10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

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.)
Stanton Tower, 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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

As of July 31, 2007, there were 45,876,480 shares of the Company’s no par value common stock outstanding.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

INDEX TO FORM 10-Q

			Page No.
PART I.    FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Consolidated Balance Sheets – June 30, 2007 and December 31, 2006	1
		Consolidated Statements of Operations - Three Months, Six Months and Twelve Months Ended June 30, 2007 and 2006	3
		Consolidated Statements of Comprehensive Operations – Three Months, Six Months and Twelve Months Ended June 30, 2007 and 2006	5
		Consolidated Statements of Cash Flows – Six Months Ended June 30, 2007 and 2006	6
		Notes to Consolidated Financial Statements	7
		Report of Independent Registered Public Accounting Firm	28
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46
	Item 4.	Controls and Procedures	47
PART II.  OTHER INFORMATION
	Item 1.	Legal Proceedings	48
	Item 1A.	Risk Factors	48
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
	Item 4.	Submission of Matters to a Vote of Security Holders	48
	Item 6.	Exhibits	49

(i)

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

ASSETS (In thousands)	June 30, 2007 (Unaudited)			December 31, 2006
Utility plant:
Electric plant in service	$	2,007,341		$	1,958,787
Less accumulated depreciation and amortization		(829,997	)		(799,579	)
Net plant in service		1,177,344			1,159,208
Construction work in progress		140,619			134,470
Nuclear fuel; includes fuel in process of $18,774 and $8,632, respectively		83,897			66,261
Less accumulated amortization		(36,551	)		(27,745	)
Net nuclear fuel		47,346			38,516
Net utility plant		1,365,309			1,332,194
Current assets:
Cash and temporary investments		49,279			40,101
Accounts receivable, principally trade, net of allowance for doubtful accounts of $2,464 and $2,999, respectively		84,661			86,730
Accumulated deferred income taxes		5,409			6,109
Inventories, at cost		33,775			31,390
Undercollection of fuel revenues		28,101			32,582
Income taxes receivables		—			9,620
Prepayments and other		11,077			7,264
Total current assets		212,302			213,796
Deferred charges and other assets:
Decommissioning trust funds		123,182			114,716
Regulatory assets		34,720			35,013
Other		18,464			18,935
Total deferred charges and other assets		176,366			168,664
Total assets	$	1,753,977		$	1,714,654

See accompanying notes to consolidated financial statements.

1

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (Continued)

CAPITALIZATION AND LIABILITIES (In thousands except for share data)	June 30, 2007 (Unaudited)			December 31, 2006
Capitalization:
Common stock, stated value $1 per share, 100,000,000 shares authorized, 64,360,822 and 63,909,974 shares issued, and 129,486 and 110,854 restricted shares, respectively	$	64,490		$	64,021
Capital in excess of stated value		286,802			283,356
Retained earnings		515,666			489,082
Accumulated other comprehensive loss, net of tax		(15,302	)		(18,316	)
		851,656			818,143
Treasury stock, 18,615,028 and 18,025,928 shares, at cost		(252,538	)		(238,468	)
Common stock equity		599,118			579,675
Long-term debt, net of current portion		590,879			590,865
Financing obligations, net of current portion		35,917			25,265
Total capitalization		1,225,914			1,195,805
Current liabilities:
Current portion of long-term debt and financing obligations		19,158			20,975
Accounts payable, principally trade		56,022			42,892
Taxes accrued		16,347			19,323
Interest accrued		4,474			4,390
Other		24,148			23,478
Total current liabilities		120,149			111,058
Deferred credits and other liabilities:
Accumulated deferred income taxes		146,790			149,981
Accrued postretirement benefit liability		88,253			85,435
Asset retirement obligation		76,697			73,267
Accrued pension liability		51,029			56,260
Regulatory liabilities		15,103			15,079
Other		30,042			27,769
Total deferred credits and other liabilities		407,914			407,791
Commitments and contingencies
Total capitalization and liabilities	$	1,753,977		$	1,714,654

See accompanying notes to consolidated financial statements.

2

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands except for share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Operating revenues	$	219,291		$	211,796		$	407,708		$	394,225
Energy expenses:
Fuel		66,783			50,814			114,247			98,370
Purchased and interchanged power		35,339			40,068			61,998			65,624
		102,122			90,882			176,245			163,994
Operating revenues net of energy expenses		117,169			120,914			231,463			230,231
Other operating expenses:
Other operations		49,538			46,422			93,179			89,712
Maintenance		17,039			23,082			28,666			36,984
Depreciation and amortization		17,083			16,860			34,134			34,078
Taxes other than income taxes		12,058			12,358			24,124			24,918
		95,718			98,722			180,103			185,692
Operating income		21,451			22,192			51,360			44,539
Other income (deductions):
Allowance for equity funds used during construction		1,129			226			2,188			391
Investment and interest income, net		1,856			1,018			3,873			2,133
Miscellaneous non-operating income		225			128			407			137
Miscellaneous non-operating deductions		(777	)		(1,054	)		(2,325	)		(2,047	)
		2,433			318			4,143			614
Interest charges (credits):
Interest on long-term debt and financing obligations		9,088			8,876			18,034			17,554
Other interest		193			128			348			45
Capitalized interest		(677	)		(860	)		(1,328	)		(1,562	)
Allowance for borrowed funds used during construction		(586	)		(117	)		(1,134	)		(199	)
		8,018			8,027			15,920			15,838
Income before income taxes		15,866			14,483			39,583			29,315
Income tax expense (benefit)		6,267			(766	)		14,865			4,762
Net income	$	9,599		$	15,249		$	24,718		$	24,553
Basic earnings per share	$	0.21		$	0.32		$	0.54		$	0.51
Diluted earnings per share	$	0.21		$	0.31		$	0.53		$	0.50
Weighted average number of shares outstanding		45,698,262			48,283,607			45,816,757			48,207,994
Weighted average number of shares and dilutive potential shares outstanding		46,050,212			48,796,409			46,211,298			48,753,475

See accompanying notes to consolidated financial statements.

3

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands except for share data)

	Twelve Months Ended June 30,
	2007			2006
Operating revenues	$	829,938		$	849,653
Energy expenses:
Fuel		229,233			260,185
Purchased and interchanged power		113,363			114,723
		342,596			374,908
Operating revenues net of energy expenses		487,342			474,745
Other operating expenses:
Other operations		194,971			182,444
Maintenance		51,726			62,256
Depreciation and amortization		68,502			69,121
Taxes other than income taxes		49,760			49,496
		364,959			363,317
Operating income		122,383			111,428
Other income (deductions):
Allowance for equity funds used during construction		2,679			883
Investment and interest income, net		8,196			5,820
Loss on extinguishments of debt		—			(143	)
Miscellaneous non-operating income		1,131			543
Miscellaneous non-operating deductions		(3,867	)		(4,559	)
		8,139			2,544
Interest charges (credits):
Interest on long-term debt and financing obligations		36,132			34,899
Other interest		1,395			517
Capitalized interest		(3,346	)		(4,107	)
Allowance for borrowed funds used during construction		(1,380	)		(556	)
		32,801			30,753
Income before income taxes, extraordinary item and cumulative effect of accounting change		97,721			83,219
Income tax expense		36,169			22,846
Income before extraordinary item and cumulative effect of accounting change		61,552			60,373
Extraordinary gain on re-application of SFAS No. 71, net of tax		6,063			—
Cumulative effect of accounting change, net of tax		—			(1,093	)
Net income	$	67,615		$	59,280
Basic earnings (losses) per share:
Income before extraordinary item and cumulative effect of accounting change	$	1.32		$	1.25
Extraordinary gain on re-application of SFAS No. 71, net of tax		0.13			—
Cumulative effect of accounting change, net of tax		—			(0.02	)
Net income	$	1.45		$	1.23
Diluted earnings (losses) per share:
Income before extraordinary item and cumulative effect of accounting change	$	1.31		$	1.24
Extraordinary gain on re-application of SFAS No. 71, net of tax		0.13			—
Cumulative effect of accounting change, net of tax		—			(0.02	)
Net income	$	1.44		$	1.22
Weighted average number of shares outstanding		46,478,096			48,035,488
Weighted average number of shares and dilutive potential shares outstanding		46,946,478			48,692,949

See accompanying notes to consolidated financial statements.

4

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS

(Unaudited)

(In thousands)

	Three Months Ended June 30,						Six Months Ended June 30,						Twelve Months Ended June 30,
	2007			2006			2007			2006			2007			2006
Net income	$	9,599		$	15,249		$	24,718		$	24,553		$	67,615		$	59,280
Other comprehensive income (loss):
Unrecognized pension and postretirement benefit costs:
Reclassification adjustments included in net income for amortization of:
Prior service cost		(688	)		—			(1,376	)		—			(1,376	)		—
Net loss		948			—			1,708			—			1,708			—
Minimum pension liability adjustment		—			—			—			—			16,923			(6,128	)
Net unrealized gains (losses) on marketable securities:
Net holding gains (losses) arising during period		4,511			(612	)		3,498			967			11,004			1,085
Reclassification adjustments for net (gains) losses included in net income		13			260			(119	)		456			418			(263	)
Net losses on cash flow hedges:
Reclassification adjustment for interest expense included in net income		69			65			137			131			269			254
Total other comprehensive income (loss) before income taxes		4,853			(287	)		3,848			1,554			28,946			(5,052	)
Income tax benefit (expense) related to items of other comprehensive income (loss):
Unrecognized pension and postretirement benefit costs		(97	)		—			(107	)		—			(107	)		—
Minimum pension liability adjustment		—			—			—			—			(6,348	)		2,299
Net unrealized gains (losses) on marketable securities		(905	)		70			(676	)		(285	)		(2,284	)		(165	)
Gains (losses) on cash flow hedges		(25	)		(25	)		(51	)		(49	)		(101	)		(96	)
Total income tax benefit (expense)		(1,027	)		45			(834	)		(334	)		(8,840	)		2,038
Other comprehensive income (loss), net of tax		3,826			(242	)		3,014			1,220			20,106			(3,014	)
Comprehensive income	$	13,425		$	15,007		$	27,732		$	25,773		$	87,721		$	56,266

See accompanying notes to consolidated financial statements.

5

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Six Months Ended June 30,
	2007			2006
Cash flows from operating activities:
Net income	$	24,718		$	24,553
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of electric plant in service		34,134			34,078
Amortization of nuclear fuel		9,788			6,593
Allowance for equity funds used during construction		(2,188	)		(391	)
Deferred income taxes, net		4,223			3,745
Excess tax benefits from long-term incentive plans		(2,220	)		(663	)
Other amortization and accretion		5,572			5,984
Gain on sale of asset		—			(58	)
Other operating activities		(58	)		153
Change in:
Accounts receivable		2,069			(11,159	)
Inventories		(2,385	)		(1,188	)
Net undercollection of fuel revenues		4,481			17,324
Prepayments and other		(4,740	)		804
Accounts payable		13,076			(3,872	)
Taxes accrued		856			1,916
Interest accrued		84			50
Other current liabilities		670			388
Deferred charges and credits		36			(1,293	)
Net cash provided by operating activities		88,116			76,964
Cash flows from investing activities:
Cash additions to utility property, plant and equipment		(55,244	)		(42,792	)
Cash additions to nuclear fuel		(17,145	)		(8,124	)
Proceeds from sale of assets		130			58
Capitalized interest and AFUDC:
Utility property, plant and equipment		(3,322	)		(1,803	)
Nuclear fuel		(1,328	)		(349	)
Allowance for equity funds used during construction		2,188			391
Decommissioning trust funds:
Purchases, including funding of $3.5 and $3.3 million, respectively		(42,706	)		(19,199	)
Sales and maturities		37,677			15,208
Other investing activities		477			1,726
Net cash used for investing activities		(79,273	)		(54,884	)
Cash flows from financing activities:
Proceeds from exercise of stock options		3,980			1,256
Repurchases of common stock		(14,070	)		—
Financing obligations:
Proceeds		18,626			9,342
Payments		(9,791	)		(8,124	)
Excess tax benefits from long-term incentive plans		2,220			663
Other financing activities		(630	)		(1,047	)
Net cash (used for) provided by financing activities		335			2,090
Net increase in cash and temporary investments		9,178			24,170
Cash and temporary investments at beginning of period		40,101			7,956
Cash and temporary investments at end of period	$	49,279		$	32,126

See accompanying notes to consolidated financial statements.

6

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A. Principles of Preparation

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Annual Report of El Paso Electric Company on Form 10-K for the year ended December 31, 2006 (the “2006 Form 10-K”). Capitalized terms used in this report and not defined herein have the meaning ascribed for such terms in the 2006 Form 10-K. In the opinion of the Company’s management, the accompanying consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company at June 30, 2007 and December 31, 2006; the results of its operations and comprehensive operations for the three, six and twelve months ended June 30, 2007 and 2006; and its cash flows for the six months ended June 30, 2007 and 2006. The results of operations and comprehensive operations and the cash flows for the six months ended June 30, 2007 are not necessarily indicative of the results to be expected for the full calendar year.

Pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), certain financial information has been condensed and certain footnote disclosures have been omitted. Such information and disclosures are normally included in financial statements prepared in accordance with generally accepted accounting principles. Certain prior period amounts have been reclassified to conform with the current period presentation.

Stock-Based Compensation. The Company has a stock-based long-term incentive plan. Effective January 1, 2006, the Company adopted SFAS No. 123 (revised) “Accounting for Stock – Based Compensation,” which requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with some limited exceptions). Such cost will be recognized over the period during which an employee is required to provide service in exchange for the award (the “requisite service period”) which typically will be the vesting period. Compensation cost is not recognized for anticipated forfeitures prior to vesting of equity instruments. SFAS No. 123 (revised) applies to all awards granted after January 1, 2006 and to awards modified, repurchased or cancelled after that date. Additionally, compensation cost for outstanding awards for which the requisite service has not been rendered as of January 1, 2006 shall be expensed as the requisite service is rendered on or after such date. The compensation cost for that portion of awards shall be based on the grant-date fair value of those awards as calculated for proforma disclosure under SFAS No. 123. SFAS No. 123 (revised) replaces SFAS No. 123, “Accounting for Stock – Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. See Note D.

Revenues. Accounts receivable include accrued unbilled revenues of $19.4 million and $18.0 million at June 30, 2007 and December 31, 2006, respectively. The Company presents sales net of sales taxes in its consolidated statements of operations.

New Accounting Standards. In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 modifies other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.

7

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company does not believe SFAS No. 157 will have a significant impact on the Company’s consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates without having to apply complex hedge accounting provisions. Unrealized gains and losses on items for which the fair value option has been elected should be reported in earnings at each subsequent reporting date. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company has not determined whether to elect to measure financial instruments at fair value and, therefore, cannot estimate the impact of adopting SFAS No. 159 on the consolidated statement of operations.

Supplemental Cash Flow Disclosures (in thousands)

	Six Months Ended June 30,
	2007		2006
Cash paid for:
Interest on long-term debt and financing obligations	$	17,076	$	16,464
Income taxes		13,246		—
Non-cash financing activities:
Grants of restricted shares of common stock		3,445		1,474

B. Regulation

General

The rates and services of the Company are regulated by incorporated municipalities in Texas, the Texas Commission, the NMPRC, and the FERC. The Texas Commission and the NMPRC have jurisdiction to review municipal orders, ordinances, and utility agreements regarding rates and services within their respective states and over certain other activities of the Company. The FERC has jurisdiction over the Company's wholesale transactions. The decisions of the Texas Commission, NMPRC and the FERC are subject to judicial review.

Texas Regulatory Matters

Texas Freeze Period. The Company has entered into agreements (“Texas Rate Agreements”) with the City of El Paso, Texas Commission Staff and other parties in Texas that provide for most retail base rates to remain at their current level through June 30, 2010. During the rate freeze period, if the Company's return on equity falls below the bottom of a defined range, the Company has the right to initiate a rate case and seek an adjustment to base rates. If the Company's return on equity exceeds the top of the range, the Company will refund an amount equal to 50% of the pre-tax return in excess of the

8

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

ceiling. The range is based upon a risk premium above average comparable credit quality bond yields, and at current rates, would be a range of approximately 8.3% to 12.3%.

Fuel and Purchased Power Costs. Although the Company's base rates are frozen under the Texas Rate Agreements, pursuant to Texas Commission rules and the Texas Rate Agreements, the Company’s fuel costs including purchased power energy costs are passed through to its customers. In January and July of each year, the Company can request adjustments to its fixed fuel factor to more accurately reflect projected energy costs associated with providing electricity, seek recovery of past undercollections of fuel revenues, and refund past overcollections of fuel revenues. All such fuel revenue and expense activities are subject to periodic final review by the Texas Commission in fuel reconciliation proceedings. Pursuant to Texas Commission rules, the Company must file, by August 31, 2007, a fuel reconciliation for the three-year period ending February 28, 2007.

On January 5, 2006, the Company filed a petition (“PUC Docket No. 32240”) with the Texas Commission to increase its fixed fuel factors and to surcharge under-recovered fuel costs as a result of increased fuel costs. The Company requested an increase in its Texas jurisdiction fixed fuel factors of $30.8 million or 16% annually to reflect an average cost of natural gas of $9.35 per MMBtu. The Company also requested a fuel surcharge to recover over a twelve-month period approximately $34 million of fuel undercollections, including interest, for under-recoveries for the period September 2005 through November 2005. The requested fuel factor and fuel surcharge were placed into effect on an interim basis subject to refund effective with February 2006 bills to customers. This proceeding was abated pending the Texas Commission’s decision in the margin sharing proceeding, PUC Docket No. 32289, which was approved December 8, 2006. The Company filed a unanimous settlement with the Texas Commission to resolve all issues in this docket on January 24, 2007. The settlement requested approval of the fuel surcharge and fuel factor for the period February 2006 through January 2007, the end of the surcharge period. In addition, the Company agreed to reduce its fixed fuel factors by 10% reducing annual fuel recoveries by approximately $20.0 million per year. The revised fixed fuel factors reflect natural gas prices of approximately $7.80 per MMBtu. The new fuel factors were approved on an interim basis and placed into effect with customer bills in February 2007. A final order approving the settlement in PUC Docket No. 32240 was issued by the Texas Commission on March 15, 2007.

Generation CCN Filing. On July 6, 2007, the Company filed a petition with the Texas Commission requesting a Certificate of Convenience and Necessity (“CCN”) for two generating facilities. The first such facility is a natural-gas fueled power generating unit to be located at an existing plant site in the City of El Paso. This facility is known as Newman Unit 5. The Newman Unit 5 project consists of 280 to 290 MW of natural gas-fired combined cycle generating capacity that the Company presently plans to construct in two phases. The first phase includes two 70 MW gas turbines to be installed by the peak of 2009. The second phase converts the unit into a combined cycle combustion turbine with a total capacity of 280 to 290 MW and is expected to be completed by the peak of 2010.

The Newman Unit 5 will operate mostly in a baseload manner, but can also be used in a load following manner. It will be the most efficient gas-fired unit on the Company’s system when operated in combined cycle. The total estimated cost of the project including allowance for funds used during construction is $245 million.

9

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company is also seeking a CCN for two renewable energy wind turbines currently operating at the Hueco Mountains Wind Ranch, the acquisition of which the Texas Commission had previously found to be consistent with the public interest.

2007 Energy Efficiency Legislation. The Texas legislature passed new energy efficiency legislation in June 2007. The new legislation establishes new and increased goals for additional cost-effective energy efficiency for residential and commercial customers equivalent to at least (i) 10% of the annual growth in demand for residential and commercial customers by December 31, 2007; (ii) 15% of the annual growth by December 31, 2008; and (iii) 20% of the annual growth by December 31, 2009. Among other things, the new legislation requires the Texas Commission to establish an energy efficiency cost recovery factor for ensuring cost recovery for utility expenditures made to satisfy the energy efficiency goal. The legislation provides that utilities that are unable to establish an energy efficiency cost recovery factor in a timely manner due to a rate freeze will be allowed to defer the costs of complying with the energy efficiency goal and recover such deferred costs at the end of the rate freeze period.

New Mexico Regulatory Matters

2007 New Mexico Stipulation. On July 3, 2007, the NMPRC issued a Final Order approving a stipulation (“2007 New Mexico Stipulation”) addressing all issues in the 2006 rate filing Case No. 06-00258-UT. On July 26, 2007, the NMPRC modified its Final Order to clarify that its approval of the Stipulation did not preclude the NMPRC from examining the Company’s rates upon its own motion at any time prior to the date stipulated for the Company's next rate filing. The 2007 New Mexico Stipulation provides for a $5.8 million non-fuel base rate increase and a $0.3 million fuel and purchased power decrease relative to test year rates. The 2007 New Mexico Stipulation reflects average natural gas costs of $7.20 per MMBtu for the June 2007 through May 2008 forecast period. Most of the Company's fuel and purchased power costs during the period of the 2007 New Mexico Stipulation are expected to be recovered through base rates. Any difference between actual fuel and purchased power costs and the amount included in base rates will be recovered or refunded through the Fuel and Purchased Power Cost Adjustment Clause (“FPPCAC”). Rates will continue in effect until changed by the NMPRC after the Company’s next rate case. The 2007 New Mexico Stipulation requires the Company to file its next general rate case no later than May 30, 2009 using a base period of the twelve months ending December 31, 2008. Under NMPRC statutes, new rates would become effective no later than July 2010.

The 2007 New Mexico Stipulation provides for energy from the deregulated Palo Verde Unit 3 to be recovered through fuel and purchased power costs based upon the contract cost of capacity and fuel for power purchased under the existing SPS purchased power contract. The 2007 New Mexico Stipulation eliminates the fixed fuel and purchased power cost of $0.021 per kWh for 10% of New Mexico kWh sales and requires 25% of jurisdictional off-system sales margins to be credited to customers through the FPPCAC. Consistent with the Texas settlement in PUC Docket No. 32289, beginning in July 2010 through June 2015, the Company will credit 90% of the New Mexico jurisdictional portion of off-system sales margins to New Mexico customers through the FPPCAC. No later than two years after implementation, the 2007 New Mexico Stipulation requires the Company to file

10

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

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(Unaudited)

to continue its FPPCAC according to NMPRC rules, at which time any party may propose to change the price of capacity and related energy from Palo Verde Unit 3 if the SPS purchased power contract is modified or terminated. The 2007 New Mexico Stipulation results in final reconciliation of fuel and purchased power costs for the period May 31, 2004 through December 31, 2005. The Company will continue to file annual reconciliation statements for fuel and purchased power costs in accordance with NMPRC rules.

Notice of Investigation of Rates. On August 3, 2007, the Company received by mail a “Notice of Investigation of Rates of El Paso Electric Company” from the NMPRC in Case No. 07-00317-UT (the “Notice”). In the Notice, the NMPRC stated that there was “probative information before it indicating that an investigation into [the Company’s] rates, particularly its commercial and industrial rates, resulting from [the 2007 New Mexico Stipulation] is justified at this time.” As a result, the NMPRC has initiated an investigation of the Company's rates in New Mexico and has instructed the Company to file by October 24, 2007 a fully allocated cost of service study based on the twelve-month period ended March 31, 2007. The Company and its New Mexico regulatory counsel are currently considering a range of actions in response to the NMPRC’s Notice. The Company is unable at this time to predict the potential financial impact of any proceeding arising from the Notice.

Renewables. The New Mexico Renewable Energy Act of 2004 as amended by the 2007 New Mexico legislature requires that, by January 1, 2006, renewable energy comprise no less than 5% of the Company's total retail sales to New Mexico customers. The requirement increases by 1% annually until January 1, 2011, when the renewable portfolio standard shall reach a level of 10% of the Company's total retail sales to New Mexico customers. After 2011, the renewable portfolio standard, as a percentage of total retail sales to New Mexico customers, increases to 15% by 2015 and 20% by 2020. The Company has met all requirements to date. On September 1, 2006, the Company filed its annual procurement plan detailing its proposed actions to comply with the Renewable Energy Act through 2011.

The Company must file its 2007 Annual Procurement Plan prior to September 1, 2007. The NMPRC approved the Company’s 2006 annual procurement plan in December 2006, which includes (i) a contract to purchase renewable energy certificates (“RECs”) for full requirements in 2006 and 2007 and approximately 50% of the Company's requirements in 2008 through 2011 and (ii) the deferral for future recovery of up to $0.2 million in costs related to the issuance of a diversity RFP for renewable resources and for investigation of small projects to meet the remaining requirements in the 2008 to 2011 timeframe and thereafter. In addition, the NMPRC authorized the Company to enter into two 20-year purchased power agreements to purchase energy from an 8 MW low-emissions biomass generating facility and from a 6 kW solar energy generating facility. Both generating facilities will be located within the Company's New Mexico service area. Costs incurred by the Company to purchase RECs to meet the requirements of the New Mexico Renewable Energy Act are to be recovered through the FPPCAC as purchased power costs from New Mexico customers pursuant to the Renewable Energy Act and the NMPRC Final Order in NMPRC Case No. 05-00231-UT. The NMPRC’s decision in that case to allow recovery of REC costs through the FPPCAC has been appealed to the New Mexico Supreme Court by the New Mexico Industrial Energy Consumers, and oral argument was heard on April 10, 2007. The Company is unable to predict how the New Mexico Supreme Court will rule in this proceeding.

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EL PASO ELECTRIC COMPANY AND SUBSIDIARY

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(Unaudited)

2007 Long-Term Incentive Plan. On May 18, 2007, the Company filed for NMPRC approval for issuance of common stock for purposes of incentives and compensation. Supplemental testimony was filed and the Hearing Examiner issued a Recommended Decision recommending that the securities transactions related to issuance of new stock be approved. The Company is awaiting further action or a final decision by the NMPRC.

Generation CCN Filing. On July 18, 2007, the Company filed its application for issuance of a CCN to construct and operate Newman Unit 5. This case has been designated as NMPRC Utility Case No. 07-00301-UT. The NMPRC may issue a decision by April 2008 unless it finds good cause to extend its order until October 2008.

C. Palo Verde

Spent Fuel Storage. The Company expects to incur significant costs for on-site spent fuel storage during the life of Palo Verde that the Company believes are the responsibility of the DOE. In December 2003, Arizona Public Service Company (“APS”), in conjunction with other nuclear plant operators, filed suit against the DOE on behalf of the Palo Verde Participants to recover monetary damages associated with the delay in the DOE’s acceptance of spent fuel. On February 28, 2007, APS served on the U.S. Department of Justice their Initial Disclosure of Claimed Damages of $93.4 million (the Company’s portion being $14.8 million). This amount includes expenses associated with design, construction, loading, and operation of the Palo Verde Independent Spent Fuel Storage Installation through December 2006. This amount represents costs incurred to ensure sufficient storage capacity for Palo Verde spent fuel that would not have been incurred had the DOE complied with its Standard Contract obligation to begin accepting spent fuel from the commercial nuclear power industry beginning in 1998. The Company is unable to predict the outcome of this matter at this time.

For a full discussion of spent fuel storage, see Note C of Notes to Consolidated Financial Statements in the 2006 Form 10-K.

D. Common Stock

Overview

The Company’s common stock has a stated value of $1 per share, with no cumulative voting rights or preemptive rights. Holders of the common stock have the right to elect the Company's directors and to vote on other matters.

Long-Term Incentive Plans

On May 2, 2007, the Company’s shareholders approved a stock-based long-term incentive plan (the “2007 Plan”) and authorized the issuance of up to one million shares of common stock for the benefit of directors and employees. Under the plan, common stock may be issued through the award or grant of non-statutory stock options, incentive stock options, stock appreciation rights, restricted stock, bonus stock, performance stock, cash-based awards and other stock-based awards. Subject to applicable regulatory approvals, the Company may issue new shares, purchase shares on the open market, or issue shares from shares the Company has repurchased to meet the share requirements of these plans.

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EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As discussed in Note A, the Company adopted SFAS No. 123 (revised) effective January 1, 2006. The Company adopted the “modified prospective application method” as provided for in SFAS No. 123 (revised) which provides for compensation expense related to unvested stock awards to be recognized prospectively. Under the modified prospective application method, the cumulative change in compensation expense vested in prior periods was recognized in the period the new accounting standard was adopted.

Stock Options. Stock options have been granted at exercise prices equal to or greater than the market value of the underlying shares at the date of grant. The fair value for these options was estimated at the grant date using the Black-Scholes option pricing model. The options expire ten years from the date of grant unless terminated earlier by the Board of Directors. No stock options were granted during 2005, 2006 or the first six months of 2007.

The following table summarizes the transactions in the Company’s stock options for the first six months of 2007:

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
						(In thousands)
Options outstanding at December 31, 2006	957,888		$	12.45
Options exercised	(274,000	)		12.44
Options outstanding at March 31, 2007	683,888			12.45
Options exercised	(80,000	)		7.15
Options outstanding at June 30, 2007	603,888			13.16	4.20	$	6,886
Exercisable at June 30, 2007	583,888			13.17	4.13		6,650

The Company received approximately $4.0 million in cash for the 354,000 stock options exercised in the first six months of 2007. During the first six months of 2007, the Company realized $1.9 million in current tax benefits from the exercise of stock options. The intrinsic value of stock options exercised during the three months ended June 30, 2007 and 2006 was $1.6 million and $1.1 million, respectively. The intrinsic value of stock options exercised during the six months ended June 30, 2007 and 2006 was $4.8 million and $2.7 million, respectively. The intrinsic value of stock options exercised during the twelve months ended June 30, 2007 and 2006 was $7.7 million and $5.3 million, respectively. No options vested during the three months ended June 30, 2007 and 2006. The fair value at grant date of options vested during the six months ended June 30, 2007 and 2006 was $0.8 million and $1.2 million, respectively. The fair value at grant date of options vested during the twelve months ended June 30, 2007 and 2006 was $0.8 million and $1.2 million, respectively. No options were forfeited or expired during the first six months of 2007.

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EL PASO ELECTRIC COMPANY AND SUBSIDIARY

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(Unaudited)

	Shares		Weighted Average Grant Date Fair Value
Nonvested options at December 31, 2006	140,000		$	6.14
Options vested	(120,000	)		6.37
Nonvested options at June 30, 2007	20,000			4.82

The Company recorded compensation cost of less than $0.1 million and $0.2 million in the three months ended June 30, 2007 and 2006, respectively, related to the outstanding unvested stock option awards and the tax benefit and capitalized costs related to these compensation costs were less than $0.1 million, respectively. The Company recorded compensation cost of less than $0.1 million and $0.4 million in the six months ended June 30, 2007 and 2006, respectively, related to the outstanding unvested stock option awards and the tax benefit and capitalized costs related to these compensation costs were less than $0.1 million for the six months ended June 30, 2007 and 2006. The Company recorded compensation cost of $0.4 million and $0.4 million in the twelve months ended June 30, 2007 and 2006, respectively, related to the outstanding unvested stock option awards and the tax benefit and capitalized costs related to these compensation costs were $0.2 million and $0.2 million, respectively. The unvested stock option awards have remaining less than $0.1 million unrecognized compensation cost. That cost is expected to be recognized in the remainder of 2007. The weighted average aggregate fair value at grant date of these unvested stock options is $0.1 million.

Restricted Stock. The Company has awarded restricted stock under its long-term incentive plans. Restrictions from resale generally lapse and awards vest over periods of one to five years. The market value of vested restricted stock awards is expensed at the time of grant. The market value of the unvested restricted stock at the date of grant is included in Capital in Excess of Stated Value in Common Stock Equity and is amortized to expense over the restriction period. Compensation costs is not recognized for anticipated forfeitures prior to vesting. On May 18, 2007, the Company entered into an employment separation agreement with Gary Hedrick, the Company’s chief executive officer. As part of this separation agreement, Mr. Hedrick forfeited 100% of his unvested restricted shares. As a result, the Company revised its estimated forfeiture rates and reduced its compensation costs accordingly.

Approximately $0.3 million and $0.4 million was charged to expense related to the restricted stock awards for the three months ended June 30, 2007 and 2006, respectively. The deferred tax benefit related to these expenses was $0.1 million and $0.2 million for the three months ended June 30, 2007 and 2006, respectively. Approximately $0.7 million and $0.8 million was charged to expense related to the restricted stock awards for the six months ended June 30, 2007 and 2006, respectively. The deferred tax benefit related to these expenses was $0.3 million for the six months ended June 30, 2007 and 2006. Approximately $1.4 million and $1.6 million was charged to expense related to restricted stock awards for the twelve months ended June 30, 2007 and 2006, respectively. The deferred tax benefit related to these expenses was $0.6 million for the twelve months ended June 30, 2007 and 2006. The Company realized $0.6 million, $0.7 million and $0.9 million of current tax benefits from the issuance of restricted stock for the three, six and twelve months ended June 30, 2007. The Company realized $0.2 million,

14

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

$0.3 million and $0.3 million of current tax benefits from the issuance of restricted stock for the three, six and twelve months ended June 30, 2006. Any capitalized costs related to these expenses would be less than $0.1 million for all periods.

The aggregate intrinsic value for restricted stock vested during the three months ended June 30, 2007 and 2006 was $1.5 million and $1.0 million, respectively. The aggregate intrinsic value for restricted stock vested during the six months ended June 30, 2007 and 2006 was $1.7 million and $1.3 million, respectively. The aggregate intrinsic value for restricted stock vested during the twelve months ended June 30, 2007 and 2006 was $2.3 million and $1.4 million, respectively. The fair value at grant date for restricted stock vested during the three months ended June 30, 2007 and 2006 was $1.0 million. The fair value at grant date for restricted stock vested during the six months ended June 30, 2007 and 2006 was $1.2 million. The fair value at grant date for restricted stock vested during the twelve months ended June 30, 2007 and 2006 was $1.6 million and $1.3 million, respectively. The outstanding restricted stock has remaining $2.4 million of unrecognized expense at June 30, 2007 that is expected to be recognized over the weighted average remaining contractual term of the outstanding restricted stock of approximately 1.25 years. The aggregate intrinsic value of the 129,486 outstanding restricted shares at June 30, 2007 was $3.2 million.

The following table summarizes the unvested restricted stock transactions for 2007:

	Total Shares		Weighted Average Grant Date Fair Value
Restricted shares outstanding at December 31, 2006	110,854		$	19.32
Restricted stock awards	23,758			23.50
Lapsed restrictions and vesting	(11,841	)		14.78
Restricted shares outstanding at March 31, 2007	122,771			20.57
Restricted stock awards	83,171			27.47
Lapsed restrictions and vesting	(52,706	)		19.34
Forfeitures	(23,750	)		21.33
Restricted shares outstanding at June 30, 2007	129,486			25.34

The weighted average fair values at grant date for restricted stock awarded during the three months ended June 30, 2007 and 2006 are $27.28 and $19.39, respectively. The weighted average fair values at grant date for restricted stock awarded during the six months ended June 30, 2007 and 2006 are $26.44 and $19.80, respectively. The weighted average fair values at grant date for restricted stock awarded during the twelve months ended June 30, 2007 and 2006 are $26.32 and $19.68, respectively.

The holder of a restricted stock award has rights as a shareholder of the Company, including the right to vote and, if applicable, receive cash dividends on restricted stock, except that certain restricted

15

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

stock awards require any cash dividend on restricted stock to be delivered to the Company in exchange for additional shares of restricted stock of equivalent market value.

Performance Shares. The Company has granted performance share awards to certain officers under the Company’s existing long-term incentive plans, which provide for issuance of Company stock based on the achievement of certain performance criteria over a three-year period. The payout varies between 0% to 200% of performance shares. On January 1, 2007, 58,650 performance shares were issued at the 150% performance level with a total cost of $0.7 million which had been expensed ratably between 2004 and 2006. The Company realized $0.6 million of current tax benefits from the issuance of performance shares in the six and twelve months ended June 30, 2007. The requisite service period for these shares ended December 31, 2006, and the shares had an aggregate intrinsic value of $1.4 million. On January 1, 2008, 2009 and 2010, subject to meeting certain performance criteria, additional performance shares will be issued. In accordance with SFAS No. 123 (revised), the Company will recognize the related compensation expense by ratably amortizing the grant date fair market value of awards over the requisite service period and the compensation expense will only be adjusted for forfeitures. The actual number of shares issued can range from zero to 292,682 shares.

The fair market value at the date of grant for the four separate grants of performance shares was based upon a Monte Carlo simulation. The Monte Carlo simulation reflected the structure of the performance plan which calculates the share payout on performance of the Company relative to a defined peer group over a three-year performance period based upon total return to shareholders. The fair market value was determined as the average payout of one million simulation paths discounted to the grant date using a risk-free interest rate based upon the constant maturity treasury rate yield curve at the grant date. The expected volatility of total return to shareholders is calculated in accordance with the plan's term structure and includes the volatilities of all members of the defined peer group.

The following table summarizes the outstanding performance share awards at the 100% performance level:

	Number Outstanding		Weighted Average Grant Date Fair Value
Performance shares outstanding at December 31, 2006	174,100		$	19.92
Performance share awards	94,480			22.78
Performance shares lapsed and issued	(41,239	)		18.46
Performance shares forfeited	(81,000	)		20.69
Performance shares outstanding at June 30, 2007	146,341			21.75

The outstanding performance awards have remaining $1.6 million of unrecognized expense at June 30, 2007 that is expected to be recognized over the weighted average remaining contractual term of the awards of approximately 1.8 years. The aggregate intrinsic value of the 146,341 shares of outstanding awards (based on 100% level) at June 30, 2007 was $3.6 million. The weighted average grant date fair value of performance shares awarded during the three months ended June 30, 2007 and

16

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2006 was $30.18 and $18.37, respectively. The weighted average grant date fair value of performance shares awarded during the six and twelve months ended June 30, 2007 and 2006 was $22.78 and $18.37, respectively. The fair value and intrinsic values of performance shares which vested in the three, six and twelve months ended June 30, 2007 and 2006 was $0.8 million for all periods.

On May 18, 2007, the Company entered into an employment separation agreement with Gary Hedrick, the Company’s chief executive officer. As part of this separation agreement, Mr. Hedrick forfeited 100% of his unvested performance shares. As a result, the Company revised its forfeiture rates related to performance shares which resulted in a cumulative adjustment which reduced operating expense by $0.7 million pretax and $0.4 million after-tax. For the three and six months ended June 30, 2007, the Company recorded a net reduction of $0.4 million and $0.1 million, respectively, to compensation expense for the performance share awards which included the cumulative adjustment. The deferred tax expense for the three and six months ended June 30, 2007 was $0.2 million and $0.1 million, respectively. For the three months ended June 30, 2006, the Company recorded compensation expense of $0.3 million and a deferred tax benefit of $0.1 million. During the first quarter of 2006, the Company recorded a cumulative adjustment to operating expense related to 2004 and 2005 performance stock awards to reflect the implementation of SFAS No. 123 (revised) which reduced expense by $0.7 million pretax and $0.4 million after-tax. For the six months ended June 30, 2006, the Company recorded a net reduction of $0.1 million to compensation expense for the performance share awards which included the cumulative adjustment. Deferred tax expense related to compensation expense for the six months ended June 30, 2006 was $0.1 million.

Prior to implementing SFAS No. 123 (revised) the Company recognized compensation expense for performance share awards by ratably amortizing their fair market value at the end of the reporting period based on the Company’s performance at that time over the performance cycles. The Company recorded compensation expense related to performance share awards of $0.4 million and $1.0 million for the twelve months ended June 30, 2007 and 2006, respectively. The deferred taxes related to these expenses was $0.2 million and $0.4 million for the twelve months ended June 30, 2007 and 2006, respectively.

17

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Proforma Results. If compensation expense for the plans had been amortized on a straight-line basis over the vesting period, consistent with the provisions of SFAS No. 123 (revised), “Accounting for Stock-Based Compensation,” the Company’s net earnings and earnings per share for the twelve months ended June 30, 2006 would have been reduced to the proforma amounts presented below (in thousands, except for per share data):

	Twelve Months Ended June 30, 2006
Net income (loss), as reported	$	59,280
Deduct: Compensation expense, net of tax		437
Proforma net income (loss)	$	58,843
Basic earnings (losses) per share:
As reported	$	1.23
Proforma		1.22
Diluted earnings (losses) per share:
As reported		1.22
Proforma		1.21

Prior to the adoption of SFAS No. 123 (revised), the Company presented all tax benefits for deductions resulting from the exercise of share-based compensation as operating cash flows in the Condensed Consolidated Statement of Cash Flows. SFAS No. 123 (revised) requires the benefits of tax deductions in excess of the taxes expensed on recognized compensation cost to be reported as financing cash flows.

Common Stock Repurchase Program

In September 2006, the Board of Directors (the “Board”) authorized the repurchase of up to 2.3 million shares of the Company’s outstanding common stock (the “2006 Plan”). The shares authorized under the 2006 Plan are in addition to the shares which were available under a repurchase program previously approved by the Board in February 2004 (the “2004 Plan”). During 2006 and 2007, the Company has repurchased 3,249,920 shares of common stock at an aggregate cost of $76.5 million, including 1,500 shares of common stock repurchased during the second quarter of 2007 at an aggregate cost of less than $0.1 million. As of June 30, 2007, no shares remain available under the 2004 Plan, and approximately 0.8 million shares remain authorized to be repurchased under the 2006 Plan. The Company may in the future make purchases of its stock pursuant to its stock repurchase plan at open market prices and may engage in private transactions, where appropriate. The repurchased shares will be available for issuance under the long-term incentive plans and other benefit plans or may be retired.

18

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Reconciliation of Basic and Diluted Earnings Per Share

The reconciliation of basic and diluted earnings per share before extraordinary item and cumulative effect of accounting change is presented below:

	Three Months Ended June 30,
	2007					2006
	Income		Shares	Per Share		Income		Shares	Per Share
	(In thousands)					(In thousands)
Basic earnings per share:
Net income	$	9,599	45,698,262	$	0.21	$	15,249	48,283,607	$	0.32
Effect of dilutive securities:
Unvested restricted stock		—	37,747				—	47,557
Unvested performance awards		—	66,640				—	77,933
Stock options		—	247,563				—	387,312
Diluted earnings per share:
Net income	$	9,599	46,050,212	$	0.21	$	15,249	48,796,409	$	0.31
	Six Months Ended June 30,
	2007					2006
	Income		Shares	Per Share		Income		Shares	Per Share
	(In thousands)					(In thousands)
Basic earnings per share:
Net income	$	24,718	45,816,757	$	0.54	$	24,553	48,207,994	$	0.51
Effect of dilutive securities:
Unvested restricted stock		—	55,623				—	46,670
Unvested performance awards		—	69,939				—	82,642
Stock options		—	268,979				—	416,169
Diluted earnings per share:
Net income	$	24,718	46,211,298	$	0.53	$	24,553	48,753,475	$	0.50

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EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	Twelve Months Ended June 30,
	2007					2006
	Income		Shares	Per Share		Income		Shares	Per Share
	(In thousands)					(In thousands)
Basic earnings per share:
Income before extraordinary item and cumulative effect of accounting change	$	61,552	46,478,096	$	1.32	$	60,373	48,035,488	$	1.25
Effect of dilutive securities:
Unvested restricted stock		—	61,936				—	60,084
Unvested performance awards		—	80,795				—	106,920
Stock options		—	325,651				—	490,457
Diluted earnings per share:
Income before extraordinary item and cumulative effect of accounting change	$	61,552	46,946,478	$	1.31	$	60,373	48,692,949	$	1.24

No options were excluded from the computation of diluted earnings per share in 2007 and 2006.

E. Income Taxes

The Company files income tax returns in the U.S. federal jurisdiction and in the states of Texas, New Mexico and Arizona. The Company is no longer subject to tax examination by the taxing authorities in the federal or state jurisdictions for years prior to 1999. The Company’s federal tax returns for the years 1999 through 2004 have been examined by the IRS. On June 12, 2007, the Company received the IRS notice of proposed deficiency for the tax years 1999 through 2004. A previous IRS notice of proposed deficiency had been received for the years 1999 through 2002 in 2005. The primary audit adjustments proposed by the IRS related to (i) whether the Company was entitled to currently deduct payments related to the repair of the Palo Verde Unit 2 steam generators or whether these payments should be capitalized and depreciated and (ii) whether the Company was entitled to currently deduct payments related to the dry cask storage facilities for spent nuclear fuel or whether these payments should be capitalized and depreciated. A tax deficiency was also received proposing to include in taxable income capital costs paid by third parties for construction of a switchyard. The third parties have indemnified the Company against any tax liability. The proposed IRS adjustments would affect the timing of these deductions not their ultimate deductibility for federal tax purposes. The Company protested the audit adjustments through administrative appeals for the initial audit of 1999 through 2002 and will protest these issues pursuant to the current audit. The Company believes that its treatment of the payments is supported by substantial legal authority.

20

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A deficiency notice relating to the Company’s 1998 through 2003 income tax returns in Arizona contests a pollution control credit and the payroll apportionment factor. The Company is contesting these adjustments.

The Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”) on January 1, 2007. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As a result of the implementation of FIN 48, the Company recognized a $1.9 million decrease in the liability for unrecognized tax benefits, which was accounted for as an increase to the January 1, 2007, balance of retained earnings. A reconciliation of the December 31, 2006 and June 30, 2007 amount of unrecognized tax benefits is as follows:

	Six Months Ended June 30, 2007
	(In millions)
Balance at December 31, 2006	$	23.0
Additions based on tax positions related to the current year		0.5
Additions for tax positions of prior years		1.6
Reductions for tax positions of prior years		(1.0	)
Balance at June 30, 2007	$	24.1

The Company has determined that the ultimate deductibility of the federal tax positions as of June 30, 2007 are “highly certain”, as such term is defined in FIN 48, but the timing of such deductibility is uncertain. Because of the impact of deferred tax accounting, the disallowance of the shorter deductibility period does not change the amount of tax expense other than associated interest and penalties. However, the timing of cash payments to the federal taxing authority would be affected.

The Company recognizes in tax expense interest and penalties related to tax benefits that have not been recognized. During the six month periods ended June 30, 2007 and June 30, 2006, the Company recognized approximately $0.1 million and $0.2 million, respectively, in interest. During the twelve month periods ended June 30, 2007 and June 30, 2006, the Company recognized approximately $0.1 million and $0.4 million, respectively, in interest. The Company had approximately $2.0 million and $1.9 million for the payment of interest and penalties accrued at June 30, 2007 and June 30, 2006, respectively.

21

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

F. Commitments, Contingencies and Uncertainties

For a full discussion of commitments and contingencies, see Note I of Notes to Consolidated Financial Statements in the 2006 Form l0-K. In addition, see Note B above and Notes B and C of Notes to Consolidated Financial Statements in the 2006 Form 10-K regarding matters related to regulation and Palo Verde, including decommissioning, spent fuel storage, disposal of low-level radioactive waste, steam generators, reactor vessel heads and liability and insurance matters.

Federal Regulatory Matters

In January 2006, the Company filed a complaint with the FERC to interpret the terms of a Power Exchange and Transmission Agreement (the “Transmission Agreement”) entered into with TEP in 1982. TEP claimed that, under the Transmission Agreement, it was entitled to up to 400 MW of transmission rights on the Company’s transmission system that would enable it to transmit power from a new generating station (the Luna Energy Facility (“LEF”) located near Deming, New Mexico) to Arizona. The Company asserted that TEP’s rights under the Transmission Agreement do not include transmission rights necessary to transmit such power as contemplated by TEP and that TEP must acquire any such rights in the open market from the Company at applicable tariff rates or from other transmission providers. During 2006 the Company recorded $3.1 million of transmission revenues under its transmission tariffs from TEP. No revenue has been recognized in 2007 for comparable transmission sales to TEP. While the Company and TEP continue to work towards a settlement, the FERC proceedings for this complaint have been completed and briefs are currently being filed with the administrative law judge. An initial decision of the administrative law judge is expected no later than January 30, 2008. The Company believes that it is not probable that TEP will ultimately prevail. The Company cannot predict the outcome of this case. An adverse ruling by the FERC could have a negative effect on the Company’s results of operations.

Power Purchase and Sale Contracts

To supplement its own generation and operating reserves, the Company entered into a 20-year contract, beginning in 2006, for the purchase of up to 133 MW of capacity and associated energy from SPS. This contract includes a demand charge, fuel charge, variable operations and maintenance charge, and a transmission charge. The contract provides that, in the event the transactions thereunder are subject to adverse regulatory action, the affected party may initiate discussions with the other party to assess whether modifications to the agreement may be appropriate. If the parties are unable to reach a mutually satisfactory resolution within six months, either party may terminate the contract by providing not less than two years' prior written notice to the other party. In October 2006, the Company received notice from SPS alleging that SPS has been subject to adverse regulatory action by the Texas Commission in a fuel surcharge proceeding (Docket No. 32685) which purportedly determined that SPS should assign incremental fuel costs to the contract. The contract provides for SPS to charge average fuel costs. On July 27, 2007, the Texas Commission issued a ruling in a SPS rate case and fuel reconciliation proceeding, Docket No. 32766, finding that effective with the date of the order, SPS’s

22

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

sale of energy to the Company should reflect incremental fuel costs rather than average fuel costs for purposes of determining SPS’s retail fuel rates. SPS has reasserted its claim of an adverse regulatory action under the contract based upon the Texas Commission’s decision and SPS has stated that it intends to terminate the contract early. Unless the Company and SPS agree to modify the contract, the Company would need to replace the power available to it under the SPS contract upon its termination.

The Company entered into a contract to sell up to 100 MW of firm energy and 50 MW of contingent energy to Imperial Irrigation District (“IID”) which began May 1, 2007 and continues through April 30, 2009. The contract also provides for the Company to provide up to 100 MW of firm energy and 40 MW of contingent energy beginning May 1, 2009 through April 30, 2010. To ensure that power is available to meet the IID contract demand, the Company entered into a contract to purchase up to 100 MW of firm energy from CreditSuisse Energy, LLC, effective May 1, 2007. This contract provides for up to 100 MW of firm energy to be delivered at Palo Verde through April 30, 2010 and 50 MW of energy delivered at Four Corners in the months of July through September in 2007 and May through September for the years 2008 through 2010. These agreements are subject to approval by the FERC.

Environmental Matters

The Company is subject to regulation with respect to air, soil and water quality, solid waste disposal and other environmental matters by federal, state, tribal and local authorities. Those authorities govern current facility operations and have continuing jurisdiction over facility modifications. Failure to comply with these environmental regulatory requirements can result in actions by regulatory agencies or other authorities that might seek to impose on the Company administrative, civil, and/or criminal penalties. In addition, unauthorized releases of pollutants or contaminants into the environment can result in costly cleanup obligations that are subject to enforcement by regulatory agencies.

These laws and regulations are subject to change and, as a result of those changes, the Company may face additional capital and operating costs to comply. For example, recent developments have created an increasing possibility of future regulation relating to climate change and greenhouse gas emissions. In Congress, there have been and will continue to be many hearings relating to climate change issues and many bills introduced to impose regulation. The State of New Mexico, where we operate one facility and have an interest in another facility, also is pursuing an initiative to reduce greenhouse gas emissions. If the United States or individual states in which we operate were to regulate greenhouse gas emissions, the Company’s fossil fuel generation assets are likely to face additional costs for monitoring, reporting, and controlling these emissions. A significant portion of the Company’s generation assets are nuclear and gas-fired which are often viewed as having no and lower emissions of greenhouse gases, respectively, than some other types of power generation facilities. As a result, the Company does not believe such regulations would impose greater burdens on the Company than on most other electric utilities. But environmental regulations can change rapidly and those changes are often difficult to predict. While the Company strives to prepare for and implement actions necessary to comply with changing environmental regulations, substantial expenditures may be required for the Company to comply with such regulations in the future.

23

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company analyzes the costs of its obligations arising from environmental matters on an ongoing basis and believes it has made adequate provision in its financial statements to meet such obligations. As a result of this analysis, the Company has a provision for environmental remediation obligations of approximately $1.9 million as of June 30, 2007, which amounts are related to compliance with federal and state environmental standards. However, unforeseen expenses associated with environmental compliance or remediation may occur and could have a material adverse effect on the future operations and financial condition of the Company.

The Company incurred the following expenditures during the three, six and twelve months ended June 30, 2007 and 2006 to comply with federal environmental statutes (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,				Twelve Months Ended June 30,
	2007		2006		2007		2006		2007		2006
Clean Air Act	$	547	$	392	$	805	$	489	$	1,519	$	1,020
Clean Water Act (1)		492		801		884		975		1,913		2,347

(1) Includes $1.1 million in remediation costs for the twelve months ended June 30, 2006.

Along with many other companies, the Company received from the Texas Commission on Environmental Quality (“TCEQ”) a request for information in 2003 in connection with environmental conditions at a facility in San Angelo, Texas that was operated by the San Angelo Electric Service Company (“SESCO”). In November 2005, TCEQ proposed the SESCO site for listing on the registry of Texas state superfund sites and mailed notice to more than five hundred entities, including the Company, indicating that TCEQ considers each of them to be “potentially responsible parties” at the SESCO site. The Company received from the SESCO working group of potentially responsible parties a settlement offer in May 2006 for remediation and other expenses expected to be incurred in connection with the SESCO site. The Company’s position is that any liability it may have related to the SESCO site was discharged in the Company’s bankruptcy. At this time, the Company has not agreed to a settlement or to otherwise participate in the cleanup of the SESCO site and is unable to predict the outcome of this matter. While the Company has no reason at present to believe that it will incur material liabilities in connection with the SESCO site, it has accrued $0.3 million for potential costs related to this matter.

On September 26, 2006, the Secretary of the New Mexico Environment Department issued a Compliance Order concerning the Company’s Rio Grande Generating Station, located in Dona Ana County, New Mexico. The Compliance Order alleges that, on approximately 650 occasions between May 2000 and September 2005, the Rio Grande Generating Station emitted sulfur dioxide, nitrogen oxides or carbon monoxide in excess of its permitted emission rates and failed to properly report these allegedly excess emissions. The Compliance Order asserts a statutory authority to seek a civil penalty of up to $15,000 per violation for each of the violations alleged. The Company disputes the allegations made and has requested a hearing before the New Mexico Environment Department on the matter. While the Company cannot predict the outcome of this matter, it believes these emissions did not violate applicable legal standards and that penalties, if any, should not involve a material liability.

On April 4, 2007, the Company submitted its application for a New Source Review Air Quality Permit/Prevention of Significant Deterioration (“PSD”) permit to the TCEQ for the new natural-gas

24

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

electric generating units to be located at its existing Newman plant site in the City of El Paso. This facility is known as Newman Unit 5. See Note B – Regulation – Texas Regulatory Matters – Generation CCN Filing. The Company expects to receive approval of its PSD application in early 2008. Additional permits other than the PSD are not required to begin construction of these new generating units because Newman Unit 5 will be constructed at an existing plant site and other permits are currently in place which will incorporate Newman Unit 5.

In May 2007, the Environmental Protection Agency finalized a new Federal Implementation Plan which addresses emissions at the Four Corners Station in northwestern New Mexico of which the Company owns a 7% interest of Units 4 and 5. Arizona Public Service, the Four Corners operating agent, has filed suit against the Environmental Protection Agency relating to this new federal implementation plan in order to resolve issues involving operating flexibility for emission opacity standards. The Company cannot predict the outcome of the suit filed against the Environmental Protection Agency or whether compliance with the new requirements could have an adverse effect on its capital and operating costs.

Except as described herein, the Company is not aware of any other active investigation of its compliance with environmental requirements by the Environmental Protection Agency, the TCEQ or the New Mexico Environment Department which is expected to result in any material liability. Furthermore, except as described herein, the Company is not aware of any unresolved, potentially material liability it would face pursuant to the Comprehensive Environmental Response, Comprehensive Liability Act of 1980, also known as the Superfund law.

See Note E for a discussion of tax contingencies and uncertainties.

G. Litigation

The Company is a party to various legal actions. In many of these matters, the Company has excess casualty liability insurance that covers the various claims, actions and complaints. Based upon a review of these claims and applicable insurance coverage, to the extent that the Company has been able to reach a conclusion as to its ultimate liability, it believes that none of these claims will have a material adverse effect on the financial position, results of operations or cash flows of the Company.

On June 7, 2004, the City of Tacoma filed suit against the Company and other defendants in the United States District Court for the Western District of Washington (City of Tacoma v. American Electric Power Service Corp., et al., C04-5325RBL). This complaint sought civil damages (including treble damages) from the Company and the other defendants for violations of certain antitrust provisions under the Sherman Act. This matter was filed in the United States District Court for the Western District of Washington and on February 11, 2005, the Court granted the Company’s motion to dismiss the case. The City of Tacoma filed a notice of appeal with the U.S. Court of Appeals for the Ninth Circuit. On March 20, 2007, the Ninth Circuit entered an order dismissing the appeal pursuant to a stipulation of the parties. The dismissal is final and no further appeal may be filed.

On May 5, 2004, Wah Chang, a specialty metals manufacturer which operates a plant in Oregon, filed suit against the Company and other defendants in the United States District Court for the District of Oregon. (Wah Chang v. Avista Corporation, et al., No. 04-619AS). The complaint also makes

25

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

substantially the same allegations as were made in City of Tacoma and seeks the same types of damages. This matter was transferred to the same court that heard and dismissed the City of Tacoma lawsuit and on February 11, 2005, the Court granted the Company’s motion to dismiss the case. Wah Chang filed notice of appeal with the U.S. Court of Appeals for the Ninth Circuit. The parties have filed briefs in this case and oral arguments were held on April 10, 2007. While the Company believes that this matter is without merit and intends to defend itself vigorously, the Company is unable to predict the outcome or range of possible loss.

See Note B for discussion of the effects of regulation on the Company.

H. Employee Benefits

Separation Agreement with Gary Hedrick

On May 15, 2007, the Company announced the appointment of Ershel C. Redd, Jr. as its President and Chief Executive Officer and a member of the Company’s Board of Directors. Mr. Redd succeeds Gary Hedrick.

On May 18, 2007, the Company entered into an employment separation agreement with Gary Hedrick. In satisfaction of any and all obligations (other than accrued compensation and benefits under health, welfare and retirement plans) resulting from Mr. Hedrick’s 30 years of service to the Company, he will receive a $1.8 million lump sum payment, in addition to two-and-one half years of Company-paid medical benefits and severance payments. In addition, Mr. Hedrick has agreed to provide part-time consulting services to the Company for a period of time. All of Mr. Hedrick’s unvested restricted shares and performance shares awarded in accordance with the Company’s long-term incentive plan were forfeited which resulted in a net cumulative adjustment of $0.9 million as reduced compensation costs, see Note D.

26

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Retirement Plans

The net periodic benefit cost recognized for the three, six and twelve months ended June 30, 2007 and 2006 is made up of the components listed below as determined using the projected unit credit actuarial cost method (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,						Twelve Months Ended June 30,
	2007			2006			2007			2006			2007			2006
Components of net periodic benefit cost:
Service cost	$	1,442		$	1,425		$	2,817		$	2,851		$	5,573		$	5,433
Interest cost		3,080			2,759			6,028			5,517			11,639			10,833
Expected return on plan assets		(3,131	)		(2,789	)		(6,268	)		(5,578	)		(11,719	)		(10,286	)
Amortization of:
Net of loss		949			1,151			1,709			2,302			3,908			4,434
Prior service cost		29			29			58			58			116			115
Net periodic benefit cost	$	2,369		$	2,575		$	4,344		$	5,150		$	9,517		$	10,529

During the six months ended June 30, 2007, the Company contributed $7.8 million of its projected $13.6 million 2007 annual contribution to its retirement plans.

Other Postretirement Benefits

The net periodic benefit cost recognized for the three, six and twelve months ended June 30, 2007 and 2006 is made up of the components listed below (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,						Twelve Months Ended June 30,
	2007			2006			2007			2006			2007			2006
Components of net periodic benefit cost:
Service cost	$	1,043		$	1,030		$	2,250		$	2,060		$	4,774		$	4,435
Interest cost		1,755			1,532			3,413			3,064			6,111			6,397
Expected return on plan assets		(425	)		(368	)		(848	)		(736	)		(1,590	)		(1,427	)
Amortization of:
Prior service cost		(718	)		(694	)		(1,435	)		(1,388	)		(2,916	)		(1,565	)
Net periodic benefit cost	$	1,655		$	1,500		$	3,380		$	3,000		$	6,379		$	7,840

During the six months ended June 30, 2007, the Company contributed $2.0 million of its projected $3.4 million 2007 annual contribution to its postretirement plan.

27

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

E1 Paso Electric Company:

We have reviewed the condensed consolidated balance sheet of E1 Paso Electric Company and subsidiary as of June 30, 2007, the related condensed consolidated statements of operations and comprehensive operations for the three-month, six-month and twelve-month periods ended June 30, 2007 and 2006, and the related condensed consolidated statements of cash flows for the six-month periods ended June 30, 2007 and 2006. These condensed consolidated financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), 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 reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of E1 Paso Electric Company and subsidiary as of December 31, 2006, and the related consolidated 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 27, 2007, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2006, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Our report on the consolidated financial statements refers to a change in the Company’s method of accounting for asset retirement obligations, effective December 31, 2005; and changes in the Company’s methods of accounting for share-based payments, effective January 1, 2006 and for defined benefit pension and other postretirement plans, effective December 31, 2006.

KPMG LLP

Houston, Texas

August 6, 2007

28

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 our 2006 Form 10-K.

FORWARD-LOOKING STATEMENTS

Certain matters discussed in this Quarterly Report on Form 10-Q other than statements of historical information are “forward-looking statements.” The Private Securities Litigation Reform Act of 1995 has established that these statements qualify for safe harbors from liability. Forward-looking statements may include words like we “believe”, “anticipate”, “target”, “expect”, “pro forma”, “estimate”, “intend” and words of similar meaning. Forward-looking statements describe our future plans, objectives, expectations or goals. Such statements address future events and conditions concerning and include, but are not limited to such things as:

• capital expenditures,

• earnings,

• liquidity and capital resources,

• litigation,

• accounting matters,

• possible corporate restructurings, acquisitions and dispositions,

• compliance with debt and other restrictive covenants,

• interest rates and dividends,

• environmental matters,

• nuclear operations, and

• the overall economy of our service area.

These forward-looking statements involve known and unknown risks that may cause our actual results in future periods to differ materially from those expressed in any forward-looking statement. Factors that would cause or contribute to such differences include, but are not limited to, such things as:

• our rates in Texas following the end of the Texas Freeze Period ending June 30, 2010,

• our rates in New Mexico following the 2007 New Mexico Stipulation,

• loss of margins on off-system sales due to changes in wholesale power prices or availability of competitive generation resources,

• ability of our operating partners to maintain plant operations and manage operation and maintenance costs at Palo Verde and Four Corners plants including additional costs associated with the degraded cornerstone status of Palo Verde,

• reductions in output at generation plants operated by the Company,

• unscheduled outages including outages at Palo Verde,

• electric utility deregulation or re-regulation,

• regulated and competitive markets,

• ongoing municipal, state and federal activities,

• economic and capital market conditions,

• changes in accounting requirements and other accounting matters,

• changing weather trends,

• rates, cost recoveries and other regulatory matters including the ability to recover fuel costs on a timely basis,

29

• changes in environmental regulations,

• the impact of changes and downturns in the energy industry and the market for trading wholesale electricity,

• political, legislative, judicial and regulatory developments,

• the impact of lawsuits filed against us,

• the impact of changes in interest rates,

• changes in, and the assumptions used for, pension and other post-retirement and post-employment benefit liability calculations, as well as actual and assumed investment returns on pension plan assets,

• the impact of changing cost escalation and other assumptions on our nuclear decommissioning liability for the Palo Verde Nuclear Generating Station,

• Texas, New Mexico and electric industry utility service reliability standards,

• homeland security considerations,

• coal, uranium, natural gas, oil and wholesale electricity prices, and

• other circumstances affecting anticipated operations, sales and costs.

These lists are not all-inclusive because it is not possible to predict all factors. A discussion of some of these factors is included in this document under the headings “Risk Factors” and in the 2006 Form 10-K under the headings “Management’s Discussion and Analysis” “-Summary of Critical Accounting Policies and Estimates” and “-Liquidity and Capital Resources.” This report should be read in its entirety. No one section of this report deals with all aspects of the subject matter. Any forward-looking statement speaks only as of the date such statement was made, and we are not obligated to update any forward-looking statement to reflect events or circumstances after the date on which such statement was made except as required by applicable laws or regulations.

Summary of Critical Accounting Policies and Estimates

The preparation of our financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes for the periods presented and actual results could differ in future periods from those estimates. Critical accounting policies and estimates are both important to the portrayal of our financial condition and results of operations and require complex, subjective judgments and are more fully described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2006 Form 10-K.

Palo Verde Operations

We own approximately 622 MW (undivided interest) of generating capacity in the three generating units at the Palo Verde nuclear power station. The operation of Palo Verde affects our ability to make off-system sales, impacts our fuel costs to native load customers and represents a significant portion of our non-fuel operating expenses. Palo Verde operated at a capacity factor of 83.2% in the first six months of 2007 and a capacity factor of 58.7% in the first six months of 2006. Palo Verde Unit 1 operated at significantly reduced power levels from December 25, 2005 until March 18, 2006 and did not operate from March 18, 2006 until early July 2006 while repairs and modifications were made to one of its shutdown cooling lines.

In October 2006, the NRC conducted an inspection of the Palo Verde emergency diesel generators after a Palo Verde Unit 3 generator did not activate during routine inspections in July and September 2006. On February 22, 2007, the NRC issued a “white” finding (low to moderate safety significance) for this matter. In connection with its finding, the NRC stated that it would use the NRC action matrix to determine the most appropriate response, including any increase in NRC oversight or

30

identification of actions that APS, the plant operator, needs to take in response to this performance deficiency. The NRC notified APS of actions required in a confirmatory action letter issued on June 21, 2007. Under the NRC’s action matrix, this finding, coupled with a previous NRC “yellow” finding (substantial safety significance) relating to a 2004 matter involving Palo Verde’s safety injection systems, placed Palo Verde in the “multiple/repetitive degraded cornerstone” column of the NRC’s action matrix which results in an enhanced NRC inspection regimen. This enhanced inspection regimen and any resulting corrective actions could result in increased operating costs at the plant. Of the 103 commercial nuclear reactors in the United States regulated by the NRC, Palo Verde is the only reactor in the “multiple/repetitive degraded cornerstone” category as of the end of the second quarter 2007. Palo Verde operations and maintenance costs in the first six months of 2007 were $1.2 million higher than the first six months of 2006. We are currently unable to predict the impact that the NRC’s increased oversight may have on Palo Verde's operations and the cost of operations.

The nuclear fuel material market has recently been affected by supply disruptions and significant price increases with the cost of uranium having increased significantly in the last few years. The Palo Verde Participants have taken steps to mitigate the effects of future supply disruptions and price increases by changing from a procurement strategy under which nuclear fuel arrives at Palo Verde one month prior to being loaded into a reactor to a strategy where (i) nuclear fuel arrives on site three months before being loaded and (ii) a strategic inventory of converted nuclear fuel material sufficient to provide feed stock for one full reactor reload is stored for future use. This change in procurement strategy will increase our cash funding requirements in 2007. See Liquidity and Capital Resources – Capital Resources.

Summary

The following is an overview of our results of operations for the three, six and twelve month periods ended June 30, 2007 and 2006. Income for the three, six and twelve month periods ended June 30, 2007 and 2006 is shown below:

	Three Months Ended June 30,				Six Months Ended June 30,				Twelve Months Ended June 30,
	2007		2006		2007		2006		2007		2006
Net income before extraordinary item and cumulative effect of accounting change (in thousands)	$	9,599	$	15,249	$	24,718	$	24,553	$	61,552	$	60,373
Basic earnings per share before extraordinary item and cumulative effect of accounting change		0.21		0.32		0.54		0.51		1.32		1.25

31

The following table and accompanying explanations show the primary factors affecting the after-tax change in income before extraordinary item and cumulative effect of accounting change between the 2007 and 2006 periods presented (in thousands):

	Three Months Ended			Six Months Ended			Twelve Months Ended
June 30, 2006 net income before extraordinary item and cumulative effect of accounting change	$	15,249		$	24,553		$	60,373
Change in (net of tax):
Decreased maintenance at coal and gas-fired generating plants (a)		3,078			4,247			5,721
Increased off-system sales margin		1,465			2,773			6,523
Increased capitalized interest and AFUDC (b)		1,079			2,231			1,834
Increased investment and interest income		519			1,078			1,473
Income tax adjustment (c)		(6,174	)		(6,174	)		(6,174	)
Increased (decreased) retail non-fuel base revenues (d)		(2,792	)		838			1,400
Decreased transmission wheeling revenue (e)		(1,274	)		(1,655	)		(608	)
Increased transmission and distribution operations and maintenance expense (f)		(330	)		(595	)		(1,978	)
Increased customer accounts (g)		(242	)		(532	)		(1,141	)
Increased Palo Verde operations and maintenance expense		(76	)		(726	)		(2,879	)
New Mexico capacity cost adjustment (h)		—			(1,289	)		(1,289	)
Other		(903	)		(31	)		(1,703	)
June 30, 2007 net income before extraordinary item and cumulative effect of accounting change	$	9,599		$	24,718		$	61,552

(a) Maintenance at coal and gas-fired generation plants decreased due to a reduction in 2007 of unplanned and planned maintenance from 2006 amounts.

(b) Capitalized interest and AFUDC (allowance for funds used during construction) increased in 2007 due to the re-application of SFAS No. 71 to our Texas jurisdiction beginning December 31, 2006 and increased construction work in progress subject to AFUDC in 2007.

(c) A reduction in deferred income tax expense was recorded in 2006 to recognize the change in tax rates resulting from changes in the Texas franchise (income) tax law in May 2006. This adjustment was a non-cash change in the second quarter of 2006 affecting deferred income tax liabilities.

(d) Retail base revenues decreased for the three month period ending June 30, 2007 compared to the same period last year primarily due to decreased kWh sales resulting from a substantial reduction in cooling degree days relative to 2006 partially offset by growth in the number of customers served. Retail base revenues increased for the six and twelve month periods ending June 30, 2007 compared to the same periods last year primarily due to increased kWh sales reflecting growth in the number of customers served.

(e) Decreased transmission wheeling revenues reflects transmission sales to third party owners of a generation plant in southern New Mexico in 2006 with no comparable transmission sales recorded in the 2007 periods.

(f) Transmission and distribution operations and maintenance expense increased due to increased maintenance cost related to environmental issues and security for the three, six and twelve month periods; and also due to tree trimming costs for the three and six month periods.

(g) Customer accounts costs increased due to increased payroll costs and mailing expense.

(h) A fuel revenue adjustment was recorded in 2006 based on a final order of the NMPRC finding that we can recover purchased power capacity costs through our New Mexico fuel adjustment clause resulting in $1.3 million, net of tax, increase in deferred fuel revenues in 2006 for the period prior to January 1, 2006.

32

Historical Results of Operations

The following discussion includes detailed descriptions of factors affecting individual line items in the results of operations. The amounts presented below are presented on a pre-tax basis.

Operating revenues

We realize revenue from the sale of electricity to retail customers at regulated rates and the sale of energy in the wholesale power market generally at market based prices. Sales for resale (which are wholesale sales within our service territory) accounted for less than 1% of revenues. Off-system sales are wholesale sales into markets outside our service territory. Off-system sales are primarily made in off-peak periods when we have competitive generation capacity available after meeting our regulated service obligations. Under the terms of our Texas Rate Agreements, we share with our Texas customers 25% of our off-system sales margins and wheeling revenues. (See Note B of the Notes to Consolidated Financial Statements).

Revenues from the sale of electricity include fuel costs, which are essentially passed through to customers through fuel adjustment mechanisms in Texas and New Mexico and a portion through base rates in New Mexico. We record deferred fuel revenues for the difference between fuel costs and fuel revenues until such amounts are collected from or refunded to customers. “Non-fuel base revenues” refers to our revenues from the sale of electricity excluding such fuel costs.

Retail non-fuel base revenue percentages by customer class are presented below:

	Three Months Ended June 30,				Six Months Ended June 30,				Twelve Months Ended June 30,
	2007		2006		2007		2006		2007		2006
Residential	38	%	39	%	39	%	39	%	40	%	40	%
Commercial and industrial, small	37		36		36		36		36		36
Commercial and industrial, large	9		9		9		9		9		9
Sales to public authorities	16		16		16		16		15		15
Total base revenues	100	%	100	%	100	%	100	%	100	%	100	%

No retail customer accounted for more than 2% of our base revenues during such periods. As shown in the table above, residential and small commercial customers comprise approximately 75% of our revenues. While this customer base is more stable, it is also more sensitive to changes in weather conditions. As a result, our business is seasonal, with higher kWh sales and revenues during the summer cooling season.

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Weather significantly impacts our residential, small commercial and industrial customers, and to a lesser extent, our sales to public authorities. For the second quarter of 2007, retail non-fuel base revenues were negatively impacted by the substantial reduction in cooling degree days relative to 2006. Heating and cooling degree days can be used to evaluate the effect of weather on energy use. For each degree the average outdoor temperature varies from a standard of 65 degrees Fahrenheit a degree day is recorded. As shown in the table below, combined heating and cooling degree days were below average for the three and twelve months ended June 30, 2007 and were comparable to the 10-year average for the six months ended June 30, 2007.

	Three Months Ended June 30,		10-Year Average	Six Months Ended June 30,		10-Year Average	Twelve Months Ended June 30,		10-Year Average*
	2007	2006		2007	2006		2007	2006
Heating degree days	87	16	80	1,375	1,040	1,299	2,355	1,925	2,374
Cooling degree days	824	1,149	958	857	1,162	971	2,152	2,767	2,519

* Calendar year basis for 2006.

Customer growth is a primary driver in our retail sales growth. The average number of retail customers grew between 2.4% to 2.5% for the three, six, and twelve months ended June 30, 2007 when compared to the same periods last year. See the tables presented on pages 37, 38, and 39 which provide detail on the average number of retail customers and the related revenues and kWh sales.

Retail non-fuel base revenues. Retail non-fuel base revenues decreased by $4.5 million or 3.9% for the three months ended June 30, 2007 when compared to the same period last year primarily due to weather-related decreases from our residential customers and our small commercial and industrial customers as previously discussed. Residential base revenues decreased by $3.1 million or 6.9% for the three months ended June 30, 2007 when compared to the same period last year as a result of a 7.3% decrease in residential kWh sales. Weather also impacted base revenues from our small commercial and industrial customers resulting in a decrease of $1.1 million or 2.5% for the quarter due to a decrease in kWh sales of 3.3%. Base revenues from large commercial and industrial customers and sales to public authorities changed minimally with decreases of less than 2% each.

Retail non-fuel base revenues increased by $1.4 million or 0.6% for the six months ended June 30, 2007 when compared to the same period last year due to a 2.5% increase in the average number of customers served. Residential base revenues increased by $1.2 million or 1.4% for the six months ended June 30, 2007 when compared to the same period last year as a result of a 1.9% increase in residential kWh sales. The increase in residential kWh sales was primarily due to a 2.4% increase in the average number of residential customers served for the six-month period. Cooler winter weather in the first quarter of 2007 was offset by a substantial reduction in second quarter cooling degree days relative to 2006. Base revenues from sales to other public authorities, large commercial and industrial customers, and small commercial and industrial revenues had less than a 1% change each.

Retail non-fuel base revenues increased by $2.3 million or 0.5% for the twelve months ended June 30, 2007 when compared to the same period last year due to an increase of 0.9% in kWh sales. Base revenues from our large commercial and industrial customers increased $1.4 million, or 3.5% due to a 4.9% increase in kWh sales. Revenues from our public authority customers increased $1.3 million, or 2.0% due to a 2.6% increase in kWh sales. Residential base revenues decreased by $0.5 million or 0.3% for the twelve months ended June 30, 2007 when compared to the same period last year as a result of a 0.5% decrease in residential kWh sales reflecting the 22% decline in cooling degree days in 2007 compared to 2006. The average number of residential customers served increased 2.5% for the twelve

34

month period ended June 30, 2007. Base revenues from our small commercial and industrial customers remained relatively unchanged for the period even with an increase of 3.4% in the average number of customers served reflecting the decline in cooling degree days.

Fuel revenues. Fuel revenues consist of: (i) revenues collected from customers under fuel recovery mechanisms approved by the state commissions, (ii) deferred fuel revenues which are comprised of the difference between fuel costs and fuel revenues collected from customers and (iii) fuel costs recovered in base rates in New Mexico. In New Mexico, the fuel adjustment clause allows us to reflect current fuel costs above the amount recovered in base rates in the clause and to recover under-recoveries or refund over-recoveries in the clause with a two-month lag with the exception of a fixed amount of fuel costs for 10% of kWh sales. In Texas, fuel costs are recovered through a fixed fuel factor that may be adjusted two times per year. In addition, if we materially over-recover fuel costs, we must seek to refund the over-recovery, and if we materially under-recover fuel costs, we may seek a surcharge to recover those costs.

In October 2005, we began recovering from our Texas customers, through a fuel surcharge, $53.6 million of fuel under-recoveries over a 24-month period. In February 2006, we implemented an additional fuel surcharge to recover approximately $34 million of fuel under-recoveries, including interest through the surcharge period, over a twelve-month period. In the three month periods ended June 30, 2007 and June 30, 2006, we collected $6.1 million and $15.2 million of deferred fuel revenues in Texas through surcharges. We have under-collected current fuel costs and deferred for future recovery from our Texas customers $14.6 million and $9.4 million, respectively, for the three-month periods ended June 30, 2007 and June 30, 2006, respectively. In the six-month periods ended June 30, 2007 and June 30, 2006, we collected $15.0 million and $25.7 million of deferred fuel revenues in Texas through surcharges, respectively. We under-collected current fuel costs and deferred for future recovery from our Texas customers $7.5 million and $9.9 million in the six-month periods ended June 30, 2007 and June 30, 2006, respectively. In the twelve-month periods ended June 30, 2007 and June 30, 2006, we collected $46.2 million and $31.7 million of deferred fuel revenues in Texas through surcharges. We over-collected current fuel costs from our Texas customers by $1.4 million in the twelve-month period ended June 30, 2007 and under-collected current fuel costs by $67.4 million in the twelve-month period ended June 30, 2006. At June 30, 2007, we had an under-recovered fuel balance of $22.4 million from our Texas customers and $5.7 million from our New Mexico customers.

35

Off-system sales. Off-system sales are primarily made in off-peak periods when we have competitive generation capacity available after meeting our regulated service obligations. Typically, we realize between 40% and 50% of our off-system sales margins in the first quarter of each calendar year when our native load is lower than at other times of the year, allowing for the sale in the wholesale market of relatively larger amounts of off-system energy generated from nuclear fuel resources. Palo Verde’s availability is an important factor in realizing these off-system sales margins. Off-system sales revenue increased $15.8 million, $25.6 million, and $41.0 million for the three, six and twelve months ended June 30, 2007 when compared to the same periods last year due to increased off-system kWh sales of 73.2%, 73.7%, and 68.8% for the three, six and twelve month periods. The table below shows the MWhs, sales revenue, fuel cost and total margins made on off-system sales for the three, six, and twelve month periods.

	Three Months Ended June 30,				Six Months Ended June 30,				Twelve Months Ended June 30,
	2007		2006		2007		2006		2007		2006
MWh sales		498,995		288,099		1,174,006		675,977		2,133,436		1,263,613
Sales revenues	$	29,705	$	13,942	$	66,321	$	40,701	$	121,552	$	80,526
Fuel cost	$	26,006	$	13,167	$	52,281	$	32,199	$	93,413	$	65,418
Total margin	$	3,699	$	775	$	14,040	$	8,502	$	28,139	$	15,108

The increase for the six and twelve month periods were partially offset by lower average market prices. Increased generation from Palo Verde in the first six months of 2007 compared to the first six months of 2006 resulted in increased energy available for off-system sales in the current periods. Since July 2005, 25% of off-system sales margins have been shared with customers in Texas.

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Comparisons of kWh sales and operating revenues are shown below (in thousands):

					Increase (Decrease)
Quarter Ended June 30:	2007		2006		Amount			Percent
kWh sales:
Retail:
Residential		499,059		538,372		(39,313	)	(7.3	)%
Commercial and industrial, small		561,960		581,136		(19,176	)	(3.3	)
Commercial and industrial, large		304,644		306,684		(2,040	)	(0.7	)
Sales to public authorities		353,231		362,809		(9,578	)	(2.6	)
Total retail sales		1,718,894		1,789,001		(70,107	)	(3.9	)
Wholesale:
Sales for resale		14,699		14,443		256		1.8
Off-system sales		498,995		288,099		210,896		73.2
Total wholesale sales		513,694		302,542		211,152		69.8
Total kWh sales		2,232,588		2,091,543		141,045		6.7
Operating revenues:
Non-fuel base revenues:
Retail:
Residential	$	41,936	$	45,021	$	(3,085	)	(6.9	)%
Commercial and industrial, small		41,499		42,554		(1,055	)	(2.5	)
Commercial and industrial, large		10,014		10,159		(145	)	(1.4	)
Sales to public authorities		17,714		17,933		(219	)	(1.2	)
Total retail non-fuel base revenues		111,163		115,667		(4,504	)	(3.9	)
Wholesale:
Sales for resale		585		561		24		4.3
Total non-fuel base revenues		111,748		116,228		(4,480	)	(3.9	)
Fuel revenues:
Recovered from customers during the period		48,736		57,084		(8,348	)	(14.6	)(1)
Under (over) collection of fuel		17,941		10,543		7,398		70.2
New Mexico fuel in base rates		7,394		7,639		(245	)	(3.2	)
Total fuel revenues		74,071		75,266		(1,195	)	(1.6	)
Off-system sales		29,705		13,942		15,763		113.1
Other		3,767		6,360		(2,593	)	40.8	(2)
Total operating revenues	$	219,291	$	211,796	$	7,495		3.5
Average number of retail customers:
Residential		314,591		307,657		6,934		2.3	%
Commercial and industrial, small		33,844		32,467		1,377		4.2
Commercial and industrial, large		56		58		(2	)	(3.4	)
Sales to public authorities		4,841		4,816		25		0.5
Total		353,332		344,998		8,334		2.4

(1) Excludes $6.1 million and $15.2 million, respectively, of prior periods deferred fuel revenues recovered through Texas fuel surcharges.

(2) Represents revenues with no related kWh sales.

37

					Increase (Decrease)
Six Months Ended June 30:	2007		2006		Amount			Percent
kWh sales:
Retail:
Residential		1,008,738		989,535		19,203		1.9	%
Commercial and industrial, small		1,021,356		1,030,743		(9,387	)	(0.9	)
Commercial and industrial, large		579,066		568,148		10,918		1.9
Sales to public authorities		647,085		645,035		2,050		0.3
Total retail sales		3,256,245		3,233,461		22,784		0.7
Wholesale:
Sales for resale		24,101		23,680		421		1.8
Off-system sales		1,174,006		675,977		498,029		73.7
Total wholesale sales		1,198,107		699,657		498,450		71.2
Total kWh sales		4,454,352		3,933,118		521,234		13.3
Operating revenues:
Non-fuel base revenues:
Retail:
Residential	$	83,374	$	82,186	$	1,188		1.4	%
Commercial and industrial, small		77,141		77,442		(301	)	(0.4	)
Commercial and industrial, large		19,362		19,204		158		0.8
Sales to public authorities		33,275		32,969		306		0.9
Total retail non-fuel base revenues		213,152		211,801		1,351		0.6
Wholesale:
Sales for resale		960		908		52		5.7
Total non-fuel base revenues		214,112		212,709		1,403		0.7
Fuel revenues:
Recovered from customers during the period		95,073		107,799		(12,726	)	(11.8	)(1)
Under (over) collection of fuel		10,382		7,955		2,427		30.5
New Mexico fuel in base rates		14,375		14,256		119		0.8
Total fuel revenues		119,830		130,010		(10,180	)	(7.8	)
Off-system sales		66,321		40,701		25,620		62.9
Other		7,445		10,805		(3,360	)	(31.1	)(2)
Total operating revenues	$	407,708	$	394,225	$	13,483		3.4
Average number of retail customers:
Residential		314,011		306,680		7,331		2.4	%
Commercial and industrial, small		33,476		32,344		1,132		3.5
Commercial and industrial, large		57		59		(2	)	(3.4	)
Sales to public authorities		4,825		4,809		16		0.3
Total		352,369		343,892		8,477		2.5

(1) Excludes $15.0 million and $25.7 million, respectively, of prior periods deferred fuel revenues recovered through Texas fuel surcharges.

(2) Represents revenues with no related kWh sales.

38

						Increase (Decrease)
Twelve Months Ended June 30:	2007			2006		Amount			Percent
kWh sales:
Retail:
Residential		2,132,936			2,143,749		(10,813	)	(0.5	)%
Commercial and industrial, small		2,150,212			2,168,194		(17,982	)	(0.8	)
Commercial and industrial, large		1,215,625			1,158,794		56,831		4.9
Sales to public authorities		1,345,179			1,311,663		33,516		2.6
Total retail sales		6,843,952			6,782,400		61,552		0.9
Wholesale:
Sales for resale		45,818			44,347		1,471		3.3
Off-system sales		2,133,436			1,263,613		869,823		68.8
Total wholesale sales		2,179,254			1,307,960		871,294		66.6
Total kWh sales		9,023,206			8,090,360		932,846		11.5
Operating revenues:
Non-fuel base revenues:
Retail:
Residential	$	176,829		$	177,361	$	(532	)	(0.3	)%
Commercial and industrial, small		161,058			160,958		100		0.1
Commercial and industrial, large		40,660			39,299		1,361		3.5
Sales to public authorities		68,744			67,416		1,328		2.0
Total retail non-fuel base revenues		447,291			445,034		2,257		0.5
Wholesale:
Sales for resale		1,846			1,763		83		4.7
Total non-fuel base revenues		449,137			446,797		2,340		0.5
Fuel revenues:
Recovered from customers during the period		212,715			204,080		8,635		4.2	(1)
Under (over) collection of fuel		(1,228	)		69,442		(70,670	)	(101.8	)
New Mexico fuel in base rates		30,152			30,052		100		0.3
Total fuel revenues		241,639			303,574		(61,935	)	(20.4	)
Off-system sales		121,552			80,526		41,026		50.9
Other		17,610			18,756		(1,146	)	(6.1	)(2)
Total operating revenues	$	829,938		$	849,653	$	(19,715	)	(2.3	)
Average number of retail customers:
Residential		312,148			304,586		7,562		2.5	%
Commercial and industrial, small		33,157			32,068		1,089		3.4
Commercial and industrial, large		58			59		(1	)	(1.7	)
Sales to public authorities		4,805			4,782		23		0.5
Total		350,168			341,495		8,673		2.5

(1) Excludes $46.2 million and $31.7 million of deferred fuel revenues recovered through Texas fuel surcharges, respectively.

(2) Represents revenues with no related kWh sales.

39

Energy expenses

Our sources of energy include electricity generated from nuclear fuel, natural gas and coal plants that we own and purchased power. Palo Verde represents approximately 40% of our available net generating capacity and approximately 42%, 47% and 46%, respectively, of our available energy for the three, six and twelve months ended June 30, 2007.

Our energy expenses increased $11.2 million or 12.4% for the three months ended June 30, 2007 when compared to 2006 primarily due to increased energy requirements of 6% and higher natural gas prices. The average cost of energy only increased 6% as a result of a 54% increase in generation from nuclear fuel, our lowest cost fuel. Natural gas expense increased $14.7 million reflecting a 12% increase in the average cost of gas and 19% increase in generation at gas-fired generating plants. During the second quarter of 2007 Palo Verde operated at a 73.7% capacity factor compared to a 48.1% capacity factor in the second quarter of 2006. As a result, most of the increase in energy requirements was met through increased nuclear generation at an average fuel cost of $5.71 per MWh in the second quarter of 2007 compared to our fuel costs of generating power at our gas-fired generating plants of $83.42 MWh and purchased power of $60.84 per MWh. Purchased power expense declined $4.7 million reflecting a 29% decline in energy purchases. The table below shows the cost of energy, MWh generated or purchased and cost per MWh for each fuel type for the three month periods ended June 30, 2007 and June 30, 2006.

	Three Months Ended June 30,
	2007					2006
Fuel Type	Cost		MWh	Cost per MWh		Cost		MWh	Cost per MWh
	(in thousands)					(in thousands)
Natural gas	$	58,807	704,968	$	83.42	$	44,155	591,716	$	74.62
Coal		2,254	121,302		18.58		3,017	211,121		14.29
Nuclear		5,722	1,001,914		5.71		3,642	649,690		5.61
Total		66,783	1,828,184		36.53		50,814	1,452,527		34.98
Purchased power		35,339	580,817		60.84		40,068	818,164		48.97
Total energy	$	102,122	2,409,001		42.39	$	90,882	2,270,691		40.02

Our energy expenses increased $12.3 million or 7.5% for the six months ended June 30, 2007 when compared to 2006 due to a 12% increase in energy requirements. The average cost of energy declined 3.9% to $36.92 per MWh in the six months ended June 30, 2007 from $38.41 per MWh in the six months ended June 30, 2006 as increased generation from Palo Verde provided most of the increase in energy requirements. During the six months ended June 30, 2007 Palo Verde operated at an 83.2% capacity factor compared to a 58.7% capacity factor during the same period in 2006. As a result, most of the increase in energy requirements was met through increased nuclear generation at an average fuel cost of $5.70 per MWh in the current period compared to our fuel costs of generating power at our gas-fired generating plants of $83.08 MWh and purchased power of $58.05 per MWh. Natural gas expense increased $12.9 million reflecting an 11% increase in natural gas-fired generation and a 4% increase in natural gas prices. Purchased power expense declined $3.6 million reflecting a 13% decline in energy purchases. The table below shows the cost of energy, MWh generated or purchased and cost per MWh for each fuel type for the six month periods ended June 30, 2007 and June 30, 2006.

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	Six Months Ended June 30,
	2007					2006
Fuel Type	Cost		MWh	Cost per MWh		Cost		MWh	Cost per MWh
	(in thousands)					(in thousands)
Natural gas	$	95,984	1,155,361	$	83.08	$	83,117	1,038,076	$	80.07
Coal		5,437	300,841		18.07		6,041	418,632		14.43
Nuclear		12,826	2,250,070		5.70		9,212	1,583,858		5.82
Total		114,247	3,706,272		30.83		98,370	3,040,566		32.35
Purchased power		61,998	1,067,997		58.05		65,624	1,228,634		53.41
Total energy	$	176,245	4,774,269		36.92	$	163,994	4,269,200		38.41

Our energy expenses decreased $32.3 million for the twelve months ended June 30, 2007 when compared to 2006 primarily due to lower natural gas prices and decreased natural gas generation. During the current period, we were able to meet a 10% increase in energy requirements and displace gas-fired generation with increased generation from Palo Verde and increased purchases of economy energy in the wholesale power market. As a result, our average cost of energy declined 17% to $35.61 in the twelve months ended June 30, 2007 from $43.00 per MWh in the twelve months ended June 30, 2006. During the twelve-month period ended June 30, 2007 Palo Verde operated at an 81.8% capacity factor compared to a 66.1% capacity factor for the twelve-month period ended June 30, 2006. As a result, most of the increase in energy requirements was met through increased nuclear generation at an average fuel cost of $5.56 per MWh during the twelve-month period ended June 30, 2007 compared to our fuel costs of generating power at our gas-fired generating plants of $80.42 per MWh. The average cost of purchased power declined 11% to $55.35 per MWh in the twelve months ended June 30, 2007 and as a result we purchased 11% more power in the twelve-month period ended June 30, 2007 rather than generating additional energy with natural gas. The table below shows the cost of energy, MWh generated or purchased and cost per MWh for each fuel type for the twelve-month periods ended June 30, 2007 and June 30, 2006.

	Twelve Months Ended June 30,
	2007					2006
Fuel Type	Cost		MWh	Cost per MWh		Cost			MWh	Cost per MWh
	(in thousands)					(in thousands)
Natural gas	$	193,352	2,404,382	$	80.42	$	229,702		2,502,428	$	91.79
Coal		11,094	709,390		15.64		11,427	(a)	819,559		13.94
Nuclear		24,787	4,459,940		5.56		19,708		3,561,328		5.53
Total		229,233	7,573,712		30.27		260,837		6,883,315		37.89
Purchased power		113,363	2,048,024		55.35		114,723		1,849,876		62.02
Total energy	$	342,596	9,621,736		35.61	$	375,560		8,733,191		43.00

(a) Excludes a reduction of $0.7 million to our coal reclamation liability recorded in the third quarter of 2005.

Other operations expense

Other operations expense increased $3.1 million, or 6.7%, for the three months ended June 30, 2007 compared to the same period last year primarily due to (i) increased Palo Verde operations expense of $2.2 million and (ii) increased outside services expenses of $0.7 million due mainly to increased legal expenses.

41

Other operations expense increased $3.5 million, or 3.9%, for the six months ended June 30, 2007 compared to the same period last year primarily due to increased Palo Verde operations expense of $4.3 million. This increase was partially offset by decreased insurance-related costs of $1.1 million.

Other operations expense increased $12.5 million, or 6.9%, for the twelve months ended June 30, 2007 compared to the same period last year primarily due to (i) increased Palo Verde operations expense of $8.0 million; (ii) increased customer accounts expense of $1.8 million, (iii) increased outside services expense of $1.2 million; and (iv) increased pension and benefits expenses of $1.0 million.

Maintenance expense

Maintenance expense decreased $6.0 million, or 26.2%, for the three months ended June 30, 2007 primarily due to (i) decreased maintenance expense at our gas-fired generating plants of $5.0 million and (ii) decreased Palo Verde maintenance expense of $2.1 million. These decreases were partially offset by increased maintenance on our distribution and transmission facilities of $0.9 million due to increased costs related to environmental issues, tree trimming and security.

Maintenance expense decreased $8.3 million, or 22.5%, for the six months ended June 30, 2007 primarily due to (i) decreased maintenance expense at our gas-fired generating plants of $6.9 million and (ii) decreased Palo Verde maintenance expense of $3.2 million. These decreases were partially offset by increased maintenance on our distribution and transmission facilities of $1.4 million due to increased costs related to environmental issues, tree trimming and security.

Maintenance expense decreased $10.5 million, or 16.9%, for the twelve months ended June 30, 2007 primarily due to (i) decreased maintenance expense at our gas-fired generating plants of $9.2 million and (ii) decreased Palo Verde maintenance expense of $3.3 million. These decreases were partially offset by increased maintenance on our distribution and transmission facilities of $2.2 million due to increased costs related to environmental issues and security.

Depreciation and amortization expense

Depreciation and amortization expense remained relatively level for the three and six months ended June 30, 2007 compared to the same periods last year. Depreciation and amortization expense decreased $0.6 million for the twelve months ended June 30, 2007 compared to the same period last year primarily due to completing the recovery of certain fresh-start accounting related assets over the term of the Texas Rate Stipulation which ended in July 2005. The decrease was partially offset by higher depreciation due to increases in depreciable plant balances, primarily related to the replacement of Palo Verde Unit 1 steam generators in December 2006.

Taxes other than income taxes

Taxes other than income taxes decreased by $0.3 million and $0.8 million for the three and six months ended June 30, 2007, respectively, compared to the same periods last year due to lower property taxes and a change in the Texas franchise tax law resulting in all franchise taxes being recorded as income taxes beginning in 2007. Taxes other than income taxes increased $0.3 million for the twelve months ended June 30, 2007 compared to the same period last year primarily due to higher revenue-related taxes associated with increased retail revenues including fuel surcharges.

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Other income (deductions)

Other income (deductions) increased $2.1 million, $3.5 million, and $5.6 million for the three, six, and twelve months ended June 30, 2007 compared to the same period last year primarily due to increased interest income on larger cash and decommissioning trust fund balances and increased allowance for equity funds used during construction (“AEFUDC”) due to the re-application of SFAS No. 71 to our Texas jurisdiction beginning December 31, 2006 and increased construction work in progress subject to AEFUDC in 2007.

Interest charges (credits)

Interest charges (credits) for the three and six months ended June 30, 2007 remained relatively level compared to the same periods last year. Interest charges (credits) increased $2.0 million for the twelve months ended June 30, 2007 compared to the same period last year primarily due to (i) increased interest on long-term debt and financing obligations of $1.2 million as a result of increased interest rates; and (ii) a $0.9 million increase in other interest related to a dispute in the timing of a federal income tax payment.

Income tax expense

Income tax expense increased $7.0 million, $10.1 million, and $13.3 million for the three, six, and twelve months ended June 30, 2007, respectively, compared to the same periods last year due to a $6.2 million reduction in deferred state income taxes resulting from a change in the Texas franchise (income) tax law recorded in June 2006 with no comparable activity in 2007 and due to increases in pretax income.

Extraordinary gain

The extraordinary gain on re-application of SFAS No. 71 for the twelve months ended June 30, 2007 relates to our determination that we met the criteria necessary to re-apply SFAS No. 71 to our Texas jurisdiction beginning December 31, 2006. The re-application of SFAS No. 71 to our Texas jurisdiction resulted in a $6.1 million extraordinary gain, net of tax, at December 31, 2006. For a full discussion on the re-application of SFAS No. 71 to our Texas jurisdiction, see Note A of Notes to Consolidated Financial Statements in the 2006 Form 10-K.

Cumulative effect of accounting change

The cumulative effect of accounting change for the twelve months ended June 30, 2006 of $1.1 million, net of tax, relates to the adoption of FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,” (“FIN 47”) in December 2005. FIN 47 provides guidance on the recognition and measurement of liabilities associated with the retirement and disposal obligations of tangible long-lived assets not already accounted for under SFAS No. 143. FIN 47 affected the accounting for the disposal obligations related to fuel oil storage tanks, water wells, evaporative ponds and asbestos at our gas-fired generating stations.

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New accounting standards

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 modifies other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We do not believe SFAS No. 157 will have a significant impact on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates without having to apply complex hedge accounting provisions. Unrealized gains and losses on items for which the fair value option has been elected should be reported in earnings at each subsequent reporting date. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. We have not determined whether to elect to measure any financial instruments at fair value and, therefore, cannot estimate the impact of adopting SFAS No. 159 on the consolidated statement of operations.

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Liquidity and Capital Resources

Our principal liquidity requirements in the near-term are expected to consist of interest payments on our indebtedness, capital expenditures related to our generating facilities and transmission and distribution systems, and operating expenses including fuel costs and taxes. Cash flow from operations funded all of our capital requirements in the six-month period ended June 30, 2007 and we expect that cash flows from operations will continue to fund a significant portion of capital requirements. As of June 30, 2007, we had approximately $49.3 million in cash and cash equivalents, an increase of $9.2 million from the balance of $40.1 million on December 31, 2006.

Capital Requirements. Substantial increases in the cost of natural gas during 2004 and 2005 and the delay in reflecting higher fuel costs in fixed fuel factors in Texas led to the under-recovery of the Texas jurisdictional portion of our fuel costs by $84.9 million, including interest, for the period from March 2004 to December 2005. The Texas Commission approved a surcharge in November 2005 providing for the recovery for $53.6 million of fuel under-recoveries over a 24-month period effective with October 2005 billings. This surcharge will be completed in September 2007. In January 2006, the Texas Commission approved a surcharge for $34 million of fuel under-recoveries over a twelve-month period effective with February 2006 bills to customers. This fuel surcharge was completed in January 2007. As of June 30, 2007, we had a fuel under-recovery balance for our Texas jurisdiction of $22.4 million of which we expect to recover approximately $9.5 million through the remaining fuel surcharge. For the six months ended June 30, 2007, we under-recovered fuel costs in Texas by approximately $7.5 million. In addition, we collected $15.0 million in fuel surcharges in the six months ended June 30, 2007, reducing our deferred fuel balance and increasing cash flow. We should continue to realize increased cash flow as we collect the remaining fuel surcharge during 2007 and will seek recovery of the remaining fuel under-recovery balance in our next fuel factor filing.

Our long-term liquidity requirements consist primarily of construction of electric utility plant and the payment of interest on debt. Projected utility construction expenditures will consist primarily of expanding and updating the transmission and distribution systems, adding new generation, and making capital improvements and replacements at Palo Verde and other generating facilities, including replacing steam generators in Palo Verde Unit 3. See Part I, Item 1, “Business – Construction Program” in our 2006 Form 10-K. We expect that a significant portion of our construction expenditures will be financed with internal sources of funds through 2008.

During the twelve months ended June 30, 2007, we utilized $54.8 million of federal income tax loss carryforwards and $29.4 million of state income tax loss carryforwards as a result of increases in taxable income and the inclusion of deferred fuel revenues in taxable income as they are collected through fuel surcharges. All federal and state tax loss carryforwards were fully utilized by year end 2006. As a result, our future cash flow requirements for federal and state income taxes are expected to increase over that required in recent years.

We continually evaluate our funding requirements related to our retirement plans, other postretirement benefit plans, and decommissioning trust funds. We have contributed $7.8 million of the projected $13.6 million 2007 annual contribution to our retirement plans during the six months ended June 30, 2007. We have also contributed $2.0 million of the projected $3.4 million 2007 annual contribution to our other postretirement benefit plan and $3.5 million of the projected $7.0 million 2007 annual contribution to our decommissioning trust funds during the six months ended June 30, 2007.

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The Company does not pay dividends on common stock. Since 1999, we have repurchased approximately 18.5 million shares of common stock at an aggregate cost of $252 million, including commissions. During the first six months of 2007, we repurchased 589,100 shares of common stock at an aggregate cost of $14.1 million. Approximately 0.8 million shares remain authorized to be repurchased under the currently authorized plan. We may in the future make purchases of our stock pursuant to our stock repurchase plan at open market prices and may engage in private transactions, where appropriate. The repurchased shares will be available for issuance under employee benefit and stock option plans, or may be retired. Common stock equity as a percentage of capitalization, including the current portion of long-term debt and financing obligations, was 48.1% as of June 30, 2007.

Capital Sources. As discussed in our 2006 Form 10-K, we maintain the ability to issue long-term debt, if needed, to finance capital requirements and for other corporate purposes including the repurchase of common stock. Our Senior Notes are rated “Baa2” by Moody’s and “BBB” by Standard & Poors. Construction expenditures are expected to increase as we plan to add new generation capacity in 2009 and subsequent years. We expect to initially fund most of our construction expenditures with internally generated funds and, when appropriate, the issuance of long-term debt, consistent with maintaining a capital structure typical of a regulated electric utility. Due to the increased volatility in the natural gas and nuclear fuel markets we expanded our existing credit facility from $150 million to $200 million and increased the maximum authorized amount of the credit facility which is available for nuclear fuel borrowings from $70 million to $120 million in July 2007. The Palo Verde Participants have taken steps to procure additional nuclear fuel inventories as market conditions have resulted in reduced supply and increased costs for nuclear fuel. As a result, we anticipate increased draws of $40 million or more from our credit facility for nuclear fuel.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk due to changes in interest rates, equity prices and commodity prices. See our 2006 Form 10-K, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” for a complete discussion of the market risks we face and our market risk sensitive assets and liabilities. As of June 30, 2007, there have been no material changes in the market risks we faced or the fair values of assets and liabilities disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our 2006 Form 10-K.

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Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures. During the period covered by this report, the Company’s chief executive officer and chief financial officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of June 30, 2007, (the “Evaluation Date”), concluded that as of the Evaluation Date, our disclosure controls and procedures (as required by paragraph (b) of the Securities Exchange Act of 1934 Rules 13a-15 or 15d-15) were effective and designed to ensure that material information relating to us and our consolidated subsidiary would be made known to them by others within those entities.

Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting in connection with the evaluation required by paragraph (d) of the Securities Exchange Act of 1934 Rules 13a-15 or 15d-15, that occurred during the quarter ended June 30, 2007, that materially affected, or that were reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We hereby incorporate by reference the information set forth in Part I of this report under Notes B and G of Notes to Consolidated Financial Statements.

Item 1A. Risk Factors

Our 2006 Form 10-K includes a detailed discussion of our risk factors.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(c) Issuer Purchases of Equity Securities.

Period	Total Number of Shares Purchased	Average Price Paid per Share (Including Commissions)		Total Number of Shares Purchased as Part of a Publicly Announced Program	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (a)
April 1 to April 30, 2007	0	$	—	0	756,738
May 1 to May 31, 2007	0		—	0	756,738
June 1 to June 30, 2007	1,500		24.50	1,500	755,238

(a) In September 2006, the Company’s Board of Directors authorized a new stock repurchase program permitting the repurchase of up to 2.3 million additional shares of its outstanding common stock.

Item 4. Submission of Matters to a Vote of Security Holders

Our annual meeting of shareholders was held on May 2, 2007. As of the record date on March 5, 2007, the total number of common shares outstanding and entitled to vote at this annual meeting was 46,033,388, of which 44,240,122 were represented in person or by proxy. The purpose of the annual meeting was to give shareholders the opportunity to vote on three matters: (i) the election of Class I directors; (ii) the approval of a long-term incentive plan; and (iii) the ratification of the selection of KPMG LLP as our independent registered public accounting firm for the year ending December 31, 2007.

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Election of Class I Directors

The following Class I directors were elected to hold office for a three-year term expiring at our annual meeting of shareholders to be held in 2010:

Director	Votes For	Votes Withheld
George W. Edwards, Jr.	42,945,456	1,294,666
John Robert Brown	43,884,983	355,139
James W. Cicconi	43,888,649	351,473
Patricia Z. Holland-Branch	43,886,361	353,761

In addition to the individuals set forth above, the following individuals continued as directors following the meeting: Gary R. Hedrick, Kenneth R. Heitz, Michael K. Parks, Eric B. Siegel, Ramiro Guzman, James W. Harris, Stephen N. Wertheimer, and Charles A. Yamarone.

2007 Long-Term Incentive Plan

At the annual meeting, our shareholders approved the 2007 Long-Term Incentive Plan pursuant to which 1,000,000 shares of our common stock will be available for various stock-based awards to our directors and employees. The final vote on this proposal was as follows:

Description	Number of Votes
FOR	39,788,187
AGAINST	1,738,348
ABSTAIN	25,689
BROKER NON-VOTE	2,687,898

Appointment of Independent Registered Public Accounting Firm

At the annual meeting, our shareholders ratified the selection of KPMG LLP as our independent registered public accounting firm for the year ending December 31, 2007 by the following vote:

Description	Number of Votes
FOR	42,761,060
AGAINST	1,463,136
ABSTAIN	15,926

Item 6. Exhibits

See Index to Exhibits incorporated herein by reference.

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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/ SCOTT D. WILSON
	Scott D. Wilson
	Executive Vice President,
	Chief Financial Officer and Chief Administrative Officer
	(Duly Authorized Officer and Principal Financial Officer)

Dated: August 7, 2007

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EL PASO ELECTRIC COMPANY

INDEX TO EXHIBITS

Exhibit Number	Exhibit
†10.05	Form of Directors’ Restricted Stock Award Agreement between the Company and certain directors of the Company. (Identical in all material respects to Exhibit 10.07 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1999)
10.06	Employment Agreement between the Company and Ershel C. Redd, Jr. (Exhibit 10.1 to the Company’s Form 8-K, dated as of May 15, 2007)
10.07	Separation Agreement between the Company and Gary R. Hedrick. (Exhibit 10.2 to the Company’s Form 8-K, dated as of May 15, 2007)
10.08	El Paso Electric Company 2007 Long-Term Incentive Plan. (Exhibit 10.1 to the Company’s Form 8-K, dated as of May 2, 2007)
10.09	Second Amendment, dated as of July 12, 2007, to the Purchase Contract referred to in Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.
10.10	Incremental Facility Assumption Agreement, dated as of July 12, 2007, related to the Credit Agreement referred to in Exhibit 10.38 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.
10.11	Lease, dated as of June 1, 2007, between the Company and 100 North Stanton Tower LLC.
15	Letter re Unaudited Interim Financial Information
31.01	Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.01	Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

† In lieu of non-employee director cash compensation, two agreements, dated as of July 1, 2007, substantially identical in all material respects to this Exhibit, have been entered into with Kenneth R. Heitz; and Patricia Z. Holland-Branch; directors of the Company.

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EX-10.09

EXHIBIT 10.09

SECOND AMENDMENT TO PURCHASE CONTRACT

THIS SECOND AMENDMENT dated as of July 12, 2007 (the “Second Amendment”), to the PURCHASE CONTRACT dated as of February 12, 1996 (the “Purchase Contract”), is entered into between THE BANK OF NEW YORK TRUST COMPANY, NATIONAL ASSOCIATION, a limited purpose national banking association with trust powers, in its capacity as successor trustee of the Rio Grande Resources Trust II (the “Trustee”), (said Trustee being the successor to JPMorgan Chase Bank, National Association, formerly known as JPMorgan Chase Bank, successor by merger to The Chase Manhattan Bank, successor by merger to Chase Bank of Texas, National Association, successor by change of name to Texas Commerce Bank National Association, as trustee of the Rio Grande Resources Trust II (the “Prior Trustee”)), and EL PASO ELECTRIC COMPANY, a Texas corporation (“El Paso”).

RECITALS

A. El Paso and the Prior Trustee were parties to that certain Credit Agreement dated as of February 12, 1996 (the “Credit Agreement”) among El Paso and the Prior Trustee as borrowers, Chase Manhattan Bank (successor by merger to Chemical Bank) as issuing bank, as administrative agent and as collateral agent for the financial institutions party thereto as lenders (such financial institutions, the “Lenders”), and the Lenders. Pursuant to the Credit Agreement, the Lenders agreed to extend credit in the form of loans and letters of credit to the Prior Trustee, in an aggregate amount not to exceed $60,000,000, (i) to finance the purchase of Nuclear Fuel by the Prior Trustee, (ii) to provide backup liquidity for commercial paper issued pursuant to a commercial paper program to be established by the Prior Trustee, and (iii) to pay interest and other amounts payable under the Credit Agreement by the Prior Trustee (the foregoing items (i), (ii) and (iii), the “Trust Credit Purposes”). Consequently, the Purchase Contract provided in Section 2(g) thereof that El Paso will not permit the total Net Investment of the Prior Trustee, at any one time, in all Nuclear Fuel to exceed $60,000,000.

B. Effective as of February 8, 1999, the Credit Agreement was amended and restated in its entirety, and the lenders thereunder agreed to extend credit in the form of loans and letters of credit to the Prior Trustee for Trust Credit Purposes in an aggregate amount not to exceed $70,000,000. Consequently, El Paso and the Prior Trustee amended Section 2(g) of the Purchase Contract (the “First Amendment”) to provide that El Paso would not cause or permit the total Net Investment of the Prior Trustee, at any one time, in all Nuclear Fuel to exceed $70,000,000.

C. The Credit Agreement was amended and restated again in its entirety on January 28, 2002, December 17, 2004 and April 11, 2006. The

amended and restated credit agreement dated as of April 11, 2006 (the “2006 Credit Agreement”) provided that the $70,000,000 available to the Prior Trustee for Trust Credit Purposes could be increased from time to time pursuant to Section 2.21 of the 2006 Credit Agreement. Subsequent to the execution of the 2006 Credit Agreement but prior to the date hereof, the Trustee succeeded the Prior Trustee as trustee under the Rio Grande Resources Trust II.

D. On May 30, 2007, El Paso delivered a written notice pursuant to Section 2.21 of the 2006 Credit Agreement to JPMorgan Chase Bank, N.A. (in its capacity as the administrative agent for the lenders under the 2006 Credit Agreement), requesting that the amount available to the Trustee in the form of loans and letters of credit for Trust Credit Purposes be increased from a total amount not to exceed $70,000,000 to a total amount not to exceed $120,000,000, such increase to be effective as of July 16, 2007.

E. As a result of the foregoing, El Paso and the Trustee desire to amend the Purchase Contract in the manner set forth below.

F. Capitalized terms used but not defined herein shall have the meanings assigned to them in the Purchase Contract.

AGREEMENT

In consideration of the mutual agreements contained herein and other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, the parties hereto agree as follows:

SECTION 1. Amendment to Section 2(g) of the Purchase Contract. Section 2(g) of the Purchase Contract is hereby amended and restated to read in its entirety:

(g) El Paso shall not cause or permit the total Net Investment of the Trustee, at any one time, in all Nuclear Fuel to exceed $120,000,000.

SECTION 2. Conditions to Effectiveness. This Amendment shall become effective as of the date first written above upon its execution by both parties hereto.

SECTION 3. Effect of Amendment. Except as expressly set forth herein, this Amendment shall not by implication or otherwise alter, modify, amend or in any way affect any of the terms, conditions, obligations, covenants or agreements contained in the Purchase Contract, all of which are ratified and affirmed in all respects and shall continue in full force and effect. This Amendment shall apply and be effective only with respect to the provision of the Purchase Contract specifically referred to herein.

SECTION 4. Counterparts. This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same contract. Delivery of an executed counterpart of a signature page of this Amendment by facsimile transmission shall be as effective as delivery of a manually executed counterpart hereof.

SECTION 5. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.

SECTION 6. Headings. The headings of this amendment are for purposes of reference only and shall not limit or otherwise affect the meaning hereof.

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their duly authorized officers, all as of the date first above written.

THE BANK OF NEW YORK TRUST
COMPANY, NATIONAL ASSOCIATION, not in its individual capacity but solely in its capacity as Trustee of the Rio Grande
Resources Trust II
By:	/s/ Kathryn M. Houston
Name:	Kathryn M. Houston
Title:	Vice President
EL PASO ELECTRIC COMPANY
By:	/s/ Steven P. Busser
Name:	Steven P. Busser
Title	V.P., Treasurer & Chief
	Risk Officer

STATE OF TEXAS	)
	)
COUNTY OF EL PASO	)

BEFORE ME, the undersigned authority, on this day personally appeared Steven P. Busser, a V.P., Treasurer & Chief Risk Officer of El Paso Electric Company, a Texas corporation, known to me to be the person whose name is subscribed to the foregoing instrument and acknowledged to me that he/she executed the same for the purposes and consideration therein expressed, in the capacity stated, and as the act and deed of said corporation.

Given under my hand and seal of office, this 12th day of July, 2007.

	/s/ Hilda Vargas
	Notary Public – State of Texas
My Commission Expires:
6-26-09

STATE OF TEXAS	)
	)
COUNTY OF TRAVIS	)

BEFORE ME, the undersigned authority, on this day personally appeared Kathryn Houston, a Vice President of The Bank of New York Trust Company, National Association, acting in its capacity as Trustee of the Rio Grande Resources Trust II, known to me to be the person whose name is subscribed to the foregoing instrument and acknowledged to me that he/she executed the same for the purposes and consideration therein expressed, in the capacity stated, and as the act and deed of said corporation.

Given under my hand and seal of office, this 11th day of July, 2007.

	/s/ Karen L. Kupecki
	Notary Public – State of Texas
My Commission Expires:
05-04-2011

EX-10.10

EXHIBIT 10.10

EXECUTION VERSION

INCREMENTAL FACILITY ASSUMPTION AGREEMENT dated as of July 12, 2007 (this “Assumption Agreement”), related to the CREDIT AGREEMENT dated as of April 11, 2006 (the “Credit Agreement”), among El Paso Electric Company, a Texas corporation (“El Paso”), The Bank of New York Trust Company, National Association, not in its individual capacity, but solely in its capacity as trustee of the Rio Grande Resources Trust II (as successor to JPMorgan Chase Bank, N.A. in such capacity, the “Trustee”), the lenders from time to time party thereto (the “Lenders”), and JPMorgan Chase Bank, N.A., as issuing bank and as administrative agent for the Lenders (in such capacity, the “Administrative Agent”).

A. Pursuant to Section 2.21 of the Credit Agreement, El Paso has requested that (i) the Total Commitment be increased by the full Incremental Facility Amount, such that the Total Commitment will increase from $150,000,000 to $200,000,000, and (ii) the full Incremental Facility Amount be made available to El Paso and/or the Trustee, such that the sum of (x) the aggregate principal amount of Loans outstanding to the Trustee and (y) the Trustee L/C Exposure at any time may equal up to, but not exceed, $120,000,000.

B. In connection with the foregoing, El Paso has requested that each person set forth on Schedule I hereto (the “Incremental Lenders”), severally and not jointly, commit to provide that portion of the Incremental Facility Amount set forth opposite its name on such Schedule I. The commitments to provide the Incremental Facility Amount are referred to herein as the “Incremental Commitments”.

C. The Incremental Lenders are willing to provide the Incremental Commitments on the Incremental Facility Effective Date (as defined below), on the terms and subject to the conditions set forth herein and in the Credit Agreement.

Accordingly, in consideration of the mutual agreements herein contained and other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, the parties hereto agree as follows:

SECTION 1. Defined Terms; Interpretation; Etc. Capitalized terms used and not defined herein shall have the meanings assigned to such terms in the Credit Agreement. The rules of construction set forth in Section 1.02 of the Credit Agreement shall apply equally to this Assumption Agreement. This Assumption Agreement shall be a “Loan Document”.

SECTION 2. Incremental Commitments; Participation Fees. (a) Each Incremental Lender, effective upon the Incremental Facility Effective Date, hereby agrees that (i) in respect of each Incremental Lender that is a Lender immediately prior to the Incremental Facility Effective Date, such Lender’s Commitment in effect immediately prior to the Incremental Facility Effective Date shall be increased by the amount set forth next to such Lender’s name on Schedule I hereto and (ii) in respect of each Incremental Lender that is not a Lender immediately prior to the Incremental Facility Effective Date, such Incremental Lender’s Commitment shall be the amount set forth next to such Incremental Lender’s name on Schedule I hereto. All such Incremental Commitments shall constitute “Commitments” and all Incremental Lenders shall constitute “Lenders”, in each case for all purposes of the Credit Agreement and the other Loan Documents.

(b) In order to effectuate the increase in the Total Commitment contemplated hereby, each of the parties hereto hereby agrees that the Administrative Agent may take any and all actions as may be reasonably necessary to ensure that, after giving effect to any such increase in the Total Commitment, the outstanding Loans (if any) are held by the Lenders in accordance with their new Applicable Percentages. This may be accomplished at the discretion of the Administrative Agent, following consultation with El Paso, (i) by requiring the outstanding Loans to be prepaid with the proceeds of a new Borrowing, (ii) by permitting the Borrowings outstanding immediately before the Incremental Facility Effective Date to remain outstanding until the last day of the respective Interest Periods therefor, even though the Lenders would hold the Loans comprising such Borrowings other than in accordance with their new Applicable Percentages or (iii) by any combination of the foregoing. Any prepayment described in this paragraph (b) shall be subject to Section 2.14 of the Credit Agreement, but shall otherwise be without premium or penalty.

(c) As consideration for the Incremental Commitments hereunder, El Paso agrees to pay to each Incremental Lender, through the Administrative Agent, a participation fee (collectively, the “Participation Fees”) equal to .050% of the aggregate amount of the Incremental Commitments of such Incremental Lender on the Incremental Facility Effective Date. The Participation Fees shall be payable in full in immediately available funds on the Incremental Facility Effective Date. Once paid, the Participation Fees shall not be refundable, in whole or in part.

SECTION 3. Effectiveness; Conditions Precedent to Incremental Commitments. This Assumption Agreement shall become effective as of the date (the “Incremental Facility Effective Date”) that the Administrative Agent shall have received counterparts of this Assumption Agreement that, when taken together, bear the signatures of the Borrowers and each Incremental Lender. The obligation of the Incremental Lenders to provide Incremental Commitments hereunder shall be subject to the satisfaction of the following conditions precedent:

(a) The representations and warranties set forth in the Credit Agreement and in the other Loan Documents shall be true and correct in all material respects on and as of the Incremental Facility Effective Date with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date.

(b) Each Borrower shall be in compliance with all the terms and provisions set forth in the Credit Agreement and in each other Loan Document on its part to be observed or performed, and at the time of and immediately after the Incremental Facility Effective Date, no Event of Default or Default shall have occurred and be continuing.

(c) The Administrative Agent shall have received a certificate dated the Incremental Facility Effective Date and executed by a Financial Officer of El Paso, confirming compliance with the conditions precedent set forth in Section 3(a) and (b) above.

(d) The Administrative Agent shall have received such legal opinions, board resolutions and other closing certificates and documentation as shall be reasonably required by the Incremental Lenders, in each case consistent with those delivered on the Closing Date under clauses (a) and (b) of Section 4.02 of the Credit Agreement.

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(e) All requisite Governmental Authorities shall have approved or consented to the increase in the Total Commitment to the extent required (and such approvals shall be in full force and effect).

(f) The Administrative Agent shall have received the Participation Fees and all other amounts due and payable on or prior to the Incremental Facility Effective Date, including, to the extent invoiced, reimbursement or payment of all out-of-pocket expenses required to be reimbursed or paid by the Borrowers hereunder or under any other Loan Document.

SECTION 4. Effect of Assumption Agreement. Except as expressly set forth herein, this Assumption Agreement shall not by implication or otherwise limit, impair, constitute a waiver of, or otherwise affect the rights and remedies of the Lenders, the Administrative Agent or the Borrowers under the Credit Agreement or any other Loan Document, and shall not alter, modify, amend or in any way affect any of the terms, conditions, obligations, covenants or agreements contained in the Credit Agreement or any other Loan Document, all of which are ratified and affirmed in all respects and shall continue in full force and effect. Nothing herein shall be deemed to entitle any Loan Party to a consent to, or a waiver, amendment, modification or other change of, any of the terms, conditions, obligations, covenants or agreements contained in the Credit Agreement or any other Loan Document in similar or different circumstances. After the date hereof, any reference to the Credit Agreement shall mean the Credit Agreement, as modified hereby.

SECTION 5. Expenses. El Paso agrees to reimburse the Administrative Agent for all reasonable out-of-pocket expenses incurred in connection with this Assumption Agreement in accordance with the Credit Agreement, including the reasonable fees, charges and disbursements of counsel for the Administrative Agent.

SECTION 6. Counterparts. This Assumption Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same contract. Delivery of an executed counterpart of a signature page of this Assumption Agreement by facsimile or electronic transmission shall be as effective as delivery of a manually executed counterpart hereof.

SECTION 7. Applicable Law. THIS ASSUMPTION AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

SECTION 8. Headings. The headings of this Assumption Agreement are for purposes of reference only and shall not limit or otherwise affect the meaning hereof.

[Remainder of page intentionally left blank]

3

IN WITNESS WHEREOF, the parties hereto have caused this Assumption Agreement to be duly executed by their respective authorized officers as of the day and year first above written.

EL PASO ELECTRIC COMPANY,
by		/s/ Steven P. Busser
	Name:	Steven P. Busser
	Title:	Vice President, Treasurer and Chief Risk Officer
THE BANK OF NEW YORK TRUST COMPANY, NATIONAL ASSOCIATION, not in its individual capacity, but solely in its capacity as trustee of the Rio Grande Resources Trust II,
by
	Name:
	Title:
JPMORGAN CHASE BANK, N.A., individually and as Administrative Agent and Issuing Bank,
by
	Name:
	Title:

4

IN WITNESS WHEREOF, the parties hereto have caused this Assumption Agreement to be duly executed by their respective authorized officers as of the day and year first above written.

EL PASO ELECTRIC COMPANY,
by
	Name:
	Title:
THE BANK OF NEW YORK TRUST COMPANY, NATIONAL ASSOCIATION, not in its individual capacity, but solely in its capacity as trustee of the Rio Grande Resources Trust II,
by		/s/ Kathryn M. Houston
	Name:	Kathryn M. Houston
	Title:	Vice President
JPMORGAN CHASE BANK, N.A., individually and as Administrative Agent and Issuing Bank,
by
	Name:
	Title:

4

IN WITNESS WHEREOF, the parties hereto have caused this Assumption Agreement to be duly executed by their respective authorized officers as of the day and year first above written.

EL PASO ELECTRIC COMPANY,
by
	Name:
	Title:
THE BANK OF NEW YORK TRUST COMPANY, NATIONAL ASSOCIATION, not in its individual capacity, but solely in its capacity as trustee of the Rio Grande Resources Trust II,
by
	Name:
	Title:
JPMORGAN CHASE BANK, N.A., individually and as Administrative Agent and Issuing Bank,
by		/s/ Paul S. Condie
	Name:	Paul S. Condie
	Title:	SVP

4

SIGNATURE PAGE TO

INCREMENTAL FACILITY

ASSUMPTION AGREEMENT

DATED AS OF JULY 12, 2007 TO

THE CREDIT AGREEMENT

Name of Incremental Lender:		JPMorgan Chase Bank, N.A.
by		/s/ Paul S. Condie
	Name:	Paul S. Condie
	Title:	SVP

SIGNATURE PAGE TO

INCREMENTAL FACILITY

ASSUMPTION AGREEMENT

DATED AS OF JULY 12, 2007 TO

THE CREDIT AGREEMENT

Name of Incremental Lender:		Union Bank of California, N.A.
by		/s/ Dennis G. Blank
	Name:	Dennis G. Blank
	Title:	Vice President

SIGNATURE PAGE TO

INCREMENTAL FACILITY

ASSUMPTION AGREEMENT

DATED AS OF JULY 12, 2007 TO

THE CREDIT AGREEMENT

Name of Incremental Lender:		Citicorp North America, Inc.
by		/s/ David E. Hunt
	Name:	David E. Hunt
	Title:	Managing Director

SIGNATURE PAGE TO

INCREMENTAL FACILITY

ASSUMPTION AGREEMENT

DATED AS OF JULY 12, 2007 TO

THE CREDIT AGREEMENT

Name of Incremental Lender:		U.S. Bank National Association
by		/s/ Kevin S. McFadden
	Name:	Kevin S. McFadden
	Title:	Vice President 612-303-3755

SCHEDULE I

Incremental Commitments

Incremental Lender	Commitment Amount
JPMorgan Chase Bank, N.A.	$	12,500,000
Union Bank of California, N.A.	$	12,500,000
Citicorp North America, Inc.	$	10,000,000
U.S. Bank National Association	$	15,000,000
TOTAL COMMITMENT	$	50,000,000

EX-10.11

EXHIBIT 10.11

100 NORTH STANTON TOWER LLC

Landlord

TO

EL PASO ELECTRIC COMPANY

Tenant

Lease

Dated as of June 1, 2007

TABLE OF CONTENTS

		Page
ARTICLE 1	DEMISED PREMISES; TERM; USE	1
1.01	Demise	1
1.02	Term	2
1.03	Use	2
ARTICLE 2	RENT	2
2.01	Rent	2
2.02	Fixed Rent	2
2.03	Additional Rent	2
2.04	Payment in Lieu of Operating Expenses	2
2.05	Fixed Rent Credit Period	4
2.06	Tax Payments	5
2.07	Insurance Expenses and Utility Expenses	6
2.08	Miscellaneous Provisions	10
2.09	Intentionally Omitted.	10
2.10	Manner of Payment	10
ARTICLE 3	SERVICES	11
3.01	Services	11
3.02	Service Interruptions	13
3.03	Initial Tenant Work	14
ARTICLE 4	LEASEHOLD IMPROVEMENTS; TENANT COVENANTS AND LANDLORD WARRANTIES	14
4.01	Acceptance of Demised Premises; Initial Improvements	14
4.02	Alterations	15
4.03	Landlord’s and Tenant’s Property	17
4.04	Access and Changes to Building	18
4.05	Maintenance of Demised Premises	19
4.06	Compliance with Laws	20
4.07	Right to Perform Covenants	21
4.08	Wireless Network	21
4.09	Landlord’s Representations and Warranties	22
ARTICLE 5	ASSIGNMENT AND SUBLETTING	24
5.01	Assignment, Etc	24
5.02	Assignment and Subletting Procedures	25
5.03	General Provisions	26
5.04	Assignment and Sublease Profits	27
ARTICLE 6	SUBORDINATION; DEFAULT; INDEMNITY	28
6.01	Subordination	28
6.02	Estoppel Certificate	29

i

Table of Contents (continued)
		Page
6.03	Default	29
6.04	Remedies	30
6.05	Re-Entry by Landlord	31
6.06	Damages	31
6.07	Right to Injunction	32
6.08	Certain Waivers	32
6.09	No Waiver	32
6.10	Holding Over	32
6.11	Landlord’s Breach	33
6.12	Attorneys’ Fees	34
6.13	Indemnification	34
ARTICLE 7	INSURANCE; CASUALTY; CONDEMNATION	35
7.01	Compliance with Insurance Standards	35
7.02	Tenant’s Insurance	36
7.03	Landlord’s Insurance	36
7.04	Other Insurance Requirements	36
7.05	Subrogation Waiver	37
7.06	Casualty	37
7.07	Condemnation	38
ARTICLE 8	MISCELLANEOUS PROVISIONS	40
8.01	Notice	40
8.02	Building Rules	40
8.03	Severability	40
8.04	Certain Definitions	40
8.05	Quiet Enjoyment	41
8.06	Limitation of Landlord’s Personal Liability	41
8.07	Survival	41
8.08	Certain Remedies	41
8.09	No Offer	42
8.10	Captions; Construction	42
8.11	Amendments	42
8.12	Broker	42
8.13	Merger	42
8.14	Successors	42
8.15	Applicable Law	43
8.16	No Development Rights	43
8.17	Signage and Directory	43
8.18	Reserved	44
8.19	No Recording	44
8.20	Auditorium	44
8.21	Representations	44

ii

Table of Contents (continued)
		Page
8.22	OFAC Certification and Indemnification.	45
8.23	Parking Contract	46
ARTICLE 9	RENEWAL OPTION	46
9.01	Renewal Option	46
ARTICLE 10	RIGHT OF FIRST REFUSAL	48
10.01	Right of First Refusal	48
10.02	Non-Applicability of Section 10.01	49

EXHIBITS
A	The Land
B	Floor Plan of the Demised Premises
C	Rules and Regulations
D	Security Procedures
E-1	HVAC Plans – 13th Floor
E-2	HVAC Plans – 15th Floor
E-3	HVAC Plans – Basement
F	Standard Cleaning Specifications
G	Landlord’s Work
H	[Intentionally Omitted]
I	Pre-Approved Architects, Engineers and Contractors
J	Permitted Encumbrances
K	RJL Broker Agreement
L	Best Broker Agreement

iii

INDEX OF DEFINED TERMS

Definition	Where Defined
AAA	Section 9.02
Additional Rent	Section 2.03
Affiliate	Section 5.01
Alterations	Section 4.02
Applicable Period	Section 10.01
Arbitrator	Section 2.07
Assignment Consideration	Section 5.05
Auditorium	Section 8.24
Assignment and Sublease Profits	Section 5.05
Badges	Exhibit D
Base Insurance Expense	Section 2.07
Base Operating Expense	Section 2.04
Base Rate	Section 2.08
Base Tax Amount	Section 2.06
Base Utility Expense	Section 2.07
Brokers	Section 8.13
Building	Recitals
Business Days	Section 3.01
Business Hours	Section 3.01
Casualty	Section 7.05
Code	Section 8.25
Commencement Date	Section 1.02
Comparison Year	Section 2.07
Consumer Price Index	Section 2.04
Control	Section 5.01
Curing Party	Section 4.08
Declaration	Section 8.18
Demised Premises	Section 1.01
ERISA	Section 8.25
Expiration Date	Section 1.02
Fair Market Rent	Section 9.02
Financial Institution	Section 8.26
First Refusal Notice	Section 10.01
Fixed Rent Credit Period	Section 2.05
Fixed Rent	Section 2.02
Fixtures	Section 4.03
Guidelines	Section 4.02
Indemnified Party	Section 6.12
Initial Tenant Work	Section 3.03
Insurance Expenses	Section 2.07
Interest Rate	Section 2.10
Land	Recitals

- iv -

Landlord’s Determination	Section 9.02
Landlord Services	Section 3.01
Landlord	Introduction
Landlord’s Estimate	Section 2.07
Landlord’s Notice	Section 2.04
Landlord’s Statement	Section 2.07
Landlord’s Work	Section 4.01
Laws	Section 4.06
Lease Year	Section 2.04
Network	Section 4.09
New Tenant	Section 6.10
Notice	Section 8.01
Occupied Premises	Section 4.01
OFAC	Section 8.26
Offeror	Section 10.01
Operating Records	Section 2.07
Original Tenant	Section 8.20
Other Sublease Consideration	Section 5.05
Patriot Act	Section 8.26
Payment in Lieu of Operating Expenses	Section 2.04
Person	Section 8.26
Project	Recitals
Public Areas	Exhibit C
Reletting Expenses	Section 6.06
Renewal Notice	Section 9.01
Renewal Option	Section 9.01
Renewal Term	Section 9.01
Rent Notice	Section 9.02
Rent	Section 2.01
Rules and Regulations	Section 8.02
Signage Threshold	Section 8.20
Specially Designated Nationals and Blocked Persons	Section 8.26
Successor Landlord	Section 6.01
Subtenant Payments	Section 5.04
Tax Payment	Section 2.06
Tax Year	Section 2.06
Taxes	Section 2.06
Tenant Delay	Section 4.01
Tenant	Introduction
Tenant’s Basic Cost	Section 5.05
Tenant’s Insurance Payment	Section 2.07
Tenant’s Notice	Section 9.02
Tenant’s Property	Section 4.03
Tenant’s Share	Section 2.07
Tenant’s Statement	Section 2.07
Tenant’s Utility Payment	Section 2.07

- v -

Term	Section 1.02
Terms	Section 10.01
Transfer Notice	Section 5.03
U.S. Person	Section 8.26
Units	Section 3.01
Utility Expenses	Section 2.07

- vi -

LEASE, dated as of June 1, 2007, between 100 NORTH STANTON TOWER LLC, a Delaware limited liability company, whose address is c/o Best Real Estate, 300 E. Main, Suite 1200, El Paso, Texas 79901, Attention: Laura Pople (“Landlord”), and El Paso Electric Company (“Tenant”), a Texas corporation whose address is 100 North Stanton Street, El Paso, Texas 79901.

WITNESSETH:

WHEREAS, Landlord is willing to lease to Tenant and Tenant is willing to hire from Landlord, on the terms hereinafter set forth, certain space in the office building located at 100 North Stanton Street, El Paso, Texas 79901 (the “Building”) on that certain land described on Exhibit A (the “Land”); the Land and the Building and all plazas, sidewalks and curbs adjacent thereto are collectively called the “Project”).

NOW, THEREFORE, Landlord and Tenant agree as follows:

ARTICLE 1

Demised Premises; Term; Use

1.01 Demise. (a) Landlord hereby leases to Tenant and Tenant hereby hires from Landlord, subject to the terms and conditions of this Lease, (i) the entire rentable area of the 11^th, 12^th, 13^th, 14^th, 15^th, and 16^th floors, and (ii) 5,500 Rentable Square Feet (“RSF”) of the basement of the Building, substantially as shown on the floor plans annexed as Exhibit B (the “Demised Premises”)

(b) For purposes of this Lease, Landlord and Tenant confirm that the Demised Premises consists of 132,346 RSF, further described as follows:

Floor	RSF
11	20,693
12	21,365
13	20,693
14	21,365
15	21,365
16	21,365
Basement	5,500
TOTAL	132,346

(c) Landlord and Tenant confirm that the total RSF in the Project is 379,389 square feet and the RSF within the Project will not be decreased during the Term of this Lease except by condemnation or deed in lieu thereof.

(d) For purposes of this Lease “Tenant Share” will mean a fraction, the numerator of which is the RSF of the Demised Premises and the denominator is the RSF of the Project (currently 132,246 divided by 379,389, rounded to the nearest percent 35%).

1.02 Term. (a) The term of this Lease (the “Term”) is to begin on June 1, 2007 (the “Commencement Date”) and end on May 31, 2018 (the “Expiration Date”) unless extended pursuant to the renewal option set forth in Article 9 hereof or sooner terminated pursuant to the terms hereof or applicable law.

1.03 Use. The Demised Premises may be used and occupied by Tenant (and its assignee or subtenants) as general and executive offices, administrative operations (including ancillary uses in connection therewith), and any other lawful use consistent with the office operations of an electric utility company; provided, that in no event shall the Demised Premises be used for any of the following: (a) offices or agencies of a government or political subdivisions thereof or any other body having or asserting sovereign immunity; (b) offices of any governmental bureau or agency of any government or any state or any political subdivision thereof; (c) health care activities other than for Tenant’s employees and family; (d) schools or other third-party training or educational uses other than for Tenant’s employees; (e) restaurant use other than a cafeteria or dining facility for Tenant’s employees and business guests; (f) storage (other than storage in the basement or elsewhere in the Demised Premises ancillary to an otherwise permitted use); (g) personnel agencies; (h) a banking, trust company, or safe deposit business providing for walk-in public business; (i) a savings bank, a savings and loan association, or a- loan company providing for walk-in public business; (m) the sale of travelers’ checks and/or foreign exchange; (j) a stock brokerage office or for stock brokerage purposes providing for walk-in public business; or (k) offices for the manufacturing of goods.

ARTICLE 2

Rent

2.01 Rent. “Rent” shall consist of Fixed Rent (as hereinafter defined) and Additional Rent (as hereinafter defined).

2.02 Fixed Rent. The fixed rent (“Fixed Rent”) shall be at the rate of $1,670,155.70 per annum and shall be payable by Tenant in equal monthly installments of $139,179.64 each for the period commencing on the Commencement Date and ending on the Expiration Date, subject to the terms of this Article 2. The Fixed Rent shall be payable by Tenant in equal monthly installments, in advance on the Commencement Date and on the first day of each calendar month thereafter.

2.03 Additional Rent. “Additional Rent” means Tax Payments (Section 2.06), Tenant’s Insurance Payment (Section 2.07), Tenant’s Utility Payment (Section 2.07) and Payments in Lieu of Operating Expenses (Section 2.04) (as each such term is hereinafter defined) and all sums of money, other than Fixed Rent, at any time payable by Tenant under this Lease, all of which Additional Rent shall be deemed to be rent.

2.04 Payment in Lieu of Operating Expenses. (a) In lieu of remitting funds to Landlord for certain operating expenses paid or incurred by or on behalf of Landlord in connection with the Project (other than Tax Payments, Tenant’s Insurance Payments and Tenant’s Utility Payments), the parties hereto agree that commencing June 1, 2008 (the “Payment in Lieu Commencement Date”) and thereafter for each calendar month any part or all

2

of which falls within the Term, Tenant shall make a Payment in Lieu of Operating Expenses (as hereinafter defined), calculated as set forth in subsection (c) below, to Landlord as Additional Rent payable as set forth in subsection (b) below. As used herein, the term (“Lease Year”) shall mean the twelve (12) month period beginning June 1 and ending May 31.

(b) “Landlord’s Notice” means a statement furnished by Landlord to Tenant that sets forth the estimated Payment in Lieu of Operating Expenses payable for any Lease Year in which the Payment in Lieu of Operating Expenses is due. Tenant shall pay to Landlord on the first day of each month during such Lease Year an amount equal to one-twelfth (1/12) of Landlord’s Notice, which shall be credited toward the Payment in Lieu of Operating Expenses for such Lease Year. If, however, Landlord shall furnish a Landlord’s Notice subsequent to the commencement of any Lease Year, then: (i) until the first day of the month following the month in which such Landlord’s Notice is furnished to Tenant, Tenant shall pay to Landlord on the first day of each month an amount equal to the monthly sum payable by Tenant to Landlord under this Section in respect of the last month of the preceding Lease Year; (ii) promptly after Landlord’s Notice is furnished to Tenant or together therewith, Landlord shall give notice to Tenant stating whether the installments of the Payment in Lieu of Operating Expenses previously made for such Lease Year were greater or less than the installments of the Payment in Lieu of Operating Expenses to be made for such Lease Year in accordance with such Landlord’s Notice; and: (A) if there is a deficiency, Tenant shall pay the amount thereof within thirty (30) Business Days after demand therefor; or (B) if there has been an overpayment, Landlord shall either refund to Tenant the amount thereof within thirty (30) Business Days or, at Tenant’s election, credit the amount thereof against the next installment or installments of Additional Rent (in either case, provided that no event of default or event for which notice has been given and with the passage of time would constitute default then exists); provided further, however, such amount due to Tenant shall be credited or paid, as set forth herein, if such default is cured in accordance with the terms of this Lease. Landlord may not give more than one Landlord’s Notice in any Lease Year. In the event Landlord fails to provide a Landlord’s Notice within three (3) months after the beginning of a Lease Year, Tenant may demand Landlord provide such notice, and if Landlord fails to do so within thirty (30) days and ultimately owes Tenant a refund for Payments in Lieu of Operating Expenses for such year, such refund shall be paid, or credited, with interest at the Base Rate plus 3% per annum from the date such refund or credit should have been paid, or applied, until in fact paid or applied.

(c) “Base Operating Expense” means $877,801.63

(d) “Payment in Lieu of Operating Expenses” means an amount, payable as provided above, equal to fifty percent (50%) of the product derived by multiplying (i) the Base Operating Expense by (ii) the percentage by which the Consumer Price Index (as hereinafter defined) in effect on the first day of such Lease Year shall exceed the Consumer Price Index in effect on June 1, of the previous year (such percentage being equal to the fraction, the denominator of which shall be the Consumer Price Index in effect on June 1^st of the year immediately preceding such Lease Year, and the numerator of which shall be the Consumer Price Index in effect on June 1 of the current Lease Year minus the Consumer Price Index in effect on June 1^st of the year immediately preceding such Lease Year). Notwithstanding the foregoing, in no event shall the increase in the Payment in Lieu of Operating Expenses for any Lease Year exceed two percent (2%) of the sum of (i) the Base Operating Expense and (ii) the

3

prior Lease Year’s Payment in Lieu of Operating Expenses. For example, if the Consumer Price Index is 130 for June 1, 2008 and is 125 for June 1, 2007, then the Payment in Lieu of Operating expenses for the Lease year beginning June 1, 2008 is (0.50)[(130-125)/125)]($877,801.63)=$17,556.03. Since the Payment in Lieu of Operating Expenses for the Lease Year beginning June 1, 2007 is zero, the maximum Payment in Lieu of Operating Expenses for the Lease Year beginning June 1, 2008, is (0.02)($877,801.63+0.0)=$17,556.03. Accordingly, in this example, if the Consumer Price Index for June 1, 2008 had been a higher number, it would not have resulted in a higher Payment in Lieu of Operating Expenses for the Lease Year beginning June 1, 2008.

(e) As used herein, “Consumer Price Index” shall mean the Consumer Price Index published by the Bureau of Labor Statistics of the United States Department of Labor for all Urban Consumers, U.S. City average, or any successor index thereto, all items (1982-84=100). In the event that the Consumer Price Index is converted to a different standard reference based or otherwise revised in the terms or number or kind of items contained therein or otherwise, the determination of the Payment in Lieu of Operating Expenses and increases therein, if any, shall be made with the use of such conversion factor, formula or table for converting the Consumer Price Index as may be published by the Bureau of Labor Statistics or, if said Bureau shall not publish the same, then with the use of such conversion factor formula or table as may be published by a nationally recognized publisher of similar statistical information reasonably selected by Landlord and reasonably approved by Tenant. If a conversion factor, formula or table is unavailable, Landlord and Tenant will reasonably agree on a method to adjust the Consumer Price Index, or any successor thereto, to the figure that would have been arrived at had the manner of computing the Consumer Price Index in effect on the date of this Lease not been altered as reasonably determined by Landlord. If the Consumer Price Index ceases to be published on a monthly basis, then the shorter or longer period for which the Consumer Price Index is published which includes the first day of June shall be used. If the Consumer Price Index ceases to be published, and there is no successor thereto, such other index as Landlord and Tenant shall reasonably agree upon in writing shall be substituted for the Consumer Price Index. If Landlord and Tenant cannot agree on an index within sixty (60) days after the Consumer Price Index ceases to be published then the increase contemplated herein shall be established by arbitration conducted with the Real Estate Valuation Arbitration Rules (Expedited Procedures) of the American Arbitration Association.

(f) No downward or upward adjustments or recomputations, retroactive or otherwise, shall be made due to any revision which may later be made in the first published figure of the Consumer Price Index for any month or date relevant under this Section.

(g) Tenant’s liability for the Payment in Lieu of Operating Expenses for any Lease Year in which the Term ends shall be the pro-rated amount of the total Payment of Lieu of Operating Expenses for such Lease Year, based upon the number of days of the Term falling within such Lease Year.

2.05 Fixed Rent Credit Period. (a) In lieu of providing Tenant with a tenant improvement allowance to refurbish the Demised Premises, Landlord agrees that, Tenant shall be entitled to credits against the Fixed Rent otherwise payable hereunder during the first eight (8) months following the Commencement Date (the “Fixed Rent Credit Period”) in an amount equal

4

to: (i) one hundred (100%) percent of each monthly installment of Fixed Rent otherwise due during the first seven (7) months of the Fixed Rent Credit Period; and (ii) $110,433.40 of the monthly installment of Fixed Rent otherwise due during the eighth (8^th) month of the Fixed Rent Credit Period.

(b) Nothing contained in this Section shall reduce or delay Tenant’s obligation to pay Additional Rent otherwise due hereunder.

2.06 Tax Payments. (a) “Base Tax Amount” means $379,389.00.

(b) “Taxes” means: only any real property taxes and assessments imposed by state, municipal, county, and district governmental and quasi-governmental authorities, including, without limitation, the Downtown Management District (as distinguished from federal and state governmental authorities) against the owners of real property, or against real property which relate to the Project, separately from any other property of the owner of the subject property. Real property taxes and assessments shall be prorated based on a three hundred sixty-five (365) day year to take into account any partial tax year in which the Commencement Date and the Expiration Date occur or an early termination occurs. Nothing contained in this Lease, however, shall be deemed or construed to include within real property taxes and assessments: (i) any transfer, documentary or stamp tax; (ii) any tax upon the revenue, income, profits or business of Landlord and/or the Project (other than taxes on rents (as opposed to an income tax) to the extent imposed as a replacement of existing Taxes or in lieu of an increase in Taxes)); or (iii) any personal property taxes, payroll taxes, capital levy, or franchise taxes or inheritance or estate taxes, even though such taxes may become a lien against the Demised Premises or the Project. If a tax existing at the time of execution of this Lease is not included in the Base Tax Amount, such tax may not be included in the calculation of Taxes in subsequent Tax Years. If a future tax should be levied, assessed or imposed by the State of Texas or by any political subdivision thereof in lieu of or as a substitute for a tax or an addition to a Tax upon the real estate relating to the Demised Premises, or on rents, such tax shall be deemed to be included within the meaning of the term “Taxes” as used in this article to the extent that (i) such tax is in lieu of or a substitute for a tax upon the real estate and/or improvements comprising the Demised Premises; or (ii) such tax is generally passed through to those tenants in the El Paso area that generally pay their share of increase in real estate taxes; provided, however, that the amount of such tax to be so included shall in no event be a greater amount than would have been payable by Landlord by way of such substitution tax had the rental hereunder upon which said tax is imposed been the sole taxable income of Landlord for the year in question after allowing for any credits and deductions attributable to such tax.

(c) “Tax Year” means each period of 12 months, commencing on January 1 of each such period, in which occurs any part of the Term, or such other period of 12 months occurring during the Term as hereafter may be adopted as the fiscal year for real estate tax purposes.

(d) Beginning in 2008, if Taxes on the Building for any Tax Year shall exceed the Base Tax Amount, Tenant shall pay to Landlord (as a “Tax Payment”) Tenant’s Share of the amount by which Taxes for such Tax Year are greater than the Base Tax Amount, payable in twelve (12) equal monthly payments, on the first day of each month commencing with the month

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after Landlord provides Tenant a copy of the actual Tax bill for the applicable Tax Year, along with a calculation and backup for Tenant’s Share of the Taxes; provided, however, that in the event the copy of the actual Tax bill is delivered to Tenant after January 1 of any year, on the first day of the second month following delivery of such bill, Tenant shall pay to Landlord 1/12^th of the Tax Payment multiplied by the number of months in the year from January through the month of such payment (both months inclusive), less any amounts previously paid on account of such bill, and shall thereafter make a payment equal to 1/12^th of the Tax Payment on the first day of each month until a new Tax bill is delivered to Tenant. In the event Landlord fails to deliver to Tenant a copy of the actual Tax bill for the applicable Tax Year by January 1 of such Tax Year, Tenant shall pay, on the first day of each month until such tax bill is received, an amount equal to one-twelfth (1/12) of Tenant’s Tax Payment for the year immediately preceding such Tax Year. By February 28 of each calendar year, as is customary in the El Paso, Texas office building market, Landlord shall engage a property tax consultant designated by Landlord and approved by Tenant, which approval shall not be unreasonably delayed or withheld, to represent Landlord in any valuation protest with respect to the Property initiated during such calendar year. In the event the valuation of the Building is increased, Landlord agrees to (a) provide to Tenant a copy of the notice of valuation at least 15 days before the end of the period during which such valuation can be protested, (b) if requested by Tenant in writing at least 5 business days prior to the deadline for protests of valuation, file with the proper authorities a protest of such valuation and pursue such protest in a commercially reasonable manner. The third party fees and expenses incurred by Landlord in engaging the property tax consultant and pursuing the valuation protest shall be added to Taxes prior to calculating Tenant’s Share of the Taxes.

(e) If Landlord shall receive a refund of, rebate on, or discount on Taxes, Landlord shall, if Tenant’s Share of Taxes for the applicable period has not been calculated, deduct the amount thereof from Taxes, or if Tenant’s Share thereof has been calculated, pay to Tenant, Tenant’s Share of the net amount thereof (after deducting therefrom the reasonable costs and expenses of obtaining the same, including, without limitation, appraisal, accounting and legal fees, to the extent that such costs and expenses were not included in the Taxes for such Tax Year) or credit such net amount against Additional Rent next due and payable, at Tenant’s option (in either case, provided that no event of default or event for which notice has been given and with the passage of time would constitute default then exists); provided further, however, such amount due to Tenant shall be credited or paid, as set forth herein, if such default is cured in accordance with the terms of this Lease. In no event shall such payment to Tenant exceed Tenant’s Tax Payment paid for such Tax Year.

(f) Notwithstanding anything contained herein, Tenant will not be responsible for payment of Tenant’s Share of Taxes to the extent of taxes attributable to penalties or interest on Taxes or for periods not included within the Term of this Lease.

(g) Landlord will pay all Taxes and any other assessments that could become a lien on the Demised Premises or the Project prior to the time such Taxes and assessments become due and payable without interest or penalty, to the extent failure to do so would have a material adverse effect on Tenant’s use and occupancy of the Demised Premises.

2.07 Insurance Expenses and Utility Expenses. For the purposes of this Section 2.07, the following terms shall have the meanings set forth below:

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(a) “Comparison Year” means with respect to Insurance Expenses and Utility Expenses, 2008 and each subsequent calendar year.

(b) “Insurance Expenses” shall include the aggregate of all premiums paid or incurred by or on behalf of Landlord for Landlord’s Insurance (including any allocated premiums for blanket policies, as reasonably determined by Landlord, but the premium allocated to the Property with respect to any blanket policy may not exceed the cost of comparable insurance coverage available through a policy covering only the Property).

(c) “Utility Expenses” shall include the aggregate of all costs and expenses (and taxes, if any, thereon) paid or incurred by or on behalf of Landlord paid to unrelated third party utility providers (or, if incurred or paid to related parties, such costs and expenses shall not exceed the amounts Landlord would have paid to unrelated third party utility providers) in respect of the cost of purchasing, providing and delivering electricity, gas, oil, steam, water, heat, ventilation, air conditioning, and other fuel and utilities for the Project, (including all leased premises therein) and all taxes, fees, surcharges and other costs associated therewith.

(d) “Landlord’s Insurance” shall mean (i) commercial general liability insurance issued by one or more insurance carriers, insuring against liability for injury to or death of persons and loss of or damage to property occurring in and on the Project, with primary coverage limits of at least One Million Dollars ($1,000,000.00) and umbrella liability limits of at least Ten Million Dollars ($10,000,000.00) combined single limits for bodily injury and property damage per occurrence; (ii) all risk property damage insurance and a standard extended coverage endorsement issued by one or more insurance carriers covering the Project to the extent of their full replacement value exclusive of foundation and excavation costs, inclusive of terrorism insurance if available at commercially reasonable rates (as reasonably determined by Landlord); (iii) fire and extended coverage insurance on the portion of the Building constructed by Landlord including building standard leasehold improvements; and (iv) such other insurance as is typically maintained by owners of first class buildings in El Paso, Texas.

(e) “Base Insurance Expense” means $68,290.02.

(f) “Base Utility Expense” means $663,930.75.

(g) “Landlord’s Statement” means an instrument or instruments containing a comparison of (a) the Base Insurance Expense and the Insurance Expenses and/or (b) the Base Utility Expense and the Utility Expenses, payable for any Comparison Year.

(h) “Tenant’s Insurance Payment” means Tenant’s Share of the excess (if any) of the Insurance Expenses payable for any Comparison Year over the Base Insurance Expense.

(i) “Tenant’s Utility Payment” means Tenant’s Share of the excess (if any) of the Utility Expenses payable for any Comparison Year over the Base Utility Expense.

(j) If the Insurance Expenses or Utility Expenses payable for any Comparison Year (any part or all of which falls within the Term) shall exceed the Base Insurance Expense or Base Utility Expense, as applicable, Tenant shall pay Tenant’s Insurance Payment and Tenant’s Utility Payment, as the case may be, to Landlord as Additional Rent payable in twelve (12) equal

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monthly payments as set forth below. Landlord covenants that the Insurance Expense and Utility Expense will be contracted for in an arms-length transaction with third party insurers and utility providers without charges added on by Landlord.

(k) Landlord may furnish to Tenant, with respect to each Comparison Year, a written statement setting forth in reasonable detail Landlord’s estimate of Tenant’s Insurance Payment and/or Tenant’s Utility Payment for such Comparison Year (“Landlord’s Estimate”). Tenant shall pay to Landlord on the first day of each month during such Comparison Year an amount equal to one-twelfth (1/12) of Landlord’s Estimate, which shall be credited toward Tenant’s Insurance Payment or Tenant’s Utility Payment, as applicable, for such Comparison Year. If, however, Landlord shall furnish a Landlord’s Estimate subsequent to the commencement of any Comparison Year, then: (i) until the first day of the second month following the month in which such estimate is furnished to Tenant, Tenant shall pay to Landlord on the first day of each month an amount equal to the monthly sum payable by Tenant to Landlord under this section in respect of the last month of the preceding Comparison Year; (ii) promptly after Landlord’s Estimate is furnished to Tenant or together therewith, Landlord shall give notice to Tenant stating whether the installments of Tenant’s Insurance Payment and Tenant’s Utility Payment previously made for such Comparison Year as applicable, were greater or less than the installments of Tenant’s Insurance Payment and Tenant’s Utility Payment to be made for such Comparison Year in accordance with such estimate as applicable; and: (A) if there is a deficiency in either such payment, Tenant shall pay the amount thereof within thirty (30) Business Days after demand therefor; or (B) if there has been an overpayment in either such payment, Landlord shall either refund to Tenant the amount thereof within thirty (30) Business Days or, at Tenant’s election, credit the amount thereof against the next installment or installments of Additional Rent (in either case, provided that no event of default or event for which notice has been given and with the passage of time would constitute default then exists); provided further, however, such amount due to Tenant shall be credited or paid, as set forth herein, if such default is cured in accordance with the terms of this Lease; and (iii) on the first day of the second month following the month in which Landlord’s Estimate is furnished to Tenant; and monthly thereafter throughout the remainder of such Comparison Year, or until a new Landlord’s Estimate is delivered, Tenant shall pay to Landlord an amount equal to one-twelfth of Tenant’s Insurance Payment and Tenant’s Utility Payment shown on such applicable Landlord’s Estimate. Landlord may, at any time or from time to time furnish to Tenant a revised Landlord’s Estimate of Tenant’s Insurance Payment or Tenant’s Utility Payment for such Comparison Year as applicable; and in such case, Tenant’s Insurance Payment or Tenant’s Utility Payment, as applicable, for such Comparison Year shall be adjusted and paid or refunded; or, at Landlord’s election, credited, as the case may be, substantially in the same manner as provided in this subsection (k).

(l) After the end of each Comparison Year, Landlord shall furnish to Tenant an initial Landlord’s Statement for such Comparison Year within 180 days of the expiration of such Comparison Year. If Landlord’s Statement shall show that the sums paid by Tenant under this section exceeded the actual amount of Tenant’s Insurance Payment and/or Tenant’s Utility Payment required to be paid by Tenant for such Comparison Year as applicable, Landlord shall either refund to Tenant the amount of such excess within thirty (30) Business Days or, at Landlord’s election, credit the amount of such excess against the next installment or installments of Additional Rent (in either case, provided that no event of default or event for which notice has

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been given and with the passage of time would constitute default then exists); provided further, however, such amount due to Tenant shall be credited or paid, as set forth herein, if such default is cured in accordance with the terms of this Lease; and if Landlord’s Statement for any Comparison Year shall show that the sums so paid by Tenant were less than Tenant’s Insurance Payment and/or Tenant’s Utility Payment payable by Tenant for such Comparison Year, Tenant shall pay the amount of such deficiency within thirty (30) Business Days after demand therefor. Tenant shall continue to pay estimated payments as set forth above, until a new statement is delivered. If a reconciliation statement is not delivered within 180 days of the end of a year, and if such statement, when initially delivered, reflects a payment due to Tenant, such payment shall be made, or credited, as set forth above, with interest at the Base Rate plus 3% per annum, payable from the first day after the expiration of the year for which the statement is rendered, until the refund is paid or credited. Landlord may correct any statement previously delivered in good faith based on information not reasonably available to Landlord at the time such statement was rendered up to 12 months after the first statement was delivered. Amounts due by one party to the other reflected in such revised statement shall be paid, or credited, as applicable, as set forth herein, without interest.

(m) The Landlord’s Statements shall be certified by Landlord as being correct. Landlord shall keep good and accurate books and records in accordance with generally accepted accounting principles concerning the Utility Expense and Insurance Expense for a period of three (3) years after rendered and Tenant and its agents shall have the right, upon ten (10) days’ notice, to audit, inspect and copy such books and records. If any Landlord’s Statement previously furnished to Tenant shall reflect a greater amount than the actual amounts shown by such audit, Landlord and Tenant shall in good faith determine if they can resolve such dispute. If, after thirty (30) days after Landlord’s receipt of the audit Landlord and Tenant are unable to agree, the matter shall be arbitrated as set forth below.

(n) If Landlord and Tenant are unable to agree on the result of the audit within the 30 day period describe above, either Party may give notice of arbitration. The dispute shall be resolved by binding arbitration under the Real Estate Arbitration Rules of the American Arbitration Association (“AAA”). The arbitration shall be conducted in Dallas, Texas by a single arbitrator selected in accordance with the rules of AAA. The arbitrator shall render a written decision setting forth findings of fact and conclusions of law within 120 days after the notice of arbitration. The arbitrator shall award to the prevailing party, in addition to any other relief granted, its expenses and attorneys fees incurred in connection with the dispute and the arbitration. The arbitrator’s decision made in accordance with this section shall be binding upon the parties; and any such determination so made in accordance herewith may be entered as a judgment in any court of competent jurisdiction. Tenant shall pay the fees and expenses of the arbitrator, unless the arbitrator shall determine that Landlord overstated Insurance Expenses or Utility Expenses for such Comparison Year, as finally determined, in which case Landlord shall pay such fees and expenses. Landlord and Tenant hereby agree that any determination made by an arbitrator designated pursuant to this section shall not exceed the amount(s) as determined to be due in the first instance by Landlord’s Statement, nor shall such determination be more than the amount(s) claimed to be due by Tenant in Tenant’s Statement; and that any determination which does not comply with the foregoing shall be null and void and not binding on the parties. In rendering such determination such arbitrator shall not add to, subtract from or otherwise modify the provisions of this Lease, including the immediately preceding sentence.

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Notwithstanding the foregoing provisions of this section, Tenant, pending the resolution of any contest pursuant to the terms hereof shall continue to pay all sums as determined to be due in the first instance by Landlord’s Statement. Upon the resolution of such contest, suitable adjustment shall be made and an appropriate credit, if applicable, shall be granted by Landlord to Tenant against the next installments of Additional Rent due under this Lease (except that if such resolution occurs during the final year of the Term of this Lease, Landlord shall refund such amount to Tenant within ten (10) Business Days).

2.08 Miscellaneous Provisions. (a) Except as set forth herein, Landlord’s failure to render or delay in rendering a Landlord’s Statement with respect to any Comparison Year or Tax Year or any component of the Payment in lieu of Operating Expenses, Tax Payment, Tenant’s Insurance Payment or Tenant’s Utility Payment shall not prejudice Landlord’s right to render a Landlord’s Statement with respect to any such Comparison Year or Tax Year or any such component, nor shall the rendering of a Landlord’s Statement for any Comparison Year or Tax Year prejudice Landlord’s right to thereafter render a corrected Landlord’s Statement for such Comparison Year or Tax Year. Notwithstanding the foregoing sentence, if Landlord does not render a Landlord’s Statement within twelve (12) months after the beginning of the Comparison Year, Landlord shall be deemed to have waived its right to one-half of the amount payable by Tenant under such Landlord’s Statement for such Comparison Year, and if Landlord does not render a Landlord’s Statement within twenty-four (24) months after the beginning of the Comparison Year, Landlord shall be deemed to have waived the right to deliver a Landlord’s Statement for such Comparison Year.

(b) Each Tax Payment in respect of a Tax Year, and each Tenant’s Insurance Payment and Tenant’s Utility Payment in respect of a Comparison Year, which begins prior to the Commencement Date or ends after the expiration or earlier termination of this Lease, and any refund shall be prorated to correspond to that portion of such Tax Year or Comparison Year occurring within the Term. Any payments owed by one party to the other after expiration of this Lease shall be paid within thirty (30) Business Days of rendering of a statement therefore (except that Tenant shall not be entitled to any refund if an event of default or event for which notice has been given and with the passage of time would constitute default then exists; provided further, however, such amount due to Tenant shall be credited or paid, as set forth herein, if such default is cured in accordance with the terms of this Lease). In no event will Tenant be liable to Landlord for payments invoiced more than twelve (12) months after the Expiration Date or earlier termination of this Lease.

(c) For purposes of this Lease the “Base Rate” shall be the so called prime or base rate from time to time in effect at Citibank, N.A. or any successor thereto, or if no successor, as announced by the Wall Street Journal, or, failing that, as published by a national banking organization having an office in El Paso, Texas.

2.09 Intentionally Omitted.

2.10 Manner of Payment. Tenant shall pay all Rent as the same shall become due and payable under this Lease either by wire transfer of immediately available federal funds as directed by Landlord or by check (subject to collection), in each case at the times provided herein, without notice or demand and without abatement, setoff or counterclaim. All Rent shall

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be paid in lawful money of the United States of America to Landlord at the address shown in the preamble to this Lease or if by wire transfer, to the account to be provided by Landlord, or to such other place or account as Landlord may from time to time designate. If Tenant fails timely to pay any Rent, Tenant shall pay interest thereon from the date beginning five (5) days after notice from Landlord, to the date of Landlord’s receipt thereof at the Interest Rate. Notwithstanding the foregoing, Landlord shall not be obligated to provide notice of a failure to pay Rent before interest accrues more than twice in any 12-month period. If Tenant fails to pay Rent when due the third time, and each time thereafter, in any 12-month period, interest shall accrue at the Interest Rate from the date due until paid. “Interest Rate” means the lesser of: (i) the Base Rate plus 3%; or (ii) the maximum rate permitted by law. Any Additional Rent for which no due date is specified in this Lease shall be due and payable on the 30th day after the date of invoice.

ARTICLE 3

Services

3.01 Services. From and after the date that Tenant first occupies the Demised Premises for the conduct of Tenant’s business, Landlord shall furnish Tenant with the following services (collectively, “Landlord Services”):

(a) heat, ventilation and air-conditioning (“HVAC”) to the Demised Premises during Business Hours, as hereinafter defined, to all spaces in the Demised Premises. In addition, Landlord shall furnish HVAC 24 hours per day, 7 days per week to the following: (i) the far east segment of the 13^th floor (see Exhibit E-1), (ii) the far west segment of the 15^th floor (see Exhibit E-2) and (iii) the southwest corner of the basement (see Exhibit E-3). HVAC shall be furnished to maintain the temperature in the Demised Premises within a range of 68 to 74 degrees Fahrenheit. If Tenant shall require HVAC services at any times other than during Business hours, Landlord shall furnish such service within 120 minutes of receiving a request from Tenant sent to the name (at the contact information) provided to Tenant from time to time. Tenant’s initial contact shall be Terri Porsberg at (915) 241-6684 and Tenant shall pay to Landlord promptly upon demand as Additional Rent for such additional service at a rate of $70.00 per hour of requested use, regardless of whether the request (or overlapping requests) is (are) for one floor or more than one floor of the Demised Premises. The rate is to be adjusted once each year, in January, during the Term in proportion to the change in the electric rate, water rate, labor rates and other costs incurred by Landlord in providing such services, as reasonably determined and documented by Landlord, applicable to the Building from the previous January.

(b) (i) passenger elevator service to each floor of the Demised Premises at all times during Business Hours (as hereinafter defined), with at least one passenger elevator subject to call at all other times, and (ii) freight elevator service to the Demised Premises at all times. Freight elevator usage shall be on an unreserved basis. Tenant’s use of all elevators and loading docks shall be on a non-exclusive basis (except as set forth herein) and subject to Landlord’s reasonable security procedures it may from time to time impose;

(c) reasonable quantities of hot and cold water to the floor(s) on which the Demised Premises are located for the Demised Premises at all times;

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(d) electric energy for Tenant’s reasonable use of lighting and other electrical fixtures, appliances and equipment consistent with typical office use, including Tenant’s internal data processing center. In no event shall Tenant’s consumption of electricity exceed the capacity of existing feeders to the Building or the risers or wiring serving the Demised Premises, as reasonably determined by Landlord nor shall Tenant be entitled to any power in the Building in excess of 5 watts per useable square foot, connected load, as reasonably determined by Landlord, exclusive of electric power for Building standard HVAC. Tenant, upon notice from Landlord, shall immediately cease using any machines or equipment that violate this subsection;

(e) cleaning services on Business Days in accordance with Exhibit F attached hereto. Notwithstanding the foregoing, Landlord shall not be required to clean any portions of the Demised Premises used for preparation, serving or consumption of food or beverages and Tenant shall retain Landlord’s cleaning contractor to perform such cleaning at Tenant’s expense. Landlord’s cleaning contractor shall have access to the Demised Premises after 5:00 p.m. and before 8:00 a.m. and shall have the right to use, without charge therefor, all light, power and water in the Demised Premises reasonably required to clean the Demised Premises;

(f) available shaft space in the Building for the installation (if one is not already present) of a telecommunications riser to be installed by Tenant or Tenant’s contractor, at no cost to Landlord, for use by Tenant and other Building occupants. Such riser shall be in a location reasonably selected by Landlord and such installation shall be subject to such rules and requirements as Landlord may reasonably impose. Tenant may, at Tenant’s option, negotiate with other telecommunications providers for use of existing risers then permitted by Landlord to be used by telecommunications providers, or for the installation of additional risers, provided that Landlord shall incur no expense in connection therewith, shall reasonably determine that space is available for such carrier or additional riser(s), as applicable, and shall reasonably approve of such carrier. Any work performed by such other carrier shall be subject to such rules and requirements as Landlord may reasonably impose;

(g) Tenant shall have the right to install and maintain at Tenant’s sole expense (including the expense of sealing any roof penetrations) on the roof of the Building (a) satellite and other communications equipment, and (b) supplemental and/or backup cooling equipment, in each case for its own use that does not, in combination with the other existing roof-mounted equipment, exceed the load-bearing capacity of the roof. Tenant and Landlord will cooperate to determine the nature, size and locations that reasonably balance the needs of Landlord and Tenant with respect to such equipment. Tenant’s facilities management personnel shall have access to the roof of the Building when accompanied by a representative of Landlord’s property management company. Landlord shall require its property management company to make a representative available for such purpose upon reasonable notice, provided that Tenant shall be responsible for the reasonable charges of the management company for such representative if roof access is required outside Business Hours; and

(h) Landlord shall provide a staffed Building security desk 24 hours a day, 7 days a week. Tenant shall have access to the Demised Premises (subject to the terms hereof) 24 hours a day, 7 days a week.

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3.02 Service Interruptions. (a) Landlord may stop or interrupt any Landlord Service and may stop or interrupt the use of any Building facilities and systems (collectively a “Landlord Interruption”) at such times as may be necessary and for as long as may reasonably be required by reason of accidents; strikes; inability to secure a proper supply of fuel, gas, steam, water, electricity, labor or supplies; governmental actions; or by reason of any other cause beyond the control of Landlord. Further, Landlord may impose a Landlord Interruption if such interruption is required to make repairs, alterations or improvements to the Project, but in so doing, Landlord shall (i) use commercially reasonable efforts to minimize any interference with Tenant’s operation of its business; and (ii) shall not, except in an emergency, interrupt utility services to the Demised Premises other than after Business Hours and on reasonable prior notice to Tenant. If Landlord imposes a Landlord Interruption that interferes with Tenant’s use of the Demised Premises, the determination of what are “commercially reasonable efforts” by Landlord and what is an “equitable abatement” of rent shall take into account, among other things, that Tenant is an electric utility that actually operates from some parts of the Demised Premises 24 hours per day, 365 days per year, and accordingly, it may be appropriate for Landlord to incur costs for overtime, additional personnel and the like to minimize the extent and duration of any such interruption even if such costs would not normally be necessary for a typical 8 to 5, five day per week office operation. Landlord shall not be liable if the Building’s HVAC system cannot adequately cool the Demised Premises if Tenant’s equipment or occupancy levels exceed the system’s design specifications (which design specifications for the Demised Premises other than the Occupied Premises provide at least as much cooling capacity as the design specifications for the Occupied Premises), or because of the manner or method Tenant has partitioned the Demised Premises. In addition, Landlord shall not materially impair Tenant’s access to the Demised Premises. Provided that such stoppage or interruption is permitted by the other provisions of this Articles 3, Landlord shall have no liability to Tenant by reason of any stoppage or interruption of any Landlord Service, or other service under this Article for any reason and such interruption or stoppage or interference with access shall not constitute an eviction, actual or constructive, nor entitle Tenant to any abatement of Rent, or other compensation, except that if such interruption or stoppage: (i) continues for a period in excess of (a) three (3) consecutive Business Days or (b) ten (10) Business Days in any forty-five (45) Business Day period; (ii) materially impairs Tenant’s access to the Demised Premises or prevents Tenant’s reasonable use of the Demised Premise or a portion thereof for the conduct of business therein; and (iii) is not the result of the intentional wrongful acts or negligence of Tenant, then Tenant, as its sole and exclusive remedy for such interruption, shall be entitled to an equitable abatement of Rent commencing on (1) the fourth (4^th) consecutive Business Day and continuing through the date on which such Landlord Service is restored, or (2) the eleventh (11^th) Business Day of such interruption or stoppage in a given forty-five (45) Business Day period and continuing until such interruption or stoppage has not occurred for forty-five (45) Business Days, as the case may be. In addition, commencing on such fourth (4^th) consecutive Business Day or eleventh (11^th) Business Day out of 45^th Business Day, as applicable, and continuing during the time such services are not provided or access is materially impaired. Tenant shall have its rights under Section 6.11 hereof, as if such failure was of an emergency nature (i.e., not requiring thirty (30) day notice), but otherwise subject to the terms of Section 6.11 hereof.

(c) Reserved.

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(d) “Business Hours” means 7:00 a.m. to 7:00 p.m. on Business Days and 9 a.m. to 2 p.m. [on all other days]. “Business Days” means all days except Saturday, Sundays, New Year’s Day, President’s Day, Memorial Day, Independence Day, Labor Day, Thanksgiving, the day following Thanksgiving, Christmas and any other days which are hereafter generally observed as new federal holidays in the El Paso, Texas area.

(e) Except as expressly specified in Section 3.01, Landlord shall not be required to provide any services to the Demised Premises.

3.03 Initial Tenant Work. “Initial Tenant Work” means the installation of fixtures, improvements and appurtenances attached to or built into the Demised Premises to prepare the Demised Premises for Tenant’s use and occupancy, all of which shall be consistent with the preliminary drawings previously approved by Landlord, and shall not include movable partitions, business and trade fixtures, machinery, equipment, cabling, furniture, furnishings and other articles of personal property.

ARTICLE 4

Leasehold Improvements; Tenant Covenants and Landlord Warranties

4.01 Acceptance of Demised Premises; Initial Improvements. (a) Tenant confirms, represents and agrees that it is currently in possession of a portion of the Demised Premises consisting of the entire 11th, 12th, 14th, 15th, and 16th floors of the Building (the “Occupied Premises”). Tenant hereby confirms that it is acquainted with the apparent condition of the Occupied Premises. Landlord represents and warrants that the common areas of the Project will be in compliance with all Legal Requirements during the Term hereof. Tenant acknowledges that no representations or warranties of any kind with respect to the physical condition, the state of repair and/or utility or fitness for a particular use or purpose thereof, or with respect to any fixtures, equipment or personal property therein contained, have been made to Tenant, except as expressly set forth herein. It is agreed that, except as expressly set forth herein, in no event shall Landlord have any obligation or be required to do any work, supply any materials or equipment and/or make any installation, repair or alteration of any kind in, to or at the Demised Premises in order to prepare same for the continued occupancy by Tenant or otherwise, Tenant hereby acknowledging that it shall be responsible for all costs and expenses relating to the preparation of the Demised Premises.

(b) Landlord, at Landlord’s expense, shall perform or cause to be performed the work described on Exhibit G (“Landlord’s Work”) in the Demised Premises in accordance with the provisions thereof. All improvements which do not constitute Landlord’s Work shall constitute Alterations and shall be performed by Tenant at Tenant’s expense in accordance with Section 4.02. Tenant acknowledges that Landlord may perform certain of the Landlord’s Work after the Commencement Date, and during the period that Tenant is performing its Initial Tenant Work to the extent commercially reasonable to do so. Performance of such Landlord’s Work shall not affect the Commencement Date. Landlord and Tenant shall cooperate with each other to the full extent commercially practicable, and each acknowledges that there may be minor inconvenience and associated delays in each performing its work concurrently that (i) are consistent with such cooperation and (ii) do not entitle either party to claim a delay caused by the

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other. Each party shall instruct its contractors and construction managers and representatives of the requirement that each cooperate and coordinate construction schedules with the other party. The parties specifically acknowledge that certain portions of each party’s work may be dependent on completion of certain work by the other party, and all said work shall be properly coordinated in order to ensure completion of all work promptly and in an efficient manner. If either party believes the other is delaying completion of any work, said party shall promptly notify the other. The parties shall thereupon promptly meet to address the alleged delay.

(c) Landlord’s Work shall be deemed to have been substantially completed on the date upon which Landlord’s Work has been certified by Landlord’s architect or engineer as completed in accordance with the plans and specifications identified on Exhibit F and Tenant’s representative has not disapproved Landlord’s Work after having been afforded a reasonable time to inspect same, subject only to: (i) minor punch list items that do not affect (other than to a de minimis extent) Tenant’s use or occupancy of the Demised Premises; and (ii) items which, in accordance with good construction practice, should be performed after completion of Tenant’s Initial Work, as reasonably agreed upon between Landlord and Tenant; provided, that in each case Landlord shall nevertheless remain obligated to diligently pursue and complete Landlord’s Work within 30 days after delivery of the punchlist by Tenant or as agreed between Landlord and Tenant under subsection (ii).

4.02 Alterations. (a) Tenant shall not (i) create any openings in the roof or exterior walls, or floors or which are visible from the exterior of the Demised Premises (ii) make any structural alterations or additions to the Demised Premises, or (iii) make any changes, modifications or additions that would have a material adverse effect on any Building system or (iv) which costs, together with any other alterations or additions or modifications reasonably included within the same scope of work, more than $50,000, without in each case the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed with respect to clause (iv) hereof, but otherwise may be given or withheld in Landlord’s sole and absolute discretion.

(b) Tenant shall have the right to make any other type of alteration to the Demised Premises without Landlord’s consent provided Tenant gives Landlord at least ten (10) days prior written notice of any alterations the cost of which exceeds $10,000. Without limitation, for purposes of this Lease, the erection, installation or relocation of non-load-bearing walls, doors, cabinets, shelves, electrical outlets, machinery, air conditioning or heating equipment and trade fixtures and other equipment will be deemed non structural alterations. Landlord shall not make any alterations to the Demised Premises without Tenant’s prior written consent in Tenant’s reasonable discretion.

(c) Notwithstanding the ownership of the alterations, additions or improvements to the Premises, Tenant retains the right during the Term to depreciate all such alterations, additions or improvements made at Tenant’s expense.

(d) Tenant, in connection with any Alteration, shall comply with Landlord’s Rules and Regulations attached to this Lease, as such Rules and Regulations may be amended from time to time in a manner that does not affect Tenant’s rights hereunder other than to a de minimis extent. Tenant shall not proceed with any Alteration for which plans or specifications

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are customarily prepared unless and until Landlord approves Tenant’s plans and specifications therefor. Any review or approval by Landlord of plans and specifications with respect to any Alteration is solely for Landlord’s benefit, and without any representation or warranty to Tenant with respect to the adequacy, correctness or efficiency thereof, its compliance with Laws (as hereafter defined) or otherwise. All plans and specifications to be approved by Landlord shall be on auto CAD or other method of presentation reasonably selected by Landlord and shall show, among other things, the exact location of all proposed conduits, wires and cabling, all of which shall be properly labeled. Landlord will either approve or disapprove Tenant’s request of Alterations within fifteen (15) days after submittal of Tenant’s request. If Landlord fails to approve or disapprove such request within such 15-day period, Tenant may submit a second request to Landlord seeking Landlord’s approval. If such second request contains a legend, in bold face type, substantially as follows: “Approval is hereby sought; failure to respond within five (5) days from the date of receipt will signify your deemed approval,” the Landlord’s failure to respond within such 5-day period shall be deemed Landlord’s approval of the proposed alteration.

(e) Tenant shall pay to Landlord upon demand Landlord’s reasonable third party costs and expenses (including, without limitation, the fees of any architect or engineer employed by Landlord or any superior lessor or superior mortgagee for such purpose) for reviewing plans and specifications and inspecting Alterations, not to exceed in the aggregate $1500 for any group of Alterations being done at the same time.

(f) Tenant shall obtain (and furnish copies to Landlord of) all necessary governmental permits and certificates for the commencement and prosecution of Alterations and for final approval thereof upon completion, and shall cause Alterations to be performed in compliance therewith, and in compliance with all Laws and, with the plans and specifications approved by Landlord. Landlord will cooperate with Tenant (at no material cost to Landlord) in obtaining approvals and governmental permits required by this Section. Alterations shall be diligently performed in a good and worker-like manner, using materials and equipment at least equal in quality and class to those in the Occupied Premises as of the completion of Initial Tenant Work. All Alterations for which Landlord’s approval is necessary shall be performed by properly licensed architects, engineers and contractors first approved by Landlord (which approval shall not be unreasonably withheld or delayed), provided that Landlord shall be entitled to designate one contractor for work on life safety systems. A list of architects, engineers and contractors that are pre-approved by Landlord is attached hereto as Exhibit I.

(g) Throughout the performance of Alterations, Tenant shall carry worker’s compensation insurance or a self-insurance program permitted by law, subject to the requirements under Section 7.04, in statutory limits, “all risk” Builders Risk coverage [in the amount of the cost of improvement] and general liability insurance, with completed operation endorsement, for any occurrence in or about the Project, under which Landlord and its agent and any superior lessor and superior mortgagee whose name and address have been furnished to Tenant shall be named as parties insured, in such limits as Landlord may reasonably require, with insurers reasonably satisfactory to Landlord. Tenant shall furnish Landlord with evidence that such insurance is in effect at or before the commencement of Alterations and, on request, at reasonable intervals thereafter during the continuance of Alterations.

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(h) Should any mechanics’ or other liens be filed against any portion of the Project by reason of the acts or omissions of, or because of a claim against, Tenant or anyone claiming under or through Tenant, Tenant shall cause the same to be canceled or record a bond in compliance with the Texas Property Code within 30 days after notice. If Tenant shall fail to cancel or discharge or bond said lien or liens within said 30 day period, Landlord may cancel or discharge the same and, upon Landlord’s demand, Tenant shall reimburse Landlord for all costs incurred in canceling or discharging such liens, together with interest thereon at the Interest Rate from the date incurred by Landlord to the date of payment by Tenant, such reimbursement to be made within thirty (30) Business Days after receipt by Tenant of a written statement from Landlord as to the amount of such costs. Tenant shall indemnify and hold Landlord harmless from and against all costs (including, without limitation, attorneys’ fees and disbursements and costs of suit), losses, liabilities or causes of action arising out of or relating to any Alteration, including, without limitation, any mechanics’ or other liens asserted in connection with such Alteration.

(i) Tenant shall deliver to Landlord, within 30 days after the completion of an Alteration, “as-built” drawings thereof. During the Term, Tenant shall keep records of all Alterations including plans and specifications, copies of contracts, invoices, evidence of payment and all other records customarily maintained in the real estate business relating to Alterations and the cost thereof and shall, within 30 days after demand by Landlord, furnish to Landlord copies of such records.

4.03 Landlord’s and Tenant’s Property. (a) All Alterations and improvements permanently attached to or built into the Demised Premises, whether or not at the expense of Tenant (collectively, “Fixtures”), shall be and remain a part of the Demised Premises and shall not be removed by Tenant except as set forth herein.

(b) Notwithstanding anything to the contrary in Section 4.03(a), all movable partitions, business and trade fixtures, machinery and equipment, supplemental HVAC equipment installed by Tenant, and all furniture, furnishings and other articles of movable personal property, or fixtures or equipment not permanently attached to the Building, owned by Tenant and located in the Demised Premises (collectively, “Tenant’s Property”) shall be and shall remain the property of Tenant and may be removed by Tenant at any time during the Term; provided, that if any of Tenant’s Property is removed, Tenant shall repair any damage to the Demised Premises or to the Building resulting from the installation and/or removal thereof, subject to the casualty and condemnation provisions contained herein. Notwithstanding the foregoing, any equipment or other property identified in this Lease or in any leasehold improvement agreement as having been paid for with any allowance or credit granted by Landlord to Tenant (“Allowance Property”), excluding Tenant’s trade fixtures, shall not be considered Tenant’s Property and shall be and remain a part of the Demised Premises, shall, upon the expiration or earlier termination of this Lease, be the property of Landlord and shall not be removed by Tenant, except as provided in subsection 4.03(c) below.

(c) At or before the Expiration Date, or within thirty (30) days after any earlier termination of this Lease, Tenant, at Tenant’s expense, shall remove Tenant’s Property from the Demised Premises (except such items thereof as Landlord shall have expressly permitted to remain, which shall become the property of Landlord), and Tenant shall repair any

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damage to the Demised Premises or the Building resulting from any installation and/or removal of Tenant’s Property, subject to the casualty and condemnation provisions contained herein. As long as Landlord has provided Tenant with reasonable access to the Demised Premises to remove Tenant’s Property, any items of Tenant’s Property which remain in the Demised Premises more than thirty (30) days after the earlier termination of this Lease, may, at the option of Landlord, be deemed to have been abandoned, and may be retained by Landlord as Landlord’s property or disposed of by Landlord, without accountability, in such manner as Landlord shall determine, all at Tenant’s expense. Tenant shall have reasonable access to the Building and Demised Premises during the period provided above to remove Tenant’s Property, subject to force majeure.

(d) Landlord, by notice given to Tenant upon or prior to approving Tenant’s plans therefor, may require Tenant, notwithstanding Section 4.03(a), to remove all or any Fixtures installed by Tenant that do not constitute a standard office installation, such as, by way of example only, kitchens, vaults, safes, trading floors and raised flooring. If Landlord shall give such notice pursuant to the preceding sentence, then Tenant, at Tenant’s expense, prior to the Expiration Date, or, in the case of an earlier termination of this Lease, within 30 Business Days after the giving of such notice by Landlord, shall remove the same from the Demised Premises and shall repair damage caused by such removal, subject to casualty and condemnation.

4.04 Access and Changes to Building. (a) In recognition of Tenant as “anchor tenant” of the Building, Landlord shall not make changes to the Demised Premises or material changes to common areas of the Building—including entrances, exits, lobby, security desk, auditorium, elevators, passages, concourses, plazas, cafeteria (it being understood, however, that Landlord has no obligation to operate the cafeteria), restrooms, loading dock, service court and conveniences without Tenant’s prior written approval, if the result of such changes would have a material adverse effect on the common areas or Tenant’s use of the Demised Premises for the ordinary conduct of Tenant’s business. Approval shall not be unreasonably delayed or withheld. Should any material changes be required by Law, Landlord shall notify Tenant in writing of changes to be made at least 10 days (or such shorter time as necessary if the Law requires that the change be made sooner than 10 days) prior to making such change. At all times, Landlord shall use reasonable efforts to not interfere in any material way with Tenant’s use of the Demised Premises for the ordinary conduct of Tenant’s business.

(b) Except for the space within the inside surfaces of all walls, floors, windows and doors bounding the Demised Premises, and common areas to the extent designated as available for use to tenants, all of the Building, including, without limitation, exterior Building walls, core corridor walls and doors and any core corridor entrance, any roofs adjacent to the Demised Premises, and any space in or adjacent to the Demised Premises used for shafts, stacks, pipes, conduits, fan rooms, ducts, electric or other utilities, sinks or other Building facilities, and the use thereof, as well as access thereto through the Demised Premises, are reserved to Landlord and Tenant shall have no access thereto. Landlord may install and maintain pipes, fans, ducts, wires and conduits within or through the Demised Premises, provided Landlord shall use good faith efforts to install said item within or through the walls, below floors or above hung ceilings of the Demised Premises. In exercising its rights under this Section 4.04, Landlord shall use reasonable efforts to minimize interference with Tenant’s use of the Demised Premises for the ordinary conduct of Tenant’s business.

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(c) Landlord shall have no liability to Tenant if at any time any windows of the Demised Premises are either temporarily darkened or obstructed by reason of any repairs, improvements, maintenance and/or cleaning (or permanently darkened or obstructed if required by Law) or covered by any translucent material for the purpose of energy conservation. No easement of light or air is hereby granted, provided that Landlord shall not install or permit the installation by parties under its control of any object not required by Law that materially and permanently obstructs any of the windows in the Demised Premises.

(d) Landlord and persons authorized by Landlord shall have the right, upon at least 48 hours prior written notice to Tenant (except in an emergency, when only reasonable notice under the applicable circumstances is required), to enter the Demised Premises (together with any necessary materials and/or equipment), to inspect, clean or perform such work or repairs as Landlord may reasonably deem necessary or to exhibit the Demised Premises to prospective lenders or purchasers, or, during the last 18 months of the Term, to prospective tenants. If requested by Tenant, entry by Landlord will be in the presence of a representative of Tenant; provided a representative of Tenant is made reasonably available. Landlord will not interfere with or create a hazard to Tenant’s normal business operations during such entry and shall repair any damage to Tenant’s property caused by Landlord’s entry.

(e) Landlord shall operate, maintain and make all necessary repairs (both structural and nonstructural) to (i) the Buildings Systems up to the point of Tenant’s distribution system in the Demised Premises; and (ii) common areas of the Project, both exterior and interior, in conformance with standards applicable to first class office buildings similar to the Building in the vicinity of the Building; (iii) glass and windows in and about the Building not installed within the Demised Premises but including exterior windows; (iv) roof, foundation and all structural elements of the Building.

4.05 Maintenance of Demised Premises. (a) Tenant shall keep the Demised Premises, and all doors, interior windows and glass partitions in and about the Demised Premises (including, without limitation, all Fixtures and supplemental HVAC equipment) in good condition and repair, and, upon expiration or earlier termination of the Term, subject to Tenant’s right to remove its trade fixtures and other property under this Lease, Tenant shall surrender the same in broom clean condition, reasonable wear and tear, casualty and condemnation excepted (provided that Tenant shall remove any supplemental HVAC equipment and shall restore the area of such equipment to the condition existing prior to its installation). Without limiting the foregoing, Tenant shall keep the Demised Premises clean in a manner commensurate with the standards of first-class office buildings of similar age, located in El Paso, Texas. Tenant’s obligation shall include, without limitation: (i) the obligation to repair all damage caused by Tenant, its agents, employees, invitees and licensees to the equipment and other installations in the Demised Premises or anywhere in the Building. Any maintenance, repair or replacement to the Building systems, the Building’s structural components or any areas outside the Demised Premises and which is Tenant’s obligation to perform, shall be performed by Landlord at Tenant’s expense.

(b) Intentionally Omitted.

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(c) Tenant shall not place a load upon any floor of the Demised Premises exceeding the floor load per square foot which such floor was designed (or previously reinforced) to carry (unless Tenant has installed suitable reinforcement, subject to the provisions of Article 4). Landlord represents that the design maximum floor load of the Premises is 70 pounds per square foot live load (live load meaning the weight of furniture, equipment, people, supplies and the like, as distinguished from the weight of the building, secondary structures, and finishing materials). If any safe, heavy equipment, business machines, freight, bulky matter or fixtures to be moved into or out of the Building requires special handling, Tenant shall give Landlord reasonable prior notice thereof.

4.06 Compliance with Laws. Except as set forth herein, Landlord shall comply with all applicable laws, ordinances and regulations of all federal, state, county and municipal authorities, including, but not limited to, Title III of the Americans With Disabilities Act of 1990, as amended, any regulations promulgated thereunder and any similar state or local laws or regulations (“Legal Requirements”) with respect to the Building. Tenant shall comply with all Legal Requirements with respect to the Demised Premises; provided, however, that the foregoing shall not require Tenant to make any structural repairs, additions or improvements to the Demised Premises, except to the extent arising out of Tenant’s specific manner of use of the Demised Premises and not to office buildings generally or to the extent arising out of any alteration to the Demised Premises made by Tenant. Tenant shall comply with the Legal Requirements that relate to its specific manner of use of the Demised Premises or arise out of any alteration to the Demised Premises made by Tenant even if such compliance requires structural repairs, additions, or improvements. Landlord reserves the right to make such repairs, additions or improvements, at Tenant’s sole cost and expense.

Landlord shall comply with all Environmental Laws in relation to the Project to the extent compliance is not required by the presence of Hazardous Materials in the Building or Demised Premises by reason of the acts or negligence of Tenant or any of its invitees, employees, agents or contractors. Tenant shall be responsible for compliance with all Environmental Laws arising out of the foregoing, which compliance Landlord may perform at Tenant’s sole cost and expense should Landlord elect to do so. Any such costs shall be payable as Additional Rent, within thirty (30) days of demand, and shall bear interest at the Interest Rate from the date incurred by Landlord until the date paid by Tenant.

For purposes of this Lease: “Environmental Laws” shall mean any federal, state or local statute, regulation or ordinance or any judicial or administrative decree or decision, whether now existing or hereinafter enacted, promulgated or issued, with respect to any Hazardous Materials, storage tanks, underground storage tanks, solid waste, waste water, storm water runoff, waste emissions or wells. Without limiting the generality of the foregoing, the term shall encompass each of the following statutes, and regulations, orders, decrees, permits, licenses and deed restrictions now or hereafter promulgated thereunder, and amendments and successors to such statutes and regulations as may be enacted and promulgated from time to time: (i) the Comprehensive Environmental Response, Compensation and Liability Act (codified in scattered sections of 26 U.S.C., 33 U.S.C., 42 U.S.C. and 42 U.S.C. Section 9601 et seq.) (“CERCLA”); (ii) the Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.) (“RCRA”); (iii) the Hazardous Materials Transportation Act (49 U.S.C. Section 1801 et seq.); (iv) the Toxic Substances Control Act (15 U.S.C. Section 2061 et seq.); (v) the Clean Water Act

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(33 U.S.C. Section 1251 et seq.); (vi) the Clean Air Act (42 U.S.C. Section 7401 et seq.); (vii) the Safe Drinking Water Act (21 U.S.C. Section 349, 42 U.S.C. Section 201 and Section 300f et seq.); (viii) the Superfund Amendments and Reauthorization Act of 1986 (codified in scattered sections of 10 U.S.C., 29 U.S.C., 33 U.S.C. and 42 U.S.C.); (ix) Title III of the Superfund Amendment and Reauthorization Act (40 U.S.C. Section 1101 et seq.); (x) the Federal Insecticide, Fungicide and Rodenticide Act (7 U.S.C. Section 136 et seq.).

“Hazardous Materials” means each and every element, compound, chemical mixture, contaminant, pollutant, material, waste or other substance which is defined, determined or identified as hazardous or toxic under any Environmental Law.

4.07 Right to Perform Covenants. (a) If Tenant fails to perform any of its obligations under this Lease, Landlord may perform the same at the expense of Tenant: (i) immediately and only with such notice as is reasonable under the circumstances in the case of: (a) emergency; (b) such failure interferes with the use of space by any other tenant in the Building; (c) may result in a violation of any Law; or (d) in a cancellation of any insurance policy maintained by Landlord; and (ii) in any other case if such failure continues beyond any applicable grace period. If a Landlord performs any of Tenant’s obligations under this Lease, Tenant shall pay to Landlord (as Additional Rent) the reasonable costs thereof, together with interest at the Interest Rate from the date incurred by Landlord until paid by Tenant, within 30 days after receipt by Tenant of a statement as to the amounts of such costs. If Landlord affects such cure by bonding any lien which Tenant is required to bond or otherwise discharge, Tenant shall obtain and substitute a bond for the Landlord’s bond and shall reimburse the Landlord for the cost of the Landlord’s bond.

(b) Subject to the terms of Section 6.11 hereof, (except to the extent of inconsistent notice periods that may be required therein), if Landlord fails to perform any of its obligations under this Lease, Tenant may perform the same at the expense of Landlord: (i) immediately and only with such notice that is reasonable under the circumstances in the event that such failure by Landlord: (a) results in an emergency; (b) interferes with access to or the use of the Demised Premises or common areas by Tenant to the extent such failure permits Tenant to abate its rent pursuant to Section 3.2 above; (c) pertains to Services to be provided pursuant to Article 3, subject to Section 3.02; (d) may result in a violation of any law; or (e) may result in a cancellation of any insurance policy maintained by Tenant and (ii) in any other case if such failure continues beyond any applicable grace period. If a Tenant performs any of Landlord’s obligations under this Lease, Landlord shall pay to Tenant the reasonable costs thereof, together with interest at the Interest Rate from the date incurred by the Tenant until paid by Landlord, within 30 days after receipt by Landlord of a statement as to the amounts of such costs.

4.08 Wireless Network. (a) Subject to all of the terms of this Lease, Tenant shall have the right to install, at its sole cost and expense, a wireless intranet, internet and communication network within the Demised Premises, solely for use by Tenant and its employees (the “Network”).

(b) Tenant shall not solicit, suffer or permit any other tenants or occupants of the Building, or any other party or person, to use the Network or any part thereof.

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4.09 Landlord’s Representations and Warranties. Landlord represents and warrants that as of the date of this Lease:

(i) Landlord has the power and authority to execute and deliver this Lease and to comply with all the provisions hereof.

(ii) That the Demised Premises will be delivered to Tenant free and clear of all tenancies except as may be created by Tenant.

(iii) The execution and entry into this Lease, the execution and delivery of the documents and instruments to be executed and delivered by Landlord hereunder, and the performance by Landlord of Landlord’s duties and obligations under this Lease and of all other acts necessary and appropriate for the full consummation of the lease of the Demised Premises as contemplated herein, are consistent with and not in violation of, any contract, agreement or other instrument to which Landlord is a party, or any judicial order or judgment of any nature by which Landlord is bound.

(iv) There is no action, suit or proceeding pending or, to Landlord’s knowledge, threatened by or against or affecting Landlord which does or will involve or affect the Project or title thereto or Landlord’s ability to perform its obligations under this Lease or any documents entered into pursuant to this Lease, in each case, to any material extent.

(v) No prior options or rights of first refusal have been granted by Landlord to any third parties to purchase or lease any interest in the Demised Premises, or any part thereof, which are effective as of the Effective Date.

(vi) Landlord represents, warrants and certifies to and for the benefit of Tenant that Landlord is not now and has never been nor shall it be at any time prior to the mutual execution and delivery of this Lease an individual, corporation, partnership, limited partnership, joint venture, association, joint stock company, trust, trustee, estate, limited liability company, unincorporated organization, real estate investment trust, government or any agency or political subdivision thereof, or any other form of entity (collectively, a “Person”) with whom a United States citizen, entity organized under the laws of the United States or its territories or entity having its principal place of business within the United States or any of its territories (collectively, a “U.S. Person”), is prohibited from transacting business of the type contemplated by this Lease, whether such prohibition arises under United States law, regulation, executive orders and lists published by the Office of Foreign Assets Control, Department of the Treasury (“OFAC”) (including those executive orders and lists published by OFAC with respect to Persons that have been designated by executive order or by the sanction regulations of OFAC as Persons with whom U.S. Persons may not transact business or must limit their interactions to types approved by OFAC (“Specially Designated Nationals and Blocked Persons”)) or otherwise. Neither Landlord nor any Person who owns an interest in Landlord, excluding public shareholders, (collectively, a “Landlord Party”) is now or has ever been, nor shall be at any time prior to the mutual execution and delivery of this Lease, a Person with whom a U.S. Person, including a “financial institution” as defined in 31 U.S.C. 5312 (a)(z), as periodically amended (“Financial Institution”), is prohibited from transacting business of the type contemplated by this Lease, whether such prohibition arises under United States law, regulation, executive orders and

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lists published by the OFAC (including those executive orders and lists published by OFAC with respect to Specially Designated Nationals and Blocked Persons) or otherwise.

(vii) Landlord represents, warrants and certifies to and for the benefit of Tenant that neither Landlord nor any Landlord Party: (i) is under investigation by any governmental authority for, or has been charged with, or convicted of, money laundering, drug trafficking, terrorist-related activities, any crimes which in the United States would be predicate crimes to money laundering, or any violation of any Anti-Money Laundering Laws (as hereinafter defined); (ii) has been assessed civil or criminal penalties under any Anti-Money Laundering Laws; or (iii) has had any of its funds seized or forfeited in any action under any Anti Money Laundering Laws. For purposes of subclause (i) of the previous sentence, the term “Anti-Money Laundering Laws” shall mean all applicable laws, regulations and sanctions, state and federal, criminal and civil, that: (w) limit the use of and/or seek the forfeiture of proceeds from illegal transactions; (x) limit commercial transactions with designated countries or individuals believed to be terrorists, narcotics dealers or otherwise engaged in activities contrary to the interests of the United States; (y) require identification and documentation of the parties with whom a Financial Institution conducts business; or (z) are designed to disrupt the flow of funds to terrorist organizations. Such laws, regulations and sanctions shall be deemed to include, without limitation, the USA PATRIOT Act of 2001, Pub. L. No. 107-56 (the “Patriot Act”), the Bank Secrecy Act of 1970, as amended, 31 U.S.C. Section 5311 et seq., the Trading with the Enemy Act, 50 U.S.C. App. Section 1 et seq., the International Emergency Economic Powers Act, 50 U.S.C. Section 1701 et seq., and the sanction regulations promulgated pursuant thereto by the OFAC, as well as laws relating to prevention and detection of money laundering in 18 U.S.C. Sections 1956 and 1957.

Nothing herein shall be deemed an obligation on either Landlord or Tenant to investigate, be responsible for or be liable for, any act of any shareholder of Landlord, a Landlord Party, Tenant or a Tenant Party, to the extent such Party is a public company.

(viii) Landlord represents, warrants and certifies to and for the benefit of Tenant that it is in compliance with any and all applicable provisions of the Patriot Act.

(ix) Landlord has received no notice of, nor is Landlord aware of, any pending, threatened or contemplated action by any governmental authority or agency having the power of eminent domain, which might result in all or any part of the Project or Demised Premises being taken by condemnation or conveyed in lieu thereof.

(x) To Landlord’s knowledge based on a title policy, the Project and Demised Premises are free from all liens and encumbrances except the “Permitted Encumbrances” shown on Exhibit J.

(xi) Landlord has received no written notice that any municipality or governmental or quasi-governmental authority has determined that there are violations of state or federal law, municipal or county ordinances, or other legal requirements with respect to the Project or Demised Premises.

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(xii) To Landlord’s knowledge, Landlord is not indebted to any contractor, laborer, mechanic, materialmen, architect or engineer for work, labor or services performed or rendered, or for materials supplied or furnished, in connection with the Project or Demised Premises for which any person could claim a lien against the Project or Demised Premises.

Notwithstanding any other provision of this Lease, Landlord shall and hereby does agree to indemnify, protect, defend and hold harmless Tenant and its partners, directors, officers, employees, shareholders, agents, contractors and each of their respective successors and assigns from and against any and all claims, judgments, damages, penalties, fines, taxes, costs, reasonable attorneys fees, liabilities, losses and expenses arising at any time during or after the term of this Lease as a result of or in connection with Landlord’s breach of any representation, warranty, covenant or obligation contained in this Lease.

ARTICLE 5

Assignment and Subletting

5.01 Assignment, Etc. (a) Subject to the further provisions of this Article 5, neither this Lease nor the term and estate hereby granted, nor any part hereof or thereof, shall be assigned, mortgaged, pledged, encumbered or otherwise transferred voluntarily, involuntarily, by operation of law or otherwise, and neither the Demised Premises, nor any part thereof, shall be subleased, licensed, used or occupied by any person or entity other than Tenant, or encumbered in any manner by reason of any act or omission on the part of Tenant, and no rents or other sums receivable by Tenant under any sublease of all or any part of the Demised Premises shall be assigned or otherwise encumbered, without the prior consent of Landlord, which shall not be unreasonably withheld, conditioned or delayed. In the event an assignee is not a publicly traded company, the dissolution or direct or indirect transfer of a majority of the interest in, or control of, such assignee (however accomplished including, by way of example, the addition of new partners or members or withdrawal of existing partners or members, or transfers of interests in distributions of profits or losses of such assignee, issuance of additional stock, redemption of stock, stock voting agreement, or change in classes of stock) shall be deemed an assignment of this Lease regardless of whether the transfer is made in or by one or more transactions, or whether one or more persons or entities hold the controlling interest prior to the transfer or afterwards. No assignment or other transfer of this Lease and the term and estate hereby granted, and no subletting of all or any portion of the Demised Premises shall relieve Tenant of its liability under this Lease or of the obligation to obtain Landlord’s prior consent to any further assignment, other transfer or subletting. Landlord acknowledges that the original Tenant named in this Lease is a publicly traded company and that a direct or indirect transfer of any interest in the original named Tenant or any successor or assign to Tenant that is a publicly traded company, whether or not a majority of the interest in or control of such Tenant is transferred, or any other action referenced in this section will not require the consent of the Landlord or be deemed an assignment or sublease.

(b) Notwithstanding Section 5.01(a), without the consent of Landlord, this Lease may be assigned to: (i) an entity created by merger, reorganization or recapitalization of or with Tenant; or (ii) a purchaser of all or substantially all of Tenant’s publicly traded stock or

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Tenant’s assets in the El Paso, Texas area; provided, in the case of both clause (i) and clause (ii), that: (A) Landlord shall have received 10 days’ notice (which may be subsequent to the event) of such assignment from Tenant; and (B) the assignee assumes by written instrument all of Tenant’s obligations under this Lease.

(c) Notwithstanding Section 5.01(a), without the consent of Landlord, Tenant may assign this Lease or sublet all or any of the Demised Premises to an Affiliate (as hereinafter defined) of Tenant; provided, that (i) Landlord shall have received 10 days’ prior notice of such assignment or sublease from Tenant; and (ii) in the case of any such assignment: (A) the assignment is for a valid business purpose and not to avoid any obligations under this Lease; and (B) the assignee assumes by written instrument all of Tenant’s obligations under this Lease; (iii) in the case of any such sublease: (A) the sublease is for a term that is shorter than the Term; (B) the sublease is subject and subordinate to this Lease (and to all things to which this Lease is subject) in all respects; and (C) the sublease otherwise comports with the provisions of Section 5.04(d); and (iv) such entity at all times remains an Affiliate of Tenant named herein. “Affiliate” means, as to any designated person or entity, any other person or entity which controls, is controlled by, or is under common control with, such designated person or entity. “Control” (and the correlative meaning, “controlled by” and “under common control with”) means ownership or voting control, directly or indirectly, of 50% or more of the voting stock, partnership interests or other beneficial ownership interests of the entity in question.

5.02 Assignment and Subletting Procedures. (a) If Tenant desires to assign this Lease or sublet all or any portion of the Demised Premises, Tenant shall notify Landlord (a “Transfer Notice”) of such assignment or sublease accompanied by: (i) a copy of the assignment or sublease and all related agreements, the effective date of which shall be expressly subject to Landlord’s consent; (ii) a statement setting forth in reasonable detail the identity of the proposed assignee or subtenant, the nature of its business and its proposed use of the Demised Premises; (iii) current financial information with respect to the proposed assignee, including without limitation, its most recent financial statements; and (iv) such other information as Landlord may reasonably request. Landlord’s consent to the proposed assignment or sublease shall, not be unreasonably withheld, conditioned or delayed and Landlord shall respond to Tenant’s request within thirty (30) days, provided that:

(i) in Landlord’s judgment the proposed assignee or subtenant will use the Demised Premises in a manner that: (A) is limited to the use expressly permitted under this Lease; and (B) will not violate any negative covenant as to use contained in any other lease of space in the Building.

(ii) the form of the proposed sublease shall be reasonably satisfactory to Landlord and shall comply with the applicable provisions of this Article 5.

(iii) Tenant shall reimburse Landlord on demand for any costs incurred by Landlord in connection with said assignment or sublease, including, without limitation, the costs of making investigations as to the acceptability of the proposed assignee or subtenant, and legal costs incurred in connection with the granting of any requested consent, whether or not consent is granted, not to exceed $1500.

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5.03 General Provisions. (a) If this Lease is assigned or transferred, whether or not in violation of this Lease, Landlord may collect rent from the assignee or transferee without waiving Landlord’s right to claim such assignment or transfer was not made in accordance with the terms of this Lease. If the Demised Premises or any part thereof are sublet or occupied by anybody other than Tenant, whether or not in violation of this Lease, Landlord may, after default by Tenant, and expiration of Tenant’s time to cure such default, collect rent from the subtenant or occupant. In either event, Landlord may apply the net amount collected against Rent, but no such assignment, subletting, occupancy or collection shall be deemed a waiver of any of the provisions of Section 5.01(a), or the acceptance of the assignee, subtenant or occupant as tenant, or a release of Tenant from the performance of Tenant’s obligations under this Lease.

(b) No assignment or transfer that requires Landlord’s consent shall be effective until the assignee delivers to Landlord: (i) evidence that the assignee, as Tenant hereunder, has complied with the requirements of Section 7.02; and (ii) an agreement in form and substance satisfactory to Landlord whereby the assignee assumes Tenant’s obligations under this Lease, and an executed Landlord consent form.

(c) Notwithstanding any assignment or transfer, whether or not in violation of this Lease, and notwithstanding the acceptance of any Rent by Landlord from an assignee, transferee, or any other party, the original named Tenant and each successor Tenant shall remain fully liable for the payment of the Rent and the performance of all of Tenant’s other obligations under this Lease. The joint and several liability of Tenant and any immediate or remote successor in interest of Tenant shall not be discharged, released or impaired in any respect by any agreement made by Landlord extending the time to perform, or otherwise modifying, any of the obligations of Tenant under this Lease, or by any waiver or failure of Landlord to enforce any of the obligations of Tenant under this Lease.

(d) Each subletting by Tenant shall be subject to the following:

(i) No subletting shall be for a term (including any renewal or extension options contained in the sublease) ending later than one day prior to the Expiration Date.

(ii) No sublease shall be valid, and no subtenant shall take possession of the Demised Premises or any part thereof, until there has been delivered to Landlord, both: (A) an executed counterpart of such sublease and Landlord consent form; and (B) a certificate of insurance evidencing that: (x) Landlord (and all other required parties) are each an additional insured under the insurance policies required to be maintained by occupants of the Demised Premises pursuant to Section 7.02; and (y) there is in full force and effect, the insurance otherwise required by Section 7.02.

(iii) Each sublease shall provide that it is subject and subordinate to this Lease, and that in the event of termination, reentry or dispossess by Landlord under this Lease Landlord may, at its option, take over all of the right, title and interest of Tenant, as sublessor, under such sublease, and such subtenant shall, at Landlord’s option, attorn to Landlord pursuant to the then executory provisions of such sublease, except that Landlord shall not be liable for,

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subject to or bound by any item of the type that a Successor Landlord (as hereinafter defined) is not so liable for, subject to or bound by in the case of an attornment by Tenant to a Successor Landlord under Section 6.01(a).

(e) Each sublease shall provide that the subtenant may not assign its rights thereunder or further sublet the space demised under the sublease, in whole or in part, without Landlord’s consent and without complying with all of the terms and conditions of this Article 5, which for purposes of this Section 5.04(e) shall be deemed to be appropriately modified to take into account that the transaction in question is an assignment of the sublease or a further subletting of the space demised under the sublease, as the case may be.

(f) Tenant shall not publicly advertise the availability of the Demised Premises or any portion thereof as sublet space or by way of an assignment of this Lease, without first obtaining Landlord’s consent, which consent shall not be unreasonably withheld or delayed provided that Tenant shall in no event advertise the rental rate or any description thereof.

5.04 Assignment and Sublease Profits. (a) Except as provided below, if the aggregate of the amounts payable as fixed rent and as additional rent on account of Taxes, Utilities, Insurance and Operating Expenses by a subtenant under a sublease of any part of the Demised Premises and the amount of any Other Sublease Consideration (as hereinafter defined) (the “Subtenant Payments”) payable to Tenant by such subtenant, whether received in a lump-sum payment or otherwise shall be in excess of Tenant’s Basic Cost (as hereinafter defined) therefor, Tenant shall pay to Landlord within [thirty (30) days of after Tenant has received Landlord’s reconciliation so that Tenant can calculate Tenant’s Basic Costs], as Additional Rent, 50% of such excess. Tenant shall deliver to Landlord within ninety (90) days after the end of each calendar year and within ninety (90) days after the expiration or earlier termination of this Lease a statement specifying each sublease in effect during such calendar year or partial calendar year, the rentable area demised thereby, the term thereof and a computation in reasonable detail showing the calculation of the amounts paid and payable by the subtenant to Tenant, and by Tenant to Landlord to the extent Landlord has provided the actual reconciliation so that Tenant can make the actual calculations, with respect to such sublease for the period covered by such statement. “Tenant’s Basic Cost” for sublet space at any time means the sum of: (i) the portion of the Fixed Rent, Tax Payments, Tenant’s Insurance Payments and Tenant’s Utility Payments which is attributable to the sublet space; plus (ii) the amount payable by Tenant on account of electricity in respect of the sublet space; plus (iii) the amount of any costs reasonably incurred by Tenant in making changes in the layout and finish of the sublet space for the subtenant amortized on a straight-line basis over the term of the sublease; plus (iv) the amount of any reasonable brokerage commissions and reasonable legal fees paid by Tenant in connection with the sublease amortized on a straight-line basis over the term of the sublease. “Other Sublease Consideration” means all sums paid for the furnishing of services by Tenant or Landlord and the sale or rental of Tenant’s Fixtures, leasehold improvements, equipment, furniture or other personal property to the extent such sums paid exceed the fair market value for such services or personal property.

(b) Landlord and Tenant agree that Section 5.04 will not be applicable to assignments or subleases to related party tenants or to tenants resulting from laws, rules or regulations requiring a separation of Tenant’s business into unrelated entities. The excess payments made to Landlord under the above provision will never exceed the amounts actually

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received by Tenant after taking into account all costs and payments made by Tenant to unaffiliated third parties under the Lease or any sublease.

(c) Upon any assignment of this Lease, Tenant shall pay to Landlord 50% of the Assignment Consideration (as hereinafter defined) received by Tenant for such assignment, after deducting therefrom customary and reasonable closing expenses. “Assignment Consideration” means an amount equal to all sums and other consideration paid to Tenant by the assignee for or by reason of such assignment (including, without limitation, sums paid for the furnishing of services by Tenant and the sale or rental of Tenant’s fixtures, leasehold improvements, equipment, furniture, furnishings or other personal property to the extent such sums exceed the fair market value of such services or personal property).

ARTICLE 6

Subordination; Default; Indemnity

6.01 Subordination. (a) Prior to the Commencement Date, Landlord shall obtain from the current holder of any mortgage or deed of trust encumbering all or any part of the Project, a Subordination, Non-Disturbance and Attornment Agreement in a form reasonably acceptable to all parties, providing among other things that the holder will recognize Tenant’s lease of the Premises hereunder and will not disturb Tenant’s quiet possession of the Premises as long as Tenant is not in default under provisions of this Lease. Landlord further agrees that, before it shall have the right to subject and subordinate this Lease to the lien of any mortgage or deed of trust hereafter placed upon Landlord’s interest in the Project, or to any ground lease, Landlord shall have first secured for Tenant’s benefit a written Subordination, Non-Disturbance and Attornment Agreement in a form reasonably acceptable to all parties. In each such subordination agreement Tenant shall attorn to any person (“Successor Landlord”) succeeding to the interest of Landlord under such mortgage, deed of trust or ground lease (by foreclosure, lease termination or otherwise). Any subordination agreement may provide that Successor Landlord shall not be: (i) liable for any act, omission or default of any prior landlord (including, without limitation, Landlord), provided that, such Successor Landlord will not be excused from performance of the Landlord’s obligations under the Lease; (ii) liable for the return of any moneys paid to or on deposit with any prior landlord (including, without limitation, Landlord), except to the extent such moneys or deposits are delivered to such Successor Landlord; (iii) subject to any offset, claims or defense that Tenant might have against any prior landlord (including, without limitation, Landlord); (iv) bound by any Rent which Tenant might have paid for more than the current month to any prior landlord (including, without limitation, Landlord) unless actually received by such Successor Landlord except that the successor Landlord shall be liable for any estimated payments made to the prior Landlord; (v) bound by any covenant to perform or complete any construction in connection with the Project or the Demised Premises or to pay any sums to Tenant in connection therewith; or (vi) bound by any waiver or forbearance under, or any amendment, modification, abridgment, cancellation or surrender of, this Lease made without the consent of such Successor Landlord.

(b) Tenant shall give any mortgagee or ground lessor of which it has notice a copy of any notice of default served upon Landlord, provided that Tenant has been notified of the address of such mortgagee or lessor. Each such mortgagee or lessor shall have the same cure

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rights as are afforded to Landlord hereunder. If such mortgagee or lessor does timely cure the default prior to termination, this Lease shall not be terminated. Nothing herein shall be deemed to imply that Tenant has any right to terminate this Lease or any other right or remedy, except as may be otherwise expressly provided for in this Lease. Prior to succeeding to Landlord’s interest, each such mortgagee or lessor may elect to cure such default or not in its sole and absolute discretion, and shall have no obligation to commence to cure a default, or, once commenced, to complete such cure.

6.02 Estoppel Certificate. Each party shall, at any time and from time to time, within 10 days after request by the other party, execute and deliver to the requesting party (or to such person or entity as the requesting party may designate) a statement certifying that this Lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as modified and stating the modifications), certifying the Commencement Date, Expiration Date and the dates to which the Fixed Rent and Additional Rent have been paid and stating whether or not, to the knowledge of such party, the other party is in default in performance of any of its obligations under this Lease, and, if so, specifying each such default of which such party has knowledge, it being intended that any such statement shall be deemed a representation and warranty to be relied upon by the party to whom such statement is addressed. Tenant also shall include or confirm in any such statement such other information concerning this Lease as Landlord may reasonably request.

6.03 Default. The following each constitutes an event of default under this Lease:

(a) if Tenant defaults in the payment of any Fixed Rent and such default continues for 10 days after written notice from Landlord;

(b) if Tenant defaults in the payment of any Additional Rent and such default continues for 15 days after Landlord gives to Tenant a written notice specifying such default;

(c) if Tenant files a voluntary petition in bankruptcy or insolvency, or is adjudicated a bankrupt or insolvent, or files any petition or answer seeking a reorganization, liquidation, dissolution or similar relief under any present or future federal or state bankruptcy or other act or law or makes an assignment for the benefit of creditors or seeks or consents to or acquiesces in the appointment of any trustee, receiver, liquidator or other similar official for Tenant or for all or substantially all of Tenant’s property;

(d) if, within 60 days after the commencement of any proceeding against Tenant, whether by the filing of a petition or otherwise, seeking bankruptcy, insolvency, reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under the present or any future federal bankruptcy act or any other federal or state statute or law, such proceeding shall not have been dismissed, or if, within 60 days after the appointment of any trustee, receiver, liquidator or other similar official for Tenant, or for all or substantially all of Tenant’s property, without the consent or acquiescence of Tenant, such appointment shall not have been vacated or otherwise discharged, or if any lien, execution or attachment or other similar filing shall be made or issued against Tenant or any of Tenant’s property pursuant to

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which the Demised Premises shall be taken or occupied or attempted to be taken or occupied by someone other than Tenant;

(e) if Tenant defaults in the keeping, observance or performance of any covenant or agreement, (other than a default of the character referred to in Sections 6.03(a), (b), (c), or (d),) and if such default continues and is not cured within 30 days after Landlord gives to Tenant a written notice specifying the same, or, in the case of a default which can be cured but cannot with due diligence be cured within such period of 30 days, if Tenant shall not within the 30 day period institute and thereafter diligently prosecute to completion a cure of the same;

(f) if Tenant defaults under Section 4.02(g) above, or Section 7.02 below, after 30 days notice thereof, which notice shall be reduced to 3 days if the net worth of Tenant at the time such notice is provided is less than $100,000,000.00 (as evidenced by (i) Tenant’s latest public filing evidencing its net worth, if it is a public company, or (ii) Tenant’s most recent audited financial statement delivered to Landlord, if Tenant is not a public company (provided, however, if such audited financial statement is more than one (1) year old Tenant’s net worth shall be deemed to be less than $100,000,000.00)).

6.04 Remedies. Upon the occurrence of an event provided for in Section 6.03 above that continues beyond the applicable notice and cure period:

(a) Landlord shall be entitled to give to Tenant a written notice of intention to end the Term at the expiration of 15 days from the date of the giving of such notice and, in the event such written request contains a legend, in bold face type, substantially as follows: “You are in default under Section          of the Lease dated                          between                  and                  for failure to                         . Failure to respond and cure this default by                          (date 15 days after the notice) will result in a termination of the Lease.”, and Tenant fails to cure within such 15 day period, this Lease and the term and estate hereby granted shall terminate upon the expiration of such 15 days with the same effect as if the last of such 15 days were the Expiration Date, but Tenant shall remain liable for damages as provided herein or pursuant to law;

(b) Landlord shall be entitled to give to Tenant a written notice of intention to reenter the Premises without terminating the Lease at the expiration of 15 days from the date of the giving of such notice and, in the event such written notice contains a legend, in bold face type, substantially as follows: “You are in default under Section          of the Lease dated                          between                  and                  for failure to                         . Failure to respond and cure this default by                          (date 15 days after the notice) will result in a reentry and action for possession of the Premises by Landlord.”, and Tenant fails to cure within such 15 day period, Landlord may proceed with an action to reenter the Demised Premises;

(c) Landlord may remedy the breach, the reasonable cost thereof shall be payable from Tenant to Landlord upon demand plus interest at the rate for failure of payments under this Lease, and Landlord by reason of so doing shall not be liable or responsible for any loss or damage thereby sustained by Tenant or anyone holding under Tenant; or

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(d) Landlord shall have any other rights and remedies available at law or equity and not inconsistent with the terms hereof, including the requirement of a court order to terminate the Lease.

6.05 Re-Entry by Landlord. After process of law and court order, if this Lease shall terminate or Landlord has the right to regain possession as set forth in Section 6.04 (a) or (b) Landlord or Landlord’s agents and servants may immediately or at any time thereafter re-enter into or upon the Demised Premises, or any part thereof and may remove any persons therefrom, to the end that Landlord may have, hold and enjoy the Demised Premises. The words “re-enter” and “re-entering” as used in this Lease are not restricted to their technical legal meanings. Landlord specifically waives all rights of self-help eviction and lockout, statutory or constitutional in relation to possession of the Demised Premises.

6.06 Damages. (a) If this Lease is terminated under Section 6.04, Tenant shall pay to Landlord as damages, at the election of Landlord, all Rent and other amounts due to Landlord and unpaid as of the date of termination, plus, a sum which, at the time of such termination, represents the then value (using a discount rate equal to 7%) of the excess, if any, of: (1) the aggregate of the Rent which, had this Lease not terminated, would have been payable hereunder by Tenant (and not paid under Subsection (b) below) for the period commencing on the day following the date of such termination to and including the Expiration Date; over (2) the aggregate fair rental value of the Demised Premises for the same period, plus all Reletting Expenses (as defined below).

(b) If Landlord reenters and takes possession of the Demised Premises without terminating the Lease, Tenant shall pay all Rent and other amounts due to Landlord and unpaid as of the date of re-entry, plus, sums equal to the Rent that would have been payable by Tenant through and including the then current Expiration Date (not including any unexercised renewal terms) had Landlord not re-entered the Demised Premises, payable upon the due dates therefor specified in this Lease; provided, that if Landlord shall relet all or any part of the Demised Premises for all or any part of the period commencing on the day following the date of such re-entry to and including the Expiration Date, either alone or with other premises, Landlord shall credit Tenant with the net rents received by Landlord from such reletting, such net rents to be determined by first deducting from the gross rents as and when received by Landlord from such reletting the reasonable expenses incurred or paid by Landlord in re-entering the Demised Premises and of securing possession thereof, as well as the reasonable expenses of reletting, including, without limitation, altering and preparing the Demised Premises for new tenants, brokers’ commissions, and all other expenses properly chargeable against the Demised Premises and the rental therefrom in connection with such reletting (all such expenses, the “Reletting Expenses”), it being understood that any such reletting may be for a period equal to or shorter or longer than said period; provided, further, that: (i) in no event shall Tenant be entitled to receive any excess of such net rents over the sums payable by Tenant to Landlord under this Lease other than a credit against the total amounts to be paid by Tenant under the Lease; (ii) if the Demised Premises or any part thereof should be relet in combination with other space, then proper apportionment on a square foot rentable area basis shall be made of the rent received from such reletting and of the expenses of reletting.

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(c) Landlord shall have the obligation to take reasonable steps to mitigate its damages arising out of any default by Tenant, but Landlord shall have no obligation to lease all or any portion of the Demised Premises prior to leasing other space in the Building, and any new lease for all or any portion of the Demised Premises shall be as determined by Landlord in its sole, but reasonable, judgment.

(d) Suit or suits for the recovery of any damages payable hereunder by Tenant, or any installments thereof, may be brought by Landlord from time to time at its election, and nothing contained herein shall require Landlord to postpone suit until the date when the Term would have expired but for such termination or re-entry. Landlord may terminate this Lease after the notice of re-entry as set forth above, at any time, and suits brought to recover rent after re-entry shall not be deemed a waiver of Landlord’s right to subsequently terminate the Lease.

6.07 Right to Injunction. In the event of a breach or threatened breach by Tenant of any of its obligations under this Lease, Landlord shall also have the right to seek an injunction. The specified remedies to which Landlord may resort hereunder are cumulative and are not intended to be exclusive of any other remedies or means of redress to which Landlord may lawfully be entitled, and Landlord may invoke any remedy allowed at law or in equity which is not inconsistent herewith.

6.08 Certain Waivers. Tenant waives and surrenders all right and privilege that Tenant might have under or by reason of any present or future law to redeem or re-enter or repossess the Demised Premises or to have a continuance of this Lease after Tenant is dispossessed or ejected therefrom by process of law through a non-appealable judgment issued by a court having jurisdiction over such matters, or after this Lease is terminated as set forth herein. Landlord and Tenant each waive trial by jury in any action in connection with this Lease. Landlord hereby waives any Landlord’s Lien and any other lien, contractual, statutory or constitutional as to Tenant’s property. Notwithstanding anything in this Lease to the contrary, Landlord shall not be entitled to seek an award for incidental, punitive or consequential damages.

6.09 No Waiver. Failure by either party to declare any default immediately upon its occurrence or delay in taking any action in connection with such default shall not waive such default but such party shall have the right to declare any such default at any time thereafter, while such default continues. Any amounts paid by Tenant to Landlord may be applied by Landlord, in Landlord’s discretion, to any items then owing by Tenant to Landlord under this Lease. Receipt by Landlord of a partial payment shall not be deemed to be an accord and satisfaction (notwithstanding any endorsement or statement on any check or any letter accompanying any check or payment) nor shall such receipt constitute a waiver by Landlord of Tenant’s obligation to make full payment.

6.10 Holding Over. (a) If Tenant holds over without the consent of Landlord after expiration or termination of this Lease, Tenant shall: (i) pay as a use and occupancy charge for each month of the holdover tenancy an amount equal to 140% multiplied by the Rent which Tenant was obligated to pay for the month immediately preceding the end of the Term. No holding over by Tenant after the Term shall operate to extend the Term beyond a month to month tenancy.

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(b) Nothing herein shall be deemed to permit Tenant to retain possession of the Demised Premises after the Expiration Date or earlier Termination of this Lease and no acceptance by Landlord of payments from Tenant after the Expiration Date or sooner termination of this Lease shall be deemed to be other than on account of the amounts to be paid by Tenant in accordance with the provisions of this Section 6.10. Tenant’s obligations under this Section shall survive the expiration or termination of this Lease.

6.11 Landlord’s Breach. (a) Should there be any breach of this Lease on the part of Landlord or failure by the Landlord to perform any of its obligations, and if such breach or failure continues and is not cured within thirty (30) days after Tenant gives Landlord notice specifying the same, or in the case of a breach which can be cured but not, using due diligence, within thirty (30) days, if Landlord does not promptly commence to remedy such breach, and diligently prosecute such remedy to completion, or if the failure of Landlord relates to a matter which in Tenant’s judgment reasonably exercised is of an emergency nature and such failure shall remain uncured for a period of time commensurate with such emergency after Tenant shall have served upon Landlord notice of such failure (either orally, by facsimile, or in writing as the circumstances warrant; provided, however, that oral notice or facsimile to be deemed effective under this section must within 72 hours after being given be confirmed by written notice sent in the manner provided for the service of any notice), then in addition to all other remedies available to Tenant under this Lease or at law or equity, and not inconsistent herewith (excluding, however, any right to terminate or seek a judicial determination of termination), Tenant may remedy the breach and the reasonable cost thereof shall be payable from Landlord to Tenant upon demand plus interest at the rate for failure of payments under this Lease, and Tenant by reason of so doing shall not be liable or responsible for any loss or damage thereby sustained by Landlord or anyone holding under Landlord, INCLUDING CAUSED BY THE NEGLIGENCE OF TENANT UNLESS CAUSED BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF TENANT. If Landlord fails to reimburse Tenant on demand for the reasonable cost of remedying Landlord’s breach, or if Landlord fails to timely pay to Tenant any other amount due to Tenant under this Lease and such failure to pay continues for fifteen (15) days after Tenant gives Landlord written notice thereof, then Tenant may in either of such events deduct any such amounts owing from Landlord, plus interest thereon from Rent or other charges due or to become due Landlord under this Lease, but not to exceed as an offset or credit, more than 25% of the Rent due in any month without liability of forfeiture, from rents or any other sums then due or thereafter becoming due from Tenant to Landlord hereunder, and irrespective of who may own or have an interest in the Premises at the time such deductions are made. If Tenant has not received or received credit for all such amounts and interest thereon at the expiration of the term of this Lease, Tenant may, at its option, extend the term of this Lease on the same terms and conditions then in effect until all such amounts and interest thereon are fully paid by application of all Rent and other charges accruing during such extended term. Notwithstanding the provisions of the first sentence of this Section, in the event of any breach of this Lease on the part of Landlord with respect to its obligations that interfere in any material respect with Tenant’s normal operations in the Demised Premises Landlord shall have only three (3) Business Days to commence and diligently pursue to completion the cure of such breach after receiving notice from Tenant, which notice may be oral to the name (and the number) provided to Tenant from time to time, and who initially is Laura Pople at (915) 533-4901, if followed in writing (including facsimile) promptly thereafter.

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(b) If Tenant so performs any of Landlord’s obligations hereunder, the full amount of the cost and expense entailed or the payment so made shall immediately be owing by Landlord to Tenant, and Landlord shall repay to Tenant upon demand the full amount thereof with interest thereon from the date of payment at the stated rate, plus a 15% administrative fee. If such repayment shall not be made within 15 days after such demand is made, Tenant shall have the right to deduct the amount thereof, together with interest as aforesaid, without liability of forfeiture, from rents or any other sums then due or thereafter becoming due from Tenant to Landlord hereunder in the same manner provided for in the preceding paragraph. Disputes regarding amounts owed under this Section 6.11(b) shall be resolved by binding arbitration conducted in accordance with the Real Estate Valuation Arbitration Rules (Expedited Procedures) of the American Arbitration Association. The result of such arbitration shall be binding and non-appealable. Any abatement or deduction pursuant to the provisions of this Lease from any Rent or other sums due or payable hereunder and in good faith made in accordance with the terms of this Section 6.11, shall not constitute a default in the payment thereof unless Tenant shall fail to pay the amount of such deduction (plus interest at the Interest Rate from the day Tenant began withholding payment) to Landlord within 15 days after a final decision by arbitration that such amount is owed to Landlord.

(c) The option given in this section is for the sole protection of Tenant, and its existence shall not release Landlord from the obligation to perform the terms, provisions, covenants and conditions herein provided to be performed by Landlord or deprive Tenant of any legal rights which it may have by reason of any such default by Landlord.

(d) In the event of a breach or threatened breach by Landlord of any of its obligations under this Lease, Tenant shall also have the right to seek an injunction.

(e) Tenant may seek actual but not punitive, incidental or consequential damages caused by Landlord’s default under the terms of this Lease.

Landlord hereby grants to Tenant non-exclusive rights of entry and non-exclusive easements for and during the term of this Lease in, over and under any and all parts of the Project situated outside the Premises (excluding the right to enter premises demised to or owned by others) for all purposes reasonably necessary to enable Tenant (acting directly or through agents, contractors, or subcontractors) so to perform any of the terms, provisions, covenants or conditions of this Lease which Landlord shall have failed to perform.

6.12 Attorneys’ Fees. If Landlord or Tenant places the enforcement of this Lease or any part thereof, or the collection of any Rent or other payment due or to become due hereunder, or recovery of the possession of the Demised Premises, in the hands of an attorney, or files suit upon the same, or in the event any bankruptcy, insolvency or other similar proceeding is commenced involving Landlord or Tenant, the non-prevailing party in a court action shall, upon demand, pay the prevailing party for any attorneys’ fees and disbursements and court costs incurred.

6.13 Indemnification. Except as otherwise provided herein, Tenant shall indemnify, defend, protect and hold harmless Landlord, all superior lessors and all superior mortgagees and each of their respective direct and indirect members, partners, directors, officers,

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shareholders, policyholders, principals, agents and employees (each, an “Indemnified Party”), from and against any and all claims arising from or in connection with: (i) the conduct or management of the Demised Premises or of any business therein, or any work or thing done, or any condition created, in or about the Demised Premises; (ii) any act, omission or negligence of Tenant or any person claiming through or under Tenant or any of their respective direct or indirect members, partners, shareholders, directors, officers, agents, employees, invitees or contractors; (iii) any accident, injury or damage occurring in, at or upon the Demised Premises; (iv) any default by Tenant in the performance of Tenant’s obligations under this Lease; and (v) any brokerage commission or similar compensation claimed to be due by reason of any proposed subletting or assignment by Tenant (irrespective of whether Landlord approves or disapproves any such arrangement or sublease); together with all costs, expenses and liabilities incurred in connection with each such claim or action or proceeding brought thereon, including, without limitation, all attorneys’ fees and disbursements; provided, that the foregoing indemnity shall not apply to the extent such claim results from the negligence (other than negligence to which the release of liability and waiver of subrogation provided in Section 7.05 applies) or willful misconduct of the Indemnified Party. If any action or proceeding is brought against any Indemnified Party by reason of any such claim, Tenant, upon notice from such Indemnified Party shall resist and defend such action or proceeding (by counsel reasonably satisfactory to such Indemnified Party).

Except as otherwise expressly provided herein, Landlord shall indemnify, defend, protect and hold Tenant harmless from and against all losses resulting from any claims (i) against Tenant arising from or in connection with any act, default, omission, negligence or willful misconduct of Landlord or any of its direct or indirect members, partners, shareholders, directors, officers, agents, employees, contractors and principals; and (ii) against Tenant arising from the conduct or management of, or any accident, injury, loss or damage whatsoever caused to any person or the property of any person in or about, the common or public areas of the Building (specifically excluding the Demised Premises), together with all costs, expenses and liabilities incurred in connection with each such claim or action or proceeding brought thereon, including, without limitation, all attorneys’ fees and disbursements; provided, that the foregoing indemnity shall not apply to the extent such claim results from the negligence (other than negligence to which the release of liability and waiver of subrogation provided in Section 7.05 applies) or willful misconduct of the Indemnified Party or any person claiming through or under Tenant or any of their respective direct or indirect members, partners, shareholders, directors, officers, agents, employees, contractors and principals.

ARTICLE 7

Insurance; Casualty; Condemnation

7.01 Compliance with Insurance Standards. (a) Except with respect to use by Tenant of the Demised Premises and common and public areas of the Project permitted under this Lease, Tenant shall not violate, or permit the violation of, any condition imposed by any insurance policy then issued in respect of the Project and shall not do, or permit anything to be done, or keep or permit anything to be kept in the Demised Premises, which would subject Landlord, any superior lessor or any superior mortgagee to any liability or responsibility for personal injury or death or property damage, or which would increase any insurance rate in

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respect of the Project over the rate which would otherwise then be in effect or which would result in insurance companies of good standing refusing to insure the Project in amounts reasonably satisfactory to Landlord, or which would result in the cancellation of, or the assertion of any defense by the insurer in whole or in part to claims under, any policy of insurance in respect of the Project.

(b) If, by reason of any failure of Tenant to comply with this Lease, the premiums on the Project shall be higher than they otherwise would be, Tenant shall reimburse Landlord, on demand, for that part of such premiums attributable to such failure on the part of Tenant. A schedule or “make up” of rates for the Building, Project or the Demised Premises, as the case may be, issued by any fire insurance rating organization or other similar body making rates for insurance for the Project or the Demised Premises, as the case may be, shall be presumptive evidence of the facts therein stated and of the several items and charges in the insurance rate then applicable to the Project or the Demised Premises, as the case may be.

7.02 Tenant’s Insurance. Tenant shall maintain at all times during the Term: (a) commercial general liability insurance, including a contractual liability endorsement, and personal injury liability coverage, in respect of the Demised Premises and the conduct or operation of business therein, with Landlord, its managing agent, if any, each superior lessor and superior mortgagee, and any other party whose name and address shall have been furnished to Tenant, as additional insureds, with limits of not less than $5,000,000 combined single limit for bodily injury and property damage liability in any one occurrence; and (b) when Alterations are in process, the insurance specified in Section 4.02(g). Tenant shall deliver to Landlord and any additional insureds, at least 3 days prior to the Commencement Date, such fully paid-for policies or certificates of insurance, in form reasonably satisfactory to Landlord issued by the insurance company or its authorized agent. Tenant shall procure and pay for renewals of such insurance from time to time before the expiration thereof, and Tenant shall deliver to Landlord and any additional insureds such renewal policy or a certificate thereof at least 3 business days before the expiration of any existing policy. Tenant shall cooperate with Landlord in connection with the collection of any insurance moneys that may be due in the event of loss and Tenant shall execute and deliver to Landlord such proofs of loss and other instruments which may be required to recover any such insurance moneys. Landlord may from time to time require that the amount and types of the insurance to be maintained by Tenant under this Section 7.02 be increased or modified, so that the amount and types thereof adequately protect Landlord’s interest; provided such insurance is then being obtained by landlords of first class buildings in El Paso, Texas.

7.03 Landlord’s Insurance. During the Term of this Lease, Landlord shall maintain Landlord’s Insurance to the extent available at commercially reasonable rates.

7.04 Other Insurance Requirements. Landlord and Tenant may comply with their insurance obligations hereunder by endorsement to any blanket policy of insurance. Landlord and Tenant shall deliver to each other certificates issued by the insurance carrier or carriers on a legally binding ACORD form for each policy of insurance they are required to maintain by this Lease within ten (10) days after request therefor. Any insurance required by this Article to be procured by one party for the benefit of another party shall contain a provision that the insurance cannot be terminated without thirty (30) days prior written notice to the other party. All insurance required of a party under Article 7.02 shall be maintained with insurance

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companies qualified to do business in the State of Texas and rated by Best’s Insurance Reports or any successor publication of comparable standing as A-; VIII or better, or the then equivalent rating. Notwithstanding any provision of this Lease, Tenant may satisfy its insurance obligations hereunder through a program of self-insurance or self retention provided Tenant’s long term unsecured debt in them rates at least A by Standard & Poors, or an equivalent rating by a nationally recognized rating agency comparable to Standard & Poors.

7.05 Subrogation Waiver. Landlord and Tenant shall each include in each of its insurance policies (insuring the Building in the case of Landlord, and insuring Tenant’s Property and Fixtures in the case of Tenant, against loss, damage or destruction by fire or other casualty) a waiver of the insurer’s right of subrogation against the other party during the Term or, if such waiver should be unobtainable or unenforceable: (a) an express agreement that such policy shall not be invalidated if the assured waives the right of recovery against any party responsible for a casualty covered by the policy before the casualty; or (b) any other form of permission for the release of the other party, each to the extent commercially available. Each party hereby releases the other party with respect to any claim (including a claim for negligence) which it might otherwise have against the other party for loss, damage or destruction with respect to its property occurring during the Term to the extent that it is insured under a policy or policies containing a waiver of subrogation or permission to release liability or should have been insured pursuant to the terms of the lease. Each party shall promptly notify the other if a waiver of subrogation or other release of liability is not commercially available. Nothing contained in this Section 7.03 shall be deemed to relieve either party of any duty imposed elsewhere in this Lease to repair, restore or rebuild or to nullify any abatement of rents provided for elsewhere in this Lease.

7.06 Casualty. (a) If the Building or the Demised Premises shall be partially or totally damaged or destroyed by fire or other casualty (each, a “Casualty”) and if this Lease is not terminated as provided below, then: (i) Landlord shall repair and restore the Building and the Demised Premises (excluding Tenant’s Property and Fixtures) with reasonable dispatch (but Landlord shall not be required to perform the same on an overtime or premium pay basis) after notice to Landlord of the Casualty and the collection of the insurance proceeds attributable to such Casualty; and (ii) Tenant shall repair and restore in accordance with Section 4.02 all Tenant’s Property and Fixtures with reasonable dispatch after the Casualty.

(b) If all or part of the Demised Premises shall be rendered untenantable by reason of a Casualty, the Fixed Rent and the Additional Rent under Sections 2.04 and 2.06 and 2.07 shall be abated in the proportion that the untenantable area of the Demised Premises bears to the total area of the Demised Premises, for the period from the date of the Casualty to the earlier of: (i) the date the Demised Premises is made tenantable (provided, that if the Demised Premises would have been tenantable at an earlier date but for Tenant having failed diligently to prosecute repairs or restoration, then the Demised Premises shall be deemed to have been made tenantable on such earlier date and the abatement shall cease); or (ii) the date Tenant or any subtenant reoccupies a portion of the Demised Premises for the ordinary conduct of business (in which case the Fixed Rent and the Additional Rent allocable to such reoccupied portion shall be payable by Tenant from the date of such occupancy). Landlord will provide Tenant written notice of the date Landlord believes the Demised Premises are tenantable. Provided Landlord has given Tenant written notice that the Demised Premises are tenantable, Landlord’s

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determination of the date the Demised Premises is tenantable shall be controlling unless Tenant disputes same by notice to Landlord within 10 days after such determination by Landlord, which notice shall include Tenant’s statement with reasonable specificity as to why the Demised Premises are not tenantable, and pending resolution of such dispute, Tenant shall pay Rent in accordance with Tenant’s determination. Upon final determination Tenant shall pay to Landlord any amounts owed within ten (10) days of resolution.

(c) If by reason of a Casualty: (i) the Building shall be totally damaged or destroyed; (ii) the Building shall be so damaged or destroyed (whether or not the Demised Premises are damaged or destroyed) that Landlord’s repair or restoration shall require more than 270 days or the expenditure of more than 20% percent of the full insurable value of the Building (which, for purposes of this Section 7.06(c), shall mean replacement cost less the cost of footings, foundations and other structures below the street and first floors of the Building) immediately prior to the Casualty; (iii) more than 20% of the Demised Premises shall be damaged or destroyed or damage caused by such Casualty deprives Tenant of reasonable access to the Demised Premises and the time for Tenant or Landlord (as applicable) to restore the same to the condition required herein shall exceed nine (9) months from the date of such Casualty; or (iv) any damage caused by a Casualty during the final twelve (12) months of the Term renders the Demised Premises wholly untenantable, deprives Tenant of reasonable access to the Demised Premises or deprives Tenant of the ability to conduct its business at the Demised Premises and such damage cannot be restored within ninety (90) days of the Casualty (all such estimates to be made by a reputable contractor, architect or engineer designated by Landlord and approved by Tenant, which approval shall not be unreasonably withheld, conditioned or delayed and shall be deemed granted if Tenant does not object to such contractor, architect or engineer within ten (10) days of receipt of such party’s name), then in any such case Landlord or Tenant may terminate this Lease by notice given to the other Party within 90 days after the Casualty.

(d) Landlord shall not carry any insurance on Tenant’s Property or Tenant’s Fixtures and shall not be obligated to repair or replace Tenant’s Property or Fixtures. Tenant shall look solely to its insurance for recovery of any damage to or loss of Tenant’s Property or Fixtures. Tenant shall notify Landlord promptly of any Casualty in or affecting the Demised Premises.

7.07 Condemnation. In the event any material part of the Demised Premises or a “Substantial Portion of the Building” is taken or condemned by any competent authority, Tenant shall have the right: (a) to terminate this Lease as of the first day following the earlier of the date of title transfer or the date of the taking of possession by the condemning authority, or (b) to continue the Lease in full force and effect (but excluding the portion of the Demised Premises taken) with a reduced Fixed Rent commensurate with the reduced area of the Premises, in lieu of the amount of Fixed Rent otherwise provided herein, which reduction in Fixed Rent shall be effective the earlier of the date of title transfer or the date the taking of possession by the condemning authority. Tenant shall give notice to Landlord of its election within sixty (60) days after the date Landlord notifies Tenant of the impending condemnation.

In the event Tenant does not elect to terminate this Lease, but the taking or condemnation is covered by the definition of Substantial Portion of the Building, or if the taking

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or condemnation affects more than 20% of the square footage of the Building, then Landlord shall also have the right to terminate this Lease.

If neither Tenant nor Landlord elects to terminate this Lease as set forth herein, then Landlord shall commence and diligently continue thereafter to restore or cause to be restored any portion of the Premises, the Common Areas and the other portions of the Building remaining after the taking to substantially the same condition and tenantability as existed immediately preceding the taking, excluding restoration of any work performed by Tenant. If, during the pendency of any such restoration, Tenant is unable to conduct its normal business operations from the Demised Premises, in Tenant’s reasonable judgment, and does not do so, then all Fixed Rent and other charges payable by Tenant hereunder shall abate to the extent of the unusable and unused portion of the Demised Premises. Such abatement of the term shall end on the earlier to occur of: (i) sixty (60) days after completion of Landlord’s work or (ii) the date on which Tenant’s conduct of its business from the Demised Premises is resumed.

For the purposes of this Section, a “Substantial Portion of the Building” is defined to mean one of the following: (i) twenty percent (20%) or more of the Common Area of the Project; or (ii) loss through the taking or condemnation of direct access to the Demised Premises or such other portions that would, in Tenant’s reasonable judgment, materially and permanently interfere with Tenant’s operations in the Demised Premises as conducted prior to the taking or condemnation.

Termination of this Lease because of condemnation shall be without prejudice to the rights of either Landlord or Tenant to recover from the condemning authority compensation and damages for the injury or loss sustained by them as a result of the taking. Tenant shall have the right to make a claim against the condemning authority for the value of its trade fixtures, furniture and personal property, damages for interruption or relocation of business in the Demised Premises, moving and remodeling expenses and unamortized value of any leasehold improvements made by Tenant on or to the Demised Premises. All other proceeds shall belong to Landlord. Landlord shall conduct all negotiations relating to the taking or condemnation, but shall not settle any claim with respect to amounts due Tenant without Tenant’s prior approval, which shall not be unreasonably withheld or delayed.

If all or any part of the Demised Premises shall be taken for a limited period, Tenant shall be entitled, except as hereinafter set forth, to that portion of the award for such taking which represents compensation for the use and occupancy of the Demised Premises, for the taking of Tenant’s Property and for moving expenses, and Landlord shall be entitled to that portion which represents reimbursement for the cost of restoration of the Demised Premises. This lease shall remain unaffected by such taking and Tenant shall continue responsible for all of its obligations under this Lease to the extent such obligations are not affected by such taking and shall continue to pay in full all Rent when due. If the period of temporary use or occupancy shall extend beyond the Expiration Date, that part of the award which represents compensation for the use and occupancy of the Demised Premises shall be apportioned between Landlord and Tenant as of the Expiration Date. Any award for temporary use and occupancy for a period beyond the date to which the Rent has been paid shall be paid to, held and applied by Landlord as a trust fund for payment of the Rent thereafter becoming due.

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ARTICLE 8

Miscellaneous Provisions

8.01 Notice. All notices, demands, consents, approvals, advices, waivers or other communications which may or are required to be given by either party to the other under this Lease (each, “Notice”) shall be in writing and shall be delivered by: (a) personal delivery; (b) the United States Postal Service, certified or registered, postage prepaid, return receipt requested; or (c) a nationally recognized overnight courier, in each case addressed to the party to be notified at the address for such party specified in the first paragraph of this Lease (in the case of each Notice to Landlord to c/o Laura Pople at Best Real Estate Management, Inc., 300 E. Main, Suite 1200, El Paso, Texas 79901 and with a copy of each notice to Landlord to Zurich Alternative Asset Management, 105 E. 17^th Street, 4^th Floor, New York, New York 10003, Attention: Sean Bannon, and R.V.I. Guaranty Co., Ltd., 177 Broad Street, 9^th Floor, Stamford, Connecticut 06901-2048, Attention: Darrel Seife and in the case of each Notice to Tenant to the attention of Gary Sanders, Esq. and with a copy of each Notice to Tenant to Gordon & Mott, PC, 4695 N. Mesa, El Paso, Texas 79912, Attention Tim Johnson, Esq.), or to such other place as the party to be notified may from time to time designate by at least 5 Business Days notice to the notifying party. Notices from Landlord may be given by Landlord’s managing agent, if any. Each Notice shall be deemed to have been given on the date such Notice is actually received as evidenced by a receipt therefor, or when delivery is first refused, and in the event of failure to deliver by reason of changed address of which no Notice was given or refusal to accept delivery, as of the date of such failure.

8.02 Building Rules. Tenant shall comply with, and Tenant shall cause its licensees, employees, contractors, agents and invitees to comply with, the rules and regulations of the Building set forth in Exhibit C, as the same may be reasonably modified or supplemented by Landlord from time to time (“Rules and Regulations”) as long as such Rules and Regulations are not discriminatorily applied by Landlord and do not serve to amend this Lease, or restrict Tenant’s rights under this Lease or expand Tenant’s obligations under this Lease in each case, more than to a de minimis extent, for construction practices, and the safety, security, maintenance, care and cleanliness of the Demised Premises and the Building and for preservation of good order therein. Landlord shall not enforce the rules of the Building in a manner which discriminates against Tenant. If any rule of the Building shall conflict with any provision of this Lease, such provision of this Lease shall govern.

8.03 Severability. If any term or provision of this Lease, or the application thereof to any person or circumstances shall to any extent be invalid or unenforceable, the remainder of this Lease, or the application of such provision to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected, and each provision of this Lease shall be valid and shall be enforceable to the extent permitted by law.

8.04 Certain Definitions. (a) “Landlord” means only the owner, at the time in question, of the Building or that portion of the Building of which the Demised Premises are a part, or of a lease of the Building or that portion of the Building of which the Demised Premises are a part, so that in the event of any transfer or transfers of title to the Building or of Landlord’s interest in a lease of the Building or such portion of the Building, the transferor shall be and

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hereby is relieved and freed of all obligations of Landlord under this Lease accruing after such transfer, and it shall be deemed, without further agreement, that such transferee has assumed all obligations of Landlord during the period it is the holder of Landlord’s interest under this Lease.

(b) “Landlord shall have no liability to Tenant” means that Tenant is not entitled to terminate this Lease, or to receive any abatement or diminution of Rent (except as set forth herein), or to be relieved in any manner or any of its other obligations under this Lease (except as set forth herein), or to be compensated for loss or injury suffered or to enforce any other right or kind of liability whatsoever against Landlord under or with respect to this Lease or with respect to Tenant’s use or occupancy of the Demised Premises.

8.05 Quiet Enjoyment. Landlord represents and warrants to Tenant that Landlord has full right and lawful authority to lease the Demised Premises to Tenant pursuant to the terms hereof. Landlord covenants with Tenant to keep Tenant in quiet enjoyment and possession of the Premises during the term of this Lease, provided Tenant is not in default under this Lease beyond any applicable notice and cure period. Landlord further represents and warrants to Tenant that: (i) no joinder or approval of any other person or entity is required with respect to Landlord’s right and authority to enter into this Lease, including any lender or mortgagee; and (ii) there exists no ground lease or similar superior lease covering any part of the Demised Premises or the Project.

8.06 Limitation of Landlord’s Personal Liability. Tenant shall look solely to Landlord’s interest in the Building (including proceeds of sale, condemnation or insurance) for the recovery of any judgment against Landlord, and no other property or assets of Landlord or Landlord’s partners, members, officers, directors, shareholders, policyholders, or principals, direct or indirect, disclosed or undisclosed, shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant’s remedies under or with respect to this Lease.

8.07 Survival. All obligations and liabilities of Landlord or Tenant to the other which accrued before the expiration or other termination of this Lease and all such obligations and liabilities which by their nature or under the circumstances can only be, or by the provisions of this Lease may be, performed after such expiration or other termination, shall survive the expiration or other termination of this Lease. Without limiting the generality of the foregoing, the rights and obligations of the parties with respect to any indemnity under this Lease, and with respect to Tax Payments and any other amounts payable under this Lease, shall survive the expiration or other termination of this Lease.

8.08 Certain Remedies. If Tenant requests Landlord’s consent and Landlord fails or refuses to give such consent, Tenant shall not be entitled to any damages for any withholding by Landlord of its consent, it being intended that Tenant’s sole remedy shall be an action for specific performance or injunction, and that such remedy shall be available only in those cases where this Lease provides that Landlord shall not unreasonably withhold its consent; provided, however, that where Landlord is required to not unreasonably withhold its consent, Landlord shall be liable for any actual damages suffered by Tenant if Landlord has withheld consent, if a court of competent jurisdiction issues a final judgment, order or decree which is not (or is no longer) appealable, finding that Landlord withheld its consent in bad faith. No dispute

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relating to this Lease or the relationship of Landlord and Tenant under this Lease shall be resolved by arbitration unless this Lease expressly provides for such dispute to be resolved by arbitration.

8.09 No Offer. The submission by Landlord of this Lease in draft form shall be solely for Tenant’s consideration and not for acceptance and execution. Such submission shall have no binding force or effect and shall confer no rights nor impose any obligations, including brokerage obligations, on either party unless and until both Landlord and Tenant shall have executed a lease and originals thereof shall have been delivered to the respective parties.

8.10 Captions; Construction. The table of contents, captions, headings and titles in this Lease are solely for convenience of reference and shall not affect its interpretation. This Lease shall be construed without regard to any presumption or other rule requiring construction against the party causing this Lease to be drafted. Each covenant, agreement, obligation or other provision of this Lease on Tenant’s part to be performed, shall be deemed and construed as a separate and independent covenant of Tenant, not dependent on any other provision of this Lease.

8.11 Amendments. This Lease may not be altered, changed or amended, except by an instrument in writing signed by the party to be charged.

8.12 Broker. Each party represents to the other that such party has dealt with no broker other than Best Real Estate, Inc. and RJL Real Estate Consultants (“Brokers”) in connection with this Lease, and each party shall indemnify and hold the other harmless from and against all loss, cost, liability and expense (including, without limitation, reasonable attorneys’ fees and disbursements) arising out of any claim for a commission or other compensation by any broker (other than Brokers) who has dealt with the indemnifying party in connection with this Lease. Landlord has entered into separate agreements with Brokers which provide that, if this Lease is executed and delivered by both Landlord and Tenant, Landlord shall pay to Brokers a commission to be agreed upon between Landlord and Brokers, subject to, and in accordance with, the terms and conditions of such agreement. A copy of Landlord’s agreement with RJL Real Estate Consultants is attached hereto as Exhibit K. A copy of Landlord’s agreement with Best Real Estate, Inc. is attached hereto as Exhibit L.

8.13 Merger. Tenant acknowledges that Landlord has not made and is not making, and Tenant, in executing and delivering this Lease, is not relying upon, any warranties, representations, promises or statements, except to the extent that the same are expressly set forth in this Lease. This Lease embodies the entire understanding between the parties with respect to the subject matter hereof, and all prior agreements, understanding and statements, oral or written, with respect thereto are merged in this Lease.

8.14 Successors. This Lease shall be binding upon and inure to the benefit of Landlord, its successors and assigns, and shall be binding upon and inure to the benefit of Tenant, its successors, and to the extent that an assignment may be approved by Landlord, Tenant’s assigns.

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8.15 Applicable Law. This Lease shall be governed by, and construed in accordance with, the laws of the State of Texas, without giving effect to any principles of conflicts of laws. Landlord and Tenant agree that all disputes arising directly or directly under this Lease, and all actions to enforce this Lease shall be heard and adjudicated in the state courts of the State of Texas or the federal courts for the western district of Texas, and Landlord and Tenant each be expressly and irrevocably submits itself to such jurisdiction. Each party hereto hereby waives any argument that such forum is inconvenient or inappropriate or that such court does not retain jurisdiction over such party.

8.16 No Development Rights. Tenant acknowledges that it has no rights to any development rights, air rights or comparable rights appurtenant to the Project, and consents, without further consideration, to any utilization of such rights by Landlord. Tenant shall promptly execute and deliver any instruments which may be requested by Landlord, including instruments merging zoning lots, evidencing such acknowledgment and consent. The provisions of this Section 8.17 shall be construed as an express waiver by Tenant of any interest Tenant may have as a party in interest in the Project.

8.17 Signage and Directory. (a) Subject to all the terms of this Lease, Landlord will, at the request of Tenant, and at Tenant’s sole cost and expense, maintain listings on the directory board (to the extent one is maintained by Landlord) of the names of Tenant and any other person, firm, association or corporation in occupancy of the Demised Premises in compliance with this Lease, provided, however, the number of names so listed shall not exceed Tenant’s Share of the total number of names that are included in the directory from time to time.

(b) Subject to all of the terms of this Lease, during the Term Tenant shall have the right, exclusive of all other tenants in the Building, to install signage containing its corporate name and/or logo in the elevator lobby of each full floor of the Building on which the Demised Premises is located, in the westernmost elevator lobby of the first floor, on the exterior of the Building, and on the roof of the Building. All signage installed by Tenant shall be subject to Landlord’s approval as to size, content, location, place, installation, design, material, color and appearance and shall be maintained in a first-class manner by Tenant at its sole cost and expense. Landlord approval shall not be unreasonably delayed or withheld. All signage installed by Tenant shall be removed by Tenant at its sole cost and expense at the expiration or termination of the Term. Upon such removal Tenant shall, at its sole cost and expense, restore the area of the sign to the condition existing prior to installation of such sign. Tenant shall pay for any increased cost in insuring the Building (including property damage and liability insurance) arising out of the signs, and all utility costs associated with the signs. Tenant shall indemnify, defend and hold Landlord harmless from and against any and all claims, demands, liabilities, expenses (including, without limitation, reasonable attorneys’ fees and costs) arising out of the installation, maintenance, removal and existence of Tenant’s signs, including with respect to Tenant’s use of Landlord’s equipment (including scaffolding), if made available by Landlord to Tenant in Landlord’s sole discretion, for such purposes. Tenant, at its sole cost and expense, shall be obligated to obtain and maintain all permits, licenses and other approvals required by any applicable governmental authority for the existence, installation, maintenance and removal of all signs to be installed by Tenant. Landlord will cooperate with Tenant, at no material cost to Landlord, with respect to permitting for such signs and will execute, without delay, such applications and approvals required by such permitting and not inconsistent with this Lease.

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(c) For the Term of this Lease, Tenant and Landlord agree that the Building shall be named THE ENERGY CENTER only, such name to be displayed on the monument sign outside of the westerly entrance to the Building and on the tenant directory in the lobby of the Building. The Building’s legal address shall remain 100 North Stanton or may be changed by Landlord in Landlord’s sole discretion.

(d) Subject to compliance with applicable laws, the following symbols and names are hereby irrevocably approved by Landlord for inclusion in signs to be installed in accordance with Section 8.17(b), such approval not to relieve Landlord of the duty not to unreasonably withhold or delay its consent to other proposed sign designs:

El Paso Electric

El Paso Electric Company

EPE

EE

The Electric Company

8.18 Reserved

8.19 No Recording. This Lease shall not be recorded; provided, however, at Landlord’s or Tenant’s request, Tenant shall promptly execute, acknowledge and delivery a memorandum of this Lease sufficient for recording and either Landlord or Tenant may record such memorandum.

8.20 Auditorium. Landlord shall implement a reservation system for use of the auditorium located on the first floor of the Building (the “Auditorium”). Tenant will have the right to reserve use of the Auditorium by contacting the then-current property manager whose name will be provided to Tenant, 180 days in advance and no other tenant will have the right to make a reservation earlier than 45 days in advance. Use of the Auditorium may be pursuant to reasonable use-specific charges imposed by Landlord from time to time. Landlord and Tenant agree that the existing audio/visual system in the Auditorium shall be replaced and agree to share equally the cost to acquire and install such system; Tenant shall select and install the system at its sole cost, only following approval (not to be unreasonably delayed or withheld) from Landlord, whose share of the cost has been included in Fixed Rent Credits per Section 2.05(a) and Landlord shall not have any additional liability therefor.

8.21 Representations. (a) Tenant represents and warrants that it has duly authorized, executed and delivered this Lease, and that this Lease is a binding obligation of

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Tenant, enforceable in accordance with its terms, subject only to bankruptcy, moratorium, fraudulent conveyances and similar limitations affecting creditors generally.

(b) Tenant represents and warrants that it is not (i) an employee benefit plan as defined under Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”); (ii) a “plan”, as defined in and subject to Section 4975 of the Internal Revenue Code of 1986, as amended (the “Code”); or (iii) an entity subject to ERISA or holding ERISA “plan assets” within the meaning of Department of Labor Regulations at Section 2510.3-101. Tenant further represents and warrants that the transactions contemplated in this Lease will not result in a nonexempt prohibited transaction under ERISA or the Code.

8.22 OFAC Certification and Indemnification.

(a) Tenant represents, warrants and certifies to and for the benefit of Landlord that Tenant is not now and has never been nor shall it be at any time prior to the mutual execution and delivery of this Lease an individual, corporation, partnership, limited partnership, joint venture, association, joint stock company, trust, trustee, estate, limited liability company, unincorporated organization, real estate investment trust, government or any agency or political subdivision thereof, or any other form of entity (collectively, a “Person”) with whom a United States citizen, entity organized under the laws of the United States or its territories or entity having its principal place of business within the United States or any of its territories (collectively, a “U.S. Person”), is prohibited from transacting business of the type contemplated by this Lease, whether such prohibition arises under United States law, regulation, executive orders and lists published by the Office of Foreign Assets Control, Department of the Treasury (“OFAC”) (including those executive orders and lists published by OFAC with respect to Persons that have been designated by executive order or by the sanction regulations of OFAC as Persons with whom U.S. Persons may not transact business or must limit their interactions to types approved by OFAC (“Specially Designated Nationals and Blocked Persons”)) or otherwise. Tenant is not now nor has it ever been, nor shall be at any time prior to the mutual execution and delivery of this Lease, a Person with whom a U.S. Person, including a “financial institution” as defined in 31 U.S.C. 5312 (a)(z), as periodically amended (“Financial Institution”), is prohibited from transacting business of the type contemplated by this Lease, whether such prohibition arises under United States law, regulation, executive orders and lists published by the OFAC (including those executive orders and lists published by OFAC with respect to Specially Designated Nationals and Blocked Persons) or otherwise. The foregoing is not a representation regarding any shareholder that may buy or sell securities on an open public market.

(b) Tenant represents, warrants and certifies to and for the benefit of Landlord that it has taken, and shall continue to take until the expiration or any earlier termination of the term of this Lease, such measures as are required by applicable law to assure that the funds used to pay Tenant Fixed Rent, Additional Rent and any other charges due hereunder are derived: (i) from transactions that do not violate United States law nor, to the extent such funds originate outside the United States, do not violate the laws of the jurisdiction in which they originated; and (ii) from permissible sources under United States law and, to the extent such funds originate outside the United States, under the laws of the jurisdiction in which they originated.

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(c) Tenant represents, warrants and certifies to and for the benefit of Landlord that Tenant: (i) is not under investigation by any governmental authority for, nor has it been charged with, or convicted of, money laundering, drug trafficking, terrorist-related activities, any crimes which in the United States would be predicate crimes to money laundering, or any violation of any Anti-Money Laundering Laws (as hereinafter defined); (ii) has not been assessed civil or criminal penalties under any Anti-Money Laundering Laws; or (iii) has not had any of its funds seized or forfeited in any action under any Anti Money Laundering Laws. For purposes of subclause (i) of the previous sentence, the term “Anti-Money Laundering Laws” shall mean all applicable laws, regulations and sanctions, state and federal, criminal and civil, that: (w) limit the use of and/or seek the forfeiture of proceeds from illegal transactions; (x) limit commercial transactions with designated countries or individuals believed to be terrorists, narcotics dealers or otherwise engaged in activities contrary to the interests of the United States; (y) require identification and documentation of the parties with whom a Financial Institution conducts business; or (z) are designed to disrupt the flow of funds to terrorist organizations. Such laws, regulations and sanctions shall be deemed to include, without limitation, the USA PATRIOT Act of 2001, Pub. L. No. 107-56 (the “Patriot Act”), the Bank Secrecy Act of 1970, as amended, 31 U.S.C. Section 5311 et seq., the Trading with the Enemy Act, 50 U.S.C. App. Section 1 et seq., the International Emergency Economic Powers Act, 50 U.S.C. Section 1701 et seq., and the sanction regulations promulgated pursuant thereto by the OFAC, as well as laws relating to prevention and detection of money laundering in 18 U.S.C. Sections 1956 and 1957.

(d) Tenant represents, warrants and certifies to and for the benefit of Landlord that it is in compliance with any and all applicable provisions of the Patriot Act.

(e) Tenant hereby agrees to forever defend, indemnify and hold harmless Landlord from and against any and all claims, damages, costs, fines, penalties, losses, risks, liabilities and expenses (including, without limitation, attorneys’ fees and costs) arising from or related to a breach of any of the foregoing representations, warranties, certifications and agreements.

8.23 Parking Contract. Tenant’s obligations hereunder shall be conditioned upon the execution and delivery by Tenant and Landlord of a parking contract satisfactory to Tenant reserving 132 spaces for Tenant for the term of this Lease, including any renewal terms (subject to the terms of such parking contract), at the parking garage located immediately across Kansas street to the east of the Project.

ARTICLE 9

RENEWAL OPTION

9.01 Renewal Option. (a) Provided that on the date Tenant exercises the Renewal Option (defined below) and at the commencement of the applicable Renewal Term (as hereinafter defined): (i) this Lease shall not have been terminated (as hereinafter defined); and (ii) Tenant shall not be in default under this Lease, beyond any applicable notice and cure period, Tenant shall have the option (the “Renewal Option”) to extend the term of this Lease for each of three consecutive five (5) year periods (each, a “Renewal Term”), to commence on the date that is the day after following the last day of the initial Term or the prior Renewal Term, as

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applicable, and to end on the day prior to the fifth anniversary of the date on which it commenced.

(b) The Renewal Option for any Renewal Term shall be exercised with respect to all of the Demised Premises only and shall be exercisable by Tenant giving notice to Landlord (the “Renewal Notice”) at least 18 months before the last day of initial Term or the prior Renewal Term, as the case may be. Time is of the essence with respect to the giving of the Renewal Notice.

9.02 Renewal Rent and Other Terms. (a) Each Renewal Term shall be upon all of the terms and conditions set forth in this Lease, except that: (i) the Fixed Rent shall be as determined pursuant to the further provisions of this Section 9.02; (ii) the Fixed Rent Credit shall not apply; (iii) Tenant shall accept the Demised Premises in their “as is” condition at the commencement of the applicable Renewal Term, and Landlord shall not be required to perform any work or pay any amount or render any services to make the Demised Premises ready for Tenant’s use and occupancy or provide any abatement of Fixed Rent or Additional Rent, in each case with respect to any Renewal Term; (iv) Tenant shall have no option to renew this Lease beyond the expiration of the third Renewal Term; and (iv) the Base Tax Amount, the Base Utility Expense and the Base Insurance Expense shall be the Taxes for the Tax Year and the Utility Expenses and Insurance Expenses, as applicable, for the Lease Year, in each case ending immediately before the commencement of the applicable Renewal Term.

(b) The annual Fixed Rent for the Demised Premises for each Renewal Term shall be Fair Market Rent (as hereinafter defined). “Fair Market Rent” means the fixed annual rent that a willing lessee would pay and a willing lessor would accept for the Demised Premises during the applicable Renewal Term, taking into account all relevant factors.

(c) If Tenant timely exercises the Renewal Option, Landlord shall notify Tenant (the “Rent Notice”) at least 12 months before the last day of the initial Term or the prior Renewal Term, as the case may be, of Landlord’s determination of the Fair Market Rent (“Landlord’s Determination”). Tenant shall notify Landlord (“Tenant’s Notice”), within 30 days after Tenant’s receipt of the Rent Notice, whether Tenant (a) accepts Landlord’s Determination; (b) disputes Landlord’s Determination; or (c) rescinds its Renewal Notice. If Tenant accepts Landlord’s Determination, then this Lease shall be renewed for five (5) years at a Fixed Rent equal to Landlord’s Determination. If Tenant disputes Landlord’s Determination, Tenant’s Notice shall set forth Tenant’s determination of the Fair Market Rent. If Tenant fails to give Tenant’s Notice within such 30 day period, Tenant shall be deemed to have accepted Landlord’s Determination. If Tenant rescinds its Renewal Notice, then the Lease shall expire as if the Renewal Notice had never been given.

(d) If Tenant timely disputes Landlord’s Determination and Landlord and Tenant fail to agree as to the Fair Market Rent within 30 days after the giving of Tenant’s Notice, then the Fair Market Rent shall be determined as follows: Such dispute shall be resolved by arbitration conducted in accordance with the Real Estate Valuation Arbitration Rules (Expedited Procedures) of the American Arbitration Association (“AAA”), except that the provisions of this Section 9.02(d) shall supersede any conflicting or inconsistent provisions of said rules. The party requesting arbitration shall do so by giving notice to that effect to the other

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party, specifying in said notice the nature of the dispute, and that said dispute shall be determined in the City of El Paso, by a panel of 3 arbitrators in accordance with this Section 9.02(d). Landlord and Tenant shall each appoint their own arbitrator within 10 days after the giving of notice by either party. If either Landlord or Tenant shall fail timely to appoint an arbitrator, the appointed arbitrator shall select the second arbitrator, who shall be impartial, within 7 days after such party’s failure to appoint. Such two arbitrators shall have 10 days to appoint a third arbitrator who shall be impartial. If such arbitrators fail to do so, then either Landlord or Tenant may request the AAA to appoint an arbitrator who shall be impartial within 14 days of such request and both parties shall be bound by any appointment so made. If no such third arbitrator shall have been appointed within such 14 days, either Landlord or Tenant may apply to any court having jurisdiction to make such appointment. The third arbitrator only shall subscribe to an oath fairly and impartially to determine such dispute. Within 30 days after the third arbitrator has been appointed, each of Landlord and Tenant shall submit simultaneously to each arbitrator and to each other such party’s opinion on Fair Market Rent. Each arbitrator shall select either Tenant’s estimate of Fair Market Rent or Landlord’s estimate of Fair Market Rent, within thirty (30) days of receipt of the estimates. Each of Landlord and Tenant may submit back-up detail supporting its estimate concurrently to each arbitrator and to each other. The arbitrators may collectively request additional information from either party, but copies of all requests and submissions shall be sent concurrently to all arbitrators and to the other party. The arbitrators shall have no authority to select a Fair Market Rent other than either Landlord’s estimate or Tenant’s estimate. The fees and expenses of any arbitration pursuant to this Section 9.02(d) shall be borne by the parties equally, but each party shall bear the expense of its own arbitrator, attorneys and experts and the additional expenses of presenting its own proof. The arbitrators shall not have the power to add to, modify or change any of the provisions of this Lease. Each arbitrator shall have at least 10 years’ experience in El Paso, Texas in leasing and valuation of properties which are similar in character to the Building. After a determination has been made of the Fair Market Rent, the parties shall execute and deliver an instrument setting forth the Fair Market Rent, but the failure to so execute and deliver any such instrument shall not effect the determination of Fair Market Rent.

(e) If Tenant disputes Landlord’s Determination and if the final determination of Fair Market Rent shall not be made on or before the first day of the applicable Renewal Term, then, pending such final determination, Tenant shall pay, as Fixed Rent for such Renewal Term, an amount equal to Landlord’s Determination. If, based upon the final determination of the Fair Market Rent, the Fixed Rent payments made by Tenant for such portion of the applicable Renewal Term were: (i) less than the Fair Market Rent payable for such Renewal Term, Tenant shall pay to Landlord the amount of such deficiency within 10 days after demand therefor; or (ii) greater than the Fair Market Rent payable for such Renewal Term, Landlord shall credit the amount of such excess against future installments of Fixed Rent and/or Additional Rent payable by Tenant.

ARTICLE 10

RIGHT OF FIRST REFUSAL

10.01 Right of First Refusal. (a) Provided that no default under this Lease exists beyond any notice and cure period, Tenant shall have a right of first refusal as described in

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this Article 10 with respect to (i) any sale of the Property, or (ii) any sale or sales that would in the aggregate result in R.V.I. Guaranty Co., Ltd. or Zurich International Bermuda or its Affiliates ceasing to own, directly or indirectly, at least a majority interest in Landlord and in the profits and losses of Landlord. If Landlord or any party that owns an interest, directly or indirectly, in Landlord (the “Offeror”), receives a bonafide third party offer for sale the Project or any of the above described interests from any party (other than an Affiliate of such Offeror), which offer the Offeror wishes to accept or has accepted subject to Tenant’s rights in this Article 10, the Offeror shall deliver to Tenant a notice (constituting an offer) stating the sales price and all other material terms for the sale of the Property or majority interest that the Landlord would accept (which notice may be an executed purchase and sale agreement with a prospective purchaser (which must be subject to the terms of this Article 10)) (the “First Refusal Notice”). Tenant shall have fifteen (15) days from its receipt of the First Refusal Notice to accept the offer set forth in the First Refusal Notice (the “Terms”). For purposes hereof, the fifteen day period is referred to as the “Applicable Period”. A First Refusal Notice may be accepted by Tenant or its designee. The Offeror shall not be permitted to revoke the First Refusal Notice during the Applicable Period, but the First Refusal Notice shall be deemed to be revoked during the Applicable Period if Offeror and Tenant or its designee enter into a purchase agreement on terms different than the Terms. The Terms may be rejected by Tenant at any time.

If Tenant desires to accept the Terms for the Project or the offered interests, Tenant must accept the Terms within the Applicable Period and must enter into a purchase agreement with the Offeror for the purchase and sale of the Project or offered interests on (i) substantially the same form as executed between Offeror and the prospective purchaser or (ii) such other form as prepared by Landlord and reasonably acceptable to Tenant within thirty (30) days after Tenant has irrevocably accepted the Terms. The purchase agreement for the sale of the Project or offered interest shall provide for a closing on the Terms. Landlord (on behalf of the Offeror) and Tenant agree to act in good faith, subject to Section 10.3, below. Tenant shall not have the right to accept the Terms during the continuance of any default under this Lease or event that would constitute a default hereunder with notice or lapse of time, or both.

If Tenant (or its designee) rejects the Terms, the Offeror either (i) may execute a purchase agreement substantially on the Terms, and close (absent a default by the buyer and subject to the terms of such agreement) or (ii) shall, if the Terms were contained in an executed agreement with a buyer, close on the Terms therein (absent a default by buyer and subject to the terms of such agreement), in each case within 210 days from (y) the expiration of the Applicable Period, or (z) the date Tenant rejects the Terms, whichever is earlier. If the closing does not occur within such period or under the Terms, Offeror shall be required to repeat the procedure set forth in Section 10.01 (subject to the terms hereof) if it still wishes to sell the Project or offered interests.

10.02 Non-Applicability of Section 10.01. (a) Section 10.01 shall not apply to a conveyance or assignment to an Affiliate of Landlord or any owner thereof or to any ground lessor or superior mortgagee, or an Affiliate of or successor to any superior mortgagee or ground lessor, or the purchaser at a foreclosure sale in connection with the foreclosure, or to any superior mortgagee, or any Affiliate or designee thereof, in connection with a deed in lieu of foreclosure of any mortgage or deed of trust or pledge agreement. Tenant’s rights hereunder shall survive

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any sale or transfer to an Affiliate, but not to any ground lessor (or Affiliate), or to any superior mortgagee (or Affiliate) or to any pledgee, or to any purchaser at a foreclosure sale.

(b) Any purchase of the Project under this Article will be subject to this Lease and any superior mortgage and superior lease, if any, unless the indebtedness secured by such superior mortgage is repaid in full. If Tenant or its Affiliate is the purchaser of the Project there shall be no merger of the fee and the leasehold.

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IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the day and year first written above.

Landlord:	100 NORTH STANTON TOWER LLC
	By:	/s/ Sean Bannon
	Name:	Sean Bannon
	Title:	President
	By:	/s/ Darrell Seife
	Name:	Darrell Seife
	Title:	VP

	El Paso Electric Company
TENANT:	By:	/s/ Ershel C. Redd, Jr.
	Name:	Ershel C. Redd, Jr.
	Title:	CEO
Tenant’s Federal Tax I.D. No.:	74-0607870

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EXHIBIT A

THE LAND

Exhibit A - 1

EXHIBIT B

FLOOR PLAN OF THE DEMISED PREMISES

Exhibit B - 1

Exhibit B - 2

Exhibit B - 3

Exhibit B - 4

Exhibit B - 5

Exhibit B - 6

Exhibit B - 7

EXHIBIT C

RULES AND REGULATIONS

No tenant shall obstruct or encumber, or use for any purpose other than ingress to and egress from its premises, the sidewalks, driveways, entrances, passages, courts, lobbies, esplanade areas, atrium, plazas, elevators, escalators, stairways, vestibules, corridors, halls and other public portions of the Building (the “Public Areas”), and no tenant shall permit any of its employees, agents, licensees or invitees to congregate or loiter in any of the Public Areas. No tenant shall invite to, or permit to visit, its premises persons in such numbers or under such conditions as may unreasonably interfere with the use and enjoyment by others of the Public Areas. Fire exits and stairways are for emergency use only, and they shall not be used for any other purposes by any tenant, or the employees, agents, licensees or invitees of any tenant. Landlord reserves the right to control and operate, and to restrict and regulate the use of the Public Areas and the public facilities, and access to and egress from the Building and Project, as well as facilities furnished for the common use of the tenants, in such manner as it deems best for the benefit of the tenants generally, including the right to allocate certain entrances and elevators for delivery service and persons making deliveries in the Building. No doormat, garbage or garbage receptacle, showcase, furniture, decoration or sculpture or other article of any kind whatsoever shall be placed or left in the Public Areas or outside any tenant’s premises.

No awnings or other projections shall be attached to the outside walls of the Building. Curtains, blinds, shades, louvered openings and screens shall (i) not be attached to or hung in, or used in connection with, any window or door of any tenant’s premises, without the prior written consent of Landlord, (ii) be of a quality, type, design and color, and attached in the manner, approved by Landlord, and (iii) once attached, hung or used with the consent of Landlord, not be thereafter removed or changed without Landlord’s consent. In order to maintain a uniform exterior appearance of the Building, each tenant occupying the perimeter areas of the Building shall unless consented to by Landlord, (a) use only Building Standard lighting in areas where lighting is visible from the outside of the Building and (b) use only Building Standard blinds in window areas which are visible from the outside of the Building.

Signs, advertisements, graphics and notices visible from the Public Areas or the exterior of the Building shall be subject to Landlord’s written approval. Signs on each entrance door of any tenant’s premises shall, unless consented to by Landlord, conform to Building Standard signs. Such signs shall, at the expense of the tenant, be inscribed, painted or affixed by sign makers approved by Landlord. Landlord shall have the right to prohibit any advertising or identifying sign by any tenant which, in Landlord’s reasonable judgment, tends to impair the reputation or desirability of the Building, and upon written notice from Landlord, such tenant shall refrain from and discontinue such advertising or identifying sign. In the event of the violation of any of the foregoing by any tenant, Landlord may remove the same without any liability, and may charge the expense incurred in such removal to the tenant violating this rule. Lettering on doors visible from Public Areas, elevator cab designations, if any and the Building or floor lobby directory shall, if and when approved by Landlord, be inscribed, painted or affixed for each tenant by Landlord, at the expense of such tenant, and shall be of a size, color, content and style reasonably acceptable to Landlord.

Exhibit C - 1

No tenant shall (a) cover or obstruct the sashes, sash doors, skylights or windows that reflect or admit light and air into the halls, passageways or other public places in the Building or the heating, ventilating and air conditioning vents and doors, or (b) place any bottles, parcels or other articles on the window sills or on the peripheral heating enclosures.

Each tenant, before closing and leaving its premises at any time, shall see that all lights are turned out. All entrance doors in each tenant’s premises shall be kept locked and all windows shall be left closed by such tenant when its premises are not in use. Entrance doors to each tenant’s premises shall not be left open at any time.

All windows in each tenant’s Demised Premises shall be kept closed, and all blinds therein above the ground floor shall be lowered as reasonably required because of the position of the sun, during the operation of the Building air conditioning system to cool or ventilate the tenant’s Demised Premises. If Landlord shall elect to install any energy saving film on the windows of the Demised Premises, or to install energy saving windows in place of the existing windows, tenant shall cooperate with the reasonable requirements of Landlord in connection with such installation and thereafter the maintenance and replacement of the film and/or windows and permit Landlord to have access to the tenant’s Demised Premises at reasonable times during Business Hours to perform such work.

Nothing shall be done or permitted in any tenant’s Demised Premises, and nothing shall be brought into or kept in any tenant’s Demised Premises, which would impair or interfere with any of the Building’s services or the proper or economic heating, ventilating, air conditioning, cleaning or other servicing of the Building or the Demised Premises, or the use or enjoyment by any other tenant of any other Demised Premises, nor shall there be installed by any tenant any ventilating, air conditioning, electrical or other equipment of any kind which, in the reasonable judgment of Landlord, might cause any such impairment or interference.

No tenant shall (a) discharge, or permit to be discharged, acids, harmful vapors or other hazardous materials into the waste lines, vents or flues of the Building; (b) use the water and wash closets and other plumbing fixtures for any purposes other than those for which they were designed and constructed, or throw or deposit therein sweepings, rubbish, rags, acids or other foreign substances; or (c) sweep or throw anything into the Public Areas or other areas of the Building, or into or upon adjoining buildings or land or the street. All damages resulting from any misuse of the fixtures shall be borne by the tenant who, or whose servants, employees, agents, visitors or licensees shall have, caused the same.

No tenant, nor the employees, agents, licensees or invitees of any tenant, shall at any time bring or keep upon its premises any inflammable, combustible or explosive fluid, chemical or substance.

Tenant shall not cause or permit any unusual or objectionable fumes, vapors or odors to emanate from the Demised Premises which would annoy other tenants or create a public or private nuisance. No cooking shall be carried out in the Demised Premises.

No tenant shall damage, or in any way deface, any part of the Building. No boring, cutting or stringing of wires shall be permitted in any part of the Building, except with

Exhibit C - 2

the prior written consent of, and as directed by, Landlord. Tenant shall not attach or affix any screws or fasteners to the exterior curtain wall of the Building or install, except with the prior written consent of Landlord, any materials that will come in contact with the exterior curtain wall of the Building. No telecommunications wires or systems, or other wires shall be introduced into the Building by any tenant except in a manner consented to by Landlord. Except as consented to by Landlord in connection with the performance of Alterations requiring Landlord’s consent, no tenant shall install linoleum, or other similar floor covering, so that the same shall come in direct contact with the floor of its premises, and, if linoleum or other similar floor covering is desired to be used, an interlining of builder’s deadening felt shall be first affixed to the floor, by a paste or other material, soluble in water, the use of cement or other similar adhesive material being expressly prohibited.

No tenant shall bring into or keep in or about its premises any bicycles, vehicles or animals (except seeing eye dogs), fish or birds of any kind.

No noise, including, without limitation, music or the playing of musical instruments, recordings, radios, loud speaker system or other sound system or television, which, in the reasonable judgment of Landlord, might disturb other tenants in the Building, shall be made or permitted by any tenant. Nothing shall be done or permitted in the Demised Premises of any tenant which would impair or interfere with the use or enjoyment by any other tenant of any space in the Building.

No tenant shall (a) place or affix any additional locks or bolts of any kind upon any of the doors or windows of its premises or the Building or (b) make any changes in locks or the mechanism thereof which shall make such locks inoperable by the Grand Master Key for the Building. Duplicate keys for any tenant’s premises and toilet rooms shall be procured only from Landlord, and Landlord may make a reasonable charge therefor. Each tenant shall, upon the expiration or sooner termination of the lease of which these Rules and Regulations are a part, turn over to Landlord all keys to stores, offices and toilet rooms, either furnished to, or otherwise procured by, such tenant, and in the event of the loss of any keys furnished by Landlord, such tenant shall pay to Landlord the cost of replacement locks.

All removals, or the carrying in or out of any safes, freight, furniture, large boxes or crates, or any other large or heavy object or matter shall take place (a) only during such hours (including non-Business Hours) as Landlord may from time to time determine and (b) using such entrances and such elevators as Landlord may from time to time determine in its sole discretion. Each tenant shall reimburse Landlord for extra costs incurred by Landlord on such tenant’s behalf, including the cost of any overtime work. No hand trucks shall be used for such purposes except those equipped with rubber tires, side guards and such other safeguards as Landlord shall reasonably require. No hand trucks shall be used in passenger elevators. Tenants shall not use the elevators during Business Hours on Business Days for haulage or removal of construction materials or debris. Persons employed to move safes and other heavy objects shall (a) provide a certificate of insurance, (b) be reasonably acceptable to Landlord and, (c) if so required by Law, shall hold a Master Rigger’s license. Arrangements must be made with Landlord by tenant for moving large quantities of furniture and equipment into or out of the Building. All labor and engineering costs incurred by Landlord in connection with any moving specified in this rule,

Exhibit C - 3

including a reasonable charge for overhead, shall be paid by tenants to Landlord as Additional Charges on demand.

Landlord shall have the right to prescribe the weight and position of safes and other objects of excessive weight, and no safe or other object whose weight exceeds the lawful load for the area upon which it would stand shall be brought into or kept on any tenant’s Demised Premises. If, in the reasonable judgment of Landlord, it is necessary to distribute the concentrated weight of any heavy object, the work involved in such distribution shall be done at the expense of the tenant and in such manner as Landlord shall determine.

No machinery or mechanical equipment other than ordinary portable business machines may be installed or operated in any tenant’s Demised Premises without Landlord’s prior written consent, which consent shall not be unreasonably withheld or delayed, and in no case (even if the same are a type so excepted or as so consented to by Landlord) shall any machines or mechanical equipment be so placed or operated as to disturb other tenants; but machines and mechanical equipment which may be permitted to be installed and used in a tenant’s Demised Premises shall be so equipped, installed and maintained by such tenant as to prevent any disturbing noise, vibration or electrical or other interference from being transmitted from such Demised Premises to any other area of the Building.

Except as otherwise expressly permitted pursuant to, and in accordance with, the terms of the lease, no tenant shall use or occupy, or permit any portion of its premises to be used or occupied, as an office for a public stenographer or public typist, or for the possession, storage, manufacture or sale of liquor, tobacco or any controlled substance or as a barber, beauty or manicure shop, telephone or telegraph agency, telephone or secretarial service, messenger service, travel or tourist agency, retail service shop, labor union, company engaged in the business of renting office or desk space, public finance (personal loan) business, hiring employment agency, stock brokerage, or for the conduct of any other business or occupation which predominantly involves direct patronage of the general public. No tenant shall advertise for laborers giving an address at the Building.

Landlord may institute, revise and discontinue such security measures, systems and requirements as Landlord shall deem appropriate. Landlord reserves the right to inspect all objects and matter to be brought into the Building and to exclude from the Building all objects and matter which violate any of these Rules and Regulations or the lease of which these Rules and Regulations are a part. Landlord may require any person leaving the Building with any package or other object or matter to submit a pass, listing such package or object or matter, from the tenant from whose premises the package or object or matter is being removed, but the establishment and enforcement or non-enforcement of such requirement shall not impose any responsibility or liability on Landlord for the protection of any tenant against the removal of property from the premises of such tenant. Landlord reserves the right to exclude from the Building all employees of any tenant who do not present a pass to the Building signed by such tenant. Landlord reserves the right to limit or control access to the Building, including, without limitation, closing certain entrances and exits in its discretion. Landlord or its agent will promptly furnish passes to persons for whom any tenant requests same in writing. Landlord reserves the right to require all other persons entering the Building to sign a register, to be announced to the tenant such person is visiting, and to be accepted as a visitor by such tenant or

Exhibit C - 4

to be otherwise properly identified (and, if not so accepted or identified, reserves the right to exclude such persons from the Building) and to require persons leaving the Building to sign a register or to surrender a pass given to such person by the tenant visited. Each tenant shall be responsible for all persons for whom it requests any such pass or any person who such tenant accepts, and such tenant shall be liable to Landlord for all acts or omissions of such persons. Any person whose presence in the Building at any time shall, in the judgment of Landlord, be prejudicial to the safety, character, security, reputation or interests of the Building or the tenants of the Building may be denied access to the Building or may be ejected from the Building. In the event of invasion, riot, public excitement or other commotion, Landlord may prevent all access to the Building during the continuance of the same by closing the doors or otherwise, if reasonably necessary for the safety of tenants and the protection of property in the Building. Landlord shall in no way be liable to any tenant for damages or loss arising from the admission, exclusion or ejection of any person, objects or matters to or from its premises or the Building under the provisions of this Rule.

Each tenant shall, at the expense of such tenant, provide light, power and water for the employees of Landlord, and the agents, contractors and employees of Landlord, while doing janitor service or other cleaning in the premises demised to such tenant and while making repairs or alterations in its premises.

No tenant shall use its premises for lodging or sleeping or for any immoral or illegal purpose.

The requirements of tenants will be attended to only upon application at the office of the Building. Employees of Landlord shall not perform any work or do anything outside of their regular duties, unless under special instructions from Landlord.

Canvassing, soliciting and peddling in the Building are prohibited and each tenant shall cooperate to prevent the same.

Only Landlord or persons approved by Landlord shall be permitted to furnish to the Demised Premises ice, drinking water, food, beverage, linen, towel, barbering, boot blacking, floor polishing, lighting, maintenance, cleaning, or other similar services. Such services shall be furnished only at such hours, and under such reasonable regulations, as may be fixed by Landlord from time to time. All messenger services and similar services shall be subject to Landlord’s approval, which may include, without limitation, limiting access by messenger and similar companies to certain designated Building areas, from which tenants shall then pick-up its packages.

If the Demised Premises be or become infested with vermin as a result of the use or any misuse or neglect of the Demised Premises by tenant, its agents, employees, visitors or licensees, tenant shall at tenant’s expense cause the same to be exterminated from time to time to the reasonable satisfaction of Landlord and shall employ such exterminator and such exterminating company or companies as shall be designated by Landlord, or if none is so designated as reasonably approved by Landlord.

Exhibit C - 5

All paneling, doors, trim or other wood products not considered furniture shall, to the extent required by law, be of fire-retardant materials. Before installation of any such materials, certification of such materials’ fire-retardant characteristics shall be submitted to and consented to by Landlord, and such materials shall be installed in a manner consented to by Landlord.

Tenants shall comply with any and all recycling measures required by law or by Landlord.

No employee, agent, licensee or invitee may carry a handgun or any other deadly weapon whether concealed or otherwise, into the Building or Project. Any violation of this policy shall constitute a criminal trespass and shall be prosecuted.

Smoking within the Building is prohibited. Designated smoking areas may be established by Landlord from time to time. All flammable materials shall be disposed of in proper containers.

Landlord reserves the right to add to, or amend or delete any of the Rules and Regulations of the Building at any time.

To the extent there is a conflict between the provisions contained in the lease or this Exhibit B annexed thereto, the provisions of the lease shall govern and control.

Exhibit C - 6

EXHIBIT D

SECURITY PROCEDURES

(Subject to change by Landlord)

1. Identification Badges:

a. All employees of tenants will be issued Security/Identification Badges (“Badges”) in such format as may be prescribed by Landlord. Each such employee shall wear such employee’s Badge in such a manner so as to be in plain sight at all times in or about the Common Areas of the Building.

b. Business invitees of tenants shall be issued a temporary Badge once Tenant’s employees shall have approved (by telephonic confirmation or pre-approved roster of invitees) the admittance of such business invitee into the Building.

c. Each tenant shall designate an employee that will: (i) monitor the issuance of new or replacement Badges; and (ii) design and make the Badge templates required by such tenant.

d. Landlord reserves the right to exclude from the Building any person who is not authorized or not properly identified through the security monitor system.

e. Landlord reserves the right to require all persons admitted to or leaving the Building between the hours of 6:00 pm and 6:00 am, Monday through Friday and at any time on Saturdays, Sundays and legal holidays to register.

f. Each tenant shall be responsible for all persons whom such tenant and such tenant’s officers, directors or employees authorize entry into the Building, and shall be liable to Landlord for all acts or omissions of such authorized persons.

2. Security Access Computer System and Hardware:

A. The location of access control devices (card readers provided by Landlord) at the entrance to each tenant’s suite shall not be removed or changed without notice to and consent of Landlord.

B. Each tenant will install and maintain any additional security devices such tenant may require within its Demised Premises, including all cabling. Each tenant will coordinate with Landlord all installations of hardware pertaining to the security system. Landlord reserves the right to approve all installations and additions to the security systems.

3. Business Invitee Procedures:

A. Business invitees will be required to “check-in” at the guard station maintained by Landlord in the Common Area of the Building.

Exhibit D - 1

B. Business invitees will be requested to identify the person or persons they intend to visit.

C. The Building’s security officer will telephone the person to be visited to get verbal approval (or confirm the invitee from a roster provided by the tenant) to permit the business invitee to enter Building and the tenant’s Demised Premises.

D. Advance approval of business invitees for special functions may be made by delivering a roster of invitees to the Building’s security management prior to the special function.

E. All business invitees are required to conduct themselves in accordance with the Building Rules and Regulations.

F. All business invitees must relinquish their temporary security badges when exiting a tenant’s offices or the Building.

G. No person will be allowed to solicit contributions, collect for charitable organizations or distribute political, religious, or advertising material in the Building and each tenant shall cooperate to prevent the same.

4. Employee Temporary Badges:

A. Employees without a Badge must “check-in” at the guard station within the Building to obtain a temporary Badge.

B. Each such employee must identify themselves to the security officer, such identification to include name of each such employee as it appears in the Building’s computer access system database.

C. The security officer will verify the employee’s identity in the Building’s computer access system database and, upon verification, each such employee will be issued a temporary Badge.

D. All employees of tenants must report lost or stolen Badges.

5. Loading Dock Procedures:

A. The Building’s loading dock will not be opened for any tenant unless a security officer is present to supervise access to the Building in the loading dock area. Each special request for the Building’s loading dock to be open for more than one hour requires advance notice to Landlord. Landlord shall invoice tenant for the actual costs of additional security in connection with such tenant’s use of the Building’s loading dock.

B. The Building’s loading dock is for loading and unloading only and is to be kept clear of all freight.

Exhibit D - 2

6. Process Servers and Law Enforcement Officers:

A. Process servers and law enforcement officers will be kept at Building’s guard station on the first floor of the Building.

B. Process servers and law enforcement officers will be required to identify themselves and the individual or company that is the subject matter of process.

C. The Building’s security officer will notify the tenant’s duly appointed employee to bring the employee, the subject matter of process, to the guard station on the first floor of the Building.

D. The Building’s security officer will make the security office available where process can be served in private.

E. The Building’s security officer will remain in the security office unless the security officer is requested to leave.

F. Arrest warrants will be handled on an individual basis and will be coordinated with the arresting law enforcement officer, the Building’s security officer and the tenant’s duly appointed official employee.

G. Each tenant will designate in writing its list of appointed employees as points of contact in dealing with process servers and law enforcement officers.

7. Reporters and Camera Crews: No media reporter or cameras will be allowed into the Building unless permission is granted by one of Tenant’s duly appointed employees. Reporters and camera crews will be escorted while in the Building.

8. Packages and Deliveries:

A. Security stations are not to be used as points of “drop-off” for any deliveries of any kind. Business invitees with deliveries will be asked to identify themselves and the recipient of the delivery.

B. Upon proper identification, the security officer will telephone the recipient of the delivery and ask the recipient if they want the package delivered to their office or wait for the recipient to come down and pick it up.

C. If business invitees with packages are to enter the Building, the Business Invitee Procedures described above are applicable.

Exhibit D - 3

EXHIBIT E-1

HVAC PLANS – 13^th FLOOR

Exhibit E-1 - 1

EXHIBIT E-2

HVAC PLANS – 15^th FLOOR

Exhibit E-2 - 1

EXHIBIT E-3

HVAC PLANS – BASEMENT

Exhibit E-3 - 1

EXHIBIT F

[CLEANING SPECIFICATIONS¹ ]

(Subject to change by Landlord)

I. Public Areas (Corridors and Stairwells)

a. Vacuum all carpeted corridors nightly. Spot clean shampoo as required.

b. Wash all non-carpeted public corridor flooring nightly and wax once per week.

c. Remove all smudges, scuffmarks, graffiti and all other unauthorized marks and writings from public corridor walls nightly.

d. Police all public stairwells throughout the entire building and keep in clean condition, sweep daily and mop same area once per week.

e. Inspect and keep clean firehoses, extinguishers and similar equipment as required.

f. Dust all railings, etc., weekly and high dust quarterly.

II. Office Areas

a. All linoleum, rubber, asphalt tile and other similar types of flooring (that may be waxed) to be swept nightly, using approved dust-check type of mop.

b. All carpentry and rugs to be carpet swept nightly and vacuum cleaned weekly moving light furniture other than desks, file cabinets, etc.

c. Hand dust and wipe clean all furniture, fixtures, desks, equipment and windowsills nightly. All dusting to be carried out using specially treated cloths.

d. Empty and clean all waste receptacles nightly and remove waste paper and waste materials to appropriate areas for removal by rubbish remover.

e. Dust interior of all waste disposal cans and baskets nightly; damp dust as necessary.

f. Wash clean all water fountains and coolers nightly.

g. Hand dust all baseboards, chair rails, trim, pictures, charts, doors and ventilating louvers, within reach, as necessary.

h. Dust all telephones as necessary.

¹ Performed by Landlord’s contractor.

Exhibit F - 1

i. Sweep all private stairway structures nightly; if carpeted, carpet sweep nightly, vacuum weekly.

j. Remove finger marks from metal partitions and other similar surfaces as necessary.

III. Lavatories

a. Sweep and wash all lavatory floors nightly using proper disinfectants. Wash and polish all mirrors, power shelves, bright work, including flushometers, piping and toilet set hinges and enameled surfaces in all lavatories nightly.

b. Scour, wash and disinfect all basins, bowls and urinals throughout all lavatories nightly.

c. Wash all toilet seats nightly.

d. Empty paper towel receptacles and transport waste paper to designated area in basement nightly.

e. Fill toilet tissue holders, towel dispensers, soap dispensers and Kotex/Modess dispensers nightly.

f. Empty sanitary disposal receptacles nightly.

g. Contractor shall use only non-abrasive material to avoid damage and deterioration to chrome fixture.

h. Machine scrub flooring with approved germicidal detergent solution once a week.

i. Thoroughly wash all wall tile and stall surfaces nightly and polish monthly.

Exhibit F - 2

EXHIBIT G

LANDLORD’S WORK

Any and all work (except as provided in the Lease) required to (i) repair the structure of the Building, (ii) repair the Building systems (excluding systems solely serving the Demised Premises), (iii) comply with all applicable laws (except to the extent provided in the Lease), and except to the extent of complying with the Americans with Disabilities Act in the Demised Premises.

Exhibit G - 1

EXHIBIT H

[Intentionally Omitted]

Exhibit H - 1

EXHIBIT I

PRE-APPROVED ARCHITECTS, ENGINEERS AND CONTRACTORS

Exhibit I - 1

EXHIBIT J

PERMITTED ENCUMBRANCES

(see attached)

Exhibit J - 1

Exhibit J - 2

Exhibit J - 3

Exhibit J - 4

EXHIBIT K

RJL BROKER AGREEMENT

Landlord agrees to pay RJL Real Estate Consultants, LLC, its successors and assigns (“RJL”), at 725 S. Mesa Hills Drive, #1, El Paso, Texas 79912, a lease commission and a limited sales commission, as follows (all capitalized terms used herein but not defined shall have the meanings set forth in that certain Lease, dated as of             , 2007, by and between 100 North Stanton Tower LLC (“Landlord”) and El Paso Electric Company (“Tenant”)):

(a) Landlord agrees to pay RJL a lease commission equal to two and one half percent (2.50%) of the monthly Fixed Rent paid by Tenant, as and when received by Landlord, during the initial Term of the Lease, and during the terms of all renewal options, holdovers, and extensions, and during the terms of any replacement, restated or new lease, between Landlord and Tenant and/or their affiliates, successors and assigns. The term “Fixed Rent” shall include all rent paid for any expansion space taken over by Tenant, whether under the Lease or in a separate lease, all increases in the Fixed Rent (without regard for how defined, other than pass-throughs and reimbursements), and all sums paid by Tenant in settlement or termination of its obligations under the Lease. As used in this Agreement, the term “Tenant” shall include all of Tenant’s affiliates, successors and assigns, and all entities in which Tenant or its affiliates may own an interest. Commission payments shall be due and payable within ten days after the Fixed Rent is received by Landlord, and commission payments that are delinquent more than thirty days shall bear interest at the rate of twelve percent per annum.

(b) Landlord agrees to pay RJL a sales commission equal to two percent (2.0%) of the total sales price or exchange value of the Building or Project if the Building or the Project, or an entity that owns the Building or the Project, is sold or conveyed to Tenant or its designee, or is contracted to be sold, during any term of the Lease or within ninety days after the expiration of the Lease. This sales commission will be due and payable at the closing of the transaction.

(c) The provisions set forth in this Agreement shall survive any assignment of the Lease and any transfer of title to the Building or Project. Upon any such assignment or transfer of title, the assignee, purchaser, or other successor in interest shall be deemed to have assumed all of the obligations of Landlord set forth herein, and RJL does not release Landlord from its obligations herein without RJL’s prior written consent at that time. Landlord agrees not to delete the reference to the existence of this Agreement contained in Section 8.12 of the Lease or to assign the Lease or transfer title unless its successor in interest expressly assumes the Landlord’s obligations in this Agreement. Pursuant to Section 62.022, chapter 62 of the Texas Property Code, any assignee, purchaser or other successor in interest that assumes the Landlord’s position in the Lease is bound by the commission agreements set forth in this Agreement.

(d) The parties hereto acknowledge that RJL has represented the Tenant in the

Exhibit K - 1

consummation of the Lease, and not the Landlord; however, the Landlord has agreed to pay the commissions. RJL represents that it is a licensed real estate broker in Texas. Landlord shall hold Tenant harmless from all claims (including reasonable attorneys’ fees) resulting from any claim for payment of the commission that may be asserted against Tenant by RJL. Landlord has entered into a separate written agreement with another broker, Best Real Estate, Inc., which broker represents Landlord, and their agreement shall be as stated in that separate agreement. Best Real Estate, Inc. will not participate in the leasing and sales commissions payable to RJL as above provided. Landlord agrees to furnish RJL with an executed copy of the Lease.

(e) Any notice pursuant to this Agreement shall be given in writing by: (a) personal delivery, (b) reputable overnight delivery service with proof of delivery, (c) United States Mail, postage prepaid, registered or certified mail, return receipt requested, (d) legible facsimile transmission, or (e) email; when sent to the intended addressee at the address set forth below, or to such other address or to the attention of such other person as the addressee shall have designated by written notice sent in accordance herewith, and shall be deemed to have been given upon receipt or refusal to accept delivery, or, in the case of facsimile transmission, as of the date of the facsimile transmission, provided that an original of such facsimile is also sent to the intended addressee by means described in clauses (a), (b) or (c) above, and in the case of email, as of the date the receipt of the email is acknowledged by the person to whom it is addressed. Unless changed in accordance with the preceding sentence, the addresses for notices given pursuant to this Agreement shall be as follows:

Landlord:	100 North Stanton Tower LLC c/o Zurich Structured Finance, Inc. 105 E. 17th Street, 4th Floor New York, New York 10003 Attention: Sean Bannon
with a copy to	R.V.I. Guaranty Co., Ltd. 177 Broad Street, 9th Floor Stamford, Connecticut 06901-2048 Attention: Darrel Seife
RJL:	RJL Real Estate Consultants, LLC 725 S. Mesa Hills Drive, #1 El Paso, Texas 79912 Attention: Richard J. Amstater

(f) Pursuant to Section 62.021, chapter 62, of the Texas Property Code, RJL has a right to file a notice of lien against Landlord’s property for non-payment of the Commission and to enforce that lien.

[SIGNATURE PAGE TO FOLLOW]

Exhibit K - 2

RJL Real Estate Consultants, LLC
By:	/s/ John Folmer
Name:	John Folmer
Title	Member
100 North Stanton Tower LLC
By:
Name:
Title

Exhibit K - 3

EXHIBIT L

BEST BROKER AGREEMENT

(see attached)

Exhibit L - 1

COMMISSION AGREEMENT

RVI Guaranty Group, Ltd./Zurich, collectively referred to herein as “Owner” of 100 Stanton Tower, herein after referred to as “Property”, jointly and severally hereby agree to pay Best Real Estate. Inc. hereinafter referred to as “Agent” the following commission on the following terms as they relate to the successful completion of a lease agreement between the Owner and El Paso Electric Company hereinafter referred to as “Lessee”.

Provided Agent shall provide leasing and/or sales information or other materials on the Property to prospective tenants which are acceptable to Owner, and tenant and Owner conclude an agreement acceptable to Owner for Lessee to occupy all or a portion of the Property, Owner shall pay a cash out commission on the lease equivalent to one and one half percent (1.5%) of the gross rentals to be paid over the primary term of the lease payable as follows: one half (1/2) within fifteen (15) days following the execution of the lease and one half (1/2) upon lease commencement. Such commission shall be paid in cash in El Paso, Texas.

In the event Lessee renews the lease or expands beyond the Leased Premises identified in the lease agreement, and in the event Agent is involved, as a representative of Lessee or Lessor, Agent will be entitled to a cash-out commission of one percent (1%).

In the event Lessee elects to purchase the Property, and in the event Agent is involved, as a representative of Lessee or Lessor, Agent will be entitled to a cash-out commission of one percent (1%).

This agreement is executed in triplicate and a copy retained by the Owner. The terms of this agreement shall be binding upon the parties hereto and their respective agents, heirs, executors, administrators, and assigns. In the event of the assignment of Owner’s rights and obligations hereunder due to sale, exchange or assignment of the above described Property, the Owner agrees to obtain from purchaser, assignee, or other successor in interest of the above described Property for rentals, an assumption agreement in recordable form, whereby such purchaser, assignee, or other successor in interest agrees to assume and perform all obligations of this agreement with respect to leasing, sale and exchange commissions. Owner at that time shall be released from any further obligations for the payment of commissions on rentals collected after consummation of such sale.

Signed and date this 21st day of May, 2007.

/s/ Sean Bannon		/s/ Laura A. Pople
RVI Guaranty Co., Ltd. (“Owner”)		Laura A. Pople – Best Real Estate, Inc.
Printed Name:	Sean Bannon	Printed Name:	Laura A. Pople
Title:	President	Title	Vice President

Exhibit L - 2

IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date set forth below.

Date: May 21st, 2007

OWNER:
100 NORTH STANTON TOWER LLC
By:	Zurich Structured Finance, Inc., its sole member
/s/ Sean Bannon
By:	Sean Bannon
Its:	VP

MANAGER:
BEST REAL ESTATE MANAGEMENT, INC.
By:	/s/ Laura A. Pople
Printed Name:
Title:

Exhibit L - 3

EX-15

Exhibit 15

August 6, 2007

El Paso Electric Company

El Paso, Texas

Re: Registration Statement Nos. 333-17971, 333-82129, 333-123646, and 333-142557

With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated August 6, 2007 related to our review of interim financial information.

Pursuant to Rule 436 under the Securities Act of 1933 (the Act), such report is not considered part of a registration statement prepared or certified by an independent registered public accounting firm, or a report prepared or certified by an independent registered public accounting firm within the meaning of Sections 7 and 11 of the Act.

KPMG LLP

Houston, Texas

EX-31.01

EXHIBIT 31.01

CERTIFICATIONS

I, Ershel C. Redd, Jr., certify that:

1. I have reviewed this quarterly report on Form 10-Q of El Paso Electric Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

4. The Company’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5. The Company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s

auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Dated: August 7, 2007

EL PASO ELECTRIC COMPANY
By:	/s/ Ershel C. Redd, Jr.
	Ershel C. Redd, Jr.
	President and Chief Executive Officer
	(Principal Executive Officer)

I, Scott D. Wilson, certify that:

1. I have reviewed this quarterly report on Form 10-Q of El Paso Electric Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

4. The Company’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5. The Company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Dated: August 7, 2007

EL PASO ELECTRIC COMPANY
By:	/s/ Scott D. Wilson
	Scott D. Wilson
	Executive Vice President, Chief Financial and Chief Administrative Officer (Principal Financial Officer)

EX-32.01

EXHIBIT 32.01

August 7, 2007

The certification set forth below is being submitted in connection with the Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 (the “Report”) of El Paso Electric Company (the “Company”) for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code.

Ershel C. Redd, Jr. and Scott D. Wilson, each certifies that, to the best of his knowledge:

1. such Report fully complies with the requirements of Section 13(a) of the Exchange Act; and

2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Ershel C. Redd, Jr.

Ershel C. Redd, Jr.

President and Chief Executive

Officer

/s/ Scott D. Wilson

Scott D. Wilson

Executive Vice President, Chief

Financial and Chief Administrative

Officer