<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 SEPTEMBER 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____ TO ____
COMMISSION FILE NUMBER 0-296
EL PASO ELECTRIC COMPANY
(Exact name of registrant as specified in its charter)
TEXAS 74-0607870
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
KAYSER CENTER, 100 NORTH STANTON, EL PASO, TEXAS 79901
(Address of principal executive offices) (Zip Code)
(915) 543-5711
(Registrant's telephone number, including area code)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTIONS 12, 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT. YES X NO
--- ---
AS OF NOVEMBER 6, 1998, THERE WERE 60,270,362 SHARES OF THE COMPANY'S NO
PAR VALUE COMMON STOCK OUTSTANDING.
================================================================================
<PAGE>
EL PASO ELECTRIC COMPANY
INDEX TO FORM 10-Q
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - September 30, 1998 and December 31, 1997...... 1
Statements of Operations - Three Months, Nine Months and
Twelve Months Ended September 30, 1998 and 1997................ 3
Statements of Comprehensive Operations - Three Months,
Nine Months and Twelve Months Ended September 30, 1998
and 1997....................................................... 5
Statements of Cash Flows - Nine Months Ended
September 30, 1998 and 1997.................................... 6
Notes to Financial Statements.................................. 7
Independent Auditors' Review Report............................ 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................... 24
Item 6. Exhibits and Reports on Form 8-K....................... 24
i
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EL PASO ELECTRIC COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30,
(IN THOUSANDS) 1998 DECEMBER 31,
(UNAUDITED) 1997
------------- ------------
<S> <C> <C>
UTILITY PLANT:
Electric plant in service.............................................. $1,547,969 $1,538,572
Less accumulated depreciation and amortization......................... 226,121 164,283
---------- ----------
Net plant in service................................................. 1,321,848 1,374,289
Construction work in progress.......................................... 61,681 43,761
Nuclear fuel; includes fuel in process of $2,072 and
$9,910, respectively................................................. 95,117 86,609
Less accumulated amortization.......................................... 52,590 40,142
---------- ----------
Net nuclear fuel..................................................... 42,527 46,467
---------- ----------
Net utility plant.................................................. 1,426,056 1,464,517
---------- ----------
CURRENT ASSETS:
Cash and temporary investments......................................... 195,825 111,227
Accounts receivable, principally trade, net of allowance for
doubtful accounts of $1,730 and $5,124, respectively................. 70,226 58,960
Inventories, at cost................................................... 27,368 27,130
Net undercollection of fuel revenues................................... 1,416 13,870
Prepayments and other.................................................. 13,193 6,930
---------- ----------
Total current assets............................................... 308,028 218,117
---------- ----------
LONG-TERM CONTRACT RECEIVABLE............................................ 24,300 27,659
---------- ----------
DEFERRED CHARGES AND OTHER ASSETS:
Accumulated deferred income taxes, net................................. 16,289 43,208
Decommissioning trust fund............................................. 41,858 38,438
Other.................................................................. 18,653 20,674
---------- ----------
Total deferred charges and other assets............................ 76,800 102,320
---------- ----------
TOTAL ASSETS....................................................... $1,835,184 $1,812,613
========== ==========
</TABLE>
See accompanying notes to financial statements.
1
<PAGE>
EL PASO ELECTRIC COMPANY
BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
CAPITALIZATION AND LIABILITIES SEPTEMBER 30,
(IN THOUSANDS EXCEPT FOR SHARE DATA) 1998 DECEMBER 31,
(UNAUDITED) 1997
------------- ------------
<S> <C> <C>
CAPITALIZATION:
Common stock, stated value $1 per share, 100,000,000 shares
authorized, 60,122,377 and 60,060,034 shares issued and
outstanding; and 149,893 and 196,404 restricted shares,
respectively........................................................ $ 60,272 $ 60,256
Capital in excess of stated value..................................... 241,336 241,222
Unearned compensation--restricted stock awards........................ (675) (1,138)
Retained earnings..................................................... 108,869 69,484
Accumulated other comprehensive loss (unrealized
losses on marketable securities), net of tax........................ (1,308) (184)
---------- ----------
Common stock equity............................................... 408,494 369,640
Preferred stock, cumulative, no par value, 2,000,000 shares
authorized:
Redemption required--1,319,848 and 1,213,188 shares issued
and outstanding, respectively; at liquidation preference........ 131,985 121,319
Long-term debt........................................................ 872,235 938,562
Financing and capital lease obligations............................... 24,110 28,248
---------- ----------
Total capitalization............................................ 1,436,824 1,457,769
---------- ----------
CURRENT LIABILITIES:
Current maturities of long-term debt and financing and
capital lease obligations........................................... 63,303 28,463
Accounts payable, principally trade................................... 21,290 24,957
Taxes accrued other than federal income taxes......................... 23,316 19,292
Interest accrued...................................................... 19,928 21,172
Other................................................................. 20,267 17,439
---------- ----------
Total current liabilities....................................... 148,104 111,323
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES:
Decommissioning....................................................... 99,177 94,917
Accrued postretirement benefit liability.............................. 78,771 75,531
Accrued pension liability............................................. 33,618 33,909
Other................................................................. 38,690 39,164
---------- ----------
Total deferred credits and other liabilities.................... 250,256 243,521
---------- ----------
COMMITMENTS AND CONTINGENCIES
TOTAL CAPITALIZATION AND LIABILITIES............................ $1,835,184 $1,812,613
========== ==========
</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 MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Base revenues................................................ $ 136,238 $ 133,005 $ 357,492 $ 349,963
Fuel revenues and economy sales.............................. 39,283 35,845 99,053 96,585
Other........................................................ 1,372 1,290 3,696 3,724
----------- ----------- ----------- -----------
176,893 170,140 460,241 450,272
----------- ----------- ----------- -----------
ENERGY EXPENSES:
Fuel......................................................... 30,739 28,459 83,851 82,368
Purchased and interchanged power............................. 7,765 8,921 15,573 16,921
----------- ----------- ----------- -----------
38,504 37,380 99,424 99,289
----------- ----------- ----------- -----------
OPERATING REVENUES NET OF ENERGY EXPENSES...................... 138,389 132,760 360,817 350,983
----------- ----------- ----------- -----------
OTHER OPERATING EXPENSES:
Other operations............................................. 30,604 34,452 94,797 96,605
Maintenance.................................................. 8,307 5,680 24,829 24,519
New Mexico settlement charge................................. 6,272 -- 6,272 --
Depreciation and amortization................................ 22,681 22,283 67,220 66,286
Taxes other than income taxes................................ 11,675 11,166 34,191 33,116
----------- ----------- ----------- -----------
79,539 73,581 227,309 220,526
----------- ----------- ----------- -----------
OPERATING INCOME............................................... 58,850 59,179 133,508 130,457
----------- ----------- ----------- -----------
OTHER INCOME (DEDUCTIONS):
Investment income............................................ 3,335 1,576 8,327 3,698
Litigation settlement, net................................... -- -- -- 7,500
Settlement of bankruptcy professional fees................... 548 (256) 1,152 56
Other, net................................................... (410) 17 (1,244) (842)
----------- ----------- ----------- -----------
3,473 1,337 8,235 10,412
----------- ----------- ----------- -----------
INCOME BEFORE INTEREST CHARGES................................. 62,323 60,516 141,743 140,869
----------- ----------- ----------- -----------
INTEREST CHARGES (CREDITS):
Interest on long-term debt................................... 20,185 21,141 60,880 64,949
Other interest............................................... 1,816 1,714 5,369 5,100
Interest capitalized and deferred............................ (1,625) (1,449) (4,871) (4,339)
----------- ----------- ----------- -----------
20,376 21,406 61,378 65,710
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES..................................... 41,947 39,110 80,365 75,159
INCOME TAX EXPENSE............................................. 15,898 15,122 30,106 29,333
----------- ----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY LOSS ON
REPURCHASES OF DEBT.......................................... 26,049 23,988 50,259 45,826
EXTRAORDINARY LOSS ON REPURCHASES OF DEBT, NET OF
FEDERAL INCOME TAX BENEFIT................................... -- (69) -- (2,741)
----------- ----------- ----------- -----------
NET INCOME..................................................... 26,049 23,919 50,259 43,085
PREFERRED STOCK DIVIDEND REQUIREMENTS.......................... 3,727 3,331 10,874 9,718
----------- ----------- ----------- -----------
NET INCOME APPLICABLE TO COMMON STOCK.......................... $ 22,322 $ 20,588 $ 39,385 $ 33,367
=========== =========== =========== ===========
BASIC EARNINGS PER COMMON SHARE:
Income before extraordinary loss on repurchases of debt...... $ 0.371 $ 0.343 $ 0.655 $ 0.601
Extraordinary loss on repurchases of debt, net of
federal income tax benefit................................ -- (0.001) -- (0.046)
----------- ----------- ----------- -----------
Net income................................................ $ 0.371 $ 0.342 $ 0.655 $ 0.555
=========== =========== =========== ===========
DILUTED EARNINGS PER COMMON SHARE:
Income before extraordinary loss on repurchases of debt...... $ 0.368 $ 0.343 $ 0.650 $ 0.599
Extraordinary loss on repurchases of debt, net of
federal income tax benefit................................ -- (0.001) -- (0.045)
----------- ----------- ----------- -----------
Net income................................................ $ 0.368 $ 0.342 $ 0.650 $ 0.554
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING........... 60,168,841 60,129,784 60,168,030 60,124,444
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND
DILUTIVE POTENTIAL COMMON SHARES OUTSTANDING................. 60,652,472 60,287,952 60,611,724 60,321,981
=========== =========== =========== ===========
</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>
TWELVE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
1998 1997
------------ ------------
<S> <C> <C>
OPERATING REVENUES:
Base revenues..................................................... $ 466,508 $ 459,527
Fuel revenues and economy sales................................... 132,640 129,023
Other............................................................. 4,859 4,744
----------- -----------
604,007 593,294
----------- -----------
ENERGY EXPENSES:
Fuel.............................................................. 114,940 112,374
Purchased and interchanged power.................................. 18,782 21,239
----------- -----------
133,722 133,613
----------- -----------
OPERATING REVENUES NET OF ENERGY EXPENSES........................... 470,285 459,681
----------- -----------
OTHER OPERATING EXPENSES:
Other operations.................................................. 130,108 132,857
Maintenance....................................................... 35,092 34,938
New Mexico settlement charge...................................... 6,272 --
Depreciation and amortization..................................... 89,669 89,105
Taxes other than income taxes..................................... 44,426 42,365
----------- -----------
305,567 299,265
----------- -----------
OPERATING INCOME.................................................... 164,718 160,416
----------- -----------
OTHER INCOME (DEDUCTIONS):
Investment income................................................. 10,724 5,011
Litigation settlement, net........................................ -- 7,500
Settlement of bankruptcy professional fees........................ 1,514 2,361
Other, net........................................................ (296) (1,074)
----------- -----------
11,942 13,798
----------- -----------
INCOME BEFORE INTEREST CHARGES...................................... 176,660 174,214
----------- -----------
INTEREST CHARGES (CREDITS):
Interest on long-term debt........................................ 82,048 87,644
Other interest.................................................... 6,469 6,446
Interest capitalized and deferred................................. (6,407) (5,809)
----------- -----------
82,110 88,281
----------- -----------
INCOME BEFORE INCOME TAXES.......................................... 94,550 85,933
INCOME TAX EXPENSE.................................................. 35,549 32,147
----------- -----------
INCOME BEFORE EXTRAORDINARY LOSS ON
REPURCHASES OF DEBT............................................... 59,001 53,786
EXTRAORDINARY LOSS ON REPURCHASES OF DEBT, NET OF
FEDERAL INCOME TAX BENEFIT........................................ (34) (2,741)
----------- -----------
NET INCOME.......................................................... 58,967 51,045
PREFERRED STOCK DIVIDEND REQUIREMENTS............................... 14,300 12,780
----------- -----------
NET INCOME APPLICABLE TO COMMON STOCK............................... $ 44,667 $ 38,265
=========== ===========
BASIC EARNINGS PER COMMON SHARE:
Income before extraordinary loss on repurchases of debt........... $ 0.743 $ 0.682
Extraordinary loss on repurchases of debt, net of
federal income tax benefit..................................... (0.001) (0.046)
----------- -----------
Net income..................................................... $ 0.742 $ 0.636
=========== ===========
DILUTED EARNINGS PER COMMON SHARE:
Income before extraordinary loss on repurchases of debt........... $ 0.739 $ 0.680
Extraordinary loss on repurchases of debt, net of
federal income tax benefit..................................... (0.001) (0.045)
----------- -----------
Net income..................................................... $ 0.738 $ 0.635
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING................ 60,161,105 60,113,236
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND
DILUTIVE POTENTIAL COMMON SHARES OUTSTANDING...................... 60,547,595 60,276,170
=========== ===========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
EL PASO ELECTRIC COMPANY
STATEMENTS OF COMPREHENSIVE OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
-------------------- -------------------- --------------------
1998 1997 1998 1997 1998 1997
--------- --------- --------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
NET INCOME...................................... $26,049 $23,919 $50,259 $43,085 $58,967 $51,045
OTHER COMPREHENSIVE INCOME (LOSS):
Net unrealized gain (loss) on marketable
securities, less applicable income tax
benefit (expense) of $813, $11, $606,
$62, $768 and $(84), respectively............ (1,510) (21) (1,124) (115) (1,425) 155
------- ------- ------- ------- ------- -------
COMPREHENSIVE INCOME............................ 24,539 23,898 49,135 42,970 57,542 51,200
PREFERRED STOCK DIVIDEND REQUIREMENTS........... 3,727 3,331 10,874 9,718 14,300 12,780
------- ------- ------- ------- ------- -------
COMPREHENSIVE INCOME APPLICABLE
TO COMMON STOCK................................ $20,812 $20,567 $38,261 $33,252 $43,242 $38,420
======= ======= ======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
EL PASO ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................ $ 50,259 $ 43,085
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................... 85,033 83,271
Deferred income taxes, net...................................... 27,525 27,305
New Mexico settlement charge.................................... 6,272 --
Other operating activities...................................... 2,987 1,781
Extraordinary loss on repurchases of debt, net of federal
income tax benefit........................................... -- 2,741
Change in:
Accounts receivable............................................. (11,266) (8,670)
Federal income tax receivable................................... -- 17,635
Inventories..................................................... (238) 703
Net undercollection of fuel revenues............................ 6,182 (9,552)
Prepayments and other........................................... (6,263) (2,205)
Long-term contract receivable................................... 3,359 2,525
Accounts payable................................................ (3,667) (9,492)
Taxes accrued other than federal income taxes................... 4,024 3,344
Interest accrued................................................ (1,244) (2,973)
Other current liabilities....................................... 2,972 1,782
Deferred charges and credits.................................... 6,488 6,867
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES..................... 172,423 158,147
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility property, plant and equipment................ (33,753) (36,306)
Additions to nuclear fuel......................................... (12,641) (17,560)
Investment in decommissioning trust fund.......................... (5,151) (4,497)
Other investing activities........................................ (270) 19
---------- ----------
NET CASH USED FOR INVESTING ACTIVITIES........................ (51,815) (58,344)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchases of and payments on long-term debt..................... (30,604) (81,228)
Net (repayments of ) proceeds from financing obligations.......... (3,866) 1,649
Redemption of capital lease obligations........................... (1,469) (1,374)
Other financing activities........................................ (71) (5)
---------- ----------
NET CASH USED FOR FINANCING ACTIVITIES........................ (36,010) (80,958)
---------- ----------
NET INCREASE IN CASH AND TEMPORARY INVESTMENTS...................... 84,598 18,845
CASH AND TEMPORARY INVESTMENTS AT BEGINNING OF PERIOD............... 111,227 68,767
---------- ----------
CASH AND TEMPORARY INVESTMENTS AT END OF PERIOD..................... $ 195,825 $ 87,612
========== ==========
</TABLE>
See accompanying notes to financial statements.
6
<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, 1997 (the
"1997 Form 10-K"). Capitalized terms used in this report and not defined herein
have the meaning ascribed for such terms in the 1997 Form 10-K. In the opinion
of management of the Company, the accompanying financial statements contain all
adjustments necessary to present fairly the financial position of the Company at
September 30, 1998 and December 31, 1997; the results of operations for the
three, nine and twelve months ended September 30, 1998 and 1997; and cash flows
for the nine months ended September 30, 1998 and 1997. The results of
operations for the three, nine and twelve months ended September 30, 1998 are
not necessarily indicative of the results to be expected for the full calendar
year.
SUPPLEMENTAL STATEMENTS OF CASH FLOW DISCLOSURES (IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash paid (refunded) for:
Income taxes, net........................... $ 1,400 $(16,035)
Interest.................................... 53,933 59,229
Reorganization items--professional
fees and other.......................... 4,280 2,469
Non-cash investing and financing activities:
Issuance of preferred stock for
pay-in-kind dividend.................... 10,666 9,533
Issuance of restricted shares of
common stock............................ 195 411
</TABLE>
7
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
RECONCILIATION OF BASIC AND DILUTED EARNINGS PER COMMON SHARE
The reconciliation of basic and diluted earnings per common share before
extraordinary item is presented below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------
1998 1997
----------------------------------- -----------------------------------
PER PER
COMMON COMMON
INCOME SHARES SHARE INCOME SHARES SHARE
-------------- ---------- ------- -------------- ---------- -------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary item...... $26,049 $23,988
Less: Preferred stock dividends..... 3,727 3,331
------- -------
Basic earnings per common share:
Income applicable to common
stock............................... 22,322 60,168,841 $0.371 20,657 60,129,784 $0.343
====== ======
Effect of dilutive securities:
Unvested restricted stock............ -- 25,726 -- 23,717
Stock options........................ -- 457,905 -- 134,451
------- ---------- ------- ----------
Diluted earnings per common share:
Income applicable to common
stock............................... $22,322 60,652,472 $0.368 $20,657 60,287,952 $0.343
======= ========== ====== ======= ========== ======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------
1998 1997
----------------------------------- -----------------------------------
PER PER
COMMON COMMON
INCOME SHARES SHARE INCOME SHARES SHARE
-------------- ---------- ------- -------------- ---------- -------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary item...... $50,259 $45,826
Less: Preferred stock dividends..... 10,874 9,718
------- -------
Basic earnings per common share:
Income applicable to common
stock............................... 39,385 60,168,030 $0.655 36,108 60,124,444 $0.601
====== ======
Effect of dilutive securities:
Unvested restricted stock............ -- 23,731 -- 20,109
Stock options........................ -- 419,963 -- 177,428
------- ---------- ------- ----------
Diluted earnings per common share:
Income applicable to common
stock............................... $39,385 60,611,724 $0.650 $36,108 60,321,981 $0.599
======= ========== ====== ======= ========== ======
</TABLE>
8
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------
1998 1997
----------------------------------- -----------------------------------
PER PER
COMMON COMMON
INCOME SHARES SHARE INCOME SHARES SHARE
-------------- ---------- ------- -------------- ---------- -------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary item...... $59,001 $53,786
Less: Preferred stock dividends..... 14,300 12,780
------- -------
Basic earnings per common share:
Income applicable to common
stock............................... 44,701 60,161,105 $0.743 41,006 60,113,236 $0.682
====== ======
Effect of dilutive securities:
Unvested restricted stock............ -- 25,807 -- 20,411
Stock options........................ -- 360,683 -- 142,523
------- ---------- ------- ----------
Diluted earnings per common share:
Income applicable to common
stock............................... $44,701 60,547,595 $0.739 $41,006 60,276,170 $0.680
======= ========== ====== ======= ========== ======
</TABLE>
B. RATE MATTERS
For a full discussion of the Company's rate matters, see Note B of Notes to
Financial Statements in the 1997 Form 10-K.
NEW MEXICO RATE MATTERS
Rate Case Settlement. On July 15, 1998, the Company entered into a
Stipulation and Settlement Agreement (the "New Mexico Settlement") with certain
parties to its pending New Mexico rate case, including the New Mexico Commission
staff and the New Mexico Attorney General, but not the City of Las Cruces ("Las
Cruces"). Following a hearing on the New Mexico Settlement, and after
considering Las Cruces' opposition, the New Mexico Commission issued an order
adopting (with some modification) the New Mexico Settlement on September 24,
1998 (the "Case 2722 Order"). The Commission's modifications were related to
the ability of a commission to bind future commissions. The Company believes
that, under applicable law, the findings of a commission with respect to issues
of fact are binding in future proceedings. The Case 2722 Order provides for:
(i) a total jurisdictional base revenue reduction of $4.6 million; (ii) a 30-
month moratorium on rate increases or decreases in New Mexico; (iii) the
elimination of the need for future fuel reconciliations in New Mexico by
incorporating the existing fixed fuel factor into rates; (iv) an increased
degree of ratemaking certainty for the future achieved by an agreement among the
signatories reducing the net value of certain assets by approximately $40
million on a New Mexico jurisdictional basis for ratemaking purposes (but with
no effect on book values), while establishing the signatories' agreement that
the Company is entitled to 100% recovery of such revalued assets; and (v) the
ability to enter into long-term rate contracts with commercial and industrial
customers in New Mexico. The Case 2722 Order became nonappealable
9
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
and effective on October 26, 1998. Additionally, as a result of the Case 2722
Order, the Company will contribute, pursuant to the New Mexico Settlement, $0.4
million annually ($1.0 million over the term of the moratorium period) to a
social services agency in Dona Ana County providing assistance to low-income
individuals. Although the New Mexico Settlement was structured to allow recovery
of previously underrecovered fuel balances, the Case 2722 Order adopting the New
Mexico Settlement does not support the recognition of this asset in the
Company's financial statements under existing accounting standards. The Company
wrote off the book value of undercollected fuel revenues in its New Mexico
jurisdiction as of September 30, 1998, which amounted to $3.8 million, net of
tax, although the Company believes that, based on current estimates of future
fuel prices and operating costs, it will recover 100% of these amounts. The
Company negotiated the New Mexico Settlement so as to substantially reduce the
likelihood of additional rate reductions during the moratorium period. However,
in light of the regulatory framework in New Mexico and the movement toward
competition, there can be no assurance that the Company will be able to maintain
its rates at the new levels.
TEXAS RATE MATTERS
The Company's rates for its Texas customers are governed by a rate order
entered by the Texas Commission in Docket 12700 (the "Agreed Order") adopting
and setting rates consistent with the Rate Stipulation. Under the Agreed Order
and Rate Stipulation, the base rates for most customers in Texas were fixed for
a ten-year period, which began in August 1995 (the "Freeze Period"), at rates
that the Texas Commission determined were just and reasonable. Further, the
signatories to the Rate Stipulation (other than the General Counsel, the Texas
Office of Public Utility Counsel and the State of Texas) agreed not to initiate
an inquiry into the reasonableness of the Company's rates during the Freeze
Period and to support the Company's entitlement to rates at the freeze level
throughout the Freeze Period.
The Company believes that it has substantial legal arguments that would
prevent any attempt to reduce the Company's rates in Texas. However, the Company
intends to voluntarily seek rate decreases in its Texas service territory
similar to the reductions negotiated and implemented in New Mexico. The Company
has contacted the Texas Commission staff and the City of El Paso regarding such
rate reductions in Texas. While the Company believes Texas rate reductions of
approximately $15 million would be comparable to the New Mexico reductions, the
Company has not reached an agreement with the City of El Paso, the Texas
Commission staff or any other party, so the actual amount of any reduction is
not known at this time.
C. COMMITMENTS AND CONTINGENCIES
For a full discussion of commitments and contingencies, including
environmental matters related to the Company, see Note H of Notes to Financial
Statements in the 1997 Form 10-K. In addition, see Note C of Notes to Financial
Statements in the 1997 Form 10-K for a full discussion of matters related to
Palo Verde, including decommissioning and the operation of steam generators.
10
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
D. LITIGATION
For a full discussion of litigation, see Note I of Notes to Financial
Statements in the 1997 Form 10-K.
LITIGATION WITH LAS CRUCES
Las Cruces is attempting to replace the Company as the electric service
provider to the city by acquiring, through condemnation or a negotiated
purchase, the distribution assets and other facilities used to provide electric
service to customers in Las Cruces. Sales to customers in Las Cruces represent
approximately 8% of the Company's annual operating revenues.
In May 1998, the Company filed a lawsuit in New Mexico federal district court
seeking a declaration that recent New Mexico legislation purporting to give Las
Cruces the authority to condemn the Company's distribution system within its
city limits and a territory extending five miles beyond the municipal boundary
is unconstitutional and invalid. Las Cruces answered the declaratory judgment
action and filed a counterclaim alleging that the Company has been unjustly
enriched by its refusal to pay Las Cruces a franchise fee since 1994. The
Company filed a motion to stay the counterclaim since the unjust enrichment
issue has been litigated and appealed in another proceeding and a ruling from
the federal appellate court on such proceeding is expected soon. The court
denied the Company's motion, and the parties are conducting discovery.
In February 1998, the Company received notice from Las Cruces of its intent
to file a condemnation action in New Mexico district court. In accordance with
the procedures required by the New Mexico Eminent Domain Code, a panel of three
appraisers was appointed to arrive at a fair compensation value for the
Company's distribution facilities in question. The appraisers valued the
property between $36 million and $60 million. On July 9, 1998, Las Cruces
submitted to the Company an offer to pay the Company $36 million for the local
distribution facilities if the Company would agree to the resolution of certain
other issues. On July 20, 1998, the Company rejected Las Cruces' offer, which
the Company believed did not satisfy the New Mexico Eminent Domain Code
requirement that the offer not be less than the appraisal prepared by the Las
Cruces appraiser. The Company expects Las Cruces to file a condemnation suit in
state district court. At this time, the Company cannot predict the outcome of
any such suit which may be filed.
Las Cruces has taken several actions to position itself to acquire portions
of the Company's distribution system and certain related facilities. Las Cruces
sold approximately $73 million in revenue bonds in October 1995 to provide
funding to finance the acquisition, by condemnation or negotiated purchase, of
the Company's electrical distribution assets within and adjacent to the Las
Cruces city limits. The Company has challenged the legality of the sale of the
revenue bonds. Oral argument before the New Mexico Supreme Court on issues
related to Las Cruces' authority to issue the revenue bonds was held in November
1997 and the parties are awaiting a ruling on the matter.
11
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
In July 1996, Las Cruces exercised its right under FERC Order No. 888 to
request that the Company calculate Las Cruces' stranded cost obligation should
it leave the Company's system and operate its own municipal utility while
receiving certain transmission services from the Company. Las Cruces
subsequently filed a request at the FERC for a summary determination that Las
Cruces would have no stranded cost obligation to the Company or, in the
alternative, that the FERC convene a hearing to establish the amount of any
stranded costs. An evidentiary hearing was held before an administrative law
judge of the FERC in February 1998 on the issues of (i) whether the Company has
met the "reasonable expectation" standard so as to justify recovery of stranded
costs from Las Cruces, and (ii) if so, the amount of stranded costs that the
Company may recover from Las Cruces. The Company submitted evidence in that
proceeding showing that it was entitled to recover stranded generation costs
from Las Cruces of $101 million. In contrast, the FERC staff recommended that
the Company be permitted to recover stranded costs of $31.8 million, and Las
Cruces claimed that its stranded cost obligation was in the range of $0 to $17.4
million. In June 1998, an administrative law judge of the FERC issued an
Initial Decision recommending that Las Cruces pay to the Company $30.4 million
for stranded costs if Las Cruces chose to leave the Company's system as of July
1, 1998. The amount recommended by the administrative law judge would decline
over time based on when, if ever, Las Cruces leaves the Company's system, and
would be reduced to zero if Las Cruces leaves the Company's system after
December 31, 2002. The administrative law judge's Initial Decision is not
binding on the FERC. The Company believes the administrative law judge's
Initial Decision is inconsistent with the intent and policy of FERC Order No.
888, which establishes the right to full recovery of a utility's stranded
generation cost. The Company continues to believe it is entitled to full
compensation for the costs it incurred with the expectation of continuing to
serve Las Cruces. The Company has sought review of the administrative law
judge's Initial Decision by the FERC and, if necessary, will contest any final
FERC decision on appeal. See Note B of Notes to Financial Statements in the
1997 Form 10-K for a full discussion of stranded costs.
In 1996, the Company filed its open access transmission tariffs (the "Open
Access Case") in compliance with FERC Order No. 888. The Company reached a
settlement with the various parties, including Las Cruces, regarding the rates
for transmission service and ancillary services under such tariffs. However,
the settlement, which was filed with the FERC in March 1997 and approved by the
FERC with a minor modification in June 1998, reserved for litigation issues
related to the criteria by which the Company will determine the amount of
transmission capacity that is available for use by third parties desiring to use
its transmission system, including the availability of firm transmission service
over the single circuit transmission and back-to-back direct current terminal
(the "Eddy County Tie") connecting the Company to Southwestern Public Service
Company ("SPS"). An evidentiary hearing on the reserved issues was held before
an administrative law judge of the FERC in January 1998. That hearing also
encompassed consideration of whether the Company should be required to offer
back-up generation service to transmission customers using the Eddy County Tie
for firm transmission service. In an Initial Decision issued August 26, 1998,
the administrative law judge ruled that the method used by the Company to
evaluate transmission service requests was reasonable and consistent with FERC
policies, and that the Company is not required by FERC Order No. 888 to provide
back-up generation services. Based on conditions that existed in the Company's
electric system in 1997, the effect of the
12
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
administrative law judge's ruling was that the Company had no firm import
capacity available on its transmission system for use by third-party
transmission customers. However, the administrative law judge noted that
material changes to the Company's system, such as the loss of load from Las
Cruces or Comision Federal de Electricidad de Mexico, the national electric
utility of Mexico ("CFE"), would necessitate a recalculation of transmission
availability. This Initial Decision is subject to review by the FERC.
In April 1998, SPS filed a complaint against the Company in which it asked
the FERC to order the Company to provide transmission and back-up generation
services that would be needed for the delivery of electricity from SPS to a Las
Cruces municipal electric system. In a September 1998 order in that proceeding,
the FERC directed the Company to evaluate SPS' transmission service request
within 30 days after issuance of a FERC decision in the Open Access Case. The
FERC further noted that if it is determined at the conclusion of proceedings in
the Open Access Case that no available transmission capacity exists on the Eddy
County Tie, SPS' complaint will be considered to have been denied.
The Company continues to believe that it can provide lower cost electric
service to customers in Las Cruces than can be achieved through a municipal
takeover. Accordingly, the Company has stated its strong preference for a
resolution of its differences with Las Cruces through negotiation rather than
litigation and condemnation.
The Company is unable to predict the outcome of Las Cruces' efforts to
replace the Company as its electric service provider or the effects it may have
on the Company's financial position, results of operations and cash flows. The
Company does not believe it is probable that a loss has been incurred and,
therefore, has made no provision in the accompanying financial statements
related to these matters.
LITIGATION WITH DEPARTMENT OF ENERGY
The Nuclear Waste Act of 1982, as amended in 1987 (the "Waste Act"), requires
the Department of Energy ("DOE") to accept and dispose of all spent nuclear fuel
and other high-level radioactive wastes generated by all domestic power
reactors. Under the Waste Act, DOE was to develop the facilities necessary for
the storage and disposal of spent nuclear fuel and to have the first such
facility in operation by 1998. That facility was to be a permanent repository,
but DOE has announced that such a repository now cannot be completed before
2010. In July 1996, the United States Court of Appeals for District of Columbia
Circuit (D.C. Circuit) ruled that DOE has an obligation to start disposing of
spent nuclear fuel no later than January 31, 1998. On July 24, 1998, Arizona
Public Service Company filed, on behalf of all Palo Verde Participants, a
Petition for Review with the D.C. Circuit regarding DOE's failure to comply with
its obligation to begin accepting spent nuclear fuel. At this time, the Company
cannot predict the outcome of pending litigation against DOE on behalf of the
Palo Verde Participants.
13
<PAGE>
Independent Auditors' Review Report
-----------------------------------
The Board of Directors and Shareholders
El Paso Electric Company:
We have reviewed the accompanying condensed balance sheet of El Paso Electric
Company as of September 30, 1998, the related condensed statements of operations
and comprehensive operations for the three months, nine months and twelve months
ended September 30, 1998 and 1997, and the related condensed statements of cash
flows for the nine months ended September 30, 1998 and 1997. These condensed
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed financial statements referred to above for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of El Paso Electric Company as of December 31,
1997, and the related statements of operations, comprehensive operations,
changes in common stock equity, and cash flows for the year then ended (not
presented herein); and in our report dated February 6, 1998, we expressed an
unqualified opinion on those financial statements. In our opinion, the
information set forth in the accompanying condensed balance sheet as of December
31, 1997, is fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
KPMG Peat Marwick LLP
El Paso, Texas
October 16, 1998
14
<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 of the Company's
1997 Form 10-K.
Statements in this document, other than statements of historical information,
are forward-looking statements that are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements, as well as other oral and written forward-looking
statements made by or on behalf of the Company from time to time, including
statements contained in the Company's filings with the Securities and Exchange
Commission and its reports to shareholders, involve known and unknown risks and
other factors which may cause the Company's actual results in future periods to
differ materially from those expressed in any forward-looking statements. Any
such statement is qualified by reference to the risks and factors discussed
below under the headings "Operational Prospects and Challenges," "Liquidity and
Capital Resources" and "Year 2000 Preparedness," as well as in the Company's
filings with the Securities and Exchange Commission, which are available from
the Securities and Exchange Commission or which may be obtained upon request
from the Company. The Company cautions that the foregoing list of important
factors is not exclusive. The Company does not undertake to update any forward-
looking statement that may be made from time to time by or on behalf of the
Company.
OPERATIONAL PROSPECTS AND CHALLENGES
The Rate Stipulation has provided the Company with a stable base of retail
revenues in Texas during a period in which the Company has substantially reduced
its fixed obligations. The Case 2722 Order provides a similar level of
certainty in the Company's New Mexico rates. As discussed below, the Case 2722
Order includes a reduction of $4.6 million, exclusive of the Company's annual
$0.4 million contribution for low-income assistance in New Mexico. The Company
has contacted the Texas Commission staff and the City of El Paso regarding
similar rate reductions in Texas. While the Company believes Texas rate
reductions of approximately $15 million would be comparable to the New Mexico
reductions, the Company has not reached an agreement with the City of El Paso,
the Texas Commission staff or any other party, so the actual amount of any
reduction is not known at this time. In return for the reductions, the Company
believes that it will have achieved in both Texas and New Mexico a new period of
revenue stability at levels that will permit it to further reduce its debt and
redeem its preferred stock while continuing to address issues raised by industry
restructuring and competition. During this period, the Company's strategic
goals include: (i) serving the growing need for electricity within its retail
service territory; (ii) continuing to focus on its strategic location on the
border with Mexico; (iii) enhancing long-term relationships with its largest
retail customers; (iv) continuing to reduce operating costs; and (v) developing
an energy-related services business.
The Case 2722 Order provides for: (i) a total jurisdictional base revenue
reduction of $4.6 million; (ii) a 30-month moratorium on rate increases or
decreases in New Mexico; (iii) the elimination of the need for future fuel
reconciliations in New Mexico by incorporating the existing fixed fuel factor
into rates; (iv) an increased degree of ratemaking certainty for the future
achieved by an agreement among the signatories reducing the net value of certain
assets by approximately $40 million on a New Mexico jurisdictional basis for
ratemaking purposes (but with no effect on book values), while establishing the
signatories' agreement that the Company is entitled to 100% recovery of such
revalued assets; and (v) the ability to enter into long-term rate contracts with
commercial and industrial customers in New Mexico. The Case 2722 Order became
nonappealable and effective on October 26, 1998. Additionally, as a
15
<PAGE>
result of the Case 2722 Order, the Company will contribute, pursuant to the New
Mexico Settlement, $0.4 million annually ($1.0 million over the term of the
moratorium period) to a social services agency in Dona Ana County providing
assistance to low-income individuals. Although the New Mexico Settlement was
structured to allow recovery of previously underrecovered fuel balances, the
Case 2722 Order adopting the New Mexico Settlement does not support the
recognition of this asset in the Company's financial statements under existing
accounting standards. The Company wrote off the book value of undercollected
fuel revenues in its New Mexico jurisdiction as of September 30, 1998, which
amounted to $3.8 million, net of tax, although the Company believes that, based
on current estimates of future fuel prices and operating costs, it will recover
100% of these amounts. The Company negotiated the New Mexico Settlement so as to
substantially reduce the likelihood of additional rate reductions during the
moratorium period. However, in light of the regulatory framework in New Mexico
and the movement toward competition, there can be no assurance that the Company
will be able to maintain its rates at the new levels.
The Company faces a number of other challenges which could negatively impact
its operations and financial results. The primary challenge is the risk of
increased costs, including the risk of additional or unanticipated costs at Palo
Verde resulting from (i) increases in operation and maintenance expenses; (ii)
the possible replacement of steam generators; (iii) an extended outage of any of
the Palo Verde units; (iv) increases in estimates of decommissioning costs; (v)
the storage of radioactive materials; and (vi) compliance with the various
requirements and regulations governing commercial nuclear generating stations.
At the same time, the Company's revenues, which will be reduced from current
levels as a result of the New Mexico Settlement and any related voluntary
reductions in Texas rates, are effectively capped by the Rate Stipulation and
the Case 2722 Order. There can be no assurance that the Company's revenues will
be sufficient to recover any increased costs, including any such increased costs
in connection with Palo Verde or increases in other costs of operation, whether
as a result of higher than anticipated levels of inflation, changes in tax laws
or regulatory requirements, or other causes.
Another risk to the Company's operations is the potential loss of customers.
The Company's wholesale and large retail customers have, in varying degrees,
additional alternate sources of economical power, including co-generation of
electric power. For example, a 504 MW combined-cycle generating plant located
in Samalayuca, Chihuahua, Mexico, which is scheduled to be fully operational by
the end of 1998 when the Company's current power contract expires, will give CFE
the current capacity to supply electricity to portions of northern Chihuahua,
including the geographic area currently served by the Company. In addition, the
New Mexico State Legislature has passed legislation which gives Las Cruces the
apparent legal authority to condemn the Company's distribution system and
related assets located within its city limits, and the Company has received
notice from Las Cruces of its intent to file an eminent domain proceeding. If
Las Cruces succeeds in its efforts, the Company could lose its Las Cruces
customer base, which currently represents approximately 8% of annual operating
revenues, although the Company would receive "just compensation" as established
by the court. If the Company loses a significant portion of its retail customer
base or wholesale sales, the Company may not be able to replace such revenues
through either the addition of new customers or an increase in rates to
remaining customers.
In recent years, the United States has closed a large number of military
bases and there can be no assurance that Holloman Air Force Base ("Holloman"),
White Sands Missile Range ("White Sands") or the United States Army Air Defense
Center at Fort Bliss ("Ft. Bliss") will not be closed in the future or that the
Company will not lose all or some of its military base sales. The Company's
sales to the military bases represent approximately 3% of annual operating
revenues. The Company signed a contract with Ft. Bliss in August 1996, under
which Ft. Bliss will take service from the Company through 1999, with
16
<PAGE>
the right thereafter to continue service on a year-to-year basis for two years.
The Company has a contract to provide retail electric service to Holloman for a
ten-year term which began in December 1995. In August 1996, the Army advised the
Company that White Sands would continue to purchase retail electric service from
the Company pursuant to the existing retail service contract for an indefinite
period. The Army will provide the Company written notice of termination of such
contract not less than one year in advance of the termination date.
Finally, the electric utility industry in general is facing significant
challenges and increased competition as a result of changes in federal
provisions relating to third-party transmission services and independent power
production, as well as potential changes in state regulatory provisions relating
to wholesale and retail service. Both the Texas and New Mexico Commissions have
conducted proceedings related to industry restructuring and stranded cost
recovery; however, restructuring legislation has yet to be passed in either
state. The potential effects of deregulation are particularly important to the
Company because its rates are significantly higher than the national and
regional averages. In the face of increased competition, there can be no
assurance that such competition will not adversely affect the future operations,
cash flow and financial condition of the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity requirements through the end of the decade
are expected to consist of interest and principal payments on the Company's
indebtedness, payment of dividends on and redemption of preferred stock, and
capital expenditures related to the Company's generating facilities and
transmission and distribution systems. The Company expects that cash flows from
operations will be sufficient for such purposes.
Long-term capital requirements of the Company will consist primarily of
construction of electric utility plant and the payment of interest on and
retirement of debt. The Company has no current plans to construct any new
generating capacity through at least 2004. Utility construction expenditures
will consist primarily of expanding and updating the transmission and
distribution systems and the cost of betterments and improvements to Palo Verde
and other generating facilities.
The Company anticipates that internally generated funds will be sufficient to
meet its construction requirements, provide for the retirement of debt and
redemption of preferred stock and enable the Company to meet other contingencies
that may exist, such as compliance with environmental regulation, pending
litigation, any claims for indemnification and Year 2000 remediation. At
September 30, 1998, the Company had approximately $195.8 million in cash and
cash equivalents. The Company also has a $100 million revolving credit facility,
which provides up to $60 million for nuclear fuel purchases and up to $50
million (depending on the amount of borrowings outstanding for nuclear fuel
purchases) for working capital needs. At September 30, 1998, approximately
$48.2 million had been drawn for nuclear fuel purchases. No amounts have been
drawn on this facility for working capital needs.
The Company has a high debt-to-capitalization ratio and significant debt
service obligations. Due to the Rate Stipulation, the Case 2722 Order and
competitive pressures, the Company does not expect to be able to raise its rates
in the event of increases in nonfuel costs, increases in fuel costs in New
Mexico or loss of revenues. Accordingly, debt reduction is a high priority for
the Company in order to gain additional financial flexibility to address the
evolving competitive market.
17
<PAGE>
The Company has significantly reduced its long-term debt following its
emergence from bankruptcy in 1996. From June 1, 1996 through September 30,
1998, the Company repurchased approximately $231.3 million of first mortgage
bonds as part of an aggressive deleveraging program and has reduced its annual
interest expense by approximately $18.0 million. Long-term indebtedness as a
percentage of capitalization was reduced from 74% at June 30, 1996 to 62% at
September 30, 1998.
The Company continues to believe that the orderly reduction of debt with a
goal of achieving a capital structure that is more typical in the electric
utility industry and, ultimately, an investment grade rating, is a significant
component of long-term shareholder value creation. Accordingly, the Company will
regularly evaluate market conditions and, when appropriate, use a portion of its
available cash to reduce its fixed obligations through open market purchases of
first mortgage bonds. However, the significant amount of debt reduction that
the Company has achieved since the Reorganization, and the need for cash both to
meet upcoming bond maturities and, if appropriate, early redemption of the
Series A Preferred Stock, may result in a lower volume of repurchases in the
future. Accordingly, the Company may experience a net increase in cash as it
evaluates the comparative economic value of using excess cash for purposes other
than open market purchases of its first mortgage bonds.
The degree to which the Company is leveraged could have important
consequences on the Company's liquidity, including the following: (i) the
Company's ability to obtain additional financing for working capital, capital
expenditures, acquisitions, general corporate or other purposes could be limited
in the future; (ii) a substantial portion of the Company's cash flow from
operations will be dedicated to the payment of principal and interest on its
indebtedness and, if appropriate, the early redemption of its Series A Preferred
Stock; and (iii) the Company's substantial leverage may place the Company at a
competitive disadvantage by limiting its financial flexibility to respond to the
demands of the competitive market and make it more vulnerable to adverse
economic or business changes.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
NET INCOME APPLICABLE DILUTED EARNINGS PER
TO COMMON STOCK BEFORE COMMON SHARE BEFORE
EXTRAORDINARY ITEM EXTRAORDINARY ITEM
----------------------- -----------------------
1998 1997 1998 1997
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Three Months Ended September 30............... $22,322 $20,657 $0.368 $0.343
Nine Months Ended September 30................ 39,385 36,108 0.650 0.599
Twelve Months Ended September 30.............. 44,701 41,006 0.739 0.680
</TABLE>
Operating revenues net of energy expenses increased $5.6 million, $9.8
million and $10.6 million for the three, nine and twelve months ended September
30, 1998, respectively, compared to the same periods last year, primarily due to
increased kWh sales to retail customers and increased fuel margins of $2.3
million for the three and nine-month periods and $3.5 million for the twelve-
month period. The increased fuel margins were due to increased economy sales at
higher margins.
18
<PAGE>
Comparisons of kWh sales and operating revenues are shown below (In
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30: INCREASE/(DECREASE)
- -------------------------------- -------------------
1998 1997 AMOUNT PERCENT
---------- ---------- ------- -------
<S> <C> <C> <C> <C>
Electric kWh Sales:
Retail Customers........................ 1,792,907 1,716,978 75,929 4.4%
Other Utilities......................... 508,318 594,433 (86,115) (14.5)
---------- ---------- -------
Total.................................. 2,301,225 2,311,411 (10,186) (0.4)
========== ========== =======
Operating Revenues:
Retail Customers........................ $ 150,139 $ 144,141 $ 5,998 4.2%
Other Utilities......................... 26,754 25,999 755 2.9
---------- ---------- -------
Total.................................. $ 176,893 $ 170,140 $ 6,753 4.0
========== ========== =======
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30: INCREASE/(DECREASE)
- ------------------------------- -------------------
1998 1997 AMOUNT PERCENT
---------- ---------- ------- -------
Electric kWh Sales:
Retail Customers........................ 4,558,310 4,397,052 161,258 3.7%
Other Utilities......................... 1,436,891 1,477,422 (40,531) (2.7)
---------- ---------- -------
Total.................................. 5,995,201 5,874,474 120,727 2.1
========== ========== =======
Operating Revenues:
Retail Customers........................ $ 382,274 $ 377,456 $ 4,818 1.3%
Other Utilities......................... 77,967 72,816 5,151 7.1
---------- ---------- -------
Total.................................. $ 460,241 $ 450,272 $ 9,969 2.2
========== ========== =======
<CAPTION>
TWELVE MONTHS ENDED SEPTEMBER 30: INCREASE/(DECREASE)
- --------------------------------- -------------------
1998 1997 AMOUNT PERCENT
---------- ---------- ------- -------
Electric kWh Sales:
Retail Customers........................ 5,945,705 5,718,239 227,466 4.0%
Other Utilities......................... 1,857,354 1,904,832 (47,478) (2.5)
---------- ---------- -------
Total.................................. 7,803,059 7,623,071 179,988 2.4
========== ========== =======
Operating Revenues:
Retail Customers........................ $ 502,686 $ 492,800 $ 9,886 2.0%
Other Utilities......................... 101,321 100,494 827 0.8
---------- ---------- -------
Total.................................. $ 604,007 $ 593,294 $10,713 1.8
========== ========== =======
</TABLE>
Other operations and maintenance expense decreased $1.2 million for the three
months ended September 30, 1998 compared to the same period last year as a
result of decreased operations expense of $3.8 million partially offset by an
increase of $2.6 million in maintenance expense. The decreased operations
expense was primarily due to (i) decreased outside services costs of $1.9
million; (ii) decreased property insurance expense of $0.9 million; (iii) the
receipt of $0.8 million due to the bankruptcy settlement of a large industrial
customer; and (iv) decreased pension and benefit expense of $0.7 million. These
decreases were partially offset by a $1.2 million increase in professional fees
related to regulatory issues. The increase in maintenance expense was primarily
due to $1.3 million in insurance settlements received in 1997 with no comparable
amount in 1998 and increased maintenance expense of $0.5 million at Palo Verde
due to the timing and duration of refueling and maintenance outages.
Other operations and maintenance expense decreased $1.5 million for the nine
months ended September 30, 1998 compared to the same period last year as a
result of decreased operations expense of $1.8 million partially offset by an
increase of $0.3 million in maintenance expense. The decreased
19
<PAGE>
operations expense was primarily due to (i) a $2.3 million decrease in outside
services costs; (ii) decreased workers' compensation and executive liability
insurance expenses of $1.2 million; and (iii) the receipt of $1.1 million due to
the bankruptcy settlements of two large industrial customers. These decreases
were partially offset by a $3.0 million increase in professional fees related to
regulatory issues. The increase in maintenance expense was primarily due to $1.3
million in insurance settlements received in 1997 with no comparable amount in
1998. This increase was partially offset by decreased maintenance expense at
Company-owned generating plants.
Other operations and maintenance expense decreased $2.6 million for the
twelve months ended September 30, 1998 compared to the same period last year as
a result of decreased operations expense of $2.8 million partially offset by
increased maintenance expense of $0.2 million. The decreased operations expense
was primarily due to (i) a $3.5 million decrease in operations expense at Palo
Verde; (ii) a $3.2 million decrease in outside services costs; (iii) the receipt
of $2.1 million due to the bankruptcy settlements of two large industrial
customers; and (iv) decreased workers' compensation and executive liability
insurance expenses of $1.6 million. These decreases were partially offset by a
$4.5 million increase in professional fees related to regulatory issues and a
$2.2 million all employee cash bonus in December 1997. The increased maintenance
expense was primarily due to (i) $1.3 million in insurance settlements received
in 1997 with no comparable amount in 1998; (ii) increased maintenance expense of
$0.8 million at Palo Verde due to the timing and duration of refueling and
maintenance outages; and (iii) increased maintenance expense of $0.4 million on
transmission and distribution facilities. This increase was partially offset by
decreased maintenance expense at Company-owned generating plants.
The New Mexico Settlement charge for the three, nine and twelve months ended
September 30, 1998 represents the write-off of the book value of undercollected
fuel revenues in the Company's New Mexico jurisdiction.
Depreciation and amortization expense was essentially unchanged for the
three, nine and twelve months ended September 30, 1998 compared to the same
periods last year.
Taxes other than income taxes increased $0.5 million, $1.1 million and $2.1
million for the three, nine and twelve months ended September 30, 1998,
respectively, compared to the same periods last year, primarily due to increases
in revenue related taxes and an increase in franchise taxes resulting from
refunds in August 1997 with no comparable amount in 1998. These increases were
partially offset by a decrease in Arizona property taxes resulting from a
decrease in the assessment ratio in 1998.
Other income increased $2.1 million for the three months ended September 30,
1998 compared to the same period last year, primarily due to increased
investment income of $1.8 million as a result of the investment of higher levels
of cash. Other income decreased $2.2 million and $1.9 million for the nine and
twelve months ended September 30, 1998, respectively, compared to the same
periods in the last year, primarily due to a favorable litigation settlement in
June 1997 of $7.5 million, net of legal fees and expenses, with no comparable
amount in the current periods. These decreases were partially offset by
increased investment income of $4.6 million and $5.7 million, respectively, due
to the investment of higher levels of cash.
Interest charges decreased $1.0 million, $4.3 million and $6.2 million for
the three, nine and twelve months ended September 30, 1998, respectively,
compared to the same periods last year, primarily due to a reduction in
outstanding debt as a result of open market purchases of the Company's first
mortgage bonds.
20
<PAGE>
Income tax expense was essentially unchanged for the three and nine months
ended September 30, 1998 compared to the same periods last year, primarily due
to increases in pretax income which were offset by permanent differences such as
bankruptcy fee settlements and tax exempt income. Income tax expense increased
$3.4 million for the twelve months ended September 30, 1998 compared to the same
period last year, primarily due to changes in pretax income and certain
permanent differences.
Extraordinary loss on repurchases of debt for the nine and twelve months
ended September 30, 1997 represents the payment of premiums on debt repurchased
and the recognition of unamortized issuance expenses on that debt of $2.7
million, net of federal income tax benefit of $1.4 million, respectively, with
no comparable amounts for the same periods in 1998.
Allowance for doubtful accounts decreased $3.4 million as of September 30,
1998 compared to December 31, 1997 due to the bankruptcy settlements of two
large industrial customers and the write-off of the related receivables against
a specific allowance that was expensed in prior years.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Company has not engaged in any transactions
involving derivative instruments or hedging activities in the current or prior
years. Accordingly, the implementation of the new accounting standard currently
is not expected to have a material effect on the Company's financial statements.
YEAR 2000 PREPAREDNESS
The Company faces the same concerns as most other companies that use
computers relating to the Year 2000 problem. The problem is that many computer
programs use only the last two digits to refer to a year. Consequently, these
programs do not recognize a year that begins with "20" instead of the familiar
"19." Applications that are date sensitive may not properly calculate
information or may not function. Problems may arise in information technology
("IT") systems, including those which allow the Company to operate generation,
transmission and distribution facilities, manage customer billing accounts,
process payroll for employees, and conduct all of the other functions needed to
operate the Company's business, as well as non-IT systems that contain date and
time functions. Affected non-IT systems containing embedded chips that are date
sensitive can include electric meters, security systems, substation generators,
communication systems and many other devices. Identifying which of these
systems are essential for the Company to operate is a significant step, and
these systems are designated as "Mission Critical."
The Company began working on the Year 2000 computer concern during the last
quarter of 1996 with a program consisting of four major phases: inventory,
assessment, remediation and testing for Year 2000 compliance. In this context,
compliance means that the system or device in question will continue to function
after December 31, 1999 in the way in which it was designed. Most systems can
proceed through the various phases independently so that the Company need not
entirely complete one phase before beginning the next.
The Company started the inventory phase for its IT systems in October 1996
and is nearing 100% completion. The inventory phase for non-IT systems is
substantially complete, having been initiated in February 1998. After the
initial inventory phase has been completed, the Company will continue to update
the information as appropriate, such as when the Company purchases new software
or hardware.
21
<PAGE>
The Company has completed the majority of the assessment phase regarding IT
systems. Assessment of non-IT systems has begun, but has been completed for only
a few systems. The Company expects the assessment phase for IT systems to be
substantially completed by the end of 1998, and for non-IT systems, early in
1999. However, as the Company purchases new software and other products in
1999, additional vendor representations must be obtained and assessments
completed.
The third phase of the Year 2000 program is remediation. While the Company
is employing remediation procedures generally accepted as standard, there are no
guarantees such efforts will be entirely successful. At this point, the Company
believes it has completed remediation on approximately half of the IT systems
requiring remediation, including at least half of the Mission Critical systems.
The Company has recently begun remediating some non-IT systems even though the
non-IT assessment phase is not yet complete. Although there can be no assurance
that future events will not cause delays in the process, at this time the
Company expects to have completed the remediation phase for nearly all of the
Mission Critical IT and non-IT systems by March 31, 1999.
The Company will continue to test for Year 2000 compliance throughout 1999.
With respect to IT systems, the Company estimates that nearly half of the
testing which will be done before January 1, 2000 has been completed. Testing
for non-IT systems has recently begun, but has not yet been completed on a
significant number of such systems. While the Company intends to test 100% of
its IT systems, it intends to utilize representative sample testing with respect
to some non-IT systems. The Company may also rely on vendor representations and
reports of tests conducted by other parties with respect to certain non-IT
systems. Although there can be no assurance that future events will not cause
delays in the process, at this time the Company expects to have completed
testing on the majority of the Mission Critical IT and non-IT systems by March
31, 1999.
Because of the integrated nature of the Company's business with other
utilities and its joint facilities operated by other utilities, the Company is
inquiring about and reviewing the activities of the other utilities that
comprise the integrated system. In addition, the Company is inquiring about and
assessing the activities of its financial institutions and major suppliers and
customers to determine their readiness for Year 2000 issues. The successful
operation of the operators of Palo Verde and other facilities from which the
Company receives energy, water companies, gas suppliers and other suppliers will
be critical to the Company's ability to limit the impact of any Year 2000
problem which may arise. Given the complex nature of this problem and the
potential overlap with systems beyond the Company's control, the Company cannot
assure that it will not experience some outages or operational failures relating
to the Year 2000 problem.
The Company expects to retain the services of an independent consulting firm
to review the Company's Year 2000 program, assess the remediation and testing
procedures and advise the Company on the best way to proceed in the time
remaining before January 1, 2000. This consulting firm is expected to provide
the Company with a report on the Year 2000 program during the fourth quarter of
1998, the cost of which will not be substantial.
The Company expects that the historical and estimated costs of its Year 2000
program, which includes all costs of assessment, remediation and testing as well
as the costs of modifying and replacing software and hiring consultants, will be
significant but will not be material in relation to the Company's financial
position or the Company's results of operations or cash flows in any future
reporting period. The Company will expense such costs as incurred. At this
time, the Company's expenses on the Year 2000 program have been minimal since
the inventory and assessment phases basically involved only internal labor costs
and most of the remediation completed to date has consisted of internally
revising
22
<PAGE>
computer programs and capital outlays for purchases of new software and computer
systems already scheduled for replacement. Future expenses may include costs for
the early replacement of computers and other systems on an accelerated schedule
to meet the Year 2000 deadline. Nonetheless, the vast majority of total costs of
the Year 2000 program will be internal labor costs.
Failure by the Company to meet the challenges of the Year 2000 problem can
result in serious problems. A malfunction in a system affecting the generation,
transmission or distribution of energy to the Company's customers, whether
caused by a problem with one of the Company's IT or non-IT systems or a system
operated by a third party, could result in a disruption of service. The
severity and cost of the problem would depend on numerous factors, including the
scope and duration of any such disruption. If the disruption is severe enough,
the Company's operations and financial condition could be adversely affected,
the extent of which cannot be predicted.
There are no guarantees that all vendor representations obtained by the
Company will prove to be entirely accurate and that the testing and remediation
procedures employed by the Company will identify and correct 100% of the
potential problems associated with the Year 2000 problem. Because there is a
chance that on January 1, 2000 there will be some system failures in the utility
industry and otherwise, the Company is also working on contingency plans.
Utilities have always had to plan for unexpected outages at their facilities
(resulting from storms and other natural disasters), and these pre-existing
plans form the core of the Company's contingency plan. Operators at the
Company's generating facilities already know how to respond if there is a
complete loss of power and generators must be brought back into operation
manually. Similar procedures, including plans for dealing with an even wider
array of difficulties resulting from the simultaneous failures of the systems of
many of the Company's suppliers, government agencies, etc., are being developed
based on the Company's basic contingency model. The complete contingency plan is
not yet fully developed and the Company will continue to work on such plan
throughout 1998 and 1999.
23
<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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See Index to Exhibits incorporated herein by reference.
(b) Reports on Form 8-K:
None
24
<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, Chief Financial Officer
and Treasurer
(Duly Authorized Officer and
Principal Financial Officer)
Dated: November 12, 1998
25
<PAGE>
EL PASO ELECTRIC COMPANY
INDEX TO EXHIBITS
Exhibit
Number Exhibit
------- -------
11 Statement re Computation of Per Share Earnings
15 Letter re Unaudited Interim Financial Information
27 Financial Data Schedule (EDGAR filing only)
26
<PAGE>
EL PASO ELECTRIC COMPANY EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET INCOME APPLICABLE TO COMMON STOCK:
Income before extraordinary loss on
repurchases of debt $ 22,322 $ 20,657 $ 39,385 $ 36,108
Extraordinary loss on repurchases of debt,
net of federal income tax benefit -- (69) -- (2,741)
------------ ------------ ------------ ------------
Net income applicable to common stock $ 22,322 $ 20,588 $ 39,385 $ 33,367
============ ============ ============ ============
BASIC EARNINGS PER COMMON SHARE:
Weighted average number of common
shares outstanding 60,168,841 60,129,784 60,168,030 60,124,444
============ ============ ============ ============
Net income per common share:
Income before extraordinary loss on
repurchases of debt $ 0.371 $ 0.343 $ 0.655 $ 0.601
Extraordinary loss on repurchases of debt,
net of federal income tax benefit -- (0.001) -- (0.046)
------------ ------------ ------------ ------------
Net income $ 0.371 $ 0.342 $ 0.655 $ 0.555
============ ============ ============ ============
DILUTED EARNINGS PER COMMON SHARE:
Weighted average number of common
shares outstanding 60,168,841 60,129,784 60,168,030 60,124,444
------------ ------------ ------------ ------------
Effect of dilutive potential common stock
options based on the treasury stock
method using average market price:
Quarter ended March 31 -- -- 262,998 220,087
Quarter ended June 30 -- -- 538,986 177,747
Quarter ended September 30 457,905 134,451 457,905 134,451
Effect of dilutive potential restricted
common stock based on the treasury
stock method using average market price:
Quarter ended March 31 -- -- 16,434 16,596
Quarter ended June 30 -- -- 29,033 20,014
Quarter ended September 30 25,726 23,717 25,726 23,717
------------ ------------ ------------ ------------
483,631 158,168 1,331,082 592,612
Divided by number of quarters 1 1 3 3
------------ ------------ ------------ ------------
Net effect of dilutive potential common stock 483,631 158,168 443,694 197,537
------------ ------------ ------------ ------------
Weighted average number of common shares and
dilutive potential common shares outstanding 60,652,472 60,287,952 60,611,724 60,321,981
============ ============ ============ ============
Net income per common share:
Income before extraordinary loss on
repurchases of debt $ 0.368 $ 0.343 $ 0.650 $ 0.599
Extraordinary loss on repurchases of debt,
net of federal income tax benefit -- (0.001) -- (0.045)
------------ ------------ ------------ ------------
Net income $ 0.368 $ 0.342 $ 0.650 $ 0.554
============ ============ ============ ============
</TABLE>
<PAGE>
EL PASO ELECTRIC COMPANY EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
SEPTEMBER 30,
------------ ------------
1998 1997
------------ ------------
<S> <C> <C>
NET INCOME APPLICABLE TO COMMON STOCK:
Income before extraordinary loss on
repurchases of debt $ 44,701 $ 41,006
Extraordinary loss on repurchases of debt,
net of federal income tax benefit (34) (2,741)
------------ ------------
Net income applicable to common stock $ 44,667 $ 38,265
============ ============
BASIC EARNINGS PER COMMON SHARE:
Weighted average number of common
shares outstanding 60,161,105 60,113,236
============ ============
Net income per common share:
Income before extraordinary loss on
repurchases of debt $ 0.743 $ 0.682
Extraordinary loss on repurchases of debt,
net of federal income tax benefit (0.001) (0.046)
------------ ------------
Net income $ 0.742 $ 0.636
============ ============
DILUTED EARNINGS PER COMMON SHARE:
Weighted average number of common
shares outstanding 60,161,105 60,113,236
------------ ------------
Effect of dilutive potential common stock options based on the
treasury stock method using average market price:
Quarter ended March 31 262,998 220,087
Quarter ended June 30 538,986 177,747
Quarter ended September 30 457,905 134,451
Quarter ended December 31 182,844 37,807
Effect of dilutive potential restricted common stock based on
the treasury stock method using average market price:
Quarter ended March 31 16,434 16,596
Quarter ended June 30 29,033 20,014
Quarter ended September 30 25,726 23,717
Quarter ended December 31 32,036 21,316
------------ ------------
1,545,962 651,735
Divided by number of quarters 4 4
------------ ------------
Net effect of dilutive potential common stock 386,490 162,934
------------ ------------
Weighted average number of common shares and
dilutive potential common shares outstanding 60,547,595 60,276,170
============ ============
Net income per common share:
Income before extraordinary loss on
repurchases of debt $ 0.739 $ 0.680
Extraordinary loss on repurchases of debt,
net of federal income tax benefit (0.001) (0.045)
============ ============
Net income $ 0.738 $ 0.635
============ ============
</TABLE>
<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 October 16, 1998 related to our review of
interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such a report is not
considered part of the registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of sections 7 and 11 of the Act.
Very truly yours,
KPMG Peat Marwick LLP
El Paso, Texas
October 16, 1998
<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 SEPTEMBER 30, 1998 AND THE RELATED
STATEMENTS OF INCOME AND CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,426,056
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 308,028
<TOTAL-DEFERRED-CHARGES> 76,800
<OTHER-ASSETS> 24,300
<TOTAL-ASSETS> 1,835,184
<COMMON> 60,272
<CAPITAL-SURPLUS-PAID-IN> 240,661
<RETAINED-EARNINGS> 107,561
<TOTAL-COMMON-STOCKHOLDERS-EQ> 408,494
131,985
0
<LONG-TERM-DEBT-NET> 872,235
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 36,121
0
<CAPITAL-LEASE-OBLIGATIONS> 24,110
<LEASES-CURRENT> 27,182
<OTHER-ITEMS-CAPITAL-AND-LIAB> 335,057
<TOT-CAPITALIZATION-AND-LIAB> 1,835,184
<GROSS-OPERATING-REVENUE> 460,241
<INCOME-TAX-EXPENSE> 27,891
<OTHER-OPERATING-EXPENSES> 326,733
<TOTAL-OPERATING-EXPENSES> 354,624
<OPERATING-INCOME-LOSS> 105,617
<OTHER-INCOME-NET> 6,020
<INCOME-BEFORE-INTEREST-EXPEN> 111,637
<TOTAL-INTEREST-EXPENSE> 61,378
<NET-INCOME> 50,259
10,874
<EARNINGS-AVAILABLE-FOR-COMM> 39,385
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 73,627
<CASH-FLOW-OPERATIONS> 172,423
<EPS-PRIMARY> 0.655<F1>
<EPS-DILUTED> 0.650<F1>
<FN>
<F1>Primary and Fully Diluted Earnings Per Share are no longer being calculated,
per SFAS No. 128. The amounts shown represent Basic and Diluted Earnings
Per Share, respectively.
</FN>
</TABLE>
