Item 1. Business
General
El Paso Electric Company is a public utility engaged in the generation, transmission and distribution of electricity in an area of approximately 10,000 square miles in west Texas and southern New Mexico. The Company also serves wholesale customers in Texas, New Mexico, California and Mexico. The Company owns or has significant ownership interests in five electrical generating facilities providing it with a total capacity of approximately 1,500 MW. For the year ended December 31, 1999, the Company's energy sources consisted of approximately 55% nuclear fuel, 33% natural gas, 8% coal and 4% purchased power.
The Company serves approximately 298,000 residential, commercial, industrial and wholesale customers. The Company distributes electricity to retail customers principally in El Paso, Texas and Las Cruces, New Mexico (representing approximately 58% and 8%, respectively, of the Company's revenues for the year ended December 31, 1999). In addition, the Company sells electricity to wholesale customers, including Texas-New Mexico Power Company and the Imperial Irrigation District. Through 1998, the Company also made wholesale sales to the Comision Federal de Electricidad de Mexico. Principal industrial and other large customers of the Company include steel production, copper and oil refining, garment manufacturing concerns and United States military installations, including the United States Army Air Defense Center at Fort Bliss in Texas and White Sands Missile Range and Holloman Air Force Base in New Mexico.
The Company's Energy Services Business Group began developing energy efficient products and services in 1997. The ESBG offers customers value-added products and services that give them greater value for the kWh purchased from the Company.
The Company's principal offices are located at Kayser Center, 100 North Stanton, El Paso, Texas 79901 (telephone 915-543-5711). The Company was incorporated in Texas in 1901. As of February 25, 2000, the Company had approximately 1,000 employees, 30% of whom are covered by a collective bargaining agreement. The collective bargaining agreement between the Company and the International Brotherhood of Electrical Workers Local 960 ("Local 960") expires on June 15, 2000. Local 960 represents approximately 300 of the Company's employees working primarily in the power plants, substations and line crews. The parties will exchange proposals as early as April 15, 2000 and will begin contract negotiations in May 2000. The Company cannot predict the outcome of these negotiations.
Facilities
The Company's net installed generating capacity of approximately 1,500 MW consists of approximately 600 MW from Palo Verde Units 1, 2 and 3, 482 MW from its Newman Power Station, 246 MW from its Rio Grande Power Station, 104 MW from Four Corners Units 4 and 5, and 68 MW from its Copper Power Station.
Palo Verde Station
The Company owns a 15.8% interest in each of the three nuclear generating units and Common Facilities at Palo Verde, located west of Phoenix, Arizona. The Palo Verde Participants include the Company and six other utilities: APS, Southern California Edison Company, PNM, Southern California Public Power Authority, Salt River Project Agricultural Improvement and Power District and the Los Angeles Department of Water and Power. APS serves as operating agent for Palo Verde.
The NRC has granted facility operating licenses and full power operating licenses for Palo Verde Units 1, 2 and 3, which expire in 2024, 2025 and 2027, respectively. In addition, the Company is separately licensed by the NRC to own its proportionate share of Palo Verde.
Pursuant to the ANPP Participation Agreement, the Palo Verde Participants share costs and generating entitlements in the same proportion as their percentage interests in the generating units, and each participant is required to fund its proportionate share of fuel, other operations, maintenance and capital costs. The Company's total monthly share of these costs was approximately $6.9 million in 1999. The ANPP Participation Agreement provides that if a participant fails to meet its payment obligations, each non-defaulting participant shall pay its proportionate share of the payments owed by the defaulting participant.
Decommissioning. Pursuant to the ANPP Participation Agreement and federal law, the Company must fund its share of the estimated costs to decommission Palo Verde Units 1, 2 and 3, including the Common Facilities, over their estimated useful lives of 40 years (to 2024, 2025 and 2027, respectively). The Company's funding requirements are determined periodically based upon engineering cost estimates performed by outside engineers retained by APS.
In December 1998, the Palo Verde Participants approved an updated decommissioning study. The 1998 study determined that the Company will have to fund approximately $280.5 million (stated in 1998 dollars) to cover its share of decommissioning costs. Cost estimates for decommissioning have increased with each study. The previous cost estimate from a 1995 study determined that the Company would have to fund approximately $229 million (stated in 1995 dollars). The 1998 estimate reflects a 22% increase from the 1995 estimate primarily due to increases in estimated costs for spent fuel storage after operations have ceased. See "Spent Fuel Storage" below.
Although the 1998 study was based on the latest available information, there can be no assurance that decommissioning cost estimates will not continue to increase in the future or that regulatory requirements will not change. In addition, until a new low-level radioactive waste repository opens and operates for a number of years, estimates of the cost to dispose of low-level radioactive waste are subject to significant uncertainty. The decommissioning study is updated every three years and a new study is expected to be completed in 2001. See "Disposal of Low-Level Radioactive Waste" below.
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 decommissioning cost estimates during the Freeze Period. See "Regulation - Texas Regulatory Matters - Deregulation" for further discussion.
Prior to the start of competition in New Mexico, the Company will continue to collect 100% of its decommissioning cost estimates under the New Mexico Settlement Agreement. Under the New Mexico Restructuring Law, however, the New Mexico Commission could effectively reduce the Company's recovery of its decommissioning costs. See " Regulation - New Mexico Regulatory Matters - Deregulation" for further discussion.
Steam Generators. Palo Verde has experienced degradation in the steam generator tubes of each unit. APS has undertaken an ongoing investigation and analysis and has performed corrective actions designed to mitigate further degradation. Corrective actions have included changes in operational procedures designed to lower the operating temperatures of the units, chemical cleaning and the implementation of other technical improvements. APS has stated that it believes its remedial actions have slowed the rate of tube degradation.
The projected service lives of the units' steam generators are reassessed by APS periodically in conjunction with inspections made during scheduled outages of the Palo Verde units. In 1997, the Palo Verde Participants unanimously approved the purchase of one set of spare steam generators for delivery in September 2002. In December 1999, the Palo Verde Participants unanimously approved installation of the new steam generators in Unit 2. The Company's portion of total costs associated with construction and installation of new steam generators in Unit 2, including replacement power costs, is currently estimated not to exceed $44 million. APS has also stated that, based on the latest available data, it estimates that the steam generators in Units 1 and 3 should operate for their designated lives of 40 years. However, APS is reassessing whether it is economically desirable to replace the steam generators in Units 1 and 3. Such replacements would also require the unanimous approval of the Palo Verde Participants.
The Texas Rate Stipulation precludes the Company from seeking a rate increase during the Freeze Period to recover additional capital costs associated with the replacement of steam generators. The Company cannot recover these costs through regulated rates in New Mexico since generation and power supply are currently scheduled to become a competitive function in January 2001 under the New Mexico Restructuring Law. Finally, the Company cannot assure that it will be able to recover these capital costs through its wholesale power rates or its competitive retail rates that become applicable after the start of competition. See also Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview."
Spent Fuel Storage. In June 1999, APS requested approval from the NRC to use more of the space in the existing spent fuel storage facilities at Palo Verde. The NRC approved this request on March 2, 2000. As a result, the spent fuel storage facilities will have sufficient capacity to store all fuel expected to be discharged from normal operation of all three Palo Verde units through 2003. Alternative on-site storage facilities are currently being constructed to supplement existing facilities. Spent fuel will be removed from the original facilities as necessary and placed in special storage casks which will be stored at the new facilities until accepted by the DOE for permanent disposal. The alternative facilities will be built in stages to accommodate casks on an as needed basis and are expected to be available for use by the end of 2002.
Pursuant to the Nuclear Waste Policy Act of 1982, as amended in 1987 (the "Waste Act"), the DOE is legally obligated to accept and dispose of all spent nuclear fuel and other high-level radioactive wastes generated by all domestic power reactors. In accordance with the Waste Act, the DOE entered into a spent nuclear fuel contract with the Company and all other Palo Verde Participants. In
November 1989, the DOE reported that its spent nuclear fuel disposal facilities would not be in operation until 2010. Subsequent judicial decisions required the DOE to start accepting spent nuclear fuel by January 31, 1998. The DOE did not meet that deadline, and the Company cannot currently predict when spent fuel shipments to the DOE's permanent disposal site will commence. The 1998 decommissioning study assumes that only 14 of 333 spent fuel casks will have been removed from Palo Verde by 2037 when title to the remaining spent fuel is assumed to be transferred to the DOE. In January 1997, the Texas Commission established a project to evaluate what, if any, action it should take with regard to payments made to the DOE for funding of the DOE's obligation to start accepting spent nuclear fuel by January 31, 1998. After receiving initial comments, no further action has been taken on the project.
In July 1998, APS filed, on behalf of all Palo Verde Participants, a petition for review with the United States Court of Appeals for the District of Columbia Circuit seeking confirmation that findings by the Circuit Court in a prior case brought by Northern States Power regarding the DOE's failure to comply with its obligation to begin accepting spent nuclear fuel would apply to all spent nuclear fuel contract holders. The Circuit Court held APS' petition in abeyance pending the United States Supreme Court's decision to review the Northern States Power case. In November 1998, the Supreme Court denied review of this case. The Circuit Court subsequently dismissed APS' petition after the Circuit Court issued clarifying orders essentially granting the relief sought by APS. APS is monitoring pending litigation between the DOE and other nuclear operators before initiating further legal proceedings or other procedural measures on behalf of the Palo Verde Participants to enforce the DOE's statutory and contractual obligations. The Company is unable to predict the outcome of these matters at this time.
The Company expects to incur significant spent fuel storage costs during the life of Palo Verde that it believes are the responsibility of the DOE. These costs will be expensed as incurred until an agreement is reached with the DOE for recovery of these costs. However, the Company cannot predict when, if ever, these additional costs will be recovered from the DOE.
Disposal of Low-Level Radioactive Waste. Congress has established requirements for the disposal by each state of low-level radioactive waste generated within its borders. Arizona, California, North Dakota and South Dakota have entered into a compact (the "Southwestern Compact") for the disposal of low-level radioactive waste. California will act as the first host state of the Southwestern Compact, and Arizona will serve as the second host state. The construction and opening of the California low-level radioactive waste disposal site in Ward Valley has been delayed due to extensive public hearings, disputes over environmental issues and review of technical issues related to the proposed site. Palo Verde is projected to undergo decommissioning during the period in which Arizona will act as host for the Southwestern Compact. However, the opposition, delays, uncertainty and costs experienced in California demonstrate possible roadblocks that may be encountered when Arizona seeks to open its own waste repository.
Liability and Insurance Matters. The Palo Verde Participants have public liability insurance against nuclear energy hazards up to the full limit of liability under federal law. The insurance consists of $200 million of primary liability insurance provided by commercial insurance carriers, with the balance being provided by an industry-wide retrospective assessment program, pursuant to which industry participants would be required to pay an assessment to cover any loss in excess of $200 million. Effective August 1998, the maximum assessment per reactor for each nuclear incident is approximately $90.7 million, subject to an annual limit of $10 million per incident. Based upon the Company's 15.8%
interest in Palo Verde, the Company's maximum potential assessment per incident is approximately $43.0 million for all three units with an annual payment limitation of approximately $4.7 million.
The Palo Verde Participants maintain "all risk" (including nuclear hazards) insurance for damage to, and decontamination of, property at Palo Verde in the aggregate amount of $2.75 billion, a substantial portion of which must first be applied to stabilization and decontamination. Finally, the Company has obtained insurance against a portion of any increased cost of generation or purchased power which may result from an accidental outage of any of the three Palo Verde units if the outage exceeds 12 weeks.
Newman Power Station
The Company's Newman Power Station, located in El Paso, Texas, consists of four generating units with an aggregate capacity of 482 MW. The units operate primarily on natural gas, but can also operate on fuel oil.
Rio Grande Power Station
The Company's Rio Grande Power Station, located in Sunland Park, New Mexico, adjacent to El Paso, Texas, consists of three steam-electric generating units with an aggregate capacity of 246 MW. The units operate primarily on natural gas, but can also operate on fuel oil.
Four Corners Station
The Company owns 7% of Units 4 and 5 at Four Corners, located in northwestern New Mexico. The two coal-fired generating units each have a generating capacity of 739 MW. The Company shares power entitlements and certain allocated costs of the two units with APS (the Four Corners operating agent) and the other participants.
Four Corners is located on land held on easements from the federal government and a lease from the Navajo Nation that expires in 2016. Certain of the facilities associated with Four Corners, including transmission lines and almost all of the contracted coal sources, are also located on Navajo land. Units 4 and 5 are located adjacent to a surface-mined supply of coal.
Copper Power Station
The Company's Copper Power Station, located in El Paso, Texas, consists of a 68 MW combustion turbine used primarily to meet peak demands. The unit operates primarily on natural gas, but can also operate on fuel oil. The Company leases the combustion turbine and other generation equipment at the station under a lease that expires in July 2005, with an extension option for two additional years.
Transmission and Distribution Lines and Agreements
The Company owns or has significant ownership interests in four major 345 kV transmission lines, three 500 kV lines in Arizona, and owns the distribution network within its retail service area. The Company is also a party to various transmission and power exchange agreements that, together with its owned transmission lines, enable the Company to obtain its energy entitlements from its remote
generation sources at Palo Verde and Four Corners. Pursuant to standards established by the North American Electric Reliability Council, the Company operates its transmission system in a way that allows it to maintain complete system integrity in the event of any one of these transmission lines being out of service.
Springerville-Diablo Line. The Company owns a 310-mile, 345 kV transmission line from TEP's Springerville Generating Plant near Springerville, Arizona, to the Luna Substation near Deming, New Mexico, and to the Diablo Substation near Sunland Park, New Mexico, providing an interconnection with TEP for delivery of the Company's generation entitlements from Palo Verde and, if necessary, Four Corners.
Arroyo-West Mesa Line. The Company owns a 202-mile, 345 kV transmission line from the Arroyo Substation located near Las Cruces, New Mexico, to PNM's West Mesa Substation located near Albuquerque, New Mexico. This is the primary delivery point for the Company's generation entitlement from Four Corners, which is transmitted to the West Mesa Substation over approximately 150 miles of transmission lines owned by PNM.
Greenlee-Newman Line. As a participant in the Southwest New Mexico Transmission Project Participation Agreement, the Company owns 40% of a 60-mile, 345 kV transmission line from TEP's Greenlee Substation in Arizona to the Hidalgo Substation near Lordsburg, New Mexico, 57.2% of a 50-mile, 345 kV transmission line between the Hidalgo Substation and the Luna Substation near Deming, New Mexico, and 100% of an 86-mile, 345 kV transmission line between the Luna Substation and the Newman Power Station. These lines provide an interconnection with TEP for delivery of the Company's entitlements from Palo Verde and, if necessary, Four Corners.
AMRAD-Eddy County Line. The Company owns 66.7% of a 125-mile, 345 kV transmission line from the AMRAD Substation near Oro Grande, New Mexico, to the Company's and TNP's high voltage direct current terminal at the Eddy County Substation near Artesia, New Mexico. This terminal enables the Company to connect its transmission system to that of SPS, providing the Company with access to emergency power from SPS and power markets to the east.
Palo Verde Transmission. The Company owns 18.7% of two 45-mile, 500 kV lines from Palo Verde to the Westwing Substation and a 75-mile, 500 kV line from Palo Verde to the Kyrene Substation. These lines provide the Company with a transmission path for delivery of power from Palo Verde.
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.
Construction Program
The Company has no current plans to construct any new generating facilities to serve retail customers through at least 2004. Utility construction expenditures reflected in the following table consist primarily of expanding and updating the electric transmission and distribution systems, and the cost of improvements at and the purchase and installation of new steam generators for Palo Verde. The Company's estimated cash construction costs for 2000 through 2003 are approximately $252 million. Actual costs may vary from the construction program estimates shown. Such estimates are reviewed and updated periodically to reflect changed conditions.
By Year (1) By Function (In millions) (In millions) ------------------------------- -----------------------------
2000..................... $ 60 Production (1)......... $ 90 2001..................... 63 Transmission........... 16 2002..................... 64 Distribution........... 101 2003..................... 65 General................ 45 ---- ---- Total.................. $252 Total................ $252 ==== ====
_____________ (1) Does not include acquisition costs for nuclear fuel. See "Energy Sources - Nuclear Fuel."
Energy Sources
General
The following table summarizes the percentage contribution of nuclear fuel, natural gas, coal and purchased power to the total kWh energy mix of the Company:
Allocated fuel and purchased power costs are generally passed through directly to customers in Texas pursuant to applicable regulations. Historical fuel costs and revenues are reconciled periodically in proceedings before the Texas Commission to determine whether a refund or surcharge based on such historical costs and revenues is necessary. Prior to the New Mexico Settlement Agreement, the Company was required to make annual filings reconciling the revenues collected under its New Mexico fixed fuel factor with its New Mexico fuel and purchased power expenses. As a result of the New Mexico Settlement Agreement, the fixed fuel factor has been incorporated into base rates. See "Regulation - Texas Regulatory Matters" and "- New Mexico Regulatory Matters."
Nuclear Fuel
The Company has contracts for uranium concentrates which should be sufficient to meet the Company's share of Palo Verde's operational requirements through 2002. The Palo Verde Participants have contracted for sufficient conversion services to provide for plant needs through 2000, but need to contract for additional conversion services for 2001 and beyond. APS, as operating agent for Palo Verde, expects that these services will be available on the spot market or, alternatively, through long-term contract arrangements. The Palo Verde Participants have an enrichment services contract which runs through 2002, with an option for five additional years.
Nuclear Fuel Financing. Pursuant to the ANPP Participation Agreement, the Company owns an undivided interest in nuclear fuel purchased in connection with Palo Verde. The Company has available a total of $100 million under a revolving credit facility that provides for both working capital and up to $70 million for the financing of nuclear fuel. At December 31, 1999, approximately $48.3 million had been drawn to finance nuclear fuel. This financing is accomplished through a trust that borrows under the facility to acquire and process the nuclear fuel. The Company is obligated to repay the trust's borrowings with interest and has secured this obligation with First Mortgage Collateral Series Bonds. In the Company's financial statements, the assets and liabilities of the trust are reported as assets and liabilities of the Company.
Natural Gas
In 1999, the Company's natural gas requirements at the Rio Grande Power Station were met with both short-term and long-term natural gas purchases from various suppliers. Interstate gas is delivered under a firm ten-year transportation agreement, which expires in 2001 with extension provisions through 2005. Based on the current availability of economical and reliable market natural gas supplies, the Company anticipates it will continue to purchase natural gas at market prices on a monthly basis for a portion of the fuel needs for the Rio Grande Power Station for the near term. To complement these monthly purchases in 2000, the Company has entered into a one-year fixed- price gas supply contract. The Company will continue to evaluate the availability of short-term natural gas supplies versus long-term supplies to maintain a reliable and economical supply for the Rio Grande Power Station.
In 1999, natural gas for the Newman and Copper Power Stations was supplied primarily pursuant to a five-year intrastate natural gas contract which became effective January 1, 1997 and expires December 31, 2001. Natural gas was also provided to the Newman and Copper Power Stations pursuant to a similar long-term interstate natural gas contract which supplements the intrastate contract and also expires on December 31, 2001. To complement these long-term contracts, the Company also evaluates and procures short-term natural gas supplies at market prices to maintain a reliable and economical supply for the Newman and Copper Power Stations.
Coal
APS, as operating agent for Four Corners, purchases Four Corners' coal requirements from a supplier with a long-term lease of coal reserves owned by the Navajo Nation. Based upon information from APS, the Company believes that Four Corners has sufficient reserves of coal to meet the plant's operational requirements for its useful life.
In 1999, upon final review of a study conducted by an outside engineering firm, the Company reduced its estimated final reclamation and coal mine closure liability related to the Company's interest in Four Corners from $14.8 million to $8.2 million. The $6.6 million adjustment was recorded as a reduction of energy expenses in the fourth quarter of 1999.
Purchased Power
To supplement its own generation and operating reserves, the Company engages in firm and non-firm power purchase arrangements which may vary in duration and amount based on evaluation of the Company's resource needs and economics of the transactions.
Operating Statistics
Regulation
General
In 1999, both Texas and New Mexico enacted electric utility industry restructuring laws requiring competition in certain functions of the industry and ultimately in the Company's service area. The New Mexico Restructuring Law currently requires competition to begin on January 1, 2001. The Company believes the New Mexico Commission may delay the start of competition, but cannot predict the length of such delay, if any. Under the Texas Restructuring Law, the Company's Texas service area is exempt from competition until the expiration of the Freeze Period, currently scheduled to terminate in August 2005.
The Company is working to become more competitive in response to these new restructuring laws as well as other regulatory, economic and technological changes occurring throughout the industry. Deregulation of the production of electricity and related services and increasing customer demand for lower priced electricity and other energy services have accelerated the industry's movement toward more competitive pricing and cost structures. These competitive pressures could result in the loss of customers and diminish the ability of the Company to fully recover its investment in generation assets. This issue is particularly important to the Company because its rates are significantly higher than national and regional averages. As a result of the initiation of deregulation in New Mexico and other portions of Texas, the Company may face increasing pressure on its retail rates and its rate freeze under the Texas Rate Stipulation. The Company's results of operations and cash flows may be adversely affected if it cannot maintain its current retail rates.
The Company is particularly concerned with the ultimate recoverability of "stranded costs," or costs previously found by regulatory authorities to be reasonable and prudent, but which are higher than would be recovered under immediate, full competition. At the federal level, the FERC has announced, through a formal rulemaking, its intention to allow 100% recovery of all legitimate verifiable stranded costs attributable to FERC jurisdictional customers. The Texas Restructuring Law exempts the Company's Texas service area from retail competition, and preserves rates at their current levels, until the end of its Freeze Period. The Company is prohibited from recovering stranded costs or costs of transition to competition beyond the Freeze Period.
Under the New Mexico Restructuring Law, the New Mexico Commission may limit the Company's recovery of its stranded costs. The New Mexico Restructuring Law also allows for recovery of prudent costs related to transition to competition. See "New Mexico Regulatory Matters - Deregulation" below.
Texas Regulatory Matters
The rates and services of the Company in Texas municipalities are regulated by those municipalities, and in unincorporated areas by the Texas Commission. The largest municipality in the Company's service area is the City of El Paso. The Texas Commission has exclusive appellate jurisdiction to review municipal orders and ordinances regarding rates and services in Texas and jurisdiction over certain other activities of the Company. The decisions of the Texas Commission are subject to judicial review.
Deregulation. The Texas Restructuring Law requires an electric utility to separate its business activities into a power generation company, a retail electric provider, and a transmission and distribution utility by January 1, 2002. The Texas Restructuring Law also requires a utility to separate its customer energy services business from its regulated utility activities by September 1, 2000. A utility may accomplish this separation through creation of nonaffiliated companies, separate affiliated companies owned by a common holding company, or through the sale of assets to third parties. 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. See "New Mexico Regulatory Matters - Deregulation" below.
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 rates at their current levels until the end of its 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.
Texas Rate Stipulation and Texas Settlement Agreement. The Company's rates for its Texas customers are governed by a rate order entered by the Texas Commission adopting the Texas Rate Stipulation and Agreed Order. The Agreed Order implemented certain provisions of the Texas Rate Stipulation and set rates consistent with the Texas Rate Stipulation. Among other things, under the Texas Rate Stipulation: (i) the Company's base rates for most customers in Texas were fixed for the ten-year Freeze Period which began in August 1995; (ii) the City of El Paso granted the Company a new franchise that extends through the Freeze Period; (iii) the Company retains 75% during the first five years of the Freeze Period and 50% during the remainder of the Freeze Period of (a) the revenues generated by providing third-party transmission services and (b) profit margins from certain off-system power sales; (iv) the Company's reacquisition of the Palo Verde leased assets was deemed to be in the public interest; and (v) all appeals of Texas Commission orders concerning the Company and all outstanding Texas Commission dockets concerning the Company's rates were resolved.
Neither the Texas Rate Stipulation nor the Agreed Order deprives the Texas regulatory authorities of their jurisdiction over the Company during the Freeze Period. However, the Texas Commission determined in the Agreed Order that the rate freeze is in the public interest and results in just and reasonable rates. Further, the signatories to the Texas Rate Stipulation (other than the OPC and the State of Texas) agreed to not seek to initiate an inquiry into the reasonableness of the Company's rates during the Freeze Period and to support the Company's entitlement to rates at the freeze level throughout the Freeze Period. The Company believes, but cannot assure, that its cost of service will support rates at or above the freeze level throughout the Freeze Period and, therefore, does not believe any attempt to reduce the Company's rates would be successful. However, during the Freeze Period, the Company is precluded from seeking rate increases in Texas, even in the event of increased operating or capital costs. In the event of a merger, the parties to the Texas Rate Stipulation retain all rights provided in the Texas Rate Stipulation, the right to participate as a party in any proceeding related to the merger, and the right to pursue a reduction in rates below the freeze level to the extent of post- merger synergy savings.
Following the New Mexico Settlement Agreement (see "New Mexico Regulatory Matters - New Mexico Settlement Agreement" below), the Company offered to enter into a comparable agreement in Texas. Based upon that offer, the Company entered into the Texas Settlement Agreement providing for: (i) a total annual jurisdictional base rate reduction of approximately $15.4 million; (ii) reconciliation of approximately $221.2 million of fuel revenues to fuel expenses for the 42-month period ended December 31, 1998, with no disallowance; and (iii) an agreement to use 50% of all Palo Verde performance rewards related to evaluation periods after 1997, when collected, for low-income assistance and for DSM programs, primarily focused on small business customers, through the end of the Freeze Period. The Texas Settlement Agreement was filed with the Texas Commission, the City of El Paso and all other municipalities having jurisdiction. The Texas Commission approved the Texas Settlement Agreement in June 1999.
Fuel. Pursuant to Texas Commission rules, the Company must periodically make a filing to reconcile the revenues collected from Texas customers under its fixed fuel factor with the actual fuel and purchased power expenses incurred. Differences between revenues collected and expenses incurred during the reconciliation period are subject to a refund (in the case of an overrecovery of fuel costs) or surcharge (in the case of an underrecovery of fuel costs). The Texas Commission staff, local regulatory authorities such as the City of El Paso, and customers are entitled to intervene in a fuel reconciliation proceeding and to challenge the prudence of fuel and purchased power expenses. The Company's fuel expenses for its most recent reconciliation period of July 1995 through December 1998 were approved, with no disallowance, as part of the Texas Settlement Agreement.
Palo Verde Performance Standards. The Texas Commission established performance standards for the operation of Palo Verde, pursuant to which each Palo Verde unit is evaluated annually to determine whether its three-year rolling average capacity factor entitles the Company to a reward or subjects it to a penalty. There are five performance bands based around a target capacity factor of 70%. The capacity factor is calculated as the ratio of actual generation to maximum possible generation. If the capacity factor, as measured on a station-wide basis for any consecutive 24-month period, should fall below 35%, the Texas Commission could reconsider the rate treatment of Palo Verde, regardless of the provisions of the Texas Rate Stipulation and the Texas Settlement Agreement. The removal of Palo Verde from rate base could have a significant negative impact on the Company's revenues and financial condition. Performance rewards and penalties for the evaluation periods ending in 1997, 1996 and 1995, as well as an agreement regarding disposition of half of any future rewards, were resolved in the Texas Settlement Agreement and the IRP stipulation. The Company has calculated significant performance rewards for the three-year periods ended December 31, 1999 and 1998. However, the ultimate disposition of these rewards is subject to Texas Commission review during the periodic fuel reconciliation proceedings discussed above. Performance rewards are not recorded on the Company's books until a final determination has been ordered by the Texas Commission in a fuel reconciliation proceeding. Performance penalties are recorded when assessed as probable by the Company.
Integrated Resource Plan. Under Texas law and regulations of the Texas Commission, the Company was required to file an IRP in June 1998. The Company's IRP was the culmination of a lengthy planning process involving the Company, its customers, the Texas Commission, consumer advocates and various special interest groups. The purpose of integrated resource planning was to ensure acquisition of the lowest cost, adequate resources necessary to meet the varied needs of the Company and its customers, and to ensure the equitable allocation and distribution of the benefits of such resource acquisitions and other system benefits to all customer classes. The Company entered into an agreement with all parties with respect to all IRP issues, and a Texas Commission order adopting the agreement
was issued in January 1999. Pursuant to the agreement, the Company will meet its resource needs through a combination of short-term purchased power and a DSM program. Pursuant to the IRP, the Company expects to incur DSM expenditures annually of approximately $1.0 million through 2001. Additionally, the Company committed a total of approximately $1.0 million to fund a low-income weatherization and energy efficiency program over a three-year period beginning in 1999. Finally, in response to interest expressed by its customers and encouragement from the Texas Commission and environmental advocates, the Company has committed to the development of renewable resources. Pursuant to the stipulation settling the IRP, the Company has pledged $3.6 million of prior Palo Verde performance rewards, including related interest, collected by the Company as a result of the Texas Settlement Agreement as initial financing for the development of renewable resources. The Company does not believe the IRP agreement will cause it to incur net costs materially in excess of those that would have been incurred in the absence of its IRP. Nevertheless, because of the Texas Rate Stipulation and the Texas Settlement Agreement, the Company will not be able to increase its rates to recover any increase in net costs actually experienced as a result of its IRP. Going forward, the Texas Restructuring Law abolished the requirement for utilities to develop IRPs; therefore, the Company will have no further IRP obligation after December 31, 2001.
New Mexico Regulatory Matters
The New Mexico Commission has jurisdiction over the Company's rates and services in New Mexico and over certain other activities of the Company, including prior approval of the issuance, assumption or guarantee of securities. The New Mexico Commission's decisions are subject to judicial review. In January 1999, pursuant to a state constitutional amendment passed in 1996, the three- member appointed commission was replaced by an elected commission from five single-member districts, with regulatory responsibility for electricity, gas, water, telecommunications, insurance and securities activities within the state. The Company's New Mexico service area falls entirely within one district. The largest city in the Company's New Mexico service territory is Las Cruces, which in 1999 accounted for approximately 8% of the Company's total revenue.
Deregulation. 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. Originally, utilities were required to file transition plans addressing the various restructuring issues, including the recovery of stranded costs, by March 1, 2000, which was subsequently extended to June 1, 2000. 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 filed its Transition Plan-Phase I early to allow the Company to obtain regulatory and other approvals necessary to complete its corporate separation by the January 1, 2001 deadline under the New Mexico Restructuring Law. The Company 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. The Company will file its Transition Plan-Phase II by June 1, 2000, detailing the Company's proposed processes and procedures to implement customer choice in New Mexico.
Under the New Mexico Restructuring Law, retail customer choice is currently scheduled to begin January 1, 2001 for public post-secondary educational institutions, public schools and residential and small business customers. Retail customer choice is currently scheduled to begin January 1, 2002 for all other customers. The New Mexico Restructuring Law allows a utility to recover at least 50% of
its stranded costs with up to 100% recovery allowed if the New Mexico Commission determines that additional recovery (i) is in the public interest, (ii) is necessary to maintain the utility's financial integrity, (iii) is necessary to continue adequate and reliable service, and (iv) will not cause an increase in rates to residential and small business customers. The New Mexico Restructuring Law, however, includes decommissioning costs as part of stranded costs. Because the New Mexico Restructuring Law defines decommissioning costs as a stranded cost, it is possible that the New Mexico Commission may allow only 50% recovery of decommissioning costs. However, the New Mexico Restructuring Law also specifically provides that nothing in the law should be interpreted as requiring the New Mexico Commission to issue an order which would jeopardize the exclusive use of the external sinking fund method for meeting decommissioning obligations pursuant to federal guidelines. The Company believes this provision requires the full recovery of New Mexico decommissioning requirements over the life of the nuclear asset through a separate non-bypassable wires charge. The Company cannot predict how the New Mexico Commission will ultimately treat this matter.
The New Mexico Restructuring Law allows the Company to recover reasonable, prudent and unmitigated costs that the Company would not have incurred but for its compliance with the New Mexico Restructuring Law. These transition costs do not include stranded costs, costs the Company can collect under federally approved rates or rates approved by the New Mexico Commission, or any costs the Company would have incurred regardless of the New Mexico Restructuring Law. The Company cannot predict whether the New Mexico Commission will allow the Company to recover all of its transition costs.
The New Mexico Restructuring Law also allowed the New Mexico Commission to review and either confirm, reject or modify the Company's New Mexico Settlement Agreement. On November 30, 1999, the New Mexico Commission issued a final order finding that the Company's New Mexico Settlement Agreement did not, under the terms of the New Mexico Restructuring Law, constitute a plan or approval for recovery of stranded costs. On December 30, 1999, the Company filed a motion for rehearing requesting the New Mexico Commission to confirm that it would determine the Company's stranded costs by using either (i) the stranded cost recovery formula contained in the New Mexico Restructuring Law, applied to the Company's generation asset values in effect prior to the rate base write-downs contained in the New Mexico Settlement Agreement, or (ii) the Company's stranded costs contained in the New Mexico Settlement Agreement. This would allow the Company to either (i) preserve the stranded cost benefits obtained in the New Mexico Settlement Agreement or (ii) be subject to the same stranded cost provisions of the New Mexico Restructuring Law as every other electric utility in New Mexico. On January 18, 2000, the New Mexico Commission issued an order granting the Company's request.
New Mexico Settlement Agreement. In July 1998, the Company entered into the New Mexico Settlement Agreement with certain parties, including the New Mexico Commission staff and the New Mexico Attorney General, but not Las Cruces. In September 1998, the New Mexico Commission issued an order adopting, with some modification, the New Mexico Settlement Agreement. The New Mexico Settlement Agreement became effective on October 26, 1998 and provides for (i) a total annual jurisdictional base revenue reduction of $4.6 million; (ii) a 30-month moratorium on rate increases or decreases in New Mexico; (iii) the elimination of the need for future fuel reconciliations in New Mexico by incorporating the existing fixed fuel factor into base rates; (iv) an increased degree of ratemaking certainty for the future achieved by an agreement among the signatories reducing the net value of certain assets by approximately $56 million on a New Mexico jurisdictional basis for ratemaking purposes (but with no effect on book values), while establishing the signatories' agreement that the
Company is entitled to 100% recovery of such revalued assets; and (v) the ability to enter into long-term rate contracts with commercial and industrial customers in New Mexico. Additionally, as a result of the New Mexico Settlement Agreement, the Company will contribute $0.4 million annually ($1.0 million over the term of the moratorium period) to a social services agency in Dona Ana County providing assistance to low-income individuals. Although the New Mexico Settlement Agreement was structured to allow recovery of previously underrecovered fuel balances, the order adopting the New Mexico Settlement Agreement does not support the recognition of this asset in the Company's financial statements under existing accounting standards. The Company wrote off the book value of undercollected fuel revenues in its New Mexico jurisdiction as of September 30, 1998, which amounted to $3.8 million, net of tax, although the Company believes that, based on current estimates of future fuel prices and operating costs, it will recover 100% of these amounts.
Fuel. Prior to the New Mexico Settlement Agreement, the Company was required to file annual reports reconciling the revenues collected under its New Mexico fixed fuel factor with its New Mexico fuel and purchased power expenses, along with the results of the application of Palo Verde performance standards. As a result of the New Mexico Settlement Agreement, outstanding fuel issues from filings in 1998 and 1997 were satisfactorily resolved with no disallowance of fuel and purchased power costs or the performance rewards, and the existing fixed fuel factor was incorporated into base rates.
Palo Verde Performance Standards. As a result of the New Mexico Settlement Agreement, the Palo Verde performance standards, which had been in place since 1986, were eliminated. Consequently, the Company is no longer entitled to a reward or exposed to a penalty in New Mexico resulting from the operations of Palo Verde. The performance standards report filed with the New Mexico Commission in January 1998 was the final such report and entitled the Company to a reward of $1.1 million.
Federal Regulatory Matters
Federal Energy Regulatory Commission. The Company is subject to regulation by the FERC in certain matters, including rates for wholesale power sales, transmission of electric power and the issuance of securities.
On December 15, 1999, the FERC approved its final rule ("Order 2000") on Regional Transmission Organizations ("RTOs"). Order 2000 strongly encourages, but does not require, public utilities to form and join RTOs. Order 2000 establishes (i) the minimum characteristics and functions an RTO must satisfy to obtain FERC acceptance; (ii) a collaborative process allowing public utilities and non-public utilities that own, operate or control interstate transmission facilities, consulting with state officials as appropriate, to consider and develop RTOs; (iii) a proposal to consider transmission ratemaking returns on a case-specific basis; (iv) opportunities for non-monetary regulatory benefits for RTOs, including deference in dispute resolution and streamlined filing and approval procedures; and (v) a time line for public utilities to make appropriate filings with the FERC to initiate operation of RTOs. All public utilities that own, operate or control interstate transmission facilities must file, by October 15, 2000, either a proposal to participate in an RTO or an alternative filing describing efforts and plans to participate in an RTO. Order 2000 also proposes RTO startup by December 15, 2001.
The Company is an active participant in the development of the Desert Southwest Transmission and Reliability Operator ("Desert Star"). The Company believes Desert Star will qualify as an RTO under Order 2000. The Company intends, subject to the resolution of outstanding issues, to participate in Desert Star. As a participating transmission owner, the Company will transfer operations of its
transmission system to Desert Star. The Company believes the Desert Star proposal will be submitted to the FERC by October 15, 2000. Desert Star is currently scheduled to become operational by January 1, 2002. If Desert Star fails to become operational, the Company intends to participate in another RTO similar to Desert Star.
In April 1996, the FERC issued its Order No. 888, requiring all public utilities owning, operating or controlling facilities used for transmitting electricity in interstate commerce to allow access to their transmission facilities under minimum terms and conditions of non-discriminatory service, including transmission service for their own new wholesale sales and purchases of electric energy. Additionally, Order No. 888 permits public utilities to seek recovery of legitimate, prudent and verifiable stranded costs and provides a mechanism for the recovery of such costs.
In April 1996, the FERC also issued Order No. 889, which requires all public utilities owning, operating or controlling facilities used for transmitting electricity in interstate commerce to develop and maintain an Open Access Same-Time Information System that will give existing and potential transmission users access to transmission-related information on a basis consistent with that available to a utility's employees engaged in the buying and selling of power. Order No. 889 further requires public utilities to separate their transmission and generation marketing functions and adopt standards of conduct ensuring that all open access transmission customers are treated in a non-discriminatory manner.
Pursuant to Order No. 888, the Company filed its non-discriminatory open access transmission tariffs with the FERC in July 1996. The Company reached a settlement with the various parties regarding rates for transmission and ancillary services under these tariffs. However, the settlement, which was filed with the FERC in March 1997 and approved by the FERC in June 1998, did not resolve issues that had been raised with respect to the manner in which the Company will determine the amount of transmission capacity that is available for use by third parties desiring to use its transmission system.
In May 1999, the FERC issued its opinion in a proceeding brought by SPS regarding the use of the Company's transmission system to serve Las Cruces, holding that once the Company's calculation of available transmission capacity was adjusted to reflect the assumed discontinuation of service to Las Cruces and CFE, the Company would have sufficient transmission capacity over the Eddy County tie to meet SPS' request for firm transmission service. Although the Company has filed a compliance filing as required by the FERC's order, the filing reflects that the Company does not have sufficient transmission capacity over the Eddy County tie to meet SPS' request for firm transmission service. The Company filed a motion for rehearing of the FERC's decision. The FERC has extended its time limit for ruling on this motion. The Company does not expect a material financial impact from this FERC ruling. However, the Company is concerned that of an adverse FERC ruling would result in impaired the reliability of service to the Company's retail customers and increased costs. This case will not be automatically dismissed under the settlement agreement with Las Cruces because SPS, not Las Cruces, was the original complainant. Although the SPS complaint was based upon the creation of a Las Cruces municipal utility, the Company cannot predict whether the case will be dismissed as a result of its settlement with Las Cruces.
On February 24, 2000, the Company and Las Cruces entered into a settlement agreement ending Las Cruces' efforts to municipalize the Company's distribution system in Las Cruces. Under the terms of the settlement agreement, all existing litigation between the Company and Las Cruces,
including all litigation pending before the FERC, will be dismissed. For a discussion of this settlement agreement, see Item 3, "Legal Proceedings - Litigation with Las Cruces."
Department of Energy. The DOE regulates the Company's exports of power to CFE in Mexico pursuant to a license granted by the DOE and a presidential permit. The DOE has determined that all such exports over international transmission lines shall be made in accordance with Order No. 888. The DOE is authorized to assess operators of nuclear generating facilities for a share of the costs of decommissioning the DOE's uranium enrichment facilities and for the ultimate costs of disposal of spent nuclear fuel. See "Facilities - Palo Verde Station - Spent Fuel Storage" for discussion of spent fuel storage and disposal costs.
Nuclear Regulatory Commission. The NRC has jurisdiction over the Company's licenses for Palo Verde and regulates the operation of nuclear generating stations to protect the health and safety of the public from radiation hazards. The NRC also has the authority to conduct environmental reviews pursuant to the National Environmental Policy Act.
Wholesale Customers
The Company provides IID with 100 MW of firm capacity and associated energy and 50 MW of system contingent capacity and associated energy pursuant to a 17- year agreement which expires April 30, 2002. The Company also provides TNP with up to 75 MW of firm power and associated energy pursuant to an agreement which expires December 31, 2002. The contract allows TNP to specify a maximum annual amount with one year's notice. TNP elected to receive up to 25 MW for 2000.
Executive Officers of the Company
The executive officers of the Company are elected annually and serve at the discretion of the Board of Directors.
Item 2.
Item 2. Properties
The principal properties of the Company are described in Item 1, "Business," and such descriptions are incorporated herein by reference. Transmission lines are located either on private rights-of-way, easements or on streets or highways by public consent. See Part II, Item 8, "Financial Statements and Supplementary Data - Note F of Notes to Financial Statements" for information regarding encumbrances against the principal properties of the Company.
Item 3.
Item 3. Legal Proceedings
Litigation with Las Cruces
On February 24, 2000, the Company and Las Cruces entered into a settlement agreement ending Las Cruces' efforts to municipalize the Company's distribution assets and other facilities used to provide electric service to customers in Las Cruces. Under the settlement agreement the Company will pay Las Cruces a one- time lump sum payment of up to $21 million, $16.5 million of which was expensed in the fourth quarter of 1999. The remaining $4.5 million relates to the transfer of Las Cruces' West Mesa Substation and related facilities to the Company. Las Cruces must substantiate the costs of building the West Mesa Substation and related transmission and distribution facilities, subject to a dollar for dollar offset against the $4.5 million purchase price for any amounts not substantiated.
The settlement agreement also provides for Las Cruces and the Company to enter into a seven-year franchise agreement with a 2% annual franchise fee (approximately $0.8 million per year currently) for the provision of electric distribution service. Las Cruces is prohibited during this seven-year period from taking any action to condemn or otherwise attempt to acquire the Company's distribution system, or attempt to operate or build its own electric distribution system. Las Cruces will have a 90-day non-assignable option at the end of the Company's seven-year franchise agreement to purchase the portion of the Company's distribution system that serves Las Cruces at a purchase price of 130% of the Company's book value at that time. If Las Cruces exercises this option, it is prohibited from reselling the distribution assets for two years. If Las Cruces fails to exercise this option, the franchise and standstill agreements will be extended for an additional two years.
Las Cruces also agreed that it will not contest the calculation of the Company's stranded costs in New Mexico, provided the stranded costs charged to Las Cruces customers do not exceed $52.9 million declining over time, which is the amount initially ordered by the FERC in the Las Cruces stranded cost proceeding. Las Cruces also agreed to assign all of its existing customer contracts to the Company.
Under the terms of the settlement agreement, all existing litigation between the Company and Las Cruces, including all litigation pending before the FERC and the Federal District Court of New Mexico, will be dismissed. The Company and Las Cruces are finalizing the written settlement agreement and obtaining final approvals. The Company anticipates signing a definitive agreement by the end of the first quarter of 2000.
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 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 have petitioned the United States Supreme Court for review of this decision. 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.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock trades on the American Stock Exchange under the symbol "EE." The high and low sales prices for the Company's common stock, as reported in the consolidated reporting system of the American Stock Exchange, for the periods indicated below, were as follows:
As of March 13, 2000, there were 5,505 holders of record of the Company's common stock.
Prior to September 1999, the Company's First and Second Supplemental Indentures restricted the Company's ability to pay dividends on its common stock. So long as the Company's First Mortgage Bonds are outstanding and the series with the longest maturity was not rated "investment grade" by either Standard & Poor's Rating Service ("S&P") or Moody's Investors Service, Inc. ("Moody's"), the Company was significantly limited in its ability to declare any dividend on the common stock, other than in additional shares of common stock. The Company's First Mortgage Bonds were upgraded to investment grade by S&P in September 1999 and by Moody's in November 1999. While the First and Second Supplemental Indentures do not currently restrict the Company's ability to pay dividends on its common stock, the Company does not currently anticipate paying dividends on its common stock in the near-term. The Company intends to continue its deleveraging and stock repurchase programs with the goals of improving its capital structure and using free cash flow to its highest economic advantage.
In May 1999, the Company's Board of Directors approved a stock repurchase program allowing the Company to purchase outstanding shares of its common stock from time to time, up to a total of six million shares. The Company will make purchases primarily in the open market at prevailing prices and will also engage in private transactions, if appropriate. The shares that the Company acquires will be available for issuance under employee benefit and stock option plans or may be retired. As of March 10, 2000, the Company had repurchased 5,747,995 shares of common stock at a cost of approximately $51.9 million, including commissions.
In March 1999, after obtaining required consents of holders of certain of the Company's outstanding debt securities, the Company redeemed its Series A Preferred Stock. The Company paid the redemption price of approximately $139.6 million, accrued cash dividends of $1.3 million and premium, fees and costs of securing the consents aggregating $9.6 million. See Part II, Item 8, "Financial Statements and Supplementary Data - Note E of Notes to Financial Statements" for additional information regarding preferred stock.
Item 6.
Item 6. Selected Financial Data
As of and for the following periods (In thousands except for share data):
On February 12, 1996, the Company emerged from a bankruptcy proceeding which it instituted in January 1992. The Company's financial statements for periods after February 12, 1996 are not comparable to the Company's financial statements for periods before February 12, 1996 due to the application of "fresh-start" reporting at that date. A vertical line is shown in the above selected financial data to separate the respective financial information and indicate that it has not been prepared on a consistent basis of accounting.
The selected financial data should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Item 8, "Financial Statements and Supplementary Data."
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 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. Both Texas and New Mexico recently passed legislation that requires the Company to separate its transmission and distribution functions from its generation business and mandates 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 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. For several years, the Company has been engaged in litigation with Las Cruces, which accounted for approximately 8% of the Company's revenues in 1999, over Las Cruces' attempts to create a municipal utility. The parties have settled the litigation, but the risk of loss of customers remains. 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 current capacity to supply electricity to portions of northern Chihuahua and allowed CFE to eliminate substantially all purchases of power from the Company in 1999. Additionally, American National Power, Inc., a wholly-owned subsidiary of National Power PLC, has announced it is exploring the possibility of building a generation plant in El Paso, Texas. If the Company loses a significant portion of its retail customer base or wholesale sales, the Company may not be able to replace such revenues through either the addition of new customers or an increase in rates to remaining customers.
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. There can be no assurance that the Company's revenues will be sufficient to recover any increased costs, including any increased costs in connection with Palo Verde or increases in other costs of operation, whether as a result of higher than anticipated levels of inflation, changes in tax laws or regulatory requirements, or other causes.
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, capital expenditures related to the Company's generating facilities and transmission and distribution systems and the $21 million payment required under the settlement agreement with Las Cruces. The Company expects that cash flows from operations will be sufficient for such purposes, except that it may be necessary to finance a portion of the Las Cruces payment in the short-term by drawing on its line of credit.
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 December 31, 1999, the Company had approximately $37.2 million in cash and cash equivalents. In February 1999, the Company renewed its $100 million revolving credit facility, which now provides up to $70 million for nuclear fuel purchases and up to $50 million (depending on the amount of borrowings outstanding for nuclear fuel purchases) for working capital needs. At December 31, 1999, approximately $48.3 million had been drawn for nuclear fuel purchases. No amounts have been drawn on this facility for working capital needs.
The Company has a high debt to capitalization ratio and significant debt service obligations. Due to the Texas Rate Stipulation, the Texas Settlement Agreement, the New Mexico Settlement 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 in New Mexico 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. In March 1999, the Company used cash on hand to pay for the early redemption of its Series A Preferred Stock, which resulted in the avoidance of additional cash dividends of approximately $2.7 million that would have been payable through May 1, 1999, and $4.0 million quarterly thereafter until mandatory redemption in 2008. The preferred stock had an annual dividend rate of 11.40%, which was paid through the issuance of additional shares of preferred stock for the first three years of the issue.
The Company has significantly reduced its long-term debt since its emergence from bankruptcy in 1996. From June 1, 1996 through March 10, 2000, the Company repurchased approximately $327.8 million of first mortgage bonds as part of an aggressive deleveraging program and repaid the remaining $36.0 million of Series A First Mortgage Bonds at their maturity in February 1999. The foregoing, together with the early redemption of Series A Preferred Stock, have reduced the Company's annual interest expense and annual cash dividend requirements by approximately $28.9 million and $15.9 million, respectively. Common stock equity as a percentage of capitalization, excluding current maturities of long-term debt, has increased from 19% at June 30, 1996 to 34% at December 31, 1999. In addition, the Company's bonds are now rated investment grade by all four major credit rating agencies.
In May 1999, the Company's Board of Directors approved a stock repurchase program allowing the Company to purchase outstanding shares of its common stock from time to time, up to a total of six million shares. The Company will make purchases primarily in the open market at prevailing prices and will also engage in private transactions, if appropriate. The shares that the Company acquires will be available for issuance under employee benefit and stock option plans or may be retired. As of March 10, 2000, the Company had repurchased 5,747,995 shares of common stock at a cost of approximately $51.9 million, including commissions.
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 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
Results of operations for the year ended December 31, 1999 were affected by unusual or infrequent items including (i) the recognition of certain items arising from the Texas Settlement Agreement; (ii) a change in estimated fuel cost reserves; (iii) an adjustment reducing fuel expense based on a reduction of the Company's estimated coal mine reclamation liability; (iv) a charge to earnings of $10.1 million, net of tax, as a result of the settlement agreement with Las Cruces; (v) 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; and (vi) the early redemption of the Company's 11.40% Series A Preferred Stock. Results of operations for 1998 reflect a charge to earnings of $3.8 million, net of tax, as a result of the New Mexico Settlement Agreement, and 1997 results reflect a favorable litigation settlement of $4.6 million, net of legal fees, expenses and tax.
Operating revenues net of energy expenses decreased $11.1 million in 1999, compared to 1998 as follows (In thousands):
Excluding the effects of the unusual or infrequent items shown above, the decrease of $21.7 million was primarily due to the rate reductions in Texas and New Mexico and the loss of sales to CFE. These decreases were partially offset by increased economy sales.
Operating revenues net of energy expenses increased $13.3 million in 1998 compared to 1997 primarily due to increased economy sales at higher margins and a $1.3 million increase in ESBG revenues.
Operating revenues from retail customers shown below include the effects of the retroactive base rate decrease, the recognition of the Palo Verde performance reward and the changes in estimated fuel cost reserves for the years ended December 31, 1999 and 1998, as applicable. Comparisons of kWh sales and operating revenues are shown below (In thousands):
________________________ (1) The Company's one-year sales agreement for firm capacity and associated energy sales to CFE terminated on December 31, 1998.
Other operations and maintenance expense decreased $0.7 million in 1999 compared to 1998 due to decreased other operations expense of $2.1 million partially offset by increased maintenance expense of $1.4 million, as follows (In thousands):
Other operations and maintenance expense increased $4.9 million in 1998 compared to 1997 due to increased other operations expense of $4.7 million and increased maintenance expense of $0.2 million, as follows (In thousands):
The New Mexico Settlement charge of $6.3 million in 1998 represents the write-off of the book value of undercollected fuel revenues in the Company's New Mexico jurisdiction. See Part I, Item 1, "Business - Regulation - New Mexico Regulatory Matters - New Mexico Settlement Agreement" for further discussion.
Depreciation and amortization expense increased $1.1 million in 1999 compared to 1998 and in 1998 compared to 1997 primarily due to increases in depreciable plant balances.
Taxes other than income taxes decreased $2.8 million in 1999 compared to 1998 primarily due to (i) a $3.1 million reversal of sales tax reserves established in prior years and (ii) a decrease in Arizona property taxes as a result of depreciation and a decrease in the assessment ratio in 1999. The decreases were partially offset by (i) an increase in Texas franchise tax resulting from a refund in 1998 with no comparable amount in 1999 and (ii) a 1999 reclassification of payroll taxes related to the 1998 all
employee cash bonus. The increase of $1.0 million in 1998 compared to 1997 was primarily due to (i) an increase in Texas property taxes and (ii) an increase in revenue related taxes resulting from an increase in revenues in 1998. These increases were partially offset by a decrease in Arizona property taxes due to a decrease in the assessment ratio in 1998.
Other income decreased $20.7 million in 1999 compared to 1998 primarily due to (i) the accrual in 1999 of the $16.5 million to be paid under the settlement agreement with Las Cruces; (ii) a decrease in investment income of $6.4 million resulting from the investment of lower levels of cash and the investment of a portion of decommissioning trust funds in equity securities, the unrealized gains and losses on which are reported as other comprehensive income; and (iii) a favorable settlement of bankruptcy professional fees of $1.3 million in 1998 with no comparable amount in 1999. These decreases were partially offset by (i) an adjustment of $1.7 million to the cash value of Company-owned life insurance policies, which was not previously recognized due to the uncertainty of recoverability from the insurer; and (ii) a gain realized on the disposition of non-utility property of $2.4 million in 1999 compared to $0.7 million in 1998. The decrease of $2.3 million in 1998 compared to 1997 was primarily due to a favorable litigation settlement in 1997 of $7.5 million, net of legal fees and expenses, partially offset by an increase in investment income of $5.1 million resulting from the investment of higher levels of cash.
Interest charges decreased $0.7 million in 1999 compared to 1998 primarily due to a reduction in outstanding debt as a result of open market purchases and redemptions of the Company's first mortgage bonds. This decrease was partially offset by adjustments to postload nuclear fuel to (i) write-off a portion of accumulated interest capitalized prior to 1999 and (ii) discontinue capitalizing interest in 1999. The decrease of $4.7 million in 1998 compared to 1997 was primarily due to a reduction in outstanding debt as a result of open market purchases of the Company's first mortgage bonds.
Income tax expense, excluding the tax effect of extraordinary items, decreased $9.1 million in 1999 compared to 1998 primarily due to changes in pretax income, including the payment under the settlement agreement with Las Cruces, and certain permanent differences including an adjustment to the cash value of Company-owned life insurance policies and tax-exempt income. Income tax expense, excluding the tax effect of extraordinary items, was essentially unchanged for 1998 compared to 1997 primarily due to changes in pretax income which were offset by permanent differences such as bankruptcy fee settlements and tax-exempt income.
Extraordinary loss on repurchases of debt of $3.3 million and $2.8 million in 1999 and 1997, respectively, net of income tax benefit of $2.1 million and $1.5 million, represents the payment of premiums on debt repurchased and the recognition of unamortized issuance expenses on that debt with no comparable amounts in 1998.
Extraordinary gain on discharge of debt of $3.3 million in 1998, net of income tax expense of $2.1 million, represents unclaimed and undistributed funds designated for the payment of preconfirmation bankruptcy claims which reverted to the Company.
For the last several years, inflation has been relatively low and, therefore, has had little impact on the Company's results of operations and financial condition.
There are no new accounting standards pending implementation by the Company which would have a material effect on the Company's financial statements.
Item 7A.
Item 7A. 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. Substantially all financial instruments and positions held by the Company described below are held for purposes other than trading.
Interest Rate Risk
The Company's interest rate risk relates primarily to debt financing issued to fund capital and nuclear fuel requirements. Currently, the Company does not have a plan to issue long-term debt within the next five years. The Company's long-term debt obligations are all fixed-rate obligations with varying maturities, except for the pollution control revenue bonds which are variable- rate bonds and nuclear fuel financing which is based on floating rates. The Company's variable-rate pollution control revenue bonds have an aggregate principal amount of $193.1 million. The near-term losses from reasonably possible near-term increases in interest rates would not be material to the Company's financial position, results of operations and cash flows. The interest rate risk related to nuclear fuel financing is substantially mitigated through the operation of the Company's fuel and purchased power cost recovery clauses ("fuel clauses") in its Texas and wholesale rates. Under these fuel clauses, fuel expenses, including interest expense on nuclear fuel financing, are passed through to the customers. Pursuant to the New Mexico Settlement Agreement, fuel costs are recovered through the Company's base rates and are not subject to periodic reconciliation for fluctuations in fuel costs. The near- term losses from reasonably possible near-term increases in interest rates related to nuclear fuel financing for New Mexico fuel costs would not be material to the Company's financial position, results of operations and cash flows.
The Company's decommissioning trust funds consist of municipal bonds and equity securities and are carried at their market value. The Company faces interest rate risk related to the municipal bonds, which were valued at $24.2 million as of December 31, 1999. A hypothetical 10% increase in the rates quoted by the bond market would result in a $2.4 million reduction in fair value.
Equity Price Risk
The Company's decommissioning trust funds include marketable equity securities of approximately $32.9 million at December 31, 1999. A hypothetical 20% decrease in the prices quoted by stock exchanges would result in a $6.6 million reduction in fair value.
Commodity Price Risk
The Company utilizes contracts of various durations 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 contracts with variable- pricing provisions are exposed to fluctuations in prices due to unpredictable factors, such as weather, which impacts supply and demand. However, the Company's exposure to fuel price risk is substantially mitigated through the operation of its fuel clauses for Texas and wholesale customers as described above. Pursuant to the New Mexico Settlement Agreement, fuel costs are recovered through the Company's base rates and are not subject to periodic reconciliation for fluctuations in fuel costs. The near-term losses from reasonably possible near-term increases in market prices as they relate to the commodity price risk exposure for New Mexico fuel costs would not be material to the Company's financial position, results of operations and cash flows.
In the normal course of business, the Company utilizes contracts of various duration for the forward sale and purchases of electricity to effectively manage its available generating capacity. Such contracts include forward contracts for wholesale sales of generating capacity and energy during periods when the Company's available power resources are expected to exceed the requirements of its native load and wholesale customers. It may also include forward contracts for the purchase of wholesale capacity and energy during periods when the market price of electricity is below the Company's expected incremental power production costs. At December 31, 1999, there were no material open positions in these activities.
Item 8.
Item 8. Financial Statements and Supplementary Data
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors El Paso Electric Company
We have audited the accompanying balance sheets of El Paso Electric Company as of December 31, 1999 and 1998 and the related statements of operations, comprehensive operations, changes in common stock equity, and cash flows for the years ended December 31, 1999, 1998 and 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of El Paso Electric Company as of December 31, 1999 and 1998, and the results of its operations and its cash flows for the years ended December 31, 1999, 1998 and 1997, in conformity with generally accepted accounting principles.
KPMG LLP
El Paso, Texas February 11, 2000
See accompanying notes to financial statements.
EL PASO ELECTRIC COMPANY BALANCE SHEETS (Continued)
See accompanying notes to financial statements.
EL PASO ELECTRIC COMPANY STATEMENTS OF OPERATIONS (In thousands except for share data)
See accompanying notes to financial statements.
EL PASO ELECTRIC COMPANY STATEMENTS OF COMPREHENSIVE OPERATIONS (In thousands)
See accompanying notes to financial statements.
EL PASO ELECTRIC COMPANY STATEMENTS OF CHANGES IN COMMON STOCK EQUITY (In thousands except for share data)
See accompanying notes to financial statements.
EL PASO ELECTRIC COMPANY STATEMENTS OF CASH FLOWS (In thousands)
See accompanying notes to financial statements.
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
A. Summary of Significant Accounting Policies
General. El Paso Electric Company (the "Company") is a public utility engaged in the generation, transmission and distribution of electricity in an area of approximately 10,000 square miles in west Texas and southern New Mexico. The Company also serves wholesale customers in Texas, New Mexico, California and Mexico.
Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Basis of Presentation. The Company maintains its accounts in accordance with the Uniform System of Accounts prescribed by the Federal Energy Regulatory Commission (the "FERC"). The Company determined that it does not meet the criteria for the application of Statement of Financial Accounting Standards ("SFAS") No. 71, "Accounting for the Effects of Certain Types of Regulation," and accordingly does not report the effects of certain actions of regulators as assets or liabilities unless such actions result in assets or liabilities under generally accepted accounting principles for commercial enterprises in general.
Comprehensive Income. Certain gains and losses that are not recognized currently in the statements of operations are reported as other comprehensive income in accordance with SFAS No. 130, "Reporting Comprehensive Income."
Utility Plant. Effective February 12, 1996, the Company applied "fresh- start" reporting in accordance with Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7") and revalued its utility plant. Additions to utility plant subsequent to February 12, 1996 are reported at historical cost. Depreciation is provided on a straight-line basis over the estimated remaining lives of the assets (ranging from 5 years to 31 years), except for approximately $384 million of reorganization value allocated to net transmission, distribution and general plant in service. This amount is being depreciated over the ten-year period of a rate settlement (the "Texas Rate Stipulation"). Amortization of intangible plant (software) is provided on a straight-line basis over the estimated useful life of the asset (primarily three years).
The Company charges the cost of repairs and minor replacements to the appropriate operating expense accounts and capitalizes the cost of renewals and betterments. Gains or losses resulting from retirements or other dispositions of operating property in the normal course of business are credited or charged to the accumulated provision for depreciation.
The Company recorded a liability for the present value of the estimated decommissioning costs for the Company's interest in Palo Verde using a cost inflation rate of 3% and a discount rate of 6%. Accretion of the decommissioning liability is charged to other interest charges in the statements of operations.
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
The cost of nuclear fuel is amortized to fuel expense on a unit-of- production basis. A provision for spent fuel disposal costs is charged to expense based on requirements of the Department of Energy (the "DOE") for disposal cost of approximately one-tenth of one cent on each kWh generated. The Company is also expensing its share of costs, as incurred, associated with on site spent fuel storage at Palo Verde. See Note C.
Impairment of Long-Lived Assets. The Company evaluates impairment of its long-lived assets and certain intangible assets whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. An asset is deemed impaired if the sum of the expected future cash flows is less than the carrying amount of the asset.
Capitalized Interest. The Company capitalizes, to construction work in progress and nuclear fuel in process, interest cost calculated in accordance with SFAS No. 34, "Capitalization of Interest Cost."
Cash and Cash Equivalents. All temporary cash investments with an original maturity of three months or less are considered cash equivalents.
Investments. The Company's marketable securities, included in decommissioning trust funds in the balance sheets, are reported at fair market value and consist primarily of equity securities and municipal bonds in trust funds established for decommissioning of its interest in Palo Verde which had a fair market value of approximately $57.1 million at December 31, 1999. Such marketable securities are classified as "available-for-sale" securities and, as such, unrealized gains and losses are included in accumulated other comprehensive income as a separate component of common stock equity.
Inventories. Inventories, primarily parts, materials and supplies are stated at average cost not to exceed recoverable cost.
Operating Revenues Net of Energy Expenses. The Company accrues revenues for services rendered, including unbilled revenues and revenues generated by the Company's Energy Services Business Group (the "ESBG"). Energy expenses are stated at actual cost incurred. The Company's Texas retail customers are presently being billed under fixed fuel factors approved by the Texas Commission. Rate tariffs currently applicable to certain FERC jurisdictional customers contain appropriate fuel and purchased power cost adjustment provisions designed to recover the Company's fuel and purchased power costs. Any difference between fuel cost and fuel revenues charged to the Company's Texas and FERC jurisdictional customers is reflected as net over/undercollection of fuel revenues in the balance sheets.
Federal Income Taxes. The Company accounts for federal income taxes under the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized for the estimated future tax consequences of "temporary differences" by applying enacted statutory tax rates for each taxable jurisdiction applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The Company records a valuation allowance to reduce its deferred tax assets to the extent it is more likely than not that such deferred tax assets will not be realized. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date.
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
Earnings per Share. In 1997, the Company adopted the provisions of SFAS No. 128, "Earnings per Share," which establishes standards for computing and presenting earnings per share. Basic earnings per common share is computed by dividing net income, after deducting the preferred stock dividend requirements, by the weighted average number of common shares outstanding. Diluted earnings per common share is computed by dividing net income, after deducting the preferred stock dividend requirements, by the weighted average number of common shares and dilutive potential common shares outstanding.
Benefit Plans. See Note J for accounting policies regarding the Company's retirement plans and postretirement benefits.
Stock Options and Restricted Stock. The Company has a long-term incentive plan which reserves shares of common stock for issuance to officers, key employees and non-employee directors through the award or grant of stock options and restricted stock. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). Accordingly, compensation expense is recognized for the intrinsic value, if any, of option grants at measurement date ratably over the vesting period of the options. Compensation expense for the restricted stock awards is recognized for the fair value of the shares at the award date ratably over the restriction period. Unearned compensation related to restricted stock awards is shown as a reduction of common stock equity.
Reclassifications. Certain amounts in the financial statements for 1998 and 1997 have been reclassified to conform with the 1999 presentation.
Supplemental Statements of Cash Flows Disclosures (In thousands)
_________________________
(1) Includes interest on bonds, letter of credit fees related to bonds, and postload interest on nuclear fuel financing that was not capitalized.
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
B. Regulation
General
In 1999, both Texas and New Mexico enacted electric utility industry restructuring laws requiring competition in certain functions of the industry and ultimately in the Company's service area. The New Mexico Restructuring Law currently requires competition to begin on January 1, 2001. The Company believes the New Mexico Commission may delay the start of competition, but cannot predict the length of such delay, if any. Under the Texas Restructuring Law, the Company's Texas service area is exempt from competition until the expiration of the Freeze Period, currently scheduled to terminate in August 2005.
The Company is working to become more competitive in response to these new restructuring laws as well as other regulatory, economic and technological changes occurring throughout the industry. Deregulation of the production of electricity and related services and increasing customer demand for lower priced electricity and other energy services have accelerated the industry's movement toward more competitive pricing and cost structures. These competitive pressures could result in the loss of customers and diminish the ability of the Company to fully recover its investment in generation assets. This issue is particularly important to the Company because its rates are significantly higher than national and regional averages. As a result of the initiation of deregulation in New Mexico and other portions of Texas, the Company may face increasing pressure on its retail rates and its rate freeze under the Texas Rate Stipulation. The Company's results of operations and cash flows may be adversely affected if it cannot maintain its current retail rates.
The Company is particularly concerned with the ultimate recoverability of "stranded costs," or costs previously found by regulatory authorities to be reasonable and prudent, but which are higher than would be recovered under immediate, full competition. At the federal level, the FERC has announced, through a formal rulemaking, its intention to allow 100% recovery of all legitimate verifiable stranded costs attributable to FERC jurisdictional customers. The Texas Restructuring Law exempts the Company's Texas service area from retail competition, and preserves rates at their current levels, until the end of its Freeze Period. The Company is prohibited from recovering stranded costs or costs of transition to competition beyond the Freeze Period.
Under the New Mexico Restructuring Law, the New Mexico Commission may limit the Company's recovery of its stranded costs. The New Mexico Restructuring Law also allows for recovery of prudent costs related to transition to competition. See "New Mexico Regulatory Matters - Deregulation" below.
Texas Regulatory Matters
The rates and services of the Company in Texas municipalities are regulated by those municipalities, and in unincorporated areas by the Texas Commission. The largest municipality in the Company's service area is the City of El Paso. The Texas Commission has exclusive appellate jurisdiction to review municipal orders and ordinances regarding rates and services in Texas and jurisdiction over certain other activities of the Company. The decisions of the Texas Commission are subject to judicial review.
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
Deregulation. The Texas Restructuring Law requires an electric utility to separate its business activities into a power generation company, a retail electric provider, and a transmission and distribution utility by January 1, 2002. The Texas Restructuring Law also requires a utility to separate its customer energy services business from its regulated utility activities by September 1, 2000. A utility may accomplish this separation through creation of nonaffiliated companies, separate affiliated companies owned by a common holding company, or through the sale of assets to third parties. 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. See "New Mexico Regulatory Matters - Deregulation" below.
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 rates at their current levels until the end of its 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.
Texas Rate Stipulation and Texas Settlement Agreement. The Company's rates for its Texas customers are governed by a rate order entered by the Texas Commission adopting the Texas Rate Stipulation and Agreed Order. The Agreed Order implemented certain provisions of the Texas Rate Stipulation and set rates consistent with the Texas Rate Stipulation. Among other things, under the Texas Rate Stipulation: (i) the Company's base rates for most customers in Texas were fixed for the ten-year Freeze Period which began in August 1995; (ii) the City of El Paso granted the Company a new franchise that extends through the Freeze Period; (iii) the Company retains 75% during the first five years of the Freeze Period and 50% during the remainder of the Freeze Period of (a) the revenues generated by providing third-party transmission services and (b) profit margins from certain off-system power sales; (iv) the Company's reacquisition of the Palo Verde leased assets was deemed to be in the public interest; and (v) all appeals of Texas Commission orders concerning the Company and all outstanding Texas Commission dockets concerning the Company's rates were resolved.
Neither the Texas Rate Stipulation nor the Agreed Order deprives the Texas regulatory authorities of their jurisdiction over the Company during the Freeze Period. However, the Texas Commission determined in the Agreed Order that the rate freeze is in the public interest and results in just and reasonable rates. Further, the signatories to the Texas Rate Stipulation (other than the OPC and the State of Texas) agreed to not seek to initiate an inquiry into the reasonableness of the Company's rates during the Freeze Period and to support the Company's entitlement to rates at the freeze level throughout the Freeze Period. The Company believes, but cannot assure, that its cost of service will support rates at or above the freeze level throughout the Freeze Period and, therefore, does not believe any attempt to reduce the Company's rates would be successful. However, during the Freeze Period, the Company is precluded from seeking rate increases in Texas, even in the event of increased operating or capital costs. In the event of a merger, the parties to the Texas Rate Stipulation retain all rights provided in the Texas Rate Stipulation, the right to participate as a party in any proceeding related to the merger, and the right to pursue a reduction in rates below the freeze level to the extent of post- merger synergy savings.
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
Following the New Mexico Settlement Agreement (see "New Mexico Regulatory Matters - New Mexico Settlement Agreement" below), the Company offered to enter into a comparable agreement in Texas. Based upon that offer, the Company entered into the Texas Settlement Agreement providing for: (i) a total annual jurisdictional base rate reduction of approximately $15.4 million; (ii) reconciliation of approximately $221.2 million of fuel revenues to fuel expenses for the 42-month period ended December 31, 1998, with no disallowance; and (iii) an agreement to use 50% of all Palo Verde performance rewards related to evaluation periods after 1997, when collected, for low-income assistance and for DSM programs, primarily focused on small business customers, through the end of the Freeze Period. The Texas Settlement Agreement was filed with the Texas Commission, the City of El Paso and all other municipalities having jurisdiction. The Texas Commission approved the Texas Settlement Agreement in June 1999.
Fuel. Pursuant to Texas Commission rules, the Company must periodically make a filing to reconcile the revenues collected from Texas customers under its fixed fuel factor with the actual fuel and purchased power expenses incurred. Differences between revenues collected and expenses incurred during the reconciliation period are subject to a refund (in the case of an overrecovery of fuel costs) or surcharge (in the case of an underrecovery of fuel costs). The Texas Commission staff, local regulatory authorities such as the City of El Paso, and customers are entitled to intervene in a fuel reconciliation proceeding and to challenge the prudence of fuel and purchased power expenses. The Company's fuel expenses for its most recent reconciliation period of July 1995 through December 1998 were approved, with no disallowance, as part of the Texas Settlement Agreement.
Palo Verde Performance Standards. The Texas Commission established performance standards for the operation of Palo Verde, pursuant to which each Palo Verde unit is evaluated annually to determine whether its three-year rolling average capacity factor entitles the Company to a reward or subjects it to a penalty. There are five performance bands based around a target capacity factor of 70%. The capacity factor is calculated as the ratio of actual generation to maximum possible generation. If the capacity factor, as measured on a station-wide basis for any consecutive 24-month period, should fall below 35%, the Texas Commission could reconsider the rate treatment of Palo Verde, regardless of the provisions of the Texas Rate Stipulation and the Texas Settlement Agreement. The removal of Palo Verde from rate base could have a significant negative impact on the Company's revenues and financial condition. Performance rewards and penalties for the evaluation periods ending in 1997, 1996 and 1995, as well as an agreement regarding disposition of half of any future rewards, were resolved in the Texas Settlement Agreement and the IRP stipulation. The Company has calculated significant performance rewards for the three-year periods ended December 31, 1999 and 1998. However, the ultimate disposition of these rewards is subject to Texas Commission review during the periodic fuel reconciliation proceedings discussed above. Performance rewards are not recorded on the Company's books until a final determination has been ordered by the Texas Commission in a fuel reconciliation proceeding. Performance penalties are recorded when assessed as probable by the Company.
Integrated Resource Plan. Under Texas law and regulations of the Texas Commission, the Company was required to file an IRP in June 1998. The Company's IRP was the culmination of a lengthy planning process involving the Company, its customers, the Texas Commission, consumer advocates and various special interest groups. The purpose of integrated resource planning was to ensure acquisition of the lowest cost, adequate resources necessary to meet the varied needs of the Company
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
and its customers, and to ensure the equitable allocation and distribution of the benefits of such resource acquisitions and other system benefits to all customer classes. The Company entered into an agreement with all parties with respect to all IRP issues, and a Texas Commission order adopting the agreement was issued in January 1999. Pursuant to the agreement, the Company will meet its resource needs through a combination of short-term purchased power and a DSM program. Pursuant to the IRP, the Company expects to incur DSM expenditures annually of approximately $1.0 million through 2001. Additionally, the Company committed a total of approximately $1.0 million to fund a low-income weatherization and energy efficiency program over a three-year period beginning in 1999. Finally, in response to interest expressed by its customers and encouragement from the Texas Commission and environmental advocates, the Company has committed to the development of renewable resources. Pursuant to the stipulation settling the IRP, the Company has pledged $3.6 million of prior Palo Verde performance rewards, including related interest, collected by the Company as a result of the Texas Settlement Agreement as initial financing for the development of renewable resources. The Company does not believe the IRP agreement will cause it to incur net costs materially in excess of those that would have been incurred in the absence of its IRP. Nevertheless, because of the Texas Rate Stipulation and the Texas Settlement Agreement, the Company will not be able to increase its rates to recover any increase in net costs actually experienced as a result of its IRP. Going forward, the Texas Restructuring Law abolished the requirement for utilities to develop IRPs; therefore, the Company will have no further IRP obligation after December 31, 2001.
New Mexico Regulatory Matters
The New Mexico Commission has jurisdiction over the Company's rates and services in New Mexico and over certain other activities of the Company, including prior approval of the issuance, assumption or guarantee of securities. The New Mexico Commission's decisions are subject to judicial review. In January 1999, pursuant to a state constitutional amendment passed in 1996, the three- member appointed commission was replaced by an elected commission from five single-member districts, with regulatory responsibility for electricity, gas, water, telecommunications, insurance and securities activities within the state. The Company's New Mexico service area falls entirely within one district. The largest city in the Company's New Mexico service territory is Las Cruces, which in 1999 accounted for approximately 8% of the Company's total revenue.
Deregulation. 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. Originally, utilities were required to file transition plans addressing the various restructuring issues, including the recovery of stranded costs, by March 1, 2000, which was subsequently extended to June 1, 2000. 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 filed its Transition Plan-Phase I early to allow the Company to obtain regulatory and other approvals necessary to complete its corporate separation by the January 1, 2001 deadline under the New Mexico Restructuring Law. The Company 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. The Company will file its Transition Plan-Phase II by June 1, 2000, detailing the Company's proposed processes and procedures to implement customer choice in New Mexico.
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
Under the New Mexico Restructuring Law, retail customer choice is currently scheduled to begin January 1, 2001 for public post-secondary educational institutions, public schools and residential and small business customers. Retail customer choice is currently scheduled to begin January 1, 2002 for all other customers. The New Mexico Restructuring Law allows a utility to recover at least 50% of its stranded costs with up to 100% recovery allowed if the New Mexico Commission determines that additional recovery (i) is in the public interest, (ii) is necessary to maintain the utility's financial integrity, (iii) is necessary to continue adequate and reliable service, and (iv) will not cause an increase in rates to residential and small business customers. The New Mexico Restructuring Law, however, includes decommissioning costs as part of stranded costs. Because the New Mexico Restructuring Law defines decommissioning costs as a stranded cost, it is possible that the New Mexico Commission may allow only 50% recovery of decommissioning costs. However, the New Mexico Restructuring Law also specifically provides that nothing in the law should be interpreted as requiring the New Mexico Commission to issue an order which would jeopardize the exclusive use of the external sinking fund method for meeting decommissioning obligations pursuant to federal guidelines. The Company believes this provision requires the full recovery of New Mexico decommissioning requirements over the life of the nuclear asset through a separate non-bypassable wires charge. The Company cannot predict how the New Mexico Commission will ultimately treat this matter.
The New Mexico Restructuring Law allows the Company to recover reasonable, prudent and unmitigated costs that the Company would not have incurred but for its compliance with the New Mexico Restructuring Law. These transition costs do not include stranded costs, costs the Company can collect under federally approved rates or rates approved by the New Mexico Commission, or any costs the Company would have incurred regardless of the New Mexico Restructuring Law. The Company cannot predict whether the New Mexico Commission will allow the Company to recover all of its transition costs.
The New Mexico Restructuring Law also allowed the New Mexico Commission to review and either confirm, reject or modify the Company's New Mexico Settlement Agreement. On November 30, 1999, the New Mexico Commission issued a final order finding that the Company's New Mexico Settlement Agreement did not, under the terms of the New Mexico Restructuring Law, constitute a plan or approval for recovery of stranded costs. On December 30, 1999, the Company filed a motion for rehearing requesting the New Mexico Commission to confirm that it would determine the Company's stranded costs by using either (i) the stranded cost recovery formula contained in the New Mexico Restructuring Law, applied to the Company's generation asset values in effect prior to the rate base write-downs contained in the New Mexico Settlement Agreement, or (ii) the Company's stranded costs contained in the New Mexico Settlement Agreement. This would allow the Company to either (i) preserve the stranded cost benefits obtained in the New Mexico Settlement Agreement or (ii) be subject to the same stranded cost provisions of the New Mexico Restructuring Law as every other electric utility in New Mexico. On January 18, 2000, the New Mexico Commission issued an order granting the Company's request.
New Mexico Settlement Agreement. In July 1998, the Company entered into the New Mexico Settlement Agreement with certain parties, including the New Mexico Commission staff and the New Mexico Attorney General, but not Las Cruces. In September 1998, the New Mexico Commission issued an order adopting, with some modification, the New Mexico Settlement Agreement. The
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
New Mexico Settlement Agreement became effective on October 26, 1998 and provides for (i) a total annual jurisdictional base revenue reduction of $4.6 million; (ii) a 30-month moratorium on rate increases or decreases in New Mexico; (iii) the elimination of the need for future fuel reconciliations in New Mexico by incorporating the existing fixed fuel factor into base rates; (iv) an increased degree of ratemaking certainty for the future achieved by an agreement among the signatories reducing the net value of certain assets by approximately $56 million on a New Mexico jurisdictional basis for ratemaking purposes (but with no effect on book values), while establishing the signatories' agreement that the Company is entitled to 100% recovery of such revalued assets; and (v) the ability to enter into long-term rate contracts with commercial and industrial customers in New Mexico. Additionally, as a result of the New Mexico Settlement Agreement, the Company will contribute $0.4 million annually ($1.0 million over the term of the moratorium period) to a social services agency in Dona Ana County providing assistance to low-income individuals. Although the New Mexico Settlement Agreement was structured to allow recovery of previously underrecovered fuel balances, the order adopting the New Mexico Settlement Agreement does not support the recognition of this asset in the Company's financial statements under existing accounting standards. The Company wrote off the book value of undercollected fuel revenues in its New Mexico jurisdiction as of September 30, 1998, which amounted to $3.8 million, net of tax, although the Company believes that, based on current estimates of future fuel prices and operating costs, it will recover 100% of these amounts.
Fuel. Prior to the New Mexico Settlement Agreement, the Company was required to file annual reports reconciling the revenues collected under its New Mexico fixed fuel factor with its New Mexico fuel and purchased power expenses, along with the results of the application of Palo Verde performance standards. As a result of the New Mexico Settlement Agreement, outstanding fuel issues from filings in 1998 and 1997 were satisfactorily resolved with no disallowance of fuel and purchased power costs or the performance rewards, and the existing fixed fuel factor was incorporated into base rates.
Palo Verde Performance Standards. As a result of the New Mexico Settlement Agreement, the Palo Verde performance standards, which had been in place since 1986, were eliminated. Consequently, the Company is no longer entitled to a reward or exposed to a penalty in New Mexico resulting from the operations of Palo Verde. The performance standards report filed with the New Mexico Commission in January 1998 was the final such report and entitled the Company to a reward of $1.1 million.
Federal Regulatory Matters
Federal Energy Regulatory Commission. The Company is subject to regulation by the FERC in certain matters, including rates for wholesale power sales, transmission of electric power and the issuance of securities.
On December 15, 1999, the FERC approved its final rule ("Order 2000") on Regional Transmission Organizations ("RTOs"). Order 2000 strongly encourages, but does not require, public utilities to form and join RTOs. Order 2000 establishes (i) the minimum characteristics and functions an RTO must satisfy to obtain FERC acceptance; (ii) a collaborative process allowing public utilities and non-public utilities that own, operate or control interstate transmission facilities, consulting with state officials as appropriate, to consider and develop RTOs; (iii) a proposal to consider transmission ratemaking returns on a case-specific basis; (iv) opportunities for non-monetary regulatory benefits for RTOs, including deference in dispute resolution and streamlined filing and approval procedures; and
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(v) a time line for public utilities to make appropriate filings with the FERC to initiate operation of RTOs. All public utilities that own, operate or control interstate transmission facilities must file, by October 15, 2000, either a proposal to participate in an RTO or an alternative filing describing efforts and plans to participate in an RTO. Order 2000 also proposes RTO startup by December 15, 2001.
The Company is an active participant in the development of the Desert Southwest Transmission and Reliability Operator ("Desert Star"). The Company believes Desert Star will qualify as an RTO under Order 2000. The Company intends, subject to the resolution of outstanding issues, to participate in Desert Star. As a participating transmission owner, the Company will transfer operations of its transmission system to Desert Star. The Company believes the Desert Star proposal will be submitted to the FERC by October 15, 2000. Desert Star is currently scheduled to become operational by January 1, 2002. If Desert Star fails to become operational, the Company intends to participate in another RTO similar to Desert Star.
In April 1996, the FERC issued its Order No. 888, requiring all public utilities owning, operating or controlling facilities used for transmitting electricity in interstate commerce to allow access to their transmission facilities under minimum terms and conditions of non-discriminatory service, including transmission service for their own new wholesale sales and purchases of electric energy. Additionally, Order No. 888 permits public utilities to seek recovery of legitimate, prudent and verifiable stranded costs and provides a mechanism for the recovery of such costs.
In April 1996, the FERC also issued Order No. 889, which requires all public utilities owning, operating or controlling facilities used for transmitting electricity in interstate commerce to develop and maintain an Open Access Same-Time Information System that will give existing and potential transmission users access to transmission-related information on a basis consistent with that available to a utility's employees engaged in the buying and selling of power. Order No. 889 further requires public utilities to separate their transmission and generation marketing functions and adopt standards of conduct ensuring that all open access transmission customers are treated in a non-discriminatory manner.
Pursuant to Order No. 888, the Company filed its non-discriminatory open access transmission tariffs with the FERC in July 1996. The Company reached a settlement with the various parties regarding rates for transmission and ancillary services under these tariffs. However, the settlement, which was filed with the FERC in March 1997 and approved by the FERC in June 1998, did not resolve issues that had been raised with respect to the manner in which the Company will determine the amount of transmission capacity that is available for use by third parties desiring to use its transmission system.
In May 1999, the FERC issued its opinion in a proceeding brought by SPS regarding the use of the Company's transmission system to serve Las Cruces, holding that once the Company's calculation of available transmission capacity was adjusted to reflect the assumed discontinuation of service to Las Cruces and CFE, the Company would have sufficient transmission capacity over the Eddy County tie to meet SPS' request for firm transmission service. Although the Company has filed a compliance filing as required by the FERC's order, the filing reflects that the Company does not have sufficient transmission capacity over the Eddy County tie to meet SPS' request for firm transmission service. The Company filed a motion for rehearing of the FERC's decision. The FERC has extended its time limit for ruling on this motion. The Company does not expect a material financial impact from this FERC
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ruling. However, the Company is concerned that an adverse FERC ruling would result in impaired reliability of service to the Company's retail customers and increased costs. This case will not be automatically dismissed under the settlement agreement with Las Cruces because SPS, not Las Cruces, was the original complainant. Although the SPS complaint was based upon the creation of a Las Cruces municipal utility, the Company cannot predict whether the case will be dismissed as a result of its settlement with Las Cruces.
On February 24, 2000, the Company and Las Cruces entered into a settlement agreement ending Las Cruces' efforts to municipalize the Company's distribution system in Las Cruces. Under the terms of the settlement agreement, all existing litigation between the Company and Las Cruces, including all litigation pending before the FERC, will be dismissed. For a discussion of this settlement agreement, see Note I.
Department of Energy. The DOE regulates the Company's exports of power to CFE in Mexico pursuant to a license granted by the DOE and a presidential permit. The DOE has determined that all such exports over international transmission lines shall be made in accordance with Order No. 888. The DOE is authorized to assess operators of nuclear generating facilities for a share of the costs of decommissioning the DOE's uranium enrichment facilities and for the ultimate costs of disposal of spent nuclear fuel. See Note C for discussion of spent fuel storage and disposal costs.
Nuclear Regulatory Commission. The NRC has jurisdiction over the Company's licenses for Palo Verde and regulates the operation of nuclear generating stations to protect the health and safety of the public from radiation hazards. The NRC also has the authority to conduct environmental reviews pursuant to the National Environmental Policy Act.
Wholesale Customers
The Company provides IID with 100 MW of firm capacity and associated energy and 50 MW of system contingent capacity and associated energy pursuant to a 17- year agreement which expires April 30, 2002. The Company also provides TNP with up to 75 MW of firm power and associated energy pursuant to an agreement which expires December 31, 2002. The contract allows TNP to specify a maximum annual amount with one year's notice. TNP elected to receive up to 25 MW for 2000.
C. Palo Verde and Other Jointly-Owned Utility Plant
The Company owns a 15.8% interest in each of the three nuclear generating units and common facilities at Palo Verde. The Palo Verde Participants include the Company, five other utilities and Arizona Public Service Company ("APS"), which serves as operating agent for Palo Verde. The operation of Palo Verde and the relationship among the Palo Verde Participants is governed by the Arizona Nuclear Power Project Participation Agreement (the "ANPP Participation Agreement").
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Other jointly-owned utility plant includes 7% of Units 4 and 5 at Four Corners Generating Station ("Four Corners") and certain other transmission facilities. A summary of the Company's investment in jointly-owned utility plant, excluding fuel, at December 31, 1999 and 1998 is as follows (In thousands):
Pursuant to the ANPP Participation Agreement, the Palo Verde Participants share costs and generating entitlements in the same proportion as their percentage interests in the generating units, and each participant is required to fund its proportionate share of fuel, other operations, maintenance and capital costs, which, except capital costs, are included in the corresponding expense captions in the statements of operations. The Company's total monthly share of these costs was approximately $6.9 million in 1999. The ANPP Participation Agreement provides that if a participant fails to meet its payment obligations, each non-defaulting participant shall pay its proportionate share of the payments owed by the defaulting participant.
Decommissioning. Pursuant to the ANPP Participation Agreement and federal law, the Company must fund its share of the estimated costs to decommission Palo Verde Units 1, 2 and 3, including the Common Facilities, over their estimated useful lives of 40 years (to 2024, 2025 and 2027, respectively). The Company's funding requirements are determined periodically based upon engineering cost estimates performed by outside engineers retained by APS.
In December 1998, the Palo Verde Participants approved an updated decommissioning study. The 1998 study determined that the Company will have to fund approximately $280.5 million (stated in 1998 dollars) to cover its share of decommissioning costs. Cost estimates for decommissioning have increased with each study. The previous cost estimate from a 1995 study determined that the Company would have to fund approximately $229 million (stated in 1995 dollars). The 1998 estimate reflects a 22% increase from the 1995 estimate primarily due to increases in estimated costs for spent fuel storage after operations have ceased. See "Spent Fuel Storage" below.
Although the 1998 study was based on the latest available information, there can be no assurance that decommissioning cost estimates will not continue to increase in the future or that regulatory requirements will not change. In addition, until a new low-level radioactive waste repository opens and operates for a number of years, estimates of the cost to dispose of low-level radioactive waste are subject to significant uncertainty. The decommissioning study is updated every three years and a new study is expected to be completed in 2001. See "Disposal of Low-Level Radioactive Waste" below.
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
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preclude the Company from seeking a rate increase in Texas to recover increases in decommissioning cost estimates during the Freeze Period. See Note B.
Prior to the start of competition in New Mexico, the Company will continue to collect 100% of its decommissioning cost estimates under the New Mexico Settlement Agreement. Under the New Mexico Restructuring Law, however, the New Mexico Commission could effectively reduce the Company's recovery of its decommissioning costs. See Note B.
The Company has established external trusts with independent trustees, which enable the Company to record a current deduction for federal income tax purposes of a portion of amounts funded. As of December 31, 1999, the fair market value of the trust funds was approximately $57.1 million, which is reflected in the Company's balance sheet in deferred charges and other assets.
Steam Generators. Palo Verde has experienced degradation in the steam generator tubes of each unit. APS has undertaken an ongoing investigation and analysis and has performed corrective actions designed to mitigate further degradation. Corrective actions have included changes in operational procedures designed to lower the operating temperatures of the units, chemical cleaning and the implementation of other technical improvements. APS has stated that it believes its remedial actions have slowed the rate of tube degradation.
The projected service lives of the units' steam generators are reassessed by APS periodically in conjunction with inspections made during scheduled outages of the Palo Verde units. In 1997, the Palo Verde Participants unanimously approved the purchase of one set of spare steam generators for delivery in September 2002. In December 1999, the Palo Verde Participants unanimously approved installation of the new steam generators in Unit 2. The Company's portion of total costs associated with construction and installation of new steam generators in Unit 2, including replacement power costs, is currently estimated not to exceed $44 million. APS has also stated that, based on the latest available data, it estimates that the steam generators in Units 1 and 3 should operate for their designated lives of 40 years. However, APS is reassessing whether it is economically desirable to replace the steam generators in Units 1 and 3. Such replacements would also require the unanimous approval of the Palo Verde Participants.
The Texas Rate Stipulation precludes the Company from seeking a rate increase during the Freeze Period to recover additional capital costs associated with the replacement of steam generators. The Company cannot recover these costs through regulated rates in New Mexico since generation and power supply are currently scheduled to become a competitive function in January 2001 under the New Mexico Restructuring Law. Finally, the Company cannot assure that it will be able to recover these capital costs through its wholesale power rates or its competitive retail rates that become applicable after the start of competition. See also Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview."
Spent Fuel Storage. In June 1999, APS requested approval from the NRC to use more of the space in the existing spent fuel storage facilities at Palo Verde. The NRC approved this request on March 2, 2000. As a result, the spent fuel storage facilities will have sufficient capacity to store all fuel expected to be discharged from normal operation of all three Palo Verde units through 2003. Alternative on-site storage facilities are currently being constructed to supplement existing facilities. Spent fuel will be
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NOTES TO FINANCIAL STATEMENTS
removed from the original facilities as necessary and placed in special storage casks which will be stored at the new facilities until accepted by the DOE for permanent disposal. The alternative facilities will be built in stages to accommodate casks on an as needed basis and are expected to be available for use by the end of 2002.
Pursuant to the Nuclear Waste Policy Act of 1982, as amended in 1987 (the "Waste Act"), the DOE is legally obligated to accept and dispose of all spent nuclear fuel and other high-level radioactive wastes generated by all domestic power reactors. In accordance with the Waste Act, the DOE entered into a spent nuclear fuel contract with the Company and all other Palo Verde Participants. In November 1989, the DOE reported that its spent nuclear fuel disposal facilities would not be in operation until 2010. Subsequent judicial decisions required the DOE to start accepting spent nuclear fuel by January 31, 1998. The DOE did not meet that deadline, and the Company cannot currently predict when spent fuel shipments to the DOE's permanent disposal site will commence. The 1998 decommissioning study assumes that only 14 of 333 spent fuel casks will have been removed from Palo Verde by 2037 when title to the remaining spent fuel is assumed to be transferred to the DOE. In January 1997, the Texas Commission established a project to evaluate what, if any, action it should take with regard to payments made to the DOE for funding of the DOE's obligation to start accepting spent nuclear fuel by January 31, 1998. After receiving initial comments, no further action has been taken on the project.
In July 1998, APS filed, on behalf of all Palo Verde Participants, a petition for review with the United States Court of Appeals for the District of Columbia Circuit seeking confirmation that findings by the Circuit Court in a prior case brought by Northern States Power regarding the DOE's failure to comply with its obligation to begin accepting spent nuclear fuel would apply to all spent nuclear fuel contract holders. The Circuit Court held APS' petition in abeyance pending the United States Supreme Court's decision to review the Northern States Power case. In November 1998, the Supreme Court denied review of this case. The Circuit Court subsequently dismissed APS' petition after the Circuit Court issued clarifying orders essentially granting the relief sought by APS. APS is monitoring pending litigation between the DOE and other nuclear operators before initiating further legal proceedings or other procedural measures on behalf of the Palo Verde Participants to enforce the DOE's statutory and contractual obligations. The Company is unable to predict the outcome of these matters at this time.
The Company expects to incur significant spent fuel storage costs during the life of Palo Verde that it believes are the responsibility of the DOE. These costs will be expensed as incurred until an agreement is reached with the DOE for recovery of these costs. However, the Company cannot predict when, if ever, these additional costs will be recovered from the DOE.
Disposal of Low-Level Radioactive Waste. Congress has established requirements for the disposal by each state of low-level radioactive waste generated within its borders. Arizona, California, North Dakota and South Dakota have entered into a compact (the "Southwestern Compact") for the disposal of low-level radioactive waste. California will act as the first host state of the Southwestern Compact, and Arizona will serve as the second host state. The construction and opening of the California low-level radioactive waste disposal site in Ward Valley has been delayed due to extensive public hearings, disputes over environmental issues and review of technical issues related to the proposed site. Palo Verde is projected to undergo decommissioning during the period in which Arizona will act as host for the Southwestern Compact. However, the opposition, delays, uncertainty and costs experienced in
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NOTES TO FINANCIAL STATEMENTS
California demonstrate possible roadblocks that may be encountered when Arizona seeks to open its own waste repository.
Liability and Insurance Matters. The Palo Verde Participants have public liability insurance against nuclear energy hazards up to the full limit of liability under federal law. The insurance consists of $200 million of primary liability insurance provided by commercial insurance carriers, with the balance being provided by an industry-wide retrospective assessment program, pursuant to which industry participants would be required to pay an assessment to cover any loss in excess of $200 million. Effective August 1998, the maximum assessment per reactor for each nuclear incident is approximately $90.7 million, subject to an annual limit of $10 million per incident. Based upon the Company's 15.8% interest in Palo Verde, the Company's maximum potential assessment per incident is approximately $43.0 million for all three units with an annual payment limitation of approximately $4.7 million.
The Palo Verde Participants maintain "all risk" (including nuclear hazards) insurance for damage to, and decontamination of, property at Palo Verde in the aggregate amount of $2.75 billion, a substantial portion of which must first be applied to stabilization and decontamination. Finally, the Company has obtained insurance against a portion of any increased cost of generation or purchased power which may result from an accidental outage of any of the three Palo Verde units if the outage exceeds 12 weeks.
Coal Reclamation. In 1999, upon final review of a study conducted by an outside engineering firm, the Company reduced its estimated final reclamation and coal mine closure liability related to the Company's interest in Four Corners from $14.8 million to $8.2 million. The $6.6 million adjustment was recorded as a reduction of energy expenses in the fourth quarter of 1999.
D. Common Stock
Overview
The Company's common stock has a stated value of $1 per share, with no cumulative voting rights or preemptive rights. Holders of the common stock have the right to elect the Company's directors and to vote on other matters.
Prior to September 1999, the Company's First and Second Supplemental Indentures restricted the Company's ability to pay dividends on its common stock. So long as the Company's First Mortgage Bonds are outstanding and the series with the longest maturity was not rated "investment grade" by either Standard & Poor's Rating Service ("S&P") or Moody's Investors Service, Inc. ("Moody's"), the Company was significantly limited in its ability to declare any dividend on the common stock, other than in additional shares of common stock. The Company's First Mortgage Bonds were upgraded to investment grade by S&P in September 1999 and by Moody's in November 1999.
1996 and 1999 Long-Term Incentive Plans
The 1996 Long-Term Incentive Plan (the "1996 Plan") authorized the issuance of up to 3,500,000 shares of common stock for the benefit of officers, key employees and non-employee directors
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NOTES TO FINANCIAL STATEMENTS
through the award or grant of non-statutory stock options, incentive stock options, stock appreciation rights, restricted stock, bonus stock and performance stock.
In May 1999, the Company's shareholders approved the adoption of a stock- based long-term incentive plan (the "1999 Plan"). Under the 1999 Plan, directors, officers, managers, other employees and consultants are eligible to receive non-statutory stock options, incentive stock options, stock appreciation rights, restricted stock, bonus stock and performance shares covering up to two million shares of common stock. In July 1999, the Company filed its Registration Statement on Form S-8 registering the two million shares of common stock reserved for issuance under the 1999 Plan. In August 1999, the FERC approved the issuance of shares under the 1999 Plan.
Stock Options. Stock options have been granted at prices equal to or greater than the market value of the shares at the date of grant. The options expire ten years from the date of grant unless terminated earlier by the Board of Directors. The following table summarizes the transactions of the Company's stock options for 1999, 1998 and 1997:
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NOTES TO FINANCIAL STATEMENTS
Stock option awards provide for vesting periods of up to five years. Stock options outstanding at December 31, 1999 are as follows:
The Company has adopted the disclosure-only provisions of SFAS No. 123. Accordingly, because the stock option grants had no intrinsic value at the measurement date, no compensation expense has been recognized. Had compensation expense for the plan been determined based on the fair value at the grant date, consistent with the provisions of SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts presented below:
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NOTES TO FINANCIAL STATEMENTS
The fair value for these options was estimated at the grant date using the Black-Scholes option pricing model. Weighted average assumptions and grant-date fair value for 1999, 1998 and 1997 are presented below:
Restricted Stock. The Company has awarded vested and unvested restricted stock awards under the 1996 Plan. Restrictions from resale generally lapse, and unvested awards vest, over periods of four to five years. The market value of the restricted stock at the time of grant is recorded as unearned compensation as a separate component of common stock equity and is amortized to expense over the restriction period. During 1999, 1998 and 1997, approximately $1.2 million, $0.5 million and $0.5 million, respectively, related to restricted stock awards was charged to expense. The following table summarizes the vested and unvested restricted stock awards for 1999, 1998 and 1997:
The holder of a restricted stock award has rights as a shareholder of the Company, including the right to vote and, if applicable, receive cash dividends on restricted stock, except that certain restricted stock awards require any cash dividend on restricted stock to be delivered to the Company in exchange for additional shares of restricted stock of equivalent market value.
Common Stock Repurchase Program
In May 1999, the Company's Board of Directors approved a stock repurchase program allowing the Company to purchase outstanding shares of its common stock from time to time, up to a total of six million shares. The Company will make purchases primarily in the open market at prevailing prices and will also engage in private transactions, if appropriate. The shares that the Company acquires will be available for issuance under employee benefit and stock option plans or may be retired. As of
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NOTES TO FINANCIAL STATEMENTS
December 31, 1999, the Company had repurchased 3,169,289 shares of common stock at a cost of approximately $28.7 million, including commissions.
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:
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NOTES TO FINANCIAL STATEMENTS
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) 300,000 options granted June 11, 1996 at an exercise price of $7.00 were excluded for the second through fourth quarters of 1997. 2) 525,000 options granted January 2, 1998 at an exercise price of $7.50 were excluded for the first quarter of 1998. 3) 60,000 options granted May 29, 1998 at an exercise price of $9.50 were excluded for the second through fourth quarters of 1998 and all of 1999. 4) 100,000 options granted January 11, 1999 at an exercise price of $8.75 were excluded for the first and second quarters of 1999.
E. Preferred Stock
In March 1999, after obtaining required consents of holders of certain of the Company's outstanding debt securities, the Company redeemed its Series A Preferred Stock. The Company paid the redemption price of approximately $139.6 million, accrued cash dividends of $1.3 million, and premium, fees and costs of securing the consents aggregating $9.6 million. The preferred stock had an annual dividend rate of 11.40%.
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NOTES TO FINANCIAL STATEMENTS
Following is a summary of the changes in the preferred stock for 1999, 1998 and 1997:
F. Long-Term Debt and Financing and Capital Lease Obligations
Outstanding long-term debt and financing and capital lease obligations are as follows:
- -------------------- (1) First Mortgage Bonds
Substantially all of the Company's utility plant is subject to liens under the First Mortgage Indenture.
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NOTES TO FINANCIAL STATEMENTS
The First Mortgage Indenture imposes certain limitations on the ability of the Company to (i) declare or pay dividends on common stock; (ii) incur additional indebtedness or liens on mortgaged property; and (iii) enter into a consolidation, merger or sale of assets.
The Company repaid the remaining $36.0 million of Series A bonds at their maturity on February 1, 1999. The Series B, C and D bonds may not be redeemed by the Company prior to maturity. The Series E bonds may be redeemed at the option of the Company, in whole or in part, on or after February 1, 2006. The Company is not required to make mandatory redemption or sinking fund payments with respect to the bonds prior to maturity.
Repurchases of First Mortgage Bonds made during 1999, 1998 and 1997 are as follows (In thousands):
(2) Pollution Control Bonds
The Company has four series of tax exempt Pollution Control Bonds in an aggregate principal amount of approximately $193.1 million. The average effective annual interest rate on the bonds is calculated to be 6.17% at December 31, 1999. The bonds may be required to be repurchased at the holder's option or are subject to mandatory redemption upon the occurrence of certain events, and are redeemable at the option of the Company under certain circumstances. Each of the tax exempt issues is enhanced by a letter of credit. The Company's obligation to the issuing banks pursuant to the letter of credit reimbursement agreements are secured by First Mortgage Collateral Series Bonds (the "Collateral Series Bonds") issued pursuant to the First Mortgage Indenture in the amount of the letters of credit.
(3) Promissory Note
The note has an annual interest rate of 5.5% and is secured by certain furniture and fixtures.
(4) Nuclear Fuel Financing
The Company has available a $100 million credit facility that provides for up to $70 million for the financing of nuclear fuel and up to $50 million, depending on the balance of nuclear fuel financings, for working capital. This financing is accomplished through a trust that borrows under the facility to acquire and process the nuclear fuel. The Company is obligated to repay the trust's borrowings with interest, and has secured this obligation with the Collateral Series Bonds. In the Company's financial statements, the assets and liabilities of the trust are reported as assets and liabilities of the Company.
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NOTES TO FINANCIAL STATEMENTS
(5) Copper Turbine Lease Obligation
The Company leases a turbine and certain other related equipment under a lease which is currently accounted for as a capital lease and expires in July 2000. Semiannual lease payments, including interest, are approximately $0.9 million through July 2000. The effective annual interest rate implicit in this lease is calculated to be 9.6%. The Company has renewed the lease through July 2005, with an extension option for two additional years. The renewal lease will be accounted for as an operating lease as of the effective date of the lease renewal and requires semiannual lease payments of approximately $0.4 million.
The letter of credit reimbursement agreements which enhance the Company's Pollution Control Bonds and the $100 million credit facility require compliance with certain total debt and interest coverage ratios. The Company maintained the required compliance throughout 1999.
As of December 31, 1999, the scheduled maturities for the next five years of long-term debt and financing and capital lease obligations are as follows (In thousands):
2000............................................... $27,042 2001............................................... 61,701 2002............................................... 104 2003............................................... 94,615 2004............................................... 116
The table above does not reflect future obligations and maturities related to nuclear fuel purchase commitments.
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NOTES TO FINANCIAL STATEMENTS
G. Income Taxes
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 1999 and 1998 are presented below (In thousands):
The deferred tax asset valuation allowance decreased by $0.7 million, $0.8 million and $0.8 million in 1999, 1998 and 1997, respectively. These decreases were due to a reduction of unused state net operating loss ("NOL") carryforward benefits, which had valuation allowances recorded against them. Based on the average annual book income before taxes for the prior three years, excluding the effects of extraordinary and unusual or infrequent items, the Company believes that the net deferred tax assets will be fully realized at current levels of book and taxable income. Approximately $26.8 million of the Company's valuation allowance at December 31, 1999, if subsequently recognized as a tax benefit, would be credited directly to capital in excess of stated value in accordance with SOP 90-7.
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NOTES TO FINANCIAL STATEMENTS
The Company recognized income taxes as follows (In thousands):
The current federal income tax expense for 1999, 1998 and 1997 results primarily from the accrual of alternative minimum tax ("AMT"). Deferred federal income tax includes an offsetting AMT benefit of $2.1 million, $2.8 million and $2.4 million for 1999, 1998 and 1997, respectively.
Federal income tax provisions differ from amounts computed by applying the statutory rate of 35% to book income before federal income tax as follows (In thousands):
As of December 31, 1999, the Company had $393.6 million of federal tax NOL carryforwards, $20.4 million of investment tax credit ("ITC") carryforwards and $16.8 million of AMT credit carryforwards. If unused, the NOL carryforwards would expire at the end of 2011, the ITC carryforwards would expire in 2001 through 2005, and the AMT credit carryforwards have an unlimited life. The Company had $367.1 million of state NOL carryforwards which, if unused, would expire at the end of 2001. These tax attributes are subject to audit by the Internal Revenue Service ("IRS"). The IRS is in the preliminary stages of its examination of the carryforwards and the 1996 through 1998 federal income tax returns. The differences between book and taxable income were primarily due to depreciation, plant basis differences and deferred fuel costs.
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NOTES TO FINANCIAL STATEMENTS
H. Commitments and Contingencies
Sale/Leaseback Indemnification Obligations
Pursuant to the Palo Verde sale/leaseback participation agreements and leases, if the lessors incur additional tax liability or other loss as a result of federal or state tax assessments related to the sale/leaseback transactions, the lessors may have claims against the Company for indemnification.
One of the lessors in the sale/leaseback transactions related to Unit 2 of Palo Verde notified the Company that the IRS raised issues, primarily related to ITC claims by the lessor, regarding the income tax treatment of the sale/leaseback transactions. Although the Company believes the lessor has meritorious defenses to the IRS' position, the Company cannot predict the outcome of this matter. The lessor has advised the Company that it held several meetings with the IRS in 1999 and anticipates a final report from the IRS in which these issues will be favorably resolved.
The Company estimates that the total amount of potential claims for indemnification from all lessors related to the issues raised by the IRS could approximate $10.0 million, exclusive of any applicable interest, if the IRS prevails. The Company does not believe it is probable that a loss has been incurred and, therefore, has made no provision in the accompanying financial statements related to this matter.
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.
I. Litigation
Litigation with Las Cruces
On February 24, 2000, the Company and Las Cruces entered into a settlement agreement ending Las Cruces' efforts to municipalize the Company's distribution assets and other facilities used to provide electric service to customers in Las Cruces. Under the settlement agreement the Company will pay Las Cruces a one- time lump sum payment of up to $21 million, $16.5 million of which was expensed in the fourth quarter of 1999. The remaining $4.5 million relates to the transfer of Las Cruces' West Mesa Substation and related facilities to the Company. Las Cruces must substantiate the costs of building the West Mesa Substation and related transmission and distribution facilities, subject to a dollar for dollar offset against the $4.5 million purchase price for any amounts not substantiated.
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
The settlement agreement also provides for Las Cruces and the Company to enter into a seven-year franchise agreement with a 2% annual franchise fee (approximately $0.8 million per year currently) for the provision of electric distribution service. Las Cruces is prohibited during this seven-year period from taking any action to condemn or otherwise attempt to acquire the Company's distribution system, or attempt to operate or build its own electric distribution system. Las Cruces will have a 90-day non-assignable option at the end of the Company's seven-year franchise agreement to purchase the portion of the Company's distribution system that serves Las Cruces at a purchase price of 130% of the Company's book value at that time. If Las Cruces exercises this option, it is prohibited from reselling the distribution assets for two years. If Las Cruces fails to exercise this option, the franchise and standstill agreements will be extended for an additional two years.
Las Cruces also agreed that it will not contest the calculation of the Company's stranded costs in New Mexico, provided the stranded costs charged to Las Cruces customers do not exceed $52.9 million declining over time, which is the amount initially ordered by the FERC in the Las Cruces stranded cost proceeding. Las Cruces also agreed to assign all of its existing customer contracts to the Company.
Under the terms of the settlement agreement, all existing litigation between the Company and Las Cruces, including all litigation pending before the FERC and the Federal District Court of New Mexico, will be dismissed. The Company and Las Cruces are finalizing the written settlement agreement and obtaining final approvals. The Company anticipates signing a definitive agreement by the end of the first quarter of 2000.
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 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
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
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 have petitioned the United States Supreme Court for review of this decision. 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.
J. Employee Benefits
Retirement Plans
The Company's Retirement Income Plan (the "Retirement Plan") covers employees who have completed one year of service with the Company, are 21 years of age and work at least a minimum number of hours each year. The Retirement Plan is a qualified noncontributory defined benefit plan. Upon retirement or death of a vested plan participant, assets of the Retirement Plan are used to pay benefit obligations under the Retirement Plan. Contributions from the Company are based on the minimum funding amounts required by the Department of Labor and IRS under provisions of the Retirement Plan, as actuarially calculated. The assets of the Retirement Plan are invested in equity securities, fixed income instruments and cash equivalents and are managed by professional investment managers appointed by the Company.
The Company's Non-Qualified Retirement Income Plan is a non-funded defined benefit plan which covers certain former employees of the Company. During 1996, as part of the Company's reorganization, the Company terminated the Non- Qualified Retirement Income Plan with respect to all active employees. The benefit cost for the Non-Qualified Retirement Income Plan is based on substantially the same actuarial methods and economic assumptions as those used for the Retirement Plan.
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
The Company accounts for the Retirement Plan and the Non-Qualified Retirement Income Plan under SFAS No. 87, "Employers' Accounting for Pensions," ("SFAS No. 87"). In accordance with SFAS No. 87, the 2000 net periodic benefit cost will include amortization of the unrecognized net gain which exceeded 10% of the benefit obligation at the beginning of the year. The amortization will reflect the excess divided by the average remaining service period of active employees expected to receive benefits. In 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," ("SFAS No. 132") which supercedes the disclosure requirements of SFAS No. 87.
The amounts recognized in the Company's balance sheets and the funded status of the plans at December 31, 1999 and 1998 are presented below (In thousands):
_____________________________
(1) Represents a change in actuarial assumptions due to revised census data.
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
Weighted average actuarial assumptions used in determining the actuarial present value of the benefit obligations are as follows:
Net periodic benefit cost is made up of the components listed below as determined using the projected unit credit actuarial cost method (In thousands):
Weighted average actuarial assumptions used in determining the net periodic benefit costs are as follows:
Other Postretirement Benefits
The Company provides certain health care benefits for retired employees and their eligible dependents and life insurance benefits for retired employees only. Substantially all of the Company's employees may become eligible for those benefits if they reach retirement age while working for the Company. Those benefits are accounted for under SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," ("SFAS No. 106"). In 1998, the Company adopted SFAS No. 132 which supercedes the disclosure requirements of SFAS No. 106. In accordance with SFAS No. 106, the 1999 net periodic benefit cost includes amortization of the unrecognized net gain arising in 1999 which exceeded 10% of the benefit obligation at the beginning of the year. The amortization reflects the excess divided by the average remaining service period of active employees expected to receive benefits. Contributions from the Company are based on the funding amounts required by the Texas Commission in the Texas Rate Stipulation. The assets of the Other Postretirement Benefits Plan are invested in fixed income instruments and cash equivalents and are managed by professional investment managers appointed by the Company.
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
The amounts recognized in the Company's balance sheets and the funded status of the plan at December 31, 1999 and 1998 are presented below (In thousands):
__________________
(1) Represents a change in actuarial assumptions due to (i) a change in Medicare credits; (ii) revised census data; and (iii) prior experience benefit.
Net periodic benefit cost is made up of the components listed below (In thousands):
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
Weighted average assumptions are as follows:
For measurement purposes, a 9.5% annual rate of increase in the per capital cost of covered health care benefits was assumed for 1999; the rate was assumed to decrease gradually to 6% for 2004 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. The effect of a 1% change in these assumed health care cost trend rates would increase or decrease the benefit obligation by $6.8 million or $6.0 million, respectively. In addition, such a 1% change would increase or decrease the aggregate service and interest cost components of net periodic benefit cost by $1.0 million or $0.8 million, respectively.
All Employee Cash Bonus Plan
The All Employee Cash Bonus Plan (the "Bonus Plan"), introduced in early 1997, was established to reward employees for their contribution in helping the Company attain its corporate goals. Eligible employees below manager level would receive a cash bonus if the Company attained established levels of safety, customer satisfaction and cash flow during 1999. The cash flow goal had to be met before any bonus amounts would be paid and improvement in cash flow must be greater than any bonus amounts paid. The Company was able to surpass the required minimum levels of improvement in all of the performance measures. As a result of the Company's success, the Company distributed approximately $4.5 million in cash bonuses, which were expensed in 1999, to all eligible employees in March 2000. The Company has renewed the Bonus Plan in 2000 with similar goals.
K. Franchises and Significant Customers
City of El Paso Franchise
The Company's major franchise is with the City of El Paso, Texas. The franchise agreement provides an arrangement for the Company's utilization of public rights-of-way necessary to serve its retail customers within the City of El Paso. The franchise with the City of El Paso extends through August 1, 2005.
Las Cruces Franchise
The Company's franchise with Las Cruces expired in March 1994. The Company has, however, continued to provide electric service to customers within Las Cruces, pending resolution of a dispute with Las Cruces over its efforts to condemn a portion of the Company's distribution assets and related facilities. On February 24, 2000, the Company entered into a settlement agreement with Las Cruces which, among other things, provides for a new seven-year franchise agreement. See Note I for futher discussion.
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
Military Installations
The Company currently serves Holloman Air Force Base ("Holloman"), White Sands Missile Range ("White Sands") and the United States Army Air Defense Center at Fort Bliss ("Ft. Bliss"). The Company's sales to the military bases represent approximately 3% of annual operating revenues. The Company currently has long-term contracts with all three military bases that it serves. The Company signed a contract with Ft. Bliss in December 1998, under which Ft. Bliss will take service from the Company through December 2008. The Company has a contract to provide retail electric service to Holloman for a ten-year term which began in December 1995. In May 1999, the Army and the Company entered into a new ten-year contract to provide retail electric service to White Sands.
L. Financial Instruments
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments," requires the Company to disclose estimated fair values for its financial instruments. The Company has determined that cash and temporary investments, accounts receivable, long-term contract receivable, decommissioning trust funds, long-term debt and financing obligations, accounts payable, litigation settlement payable and customer deposits meet the definition of financial instruments. The carrying amounts of cash and temporary investments, accounts receivable, accounts payable and customer deposits approximate fair value because of the short maturity of these items. Based on prevailing interest rates, the fair value of the long-term contract receivable approximates its carrying value. Decommissioning trust funds are carried at market value.
The fair values of the Company's long-term debt and financing obligations, including the current portion thereof, are based on estimated market prices for similar issues at December 31, 1999 and 1998 and are presented in the table below (In thousands):
__________________ (1) Includes current maturities. (2) The interest rate on the Company's pollution control bonds is reset weekly to reflect current market rates. Consequently, the carrying value approximates fair value. (3) The interest rate on the Company's financing for nuclear fuel purchases is reset every quarter to reflect current market rates. Consequently, the carrying value approximates fair value.
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
M. Selected Quarterly Financial Data (Unaudited)
__________
(1) Includes an accrued loss pursuant to the settlement agreement with Las Cruces, a coal mine reclamation adjustment, an all employee bonus, the write-off of capitalized interest on postload nuclear fuel and a sales tax liability adjustment, which resulted in an aggregate decrease in net earnings applicable to common stock of approximately $9.3 million, net of income tax benefit, or $0.16 diluted loss per common share.
(2) Includes an all employee bonus of approximately $3.1 million, net of income tax benefit, or $0.05 diluted loss per common share.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Information regarding directors is incorporated herein by reference from the Company's definitive proxy statement for the 2000 Annual Meeting of Shareholders (the "2000 Proxy Statement"). Information regarding executive officers of the Company, included herein under the caption "Executive Officers of the Registrant" in Part I, Item 1 above, is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation
Incorporated herein by reference from the 2000 Proxy Statement.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated herein by reference from the 2000 Proxy Statement.
Item 13.
Item 13. Certain Relationships and Related Transactions
Incorporated herein by reference from the 2000 Proxy Statement.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as a part of this report:
Page ---- 1. Financial Statements:
See Index to Financial Statements................... 35
2. Financial Statement Schedules:
All schedules are omitted as the required information is not applicable or is included in the financial statements or related notes thereto.
3. Exhibits
Certain of the following documents are filed herewith. Certain other of the following exhibits have heretofore been filed with the Securities and Exchange Commission, and, pursuant to Rule 12b-32 and Regulation 201.24, are incorporated herein by reference.
INDEX TO EXHIBITS
Exhibit Number Title ------- -----
Exhibit 2 - Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession:
2.01 - Fourth Amended Plan of Reorganization, dated November 7, 1995. (Exhibit 2.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995)
2.02 - Disclosure Statement to Fourth Amended Plan of Reorganization of El Paso Electric Company. (Exhibit 2.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995)
Exhibit 3 - Articles of Incorporation and Bylaws:
3.01 - Restated Articles of Incorporation of the Company, dated February 7, 1996 and effective February 12, 1996. (Exhibit 3.01 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995)
3.01-01 - Statement of Resolution Establishing Series of Preferred Stock, dated February 7, 1996 and effective February 12, 1996, amending Exhibit 3.01. (Exhibit 3.01-01 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995)
3.02 - Bylaws of the Company, dated February 6, 1996. (Exhibit 3.02 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995)
Exhibit 4 - Instruments Defining the Rights of Security Holders, including Indentures:
4.01 - General Mortgage Indenture and Deed of Trust, dated as of February 1, 1996, and First Supplemental Indenture, dated as of February 1, 1996, including form of Series A through H First Mortgage Bonds. (Exhibit 4.01 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995)
4.01-01 - Second Supplemental Indenture, dated as of August 19, 1997, to Exhibit 4.01. (Exhibit 4.01 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997)
4.02 - Statement of Resolution Establishing Series of Preferred Stock, dated February 7, 1996 and effective February 12, 1996. (Exhibit 4.02 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995)
4.03 - Indenture of Trust, dated as of July 1, 1994, between Maricopa County, Arizona Pollution Control Corporation and Texas Commerce Bank National Association, as Trustee, related to $63,500,000 principal amount of Maricopa County, Arizona Pollution Control Corporation Adjustable Tender Pollution Control Revenue Bonds, 1994 Series A (El Paso Electric Company Palo Verde Project). (Exhibit 4.01 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994)
4.03-01 - Supplemental Indenture of Trust No. 1, dated as of December 12, 1995, related to Exhibit 4.03, including form of bond. (Exhibit 4.03-01 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995)
4.04 - Loan Agreement, dated as of July 1, 1994, between Maricopa County, Arizona Pollution Control Corporation and the Company, related to the Pollution Control Bonds referred to in Exhibit 4.03. (Exhibit 4.02 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994)
4.04-01 - Supplemental Loan Agreement No. 1, dated as of February 12, 1996, related to Exhibit 4.04. (Exhibit 4.04-01 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995)
4.05 - Remarketing Agreement, dated as of July 1, 1994, between the Company and Smith Barney Inc., related to the Pollution Control Bonds referred to in Exhibit 4.03. (Exhibit 4.04 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994)
4.06 - Tender Agreement, dated as of July 1, 1994, between the Company and Smith Barney Inc., related to the Pollution Control Bonds referred to in Exhibit 4.03. (Exhibit 4.05 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994)
4.07 - Ordinance No. 94-1018 adopted by the City Council of the City of Farmington, New Mexico, on October 18, 1994, authorizing and providing for the issuance by the City of Farmington, New Mexico, of $33,300,000 principal amount of its Adjustable Tender Pollution Control Revenue Refunding Bonds, 1994 Series A (El Paso Electric Company Four Corners Project). (Exhibit 4.07 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994)
4.07-01 - Ordinance No. 96-1035 adopted by the City Council of the City of Farmington, New Mexico, on January 23, 1996 as Supplemental Ordinance No. 1, related to Exhibit 4.07. (Exhibit 4.07-01 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995)
4.08 - Resolution No. 94-798 adopted by the City Council of the City of Farmington, New Mexico, on October 18, 1994, relating to the issuance of the Pollution Control Bonds referred to in Exhibit 4.07. (Exhibit 4.08 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994)
4.09 - Amended and Restated Installment Sale Agreement, dated as of November 1, 1994, between the Company and the City of Farmington, New Mexico, relating to the Pollution Control Bonds referred to in Exhibit 4.07. (Exhibit 4.09 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994)
4.10 - Representation and Indemnity Agreement, dated as of October 31, 1994, between the Company, the City of Farmington, New Mexico, and Smith Barney Inc., relating to the Pollution Control Bonds referred to in Exhibit 4.07. (Exhibit 4.10 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994)
4.11 - Remarketing Agreement, dated as of November 1, 1994, between the Company and Smith Barney Inc., relating to the Pollution Control Bonds referred to in Exhibit 4.07. (Exhibit 4.11 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994)
4.12 - Tender Agreement, dated as of November 1, 1994, between the Company and Smith Barney Inc., relating to the Pollution Control Bonds referred to in Exhibit 4.07. (Exhibit 4.12 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994)
4.13 - Letter of Credit and Reimbursement Agreement dated as of August 27, 1997, between the Company, the Creditors named therein, Barclays Bank PLC, New York Branch, as Issuing Bank and Agent for the Creditors, and Union Bank of California, N.A., as Documentation Agent, relating to the Pollution Control Bonds referred to in Exhibit 4.07. (Exhibit 4.03 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997)
4.13-01 - Amendment No. 1, dated as of February 1, 1999, to Exhibits 4.13 and 4.22. (Exhibit 4.01 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999)
4.14 - Loan Agreement, dated as of December 1, 1984, between Maricopa County, Arizona Pollution Control Corporation and the Company, relating to $37,100,000 principal amount of Maricopa County, Arizona Pollution Control Corporation Pollution Control Refunding Revenue Bonds, 1984 Series E (El Paso Electric Company Palo Verde Project). (Exhibit 4.27 to the Company's Annual Report on Form 10-K for the year ended December 31, 1984)
4.14-01 - Supplemental Loan Agreement, dated as of June 1, 1986, to Exhibit 4.14. (Exhibit 4.29-01 to the Company's Annual Report on Form 10-K for the year ended December 31, 1986)
4.14-02 - Supplemental Loan Agreement No. 3, dated as of February 12, 1996, to Exhibit 4.14. (Exhibit 4.14-02 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995)
4.15 - Trust Indenture, dated as of December 1, 1984, by and between Maricopa County, Arizona Pollution Control Corporation and MBank El Paso, National Association, as Trustee, securing the Pollution Control Refunding Revenue Bonds referred to in Exhibit 4.14. (Exhibit 4.27-01 to the Company's Annual Report on Form 10-K for the year ended December 31, 1984)
4.15-01 - Supplemental Trust Indenture No. 2, dated as of June 1, 1986, to Exhibit 4.15. (Exhibit 4.29-03 to the Company's Annual Report on Form 10-K for the year ended December 31, 1986)
4.15-02 - Supplemental Trust Indenture No. 3, dated as of May 6, 1994, to Exhibit 4.15. (Exhibit 4.01 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994)
4.15-03 - Supplemental Trust Indenture No. 4, dated as of November 30, 1995, to Exhibit 4.15, including form of bond. (Exhibit 4.15-03 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995)
4.16 - Indexing Agent's Agreement among Maricopa County, Arizona Pollution Control Corporation, the Company and Smith Barney, Harris Upham & Co., Incorporated, relating to the Pollution Control Refunding Revenue Bonds referred to in Exhibit 4.14. (Exhibit 4.27-03 to the Company's Annual Report on Form 10-K for the year ended December 31, 1984)
4.17 - Remarketing Agent Agreement, dated as of May 6, 1994, between Smith Barney Shearson Inc., and the Company, relating to the Pollution Control Refunding Revenue Bonds referred to in Exhibit 4.14. (Exhibit 4.02 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994)
4.18 - Loan Agreement, dated as of February 12, 1996, between Maricopa County, Arizona Pollution Control Corporation and the Company, relating to $59,235,000 principal amount of Maricopa County, Arizona Pollution Control Corporation Pollution Control Refunding Revenue Bonds, 1985 Series A (El Paso Electric Company Palo Verde Project). (Exhibit 4.18 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995)
4.19 - Indenture of Trust, dated as of February 12, 1996, by and between Maricopa County, Arizona Pollution Control Corporation and Texas Commerce Bank National Association, as Trustee, relating to the Pollution Control Refunding Revenue Bonds referred to in Exhibit 4.18. (Exhibit 4.19 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995)
4.20 - Tender Agent Agreement, dated as of February 12, 1996, between the Company and Smith Barney Inc., relating to the Pollution Control Refunding Revenue Bonds referred to in Exhibit 4.18. (Exhibit 4.20 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995)
4.21 - Remarketing Agent Agreement, dated as of February 12, 1996, between the Company and Smith Barney Inc., relating to the Pollution Control Refunding Revenue Bonds referred to in Exhibit 4.18. (Exhibit 4.21 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995)
4.22 - Letter of Credit and Reimbursement Agreement, dated as of August 27, 1997, between the Company, the Creditors named therein, Barclays Bank PLC, New York Branch, as Issuing Bank and Agent for the Creditors, and Union Bank of California, N.A., as Documentation Agent, relating to the Pollution Control Bonds referred to in Exhibits 4.03, 4.14 and 4.18. (Exhibit 4.02 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997)
Exhibit 10 - Material Contracts:
10.01 - Co-Tenancy Agreement, dated July 19, 1966, and Amendments No. 1 through 5 thereto, between the Participants of the Four Corners Project, defining the respective ownerships, rights and obligations of the Parties. (Exhibit 10.01 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995)
10.02 - Supplemental and Additional Indenture of Lease, dated May 27, 1966, including amendments and supplements to original Lease Four Corners Units 1, 2 and 3, between the Navajo Tribe of Indians and Arizona Public Service Company, and including new Lease Four Corners Units 4 and 5, between the Navajo Tribe of Indians and Arizona Public Service Company, the Company, Public Service Company of New Mexico, Salt River Project Agricultural Improvement and Power District, Southern California Edison Company and Tucson Gas & Electric Company. (Exhibit 4-e to Registration Statement No. 2-28692 on Form S-9)
10.02-01 - Amendment and Supplement No. 1, dated March 21, 1985, to Exhibit 10.02. (Exhibit 19.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1985)
10.03 - El Paso Electric Company 1996 Long-Term Incentive Plan. (Exhibit 4.1 to Registration Statement No. 333-17971 on Form S-8)
10.04 - Four Corners Project Operating Agreement, dated May 15, 1969, between Arizona Public Service Company, the Company, Public Service Company of New Mexico, Salt River Project Agricultural Improvement and Power District, Southern California Edison Company and Tucson Gas & Electric Company, and Amendments 1 through 10 thereto. (Exhibit 10.04 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995)
10.04-01 - Amendment No. 11, dated May 23, 1997, to Exhibit 10.04. (Exhibit 10.04-01 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997)
10.05 - Arizona Nuclear Power Project Participation Agreement, dated August 23, 1973, between Arizona Public Service Company, Public Service Company of New Mexico, Salt River Project Agricultural Improvement and Power District, Tucson Gas & Electric Company and the Company, describing the respective participation ownerships of the various utilities having undivided interests in the Arizona Nuclear Power Project and in general terms defining the respective ownerships, rights, obligations, major construction and operating arrangements of the Parties, and Amendments No. 1 through 13 thereto. (Exhibit 10.05 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995)
10.06 - ANPP Valley Transmission System Participation Agreement, dated August 20, 1981, and Amendments No. 1 and 2 thereto. APS Contract No. 2253-419.00. (Exhibit 10.06 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995)
10.07 - Arizona Nuclear Power Project High Voltage Switchyard Participation Agreement, dated August 20, 1981. APS Contract No. 2252-419.00. (Exhibit 20.14 to the Company's Annual Report on Form 10-K for the year ended December 31, 1981)
10.07-01 - Amendment No. 1, dated November 20, 1986, to Exhibit 10.07. (Exhibit 10.11-01 to the Company's Annual Report on Form 10-K for the year ended December 31, 1986)
10.08 - Firm Palo Verde Nuclear Generating Station Transmission Service Agreement, between Salt River Project Agricultural Improvement and Power District and the Company, dated October 18, 1983. (Exhibit 19.12 to the Company's Annual Report on Form 10-K for the year ended December 31, 1983)
10.09 - Trust Agreement, dated as of May 1, 1980, between The Bank of New York, as Beneficiary, and First Security Bank of Utah, N.A., and Robert S. Clark, as Owner Trustees, establishing a trust designated as El Paso Electric Company (1980) Equipment Trust No. 2. (Exhibit 5-p-1 to Registration Statement No. 2-68414 on Form S-7)
10.10 - Trust Indenture, dated as of May 1, 1980, between The Connecticut Bank and Trust Company, as Indenture Trustee, and First Security Bank of Utah, N.A., and Robert S. Clark, Owner Trustees. (Exhibit 5-p-2 to Registration Statement No. 2-68414 on Form S-7)
10.11 - Lease Agreement, dated as of May 1, 1980, between First Security Bank of Utah, N.A., and Robert S. Clark, the Owner Trustees, as Lessor, and the Company, as Lessee, providing for the lease of a combustion turbine and related generation equipment. (Exhibit 5- p-3 to Registration Statement No. 2-68414 on Form S-7)
10.12 - Participation Agreement, dated as of May 1, 1980, among the Company, as Lessee, The Bank of New York, as Beneficiary, First Security Bank of Utah, N.A., and Robert S. Clark, as Owner Trustees, The Connecticut Bank and Trust Company, as Indenture Trustee, Franklin Life Insurance Company, Woodmen of the World Life Insurance Society, Minnesota Mutual Life Insurance Company, MacCabees Mutual Life Insurance Company and Mutual Service Insurance Company, as Lenders, pertaining to Exhibit 10.11. (Exhibit 5-p-4 to Registration Statement No. 2-68414 on Form S- 7)
10.13 - Interconnection Agreement, as amended, dated December 8, 1981, between the Company and Southwestern Public Service Company, and Service Schedules A through F thereto. (Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995)
10.13-01 - Letter Agreement, dated December 19, 1996, modifying Service Schedule E, relating to Exhibit 10.13. (Exhibit 10.13-01 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996)
10.14 - Amrad to Artesia 345 KV Transmission System and DC Terminal Participation Agreement, dated December 8, 1981, between the Company and Texas-New Mexico Power Company, and the First through Third Supplemental Agreements thereto. (Exhibit 10.14 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995)
10.15 - Interconnection Agreement and Amendment No. 1, dated July 19, 1966, between the Company and Public Service Company of New Mexico. (Exhibit 19.01 to the Company's Annual Report on Form 10-K for the year ended December 31, 1982)
10.16 - Southwest New Mexico Transmission Project Participation Agreement, dated April 11, 1977, between Public Service Company of New Mexico, Community Public Service Company and the Company, and Amendments 1 through 5 thereto. (Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995)
10.16-01 - Amendment No. 6, dated as of June 17, 1999, to Exhibit 10.16. (Exhibit 10.09 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999)
10.17 - Tucson-El Paso Power Exchange and Transmission Agreement, dated April 19, 1982, between Tucson Electric Power Company and the Company. (Exhibit 19.26 to the Company's Annual Report on Form 10-K for the year ended December 31, 1982)
10.18 - Southwest Reserve Sharing Group Participation Agreement, dated January 1, 1998, between the Company, Arizona Electric Power Cooperative, Arizona Public Service Company, City of Farmington, Los Alamos County, Nevada Power Company, Plains Electric G&T Cooperative, Inc., Public Service Company of New Mexico, Tucson Electric Power and Western Area Power Administration. (Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997)
10.19 - Power Sales Agreement No. 2, dated December 2, 1986, between the Company and Imperial Irrigation District, and Amendment No. 1 thereto. (Exhibit 10.19 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995)
10.20 - Arizona Nuclear Power Project Transmission Project Westwing Switchyard Amended Interconnection Agreement, dated August 14, 1986, between The United States of America; Arizona Public Service Company; Department of Water and Power of the City of Los Angeles; Nevada Power Company; Public Service Company of New Mexico; Salt River Project Agricultural Improvement and Power District; Tucson Electric Power Company; and the Company. (Exhibit 10.72 to the Company's Annual Report on Form 10-K for the year ended December 31, 1986)
10.21 - Power Sales Agreement, dated April 29, 1987, between the Company and Texas-New Mexico Power Company, and Amendment No. 1 thereto. (Exhibit 10.21 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995)
10.22 - Form of Indemnity Agreement, between the Company and its directors and officers. (Exhibit 10.22 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995)
10.23 - Interchange Agreement, executed April 14, 1982, between Comision Federal de Electricidad and the Company. (Exhibit 19.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991)
10.24 - Credit Agreement, dated as of February 12, 1996, as amended and restated as of February 8, 1999, between the Company, Chase Manhattan Bank, as agent, and Chase Bank of Texas, National Association, as Trustee. (Exhibit 10.24 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998)
10.24-01 - Amendment Agreement, dated as of February 8, 1999, to Exhibit 10.24. (Exhibit 10.24-01 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998)
10.25 - Amended and Restated Executive Services Agreement for David H. Wiggs, Jr., dated February 27, 1996. (Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995)
10.26 - Employment Agreement for Eduardo A. Rodriguez, dated October 26, 1995. (Exhibit 10.28 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995)
10.27 - Employment Agreement for James S. Haines, Jr., dated April 30, 1996. (Exhibit 10.30 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996)
10.28 - Restatement of Decommissioning Trust Agreement, dated as of February 12, 1996, between the Company and Boatmen's Trust Company of Texas, as Decommissioning Trustee for Palo Verde Unit 1. (Exhibit 10.30 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995)
10.29 - Restatement of Decommissioning Trust Agreement, dated as of February 12, 1996, between the Company and Boatmen's Trust Company of Texas, as Decommissioning Trustee for Palo Verde Unit 2. (Exhibit 10.31 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995)
10.30 - Restatement of Decommissioning Trust Agreement, dated as of February 12, 1996, between the Company and Boatmen's Trust Company of Texas, as Decommissioning Trustee for Palo Verde Unit 3. (Exhibit 10.32 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995)
10.31 - Spent Fuel Trust Agreement, dated as of February 12, 1996, between the Company and Boatmen's Trust Company of Texas, as Spent Fuel Trustee. (Exhibit 10.33 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995)
10.32 - Trust Agreement, dated as of February 12, 1996, between the Company and Texas Commerce Bank National Association, as Trustee of the Rio Grande Resources Trust II. (Exhibit 10.34 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995)
10.33 - Purchase Contract, dated as of February 12, 1996, between the Company and Texas Commerce Bank National Association, as Trustee of the Rio Grande Resources Trust II. (Exhibit 10.35 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995)
10.34 - Registration Rights Agreement, dated as of February 12, 1996, among the Company, Fidelity Management & Research Company and Fidelity Management Trust Company. (Exhibit 10.01 to Registration Statement No. 333-32030 on Form S-1)
10.35 - Employment Agreement for Earnest A. Lehman, dated January 5, 1999. (Exhibit 10.38 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998)
10.36 - Form of Change of Control Agreement between the Company and certain key officers of the Company. (Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999)
10.37 - Directors' Restricted Stock Award Agreement, dated as of January 28, 1999, with George W. Edwards, Jr. (Exhibit 10.02 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999)
10.38 - Stock Option Agreement, dated as of January 11, 1999, with Earnest A. Lehman. (Exhibit 10.03 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999)
10.39 - Form of Restricted Stock Award Agreement between the Company and certain key officers of the Company. (Exhibit 10.04 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999)
10.40 - Stock Option Agreement, dated as of April 26, 1999, with James S. Haines, Jr. (Exhibit 10.05 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999)
10.41 - Stock Option Agreement, dated as of May 28, 1999, with Helen Knopp. (Exhibit 10.06 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999)
10.42 - Form of Directors' Restricted Stock Award Agreement between the Company and certain directors of the Company. (Exhibit 10.07 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999)
10.43 - Stock Option Agreement, dated as of July 1, 1999, with Wilson K. Cadman. (Exhibit 10.08 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999)
10.44 - Directors' Restricted Stock Award Agreement between the Company and certain directors of the Company. (Exhibit 10.10 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999)
10.45 - Stock Option Agreement, dated as of October 1, 1999, with Wilson K. Cadman. (Exhibit 10.11 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999)
*10.46 - Employment Agreement for Helen Knopp, dated April 30, 1999.
10.47 - Change of Control Agreement with Helen Knopp, dated April 30, 1999. (Identical in all material respects to Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999)
10.48 - El Paso Electric Company 1999 Long-Term Incentive Plan. (Exhibit 4.1 to Registration Statement No. 333-82129 on Form S-8)
* Exhibit 11 - Statement re Computation of Per Share Earnings
Exhibit 23 - Consent of Experts:
*23.01 - Consent of KPMG LLP (set forth on page 92 of this report).
Exhibit 24 - Power of Attorney:
*24.01 - Power of Attorney (set forth on page 91 of this report).
*24.02 - Certified copy of resolution authorizing signatures pursuant to power of attorney.
* Exhibit 27 - Financial Data Schedule (EDGAR filing only)
Exhibit 99 - Additional Exhibits:
99.01 - Agreed Order, entered August 30, 1995, by the Public Utility Commission of Texas. (Exhibit 99.31 to Registration Statement No. 33-99744 on Form S-1)
99.02 - Restricted Stock Award Agreement, dated as of January 17, 1997, with James S. Haines, Jr. (Exhibit 99.02 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996)
99.03 - Stock Option Agreement, dated as of January 17, 1997, with James S. Haines, Jr. (Exhibit 99.03 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996)
99.03-01 - Amendment No. 1, dated April 30, 1997, to Exhibit 99.03. (Exhibit 99.03-01 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997)
99.04 - Stock Option Agreement, dated as of January 17, 1997, with David H. Wiggs, Jr. (Exhibit 99.04 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996)
99.05 - Directors' Restricted Stock Award Agreement, dated as of January 17, 1997, with George W. Edwards, Jr. (Exhibit 99.05 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996)
99.06 - Form of Directors' Restricted Stock Award Agreement between the Company and certain directors of the Company. (Exhibit 99.06 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996)
99.07 - Form of Stock Option Agreement between the Company and certain key officers of the Company. (Exhibit 99.07 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996)
99.08 - Form of Restricted Stock Award Agreement between the Company and certain key officers of the Company. (Exhibit 99.08 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997)
99.09 - Restricted Stock Award Agreement, dated as of June 9, 1997, with Eduardo A. Rodriguez. (Exhibit 99.09 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997)
99.10 - Restricted Stock Award Agreement, dated as of June 15, 1997, with Robert C. McNiel. (Exhibit 99.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997)
99.11 - Restricted Stock Award Agreement, dated as of June 16, 1997, with Guillermo Silva, Jr. (Exhibit 99.12 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997)
99.12 - Restricted Stock Award Agreement, dated as of June 9, 1997, with Terry D. Bassham. (Exhibit 99.16 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997)
99.13 - Form of Stock Option Agreement between the Company and certain directors of the Company. (Exhibit 99.17 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997)
99.14 - Directors' Restricted Stock Award Agreement, dated as of November 13, 1997, with George W. Edwards, Jr. (Exhibit 99.18 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997)
99.15 - Form of Stock Option Agreement between the Company and certain key officers of the Company. (Exhibit 99.01 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998)
99.16 - Stock Option Agreement, dated as of January 3, 1998, with Terry D. Bassham. (Exhibit 99.02 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998)
99.17 - Stock Option Agreement, dated as of January 3, 1998, with John C. Horne. (Exhibit 99.03 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998)
99.18 - Form of Restricted Stock Award Agreement between the Company and certain key officers of the Company. (Exhibit 99.04 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998)
99.19 - Restricted Stock Award Agreement, dated as of April 6, 1998, with Robert C. McNiel. (Exhibit 99.05 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998)
99.20 - Restricted Stock Award Agreement, dated as of April 6, 1998, with Guillermo Silva, Jr. (Exhibit 99.07 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998)
99.21 - Restricted Stock Award Agreement, dated as of March 25, 1998, with Terry D. Bassham. (Exhibit 99.11 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998)
99.22 - Restricted Stock Award Agreement, dated as of March 30, 1998, with Eduardo A. Rodriguez. (Exhibit 99.12 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998)
99.23 - Restricted Stock Award Agreement, dated as of March 20, 1998, with Gary R. Hedrick. (Exhibit 99.13 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998)
99.24 - Restricted Stock Award Agreement, dated as of March 25, 1998, with John C. Horne. (Exhibit 99.14 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998)
99.25 - Final Order, entered September 24, 1998, by the New Mexico Public Utility Commission. (Exhibit 99.31 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998)
99.26 - Final Order, entered June 8, 1999, by the Public Utility Commission of Texas. (Exhibit 99.01 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999)
* Filed herewith.
(b) Reports on Form 8-K:
The following reports on Form 8-K were filed during the last quarter of 1999:
Financial Statements Date of Report Item Number Required to be Filed -------------- ----------- -------------------- None
UNDERTAKING
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of El Paso Electric Company, a Texas corporation, and the undersigned directors and officers of El Paso Electric Company, hereby constitutes and appoints James Haines, Eduardo A. Rodriguez, Gary R. Hedrick, Terry Bassham and Guillermo Silva, Jr., its, his or her true and lawful attorneys-in-fact and agents, for it, him or her and its, his or her name, place and stead, in any and all capacities, with full power to act alone, to sign this report and any and all amendments to this report, and to file each such amendment to this report, with all exhibits thereto, and any and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as it, he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 21st day of March 2000.
EL PASO ELECTRIC COMPANY
By: /s/ JAMES HAINES ------------------------------------- James Haines Chief Executive Officer and President (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.