ML17297A653

Annual Financial Rept 1980

ML17297A653
Person / Time
Site:	Palo Verde
Issue date:	08/05/1981
From:	EL PASO ELECTRIC CO.
To:
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ML17297A650	List: ML17297A649 ML17297A651 ML17297A652 ML17297A653 ML17297A654
References
NUDOCS 8108110414
Download: ML17297A653 (47)

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Confents About the and isa convenient method Cover of investing dividends and optional cash payments in Page El Paso Electric Company's new shares without giant "Staronthe Mountain" payment of commissions Highlights is a holiday tradition in El and fees. An enrollment Paso. In 1980 the Company card may be obtained by Letter to Shareholders 2-3 and the City agreed the star writing the Company would be lighted nightly Secretary.

Year In Review . 4-13 until the Americanhostages in Iran were released. The Directors and Executive Officers star is located on the of the Company 14 rugged slopes of the Franklin Mountains Management's Discussion and Analysis of overlooking the City and Financial Condition and Results of has been lighted annually Operations ........................... 15-17 during the Christmas season Figures appearing in this since 1941. The star is 459 report are presented as Market Price of the Registrant's feet long and 278 feet wide general information and Common Stock and Related and contains 459 white not in connection with any Security Holder Matters ....... 17-18 frosted150-watt lightbulbs. It sale or offer to sell or is visible for 25 miles from solicitation of any offer to Quarterly Financial Summary .. .. 18 ground level andmore than buy any securities nor are 100 miles from the air. they intended as a Report of Independent representation by the Certified Public Accountants...... .. 19 Company of the value of its securities.

Dividend Consolidated Financial Statements .. 20-36 Reinvestment Supplemental Information Concerning Another year of growth was the Effects of Inflation 37-39 noted in the Company's Dividend Reinvestment and Selected Financial Data .. 40-41 Stock Purchase Plan. The plan is available to holders Selected Operating and Statiscal Data... 42-43 of record of Common Stock Service Area

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Highlights At December 31, 1980 1979 Operating Revenues (000) . $ 210,513 $ 159,712 Operating Expenses (000) $ 172,296 $ 135,643 Net Income (000) $ 41,177 $ 23,190 Net Income per share (Common) $ 2.05 $ 1.45 Dividends per share (Common) $ 1.13 $ 1.07 Book Value per share $ 10.82 $ 10.44 ommon Shares Outstanding 20,485,067 14,503,373 Number of Common Shareholders... 42,132 32,995 Number of Customers 180,922 175,311 Number of Employees . 986 965 Peak Load 718,000 KW 688;000 KW Net Generation Capacity 977,000 KW 982,000 KW verage Residential Use 6,065 KWH 6,072 KWH uel Expense (000) . $ 95,461 $ 81,669 nergy SaIes (MWH) 3,728,022 3,424,284 Utility Plant (000) $ 716,357 $ 561,783 orporate in early April. This Annual Report is not a part of such proxy Common Stock Shareholders Transfer Agents National Bank of North America nformation solicitation and is not intended to be used as such. The Common Stock ot the 80 Pine Street New York. New York 10005 A copy of the Company's Company ls held in every state of most recent 10-K Report, flied the union, the District of Columbia. (Common and Preferred Stock) nnual Meeting of hareholders by El Paso Electric Company some U,S. territories and many The State National Bank of El Paso with the Securities and foreign countries. The number of Post Office Box 1072 All Shareholders are invited to Exchange Commission, will be Shareholders increased from EI Paso, Texas 79958 ttend the 1981 Annual Meeting of made available to 32,995 in 1979 to 42,132 in 1980. (Common Stock Only) hareholders Monday, May 18, Shareholders without charge Many of our customers and other 981 at 10 a.m. EI Paso time, in the upon written request to: persons in the Southwest are leander Room of the Rodeway Theta S. fields, Secretary Shareholders as evidenced by the

, 6201 Gateway West, El Paso, El Paso Electric Company 8,731 Shareholders in Texas and xas. Post Office Box 982 New Mexico who own 22 percent Proxies for the meeting will be El Paso, Texas 79960 of the outstanding shares. Our licited by the Board of Directors records show that 77 percent of the a communication to be mailed Company's Shareholders own less than 500 shares each.

Letter to Total operating revenues by high interest rates and increased to approximately double digit inflation, it was.

We are now well under way toward converting the Shareholders S211 million in 1980, an But by maintaining flexibility Company's fuel base from increase of about S51 and through creative reliance on petroleum fuels million over 1979 revenues financial management the toward nuclear power and Activities of the men and of approximately S160 Company has emerged in increased use of coal.

women of The Electric million. The increase was a stronger position. Timely Uranium and coal are the Company during 1980 were due primarily to increased rate increases coupled only major fuels available centered around average base rates, with off-system sales of considering the shortages aggressively satisfying its increased fuel revenues electricity have permitted and cost problems three basic corporate and a considerable the Company to sustain associated with petroleum goals: providing efficient amount of off-system earnings and dividends fuels. We must also and reliable service to our sales of electricity. Total at a level attractive to comply with government customers, protecting and operating expenses investors and the requirements that industrial enhancing the investment increased by financial community. boilers convert to fuel of our Shareholders and approximately 27 percent Of course, challenges lie alternatives other than providing an enriching and to S172 million. ahead some of them of petroleum.

rewarding place for our Achieving adequate unprecedented difficulty It is a truism to state from employees to work. rates that accurately reflect and complexity. Emerging the perspective of 1980 that These remain our guiding our cost to serve eqch technologies, changing the United States should principles, and we believe customer and provide a fair demographics, the lack of reduce its continued substantial progress was rate of return to investors is traditional resources, social, reliance on petroleum made toward meeting an integral corporate political and economic imports as its primary source each of them during responsibility. In 1980 the flux all bear heavily on of energy. Practically every the year. Company obtained rate how electric utilities will segment of our society is in The Company increases totaling S31.9 perform during the 1980's. agreement on that one experienced improved million in Texas and S5.1 The past five years have principle. Nuclear power financial results in 1980, as million in New Mexico. seen dramatic changes in plants, such as Palo Verde earnings per share Recognizing that these your Company and the Nuclear Generating increasedby 60 cents to are unstable economic area it serves. El Paso has Station, together with othe S2.05. representing an times, we can take some grown to the 28th largest power plants using coal, approximate 41 percent satisfaction in the city in the nation, and the must play an expanding increase over 1979. Company's strengthened fourth largest in Texas, and role in reducing the use of Dividends in 1980 totaled financial condition. While continues to grow at a rapid foreign as well as domesti S1.13 a share, up 6 cents much of the utility industry rate. The Company has petroleum resources.

from 1979. During the past continues to reel from the continued to meet the The United States paid 33 years, annual dividends high cost of raising capital energy demands of its foreign nations including have been increased every as record high interest rates developing service area OPEC approximately S90 year and have continued deteriorate earnings and located in the heart of the billion for oil in 1980. A without interruption since inflation drives construction sunbelt, and we are continuing financial distribution of common costs continually higher, building and planning hemorrhage of such stock to the public in 1947. El Paso Electric is pleased to today to meet the magnitude is not consisten The weighted average be able to report requirements of our with a healthy national number of shares consistently improved customers during the economy.

outstanding increased ln earnings and return on fast-paced decade of 1980by about 29 percent to average common equity. the 1980's.

more than 17 million, due That is not to say the primarily to issuance of new Company was unaffected common stock in february, August and November, 1980.

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It has become apparent energy resources we feel could be financial community to during the early weeks like oil, natural gas, developed in the future. learn more about our

~f the nation's new and coal, are being The Electric Company is Company and its

~dministration that it will used up. Alternatives must very interested in continuing opportunities attempt to deal decisively be perfected and made to cooperate with the opportunities which we vith the country's most economically and Cornision Federal de believe provide this oressing problerns- technologically feasible Electricidad by making Company's securities with nflation and energy. Our to insure continued arrangements to provide an important competitive

ountry needs a energy availability. electricity to the total edge in this day of

omprehensive and El Paso's distinct El Paso-Juarez area. economic uncertainty.

balanced national energy geographical location, The industrial growth In closing, I again wish to rogram which optimizes midway along the 2,000 experienced on both sides thank the employees of The II energy alternatives. mile U.S. border with of the border in the last few Electric Company and you, The Company is in the Mexico, offers a number years has been extremely the Shareholder. for all your rocess of applying for a of unique opportunities helpful to both cities by dedication and support.

'150 million grant from the to our customers and providing growth in the We look forward to the ederal government to Shareholders alike. Sales number of jobs and future with confidence, ouild a solar repowering of electricity to Ciudad improved living standards knowing that your interest roject at its Newman Juarez provided additional for the people of the area. and trust will continue.

ower Station. The net income and revenues to Growth of this type will pplication has gained the Company in1980 which, continue with the assurance widespread support but combined with other of an adequate and ould face delay or factors, were consideredby reliable supply of ancellation due to budget the Board of Directors in the electric energy.

utting efforts. We decision to increase The Company's Evern R. Wall ornmend the dividends in the first quarter construction program President tk Chairman requires the regular or the Board dministration on their of 1981. The Company also fforts to cut federal extended from18 months to borrowing of funds for pending and want to two years an announced construction expenses.

ssure all that we believe in moratorium between rate Improved financial results jt' he importance of reduced increases in Texas and will allow us to request an ederal spending. Even if New Mexico. improvement in the ~J he proposed solar project Off-system sales of Company's bond rating in s cut from the federal electricity to Mexico, from the financial market. An udget, the Company the Company's spinning improved rating could save ')r 4 f ntends to continue solar reserves, are expected to ratepayers millions of esearch on a local level. continue during the dollars by lowering the e remain optimistic foreseeable future and long-term cost bout solar energy in the have opened the door of borrowing. gp~

outhwest and believe ours to other cooperative The Company is s the most favorable undertakings between the committed to furnishing J location to develop and U.S. and Mexico. high quality service to its tilize the sun's energy for El Paso and Juarez customers at the most ommercial application. constitute the largest single economical cost consistent The critical point which international border with the need to maintain ust be recognized is that community on the the financial integrity of the he easily recoverable U.S.-Mexican boundary Company and to provide and area single community a reasonable return inmany ways. Opportunities to Shareholders.

for joint projects between Achieving this goal the two countries in requires the support of energy-related matters customers, Shareholders, clearly exist, and could employees, regulators and provide continuing the financial community.

mutual benefits. We took our 1980 message I have discussed with to the New York Society of Mexican Ambassador Security Analysts and the to the United States area's financial community Mugo B. Margain a early in1981. The response to proposed energy our communication effort agreement between the has been very good. We Company and Mexico and, believe it is important for the in addition, a number of possible joint projects which kQw AP/,

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Year attributed to the moves totaled 1,563 jobs. Within Grande River.

The twin plant industry is System ln the next five years these thriving in EI Paso-Juarez Development firms will employ about and there is only optimism The fundamental Review 2,500 people. These new El Paso industries create a for the future. The twin plants in the El Paso-Juarez area obligation of El Paso Electric is to provide its customers

$ 51 million total economic employ approximately impact on the El Paso with an adequate and 50,000 persons and result in reliable supply of electric Area economy. Firms locating new facilities in the El Paso an inflow of about $ 12 energy at a reasonable million per month into the Development area in 1980 included Ohio El Paso economy.

cost, and while protecting enhancing the The Census Bureau in Medical, General Electric, Most of the plants Marsh Instruments and are owned by major Shareholders'nvestment.

December reported that Adequate electric energy the City of El Paso had Searle Medical Products. American companies is essential to assure a increased in population The City's1980 building including General Electric, continuing permit totals were valued RCA, Rockwell International healthy from 45th in1970 to become economy and in assuring the 28th largest city in the at more than S257 million in and General Motors.

1980 compared with S238 the health and welfare of U.S. today. The City's growth While the twin plants its customers.

rate during the decade million in 1979, an 8% have benefited both sides In 1980, The Electric was 32 percent, a truly increase. of the border by stimulating The Las Cruces, New the area economy and Company added phenomenal rate even for a approximately 5,600 new city which has been called Mexico area also reflects creating much needed continuing growth customers to its system, the "buckle on the sunbelt." employment opportunities, reflecting the continuing El Paso is the fourth prospects. Building permit another event of major totals in Las Cruces growth significance is viewed with attractive of the area as an largest city in Texas, ahead place to live an of Fort Worth and behind increased from S29.3 million anticipation by border in 1979 to $ 39.1 million in work. At the end of1980 the Houston, Dallas and industrialists.

San Antonio. 1980, a 33 percent increase, A natural gas pipeline Company was serving El Paso didn't reach this and a record for Las Cruces. connecting Juarez with approximately 181,000 El Paso's location customers in its two-state plateau overnight. It is one the rich petroleum fields on the U.S.-Mexican border of southern Mexico is service area.

of a few cities in the U.S. that has a 400 year history. is a matchless place to live scheduled for completion in wereNative system sales and is rapidly developing 1981. The completion of the 3,425,000 megawatt During 1981 El Paso will hours (MWH) a slight be honoring its unique and into an industrialized pipeline is expected to area and a major center for increase over 1979. The colorful past with a bring about further changes "4 Centuries 81" Anniversary international trade. in the character of the commercial and industrial Border related border area with customer class, including celebration. schools, hospitals, and Behind the festivities, industrial development predictions of significant for the last 15 years is industrial development. other public facilities, store however, is a unique and offices accounted for historical concept: 400 characterized by growth Juarez businessmen plan to in twin plants, or attract industries such as 1,607,000 MWH, down 2 years of history at the Pass of percent from 1979.

the North has produced a Maquiladoras, a unique steel mills, foundries, auto concept whereby Residential customers metropolitan complex assembly plants, and the accounted for 972,000 which is binational, American manufacturers like, rather than light export component parts MWH, up 4 percent from bicultural and bilingual. assembly plants which The average El Paso has a duty-free from nearby U.S. make up the major part of 1979. residential plants to Mexican plants for the present twin plant and customer used diverse economic base 6065 KWH in 1980, a slight relying on light final assembly. The finished border industrial products are then shipped development. decrease from 1979.

manufacturing, mining and An all-time high. syste refining of metals, tourism back across the border for Application has been distribution and sale in the made to the Department of peak load of 718,000 and national defense. Kilowatts (KW) was Clothing manufacturing U.S. The U.S. Government Commerce for the imposes duties only on the establishment of a foreign recorded on June 26, and agriculture are major during a record setting heat economic factors in the El "value added" to the trade zone in EI Paso to be wave components, mainly labor in the El Paso area.

Paso area. The American located on a 60-acre site The 1979 peak load was Smelting and Refining Co.

which goes into the within the 530-acre assembly process. 688,000 KW. The Compan (ASARCO) Inc. plant in El Butterfield Trail Industrial Paso is the largest custom In all, more than 500 Park. The trade zone would expects its peak twin plants have been be located adjacent to requirements to continue smelter in the nation. growing at an annual rate Industrial expansion opened in Mexico along its El Paso International Airport.

2,000 mile border with the The zone could be opened of approximately 5 percent in El Paso is proceeding at according to its latest loa an increasing rate. During U.S. and 120 of these by late 1981. Establishment 1980 a total of 16 new are located in Juarez, of the trade zone in El Paso growth study.

In 1980, the Company industries decided to locate the fourth largest city in will further enhance the Mexico and separated area's reputation as an spent approximately S158 in the El Paso area. Direct million on construction. The and indirect employment from El Paso only by the Rio international trade center.

MARKET'TO BOOK RATIO Off-System Sales In May 1980, the

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Company began firm sales to Southern California El Edison under terms of a

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Et Paso Etecetc Ccmpavty EPEC Pevlcvmaoce Hsgtvas tttsst totsssey Ihiee-year contract providing capacity of 100 MW in 1980, 75 MW in 1981 and 50 MW in 1982. These sales are expected to provide additional revenues totaling approximately S6 million in capacity charges over the no 70 1t 72 73 18 18 78 71 78 79 80 life of the contract.

YEAR Additionally, the Company made sales RETURN ON COMMON EQUITY totaling approximately $ 15 million in 1980 to the

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Electricidad, which supplies Ciudad Juarez, Mexico, under an emergency (8 assistance agreement.

'la Mexico purchased 175 million kilowatt-hours from the Company in 1980 because of shortages in its generating capacity due to a lack of water for hydro-electric generation in 70 7( 72 73 78 78 18 77 78 79 80 exico, and other factors.

YEAR Sales to Juarez were generated from spinning reserves which must be ne available in any case.

Prospects for continued sales to Juarez remain good, given its tremendous ajor portion of the Two generating units at growth rate and the j-.onstruction program is the Rio Grande Power Mexican government's esigned to make Station (Units 1 and 2) were efforts to stimulate its available required electric retired in 1980 after many economy. es Y eneration capacity from decades of service. v F~jY he Palo Verde Nuclear The Company Inland Power Pool enerating Station when owns a 230-mile, 345 KV In September, 1980 ceded to supply transmission line between the Company joined a equirements of the the Newman Power Station group of 12 interconnected ustomers, while converting and Albuquerque, New utilities in seven western he Company's fuel base Mexico where its states in a cooperative rom reliance on petroleum entitlement from the power sharing agreement, o alternative fuels. Four Corners project is called the Inland Power The Company has a delivered from 150 miles of Pool, to make more efficient et generating capacity of transmission lines owned by and economical use of 77 MW, consisting of 333 Public Service Company of generating and W at its Rio Grande Power New Mexico; it also transmission facilities.

tation, 463 MW at its provides a major Through operating ties ewman Power Station, 69 interconnection with the five with the power pool, power W at its Copper Power other participants in the loads of the Company's tation and its 112 MW project. The Company also system can be supplied ntitlement from the Four orAIns an undivided interest with less operating reserve orners Power Station. in a 200-mile 345 KV capacity, resulting in a opper Station was transmission line from reduction in operating ompleted and brought Newman Station across expenses.

n line in June, 1980. southern New Mexico to Greenlee, Arizona.

Palo Verde and Southern California Edison Company. As of operated without undue risk to the health and safety of nuclear power plants. The nuclear Industry's already When the Company December 31, 1980, Unit the public. enviable safety record will became a participant in No. 1 was approximately Nuclear Regulatory be preserved and the Palo Verde Nuclear 81 percent complete, Unit Commission (NRC) enhanced as a result of its Generating Station in 1973 No. 2 approximately 50 requirements for operator conscientious response to studies indicated electricity percent complete and Unit training, instrumentation the TMI incident.

generated with uranium No. 3 approximately 16 and other measures will be Before the TMI incident, fuel would be the most percent complete. The incorporated into the plant Palo Verde participants economical it could project is on schedule for design at a cost to the had planned the most provide in the rnid 1980's completion beginning in project of approximately comprehensive operator and beyond. Events during 1983 and is within its S80 million and are training program available'n the ensuing years have projected budget. included in the budget. 1980, one of the most reinforced that projection The total cash The participants sophisticated nuclear the Arab oil embargo, expenditure for the project wholeheartedly support control room simulators in OPEC price increases, is approximately S3.6 massive industry response the U.S. was installed at Palo severe winters and billion, excluding measures initiated following Verde and is currently bein curtailments of natural gas allowance for funds used the TMI incident, including used to train control room fuels, unstable political during construction (AFUDC) the establishment of the operators for Unit No. 1 conditions in mideast oil The Company's estimated Institute of Nuclear Power Start-up in 1983. The producing areas and world cost is about S937 million Operations (INPO), Nuclear computerized simulator is market demand. including AFUDC, Safety Analysis Center identical to the three Palo The Company owns substation, plant and (NSAC) and nuclear Verde control rooms.

15.8 percent undivided transmission lines. insurance coverage to Late in 1980, the NRC interest in Palo Verde, now The Palo Verde protect against the agreed to accept for under construction 50 miles participants organized a financial consequences of detailed review the west of Phoenix, Arizona, task force following the prolonged outages of application by the Palo and will receive 200 MW incident at the Three Mile Verde project manager fo from each of three units Island Nuclear Station (TMI) an operating license, scheduled for commercial in Pennsylvania in 1979 to scheduled for issuance in operation beginning in completely review and 1982.

1983, 1984 and 1986. Other analyze safety features at participants include Palo Verde. The final report Arizona Public Service of the task force was issued Company, Salt River Project during1980 and concluded Agricultural Improvement that Palo Verde canbe District, Public Service Company of New Mexico 6

Upon completion, Palo The Company has allocation curtailments to The Company Verde will be one of the been engaged in a industrial users because of presently has little control largest nuclear power large-scale fuel conversion greater winter demand. over fuel costs which plants in the U.S., will program to begin shifting A new natural gas constitute a substantial represent the most the Company's fuel base contract was signed in portion of each electric bill.

advanced in nuclear plant from primary reliance on April, 1980 between the With the addition ofuranium design, and will offset the natural gas and oil to Company and El Paso Gas to its fuel mix the Company equivalent of an estimated nuclear fuel through its Transportation Co. will begin to regain some 00,000 barrels of oil per participation in the Palo providing for the purchase degree of control over fuel day. Verde Station. Additional and delivery of 70,000 MCF costs and customers should As the sunbelt region coal fueled units are also (thousand cubic feet) of experience a lowering in continues to prosper and under consideration for intrastate natural gas per the cost of fuel used to expand, nuclear energy will the 1990's. day through 1984. This is generate electricity.

play an increasingly During the year ended expected to supply If the sunbelt region significant role in satisfying December 31, 1980 the substantially all the fuel and the nation are to he energy demands of the Company's average cost of needs of the Newman and continue providing customers. coal was S0.46 per million Copper power stations increasing numbers of jobs BTU's, up 12 percent over during that period. and improved living 1979; for natural gas,S2.50 The Palo Verde standards, as most people Fuel per million BTU's, up 18 percent; and for oil, S4.22 participants have contracts desire, a corresponding for the supply of uranium growth in the use of energy The cost of fuel per million BTU's, up 44 concentrate to fuel the to drive machines and represents an ever percent. three Palo Verde reactor produce goods and ncreasing portion of the Rate tariffs applicable units extending through the services must follow. With oil C ompany's operating to all the Company's late 1990's. The participants and natural gas in short bu dget. In 1980, the sales contain fuel cost have provided further supply and increasing in C ompany had to spend adjustment provisions. In assurance of a uranium price, clearly the only major ov er S95 million for fuel to December 1980, the fuel supply by acquiring a 50 choices currently available ge nerate electricity. adjustment charge in Texas percent interest in uranium are uranium and coal as The Company's 1980 reached 3 cents per KWH mining claims and leases replacements. Both coal fu el mix was 81 percent for the first time due to covering approximately and uranium will become na tural gas, 16 percent coal increased fuel prices from 60,000 acres in Wyoming. an increasingly significant an d 3 percent oil. foreign oil producing part of the Company's fuel nations and natural gas mix through the 1990's.

Rates and The Company derives approximately 71 percent Regulations of its revenues from its Texas service area.

In August 1980, the On July 24, 1980, the Company and the City of New Mexico Public Service AVERAGE ANNUALRESIDENTIAL BILL El Paso reached a negotiated agreement Commission granted the granting the Company a Company a S5.1 million

$ 31.9 million annual increase in annual revenues in its New Mexico service OP9OOE~~

revenue increase in Texas.

The agreement authorized the inclusion of 60 percent area. The Commission authorized a 15 percent El ~ AvOr$09 I 1 930 0$ !i1l0tC0) of construction work in return on common equity progress (CWIP) related to and granted extraordinary the Palo Verde Nuclear cash rate relief of S3.1 Generating Station in the million based on rate base and authorizes a approximately 35 percent 16.25 percent return on of total CWIP on Palo Verde common equity. Unit No. 1 and related The new rates became transmission facilities.

effective with energy The decision by the consumed on October 1, New Mexico Commission 1980. The Company agreed reflects the view that 70 7I 79 73 79 7370 77 79 79 90 not to implement further adequate construction YEAR ~

rate increases in Texas until financing depends on April 1982, 18 months after timely recovery of current the agreement was signed. financing costs.

However, the Company The Company derives announced in December approximately 16 percent economic downturns affect that due to the collection of of its revenues from its New the public. But while unit unanticipated revenues Mexico service area.

The Company will rates are relatively high, from sales of electricity to El Paso Electric customers Mexico and Southern continue to evaluate all enjoy monthly bills which California Edison Company financial indicators in are among the lowest in the time period before assessing its financial needs. In order to meet the Texas. This is due primarily to revised rate lower consumption patterns implementation is requirements of its customers and its brought on by the area's expected to be extended mild climate resulting in to a full two years. Shareholders. the Company must remain financially lower electrical The Public Utility requirements to maintain Commission of Texas sound. This requires periodic rate adjustments and the the level of comfort enjoyed adopted the City's rate in the desert southwest.

order for unincorporated Company will continue to file for rate relief whenever The Company initiated areas of the Company's a program in1980 to detect Texas service area under necessary.

The results of the past and eliminate the theft of the jurisdiction of the electricity. The aim of the Commission. year have advanced  ;$ 7 management's goal of program is to inform the The Company agreed public about the hazards of to the terms in the final order maintaining and improving handed down by the City the financial integrity of the Council except for a Company. pe provision ordering the Rates paid by El Paso ,c).

to sell half its Electric customers often Company become items of interest in the Palo Verde ~p Station. This was appealed controversy as inflation and to the Commission which agreed to hear the appeal during hearings scheduled for June, 1981. The Commission has on two separate occasions certified the Company's full participation in the project as being in the best interests and welfare of the Company's customers.

energy theft and that regard to air and water At the Four Corners removal facilities under whenever theft occurs, the protection, continue to Power Station, New Mexico construction at the plant, loss is made up by all require increased attention. Citizens for Clean Air and bringing the participants'ash customers. The Company While much is being done Water, the Rio Grande investment in sulfur will take the necessary to protect the environment, Chapter of the Sierra Club, dioxide and particulate actions to see that anyone pollution control measures the State of New Mexico equipment at Four Corners apprehended diverting are expensive and do not and project managers for Units 4 and 5 to electricity makes up the loss produce new revenues. The the coal-fueled facility approximately $ 540 million.

of revenues. cost of these measures must announced an agreement The Company's cost of thenbe passed on to in August which requires these improvements customers in the form of 72 percent control of sulfur amounts to approximately Environmental higher rates.

The Company's dioxide by 1984. S43 million, including Installation of the sulfur AFUDC.

The Company is aware Newman, Copper and Rio dioxide equipment is in of its responsibility to protect Grande power stations are addition to particulate the environment and help in compliance with existing conserve natural resources environmental, regulations and of trying to balance and standards.

these needs with its primary responsibility of providing reliable electric service to its customers.

increasing federal, state and local regulations pertaining to environmental controls, especially with 8'

resolutions supporting the Research and The Company will apply for a S150 million project would require approximately 370 acres of project being located in Development grant from the federal government to demonstrate land adjacent to the station for heliostat (mirror)

El Paso.

In addition, dedication In the next 20 years the feasibility of harnessing placement and could ceremonies were held experts are saying we can the power of the sun by produce about 41 MW at an February 12,1981 fora 20KW expect to see electricity using solar repowering estimated total cost of solar photovoltaic project consumption in the U.S. techniques on an existing approximately S165 million. at the Newman Station, a increase to nearly double generating unit. The When operational the joint effort between the the current demand, even Company in 1980 project has the potential to Company, the New Mexico at a slower annual growth completed a federally save 133,000 barrels of oil Solar Energy Institute and rate ofabout 4 percent. sponsored program to equivalent per year over the the Department of Energy.

Clearly, both old and develop a conceptual 30-year life of the project. The photovoltaic solar cell new energy producing design for repowering Unit The Company has array provides power to the technologies will be No. 1 at its Newman station received widespread control computer of Unit No, needed to meet the with solar energy using the community support in its 4 at the station. This is the first demand for electricity in central receiver. or "power effort to obtain the project solar photovoltaic coming years. tower," concept. The andboth the Texas House of application tied directly Representatives and into a commercial utility Senate have approved power generating station.

The project will provide

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valuable research in the distant future and The The fusion program is research. The Texas knowledge and first-hand Electric Company has been located on the campus of Experimental Torus (TEXT) experience in the design involved with research on the University of Texas at was recently completed and operation of this long-term energy source , Austin. The University of and will serve as a focal photovoltaic systems. through its involvement in Texas Fusion Research point in continued national The Company's the Texas Atomic Energy Center has become one of fusion research.

San Augustine Pass, N.M. Research Foundation. the largest university The Company also site has been selected by Company President Evern R. experimental fusion supports numerous research

'the Department of Wall was elected president programs in the world. Its activities through its Energy (DOE) as one of of the foundation in May. scientists and engineers are participation jn the Electric seven wind turbine distinguished internationally Power Research Institute.

generation candidate sites for their contributions to the nationally. making it global fusion effort. The eligible for future program was the world's first experimental wind turbine privately financed fusion installations. Wind monitoring equipment was installed by DOE in October, 1980.

Fusion energy may be the nation's most important source of electrical energy

Community before civic. social, cultural and fraternal organizations.

Activities Company representatives made personal contact In today's complex with an estimated 30,000 NUMBER OF CUSTOMERS PERCENTAGE INCREASE SINCE 1969 industrial society corporate people during1980 through communications with the its various programs. IOOttdttt AVotOgtt (1 tttO Ol>>'fttttttttt public and participation Representatives from in community activities rank in importance with the Company's Energy g 40 EI dOEC Gtowttt Utilization and Conservation dPKC Outtotftotllotttoo engineering, accounting Section held a series of hatt IfK451ty and finance as managerial do-it-yourself workshops for functions. customers who learnedhow As energy costs to convert existing domestic continue to rise it Is water heating systems to essential that customers, solar, including all materials shareholders, employees, required to build solar regulators, suppliers and collectors plus a kit the public understand or at containing a pump, control least have access to panel, valves and sensors. 70 dI dd ld N 75 7d dl Td 70 dd information regarding the Thirly-two of the top Vdtttt energy business from the high school seniors from business itself. schools throughout the Toward that end, Company's service area in the Company is engaged Texas and New Mexico environmental aspects of Employees in a broad range of were honored at its electric power generation. At year's end the cornrnunications and Third Annual Salute to Fourteen area high Company had 986 community relations Teenagers Banquet school students and two employees serving activities designed to meet sponsored by the teachers were sponsored approximately 181,000 the information needs of Company. by the Company at the1980 customers.

these groups. Five area teachers Texas Energy Science The Company is veIy The Company Symposium on the campus proud of its affirmative were sponsored by the utilizes various means to of U.T. Austin. It was the 20th action program.

Company at the Seventh communicate with Annual Electric Power and year for the Symposium, From a customers Including the Environment Program at sponsored by the Texas personal contact and the University of Texas at Atomic Energy Research paid media. Austin, sponsored by Foundation and the The Company is electric utilities In Texas to university.

proud of its record as a provide teachers a strong tong-standing good background in the community citizen. technical, economic and Employees serve onboards or in other leadership positions in essentially every organization engaged in providing services to the community.

Company representatives seek every opportuniiy to discuss yO topics such as nuclear energy, alternative energy resources and energy conseIvation. Organized tours of various Company ~+0(~,a facilities are held throughout the year and the Community Services 0(

aec~ ~e".. a~

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Section works diligently in area school districts p5 .(go<~ya~ .g'o>+

~gC providing programs in ~e classrooms on various v~0 (~(o (ac pg .(~p4 ~e>

energy related topics as well as in-service training for teachers and presentations 12 See'(,e(Cia ((k ((0~((e

~ yi(( ae> e~9'

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gX((+(Ou~ ~~~ ~9 . ~9

total of 115 employees hired the Company and the with salaried positions Board. Wall will continue to during1980 at The Electric International Brotherhood of being assigned applicable serve as President and Chief Company,67 percent were Electrical Workers, Local salary grade levels. A new Executive Officer of the minorities. The female work 960, effective from March1, performance appraisal Company, the position he force increased from 27.6 1980 until February 28,1982. program for these salaried has held since May 1976.

percent in 1979 to 28.7 Approximately 30 percent positions was also Robert N. Hackett was percent in December,1980. of the Company's implemented that will appointed Assistant Vice Minorities represent employees are members recognize productive President by the Board in 52.7 percent of the of Local 960. employees more effectively March. Hackett has served Company's employees, Evaluation of ail as Manager of the Rate compared with 50.7 salaried jobs was Department since 1978.

percent in 1979. completed in March Parker Davenport was A two-year contract also made Assistant Vice was negotiated between President in the Company's Mesilla Valley Division in In December, 1980 1980. Davenport has served Company President Evern R. in various capacities with Wall was elected by the the Company since 1946, Board of Directors to the most recently as Executive position of Chairman of the Assistant to the Vice President.

All other officers and

,, directors were reelected to their respective positions in 1980.

Directors 8r Executiv Frrectrrive ~ee

'Members of the

) Years of servtce on the aocrd Officers of the Company Tad Smith Board of R.

Attorney: Partner; Kemp, Josefina A.

Directors Smith, White, Duncan Ik Salas-Porras Executive Director, Hammond; BILanguage Counsel for the Company Services (2)

From left to right - standtng Ben L. Ivey (20)

Farming; Chairman of the Leonard A. Board, Goodman, Jr. Bank of Ysieta (11)

Chartered Life Undefwriter; r General Agent. John Hancock Company (2)

"er e

+le a)q

r 1's (i

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,'.,ee ~ a e e

I 'I From left to right - seated George C. Matkin" Chairman of the Board Robert H. Cutler The State National Bank of Chairman of the Board EI Paso; Iliinois~iifornia Express, Chairman of the Board Inc. (10)

PanNational Group, inc.

(14)

Paul Harvey* Robert E. Boney*

Honorary Chairman of the Evern R. Wall'nvestments, Board of the Company President 8. Chairman of Las Cruces, New Mexico (40) the Board (6) (33)

Officers

'vern R. Wall Harry I. Zimmer William J. Johnson Robert L. Corbin

'resident Ik Chairman of Vice President (35) Controller (3) Assistant Treasurer Ik the Board (23) Assistant Secretary (32)

Donald G. Isbell Theta S. Fields Rolland E. York Vice President (16) Secretary (31) Richard E. Farlow Senior Vice President (30) Assistant Treasurer (32)

Charles Mais Robert N. Hackett Billye E. Bostic Administrative 'ssistant Vice President Cecelia R. Shea Senior Vice President (33) Vice President (26) ,

(10) Assistant Secretary (23)

James H. Jones Ralph G. Crocker Parker F. Davenport Vice President (17) Treasurer (41) Assistant Vice President I ) Years of sevlce with trte company (34)

EL PASO ELECTRIC COMPANY AND SUBSIDIARY Financial WHERE THE REVENUE DOLLAR CAME FROM:

Residential SOC Sales to Public Authorities 14C Sales for Resale 64 Othe; 1C Oommercfal and industrial-Large14C Commercial and Industrhl-Smati28C Emergency Sales TC

'HERE THE REVENUE DOLLAR WENT:

Fuel 45C Taxes 17C Interest Expect SC Deprectsticn 4C Other Operating Expenses gC Retained Eamingstc MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

,LIQUIDITYAND CAPITAL RESOURCES Utilities in general and, more specifically, utilities engaged in major construction projects, measure liquidityin terms of

'their ability to provide funds from external financings. Funds provided by a utility's customers, representing internal cash generation, may be sufficient to provide for normal construction requirements. However, an expansion of generating facilities, due to the long lead times and major cost involved, cannot be met from this source.

The Company is engaged in the construction of a major nuclear generating station with four other utilities. It has an undivided 15.8% interest in the Palo Verde Nuclear Generating Station and has incurred substantial cash requirements to fulfillthis obligation. During the past three years the Company has demonstrated its ability to meet its cash requirements through internal cash generation, sales of bonds, preferred stock and common stock and other specialized financing arrangements when appropriate.

For the year 1978 construction requirements totaled approximately $ 100,000,000. Of this amount, preferred stock sales provided $ 14,000,000, common stock sales $ 30,000,000, bonds $ 9,000,000 and funds from operations approximately $ 31,000,000. During 1979 approximately $ 130,000,000 was required for construction and was financed with

$ 26,000,000 from preferred stock sales, $ 35,000,000 from common stock sales, $ 25,000,000 from first mortgage bonds,

$ 25,000,000 from a long-term promissory note, $ 5,000,000 from the sale of nuclear fuel to a trust and approximately

$ 35,000,000 of funds from operations. Construction requirements were approximately $ 158,000,000 in 1980. Financings included $ 15,000,000 from preferred stock, $ 56,000,000 from common stock, $ 18,000,000 from long-term promissory notes, $ 12,000,000 from a capitalized lease and approximately $ 55,000,000 of funds from operations.

Short-term financing arrangements are used as the first source of construction funds until such time as they can be converted into long-term securities. The Company uses a combination of commercial paper, bank loans and other short-term financing arrangements. The Company has established a nuclear fuel trust to finance its interest in nuclear fuel required by the Palo Verde Station. The arrangement calls for the trust to finance up to $ 30,000,000 of the nuclear fuel required and, pending expenditures for fuel, the uncommitted funds are available to the Company to supplement its short-term financing needs.

15

Financial EL PASO ELECTRIC COMPANY AND SUBSIDIARY LIQUIDITYAND CAPITAL RESOURCES (Continued)

Within the utilityindustry, successful generation of funds, at reasonable cost, from external sources is dependent upon the strength of the utility issuing the securities as well as prevailing market conditions and other factors. The Company's Articles of Incorporation contain restrictions on the issuance of preferred stock. The most restrictive of these conditions would have allowed the issuance of an additional $ 23,000,000 in preferred stock at an assumed dividend rate of 14% at December 31, 1980. Its Indenture of Mortgage contains restrictions on the issuance of first mortgage bonds. At a minimum, net earnings available for interest must be at least two times the annual interest requirements. At December 31, 1980, the Company's ratio was 5.83 times and would have allowed the issuance of an additional $ 150,000,000 in bonds at an assumed rate of 15%.

During the preceding three years the Company has issued 11,000,000 shares of common stock representing seven separate issues. All but two of the issues (sold in 1980) were sold at a price above the book value of the shares, thereby increasing the book value of all shares by approximately $ 6,000,000.

Rate increases have been sought from the regulatory bodies having jurisdiction over the Company when necessary to protect its financial integrity. The Company was granted rate increases of $ 8,600,000 in 1978, $ 13,800,000 in 1979 and will

$ 37,500,000 in 1980. While the Company has been successful in the past, there can be no assurance that the Company continue to receive rate increases or that the rate increases, if granted, will be in the amounts requested.

The Company's estimated construction expenditures for 1981 through 1984, including AFUDC, are approximately

$ 669,400,000. Of this amount, approximately $ 477,700,000 will be spent for the construction of the Palo Verde Nuclear Generating Station. External funding for the 1981 through 1984 construction program will be approximately $ 437,000,000 and willbe accomplished through a combination of first mortgage bonds, preferred stock, common stock, other secured and unsecured debt and pollution control bonds. The timing and amount of additional external financing will depend upon market conditions, rate increases and other factors.

The Company expects that its current capitalization ratio of 44% common equity, 16% preferred stock and 40%

long-term debt will not change substantially for the next several years.

RESULTS OF OPERATIONS Operating Revenues Operating revenues increased approximately $ 50,800,000 in 1980 over 1979 representing a 31.8% increase. While escalating fuel costs represented approximately $ 17,000,000 of this increase, the major portion resulted from base rate increases authorized by the Public UtilityCommission of Texas (Texas Commission) and the New Mexico Public Service Commission (New Mexico Commission) and special sales to the Comision Federal de Electricidad (CFE), Ciudad Juarez, Mexico and Southern California Edison Company (SCE). Sales to CFE were provided under an Emergency Assistance Agreement between the Company and CFE and provided approximately $ 15,000,000 in total revenues and sales to SCE provided approximately $ 6,700,000 including fuel. Of the increase in base revenues, average base rates and volume accounted for 79% and 21%, respectively.

Operating revenues increased approximately $ 23,200,000 in 1979 over 1978 representing a 17.0% increase. While escalating fuel costs represented approximately $ 7,000,000 of this increase, the major portion resulted from base rate increases authorized by the Texas and New Mexico Commissions. Of the increase in base revenues, average base rates and volume accounted for 87% and 13%, respectively.

The increases in average base rates for all periods reflect increases in rates allowed by the various regulatory bodies which became effective in December 1978, June and November 1979, and April, July and November 1980.

Operating Expenses Increases in operating expenses for 1980 over 1979 and 1979 over 1978 were primarily due to increases in fuel expense and Federal income taxes. Fuel expense and Federal income taxes accounted for 38% and 34%, respectively, of the total increase for 1980 over 1979. Fuel expense and Federal income taxes accounted for 42% and 34%, respectively, of the total increase for 1979 over 1978.

Financial EL PASO ELECTRIC COMPANY AND SUBSIDIARY RESULTS OF OPERATIONS (Continued)

Fuel expense increasedin 1980 over 1979 and 1979 over 1978 primarily due to escalating fuel costs. The Company's primary fuel source for generation of electricity for all periods has been natural gas (81% in 1980, 79% in 1979 and 85% in 1978). This fuel source will likely continue as the primary source until the Palo Verde Nuclear Generating Station starts commercial operation. Unit 1 of this station is scheduled to start operation in 1983.

Total Federal income tax expenses increased in 1980 over 1979 primarily due to'increased taxable income and providing deferred taxes for the borrowed portion of funds used during construction, changes in deferred fuel balances and taxes capitalized. Total Federal income tax expenses increased in 1979 over 1978 primarilydue to providing deferred taxes for the borrowed portion of funds used during construction and changes in deferred fuel balances.

Allowance for Funds Used During Construction AFUDC increased in 1980 over 1979 and in 1979 over 1978 due to the increased construction expenditures principally associated with the Palo Verde Station and the adoption of AFUDC compounding in 1980 on such facility, as well as increased accrual rates.

AFUDC amounted to 63%, 63% and 56% of net income applicable to common stock during the years ended December 31, 1980, 1979 and 1978, respectively. AFUDC's contribution to net income is net of the effect of deferred Federal income taxes on the borrowed portion of AFUDC for the periods commencing on or after January 1, 1979. See Note I of Notes to Consolidated Financial Statements for further details and a discussion of the non-cash nature of AFUDC.

Interest Charges Interest on long-term obligations increased in all periods primarily due to the issuance of an additional first mortgage bond series and long-term promissory notes. Additionally, during 1980, the capitalization of a lease obligation caused an increase in long-term interest.

The changes in other interest in 1980 and 1979 over the respective prior years reflect increased short-term borrowing and higher prevailing average interest rates.

Supplemental Information Concerning the Effects of Inflation Information required in regard to the effects of inflation is included on pages 37 through 39 of this annual report.

MARKET PRICE OF THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The Company's Common Stock is traded in the over-the-counter market. The bid quotations as reported on the National Association of Securities Dealers Automated Quotation system (NASDAQ) and published in the Wall Street Journal and the quarterly dividends per share for the periods indicated were as follows:

Bid Quotation Dividends Migh Low 1979

- First Quarter 10r/e 10s/s $ 0.26 Second Quarter 10>/4 9~/s 0.26 Third Quarter 11 10 0.275 Fourth Quarter 10'/s 9 0.275 980 First Quarter 10 77/e 0.275 Second Quarter 97/e 81/s 0.275 Third Quarter 10'/e 9'/e 0.29 Fourth Quarter 9e/e 8s/e 0.29 he above quotations do not include retail mark-ups, mark-downs, or commissions and do not necessarily represent actual ransactions.

Financial EL PASO ELECTRIC COMPANY AND SUBSIDIARY MARKET PRICE OF THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS Continued At December 31, 1980 there were 42,132 holders of record of the Company's common stock.

The Company's Restated Articles of Incorporation, the original Indenture of Mortgage and certain of the supplemental indentures relating to different.series of first mortgage bonds contain restrictions as to the payment of dividends on the common stock of the Company and as to the purchase or retirement of capital stock of the Company. At December 31, 1980 the amount available for dividends on the common stock under the most restrictive of those provisions was approximately

$ 38,000,000.

The Company has paid quarterly dividends on its common stock without interruption since distribution of the common stock to the public in 1947 (33 years).

At its meeting on February 9, 1981 the Board of Directors declared a cash dividend of $ 0.30'/2 per share of common stock, increasing the quarterly dividend $ 0.01~/2 per share from $ 0.29 per share. This dividend will be paid March 15, 1981, to shareholders of record at the close of business on February 25, 1981. The current indicated annual dividend rate is $ 1.22 per share.

The Company maintains a dividend policy to continue to pay quarterly dividends on its common stock but future dividends will depend upon earnings, cash flow, the financial condition of the Company and other factors.

QUARTERLY FINANCIAL

SUMMARY

For the years ended December 31, 1979 and 1980 (Unaudited)

Net Net Income Income Per Applicable Share Operating Operating Operating Net to Common of Common Revenues Expenses Income Income Stock Stock (In thousands of dollars except for per share data) 1979 1st quarter $ 36,873 $ 32,119 $ 4,754 $ 3,976 $ 3,085 $ .25 2nd quarter 37,147 31,564 5,583 5,334 4,441 .35 3rd quarter 45,604 37,927 7,677 7,705 6,801 .50 4th quarter 40,088 34,033 6,055 6,175 4,915 .34 1980 1st quarter 38,761 31,993 6,768 6,415 4,972 .32 2nd quarter 49,372 41,187 8,185 9,107 7,665 .48 3rd quarter 65,860 53,519 12,341 14,131 12,688 .74 4th quarter 56,520 45,597 10,923 11,524 9,734 .50

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of El Paso Electric Company:

We have examined the consolidated balance sheets of El Paso Electric Company and Subsidiary at December 31, 1980 and 1979, and the related consolidated statements of income, retained earnings and changes in financial position for each of the three years in the period ended December 31, 1980. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

In our opinion, the consolidated financial statements referred to above present fairly the consolidated financial position of El Paso Electric Company and Subsidiary at December 31, 1980 and 1979, and the consolidated results of operations and changes in financial position for each of the three years in the period ended December 31, 1980, in conformity with generally accepted accounting principles applied on a consistent basis.

COOPERS & LYBRAND Dallas, Texas February 18, 1981

Financial EL PASO ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS ASSETS December 31 1980 1979 (In thousands)

Utility plant (Notes B and E):

Electric plant in service $ 315,947 $ 290,229 Construction work in progress 387)317 260,419 Other investments 13,093 11,135 Accumulated depreciation and amortization (82,239) (76,053)

Net utility plant 634,118 485,730 Nonutility property, at cost . 2)389 2,357 Accumulated depreciation (150) (81)

Net nonutility plant 2l239 2,276 Current assets:

Cash (Note F) . 7,799 10,684 Accounts receivable, principally trade (less allowance for ~

doubtful accounts of $ 371,000 and $ 205,000, respectively) 25,042 18,327 Federal income taxes refundable . 2,694 2,694 Materials and supplies 4,572 3,880 Fuel (Note H) 10,551 8,060 Prepayments 1,961 1,712 Other 11 1,030 Total current assets 52,630 46,387 Deferred charges and other assets 2,005 2,725 Total assets $ 690,992 $ 537,118 The accompanying notes are an integral part of the consolidated financial statements.

20

Financial EL PASO ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS CAPITALIZATIONAND LIABILITIES December 31 1980 1979 (In thousands)

Capitalization:

Common stock, no par value, 30,000,000 shares authorized: 20,485,067 and 14,503,373 shares issued and outstanding, respectively (Note C) . $ 162)303 $ 106,329 Retained earnings (Note E) . 59,383 45,097 Common stock equity 221,686 151,426 Preferred stock, cumulative, no par value, 1,000,000 shares authorized (Note D):

Redemption required, 646,000 and 500,000 shares outstanding, respectively. 64,600 50,000 Redemption not required, 190,000 shares outstanding 18,873 18,873 Long-term obligations (less net unamortized premium and discount of $ 2,308,000 and $ 2,427,000, respectively) (Note E) .. 202,263 171,721 Total capitalization 507,422 392,020 Current liabilities:

Current portion of long-term obligations (Note E) 54 4,549 Notes payable banks (Note F) 17,903 2,125 Notes payable other (Note F) . 15)850 15,290 Commercial paper (Note F) 43,158 34,332 Turbine contract payable (Note E) 7,754 Fuel purchase commitment (Note H) . 'f 0)449 7,958 Accounts payable, principally trade 9,244 10,607 Taxes accrued . 9,121 6,123 Interest accrued . 4,351 3,183 Other 4)594 4,974 Total current liabilities . 114,724 96,895 Deferred credits and other liabilities:

Accumulated deferred Federal income taxes 33,260 24,873 Accumulated deferred investment tax credit 31,721 22,537 Other . 3,865 793 Total deferred credits and other liabilities 68,846 48,203 Commitments and contingencies (Notes H and J)

Total capitalization and liabilities 6690 992 ~537 119 The accompanying notes are an integral part of the consolidated financial statements.

2'j

Financial EL PASO ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31, 1980, 1979 and 1978 1980 1979 1978 (In thousands)

Operating revenues $210 513 ~159 712 ~136 556 Operating expenses (Note J):

Operations:

Fuel 95)461 81,669 73,447 Purchased and interchanged power . (820) (3,531) (2,110)

Other operation 24,839 20,962 17,722 Maintenance 7,925 6,725 5,559 Depreciation and amortization (Note B) 9,090 8,245 7,361 Taxes (Note G):

Federal income, current (credit) . 5,396 1,238 (2,617)

Federal income, deferred (credit) 8,743 6,138 (1,500)

Charge equivalent to investment tax credit, net of amortization . 9,941 4,083 9,014 Other . 11,721 10,114 9,231 172,296 135,643 116,107 Operating income 38,217 24,069 20,449 Other income (deductions):

Allowance for other funds used during construction (Note I) . 14,377 7,450 3,197 Other income, net of other expenses and Federal income taxes (Note G) . (366) 292 491 14,011 7,742 3,688 Income before interest charges 52,228 31,811 24,137 Interest charges:

Interest on long-term obligations 16,875 11,589 9,477 Other interest (Note B) 10)533 7,420 4,041 Other interest capitalized (Note B) (1,980) (1,643) (1,098)

Allowance for borrowed funds used during construction (Note I) . (14,377) (8,745) (4,307) 11,051 8,621 8,113 Net income (Note I) . 41,177 23,190 16,024 Preferred stock dividend requirements 6118 3 948 2 575 Net income applicable to common stock (Note C) $ 35,059 $ 19,242 $ 13,449 Net income per share of common stock, based on weighted average number of shares outstanding during the period (Note C). $ 2.05 $ 1.45 $ 1.30 Weighted average number of common shares outstanding (Note C) ... 17,063,864 13,252,102 10,333,109 The accompanying notes are an integral part of the consolidated financial statements.

22

Financial EL PASO ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF RETAINED EARNINGS For the years ended December 31, 1980, 1979 and 1978 1980 1979 1978 (In thousands)

Retained earnings at beginning of year $ 45,097 $ 40,753 $ 38,560 Add:

Net income 41,177 23,190 16,024 86,274 63,943 54,584 Deduct:

Cash dividends:

Preferred stock 6,118 3,948 2,575 Common stock 20,012 14,523 10,825 Capital stock expense 761 375 431 26,891 18,846 13,831 Retained earnings at end of year $ 59,383 $ 45,097 $ 40,753 The accompanying notes are an integral part of the consolidated financial statements.

23

Financial EL PASO ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIALPOSITION For the years ended December 31, 1980, 1979 and 1978 1980 1979 1978 (In thousands)

Source of funds:

From operations:

Net income . $ 41,177 $ 23,190 $ 16,024 Items not requiring (providing) working capital:

Depreciation and amortization 9,090 8,245 7,361, Deferred Federal income taxes 8,387 6,875 1,354 Investment tax credit . 10>641 4,083 9,014 Allowance for other funds used during construction (14,377) (7,450) (3,19 Other . 337 278 223 Funds provided by operations . 55,255 35,221 30,779 Other sources:

Sale of preferred stock . 15,000 26,000 14,000 Sale of common stock . 55,974 35,060 30,205 Sale of first mortgage bonds 25,000 9,000 Sale of unsecured promissory notes 18,000 25,000 Long-term lease obligation. 12,477 Sale of nuclear fuel to trust 4,712 Deferred gain on capital lease . 2,386 Long-term mortgage note payable . 2,124 Long-term purchase commitment 591 563 (Increase) decrease in other deferred debits 696 (642) 74 Advances for construction and other 755 439 (51 160)543 151,381 86,694 Application of funds:

Gross additions to plant 158,324 130,282 100,101 Allowance for other funds used during construction . (14,377) (7,450) (3,19 Transfer of long-term purchase commitment to current 7,754 Gross additions to other property and investments . 32 794 1,539 Redemption of preferred stock 400 Dividends on preferred stock 6,118 3,948 2,575 Dividends on common stock . 20,012 14,523 10,825 Capital stock expense. 761 375 431 Reduction of long-term debt 4,549 1,000 Increase in bond discount . 2,196 Other 859 (129) 903 172,129 154,646 116,373 Decrease in working capital. $ 11,586 $ 3,265 $ 29,679 The accompanying notes are an integral part of the consolidated financial statements.

24

Financial EL PASO ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIALPOSITION (Continued)

For the years ended December 31, 1980, 1979 and 1978 1980 1979 1978 (In thousands)

Increase (decrease) in components of working capital:

Current assets:

Cash $ (2,885) $ 4,652 $ 1,685 Restricted cash (6,600)

Accounts receivable, principally trade 6,715 3,002 942 Federal income taxes refundable . (3,344) 2,011 Materials and supplies 692 1,059 203 Fuel 2,491 (789) 2,647 Prepayments 249 (76) 272 Other (1,019) (1,096) (5,945) 6,243 3,408 (4,785)

Current liabilities:

Current portion of long-term obligations (4,495) 3,504 1,045 Notes payable banks 15,778 (24,475) 15,735 Notes payable other 560 15,290 Commercial paper 8,826 2,157 6,875 Turbine contract payable (7,754) 7,754 Fuel purchase commitment 2,491 (789) 2,647 Accounts payable, principally trade (1,363) 1,625 (823)

Taxes accrued 2,998 704 1,132 Interest accrued.......... 1,168 352 509 Other (380) 551 (2,226) 17,829 6,673 24,894 Decrease in working capital. $ 11,586 $ 3,265 $ 29,679 The accompanying notes are an integral part of the consolidated financial statements.

25

Financial EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS A. Summary of Significant Accounting Policies General The Company maintains its accounts in accordance with the Uniform System of Accounts prescribed for electric utilities by the Federal Energy Regulatory Commission (FERC).

Reclassification In accordance with a FERC requirement, the Company charged all capital stock expense incurred directly to retained earnings. The Consolidated Balance Sheet at December 31, 1979 has been reclassified to deduct unamortized capital stock expense from retained earnings. The Consolidated Statements of Retained Earnings for the years ended December 31, 1979 and 1978 have been reclassified to reflect the amount of capital stock expense incurred in the respective years.

Principles of Consolidation The consolidated financial statements include El Paso Electric Company and its wholly-owned subsidiary. All intercompany balances and significant intercompany transactions have been eliminated in consolidation.

Utility Plant Utilityplant and equipment are stated at original cost. The Company provides for depreciation on a straight-line basis at annual rates which will amortize the undepreciated cost of depreciable property over estimated remaining service lives.

The Company charges the cost of repairs and minor replacements to the appropriate operating expense and capitalizes the cost of renewals and betterments. The cost of depreciable plant retired or sold and the cost of removal, less salvage, are charged to accumulated depreciation.

Inventories Materials and supplies and fuel inventories are valued at the lower of average cost or market.

Revenues Revenues are recognized based on cycle billings rendered to customers monthly. The Company does not accrue revenues in respect to energy consumed but not billed at the end of a fiscal period.

Unamortized Expense, Premium and Discount on Debt Unamortized amounts apply to outstanding issues and are being amortized ratably over the lives of such issues.

Federal Income Taxes and Investment Tax Credits Accelerated depreciation of utility plant is used for Federal income tax reporting purposes which differs from the methods used for financial reporting purposes. Differences in the tax and financial methods of accounting for fuel costs and other capitalized costs also exist. In accordance with regulatory authority requirements, provision has been made in the financial statements for Federal income taxes deferred to future years as a result of these items. The Company has not provided deferred taxes on certain other differences between financial and tax reporting, prior to 1979, since such differences were not approved as an expense in rate of return computations by regulatory authorities.

26

Financial EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

Effective January 1, 1979, in accordance with a Texas Commission rate order, the Company began providing deferred Federal income taxes relating to the borrowed portion of allowance for funds used during construction (AFUDC), to certain capitalized costs, and to all differences between book and tax depreciation for property placed in service after 1978.

Investment tax credits utilized are deferred and amortized to income over the estimated useful lives of the related properties after such properties are placed in service.

'et Income Per Share of Common Stock Net income per share of common stock is computed using the weighted average number of common shares outstanding during the year. Common equivalent shares related to the Amended Employee Stock Purchase Plan are not significant.

B. Utility Plant During the years ended December 31, 1980, 1979 and 1978, interest in the amount of approximately $ 1,980,000,

$ 1,643,000 and $ 1,098,000, respectively, relative to funds borrowed by a turbine trust and the Company's subsidiary has been capitalized. The borrowed funds at rates ranging from 4t/4% to 21'/2% were used to acquire utilityplant (construction work in progress and other investments). The interest amount has been included in the Consolidated Statements of Income as "Other Interest" with a corresponding amount included in "Other Interest Capitalized."

The Company has a 7% undivided interest in Units 4 and 5 of the Four Corners Project located in northwestern New Mexico and a 15.8% undivided interest in Units 1, 2 and 3 of Palo Verde Nuclear Generating Station which are under construction near Phoenix, Arizona. The Company is also constructing transmission facilities related to the nuclear station.

Participants in the joint plants are responsible for obtaining their respective financing. The extent of Company interests in these facilities, excluding nuclear fuel, is as follows:

December 31, 1980 1979 Palo Verde Palo Verde Nuclear Four Nuclear Four Generating Corners Generating Comers Station ~Prc'ect Station ~Pfc ect (In thousands)

Electric plant in sewice . $ 15,425 $ $ 15,409 Accumulated depreciation . (3,500) (3,098)

Construction work in progress . 378,516 3,108 241,352 1,453 The Company's direct expenses associated with the in-service portion of the Four Corners Project are included in the pplicable operating expense categories of the Consolidated Statements of Income.

Total depreciation was approximately $ 9,004,000 in 1980, $ 8,531,000 in 1979 and $ 7,616,000 in 1978, of which approximately $ 257,000, $ 286,000 and $ 255,000, respectively, was applicable to transportation equipment and has been charged to other accounts. Additionally, amortization of electric plant under capital lease, commencing in June 1980, amounted to approximately $ 343,000.

The average annual depreciation rate used by the Company for the years ended December 31, 1979 and 1978, was 2.93%. Effective November 1980, in accordance with a Texas Commission order, the rate was changed from 2.93%

to 3.28%.

27

Financial EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

C. Common Stock Under a shareholder approved employee stock purchase plan, qualified employees may purchase shares of the Company's common stock at two specified dates each year for a period ending no later than June 30, 1984. The purchase price is 90 Io of the average bid price of the stock at the option dates. During 1980, 1979 and 1978, 12,388, 6,717 and 11,120 shares of common stock, respectively, were purchased at an aggregate amount of approximately $ 106,000, $ 63,000 and

$ 111,000, respectively. The cumulative aggregate corresponding fair market values as of the purchase dates were approximately $ 119,000, $ 70,000 and $ 117,000 in 1980, 1979 and 1978, respectively. At December 31, 1980, 54,490 shares were reserved for future purchases under the plan. Proceeds from issuances are credited to common stock and no charges are reflected in income with respect to the plan.

The Company has a dividend reinvestment and stock purchase plan which provides holders of its common stock the option to invest cash dividends and/or optional cash payments (up to $ 3,000 per quarter) in additional shares of the Company's common stock. During 1980, 1979 and 1978, 292,136, 178,652 and 116,904 shares, respectively, were purchased by shareholders who reinvested dividends and invested cash in the amounts of approximately $ 2,711,000,

$ 1,854,000 and $ 1,263,000, respectively. The purchase price is the average of the last bid and ask price of the stock on the purchase date. At December 31, 1980, 40,059 shares were reserved for future purchases under the plan. In February 1981, an additional 750,000 shares were reserved.

The Company adopted an employee stock ownership plan in May 1978. In accordance with prevailing Federal income tax provisions, common stock with a value equal to the sum of a specified amount of the Company's investment tax credit and employee cash participation is contributed to the plan. In October 1980 and 1979, the Company and participating employees contributed 177,170 and 126,633 shares of stock, respectively, with a market value of approximately

$ 1,709,000 and $ 1,287,000, respectively, to the plan. In June 1978, the Company contributed 26,529 shares of stock with a market value of approximately $ 294,000 to the plan. At December 31, 1980, 169,668 shares were reserved for future contributions under the plan.

Changes in common stock are as follows:

Common Stock Shares Amount (In thousands)

Balance, December 31, 1977 8,536,818 S 41,064 Sales of Common Stock 2.654,553 30 205 Balance, December 31, 1978 11,191,371 71,269 Sales of Common Stock 3 312 002 35 060 Balance, December 31, 1979 14,503,373 106,329 Sales of Common Stock 5 981,694 55 974 Balance, December 31, 1980 20 485 067 S162,303 Net income applicable to common stock, net income per share of common stock and weighted average number of common shares outstanding for the year ended December 31, 1980, would have been $ 37,226,000, $ 1.82 and 20,485,067, respectively, assuming that the proceeds (before expenses of sale) of approximately $ 55,974,000 from the sale of common stock during the year were used to retire short-term debt outstanding during the year.

28

Financial EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

D. Preferred Stock (1) Preferred stock Redem tion re uired Following is a summary of outstanding preferred stock redemption required:

Optional Redemption Price Per December 31, December 31, Share at 1980 1979 De'cember 31 ~

Shares Amount Shares Amounr 1980 (In thousands) (In Ihousanus)

$ 10.75 Dividend. 96,000 $ 9,600 100,000 $ 10,000 $ 108.00

$ 8.44 Dividend 150,000 15,000 150,000 15,000 108.44

$ 8.95 Dividend 150,000 15,000 150,000 15,000 108.95

$ 9.00 Dividend 100,000 10,000 100,000 10,000

$ 8.80 Dividend 50,000 5,000

$ 9.50 Dividend 100,000 10,000 646,000 $ 64,600 500,000 $ 50,000 The $ 10.75 preferred shares are entitled to the benefits of an annual sinking fund whereby on January 1 of each year, beginning in 1980, the Company will redeem 4,000 shares at the sinking fund redemption price of $ 100 per share plus accrued dividends. The $ 10.75 preferred shares are redeemable at the option of the Company; however, no optional redemption of the shares may be made prior to January 1, 1985, as a part of, or in anticipation of, any refunding involving the issue of indebtedness or preferred stock having an effective interest or dividend cost of less than 10.75/o per annum.

The $ 8.44 preferred shares are entitled to the benefits of an annual sinking fund whereby on October 1 of each year, beginning in 1984, the Company will redeem 4'/0 (and may, at its option, redeem an additional 4'/o) of the aggregate maximum number of shares outstanding at the sinking fund redemption price of $ 100 per share plus accrued dividends. The

$ 8.44 preferred shares are redeemable at the option of the Company; however, except as set forth above, no optional redemption of the shares may be made prior to October 1, 1988, as a part of, or in anticipation of, any refunding involving the issue of indebtedness or preferred stock having an effective interest or dividend cost of less than 8.44/o per annum.

The $ 8.95 preferred shares are entitled to the benefits of an annual sinking fund whereby on October 1 of each year, beginning in 1985, the Company will redeem 5/o (and may, at its option, redeem an additional 5/o) of the aggregate maximum number of shares outstanding at the sinking fund redemption price of $ 100 per share plus accrued dividends. The 8.95 preferred shares are redeemable at the option of the Company; however, no optional redemption of the shares may be made prior to October 1, 1984, as a part of, or in anticipation of, any refunding involving the issue of indebtedness or referred stock having an effective interest or dividend cost of less than 8.95'/o per annum.

The $ 9.50 preferred shares are entitled to the benefits of an annual sinking fund whereby on July 1 of each year, beginning in 1986, the Company will offer to purchase on the next succeeding October 1, out of funds legally available for the purchase or redemption of $ 9.50 preferred shares, not less than 20,000 shares (or the number of such shares then utstanding if less than 20,000) at a purchase price of $ 100 per share, plus accrued dividends. The Company is required to edeem on October 1, 1990, all shares then outstanding at a redemption price equal to $ 100 per share plus an amount equal to accrued and unpaid dividends to and including the date of redemption. The $ 9.50 preferred shares are redeemable at the ption of the Company, however, no optional redemption of the shares may be made prior to October 1, 1987.

29

Financial EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

Sinking fund requirements for each of the above series are cumulative and, in the event they are not satisfied at any redemption date, the Company is restricted from paying any dividends on its common stock (other than dividends in common stock or other class of stock ranking junior to the preferred stock as to dividends or assets).

The $ 9.00 preferred shares have no provision for a sinking fund, are not redeemable at the option of the Company, and must be redeemed in full on October 1, 1986 at $ 100 per share plus accrued dividends. In the event the Company fails to provide sufficient funds for redemption, the Company is restricted from paying any dividends on its common stock (other than dividends in common stock or other class of stock ranking junior to the preferred stock as to dividends and assets).

The $ 8.80 preferred shares have no provision for a sinking fund and are not redeemable at the option of the Company until October 1, 1987. On October 1 of each year, beginning in 1990, the Company will offer to purchase on the next succeeding February 1, out of funds legally available for the purchase or redemption of the $ 8.80 preferred shares, any or all outstanding shares of $ 8.80 preferred shares at a purchase price of $ 100 per share, plus accrued dividends. In the event the Company fails to provide sufficient funds for redemption, the Company is restricted from paying any dividends on its common stock(other than dividends in common stock or other stock ranking junior to the preferred stock as to dividends and assets).

The aggregate amounts of the above preferred stock required to be retired for each of the next five years are as follows:

(In thousands) 1981 $ 400 1982 400 1983 . 400 1984 . 1,000 1985 . 1,750 Sales and redemption of preferred stock redemption required were as follows:

Shares Amount (In thousands)

Balance, December 31, 1977 . 100,000 $ 10,000 Issuance of Preferred Stock, $ 8.44 Dividend 140,000 14,000 Balance, December 31, 1978 . 240,000 24,000 Issuance of Preferred Stock, $ 8.44 Dividend 10,000 1,000 Issuance of Preferred Stock, $ 8.95 Dividend 150,000 15,000 Issuance of Preferred Stock, $ 9.00 Dividend 100,000 10,000 Balance, December 31, 1979 . 500,000 50,000 Redemption of Preferred Stock, $ 10.75 Dividend. (4,000) (400)

Issuance of Preferred Stock, $ 8.80 Dividend 50,000 5,000 Issuance of Preferred Stock, $ 9.50 Dividend 100,000 10,000 Balance, December 31, 1980 . 646,000 $ 64,600

Financial EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

(2) Preferred stock Redemption not required Following is a summary of preferred stock which is not redeemable except at the option of the Company:

Optional Redemp-tion Price Amount Per Share at December 31, December 31, Shares 1980 1979 1980 (In thousands)

$ 4.50 Dividend 15,000 $ 1,534 $ 1,534 $ 109.00

$ 4.12 Dividend 15,000 1,506 1,506 103.98

$ 4.72 Dividend 20,000 2,001 2,001 104.00

$ 4.56 Dividend 40,000 4,000 4,000 100.00

$ 8.24 Dividend 100,000 9,832 9,832 107.52 190,000 $ 18,873 $ 18,873 The above preferred shares are redeemable at the option of the Company; however, no optional redemption of the

$ 8.24 shares may be made prior to April 1, 1982, directly or indirectly as part of, or in anticipation of, any refunding involving the issue of indebtedness or preferred stock having an effective interest or dividend cost less than 8.38'h per annum.

There have been no changes in preferred stock redemption not required during the three years ended December 31, 1980.

All preferred stock issues (redemption required and redemption not required) are entitled, in preference to common stock, to $ 100.00 per share, plus accrued dividends, upon involuntary liquidation. All issues except the $ 9.00, $ 8.80 and

$ 9.50 preferred stock issues, are entitled to an amount per share equal to the applicable optional redemption price, plus accrued dividends, upon voluntary liquidation. The $ 9.00, $ 8.80 and $ 9.50 preferred stock issues are entitled to a fixed price ($ 109.00, $ 108.80 and $ 109.50 per share at December 31, 1980, respectively), plus accrued dividends, upon voluntary liquidation.

3'j

Financial EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

E. Long-Term Obligations Outstanding long-term obligations are as follows:

Redemption Price at December 31 December 31, 1980 1979 1980 (In thousands)

First mortgage bonds:

2r/e/o Series, due 1980 . $ $ 4,500 s 3V8/o Series, due 1984 . 4,950 4,950 100.65 4V4/o Series, due 1988 . 6>100 6,100 101.70 4%/o Series, due 1992 10,385 10,385 102.22 674/o Series, due 1998 . 24,800 24,800 103.96 774'/o Series, due 2001 . 15,838 15,838 106.16 9/o Series, due 2004 . 20,000 20,000 106.75 9.95'/o Series, due 2004 ... 25,000 25,000 109.95 10~/Plo Series, due 2005 . 151000 15,000 109.45 8V~'/o Series, due 2007 25,000 25,000 107.85 147,073 151,573 Unsecured floating rate (20.50/o to 21.50/o at December 31, 1980 and 15.25'/o at December 31, 1979) promissory notes:

Due 1984 25,000 25,000 Due 1985 18,000 Obligation under capital lease . 12,477 Other, 8.8125/o, due in installments through 1998 . 2,075 2,124 204,625 178,697 Current maturities of long. term obligations (54) (4,549)

Unamortized premium and discount (2,308) (2,427)

$ 202,263 $ 171,721 The premiums reflected in the redemption prices shown above continue at reduced amounts in future years, finally resulting in each case in redemption at par at maturity.

The Company's indenture of mortgage provides for sinking and improvement funds. For each series other than the 9.95'/o series, the Company is required to make annual payments to the trustee equivalent to 1 /o ($ 1,230,000 at December 31, 1980 and $ 1,275,000 at December 31, 1979) of the greatest aggregate principal amount of such series outstanding prior to a specified date. The Company has generally satisfied the 1 h requirements by relinquishing the right to use a net amount of additional property for the issuance of bonds or by purchasing bonds in the open market and expects to continue as reflected in the following table. With respect to the 9.95 k series, commencing April 30, 1985, the Company will this'ractice be required to make annual cash payments to the trustee equivalent to 4'/4/o of the greatest aggregate principal amount of such series outstanding at any one time prior to a specified date. The 4'/4 k cash payment must be applied to redeembonds of the 9.95'/o series at 100/o of the principal amount thereof plus accrued interest.

Scheduled maturities of long-term obligations at December 31, 1980, excluding obligation under capital lease, are as follows (in thousands):

1981 s 54 1982 59 1983 64 1984 30,020 1985 18,076 Thereafter . ~143 875 32

Financial EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

Substantially all of the Company's utility plant is subject to a lien under the indenture of mortgage collateralizing the Company's bonds.

In accordance with certain provisions of the indenture covering the first mortgage bonds, payment of cash dividends on common stock is restricted to an amount equal to retained earnings accumulated after December 31, 1966, plus

$ 4,100,000. Retained earnings in the amount of approximately $ 38,000,000 are unrestricted as to the payment of cash dividends at December 31, 1980.

The unsecured floating rate notes due in 1984 and 1985 may be prepaid at the option of the Company without premium.

At December 31, 1979, the Company had a commitment in the amount of approximately $ 7,754,000 to purchase a turbine from an independent trust no later than a specified date in 1980. During 1980 the turbine and related equipment were sold to a second independent trust and an arrangement was made whereby the Company leased the turbine and certain other related equipment from the trust-lessor for a twenty-year period with renewal options for up to seven more years.

Semi-annual lease payments, including interest, commencing in January, 1982, are approximately $ 719,000 through, January, 1991 and $ 861,000 thereafter to July, 2000. The effective annual interest rate implicit in this lease has been calculated to be 9.6%. The total cost of the equipment to the trust-lessor was approximately $ 11,800,000 which is reflected in utilityplant. The obligation to the trust-lessor of $ 11,800,000 plus approximately $ 677,000 interest accrued is reflected in ong-term obligations at December 31, 1980. Of the $ 11,800,000 approximately $ 8,374,000 was paid to the equipment trust hich owned the turbine and approximately $ 3,426,000 was paid to the Company for its interest in the turbine and certain other related equipment. The difference between the sales price and the original basis of the turbine and related equipment will be amortized to income over the lease term.

F. Notes Payable and Commercial Paper The Company and its subsidiary have informal lines of credit with various lenders. Certain of these arrangements provide for the maintenance of compensating balances for the available lines of credit and the loans outstanding. At December 31, 1980, the lines of credit available under these arrangements totaled $ 135,252,000 (including subsidiary lines f $ 19,025,000 not guaranteed by the Company). Average bank balances of approximately $ 9,163,000 were maintained as ompensating balances at December 31, 1980, in connection with the informal lines of credit. The amount of unused lines of redit at December 31, 1980, was approximately $ 103,000,000.

Through December 31, 1982, the FERC has authorized the Company to incur short-term debt (in the form of romissory notes or commercial paper) in an amount not to exceed $ 1 75,000,000 outstanding at any one time. The interest ates are to be at the prime rate in effect at the time of issuance, plus in some cases, provisions for compensating balances f 20/o under certain conditions. The net proceeds from the issuance of the short-term debt are to be used primarily for onstruction expenditures.

~. Federal Income Taxes The provisions (credits) for deferred Federal income taxes, which arise from timing differences between financial and ax reporting, are as follows:

Years Ended December 31, 1980 1979 1978 (In thousands) rax effect of:

Operating income:

Depreciation differences . $ 1,566 $ 1,769 S 1,572 Deferred fuel costs . 226 (1,074) (2,597)

Allowance for borrowed funds used during construction 6,613 4,023 Other 338 1,420 (475)

Other income (609)

$ 8,134 $ 6,138 $ (1,500) 33

Financial EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

Effective January 1, 1979, in accordance with a Texas Commission rate order, the Company began providing deferred Federal income taxes applicable to the allowance for borrowed funds used during construction, to other costs capitalized and to all differences between book and tax depreciation for property placed in service after 1978. Accordingly, additional deferred taxes of approximately $ 7,936,000 and $ 4,828,000 are reflected in deferred tax expense for the years ended December 31, 1980 and 1979, respectively.

Federal income tax provisions are less than the amounts computed by applying the statutory rate (46'/0 during 1980, and 1979 and 48'/o during 1978) to book income before Federal income taxes. Details are as follows; Years Ended December 31, 1980 1979 1978 (In thousands)

Tax computed at statutory rate $ 30,103 $ 16,062 $ 10,264 Decreases due to:

Allowance for funds used during construction (6,613) (3,427) (3,602)

Other 774 (907) (1,302)

Total Federal income tax expense $ 24,264 $ 11,728 $ 5,360 Effective Federal income tax rate 37 1O/o 33.6O/o 25.1 /o Years Ended Total Federal income tax expense is as follows: December 31, 1980 1979 1978 (In thousands)

Current income taxes (credit) operating $ 5,396 S 1,238 S (2,617)

Current income taxes other income . 93 269 463 Total current 5,489 1,507 (2,154)

Deferred income taxes (credit) operating 8I743 6,138 (1,500)

Deferred income taxes (credit) other income (609)

Deferred investment tax credit operating . 10,355 4,379 9,412 Deferred investment tax credit other income 700 Amortization of deferred investment tax credit operating (414) (296) (398)

$ 24,264 $ 11,728 $ 5,360 At December 31, 1980, the Company had available for Federal income tax purposes an investment tax credit carryforward of approximately $ 12,000,000 expiring in 1987.

H. Commitments and Contingencies The Company has a 15.8'/o interest in three units of a nuclear plant and related transmission lines and switchyard presently under construction. The costs to be incurred by the Company subsequent to December 31, 1980 are approximately $ 558,500,000, including approximately $ 217,900,000 of AFUDC. The Company is also committed at December 31, 1980 for construction of pollution control facilities in the amount of approximately $ 41,500,000, including approximately $ 7,800,000 of AFUDC. The above amounts were computed assuming an estimated average annual inflation rate of 8'/o.

34

Financial EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

In January 1979, the Company entered into an agreement with an independent trust whereby the Company sold to the trust, at cost, substantially all of its nuclear fuel. Under the trust agreement the Company has the option of either repurchasing the fuel from the trust or leasing the heat generated by the fuel. Management of the Company intends to enter into a basic heat supply contract whereby title to the fuel remains with the trust and the Company makes lease payments for the heat generated. Based on this intention and in accordance with industry practice, the nuclear fuel and related liabilityare not included in the accompanying balance sheets. At December 31, 1980, the trust has incurred cumulative costs of approximately $ 13,273,000. The Company expects that fuel costs incurred will be recouped at the time the fuel is used. The Company is committed to reimburse the trust for its cash investment in nuclear fuel, not expected to exceed a maximum cash amount of $ 85,000,000 during the ten-year period ending December 31, 1990, as well as for interest and other carrying costs of the trust.

The Company's fuel supply arrangements include short-term commitments under a fuel supply arrangement entered into in 1977 with a trust, whereby the Company concurrently assigned its principal long-term fuel supply contract to the trust and agreed to purchase all fuel oil delivered to the trust by the fuel supplier. Payments to the trust for fuel oil purchases consist of the trust's cost of oil determined on an average cost basis plus related administrative and carrying costs. For financial reporting purposes, purchases of the trust are assumed to have been made on behalf of the Company.

Accordingly, the balance sheets at December 31, 1980 and 1979, include approximately $ 10,449,000 and $ 7,958,000, respectively, recorded as fuel and fuel purchase commitment, representing the Company's commitment to purchase the trust's fuel oil inventory as of those dates.

The Company's operations are subject to environmental protection measures imposed under Federal and state laws and regulations. Management does not believe that the impact of any of these matters will have a materially adverse effect on the financial statements.

The Company's rates, including fuel adjustment clauses, are subject to the jurisdiction of local, state and Federal authorities.

Revenues for 1980, 1979 and 1978 include approximately $ 692,000, $ 623,000 and $ 635,000, respectively, subject to efund pending final rate determination by the FERC. The aggregate amount of such revenues subject to refund at ecember 31, 1980 is approximately $ 2,066,000. The Company has provided $ 300,000 in 1980 in anticipation of an rder by the FERC to refund only that amount. A final order dated January 29, 1981 was rendered by the F ERG in regards to he issues of the case. The Company is currently calculating the proposed refund which is subject to further FERC review.

he Company does not anticipate that the approved amount of the refund will be materially different from the amount rovided in 1980.

35

Financial EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

I. Allowance for Funds Used During Construction (AFUDC)

The applicable regulatory uniform system of accounts provides for AFUDC which is defined as an amount which includes the net cost during a period of construction of borrowed funds used for construction purposes plus a reasonable rate on other funds when so used. While AFUDC results in an increase in utility plant under construction for ratemaking purposes with a corresponding credit to income, it is not a current cash item. AFUDC is realized in cash net of certain tax effects after the related plant is placed in service and the depreciation charges based on the total cost of the plant, including AFUDC, are allowed in cost of service amounts by regulatory authorities.

The amount of AFUDC is determined by applying an accrual rate to the balance of certain utility plant construction. In this connection, the FERC has promulgated procedures for the computation (a prescribed formula) of the accrual rate. The rates used by the Company do not exceed those permitted by the FERC. The AFUDC rate is reviewed periodically and adjustments, if any, are applied to the full year.

The Company used an accrual rate of 9.5'/o in 1978. During 1979, the Company changed the rate used to calculate AFUDC from 9.5% to 11.0/o, effective as of January 1, 1979. During 1980, the Company changed the rate from 11.0/o to 11.9'/0, effective as of January 1, 1980.

The increase in the AFUDC rate during 1979, increased net income by approximately $ 1,659,000 and net income per share by approximately $ .13 for the year ended December 31, 1979. The increase in the AFUDC rate during 1980, increased net income (excluding effect of compounded AFUDC) by approximately $ 1,490,000 and net income per share by approximately $ .09 for the year ended December 31,"1980.

Effective January 1, 1980, the Company began semi-annual compounding of AFUDC on the Palo Verde Station nuclear plant, its major construction project. Compounding involves using previously capitalized AFUDC as part of the cost base on which to apply the AFUDC rate. Accordingly, the adoption of compounding on this project increased net income and net income per share of common stock by approximately $ 2,444,000 and $ .14, respectively, for the year ended December 31, 1980.

J. Pension Plan The Company has a non-contributory retirement annuity plan under a group annuity contract. The plan provides annual pensions for regular employees with more than one year of service. The pension expense in 1980, 1979 and 1978 was approximately $ 800,000, $ 751,000 and $ 680,000, respectively, which includes amortization of past service cost over a 30 year period beginning in 1972. The Company makes contributions to the plan equal to the amount accrued for pension expense.

As of July 1, 1978, date of the most current actuarial valuation, assets of the pension fund exceeded vested benefits by approximately $ 677,000 and unfunded prior service benefits were estimated to be approximately $ 3,500,000.

The actuarial present value of vested and nonvested accumulated plan benefits, net plan assets available for benefits and the assumed rate of return used in determing the actuarial present values are not provided as these data are not available from the actuary.

36

Financial EL PASO ELECTRIC COMPANY AND SUBSID/ARY SUPPLEMENTAL INFORMATION CONCERNING THE EFFECTS OF INFLATION Unaudited The following supplementary information is supplied in accordance with the requirements of Financial Accounting Standards Board (FASB) Statement No. 33 Financial Reporting and Changing Prices, for the purpose of providing certain information about the effects of changing prices. It should be viewed as an estimate of the approximate effect of inflation, rather than as a precise measure.

Constant dollar amounts represent historical costs stated in terms of dollars of equal purchasing power, as measured by the Consumer Price Index for All Urban Consumers. Current cost amounts reflect the changes in specific prices from the date the plant was acquired to the present, and differ from constant dollar amounts to the extent that specific prices have increased more or less rapidly than prices in general.

The current cost of plant net of accumulated depreciation and amortization, which includes electric plant in service, construction work in progress, other investments and nonutility property, represents the estimated cost of replacing existing plant assets and was determinedby indexing the surviving plant by the Handy-Whitman Index of Public UtilityConstruction Costs. The current year's provision for depreciation and amortization on the constant dollar and current cost amounts of plant was determined by applying effective depreciation and amortization rates to the indexed plant amounts.

Fuel inventories and the cost of fuel used in generation have not been restated from their historical cost in nominal dollars. Regulation limits the recovery of fuel costs through the operation of adjustment clauses or adjustments in basic rate schedules to actual costs. For this reason fuel inventories are effectively monetary assets.

As prescribed in FASB Statement 33, income taxes were not adjusted.

Under the rate making prescribed by the regulatory commissions to which the Company is subject, only the historical ost of plant is recoverable in revenues as depreciation. Therefore, the excess of the cost of plant statedin terms of constant ollars or current cost over the historical cost of plant is not presently recoverable in rates as depreciation, and is reflected as reduction to net recoverable cost. While the rate-making process gives no recognition to the current cost of replacing plant ssets, based on past practices, the Company believes it willbe allowed to earn on the increased cost of its net investment hen replacement of facilities actually occurs.

To properly reflect the economics of rate regulation in the Supplemental Consolidated Statement of Income from perations Adjusted for Changing Prices, the reduction of plant to net recoverable amount should be offset by the gain from he decline in purchasing power of net amounts owed on a constant dollar basis while the excess of increase in general price vel over increase in specific prices at net recoverable amount should be offset by the gain from decline in purchasing ower of net amounts owed on a current cost basis. During a period of inflation, holders of monetary assets suffer a loss of eneral purchasing power while holders of monetary liabilities experience a gain. The gain from the decline in purchasing ower of net amounts owedis primarily attributable to the substantial amount of debt which has been used to finance plant ssets. Since the depreciation on plant is limited to the recovery of historical costs, the Company does not have the pportunity to realize a holding gain on debt and is limited to recovery only of the embedded cost of debt capital.

Financial EL PASO ELECTRIC COMPANY AND SUBSIDIARY Supplemental Consolidated Statement Of income From Operations Adjusted For Changing Prices For the year ended December 31, 1980 (Unaudited)

Conventional Constant Dollar Current Cost Historical Average Average Cost 1980 Dollars 1980 Dollars (In thousands)

Operating revenues $ 210,513 $ 210,513 $ 210,513 Fuel, purchased and interchanged power 94,641 94,641 94,641 Other operating and maintenance expenses 44,485 44,485 44,485 Depreciation and amortization .. 9,090 18,380 19,768 Federal income taxes . 24,080 24,080 24,080 Interest expense 11,051 11,051 11,051 Other income (14,011) (14,011) (14,011) 169,336 178,626 180,014 Net income $ 41,177 $ 31,887 (2) $ 30,499 Increase in specific prices (current cost) of plant held during the year (1) $ 43,183 Reduction of plant to net recoverable amount $ (55,150) (2)

Effect of increase in general price level (96,823)

Excess of increase in general price level over increase in specific prices at net recoverable amount (53,640)

Gain from decline in purchasing power of net amounts owed. 34,547 34,547 Net. $ (20,603) $ (19,093)

(1) At December 31, 1980, current cost of plant net of accumulated depreciation was $ 969,379, while historical cost or net amount recoverab! e through depreciation was $ 636,357.

(2) inclusion of the reduction to net recoverable amount in net income on a constant dollar basis produces a loss of $ 23,263.

38

Financial EL PASO ELECTRIC COMPANY AND SUBSIDIARY Five Year Comparison Of Selected Supplementary Financial Data Adjusted For Ettects Ot Changing Prices (Note)

(Unaudited)

Years ended December 31, 1980 1979 1978 1977 1976 (In thousands except for per share amounts)

Historical cost . $ 210,513 $ 159,712 $ 136,556 $ 112,339 $ 111,188 Constant dollars 210,513 181,311 172,477 152,756 160,945 Constant dollar information Net income:

Historical cost $ 41,177 S 23,190 Constant dollars 31,887 17,961 Net income per share of common stock Historical cost $ 2.05 $ 1.45 Constant dollars 1.51 1.02 Net assets at year-end at net recoverable amounts:

Historical cost $ 305,159 $ 220,299 Constant dollars 291,460 236,493 urrent cost information Net income:

Historical cost $ 41,177 S 23,190 Current cost 30,499 15,335 Net income per share of common stock:

Historical cost $ 2.05 $ 1.45 Current cost . 1.43 .82 Net assets at year.end at net recoverable amounts:

Historical cost $ 305,159 $ 220,299 Current cost . 291,460 236,493 Excess of increase in general price level over increase in specific prices at net recoverable amount, current cost . $ 53,640 $ 48,710 ther information Gain from decline in purchasing power of net amounts owed, constant dollars $ 34,547 S 34,053 Cash dividends declared per share of common stock:

Historical cost .

Constant dollars .

$ 1.13 1.13

$ 1.07 1.21

'1.02 1.29

$ .99 1.35

$ .95 1.38 Market price per share of common stock at year-end:

Historical cost . $ 9.50 $ 9.38 $ 10.88 $ 12.00 $ 12.00 Constant dollars . 9.07 10.07 13.23 15.91 16.99 Average consumer price index 246.8 217.4 195.4 181.5 170.5 ote: Constant dollars and current cost amounts are stated in average 1980 dollars.

39

Financial EL PASO ELECTRIC COMPANY AND SUBSIDIARY SELECTED FINANCIALDATA For the years ended December 31 1980 1979 1978 Operating revenues $ 210,513 $ 159,712 $ 136,556 Fuel 95,461 81,669 73,447 Operation and maintenance . 31,944 24,156 21,171 Depreciation and amortization 9,090 8,245 7,361 Taxes . 35,801 21,573 14,128 Other income . (14,011) (7,742) (3,688) 158,285 127,901 112,419 Income before interest charges 52,228 31,811 24,137 Total interest charges 11,051 8,621 8,113 Income before cumulative effect on prior years of change in accounting method . 41,177 23,190 16,024 Cumulative effect to January 1, 1974, of change in accounting for fuel costs, net of related income taxes ($ 912,000)

Net income $ 41,177 $ 23,190 $ 16,024 Net income per share of common stock, based on weighted average number of shares outstanding during each year:

Income applicable to common stock before cumulative effect of change in accounting method $ 2.05 $ 1.45 $ 1.30 Cumulative effect to January 1, 1974, of change in accounting for fuel costs ....

Net income applicable to common stock ..... $ 2.05 $ 1.45 $ 1.30 Pro forma amounts assuming the new method of accounting for fuel costs is applied retroactively:

Net income applicable to common stock ....

Net income per share Dividends per share paid on common stock $ 1.13 $ 1.07 $ 1.0 Gross utility plant . $ 716,357 $ 561,783 $ 438,08 Total assets $ 690,992 $ 537,118 $ 415,97 Long-term obligations and preferred stock-redemption required . $ 266,863 $ 221,721 $ 150,15 40

197? 1976 1975 1974 1973 1972 1971

$ 112,339 $ 111,188 $ 91,461 $ 63,072 $ 49,483 $ 43,284 $ 38,919 59,442 53,154 44,714 24,914 15,766 10,951 8,974 16,685 17,954 14,516 11,463 8,160 8,101 7,717 6,498 6,233 .5,506 4,345 4,102 3,776 3,509 12 377 15,727 11,197 9,809 9,573 9,279 8,151 (1,689) (838) (1,423) (770) (84) (668) (699) 93,313 92,230 74,510 49,761 37,517 31,439 27,652 19,026 18,958 16,951 13,311 11,966 11,845 11,267 7,604 7,442 6,853 5,280 3,962 3,591 3,450 11,422 11,516 10,098 8,031 8,004 8,254 7,817 988

$ 11,422 $ 11,516 $ 10,098 $ 9,019 $ 8,004 $ 8,254 $ 7,817

$ 1.11 $ 129 $ 130 $ 119 $ 119 $ 122 $ 116

.15

$ 1.11 $ 1.29 $ 1.30 $ 1.34 $ 1.19 $ 1.22 $ 1.16

$ 8,270 $ 8,035 $ 7,481

$ 1.29 $ 1.25 $ 1.17

$ .99 $ .95 $ .91 $ .88 $ .86 $ .83 $ .80

$ 338,598 $ 274,502 $ 250,375 $ 227,196 $ 185,058 $ 174,485 $ 'f 66,275

$ 326,910 $ 258,407 $ 240,659 $ 206,490 $ 156,435 $ 146,401 $ 140,298

$ 128,171 $ 102,290 $ 103,104 $ 85,906 $ 66,309 $ 66,299 $ 66,385

Financial EL PASO ELECTRIC COMPANY AND SUBSIDIARY SELECTED OPERATING AND STATISTICAL DATA 1980 1979 1978 Population served at retail, estimated. 600,000 554,000 544,00C Number of Customers:

Residential . 162,770 157,601 150,73~

Commercial and industrial, small 16,169 15,791 15,381 Commercial and industrial, large 42 44 4)

Other 1,941 1,875 1,84c Total . 180,922 175,311 168,00.'90,00C Annual native system peak load, net kilowatts 718,000 688,000 Output, net generated and purchased, thousand kilowatt-hours:

Steam 3,928,860 3,771,043 Other 47,969 3,673,68.'84,60'.

Purchased and interchanged 9,794 (119,166)

Total(a) . 3,986,623 3,651,877 3,589,07(

Sales of electricity, thousands of dollars; Residential $ 63,659 $ 52,899 $ 44,17$

Commercial and industrial, small 58,679 46,741 39,78(

Commercial and industrial, large 28,155 26,402 22,40~

Other 59,043 32,577 29,28 Total $ 209,536 $ 158,619 $ 135,64 Sales, thousand kilowatt-hours:

Residential 972,070 937,858 907,95 Commercial and industrial, small 985,123 949,514 913,03 Commercial and industrial, large 621)877 682,163 650,54 Other 1,148,952 854,749 849,11 Total (a). 3,728,022 3,424,284 3,320,64 Average annual use per residential customer, KWH . 6,065 6,072 6,15 Average annual revenue per residential customer... $ 397.74 $ 342.49 $ 299.4 Average revenue per KWH sold, cents(b):

Residential . 6 56c 5.64~ 4.

Commercial and industrial, small 5.96 4.92 4.3 Commercial and industrial, large 4.53 3.87 3.4 Average revenue per KWH; total sales. 5.64 4.63 4.0 Electric line, pole miles:

Over 15,000 volts 2,131 2,070 1,99 Less than15,000volts(c) . 2,841 2,794 27 Total . 4,972 4,864 4,7 Total employees 986 965 (a) Differences between total output and total sales represent company use and line losses.

(b) Includes adjustments under existing fuel clauses.

(c) Includes minor amounts of line on poles owned by telephone utility.

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Service Area III FOUR CORNERS,N.M.

400 MILES V

ELEPHANT BUTTE DAM TO ALBUQUERQUE CABALLO OAM Q

ALAMOGORDO +E 1 HOLLOMANA.F.B. P~~>g 1 ~5P~M~PP R(O G MAR RIIPE~ROZ COMPANY LINES

><<>>~ COMPANY 345K AI OLLO IIIIIMIMIIIIIIOTHER LINES HATCH 1 IMllll IIIII"'AM WHITE SANDS ~ IE POWER STATION MISSILE RANGE ll'IVIIII IIII a ,Eil'll IIIIIINlllllllllllMIS LAS CRUCES

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PALO VERDE Vsg~

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ANTHONY ~I NEW MEXICO TEXAS NEWMAN FORT BLISS WM. BEAUMONT NEW MEXICO . RIO GRANDE EL PA MEXICO CIUDAD JUAREZ

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Gl FABENS

~o SIERRA BLANCA El Paso Electric is an customers in West Texas and P@

investor-owned, tax-paying South Central New Mexico electric utility operating in in a sewice area of /CI VAN HORN Texas and New Mexico. The approximately 10,000 Company is engaged in the square miles. The service generation, transmission, area extends from the distribution and sale of Caballo Darn in New electric energy. EI Paso Mexico southeasterly to Van Electric serves Horn, Texas.

approximately 181,000 El Paso Electric Company P.O. Box 982 El Paso, Texas 79960 Equal Opportunity Employer 44

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