-----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, JQZwWJL0mkhKX0v8hEGIACzIEiYiwcINPiUpyjGTtcTGKnEGAiTfYDEeOlJvNiFM ONObBaC8iWbJ0RsK5bSPIg== /in/edgar/work/20000811/0000930661-00-001978/0000930661-00-001978.txt : 20000921 0000930661-00-001978.hdr.sgml : 20000921 ACCESSION NUMBER: 0000930661-00-001978 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EL PASO ELECTRIC CO /TX/ CENTRAL INDEX KEY: 0000031978 STANDARD INDUSTRIAL CLASSIFICATION: [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: 694635 BUSINESS ADDRESS: STREET 1: 303 N OREGON ST CITY: EL PASO STATE: TX ZIP: 79901 BUSINESS PHONE: 9155435711 10-Q 1 0001.txt 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 June 30, 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 (I.R.S. Employer incorporation or organization) 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 August 4, 2000, there were 54,628,502 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 - June 30, 2000 and December 31, 1999.......................... 1 Statements of Operations - Three Months, Six Months and Twelve Months Ended June 30, 2000 and 1999........................................... 3 Statements of Comprehensive Operations - Three Months, Six Months and Twelve Months Ended June 30, 2000 and 1999......................... 5 Statements of Cash Flows - Six Months Ended June 30, 2000 and 1999.......................................................................... 6 Notes to Financial Statements................................................. 7 Independent Accountants' Review Report........................................ 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................ 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk............... 22 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................................ 24 Item 4. Submission of Matters to a Vote of Security Holders...................... 24 Item 5. Other Matters............................................................ 24 Item 6. Exhibits and Reports on Form 8-K......................................... 24
i PART I. FINANCIAL INFORMATION Item 1. Financial Statements EL PASO ELECTRIC COMPANY BALANCE SHEETS
ASSETS June 30, (In thousands) 2000 December 31, (Unaudited) 1999 ------------- ------------- Utility plant: Electric plant in service.................................................. $ 1,643,930 $ 1,626,224 Less accumulated depreciation and amortization............................. 363,949 329,165 ------------- ------------- Net plant in service.................................................... 1,279,981 1,297,059 Construction work in progress.............................................. 70,202 61,842 Nuclear fuel; includes fuel in process of $9,672 and $8,994, respectively.................................................... 78,020 78,891 Less accumulated amortization.............................................. 38,696 39,355 ------------- ------------- Net nuclear fuel........................................................ 39,324 39,536 ------------- ------------- Net utility plant.................................................... 1,389,507 1,398,437 ------------- ------------- Current assets: Cash and temporary investments............................................. 13,431 37,234 Accounts receivable, principally trade, net of allowance for doubtful accounts of $2,430 and $2,429, respectively.................... 79,187 62,036 Inventories, at cost....................................................... 25,315 25,963 Net undercollection of fuel revenues....................................... 6,412 - Prepayments and other...................................................... 5,184 8,832 ------------- ------------- Total current assets................................................. 129,529 134,065 ------------- ------------- Long-term contract receivable................................................ 14,032 17,237 ------------- ------------- Deferred charges and other assets: Decommissioning trust fund................................................. 60,013 57,117 Other...................................................................... 17,652 19,035 ------------- ------------- Total deferred charges and other assets.............................. 77,665 76,152 ------------- ------------- Total assets......................................................... $ 1,610,733 $ 1,625,891 ============= =============
See accompanying notes to financial statements. 1 EL PASO ELECTRIC COMPANY BALANCE SHEETS (Continued)
CAPITALIZATION AND LIABILITIES June 30, (In thousands except for share data) 2000 December 31, (Unaudited) 1999 ------------- ------------- Capitalization: Common stock, stated value $1 per share, 100,000,000 shares authorized, 60,332,533 and 60,200,921 shares issued, and 273,485 and 258,788 restricted shares, respectively................. $ 60,606 $ 60,460 Capital in excess of stated value.......................................... 244,062 242,702 Unearned compensation - restricted stock awards............................ (1,978) (1,149) Retained earnings.......................................................... 166,899 143,724 Accumulated other comprehensive income (net unrealized gains on marketable securities), net of tax............................. 4,281 4,179 ------------- ------------- 473,870 449,916 Treasury stock, 5,980,072 and 3,199,927 shares, respectively; at cost...... (53,933) (28,658) ------------- ------------- Common stock equity..................................................... 419,937 421,258 Long-term debt............................................................. 730,959 788,576 Financing and capital lease obligations.................................... 25,437 23,031 ------------- ------------- Total capitalization................................................. 1,176,333 1,232,865 ------------- ------------- Current liabilities: Current maturities of long-term debt and financing and capital lease obligations............................................... 58,012 27,042 Revolving credit facility.................................................. 5,000 - Accounts payable, principally trade........................................ 32,575 22,241 Litigation settlements payable............................................. - 16,500 Taxes accrued other than federal income taxes.............................. 14,220 17,617 Interest accrued........................................................... 16,536 17,022 Net overcollection of fuel revenues........................................ - 2,640 Other...................................................................... 12,792 12,946 ------------- ------------- Total current liabilities............................................ 139,135 116,008 ------------- ------------- Deferred credits and other liabilities: Decommissioning liability.................................................. 124,483 120,875 Accrued postretirement benefit liability................................... 81,454 81,176 Accrued pension liability.................................................. 32,268 32,476 Accumulated deferred income taxes, net..................................... 27,640 12,503 Other...................................................................... 29,420 29,988 ------------- ------------- Total deferred credits and other liabilities......................... 295,265 277,018 ------------- ------------- Commitments and contingencies Total capitalization and liabilities................................. $ 1,610,733 $ 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 Six Months Ended June 30, June 30, ------------------------ ------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- Operating revenues.............................................. $ 171,464 $ 133,168 $ 309,509 $ 262,719 ----------- ----------- ----------- ----------- Energy expenses: Fuel.......................................................... 34,564 22,272 61,674 44,334 Purchased and interchanged power.............................. 16,064 3,968 19,553 4,720 ----------- ----------- ----------- ----------- 50,628 26,240 81,227 49,054 ----------- ----------- ----------- ----------- Operating revenues net of energy expenses....................... 120,836 106,928 228,282 213,665 ----------- ----------- ----------- ----------- Other operating expenses: Other operations.............................................. 33,452 32,787 67,013 63,852 Maintenance................................................... 11,033 11,874 19,376 20,788 Depreciation and amortization................................. 21,535 22,931 43,324 45,736 Taxes other than income taxes................................. 11,030 10,889 21,991 22,169 ----------- ----------- ----------- ----------- 77,050 78,481 151,704 152,545 ----------- ----------- ----------- ----------- Operating income................................................ 43,786 28,447 76,578 61,120 ----------- ----------- ----------- ----------- Other income (deductions): Investment income............................................. 964 1,415 1,745 4,494 Litigation settlements........................................ - - (1,000) - Other, net.................................................... (764) 518 (1,633) (44) ----------- ----------- ----------- ----------- 200 1,933 (888) 4,450 ----------- ----------- ----------- ----------- Income before interest charges.................................. 43,986 30,380 75,690 65,570 ----------- ----------- ----------- ----------- Interest charges (credits): Interest on long-term debt.................................... 16,991 18,565 33,563 37,720 Other interest................................................ 2,020 2,038 3,830 4,075 Interest capitalized.......................................... (951) (1,635) (1,832) (3,339) ----------- ----------- ----------- ----------- 18,060 18,968 35,561 38,456 ----------- ----------- ----------- ----------- Income before income taxes...................................... 25,926 11,412 40,129 27,114 Income tax expense.............................................. 10,758 4,364 16,405 10,604 ----------- ----------- ----------- ----------- Income before extraordinary loss on repurchases of debt........................................... 15,168 7,048 23,724 16,510 Extraordinary loss on repurchases of debt, net of income tax benefit............................ - (1,183) (549) (1,183) ----------- ----------- ----------- ----------- Net income...................................................... 15,168 5,865 23,175 15,327 Preferred stock: Dividend requirements......................................... - - - 2,616 Redemption costs.............................................. - 10 - 9,581 ----------- ----------- ----------- ----------- Net income applicable to common stock........................... $ 15,168 $ 5,855 $ 23,175 $ 3,130 =========== =========== =========== =========== Basic earnings per common share: Income before extraordinary loss on repurchases of debt........................................ $ 0.279 $ 0.117 $ 0.433 $ 0.072 Extraordinary loss on repurchases of debt, net of income tax benefit......................................... - (0.020) (0.010) (0.020) ----------- ----------- ----------- ----------- Net income................................................. $ 0.279 $ 0.097 $ 0.423 $ 0.052 =========== =========== =========== =========== Diluted earnings per common share: Income before extraordinary loss on repurchases of debt........................................ $ 0.275 $ 0.116 $ 0.427 $ 0.071 Extraordinary loss on repurchases of debt, net of income tax benefit......................................... - (0.019) (0.010) (0.019) ----------- ----------- ----------- ----------- Net income................................................. $ 0.275 $ 0.097 $ 0.417 $ 0.052 =========== =========== =========== =========== Weighted average number of common shares outstanding................................................... 54,375,819 60,206,105 54,837,870 60,208,059 =========== =========== =========== =========== Weighted average number of common shares and dilutive potential common shares outstanding.................. 55,172,804 60,620,058 55,519,019 60,415,036 =========== =========== =========== ===========
See accompanying notes to financial statements. 3 EL PASO ELECTRIC COMPANY STATEMENTS OF OPERATIONS (Unaudited) (In thousands except for share data)
Twelve Months Ended June 30, ------------------------- 2000 1999 ----------- ----------- Operating revenues........................................................................ $ 617,259 $ 581,959 ----------- ----------- Energy expenses: Fuel.................................................................................... 121,738 100,672 Coal mine reclamation adjustment........................................................ (6,601) - Purchased and interchanged power........................................................ 26,833 17,522 ----------- ----------- 141,970 118,194 ----------- ----------- Operating revenues net of energy expenses................................................. 475,289 463,765 ----------- ----------- Other operating expenses: Other operations........................................................................ 137,757 135,534 Maintenance............................................................................. 34,895 39,221 New Mexico Settlement charge............................................................ - 6,272 Depreciation and amortization........................................................... 88,522 91,010 Taxes other than income taxes........................................................... 41,321 43,985 ----------- ----------- 302,495 316,022 ----------- ----------- Operating income.......................................................................... 172,794 147,743 ----------- ----------- Other income (deductions): Investment income....................................................................... 4,179 11,882 Litigation settlements.................................................................. (17,500) - Settlement of bankruptcy professional fees.............................................. - 657 Other, net.............................................................................. 1,177 (556) ----------- ----------- (12,144) 11,983 ----------- ----------- Income before interest charges............................................................ 160,650 159,726 ----------- ----------- Interest charges (credits): Interest on long-term debt.............................................................. 72,477 77,992 Other interest.......................................................................... 7,452 7,720 Interest capitalized.................................................................... (1,735) (6,493) ----------- ----------- 78,194 79,219 ----------- ----------- Income before income taxes................................................................ 82,456 80,507 Income tax expense........................................................................ 31,433 31,134 ----------- ----------- Income before extraordinary items......................................................... 51,023 49,373 ----------- ----------- Extraordinary items: Extraordinary loss on repurchases of debt, net of income tax benefit.................... (2,702) (1,183) Extraordinary gain on discharge of debt, net of income tax expense...................... - 3,343 ----------- ----------- Net income................................................................................ 48,321 51,533 Preferred stock: Dividend requirements................................................................... - 10,176 Redemption costs........................................................................ - 9,581 ----------- ----------- Net income applicable to common stock..................................................... $ 48,321 $ 31,776 =========== =========== Basic earnings per common share: Income before extraordinary items....................................................... $ 0.902 $ 0.492 Extraordinary loss on repurchases of debt, net of income tax benefit.................... (0.048) (0.020) Extraordinary gain on discharge of debt, net of income tax expense...................... - 0.056 ----------- ----------- Net income........................................................................... $ 0.854 $ 0.528 =========== =========== Diluted earnings per common share: Income before extraordinary items....................................................... $ 0.892 $ 0.489 Extraordinary loss on repurchases of debt, net of income tax benefit.................... (0.047) (0.019) Extraordinary gain on discharge of debt, net of income tax expense...................... - 0.055 ----------- ----------- Net income........................................................................... $ 0.845 $ 0.525 =========== =========== Weighted average number of common shares outstanding...................................... 56,572,978 60,188,290 =========== =========== Weighted average number of common shares and dilutive potential common shares outstanding............................................ 57,192,245 60,544,762 =========== ===========
See accompanying notes to financial statements. 4 EL PASO ELECTRIC COMPANY STATEMENTS OF COMPREHENSIVE OPERATIONS (Unaudited) (In thousands)
Three Months Six Months Twelve Months Ended Ended Ended June 30, June 30, June 30, ---------------------- ---------------------- ---------------------- 2000 1999 2000 1999 2000 1999 --------- --------- --------- --------- --------- --------- Net income.......................................... $ 15,168 $ 5,865 $ 23,175 $ 15,327 $ 48,321 $ 51,533 Other comprehensive income (loss): Net unrealized gain (loss) on marketable securities, less applicable income tax benefit (expense) of $249, $(683), $(55), $(1,027), $(686) and $(1,511), respectively..................................... (463) 1,268 102 1,906 1,274 2,805 --------- --------- --------- --------- --------- --------- Comprehensive income................................ 14,705 7,133 23,277 17,233 49,595 54,338 Preferred stock: Dividend requirements.............................. - - - 2,616 - 10,176 Redemption costs................................... - 10 - 9,581 - 9,581 --------- --------- --------- --------- --------- --------- Comprehensive income applicable to common stock.................................... $ 14,705 $ 7,123 $ 23,277 $ 5,036 $ 49,595 $ 34,581 ========= ========= ========= ========= ========= =========
See accompanying notes to financial statements. 5 EL PASO ELECTRIC COMPANY STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Six Months Ended June 30, --------------------------------------- 2000 1999 ----------- ------------ Cash Flows From Operating Activities: Net income..................................................................... $ 23,175 $ 15,327 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................................................ 43,324 45,736 Amortization of nuclear fuel................................................. 8,596 10,351 Deferred income taxes, net................................................... 15,431 9,486 Provision for Texas Settlement base revenue refund........................... - 4,156 Extraordinary loss on repurchases of debt, net of income tax benefit........................................................ 549 1,183 Other operating activities................................................... 2,782 2,697 Change in: Accounts receivable.......................................................... (17,151) 8,526 Inventories.................................................................. 648 1,017 Prepayments and other........................................................ 3,648 9,846 Long-term contract receivable................................................ 3,205 2,898 Accounts payable............................................................. 10,334 (15,919) Litigation settlements payable............................................... (16,500) - Taxes accrued other than federal income taxes................................ (3,397) (3,115) Interest accrued............................................................. (486) (2,303) Net under/overcollection of fuel revenues.................................... (9,052) 578 Other current liabilities.................................................... (153) 8,923 Deferred charges and credits................................................. 3,223 2,944 ----------- ------------ Net cash provided by operating activities.................................. 68,176 102,331 ----------- ------------ Cash Flows From Investing Activities: Cash additions to utility property, plant and equipment........................ (33,926) (29,501) Cash additions to nuclear fuel................................................. (8,032) (6,741) Interest capitalized: Utility property, plant and equipment........................................ (1,480) (1,648) Nuclear fuel................................................................. (352) (1,691) Investment in decommissioning trust fund....................................... (2,739) (2,728) Other investing activities..................................................... (59) (136) ----------- ------------ Net cash used for investing activities..................................... (46,588) (42,445) ----------- ------------ Cash Flows From Financing Activities: Treasury stock purchases....................................................... (25,275) (4,288) Repurchases of and payments on long-term debt.................................. (23,731) (82,196) Nuclear fuel financing obligations: Proceeds..................................................................... 9,687 8,433 Payments..................................................................... (10,055) (10,725) Revolving credit facility, net proceeds........................................ 5,000 - Redemption of preferred stock.................................................. - (148,937) Preferred stock dividend payment............................................... - (1,328) Payments on capital lease obligations.......................................... (827) (751) Other financing activities..................................................... (190) (138) ----------- ------------ Net cash used for financing activities..................................... (45,391) (239,930) ----------- ------------ Net decrease in cash and temporary investments................................... (23,803) (180,044) Cash and temporary investments at beginning of period............................ 37,234 229,150 ----------- ------------ Cash and temporary investments at end of period.................................. $ 13,431 $ 49,106 =========== ============
See accompanying notes to financial statements. 6 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (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 June 30, 2000 and December 31, 1999; the results of operations for the three, six and twelve months ended June 30, 2000 and 1999; and cash flows for the six months ended June 30, 2000 and 1999. The results of operations for the three, six and twelve months ended June 30, 2000 and the cash flows for the six months ended June 30, 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, effective January 1, 2000, 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, $1.5 million and $1.5 million, net of tax, or $0.01, $0.03 and $0.03 diluted earnings per common share for the three, six and twelve months ended June 30, 2000. Supplemental Cash Flow Disclosures (In thousands)
Six Months Ended June 30, ------------------------------------ 2000 1999 ----------- ----------- Cash paid for: Interest on long-term debt (1)........................ $ 32,718 $ 38,140 Other interest........................................ 48 530 Income taxes, net..................................... 1,200 1,200 Non-cash investing and financing activities: Grants of restricted shares of common stock...................................... 1,696 1,480 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. 7 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 June 30, ------------------------------------------------------------------------------------- 2000 1999 ----------------------------------------- ---------------------------------------- Per Per Common Common Income Shares Share Income Shares Share ------------ ------------ ------------ ------------ ------------ ------------ (In thousands) (In thousands) Income before extraordinary item..... $ 15,168 $ 7,048 Less: Preferred stock redemption costs................... - 10 ------------ ------------ Basic earnings per common share: Income before extraordinary item applicable to common stock.............................. 15,168 54,375,819 $ 0.279 7,038 60,206,105 $ 0.117 ============ ============ Effect of dilutive securities: Unvested restricted stock........... - 51,623 - 29,186 Stock options....................... - 745,362 - 384,767 ------------ ------------ ------------ ------------ Diluted earnings per common share: Income before extraordinary item applicable to common stock.............................. $ 15,168 55,172,804 $ 0.275 $ 7,038 60,620,058 $ 0.116 ============ ============ ============ ============ ============ ============
Six Months Ended June 30, ------------------------------------------------------------------------------------- 2000 1999 ----------------------------------------- ---------------------------------------- Per Per Common Common Income Shares Share Income Shares Share ------------ ------------ ------------ ------------ ------------ ------------ (In thousands) (In thousands) Income before extraordinary item..... $ 23,724 $ 16,510 Less: Preferred stock: Dividend requirements............ - 2,616 Redemption costs................. - 9,581 ------------ ------------ Basic earnings per common share: Income before extraordinary item applicable to common stock......... 23,724 54,837,870 $ 0.433 4,313 60,208,059 $ 0.072 ============ ============ Effect of dilutive securities: Unvested restricted stock........... - 37,186 - 14,593 Stock options....................... - 643,963 - 192,384 ------------ ------------ ------------ ------------ Diluted earnings per common share: Income before extraordinary item applicable to common stock......... $ 23,724 55,519,019 $ 0.427 $ 4,313 60,415,036 $ 0.071 ============ ============ ============ ============ ============ ============
8 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (Unaudited)
Twelve Months Ended June 30, ------------------------------------------------------------------------------------- 2000 1999 ----------------------------------------- ---------------------------------------- Per Per Common Common Income Shares Share Income Shares Share ------------ ------------ ------------ ------------ ------------ ------------ (In thousands) (In thousands) Income before extraordinary items.... $ 51,023 $ 49,373 Less: Preferred stock: Dividend requirements............ - 10,176 Redemption costs................. - 9,581 ------------ ------------ Basic earnings per common share: Income before extraordinary items applicable to common stock.............................. 51,023 56,572,978 $ 0.902 29,616 60,188,290 $ 0.492 ============ ============ Effect of dilutive securities: Unvested restricted stock........... - 44,025 - 26,022 Stock options....................... - 575,242 - 330,450 ------------ ------------ ------------ ------------ Diluted earnings per common share: Income before extraordinary items applicable to common stock.............................. $ 51,023 57,192,245 $ 0.892 $ 29,616 60,544,762 $ 0.489 ============ ============ ============ ============ ============ ============
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 third and 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 9 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (Unaudited) 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. The Company believes that its corporate restructuring described below in "New Mexico Regulatory Matters" satisfies the restructuring requirements under the Texas Restructuring Law. On March 14, 2000, as supplemented on May 15, 2000, the Company filed for necessary Texas Commission approvals relating to the Company's corporate restructuring. The Company, the Texas Commission staff and other interested parties have reached an agreement in principle on all issues related to the Company's corporate restructuring and will submit a stipulation to the Texas Commission in August 2000. Fuel. Although the Company's base rates are frozen in Texas, pursuant to Texas Commission rules and the Texas Rate Stipulation, the Company can request adjustments to its fuel factor to more accurately reflect its projected increases or decreases in energy costs associated with the provision of electricity. The recent substantial increases in the price of natural gas and purchased power exceed the Company's current fuel factor, resulting in a significant underrecovery of the Company's actual fuel expense. Therefore, on August 1, 2000, the Company filed a petition with the Texas Commission requesting an increase in its fuel factor in Texas. The Company's petition requested expedited approval by the Texas Commission. The Company also intends to seek recovery of cumulative underrecovered fuel expense by filing an interim surcharge proceeding in January 2001. If this surcharge is approved, these charges are subject to final review by the Texas Commission in the Company's next applicable fuel reconciliation proceeding. 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, 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 10 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (Unaudited) 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. On June 1, 2000, the Company filed its Transition Plan-Phase II with the New Mexico Commission, 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. The Company believes that the New Mexico Commission will enter a final order on the Transition Plan- Phase I by December 1, 2000, and on the Transition Plan-Phase II by October 1, 2001. Under the New Mexico Restructuring Law, the New Mexico Commission delayed the start of retail customer choice until January 1, 2002 for public post- secondary educational institutions, public schools and residential and small business customers. Fuel. The New Mexico Settlement Agreement incorporated the then existing fuel factor into base rates and accordingly, the Company will absorb any increases or decreases in fuel expense related to its New Mexico retail customers until the start of competition on January 1, 2002. Federal Regulatory Matters On June 16, 2000, the Company filed its Application for Authorization to Transfer Certain Assets and Approval of Certain Securities Transactions with the FERC seeking the necessary FERC approvals for its corporate restructuring. On July 6, 2000, the Company filed its Application for Nuclear Regulatory Commission Consent to the indirect transfer of control of the Company's minority non-operating ownership interest in Palo Verde seeking necessary NRC approvals related to the Company's corporate restructuring. The Company believes it will obtain these regulatory approvals for its corporate restructuring before January 1, 2001, when the Company anticipates implementing its new corporate structure. Fuel. Under FERC regulations, the Company's fuel factor is adjusted monthly for the majority of FERC jurisdictional customers. Accordingly, any increases or decreases in natural gas or purchased power expenses immediately flow through to such customers. 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. In March 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. As of June 30, 2000, the Company had repurchased approximately 5.9 million shares of common stock for approximately $53.9 million, including commissions, under the initial repurchase program. The Company will make purchases primarily in the open market at prevailing prices and will also engage in private transactions, if appropriate. Any repurchased shares will be available for issuance under employee benefit and stock option plans, or may be retired. 11 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (Unaudited) 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 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 Pursuant to the terms of the settlement agreement dated May 3, 2000 with Las Cruces, all existing litigation between the Company and Las Cruces, including all litigation pending before the FERC and the Federal District Court of New Mexico, has been dismissed. 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 12 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (Unaudited) 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 petitioned the United States Supreme Court for review of this decision. This petition was denied, and the pending lower court litigation will proceed. The Company is unable to predict the outcome of this case. APS's contractual rights to effluent are not currently in controversy in this litigation. This effluent is the Participants' primary source of water in the operation of Palo Verde. The Company does not currently believe that an adverse ruling in this litigation on groundwater rights will materially affect Palo Verde operations. Other Legal Proceedings The Company is a party to various other claims, legal actions and complaints. In many of these matters, the Company has excess casualty liability insurance which is applicable. Based upon a review of these claims and applicable insurance coverage, the Company believes that none of these claims will have a material adverse effect on the financial position, results of operations and cash flows of the Company. 13 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 June 30, 2000, the related condensed statements of operations and comprehensive operations for the three months, six months and twelve months ended June 30 , 2000 and 1999, and the related condensed statements of cash flows for the six months ended June 30, 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 July 21, 2000 14 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 15 uncertainty as to whether the New Mexico legislation will effectively permit the Company to recover its stranded costs, including the costs of decommissioning, in full. The potential effects of deregulation are particularly important to the Company because its rates are significantly higher than the national and 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 five months of 2000. However, on May 31, 2000, CFE agreed to purchase from the Company firm capacity and associated energy sales of up to 80 MW from June 1, 2000 through August 31, 2000, up to 40 MW during May 2001 and up to 100 MW from June 1, 2001 through 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, and Duke Energy has announced it is exploring the possibility of building a generation plant in Deming, New Mexico. 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. During the second quarter of 2000, the Company experienced increased costs related to its inability to pass through to customers certain fuel expenses and to an unscheduled plant shutdown. The Company is unable to increase or decrease base rates in certain areas and under certain contracts to compensate for increases or decreases in fuel expense. For the three months ended June 30, 2000, increases in the cost of natural gas and purchased power have resulted in additional fuel expenses of $0.8 million, net of tax, that were not recovered from the Company's customers. In July 2000, Unit 3 at the Company's Newman Power Station experienced a mechanical problem with its turbine shaft, resulting in Unit 3 being taken out of service. Due to the loss of this generation, the Company is purchasing power in the open market to meet the Company's load demand during peak demand periods. The cost of this purchased power, together with the loss of Unit 3's generating 16 capacity, will mitigate the benefits that the Company would otherwise realize from its off-system wholesale power sales. The Company believes that Unit 3 will be repaired and available for service by September 2000. The vendor has agreed to perform the necessary repairs at no charge. 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, and capital expenditures related to the Company's generating facilities and transmission and distribution systems. While the underrecovery of fuel expense and the timing of recovery of fuel expense in Texas will reduce the Company's cash flows, the Company believes that cash flows from operations will generally be sufficient to meet its principal liquidity requirements. 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. At June 30, 2000, the Company had approximately $13.4 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 June 30, 2000, approximately $47.9 million had been drawn for nuclear fuel purchases. On July 7, 2000, the remaining $5 million outstanding of the $10 million drawn in May 2000 to pay a portion of the Las Cruces settlement payment was repaid. Otherwise no amounts have ever been drawn on this facility for working capital needs. The Company has a high debt to capitalization ratio and significant debt service obligations. Due to the Texas Rate Stipulation, the Texas Settlement Agreement, the New Mexico Settlement Agreement and competitive pressures, the Company does not expect to be able to raise its base rates in the event of increases in non-fuel costs, increases in fuel costs for New Mexico and certain wholesale customers 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 August 4, 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 36% at June 30, 2000. In addition, the Company's bonds are now rated investment grade by all four major credit rating agencies. 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. 17 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. In March 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. As of August 4, 2000, the Company had repurchased approximately 5.9 million shares of common stock for approximately $53.9 million, including commissions, under the initial repurchase program. The Company will make purchases primarily in the open market at prevailing prices and will also engage in private transactions, if appropriate. Any repurchased shares will be available for issuance under employee benefit and stock option plans or may be retired. 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. Historical Results of Operations
Income Before Diluted Earnings Extraordinary Before Items Applicable to Extraordinary Items Common Stock Per Common Share ------------------------- ------------------------ 2000 1999 2000 1999 --------- --------- -------- -------- (In thousands) Three Months Ended June 30.................... $ 15,168 $ 7,038 $ 0.275 $ 0.116 Six Months Ended June 30...................... 23,724 4,313 0.427 0.071 Twelve Months Ended June 30................... 51,023 29,616 0.892 0.489
Results of operations for the twelve months ended June 30, 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 six and twelve months ended June 30, 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 June 30, 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 $13.9 million for the three months ended June 30, 2000 compared to the same period last year primarily due to increased kWh sales and increased margins on economy sales. Operating revenues net of energy expenses increased $14.6 million and 18 $11.5 million for the six and twelve months ended June 30, 2000, respectively, compared to the same periods last year, as follows (in thousands): Six Months Ended June 30: 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............ $ 228,282 $ 208,801 $ 19,481 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.................. $ 228,282 $ 213,665 $ 14,617 ========= ========= ========= Twelve Months Ended June 30: 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 a coal mine reclamation adjustment............. $ 468,688 $ 455,663 $ 13,025 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.................. $ 475,289 $ 463,765 $ 11,524 ========= ========= =========
Excluding the effects of the unusual or infrequent items shown above, the six and twelve month increases in operating revenues net of energy expenses of $19.5 million and $13.0 million, respectively, were primarily due to increased kWh sales and increased economy sales at higher margins. The twelve month increase was partially offset by the rate reductions in Texas and New Mexico and decreased sales to CFE. 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 six and twelve month periods ended June 30, 1999. Comparisons of kWh sales and operating revenues are shown below (in thousands):
Increase/(Decrease) -------------------- Three Months Ended June 30: 2000 1999 Amount Percent - --------------------------- ---------- ---------- -------- ------- Electric kWh sales: Retail.................................. 1,542,826 1,417,621 125,205 8.8% (1) Sales for resale........................ 295,709 225,163 70,546 31.3 (2) Economy sales........................... 290,533 233,971 56,562 24.2 (3) ---------- ---------- -------- Total.................................. 2,129,068 1,876,755 252,313 13.4 ========== ========== ======== Operating revenues: Retail.................................. $ 139,606 $ 116,686 $ 22,920 19.6% (4) Sales for resale........................ 16,840 12,248 4,592 37.5 (5) Economy sales........................... 15,018 4,234 10,784 254.7 (3) ---------- ---------- -------- Total.................................. $ 171,464 $ 133,168 $ 38,296 28.8 ========== ========== ========
19
Increase/(Decrease) ---------------------- Six Months Ended June 30: 2000 1999 Amount Percent - ------------------------- ---------- ---------- --------- ------- Electric kWh sales: Retail.................................. 2,883,007 2,740,133 142,874 5.2% Sales for resale........................ 567,439 372,423 195,016 52.4 (2) Economy sales........................... 896,415 700,947 195,468 27.9 (3) ---------- ---------- -------- Total.................................. 4,346,861 3,813,503 533,358 14.0 ========== ========== ======== Operating revenues: Retail.................................. $ 249,971 $ 227,514 (6) $ 22,457 9.9% Sales for resale........................ 29,751 22,893 6,858 30.0 (5) Economy sales........................... 29,787 12,312 17,475 141.9 (3) ---------- ---------- -------- Total.................................. $ 309,509 $ 262,719 $ 46,790 17.8 ========== ========== ======== Increase/(Decrease) ---------------------- Twelve Months Ended June 30: 2000 1999 Amount Percent - ---------------------------- ---------- ---------- --------- ------- Electric kWh sales: Retail.................................. 6,009,042 5,922,951 86,091 1.5% Sales for resale........................ 1,100,991 1,201,730 (100,739) (8.4) (7) Economy sales........................... 1,693,348 1,209,240 484,108 40.0 (3) ---------- ---------- --------- Total.................................. 8,803,381 8,333,921 469,460 5.6 ========== ========== ========= Operating revenues: Retail.................................. $ 510,962 $ 494,426 (6) $ 16,536 3.3% Sales for resale........................ 56,299 61,420 (5,121) (8.3) (8) Economy sales........................... 49,998 26,113 23,885 91.5 (3) ---------- ---------- --------- Total.................................. $ 617,259 $ 581,959 $ 35,300 6.1 ========== ========== =========
- ------------- (1) Primarily due to (i) mild weather during the three months ended June 30, 1999 and (ii) normal customer growth. (2) Primarily due to (i) increased kWh sales to IID and (ii) sales to CFE as a result of a new contract that is effective from June through August 2000 with no comparable sales to CFE in 1999. (3) In order to ensure sufficient availability of purchased power during the summer of 2000, the Company entered into a firm purchased power contract in January 2000 that is effective through the end of the year. The increase in economy sales is partially due to the sale of power purchased under this contract that was not needed to serve native load and wholesale contracts during the first half of the year. (4) Primarily due to (i) increased fuel costs that are passed through directly to Texas jurisdictional customers, (ii) mild weather during the three months ended June 30, 1999 and (iii) normal customer growth. (5) Primarily due to (i) increased fuel costs that are passed through directly to certain wholesale customers and (ii) sales to CFE as noted above. (6) Includes the effects of the Texas Settlement Agreement and changes in estimated fuel cost reserves of $4,864 and $8,102 for the six and twelve months ended June 30, 1999, respectively. (7) Primarily due to decreased sales to CFE partially offset by increased kWh sales to IID. (8) Primarily due to decreased sales to CFE partially offset by increased fuel costs that are passed through directly to certain wholesale customers. 20 On May 31, 2000, CFE agreed to purchase from the Company firm capacity and associated energy sales of up to 80 MW from June 1, 2000 through August 31, 2000, up to 40 MW during May 2001 and up to 100 MW from June 1, 2001 through September 30, 2001. Other operations and maintenance expense decreased $0.2 million for the three months ended June 30, 2000 compared to the same period last year, as follows (in thousands): Three Months Ended June 30: 2000 1999 Increase/(Decrease) - --------------------------- ------- ------- ------------------- Palo Verde................................ $12,403 $13,461 $(1,058) Pensions and benefits..................... 3,259 4,178 (919) (1) ESBG activity............................. 1,593 909 684 Outside services and regulatory expense... 3,468 2,937 531 Other..................................... 23,762 23,176 586 ------- ------- ------- Total other operations and maintenance expense................. $44,485 $44,661 $ (176) ======= ======= =======
Other operations and maintenance expense increased $1.7 million for the six months ended June 30, 2000 compared to the same period last year, as follows (in thousands): Six Months Ended June 30: 2000 1999 Increase/(Decrease) - ------------------------- ------- ------- ------------------ ESBG activity............................. $ 2,779 $ 1,341 $ 1,438 Outside services and regulatory expense... 6,063 4,817 1,246 Pensions and benefits..................... 7,523 9,361 (1,838) (1) Other..................................... 70,024 69,121 903 ------- ------- ------- Total other operations and maintenance expense................. $86,389 $84,640 $ 1,749 ======= ======= =======
Other operations and maintenance expense decreased $2.1 million for the twelve months ended June 30, 2000 compared to the same period last year, as follows (in thousands): Twelve Months Ended June 30: 2000 1999 Increase/(Decrease) - ---------------------------- -------- -------- ------------------ Pensions and benefits..................... $ 13,759 $ 19,512 $(5,753) (1) Customer accounts expense................. 5,434 3,519 1,915 (2) Outside services and regulatory expense... 12,614 10,927 1,687 ESBG activity............................. 4,444 2,967 1,477 Other..................................... 136,401 137,830 (1,429) -------- -------- ------- Total other operations and maintenance expense................. $172,652 $174,755 $(2,103) ======== ======== =======
- ------------- (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 receipt in the prior period from a large industrial customer of an amount previously expensed. 21 Depreciation and amortization expense decreased $1.4 million, $2.4 million and $2.5 million for the three, six and twelve months ended June 30, 2000, respectively, compared to the same periods last year due to a change in the estimated depreciable life of the decommissioning portion of Palo Verde. Taxes other than income taxes did not change significantly for the three and six months ended June 30, 2000 compared to the same periods last year. Taxes other than income taxes decreased $2.7 million for the twelve months ended June 30, 2000 compared to the same period last year primarily due to a $3.1 million reversal of sales tax reserves established in prior years and a decrease in Arizona property taxes resulting from a decrease in the assessment ratio and a decrease in tax base. These decreases were partially offset by an increase in Texas property taxes primarily due to an increase in operating income on which property taxes are based and franchise taxes due to refunds in 1998 with no comparable amount in 1999. Other income decreased $1.7 million, $5.3 million and $24.1 million for the three, six and twelve months ended June 30, 2000, respectively, compared to the same periods last year due to (i) decreased investment income of $0.5 million, $2.7 million and $7.7 million, respectively, resulting from the investment of lower levels of cash; (ii) litigation settlements of $1.0 million for the six and twelve months ended June 30, 2000; (iii) the sale of non-utility property of $1.0 million for the six months ended June 30, 1999 with no comparable activity in 2000; and (iv) the accrual of the $16.5 million settlement agreement payment to Las Cruces during the twelve months ended June 30, 2000. Interest charges decreased $0.9 million, $2.9 million and $1.0 million for the three, six and twelve months ended June 30, 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. These decreases were partially offset by the discontinuance of capitalizing interest on postload nuclear fuel. The decrease for the twelve months ended June 30, 2000, was partially offset by adjustments to postload nuclear fuel to write-off a portion of accumulated interest capitalized prior to 1999. Income tax expense, excluding the tax effect of extraordinary items, increased $6.4 million, $5.8 million and $0.3 million for the three, six and twelve months ended June 30, 2000, respectively, compared to the same periods last year due to changes in pretax income and certain permanent differences. Extraordinary loss on repurchases of debt of $0.5 million and $2.7 million for the six and twelve months ended June 30, 2000, respectively, net of income tax benefit of $0.3 million and $1.7 million, represents the payment of premiums on debt repurchased and the recognition of unamortized issuance expenses on that debt. Extraordinary gain on discharge of debt of $3.3 million for the twelve months ended June 30, 1999, net of income tax expense of $2.1 million, represents unclaimed and undistributed funds designated for the payment of preconfirmation claims which reverted to the Company. Item 3. Quantitative and Qualitative Disclosures About Market Risk The following discussion regarding the Company's market-risk sensitive instruments contains forward-looking information involving risks and uncertainties. The statements regarding potential gains and losses are only estimates of what could occur in the future. Actual future results may differ 22 materially from those estimates presented due to the characteristics of the risks and uncertainties involved. The Company is exposed to market risk due to changes in interest rates, equity prices and commodity prices. 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 June 30, 2000, there have been no material changes in the interest rate and equity price 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. However, due to rising costs of fuel and purchased power ("energy costs"), the Company is facing increased commodity price risk, as discussed below. Commodity Price Risk The Company utilizes contracts of various duration for the purchase of natural gas, uranium concentrates and coal to effectively manage its available fuel portfolio. These agreements contain fixed-priced and variable-priced provisions and are settled by physical delivery. The fuel contracts with variable-pricing provisions, as well as substantially all of the Company's purchased power requirements, are exposed to fluctuations in prices due to unpredictable factors, such as weather, which impact supply and demand. Natural gas and purchased power prices increased significantly during the three months ended June 30, 2000. Furthermore, these prices are expected to remain high on average over the next twelve months. The Company's exposure to fuel and purchased power price risk is substantially mitigated through the operation of the Texas Commission rules and the Company's energy cost recovery clauses ("fuel clauses") in certain wholesale rates. Under these rules and fuel clauses, energy costs are passed through to customers. However, there are areas and contracts where energy costs are fixed as part of the Company's base rates and are not subject to periodic reconciliation or adjustment for fluctuations in such costs. The Company's average energy costs incurred in these areas and under certain contracts currently exceed the fixed fuel factor that was incorporated into base rates or into certain wholesale contracts. Therefore, the Company is exposed to commodity price risk on energy costs that are related to these sales of electricity. If the Company's average energy costs remain at the levels experienced during the three months ended June 30, 2000, the Company would not be able to recover energy costs of approximately $3.3 million, net of tax, over the next twelve months. Additionally, a hypothetical 10% increase in the market-based energy costs incurred during the three months ended June 30, 2000 would result in an annualized after-tax increase in energy costs of approximately $2.0 million that would not be mitigated by the Company's fuel clauses. 23 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 4. Submission of Matters to a Vote of Security Holders The annual meeting of shareholders of the Company was held May 4, 2000. The total number of common shares outstanding was 54,778,810, of which 50,358,454 were represented in person or by proxy. The following directors were elected to hold office for a three-year term expiring at the annual meeting of shareholders of the Company to be held in 2003: Director Votes For Votes Withheld -------- ---------- -------------- George W. Edwards, Jr. 50,230,172 128,282 Ramiro Guzman 49,712,784 645,670 Stephen Wertheimer 50,225,672 132,782 Charles A. Yamarone 50,224,366 134,088 In addition to the individuals set forth above, the following individuals continued as directors following the meeting: Wilson K. Cadman, James A. Cardwell, James W. Cicconi, Patricia Z. Holland-Branch, James W. Harris, Kenneth R. Heitz, Michael K. Parks, Eric B. Siegel, and James Haines. Item 5. Other Matters The Company has 320 employees (approximately 30% of its work force) who are covered by a collective bargaining agreement with the International Brotherhood of Electrical Workers, Local 960 ("Local 960"). Local 960's members work primarily as linemen and power plant personnel with the Company. The collective bargaining agreement between the Company and Local 960 expired on June 16, 2000. On July 14, 2000, the Company and Local 960 agreed on the terms of a new collective bargaining agreement. On July 28, 2000, Local 960's members ratified the new agreement by a majority vote. The new agreement will be in effect through June 2003. 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 24 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: August 11, 2000 25 EL PASO ELECTRIC COMPANY INDEX TO EXHIBITS Exhibit Number Exhibit - ------ ------- 10.08 Form of Directors' Restricted Stock Award Agreement between the Company and George W. Edwards, Jr. (Identical in all material respects to Exhibit 10.02 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999) +10.09 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) 11 Statement re Computation of Per Share Earnings 15 Letter re Unaudited Interim Financial Information 27 Financial Data Schedule (EDGAR filing only) + Twelve agreements, dated as of May 4, 2000, substantially identical in all material respects to this Exhibit were entered into with George W. Edwards, Jr.; Ramiro Guzman; James W. Harris; Kenneth R. Heitz; James W. Cicconi; Patricia Z. Holland-Branch; Michael K. Parks; Eric B. Siegel; Stephen Wertheimer; Charles A. Yamarone; James A. Cardwell; and Wilson K. Cadman, directors of the Company. EX-11 2 0002.txt STATEMENT RE 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 Six Months Ended June 30, June 30, ------------------------- ---------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- Net income applicable to common stock: Income before extraordinary item.............................. $ 15,168 $ 7,038 $ 23,724 $ 4,313 Extraordinary loss on repurchases of debt, net of income tax benefit................................................. - (1,183) (549) (1,183) ----------- ----------- ----------- ----------- Net income applicable to common stock....................... $ 15,168 $ 5,855 $ 23,175 $ 3,130 =========== =========== =========== =========== Basic earnings per common share: Weighted average number of common shares outstanding................................................. 54,375,819 60,206,105 54,837,870 60,208,059 =========== =========== =========== =========== Net income per common share: Income before extraordinary item............................ $ 0.279 $ 0.117 $ 0.433 $ 0.072 Extraordinary loss on repurchases of debt, net of income tax benefit............................................... - (0.020) (0.010) (0.020) ----------- ----------- ----------- ----------- Net income................................................ $ 0.279 $ 0.097 $ 0.423 $ 0.052 =========== =========== =========== =========== Diluted earnings per common share: Weighted average number of common shares outstanding................................................. 54,375,819 60,206,105 54,837,870 60,208,059 ----------- ----------- ----------- ----------- Effect of dilutive potential common stock options based on the treasury stock method using average market price: Quarter ended March 31.................................... - - 542,564 - Quarter ended June 30..................................... 745,362 384,767 745,362 384,767 Quarter ended September 30................................ - - - - Quarter ended December 31................................. - - - - Effect of dilutive potential restricted common stock based on the treasury stock method using average market price: Quarter ended March 31.................................... - - 22,749 - Quarter ended June 30..................................... 51,623 29,186 51,623 29,186 Quarter ended September 30................................ - - - - Quarter ended December 31................................. - - - - ----------- ----------- ----------- ----------- 796,985 413,953 1,362,298 413,953 Divided by number of quarters............................. 1 1 2 2 ----------- ----------- ----------- ----------- Net effect of dilutive potential common stock............ 796,985 413,953 681,149 206,977 ----------- ----------- ----------- ----------- Weighted average number of common shares and dilutive potential common shares outstanding......................... 55,172,804 60,620,058 55,519,019 60,415,036 =========== =========== =========== =========== Net income per common share: Income before extraordinary item............................ $ 0.275 $ 0.116 $ 0.427 $ 0.071 Extraordinary loss on repurchases of debt, net of income tax benefit............................................... - (0.019) (0.010) (0.019) ----------- ----------- ----------- ----------- Net income................................................ $ 0.275 $ 0.097 $ 0.417 $ 0.052 =========== =========== =========== ===========
El Paso Electric Company Exhibit 11 Computation of Earnings Per Share (In Thousands Except for Share Data)
Twelve Months Ended June 30, ---------------------------------- 2000 1999 ----------- ----------- Net income applicable to common stock: Income before extraordinary items............................. $ 51,023 $ 29,616 Extraordinary loss on repurchases of debt, net of income tax benefit................................................. (2,702) (1,183) Extraordinary gain on discharge of debt, net of income tax expense................................................. - 3,343 ----------- ----------- Net income applicable to common stock....................... $ 48,321 $ 31,776 =========== =========== Basic earnings per common share: Weighted average number of common shares outstanding................................................. 56,572,978 60,188,290 =========== =========== Net income per common share: Income before extraordinary items........................... $ 0.902 $ 0.492 Extraordinary loss on repurchases of debt, net of income tax benefit............................................... (0.048) (0.020) Extraordinary gain on discharge of debt, net of income tax expense................................................. - 0.056 ----------- ----------- Net income................................................ $ 0.854 $ 0.528 =========== =========== Diluted earnings per common share: Weighted average number of common shares outstanding................................................. 56,572,978 60,188,290 ----------- ----------- Effect of dilutive potential common stock options based on the treasury stock method using average market price: Quarter ended March 31.................................... 542,564 - Quarter ended June 30..................................... 745,362 384,767 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.................................... 22,749 - Quarter ended June 30..................................... 51,623 29,186 Quarter ended September 30................................ 45,471 35,468 Quarter ended December 31................................. 56,258 39,433 ----------- ----------- 2,477,067 1,425,889 Divided by number of quarters............................. 4 4 ----------- ----------- Net effect of dilutive potential common stock............ 619,267 356,472 ----------- ----------- Weighted average number of common shares and dilutive potential common shares outstanding......................... 57,192,245 60,544,762 =========== =========== Net income per common share: Income before extraordinary items........................... $ 0.892 $ 0.489 Extraordinary loss on repurchases of debt, net of income tax benefit............................................... (0.047) (0.019) Extraordinary gain on discharge of debt, net of income tax expense........................................ - 0.055 ----------- ----------- Net income................................................ $ 0.845 $ 0.525 =========== ===========
EX-15 3 0003.txt LETTER RE 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 July 21, 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 August 11, 2000 EX-27 4 0004.txt FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET OF EL PASO ELECTRIC COMPANY AS OF JUNE 30, 2000 AND THE RELATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 PER-BOOK 1,389,507 0 129,529 77,665 14,032 1,610,733 60,606 244,062 169,202 419,937 0 0 730,959 0 0 0 34,664 0 25,437 23,348 376,388 1,610,733 309,509 16,499 232,931 249,430 60,079 (794) 59,285 35,561 23,175 0 23,175 0 62,440 68,176 0.423 0.417 Includes ($53,933) related to 5,980,072 shares of treasury stock. Net income is net of extraordinary loss on repurchased debt (net of income tax benefit) of ($549).
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