<PAGE>
===============================================================================
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 0-296
El Paso Electric Company
(Exact name of registrant as specified in its charter)
Texas 74-0607870
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Kayser Center, 100 North Stanton, El Paso, Texas 79901
(Address of principal executive offices) (Zip Code)
(915) 543-5711
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES X NO
--- ---
As of August 4, 2000, there were 54,628,502 shares of the Company's no par
value common stock outstanding.
===============================================================================
<PAGE>
EL PASO ELECTRIC COMPANY
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page No.
--------
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Balance Sheets - June 30, 2000 and December 31, 1999.......................... 1
Statements of Operations - Three Months, Six Months and Twelve
Months Ended June 30, 2000 and 1999........................................... 3
Statements of Comprehensive Operations - Three Months, Six
Months and Twelve Months Ended June 30, 2000 and 1999......................... 5
Statements of Cash Flows - Six Months Ended June 30, 2000 and
1999.......................................................................... 6
Notes to Financial Statements................................................. 7
Independent Accountants' Review Report........................................ 14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................ 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk............... 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................ 24
Item 4. Submission of Matters to a Vote of Security Holders...................... 24
Item 5. Other Matters............................................................ 24
Item 6. Exhibits and Reports on Form 8-K......................................... 24
</TABLE>
i
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EL PASO ELECTRIC COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS June 30,
(In thousands) 2000 December 31,
(Unaudited) 1999
------------- -------------
<S> <C> <C>
Utility plant:
Electric plant in service.................................................. $ 1,643,930 $ 1,626,224
Less accumulated depreciation and amortization............................. 363,949 329,165
------------- -------------
Net plant in service.................................................... 1,279,981 1,297,059
Construction work in progress.............................................. 70,202 61,842
Nuclear fuel; includes fuel in process of $9,672 and
$8,994, respectively.................................................... 78,020 78,891
Less accumulated amortization.............................................. 38,696 39,355
------------- -------------
Net nuclear fuel........................................................ 39,324 39,536
------------- -------------
Net utility plant.................................................... 1,389,507 1,398,437
------------- -------------
Current assets:
Cash and temporary investments............................................. 13,431 37,234
Accounts receivable, principally trade, net of allowance for
doubtful accounts of $2,430 and $2,429, respectively.................... 79,187 62,036
Inventories, at cost....................................................... 25,315 25,963
Net undercollection of fuel revenues....................................... 6,412 -
Prepayments and other...................................................... 5,184 8,832
------------- -------------
Total current assets................................................. 129,529 134,065
------------- -------------
Long-term contract receivable................................................ 14,032 17,237
------------- -------------
Deferred charges and other assets:
Decommissioning trust fund................................................. 60,013 57,117
Other...................................................................... 17,652 19,035
------------- -------------
Total deferred charges and other assets.............................. 77,665 76,152
------------- -------------
Total assets......................................................... $ 1,610,733 $ 1,625,891
============= =============
</TABLE>
See accompanying notes to financial statements.
1
<PAGE>
EL PASO ELECTRIC COMPANY
BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
CAPITALIZATION AND LIABILITIES June 30,
(In thousands except for share data) 2000 December 31,
(Unaudited) 1999
------------- -------------
<S> <C> <C>
Capitalization:
Common stock, stated value $1 per share, 100,000,000 shares
authorized, 60,332,533 and 60,200,921 shares issued,
and 273,485 and 258,788 restricted shares, respectively................. $ 60,606 $ 60,460
Capital in excess of stated value.......................................... 244,062 242,702
Unearned compensation - restricted stock awards............................ (1,978) (1,149)
Retained earnings.......................................................... 166,899 143,724
Accumulated other comprehensive income (net unrealized
gains on marketable securities), net of tax............................. 4,281 4,179
------------- -------------
473,870 449,916
Treasury stock, 5,980,072 and 3,199,927 shares, respectively; at cost...... (53,933) (28,658)
------------- -------------
Common stock equity..................................................... 419,937 421,258
Long-term debt............................................................. 730,959 788,576
Financing and capital lease obligations.................................... 25,437 23,031
------------- -------------
Total capitalization................................................. 1,176,333 1,232,865
------------- -------------
Current liabilities:
Current maturities of long-term debt and financing and
capital lease obligations............................................... 58,012 27,042
Revolving credit facility.................................................. 5,000 -
Accounts payable, principally trade........................................ 32,575 22,241
Litigation settlements payable............................................. - 16,500
Taxes accrued other than federal income taxes.............................. 14,220 17,617
Interest accrued........................................................... 16,536 17,022
Net overcollection of fuel revenues........................................ - 2,640
Other...................................................................... 12,792 12,946
------------- -------------
Total current liabilities............................................ 139,135 116,008
------------- -------------
Deferred credits and other liabilities:
Decommissioning liability.................................................. 124,483 120,875
Accrued postretirement benefit liability................................... 81,454 81,176
Accrued pension liability.................................................. 32,268 32,476
Accumulated deferred income taxes, net..................................... 27,640 12,503
Other...................................................................... 29,420 29,988
------------- -------------
Total deferred credits and other liabilities......................... 295,265 277,018
------------- -------------
Commitments and contingencies
Total capitalization and liabilities................................. $ 1,610,733 $ 1,625,891
============= =============
</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 Six Months Ended
June 30, June 30,
------------------------ -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating revenues.............................................. $ 171,464 $ 133,168 $ 309,509 $ 262,719
----------- ----------- ----------- -----------
Energy expenses:
Fuel.......................................................... 34,564 22,272 61,674 44,334
Purchased and interchanged power.............................. 16,064 3,968 19,553 4,720
----------- ----------- ----------- -----------
50,628 26,240 81,227 49,054
----------- ----------- ----------- -----------
Operating revenues net of energy expenses....................... 120,836 106,928 228,282 213,665
----------- ----------- ----------- -----------
Other operating expenses:
Other operations.............................................. 33,452 32,787 67,013 63,852
Maintenance................................................... 11,033 11,874 19,376 20,788
Depreciation and amortization................................. 21,535 22,931 43,324 45,736
Taxes other than income taxes................................. 11,030 10,889 21,991 22,169
----------- ----------- ----------- -----------
77,050 78,481 151,704 152,545
----------- ----------- ----------- -----------
Operating income................................................ 43,786 28,447 76,578 61,120
----------- ----------- ----------- -----------
Other income (deductions):
Investment income............................................. 964 1,415 1,745 4,494
Litigation settlements........................................ - - (1,000) -
Other, net.................................................... (764) 518 (1,633) (44)
----------- ----------- ----------- -----------
200 1,933 (888) 4,450
----------- ----------- ----------- -----------
Income before interest charges.................................. 43,986 30,380 75,690 65,570
----------- ----------- ----------- -----------
Interest charges (credits):
Interest on long-term debt.................................... 16,991 18,565 33,563 37,720
Other interest................................................ 2,020 2,038 3,830 4,075
Interest capitalized.......................................... (951) (1,635) (1,832) (3,339)
----------- ----------- ----------- -----------
18,060 18,968 35,561 38,456
----------- ----------- ----------- -----------
Income before income taxes...................................... 25,926 11,412 40,129 27,114
Income tax expense.............................................. 10,758 4,364 16,405 10,604
----------- ----------- ----------- -----------
Income before extraordinary loss on
repurchases of debt........................................... 15,168 7,048 23,724 16,510
Extraordinary loss on repurchases
of debt, net of income tax benefit............................ - (1,183) (549) (1,183)
----------- ----------- ----------- -----------
Net income...................................................... 15,168 5,865 23,175 15,327
Preferred stock:
Dividend requirements......................................... - - - 2,616
Redemption costs.............................................. - 10 - 9,581
----------- ----------- ----------- -----------
Net income applicable to common stock........................... $ 15,168 $ 5,855 $ 23,175 $ 3,130
=========== =========== =========== ===========
Basic earnings per common share:
Income before extraordinary loss on
repurchases of debt........................................ $ 0.279 $ 0.117 $ 0.433 $ 0.072
Extraordinary loss on repurchases of debt, net of
income tax benefit......................................... - (0.020) (0.010) (0.020)
----------- ----------- ----------- -----------
Net income................................................. $ 0.279 $ 0.097 $ 0.423 $ 0.052
=========== =========== =========== ===========
Diluted earnings per common share:
Income before extraordinary loss on
repurchases of debt........................................ $ 0.275 $ 0.116 $ 0.427 $ 0.071
Extraordinary loss on repurchases of debt, net of
income tax benefit......................................... - (0.019) (0.010) (0.019)
----------- ----------- ----------- -----------
Net income................................................. $ 0.275 $ 0.097 $ 0.417 $ 0.052
=========== =========== =========== ===========
Weighted average number of common shares
outstanding................................................... 54,375,819 60,206,105 54,837,870 60,208,059
=========== =========== =========== ===========
Weighted average number of common shares and
dilutive potential common shares outstanding.................. 55,172,804 60,620,058 55,519,019 60,415,036
=========== =========== =========== ===========
</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
June 30,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Operating revenues........................................................................ $ 617,259 $ 581,959
----------- -----------
Energy expenses:
Fuel.................................................................................... 121,738 100,672
Coal mine reclamation adjustment........................................................ (6,601) -
Purchased and interchanged power........................................................ 26,833 17,522
----------- -----------
141,970 118,194
----------- -----------
Operating revenues net of energy expenses................................................. 475,289 463,765
----------- -----------
Other operating expenses:
Other operations........................................................................ 137,757 135,534
Maintenance............................................................................. 34,895 39,221
New Mexico Settlement charge............................................................ - 6,272
Depreciation and amortization........................................................... 88,522 91,010
Taxes other than income taxes........................................................... 41,321 43,985
----------- -----------
302,495 316,022
----------- -----------
Operating income.......................................................................... 172,794 147,743
----------- -----------
Other income (deductions):
Investment income....................................................................... 4,179 11,882
Litigation settlements.................................................................. (17,500) -
Settlement of bankruptcy professional fees.............................................. - 657
Other, net.............................................................................. 1,177 (556)
----------- -----------
(12,144) 11,983
----------- -----------
Income before interest charges............................................................ 160,650 159,726
----------- -----------
Interest charges (credits):
Interest on long-term debt.............................................................. 72,477 77,992
Other interest.......................................................................... 7,452 7,720
Interest capitalized.................................................................... (1,735) (6,493)
----------- -----------
78,194 79,219
----------- -----------
Income before income taxes................................................................ 82,456 80,507
Income tax expense........................................................................ 31,433 31,134
----------- -----------
Income before extraordinary items......................................................... 51,023 49,373
----------- -----------
Extraordinary items:
Extraordinary loss on repurchases of debt, net of income tax benefit.................... (2,702) (1,183)
Extraordinary gain on discharge of debt, net of income tax expense...................... - 3,343
----------- -----------
Net income................................................................................ 48,321 51,533
Preferred stock:
Dividend requirements................................................................... - 10,176
Redemption costs........................................................................ - 9,581
----------- -----------
Net income applicable to common stock..................................................... $ 48,321 $ 31,776
=========== ===========
Basic earnings per common share:
Income before extraordinary items....................................................... $ 0.902 $ 0.492
Extraordinary loss on repurchases of debt, net of income tax benefit.................... (0.048) (0.020)
Extraordinary gain on discharge of debt, net of income tax expense...................... - 0.056
----------- -----------
Net income........................................................................... $ 0.854 $ 0.528
=========== ===========
Diluted earnings per common share:
Income before extraordinary items....................................................... $ 0.892 $ 0.489
Extraordinary loss on repurchases of debt, net of income tax benefit.................... (0.047) (0.019)
Extraordinary gain on discharge of debt, net of income tax expense...................... - 0.055
----------- -----------
Net income........................................................................... $ 0.845 $ 0.525
=========== ===========
Weighted average number of common shares outstanding...................................... 56,572,978 60,188,290
=========== ===========
Weighted average number of common shares and
dilutive potential common shares outstanding............................................ 57,192,245 60,544,762
=========== ===========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
EL PASO ELECTRIC COMPANY
STATEMENTS OF COMPREHENSIVE OPERATIONS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Six Months Twelve Months
Ended Ended Ended
June 30, June 30, June 30,
---------------------- ---------------------- ----------------------
2000 1999 2000 1999 2000 1999
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income.......................................... $ 15,168 $ 5,865 $ 23,175 $ 15,327 $ 48,321 $ 51,533
Other comprehensive income (loss):
Net unrealized gain (loss) on marketable
securities, less applicable income tax
benefit (expense) of $249, $(683),
$(55), $(1,027), $(686) and $(1,511),
respectively..................................... (463) 1,268 102 1,906 1,274 2,805
--------- --------- --------- --------- --------- ---------
Comprehensive income................................ 14,705 7,133 23,277 17,233 49,595 54,338
Preferred stock:
Dividend requirements.............................. - - - 2,616 - 10,176
Redemption costs................................... - 10 - 9,581 - 9,581
--------- --------- --------- --------- --------- ---------
Comprehensive income applicable
to common stock.................................... $ 14,705 $ 7,123 $ 23,277 $ 5,036 $ 49,595 $ 34,581
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
EL PASO ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------------------
2000 1999
----------- ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income..................................................................... $ 23,175 $ 15,327
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................................ 43,324 45,736
Amortization of nuclear fuel................................................. 8,596 10,351
Deferred income taxes, net................................................... 15,431 9,486
Provision for Texas Settlement base revenue refund........................... - 4,156
Extraordinary loss on repurchases of debt, net of
income tax benefit........................................................ 549 1,183
Other operating activities................................................... 2,782 2,697
Change in:
Accounts receivable.......................................................... (17,151) 8,526
Inventories.................................................................. 648 1,017
Prepayments and other........................................................ 3,648 9,846
Long-term contract receivable................................................ 3,205 2,898
Accounts payable............................................................. 10,334 (15,919)
Litigation settlements payable............................................... (16,500) -
Taxes accrued other than federal income taxes................................ (3,397) (3,115)
Interest accrued............................................................. (486) (2,303)
Net under/overcollection of fuel revenues.................................... (9,052) 578
Other current liabilities.................................................... (153) 8,923
Deferred charges and credits................................................. 3,223 2,944
----------- ------------
Net cash provided by operating activities.................................. 68,176 102,331
----------- ------------
Cash Flows From Investing Activities:
Cash additions to utility property, plant and equipment........................ (33,926) (29,501)
Cash additions to nuclear fuel................................................. (8,032) (6,741)
Interest capitalized:
Utility property, plant and equipment........................................ (1,480) (1,648)
Nuclear fuel................................................................. (352) (1,691)
Investment in decommissioning trust fund....................................... (2,739) (2,728)
Other investing activities..................................................... (59) (136)
----------- ------------
Net cash used for investing activities..................................... (46,588) (42,445)
----------- ------------
Cash Flows From Financing Activities:
Treasury stock purchases....................................................... (25,275) (4,288)
Repurchases of and payments on long-term debt.................................. (23,731) (82,196)
Nuclear fuel financing obligations:
Proceeds..................................................................... 9,687 8,433
Payments..................................................................... (10,055) (10,725)
Revolving credit facility, net proceeds........................................ 5,000 -
Redemption of preferred stock.................................................. - (148,937)
Preferred stock dividend payment............................................... - (1,328)
Payments on capital lease obligations.......................................... (827) (751)
Other financing activities..................................................... (190) (138)
----------- ------------
Net cash used for financing activities..................................... (45,391) (239,930)
----------- ------------
Net decrease in cash and temporary investments................................... (23,803) (180,044)
Cash and temporary investments at beginning of period............................ 37,234 229,150
----------- ------------
Cash and temporary investments at end of period.................................. $ 13,431 $ 49,106
=========== ============
</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, 1999 (the
"1999 Form 10-K"). Capitalized terms used in this report and not defined herein
have the meaning ascribed for such terms in the 1999 Form 10-K. In the opinion
of management of the Company, the accompanying financial statements contain all
adjustments necessary to present fairly the financial position of the Company at
June 30, 2000 and December 31, 1999; the results of operations for the three,
six and twelve months ended June 30, 2000 and 1999; and cash flows for the six
months ended June 30, 2000 and 1999. The results of operations for the three,
six and twelve months ended June 30, 2000 and the cash flows for the six months
ended June 30, 2000, are not necessarily indicative of the results to be
expected for the full calendar year.
Based on a provision in the Texas Restructuring Law allowing recovery of
nuclear decommissioning costs over the lives of nuclear plants, effective
January 1, 2000, the Company changed the estimated useful life of the plant
investment related to the decommissioning of Palo Verde. Previously, this
decommissioning portion of Palo Verde plant costs had been depreciated over 10
years. The change in the estimated useful life for the Texas jurisdiction
resulted in a decrease in depreciation expense and an increase in net income of
$0.8 million, $1.5 million and $1.5 million, net of tax, or $0.01, $0.03 and
$0.03 diluted earnings per common share for the three, six and twelve months
ended June 30, 2000.
Supplemental Cash Flow Disclosures (In thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash paid for:
Interest on long-term debt (1)........................ $ 32,718 $ 38,140
Other interest........................................ 48 530
Income taxes, net..................................... 1,200 1,200
Non-cash investing and financing activities:
Grants of restricted shares of
common stock...................................... 1,696 1,480
Issuance of preferred stock for
pay-in-kind dividend.............................. - 3,867
</TABLE>
------------
(1) Includes interest on bonds, letter of credit fees related to bonds, and
interest on nuclear fuel financing net of amounts capitalized.
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 June 30,
-------------------------------------------------------------------------------------
2000 1999
----------------------------------------- ----------------------------------------
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..... $ 15,168 $ 7,048
Less: Preferred stock
redemption costs................... - 10
------------ ------------
Basic earnings per common share:
Income before extraordinary
item applicable to common
stock.............................. 15,168 54,375,819 $ 0.279 7,038 60,206,105 $ 0.117
============ ============
Effect of dilutive securities:
Unvested restricted stock........... - 51,623 - 29,186
Stock options....................... - 745,362 - 384,767
------------ ------------ ------------ ------------
Diluted earnings per common share:
Income before extraordinary
item applicable to common
stock.............................. $ 15,168 55,172,804 $ 0.275 $ 7,038 60,620,058 $ 0.116
============ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------------------------------------------------------------
2000 1999
----------------------------------------- ----------------------------------------
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..... $ 23,724 $ 16,510
Less:
Preferred stock:
Dividend requirements............ - 2,616
Redemption costs................. - 9,581
------------ ------------
Basic earnings per common share:
Income before extraordinary item
applicable to common stock......... 23,724 54,837,870 $ 0.433 4,313 60,208,059 $ 0.072
============ ============
Effect of dilutive securities:
Unvested restricted stock........... - 37,186 - 14,593
Stock options....................... - 643,963 - 192,384
------------ ------------ ------------ ------------
Diluted earnings per common share:
Income before extraordinary item
applicable to common stock......... $ 23,724 55,519,019 $ 0.427 $ 4,313 60,415,036 $ 0.071
============ ============ ============ ============ ============ ============
</TABLE>
8
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
Twelve Months Ended June 30,
-------------------------------------------------------------------------------------
2000 1999
----------------------------------------- ----------------------------------------
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.... $ 51,023 $ 49,373
Less:
Preferred stock:
Dividend requirements............ - 10,176
Redemption costs................. - 9,581
------------ ------------
Basic earnings per common share:
Income before extraordinary
items applicable to common
stock.............................. 51,023 56,572,978 $ 0.902 29,616 60,188,290 $ 0.492
============ ============
Effect of dilutive securities:
Unvested restricted stock........... - 44,025 - 26,022
Stock options....................... - 575,242 - 330,450
------------ ------------ ------------ ------------
Diluted earnings per common share:
Income before extraordinary
items applicable to common
stock.............................. $ 51,023 57,192,245 $ 0.892 $ 29,616 60,544,762 $ 0.489
============ ============ ============ ============ ============ ============
</TABLE>
Options that were excluded from the computation of diluted earnings per
common share because the options' exercise price was greater than the average
market price of the common shares for the period are listed below:
1) 60,000 options granted May 29, 1998 at an exercise price of $9.50 were
excluded for the third and fourth quarters of 1998, all of 1999 and
the first quarter of 2000.
2) 100,000 options granted January 11, 1999 at an exercise price of $8.75
were excluded for the first and second quarters of 1999.
3) 42,432 options granted January 1, 2000 at an exercise price of $9.81
were excluded for the first quarter of 2000.
4) 50,000 options granted March 15, 2000 at an exercise price of $9.50
were excluded for the first quarter of 2000.
B. Regulation
For a full discussion of the Company's regulatory matters, see Note B of
Notes to Financial Statements in the 1999 Form 10-K.
Texas Regulatory Matters
The Texas Restructuring Law specifically recognizes and preserves the
substantial benefits the Company bargained for in its Texas Rate Stipulation and
Texas Settlement Agreement. The Texas Restructuring Law exempts the Company's
Texas service area from retail competition, and preserves
9
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
rates at their current levels until the end of the Company's Freeze Period. At
the end of the Freeze Period, the Company will be subject to retail competition
and will have no further claim for recovery of stranded costs or costs of
transition to competition. The Company believes that its continued ability to
provide bundled electric service at current rates in its Texas service area will
allow the Company to collect its Texas jurisdictional stranded costs and costs
of transition to competition. The Company will recover its current
decommissioning cost estimates through its existing rates during the Freeze
Period, and thereafter under the provisions of the Texas Restructuring Law. The
rate freeze under the Texas Rate Stipulation and the rate reduction under the
Texas Settlement Agreement preclude the Company from seeking a rate increase in
Texas to recover increases in the decommissioning cost estimates during the
Freeze Period.
Although the Company is not subject to the Texas restructuring requirements
until the expiration of the Freeze Period, the Company is subject to the
restructuring requirements of the New Mexico Restructuring Law. The Company
believes that its corporate restructuring described below in "New Mexico
Regulatory Matters" satisfies the restructuring requirements under the Texas
Restructuring Law. On March 14, 2000, as supplemented on May 15, 2000, the
Company filed for necessary Texas Commission approvals relating to the Company's
corporate restructuring. The Company, the Texas Commission staff and other
interested parties have reached an agreement in principle on all issues related
to the Company's corporate restructuring and will submit a stipulation to the
Texas Commission in August 2000.
Fuel. Although the Company's base rates are frozen in Texas, pursuant to
Texas Commission rules and the Texas Rate Stipulation, the Company can request
adjustments to its fuel factor to more accurately reflect its projected
increases or decreases in energy costs associated with the provision of
electricity. The recent substantial increases in the price of natural gas and
purchased power exceed the Company's current fuel factor, resulting in a
significant underrecovery of the Company's actual fuel expense. Therefore, on
August 1, 2000, the Company filed a petition with the Texas Commission
requesting an increase in its fuel factor in Texas. The Company's petition
requested expedited approval by the Texas Commission. The Company also intends
to seek recovery of cumulative underrecovered fuel expense by filing an interim
surcharge proceeding in January 2001. If this surcharge is approved, these
charges are subject to final review by the Texas Commission in the Company's
next applicable fuel reconciliation proceeding.
New Mexico Regulatory Matters
The New Mexico Restructuring Law requires the Company to reorganize its
present corporate structure, separating its power generation and energy services
businesses, which will become competitive, from its transmission and
distribution business, which will remain regulated. On March 1, 2000, the
Company filed the first phase of its transition plan ("Transition Plan-Phase I")
with the New Mexico Commission, requesting approval of the Company's proposed
corporate reorganization under the New Mexico Restructuring Law. The Company
initially proposed to separate its current operations into a power generation
subsidiary, a transmission and distribution subsidiary, and an energy services
subsidiary, all owned and controlled by a common holding company. On May 2,
2000, the Company
10
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
filed an amendment to its Transition Plan-Phase I with the New Mexico
Commission, requesting approval to create a separate administrative and
corporate support services subsidiary, which will also be owned and controlled
by the common holding company. On June 1, 2000, the Company filed its Transition
Plan-Phase II with the New Mexico Commission, detailing the Company's proposed
processes and procedures to implement customer choice, including the Company's
proposal for recovery of stranded costs, in New Mexico. The Company believes
that the New Mexico Commission will enter a final order on the Transition Plan-
Phase I by December 1, 2000, and on the Transition Plan-Phase II by October 1,
2001. Under the New Mexico Restructuring Law, the New Mexico Commission delayed
the start of retail customer choice until January 1, 2002 for public post-
secondary educational institutions, public schools and residential and small
business customers.
Fuel. The New Mexico Settlement Agreement incorporated the then existing
fuel factor into base rates and accordingly, the Company will absorb any
increases or decreases in fuel expense related to its New Mexico retail
customers until the start of competition on January 1, 2002.
Federal Regulatory Matters
On June 16, 2000, the Company filed its Application for Authorization to
Transfer Certain Assets and Approval of Certain Securities Transactions with the
FERC seeking the necessary FERC approvals for its corporate restructuring. On
July 6, 2000, the Company filed its Application for Nuclear Regulatory
Commission Consent to the indirect transfer of control of the Company's minority
non-operating ownership interest in Palo Verde seeking necessary NRC approvals
related to the Company's corporate restructuring. The Company believes it will
obtain these regulatory approvals for its corporate restructuring before January
1, 2001, when the Company anticipates implementing its new corporate structure.
Fuel. Under FERC regulations, the Company's fuel factor is adjusted monthly
for the majority of FERC jurisdictional customers. Accordingly, any increases or
decreases in natural gas or purchased power expenses immediately flow through to
such customers.
C. Common Stock Repurchase Program
In May 1999, the Company's Board of Directors approved a stock repurchase
program allowing the Company to purchase up to six million of its outstanding
shares of common stock. In March 2000, the Company's Board of Directors
authorized a new stock repurchase program under which the Company may purchase
up to an additional six million shares. As of June 30, 2000, the Company had
repurchased approximately 5.9 million shares of common stock for approximately
$53.9 million, including commissions, under the initial repurchase program. The
Company will make purchases primarily in the open market at prevailing prices
and will also engage in private transactions, if appropriate. Any repurchased
shares will be available for issuance under employee benefit and stock option
plans, or may be retired.
11
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
D. Commitments and Contingencies
For a full discussion of commitments and contingencies, including
environmental matters related to the Company, see Note H of Notes to Financial
Statements in the 1999 Form 10-K. In addition, see Note C of Notes to Financial
Statements in the 1999 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.
Environmental Matters
The Company is subject to regulation with respect to air, soil and water
quality, solid waste disposal and other environmental matters by federal, state
and local authorities. These authorities govern current facility operations and
exercise continuing jurisdiction over facility modifications. Environmental
regulations can change rapidly and are difficult to predict. Substantial
expenditures may be required to comply with these regulations. The Company
analyzes the costs of its obligations arising from environmental matters on an
ongoing basis, and management believes it has made adequate provision in its
financial statements to meet such obligations. However, unforeseen expenses
associated with compliance could have a material adverse effect on the future
operations and financial condition of the Company.
E. Litigation
Litigation with Las Cruces
Pursuant to the terms of the settlement agreement dated May 3, 2000 with
Las Cruces, all existing litigation between the Company and Las Cruces,
including all litigation pending before the FERC and the Federal District Court
of New Mexico, has been dismissed.
Four Corners
In July 1995, the Navajo Nation enacted the Navajo Nation Air Pollution
Prevention and Control Act, the Navajo Nation Safe Drinking Water Act and the
Navajo Nation Pesticide Act (collectively, the "Acts"). In October 1995, the
Four Corners participants requested that the United States Secretary of the
Interior resolve their dispute with the Navajo Nation regarding whether the Acts
apply to operation of Four Corners. The Four Corners participants subsequently
filed a lawsuit in the District Court of the Navajo Nation, Window Rock
District, seeking, among other things, a declaratory judgment that (i) the Four
Corners leases and federal easements preclude the application of the Acts to the
operation of Four Corners and (ii) the Navajo Nation and its agencies and courts
lack adjudicatory jurisdiction to determine the enforceability of the Acts as
applied to Four Corners. In October 1995, the Navajo Nation and the Four
Corners participants agreed to stay the proceedings indefinitely so the parties
may
12
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
attempt to resolve the dispute without litigation. This matter remains inactive
and the Company is unable to predict the outcome of this case.
Water Cases
San Juan River System. The Four Corners participants are among the
defendants in a suit filed by the State of New Mexico in 1975 in state district
court in New Mexico against the United States of America, the City of
Farmington, New Mexico, the Secretary of the Interior as Trustee for the Navajo
Nation and other Indian tribes and certain other defendants (State of New Mexico
ex rel. S. E. Reynolds, New Mexico State Engineer v. United States of America,
et al., Eleventh Judicial District Court, County of San Juan, State of New
Mexico, Cause No. 75-184). The suit seeks adjudication of the water rights of
the San Juan River Stream System in New Mexico, which, among other things,
supplies the water used at Four Corners. An agreement reached with the Navajo
Nation in 1985 provides that if Four Corners loses a portion of its water rights
in the adjudication, the tribe will provide sufficient water from its allocation
to offset the loss. The case has been inactive for many years and the Company is
unable to predict the outcome of this case.
Gila River System. In connection with the construction and operation of
Palo Verde, APS entered into contracts with certain municipalities granting APS
the right to purchase effluent for cooling purposes at Palo Verde. In 1986, a
summons was served on APS that required all water claimants in the Lower Gila
River Watershed in Arizona to assert any claims to water in an action pending in
Maricopa County Superior Court, titled In re The General Adjudication of All
Rights to Use Water in the Gila River System and Source. Palo Verde is located
within the geographic area subject to the summons and the rights of the Palo
Verde Participants to the use of groundwater and effluent at Palo Verde is
potentially at issue in this action. APS, as operating agent, filed claims that
dispute the Court's jurisdiction over the Palo Verde Participants' groundwater
rights and their contractual rights to effluent relating to Palo Verde and,
alternatively, seek confirmation of such rights. In November 1999, the Arizona
Supreme Court issued a decision confirming that certain groundwater rights may
be available to the federal government and Indian tribes. APS and other parties
petitioned the United States Supreme Court for review of this decision. This
petition was denied, and the pending lower court litigation will proceed. The
Company is unable to predict the outcome of this case. APS's contractual rights
to effluent are not currently in controversy in this litigation. This effluent
is the Participants' primary source of water in the operation of Palo Verde. The
Company does not currently believe that an adverse ruling in this litigation on
groundwater rights will materially affect Palo Verde operations.
Other Legal Proceedings
The Company is a party to various other claims, legal actions and
complaints. In many of these matters, the Company has excess casualty liability
insurance which is applicable. Based upon a review of these claims and
applicable insurance coverage, the Company believes that none of these claims
will have a material adverse effect on the financial position, results of
operations and cash flows of the Company.
13
<PAGE>
Independent Accountants' Review Report
--------------------------------------
The Shareholders and the Board of Directors
El Paso Electric Company:
We have reviewed the accompanying condensed balance sheet of El Paso Electric
Company (the Company) as of June 30, 2000, the related condensed statements of
operations and comprehensive operations for the three months, six months and
twelve months ended June 30 , 2000 and 1999, and the related condensed
statements of cash flows for the six months ended June 30, 2000 and 1999. 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 accounting principles generally accepted in the United
States.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of El Paso Electric Company as of December 31,
1999, 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 11, 2000, 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, 1999, is fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
KPMG LLP
El Paso, Texas
July 21, 2000
14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information contained in this Item 2 updates, and should be read in
conjunction with, the information set forth in Part II, Item 7 of the Company's
1999 Form 10-K.
Statements in this document, other than statements of historical
information, are forward-looking statements that are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements, as well as other oral and written forward-looking
statements made by or on behalf of the Company from time to time, including
statements contained in the Company's filings with the Securities and Exchange
Commission and its reports to shareholders, involve known and unknown risks and
other factors which may cause the Company's actual results in future periods to
differ materially from those expressed in any forward-looking statements. Any
such statement is qualified by reference to the risks and factors discussed
below under the headings "Overview" and "Liquidity and Capital Resources," as
well as in the Company's other 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.
Overview
El Paso Electric Company is an electric utility that serves retail
customers in west Texas and southern New Mexico and wholesale customers in
Texas, New Mexico, California and Mexico. The Company owns or has substantial
ownership interests in five electrical generating facilities providing it with a
total capacity of approximately 1,500 MW. The Company's energy sources consist
of nuclear fuel, natural gas, coal and purchased power. The Company owns or has
significant ownership interests in four major 345 kV transmission lines and
three 500 kV lines to provide power from Palo Verde, and owns the distribution
network within its retail service territory. The Company is subject to extensive
regulation by the Texas and New Mexico Commissions and, with respect to
wholesale power sales, transmission of electric power and the issuance of
securities, by the FERC.
The Company faces a number of risks and challenges that could negatively
impact its operations and financial results. The most significant of these risks
and challenges arise from the deregulation of the electric utility industry, the
possibility of increased costs, especially from Palo Verde, and the Company's
high level of debt.
The electric utility industry in general and the Company in particular are
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. In 1999 both Texas and New
Mexico passed legislation requiring the Company to separate its transmission and
distribution functions from its generation business and mandating competition in
the Company's retail service territory in the future. The Company faces certain
risks inherent in separating the Company into affiliates, including the possible
loss of operational and administrative efficiencies. In addition to the
operational challenges created by separating functions that have historically
operated within a single entity, there is substantial
15
<PAGE>
uncertainty as to whether the New Mexico legislation will effectively permit the
Company to recover its stranded costs, including the costs of decommissioning,
in full. 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.
The changing regulatory environment and the advent of customer choice have
created a substantial risk that the Company will lose important customers. 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, Mexico, which became fully operational at the end of
1998, gave CFE the capacity to supply electricity to portions of northern
Chihuahua and allowed CFE to eliminate substantially all purchases of power from
the Company in 1999 and the first five months of 2000. However, on May 31, 2000,
CFE agreed to purchase from the Company firm capacity and associated energy
sales of up to 80 MW from June 1, 2000 through August 31, 2000, up to 40 MW
during May 2001 and up to 100 MW from June 1, 2001 through September 30, 2001.
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, and Duke Energy has announced it is
exploring the possibility of building a generation plant in Deming, New Mexico.
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.
Another risk to the Company is potential increased costs, including the
risk of additional or unanticipated costs at Palo Verde resulting from (i)
increases in operation and maintenance expenses; (ii) the 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 Agreement and the Texas Settlement Agreement, are
effectively capped through the rate freeze periods. Additionally, upon
initiation of competition, there will be competitive pressure on the Company's
power generation rates. The Company cannot assure that its revenues will be
sufficient to recover any increased costs, including any increased costs in
connection with Palo Verde or other operations, whether as a result of higher
than anticipated levels of inflation, changes in tax laws or regulatory
requirements, or other causes.
During the second quarter of 2000, the Company experienced increased costs
related to its inability to pass through to customers certain fuel expenses and
to an unscheduled plant shutdown. The Company is unable to increase or decrease
base rates in certain areas and under certain contracts to compensate for
increases or decreases in fuel expense. For the three months ended June 30,
2000, increases in the cost of natural gas and purchased power have resulted in
additional fuel expenses of $0.8 million, net of tax, that were not recovered
from the Company's customers.
In July 2000, Unit 3 at the Company's Newman Power Station experienced a
mechanical problem with its turbine shaft, resulting in Unit 3 being taken out
of service. Due to the loss of this generation, the Company is purchasing power
in the open market to meet the Company's load demand during peak demand periods.
The cost of this purchased power, together with the loss of Unit 3's generating
16
<PAGE>
capacity, will mitigate the benefits that the Company would otherwise realize
from its off-system wholesale power sales. The Company believes that Unit 3
will be repaired and available for service by September 2000. The vendor has
agreed to perform the necessary repairs at no charge.
Liquidity and Capital Resources
The Company's principal liquidity requirements in the near-term 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. While the underrecovery of
fuel expense and the timing of recovery of fuel expense in Texas will reduce the
Company's cash flows, the Company believes that cash flows from operations will
generally be sufficient to meet its principal liquidity requirements.
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, including the replacement of the
Palo Verde Unit 2 steam generators.
At June 30, 2000, the Company had approximately $13.4 million in cash and
cash equivalents. The Company also has a $100 million revolving credit facility,
which 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 June 30, 2000, approximately $47.9
million had been drawn for nuclear fuel purchases. On July 7, 2000, the
remaining $5 million outstanding of the $10 million drawn in May 2000 to pay a
portion of the Las Cruces settlement payment was repaid. Otherwise no amounts
have ever 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 Agreement 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 for New Mexico and certain
wholesale customers or loss of revenues. Accordingly, as described below, debt
reduction continues to be a high priority for the Company in order to gain
additional financial flexibility to address the evolving competitive market.
The Company has significantly reduced its long-term debt since its
emergence from bankruptcy in 1996. From June 1, 1996 through August 4, 2000, the
Company repurchased approximately $337.8 million of first mortgage bonds as part
of an aggressive deleveraging program. Common stock equity as a percentage of
capitalization, excluding current maturities of long-term debt, has increased
from 19% at June 30, 1996 to 36% at June 30, 2000. In addition, the Company's
bonds are now rated investment grade by all four major credit rating agencies.
The Company continues to believe that the orderly reduction of debt with a
goal of achieving a capital structure that is more typical in the electric
utility industry is a significant component of long-term shareholder value
creation. Accordingly, the Company will regularly evaluate market conditions
and, when appropriate, use a portion of its available cash to reduce its fixed
obligations through open market purchases of first mortgage bonds.
17
<PAGE>
In May 1999, the Company's Board of Directors approved a stock repurchase
program allowing the Company to purchase up to six million of its outstanding
shares of common stock. In March 2000, the Company's Board of Directors
authorized a new stock repurchase program under which the Company may purchase
up to an additional six million shares. As of August 4, 2000, the Company had
repurchased approximately 5.9 million shares of common stock for approximately
$53.9 million, including commissions, under the initial repurchase program. The
Company will make purchases primarily in the open market at prevailing prices
and will also engage in private transactions, if appropriate. Any repurchased
shares will be available for issuance under employee benefit and stock option
plans or may be retired.
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 higher than average 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.
Historical Results of Operations
<TABLE>
<CAPTION>
Income Before Diluted Earnings
Extraordinary Before
Items Applicable to Extraordinary Items
Common Stock Per Common Share
------------------------- ------------------------
2000 1999 2000 1999
--------- --------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Three Months Ended June 30.................... $ 15,168 $ 7,038 $ 0.275 $ 0.116
Six Months Ended June 30...................... 23,724 4,313 0.427 0.071
Twelve Months Ended June 30................... 51,023 29,616 0.892 0.489
</TABLE>
Results of operations for the twelve months ended June 30, 2000 were
affected by the following unusual or infrequent items: (i) an adjustment of $4.0
million, net of tax, reducing fuel expense based on a reduction of the Company's
estimated coal mine reclamation liability; (ii) a charge to earnings of $10.1
million, net of tax, as a result of the settlement agreement with Las Cruces;
and (iii) a one-time charge to earnings of $2.5 million, net of tax, resulting
from the write-off of interest capitalized prior to 1999 on postload nuclear
fuel. Results of operations for the six and twelve months ended June 30, 1999
were affected by the following unusual or infrequent items: (i) the recognition
of certain items arising from the Texas Settlement Agreement; (ii) a change in
estimated fuel cost reserves; and (iii) the early redemption of the Company's
11.40% Series A Preferred Stock. The results of operations for the twelve months
ended June 30, 1999 were also affected by a charge to earnings of $3.8 million,
net of tax, as a result of the New Mexico Settlement Agreement.
Operating revenues net of energy expenses increased $13.9 million for the
three months ended June 30, 2000 compared to the same period last year primarily
due to increased kWh sales and increased margins on economy sales. Operating
revenues net of energy expenses increased $14.6 million and
18
<PAGE>
$11.5 million for the six and twelve months ended June 30, 2000, respectively,
compared to the same periods last year, as follows (in thousands):
<TABLE>
<S> <C> <C> <C>
Six Months Ended June 30: 2000 1999 Increase/(Decrease)
------------------------------------------ --------- --------- --------------------
Operating revenues net of energy expenses
before the effects of the Texas
Settlement Agreement and a change in
estimated fuel cost reserves............ $ 228,282 $ 208,801 $ 19,481
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)
--------- --------- ---------
Total operating revenues net
of energy expenses.................. $ 228,282 $ 213,665 $ 14,617
========= ========= =========
Twelve Months Ended June 30: 2000 1999 Increase/(Decrease)
------------------------------------------ --------- --------- --------------------
Operating revenues net of energy expenses
before the effects of the Texas
Settlement Agreement, a change in
estimated fuel cost reserves and a coal
mine reclamation adjustment............. $ 468,688 $ 455,663 $ 13,025
Texas Settlement Agreement:
Palo Verde performance reward........... - 3,453 (3,453)
Change in estimated fuel cost reserves.... - 4,649 (4,649)
Coal mine reclamation adjustment.......... 6,601 - 6,601
--------- --------- ---------
Total operating revenues net
of energy expenses.................. $ 475,289 $ 463,765 $ 11,524
========= ========= =========
</TABLE>
Excluding the effects of the unusual or infrequent items shown above, the
six and twelve month increases in operating revenues net of energy expenses of
$19.5 million and $13.0 million, respectively, were primarily due to increased
kWh sales and increased economy sales at higher margins. The twelve month
increase was partially offset by the rate reductions in Texas and New Mexico and
decreased sales to CFE.
Operating revenues from retail customers shown below include the effects of
the Texas Settlement Agreement and a change in estimated fuel cost reserves for
the six and twelve month periods ended June 30, 1999. Comparisons of kWh sales
and operating revenues are shown below (in thousands):
<TABLE>
<CAPTION>
Increase/(Decrease)
--------------------
Three Months Ended June 30: 2000 1999 Amount Percent
--------------------------- ---------- ---------- -------- -------
<S> <C> <C> <C> <C> <C>
Electric kWh sales:
Retail.................................. 1,542,826 1,417,621 125,205 8.8% (1)
Sales for resale........................ 295,709 225,163 70,546 31.3 (2)
Economy sales........................... 290,533 233,971 56,562 24.2 (3)
---------- ---------- --------
Total.................................. 2,129,068 1,876,755 252,313 13.4
========== ========== ========
Operating revenues:
Retail.................................. $ 139,606 $ 116,686 $ 22,920 19.6% (4)
Sales for resale........................ 16,840 12,248 4,592 37.5 (5)
Economy sales........................... 15,018 4,234 10,784 254.7 (3)
---------- ---------- --------
Total.................................. $ 171,464 $ 133,168 $ 38,296 28.8
========== ========== ========
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Increase/(Decrease)
----------------------
Six Months Ended June 30: 2000 1999 Amount Percent
------------------------- ---------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Electric kWh sales:
Retail.................................. 2,883,007 2,740,133 142,874 5.2%
Sales for resale........................ 567,439 372,423 195,016 52.4 (2)
Economy sales........................... 896,415 700,947 195,468 27.9 (3)
---------- ---------- --------
Total.................................. 4,346,861 3,813,503 533,358 14.0
========== ========== ========
Operating revenues:
Retail.................................. $ 249,971 $ 227,514 (6) $ 22,457 9.9%
Sales for resale........................ 29,751 22,893 6,858 30.0 (5)
Economy sales........................... 29,787 12,312 17,475 141.9 (3)
---------- ---------- --------
Total.................................. $ 309,509 $ 262,719 $ 46,790 17.8
========== ========== ========
Increase/(Decrease)
----------------------
Twelve Months Ended June 30: 2000 1999 Amount Percent
---------------------------- ---------- ---------- --------- -------
Electric kWh sales:
Retail.................................. 6,009,042 5,922,951 86,091 1.5%
Sales for resale........................ 1,100,991 1,201,730 (100,739) (8.4) (7)
Economy sales........................... 1,693,348 1,209,240 484,108 40.0 (3)
---------- ---------- ---------
Total.................................. 8,803,381 8,333,921 469,460 5.6
========== ========== =========
Operating revenues:
Retail.................................. $ 510,962 $ 494,426 (6) $ 16,536 3.3%
Sales for resale........................ 56,299 61,420 (5,121) (8.3) (8)
Economy sales........................... 49,998 26,113 23,885 91.5 (3)
---------- ---------- ---------
Total.................................. $ 617,259 $ 581,959 $ 35,300 6.1
========== ========== =========
</TABLE>
-------------
(1) Primarily due to (i) mild weather during the three months ended June 30,
1999 and (ii) normal customer growth.
(2) Primarily due to (i) increased kWh sales to IID and (ii) sales to CFE as a
result of a new contract that is effective from June through August 2000
with no comparable sales to CFE in 1999.
(3) In order to ensure sufficient availability of purchased power during the
summer of 2000, the Company entered into a firm purchased power contract in
January 2000 that is effective through the end of the year. The increase
in economy sales is partially due to the sale of power purchased under this
contract that was not needed to serve native load and wholesale contracts
during the first half of the year.
(4) Primarily due to (i) increased fuel costs that are passed through directly
to Texas jurisdictional customers, (ii) mild weather during the three
months ended June 30, 1999 and (iii) normal customer growth.
(5) Primarily due to (i) increased fuel costs that are passed through directly
to certain wholesale customers and (ii) sales to CFE as noted above.
(6) Includes the effects of the Texas Settlement Agreement and changes in
estimated fuel cost reserves of $4,864 and $8,102 for the six and twelve
months ended June 30, 1999, respectively.
(7) Primarily due to decreased sales to CFE partially offset by increased kWh
sales to IID.
(8) Primarily due to decreased sales to CFE partially offset by increased fuel
costs that are passed through directly to certain wholesale customers.
20
<PAGE>
On May 31, 2000, CFE agreed to purchase from the Company firm capacity and
associated energy sales of up to 80 MW from June 1, 2000 through August 31,
2000, up to 40 MW during May 2001 and up to 100 MW from June 1, 2001 through
September 30, 2001.
Other operations and maintenance expense decreased $0.2 million for the
three months ended June 30, 2000 compared to the same period last year, as
follows (in thousands):
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended June 30: 2000 1999 Increase/(Decrease)
--------------------------- ------- ------- -------------------
Palo Verde................................ $12,403 $13,461 $(1,058)
Pensions and benefits..................... 3,259 4,178 (919) (1)
ESBG activity............................. 1,593 909 684
Outside services and regulatory expense... 3,468 2,937 531
Other..................................... 23,762 23,176 586
------- ------- -------
Total other operations and
maintenance expense................. $44,485 $44,661 $ (176)
======= ======= =======
</TABLE>
Other operations and maintenance expense increased $1.7 million for the six
months ended June 30, 2000 compared to the same period last year, as follows (in
thousands):
<TABLE>
<S> <C> <C> <C> <C>
Six Months Ended June 30: 2000 1999 Increase/(Decrease)
------------------------- ------- ------- ------------------
ESBG activity............................. $ 2,779 $ 1,341 $ 1,438
Outside services and regulatory expense... 6,063 4,817 1,246
Pensions and benefits..................... 7,523 9,361 (1,838) (1)
Other..................................... 70,024 69,121 903
------- ------- -------
Total other operations and
maintenance expense................. $86,389 $84,640 $ 1,749
======= ======= =======
</TABLE>
Other operations and maintenance expense decreased $2.1 million for the
twelve months ended June 30, 2000 compared to the same period last year, as
follows (in thousands):
<TABLE>
<S> <C> <C> <C> <C>
Twelve Months Ended June 30: 2000 1999 Increase/(Decrease)
---------------------------- -------- -------- ------------------
Pensions and benefits..................... $ 13,759 $ 19,512 $(5,753) (1)
Customer accounts expense................. 5,434 3,519 1,915 (2)
Outside services and regulatory expense... 12,614 10,927 1,687
ESBG activity............................. 4,444 2,967 1,477
Other..................................... 136,401 137,830 (1,429)
-------- -------- -------
Total other operations and
maintenance expense................. $172,652 $174,755 $(2,103)
======== ======== =======
</TABLE>
-------------
(1) Due to an actuarial gain resulting from a change in actuarial assumptions
due to (i) a change in Medicare credits; (ii) revised census data; and
(iii) prior experience benefit.
(2) Due to an increase in the uncollectible reserve related to a disputed
charge with a large industrial customer in 2000 and the receipt in the
prior period from a large industrial customer of an amount previously
expensed.
21
<PAGE>
Depreciation and amortization expense decreased $1.4 million, $2.4 million
and $2.5 million for the three, six and twelve months ended June 30, 2000,
respectively, compared to the same periods last year due to a change in the
estimated depreciable life of the decommissioning portion of Palo Verde.
Taxes other than income taxes did not change significantly for the three
and six months ended June 30, 2000 compared to the same periods last year. Taxes
other than income taxes decreased $2.7 million for the twelve months ended June
30, 2000 compared to the same period last year primarily due to a $3.1 million
reversal of sales tax reserves established in prior years and a decrease in
Arizona property taxes resulting from a decrease in the assessment ratio and a
decrease in tax base. These decreases were partially offset by an increase in
Texas property taxes primarily due to an increase in operating income on which
property taxes are based and franchise taxes due to refunds in 1998 with no
comparable amount in 1999.
Other income decreased $1.7 million, $5.3 million and $24.1 million for the
three, six and twelve months ended June 30, 2000, respectively, compared to the
same periods last year due to (i) decreased investment income of $0.5 million,
$2.7 million and $7.7 million, respectively, resulting from the investment of
lower levels of cash; (ii) litigation settlements of $1.0 million for the six
and twelve months ended June 30, 2000; (iii) the sale of non-utility property of
$1.0 million for the six months ended June 30, 1999 with no comparable activity
in 2000; and (iv) the accrual of the $16.5 million settlement agreement payment
to Las Cruces during the twelve months ended June 30, 2000.
Interest charges decreased $0.9 million, $2.9 million and $1.0 million for
the three, six and twelve months ended June 30, 2000, 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. These decreases were partially offset by the discontinuance of
capitalizing interest on postload nuclear fuel. The decrease for the twelve
months ended June 30, 2000, was partially offset by adjustments to postload
nuclear fuel to write-off a portion of accumulated interest capitalized prior to
1999.
Income tax expense, excluding the tax effect of extraordinary items,
increased $6.4 million, $5.8 million and $0.3 million for the three, six and
twelve months ended June 30, 2000, respectively, compared to the same periods
last year due to changes in pretax income and certain permanent differences.
Extraordinary loss on repurchases of debt of $0.5 million and $2.7 million
for the six and twelve months ended June 30, 2000, respectively, net of income
tax benefit of $0.3 million and $1.7 million, represents the payment of premiums
on debt repurchased and the recognition of unamortized issuance expenses on that
debt.
Extraordinary gain on discharge of debt of $3.3 million for the twelve
months ended June 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following discussion regarding the Company's market-risk sensitive
instruments contains forward-looking information involving risks and
uncertainties. The statements regarding potential gains and losses are only
estimates of what could occur in the future. Actual future results may differ
22
<PAGE>
materially from those estimates presented due to the characteristics of the
risks and uncertainties involved.
The Company is exposed to market risk due to changes in interest rates,
equity prices and commodity prices. See the Company's 1999 Form 10-K, Item 7A,
"Quantitative and Qualitative Disclosures About Market Risk," for a complete
discussion of the market risks faced by the Company and the Company's market
risk sensitive assets and liabilities. As of June 30, 2000, there have been no
material changes in the interest rate and equity price 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
1999 Form 10-K. However, due to rising costs of fuel and purchased power
("energy costs"), the Company is facing increased commodity price risk, as
discussed below.
Commodity Price Risk
The Company utilizes contracts of various duration for the purchase of
natural gas, uranium concentrates and coal to effectively manage its available
fuel portfolio. These agreements contain fixed-priced and variable-priced
provisions and are settled by physical delivery. The fuel contracts with
variable-pricing provisions, as well as substantially all of the Company's
purchased power requirements, are exposed to fluctuations in prices due to
unpredictable factors, such as weather, which impact supply and demand. Natural
gas and purchased power prices increased significantly during the three months
ended June 30, 2000. Furthermore, these prices are expected to remain high on
average over the next twelve months.
The Company's exposure to fuel and purchased power price risk is
substantially mitigated through the operation of the Texas Commission rules and
the Company's energy cost recovery clauses ("fuel clauses") in certain wholesale
rates. Under these rules and fuel clauses, energy costs are passed through to
customers. However, there are areas and contracts where energy costs are fixed
as part of the Company's base rates and are not subject to periodic
reconciliation or adjustment for fluctuations in such costs. The Company's
average energy costs incurred in these areas and under certain contracts
currently exceed the fixed fuel factor that was incorporated into base rates or
into certain wholesale contracts. Therefore, the Company is exposed to
commodity price risk on energy costs that are related to these sales of
electricity. If the Company's average energy costs remain at the levels
experienced during the three months ended June 30, 2000, the Company would not
be able to recover energy costs of approximately $3.3 million, net of tax, over
the next twelve months. Additionally, a hypothetical 10% increase in the
market-based energy costs incurred during the three months ended June 30, 2000
would result in an annualized after-tax increase in energy costs of
approximately $2.0 million that would not be mitigated by the Company's fuel
clauses.
23
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company hereby incorporates by reference the information set forth in
Part I of this report under Note E of Notes to Financial Statements.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of the Company was held May 4, 2000.
The total number of common shares outstanding was 54,778,810, of which
50,358,454 were represented in person or by proxy. The following directors were
elected to hold office for a three-year term expiring at the annual meeting of
shareholders of the Company to be held in 2003:
Director Votes For Votes Withheld
-------- ---------- --------------
George W. Edwards, Jr. 50,230,172 128,282
Ramiro Guzman 49,712,784 645,670
Stephen Wertheimer 50,225,672 132,782
Charles A. Yamarone 50,224,366 134,088
In addition to the individuals set forth above, the following individuals
continued as directors following the meeting: Wilson K. Cadman, James A.
Cardwell, James W. Cicconi, Patricia Z. Holland-Branch, James W. Harris, Kenneth
R. Heitz, Michael K. Parks, Eric B. Siegel, and James Haines.
Item 5. Other Matters
The Company has 320 employees (approximately 30% of its work force) who are
covered by a collective bargaining agreement with the International Brotherhood
of Electrical Workers, Local 960 ("Local 960"). Local 960's members work
primarily as linemen and power plant personnel with the Company. The collective
bargaining agreement between the Company and Local 960 expired on June 16, 2000.
On July 14, 2000, the Company and Local 960 agreed on the terms of a new
collective bargaining agreement. On July 28, 2000, Local 960's members ratified
the new agreement by a majority vote. The new agreement will be in effect
through June 2003.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: See Index to Exhibits incorporated herein by reference.
(b) Reports on Form 8-K:
None
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EL PASO ELECTRIC COMPANY
By: /s/ Gary R. Hedrick
--------------------------------------
Gary R. Hedrick
Vice President, Chief Financial
Officer and Treasurer
(Duly Authorized Officer and
Principal Financial Officer)
Dated: August 11, 2000
25
<PAGE>
EL PASO ELECTRIC COMPANY
INDEX TO EXHIBITS
Exhibit
Number Exhibit
------ -------
10.08 Form of Directors' Restricted Stock Award Agreement between the
Company and George W. Edwards, Jr. (Identical in all material
respects to Exhibit 10.02 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1999)
+10.09 Form of Directors' Restricted Stock Award Agreement between the
Company and certain directors of the Company. (Identical in all
material respects to Exhibit 10.07 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)
+ Twelve agreements, dated as of May 4, 2000, substantially identical
in all material respects to this Exhibit were entered into with
George W. Edwards, Jr.; Ramiro Guzman; James W. Harris; Kenneth R.
Heitz; James W. Cicconi; Patricia Z. Holland-Branch; Michael K.
Parks; Eric B. Siegel; Stephen Wertheimer; Charles A. Yamarone; James
A. Cardwell; and Wilson K. Cadman, directors of the Company.
