-----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, E8QMxpX9+7ySEQNbWqDaI8N8A7Z6C3aDwBno/8DtXH3t1SSTExxa53gGE+tiwOCO rep60Mxo65vDOXxd7mvazg== 0000930661-99-002618.txt : 19991115 0000930661-99-002618.hdr.sgml : 19991115 ACCESSION NUMBER: 0000930661-99-002618 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: 99750461 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, 1999 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 incorporation or organization) (I.R.S. Employer 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 November 11, 1999, there were 57,838,209 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, 1999 and December 31, 1998....... 1 Statements of Operations - Three Months, Nine Months and Twelve Months Ended September 30, 1999 and 1998................. 3 Statements of Comprehensive Operations - Three Months, Nine Months and Twelve Months Ended September 30, 1999 and 1998...... 5 Statements of Cash Flows - Nine Months Ended September 30, 1999 and 1998................................................... 6 Notes to Financial Statements................................... 7 Independent Auditors' Review Report............................. 15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 16 Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................................ 27 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................... 29 Item 6. Exhibits and Reports on Form 8-K............................ 29 i PART I. FINANCIAL INFORMATION Item 1. Financial Statements EL PASO ELECTRIC COMPANY BALANCE SHEETS
ASSETS September 30, (In thousands) 1999 December 31, (Unaudited) 1998 ------------------- --------------- Utility plant: Electric plant in service............................................ $1,603,015 $1,599,207 Less accumulated depreciation and amortization....................... 308,486 243,405 ---------- ---------- Net plant in service............................................... 1,294,529 1,355,802 Construction work in progress........................................ 73,329 54,641 Nuclear fuel; includes fuel in process of $573 and $8,031, respectively............................................... 90,281 89,784 Less accumulated amortization........................................ 50,962 45,691 ---------- ---------- Net nuclear fuel................................................... 39,319 44,093 ---------- ---------- Net utility plant................................................ 1,407,177 1,454,536 ---------- ---------- Current assets: Cash and temporary investments....................................... 50,064 229,150 Accounts receivable, principally trade, net of allowance for doubtful accounts of $1,635 and $1,738, respectively............... 68,388 64,735 Inventories, at cost................................................. 26,737 27,537 Prepayments and other................................................ 10,380 16,896 ---------- ---------- Total current assets............................................. 155,569 338,318 ---------- ---------- Long-term contract receivable.......................................... 18,753 23,139 ---------- ---------- Deferred charges and other assets: Accumulated deferred income taxes, net............................... - 10,518 Decommissioning trust fund........................................... 51,895 46,725 Other................................................................ 16,309 17,983 ---------- ---------- Total deferred charges and other assets.......................... 68,204 75,226 ---------- ---------- Total assets..................................................... $1,649,703 $1,891,219 ========== ==========
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) 1999 December 31, (Unaudited) 1998 ------------------ ------------------ Capitalization: Common stock, stated value $1 per share, 100,000,000 shares authorized, 60,200,921 and 60,122,377 shares issued, and 257,567 and 147,985 restricted shares, respectively................... $ 60,458 $ 60,270 Capital in excess of stated value........................................... 242,693 241,325 Unearned compensation - restricted stock awards............................. (1,398) (611) Retained earnings........................................................... 142,734 115,193 Accumulated other comprehensive income (net unrealized gains on marketable securities)........................................... 1,662 1,101 ---------- ---------- 446,149 417,278 Reacquired common stock, 1,643,500 shares; at cost.......................... (14,747) - ---------- ---------- Common stock equity..................................................... 431,402 417,278 Preferred stock, redemption required, cumulative, no par value, 2,000,000 shares authorized, 1,357,444 shares issued and outstanding; at liquidation preference.................................... - 135,744 Long-term debt.............................................................. 795,287 872,213 Financing and capital lease obligations..................................... 19,167 24,849 ---------- ---------- Total capitalization.................................................. 1,245,856 1,450,084 ---------- ---------- Current liabilities: Current maturities of long-term debt and financing and capital lease obligations................................................. 27,335 63,817 Accounts payable, principally trade......................................... 23,338 31,135 Taxes accrued other than federal income taxes............................... 22,730 20,316 Interest accrued............................................................ 17,560 20,412 Net overcollection of fuel revenues......................................... 2,797 2,632 Other....................................................................... 26,622 19,359 ---------- ---------- Total current liabilities............................................. 120,382 157,671 ---------- ---------- Deferred credits and other liabilities: Accumulated deferred income taxes, net...................................... 12,686 - Decommissioning liability................................................... 119,150 129,750 Accrued postretirement benefit liability.................................... 81,503 80,477 Accrued pension liability................................................... 33,594 33,880 Other....................................................................... 36,532 39,357 ---------- ---------- Total deferred credits and other liabilities.......................... 283,465 283,464 ---------- ---------- Commitments and contingencies Total capitalization and liabilities.................................. $1,649,703 $1,891,219 ========== ==========
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, ----------------------------------- -------------------------- 1999 1998 1999 1998 ------------- ------------ ------------ ------------ Operating revenues.............................. $ 170,114 $ 176,893 $ 432,705 $ 460,241 ------------ ----------- ----------- ----------- Energy expenses: Fuel.......................................... 32,516 30,739 76,850 83,851 Purchased and interchanged power.............. 5,935 7,765 10,655 15,573 ------------ ----------- ----------- ----------- 38,451 38,504 87,505 99,424 ------------ ----------- ----------- ----------- Operating revenues net of energy expenses....... 131,663 138,389 345,200 360,817 ------------ ----------- ----------- ----------- Other operating expenses: Other operations.............................. 29,979 30,604 92,490 94,797 Maintenance................................... 7,819 8,307 28,607 24,829 New Mexico Settlement charge.................. - 6,272 - 6,272 Depreciation and amortization................. 22,105 22,681 67,841 67,220 Taxes other than income taxes................. 11,481 11,675 33,650 34,191 ------------ ----------- ----------- ----------- 71,384 79,539 222,588 227,309 ------------ ----------- ----------- ----------- Operating income................................ 60,279 58,850 122,612 133,508 ------------ ----------- ----------- ----------- Other income (deductions): Investment income............................. 1,003 3,335 4,723 8,327 Settlement of bankruptcy professional fees.... - 548 - 1,152 Other, net.................................... (376) (410) (859) (1,244) ------------ ----------- ----------- ----------- 627 3,473 3,864 8,235 ------------ ----------- ----------- ----------- Income before interest charges.................. 60,906 62,323 126,476 141,743 ------------ ----------- ----------- ----------- Interest charges (credits): Interest on long-term debt.................... 17,603 20,185 55,323 60,880 Other interest................................ 1,822 1,816 5,897 5,369 Interest capitalized and deferred............. (1,089) (1,625) (4,428) (4,871) ------------ ----------- ----------- ----------- 18,336 20,376 56,792 61,378 ------------ ----------- ----------- ----------- Income before income taxes...................... 42,570 41,947 69,684 80,365 Income tax expense.............................. 16,346 15,898 26,950 30,106 ------------ ----------- ----------- ----------- Income before extraordinary loss on repurchases of debt....................................... 26,224 26,049 42,734 50,259 Extraordinary loss on repurchases of debt, net of income tax benefit............................ (2,068) - (3,251) - ------------ ----------- ----------- ----------- Net income...................................... 24,156 26,049 39,483 50,259 Preferred stock: Dividend requirements......................... - 3,727 2,616 10,874 Redemption costs.............................. - - 9,581 - ------------ ----------- ----------- ----------- Net income applicable to common stock........... $ 24,156 $ 22,322 $ 27,286 $ 39,385 ============ =========== =========== =========== Basic earnings per common share: Income before extraordinary loss on repurchases of debt $ 0.443 $ 0.371 $ 0.510 $ 0.655 Extraordinary loss on repurchases of debt, net of income tax benefit......................... (0.035) - (0.054) - ------------ ----------- ----------- ----------- Net income................................. $ 0.408 $ 0.371 $ 0.456 $ 0.655 ============ =========== =========== =========== Diluted earnings per common share: Income before extraordinary loss on repurchases of debt $ 0.439 $ 0.368 $ 0.508 $ 0.650 Extraordinary loss on repurchases of debt, net of income tax benefit......................... (0.034) - (0.054) - ------------ ----------- ----------- ----------- Net income................................. $ 0.405 $ 0.368 $ 0.454 $ 0.650 ============ =========== =========== =========== Weighted average number of common shares outstanding 59,232,142 60,168,841 59,879,180 60,168,030 ============ =========== =========== =========== Weighted average number of common shares and dilutive potential common shares outstanding.. 59,677,283 60,662,214 60,165,757 60,615,261 ============ =========== =========== ===========
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, ---------------------------- 1999 1998 ----------- ------------- Operating revenues................................................................. $ 574,685 $ 604,007 ----------- ------------- Energy expenses: Fuel............................................................................ 102,449 114,940 Purchased and interchanged power................................................. 15,692 18,782 ----------- ------------- 118,141 133,722 ----------- ------------- Operating revenues net of energy expenses.......................................... 456,544 470,285 ----------- ------------- Other operating expenses: Other operations................................................................. 131,943 130,108 Maintenance...................................................................... 38,733 35,092 New Mexico Settlement charge..................................................... - 6,272 Depreciation and amortization.................................................... 90,434 89,669 Taxes other than income taxes.................................................... 43,791 44,426 ----------- ------------- 304,901 305,567 ----------- ------------- Operating income................................................................... 151,643 164,718 ----------- ------------- Other income (deductions): Investment income................................................................ 7,902 10,724 Settlement of bankruptcy professional fees....................................... 109 1,458 Other, net....................................................................... (1,345) (292) ----------- ------------- 6,666 11,890 ----------- ------------- Income before interest charges..................................................... 158,309 176,608 ----------- ------------- Interest charges (credits): Interest on long-term debt....................................................... 75,410 82,048 Other interest................................................................... 7,726 6,469 Interest capitalized and deferred................................................ (5,957) (6,407) ----------- ------------- 77,179 82,110 ----------- ------------- Income before income taxes......................................................... 81,130 94,498 Income tax expense................................................................. 31,582 35,531 ----------- ------------- Income before extraordinary items.................................................. 49,548 58,967 ----------- ------------- Extraordinary items: Extraordinary gain on discharge of debt, net of income tax expense............... 3,343 - Extraordinary loss on repurchases of debt, net of income tax benefit............. (3,251) - ----------- ------------- 92 - ----------- ------------- Net income......................................................................... 49,640 58,967 Preferred stock: Dividend requirements............................................................ 6,449 14,300 Redemption costs................................................................. 9,581 - ----------- ------------- Net income applicable to common stock.............................................. $ 33,610 $ 44,667 =========== ============= Basic earnings per common share: Income before extraordinary items................................................ $0.559 $0.742 Extraordinary gain on discharge of debt, net of income tax expense............... 0.056 - Extraordinary loss on repurchases of debt, net of income tax benefit............. (0.054) - ----------- ------------- Net income.................................................................... $0.561 $0.742 =========== ============= Diluted earnings per common share: Income before extraordinary items................................................ $0.556 $0.737 Extraordinary gain on discharge of debt, net of income tax expense............... 0.055 - Extraordinary loss on repurchases of debt, net of income tax benefit............. (0.054) - ----------- ------------- Net income.................................................................... $0.557 $0.737 =========== ============= Weighted average number of common shares outstanding............................... 59,952,191 60,161,105 =========== ============= Weighted average number of common shares and dilutive potential common shares outstanding..................................... 60,296,765 60,575,588 =========== =============
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, ------------------ --------------------- --------------------- 1999 1998 1999 1998 1999 1998 -------- ------- -------- -------- -------- ------- Net income...................................... $24,156 $26,049 $39,483 $50,259 $49,640 $58,967 Other comprehensive income (loss): Net unrealized gain (loss) on marketable securities, less applicable income tax benefit (expense) of $725, $813, $(302), $606, $(1,599) and $768, respectively........ (1,345) (1,510) 561 (1,124) 2,970 (1,425) ------- ------- ------- ------- ------- ------- Comprehensive income............................ 22,811 24,539 40,044 49,135 52,610 57,542 Preferred stock: Dividend requirements.......................... - 3,727 2,616 10,874 6,449 14,300 Redemption costs............................... - - 9,581 - 9,581 - ------- ------- ------- ------- ------- ------- Comprehensive income applicable to common stock................................ $22,811 $20,812 $27,847 $ 38,261 $36,580 $43,242 ======= ======= ======= ======= ======= =======
See accompanying notes to financial statements. 5 EL PASO ELECTRIC COMPANY STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Nine Months Ended September 30, ------------------------------------- 1999 1998 ------------ ----------- Cash Flows From Operating Activities: Net income........................................................ $ 39,483 $ 50,259 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................................... 67,841 67,220 Amortization of nuclear fuel.................................... 15,708 16,580 Deferred income taxes, net...................................... 24,976 27,525 New Mexico Settlement charge.................................... - 6,272 Extraordinary loss on repurchases of debt, net of income tax benefit........................................... 3,251 - Other operating activities...................................... 3,942 4,220 Change in: Accounts receivable............................................. (3,653) (11,266) Inventories..................................................... 800 (238) Prepayments and other........................................... 6,516 (6,263) Long-term contract receivable................................... 4,386 3,359 Accounts payable................................................ (7,797) (3,667) Taxes accrued other than federal income taxes................... 2,414 4,024 Interest accrued................................................ (2,852) (1,244) Net over/undercollection of fuel revenues....................... 165 6,182 Other current liabilities....................................... 9,842 2,972 Deferred charges and credits.................................... 2,870 6,488 ------------ ---------- Net cash provided by operating activities..................... 167,892 172,423 ------------ ---------- Cash Flows From Investing Activities: Cash additions to utility property, plant and equipment........... (39,953) (31,940) Cash additions to nuclear fuel.................................... (8,475) (9,583) Interest capitalized: Nuclear fuel.................................................... (2,460) (3,058) Utility property, plant and equipment........................... (1,968) (1,813) Investment in decommissioning trust fund.......................... (4,308) (5,151) Other investing activities........................................ (998) (270) ------------ ---------- Net cash used for investing activities........................ (58,162) (51,815) ------------ ---------- Cash Flows From Financing Activities: Reacquired common stock........................................... (14,747) - Repurchases of and payments on long-term debt..................... (117,533) (30,604) Nuclear fuel financing obligations: Proceeds........................................................ 10,934 12,649 Payments........................................................ (15,494) (16,515) Redemption of preferred stock..................................... (148,937) - Preferred stock dividend payment.................................. (1,328) - Payments on capital lease obligations............................. (1,573) (1,469) Other financing activities........................................ (138) (71) ------------ ---------- Net cash used for financing activities........................ (288,816) (36,010) ------------ ---------- Net (decrease) increase in cash and temporary investments........... (179,086) 84,598 Cash and temporary investments at beginning of period............... 229,150 111,227 ------------ ---------- Cash and temporary investments at end of period..................... $ 50,064 $ 195,825 ============ ==========
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, 1998 (the "1998 Form 10-K"). Capitalized terms used in this report and not defined herein have the meaning ascribed for such terms in the 1998 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, 1999 and December 31, 1998; the results of operations for the three, nine and twelve months ended September 30, 1999 and 1998; and cash flows for the nine months ended September 30, 1999 and 1998. The results of operations for the three, nine and twelve months ended September 30, 1999 are not necessarily indicative of the results to be expected for the full calendar year. Supplemental Cash Flow Disclosures (In thousands)
Nine Months Ended September 30, -------------------------------------------- 1999 1998 --------------------- --------------------- Cash paid for: Interest on long-term debt....................... $53,533 $56,673 Income taxes, net................................ 1,332 1,400 Reorganization items - professional fees and other............................... - 4,280 Non-cash investing and financing activities: Issuance of preferred stock for pay-in-kind dividend......................... 3,867 10,666 Grants of restricted shares of common stock................................. 1,705 195
7 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (Unaudited) Reconciliation of Basic and Diluted Earnings Per Common Share The reconciliation of basic and diluted earnings per common share before extraordinary items is presented below:
Three Months Ended September 30, ------------------------------------------------------------------------ 1999 1998 ----------------------------------- ----------------------------------- Per Per Common Common Income Shares Share Income Shares Share -------------- ---------- ------- -------------- ---------- ------- (In thousands) (In thousands) Income before extraordinary item..... $26,224 $26,049 Less: Preferred stock dividend requirements.............. - 3,727 ------- ------- Basic earnings per common share: Net income applicable to common stock....................... 26,224 59,232,142 $0.443 22,322 60,168,841 $0.371 ======= ======= Effect of dilutive securities: Unvested restricted stock........... - 45,471 - 35,468 Stock options....................... - 399,670 - 457,905 ------- ---------- ------- ---------- Diluted earnings per common share: Net income applicable to common stock....................... $26,224 59,677,283 $0.439 $22,322 60,662,214 $0.368 ======= ========== ======= ======= ========== ======= Nine Months Ended September 30, ------------------------------------------------------------------------ 1999 1998 ----------------------------------- ----------------------------------- Per Per Common Common Income Shares Share Income Shares Share -------------- ---------- ------- -------------- ---------- ------- (In thousands) (In thousands) Income before extraordinary item..... $42,734 $50,259 Less: Preferred stock: Dividend requirements............ 2,616 10,874 Redemption costs................. 9,581 - ------- ------------- Basic earnings per common share: Net income applicable to common stock....................... 30,537 59,879,180 $0.510 39,385 60,168,030 $0.655 ======= ======= Effect of dilutive securities: Unvested restricted stock........... - 24,886 - 27,268 Stock options....................... - 261,691 - 419,963 ------- ---------- ------------- ---------- Diluted earnings per common share: Net income applicable to common stock....................... $30,537 60,165,757 $0.508 $39,385 60,615,261 $0.650 ======= ========== ======= ============= ========== =======
8 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (Unaudited)
Twelve Months Ended September 30, ------------------------------------------------------------------------ 1999 1998 ----------------------------------- ----------------------------------- Per Per Common Common Income Shares Share Income Shares Share -------------- ---------- ------- -------------- ---------- ------- (In thousands) (In thousands) Income before extraordinary items.... $49,548 $58,967 Less: Preferred stock: Dividend requirements............ 6,449 14,300 Redemption costs................. 9,581 - ------- ------------- Basic earnings per common share: Net income applicable to common stock....................... 33,518 59,952,191 $0.559 44,667 60,161,105 $0.742 ======= ======= Effect of dilutive securities: Unvested restricted stock........... - 28,523 - 24,575 Stock options....................... - 316,051 - 389,908 ------- ---------- ------------- ---------- Diluted earnings per common share: Net income applicable to common stock....................... $33,518 60,296,765 $0.556 $44,667 60,575,588 $0.737 ======= ========== ======= ============= ========== =======
B. Rate Matters For a full discussion of the Company's rate matters, see Note B of Notes to Financial Statements in the 1998 Form 10-K. Texas Rate Matters A comprehensive electric industry restructuring bill was signed into law by the Governor of Texas and became effective on September 1, 1999. Under the new law, retail customer choice will begin in the service territories of most investor-owned utilities on January 1, 2002. Municipal and cooperative utilities will have the option of electing to offer customer choice in their service areas. In recognition of the Company's Texas Settlement Agreement, the new law does not require retail customer choice to begin in the Company's Texas service territory until August 2005, after the expiration of the Company's Freeze Period. Additionally, after August 2005, the Company will have no further claim for stranded costs or transition costs incurred or otherwise provided for pursuant to the law. The Company is exempt from the competitive provisions of this law until August 2005. The competitive provisions of the new law include the following: (i) a requirement that each utility, on or before January 1, 2002, must separate its business activities into at least three separate entities: a power generation company; a company selling electric energy to retail customers; and a transmission and distribution utility; (ii) a 6% rate reduction, coincident with the start of retail choice, for residential and small commercial customers; (iii) a limitation that no power generation company may own and control more than 20% of the generation capacity in a power region; (iv) an obligation to auction entitlements to at least 15% of a utility's Texas jurisdictional installed generation capacity, continuing until the earlier of 60 months after 9 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (Unaudited) the date customer choice is introduced or the date the Texas Commission determines that 40% of the power consumed by residential and small commercial customers is served by non-affiliated retail electric providers; (v) a reduction in emissions for grandfathered plants by May 2003; (vi) an additional 2,000 MW of statewide renewable energy capacity by 2009; (vii) the establishment of a System Benefit Fund ($0.50/MWh) for customer education and low-income assistance; and (viii) a detailed affiliate code of conduct to govern relationships between the regulated utility and its affiliates. The Company will have to comply with certain of these competitive provisions beginning in August 2005. New Mexico Rate Matters A comprehensive electric utility industry restructuring bill was signed into law by the Governor of New Mexico and became effective on April 8, 1999. The new law requires each utility, on or before January 1, 2001, to separate into at least two entities, separating its supply service and generation assets from its transmission and distribution service assets. This corporate separation can be accomplished through the creation of separate non-affiliated companies, separate affiliated companies owned by a common holding company, or the sale of assets to third parties. Under the new law, retail customer choice begins January 1, 2001 for public post-secondary educational institutions, public schools, and residential and small business customers. Retail customer choice begins January 1, 2002 for all other customers. The New Mexico Commission may delay implementation of retail customer choice or other restructuring deadlines established by the new law for up to one year. The new law allows utilities to recover no less than 50% of their stranded costs with up to 100% recovery allowed if the New Mexico Commission determines that additional recovery is in the public interest, is necessary to maintain a utility's financial integrity, is necessary to continue adequate and reliable service, and will not cause an increase in rates to residential and small business customers. Utilities are required to file transition plans addressing the various restructuring issues, including the recovery of stranded costs, by March 1, 2000. The Company is currently working to comply with the requirements of the New Mexico law, and is developing its transition plan for filing with the New Mexico Commission on or before March 1, 2000. In June 1999, the New Mexico Commission ordered the review of the Company's New Mexico Settlement. Under the new law, the New Mexico Commission may review any rate settlement which provides a means of transition to competition and which had been previously approved by the New Mexico Commission in order to confirm, reject or modify such plans by November 30, 1999. If the New Mexico Commission approves the New Mexico Settlement, it will supersede the new law to the extent the new law is inconsistent. On August 3, 1999, the Company filed with the New Mexico Commission testimony and exhibits in support of the New Mexico Settlement. On October 12, 1999, an administrative law judge held an evidentiary hearing on the Company's New Mexico Settlement. The Company is currently awaiting the New Mexico Commission's decision on the New Mexico Settlement. Although the Company believes that the recovery of costs provided for in the New Mexico Settlement is consistent with the intent of the new law, it cannot predict whether the New Mexico Commission's decision will impact the Company's revenues and recovery of costs contemplated under the New Mexico Settlement, or whether the Company will be able to maintain its New Mexico rates at the new levels. 10 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (Unaudited) Federal Regulatory Matters 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. In May 1999, the FERC issued its opinion and ruled that based on the FERC's method for calculating stranded costs, Las Cruces' stranded cost obligation was $52.9 million, assuming a departure date of July 1, 1999. Although this amount is approximately $30 million higher than an earlier administrative law judge's recommendation, the Company believes the FERC's 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 filed a motion for rehearing of the FERC's decision. The FERC has extended its time limit for ruling on this motion. The Company cannot predict when the FERC will rule on this motion. See Note B of Notes to Financial Statements in the 1998 Form 10-K for a full discussion of stranded costs. Pursuant to FERC Order No. 888, the Company filed its non-discriminatory open access transmission tariffs with the FERC in July 1996. The Company reached a settlement with the various parties regarding rates for transmission and ancillary services under these tariffs. However, the settlement, which was filed with the FERC in March 1997 and approved by the FERC in June 1998, did not resolve the issues concerning the manner in which the Company will determine the amount of transmission capacity that is available for use by third parties desiring to use its transmission system and whether the Company must provide back-up generation services to third parties using its transmission system. In May 1999, the FERC issued its opinion in a proceeding brought by Southwestern Public Service Company ("SPS") regarding the use of the Company's transmission system to serve Las Cruces, holding that the Company was not obligated under FERC Order No. 888 to provide back-up generation services to third parties using its transmission system. However, the FERC stated that, for purposes of calculating available transmission capacity, the Company should assume that it would not be providing generation service to Las Cruces or Comision Federal de Electricidad ("CFE"), and the loads of those customers should be omitted from its calculation of available transmission capacity. The FERC also concluded that once the Company's calculation was adjusted to reflect the assumed discontinuation of service to Las Cruces and CFE, the Company would have sufficient transmission capacity over the Eddy County tie to meet SPS' request for firm transmission service. Although the Company has filed a compliance filing as required by the order, the filing reflects that the Company does not have sufficient transmission capacity over the Eddy County tie to meet SPS' request for firm transmission service. The Company filed a motion for rehearing of the FERC's decision. The FERC has extended its time limit for ruling on this motion. The Company does not expect a material financial impact from this FERC ruling. However, the Company is concerned that the result of an adverse FERC ruling would be to impair the reliability of service to the Company's other retail customers, while increasing costs. 11 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (Unaudited) In order to procure a firm supply of electric power to serve its proposed municipal electric system, during the pendency of the transmission litigation, Las Cruces filed a request with the FERC in November 1998 for an order requiring the Company to sell wholesale power to Las Cruces on a temporary basis pursuant to Section 202(b) of the Federal Power Act from July 1999 until such time as Las Cruces is able to secure firm transmission service and back-up generation service required to enable it to obtain reliable service from SPS. In January 1999, the FERC ordered the Company to sell electric energy to Las Cruces at a cost-based wholesale rate from July 1, 1999 until the earlier of the time Las Cruces begins receiving its power from a different supplier or one year. In May 1999, the FERC issued an order denying requests for rehearing of its January 1999 order. On August 16, 1999, the Company and Las Cruces submitted an agreement to the FERC specifying the cost-based wholesale rate at which Las Cruces would take power from the Company, while at the same time allowing the Company to appeal the FERC's January 1999 order requiring such service. The FERC staff supported the stipulated settlement agreement between the Company and Las Cruces and the assigned FERC administrative law judge certified the stipulation to the FERC on September 10, 1999. The Company expects the FERC to approve the settlement agreement, but cannot predict when such approval might occur. The Company has appealed the FERC's January 1999 order to the United States Court of Appeals for the Fifth Circuit (the "Fifth Circuit"). On November 2, 1999, the Fifth Circuit heard oral argument on the Company's appeal. The Company cannot predict when the Fifth Circuit will rule on the Company's appeal. C. 1999 Long-Term Incentive Plan In May 1999, the Company's shareholders approved the adoption of a stock- based long-term incentive plan (the "1999 Plan"). Under the 1999 Plan, directors, officers, managers, other employees and consultants are eligible to receive non-statutory stock options, incentive stock options, stock appreciation rights, restricted stock, bonus stock and performance shares covering up to two million shares of common stock. On July 1, 1999, the Company filed its Registration Statement on Form S-8 registering the two million shares of common stock reserved for issuance under the 1999 Plan. On August 31, 1999, the FERC approved the issuance of shares under the 1999 Plan. D. Common Stock Repurchase Program In May 1999, the Company's Board of Directors approved a stock repurchase program allowing the Company to purchase outstanding shares of its common stock from time to time, up to a total of six million shares. The Company will make purchases primarily in the open market at prevailing prices and will also engage in private transactions, if appropriate. The shares that the Company acquires will be available for issuance under employee benefit and stock option plans or may be retired. As of September 30, 1999, the Company had reacquired 1,643,500 shares of common stock at a cost of approximately $14.7 million, including commissions. 12 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (Unaudited) E. Preferred Stock Redemption In March 1999, after obtaining required consents of holders of certain of the Company's outstanding debt securities, the Company redeemed the Series A Preferred Stock. The Company paid the redemption price of approximately $139.6 million, accrued cash dividends of $1.3 million, and premium, fees and costs of securing the consents aggregating $9.6 million. The preferred stock had an annual dividend rate of 11.40%. F. 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 1998 Form 10-K. In addition, see Note C of Notes to Financial Statements in the 1998 Form 10-K regarding matters related to Palo Verde, including decommissioning, spent fuel storage, disposal of low-level radioactive waste and liability and insurance matters. Coal Mine Reclamation The Four Corners participants are currently reviewing a 1999 study conducted by an outside engineering firm of the estimated final reclamation and coal mine closure costs. Based on a preliminary review of this report, the Company believes that its ultimate liability for reclamation and closure costs may be less than the currently accrued amount of $14.8 million. The participants' review of the study includes an analysis of the assumptions used to estimate the liability for reclamation and closure costs. Once the review is completed, the Company can determine what effect, if any, the study may have on the Company. Participant review of the study is expected to be completed by the end of 1999. Final review of the study may justify a material reduction in the Company's liability for reclamation and closure costs. If the review is completed by year-end and the reduction is so justified, it will be recorded in the fourth quarter as a change in estimate. G. Litigation For a full discussion of litigation, see Note I of Notes to Financial Statements in the 1998 Form 10-K. Litigation with Las Cruces Las Cruces is attempting to replace the Company as the electric service provider in Las Cruces by acquiring, through condemnation or 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 operating revenues. 13 EL PASO ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (Unaudited) In February 1999, Las Cruces filed its Petition for Condemnation and Application for Immediate Possession with the New Mexico State District Court. In March 1999, the Company removed the Las Cruces petition and application to the United States District Court for the District of New Mexico. In May 1999, the federal court issued a final decision finding that the removal to federal court was proper. In June 1999, the federal court consolidated this matter with the declaratory action previously filed by the Company challenging the constitutionality of the legislation giving Las Cruces the authority to condemn. At this time no hearing on the immediate possession matter has been set. The Company is unable to predict the outcome of this litigation. If Las Cruces succeeds in its efforts to condemn the Company's distribution system, the Company could lose its Las Cruces customer base, although the Company would be entitled to receive "just compensation" as established by New Mexico law. "Just compensation" is generally defined as the amount of money that would fairly compensate the party whose property is condemned. It is the Company's opinion that this amount would be the difference between the value of the Company's distribution system prior to the taking, as compared to the value of the distribution system after the taking. Compensation for any stranded costs related to the Company's generation assets will be determined by the FERC. See Note B, "Rate Matters - Federal Regulatory Matters." 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, 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 Las Cruces 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. 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. See Note B, "Rate Matters - Federal Regulatory Matters" for a discussion of this proceeding. 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 (the Company) as of September 30, 1999, the related condensed statements of operations and comprehensive operations for the three, nine, and twelve months ended September 30, 1999 and 1998, and the related condensed statements of cash flows for the nine months ended September 30, 1999 and 1998. 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, 1998, 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 5, 1999, 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, 1998, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. KPMG LLP El Paso, Texas October 18, 1999 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 1998 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 stockholders, involve known and unknown risks and other factors which may cause the Company's actual results in future periods to differ materially from those expressed in any forward-looking statements. Any such statement is qualified by reference to the risks and factors discussed below under the headings "Operational 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 risks and factors discussed below and in such filings are not exclusive. The Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company. Operational Prospects and Challenges The Texas Settlement Agreement provides 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 New Mexico Settlement provides a similar level of certainty in the Company's New Mexico rates, although of shorter duration. As discussed below, the Texas Settlement Agreement provided for an annual base revenue reduction in Texas of approximately $15.4 million and approval of all Company fuel expenses for the 42-month period subject to reconciliation. The Texas Rate Stipulation is preserved under the Texas Settlement Agreement and the Texas electric industry restructuring law. The New Mexico Settlement included an annual base revenue reduction of $4.6 million, exclusive of the Company's $1.0 million contribution, paid over a 30-month period, for low-income assistance in New Mexico. In return for these rate reductions, the Company believes it will achieve in both Texas and New Mexico a new period of revenue stability at levels that will permit it to further reduce its debt 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 New Mexico Settlement provides for (i) a total annual 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 16 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 New Mexico Settlement became effective on October 26, 1998. Additionally, as a result of the New Mexico Settlement, the Company will contribute $0.4 million annually ($1.0 million over the 30-month term of the moratorium period) to a social services agency in Dona Ana County providing assistance to low-income individuals. The Company negotiated the New Mexico Settlement so as to substantially reduce the likelihood of additional rate reductions during the moratorium period. A comprehensive electric utility industry restructuring bill was signed into law by the Governor of New Mexico and became effective on April 8, 1999. The new law requires each utility, on or before January 1, 2001, to separate into at least two entities, separating its supply service and generation assets from its transmission and distribution service assets. This corporate separation can be accomplished through the creation of separate non-affiliated companies, separate affiliated companies owned by a common holding company, or the sale of assets to third parties. Under the new law, retail customer choice begins January 1, 2001 for public post-secondary educational institutions, public schools, and residential and small business customers. Retail customer choice begins January 1, 2002 for all other customers. The New Mexico Commission may delay implementation of retail customer choice or other restructuring deadlines established by the new law for up to one year. The new law allows utilities to recover no less than 50% of their stranded costs with up to 100% recovery allowed if the New Mexico Commission determines that additional recovery is in the public interest, is necessary to maintain a utility's financial integrity, is necessary to continue adequate and reliable service, and will not cause an increase in rates to residential and small business customers. Utilities are required to file transition plans addressing the various restructuring issues, including the recovery of stranded costs, by March 1, 2000. The Company is currently working to comply with the requirements of the New Mexico law, and is developing its transition plan for filing with the New Mexico Commission on or before March 1, 2000. In June 1999, the New Mexico Commission ordered the review of the Company's New Mexico Settlement. Under the new law, the New Mexico Commission may review any rate settlement which provides a means of transition to competition and which had been previously approved by the New Mexico Commission in order to confirm, reject or modify such plans by November 30, 1999. If the New Mexico Commission approves the New Mexico Settlement, it will supersede the new law to the extent the new law is inconsistent. On August 3, 1999, the Company filed with the New Mexico Commission testimony and exhibits in support of the New Mexico Settlement. On October 12, 1999, an administrative law judge held an evidentiary hearing on the Company's New Mexico Settlement. The Company is currently awaiting the New Mexico Commission's decision on the New Mexico Settlement. Although the Company believes that the recovery of costs provided for in the New Mexico Settlement is consistent with the intent of the new law, it cannot predict whether the New Mexico Commission's decision will impact the Company's revenues and recovery of costs contemplated under the New Mexico Settlement, or whether the Company will be able to maintain its New Mexico rates at the new levels. Following the New Mexico Settlement, the Company offered to enter into a comparable agreement in Texas. Based upon that offer, the Company entered into the Texas Settlement Agreement providing for: (i) a total annual jurisdictional base revenue reduction of approximately $15.4 million retroactive to November 1, 1998; (ii) reconciliation of the Company's fuel expenses through December 31, 1998, with no disallowance; and (iii) an agreement to use 50% of all Palo Verde performance rewards related to evaluation periods after 1997, when collected, for low-income assistance and for Demand-Side Management ("DSM") programs, primarily focused on small business customers, through the end of the Freeze Period. The new rates under the Texas Settlement Agreement were 17 implemented in April 1999, pursuant to an interim order of the Texas Commission. In June 1999, the Texas Commission issued a final order approving the Texas Settlement Agreement. A comprehensive electric industry restructuring bill was signed into law by the Governor of Texas and became effective on September 1, 1999. Under the new law, retail customer choice will begin in the service territories of most investor-owned utilities on January 1, 2002. Municipal and cooperative utilities will have the option of electing to offer customer choice in their service areas. In recognition of the Company's Texas Settlement Agreement, the new law does not require retail customer choice to begin in the Company's Texas service territory until August 2005, after the expiration of the Company's Freeze Period. Additionally, after August 2005, the Company will have no further claim for stranded costs or transition costs incurred or otherwise provided for pursuant to the law. The Company is exempt from the competitive provisions of this law until August 2005. The competitive provisions of the new law include the following: (i) a requirement that each utility, on or before January 1, 2002, must separate its business activities into at least three separate entities: a power generation company; a company selling electric energy to retail customers; and a transmission and distribution utility; (ii) a 6% rate reduction, coincident with the start of retail choice, for residential and small commercial customers; (iii) a limitation that no power generation company may own and control more than 20% of the generation capacity in a power region; (iv) an obligation to auction entitlements to at least 15% of a utility's Texas jurisdictional installed generation capacity, continuing until the earlier of 60 months after the date customer choice is introduced or the date the Texas Commission determines that 40% of the power consumed by residential and small commercial customers is served by non-affiliated retail electric providers; (v) a reduction in emissions for grandfathered plants by May 2003; (vi) an additional 2,000 MW of statewide renewable energy capacity by 2009; (vii) the establishment of a System Benefit Fund ($0.50/MWh) for customer education and low-income assistance; and (viii) a detailed affiliate code of conduct to govern relationships between the regulated utility and its affiliates. The Company will have to comply with certain of these competitive provisions beginning in August 2005. The Company faces a number of 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 rates, which have been reduced from previous levels as a result of the New Mexico Settlement and the Texas Settlement Agreement, are effectively capped. 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. Competition will begin in New Mexico on January 1, 2001, or January 1, 2002, if the New Mexico Commission extends the time for implementing customer choice. Competition in the Company's Texas service territory is not required to begin until August 2005. The Company cannot predict what effect competition will have on the Company's customer base. The Company's wholesale and large retail customers already have, in varying degrees, additional alternate sources of economical power, including co-generation of electric power. For example, a 504 MW combined-cycle generating plant located in Samalayuca, Chihuahua, 18 Mexico, which became fully operational at the end of 1998, gave CFE the current capacity to supply electricity to portions of northern Chihuahua, including the geographic area previously served by the Company. In addition, the New Mexico State Legislature has passed legislation which purportedly gives Las Cruces the authority to condemn the Company's distribution system and related assets located within its city limits. In February 1999, Las Cruces filed its 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. Additionally, American National Power, Inc., a wholly-owned subsidiary of National Power PLC, has announced it is exploring the possibility of building a generation plant in El Paso, Texas. 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. The Company's sales to military bases represent approximately 3% of annual operating revenues. While 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 currently has long-term contracts with all three military bases that it serves. The Company signed a contract with Ft. Bliss in December 1998, under which Ft. Bliss will take service from the Company through December 2008. The Company has a contract to provide retail electric service to Holloman for a ten-year term which began in December 1995. In May 1999, the Army and the Company entered into a new ten-year contract to provide retail electric service to White Sands. 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 changes in state laws and regulatory provisions relating to wholesale and retail service. The potential effects of deregulation are particularly important to the Company because its rates are significantly higher than the national and regional averages. In the face of increased competition, there can be no assurance that this competition will not adversely affect the future operations, cash flows, and financial condition of the Company. Liquidity and Capital Resources The Company's principal liquidity requirements for the next several years are expected to consist of interest and principal payments on the Company's indebtedness and capital expenditures related to the Company's generating facilities and transmission and distribution systems. The Company expects that cash flows from operations will be sufficient for such purposes. Long-term capital requirements of the Company will consist primarily of construction of electric utility plant and payment of interest on and retirement of debt. The Company has no current plans to construct any new generating capacity to serve retail load through at least 2004. Utility construction expenditures will consist primarily of expanding and updating the transmission and distribution systems and the cost of capital improvements and replacements at Palo Verde and other generating facilities. The Company anticipates that internally generated funds will be sufficient to meet its construction requirements, provide for the retirement of debt, 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, 1999, the Company had approximately 19 $50.1 million in cash and cash equivalents. In February 1999, the Company renewed its $100 million revolving credit facility, which now provides up to $70 million for nuclear fuel purchases and up to $50 million (depending on the amount of borrowings outstanding for nuclear fuel purchases) for working capital needs. At September 30, 1999, approximately $44.8 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 Texas Rate Stipulation, the Texas Settlement Agreement, the New Mexico Settlement, and competitive pressures, the Company does not expect to be able to raise its base rates in the event of increases in non-fuel costs, increases in fuel costs in New Mexico or loss of revenues. Accordingly, as described below, the reduction of fixed obligations is a high priority for the Company in order to gain additional financial flexibility to address the evolving competitive market. In March 1999, the Company used cash on hand to pay for the early redemption of its Series A Preferred Stock, which resulted in the avoidance of additional cash dividends of approximately $2.7 million that would have been payable through May 1, 1999, and $4.0 million quarterly thereafter until mandatory redemption in 2008. The Company has significantly reduced its long-term debt following its emergence from bankruptcy in 1996. From June 1, 1996 through November 11, 1999, the Company has repurchased approximately $308.1 million of first mortgage bonds as part of an aggressive deleveraging program and repaid the remaining $36.0 million of Series A First Mortgage Bonds at their maturity on February 1, 1999. The foregoing, together with the early redemption of the Series A Preferred Stock, reduced the Company's annual interest expense and annual cash dividend requirements by approximately $27.2 million and $15.9 million, respectively. Common stock equity as a percentage of capitalization has increased from 19% at June 30, 1996 to 35% at September 30, 1999. In May 1999, the Company's Board of Directors approved a stock repurchase program allowing the Company to purchase outstanding shares of its common stock from time to time, up to a total of six million shares. The Company will make purchases primarily in the open market at prevailing prices and will also engage in private transactions, if appropriate. The shares that the Company acquires will be available for issuance under employee benefit and stock option plans or may be retired. As of November 11, 1999, the Company had reacquired 2,621,500 shares of common stock at a cost of approximately $23.6 million, including commissions. The Company continues to believe that the orderly reduction of fixed obligations with a goal of achieving a capital structure that is more typical in the electric utility industry and consistent with an investment grade rating, is a significant component of long-term shareholder value creation. Future repurchases of first mortgage bonds and common stock will be evaluated based on market conditions, the availability of cash to meet bond maturities, and the comparative economic value of alternative uses of cash. The degree to which the Company is leveraged could have important consequences on the Company's liquidity, including (i) the Company's ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate or other purposes could be limited in the future, and (ii) the Company's 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. 20 Results of Operations
Net Income Applicable Diluted Earnings Per to Common Stock Before Common Share Before Extraordinary Items Extraordinary Items ------------------------------ ------------------------------ 1999 1998 1999 1998 -------------- -------------- -------------- -------------- (In thousands) Three Months Ended September 30............... $26,224 $22,322 $0.439 $0.368 Nine Months Ended September 30................ 30,537 39,385 0.508 0.650 Twelve Months Ended September 30.............. 33,518 44,667 0.556 0.737
Results of operations for the nine and twelve months ended September 30, 1999 were affected by unusual or infrequent items, including the recognition of certain items arising from the Texas Settlement Agreement, a change in estimated fuel cost reserves, and the early redemption of the Company's 11.40% Series A Preferred Stock. Operating revenues net of energy expenses decreased $6.7 million for the three months ended September 30, 1999 compared to the same period last year primarily due to the rate reductions in Texas and New Mexico and the loss of sales to CFE. These decreases were partially offset by increased economy sales. Operating revenues net of energy expenses decreased $15.6 million and $13.7 million for the nine and twelve months ended September 30, 1999, respectively, compared to the same periods last year, as follows (In thousands):
Nine Months Ended September 30: 1999 1998 Increase/(Decrease) - ------------------------------- ---- ---- ------------------- Texas Settlement Agreement: Palo Verde performance reward........... $ 3,453 $ - $ 3,453 Retroactive base rate decrease.......... (2,343) - (2,343) Change in estimated fuel cost reserves.... 3,754 - 3,754 Other..................................... 340,336 360,817 (20,481) -------- -------- -------- Total operating revenues net of energy expenses................ $345,200 $360,817 $(15,617) ======== ======== ======== Twelve Months Ended September 30: 1999 1998 Increase/(Decrease) - --------------------------------- ---- ---- ------------------- Texas Settlement Agreement: Palo Verde performance reward........... $ 3,453 $ - $ 3,453 Change in estimated fuel cost reserves.... 3,754 - 3,754 Other..................................... 449,337 470,285 (20,948) -------- -------- -------- Total operating revenues net of energy expenses................ $456,544 $470,285 $(13,741) ======== ======== ========
Excluding the effects of the recognition of the Palo Verde performance reward, the retroactive base rate decrease, and the change in estimated fuel cost reserves, the nine month decrease of $20.5 million was primarily due to the rate reductions in Texas and New Mexico and the loss of sales to CFE. These decreases were partially offset by increased economy sales. Excluding the recognition of the Palo Verde performance reward and the change in estimated fuel cost reserves, the twelve month decrease of $20.9 million was primarily due to the rate reductions in Texas and New Mexico and loss of sales to CFE. These decreases were partially offset by increased economy sales. 21 Operating revenues from retail customers shown below include the recognition of the Palo Verde performance reward and the effects of the change in estimated fuel cost reserves for the nine and twelve month periods ended September 30, 1999. Also included in the nine month period is the effect of the retroactive base rate decrease. Comparisons of kWh sales and operating revenues are shown below (In thousands):
Increase/(Decrease) --------------------- Three Months Ended September 30: 1999 1998 Amount Percent - -------------------------------- ---- ---- ------ ------- Electric kWh Sales: Retail Customers........................ 1,774,724 1,792,907 (18,183) (1.0)% Other Utilities......................... 289,318 508,318 (219,000) (43.1) (1) ---------- ---------- --------- Subtotal............................... 2,064,042 2,301,225 (237,183) (10.3) Economy Sales........................... 386,900 184,507 202,393 109.7 ---------- ---------- --------- Total.................................. 2,450,942 2,485,732 (34,790) (1.4) ========== ========== ========= Operating Revenues: Retail Customers........................ $ 145,558 $ 150,139 $ (4,581) (3.1)% Other Utilities......................... 14,061 21,771 (7,710) (35.4) (1) Economy Sales........................... 10,495 4,983 5,512 110.6 ---------- ---------- --------- Total.................................. $ 170,114 $ 176,893 $ (6,779) (3.8) ========== ========== ========= Increase/(Decrease) ---------------------------- Nine Months Ended September 30: 1999 1998 Amount Percent - ------------------------------- ---- ---- ------ ------- Electric kWh Sales: Retail Customers........................ 4,514,857 4,558,310 (43,453) (1.0)% Other Utilities......................... 661,741 1,436,891 (775,150) (53.9) (1) ---------- ---------- --------- Subtotal............................... 5,176,598 5,995,201 (818,603) (13.7) Economy Sales........................... 1,087,846 564,922 522,924 92.6 ---------- ---------- --------- Total.................................. 6,264,444 6,560,123 (295,679) (4.5) ========== ========== ========= Operating Revenues: Retail Customers........................ $ 372,170 $ 382,274 $ (10,104) (2.6)% Other Utilities......................... 37,728 66,618 (28,890) (43.4) (1) Economy Sales........................... 22,807 11,349 11,458 101.0 ---------- ---------- --------- Total.................................. $ 432,705 $ 460,241 $ (27,536) (6.0) ========== ========== ========= Increase/(Decrease) ---------------------------- Twelve Months Ended September 30: 1999 1998 Amount Percent - --------------------------------- ---- ---- ------ ------- Electric kWh Sales: Retail Customers........................ 5,904,768 5,945,705 (40,937) (0.7)% Other Utilities......................... 982,730 1,857,354 (874,624) (47.1) (1) ---------- ---------- --------- Subtotal............................... 6,887,498 7,803,059 (915,561) (11.7) Economy Sales........................... 1,411,632 778,733 632,899 81.3 ---------- ---------- --------- Total.................................. 8,299,130 8,581,792 (282,662) (3.3) ========== ========== ========= Operating Revenues: Retail Customers........................ $ 487,726 $ 502,686 $ (14,960) (3.0)% Other Utilities......................... 55,334 86,221 (30,887) (35.8) (1) Economy Sales........................... 31,625 15,100 16,525 109.4 ---------- ---------- --------- Total.................................. $ 574,685 $ 604,007 $ (29,322) (4.9) ========== ========== =========
(1) Primarily due to the loss of sales to CFE. 22 Other operations and maintenance expense decreased $1.1 million for the three months ended September 30, 1999 compared to the same period last year due to decreased operations expense of $0.6 million and decreased maintenance expense of $0.5 million, as follows (In thousands):
Three Months Ended September 30: 1999 1998 Increase/(Decrease) - -------------------------------- ---- ---- ------------------- Pensions and benefits expense............. $ 1,404 $ 4,541 $(3,137) (2) Regulatory expense........................ 639 1,990 (1,351) Palo Verde operations expense............. 8,537 7,222 1,315 Outside services expense.................. 2,499 1,292 1,207 Other..................................... 16,900 15,559 1,341 ------- ------- ------- Total other operations expense......... 29,979 30,604 (625) Total maintenance expense................. 7,819 8,307 (488) ------- ------- ------- Total other operations and maintenance expense................. $37,798 $38,911 $(1,113) ======= ======= =======
Other operations and maintenance expense increased $1.5 million for the nine months ended September 30, 1999 compared to the same period last year due to increased maintenance expense of $3.8 million partially offset by decreased operations expense of $2.3 million, as follows (In thousands):
Nine Months Ended September 30: 1999 1998 Increase/(Decrease) - ------------------------------- ---- ---- ------------------- Regulatory expense........................ $ 1,011 $ 5,045 $(4,034) Pensions and benefits expense............. 10,765 14,329 (3,564) (2) Palo Verde operations expense............. 24,886 23,592 1,294 Non-nuclear generation expense............ 3,876 2,605 1,271 Customer accounts expense................. 2,965 1,997 968 Other..................................... 48,987 47,229 1,758 -------- -------- ------- Total other operations expense......... 92,490 94,797 (2,307) -------- -------- ------- Maintenance at Company-owned generating plants....................... 9,048 5,204 3,844 (3) Other..................................... 19,559 19,625 (66) -------- -------- ------- Total maintenance expense.............. 28,607 24,829 3,778 -------- -------- ------- Total other operations and maintenance expense............... $121,097 $119,626 $ 1,471 ======== ======== =======
23 Other operations and maintenance expense increased $5.5 million for the twelve months ended September 30, 1999 compared to the same period last year due to increased maintenance expense of $3.6 million and increased operations expense of $1.8 million, as follows (In thousands):
Twelve Months Ended September 30: 1999 1998 Increase/(Decrease) - -------------------------------- ---- ---- ------------------- All employee bonus plan................... $ 5,606 $ 2,200 $ 3,406 Palo Verde operations expense............. 35,131 32,641 2,490 Customer accounts expense................. 4,100 1,980 2,120 Non-nuclear generation expense............ 4,943 3,581 1,362 Regulatory expense........................ 2,009 6,953 (4,944) Pensions and benefits expense............. 16,375 17,682 (1,307) (2) Other..................................... 63,779 65,071 (1,292) -------- -------- ------- Total other operations expense......... 131,943 130,108 1,835 -------- -------- ------- Maintenance at Company-owned generating plants....................... 12,081 7,117 4,964 (3) Maintenance at Palo Verde................. 14,973 16,313 (1,340) Other..................................... 11,679 11,662 17 -------- -------- ------- Total maintenance expense.............. 38,733 35,092 3,641 -------- -------- ------- Total other operations and maintenance expense............... $170,676 $165,200 $ 5,476 ======== ======== =======
(2) Includes a cumulative 1999 year-to-date adjustment to other postretirement benefits of $3.0 million as a result of a revised actuarial valuation, which was recorded in the third quarter. (3) Primarily due to scheduled maintenance and overhauls at Company-owned generating plants, including underestimated costs of overhauling a steam generator turbine of $1.4 million and $3.1 million for the nine and twelve months ended September 30, 1999, respectively. The New Mexico Settlement charge of $6.3 million 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, 1999 compared to the same periods last year. Taxes other than income taxes were essentially unchanged for the three, nine and twelve months ended September 30, 1999 compared to the same periods last year. Other income decreased $2.8 million, $4.4 million and $5.2 million for the three, nine and twelve months ended September 30, 1999, respectively, compared to the same periods last year primarily due to (i) a decrease in investment income of $2.3 million, $3.6 million and $2.8 million, respectively, resulting from the investment of lower levels of cash and a change in investment strategy for decommissioning trust funds; and (ii) a favorable settlement of bankruptcy professional fees of $0.5 million, $1.2 million and $1.5 million in the prior periods, respectively, with no comparable amounts in the current periods. The twelve month decrease was also due to (i) a decrease in gains 24 realized on disposition of non-utility property of $0.6 million; and (ii) increased donations of $0.4 million in 1999 pursuant to the terms of the New Mexico Settlement. Interest charges decreased $2.0 million, $4.6 million and $4.9 million for the three, nine and twelve months ended September 30, 1999, respectively, compared to the same periods last year, primarily due to a reduction in outstanding debt as a result of open market purchases and redemptions of the Company's first mortgage bonds. Income tax expense increased $0.4 million and decreased $3.2 million and $3.9 million for the three, nine and twelve months ended September 30, 1999, respectively, compared to the same periods last year primarily due to changes in pretax income and certain permanent differences. Extraordinary loss on repurchases of debt of $2.1 million, $3.3 million and $3.3 million for the three, nine and twelve months ended September 30, 1999, respectively, net of income tax benefit of $1.3 million, $2.1 million and $2.1 million, represents the payment of premiums on debt repurchased and the recognition of unamortized issuance expenses on that debt with no comparable amounts for the same periods ended in 1998. Extraordinary gain on discharge of debt of $3.3 million for the twelve months ended September 30, 1999, net of income tax expense of $2.1 million, represents unclaimed and undistributed funds designated for the payment of preconfirmation claims which reverted to the Company pursuant to the Company's Fourth Amended Plan of Reorganization, with no comparable amount for the same period ended in 1998. The Company has an Energy Services Business Unit (the "ESBU") which began developing energy efficient products and services in 1997. The ESBU offers customers pricing options, as well as value-added products and services designed to give them greater value for the kWh purchased from the Company. The revenues and expenses related to the operations of the ESBU have not been material to date. Year 2000 Preparedness The Company faces the same concerns regarding the transition to the Year 2000 ("Y2K") as virtually all other companies. During the Y2K transition, computer hardware and software, or equipment with embedded computer chips, may encounter the year 2000 and interpret a two-digit year "00" as 1900, instead of 2000. As a result, equipment and applications that are date sensitive may not properly calculate information or otherwise may not function as intended. Because the Y2K challenge, if not addressed, could directly affect the Company's service reliability, the Company considers it to be of the highest priority. The Company's Y2K mission statement is to "provide for the safe, continuous operation of EPE's electric and business systems during the Y2K transition period." The North American Electric Reliability Council (the "NERC") has defined "mission-critical" systems or applications as those "whose misoperation could directly contribute toward the loss of a 50 MW or larger generating resource, the loss of a transmission facility, or interruption of system load." Mission- critical systems and applications have received top priority. As reported to the NERC on June 30, 1999, the Company believes all of its mission-critical systems and applications, as defined above, are suitable for continued use into the Year 2000 ("Y2K ready"). The Company's assessment of 25 its mission-critical systems and applications as Y2K ready was endorsed by the receipt of a "level 3" rating from the Department of Energy (the "DOE"), as discussed below. Substantially all other systems and applications are scheduled to be Y2K ready by December 31, 1999. In June 1999, the Company conducted a live, integrated test of its primary control and local generating facilities, including the Company's energy management system computer and local power plant and key substation equipment. Internal clocks for equipment included in the test were synchronously forwarded to roll over into the year 2000 and typical, individual operations were then performed to verify that the equipment will operate as expected in a year 2000 environment. All devices handled the rollover without incident and all commands sent from the control computer to remote equipment were executed properly. The integrated test was observed by an assessment team of engineers on behalf of the DOE. Following the test, the DOE team issued the Company a "level 3" rating regarding its state of Y2K readiness, asserting that the Company's mission-critical systems and applications will be Y2K ready by December 31, 1999. Level 3 is the most favorable rating that could be issued and was based not only on the successful integrated test, but also on the DOE team's review of documentation, interviews with Company personnel and observance of a rerunning of embedded chip tests for digitally-controlled relays. DOE teams initially reviewed 36 utilities in North America in order to better predict an overall state of readiness, and are currently reviewing an additional 20 utilities. On September 8, 1999, the Company participated in a NERC-sponsored drill. The primary purposes for the drill were to (i) test responses to the simulated loss of various modes of voice and data communication and (ii) to practice electric-system personnel field deployment and procedures under the Company's Y2K Operational Contingency Plan. During the drill, the Company successfully operated its electric system under these simulated conditions. In addition to the drill, the Company's computers successfully transitioned into one of the industry's high priority testing dates (9/9/99) without incident. The Company began addressing the Y2K issue during the last quarter of 1996 with a program consisting of four major phases: inventory, assessment, remediation and testing for Y2K readiness. This readiness process was recommended by the NERC. For its mission-critical equipment and applications, the Company believes it has completed each of these phases. For its non- critical equipment and applications, the Company believes it is 100% complete with inventory and assessment and 93% complete with remediation/testing. Overall, the Company believes it is currently 98% complete with the four-phase process. The Company is actively participating in Y2K planning sessions with other Western System Coordinating Council ("WSCC") members due to the interrelated nature of the Company's electric system and those of other neighboring utilities. WSCC utilities comprise the western United States electric "grid." The Company is monitoring the Y2K readiness status of Palo Verde and Four Corners power plants, in which the Company has partial ownership. These plants are operated by Arizona Public Service Company ("APS"). APS has reported to the NERC regarding Palo Verde and Four Corners and to the Nuclear Regulatory Commission regarding Palo Verde that the mission-critical facilities at each plant are now Y2K ready. In addition, the Company has essentially completed assessment of and continues to monitor financial institutions and critical suppliers to verify their respective states of readiness for the Y2K 26 transition. The Company has provided Y2K information to its customers and community through a public outreach program, and has contacted large industrial customers to ascertain their plans for the transition period. Given the complex nature and uncertainties of the Y2K issue, the Company cannot absolutely assure that it will not experience some outages or operational failures during the Y2K transition period. Further, there are no guarantees that all vendor representations obtained by the Company will prove to be entirely accurate or that testing and remediation procedures employed by the Company will identify and correct 100% of potential Y2K-related problems. There remains a chance that on January 1, 2000 some equipment will not function properly. Therefore, the Company has prepared a Y2K Operational Contingency Plan. The Company has always prepared for unexpected outages of its facilities (resulting from storms and other natural disasters and failures). Consequently, the Company's existing Emergency Procedure Manual forms the basis for the Company's Y2K Operational Contingency Plan. Procedures to deal with an array of scenarios resulting from the singular or simultaneous failure(s) of elements or systems during the Y2K transition period have also been developed. The Company's Y2K Operational Contingency Plan for its electric system was completed in June 1999 and updated in October 1999. The Company has also completed a Y2K Business Continuity Plan for its key business systems and processes. Failure by the Company to meet the challenges of the Y2K issue could have serious consequences. 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 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. However, given the completion of all mission- critical readiness activities, the successful integrated test of the primary control equipment on the Company's electric system, and the independent verification by the DOE team regarding the Company's state of readiness, the Company does not believe that significant adverse impacts as a result of the Y2K issue are likely to occur. The Company has expensed substantially all costs of its Y2K program. Through September 30, 1999, the Company's expenditures on the Y2K program have been predominantly related to internal labor, diagnostic tools, remediations, server upgrades and consultation costs totaling approximately $2.9 million. Costs associated with hardware and software replacements and other technology "refresh" programs that may also remediate non-ready equipment and applications have not been included in the Company's accounting of Y2K expenses. These activities are considered to have been undertaken as part of the normal course of business. Future Y2K expenses, to be incurred through the end of the project, are not expected to exceed an additional $1.1 million and will predominantly include costs for consultation, independent verification, documentation, business continuity planning and event management. Approximately half of all the Company's Y2K program expenses are expected to be internal labor costs. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to market risk due to changes in interest rates, equity prices and commodity prices. See the Company's 1998 Form 10-K, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," for a complete discussion of the market risks faced by the Company 27 and the Company's market risk sensitive assets and liabilities. As of September 30, 1999, there have been no material changes in the market risks faced by the Company or the fair values of assets and liabilities disclosed in Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," in the Company's 1998 Form 10-K. 28 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 G 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 29 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, 1999 30 EL PASO ELECTRIC COMPANY INDEX TO EXHIBITS Exhibit Number Exhibit ------- ------- +10.10 Directors' Restricted Stock Award Agreement between the Company and certain directors of the Company. (Exhibit 10.07 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999) 10.11 Stock Option Agreement, dated as of October 1, 1999, with Wilson K. Cadman. (Identical in all material respects to Exhibit 10.08 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999) 11 Statement re Computation of Per Share Earnings 15 Letter re Unaudited Interim Financial Information 27 Financial Data Schedule (EDGAR filing only) + In lieu of non-employee director compensation, agreements substantially identical in all material respects to this Exhibit have been entered into with Patricia Z. Holland-Branch and Charles Yamarone, directors of the Company. 31 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- --------------------------------- 1999 1998 1999 1998 ------------- -------------- ------------- --------------- NET INCOME APPLICABLE TO COMMON STOCK: Income before extraordinary item $ 26,224 $ 22,322 $ 30,537 $ 39,385 Extraordinary loss on repurchases of debt, net of income tax benefit (2,068) - (3,251) - ------------- -------------- ------------- --------------- Net income applicable to common stock $ 24,156 $ 22,322 $ 27,286 $ 39,385 ============= ============== ============= =============== BASIC EARNINGS PER COMMON SHARE: Weighted average number of common shares outstanding 59,232,142 60,168,841 59,879,180 60,168,030 ============= ============== ============= =============== Net income per common share: Income before extraordinary item $ 0.443 $ 0.371 $ 0.510 $ 0.655 Extraordinary loss on repurchases of debt, net of income tax benefit (0.035) - (0.054) - ------------- -------------- ------------- --------------- Net income $ 0.408 $ 0.371 $ 0.456 $ 0.655 ============= ============== ============= =============== DILUTED EARNINGS PER COMMON SHARE: Weighted average number of common shares outstanding 59,232,142 60,168,841 59,879,180 60,168,030 ------------- -------------- ------------- --------------- Effect of dilutive potential common stock options based on the treasury stock method using average market price: Quarter ended March 31 - - - 262,998 Quarter ended June 30 - - 385,405 538,986 Quarter ended September 30 399,670 457,905 399,670 457,905 Quarter ended December 31 - - - - Effect of dilutive potential restricted common stock based on the treasury stock method using average market price: Quarter ended March 31 - - - 14,496 Quarter ended June 30 - - 29,186 31,840 Quarter ended September 30 45,471 35,468 45,471 35,468 Quarter ended December 31 - - - - ------------- -------------- ------------- -------------- 445,141 493,373 859,732 1,341,693 Divided by number of quarters 1 1 3 3 ------------- -------------- ------------- -------------- Net effect of dilutive potential common stock 445,141 493,373 286,577 447,231 ------------- -------------- ------------- -------------- Weighted average number of common shares and dilutive potential common shares outstanding 59,677,283 60,662,214 60,165,757 60,615,261 ============= ============== ============= ============== Net income per common share: Income before extraordinary item $ 0.439 $ 0.368 $ 0.508 $ 0.650 Extraordinary loss on repurchases of debt, net of income tax benefit (0.034) - (0.054) - ------------- -------------- ------------- --------------- Net income $ 0.405 $ 0.368 $ 0.454 $ 0.650 ============= ============== ============= ===============
EL PASO ELECTRIC COMPANY EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE (IN THOUSANDS EXCEPT FOR SHARE DATA)
TWELVE MONTHS ENDED SEPTEMBER 30, ----------------------------------------------- 1999 1998 --------------------- --------------------- NET INCOME APPLICABLE TO COMMON STOCK: Income before extraordinary items $ 33,518 $ 44,667 Extraordinary gain on discharge of debt, net of income tax expense 3,343 - Extraordinary loss on repurchases of debt, net of income tax benefit (3,251) - --------------------- --------------------- Net income applicable to common stock $ 33,610 $ 44,667 ===================== ===================== BASIC EARNINGS PER COMMON SHARE: Weighted average number of common shares outstanding 59,952,191 60,161,105 ===================== ===================== Net income per common share: Income before extraordinary items $ 0.559 $ 0.742 Extraordinary gain on discharge of debt, net of income tax expense 0.056 - Extraordinary loss on repurchases of debt, net of income tax benefit (0.054) - --------------------- --------------------- Net income $ 0.561 $ 0.742 ===================== ===================== DILUTED EARNINGS PER COMMON SHARE: Weighted average number of common shares outstanding 59,952,191 60,161,105 --------------------- --------------------- Effect of dilutive potential common stock options based on the treasury stock method using average market price: Quarter ended March 31 - 262,998 Quarter ended June 30 385,405 538,986 Quarter ended September 30 399,670 457,905 Quarter ended December 31 479,130 299,744 Effect of dilutive potential restricted common stock based on the treasury stock method using average market price: Quarter ended March 31 - 14,496 Quarter ended June 30 29,186 31,840 Quarter ended September 30 45,471 35,468 Quarter ended December 31 39,433 16,496 --------------------- --------------------- 1,378,295 1,657,933 Divided by number of quarters 4 4 --------------------- --------------------- Net effect of dilutive potential common stock 344,574 414,483 --------------------- --------------------- Weighted average number of common shares and dilutive potential common shares outstanding 60,296,765 60,575,588 ===================== ===================== Net income per common share: Income before extraordinary items $ 0.556 $ 0.737 Extraordinary gain on discharge of debt, net of income tax expense 0.055 - Extraordinary loss on repurchases of debt, net of income tax benefit (0.054) - --------------------- --------------------- Net income $ 0.557 $ 0.737 ===================== =====================
EX-15 3 LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION Exhibit 15 El Paso Electric Company El Paso, Texas Ladies and Gentlemen: Registration Statement No's. 333-17971 and 333-82129 With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated October 18, 1999 related to our review of interim financial information. Pursuant to Rule 436(c) under the Securities Act of 1933, such a report is not considered part of the registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of sections 7 and 11 of the Act. Very truly yours, KPMG LLP El Paso, Texas November 12, 1999 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, 1999 AND THE RELATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 PER-BOOK 1,407,177 0 155,569 68,204 18,753 1,649,703 45,711 241,295 144,396 431,402 0 0 795,287 0 0 0 91 0 19,167 27,244 376,512 1,649,703 432,705 25,650 310,093 335,743 96,962 2,564 99,526 56,792 39,483 12,197 27,286 0 63,968 167,892 0.456 0.454 Net income is net of extraordinary loss on repurchased debt (net of income tax benefit) of ($3,251). Includes $9,581 of redemption costs.
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