-----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, J/0Yln4VNzDTEI9gmL2Tug/G8Ef8AS0+9NuXD8m2+9iDF9j7p+no+M5gHxYhwNQm Jhd9lCNfXQhsViKbxtcf9g== 0000930661-98-002339.txt : 19981116 0000930661-98-002339.hdr.sgml : 19981116 ACCESSION NUMBER: 0000930661-98-002339 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 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: 98746011 BUSINESS ADDRESS: STREET 1: 303 N OREGON ST CITY: EL PASO STATE: TX ZIP: 79901 BUSINESS PHONE: 9155435711 10-Q 1 FORM 10-Q ================================================================================ FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------------- (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 Identification No.) incorporation or organization) KAYSER CENTER, 100 NORTH STANTON, EL PASO, TEXAS 79901 (Address of principal executive offices) (Zip Code) (915) 543-5711 (Registrant's telephone number, including area code) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --- --- INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND REPORTS REQUIRED TO BE FILED BY SECTIONS 12, 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN CONFIRMED BY A COURT. YES X NO --- --- AS OF NOVEMBER 6, 1998, THERE WERE 60,270,362 SHARES OF THE COMPANY'S NO PAR VALUE COMMON STOCK OUTSTANDING. ================================================================================ EL PASO ELECTRIC COMPANY INDEX TO FORM 10-Q Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets - September 30, 1998 and December 31, 1997...... 1 Statements of Operations - Three Months, Nine Months and Twelve Months Ended September 30, 1998 and 1997................ 3 Statements of Comprehensive Operations - Three Months, Nine Months and Twelve Months Ended September 30, 1998 and 1997....................................................... 5 Statements of Cash Flows - Nine Months Ended September 30, 1998 and 1997.................................... 6 Notes to Financial Statements.................................. 7 Independent Auditors' Review Report............................ 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings...................................... 24 Item 6. Exhibits and Reports on Form 8-K....................... 24 i PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS EL PASO ELECTRIC COMPANY BALANCE SHEETS
ASSETS SEPTEMBER 30, (IN THOUSANDS) 1998 DECEMBER 31, (UNAUDITED) 1997 ------------- ------------ UTILITY PLANT: Electric plant in service.............................................. $1,547,969 $1,538,572 Less accumulated depreciation and amortization......................... 226,121 164,283 ---------- ---------- Net plant in service................................................. 1,321,848 1,374,289 Construction work in progress.......................................... 61,681 43,761 Nuclear fuel; includes fuel in process of $2,072 and $9,910, respectively................................................. 95,117 86,609 Less accumulated amortization.......................................... 52,590 40,142 ---------- ---------- Net nuclear fuel..................................................... 42,527 46,467 ---------- ---------- Net utility plant.................................................. 1,426,056 1,464,517 ---------- ---------- CURRENT ASSETS: Cash and temporary investments......................................... 195,825 111,227 Accounts receivable, principally trade, net of allowance for doubtful accounts of $1,730 and $5,124, respectively................. 70,226 58,960 Inventories, at cost................................................... 27,368 27,130 Net undercollection of fuel revenues................................... 1,416 13,870 Prepayments and other.................................................. 13,193 6,930 ---------- ---------- Total current assets............................................... 308,028 218,117 ---------- ---------- LONG-TERM CONTRACT RECEIVABLE............................................ 24,300 27,659 ---------- ---------- DEFERRED CHARGES AND OTHER ASSETS: Accumulated deferred income taxes, net................................. 16,289 43,208 Decommissioning trust fund............................................. 41,858 38,438 Other.................................................................. 18,653 20,674 ---------- ---------- Total deferred charges and other assets............................ 76,800 102,320 ---------- ---------- TOTAL ASSETS....................................................... $1,835,184 $1,812,613 ========== ==========
See accompanying notes to financial statements. 1 EL PASO ELECTRIC COMPANY BALANCE SHEETS (CONTINUED)
CAPITALIZATION AND LIABILITIES SEPTEMBER 30, (IN THOUSANDS EXCEPT FOR SHARE DATA) 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........................ (675) (1,138) Retained earnings..................................................... 108,869 69,484 Accumulated other comprehensive loss (unrealized losses on marketable securities), net of tax........................ (1,308) (184) ---------- ---------- Common stock equity............................................... 408,494 369,640 Preferred stock, cumulative, no par value, 2,000,000 shares authorized: Redemption required--1,319,848 and 1,213,188 shares issued and outstanding, respectively; at liquidation preference........ 131,985 121,319 Long-term debt........................................................ 872,235 938,562 Financing and capital lease obligations............................... 24,110 28,248 ---------- ---------- Total capitalization............................................ 1,436,824 1,457,769 ---------- ---------- CURRENT LIABILITIES: Current maturities of long-term debt and financing and capital lease obligations........................................... 63,303 28,463 Accounts payable, principally trade................................... 21,290 24,957 Taxes accrued other than federal income taxes......................... 23,316 19,292 Interest accrued...................................................... 19,928 21,172 Other................................................................. 20,267 17,439 ---------- ---------- Total current liabilities....................................... 148,104 111,323 ---------- ---------- DEFERRED CREDITS AND OTHER LIABILITIES: Decommissioning....................................................... 99,177 94,917 Accrued postretirement benefit liability.............................. 78,771 75,531 Accrued pension liability............................................. 33,618 33,909 Other................................................................. 38,690 39,164 ---------- ---------- Total deferred credits and other liabilities.................... 250,256 243,521 ---------- ---------- COMMITMENTS AND CONTINGENCIES TOTAL CAPITALIZATION AND LIABILITIES............................ $1,835,184 $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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- ------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ----------- OPERATING REVENUES: Base revenues................................................ $ 136,238 $ 133,005 $ 357,492 $ 349,963 Fuel revenues and economy sales.............................. 39,283 35,845 99,053 96,585 Other........................................................ 1,372 1,290 3,696 3,724 ----------- ----------- ----------- ----------- 176,893 170,140 460,241 450,272 ----------- ----------- ----------- ----------- ENERGY EXPENSES: Fuel......................................................... 30,739 28,459 83,851 82,368 Purchased and interchanged power............................. 7,765 8,921 15,573 16,921 ----------- ----------- ----------- ----------- 38,504 37,380 99,424 99,289 ----------- ----------- ----------- ----------- OPERATING REVENUES NET OF ENERGY EXPENSES...................... 138,389 132,760 360,817 350,983 ----------- ----------- ----------- ----------- OTHER OPERATING EXPENSES: Other operations............................................. 30,604 34,452 94,797 96,605 Maintenance.................................................. 8,307 5,680 24,829 24,519 New Mexico settlement charge................................. 6,272 -- 6,272 -- Depreciation and amortization................................ 22,681 22,283 67,220 66,286 Taxes other than income taxes................................ 11,675 11,166 34,191 33,116 ----------- ----------- ----------- ----------- 79,539 73,581 227,309 220,526 ----------- ----------- ----------- ----------- OPERATING INCOME............................................... 58,850 59,179 133,508 130,457 ----------- ----------- ----------- ----------- OTHER INCOME (DEDUCTIONS): Investment income............................................ 3,335 1,576 8,327 3,698 Litigation settlement, net................................... -- -- -- 7,500 Settlement of bankruptcy professional fees................... 548 (256) 1,152 56 Other, net................................................... (410) 17 (1,244) (842) ----------- ----------- ----------- ----------- 3,473 1,337 8,235 10,412 ----------- ----------- ----------- ----------- INCOME BEFORE INTEREST CHARGES................................. 62,323 60,516 141,743 140,869 ----------- ----------- ----------- ----------- INTEREST CHARGES (CREDITS): Interest on long-term debt................................... 20,185 21,141 60,880 64,949 Other interest............................................... 1,816 1,714 5,369 5,100 Interest capitalized and deferred............................ (1,625) (1,449) (4,871) (4,339) ----------- ----------- ----------- ----------- 20,376 21,406 61,378 65,710 ----------- ----------- ----------- ----------- INCOME BEFORE INCOME TAXES..................................... 41,947 39,110 80,365 75,159 INCOME TAX EXPENSE............................................. 15,898 15,122 30,106 29,333 ----------- ----------- ----------- ----------- INCOME BEFORE EXTRAORDINARY LOSS ON REPURCHASES OF DEBT.......................................... 26,049 23,988 50,259 45,826 EXTRAORDINARY LOSS ON REPURCHASES OF DEBT, NET OF FEDERAL INCOME TAX BENEFIT................................... -- (69) -- (2,741) ----------- ----------- ----------- ----------- NET INCOME..................................................... 26,049 23,919 50,259 43,085 PREFERRED STOCK DIVIDEND REQUIREMENTS.......................... 3,727 3,331 10,874 9,718 ----------- ----------- ----------- ----------- NET INCOME APPLICABLE TO COMMON STOCK.......................... $ 22,322 $ 20,588 $ 39,385 $ 33,367 =========== =========== =========== =========== BASIC EARNINGS PER COMMON SHARE: Income before extraordinary loss on repurchases of debt...... $ 0.371 $ 0.343 $ 0.655 $ 0.601 Extraordinary loss on repurchases of debt, net of federal income tax benefit................................ -- (0.001) -- (0.046) ----------- ----------- ----------- ----------- Net income................................................ $ 0.371 $ 0.342 $ 0.655 $ 0.555 =========== =========== =========== =========== DILUTED EARNINGS PER COMMON SHARE: Income before extraordinary loss on repurchases of debt...... $ 0.368 $ 0.343 $ 0.650 $ 0.599 Extraordinary loss on repurchases of debt, net of federal income tax benefit................................ -- (0.001) -- (0.045) ----------- ----------- ----------- ----------- Net income................................................ $ 0.368 $ 0.342 $ 0.650 $ 0.554 =========== =========== =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING........... 60,168,841 60,129,784 60,168,030 60,124,444 =========== =========== =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND DILUTIVE POTENTIAL COMMON SHARES OUTSTANDING................. 60,652,472 60,287,952 60,611,724 60,321,981 =========== =========== =========== ===========
See accompanying notes to financial statements. 3 EL PASO ELECTRIC COMPANY STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS EXCEPT FOR SHARE DATA)
TWELVE MONTHS ENDED SEPTEMBER 30, --------------------------------- 1998 1997 ------------ ------------ OPERATING REVENUES: Base revenues..................................................... $ 466,508 $ 459,527 Fuel revenues and economy sales................................... 132,640 129,023 Other............................................................. 4,859 4,744 ----------- ----------- 604,007 593,294 ----------- ----------- ENERGY EXPENSES: Fuel.............................................................. 114,940 112,374 Purchased and interchanged power.................................. 18,782 21,239 ----------- ----------- 133,722 133,613 ----------- ----------- OPERATING REVENUES NET OF ENERGY EXPENSES........................... 470,285 459,681 ----------- ----------- OTHER OPERATING EXPENSES: Other operations.................................................. 130,108 132,857 Maintenance....................................................... 35,092 34,938 New Mexico settlement charge...................................... 6,272 -- Depreciation and amortization..................................... 89,669 89,105 Taxes other than income taxes..................................... 44,426 42,365 ----------- ----------- 305,567 299,265 ----------- ----------- OPERATING INCOME.................................................... 164,718 160,416 ----------- ----------- OTHER INCOME (DEDUCTIONS): Investment income................................................. 10,724 5,011 Litigation settlement, net........................................ -- 7,500 Settlement of bankruptcy professional fees........................ 1,514 2,361 Other, net........................................................ (296) (1,074) ----------- ----------- 11,942 13,798 ----------- ----------- INCOME BEFORE INTEREST CHARGES...................................... 176,660 174,214 ----------- ----------- INTEREST CHARGES (CREDITS): Interest on long-term debt........................................ 82,048 87,644 Other interest.................................................... 6,469 6,446 Interest capitalized and deferred................................. (6,407) (5,809) ----------- ----------- 82,110 88,281 ----------- ----------- INCOME BEFORE INCOME TAXES.......................................... 94,550 85,933 INCOME TAX EXPENSE.................................................. 35,549 32,147 ----------- ----------- INCOME BEFORE EXTRAORDINARY LOSS ON REPURCHASES OF DEBT............................................... 59,001 53,786 EXTRAORDINARY LOSS ON REPURCHASES OF DEBT, NET OF FEDERAL INCOME TAX BENEFIT........................................ (34) (2,741) ----------- ----------- NET INCOME.......................................................... 58,967 51,045 PREFERRED STOCK DIVIDEND REQUIREMENTS............................... 14,300 12,780 ----------- ----------- NET INCOME APPLICABLE TO COMMON STOCK............................... $ 44,667 $ 38,265 =========== =========== BASIC EARNINGS PER COMMON SHARE: Income before extraordinary loss on repurchases of debt........... $ 0.743 $ 0.682 Extraordinary loss on repurchases of debt, net of federal income tax benefit..................................... (0.001) (0.046) ----------- ----------- Net income..................................................... $ 0.742 $ 0.636 =========== =========== DILUTED EARNINGS PER COMMON SHARE: Income before extraordinary loss on repurchases of debt........... $ 0.739 $ 0.680 Extraordinary loss on repurchases of debt, net of federal income tax benefit..................................... (0.001) (0.045) ----------- ----------- Net income..................................................... $ 0.738 $ 0.635 =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING................ 60,161,105 60,113,236 =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND DILUTIVE POTENTIAL COMMON SHARES OUTSTANDING...................... 60,547,595 60,276,170 =========== ===========
See accompanying notes to financial statements. 4 EL PASO ELECTRIC COMPANY STATEMENTS OF COMPREHENSIVE OPERATIONS (UNAUDITED) (IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, -------------------- -------------------- -------------------- 1998 1997 1998 1997 1998 1997 --------- --------- --------- --------- ---------- -------- NET INCOME...................................... $26,049 $23,919 $50,259 $43,085 $58,967 $51,045 OTHER COMPREHENSIVE INCOME (LOSS): Net unrealized gain (loss) on marketable securities, less applicable income tax benefit (expense) of $813, $11, $606, $62, $768 and $(84), respectively............ (1,510) (21) (1,124) (115) (1,425) 155 ------- ------- ------- ------- ------- ------- COMPREHENSIVE INCOME............................ 24,539 23,898 49,135 42,970 57,542 51,200 PREFERRED STOCK DIVIDEND REQUIREMENTS........... 3,727 3,331 10,874 9,718 14,300 12,780 ------- ------- ------- ------- ------- ------- COMPREHENSIVE INCOME APPLICABLE TO COMMON STOCK................................ $20,812 $20,567 $38,261 $33,252 $43,242 $38,420 ======= ======= ======= ======= ======= =======
See accompanying notes to financial statements. 5 EL PASO ELECTRIC COMPANY STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------- 1998 1997 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................................ $ 50,259 $ 43,085 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................................... 85,033 83,271 Deferred income taxes, net...................................... 27,525 27,305 New Mexico settlement charge.................................... 6,272 -- Other operating activities...................................... 2,987 1,781 Extraordinary loss on repurchases of debt, net of federal income tax benefit........................................... -- 2,741 Change in: Accounts receivable............................................. (11,266) (8,670) Federal income tax receivable................................... -- 17,635 Inventories..................................................... (238) 703 Net undercollection of fuel revenues............................ 6,182 (9,552) Prepayments and other........................................... (6,263) (2,205) Long-term contract receivable................................... 3,359 2,525 Accounts payable................................................ (3,667) (9,492) Taxes accrued other than federal income taxes................... 4,024 3,344 Interest accrued................................................ (1,244) (2,973) Other current liabilities....................................... 2,972 1,782 Deferred charges and credits.................................... 6,488 6,867 ---------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES..................... 172,423 158,147 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to utility property, plant and equipment................ (33,753) (36,306) Additions to nuclear fuel......................................... (12,641) (17,560) Investment in decommissioning trust fund.......................... (5,151) (4,497) Other investing activities........................................ (270) 19 ---------- ---------- NET CASH USED FOR INVESTING ACTIVITIES........................ (51,815) (58,344) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Repurchases of and payments on long-term debt..................... (30,604) (81,228) Net (repayments of ) proceeds from financing obligations.......... (3,866) 1,649 Redemption of capital lease obligations........................... (1,469) (1,374) Other financing activities........................................ (71) (5) ---------- ---------- NET CASH USED FOR FINANCING ACTIVITIES........................ (36,010) (80,958) ---------- ---------- NET INCREASE IN CASH AND TEMPORARY INVESTMENTS...................... 84,598 18,845 CASH AND TEMPORARY INVESTMENTS AT BEGINNING OF PERIOD............... 111,227 68,767 ---------- ---------- CASH AND TEMPORARY INVESTMENTS AT END OF PERIOD..................... $ 195,825 $ 87,612 ========== ==========
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 September 30, 1998 and December 31, 1997; the results of operations for the three, nine and twelve months ended September 30, 1998 and 1997; and cash flows for the nine months ended September 30, 1998 and 1997. The results of operations for the three, nine and twelve months ended September 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)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 1998 1997 -------- -------- Cash paid (refunded) for: Income taxes, net........................... $ 1,400 $(16,035) Interest.................................... 53,933 59,229 Reorganization items--professional fees and other.......................... 4,280 2,469 Non-cash investing and financing activities: Issuance of preferred stock for pay-in-kind dividend.................... 10,666 9,533 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 SEPTEMBER 30, -------------------------------------------------------------------------- 1998 1997 ----------------------------------- ----------------------------------- PER PER COMMON COMMON INCOME SHARES SHARE INCOME SHARES SHARE -------------- ---------- ------- -------------- ---------- ------- (IN THOUSANDS) (IN THOUSANDS) Income before extraordinary item...... $26,049 $23,988 Less: Preferred stock dividends..... 3,727 3,331 ------- ------- Basic earnings per common share: Income applicable to common stock............................... 22,322 60,168,841 $0.371 20,657 60,129,784 $0.343 ====== ====== Effect of dilutive securities: Unvested restricted stock............ -- 25,726 -- 23,717 Stock options........................ -- 457,905 -- 134,451 ------- ---------- ------- ---------- Diluted earnings per common share: Income applicable to common stock............................... $22,322 60,652,472 $0.368 $20,657 60,287,952 $0.343 ======= ========== ====== ======= ========== ======
NINE MONTHS ENDED SEPTEMBER 30, -------------------------------------------------------------------------- 1998 1997 ----------------------------------- ----------------------------------- PER PER COMMON COMMON INCOME SHARES SHARE INCOME SHARES SHARE -------------- ---------- ------- -------------- ---------- ------- (IN THOUSANDS) (IN THOUSANDS) Income before extraordinary item...... $50,259 $45,826 Less: Preferred stock dividends..... 10,874 9,718 ------- ------- Basic earnings per common share: Income applicable to common stock............................... 39,385 60,168,030 $0.655 36,108 60,124,444 $0.601 ====== ====== Effect of dilutive securities: Unvested restricted stock............ -- 23,731 -- 20,109 Stock options........................ -- 419,963 -- 177,428 ------- ---------- ------- ---------- Diluted earnings per common share: Income applicable to common stock............................... $39,385 60,611,724 $0.650 $36,108 60,321,981 $0.599 ======= ========== ====== ======= ========== ======
8 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
TWELVE MONTHS ENDED SEPTEMBER 30, -------------------------------------------------------------------------- 1998 1997 ----------------------------------- ----------------------------------- PER PER COMMON COMMON INCOME SHARES SHARE INCOME SHARES SHARE -------------- ---------- ------- -------------- ---------- ------- (IN THOUSANDS) (IN THOUSANDS) Income before extraordinary item...... $59,001 $53,786 Less: Preferred stock dividends..... 14,300 12,780 ------- ------- Basic earnings per common share: Income applicable to common stock............................... 44,701 60,161,105 $0.743 41,006 60,113,236 $0.682 ====== ====== Effect of dilutive securities: Unvested restricted stock............ -- 25,807 -- 20,411 Stock options........................ -- 360,683 -- 142,523 ------- ---------- ------- ---------- Diluted earnings per common share: Income applicable to common stock............................... $44,701 60,547,595 $0.739 $41,006 60,276,170 $0.680 ======= ========== ====== ======= ========== ======
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 Rate Case Settlement. On July 15, 1998, the Company entered into a Stipulation and Settlement Agreement (the "New Mexico Settlement") with certain parties to its pending New Mexico rate case, including the New Mexico Commission staff and the New Mexico Attorney General, but not the City of Las Cruces ("Las Cruces"). Following a hearing on the New Mexico Settlement, and after considering Las Cruces' opposition, the New Mexico Commission issued an order adopting (with some modification) the New Mexico Settlement on September 24, 1998 (the "Case 2722 Order"). The Commission's modifications were related to the ability of a commission to bind future commissions. The Company believes that, under applicable law, the findings of a commission with respect to issues of fact are binding in future proceedings. The Case 2722 Order provides for: (i) a total jurisdictional base revenue reduction of $4.6 million; (ii) a 30- month moratorium on rate increases or decreases in New Mexico; (iii) the elimination of the need for future fuel reconciliations in New Mexico by incorporating the existing fixed fuel factor into rates; (iv) an increased degree of ratemaking certainty for the future achieved by an agreement among the signatories reducing the net value of certain assets by approximately $40 million on a New Mexico jurisdictional basis for ratemaking purposes (but with no effect on book values), while establishing the signatories' agreement 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 Case 2722 Order became nonappealable 9 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (UNAUDITED) and effective on October 26, 1998. Additionally, as a result of the Case 2722 Order, the Company will contribute, pursuant to the New Mexico Settlement, $0.4 million annually ($1.0 million over the term of the moratorium period) to a social services agency in Dona Ana County providing assistance to low-income individuals. Although the New Mexico Settlement was structured to allow recovery of previously underrecovered fuel balances, the Case 2722 Order adopting the New Mexico Settlement does not support the recognition of this asset in the Company's financial statements under existing accounting standards. The Company wrote off the book value of undercollected fuel revenues in its New Mexico jurisdiction as of September 30, 1998, which amounted to $3.8 million, net of tax, although the Company believes that, based on current estimates of future fuel prices and operating costs, it will recover 100% of these amounts. The Company negotiated the New Mexico Settlement so as to substantially reduce the likelihood of additional rate reductions during the moratorium period. However, in light of the regulatory framework in New Mexico and the movement toward competition, there can be no assurance that the Company will be able to maintain its rates at the new levels. 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 a ten-year period, which began 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 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 to reduce the Company's rates in Texas. However, the Company intends to voluntarily seek rate decreases in its Texas service territory similar to the reductions negotiated and implemented in New Mexico. The Company has contacted the Texas Commission staff and the City of El Paso regarding such rate reductions in Texas. While the Company believes Texas rate reductions of approximately $15 million would be comparable to the New Mexico reductions, the Company has not reached an agreement with the City of El Paso, the Texas Commission staff or any other party, so the actual amount of any reduction is not known at this time. 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. 10 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 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 May 1998, the Company filed a lawsuit in New Mexico federal district court seeking a declaration that recent New Mexico legislation purporting 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 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 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. The court denied the Company's motion, and the parties are conducting discovery. 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 an offer to 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, which the Company believed did not satisfy the New Mexico Eminent Domain Code requirement that the offer not be less than the appraisal prepared by the Las Cruces appraiser. The Company expects Las Cruces to file a condemnation suit in state district court. 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. 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 challenged the legality of the sale of the revenue bonds. Oral argument before the New Mexico Supreme Court on issues related to Las Cruces' authority to issue the revenue bonds was held in November 1997 and the parties are awaiting a ruling on the matter. 11 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 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 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 that 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. In June 1998, an 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, and would be reduced to zero if Las Cruces leaves the Company's system after December 31, 2002. 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. The Company has sought review of the administrative law judge's Initial Decision by the FERC and, if necessary, will contest any final FERC decision on appeal. See Note B of Notes to Financial Statements in the 1997 Form 10-K for a full discussion of stranded costs. In 1996, the Company filed its open access transmission tariffs (the "Open Access Case") in compliance with FERC Order No. 888. The Company reached a settlement with the various parties, including Las Cruces, regarding the rates for transmission service and ancillary services under such tariffs. However, the settlement, which was filed with the FERC in March 1997 and approved by the FERC with a minor modification in June 1998, reserved for litigation issues related to the criteria by which the Company will determine the amount of transmission capacity that is available for use by third parties desiring to use its transmission system, including the availability of firm transmission service over the single circuit transmission and back-to-back direct current terminal (the "Eddy County Tie") connecting the Company to Southwestern Public Service Company ("SPS"). An evidentiary hearing on the reserved issues was held before an administrative law judge of the FERC in January 1998. That hearing also encompassed consideration of whether the Company should be required to offer back-up generation service to transmission customers using the Eddy County Tie for firm transmission service. In an Initial Decision issued August 26, 1998, the administrative law judge ruled that the method used by the Company to evaluate transmission service requests was reasonable and consistent with FERC policies, and that the Company is not required by FERC Order No. 888 to provide back-up generation services. Based on conditions that existed in the Company's electric system in 1997, the effect of the 12 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (UNAUDITED) administrative law judge's ruling was that the Company had no firm import capacity available on its transmission system for use by third-party transmission customers. However, the administrative law judge noted that material changes to the Company's system, such as the loss of load from Las Cruces or Comision Federal de Electricidad de Mexico, the national electric utility of Mexico ("CFE"), would necessitate a recalculation of transmission availability. This Initial Decision is subject to review by the FERC. In April 1998, SPS filed a complaint against the Company in which it asked the FERC to order the Company to provide transmission and back-up generation services that would be needed for the delivery of electricity from SPS to a Las Cruces municipal electric system. In a September 1998 order in that proceeding, the FERC directed the Company to evaluate SPS' transmission service request within 30 days after issuance of a FERC decision in the Open Access Case. The FERC further noted that if it is determined at the conclusion of proceedings in the Open Access Case that no available transmission capacity exists on the Eddy County Tie, SPS' complaint will be considered to have been denied. 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. LITIGATION WITH DEPARTMENT OF ENERGY The Nuclear Waste Act of 1982, as amended in 1987 (the "Waste Act"), requires the Department of Energy ("DOE") to accept and dispose of all spent nuclear fuel and other high-level radioactive wastes generated by all domestic power reactors. Under the Waste Act, DOE was to develop the facilities necessary for the storage and disposal of spent nuclear fuel and to have the first such facility in operation by 1998. That facility was to be a permanent repository, but DOE has announced that such a repository now cannot be completed before 2010. In July 1996, the United States Court of Appeals for District of Columbia Circuit (D.C. Circuit) ruled that DOE has an obligation to start disposing of spent nuclear fuel no later than January 31, 1998. On July 24, 1998, Arizona Public Service Company filed, on behalf of all Palo Verde Participants, a Petition for Review with the D.C. Circuit regarding DOE's failure to comply with its obligation to begin accepting spent nuclear fuel. At this time, the Company cannot predict the outcome of pending litigation against DOE on behalf of the Palo Verde Participants. 13 Independent Auditors' Review Report ----------------------------------- The Board of Directors and Shareholders El Paso Electric Company: We have reviewed the accompanying condensed balance sheet of El Paso Electric Company as of September 30, 1998, the related condensed statements of operations and comprehensive operations for the three months, nine months and twelve months ended September 30, 1998 and 1997, and the related condensed statements of cash flows for the nine months ended September 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. KPMG Peat Marwick LLP El Paso, Texas October 16, 1998 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information contained in this Item 2 updates, and should be read in conjunction with, the information set forth in Part II, Item 7 of the Company's 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," "Liquidity and Capital Resources" and "Year 2000 Preparedness," as well as 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 Case 2722 Order provides a similar level of certainty in the Company's New Mexico rates. As discussed below, the Case 2722 Order includes a reduction of $4.6 million, exclusive of the Company's annual $0.4 million contribution for low-income assistance in New Mexico. The Company has contacted the Texas Commission staff and the City of El Paso regarding similar rate reductions in Texas. While the Company believes Texas rate reductions of approximately $15 million would be comparable to the New Mexico reductions, the Company has not reached an agreement with the City of El Paso, the Texas Commission staff or any other party, so the actual amount of any reduction is not known at this time. In return for the reductions, 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 redeem its preferred stock while continuing to address issues raised by industry restructuring 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 Case 2722 Order provides for: (i) a total jurisdictional base revenue reduction of $4.6 million; (ii) a 30-month moratorium on rate increases or decreases in New Mexico; (iii) the elimination of the need for future fuel reconciliations in New Mexico by incorporating the existing fixed fuel factor into rates; (iv) an increased degree of ratemaking certainty for the future achieved by an agreement among the signatories reducing the net value of certain assets by approximately $40 million on a New Mexico jurisdictional basis for ratemaking purposes (but with no effect on book values), while establishing the signatories' agreement 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 Case 2722 Order became nonappealable and effective on October 26, 1998. Additionally, as a 15 result of the Case 2722 Order, the Company will contribute, pursuant to the New Mexico Settlement, $0.4 million annually ($1.0 million over the term of the moratorium period) to a social services agency in Dona Ana County providing assistance to low-income individuals. Although the New Mexico Settlement was structured to allow recovery of previously underrecovered fuel balances, the Case 2722 Order adopting the New Mexico Settlement does not support the recognition of this asset in the Company's financial statements under existing accounting standards. The Company wrote off the book value of undercollected fuel revenues in its New Mexico jurisdiction as of September 30, 1998, which amounted to $3.8 million, net of tax, although the Company believes that, based on current estimates of future fuel prices and operating costs, it will recover 100% of these amounts. The Company negotiated the New Mexico Settlement so as to substantially reduce the likelihood of additional rate reductions during the moratorium period. However, in light of the regulatory framework in New Mexico and the movement toward competition, there can be no assurance that the Company will be able to maintain its rates at the new levels. 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, which will be reduced from current levels as a result of the New Mexico Settlement and any related voluntary reductions in Texas rates, are effectively capped by the Rate Stipulation and the Case 2722 Order. 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, Mexico, which is scheduled to be fully operational by the end of 1998 when the Company's current power contract expires, will give CFE the current capacity to supply electricity to portions of northern Chihuahua, including the geographic area currently served by the Company. In addition, 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. 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. 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 annual 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 16 the right thereafter to continue service on a year-to-year basis for two years. The Company has a contract to 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. 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, payment of dividends on and redemption of preferred stock, and capital expenditures related to the Company's generating facilities and transmission and distribution systems. The Company expects that cash flows from operations will be sufficient for such purposes. Long-term capital requirements of the Company will consist primarily of construction of electric utility plant and the payment of interest on and retirement of debt. The Company has no current plans to construct any new generating capacity through at least 2004. Utility construction expenditures will consist primarily of expanding and updating the transmission and distribution systems and the cost of betterments and improvements to Palo Verde and other generating facilities. 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 and enable the Company to meet other contingencies that may exist, such as compliance with environmental regulation, pending litigation, any claims for indemnification and Year 2000 remediation. At September 30, 1998, the Company had approximately $195.8 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 September 30, 1998, approximately $48.2 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 Case 2722 Order and competitive pressures, the Company does not expect to be able to raise its rates in the event of increases in nonfuel costs, increases in fuel costs in New Mexico or loss of revenues. Accordingly, debt reduction is a high priority for the Company in order to gain additional financial flexibility to address the evolving competitive market. 17 The Company has significantly reduced its long-term debt following its emergence from bankruptcy in 1996. From June 1, 1996 through September 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 62% at September 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 the following: (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. 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 September 30............... $22,322 $20,657 $0.368 $0.343 Nine Months Ended September 30................ 39,385 36,108 0.650 0.599 Twelve Months Ended September 30.............. 44,701 41,006 0.739 0.680
Operating revenues net of energy expenses increased $5.6 million, $9.8 million and $10.6 million for the three, nine and twelve months ended September 30, 1998, respectively, compared to the same periods last year, primarily due to increased kWh sales to retail customers and increased fuel margins of $2.3 million for the three and nine-month periods and $3.5 million for the twelve- month period. The increased fuel margins were due to increased economy sales at higher margins. 18 Comparisons of kWh sales and operating revenues are shown below (In thousands):
THREE MONTHS ENDED SEPTEMBER 30: INCREASE/(DECREASE) - -------------------------------- ------------------- 1998 1997 AMOUNT PERCENT ---------- ---------- ------- ------- Electric kWh Sales: Retail Customers........................ 1,792,907 1,716,978 75,929 4.4% Other Utilities......................... 508,318 594,433 (86,115) (14.5) ---------- ---------- ------- Total.................................. 2,301,225 2,311,411 (10,186) (0.4) ========== ========== ======= Operating Revenues: Retail Customers........................ $ 150,139 $ 144,141 $ 5,998 4.2% Other Utilities......................... 26,754 25,999 755 2.9 ---------- ---------- ------- Total.................................. $ 176,893 $ 170,140 $ 6,753 4.0 ========== ========== ======= NINE MONTHS ENDED SEPTEMBER 30: INCREASE/(DECREASE) - ------------------------------- ------------------- 1998 1997 AMOUNT PERCENT ---------- ---------- ------- ------- Electric kWh Sales: Retail Customers........................ 4,558,310 4,397,052 161,258 3.7% Other Utilities......................... 1,436,891 1,477,422 (40,531) (2.7) ---------- ---------- ------- Total.................................. 5,995,201 5,874,474 120,727 2.1 ========== ========== ======= Operating Revenues: Retail Customers........................ $ 382,274 $ 377,456 $ 4,818 1.3% Other Utilities......................... 77,967 72,816 5,151 7.1 ---------- ---------- ------- Total.................................. $ 460,241 $ 450,272 $ 9,969 2.2 ========== ========== ======= TWELVE MONTHS ENDED SEPTEMBER 30: INCREASE/(DECREASE) - --------------------------------- ------------------- 1998 1997 AMOUNT PERCENT ---------- ---------- ------- ------- Electric kWh Sales: Retail Customers........................ 5,945,705 5,718,239 227,466 4.0% Other Utilities......................... 1,857,354 1,904,832 (47,478) (2.5) ---------- ---------- ------- Total.................................. 7,803,059 7,623,071 179,988 2.4 ========== ========== ======= Operating Revenues: Retail Customers........................ $ 502,686 $ 492,800 $ 9,886 2.0% Other Utilities......................... 101,321 100,494 827 0.8 ---------- ---------- ------- Total.................................. $ 604,007 $ 593,294 $10,713 1.8 ========== ========== =======
Other operations and maintenance expense decreased $1.2 million for the three months ended September 30, 1998 compared to the same period last year as a result of decreased operations expense of $3.8 million partially offset by an increase of $2.6 million in maintenance expense. The decreased operations expense was primarily due to (i) decreased outside services costs of $1.9 million; (ii) decreased property insurance expense of $0.9 million; (iii) the receipt of $0.8 million due to the bankruptcy settlement of a large industrial customer; and (iv) decreased pension and benefit expense of $0.7 million. These decreases were partially offset by a $1.2 million increase in professional fees related to regulatory issues. The increase in maintenance expense was primarily due to $1.3 million in insurance settlements received in 1997 with no comparable amount in 1998 and increased maintenance expense of $0.5 million at Palo Verde due to the timing and duration of refueling and maintenance outages. Other operations and maintenance expense decreased $1.5 million for the nine months ended September 30, 1998 compared to the same period last year as a result of decreased operations expense of $1.8 million partially offset by an increase of $0.3 million in maintenance expense. The decreased 19 operations expense was primarily due to (i) a $2.3 million decrease in outside services costs; (ii) decreased workers' compensation and executive liability insurance expenses of $1.2 million; and (iii) the receipt of $1.1 million due to the bankruptcy settlements of two large industrial customers. These decreases were partially offset by a $3.0 million increase in professional fees related to regulatory issues. The increase in maintenance expense was primarily due to $1.3 million in insurance settlements received in 1997 with no comparable amount in 1998. This increase was partially offset by decreased maintenance expense at Company-owned generating plants. Other operations and maintenance expense decreased $2.6 million for the twelve months ended September 30, 1998 compared to the same period last year as a result of decreased operations expense of $2.8 million partially offset by increased maintenance expense of $0.2 million. The decreased operations expense was primarily due to (i) a $3.5 million decrease in operations expense at Palo Verde; (ii) a $3.2 million decrease in outside services costs; (iii) the receipt of $2.1 million due to the bankruptcy settlements of two large industrial customers; and (iv) decreased workers' compensation and executive liability insurance expenses of $1.6 million. These decreases were partially offset by a $4.5 million increase in professional fees related to regulatory issues and a $2.2 million all employee cash bonus in December 1997. The increased maintenance expense was primarily due to (i) $1.3 million in insurance settlements received in 1997 with no comparable amount in 1998; (ii) increased maintenance expense of $0.8 million at Palo Verde due to the timing and duration of refueling and maintenance outages; and (iii) increased maintenance expense of $0.4 million on transmission and distribution facilities. This increase was partially offset by decreased maintenance expense at Company-owned generating plants. The New Mexico Settlement charge for the three, nine and twelve months ended September 30, 1998 represents the write-off of the book value of undercollected fuel revenues in the Company's New Mexico jurisdiction. Depreciation and amortization expense was essentially unchanged for the three, nine and twelve months ended September 30, 1998 compared to the same periods last year. Taxes other than income taxes increased $0.5 million, $1.1 million and $2.1 million for the three, nine and twelve months ended September 30, 1998, respectively, compared to the same periods last year, primarily due to increases in revenue related taxes and an increase in franchise taxes resulting from refunds in August 1997 with no comparable amount in 1998. These increases were partially offset by a decrease in Arizona property taxes resulting from a decrease in the assessment ratio in 1998. Other income increased $2.1 million for the three months ended September 30, 1998 compared to the same period last year, primarily due to increased investment income of $1.8 million as a result of the investment of higher levels of cash. Other income decreased $2.2 million and $1.9 million for the nine and twelve months ended September 30, 1998, respectively, compared to the same periods in the 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. These decreases were partially offset by increased investment income of $4.6 million and $5.7 million, respectively, due to the investment of higher levels of cash. Interest charges decreased $1.0 million, $4.3 million and $6.2 million for the three, nine and twelve months ended September 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. 20 Income tax expense was essentially unchanged for the three and nine months ended September 30, 1998 compared to the same periods last year, primarily due to increases in pretax income which were offset by permanent differences such as bankruptcy fee settlements and tax exempt income. Income tax expense increased $3.4 million for the twelve months ended September 30, 1998 compared to the same period last year, primarily due to changes in pretax income and certain permanent differences. Extraordinary loss on repurchases of debt for the nine and twelve months ended September 30, 1997 represents the payment of premiums on debt repurchased and the recognition of unamortized issuance expenses on that debt of $2.7 million, net of federal income tax benefit of $1.4 million, respectively, with no comparable amounts for the same periods in 1998. Allowance for doubtful accounts decreased $3.4 million as of September 30, 1998 compared to December 31, 1997 due to the bankruptcy settlements of two large industrial customers and the write-off of the related receivables against a specific allowance that was expensed in prior years. 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 or 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. YEAR 2000 PREPAREDNESS 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 programs use only the last two digits to refer to a year. Consequently, these programs do not recognize a year that begins with "20" instead of the familiar "19." Applications that are date sensitive may not properly calculate information or may not function. Problems may arise in information technology ("IT") systems, including those which allow the Company to operate generation, transmission and distribution facilities, manage customer billing accounts, process payroll for employees, and conduct all of the other functions needed to operate the Company's business, as well as non-IT systems that contain date and time functions. Affected non-IT systems containing embedded chips that are date sensitive can include electric meters, security systems, substation generators, communication systems and many other devices. Identifying which of these systems are essential for the Company to operate is a significant step, and these systems are designated as "Mission Critical." The Company began working on the Year 2000 computer concern during the last quarter of 1996 with a program consisting of four major phases: inventory, assessment, remediation and testing for Year 2000 compliance. In this context, compliance means that the system or device in question will continue to function after December 31, 1999 in the way in which it was designed. Most systems can proceed through the various phases independently so that the Company need not entirely complete one phase before beginning the next. The Company started the inventory phase for its IT systems in October 1996 and is nearing 100% completion. The inventory phase for non-IT systems is substantially complete, having been initiated in February 1998. After the initial inventory phase has been completed, the Company will continue to update the information as appropriate, such as when the Company purchases new software or hardware. 21 The Company has completed the majority of the assessment phase regarding IT systems. Assessment of non-IT systems has begun, but has been completed for only a few systems. The Company expects the assessment phase for IT systems to be substantially completed by the end of 1998, and for non-IT systems, early in 1999. However, as the Company purchases new software and other products in 1999, additional vendor representations must be obtained and assessments completed. The third phase of the Year 2000 program is remediation. While the Company is employing remediation procedures generally accepted as standard, there are no guarantees such efforts will be entirely successful. At this point, the Company believes it has completed remediation on approximately half of the IT systems requiring remediation, including at least half of the Mission Critical systems. The Company has recently begun remediating some non-IT systems even though the non-IT assessment phase is not yet complete. Although there can be no assurance that future events will not cause delays in the process, at this time the Company expects to have completed the remediation phase for nearly all of the Mission Critical IT and non-IT systems by March 31, 1999. The Company will continue to test for Year 2000 compliance throughout 1999. With respect to IT systems, the Company estimates that nearly half of the testing which will be done before January 1, 2000 has been completed. Testing for non-IT systems has recently begun, but has not yet been completed on a significant number of such systems. While the Company intends to test 100% of its IT systems, it intends to utilize representative sample testing with respect to some non-IT systems. The Company may also rely on vendor representations and reports of tests conducted by other parties with respect to certain non-IT systems. Although there can be no assurance that future events will not cause delays in the process, at this time the Company expects to have completed testing on the majority of the Mission Critical IT and non-IT systems by March 31, 1999. 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 that 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 readiness for Year 2000 issues. The successful operation of the operators of Palo Verde and other facilities from which the Company receives energy, water companies, gas suppliers and other suppliers will be critical to the Company's ability to limit the impact of any Year 2000 problem which may arise. 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 outages or operational failures relating to the Year 2000 problem. The Company expects to retain the services of an independent consulting firm to review the Company's Year 2000 program, assess the remediation and testing procedures and advise the Company on the best way to proceed in the time remaining before January 1, 2000. This consulting firm is expected to provide the Company with a report on the Year 2000 program during the fourth quarter of 1998, the cost of which will not be substantial. The Company expects that the historical and estimated costs of its Year 2000 program, which includes all costs of assessment, remediation and testing as well as the costs of modifying and replacing software and hiring consultants, will be significant but will not be material in relation to the Company's financial position or the Company's results of operations or cash flows in any future reporting period. The Company will expense such costs as incurred. At this time, the Company's expenses on the Year 2000 program have been minimal since the inventory and assessment phases basically involved only internal labor costs and most of the remediation completed to date has consisted of internally revising 22 computer programs and capital outlays for purchases of new software and computer systems already scheduled for replacement. Future expenses may include costs for the early replacement of computers and other systems on an accelerated schedule to meet the Year 2000 deadline. Nonetheless, the vast majority of total costs of the Year 2000 program will be internal labor costs. Failure by the Company to meet the challenges of the Year 2000 problem can result in serious problems. A malfunction in a system affecting the generation, transmission or distribution of energy to the Company's customers, whether caused by a problem with one of the Company's IT or non-IT systems or a system operated by a third party, could result in a disruption of service. The severity and cost of the problem would depend on numerous factors, including the scope and duration of any such disruption. If the disruption is severe enough, the Company's operations and financial condition could be adversely affected, the extent of which cannot be predicted. There are no guarantees that all vendor representations obtained by the Company will prove to be entirely accurate and that the testing and remediation procedures employed by the Company will identify and correct 100% of the potential problems associated with the Year 2000 problem. Because there is a chance that on January 1, 2000 there will be some system failures in the utility industry and otherwise, the Company is also working on contingency plans. Utilities have always had to plan for unexpected outages at their facilities (resulting from storms and other natural disasters), and these pre-existing plans form the core of the Company's contingency plan. Operators at the Company's generating facilities already know how to respond if there is a complete loss of power and generators must be brought back into operation manually. Similar procedures, including plans for dealing with an even wider array of difficulties resulting from the simultaneous failures of the systems of many of the Company's suppliers, government agencies, etc., are being developed based on the Company's basic contingency model. The complete contingency plan is not yet fully developed and the Company will continue to work on such plan throughout 1998 and 1999. 23 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company hereby incorporates by reference the information set forth in Part I of this report under Note D of Notes to Financial Statements. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: See Index to Exhibits incorporated herein by reference. (b) Reports on Form 8-K: None 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: November 12, 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) 26 EX-11 2 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS EL PASO ELECTRIC COMPANY EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE (IN THOUSANDS EXCEPT FOR SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- --------------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ------------ NET INCOME APPLICABLE TO COMMON STOCK: Income before extraordinary loss on repurchases of debt $ 22,322 $ 20,657 $ 39,385 $ 36,108 Extraordinary loss on repurchases of debt, net of federal income tax benefit -- (69) -- (2,741) ------------ ------------ ------------ ------------ Net income applicable to common stock $ 22,322 $ 20,588 $ 39,385 $ 33,367 ============ ============ ============ ============ BASIC EARNINGS PER COMMON SHARE: Weighted average number of common shares outstanding 60,168,841 60,129,784 60,168,030 60,124,444 ============ ============ ============ ============ Net income per common share: Income before extraordinary loss on repurchases of debt $ 0.371 $ 0.343 $ 0.655 $ 0.601 Extraordinary loss on repurchases of debt, net of federal income tax benefit -- (0.001) -- (0.046) ------------ ------------ ------------ ------------ Net income $ 0.371 $ 0.342 $ 0.655 $ 0.555 ============ ============ ============ ============ DILUTED EARNINGS PER COMMON SHARE: Weighted average number of common shares outstanding 60,168,841 60,129,784 60,168,030 60,124,444 ------------ ------------ ------------ ------------ 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 30 457,905 134,451 457,905 134,451 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 25,726 23,717 25,726 23,717 ------------ ------------ ------------ ------------ 483,631 158,168 1,331,082 592,612 Divided by number of quarters 1 1 3 3 ------------ ------------ ------------ ------------ Net effect of dilutive potential common stock 483,631 158,168 443,694 197,537 ------------ ------------ ------------ ------------ Weighted average number of common shares and dilutive potential common shares outstanding 60,652,472 60,287,952 60,611,724 60,321,981 ============ ============ ============ ============ Net income per common share: Income before extraordinary loss on repurchases of debt $ 0.368 $ 0.343 $ 0.650 $ 0.599 Extraordinary loss on repurchases of debt, net of federal income tax benefit -- (0.001) -- (0.045) ------------ ------------ ------------ ------------ Net income $ 0.368 $ 0.342 $ 0.650 $ 0.554 ============ ============ ============ ============
EL PASO ELECTRIC COMPANY EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE (IN THOUSANDS EXCEPT FOR SHARE DATA)
TWELVE MONTHS ENDED SEPTEMBER 30, ------------ ------------ 1998 1997 ------------ ------------ NET INCOME APPLICABLE TO COMMON STOCK: Income before extraordinary loss on repurchases of debt $ 44,701 $ 41,006 Extraordinary loss on repurchases of debt, net of federal income tax benefit (34) (2,741) ------------ ------------ Net income applicable to common stock $ 44,667 $ 38,265 ============ ============ BASIC EARNINGS PER COMMON SHARE: Weighted average number of common shares outstanding 60,161,105 60,113,236 ============ ============ Net income per common share: Income before extraordinary loss on repurchases of debt $ 0.743 $ 0.682 Extraordinary loss on repurchases of debt, net of federal income tax benefit (0.001) (0.046) ------------ ------------ Net income $ 0.742 $ 0.636 ============ ============ DILUTED EARNINGS PER COMMON SHARE: Weighted average number of common shares outstanding 60,161,105 60,113,236 ------------ ------------ 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 30 457,905 134,451 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 25,726 23,717 Quarter ended December 31 32,036 21,316 ------------ ------------ 1,545,962 651,735 Divided by number of quarters 4 4 ------------ ------------ Net effect of dilutive potential common stock 386,490 162,934 ------------ ------------ Weighted average number of common shares and dilutive potential common shares outstanding 60,547,595 60,276,170 ============ ============ Net income per common share: Income before extraordinary loss on repurchases of debt $ 0.739 $ 0.680 Extraordinary loss on repurchases of debt, net of federal income tax benefit (0.001) (0.045) ============ ============ Net income $ 0.738 $ 0.635 ============ ============
EX-15 3 LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION EXHIBIT 15 El Paso Electric Company El Paso, Texas Ladies and Gentlemen: Re: Registration Statement No. 333-17971 With respect to the subject registration statement, we acknowledge our awareness of the use therein of our report dated October 16, 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, KPMG Peat Marwick LLP El Paso, Texas October 16, 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 SEPTEMBER 30, 1998 AND THE RELATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 PER-BOOK 1,426,056 0 308,028 76,800 24,300 1,835,184 60,272 240,661 107,561 408,494 131,985 0 872,235 0 0 0 36,121 0 24,110 27,182 335,057 1,835,184 460,241 27,891 326,733 354,624 105,617 6,020 111,637 61,378 50,259 10,874 39,385 0 73,627 172,423 0.655 0.650 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.
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