-----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, QIYkopgk6x3zh2pn0k98ZrzJ4cR9AuAgHVBEtYALItTbztBaoHMnRLdG8mx6J7lI EXUVIX1IvWj2UhX7J/nW1w== 0000930661-98-001627.txt : 19980806 0000930661-98-001627.hdr.sgml : 19980806 ACCESSION NUMBER: 0000930661-98-001627 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980805 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: 98677153 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 JUNE 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____ TO ____ COMMISSION FILE NUMBER 0-296 EL PASO ELECTRIC COMPANY (Exact name of registrant as specified in its charter) TEXAS 74-0607870 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) KAYSER CENTER, 100 NORTH STANTON, EL PASO, TEXAS 79901 (Address of principal executive offices) (Zip Code) (915) 543-5711 (Registrant's telephone number, including area code) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --- --- INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND REPORTS REQUIRED TO BE FILED BY SECTIONS 12, 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN CONFIRMED BY A COURT. YES X NO --- --- AS OF JULY 31, 1998, THERE WERE 60,272,270 SHARES OF THE COMPANY'S NO PAR VALUE COMMON STOCK OUTSTANDING. =============================================================================== EL PASO ELECTRIC COMPANY INDEX TO FORM 10-Q Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets - June 30, 1998 and December 31, 1997.................. 1 Statements of Operations - Three Months, Six Months and Twelve Months Ended June 30, 1998 and 1997......................................... 3 Statements of Comprehensive Operations - Three Months, Six Months and Twelve Months Ended June 30, 1998 and 1997....................... 5 Statements of Cash Flows - Six Months Ended June 30, 1998 and 1997.... 6 Notes to Financial Statements......................................... 7 Independent Auditor's Review Report................................... 15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................... 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings.............................................. 23 Item 4. Submission of Matters to a Vote of Security Holders............ 23 Item 5. Other Matters.................................................. 23 Item 6. Exhibits and Reports on Form 8-K............................... 24 i PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS EL PASO ELECTRIC COMPANY BALANCE SHEETS
ASSETS JUNE 30, (IN THOUSANDS) 1998 DECEMBER 31, (UNAUDITED) 1997 ----------- ------------ UTILITY PLANT: Electric plant in service.............................................. $1,542,215 $1,538,572 Less accumulated depreciation and amortization......................... 206,964 164,283 ---------- ---------- Net plant in service................................................. 1,335,251 1,374,289 Construction work in progress.......................................... 59,105 43,761 Nuclear fuel; includes fuel in process of $9,210 and $9,910, respectively................................................. 92,345 86,609 Less accumulated amortization.......................................... 46,985 40,142 ---------- ---------- Net nuclear fuel..................................................... 45,360 46,467 ---------- ---------- Net utility plant.................................................. 1,439,716 1,464,517 ---------- ---------- CURRENT ASSETS: Cash and temporary investments......................................... 137,185 111,227 Accounts receivable, principally trade, net of allowance for doubtful accounts of $2,370 and $5,124, respectively................. 61,379 58,960 Inventories, at cost................................................... 27,423 27,130 Net undercollection of fuel revenues................................... 10,437 13,870 Prepayments and other.................................................. 9,307 6,930 ---------- ---------- Total current assets............................................... 245,731 218,117 ---------- ---------- LONG-TERM CONTRACT RECEIVABLE............................................ 25,440 27,659 ---------- ---------- DEFERRED CHARGES AND OTHER ASSETS: Accumulated deferred income taxes, net................................. 30,151 43,208 Decommissioning trust fund............................................. 42,153 38,438 Other.................................................................. 19,378 20,674 ---------- ---------- Total deferred charges and other assets............................ 91,682 102,320 ---------- ---------- TOTAL ASSETS....................................................... $1,802,569 $1,812,613 ========== ==========
See accompanying notes to financial statements. 1 EL PASO ELECTRIC COMPANY BALANCE SHEETS (CONTINUED)
CAPITALIZATION AND LIABILITIES JUNE 30, (IN THOUSANDS EXCEPT FOR SHARE DATA) 1998 DECEMBER 31, (UNAUDITED) 1997 ---------------- ---------------- CAPITALIZATION: Common stock, stated value $1 per share, 100,000,000 shares authorized, 60,122,377 and 60,060,034 shares issued and outstanding; and 149,893 and 196,404 restricted shares, respectively........................................................ $ 60,272 $ 60,256 Capital in excess of stated value..................................... 241,336 241,222 Unearned compensation-restricted stock awards......................... (751) (1,138) Accumulated earnings.................................................. 86,547 69,484 Accumulated other comprehensive income (loss) (unrealized gains (losses) on marketable securities), net of tax................ 202 (184) ---------- ---------- Common stock equity............................................... 387,606 369,640 Preferred stock, cumulative, no par value, 2,000,000 shares authorized: Redemption required-1,283,291 and 1,213,188 shares issued and and outstanding, respectively; at liquidation preference........ 128,329 121,319 Long-term debt........................................................ 872,258 938,562 Financing and capital lease obligations............................... 27,702 28,248 ---------- ---------- Total capitalization............................................ 1,415,895 1,457,769 ---------- ---------- CURRENT LIABILITIES: Current maturities of long-term debt and financing and capital lease obligations........................................... 63,158 28,463 Accounts payable, principally trade................................... 19,541 24,957 Taxes accrued other than federal income taxes......................... 17,012 19,292 Interest accrued...................................................... 20,310 21,172 Other................................................................. 18,751 17,439 ---------- ---------- Total current liabilities....................................... 138,772 111,323 ---------- ---------- DEFERRED CREDITS AND OTHER LIABILITIES: Decommissioning....................................................... 97,741 94,917 Accrued postretirement benefit liability.............................. 77,794 75,531 Accrued pension liability............................................. 33,739 33,909 Other................................................................. 38,628 39,164 ---------- ---------- Total deferred credits and other liabilities.................... 247,902 243,521 ---------- ---------- COMMITMENTS AND CONTINGENCIES TOTAL CAPITALIZATION AND LIABILITIES............................ $1,802,569 $1,812,613 ========== ========== See accompanying notes to financial statements.
2 EL PASO ELECTRIC COMPANY STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS EXCEPT FOR SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------------- --------------------------------- 1998 1997 1998 1997 ------------ ------------ --------------- --------------- OPERATING REVENUES: Base revenues...............................................$ 113,954 $ 113,304 $ 221,254 $ 216,958 Fuel revenues and economy sales............................. 31,284 29,780 59,770 60,740 Other....................................................... 1,165 1,191 2,324 2,434 ------------ ------------ --------------- --------------- 146,403 144,275 283,348 280,132 ------------ ------------ --------------- --------------- ENERGY EXPENSES: Fuel........................................................ 27,630 25,443 53,112 53,909 Purchased and interchanged power............................ 4,644 5,214 7,808 8,000 ------------ ------------ --------------- --------------- 32,274 30,657 60,920 61,909 ------------ ------------ --------------- --------------- OPERATING REVENUES NET OF ENERGY EXPENSES........................ 114,129 113,618 222,428 218,223 ------------ ------------ --------------- --------------- OTHER OPERATING EXPENSES: Other operations............................................ 31,623 31,189 64,193 62,153 Maintenance................................................. 8,320 9,410 16,522 18,839 Depreciation and amortization............................... 22,312 22,098 44,539 44,003 Taxes other than income taxes............................... 11,156 10,876 22,516 21,950 ------------ ------------ --------------- --------------- 73,411 73,573 147,770 146,945 ------------ ------------ --------------- --------------- OPERATING INCOME................................................. 40,718 40,045 74,658 71,278 ------------ ------------ --------------- --------------- OTHER INCOME (DEDUCTIONS): Investment income........................................... 2,357 1,013 4,992 2,122 Litigation settlement, net.................................. - 7,500 - 7,500 Settlement of bankruptcy professional fees.................. 228 725 604 312 Other, net.................................................. (808) (570) (834) (860) ------------ ------------ --------------- --------------- 1,777 8,668 4,762 9,074 ------------ ------------ --------------- --------------- INCOME BEFORE INTEREST CHARGES................................... 42,495 48,713 79,420 80,352 ------------ ------------ --------------- --------------- INTEREST CHARGES (CREDITS): Interest on long-term debt.................................. 20,359 21,582 40,695 43,807 Other interest.............................................. 1,788 1,766 3,553 3,386 Interest capitalized and deferred........................... (1,625) (1,539) (3,246) (2,889) ------------ ------------ --------------- --------------- 20,522 21,809 41,002 44,304 ------------ ------------ --------------- --------------- INCOME BEFORE INCOME TAXES....................................... 21,973 26,904 38,418 36,048 INCOME TAX EXPENSE............................................... 8,278 10,659 14,208 14,211 ------------ ------------ --------------- --------------- INCOME BEFORE EXTRAORDINARY LOSS ON REPURCHASES OF DEBT......................................... 13,695 16,245 24,210 21,837 EXTRAORDINARY LOSS ON REPURCHASES OF DEBT, NET OF FEDERAL INCOME TAX BENEFIT.................................. - (427) - (2,671) ----------- - ------------ -------------- - --------------- NET INCOME....................................................... 13,695 15,818 24,210 19,166 PREFERRED STOCK DIVIDEND REQUIREMENTS............................ 3,624 3,238 7,147 6,387 ------------ ------------ --------------- --------------- NET INCOME APPLICABLE TO COMMON STOCK............................$ 10,071 $ 12,580 $ 17,063 $ 12,779 ============ ============ =============== =============== BASIC EARNINGS PER COMMON SHARE: Income before extraordinary loss on repurchases of debt.....$ 0.167 $ 0.216 $ 0.284 $ 0.257 Extraordinary loss on repurchases of debt, net of federal income tax benefit.............................. - (0.007) - (0.044) ----------- - ------------ -------------- - --------------- Net income..............................................$ 0.167 $ 0.209 $ 0.284 $ 0.213 ============ ============ =============== =============== DILUTED EARNINGS PER COMMON SHARE: Income before extraordinary loss on repurchases of debt.....$ 0.166 $ 0.216 $ 0.282 $ 0.256 Extraordinary loss on repurchases of debt, net of federal income tax benefit.............................. - (0.007) - (0.044) ----------- - ------------ -------------- - --------------- Net income..............................................$ 0.166 $ 0.209 $ 0.282 $ 0.212 ============ ============ =============== =============== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING............. 60,169,436 60,129,784 60,167,618 60,121,729 ============ ============ =============== =============== WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND DILUTIVE POTENTIAL COMMON SHARES OUTSTANDING................ 60,737,455 60,327,545 60,591,344 60,338,951 ============ ============ =============== ===============
See accompanying notes to financial statements. 3 EL PASO ELECTRIC COMPANY STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS EXCEPT FOR SHARE DATA)
TWELVE MONTHS ENDED JUNE 30, --------------------------------- 1998 1997 -------------- --------------- OPERATING REVENUES: Base revenues................................................... $ 463,275 $ 458,478 Fuel revenues and economy sales................................. 129,202 126,822 Other........................................................... 4,777 4,511 --------------- --------------- 597,254 589,811 --------------- --------------- ENERGY EXPENSES: Fuel............................................................ 112,660 113,968 Purchased and interchanged power................................ 19,938 17,644 --------------- --------------- 132,598 131,612 --------------- --------------- OPERATING REVENUES NET OF ENERGY EXPENSES............................ 464,656 458,199 --------------- --------------- OTHER OPERATING EXPENSES: Other operations................................................ 133,956 130,699 Maintenance..................................................... 32,465 38,079 Depreciation and amortization................................... 89,271 89,406 Taxes other than income taxes................................... 43,917 40,814 --------------- --------------- 299,609 298,998 --------------- --------------- OPERATING INCOME..................................................... 165,047 159,201 --------------- --------------- OTHER INCOME (DEDUCTIONS): Investment income............................................... 8,965 4,681 Litigation settlement, net...................................... - 7,500 Settlement of bankruptcy professional fees...................... 654 2,617 Gain on sale of investment...................................... - 3,844 Other, net...................................................... 28 (1,425) --------------- --------------- 9,647 17,217 --------------- --------------- INCOME BEFORE INTEREST CHARGES....................................... 174,694 176,418 --------------- --------------- INTEREST CHARGES (CREDITS): Interest on long-term debt...................................... 83,005 90,732 Other interest.................................................. 6,367 6,539 Interest capitalized and deferred............................... (6,232) (5,762) --------------- --------------- 83,140 91,509 --------------- --------------- INCOME BEFORE INCOME TAXES........................................... 91,554 84,909 INCOME TAX EXPENSE................................................... 34,717 32,342 --------------- --------------- INCOME BEFORE EXTRAORDINARY LOSS ON REPURCHASES OF DEBT............................................. 56,837 52,567 EXTRAORDINARY LOSS ON REPURCHASES OF DEBT, NET OF FEDERAL INCOME TAX BENEFIT...................................... - (2,671) -------------- --------------- NET INCOME........................................................... 56,837 49,896 PREFERRED STOCK DIVIDEND REQUIREMENTS................................ 13,904 12,426 --------------- --------------- NET INCOME APPLICABLE TO COMMON STOCK................................ $ 42,933 $ 37,470 =============== =============== BASIC EARNINGS PER COMMON SHARE: Income before extraordinary loss on repurchases of debt......... $ 0.714 $ 0.668 Extraordinary loss on repurchases of debt, net of federal income tax benefit.................................. - (0.044) --------------- --------------- Net income.................................................. $ 0.714 $ 0.624 =============== =============== DILUTED EARNINGS PER COMMON SHARE: Income before extraordinary loss on repurchases of debt......... $ 0.710 $ 0.666 Extraordinary loss on repurchases of debt, net of federal income tax benefit.................................. - (0.044) --------------- --------------- Net income.................................................. $ 0.710 $ 0.622 =============== =============== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING................. 60,151,260 60,100,684 =============== =============== WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND DILUTIVE POTENTIAL COMMON SHARES OUTSTANDING.................... 60,456,385 60,238,424 =============== ===============
See accompanying notes to financial statements. 4 EL PASO ELECTRIC COMPANY STATEMENTS OF COMPREHENSIVE OPERATIONS (UNAUDITED) (IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED JUNE 30, JUNE 30, JUNE 30, ------------------- ------------------- ------------------- 1998 1997 1998 1997 1998 1997 --------- -------- -------- --------- --------- -------- NET INCOME...................................... $13,695 $15,818 $24,210 $19,166 $56,837 $49,896 OTHER COMPREHENSIVE INCOME (LOSS): Net unrealized gain (loss) on marketable securities, less applicable income tax benefit (expense) of $6, $(74), $(207), $51, $(35) and $(203), respectively.......... (11) 138 386 (94) 64 377 ------- ------- ------- ------- ------- ------- COMPREHENSIVE INCOME............................ 13,684 15,956 24,596 19,072 56,901 50,273 PREFERRED STOCK DIVIDEND REQUIREMENTS........... 3,624 3,238 7,147 6,387 13,904 12,426 ------- ------- ------- ------- ------- ------- COMPREHENSIVE INCOME APPLICABLE TO COMMON STOCK................................ $10,060 $12,718 $17,449 $12,685 $42,997 $37,847 ======= ======= ======= ======= ======= ======= See accompanying notes to financial statements.
5 EL PASO ELECTRIC COMPANY STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, ------------------------------ 1998 1997 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................................ $ 24,210 $ 19,166 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................................... 56,345 55,336 Deferred income taxes, net...................................... 12,850 13,316 Other operating activities...................................... 2,138 1,215 Extraordinary loss on repurchases of debt, net of federal income tax benefit........................................... - 2,671 Change in: Accounts receivable............................................. (2,419) (1,618) Federal income tax receivable................................... - 17,636 Litigation settlement receivable, net........................... - (7,500) Inventories..................................................... (293) 641 Net undercollection of fuel revenues............................ 3,433 (6,839) Prepayments and other........................................... (2,377) 2,365 Long-term contract receivable................................... 2,219 1,668 Accounts payable................................................ (5,416) (12,156) Taxes accrued other than federal income taxes................... (2,280) (2,998) Interest accrued................................................ (862) (1,779) Other current liabilities....................................... 1,524 1,359 Deferred charges and credits.................................... 4,154 6,382 ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES..................... 93,226 88,865 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Additions to utility property, plant and equipment................ (21,698) (27,792) Additions to nuclear fuel......................................... (9,868) (10,334) Investment in decommissioning trust fund.......................... (3,122) (2,886) Other investing activities........................................ (42) 172 ------------ ------------ NET CASH USED FOR INVESTING ACTIVITIES........................ (34,730) (40,840) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Repurchases of and payments on long-term debt..................... (30,582) (76,130) Net (repayments of) proceeds from financing obligations.......... (1,204) 230 Redemption of capital lease obligations........................... (683) (621) Other financing activities........................................ (69) - ------------ ------------ NET CASH USED FOR FINANCING ACTIVITIES........................ (32,538) (76,521) ------------ ------------ NET INCREASE (DECREASE) IN CASH AND TEMPORARY INVESTMENTS........... 25,958 (28,496) CASH AND TEMPORARY INVESTMENTS AT BEGINNING OF PERIOD............... 111,227 68,767 ------------ ------------ CASH AND TEMPORARY INVESTMENTS AT END OF PERIOD..................... $ 137,185 $ 40,271 ============ ============
See accompanying notes to financial statements. 6 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (UNAUDITED) A. PRINCIPLES OF PREPARATION Pursuant to the rules and regulations of the Securities and Exchange Commission, certain financial information has been condensed and certain footnote disclosures have been omitted. Such information and disclosures are normally included in financial statements prepared in accordance with generally accepted accounting principles. These condensed financial statements should be read in conjunction with the financial statements and notes thereto in the Annual Report of El Paso Electric Company (the "Company") on Form 10-K for the year ended December 31, 1997 (the "1997 Form 10-K"). Capitalized terms used in this report and not defined herein have the meaning ascribed for such terms in the 1997 Form 10-K. In the opinion of management of the Company, the accompanying financial statements contain all adjustments necessary to present fairly the financial position of the Company at June 30, 1998 and December 31, 1997; the results of operations for the three, six and twelve months ended June 30, 1998 and 1997; and cash flows for the six months ended June 30, 1998 and 1997. The results of operations for the three, six and twelve months ended June 30, 1998 are not necessarily indicative of the results to be expected for the full calendar year. SUPPLEMENTAL STATEMENTS OF CASH FLOW DISCLOSURES (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, ------------------------------------ 1998 1997 ------------ ------------ Cash paid (refunded) for: Income taxes, net................................ $ 1,300 $(17,035) Interest......................................... 36,113 39,781 Reorganization items-professional fees and other............................... 2,715 2,370 Non-cash investing and financing activities: Issuance of preferred stock for pay-in-kind dividend......................... 7,010 6,265 Issuance of restricted shares of common stock................................. 195 411
7 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (UNAUDITED) RECONCILIATION OF BASIC AND DILUTED EARNINGS PER COMMON SHARE The reconciliation of basic and diluted earnings per common share before extraordinary item is presented below:
THREE MONTHS ENDED JUNE 30, ------------------------------------------------------------------------ 1998 1997 ----------------------------------- ----------------------------------- PER PER COMMON COMMON INCOME SHARES SHARE INCOME SHARES SHARE -------------- ---------- ------- -------------- ---------- ------- (IN THOUSANDS) (IN THOUSANDS) Income before extraordinary item..... $13,695 $16,245 Less: Preferred stock dividends.... 3,624 3,238 ------------- ------------- Basic earnings per common share: Income applicable to common stock.............................. 10,071 60,169,436 $0.167 13,007 60,129,784 $0.216 ======= ======= Effect of dilutive securities: Unvested restricted stock........... -- 29,033 -- 20,014 Stock options....................... -- 538,986 -- 177,747 ------------- ---------- ------------- ---------- Diluted earnings per common share: Income applicable to common stock.............................. $10,071 60,737,455 $0.166 $13,007 60,327,545 $0.216 ============= ========== ======= ============= ========== =======
SIX MONTHS ENDED JUNE 30, ------------------------------------------------------------------------ 1998 1997 ----------------------------------- ----------------------------------- PER PER COMMON COMMON INCOME SHARES SHARE INCOME SHARES SHARE -------------- ---------- ------- -------------- ---------- ------- (IN THOUSANDS) (IN THOUSANDS) Income before extraordinary item..... $24,210 $21,837 Less: Preferred stock dividends.... 7,147 6,387 ------------- ------------- Basic earnings per common share: Income applicable to common stock.............................. 17,063 60,167,618 $0.284 15,450 60,121,729 $0.257 ======= ======= Effect of dilutive securities: Unvested restricted stock........... -- 22,734 -- 18,305 Stock options....................... -- 400,992 -- 198,917 ------------- ---------- ------------- ---------- Diluted earnings per common share: Income applicable to common stock.............................. $17,063 60,591,344 $0.282 $15,450 60,338,951 $0.256 ============= ========== ======= ============= ========== =======
8 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
TWELVE MONTHS ENDED JUNE 30, ------------------------------------------------------------------------ 1998 1997 ----------------------------------- ----------------------------------- PER PER COMMON COMMON INCOME SHARES SHARE INCOME SHARES SHARE -------------- ---------- ------- -------------- ---------- ------- (IN THOUSANDS) (IN THOUSANDS) Income before extraordinary item..... $56,837 $52,567 Less: Preferred stock dividends.... 13,904 12,426 ------------- ------------- Basic earnings per common share: Income applicable to common stock.............................. 42,933 60,151,260 $0.714 40,141 60,100,684 $0.668 ======= ======= Effect of dilutive securities: Unvested restricted stock........... -- 25,305 -- 19,793 Stock options....................... -- 279,820 -- 117,947 ------------- ---------- ------------- ---------- Diluted earnings per common share: Income applicable to common stock.............................. $42,933 60,456,385 $0.710 $40,141 60,238,424 $0.666 ============= ========== ======= ============= ========== =======
B. RATE MATTERS For a full discussion of the Company's rate matters, see Note B of Notes to Financial Statements in the 1997 Form 10-K. NEW MEXICO RATE MATTERS Pending Rate Case. In October 1996, the New Mexico Commission issued an order in Case No. 2722, requiring the Company to answer certain ratepayer complaints and to file a rate filing package, including cost of service data and supporting testimony. In March 1997, the Company filed with the New Mexico Commission all of the rate filing package data required by the Commission's order. Although the Company's filing demonstrated a revenue deficiency of approximately $8.6 million under current rates, the Company did not request a rate change to recover the deficiency. In April 1998, testimony was filed by the New Mexico Commission staff and intervenors which included recommendations based on (i) traditional original cost ratemaking and (ii) revaluation of the Company's generating assets. These filings recommended rate reductions ranging from 5.2% to 26.0% of base revenues based on various theories. On July 15, 1998, the Company entered into a Stipulation and Settlement Agreement (the "New Mexico Settlement") with certain parties to the rate case, including the New Mexico Commission staff and the New Mexico Attorney General, but not the City of Las Cruces ("Las Cruces"). The New Mexico Settlement provides for: (i) a total jurisdictional base revenue reduction of $5 million, which amount includes a discount for low income residential customers (approximately $0.4 million) and a reduction for two large contract customers (approximately $0.5 million), both of which represent benefits already in place in Texas, leaving a reduction of 9 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (UNAUDITED) approximately $4.1 million which correlates to Texas rates that may be subject to reduction on a proportional basis, as discussed below; (ii) a 30-month moratorium on rate increases or decreases in New Mexico; (iii) the elimination of the need for future fuel reconciliations by incorporating the existing fixed fuel factor into rates, which, depending on future accounting analysis, could result in the Company writing off the book value of unrecovered fuel costs in New Mexico, which amounted to approximately $5.5 million as of June 30, 1998; (iv) a degree of ratemaking certainty for the future by reducing the net value of certain assets for ratemaking purposes, but with no effect on book values, by approximately $40 million on a New Mexico jurisdictional basis, and supporting the position that the Company is entitled to 100% recovery of such revalued assets; and (v) the ability to enter into long-term rate contracts with commercial and industrial customers in New Mexico. The New Mexico Commission has scheduled a hearing for August 28, 1998 to consider the approval of the New Mexico Settlement. At this time, only Las Cruces has filed an opposition to the New Mexico Settlement. The New Mexico Settlement will become effective on the later of October 1, 1998 or thirty days after approval by the New Mexico Commission. Although the Company cannot be certain the New Mexico Commission will approve the New Mexico Settlement, the Company considers such approval to be likely. The Company has structured the New Mexico Settlement so as to reduce the likelihood of additional rate reductions during the moratorium period. However, in light of the regulatory framework in New Mexico and the movement of the industry toward competition, there can be no assurance that the Company will be able to maintain its rates at their new levels following implementation of the New Mexico Settlement. TEXAS RATE MATTERS The Company's rates for its Texas customers are governed by a rate order entered by the Texas Commission in Docket 12700 (the "Agreed Order") adopting and setting rates consistent with the Rate Stipulation. Under the Agreed Order and Rate Stipulation, the base rates for most customers in Texas were fixed for ten years beginning in August 1995 (the "Freeze Period") at rates that the Texas Commission determined were just and reasonable. Further, the signatories to the Rate Stipulation (other than the General Counsel, the Texas Office of Public Utility Counsel and the State of Texas) agreed not to seek to initiate an inquiry into the reasonableness of the Company's rates during the Freeze Period and to support the Company's entitlement to rates at the freeze level throughout the Freeze Period. The Company believes that it has substantial legal arguments that would prevent any attempt by the Texas Commission to reduce the Company's rates in Texas. However, the Company has stated that, to the extent rates are reduced pursuant to the negotiated New Mexico Settlement, it intends to seek proportional decreases in its Texas jurisdiction. The Company has contacted the Texas Commission and the City of El Paso regarding such reductions. Upon approval of the New Mexico Settlement by the New Mexico Commission, the Company will proceed to negotiate and implement lower rates in Texas. While the Company intends to reduce rates proportionately to the New Mexico Settlement, the exact amount of any such reduction cannot be predicted at this time. The amount of proportional Texas revenues that would be subject to reduction represents approximately four times the corresponding New Mexico revenues. 10 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (UNAUDITED) FEDERAL REGULATORY MATTERS In September 1996, one of the wholesale power marketers that submitted a bid in 1996 to the Comision Federal de Electricidad de Mexico ("CFE") for the supply of power during 1997 to Ciudad Juarez, Mexico, filed a complaint against the Company with the Federal Energy Regulatory Commission ("FERC"). The complaint sought emergency relief and requested the FERC to direct the Company to enter into an agreement to provide firm point-to-point transmission service to the CFE under the Company's open access transmission tariff. In April 1998, the FERC issued its order in this proceeding, finding that the Department of Energy has the authority, which has now been delegated to the FERC, to require the Company to provide open access transmission service, upon a finding that so doing would be in the public interest. Accordingly, the FERC has ordered the Company to revise its open access transmission tariff to provide non-discriminatory open access transmission service over the United States portion of the lines connecting the Company's Diablo and Ascarate substations in the United States with the Insurgentes and Riverena substations in Mexico. There are currently no pending transmission requests for cross-border transactions. C. COMMITMENTS AND CONTINGENCIES For a full discussion of commitments and contingencies, including environmental matters related to the Company, see Note H of Notes to Financial Statements in the 1997 Form 10-K. In addition, see Note C of Notes to Financial Statements in the 1997 Form 10-K for a full discussion of matters related to Palo Verde, including decommissioning and the operation of steam generators. PALO VERDE LIABILITY AND INSURANCE MATTERS The Palo Verde Participants have public liability insurance against nuclear energy hazards up to the full limit of liability under federal law. The insurance consists of $200 million of primary liability insurance provided by commercial insurance carriers, with the balance being provided by an industry- wide retrospective assessment program, pursuant to which industry participants would be required to pay an assessment to cover any loss in excess of $200 million. Following a periodic inflation adjustment by the Nuclear Regulatory Commission ("NRC"), effective August 20, 1998, the maximum assessment per reactor for each nuclear incident will increase to approximately $88.1 million from approximately $79.2 million, subject to an annual limit of $10 million per incident. Based upon the Company's 15.8% interest in Palo Verde, the Company's maximum potential assessment per incident will increase to approximately $41.8 million from approximately $37.6 million for all three units with an annual payment limitation of approximately $4.7 million. The Palo Verde Participants maintain "all risk" (including nuclear hazards) insurance for property damage to, and decontamination of, property at Palo Verde in the aggregate amount of $2.7 billion, a 11 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (UNAUDITED) substantial portion of which must first be applied to stabilization and decontamination. Finally, the Company has obtained insurance against a portion of any increased cost of generation or purchased power which may result from an accidental outage of any of the three Palo Verde units if the outage exceeds 23 weeks. D. LITIGATION For a full discussion of litigation, see Note I of Notes to Financial Statements in the 1997 Form 10-K. LITIGATION WITH LAS CRUCES Las Cruces is attempting to replace the Company as the electric service provider to the city by acquiring, through condemnation or a negotiated purchase, the distribution assets and other facilities used to provide electric service to customers in Las Cruces. Sales to customers in Las Cruces represent approximately 8% of the Company's annual operating revenues. 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 as to 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 issuing a ruling, the New Mexico State 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. In February 1998, the New Mexico Supreme Court ruled that the subsequent legislation rendered moot the certified question before the Supreme Court. The Supreme Court also left questions about the validity of the new legislation to be decided in other proceedings. In April 1998, the Federal Magistrate ruled that Las Cruces' existing declaratory judgment action was moot as a result of the new legislation, but did not address any challenge to the new legislation. In May 1998, the Company filed a lawsuit in New Mexico federal district court seeking a declaration that the recent New Mexico legislation purporting to give Las Cruces the authority to condemn the Company's distribution system is unconstitutional and invalid. Las Cruces answered the declaratory judgment action and filed a counterclaim alleging that the Company has been unjustly enriched by its refusal to pay Las Cruces a franchise fee since 1994. The Company has filed a motion to stay the counterclaim since the unjust enrichment issue has been litigated and appealed in another proceeding and a ruling from the federal appellate court on such proceeding is expected soon. 12 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (UNAUDITED) In February 1998, the Company received notice from Las Cruces of its intent to file a condemnation action in New Mexico district court. In accordance with the procedures required by the New Mexico Eminent Domain Code, a panel of three appraisers was appointed to arrive at a fair compensation value for the Company's distribution facilities in question. The appraisers valued the property between $36 million and $60 million . On July 9, 1998, Las Cruces submitted to the Company a proposal by which Las Cruces would pay the Company $36 million for the local distribution facilities if the Company would agree to the resolution of certain other issues. On July 20, 1998, the Company rejected Las Cruces' offer and noted that the Company believes the offer to be deficient under the law. The New Mexico Eminent Domain Code provides that, if Las Cruces' offer is ruled sufficient, Las Cruces would then be allowed to file a condemnation suit in state district court. The Company expects Las Cruces to do so. At this time, the Company cannot predict the outcome of any such suit which may be filed. 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 an agreement granting SPS the right to provide all of the electric power and energy required by Las Cruces if it succeeds in its efforts to obtain the Company's distribution system. 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 has 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 to SPS electric utility assets acquired through condemnation. 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 obtain 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 of 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 Company filed an appeal with the New Mexico Court of Appeals and Las Cruces requested an expedited ruling from the Court of Appeals. In August 1997, the New Mexico Court of Appeals certified to the New Mexico Supreme Court the issues related to Las Cruces' authority to issue the revenue bonds. Oral argument before the Supreme Court was held in November 1997. 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 while receiving certain transmission services from the Company. Las Cruces subsequently filed a request at the FERC for a summary determination that Las Cruces 13 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (UNAUDITED) would have no stranded cost obligation to the Company or, in the alternative, that the FERC convene a hearing to establish the amount of any stranded costs. An evidentiary hearing was held before an administrative law judge of the FERC in February 1998 on the issues of (i) whether the Company has met the "reasonable expectation" standard so as to justify recovery of stranded costs from Las Cruces, and (ii) if so, the amount of stranded costs that the Company may recover from Las Cruces. The Company submitted evidence in that proceeding showing it was entitled to recover stranded generation costs from Las Cruces of $101 million. In contrast, the FERC staff recommended that the Company be permitted to recover stranded costs of $31.8 million, and Las Cruces claimed that its stranded cost obligation was in the range of $0 to $17.4 million. On June 25, 1998, the administrative law judge of the FERC issued an Initial Decision recommending that Las Cruces pay to the Company $30.4 million for stranded costs if Las Cruces chose to leave the Company's system as of July 1, 1998. The amount recommended by the administrative law judge would decline over time based on when, if ever, Las Cruces leaves the Company's system. The administrative law judge's Initial Decision is not binding on the FERC. The Company believes the administrative law judge's Initial Decision is inconsistent with the intent and policy of FERC Order No. 888, which establishes the right to full recovery of a utility's stranded generation cost. The Company continues to believe it is entitled to full compensation for the costs it incurred with the expectation of continuing to serve Las Cruces and will contest the administrative law judge's Initial Decision before the FERC and, if necessary, on appeal. See Note B of Notes to Financial Statements in the 1997 Form 10-K for a full discussion of stranded costs. 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. Las Cruces has approved a contract with SPS to provide operation and maintenance services for the proposed Las Cruces electric distribution system, substations and associated transmission facilities. 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 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. 14 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 as of June 30, 1998, the related condensed statements of operations and comprehensive operations for the three months, six months and twelve months ended June 30, 1998 and 1997, and the related condensed statements of cash flows for the six months ended June 30, 1998 and 1997. These condensed financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed financial statements referred to above for them to be in conformity with 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, 1997, and the related statements of operations, comprehensive operations, changes in common stock equity, and cash flows for the year then ended (not presented herein); and in our report dated February 6, 1998, 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, 1997, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. /s/ KPMG Peat Marwick LLP El Paso, Texas July 24, 1998 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information contained in this Item 2 updates, and should be read in conjunction with, the information set forth in Part II, Item 7 of the Company's 1997 Form 10-K. Statements in this document, other than statements of historical information, are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, as well as other oral and written forward-looking statements made by or on behalf of the Company from time to time, including statements contained in the Company's filings with the Securities and Exchange Commission and its reports to shareholders, involve known and unknown risks and other factors which may cause the Company's actual results in future periods to differ materially from those expressed in any forward-looking statements. Any such statement is qualified by reference to the risks and factors discussed below under the headings "Operational 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 PROSPECTS AND CHALLENGES The Rate Stipulation has provided the Company with a stable base of retail revenues in Texas during a period in which the Company has substantially reduced its fixed obligations. The Company has entered into the New Mexico Settlement to achieve a similar level of certainty in its New Mexico rates. As discussed below, the New Mexico Settlement includes a reduction of $5 million, approximately $4.1 million of which correlates to Texas rates that may be subject to reduction on a proportional basis. If the New Mexico Settlement is approved, the Company intends to seek proportional decreases in its Texas jurisdiction, where revenues that would be subject to reduction represent approximately four times the corresponding New Mexico revenues. In return, the Company believes that it will have achieved in both Texas and New Mexico a new period of revenue stability at levels that will permit it to further reduce its debt and other high coupon obligations while preparing for deregulation and competition. During this period, the Company's strategic goals include (i) serving the growing need for electricity within its retail service territory; (ii) continuing to focus on its strategic location on the border with Mexico; (iii) enhancing long-term relationships with its largest retail customers; (iv) continuing to reduce operating costs; and (v) developing an energy-related services business. The New Mexico Settlement, which was entered into on July 15, 1998 among the Company and all other parties to the pending New Mexico rate case other than Las Cruces, provides for: (i) a total jurisdictional base revenue reduction of $5 million, which amount includes a discount for low income residential customers (approximately $0.4 million) and a reduction for two large contract customers (approximately $0.5 million), both of which represent benefits already in place in Texas, leaving a reduction of approximately $4.1 million which correlates to Texas rates that may be subject to reduction on a proportional basis; (ii) a 30- month moratorium on rate increases or decreases in New Mexico; (iii) the elimination of the need for future fuel reconciliations by incorporating the existing fixed fuel factor into rates, which, depending on future accounting analysis, could result in the Company writing off the book value of unrecovered fuel costs in New Mexico, which amounted to approximately $5.5 million as of June 30, 1998; (iv) a degree of ratemaking certainty for the future by reducing the net 16 value of certain assets for ratemaking purposes, but with no effect on book values, by approximately $40 million on a New Mexico jurisdictional basis, and supporting the position that the Company is entitled to 100% recovery of such revalued assets; and (v) the ability to enter into long-term rate contracts with commercial and industrial customers in New Mexico. The New Mexico Commission has scheduled a hearing for August 28, 1998 to consider the approval of the New Mexico Settlement. At this time, only Las Cruces has filed an opposition to the New Mexico Settlement. The New Mexico Settlement will become effective on the later of October 1, 1998 or thirty days after approval by the New Mexico Commission. Although the Company cannot be certain the New Mexico Commission will approve the New Mexico Settlement, the Company considers such approval to be likely. The Company has structured the New Mexico Settlement so as to reduce the likelihood of additional rate reductions during the moratorium period. However, in light of the regulatory framework in New Mexico and the movement of the industry toward competition, there can be no assurance that the Company will be able to maintain its rates at their new levels following implementation of the New Mexico Settlement. The Company faces a number of other challenges which could negatively impact its operations and financial results. The primary challenge is the risk of increased costs, including the risk of additional or unanticipated costs at Palo Verde resulting from (i) increases in operation and maintenance expenses; (ii) the possible replacement of steam generators; (iii) an extended outage of any of the Palo Verde units; (iv) increases in estimates of decommissioning costs; (v) the storage of radioactive materials; and (vi) compliance with the various requirements and regulations governing commercial nuclear generating stations. At the same time, the Company's revenues will also be reduced from current levels as a result of the New Mexico Settlement, if approved, and any related voluntary reductions in Texas rates which may follow. There can be no assurance that the Company's revenues will be sufficient to recover any increased costs, including any such increased costs in connection with Palo Verde or increases in other costs of operation, whether as a result of higher than anticipated levels of inflation, changes in tax laws or regulatory requirements, or other causes. Another risk to the Company's operations is the potential loss of customers. The Company's wholesale and large retail customers have, in varying degrees, additional alternate sources of economical power, including co-generation of electric power. For example, a 504 MW combined-cycle generating plant located in Samalayuca, Chihuahua, which is scheduled to be fully operational by the end of 1998, when the Company's current power contract expires, will give the CFE the current capacity to supply electricity to portions of northern Chihuahua, including the geographic area currently served by the Company. 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. The New Mexico State Legislature has passed legislation which gives Las Cruces the apparent legal authority to condemn the Company's distribution system and related assets located within its city limits, and the Company has received notice from Las Cruces of its intent to file an eminent domain proceeding. If Las Cruces succeeds in its efforts, the Company could lose its Las Cruces customer base, which currently represents approximately 8% of annual operating revenues, although the Company would receive "just compensation" as established by the court. 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 contract with Ft. Bliss in August 1996, under which Ft. Bliss will take service from the Company through 1999, with the right thereafter to continue service on a year-to-year basis for two years. The Company has a contract to 17 provide retail electric service to Holloman for a ten-year term which began in December 1995. In August 1996, the Army advised the Company that White Sands would continue to purchase retail electric service from the Company pursuant to the existing retail service contract for an indefinite period. The Army will provide the Company written notice of termination of such contract not less than one year in advance of the termination date. The Company faces the same concerns as most other companies that use computers relating to the Year 2000 problem. The problem is that many computer applications do not correctly differentiate a one year difference between the years 1999 and 2000. Applications that are date sensitive may not properly calculate information or may not function. The Company began working on the Year 2000 computer concern during the last quarter of 1996. To allow adequate time for additional testing and correction, the Company is attempting to either (i) revise current computer systems to be Year 2000 compliant, or (ii) replace systems with new ones that are Year 2000 compliant by the end of 1998. Incremental costs of the project are anticipated to be immaterial as the Company is using internal resources to modify and test programs. The Company anticipates spending approximately $1.8 million to revise current computer systems and is expensing such amount as incurred. Because of the integrated nature of the Company's business with other utilities and its joint facilities operated by other utilities, the Company is inquiring about and reviewing the activities of the other utilities which comprise the integrated system. In addition, the Company is inquiring about and assessing the activities of its financial institutions and major suppliers and customers to determine their compliance with Year 2000 issues. Given the complex nature of this problem and the potential overlap with systems beyond the Company's control, the Company cannot assure that it will not experience some difficulty relating to the Year 2000 problem. Finally, the electric utility industry in general is facing significant challenges and increased competition as a result of changes in federal provisions relating to third-party transmission services and independent power production, as well as potential changes in state regulatory provisions relating to wholesale and retail service. Both the Texas and New Mexico Commissions have conducted proceedings related to industry restructuring and stranded cost recovery; however, restructuring legislation has yet to be passed in either state. The potential effects of deregulation are particularly important to the Company because its rates are significantly higher than the national and regional averages. In the face of increased competition, there can be no assurance that such competition will not adversely affect the future operations, cash flow and financial condition of the Company. LIQUIDITY AND CAPITAL RESOURCES The Company's principal liquidity requirements through the end of the decade are expected to consist of interest and principal payments on the Company's indebtedness and capital expenditures related to the Company's generating facilities and transmission and distribution systems. The Company expects that cash flows from operations will be sufficient for such purposes. Long-term capital requirements of the Company will consist primarily of construction of electric utility plant, 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 18 updating the transmission and distribution systems and the cost of betterments and improvements to Palo Verde and other generating facilities. The Company anticipates that internally generated funds will be sufficient to meet its construction requirements, provide for the retirement of debt and redemption of preferred stock 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 June 30, 1998, the Company had approximately $137.2 million in cash and cash equivalents. 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 June 30, 1998, approximately $50.8 million had been drawn for nuclear fuel purchases. No amounts have been drawn on this facility for working capital needs. The Company has a high debt-to-capitalization ratio and significant debt service obligations. Due to the Rate Stipulation, the New Mexico Settlement and competitive pressures, the Company does not expect to be able to raise its rates in the event of increases in nonfuel 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 June 30, 1998, the Company repurchased approximately $231.3 million of first mortgage bonds as part of an aggressive deleveraging program and has reduced its annual interest expense by approximately $18.0 million. Long-term indebtedness as a percentage of capitalization was reduced from 74% at June 30, 1996 to 64% at June 30, 1998. The Company continues to believe that the orderly reduction of debt with a goal of achieving a capital structure that is more typical in the electric utility industry and, ultimately, an investment grade rating, is a significant component of long-term shareholder value creation. Accordingly, the Company will regularly evaluate market conditions and, when appropriate, use a portion of its available cash to reduce its fixed obligations through open market purchases of first mortgage bonds. 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, early redemption of 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, the early redemption 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. 19 RESULTS OF OPERATIONS
NET INCOME APPLICABLE DILUTED EARNINGS PER TO COMMON STOCK BEFORE COMMON SHARE BEFORE EXTRAORDINARY ITEM EXTRAORDINARY ITEM ------------------------------ ------------------------------ 1998 1997 1998 1997 -------------- -------------- -------------- -------------- (IN THOUSANDS) Three Months Ended June 30.................... $10,071 $13,007 $0.166 $0.216 Six Months Ended June 30...................... 17,063 15,450 0.282 0.256 Twelve Months Ended June 30................... 42,933 40,141 0.710 0.666
Operating revenues net of energy expenses increased $0.5 million, $4.2 million and $6.5 million for the three, six and twelve months ended June 30, 1998 compared to the same periods last year, primarily due to increased KWH sales. The twelve-month increase was partially offset by decreased revenue per KWH from the CFE. Comparisons of KWH sales and operating revenues are shown below (In thousands):
THREE MONTHS ENDED JUNE 30: INCREASE/(DECREASE) - --------------------------- -------------------------- 1998 1997 AMOUNT PERCENT ---- ---- ---------- ----------- Electric KWH Sales: Retail Customers........................ 1,439,329 1,408,345 30,984 2.2% Other Utilities......................... 469,239 498,233 (28,994) (5.8) ---------- ---------- ---------- Total.................................. 1,908,568 1,906,578 1,990 0.1 ========== ========== ========== Operating Revenues: Retail Customers........................ $ 121,396 $ 120,002 $ 1,394 1.2% Other Utilities......................... 25,007 24,273 734 3.0 ---------- ---------- ---------- Total.................................. $ 146,403 $ 144,275 $ 2,128 1.5 ========== ========== ========== SIX MONTHS ENDED JUNE 30: INCREASE/(DECREASE) - ------------------------- -------------------------- 1998 1997 AMOUNT PERCENT ---- ---- ---------- ----------- Electric KWH Sales: Retail Customers........................ 2,765,403 2,680,074 85,329 3.2% Other Utilities......................... 928,573 882,989 45,584 5.2 ---------- ---------- ---------- Total.................................. 3,693,976 3,563,063 130,913 3.7 ========== ========== ========== Operating Revenues: Retail Customers........................ $ 232,135 $ 233,315 $ (1,180) (0.5)% Other Utilities......................... 51,213 46,817 4,396 9.4 ---------- ---------- ---------- Total.................................. $ 283,348 $ 280,132 $ 3,216 1.1 ========== ========== ========== TWELVE MONTHS ENDED JUNE 30: INCREASE/(DECREASE) - ---------------------------- -------------------------- 1998 1997 AMOUNT PERCENT ---- ---- ---------- ----------- Electric KWH Sales: Retail Customers........................ 5,869,776 5,635,437 234,339 4.2% Other Utilities......................... 1,943,469 1,813,497 129,972 7.2 ---------- ---------- ---------- Total.................................. 7,813,245 7,448,934 364,311 4.9 ========== ========== ========== Operating Revenues: Retail Customers........................ $ 496,688 $ 486,344 $ 10,344 2.1% Other Utilities......................... 100,566 103,467 (2,901) (2.8) ---------- ---------- ---------- Total.................................. $ 597,254 $ 589,811 $ 7,443 1.3 ========== ========== ==========
20 Other operations and maintenance expense decreased $0.7 million for the three months ended June 30, 1998 compared to the same period last year as a result of decreased maintenance expense of $1.1 million partially offset by an increase of $0.4 million in operations expense. The decreased maintenance expense was primarily due to a $1.3 million decrease in maintenance costs at Company-owned generating plants offset in part by a $0.2 million increase in maintenance expense at Palo Verde due to the timing and duration of refueling and maintenance outages. The increased operations expense was primarily due to a $0.8 million increase in professional fees related to regulatory issues offset in part by a $0.4 million decrease in outside services cost. Other operations and maintenance expense decreased $0.3 million for the six months ended June 30, 1998 compared to the same period last year as a result of decreased maintenance expense of $2.3 million partially offset by an increase of $2.0 million in operations expense. The decreased maintenance expense was primarily due to a $2.0 million decrease in maintenance costs at Company-owned generating plants and decreased maintenance expense of $0.3 million at Palo Verde due to the timing and duration of refueling and maintenance outages. The increased operations expense was primarily due to (i) a $1.7 million increase in professional fees related to regulatory issues; (ii) the receipt of a damage claim of $0.8 million in 1997 with no comparable amount in 1998; and (iii) an additional accrual for sick leave of $0.7 million. These increases were offset in part by the receipt of wheeling refunds of $0.6 million in 1998 and a $0.4 million decrease in outside services cost. Other operations and maintenance expense decreased $2.4 million for the twelve months ended June 30, 1998 compared to the same period last year as a result of decreased maintenance expense of $5.6 million partially offset by an increase of $3.2 million in operations expense. The decreased maintenance expense was primarily due to a $4.7 million decrease in maintenance costs at Company-owned generating plants. The increased operations expense was primarily due to a $3.2 million increase in professional fees related to regulatory issues and a $2.2 million all employee cash bonus in December 1997 offset in part by a $2.4 million decrease in operations expense at Palo Verde. Depreciation and amortization expense was essentially unchanged for the three, six and twelve months ended June 30, 1998 compared to the same periods last year. Taxes other than income taxes increased $0.3 million, $0.6 million and $3.1 million for the three, six and twelve months ended June 30, 1998, respectively, compared to the same periods last year, primarily due to increases in (i) Texas property taxes resulting from changes in regulatory operating income; (ii) payroll taxes related to the all employee cash bonus in 1997; and (iii) revenue related state taxes resulting from an increase in income. The increase for the twelve-month period was also due to a 1996 Arizona property tax reduction, resulting from a change of law, which was recorded in the last six months of 1996. The increases for the three and six-month periods were partially offset by a decrease in Arizona property taxes resulting from a 1996 regulatory-basis plant write-down and decreased depreciation. Other income decreased $6.9 million, $4.3 million and $7.6 million for the three, six and twelve months ended June 30, 1998, respectively, compared to the same periods last year, primarily due to a favorable litigation settlement in June 1997 of $7.5 million, net of legal fees and expenses, with no comparable amount in the current periods. The twelve-month decrease was also due to a gain on sale of investment of $3.8 million in August 1996. These decreases were partially offset by increased investment income of $1.3 million, $2.9 million and $4.3 million, respectively, due to increased levels of cash. 21 Interest charges decreased $1.3 million, $3.3 million and $8.4 million for the three, six and twelve months ended June 30, 1998, respectively, 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. Income tax expense decreased $2.4 million for the three months ended and increased $2.4 million for the twelve months ended June 30, 1998, respectively, compared to the same periods last year, primarily due to changes in pretax income and certain permanent differences. Income tax expense was essentially unchanged for the six months ended June 30, 1998 compared to the same period last year primarily due to changes in pretax income which were offset by permanent differences such as bankruptcy fee settlements and tax exempt income. Extraordinary loss on repurchases of debt for the three, six and twelve months ended June 30, 1997 represents the payment of premiums on debt repurchased and the recognition of unamortized issuance expenses on that debt of $0.4 million, $2.7 million and $2.7 million, net of federal income tax benefit of $0.2 million, $1.4 million and $1.4 million, respectively, with no comparable amounts for the same periods in 1998. Allowance for doubtful accounts decreased $2.8 million as of June 30, 1998 compared to December 31, 1997 due to the bankruptcy settlement of a large industrial customer and the write-off of the related receivable against a specific allowance that was expensed in 1993. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Company has not engaged in any transactions involving derivative instruments nor any hedging activities in the current or prior years. Accordingly, the implementation of the new accounting standard currently is not expected to have a material effect on the Company's financial statements. 22 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company hereby incorporates by reference the information set forth in Part I of this report under Note D of Notes to Financial Statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of shareholders of the Company was held May 29, 1998. The following directors were elected to hold office for a three-year term expiring at the annual meeting of shareholders of the Company to be held in 2001:
DIRECTOR VOTES FOR VOTES AGAINST -------- --------- ------------- Wilson K. Cadman 58,079,221 84,475 James A. Cardwell 58,090,064 73,632 James W. Cicconi 57,861,603 302,093 Patricia Z. Holland-Branch 58,091,106 72,590
In addition to the individuals set forth above, the following individuals continued as directors following the meeting: George W. Edwards, Jr., Ramiro Guzman, Stephen Wertheimer, Charles A. Yamarone, James W. Harris, Kenneth R. Heitz, Michael K. Parks, Eric B. Siegel and James S. Haines, Jr. No other matters were voted on at the annual meeting of shareholders. ITEM 5. OTHER MATTERS On July 10, 1998, the NRC issued a Notice of Violation and Proposed Imposition of Civil Penalty in the amount of $50,000 regarding a 1993 event at the Palo Verde Nuclear Generating Station. Three violations were cited which were issued as a single Level III Violation by the NRC (on a scale of I to V, with Level I being the most severe). Subsequent to an anonymous allegation made to the NRC, it was determined that in March 1993, licensed operators improperly recorded the time for performance of a surveillance test as being several hours before it was actually accomplished. As a result, inaccurate records existed at the station which resulted in the failure to report to the NRC that the surveillance test had not been conducted within the required time frame. The NRC requires that Arizona Public Service Company respond to the Notice of Violation and pay the proposed civil penalty within 30 days. The Company's portion of the penalty will be $7,900. 23 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: See Index to Exhibits incorporated herein by reference. (b) Reports on Form 8-K: None 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EL PASO ELECTRIC COMPANY By: /s/ Gary R. Hedrick --------------------------------------- Gary R. Hedrick Vice President, Chief Financial Officer and Treasurer (Duly Authorized Officer and Principal Financial Officer) Dated: August 5, 1998 25
EL PASO ELECTRIC COMPANY INDEX TO EXHIBITS Exhibit Number Exhibit ------ ------- 11 Statement re Computation of Per Share Earnings 15 Letter re Unaudited Interim Financial Information 27 Financial Data Schedule (EDGAR filing only) +99.01 Form of Stock Option Agreement between the Company and certain directors of the Company. + Twelve agreements, substantially identical in all material respects to this Exhibit, have been entered into with Wilson K. Cadman; James A. Cardwell; James W. Cicconi; George W. Edwards, Jr.; Ramiro Guzman; Kenneth Heitz; James W. Harris; Patricia Z. Holland-Branch; Michael K. Parks; Eric B. Siegel; Stephen Wertheimer; and Charles Yamarone, directors of the Company.
26 EX-11 2 STATEMENT RE COMPUTATION PER SHARE EARNINGS EXHIBIT 11 EL PASO ELECTRIC COMPANY COMPUTATION OF EARNINGS PER SHARE (IN THOUSANDS EXCEPT FOR SHARE DATA)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- --------------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ------------ NET INCOME APPLICABLE TO COMMON STOCK: Income before extraordinary loss on repurchases of debt $ 10,071 $ 13,007 $ 17,063 $ 15,450 Extraordinary loss on repurchases of debt, net of federal income tax benefit - (427) - (2,671) ------------ ------------ ------------ ------------ Net income applicable to common stock $ 10,071 $ 12,580 $ 17,063 $ 12,779 ============ ============ ============ ============ BASIC EARNINGS PER COMMON SHARE: Weighted average number of common shares outstanding 60,169,436 60,129,784 60,167,618 60,121,729 ============ ============ ============ ============ Net income per common share: Income before extraordinary loss on repurchases of debt $ 0.167 $ 0.216 $ 0.284 $ 0.257 Extraordinary loss on repurchases of debt, net of federal income tax benefit - (0.007) - (0.044) ------------ ------------ ------------ ------------ Net income $ 0.167 $ 0.209 $ 0.284 $ 0.213 ============ ============ ============ ============ DILUTED EARNINGS PER COMMON SHARE: Weighted average number of common shares outstanding 60,169,436 60,129,784 60,167,618 60,121,729 ------------ ------------ ------------ ------------ Effect of dilutive potential common stock options based on the treasury stock method using average market price: Quarter ended March 31 - - 262,998 220,087 Quarter ended June 30 538,986 177,747 538,986 177,747 Effect of dilutive potential restricted common stock based on the treasury stock method using average market price: Quarter ended March 31 - - 16,434 16,596 Quarter ended June 30 29,033 20,014 29,033 20,014 ------------ ------------ ------------ ------------ 568,019 197,761 847,451 434,444 Divided by number of quarters 1 1 2 2 ------------ ------------ ------------ ------------ Net effect of dilutive potential common stock 568,019 197,761 423,726 217,222 ------------ ------------ ------------ ------------ Weighted average number of common shares and dilutive potential common shares outstanding 60,737,455 60,327,545 60,591,344 60,338,951 ============ ============ ============ ============ Net income per common share: Income before extraordinary loss on repurchases of debt $ 0.166 $ 0.216 $ 0.282 $ 0.256 Extraordinary loss on repurchases of debt, net of federal income tax benefit - (0.007) - (0.044) ------------ ------------ ------------ ------------ Net income $ 0.166 $ 0.209 $ 0.282 $ 0.212 ============ ============ ============ ============
EXHIBIT 11 EL PASO ELECTRIC COMPANY COMPUTATION OF EARNINGS PER SHARE (IN THOUSANDS EXCEPT FOR SHARE DATA) TWELVE MONTHS ENDED JUNE 30, ---------------------------- 1998 1997 ------------ ------------ NET INCOME APPLICABLE TO COMMON STOCK: Income before extraordinary loss on repurchases of debt $ 42,933 $ 40,141 Extraordinary loss on repurchases of debt, net of federal income tax benefit - (2,671) ------------ ------------ Net income applicable to common stock $ 42,933 $ 37,470 ============ ============ BASIC EARNINGS PER COMMON SHARE: Weighted average number of common shares outstanding 60,151,260 60,100,684 ============ ============ Net income per common share: Income before extraordinary loss on repurchases of debt $ 0.714 $ 0.668 Extraordinary loss on repurchases of debt, net of federal income tax benefit - (0.044) ------------ ------------ Net income $ 0.714 $ 0.624 ============ ============ DILUTED EARNINGS PER COMMON SHARE: Weighted average number of common shares outstanding 60,151,260 60,100,684 ------------ ------------ Effect of dilutive potential common stock options based on the treasury stock method using average market price: Quarter ended March 31 262,998 220,087 Quarter ended June 30 538,986 177,747 Quarter ended September 30 134,451 36,147 Quarter ended December 31 182,844 37,807 Effect of dilutive potential restricted common stock based on the treasury stock method using average market price: Quarter ended March 31 16,434 16,596 Quarter ended June 30 29,033 20,014 Quarter ended September 30 23,717 21,246 Quarter ended December 31 32,036 21,316 ------------ ------------ 1,220,499 550,960 Divided by number of quarters 4 4 ------------ ------------ Net effect of dilutive potential common stock 305,125 137,740 ------------ ------------ Weighted average number of common shares and dilutive potential common shares outstanding 60,456,385 60,238,424 ============ ============ Net income per common share: Income before extraordinary loss on repurchases of debt $ 0.710 $ 0.666 Extraordinary loss on repurchases of debt, net of federal income tax benefit - (0.044) ------------ ------------ Net income $ 0.710 $ 0.622 ============ ============ EX-15 3 LETTER RE UNAUDITED INTERIM FINANCIAL INFO 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 July 24, 1998 related to our review of interim financial information. Pursuant to Rule 436(c) under the Securities Act of 1933, such a report is not considered part of the registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of sections 7 and 11 of the Act. Very truly yours, /s/ KPMG Peat Marwick LLP El Paso, Texas July 24, 1998 EX-27 4 FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET OF EL PASO ELECTRIC COMPANY AS OF JUNE 30, 1998 AND THE RELATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 PER-BOOK 1,439,716 0 245,731 91,682 25,440 1,802,569 60,272 240,585 86,749 387,606 128,329 0 872,258 0 0 0 36,120 0 27,702 27,038 323,516 1,802,569 283,348 12,895 208,690 221,585 61,763 3,449 65,212 41,002 24,210 7,147 17,063 0 73,532 93,226 0.284 0.282 PRIMARY AND FULLY DILUTED EARNINGS PER SHARE ARE NO LONGER BEING CALCULATED, PER SFAS NO. 128. THE AMOUNTS SHOWN REPRESENT BASIC AND DILUTED EARNINGS PER SHARE, RESPECTIVELY.
EX-99.01 5 STOCK OPTION AGREEMENT COMPANY AND DIRECTORS EXHIBIT 99.01 Page 1 of 6 EL PASO ELECTRIC COMPANY STOCK OPTION AGREEMENT FOR NON-EMPLOYEE DIRECTORS (Non-Qualified Stock Options) El Paso Electric Company, a Texas corporation (the "Company"), hereby grants to __________________ (the "Optionee") as of May 29, 1998 (the "Option Date"), pursuant to the provisions of the El Paso Electric Company 1996 Long- Term Incentive Plan (the "Plan"), a non-qualified option (the "Option") to purchase from the Company 5,000 shares of its Common Stock, no par value ("Stock") at the price of $9.50 per share, upon and subject to the terms and conditions set forth below. 1. Options Subject to Acceptance of Agreement. The Options shall be null and void unless the Optionee shall accept this Agreement by executing it in the space provided below and returning such original execution copy to the Company. 2. Time and Manner of Exercise of Option. 2.1. Maximum Term of Option. In no event may the Options be exercised, in whole or in part, after May 29, 2008 (the "Expiration Date"). 2.2. Exercise of Options. (a) The Options are fully exercisable from and after the date hereof. (b) If the Optionee shall cease for any reason to serve as a Director of the Company, the Options may thereafter be exercised by the Optionee or the Optionee's Legal Representative or Permitted Transferees, as the case may be, until and including the earliest to occur of (i) the date which is 120 days after the termination of such person's service on the Board and (ii) the Expiration Date. 2.3 Method of Exercise. Subject to the limitations set forth in this Agreement, the Options may be exercised by the Optionee (1) by giving written notice to the Company specifying the Option or Options being exercised, and the number of whole shares of Stock to be purchased and accompanied by payment therefor in full (or arrangement made for such payment to the Company's satisfaction) either (i) in cash, (ii) by delivery of previously owned whole shares of Stock (which the Optionee has held for at least six months prior to the delivery of such shares or which the Optionee purchased on the open market and for which the Optionee has good title, free and clear of all liens and encumbrances) having a Fair Market Value, determined as of the date of exercise, equal to the aggregate purchase price payable pursuant to the Option by reason of such exercise, (iii) in cash by a broker-dealer acceptable to the Company to whom the Optionee has submitted an irrevocable notice of exercise, (iv) a combination of (i) and (ii), and (2) by executing such documents as the Company may reasonably request. The Committee may disapprove an election pursuant to any of clauses (ii) - (iv) if the Committee determines, based on the opinion of recognized securities counsel, that the method of exercise so elected would result in liability to the Optionee under Section 16(b) of the Securities Exchange Act of 1934, as amended (the Page 2 of 6 "Exchange Act"), or the regulations promulgated thereunder. Any fraction of a share of Stock which would be required to pay such purchase price shall be disregarded and the remaining amount due shall be paid in cash by the Optionee. No certificate representing a share of Stock shall be delivered until the full purchase price therefor has been paid. 2.4 Termination of Options. (a) In no event may an Option be exercised after it terminates as set forth in this Section 2.4. The Option shall terminate, to the extent not exercised pursuant to Section 2.3 or earlier terminated pursuant to Section 2.2, on the Expiration Date. (b) In the event that rights to purchase all or a portion of the shares of Stock subject to the Option expire or are exercised, cancelled or forfeited, the Optionee shall, upon the Company's request, promptly return this Agreement to the Company for full or partial cancellation, as the case may be. Such cancellation shall be effective regardless of whether the Optionee returns this Agreement. If the Optionee continues to have rights to purchase shares of Stock hereunder, the Company shall, within 10 days of the Optionee's delivery of this Agreement to the Company, either (i) mark this Agreement to indicate the extent to which the Option has expired or been exercised, cancelled or forfeited or (ii) issue to the Optionee a substitute option agreement applicable to such rights, which agreement shall otherwise be substantially similar to this Agreement in form and substance. 3. Additional Terms and Conditions of Option. 3.1. Nontransferability of Options. The Options may not be transferred by the Optionee other than (i) by will or the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Company or (ii) as otherwise permitted under Rule 16b-3 under the Exchange Act as may be set forth in an amendment to this Agreement. Except to the extent permitted by the foregoing sentence, during the Optionee's lifetime the Options are exercisable only by the Optionee or the Optionee's Legal Representative. Except to the extent permitted by the foregoing, the Options may not be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process. Upon any attempt to so sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose of an Option, the Option and all rights hereunder shall immediately become null and void. 3.2. Investment Representation. The Optionee hereby represents and covenants that (a) any share of Stock purchased upon exercise of the Option will be purchased for investment and not with a view to the distribution thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), unless such purchase has been registered under the Securities Act and any applicable state securities laws; (b) any subsequent sale of any such shares shall be made either pursuant to an effective registration statement under the Securities Act and any applicable state securities laws, or pursuant to an exemption from registration under the -2- Page 3 of 6 Securities Act and such state securities laws; and (c) if requested by the Company, the Optionee shall submit a written statement, in form satisfactory to the Company, to the effect that such representation (x) is true and correct as of the date of purchase of any shares hereunder or (y) is true and correct as of the date of any sale of any such shares, as applicable. As a further condition precedent to any exercise of the Option, the Optionee shall comply with all regulations and requirements of any regulatory authority having control of or supervision over the issuance or delivery of the shares and, in connection therewith, shall execute any documents which the Board or the Committee shall in its sole discretion deem necessary or advisable. 3.3. Withholding Taxes. (a) As a condition precedent to the delivery of Stock upon exercise of the Option, the Optionee may, upon request by the Company, pay to the Company in addition to the purchase price of the shares, such amount of cash as the Company may be required, under all applicable federal, state, local or other laws or regulations, to withhold and pay over as income or other withholding taxes (the "Required Tax Payments") with respect to such exercise of the Option. If the Optionee shall fail to advance the Required Tax Payments after request by the Company, the Company may, in its discretion, deduct any Required Tax Payments from any amount then or thereafter payable by the Company to the Optionee. (b) The Optionee may elect to satisfy his or her obligation to advance the Required Tax Payments by any of the following means: (1) a cash payment to the Company pursuant to Section 3.3(a), (2) delivery to the Company of previously owned whole shares of Stock (which the Optionee has held for at least six months prior to the delivery of such shares or which the Optionee purchased on the open market and for which the Optionee has good title, free and clear of all liens and encumbrances) having a Fair Market Value, determined as of the date the obligation to withhold or pay taxes first arises in connection with the Option (the "Tax Date"), equal to the Required Tax Payments, (3) authorizing the Company to withhold whole shares of Stock which would otherwise be delivered to the Optionee upon exercise of the Option having a Fair Market Value, determined as of the Tax Date, equal to the Required Tax Payments, (4) a cash payment by a broker-dealer acceptable to the Company to whom the Optionee has submitted an irrevocable notice of exercise or (5) any combination of (1), (2) and (3). The Committee may disapprove an election pursuant to any of clauses (2)-(5) if the Committee determines, based on the opinion of recognized securities counsel, that the method so elected would result in liability to the Optionee under Section 16(b) of the Exchange Act or the regulations promulgated thereunder. Shares of Stock to be delivered or withheld may not have a Fair Market Value in excess of the minimum amount of the Required Tax Payments. Any fraction of a share of Stock which would be required to satisfy any such obligation shall be disregarded and the remaining amount due shall be paid in cash by the Optionee. No certificate representing a share of Stock shall be delivered until the Required Tax Payments have been satisfied in full. 3.4 Adjustment. In the event of any stock split, stock dividend, recapitalization, reorganization, merger, consolidation, combination, exchange of -3- Page 4 of 6 shares, liquidation, spin-off or other similar change in capitalization or event, or any distribution to holders of Stock other than a regular cash dividend, the number and class of securities subject to the Options and the purchase price per security shall be appropriately adjusted by the Committee without an increase in the aggregate purchase price. If any adjustment would result in a fractional security being subject to the Options, the Company shall pay the Optionee, in connection with the first exercise of the Option, in whole or in part, occurring after such adjustment, an amount in cash determined by multiplying (i) the fraction of such security (rounded to the nearest hundredth) by (ii) the excess, if any, of (A) the Fair Market Value on the exercise date over (B) the exercise price of the Option. The decision of the Committee regarding any such adjustment shall be final, binding and conclusive. 3.5. Compliance with Applicable Law. The Options is subject to the condition that if the listing, registration or qualification of the shares subject to the Option upon any securities exchange or under any law, or the consent or approval of any governmental body, or the taking of any other action is necessary or desirable as a condition of, or in connection with, the purchase or delivery of shares hereunder, the Options may not be exercised, in whole or in part, unless such listing, registration, qualification, consent or approval shall have been effected or obtained, free of any conditions not acceptable to the Company. The Company agrees to use reasonable efforts to effect or obtain any such listing, registration, qualification, consent or approval. 3.6. Delivery of Certificates. Upon the exercise of the Option, in whole or in part, the Company shall deliver or cause to be delivered one or more certificates representing the number of shares purchased against full payment therefor. The Company shall pay all original issue or transfer taxes and all fees and expenses incident to such delivery, except as otherwise provided in Section 3.3. 3.7. Options Confer No Rights as Stockholder. The Optionee shall not be entitled to any privileges of ownership with respect to shares of Stock subject to the Option unless and until purchased and delivered upon the exercise of an Option, in whole or in part, and the Optionee becomes a stockholder of record with respect to such delivered shares; and the Optionee shall not be considered a stockholder of the Company with respect to any such shares not so purchased and delivered. 3.8. Company to Reserve Shares. The Company shall at all times prior to the expiration or termination of the Options reserve and keep available, either in its treasury or out of its authorized but unissued shares of Stock, the full number of shares subject to the Options from time to time. 3.9. Agreement Subject to the Plan. This Agreement is subject to the provisions of the Plan and shall be interpreted in accordance therewith. The Optionee hereby acknowledges receipt of a copy of the Plan. -4- Page 5 of 6 4. Miscellaneous Provisions. 4.1. Designation as Stock Option. The Option is hereby designated as not constituting an "incentive stock option" within meaning of Section 422 of the Internal Revenue Code of 1986, as amended. This Agreement shall be interpreted and treated consistently with such designation. 4.2. Meaning of Certain Terms. As used herein, the term "Legal Representative" shall include an executor, administrator, legal representative, guardian or similar person and the term "Permitted Transferee" shall include any transferee (i) pursuant to a transfer permitted under Section 6.4 of the Plan and Section 3.1 hereof or (ii) designated pursuant to beneficiary designation procedures approved by the Company. 4.3. Successors. This Agreement shall be binding upon and inure to the benefit of any successor or successors of the Company and any person or persons who shall, upon the death of the Optionee, acquire any rights hereunder in accordance with this Agreement or the Plan. 4.4. Notices. All notices, requests or other communications provided for in this Agreement shall be made, if to the Company, to Kayser Building, 100 North Stanton, El Paso, Texas 79901, Attention: Corporate Secretary, and if to the Optionee, to ___________________________. All notices, requests or other communications provided for in this Agreement shall be made in writing either (a) by personal delivery to the party entitled thereto, (b) by facsimile with confirmation of receipt, (c) by mailing in the United States mails to the last known address of the party entitled thereto or (d) by express courier service. The notice, request or other communication shall be deemed to be received upon personal delivery, upon confirmation of receipt of facsimile transmission or upon receipt by the party entitled thereto if by United States mail or express courier service; provided, however, that if a notice, request or other communication is not received during regular business hours, it shall be deemed to be received on the next succeeding business day of the Company. 4.5. Governing Law. This Agreement, the Option and all determinations made and actions taken pursuant hereto and thereto, to the extent not governed by the laws of the United States, shall be governed by the laws of the State of Texas and construed in accordance therewith without giving effect to principles of conflicts of laws. -5- Page 6 of 6 4.6. Counterparts. This Agreement may be executed in two counterparts each of which shall be deemed an original and both of which together shall constitute one and the same instrument. EL PASO ELECTRIC COMPANY By: /s/KENNETH R. HEITZ ----------------------------------------------- Name: Kenneth R. Heitz Title: Director Accepted this 29th day of May, 1998 - ----------------------------------- -6- -----END PRIVACY-ENHANCED MESSAGE-----