<PAGE>
================================================================================
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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)
<TABLE>
<S> <C>
Texas 74-0607870
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
Kayser Center, 100 North Stanton, El Paso, Texas 79901
(Address of principal executive offices) (Zip Code)
</TABLE>
(915) 543-5711
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES X NO
--- ---
As of November 11, 1999, there were 57,838,209 shares of the Company's no
par value common stock outstanding.
================================================================================
<PAGE>
EL PASO ELECTRIC COMPANY
INDEX TO FORM 10-Q
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - September 30, 1999 and December 31, 1998....... 1
Statements of Operations - Three Months, Nine Months and
Twelve Months Ended September 30, 1999 and 1998................. 3
Statements of Comprehensive Operations - Three Months, Nine
Months and Twelve Months Ended September 30, 1999 and 1998...... 5
Statements of Cash Flows - Nine Months Ended September 30,
1999 and 1998................................................... 6
Notes to Financial Statements................................... 7
Independent Auditors' Review Report............................. 15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 16
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 29
Item 6. Exhibits and Reports on Form 8-K............................ 29
i
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EL PASO ELECTRIC COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS September 30,
(In thousands) 1999 December 31,
(Unaudited) 1998
------------------- ---------------
<S> <C> <C>
Utility plant:
Electric plant in service............................................ $1,603,015 $1,599,207
Less accumulated depreciation and amortization....................... 308,486 243,405
---------- ----------
Net plant in service............................................... 1,294,529 1,355,802
Construction work in progress........................................ 73,329 54,641
Nuclear fuel; includes fuel in process of $573 and
$8,031, respectively............................................... 90,281 89,784
Less accumulated amortization........................................ 50,962 45,691
---------- ----------
Net nuclear fuel................................................... 39,319 44,093
---------- ----------
Net utility plant................................................ 1,407,177 1,454,536
---------- ----------
Current assets:
Cash and temporary investments....................................... 50,064 229,150
Accounts receivable, principally trade, net of allowance for
doubtful accounts of $1,635 and $1,738, respectively............... 68,388 64,735
Inventories, at cost................................................. 26,737 27,537
Prepayments and other................................................ 10,380 16,896
---------- ----------
Total current assets............................................. 155,569 338,318
---------- ----------
Long-term contract receivable.......................................... 18,753 23,139
---------- ----------
Deferred charges and other assets:
Accumulated deferred income taxes, net............................... - 10,518
Decommissioning trust fund........................................... 51,895 46,725
Other................................................................ 16,309 17,983
---------- ----------
Total deferred charges and other assets.......................... 68,204 75,226
---------- ----------
Total assets..................................................... $1,649,703 $1,891,219
========== ==========
</TABLE>
See accompanying notes to financial statements.
1
<PAGE>
EL PASO ELECTRIC COMPANY
BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
CAPITALIZATION AND LIABILITIES September 30,
(In thousands except for share data) 1999 December 31,
(Unaudited) 1998
------------------ ------------------
<S> <C> <C>
Capitalization:
Common stock, stated value $1 per share, 100,000,000 shares
authorized, 60,200,921 and 60,122,377 shares issued,
and 257,567 and 147,985 restricted shares, respectively................... $ 60,458 $ 60,270
Capital in excess of stated value........................................... 242,693 241,325
Unearned compensation - restricted stock awards............................. (1,398) (611)
Retained earnings........................................................... 142,734 115,193
Accumulated other comprehensive income (net unrealized
gains on marketable securities)........................................... 1,662 1,101
---------- ----------
446,149 417,278
Reacquired common stock, 1,643,500 shares; at cost.......................... (14,747) -
---------- ----------
Common stock equity..................................................... 431,402 417,278
Preferred stock, redemption required, cumulative, no par value,
2,000,000 shares authorized, 1,357,444 shares issued and
outstanding; at liquidation preference.................................... - 135,744
Long-term debt.............................................................. 795,287 872,213
Financing and capital lease obligations..................................... 19,167 24,849
---------- ----------
Total capitalization.................................................. 1,245,856 1,450,084
---------- ----------
Current liabilities:
Current maturities of long-term debt and financing and
capital lease obligations................................................. 27,335 63,817
Accounts payable, principally trade......................................... 23,338 31,135
Taxes accrued other than federal income taxes............................... 22,730 20,316
Interest accrued............................................................ 17,560 20,412
Net overcollection of fuel revenues......................................... 2,797 2,632
Other....................................................................... 26,622 19,359
---------- ----------
Total current liabilities............................................. 120,382 157,671
---------- ----------
Deferred credits and other liabilities:
Accumulated deferred income taxes, net...................................... 12,686 -
Decommissioning liability................................................... 119,150 129,750
Accrued postretirement benefit liability.................................... 81,503 80,477
Accrued pension liability................................................... 33,594 33,880
Other....................................................................... 36,532 39,357
---------- ----------
Total deferred credits and other liabilities.......................... 283,465 283,464
---------- ----------
Commitments and contingencies
Total capitalization and liabilities.................................. $1,649,703 $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 Nine Months Ended
September 30, September 30,
----------------------------------- --------------------------
1999 1998 1999 1998
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating revenues.............................. $ 170,114 $ 176,893 $ 432,705 $ 460,241
------------ ----------- ----------- -----------
Energy expenses:
Fuel.......................................... 32,516 30,739 76,850 83,851
Purchased and interchanged power.............. 5,935 7,765 10,655 15,573
------------ ----------- ----------- -----------
38,451 38,504 87,505 99,424
------------ ----------- ----------- -----------
Operating revenues net of energy expenses....... 131,663 138,389 345,200 360,817
------------ ----------- ----------- -----------
Other operating expenses:
Other operations.............................. 29,979 30,604 92,490 94,797
Maintenance................................... 7,819 8,307 28,607 24,829
New Mexico Settlement charge.................. - 6,272 - 6,272
Depreciation and amortization................. 22,105 22,681 67,841 67,220
Taxes other than income taxes................. 11,481 11,675 33,650 34,191
------------ ----------- ----------- -----------
71,384 79,539 222,588 227,309
------------ ----------- ----------- -----------
Operating income................................ 60,279 58,850 122,612 133,508
------------ ----------- ----------- -----------
Other income (deductions):
Investment income............................. 1,003 3,335 4,723 8,327
Settlement of bankruptcy professional fees.... - 548 - 1,152
Other, net.................................... (376) (410) (859) (1,244)
------------ ----------- ----------- -----------
627 3,473 3,864 8,235
------------ ----------- ----------- -----------
Income before interest charges.................. 60,906 62,323 126,476 141,743
------------ ----------- ----------- -----------
Interest charges (credits):
Interest on long-term debt.................... 17,603 20,185 55,323 60,880
Other interest................................ 1,822 1,816 5,897 5,369
Interest capitalized and deferred............. (1,089) (1,625) (4,428) (4,871)
------------ ----------- ----------- -----------
18,336 20,376 56,792 61,378
------------ ----------- ----------- -----------
Income before income taxes...................... 42,570 41,947 69,684 80,365
Income tax expense.............................. 16,346 15,898 26,950 30,106
------------ ----------- ----------- -----------
Income before extraordinary loss on repurchases
of debt....................................... 26,224 26,049 42,734 50,259
Extraordinary loss on repurchases of debt, net of
income tax benefit............................ (2,068) - (3,251) -
------------ ----------- ----------- -----------
Net income...................................... 24,156 26,049 39,483 50,259
Preferred stock:
Dividend requirements......................... - 3,727 2,616 10,874
Redemption costs.............................. - - 9,581 -
------------ ----------- ----------- -----------
Net income applicable to common stock........... $ 24,156 $ 22,322 $ 27,286 $ 39,385
============ =========== =========== ===========
Basic earnings per common share:
Income before extraordinary loss on repurchases of debt $ 0.443 $ 0.371 $ 0.510 $ 0.655
Extraordinary loss on repurchases of debt, net of
income tax benefit......................... (0.035) - (0.054) -
------------ ----------- ----------- -----------
Net income................................. $ 0.408 $ 0.371 $ 0.456 $ 0.655
============ =========== =========== ===========
Diluted earnings per common share:
Income before extraordinary loss on repurchases of debt $ 0.439 $ 0.368 $ 0.508 $ 0.650
Extraordinary loss on repurchases of debt, net of
income tax benefit......................... (0.034) - (0.054) -
------------ ----------- ----------- -----------
Net income................................. $ 0.405 $ 0.368 $ 0.454 $ 0.650
============ =========== =========== ===========
Weighted average number of common shares outstanding 59,232,142 60,168,841 59,879,180 60,168,030
============ =========== =========== ===========
Weighted average number of common shares and
dilutive potential common shares outstanding.. 59,677,283 60,662,214 60,165,757 60,615,261
============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
EL PASO ELECTRIC COMPANY
STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except for share data)
<TABLE>
<CAPTION>
Twelve Months Ended
September 30,
----------------------------
1999 1998
----------- -------------
<S> <C> <C>
Operating revenues................................................................. $ 574,685 $ 604,007
----------- -------------
Energy expenses:
Fuel............................................................................ 102,449 114,940
Purchased and interchanged power................................................. 15,692 18,782
----------- -------------
118,141 133,722
----------- -------------
Operating revenues net of energy expenses.......................................... 456,544 470,285
----------- -------------
Other operating expenses:
Other operations................................................................. 131,943 130,108
Maintenance...................................................................... 38,733 35,092
New Mexico Settlement charge..................................................... - 6,272
Depreciation and amortization.................................................... 90,434 89,669
Taxes other than income taxes.................................................... 43,791 44,426
----------- -------------
304,901 305,567
----------- -------------
Operating income................................................................... 151,643 164,718
----------- -------------
Other income (deductions):
Investment income................................................................ 7,902 10,724
Settlement of bankruptcy professional fees....................................... 109 1,458
Other, net....................................................................... (1,345) (292)
----------- -------------
6,666 11,890
----------- -------------
Income before interest charges..................................................... 158,309 176,608
----------- -------------
Interest charges (credits):
Interest on long-term debt....................................................... 75,410 82,048
Other interest................................................................... 7,726 6,469
Interest capitalized and deferred................................................ (5,957) (6,407)
----------- -------------
77,179 82,110
----------- -------------
Income before income taxes......................................................... 81,130 94,498
Income tax expense................................................................. 31,582 35,531
----------- -------------
Income before extraordinary items.................................................. 49,548 58,967
----------- -------------
Extraordinary items:
Extraordinary gain on discharge of debt, net of income tax expense............... 3,343 -
Extraordinary loss on repurchases of debt, net of income tax benefit............. (3,251) -
----------- -------------
92 -
----------- -------------
Net income......................................................................... 49,640 58,967
Preferred stock:
Dividend requirements............................................................ 6,449 14,300
Redemption costs................................................................. 9,581 -
----------- -------------
Net income applicable to common stock.............................................. $ 33,610 $ 44,667
=========== =============
Basic earnings per common share:
Income before extraordinary items................................................ $0.559 $0.742
Extraordinary gain on discharge of debt, net of income tax expense............... 0.056 -
Extraordinary loss on repurchases of debt, net of income tax benefit............. (0.054) -
----------- -------------
Net income.................................................................... $0.561 $0.742
=========== =============
Diluted earnings per common share:
Income before extraordinary items................................................ $0.556 $0.737
Extraordinary gain on discharge of debt, net of income tax expense............... 0.055 -
Extraordinary loss on repurchases of debt, net of income tax benefit............. (0.054) -
----------- -------------
Net income.................................................................... $0.557 $0.737
=========== =============
Weighted average number of common shares outstanding............................... 59,952,191 60,161,105
=========== =============
Weighted average number of common shares and
dilutive potential common shares outstanding..................................... 60,296,765 60,575,588
=========== =============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
EL PASO ELECTRIC COMPANY
STATEMENTS OF COMPREHENSIVE OPERATIONS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
------------------ --------------------- ---------------------
1999 1998 1999 1998 1999 1998
-------- ------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Net income...................................... $24,156 $26,049 $39,483 $50,259 $49,640 $58,967
Other comprehensive income (loss):
Net unrealized gain (loss) on marketable
securities, less applicable income tax
benefit (expense) of $725, $813, $(302),
$606, $(1,599) and $768, respectively........ (1,345) (1,510) 561 (1,124) 2,970 (1,425)
------- ------- ------- ------- ------- -------
Comprehensive income............................ 22,811 24,539 40,044 49,135 52,610 57,542
Preferred stock:
Dividend requirements.......................... - 3,727 2,616 10,874 6,449 14,300
Redemption costs............................... - - 9,581 - 9,581 -
------- ------- ------- ------- ------- -------
Comprehensive income applicable
to common stock................................ $22,811 $20,812 $27,847 $ 38,261 $36,580 $43,242
======= ======= ======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
EL PASO ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------------
1999 1998
------------ -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income........................................................ $ 39,483 $ 50,259
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................... 67,841 67,220
Amortization of nuclear fuel.................................... 15,708 16,580
Deferred income taxes, net...................................... 24,976 27,525
New Mexico Settlement charge.................................... - 6,272
Extraordinary loss on repurchases of debt, net of
income tax benefit........................................... 3,251 -
Other operating activities...................................... 3,942 4,220
Change in:
Accounts receivable............................................. (3,653) (11,266)
Inventories..................................................... 800 (238)
Prepayments and other........................................... 6,516 (6,263)
Long-term contract receivable................................... 4,386 3,359
Accounts payable................................................ (7,797) (3,667)
Taxes accrued other than federal income taxes................... 2,414 4,024
Interest accrued................................................ (2,852) (1,244)
Net over/undercollection of fuel revenues....................... 165 6,182
Other current liabilities....................................... 9,842 2,972
Deferred charges and credits.................................... 2,870 6,488
------------ ----------
Net cash provided by operating activities..................... 167,892 172,423
------------ ----------
Cash Flows From Investing Activities:
Cash additions to utility property, plant and equipment........... (39,953) (31,940)
Cash additions to nuclear fuel.................................... (8,475) (9,583)
Interest capitalized:
Nuclear fuel.................................................... (2,460) (3,058)
Utility property, plant and equipment........................... (1,968) (1,813)
Investment in decommissioning trust fund.......................... (4,308) (5,151)
Other investing activities........................................ (998) (270)
------------ ----------
Net cash used for investing activities........................ (58,162) (51,815)
------------ ----------
Cash Flows From Financing Activities:
Reacquired common stock........................................... (14,747) -
Repurchases of and payments on long-term debt..................... (117,533) (30,604)
Nuclear fuel financing obligations:
Proceeds........................................................ 10,934 12,649
Payments........................................................ (15,494) (16,515)
Redemption of preferred stock..................................... (148,937) -
Preferred stock dividend payment.................................. (1,328) -
Payments on capital lease obligations............................. (1,573) (1,469)
Other financing activities........................................ (138) (71)
------------ ----------
Net cash used for financing activities........................ (288,816) (36,010)
------------ ----------
Net (decrease) increase in cash and temporary investments........... (179,086) 84,598
Cash and temporary investments at beginning of period............... 229,150 111,227
------------ ----------
Cash and temporary investments at end of period..................... $ 50,064 $ 195,825
============ ==========
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
A. Principles of Preparation
Pursuant to the rules and regulations of the Securities and Exchange
Commission, certain financial information has been condensed and certain
footnote disclosures have been omitted. Such information and disclosures are
normally included in financial statements prepared in accordance with generally
accepted accounting principles.
These condensed financial statements should be read in conjunction with the
financial statements and notes thereto in the Annual Report of El Paso Electric
Company (the "Company") on Form 10-K for the year ended December 31, 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
September 30, 1999 and December 31, 1998; the results of operations for the
three, nine and twelve months ended September 30, 1999 and 1998; and cash flows
for the nine months ended September 30, 1999 and 1998. The results of
operations for the three, nine and twelve months ended September 30, 1999 are
not necessarily indicative of the results to be expected for the full calendar
year.
Supplemental Cash Flow Disclosures (In thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------------------
1999 1998
--------------------- ---------------------
<S> <C> <C>
Cash paid for:
Interest on long-term debt....................... $53,533 $56,673
Income taxes, net................................ 1,332 1,400
Reorganization items - professional
fees and other............................... - 4,280
Non-cash investing and financing activities:
Issuance of preferred stock for
pay-in-kind dividend......................... 3,867 10,666
Grants of restricted shares of
common stock................................. 1,705 195
</TABLE>
7
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Reconciliation of Basic and Diluted Earnings Per Common Share
The reconciliation of basic and diluted earnings per common share before
extraordinary items is presented below:
<TABLE>
<CAPTION>
Three Months Ended September 30,
------------------------------------------------------------------------
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..... $26,224 $26,049
Less: Preferred stock
dividend requirements.............. - 3,727
------- -------
Basic earnings per common share:
Net income applicable to
common stock....................... 26,224 59,232,142 $0.443 22,322 60,168,841 $0.371
======= =======
Effect of dilutive securities:
Unvested restricted stock........... - 45,471 - 35,468
Stock options....................... - 399,670 - 457,905
------- ---------- ------- ----------
Diluted earnings per common share:
Net income applicable to
common stock....................... $26,224 59,677,283 $0.439 $22,322 60,662,214 $0.368
======= ========== ======= ======= ========== =======
<CAPTION>
Nine Months Ended September 30,
------------------------------------------------------------------------
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..... $42,734 $50,259
Less:
Preferred stock:
Dividend requirements............ 2,616 10,874
Redemption costs................. 9,581 -
------- -------------
Basic earnings per common share:
Net income applicable to
common stock....................... 30,537 59,879,180 $0.510 39,385 60,168,030 $0.655
======= =======
Effect of dilutive securities:
Unvested restricted stock........... - 24,886 - 27,268
Stock options....................... - 261,691 - 419,963
------- ---------- ------------- ----------
Diluted earnings per common share:
Net income applicable to
common stock....................... $30,537 60,165,757 $0.508 $39,385 60,615,261 $0.650
======= ========== ======= ============= ========== =======
</TABLE>
8
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
Twelve Months Ended September 30,
------------------------------------------------------------------------
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 items.... $49,548 $58,967
Less:
Preferred stock:
Dividend requirements............ 6,449 14,300
Redemption costs................. 9,581 -
------- -------------
Basic earnings per common share:
Net income applicable to
common stock....................... 33,518 59,952,191 $0.559 44,667 60,161,105 $0.742
======= =======
Effect of dilutive securities:
Unvested restricted stock........... - 28,523 - 24,575
Stock options....................... - 316,051 - 389,908
------- ---------- ------------- ----------
Diluted earnings per common share:
Net income applicable to
common stock....................... $33,518 60,296,765 $0.556 $44,667 60,575,588 $0.737
======= ========== ======= ============= ========== =======
</TABLE>
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.
Texas Rate Matters
A comprehensive electric industry restructuring bill was signed into law by
the Governor of Texas and became effective on September 1, 1999. Under the new
law, retail customer choice will begin in the service territories of most
investor-owned utilities on January 1, 2002. Municipal and cooperative
utilities will have the option of electing to offer customer choice in their
service areas. In recognition of the Company's Texas Settlement Agreement, the
new law does not require retail customer choice to begin in the Company's Texas
service territory until August 2005, after the expiration of the Company's
Freeze Period. Additionally, after August 2005, the Company will have no
further claim for stranded costs or transition costs incurred or otherwise
provided for pursuant to the law. The Company is exempt from the competitive
provisions of this law until August 2005. The competitive provisions of the new
law include the following: (i) a requirement that each utility, on or before
January 1, 2002, must separate its business activities into at least three
separate entities: a power generation company; a company selling electric
energy to retail customers; and a transmission and distribution utility; (ii) a
6% rate reduction, coincident with the start of retail choice, for residential
and small commercial customers; (iii) a limitation that no power generation
company may own and control more than 20% of the generation capacity in a power
region; (iv) an obligation to auction entitlements to at least 15% of a
utility's Texas jurisdictional installed generation capacity, continuing until
the earlier of 60 months after
9
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
the date customer choice is introduced or the date the Texas Commission
determines that 40% of the power consumed by residential and small commercial
customers is served by non-affiliated retail electric providers; (v) a reduction
in emissions for grandfathered plants by May 2003; (vi) an additional 2,000 MW
of statewide renewable energy capacity by 2009; (vii) the establishment of a
System Benefit Fund ($0.50/MWh) for customer education and low-income
assistance; and (viii) a detailed affiliate code of conduct to govern
relationships between the regulated utility and its affiliates. The Company will
have to comply with certain of these competitive provisions beginning in August
2005.
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.
The new law requires each utility, on or before January 1, 2001, to separate
into at least two entities, separating its supply service and generation assets
from its transmission and distribution service assets. This corporate separation
can be accomplished through the creation of separate non-affiliated companies,
separate affiliated companies owned by a common holding company, or the sale of
assets to third parties. Under the new 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. The New Mexico Commission may
delay implementation of retail customer choice or other restructuring deadlines
established by the new law for up to one year. The new law allows utilities 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,
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 Company is
currently working to comply with the requirements of the New Mexico law, and is
developing its transition plan for filing with the New Mexico Commission on or
before March 1, 2000.
In June 1999, the New Mexico Commission ordered the review of the Company's
New Mexico Settlement. Under the new law, the New Mexico Commission may review
any rate settlement which provides a means of transition to competition and
which had been previously approved by the New Mexico Commission in order to
confirm, reject or modify such plans by November 30, 1999. If the New Mexico
Commission approves the New Mexico Settlement, it will supersede the new law to
the extent the new law is inconsistent. On August 3, 1999, the Company filed
with the New Mexico Commission testimony and exhibits in support of the New
Mexico Settlement. On October 12, 1999, an administrative law judge held an
evidentiary hearing on the Company's New Mexico Settlement. The Company is
currently awaiting the New Mexico Commission's decision on the New Mexico
Settlement. Although the Company believes that the recovery of costs provided
for in the New Mexico Settlement is consistent with the intent of the new law,
it cannot predict whether the New Mexico Commission's decision will impact the
Company's revenues and recovery of costs contemplated under the New Mexico
Settlement, or whether the Company will be able to maintain its New Mexico rates
at the new levels.
10
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Federal Regulatory Matters
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. In May 1999, the FERC
issued its opinion and ruled that based on the FERC's method for calculating
stranded costs, Las Cruces' stranded cost obligation was $52.9 million, assuming
a departure date of July 1, 1999. Although this amount is approximately $30
million higher than an earlier administrative law judge's recommendation, the
Company believes the FERC's decision is inconsistent with the intent and policy
of FERC Order No. 888, which establishes the right to full recovery of a
utility's stranded generation cost. The Company continues to believe it is
entitled to full compensation for the costs it incurred with the expectation of
continuing to serve Las Cruces. The Company filed a motion for rehearing of the
FERC's decision. The FERC has extended its time limit for ruling on this
motion. The Company cannot predict when the FERC will rule on this motion. See
Note B of Notes to Financial Statements in the 1998 Form 10-K for a full
discussion of stranded costs.
Pursuant to FERC Order No. 888, the Company filed its non-discriminatory
open access transmission tariffs with the FERC in July 1996. The Company reached
a settlement with the various parties regarding rates for transmission and
ancillary services under these tariffs. However, the settlement, which was filed
with the FERC in March 1997 and approved by the FERC in June 1998, did not
resolve the issues concerning the manner in which the Company will determine the
amount of transmission capacity that is available for use by third parties
desiring to use its transmission system and whether the Company must provide
back-up generation services to third parties using its transmission system.
In May 1999, the FERC issued its opinion in a proceeding brought by
Southwestern Public Service Company ("SPS") regarding the use of the Company's
transmission system to serve Las Cruces, holding that the Company was not
obligated under FERC Order No. 888 to provide back-up generation services to
third parties using its transmission system. However, the FERC stated that, for
purposes of calculating available transmission capacity, the Company should
assume that it would not be providing generation service to Las Cruces or
Comision Federal de Electricidad ("CFE"), and the loads of those customers
should be omitted from its calculation of available transmission capacity. The
FERC also concluded that once the Company's calculation was adjusted to reflect
the assumed discontinuation of service to Las Cruces and CFE, the Company would
have sufficient transmission capacity over the Eddy County tie to meet SPS'
request for firm transmission service. Although the Company has filed a
compliance filing as required by the order, the filing reflects that the Company
does not have sufficient transmission capacity over the Eddy County tie to meet
SPS' request for firm transmission service. The Company filed a motion for
rehearing of the FERC's decision. The FERC has extended its time limit for
ruling on this motion. The Company does not expect a material financial impact
from this FERC ruling. However, the Company is concerned that the result of an
adverse FERC ruling would be to impair the reliability of service to the
Company's other retail customers, while increasing costs.
11
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
In order to procure a firm supply of electric power to serve its proposed
municipal electric system, during the pendency of the transmission litigation,
Las Cruces filed a request with the FERC in November 1998 for an order requiring
the Company to sell wholesale power to Las Cruces on a temporary basis pursuant
to Section 202(b) of the Federal Power Act from July 1999 until such time as Las
Cruces is able to secure firm transmission service and back-up generation
service required to enable it to obtain reliable service from SPS. In January
1999, the FERC ordered the Company to sell electric energy to Las Cruces at a
cost-based wholesale rate from July 1, 1999 until the earlier of the time Las
Cruces begins receiving its power from a different supplier or one year. In May
1999, the FERC issued an order denying requests for rehearing of its January
1999 order. On August 16, 1999, the Company and Las Cruces submitted an
agreement to the FERC specifying the cost-based wholesale rate at which Las
Cruces would take power from the Company, while at the same time allowing the
Company to appeal the FERC's January 1999 order requiring such service. The
FERC staff supported the stipulated settlement agreement between the Company and
Las Cruces and the assigned FERC administrative law judge certified the
stipulation to the FERC on September 10, 1999. The Company expects the FERC to
approve the settlement agreement, but cannot predict when such approval might
occur. The Company has appealed the FERC's January 1999 order to the United
States Court of Appeals for the Fifth Circuit (the "Fifth Circuit"). On
November 2, 1999, the Fifth Circuit heard oral argument on the Company's appeal.
The Company cannot predict when the Fifth Circuit will rule on the Company's
appeal.
C. 1999 Long-Term Incentive Plan
In May 1999, the Company's shareholders approved the adoption of a stock-
based long-term incentive plan (the "1999 Plan"). Under the 1999 Plan,
directors, officers, managers, other employees and consultants are eligible to
receive non-statutory stock options, incentive stock options, stock appreciation
rights, restricted stock, bonus stock and performance shares covering up to two
million shares of common stock. On July 1, 1999, the Company filed its
Registration Statement on Form S-8 registering the two million shares of common
stock reserved for issuance under the 1999 Plan. On August 31, 1999, the FERC
approved the issuance of shares under the 1999 Plan.
D. Common Stock Repurchase Program
In May 1999, the Company's Board of Directors approved a stock repurchase
program allowing the Company to purchase outstanding shares of its common stock
from time to time, up to a total of six million shares. The Company will make
purchases primarily in the open market at prevailing prices and will also engage
in private transactions, if appropriate. The shares that the Company acquires
will be available for issuance under employee benefit and stock option plans or
may be retired. As of September 30, 1999, the Company had reacquired 1,643,500
shares of common stock at a cost of approximately $14.7 million, including
commissions.
12
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
E. Preferred Stock Redemption
In March 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%.
F. 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.
Coal Mine Reclamation
The Four Corners participants are currently reviewing a 1999 study
conducted by an outside engineering firm of the estimated final reclamation and
coal mine closure costs. Based on a preliminary review of this report, the
Company believes that its ultimate liability for reclamation and closure costs
may be less than the currently accrued amount of $14.8 million. The
participants' review of the study includes an analysis of the assumptions used
to estimate the liability for reclamation and closure costs. Once the review is
completed, the Company can determine what effect, if any, the study may have on
the Company. Participant review of the study is expected to be completed by the
end of 1999. Final review of the study may justify a material reduction in the
Company's liability for reclamation and closure costs. If the review is
completed by year-end and the reduction is so justified, it will be recorded in
the fourth quarter as a change in estimate.
G. 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.
13
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
In February 1999, Las Cruces filed its Petition for Condemnation and
Application for Immediate Possession with the New Mexico State District Court.
In March 1999, the Company removed the Las Cruces petition and application to
the United States District Court for the District of New Mexico. In May 1999,
the federal court issued a final decision finding that the removal to federal
court was proper. In June 1999, the federal court consolidated this matter with
the declaratory action previously filed by the Company challenging the
constitutionality of the legislation giving Las Cruces the authority to condemn.
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 distribution system prior to the taking, as compared to the value
of the distribution system after the taking. Compensation for any stranded
costs related to the Company's generation assets will be determined by the FERC.
See Note B, "Rate Matters - Federal Regulatory Matters."
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, 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. See Note
B, "Rate Matters - Federal Regulatory Matters" for a discussion of this
proceeding.
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.
14
<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 September 30, 1999, the related condensed statements
of operations and comprehensive operations for the three, nine, and twelve
months ended September 30, 1999 and 1998, and the related condensed statements
of cash flows for the nine months ended September 30, 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
October 18, 1999
15
<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 Settlement Agreement 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 Texas Settlement Agreement provided for an
annual base revenue reduction in Texas of approximately $15.4 million and
approval of all Company fuel expenses for the 42-month period subject to
reconciliation. The Texas Rate Stipulation is preserved under the Texas
Settlement Agreement and the Texas electric industry restructuring law. The New
Mexico Settlement included an annual base revenue reduction of $4.6 million,
exclusive of the Company's $1.0 million contribution, paid over a 30-month
period, for low-income assistance in New Mexico.
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
16
<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 30-month term of the
moratorium period) to a social services agency in Dona Ana County providing
assistance to low-income individuals. The Company negotiated the New Mexico
Settlement so as to substantially reduce the likelihood of additional rate
reductions during the moratorium period.
A comprehensive electric utility industry restructuring bill was signed
into law by the Governor of New Mexico and became effective on April 8, 1999.
The new law requires each utility, on or before January 1, 2001, to separate
into at least two entities, separating its supply service and generation assets
from its transmission and distribution service assets. This corporate separation
can be accomplished through the creation of separate non-affiliated companies,
separate affiliated companies owned by a common holding company, or the sale of
assets to third parties. Under the new 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. The New Mexico Commission may
delay implementation of retail customer choice or other restructuring deadlines
established by the new law for up to one year. The new law allows utilities 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,
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 Company is
currently working to comply with the requirements of the New Mexico law, and is
developing its transition plan for filing with the New Mexico Commission on or
before March 1, 2000.
In June 1999, the New Mexico Commission ordered the review of the Company's
New Mexico Settlement. Under the new law, the New Mexico Commission may review
any rate settlement which provides a means of transition to competition and
which had been previously approved by the New Mexico Commission in order to
confirm, reject or modify such plans by November 30, 1999. If the New Mexico
Commission approves the New Mexico Settlement, it will supersede the new law to
the extent the new law is inconsistent. On August 3, 1999, the Company filed
with the New Mexico Commission testimony and exhibits in support of the New
Mexico Settlement. On October 12, 1999, an administrative law judge held an
evidentiary hearing on the Company's New Mexico Settlement. The Company is
currently awaiting the New Mexico Commission's decision on the New Mexico
Settlement. Although the Company believes that the recovery of costs provided
for in the New Mexico Settlement is consistent with the intent of the new law,
it cannot predict whether the New Mexico Commission's decision will impact the
Company's revenues and recovery of costs contemplated under the New Mexico
Settlement, or whether the Company will be able to maintain its New Mexico 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 new rates under the Texas Settlement Agreement were
17
<PAGE>
implemented in April 1999, pursuant to an interim order of the Texas Commission.
In June 1999, the Texas Commission issued a final order approving the Texas
Settlement Agreement.
A comprehensive electric industry restructuring bill was signed into law by
the Governor of Texas and became effective on September 1, 1999. Under the new
law, retail customer choice will begin in the service territories of most
investor-owned utilities on January 1, 2002. Municipal and cooperative
utilities will have the option of electing to offer customer choice in their
service areas. In recognition of the Company's Texas Settlement Agreement, the
new law does not require retail customer choice to begin in the Company's Texas
service territory until August 2005, after the expiration of the Company's
Freeze Period. Additionally, after August 2005, the Company will have no
further claim for stranded costs or transition costs incurred or otherwise
provided for pursuant to the law. The Company is exempt from the competitive
provisions of this law until August 2005. The competitive provisions of the new
law include the following: (i) a requirement that each utility, on or before
January 1, 2002, must separate its business activities into at least three
separate entities: a power generation company; a company selling electric
energy to retail customers; and a transmission and distribution utility; (ii) a
6% rate reduction, coincident with the start of retail choice, for residential
and small commercial customers; (iii) a limitation that no power generation
company may own and control more than 20% of the generation capacity in a power
region; (iv) an obligation to auction entitlements to at least 15% of a
utility's Texas jurisdictional installed generation capacity, continuing until
the earlier of 60 months after the date customer choice is introduced or the
date the Texas Commission determines that 40% of the power consumed by
residential and small commercial customers is served by non-affiliated retail
electric providers; (v) a reduction in emissions for grandfathered plants by May
2003; (vi) an additional 2,000 MW of statewide renewable energy capacity by
2009; (vii) the establishment of a System Benefit Fund ($0.50/MWh) for customer
education and low-income assistance; and (viii) a detailed affiliate code of
conduct to govern relationships between the regulated utility and its
affiliates. The Company will have to comply with certain of these competitive
provisions beginning in August 2005.
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 rates, 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. Competition will begin in New Mexico on January 1, 2001, or January
1, 2002, if the New Mexico Commission extends the time for implementing customer
choice. Competition in the Company's Texas service territory is not required to
begin until August 2005. The Company cannot predict what effect competition will
have on the Company's customer base. The Company's wholesale and large retail
customers already 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,
18
<PAGE>
Mexico, which became fully operational at the end of 1998, gave CFE the current
capacity to supply electricity to portions of northern Chihuahua, including the
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. In February 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. Additionally, American National
Power, Inc., a wholly-owned subsidiary of National Power PLC, has announced it
is exploring the possibility of building a generation plant in El Paso, Texas.
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. The Company's sales to military bases represent approximately 3% of
annual operating revenues. While 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 currently has long-term contracts with all three military
bases that it serves. 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 retail electric service
to White Sands.
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 changes in state laws and regulatory provisions relating to wholesale and
retail service. 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 flows, and financial condition of the Company.
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 September 30, 1999, the Company
had approximately
19
<PAGE>
$50.1 million in cash and cash equivalents. In February 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 September 30, 1999, approximately $44.8 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, the reduction of fixed obligations is a high
priority for the Company in order to gain additional financial flexibility to
address the evolving competitive market. In March 1999, the Company used cash
on hand to pay for the early redemption of its Series A Preferred Stock, which
resulted in the avoidance of additional cash dividends of approximately $2.7
million that would have been payable through May 1, 1999, and $4.0 million
quarterly thereafter until mandatory redemption in 2008.
The Company has significantly reduced its long-term debt following its
emergence from bankruptcy in 1996. From June 1, 1996 through November 11, 1999,
the Company has repurchased approximately $308.1 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 the Series A Preferred
Stock, reduced the Company's annual interest expense and annual cash dividend
requirements by approximately $27.2 million and $15.9 million, respectively.
Common stock equity as a percentage of capitalization has increased from 19% at
June 30, 1996 to 35% at September 30, 1999.
In May 1999, the Company's Board of Directors approved a stock repurchase
program allowing the Company to purchase outstanding shares of its common stock
from time to time, up to a total of six million shares. The Company will make
purchases primarily in the open market at prevailing prices and will also engage
in private transactions, if appropriate. The shares that the Company acquires
will be available for issuance under employee benefit and stock option plans or
may be retired. As of November 11, 1999, the Company had reacquired 2,621,500
shares of common stock at a cost of approximately $23.6 million, including
commissions.
The Company continues to believe that the orderly reduction of fixed
obligations with a goal of achieving a capital structure that is more typical in
the electric utility industry and consistent with an investment grade rating, is
a significant component of long-term shareholder value creation. Future
repurchases of first mortgage bonds and common stock 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.
20
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Results of Operations
<TABLE>
<CAPTION>
Net Income Applicable Diluted Earnings Per
to Common Stock Before Common Share Before
Extraordinary Items Extraordinary Items
------------------------------ ------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
(In thousands)
<S> <C> <C> <C> <C>
Three Months Ended September 30............... $26,224 $22,322 $0.439 $0.368
Nine Months Ended September 30................ 30,537 39,385 0.508 0.650
Twelve Months Ended September 30.............. 33,518 44,667 0.556 0.737
</TABLE>
Results of operations for the nine and twelve months ended September 30,
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 $6.7 million for the
three months ended September 30, 1999 compared to the same period last year
primarily due to the rate reductions in Texas and New Mexico and the loss of
sales to CFE. These decreases were partially offset by increased economy sales.
Operating revenues net of energy expenses decreased $15.6 million and $13.7
million for the nine and twelve months ended September 30, 1999, respectively,
compared to the same periods last year, as follows (In thousands):
<TABLE>
<CAPTION>
Nine Months Ended September 30: 1999 1998 Increase/(Decrease)
- ------------------------------- ---- ---- -------------------
<S> <C> <C> <C>
Texas Settlement Agreement:
Palo Verde performance reward........... $ 3,453 $ - $ 3,453
Retroactive base rate decrease.......... (2,343) - (2,343)
Change in estimated fuel cost reserves.... 3,754 - 3,754
Other..................................... 340,336 360,817 (20,481)
-------- -------- --------
Total operating revenues net
of energy expenses................ $345,200 $360,817 $(15,617)
======== ======== ========
<CAPTION>
Twelve Months Ended September 30: 1999 1998 Increase/(Decrease)
- --------------------------------- ---- ---- -------------------
<S> <C> <C> <C>
Texas Settlement Agreement:
Palo Verde performance reward........... $ 3,453 $ - $ 3,453
Change in estimated fuel cost reserves.... 3,754 - 3,754
Other..................................... 449,337 470,285 (20,948)
-------- -------- --------
Total operating revenues net
of energy expenses................ $456,544 $470,285 $(13,741)
======== ======== ========
</TABLE>
Excluding the effects of the recognition of the Palo Verde performance
reward, the retroactive base rate decrease, and the change in estimated fuel
cost reserves, the nine month decrease of $20.5 million was primarily due to the
rate reductions in Texas and New Mexico and the loss of sales to CFE. These
decreases were partially offset by increased economy sales. Excluding the
recognition of the Palo Verde performance reward and the change in estimated
fuel cost reserves, the twelve month decrease of $20.9 million was primarily due
to the rate reductions in Texas and New Mexico and loss of sales to CFE. These
decreases were partially offset by increased economy sales.
21
<PAGE>
Operating revenues from retail customers shown below include the
recognition of the Palo Verde performance reward and the effects of the change
in estimated fuel cost reserves for the nine and twelve month periods ended
September 30, 1999. Also included in the nine 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 September 30: 1999 1998 Amount Percent
- -------------------------------- ---- ---- ------ -------
<S> <C> <C> <C> <C> <C>
Electric kWh Sales:
Retail Customers........................ 1,774,724 1,792,907 (18,183) (1.0)%
Other Utilities......................... 289,318 508,318 (219,000) (43.1) (1)
---------- ---------- ---------
Subtotal............................... 2,064,042 2,301,225 (237,183) (10.3)
Economy Sales........................... 386,900 184,507 202,393 109.7
---------- ---------- ---------
Total.................................. 2,450,942 2,485,732 (34,790) (1.4)
========== ========== =========
Operating Revenues:
Retail Customers........................ $ 145,558 $ 150,139 $ (4,581) (3.1)%
Other Utilities......................... 14,061 21,771 (7,710) (35.4) (1)
Economy Sales........................... 10,495 4,983 5,512 110.6
---------- ---------- ---------
Total.................................. $ 170,114 $ 176,893 $ (6,779) (3.8)
========== ========== =========
<CAPTION>
Increase/(Decrease)
----------------------------
Nine Months Ended September 30: 1999 1998 Amount Percent
- ------------------------------- ---- ---- ------ -------
<S> <C> <C> <C> <C> <C>
Electric kWh Sales:
Retail Customers........................ 4,514,857 4,558,310 (43,453) (1.0)%
Other Utilities......................... 661,741 1,436,891 (775,150) (53.9) (1)
---------- ---------- ---------
Subtotal............................... 5,176,598 5,995,201 (818,603) (13.7)
Economy Sales........................... 1,087,846 564,922 522,924 92.6
---------- ---------- ---------
Total.................................. 6,264,444 6,560,123 (295,679) (4.5)
========== ========== =========
Operating Revenues:
Retail Customers........................ $ 372,170 $ 382,274 $ (10,104) (2.6)%
Other Utilities......................... 37,728 66,618 (28,890) (43.4) (1)
Economy Sales........................... 22,807 11,349 11,458 101.0
---------- ---------- ---------
Total.................................. $ 432,705 $ 460,241 $ (27,536) (6.0)
========== ========== =========
<CAPTION>
Increase/(Decrease)
----------------------------
Twelve Months Ended September 30: 1999 1998 Amount Percent
- --------------------------------- ---- ---- ------ -------
<S> <C> <C> <C> <C> <C>
Electric kWh Sales:
Retail Customers........................ 5,904,768 5,945,705 (40,937) (0.7)%
Other Utilities......................... 982,730 1,857,354 (874,624) (47.1) (1)
---------- ---------- ---------
Subtotal............................... 6,887,498 7,803,059 (915,561) (11.7)
Economy Sales........................... 1,411,632 778,733 632,899 81.3
---------- ---------- ---------
Total.................................. 8,299,130 8,581,792 (282,662) (3.3)
========== ========== =========
Operating Revenues:
Retail Customers........................ $ 487,726 $ 502,686 $ (14,960) (3.0)%
Other Utilities......................... 55,334 86,221 (30,887) (35.8) (1)
Economy Sales........................... 31,625 15,100 16,525 109.4
---------- ---------- ---------
Total.................................. $ 574,685 $ 604,007 $ (29,322) (4.9)
========== ========== =========
</TABLE>
(1) Primarily due to the loss of sales to CFE.
22
<PAGE>
Other operations and maintenance expense decreased $1.1 million for the
three months ended September 30, 1999 compared to the same period last year due
to decreased operations expense of $0.6 million and decreased maintenance
expense of $0.5 million, as follows (In thousands):
<TABLE>
<CAPTION>
Three Months Ended September 30: 1999 1998 Increase/(Decrease)
- -------------------------------- ---- ---- -------------------
<S> <C> <C> <C>
Pensions and benefits expense............. $ 1,404 $ 4,541 $(3,137) (2)
Regulatory expense........................ 639 1,990 (1,351)
Palo Verde operations expense............. 8,537 7,222 1,315
Outside services expense.................. 2,499 1,292 1,207
Other..................................... 16,900 15,559 1,341
------- ------- -------
Total other operations expense......... 29,979 30,604 (625)
Total maintenance expense................. 7,819 8,307 (488)
------- ------- -------
Total other operations and
maintenance expense................. $37,798 $38,911 $(1,113)
======= ======= =======
</TABLE>
Other operations and maintenance expense increased $1.5 million for the
nine months ended September 30, 1999 compared to the same period last year due
to increased maintenance expense of $3.8 million partially offset by decreased
operations expense of $2.3 million, as follows (In thousands):
<TABLE>
<CAPTION>
Nine Months Ended September 30: 1999 1998 Increase/(Decrease)
- ------------------------------- ---- ---- -------------------
<S> <C> <C> <C>
Regulatory expense........................ $ 1,011 $ 5,045 $(4,034)
Pensions and benefits expense............. 10,765 14,329 (3,564) (2)
Palo Verde operations expense............. 24,886 23,592 1,294
Non-nuclear generation expense............ 3,876 2,605 1,271
Customer accounts expense................. 2,965 1,997 968
Other..................................... 48,987 47,229 1,758
-------- -------- -------
Total other operations expense......... 92,490 94,797 (2,307)
-------- -------- -------
Maintenance at Company-owned
generating plants....................... 9,048 5,204 3,844 (3)
Other..................................... 19,559 19,625 (66)
-------- -------- -------
Total maintenance expense.............. 28,607 24,829 3,778
-------- -------- -------
Total other operations and
maintenance expense............... $121,097 $119,626 $ 1,471
======== ======== =======
</TABLE>
23
<PAGE>
Other operations and maintenance expense increased $5.5 million for the
twelve months ended September 30, 1999 compared to the same period last year due
to increased maintenance expense of $3.6 million and increased operations
expense of $1.8 million, as follows (In thousands):
<TABLE>
<CAPTION>
Twelve Months Ended September 30: 1999 1998 Increase/(Decrease)
- -------------------------------- ---- ---- -------------------
<S> <C> <C> <C> <C>
All employee bonus plan................... $ 5,606 $ 2,200 $ 3,406
Palo Verde operations expense............. 35,131 32,641 2,490
Customer accounts expense................. 4,100 1,980 2,120
Non-nuclear generation expense............ 4,943 3,581 1,362
Regulatory expense........................ 2,009 6,953 (4,944)
Pensions and benefits expense............. 16,375 17,682 (1,307) (2)
Other..................................... 63,779 65,071 (1,292)
-------- -------- -------
Total other operations expense......... 131,943 130,108 1,835
-------- -------- -------
Maintenance at Company-owned
generating plants....................... 12,081 7,117 4,964 (3)
Maintenance at Palo Verde................. 14,973 16,313 (1,340)
Other..................................... 11,679 11,662 17
-------- -------- -------
Total maintenance expense.............. 38,733 35,092 3,641
-------- -------- -------
Total other operations and
maintenance expense............... $170,676 $165,200 $ 5,476
======== ======== =======
</TABLE>
(2) Includes a cumulative 1999 year-to-date adjustment to other postretirement
benefits of $3.0 million as a result of a revised actuarial valuation,
which was recorded in the third quarter.
(3) Primarily due to scheduled maintenance and overhauls at Company-owned
generating plants, including underestimated costs of overhauling a steam
generator turbine of $1.4 million and $3.1 million for the nine and twelve
months ended September 30, 1999, respectively.
The New Mexico Settlement charge of $6.3 million for the three, nine and
twelve months ended September 30, 1998 represents the write-off of the book
value of undercollected fuel revenues in the Company's New Mexico jurisdiction.
Depreciation and amortization expense was essentially unchanged for the
three, nine and twelve months ended September 30, 1999 compared to the same
periods last year.
Taxes other than income taxes were essentially unchanged for the three,
nine and twelve months ended September 30, 1999 compared to the same periods
last year.
Other income decreased $2.8 million, $4.4 million and $5.2 million for the
three, nine and twelve months ended September 30, 1999, respectively, compared
to the same periods last year primarily due to (i) a decrease in investment
income of $2.3 million, $3.6 million and $2.8 million, respectively, resulting
from the investment of lower levels of cash and a change in investment strategy
for decommissioning trust funds; and (ii) a favorable settlement of bankruptcy
professional fees of $0.5 million, $1.2 million and $1.5 million in the prior
periods, respectively, with no comparable amounts in the current periods. The
twelve month decrease was also due to (i) a decrease in gains
24
<PAGE>
realized on disposition of non-utility property of $0.6 million; and (ii)
increased donations of $0.4 million in 1999 pursuant to the terms of the New
Mexico Settlement.
Interest charges decreased $2.0 million, $4.6 million and $4.9 million for
the three, nine and twelve months ended September 30, 1999, respectively,
compared to the same periods last year, primarily due to a reduction in
outstanding debt as a result of open market purchases and redemptions of the
Company's first mortgage bonds.
Income tax expense increased $0.4 million and decreased $3.2 million and
$3.9 million for the three, nine and twelve months ended September 30, 1999,
respectively, compared to the same periods last year primarily due to changes in
pretax income and certain permanent differences.
Extraordinary loss on repurchases of debt of $2.1 million, $3.3 million and
$3.3 million for the three, nine and twelve months ended September 30, 1999,
respectively, net of income tax benefit of $1.3 million, $2.1 million and $2.1
million, represents the payment of premiums on debt repurchased and the
recognition of unamortized issuance expenses on that debt with no comparable
amounts for the same periods ended in 1998.
Extraordinary gain on discharge of debt of $3.3 million for the twelve
months ended September 30, 1999, net of income tax expense of $2.1 million,
represents unclaimed and undistributed funds designated for the payment of
preconfirmation claims which reverted to the Company pursuant to the Company's
Fourth Amended Plan of Reorganization, with no comparable amount for the same
period ended 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 designed
to 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 regarding the transition to the Year
2000 ("Y2K") as virtually all other companies. During the Y2K transition,
computer hardware and software, or equipment with embedded computer chips, may
encounter the year 2000 and interpret a two-digit year "00" as 1900, instead of
2000. As a result, equipment and applications that are date sensitive may not
properly calculate information or otherwise may not function as intended.
Because the Y2K challenge, if not addressed, could directly affect the Company's
service reliability, the Company considers it to be of the highest priority.
The Company's Y2K mission statement is to "provide for the safe, continuous
operation of EPE's electric and business systems during the Y2K transition
period."
The North American Electric Reliability Council (the "NERC") has defined
"mission-critical" systems or applications as those "whose misoperation could
directly contribute toward the loss of a 50 MW or larger generating resource,
the loss of a transmission facility, or interruption of system load." Mission-
critical systems and applications have received top priority. As reported to
the NERC on June 30, 1999, the Company believes all of its mission-critical
systems and applications, as defined above, are suitable for continued use into
the Year 2000 ("Y2K ready"). The Company's assessment of
25
<PAGE>
its mission-critical systems and applications as Y2K ready was endorsed by the
receipt of a "level 3" rating from the Department of Energy (the "DOE"), as
discussed below. Substantially all other systems and applications are scheduled
to be Y2K ready by December 31, 1999.
In June 1999, the Company conducted a live, integrated test of its primary
control and local generating facilities, including the Company's energy
management system computer and local power plant and key substation equipment.
Internal clocks for equipment included in the test were synchronously forwarded
to roll over into the year 2000 and typical, individual operations were then
performed to verify that the equipment will operate as expected in a year 2000
environment. All devices handled the rollover without incident and all commands
sent from the control computer to remote equipment were executed properly.
The integrated test was observed by an assessment team of engineers on
behalf of the DOE. Following the test, the DOE team issued the Company a "level
3" rating regarding its state of Y2K readiness, asserting that the Company's
mission-critical systems and applications will be Y2K ready by December 31,
1999. Level 3 is the most favorable rating that could be issued and was based
not only on the successful integrated test, but also on the DOE team's review of
documentation, interviews with Company personnel and observance of a rerunning
of embedded chip tests for digitally-controlled relays. DOE teams initially
reviewed 36 utilities in North America in order to better predict an overall
state of readiness, and are currently reviewing an additional 20 utilities.
On September 8, 1999, the Company participated in a NERC-sponsored drill.
The primary purposes for the drill were to (i) test responses to the simulated
loss of various modes of voice and data communication and (ii) to practice
electric-system personnel field deployment and procedures under the Company's
Y2K Operational Contingency Plan. During the drill, the Company successfully
operated its electric system under these simulated conditions. In addition to
the drill, the Company's computers successfully transitioned into one of the
industry's high priority testing dates (9/9/99) without incident.
The Company began addressing the Y2K issue during the last quarter of 1996
with a program consisting of four major phases: inventory, assessment,
remediation and testing for Y2K readiness. This readiness process was
recommended by the NERC. For its mission-critical equipment and applications,
the Company believes it has completed each of these phases. For its non-
critical equipment and applications, the Company believes it is 100% complete
with inventory and assessment and 93% complete with remediation/testing.
Overall, the Company believes it is currently 98% complete with the four-phase
process.
The Company is actively participating in Y2K planning sessions with other
Western System Coordinating Council ("WSCC") members due to the interrelated
nature of the Company's electric system and those of other neighboring
utilities. WSCC utilities comprise the western United States electric "grid."
The Company is monitoring the Y2K readiness status of Palo Verde and Four
Corners power plants, in which the Company has partial ownership. These plants
are operated by Arizona Public Service Company ("APS"). APS has reported to the
NERC regarding Palo Verde and Four Corners and to the Nuclear Regulatory
Commission regarding Palo Verde that the mission-critical facilities at each
plant are now Y2K ready.
In addition, the Company has essentially completed assessment of and
continues to monitor financial institutions and critical suppliers to verify
their respective states of readiness for the Y2K
26
<PAGE>
transition. The Company has provided Y2K information to its customers and
community through a public outreach program, and has contacted large industrial
customers to ascertain their plans for the transition period.
Given the complex nature and uncertainties of the Y2K issue, the Company
cannot absolutely assure that it will not experience some outages or operational
failures during the Y2K transition period. Further, 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 some equipment will not function properly.
Therefore, the Company has prepared a Y2K Operational Contingency Plan. The
Company has always prepared for unexpected outages of its facilities (resulting
from storms and other natural disasters and failures). Consequently, the
Company's existing Emergency Procedure Manual forms the basis for the Company's
Y2K Operational Contingency Plan. Procedures to deal with an array of scenarios
resulting from the singular or simultaneous failure(s) of elements or systems
during the Y2K transition period have also been developed. The Company's Y2K
Operational Contingency Plan for its electric system was completed in June 1999
and updated in October 1999. The Company has also completed a Y2K Business
Continuity Plan for its key business systems and processes.
Failure by the Company to meet the challenges of the Y2K issue 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 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. However, given the completion of all mission-
critical readiness activities, the successful integrated test of the primary
control equipment on the Company's electric system, and the independent
verification by the DOE team regarding the Company's state of readiness, the
Company does not believe that significant adverse impacts as a result of the Y2K
issue are likely to occur.
The Company has expensed substantially all costs of its Y2K program.
Through September 30, 1999, the Company's expenditures on the Y2K program have
been predominantly related to internal labor, diagnostic tools, remediations,
server upgrades and consultation costs totaling approximately $2.9 million.
Costs associated with hardware and software replacements and other technology
"refresh" programs that may also remediate non-ready equipment and applications
have not been included in the Company's accounting of Y2K expenses. These
activities are considered to have been undertaken as part of the normal course
of business. Future Y2K expenses, to be incurred through the end of the project,
are not expected to exceed an additional $1.1 million and will predominantly
include costs for consultation, independent verification, documentation,
business continuity planning and event management. Approximately half of all the
Company's Y2K program expenses are expected to be internal labor costs.
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
27
<PAGE>
and the Company's market risk sensitive assets and liabilities. As of September
30, 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.
28
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company hereby incorporates by reference the information set forth in
Part I of this report under Note G 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
29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EL PASO ELECTRIC COMPANY
By: /s/ Gary R. Hedrick
-----------------------------------
Gary R. Hedrick
Vice President, Chief Financial
Officer and Treasurer
(Duly Authorized Officer and
Principal Financial Officer)
Dated: November 12, 1999
30
<PAGE>
EL PASO ELECTRIC COMPANY
INDEX TO EXHIBITS
Exhibit
Number Exhibit
------- -------
+10.10 Directors' Restricted Stock Award Agreement between the Company
and certain directors of the Company. (Exhibit 10.07 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999)
10.11 Stock Option Agreement, dated as of October 1, 1999, with Wilson
K. Cadman. (Identical in all material respects to Exhibit 10.08
to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999)
11 Statement re Computation of Per Share Earnings
15 Letter re Unaudited Interim Financial Information
27 Financial Data Schedule (EDGAR filing only)
+ In lieu of non-employee director compensation, agreements
substantially identical in all material respects to this Exhibit
have been entered into with Patricia Z. Holland-Branch and
Charles Yamarone, directors of the Company.
31
<PAGE>
EL PASO ELECTRIC COMPANY EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- ---------------------------------
1999 1998 1999 1998
------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
NET INCOME APPLICABLE TO COMMON STOCK:
Income before extraordinary item $ 26,224 $ 22,322 $ 30,537 $ 39,385
Extraordinary loss on repurchases of debt,
net of income tax benefit (2,068) - (3,251) -
------------- -------------- ------------- ---------------
Net income applicable to common stock $ 24,156 $ 22,322 $ 27,286 $ 39,385
============= ============== ============= ===============
BASIC EARNINGS PER COMMON SHARE:
Weighted average number of common
shares outstanding 59,232,142 60,168,841 59,879,180 60,168,030
============= ============== ============= ===============
Net income per common share:
Income before extraordinary item $ 0.443 $ 0.371 $ 0.510 $ 0.655
Extraordinary loss on repurchases of debt,
net of income tax benefit (0.035) - (0.054) -
------------- -------------- ------------- ---------------
Net income $ 0.408 $ 0.371 $ 0.456 $ 0.655
============= ============== ============= ===============
DILUTED EARNINGS PER COMMON SHARE:
Weighted average number of common
shares outstanding 59,232,142 60,168,841 59,879,180 60,168,030
------------- -------------- ------------- ---------------
Effect of dilutive potential common stock
options based on the treasury stock
method using average market price:
Quarter ended March 31 - - - 262,998
Quarter ended June 30 - - 385,405 538,986
Quarter ended September 30 399,670 457,905 399,670 457,905
Quarter ended December 31 - - - -
Effect of dilutive potential restricted
common stock based on the treasury
stock method using average market price:
Quarter ended March 31 - - - 14,496
Quarter ended June 30 - - 29,186 31,840
Quarter ended September 30 45,471 35,468 45,471 35,468
Quarter ended December 31 - - - -
------------- -------------- ------------- --------------
445,141 493,373 859,732 1,341,693
Divided by number of quarters 1 1 3 3
------------- -------------- ------------- --------------
Net effect of dilutive potential
common stock 445,141 493,373 286,577 447,231
------------- -------------- ------------- --------------
Weighted average number of common shares and
dilutive potential common shares outstanding 59,677,283 60,662,214 60,165,757 60,615,261
============= ============== ============= ==============
Net income per common share:
Income before extraordinary item $ 0.439 $ 0.368 $ 0.508 $ 0.650
Extraordinary loss on repurchases of debt,
net of income tax benefit (0.034) - (0.054) -
------------- -------------- ------------- ---------------
Net income $ 0.405 $ 0.368 $ 0.454 $ 0.650
============= ============== ============= ===============
</TABLE>
<PAGE>
EL PASO ELECTRIC COMPANY EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------
1999 1998
--------------------- ---------------------
<S> <C> <C>
NET INCOME APPLICABLE TO COMMON STOCK:
Income before extraordinary items $ 33,518 $ 44,667
Extraordinary gain on discharge of debt,
net of income tax expense 3,343 -
Extraordinary loss on repurchases of debt,
net of income tax benefit (3,251) -
--------------------- ---------------------
Net income applicable to common stock $ 33,610 $ 44,667
===================== =====================
BASIC EARNINGS PER COMMON SHARE:
Weighted average number of common
shares outstanding 59,952,191 60,161,105
===================== =====================
Net income per common share:
Income before extraordinary items $ 0.559 $ 0.742
Extraordinary gain on discharge of debt,
net of income tax expense 0.056 -
Extraordinary loss on repurchases of debt,
net of income tax benefit (0.054) -
--------------------- ---------------------
Net income $ 0.561 $ 0.742
===================== =====================
DILUTED EARNINGS PER COMMON SHARE:
Weighted average number of common
shares outstanding 59,952,191 60,161,105
--------------------- ---------------------
Effect of dilutive potential common stock
options based on the treasury
stock method using average market price:
Quarter ended March 31 - 262,998
Quarter ended June 30 385,405 538,986
Quarter ended September 30 399,670 457,905
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
Quarter ended June 30 29,186 31,840
Quarter ended September 30 45,471 35,468
Quarter ended December 31 39,433 16,496
--------------------- ---------------------
1,378,295 1,657,933
Divided by number of quarters 4 4
--------------------- ---------------------
Net effect of dilutive potential
common stock 344,574 414,483
--------------------- ---------------------
Weighted average number of common shares and
dilutive potential common shares outstanding 60,296,765 60,575,588
===================== =====================
Net income per common share:
Income before extraordinary items $ 0.556 $ 0.737
Extraordinary gain on discharge of debt,
net of income tax expense 0.055 -
Extraordinary loss on repurchases of debt,
net of income tax benefit (0.054) -
--------------------- ---------------------
Net income $ 0.557 $ 0.737
===================== =====================
</TABLE>
<PAGE>
Exhibit 15
El Paso Electric Company
El Paso, Texas
Ladies and Gentlemen:
Registration Statement No's. 333-17971 and 333-82129
With respect to the subject registration statements, we acknowledge our
awareness of the use therein of our report dated October 18, 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
November 12, 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 SEPTEMBER 30, 1999 AND THE RELATED
STATEMENTS OF INCOME AND CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,407,177
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 155,569
<TOTAL-DEFERRED-CHARGES> 68,204
<OTHER-ASSETS> 18,753
<TOTAL-ASSETS> 1,649,703
<COMMON> 45,711
<CAPITAL-SURPLUS-PAID-IN> 241,295
<RETAINED-EARNINGS> 144,396
<TOTAL-COMMON-STOCKHOLDERS-EQ> 431,402
0
0
<LONG-TERM-DEBT-NET> 795,287
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 91
0
<CAPITAL-LEASE-OBLIGATIONS> 19,167
<LEASES-CURRENT> 27,244
<OTHER-ITEMS-CAPITAL-AND-LIAB> 376,512
<TOT-CAPITALIZATION-AND-LIAB> 1,649,703
<GROSS-OPERATING-REVENUE> 432,705
<INCOME-TAX-EXPENSE> 25,650
<OTHER-OPERATING-EXPENSES> 310,093
<TOTAL-OPERATING-EXPENSES> 335,743
<OPERATING-INCOME-LOSS> 96,962
<OTHER-INCOME-NET> 2,564
<INCOME-BEFORE-INTEREST-EXPEN> 99,526
<TOTAL-INTEREST-EXPENSE> 56,792
<NET-INCOME> 39,483<F1>
12,197<F2>
<EARNINGS-AVAILABLE-FOR-COMM> 27,286
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 63,968
<CASH-FLOW-OPERATIONS> 167,892
<EPS-BASIC> 0.456
<EPS-DILUTED> 0.454
<FN>
<F1>Net income is net of extraordinary loss on repurchased debt (net of income
tax benefit) of ($3,251).
<F2>Includes $9,581 of redemption costs.
</FN>
</TABLE>
