<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 MARCH 31, 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 Identification No.)
incorporation or organization)
KAYSER CENTER, 100 NORTH STANTON, EL PASO, TEXAS 79901
(Address of principal executive offices) (Zip Code)
(915) 543-5711
(Registrant's telephone number, including area code)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTIONS 12, 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT. YES X NO
--- ---
AS OF MAY 2, 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 - March 31, 1997 and December 31, 1996......... 1
Statements of Operations - Three Months Ended March 31, 1997,
Period from February 12 to March 31, 1996 and Period from
January 1 to February 11, 1996................................ 3
Statements of Accumulated Earnings (Deficit) - Three
Months Ended March 31, 1997, Period from February 12 to
March 31, 1996 and Period from January 1 to February 11,
1996.......................................................... 4
Statements of Cash Flows - Three Months Ended
March 31, 1997, Period from February 12 to March 31, 1996
and Period from January 1 to February 11, 1996................ 5
Notes to Financial Statements................................. 6
Report on Review by Independent Certified Public Accountants.. 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................... 22
Item 6. Exhibits and Reports on Form 8-K.......................... 23
i
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EL PASO ELECTRIC COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS MARCH 31,
(IN THOUSANDS) 1997 DECEMBER 31,
(UNAUDITED) 1996
-------------- ------------
<S> <C> <C>
UTILITY PLANT:
Electric plant in service...................................... $1,512,859 $1,492,737
Less accumulated depreciation and amortization................. 99,401 77,976
---------- ----------
Net plant in service......................................... 1,413,458 1,414,761
Construction work in progress.................................. 38,218 44,432
Nuclear fuel; includes fuel in process of $4,182 and $5,084,
respectively................................................. 69,125 60,014
Less accumulated amortization.................................. 23,489 18,651
---------- ----------
Net nuclear fuel............................................. 45,636 41,363
---------- ----------
Net utility plant......................................... 1,497,312 1,500,556
---------- ----------
CURRENT ASSETS:
Cash and temporary investments................................. 43,981 68,767
Accounts receivable, principally trade, net of allowance for
doubtful accounts of $6,127 and $6,161, respectively......... 50,606 57,587
Federal income tax receivable.................................. 3,494 20,713
Inventories, at cost........................................... 27,819 28,322
Prepayments and other.......................................... 13,106 10,652
---------- ----------
Total current assets...................................... 139,006 186,041
---------- ----------
LONG-TERM CONTRACT RECEIVABLE.................................... 30,231 31,057
---------- ----------
DEFERRED CHARGES AND OTHER ASSETS:
Accumulated deferred income taxes, net......................... 71,945 73,884
Decommissioning trust fund..................................... 34,107 33,054
Other.......................................................... 20,350 21,598
---------- ----------
Total deferred charges and other assets................... 126,402 128,536
---------- ----------
TOTAL ASSETS.............................................. $1,792,951 $1,846,190
========== ==========
</TABLE>
See accompanying notes to financial statements.
1
<PAGE>
EL PASO ELECTRIC
COMPANY
BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
CAPITALIZATION AND LIABILITIES MARCH 31,
(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,
60,042,832 and 59,999,981 shares issued and outstanding; and 196,404
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.................................. (1,115) (758)
Accumulated earnings........................................................... 31,034 30,835
Net unrealized gain on marketable securities, less applicable
income tax expense of $125 in 1996........................................... - 232
---------- ----------
Common stock equity....................................................... 331,278 331,257
Preferred stock, cumulative, no par value, 2,000,000 shares authorized:
Redemption required-1,115,150 and 1,084,264 shares issued and
outstanding, respectively; at liquidation preference................... 111,515 108,426
Long-term debt................................................................. 971,538 1,021,749
Financing and capital lease obligations........................................ 26,932 24,424
---------- ----------
Total capitalization...................................................... 1,441,263 1,485,856
---------- ----------
CURRENT LIABILITIES:
Current maturities of long-term, financing and capital lease obligations....... 28,782 28,333
Accounts payable, principally trade............................................ 26,340 37,215
Taxes accrued other than federal income taxes.................................. 21,998 21,296
Interest accrued............................................................... 20,376 23,150
Other.......................................................................... 15,084 15,000
---------- ----------
Total current liabilities................................................. 112,580 124,994
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES:
Decommissioning................................................................ 90,888 89,544
Accrued postretirement benefit liability....................................... 73,643 71,313
Accrued pension liability...................................................... 34,476 34,550
Other.......................................................................... 40,101 39,933
---------- ----------
Total deferred credits and other liabilities.............................. 239,108 235,340
---------- ----------
COMMITMENTS AND CONTINGENCIES
TOTAL CAPITALIZATION AND LIABILITIES................................... $1,792,951 $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>
| PREDECESSOR
REORGANIZED COMPANY | COMPANY
------------------------------- | ------------
THREE PERIOD FROM | PERIOD FROM
MONTHS FEBRUARY 12 | JANUARY 1
ENDED TO | TO
MARCH 31, MARCH 31, | FEBRUARY 11,
1997 1996 | 1996
----------- ------------- | -----------
<S> <C> <C> | <C>
OPERATING REVENUES: |
Base revenues....................................................... $ 103,654 $ 57,760 | $ 44,679
Fuel revenues and economy sales..................................... 30,960 11,605 | 9,849
Other............................................................... 1,243 542 | 421
----------- ----------- | -----------
135,857 69,907 | 54,949
----------- ----------- | -----------
OPERATING EXPENSES: |
Operation: |
Fuel............................................................... 28,466 10,347 | 10,125
Purchased and interchanged power................................... 2,786 1,361 | 2,282
----------- ----------- | -----------
31,252 11,708 | 12,407
Other.............................................................. 30,964 16,710 | 23,559
Maintenance........................................................... 9,429 6,725 | 4,743
Depreciation and amortization......................................... 21,905 11,962 | 6,577
Taxes: |
Federal income tax expense (benefit)................................ 2,981 601 | (2,700)
State income tax expense (benefit).................................. 239 490 | (750)
Other............................................................... 11,074 6,963 | 6,024
----------- ----------- | -----------
107,844 55,159 | 49,860
----------- ----------- | -----------
OPERATING INCOME...................................................... 28,013 14,748 | 5,089
----------- ----------- | -----------
OTHER INCOME (DEDUCTIONS): |
Investment income................................................... 1,109 836 | -
Other, net.......................................................... (703) (76) | 50
Federal income tax expense applicable to other income............... (332) (297) | (35)
----------- ----------- | -----------
74 463 | 15
----------- ----------- | -----------
INCOME BEFORE INTEREST CHARGES........................................ 28,087 15,211 | 5,104
----------- ----------- | -----------
INTEREST CHARGES (CREDITS): |
Interest on long-term debt.......................................... 22,225 13,597 | -
Other interest...................................................... 1,620 819 | -
Interest during reorganization...................................... - - | 9,569
Interest capitalized and deferred................................... (1,350) (894) | (412)
----------- ----------- | -----------
22,495 13,522 | 9,157
----------- ----------- | -----------
INCOME (LOSS) BEFORE REORGANIZATION ITEMS |
AND EXTRAORDINARY ITEMS............................................ 5,592 1,689 | (4,053)
REORGANIZATION ITEMS, NET OF INCOME TAX BENEFITS...................... - - | 122,251
----------- ----------- | -----------
INCOME BEFORE EXTRAORDINARY ITEMS..................................... 5,592 1,689 | 118,198
|
EXTRAORDINARY ITEMS: |
Extraordinary loss on repurchase of debt, net of federal |
income tax benefit................................................ (2,244) - | -
Extraordinary gain on discharge of debts............................ - - | 264,273
----------- ----------- | -----------
NET INCOME........................................................... 3,348 1,689 | 382,471
PREFERRED STOCK DIVIDEND REQUIREMENTS................................. 3,149 1,552 | -
----------- ----------- | -----------
NET INCOME APPLICABLE TO COMMON STOCK................................. $ 199 $ 137 | $ 382,471
=========== =========== | ===========
NET INCOME PER COMMON SHARE: |
Income before extraordinary items................................... $0.040 $0.002 | $3.325
Extraordinary loss on repurchase of debt, net of federal |
income tax benefit................................................. (0.037) - | -
Extraordinary gain on discharge of debt............................. - - | 7.435
----------- ----------- | -----------
Net income........................................................ $0.003 $0.002 | $10.760
=========== =========== | ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND COMMON |
SHARE EQUIVALENTS OUTSTANDING...................................... 60,561,337 60,054,981 | 35,544,330
=========== =========== | ===========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
EL PASO ELECTRIC COMPANY
STATEMENTS OF ACCUMULATED EARNINGS (DEFICIT)
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
| PREDECESSOR
REORGANIZED COMPANY | COMPANY
--------------------------------- | -----------
THREE PERIOD FROM | PERIOD FROM
MONTHS FEBRUARY 12 | JANUARY 1
ENDED TO | TO
MARCH 31, MARCH 31, | FEBRUARY 11,
1997 1996 | 1996
--------- ----------- | ------------
<S> <C> <C> | <C>
ACCUMULATED EARNINGS (DEFICIT) AT |
BEGINNING OF PERIOD......................... $30,835 $ - | $ (758,032)
|
ADD: |
Net income................................. 3,348 1,689 | 382,471
Elimination of predecessor equity accounts. - - | 375,561
------- --------- | ----------
3,348 1,689 | 758,032
------- --------- | ----------
|
DEDUCT: |
Cumulative preferred stock dividend |
requirement............................... 3,149 1,552 | -
Capital stock expense...................... - 262 | -
------- --------- | ----------
3,149 1,814 | -
------- --------- | ----------
|
ACCUMULATED EARNINGS (DEFICIT) AT END |
OF PERIOD................................... $31,034 $ (125) | $ -
======= ========= | ==========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
EL PASO ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
| PREDECESSOR
REORGANIZED COMPANY | COMPANY
-------------------------- | -----------
THREE PERIOD FROM | PERIOD FROM
MONTHS FEBRUARY 12 | JANUARY 1
ENDED TO | TO
MARCH 31, MARCH 31, | FEBRUARY 11,
1997 1996 | 1996
----------- ----------- | ------------
<S> <C> <C> | <C>
CASH FLOWS FROM OPERATING ACTIVITIES: |
Net income.................................................................. $ 3,348 $ 1,689 | $ 382,471
Adjustments to reconcile net income to net cash provided by |
operating activities: |
Depreciation and amortization............................................ 27,082 14,656 | 8,246
Deferred income taxes and investment tax credit, net..................... 3,272 1,070 | (3,116)
Reorganization items, net of income tax benefit.......................... - - | (122,251)
Extraordinary loss on repurchase of debt, net of federal |
income tax benefit..................................................... 2,244 - | -
Extraordinary gain on discharge of debt.................................. - - | (264,273)
Other operating activities............................................... 645 369 | (805)
Change in: |
Accounts receivable...................................................... 6,981 5,170 | 5,429
Federal income tax receivable............................................ 17,219 - | -
Inventories.............................................................. 503 (580) | 90
Prepayments and other.................................................... (2,454) (14) | 34
Long-term contract receivable............................................ 826 346 | 293
Obligations subject to compromise........................................ - - | 9,430
Accounts payable......................................................... (10,875) (5,636) | (6,859)
Interest accrued......................................................... (2,774) 12,253 | -
Revenues subject to refund............................................... - - | 2,785
Other current liabilities................................................ 782 2,510 | 265
Deferred charges and credits............................................. 3,721 405 | 1,994
-------- ------- | -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES.............................. 50,520 32,238 | 13,733
-------- ------- | -----------
CASH FLOWS FROM INVESTING ACTIVITIES (NOTE A): |
Additions to utility plant.................................................. (23,838) (7,696) | (8,231)
Investment in decommissioning trust fund.................................... (1,411) (1,816) | (553)
Other investing activities.................................................. 19 (178) | 55
-------- ------- | -----------
NET CASH USED FOR INVESTING ACTIVITIES................................. (25,230) (9,690) | (8,729)
-------- ------- | -----------
CASH FLOWS FROM FINANCING ACTIVITIES (NOTE A): |
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)
Repurchase of long-term debt................................................ (53,013) - | -
Principal payments on long-term note payable................................ (168) - | -
Proceeds from financing and capital lease obligations....................... 9,111 939 | 43,309
Redemption of financing and capital lease obligations....................... (6,006) - | -
Capital stock expense....................................................... - (262) | -
-------- ------- | -----------
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES..................... (50,076) 677 | (212,766)
-------- ------- | -----------
NET (DECREASE) INCREASE IN CASH AND TEMPORARY INVESTMENTS..................... (24,786) 23,225 | (207,762)
|
CASH AND TEMPORARY INVESTMENTS AT BEGINNING OF PERIOD......................... 68,767 54,745 | 262,507
-------- ------- | -----------
CASH AND TEMPORARY INVESTMENTS AT END OF PERIOD............................... $ 43,981 $77,970 | $ 54,745
======== ======= | ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
Cash (refunded) paid for: |
Income taxes............................................................. $(17,219) $ 353 | $ -
Interest................................................................. 21,999 511 | 8,580
Reorganization items-professional fees and other......................... 155 1,990 | 2,279
======== ======= | ===========
</TABLE>
See accompanying notes to financial statements.
5
<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"). 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 March 31, 1997, and the results
of operations and cash flows for the three months ended March 31, 1997, for the
period from February 12 to March 31, 1996 and for the period January 1 to
February 11, 1996. The results of operations for the three months ended March
31, 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 emergence from bankruptcy, 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.
6
<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
<TABLE>
<CAPTION>
Non-cash investing and financing activities recorded by the Company consisted of the
following (In thousands):
REORGANIZED COMPANY | PREDECESSOR COMPANY
------------------------------------ | -------------------
|
THREE |
MONTHS PERIOD FROM | PERIOD FROM
ENDED FEBRUARY 12 | JANUARY 1 TO
MARCH 31, TO MARCH 31, | FEBRUARY 11,
1997 1996 | 1996
--------- ------------ | ------------
<S> <C> <C> | <C>
Issuance of preferred stock for |
pay-in-kind dividend.............................................. $3,089 $ - | $ -
|
Issuance of restricted shares of Common Stock....................... 59 - | -
|
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>
7
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
B. RATE MATTERS
For a full discussion on the Company's rate matters, see Note C of Notes to
Financial Statements in the 1996 Form 10-K.
RECENT CHANGES IN UTILITY REGULATION
General. The electric utility industry faces increasing pressure to become
more competitive as legislative, regulatory, economic and technological changes
occur. Federal legislation, 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 retail rates at the levels established by the Rate Stipulation
during the Freeze Period.
Of particular importance to the Company is the issue of ultimate
recoverability of costs previously found by regulatory authorities to be
reasonable and prudent, but which at the same time are higher than would be
recovered under immediate, full competition (i.e., stranded costs). Across the
industry, as well as at the state level, there is much discussion and debate on
this issue. At this time, there appears to be no clear solution. 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. Texas and New Mexico are engaged in various activities, at the
regulatory and legislative level, which are attempting to address the issue of
stranded cost recovery from customers subject to state jurisdiction.
FERC. In April 1996, pursuant to its authority under Sections 205 and 206 of
the Federal Power Act, 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 in rehearing in Order No. 888A in March 1997)
("Order No. 888/888A"). Order No. 888/888A 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. 888/888A permits public utilities to seek recovery of
legitimate, prudent and verifiable stranded costs and provides a mechanism for
the recovery of such costs. Order No. 888/888A with respect to former
8
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
power customers and new municipally-owned entities becoming transmission-only
customers as a result of obtaining open access transmission, Order No. 888/888A
provides for recovery of stranded costs from the utility if the utility had a
reasonable expectation of continuing to provide service to the departing
customer. Order No. 888/888A established 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 in rehearing in Order No. 889A in March 1997) ("Order No.
889/889A"). Order No. 889/889A 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. 889/889A 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.
Texas. In February 1996, the Public Utility Commission of Texas (the "Texas
Commission") adopted a rule governing intrastate wholesale transmission access,
as required by Texas legislation passed in 1995. The Texas Commission does not
have jurisdiction over the Company's wholesale transactions. However, the rule
requires the Company to file its FERC-approved open access transmission tariffs
with the Texas Commission to certify compliance with the Texas legislation.
During 1996, pursuant to Texas legislation, 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 safeguards, it also recommended against any legislation
that would introduce broad based retail competition before 2000. The Texas
Commission quantified the potential "excess of cost over market" ("ECOM") at
both wholesale and retail levels under several scenarios. With respect to the
Company's potential for stranded costs, the Texas Commission estimated no
wholesale ECOM, 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 have been offered
in the 1997 legislative session, the most recent bill offered in May of 1997 has
been endorsed by the Public Utility Commission of Texas, the Association of
Electric Companies of Texas and the Governor. This latest legislative proposal
would provide for a 10% rate decrease for residential customers over three years
and a securitization mechanism for each utility's stranded cost. The Company is
supportive of the current proposal and will monitor the bill as it progresses
through the legislative process.
9
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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 1995. 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 was reached by the participants.
With respect to stranded costs, the New Mexico Commission applied the same ECOM
model that was developed for Texas. The Company's New Mexico ECOM calculation
ranged from a high of $248 million to a low of $173 million. The Company also
provided the New Mexico Commission with its calculation of stranded costs for
New Mexico pursuant to FERC Order No. 888/888A, which equaled $364 million. The
1997 New Mexico legislative session adjourned without passing any significant
legislation dealing with industry deregulation.
In May 1997, in response to a motion by Public Service Company of New Mexico
("PNM"), the New Mexico Commission agreed to stay the currently pending rate
cases of the Company and PNM in return for an agreement of all interested
parties to reopen discussions to attempt a consensus resolution of all
competition issues. At this time, however, the Company cannot predict the
possibility of a consensus resolution or the contents of any such resolution.
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.
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. In June 1995,
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 that CSW claims it advanced on behalf of
the Company in certain regulatory proceedings, and $25 million for the alleged
violation of the Merger Agreement's no-solicitation provisions. All
10
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
of the claims by both parties were tried in the Bankruptcy Court and in April
1997 the judge ruled in the Company's favor finding that CSW owes the Company
$25 million in termination fees. Still pending is the Company's claim for
approximately $18 million for reimbursement of interest expense paid to
creditors which CSW agreed to pay under the Merger Agreement. Pursuant to the
terms of the Reorganization, the first $20 million in proceeds to the Company
from this litigation will be distributed to the holders of preferred stock and
common stock of the Predecessor Company as of the Effective Date. Accordingly,
unless the court awards a significant amount for reimbursement of interest
expense, the Company will not realize a material financial benefit from the CSW
litigation.
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 7.5% of the Company's operating revenues in the first quarter of
1997. Las Cruces has two actions pending against the Company, one seeking to
recover franchise fees despite the expiration of the Company's Las Cruces
franchise in March 1994 and one seeking a declaratory judgment that Las Cruces
can proceed with a condemnation action against the Company. In addition, the
New Mexico State Legislature has recently passed a bill that would allow Las
Cruces to proceed with the condemnation.
In the franchise fee action before the Federal District Court in New Mexico,
Las Cruces is 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. The Company has filed an answer denying that it has
any liability or continuing payment obligation to Las Cruces regarding franchise
fees or use of the Las Cruces' rights-of-way, and also denies that it has
committed any trespass. The Company has also filed a counterclaim seeking to
condemn, pursuant to statutory authority, those Las Cruces' rights-of-way
currently used and occupied by the Company, and Las Cruces has responded
contesting the Company's right to proceed with such a condemnation. In August
1996, the court severed the Company's counterclaim and stayed all proceedings
related to the counterclaim until further order of the court. In April 1997,
the Federal Magistrate granted the Company's motion for summary judgment on all
trespass and punitive damage issues. The bench trial on the remaining claims is
set for May 1997. The Company has reserved in its financial statements an
amount equal to the franchise fees under the expired agreement.
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 the United States District Court for the District of
New Mexico. Following a trial on the merits, the Federal Magistrate granted the
Company's motion to certify to the New Mexico Supreme
11
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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 effective April 11, 1997 which gives Las Cruces the authority to
acquire and operate the Company's distribution system within the 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 will request
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.
Las Cruces has taken several actions to position itself to acquire portions
of the Company's distribution system and certain related facilities. See Note C
of Notes to Financial Statements in the 1996 Form 10-K for discussion regarding
Las Cruces' filing with the FERC for determination of stranded cost. 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.
On April 16, 1997, Las Cruces announced its plan to build a substation and
distribution lines to serve a new customer in an industrial park owned by Las
Cruces. 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. The Las Cruces City
Council has approved a contract with SPS to provide operation and maintenance
services for the proposed Las Cruces electric distribution system, substations
and associated transmission facilities. The Company believes that, under New
Mexico law, SPS cannot participate in the construction or operation of this
facility without first obtaining a Certificate of Convenience and Necessity
("CCN") from the New Mexico Commission, based on a finding by the Commission
that the project is consistent with the public interest. In early May 1997, the
Company filed a complaint with the New Mexico Commission alleging that SPS'
participation in this project without first obtaining a CCN violates state law,
and may also violate the Company's rights under the CCN previously granted to
the Company, which gives it exclusive rights to serve customers in this area of
the state. The Company cannot predict the ultimate outcome of this complaint.
12
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
The Company has filed a lawsuit in the Dona Ana County District Court and is
pursuing a complaint simultaneously before the New Mexico Commission challenging
the legality of the sale of the revenue bonds, and the New Mexico Commission is
investigating the agreement between SPS and Las Cruces which would grant, in
certain circumstances, 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 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 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 such negotiated settlement could include an
agreement by the Company to reduce its rates as part of an overall settlement of
all issues in New Mexico. The Company intends to vigorously pursue before the
FERC its right to recover stranded costs from Las Cruces in the event Las Cruces
succeeds in leaving the system.
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.
13
<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 March 31, 1997, the related condensed statements of
operations, accumulated earnings (deficit), and cash flows for the three months
ended March 31, 1997 and for the period from February 12, 1996 to March 31,
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 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
April 29, 1997
14
<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 Prospects and
Challenges" and "Liquidity and Capital Resources" and in the Company's filings
with the Securities and Exchange Commission, which are available from the
Securities and Exchange Commission or which may be obtained upon request from
the Company. The Company cautions that the foregoing list of important factors
is not exclusive. The Company does not undertake to update any forward-looking
statement that may be made from time to time by or on behalf of the Company.
OPERATIONAL PROSPECTS AND CHALLENGES
The electric utility industry faces increasing pressure to become more
competitive as legislative, regulatory, economic and technological changes
occur. Federal legislation, 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 retail rates at the levels
established by the Rate Stipulation during the Freeze Period.
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. 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
15
<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.
In recent months, rapid escalation in fuel prices has increased concern
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 March 31, 1997, the Company billed to its customers approximately $4.2
million less than the actual cost of fuel used in its electric generating
activities.
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 State Legislature has recently passed legislation which gives Las Cruces
the legal authority to condemn the Company's distribution system and related
assets located within its city limits. If Las Cruces succeeds in its efforts,
the Company could lose its Las Cruces customer base, although the Company would
be entitled to receive "just compensation" as established by the court.
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 $4.9 million or 4% of
operating revenues for the three months ended March 31, 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 on a year to year basis for two years. 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 pursuant to the retail service
contract which was set to expire on December 31, 1993, but which had previously
been unilaterally extended by the Army for an indefinite period, until written
termination of such contract by the Army not less than one year in advance of
the termination date.
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,
16
<PAGE>
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 from $0.01685. 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
Commission is expected to take preliminary action on the Company's application
as well as the Staff challenge to that application in May 1997. During the
period from January 1 through March 31, 1997, the Company billed its New Mexico
customers approximately $1.9 million less than the actual cost of fuel used in
its electric generating activities.
Finally, the electric utility industry in general is facing significant
challenges and increased competition as a result of changes in federal
provisions relating to third-party transmission services and independent power
production, as well as potential changes in state regulatory provisions relating
to wholesale and retail service. Both the Texas and New Mexico Commissions 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 rates permitted under the Rate Stipulation,
future operations, cash flow and financial condition of the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity requirements through the end of the
decade are expected to consist of the payment of interest on the Company's
indebtedness and capital expenditures related to the Company's generating
facilities and transmission and distribution systems. The Company expects that
cash flows from operations will be sufficient for such purposes.
Long-term capital requirements of the Company will consist primarily of
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 March 31, 1997, the Company had
approximately $44.0 million in cash and cash equivalents, out of which
approximately $9.5 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 March 31, 1997,
17
<PAGE>
approximately $50.5 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 March 31, 1997, the Company
had total long-term indebtedness, excluding the short-term portion of financing
and capital lease obligations, of approximately $998.5 million and redeemable
preferred stock of $111.5 million. Long-term indebtedness as a percentage of
total capitalization totaled approximately 69%.
From June 1996 through May 1, 1997, the Company repurchased approximately
$185.7 million of its first mortgage bonds which resulted in a $2.7 million net
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. From time to time, based on prevailing market
conditions, the Company intends to continue to use a portion of its available
cash flow to reduce fixed obligations by making open market purchases of its
first mortgage bonds.
The degree to which the Company is leveraged could have important
consequences on the Company's liquidity, including (i) the Company's ability to
obtain additional financing for working capital, capital expenditures,
acquisitions, general corporate 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 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.
18
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
OPERATING REVENUES
Financial comparisons herein are based on the results for the Reorganized
Company for the three months ended March 31, 1997 as compared to the combined
results for the Reorganized Company for the period February 12, 1996 to March
31, 1996 and the Predecessor Company for the period January 1, 1996 to February
11, 1996.
Operating revenues increased 8.8% to $135.9 million for the three month
period ended March 31, 1997 compared to $124.9 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 increased 1.2% to $103.7 million for the
three month period ended March 31, 1997 compared to $102.4 million of base
revenues for the same period in 1996 primarily due to an increase in Texas base
rates associated with the implementation of the Rate Stipulation partially
offset by decreased rates on sales to Comision Federal de Electricidad de Mexico
("CFE").
KWH sales increased 3.1% for the three month period ended March 31, 1997
compared to the same period in 1996 due primarily to increased KWH sales to the
CFE and Imperial Irrigation District.
<TABLE>
<CAPTION>
KWH SALES
--------------------
1997 1996 INCREASE
--------- --------- --------
<S> <C> <C> <C>
(IN THOUSANDS)
Retail..... 1,271,729 1,251,433 1.6%
Wholesale.. 384,756 355,851 8.1%
--------- ---------
Total.... 1,656,485 1,607,284 3.1%
========= =========
</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. These costs are
reflected in the Company's fuel revenues. Fuel revenues and economy sales
increased 44.3% to $31.0 million for the three month period ended March 31, 1997
compared to $21.5 million of combined fuel revenues and economy sales for the
same period in 1996 primarily due to increased cost of fuel.
FUEL AND PURCHASED AND INTERCHANGED POWER EXPENSE
Fuel and purchased and interchanged power expense increased 29.6% to
$31.3 million for the three month period ended March 31, 1997, compared to $24.1
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 from $0.01685. 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
19
<PAGE>
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 New
Mexico Commission is expected to take preliminary action on the Company's
application as well as the Staff challenge to that application in May 1997.
OPERATION AND MAINTENANCE EXPENSE
Other operation and maintenance expense decreased 21.9% to $40.4 million
for the three month period ended March 31, 1997 compared to $51.7 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 $9.2 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 $3.4 million to $21.9 million for the
three month period ended March 31, 1997 compared to $18.5 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 $5.1 million to $3.3 million for the
three month period ended March 31, 1997 compared to $1.8 million for the
combined federal income tax benefit for the same period in 1996 primarily due to
changes in pretax income and certain differences in book and taxable income.
OTHER TAXES
Taxes other than federal income taxes decreased $1.9 million to $11.1
million for the three month period ended March 31, 1997 compared to $13.0
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 property taxes for the full year
of 1996, but were recorded beginning in July 1996; (ii) a decrease in Arizona
taxable property base resulting from depreciation; and (iii) the elimination of
Arizona sales tax on lease payments due to the reacquisition of leased property
in February 1996.
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 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 three month
period ended March 31, 1997.
20
<PAGE>
EXTRAORDINARY LOSS ON REPURCHASE OF DEBT, NET
Extraordinary loss on repurchase of debt for the three month period ended
March 31, 1997 which represented the payment of premiums on debt repurchased and
the recognition of unamortized issuance expenses on that debt was $2.2 million,
net federal income tax benefit of $1.2 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 three month period ended March 31,
1997.
NET INCOME
The change in net income for the first three months of 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.
21
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Registrant hereby incorporates by reference the information set forth
in Part I of this report under the caption "Litigation with Central and South
West Corporation."
22
<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
23
<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: May 13, 1997
24
<PAGE>
EL PASO ELECTRIC COMPANY
INDEX TO EXHIBITS
Exhibit Sequentially
Number Exhibit Numbered Page
- ------- ------- -------------
11 Statement re Computation
of Per Share Earnings
15 Letter re Unaudited Interim
Financial Information
27 Financial Data Schedule (EDGAR
filing only)
25
<PAGE>
EXHIBIT 11
EL PASO ELECTRIC COMPANY
COMPUTATION OF EARNINGS PER COMMON SHARE
(IN THOUSANDS EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
| PREDECESSOR
REORGANIZED COMPANY | COMPANY
------------------------ | -----------
THREE PERIOD FROM | PERIOD FROM
MONTHS FEBRUARY 12 | JANUARY 1
ENDED TO | TO
MARCH 31, MARCH 31, | FEBRUARY 11,
1997 1996 | 1996
PRIMARY: ----------- ----------- | ------------
<S> <C> <C> | <C>
Weighted average number of common shares outstanding...... 60,030,286 59,999,981 | 35,544,330
Weighted average number of restricted shares.............. 170,253 55,000 | -
Net effect of dilutive stock options...................... 360,798 - | -
----------- ----------- | -----------
Total................................................... 60,561,337 60,054,981 | 35,544,330
=========== =========== | ===========
|
|
Net income applicable to common stock: |
Income before extraordinary items....................... $ 2,443 $ 137 | $ 118,198
Extraordinary loss on repurchase of debt, net of federal |
income tax benefit.................................... (2,244) - | -
Extraordinary gain on discharge of debt................. - - | 264,273
----------- ----------- | -----------
Net income applicable to common stock................... $ 199 $ 137 | $ 382,471
=========== =========== | ===========
|
Net income per common share: |
Income before extraordinary items....................... $ 0.040 $ 0.002 | $ 3.325
Extraordinary loss on repurchase of debt, net of federal |
income tax benefit.................................... (0.037) - | -
Extraordinary gain on discharge of debt................. - - | 7.435
----------- ----------- | -----------
Net income.............................................. $ 0.003 $ 0.002 | $ 10.760
=========== =========== | ===========
|
FULLY DILUTED (1): |
Weighted average number of common shares outstanding...... 60,030,286 59,999,981 | 35,544,330
Weighted average number of restricted shares.............. 170,253 55,000 | -
Net effect of dilutive stock options...................... 360,798 - | -
----------- ----------- | -----------
Total................................................... 60,561,337 60,054,981 | 35,544,330
=========== =========== | ===========
|
|
Net income applicable to common stock: |
Income before extraordinary items....................... $ 2,443 $ 137 | $ 118,198
Extraordinary loss on repurchase of debt, net of federal |
income tax benefit.................................... (2,244) - | -
Extraordinary gain on discharge of debt................. - - | 264,273
----------- ----------- | -----------
Net income applicable to common stock................... $ 199 $ 137 | $ 382,471
=========== =========== | ===========
|
Net income per common share: |
Income before extraordinary items....................... $ 0.040 $ 0.002 | $ 3.325
Extraordinary loss on repurchase of debt, net of federal |
income tax benefit.................................... (0.037) - | -
Extraordinary gain on discharge of debt................. - - | 7.435
----------- ----------- | -----------
Net income.............................................. $ 0.003 $ 0.002 | $ 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 April 29, 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
April 29, 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 MARCH 31, 1997 AND THE RELATED
STATEMENTS OF INCOME AND CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,497,312
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 139,006
<TOTAL-DEFERRED-CHARGES> 126,402
<OTHER-ASSETS> 30,231
<TOTAL-ASSETS> 1,792,951
<COMMON> 60,239
<CAPITAL-SURPLUS-PAID-IN> 240,005
<RETAINED-EARNINGS> 31,034
<TOTAL-COMMON-STOCKHOLDERS-EQ> 331,278
111,515
0
<LONG-TERM-DEBT-NET> 971,538
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 80
0
<CAPITAL-LEASE-OBLIGATIONS> 26,932
<LEASES-CURRENT> 28,702
<OTHER-ITEMS-CAPITAL-AND-LIAB> 322,906
<TOT-CAPITALIZATION-AND-LIAB> 1,792,951
<GROSS-OPERATING-REVENUE> 135,857
<INCOME-TAX-EXPENSE> 3,220
<OTHER-OPERATING-EXPENSES> 104,624
<TOTAL-OPERATING-EXPENSES> 107,844
<OPERATING-INCOME-LOSS> 28,013
<OTHER-INCOME-NET> 74
<INCOME-BEFORE-INTEREST-EXPEN> 28,087
<TOTAL-INTEREST-EXPENSE> 22,495
<NET-INCOME> 3,348<F1>
3,149
<EARNINGS-AVAILABLE-FOR-COMM> 199
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 79,517
<CASH-FLOW-OPERATIONS> 50,520
<EPS-PRIMARY> 0.003
<EPS-DILUTED> 0.003
<FN>
<F1>Net income is net of extraordinary loss on repurchase of debt (net of federal
income tax benefit) of ($2,244).
</FN>
</TABLE>
