electric utility serving all of Las Cruces; WHEREAS, the City and EPE, for many years, have been engaged in litigation and regulatory proceedings in various courts and regulatory agencies concerning the City's efforts, through the formation of a municipal electric utility, to provide electric service to all of Las Cruces; WHEREAS, on February 21, 2000, representatives of the City and EPE reached an agreement, pursuant to court-ordered and court-supervised settlement negotiations, on the terms of a Settlement Proposal, attached hereto as Exhibit A and made a part hereof by reference, subject to final approval by the City of its Council ("City Council"), and the Board of Directors of EPE; WHEREAS, on February 24, 2000, the City Council, at a duly convened meeting, gave final approval to the Settlement Proposal; WHEREAS, the Board of Directors of EPE gave final approval to the Settlement Proposal; WHEREAS, the approved Settlement Proposal anticipates the preparation of a more detailed final writing reflecting its terms; WHEREAS, this Settlement Agreement constitutes that anticipated final agreement; WHEREAS, on April 3, 2000, the City Council adopted, at a duly convened meeting, an ordinance (a copy of which is attached hereto as Exhibit B) approving the conveyance to EPE of the West Mesa Substation property and certain other interests in real property currently owned by the City; WHEREAS, the City Council, at the same meeting of April 3, 2000, adopted an ordinance (a copy of which is attached hereto as Exhibit C) granting EPE a franchise; WHEREAS, the City Council has authorized the City's Staff to take all steps necessary to implement and accomplish the provisions of Exhibit A, to execute this Settlement Agreement on behalf of the City, and to execute the documents provided for in this Settlement Agreement; and WHEREAS, the City and EPE desire to enter into this Settlement Agreement in order to avoid further controversy between them and the incurrence of additional costs of litigation. NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the City and EPE (together the "Parties") agree as follows: 1. Effective Date: This Settlement Agreement shall become immediately -------------- effective as of the date it has been executed by duly authorized representatives of both the City and EPE (the "Effective Date"). This Settlement Agreement may be executed in multiple counterparts, each of which shall be an original, but all of which together shall constitute one and the same Settlement Agreement. 2. Closing Date: The Closing Date for this Settlement Agreement shall be ------------ three (3) days after the Effective Date of this Settlement Agreement. 3. New Franchise Agreement: The City Council adopted, at a duly convened ----------------------- meeting on April 3, 2000, an ordinance granting a franchise to EPE, which franchise is attached hereto as Exhibit C. On or before the Closing Date, EPE agrees to execute the Franchise Ordinance attached hereto as Exhibit C. 4. Transfer of Ownership of City Electric Utility Assets And City -------------------------------------------------------------------- Electric Service Contracts: - -------------------------- a) On or before the Closing Date, the City shall do the following: (1) Convey to EPE, free and clear of any and all encumbrances, except those reservations contained in the patent and those easements and restrictive covenants of record as shown in a title policy to be obtained by the City, all of the City's right, title and interest in the real property listed in Exhibit D attached hereto. In connection with said title policy, the City shall furnish at its expense a title policy for the real property listed in Exhibit D in the amount of $133,000.00, which policy shall contain only the usual printed exceptions and exceptions for reservations in the patent and any easements of record and restrictive covenants of record as shown in the title policy. Prior to Closing, the City will furnish to EPE a title binder in the above amount. EPE at its own expense may eliminate any of the usual printed exceptions which can be eliminated. (2) Execute a Quitclaim Deed in favor of EPE conveying all of the City's right, title and interest in the real property listed in Exhibit D attached hereto, subject to reservations in the patent, easements of record, and restrictive covenants of record, if any, as shown in the title policy. 2 (3) Take any and all steps necessary to release any lis pendens placed on any real property subject to this Settlement Agreement. (4) Convey to EPE, free and clear of any and all encumbrances, all of the City's right, title and interest in the personal property listed in Exhibit E attached hereto. In connection with said conveyance, the City shall execute a Bill of Sale in favor of EPE for the personal property listed in Exhibit E attached hereto. (5) Convey to EPE all of the City's right, title and interest in the easements, right of way grants, and temporary use permits listed in Exhibit F, which Exhibit the City represents includes all of the easements, right of way grants, and temporary use permits from third parties that the City has been using in connection with its municipal electric utility. In connection with said conveyance, the City shall execute an Assignment of the Easements, an Assignment of Right of Way Grants and Temporary Use Permits, and a Grant Of Easements to EPE for the easements and other interests which are listed in Exhibit F attached hereto. (6) Execute an Assignment of all customer contracts to EPE which are listed in Exhibit G attached hereto. The City represents and warrants that the contracts listed in Exhibit G constitute all of its contracts to provide electric service, and that all such contracts are in writing. The City has also informed EPE that it has provided electric service to certain customers (including certain City departments and the airport) not pursuant to contracts with these customers, and EPE has informed the City that it intends to charge these customers EPE's tariffed rates. (7) Deliver to EPE copies of (A) all books and records relating to the real and personal property and easements listed in Exhibits D, E and F attached hereto, and (B) all books and records relating to the customer contracts listed in Exhibit G attached hereto. In fulfilling this commitment, the City shall deliver to EPE records sufficient to demonstrate that the City expended no less than FOUR MILLION, FIVE HUNDRED THOUSAND DOLLARS ($4,500,000.00) for the construction of the West Mesa Substation and related facilities being conveyed hereunder to EPE, an amount that the City warrants and represents that it in fact expended for such construction. 3 (8) Take any and all reasonable steps, including executing any documents, that may be necessary or desirable promptly to effectuate this transfer and assignment of property and contracts. b) The City represents and warrants each of the following as of the Effective Date and through the time of the conveyances and assignments required under this Settlement Agreement: (1) The City (A) has good and marketable title in fee simple to all real property listed in Exhibit D, and to all buildings, structures and other improvements thereon, free and clear of any and all encumbrances, except as shown in the title policy to be obtained; (B) has good and marketable title to all of the personal property and assets listed in Exhibit E, free and clear of any and all encumbrances, and (C) upon transfer to EPE of the real and personal property and assets listed in Exhibits D and E, will thereby transfer to EPE good and marketable title to said property and assets, subject to no encumbrances, except as shown in the title policy to be obtained. (2) The City's municipal electric utility has complied with all federal and state environmental laws applicable to the property. (3) The City has obtained all necessary environmental permits applicable to the real property listed in Exhibit D, and any such permits are in good standing and the City is in compliance with all terms and conditions of such permits. (4) The City is not aware of any ongoing investigation relating to its municipal electric utility, or to any of the City property that is the subject of the conveyances and assignments required under this Settlement Agreement, by any governmental agency concerning (A) any environmental law, (B) any environmental remedial action, or (C) any claim of losses or expenses arising from the release or threatened release of a contaminant. (5) The City is not aware, with respect to its municipal electric utility or any of the property that is the subject of the conveyances and assignments required under this Settlement Agreement, of any judicial or administrative proceeding, order, judgment, decree or settlement alleging or addressing a violation of or liability under any environmental law. 4 (6) The City has not received any notice or claim from any governmental agency with respect to its municipal electric utility, or any of the property that is the subject of the conveyances and assignments required under this Settlement Agreement, to the effect that the City is or may be liable to any person as a result of the release or threatened release of a contaminant. (7) The City is not aware of any environmental encumbrance that has attached to the real property listed in Exhibit D or the buildings, structures and other improvements thereon. (8) There is no asbestos containing material which is on or part of the real property listed in Exhibit D or the buildings, structures and other improvements thereon. c) The City will inform the customers listed in Exhibit G of its assignment of the City's rights in said contracts to EPE no later than the Closing Date. d) EPE shall not assume or be responsible for any liability or obligation of the City relating to the property or customer contracts being conveyed or assigned hereunder (as listed in Exhibits D, E, F and G) arising from any act or omission prior to the Closing Date, whether such liability or obligation is direct or indirect, known or unknown, absolute or contingent. The City agrees to indemnify and hold harmless EPE from any and all claims, losses, expenses (including reasonable attorneys' fees), liabilities and obligations arising from any act or omission relating to the property or customer contracts being conveyed or assigned hereunder (as listed in Exhibits D, E, F and G) occurring prior to the Closing Date. e) The City shall not assume or be responsible for any liability or obligation of EPE relating to the property or customer contracts being conveyed or assigned hereunder (as listed in Exhibits D, E, F and G) arising from any act or omission after the Closing Date, whether such liability or obligation is direct or indirect, known or unknown, absolute or contingent. EPE agrees to indemnify and hold harmless the City from any and all claims, losses, expenses (including reasonable attorneys' fees), liabilities, and obligations arising from any act or omission relating to the property or customer contracts being conveyed or assigned hereunder (as listed in Exhibits D, E, F and G) occurring after the Closing Date. 5. Taxes: The City shall be responsible for any taxes for any period ----- prior to the Closing Date attributable to the property and assets being conveyed by the City pursuant to this Settlement Agreement. EPE shall be responsible for any taxes for any 5 period after the Closing Date attributable to the property and assets being conveyed to EPE pursuant to this Settlement Agreement. 6. Payment by EPE: EPE shall pay to the City by wire transfer on the -------------- Closing Date the sum of TWENTY ONE MILLION DOLLARS ($21,000,000.00). The City, prior to the Closing Date, will provide EPE with appropriate wiring instructions. 7. Termination of Litigation and Regulatory Proceedings: ---------------------------------------------------- a) The Parties are currently involved in the following lawsuits and regulatory proceedings: (1) EPE v. City, CIV-98-566, pending in the United States ----------- District Court for the District of New Mexico, which is consolidated with CIV-99-259, described hereinafter. (2) City v. EPE, CIV-99-259, pending in the United States ----------- District Court for the District of New Mexico, which is consolidated with CIV-98-566, and which CIV-99-259, described above. (3) City v. EPE, SC-97-2-000, pending before the Federal Energy ----------- Regulatory Commission ("FERC"). (4) EPE, OA96-200-000, pending before FERC. --- (5) SPS v. EPE, EL-98-44-000, pending before FERC. ---------- (6) City v. EPE, EL-99-10-000, pending before FERC. ----------- (7) EPE, OA-97-686-000, pending before FERC. --- b) The Parties agree to do the following on or before the Closing Date to terminate the lawsuits and regulatory matters pending between them: (1) In CIV-98-0566, the Parties will execute and file with the court a joint stipulation to voluntarily dismiss the case without prejudice, each party to bear its own costs, expenses and attorneys' fees. (2) With respect to CIV-99-259, the Parties will take the following actions in the federal district court and state district court to dismiss the case and release to the City the deposit, including interest thereon, that the City deposited at the commencement of the case: (A) The Parties will first execute and file a joint motion 6 for an order authorizing EPE and the City to file a joint stipulated motion with the Third Judicial District Court, State of New Mexico, County of Dona Ana, stipulating that the THIRTY-SEVEN MILLION DOLLARS ($37,000,000.00) deposited by the City on February 26, 1999, together with all interest accrued thereon, be released and returned directly to the City, and representing that the federal district court has granted the Parties permission to request from the Third Judicial District such a release of funds directly to the City; (B) Upon receipt of an order from the federal district court granting the Parties' joint motion as described in the preceding subparagraph 7(b)(2)(A), the Parties will execute and file a conforming joint stipulated motion with the Third Judicial District Court, State of New Mexico, County of Dona Ana; and present to the State District Court an order closing Cause No. CV-99- 187 pending in the Third Judicial District, State of New Mexico, and directing the Court Administrator to pay to the City the sum of $37,000,000.00, plus accrued interest. (C) Upon receipt of an order from the state district court granting the Parties' joint motion as described in subparagraph 7(b)(2)(B), the Parties will execute and file a joint motion in federal court, Cause No. CV-99- 259, for an order dismissing the case without prejudice, each party to bear its own costs, expenses and attorneys' fees, provided, however, that the court shall maintain jurisdiction for the limited purpose of enforcing and resolving disputes regarding this Settlement Agreement, as provided in paragraph 21(a) of this Settlement Agreement. The Parties shall also present to the federal court an order consistent with the above joint motion. (3) In SC-97-2-000, OA-96-200-000, EL-98-44-000, EL-99-10-000, and OA-97-686-000, pending at FERC, the Parties will execute and file with FERC the Joint Notice attached hereto as Exhibit H. It is understood that the City has no reponsibility for obtaining dismissal of any pending FERC case or vacating of any FERC order other than submitting to FERC the Joint Notice attached hereto as Exhibit H. 7 8. City's Option to Purchase EPE's Distribution System: --------------------------------------------------- a) In paragraph 4 of Exhibit A attached hereto, EPE has granted, and does hereby grant, to the City an option to purchase the entirety of EPE's electric distribution system within the City of Las Cruces. This option is granted solely to the City and is not assignable by the City. (1) The option herein granted must be exercised by the City within a period commencing on April 30, 2007 and ending on July 30, 2007. The City shall exercise this option by giving notice in writing by certified mail, return receipt requested, to EPE at 123 W. Mills, El Paso, Texas, 79901- 1341, or such other address as EPE shall hereafter provide to the City in writing, such notice to be effective upon the date of mailing of said notice by the City. (2) The City shall be required to take possession of EPE's electric distribution system within the City of Las Cruces pursuant to an exercise of its option no later than the later of (A) one year from the date it provides EPE notice hereunder of its exercise of the option, and (B) sixty (60) days after severance of the City's distribution system from EPE's distribution system has been completed in accordance with the provisions of subparagraph 8(a)(5) below. The City shall provide in writing to EPE no less than thirty (30) days' advance notice of the date on which it will take possession of EPE's distribution system, provided, however, that in no event shall the date of possession be prior to completion of severance. (3) The property subject to the City's option hereunder and under Exhibit A shall constitute the following, and if the City exercises the option it must do so with respect to all such property: (A) the distribution system of EPE within the City of Las Cruces as of the date the City takes possession of said distribution system pursuant to the option herein, including but not limited to all distribution lines and substations within the City limits, all transmission lines within the City limits of 115kv or above that are necessary to operate the distribution system (subject to receipt of all regulatory approvals necessary for such conveyance), all real property on which such distribution or transmission lines and substations are located, and all fixtures on 8 such real property; (B) all office buildings within the City of Las Cruces, warehouses within the City of Las Cruces, (including 201 N. Water and 555 S. Compress, if owned by EPE at the time of the City's exercise of its option)all real property on which buildings are located, and all fixtures on such real property; (C) all books and records used in the operation and maintenance of the distribution system on the date the City takes possession. (4) In the event that the City exercises its option as provided for in this paragraph, and EPE owns and controls the transmission system in and around Las Cruces at that time, EPE shall not require the City to pay any amount for such transmission service in excess of EPE's applicable FERC tariffed rates, which rates as applied to the City shall not include any "stranded costs" resulting from the City's exercise of its option. At the time of transfer of the distribution assets, EPE's distribution company shall also assign or transfer to the City any transmission or generation contracts in effect to provide generation service to customers within the City limits. (5) After the exercise of said option, the City and EPE shall jointly prepare a severance plan to sever the City's distribution system from EPE's distribution system, which plan shall provide for a complete severance (similar in degree and scope of separation to the proposed severance plan submitted by EPE to the New Mexico Public Regulatory Commission in Case No. 2957 before the NMPRC) between the two distribution systems. (A) After the exercise of the option, the City and EPE shall immediately begin to work together to attempt to prepare a joint severance plan. In the event that the City and EPE are unable to agree on a joint severance plan within ninety (90) days of the date of the mailing of the City's notice of exercise of its option, the City and EPE shall each designate within 15 days one expert to assist in preparing a severance plan. Within 21 days of their appointment, the two experts shall agree as to a third expert to assist in preparing such severance plan. The severance plan shall be prepared within 9 90 days of the appointment of the third expert unless the third expert determines that additional time is required. The severance plan adopted shall be that plan which is agreed to by the majority vote of the three experts. Each party will pay one-half of the third expert's fees and costs. (B) The City and EPE shall fully cooperate with each other in the implementation of any severance plan. Because severance will be for the purpose of enabling the City to operate its own separate municipal electric utility, all costs of construction, equipment, labor, installation and repair necessary for implementation of the severance plan shall be paid by the City. (6) In the event the City exercises this option, the purchase price shall be the book value (i.e., original cost less ---- depreciation plus capital additions) of the EPE property described in paragraphs 8(a)(3)(A) and (B) above, plus an amount equal to thirty (30%) percent in excess of such book value, as of the date the City provides notice of intent to exercise the option. For property owned by EPE at the time of the filing of its FERC Form 1 as of December 31, 2006 that has not been the subject of any subsequent capital additions, the book value for such property to be used in calculating the purchase price hereunder shall be the book value used by EPE in connection with its FERC Form 1 filing. (A) The book value shall not include any stranded costs. (B) On July 31, 2006, EPE shall furnish to the City the book value as of December 31, 2005 of that EPE property subject to the option included in EPE's' most recent FERC Form 1 filing. (C) The purchase price above provided for shall be due and paid by the City by wire transfer, to an account designated by EPE at the time, on or before the date the City takes possession of the system. (7) In the event the City exercises its option, the City will not transfer, assign, convey, sell, lease, rent or otherwise cede control of the distribution system to any other corporation, person or entity for a period commencing two (2) years from the date the City takes possession of said system; 10 provided, however, it is expressly understood and agreed that the City may subcontract for operation and maintenance of said system and may contract for wholesale purchase of electricity, including wholesale purchases of electricity from EPE if the Parties reach agreement for such wholesale purchase. (8) On the date possession of said system is conveyed to the City pursuant to this option, EPE will: (A) Convey to the City, free and clear of all encumbrances, except reservations contained in the patent, and those easements and restrictive covenants of record as shown in a title policy to be obtained by EPE, all of EPE's right, title and interest in the real property described in paragraph 8(a)(3) above. In connection with said title policy, EPE shall furnish at its expense a title policy for such real property in the amount of the book value of such real property plus 30% (calculated the same as for the purpose of calculating the option purchase price hereunder), which policy shall contain only the usual printed exceptions and exceptions for reservation in the patent and any easements of record and restrictive covenants of record as shown in the title policy. EPE will furnish to the City a title binder in such amount. The City at its own expense may eliminate any of the usual printed exceptions which can be eliminated. (B) Execute a Quitclaim Deed in favor of the City conveying all of EPE's right, title and interest in the real property described in paragraph 8(b)(3) above, subject to reservations in the patent, easements of record, and restrictive covenants of record, if any, as shown in the title policy. (C) Execute a Bill of Sale in favor of the City for the personal property described in paragraph 8(b)(3) above. (D) Execute an Assignment of Easements to the City for all easements belonging to EPE in the real property described in paragraph 8(b)(3) above. (E) EPE's distribution company shall execute an Assignment to the City of all customer contracts for 11 the provision of electricity in the City of Las Cruces. (F) Deliver to the City copies of all books and records relating to the real and personal property described in paragraph 8(b)(3) above, and all books and records relating to the customer contracts referred to in the preceding subparagraph. (G) Take any and all reasonable steps, including executing any documents, that may be necessary or desirable promptly to effectuate such transfer and assignment of property and contracts. (9) In connection with the exercise of this option, EPE, at the time of the conveyance of the property subject to the option, shall represent and warrant with respect to the property being conveyed as follows, unless EPE notifies the City to the contrary at the time of the conveyance: (A) EPE (i) has good and marketable title in fee simple to all conveyed real property, and to all buildings, structures and other improvements thereon, free and clear of any and all encumbrances, except as shown in the title policy to be obtained; (ii) has good and marketable title to all of the other personal property and assets to be conveyed, free and clear of any and all encumbrances, and (iii) upon transfer to the City of the real and personal property and assets, will thereby transfer to the City good and marketable title to the property and assets, subject to no encumbrances, except as shown in the title policy to be obtained. (B) EPE has complied with all federal and state environmental laws applicable to the property. (C) EPE has obtained all necessary environmental permits applicable to the real property, and all such permits are in good standing and EPE is in compliance with all terms and conditions of such permits. (D) EPE is not aware of any ongoing investigation by any governmental agency relating to the property to be conveyed concerning (i) any environmental law, (ii) any environmental remedial action, or (iii) any 12 claim of losses or expenses arising from the release or threatened release of a contaminant. (E) EPE is not aware, with respect to the property to be conveyed of any judicial or administrative proceeding, order, judgment, decree or settlement alleging or addressing a violation of or liability under any environmental law. (F) EPE has not received any notice or claim from any governmental agency with respect to the property to be conveyed to the effect that it is or may be liable to any person as a result of the release or threatened release of a contaminant. (G) EPE is not aware of any environmental encumbrance that has attached to the real property to be conveyed, or to the buildings, structures and other improvements thereon. (H) There is no asbestos containing material which is on or part of the real property to be conveyed or the buildings, structures and other improvements thereon. (10) At the time of conveyance pursuant to the option, the City shall not assume or be responsible for any liability or obligation of EPE in connection with the property being conveyed incurred prior to the date of conveyance, whether such liability or obligation is direct or indirect, known or unknown, absolute or contingent, and EPE agrees to indemnify and hold harmless the City from any and all losses and expenses, including reasonable attorneys' fees, liabilities and obligations arising from any act or omission occurring prior to the date of conveyance. (11) EPE shall not be responsible for any liability or obligation of the City, direct or indirect, known or unknown, absolute or contingent, that arises after the date of conveyance pursuant to said option, and the City agrees to indemnify and hold harmless EPE from any losses and expenses, including reasonable attorneys' fees, liabilities and obligations arising from any act or omission occurring prior to the date of conveyance. (12) EPE shall be responsible for any taxes attributable to EPE's ownership of the property and assets transferred pursuant to 13 this Settlement Agreement to the City, which taxes accrue up to the date of conveyance pursuant to this option and which taxes arise from EPE's ownership of the property conveyed or the electric service provided. The City will be responsible for all taxes from the date of conveyance pursuant to the option and thereafter in connection with the property transferred pursuant to said option and the providing of electric service by the City after conveyance pursuant to the option. 9. City's Agreement to Forego Municipalization Efforts: --------------------------------------------------- a) The City promises, covenants, and agrees that the City will take no actions or engage in any negotiations prior to April 30, 2009 (1) to purchase, condemn, or otherwise acquire any part of the electric distribution system owned by EPE, its successors, or assigns, (2) to construct its own electric distribution system, or (3) to establish a municipal electric utility, except as provided in paragraph 8 of this Settlement Agreement. b) Nothing in subparagraph 9(a) above is intended to alter any rights that the City may have, to the extent provided by law, to take advantage of retail wheeling and to be an aggregator. 10. City's Participation in New Mexico Stranded Cost Case: The City agrees ----------------------------------------------------- that, in any future proceeding at the New Mexico Public Regulatory Commission ("NMPRC") to determine the amount of EPE's stranded costs attributable to EPE's service in Las Cruces, the City shall not contest or oppose EPE's estimate of its stranded costs, provided that the City may contest or oppose EPE's estimate only if, and only to the extent that, EPE's estimate exceeds the amount determined by the FERC in its May 26 Order in City of Las Cruces v. El Paso Elec. Co., No. SC-97-2-000, including the FERC's determination that the stranded cost amount was $52.9 million as of July 1, 1999 and has declined in time on a daily basis since July 1, 1999. This Paragraph shall not apply to any NMPRC proceeding that is unrelated to the determination of EPE's stranded costs. EPE will notify the City in writing of any proceeding before the NMPRC which involves issues of EPE's stranded cost attributable to EPE's service in Las Cruces. 11. City's Release of EPE: The City, for itself and its successors and --------------------- assigns, hereby releases and discharges EPE, its subsidiaries, successors, predecessors and assigns, and their respective officers, directors, agents, employees, consultants, attorneys and legal representatives, from any and all claims, demands, causes of action, obligations, damages and liabilities of any nature whatsoever, whether now known or unknown, arising from or relating in any way to the City's past efforts to form a municipal electric utility, past franchise agreements between the Parties, EPE's past use of right-of-ways to provide electricity, or any acts or omissions that may have been subject to any regulatory proceeding or litigation between the Parties; provided, however, that up to and through April 30, 2000, EPE shall have a continuing obligation to pay the two (2) percent fees of 14 gross revenue for use of City right-of-ways presently being paid. 12. EPE's Release of the City: EPE, for itself and its successors and ------------------------- assigns, hereby releases and discharges the City, its successors, predecessors or assigns, and its City Council, officers, employees, consultants, attorneys and legal representatives, from any and all claims, demands, causes of action, obligations, damages and liabilities of any nature whatsoever, whether now known or unknown, arising in any way from EPE's opposition to the City's formation of a municipal electric utility, the City's past effort to form an electric utility, the past franchise agreements between the Parties, the City's opposition to EPE's use of right-of-ways, or any act or omission that has been the subject of any regulatory proceeding or litigation between the Parties. 13. Authority to Execute Agreement: The individuals executing this ------------------------------ Settlement Agreement on behalf of the City and EPE each represent that they have read and understand the terms of this Settlement Agreement, that they have had the benefit and advice of counsel of their choice in the negotiation and execution of this Settlement Agreement, and that they possess full power and authority to execute and deliver the Settlement Agreement on behalf of the stated Parties. 14. No Admission of Liability: Nothing herein shall be construed as a ------------------------- determination or admission by any party of any liability or wrongdoing, or as a determination or admission by any party of any issue of fact or law previously in dispute between the Parties. 15. Breaches of Representations: Each party recognizes that one party's --------------------------- breach of any of the representations and warranties contained in this Settlement Agreement will cause damage to the other party, and thus agrees to compensate, indemnify and hold harmless the other party for any breach of any representation or warranty. 16. Entire Agreement: This Settlement Agreement, including the exhibits ---------------- attached hereto, embodies the entire agreement between the Parties concerning the matters dealt with herein and supersedes any and all prior agreements or understandings as may relate to the matters dealt with herein. 17. Amendment: This Settlement Agreement may be amended only by an --------- instrument in writing executed by both Parties. 18. Governing Law: This Settlement Agreement shall be governed by and ------------- construed under the laws of the State of New Mexico. 19. Successors: This Settlement Agreement is binding on EPE's successors ---------- and assigns, and on the City's successors. 20. Partial Invalidity: Whenever possible, each provision of this ------------------ Settlement Agreement hereof shall be interpreted in such manner as to be effective and valid under applicable law, but in case any one or more of the provisions contained herein shall, for any reason, be held to be invalid, illegal, or unenforceable in any respect, such provision 15 shall be ineffective to the extent, but only to the extent, of such invalidity, illegality, or unenforceability without invalidating the remainder of such invalid, illegal, or unenforceable provision or provisions or any other provisions hereof, unless such a construction would be unreasonable. 21. Dispute Resolution: ------------------ a) The Parties agree that the United States District Court for the District of New Mexico shall retain jurisdiction pursuant to this Settlement Agreement for a period of one year from the Effective Date for the purpose of enforcing this Settlement Agreement or adjudicating any dispute arising out of, or relating to, this Settlement Agreement. b) With respect to any dispute between the Parties arising out of or relating to this Settlement Agreement that arises more than one year after the Effective Date, a party seeking resolution of such dispute shall provide written notice to the other party describing the existence and nature of the dispute. The Parties shall then attempt to resolve the dispute within thirty (30) days of such written notice by good faith negotiation. If the Parties are unable to resolve a dispute by negotiation within thirty (30) days, or such additional time as the Parties mutually agree is appropriate to continue their efforts, the Parties shall submit the dispute to binding arbitration before an arbitrator mutually agreeable to the Parties who shall have expertise in the area of dispute. In order to select the arbitrator, each party shall submit to the other, no later than fourteen (14) days after the termination of the negotiation period, a list of three proposed arbitrators. Within seven (7) days thereafter, each party shall respond to the other's list, indicating which of the proposed arbitrators, if any, is acceptable. If more than one of the proposed arbitrators is accepted, the Parties shall attempt to reach an agreement regarding which of the accepted arbitrators is to be selected; if the Parties are unable to so agree within three (3) business days, one of the accepted arbitrators shall be selected by lot. If none of the arbitrators on the Parties' lists is accepted by the other party, the Parties shall repeat the process. If the Parties remain unable to agree on an arbitrator at that time, they shall submit the dispute to binding arbitration administered by the American Arbitration Association, in accordance with its Commercial Rules. c) Judgment on any award rendered in an arbitration proceeding held pursuant to paragraph 21(b) above may be entered in any court having jurisdiction thereof. The arbitrator shall have the authority to award any remedy or relief that a court of competent jurisdiction could order or grant, including the issuance of a mandatory 16 injunction, with the exception that punitive, exemplary or other noncompensatory damages may not be awarded. 17 IN WITNESS OF THE ABOVE, the Parties have executed this Settlement Agreement as of the date(s) indicated below. CITY OF LAS CRUCES By /s/ James A. Ericson ------------------------- James A. Ericson, Interim City Manager APPROVED AS TO FORM: By /s/ Fermin Rubio ------------------- City Attorney EL PASO ELECTRIC COMPANY By /s/ James S. Haines -------------------------- James S. Haines, President 18 STATE OF NEW MEXICO ) ss.: County of DONA ANA ) This instrument was acknowledged before me this 3rd day of May, 2000, by James A. Ericson, Interim City Manager, City of Las Cruces. /s/ Sandra H. Hiss ------------------------------- Notary Public My Commission Expires: 8-25-01 19 STATE OF TEXAS ) ss.: County of EL PASO ) This instrument was acknowledged before me this 3rd day of May, 2000, by James S. Haines, President of El Paso Electric Company. /s/ Carolina Pena --------------------------------- Notary Public My Commission Expires: 03-24-2003 20 EX-10.02 3 FRANCHISE AGREEMENT - APRIL 3, 2000 Exhibit 10.02 COUNCIL BILL NO. 00- 041 ORDINANCE NO. 1790 ---- AN ORDINANCE GRANTING TO EL PASO ELECTRIC COMPANY, A CORPORATION ORGANIZED AND EXISTING UNDER AND BY VIRTUE OF THE LAWS OF THE STATE OF TEXAS, ITS LEGAL REPRESENTATIVES, SUCCESSORS, LESSEES AND ASSIGNS, CERTAIN POWERS, LICENSES, RIGHTS OF WAY AND PRIVILEGES TO MAINTAIN, ERECT, CONSTRUCT, EQUIP, CONDUCT AND OPERATE IN THE CITY OF LAS CRUCES, NEW MEXICO, WORKS, SYSTEMS, AND PLANTS TO GENERATE, MANUFACTURE, USE, STORE, SELL DISTRIBUTE, CONVEY, OR OTHERWISE USE, CONDUCT, SERVE, SUPPLY AND FURNISH SAID CITY, ITS INHABITANTS AND OTHERS ELECTRICITY FOR LIGHT, HEAT AND POWER, AND OTHER USEFUL SERVICE, AND TO USE THE STREETS, AVENUES, ALLEYS, HIGHWAYS, PUBLIC WAYS, SIDEWALKS, BRIDGES, AND GROUNDS OF SAID CITY, FOR A PERIOD OF UP TO NINE (9)YEARS, AND PRESCRIBING CERTAIN TERMS AND CONDITIONS THEREIN MENTIONED. The City Council of the City of Las Cruces is informed that: WHEREAS, on February 24, 2000, the City Council passed Resolution No. 00- 238, which resolution approved a global settlement agreement between the City of Las Cruces ("City") and El Paso Electric Company ("EPE"); and WHEREAS, as part of the Settlement Agreement, the City is required to grant a franchise ordinance/agreement to EPE for an initial term of seven (7) years which is to be similar to the 1983 franchise ordinance/agreement between EPE and the City. This franchise ordinance/agreement will remain in effect and shall automatically be extended for an additional two (2) years if the City does not timely exercise its purchase options granted it under the Settlement Agreement in accordance with the terms set forth therein; and WHEREAS, the franchise ordinance/agreement partially implements the settlement agreement between the City and EPE; and 254 Council Bill No. 00-041 --- Ordinance No. 00-1790 ---- Page 2 WHEREAS, the franchise ordinance/agreement will assist the governing body in bringing the settlement agreement between the City and EPE to final completion. NOW, THEREFORE, be it ordained by the governing body of the City of Las Cruces that: (I) The Franchise Ordinance/Agreement attached hereto and incorporated herein is hereby adopted. (II) City staff is hereby authorized to do all acts necessary in the accomplishment of the hereinabove. DONE AND APPROVED this 3rd day of April, 2000. --- APPROVED: /s/ RUBEN A. SMITH ----------------------------------- Mayor ATTEST: /s/ SHIRLEY CLARK - ----------------------------------- City Clerk Mayor Smith: aye ---------- Councillor Frietze: aye ---------- Councillor Mattiace: aye ---------- Councillor Valencia: absent ---------- Councillor Trowbridge: aye ---------- Councillor Tomlin: absent ---------- Councillor Haltom: aye ---------- 255 Council Bill No. 00-041 --- Ordinance No. 00-1790 ---- Page 3 Moved by: Frietze ------------------- Seconded by: Haltom ----------------- APPROVED BY: /s/ HARRY S (PETE) CONNELLY - ----------------------------------- Harry S. (Pete) Connelly Deputy City Attorney 256 FRANCHISE ORDINANCE/AGREEMENT ----------------------------- SECTION 1: PURPOSE - COMPANY'S USE OF STREETS - --------- ---------------------------------- That the City of Las Cruces, New Mexico (hereinafter called the "City"), hereby grants unto and vests in the El Paso Electric Company, a Corporation organized and existing under and by virtue of the laws of the State of Texas, and authorized to transact business in the State of New Mexico, (hereinafter called the "Company"), its legal representatives, successors, lessees and assigns, AN ELECTRICAL FRANCHISE. This Franchise Ordinance gives the Company the right to operate its electric plant, systems and works now installed and in operation or hereafter installed and operated in the City of Las Cruces, New Mexico, and the authority, license, power and privileges to promote, maintain, construct, build, equip, conduct, or otherwise establish and operate in the City, works or systems and plants to generate, manufacture, use, store, sell, distribute, convey, or otherwise establish, conduct, serve, supply and furnish, the inhabitants of the City, whenever the inhabitants of the City and others, and/or the City shall desire to contract therefor, with electricity for light, heat, power and other useful service, and elements and materials necessarily incidental to the use of same, including the sale of electrical appliances. The Company is hereby granted passage right of way and the right to continued use and occupancy, and to occupy and use during the life of this Franchise Ordinance, every and any and all streets, avenues, alleys, highways, public ways, sidewalks, bridges, and other public structures and public places, and public grounds of the City, both above and beneath the surface of the City, as (said streets, 257 avenues, alleys, highways, public ways, sidewalks, bridges, and other public structures and public places, and public grounds of the City) they now exist, or may be hereafter extended, or such as may be hereafter created within the corporate limits of the City, or as same may be hereafter extended, for the purpose of carrying out that part of its business as is authorized by the City pursuant to the terms of this Franchise Ordinance. SECTION 2: LICENSE - POLE RELOCATION - REPLACEMENT OF - --------- ------------------------------------------ PAVEMENT -APPEALS - BOND - HOLD HARMLESS AGREEMENT - -------------------------------------------------- The Company is hereby authorized, licensed and empowered to do any and all things necessary and proper in executing the powers and utilizing the privileges herein mentioned and granted by this Franchise Ordinance, including the making of necessary excavations and the right to acquire, erect and maintain and operate its poles, wires and appurtenances in and on any and all of the streets, avenues, alleys, highways, public ways, sidewalks, bridges, and other public structures and public places, and public grounds of the City. The Company is hereby authorized to extend, construct, place, locate its poles, lines, wires, connections, and appurtenances through, over, across, and under any and all of the streets, avenues, highways, public ways, sidewalks, bridges, and other public structures and public places, and public grounds of the City, subject, however, to the express approval of the City's Planning Department and provided that such installation does not conflict with existing water and/or gas and/or sewer lines. No part of the expense of the above-described work shall be borne by the City. 2 258 Both parties acknowledge the long range importance to the City in having appropriate coordination between various construction programs now in progress or contemplated for some future year by the various agencies authorized to make use of City streets, avenues, alleys, highways, public ways, sidewalks, bridges, and other public structures and public places, and public grounds of the City. In order that such coordination shall be effective, and that possible conflicts between power poles and future street or City utility system improvements be eliminated, the Company, prior to commencement of such work, will review and coordinate the work with the City's Planning Department. It shall be considered that projects (new construction and/or emergency replacement) consisting of four primary in-line poles or less are not of sufficient magnitude to warrant the review and coordination study by the City's Planning Department as above mentioned. Where existing poles and facilities are installed in City streets, and street right-of-ways, alleys, highways, public ways, sidewalks, bridges, and other public structures and public places, and public grounds of the City and it is determined that such poles and facilities are in conflict with authorized street widening and street improvements, the project to relocate the poles and facilities to a mutually acceptable location shall be subject to the approval of the City's Planning Department. All of such pole relocation work and installation shall be performed by the Company at no expense to the City. All work done in said streets, alleys, highways, public ways, sidewalks, bridges, and other public structures and public places, and public grounds of the City by the Company, shall be performed with 3 259 reasonable diligence; and the Company shall, within a reasonable time, restore such streets, alleys, and public grounds excavated by it, to their original condition as nearly as possible; and said work shall be done subject to the approval and acceptance of the City's Planning Department. No trench excavations or pavement cuts in any public way shall be commenced under the license herein granted until a permit to commence such work is secured from the City's Planning Department. The replacement of pavement shall be performed in accordance to City standards and ordinances. All expenses associated with such replacement of pavement shall be borne by the Company, whether completed by private contractors or by City work force. Appeals from decisions of the City's Planning Department may be taken to the City Council. During the term of this Franchise Ordinance, the Company shall have in force for the benefit of the City, a bond in the sum of Ten Thousand Dollars ($10,000) securing prompt performance of all of its duties and obligations under the terms of this Franchise Ordinance. The City and its officers, agents and employees shall be indemnified and held harmless for all claims, losses and damages to persons or property on account of or resulting from the Company's operation, work, duties, and obligations pursuant to the terms of this Franchise Ordinance. 4 260 SECTION 3: COMPANY'S RIGHT TO TURN-OFF - --------- --------------------------- The City, acting as aforesaid, hereby grants unto the Company, its successors, lessees and assigns, the right to operate and control all meters, wires, appliances and/or appurtenances owned by the Company, and in case of refusal or failure on the part of any customer to pay the Company proper charges for electricity consumed, or to observe the established rules and regulations of the Company to disconnect the service and wires of the Company connecting to the premises of such consumer, and to remove all meters and other materials, appliances or appurtenances furnished and owned by the Company. SECTION 4: COMPANY RIGHT TO TREE-TRIM - --------- -------------------------- The Company shall have the authority to trim trees upon and overhanging streets, avenues, highways, public ways, sidewalks, bridges, and other public structures, public places, and public grounds of the City so as to prevent the branches of such trees from coming in contact with the wires of the Company. All tree trimming to be done under the supervision and direction of the Company and at the expense and liability of the Company. SECTION 5: EXTENSION OF OVERHEAD WIRES - --------- --------------------------- Whenever an applicant for electric service shall have complied with established rules and regulations of the Company and whenever necessary, the Company shall, without charge, extend its overhead wires a distance of three hundred (300) feet per customer, and provide a reasonable overhead service from the nearest pole to the customer's building; 5 261 PROVIDED, however, that the Company shall not be so required in cases where there exists any physical obstruction within said three hundred (300) feet making such extension impractical, or when the permission of some third party is required and is refused. SECTION 6: FRANCHISE TAX - EXEMPTIONS - --------- -------------------------- The Company, its successors, lessees and assigns, for and in consideration of the granting of this Franchise Ordinance, and as rental and/or tax for the occupation and use or easement over, upon, and beneath the streets, avenues, alleys, highways, public ways, sidewalks, bridges, and other public structures and public places, and public grounds of the City, shall pay monthly to the City, beginning with the time hereinafter set forth, and thereafter during all the time this provision shall remain in force and effect, a total aggregate sum of two percent (2%) of the gross receipts of the Company, its successors, lessees and assigns, derived from (1) the sales of electricity used or consumed within the corporate limits of the City, (2) from the lease of poles and equipment, excepting poles used under joint use agreements by Mountain States Telephone and Telegraph Company, Western Union Telegraph Company, New Mexico State University, the United States Government, and Community Antenna TV (Cable) Companies, and (3) from all revenue whatsoever from whatever source under the Company's rate, fees or charges, in existence at the time of payment, excepting therefrom such receipts for electricity furnished schools, colleges and universities operated by a Governmental Agency; PROVIDED, HOWEVER, that until such 6 262 time as said two percent of the annual gross receipts of the Company shall have exceeded sixty thousand dollars ($60,000.00) per annum, the Company shall be obliged to make in lieu thereof to the City an annual minimum payment of sixty thousand dollars ($60,000.00). Said payments shall be based on such gross receipts beginning on meter reading on first day of calendar month next following the effective date of this instrument and shall be made to the City on or after the expiration of thirty (30) days from and after the first day of each month of each year from and after and during all the time this Franchise Ordinance shall remain in force and effect. For the purpose of determining said revenue, the revenue accounts of the Company shall at all times be subject to inspection by duly authorized City Officials. Said payments shall be made in lieu of any and all other Franchise Ordinance, license, privileges, pole, easement, wire or instrument, excise or revenue taxes except municipal occupation taxes, on all sales or revenues from any source other than electrical energy sales, and all other exactions except general ad valorem property taxes upon business, revenues, property, poles, wires, instruments, conduits, pipes, fixtures or other appurtenances of the Company, and all other property or equipment of the Company or any part thereof, in the City during the term of this Franchise Ordinance. SECTION 7: COLLECTION OF ADDITIONAL MUNICIPAL GROSS RECEIPTS TAX - --------- ----------------------------------------------------- The provisions of Section 6 shall not be construed to excuse the Company from 7 263 collecting from its electric service customers and paying over to the City additional municipal gross receipts tax levied, in the event the City shall, at any time during the term of this Franchise Ordinance, enact such additional municipal gross receipts tax. SECTION 8: NOTICE OF FILING - --------- ---------------- The Company will not make application to the New Mexico Public Regulatory Commission for a change in any of the various rate schedules applicable to services required by the City and in effect at the time the Franchise Ordinance becomes effective without first discussing the matter with the City. Should such an application be presented to the New Mexico Public Regulatory Commission, the Company agrees that reasonable advance notice of such hearing will be given the City in order to afford the City an opportunity to intervene in the formal hearing before the New Mexico Public Regulatory Commission. In such instance, the Company agrees to provide the City with available engineering, statistical, billing and other data pertinent to the rate change application. SECTION 9: UNDERGROUND FACILITIES - --------- ---------------------- The Company shall encourage and promote the design and use of underground cables and facilities for the downtown redevelopment area at the request of the City and PROVIDED, however, that the City and the property owners involved are agreeable in supporting the cost differential for this project. The Company also agrees to promote and encourage the use of underground facilities in new subdivisions where the differential costs 8 264 of underground versus overhead distribution is agreeable to both the Company and the property owner. If an adjoining subdivision is served from underground facilities, every effort will be made to design, operate and maintain these facilities for future expansion to other subdivisions in the immediate areas. SECTION 10: SWITCHING FACILITIES - STAND-BY AUXILIARY SERVICE - ---------- ------------------------------------------------- The Company shall establish and shall maintain during the term of this Franchise Ordinance such switching facilities as may be required to provide alternate circuits to supply electrical power for emergency installations within the City limits, limited to the following: Memorial Medical Center and such other City-County Hospital (or hospitals) as may be constructed during the term of this Franchise Ordinance, and at the county jail and/or City public safety buildings and at a Civil Defense Headquarters Center as the same may be constructed during the term of this Franchise Ordinance. Upon written request the Company will provide standby and/or auxiliary service to customers having other power or power generating equipment and facilities. The service will be provided in accordance with the Company's published RULES AND REGULATIONS and billed under approved tariff schedules on file with the New Mexico Public Regulatory Commission. SECTION 11: ACCEPTANCE OF FRANCHISE - ---------- ----------------------- This Franchise Ordinance shall be accepted by the Company in writing within 30 days 9 265 from the date this Franchise Ordinance is passed by the City Council. If not so accepted this Franchise Ordinance shall be repealed and negotiation for a new Franchise Ordinance may take place between the City and the Company; PROVIDED, that in any such negotiation neither party shall be bound by the terms of this Franchise Ordinance. It is hereby made an essential condition in the granting of this Franchise Ordinance, and its use and enjoyment by the Company, its successors, lessees, and assigns, that the acceptance by the Company, its successors, lessees, and assigns, of the Franchise Ordinance and the rights and privileges hereby granted shall be the acceptance by the Company, its successors, lessees and assigns, of all the conditions, reservations and restrictions herein provided and contained; and when this Franchise Ordinance has been accepted as aforesaid in the space provided at the end of this instrument, this Franchise Ordinance shall be and become a contract duly executed by and between the City and the Company, PROVIDED, however, that excepting for mortgages, stockholders, bondholders, or any others having any lien or claim of whatever sort against the Company including its rights and privileges as herein granted, the Company will make no transfer, assignment, lease, or other succession of or to the rights herein granted, without the approval of the City, which approval shall be granted as to any person or entity which provides information sufficient to demonstrate that it is financially sound and technically qualified to provide electric distribution service, and the regulatory agencies having jurisdiction over the Company's operations. 10 266 SECTION 12: REPEAL OF CONFLICTING ORDINANCES - ---------- -------------------------------- All other ordinances or parts of ordinances in conflict herewith are hereby repealed. SECTION 13: SCOPE - ---------- ----- Except for the written Settlement Agreement between the parties dated as of February 24, 2000 (hereinafter called the "Settlement Agreement"), this Franchise Ordinance incorporates all of the agreements, covenants and understandings between the Parties hereto concerning the subject matter hereof, and all such covenants, agreements, and understandings have been merged into this written Franchise Ordinance. Except for the written Settlement Agreement, no prior agreement or understanding, verbally or otherwise, of the parties or their agents, shall be enforceable unless embodied in this Franchise Ordinance. SECTION 14: AMENDMENTS - ---------- ---------- This Franchise Ordinance shall not be altered, changed or amended except by ordinance in writing and executed by the parties hereto. SECTION 15: RIGHTS OF SUCCESSORS - ---------- -------------------- This Franchise Ordinance shall be binding upon the successors, lessees and assigns of the parties hereto. SECTION 16: PARAGRAPH HEADINGS - ---------- ------------------ The paragraph headings of this Franchise Ordinance are inserted only for reference 11 267 and in no way define, limit or describe the scope or intent of this Franchise Ordinance nor affect its terms and provisions. SECTION 17: TERM - ---------- ---- This Franchise Ordinance shall expire on April 30, 2007, unless the City does not timely exercise the purchase option granted it under the Settlement Agreement in accordance with the terms set forth therein, in which event this Franchise Ordinance shall remain in effect and shall automatically be extended for an additional two (2) years through April 30, 2009. This Franchise Ordinance shall take effect and be in force 30 days after the passage and adoption of this Franchise Ordinance, the date of passage and adoption being set forth below. However, after such passage and adoption and during the aforementioned 30 day period, this Franchise Ordinance (1) must be published at the expense of the Company in full, in two weekly issues of a newspaper published in the City of Las Cruces, New Mexico, said publications not less than seven days apart; (2) proof of such publication must be submitted by affidavit from the publisher and placed in the appropriate City records, and (3) this Franchise Ordinance must be accepted in writing by the Company in the space provided at the end of this instrument; otherwise, this Franchise Ordinance shall be null and void. SECTION 18: NON-EXCLUSIVE FRANCHISE - CITY OPTION TO PURCHASE - ---------- ------------------------------------------------- A. The City in granting this Franchise Ordinance grants only a non- exclusive Franchise Ordinance. Furthermore, the City in granting this Franchise Ordinance, reserves 12 268 the right, under applicable provisions of New Mexico law, to purchase electricity from other parties on a retail basis, including being an aggregater for its citizens or businesses operating within the City of Las Cruces. B. This Franchise Ordinance is subject to an option to purchase by the City of the Company's distribution system within the City of Las Cruces as contained in the Settlement Agreement, which option to purchase is incorporated herein by reference. SECTION 19: SAVINGS CLAUSE - REPEAL - ---------- ----------------------- If any section, paragraph, subdivision, clause, phrase or provision of this Franchise Ordinance except the provision containing the Franchise Ordinance rental or tax shall be adjudged invalid or unconstitutional, the same shall not affect the validity of this Franchise Ordinance as a whole, or any part or provisions thereof other than the part so decided to be invalid or unconstitutional. If the Franchise tax or rental is declared invalid, or unconstitutional, then this entire Franchise Ordinance shall be null and void. DATED this 3rd day of April, 2000. CITY OF LAS CRUCES By /s/ RUBEN A. SMITH ----------------------------------- Ruben A. Smith, Mayor ATTEST: /s/ SHIRLEY CLARK - ----------------------------------- City Clerk 13 269 APPROVED AS TO FORM: /s/ HARRY S. (PETE) CONNELLY - ----------------------------------- Harry S.(Pete) Connelly Deputy City Attorney ACCEPTANCE The above Franchise Ordinance/Agreement is hereby accepted as to all of its terms, conditions, and provisions on this 18th day of April, 2000. ----- EL PASO ELECTRIC COMPANY A Texas Corporation By /s/ JAMES HAINES ----------------------------------- President ATTEST: /s/ GUILLERMO SILVA, JR. - ----------------------------------- Secretary 14 270 EX-11 4 COMPUTATION OF PER SHARE EARNINGS Exhibit 11 El Paso Electric Company Computation of Earnings Per Share (In Thousands Except for Share Data)
Three Months Ended March 31, Twelve Months Ended March 31, ---------------------------- ---------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Net income (loss) applicable to common stock: Income (loss) before extraordinary items $ 8,560 $ (2,725) $ 42,897 $ 32,649 Extraordinary loss on repurchases of debt, net of income tax benefit (553) -- (3,889) -- Extraordinary gain on discharge of debt, net of income tax expense -- -- -- 3,343 ------------ ------------ ------------ ------------ Net income (loss) applicable to common stock $ 8,007 $ (2,725) $ 39,008 $ 35,992 ============ ============ ============ ============ Basic earnings (loss) per common share: Weighted average number of common shares outstanding 55,299,922 60,209,960 57,994,205 60,179,129 ============ ============ ============ ============ Net income (loss) per common share: Income (loss) before extraordinary items $ 0.155 $ (0.045) $ 0.740 $ 0.542 Extraordinary loss on repurchases of debt, net of income tax benefit (0.010) -- (0.067) -- Extraordinary gain on discharge of debt, net of income tax expense -- -- -- 0.056 ------------ ------------ ------------ ------------ Net income (loss) $ 0.145 $ (0.045) $ 0.673 $ 0.598 ============ ============ ============ ============ Diluted earnings (loss) per common share: Weighted average number of common shares outstanding 55,299,922 60,209,960 57,994,205 60,179,129 ------------ ------------ ------------ ------------ Effect of dilutive potential common stock options based on the treasury stock method using average market price: Quarter ended March 31 492,272 -- 492,272 -- Quarter ended June 30 -- -- 384,767 538,986 Quarter ended September 30 -- -- 498,828 457,905 Quarter ended December 31 -- -- 514,212 479,130 Effect of dilutive potential restricted common stock based on the treasury stock method using average market price: Quarter ended March 31 20,116 -- 20,116 -- Quarter ended June 30 -- -- 29,186 31,840 Quarter ended September 30 -- -- 45,471 35,468 Quarter ended December 31 -- -- 56,258 39,433 ------------ ------------ ------------ ------------ 512,388 -- 2,041,110 1,582,762 Divided by number of quarters 1 1 4 4 ------------ ------------ ------------ ------------ Net effect of dilutive potential common stock 512,388 -- 510,278 395,690 ------------ ------------ ------------ ------------ Weighted average number of common shares and dilutive potential common shares outstanding 55,812,310 60,209,960 58,504,483 60,574,819 ============ ============ ============ ============ Net income (loss) per common share: Income (loss) before extraordinary items $ 0.153 $ (0.045) $ 0.733 $ 0.539 Extraordinary loss on repurchases of debt, net of income tax benefit (0.010) -- (0.066) -- Extraordinary gain on discharge of debt, net of income tax expense -- -- -- 0.055 ------------ ------------ ------------ ------------ Net income (loss) $ 0.143 $ (0.045) $ 0.667 $ 0.594 ============ ============ ============ ============
EX-15 5 UNAUDITED INTERIM FINANCIAL INFORMATION Exhibit 15 El Paso Electric Company El Paso, Texas Ladies and Gentlemen: Registration Statement Nos. 333-17971 and 333-82129 With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated May 4, 2000 related to our review of interim financial information. Pursuant to Rule 436(c) under the Securities Act of 1933, such a report is not considered part of the registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of sections 7 and 11 of the Act. Very truly yours, KPMG LLP El Paso, Texas May 11, 2000 EX-27 6 FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET OF EL PASO ELECTRIC COMPANY AS OF MARCH 31, 2000 AND THE RELATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 PER-BOOK 1,389,307 0 118,688 77,502 15,649 1,601,146 60,538 243,358 154,878 405,483 0 0 775,553 0 0 0 93 0 23,420 23,228 373,369 1,601,146 138,045 5,936 105,253 111,189 26,856 (795) 26,061 17,501 8,007 0 8,007 0 61,335 55,364 0.145 0.143 INCLUDES ($53,291) RELATED TO 5,917,433 SHARES OF TREASURY STOCK. NET INCOME IS NET OF EXTRAORDINARY LOSS ON REPURCHASED DEBT (NET OF INCOME TAX BENEFIT) OF ($553).
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