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Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 0-296
El Paso Electric Company
(Exact name of registrant as specified in its charter)
Texas 74-0607870
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
Kayser Center, 100 North Stanton, El Paso, Texas 79901
(Address of principal executive offices) (Zip Code)
(915) 543-5711
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES X NO
--- ---
As of May 7, 2001, there were 51,392,803 shares of the Company's no par value
common stock outstanding.
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EL PASO ELECTRIC COMPANY AND SUBSIDIARY
INDEX TO FORM 10-Q
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2001 and December 31, 2000...... 1
Consolidated Statements of Operations - Three Months and Twelve Months
Ended March 31, 2001 and 2000............................................ 3
Consolidated Statements of Comprehensive Operations - Three Months and
Twelve Months Ended March 31, 2001 and 2000.............................. 4
Consolidated Statements of Cash Flows - Three Months Ended March 31,
2001 and 2000............................................................ 5
Notes to Consolidated Financial Statements............................... 6
Independent Accountants' Review Report................................... 14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 23
Item 6. Exhibits and Reports on Form 8-K.................................. 23
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EL PASO ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS March 31,
(In thousands) 2001 December 31,
(Unaudited) 2000
------------------ ------------------
Utility plant:
Electric plant in service............................................ $ 1,662,767 $ 1,659,539
Less accumulated depreciation and amortization....................... 413,651 391,675
------------------ ------------------
Net plant in service............................................... 1,249,116 1,267,864
Construction work in progress........................................ 88,210 72,580
Nuclear fuel; includes fuel in process of $4,047 and
$10,430, respectively.............................................. 77,598 75,880
Less accumulated amortization........................................ 40,629 36,289
------------------ ------------------
Net nuclear fuel................................................... 36,969 39,591
------------------ ------------------
Net utility plant................................................ 1,374,295 1,380,035
------------------ ------------------
Current assets:
Cash and temporary investments....................................... 42,875 11,344
Accounts receivable, principally trade, net of allowance for
doubtful accounts of $4,209 and $3,293, respectively............... 92,547 86,647
Inventories, at cost................................................. 24,578 24,845
Net undercollection of fuel revenues................................. 14,580 15,733
Prepayments and other................................................ 6,784 9,165
------------------ ------------------
Total current assets............................................. 181,364 147,734
------------------ ------------------
Long-term contract receivable.......................................... 8,811 10,709
------------------ ------------------
Deferred charges and other assets:
Decommissioning trust fund........................................... 57,316 60,176
Other................................................................ 17,379 17,890
------------------ ------------------
Total deferred charges and other assets.......................... 74,695 78,066
------------------ ------------------
Total assets..................................................... $ 1,639,165 $ 1,616,544
================== ==================
See accompanying notes to consolidated financial statements.
1
EL PASO ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (Continued)
CAPITALIZATION AND LIABILITIES March 31,
(In thousands except for share data) 2001 December 31,
(Unaudited) 2000
------------- -------------
Capitalization:
Common stock, stated value $1 per share, 100,000,000 shares
authorized, 60,751,658 and 60,429,107 shares issued,
and 232,120 and 276,066 restricted shares, respectively................... $ 60,984 $ 60,705
Capital in excess of stated value........................................... 245,948 244,528
Unearned compensation - restricted stock awards............................. (1,566) (1,309)
Retained earnings........................................................... 220,714 202,116
Accumulated other comprehensive income (net unrealized
gains on marketable securities), net of tax............................... 212 2,902
------------- -------------
526,292 508,942
Treasury stock, 9,904,237 and 9,230,786 shares, respectively; at cost....... (105,193) (96,908)
------------- -------------
Common stock equity....................................................... 421,099 412,034
Long-term debt.............................................................. 715,033 715,058
Financing and capital lease obligations..................................... - 25,165
------------- -------------
Total capitalization.................................................. 1,136,132 1,152,257
------------- -------------
Current liabilities:
Current maturities of long-term debt and financing and
capital lease obligations................................................. 80,573 57,663
Accounts payable, principally trade......................................... 38,852 39,799
Taxes accrued other than federal income taxes............................... 15,269 17,054
Interest accrued............................................................ 17,687 16,528
Other....................................................................... 21,827 15,930
------------- -------------
Total current liabilities............................................. 174,208 146,974
------------- -------------
Deferred credits and other liabilities:
Decommissioning liability................................................... 130,051 128,129
Accrued postretirement benefit liability.................................... 82,028 81,784
Accumulated deferred income taxes, net...................................... 56,701 47,279
Accrued pension liability................................................... 31,046 31,134
Other....................................................................... 28,999 28,987
------------- -------------
Total deferred credits and other liabilities.......................... 328,825 317,313
------------- -------------
Commitments and contingencies
Total capitalization and liabilities.................................. $ 1,639,165 $ 1,616,544
============= =============
See accompanying notes to consolidated financial statements.
2
EL PASO ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except for share data)
Three Months Ended Twelve Months Ended
March 31, March 31,
----------------------------- -----------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Electric operating revenues........................ $ 191,390 $ 137,067 $ 750,732 $ 575,975
----------- ----------- ----------- -----------
Energy expenses:
Fuel............................................. 49,452 27,110 181,889 109,446
Coal mine reclamation adjustment................. - - - (6,601)
Purchased and interchanged power................. 16,611 3,489 74,339 14,737
----------- ----------- ----------- -----------
66,063 30,599 256,228 117,582
----------- ----------- ----------- -----------
Electric operating revenues net of
energy expenses................................... 125,327 106,468 494,504 458,393
----------- ----------- ----------- -----------
MiraSol:
Operating revenues............................... 1,489 978 5,751 2,987
Operating expenses............................... 1,889 1,186 7,373 3,760
----------- ----------- ----------- -----------
MiraSol operating loss............................. 400 208 1,622 773
----------- ----------- ----------- -----------
Other electric operating expenses:
Other operations................................. 33,005 32,375 132,916 133,332
Maintenance...................................... 11,282 8,343 44,739 35,736
Depreciation and amortization.................... 22,157 21,789 87,369 89,918
Taxes other than income taxes.................... 10,727 10,961 42,920 41,180
----------- ----------- ----------- -----------
77,171 73,468 307,944 300,166
----------- ----------- ----------- -----------
Operating income................................... 47,756 32,792 184,938 157,454
----------- ----------- ----------- -----------
Other income (deductions):
Investment income, net........................... 901 781 3,602 4,630
Litigation settlements........................... - (1,000) - (17,500)
Other, net....................................... (640) (863) (2,048) 2,466
----------- ----------- ----------- -----------
261 (1,082) 1,554 (10,404)
----------- ----------- ----------- -----------
Income before interest charges..................... 48,017 31,710 186,492 147,050
----------- ----------- ----------- -----------
Interest charges (credits):
Interest on long-term debt....................... 16,669 16,572 67,346 74,051
Other interest................................... 1,990 1,810 7,812 7,470
Interest capitalized............................. (1,041) (881) (3,916) (2,419)
----------- ----------- ----------- -----------
17,618 17,501 71,242 79,102
----------- ----------- ----------- -----------
Income before income taxes and
extraordinary item................................ 30,399 14,209 115,250 67,948
Income tax expense................................. 11,801 5,649 45,048 25,041
----------- ----------- ----------- -----------
Income before extraordinary item................... 18,598 8,560 70,202 42,907
----------- ----------- ----------- -----------
Extraordinary loss on extinguishments of debt,
net of income tax benefit........................ - 553 1,219 3,889
----------- ----------- ----------- -----------
Net income......................................... 18,598 8,007 68,983 39,018
Preferred stock redemption costs................... - - - 10
----------- ----------- ----------- -----------
Net income applicable to common stock.............. $ 18,598 $ 8,007 $ 68,983 $ 39,008
=========== =========== =========== ===========
Basic earnings per common share:
Income before extraordinary item................. $ 0.36 $ 0.16 $ 1.32 $ 0.74
Extraordinary loss on extinguishments of debt,
net of income tax benefit...................... - 0.01 0.02 0.07
----------- ----------- ----------- -----------
Net income.................................... $ 0.36 $ 0.15 $ 1.30 $ 0.67
=========== =========== =========== ===========
Diluted earnings per common share:
Income before extraordinary item................. $ 0.36 $ 0.15 $ $1.30 $ 0.73
Extraordinary loss on extinguishments of debt,
net of income tax benefit..................... - 0.01 0.02 0.06
----------- ----------- ----------- -----------
Net income.................................... $ 0.36 $ 0.14 $ 1.28 $ 0.67
=========== =========== =========== ===========
Weighted average number of common shares
outstanding...................................... 51,015,982 55,299,922 53,124,544 57,994,205
=========== =========== =========== ===========
Weighted average number of common shares and
dilutive potential common shares
outstanding..................................... 51,989,157 55,812,310 54,044,220 58,504,483
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
3
EL PASO ELECTRIC COMPANY AND SUBSIDARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(Unaudited)
(In thousands)
Three Months Ended Twelve Months Ended
March 31, March 31,
----------------------------- -----------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net income........................................ $ 18,598 $ 8,007 $ 68,983 $ 39,018
Other comprehensive income (loss):
Net unrealized gains (losses) on marketable
securities, net of income tax benefit
(expense) of $1,448, $(304), $2,440
and $(1,618), respectively..................... (2,690) 565 (4,532) 3,005
----------- ----------- ----------- -----------
Comprehensive income.............................. 15,908 8,572 64,451 42,023
Preferred stock redemption costs.................. - - - 10
----------- ----------- ----------- -----------
Comprehensive income applicable
to common stock.................................. $ 15,908 $ 8,572 $ 64,451 $ 42,013
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
4
EL PASO ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
March 31,
---------------------------------
2001 2000
-------- ----------
Cash flows from operating activities:
Net income.............................................................. $ 18,598 $ 8,007
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of electric plant in service............ 22,157 21,789
Amortization of nuclear fuel.......................................... 4,340 4,513
Deferred income taxes, net............................................ 10,870 5,023
Extraordinary loss on extinguishments of debt, net of
income tax benefit................................................. - 553
Amortization and accretion of interest costs.......................... 2,373 2,345
Other operating activities............................................ 510 900
Change in:
Accounts receivable................................................... (5,900) 7,831
Inventories........................................................... 267 415
Net under/overcollection of fuel revenues............................. 1,153 1,874
Prepayments and other................................................. 2,381 1,749
Long-term contract receivable......................................... 1,898 1,588
Accounts payable...................................................... (947) (759)
Taxes accrued other than federal income taxes......................... (1,785) (1,620)
Interest accrued...................................................... 1,159 (655)
Other current liabilities............................................. 5,897 2,094
Deferred charges and credits.......................................... 25 (283)
-------- ----------
Net cash provided by operating activities........................... 62,996 55,364
-------- ----------
Cash flows from investing activities:
Cash additions to utility property, plant and equipment................. (17,547) (15,250)
Cash additions to nuclear fuel.......................................... (1,560) (1,488)
Interest capitalized:
Utility property, plant and equipment................................. (884) (726)
Nuclear fuel.......................................................... (157) (155)
Investment in decommissioning trust fund................................ (1,277) (1,271)
Other investing activities.............................................. (355) 57
-------- ----------
Net cash used for investing activities.............................. (21,780) (18,833)
-------- ----------
Cash flows from financing activities:
Proceeds from exercise of stock options................................. 1,330 -
Purchases of treasury stock............................................. (8,285) (24,633)
Repurchases of and payments on long-term debt........................... (24) (13,757)
Nuclear fuel financing obligations:
Proceeds.............................................................. 2,340 2,308
Payments.............................................................. (4,595) (4,800)
Payments on capital lease obligations................................... - (841)
Other financing activities.............................................. (451) (190)
-------- ----------
Net cash used for financing activities.............................. (9,685) (41,913)
-------- ----------
Net increase (decrease) in cash and temporary investments................. 31,531 (5,382)
Cash and temporary investments at beginning of period..................... 11,344 37,234
-------- ----------
Cash and temporary investments at end of period........................... $ 42,875 $ 31,852
======== ==========
See accompanying notes to consolidated financial statements.
5
EL PASO ELECTRIC COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. Principles of Preparation
The consolidated financial statements include the accounts of El Paso
Electric Company and its wholly owned subsidiary, MiraSol Energy Services, Inc.
("MiraSol") (collectively the "Company"). MiraSol, which began operations as a
separate subsidiary in March 2001, provides energy efficiency products and
services previously provided by the Company's Energy Services Business Group.
All intercompany transactions and balances have been eliminated in
consolidation. Additionally, the revenues and expenses of the former Energy
Services Business Group have been reclassified for all periods presented in the
accompanying consolidated statements of operations as MiraSol revenues and
expenses.
Pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"), certain financial information has been condensed and certain
footnote disclosures have been omitted. Such information and disclosures are
normally included in financial statements prepared in accordance with generally
accepted accounting principles.
These condensed consolidated financial statements should be read in
conjunction with the financial statements and notes thereto in the Annual Report
of El Paso Electric Company on Form 10-K for the year ended December 31, 2000
(the "2000 Form 10-K"). Capitalized terms used in this report and not defined
herein have the meaning ascribed for such terms in the 2000 Form 10-K. In the
opinion of management of the Company, the accompanying consolidated financial
statements contain all adjustments necessary to present fairly the financial
position of the Company at March 31, 2001 and December 31, 2000; the results of
its operations for the three and twelve months ended March 31, 2001 and 2000;
and its cash flows for the three months ended March 31, 2001 and 2000. The
results of operations for the three and twelve months ended March 31, 2001 and
the cash flows for the three months ended March 31, 2001 are not necessarily
indicative of the results to be expected for the full calendar year.
At January 1, 2001, the Company adopted Financial Accounting Standard No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), as amended, including implementation guidance discussed by the FASB's
Derivatives Implementation Group (the "DIG") and cleared by the FASB as of
January 1, 2001. This standard requires the recognition of derivatives as
either assets or liabilities in the balance sheet with measurement of those
instruments at fair value. Any changes in the fair value of these instruments
are recorded in earnings or other comprehensive income.
The Company completed the review of all of its current financial instruments
and commodity contracts, including fuel supply, purchased power and power sales
contracts. The Company uses commodity contracts to manage its exposure to price
and availability risks and these contracts generally have the characteristics of
derivatives. The Company does not trade or use these instruments with the
objective of earning financial gains on the commodity price fluctuations. The
Company has determined that all these contracts that had the characteristics of
derivatives met the "normal purchases and normal sales" exception provided in
SFAS 133, and, as such, were not required to be accounted for as derivatives
pursuant to SFAS 133 and other guidance.
6
EL PASO ELECTRIC COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On March 21, 2001, DIG Issue C10, "Can Option Contracts and Forward Contracts
with Optionality Features Qualify for the Normal Purchases and Normal Sales
Exception," was cleared by the FASB and is effective as of April 1, 2001. This
DIG provides guidance related to whether contracts with certain optionality
features are eligible for the normal purchase and normal sale exception. The
Company has not yet completed its analysis of the implications of this guidance.
This guidance may require the Company to account for certain of its electricity
and gas commodity contracts, as derivatives pursuant to SFAS 133. Any such
change in the Company's accounting for such contracts may be material to the
Company's reported financial position or results of operations and would be
accounted for as a cumulative-effect-type adjustment as of April 1, 2001.
Additionally, there remain a number of other unresolved issues before the
DIG, the ultimate resolution of which may impact the Company's application of
SFAS 133.
Supplemental Cash Flow Disclosures (in thousands)
Three Months Ended March 31,
------------------------------
2001 2000
------- -------
Cash paid for:
Interest on long-term debt (1)................... $15,074 $16,507
Other interest................................... 6 86
Non-cash investing and financing activities:
Grants of restricted shares of
common stock................................. 757 924
- --------------
(1) Includes interest on bonds, letter of credit fees related to bonds, and
interest on nuclear fuel financing not capitalized.
7
EL PASO ELECTRIC COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Reconciliation of Basic and Diluted Earnings Per Common Share
The reconciliation of basic and diluted earnings per common share before
extraordinary item is presented below:
Three Months Ended March 31,
----------------------------------------------------------------------
2001 2000
---------------------------------- ----------------------------------
Per Per
Common Common
Income Shares Share Income Shares Share
------------- ---------- ------ ------------- ---------- ------
(In thousands) (In thousands)
Basic earnings per share:
Income before extraordinary
item............................... $18,598 51,015,982 $0.36 $8,560 55,299,922 $0.16
===== =====
Effect of dilutive securities:
Unvested restricted stock........... - 24,851 - 20,116
Stock options....................... - 948,324 - 492,272
------------- ---------- ------------- ----------
Diluted earnings per share:
Income before extraordinary
item............................... $18,598 51,989,157 $0.36 $8,560 55,812,310 $0.15
============= ========== ===== ============= ========== =====
Twelve Months Ended March 31,
----------------------------------------------------------------------
2001 2000
---------------------------------- ----------------------------------
Per Per
Common Common
Income Shares Share Income Shares Share
------------- ---------- ------ ------------- ---------- ------
(In thousands) (In thousands)
Income before extraordinary item..... $70,202 $42,907
Less:
Preferred stock:
Redemption costs................. - 10
------------- -------------
Basic earnings per common share:
Income before extraordinary
item applicable to common
stock.............................. 70,202 53,124,544 $1.32 42,897 57,994,205 $0.74
====== ======
Effect of dilutive securities:
Unvested restricted stock........... - 57,016 - 37,758
Stock options....................... - 862,660 - 472,520
------------- ---------- ------------- ----------
Diluted earnings per common share:
Income before extraordinary
item applicable to common
stock.............................. $70,202 54,044,220 $1.30 $42,897 58,504,483 $0.73
============= ========== ====== ============= ========== ======
Options that were excluded from the computation of diluted earnings per
common share because the exercise price was greater than the average market
price of the common shares for the period are listed below:
1) 60,000 options granted May 29, 1998 at an exercise price of $9.50 were
excluded for the second through fourth quarters of 1999 and the first
quarter of 2000.
2) 100,000 options granted January 11, 1999 at an exercise price of $8.75
were excluded for the second quarter of 1999.
8
EL PASO ELECTRIC COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3) 42,432 options granted January 1, 2000 at an exercise price of $9.81 were
excluded for the first quarter of 2000.
4) 50,000 options granted March 15, 2000 at an exercise price of $9.50 were
excluded for the first quarter of 2000.
5) 2,107 options granted October 1, 2000 at an exercise price of $13.77 were
excluded for the fourth quarter of 2000 and the first quarter of 2001.
6) 150,000 options granted December 15, 2000 at an exercise price of $12.60
were excluded for the first quarter of 2001.
7) 2,941 options granted January 1, 2001 at an exercise price of $13.20 were
excluded for the first quarter of 2001.
B. Regulation
For a full discussion of the Company's regulatory matters, see Note B of
Notes to Financial Statements in the 2000 Form 10-K.
Texas Regulatory Matters
Deregulation. The Texas Restructuring Law requires most electric utilities
to separate their power generation activities from transmission and distribution
activities by January 1, 2002. However, the law specifically recognizes and
preserves the substantial benefits the Company bargained for in its Texas Rate
Stipulation and Texas Settlement Agreement, exempting the Company's Texas
service area from retail competition and preserving non-fuel base rates at their
current levels until the end of the Freeze Period. At the end of the Freeze
Period, the Company will be subject to the provisions of retail competition
under the law and will have no further claim for recovery of stranded costs.
The Company believes that its continued ability to provide bundled electric
service at current frozen base rates in its Texas service area will allow the
Company the opportunity to collect its Texas jurisdictional stranded costs.
Although the Company is not subject to the Texas restructuring requirements
until the expiration of the Freeze Period, the Company sought Texas Commission
approval of the Company's proposed corporate restructuring in anticipation of
complying with the restructuring requirements of the New Mexico Restructuring
Law. In December 2000, the Texas Commission approved the Company's corporate
restructuring plan. The New Mexico Restructuring Law was subsequently amended,
and currently does not require separation of the Company's generation activities
from its transmission and distribution activities until January 1, 2007, but
does allow separation as early as September 1, 2005. In either 2004 or 2005,
the Company will seek New Mexico Commission approval to separate the Company's
generation activities from its transmission and distribution activities to allow
the Company to comply with the Texas Restructuring Law requirements. The
Company has applied for New Mexico Commission approval to form a holding company
consistent with the amended New Mexico Law. See "New Mexico Regulatory
Matters."
Fuel. Although the Company's base rates are frozen in Texas pursuant to the
Texas Rate Stipulation, the Company can request adjustments to its fuel factor
to more accurately reflect projected
9
EL PASO ELECTRIC COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
increases or decreases in energy costs associated with the provision of
electricity as well as seek recovery of past undercollections of fuel revenues.
Beginning in the second quarter of 2000, the Company's average Texas
jurisdictional energy costs exceeded its fuel factor due to substantial
increases in the prices of natural gas and purchased power. Accordingly, the
Company experienced a significant underrecovery of its actual energy expenses.
In August 2000, the Company filed a petition with the Texas Commission to
increase its fixed fuel factor from $0.01435 per kWh to $0.02186 per kWh. The
Texas Commission granted final approval of the increased fuel factor in November
2000. The new fuel factor increased fuel revenue collections by $12.2 million in
2000 and $8.4 million during the first quarter of 2001.
On January 8, 2001, the Company filed a second petition with the Texas
Commission for an additional fuel factor increase to $0.02915 per kWh and a 12-
month surcharge of previously undercollected fuel costs. On May 4, 2001, the
Company filed a unanimous settlement agreement between the Company and the
parties which had intervened, including the City of El Paso. The settlement
reflects a reduction in future anticipated gas costs and higher than previously
anticipated off-system sales margins resulting in a stipulated fuel factor of
$0.02495 per kWh. This factor was implemented on an interim basis in April 2001.
The agreement also provides for the surcharge of underrecovered fuel costs as of
December 31, 2000 of approximately $15 million plus interest over an 18-month
period beginning with the first billing cycle in June 2001. The settlement
provides for the final agreement between the parties for the non-recovery of
certain purchased power contract costs as well as the favorable disposition of
previously unrecognized Palo Verde performance rewards, which taken together,
and if approved by the Texas Commission will not have any material adverse
effects on the Company's results of operations. The Company also agreed to a
prospective change in these performance standards which have the effect of
materially reducing the opportunity for future rewards or penalties on a
symmetrical basis. The settlement agreement is subject to review by a hearings
officer and final approval of the Texas Commission which the Company anticipates
should occur by mid-year.
Any fuel surcharge granted to the Company, as well as the Company's other
energy expenses not otherwise finally resolved in the settlement agreement, will
be subject to final review by the Texas Commission in the Company's next fuel
reconciliation proceeding, which is expected to be filed by the middle of 2002.
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
not otherwise finally resolved in the settlement agreement.
New Mexico Regulatory Matters
Deregulation. In March 2001, the New Mexico Legislature amended the New
Mexico Restructuring Law to postpone deregulation in New Mexico until January 1,
2007, and prohibit the separation of a utility's transmission and distribution
activities from its existing generation activities until September 1, 2005. The
amended New Mexico Restructuring Law permits utilities to form holding companies
and, through the holding company, participate in unregulated power production,
provided the utility does not separate its transmission and distribution
activities from its existing generation activities.
The amended New Mexico law requires the New Mexico Commission to approve
previously filed applications to form holding companies to the extent that they
do not conflict with the provisions of the
10
EL PASO ELECTRIC COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
law as amended and are otherwise in the public interest. Accordingly, in early
April 2001, the Company filed its suggested amendments to its previously filed
proposed corporate restructuring plan. The filing seeks to conform the Company's
proposal with the requirements under the amended law which requires the
regulated utility to continue to own all regulated generation currently owned
and operated by the utility. The Company's proposal requests approval to form a
holding company with three subsidiaries: (i) a regulated utility with both
generation and transmission and distribution properties; (ii) an energy services
subsidiary; and (iii) a "shared services" subsidiary which would provide
administrative services to its corporate affiliates. The New Mexico Commission
has scheduled hearings on the Company's proposal for mid-May 2001 and should
issue an order by July 2001. Upon receipt of New Mexico Commission approval, the
Company will have received all necessary regulatory approvals except for
Securities and Exchange Commission authorization which would be sought along
with shareholder approval if the Company decides to proceed with the formation
of a holding company prior to 2005.
While the Company is continuing to evaluate the possible benefits, if any, of
forming a holding company prior to 2005, it cannot separate its existing
generation activities from its transmission and distribution activities until
September 1, 2005. In either 2004 or 2005, the Company will seek New Mexico
Commission approval to separate the Company's generation activities from its
transmission and distribution activities to allow the Company to comply with the
Texas Restructuring Law requirements.
Fuel. The New Mexico Settlement entered into in October 1998 incorporated
the then existing fuel factor of $0.01949 per kWh into frozen base rates.
Accordingly, the Company was required to absorb any increases in fuel and
purchased power ("energy") expenses related to its New Mexico retail customers
until the expiration of the rate freeze on April 30, 2001. The average energy
costs incurred for New Mexico jurisdictional customers currently exceed this
fuel factor by a substantial amount. Therefore, on April 23, 2001, the Company
filed a petition with the New Mexico Commission requesting an increase in base
rates, primarily to reflect these increased energy costs. The Company's filing
is based on the terms of its 1998 Rate Stipulation and reflects the Company's
entitlement to an approximate $50 million increase in New Mexico jurisdictional
revenues under the terms of that agreement. However, the Company believes
recovery of this $50 million increase would require 10 to 12 months of
litigation with the New Mexico Commission and intervenors. Accordingly, within
this petition the Company is also proposing a settlement that would reinstate a
fixed fuel factor in lieu of a base rate increase. The new fixed fuel factor
would provide the Company with a more efficient and timely manner in which to
request rate changes for future increases and decreases of energy expenses. The
proposed fixed fuel factor of $0.01501 per kWh would increase fuel revenues by
approximately $19 million annually, and would be in addition to the fuel factor
that is currently included in base rates. The Company's proposed settlement is
substantially lower than the increase related to energy costs that is included
in the petition for a base rate increase. The proposed fixed fuel factor would
result in a substantially lower rate increase for New Mexico customers and would
keep overall retail rates more consistent with the retail rates charged to Texas
jurisdictional customers. The reinstatement of a fixed fuel factor would also
substantially mitigate the financial risk to the Company of any further energy
cost increases.
The Company's proposed settlement is contingent upon the timely reinstatement
of a fixed fuel factor by the New Mexico Commission. If this proposal is not
accepted by mid-June 2001, the
11
EL PASO ELECTRIC COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Company has informed the parties of its current intention to withdraw its
settlement proposal, proceed with its base rate increase request and seek
interim rate relief as provided under New Mexico law.
C. Common Stock Repurchase Program
The Company's Board of Directors previously approved two stock repurchase
programs allowing the Company to purchase up to twelve million of its
outstanding shares of common stock. As of March 31, 2001, the Company had
repurchased 9,833,929 shares of common stock under these programs for
approximately $104.7 million, including commissions. The Company expects to
continue to make purchases primarily in the open market at prevailing prices and
will also engage in private transactions, if appropriate. Any repurchased
shares will be available for issuance under employee benefit and stock option
plans, or may be retired.
D. Commitments and Contingencies
For a full discussion of commitments and contingencies, including
environmental matters related to the Company, see Note H of Notes to Financial
Statements in the 2000 Form 10-K. In addition, see Note C of Notes to Financial
Statements in the 2000 Form 10-K regarding matters related to Palo Verde,
including decommissioning, spent fuel storage, disposal of low-level radioactive
waste and liability and insurance matters.
Power Contracts
During the first quarter of 2001, the Company had entered into contracts for
forward purchases of firm on-peak energy as follows: (i) 103 MW monthly during
2001 from Southwestern Public Service Company; (ii) 50 MW monthly during 2002
from Enron Power Marketing ("Enron"); (iii) 25 MW monthly during 2002 from
Mirant Americas Energy Marketing ("Mirant"); and (iv) 25 MW from Mirant for
April 2002 through October 2002. The Company had not entered into any new
contracts for forward sales of energy as of March 31, 2001.
During April 2001, the Company entered into contracts for purchases of firm
on-peak energy to be delivered in May 2001 as follows: (i) 50 MW from Enron;
(ii) 50 MW from American Electric Power Service; (iii) 25 MW from Sempra Energy;
and (iv) 25 MW from Williams Energy Marketing & Trading Company. The Company
also contracted to sell 25 MW of firm off-peak energy to Enron from July 2001
through September 2001.
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
12
EL PASO ELECTRIC COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
provision in its consolidated financial statements to meet such obligations.
However, unforeseen expenses associated with compliance could have a material
adverse effect on the future operations and financial condition of the Company.
E. Litigation
The Company is a party to various claims, legal actions and complaints. In
many of these matters, the Company has excess casualty liability insurance that
covers the various claims, actions and complaints. Based upon a review of these
claims and applicable insurance coverage, the Company believes that none of
these claims will have a material adverse effect on the financial position,
results of operations and cash flows of the Company.
13
Independent Accountants' Review Report
--------------------------------------
The Shareholders and the Board of Directors
El Paso Electric Company:
We have reviewed the accompanying condensed consolidated balance sheet of El
Paso Electric Company and subsidiary (the Company) as of March 31, 2001, the
related condensed consolidated statements of operations and comprehensive
operations for the three months and twelve months ended March 31, 2001 and 2000,
and the related condensed consolidated statements of cash flows for the three
months ended March 31, 2001 and 2000. These condensed consolidated financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with accounting principles generally accepted in the
United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the balance sheet of El Paso Electric
Company as of December 31, 2000, and the related statements of operations,
comprehensive operations, changes in common stock equity and cash flows for the
year then ended (not presented herein); and in our report dated March 8, 2001,
we expressed an unqualified opinion on those financial statements. In our
opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 2000 is fairly stated, in all material
respects, in relation to the balance sheet from which it has been derived.
KPMG LLP
El Paso, Texas
May 4, 2001
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information contained in this Item 2 updates, and should be read in
conjunction with, the information set forth in Part II, Item 7 of the Company's
2000 Form 10-K.
Statements in this document, other than statements of historical information,
are forward-looking statements that are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements, as well as other oral and written forward-looking
statements made by or on behalf of the Company from time to time, including
statements contained in the Company's filings with the Securities and Exchange
Commission and its reports to shareholders, involve known and unknown risks and
other factors which may cause the Company's actual results in future periods to
differ materially from those expressed in any forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to: (i) increased prices for fuel and purchased power, (ii) the
possibility that regulators may not permit the Company to pass through all such
increased costs to customers, (iii) the costs of unscheduled outages and (iv)
other 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. The Company's filings are available from the Securities
and Exchange Commission or may be obtained upon request from the Company. Any
such forward-looking statement is qualified by reference to these risks and
factors. The Company cautions that these risks and factors 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 except as required by
law.
Overview
El Paso Electric Company is an electric utility that serves retail customers
in west Texas and southern New Mexico and wholesale customers in Texas, New
Mexico, California and Mexico. The Company owns or has substantial ownership
interests in five electrical generating facilities providing it with a total
capacity of approximately 1,500 MW. The Company's energy sources consist of
nuclear fuel, natural gas, coal and purchased power. The Company owns or has
significant ownership interests in four 345 kV transmission lines and three 500
kV lines to provide power from Palo Verde and Four Corners, and owns the
distribution network within its retail service territory. The Company is
subject to extensive regulation by the Texas and New Mexico Commissions and,
with respect to wholesale power sales, transmission of electric power and the
issuance of securities, by the FERC.
The Company faces a number of risks and challenges that could negatively
impact its operations and financial results. The most significant of these
risks and challenges arise from the deregulation of the electric utility
industry, the possibility of increased costs, especially from Palo Verde, and
the Company's high level of debt.
The electric utility industry in general and the Company in particular are
facing significant challenges and increased competition as a result of changes
in federal provisions relating to third-party transmission services and
independent power production, as well as changes in state laws and regulatory
provisions relating to wholesale and retail service. In 1999, both Texas and
New Mexico passed industry deregulation legislation requiring the Company to
separate its transmission and distribution functions, which will remain
regulated, from its power generation and energy services businesses, which will
operate in a competitive market in the future. New Mexico recently amended its
deregulation law to delay the implementation date. While the Company is not
subject to deregulation in its Texas and
15
New Mexico jurisdictions until late 2005 and January 2007, respectively, the
potential effects of competition in the power generation and energy services
markets remain important to the Company. There can be no assurance that the
deregulation of the power generation market will not adversely affect the future
operations, cash flows and financial condition of the Company.
The changing regulatory environment and the advent of unregulated power
production have created a substantial risk that the Company will lose important
customers. The Company's wholesale and large retail customers already have, in
varying degrees, additional alternate sources of economical power, including co-
generation of electric power. Historically, the Company has lost certain large
retail customers to self generation and/or co-generation and seen reductions in
wholesale sales due to new sources of generation. American National Power,
Inc., a wholly-owned subsidiary of International Power PLC, has announced it is
exploring the possibility of building a generation plant in El Paso, Texas, and
Duke Energy has announced it is exploring the possibility of building a
generation plant in Deming, New Mexico. If the Company loses a significant
portion of its retail customer base or wholesale sales, the Company may not be
able to replace such revenues through either the addition of new customers or an
increase in rates to remaining customers.
Another risk to the Company is potential increased costs, including the risk
of additional or unanticipated costs at Palo Verde resulting from (i) increases
in operation and maintenance expenses; (ii) the replacement of steam generators;
(iii) an extended outage of any of the Palo Verde units; (iv) increases in
estimates of decommissioning costs; (v) the storage of radioactive waste,
including spent nuclear fuel; and (vi) compliance with the various requirements
and regulations governing commercial nuclear generating stations. At the same
time, the Company's Texas retail base rates are effectively capped through a
rate freeze ending in August 2005. Additionally, upon initiation of retail
competition, there will be competitive pressure on the Company's power
generation rates which could reduce its profitability. The Company also cannot
assure that its revenues will be sufficient to recover any increased costs,
including any increased costs in connection with Palo Verde or other operations,
whether as a result of inflation, changes in tax laws or regulatory
requirements, or other causes.
During the twelve months ended March 31, 2001, the Company was unable to pass
through to certain customers increased energy expenses resulting from higher
natural gas prices and increased power purchases needed because of unscheduled
generating unit outages. The Company was unable to request increased rates in
its New Mexico service area prior to May 1, 2001, and is unable to increase
rates under certain small wholesale contracts, to compensate for increased
energy expenses. From April 1, 2000 through March 31, 2001, the Company
incurred increased energy expenses which cannot be recovered from New Mexico and
certain wholesale customers of approximately $11.0 million, net of tax, compared
to the same period a year earlier. The Company may not be able to recover its
increased energy costs from its New Mexico customers during 2001 and the first
quarter of 2002. See Item 1, Note B, "Regulation - New Mexico Regulatory
Matters - Fuel" and Item 3, "Quantitative and Qualitative Disclosures About
Market Risk - Commodity Price Risk."
Liquidity and Capital Resources
The Company's principal liquidity requirements in the near-term are expected
to consist of interest and principal payments on the Company's indebtedness and
capital expenditures related to the Company's generating facilities and
transmission and distribution systems. The Company expects that cash flows from
operations will be sufficient for such purposes.
16
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 significant amount
of 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.
As of March 31, 2001, cash and temporary investments totaled $42.9 million,
an increase of $31.6 million from the December 31, 2000 balance of $11.3
million. The Company repaid the remaining $34.6 million of Series B First
Mortgage Bonds at their maturity on May 1, 2001 from cash on hand. The Company
has a $100 million revolving credit facility, which provides up to $70 million
for nuclear fuel purchases and up to $50 million (depending on the amount of
borrowings outstanding for nuclear fuel purchases) for working capital needs.
The revolving credit facility's term ends on February 8, 2002, when it is
expected to be renewed or replaced on comparable terms. At March 31, 2001,
approximately $45.9 million had been drawn for nuclear fuel purchases. No
amounts are currently outstanding on this facility for working capital needs.
The Company has a high debt to capitalization ratio and significant debt
service obligations. Due to the Texas Rate Stipulation, the Texas Settlement
Agreement, and competitive pressures, the Company does not expect to be able to
raise its base rates in Texas in the event of increases in non-fuel costs or
loss of revenues. Accordingly, as described below, debt reduction continues to
be a high priority for the Company in order to gain additional financial
flexibility to address the evolving competitive market.
The Company has significantly reduced its long-term debt since its emergence
from bankruptcy in 1996. From June 1, 1996 through May 7, 2001, the Company
repurchased approximately $353.7 million of first mortgage bonds as part of an
aggressive deleveraging program. No first mortgage bonds were repurchased
during the first quarter of 2001. As mentioned above, the Company repaid the
remaining $34.6 million of Series B First Mortgage Bonds at their maturity on
May 1, 2001 from cash on hand. Common stock equity as a percentage of
capitalization, excluding current maturities of long-term debt, has increased
from 19% at June 30, 1996 to 37% at March 31, 2001.
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.
The Company's Board of Directors previously approved two stock repurchase
programs allowing the Company to purchase up to twelve million of its
outstanding shares of common stock. As of May 7, 2001, the Company had
repurchased 9,833,929 shares of common stock under these programs for
approximately $104.7 million, including commissions. The Company expects to
continue to make
17
purchases primarily in the open market at prevailing prices and will also engage
in private transactions, if appropriate. Any repurchased shares will be
available for issuance under employee benefit and stock option plans, or may be
retired.
Historical Results of Operations
Three Months Twelve Months
Ended March 31, Ended March 31,
----------------------- -----------------------
2001 2000 2001 2000
------- ------ ------- -------
Net income applicable to common stock
before extraordinary item (in thousands).... $18,598 $8,560 $70,202 $42,897
Diluted earnings per common share
before extraordinary item................... 0.36 0.15 1.30 0.73
Results of operations for the twelve months ended March 31, 2000 were
affected by the following unusual or infrequent items: (i) an adjustment of $4.0
million, net of tax, reducing fuel expense based on a reduction of the Company's
estimated coal mine reclamation liability; (ii) a charge to earnings of $10.1
million, net of tax, as a result of the settlement agreement with Las Cruces;
and (iii) a one-time charge to earnings of $2.5 million, net of tax, resulting
from the write-off of interest capitalized prior to 1999 on postload nuclear
fuel.
Electric operating revenues net of energy expenses increased $18.9 million
and $36.1 million for the three and twelve months ended March 31, 2001,
respectively, compared to the same periods last year, primarily due to changes
in the following (in thousands):
Three Twelve
Months Months
Ended Ended
------- --------
Economy sales margins............................. $19,158 $ 37,607
Retail kWh sales.................................. 5,435 23,700
Energy expenses not recovered in New Mexico
service area..................................... (5,528) (18,035)
Coal mine reclamation adjustment.................. - (6,601)
Other............................................. (206) (562)
------- --------
Total.......................................... $18,859 $ 36,109
======= ========
18
Comparisons of kWh sales and electric operating revenues are shown below (in
thousands):
Increase (Decrease)
----------------------------
Three Months Ended March 31: 2001 2000 Amount Percent
- ---------------------------- ---------- ---------- ------------ -------------
Electric kWh sales:
Retail.................................. 1,442,647 1,340,181 102,466 7.6%
Sales for resale........................ 322,420 271,730 50,690 18.7 (1)
Economy sales........................... 354,959 605,882 (250,923) (41.4) (2)
---------- ---------- ---------
Total.................................. 2,120,026 2,217,793 (97,767) (4.4)
========== ========== =========
Electric operating revenues:
Retail.................................. $ 122,827 $ 107,937 $ 14,890 13.8%
Sales for resale........................ 18,291 12,911 5,380 41.7 (3)
Economy sales........................... 47,502 14,769 32,733 221.6 (4)
Other (5)............................... 2,770 1,450 1,320 91.0 (6)
---------- ---------- ---------
Total.................................. $ 191,390 $ 137,067 $ 54,323 39.6
========== ========== =========
Increase (Decrease)
----------------------------
Twelve Months Ended March 31: 2001 2000 Amount Percent
- ----------------------------- ---------- ---------- ------------ -------------
Electric kWh sales:
Retail.................................. 6,217,208 5,883,837 333,371 5.7%
Sales for resale........................ 1,333,230 1,030,445 302,785 29.4 (7)
Economy sales........................... 1,463,365 1,636,786 (173,421) (10.6) (2)
---------- ---------- ---------
Total.................................. 9,013,803 8,551,068 462,735 5.4
========== ========== =========
Electric operating revenues:
Retail.................................. $ 545,198 $ 478,962 $ 66,236 13.8%
Sales for resale........................ 75,542 51,707 23,835 46.1 (8)
Economy sales........................... 117,651 39,214 78,437 200.0 (4)
Other (5)............................... 12,341 6,092 6,249 102.6 (9)
---------- ---------- ---------
Total.................................. $ 750,732 $ 575,975 $ 174,757 30.3
========== ========== =========
- ---------------
(1) Primarily due to increased kWh sales to Imperial Irrigation District
("IID").
(2) Primarily due to decreased power production and availability resulting from
increased maintenance outages of the Company's generating units and an
earlier start of the Palo Verde fuel outage.
(3) Primarily due to increased energy expenses that are passed through directly
to certain wholesale customers.
(4) Primarily due to (i) increased margins and (ii) higher prices as a result of
increased energy expenses.
(5) Represents revenues with no related kWh sales.
(6) Primarily due to increased transmission revenues.
(7) Primarily due to (i) increased kWh sales to IID and (ii) sales to CFE as a
result of a contract that was effective from June through August 2000 with
no comparable sales to CFE in the prior period.
(8) Primarily due to (i) increased energy expenses that are passed through
directly to certain wholesale customers and (ii) sales to CFE as noted
above.
(9) Primarily due to (i) margins on swaps entered into with a large power
marketer in order to lock in a fixed price on certain power purchases during
the summer of 2000 and (ii) increased transmission revenues.
19
Other electric operations and maintenance expense increased $3.6 million and
$8.6 million for the three and twelve months ended March 31, 2001, respectively,
compared to the same periods last year as follows (in thousands):
Increase
Three Months Ended March 31: 2001 2000 (Decrease)
- ---------------------------- ------- ------- ---------------
Maintenance expense at
generation plants....................... $ 9,112 $ 6,226 $ 2,886 (1)
Pensions and benefits expense............. 6,968 5,368 1,600 (2)
Customer accounts expense................. 3,362 2,387 975 (3)
Outside services expense.................. 857 2,208 (1,351) (4)
Other..................................... 23,988 24,529 (541)
------- ------- -------
Total other electric operations
and maintenance expense.............. $44,287 $40,718 $ 3,569
======= ======= =======
Increase
Twelve Months Ended March 31: 2001 2000 (Decrease)
- ----------------------------- ------- ------- ---------------
Maintenance expense at
generation plants....................... $ 34,263 $ 26,705 $ 7,558 (5)
Customer accounts expense................. 11,691 10,121 1,570 (3)
Pensions and benefits expense............. 25,596 24,583 1,013
Outside services expense.................. 7,379 9,939 (2,560) (4)
Other..................................... 98,726 97,720 1,006
-------- -------- -------
Total other electric operations
and maintenance expense.............. $177,655 $169,068 $ 8,587
======== ======== =======
- --------------------
(1) Primarily due to scheduled maintenance outages.
(2) Primarily due to an accrual for employee bonuses for 2001.
(3) Primarily due to an increase in the provision for uncollectible accounts
due to bankruptcy of a large customer.
(4) Primarily due to a decrease in consulting fees related to: (i) Y2K; (ii)
stranded cost studies; and (iii) public relations with no comparable
fees in the current period.
(5) Primarily due to (i) scheduled maintenance outages in 2001; (ii)
unscheduled maintenance due to a mechanical problem with a turbine shaft
during the third quarter of 2000; and (iii) an insurance claim
receivable recognized in December 1999 for expenses of a major overhaul
of a gas turbine at a local plant that were recognized in prior periods.
Depreciation and amortization expense did not change significantly for the
three months ended March 31, 2001 compared to the same period last year. The
decrease of $2.5 million for the twelve months ended March 31, 2001 compared to
the same period last year was primarily due to a change in the estimated
depreciable life in the first quarter of 2000 of the plant investment related to
the decommissioning of Palo Verde.
Taxes other than income taxes did not change significantly for the three
months ended March 31, 2001 compared to the same period last year. The increase
of $1.7 million for the twelve months ended March 31, 2001 compared to the same
period last year was primarily due to (i) a $3.1 million reversal in December
1999 of sales tax reserves established in prior years and (ii) an increase in
Texas revenue related taxes due to higher operating income in the current
period. These increases were partially offset
20
by (i) a $1.9 million decrease in Arizona property taxes as a result of
depreciation and a regulatory basis plant writedown pursuant to the New Mexico
Settlement Agreement and (ii) a $0.4 million franchise tax refund in September
2000.
Other income (deductions) increased $1.3 million and $12.0 million for the
three and twelve months ended March 31, 2001, respectively, compared to the same
periods last year due to (i) litigation settlements of $1.0 million for the
three and twelve months ended March 31, 2000 and (ii) the accrual of the $16.5
million settlement agreement payment to Las Cruces in December 1999, with no
comparable activity in the current period. The twelve month increase was
partially offset by (i) an adjustment of $1.7 million to increase the reported
cash value of Company-owned life insurance policies in December 1999 and (ii) a
gain realized on the disposition of non-utility property of $2.4 million during
the twelve months ended March 31, 2000 with no comparable activity in the
current period.
Interest charges did not change significantly for the three months ended
March 31, 2001 compared to the same period last year. The decrease of $7.9
million for the twelve months ended March 31, 2001 compared to the same period
last year was primarily due to (i) a reduction in outstanding debt as a result
of open market purchases of the Company's first mortgage bonds and (ii)
adjustments to postload nuclear fuel to write-off a portion of accumulated
interest capitalized prior to 1999 and discontinue capitalizing interest in
1999. These decreases were partially offset by an increase in interest charges
related to the remarketing of the pollution control bonds in August 2000.
Income tax expense, excluding the tax effect of the extraordinary item,
increased $6.2 million for the three months ended March 31, 2001 primarily due
to changes in pretax income. The increase of $20.0 million for the twelve
months ended March 31, 2001 compared to the same period last year was primarily
due to changes in pretax income and certain permanent differences including (i)
an increase in nondeductible transition costs; (ii) a decrease in the adjustment
to the cash value of Company-owned life insurance policies and (iii) a decrease
in tax-exempt income.
Extraordinary loss on extinguishments of debt, net of income tax benefit,
represents the payment of premiums on debt extinguishments and the recognition
of unamortized issuance expenses on that debt.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following discussion regarding the Company's market-risk sensitive
instruments contains forward-looking information involving risks and
uncertainties. The statements regarding potential gains and losses are only
estimates of what could occur in the future. Actual future results may differ
materially from those estimates presented due to the characteristics of the
risks and uncertainties involved.
The Company is exposed to market risk due to changes in interest rates,
equity prices and commodity prices. See the Company's 2000 Form 10-K, Item 7A,
"Quantitative and Qualitative Disclosures About Market Risk," for a complete
discussion of the market risks faced by the Company and the Company's market
risk sensitive assets and liabilities. As of March 31, 2001, there have been no
material changes in the interest rate and equity price risks faced by the
Company or the fair values of assets and liabilities disclosed in Item 7A,
"Quantitative and Qualitative Disclosures About Market Risk," in the Company's
2000 Form 10-K. However, due to increased costs of fuel and purchased power
("energy costs") over the last twelve months, the Company continues to face
increased commodity price risk, as discussed below.
21
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 and variable pricing provisions
and are settled by physical delivery. The fuel contracts with variable pricing
provisions, as well as substantially all of the Company's purchased power
requirements, are exposed to fluctuations in prices due to unpredictable
factors, including weather, which impact supply and demand. Natural gas and
purchased power prices have increased significantly since May 2000 and are
expected to remain high on average over the next twelve months.
The Company's exposure to fuel and purchased power price risk is
substantially mitigated through the operation of the Texas Commission rules and
the Company's energy cost recovery clauses ("fuel clauses") in certain wholesale
rates. Under these rules and fuel clauses, energy costs are passed through to
customers. However, in the Company's New Mexico service area, pursuant to a
rate freeze that expired on April 30, 2001, and under certain wholesale
contracts, energy costs are included in the Company's base rates and are not
subject to periodic reconciliation or adjustment for past fluctuations in such
costs. The Company's average energy costs incurred for these customers
currently exceed the energy costs that were incorporated into the applicable
rates. Therefore, the Company is exposed to commodity price risk on energy costs
(primarily comprised of natural gas and purchased power) that are related to
these sales of electricity. From a historical perspective, a hypothetical 10%
increase in the market-based natural gas and purchased power costs incurred
during the latest nine month period would have resulted in an additional
annualized after-tax increase in natural gas and purchased power costs of
approximately $1.2 million and $0.9 million, respectively, that would not have
been recoverable.
Focusing on the remainder of the year, with respect to natural gas,
approximately 40% of the Company's estimated requirements for the next nine
months are expected to be acquired through contracts with fixed-pricing
provisions and the remaining requirements will be acquired through contracts
with variable-pricing provisions. Based on these projections which assume an
average variable price for natural gas of $5.67 per MMBtu, the Company could
incur increased natural gas expenses which may not be recovered from New Mexico
and certain wholesale customers over the next nine months of approximately $2.2
million, net of tax, as compared to actual natural gas expenses incurred in the
comparable nine month period in 2000. A hypothetical 10% increase in the assumed
$5.67 per MMBtu average variable price of natural gas would result in the
Company incurring an additional increase in natural gas expense of $0.8 million,
net of tax, which may not be recovered from New Mexico and certain small
wholesale customers over the next nine months. However, on April 23, 2001, the
Company filed a petition with the New Mexico Commission requesting an increase
in base rates or, alternatively, the reinstatement of a fixed fuel factor to
reflect its increased energy costs. See Item 1, Note B, "Regulation - New Mexico
Regulatory Matters - Fuel" for further discussion. The reinstatement of a fixed
fuel factor would substantially mitigate the financial risk to the Company of
any further energy cost increases.
In the normal course of business, the Company utilizes contracts of various
durations for the forward sales and purchases of electricity to effectively
manage its available generating capacity and supply needs. Such contracts
include forward contracts for the sale 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 sales for resale. They 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 or to supplement the Company's generating
capacity when demand is anticipated to exceed such capacity. As of March 31,
2001, the Company had
22
entered into forward sales and purchase contracts for energy with aggregate
contract values of approximately $5.4 million and $96.3 million, respectively. A
hypothetical 10% increase in the market price of wholesale electricity would
result in a $0.5 million decrease in the fair value of the forward sales
contracts. A hypothetical 10% decrease in the market price of wholesale
electricity would result in a $9.6 million decrease in the fair value of the
forward purchase contracts.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company hereby incorporates by reference the information set forth in
Part I of this report under Note E of Notes to Consolidated Financial
Statements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: See Index to Exhibits incorporated herein by reference.
(b) Reports on Form 8-K:
None
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EL PASO ELECTRIC COMPANY
By: /s/ Gary R. Hedrick
------------------------------------
Gary R. Hedrick
Executive Vice President,
Chief Financial and
Administrative Officer
(Duly Authorized Officer and
Principal Financial Officer)
Dated: May 14, 2001
24
EL PASO ELECTRIC COMPANY
INDEX TO EXHIBITS
Exhibit
Number Exhibit
------- -------
+10.01 Form of Restricted Stock Award Agreement between the Company and certain key
officers of the Company. (Identical in all material respects to Exhibit
99.04 to the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998)
++10.02 Form of Directors' Restricted Stock Award Agreement between the Company and
certain directors of the Company. (Identical in all material respects to
Exhibit 10.07 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999)
10.03 Stock Option Agreements, dated as of January 1, 2001 and April 1, 2001, with
Wilson K. Cadman. (Identical in all material respects to Exhibit 99.17 to
the Company's Annual Report on Form 10-K for the year ended December 31, 1997)
15 Letter re Unaudited Interim Financial Information
+ Twelve agreements, dated as of February 28, 2001, substantially identical in
all material respects to this Exhibit, have been entered into with Terry D.
Bassham; J. Frank Bates; Michael L. Blough; Gary R. Hedrick; Kathryn Hood;
John C. Horne; Helen Williams Knopp; Earnest A. Lehman; Kerry B. Lore; Robert
C. McNiel; Eduardo A. Rodriguez; and Guillermo Silva; officers of the Company.
++ In lieu of non-employee director compensation, eight agreements, dated as of
January 1, 2001 and April 1, 2001, substantially identical in all material
respects to this Exhibit, have been entered into with Ramiro Guzman; Kenneth
Heitz; Patricia Z. Holland-Branch; and Charles Yamarone; directors of the
Company.