<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, 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 Identification No.)
incorporation or organization)
Kayser Center, 100 North Stanton, El Paso, Texas 79901
(Address of principal executive offices) (Zip Code)
(915) 543-5711
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES X NO
--- ---
As of November 3, 2000, there were 53,966,246 shares of the Company's no par
value common stock outstanding.
================================================================================
<PAGE>
EL PASO ELECTRIC COMPANY
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page No.
-------------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - September 30, 2000 and December 31, 1999....................... 1
Statements of Operations - Three Months, Nine Months and Twelve Months Ended
September 30, 2000 and 1999.................................................... 3
Statements of Comprehensive Operations - Three Months, Nine Months and Twelve
Months Ended September 30, 2000 and 1999....................................... 5
Statements of Cash Flows - Nine Months Ended September 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............... 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................ 25
Item 6. Exhibits and Reports on Form 8-K......................................... 25
</TABLE>
i
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EL PASO ELECTRIC COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS September 30,
(In thousands) 2000 December 31,
(Unaudited) 1999
------------------- -------------
<S> <C> <C>
Utility plant:
Electric plant in service.................................................. $1,637,793 $1,626,224
Less accumulated depreciation and amortization............................. 372,133 329,165
---------- ----------
Net plant in service..................................................... 1,265,660 1,297,059
Construction work in progress.............................................. 79,009 61,842
Nuclear fuel; includes fuel in process of $3,476 and
$8,994, respectively..................................................... 79,787 78,891
Less accumulated amortization.............................................. 43,252 39,355
---------- ----------
Net nuclear fuel......................................................... 36,535 39,536
---------- ----------
Net utility plant...................................................... 1,381,204 1,398,437
---------- ----------
Current assets:
Cash and temporary investments............................................. 20,181 37,234
Accounts receivable, principally trade, net of allowance for
doubtful accounts of $3,065 and $2,429, respectively..................... 87,040 62,036
Inventories, at cost....................................................... 25,167 25,963
Net undercollection of fuel revenues....................................... 17,077 -
Prepayments and other...................................................... 10,284 8,832
---------- ----------
Total current assets................................................... 159,749 134,065
---------- ----------
Long-term contract receivable................................................ 12,386 17,237
---------- ----------
Deferred charges and other assets:
Decommissioning trust fund................................................. 61,047 57,117
Other...................................................................... 17,435 19,035
---------- ----------
Total deferred charges and other assets................................ 78,482 76,152
---------- ----------
Total assets........................................................... $1,631,821 $1,625,891
========== ==========
See accompanying notes to financial statements.
</TABLE>
1
<PAGE>
EL PASO ELECTRIC COMPANY
BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
CAPITALIZATION AND LIABILITIES September 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, 60,333,931 and 60,200,921 shares issued,
and 274,643 and 258,788 restricted shares, respectively................... $ 60,609 $ 60,460
Capital in excess of stated value........................................... 244,087 242,702
Unearned compensation - restricted stock awards............................. (1,643) (1,149)
Retained earnings........................................................... 191,118 143,724
Accumulated other comprehensive income (net unrealized
gains on marketable securities), net of tax............................... 4,112 4,179
---------- ----------
498,283 449,916
Treasury stock, 5,980,072 and 3,199,927 shares, respectively; at cost....... (53,933) (28,658)
---------- ----------
Common stock equity....................................................... 444,350 421,258
Long-term debt.............................................................. 715,087 788,576
Financing and capital lease obligations..................................... 23,069 23,031
---------- ----------
Total capitalization.................................................. 1,182,506 1,232,865
---------- ----------
Current liabilities:
Current maturities of long-term debt and financing and
capital lease obligations................................................. 57,358 27,042
Accounts payable, principally trade......................................... 30,055 22,241
Litigation settlement payable............................................... - 16,500
Taxes accrued other than federal income taxes............................... 19,154 17,617
Interest accrued............................................................ 15,660 17,022
Net overcollection of fuel revenues......................................... - 2,640
Other....................................................................... 16,328 12,946
---------- ----------
Total current liabilities............................................. 138,555 116,008
---------- ----------
Deferred credits and other liabilities:
Decommissioning liability................................................... 126,306 120,875
Accrued postretirement benefit liability.................................... 81,937 81,176
Accrued pension liability................................................... 32,166 32,476
Accumulated deferred income taxes, net...................................... 41,019 12,503
Other....................................................................... 29,332 29,988
---------- ----------
Total deferred credits and other liabilities.......................... 310,760 277,018
---------- ----------
Commitments and contingencies
Total capitalization and liabilities.................................. $1,631,821 $1,625,891
========== ==========
See accompanying notes to financial statements.
</TABLE>
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,
-------------------------- --------------------------
2000 1999 2000 1999
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating revenues............................................. $ 211,410 $ 170,340 $ 520,919 $ 433,059
---------- ----------- ----------- -----------
Energy expenses:
Fuel......................................................... 50,006 32,516 111,680 76,850
Purchased and interchanged power............................. 27,008 5,935 46,561 10,655
---------- ----------- ----------- -----------
77,014 38,451 158,241 87,505
---------- ----------- ----------- -----------
Operating revenues net of energy expenses...................... 134,396 131,889 362,678 345,554
---------- ----------- ----------- -----------
Other operating expenses:
Other operations............................................. 34,275 30,694 101,288 94,546
Maintenance.................................................. 9,946 7,819 29,322 28,607
Depreciation and amortization................................ 21,739 22,105 65,063 67,841
Taxes other than income taxes................................ 10,692 11,481 32,683 33,650
---------- ----------- ----------- -----------
76,652 72,099 228,356 224,644
---------- ----------- ----------- -----------
Operating income............................................... 57,744 59,790 134,322 120,910
---------- ----------- ----------- -----------
Other income (deductions):
Investment income............................................ 961 1,351 2,706 5,845
Litigation settlements....................................... - - (1,000) -
Other, net................................................... (494) (235) (2,127) (279)
---------- ----------- ----------- -----------
467 1,116 (421) 5,566
---------- ----------- ----------- -----------
Income before interest charges................................. 58,211 60,906 133,901 126,476
---------- ----------- ----------- -----------
Interest charges (credits):
Interest on long-term debt................................... 16,890 17,603 50,453 55,323
Other interest............................................... 1,909 1,822 5,739 5,897
Interest capitalized......................................... (931) (1,089) (2,763) (4,428)
---------- ----------- ----------- -----------
17,868 18,336 53,429 56,792
---------- ----------- ----------- -----------
Income before income taxes..................................... 40,343 42,570 80,472 69,684
Income tax expense............................................. 14,901 16,346 31,306 26,950
---------- ----------- ----------- -----------
Income before extraordinary loss on
extinguishments of debt...................................... 25,442 26,224 49,166 42,734
Extraordinary loss on extinguishments
of debt, net of income tax benefit........................... 1,223 2,068 1,772 3,251
---------- ----------- ----------- -----------
Net income..................................................... 24,219 24,156 47,394 39,483
Preferred stock:
Dividend requirements........................................ - - - 2,616
Redemption costs............................................. - - - 9,581
---------- ----------- ----------- -----------
Net income applicable to common stock.......................... $ 24,219 $ 24,156 $ 47,394 $ 27,286
========== =========== =========== ===========
Basic earnings per common share:
Income before extraordinary loss on
extinguishments of debt................................... $ 0.468 $0.443 $0.899 $0.510
Extraordinary loss on extinguishments of debt, net of
income tax benefit........................................ 0.023 0.035 0.032 0.054
---------- ----------- ----------- -----------
Net income................................................ $ 0.445 $0.408 $0.867 $0.456
========== =========== =========== ===========
Diluted earnings per common share:
Income before extraordinary loss on
extinguishments of debt................................... $ 0.460 $0.439 $0.887 $0.507
Extraordinary loss on extinguishments of debt, net of
income tax benefit........................................ 0.022 0.035 0.032 0.054
---------- ----------- ----------- -----------
Net income................................................ $ 0.438 $0.404 $0.855 $0.453
========== =========== =========== ===========
Weighted average number of common shares
outstanding.................................................. 54,400,463 59,232,142 54,691,003 59,879,180
========== =========== =========== ===========
Weighted average number of common shares and
dilutive potential common shares outstanding................. 55,345,544 59,776,441 55,460,129 60,198,598
========== =========== =========== ===========
</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,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Operating revenues........................................................................... $ 658,329 $ 574,828
----------- -----------
Energy expenses:
Fuel...................................................................................... 139,228 102,449
Coal mine reclamation adjustment........................................................... (6,601) -
Purchased and interchanged power........................................................... 47,906 15,692
----------- -----------
180,533 118,141
----------- -----------
Operating revenues net of energy expenses.................................................... 477,796 456,687
----------- -----------
Other operating expenses:
Other operations........................................................................... 141,338 134,485
Maintenance................................................................................ 37,022 38,733
Depreciation and amortization.............................................................. 88,156 90,434
Taxes other than income taxes.............................................................. 40,532 43,791
----------- -----------
307,048 307,443
----------- -----------
Operating income............................................................................. 170,748 149,244
----------- -----------
Other income (deductions):
Investment income.......................................................................... 3,789 9,450
Litigation settlements..................................................................... (17,500) -
Settlement of bankruptcy professional fees................................................. - 109
Other, net................................................................................. 918 (494)
----------- -----------
(12,793) 9,065
----------- -----------
Income before interest charges............................................................... 157,955 158,309
----------- -----------
Interest charges (credits):
Interest on long-term debt................................................................. 71,764 75,410
Other interest............................................................................. 7,539 7,726
Interest capitalized....................................................................... (1,577) (5,957)
----------- -----------
77,726 77,179
----------- -----------
Income before income taxes................................................................... 80,229 81,130
Income tax expense........................................................................... 29,988 31,582
----------- -----------
Income before extraordinary items............................................................ 50,241 49,548
----------- -----------
Extraordinary items:
Extraordinary loss on extinguishments of debt, net of income tax benefit................... 1,857 3,251
Extraordinary gain on discharge of debt, net of income tax expense......................... - 3,343
----------- -----------
1,857 92
----------- -----------
Net income................................................................................... 48,384 49,640
Preferred stock:
Dividend requirements...................................................................... - 6,449
Redemption costs........................................................................... - 9,581
----------- -----------
Net income applicable to common stock........................................................ $ 48,384 $ 33,610
=========== ===========
Basic earnings per common share:
Income before extraordinary items.......................................................... $ 0.907 $ 0.559
Extraordinary loss on extinguishments of debt, net of income tax benefit................... 0.034 0.054
Extraordinary gain on discharge of debt, net of income tax expense......................... - 0.056
----------- -----------
Net income.............................................................................. $ 0.873 $ 0.561
=========== ===========
Diluted earnings per common share:
Income before extraordinary items.......................................................... $ 0.895 $ 0.556
Extraordinary loss on extinguishments of debt, net of income tax benefit................... 0.033 0.054
Extraordinary gain on discharge of debt, net of income tax expense......................... - 0.055
----------- -----------
Net income.............................................................................. $ 0.862 $ 0.557
=========== ===========
Weighted average number of common shares outstanding......................................... 55,412,512 59,952,191
=========== ===========
Weighted average number of common shares and
dilutive potential common shares outstanding............................................... 56,131,974 60,321,395
=========== ===========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
EL PASO ELECTRIC COMPANY
STATEMENTS OF COMPREHENSIVE OPERATIONS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Nine Months Twelve Months
Ended Ended Ended
September 30, September 30, September 30,
------------------ --------------------- -------------------------
2000 1999 2000 1999 2000 1999
------- ------- ------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net income................................. $24,219 $24,156 $47,394 $ 39,483 $ 48,384 $ 49,640
Other comprehensive income (loss):
Net unrealized gain (loss) on marketable
securities, less applicable income tax
benefit (expense) of $91, $725, $36,
$(302), $(1,320) and $(1,599),
respectively............................ (169) (1,345) (67) 561 2,450 2,970
------- ------- ------- ----------- ----------- -----------
Comprehensive income....................... 24,050 22,811 47,327 40,044 50,834 52,610
Preferred stock:
Dividend requirements..................... - - - 2,616 - 6,449
Redemption costs.......................... - - - 9,581 - 9,581
------- ------- ------- ----------- ----------- -----------
Comprehensive income applicable
to common stock........................... $24,050 $22,811 $47,327 $ 27,847 $ 50,834 $ 36,580
======= ======= ======= =========== =========== ===========
See accompanying notes to financial statements.
</TABLE>
5
<PAGE>
EL PASO ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------------
2000 1999
----------- ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income..................................................................... $ 47,394 $ 39,483
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................................ 65,063 67,841
Amortization of nuclear fuel................................................. 13,152 15,708
Deferred income taxes, net................................................... 29,679 24,976
Extraordinary loss on extinguishments of debt, net of
income tax benefit........................................................ 1,772 3,251
Other operating activities................................................... 4,116 3,942
Change in:
Accounts receivable.......................................................... (25,004) (3,653)
Inventories.................................................................. 796 800
Prepayments and other........................................................ (1,452) 6,516
Long-term contract receivable................................................ 4,851 4,386
Accounts payable............................................................. 7,814 (7,797)
Litigation settlement payable................................................ (16,500) -
Taxes accrued other than federal income taxes................................ 1,537 2,414
Interest accrued............................................................. (1,362) (2,852)
Net under/overcollection of fuel revenues.................................... (19,717) 165
Other current liabilities.................................................... 3,382 9,842
Deferred charges and credits................................................. 5,290 2,870
----------- ------------
Net cash provided by operating activities.................................. 120,811 167,892
----------- ------------
Cash Flows From Investing Activities:
Cash additions to utility property, plant and equipment........................ (49,747) (39,953)
Cash additions to nuclear fuel................................................. (9,685) (8,475)
Interest capitalized:
Utility property, plant and equipment........................................ (2,296) (1,968)
Nuclear fuel................................................................. (467) (2,460)
Investment in decommissioning trust fund....................................... (4,034) (4,308)
Other investing activities..................................................... 64 (998)
----------- ------------
Net cash used for investing activities..................................... (66,165) (58,162)
----------- ------------
Cash Flows From Financing Activities:
Treasury stock................................................................. (25,275) (14,747)
Repurchases of and payments on long-term debt.................................. (40,628) (117,533)
Nuclear fuel financing obligations:
Proceeds..................................................................... 12,229 10,934
Payments..................................................................... (14,758) (15,494)
Redemption of preferred stock.................................................. - (148,937)
Preferred stock dividend payment............................................... - (1,328)
Payments on capital lease obligations.......................................... (1,688) (1,573)
Other financing activities..................................................... (1,579) (138)
----------- ------------
Net cash used for financing activities..................................... (71,699) (288,816)
----------- ------------
Net decrease in cash and temporary investments................................... (17,053) (179,086)
Cash and temporary investments at beginning of period............................ 37,234 229,150
----------- ------------
Cash and temporary investments at end of period.................................. $ 20,181 $ 50,064
=========== ============
See accompanying notes to financial statements.
</TABLE>
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 to 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
September 30, 2000 and December 31, 1999; the results of operations for the
three, nine and twelve months ended September 30, 2000 and 1999; and cash flows
for the nine months ended September 30, 2000 and 1999. The results of
operations for the three, nine and twelve months ended September 30, 2000 and
the cash flows for the nine months ended September 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 resulted in a decrease in
depreciation expense and an increase in net income of $0.8 million, $2.3 million
and $2.3 million, net of tax, or $0.01, $0.04 and $0.04 diluted earnings per
common share for the three, nine and twelve months ended September 30, 2000.
Supplemental Cash Flow Disclosures (In thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Cash paid for:
Interest on long-term debt (1)........................ $48,945 $55,745
Other interest........................................ 146 577
Income taxes, net..................................... 1,200 1,332
Non-cash investing and financing activities:
Grants of restricted shares of
common stock...................................... 1,725 1,705
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)
During the third quarter of 2000, the Company, through an agent, remarketed
its $193.1 million pollution control bonds, electing to establish fixed interest
rates over two and five year periods and not to renew the letters of credit that
provided credit support for the pollution control bonds. This in turn permitted
the Company to cancel $198.0 million of collateral first mortgage bonds that
secured the Company's reimbursement obligation to the providers of the letters
of credit. The interest rate for $122.7 million of the pollution control bonds
was fixed for five years at 6.375%, while the interest rate for the remaining
$70.4 million was fixed for two years at 6.15%.
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,
------------------------------------------------------------------------
2000 1999
----------------------------------- -----------------------------------
Per Per
Common Common
Income Shares Share Income Shares Share
------------- ---------- ------- ------------- ---------- -------
(In thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per common share:
Income before extraordinary
item............................... $25,442 54,400,463 $0.468 $26,224 59,232,142 $0.443
======= =======
Effect of dilutive securities:
Unvested restricted stock........... - 70,209 - 45,471
Stock options....................... - 874,872 - 498,828
------------- ---------- ------------- ----------
Diluted earnings per common share:
Income before extraordinary
item............................... $25,442 55,345,544 $0.460 $26,224 59,776,441 $0.439
============= ========== ======= ============= ========== =======
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 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..... $49,166 $42,734
Less:
Preferred stock:
Dividend requirements............ - 2,616
Redemption costs................. - 9,581
------------- -------------
Basic earnings per common share:
Income before extraordinary
item applicable to common
stock.............................. 49,166 54,691,003 $0.899 30,537 59,879,180 $0.510
======= =======
Effect of dilutive securities:
Unvested restricted stock........... - 48,193 - 24,886
Stock options....................... - 720,933 - 294,532
------------- ---------- ------------- ----------
Diluted earnings per common share:
Income before extraordinary
item applicable to common
stock.............................. $49,166 55,460,129 $0.887 $30,537 60,198,598 $0.507
============= ========== ======= ============= ========== =======
</TABLE>
8
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
Twelve Months Ended September 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.... $50,241 $49,548
Less:
Preferred stock:
Dividend requirements............ - 6,449
Redemption costs................. - 9,581
------------- -------------
Basic earnings per common share:
Income before extraordinary
items applicable to common
stock.............................. 50,241 55,412,512 $0.907 33,518 59,952,191 $0.559
======= =======
Effect of dilutive securities:
Unvested restricted stock........... - 50,210 - 28,523
Stock options....................... - 669,252 - 340,681
------------- ---------- ------------- ----------
Diluted earnings per common share:
Income before extraordinary
items applicable to common
stock.............................. $50,241 56,131,974 $0.895 $33,518 60,321,395 $0.556
============= ========== ======= ============= ========== =======
</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 fourth quarter 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.
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 September 18, 2000, the Company, the Texas Commission
staff and other interested parties filed a stipulation with the Texas Commission
resolving all issues related to the Company's corporate restructuring. The
Company anticipates the Texas Commission will enter its order approving this
stipulation.
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 as well as seek recovery of past undercollections of fuel revenues.
The recent substantial increases in the price of natural gas and purchased power
resulted in average energy costs that exceeded the Company's fuel factor during
the first eight months of this year, resulting in a significant underrecovery of
the Company's actual energy expenses. On August 1, 2000, the Company filed a
petition with the Texas Commission requesting an increase in its fuel factor in
Texas. The Company was granted interim approval to implement an increased fuel
factor beginning with the first billing cycle in September 2000. The Texas
Commission granted final approval of the increased fuel factor on November 1,
2000. If the price of natural gas and purchased power continues to escalate, the
Company may seek an additional increase to its fuel factor in January 2001. The
Company also intends to seek recovery of the cumulative underrecovered energy
expense (currently approximately $17.0 million) by filing for an interim
surcharge in January 2001. Such a surcharge, like the rest of the Company's
energy expenses, would be subject to final review by the Texas Commission in the
Company's next applicable fuel reconciliation proceeding. An interim surcharge,
if approved, would likely be spread over a twelve to eighteen-month period
beginning in the second quarter of 2001.
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 operate in a competitive market, from its transmission
and distribution business, which will remain regulated, by the beginning of
customer choice, currently scheduled for January 1, 2002. The Company has filed
its proposed corporate restructuring with the New Mexico Commission under the
New Mexico Restructuring Law. The Company has proposed to separate its current
operations into a power generation subsidiary, a transmission and distribution
subsidiary, an energy services subsidiary, and an administrative and corporate
support services subsidiary, all owned and controlled by a common holding
company. On August 17 and 18, 2000, the New Mexico Commission's administrative
law judge held hearings on the Company's proposed corporate restructuring. The
Company, the New Mexico Commission staff, and the New Mexico Attorney General
reached an agreement in principle on the
10
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Company's corporate restructuring following these hearings. The parties
submitted joint proposed findings of fact and conclusions of law to the
administrative law judge. The Company anticipates that the administrative law
judge will submit a recommended decision to the New Mexico Commission that is
consistent with the parties' stipulation.
While the New Mexico Commission staff and the New Mexico Attorney General
agree upon the terms of the Company's proposed corporate restructuring, they are
seeking to delay the corporate separation of all investor owned utilities in New
Mexico in light of the substantial increases in electricity costs in California
following deregulation. On August 17, 2000, the New Mexico Commission staff, the
New Mexico Attorney General, and other interested parties requested that the New
Mexico Commission delay corporate separation until the New Mexico Legislature
has had the opportunity to review the requirements of the New Mexico
Restructuring Law and possibly further delay the start of retail competition.
While the New Mexico Commission has held working sessions to consider the
proposed delay of corporate separation, it has not issued any decision on
whether to implement such a delay. The Company does not believe it is likely
that the New Mexico Commission will approve the Company's proposed corporate
restructuring prior to the end of the New Mexico legislative session in March
2001. The Company cannot predict whether the New Mexico Legislature will proceed
to implement deregulation beginning January 1, 2002, or delay or otherwise alter
the current plan for deregulation in New Mexico.
Due to the uncertainty of the timing of deregulation in New Mexico, on
October 12, 2000, the Company filed with the New Mexico Commission an
application to form a wholly owned energy services subsidiary (the "ESCO"). The
Company anticipates it will receive a final decision from the New Mexico
Commission on the formation of the ESCO by December 31, 2000. The ESCO is being
formed to provide energy services to customers in Texas and New Mexico as well
as pursue business opportunities in Mexico. The Company anticipates the ESCO
will begin operations in January 2001.
Fuel. The New Mexico Settlement Agreement entered into in October 1998
incorporated the then existing fuel factor into base rates and accordingly, the
Company must absorb any increases or decreases in energy expenses related to its
New Mexico retail customers until the expiration of the Company's New Mexico
Settlement Agreement in April 2001, at which point the Company could seek to
increase rates to prospectively recover higher energy costs.
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
October 4, 2000, the FERC issued its Order Authorizing Disposition of
Jurisdictional Facilities allowing the transfer of assets necessary to implement
corporate restructuring under the Company's Transition Plan - Phase I. On
October 13, 2000, the FERC issued its order authorizing the securities
transactions related to the Company's corporate restructuring proposed in its
Transition Plan - Phase I. On July 6, 2000, the Company filed its Application
for
11
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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 NRC approvals for its corporate
restructuring before January 1, 2001.
Fuel. Under FERC regulations, the Company's fuel factor is adjusted monthly
for almost all FERC jurisdictional customers. Accordingly, any increases or
decreases in energy expenses immediately flow through to such customers.
C. Common Stock Repurchase Program
The Company's Board of Directors has approved a stock repurchase program
allowing the Company to purchase up to twelve million of its outstanding shares
of common stock. As of September 30, 2000, the Company had repurchased
approximately 5.9 million shares of common stock under this program for
approximately $53.9 million, including commissions. The Company will continue
to 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.
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.
12
<PAGE>
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
E. Litigation
Four Corners
In 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"). 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 late 1995, the Navajo Nation and the Four Corners participants
agreed to stay the proceedings indefinitely so the parties may attempt to
resolve the dispute without litigation. This matter remains inactive and the
Company is unable to predict the outcome of this case.
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 September 30, 2000, the related condensed statements
of operations and comprehensive operations for the three months, nine months and
twelve months ended September 30, 2000 and 1999, and the related condensed
statements of cash flows for the nine months ended September 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
of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, 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.
/s/KPMG LLP
El Paso, Texas
October 23, 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 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 industry deregulation legislation requiring the Company to
separate its transmission and distribution functions, which will remain
regulated, from its power generation and energy services businesses, which will
operate in a competitive market 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
15
<PAGE>
within a single entity, there is substantial 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 competition in the power generation and energy services markets are
particularly important to the Company because its current rates are
significantly higher than the national and regional averages. There can be no
assurance that the deregulation of the electric utility industry 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 waste,
including spent nuclear fuel; and (vi) compliance with the various requirements
and regulations governing commercial nuclear generating stations. At the same
time, the Company's retail base rates are effectively capped through rate
freezes ending in August 2005 for Texas and April 2001 for New Mexico.
Additionally, upon initiation of competition, there will be competitive pressure
on the Company's power generation rates which could reduce its profitability.
The Company also 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 inflation, changes in tax laws or
regulatory requirements, or other causes.
During the second and third quarters of 2000, the Company was unable to pass
through to certain customers increased energy expenses resulting from higher
natural gas prices and increased power purchases needed because of an
unscheduled generating unit outage. The Company is unable to increase rates in
the Company's New Mexico service area and under certain wholesale contracts to
compensate for these increases in energy expenses. From April 1, 2000 through
September 30, 2000, the Company incurred increased energy expenses which cannot
be recovered from New Mexico and certain wholesale customers of $5.2 million,
net of tax, compared to the same period last year. The primary cause of this
increase was higher energy prices. See Item 3, "Quantitative and Qualitative
Disclosures About Market Risk."
16
<PAGE>
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 purchased 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
capacity, mitigated the benefits that the Company would have otherwise realized
from its off-system wholesale power sales. Unit 3 was partially repaired and
available for service in September 2000. In October 2000, Unit 3 was taken out
of service to complete the repairs. The Company believes Unit 3 will be fully
repaired and available for service in December 2000. The Company believes the
cost of the repairs will ultimately be paid by the vendor or through the
Company's insurance coverage.
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 inability to pass through
increased energy expenses to certain customers and the timing of recovery of
increased fuel expenses in Texas reduced the Company's cash flows in 2000, the
Company believes that cash flows from operations will 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 September 30, 2000, the Company had approximately $20.2 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 September 30, 2000, approximately $45.8
million had been drawn for nuclear fuel purchases. No amounts are currently
outstanding 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 energy expenses 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 November 3, 2000, the
Company repurchased approximately $353.7 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 38% at September 30, 2000. In addition, the
Company's bonds are now rated investment grade by all three major credit rating
agencies.
17
<PAGE>
The Company continues to believe that the orderly reduction of debt with a
goal of achieving a capital structure that is more typical in the electric
utility industry 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.
The Company's Board of Directors has approved a stock repurchase program
allowing the Company to purchase up to twelve million of its outstanding shares
of common stock. As of November 3, 2000, the Company had repurchased
approximately 6.6 million shares of common stock under this program for
approximately $61.9 million, including commissions. The Company will continue
to 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 September 30............... $25,442 $26,224 $0.460 $0.439
Nine Months Ended September 30................ 49,166 30,537 0.887 0.507
Twelve Months Ended September 30.............. 50,241 33,518 0.895 0.556
</TABLE>
Results of operations for the twelve months ended September 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 nine and twelve months ended
September 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.
Operating revenues net of energy expenses increased $2.5 million for the
three months ended September 30, 2000 compared to the same period last year.
This increase was primarily due to increased kWh sales and increased margins on
economy sales partially offset by increased energy expenses not recovered in the
Company's New Mexico service area and from certain wholesale customers.
Operating revenues net of energy expenses increased $17.1 million and $21.1
million for the
18
<PAGE>
nine and twelve months ended September 30, 2000, respectively, compared to the
same periods last year, as follows (in thousands):
<TABLE>
Nine Months Ended September 30: 2000 1999 Increase/(Decrease)
------------------------------------------ -------- -------- --------------------
<S> <C> <C> <C>
Operating revenues net of energy expenses
before the effects of the Texas
Settlement Agreement and a change in
estimated fuel cost reserves............ $362,678 $340,690 $21,988
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.................. $362,678 $345,554 $17,124
======== ======== =======
</TABLE>
<TABLE>
Twelve Months Ended September 30: 2000 1999 Increase/(Decrease)
------------------------------------------ -------- -------- --------------------
<S> <C> <C> <C>
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............. $471,195 $448,585 $22,610
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.................. $477,796 $456,687 $21,109
======== ======== =======
</TABLE>
Excluding the effects of the unusual or infrequent items shown above, the
nine and twelve month increases in operating revenues net of energy expenses of
$22.0 million and $22.6 million, respectively, were primarily due to increased
kWh sales and increased economy sales at higher margins. These increases were
partially offset by increased energy expenses not recovered in the Company's New
Mexico service area and from certain wholesale customers.
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 nine and twelve month periods ended September 30, 1999. 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.
Comparisons of kWh sales and operating revenues are shown below (in thousands):
<TABLE>
<CAPTION>
Increase/(Decrease)
---------------------------
Three Months Ended September 30: 2000 1999 Amount Percent
------------------------------------------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Electric kWh sales:
Retail.................................. 1,833,694 1,774,724 58,970 3.3%
Sales for resale........................ 398,239 289,318 108,921 37.6 (1)
Economy sales........................... 399,415 386,899 12,516 3.2
---------- ---------- --------
Total.................................. 2,631,348 2,450,941 180,407 7.4
========== ========== ========
Operating revenues:
Retail.................................. $ 168,567 $ 146,132 $ 22,435 15.4% (2)
Sales for resale........................ 23,185 13,713 9,472 69.1 (3)
Economy sales........................... 19,658 10,495 9,163 87.3 (4)
---------- ---------- --------
Total.................................. $ 211,410 $ 170,340 $ 41,070 24.1
========== ========== ========
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Increase/(Decrease)
---------------------------
Nine Months Ended September 30: 2000 1999 Amount Percent
------------------------------------------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Electric kWh sales:
Retail.................................. 4,716,701 4,514,857 201,844 4.5%
Sales for resale........................ 965,678 661,741 303,937 45.9 (1)
Economy sales........................... 1,295,830 1,087,846 207,984 19.1 (4)
---------- ---------- --------
Total.................................. 6,978,209 6,264,444 713,765 11.4
========== ========== ========
Operating revenues:
Retail.................................. $ 418,538 $ 373,646 (5) $ 44,892 12.0% (2)
Sales for resale........................ 52,936 36,606 16,330 44.6 (3)
Economy sales........................... 49,445 22,807 26,638 116.8 (4)
---------- ---------- --------
Total.................................. $ 520,919 $ 433,059 $ 87,860 20.3
========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
Increase/(Decrease)
---------------------------
Twelve Months Ended September 30: 2000 1999 Amount Percent
------------------------------------------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Electric kWh sales:
Retail.................................. 6,068,012 5,904,768 163,244 2.8%
Sales for resale........................ 1,209,912 982,730 227,182 23.1 (6)
Economy sales........................... 1,705,864 1,411,632 294,232 20.8 (4)
---------- ---------- --------
Total.................................. 8,983,788 8,299,130 684,658 8.2
========== ========== ========
Operating revenues:
Retail.................................. $ 533,397 $ 489,417 (5) $ 43,980 9.0% (2)
Sales for resale........................ 65,771 53,786 11,985 22.3 (7)
Economy sales........................... 59,161 31,625 27,536 87.1 (4)
---------- ---------- --------
Total.................................. $ 658,329 $ 574,828 $ 83,501 14.5
========== ========== ========
-------------
</TABLE>
(1) Primarily due to (i) sales to CFE as a result of a contract that was
effective from June through August 2000 with no comparable sales to CFE in
1999 and (ii) increased kWh sales to IID.
(2) Primarily due to (i) increased energy expenses that are passed through
directly to Texas jurisdictional customers and (ii) increased kWh sales to
retail customers.
(3) Primarily due to (i) sales to CFE as noted above and (ii) increased energy
expenses that are passed through directly to certain wholesale customers.
(4) 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 kWh sales is primarily 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. The increase in economy sales
revenue was primarily due to (i) increased fuel revenues as a result of
increased fuel costs and (ii) increased margins.
(5) Includes the effects of the Texas Settlement Agreement and a change in
estimated fuel cost reserves of $4,864 and $8,102 for the nine and twelve
months ended September 30, 1999, respectively.
(6) Primarily due to increased kWh sales to IID.
(7) Primarily due to (i) increased energy expenses that are passed through
directly to certain wholesale customers and (ii) sales to CFE at higher
rates than in the fourth quarter of 1998.
20
<PAGE>
Other operations and maintenance expense increased $5.7 million for the three
months ended September 30, 2000 compared to the same period last year, as
follows (in thousands):
<TABLE>
Three Months Ended September 30: 2000 1999 Increase/(Decrease)
------------------------------------------ ------- ------- --------------------
<S> <C> <C> <C>
Pensions and benefits..................... $ 3,839 $ 1,404 $2,435 (1)
Maintenance at Company-owned
generating plants....................... 3,027 1,551 1,476 (2)
ESBG activity............................. 1,628 715 913
Customer accounts......................... 1,768 1,035 733 (3)
Other..................................... 33,959 33,808 151
------- ------- ------
Total other operations and
maintenance expense................. $44,221 $38,513 $5,708
======= ======= ======
</TABLE>
Other operations and maintenance expense increased $7.5 million for the nine
months ended September 30, 2000 compared to the same period last year, as
follows (in thousands):
<TABLE>
Nine Months Ended September 30: 2000 1999 Increase/(Decrease)
------------------------------------------ -------- -------- --------------------
<S> <C> <C> <C>
ESBG activity............................. $ 4,406 $ 2,055 $2,351 (4)
Payroll................................... 32,790 31,322 1,468 (5)
Customer accounts......................... 4,117 2,965 1,152 (3)
Maintenance of general plant.............. 2,733 1,705 1,028 (6)
Regulatory expense........................ 1,727 1,011 716
Union negotiations........................ 1,264 667 597
Other..................................... 83,573 83,428 145
-------- -------- ------
Total other operations and
maintenance expense................. $130,610 $123,153 $7,457
======== ======== ======
</TABLE>
Other operations and maintenance expense increased $5.1 million for the
twelve months ended September 30, 2000 compared to the same period last year, as
follows (in thousands):
<TABLE>
Twelve Months Ended September 30: 2000 1999 Increase/(Decrease)
------------------------------------------ -------- -------- --------------------
<S> <C> <C> <C>
ESBG activity............................. $ 5,357 $ 2,542 $ 2,815 (4)
Customer accounts......................... 6,166 4,100 2,066 (3)
Corporate restructuring................... 3,647 2,138 1,509
Maintenance of general plant.............. 3,576 2,213 1,363 (6)
Payroll................................... 47,643 46,712 931
Union negotiations........................ 1,559 878 681
Advertising............................... 728 83 645
Palo Verde................................ 48,604 50,104 (1,500)
Maintenance at Company-owned
generating plants....................... 8,181 12,081 (3,900) (7)
Other..................................... 52,899 52,367 532
-------- -------- -------
Total other operations and
maintenance expense................. $178,360 $173,218 $ 5,142
======== ======== =======
</TABLE>
-------------
(1) Primarily due to a cumulative year-to-date adjustment that reduced other
postretirement benefits as a result of a revised actuarial valuation
recorded in the third quarter of 1999 with no corresponding activity in
2000.
21
<PAGE>
(2) Primarily unscheduled maintenance due to a mechanical problem with a
turbine shaft.
(3) Primarily due to increased reserve for uncollectible accounts receivable
resulting primarily from a moratorium on residential service disconnects in
the Company's Texas jurisdiction during the third quarter of 2000.
(4) Primarily due to increased project costs related to new customers.
(5) Primarily due to increased overtime incurred on the distribution system due
to weather related repairs and increased bonus accrual.
(6) Primarily due to increased expenses for (i) a one-time environmental
assessment at Company-owned generating plants and (ii) new maintenance
agreements on computer equipment.
(7) Primarily due to scheduled major overhauls completed in 1999 with no
corresponding activity in 2000 partially offset by unscheduled maintenance
due to a mechanical problem with a turbine shaft.
Depreciation and amortization expense decreased $0.4 million, $2.8 million
and $2.3 million for the three, nine and twelve months ended September 30, 2000,
respectively, compared to the same periods last year primarily due to a change
in the estimated depreciable life of the plant investment related to the
decommissioning of Palo Verde. The three month ended decrease was partially
offset by a depreciation expense adjustment recorded in September 1999 related
to retirements at Palo Verde Unit 2.
Taxes other than income taxes decreased $0.8 million, $1.0 million and $3.3
million for the three, nine and twelve months ended September 30, 2000,
respectively, compared to the same periods last year primarily due to (i) a $0.4
million franchise tax refund and (ii) a decrease in Arizona property taxes
resulting from a decrease in the assessment ratio and a decrease in tax base.
The decrease for the twelve months ended September 30, 2000 was primarily due to
a $3.1 million reversal of sales tax reserves established in prior years. These
decreases were partially offset by an increase in Texas property taxes primarily
due to an increase in operating income on which the property taxes are based.
Other income (deductions) decreased $0.6 million, $6.0 million and $21.9
million for the three, nine and twelve months ended September 30, 2000,
respectively, compared to the same periods last year due to (i) decreased
investment income of $0.4 million, $3.1 million and $5.7 million, respectively,
resulting from the investment of lower levels of cash; (ii) litigation
settlements of $1.0 million for the nine and twelve months ended September 30,
2000; (iii) the gain on sale of non-utility property of $1.0 million for the
nine months ended September 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 September 30, 2000. The decrease for the twelve-
month period was partially offset by an adjustment of $1.7 million in December
1999 to the cash value of Company-owned life insurance policies, which was not
previously recognized due to the uncertainty of recoverability from the insurer.
Interest charges decreased $0.5 million and $3.4 million for the three and
nine months ended September 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 of the Company's first mortgage bonds. These decreases were
partially offset by the discontinuance of capitalizing interest on postload
nuclear fuel. Interest charges increased $0.5 million for the twelve months
ended September 30, 2000, compared to the same period last year, primarily due
to adjustments to postload nuclear fuel to write-off a portion of accumulated
interest capitalized prior to 1999. This increase was partially offset by a
reduction in outstanding debt as a result of open market purchases and
redemptions of the Company's first mortgage bonds.
22
<PAGE>
Income tax expense, excluding the tax effect of extraordinary items,
decreased $1.4 million and $1.6 million for the three and twelve months ended
September 30, 2000, respectively, and increased $4.4 million for the nine months
ended September 30, 2000, compared to the same periods last year due to changes
in pretax income and certain permanent differences.
Extraordinary loss on extinguishments of debt of $1.2 million, $1.8 million
and $1.9 million for the three, nine and twelve months ended September 30, 2000,
respectively, net of income tax benefit of $0.8 million, $1.1 million and $1.2
million, represents the payment of premiums on debt extinguishments 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 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.
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133, as amended, is effective for
fiscal years beginning after June 15, 2000. The Company will adopt SFAS 133
as of January 1, 2001. The Company has not yet quantified all effects of
adopting SFAS 133. The Company has completed a preliminary review of the
Company's significant commodity contracts, including fuel supply, purchased
power and power sales contracts. Based on the Company's preliminary review of
these contracts, the Company believes that adoption of SFAS 133 will not have a
material impact on the Company's financial position or results of operations.
However, changing market conditions, effects of financial instruments and other
contracts not yet reviewed, new transactions, and interpretations from the
FASB's Derivative Implementation Group could change the Company's current
assessment. The implementation of the requirements of SFAS 133, as amended,
could increase the volatility of the Company's future earnings.
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
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 September 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-
23
<PAGE>
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, including weather, which impact supply and
demand. Natural gas and purchased power prices have increased significantly
since May 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, in the Company's New Mexico service area and under certain
wholesale contracts, energy costs are included in 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 for these customers
currently exceed the energy costs that were incorporated into the applicable
rates. Therefore, the Company is exposed to commodity price risk on energy costs
(primarily comprised of natural gas and purchased power) that are related to
these sales of electricity. If the Company's average energy costs remain at
levels experienced for the latest six months and sales volume does not change,
the Company would incur increased energy expenses which cannot be recovered from
New Mexico and certain wholesale customers over the next twelve months of
approximately $3.6 million, net of tax, as compared to actual energy expenses
incurred for the twelve-month period ended September 30, 2000. Additionally, a
hypothetical 10% increase in the market-based natural gas and purchased power
costs incurred during the second and third quarters of 2000 would result in an
additional annualized after-tax increase in natural gas and purchased power
costs of approximately $1.5 million and $0.9 million, respectively, that would
not be recoverable.
24
<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 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
25
<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
Executive Vice President, Chief Financial
and Administrative Officer
(Duly Authorized Officer and
Principal Financial Officer)
Dated: November 14, 2000
26
<PAGE>
EL PASO ELECTRIC COMPANY
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
--------------- ---------------------------------------------------------------
<S> <C>
10.10 Stock Option Agreement, dated as of July 1, 2000, 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)
+10.11 Form of Directors' Restricted Stock Award Agreement between the
Company and certain directors of the Company. (Identical in all
material respects to Exhibit 10.09 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000)
11 Statement re Computation of Per Share Earnings
15 Letter re Unaudited Interim Financial Information
27 Financial Data Schedule (EDGAR filing only)
+ Four agreements, dated as of July 1, 2000, substantially
identical in all material respects to this Exhibit were entered
into with Ramiro Guzman; Kenneth R. Heitz; Patricia Z. Holland-
Branch; and Charles A. Yamarone, directors of the Company.
</TABLE>
27
