-----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, RAM2eZ9//0GGwkxklkGiuBlyWouVDmEO6/zctCa5QCj6npxvajqKQhmwNTQJLxg/ vOYvdTUulNL1wWTTd5dM/w== 0000930661-01-501643.txt : 20010815 0000930661-01-501643.hdr.sgml : 20010815 ACCESSION NUMBER: 0000930661-01-501643 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 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: 1934 Act SEC FILE NUMBER: 000-00296 FILM NUMBER: 1710452 BUSINESS ADDRESS: STREET 1: 303 N OREGON ST CITY: EL PASO STATE: TX ZIP: 79901 BUSINESS PHONE: 9155435711 10-Q 1 d10q.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, 2001 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 6, 2001, there were 51,624,447 shares of the Company's no par value common stock outstanding. ================================================================================ EL PASO ELECTRIC COMPANY AND SUBSIDIARY INDEX TO FORM 10-Q
Page No. ------------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - June 30, 2001 and December 31, 2000....... 1 Consolidated Statements of Operations - Three Months, Six Months and Twelve Months Ended June 30, 2001 and 2000............................... 3 Consolidated Statements of Comprehensive Operations - Three Months, Six Months and Twelve Months Ended June 30, 2001 and 2000.................... 5 Consolidated Statements of Cash Flows - Six Months Ended June 30, 2001 and 2000................................................................. 6 Notes to Consolidated Financial Statements............................... 7 Independent Accountants' Review Report................................... 15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................. 16 Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 23 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................................. 25 Item 4. Submission of Matters to a Vote of Security Holders............... 25 Item 6. Exhibits and Reports on Form 8-K.................................. 25
PART I. FINANCIAL INFORMATION Item 1. Financial Statements EL PASO ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
ASSETS June 30, (In thousands) 2001 December 31, (Unaudited) 2000 ------------------ ------------ Utility plant: Electric plant in service............................................ $1,665,135 $1,659,539 Less accumulated depreciation and amortization....................... 432,448 391,675 ---------- ---------- Net plant in service............................................... 1,232,687 1,267,864 Construction work in progress........................................ 100,113 72,580 Nuclear fuel; includes fuel in process of $9,681 and $10,430, respectively.............................................. 73,805 75,880 Less accumulated amortization........................................ 34,944 36,289 ---------- ---------- Net nuclear fuel................................................... 38,861 39,591 ---------- ---------- Net utility plant................................................ 1,371,661 1,380,035 ---------- ---------- Current assets: Cash and temporary investments....................................... 18,682 11,344 Accounts receivable, principally trade, net of allowance for doubtful accounts of $3,278 and $3,293, respectively............... 84,451 86,647 Inventories, at cost................................................. 24,587 24,845 Net undercollection of fuel revenues................................. 36,203 15,733 Prepayments and other................................................ 8,619 9,165 ---------- ---------- Total current assets............................................. 172,542 147,734 ---------- ---------- Long-term contract receivable.......................................... 6,877 10,709 ---------- ---------- Deferred charges and other assets: Decommissioning trust fund........................................... 60,380 60,176 Other................................................................ 16,904 17,890 ---------- ---------- Total deferred charges and other assets.......................... 77,284 78,066 ---------- ---------- Total assets..................................................... $1,628,364 $1,616,544 ========== ==========
See accompanying notes to consolidated financial statements. 1 EL PASO ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Continued)
CAPITALIZATION AND LIABILITIES June 30, (In thousands except for share data) 2001 December 31, (Unaudited) 2000 ----------------- ------------ Capitalization: Common stock, stated value $1 per share, 100,000,000 shares authorized, 61,475,666 and 60,429,107 shares issued, and 232,542 and 276,066 restricted shares, respectively................... $ 61,708 $ 60,705 Capital in excess of stated value........................................... 249,754 244,528 Unearned compensation - restricted stock awards............................. (2,203) (1,309) Retained earnings........................................................... 232,819 202,116 Accumulated other comprehensive income (net unrealized gains on marketable securities), net of tax............................... 1,372 2,902 ---------- ---------- 543,450 508,942 Treasury stock, 9,904,237 and 9,230,786 shares, respectively; at cost....... (105,193) (96,908) ---------- ---------- Common stock equity....................................................... 438,257 412,034 Long-term debt.............................................................. 708,791 715,058 Financing and capital lease obligations..................................... - 25,165 ---------- ---------- Total capitalization.................................................. 1,147,048 1,152,257 ---------- ---------- Current liabilities: Current maturities of long-term debt and financing and capital lease obligations................................................. 47,092 57,663 Accounts payable, principally trade......................................... 33,146 39,799 Taxes accrued other than federal income taxes............................... 13,779 17,054 Interest accrued............................................................ 18,219 16,528 Other....................................................................... 19,765 15,930 ---------- ---------- Total current liabilities............................................. 132,001 146,974 ---------- ---------- Deferred credits and other liabilities: Decommissioning liability................................................... 131,974 128,129 Accrued postretirement benefit liability.................................... 82,280 81,784 Accumulated deferred income taxes, net...................................... 64,870 47,279 Accrued pension liability................................................... 30,958 31,134 Other....................................................................... 39,233 28,987 ---------- ---------- Total deferred credits and other liabilities.......................... 349,315 317,313 ---------- ---------- Commitments and contingencies Total capitalization and liabilities.................................. $1,628,364 $1,616,544 ========== ==========
See accompanying notes to consolidated financial statements. 2 EL PASO ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands except for share data)
Three Months Ended Six Months Ended June 30, June 30, -------------------------- -------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Electric utility operating revenues................................. $ 203,127 $ 170,137 $ 394,517 $ 307,204 ----------- ----------- ----------- ----------- Energy expenses: Fuel.............................................................. 53,207 34,564 102,659 61,674 Purchased and interchanged power.................................. 34,537 16,064 51,148 19,553 ----------- ----------- ----------- ----------- 87,744 50,628 153,807 81,227 ----------- ----------- ----------- ----------- Electric utility operating revenues net of energy expenses.......... 115,383 119,509 240,710 225,977 ----------- ----------- ----------- ----------- Energy services operations: Operating revenues................................................ 496 1,327 1,985 2,305 Operating expenses................................................ 1,224 1,592 3,113 2,779 ----------- ----------- ----------- ----------- (728) (265) (1,128) (474) ----------- ----------- ----------- ----------- Other electric utility operating expenses: Other operations.................................................. 31,687 31,860 64,692 64,234 Maintenance....................................................... 13,899 11,033 25,181 19,376 Depreciation and amortization..................................... 22,242 21,535 44,399 43,324 Taxes other than income taxes..................................... 10,812 11,030 21,539 21,991 ----------- ----------- ----------- ----------- 78,640 75,458 155,811 148,925 ----------- ----------- ----------- ----------- Operating income.................................................... 36,015 43,786 83,771 76,578 ----------- ----------- ----------- ----------- Other income (deductions): Investment income, net............................................ 1,706 964 2,607 1,745 Litigation settlements............................................ - - - (1,000) Other, net........................................................ (613) (764) (1,253) (1,633) ----------- ----------- ----------- ----------- 1,093 200 1,354 (888) ----------- ----------- ----------- ----------- Income before interest charges...................................... 37,108 43,986 85,125 75,690 ----------- ----------- ----------- ----------- Interest charges (credits): Interest on long-term debt........................................ 16,025 16,991 32,694 33,563 Other interest.................................................... 1,995 2,020 3,985 3,830 Interest capitalized.............................................. (1,255) (951) (2,296) (1,832) ----------- ----------- ----------- ----------- 16,765 18,060 34,383 35,561 ----------- ----------- ----------- ----------- Income before income taxes and extraordinary item................... 20,343 25,926 50,742 40,129 Income tax expense.................................................. 8,077 10,758 19,878 16,405 ----------- ----------- ----------- ----------- Income before extraordinary item.................................... 12,266 15,168 30,864 23,724 Extraordinary loss on extinguishments of debt, net of income tax benefit................................................ 161 - 161 549 ----------- ----------- ----------- ----------- Net income applicable to common stock............................... $ 12,105 $ 15,168 $ 30,703 $ 23,175 =========== =========== =========== =========== Basic earnings per common share: Income before extraordinary item.................................. $0.24 $0.28 $0.60 $ 0.43 Extraordinary loss on extinguishments of debt, net of income tax benefit............................................. - - - 0.01 ----------- ----------- ----------- ----------- Net income..................................................... $0.24 $0.28 $0.60 $ 0.42 =========== =========== =========== =========== Diluted earnings per common share: Income before extraordinary item.................................. $0.23 $0.28 $0.59 $ 0.43 Extraordinary loss on extinguishments of debt, net of income tax benefit............................................. - - - 0.01 ----------- ----------- ----------- ----------- Net income..................................................... $0.23 $0.28 $0.59 $ 0.42 =========== =========== =========== =========== Weighted average number of common shares outstanding....................................................... 51,333,726 54,375,819 51,175,732 54,837,870 =========== =========== =========== =========== Weighted average number of common shares and dilutive potential common shares outstanding...................... 52,314,337 55,172,804 52,152,625 55,519,019 =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. 3 EL PASO ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands except for share data)
Twelve Months Ended June 30, ------------------------------ 2001 2000 ----------- ----------- Electric utility operating revenues............................................. $ 783,721 $ 613,765 ----------- ----------- Energy expenses: Fuel.......................................................................... 200,532 121,738 Coal mine reclamation adjustment.............................................. - (6,601) Purchased and interchanged power.............................................. 92,812 26,833 ----------- ----------- 293,344 141,970 ----------- ----------- Electric utility operating revenues net of energy expenses...................... 490,377 471,795 ----------- ----------- Energy services operations: Operating revenues............................................................ 4,921 3,494 Operating expenses............................................................ 7,004 4,443 ----------- ----------- (2,083) (949) ----------- ----------- Other electric utility operating expenses: Other operations.............................................................. 132,744 133,314 Maintenance................................................................... 47,605 34,895 Depreciation and amortization................................................. 88,076 88,522 Taxes other than income taxes................................................. 42,702 41,321 ----------- ----------- 311,127 298,052 ----------- ----------- Operating income................................................................ 177,167 172,794 ----------- ----------- Other income (deductions): Investment income, net........................................................ 4,344 4,179 Litigation settlements........................................................ - (17,500) Other, net.................................................................... (1,891) 1,177 ----------- ----------- 2,453 (12,144) ----------- ----------- Income before interest charges.................................................. 179,620 160,650 ----------- ----------- Interest charges (credits): Interest on long-term debt.................................................... 66,380 72,477 Other interest................................................................ 7,787 7,452 Interest capitalized.......................................................... (4,220) (1,735) ----------- ----------- 69,947 78,194 ----------- ----------- Income before income taxes and extraordinary item............................... 109,673 82,456 Income tax expense.............................................................. 42,369 31,433 ----------- ----------- Income before extraordinary item................................................ 67,304 51,023 Extraordinary loss on extinguishments of debt, net of income tax benefit...... 1,384 2,702 ----------- ----------- Net income applicable to common stock........................................... $ 65,920 $ 48,321 =========== =========== Basic earnings per common share: Income before extraordinary item.............................................. $ 1.29 $ 0.90 Extraordinary loss on extinguishments of debt, net of income tax benefit...... 0.03 0.05 ----------- ----------- Net income................................................................. $ 1.26 $ 0.85 =========== =========== Diluted earnings per common share: Income before extraordinary item.............................................. $ 1.26 $ 0.89 Extraordinary loss on extinguishments of debt, net of income tax benefit...... 0.02 0.04 ----------- ----------- Net income................................................................. $ 1.24 $ 0.85 =========== =========== Weighted average number of common shares outstanding............................ 52,366,103 56,572,978 =========== =========== Weighted average number of common shares and dilutive potential common shares outstanding........................................... 53,331,686 57,192,245 =========== ===========
See accompanying notes to consolidated financial statements. 4 EL PASO ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (Unaudited) (In thousands)
Three Months Six Months Twelve Months Ended Ended Ended June 30, June 30, June 30, ------------------ ------------------ ----------------- 2001 2000 2001 2000 2001 2000 -------- ------- ------- ------- ------- ------- Net income...................................... $12,105 $15,168 $30,703 $23,175 $65,920 $48,321 Other comprehensive income (loss): Net unrealized gains (losses) on marketable securities, net of income tax benefit (expense) of $(624), $249, $824, $(55), $1,567 and $(686), respectively................................. 1,160 (463) (1,530) 102 (2,909) 1,274 ------- ------- ------- ------- ------- ------- Comprehensive income applicable to common stock................................ $13,265 $14,705 $29,173 $23,277 $63,011 $49,595 ======= ======= ======= ======= ======= =======
See accompanying notes to consolidated financial statements. 5 EL PASO ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Six Months Ended June 30, ------------------------------ 2001 2000 --------- ----------- Cash flows from operating activities: Net income.............................................................. $ 30,703 $ 23,175 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of electric plant in service............ 44,399 43,324 Amortization of nuclear fuel.......................................... 8,107 8,596 Deferred income taxes................................................. 18,486 15,431 Extraordinary loss on extinguishments of debt, net of income tax benefit................................................. 161 549 Amortization and accretion of interest costs.......................... 4,742 4,688 Other operating activities............................................ 914 1,701 Change in: Accounts receivable................................................... 2,196 (17,151) Inventories........................................................... 258 648 Net under/overcollection of fuel revenues............................. (10,628) (9,052) Prepayments and other................................................. 546 3,648 Long-term contract receivable......................................... 3,832 3,205 Accounts payable...................................................... (6,653) 10,334 Litigation settlements payable........................................ - (16,500) Taxes accrued other than federal income taxes......................... (3,275) (3,397) Interest accrued...................................................... 1,691 (486) Other current liabilities............................................. 3,835 (153) Deferred charges and credits.......................................... 637 (384) -------- ----------- Net cash provided by operating activities........................... 99,951 68,176 -------- ----------- Cash flows from investing activities: Cash additions to utility property, plant and equipment................. (35,682) (33,926) Cash additions to nuclear fuel.......................................... (7,075) (8,032) Interest capitalized: Utility property, plant and equipment................................. (1,995) (1,480) Nuclear fuel.......................................................... (301) (352) Investment in decommissioning trust fund................................ (2,558) (2,739) Other investing activities.............................................. 1,118 (59) -------- ----------- Net cash used for investing activities.............................. (46,493) (46,588) -------- ----------- Cash flows from financing activities: Proceeds from exercise of stock options................................. 4,869 - Purchases of treasury stock............................................. (8,285) (25,275) Repurchases of and payments on long-term debt........................... (41,083) (23,731) Nuclear fuel financing obligations: Proceeds.............................................................. 8,498 9,687 Payments.............................................................. (9,663) (10,055) Revolving credit facility, net proceeds................................. - 5,000 Payments on capital lease obligations................................... - (827) Other financing activities.............................................. (456) (190) -------- ----------- Net cash used for financing activities.............................. (46,120) (45,391) -------- ----------- Net increase (decrease) in cash and temporary investments................. 7,338 (23,803) Cash and temporary investments at beginning of period..................... 11,344 37,234 -------- ----------- Cash and temporary investments at end of period........................... $ 18,682 $ 13,431 ======== ===========
See accompanying notes to consolidated financial statements. 6 EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) A. Principles of Preparation The consolidated financial statements include the accounts of El Paso Electric Company and its wholly-owned subsidiary, MiraSol Energy Services, Inc. ("MiraSol") (collectively, the "Company"). MiraSol, which began operations as a separate subsidiary in March 2001, provides energy efficiency products and services previously provided by the Company's Energy Services Business Group. All intercompany transactions and balances have been eliminated in consolidation. Additionally, the revenues and expenses of the former Energy Services Business Group have been reclassified for all periods presented in the accompanying consolidated statements of operations as energy services revenues and expenses. Pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"), 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 consolidated financial statements should be read in conjunction with the financial statements and notes thereto in the Annual Report of El Paso Electric Company on Form 10-K for the year ended December 31, 2000 (the "2000 Form 10-K"). Capitalized terms used in this report and not defined herein have the meaning ascribed for such terms in the 2000 Form 10-K. In the opinion of management of the Company, the accompanying consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company at June 30, 2001 and December 31, 2000; the results of its operations for the three, six and twelve months ended June 30, 2001 and 2000; and its cash flows for the six months ended June 30, 2001 and 2000. The results of operations for the three, six and twelve months ended June 30, 2001 and the cash flows for the six months ended June 30, 2001 are not necessarily indicative of the results to be expected for the full calendar year. At January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), as amended, including implementation guidance discussed by the Financial Accounting Standards Board's (the "FASB") Derivatives Implementation Group (the "DIG") and cleared by the FASB as of January 1, 2001. This standard requires the recognition of derivatives as either assets or liabilities in the balance sheet with measurement of those instruments at fair value. Any changes in the fair value of these instruments are recorded in earnings or other comprehensive income. The Company uses commodity contracts to manage its exposure to price and availability risks and these contracts generally have the characteristics of derivatives. The Company does not trade or use these instruments with the objective of earning financial gains on the commodity price fluctuations. The Company determined that all such contracts that had the characteristics of derivatives met the "normal purchases and normal sales" exception provided in SFAS No. 133, and, as such, were not required to be accounted for as derivatives pursuant to SFAS No. 133 and other guidance. 7 EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) DIG Issue C10, "Can Option Contracts and Forward Contracts with Optionality Features Qualify for the Normal Purchases and Normal Sales Exception," and DIG Issue C16 "Scope Exception: Applying the Normal Purchases and Normal Sales Exception to Contracts That Combine a Forward Contract and a Purchase Option Contract" were posted by the FASB during the second quarter of 2001 and are effective as of July 1, 2001. DIG C10 and C16 provide guidance related to whether contracts with certain optionality features are eligible for the normal purchases and normal sales exception (DIG Issue C10 and C16 do not apply to certain electric contracts, which are discussed below). Additionally, in June 2001, DIG Issue C15 "Scope Exception: Normal Purchases and Normal Sales Exception for Option-Type Contracts and Forward Contracts in Electricity" was posted by the FASB and is effective as of July 1, 2001. This DIG Issue provides guidance related to whether certain contracts for the purchase and sale of electricity can be eligible for the normal purchases and normal sales exception. The Company has not yet completed its analysis of the implications of this guidance. This guidance may require the Company to account for certain of its electricity and gas commodity contracts as derivatives pursuant to SFAS No. 133. Any such change in the Company's accounting for such contracts may be material to the Company's reported financial position or results of operations and would be accounted for as a cumulative-effect-type adjustment as of July 1, 2001. Additionally, there remain a number of other unresolved issues before the DIG, the ultimate resolution of which may impact the Company's application of SFAS No. 133. Supplemental Cash Flow Disclosures (in thousands)
Six Months Ended June 30, ------------------------------- 2001 2000 ------- ------- Cash paid for: Interest on long-term debt (1)................... $30,103 $32,718 Other interest................................... 12 93 Income taxes..................................... 3,550 1,200 Non-cash investing and financing activities: Grants of restricted shares of common stock................................. 1,779 1,696
- ----------- (1) Includes interest on bonds, letter of credit fees related to bonds, and interest on nuclear fuel financing not capitalized. 8 EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Reconciliation of Basic and Diluted Earnings Per Common Share The reconciliation of basic and diluted earnings per common share before extraordinary item is presented below:
Three Months Ended June 30, ---------------------------------------------------------------------- 2001 2000 ---------------------------------- ---------------------------------- Per Per Common Common Income Shares Share Income Shares Share ------------- ---------- ------ ------------- ---------- ------ (In thousands) (In thousands) Basic earnings per share: Income before extraordinary item............................... $12,266 51,333,726 $0.24 $15,168 54,375,819 $0.28 ====== ====== Effect of dilutive securities: Unvested restricted stock........... - 56,143 - 51,623 Stock options....................... - 924,468 - 745,362 ------------- ---------- ------------- ---------- Diluted earnings per share: Income before extraordinary item............................... $12,266 52,314,337 $0.23 $15,168 55,172,804 $0.28 ============= ========== ====== ============= ========== ======
Six Months Ended June 30, ---------------------------------------------------------------------- 2001 2000 ---------------------------------- ---------------------------------- Per Per Common Common Income Shares Share Income Shares Share ------------- ---------- ------ ------------- ---------- ------ (In thousands) (In thousands) Basic earnings per share: Income before extraordinary item............................... $30,864 51,175,732 $0.60 $23,724 54,837,870 $0.43 ====== ====== Effect of dilutive securities: Unvested restricted stock........... - 40,497 - 37,186 Stock options....................... - 936,396 - 643,963 ------------- ---------- ------------- ---------- Diluted earnings per share: Income before extraordinary item............................... $30,864 52,152,625 $0.59 $23,724 55,519,019 $0.43 ============= ========== ====== ============= ========== ======
Twelve Months Ended June 30, ---------------------------------------------------------------------- 2001 2000 ---------------------------------- ---------------------------------- Per Per Common Common Income Shares Share Income Shares Share ------------- ---------- ------ ------------- ---------- ------ (In thousands) (In thousands) Basic earnings per share: Income before extraordinary item............................... $67,304 52,366,103 $1.29 $51,023 56,572,978 $0.90 ====== ====== Effect of dilutive securities: Unvested restricted stock........... - 58,146 - 44,025 Stock options....................... - 907,437 - 575,242 ------------- ---------- ------------- ---------- Diluted earnings per share: Income before extraordinary item............................... $67,304 53,331,686 $1.26 $51,023 57,192,245 $0.89 ============= ========== ====== ============= ========== ======
9 EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Options that were excluded from the computation of diluted earnings per common share because the 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 1999 and the first quarter of 2000. 2) 42,432 options granted January 1, 2000 at an exercise price of $9.81 were excluded for the first quarter of 2000. 3) 50,000 options granted March 15, 2000 at an exercise price of $9.50 were excluded for the first quarter of 2000. 4) 2,107 options granted October 1, 2000 at an exercise price of $13.77 were excluded for the fourth quarter of 2000 and the first quarter of 2001. 5) 150,000 options granted December 15, 2000 at an exercise price of $12.60 were excluded for the first quarter of 2001. 6) 2,941 options granted January 1, 2001 at an exercise price of $13.20 were excluded for the first quarter of 2001. 7) 150,000 options granted May 10, 2001 at an exercise price of $14.95 were excluded for the second quarter of 2001. B. Regulation For a full discussion of the Company's regulatory matters, see Note B of Notes to Financial Statements in the 2000 Form 10-K. Texas Regulatory Matters Deregulation. The Texas Restructuring Law requires most electric utilities to separate their power generation activities from transmission and distribution activities by January 1, 2002. However, the law specifically recognizes and preserves the substantial benefits the Company bargained for in its Texas Rate Stipulation and Texas Settlement Agreement, exempting the Company's Texas service area from retail competition and preserving non-fuel base rates at their current levels until the end of the Freeze Period in 2005. At the end of the Freeze Period, the Company will be subject to the provisions of retail competition under the law and may have no further claim for recovery of stranded costs. The Company believes that its continued ability to provide bundled electric service at current frozen base rates in its Texas service area will allow the Company the opportunity to collect its Texas jurisdictional stranded costs. Fuel. Although the Company's base rates are frozen in Texas pursuant to the Texas Rate Stipulation, the Company can request adjustments to its fuel factor to more accurately reflect projected increases or decreases in energy costs associated with the provision of electricity as well as seek recovery of past undercollections of fuel revenues. In November 2000, the Texas Commission approved a settlement which increased the fixed fuel factor from $0.01435 to $0.02186 per kWh. 10 EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) On January 8, 2001, the Company filed a new petition with the Texas Commission for a fuel factor increase to $0.02915 per kWh and a 12-month surcharge of previously undercollected fuel costs. On May 4, 2001, the Company filed a unanimous settlement agreement (the "Texas Fuel Settlement") between the Company and the parties which had intervened, including the City of El Paso. After gas costs declined and off-system sales margins increased from previously forecasted levels, the Texas Fuel Settlement included a proposed fuel factor increase to $0.02494 per kWh. This factor was implemented on an interim basis in April 2001. In combination, the two increases in fuel factors increased fuel revenue collections by $21.3 million during the first half of 2001. The Texas Fuel Settlement also provides for the surcharge of underrecovered fuel costs as of December 31, 2000 of approximately $15 million plus interest over an 18-month period. The surcharge was implemented on an interim basis beginning with the first billing cycle in June 2001. The Texas Fuel Settlement provides for the final agreement between the parties for the non-recovery of certain purchased power contract costs as well as the favorable disposition of previously unrecognized Palo Verde performance rewards, including interest. These provisions taken together did not have a material effect on the Company's results of operations and resulted in an $11.0 million increase in Net Undercollection of Fuel Revenues and a $10.5 million increase in Deferred Credits and Other Liabilities - Other, which were recorded in June 2001. The Company also agreed to a prospective change in the Palo Verde performance standards, which will materially reduce future rewards and penalties on a symmetrical basis. The Texas Fuel Settlement is subject to review by a hearings officer and is contingent upon the final approval of the Texas Commission. Based on the information available to the Company at this time, the Company believes the Texas Commission should grant final approval of the settlement in the near future. Any fuel surcharge granted to the Company, as well as the Company's other energy expenses not otherwise finally resolved in the Texas Fuel Settlement, will be subject to final review by the Texas Commission in the Company's next fuel reconciliation proceeding, which is expected to be filed by the middle of 2002. The Texas Commission staff, local regulatory authorities such as the City of El Paso, and customers are entitled to intervene in a fuel reconciliation proceeding and to challenge the prudence of fuel and purchased power expenses not otherwise finally resolved in the Texas Fuel Settlement. New Mexico Regulatory Matters Deregulation. In March 2001, the New Mexico Legislature amended the New Mexico Restructuring Law to postpone deregulation in New Mexico until January 1, 2007, and to prohibit the separation of a utility's transmission and distribution activities from its existing generation activities until September 1, 2005. The amended New Mexico Restructuring Law permits utilities to form holding companies and participate in unregulated power production, provided the utility does not separate its transmission and distribution activities from its existing generation activities. The amended New Mexico law requires the New Mexico Commission to approve previously filed applications to form holding companies to the extent that the applications do not conflict with the provisions of the law as amended and are otherwise in the public interest. Accordingly, in early April 2001, the Company filed its suggested amendments to its previously filed proposed corporate restructuring plan. The filing sought to conform the Company's proposal with the requirements under the amended law which requires the regulated utility to continue to own all regulated generation currently owned and operated by the utility. On June 28, 2001, the New Mexico Commission issued its 11 EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) order approving formation of a holding company for the Company. Although the order approved the Company's formation of a holding company, it also placed thirty-eight conditions upon its approval. The conditions include numerous reporting and compliance requirements as well as strict prohibitions on certain intercompany activity. The Company has filed a Motion for Rehearing and asked the New Mexico Commission to remove twelve of the thirty-eight conditions and consolidate several others. The Company cannot predict the outcome of its Motion for Rehearing and will evaluate the benefit of a holding company after the issuance of a new Final Order or denial of rehearing. While the Company is continuing to evaluate the possible benefits, if any, of forming a holding company prior to 2005, it cannot separate its existing generation activities from its transmission and distribution activities until September 1, 2005. In either 2004 or 2005, the Company anticipates that it will seek New Mexico Commission approval to separate the Company's generation activities from its transmission and distribution activities to allow the Company to comply with the Texas Restructuring Law requirements. Fuel. The New Mexico Settlement Agreement entered into in October 1998 eliminated the then existing fuel factor of $0.01949 per kWh and incorporated it into frozen base rates. Accordingly, the Company was required to absorb any increases in fuel and purchased power ("energy") expenses related to its New Mexico retail customers prior to May 1, 2001. The average energy costs incurred for New Mexico jurisdictional customers exceeded this fuel factor by a substantial amount. Therefore, on April 23, 2001, the Company filed a petition with the New Mexico Commission proposing a settlement that would implement a new fixed fuel factor and reinstate a fuel adjustment clause in lieu of a base rate increase (the "New Mexico Fuel Factor Agreement"). The proposed fixed fuel factor of $0.01501 per kWh would increase revenues by approximately $19 million annually and would be in addition to the fuel factor that is currently included in base rates. The proposed fixed fuel factor would keep overall retail rates more consistent with the retail rates charged to Texas jurisdictional customers. The reinstatement of a fuel adjustment clause would also substantially mitigate the financial risk to the Company of any further energy cost increases. The New Mexico Commission has allowed the Company to implement its New Mexico Fuel Factor Agreement, beginning with consumption on June 15, 2001, on a provisional basis. The agreement currently is unopposed, but final implementation is contingent upon approval of the New Mexico Commission. Based on the information available to the Company at this time, the Company believes the New Mexico Commission should grant final approval of the agreement in the near future. C. Common Stock Repurchase Program The Company's Board of Directors previously approved two stock repurchase programs allowing the Company to purchase up to twelve million of its outstanding shares of common stock. As of June 30, 2001, the Company had repurchased 9,833,929 shares of common stock under these programs for approximately $104.7 million, including commissions. The Company expects to continue to 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. 12 EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED 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 2000 Form 10-K. In addition, see Note C of Notes to Financial Statements in the 2000 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. Power Contracts In addition to the contracts entered into prior to December 31, 2000 and discussed in the Company's 2000 Form 10-K, the Company has since entered into the following agreements with various counterparties for forward firm purchases and sales of electricity:
Type of Contract Quantity Term - --------------------------- -------------------------------- ------------------------------------------- Purchase on-peak 103 MW 2001 Sale off-peak 25 MW July through September 2001 Purchase off-peak 25 MW July 15 through September 2001 Purchase on-peak 128 MW 2002 Purchase on-peak 25 MW April through October 2002 Purchase on-peak 103 MW 2003 through 2005
The Company also has a new agreement with a counterparty for power exchanges under which the Company will receive 80 MW of on-peak capacity and associated energy during 2002 at the Eddy County tie and concurrently deliver the same amount at Palo Verde and/or Four Corners. The on-peak exchange amount will decrease to 30 MW for 2003 through 2005. The agreement also gives the counterparty the option to deliver up to 133 MW of off-peak capacity and associated energy to the Company at the Eddy County tie from 2002 through 2005 in exchange for the same amount of energy concurrently delivered by the Company at Palo Verde and/or Four Corners. The Company will receive a guaranteed margin on any energy exchanged under the off-peak agreement. 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 consolidated 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. 13 EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) E. Litigation The Company is a party to various claims, legal actions and complaints. In many of these matters, the Company has excess casualty liability insurance that covers the various claims, actions and complaints. 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. 14 Independent Accountants' Review Report -------------------------------------- The Shareholders and the Board of Directors El Paso Electric Company: We have reviewed the accompanying condensed consolidated balance sheet of El Paso Electric Company and subsidiary (the Company) as of June 30, 2001, the related condensed consolidated statements of operations and comprehensive operations for the three months, six months and twelve months ended June 30, 2001 and 2000, and the related condensed consolidated statements of cash flows for the six months ended June 30, 2001 and 2000. These condensed consolidated 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 consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the balance sheet of El Paso Electric Company as of December 31, 2000, 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 March 8, 2001, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2000 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 20, 2001 15 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 2000 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. Factors that could cause or contribute to such differences include, but are not limited to: (i) increased prices for fuel and purchased power, (ii) the possibility that regulators may not permit the Company to pass through all such increased costs to customers, (iii) unanticipated increased costs associated with scheduled and unscheduled outages and (iv) other factors discussed below under the headings "Overview" and "Liquidity and Capital Resources," as well as in the Company's filings with the Securities and Exchange Commission. The Company's filings are available from the Securities and Exchange Commission or may be obtained upon request from the Company. Any such forward-looking statement is qualified by reference to these risks and factors. The Company cautions that these risks and factors 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 except as required by law. 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, purchased power and wind. The Company owns or has significant ownership interests in four 345 kV transmission lines and three 500 kV lines to provide power from Palo Verde and Four Corners, 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 industry deregulation legislation requiring the Company to separate its transmission and distribution functions, which will remain regulated, from its power generation and energy services businesses, which will operate in a competitive market in the future. New Mexico recently amended its deregulation law to delay the implementation date. While the Company is not subject to deregulation in its Texas and 16 New Mexico jurisdictions until late 2005 and January 2007, respectively, the potential effects of competition in the power generation and energy services markets remain important to the Company. There can be no assurance that the deregulation of the power generation market will not adversely affect the future operations, cash flows and financial condition of the Company. The changing regulatory environment and the advent of unregulated power production 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. Historically, the Company has lost certain large retail customers to self generation and/or co-generation and seen reductions in wholesale sales due to new sources of generation. American National Power, Inc., a wholly-owned subsidiary of International Power PLC, has announced it is exploring the possibility of building a generation plant in El Paso, Texas. Duke Energy has announced it is exploring the possibility of building a generation plant in Deming, New Mexico. Public Service Company of New Mexico has announced its intent to build a generation plant outside Las Cruces, 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 waste, including spent nuclear fuel; and (vi) compliance with the various requirements and regulations governing commercial nuclear generating stations. At the same time, the Company's Texas retail base rates are effectively capped through a rate freeze ending in August 2005. Additionally, upon initiation of retail competition, there will be competitive pressure on the Company's power generation rates which could reduce its profitability. The Company also 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 inflation, changes in tax laws or regulatory requirements, or other causes. During the twelve months ended June 30, 2001, the Company was unable to pass through to certain customers increased energy expenses resulting from higher natural gas prices and increased power purchases needed because of unscheduled generating unit outages. The Company was unable to request increased rates in its New Mexico service area prior to May 1, 2001, and is unable to increase rates under certain small wholesale contracts, to compensate for increased energy expenses. From July 1, 2000 through June 15, 2001, the Company incurred increased energy expenses which cannot be recovered from New Mexico and certain wholesale customers of approximately $12.2 million, net of tax, compared to the same period a year earlier. The New Mexico Commission has allowed the Company to implement its New Mexico Fuel Factor Agreement beginning with consumption on June 15, 2001, on a provisional basis. The agreement currently is unopposed, but final implementation is contingent upon approval of the New Mexico Commission. Based on the information available to the Company at this time, the Company believes the New Mexico Commission should grant final approval of the agreement in the near future. See Item 1, Note B, "Regulation - New Mexico Regulatory Matters - Fuel" and Item 3, "Quantitative and Qualitative Disclosures About Market Risk - Commodity Price Risk." 17 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. The Company expects that cash flows from operations will be sufficient for such purposes. Long-term capital requirements of the Company will consist primarily of construction of electric utility plant and payment of interest on and retirement of debt. The Company is analyzing its capacity needs, but currently has no definite plans to add any significant amount of new generating capacity to serve retail load prior to 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. As of June 30, 2001, cash and temporary investments totaled $18.7 million, an increase of $7.4 million from the December 31, 2000 balance of $11.3 million. The Company redeemed the remaining $34.6 million of Series B First Mortgage Bonds at their maturity on May 1, 2001 from cash on hand. The Company 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. The revolving credit facility's term ends on February 8, 2002, when it is expected to be renewed or replaced on comparable terms. At June 30, 2001, approximately $47.0 million had been drawn for nuclear fuel purchases. No amounts are currently outstanding 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, and competitive pressures, the Company does not expect to be able to raise its base rates in Texas in the event of increases in non-fuel costs 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. As part of an aggressive deleveraging program, the Company has significantly reduced its long-term debt since its emergence from bankruptcy in 1996. From June 1, 1996 through August 6, 2001, the Company repurchased on the open market approximately $366.1 million of first mortgage bonds, including approximately $6.2 million of first mortgage bonds during the second quarter of 2001 and an additional $6.2 million on July 17, 2001. As mentioned above, the Company also redeemed the remaining $34.6 million of Series B First Mortgage Bonds at their maturity on May 1, 2001 from cash on hand. Common stock equity as a percentage of capitalization, excluding current maturities of long-term debt, has increased from 19% at June 30, 1996 to 38% at June 30, 2001. 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 18 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. The Company's Board of Directors previously approved two stock repurchase programs allowing the Company to purchase up to twelve million of its outstanding shares of common stock. As of August 6, 2001, the Company had repurchased 10,065,829 shares of common stock under these programs for approximately $108.0 million, including commissions. The Company expects to continue to 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.
Historical Results of Operations Three Months Six Months Twelve Months Ended June 30, Ended June 30, Ended June 30, ----------------- ----------------- ----------------- 2001 2000 2001 2000 2001 2000 ------- ------- ------- ------- ------- ------- Net income applicable to common stock before extraordinary item (in thousands)............................ $12,266 $15,168 $30,864 $23,724 $67,304 $51,023 Diluted earnings per common share before extraordinary item...................................... 0.23 0.28 0.59 0.43 1.26 0.89
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. Electric utility operating revenues net of energy expenses decreased $4.1 million for the three months ended June 30, 2001, and increased $14.7 million and $18.6 million for the six and twelve months ended June 30, 2001, respectively, compared to the same periods last year, primarily due to changes in the following (in thousands):
Three Six Twelve Months Months Months Ended Ended Ended ----------------- ----------------- ----------------- Economy sales margins.............. $ 4,372 $ 23,531 $ 36,204 Retail kWh sales................... (2,216) 4,641 14,122 Energy expenses not recovered in New Mexico service area........ (5,466) (10,993) (20,055) Tax refund related to prior periods (716) (1,912) (2,027) Coal mine reclamation adjustment........................ - - (6,601) Write-off of capitalized interest related to postload nuclear fuel.......... - - (2,614) Other.............................. (100) (534) (447) ------- -------- -------- Total........................... $(4,126) $ 14,733 $ 18,582 ======= ======== ========
19 Comparisons of kWh sales and electric utility operating revenues are shown below (in thousands):
Increase (Decrease) ---------------------------- Three Months Ended June 30: 2001 2000 Amount Percent - ------------------------------------------ ---------- ---------- ------------ ------------ Electric kWh sales: Retail.................................. 1,522,014 1,542,826 (20,812) (1.3)% (1) Sales for resale........................ 383,502 295,709 87,793 29.7 (2) Economy sales........................... 273,893 290,533 (16,640) (5.7) (3) ---------- ---------- -------- Total.................................. 2,179,409 2,129,068 50,341 2.4 ========== ========== ======== Electric utility operating revenues: Retail.................................. $ 147,935 $ 135,684 $ 12,251 9.0% (4) Sales for resale........................ 25,425 16,840 8,585 51.0 (5) Economy sales........................... 27,228 15,018 12,210 81.3 (6) Other (7)............................... 2,539 2,595 (56) (2.2) ---------- ---------- -------- Total.................................. $ 203,127 $ 170,137 $ 32,990 19.4 ========== ========== ======== Increase (Decrease) ---------------------------- Six Months Ended June 30: 2001 2000 Amount Percent - ------------------------------------------ ---------- ---------- ------------ ------------ Electric kWh sales: Retail.................................. 2,964,661 2,883,007 81,654 2.8% Sales for resale........................ 705,922 567,439 138,483 24.4 (2) Economy sales........................... 628,852 896,415 (267,563) (29.8) (3) ---------- ---------- --------- Total.................................. 4,299,435 4,346,861 (47,426) (1.1) ========== ========== ========= Electric utility operating revenues: Retail.................................. $ 270,762 $ 243,621 $ 27,141 11.1% (4) Sales for resale........................ 43,716 29,751 13,965 46.9 (5) Economy sales........................... 74,730 29,787 44,943 150.9 (6) Other (7)............................... 5,309 4,045 1,264 31.2 (8) ---------- ---------- --------- Total.................................. $ 394,517 $ 307,204 $ 87,313 28.4 ========== ========== ========= Increase (Decrease) ---------------------------- Twelve Months Ended June 30: 2001 2000 Amount Percent - ------------------------------------------ ---------- ---------- ------------ ------------ Electric kWh sales: Retail.................................. 6,196,396 6,009,042 187,354 3.1% Sales for resale........................ 1,421,023 1,100,991 320,032 29.1 (2) Economy sales........................... 1,446,725 1,693,348 (246,623) (14.6) (3) ---------- ---------- --------- Total.................................. 9,064,144 8,803,381 260,763 3.0 ========== ========== ========= Electric utility operating revenues: Retail.................................. $ 557,449 $ 500,098 $ 57,351 11.5% (4) Sales for resale........................ 84,128 56,299 27,829 49.4 (5) Economy sales........................... 129,861 49,998 79,863 159.7 (6) Other (7)............................... 12,283 7,370 4,913 66.7 (9) ---------- ---------- --------- Total.................................. $ 783,721 $ 613,765 $ 169,956 27.7 ========== ========== ========= - -----------------
(1) Primarily due to milder weather in 2001. (2) Primarily due to increased kWh sales to IID and CFE. (3) Primarily due to decreased power production and availability resulting from increased maintenance outages of the Company's generating units, including an extended refueling and maintenance outage at Palo Verde Unit 1. The three and six month decreases were also partially due to a weaker power market in June 2001 compared to last year. 20 (4) Primarily due to increased energy expenses that are passed through directly to Texas jurisdictional customers. (5) Primarily due to (i) increased energy expenses that are passed through directly to certain wholesale customers and (ii) increased sales to CFE. (6) Primarily due to (i) increased margins and (ii) higher prices as a result of increased energy expenses. (7) Represents revenues with no related kWh sales. (8) Primarily due to increased transmission revenues partially offset by margins on swaps entered into with a large power marketer in order to lock in a fixed price on certain power purchases during June 2000 with no comparable amount in the current period. (9) Primarily due to (i) increased transmission revenues and (ii) margins on swaps entered into with a large power marketer in order to lock in a fixed price on certain power purchases during the summer of 2000. Other electric utility operations and maintenance expense increased $2.7 million, $6.3 million and $12.1 million for the three, six and twelve months ended June 30, 2001, respectively, compared to the same periods last year, as follows (in thousands): Increase Three Months Ended June 30: 2001 2000 (Decrease) - ------------------------------------------ ------- ------- --------------- Maintenance expense at generation plants........................ $10,897 $ 8,535 $ 2,362 (1) Transmission maintenance expense.......... 886 189 697 (2) Outside services expense.................. 1,673 2,730 (1,057) (3) Other..................................... 32,130 31,439 691 ------- ------- ------- Total other electric utility operations and maintenance expense.............. $45,586 $42,893 $ 2,693 ======= ======= ======= Increase Six Months Ended June 30: 2001 2000 (Decrease) - ------------------------------------------ ------- ------- --------------- Maintenance expense at generation plants........................ $20,009 $14,762 $ 5,247 (1) Pensions and benefits expense............. 11,840 10,657 1,183 (4) Customer accounts expense................. 5,632 4,936 696 (5) Transmission maintenance expense.......... 1,055 378 677 (2) Outside services expense.................. 2,530 4,938 (2,408) (6) Other..................................... 48,807 47,939 868 ------- ------- ------- Total other electric utility operations and maintenance expense.............. $89,873 $83,610 $ 6,263 ======= ======= ======= Increase Twelve Months Ended June 30: 2001 2000 (Decrease) - ------------------------------------------ -------- -------- --------------- Maintenance expense at generation plants........................ $ 36,625 $ 25,413 $11,212 (7) Transmission operations expense........... 4,960 3,710 1,250 (8) Transmission maintenance expense.......... 1,776 778 998 (2) Pensions and benefits expense............. 25,179 24,218 961 (4) Outside services expense.................. 6,323 10,283 (3,960) (9) Other..................................... 105,486 103,807 1,679 -------- -------- ------- Total other electric utility operations and maintenance expense.............. $180,349 $168,209 $12,140 ======== ======== ======= - --------------
21 (1) Primarily due to scheduled maintenance outages. (2) Primarily due to increased costs related to a jointly owned transmission line operated by another utility. (3) Primarily due to a decrease in (i) tax consulting fees and (ii) corporate restructuring expenses. (4) Primarily due to an increased accrual for employee bonuses for 2001. (5) Primarily due to an increase in the provision for uncollectible accounts due to bankruptcy of a large customer. (6) Primarily due to a decrease in (i) tax consulting fees; (ii) expenses related to condemnation issues; (iii) Y2K consulting fees with no comparable fees in the current period; (iv) consulting fees for stranded cost studies; and (v) corporate restructuring expenses. (7) Primarily due to (i) scheduled maintenance outages in 2001 and fourth quarter of 2000; (ii) unscheduled maintenance during the third quarter of 2000; and (iii) an insurance claim receivable recognized in December 1999 for maintenance expenses that were recognized in prior periods. (8) Primarily due to (i) increased wheeling costs during the third quarter of 2000 due to increased purchased power as a result of a local unit being down for unscheduled maintenance; and (ii) emergency repairs at a transmission switchyard in the third quarter of 2000 with no comparable expenses in the prior period. (9) Primarily due to a decrease in (i) legal costs; (ii) Y2K consulting fees with no comparable fees in the current period; (iii) consulting fees for stranded cost studies; (iv) expenses related to condemnation issues; and (v) tax consulting fees. Depreciation and amortization expense did not change significantly for the three, six and twelve months ended June 30, 2001 compared to the same period last year. Taxes other than income taxes did not change significantly for the three and six months ended June 30, 2001 compared to the same period last year. The increase of $1.4 million for the twelve months ended June 30, 2001 compared to the same period last year was primarily due to (i) a $3.1 million reversal in December 1999 of sales tax reserves established in prior years and (ii) an increase in Texas revenue related taxes due to higher operating income in the current period. These increases were partially offset by (i) a $1.9 million decrease in Arizona property taxes as a result of depreciation, a regulatory basis plant writedown pursuant to the New Mexico Settlement Agreement and an Arizona bill effective in 2001, and (ii) a $0.4 million franchise tax refund in September 2000. Other income (deductions) did not change significantly for the three months ended June 30, 2001 compared to the same period last year. Other income (deductions) increased $2.2 million and $14.6 million for the six and twelve months ended June 30, 2001, respectively, compared to the same periods last year due to litigation settlements of $1.0 million for the six and twelve months ended June 30, 2000 with no comparable activity in the current period. The twelve months ended June 30, 2000 also increased due to the accrual of the $16.5 million settlement agreement payment to Las Cruces in December 1999. The twelve month increase was partially offset by (i) an adjustment of $1.7 million to increase the reported cash value of Company-owned life insurance policies in December 1999 and (ii) a gain realized on the disposition of non-utility property of $1.4 million during the twelve months ended June 30, 2000 with no comparable activity in the current period. 22 Interest charges decreased $1.3 million, $1.2 million, and $8.2 million for the three, six and twelve months ended June 30, 2001, respectively, compared to the same periods last year due to (i) a reduction in outstanding debt as a result of open market purchases of the Company's first mortgage bonds and (ii) increased capitalized interest related to construction work in progress. The twelve month decrease was also due to adjustments to postload nuclear fuel to write-off a portion of accumulated interest capitalized prior to 1999 and discontinue capitalizing interest in 1999. These decreases were partially offset by an increase in interest charges related to the remarketing of the pollution control bonds in August 2000. Income tax expense, excluding the tax effect of the extraordinary item, decreased $2.7 million for the three months ended June 30, 2001, and increased $3.5 million for the six months ended June 30, 2001 primarily due to changes in pretax income and certain permanent differences. The increase of $10.9 million for the twelve months ended June 30, 2001 compared to the same period last year was primarily due to changes in pretax income and certain permanent differences including (i) a decrease in the adjustment to the cash value of Company-owned life insurance policies and (ii) a decrease in tax-exempt income partially offset by a decrease in nondeductible transition costs. Extraordinary loss on extinguishments of debt, net of income tax benefit, represents the payment of premiums on debt extinguishments and the recognition of unamortized issuance expenses on that debt. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 141, "Business Combinations" and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." The Company does not believe that its activities or assets as of June 30, 2001 will be impacted by these standards. Additionally, in July 2001, the FASB issued Statement of Financial Accounting Standards No. 143 "Accounting for Asset Retirement Obligations" ("SFAS No. 143"). SFAS No. 143 provides accounting guidance for retirement obligations, for which there is a legal obligation to settle, associated with tangible long- lived assets. SFAS No. 143 requires that asset retirement costs be capitalized as part of the cost of the related long-lived asset and such costs should be allocated to expense by using a systematic and rational method. The statement requires that the initial measurement of the asset retirement obligation liability to be recorded at fair value and the use of an allocation approach for subsequent changes in the measurement of the liability. Upon adoption of SFAS No. 143, an entity will use a cumulative-effect approach to recognize transition amounts for any existing asset retirement obligation liability, asset retirement costs and accumulated depreciation. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. Management has not yet quantified the impact of adopting SFAS No. 143 on the Company's financial statements. 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 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 2000 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, 2001, there have been no 23 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 2000 Form 10-K. Additionally, the commodity price risk that the Company had been exposed to due to increased energy costs will be substantially mitigated by the New Mexico Fuel Factor Agreement as discussed below. Commodity Price Risk The Company utilizes contracts of various durations for the purchase of natural gas, uranium concentrates and coal to effectively manage its available fuel portfolio. These agreements contain fixed and variable pricing 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, including weather, which impact supply and demand. Natural gas and purchased power prices increased significantly from May 2000 through May 2001, but have recently begun to decrease on average. The Company's exposure to fuel and purchased power price risk has been substantially mitigated during this time period 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. In the Company's New Mexico service area, pursuant to a rate freeze that expired on April 30, 2001, energy costs were included in the Company's base rates and were not subject to periodic reconciliation or adjustment for past fluctuations in such costs. Therefore, the Company was exposed to commodity price risk on energy costs that were related to sales of electricity to its New Mexico customers. However, the Company has entered into the New Mexico Fuel Factor Agreement which, among other things, would implement a new fixed fuel factor and reinstate a fuel adjustment clause to reflect its increased energy costs and provide a mechanism for passing through to New Mexico customers increases and decreases in energy costs. See Item 1, Note B, "Regulation - New Mexico Regulatory Matters - Fuel" for further discussion. The implementation of the provisions of the New Mexico Fuel Factor Agreement, which is contingent on final approval of the New Mexico Commission, will substantially mitigate the remaining financial risk to the Company of any further energy cost increases. In the normal course of business, the Company utilizes contracts of various durations for the forward sales and purchases of electricity to effectively manage its available generating capacity and supply needs. Such contracts include forward contracts for the sale of generating capacity and energy during periods when the Company's available power resources are expected to exceed the requirements of its native load and sales for resale. They may also include forward contracts for the purchase of wholesale capacity and energy during periods when the market price of electricity is below the Company's expected incremental power production costs or to supplement the Company's generating capacity when demand is anticipated to exceed such capacity. As of June 30, 2001, the Company had entered into forward sales and purchase contracts for energy. These agreements are generally fixed-priced contracts and are not recorded at their fair value in the Company's financial statements. Therefore, these contracts do not expose the Company to significant commodity price risk. 24 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 Consolidated Financial Statements. Item 4. Submission of Matters to a Vote of Security Holders The annual meeting of shareholders of the Company was held May 10, 2001. The total number of common shares outstanding was 51,221,408, of which 46,591,395 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 - --------------------------- --------------------- --------------------- Wilson K. Cadman 46,474,118 117,277 James A. Cardwell 46,475,772 115,623 James W. Cicconi 46,473,959 117,436 Patricia Z. Holland-Branch 46,422,609 168,786
In addition to the individuals set forth above, the following individuals continued as directors following the meeting: George W. Edwards, Jr., Ramiro Guzman, James W. Harris, Kenneth R. Heitz, Michael K. Parks, Eric B. Siegel, Stephen Wertheimer, Charles A. Yamarone, and James Haines. 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 25 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 Executive Vice President, Chief Financial and Administrative Officer (Duly Authorized Officer and Principal Financial Officer) Dated: August 13, 2001 26 EL PASO ELECTRIC COMPANY INDEX TO EXHIBITS
Exhibit Number Exhibit - -------------- ------------------------------------------------------------------------------ 10.04 Form of Directors' Restricted Stock Award Agreement, dated as of May 10, 2001, between the Company and George W. Edwards, Jr. (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) +10.05 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) 10.06 Form of Change of Control Agreement, dated as of April 23, 2001, between the Company and Hector Puente. (Identical in all material respects to Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999) 10.07 Employment Agreement for Hector Puente, dated April 23, 2001. 10.08 Form of Stock Option Agreement, dated as of April 23, 2001, between the Company and Hector Puente. (Identical in all material respects to Exhibit 99.01 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998) 15 Letter re Unaudited Interim Financial Information + Twelve agreements, dated as of May 10, 2001, 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.
27 EX-10.7 3 dex107.txt EMPLOYMENT AGREE. - HECTOR PUENTE Exhibit 10.07 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT (this "Agreement"), effective as of April 23, 2001, by and between El Paso Electric Company, a Texas corporation ("Company"), and Hector Puente ("Executive"). WITNESSETH: WHEREAS, the Board of Directors of the Company desires to employ Executive as its Vice President - Power Generation; and WHEREAS, Executive is willing, on the terms and subject to the conditions provided in this Agreement, to undertake the management responsibilities contemplated herein, to furnish services to Company as provided herein, and to be subject to certain employment restrictions and obligations. NOW, THEREFORE, in consideration of the premises and the covenants herein contained and other good, valuable, and binding consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: Article I. Employment 1.1 Responsibilities and Authority. Company hereby employs Executive to ------------------------------ serve as its Vice President - Power Generation for planning or directing all activities pertaining to Power Generation and Energy Resource & Planning. The duties of Executive shall be those duties which can reasonably be expected to be performed by a person with the title of Vice President - Power Generation. Executive shall report directly to the Executive Vice President and Chief Operating Officer of the Company and shall perform such other duties as may be assigned to him by the Executive Vice President and Chief Operating Officer or the Board of Directors as are not inconsistent with Executive's position as Vice President - Power Generation. 1.2 Acceptance of Employment. Executive accepts employment by Company on ------------------------ the terms and conditions herein provided and agrees, subject to the terms of this Agreement, to devote substantially all of his business time to advance the business of the Company. Nothing contained in this Agreement shall be construed so as to prevent Executive from investing his personal assets in such a manner and otherwise engaging in business transactions that are not inconsistent with the interests of the Company and that will not require a substantial portion of Executive's business time or otherwise interfere with the performance of his duties hereunder. 1.3 Employment Term. Company hereby employs Executive for an employment --------------- term of two years, beginning April 23, 2001 and terminating on April 23, 2003 (the "Employment Term"). 1 1.4 Termination. This Agreement may be terminated, subject to the ----------- provisions of Article IV below, at the option of either party upon the giving of at least thirty (30) days written notice to the other party. Article II. Compensation and Incentives As compensation for his services hereunder, Executive shall be paid the following: 2.1 Base Compensation. Commencing on April 23, 2001, Company shall pay ----------------- Executive a base cash salary at the aggregate initial rate of $140,000.00 per annum. Thereafter, the base salary amount will be reviewed annually by the Board of Directors, which may, in its discretion, make appropriate annual merit increases, provided, however, Executive's base cash salary shall never be less than $140,000.00 per annum. The compensation paid to Executive pursuant to this Section 2.1 is hereinafter referred to as "Base Compensation." The Base Compensation shall be paid to Executive in accordance with the Company's existing payroll policy. 2.2 Options. (a) As additional inducement for Executive to enter into ------- this Agreement, Company hereby grants to Executive nontransferable Options to purchase 100,000 shares of Common Stock (the "Options") for an amount per share equal to the closing price of the Common Stock on the American Stock Exchange on April 20, 2001. The Options will be issued under the El Paso Electric Company 1996 Long Term Incentive Plan or 1999 Long Term Incentive Plan and will be evidenced by a separate Stock Option Agreement (the "Stock Option Agreement") between Executive and the Company which agreement will provide that the maximum number of Options will be incentive stock options (the "Qualified Options") and the remainder of the Options will be non-qualified stock options (the, "Non- Qualified Options"). (b) The Stock Option Agreement will provide that twenty percent (20%) of the Qualified Options and twenty percent (20%) of the Non-Qualified Options shall vest each year for five (5) successive years beginning on January 2, 2002, and continuing each and every January 2 thereafter, until all such are fully vested on January 2, 2006; provided, however, that all such shall vest immediately in the event of a Triggering Event (as described in Section 5.3 below). Executive (or his legal representative) may exercise such Options any time after vesting subject to such reasonable terms and conditions as are contained in the Stock Option Agreement. All Options granted and not earlier exercised shall expire ten years from the date of grant. 2 Article III. Benefits 3.1 Benefits. In addition to the Base Compensation required to be paid to -------- Executive hereunder, Executive shall receive the benefits (the "Benefits") described on Exhibit 3.1 attached hereto and made a part hereof for ail purposes. 3.2 Beneficiaries. Executive shall have the absolute right to designate ------------- the beneficiary or beneficiaries to receive all payments and employee benefits described in this Agreement which may be payable or available in the event of Executive's death. 3.3 Reimbursement of Expenses. Executive will be promptly reimbursed by ------------------------- Company for all reasonable and necessary expenses incurred by Executive on behalf of, and in connection with the business of Company. Article IV. Termination 4.1 Acceleration of Payments. In the event of the occurrence of a ------------------------ "Triggering Event (as defined in Section 5.3 below), Company shall pay to Executive upon the fifth business day after the giving of written demand from the Executive to Company, a lump sum cash payment equal to the sum of (i) the greater of (x) the balance of the Base Compensation due to Executive for the remainder of the Employment Term and (y) the product obtained by multiplying Executive's then current monthly Base Compensation by six (6) (including in each case, without limitation. accrued but unused vacation time), plus (ii) earned but unpaid bonuses, plus (iii) any other payments due to Executive pursuant to any Benefits. Executive will forfeit the unvested Options described in Section 2.2 above, and Executive will have not less than 90 days to exercise the vested Qualified Options and not less than 120 days to exercise the vested Non- Qualified Options. 4.2 Continuation of Benefits. In the event of any termination of this ------------------------ Agreement, except voluntary termination by Executive which is not for "Good Reason" prior to April 23, 2003, for a period of two years from the date of such termination the Company shall maintain full coverage for Executive and his surviving spouse, if any, under all group medical and dental plans in which Executive was entitled to participate immediately prior to the termination, provided that his continued participation is possible under the general terms and provisions of such plans. In the event that Executive's participation in any such plan or program is barred, Company shall arrange to provide Executive and such surviving spouse with benefits substantially similar to those which they are entitled to receive under such plans. While Executive continues to participate in any such plan or receive any such benefit, he shall continue to pay employee premiums, at the level of such premiums in force at the time of such termination. Executive and Company hereby expressly acknowledge that all eligibility periods under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") shall run from the termination of this Agreement and provision of benefits by the Company during the two year period following termination shall not extend the period during which Executive can elect to participate under COBRA. 3 4.3 Termination Upon Death. In the event of Executive's death, this ---------------------- Agreement will terminate upon the first day of the month following Executive's date of death, and his surviving spouse, if any, shall be entitled to the benefits described in Section 4.2 above and to all other benefits described in this Agreement or otherwise available to Executive which may be payable or available in the event of Executive's death. Any unvested Options described in Section 2.2. above shall be forfeited, and Executive's surviving spouse or legal representative shall have not less than 90 days to exercise the vested Qualified Options and not less than 120 days to, exercise vested Non-Qualified Options. 4.4 Termination Upon Total Disability. (a) Company may terminate this --------------------------------- Agreement by reason of Executive's "Total Disability" upon at least 30 days' written notice to Executive, in which event Company shall pay Executive the amounts set forth in Section 4.1 above and, subject to the standards and restrictions governing employee disabilities in general under the Company's medical plans, Executive shall be entitled to the benefits set forth in Section 4.2 above. As used herein, "Total Disability" means illness or other physical or mental disability of Executive which shall continue for a period aggregating at least six months during any 12-month period, which such illness or disability shall make it impossible or impracticable for Executive to substantially perform his duties and responsibilities hereunder with whatever reasonable accommodation may be required by applicable law. If a disagreement arises between Executive and Company as to whether Executive is suffering from "Total Disability," as defined herein, the question of Executive's disability shall be determined by a physician designated by a majority of the Board of Directors. (b) In the event of a termination of this Agreement by Company pursuant to subparagraph (a) above, Executive will forfeit any right to unvested Options described in Section 2.2 above and Executive will be paid those benefits provided by Company's disability insurance coverage as described on Exhibit 3.1. Executive shall have not less than 90 days to exercise vested Qualified Options and not less than 120 days to exercise vested Non-Qualified Options. 4.5 Constructive Termination by Company. As used herein, "constructive ----------------------------------- termination" shall mean any one or more of the events constituting "Good Reason" if not remedied by Company within 15 business days after receipt by Company of written notice from Executive of such event of constructive termination. Executive's continued employment with Company shall not constitute consent to, or a waiver of rights with respect to, any circumstances constituting constructive termination hereunder. 4.6 Termination by Company for Cause. Pursuant to the procedure set forth -------------------------------- in the definition of "Cause" in Section 5.1 below, Company shall be entitled to terminate Executive's employment for Cause, in which event Executive will no longer be entitled to his Base compensation, will forfeit the unvested Options as described in Section 2.2 above, and, if such termination occurs before October 23, 2001, will forfeit the benefits described in Section 4.2 above. Notwithstanding the foregoing, if Executive 4 disputes such termination for Cause, Executive may require the Company to resolve the dispute pursuant to the procedure set forth in Article VII of this Agreement. As provided in Section 6.4 below, Executive's Base Compensation, the grant of Options described in Section 2.2 above, and all Benefits to which Executive would otherwise be entitled, including, but not limited to, group medical and dental coverage, shall continue to be made currently available to Executive pending final resolution of the dispute. Article V. Definitions For purposes of this Agreement, and in addition to any other defined terms herein, the following terms shall have the indicated meanings: 5.1 Cause. (a) "Cause" shall mean any act of dishonesty, commission of a ----- felony, significant activities harmful to the reputation of the Company, repeated refusal to perform or substantial disregard of duties properly assigned by the Executive Vice President and Chief Operating Officer or the Board of Directors (following notice thereof to the Executive), or significant violation of any statutory or common law duty of loyalty to the Company. (b) Notwithstanding the foregoing and subject to the resolution of any disputes pursuant to Articles IV and VI, the Executive shall in no event be deemed to have been terminated for Cause unless and until there shall have been delivered to him a termination notice in the form of a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board of Directors specifying the reason for such termination at a meeting of such Board duly called and held. 5.2 Good Reason. "Good Reason" shall mean the occurrence of any of the ----------- following events without Executive's express written consent: (a) A substantial and adverse change in the Executive's duties, control, authority, status or position, or the assignment to the Executive of any duties or responsibilities which are inconsistent with such status or position, or a reduction in the duties and responsibilities previously exercised by the Executive, or a loss of title, loss of office, relocation of Executive's office to a location more than 100 miles from Executive's original office with Company, loss of significant authority, power or control, or any removal of him from or any failure to reappoint or reelect him to such positions, except in connection with the termination of his employment for "Cause" (as defined in Section 5.1(a)) or "Total Disability" (as defined in Section 4.4), or as a result of his death; (b) A reduction by Company for any reason in Executive's Base Compensation or in the grants of Options described in Section 2.2 above, or a substantial and adverse change in Executive's Benefits; or 5 (c) Any material breach by Company of any provisions of this Agreement. 5.3 Triggering Event. "Triggering Event" shall mean the termination by ---------------- Executive of Executive's employment hereunder after the occurrence of Good Reason; or the actual or constructive termination of this Agreement by the Company for any other reason other than: (a) Executive's voluntary termination (except a voluntary termination for "Good Reason" as defined in Section 5.2 above); or (b) Termination of employment in the event of Executive's death (under Section 4.3 above); or in the event of Executive's "Total Disability" under Section 4.4 above; or (b) Termination of employment for "Cause" as defined in Section 5.1 above. Article VI. Arbitration and Mediation 6.1 Mediation. Any dispute arising hereunder between Executive and --------- Company (including any dispute over whether Company has properly terminated Executive for Cause) which cannot be resolved by them to their mutual satisfaction within a period of fourteen days, unless mutually extended, shall first be submitted to mediation in El Paso, Texas, to a mediator selected pursuant to the rules of the American Arbitration Association ("AAA"). All costs of mediation incurred by Executive will be paid by the Company. 6.2 Arbitration. If such mediation shall not result in an agreed ----------- settlement between the parties, the dispute will be promptly submitted to binding arbitration (conducted in Ell Paso, Texas, by a panel of three arbitrators) in accordance with the rules of the AAA then in effect. The results of such arbitration shall be binding and conclusive upon the parties hereto, and judgment on the award may be entered at the instance of either party in any court of competent jurisdiction. The dispute resolution procedure set forth in this Section 6.2 may be initiated by either party upon five business days prior written notice to the other and after failure to resolve the dispute after the expiration of the 14 day time period referred to in Section 6.1. 6.3 Proceedings. Unless otherwise expressly agreed in writing by the ----------- parties to the arbitration proceedings: (a) The arbitration proceedings shall be conducted in accordance with the Commercial Arbitration Rules of the AAA, as amended from time to time; 6 (b) Any procedural issues not determined under the arbitral rules selected pursuant to item (a) above shall be determined by the law of the place of arbitration, other than those laws which would refer the matter to another jurisdiction; (c) All costs of the arbitration proceedings incurred by Executive (including the fees of attorneys and expert witnesses and all other costs) shall be borne by the Company regardless of the outcome of the proceeding; and (d) The decision of the arbitrators shall be reduced to writing; final and binding without the right of appeal; the sole and exclusive remedy regarding any claims, counterclaims, issues or accounting presented to the arbitrators; made and promptly paid in United States dollars free of any deduction or offset; and any costs or fees incident to enforcing the award shall, to the maximum extent permitted by law, be charged against the party resisting such enforcement. 6.4 Continuation of Payments/Benefits. Until final resolution of any --------------------------------- dispute between Company and Executive, the Company shall continue to pay to Executive the Base Compensation under Section 2.1, and the Options shall continue to vest in Executive pursuant to Section 2.2 above. 6.5 Acknowledgement of Parties. Each party acknowledges that he or it has -------------------------- voluntarily and knowingly entered into an agreement to arbitration under this Section executing this Agreement. Article VII. Miscellaneous 7.1 Notices. Any notice, demand or request to be given hereunder to ------- either party hereto shall be deemed given and effective only if in writing and either (1) delivered personally to Executive or (in case of a notice to Company) to the Secretary of the Company, or (2) sent by certified or registered mail, postage prepaid, to the addresses set forth on the signature page hereof or to such other address as either party may hereafter specify to the other by notice similarly served. 7.2 Governing Law. This Agreement shall be construed and enforced in ------------- accordance with the laws of the State of Texas. 7.3 Modification. No modification or waiver of any provision hereof shall ------------ be made unless it be in writing and signed by both of the parties hereto. 7.4 Scope of Agreement. This Agreement constitutes the whole of the ------------------ agreement, between the parties on the subject matter, superseding all prior oral and written conversations, negotiations, understandings, and agreements in effect as of the date of this Agreement. 7.5 Indemnification. The Company shall provide Executive with the same --------------- indemnification and insurance protection provided by Company from time to time to all 7 of its officers and directors, whether pursuant to that Indemnity Agreement attached hereto as Exhibit 7.5 or otherwise. 7.6 Tax Payments, Withholdings and Reporting. Executive recognizes that ---------------------------------------- the payments and benefits provided under this Agreement may result in taxable income to him which Company and its affiliates will report to the appropriate taxing authorities. Company shall have the right to deduct from any payment made under this Agreement to Executive, any federal, state, local or foreign income, employment or other taxes it determines are required by law to be withheld with respect to such payments or benefits provided thereunder or to require payment from Executive which he agrees to pay upon demand, for the purpose of satisfying any such withholding requirement. 7.7 Separate Counsel. Executive acknowledges that he has been advised by ---------------- Company that before he signs this Agreement he should consult with an attorney. 7.8 Successors and Assigns. The terms and provisions of this Agreement ---------------------- shall inure to the benefit of and be binding upon the successors and assigns of the Company. IN WITNESS WHEREOF, the parties hereto have executed this Agreement April 24, 2001. EL PASO ELECTRIC COMPANY 123 W. Mills St. El Paso, Texas 79901 By: /s/ James Haines ------------------------------------ Authorized Officer COMPANY Hector Puente 6620 Isla Del Rey El Paso, Texas 79912 /s/ Hector R. Puente --------------------------------------- EXECUTIVE 8 EXHIBIT 3.1 SCHEDULE OF BENEFITS FOR . Participation in the El Paso Electric Company Retirement Income Plan, as amended from time to time and other qualified plans covering Executive Officers of the Company from time to time. . All other insurance coverages, including without limitations, any disability, life and accident coverage, extended to non-bargaining employees from time to time. . Annual physical coverage as previously structured for senior management of the Company. . Annual paid vacation of four (4) weeks per year or such greater vacation benefits as may be provided generally to Executive Officers of the Company. . Personal use of cellular phone and related service. . Car allowance of $250 per month. . All other benefits to which Executive Officers of the Company are entitled from time to time. EL PASO ELECTRIC COMPANY Hector Puente By: /s/ James Haines /s/ Hector R. Puente ------------------------------- ------------------------------ Authorized Officer COMPANY EXECUTIVE 9 EX-15 4 dex15.txt 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 20, 2001 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, /s/KPMG LLP El Paso, Texas August 13, 2001 -----END PRIVACY-ENHANCED MESSAGE-----