<PAGE>
===============================================================================
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 0-296
EL PASO ELECTRIC COMPANY
(Exact name of registrant as specified in its charter)
TEXAS 74-0607870
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
KAYSER CENTER, 100 NORTH STANTON, EL PASO, TEXAS 79901
(Address of principal executive offices) (Zip Code)
(915) 543-5711
(Registrant's telephone number, including area code)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTIONS 12, 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT. YES [X] NO [ ]
AS OF AUGUST 8, 1997, THERE WERE 60,239,236 SHARES OF THE COMPANY'S NO PAR
VALUE COMMON STOCK OUTSTANDING.
===============================================================================
<PAGE>
EL PASO ELECTRIC COMPANY
INDEX TO FORM 10-Q
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - June 30, 1997 and December 31, 1996......... 1
Statements of Operations - Three Months Ended June 30, 1997
and 1996; Six Months Ended June 30, 1997, Period from
February 12 to June 30, 1996 and Period from January 1 to
February 11, 1996............................................ 3
Statements of Accumulated Earnings - Three Months Ended
June 30, 1997 and 1996; Six Months Ended June 30, 1997,
Period from February 12 to June 30, 1996 and Period from
January 1 to February 11, 1996............................... 5
Statements of Cash Flows - Six Months Ended June 30, 1997,
Period from February 12 to June 30, 1996 and Period from
January 1 to February 11, 1996............................... 7
Notes to Financial Statements................................ 8
Report on Review by Independent Certified Public Accountants. 17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................... 28
Item 5. Other Information......................................... 28
Item 6. Exhibits and Reports on Form 8-K.......................... 29
i
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EL PASO ELECTRIC COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS JUNE 30,
(IN THOUSANDS) 1997 DECEMBER 31,
(UNAUDITED) 1996
----------- ------------
<S> <C> <C>
UTILITY PLANT:
Electric plant in service................. $1,516,360 $1,492,737
Less accumulated depreciation and
amortization............................. 121,625 77,976
---------- ----------
Net plant in service.............. 1,394,735 1,414,761
Construction work in progress............. 47,572 44,432
Nuclear fuel; includes fuel in process
of $4,423 and $5,084, respectively....... 70,348 60,014
Less accumulated amortization............. 29,295 18,651
---------- ----------
Net nuclear fuel.................. 41,053 41,363
---------- ----------
Net utility plant......... 1,483,360 1,500,556
---------- ----------
CURRENT ASSETS:
Cash and temporary investments............ 40,271 68,767
Accounts receivable, principally trade,
net of allowance for doubtful accounts
of $6,039 and $6,161, respectively....... 59,205 57,587
Litigation settlement receivable.......... 15,000 -
Federal income tax receivable............. 3,077 20,713
Inventories, at cost...................... 27,681 28,322
Net undercollection of fuel revenues...... 8,764 1,925
Prepayments and other..................... 6,362 8,727
---------- ----------
Total current assets...... 160,360 186,041
---------- ----------
LONG-TERM CONTRACT RECEIVABLE..................... 29,389 31,057
---------- ----------
DEFERRED CHARGES AND OTHER ASSETS:
Accumulated deferred income taxes, net.... 62,057 73,884
Decommissioning trust fund................ 35,795 33,054
Other..................................... 19,599 21,598
---------- ----------
Total deferred charges
and other assets......... 117,451 128,536
---------- ----------
TOTAL ASSETS.............. $1,790,560 $1,846,190
========== ==========
</TABLE>
See accompanying notes to financial statements.
1
<PAGE>
EL PASO ELECTRIC COMPANY
BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
CAPITALIZATION AND LIABILITIES JUNE 30,
(IN THOUSANDS EXCEPT FOR SHARE DATA) 1997 DECEMBER 31,
(UNAUDITED) 1996
----------- ------------
<S> <C> <C>
CAPITALIZATION:
Common stock, stated value $1 per
share, 100,000,000 shares authorized,
60,067,832 and 59,999,981 shares issued
and outstanding; and 171,404
and 180,000 restricted shares,
respectively............................. $ 60,239 $ 60,180
Capital in excess of stated value......... 241,120 240,768
Unearned compensation-restricted stock
awards................................... (975) (758)
Accumulated earnings...................... 43,614 30,835
Net unrealized gain on marketable
securities, less applicable
income tax expense of $74 and $125,
respectively............................. 138 232
---------- ----------
Common stock equity................... 344,136 331,257
Preferred stock, cumulative, no par
value, 2,000,000 shares authorized:
Redemption required-1,146,914 and
1,084,264 shares issued and
outstanding, respectively; at
liquidation preference............... 114,691 108,426
Long-term debt............................ 949,030 1,021,749
Financing and capital lease obligations... 23,812 24,424
---------- ----------
Total capitalization............. 1,431,669 1,485,856
---------- ----------
CURRENT LIABILITIES:
Current maturities of long-term,
financing and capital lease obligations.. 28,407 28,333
Accounts payable, principally trade....... 25,059 37,215
Taxes accrued other than federal income
taxes.................................... 18,297 21,296
Interest accrued.......................... 21,371 23,150
Litigation fees and expenses payable...... 7,500 -
Other..................................... 16,284 15,000
---------- ----------
Total current liabilities........ 116,918 124,994
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES:
Decommissioning........................... 92,231 89,544
Accrued postretirement benefit liability.. 75,376 71,313
Accrued pension liability................. 34,319 34,550
Other..................................... 40,047 39,933
---------- ----------
Total deferred credits and other
liabilities..................... 241,973 235,340
---------- ----------
COMMITMENTS AND CONTINGENCIES
TOTAL CAPITALIZATION AND
LIABILITIES..................... $1,790,560 $1,846,190
========== ==========
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
EL PASO ELECTRIC COMPANY
STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
THREE THREE
MONTHS MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1997 1996
----------- -----------
<S> <C> <C>
OPERATING REVENUES:
Base revenues............................ $ 113,304 $ 116,941
Fuel revenues and economy sales.......... 29,780 26,506
Other.................................... 1,191 941
----------- -----------
144,275 144,388
----------- -----------
OPERATING EXPENSES:
Operation:
Fuel.................................. 25,443 22,493
Purchased and interchanged power...... 5,214 6,816
----------- -----------
30,657 29,309
Other................................. 31,189 30,485
Maintenance.............................. 9,410 8,737
Depreciation and amortization............ 22,098 22,407
Taxes:
Federal income tax expense............ 5,904 4,666
State income tax expense.............. 1,533 1,968
Other................................. 10,876 12,720
----------- -----------
111,667 110,292
----------- -----------
OPERATING INCOME............................ 32,608 34,096
----------- -----------
OTHER INCOME (DEDUCTIONS):
Litigation settlement, net............... 7,500 -
Investment income........................ 1,013 1,402
Other, net............................... 155 (41)
Federal income tax expense applicable
to other income......................... (3,222) (517)
----------- -----------
5,446 844
----------- -----------
INCOME BEFORE INTEREST CHARGES.............. 38,054 34,940
----------- -----------
INTEREST CHARGES (CREDITS):
Interest on long-term debt............... 21,582 25,111
Other interest........................... 1,766 1,751
Interest capitalized and deferred........ (1,539) (1,422)
----------- -----------
21,809 25,440
----------- -----------
INCOME BEFORE EXTRAORDINARY LOSS ON
REPURCHASE OF DEBT......................... 16,245 9,500
EXTRAORDINARY LOSS ON REPURCHASE OF
DEBT, NET OF FEDERAL TAX
INCOME BENEFIT............................. (427) -
----------- -----------
NET INCOME.................................. 15,818 9,500
PREFERRED STOCK DIVIDEND REQUIREMENTS....... 3,238 2,897
----------- -----------
NET INCOME APPLICABLE TO COMMON STOCK....... $ 12,580 $ 6,603
=========== ===========
NET INCOME PER COMMON SHARE:
Income before extraordinary loss on
repurchase of debt...................... $ 0.215 $ 0.110
Extraordinary loss on repurchase of
debt, net of federal income tax
benefit................................. (0.007) -
----------- -----------
Net income........................... $ 0.208 $ 0.110
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES AND COMMON SHARE
EQUIVALENTS OUTSTANDING.................... 60,530,625 60,164,112
=========== ===========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
EL PASO ELECTRIC COMPANY
STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
| PREDECESSOR
REORGANIZED COMPANY | COMPANY
------------------------- | ------------
SIX PERIOD FROM | PERIOD FROM
MONTHS FEBRUARY 12 | JANUARY 1
ENDED TO | TO
JUNE 30, JUNE 30, | FEBRUARY 11,
1997 1996 | 1996
----------- ----------- | ------------
<S> <C> <C> | <C>
OPERATING REVENUES: |
Base revenues........................... $ 216,958 $ 174,701 | $ 44,679
Fuel revenues and economy sales......... 60,740 38,111 | 9,849
Other................................... 2,434 1,483 | 421
----------- ----------- | ------------
280,132 214,295 | 54,949
----------- ----------- | ------------
OPERATING EXPENSES: |
Operation: |
Fuel................................. 53,909 32,840 | 10,125
Purchased and interchanged power..... 8,000 8,177 | 2,282
----------- ----------- | ------------
61,909 41,017 | 12,407
Other................................ 62,153 47,196 | 23,559
Maintenance............................. 18,839 15,462 | 4,743
Depreciation and amortization........... 44,003 34,369 | 6,577
|
Taxes: |
Federal income tax expense (benefit). 8,885 5,267 | (2,700)
State income tax expense (benefit)... 1,772 2,458 | (750)
Other................................ 21,950 19,683 | 6,024
----------- ----------- | ------------
219,511 165,452 | 49,860
----------- ----------- | ------------
OPERATING INCOME........................... 60,621 48,843 | 5,089
----------- ----------- | ------------
OTHER INCOME (DEDUCTIONS): |
Litigation settlement, net.............. 7,500 - | -
Investment income....................... 2,122 2,237 | -
Other, net.............................. (548) (116)| 50
Federal income tax expense |
applicable to other income.......... (3,554) (814)| (35)
----------- ----------- | ------------
5,520 1,307 | 15
----------- ----------- | ------------
INCOME BEFORE INTEREST CHARGES............. 66,141 50,150 | 5,104
----------- ----------- | ------------
INTEREST CHARGES (CREDITS): |
Interest on long-term debt.............. 43,807 38,708 | -
Other interest.......................... 3,386 2,569 | -
Interest during reorganization.......... - - | 9,569
Interest capitalized and deferred....... (2,889) (2,316)| (412)
----------- ----------- | ------------
44,304 38,961 | 9,157
----------- ----------- | ------------
INCOME (LOSS) BEFORE REORGANIZATION |
ITEMS AND EXTRAORDINARY ITEMS............. 21,837 11,189 | (4,053)
REORGANIZATION ITEMS, NET OF INCOME TAX |
BENEFIT................................... - - | 122,251
----------- ----------- | ------------
INCOME BEFORE EXTRAORDINARY ITEMS.......... 21,837 11,189 | 118,198
|
EXTRAORDINARY ITEMS: |
Extraordinary loss on repurchase of |
debt, net of federal |
income tax benefit..................... (2,671) - | -
Extraordinary gain on discharge of debt. - - | 264,273
----------- ----------- | ------------
(2,671) - | 264,273
----------- ----------- | ------------
|
NET INCOME................................. 19,166 11,189 | 382,471
|
PREFERRED STOCK DIVIDEND REQUIREMENTS...... 6,387 4,449 | -
----------- ----------- | ------------
|
NET INCOME APPLICABLE TO COMMON STOCK...... $ 12,779 $ 6,740 | $ 382,471
=========== =========== | ============
|
NET INCOME PER COMMON SHARE: |
Income before extraordinary items........ $ 0.255 $ 0.112 | $ 3.325
Extraordinary loss on repurchase of debt, |
net of federal income tax benefit...... (0.044) - | -
Extraordinary gain on discharge of debt.. - - | 7.435
----------- ----------- | ------------
Net income............................. $ 0.211 $ 0.112 | $ 10.760
=========== =========== | ============
|
WEIGHTED AVERAGE NUMBER OF COMMON |
SHARES AND COMMON |
SHARE EQUIVALENTS OUTSTANDING............. 60,545,886 60,120,226 | 35,544,330
=========== =========== | ============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
EL PASO ELECTRIC COMPANY
STATEMENTS OF ACCUMULATED EARNINGS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE THREE
MONTHS MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1997 1996
-------- ---------
<S> <C> <C>
ACCUMULATED EARNINGS (DEFICIT) AT
BEGINNING OF PERIOD $31,034 $ (125)
ADD:
Net income........................... 15,818 9,500
------- ------
15,818 9,500
------- ------
DEDUCT:
Cumulative preferred stock dividend
requirement......................... 3,238 2,897
Capital stock expense................ - 334
------- ------
3,238 3,231
------- ------
ACCUMULATED EARNINGS AT END OF PERIOD... $43,614 $6,144
======= ======
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
EL PASO ELECTRIC COMPANY
STATEMENTS OF ACCUMULATED EARNINGS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
| PREDECESSOR
REORGANIZED COMPANY | COMPANY
--------------------- | -----------
SIX PERIOD FROM | PERIOD FROM
MONTHS FEBRUARY 12 | JANUARY 1
ENDED TO | TO
JUNE 30, JUNE 30, | FEBRUARY 11,
1997 1996 | 1996
-------- ----------- | -------------
<S> <C> <C> | <C>
ACCUMULATED EARNINGS (DEFICIT) AT BEGINNING OF PERIOD..... $30,835 $ - | $ (758,032)
|
ADD: |
Net income............................................. 19,166 11,189 | 382,471
Elimination of predecessor equity accounts............. - - | 375,561
------- ------- | ------------
19,166 11,189 | 758,032
------- ------- | ------------
DEDUCT: |
Cumulative preferred stock dividend requirement........ 6,387 4,449 | -
Capital stock expense.................................. - 596 | -
------- ------- | ------------
6,387 5,045 | -
------- ------- | ------------
|
ACCUMULATED EARNINGS AT END OF PERIOD..................... $43,614 $ 6,144 | $ -
======= ======= | ============
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
EL PASO ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
| PREDECESSOR
REORGANIZED COMPANY | COMPANY
---------------------- | ---------
SIX PERIOD FROM | PERIOD FROM
MONTHS FEBRUARY 12 | JANUARY 1
ENDED TO | TO
JUNE 30, JUNE 30, | FEBRUARY 11,
1997 1996 | 1996
-------- -------- | ---------
<S> <C> <C> | <C>
CASH FLOWS FROM OPERATING ACTIVITIES: |
Net income..................................................... $ 19,166 $ 11,189 | $ 382,471
Adjustments to reconcile net income to net cash |
provided by operating activities: |
Depreciation and amortization.......................... 55,336 42,247 | 8,246
Deferred income taxes and investment tax credit, |
net.................................................. 13,316 7,622 | (3,116)
Reorganization items, net of income tax benefit........ - - | (122,251)
Extraordinary loss on repurchase of |
debt, net of federal income tax benefit............... 2,671 - | -
Extraordinary gain on discharge of debt................ - - | (264,273)
Other operating activities............................. 1,215 1,071 | (805)
Change in: |
Accounts receivable.................................... (1,618) (6,026) | 5,429
Federal income tax receivable.......................... 17,636 - | -
Litigation settlement receivable, net.................. (7,500) - | -
Inventories............................................ 641 (203) | 90
Prepayments and other.................................. 2,365 (1,502) | 34
Long-term contract receivable.......................... 1,668 996 | 293
Obligations subject to compromise...................... - - | 9,430
Accounts payable....................................... (12,156) (6,842) | (6,859)
Interest accrued....................................... (1,779) 23,768 | -
Net under/overcollection of fuel revenues.............. (6,839) (2,480) | 417
Revenues subject to refund............................. - - | 2,785
Other current liabilities.............................. (1,639) (3,457) | (152)
Deferred charges and credits........................... 6,382 2,303 | 1,994
-------- -------- | ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES...... 88,865 68,686 | 13,733
-------- -------- | ---------
|
CASH FLOWS FROM INVESTING ACTIVITIES (NOTE A): |
Additions to utility plant..................................... (38,126) (22,983) | (8,231)
Investment in decommissioning trust fund....................... (2,886) (3,355) | (553)
Other investing activities..................................... 172 (266) | 55
-------- -------- | ---------
NET CASH USED FOR INVESTING ACTIVITIES......... (40,840) (26,604) | (8,729)
-------- -------- | ---------
|
CASH FLOWS FROM FINANCING ACTIVITIES (NOTE A): |
Repurchase of long-term debt................................... (75,942) (8,844) | -
Principal payments on long-term note payable................... (188) - | -
Proceeds from financing and capital lease obligations.......... 10,334 7,393 | 43,309
Redemption of financing and capital lease obligations.......... (10,725) (2,950) | -
Capital stock expense.......................................... - (596) | -
Proceeds from issuance of preferred stock...................... - - | 97,500
Proceeds from issuance of long-term debt....................... - - | 778,120
Redemption of obligations subject to compromise................ - - | (1,131,695)
-------- -------- | ---------
NET CASH USED FOR FINANCING ACTIVITIES......... (76,521) (4,997) | (212,766)
-------- -------- | ---------
|
NET (DECREASE) INCREASE IN CASH AND TEMPORARY INVESTMENTS.............. (28,496) 37,085 | (207,762)
|
CASH AND TEMPORARY INVESTMENTS AT BEGINNING OF PERIOD.................. 68,767 54,745 | 262,507
-------- -------- | ---------
CASH AND TEMPORARY INVESTMENTS AT END OF PERIOD........................ $ 40,271 $ 91,830 | $ 54,745
======== ======== | =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
Cash (refunded) paid for: |
Income taxes, net...................................... $(17,035) $ 353 | $ -
Interest............................................... 39,781 11,078 | 8,580
Reorganization items - professional |
fees and other........................................ 2,370 4,191 | 2,279
======== ======== | =========
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
A. PRINCIPLES OF PREPARATION
Pursuant to the rules and regulations of the Securities and Exchange
Commission, certain financial information has been condensed and certain
footnote disclosures have been omitted. Such information and disclosures are
normally included in financial statements prepared in accordance with generally
accepted accounting principles.
These condensed financial statements should be read in conjunction with the
financial statements and notes thereto in the Annual Report of El Paso Electric
Company (the "Company") on Form 10-K for the year ended December 31, 1996 (the
"1996 Form 10-K"). Capitalized terms used in this report and not defined herein
have the meaning ascribed for such terms in the 1996 Form 10-K. In the opinion
of management of the Company, the accompanying financial statements contain all
adjustments necessary to present fairly the financial position of the Company at
June 30, 1997, and the results of operations for the three months ended June 30,
1997 and 1996, and for the six months ended June 30, 1997 and for the period
from February 12 to June 30, 1996 and for the period January 1 to February 11,
1996, and cash flows for the six months ended June 30, 1997 and for the period
from February 12 to June 30, 1996 and for the period January 1 to February 11,
1996. The results of operations for the six months ended June 30, 1997 are not
necessarily indicative of the results to be expected for the full year.
FRESH-START REPORTING
On January 8, 1992, El Paso Electric Company (the "Predecessor Company")
filed a voluntary petition for reorganization under Chapter 11 of the United
States Bankruptcy Code in the United States Bankruptcy Court for the Western
District of Texas, Austin Division (the "Bankruptcy Court"). The Bankruptcy
Court entered an order dated January 9, 1996 confirming the Company's Fourth
Amended Plan of Reorganization (the "Plan"). On February 12, 1996, the Plan
became effective (the "Effective Date") and the Company emerged from bankruptcy
(the "Reorganization") as an independent investor-owned utility (the
"Reorganized Company" or the "Company").
In connection with the Reorganization, the Company adopted fresh-start
reporting in accordance with the requirements of Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code"
("SOP 90-7"). The application of SOP 90-7 resulted in the creation of a new
reporting entity having no retained earnings or accumulated deficit.
Accordingly, the financial statements of the Reorganized Company for post-
bankruptcy periods, which reflect the application of fresh-start reporting, are
not comparable to the financial statements of the Predecessor Company. A
vertical line is shown in the financial statements to separate the Reorganized
Company from the Predecessor Company since the financial statements have not
been prepared on a consistent basis of accounting.
8
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Reorganization items, net of income tax benefit, recorded by the Predecessor
Company consisted of the following (In thousands):
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1
TO
FEBRUARY 11,
1996
------------
<S> <C>
Adjustments of assets and liabilities to fair value............... $(92,013)
Rate Stipulation.................................................. 71,579
Provisions for settlement of claims............................... (34,317)
Deferred income tax benefit related to Reorganization............. 190,393
Professional fees and other expenses.............................. (14,348)
Interest earned on accumulated cash resulting from
Bankruptcy Case, net of income tax expense..................... 957
--------
$122,251
========
</TABLE>
NON-CASH INVESTING AND FINANCING
Non-cash investing and financing activities recorded by the Company consisted
of the following (In thousands):
<TABLE>
<CAPTION>
| PREDECESSOR
REORGANIZED COMPANY | COMPANY
-------------------- | -----------
SIX PERIOD FROM | PERIOD FROM
MONTHS FEBRUARY 12 | JANUARY 1
ENDED TO | TO
JUNE 30, JUNE 30, | FEBRUARY 11,
1997 1996 | 1996
-------- ----------- | ------------
<S> <C> <C> | <C>
Issuance of Preferred Stock for |
pay-in-kind dividend...................... $6,265 $ - | $ -
Issuance of restricted shares of |
Common Stock.............................. 411 948 | -
Reorganized Common Stock exchanged |
for Predecessor Common and |
Preferred Stock........................... - - | 45,000
Reorganized Common Stock exchanged |
for settlement of obligations subject |
to compromise............................. - - | 255,000
Long-term debt exchanged for settlement |
of obligations subject to compromise...... - - | 151,834
Plant in service reacquired through |
incurring obligation subject to |
compromise................................ - - | 227,656
</TABLE>
9
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
B. RATE MATTERS
For a full discussion of the Company's rate matters, see Note C of Notes to
Financial Statements in the 1996 Form 10-K.
General. The electric utility industry faces increasing pressure to become
more competitive as legislative, regulatory, economic and technological changes
occur. Federal regulation, as well as legislative and regulatory initiatives in
various states, including Texas and New Mexico, encourages competition for
electricity generation among electric utility and non-utility power producers.
Together with increasing customer demand for lower-priced electricity and other
energy services, these measures have accelerated the industry's movement toward
more competitive pricing and cost structures. Such competitive pressures could
require the Company to reduce its rates, result in the loss of customers and
diminish the ability of the Company to fully recover both its investment in
generation assets and the cost of operating these assets. This issue is
particularly important to the Company because its rates are higher than national
and regional averages. In the face of increased competition, there can be no
assurance that such competition will not adversely affect the future operations,
cash flows and financial condition of the Company, or that the Company will be
able to sustain current retail rates.
Of particular importance to the Company is the issue of the recoverability
from customers of "stranded costs," or costs previously found by regulatory
authorities to be reasonable and prudent, but which are higher than would be
recovered under immediate, full competition. Throughout the industry, and at
the federal and state levels, there is substantial discussion and debate on this
issue, but no consensus solution has yet emerged. At the federal level, the
Federal Energy Regulatory Commission ("FERC") has announced, through a formal
rulemaking, its intention to allow 100% recovery of all legitimate verifiable
stranded costs attributable to FERC jurisdictional customers. Regulatory
initiatives in Texas and New Mexico are attempting to address the issue of
stranded cost recovery within each jurisdiction. Although the issues of
competition and stranded costs were considered in the Texas and New Mexico 1997
legislative sessions, no definitive action was taken in either state. The Texas
Legislature is not expected to meet again until January 1999; the New Mexico
Legislature reconvenes in January 1998.
FERC. In April 1996, the FERC issued its Order No. 888, Promoting Wholesale
Competition Through Open Access Non-Discriminatory Transmission Services by
Public Utilities; Recovery of Stranded Costs by Public Utilities and
Transmitting Utilities (clarified on rehearing in Order No. 888A in March 1997)
(together, "Order No. 888/A"). Order No. 888/A requires all public utilities
owning, operating or controlling facilities used for transmitting electricity in
interstate commerce to (i) file open access transmission tariffs containing
minimum terms and conditions of non-discriminatory transmission service and (ii)
take transmission service (including ancillary services) for their own new
wholesale sales and purchases of electric energy under the open access tariffs.
Additionally, Order No. 888/A permits public utilities to seek recovery of
legitimate, prudent and verifiable stranded costs and provides a mechanism for
the recovery of such costs. With respect to existing wholesale power customers
and new municipally-owned utilities becoming transmission-only customers as a
result of obtaining open access transmission, Order No. 888/A provides for
recovery of
10
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
stranded costs if the utility had a reasonable expectation of continuing to
provide service to the departing customer. Order No. 888/A establishes criteria
under which stranded costs will be evaluated for wholesale contracts entered
into prior to July 11, 1994, and for stranded costs resulting from the formation
of new municipal utilities. Recovery of stranded costs under wholesale
contracts entered into after July 10, 1994, will be governed by the terms of
those contracts.
In April 1996, the FERC also issued Order No. 889, Open Access Same-Time
Information System (formerly Real-Time Information Networks) and Standards of
Conduct (clarified on rehearing in Order No. 889A in March 1997) (together,
"Order No. 889/A"). Order No. 889/A requires all public utilities owning,
operating or controlling facilities used for transmitting electricity in
interstate commerce to develop and maintain an Open Access Same-Time Information
System that will give existing and potential transmission users access to
transmission related information on a basis consistent with that available to a
utility's employees engaged in the buying and selling of power. Order No. 889/A
further requires public utilities to separate their transmission and generation
marketing functions and communications and adopt standards of conduct ensuring
that all open access transmission customers are treated in a non-discriminatory
manner.
In July 1996, the Company filed its open access transmission tariffs (Docket
No. 0A96-200-000) in compliance with Order No. 888/A, covering network and
point-to-point transmission services and the six specifically required ancillary
services. Several parties, including the City of Las Cruces, other utilities
and several wholesale power marketers intervened and filed protests to the
Company's tariffs. Issues raised by the intervenors included rates and the
terms and conditions of the Company's tariffs, including the treatment and costs
related to certain facilities making access to the Comision Federal de
Electricidad de Mexico ("CFE") more available to parties other than the Company.
In February 1997, the Company entered into a stipulated agreement among the
various parties settling all rate issues related to this proceeding. Under the
settlement the Company will provide transmission service, to the extent
transmission capacity is available, to any party for firm or interruptible
service to the CFE until the earlier of the end of 1998 or the date the FERC
rules on the previous complaint filed by Enron requesting service to Mexico.
Intervenors in this proceeding have also raised certain issues relating to the
criteria by which the Company will determine the amount of transmission capacity
that is available for use by third parties desiring to use its transmission
system. Pursuant to a procedural schedule adopted in July 1997, an evidentiary
hearing on these issues is to be held before a FERC administrative law judge in
January 1998.
Texas. In 1996, the Public Utility Commission of Texas (the "Texas
Commission") adopted a rule governing intrastate wholesale transmission access.
Although the Texas Commission does not have jurisdiction over the Company's
wholesale transactions, the rule requires the Company to file its FERC-approved
open access transmission tariffs with the Texas Commission.
During 1996, the Texas Commission conducted projects to evaluate the (i)
scope of competition in the electric industry in Texas and (ii) potential for
stranded investment, procedures for allocating stranded costs and acceptable
methods of stranded cost recovery. The Texas Commission's report consolidating
the two projects was issued in January 1997. While it recommended a careful and
deliberate approach to continued expansion of competition in the Texas electric
market, ultimately leading to retail competition with certain
11
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
safeguards, it also recommended against any legislation that would introduce
broad based retail competition before 2000. The Texas Commission quantified the
Company's potential "excess of cost over market" ("ECOM") at Texas retail levels
under several scenarios, and estimated retail ECOM ranging from a high of $1.3
billion to a low of $781 million, with an expected value of $1.1 billion,
assuming full retail access in 1998. Although several pieces of legislation
were offered, the 1997 Texas legislative session adjourned without passing any
significant deregulation legislation. The Company expects a legislative
initiative during the next session in January 1999, but cannot predict the
result of any such initiative.
New Mexico. The New Mexico Public Utility Commission (the "New Mexico
Commission") initiated a notice of inquiry regarding competition and the
restructuring of regulation of the electric industry in 1996. The New Mexico
Commission received comments from numerous parties representing various
interests and conducted workshops in an attempt to arrive at a consensus with
respect to the need for regulatory change, the nature of such change and the
timing/transition of any changes. No consensus has yet been reached by the
participants, but, the New Mexico Commission has commenced a collaborative
process with the assistance of mediators to attempt to reach consensus by
September 15, 1997. With respect to the calculation of stranded costs, the New
Mexico Commission utilized several methodologies, one of which was the same ECOM
model that was developed for Texas. The New Mexico Commission's ECOM
calculation ranged from a high of $248 million to a low of $173 million, but the
Company's calculation of stranded costs for New Mexico pursuant to FERC Order
No. 888/A, totals $364 million. Although the 1997 New Mexico legislative
session adjourned without passing any significant legislation dealing with
industry deregulation, the Company expects legislative initiatives in this area
during the 1998 session.
The New Mexico Commission in response to complaints filed by two customers
docketed an investigation into the Company's current rates and ordered the
Company to file data to support its current rates. In March 1997, the Company
filed the data requested. The filing showed that the Company had a rate
deficiency of approximately $8.6 million dollars, although the Company did not
request a rate increase.
In May 1997, in response to a motion by Public Service Company of New Mexico
("PNM") in the restructuring inquiry, the New Mexico Commission agreed to stay
the Company's and PNM's pending rate cases in return for an agreement of all
interested parties to reopen discussions using a mediated collaborative process
to attempt a consensus resolution of all competition issues. The collaborative
process is scheduled to terminate by September 15, 1997. If the collaborative
process is not successful, the New Mexico Commission has ordered a resumption of
the Company's rate case on October 1, 1997. At this time, however, the Company
cannot predict the possibility of a consensus resolution or the contents of any
such resolution.
The Company filed an application to increase its 1997 New Mexico fixed fuel
factor to $0.01949 per KWH from $0.01283. The New Mexico Commission Staff has
contested that portion of the proposed fuel factor which covers the Company's
1997 forecasted fuel cost and recommended that the New Mexico Commission review
the Company's fuel procurement practices. The Staff did not contest the
Company's termination of the refund for the 1995 fixed fuel cost overcollection
or the Company's collection of the underrecovery of fuel costs for 1996. The
Staff subsequently recommended that the New Mexico Commission allow the
Company's proposed fixed fuel factor to become effective on or before August 1,
1997 and docket a review of the Company's fuel procurement practice. On August
1, 1997 the New Mexico Commission allowed the Company's proposed fuel factor to
become effective and ordered the Company to file testimony supporting continued
use of its methodology and manner of collecting purchased power and fuel costs
contained in its tariffs by October 31, 1997.
C. COMMITMENTS AND CONTINGENCIES
For a full discussion of commitments and contingencies, including
environmental matters related to the Company, see Note J of Notes to Financial
Statements in the 1996 Form 10-K. In addition, see Note E of Notes to Financial
Statements in the 1996 Form 10-K regarding matters related to Palo Verde,
including liability and insurance matters, decommissioning and operation of
steam generators.
12
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
D. LITIGATION
For a full discussion of litigation, see Note K of Notes to Financial
Statements in the 1996 Form 10-K.
LITIGATION WITH CENTRAL AND SOUTH WEST CORPORATION
In May 1993, the Company entered into an Agreement and Plan of Merger (the
"Merger Agreement"), pursuant to which the Company would have been acquired by
Central and South West Corporation ("CSW"). In June 1995, CSW terminated the
Merger Agreement. In response, the Company initiated litigation against CSW
alleging, among other claims, breach of contract, and seeking an unspecified
amount of damages, punitive damages, attorneys' fees and costs. CSW filed an
adversary proceeding against the Company in the Bankruptcy Court seeking the
recovery of termination fees of $25 million, approximately $3.7 million in
attorneys' fees and expenses, and $25 million for an alleged violation of the
Merger Agreement. All claims were tried in the Bankruptcy Court and in April
1997 the judge ruled in the Company's favor finding that CSW owed the Company
$25 million in termination fees. Left pending was the Company's claim for
approximately $18 million for reimbursement of interest expense paid to
creditors, which CSW had agreed to pay under the Merger Agreement. The matter
was settled by agreement of the parties in July 1997, with CSW agreeing to pay a
total of $35 million. Pursuant to the terms of the Company's Fourth Amended
Plan of Reorganization, the first $20 million in proceeds from this litigation
was paid by CSW directly to the agent for the holders of the Predecessor
Company's preferred stock and common stock as of February 12, 1996. The balance
of $15 million was paid to the Company which, after the payment of fees and
expenses, realized a pre-tax benefit of $7.5 million.
LITIGATION WITH LAS CRUCES
The City of Las Cruces, New Mexico is attempting to replace the Company as
its electric service provider by acquiring, through condemnation or otherwise,
the distribution assets and other facilities used to provide electric service to
customers in Las Cruces. Sales to customers in Las Cruces represented
approximately 7% of the Company's operating revenues in the first half of 1997.
Las Cruces filed two actions against the Company, one to recover franchise fees
and one seeking a declaratory judgment that Las Cruces can proceed with a
condemnation action against the Company. After the latter case was filed, the
New Mexico legislature passed a bill in March 1997 which purports to authorize
Las Cruces to proceed with the condemnation.
Las Cruces filed the franchise fee action in federal district court in New
Mexico in 1995, seeking the reasonable value of the Company's use, occupation
and rental of Las Cruces' rights-of-way or damages for trespass and an
unspecified amount of punitive damages. In June 1997, after disposing of
various procedural and substantive issues and after a trial on the merits, the
court rendered judgment in favor of Las Cruces, ordering the Company to pay $2.5
million in back franchise fees and judgment interest. The Company has reserved
in its financial statements an amount equal to the franchise fees under the
expired agreement and the related interest.
13
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
In April 1995, Las Cruces filed a complaint against the Company in the
District Court for Dona Ana County, New Mexico, seeking a declaratory judgment
that Las Cruces has a right of eminent domain to condemn the electric
distribution system and related facilities owned and operated by the Company
within and adjacent to the city limits that provide or assist in the provision
of electricity within the municipal boundaries of Las Cruces. In May 1995, the
Company removed the case to federal district court in New Mexico. Following a
trial on the merits, the Federal Magistrate granted the Company's motion to
certify to the New Mexico Supreme Court the question as to whether Las Cruces
possesses the authority to condemn the Company's property for use as a municipal
utility when that property is already devoted to public use. The New Mexico
Supreme Court heard oral arguments in February 1997, but prior to issuing a
ruling, the New Mexico legislature enacted a bill which purports to give Las
Cruces the authority to condemn the Company's distribution system within its
city limits and a territory extending five miles beyond the municipal boundary.
The New Mexico Supreme Court has subsequently requested that the parties submit
to the court briefs on the impact this new legislation will have on the case.
The Company believes that the new legislation does not render the case moot and
has requested that the court rule on the issues presented to it in the February
1997 hearing.
If Las Cruces succeeds in its efforts to condemn the Company's distribution
system, the Company could lose its Las Cruces customer base, although the
Company would be entitled to receive "just compensation" as established by the
court under New Mexico law. "Just compensation" is generally defined as the
amount of money that would fairly compensate the party whose property is
condemned. In the Company's case, this amount would be the difference between
the value of the Company's entire system prior to the taking, as compared to the
value of the entire system after the taking. In any successful condemnation by
Las Cruces, the Company also would be entitled to recover, pursuant to Order No.
888/A, the stranded cost associated with the loss of its distribution system as
determined by the FERC, to the extent such cost is in excess of "just
compensation."
Las Cruces has taken several actions to position itself to acquire portions
of the Company's distribution system and certain related facilities. In August
1994, Southwestern Public Service Company ("SPS") and Las Cruces entered into a
fifteen-year contract granting SPS the right to provide all of the electric
power and energy required by Las Cruces during the term of the contract. In
addition, Las Cruces sold approximately $73 million in revenue bonds in October
1995 to provide funding to finance the acquisition by condemnation or negotiated
purchase of the Company's electrical distribution assets within and adjacent to
the Las Cruces city limits.
The Company filed a lawsuit in the Dona Ana County District Court and is
pursuing a complaint simultaneously before the New Mexico Commission challenging
the legality of the sale of the revenue bonds. In addition, the New Mexico
Commission is investigating the agreement between SPS and Las Cruces which,
under certain circumstances, would grant Las Cruces an option to sell electric
utility assets acquired through condemnation to SPS. In August 1996, the Dona
Ana County District Court issued an opinion letter stating that Section 3-23-3
of the New Mexico Municipal Code is inapplicable to home rule municipalities and
Las Cruces, therefore, was not required to acquire the New Mexico Commission's
approval before issuing revenue bonds to acquire utility property. However, the
court did agree with the
14
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Company that the revenue bonds, in this case backed by utility revenues, are
subject to the same requirements as those imposed on other revenue bonds backed
by gross receipts tax revenues. Therefore, if the court's finding on the
applicability of Las Cruces' home rule authority is overturned on appeal, the
Company's position that the issuance of the bonds required prior approval could
be upheld. The court's order was signed and entered in November 1996. The
Company has filed an appeal with the New Mexico Court of Appeals. The City has
requested an expedited ruling from the Court of Appeals. A final ruling by the
Court of Appeals is subject to appeal to the New Mexico Supreme Court.
In April 1997, Las Cruces announced its plan to build a substation and
distribution lines to serve a new customer in a city-owned industrial park. Las
Cruces stated that SPS would construct, operate and maintain the new substation
facility, and that the rates for this new customer would be significantly lower
than the Company's current rates. In that regard, Las Cruces has approved a
contract with SPS to provide operation and maintenance services for the proposed
Las Cruces electric distribution system, substations and associated transmission
facilities. In May 1997, the Company filed a complaint with the New Mexico
Commission alleging that the participation of SPS in this project without first
obtaining a Certificate of Convenience and Necessity ("CCN") from the New Mexico
Commission violates New Mexico law. In June 1997, the New Mexico Commission
rejected the Company's complaint and ruled that SPS' participation in this
project is part of an agency relationship with Las Cruces and, therefore, not
subject to the New Mexico Commission's jurisdiction.
Las Cruces previously filed a request at the FERC for a determination that
Las Cruces would have no stranded cost obligation to the Company in the event
the city leaves the Company's system and operates its own municipal utility.
The Company calculated Las Cruces' stranded cost obligation to be approximately
$234 million. In August 1997, the FERC issued an order providing for the
conduct of evidentiary hearings on the following stranded cost issues: (i)
whether the Company has met the reasonable expectation standard so as to justify
recovery of stranded costs from Las Cruces; and (ii) if so, the amount of
stranded costs that the Company may recover from Las Cruces. An administrative
law judge is scheduled to convene a conference on August 13, 1997 for the
purpose of establishing a procedural schedule for the submission of testimony in
connection with the evidentiary hearing.
In December 1996, SPS filed a request at the FERC for an order finding that
its application to the Company for point-to-point transmission service to
deliver electricity to Las Cruces was in conformance with FERC requirements. In
July 1997, the FERC granted that request and ordered the Company to respond to
SPS's request for firm point-to-point transmission service under the Company's
open access transmission tariff within 30 days of the date of that order.
The Company continues to believe that it can provide lower cost electric
service to customers in Las Cruces than can be achieved through a municipal
takeover. Accordingly, the Company has stated its strong preference for a
resolution of its differences with Las Cruces through negotiation rather than
litigation and condemnation. Any negotiated settlement in New Mexico could
include an agreement by the Company to reduce its rates as part of an overall
settlement of all issues in New Mexico, which could create increased political
and economic pressure on the Company to reduce rates in Texas.
15
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
The Company is unable to predict the outcome of Las Cruces' efforts to
replace the Company as its electric service provider or the effects it may have
on the Company's financial position, results of operations and cash flows. The
Company does not believe it is probable that a loss has been incurred and,
therefore, has made no provision in the accompanying financial statements
related to these matters.
16
<PAGE>
Independent Auditors' Review Report
-----------------------------------
The Shareholders and the Board of Directors
El Paso Electric Company:
We have reviewed the accompanying condensed balance sheet of El Paso Electric
Company (the Company) as of June 30, 1997, the related condensed statements of
operations and accumulated earnings for the three months ended June 30, 1997 and
1996, for the six months ended June 30, 1997, and for the period from February
12, 1996 to June 30, 1996, and the related condensed statements of cash flows
for the six months ended June 30, 1997 and for the period from February 12, 1996
to June 30, 1996. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical review procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of El Paso Electric Company as of December 31,
1996, and the related statements of operations, accumulated earnings (deficit),
and cash flows for the period February 12, 1996 to December 31, 1996, and the
period January 1, 1996 to February 11, 1996 (not presented herein); and in our
report dated March 27, 1997, we expressed an unqualified opinion on those
financial statements. In our opinion, the information set forth in the
accompanying condensed balance sheet as of December 31, 1996 and in the
condensed statements of operations, accumulated earnings (deficit), and cash
flows for the period January 1, 1996 to February 11, 1996, is fairly presented,
in all material respects, in relation to the financial statements from which it
has been derived.
As discussed in Note A of Notes to Financial Statements, on February 12, 1996,
the Company emerged from bankruptcy. The financial statements of the
reorganized Company reflect assets at reorganization value and liabilities at
fair value under fresh-start reporting as of February 12, 1996. As a result,
the financial statements of the reorganized Company are presented on a different
basis than those prior to the reorganization and, therefore, are not comparable
in all respects.
KPMG Peat Marwick LLP
El Paso, Texas
July 23, 1997
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in this Item 2 updates and should be read in
conjunction with the information set forth in Part II, Item 7 in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996 (the "1996 Form
10-K"). Capitalized terms used in this report and not defined herein have the
meaning ascribed for such terms in the 1996 Form 10-K.
Statements in this document, other than statements of historical
information, are forward-looking statements that are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995 (the
"1995 Act"). Such forward-looking statements, as well as other oral and written
forward-looking statements made by or on behalf of the Company from time to
time, including statements contained in the Company's filings with the
Securities and Exchange Commission and its reports to stockholders, involve
known and unknown risks and other factors which may cause the Company's actual
results in future periods to differ materially from those expressed in any
forward-looking statements. Any such statement is qualified by reference to the
risks and factors discussed below under the headings "Operational and Regulatory
Prospects and Challenges" and "Liquidity and Capital Resources" and in the
Company's filings with the Securities and Exchange Commission, which are
available from the Securities and Exchange Commission or which may be obtained
upon request from the Company. The Company cautions that the foregoing list of
important factors is not exclusive. The Company does not undertake to update any
forward-looking statement that may be made from time to time by or on behalf of
the Company.
OPERATIONAL AND REGULATORY PROSPECTS AND CHALLENGES
OPERATIONAL
The electric utility industry faces increasing pressure to become more
competitive as legislative, regulatory, economic and technological changes
occur. Federal regulation, as well as legislative and regulatory initiatives in
various states, including Texas and New Mexico, encourages competition in the
Company's service area for electricity generation among electric utility and
non-utility power producers. Together with increasing customer demand for lower-
priced electricity and other energy services, these measures have accelerated
the industry's movement toward more competitive pricing and cost structures.
Such competitive pressures could require the Company to reduce its rates, result
in the loss of customers and diminish the ability of the Company to fully
recover both its investment in generation assets and the cost of operating these
assets. This issue is particularly important to the Company because its rates
are higher than national and regional averages. In the face of increased
competition, there can be no assurance that such competition will not adversely
affect the future operations, cash flows and financial condition of the Company,
or that the Company will be able to sustain current retail rates.
Although the Rate Stipulation provides a certain level of stability in
the rates that the Company currently charges the majority of its customers,
political and economic forces may create downward pressures on the Company's
rates. Any negotiated settlement in New Mexico could include an agreement by the
Company to reduce its rates as part of an overall settlement of all issues in
New Mexico, which could create increased political and economic pressure on the
Company to reduce rates in Texas. Nonetheless, the Company intends to enhance
its position during the Freeze Period by (i) serving the growing need for
electricity within its retail service territory; (ii) continuing to focus on its
strategic location on the border with Mexico; (iii) executing long-term
contracts to provide electricity to its largest retail customers; and (iv)
controlling and reducing operating costs.
The Company faces a number of challenges which could negatively impact
its operations during the Freeze Period. An important challenge is the risk of
increased costs, including the risk of additional or unanticipated costs at Palo
Verde resulting from (i) increases in operation and maintenance expenses; (ii)
the
18
<PAGE>
potential replacement of steam generators; (iii) an extended outage of any of
the Palo Verde units; (iv) increases in estimates of decommissioning costs; (v)
the storage of radioactive materials; and (vi) compliance with the various
requirements and regulations governing commercial nuclear generating stations.
There can be no assurance that the Company's revenues will be sufficient to
recover any increased costs incurred during the Freeze Period, including any
such increased costs in connection with Palo Verde or increases in other costs
of operation, whether as a result of higher than anticipated levels of
inflation, changes in tax laws or regulatory requirements, or other causes.
Another risk to the Company's operations is the potential loss of
customers. The Company's wholesale and large retail customers currently have, in
varying degrees, and, in the future may have, alternate sources of economical
power, including co-generation of electric power. If the Company loses a
significant portion of its retail customer base or wholesale sales, the Company
may not be able to replace such revenues through either the addition of new
customers or an increase in rates to remaining customers. Las Cruces continues
its efforts to replace the Company as its electric service provider. The New
Mexico legislature has recently passed legislation which gives Las Cruces the
authority to condemn the Company's distribution system and related assets
located within its city limits and a territory extending five miles beyond the
municipal boundary. If Las Cruces succeeds in its efforts to condemn the
Company's distribution system, the Company could lose its Las Cruces customer
base, although the Company would be entitled to receive "just compensation" as
established by the court under New Mexico law and may be entitled to stranded
cost recovery from the FERC. In the Company's case, this amount would be the
difference between the value of the Company's entire system prior to the taking,
as compared to the value of the entire system after the taking. In any
successful condemnation by Las Cruces, the Company also would be eligible to
receive, pursuant to Order No. 888/A, the stranded cost associated with the loss
of its distribution system to the extent such cost is in excess of "just
compensation."
Additionally, Texas-New Mexico Power Company ("TNP") has filed an
application to obtain a CCN from the New Mexico Commission to serve customers
within the Company's New Mexico service territory near the New Mexico, Texas and
Mexico borders. The Company has intervened in the proceeding, challenging TNP's
CCN application. Hearings on the application are scheduled to commence in
September 1997. If TNP's application is approved, the Company might lose the
ability to serve the future anticipated retail growth in the area. Further,
there are state and federal legislative initiatives related to deregulation
which would provide the Company's customers an opportunity to choose an
alternative power supplier. These initiatives could adversely affect the
Company's revenues and financial condition.
In recent years, the United States has closed a large number of
military bases and there can be no assurance that Holloman Air Force Base
("Holloman"), White Sands Missile Range ("White Sands") or the United States
Army Air Defense Center at Fort Bliss ("Ft. Bliss") will not be closed in the
future or that the Company will not lose all or some of its military base sales.
The Company's sales to the military bases represented approximately $10.0
million or 4% of operating revenues for the six months ended June 30, 1997. The
Company signed a new contract with Ft. Bliss in August 1996, which provides that
Ft. Bliss will take service from the Company through 1999, with the right
thereafter to continue service for two years on a year to year basis. The
Company has a contract for service to Holloman for a ten-year term beginning in
December 1995. In August 1996, the Army advised the Company that White Sands
would continue to purchase retail electric service from the Company until
written termination of such contract by the Army not less than one year in
advance of the termination date.
19
<PAGE>
REGULATORY
Seasonal volatility in fuel prices may increase concern among the
Company's customers and regulators over price levels for energy, including
electricity. The Company's recovery of fuel expense is subject to challenges
regarding reasonableness and prudence through periodic fuel reconciliation
proceedings. During the period from January 1 through June 30, 1997, the Company
billed to its Texas and New Mexico customers approximately $3.6 million and $2.9
million, respectively, less than the actual cost of fuel used in its electric
generating activities. As of June 30, 1997, the Company had a net undercollected
balance of approximately $8.8 million which consists of $4.9 million in New
Mexico and $4.4 million in Texas and an overcollected balance from FERC
jurisdictional customers of $0.5 million. The Company is also entitled to a
reward of approximately $0.6 million in its Texas jurisdiction (related to the
performance of Palo Verde) which is not reflected in the Company's financial
statements.
The Company does not currently have an agreement with New Mexico
regulatory authorities or parties to past New Mexico regulatory proceedings
comparable to the Rate Stipulation. Pursuant to an order from the New Mexico
Commission, the Company filed data to support its current level of rates with
the Commission in March 1997. Although the Company's filing demonstrates a
revenue deficiency of approximately $8.6 million under current rates, the
Company did not request a rate change to recover the deficiency. The New Mexico
Commission may attempt to impose a rate reduction on the Company or,
alternatively, in response to regulatory, political and competitive pressures,
the Company may agree to a rate reduction as part of an overall settlement of
all issues in New Mexico. The Company is unable at this time to predict with
certainty the outcome of the proceeding currently pending before the New Mexico
Commission.
The Company filed an application to increase its 1997 New Mexico fixed
fuel factor to $0.01949 per KWH from $0.01283. The New Mexico Commission Staff
has contested that portion of the proposed fuel factor which covers the
Company's 1997 forecasted fuel cost and recommended that the New Mexico
Commission review the Company's fuel procurement practices. The Staff did not
contest the Company's termination of the refund for the 1995 fixed fuel cost
overcollection or the Company's collection of the underrecovery of fuel costs
for 1996. On August 1, 1997, the New Mexico Commission ordered the
implementation of the Company's new fuel factor and ordered the Company to file
testimony and evidence to support its continued use of its methodology and
manner of collecting purchased power and fuel costs contained in its tariffs by
October 31, 1997.
Finally, the electric utility industry in general is facing significant
challenges and increased competition as a result of changes in federal
provisions relating to third-party transmission services and independent power
production, as well as potential changes in state law and regulatory provisions
relating to wholesale and retail service. Both the Texas and New Mexico
Commissions are conducting proceedings related to industry restructuring and
stranded cost recovery. The Company cannot predict the outcome of these
proceedings. The potential effects of deregulation are particularly important to
the Company because its rates are higher than national and regional averages. In
the face of increased competition, there can be no assurance that such
competition will not adversely affect the level of current retail rates or
future operations, cash flow and financial condition of the Company.
20
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity requirements through the end of the
decade are expected to consist of the payment of interest on the Company's
indebtedness and capital expenditures related to the Company's generating
facilities and transmission and distribution systems. Even with possible rate
decreases, the Company expects that cash flows from operations will be
sufficient for such purposes.
Long-term capital requirements of the Company will consist primarily of
maintenance and construction of electric utility plant, payment of interest on
and retirement of debt and payment of dividends on and redemption of preferred
stock. The Company has no current plans to construct any new generating capacity
through at least 2004. Utility construction expenditures will consist primarily
of expanding and updating the transmission and distribution systems and the cost
of betterments and improvements to Palo Verde and other generating facilities.
The Company anticipates that internally generated funds will be
sufficient to meet its construction requirements, provide for the retirement of
debt at maturity and enable the Company to meet other contingencies that may
exist, such as compliance with environmental regulation, pending litigation and
any claims for indemnification. At June 30, 1997, the Company had approximately
$40.3 million in cash and cash equivalents, out of which approximately $6.6
million of reorganization expenses are expected to be paid upon receipt of the
Bankruptcy Court's final order for allowable professional fees related to the
Company's bankruptcy proceedings. The Company also has a $100 million revolving
credit facility, which provides up to $60 million for nuclear fuel purchases and
up to $50 million (depending on the amount of borrowings outstanding for nuclear
fuel purchases) for working capital needs. At June 30, 1997, approximately $46.9
million had been drawn for nuclear fuel purchases. No amounts have been drawn on
this facility for working capital needs.
The Company has substantial leverage and significant debt service
obligations and, primarily due to the Rate Stipulation, does not expect to be
able to raise its base rates in order to recover any future increases in non-
fuel costs or to replace any lost revenues. As of June 30, 1997, the Company had
total long-term indebtedness, excluding the short-term portion of financing and
capital lease obligations, of approximately $973 million and redeemable
preferred stock of $114.7 million. Long-term indebtedness as a percentage of
capitalization was approximately 68%.
From June 1996 through July 11, 1997, the Company repurchased
approximately $193.1 million of its first mortgage bonds resulting in a $2.9
million loss, net of federal income tax benefits, which represented the payment
of premiums on debt repurchased and the recognition of unamortized issuance
expenses on that debt. As a result of these repurchases, the Company has reduced
its annual interest expense by approximately $15.2 million. The Company
continues to believe that reduction of debt is a significant component of long-
term value creation. Accordingly, the Company will regularly evaluate market
conditions and, when appropriate, use a portion of its available cash flow to
reduce its fixed obligations through open market purchases of first mortgage
bonds.
The degree to which the Company is leveraged could have important
consequences on the Company's liquidity, including (i) the Company's ability to
obtain additional financing for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes could be limited in
the future; (ii) a substantial portion of the Company's cash flow from
operations will be dedicated to the payment of principal and interest on its
indebtedness, thereby reducing the funds available to the Company for other
purposes; and (iii) the Company's substantial leverage may place the Company at
a competitive disadvantage, hinder its ability to adjust rapidly to changing
market conditions and make it more vulnerable
21
<PAGE>
in the event of a downturn in general economic conditions or its business. As a
result, any significant reduction in revenues and/or significant increase in
costs or expenditures could adversely affect the Company's liquidity.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
Financial comparisons herein are based on the results for the three
months ended June 30, 1997 as compared to the results for the three months ended
June 30, 1996.
OPERATING REVENUES
Operating revenues decreased 0.1% to $144.3 million for the three month
period ended June 30, 1997 compared to $144.4 million for the same period in
1996. The decrease in revenues was primarily due to lower rates on sales to CFE
and was partially offset by increased fuel revenues.
Base Revenues. Base revenues decreased 3.1% to $113.3 million for the
three month period ended June 30, 1997 compared to $116.9 million for the same
period in 1996 primarily due to lower rates on sales to CFE.
KWH sales increased 1.1% for the three month period ended June 30, 1997
compared to the same period in 1996 due primarily to increased KWH sales to CFE
and to the Imperial Irrigation District.
<TABLE>
<CAPTION>
KWH SALES
--------------------- INCREASE
1997 1996 (DECREASE)
--------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Retail......... 1,436,610 1,446,111 (0.7)%
Wholesale...... 498,387 467,194 6.7%
--------- ---------
Total...... 1,934,997 1,913,305 1.1%
========= =========
</TABLE>
Fuel Revenues and Economy Sales. Regulations of the Texas and the New
Mexico Commissions allow substantially all fuel and purchased and interchanged
power costs to be passed through directly to customers through periodic
surcharges and refunds, subject to a determination that those costs were
reasonable in amount and prudently incurred. Accordingly, these costs are
reflected in the Company's fuel revenues but may be subsequently adjusted to
reflect the results of regulatory review. Fuel revenues and economy sales
increased 12.4% to $29.8 million for the three month period ended June 30, 1997
compared to $26.5 million of fuel revenues and economy sales for the same period
in 1996 primarily due to increased cost of fuel.
The Company achieved a new record system peak of 1,442 MW (megawatts)
on July 2, 1997, which was a 4% increase over the 1996 record system peak of
1,387 MW. The Company also recorded a native system peak demand of 1,112 MW on
July 2, 1997, a 0.6% increase from the previous record of 1,105 MW set in 1996.
22
<PAGE>
FUEL AND PURCHASED AND INTERCHANGED POWER EXPENSE
Fuel and purchased and interchanged power expense increased 4.6% to
$30.7 million for the three month period ended June 30, 1997, compared to $29.3
million for the same period in 1996 primarily due to the increased cost of fuel
used in Company-owned generation. This increase was partially offset by lower
volumes of higher cost purchased power in 1997, which reflects fewer and shorter
refueling and maintenance outages at Palo Verde compared to 1996.
The Company filed an application to increase its 1997 New Mexico fixed
fuel factor to $0.01949 per KWH from $0.01283. The New Mexico Commission Staff
has contested that portion of the proposed fuel factor which covers the
Company's 1997 forecasted fuel cost and recommended that the New Mexico
Commission review the Company's fuel procurement practices. The Staff did not
contest the Company's termination of the refund for the 1995 fixed fuel cost
overcollection or the Company's collection of the underrecovery of fuel costs
for 1996. The Staff subsequently recommended that the New Mexico Commission
allow the Company's proposed fixed fuel factor to become effective on or before
August 1, 1997 and docket a review of the Company's fuel procurement practice.
On August 1, 1997 the New Mexico Commission allowed the Company's proposed fuel
factor to become effective and ordered the Company to file testimony supporting
continued use of its methodology and manner of collecting purchased power and
fuel costs contained in its tariffs by October 31, 1997.
OPERATION AND MAINTENANCE EXPENSE
Other operation and maintenance expense increased 3.5% to $40.6 million
for the three month period ended June 30, 1997 compared to $39.2 million for the
same period in 1996 primarily due to (i) increased maintenance at Company-owned
plants of approximately $1.5 million; and (ii) increased outside services of
approximately $0.8 million. These increases were partially offset by decreased
property insurance due to the receipt of a damage claim of approximately $0.8
million in 1997 with no comparable amount in 1996.
FEDERAL INCOME TAXES
Federal income tax expense increased $3.9 million to $9.1 million for
the three month period ended June 30, 1997 compared to $5.2 million for the same
period in 1996 primarily due to changes in pretax income including the CSW
litigation settlement, which is discussed in more detail below, and certain
differences in book and taxable income.
OTHER TAXES
Taxes other than federal income taxes decreased $1.8 million to $10.9
million for the three month period ended June 30, 1997 compared to $12.7 million
for the same period in 1996 primarily due to (i) a decrease in Arizona property
tax resulting from a new state property tax law which reduced total annual
property taxes for 1996 and forward, but were recorded beginning in July 1996
and (ii) a decrease in Arizona taxable property base resulting from
depreciation.
LITIGATION SETTLEMENT
The Company recorded a pretax gain, net of legal fees and expenses, of
approximately $7.5 million from the settlement of litigation between the Company
and CSW. CSW has agreed to pay $35 million to settle all claims by the Company
in connection with the Company's failed merger with CSW.
23
<PAGE>
Pursuant to the terms of the Company's Fourth Amended Plan of Reorganization,
the first $20 million in proceeds from this litigation was paid by CSW directly
to the agent for the record holders of the Predecessor Company's preferred stock
and common stock as of February 12, 1996.
INTEREST CHARGES
Interest charges decreased 14.3% to $21.8 million for the three month
period ended June 30, 1997 compared to $25.4 million for the same period in 1996
primarily because of a reduction of interest bearing debt as a result of open
market repurchases of the Company's first mortgage bonds.
EXTRAORDINARY LOSS ON REPURCHASE OF DEBT, NET
Extraordinary loss on repurchase of debt for the three month period
ended June 30, 1997 which represented the payment of premiums on debt
repurchased and the recognition of unamortized issuance expenses on that debt of
$0.4 million, net of federal income tax benefit of $0.2 million, with no
comparable amounts in the same period in 1996.
NET INCOME
The change in net income for the three months ended June 30, 1997 as
compared to the same period in the prior year was primarily due to a gain, net
of tax and legal fees and expenses, of approximately $4.6 million from the
settlement of litigation between the Company and CSW.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Financial comparisons herein are based on the results for the six
months ended June 30, 1997 as compared to the combined results for the
Reorganized Company for the period February 12, 1996 to June 30, 1996 and the
Predecessor Company for the period January 1, 1996 to February 11, 1996.
OPERATING REVENUES
Operating revenues increased 4.0% to $280.1 million for the six month
period ended June 30, 1997 compared to $269.2 million of combined operating
revenues for the Reorganized and Predecessor Company for the same period in
1996. The increase was primarily due to increased fuel revenues.
Base Revenues. Base revenues decreased 1.1% to $217.0 million for the
six month period ended June 30, 1997 compared to $219.4 million of base revenues
for the same period in 1996 primarily due to decreased rates on sales to CFE
partially offset by an increase in Texas base rates associated with the
implementation of the Rate Stipulation.
24
<PAGE>
KWH sales increased 2.0% for the six month period ended June 30, 1997
compared to the same period in 1996 due primarily to increased KWH sales to the
CFE and to the Imperial Irrigation District.
<TABLE>
<CAPTION>
KWH SALES
---------------------
1997 1996 INCREASE
--------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Retail........ 2,708,339 2,697,544 0.4%
Wholesale..... 883,143 823,045 7.3%
--------- ---------
Total...... 3,591,482 3,520,589 2.0%
========= =========
</TABLE>
Fuel Revenues and Economy Sales. Regulations of the Texas and the New
Mexico Commissions allow substantially all fuel and purchased and interchanged
power costs to be passed through directly to customers through periodic
surcharges and refunds, subject to a determination that those costs were
reasonable in amount and prudently incurred. Accordingly, these costs are
reflected in the Company's fuel revenues but may be subsequently adjusted to
reflect the results of regulatory review. Fuel revenues and economy sales
increased 26.6% to $60.7 million for the six month period ended June 30, 1997
compared to $48.0 million of combined fuel revenues and economy sales for the
same period in 1996 primarily due to increased cost of fuel.
The Company achieved a new record system peak of 1,442 MW (megawatts)
on July 2, 1997, which was a 4% increase over the 1996 record system peak of
1,387 MW. The Company also recorded a native system peak demand of 1,112 MW on
July 2, 1997, a 0.6% increase from the previous record of 1,105 MW set in 1996.
FUEL AND PURCHASED AND INTERCHANGED POWER EXPENSE
Fuel and purchased and interchanged power expense increased 15.9% to
$61.9 million for the six month period ended June 30, 1997, compared to $53.4
million for the combined expense for the same period in 1996. Such increase was
primarily due to the increased cost of fuel used in Company-owned generation.
The Company filed an application to increase its 1997 New Mexico fixed
fuel factor to $0.01949 per KWH from $0.01283. The New Mexico Commission Staff
has contested the portion of the proposed fuel factor which covers the Company's
1997 forecasted fuel cost and recommended that the New Mexico Commission review
the Company's fuel procurement practices. The Staff did not contest the
Company's termination of the refund for the 1995 fixed fuel cost overcollection
or the Company's collection of the underrecovery of fuel costs for 1996. The
Staff subsequently recommended that the New Mexico Commission allow the
Company's proposed fixed fuel factor to become effective on or before August 1,
1997 and docket a review of the Company's fuel procurement practice. On August
1, 1997 the New Mexico Commission allowed the Company's proposed fuel factor to
become effective and ordered the Company to file testimony supporting continued
use of its methodolgy and manner of collecting purchased power and fuel costs
contained in its tariffs by October 31, 1997.
OPERATION AND MAINTENANCE EXPENSE
Other operation and maintenance expense decreased 11.0% to $81.0
million for the six month period ended June 30, 1997 compared to $91.0 million
for the combined other operation and maintenance expense for the same period in
1996 as a result of decreased Palo Verde costs of approximately
25
<PAGE>
$10.2 million. The reduction in Palo Verde costs consisted of approximately $8.7
million associated with lease accruals recorded in 1996, with no corresponding
accrual in 1997 by the Reorganized Company as a result of the reacquisition of
the leased portion of Palo Verde in the Reorganization.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation expense increased $3.1 million to $44.0 million for the
six month period ended June 30, 1997 compared to $40.9 million for the combined
depreciation expense for the same period in 1996. The effect of an increase in
depreciable plant following the reacquisition in the Reorganization of a portion
of Palo Verde and the accelerated depreciation of a portion of such amounts over
the period of the Rate Stipulation was partially offset by the decrease in the
book value of depreciable plant from fresh-start adjustments.
FEDERAL INCOME TAXES
Federal income tax expense increased $9.0 million to $12.4 million for
the six month period ended June 30, 1997 compared to $3.4 million for the
combined federal income tax expense for the same period in 1996 primarily due to
changes in pretax income, including the CSW litigation settlement, and certain
differences in book and taxable income.
OTHER TAXES
Taxes other than federal income taxes decreased $3.8 million to $21.9
million for the six month period ended June 30, 1997 compared to $25.7 million
for the combined taxes other than federal income taxes for the same period in
1996 primarily due to (i) a decrease in Arizona property tax resulting from a
new state property tax law which reduced total annual property taxes for 1996
and forward, but were recorded beginning in July 1996; and (ii) a decrease in
Arizona taxable property base resulting from depreciation.
LITIGATION SETTLEMENT
The Company recorded a pretax gain, net of legal fees and expenses, of
approximately $7.5 million from the settlement of litigation between the Company
and CSW. CSW has agreed to pay $35 million to settle all claims by the Company
in connection with the Company's failed merger with CSW. Pursuant to the terms
of the Company's Fourth Amended Plan of Reorganization, the first $20 million in
proceeds from this litigation was paid by CSW directly to the agent for the
record holders of the Predecessor Company's preferred stock and common stock as
of February 12, 1996.
INTEREST CHARGES
Interest charges decreased 7.9% to $44.3 million for the six month
period ended June 30, 1997 compared to $48.1 million for the combined interest
charges for the same period in 1996 primarily due to a reduction in outstanding
debt as a result of open market purchases of the Company's first mortgage bonds
and the extinguishment of certain debt in conjunction with the Reorganization.
REORGANIZATION ITEMS
The $122.2 million benefit recorded by the Predecessor Company upon the
emergence from bankruptcy consisted of deferred income tax benefits related to
the Reorganization and the effects of the
26
<PAGE>
Rate Stipulation. These benefits were partially offset by (i) the adjustments of
assets and liabilities to their fair market values; (ii) provisions for
settlement of claims; and (iii) professional fees and other expenses. There were
no comparable amounts in the six month period ended June 30, 1997.
EXTRAORDINARY LOSS ON REPURCHASE OF DEBT, NET
Extraordinary loss on repurchase of debt for the six month period ended
June 30, 1997 which represented the payment of premiums on debt repurchased and
the recognition of unamortized issuance expenses on that debt of $2.7 million,
net of federal income tax benefit of $1.4 million, with no comparable amounts in
the same period in 1996.
EXTRAORDINARY GAIN ON DISCHARGE OF DEBT
Extraordinary gain on discharge of debt for the Predecessor Company for
the period January 1, 1996 to February 11, 1996 consisted of forgiven
indebtedness primarily related to the extinguishment of Palo Verde lease
obligations with no comparable amounts in the six month period ended June 30,
1997.
NET INCOME
The change in net income for the six months ended June 30, 1997 as
compared to the same period in the prior year was primarily due to the
extraordinary gain on discharge of debt and reorganization items related to the
Company's emergence from bankruptcy recorded in 1996 with no comparable activity
in 1997.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 128, "Earnings per Share" ("SFAS No. 128"), establishes
standards for computing and presenting earnings per share and applies to
entities with publicly held common stock. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods; earlier application is not permitted. The Company has
not performed an analysis to determine what effect SFAS No. 128 will have on its
financial statements.
27
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company hereby incorporates by reference the information set forth
in Part I of this report under Note D of Notes to Financial Statements.
ITEM 5. OTHER MATTERS
The Company has 337 employees (approximately 30% of its work force),
who are covered by a collective bargaining agreement with the International
Brotherhood of Electric Workers, Local 960 ("Local 960"). Local 960's members
work primarily as linemen and power plant operators with the Company. The
collective bargaining agreement may be terminated by Local 960 any time after
June 15, 1997 upon sixty days' notice to the Company. In May 1997, the Company
and Local 960 began negotiations on a new agreement. In June 1997, Local 960
gave the Company notice which will effectively terminate the existing agreement
as of August 15, 1997. In July 1997, the Company and Local 960 obtained the
assistance of a federal mediator who immediately recommended the suspension of
negotiations. Active negotiations between the Company and Local 960 resumed on
August 11, 1997. The Company is working diligently to resolve the remaining
issues with Local 960 in hopes of avoiding a work stoppage; however, in the
event of a strike, the Company has a work continuation plan in place to maintain
normal operations and services.
28
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See Index to Exhibits incorporated herein by reference.
(b) Reports on Form 8-K:
None
29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EL PASO ELECTRIC COMPANY
By: /s/ Gary R. Hedrick
-----------------------------
Gary R. Hedrick
Vice President, Treasurer and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
Dated: August 13, 1997
30
<PAGE>
EL PASO ELECTRIC COMPANY
INDEX TO EXHIBITS
Exhibit Sequentially
Number Exhibit Numbered Page
- ------- ------- -------------
10.04-01 Amendment No. 11, dated May 23, 1997, to
the Four Corners Project Operating
Agreement, dated May 15, 1969, between
Arizona Public Service Company, the
Company, Public Service Company of
New Mexico, Salt River Project Agricultural
Improvement and Power District, Southern
California Edison Company, Tucson Gas
and Electric Company, and Amendments 1
through 10 thereto. (Exhibit 10.04 to the
Company's Annual Report on Form 10-K
for the year ended December 31, 1995)
11 Statement re Computation
of Per Share Earnings
15 Letter re Unaudited Interim
Financial Information
27 Financial Data Schedule (EDGAR
filing only)
31
<PAGE>
EXHIBIT 10.04-01
AMENDMENT NO. 11 TO FOUR CORNERS PROJECT
OPERATING AGREEMENT
AMONG
ARIZONA PUBLIC SERVICE COMPANY
SALT RIVER PROJECT AGRICULTURAL
IMPROVEMENT AND POWER DISTRICT
SOUTHERN CALIFORNIA EDISON COMPANY
PUBLIC SERVICE COMPANY OF NEW MEXICO
EL PASO ELECTRIC COMPANY
AND
TUCSON ELECTRIC POWER COMPANY
MAY 23, 1997
<PAGE>
AMENDMENT NO. 11 TO THE FOUR CORNERS PROJECT
OPERATING AGREEMENT
1. PARTIES:
The Parties to this Amendment No. 11 to the Four Corners Project Operating
Agreement, hereinafter referred to as "Amendment No. 11," are: ARIZONA
PUBLIC SERVICE COMPANY, a corporation organized and existing under and by
virtue of the laws of the State of Arizona, hereinafter referred to as
"APS"; SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT, an
agricultural improvement district organized and existing under and by
virtue of the laws of the State of Arizona, hereinafter referred to as
"SRP"; SOUTHERN CALIFORNIA EDISON COMPANY, a corporation organized and
existing under and by virtue of the laws of the State of California,
hereinafter referred to as "Edison"; PUBLIC SERVICE COMPANY OF NEW MEXICO,
a corporation organized and existing under and by virtue of the laws of the
State of New Mexico, hereinafter referred to as "PNM"; AND TUCSON ELECTRIC
POWER COMPANY (formerly Tucson Gas & Electric Company), hereinafter
referred to as "TEP," a corporation organized and existing under and by
virtue of the laws of the State of Arizona, hereinafter referred to
collectively as "Parties."
2. RECITALS:
2.1 The Four Corners Project Operating Agreement has been amended by
Amendment No. 1, dated August 5, 1974, Amendment No. 2, dated
September 1, 1975, Amendment No. 3, dated March 23, 1981, Amendment
No. 4, dated January 21, 1982, Amendment No. 5, dated January 11,
1982, Amendment No. 6, dated
2
<PAGE>
February 25, 1982, Amendment No. 7, dated January 1, 1983, Amendment
No. 8, dated October 6, 1989, Amendment No. 9, dated October 6, 1989,
and Amendment No. 10, dated May 30, 1991.
2.2 Under the provisions of Section 11 of the Supplemental Lease, each of
the Parties, as Lessees, is responsible for paying directly to the
Navajo Tribe, as Lessor, its pro rata share of the total annual lease
payment.
2.3 In the interest of efficiency, the Mineral and Lands Department of the
Navajo Tribe has requested assistance from APS, as Operating Agent of
Four Corners Generating Unit Nos. 4 and 5, in collecting from the
Parties and remitting to the Navajo Tribe annual lease payments due
under the Supplemental Lease.
2.4 The Parties are willing to accommodate the Navajo Tribe's request,
subject to their understanding that their obligations to the Navajo
Tribe for such payments will continue to be several and not joint.
3. AGREEMENT:
For and in consideration of the premises and the mutual obligations of and
undertakings by the Parties as hereinafter provided in this Amendment No.
11 to the Operating Agreement, the Parties agree as follows:
4. EFFECTIVE DATE:
This Amendment No. 11, when executed by all Parties, shall become effective
as of May 23, 1997.
3
<PAGE>
5. AMENDMENTS TO THE OPERATING AGREEMENT MADE BY THIS AMENDMENT NO. 11:
The Operating Agreement is hereby amended by adding the following provision
to Section 6.3:
6.3.25 Receive from the Navajo Tribe bills addressed to each Participant
for its annual lease payment due pursuant to the Supplemental
Lease, collect from each Participant its annual lease payment, and
remit the lease payments to the Navajo Tribe within the time
prescribed in the Supplemental Lease.
6. EXECUTION BY COUNTERPARTS:
This Amendment No. 11 may be executed in any number of counterparts, and
upon execution by all Parties, each executed counterpart shall have the
same force and effect as an original instrument and as if all Parties had
signed the same instrument. Any signature page of this Amendment No. 11
may be detached from any counterpart of this Amendment No. 11 without
impairing, the legal effect of any signature thereon, and may be attached
to another counterpart of this Amendment No. 11 identical in form hereto
but having attached to it one or more signature pages.
7. SIGNATURE CLAUSE:
The signatories hereto represent that they have been appropriately
authorized to enter into this Amendment No. 11 on behalf of the Party for
whom they sign. This Amendment No. 11 is hereby executed as of the 23rd
day of May 1997.
4
<PAGE>
ARIZONA PUBLIC SERVICE COMPANY
By: /s/ John R. Denman
------------------------------------
Its: Vice President Fossil
------------------------------------
ATTEST:
- ------------------------------
Secretary
SALT RIVER PROJECT AGRICULTURAL
IMPROVEMENT AND POWER DISTRICT
By: /s/ David G. Areghini
-----------------------------------
Its: Associate General Manager
-----------------------------------
ATTEST AND COUNTERSIGN:
- ------------------------------
Its:
--------------------------
5
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
By: /s/ Lawrence D. Hamlin
-----------------------------------
Its: Vice President
----------------------------------
ATTEST:
- ------------------------------
Secretary
PUBLIC SERVICE COMPANY OF
NEW MEXICO
By: /s/ Patrick J. Goodman
-----------------------------------
Its: Vice President - Power Production
-----------------------------------
ATTEST:
- ------------------------------
Secretary
EL PASO ELECTRIC COMPANY
By: /s/ John C. Horne
-----------------------------------
Its: Vice President - Power Generation
----------------------------------
ATTEST:
- ------------------------------
Secretary
6
<PAGE>
TUCSON ELECTRIC POWER COMPANY
By: /s/ Thomas A. Delawder
-----------------------------------
Its: Vice President
----------------------------------
ATTEST:
- ------------------------------
Secretary
7
<PAGE>
EXHIBIT 11
EL PASO ELECTRIC COMPANY
COMPUTATION OF EARNINGS PER COMMON SHARE
(IN THOUSANDS EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
THREE THREE
MONTHS MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1997 1996
----------- -----------
<S> <C> <C>
PRIMARY:
Weighted average number of common shares outstanding.......... 60,059,316 59,999,981
Weighted average number of restricted shares.................. 179,920 139,890
Net effect of dilutive stock options.......................... 291,389 24,241
----------- -----------
Total................................................. 60,530,625 60,164,112
=========== ===========
Net income applicable to common stock:
Income before extraordinary loss on repurchase of debt..... $ 13,007 $ 6,603
Extraordinary loss on repurchase of debt, net of federal
income tax benefit....................................... (427) -
----------- -----------
Net income applicable to common stock................ $ 12,580 $ 6,603
=========== ===========
Net income per common share:
Income before extraordinary loss on repurchase of debt..... $ 0.215 $ 0.110
Extraordinary loss on repurchase of debt, net of federal
income tax benefit....................................... (0.007) -
----------- -----------
Net income............................................ $ 0.208 $ 0.110
=========== ===========
FULLY DILUTED (1):
Weighted average number of common shares outstanding.......... 60,059,316 59,999,981
Weighted average number of restricted shares.................. 179,920 139,890
Net effect of dilutive stock options.......................... 371,830 73,536
----------- -----------
Total................................................. 60,611,066 60,213,407
=========== ===========
Net income applicable to common stock:
Income before extraordinary loss on repurchase of debt..... $ 13,007 $ 6,603
Extraordinary loss on repurchase of debt, net of federal
income tax benefit....................................... (427) -
----------- -----------
Net income applicable to common stock................. $ 12,580 $ 6,603
=========== ===========
Net income per common share:
Income before extraordinary loss on repurchase of debt..... $ 0.215 $ 0.110
Extraordinary loss on repurchase of debt, net of federal
income tax benefit....................................... (0.007) -
----------- -----------
Net income............................................ $ 0.208 $ 0.110
=========== ===========
</TABLE>
(1) This calculation is submitted in accordance with Securities Exchange Act of
1934 Release No. 9083, although not required by footnote 2 to paragraph 14
of APB Opinion No. 15 because it results in dilution of less than 3%.
<PAGE>
EL PASO ELECTRIC COMPANY
COMPUTATION OF EARNINGS PER COMMON SHARE
(IN THOUSANDS EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
| PREDECESSOR
REORGANIZED COMPANY | COMPANY
----------------------- | ------------
SIX PERIOD FROM | PERIOD FROM
MONTHS FEBRUARY 12 | JANUARY 1
ENDED TO | TO
JUNE 30, JUNE 30, | FEBRUARY 11,
1997 1996 | 1996
----------- ----------- | ------------
PRIMARY: |
<S> <C> <C> | <C>
Weighted average number of common shares outstanding.............. 60,044,678 59,999,981 | 35,544,330
Weighted average number of restricted shares...................... 175,113 110,179 | -
Net effect of dilutive stock options.............................. 326,095 10,066 | -
----------- ----------- | -----------
Total..................................................... 60,545,886 60,120,226 | 35,544,330
=========== =========== | ===========
|
Net income applicable to common stock: |
Income before extraordinary items.............................. $ 15,450 $ 6,740 | $ 118,198
Extraordinary loss on repurchase of debt, net of federal |
income tax benefit........................................... (2,671) - | -
Extraordinary gain on discharge of debt........................ - - | 264,273
----------- ----------- | -----------
Net income applicable to common stock..................... $ 12,779 $ 6,740 | $ 382,471
=========== =========== | ============
|
Net income per common share: |
Income before extraordinary items.............................. $ 0.255 $ 0.112 | $ 3.325
Extraordinary loss on repurchase of debt, net of federal |
income tax benefit........................................... (0.044) - | -
Extraordinary gain on discharge of debt........................ - - | 7.435
----------- ----------- | -----------
Net income................................................ $ 0.211 $ 0.112 | $ 10.760
=========== =========== | ============
|
FULLY DILUTED (1): |
Weighted average number of common shares outstanding............. 60,044,678 59,999,981 | 35,544,330
Weighted average number of restricted shares..................... 175,113 110,179 | -
Net effect of dilutive stock options............................. 370,681 47,798 | -
----------- ----------- | -----------
Total..................................................... 60,590,472 60,157,958 | 35,544,330
=========== =========== | ============
Net income applicable to common stock: |
Income before extraordinary items............................... $ 15,450 $ 6,740 | $ 118,198
Extraordinary loss on repurchase of debt, net of federal |
income tax benefit........................................... (2,671) - | -
Extraordinary gain on discharge of debt......................... - - | 264,273
----------- ----------- | -----------
Net income applicable to common stock..................... $ 12,779 $ 6,740 | $ 382,471
=========== =========== | ============
|
Net income per common share: |
Income before extraordinary items.............................. $ 0.255 $ 0.112 | $ 3.325
Extraordinary loss on repurchase of debt, net of federal |
income tax benefit........................................... (0.044) - | -
Extraordinary gain on discharge of debt........................ - - | 7.435
----------- ----------- | -----------
Net income................................................ $ 0.211 $ 0.112 | $ 10.760
=========== =========== | ============
</TABLE>
(1) This calculation is submitted in accordance with Securities Exchange Act of
1934 Release No. 9083, although not required by footnote 2 to paragraph 14
of APB Opinion No. 15 because it results in dilution of less than 3%.
<PAGE>
EXHIBIT 15
El Paso Electric Company
El Paso, Texas
Ladies and Gentlemen:
Re: Registration Statement No. 333-17971
With respect to the subject registration statement, we acknowledge our awareness
of the use therein of our report dated July 23, 1997 related to our review of
interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not
considered part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of sections 7 and 11 of the Act.
Very truly yours,
KPMG Peat Marwick LLP
El Paso, Texas
July 23, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET OF EL PASO ELECTRIC COMPANY AS OF JUNE 30, 1997 AND THE RELATED STATEMENTS
OF INCOME AND CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,483,360
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 160,360
<TOTAL-DEFERRED-CHARGES> 117,451
<OTHER-ASSETS> 29,389
<TOTAL-ASSETS> 1,790,560
<COMMON> 60,239
<CAPITAL-SURPLUS-PAID-IN> 240,145
<RETAINED-EARNINGS> 43,752
<TOTAL-COMMON-STOCKHOLDERS-EQ> 344,136
114,691
0
<LONG-TERM-DEBT-NET> 949,030
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 81
0
<CAPITAL-LEASE-OBLIGATIONS> 23,812
<LEASES-CURRENT> 28,326
<OTHER-ITEMS-CAPITAL-AND-LIAB> 330,484
<TOT-CAPITALIZATION-AND-LIAB> 1,790,560
<GROSS-OPERATING-REVENUE> 280,132
<INCOME-TAX-EXPENSE> 10,657
<OTHER-OPERATING-EXPENSES> 208,854
<TOTAL-OPERATING-EXPENSES> 219,511
<OPERATING-INCOME-LOSS> 60,621
<OTHER-INCOME-NET> 5,520
<INCOME-BEFORE-INTEREST-EXPEN> 66,141
<TOTAL-INTEREST-EXPENSE> 44,304
<NET-INCOME> 19,166<F1>
6,387
<EARNINGS-AVAILABLE-FOR-COMM> 12,779
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 79,299
<CASH-FLOW-OPERATIONS> 88,865
<EPS-PRIMARY> 0.211
<EPS-DILUTED> 0.211
<FN>
<F1> NET INCOME IS NET OF EXTRAORDINARY LOSS ON REPURCHASE OF DEBT (NET OF
FEDERAL INCOME TAX BENEFIT) OF ($2,671).
</FN>
</TABLE>
