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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 June 30, 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 (I.R.S. Employer
incorporation or organization) Identification No.)
Kayser Center, 100 North Stanton, El Paso, Texas 79901
(Address of principal executive offices) (Zip Code)
(915) 543-5711
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO __
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES [X] NO __
As of August 6, 2001, there were 51,624,447 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 - June 30, 2001 and December 31, 2000....... 1
Consolidated Statements of Operations - Three Months, Six Months and
Twelve Months Ended June 30, 2001 and 2000............................... 3
Consolidated Statements of Comprehensive Operations - Three Months, Six
Months and Twelve Months Ended June 30, 2001 and 2000.................... 5
Consolidated Statements of Cash Flows - Six Months Ended June 30, 2001
and 2000................................................................. 6
Notes to Consolidated Financial Statements............................... 7
Independent Accountants' Review Report................................... 15
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 25
Item 4. Submission of Matters to a Vote of Security Holders............... 25
Item 6. Exhibits and Reports on Form 8-K.................................. 25
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EL PASO ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS June 30,
(In thousands) 2001 December 31,
(Unaudited) 2000
------------------ ------------
Utility plant:
Electric plant in service............................................ $1,665,135 $1,659,539
Less accumulated depreciation and amortization....................... 432,448 391,675
---------- ----------
Net plant in service............................................... 1,232,687 1,267,864
Construction work in progress........................................ 100,113 72,580
Nuclear fuel; includes fuel in process of $9,681 and
$10,430, respectively.............................................. 73,805 75,880
Less accumulated amortization........................................ 34,944 36,289
---------- ----------
Net nuclear fuel................................................... 38,861 39,591
---------- ----------
Net utility plant................................................ 1,371,661 1,380,035
---------- ----------
Current assets:
Cash and temporary investments....................................... 18,682 11,344
Accounts receivable, principally trade, net of allowance for
doubtful accounts of $3,278 and $3,293, respectively............... 84,451 86,647
Inventories, at cost................................................. 24,587 24,845
Net undercollection of fuel revenues................................. 36,203 15,733
Prepayments and other................................................ 8,619 9,165
---------- ----------
Total current assets............................................. 172,542 147,734
---------- ----------
Long-term contract receivable.......................................... 6,877 10,709
---------- ----------
Deferred charges and other assets:
Decommissioning trust fund........................................... 60,380 60,176
Other................................................................ 16,904 17,890
---------- ----------
Total deferred charges and other assets.......................... 77,284 78,066
---------- ----------
Total assets..................................................... $1,628,364 $1,616,544
========== ==========
See accompanying notes to consolidated financial statements.
1
EL PASO ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (Continued)
CAPITALIZATION AND LIABILITIES June 30,
(In thousands except for share data) 2001 December 31,
(Unaudited) 2000
----------------- ------------
Capitalization:
Common stock, stated value $1 per share, 100,000,000 shares
authorized, 61,475,666 and 60,429,107 shares issued,
and 232,542 and 276,066 restricted shares, respectively................... $ 61,708 $ 60,705
Capital in excess of stated value........................................... 249,754 244,528
Unearned compensation - restricted stock awards............................. (2,203) (1,309)
Retained earnings........................................................... 232,819 202,116
Accumulated other comprehensive income (net unrealized
gains on marketable securities), net of tax............................... 1,372 2,902
---------- ----------
543,450 508,942
Treasury stock, 9,904,237 and 9,230,786 shares, respectively; at cost....... (105,193) (96,908)
---------- ----------
Common stock equity....................................................... 438,257 412,034
Long-term debt.............................................................. 708,791 715,058
Financing and capital lease obligations..................................... - 25,165
---------- ----------
Total capitalization.................................................. 1,147,048 1,152,257
---------- ----------
Current liabilities:
Current maturities of long-term debt and financing and
capital lease obligations................................................. 47,092 57,663
Accounts payable, principally trade......................................... 33,146 39,799
Taxes accrued other than federal income taxes............................... 13,779 17,054
Interest accrued............................................................ 18,219 16,528
Other....................................................................... 19,765 15,930
---------- ----------
Total current liabilities............................................. 132,001 146,974
---------- ----------
Deferred credits and other liabilities:
Decommissioning liability................................................... 131,974 128,129
Accrued postretirement benefit liability.................................... 82,280 81,784
Accumulated deferred income taxes, net...................................... 64,870 47,279
Accrued pension liability................................................... 30,958 31,134
Other....................................................................... 39,233 28,987
---------- ----------
Total deferred credits and other liabilities.......................... 349,315 317,313
---------- ----------
Commitments and contingencies
Total capitalization and liabilities.................................. $1,628,364 $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 Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Electric utility operating revenues................................. $ 203,127 $ 170,137 $ 394,517 $ 307,204
----------- ----------- ----------- -----------
Energy expenses:
Fuel.............................................................. 53,207 34,564 102,659 61,674
Purchased and interchanged power.................................. 34,537 16,064 51,148 19,553
----------- ----------- ----------- -----------
87,744 50,628 153,807 81,227
----------- ----------- ----------- -----------
Electric utility operating revenues net of energy expenses.......... 115,383 119,509 240,710 225,977
----------- ----------- ----------- -----------
Energy services operations:
Operating revenues................................................ 496 1,327 1,985 2,305
Operating expenses................................................ 1,224 1,592 3,113 2,779
----------- ----------- ----------- -----------
(728) (265) (1,128) (474)
----------- ----------- ----------- -----------
Other electric utility operating expenses:
Other operations.................................................. 31,687 31,860 64,692 64,234
Maintenance....................................................... 13,899 11,033 25,181 19,376
Depreciation and amortization..................................... 22,242 21,535 44,399 43,324
Taxes other than income taxes..................................... 10,812 11,030 21,539 21,991
----------- ----------- ----------- -----------
78,640 75,458 155,811 148,925
----------- ----------- ----------- -----------
Operating income.................................................... 36,015 43,786 83,771 76,578
----------- ----------- ----------- -----------
Other income (deductions):
Investment income, net............................................ 1,706 964 2,607 1,745
Litigation settlements............................................ - - - (1,000)
Other, net........................................................ (613) (764) (1,253) (1,633)
----------- ----------- ----------- -----------
1,093 200 1,354 (888)
----------- ----------- ----------- -----------
Income before interest charges...................................... 37,108 43,986 85,125 75,690
----------- ----------- ----------- -----------
Interest charges (credits):
Interest on long-term debt........................................ 16,025 16,991 32,694 33,563
Other interest.................................................... 1,995 2,020 3,985 3,830
Interest capitalized.............................................. (1,255) (951) (2,296) (1,832)
----------- ----------- ----------- -----------
16,765 18,060 34,383 35,561
----------- ----------- ----------- -----------
Income before income taxes and extraordinary item................... 20,343 25,926 50,742 40,129
Income tax expense.................................................. 8,077 10,758 19,878 16,405
----------- ----------- ----------- -----------
Income before extraordinary item.................................... 12,266 15,168 30,864 23,724
Extraordinary loss on extinguishments of debt, net of
income tax benefit................................................ 161 - 161 549
----------- ----------- ----------- -----------
Net income applicable to common stock............................... $ 12,105 $ 15,168 $ 30,703 $ 23,175
=========== =========== =========== ===========
Basic earnings per common share:
Income before extraordinary item.................................. $0.24 $0.28 $0.60 $ 0.43
Extraordinary loss on extinguishments of debt, net of
income tax benefit............................................. - - - 0.01
----------- ----------- ----------- -----------
Net income..................................................... $0.24 $0.28 $0.60 $ 0.42
=========== =========== =========== ===========
Diluted earnings per common share:
Income before extraordinary item.................................. $0.23 $0.28 $0.59 $ 0.43
Extraordinary loss on extinguishments of debt, net of
income tax benefit............................................. - - - 0.01
----------- ----------- ----------- -----------
Net income..................................................... $0.23 $0.28 $0.59 $ 0.42
=========== =========== =========== ===========
Weighted average number of common shares
outstanding....................................................... 51,333,726 54,375,819 51,175,732 54,837,870
=========== =========== =========== ===========
Weighted average number of common shares and
dilutive potential common shares outstanding...................... 52,314,337 55,172,804 52,152,625 55,519,019
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
3
EL PASO ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except for share data)
Twelve Months Ended
June 30,
------------------------------
2001 2000
----------- -----------
Electric utility operating revenues............................................. $ 783,721 $ 613,765
----------- -----------
Energy expenses:
Fuel.......................................................................... 200,532 121,738
Coal mine reclamation adjustment.............................................. - (6,601)
Purchased and interchanged power.............................................. 92,812 26,833
----------- -----------
293,344 141,970
----------- -----------
Electric utility operating revenues net of energy expenses...................... 490,377 471,795
----------- -----------
Energy services operations:
Operating revenues............................................................ 4,921 3,494
Operating expenses............................................................ 7,004 4,443
----------- -----------
(2,083) (949)
----------- -----------
Other electric utility operating expenses:
Other operations.............................................................. 132,744 133,314
Maintenance................................................................... 47,605 34,895
Depreciation and amortization................................................. 88,076 88,522
Taxes other than income taxes................................................. 42,702 41,321
----------- -----------
311,127 298,052
----------- -----------
Operating income................................................................ 177,167 172,794
----------- -----------
Other income (deductions):
Investment income, net........................................................ 4,344 4,179
Litigation settlements........................................................ - (17,500)
Other, net.................................................................... (1,891) 1,177
----------- -----------
2,453 (12,144)
----------- -----------
Income before interest charges.................................................. 179,620 160,650
----------- -----------
Interest charges (credits):
Interest on long-term debt.................................................... 66,380 72,477
Other interest................................................................ 7,787 7,452
Interest capitalized.......................................................... (4,220) (1,735)
----------- -----------
69,947 78,194
----------- -----------
Income before income taxes and extraordinary item............................... 109,673 82,456
Income tax expense.............................................................. 42,369 31,433
----------- -----------
Income before extraordinary item................................................ 67,304 51,023
Extraordinary loss on extinguishments of debt, net of income tax benefit...... 1,384 2,702
----------- -----------
Net income applicable to common stock........................................... $ 65,920 $ 48,321
=========== ===========
Basic earnings per common share:
Income before extraordinary item.............................................. $ 1.29 $ 0.90
Extraordinary loss on extinguishments of debt, net of income tax benefit...... 0.03 0.05
----------- -----------
Net income................................................................. $ 1.26 $ 0.85
=========== ===========
Diluted earnings per common share:
Income before extraordinary item.............................................. $ 1.26 $ 0.89
Extraordinary loss on extinguishments of debt, net of income tax benefit...... 0.02 0.04
----------- -----------
Net income................................................................. $ 1.24 $ 0.85
=========== ===========
Weighted average number of common shares outstanding............................ 52,366,103 56,572,978
=========== ===========
Weighted average number of common shares and dilutive
potential common shares outstanding........................................... 53,331,686 57,192,245
=========== ===========
See accompanying notes to consolidated financial statements.
4
EL PASO ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(Unaudited)
(In thousands)
Three Months Six Months Twelve Months
Ended Ended Ended
June 30, June 30, June 30,
------------------ ------------------ -----------------
2001 2000 2001 2000 2001 2000
-------- ------- ------- ------- ------- -------
Net income...................................... $12,105 $15,168 $30,703 $23,175 $65,920 $48,321
Other comprehensive income (loss):
Net unrealized gains (losses) on marketable
securities, net of income tax benefit
(expense) of $(624), $249, $824,
$(55), $1,567 and $(686),
respectively................................. 1,160 (463) (1,530) 102 (2,909) 1,274
------- ------- ------- ------- ------- -------
Comprehensive income applicable
to common stock................................ $13,265 $14,705 $29,173 $23,277 $63,011 $49,595
======= ======= ======= ======= ======= =======
See accompanying notes to consolidated financial statements.
5
EL PASO ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
June 30,
------------------------------
2001 2000
--------- -----------
Cash flows from operating activities:
Net income.............................................................. $ 30,703 $ 23,175
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of electric plant in service............ 44,399 43,324
Amortization of nuclear fuel.......................................... 8,107 8,596
Deferred income taxes................................................. 18,486 15,431
Extraordinary loss on extinguishments of debt, net of
income tax benefit................................................. 161 549
Amortization and accretion of interest costs.......................... 4,742 4,688
Other operating activities............................................ 914 1,701
Change in:
Accounts receivable................................................... 2,196 (17,151)
Inventories........................................................... 258 648
Net under/overcollection of fuel revenues............................. (10,628) (9,052)
Prepayments and other................................................. 546 3,648
Long-term contract receivable......................................... 3,832 3,205
Accounts payable...................................................... (6,653) 10,334
Litigation settlements payable........................................ - (16,500)
Taxes accrued other than federal income taxes......................... (3,275) (3,397)
Interest accrued...................................................... 1,691 (486)
Other current liabilities............................................. 3,835 (153)
Deferred charges and credits.......................................... 637 (384)
-------- -----------
Net cash provided by operating activities........................... 99,951 68,176
-------- -----------
Cash flows from investing activities:
Cash additions to utility property, plant and equipment................. (35,682) (33,926)
Cash additions to nuclear fuel.......................................... (7,075) (8,032)
Interest capitalized:
Utility property, plant and equipment................................. (1,995) (1,480)
Nuclear fuel.......................................................... (301) (352)
Investment in decommissioning trust fund................................ (2,558) (2,739)
Other investing activities.............................................. 1,118 (59)
-------- -----------
Net cash used for investing activities.............................. (46,493) (46,588)
-------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options................................. 4,869 -
Purchases of treasury stock............................................. (8,285) (25,275)
Repurchases of and payments on long-term debt........................... (41,083) (23,731)
Nuclear fuel financing obligations:
Proceeds.............................................................. 8,498 9,687
Payments.............................................................. (9,663) (10,055)
Revolving credit facility, net proceeds................................. - 5,000
Payments on capital lease obligations................................... - (827)
Other financing activities.............................................. (456) (190)
-------- -----------
Net cash used for financing activities.............................. (46,120) (45,391)
-------- -----------
Net increase (decrease) in cash and temporary investments................. 7,338 (23,803)
Cash and temporary investments at beginning of period..................... 11,344 37,234
-------- -----------
Cash and temporary investments at end of period........................... $ 18,682 $ 13,431
======== ===========
See accompanying notes to consolidated financial statements.
6
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 energy services revenues
and expenses.
Pursuant to the rules and regulations of the Securities and Exchange
Commission (the "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 June 30, 2001 and December 31, 2000; the results of
its operations for the three, six and twelve months ended June 30, 2001 and
2000; and its cash flows for the six months ended June 30, 2001 and 2000. The
results of operations for the three, six and twelve months ended June 30, 2001
and the cash flows for the six months ended June 30, 2001 are not necessarily
indicative of the results to be expected for the full calendar year.
At January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"), as amended, including implementation guidance
discussed by the Financial Accounting Standards Board's (the "FASB") 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 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 determined that all such contracts that had the characteristics of
derivatives met the "normal purchases and normal sales" exception provided in
SFAS No. 133, and, as such, were not required to be accounted for as derivatives
pursuant to SFAS No. 133 and other guidance.
7
EL PASO ELECTRIC COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DIG Issue C10, "Can Option Contracts and Forward Contracts with Optionality
Features Qualify for the Normal Purchases and Normal Sales Exception," and DIG
Issue C16 "Scope Exception: Applying the Normal Purchases and Normal Sales
Exception to Contracts That Combine a Forward Contract and a Purchase Option
Contract" were posted by the FASB during the second quarter of 2001 and are
effective as of July 1, 2001. DIG C10 and C16 provide guidance related to
whether contracts with certain optionality features are eligible for the normal
purchases and normal sales exception (DIG Issue C10 and C16 do not apply to
certain electric contracts, which are discussed below). Additionally, in June
2001, DIG Issue C15 "Scope Exception: Normal Purchases and Normal Sales
Exception for Option-Type Contracts and Forward Contracts in Electricity" was
posted by the FASB and is effective as of July 1, 2001. This DIG Issue provides
guidance related to whether certain contracts for the purchase and sale of
electricity can be eligible for the normal purchases and normal sales 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 No. 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 July 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 No. 133.
Supplemental Cash Flow Disclosures (in thousands)
Six Months Ended June 30,
-------------------------------
2001 2000
------- -------
Cash paid for:
Interest on long-term debt (1)................... $30,103 $32,718
Other interest................................... 12 93
Income taxes..................................... 3,550 1,200
Non-cash investing and financing activities:
Grants of restricted shares of
common stock................................. 1,779 1,696
- -----------
(1) Includes interest on bonds, letter of credit fees related to bonds, and
interest on nuclear fuel financing not capitalized.
8
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 June 30,
----------------------------------------------------------------------
2001 2000
---------------------------------- ----------------------------------
Per Per
Common Common
Income Shares Share Income Shares Share
------------- ---------- ------ ------------- ---------- ------
(In thousands) (In thousands)
Basic earnings per share:
Income before extraordinary
item............................... $12,266 51,333,726 $0.24 $15,168 54,375,819 $0.28
====== ======
Effect of dilutive securities:
Unvested restricted stock........... - 56,143 - 51,623
Stock options....................... - 924,468 - 745,362
------------- ---------- ------------- ----------
Diluted earnings per share:
Income before extraordinary
item............................... $12,266 52,314,337 $0.23 $15,168 55,172,804 $0.28
============= ========== ====== ============= ========== ======
Six Months Ended June 30,
----------------------------------------------------------------------
2001 2000
---------------------------------- ----------------------------------
Per Per
Common Common
Income Shares Share Income Shares Share
------------- ---------- ------ ------------- ---------- ------
(In thousands) (In thousands)
Basic earnings per share:
Income before extraordinary
item............................... $30,864 51,175,732 $0.60 $23,724 54,837,870 $0.43
====== ======
Effect of dilutive securities:
Unvested restricted stock........... - 40,497 - 37,186
Stock options....................... - 936,396 - 643,963
------------- ---------- ------------- ----------
Diluted earnings per share:
Income before extraordinary
item............................... $30,864 52,152,625 $0.59 $23,724 55,519,019 $0.43
============= ========== ====== ============= ========== ======
Twelve Months Ended June 30,
----------------------------------------------------------------------
2001 2000
---------------------------------- ----------------------------------
Per Per
Common Common
Income Shares Share Income Shares Share
------------- ---------- ------ ------------- ---------- ------
(In thousands) (In thousands)
Basic earnings per share:
Income before extraordinary
item............................... $67,304 52,366,103 $1.29 $51,023 56,572,978 $0.90
====== ======
Effect of dilutive securities:
Unvested restricted stock........... - 58,146 - 44,025
Stock options....................... - 907,437 - 575,242
------------- ---------- ------------- ----------
Diluted earnings per share:
Income before extraordinary
item............................... $67,304 53,331,686 $1.26 $51,023 57,192,245 $0.89
============= ========== ====== ============= ========== ======
9
EL PASO ELECTRIC COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 third and fourth quarters of 1999 and the first quarter
of 2000.
2) 42,432 options granted January 1, 2000 at an exercise price of $9.81 were
excluded for the first quarter of 2000.
3) 50,000 options granted March 15, 2000 at an exercise price of $9.50 were
excluded for the first quarter of 2000.
4) 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.
5) 150,000 options granted December 15, 2000 at an exercise price of $12.60
were excluded for the first quarter of 2001.
6) 2,941 options granted January 1, 2001 at an exercise price of $13.20 were
excluded for the first quarter of 2001.
7) 150,000 options granted May 10, 2001 at an exercise price of $14.95 were
excluded for the second 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 in 2005. At the end of the
Freeze Period, the Company will be subject to the provisions of retail
competition under the law and may 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.
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 increases or decreases in energy costs
associated with the provision of electricity as well as seek recovery of past
undercollections of fuel revenues. In November 2000, the Texas Commission
approved a settlement which increased the fixed fuel factor from $0.01435 to
$0.02186 per kWh.
10
EL PASO ELECTRIC COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On January 8, 2001, the Company filed a new petition with the Texas
Commission for a 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 (the "Texas Fuel Settlement") between the
Company and the parties which had intervened, including the City of El Paso.
After gas costs declined and off-system sales margins increased from previously
forecasted levels, the Texas Fuel Settlement included a proposed fuel factor
increase to $0.02494 per kWh. This factor was implemented on an interim basis
in April 2001. In combination, the two increases in fuel factors increased fuel
revenue collections by $21.3 million during the first half of 2001. The Texas
Fuel Settlement 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. The surcharge was implemented on an interim basis beginning with the
first billing cycle in June 2001. The Texas Fuel 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, including interest. These
provisions taken together did not have a material effect on the Company's
results of operations and resulted in an $11.0 million increase in Net
Undercollection of Fuel Revenues and a $10.5 million increase in Deferred
Credits and Other Liabilities - Other, which were recorded in June 2001. The
Company also agreed to a prospective change in the Palo Verde performance
standards, which will materially reduce future rewards and penalties on a
symmetrical basis. The Texas Fuel Settlement is subject to review by a hearings
officer and is contingent upon the final approval of the Texas Commission. Based
on the information available to the Company at this time, the Company believes
the Texas Commission should grant final approval of the settlement in the near
future.
Any fuel surcharge granted to the Company, as well as the Company's other
energy expenses not otherwise finally resolved in the Texas Fuel Settlement,
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 Texas Fuel Settlement.
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 to 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 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 the
applications do not conflict with the provisions of the 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 sought 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. On June 28, 2001, the New Mexico Commission issued its
11
EL PASO ELECTRIC COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
order approving formation of a holding company for the Company. Although the
order approved the Company's formation of a holding company, it also placed
thirty-eight conditions upon its approval. The conditions include numerous
reporting and compliance requirements as well as strict prohibitions on certain
intercompany activity. The Company has filed a Motion for Rehearing and asked
the New Mexico Commission to remove twelve of the thirty-eight conditions and
consolidate several others. The Company cannot predict the outcome of its Motion
for Rehearing and will evaluate the benefit of a holding company after the
issuance of a new Final Order or denial of rehearing.
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 anticipates that it 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 Agreement entered into in October 1998
eliminated the then existing fuel factor of $0.01949 per kWh and incorporated it
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 prior to May 1, 2001. The average energy costs incurred
for New Mexico jurisdictional customers exceeded this fuel factor by a
substantial amount. Therefore, on April 23, 2001, the Company filed a petition
with the New Mexico Commission proposing a settlement that would implement a new
fixed fuel factor and reinstate a fuel adjustment clause in lieu of a base rate
increase (the "New Mexico Fuel Factor Agreement"). The proposed fixed fuel
factor of $0.01501 per kWh would increase revenues by approximately $19 million
annually and would be in addition to the fuel factor that is currently included
in base rates. The proposed fixed fuel factor would keep overall retail rates
more consistent with the retail rates charged to Texas jurisdictional customers.
The reinstatement of a fuel adjustment clause would also substantially mitigate
the financial risk to the Company of any further energy cost increases.
The New Mexico Commission has allowed the Company to implement its New Mexico
Fuel Factor Agreement, beginning with consumption on June 15, 2001, on a
provisional basis. The agreement currently is unopposed, but final
implementation is contingent upon approval of the New Mexico Commission. Based
on the information available to the Company at this time, the Company believes
the New Mexico Commission should grant final approval of the agreement in the
near future.
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 June 30, 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.
12
EL PASO ELECTRIC COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
D. Commitments and Contingencies
For a full discussion of commitments and contingencies, including
environmental matters related to the Company, see Note H of Notes to Financial
Statements in the 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
In addition to the contracts entered into prior to December 31, 2000 and
discussed in the Company's 2000 Form 10-K, the Company has since entered into
the following agreements with various counterparties for forward firm purchases
and sales of electricity:
Type of Contract Quantity Term
- --------------------------- -------------------------------- -------------------------------------------
Purchase on-peak 103 MW 2001
Sale off-peak 25 MW July through September 2001
Purchase off-peak 25 MW July 15 through September 2001
Purchase on-peak 128 MW 2002
Purchase on-peak 25 MW April through October 2002
Purchase on-peak 103 MW 2003 through 2005
The Company also has a new agreement with a counterparty for power exchanges
under which the Company will receive 80 MW of on-peak capacity and associated
energy during 2002 at the Eddy County tie and concurrently deliver the same
amount at Palo Verde and/or Four Corners. The on-peak exchange amount will
decrease to 30 MW for 2003 through 2005. The agreement also gives the
counterparty the option to deliver up to 133 MW of off-peak capacity and
associated energy to the Company at the Eddy County tie from 2002 through 2005
in exchange for the same amount of energy concurrently delivered by the Company
at Palo Verde and/or Four Corners. The Company will receive a guaranteed margin
on any energy exchanged under the off-peak agreement.
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
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.
13
EL PASO ELECTRIC COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
14
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 June 30, 2001, the
related condensed consolidated statements of operations and comprehensive
operations for the three months, six months and twelve months ended June 30,
2001 and 2000, and the related condensed consolidated statements of cash flows
for the six months ended June 30, 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
July 20, 2001
15
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) unanticipated increased costs associated
with scheduled and 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, purchased power and wind. 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
16
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.
Duke Energy has announced it is exploring the possibility of building a
generation plant in Deming, New Mexico. Public Service Company of New Mexico
has announced its intent to build a generation plant outside Las Cruces, 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 June 30, 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 July 1, 2000 through June 15, 2001, the Company incurred
increased energy expenses which cannot be recovered from New Mexico and certain
wholesale customers of approximately $12.2 million, net of tax, compared to the
same period a year earlier. The New Mexico Commission has allowed the Company
to implement its New Mexico Fuel Factor Agreement beginning with consumption on
June 15, 2001, on a provisional basis. The agreement currently is unopposed, but
final implementation is contingent upon approval of the New Mexico Commission.
Based on the information available to the Company at this time, the Company
believes the New Mexico Commission should grant final approval of the agreement
in the near future. See Item 1, Note B, "Regulation - New Mexico Regulatory
Matters - Fuel" and Item 3, "Quantitative and Qualitative Disclosures About
Market Risk - Commodity Price Risk."
17
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.
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 is analyzing its capacity needs, but currently has no
definite plans to add any significant amount of new generating capacity to serve
retail load prior to 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 June 30, 2001, cash and temporary investments totaled $18.7 million, an
increase of $7.4 million from the December 31, 2000 balance of $11.3 million.
The Company redeemed 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 June 30, 2001, approximately $47.0
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.
As part of an aggressive deleveraging program, the Company has significantly
reduced its long-term debt since its emergence from bankruptcy in 1996. From
June 1, 1996 through August 6, 2001, the Company repurchased on the open market
approximately $366.1 million of first mortgage bonds, including approximately
$6.2 million of first mortgage bonds during the second quarter of 2001 and an
additional $6.2 million on July 17, 2001. As mentioned above, the Company also
redeemed 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 38% at June 30, 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
18
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 August 6, 2001, the Company had
repurchased 10,065,829 shares of common stock under these programs for
approximately $108.0 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.
Historical Results of Operations
Three Months Six Months Twelve Months
Ended June 30, Ended June 30, Ended June 30,
----------------- ----------------- -----------------
2001 2000 2001 2000 2001 2000
------- ------- ------- ------- ------- -------
Net income applicable to
common stock before
extraordinary item
(in thousands)............................ $12,266 $15,168 $30,864 $23,724 $67,304 $51,023
Diluted earnings per common
share before extraordinary
item...................................... 0.23 0.28 0.59 0.43 1.26 0.89
Results of operations for the twelve months ended June 30, 2000 were affected
by the following unusual or infrequent items: (i) an adjustment of $4.0 million,
net of tax, reducing fuel expense based on a reduction of the Company's
estimated coal mine reclamation liability; (ii) a charge to earnings of $10.1
million, net of tax, as a result of the settlement agreement with Las Cruces;
and (iii) a one-time charge to earnings of $2.5 million, net of tax, resulting
from the write-off of interest capitalized prior to 1999 on postload nuclear
fuel.
Electric utility operating revenues net of energy expenses decreased $4.1
million for the three months ended June 30, 2001, and increased $14.7 million
and $18.6 million for the six and twelve months ended June 30, 2001,
respectively, compared to the same periods last year, primarily due to changes
in the following (in thousands):
Three Six Twelve
Months Months Months
Ended Ended Ended
----------------- ----------------- -----------------
Economy sales margins.............. $ 4,372 $ 23,531 $ 36,204
Retail kWh sales................... (2,216) 4,641 14,122
Energy expenses not recovered
in New Mexico service area........ (5,466) (10,993) (20,055)
Tax refund related to prior periods (716) (1,912) (2,027)
Coal mine reclamation
adjustment........................ - - (6,601)
Write-off of capitalized interest
related
to postload nuclear fuel.......... - - (2,614)
Other.............................. (100) (534) (447)
------- -------- --------
Total........................... $(4,126) $ 14,733 $ 18,582
======= ======== ========
19
Comparisons of kWh sales and electric utility operating revenues are shown
below (in thousands):
Increase (Decrease)
----------------------------
Three Months Ended June 30: 2001 2000 Amount Percent
- ------------------------------------------ ---------- ---------- ------------ ------------
Electric kWh sales:
Retail.................................. 1,522,014 1,542,826 (20,812) (1.3)% (1)
Sales for resale........................ 383,502 295,709 87,793 29.7 (2)
Economy sales........................... 273,893 290,533 (16,640) (5.7) (3)
---------- ---------- --------
Total.................................. 2,179,409 2,129,068 50,341 2.4
========== ========== ========
Electric utility operating revenues:
Retail.................................. $ 147,935 $ 135,684 $ 12,251 9.0% (4)
Sales for resale........................ 25,425 16,840 8,585 51.0 (5)
Economy sales........................... 27,228 15,018 12,210 81.3 (6)
Other (7)............................... 2,539 2,595 (56) (2.2)
---------- ---------- --------
Total.................................. $ 203,127 $ 170,137 $ 32,990 19.4
========== ========== ========
Increase (Decrease)
----------------------------
Six Months Ended June 30: 2001 2000 Amount Percent
- ------------------------------------------ ---------- ---------- ------------ ------------
Electric kWh sales:
Retail.................................. 2,964,661 2,883,007 81,654 2.8%
Sales for resale........................ 705,922 567,439 138,483 24.4 (2)
Economy sales........................... 628,852 896,415 (267,563) (29.8) (3)
---------- ---------- ---------
Total.................................. 4,299,435 4,346,861 (47,426) (1.1)
========== ========== =========
Electric utility operating revenues:
Retail.................................. $ 270,762 $ 243,621 $ 27,141 11.1% (4)
Sales for resale........................ 43,716 29,751 13,965 46.9 (5)
Economy sales........................... 74,730 29,787 44,943 150.9 (6)
Other (7)............................... 5,309 4,045 1,264 31.2 (8)
---------- ---------- ---------
Total.................................. $ 394,517 $ 307,204 $ 87,313 28.4
========== ========== =========
Increase (Decrease)
----------------------------
Twelve Months Ended June 30: 2001 2000 Amount Percent
- ------------------------------------------ ---------- ---------- ------------ ------------
Electric kWh sales:
Retail.................................. 6,196,396 6,009,042 187,354 3.1%
Sales for resale........................ 1,421,023 1,100,991 320,032 29.1 (2)
Economy sales........................... 1,446,725 1,693,348 (246,623) (14.6) (3)
---------- ---------- ---------
Total.................................. 9,064,144 8,803,381 260,763 3.0
========== ========== =========
Electric utility operating revenues:
Retail.................................. $ 557,449 $ 500,098 $ 57,351 11.5% (4)
Sales for resale........................ 84,128 56,299 27,829 49.4 (5)
Economy sales........................... 129,861 49,998 79,863 159.7 (6)
Other (7)............................... 12,283 7,370 4,913 66.7 (9)
---------- ---------- ---------
Total.................................. $ 783,721 $ 613,765 $ 169,956 27.7
========== ========== =========
- -----------------
(1) Primarily due to milder weather in 2001.
(2) Primarily due to increased kWh sales to IID and CFE.
(3) Primarily due to decreased power production and availability resulting from
increased maintenance outages of the Company's generating units, including
an extended refueling and maintenance outage at Palo Verde Unit 1. The
three and six month decreases were also partially due to a weaker power
market in June 2001 compared to last year.
20
(4) Primarily due to increased energy expenses that are passed through directly
to Texas jurisdictional customers.
(5) Primarily due to (i) increased energy expenses that are passed through
directly to certain wholesale customers and (ii) increased sales to CFE.
(6) Primarily due to (i) increased margins and (ii) higher prices as a result
of increased energy expenses.
(7) Represents revenues with no related kWh sales.
(8) Primarily due to increased transmission revenues partially offset by
margins on swaps entered into with a large power marketer in order to lock
in a fixed price on certain power purchases during June 2000 with no
comparable amount in the current period.
(9) Primarily due to (i) increased transmission revenues and (ii) 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.
Other electric utility operations and maintenance expense increased $2.7
million, $6.3 million and $12.1 million for the three, six and twelve months
ended June 30, 2001, respectively, compared to the same periods last year, as
follows (in thousands):
Increase
Three Months Ended June 30: 2001 2000 (Decrease)
- ------------------------------------------ ------- ------- ---------------
Maintenance expense at
generation plants........................ $10,897 $ 8,535 $ 2,362 (1)
Transmission maintenance expense.......... 886 189 697 (2)
Outside services expense.................. 1,673 2,730 (1,057) (3)
Other..................................... 32,130 31,439 691
------- ------- -------
Total other electric utility operations
and maintenance expense.............. $45,586 $42,893 $ 2,693
======= ======= =======
Increase
Six Months Ended June 30: 2001 2000 (Decrease)
- ------------------------------------------ ------- ------- ---------------
Maintenance expense at
generation plants........................ $20,009 $14,762 $ 5,247 (1)
Pensions and benefits expense............. 11,840 10,657 1,183 (4)
Customer accounts expense................. 5,632 4,936 696 (5)
Transmission maintenance expense.......... 1,055 378 677 (2)
Outside services expense.................. 2,530 4,938 (2,408) (6)
Other..................................... 48,807 47,939 868
------- ------- -------
Total other electric utility operations
and maintenance expense.............. $89,873 $83,610 $ 6,263
======= ======= =======
Increase
Twelve Months Ended June 30: 2001 2000 (Decrease)
- ------------------------------------------ -------- -------- ---------------
Maintenance expense at
generation plants........................ $ 36,625 $ 25,413 $11,212 (7)
Transmission operations expense........... 4,960 3,710 1,250 (8)
Transmission maintenance expense.......... 1,776 778 998 (2)
Pensions and benefits expense............. 25,179 24,218 961 (4)
Outside services expense.................. 6,323 10,283 (3,960) (9)
Other..................................... 105,486 103,807 1,679
-------- -------- -------
Total other electric utility operations
and maintenance expense.............. $180,349 $168,209 $12,140
======== ======== =======
- --------------
21
(1) Primarily due to scheduled maintenance outages.
(2) Primarily due to increased costs related to a jointly owned transmission
line operated by another utility.
(3) Primarily due to a decrease in (i) tax consulting fees and (ii) corporate
restructuring expenses.
(4) Primarily due to an increased accrual for employee bonuses for 2001.
(5) Primarily due to an increase in the provision for uncollectible accounts
due to bankruptcy of a large customer.
(6) Primarily due to a decrease in (i) tax consulting fees; (ii) expenses
related to condemnation issues; (iii) Y2K consulting fees with no
comparable fees in the current period; (iv) consulting fees for stranded
cost studies; and (v) corporate restructuring expenses.
(7) Primarily due to (i) scheduled maintenance outages in 2001 and fourth
quarter of 2000; (ii) unscheduled maintenance during the third quarter of
2000; and (iii) an insurance claim receivable recognized in December 1999
for maintenance expenses that were recognized in prior periods.
(8) Primarily due to (i) increased wheeling costs during the third quarter of
2000 due to increased purchased power as a result of a local unit being
down for unscheduled maintenance; and (ii) emergency repairs at a
transmission switchyard in the third quarter of 2000 with no comparable
expenses in the prior period.
(9) Primarily due to a decrease in (i) legal costs; (ii) Y2K consulting fees
with no comparable fees in the current period; (iii) consulting fees for
stranded cost studies; (iv) expenses related to condemnation issues; and
(v) tax consulting fees.
Depreciation and amortization expense did not change significantly for the
three, six and twelve months ended June 30, 2001 compared to the same period
last year.
Taxes other than income taxes did not change significantly for the three and
six months ended June 30, 2001 compared to the same period last year. The
increase of $1.4 million for the twelve months ended June 30, 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 by (i) a $1.9 million
decrease in Arizona property taxes as a result of depreciation, a regulatory
basis plant writedown pursuant to the New Mexico Settlement Agreement and an
Arizona bill effective in 2001, and (ii) a $0.4 million franchise tax refund in
September 2000.
Other income (deductions) did not change significantly for the three months
ended June 30, 2001 compared to the same period last year. Other income
(deductions) increased $2.2 million and $14.6 million for the six and twelve
months ended June 30, 2001, respectively, compared to the same periods last year
due to litigation settlements of $1.0 million for the six and twelve months
ended June 30, 2000 with no comparable activity in the current period. The
twelve months ended June 30, 2000 also increased due to the accrual of the $16.5
million settlement agreement payment to Las Cruces in December 1999. 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 $1.4 million during the twelve months ended June 30, 2000 with no
comparable activity in the current period.
22
Interest charges decreased $1.3 million, $1.2 million, and $8.2 million for
the three, six and twelve months ended June 30, 2001, respectively, compared to
the same periods last year due to (i) a reduction in outstanding debt as a
result of open market purchases of the Company's first mortgage bonds and (ii)
increased capitalized interest related to construction work in progress. The
twelve month decrease was also due to 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,
decreased $2.7 million for the three months ended June 30, 2001, and increased
$3.5 million for the six months ended June 30, 2001 primarily due to changes in
pretax income and certain permanent differences. The increase of $10.9 million
for the twelve months ended June 30, 2001 compared to the same period last year
was primarily due to changes in pretax income and certain permanent differences
including (i) a decrease in the adjustment to the cash value of Company-owned
life insurance policies and (ii) a decrease in tax-exempt income partially
offset by a decrease in nondeductible transition costs.
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.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
141, "Business Combinations" and Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets." The Company does not believe that
its activities or assets as of June 30, 2001 will be impacted by these
standards.
Additionally, in July 2001, the FASB issued Statement of Financial Accounting
Standards No. 143 "Accounting for Asset Retirement Obligations" ("SFAS No.
143"). SFAS No. 143 provides accounting guidance for retirement obligations,
for which there is a legal obligation to settle, associated with tangible long-
lived assets. SFAS No. 143 requires that asset retirement costs be capitalized
as part of the cost of the related long-lived asset and such costs should be
allocated to expense by using a systematic and rational method. The statement
requires that the initial measurement of the asset retirement obligation
liability to be recorded at fair value and the use of an allocation approach for
subsequent changes in the measurement of the liability. Upon adoption of SFAS
No. 143, an entity will use a cumulative-effect approach to recognize transition
amounts for any existing asset retirement obligation liability, asset retirement
costs and accumulated depreciation. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. Management has not yet quantified the impact of
adopting SFAS No. 143 on the Company's financial statements.
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 June 30, 2001, there have been no
23
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. Additionally, the commodity price risk that the Company had
been exposed to due to increased energy costs will be substantially mitigated by
the New Mexico Fuel Factor Agreement as discussed below.
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 increased significantly from May 2000
through May 2001, but have recently begun to decrease on average. The Company's
exposure to fuel and purchased power price risk has been substantially mitigated
during this time period 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. In the Company's New Mexico service area, pursuant to a rate freeze
that expired on April 30, 2001, energy costs were included in the Company's base
rates and were not subject to periodic reconciliation or adjustment for past
fluctuations in such costs. Therefore, the Company was exposed to commodity
price risk on energy costs that were related to sales of electricity to its New
Mexico customers. However, the Company has entered into the New Mexico Fuel
Factor Agreement which, among other things, would implement a new fixed fuel
factor and reinstate a fuel adjustment clause to reflect its increased energy
costs and provide a mechanism for passing through to New Mexico customers
increases and decreases in energy costs. See Item 1, Note B, "Regulation - New
Mexico Regulatory Matters - Fuel" for further discussion. The implementation of
the provisions of the New Mexico Fuel Factor Agreement, which is contingent on
final approval of the New Mexico Commission, will substantially mitigate the
remaining 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 June 30,
2001, the Company had entered into forward sales and purchase contracts for
energy. These agreements are generally fixed-priced contracts and are not
recorded at their fair value in the Company's financial statements. Therefore,
these contracts do not expose the Company to significant commodity price risk.
24
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 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of the Company was held May 10, 2001. The
total number of common shares outstanding was 51,221,408, of which 46,591,395
were represented in person or by proxy. The following directors were elected to
hold office for a three-year term expiring at the annual meeting of shareholders
of the Company to be held in 2003:
Director Votes For Votes Withheld
- --------------------------- --------------------- ---------------------
Wilson K. Cadman 46,474,118 117,277
James A. Cardwell 46,475,772 115,623
James W. Cicconi 46,473,959 117,436
Patricia Z. Holland-Branch 46,422,609 168,786
In addition to the individuals set forth above, the following individuals
continued as directors following the meeting: George W. Edwards, Jr., Ramiro
Guzman, James W. Harris, Kenneth R. Heitz, Michael K. Parks, Eric B. Siegel,
Stephen Wertheimer, Charles A. Yamarone, and James Haines.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: See Index to Exhibits incorporated herein by reference.
(b) Reports on Form 8-K:
None
25
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: August 13, 2001
26
EL PASO ELECTRIC COMPANY
INDEX TO EXHIBITS
Exhibit
Number Exhibit
- -------------- ------------------------------------------------------------------------------
10.04 Form of Directors' Restricted Stock Award Agreement, dated as of May 10,
2001, between the Company and George W. Edwards, Jr. (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)
+10.05 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)
10.06 Form of Change of Control Agreement, dated as of April 23, 2001, between the
Company and Hector Puente. (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)
10.07 Employment Agreement for Hector Puente, dated April 23, 2001.
10.08 Form of Stock Option Agreement, dated as of April 23, 2001, between the
Company and Hector Puente. (Identical in all material respects to Exhibit
99.01 to the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998)
15 Letter re Unaudited Interim Financial Information
+ Twelve agreements, dated as of May 10, 2001, substantially identical in all
material respects to this Exhibit, were entered into with George W. Edwards,
Jr.; Ramiro Guzman; James W. Harris; Kenneth R. Heitz; James W. Cicconi;
Patricia Z. Holland-Branch; Michael K. Parks; Eric B. Siegel; Stephen
Wertheimer; Charles A. Yamarone; James A. Cardwell; and Wilson K. Cadman,
directors of the Company.
27