<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, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 0-296
El Paso Electric Company
(Exact name of registrant as specified in its charter)
Texas 74-0607870
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Kayser Center, 100 North Stanton, El Paso, Texas 79901
(Address of principal executive offices) (Zip Code)
(915) 543-5711
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES X NO
--- ---
As of May 7, 1999, there were 60,403,651 shares of the Company's no par
value common stock outstanding.
================================================================================
<PAGE>
EL PASO ELECTRIC COMPANY
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - March 31, 1999 and December 31, 1998.................... 1
Statements of Operations - Three Months and Twelve Months Ended March 31,
1999 and 1998........................................................... 3
Statements of Comprehensive Operations - Three Months and Twelve Months
Ended March 31, 1999 and 1998........................................... 4
Statements of Cash Flows - Three Months Ended March 31, 1999 and 1998.... 5
Notes to Financial Statements............................................ 6
Independent Auditors' Review Report...................................... 11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 22
Item 6. Exhibits and Reports on Form 8-K.................................. 22
</TABLE>
i
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EL PASO ELECTRIC COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS March 31,
(In thousands) 1999 December 31,
(Unaudited) 1998
---------------- ---------------
<S> <C> <C>
Utility plant:
Electric plant in service.............................................. $1,608,361 $1,599,207
Less accumulated depreciation and amortization......................... 266,775 243,405
---------- ----------
Net plant in service................................................. 1,341,586 1,355,802
Construction work in progress.......................................... 61,096 54,641
Nuclear fuel; includes fuel in process of $1,939 and
$8,031, respectively................................................. 92,801 89,784
Less accumulated amortization.......................................... 51,193 45,691
---------- ----------
Net nuclear fuel..................................................... 41,608 44,093
---------- ----------
Net utility plant.................................................. 1,444,290 1,454,536
---------- ----------
Current assets:
Cash and temporary investments......................................... 75,544 229,150
Accounts receivable, principally trade, net of allowance for
doubtful accounts of $1,584 and $1,738, respectively................. 51,771 64,735
Inventories, at cost................................................... 27,026 27,537
Prepayments and other.................................................. 7,867 16,896
---------- ----------
Total current assets............................................... 162,208 338,318
---------- ----------
Long-term contract receivable............................................ 21,703 23,139
---------- ----------
Deferred charges and other assets:
Accumulated deferred income taxes, net................................. 4,497 10,518
Decommissioning trust fund............................................. 49,011 46,725
Other.................................................................. 18,145 17,983
---------- ----------
Total deferred charges and other assets............................ 71,653 75,226
---------- ----------
Total assets....................................................... $1,699,854 $1,891,219
========== ==========
</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) 1999 December 31,
(Unaudited) 1998
---------------- ----------------
<S> <C> <C>
Capitalization:
Common stock, stated value $1 per share, 100,000,000 shares
authorized, 60,175,763 and 60,122,377 shares issued and outstanding;
and 214,169 and 147,985 restricted shares, respectively............. $ 60,399 $ 60,270
Capital in excess of stated value..................................... 242,251 241,325
Unearned compensation-restricted stock awards......................... (1,365) (611)
Accumulated earnings.................................................. 112,723 115,193
Accumulated other comprehensive income (unrealized
gains on marketable securities)..................................... 1,739 1,101
---------- ----------
Common stock equity............................................... 415,747 417,278
Preferred stock, redemption required, cumulative, no par value,
2,000,000 shares authorized-1,357,444 shares issued and
outstanding in 1998; at liquidation preference.................... -- 135,744
Long-term debt........................................................ 872,190 872,213
Financing and capital lease obligations............................... 22,240 24,849
---------- ----------
Total capitalization............................................ 1,310,177 1,450,084
---------- ----------
Current liabilities:
Current maturities of long-term debt and financing and
capital lease obligations........................................... 27,384 63,817
Accounts payable, principally trade................................... 16,502 31,135
Taxes accrued other than federal income taxes......................... 19,005 20,316
Interest accrued...................................................... 19,067 20,412
Net overcollection of fuel revenues................................... 2,182 2,632
Other................................................................. 21,213 19,359
---------- ----------
Total current liabilities....................................... 105,353 157,671
---------- ----------
Deferred credits and other liabilities:
Decommissioning....................................................... 131,437 129,750
Accrued postretirement benefit liability.............................. 81,804 80,477
Accrued pension liability............................................. 33,783 33,880
Other................................................................. 37,300 39,357
---------- ----------
Total deferred credits and other liabilities.................... 284,324 283,464
---------- ----------
Commitments and contingencies
Total capitalization and liabilities............................ $1,699,854 $1,891,219
========== ==========
</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 Twelve Months Ended
March 31, March 31,
-------------------------- --------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating revenues............................................. $ 129,869 $ 136,945 $ 595,145 $ 595,126
----------- ----------- ----------- -----------
Energy expenses:
Fuel......................................................... 22,062 25,482 106,030 110,473
Purchased and interchanged power............................. 752 3,164 18,198 20,508
----------- ----------- ----------- -----------
22,814 28,646 124,228 130,981
----------- ----------- ----------- -----------
Operating revenues net of energy expenses...................... 107,055 108,299 470,917 464,145
----------- ----------- ----------- -----------
Other operating expenses:
Other operations............................................. 30,632 32,570 132,312 133,522
Maintenance.................................................. 8,914 8,202 35,667 33,555
New Mexico Settlement charge................................. -- -- 6,272 --
Depreciation and amortization................................ 22,805 22,227 90,391 89,057
Taxes other than income taxes................................ 11,280 11,360 44,252 43,637
----------- ----------- ----------- -----------
73,631 74,359 308,894 299,771
----------- ----------- ----------- -----------
Operating income............................................... 33,424 33,940 162,023 164,374
----------- ----------- ----------- -----------
Other income (deductions):
Investment income............................................ 2,679 2,635 11,550 7,621
Litigation settlement, net................................... -- -- -- 7,500
Settlement of bankruptcy professional fees................... -- 376 885 1,151
Other, net................................................... (913) (26) (2,617) (390)
----------- ----------- ----------- -----------
1,766 2,985 9,818 15,882
----------- ----------- ----------- -----------
Income before interest charges................................. 35,190 36,925 171,841 180,256
----------- ----------- ----------- -----------
Interest charges (credits):
Interest on long-term debt................................... 19,155 20,336 79,786 84,228
Other interest............................................... 2,037 1,765 7,470 6,345
Interest capitalized and deferred............................ (1,704) (1,621) (6,483) (6,146)
----------- ----------- ----------- -----------
19,488 20,480 80,773 84,427
----------- ----------- ----------- -----------
Income before income taxes..................................... 15,702 16,445 91,068 95,829
Income tax expense............................................. 6,240 5,930 35,048 36,869
----------- ----------- ----------- -----------
Income before extraordinary gain on discharge
of debt...................................................... 9,462 10,515 56,020 58,960
Extraordinary gain on discharge of debt, net of
income tax expense........................................... -- -- 3,343 --
----------- ----------- ----------- -----------
Net income..................................................... 9,462 10,515 59,363 58,960
Preferred stock:
Dividend requirements........................................ 2,616 3,523 13,800 13,518
Redemption costs............................................. 9,571 -- 9,571 --
----------- ----------- ----------- -----------
Net income (loss) applicable to common stock................... $ (2,725) $ 6,992 $ 35,992 $ 45,442
=========== =========== =========== ===========
Basic earnings (loss) per common share:
Income (loss) before extraordinary gain on discharge of debt. $ (0.045) $ 0.116 $ 0.542 $ 0.756
Extraordinary gain on discharge of debt, net of
income tax expense........................................ -- -- 0.056 --
----------- ----------- ----------- -----------
Net income (loss)......................................... $ (0.045) $ 0.116 $ 0.598 $ 0.756
=========== =========== =========== ===========
Diluted earnings (loss) per common share:
Income (loss) before extraordinary gain on discharge of debt. $ (0.045) $ 0.116 $ 0.539 $ 0.752
Extraordinary gain on discharge of debt, net of
income tax expense........................................ -- -- 0.055 --
----------- ----------- ----------- -----------
Net income (loss)......................................... $ (0.045) $ 0.116 $ 0.594 $ 0.752
=========== =========== =========== ===========
Weighted average number of common shares outstanding........... 60,209,960 60,165,778 60,179,129 60,141,375
=========== =========== =========== ===========
Weighted average number of common shares and
dilutive potential common shares outstanding................. 60,209,960 60,443,272 60,574,819 60,424,903
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
EL PASO ELECTRIC COMPANY
STATEMENTS OF COMPREHENSIVE OPERATIONS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
March 31, March 31,
------------------- -------------------
1999 1998 1999 1998
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net income................................................ $ 9,462 $10,515 $59,363 $58,960
Other comprehensive income:
Net unrealized gain on marketable securities,
less applicable income tax expense of
$344, $213, $821and $115, respectively............... 638 397 1,526 213
------- ------- ------- -------
Comprehensive income...................................... 10,100 10,912 60,889 59,173
Preferred stock:
Dividend requirements................................... 2,616 3,523 13,800 13,518
Redemption costs........................................ 9,571 -- 9,571 --
------- -------- ------- --------
Comprehensive income (loss) applicable
to common stock......................................... $(2,087) $ 7,389 $37,518 $45,655
======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
EL PASO ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income........................................................ $ 9,462 $ 10,515
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................... 28,722 28,184
Deferred income taxes, net...................................... 5,678 5,302
Provision for rate refund....................................... 5,855 --
Other operating activities...................................... 1,013 1,222
Change in:
Accounts receivable............................................. 12,964 5,634
Inventories..................................................... 511 (317)
Prepayments and other........................................... 9,029 (2,784)
Long-term contract receivable................................... 1,436 1,100
Accounts payable................................................ (14,633) (2,007)
Interest accrued................................................ (1,345) (1,373)
Net over/undercollection of fuel revenues....................... (450) 1,191
Other current liabilities....................................... (2,734) 1,959
Deferred charges and credits.................................... 44 1,603
-------- ---------
Net cash provided by operating activities..................... 55,552 50,229
-------- ---------
Cash Flows From Investing Activities:
Cash additions to utility property, plant and equipment........... (14,506) (10,052)
Cash additions to nuclear fuel.................................... (2,114) (1,013)
Interest capitalized to utility property, plant and
equipment and nuclear fuel...................................... (1,704) (1,621)
Investment in decommissioning trust fund.......................... (1,305) (1,528)
Other investing activities........................................ (141) 79
-------- ---------
Net cash used for investing activities........................ (19,770) (14,135)
-------- ---------
Cash Flows From Financing Activities:
Repurchases of and payments on long-term debt..................... (36,056) (29,554)
Net repayments of financing obligations........................... (2,206) (3,494)
Redemption of preferred stock..................................... (148,927) --
Preferred stock dividend payment.................................. (1,328) --
Redemption of capital lease obligations........................... (803) (770)
Other financing activities........................................ (68) (35)
--------- ---------
Net cash used for financing activities........................ (189,388) (33,853)
--------- ---------
Net (decrease) increase in cash and temporary investments........... (153,606) 2,241
Cash and temporary investments at beginning of period............... 229,150 111,227
--------- ---------
Cash and temporary investments at end of period..................... $ 75,544 $ 113,468
========= =========
</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, 1998 (the
"1998 Form 10-K"). Capitalized terms used in this report and not defined herein
have the meaning ascribed for such terms in the 1998 Form 10-K. In the opinion
of management of the Company, the accompanying financial statements contain all
adjustments necessary to present fairly the financial position of the Company at
March 31, 1999 and December 31, 1998; the results of operations for the three
and twelve months ended March 31, 1999 and 1998; and cash flows for the three
months ended March 31, 1999 and 1998. The results of operations for the three
and twelve months ended March 31, 1999 are not necessarily indicative of the
results to be expected for the full calendar year.
Supplemental Cash Flow Disclosures (In thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------
1999 1998
------------ ------------
Cash paid for:
<S> <C> <C>
Interest on long-term debt....................... $18,542 $19,845
Reorganization items- professional
fees and other............................... -- 1,273
Non-cash investing and financing activities:
Issuance of preferred stock for
pay-in-kind dividend......................... 3,867 3,456
Issuance of restricted shares of
common stock................................. 1,123 195
</TABLE>
6
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Reconciliation of Basic and Diluted Earnings (Loss) Per Common Share
The reconciliation of basic and diluted earnings (loss) per common share
before extraordinary item is presented below:
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------------------------------------------------
1999 1998
------------------------------------- -----------------------------------
Per Per
Common Common
Income (Loss) Shares Share Income Shares Share
-------------- ---------- --------- -------------- ---------- -------
(In thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary item..... $ 9,462 $ 10,515
Less:
Preferred stock:
Dividend requirements............ 2,616 3,523
Redemption costs................. 9,571 --
------------ ------------
Basic earnings (loss) per common
share:
Net income (loss) applicable to
common stock....................... (2,725) 60,209,960 $ (0.045) 6,992 60,165,778 $ 0.116
======== =======
Effect of dilutive securities:
Unvested restricted stock........... -- -- -- 14,496
Stock options....................... -- -- -- 262,998
------------ ---------- ------------ ----------
Diluted earnings (loss) per common
share:
Net income (loss) applicable to
common stock....................... $ (2,725) 60,209,960 $ (0.045) $ 6,992 60,443,272 $ 0.116
============ ========== ======== ============ ========== =======
</TABLE>
<TABLE>
<CAPTION>
Twelve Months Ended March 31,
------------------------------------------------------------------------
1999 1998
----------------------------------- -----------------------------------
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..... $ 56,020 $ 58,960
Less:
Preferred stock:
Dividend requirements............ 13,800 13,518
Redemption costs................. 9,571 --
------------ ----------
Basic earnings per common share:
Net income applicable to
common stock....................... 32,649 60,179,129 $ 0.542 45,442 60,141,375 $ 0.756
======= =======
Effect of dilutive securities:
Unvested restricted stock........... -- 26,685 -- 14,892
Stock options....................... -- 369,005 -- 268,636
------------ ---------- ---------- ----------
Diluted earnings per common share:
Net income applicable to
common stock....................... $ 32,649 60,574,819 $ 0.539 $ 45,442 60,424,903 $ 0.752
============ ========== ======= ========== ========== =======
</TABLE>
7
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
B. Rate Matters
For a full discussion of the Company's rate matters, see Note B of Notes to
Financial Statements in the 1998 Form 10-K.
New Mexico Rate Matters
A comprehensive electric utility industry restructuring bill was signed
into law by the Governor of New Mexico and became effective on April 8, 1999.
Under this law, retail customer choice begins January 1, 2001 for public post-
secondary educational institutions, public schools, and residential and small
business customers. Retail customer choice begins January 1, 2002 for all other
customers. Utilities are allowed to recover no less than 50% of their stranded
costs with up to 100% recovery allowed if the New Mexico Commission determines
that additional recovery is in the public interest, is necessary to maintain a
utility's financial integrity, or is necessary to continue adequate and reliable
service and will not cause an increase in rates to residential and small
business customers. Utilities are required to file transition plans addressing
the various restructuring issues, including the recovery of stranded costs, by
March 1, 2000. The New Mexico Commission could delay implementation of retail
customer choice for up to one year. The new law also allows the New Mexico
Commission to review and approve any rate settlement previously approved by the
New Mexico Commission as a means of transition to competition. After such
approval, any such settlement shall supercede the new law to the extent it is
inconsistent. The Company cannot predict whether the implementation of this
legislation will impact the Company's revenues and recovery of costs
contemplated under the New Mexico Settlement.
C. Preferred Stock Redemption
On March 1, 1999, after obtaining required consents of holders of certain
of the Company's outstanding debt securities, the Company redeemed the Series A
Preferred Stock. The Company paid the redemption price of approximately $139.6
million; accrued cash dividends of $1.3 million; and premium, fees and costs of
securing the consents aggregating $9.6 million. The preferred stock had an
annual dividend rate of 11.40%.
D. Commitments and Contingencies
For a full discussion of commitments and contingencies, including
environmental matters related to the Company, see Note H of Notes to Financial
Statements in the 1998 Form 10-K. In addition, see Note C of Notes to Financial
Statements in the 1998 Form 10-K regarding matters related to Palo Verde,
including decommissioning, spent fuel storage, disposal of low-level radioactive
waste and liability and insurance matters.
8
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
E. Litigation
For a full discussion of litigation, see Note I of Notes to Financial
Statements in the 1998 Form 10-K.
Litigation with Las Cruces
Las Cruces is attempting to replace the Company as the electric service
provider in Las Cruces by acquiring, through condemnation or a negotiated
purchase, the distribution assets and other facilities used to provide electric
service to customers in Las Cruces. Sales to customers in Las Cruces represent
approximately 8% of the Company's operating revenues.
On February 26, 1999, Las Cruces filed its Petition for Condemnation and
Application for Immediate Possession with the New Mexico State District Court.
On March 9, 1999, the Company removed the Las Cruces petition and application to
the United States District Court for the District of New Mexico. Following a
hearing on a motion for remand filed by Las Cruces, the federal court ruled that
the Company's removal to federal court was proper. Las Cruces has filed a
motion for reconsideration of the removal issue. At this time no hearing on the
immediate possession matter has been set. The Company is unable to predict the
outcome of this litigation.
If Las Cruces succeeds in its efforts to condemn the Company's distribution
system, the Company could lose its Las Cruces customer base, although the
Company would be entitled to receive "just compensation" as established by New
Mexico law. "Just compensation" is generally defined as the amount of money
that would fairly compensate the party whose property is condemned. It is the
Company's opinion that this amount would be the difference between the value of
the Company's 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. In August
1994 Southwestern Public Service Company ("SPS") and Las Cruces entered into an
agreement granting SPS the right to provide all of the electric power and energy
required by Las Cruces if Las Cruces succeeds in its efforts to obtain the
Company's distribution system. In addition, Las Cruces sold approximately $73
million in revenue bonds in October 1995 to provide funding to finance the
acquisition by condemnation or negotiated purchase of the Company's electrical
distribution assets within and adjacent to the Las Cruces city limits.
In July 1996 Las Cruces exercised its right under FERC Order No. 888 to
request that the Company calculate Las Cruces' stranded cost obligation should
it leave the Company's system and operate its own municipal utility 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 who issued an Initial Decision in June 1998 recommending that
Las Cruces pay the Company $30.4 million for stranded costs if Las Cruces chose
to leave the
9
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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 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. The Company cannot predict when the
FERC will render a final decision on this issue. See Note B of Notes to
Financial Statements in the 1998 Form 10-K for a full discussion of stranded
costs.
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.
10
<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, 1999, the related condensed statements of
operations and comprehensive operations for the three months and twelve months
ended March 31, 1999 and 1998, and the related condensed statements of cash
flows for the three months ended March 31, 1999 and 1998. These condensed
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed financial statements referred to above for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of El Paso Electric Company as of December 31,
1998, and the related statements of operations, comprehensive operations,
changes in common stock equity, and cash flows for the year then ended (not
presented herein); and in our report dated February 5, 1999, we expressed an
unqualified opinion on those financial statements. In our opinion, the
information set forth in the accompanying condensed balance sheet as of December
31, 1998, is fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
KPMG LLP
El Paso, Texas
April 26, 1999
11
<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
1998 Form 10-K.
Statements in this document, other than statements of historical
information, are forward-looking statements that are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements, as well as other oral and written forward-looking
statements made by or on behalf of the Company from time to time, including
statements contained in the Company's filings with the Securities and Exchange
Commission and its reports to stockholders, involve known and unknown risks and
other factors which may cause the Company's actual results in future periods to
differ materially from those expressed in any forward-looking statements. Any
such statement is qualified by reference to the risks and factors discussed
below under the headings "Operational Prospects and Challenges," "Liquidity and
Capital Resources" and "Year 2000 Preparedness," as well as in the Company's
filings with the Securities and Exchange Commission, which are available from
the Securities and Exchange Commission or which may be obtained upon request
from the Company. The Company cautions that the risks and factors discussed
below and in such filings are not exclusive. The Company does not undertake to
update any forward-looking statement that may be made from time to time by or on
behalf of the Company.
Operational Prospects and Challenges
The Texas Rate Stipulation provides the Company with a stable base of
retail revenues in Texas during a period in which the Company has substantially
reduced its fixed obligations. The New Mexico Settlement provides a similar
level of certainty in the Company's New Mexico rates, although of shorter
duration. As discussed below, the New Mexico Settlement includes an annual base
revenue reduction of $4.6 million, exclusive of the Company's annual $0.4
million contribution for low-income assistance in New Mexico. The Company and
all signatories to the Texas Settlement Agreement have reached an agreement,
subject to Texas Commission approval, providing for comparable annual revenue
reductions in Texas of approximately $15.4 million and approval of all Company
fuel expenses for the 42-month period currently subject to reconciliation.
In return for these rate reductions, the Company believes it will achieve
in both Texas and New Mexico a new period of revenue stability at levels that
will permit it to further reduce its debt while continuing to address issues
raised by industry restructuring and competition. During this period, the
Company's strategic goals include (i) serving the growing need for electricity
within its retail service territory; (ii) continuing to focus on its strategic
location on the border with Mexico; (iii) enhancing long-term relationships with
its largest retail customers; (iv) continuing to reduce operating costs; and (v)
developing an energy-related services business.
The New Mexico Settlement provides for (i) a total annual jurisdictional
base revenue reduction of $4.6 million; (ii) a 30-month moratorium on rate
increases or decreases in New Mexico; (iii) the elimination of the need for
future fuel reconciliations in New Mexico by incorporating the existing fixed
fuel factor into rates; (iv) an increased degree of ratemaking certainty for the
future achieved by an agreement among the signatories reducing the net value of
certain assets by approximately $40 million
12
<PAGE>
on a New Mexico jurisdictional basis for ratemaking purposes (but with no effect
on book values), while establishing the signatories' agreement that the Company
is entitled to 100% recovery of such revalued assets; and (v) the ability to
enter into long-term rate contracts with commercial and industrial customers in
New Mexico. The New Mexico Settlement became effective on October 26, 1998.
Additionally, as a result of the New Mexico Settlement, the Company will
contribute $0.4 million annually ($1.0 million over the 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 order adopting
the New Mexico Settlement did 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.
Following the New Mexico Settlement, the Company offered to enter into a
comparable agreement in Texas. Based upon that offer, the Company entered into
the Texas Settlement Agreement providing for: (i) a total annual jurisdictional
base revenue reduction of approximately $15.4 million retroactive to November 1,
1998; (ii) reconciliation of the Company's fuel expenses through December 31,
1998, with no disallowance; and (iii) an agreement to use 50% of all Palo Verde
performance rewards related to evaluation periods after 1997, when collected,
for low-income assistance and for Demand-Side Management ("DSM") programs,
primarily focused on small business customers, through the end of the Freeze
Period. The parties have executed the Texas Settlement Agreement and filed it
with the Texas Commission, the City of El Paso and all other municipalities
having jurisdiction. The Company anticipates the Texas Commission will consider
and approve the Texas Settlement Agreement in the near future. The new rates
under the Texas Settlement Agreement were implemented in April 1999, pursuant to
an interim order of the Texas Commission.
The Company faces a number of challenges which could negatively impact its
operations and financial results. The primary challenge is the risk of
increased costs, including the risk of additional or unanticipated costs at Palo
Verde resulting from (i) increases in operation and maintenance expenses; (ii)
the possible replacement of steam generators; (iii) an extended outage of any of
the Palo Verde units; (iv) increases in estimates of decommissioning costs; (v)
the storage of radioactive materials; and (vi) compliance with the various
requirements and regulations governing commercial nuclear generating stations.
At the same time, the Company's revenues, which have been reduced from previous
levels as a result of the New Mexico Settlement and the Texas Settlement
Agreement, are effectively capped. There can be no assurance that the Company's
revenues will be sufficient to recover any increased costs, including any such
increased costs in connection with Palo Verde or increases in other costs of
operation, whether as a result of higher than anticipated levels of inflation,
changes in tax laws or regulatory requirements, or other causes.
Another risk to the Company's operations is the potential loss of
customers. 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 became fully operational
at the end of 1998, gave the CFE the current capacity to supply electricity to
portions of northern Chihuahua, including the
13
<PAGE>
geographic area previously served by the Company. In addition, the New Mexico
State Legislature has passed legislation which purportedly gives Las Cruces the
authority to condemn the Company's distribution system and related assets
located within its city limits. On February 26, 1999, Las Cruces filed its
eminent domain proceeding. If Las Cruces succeeds in its efforts, the Company
could lose its Las Cruces customer base, which currently represents
approximately 8% of annual operating revenues, although the Company would
receive "just compensation" as established by the court. 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. 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 December 1998, under
which Ft. Bliss will take service from the Company through December 2008. The
Company has a contract to provide retail electric service to Holloman for a ten-
year term which began in December 1995. In May 1999 the Army and the Company
entered into a new ten-year contract to provide White Sands retail electric
service.
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. The Texas Commission and committees of both
houses of the Texas legislature have conducted proceedings related to industry
restructuring and stranded cost recovery; however, restructuring legislation has
yet to be passed. In New Mexico, a comprehensive electric utility restructuring
bill was signed into law by the Governor of New Mexico and became effective on
April 8, 1999. Under this law, retail customer choice begins January 1, 2001
for public post-secondary educational institutions, public schools, and
residential and small business customers. Retail customer choice begins January
1, 2002 for all other customers. Utilities are allowed to recover no less than
50% of their stranded costs with up to 100% recovery allowed if the New Mexico
Commission determines that additional recovery is in the public interest, is
necessary to maintain a utility's financial integrity, or is necessary to
continue adequate and reliable service and will not cause an increase in rates
to residential and small business customers. Utilities are required to file
transition plans addressing the various restructuring issues, including the
recovery of stranded costs, by March 1, 2000. The New Mexico Commission could
delay implementation of retail customer choice for up to one year. The new law
also allows the New Mexico Commission to review and approve any rate settlement
previously approved by the New Mexico Commission as a means of transition to
competition. After such approval, any such settlement would supercede the new
law to the extent it is inconsistent. The Company cannot predict whether the
implementation of this legislation will impact the Company's revenues and
recovery of costs contemplated under the New Mexico Settlement. The potential
effects of deregulation are particularly important to the Company because its
rates are significantly higher than the national and regional averages. In the
face of increased competition, there can be no assurance that this competition
will not adversely affect the future operations, cash flow, and financial
condition of the Company.
14
<PAGE>
Liquidity and Capital Resources
The Company's principal liquidity requirements for the next several years
are expected to consist of interest and principal payments on the Company's
indebtedness and capital expenditures related to the Company's generating
facilities and transmission and distribution systems. The Company expects that
cash flows from operations will be sufficient for such purposes.
Long-term capital requirements of the Company will consist primarily of
construction of electric utility plant and payment of interest on and retirement
of debt. The Company has no current plans to construct any new generating
capacity to serve retail load through at least 2004. Utility construction
expenditures will consist primarily of expanding and updating the transmission
and distribution systems and the cost of capital improvements and replacements
at Palo Verde and other generating facilities.
The Company anticipates that internally generated funds will be sufficient
to meet its construction requirements, provide for the retirement of debt and
enable the Company to meet other contingencies that may exist, such as
compliance with environmental regulation, pending litigation, any claims for
indemnification, and Year 2000 remediation. At March 31, 1999, the Company had
approximately $75.5 million in cash and cash equivalents. On February 8, 1999,
the Company renewed its $100 million revolving credit facility, which now
provides up to $70 million for nuclear fuel purchases and up to $50 million
(depending on the amount of borrowings outstanding for nuclear fuel purchases)
for working capital needs. At March 31, 1999, approximately $47.1 million had
been drawn for nuclear fuel purchases. No amounts have been drawn on this
facility for working capital needs.
The Company has a high debt to capitalization ratio and significant debt
service obligations. Due to the Texas Rate Stipulation, the Texas Settlement
Agreement, the New Mexico Settlement, and competitive pressures, the Company
does not expect to be able to raise its base rates in the event of increases in
non-fuel costs, increases in fuel costs in New Mexico or loss of revenues.
Accordingly, as described below, debt reduction is a high priority for the
Company in order to gain additional financial flexibility to address the
evolving competitive market. On March 1, 1999, after obtaining required
consents of holders of certain of the Company's outstanding debt securities, the
Company used cash on hand to pay for the early redemption of its Series A
Preferred Stock. The Company paid the redemption price of approximately $139.6
million; accrued cash dividends of $1.3 million; and premium, fees and costs of
securing the consents aggregating $9.6 million. The preferred stock had an
annual dividend rate of 11.40%. As a result of the early redemption of its
Series A Preferred Stock, the Company will avoid additional cash dividends of
approximately $2.7 million that would have occurred through May 1, 1999, and
$4.0 million quarterly thereafter until mandatory redemption in 2008. The
Company reported the premium and other costs related to the preferred stock
redemption as a reduction of net income applicable to common stock for the three
months ended March 31, 1999, which resulted in a one-time decrease in diluted
earnings per common share of $0.16.
The Company has significantly reduced its long-term debt following its
emergence from bankruptcy in 1996. From June 1, 1996 through April 30, 1999,
the Company repurchased approximately $246.3 million of first mortgage bonds as
part of an aggressive deleveraging program and repaid the remaining $36.0
million of Series A First Mortgage Bonds at their maturity on February 1, 1999.
The foregoing, together with the early redemption of Series A Preferred Stock,
reduced the Company's annual interest expense and annual cash dividend
requirements by approximately $21.8 million and $15.9 million, respectively.
Long-term indebtedness as a percentage of capitalization was reduced from 74% at
June 30, 1996 to 68% at March 31, 1999.
15
<PAGE>
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. Future repurchases of first
mortgage bonds will be evaluated based on market conditions, the availability of
cash to meet bond maturities and the comparative economic value of alternative
uses of cash.
The degree to which the Company is leveraged could have important
consequences on the Company's liquidity, including (i) the Company's ability to
obtain additional financing for working capital, capital expenditures,
acquisitions, general corporate or other purposes could be limited in the
future, and (ii) the Company's substantial leverage may place the Company at a
competitive disadvantage by limiting its financial flexibility to respond to the
demands of the competitive market and make it more vulnerable to adverse
economic or business changes.
Results of Operations
<TABLE>
<CAPTION>
Net Income Diluted Earnings
(Loss) Applicable to (Loss) Per
Common Stock Before Common Share Before
Extraordinary Item Extraordinary Item
------------------------------- -------------------------------
1999 1998 1999 1998
--------------- -------------- --------------- --------------
(In thousands)
<S> <C> <C> <C> <C>
Three Months Ended March 31................... $(2,725) $ 6,992 $(0.045) $0.116
Twelve Months Ended March 31.................. 32,649 45,442 0.539 0.752
</TABLE>
Results of operations for the three and twelve months ended March 31, 1999
were affected by unusual or infrequent items, including the recognition of
certain items arising from the Texas Settlement Agreement, a change in estimated
fuel cost reserves, and the early redemption of the Company's 11.40% Series A
Preferred Stock.
Operating revenues net of energy expenses decreased $1.2 million for the
three months ended March 31, 1999, and increased $6.8 million for the twelve
months ended March 31, 1999, compared to the same periods last year, as follows
(In thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31: 1999 1998 Increase/(Decrease)
- ---------------------------- ---- ---- ------------------
<S> <C> <C> <C>
Texas Settlement Agreement:
Palo Verde performance rewards.......... $ 3,453 $ -- $ 3,453
Retroactive base rate decrease.......... (2,343) -- (2,343)
Change in estimated fuel cost reserves.... 3,754 -- 3,754
Other..................................... 102,191 108,299 (6,108)
-------- -------- -------
Total operating revenues net
of energy expenses................ $107,055 $108,299 $(1,244)
======== ======== =======
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Twelve Months Ended March 31: 1999 1998 Increase/(Decrease)
- ----------------------------- ---- ---- -------------------
<S> <C> <C> <C>
Texas Settlement Agreement:
Palo Verde performance rewards.......... $ 3,453 $ -- $3,453
Change in estimated fuel cost reserves.... 3,754 -- 3,754
Other..................................... 463,710 464,145 (435)
-------- -------- ------
Total operating revenues net
of energy expenses................ $470,917 $464,145 $6,772
======== ======== ======
</TABLE>
Excluding the effects of the recognition of the Palo Verde performance
rewards, a retroactive base rate decrease, and the change in estimated fuel cost
reserves, the three-month decrease of $6.1 million was primarily due to the loss
of sales to CFE and the rate reductions in Texas and New Mexico. These
decreases were partially offset by increased economy sales at higher margins.
Excluding the recognition of the Palo Verde performance rewards and the change
in estimated fuel cost reserves, the twelve-month decrease of $0.4 million was
primarily due to the loss of sales to CFE and the rate reductions in Texas and
New Mexico partially offset by increased kWh sales to retail customers and
increased economy sales at higher margins.
Retail customers' operating revenues shown below include the recognition of
the Palo Verde performance rewards and the effects of the change in estimated
fuel cost reserves for the three and twelve month periods ended March 31, 1999.
Also included in the three-month period is the effect of the retroactive base
rate decrease. Comparisons of kWh sales and operating revenues are shown below
(In thousands):
<TABLE>
<CAPTION>
Increase/(Decrease)
-------------------
Three Months Ended March 31: 1999 1998 Amount Percent
- ---------------------------- ---- ---- ------ -------
<S> <C> <C> <C> <C>
Electric kWh Sales:
Retail Customers........................ 1,322,512 1,326,074 (3,562) (0.3)%
Other Utilities......................... 147,260 459,334 (312,074) (67.9)
---------- ---------- --------
Total.................................. 1,469,772 1,785,408 (315,636) (17.7)
========== ========== ========
Operating Revenues:
Retail Customers........................ $ 110,746 $ 110,739 $ 7 0.0 %
Other Utilities......................... 19,123 26,206 (7,083) (27.0)
---------- ---------- --------
Total.................................. $ 129,869 $ 136,945 $ (7,076) (5.2)
========== ========== ========
<CAPTION>
Increase/(Decrease)
-------------------
Twelve Months Ended March 31: 1999 1998 Amount Percent
- ------------------------------ ---- ---- ------ -------
<S> <C> <C> <C> <C>
Electric kWh Sales:
Retail Customers........................ 5,944,659 5,838,792 105,867 1.8 %
Other Utilities......................... 1,445,806 1,972,463 (526,657) (26.7)
---------- ---------- --------
Total.................................. 7,390,465 7,811,255 (420,790) (5.4)
========== ========== ========
Operating Revenues:
Retail Customers........................ $ 497,837 $ 495,294 $ 2,543 0.5 %
Other Utilities......................... 97,308 99,832 (2,524) (2.5)
---------- ---------- --------
Total.................................. $ 595,145 $ 595,126 $ 19 0.0
========== ========== ========
</TABLE>
17
<PAGE>
Other operations and maintenance expense decreased $1.2 million for the
three months ended March 31, 1999, compared to the same period last year due to
decreased operations expense of $1.9 million. Other operations expense decreased
primarily due to decreased professional fees of $1.6 million resulting from
fewer regulatory issues. The decrease was partially offset by increased
maintenance expense of $0.7 million, as follows (In thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31: 1999 1998 Increase/(Decrease)
- ---------------------------- ---- ---- -------------------
<S> <C> <C> <C>
Outside services.......................... $ 1,880 $ 3,930 $(2,050)
Other..................................... 28,752 28,640 112
------- ------- -------
Total other operations expense.......... 30,632 32,570 (1,938)
------- ------- -------
Maintenance at Company-owned
generating plants....................... 3,648 1,546 2,102
Maintenance at Palo Verde................. 2,579 3,836 (1,257)
Other..................................... 2,687 2,820 (133)
------- ------- -------
Total maintenance expense............... 8,914 8,202 712
------- ------- -------
Total other operations and
maintenance expense................. $39,546 $40,772 $(1,226)
======= ======= =======
</TABLE>
Other operations and maintenance expense increased $0.9 million for the
twelve months ended March 31, 1999, compared to the same period last year due to
increased maintenance expense of $2.1 million partially offset by decreased
operations expense of $1.2 million, as follows (In thousands):
<TABLE>
<CAPTION>
Twelve Months Ended March 31: 1999 1998 Increase/(Decrease)
- ----------------------------- ---- ---- -------------------
<S> <C> <C> <C>
Outside services.......................... $ 12,002 $ 16,672 $(4,670)
All employee bonus plan................... 5,606 2,200 3,406
Other..................................... 114,704 114,650 54
-------- -------- -------
Total other operations expense.......... 132,312 133,522 (1,210)
-------- -------- -------
Maintenance at Company-owned
generating plants....................... 10,338 7,516 2,822
Insurance settlements..................... -- (1,192) 1,192
Maintenance at Palo Verde................. 14,045 15,511 (1,466)
Other..................................... 11,284 11,720 (436)
-------- -------- -------
Total maintenance expense............... 35,667 33,555 2,112
-------- -------- -------
Total other operations and
maintenance expense................. $167,979 $167,077 $ 902
======== ======== =======
</TABLE>
Depreciation and amortization expense increased slightly due to routine
capital additions for the three and twelve months ended March 31, 1999, compared
to the same periods last year.
Taxes other than income taxes were essentially unchanged for the three
months ended March 31, 1999, and increased $0.6 million for the twelve months
ended March 31, 1999, compared to the same period last year, primarily due to
increases in Texas revenue related taxes resulting from an increase in Texas
revenues and Texas property tax. These increases were partially offset by a
decrease in Arizona property taxes resulting from a decrease in the assessment
ratio in 1998 and a decrease in property values due to depreciation.
18
<PAGE>
Other income, net decreased $1.2 million for the three months ended March
31, 1999, compared to the same period last year primarily due to a gain on
disposition of non-utility property of $0.7 million in 1998 with no comparable
amount in 1999, and increased donations of $0.4 million in 1999 pursuant to the
terms of the New Mexico Settlement. Other income, net decreased $6.1 million for
the twelve months ended March 31, 1999, compared to the same period last year
primarily due to a favorable litigation settlement of $7.5 million, net of legal
fees and expenses, and a gain on disposition of non-utility property of $1.5
million in the prior period, with no comparable amounts in the current period.
These decreases were partially offset by an increase in investment income of
$3.9 million in 1999 resulting from the investment of higher levels of cash.
Interest charges decreased $1.0 million and $3.7 million for the three and
twelve months ended March 31, 1999, 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.
Income tax expense increased $0.3 million for the three months ended March
31, 1999, and decreased $1.8 million for the twelve months ended March 31, 1999,
compared to the same periods last year, primarily due to changes in pretax
income and certain permanent differences.
Extraordinary gain on discharge of debt of $3.3 million, net of income tax
expense of $2.1 million for the twelve months ended March 31, 1999 represents
unclaimed and undistributed funds designated for the payment of preconfirmation
claims which reverted to the Company pursuant to the Fourth Amended Plan of
Reorganization, with no comparable amounts for the same period in 1998.
The Company has an Energy Services Business Unit (the "ESBU") which began
developing energy efficient products and services in 1997. The ESBU offers
customers pricing options, as well as value-added products and services that
give them greater value for the kWh purchased from the Company. The revenues and
expenses related to the operations of the ESBU have not been material to date.
Year 2000 Preparedness
The Company faces the same concerns relating to the Year 2000 ("Y2K")
problem as other companies that use computers. The problem is that many computer
programs use only the last two digits to refer to a year. Consequently, these
programs may not recognize a year that begins with "20" instead of the familiar
"19". Therefore, applications that are date sensitive may not function properly.
Problems may arise in the Company's information technology ("IT") systems,
including those that allow the Company to operate generation, transmission and
distribution facilities, manage customer billing accounts and conduct other
functions needed to operate the Company's business. 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.
The Company has defined "mission critical" systems as those that could
affect service to its customers or could otherwise result in a permanent and
significant financial loss to the Company, if they fail to function properly.
The Company's goal is that all mission critical systems and applications be
suitable for continued use into the year 2000 ("Y2K ready") by June 30, 1999,
and that all systems and applications will be Y2K ready by December 31, 1999.
The Company began addressing the Y2K problem during the last quarter of 1996
with a program consisting of four major phases: inventory, assessment,
remediation and testing for Y2K readiness.
19
<PAGE>
The Company started the inventory phase for its IT systems in October 1996
and for its non-IT systems in February 1998. Each has been completed. The
Company will, however, continue to update the information as appropriate, such
as when the Company purchases new software or hardware.
The Company has substantially completed the assessment phase on its IT
systems. Assessment of non-IT systems is nearing completion. The assessment
phase is complete for substantially all mission critical systems. As the
Company purchases new software and other products in 1999, additional readiness
assessment will be performed.
The third phase of the Y2K program is remediation. While the Company is
employing remediation procedures generally accepted as standard, there are no
guarantees such efforts will be entirely successful. As this point, the Company
believes it has completed remediation on about 65% of all its IT and non-IT
systems and on more than 90% of its mission critical systems. The Company
expects to have completed the remediation phase for substantially all mission
critical systems by June 30, 1999.
The Company will continue to test for Y2K readiness throughout 1999. With
respect to IT and non-IT systems, the Company estimates that about 65% of the
planned testing has already been completed. The Company intends to test
substantially all of its IT systems and 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 IT and non-IT systems. The Company expects to have completed testing on
substantially all mission critical systems by June 30, 1999.
Because of the integrated nature of the Company's business with other
utilities and its jointly-owned facilities operated by other utilities, the
Company is reviewing the activities of other utilities that interconnect with
the Company on the integrated system. In addition, the Company is assessing the
activities of its financial institutions and major suppliers and customers to
determine their readiness for Y2K issues. The successful operation of Palo
Verde and other energy sources, water companies, gas suppliers and other
suppliers will be critical to the Company's ability to limit the impact of any
Y2K problems that may arise. Given the complex nature of this problem and the
potential impacts on the Company of non-Y2K ready systems beyond its control,
the Company cannot assure that it will not experience some outages or
operational failures during the Y2K transition period.
In December 1998 the Company retained the services of an independent
consulting firm to review the Company's Y2K 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. As a result of the independent review,
the Company in February 1999 reassigned the personnel in charge of its Y2K
program and instituted various procedural and process modifications to improve
the program.
The Company has expensed substantially all costs of its Y2K program. As of
March 31, 1999, the Company's expenditures on the Y2K program totaled
approximately $1.7 million and were predominantly related to internal labor,
diagnostic tools, server upgrades and contracted costs. Expenses in 1999 are
not expected to substantially exceed $3.0 million and will include costs for
remediation, consultation, independent verification, participation in North
American Electric Reliability Council drills and contingency planning.
Approximately half of all Y2K program expenses are expected to be internal labor
costs.
20
<PAGE>
The Company has been advised by APS, operating agent for Palo Verde and
Four Corners, that APS has inventoried and assessed essentially all mission
critical IT and non-IT systems and equipment. APS has indicated that they are
90% complete with the remediation and testing of these systems and expects to
complete all such testing by June 30, 1999, for all mission critical systems,
except for (i) those items that can only be completed during maintenance outages
at Palo Verde, which will be completed for the last unit, which is substantially
identical to the other two units, during the last half of 1999 and (ii) the
continuous emissions monitoring systems for Four Corners, which will also be
completed during the last half of 1999. APS has an internal audit/quality review
team that is periodically reviewing the individual Y2K projects and their Y2K
readiness.
Failure by the Company to meet the challenges of the Y2K problem could have
serious consequences. A malfunction in a system affecting the generation,
transmission or distribution of energy to the Company's customers, whether
caused by a problem with one of the Company's 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 or that testing and remediation
procedures employed by the Company will identify and correct 100% of potential
Y2K-related problems. There remains a chance that on January 1, 2000 there will
be some system failures. Therefore, the Company is also preparing contingency
and continuity plans. The Company has always prepared for unexpected outages of
its facilities (resulting from storms and other natural disasters) and,
therefore, pre-existing emergency response plans form the core of the Company's
electric system contingency plan. Procedures to deal with a wide array of
difficulties resulting from the singular or simultaneous failure(s) of elements
or systems related specifically to the Y2K transition period are also being
developed based on the Company's basic contingency model. A draft of the
Company's contingency plan was completed in December 1998, and the Company
expects to complete the contingency plan by June 1999. The Company is also
developing a business continuity plan for its business systems and processes
that it expects to complete by December 31, 1999.
In April 1999 the Company along with about 200 other electric transmission
systems across North America, conducted simulated testing of primary and backup
communication equipment currently used to relay information to and from its
System Operations Control Center. As a result of the testing, the Company now
believes that sufficiently accurate and timely data can be provided by field
personnel to operate the Company's electric system in the event of certain
communication system failures. Substantially all communication facilities
tested during the drill operated as expected. The Company will participate in
another industry-sponsored drill in September 1999, which will afford an
opportunity to rehearse, under simulated conditions, key portions of the
Company's administrative, operating, communications and contingency response
plans for the Y2K transition period.
21
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk due to changes in interest rates,
equity prices, and commodity prices. See the Company's 1998 Form 10-K "Item 7A.
Quantitative and Qualitative Disclosures About Market Risk" for a complete
discussion of the market risks faced by the Company and the Company's market
risk sensitive assets and liabilities. As of March 31, 1999, there have been no
material changes in the market risks faced by the Company or the fair values of
assets and liabilities disclosed in "Item 7A. Quantitative and Qualitative
Disclosures About Market Risk" in the Company's 1998 Form 10-K.
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
22
<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: May 14, 1999
23
<PAGE>
EL PASO ELECTRIC COMPANY
INDEX TO EXHIBITS
Exhibit
Number Exhibit
- ------- -------
4.01 Amendment No. 1 dated, February 1, 1999, to the Letter of Credit and
Reimbursement Agreements, dated as of August 27, 1997, relating to the
Pollution Control Bonds.
+10.01 Form of Change of Control Agreement between the Company and certain
key officers of the Company.
10.02 Directors' Restricted Stock Award Agreement, dated as of January 28,
1999, with George H. Edwards, Jr.
10.03 Stock Option Agreement, dated as of January 11, 1999, with Earnest A.
Lehman.
++10.04 Form of Restricted Stock Award Agreement between the Company and
certain key officers of the Company.
11 Statement re Computation of Per Share Earnings
15 Letter re Unaudited Interim Financial Information
27 Financial Data Schedule (EDGAR filing only)
+ Eight agreements, substantially identical in all material respects to
this Exhibit, have been entered into with Terry D. Bassham; J. Frank
Bates; Michael L. Blough; Gary R. Hedrick; John C. Horne; Earnest A.
Lehman; Robert C. McNiel; and Eduardo A. Rodriguez, officers of the
Company.
++ Eleven agreements, substantially identical in all material respects to
this Exhibit, except for the number of shares, have been entered into
with Terry D. Bassham; J. Frank Bates; Michael L. Blough; Gary R.
Hedrick; John C. Horne; Robert C. McNiel; Thomas L. Newsom; Eduardo A.
Rodriguez; Pedro Serrano; Guillermo Silva; and John A. Whitacre;
officers and key employees of the Company.
24
<PAGE>
EXHIBIT 4.01
AMENDMENT NO.1
AMENDMENT NO. 1, dated as of February 1, 1999 (the "Amendment No. 1"), to
the Letter of Credit and Reimbursement Agreements dated as of August 27, 1997
(collectively, the "Agreement"), among El Paso Electric Company, a Texas
corporation (the "Company"), Barclays Bank PLC, New York Branch ("Barclays"), as
issuing bank (the "Issuing Bank"), the Creditors (as defined in the Agreement),
Barclays, as administrative agent for the Issuing Bank and the Creditors (the
"Administrative Agent") and Union Bank of California, N.A. as documentation
agent (the "Documentation Agent"). Capitalized terms used herein and not
otherwise defined shall have the meanings assigned to them in the Agreement.
WHEREAS, on February 12, 1996 the Company issued and sold $100,000,000 of
11.40% Series A Preferred Stock (the "Preferred Stock"), which, in the Company's
opinion, is an expensive security that is no longer appropriate in the capital
structure and is a security whose redemption is in the best interests of the
Company;
WHEREAS, the Company has taken steps and expects to redeem the Preferred
Stock no later than May 1, 1999;
WHEREAS, the Agreement prohibits the Company from having a debt to
capitalization ratio (the "Ratio Test") in excess of specified levels, and the
redemption of the Preferred Stock may make it difficult for the Company to meet
the Ratio Test; and
WHEREAS, the Company wishes and Requisite Creditors agree to amend the
Ratio Test to facilitate the redemption of the Preferred Stock;
NOW AND THEREFORE, in consideration of the mutual agreements contained
herein and other good and valuable consideration, the sufficiency and receipt of
which are hereby acknowledged, the parties hereto agree as follows:
Section 1. Amendment to Section 5.03(p) of the Agreement. The last line
---------------------------------------------
of Section 5.03(p) of the Agreement shall be deleted and replaced with the
following language:
"and 0.70:1.0 for each fiscal quarter thereafter."
<PAGE>
Section 2. Amendments to Section 1.01 of the Agreement.
-------------------------------------------
(a) The following definition of "Excess Cash" shall be added to
precede the definition of "Exchange Act":
"Excess Cash" means, as of any date of determination, the sum
of (a) cash and (b) the fair market value of all Permitted
Investments as shown on the Company's consolidated balance
sheet on such date minus $25,000,000; provided, however; that
in no event shall "Excess Cash" be deemed to be less than zero.
(b) The definition of "Total Debt" shall be replaced in its
entirety with the following language:
"Total Debt" means, as of any date of determination, all
Indebtedness (excluding letters of credit and Hedging
Obligations of the Company at such date), minus Excess Cash.
Section 3. Conditions to Effectiveness. This Amendment No. 1 shall be
---------------------------
effective as of the date first written above upon its execution by the Company
and the Requisite Creditors.
Section 4. Representations and Warranties of the Company. The Company
---------------------------------------------
represents and warrants as follows:
(a) The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Texas.
(b) The execution, delivery and performance by the Company of this
Amendment No. 1 are within its corporate powers, have been duly
authorized by all necessary corporate action, and do not
contravene the Company's articles of incorporation or by-laws.
(c) No authorization or approval or other action by, and no notice
to or filing with, any governmental authority or regulatory
body is required for the due execution, delivery and
performance by the Company of this Amendment No. 1.
<PAGE>
(d) This Amendment No. 1 has been duly executed and delivered by
the Company. This Amendment No. 1 is the legal, valid and
binding obligation of the Company, enforceable against the
Company, in accordance with its terms, subject to applicable
bankruptcy, insolvency, reorganization, moratorium or similar
laws affecting the enforceability of creditors' rights
generally and by general principles of equity.
(e) The representations and warranties contained in Section 4.01 of
the Agreement (other than those contained in subsections (m),
(n), (p) and (q)) are correct in all material respects on and
as of the date hereof, as though made on and as of the date
hereof.
(f) No event has occurred and is continuing which constitutes a
Default.
Section 5. Effect of Amendment. Except as expressly set forth herein,
-------------------
this Amendment No. 1 shall not by implication or otherwise alter, modify, amend
or in any way affect any of the terms, conditions, obligations, covenants or
agreements contained in the Agreement, all of which are ratified and affirmed in
all respects and shall continue in full force and effect. This Amendment No. 1
shall apply and be effective only with respect to the provisions of the
Agreement specifically referred to herein.
Section 6. Counterparts. This Amendment No. 1 may be executed in any
-------------
number of counterparts, each of which when so executed and delivered shall be
deemed an original, but all such counterparts together shall constitute but one
and the same contract. Delivery of an executed counterpart of a signature page
of this Amendment No. 1 by facsimile transmission shall be as effective as
delivery of a manually executed counterpart hereof.
Section 7. Applicable Law. THIS AMENDMENT NO. 1 SHALL BE GOVERNED BY, AND
--------------
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
Section 8. Headings. The headings of this Amendment No. 1 are for
--------
purposes of reference only and shall not limit or otherwise affect the meaning
hereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to
be duly executed by their duly authorized officers, all as of the date first
above written.
EL PASO ELECTRIC COMPANY
By: /s/ GARY R. HEDRICK
------------------------------------
Vice President, Treasurer
And Chief Financial Officer
<PAGE>
Issuing Bank and Administrative
Agent
BARCLAYS BANK PLC, NEW
YORK BRANCH
By: /s/ SYLVIA C. DENNIS
-----------------------------------
Name: Sylvia C. Dennis
------------------------------
Title: Director
-----------------------------
By:____________________________________
Name:_______________________________
Title:______________________________
<PAGE>
Documentation Agent
UNION BANK OF CALIFORNIA,
N.A.
By: /s/ JASON P. DINAPOLI
----------------------------------------
Name: Jason P. DiNapoli
----------------------------------
Title: Vice President
----------------------------------
<PAGE>
CREDITORS
BARCLAYS BANK PLC, NEW
YORK BRANCH
By: /s/ SYLVIA C. DENNIS
----------------------------------------
Name: Sylvia C. Dennis
----------------------------------
Title: Director
---------------------------------
<PAGE>
CREDITORS
UNION BANK OF
CALIFORNIA, N.A.
By: /s/ JASON P. DiNAPOLI
--------------------------------------
Name: Jason P. DiNapoli
-----------------------------------
Title: Vice President
----------------------------------
<PAGE>
CREDITORS
THE MITSUBISHI TRUST AND
BANKING CORPORATION, LOS
ANGELES AGENCY
By: /s/ YASUSHI SATOMI
----------------------------------------
Name: Yasushi Satomi
-----------------------------------
Title: Senior Vice President
----------------------------------
<PAGE>
CREDITORS
CREDIT LYONNAIS NEW YORK
BRANCH
By: /s/ ROBERT IVOSEVICH
----------------------------------------
Name: Robert Ivosevich
-----------------------------------
Title: Senior Vice President
----------------------------------
<PAGE>
CREDITORS
THE INDUSTRIAL BANK OF
JAPAN TRUST COMPANY
By: /s/ MIKE OAKES
----------------------------------------
Name: Mike Oakes
-----------------------------------
Title: Senior Vice President
----------------------------------
THE INDUSTRIAL BANK OF JAPAN, LIMITED, HOUSTON OFFICE
(Authorized Representative)
<PAGE>
CREDITORS
ABN AMRO BANK
By: /s/ KEVIN S. McFADDEN
-----------------------------------------
Name: Kevin S. McFadden
------------------------------------
Title: Vice Presient
-----------------------------------
By: /s/ KRIS A. GROSSHANS
-----------------------------------------
Name: Kris A. Grosshans
------------------------------------
Title: Vice President & Director
-----------------------------------
<PAGE>
CREDITORS
THE CHASE MANHATTAN
BANK
By: /s/
-------------------------------------
Name:________________________________
Title:_______________________________
<PAGE>
CREDITORS
BANKBOSTON, N.A.
By: /s/ MICHAEL M. PARKER
--------------------------------------
Name: Michael M. Parker
---------------------------------
Title: Managing Director
--------------------------------
<PAGE>
CREDITORS
BANK OF SCOTLAND
By: /s/ ANNIE CHIN TAT
---------------------------------------
Name: Annie Chin Tat
----------------------------------
Title: Senior Vice President
---------------------------------
<PAGE>
CREDITORS
THE MITSUI TRUST AND
BANKING COMPANY, LIMITED
By: /s/
---------------------------------------
Name:__________________________________
Title:_________________________________
<PAGE>
CREDITORS
BANQUE PARIBAS
By:___________________________________
Name:______________________________
Title:_____________________________
<PAGE>
CREDITORS
BAYERISCHE HYPO-UND VEREINSBANK
AG NEW YORK BRANCH
By: /s/ SYLVIA CHENG
----------------------------------------
Name: Sylvia Cheng
-----------------------------------
Title: Director
----------------------------------
By: /s/ CARLO LAMBERTI
----------------------------------------
Name: Carlo Lamberti
-----------------------------------
Title: Associate Director
----------------------------------
<PAGE>
EXHIBIT 10.01
EL PASO ELECTRIC COMPANY
CHANGE OF CONTROL AGREEMENT
FOR EXECUTIVE OFFICERS
AGREEMENT by and between El Paso Electric Company, a Texas corporation
(the "Company"), and ________________ (the "Executive"), dated as of the 28th
day of January, 1999.
W I T N E S S E T H
WHEREAS, the Executive currently serves as a key employee of the
Company and his services and knowledge are valuable to the Company in connection
with the management of the Company; and
WHEREAS, the Board of Directors of the Company (the "Board") has
determined that it is in the best interests of the Company and its stockholders
to secure the Executive's continued services and to ensure the Executive's
continued dedication and objectivity in the event of any threat or occurrence
of, or negotiation or other action that could lead to, or create the possibility
of, a Change in Control (as defined in Attachment 1) of the Company, without
concern as to whether the Executive might be hindered or distracted by personal
uncertainties and risks created by any such possible Change in Control, and to
encourage the Executive's full attention and dedication to the Company, the
Board has authorized the Company to enter into this Agreement.
NOW, THEREFORE, for and in consideration of the premises and the
mutual covenants and agreements herein contained, the Company and the Executive
hereby agree as follows:
1. Employment Period. (a) The Company hereby agrees to employ the Executive
and the Executive hereby agrees to accept employment with and remain in the
employment of the Company, subject to the terms and conditions of this
Agreement, for the period commencing upon the occurrence of a Change in Control
and ending on the second anniversary thereof, or such later date as may be
mutually agreed upon by the Company and the Executive. Notwithstanding the
foregoing, the Executive's employment hereunder may be earlier terminated,
subject to Section 4 of this Agreement. The period of time between the
commencement and the termination of the Executive's employment hereunder shall
be referred to herein as the "Employment Period."
1
<PAGE>
(b) Prior to the occurrence of a Change in Control, the Executive's
employment by the Company shall be governed by any current contract of
employment, and this Agreement shall not confer upon the Executive any right to
continued employment by the Company nor affect in any manner the right of the
Company to terminate the employment of the Executive at any time prior to the
occurrence of a Change in Control. In particular, the Executive shall not have
any rights under this Agreement for termination of employment "in anticipation
of" any "change of control" that shall occur prior to the occurrence of a Change
in Control.
2. Terms of Employment. (a) Position and Duties. (i) During the
Employment Period, (A) the Executive shall serve as _______________________ of
the Company (or the equivalent position in the division, subsidiary or other
portion of any post-merger or post-acquisition successor that is operationally
responsible for the electric business conducted by the Company prior to the
merger or acquisition), with such authority, duties and responsibilities as are
commensurate with such position and as may be consistent with such position as
may be assigned to him by the Board and (B) the Executive's services shall be
performed at the Company's offices in El Paso, Texas. Notwithstanding the
foregoing, the Company and the Executive may mutually agree to such changes in
the Executive's position, reporting or location of employment as are in the best
interest of the Company without violating the provisions of this paragraph.
(ii) During the Employment Period, and excluding any periods of vacation
and sick leave to which the Executive is entitled, the Executive agrees to
devote substantially all of his or her attention and time during normal business
hours to the business and affairs of the Company and, to the extent necessary to
discharge the responsibilities assigned to the Executive hereunder, to use the
Executive's best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period, it shall not be a violation of
this Agreement for the Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking engagements, or
teach at educational institutions, and (C) manage personal investments, so long
as such activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this Agreement.
(b) Compensation. (i) Base Salary. During the Employment Period, the
Executive shall receive an annual base salary ("Annual Base Salary"), payable
biweekly, at least equal to the annual base salary paid or payable, including
any base salary which has been earned but deferred, to the Executive by the
Company in respect of the twelve-month period immediately preceding the
occurrence of a Change in Control. During the Employment Period, the Annual
Base Salary shall be reviewed no more than 12 months after the last salary
increase awarded to the Executive prior to the
2
<PAGE>
occurrence of a Change in Control and thereafter at least annually. Any
increase in Annual Base Salary shall not serve to limit or reduce any other
obligation to the Executive under this Agreement. Annual Base Salary shall not
be reduced after any such increase and the term Annual Base Salary shall refer
to Annual Base Salary as so increased. As used in this Agreement, the term
"affiliated companies" shall include any company controlled by, controlling or
under common control with the Company.
(ii) Annual Bonus. In addition to Annual Base Salary, for each fiscal
year ending during the Employment Period the Executive shall be eligible, based
upon the Executive's achievement of performance goals, and the Company's
achievement of financial and other operating goals, in each case set by the
Compensation Committee of the Board, in consultation with the Executive, at
levels substantially consistent with past practice, during such fiscal year, to
receive a bonus (the "Annual Bonus") at a target level of not less than 30% of
the Annual Base Salary (the "Target Bonus Amount") with the opportunity,
substantially consistent with past practice, to earn in excess of such amount
based upon the attainment of agreed upon performance goals. Each such Annual
Bonus shall be paid no later than the last business day of the third month of
the fiscal year next following the fiscal year for which the Annual Bonus is
awarded (the "Last Payment Date").
(iii) Long-Term Incentive Compensation. During the Employment Period, the
Executive shall be entitled to participate in all long-term incentive plans,
practices, policies and programs applicable generally to other peer executives
of the Company.
(iv) Savings and Retirement Plans. During the Employment Period, the
Executive shall be entitled to participate in all savings and retirement plans,
practices, policies and programs on a basis no less favorable than that
generally applicable to peer executives of the Company.
(v) Welfare Benefit Plans. During the Employment Period, the Executive
and/or the Executive's dependents, as the case may be, shall be eligible for
participation in and shall receive all benefits under welfare benefit plans,
practices, policies and programs provided by the Company on a basis no less
favorable than that generally applicable to peer executives of the Company.
(vi) Expenses. During the Employment Period, the Executive shall be
entitled to receive prompt reimbursement for all reasonable expenses incurred by
the Executive in accordance with the Company's policies.
(vii) Vacation. During the Employment Period, the Executive shall be
entitled to paid vacation in accordance with the plans, policies, programs and
practices of the Company on a basis no less favorable than that generally
applicable to peer executives
3
<PAGE>
of the Company but, in any event, shall be entitled to no less than four weeks
of vacation per year during the Employment Period.
3. Termination of Employment. (a) Death or Disability. The Executive's
employment shall terminate automatically upon the Executive's death during the
Employment Period. If the Disability of the Executive occurs during the
Employment Period pursuant to the definition of Disability set forth below, the
Company may give the Executive written notice, in accordance with Section 10(b)
of this Agreement, of its intention to terminate the Executive's employment. In
such event, the Executive's employment with the Company shall terminate
effective on the 60th day after receipt of such notice by the Executive (the
"Disability Effective Date"); provided that, within the 60 days after such
receipt, the Executive shall not have returned to substantially full time
performance of the Executive's duties. For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from the performance of the
Executive's duties with the Company on a full time basis for an aggregate of 120
out of any 180 consecutive business days as a result of incapacity due to mental
or physical illness which is determined to be total and permanent by an
independent physician selected by the Company or its insurers and reasonably
acceptable to the Executive or the Executive's legal representative.
(b) Cause. The Company may terminate the Executive's employment during
the Employment Period for Cause. For purposes of this Agreement, "Cause" shall
mean the willful and continued failure by the Executive to perform his or her
duties, or the engaging by the Executive in illegal conduct or misconduct which
is materially injurious to the Company. The cessation of employment of the
Executive shall not be deemed to be for Cause unless and until there shall have
been delivered to the Executive a copy of a resolution duly adopted by the
affirmative vote of not less than three-quarters of the entire membership of the
Board at a meeting of the Board called and held for such purpose (after
reasonable notice is provided to the Executive and the Executive is given an
opportunity, together with counsel, to be heard before the Board) finding that,
in the good faith opinion of the Board, the Executive is guilty of the conduct
described above, and specifying the particulars thereof in detail.
(c) Good Reason. The Executive's employment may be terminated by the
Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean:
(i) the assignment to the Executive of any duties inconsistent with the
Executive's position (including status, offices, titles and reporting
requirements), authority, duties or responsibilities set forth in Section 2(a)
of this Agreement, or any other action by the Company which results in a
diminution in such position, authority, duties or responsibilities, excluding
for these purposes (A) assignment to a comparable
4
<PAGE>
position and duties in the division, subsidiary or other portion of any post-
merger or post-acquisition successor that is operationally responsible for the
electric business conducted by the Company prior to the merger or acquisition,
(B) an isolated and insubstantial action not taken in bad faith and which is
remedied by the Company promptly after receipt of notice thereof given by the
Executive, and (C) any action to which the Executive has given his or her
written consent;
(ii) any failure by the Company to comply with any of the provisions of
Section 2(b) of this Agreement, other than an isolated and insubstantial failure
not occurring in bad faith and which is remedied by the Company promptly after
receipt of notice thereof given by the Executive;
(iii) the Company's requiring the Executive without the Executive's
written consent to be based at any office or location located more than 100
miles from the office or location provided in Section 2(a)(i)(B) hereof or the
Company's requiring the Executive to travel on Company business to a
substantially greater extent than required immediately prior to the Effective
Date;
(iv) any failure by the Company to comply with and satisfy Section 9(c) of
this Agreement; or
(v) the Company's purported termination of Agreement other than in
accordance with its terms.
(d) Notice of Termination. Any termination by the Company for Cause, or
by the Executive for Good Reason, shall be communicated by Notice of Termination
to the other party hereto given in accordance with Section 10(b) of this
Agreement. In the case of a Good Reason termination, such Notice of Termination
shall be given within 90 days of the occurrence of the event that provides the
basis for the termination as a condition of such claim being treated as a Good
Reason termination hereunder. For purposes of this Agreement, a "Notice of
Termination" means a written notice which (i) indicates the specific termination
provision in this Agreement relied upon, (ii) to the extent applicable, sets
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Executive's employment under the provision so
indicated and (iii) if the Date of Termination (as defined below) is other than
the date of receipt of such notice, specifies the termination date (which date
shall be not more than 30 days after the giving of such notice). The failure by
the Executive or the Company to set forth in the Notice of Termination any fact
or circumstance which contributes to a showing of Good Reason or Cause shall not
waive any right of the Executive or the Company, respectively, hereunder or
preclude the Executive or the Company, respectively, from asserting such fact or
circumstance in enforcing the Executive's or the Company's rights hereunder.
5
<PAGE>
(e) Date of Termination. "Date of Termination" means (i) if the
Executive's employment is terminated by the Company for Cause, or by the
Executive for any reason (including Good Reason), the date of receipt of the
Notice of Termination or any later date specified therein that is within 30 days
of such Notice, as the case may be, (ii) if the Executive's employment is
terminated by the Company other than for Cause or Disability, the Date of
Termination shall be the date on which the Company notifies the Executive of
such termination and (iii) if the Executive's employment is terminated by reason
of death or Disability, the Date of Termination shall be the date of death of
the Executive or the Disability Effective Date, as the case may be.
4. Obligations of the Company upon Termination. (a) Good Reason; Other
than for Cause, Death or Disability. If, during the Employment Period, the
Company shall terminate the Executive's employment other than for Cause or
Disability or the Executive shall terminate employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in cash within 30
days after the Date of Termination the aggregate of the following amounts:
A. the sum of (1) the Executive's Annual Base Salary through the Date of
Termination to the extent not theretofore paid; (2) the product of (x) higher of
the bonus paid to the Executive for the most recent full year prior to the Date
of Termination or the average of the past 3 years' bonuses (the "Highest Annual
Bonus") and (y) a fraction, the numerator of which is the number of days in the
current year through the Date of Termination, and the denominator of which is
365; and (3) any accrued vacation pay to the extent not theretofore paid (the
sum of the amounts described in clauses (1), (2), and (3) shall be hereinafter
referred to as the "Accrued Obligations");
B. the amount equal to the product of (1) 2.99 and (2) the sum of (x) the
Executive's Annual Base Salary and (y) the Highest Annual Bonus; and
C. the actuarial equivalent of the amounts by which the Executive's total
vested benefits under The El Paso Electric Company Retirement Plan (or any
successor plan put into effect prior to a Change in Control), computed as if
Executive had three additional years of benefit accrual service, exceed the
Executive's actual pension benefits. For this computation, the Executive's
final average salary shall be deemed to be the Executive's annual base
compensation in effect immediately prior to the time a Notice of Termination is
given and the benefit and accrual formulas and actuarial assumptions shall be no
less favorable than those in effect at such time; "base compensation" shall
include any amounts deducted by the Company for Executive's account under any
agreement with the Company or Section 125 and 401(k) of the Internal Revenue
Code of 1986, as amended (the "Code").
6
<PAGE>
(ii) for two years after the Executive's Date of Termination, or such
longer period as may be provided by the terms of the appropriate plan, program,
practice or policy, the Company shall continue the medical, long-term
disability, dental, accidental death and dismemberment and life insurance
benefits to the Executive and/or the Executive's dependents at least equal to
those which would have been provided to them in accordance with the plans,
programs, practices and policies in effect under Section 2(b)(v) of this
Agreement (the "Continuing Benefit Plans") as if the Executive's employment had
not been terminated (either by permitting the Executive and/or the Executive's
dependents to participate in the Continuing Benefit Plans, or by providing the
Executive and/or the Executive's dependents with equivalent benefits outside the
Continuing Benefit Plans, as the Company may elect, so long as the net after-tax
benefit to them is the same as if the Executive had remained an employee of the
Company participating in the Continuing Benefit Plans); provided, however, that
if the Executive becomes reemployed with another employer and is eligible to
receive medical, long-term disability, dental, accidental death and
dismemberment or life insurance benefits under another employer-provided plan,
the medical, long-term disability, dental, accidental death and dismemberment
and life insurance benefits described herein shall be secondary to those
provided under such other plan during such applicable period of eligibility.
For purposes of determining eligibility (but not the time of commencement of
benefits) of the Executive for retiree benefits pursuant to the Continuing
Benefit Plans and any other welfare benefit plans, practices, policies and
programs provided by the Company and its affiliated companies, the Executive
shall be considered to have remained employed until two years after the Date of
Termination and to have retired on the last day of such period;
(iii) for one year after the Executive's Date of Termination, the Company
shall provide outplacement services for the Executive; and
(iv) to the extent not theretofore paid or provided, the Company shall
timely pay or provide to the Executive any other amounts or benefits required to
be paid or provided or which the Executive is eligible to receive under any
plan, program, policy or practice or contract or agreement of the Company, as of
the Date of Termination (such other amounts are benefits shall be thereinafter
referred to as the "Other Benefits").
(b) Death. If the Executive's employment is terminated by reason of the
Executive's death during the Employment Period, this Agreement shall terminate
without further obligation to the Executive's Legal Representatives under this
Agreement, other than for payment of Accrued Obligations and the timely payment
or provision of Other Benefits. Accrued Obligations shall be paid to the
Executive's estate or beneficiary, as applicable, in a lump sum in cash within
30 days of the Date of
7
<PAGE>
Termination. The term Other Benefits as utilized in this Section 4(b) shall
include death benefits as in effect on the date of the Executive's death.
(c) Disability. If the Executive's employment is terminated by reason of
the Executive's Disability during the Employment Period, this Agreement shall
terminate without further obligation to the Executive, other than for payment of
Accrued Obligations and the timely payment or provision of Other Benefits.
Accrued Obligations shall be paid to the Executive in a lump sum in cash within
30 days of the Date of Termination.
(d) Cause; Other than for Good Reason. If the Executive's employment
shall be terminated for Cause or the Executive terminates his employment without
Good Reason during the Employment Period, this Agreement shall terminate without
further obligation to the Executive other than the obligation to pay to the
Executive (x) his or her Annual Base Salary through the Date of Termination and
(y) Other Benefits, in each case to the extent theretofore unpaid.
5. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any plan, program,
policy or practice provided by the Company or any of its affiliated companies
and for which the Executive may qualify, nor, subject to Section 10(f), shall
anything herein limit or otherwise affect such rights as the Executive may have
under any contract or agreement with the Company or any of its affiliated
Companies. Any rights that are vested and any benefits that the Executive is
otherwise entitled to receive under any plan, policy, practice or program of or
any contract or agreement with the Company or any of its affiliated companies at
or subsequent to the Date of Termination shall be payable in accordance with
such plan, policy, practice or program or contract or agreement except as
explicitly modified by this Agreement.
6. Full Settlement. In no event shall the Executive be obligated to seek
other employment or take any other action by way of mitigation of the amounts
payable to the Executive under any of the provisions of this Agreement and,
except as provided in section 4(a)(ii) of this Agreement, such amounts shall not
be reduced whether or not the Executive obtains other employment. The Company
agrees to pay as incurred, to the full extent permitted by law, all legal fees
and expenses which the Executive may reasonably incur as a result of any contest
regardless of the outcome thereof by the Company, the Executive or others of the
validity or enforceability of, liability under, any provision of this Agreement
of any guarantee of performance thereof including as a result of any contest by
the Executive about the amount of any payment pursuant to this Agreement;
provided, however, that the foregoing shall not apply in connection with any
such contest in which the finder of fact determines that the contest is
frivolous or was brought by the Executive in bad faith.
8
<PAGE>
7. Gross-Up Provision. (a) If the payments provided by Section 4(a)(i)-
(iv) hereof (the "Agreement Payments") become subject to the tax (the "Excise
Tax") imposed by Section 4999 of the Code as in effect on the date of this
Agreement (or any similar tax), Executive will be responsible for the Excise Tax
and the Company will not pay Executive an additional amount (the "Gross-up
Payment"). If, however, the "Agreement Payments" become subject to the Excise
Tax (or any similar tax) by virtue of changes in the Code which occur after the
date of this Agreement, the Company shall pay to Executive at the time specified
in Section 7(b) below a "Gross-up Payment" such that the net amount retained by
Executive, after deduction of any Excise Tax on the Total Payments (as
hereinafter defined), and any federal, state and local income tax and Excise Tax
upon the Gross-up Payment provided for by this subsection (a) shall be equal to
what the Total Payments would have been had such changes in the Code not
occurred.
For purposes of determining whether any of the Agreement Payments will be
subject to the Excise Tax and the amount of such Excise Tax, (i) any other
payments or benefits received or to be received by Executive in connection with
a Change in Control or Executive's termination of employment (under this
Agreement or any other agreement with the Company or any person whose actions
result in a Change of Control or any person affiliated with the Company) (which,
together with the Agreement Payments, shall constitute the "Total Payments")
shall be treated as "parachute payments" within the meaning of Section
280G(b)(2) of the Code, and all "excess parachute payments" within the meaning
of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax,
unless in the opinion of tax counsel selected by the Company's independent
auditors such other payments or benefits (in whole or in part) are not subject
to the Excise Tax, (ii) the amount of the Total Payments which shall be treated
as subject to the Excise Tax shall be equal to the lesser of (A) the Total
Payments or (B) the amount of excess parachute payments within the meaning of
Section 280G(b)(1) of the Code (after applying clause (i), above), and (iii) the
value of any non-cash benefits or any deferred payment or benefit shall be
determined by the Company's independent auditors in accordance with the
principles of Sections 280G(d)(3) and (4) of the Code.
For purposes of determining the Gross-up Payment, Executive shall be deemed
to pay federal, state, and local income taxes at the highest applicable marginal
rate for the calendar year in which the Gross-up Payment is to be made net of
the maximum reduction in federal income taxes which could be obtained from
deduction of such state and local taxes. If the Excise Tax is finally
determined to be less than the amount taken into account at the time the Gross-
up Payment is made, Executive shall repay the portion attributable to such
reduction (plus the portion of the Gross-up Payment attributable to a reduction
in Excise Tax and/or a federal and state and local income tax
9
<PAGE>
deduction), plus interest on the amount of such repayment at the rate provided
in Section 1274(b)(2)(B)of the Code. If the Excise Tax is later determined to
exceed the amount taken into account at the time the Gross-up Payment is made,
the Company shall make an additional gross-up payment (plus any interest payable
with respect to such excess at the rate provided in Section 1274(b)(2)(B) of the
Code) when such excess is finally determined.
(b) The Gross-up Payment or portion thereof provided for in subsection (a)
above shall be paid not later than the thirtieth day following payment of any
amounts under Section 4(a)(i); provided, however, that if the amount of such
Gross-up Payment or portion thereof cannot be finally determined on or before
such day, the Company shall pay to Executive on such day an estimate, as
determined in good faith by the Company, of the minimum amount of such payments
and shall pay the remainder of such payments (together with interest at the rate
provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can
be determined, but in no event later than the forty-fifth day after payment of
any amounts under Section 4(a)(i). If the amount of the estimated payments
exceeds the amount subsequently determined to have been due, such excess shall
constitute a loan by the Company to the Executive, payable on the fifth day
after demand by the Company (together with interest at the rate provided for in
Section 1274(b)(2)(B) of the Code).
(c) In the event it shall be determined by the Company's independent
auditors that the Agreement Payments would subject the Executive to the Excise
Tax, it shall also be determined whether a reduction in the Agreement Payments
would result in an after-tax amount with a greater net present value than would
occur without such reduction. If so, the Agreement Payments shall be reduced by
the minimum amount necessary to obtain such result.
If such reduced payments incorrectly result in an overpayment or
underpayment to Executive, the underpayment shall be promptly paid to Executive
and, if an overpayment shall have occurred, it shall be treated for all purposes
as a loan to Executive by the Company which Executive shall repay on the fifth
day after demand by the Company, in each case together with interest at the
applicable rate provided for in Section 1274(b)(2)(B) of the Code.
8. (a) Confidential Information. The Executive shall hold in a fiduciary
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been obtained by the Executive
during the Executive's employment by the Company or any of its affiliated
companies and which shall not be or become public knowledge (other than by acts
by the Executive or representatives of the Executive in violation of this
Agreement). The Executive shall not, at any time
10
<PAGE>
during his employment with the Company or at any time thereafter, for any
reason, in any fashion, form or manner, either directly or indirectly,
communicate, divulge, copy or permit to be copied (without the prior written
consent of the Company or as may otherwise be required by law or legal process
or in order to enforce his rights under this Agreement or as necessary to defend
himself against a claim asserted directly or indirectly by the Company or any of
its affiliated companies) any secret or confidential information, knowledge or
data relating to the Company or any of its affiliated companies, and their
respective businesses, in any manner whatsoever, that is not otherwise publicly
available to, or for the benefit of, any person, firm, corporation or other
entity, other than the Company and those designated by it or in the course of
his employment with the Company and its affiliated companies. As used herein,
the term "all secret or confidential information, knowledge or data relating to
the Company or any of its affiliated companies, and their respective businesses"
shall include, without limitation, the Company's plans, strategies, proposals to
potential customers and/or partners, costs, prices, proprietary systems for
buying and selling, client and customer lists, identity of prospects,
proprietary computer programs, policy or procedure-manuals, proprietary training
and recruiting procedures, proprietary accounting procedures, and the status and
contents of the Company's contracts with its suppliers, clients, customers or
prospects. The Executive further agrees to maintain in confidence any
confidential information of third parties received as a result of his employment
with the Company.
(b) Enforcement. In the event of a breach or threatened breach of this
Section 8, the Executive agrees that the Company shall be entitled, in addition
to any other remedies available to it to specific performance and injunctive
relief in a court of appropriate jurisdiction to remedy any such breach or
threatened breach, and the Executive acknowledges that damages would be
inadequate and insufficient. In no event shall an asserted violation of the
provisions of this Section 8 constitute a basis for deferring or withholding any
amounts otherwise payable to the Executive under this Agreement.
(c) Survival. Any termination of the Executive's employment or of this
Agreement shall have no effect on the continuing operation of this Section 8.
9. Successors. (a) This Agreement is personal to the Executive and
without the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns.
11
<PAGE>
(c) The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company to assume expressly and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. As used in
this Agreement, "Company" shall mean the Company as hereinbefore defined and any
successor to its business and/or assets as aforesaid (whether or not the Company
ceases to exist) which assumes and agrees to perform this Agreement by operation
of law, or otherwise. In the event of any such succession, "Board" shall mean
the board of directors or similar managing body of the successor to the Company.
10. Miscellaneous. (a) This Agreement shall be governed by and construed
in accordance with the laws of the State of Texas, without reference to
principles of conflict of laws. The captions of this Agreement are not part of
the provisions hereof and shall have no force or effect. This Agreement may not
be amended or modified otherwise than by a written agreement executed by the
parties hereto or their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing and
shall be given by hand delivery to the other party or by registered or certified
mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
________________
________________
________________
If to the Company:
El Paso Electric Company
100 North Stanton
El Paso, Texas 79901
Attention: Board of Directors
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement.
12
<PAGE>
(d) The Company may withhold from any amounts payable under this Agreement
such Federal, state, local or foreign taxes as shall be required to be withheld
pursuant to any applicable law or regulation.
(e) Subject to Section 3(d) of this Agreement, the Executive's or the
Company's failure to insist upon strict compliance with any provision of this
Agreement or the failure to assert any right the Executive or the Company may
have hereunder, including, without limitation, the right of the Executive to
terminate employment for Good Reason pursuant to Section 3(c)(i)-(v) of this
Agreement, shall not be deemed to be a waiver of such provision or right or any
other provision or right of this Agreement.
(f) This Agreement constitutes the entire agreement between the parties
and is intended to be an integration of all agreements between the parties with
respect to the Executive's employment by the Company on and after the occurrence
of a Change in Control, the terms and conditions of such employment or the
termination of such employment. Any and all prior agreements, understandings or
commitments between the Company and the Executive with respect to any such
matter are hereby superseded and revoked.
(g) The Company shall indemnify and hold the Executive and his legal
representatives harmless to the fullest extent permitted by applicable law, from
and against all judgments, fines, penalties, excise taxes, amounts paid in
settlement, losses, expenses, costs, liabilities and legal fees if the Executive
is made, or threatened to be made a party to any threatened or pending or
completed action, suit, proceeding, whether civil, criminal, administrative or
investigative, including an action by or in the right of the Company or any of
its affiliated companies to procure a judgment in its favor, by reasons of the
fact that the Executive is or was serving in any capacity at the request of the
Company or any of its affiliated companies for any other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise.
The right to indemnification provided, in this paragraph (g) shall not be deemed
exclusive under any law or the charter or by-laws of the Company or any of its
affiliated companies or otherwise, both as to action in the Executive's official
capacity and as to action in another capacity while holding such office, and
shall continue after the Executive has ceased to be a director or officer and
shall inure to the benefit of the Executive's heirs, executors and
administrators. Any reimbursement obligation arising hereunder shall be
satisfied on an as-incurred basis. In addition, the Company agrees to continue
to maintain customary and appropriate directors and liability insurance during
the Employment Period and the Executive shall be entitled to the protection of
any such insurance policies on no less favorable a basis than is provided to any
other officer or director of the Company or any of its affiliated companies.
13
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, all as of the
day and year first above written.
"EXECUTIVE"
_______________________________
{Name}
_______________________________
EL PASO ELECTRIC COMPANY
/s/ JAMES HAINES
-------------------------------
James Haines
Chief Executive Officer and President
14
<PAGE>
Attachment 1
"Change in Control" shall mean:
(1) the acquisition by any individual, entity or group (a "Person"),
including any "person" within the meaning of Section 13(d) (3) or 14(d) (2) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") of
beneficial ownership within the meaning of Rule 13d-3 promulgated under the
Exchange Act, of 30% more of either (i) the then outstanding shares of common
stock of the Company (the "Outstanding Company Common Stock") or (ii) the
--------------------------------
combined voting power of the then outstanding securities of the Company entitled
to vote generally in the election of directors (the "Outstanding Company Voting
--------------------------
Securities"); excluding, however, the following: (A) any acquisition directly
- ----------
from the Company (excluding any acquisition resulting from the exercise of an
exercise, conversion or exchange privilege unless the security being so
exercised, converted or exchanged was acquired directly from the Company), (B)
any acquisition by the Company, (C) any acquisition by an employee benefit plan
(or related trust) sponsored or maintained by the Company or any corporation
controlled by the Company, or (D) any acquisition by any corporation pursuant to
a transaction which complies with clauses (i), (ii) and (iii) of subsection (3)
of this definition;
(2) individuals who, as of January 28,1999, constitute the Board of
Directors (the "Incumbent Board") cease for any reason to constitute at least a
---------------
majority of such Board; provided that any individual who becomes a director of
the Company subsequent to January 28, 1999 whose election, or nomination for
election by the Company's stockholders, was approved by the vote of at least a
majority of the directors then comprising the Incumbent Board shall be deemed a
member of the Incumbent Board; and provided further, that any individual who was
initially elected as a director of the Company as a result of an actual or
threatened election contest, as such terms are used in Rule 14a-11 of Regulation
14A promulgated under the Exchange Act, or any other actual or threatened
solicitation of proxies or consents by or on behalf of any Person other than the
Board shall not be deemed a member of the Incumbent Board;
(3) approval by the stockholders of the Company of a reorganization,
merger or consolidation or sale or other disposition of all or substantially all
of the assets of the Company (a "Corporate Transaction"); excluding, however, a
---------------------
Corporate Transaction pursuant to which (i) all or substantially all of the
individual or entities who are the beneficial owners, respectively, of the
Outstanding Company Common Stock and the Outstanding Company Voting Securities
immediately prior to such Corporate Transaction will beneficially own, directly
or indirectly, more than 60% of, respectively, the outstanding shares of common
stock, and the combined voting power of the
A-1
<PAGE>
outstanding securities of such corporation entitled to vote generally in the
election of directors, as the case may be, of the corporation resulting from
such Corporate Transaction (including, without limitation, a corporation which
as a result of such transaction owns the Company or all or substantially all of
the Company's assets either directly or indirectly) in substantially the same
proportions relative to each other as their ownership, immediately prior to such
Corporate Transaction, of the Outstanding Company Common Stock and the
Outstanding Company Voting Securities, as the case may be, (ii) no Person (other
than: the Company; any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company; the
corporation resulting from such Corporate Transaction; and any Person which
beneficially owned, immediately prior to such Corporate Transaction, directly or
indirectly, 30% or more of the Outstanding Company Common Stock or the
Outstanding Company Voting Securities, as the case may be) will beneficially
own, directly or indirectly, 30% or more of, respectively, the outstanding
shares of common stock of the corporation resulting from such Corporate
Transaction or the combined voting power of the outstanding securities of such
corporation entitled to vote generally in the election of directors and (iii)
individuals who were members of the Incumbent Board will constitute at least a
majority of the members of the board of directors of the corporation resulting
from such Corporate Transaction; or
(4) approval by the stockholders of the Company of a plan of complete
liquidation or dissolution of the Company.
A-2
<PAGE>
Exhibit 10.02
EL PASO ELECTRIC COMPANY
DIRECTORS' RESTRICTED STOCK AWARD AGREEMENT
El Paso Electric Company, a Texas corporation (the "Company"), hereby
grants to George W. Edwards, Jr. (the "Holder"), pursuant to the provisions of
the El Paso Electric Company 1996 Long-Term Incentive Plan (the "Plan"), a
restricted stock award (the "Award") of 25,000 shares of the Company's Common
Stock, no par value ("Stock"), upon and subject to the restrictions, terms and
conditions set forth below. Capitalized terms not defined herein shall have the
meanings specified in the Plan.
1. Award Subject to Acceptance of Agreement. The Award shall be
----------------------------------------
null and void unless the Holder shall (a) accept this Agreement by executing it
in the space provided below and returning it to the Company and (b) execute and
return one or more irrevocable stock powers. As soon as practicable after the
Holder has executed this Agreement and such stock power or powers and returned
the same to the Company, the Company shall cause to be issued in the Holder's
name a stock certificate or certificates representing the total number of shares
of Stock subject to the Award.
2. Rights as a Stockholder. The Holder shall have the right to vote
-----------------------
the shares of Stock subject to the Award and to receive dividends and other
distributions thereon; provided, however, that a dividend or other distribution
with respect to shares of Stock (including, without limitation, a stock dividend
or stock split), other than a regular cash dividend, shall be delivered to the
Company (and the Holder shall, if requested by the Company, execute and return
one or more irrevocable stock powers related thereto) and shall be subject to
the same restrictions as the shares of Stock with respect to which such dividend
or other distribution was made.
3. Custody and Delivery of Certificates Representing Shares. The
--------------------------------------------------------
Company shall hold the certificate or certificates representing the shares of
Stock subject to the Award until the restrictions on such Award shall have
lapsed, in whole or in part, pursuant to Paragraph 4 hereof, and the Company
shall as soon thereafter as practicable, subject to Section 5.3, deliver the
certificate or certificates for such shares to the Holder and destroy the stock
power or powers relating to such shares. If such stock power or powers also
relates to shares as to which restrictions remain in effect, the Company may
require, as a condition precedent to delivery of any certificate pursuant to
this Section 3, the execution and delivery to the Company of one or more stock
powers relating to such shares.
4. Restriction Period and Vesting. The restrictions on the Award
------------------------------
shall lapse (i) with respect to all of the shares of Stock subject to the Award
at the earlier of May 31, 1998 and the conclusion of the 1999 Annual Meeting of
Shareholders of the Company, or (ii) earlier in accordance with Section 6.8 of
the Plan (the "Restriction Period").
<PAGE>
5. Additional Terms and Conditions of Award.
----------------------------------------
5.1. Nontransferability of Award. During the Restriction Period, the
---------------------------
shares of Stock subject to the Award as to which restrictions remain in effect
may not be transferred by the Holder other than by will, the laws of descent and
distribution or pursuant to beneficiary designation procedures approved by the
Company. Except to the extent permitted by the foregoing, during the
Restriction Period, the shares of Stock subject to the Award as to which
restrictions remain in effect may not be sold, transferred, assigned, pledged,
hypothecated, encumbered or otherwise disposed of (whether by operation of law
or otherwise) or be subject to execution, attachment or similar process. Upon
any attempt to so sell, transfer, assign, pledge, hypothecate or encumber, or
otherwise dispose of such shares, the Award shall immediately become null and
void.
5.2. Investment Representation. The Holder hereby represents and
-------------------------
covenants that (a) any share of Stock acquired upon the lapse of restrictions
will be acquired for investment and not with a view to the distribution thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act"), unless such acquisition has been registered under the Securities Act and
any applicable state securities law; (b) any subsequent sale of any such shares
shall be made either pursuant to an effective registration statement under the
Securities Act and any applicable state securities laws, or pursuant to an
exemption from registration under the Securities Act and such state securities
laws; and (c) if requested by the Company, the Holder shall submit a written
statement, in form satisfactory to the Company, to the effect that such
representation (x) is true and correct as of the date of acquisition of any
shares hereunder or (y) is true and correct as of the date of any sale of any
such shares, as applicable. As a further condition precedent to the delivery to
the Holder of any shares subject to the Award, the Holder shall comply with all
regulations and requirements of any regulatory authority having control of or
supervision over the issuance of the shares and, in connection therewith, shall
execute any documents which the Board or any committee authorized by the Board
shall in its sole discretion deem necessary or advisable.
5.3. Withholding Taxes. (a) As a condition precedent to the delivery
-----------------
to the Holder of any shares of Stock subject to the Award, the Holder may, upon
request by the Company, pay to the Company such amount of cash as the Company
may be required, under all applicable federal, state, local or other laws or
regulations, to withhold and pay over as income or other withholding taxes (the
"Required Tax Payments") with respect to the Award. If the Holder shall fail to
advance the Required Tax Payments after request by the Company, the Company may,
in its discretion, deduct any Required Tax Payments from any amount then or
thereafter payable by the Company to the Holder.
(b) The Holder may elect to satisfy his or her obligation to advance
the Required Tax Payments by any of the following means: (1) a cash payment to
the Company pursuant to Section 5.3(a), (2) delivery to the Company of
previously owned
-2-
<PAGE>
whole shares of Stock (which the Holder has held for at least six months prior
to the delivery of such shares or which the Holder purchased on the open market
and for which the Holder has good title, free and clear of all liens and
encumbrances) having a Fair Market Value, determined as of the date the
obligation to withhold or pay taxes first arises in connection with the Award
(the "Tax Date"), equal to the Required Tax Payments, (3) authorizing the
Company to withhold from the shares of Stock otherwise to be delivered to the
Holder pursuant to the Award, a number of whole shares of Stock having a Fair
Market Value, determined as of the Tax Date, equal to the Required Tax Payments,
(4) a cash payment by a broker-dealer acceptable to the Company through whom the
Holder has sold the shares with respect to which the Required Tax Payments have
arisen or (5) any combination of (1), (2) and (3). The Committee may disapprove
an election pursuant to any of clauses (2)-(5) if the Committee determines,
based on the opinion of recognized securities counsel, that the method so
elected would result in liability to the Optionee under Section 16(b) of the
Securities Exchange Act of 1934, as amended, or the regulations promulgated
thereunder. Shares of Stock to be delivered or withheld may have a Fair Market
Value in excess of the minimum amount of the Required Tax Payments, but not in
excess of the amount determined by applying the Holder's maximum marginal tax
rate. Any fraction of a share of Stock which would be required to satisfy such
an obligation shall be disregarded and the remaining amount due shall be paid in
cash by the Holder. No certificate representing a share of Stock shall be
delivered until the Required Tax Payments have been satisfied in full.
5.4. Adjustment. In the event of any stock split, stock dividend,
----------
recapitalization, reorganization, merger, consolidation, combination, exchange
of shares, liquidation, spin-off or other similar change in capitalization or
event, or any distribution to holders of Stock other than a regular cash
dividend, the number and class of securities subject to the Award shall be
appropriately adjusted by the Committee. If any adjustment would result in a
fractional security being subject to the Award, the Company shall pay the Holder
in connection with the vesting, if any, of such fractional security, an amount
in cash determined by multiplying (i) such fraction (rounded to the nearest
hundredth) by (ii) the Fair Market Value on the vesting date. The decision of
the Committee regarding any such adjustment shall be final, binding and
conclusive.
5.5. Compliance with Applicable Law. The Award is subject to the
------------------------------
condition that if the listing, registration or qualification of the shares
subject to the Award upon any securities exchange or under any law, or the
consent or approval of any governmental body, or the taking of any other action
is necessary or desirable as a condition of, or in connection with, the vesting
or delivery of shares hereunder, the shares of Stock subject to the Award may
not be delivered, in whole or in part, unless such listing, registration,
qualification, consent or approval shall have been effected or obtained, free of
any conditions not acceptable to the Company. The Company agrees to use
reasonable efforts to effect or obtain any such listing, registration,
qualification, consent or approval.
<PAGE>
5.6. Decisions of Board or Committee. The Board or the Committee
-------------------------------
shall have the right to resolve all questions which may arise in connection with
the Award. Any interpretation, determination or other action made or taken by
the Board or the Committee regarding the Plan or this Agreement shall be final,
binding and conclusive.
5.7. Agreement Subject to the Plan. This Agreement is subject to the
-----------------------------
provisions of the Plan and shall be interpreted in accordance therewith. The
Holder hereby acknowledges receipt of a copy of the Plan.
6. Miscellaneous Provisions.
------------------------
6.1. Successors. This Agreement shall be binding upon and inure to
----------
the benefit of any successor or successors of the Company and any person or
persons who shall, upon the death of the Holder, acquire any rights hereunder in
accordance with this Agreement or the Plan.
6.2. Notices. All notices, requests or other communications provided
-------
for in this Agreement shall be made, if to the Company, to Kayser Building, 100
North Stanton, El Paso, Texas 79901, Attention: Corporate Secretary, and if to
the Holder, to 79 West View Way, Eatonton, Georgia 31024. All notices,
requests or other communications provided for in this Agreement shall be made in
writing either (a) by personal delivery to the party entitled thereto, (b) by
facsimile with confirmation of receipt, (c) by mailing in the United States
mails to the last known address of the party entitled thereto or (d) by express
courier service. The notice, request or other communication shall be deemed to
be received upon personal delivery, upon confirmation of receipt of facsimile
transmission, or upon receipt by the party entitled thereto if by United States
mail or express courier service; provided, however, that if a notice, request or
other communication is not received during regular business hours, it shall be
deemed to be received on the next succeeding business day of the Company.
6.3. Governing Law. This Agreement, the Award and all determinations
-------------
made and actions taken pursuant hereto and thereto, to the extent not otherwise
governed by the laws of the United States, shall be governed by the laws of the
State of Texas and construed in accordance therewith without giving effect to
conflicts of laws principles.
-4-
<PAGE>
6.4. Counterparts. This Agreement may be executed in two counterparts
------------
each of which shall be deemed an original and both of which together shall
constitute one and the same instrument.
EL PASO ELECTRIC COMPANY
By: /s/ KENNETH R. HEITZ
---------------------------
Name: Kenneth R. Heitz
Title: Director
Accepted this 28th day of
January, 1999
/s/ GEORGE W. EDWARDS, JR.
- --------------------------
Holder
-5-
<PAGE>
EXHIBIT 10.03
EL PASO ELECTRIC COMPANY
STOCK OPTION AGREEMENT
(INCENTIVE STOCK OPTIONS)
El Paso Electric Company, a Texas corporation (the "Company"), hereby
-------
grants to Earnest A. Lehman (the "Optionee") as of January 11, 1999 (the "Option
------
Date"), pursuant to the provisions of the El Paso Electric Company 1996 Long-
- ----
Term Incentive Plan (the "Plan"), an option to purchase from the Company (the
----
"Option") 57,140 shares of its Common Stock, no par value ("Stock"), at the
-----
price of $8.75 per share upon and subject to the terms and conditions set forth
below.
1. Option Subject to Acceptance of Agreement. The Option shall be
-----------------------------------------
null and void unless the Optionee shall accept this Agreement by executing it in
the space provided below and returning such original execution copy to the
Company.
2. Time and Manner of Exercise of Option.
-------------------------------------
2.1. Maximum Term of Option. In no event may the Option be exercised,
----------------------
in whole or in part, after January 2, 2009 (the "Expiration Date"). "Any vested
Option which has not been exercised by Optionee or Optionee's Legal
Representative by the Expiration Date shall be forfeited."
2.2. Exercise of Option. (a) Except as otherwise provided by Sections
------------------
2.2(b) through (g) hereof and by Section 6.8 of the Plan, the Option shall vest
and become exercisable ratably over a period of five (5) years from the date
hereof as follows:
Date Exercisable Amount Exercisable
---------------- ------------------
January 2, 2000 11,428
January 2, 2001 11,428
January 2, 2002 11,428
January 2, 2003 11,428
January 2, 2004 11,428
(b) Notwithstanding anything in this Agreement to the contrary, if a
Triggering Event (as such term is defined in that certain Employment Agreement
dated January 11, 1999, by and between the Company and Optionee, the "Employment
Agreement") shall occur, then all unvested Options shall immediately vest and
become exercisable in full and may be exercised by Optionee at any time prior to
the Expiration Date.
(c) If the Optionee's employment by the Company terminates by reason
of Total Disability (as such term is defined in that certain Employment
Agreement), the Option shall be exercisable only to the extent it is vested and
exercisable on the effective date of the Optionee's termination of employment
and may thereafter be exercised by the Optionee or the Optionee's Legal
Representative until and including the earliest to occur of (i) the date which
is 90 days after the effective date of the
<PAGE>
Optionee's termination of employment and (ii) the Expiration Date. "Any Option
which has not vested as of the effective date of Optionee's termination of
employment shall be forfeited."
(d) If the Optionee's employment by the Company terminates by reason
of retirement, (as such term is defined in the Employment Agreement) the Option
shall be exercisable only to the extent it is vested and exercisable on the
effective date of the Optionee's termination of employment and may thereafter be
exercised by the Optionee or the Optionee's Legal Representative until and
including the earliest to occur of (i) the date which is 90 days after the
effective date of the Optionee's termination of employment and (ii) the
Expiration Date. "Any Option which has not vested as of the effective date of
Optionee's termination of employment shall be forfeited."
(e) If the Optionee's employment by the Company terminates by reason
of death, the Option shall be exercisable only to the extent it is vested and
exercisable on the date of death and may thereafter be exercised by the Optionee
or the Optionee's Legal Representative or Permitted Transferees, as the case may
be, until and including the earliest to occur of (i) the date which is 90 days
after the date of death and (ii) the Expiration Date. "Any Option which has not
vested as of the effective date of Optionee's termination of employment shall be
forfeited."
(f) If the Optionee's employment by the Company terminates for any
reason other than Total Disability, retirement or death, the Option shall be
vested and exercisable only to the extent it is vested and exercisable on the
effective date of the Optionee's termination of employment and may thereafter
be exercised by the Optionee or the Optionee's Legal Representative until and
including the earliest to occur of (i) the date which is 90 days after the
effective date of the Optionee's termination of employment and (ii) the
Expiration Date. "Any Option which has not vested as of the effective date of
Optionee's termination of employment shall be forfeited."
(g) If the Optionee dies during the period set forth in Section
2.2(b) following termination of employment by reason of Total Disability, or if
the Optionee dies during the period set forth in Section 2.2(c) following
termination of employment, or if the Optionee dies during the period set forth
in Section 2.2(e) following termination of employment for any reason other than
Total Disability or retirement, the Option shall be exercisable only to the
extent it is vested and exercisable on the date of death and may thereafter be
exercised by the Optionee's Legal Representative or Permitted Transferees, as
the case may be, until and including the earliest to occur of (i) the date which
is 90 days after the date of death and (ii) the Expiration Date. "Any Option
which has not vested as of the effective date of Optionee's termination of
employment shall be forfeited."
2.3 Method of Exercise. Subject to the limitations set forth in this
------------------
Agreement, the Option may be exercised by the Optionee (1) by giving written
notice to the Company specifying the number of whole shares of Stock to be
purchased and accompanied by payment therefor in full (or arrangement made for
such payment to the Company's satisfaction) either (i) in cash, (ii) by delivery
of previously owned whole shares of Stock (which the Optionee has held for at
least six months prior to the delivery
-2-
<PAGE>
of such shares or which the Optionee purchased on the open market and for which
the Optionee has good title, free and clear of all liens and encumbrances)
having a fair market value ("Fair Market Value",) determined as of the date of
-----------------
exercise, equal to the aggregate purchase price payable pursuant to the Option
by reason of such exercise, (iii) in cash by a broker-dealer acceptable to the
Company to whom the Optionee has submitted an irrevocable notice of exercise or
(iv) a combination of (i) and (ii), and (2) by executing such documents as the
Company may reasonably request. The Compensation Committee of the Board of
Directors of the Company (the "Committee") may disapprove an election pursuant
to any of clauses (ii) - (iv) if the Committee determines, based on the opinion
of recognized securities counsel, that the method of exercise so elected would
result in liability to the Optionee under Section 16(b) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or the regulations
------------
promulgated thereunder. Any fraction of a share of Stock which would be required
to pay such purchase price shall be disregarded and the remaining amount due
shall be paid in cash by the Optionee. No certificate representing a share of
Stock shall be delivered until the full purchase price therefor has been paid.
2.4 Termination of Option. (a) In no event may the Option be
---------------------
exercised after it terminates as set forth in this Section 2.4. The Option shall
terminate, to the extent not exercised pursuant to Section 2.3 or earlier
terminated pursuant to Section 2.2, on the Expiration Date.
(b) In the event that rights to purchase all or a portion of the
shares of Stock subject to the Option expire or are exercised, canceled or
forfeited, the Optionee shall, upon the Company's request, promptly return this
Agreement to the Company for full or partial cancellation, as the case may be.
Such cancellation shall be effective regardless of whether the Option returns
this Agreement. If the Optionee continues to have rights to purchase shares of
Stock hereunder, the Company shall, within 10 days of the Optionee's delivery of
this Agreement to the Company, either (i) mark this Agreement to indicate the
extent to which the Option has expired or been exercised, canceled or forfeited
or (ii) issue to the Optionee a substitute option agreement applicable to such
rights, which agreement shall otherwise be substantially similar to this
Agreement in form and substance.
3. Additional Terms and COnditions of Option.
-----------------------------------------
3.1. Nontransferability of Option. The Option may not be transferred
----------------------------
by the Optionee other than (i) by will or the laws of descent and distribution
or pursuant to beneficiary designation procedures approved by the Company or
(ii) as otherwise permitted under Rule 16b-3 under the Exchange Act as may be
set forth in an amendment to this Agreement. Except to the extent permitted by
the foregoing sentence, during the Optionee's lifetime the Option is exercisable
only by the Optionee or the Optionee's Legal Representative. Except to the
extent permitted by the foregoing, the Option may not be sold, transferred,
assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by
operation of law or otherwise) or be subject to execution, attachment or similar
process. Upon any attempt to so sell, transfer, assign, pledge, hypothecate,
encumber or otherwise dispose of the Option, the Option and all rights hereunder
shall immediately become null and void.
-3-
<PAGE>
3.2. Investment Representation. The Optionee hereby represents and
-------------------------
covenants that (a) any share of Stock purchased upon exercise of the Option will
be purchased for investment and not with a view to the distribution thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
----------
Act"), unless such purchase has been registered under the Securities Act and any
- ---
applicable state securities laws; (b) any subsequent sale of any such shares
shall be made either pursuant to an effective registration statement under the
Securities Act and any applicable state securities laws, or pursuant to an
exemption from registration under the Securities Act and such state securities
laws; and (c) if requested by the Company, the Optionee shall submit a written
statement, in form satisfactory to the Company, to the effect that such
representation (x) is true and correct as of the date of purchase of any shares
hereunder or (y) is true and correct as of the date of any sale of any such
shares, as applicable. As a further condition precedent to any exercise of the
Option, the Optionee shall comply with all regulations and requirements of any
regulatory authority having control of or supervision over the issuance or
delivery of the shares and, in connection therewith, shall execute any documents
which the Board or the Committee shall in its sole discretion deem necessary or
advisable.
3.3. Withholding Taxes. (a) As a condition precedent to the delivery
-----------------
of Stock upon exercise of the Option, the Optionee shall, upon request by the
Company, pay to the Company in addition to the purchase price of the shares,
such amount of cash as the Company may be required, under all applicable
federal, state, local or other laws or regulations, to withhold and pay over as
income or other withholding taxes (the "Required Tax Payments") with respect to
---------------------
such exercise of the Option. If the Optionee shall fail to advance the Required
Tax Payments after request by the Company, the Company may, in its discretion,
deduct any Required Tax Payments from any amount then or thereafter payable by
the Company to the Optionee.
(b) The Optionee may elect to satisfy his or her obligation to
advance the Required Tax Payments by any of the following means: (1) a cash
payment to the Company pursuant to Section 3.3(a), (2) delivery to the Company
of previously owned whole shares of Stock (which the Optionee has held for at
least six months prior to the delivery of such shares or which the Optionee
purchased on the open market and for which the Optionee has good title, free and
clear of all liens and encumbrances) having a Fair Market Value, determined as
of the date the obligation to withhold or pay taxes first arises in connection
with the Option (the "Tax Date"), equal to the Required Tax Payments, (3)
--------
authorizing the Company to withhold whole shares of Stock which would otherwise
be delivered to the Optionee upon exercise of the Option having a Fair Market
Value, determined as of the Tax Date, equal to the Required Tax Payments (4) a
cash payment by a broker-dealer acceptable to the Company to whom the Optionee
has submitted an irrevocable notice of exercise or (5) any combination of (1),
(2) and (3). The Committee may disapprove an election pursuant to any of clauses
(2)-(5) if the Committee determines, based on the opinion of recognized
securities counsel, that the method so elected would result in liability to the
Optionee under Section 16(b) of the Exchange Act or the regulations promulgated
thereunder. Shares of Stock to be delivered or withheld may not have a Fair
Market Value in excess of the minimum amount of the Required Tax Payments. Any
fraction of a share of Stock
-4-
<PAGE>
which would be required to satisfy any such obligation shall be disregarded and
the remaining amount due shall be paid in cash by the Optionee. No certificate
representing a share of Stock shall be delivered until the Required Tax Payments
have been satisfied in full.
3.4. Adjustment. In the event of any stock split, stock dividend,
----------
recapitalization, reorganization, merger, consolidation, combination, exchange
of shares, liquidation, spin-off or other similar change in capitalization or
event, or any distribution to holders of Stock other than a regular cash
dividend, the number and class of securities subject to the Option and the
purchase price per security shall be appropriately adjusted by the Committee
without an increase in the aggregate purchase price. If any adjustment would
result in a fractional security being subject to the Option, the Company shall
pay the Optionee, in connection with the first exercise of the Option, in whole
or in part, occurring after such adjustment, an amount in cash determined by
multiplying (i) the fraction of such security (rounded to the nearest hundredth)
by (ii) the excess, if any, of (A) the Fair Market Value on the exercise date
over (B) the exercise price of the Option. The decision of the Committee
regarding any such adjustment shall be final, binding and conclusive.
3.5. Compliance with Applicable Law. The Option is subject to the
------------------------------
condition that if the listing, registration or qualification of the shares
subject to the Option upon any securities exchange or under any law, or the
consent or approval of any governmental body, or the taking of any other action
is necessary or desirable as a condition of, or in connection with, the purchase
or delivery of shares hereunder, the Option may not be exercised, in whole or in
part, unless such listing, registration, qualification, consent or approval
shall have been effected or obtained, free of any conditions not acceptable to
the Company. The Company agrees to use reasonable efforts to effect or obtain
any such listing, registration, qualification, consent or approval.
3.6. Delivery of Certificates. Upon the exercise of the Option, in
------------------------
whole or in part, the Company shall deliver or cause to be delivered one or more
certificates representing the number of shares purchased against full payment
therefor. The Company shall pay all original issue or transfer taxes and all
fees and expenses incident to such delivery, except as otherwise provided in
Section 3.3.
3.7. Option Confers No Rights as Stockholder. The Optionee shall not
---------------------------------------
be entitled to any privileges of ownership with respect to shares of Stock
subject to the Option unless and until purchased and delivered upon the exercise
of the Option, in whole or in part, and the Optionee becomes a stockholder of
record with respect to such delivered shares; and the Optionee shall not be
considered a stockholder of the Company with respect to any such shares not so
purchased and delivered.
3.8. Option Confers No Rights to Continued Employment. In no event
------------------------------------------------
shall the granting of the Option or its acceptance by the Optionee give or be
deemed to give the Optionee any right to continued employment by the Company.
3.9. Decisions of Board or Committee. The Board or the Committee
-------------------------------
shall have the right to resolve all questions which may arise in connection with
the
-5-
<PAGE>
Option or its exercise. Any interpretation, determination or other action made
or taken by the Board or the Committee regarding the Plan or this Agreement
shall be final, binding and conclusive.
3.10. Company to Reserve Shares. The Company shall at all times
-------------------------
prior to the expiration or termination of the Option reserve and keep available,
either in its treasury or out of its authorized but unissued shares of Stock,
the full number of shares subject to the Option from time to time.
3.11. Agreement Subject to the Plan. This Agreement is subject to
-----------------------------
the provisions of the Plan and shall be interpreted in accordance
therewith. The Optionee hereby acknowledges receipt of a copy of the
Plan.
4. Miscellaneous Provisions.
-------------------------
4.1. Designation as an Incentive Stock Option. The Option is hereby
----------------------------------------
designated as constituting an "incentive stock option" within meaning of Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"); this
Agreement shall be interpreted and treated consistently with such designation.
4.2. Meaning of Certain Terms. As used herein, the term "Legal
------------------------ -----
Representative" shall include an executor, administrator, legal representative,
- --------------
guardian or similar person and the term "Permitted Transferee" shall include any
--------------------
transferee (i) pursuant to a transfer permitted under Section 6.4 of the Plan
and Section 3.1 hereof or (ii) designated pursuant to beneficiary designation
procedures approved by the Company.
4.3. Successors. This Agreement shall be binding upon the inure to
----------
the benefit of any successor or successors of the Company and any person or
persons who shall, upon the death of the Optionee, acquire any rights hereunder
in accordance with this Agreement or the Plan.
4.4. Notices. All notices, requests or other communications
-------
provided for in this Agreement shall be made, if to the Company, to Kayser
Building, 100 North Stanton, El Paso, Texas 79901, Attention: Corporate
Secretary, and if the Optionee, to Earnest A. Lehman, 123 West Mills, El Paso,
Texas 79901. All notices, requests or other communications provided for in this
Agreement shall be made in writing either (a) by personal delivery to the party
entitled thereto, (b) by facsimile with confirmation of receipt, (c) by mailing
in the United States mails to the last known address of the party entitled
thereto or (d) by express courier service. The notice, request or other
communication shall be deemed to be received upon personal delivery, upon
confirmation of receipt of facsimile transmission or upon receipt by the party
entitled thereto if by United States mail or express courier service; provided,
however, that if a notice, request or other communication is not received during
regular business hours, it shall be deemed to be received on the next succeeding
business day of the Company.
4.5. Governing Law. This Agreement, the Option and all
-------------
determinations made and actions taken pursuant hereto and thereto, to the extent
not governed by the
-6-
<PAGE>
laws of the United States, shall be governed by the laws of the State of Texas
and construed in accordance therewith without giving effect to principles of
conflicts of laws.
4.6. Counterparts. This Agreement may be executed in two counterparts
------------
each of which shall be deemed an original and both of which together shall
constitute one and the same instrument.
EL PASO ELECTRIC COMPANY
By: /s/ KENNETH R. HEITZ
------------------------------------
Name: Kenneth R. Heitz
Title: Director
Accepted this 11th day of January, 1999
/S/ EARNEST A LEHMAN
- -------------------------------
Earnest A. Lehman
-7-
<PAGE>
EL PASO ELECTRIC COMPANY
ELECTRIC COMPANY
STOCK OPTION AGREEMENT
FOR EMPLOYEES
(NON-QUALIFIED STOCK OPTIONS)
El Paso Electric Company, a Texas corporation (the "Company"), hereby
-------
grants to Earnest A. Lehman (the "Optionee") as of January 11, 1999 (the "Option
-------- ------
Date"), pursuant to the provisions of the El Paso Electric Company 1996 Long-
- ----
Term Incentive Plan (the "Plan"), a non-qualified option to purchase from the
----
Company (the "Option") 42,860 shares of its Common Stock, no par value
("Stock"), at the price of $8.75 per share upon and subject to the terms and
-----
conditions set forth below.
1. Option Subject to Acceptance of Agreement. The Option shall be
-----------------------------------------
null and void unless the Optionee shall accept this Agreement by executing it in
the space provided below and returning such original execution copy to the
Company.
2. Time and Manner of Exercise of Option.
-------------------------------------
2.1. Maximum Term of Option. In no event may the Option be
----------------------
exercised, in whole or in part, after January 2, 2009 (the "Expiration Date").
---------------
"Any vested Option which has not been exercised by Optionee or Optionee's Legal
Representative by the Expiration Date shall be forfeited."
2.2. Exercise of Option. (a) Except as otherwise provided by
------------------
Sections 2.2(b) through (g) hereof and by Section 6.8 of the Plan, the Option
shall vest and become exercisable ratably over a period of five (5) years from
the date hereof as follows:
Date Exercisable No. of Shares Exercisable
---------------- -------------------------
January 2, 2000 8,572
January 2, 2001 8,572
January 2, 2002 8,572
January 2, 2003 8,572
January 2, 2004 8,572
(b) Notwithstanding anything in this Agreement to the contrary, if a
Triggering Event (as such term is defined in that certain Employment Agreement
dated January 11, 1999 by and between the Company and Optionee, the "Employment
Agreement") shall occur, then all unvested Options shall immediately vest and
become exercisable in full and may be exercised by Optionee at any time prior to
the Expiration Date.
(c) If the Optionee's employment by the Company terminates by reason
of Total Disability (as such term is defined in the Employment Agreement), the
Option shall be exercisable only to the extent it is vested and exercisable on
the effective date of the Optionee's termination of employment and may
thereafter be exercised by the Optionee or the Optionee's Legal Representative
until and including
<PAGE>
the earliest to occur of (i) the date which is 120 days after the effective date
of the Optionee's termination of employment and (ii) the Expiration Date. "Any
Option which has not vested as of the effective date of Optionee's termination
of employment shall be forfeited."
(d) If the Optionee's employment by the Company terminates by reason
of retirement, the Option shall be exercisable only to the extent it is vested
and exercisable on the effective date of the Optionee's termination of
employment and may thereafter be exercised by the Optionee or the Optionee's
Legal Representative until and including the earliest to occur of (i) the date
which is 120 days after the effective date of the Optionee's termination of
employment and (ii) the Expiration Date. "Any Option which has not vested as of
the effective date of Optionee's termination of employment shall be forfeited."
(e) If the Optionee's employment by the Company terminates by reason
of death, the Option shall be exercisable only to the extent it is vested and
exercisable on the date of death and may thereafter be exercised by the Optionee
or the Optionee's Legal Representative or Permitted Transferees, as the case may
be, until and including the earliest to occur of (i) the date which is 120 days
after the date of death and (ii) the Expiration Date. "Any Option which has not
vested as of the effective date of Optionee's termination of employment shall be
forfeited."
(f) If the Optionee's employment by the Company terminates for any
reason other than Total Disability, retirement or death, the Option shall be
exercisable only to the extent it is vested and exercisable on the effective
date of the Optionee's termination of employment and may thereafter be exercised
by the Optionee or the Optionee's Legal Representative until and including the
earliest to occur of (i) the date which is 120 days after the effective date of
the Optionee's termination of employment and (ii) the Expiration Date. "Any
Option which has not vested as of the effective date of Optionee's termination
of employment shall be forfeited."
(g) If the Optionee dies during the period set forth in Section
2.2(b) following termination of employment by reason of Total Disability, or if
the Optionee dies during the period set forth in Section 2.2(c) following
termination of employment, or if the Optionee dies during the period set forth
in Section 2.2(e) following termination of employment for any reason other than
Total Disability or retirement, the Option shall be exercisable only to the
extent it is vested and exercisable on the date of death and may thereafter be
exercised by the Optionee's Legal Representative or Permitted Transferees, as
the case may be, until and including the earliest to occur of (i) the date which
is 90 days after the date of death and (ii) the Expiration Date. "Any Option
which has not vested as of the effective date of Optionee's termination of
employment shall be forfeited."
2.3 Method of Exercise. Subject to the limitations set forth in this
------------------
Agreement, the Option may be exercised by the Optionee (1) by giving written
notice to the Company specifying the number of whole
-2-
<PAGE>
shares of Stock to be purchased and accompanied by payment therefor in full (or
arrangement made for such payment to the Company's satisfaction) either (i) in
cash, (ii) by delivery of previously owned whole shares of Stock (which the
Optionee has held for at least six months prior to the delivery of such shares
or which the Optionee purchased on the open market and for which the Optionee
has good title, free and clear of all liens and encumbrances) having a fair
market value ("Fair Market Value"), determined as of the date of exercise, equal
-----------------
to the aggregate purchase price payable pursuant to the Option by reason of such
exercise, (iii) in cash by a broker-dealer acceptable to the Company to whom the
Optionee has submitted an irrevocable notice of exercise or (iv) a combination
of (i) and (ii), and (2) by executing such documents as the Company may
reasonably request. The Compensation Committee of the Board of Directors of the
Company (the "Committee") may disapprove an election pursuant to any of clauses
(ii) - (iv) if the Committee determines, based on the opinion of recognized
securities counsel, that the method of exercise so elected would result in
liability to the Optionee under Section 16(b) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), or the regulations promulgated
------------
thereunder. Any fraction of a share of Stock which would be required to pay such
purchase price shall be disregarded and the remaining amount due shall be paid
in cash by the Optionee. No certificate representing a share of Stock shall be
delivered until the full purchase price therefor has been paid.
2.4 Termination of Option. (a) In no event may the Option be
---------------------
exercised after it terminates as set forth in this Section 2.4. The Option
shall terminate, to the extent not exercised pursuant to Section 2.3 or earlier
terminated pursuant to Section 2.2, on the Expiration Date.
(b) In the event that rights to purchase all or a portion of the
shares of Stock subject to the Option expire or are exercised, cancelled or
forfeited, the Optionee shall, upon the Company's request, promptly return this
Agreement to the Company for full or partial cancellation, as the case may be.
Such cancellation shall be effective regardless of whether the Optionee returns
this Agreement. If the Optionee continues to have rights to purchase shares of
Stock hereunder, the Company shall, within 10 days of the Optionee's delivery of
this Agreement to the Company, either (i) mark this Agreement to indicate the
extent to which the Option has expired or been exercised, cancelled or forfeited
or (ii) issue to the Optionee a substitute option agreement applicable to such
rights, which agreement shall otherwise be substantially similar to this
Agreement in form and substance.
3. Additional Terms and Conditions of Option.
-----------------------------------------
3.1. Nontransferability of Option. The Option may not be transferred
----------------------------
by the Optionee other than (i) by will or the laws of descent and distribution
or pursuant to beneficiary designation procedures approved by the Company or
(ii) as otherwise permitted under Rule 16b-3 under the Exchange Act as may be
set forth in an amendment to this Agreement. Except to the extent permitted by
the foregoing sentence, during the Optionee's lifetime the Option is exercisable
only by the Optionee or the Optionee's Legal Representative. Except to the
extent permitted by the foregoing, the Option may not be sold, transferred,
assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by
operation of law or otherwise) or be subject to execution, attachment or similar
process. Upon any attempt to so sell,
-3-
<PAGE>
transfer, assign, pledge, hypothecate, encumber or otherwise dispose of the
Option, the Option and all rights hereunder shall immediately become null and
void.
3.2. Investment Representation. The Optionee hereby represents and
-------------------------
covenants that (a) any share of Stock purchased upon exercise of the Option will
be purchased for investment and not with a view to the distribution thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
----------
Act"), unless such purchase has been registered under the Securities Act and any
- ---
applicable state securities laws; (b) any subsequent sale of any such shares
shall be made either pursuant to an effective registration statement under the
Securities Act and any applicable state securities laws, or pursuant to an
exemption from registration under the Securities Act and such state securities
laws; and (c) if requested by the Company, the Optionee shall submit a written
statement, in form satisfactory to the Company, to the effect that such
representation (x) is true and correct as of the date of purchase of any shares
hereunder or (y) is true and correct as of the date of any sale of any such
shares, as applicable. As a further condition precedent to any exercise of the
Option, the Optionee shall comply with all regulations and requirements of any
regulatory authority having control of or supervision over the issuance or
delivery of the shares and, in connection therewith, shall execute any documents
which the Board or the Committee shall in its sole discretion deem necessary or
advisable.
3.3. Withholding Taxes. (a) As a condition precedent to the delivery
-----------------
of Stock upon exercise of the Option, the Optionee shall, upon request by the
Company, pay to the Company in addition to the purchase price of the shares,
such amount of cash as the Company may be required, under all applicable
federal, state, local or other laws or regulations, to withhold and pay over as
income or other withholding taxes (the "Required Tax Payments") with respect to
---------------------
such exercise of the Option. If the Optionee shall fail to advance the Required
Tax Payments after request by the Company, the Company may, in its discretion,
deduct any Required Tax Payments from any amount then or thereafter payable by
the Company to the Optionee.
(b) The Optionee may elect to satisfy his or her obligation to
advance the Required Tax Payments by any of the following means: (1) a cash
payment to the Company pursuant to Section 3.3(a), (2) delivery to the Company
of previously owned whole shares of Stock (which the Optionee has held for at
least six months prior to the delivery of such shares or which the Optionee
purchased on the open market and for which the Optionee has good title, free and
clear of all liens and encumbrances) having a Fair Market Value, determined as
of the date the obligation to withhold or pay taxes first arises in connection
with the Option (the "Tax Date"), equal to the Required Tax Payments, (3)
--------
authorizing the Company to withhold whole shares of Stock which would otherwise
be delivered to the Optionee upon exercise of the Option having a Fair Market
Value, determined as of the Tax Date, equal to the Required Tax Payments, (4) a
cash payment by a broker-dealer acceptable to the Company to whom the Optionee
has submitted an irrevocable notice of exercise or (5) any combination of (1),
(2) and (3). The Committee may disapprove an election pursuant to any of
clauses (2)-(5) if the Committee determines, based on the opinion of recognized
securities counsel, that the method so elected would result in liability to the
Optionee under Section 16(b) of the Exchange Act or the regulations promulgated
thereunder. Shares of Stock to be
-4-
<PAGE>
delivered or withheld may not have a Fair Market Value in excess of the minimum
amount of the Required Tax Payments. Any fraction of a share of Stock which
would be required to satisfy any such obligation shall be disregarded and the
remaining amount due shall be paid in cash by the Optionee. No certificate
representing a share of Stock shall be delivered until the Required Tax Payments
have been satisfied in full.
3.4 Adjustment. In the event of any stock split, stock dividend,
----------
recapitalization, reorganization, merger, consolidation, combination, exchange
of shares, liquidation, spin-off or other similar change in capitalization or
event, or any distribution to holders of Stock other than a regular cash
dividend, the number and class of securities subject to the Option and the
purchase price per security shall be appropriately adjusted by the Committee
without an increase in the aggregate purchase price. If any adjustment would
result in a fractional security being subject to the Option, the Company shall
pay the Optionee, in connection with the first exercise of the Option, in whole
or in part, occurring after such adjustment, an amount in cash determined by
multiplying (i) the fraction of such security (rounded to the nearest hundredth)
by (ii) the excess, if any, of (A) the Fair Market Value on the exercise date
over (B) the exercise price of the Option. The decision of the Committee
regarding any such adjustment shall be final, binding and conclusive.
3.5. Compliance with Applicable Law. The Option is subject to the
------------------------------
condition that if the listing, registration or qualification of the shares
subject to the Option upon any securities exchange or under any law, or the
consent or approval of any governmental body, or the taking of any other action
is necessary or desirable as a condition of, or in connection with, the purchase
or delivery of shares hereunder, the Option may not be exercised, in whole or in
part, unless such listing, registration, qualification, consent or approval
shall have been effected or obtained, free of any conditions not acceptable to
the Company. The Company agrees to use reasonable efforts to effect or obtain
any such listing, registration, qualification, consent or approval.
3.6. Delivery of Certificates. Upon the exercise of the Option, in
------------------------
whole or in part, the Company shall deliver or cause to be delivered one or more
certificates representing the number of shares purchased against full payment
therefor. The Company shall pay all original issue or transfer taxes and all
fees and expenses incident to such delivery, except as otherwise provided in
Section 3.3.
3.7. Option Confers No Rights as Stockholder. The Optionee shall not
---------------------------------------
be entitled to any privileges of ownership with respect to shares of Stock
subject to the Option unless and until purchased and delivered upon the exercise
of the Option, in whole or in part, and the Optionee becomes a stockholder of
record with respect to such delivered shares; and the Optionee shall not be
considered a stockholder of the Company with respect to any such shares not so
purchased and delivered.
3.8. Option Confers No Rights to Continued Employment. In no event
------------------------------------------------
shall the granting of the Option or its acceptance by the Optionee give or be
deemed to give the Optionee any right to continued employment by the Company.
-5-
<PAGE>
3.9. Decisions of Board or Committee. The Board or the Committee
-------------------------------
shall have the right to resolve all questions which may arise in connection with
the Option or its exercise. Any interpretation, determination or other action
made or taken by the Board or the Committee regarding the Plan or this Agreement
shall be final, binding and conclusive.
3.10. Company to Reserve Shares. The Company shall at all times
-------------------------
prior to the expiration or termination of the Option reserve and keep available,
either in its treasury or out of its authorized but unissued shares of Stock,
the full number of shares subject to the Option from time to time.
3.11. Agreement Subject to the Plan. This Agreement is subject to
-----------------------------
the provisions of the Plan and shall be interpreted in accordance therewith.
The Optionee hereby acknowledges receipt of a copy of the Plan.
4. Miscellaneous Provisions.
------------------------
4.1. Designation as Nonqualified Stock Option. The Option is hereby
----------------------------------------
designated as not constituting an "incentive stock option" within meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"); this
----
Agreement shall be interpreted and treated consistently with such designation.
4.2. Meaning of Certain Terms. As used herein, the term "Legal
------------------------ -----
Representative" shall include an executor, administrator, legal representative,
- --------------
guardian or similar person and the term "Permitted Transferee" shall include any
--------------------
transferee (i) pursuant to a transfer permitted under Section 6.4 of the Plan
and Section 3.1 hereof or (ii) designated pursuant to beneficiary designation
procedures approved by the Company.
4.3. Successors. This Agreement shall be binding upon and inure to
----------
the benefit of any successor or successors of the Company and any person or
persons who shall, upon the death of the Optionee, acquire any rights hereunder
in accordance with this Agreement or the Plan.
4.4. Notices. All notices, requests or other communications provided
-------
for in this Agreement shall be made, if to the Company, to Kayser Building, 100
North Stanton, El Paso, Texas 79901, Attention: Corporate Secretary, and if to
the Optionee, to Earnest A. Lehman, 123 West Mills, El Paso, Texas 79901. All
notices, requests or other communications provided for in this Agreement shall
be made in writing either (a) by personal delivery to the party entitled
thereto, (b) by facsimile with confirmation of receipt, (c) by mailing in the
United States mails to the last known address of the party entitled thereto or
(d) by express courier service. The notice, request or other communication
shall be deemed to be received upon personal delivery, upon confirmation of
receipt of facsimile transmission or upon receipt by the party entitled thereto
if by United States mail or express courier service; provided, however, that if
a notice, request or other communication is not received during regular business
hours, it shall be deemed to be received on the next succeeding business day of
the Company.
-6-
<PAGE>
4.5. Governing Law. This Agreement, the Option and all determinations
-------------
made and actions taken pursuant hereto and thereto, to the extent not governed
by the laws of the United States, shall be governed by the laws of the State of
Texas and construed in accordance therewith without giving effect to principles
of conflicts of laws.
4.6. Counterparts. This Agreement may be executed in two counterparts
------------
each of which shall be deemed an original and both of which together shall
constitute one and the same instrument.
EL PASO ELECTRIC COMPANY
By: /s/ KENNETH R. HEITZ
---------------------
Name: Kenneth R. Heitz
Title: Director
Accepted this 11th day of January, 1999
/s/ EARNEST A. LEHMAN
-------------------------
Earnest A. Lehman
-7-
<PAGE>
EXHIBIT 10.04
EL PASO ELECTRIC COMPANY
RESTRICTED STOCK AWARD AGREEMENT
El Paso Electric Company, a Texas corporation (the 'Company'), hereby
grants to ____________________ (the "Holder"), pursuant to the provisions of the
El Paso Electric Company 1996 Long-Term Incentive Plan (the "Plan"), a
restricted stock award (the "Award") of ____________________ shares of the
Company's Common Stock, no par value ("Stock"), upon and subject to the
restrictions, terms and conditions set forth below. Capitalized terms not
defined herein shall have the meanings specified in the Plan.
1. Award Subject to Acceptance of Agreement. The Award shall be null and
----------------------------------------
void unless the Holder shall accept this Agreement by executing it in the space
provided below and returning it to the Company and execute and return one or
more irrevocable stock powers. As soon as practicable after the Holder has
executed this Agreement and such stock power or powers and returned the same to
the Company, the Company shall cause to be issued in the Holder's name a stock
certificate or certificates representing the total number of shares of Stock
subject to the Award.
2. Rights as a Stockholder. Holder shall have the right to vote the
-----------------------
shares of Stock subject to the Award. During the Restriction Period as to any
shares of Stock, cash dividends which would otherwise be payable on any such
shares of will be credited to the Holder in the form of additional unvested
shares of Stock as if the dividend had purchased additional shares at the
closing market price on the date such dividend is paid, and such additional
shares (including shares received as stock dividend or stock split), shall be
delivered to the Company (and the Holder shall, if requested by the Company,
execute and return one or more irrevocable stock powers related thereto) and
shall be subject to the same restrictions as the shares of Stock with respect to
which such dividend or other distribution was made.
3. Custody and Delivery of Certificates Representing Shares. The Company
--------------------------------------------------------
shall hold the certificate or certificates representing the shares of Stock
subject to the Award until the restrictions on such Award shall have lapsed, in
whole or in part, pursuant to Section 4 hereof, and the Company shall as soon
thereafter as practicable, subject to Section 5.3, deliver the certificate or
certificates for such shares to the Holder and destroy the stock power or powers
relating to such shares. If such stock power or powers also relates to shares as
to which restrictions remain in effect, the Company may require, as a condition
precedent to delivery of any certificate pursuant to this Section 3, the
execution and delivery to the Company of one or more stock powers relating to
such shares.
4. Restriction Period and Vesting. (a) The restrictions on the Award
------------------------------
shall lapse on the earliest of the following: (i) with respect to one-fifth of
the aggregate number of shares of Stock subject to the Award on February 19,
1999 and as to an
<PAGE>
additional one-fifth of such aggregate number of shares on each anniversary
thereof during the years 2000 through 2003, inclusive, or (ii) in accordance
with Section 6.8 of the Plan (the "Restriction Period").
(b) If the Holder's employment with the Company is terminated by the
Company during the Restriction Period or by reason of the Holder's "Permanent
and Total Disability" (as such term is defined in the Plan), or by reason of the
Holder's voluntary resignation or retirement or his death, then any shares of
Stock as to which restrictions have not lapsed shall be forfeited.
5. Additional Terms and Conditions of Award.
----------------------------------------
5.1. Nontransferability of Award. During the Restriction Period, the
---------------------------
shares of Stock subject to the Award as to which restrictions remain in effect
may not be transferred by the Holder other than by will, the laws of descent and
distribution or pursuant to beneficiary designation procedures approved by the
Company. Except to the extent permitted by the foregoing, during the Restriction
Period, the shares of Stock subject to the Award as to which restrictions remain
in effect may not be sold, transferred, assigned, pledged, hypothecated,
encumbered or otherwise disposed of (whether by operation of law or otherwise)
or be subject to execution, attachment or similar process. Upon any attempt to
so sell, transfer, assign, pledge, hypothecate or encumber, or otherwise dispose
of such shares, the Award shall immediately become null and void.
5.2. Investment Representation. The Holder hereby represents and
-------------------------
covenants that (a) any share of Stock acquired upon the lapse of restrictions
will be acquired for investment and not with a view to the distribution thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act"), unless such acquisition has been registered under the Securities Act and
any applicable state securities law; (b) any subsequent sale of any such shares
shall be made either pursuant to an effective registration statement under the
Securities Act and any applicable state securities laws, or pursuant to an
exemption from registration under the Securities Act and such state securities
laws; and (c) if requested by the Company, the Holder shall submit a written
statement, in form satisfactory to the Company, to the effect that such
representation (x) is true and correct as of the date of acquisition of any
shares hereunder or (y) is true and correct as of the date of any sale of any
such shares, as applicable. As a further condition precedent to the delivery to
the Holder of any shares subject to the Award, the Holder shall comply with all
regulations and requirements of any regulatory authority having control of or
supervision over the issuance of the shares and, in connection therewith, shall
execute any documents which the Board or any committee authorized by the Board
shall in its sole discretion deem necessary or advisable.
-2-
<PAGE>
5.3. Withholding Taxes. (a) As a condition precedent to the delivery to
-----------------
the Holder of any shares of Stock subject to the Award, the Holder may, upon
request by the Company, pay to the Company such amount of cash as the Company
may be required, under all applicable federal, state, local or other laws or
regulations, to withhold and pay over as income or other withholding taxes (the
"Required Tax Payments") with respect to the Award. If the Holder shall fail to
advance the Required Tax Payments after request by the Company, the Company may,
in its discretion, deduct any Required Tax Payments from any amount then or
thereafter payable by the Company to the Holder.
(b) The Holder may elect to satisfy his or her obligation to advance
the Required Tax Payments by any of the following means: (1) a cash payment to
the Company pursuant to Section 5.3(a), (2) delivery to the Company of
previously owned whole shares of Stock (which the Holder has held for at least
six months prior to the delivery of such shares or which the Holder purchased on
the open market and for which the Holder has good title, free and clear of all
liens and encumbrances) having a Fair Market Value, determined as of the date
the obligation to withhold or pay taxes first arises in connection with the
Award (the "Tax Date"), equal to the Required Tax Payments, (3) authorizing the
Company to withhold from the shares of Stock otherwise to be delivered to the
Holder pursuant to the Award, a number of whole shares of Stock having a Fair
Market Value, determined as of the Tax Date, equal to the Required Tax Payments,
(4) a cash payment by a broker-dealer acceptable to the Company through whom the
Holder has sold the shares with respect to which the Required Tax Payments have
arisen or (5) any combination of (1), (2) and (3). The Committee may disapprove
an election pursuant to any of clauses (2)-(5) if the Committee determines,
based on the opinion of recognized securities counsel, that the method so
elected would result in liability to the Optionee under Section 16(b) of the
Securities Exchange Act of 1934, as amended, or the regulations promulgated
thereunder. Shares of Stock to be delivered or withheld may have a Fair Market
Value in excess of the minimum amount of the Required Tax Payments, but not in
excess of the amount determined by applying the Holder's maximum marginal tax
rate. Any fraction of a share of Stock which would be required to satisfy such
an obligation shall be disregarded and the remaining amount due shall be paid in
cash by the Holder. No certificate representing a share of Stock shall be
delivered until the Required Tax Payments have been satisfied in full.
5.4. Adjustment. In the event of any stock split, stock dividend,
----------
recapitalization, reorganization, merger, consolidation, combination, exchange
of shares, liquidation, spin-off or other similar change in capitalization or
event, or any distribution to holders of Stock other than a regular cash
dividend, the number and class of securities subject to the Award shall be
appropriately adjusted by the Committee. If any adjustment would result in a
fractional security being subject to the Award, the Company shall pay the Holder
in connection with the vesting, if any, of such fractional security, an amount
in cash determined by multiplying (i) such fraction (rounded to the nearest
hundredth)
-3-
<PAGE>
by (ii) the Fair Market Value on the vesting date. The decision of the Committee
regarding any such adjustment shall be final, binding and conclusive.
5.5. Compliance with Applicable Law. Award is subject to the condition
------------------------------
that if the listing, registration or qualification of the shares subject to the
Award upon any securities exchange or under any law, or the consent or approval
of any governments body, or the taking of any other action is necessary or
desirable as a condition of, or in connection with, the vesting or delivery of
shares hereunder, the shares of Stock subject to the Award may not be delivered,
in whole or in part, unless such listing, registration, qualification, consent
or approval shall have been effected or obtained, free of any conditions not
acceptable to the Company. The Company agrees to use reasonable efforts to
effect or obtain any :such listing, registration, qualification, consent or
approval.
5.6. Agreement Subject to the Plan. This Agreement is subject to the
-----------------------------
provisions of the Plan and shall be interpreted in accordance therewith. The
Holder hereby acknowledges receipt of a copy of the Plan.
6. Miscellaneous Provisions.
------------------------
6.1. Successors. This Agreement shall be binding upon and inure to the
----------
benefit of any successor or successors of the Company and any person or persons
who shall, upon the death of the Holder, acquire any rights hereunder in
accordance with this Agreement or the Plan.
6.2. Notices. All notices, requests or other communications provided for
-------
in this Agreement shall be made, if to the Company, to Kayser Building, 100
North Stanton, El Paso, Texas 79901, Attention: Corporate Secretary, and if to
the Holder, to ____________________. All notices, requests or other
communications provided for in this Agreement shall be made in writing either
(a) by personal delivery to the party entitled thereto, (b) by facsimile with
confirmation of receipt, (c) by mailing in the United States mails to the last
known address of the party entitled thereto or (d) by express courier service.
The notice, request or other communication shall be deemed to be received upon
personal delivery, upon confirmation of receipt of facsimile transmission, or
upon receipt by the party entitled thereto if by United States mail or express
courier service; provided, however, that if a notice, request or other
communication is not received during regular business hours, it shall be deemed
to be received on the next succeeding business day of the Company.
6.3. Governing Law. This Agreement, the Award and all determinations made
-------------
and actions taken pursuant hereto and thereto, to the extent not otherwise
governed by the laws of the United States, shall be governed by the laws of the
State of Texas and construed in accordance therewith without giving effect to
conflicts of laws principles.
-4-
<PAGE>
6.4. Counterparts. This Agreement may be executed in two counterpart each
------------
of which shall be deemed an original and both of which together shall constitute
one and the same instrument.
EL PASO ELECTRIC COMPANY
By: /s/Kenneth R. Heitz
---------------------------------
Name: Kenneth R. Heitz
Title: Director
Acceptance Date:_______________
_______________________________
-5-
<PAGE>
EL PASO ELECTRIC COMPANY EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------- --------------------------
1999 1998 1999 1998
------------ ----------- ----------- -----------
<S>............................................................ <C> <C> <C> <C>
NET INCOME APPLICABLE TO COMMON STOCK:
Income before extraordinary items........................... $ (2,725) $ 6,992 $ 32,649 $ 45,442
Extraordinary gain on discharge of debt, net of income
tax expense.............................................. - - 3,343 -
----------- ----------- ----------- -----------
Net income applicable to common stock.................... $ (2,725) $ 6,992 $ 35,992 $ 45,442
=========== =========== =========== ===========
BASIC EARNINGS PER COMMON SHARE:
Weighted average number of common shares
outstanding.............................................. 60,209,960 60,165,778 60,179,129 60,141,375
=========== =========== =========== ===========
Net income per common share:
Income before extraordinary items........................ $ (0.045) $ 0.116 $ 0.542 $ 0.756
Extraordinary gain on discharge of debt, net of income
tax expense........................................... - - 0.056 -
----------- ----------- ----------- -----------
Net income............................................ $ (0.045) $ 0.116 $ 0.598 $ 0.756
=========== =========== =========== ===========
DILUTED EARNINGS PER COMMON SHARE:
Weighted average number of common shares
outstanding.............................................. 60,209,960 60,165,778 60,179,129 60,141,375
----------- ----------- ----------- -----------
Effect of dilutive potential common stock options based on
the treasury stock method using average market price:
Quarter ended March 31................................ - 262,998 - 262,998
Quarter ended June 30................................. - - 538,986 291,388
Quarter ended September 30............................ - - 457,905 220,412
Quarter ended December 31............................. - - 479,130 299,744
Effect of dilutive potential restricted common stock based
on the treasury stock method using average market price:
Quarter ended March 31................................ - 14,496 - 14,496
Quarter ended June 30................................. - - 31,840 15,940
Quarter ended September 30............................ - - 35,468 12,636
Quarter ended December 31............................. - - 39,433 16,496
----------- ----------- ----------- -----------
- 277,494 1,582,762 1,134,110
Divided by number of quarters......................... 1 1 4 4
----------- ----------- ----------- -----------
Net effect of dilutive potential common stock...... - 277,494 395,690 283,528
----------- ----------- ----------- -----------
Weighted average number of common shares and dilutive
potential common shares outstanding...................... 60,209,960 60,443,272 60,574,819 60,424,903
=========== =========== =========== ===========
Net income per common share:
Income before extraordinary items........................ $ (0.045) $ 0.116 $ 0.539 $ 0.752
Extraordinary gain on discharge of debt, net of
income tax expense.................................... - - 0.055 -
----------- ----------- ----------- -----------
Net income............................................ $ (0.045) $ 0.116 $ 0.594 $ 0.752
=========== =========== =========== ===========
</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 April 26, 1999 related to our review of
interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such a report is not
considered part of the registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of sections 7 and 11 of the Act.
Very truly yours,
KPMG LLP
El Paso, Texas
April 26, 1999
<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, 1999 AND THE RELATED
STATEMENTS OF INCOME AND CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1999
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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,444,290
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 162,208
<TOTAL-DEFERRED-CHARGES> 71,653
<OTHER-ASSETS> 21,703
<TOTAL-ASSETS> 1,699,854
<COMMON> 60,399
<CAPITAL-SURPLUS-PAID-IN> 240,886
<RETAINED-EARNINGS> 114,462
<TOTAL-COMMON-STOCKHOLDERS-EQ> 415,747
0
0
<LONG-TERM-DEBT-NET> 872,190
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 90
0
<CAPITAL-LEASE-OBLIGATIONS> 22,240
<LEASES-CURRENT> 27,294
<OTHER-ITEMS-CAPITAL-AND-LIAB> 362,293
<TOT-CAPITALIZATION-AND-LIAB> 1,699,854
<GROSS-OPERATING-REVENUE> 129,869
<INCOME-TAX-EXPENSE> 5,599
<OTHER-OPERATING-EXPENSES> 96,445
<TOTAL-OPERATING-EXPENSES> 102,044
<OPERATING-INCOME-LOSS> 27,825
<OTHER-INCOME-NET> 1,125
<INCOME-BEFORE-INTEREST-EXPEN> 28,950
<TOTAL-INTEREST-EXPENSE> 19,488
<NET-INCOME> 9,462
12,187<F1>
<EARNINGS-AVAILABLE-FOR-COMM> (2,725)
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 69,849
<CASH-FLOW-OPERATIONS> 55,552
<EPS-PRIMARY> (0.045)<F2>
<EPS-DILUTED> (0.045)<F2>
<FN>
<F1> INCLUDES $9,571 OF REDEMPTION COSTS.
<F2> 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>
