-----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, DdaNmFbJS6FDP2CMBJ/QSIEoA0gzIj6Qw0PTR61Hie/MFY0TmG1ySTQZusQ8vcgk QDkNSSh2XG5QZLbEGhYNLw== 0000930661-97-002634.txt : 19971113 0000930661-97-002634.hdr.sgml : 19971113 ACCESSION NUMBER: 0000930661-97-002634 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: EL PASO ELECTRIC CO /TX/ CENTRAL INDEX KEY: 0000031978 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 740607870 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-00296 FILM NUMBER: 97716965 BUSINESS ADDRESS: STREET 1: 303 N OREGON ST CITY: EL PASO STATE: TX ZIP: 79901 BUSINESS PHONE: 9155435711 10-Q 1 FORM 10-Q ================================================================================ FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____ TO ____ COMMISSION FILE NUMBER 0-296 EL PASO ELECTRIC COMPANY (Exact name of registrant as specified in its charter) TEXAS 74-0607870 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) KAYSER CENTER, 100 NORTH STANTON, EL PASO, TEXAS 79901 (Address of principal executive offices) (Zip Code) (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 November 7, 1997, there were 60,239,236 shares of the Company's no par value common stock outstanding. ================================================================================ EL PASO ELECTRIC COMPANY INDEX TO FORM 10-Q Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets - September 30, 1997 and December 31, 1996......................................... 1 Statements of Operations - Three Months Ended September 30, 1997 and 1996; Nine Months Ended September 30, 1997, Period From February 12 to September 30, 1996 and Period From January 1 to February 11, 1996; Twelve Months Ended September 30, 1997, Period From February 12 to September 30, 1996 and Period From October 1, 1995 to February 11, 1996..... 3 Statements of Accumulated Earnings - Three Months Ended September 30, 1997 and 1996; Nine Months Ended September 30, 1997, Period From February 12 to September 30, 1996 and Period From January 1 to February 11, 1996; Twelve Months Ended September 30, 1997, Period From February 12 to September 30, 1996 and Period From October 1, 1995 to February 11, 1996..... 6 Statements of Cash Flows - Nine Months Ended September 30, 1997, Period From February 12 to September 30, 1996 and Period From January 1 to February 11, 1996................................ 9 Notes to Financial Statements.................................. 10 Independent Auditors' Review Report............................ 18 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 19 PART II. OTHER INFORMATION Item 1. Legal Proceedings....................................... 26 Item 5. Other Matters........................................... 26 Item 6. Exhibits and Reports on Form 8-K........................ 26 -i- PART I. FINANCIAL INFORMATION Item 1. Financial Statements EL PASO ELECTRIC COMPANY BALANCE SHEETS
ASSETS September 30, (In thousands) 1997 December 31, (UNAUDITED) 1996 ------------- ------------ Utility plant: Electric plant in service............................................................ $1,521,218 $1,492,737 Less accumulated depreciation and amortization....................................... 142,055 77,976 ---------- ---------- Net plant in service............................................................... 1,379,163 1,414,761 Construction work in progress........................................................ 49,023 44,432 Nuclear fuel; includes fuel in process of $1,941 and $5,084, respectively............ 77,574 60,014 Less accumulated amortization........................................................ 34,601 18,651 ---------- ---------- Net nuclear fuel................................................................... 42,973 41,363 ---------- ---------- Net utility plant................................................................ 1,471,159 1,500,556 ---------- ---------- CURRENT ASSETS: Cash and temporary investments....................................................... 87,612 68,767 Accounts receivable, principally trade, net of allowance for doubtful accounts of $6,241 and $6,161, respectively............................... 69,335 57,587 Federal income tax receivable........................................................ - 20,713 Inventories, at cost................................................................. 27,619 28,322 Net undercollection of fuel revenues................................................. 11,477 1,925 Prepayments and other................................................................ 10,932 8,727 ---------- ---------- Total current assets............................................................. 206,975 186,041 ---------- ---------- LONG-TERM CONTRACT RECEIVABLE.......................................................... 28,532 31,057 ---------- ---------- DEFERRED CHARGES AND OTHER ASSETS: Accumulated deferred income taxes, net............................................... 48,117 73,884 Decommissioning trust fund........................................................... 37,374 33,054 Other................................................................................ 21,299 21,598 ---------- ---------- Total deferred charges and other assets.......................................... 106,790 128,536 ---------- ---------- TOTAL ASSETS..................................................................... $1,813,456 $1,846,190 ========== ==========
See accompanying notes to financial statements. 1 EL PASO ELECTRIC COMPANY BALANCE SHEETS (Continued)
CAPITALIZATION AND LIABILITIES SEPTEMBER 30, (In thousands except for share data) 1997 DECEMBER 31, (UNAUDITED) 1996 ------------- ------------ Capitalization: Common stock, stated value $1 per share, 100,000,000 shares authorized, 60,067,832 and 59,999,981 shares issued and outstanding; and 171,404 and 180,000 restricted shares, respectively...................................... $ 60,239 $ 60,180 Capital in excess of stated value.................................................. 241,120 240,768 Unearned compensation - restricted stock awards.................................... (975) (758) Accumulated earnings............................................................... 64,202 30,835 Net unrealized gain on marketable securities, less applicable income tax expense of $63 and $125, respectively................................. 117 232 ---------- ---------- Common stock equity............................................................ 364,703 331,257 Preferred stock, cumulative, no par value, 2,000,000 shares authorized: Redemption required - 1,179,587 and 1,084,264 shares issued and outstanding, respectively; at liquidation preference......................... 117,959 108,426 Long-term debt..................................................................... 944,014 1,021,749 Financing and capital lease obligations............................................ 24,398 24,424 ---------- ---------- Total capitalization......................................................... 1,451,074 1,485,856 ---------- ---------- CURRENT LIABILITIES: Current maturities of long-term debt and financing and capital lease obligations... 28,489 28,333 Accounts payable, principally trade................................................ 27,723 37,215 Taxes accrued other than federal income taxes...................................... 24,639 21,296 Interest accrued................................................................... 20,177 23,150 Other.............................................................................. 16,768 15,000 ---------- ---------- Total current liabilities.................................................... 117,796 124,994 ---------- ---------- DEFERRED CREDITS AND OTHER LIABILITIES: Decommissioning.................................................................... 93,574 89,544 Accrued postretirement benefit liability........................................... 77,015 71,313 Accrued pension liability.......................................................... 34,259 34,550 Other.............................................................................. 39,738 39,933 ---------- ---------- Total deferred credits and other liabilities................................. 244,586 235,340 ---------- ---------- COMMITMENTS AND CONTINGENCIES TOTAL CAPITALIZATION AND LIABILITIES......................................... $1,813,456 $1,846,190 ========== ==========
See accompanying notes to financial statements. 2
EL PASO ELECTRIC COMPANY STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands except for share data) THREE THREE MONTHS MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, 1997 1996 ------------- ------------- OPERATING REVENUES: Base revenues.............................................................. $ 133,005 $ 131,955 Fuel revenues and economy sales............................................ 35,845 33,645 Other...................................................................... 1,290 1,056 ----------- ----------- 170,140 166,656 ----------- ----------- FUEL EXPENSES: Fuel....................................................................... 28,459 30,052 Purchased and interchanged power........................................... 8,921 5,326 ----------- ----------- 37,380 35,378 ----------- ----------- OPERATING REVENUES NET OF FUEL EXPENSES...................................... 132,760 131,278 ----------- ----------- OTHER OPERATING EXPENSES: Other operations........................................................... 34,452 32,295 Maintenance................................................................ 5,680 8,820 Depreciation and amortization.............................................. 22,283 22,584 Taxes other than income taxes.............................................. 11,166 9,615 ----------- ----------- 73,581 73,314 ----------- ----------- OPERATING INCOME............................................................. 59,179 57,964 ----------- ----------- OTHER INCOME (DEDUCTIONS): Investment income.......................................................... 1,576 1,245 Gain on sale of investment................................................. - 3,844 Other, net................................................................. (239) (333) ----------- ----------- 1,337 4,756 ----------- ----------- INCOME BEFORE INTEREST CHARGES............................................... 60,516 62,720 ----------- ----------- INTEREST CHARGES (CREDITS): Interest on long-term debt................................................. 21,141 24,230 Other interest............................................................. 1,714 1,806 Interest capitalized and deferred.......................................... (1,449) (1,402) ----------- ----------- 21,406 24,634 ----------- ----------- INCOME BEFORE INCOME TAXES................................................... 39,110 38,086 INCOME TAX EXPENSE........................................................... 15,122 15,316 ----------- ----------- INCOME BEFORE EXTRAORDINARY LOSS ON REPURCHASE OF DEBT....................... 23,988 22,770 EXTRAORDINARY LOSS ON REPURCHASE OF DEBT, NET OF FEDERAL INCOME TAX BENEFIT......................................................... (69) - ----------- ----------- NET INCOME.................................................................. 23,919 22,770 PREFERRED STOCK DIVIDEND REQUIREMENTS........................................ 3,331 2,977 ----------- ----------- NET INCOME APPLICABLE TO COMMON STOCK........................................ $ 20,588 $ 19,793 =========== =========== NET INCOME PER COMMON SHARE: Income before extraordinary loss on repurchase of debt..................... $ 0.342 $ 0.329 Extraordinary loss on repurchase of debt, net of federal income tax benefit....................................................... (0.001) - ----------- ----------- Net income............................................................... $ 0.341 $ 0.329 =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND COMMON SHARE EQUIVALENTS OUTSTANDING.............................................. 60,459,648 60,239,238 =========== ===========
See accompanying notes to financial statements. 3 EL PASO ELECTRIC COMPANY STATEMENTS OF OPERATIONS (In thousands except for share data)
NINE PERIOD FROM | MONTHS FEBRUARY 12 | PERIOD FROM ENDED TO | JANUARY 1 SEPTEMBER 30, SEPTEMBER 30, | TO 1997 1996 | FEBRUARY 11, (UNAUDITED) (UNAUDITED) | 1996 ------------- ------------- | ------------ | OPERATING REVENUES: | Base revenues.......................................................... $ 349,963 $ 306,656 | $ 44,679 Fuel revenues and economy sales........................................ 96,585 71,755 | 9,849 Other.................................................................. 3,724 2,540 | 421 ----------- ----------- | ----------- 450,272 380,951 | 54,949 ----------- ----------- | ----------- FUEL EXPENSES: | Fuel................................................................... 82,368 62,893 | 10,125 Purchased and interchanged power....................................... 16,921 13,503 | 2,282 ----------- ----------- | ----------- 99,289 76,396 | 12,407 ----------- ----------- | ----------- OPERATING REVENUES NET OF FUEL EXPENSES.................................. 350,983 304,555 | 42,542 ----------- ----------- | ----------- OTHER OPERATING EXPENSES: | Other operations....................................................... 96,605 79,491 | 23,559 Maintenance............................................................ 24,519 24,282 | 4,743 Depreciation and amortization.......................................... 66,286 56,953 | 6,577 Taxes other than income taxes.......................................... 33,116 29,298 | 6,024 ----------- ----------- | ----------- 220,526 190,024 | 40,903 ----------- ----------- | ----------- OPERATING INCOME......................................................... 130,457 114,531 | 1,639 ----------- ----------- | ----------- OTHER INCOME (DEDUCTIONS): | Litigation settlement, net............................................. 7,500 - | - Investment income...................................................... 3,698 3,482 | - Gain on sale of investment............................................. - 3,844 | - Other, net............................................................. (786) (449) | 50 ----------- ----------- | ----------- 10,412 6,877 | 50 ----------- ----------- | ----------- INCOME BEFORE INTEREST CHARGES........................................... 140,869 121,408 | 1,689 ----------- ----------- | ----------- INTEREST CHARGES (CREDITS): | Interest on long-term debt............................................. 64,949 62,937 | - Other interest......................................................... 5,100 4,376 | - Interest during reorganization......................................... - - | 9,569 Interest capitalized and deferred...................................... (4,339) (3,718) | (412) ----------- ----------- | ----------- 65,710 63,595 | 9,157 ----------- ----------- | ----------- INCOME (LOSS) BEFORE INCOME TAXES........................................ 75,159 57,813 | (7,468) INCOME TAX EXPENSE (BENEFIT)............................................. 29,333 23,854 | (3,415) ----------- ----------- | ----------- INCOME (LOSS) BEFORE REORGANIZATION ITEMS AND | EXTRAORDINARY ITEMS.................................................... 45,826 33,959 | (4,053) REORGANIZATION ITEMS, NET OF INCOME TAX BENEFIT.......................... - - | 122,251 ----------- ----------- | ----------- INCOME BEFORE EXTRAORDINARY ITEMS........................................ 45,826 33,959 | 118,198 ----------- ----------- | ----------- EXTRAORDINARY ITEMS: | Extraordinary loss on repurchase of debt, net of federal | income tax benefit................................................... (2,741) - | - Extraordinary gain on discharge of debt................................ - - | 264,273 ----------- ----------- | ----------- (2,741) - | 264,273 ----------- ----------- | ----------- NET INCOME............................................................... 43,085 33,959 | 382,471 PREFERRED STOCK DIVIDEND REQUIREMENTS.................................... 9,718 7,426 | - ----------- ----------- | ----------- NET INCOME APPLICABLE TO COMMON STOCK.................................... $ 33,367 $ 26,533 | $ 382,471 =========== =========== | =========== NET INCOME PER COMMON SHARE: | Income before extraordinary items...................................... $ 0.596 $ 0.441 | $ 3.325 Extraordinary loss on repurchase of debt, net of federal | income tax benefit................................................... (0.045) - | - Extraordinary gain on discharge of debt................................ - - | 7.435 ----------- ----------- | ----------- Net income........................................................... $ 0.551 $ 0.441 | $ 10.760 =========== =========== | =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND COMMON | SHARE EQUIVALENTS OUTSTANDING.......................................... 60,517,687 60,160,478 | 35,544,330 =========== =========== | ===========
See accompanying notes to financial statements. 4 EL PASO ELECTRIC COMPANY STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS EXCEPT FOR SHARE DATA)
TWELVE PERIOD FROM | PERIOD FROM MONTHS FEBRUARY 12 | OCTOBER 1, 1995 ENDED TO | TO SEPTEMBER 30, SEPTEMBER 30, | FEBRUARY 11, 1997 1996 | 1996 -------------- -------------- | ---------------- | OPERATING REVENUES: | Base revenues............................................. $ 459,527 $ 306,656 | $ 145,596 Fuel revenues and economy sales........................... 129,023 71,755 | 27,398 Other..................................................... 4,744 2,540 | 1,323 ----------- ----------- | ----------- 593,294 380,951 | 174,317 ----------- ----------- | ----------- FUEL EXPENSES: | Fuel...................................................... 112,374 62,893 | 34,289 Purchased and interchanged power.......................... 21,239 13,503 | 6,318 ----------- ----------- | ----------- 133,613 76,396 | 40,607 ----------- ----------- | ----------- OPERATING REVENUES NET OF FUEL EXPENSES..................... 459,681 304,555 | 133,710 ----------- ----------- | ----------- OTHER OPERATING EXPENSES: | Other operations.......................................... 132,857 79,491 | 76,907 Maintenance............................................... 34,938 24,282 | 15,461 Depreciation and amortization............................. 89,105 56,953 | 20,883 Taxes other than income taxes............................. 42,365 29,298 | 19,678 ----------- ----------- | ----------- 299,265 190,024 | 132,929 ----------- ----------- | ----------- OPERATING INCOME............................................ 160,416 114,531 | 781 ----------- ----------- | ----------- OTHER INCOME (DEDUCTIONS): | Litigation settlement, net................................ 7,500 - | - Investment income......................................... 5,011 3,482 | - Settlement of bankruptcy professional fees................ 2,305 - | - Gain on sale of investment................................ - 3,844 | - Other, net................................................ (1,018) (449) | (259) ----------- ----------- | ----------- 13,798 6,877 | (259) ----------- ----------- | ----------- INCOME BEFORE INTEREST CHARGES.............................. 174,214 121,408 | 522 ----------- ----------- | ----------- INTEREST CHARGES (CREDITS): | Interest on long-term debt................................ 87,644 62,937 | - Other interest............................................ 6,446 4,376 | - Interest during reorganization............................ - - | 29,021 Interest capitalized and deferred......................... (5,809) (3,718) | (1,299) ----------- ----------- | ----------- 88,281 63,595 | 27,722 ----------- ----------- | ----------- INCOME (LOSS) BEFORE INCOME TAXES........................... 85,933 57,813 | (27,200) INCOME TAX EXPENSE (BENEFIT)................................ 32,147 23,854 | (9,127) ----------- ----------- | ----------- INCOME (LOSS) BEFORE REORGANIZATION | ITEMS AND EXTRAORDINARY ITEMS.............................. 53,786 33,959 | (18,073) REORGANIZATION ITEMS, NET OF INCOME TAX BENEFIT............. - - | 117,402 ----------- ----------- | ----------- INCOME BEFORE EXTRAORDINARY ITEMS........................... 53,786 33,959 | 99,329 ----------- ----------- | ----------- EXTRAORDINARY ITEMS: | Extraordinary loss on repurchase of debt, net of federal | income tax benefit....................................... (2,741) - | - Extraordinary gain on discharge of debt................... - - | 264,273 ----------- ----------- | ----------- (2,741) - | 264,273 ----------- ----------- | ----------- NET INCOME.................................................. 51,045 33,959 | 363,602 PREFERRED STOCK DIVIDEND REQUIREMENTS....................... 12,780 7,426 | - ----------- ----------- | ----------- NET INCOME APPLICABLE TO COMMON STOCK....................... $ 38,265 $ 26,533 | $ 363,602 =========== =========== | =========== NET INCOME PER COMMON SHARE: | Income before extraordinary items......................... $ 0.678 $ 0.441 | $ 2.795 Extraordinary loss on repurchase of debt, net of federal | income tax benefit....................................... (0.045) - | - Extraordinary gain on discharge of debt................... - - | 7.435 ----------- ----------- | ----------- Net income.............................................. $ 0.633 $ 0.441 | $ 10.230 =========== =========== | =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND COMMON | SHARE EQUIVALENTS OUTSTANDING............................. 60,454,470 60,160,478 | 35,544,330 =========== =========== | ===========
See accompanying notes to financial statements. 5 EL PASO ELECTRIC COMPANY STATEMENTS OF ACCUMULATED EARNINGS (UNAUDITED) (IN THOUSANDS)
THREE THREE MONTHS MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, 1997 1996 -------------- ------------- ACCUMULATED EARNINGS AT BEGINNING OF PERIOD................... $43,614 $ 6,144 ADD: Net income.................................................. 23,919 22,770 ------- ------- 23,919 22,770 ------- ------- DEDUCT: Cumulative preferred stock dividend requirement............. 3,331 2,977 ------- ------- 3,331 2,977 ------- ------- ACCUMULATED EARNINGS AT END OF PERIOD......................... $64,202 $25,937 ======= =======
See accompanying notes to financial statements. 6 EL PASO ELECTRIC COMPANY STATEMENTS OF ACCUMULATED EARNINGS (IN THOUSANDS)
NINE PERIOD FROM | MONTHS FEBRUARY 12 | PERIOD FROM ENDED TO | JANUARY 1 SEPTEMBER 30, SEPTEMBER 30, | TO 1997 1996 | FEBRUARY 11, (UNAUDITED) (UNAUDITED) | 1996 -------------- -------------- | ------------- | | ACCUMULATED EARNINGS (DEFICIT) AT BEGINNING OF PERIOD.................... $30,835 $ - | $(758,032) | ADD: | Net income............................................................. 43,085 33,959 | 382,471 Elimination of predecessor equity accounts............................. - - | 375,561 ------- ------- | --------- 43,085 33,959 | 758,032 ------- ------- | --------- | DEDUCT: | Cumulative preferred stock dividend requirement........................ 9,718 7,426 | - Capital stock expense.................................................. - 596 | - ------- ------- | --------- 9,718 8,022 | - ------- ------- | --------- | ACCUMULATED EARNINGS AT END OF PERIOD.................................... $64,202 $25,937 | $ - ======= ======= | =========
See accompanying notes to financial statements. 7 EL PASO ELECTRIC COMPANY STATEMENTS OF ACCUMULATED EARNINGS (UNAUDITED) (IN THOUSANDS)
TWELVE PERIOD FROM | PERIOD FROM MONTHS FEBRUARY 12 | OCTOBER 1, 1995 ENDED TO | TO SEPTEMBER 30, SEPTEMBER 30, | FEBRUARY 11, 1997 1996 | 1996 ------------- ------------- | ---------------- | | ACCUMULATED EARNINGS (DEFICIT) AT BEGINNING OF PERIOD.................... $25,937 $ - | $(739,163) | ADD: | Net income............................................................. 51,045 33,959 | 363,602 Elimination of predecessor equity accounts............................. - - | 375,561 ------- ------- | --------- 51,045 33,959 | 739,163 ------- ------- | --------- | DEDUCT: | Cumulative preferred stock dividend requirement........................ 12,780 7,426 | - Capital stock expense.................................................. - 596 | - ------- ------- | --------- 12,780 8,022 | - ------- ------- | --------- | ACCUMULATED EARNINGS AT END OF PERIOD.................................... $64,202 $25,937 | $ - ======= ======= | =========
See accompanying notes to financial statements. 8 EL PASO ELECTRIC COMPANY STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE PERIOD FROM | MONTHS FEBRUARY 12 | PERIOD FROM ENDED TO | JANUARY 1 SEPTEMBER 30, SEPTEMBER 30, | TO 1997 1996 | FEBRUARY 11, (UNAUDITED) (UNAUDITED) | 1996 ------------- ------------- | -------------- | CASH FLOWS FROM OPERATING ACTIVITIES: | Net income..................................................................... $ 43,085 $ 33,959 | $ 382,471 Adjustments to reconcile net income to net cash provided by operating | activities: | Depreciation and amortization................................................ 83,271 71,129 | 8,246 Deferred income taxes and investment tax credit, net......................... 27,305 22,349 | (3,116) Other operating activities................................................... 1,781 2,011 | (805) Extraordinary loss on repurchase of debt, net of federal income tax benefit.. 2,741 - | - Gain on sale of investment................................................... - (3,844) | - Reorganization items, net of income tax benefit.............................. - - | (122,251) Extraordinary gain on discharge of debt...................................... - - | (264,273) Change in: | Accounts receivable.......................................................... (8,670) (3,746) | 5,429 Federal income tax receivable................................................ 17,635 - | - Inventories.................................................................. 703 24 | 90 Prepayments and other........................................................ (2,205) (4,152) | 34 Long-term contract receivable................................................ 2,525 1,658 | 293 Accounts payable............................................................. (9,492) (7,758) | (6,859) Interest accrued............................................................. (2,973) 23,137 | - Net under/overcollection of fuel revenues.................................... (9,552) (7,767) | 417 Other current liabilities.................................................... 5,126 1,955 | (152) Deferred charges and credits................................................. 6,867 (856) | 1,994 Obligations subject to compromise............................................ - - | 9,430 Revenues subject to refund................................................... - - | 2,785 ---------- ---------- | ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES.................................. 158,147 128,099 | 13,733 ---------- ---------- | ------------ CASH FLOWS FROM INVESTING ACTIVITIES (NOTE A): | Additions to utility plant and other investing activities...................... (53,847) (39,899) | (8,176) Investment in decommissioning trust fund....................................... (4,497) (4,555) | (553) Proceeds from sale of investment............................................... - 20,183 | - ---------- ---------- | ------------ NET CASH USED FOR INVESTING ACTIVITIES..................................... (58,344) (24,271) | (8,729) ---------- ---------- | ------------ CASH FLOWS FROM FINANCING ACTIVITIES (NOTE A): | Repurchase of and payments on long-term debt................................... (81,233) (64,023) | - Proceeds from financing and capital lease obligations.......................... 17,560 14,890 | 43,309 Redemption of financing and capital lease obligations.......................... (17,285) (8,556) | - Capital stock expense.......................................................... - (596) | - Proceeds from issuance of preferred stock...................................... - - | 97,500 Proceeds from issuance of long-term debt....................................... - - | 778,120 Redemption of obligations subject to compromise................................ - - | (1,131,695) ---------- ---------- | ------------ NET CASH USED FOR FINANCING ACTIVITIES..................................... (80,958) (58,285) | (212,766) ---------- ---------- | ------------ NET INCREASE (DECREASE) IN CASH AND TEMPORARY INVESTMENTS........................ 18,845 45,543 | (207,762) CASH AND TEMPORARY INVESTMENTS AT BEGINNING OF PERIOD............................ 68,767 54,745 | 262,507 ---------- ---------- | ------------ CASH AND TEMPORARY INVESTMENTS AT END OF PERIOD.................................. $ 87,612 $ 100,288 | $ 54,745 ========== ========== | ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | Cash (refunded) paid for: | Income taxes, net............................................................ $ (16,035) $ 353 | $ - Interest..................................................................... 59,229 32,911 | 8,580 Reorganization items - professional fees and other........................... 2,469 5,017 | 2,279 ========== ========== | ============
See accompanying notes to financial statements. 9 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (UNAUDITED) A. PRINCIPLES OF PREPARATION Pursuant to the rules and regulations of the Securities and Exchange Commission, certain financial information has been condensed and certain footnote disclosures have been omitted. Such information and disclosures are normally included in financial statements prepared in accordance with generally accepted accounting principles. These condensed financial statements should be read in conjunction with the financial statements and notes thereto in the Annual Report of El Paso Electric Company (the "Company") on Form 10-K for the year ended December 31, 1996 (the "1996 Form 10-K"). Capitalized terms used in this report and not defined herein have the meaning ascribed for such terms in the 1996 Form 10-K. In the opinion of management of the Company, the accompanying financial statements contain all adjustments necessary to present fairly the financial position of the Company at September 30, 1997 and December 31, 1996; the results of operations for the three months ended September 30, 1997 and 1996, the nine months ended September 30, 1997, the period from February 12 to September 30, 1996, the period from January 1 to February 11, 1996, the twelve months ended September 30, 1997, the period from February 12 to September 30, 1996 and the period from October 1, 1995 to February 11, 1996; and cash flows for the nine months ended September 30, 1997, the period from February 12 to September 30, 1996 and the period from January 1 to February 11, 1996. The results of operations for the nine and twelve months ended September 30, 1997 are not necessarily indicative of the results to be expected for the full calendar year. As more fully described in the 1996 Form 10-K, on February 12, 1996, the Company emerged from bankruptcy reorganization as an independent investor-owned utility. As of February 12, 1996, the Company applied fresh-start reporting to the financial statements to reflect assets at reorganization value and liabilities at fair value. A vertical line separates the accompanying financial statements prepared before and after the application of fresh-start reporting to signify that the financial statements of the Reorganized Company have been prepared on a different basis than those prior to the Reorganization and, therefore, are not comparable in all respects. 10 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (UNAUDITED) NON-CASH INVESTING AND FINANCING Non-cash investing and financing activities recorded by the Company consisted of the following (In thousands):
NINE PERIOD FROM | PERIOD FROM MONTHS FEBRUARY 12 | JANUARY 1 ENDED TO | TO SEPTEMBER 30, SEPTEMBER 30, | FEBRUARY 11, 1997 1996 | 1996 ------------- ------------- | ------------ | Issuance of Preferred Stock for | pay-in-kind dividend........................ $9,533 $ - | $ - Issuance of restricted shares of | Common Stock................................ 411 948 | - Reorganized Common Stock exchanged | for Predecessor Common and | Preferred Stock............................. - - | 45,000 Reorganized Common Stock exchanged | for settlement of obligations subject | to compromise............................... - - | 255,000 Long-term debt exchanged for settlement | of obligations subject to compromise........ - - | 151,834 Plant in service reacquired through | incurring obligation subject to | compromise.................................. - - | 227,656
B. RATE MATTERS For a full discussion of the Company's rate matters, see Note C of Notes to Financial Statements in the 1996 Form 10-K. General. The electric utility industry faces increasing pressure to become more competitive as legislative, regulatory, economic and technological changes occur. Federal regulation, as well as legislative and regulatory initiatives in various states, including Texas and New Mexico, encourages competition for electricity generation among electric utility and non-utility power producers. Together with increasing customer demand for lower-priced electricity and other energy services, these measures have accelerated the industry's movement toward more competitive pricing and cost structures. Such competitive pressures could require the Company to reduce its rates, result in the loss of customers and diminish the ability of the Company to fully recover both its investment in generation assets and the cost of operating these assets. This issue is particularly important to the Company because its rates are higher than national and regional averages. There can be no assurance that these competitive pressures will not adversely affect the future operations, cash flows and financial condition of the Company, or that the Company will be able to sustain current retail rates. 11 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (UNAUDITED) Of particular importance to the Company is the issue of the recoverability from customers of "stranded costs," or costs previously found by regulatory authorities to be reasonable and prudent, but which are higher than would be recovered under immediate, full competition. Throughout the industry, and at the federal and state levels, there is substantial discussion and debate on this issue, but no consensus solution has yet emerged. At the federal level, the Federal Energy Regulatory Commission ("FERC") has announced, through a formal rulemaking, its intention to allow 100% recovery of all legitimate verifiable stranded costs attributable to FERC jurisdictional customers. Both the Texas and New Mexico Commissions are conducting proceedings related to industry restructuring and stranded cost recovery, but the Company is unable to predict the ultimate outcome of these proceedings. FERC. In July 1996, the Company filed its open access transmission tariffs (Docket No. 0A96-200-000) in compliance with FERC Order No. 888, covering network and point-to-point transmission services and the six specifically required ancillary services. Several parties, including Las Cruces, other utilities and several wholesale power marketers, intervened and filed protests to the Company's tariffs. Issues raised by the intervenors included rates and the terms and conditions of the Company's tariffs, including the treatment and costs related to certain facilities making access to the Comision Federal de Electricidad de Mexico ("CFE") more available to parties other than the Company. In February 1997, the Company entered into a stipulated agreement among the various parties settling all rate issues related to this proceeding. Under the settlement, the Company will provide transmission service, to the extent transmission capacity is available, to any party for firm or interruptible service to the CFE until the earlier of the end of 1998 or the date the FERC rules on the previous complaint requesting service to Mexico. Intervenors in this proceeding have also raised certain issues relating to the criteria by which the Company will determine the amount of transmission capacity that is available for use by third parties desiring to use its transmission system. Pursuant to a procedural schedule adopted in July 1997, an evidentiary hearing on these issues is to be held before a FERC administrative law judge in January 1998. In July 1996, Las Cruces exercised its right under FERC Order No. 888 to request that the Company calculate Las Cruces' stranded cost obligation should it leave the Company's system and operate its own municipal utility. The Company's initial non-binding calculation was provided within the statutory period. Las Cruces subsequently filed a request at the FERC for a determination that Las Cruces would have no stranded cost obligation to the Company or, in the alternative, that the FERC convene a hearing to establish the amount of any stranded costs. In August 1997, the FERC issued an order denying Las Cruces' request for a determination that Las Cruces would have no stranded cost obligation, and providing for evidentiary hearings on the following stranded cost issues: (i) whether the Company has met the "reasonable expectation" standard so as to justify recovery of stranded costs from Las Cruces; and (ii) if so, the amount of stranded costs that the Company may recover from Las Cruces. On October 3, 1997, the Company filed testimony in support of its recovery and calculation of stranded costs, calculated pursuant to the FERC formula, of approximately $169 million. Las Cruces is scheduled to file its testimony on November 14, 1997 and the FERC staff is scheduled to file testimony on December 19, 1997. The Company is scheduled to file rebuttal testimony on January 10, 1998. Hearings are scheduled to begin on February 2, 1998. 12 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (UNAUDITED) Texas. During 1996, the Texas Commission conducted projects to evaluate the (i) scope of competition in the electric industry in Texas and (ii) potential for stranded investment, procedures for allocating stranded costs and acceptable methods of stranded cost recovery. The Texas Commission's report consolidating the two projects was issued in January 1997. While it recommended a careful and deliberate approach to continued expansion of competition in the Texas electric market, ultimately leading to retail competition with certain safeguards, it also recommended against any legislation that would introduce broad-based retail competition before 2000. The Texas Commission also quantified the potential retail "excess of cost over market" ("ECOM") under several scenarios. The Texas Commission's ECOM estimate for the Company ranged from a high of $1.3 billion to a low of $781 million, with an expected value of $1.1 billion, assuming full retail access in 1998. Although several pieces of legislation were offered, the 1997 Texas legislative session adjourned without passing any significant deregulation legislation. In August 1997, the Lieutenant Governor appointed seven senators to serve on a special interim committee to study the various issues involved in a possible transition to a competitive electric market. On September 26, 1997, the committee held its first meeting to receive invited testimony from various parties, including environmental advocates, consumer advocates, power marketers, public power entities, electric cooperatives and investor-owned utilities, as well as testimony and comments from the public at large. The committee is holding public hearings across the state on various aspects of the electric industry restructuring debate. The Association of Electric Companies of Texas (the "AECT") testified on behalf of all investor-owned utilities in Texas, including the Company. The AECT testified that it would support retail competition that provides benefits to all consumers, maintains electric system reliability, provides for equitable treatment of all competitors and provides for the preservation of prior regulatory commitments. The committee is scheduled to file a status report by March 1, 1998 and a final report by October 1, 1998. Recently, the Lieutenant Governor asked the Texas Comptroller of Public Accounts to initiate a study to review the impact of a deregulated electric market on state and local tax systems. New Mexico. The New Mexico Commission initiated a notice of inquiry regarding competition and the restructuring of regulation of the electric industry in 1996. The New Mexico Commission received comments from numerous parties representing various interests and conducted workshops in an attempt to arrive at a consensus with respect to the need for regulatory change, the nature of such change and the timing/transition of any changes. No consensus was reached by the participants. The New Mexico Commission also commenced a collaborative process with the assistance of facilitators in an attempt to reach consensus. Although that collaborative process failed to reach a consensus around which restructuring legislation could be drafted, the New Mexico investor-owned utilities, including the Company, have agreed to support legislation that would permit retail competition provided: (i) all customers have the opportunity to benefit, (ii) reliability of electric service is maintained, (iii) all energy suppliers are subject to the same laws and regulations, (iv) the price of electric generating capacity and electric energy is determined solely by market forces, (v) unbundled transmission and distribution functions remain subject to regulation, and (vi) each electric utility must have a reasonable opportunity to recover its strandable costs. 13 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (UNAUDITED) With respect to the calculation of the Company's stranded costs, the New Mexico Commission utilized several methodologies, one of which was the same ECOM model that was developed for Texas. The New Mexico Commission's ECOM calculation for the Company ranged from a high of $248 million to a low of $173 million. The Company's calculation of stranded costs for New Mexico pursuant to FERC Order No. 888, as previously reported to the New Mexico Commission, totaled $364 million. The Company cannot predict the nature of any legislative initiatives addressing electric industry restructuring during the 1998 legislative session. Additionally, if there are legislative initiatives, the Company cannot predict whether any, or all, will be consistent with the principles stated above, and therefore, supportable by the Company. In response to complaints filed by two customers in the fall of 1996, the New Mexico Commission docketed an investigation into the Company's current rates and ordered the Company to file data to support its current rate level. In March 1997, the Company filed the data requested, which showed that the Company had a rate deficiency of approximately $8.6 million, although the Company did not request a rate increase. On October 22, 1997, the New Mexico Commission appointed a hearing examiner to preside over the proceeding investigating the Company's New Mexico rates. The Company cannot predict the timing or ultimate outcome of this proceeding. On August 1, 1997 the New Mexico Commission allowed the Company's proposed increase in its fuel factor to $0.01949 per KWH from $0.01283 to become effective and ordered the Company to file testimony supporting continued use of its methodology and manner of collecting fuel and purchased power costs contained in its tariffs. On October 31, 1997, the Company filed testimony supplementing the testimony filed with the New Mexico Commission in its original request to change fuel factors and reconcile 1996 fuel and purchased power costs. The Company believes it has fully justified its fuel and purchased power cost recovery methodology, as required by New Mexico Commission rules. The Company cannot predict what, if any, further action the New Mexico Commission may take with respect to the Company's fuel and purchased power recovery and reconciliation procedures. In May 1997, Texas-New Mexico Power Company ("TNP") filed an application to obtain a Certificate of Convenience and Necessity ("CCN") from the New Mexico Commission to serve customers within the Company's New Mexico service territory in the Santa Teresa, New Mexico area. The Company has intervened in the proceeding, challenging TNP's CCN application. Hearings on the application are scheduled to commence in December 1997. The Company believes TNP's application should be rejected because granting TNP's application would result in an unnecessary duplication of facilities and would impact the Company's CCN rights. In August 1997, the Company filed suit in the District Court for Dona Ana County, New Mexico against TNP for tortious interference with a contract. The Company alleges that TNP knowingly entered into an agreement with a customer already under contract with the Company. The Company also filed a breach of contract lawsuit against the customer. Neither case has been set for trial. The Company is unable at this time to predict the outcome of these proceedings. 14 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (UNAUDITED) C. COMMITMENTS AND CONTINGENCIES For a full discussion of commitments and contingencies, including environmental matters related to the Company, see Note J of Notes to Financial Statements in the 1996 Form 10-K. In addition, see Note E of Notes to Financial Statements in the 1996 Form 10-K regarding matters related to Palo Verde, including liability and insurance matters, decommissioning and the operation of steam generators. D. LITIGATION For a full discussion of litigation, see Note K of Notes to Financial Statements in the 1996 Form 10-K. LITIGATION WITH LAS CRUCES Las Cruces is attempting to replace the Company as the electric service provider in Las Cruces by acquiring, through condemnation or otherwise, the distribution assets and other facilities used to provide electric service to customers in Las Cruces. Sales to customers in Las Cruces represent approximately 7% of the Company's operating revenues. Las Cruces filed an action seeking to recover unpaid franchise fees in federal district court in New Mexico in 1995, seeking the reasonable value of the Company's use, occupation and rental of Las Cruces' rights-of-way or damages for trespass and an unspecified amount of punitive damages. The Company ceased payment of franchise fees in March 1994 upon the expiration of the franchise agreement. In June 1997, after disposing of various procedural and substantive issues and after a trial on the merits, the court rendered judgment in favor of Las Cruces, ordering the Company to pay $2.5 million in back franchise fees and judgment interest. Although the Company has appealed the judgment, it has reserved in its financial statements an amount equal to the franchise fees under the expired agreement and the related interest. In April 1995, Las Cruces filed a complaint against the Company in the District Court for Dona Ana County, New Mexico, seeking a declaratory judgment that Las Cruces has a right of eminent domain to condemn the electric distribution system and related facilities owned and operated by the Company within and adjacent to the city limits that provide or assist in the provision of electricity within the municipal boundaries of Las Cruces. In May 1995, the Company removed the case to federal district court in New Mexico. Following a trial on the merits, the Federal Magistrate granted the Company's motion to certify to the New Mexico Supreme Court the question of whether Las Cruces possesses the authority to condemn the Company's property for use as a municipal utility when that property is already devoted to public use. The New Mexico Supreme Court heard oral arguments in February 1997, but prior to the issuance of a ruling by the courts, the New Mexico legislature enacted a bill which purports to give Las Cruces the authority to condemn the Company's distribution system within its city limits and a territory extending five miles beyond the municipal boundary. The New Mexico Supreme Court has subsequently requested that the parties submit to the court briefs on 15 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (UNAUDITED) the impact this new legislation will have on the case. The Company believes that the new legislation does not render the case moot and has requested that the court rule on the issues presented to it in the February 1997 hearing. If Las Cruces succeeds in its efforts to condemn the Company's distribution system, the Company could lose its Las Cruces customer base, although the Company would be entitled to receive "just compensation" as established by the court under New Mexico law. "Just compensation" is generally defined as the amount of money that would fairly compensate the party whose property is condemned. In the Company's case, it is the Company's opinion that this amount would be the difference between the value of the Company's entire system prior to the taking, as compared to the value of the entire system after the taking. In any successful condemnation by Las Cruces, the Company also would be entitled to recover, pursuant to Order No. 888, the stranded costs associated with the loss of its distribution system as determined by the FERC, to the extent such costs are in excess of "just compensation." For a full discussion of stranded costs see Note B. Las Cruces has taken several actions to position itself to acquire portions of the Company's distribution system and certain related facilities. In August 1994, Southwestern Public Service Company ("SPS") and Las Cruces entered into a fifteen-year contract granting SPS the right to provide all of the electric power and energy required by Las Cruces during the term of the contract. In addition, Las Cruces sold approximately $73 million in revenue bonds in October 1995 to provide funding to finance the acquisition by condemnation or negotiated purchase of the Company's electrical distribution assets within and adjacent to the Las Cruces city limits. The Company filed a lawsuit in the Dona Ana County District Court and is pursuing a complaint simultaneously before the New Mexico Commission challenging the legality of the sale of the revenue bonds. In addition, the New Mexico Commission is investigating the agreement between SPS and Las Cruces which, under certain circumstances, would grant Las Cruces an option to sell electric utility assets acquired through condemnation to SPS. In August 1996, the Dona Ana County District Court issued an opinion letter stating that Section 3-23-3 of the New Mexico Municipal Code is inapplicable to home rule municipalities and Las Cruces, therefore, was not required to acquire the New Mexico Commission's approval before issuing revenue bonds to acquire utility property. However, the court did agree with the Company that the revenue bonds, in this case backed by utility revenues, are subject to the same requirements as those imposed on other revenue bonds backed by gross receipts tax revenues. Therefore, if the court's finding on the applicability of Las Cruces' home rule authority is overturned on appeal, the Company's position that the issuance of the bonds required prior approval could be upheld. The court's order was signed and entered in November 1996. The Company has filed an appeal with the New Mexico Court of Appeals. Las Cruces has requested an expedited ruling from the Court of Appeals. A final ruling by the Court of Appeals is subject to appeal to the New Mexico Supreme Court. In April 1997, Las Cruces announced its plan to build a substation and distribution lines to serve a new customer in a city-owned industrial park. Las Cruces stated that SPS would construct, operate and maintain the new substation facility, and that the rates for this new customer would be significantly lower than the Company's current rates. In that regard, Las Cruces has approved a contract with SPS to 16 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (UNAUDITED) provide operation and maintenance services for the proposed Las Cruces electric distribution system, substations and associated transmission facilities. In May 1997, the Company filed a complaint with the New Mexico Commission alleging that the participation of SPS in this project without first obtaining a CCN from the New Mexico Commission violates New Mexico law. In June 1997, the New Mexico Commission rejected the Company's complaint and ruled that SPS's participation in this project is part of an agency relationship with Las Cruces and, therefore, not subject to the New Mexico Commission's jurisdiction. The Company continues to believe that it can provide lower cost electric service to customers in Las Cruces than can be achieved through a municipal takeover. Accordingly, the Company has stated its strong preference for a resolution of its differences with Las Cruces through negotiation rather than litigation and condemnation. The parties are currently participating in a FERC sponsored mediation in an effort to seek a negotiated resolution. Any negotiated settlement in New Mexico could include an agreement by the Company to reduce its rates as part of an overall settlement of all issues in New Mexico, which could create increased political and economic pressure on the Company to reduce rates in Texas. The Company is unable to predict the outcome of Las Cruces' efforts to replace the Company as its electric service provider or the effects it may have on the Company's financial position, results of operations and cash flows. The Company does not believe it is probable that a loss has been incurred and, therefore, has made no provision in the accompanying financial statements related to these matters. 17 Independent Auditors' Review Report ----------------------------------- The Shareholders and the Board of Directors El Paso Electric Company: We have reviewed the accompanying condensed balance sheet of El Paso Electric Company (the Company) as of September 30, 1997, the related condensed statements of operations and accumulated earnings for the three months ended September 30, 1997 and 1996, for the nine months ended September 30, 1997, for the period from February 12, 1996 to September 30, 1996, for the twelve months ended September 30, 1997, and the period from October 1, 1995 to February 11, 1996, and the related condensed statements of cash flows for the nine months ended September 30, 1997 and for the period from February 12, 1996 to September 30, 1996. These 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 review 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 accompanying financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet of El Paso Electric Company as of December 31, 1996, and the related statements of operations, accumulated earnings (deficit), and cash flows for the period February 12, 1996 to December 31, 1996, and the period January 1, 1996 to February 11, 1996 (not presented herein); and in our report dated March 27, 1997, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed balance sheet as of December 31, 1996 and in the condensed statements of operations, accumulated earnings (deficit), and cash flows for the period January 1, 1996 to February 11, 1996, is fairly presented, in all material respects, in relation to the financial statements from which it has been derived. As discussed in Note A of Notes to Financial Statements, on February 12, 1996, the Company emerged from bankruptcy. The financial statements of the reorganized Company reflect assets at reorganization value and liabilities at fair value under fresh-start reporting as of February 12, 1996. As a result, the financial statements of the reorganized Company are presented on a different basis than those prior to the reorganization and, therefore, are not comparable in all respects. KPMG Peat Marwick LLP El Paso, Texas October 16, 1997 18 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 in the Company's 1996 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 (the "1995 Act"). Such forward-looking statements, as well as other oral and written forward-looking statements made by or on behalf of the Company from time to time, including statements contained in the Company's filings with the Securities and Exchange Commission and its reports to stockholders, involve known and unknown risks and other factors which may cause the Company's actual results in future periods to differ materially from those expressed in any forward-looking statements. Any such statement is qualified by reference to the risks and factors discussed below under the headings "Operational and Regulatory Prospects and Challenges" and "Liquidity and Capital Resources" and in the Company's filings with the Securities and Exchange Commission, which are available from the Securities and Exchange Commission or which may be obtained upon request from the Company. The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company. OPERATIONAL AND REGULATORY PROSPECTS AND CHALLENGES OPERATIONAL The electric utility industry faces increasing pressure to become more competitive as legislative, regulatory, economic and technological changes occur. Federal regulation, as well as legislative and regulatory initiatives in various states, including Texas and New Mexico, encourages competition in the Company's service area for electricity generation among electric utility and non-utility power producers. Together with increasing customer demand for lower- priced electricity and other energy services, these measures have accelerated the industry's movement toward more competitive pricing and cost structures. Such competitive pressures could require the Company to reduce its rates, result in the loss of customers and diminish the ability of the Company to fully recover both its investment in generation assets and the cost of operating these assets. This issue is particularly important to the Company because its rates are higher than national and regional averages. In the face of increased competition, there can be no assurance that such competition will not adversely affect the future operations, cash flows and financial condition of the Company, or that the Company will be able to sustain current retail rates. Although the Rate Stipulation provides a certain level of stability in the rates that the Company currently charges the majority of its customers, political and economic forces may create downward pressures on the Company's rates. Any negotiated settlement in New Mexico could include an agreement by the Company to reduce its rates as part of an overall settlement of all issues in New Mexico, which could create increased political and economic pressure on the Company to reduce rates in Texas. Nonetheless, the Company intends to enhance its position during the Freeze Period by (i) serving the growing need for electricity within its retail service territory; (ii) continuing to focus on its strategic location on the border with Mexico; (iii) executing long-term contracts to provide electricity to its largest retail customers; and (iv) controlling and reducing operating costs. The Company faces a number of challenges which could negatively impact its operations during the Freeze Period. An important challenge is the risk of increased costs, including the risk of additional 19 or unanticipated costs at Palo Verde resulting from (i) increases in operation and maintenance expenses; (ii) the potential replacement of steam generators; (iii) an extended outage of any of the Palo Verde units; (iv) increases in estimates of decommissioning costs; (v) the storage of radioactive materials; and (vi) compliance with the various requirements and regulations governing commercial nuclear generating stations. There can be no assurance that the Company's revenues will be sufficient to recover any increased costs incurred during the Freeze Period, including any such increased costs in connection with Palo Verde or increases in other costs of operation, whether as a result of higher than anticipated levels of inflation, changes in tax laws or regulatory requirements, or other causes. Another risk to the Company's operations is the potential loss of customers. The Company's wholesale and large retail customers currently have, in varying degrees, and, in the future may have, alternate sources of economical power, including co-generation of electric power. 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. Las Cruces continues its efforts to replace the Company as its electric service provider. The New Mexico legislature has recently passed legislation which purports to give Las Cruces the authority to condemn the Company's distribution system and related assets located within its city limits and a territory extending five miles beyond the municipal boundary. If Las Cruces succeeds in its efforts to condemn the Company's distribution system, the Company could lose its Las Cruces customer base, although the Company would be entitled to receive "just compensation" as established by the court under New Mexico law. In the Company's case, it is the Company's belief that "just compensation" would be the difference between the value of the Company's entire system prior to the taking, as compared to the value of the entire system after the taking. In any successful condemnation by Las Cruces, the Company also would be eligible to receive, pursuant to Order No. 888, the stranded costs associated with the loss of its distribution system to the extent such costs are in excess of "just compensation." Additionally, TNP has filed an application to obtain a CCN from the New Mexico Commission to serve customers within the Company's New Mexico service territory in the Santa Teresa, New Mexico area. The Company has intervened in the proceeding, challenging TNP's CCN application. Hearings on the application are scheduled to commence in December 1997. The Company believes TNP's application should be rejected because granting TNP's application would result in an unnecessary duplication of facilities and would impact the Company's CCN rights. In August 1997, the Company filed suit in the District Court for Dona Ana County, New Mexico against TNP for tortious interference with a contract. The Company alleges that TNP knowingly entered into an agreement with a customer already under contract with the Company. The Company also filed a breach of contract lawsuit against the customer. Neither case has been set for trial. The Company is unable at this time to predict the outcome of these proceeding. In recent years, the United States has closed a large number of military bases and there can be no assurance that Holloman Air Force Base ("Holloman"), White Sands Missile Range ("White Sands") or the United States Army Air Defense Center at Fort Bliss ("Ft. Bliss") will not be closed in the future or that the Company will not lose all or some of its military base sales. The Company's sales to the military bases represent approximately 3% of operating revenues. The Company signed a new contract with Ft. Bliss in August 1996, which provides that Ft. Bliss will take service from the Company through 1999, with the right thereafter to continue service for two years on a year to year basis. The Company has a contract for service to Holloman for a ten-year term beginning in December 1995. In August 1996, the Army advised the Company that White Sands would continue to purchase retail electric service from the Company until written termination of such contract by the Army not less than one year in advance of the termination date. 20 REGULATORY Seasonal volatility in fuel prices may increase concern among the Company's customers and regulators over price levels for energy, including electricity. The Company's recovery of fuel expense is subject to challenges regarding reasonableness and prudence through periodic fuel reconciliation proceedings. As of September 30, 1997, the Company had a net undercollected balance of approximately $11.5 million, which consists of $6.2 million in New Mexico, $5.1 million in Texas and $0.2 million from FERC jurisdictional customers. The Company believes it is also entitled to a performance reward of approximately $0.6 million in its Texas jurisdiction (related to the operating performance of Palo Verde) which is not reflected in the Company's financial statements. On August 1, 1997, the New Mexico Commission ordered the implementation of the Company's new fuel factor. On October 31, 1997, as ordered by the New Mexico Commission, the Company filed testimony and evidence to support its continued use of the methodology and manner of collecting fuel and purchased power costs contained in its tariffs. The Company does not currently have an agreement with New Mexico regulatory authorities or parties to past New Mexico regulatory proceedings comparable to the Rate Stipulation. Pursuant to an order from the New Mexico Commission, the Company filed data to support its current level of rates with the Commission in March 1997. Although the Company's filing demonstrates a revenue deficiency of approximately $8.6 million under current rates, the Company did not request a rate change to recover the deficiency. The New Mexico Commission could order a rate reduction or, alternatively, in response to regulatory, political and competitive pressures, the Company could agree to a rate reduction as part of an overall settlement of all issues in New Mexico. The Company is unable at this time to predict with certainty the outcome of the proceeding currently pending before the New Mexico Commission. Finally, the electric utility industry in general is facing significant challenges and increased competition as a result of changes in federal provisions relating to third-party transmission services and independent power production, as well as potential changes in federal and state law and regulatory provisions relating to wholesale and retail service. Both the Texas and New Mexico Commissions are conducting proceedings related to industry restructuring and stranded cost recovery. The Company cannot predict the outcome of these proceedings. The potential effects of deregulation are particularly important to the Company because its rates are higher than national and regional averages. In the face of increased competition, there can be no assurance that such competition will not adversely affect the level of current retail rates or future operations, cash flow and financial condition of the Company. LIQUIDITY AND CAPITAL RESOURCES The Company's principal liquidity requirements through the end of the decade are expected to consist of interest payments on the Company's indebtedness and capital expenditures related to the Company's generating facilities and transmission and distribution systems. The Company expects that cash flows from operations will be sufficient for such purposes. Long-term capital requirements of the Company will consist primarily of maintenance and construction of electric utility plant, payment of interest on and retirement of debt and payment of dividends on and redemption of preferred stock. The Company has no current plans to construct any new generating capacity through at least 2004. Utility construction expenditures will consist primarily of expanding and updating the transmission and distribution systems and the cost of betterments and improvements to Palo Verde and other generating facilities. 21 The Company anticipates that internally generated funds will be sufficient to meet its construction requirements, provide for the retirement of debt at maturity and enable the Company to meet other contingencies that may exist, such as compliance with environmental regulation, pending litigation and any claims for indemnification. At September 30, 1997, the Company had approximately $87.6 million in cash and cash equivalents, out of which approximately $6.6 million of reorganization expenses are expected to be paid upon receipt of the Bankruptcy Court's final order for allowable professional fees related to the Company's bankruptcy proceedings. The Company also has a $100 million revolving credit facility, which provides up to $60 million for nuclear fuel purchases and up to $50 million (depending on the amount of borrowings outstanding for nuclear fuel purchases) for working capital needs. At September 30, 1997, approximately $48.3 million had been drawn for nuclear fuel purchases. No amounts have been drawn on this facility for working capital needs. The Company has substantial leverage and significant debt service obligations. Due to the Rate Stipulation and competitive pressures, the Company does not expect to be able to raise its base rates in the event of increases in non-fuel costs or loss of revenues. Accordingly, soon after its emergence from bankruptcy, the Company established debt reduction as a high priority in order to gain additional financial flexibility to address the evolving competitive market. The Company has significantly reduced its long-term debt following the Reorganization. From June 1, 1996 through September 30, 1997, the Company repurchased approximately $195.6 million of first mortgage bonds as part of an aggressive deleveraging program. As a result, long-term indebtedness as a percentage of capitalization was reduced from 74% at June 30, 1996 to 67% at September 30, 1997, and the Company will reduce its annual interest expense by approximately $15.4 million. The Company continues to believe that the orderly reduction of debt with a goal of achieving a debt to capitalization ratio that is more typical in the electric utility industry and, ultimately, an investment grade rating, is a significant component of long-term shareholder value creation. Accordingly, the Company will regularly evaluate market conditions and, when appropriate, use a portion of its available cash to reduce its fixed obligations through open market purchases of first mortgage bonds. However, the significant amount of debt reduction that the Company has achieved since the Reorganization, and the need for cash both to meet upcoming bond maturities and, if appropriate, to redeem early the Series A Preferred Stock, may result in a lower volume of repurchases in the future. Accordingly, the Company may experience a net increase in cash as it evaluates the comparative economic value of using excess cash for purposes other than open market purchases of its first mortgage bonds. The degree to which the Company is leveraged could have important consequences on the Company's liquidity, including (i) the Company's ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate or other purposes could be limited in the future; (ii) a substantial portion of the Company's cash flow from operations will be dedicated to the payment of principal and interest on its indebtedness and, if appropriate, to the payment of the early redemption price of its Series A Preferred Stock; and (iii) the Company's substantial leverage may place the Company at a competitive disadvantage by limiting its financial flexibility to respond to the demands of the competitive market and make it more vulnerable to adverse economic or business changes. 22 RESULTS OF OPERATIONS Financial comparisons herein for the nine and twelve months ended September 30, 1997 as compared to the same period in the prior year are based on the combined results of the Reorganized Company for the period February 12, 1996 to September 30, 1996 and the Predecessor Company for the period January 1, 1996 to February 11, 1996 and the period October 1, 1995 to February 11, 1996, respectively. Net income applicable to common stock before extraordinary item was approximately $20.7 million, or $0.34 per common share, for the three months ended September 30, 1997, compared with $19.8 million, or $0.33 per share, for the same period a year ago. For the nine months ended September 30, 1997, net income applicable to common stock before reorganization items and extraordinary items was approximately $36.1 million, or $0.60 per common share, compared with combined net income applicable to common stock before reorganization items and extraordinary items of $22.5 million for the same period a year ago. For the twelve months ended September 30, 1997, net income applicable to common stock before reorganization items and extraordinary items was approximately $41.0 million, or $0.68 per common share, compared with $8.5 million for the same period a year ago. Operating revenues net of fuel expenses increased $1.5 million, $3.9 million and $21.4 million for the three, nine and twelve months ended September 30, 1997 compared to the same periods last year. The increase was primarily due to increased KWH sales, partially offset by reduced revenue per KWH from CFE. Comparisons of KWH sales and operating revenues are shown below (In thousands):
THREE MONTHS ENDED SEPTEMBER 30: INCREASE/(DECREASE) - -------------------------------- ---------------------- 1997 1996 AMOUNT PERCENT ---------- ---------- --------- ------- Electric KWH Sales: Retail Customers........................ 1,688,713 1,634,176 54,537 3.3% Other Utilities......................... 594,279 503,098 91,181 18.1 ---------- ---------- --------- ----- Total.................................. 2,282,992 2,137,274 145,718 6.8 ========== ========== ========= ===== Operating Revenues: Retail Customers........................ $ 144,141 $ 134,523 $ 9,618 7.1% Other Utilities......................... 25,999 32,133 (6,134) (19.1) ---------- ---------- --------- ----- Total.................................. $ 170,140 $ 166,656 $ 3,484 2.1 ========== ========== ========= ===== NINE MONTHS ENDED SEPTEMBER 30: INCREASE/(DECREASE) - ------------------------------- ---------------------- 1997 1996 AMOUNT PERCENT ---------- ---------- --------- ------- Electric KWH Sales: Retail Customers........................ 4,397,052 4,331,720 65,332 1.5% Other Utilities......................... 1,477,422 1,326,143 151,279 11.4 ---------- ---------- --------- ----- Total.................................. 5,874,474 5,657,863 216,611 3.8 ========== ========== ========= ===== Operating Revenues: Retail Customers........................ $ 377,456 $ 356,479 $ 20,977 5.9% Other Utilities......................... 72,816 79,421 (6,605) (8.3) ---------- ---------- --------- ----- Total.................................. $ 450,272 $ 435,900 $ 14,372 3.3 ========== ========== ========= =====
23
TWELVE MONTHS ENDED SEPTEMBER 30: INCREASE/(DECREASE) - --------------------------------- -------------------- 1997 1996 AMOUNT PERCENT ----------- ---------- --------- ------- Electric KWH Sales: Retail Customers........................ 5,718,239 5,591,301 126,938 2.3% Other Utilities......................... 1,904,832 1,678,285 226,547 13.5 ---------- ---------- -------- ----- Total.................................. 7,623,071 7,269,586 353,485 4.9 ========== ========== ======== ===== Operating Revenues: Retail Customers........................ $ 492,800 $ 450,858 $ 41,942 9.3% Other Utilities......................... 100,494 104,410 (3,916) (3.8) ---------- ---------- -------- ----- Total.................................. $ 593,294 $ 555,268 $ 38,026 6.8 ========== ========== ======== =====
Other operations and maintenance expense decreased $1.0 million for the three months ended September 30, 1997 compared to the same period last year as a result of decreased maintenance expense of $3.1 million offset by an increase of $2.1 million in operations expenses. The decreased maintenance expense was due to various factors, the largest of which were a $0.8 million reclassification of an insurance settlement and a $0.5 million settlement related to environmental claims. The increase in operations expenses was due to various factors, the largest of which is the $0.8 million reclassification mentioned above. Other operations and maintenance expense decreased $11.0 million and $28.3 million for the nine and twelve months ended September 30, 1997 compared to the same periods last year. The decrease was a result of a reduction in Palo Verde costs of approximately $8.7 million and $27.7 million for the nine and twelve month periods, due to the lease accruals recorded by the Predecessor Company, with no corresponding accrual by the Reorganized Company as a result of the reacquisition of the leased portion of Palo Verde in the Reorganization. Depreciation and amortization expense was essentially unchanged for the three months ended and increased $2.8 million and $11.3 million for the nine and twelve months ended September 30, 1997 compared to the same periods last year. The effect of an increase in depreciable plant following the reacquisition in the Reorganization of a portion of Palo Verde and the depreciation of a portion of such amounts over the period of the Rate Stipulation was partially offset by the decrease in the book value of depreciable plant from fresh-start adjustments. Taxes other than income taxes increased $1.6 million for the three months ended and decreased $2.2 million and $6.6 million for the nine and twelve months ended September 30, 1997 compared to the same periods last year, primarily due to an annual decrease in Arizona property tax resulting from a new state property tax law which reduced total property taxes for the calendar years 1996 and 1997, but which was recorded beginning in July 1996. Other income decreased $3.4 million for the three months ended September 30, 1997 compared to the same period last year as a result of a gain on sale of investment of $3.8 million in 1996. Other income increased $3.5 million and $7.2 million for the nine and twelve month periods when compared to the same periods last year due to a favorable litigation settlement in 1997 of $7.5 million, net of legal fees and expenses, partially offset by a gain on sale of investment of $3.8 million in 1996 for the nine month period and an additional increase of $2.3 million for the twelve month period due to the settlement of bankruptcy professional fees. 24 Interest charges decreased $3.2 million, $7.0 million and $3.0 million for the three, nine and twelve months ended September 30, 1997 compared to the same periods last year, primarily due to a reduction in outstanding debt as a result of open market purchases of the Company's first mortgage bonds and the extinguishment of certain debt in conjunction with the Reorganization. Income taxes as a percentage of pretax income is higher for the twelve months ended September 30, 1996 as compared to the same period in 1997 due to permanent differences that arose in the fourth quarter of 1995 with no comparable items in the twelve months ended September 30, 1997. The reorganization items benefit recorded by the Predecessor Company upon the emergence from bankruptcy consisted of the effects of the Rate Stipulation and deferred income tax benefits related to the Reorganization. These benefits were partially offset by (i) the adjustments of assets and liabilities to their fair market values; (ii) provisions for settlement of claims; and (iii) professional fees and other expenses. There were no comparable amounts in the nine and twelve month periods ended September 30, 1997. Extraordinary loss on repurchase of debt for the three, nine and twelve months ended September 30, 1997 represents the payment of premiums on debt repurchased and the recognition of unamortized issuance expenses on that debt of $69,000, net of federal income tax benefit of $38,000, $2.7 million, net of federal income tax benefit of $1.4 million, and $2.7 million, net of federal income tax benefit of $1.4 million, respectively, with no comparable amounts for the same periods in 1996. Extraordinary gain on discharge of debt for the Predecessor Company for the periods January 1, 1996 to February 11, 1996 and October 1, 1995 to February 11, 1996 consisted of forgiven indebtedness primarily related to the extinguishment of Palo Verde lease obligations with no comparable amounts in the nine and twelve month periods ended September 30, 1997. SFAS No. 128, "Earnings per Share" ("SFAS No. 128"), establishes standards for computing and presenting earnings per share and applies to entities with publicly held common stock. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods; earlier application is not permitted. The Company has determined that SFAS No. 128 will not have a material effect on its financial statements. 25 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In August 1997, the Company filed suit in the District Court for Dona Ana County, New Mexico, against TNP. The suit alleges that TNP knowingly entered into an agreement with a customer already under contract with the Company. The Company has also filed a breach of contract suit against the customer in New Mexico Federal Court. This litigation arises out of a proceeding before the New Mexico Commission in which the Company is challenging TNP's application for a CCN to serve customers within the Company's service territory in Santa Teresa, New Mexico. ITEM 5. OTHER MATTERS The Company has 337 employees (approximately 30% of its work force) who are covered by a collective bargaining agreement with the International Brotherhood of Electrical Workers, Local 960 ("Local 960"). Local 960's members work primarily as linemen and power plant personnel with the Company. The collective bargaining agreement between the Company and Local 960 expired on June 16, 1997. On August 21, 1997, the Company and Local 960 agreed on the terms of a new collective bargaining agreement, and Local 960's members ratified the new agreement by a majority vote. The new agreement is in effect through June 2000. 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 26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EL PASO ELECTRIC COMPANY By: /s/ Gary R. Hedrick ---------------------------------- Gary R. Hedrick Vice President, Treasurer and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) Dated: November 13, 1997 27
EL PASO ELECTRIC COMPANY INDEX TO EXHIBITS Exhibit Sequentially Number Exhibit Numbered Page -------- ------- ------------- 4.01 Second Supplemental Indenture dated as of August 19, 1997, including form of Series I and Series J First Mortgage Bonds. 4.02 Letter of Credit and Reimbursement Agreement dated as of August 27, 1997, between the Company, the creditors named therein, Barclays Bank PLC, New York Branch, as Issuing Bank and Agent for the Creditors, and Union Bank of California, N.A., as Documentation Agent, related to the three series of pollution control bonds issued in connection with the Company's interest in Palo Verde. 4.03 Letter of Credit and Reimbursement Agreement dated as of August 27, 1997, between the Company, the Creditors named therein, Barclays Bank PLC, New York Branch, as Issuing Bank and Agent for the Creditors, and Union Bank of California, N.A., as Documentation Agent, related to the series of pollution control bonds issued in connection with the Company's interest in Four Corners. 11 Statement re Computation of Per Share Earnings 15 Letter re Unaudited Interim Financial Information 27 Financial Data Schedule (EDGAR filing only)
28 EX-4.01 2 SECOND SUPPLEMENTAL INDENTURE Exhibit 4.01 THIS INSTRUMENT GRANTS A SECURITY INTEREST BY A UTILITY THIS INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY PROVISIONS _______________________________________________________ SECOND SUPPLEMENTAL INDENTURE ____________________ EL PASO ELECTRIC COMPANY TO STATE STREET BANK AND TRUST COMPANY TRUSTEE DATED AS OF AUGUST 19, 1997 ____________________ CREATING ISSUES OF COLLATERAL SERIES I FIRST MORTGAGE BONDS COLLATERAL SERIES J FIRST MORTGAGE BONDS SUPPLEMENTAL TO GENERAL MORTGAGE INDENTURE AND DEED OF TRUST DATED AS OF FEBRUARY 1, 1996 _______________________________________________________ THIS IS A SECURITY AGREEMENT GRANTING A SECURITY INTEREST IN PERSONAL PROPERTY INCLUDING PERSONAL PROPERTY AFFIXED TO REALTY AS WELL AS A MORTGAGE UPON REAL ESTATE AND OTHER PROPERTY TABLE OF CONTENTS ARTICLE 1 Definitions SECTION 1.01. Terms Incorporated by Reference............................. 2 SECTION 1.02. Additional Definitions...................................... 3 SECTION 1.03. Other Definitions........................................... 4 ARTICLE 2 The Series I Bonds and the Series J Bonds SECTION 2.01. Terms of Series I Bonds and the Series J Bonds.............. 4 SECTION 2.02. Payment of Interest......................................... 7 SECTION 2.03. Registrar and Paying Agent; Transfer and Exchange of Bonds.. 7 SECTION 2.04. Definitive Bonds............................................ 8 SECTION 2.05. Execution, Authentication and Delivery...................... 8 ARTICLE 3 Redemptions and Repurchases SECTION 3.01. Mandatory Redemption of Series I Bonds and Series J Bonds... 8 ARTICLE 4 Covenants SECTION 4.01. Restricted Payments......................................... 9 SECTION 4.02. Incurrence of Indebtedness.................................. 11 SECTION 4.03. Limitation on Liens......................................... 13 SECTION 4.04. Dividend and Other Payment Restrictions Affecting Subsidiaries...................................... 14 SECTION 4.05. Merger, Consolidation or Sale of Assets..................... 14 SECTION 4.06. Transactions with Affiliates................................ 15 SECTION 4.07. Insurance................................................... 15 SECTION 4.08. Payments for Consents....................................... 15 SECTION 4.09. Reports..................................................... 16 SECTION 4.10. Restrictions on Release of Mortgaged Property............... 17 SECTION 4.11. Application of Certain Proceeds of Sales or Condemnations... 17 -ii- ARTICLE 5 Events of Default SECTION 5.01. Events of Default........................................... 18 ARTICLE 6 The Trustee SECTION 6.01. Trustee's Disclaimer........................................ 20 ARTICLE 7 Miscellaneous SECTION 7.01. Reference to Original Indenture............................. 20 SECTION 7.02. Benefits of Original Indenture.............................. 20 SECTION 7.03. Governing Law............................................... 20 SECTION 7.04. Successors.................................................. 21 SECTION 7.05. Counterparts................................................ 21 SCHEDULES Schedule 1 - Existing Investments of the Company EXHIBITS Exhibit A - Form of Series I Bond Exhibit B - Form of Series J Bond -iii- SECOND SUPPLEMENTAL INDENTURE THIS SECOND SUPPLEMENTAL INDENTURE, dated as of August 19, 1997 (the "Supplemental Indenture"), between EL PASO ELECTRIC COMPANY, a Texas corporation (the "Company"), whose principal office is located at 100 North Stanton Street, El Paso, Texas, 79901, and STATE STREET BANK AND TRUST COMPANY, a banking corporation organized under the laws of The Commonwealth of Massachusetts, as Trustee (the "Trustee"), whose principal corporate trust office is located at 225 Franklin Street, Boston, Massachusetts, 02110. WITNESSETH WHEREAS, the Company and the Trustee have entered into that (i) General Mortgage Indenture and Deed of Trust, dated as of February 1, 1996 (the "Original Indenture"), relating to the issuance of Bonds as may be created and established from time to time in one or more series; (ii) First Supplemental Indenture dated as of February 1, 1996 (the "First Supplemental Indenture" and, together with the Original Indenture, the "Indenture"); and WHEREAS, the Company issued Bonds pursuant to the terms of the Original Indenture and the First Supplemental Indenture, and mortgaged and pledged the Mortgaged Property to secure payment of the Bonds; and WHEREAS, pursuant to the Indenture, there have been executed, authenticated, delivered and issued and there are now outstanding Bonds of series and in principal amounts as follows:
Issued and Series Designation Outstanding Amount ------------------ ------------------ 7.25% Series A First Mortgage Bonds due 1999 $ 77,792,000 7.75% Series B First Mortgage Bonds due 2001 $ 68,323,000 8.25% Series C First Mortgage Bonds due 2003 $138,219,000 8.90% Series D First Mortgage Bonds due 2006 $235,957,000 9.40% Series E First Mortgage Bonds due 2011 $285,900,000 Collateral Series F First Mortgage Bonds $163,841,823 Collateral Series G First Mortgage Bonds $ 34,134,780 Collateral Series H First Mortgage Bonds $100,000,000;
and WHEREAS, the Collateral Series F First Mortgage Bonds will be extinguished and retired pursuant to their terms on or around September 23, 1997 upon the surrender and cancellation thereof by the Holders thereof in connection with the refinancing of the Maricopa LCs and the replacement of the Maricopa Reimbursement Agreement with the New Maricopa Reimbursement Agreement; and -1- WHEREAS, the Collateral Series G First Mortgage Bonds will be extinguished and retired pursuant to their terms on or about September 23, 1997 upon the surrender and cancellation thereof by the Holders thereof in connection with the refinancing of the Farmington LC and the replacement of the Farmington Reimbursement Agreement with the New Farmington Reimbursement Agreement; and WHEREAS, Section 4.01 of the Original Indenture permits the issuance of additional Bonds to secure Indebtedness or reimbursement obligations of the Company in a principal amount not exceeding 100% of the principal amount of certain Retired Bonds, including Retired Initial Series Bonds that were issued for the purpose of securing the repayment of any Indebtedness or reimbursement obligations of the Company; and WHEREAS, the Company desires in and by this Supplemental Indenture to create new series of Bonds to be issued under the Original Indenture, to designate such series and to set forth the form, the maturity date, interest rate and other terms of the Bonds of such series; and WHEREAS, it is provided in the Original Indenture, among other things, that the Company shall execute and file with the Trustee, and the Trustee at the request of the Company, when required by the Original Indenture, shall join in indentures supplemental thereto, and which thereafter shall form a part thereof, for the purpose, among others, of providing for the creation of any series of Bonds and specifying the form and provisions of the Bonds of such series; and WHEREAS, all acts and things have been done and performed which are necessary to make this Supplemental Indenture, when duly executed and delivered, a valid, binding and legal instrument in accordance with its terms and for the purposes herein expressed; and the execution and delivery of this Supplemental Indenture have been in all respects duly authorized. NOW THEREFORE, in consideration of the premises and in further consideration of the sum of One Dollar in lawful money of the United States of America paid to the Company by the Trustee at or before the execution and delivery of this Supplemental Indenture, the receipt whereof is hereby acknowledged, and of other good and valuable consideration, it is agreed by and between the Company and the Trustee as follows: ARTICLE 1 DEFINITIONS SECTION 1.01 Terms Incorporated by Reference. ------------------------------- Except for the terms defined in this Supplemental Indenture, all capitalized terms used in this Supplemental Indenture have the respective meanings set forth in the Indenture. -2- SECTION 1.02 Additional Definitions. ---------------------- "Collateral Series Bonds" means, collectively, the Series F Bonds, ----------------------- Series G Bonds and Series H Bonds. "New Farmington LC Agent" means Barclays Bank PLC, New York Branch, as ----------------------- agent for the Issuing Bank and the New Farmington LC Creditors under the New Farmington Reimbursement Agreement, and its successors. "New Farmington LC Creditors" means the Creditors specified in the New --------------------------- Farmington Reimbursement Agreement and their respective successors. "New Farmington Reimbursement Agreement" means that certain Letter of -------------------------------------- Credit and Reimbursement Agreement to be entered into among the Company, Barclays Bank PLC, New York Branch, as Issuing Bank, and the Creditors specified therein, and Barclays Bank PLC, New York Branch, as Administrative Agent for the Issuing Bank and the Creditors, and Union Bank of California, N.A., as Documentation Agent, as the same may be amended from time to time. "New Maricopa LC Agent" means Barclays Bank PLC, New York Branch, as --------------------- agent for the Issuing Bank and the New Maricopa LC Creditors under the New Maricopa Reimbursement Agreement, and its successors. "New Maricopa LC Creditors" means the Creditors specified in the New ------------------------- Maricopa Reimbursement Agreement and their respective successors. "New Maricopa Reimbursement Agreement" means that certain Letter of ------------------------------------ Credit and Reimbursement Agreement to be entered into among the Company, Barclays Bank PLC, New York Branch, as Issuing Bank, and the Creditors specified therein, and Barclays Bank PLC, New York Branch, as Administrative Agent for the Issuing Bank and the Creditors, and Union Bank of California, N.A. as Documentation Agent, as the same may be amended from time to time. "New Reimbursement Agent" means the New Maricopa LC Agent and the New ----------------------- Farmington LC Agent, as the context may require. "New Reimbursement Agreement" means the New Maricopa Reimbursement --------------------------- Agreement and the New Farmington Reimbursement Agreement, as the context may require. "Second Issuance Date" means the date that Series I Bonds or Series J -------------------- Bonds are first issued pursuant to this Supplemental Indenture. "Series I Bonds" means the Collateral Series I First Mortgage Bonds of -------------- the Company. -3- "Series J Bonds" means the Collateral Series J First Mortgage Bonds of -------------- the Company. SECTION 1.03. Other Definitions. Defined in Term Section ---- ---------- "Affiliate Transaction" 4.06 "Excess Proceeds" 4.11 "Net Proceeds" 4.11 "Payment Default" 5.01 "Restricted Payments" 4.01 "Series I or J Redemption Demand" 3.01 ARTICLE 2 THE SERIES I BONDS AND SERIES J BONDS SECTION 2.01 Terms of Series I Bonds and the Series J Bonds. ---------------------------------------------- (a) There are hereby created and established two new series of Bonds to be issued and secured by the Lien of the Indenture, having the respective series designations and maximum aggregate principal amounts (subject to Section 2.09 of the Original Indenture) as follows:
Maximum Series Designation Principal Amount - ------------------ ---------------- Collateral Series I First Mortgage Bonds $163,841,823 Collateral Series J First Mortgage Bonds $ 34,134,780
(i) The Series I Bonds are issued to provide for payment by the Company of the principal, reimbursement obligations, interest, commissions, fees, charges, expenses and other amounts due under the New Maricopa Reimbursement Agreement. For purposes of the Series I Bonds, (i) interest shall include, without limitation, interest payable under Article II of the New Maricopa Reimbursement Agreement and (ii) commissions and fees shall include, without limitation, the letter of credit fees and fronting fees payable under Section 2.04 of the New Maricopa Reimbursement Agreement and the drawing fee, agency fee and transfer fee payable under Section 2.03 of the New Maricopa Reimbursement Agreement. The Series I Bonds will be issued to and registered in the name of the New Maricopa LC Agent and will not be transferable except to a successor to such New Maricopa LC Agent under the New Maricopa Reimbursement Agreement. The Series I Bonds shall be limited to an aggregate principal amount of $163,841,823, but the -4- aggregate principal amount thereof outstanding at any time shall not exceed (if less) such lesser amount as is equal to the sum of (a) the aggregate Available Amount of all Letters of Credit outstanding at such time, plus (b) the aggregate principal amount of Tender Advances (as such terms are defined in the New Maricopa Reimbursement Agreement) then outstanding under the New Maricopa Reimbursement Agreement, plus (c) the aggregate amount of all other unreimbursed drawings under such Letters of Credit which are then outstanding. The principal amount of the Series I Bonds shall be payable in such amount and on such date or dates set forth in the New Maricopa Reimbursement Agreement for the payment of principal or the reimbursement of drawings under the Letters of Credit, but not later than the Stated Termination Date (as defined in the New Maricopa Reimbursement Agreement) for the last Letter of Credit outstanding under the Reimbursement Agreement or December 31, 2000, whichever shall occur first. Interest will accrue and be payable on the Series I Bonds at the rates per annum, in the amounts, and on each date set forth in the New Maricopa Reimbursement Agreement for the accrual and payment of interest, commissions, fees, charges, expenses and other amounts due thereunder. Any payment made in respect of the Company's obligations to pay principal, reimbursement obligations, interest, commissions, fees, charges, expenses and other amounts under the New Maricopa Reimbursement Agreement shall be deemed a payment in respect of the Series I Bonds, but such payment shall not reduce the principal amount of the Series I Bonds unless the sum of (a) the aggregate Available Amount of all Letters of Credit outstanding at such time, plus (b) the aggregate principal amount of Tender Advances then outstanding under the New Maricopa Reimbursement Agreement, plus (c) the aggregate amount of all other unreimbursed drawings under such Letters of Credit which are then outstanding is reduced concurrently with such payment; provided, however, if after a drawing under a -------- ------- Letter of Credit issued under the New Maricopa Reimbursement Agreement such Letter of Credit shall have been reinstated in respect of such drawing prior to the Maricopa LC Agent having received reimbursement for such drawing from the Company, the reimbursement of such reinstated amount shall not reduce the principal amount of the Series I Bonds. (ii) The Series J Bonds are issued to provide for payment by the Company of the principal, reimbursement obligations, interest, commissions, fees, charges, expenses and other amounts due under the New Farmington Reimbursement Agreement. For purposes of the Series J Bonds, (i) interest shall include, without limitation, interest payable under Article II of the New Farmington Reimbursement Agreement and (ii) commissions and fees shall include, without limitation, the letter of credit fees and fronting fees payable under Section 2.04 of the New Farmington Reimbursement Agreement and the drawing fee, agency fee and transfer fee payable under Section 2.03 of the New Farmington Reimbursement Agreement. The Series J Bonds will be issued to and registered in the name of the New Farmington LC Agent and will be not be transferable except to a successor to the New Farmington LC Agent under the New Farmington Reimbursement Agreement. The Series J Bonds shall be limited to an aggregate principal amount of $34,134,780, but the aggregate principal amount thereof outstanding at any time shall not exceed (if less) such lesser amount as is equal to the sum of (a) the aggregate Available Amount of the Letter of Credit outstanding at such time, plus (b) the aggregate principal amount of Tender Advances (as such terms are defined in the New Farmington Reimbursement Agreement) then outstanding under the New Farmington Reimbursement Agreement, plus (c) the aggregate amount of all other unreimbursed -5- drawings under the Letter of Credit which are then outstanding. The principal amount of the Series J Bonds shall be payable in such amount and on such date or dates set forth in the New Farmington Reimbursement Agreement for the payment of principal or the reimbursement of drawings under the Letter of Credit, but not later than the Stated Termination Date (as defined in the New Farmington Reimbursement Agreement) or December 31, 2000, whichever shall occur first. Interest will accrue and be payable on the Series J Bonds at the rates per annum and on each date set forth in the New Farmington Reimbursement Agreement for the accrual and payment of interest, commissions, fees, charges, expenses and other amounts due thereunder. Any payment made in respect of the Company's obligations to pay principal, reimbursement obligations, interest, commissions, fees, charges, expenses and other amounts under the New Farmington Reimbursement Agreement shall be deemed a payment in respect of the Series J Bonds, but such payment shall not reduce the principal amount of the Series J Bonds unless the sum of (a) the aggregate Available Amount of the Letter of Credit outstanding at such time, plus (b) the aggregate principal amount of Tender Advances then outstanding under the New Farmington Reimbursement Agreement, plus (c) the aggregate amount of all other unreimbursed drawings under such Letter of Credit which are then outstanding is reduced concurrently with such payment; provided, -------- however, if after a drawing under the Letter of Credit issued under the New - ------- Farmington Reimbursement Agreement the Letter of Credit shall have been reinstated in respect of such drawing prior to the New Farmington LC Agent having received reimbursement for such drawing from the Company, the reimbursement of such reinstated amount shall not reduce the principal amount of the Series J Bonds. (b) The Trustee may conclusively presume that the Company's obligations to make payments of principal, interest, fees and other amounts under the respective New Reimbursement Agreement have been satisfied and discharged, unless and until the Trustee shall have received a Series I or J Redemption Demand for the Series I Bonds or the Series J Bonds, as the case may be. The Company shall provide the Trustee with complete copies of each New Reimbursement Agreement promptly upon the Second Issuance Date and shall provide the Trustee with all copies of any amendment, modification or extension to any such New Reimbursement Agreement promptly upon execution thereof. The Trustee shall be fully protected in relying on such Series I or J Redemption Demand from the New Maricopa LC Agent with respect to a Series I Bond or the New Farmington LC Agent with respect to a Series J Bond or the absence of such Series I or J Redemption Demand and shall have no duty to inquire into the rights, obligations or performance of any party to a New Reimbursement Agreement. In the event that all of the Company's obligations under a New Reimbursement Agreement have been paid in full and discharged, the Series I Bonds or Series J Bonds issued to secure such New Reimbursement Agreement shall be deemed paid in full and the New Maricopa LC Agent holding such Series I Bonds or New Farmington LC Agent holding such Series J Bonds, as applicable, shall surrender such Bonds to the Trustee for cancellation. (c) The Series I Bonds and Series J Bonds are entitled to the protections of the covenants contained in Article 4 hereof and are subject to the provisions pertaining to Events of Default contained in Article 5 hereof. The Series I Bonds and Series J Bonds shall be issuable in fully registered form, without coupons. The Series I Bonds shall be numbered RI-001 consecutively upwards and the Series J Bonds shall be numbered RJ-001 consecutively upwards. The Series I -6- Bonds and Series J Bonds shall be dated as described in Section 2.03 of the Original Indenture, except that the Series I Bonds and Series J Bonds first issued shall be dated as of their date of initial issuance. (d) The Series I Bonds shall be substantially in the form of Exhibit A and the Series J Bonds shall be substantially in the form of Exhibit B, which exhibits shall be a part of this Supplemental Indenture. Additional terms are contained in the forms of the Series I Bonds and the Series J Bonds, which terms are incorporated by reference herein. SECTION 2.02 Payment of Interest. ------------------- So long as there is no existing Default in the payment of interest on the Series I Bonds or Series J Bonds, the Person in whose name any Series I Bond or Series J Bond, as applicable, is registered at the close of business on any record date with respect to any interest payment date shall be entitled to receive the interest payable on such interest payment date, notwithstanding any transfer or exchange of such Series I Bond or Series J Bond subsequent to the record date and on or prior to such interest payment date, except as and to the extent the Company shall default in the payment of the interest due on such interest payment date, in which case such defaulted interest shall be paid to the Person in whose name such Series I Bond or Series J Bond, as applicable, is registered on the record date for the payment of such defaulted interest. SECTION 2.03 Registrar and Paying Agent; Transfer and Exchange of Bonds. ---------------------------------------------------------- The Company initially appoints the Trustee as Registrar, Paying Agent and agent for service of demands and notices to or upon the Company in respect of this Supplemental Indenture and the Series I Bonds and the Series J Bonds. Subject to the limitations on transfer of Series I Bonds and Series J Bonds contained in Section 2.01 of this Supplemental Indenture, Series I Bonds and the Series J Bonds shall be transferrable and exchangeable at the option of the Holders thereof and upon surrender thereof at the office or agency of the Company in the City and State of New York (initially State Street Bank and Trust Company, N.A.) or at the principal corporate trust office of the Trustee, for registered Series I Bonds or Series J Bonds of the same series without coupons of the same aggregate principal amount but of different authorized denomination or denominations, and such exchanges and any transfer of Series I Bonds or Series J Bonds will be made without service charge (except for any applicable taxes or fees required by law). SECTION 2.04 Definitive Bonds. ---------------- Definitive Series I Bonds and Series J Bonds may be in the form of fully engraved Bonds or Bonds typed, printed or lithographed with or without steel engraved borders. Until Series I Bonds or Series J Bonds in definitive form are ready for delivery, the Company may execute, and upon its -7- request in writing the Trustee shall authenticate and deliver, Series I Bonds and Series J Bonds, as applicable, in temporary form as provided in Section 2.08 of the Original Indenture. SECTION 2.05 Execution, Authentication and Delivery. -------------------------------------- Series I Bonds and Series J Bonds shall be executed, authenticated and delivered pursuant to Article 4 of the Original Indenture. ARTICLE 3 REDEMPTIONS AND REPURCHASES SECTION 3.01 Mandatory Redemption of Series I Bonds and Series J Bonds. --------------------------------------------------------- Upon receipt by the Trustee of a written demand for redemption from a Holder of Series I Bonds or Series J Bonds (a "Series I or J Redemption Demand"), such Series I Bonds or Series J Bonds, as applicable, shall be redeemed at a redemption price of 100% (expressed as a percentage of principal amount) plus accrued interest thereon through the redemption date, in cash. Such Series I Bonds or Series J Bonds, as applicable, shall be redeemed in the amount specified in the Series I or J Redemption Demand, which amount shall be equal to all outstanding principal, reimbursement obligations, interest, commissions, fees, charges, expenses and other amounts then due and owing under the applicable New Reimbursement Agreement. The Series I or J Redemption Demand shall also state (i) that an "Event of Default" has occurred and is continuing under the terms of the applicable New Reimbursement Agreement, (ii) that payment of the principal amount outstanding under such New Reimbursement Agreement, all interest thereon and all other amounts payable thereunder are immediately due and payable, and (iii) that such Holder of Series I Bonds or Series J Bonds, as the case may be, has demanded payment thereof from the Company. The portion of the Series I Bonds or Series J Bonds, as applicable, subject to redemption shall be redeemed on the fifth Business Day following receipt by the Trustee of such Series I or J Redemption Demand. Any payment made to the Holder of Series I Bonds or Series J Bonds, as applicable, pursuant to a Series I or J Redemption Demand shall constitute a payment by the Company in respect of its obligations under the New Reimbursement Agreement applicable to the redeemed Series I Bonds or Series J Bonds. The Series I or J Redemption Demand shall be rescinded and shall be null and void for all purposes of the Indenture upon receipt by the Trustee, no later than the Business Day prior to the date fixed for redemption, of a certificate of the Holder of Series I Bonds or Series J Bonds previously making such Series I or J Redemption Demand (a) stating that there has been a waiver of such Event of Default, or (b) withdrawing said Series I or J Redemption Demand. -8- ARTICLE 4 COVENANTS For the benefit of the Series I Bonds and the Series J Bonds, the Company agrees that it shall not fail to observe any of the following covenants: SECTION 4.01 Restricted Payments. -------------------- The Company shall not, and shall not permit any of its Subsidiaries, directly or indirectly, to: (i) declare or pay any dividend or make any distribution on account of the Company's or any of its Subsidiaries' Equity Interests, including, without limitation, any payment in connection with any merger or consolidation involving the Company (other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of the Company or dividends or distributions payable by a Subsidiary of the Company to the Company or to any Wholly Owned Subsidiary of the Company); (ii) purchase, redeem or otherwise acquire or retire for value any Equity Interests of the Company, any of its Subsidiaries or any direct or indirect parent of the Company (other than any Equity Interests owned by the Company); (iii) make any principal payment on, or purchase, redeem, defease or otherwise acquire or retire for value any Subordinated Indebtedness, except at final maturity; or (iv) make any Restricted Investment (all such payments and other actions set forth in clauses (i) through (iv) above being referred to as "Restricted Payments"), unless, at the time of and after giving effect to such Restricted Payment: (A) no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof; and (B) the Company would, at the time of such Restricted Payment and after giving pro forma effect thereto as if such Restricted Payment had --- ----- been made at the beginning of the applicable four-quarter period, have been permitted to incur at least $1.00 of Subordinated Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in clause (a) of the first paragraph of Section 4.02 of this Supplemental Indenture; provided, -------- however, that this clause (B) shall not apply to the payment of dividends ------- in respect of Common Stock; and (C) such Restricted Payment, together with the aggregate of all other Restricted Payments made by the Company and its Subsidiaries after the Initial Issuance Date (excluding Restricted Payments permitted by clauses (i), (ii), (iv) and (vi) of the next succeeding paragraph), is less than the sum of (i) 50% of an amount equal to the Consolidated Net Income of the Company minus dividends (whether in cash or in kind) paid in respect of its Series A Preferred Stock for the period (taken as one accounting period) from the day after the Initial Issuance Date to the end of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit), plus (ii) 100% of the aggregate net cash proceeds received by the ---- Company from the issuance or sale since the Initial Issuance Date of Equity Interests (other than Disqualified Stock) of the Company or of debt securities of the Company that have been converted into such Equity Interests of the Company, plus (iii) $10,000,000; ---- -9- provided, however, that the foregoing limitations contained in clause (C) of the - -------- ------- first paragraph of this Section 4.01 shall not apply during any period commencing on the date of delivery to the Trustee of an Officers' Certificate to the effect that the Investor Series Bonds of the series having the longest maturity then Outstanding have been rated Investment Grade by a Rating Agency identified in such certificate and terminating on the date upon which such securities cease to be rated, or are downgraded or placed on a "watch list" for possible downgrading below, Investment Grade by every Rating Agency which provided the Investment Grade rating (or if a Rating Agency is then no longer able to provide rating information, by any other Rating Agency which similarly rated such series of Investor Series Bonds Investment Grade). The foregoing provisions shall not prohibit: (i) the payment of dividends, whether paid in kind or in cash, in respect of the Series A Preferred Stock in accordance with the terms thereof; (ii) the purchase, redemption or other acquisition or retirement for value of the Series A Preferred Stock (provided, -------- however, in the case of the foregoing clauses (i) and (ii),the Company shall not - ------- pay any cash dividends on (except cash paid solely in lieu of the Company's issuance of any fractional shares of Series A Preferred Stock paid as in kind dividends on the Series A Preferred Stock) or purchase, redeem, acquire or retire any Series A Preferred Stock until the earlier to occur of (A) the date of delivery to the Trustee of an Officers' Certificate to the effect that the Investor Series Bonds having the longest maturity then Outstanding have been rated Investment Grade by a Rating Agency identified in such certificate, and terminating on the date upon which such securities cease to be rated or are downgraded or placed on a "watch list" for possible downgrading below Investment Grade by every Rating Agency which provided the Investment Grade rating, and (B) February 12, 1999); (iii) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration such payment would have complied with the provisions of the Indenture; (iv) the redemption, repurchase, retirement or other acquisition of any Equity Interests of the Company in exchange for, or out of the proceeds of, the substantially concurrent sale (other than to a Subsidiary of the Company) of other Equity Interests of the Company (other than any Disqualified Stock); provided, however, that the -------- ------- amount of any such net cash proceeds that are utilized for any such redemption, repurchase, retirement or other acquisition shall be excluded from clause (C)(ii) of the first paragraph of this Section 4.01; (v) the repurchase, redemption or other acquisition or retirement for value of any Equity Interests of the Company or any Subsidiary of the Company held by any member of the Company's (or any of its Subsidiaries') management; provided, however, that the -------- ------- aggregate price paid for all such repurchased, redeemed, acquired or retired Equity Interests shall not exceed $250,000 in any twelve-month period, plus the aggregate cash proceeds received by the Company during such twelve-month period from any reissuance of Equity Interests by the Company to members of management of the Company and its Subsidiaries; and (vi) the repurchase by the Company of the Series A Preferred Stock on or prior to February 12, 1999 in accordance with the terms thereof upon the occurrence of a Change of Control; provided, further, -------- ------- that in the case of each of clauses (i) through (vi) above, no Default or Event of Default shall have occurred and be continuing immediately after such transaction. The amount of all Restricted Payments (other than cash) shall be the fair market value (evidenced by a resolution of the Board of Directors set forth in an Officers' Certificate delivered to the Trustee) on the date of the Restricted Payment of the asset(s) proposed to be transferred by the Company or such Subsidiary, as the case may be. Not later than the date of making any Restricted -10- Payment, and so long as the limitations contained in clause (C) of the first paragraph of this Section 4.01 apply, the Company shall deliver to the Trustee an Officers' Certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required in this Section 4.01 were computed, which calculations may be based upon the Company's latest available financial statements. SECTION 4.02 Incurrence of Indebtedness. -------------------------- The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, issue, assume, guaranty or otherwise become directly or indirectly liable, contingently or otherwise, with respect to (collectively, "incur") any Indebtedness (including Acquired Debt) and the Company shall not issue any Disqualified Stock; provided, however, that (a) the -------- ------- Company may incur Subordinated Indebtedness (including Acquired Debt) and issue shares of Disqualified Stock if the Fixed Charge Coverage Ratio for the Company's most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date on which such Subordinated Indebtedness is incurred or such Disqualified Stock is issued would have been at least 2.0 to 1, and (b) the Company may incur any Indebtedness (including Acquired Debt) other than Subordinated Indebtedness if the Fixed Charge Coverage Ratio for the Company's most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional Indebtedness is incurred would have been at least 2.5 to 1, in each case, determined on a pro forma basis (including --- ----- a pro forma application of the net proceeds therefrom), as if such additional --- ----- Indebtedness had been incurred, or the Disqualified Stock had been issued, as the case may be, at the beginning of such four-quarter period. The foregoing provisions shall not apply to: (i) Indebtedness represented by the Initial Series Bonds; (ii) Plan Indebtedness other than the Initial Series Bonds; (iii) Indebtedness arising under a nuclear fuel financing facility (including, without limitation, any Indebtedness represented by the nuclear fuel financing portion of the New Credit Agreement); provided, however, that an -------- ------- amount equal to the amount of such nuclear fuel financing facility (after deduction for any transaction costs) shall have been applied pursuant to the Plan or, thereafter, the positive difference, if any, between the amount of the nuclear fuel financing facility and the amount previously applied either pursuant to the Plan or to retire Investor Series Bonds shall be used within 45 days of the receipt thereof by the Company to retire Investor Series Bonds then Outstanding through open market purchases of such Bonds; (iv) Indebtedness arising under an accounts receivable financing facility and/or contract payments financing facility; provided, however, that the net proceeds (after deduction -------- ------- for any transaction costs) from such facility shall be used within 45 days of the receipt thereof by the Company to retire Investor Series Bonds then Outstanding through open market purchases of such Bonds; (v) any Indebtedness (not otherwise arising under clauses (iii) and (iv) above) issued to a bank or other commercial lender (including, without limitation, Indebtedness represented by the working capital portion of the New Credit Agreement, if issued); provided, however, that any advances thereunder which shall result at any time - -------- ------- in an amount outstanding in excess of $50,000,000 thereunder (after deduction for any transaction costs) shall be used within 45 days of receipt by the Company to retire Investor Series Bonds then Outstanding through open market purchases of such Bonds); (vi) the incurrence by the Company or any of its Subsidiaries of Indebtedness represented by Capital Lease Obligations, mortgage financings or purchase money -11- obligations, or extensions, refinancings, renewals or replacements thereof, in each case incurred for the purpose of financing all or any part of the purchase price or cost of construction or improvement of property used in the business of the Company or such Subsidiary, in an aggregate principal amount not to exceed $5,000,000 at any time outstanding; (vii) the incurrence by the Company or any of its Subsidiaries of (A) Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund, Indebtedness permitted under clause (ii) above, and (B) any Indebtedness in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund, Indebtedness permitted under clauses (iii), (iv) or (v) above so long as the principal amount of such Indebtedness does not exceed the principal amount of the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded (plus the amount of accrued interest and premiums, if any, thereon and the reasonable expenses incurred in connection therewith); (viii) the incurrence by the Company or any of its Subsidiaries of intercompany Indebtedness between and among the Company and any of its Wholly Owned Subsidiaries; provided, however, that (A) any -------- ------- subsequent issuance or transfer of Equity Interests that results in any such Indebtedness being held by a Person other than a Wholly Owned Subsidiary and (B) any sale or other transfer of any such Indebtedness to a Person that is not either the Company or a Wholly Owned Subsidiary shall be deemed, in each case, to constitute an incurrence of such Indebtedness by the Company or such Subsidiary, as the case may be; (ix) the incurrence by the Company or any of its Subsidiaries of Hedging Obligations that are incurred for the purpose of fixing or hedging interest rate risk with respect to any floating rate Indebtedness that is permitted by the terms of the Indenture to be outstanding; (x) Bonds issued from time to time to secure the obligations of the Company under (A) each New Facility Agreement or New Reimbursement Agreement, (B) the pollution control bonds for which the New Maricopa Reimbursement Agreement and/or New Farmington Reimbursement Agreements provides credit support, or (C) any financing entered into in connection with the extension, refinancing, renewal or refunding of all or part of the Indebtedness under such New Facility Agreement or New Reimbursement Agreement, the Indebtedness in respect of such pollution control bonds for which such New Facility Agreement or New Reimbursement Agreement provides credit support, or the Indebtedness under such extension, refinancing, renewal or refunding; provided, however, that each such Bond shall by its terms -------- ------- provide that it shall be deemed paid in full at such time as the Company's obligations referenced in the above subclauses (A), (B) or (C) of this clause (x) which such Bond is intended to secure, as the case may be, are paid in full and discharged, and that any payment made in respect of such Bond shall be deemed a payment made in respect of such underlying obligation which such Bond is intended to secure; and (xi) Subordinated Indebtedness incurred after the third anniversary of the Initial Issuance Date for the purpose of financing the redemption or repurchase of any Series A Preferred Stock of the Company, provided that (A) the principal amount of such Subordinated Indebtedness does not exceed the aggregate redemption or repurchase price of such Series A Preferred Stock (plus accrued dividends thereon and reasonable expenses incurred in connection therewith), (B) the interest rate on such Subordinated Indebtedness shall not exceed the dividend or coupon rate payable in respect of such Series A Preferred Stock, and (C) the maturity date of such Subordinated Indebtedness shall be no sooner than the mandatory redemption date for the Series A Preferred Stock occurring in the year 2008. -12- SECTION 4.03 Limitation on Liens. ------------------- The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist any Lien on any Mortgaged Property now owned or hereafter acquired, other than the Lien of the Indenture and Permissible Encumbrances (provided, however, that, for purposes of -------- ------- this Section 4.03 only, Permissible Encumbrances of the type set forth in clause (a) of the definition of Permissible Encumbrances, other than the Lien of the Indenture, shall not be permitted hereunder). The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist any Lien on any assets other than the Mortgaged Property now owned or hereafter acquired by the Company or a Subsidiary of the Company, other than (i) Permissible Encumbrances (provided, however, that, for purposes of this Section 4.03 only, Permissible -------- ------- Encumbrances of the type set forth in clause (a) of the definition of Permissible Encumbrances, other than the Lien of the Indenture, shall not be permitted hereunder), (ii) Liens existing on the Second Issuance Date, (iii) Liens on nuclear fuel, cores and materials, and interests in such nuclear fuel, cores and materials, pursuant to a nuclear fuel financing facility permitted under clause (iii) of the second paragraph of Section 4.02 of this Supplemental Indenture; (iv) Liens incurred in connection with an accounts receivable facility and/or contract payments facility permitted under clause (iv) of the second paragraph of Section 4.02 of this Supplemental Indenture; (v) Liens with respect to Indebtedness incurred by the Company or a Subsidiary of the Company in connection with the acquisition or lease by the Company or such Subsidiary after the Second Issuance Date of furniture, fixtures, equipment and other assets not owned by the Company as of the Second Issuance Date in connection with the ordinary course of business of the Company or such Subsidiary and otherwise permitted under Section 4.02 of this Supplemental Indenture; provided, -------- however, that (a) such Indebtedness shall not be secured by any assets of the - ------- Company or any Subsidiary of the Company other than the asset with respect to which such Indebtedness is incurred; and (b) the Lien securing such Indebtedness shall be created within 90 days of the incurrence of such Indebtedness; (vi) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security; (vii) Liens on the assets of any Person existing at the time such assets are acquired by the Company or any of its Subsidiaries, whether by merger, consolidation, purchase of assets or otherwise so long as such Liens (a) are not created, incurred or assumed in contemplation of such assets being acquired by the Company or any of its Subsidiaries, and (b) do not extend to any other assets of the Company or any of its Subsidiaries; and (viii) Liens arising from any Permitted Refinancing Indebtedness with respect to the foregoing; provided, however, that the Lien shall be limited to all or part of the property - -------- ------- or assets which secured the Indebtedness so refinanced. SECTION 4.04 Dividend and Other Payment Restrictions Affecting Subsidiaries. -------------------------------------------------------------- The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any Subsidiary to: (a)(i) pay dividends or make any other distributions to the Company or any of its Subsidiaries (A) on its Capital Stock or (B) with respect to any other interest or -13- participation in, or measured by, its profits or (ii) pay any Indebtedness owed to the Company or any of its Subsidiaries, (b) make loans or advances to the Company or any of its Subsidiaries or (c) transfer any of its properties or assets to the Company or any of its Subsidiaries, except for such encumbrances or restrictions existing under or by reason of (i) the Indenture and the Bonds, (ii) the New Facility Agreements or New Reimbursement Agreements, (iii) applicable law, (iv) any instrument governing Indebtedness or Capital Stock of a Person acquired by the Company or any of its Subsidiaries as in effect at the time of such acquisition (except to the extent such Indebtedness was incurred in connection with or in contemplation of such acquisition), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired, provided, however, that the Consolidated Cash Flow of such Person is -------- ------- not taken into account in determining whether such acquisition was permitted by the terms of the Indenture, (v) by reason of customary non-assignment provisions in leases entered into in the ordinary course of business and consistent with past practices, (vi) purchase money obligations for property acquired in the ordinary course of business that impose restrictions of the nature described in clause (c) above on the property so acquired, or (vii) Permitted Refinancing Indebtedness, provided, however, that the restrictions contained in the -------- ------- agreements governing such Permitted Refinancing Indebtedness are no more restrictive than those contained in the agreements governing the Indebtedness being refinanced. SECTION 4.05 Merger, Consolidation or Sale of Assets. --------------------------------------- In addition to the provisions of Section 12.01 of the Indenture, the Company shall not, directly or indirectly, consolidate or merge with or into (whether or not the Company is the surviving corporation), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the Mortgaged Property in one or more related transactions, or assign any of its obligations under the Indenture, to another corporation, Person or entity, unless (i) immediately before and after such transaction no Default or Event of Default exists, and (ii) the Successor Entity (or the Company, in the case of a consolidation or merger in which the Company is the surviving entity) (a) has Consolidated Net Worth immediately after the transaction (but prior to any revaluation or recalculation of Consolidated Net Worth as of the date of the transaction relating to a carry-over basis (if any) of the assets acquired in the transaction (as determined in accordance with GAAP)) equal to or greater than the Consolidated Net Worth of the Company immediately preceding the transaction, and (b) shall, at the time of such transaction and after giving pro --- forma effect thereto as if such transaction had occurred at the beginning of the - ----- applicable four-quarter period, be permitted to incur at least $1.00 of additional Subordinated Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in clause (a) of the first paragraph of Section 4.02 of this Supplemental Indenture. SECTION 4.06 Transactions with Affiliates. ---------------------------- The Company shall not, and shall not permit any of its Subsidiaries to, sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make any contract, agreement, understanding, loan, advance or Guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (a) such Affiliate Transaction is on terms that are no less favorable to the Company or the relevant Subsidiary -14- than those that would have been obtained in a comparable transaction by the Company or such Subsidiary with an unrelated Person, and (b) the Company delivers to the Trustee (i) with respect to any Affiliate Transaction involving aggregate consideration in excess of $5,000,000, a resolution of the Board of Directors set forth in an Officers' Certificate certifying that such Affiliate Transaction complies with clause (a) above and that such Affiliate Transaction has been approved by a majority of the disinterested members of the Board of Directors, and (ii) with respect to any Affiliate Transaction involving aggregate consideration in excess of $10,000,000, an opinion as to the fairness to the Company or such subsidiary of such Affiliate Transaction from a financial point of view issued by an investment banking firm of national standing with total assets in excess of $1,000,000,000; provided, however, that (x) any -------- ------- employment agreement entered into by the Company or any of its Subsidiaries, provided that the Company delivers to the Trustee a resolution of the Board of Directors set forth in an Officers' Certificate certifying that such transaction has been approved by a majority of the disinterested members of the Board of Directors, (y) transactions between or among the Company and/or its Subsidiaries, and (z) transactions permitted under Section 4.01 of this Supplemental Indenture, in each case, shall not be deemed Affiliate Transactions. SECTION 4.07 Insurance. --------- Until such time as the Series I Bonds and Series J Bonds shall have been paid in full, the Company shall, and shall cause its Subsidiaries to, maintain insurance with responsible carriers against such risks and in such amounts as is customarily carried by similar businesses with such deductibles, retentions, self-insured amounts and co-insurance provisions as are customarily carried by similar businesses of similar size, including, without limitation, general liability, special liability, property and casualty and nuclear insurance. SECTION 4.08 Payments for Consents. --------------------- Neither the Company nor any of its Subsidiaries shall, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to any Holder of any Bonds for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of the Indenture or the Bonds unless such consideration is offered to be paid or agreed to be paid to all Holders of the Bonds that consent, waive or agree to amend in the time frame set forth in the solicitation documents relating to such consent, waiver or agreement. SECTION 4.09 Reports. ------- The Company shall file with the Trustee, within 15 days of filing them with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may by rules and regulations prescribe) that the Company is required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act. If the Company is not subject to the requirements of Section 13 or 15(d) of the Exchange Act, the Company shall nevertheless file with the Commission and the Trustee, on the date upon which it would have been required to file with the Commission, financial statements, including any notes thereto (and with respect to annual reports, an auditor's report by a firm of established national reputation, upon which the Trustee may conclusively rely), and a "Management's Discussion and -15- Analysis of Financial Condition and Results of Operations," both comparable to that which the Company would have been required to include in such annual reports, information, documents or other reports if the Company were subject to the requirements of Section 13 or 15(d) of the Exchange Act; provided, however, -------- ------- that the Company shall not be required to register under the Exchange Act by virtue of this provision, if it were not otherwise required to do so. If the Company is required to furnish annual or quarterly reports to its stockholders pursuant to the Exchange Act, the Company shall cause any annual report furnished to its stockholders generally and any quarterly or other financial reports it furnishes to its stockholders generally to be filed with the Trustee and the Company shall cause such reports to be mailed to the Holders at their addresses appearing in the register of Bonds maintained by the Registrar. If the Company is not required to furnish annual or quarterly reports to its stockholders pursuant to the Exchange Act, the Company shall cause its financial statements referred to in the immediately preceding paragraph, including any notes thereto (and with respect to annual reports, an auditors' report by a firm of established national reputation), and a "Management's Discussion and Analysis of Financial Condition and Results of Operations," to be so mailed to the Holders within 120 days after the end of each of the Company's fiscal years and within 60 days after the end of each of the first three fiscal quarters of each year. So long as not contrary to the then current recommendations of the American Institute of Certified Public Accountants, the year-end financial statements delivered to the Trustee pursuant to this Section 4.09 shall be accompanied by a written statement of the Company's independent public accountants (who shall be a firm of established national reputation reasonably satisfactory to the Trustee) that in making the examination necessary for certification of such financial statements nothing has come to their attention which would lead them to believe that the Company has violated any provisions of Sections 7.01(a) of the Original Indenture or Sections 4.01 through 4.06 of this Supplemental Indenture or, if any such violation has occurred, specifying the nature and period of existence thereof, it being understood that such accountants shall not be liable directly or indirectly to any Person for any failure to obtain knowledge of any such violation. SECTION 4.10 Restrictions on Release of Mortgaged Property. --------------------------------------------- The Company covenants and agrees that so long as any Series I Bonds or Series J Bonds are Outstanding, it shall not release or cause to release any Mortgaged Property on the basis of Section 9.04 of the Original Indenture. Section 9.04 of the Original Indenture is hereby deemed inoperative until such time as the Series I Bonds and Series J Bonds are no longer Outstanding at which time (and only at such time) the provisions of such section shall be reinstated with full force and effect. SECTION 4.11 Application of Certain Proceeds of Sales or Condemnations. --------------------------------------------------------- The Company covenants and agrees that, in the event of the sale or condemnation of Bondable Property, it shall deposit the Net Proceeds thereof with the Trustee to the extent required by the Original Indenture. Within one year of the receipt by the Trustee of any Excess Proceeds, the Company will (i) reinvest, or enter into an agreement with respect to the reinvestment of, such Excess Proceeds in real or tangible personal property integral to the generation, transmission or -16- distribution of electricity (which property shall automatically be deemed to constitute Bondable Property for purposes of the Indenture) or (ii) use such Excess Proceeds to repurchase Investor Series Bonds through open market purchases of such Investor Series Bonds. To the extent that, after application of such Excess Proceeds in accordance with clauses (i) and (ii) above, any Excess Proceeds remain in an amount less than $1,000 (or an amount necessary to purchase one Bond), such remaining Excess Proceeds shall remain on deposit with the Trustee. Notwithstanding anything to the contrary contained in Articles 3 or 5 of the Original Indenture, the Company shall not use any Excess Proceeds as a basis upon which to issue additional Bonds under the Indenture, unless and until such Excess Proceeds are reinvested as contemplated by clause (i) of the preceding paragraph. As used in this Section 4.11, "Excess Proceeds" shall mean an amount equal to (x) the aggregate Net Proceeds from all such sales or condemnations occurring within any twelve month period (which, within such twelve month period, have not been reinvested in real or tangible personal property integral to the generation, transmission or distribution of electricity (which property shall automatically be deemed to constitute Bondable Property)), the value of which sales or condemnations shall be determined as of the date of such sale or condemnation, minus (y) the amount, if any, required under Section 2(j) of the ----- Rate Stipulation (as such term is defined in the Plan) to be paid or credited to ratepayers as a result of each such sale or condemnation, if and only if the Company is required to make such payment or credit to ratepayers over a period of twelve months or less, minus (z) $10,000,000. The amount of Excess Proceeds ----- shall be determined as of the date of sale or condemnation and shall be deposited and applied as such amount is received by the Company or the Trustee (as the case may be). "Net Proceeds" means the aggregate cash proceeds received by the Company or any of its Subsidiaries in respect of any sale or condemnation of Bondable Property (including, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received in any such sale or condemnation), net of the direct costs relating to such sale or condemnation (including, without limitation, legal, accounting and investment banking fees, and sales commissions) and any expenses incurred in the relocation of assets (which relocation is required as a result of such sale or condemnation), taxes paid or payable which are attributable to such sale or condemnation (after taking into account any available tax credits or deductions and any tax sharing arrangements), and any cash reserve for adjustment in respect of the sale price of such asset or assets established in accordance with GAAP. ARTICLE 5 EVENTS OF DEFAULT SECTION 5.01 Events of Default. ----------------- (a) So long as any Series I Bonds or Series J Bonds are Outstanding, in addition to the Events of Default specified in clauses (i) through (vi) of the Section 11.01(a) under the Original Indenture, each of the following is also an Event of Default: -17- (i) failure by the Company to comply with the requirements of Sections 3.01, 4.01, 4.02 or 4.05 of this Supplemental Indenture or Section 12.01 of the Original Indenture; (ii) a default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness of the Company or any of its Subsidiaries (or the payment of which is Guaranteed by the Company or any of its Subsidiaries) whether such Indebtedness or Guarantee now exists, or is created after the date of this Supplemental Indenture, which default (a) is caused by a failure to pay principal of, interest on or other amounts owing in respect of such Indebtedness at maturity of such Indebtedness (a "Payment Default") or (b) has resulted in the acceleration of such Indebtedness prior to its expressed maturity; and in each case the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $10,000,000 or more; (iii) the failure by the Company or any of its Subsidiaries to pay one or more final judgments aggregating in excess of $10,000,000, not otherwise covered and payable by insurance, which judgments are not paid, discharged or stayed for a period of 60 days; (iv) by decree of a court of competent jurisdiction any Subsidiary of the Company is adjudicated a bankrupt or insolvent, or an order is made by such court for the winding up or liquidation of the affairs of any Subsidiary of the Company or approving a petition seeking reorganization or arrangement of a Subsidiary of the Company under any Bankruptcy Law, or, by order of such court, a trustee, liquidator, receiver, assignee or similar official under any Bankruptcy Law is appointed for a Subsidiary of the Company or for the property of such Subsidiary, and such decree or order shall continue in effect for a period of 60 days; or (v) a Subsidiary of the Company files a petition for voluntary bankruptcy, or consents to the filing of any order for relief against it in an involuntary case, or makes an assignment for the benefit of creditors, or consents to the appointment of a trustee, liquidator, receiver, assignee or similar official under any Bankruptcy Law of such Subsidiary, or files a petition or answer or consent seeking reorganization or arrangement under any Bankruptcy Law, or consents to the filing of any such petition, or files a petition to take advantage of any law for the relief of debtors. (b) So long as any Series I Bonds or Series J Bonds are Outstanding, Section 11.03(a) of the Original Indenture is hereby replaced with the following: "In case of the occurrence and during the continuance of any Event of Default with respect to any Bonds at the time Outstanding, the Trustee or the Holders of at least 25% in aggregate principal amount of the then Outstanding Bonds (or, in case the Event of Default affects the rights of the Holders of Bonds of one or more series which does not similarly affect the rights of Holders of other series of Bonds at the time Outstanding, then at least 25% in aggregate principal amount of the then Outstanding Bonds of any such affected series) may, -18- by notice in writing delivered to the Company, declare the Principal of and all accrued interest on all the Bonds due and payable immediately, and upon any such declaration, the same shall be immediately due and payable. Notwithstanding the foregoing, if an Event of Default specified in clauses (iv) or (v) of Section 11.01(a) of the Original Indenture or, with respect to any Significant Subsidiary or any group of Subsidiaries that, taken together, would constitute a Significant Subsidiary, an Event of Default specified in clauses (iv) and (v) of Section 5.01(a) of this Supplemental Indenture occurs, such an amount shall become immediately due and payable without any declaration or any other act on the part of the Trustee or any other Holder. The foregoing provisions, however, are subject to the condition that if at any time after the Principal of said Bonds shall have been so declared due and payable and before any sale of the Mortgaged Property shall have been made pursuant to the Original Indenture, all arrears of interest upon all of said Bonds, with interest upon overdue installments of interest at the same rates respectively as were borne by the respective Bonds on which installments of interest were overdue, shall either be paid by the Company or be collected out of the Mortgaged Property, and all other Events of Default shall have been remedied, then the Holders of at least 25% in aggregate principal amount of the Outstanding Bonds (unless such declaration has been made only with respect to the series of Bonds affected by such Event of Default, in which event at least 25% in aggregate principal amount of the Outstanding Bonds of such series), by written notice to the Company and to the Trustee, may rescind such declaration and its consequences; but no such rescission shall extend to or affect any subsequent Event of Default, or impair any right consequent thereon." ARTICLE 6 THE TRUSTEE SECTION 6.01 Trustee's Disclaimer. -------------------- The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Supplemental Indenture or the due execution hereof by the Company, or for or in respect of the recitals and statements contained herein, all of which recitals and statements are made solely by the Company. Except as herein otherwise provided, no duties, responsibilities or liabilities are assumed, or shall be construed to be assumed, by the Trustee by reason of this Supplemental Indenture other than as set forth in the Indenture, and this Supplemental Indenture is executed and accepted on behalf of the Trustee, subject to all the terms and conditions set forth in the Indenture, as fully to all intents as if the same were set forth at length herein. -19- ARTICLE 7 MISCELLANEOUS SECTION 7.01 Reference to Original Indenture. ------------------------------- Except insofar as otherwise expressly provided herein, all the provisions, definitions, terms and conditions of the Original Indenture, as it has been and may from time to time be amended, shall be deemed to be incorporated in and made a part of this Supplemental Indenture; and the Original Indenture as heretofore supplemented and as supplemented by this Supplemental Indenture is in all respects ratified and confirmed; and the Original Indenture, as amended, and this Supplemental Indenture shall be read, taken and construed as one and the same instrument. SECTION 7.02 Benefits of Original Indenture. ------------------------------ Nothing in this Supplemental Indenture is intended, or shall be construed, to give to any Person, other than the parties hereto and the Holders of Series I Bonds and Series J Bonds issued under and secured by the Original Indenture, any legal or equitable right, remedy or claim under or in respect of this Supplemental Indenture, or under any covenant, condition or provision herein contained, all the covenants, conditions and provisions of this Supplemental Indenture being intended to be, and being, for the sole and exclusive benefit of the parties hereto and of the Holders of Series I Bonds and Series J Bonds issued and to be issued under the Original Indenture and this Supplemental Indenture. SECTION 7.03 Governing Law. ------------- In view of the fact that Bondholders may reside in various states and the desire to establish with certainty that this Supplemental Indenture will be governed by and construed and interpreted in accordance with the law of a state having a well developed body of commercial and financial law relevant to transactions of the type contemplated herein, this Supplemental Indenture and each Series I Bond and Series J Bond shall be construed in accordance with and governed by the laws of the State of New York (without regard to the conflict of laws provisions thereof) applicable to agreements made and to be performed therein, except to the extent that the TIA shall be applicable and except to the extent the law of any jurisdiction wherein any portion of the Mortgaged Property is located shall mandatorily govern the perfection, priority or enforcement of the Lien of the Indenture with respect to such portion of the Mortgaged Property. SECTION 7.04 Successors. ---------- All covenants, stipulations and agreements of the Company in this Supplemental Indenture and the Series I Bonds and Series J Bonds shall bind its successors and assigns. All agreements of the Trustee in this Supplemental Indenture shall bind its successor. -20- SECTION 7.05 Counterparts. ------------ This Supplemental Indenture may be executed in any number of counterparts, and each of such counterparts when so executed shall be deemed to be an original, but all such counterparts shall together constitute by one and the same instrument. -21- IN WITNESS WHEREOF, EL PASO ELECTRIC COMPANY has caused this Supplemental Indenture to be executed by its Chairman of the Board, Chief Executive Officer, President or one of its Vice Presidents, and duly attested by its Secretary or one of its Assistant Secretaries, and STATE STREET BANK AND TRUST COMPANY has caused the same to be executed by one of its Vice Presidents or Assistant Vice Presidents and its corporate seal to be hereunto affixed, and duly attested by one of its Assistant Secretaries, as of the day and year first above written. EL PASO ELECTRIC COMPANY By: /s/ Gary R. Hedrick ---------------------------------------------- Gary R. Hedrick Vice President and Chief Financial Officer Attest: /s/ Guillermo Silva, Jr. - --------------------------------- Secretary -22- STATE STREET BANK AND TRUST COMPANY By: /s/ Ruth A. Smith ---------------------------------------------- Name: Ruth A. Smith Title: Vice President [Corporate Seal] Attest: /s/ T. Hopkins - --------------------------------- Title: Assistant Secretary -23- ACKNOWLEDGMENT -------------- STATE OF TEXAS ) ) SS. COUNTY OF EL PASO ) On the 20th day of August 1997, before me personally came Gary R. Hedrick, to me known, who, being by me duly sworn, did depose and say that he resides in El Paso, Texas; that he is the Vice President and Chief Financial Officer of El Paso Electric Company, a Texas corporation, the corporation described in and which executed the foregoing instrument; and that he signed his name thereto by authority of the board of directors of said corporation. /s/ Hilda Vargas ----------------------------------------------------- Notary Public (Notary Seal) -24- ACKNOWLEDGMENT -------------- COMMONWEALTH OF MASSACHUSETTS ) ) SS. COUNTY OF SUFFOLK ) On the 20th day of August 1997, before me personally came Ruth A. Smith, to me known, who, being by me duly sworn, did depose and say that she resides in Stoughton, Massachusetts; that she is a Vice President of State Street Bank and Trust Company, a banking corporation organized under the laws of The Commonwealth of Massachusetts, the corporation described in and which executed the foregoing instrument; that she knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the board of directors of said corporation, and that she signed her name thereto by like authority. /s/ Stacye M. Junior ----------------------------------------------------- Notary Public (Notary Seal) -25- Schedule 1 Existing Investments of the Company 1. Note receivable from Wheeler Peak Capital Corporation for $125,000, balance due at October 31, 1991. 2. Contributions to and interests of the Company in decommissioning trusts relating to the Palo Verde Nuclear Generating Station (to the extent such contributions and interests constitute investments). 3. Other minor investments existing on the date of this Supplemental Indenture, which were obtained in the ordinary course of business and, in the aggregate, have a book value of less than $200,000. -26- EX-4.02 3 LETTER OF CREDIT AND REIMBURSEMENT -- PALO VERDE Exhibit 4.02 EXHIBIT A THIS BOND IS NOT TRANSFERABLE EXCEPT TO A SUCCESSOR UNDER THE LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT, DATED AS OF ______ ____, 1997, AMONG THE COMPANY, BARCLAYS BANK PLC, NEW YORK BRANCH, AS ISSUING BANK, THE CREDITORS SPECIFIED THEREIN, BARCLAYS BANK PLC, NEW YORK BRANCH, AS ADMINISTRATIVE AGENT FOR THE ISSUING BANK AND THE CREDITORS (THE "AGENT"), AND UNION BANK OF CALIFORNIA, N.A., AS DOCUMENTATION AGENT (SUCH REIMBURSEMENT AGREEMENT, AS AMENDED FROM TIME TO TIME, THE "REIMBURSEMENT AGREEMENT"). EL PASO ELECTRIC COMPANY No. RI - ___________ [$163,841,823] COLLATERAL SERIES I FIRST MORTGAGE BONDS El Paso Electric Company, a Texas corporation (herein, together with its successors and assigns, the "Company"), for value received promises to pay to Barclays Bank PLC, New York Branch, as Agent, or registered assigns, the principal sum of [spell out amount of bond] Dollars or, at any time (if less), such lesser principal amount as is equal to the sum of (a) the aggregate Available Amount of all Letters of Credit outstanding at such time, plus (b) the aggregate principal amount of all Tender Advances which are outstanding at such time, plus (c) the aggregate amount of all other unreimbursed drawings under all Letters of Credit which are outstanding at such time, on such date or dates and in such amounts as set forth in the Reimbursement Agreement for the payment of principal on Tender Advances and the reimbursement of drawings under the Letters of Credit, but not later than the Stated Termination Date for the last Letter of Credit outstanding under the Reimbursement Agreement and [_________], 2000, whichever shall occur first, at the same place or places as set forth in the Reimbursement Agreement, in any coin or currency of the United States of America which at the time of such payment shall be legal tender for the payment of public and private debts and in the same manner set forth in the Reimbursement Agreement. Interest will accrue and be payable on this Series I Bond at the rates per annum, in the amounts, and on each date set forth in the Reimbursement Agreement for the accrual and payment of interest, commissions, fees, charges, expenses and other amounts (all such interest, commissions, fees, charges, expenses and other amounts payable under the Reimbursement Agreement being referred to collectively as "Interest") in like coin or currency to the registered owner hereof at said place or places and in the same manner set forth in the Reimbursement Agreement. Interest shall accrue and be payable until maturity of this Series I Bond, or if the Agent shall demand redemption of this Series I Bond, until the redemption date, or, if the Company shall default in the payment of principal due on this Series I Bond, whether at maturity or upon redemption, until the Company's obligation with respect to the payment of such principal shall be discharged as provided in the Indenture (as hereinafter defined). For purposes hereof, (i) interest under the Reimbursement Agreement shall include, without limitation, interest provided for under Article II of the Reimbursement Agreement and (ii) commissions and fees under the Reimbursement Agreement shall include, without limitation, the letter of credit fees and fronting fees provided for under Section 2.04 of the Reimbursement Agreement and the drawing fee, agency fee and transfer fee provided for under Section 2.03 of the Reimbursement Agreement. The Bonds of this series have been issued to the Agent for the issuer of Letters of Credit for the account of the Company and for certain creditors pursuant to the Reimbursement Agreement, to secure the payment of principal, reimbursement obligations, interest, fees, commissions, charges, expenses and other amounts due to the Holder under the Reimbursement Agreement. As used herein, the terms "Available Amount," "Tender Advances", "Letters of Credit", "Participation Percentage" and "Stated Termination Date" shall have the respective meanings set forth in the Reimbursement Agreement. Except as hereinafter provided, this Series I Bond shall bear interest (a) from the interest payment date next preceding the date of this Series I Bond to which interest has been paid, or (b) if the date of this Series I Bond is an interest payment date to which interest has been paid, then from such date, or (c) if no interest has been paid on this Series I Bond, then from the date of initial issue. This Series I Bond is one of the bonds of the Company known as its First Mortgage Bonds (the "Bonds"), issued and to be issued in one or more series under and secured by a General Mortgage Indenture and Deed of Trust, dated as of February 1, 1996, duly executed by the Company to State Street Bank and Trust Company, a banking corporation organized under the laws of The Commonwealth of Massachusetts, Trustee ("Trustee"), and indentures supplemental thereto, heretofore or hereafter executed, to which General Mortgage Indenture and Deed of Trust and all indentures supplemental thereto (collectively referred to as the "Indenture") reference is hereby made for a description of the property mortgaged and pledged, the nature and extent of the security, the terms and conditions upon which the Bonds are, and are to be, issued and secured, and the rights of the owners of the Bonds and the Trustee in respect of such security. As provided in the Indenture, the Bonds may be in various principal sums, are issuable in series, may mature at different times, may bear interest at different rates and may otherwise vary as therein provided; and this Bond is the only Bond of a series entitled "Collateral Series I First Mortgage Bonds", created by a Second Supplemental Indenture dated as of August 19, 1997, as provided for in the Indenture. The terms of this Series I Bond include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code Sections 77aaa-77bbbb) (the "Act"), as in effect on the date of the Indenture. The Indenture authorizes the issuance of up to $163,841,823 aggregate principal amount of Series I Bonds, but the aggregate principal amount of all Series I Bonds outstanding at any time shall not exceed the lesser of such amount and the amount that is equal to the sum of (a) the aggregate Available Amount of all Letters of Credit outstanding at such time, plus (b) the aggregate principal amount of all Tender Advances outstanding at such time, plus (c) the I-2 aggregate amount of all other unreimbursed drawings under such Letters of Credit which are outstanding at such time. This Series I Bond has been issued by the Company to the Agent (i) to provide for the payment of the Company's obligations to make payments in respect of principal, reimbursement obligations, interest, fees, commissions, charges, expenses and other amounts to any person under the Reimbursement Agreement and (ii) to provide to such person the benefits of the security provided for by this Series I Bond. Any payment of principal, reimbursement obligations, interest, fees, charges, expenses, commissions or other amounts made by or on behalf of the Company in respect of its obligations to pay such principal, reimbursement obligations, interest, fees, commissions, charges, expenses and other amounts under and in accordance with the Reimbursement Agreement shall be deemed a payment in respect of this Series I Bond, but such payment shall not reduce the principal amount of this Series I Bond then in effect unless the sum of (a) the aggregate Available Amount of all Letters of Credit outstanding at such time, plus (b) the aggregate principal amount of Tender Advances which are then outstanding under the Reimbursement Agreement, plus (c) the aggregate amount of all other unreimbursed drawings under such Letters of Credit which are then outstanding, is reduced concurrently with such payment; provided, however, if -------- ------- after a drawing under any Letter of Credit issued under the Reimbursement Agreement such Letter of Credit shall have been reinstated in respect of such drawing prior to the Agent having received reimbursement for such drawing from the Company, the reimbursement of such reinstated amount shall not reduce the principal amount of this Bond. In the event that all of the Company's obligations under the Reimbursement Agreement have been discharged, this Series I Bond shall be deemed paid in full and the Holder shall surrender this Series I Bond to the Trustee for cancellation. In the manner provided in the Indenture, this Series I Bond shall be redeemed at a redemption price of 100% (expressed as a percentage of principal amount) plus accrued interest thereon through the redemption date, in cash, upon receipt by the Trustee of a written demand for redemption of this Series I Bond from the Agent on behalf of the Holder (the "Series I Redemption Demand"). This Series I Bond shall be redeemed in the amount specified with respect thereto in the Series I Redemption Demand, which amount shall be equal to the portions of the outstanding principal, reimbursement obligation, interest, commissions, fees, charges, expenses and other amounts then due and owing under the Reimbursement Agreement. The Series I Redemption Demand shall also state (i) that an "Event of Default" has occurred and is continuing under the terms of the Reimbursement Agreement, (ii) that payment of the principal amount and reimbursement obligations outstanding under the Reimbursement Agreement, all interest, commissions and fees thereon and all charges, expenses and other amounts payable thereunder are immediately due and payable, and (iii) that the Agent has demanded payment thereof from the Company. The portion of this Series I Bond subject to redemption shall be redeemed on the fifth Business Day following receipt by the Trustee of the Series I Redemption Demand. Any payment made to the Agent pursuant to a Series I Redemption Demand shall constitute a payment by the Company in respect of its obligations under the Reimbursement I-3 Agreement. The Series I Redemption Demand shall be rescinded and shall be null and void for all purposes of the Indenture upon receipt by the Trustee, no later than the Business Day prior to the date fixed for redemption, of a certificate of the Agent (a) stating that there has been a waiver of such Event of Default, or (b) withdrawing said Series I Redemption Demand. The principal of this Series I Bond may be declared or may become due before the maturity hereof, on the conditions, in the manner and at the times set forth in the Indenture, upon the happening of an Event of Default as therein defined. With the consent of the Holders of not less than a majority in aggregate principal amount of the Outstanding Bonds which would be affected by the action to be taken, the Company and the Trustee may from time to time and at any time, enter into a Supplemental Indenture for the purpose of adding any provision or changing in any manner or eliminating any provision of the Indenture or of any Supplemental Indenture or of modifying in any manner the rights of the Holders of Bonds and any coupons; provided, however, that (i) no -------- ------- such Supplemental Indenture shall, without the consent of the Holder of each Outstanding Bond affected thereby (a) reduce the principal amount of Bonds whose Holders must consent to an amendment, supplement or waiver, (b) reduce the Principal of or change the fixed maturity of any Bond, or alter the provisions with respect to any sinking, improvement, maintenance, replacement or analogous fund or conversion, redemption or repurchase rights with respect to any Bond, (c) reduce the rate of or change the time for payment of interest on any Bond, (d) waive a Default or Event of Default in the payment of Principal of or interest on the Bonds (except a rescission of acceleration of the Bonds pursuant to the Indenture where the Event of Default has been remedied), (e) make any Bond of any Series payable in money other than that stated in such Bond, (f) make any change in the provisions of the Indenture relating to waivers of past Defaults or the rights of Holders of Bonds to receive payments of Principal of or interest on the Bonds, (g) waive a redemption payment with respect to any Bond, (h) limit the right of a Holder of Bonds to institute suit for the enforcement of payment of Principal of or interest on such Bonds in accordance with the terms of said Bonds, (i) permit the creation by the Company of any Prior Lien (but no merger or consolidation permitted under the Indenture of the Company with any other Person owning property which is subject to a Prior Lien, shall be deemed the creation of a Prior Lien), or (j) make any change in the Indenture pertaining to amendments, supplements or waivers to the Indenture or any Supplemental Indenture with the consent of the Holders, and (ii) if there shall be Bonds of more than one series of Bonds outstanding and if such proposed action shall materially adversely affect the rights of Holders of Bonds of one or more such series, then the consent (including consents obtained in connection with a tender offer or exchange offer for Bonds) only of the Holders of a majority in aggregate principal amount of the outstanding Bonds of all series so affected, considered as one class, shall be required. No incorporator, stockholder, director, officer or employee of the Company shall have any liability for any obligations of the Company under this Series I Bond and the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Any and all such rights and claims against every such incorporator, stockholder, director, officer or employee, as such, whether arising at common law or in equity, or created by rule of law, statute, I-4 constitution or otherwise, are expressly released and waived as a condition of, and as part of the consideration for, the execution of the Indenture and the issuance of this Series I Bond. This Series I Bond is nontransferable except to effect transfer to any successor to the Agent under the Reimbursement Agreement, but is exchangeable by the registered holder hereof, in person or by attorney duly authorized, at the corporate trust office of the Trustee, any such permitted transfer or exchange to be made in the manner and upon the conditions prescribed in the Indenture, upon the surrender and cancellation of this Series I Bond and the payment of any applicable taxes and fees required by law, and upon any such transfer or exchange a new registered bond or bonds or the same series and tenor, will be issued to the authorized transferee, or the registered holder, as the case may be. This Series I Bond shall not be valid until authenticated by the manual signature of the Trustee, or a successor trustee or authenticating agent appointed pursuant to the Indenture. I-5 IN WITNESS WHEREOF, the Company has caused this Series I Bond to be executed in its name by the manual or facsimile signature of its Chairman of the Board, its Chief Executive Officer, its President or one of its Vice Presidents, and attested by the manual or facsimile signature of its Secretary or one of its Assistant Secretaries. Issue Date: Authentication Date: This Bond is one of the Bonds of the EL PASO ELECTRIC COMPANY, series designated therein, described in as Issuer the within-mentioned Indenture. STATE STREET BANK AND By: TRUST COMPANY, -------------------------------- as Trustee [Title of Officer] Attest: By: ------------------------------------ Authorized Officer ----------------------------------- [Assistant] Secretary I-6 ASSIGNMENT To assign this Series I Bond, fill in the form below: (I) or (we) assign and transfer this Series I Bond to - ------------------------------------------------------------------------------- (Insert assignee's soc. sec. or tax I.D. no.) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) and irrevocably appoint _______________________________________________________ _____________________________agent to transfer this Series I Bond on the books of the Company. The agent may substitute another to act for him. Date: --------------------- Your Signature: - ------------------------------------------------------------------------------- (Sign exactly as your name appears on this Series I Bond) Signature Guarantee: --------------------------------------------------------------------- (Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Registrar, which requirements will include membership or participation in STAMP or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Exchange Act.) I-7 EX-4.03 4 LETTER OF CREDIT AND REIMBURSEMENT -- FOUR CORNERS Exhibit 4.03 EXHIBIT B THIS BOND IS NOT TRANSFERABLE EXCEPT TO A SUCCESSOR AGENT UNDER THE LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT, DATED AS OF _________, 1997 AMONG THE COMPANY, BARCLAYS BANK, PLC, NEW YORK BRANCH, AS ISSUING BANK, THE CREDITORS SPECIFIED THEREIN, BARCLAYS BANK PLC, NEW YORK BRANCH, AS ADMINISTRATIVE AGENT FOR THE ISSUING BANK AND THE CREDITORS (THE "AGENT"), AND UNION BANK OF CALIFORNIA, N.A., AS DOCUMENTATION AGENT (SUCH REIMBURSEMENT AGREEMENT, AS AMENDED FROM TIME TO TIME, THE "REIMBURSEMENT AGREEMENT"). EL PASO ELECTRIC COMPANY No. RJ - ___________ $34,134,780 COLLATERAL SERIES J FIRST MORTGAGE BONDS El Paso Electric Company, a Texas corporation (herein, together with its successors and assigns, the "Company"), for value received promises to pay to Barclays Bank PLC, New York Branch, as Agent, or registered assigns, the principal sum of Thirty Four Million One Hundred Thirty Four Thousand Seven Hundred Eighty Dollars or, at any time (if less), such lesser principal amount as is equal to the sum of (a) the Available Amount under the Letter of Credit, plus (b) the aggregate principal amount of all Tender Advances outstanding at such time, plus (c) the aggregate amount of all other unreimbursed drawings of the Letter of Credit which are outstanding at such time, on such date or dates and in such amounts as set forth in the Reimbursement Agreement for the payment of principal on Tender Advances and the reimbursement of drawings under the Letter of Credit, but not later than the Stated Termination Date or [____________], 2000, whichever shall occur first, at the same place or places as set forth in the Reimbursement Agreement, in any coin or currency of the United States of America which at the time of such payment shall be legal tender for the payment of public and private debts and in the same manner set forth in the Reimbursement Agreement. Interest will accrue and be payable on this Series J Bond at the rates per annum, in the amounts, and on each date set forth in the Reimbursement Agreement for the accrual and payment of interest, commissions, fees, charges, expenses and other amounts in like coin or currency to the registered owner hereof at said place or places and in the same manner set forth in the Reimbursement Agreement. Such interest shall accrue and be payable until maturity of this Series J Bond, or if the Agent shall demand redemption of this Series J Bond, until the redemption date, or, if the Company shall default in the payment of principal due on this Series J Bond, whether at maturity or upon redemption, until the Company's obligation with respect to the payment of such principal shall be discharged as provided in the Indenture (as hereinafter defined). For purposes hereof, (i) interest shall include, without limitation, interest provided for under Article II of the Reimbursement Agreement and (ii) commissions and fees shall include, without limitation, the letter of credit fees and fronting fees provided for under Section 2.04 of the Reimbursement Agreement and the drawing fee, agency fee and transfer fee payable under Section 2.03 of the Reimbursement Agreement. The Bonds of this series have been issued to the Agent for the issuer of a Letter of Credit for the account of the Company and for certain creditors pursuant to the Reimbursement Agreement, to secure the payment of principal, reimbursement obligations, interest, fees, commissions, charges, expenses and other amounts due thereunder. As used herein, the terms "Available Amount," "Tender Advances", "Letter of Credit" and "Stated Termination Date" shall have the respective meanings set forth in the Reimbursement Agreement. Except as hereinafter provided, this Series J Bond shall bear interest (a) from the interest payment date next preceding the date of this Series J Bond to which interest has been paid, or (b) if the date of this Series J Bond is an interest payment date to which interest has been paid, then from such date, or (c) if no interest has been paid on this Series J Bond, then from the date of initial issue. This Series J Bond is one of the bonds of the Company known as its First Mortgage Bonds (the "Bonds"), issued and to be issued in one or more series under and secured by a General Mortgage Indenture and Deed of Trust, dated as of February 1, 1996, duly executed by the Company to State Street Bank and Trust Company, a banking corporation organized under the laws of The Commonwealth of Massachusetts, Trustee ("Trustee"), and indentures supplemental thereto, heretofore or hereafter executed, to which General Mortgage Indenture and Deed of Trust and all indentures supplemental thereto (collectively referred to as the "Indenture") reference is hereby made for a description of the property mortgaged and pledged, the nature and extent of the security, the terms and conditions upon which the Bonds are, and are to be, issued and secured, and the rights of the owners of the Bonds and the Trustee in respect of such security. As provided in the Indenture, the Bonds may be in various principal sums, are issuable in series, may mature at different times, may bear interest at different rates and may otherwise vary as therein provided; and this Bond is the only Bond of a series entitled "Collateral Series J First Mortgage Bonds", created by a Second Supplemental Indenture dated as of August 19, 1997, as provided for in the Indenture. The terms of this Series J Bond include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code Sections 77aaa-77bbbb) (the "Act"), as in effect on the date of the Indenture. The Indenture authorizes the issuance of up to $34,134,780 aggregate principal amount of Series J Bonds, but the aggregate principal amount of all Series J Bonds outstanding at any time shall not exceed the lesser of such amount and the amount that is equal to the sum of (a) the Available Amount of the Letter of Credit, plus (b) the aggregate principal amount of all Tender Advances outstanding at such time, plus (c) the aggregate amount of all other unreimbursed drawings under such Letter of Credit which are outstanding at such time. J-2 This Series J Bond has been issued by the Company to the Agent (i) to provide for the payment of the Company's obligations to make payments in respect of principal, reimbursement obligations, interest, fees, commissions, charges, expenses, and other amounts to any person under the Reimbursement Agreement and (ii) to provide to such persons the benefits of the security provided for by this Series J Bond. Any payment of principal, reimbursement obligations, interest, fees, commissions, charges, expenses or other amounts made by or on behalf of the Company in respect of its obligations to pay such principal, reimbursement obligations, interest, fees, commissions, charges, expenses and other amounts under and in accordance with the Reimbursement Agreement shall be deemed a payment in respect of this Series J Bond, but such payment shall not reduce the principal amount of this Series J Bond unless the sum of (a) the Available Amount of the Letter of Credit outstanding at such time, plus (b) the aggregate principal amount of all Tender Advances then outstanding under the Reimbursement Agreement, plus (c) the aggregate amount of all other unreimbursed drawings under the Letter of Credit which are then outstanding, is reduced concurrently with such payment; provided, however, if after a drawing under any Letter of -------- ------- Credit issued under the Reimbursement Agreement such Letter of Credit shall have been reinstated in respect of such drawing prior to the Agent having received reimbursement for such drawing from the Company, the reimbursement of such reinstated amount shall not reduce the principal amount of this Bond. In the event that all of the Company's obligations under the Reimbursement Agreement have been discharged, this Series J Bond shall be deemed paid in full and the Agent shall surrender this Series J Bond to the Trustee for cancellation. In the manner provided in the Indenture, this Series J Bond shall be redeemed at a redemption price of 100% (expressed as a percentage of principal amount) plus accrued interest thereon through the redemption date, in cash, upon receipt by the Trustee of a written demand for redemption of this Series J Bond from the Agent (the "Series J Redemption Demand"). This Series J Bond shall be redeemed in the amount specified in the Series J Redemption Demand, which amount shall be equal to the outstanding principal, reimbursement obligations, interest, commissions, fees, charges, expenses, and other amounts then due and owing under the Reimbursement Agreement. The Series J Redemption Demand shall also state (i) that an "Event of Default" has occurred and is continuing under the terms of the Reimbursement Agreement, (ii) that payment of the principal amount and reimbursement obligations outstanding under the Reimbursement Agreement, all interest, commissions and fees thereon and all charges, expenses, and other amounts payable thereunder are immediately due and payable, and (iii) that the Agent has demanded payment thereof from the Company. The portion of this Series J Bond subject to redemption shall be redeemed on the fifth Business Day following receipt by the Trustee of the Series J Redemption Demand. Any payment made to the Agent pursuant to a Series J Redemption Demand shall constitute a payment by the Company in respect of its obligations under the Reimbursement Agreement. The Series J Redemption Demand shall be rescinded and shall be null and void for all purposes of the Indenture upon receipt by the Trustee, no later than the Business Day prior to the date fixed for redemption, of a certificate of the Agent (a) stating J-3 that there has been a waiver of such Event of Default, or (b) withdrawing said Series J Redemption Demand. The principal of this Series J Bond may be declared or may become due before the maturity hereof, on the conditions, in the manner and at the times set forth in the Indenture, upon the happening of an Event of Default as therein defined. With the consent of the Holders of not less than a majority in aggregate principal amount of the Outstanding Bonds which would be affected by the action to be taken, the Company and the Trustee may from time to time and at any time, enter into a Supplemental Indenture for the purpose of adding any provision or changing in any manner or eliminating any provision of the Indenture or of any Supplemental Indenture or of modifying in any manner the rights of the Holders of Bonds and any coupons; provided, however, that (i) no -------- ------- such Supplemental Indenture shall, without the consent of the Holder of each Outstanding Bond affected thereby (a) reduce the principal amount of Bonds whose Holders must consent to an amendment, supplement or waiver, (b) reduce the Principal of or change the fixed maturity of any Bond, or alter the provisions with respect to any sinking, improvement, maintenance, replacement or analogous fund or conversion, redemption or repurchase rights with respect to any Bond, (c) reduce the rate of or change the time for payment of interest on any Bond, (d) waive a Default or Event of Default in the payment of Principal of or interest on the Bonds (except a rescission of acceleration of the Bonds pursuant to the Indenture where the Event of Default has been remedied), (e) make any Bond payable in money other than that stated in such Bond, (f) make any change in the provisions of the Indenture relating to waivers of past Defaults or the rights of Holders of Bonds to receive payments of Principal of or interest on the Bonds, (g) waive a redemption payment with respect to any Bond, (h) limit the right of a Holder of Bonds to institute suit for the enforcement of payment of Principal of or interest on such Bonds in accordance with the terms of said Bonds, (i) permit the creation by the Company of any Prior Lien (but no merger or consolidation permitted under the Indenture of the Company with any other Person owning property which is subject to a Prior Lien, shall be deemed the creation of a Prior Lien), or (j) make any change in the Indenture pertaining to amendments, supplements or waivers to the Indenture or any Supplemental Indenture with the consent of the Holders, and (ii) if there shall be Bonds of more than one series of Bonds outstanding and if such proposed action shall materially adversely affect the rights of Holders of Bonds of one or more such series, then the consent (including consents obtained in connection with a tender offer or exchange offer for Bonds) only of the Holders of a majority in aggregate principal amount of the outstanding Bonds of all series so affected, considered as one class, shall be required. No incorporator, stockholder, director, officer or employee of the Company shall have any liability for any obligations of the Company under this Series J Bond and the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Any and all such rights and claims against every such incorporator, stockholder, director, officer or employee, as such, whether arising at common law or in equity, or created by rule of law, statute, constitution or otherwise, are expressly released and waived as a condition of, and as part of the consideration for, the execution of the Indenture and the issuance of this Series J Bond. J-4 This Series J Bond is nontransferable except to effect transfer to any successor to the Agent under the Reimbursement Agreement, but is exchangeable by the registered holder hereof, in person or by attorney duly authorized, at the corporate trust office of the Trustee, any such permitted transfer or exchange to be made in the manner and upon the conditions prescribed in the Indenture, upon the surrender and cancellation of this Series J Bond and the payment of any applicable taxes and fees required by law, and upon any such transfer or exchange a new registered bond or bonds or the same series and tenor, will be issued to the authorized transferee, or the registered holder, as the case may be. This Series J Bond shall not be valid until authenticated by the manual signature of the Trustee, or a successor trustee or authenticating agent appointed pursuant to the Indenture. IN WITNESS WHEREOF, the Company has caused this Series J Bond to be executed in its name by the manual or facsimile signature of its Chairman of the Board, its Chief Executive Officer, its President or one of its Vice Presidents, and attested by the manual or facsimile signature of its Secretary or one of its Assistant Secretaries. Issue Date: Authentication Date: This Bond is one of the Bonds of the EL PASO ELECTRIC COMPANY, series designated therein, described in as Issuer the within-mentioned Indenture. STATE STREET BANK AND By: TRUST COMPANY, -------------------------------- as Trustee Title: Attest: By: ----------------------------------- Authorized Officer ----------------------------------- [Assistant] Secretary J-5 ASSIGNMENT To assign this Series J Bond, fill in the form below: (I) or (we) assign and transfer this Series J Bond to - -------------------------------------------------------------------------------- (Insert assignee's soc. sec. or tax I.D. no.) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) and irrevocably appoint _______________________________________________________ _____________________________agent to transfer this Series J Bond on the books of the Company. The agent may substitute another to act for him. Date: --------------- Your Signature: - -------------------------------------------------------------------------------- (Sign exactly as your name appears on this Series J Bond) Signature Guarantee: ---------------------------------------------------------------------- (Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Registrar, which requirements will include membership or participation in STAMP or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Exchange Act.) J-6 EX-11 5 COMPUTATION OF EARNINGS EL PASO ELECTRIC COMPANY EXHIBIT 11 COMPUTATION OF EARNINGS PER COMMON SHARE (IN THOUSANDS EXCEPT FOR SHARE DATA)
THREE THREE MONTHS MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, 1997 1996 ------------ ------------ PRIMARY: Weighted average number of common shares outstanding 60,067,832 59,999,981 Weighted average number of restricted shares 171,404 180,000 Net effect of dilutive stock options 220,412 59,257 ------------ ------------ Total 60,459,648 60,239,238 ============ ============ Net income applicable to common stock: Income before extraordinary loss on repurchase of debt $ 20,657 $ 19,793 Extraordinary loss on repurchase of debt, net of federal income tax benefit (69) - ------------ ------------ Net income applicable to common stock $ 20,588 $ 19,793 ============ ============ Net income per common share: Income before extraordinary loss on repurchase of debt $ 0.342 $ 0.329 Extraordinary loss on repurchase of debt, net of federal income tax benefit (0.001) - ------------ ------------ Net income $ 0.341 $ 0.329 ============ ============ FULLY DILUTED (1): Weighted average number of common shares outstanding 60,067,832 59,999,981 Weighted average number of restricted shares 171,404 180,000 Net effect of dilutive stock options 220,412 59,257 ------------ ------------ Total 60,459,648 60,239,238 ============ ============ Net income applicable to common stock: Income before extraordinary loss on repurchase of debt $ 20,657 $ 19,793 Extraordinary loss on repurchase of debt, net of federal income tax benefit (69) - ------------ ------------ Net income applicable to common stock $ 20,588 $ 19,793 ============ ============ Net income per common share: Income before extraordinary loss on repurchase of debt $ 0.342 $ 0.329 Extraordinary loss on repurchase of debt, net of federal income tax benefit (0.001) - ------------ ------------ Net income $ 0.341 $ 0.329 ============ ============
(1) This calculation is submitted in accordance with Securities Exchange Act of 1934 Release No. 9083, although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%. EL PASO ELECTRIC COMPANY EXHIBIT 11 COMPUTATION OF EARNINGS PER COMMON SHARE (IN THOUSANDS EXCEPT FOR SHARE DATA)
NINE PERIOD FROM | PERIOD FROM MONTHS FEBRUARY 12 | JANUARY 1 ENDED TO | TO SEPTEMBER 30, SEPTEMBER 30, | FEBRUARY 11, 1997 1996 | 1996 ------------ ------------ | ----------- | PRIMARY: | | Weighted average number of common shares outstanding 60,052,481 59,999,981 | 35,544,330 Weighted average number of restricted shares 173,863 137,866 | - Net effect of dilutive stock options 291,343 22,631 | - ------------ ------------ | ----------- Total 60,517,687 60,160,478 | 35,544,330 ============ ============ | =========== | | Net income applicable to common stock: | Income before extraordinary items $ 36,108 $ 26,533 | $ 118,198 Extraordinary loss on repurchase of debt, net of | federal income tax benefit (2,741) - | - Extraordinary gain on discharge of debt - - | 264,273 ------------ ------------ | ----------- Net income applicable to common stock $ 33,367 $ 26,533 | 382,471 ============ ============ | =========== | Net income per common share: | Income before extraordinary items $ 0.596 $ 0.441 | 3.325 Extraordinary loss on repurchase of debt, net of | federal income tax benefit (0.045) - | - Extraordinary gain on discharge of debt - - | 7.435 ------------ ------------ | ----------- Net income $ 0.551 $ 0.441 | $ 10.760 ============ ============ | =========== | FULLY DILUTED (1): | | Weighted average number of common shares outstanding 60,052,481 59,999,981 | 35,544,330 Weighted average number of restricted shares 173,863 137,866 | - Net effect of dilutive stock options 291,343 22,631 | - ------------ ------------ | ----------- Total 60,517,687 60,160,478 | 35,544,330 ============ ============ | =========== | | Net income applicable to common stock: | Income before extraordinary items $ 36,108 $ 26,533 | $ 118,198 Extraordinary loss on repurchase of debt, net of | federal income tax benefit (2,741) - | - Extraordinary gain on discharge of debt - - | 264,273 ------------ ------------ | ----------- Net income applicable to common stock $ 33,367 $ 26,533 | $ 382,471 ============ ============ | =========== | Net income per common share: | Income before extraordinary items $ 0.596 $ 0.441 | $ 3.325 Extraordinary loss on repurchase of debt, net of | federal income tax benefit (0.045) - | - Extraordinary gain on discharge of debt - - | 7.435 ------------ ------------ | ----------- Net income $ 0.551 $ 0.441 | $ 10.760 ============ ============ | ===========
(1) This calculation is submitted in accordance with Securities Exchange Act of 1934 Release No. 9083, although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%. EL PASO ELECTRIC COMPANY EXHIBIT 11 COMPUTATION OF EARNINGS PER COMMON SHARE (IN THOUSANDS EXCEPT FOR SHARE DATA)
TWELVE PERIOD FROM | PERIOD FROM MONTHS FEBRUARY 12 | OCTOBER 1, 1995 ENDED TO | TO SEPTEMBER 30, SEPTEMBER 30, | FEBRUARY 11, 1997 1996 | 1996 ------------ ------------ | ------------- | PRIMARY: | | Weighted average number of common shares outstanding 60,039,248 59,999,981 | 35,544,330 Weighted average number of restricted shares 175,410 137,866 | - Net effect of dilutive stock options 239,812 22,631 | - ------------ ------------ | ------------ Total 60,454,470 60,160,478 | 35,544,330 ============ ============ | ============ | | Net income applicable to common stock: | Income before extraordinary items $ 41,006 $ 26,533 | $ 99,329 Extraordinary loss on repurchase of debt, net of | federal income tax benefit (2,741) - | - Extraordinary gain on discharge of debt - - | 264,273 ------------ ------------ | ------------ Net income applicable to common stock $ 38,265 $ 26,533 | $ 363,602 ============ ============ | ============ | Net income per common share: | Income before extraordinary items $ 0.678 $ 0.441 | $ 2.795 Extraordinary loss on repurchase of debt, net of | federal income tax benefit (0.045) - | - Extraordinary gain on discharge of debt - - | 7.435 ------------ ------------ | ------------ Net income $ 0.633 $ 0.441 | $ 10.230 ============ ============ | ============ | FULLY DILUTED (1): | | Weighted average number of common shares outstanding 60,039,248 59,999,981 | 35,544,330 Weighted average number of restricted shares 175,410 137,866 | - Net effect of dilutive stock options 239,812 22,631 | - ------------ ------------ | ------------ Total 60,454,470 60,160,478 | 35,544,330 ============ ============ | ============ | | Net income applicable to common stock: | Income before extraordinary items $ 41,006 $ 26,533 | $ 99,329 Extraordinary loss on repurchase of debt, net of | federal income tax benefit (2,741) - | - Extraordinary gain on discharge of debt - - | 264,273 ------------ ------------ | ------------ Net income applicable to common stock $ 38,265 $ 26,533 | $ 363,602 ============ ============ | ============ | Net income per common share: | Income before extraordinary items $ 0.678 $ 0.441 | $ 2.795 Extraordinary loss on repurchase of debt, net of | federal income tax benefit (0.045) - | - Extraordinary gain on discharge of debt - - | 7.435 ------------ ------------ | ------------ Net income $ 0.633 $ 0.441 | $ 10.230 ============ ============ | ============
(1) This calculation is submitted in accordance with Securities Exchange Act of 1934 Release No. 9083, although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%. EX-15 6 KPMG LETTER Exhibit 15 El Paso Electric Company El Paso, Texas Ladies and Gentlemen: Re: Registration Statement No. 333-17971 With respect to the subject registration statement, we acknowledge our awareness of the use therein of our report dated October 16, 1997 related to our review of interim financial information. Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not considered part of a registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of sections 7 and 11 of the Act. Very truly yours, KPMG Peat Marwick LLP El Paso, Texas October 16, 1997 EX-27 7 FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET OF EL PASO ELECTRIC COMPANY AS OF SEPTEMBER 30, 1997 AND THE RELATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 PER-BOOK 1,471,159 0 206,975 106,790 28,532 1,813,456 60,239 240,145 64,319 364,703 117,959 0 944,014 0 0 0 83 0 24,398 28,406 333,893 1,813,456 450,272 25,162 319,815 344,977 105,295 6,241 111,536 65,710 43,085 9,718 33,367 0 77,376 158,147 0.551 0.551 NET INCOME IS NET OF EXTRAORDINARY LOSS ON REPURCHASE OF DEBT (NET OF FEDERAL INCOME TAX BENEFIT) OF ($2,741).
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