ML17297A653

Annual Financial Rept 1980

ML17297A653
Person / Time
Site:	Palo Verde
Issue date:	08/05/1981
From:	EL PASO ELECTRIC CO.
To:
Shared Package
ML17297A650	List: ML17297A649 ML17297A651 ML17297A652 ML17297A653 ML17297A654 ML20037D501
References
NUDOCS 8108110414
Download: ML17297A653 (47)

Text

~.

~

~

I ~

~

~

~

~

~

~

~

~

~

~

~ I

~

~

~

~

~ ~

~

1

~

~ ~

~

~

')

1 L

'I

~ ~

~

~

~

1

~

~

~

~

I ~ '

I

~

~

~ ~

a

~

~

~ ~

~

~

1 I-II

~

I ~

~ ~

~

~

~

IN

~

~

~

"'T 1

.r.

J H

~

~

~ ~ ~

..1 3

Ar

l. 7 1

1 I

4 1

Confents Highlights Letter to Shareholders Page 2-3 Year In Review.

4-13 Directors and Executive Officers of the Company 14 Management's Discussion and Analysis of Financial Condition and Results of Operations...........................

15-17 Market Price of the Registrant's Common Stock and Related Security Holder Matters.......

17-18 Quarterly Financial Summary..

.. 18 Report of Independent Certified Public Accountants......

Consolidated Financial Statements

.. 19 20-36 Supplemental Information Concerning the Effects of Inflation 37-39 Selected Financial Data..

40-41 Selected Operating and Statiscal Data... 42-43 Service Area About the Cover El Paso Electric Company's giant "Staronthe Mountain" is a holiday tradition in El Paso. In 1980 the Company and the Cityagreed the star would be lighted nightly untilthe Americanhostages in Iran were released.

The star is located on the rugged slopes of the Franklin Mountains overlooking the City and has been lighted annually during the Christmas season since 1941. The star is 459 feet long and 278 feet wide and contains 459 white frosted150-watt lightbulbs. It is visible for 25 miles from ground level andmore than 100 miles from the air.

Dividend Reinvestment Another year ofgrowth was noted in the Company's Dividend Reinvestment and Stock Purchase Plan. The plan is available to holders of record ofCommon Stock and isa convenient method of investing dividends and optional cash payments in new shares without payment of commissions and fees. An enrollment card may be obtained by writing the Company Secretary.

Figures appearing in this report are presented as general information and not in connection with any sale or offer to sell or solicitation of any offer to buy any securities nor are they intended as a representation by the Company of the value of its securities.

ÃVOO)fhB 038NOOMcf

+01>:!'1 8QI'18 8NOAQ08pog 8

Highlights At December 31, Operating Revenues (000)

Operating Expenses (000)

Net Income (000)

Net Income per share (Common)

Dividends per share (Common)

Book Value per share ommon Shares Outstanding Number of Common Shareholders...

Number of Customers Number of Employees Peak Load Net Generation Capacity verage Residential Use uel Expense (000) nergy SaIes (MWH)

Utility Plant (000) 1980 210,513 172,296 41,177 2.05 1.13 10.82 20,485,067 42,132 180,922 986 718,000 KW 977,000 KW 6,065 KWH 95,461 3,728,022 716,357 1979 159,712 135,643 23,190 1.45 1.07 10.44 14,503,373 32,995 175,311 965 688;000 KW 982,000 KW 6,072 KWH 81,669 3,424,284 561,783 orporate nformation nnual Meeting of hareholders AllShareholders are invited to ttend the 1981 Annual Meeting of hareholders Monday, May 18, 981 at 10 a.m. EI Paso time, in the leander Room of the Rodeway

, 6201 Gateway West, El Paso, xas.

Proxies for the meeting willbe licited by the Board of Directors a communication to be mailed in early April. This Annual Report is not a part of such proxy solicitation and is not intended to be used as such.

A copy of the Company's most recent 10-K Report, flied by El Paso Electric Company with the Securities and Exchange Commission, willbe made available to Shareholders without charge upon written request to:

Theta S. fields, Secretary El Paso Electric Company Post Office Box 982 El Paso, Texas 79960 Common Stock Shareholders The Common Stock ot the Company ls held in every state of the union, the DistrictofColumbia.

some U,S. territories and many foreign countries. The number of Shareholders increased from 32,995 in 1979 to 42,132 in 1980.

Many of our customers and other persons in the Southwest are Shareholders as evidenced by the 8,731 Shareholders in Texas and New Mexico who own 22 percent of the outstanding shares. Our records show that 77 percent ofthe Company's Shareholders own less than 500 shares each.

Transfer Agents National Bank of North America 80 Pine Street New York. New York 10005 (Common and Preferred Stock)

The State National Bank of El Paso Post Office Box 1072 EI Paso, Texas 79958 (Common Stock Only)

Letter to Shareholders Activities of the men and women of The Electric Company during 1980 were centered around aggressively satisfying its three basic corporate goals: providing efficient and reliable service to our customers, protecting and enhancing the investment of our Shareholders and providing an enriching and rewarding place for our employees to work.

These remain our guiding principles, and we believe substantial progress was made toward meeting each of them during the year.

The Company experienced improved financial results in 1980, as earnings per share increasedby 60 cents to S2.05. representing an approximate 41 percent increase over 1979.

Dividends in 1980 totaled S1.13 a share, up 6 cents from 1979. During the past 33 years, annual dividends have been increased every year and have continued without interruption since distribution of common stock to the public in 1947.

The weighted average number of shares outstanding increased ln 1980by about 29 percent to more than 17 million, due primarilyto issuance of new common stock in february, August and November, 1980.

Total operating revenues increased to approximately S211 million in 1980, an increase of about S51 million over 1979 revenues of approximately S160 million. The increase was due primarily to increased average base rates, increased fuel revenues and a considerable amount of off-system sales of electricity. Total operating expenses increased by approximately 27 percent to S172 million.

Achieving adequate rates that accurately reflect our cost to serve eqch customer and provide a fair rate of return to investors is an integral corporate responsibility. In 1980 the Company obtained rate increases totaling S31.9 million in Texas and S5.1 million in New Mexico.

Recognizing that these are unstable economic times, we can take some satisfaction in the Company's strengthened financial condition. While much of the utilityindustry continues to reel from the high cost of raising capital as record high interest rates deteriorate earnings and inflation drives construction costs continually higher, El Paso Electric is pleased to be able to report consistently improved earnings and return on average common equity.

That is not to say the Company was unaffected by high interest rates and double digitinflation, itwas.

But by maintaining flexibility and through creative financial management the Company has emerged in a stronger position. Timely rate increases coupled with off-system sales of electricity have permitted the Company to sustain earnings and dividends at a level attractive to investors and the financial community.

Of course, challenges lie ahead some of them of unprecedented difficulty and complexity. Emerging technologies, changing demographics, the lack of traditional resources, social, political and economic fluxall bear heavily on how electric utilities will perform during the 1980's.

The past five years have seen dramatic changes in your Company and the area it serves.

El Paso has grown to the 28th largest city in the nation, and the fourth largest in Texas, and continues to grow at a rapid rate. The Company has continued to meet the energy demands of its developing service area located in the heart of the sunbelt, and we are building and planning today to meet the requirements of our customers during the fast-paced decade of the 1980's.

We are now well under way toward converting the Company's fuel base from reliance on petroleum fuels toward nuclear power and increased use of coal.

Uranium and coal are the only major fuels available considering the shortages and cost problems associated with petroleum fuels. We must also comply with government requirements that industrial boilers convert to fuel alternatives other than petroleum.

It is a truism to state from the perspective of 1980 that the United States should reduce its continued reliance on petroleum imports as its primary source of energy. Practically every segment of our society is in agreement on that one principle. Nuclear power plants, such as Palo Verde Nuclear Generating Station, together with othe power plants using coal, must play an expanding role in reducing the use of foreign as well as domesti petroleum resources.

The United States paid foreign nations including OPEC approximately S90 billion for oil in 1980. A continuing financial hemorrhage of such magnitude is not consisten with a healthy national economy.

7

,c c-j

~~i" j)~~ ~<,

'j "8 piji" L~,a

-'p Sg I

g

(

j r

('sSM3HWtP~

l COMMON sTO EL PASO ELECTRIC COMPANY INCORPORJLTRO UNOER TRR LA%8 OY

It has become apparent during the early weeks

~f the nation's new

~dministration that it will attempt to deal decisively vith the country's most oressing problerns-nflation and energy. Our

ountry needs a

omprehensive and balanced national energy rogram which optimizes II energy alternatives.

The Company is in the rocess of applying for a

'150 million grant from the ederal government to ouild a solar repowering roject at its Newman ower Station. The pplication has gained widespread support but ould face delay or ancellation due to budget utting efforts. We ornmend the dministration on their fforts to cut federal pending and want to ssure all that we believe in he importance of reduced ederal spending. Even if he proposed solar project s cut from the federal udget, the Company ntends to continue solar esearch on a local level.

e remain optimistic bout solar energy in the outhwest and believe ours s the most favorable location to develop and tilize the sun's energy for ommercial application.

The critical point which ust be recognized is that he easily recoverable kQw AP/,

S gZZ?I~

iy energy resources like oil, natural gas, and coal, are being used up. Alternatives must be perfected and made economically and technologically feasible to insure continued energy availability.

El Paso's distinct geographical location, midway along the 2,000 mile U.S. border with Mexico, offers a number of unique opportunities to our customers and Shareholders alike. Sales of electricity to Ciudad Juarez provided additional net income and revenues to the Company in1980 which, combined with other factors, were consideredby the Board of Directors in the decision to increase dividends in the first quarter of 1981. The Company also extended from18 months to two years an announced moratorium between rate increases in Texas and New Mexico.

Off-system sales of electricity to Mexico, from the Company's spinning reserves, are expected to continue during the foreseeable future and have opened the door to other cooperative undertakings between the U.S. and Mexico.

El Paso and Juarez constitute the largest single international border community on the U.S.-Mexican boundary and area single community inmany ways. Opportunities for joint projects between the two countries in energy-related matters clearly exist, and could provide continuing mutual benefits.

I have discussed with Mexican Ambassador to the United States Mugo B. Margain a proposed energy agreement between the Company and Mexicoand, in addition, a number of possible jointprojects which

';F,.

we feel could be developed in the future.

The Electric Company is very interested in continuing to cooperate with the Cornision Federal de Electricidad by making arrangements to provide electricity to the total El Paso-Juarez area.

The industrial growth experienced on both sides of the border in the last few years has been extremely helpful to both cities by providing growth in the number of jobs and improved living standards for the people of the area.

Growth of this type will continue withthe assurance of an adequate and reliable supply of electric energy.

The Company's construction program requires the regular borrowing of funds for construction expenses.

Improved financial results willallow us to request an improvement in the Company's bond rating in the financial market. An improved rating could save ratepayers millions of dollars by lowering the long-term cost of borrowing.

The Company is committed to furnishing high quality service to its customers at the most economical cost consistent with the need to maintain the financial integrity of the Company and to provide a reasonable return to Shareholders.

Achieving this goal requires the support of customers, Shareholders, employees, regulators and the financial community.

We took our 1980 message to the New York Society of Security Analysts and the area's financial community early in1981. The response to our communication effort has been very good. We believe itis important forthe financial community to learn more about our Company and its opportunities opportunities which we believe provide this Company's securities with an important competitive edge in this day of economic uncertainty.

In closing, I again wish to thank the employees of The Electric Company and you, the Shareholder. for all your dedication and support.

We look forward to the future with confidence, knowing that your interest and trust will continue.

Evern R. Wall President tk Chairman or the Board jt'

~J

')r 4

f gp~

J

Year ln Review Area Development The Census Bureau in December reported that the City of El Paso had increased in population from 45th in1970 to become the 28th largest city in the U.S. today. The City's growth rate during the decade was 32 percent, a truly phenomenal rate even fora city which has been called the "buckle on the sunbelt."

El Paso is the fourth largest city in Texas, ahead of Fort Worth and behind Houston, Dallas and San Antonio.

El Paso didn't reach this plateau overnight. It is one ofa few cities in the U.S. that has a 400 year history.

During 1981 El Paso will be honoring its unique and colorful past with a "4 Centuries 81" Anniversary celebration.

Behind the festivities, however, is a unique historical concept: 400 years ofhistory at the Pass of the North has produced a metropolitan complex which is binational, bicultural and bilingual.

El Paso has a diverse economic base relying on light manufacturing, mining and refining of metals, tourism and national defense.

Clothing manufacturing and agriculture are major economic factors in the El Paso area. The American Smelting and Refining Co.

(ASARCO) Inc. plant in El Paso is the largest custom smelter in the nation.

Industrial expansion in El Paso is proceeding at an increasing rate. During 1980 a total of 16 new industries decided to locate in the El Paso area. Direct and indirect employment attributed to the moves totaled 1,563 jobs. Within the next five years these firms will employ about 2,500 people. These new El Paso industries create a

$51 million total economic impact on the El Paso economy. Firms locating new facilities in the El Paso area in 1980 included Ohio Medical, General Electric, Marsh Instruments and Searle Medical Products.

The City's1980 building permit totals were valued at more than S257 millionin 1980 compared with S238 million in 1979, an 8%

increase.

The Las Cruces, New Mexico area also reflects continuing growth prospects. Building permit totals in Las Cruces increased from S29.3 million in 1979 to $39.1 million in 1980, a 33 percent increase, and a record forLas Cruces.

El Paso's location on the U.S.-Mexican border is a matchless place to live and is rapidly developing into an industrialized area and a major center for international trade.

Border related industrial development for the last 15 years is characterized by growth in twin plants, or Maquiladoras, a unique concept whereby American manufacturers export component parts duty-free from nearby U.S.

plants to Mexican plants for final assembly. The finished products are then shipped back across the border for distribution and sale in the U.S. The U.S. Government imposes duties only on the "value added" to the components, mainly labor which goes into the assembly process.

In all, more than 500 twin plants have been opened in Mexico along its 2,000 mile border with the U.S. and 120 of these are located in Juarez, the fourth largest city in Mexico and separated from El Paso only by the Rio Grande River.

The twinplant industry is thriving in EI Paso-Juarez and there is only optimism forthe future. The twinplants in the El Paso-Juarez area employ approximately 50,000 persons and result in an inflow of about

$12 million per month into the El Paso economy.

Most of the plants are owned by major American companies including General Electric, RCA, Rockwell International and General Motors.

While the twin plants have benefited both sides ofthe border by stimulating the area economy and creating much needed employment opportunities, another event of major significance is viewed with anticipation by border industrialists.

A natural gas pipeline connecting Juarez with the rich petroleum fields of southern Mexico is scheduled forcompletion in 1981. The completion of the pipeline is expected to bring about further changes in the character of the border area with predictions of significant industrial development.

Juarez businessmen plan to attract industries such as steel mills, foundries, auto assembly plants, and the like, rather than light assembly plants which make up the major part of the present twin plant and border industrial development.

Application has been made to the Department of Commerce for the establishment of a foreign trade zone in EI Paso to be located on a 60-acre site within the 530-acre Butterfield Trail Industrial Park. The trade zone would be located adjacent to El Paso International Airport.

The zone could be opened by late 1981. Establishment of the trade zone in El Paso willfurther enhance the area's reputation as an international trade center.

System Development The fundamental obligation of El Paso Electric is to provide its customers with an adequate and reliable supply of electric energy at a reasonable cost, while protecting and enhancing the Shareholders'nvestment.

Adequate electric energy is essential to assure a continuing healthy economy and in assuring the health and welfare of its customers.

In 1980, The Electric Company added approximately 5,600 new customers to its system, reflecting the continuing growth of the area as an attractive place to live an work. Atthe end of1980 the Company was serving approximately 181,000 customers in its two-state service area.

Native system sales were 3,425,000 megawatt hours (MWH) a slight increase over 1979. The commercial and industrial customer class, including schools, hospitals, and other public facilities, store and offices accounted for 1,607,000 MWH, down 2 percent from 1979.

Residential customers accounted for 972,000 MWH, up 4 percent from 1979. The average residential customer used 6065 KWH in 1980, a slight decrease from 1979.

Anall-time high. syste peak load of 718,000 Kilowatts (KW) was recorded on June 26, during a record setting heat wave in the El Paso area.

The 1979 peak load was 688,000 KW. The Compan expects its peak requirements to continue growing at an annual rate ofapproximately 5 percent according to its latest loa growth study.

In 1980, the Company spent approximately S158 million on construction. The

MARKET'TOBOOK RATIO

~ Industry Average ((980 astmated)

Et Paso Etecetc Ccmpavty El~ EPEC Pevlcvmaoce Hsgtvas

~ tttsst totsssey 70 1t 72 73 18 18 YEAR 78 71 78 79 80 RETURN ON COMMON EQUITY 28

~

vvdustvy Average ((980 estmated) e 0 Paso Etacetc~

(8

'la ajor portion of the j-.onstruction program is esigned to make available required electric eneration capacity from he Palo Verde Nuclear enerating Station when ceded to supply equirements of the ustomers, while converting he Company's fuel base rom reliance on petroleum o alternative fuels.

The Company has a et generating capacity of 77 MW, consisting of 333 Wat its Rio Grande Power tation, 463 MW at its ewman Power Station, 69 W at its Copper Power tation and its 112 MW ntitlement from the Four orners Power Station.

opper Station was ompleted and brought n line in June, 1980.

Two generating units at the Rio Grande Power Station (Units 1 and 2) were retired in 1980 after many decades of service.

The Company owns a 230-mile, 345 KV transmission line between the Newman Power Station and Albuquerque, New Mexico where its entitlement from the Four Corners project is delivered from 150 miles of transmission lines owned by Public Service Company of New Mexico; it also provides a major interconnection withthe five other participants in the project. The Company also orAIns an undivided interest in a 200-mile 345 KV transmission line from Newman Station across southern New Mexico to Greenlee, Arizona.

70 7(

72 73 78 78 18 77 78 79 80 YEAR Off-System Sales In May 1980, the Company began firmsales to Southern California Edison under terms of a 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 life of the contract.

Additionally, the Company made sales totaling approximately $15 million in 1980 to the Comision Federal de Electricidad, which supplies Ciudad Juarez, Mexico, under an emergency assistance agreement.

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 exico, and other factors.

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

Prospects for continued sales to Juarez remain good, given its tremendous growth rate and the Mexican government's efforts to stimulate its economy.

Inland Power Pool In September, 1980 the Company joined a group of 12 interconnected utilities in seven western states in a cooperative power sharing agreement, called the Inland Power Pool, to make more efficient and economical use of generating and transmission facilities.

Through operating ties with the power pool, power loads of the Company's system can be supplied with less operating reserve capacity, resulting in a reduction in operating expenses.

no ne es v Y F~jY

Palo Verde When the Company became a participant in the Palo Verde Nuclear Generating Station in 1973 studies indicated electricity generated with uranium fuel would be the most economical it could provide in the rnid 1980's and beyond. Events during the ensuing years have reinforced that projection the Arab oil embargo, OPEC price increases, severe winters and curtailments of natural gas fuels, unstable political conditions in mideast oil producing areas and world market demand.

The Company owns 15.8 percent undivided interest in Palo Verde, now under construction 50 miles west of Phoenix, Arizona, and will receive 200 MW from each of three units scheduled for commercial operation beginning in 1983, 1984 and 1986. Other participants include Arizona Public Service Company, Salt River Project Agricultural Improvement District, Public Service Company of New Mexico and Southern California Edison Company. As of December 31, 1980, Unit No. 1 was approximately 81 percent complete, Unit No. 2 approximately 50 percent complete and Unit No. 3 approximately 16 percent complete. The project is on schedule for completion beginning in 1983 and is within its projected budget.

The total cash expenditure for the project is approximately S3.6 billion, excluding allowance for funds used during construction (AFUDC)

The Company's estimated cost is about S937 million including AFUDC, substation, plant and transmission lines.

The Palo Verde participants organized a task force following the incident at the Three Mile Island Nuclear Station (TMI) in Pennsylvania in 1979 to completely review and analyze safety features at Palo Verde. The final report of the task force was issued during1980 and concluded that Palo Verde canbe operated without undue risk to the health and safety of the public.

Nuclear Regulatory Commission (NRC) requirements for operator training, instrumentation and other measures willbe incorporated into the plant design at a cost to the project of approximately S80 million and are included in the budget.

The participants wholeheartedly support massive industry response measures initiated following the TMI incident, including the establishment of the Institute of Nuclear Power Operations (INPO), Nuclear Safety Analysis Center (NSAC) and nuclear insurance coverage to protect against the financial consequences of prolonged outages of nuclear power plants. The nuclear Industry's already enviable safety record will be preserved and enhanced as a result of its conscientious response to the TMI incident.

Before the TMIincident, Palo Verde participants had planned the most comprehensive operator training program available'n 1980, one of the most sophisticated nuclear control room simulators in the U.S. was installed at Palo Verde and is currently bein used to train control room operators for Unit No. 1 Start-up in 1983. The computerized simulator is identical to the three Palo Verde control rooms.

Late in 1980, the NRC agreed to accept for detailed review the application by the Palo Verde project manager fo an operating license, scheduled for issuance in 1982.

6

Fuel The cost of fuel represents an ever ncreasing portion of the ompany's operating dget. In 1980, the ompany had to spend er S95 million for fuel to nerate electricity.

The Company's 1980 el mix was 81 percent tural gas, 16 percent coal d 3 percent oil.

C bu C

ov ge fu na an Upon completion, Palo Verde willbe one of the largest nuclear power plants in the U.S., will represent the most advanced in nuclear plant design, and will offset the equivalent of an estimated 00,000 barrels of oil per day.

As the sunbelt region continues to prosper and expand, nuclear energy will play an increasingly significant role in satisfying he energy demands of the customers.

The Company has been engaged in a large-scale fuel conversion program to begin shifting the Company's fuel base from primary reliance on natural gas and oil to nuclear fuel through its participation in the Palo Verde Station. Additional coal fueled units are also under consideration for the 1990's.

During the year ended December 31, 1980 the Company's average cost of coal was S0.46 per million BTU's, up 12 percent over 1979; for natural gas,S2.50 per million BTU's, up 18 percent; and for oil, S4.22 per million BTU's, up 44 percent.

Rate tariffs applicable to all the Company's sales contain fuel cost adjustment provisions. In December 1980, the fuel adjustment charge in Texas reached 3 cents per KWH for the first time due to increased fuel prices from foreign oil producing nations and natural gas allocation curtailments to industrial users because of greater winter demand.

A new natural gas contract was signed in April, 1980 between the Company and El Paso Gas Transportation Co.

providing for the purchase and delivery of 70,000 MCF (thousand cubic feet) of intrastate natural gas per day through 1984. This is expected to supply substantially all the fuel needs of the Newman and Copper power stations during that period.

The Palo Verde participants have contracts for the supply of uranium concentrate to fuel the three Palo Verde reactor units extending through the late 1990's. The participants have provided further assurance of a uranium supply by acquiring a 50 percent interest in uranium mining claims and leases covering approximately 60,000 acres in Wyoming.

The Company presently has little control over fuel costs which constitute a substantial portion ofeach electric bill.

Withthe addition ofuranium to its fuel mix the Company willbegin to regain some degree of control over fuel costs and customers should experience a lowering in the cost of fuel used to generate electricity.

If the sunbelt region and the nation are to continue providing increasing numbers of jobs and improved living standards, as most people desire, a corresponding growth in the use of energy to drive machines and produce goods and services must follow.With oil and natural gas in short supply and increasing in price, clearly the onlymajor choices currently available are uranium and coal as replacements.

Both coal and uranium willbecome an increasingly significant part of the Company's fuel mix through the 1990's.

Rates and Regulations In August 1980, the Company and the City of El Paso reached a negotiated agreement granting the Company a

$31.9 million annual revenue increase in Texas.

The agreement authorized the inclusion of 60 percent of construction work in progress (CWIP) related to the Palo Verde Nuclear Generating Station in the rate base and authorizes a 16.25 percent return on common equity.

The new rates became effective with energy consumed on October 1, 1980. The Company agreed not to implement further rate increases in Texas until April 1982, 18 months after the agreement was signed.

However, the Company announced in December that due to the collection of unanticipated revenues from sales of electricity to Mexico and Southern California Edison Company the time period before revised rate implementation is expected to be extended to a full two years.

The Public Utility Commission of Texas adopted the City's rate order for unincorporated areas of the Company's Texas service area under the jurisdiction of the Commission.

The Company agreed to the terms inthe finalorder handed down by the City Council except for a provision ordering the Company to sell half its interest in the Palo Verde Station. This was appealed 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 inthe best interests and welfare of the Company's customers.

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

On July 24, 1980, the New Mexico Public Service Commission granted the Company a S5.1 million increase inannual revenues in its New Mexico service area. The Commission authorized a 15 percent return on common equity and granted extraordinary cash rate relief of S3.1 million based on approximately 35 percent oftotal CWIP on Palo Verde Unit No. 1 and related transmission facilities.

The decision by the New Mexico Commission reflects the view that adequate construction financing depends on timely recovery of current financing costs.

The Company derives approximately 16 percent of its revenues from its New Mexico service area.

The Company will continue to evaluate all financial indicators in assessing its financial needs. In order to meet the requirements of its customers and its Shareholders. the Company must remain financially sound. This requires periodic rate adjustments and the Company will continue to file for rate relief whenever necessary.

The results of the past year have advanced management's goal of maintaining and improving the financial integrity of the Company.

Rates paid by El Paso Electric customers often become items of controversy as inflation and AVERAGE ANNUALRESIDENTIALBILL OP9OOE~~

~ AvOr$09 I 1 930 0$!i1l0tC0)

El economic downturns affect the public. But while unit rates are relatively high, El Paso Electric customers enjoy monthly bills which are among the lowest in Texas. This is due primarilyto lower consumption patterns brought on by the area's mild climate resulting in lower electrical requirements to maintain the level ofcomfort enjoyed in the desert southwest.

The Company initiated a program in1980 to detect and eliminate the theft of electricity. The aim of the program is to inform the public about the hazards of

$7 pe

,c).

~p 70 7I 79 73 79 7370 77 79 79 90

~

YEAR

energy theft and that whenever theft occurs, the loss is made up by all customers.

The Company will take the necessary actions to see that anyone apprehended diverting electricity makes up the loss of revenues.

Environmental The Company is aware ofits responsibility toprotect the environment and help conserve natural resources and of trying to balance 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 regard to air and water protection, continue to require increased attention.

While much is being done to protect the environment, pollution control measures are expensive and do not produce new revenues. The cost of these measures must thenbe passed on to customers in the form of higher rates.

The Company's Newman, Copper and Rio Grande power stations are in compliance with existing environmental, regulations and standards.

At the Four Corners Power Station, New Mexico Citizens for Clean Airand Water, the Rio Grande Chapter of the Sierra Club, the State of New Mexico and project managers for the coal-fueled facility announced an agreement in August which requires 72 percent control of sulfur dioxide by 1984.

Installation of the sulfur dioxide equipment is in addition to particulate removal facilities under construction at the plant, bringing the participants'ash investment in sulfur dioxide and particulate equipment at Four Corners Units 4 and 5 to approximately $540 million.

The Company's cost of these improvements amounts to approximately S43 million, including AFUDC.

8'

Research and Development In the next 20 years experts are saying we can expect to see electricity consumption in the U.S.

increase to nearly double the current demand, even at a slower annual growth rate ofabout 4 percent.

Clearly, both old and new energy producing technologies willbe needed to meet the demand for electricity in coming years.

The Company will apply for a S150 million grant from the federal government to demonstrate the feasibility of harnessing the power of the sun by using solar repowering techniques on an existing generating unit. The Company in 1980 completed a federally sponsored program to develop a conceptual design for repowering Unit No. 1 at its Newman station with solar energy using the central receiver. or "power tower," concept. The project would require approximately 370 acres of land adjacent to the station for heliostat (mirror) placement and could produce about 41 MWat an estimated total cost of approximately S165 million.

When operational the project has the potential to save 133,000 barrels of oil equivalent per year over the 30-year life of the project.

The Company has received widespread community support in its effort to obtain the project andboth the Texas House of Representatives and Senate have approved resolutions supporting the project being located in El Paso.

In addition, dedication ceremonies were held February 12,1981 fora 20KW solar photovoltaic project at the Newman Station, a joint effort between the Company, the New Mexico Solar Energy Institute and the Department of Energy.

The photovoltaic solar cell array provides power to the control computer ofUnitNo, 4 at the station. This is the first solar photovoltaic application tied directly into a commercial utility power generating station.

The project willprovide

\\

4 I

I I.

l L

I I

I

'lt79 1

'Olfe)9

-O i'

Ago ~1 cgrIc g0~>~nj, i

~.

0 e

4 10

<lpga)~

980

valuable research knowledge and first-hand experience in the design and operation of photovoltaic systems.

The Company's San Augustine Pass, N.M.

site has been selected by

'the Department of Energy (DOE) as one of seven wind turbine generation candidate sites nationally. making it eligible for future experimental wind turbine installations. Wind monitoring equipment was installed by DOE in October, 1980.

Fusion energy may be the nation's most important source of electrical energy in the distant future and The Electric Company has been involved with research on this long-term energy source through its involvement in the Texas Atomic Energy Research Foundation.

Company President Evern R.

Wall was elected president of the foundation in May.

The fusion program is located on the campus of the University of Texas at

, Austin. The University of Texas Fusion Research Center has become one of the largest university experimental fusion programs in the world. Its scientists and engineers are distinguished internationally for their contributions to the global fusion effort. The program was the world's first privately financed fusion research.

The Texas Experimental Torus (TEXT) was recently completed and willserve as a focal point in continued national fusion research.

The Company also supports numerous research activities through its participation jn the Electric Power Research Institute.

12 Community Activities In today's complex industrial society corporate communications with the public and participation in community activities rank in importance with engineering, accounting and finance as managerial functions.

As energy costs continue to rise it Is essential that customers, shareholders, employees, regulators, suppliers and the public understand or at least have access to information regarding the energy business from the business itself.

Toward that end, the Company is engaged in a broad range of cornrnunications and community relations activities designed to meet the information needs of these groups.

The Company utilizes various means to communicate with customers Including personal contact and paid media.

The Company is proud of its record as a tong-standing good community citizen.

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 topics such as nuclear energy, alternative energy resources and energy conseIvation. Organized tours of various Company facilities are held throughout the year and the Community Services Section works diligently in area school districts providing programs in classrooms on various energy related topics as wellas in-service training for teachers and presentations before civic. social, cultural and fraternal organizations.

Company representatives made personal contact with an estimated 30,000 people during1980 through its various programs.

Representatives from the Company's Energy Utilizationand Conservation Section held a series of do-it-yourself workshops for customers who learnedhow to convert existing domestic water heating systems to solar, including all materials required to build solar collectors plus a kit containing a pump, control panel, valves and sensors.

Thirly-twoof the top high school seniors from schools throughout the Company's service area in Texas and New Mexico were honored at its Third Annual Salute to Teenagers Banquet sponsored by the Company.

Five area teachers were sponsored by the Company at the Seventh Annual Electric Power and the Environment Program at the University of Texas at Austin, sponsored by electric utilities In Texas to provide teachers a strong background in the technical, economic and NUMBER OF CUSTOMERS PERCENTAGE INCREASE SINCE 1969 g

40 IOOttdttt AVotOgtt (1 tttO Ol>>'fttttttttt EI dOEC Gtowttt dPKC Outtotftotllotttoo hatt IfK451ty environmental aspects of electric power generation.

Fourteen area high school students and two teachers were sponsored bythe Company at the1980 Texas Energy Science Symposium on the campus of U.T. Austin. It was the 20th year for the Symposium, sponsored by the Texas Atomic Energy Research Foundation and the university.

Employees At year's end the Company had 986 employees serving approximately 181,000 customers.

The Company is veIy proud of its affirmative action program.

From a yO

~+0(~,a aec~..

a~

0(

~e"

~h>

p5.(go<~ya~.g'o>+

~gC

~e v~0 (~(o (ac pg.(~p4 ~e>

See'(,e(Cia ((k ((0~((e

~ ((tIc<. yi((

ae>

e~9' gX((+(Ou~ ~~~ ~9

. ~9 70 d I dd ld N

75 7d dl Td 70 dd Vdtttt

total of 115 employees hired during1980 at The Electric Company,67 percent were minorities. The female work force increased from 27.6 percent in 1979 to 28.7 percent in December,1980.

Minorities represent 52.7 percent of the Company's employees, compared with 50.7 percent in 1979.

A two-year contract was negotiated between the Company and the International Brotherhood of Electrical Workers, Local 960, effective from March1, 1980 until February 28,1982.

Approximately 30 percent of the Company's employees are members of Local 960.

Evaluation of ail salaried jobs was completed in March with salaried positions being assigned applicable salary grade levels. A new performance appraisal program for these salaried positions was also implemented that will recognize productive employees more effectively In December, 1980 Company President Evern R.

Wall was elected by the Board of Directors to the position of Chairman of the Board. Wall willcontinue to serve as President and Chief Executive Officer of the Company, the position he has held since May 1976.

Robert N. Hackett was appointed Assistant Vice President by the Board in March. Hackett has served as Manager of the Rate Department since 1978.

Parker Davenport was also made Assistant Vice President in the Company's Mesilla Valley Division in 1980. Davenport has served in various capacities with the Company since 1946, most recently as Executive Assistant to the Vice President.

Allother officers and

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

Directors 8r Executiv Officers of the Company

'Members of the Frrectrrive~ee

) Years of servtce on the aocrd Board of Directors From left to right - standtng Tad R. Smith Attorney: Partner; Kemp,

Smith, White, Duncan Ik Hammond; Counsel for the Company (20)

Leonard A.

Goodman, Jr.

Chartered LifeUndefwriter; r

General Agent. John Hancock Company (2) a)q Josefina A.

Salas-Porras Executive Director, BILanguage Services (2) e

+le "er Ben L. Ivey Farming; Chairman of the

Board, Bank of Ysieta (11)

r 1's (i

~

,'.,ee

~ a e e

I 'I From left to right - seated George C. Matkin" Chairman of the Board The State National Bank of EI Paso; Chairman of the Board PanNational Group, inc.

(14)

Paul Harvey*

Honorary Chairman of the Board of the Company (40)

Robert E. Boney*

Evern R. Wall'nvestments, President

8. Chairman of Las Cruces, New Mexico the Board (6)

(33)

Robert H. Cutler Chairman of the Board Iliinois~iiforniaExpress, Inc. (10)

Officers

'vern R. Wall

'resident Ik Chairman of the Board (23)

Rolland E. York Senior Vice President (30)

Billye E. Bostic Senior Vice President (33)

James H. Jones Vice President (17)

Harry I. Zimmer Vice President (35)

Donald G. Isbell Vice President (16)

Charles Mais Administrative Vice President (26)

Ralph G. Crocker Treasurer (41)

William J. Johnson Controller (3)

Theta S. Fields Secretary (31)

Robert N. Hackett

'ssistant Vice President

, (10)

Parker F. Davenport Assistant Vice President (34)

Robert L. Corbin Assistant Treasurer Ik Assistant Secretary (32)

Richard E. Farlow Assistant Treasurer (32)

Cecelia R. Shea Assistant Secretary (23)

I ) Years of sevlce with trte company

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

'HERE THE REVENUE DOLLAR WENT:

Commercial and Industrhl-Smati28C Emergency Sales TC Fuel 45C Taxes 17C Interest Expect SC Deprectsticn 4C Other Operating Expenses gC Retained Eamingstc MANAGEMENT'SDISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

,LIQUIDITYAND CAPITAL RESOURCES Utilitiesin 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 forconstruction 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)

Withinthe utilityindustry, successful generation offunds, at reasonable cost, from external sources is dependent upon the strength of the utilityissuing 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 offirstmortgage bonds. Ata 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. Allbut 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

$37,500,000 in 1980. While the Company has been successful in the past, there can be no assurance that the Company will 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 willbe spent for the construction of the Palo Verde Nuclear Generating Station. External funding for the 1981 through 1984 construction program willbe approximately $437,000,000 and willbe accomplished through a combination offirstmortgage 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 for38% and 34%, respectively, of the total increase for 1980 over 1979. Fuel expense and Federal income taxes accounted for42% 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 primarilydue 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 willlikely 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 forthe 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 AFUDCincreased 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.

AFUDCamounted to 63%, 63% and 56% ofnet 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 AFUDCforthe 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.

MARKETPRICE 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:

Migh Bid Quotation Low Dividends 1979

- First Quarter Second Quarter Third Quarter Fourth Quarter 980 First Quarter Second Quarter Third Quarter Fourth Quarter 10r/e 10>/4 11 10'/s 10 97/e 10'/e 9e/e 10s/s 9~/s 10 9

77/e 81/s 9'/e 8s/e

$0.26 0.26 0.275 0.275 0.275 0.275 0.29 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 MATTERSContinued 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. AtDecember 31, 1980 the amount available fordividends 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).

Atits 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 willbe 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)

Operating Revenues Operating Operating Expenses Income (In thousands of dollars Net Income Net Income Applicable to Common Stock except for per share data)

Net Income Per Share of Common Stock 1979 1st quarter 2nd quarter 3rd quarter 4th quarter 1980 1st quarter 2nd quarter 3rd quarter 4th quarter

$36,873 37,147 45,604 40,088 38,761 49,372 65,860 56,520

$32,119 31,564 37,927 34,033 31,993 41,187 53,519 45,597

$ 4,754 5,583 7,677 6,055 6,768 8,185 12,341 10,923 6,415 9,107 14,131 11,524 4,972 7,665 12,688 9,734

$ 3,976

$ 3,085 5,334 4,441 7,705 6,801 6,175 4,915

$.25

.35

.50

.34

.32

.48

.74

.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 fairlythe 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.

Dallas, Texas February 18, 1981 COOPERS & LYBRAND

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

Utilityplant (Notes B and E):

Electric plant in service Construction work in progress Other investments Accumulated depreciation and amortization Net utility plant

$315,947 387)317 13,093 (82,239) 634,118

$290,229 260,419 11,135 (76,053) 485,730 Nonutility property, at cost Accumulated depreciation Net nonutility plant 2)389 (150) 2l239 2,357 (81) 2,276 Current assets:

Cash (Note F)

Accounts receivable, principally trade (less allowance for

~

doubtful accounts of $371,000 and $205,000, respectively)

Federal income taxes refundable Materials and supplies Fuel (Note H)

Prepayments Other Total current assets 7,799 25,042 2,694 4,572 10,551 1,961 11 52,630 10,684 18,327 2,694 3,880 8,060 1,712 1,030 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 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)

Retained earnings (Note E).

Common stock equity Preferred stock, cumulative, no par value, 1,000,000 shares authorized (Note D):

Redemption required, 646,000 and 500,000 shares outstanding, respectively.

Redemption not required, 190,000 shares outstanding Long-term obligations (less net unamortized premium and discount of $2,308,000 and $2,427,000, respectively) (Note E)..

Total capitalization December 31 1980 1979 (In thousands) 64,600 18,873 202,263 507,422 50,000 18,873 171,721 392,020

$162)303

$ 106,329 59,383 45,097 221,686 151,426 Current liabilities:

Current portion of long-term obligations (Note E)

Notes payable banks (Note F)

Notes payable other (Note F)

Commercial paper (Note F)

Turbine contract payable (Note E)

Fuel purchase commitment (Note H)

Accounts payable, principally trade Taxes accrued Interest accrued Other Total current liabilities.

Deferred credits and other liabilities:

Accumulated deferred Federal income taxes Accumulated deferred investment tax credit Other Total deferred credits and other liabilities 54 17,903 15)850 43,158

'f0)449 9,244 9,121 4,351 4)594 114,724 33,260 31,721 3,865 68,846 4,549 2,125 15,290 34,332 7,754 7,958 10,607 6,123 3,183 4,974 96,895 24,873 22,537 793 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 Operating revenues 1978 1980 1979 (In thousands)

$210 513

~159 712

~136 556 Operating expenses (Note J):

Operations:

Fuel Purchased and interchanged power Other operation Maintenance Depreciation and amortization (Note B)

Taxes (Note G):

Federal income, current (credit).

Federal income, deferred (credit)

Charge equivalent to investment tax credit, net of amortization Other Operating income Other income (deductions):

Allowance for other funds used during construction (Note I).

Other income, net of other expenses and Federal income taxes (Note G)

Income before interest charges Interest charges:

Interest on long-term obligations Other interest (Note B)

Other interest capitalized (Note B)

Allowance for borrowed funds used during construction (Note I).

Net income (Note I)

Preferred stock dividend requirements Net income applicable to common stock (Note C)

Net income per share of common stock, based on weighted average number of shares outstanding during the period (Note C).

95)461 (820) 24,839 7,925 9,090 5,396 8,743 9,941 11,721 172,296 38,217 14,377 (366) 14,011 52,228 16,875 10)533 (1,980)

(14,377) 11,051 41,177 6118

$ 35,059

$2.05 81,669 (3,531) 20,962 6,725 8,245 1,238 6,138 4,083 10,114 135,643 24,069 7,450 292 7,742 31,811 11,589 7,420 (1,643)

(8,745) 8,621 23,190 3 948

$ 19,242

$ 1.45 73,447 (2,110) 17,722 5,559 7,361 (2,617)

(1,500) 9,014 9,231 116,107 20,449 3,197 491 3,688 24,137 9,477 4,041 (1,098)

(4,307) 8,113 16,024 2 575

$ 13,449

$1.30 Weighted average number of common shares outstanding (Note C)...

17,063,864 13,252,102 10,333,109 22 The accompanying notes are an integral part of the consolidated financial statements.

Financial EL PASO ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF RETAINED EARNINGS For the years ended December 31, 1980, 1979 and 1978 Retained earnings at beginning of year Add:

Net income 1980 41,177 86,274 23,190 63,943 16,024 54,584 1979 1978 (In thousands)

$45,097

$40,753

$38,560 Deduct:

Cash dividends:

Preferred stock Common stock Capital stock expense Retained earnings at end of year 6,118 20,012 761 26,891

$59,383 3,948 14,523 375 18,846

$45,097 2,575 10,825 431 13,831

$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 (In thousands) 1978 Source of funds:

From operations:

Net income Items not requiring (providing) working capital:

Depreciation and amortization Deferred Federal income taxes Investment tax credit Allowance for other funds used during construction Other 9,090 8,387 10>641 (14,377) 337 8,245 6,875 4,083 (7,450) 278

$ 41,177

$ 23,190

$ 16,024 7,361, 1,354 9,014 (3,19 223 Funds provided by operations Other sources:

Sale of preferred stock Sale of common stock Sale of first mortgage bonds Sale of unsecured promissory notes Long-term lease obligation.

Sale of nuclear fuel to trust Deferred gain on capital lease Long-term mortgage note payable Long-term purchase commitment (Increase) decrease in other deferred debits Advances for construction and other Application of funds:

Gross additions to plant Allowance for other funds used during construction Transfer of long-term purchase commitment to current Gross additions to other property and investments Redemption of preferred stock Dividends on preferred stock Dividends on common stock Capital stock expense.

Reduction of long-term debt Increase in bond discount Other 55,255 15,000 55,974 18,000 12,477 2,386 696 755 160)543 158,324 (14,377) 32 400 6,118 20,012 761 859 172,129 35,221 26,000 35,060 25,000 25,000 4,712 591 (642) 439 151,381 130,282 (7,450) 7,754 794 3,948 14,523 375 4,549 (129) 154,646 30,779 14,000 30,205 9,000 2,124 563 74 (51 86,694 100,101 (3,19 1,539 2,575 10,825 431 1,000 2,196 903 116,373 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 COMPANYAND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIALPOSITION (Continued)

For the years ended December 31, 1980, 1979 and 1978 1980 1979 (In thousands) 1978 Increase (decrease) in components of working capital:

Current assets:

Cash Restricted cash Accounts receivable, principally trade Federal income taxes refundable Materials and supplies Fuel Prepayments Other Current liabilities:

Current portion of long-term obligations Notes payable banks Notes payable other Commercial paper Turbine contract payable Fuel purchase commitment Accounts payable, principally trade Taxes accrued Interest accrued..........

Other Decrease in working capital.

$ (2,885) 6,715 692 2,491 249 (1,019) 6,243 (4,495) 15,778 560 8,826 (7,754) 2,491 (1,363) 2,998 1,168 (380) 17,829

$11,586

$ 4,652 3,002 (3,344) 1,059 (789)

(76)

(1,096) 3,408 3,504 (24,475) 15,290 2,157 7,754 (789) 1,625 704 352 551 6,673

$ 3,265

$ 1,685 (6,600) 942 2,011 203 2,647 272 (5,945)

(4,785) 1,045 15,735 6,875 2,647 (823) 1,132 509 (2,226) 24,894

$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 forthe 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 fordepreciation on a straight-line basis at annual rates which willamortize 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 ofdepreciable 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 forfinancial reporting purposes. Differences in the tax and financial methods ofaccounting forfuel 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 forfunds 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. UtilityPlant 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:

Electric plant in sewice.

Accumulated depreciation Construction work in progress Palo Verde Nuclear Generating Station 378,516 1980 December 31, Palo Verde Four Nuclear Corners Generating

~Prc'ect Station (In thousands)

$ 15,425 (3,500) 3,108 241,352 1979 Four Comers

~Pfc ect

$ 15,409 (3,098) 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 fora 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 forfuture 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 withprevailing 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 ofstock 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 Balance, December 31, 1977 Sales of Common Stock Balance, December 31, 1978 Sales of Common Stock Balance, December 31, 1979 Sales of Common Stock Balance, December 31, 1980 Shares 8,536,818 2.654,553 11,191,371 3 312 002 14,503,373 5 981,694 20 485 067 Amount (In thousands)

S 41,064 30 205 71,269 35 060 106,329 55 974 S162,303 Net income applicable to common stock, net income per share of common stock and weighted average number of common shares outstanding forthe year ended December 31, 1980, would have been $37,226,000, $ 1.82 and 20,485,067, respectively, assuming that the proceeds (before expenses ofsale) ofapproximately $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:

$ 10.75 Dividend.

$ 8.44 Dividend

$ 8.95 Dividend

$ 9.00 Dividend

$ 8.80 Dividend

$ 9.50 Dividend December 31, 1980 Shares 96,000 150,000 150,000 100,000 50,000 100,000 Amount (In thousands)

$ 9,600 15,000 15,000 10,000 5,000 10,000 December 31, 1979 Shares 100,000 150,000 150,000 100,000 Amounr (In Ihousanus)

$10,000 15,000 15,000 10,000 Optional Redemption Price Per Share at De'cember 31

~

1980

$ 108.00 108.44 108.95 646,000

$64,600 500,000

$50,000 The $10.75 preferred shares are entitled to the benefits ofan 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 ofthe shares may be made priorto 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 $8.44 preferred shares are entitled to the benefits of an annual sinking fund whereby on October 1 of each year, beginning in 1984, the Company will redeem 4'/0 (and may, at its option, redeem an additional 4'/o) of the aggregate maximum number ofshares outstanding at the sinking fund redemption price of$ 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 priorto 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 ofshares 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 willoffer to purchase on the next succeeding October 1, out of funds legally available for the purchase or redemption of $9.50 preferred shares, not less than 20,000 shares (or the number of such shares then utstanding ifless than 20,000) at a purchase price of$ 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 ofredemption. 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 fora sinking fund, are not redeemable at the option ofthe Company, and must be redeemed in fullon 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 fora sinking fund and are not redeemable at the option ofthe 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 forthe purchase or redemption ofthe $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 juniorto the preferred stock as to dividends and assets).

The aggregate amounts ofthe above preferred stock required to be retired foreach of the next fiveyears are as follows:

(In thousands) 1981 1982 1983.

1984.

1985.

400 400 400 1,000 1,750 Sales and redemption of preferred stock redemption required were as follows:

Balance, December 31, 1977 Issuance of Preferred Stock, $8.44 Dividend Balance, December 31, 1978.

Issuance of Preferred Stock, $8.44 Dividend Issuance of Preferred Stock, $8.95 Dividend Issuance of Preferred Stock, $9.00 Dividend Balance, December 31, 1979 Redemption of Preferred Stock, $ 10.75 Dividend.

Issuance of Preferred Stock, $8.80 Dividend Issuance of Preferred Stock, $9.50 Dividend Balance, December 31, 1980 Shares 100,000 140,000 240,000 10,000 150,000 100,000 500,000 (4,000) 50,000 100,000 646,000 Amount (In thousands)

$ 10,000 14,000 24,000 1,000 15,000 10,000 50,000 (400) 5,000 10,000

$64,600

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

December 31, 1980 1979 (In thousands)

$ 1,534

$ 1,534 1,506 1,506 2,001 2,001 4,000 4,000 9,832 9,832

$18,873

$18,873

$109.00 103.98 104.00 100.00 107.52

$4.50 Dividend

$4.12 Dividend

$4.72 Dividend

$4.56 Dividend

$8.24 Dividend 15,000 15,000 20,000 40,000 100,000 190,000 (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, Shares 1980 The above preferred shares are redeemable at the option of the Company; however, no optional redemption of the

$8.24 shares may be made priorto April1, 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.

Allpreferred 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. Allissues 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:

December 31 1980 1979 (In thousands)

Redemption Price at December 31, 1980 First mortgage bonds:

2r/e/o Series, due 1980 3V8/o Series, due 1984 4V4/o Series, due 1988 4%/o Series, due 1992 674/o Series, due 1998 774'/o Series, due 2001 9/o Series, due 2004 9.95'/o Series, due 2004...

10~/Plo Series, due 2005 8V~'/o Series, due 2007 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 Due 1985 Obligation under capital lease Other, 8.8125/o, due in installments through 1998 Current maturities of long.term obligations Unamortized premium and discount 4,950 6>100 10,385 24,800 15,838 20,000 25,000 151000 25,000 147,073 25,000 18,000 12,477 2,075 204,625 (54)

(2,308)

$202,263 4,500 4,950 6,100 10,385 24,800 15,838 20,000 25,000 15,000 25,000 151,573 25,000 2,124 178,697 (4,549)

(2,427)

$ 171,721 s

100.65 101.70 102.22 103.96 106.16 106.75 109.95 109.45 107.85 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) ofthe 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 this'ractice as reflected in the followingtable. With respect to the 9.95 k series, commencing April30, 1985, the Company will 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 priorto 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.

s 54 59 64 30,020 18,076

~143 875 Scheduled maturities of long-term obligations at December 31, 1980, excluding obligation under capital lease, are as follows (in thousands):

1981 1982 1983 1984 1985 Thereafter 32

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

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

In accordance with certain provisions ofthe indenture covering the firstmortgage bonds, payment ofcash 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. Ofthe $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 ofthe 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 withthe informal lines ofcredit. 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 forcompensating 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 Deferred fuel costs Allowance for borrowed funds used during construction Other Other income

$1,566 226 6,613 338 (609)

$8,134

$ 1,769 (1,074) 4,023 1,420

$6,138 S 1,572 (2,597)

(475)

$(1,500) 33

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

Effective January 1, 1979, in accordance witha 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.

1980 Tax computed at statutory rate Decreases due to:

Allowance for funds used during construction Other Total Federal income tax expense Effective Federal income tax rate (3,427)

(907)

$ 11,728 33.6O/o (6,613) 774

$24,264 37 1O/o (3,602)

(1,302)

$ 5,360 25.1 /o 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, 1979 1978 (In thousands)

$30,103

$ 16,062

$ 10,264 Total Federal income tax expense is as follows:

Current income taxes (credit) operating Current income taxes other income Total current Deferred income taxes (credit) operating Deferred income taxes (credit) other income Deferred investment tax credit operating Deferred investment tax credit other income Amortization of deferred investment tax credit operating 1980

$ 5,396 93 5,489 8I743 (609) 10,355 700 (414)

$24,264 Years Ended December 31, 1979 (In thousands)

S 1,238 269 1,507 6,138 4,379 (296)

$ 11,728 1978 S (2,617) 463 (2,154)

(1,500) 9,412 (398)

$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 ofAFUDC.The above amounts were computed assuming an estimated average annual inflation rate of 8'/o.

34

Financial EL PASO ELECTRIC COMPANYAND 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 ofthe 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 willbe 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 willhave 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 ofan rder by the FERC to refund only that amount. Afinalorder dated January 29, 1981 was rendered by the FERG 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 forconstruction purposes plus a reasonable rate on other funds when so used. While AFUDC results in an increase in utilityplant 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 utilityplant construction. In this connection, the FERC has promulgated procedures forthe computation (a prescribed formula) ofthe 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 ofAFUDCon 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 ofthe most current actuarial valuation, assets ofthe 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 ofvested and nonvested accumulated plan benefits, net plan assets available forbenefits 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 COMPANYAND SUBSID/ARY SUPPLEMENTAL INFORMATIONCONCERNING 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, forthe purpose ofproviding 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 forAllUrban 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 nonutilityproperty, 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 limitsthe 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 ofplant statedin terms ofconstant 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 itwillbe 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 forChanging Prices, the reduction ofplant 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 primarilyattributable to the substantial amount ofdebt 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)

Operating revenues Fuel, purchased and interchanged power Other operating and maintenance expenses Depreciation and amortization..

Federal income taxes Interest expense Other income Net income Increase in specific prices (current cost) of plant held during the year (1)

Reduction of plant to net recoverable amount Effect of increase in general price level Excess of increase in general price level over increase in specific prices at net recoverable amount Gain from decline in purchasing power of net amounts owed.

Conventional Historical Cost

$ 210,513 94,641 44,485 9,090 24,080 11,051 (14,011) 169,336 41,177 Constant Dollar Average 1980 Dollars (In thousands)

$ 210,513 94,641 44,485 18,380 24,080 11,051 (14,011) 178,626 31,887 (2)

$ (55,150)

(2) 34,547 Current Cost Average 1980 Dollars

$ 210,513 94,641 44,485 19,768 24,080 11,051 (14,011) 180,014 30,499 43,183 (96,823)

(53,640) 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) 1980 1979 Years ended December 31, 1978 1977 1976 (In thousands except for per share amounts)

Historical cost Constant dollars Constant dollar information Net income:

Historical cost Constant dollars Net income per share of common stock Historical cost Constant dollars Net assets at year-end at net recoverable amounts:

Historical cost Constant dollars urrent cost information Net income:

Historical cost Current cost Net income per share of common stock:

Historical cost Current cost.

Net assets at year.end at net recoverable amounts:

Historical cost Current cost.

$210,513 210,513

$ 41,177 31,887 2.05 1.51

$305,159 291,460

$ 41,177 30,499 2.05 1.43

$305,159 291,460

$ 159,712 181,311 S 23,190 17,961 1.45 1.02

$220,299 236,493 S 23,190 15,335 1.45

.82

$220,299 236,493

$ 136,556 172,477

$112,339 152,756

$ 111,188 160,945 Excess of increase in general price level over increase in specific prices at net recoverable amount, current cost ther information Gain from decline in purchasing power of net amounts owed, constant dollars Cash dividends declared per share of common stock:

Historical cost Constant dollars

$ 53,640

$ 48,710

$ 34,547 S 34,053 1.13 1.07 '1.02

.99

.95 1.13 1.21 1.29 1.35 1.38 Market price per share of common stock at year-end:

Historical cost Constant dollars Average consumer price index 9.50 9.07 246.8 9.38 10.07 217.4 10.88 13.23 195.4 12.00 15.91 181.5 12.00 16.99 170.5 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 Operating revenues Fuel Operation and maintenance Depreciation and amortization Taxes Other income Income before interest charges Total interest charges 1980

$210,513 95,461 31,944 9,090 35,801 (14,011) 158,285 52,228 11,051 1979

$ 159,712 81,669 24,156 8,245 21,573 (7,742) 127,901 31,811 8,621 1978

$136,556 73,447 21,171 7,361 14,128 (3,688) 112,419 24,137 8,113 Income before cumulative effect on prior years of change in accounting method Cumulative effect to January 1, 1974, of change in accounting for fuel costs, net of related income taxes ($912,000)

Net income 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 Cumulative effect to January 1, 1974, of change in accounting for fuel costs....

Net income applicable to common stock.....

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 41,177 23,190 16,024 2.05 1.45 1.30 2.05 1.45 1.30

$ 41,177

$ 23,190

$ 16,024 Dividends per share paid on common stock Gross utility plant Total assets 1.13

$716,357

$690,992 1.07

$561,783

$537,118 1.0

$438,08

$415,97 Long-term obligations and preferred stock-redemption required

$266,863

$221,721

$ 150,15 40

197?

$112,339 59,442 16,685 6,498 12 377 (1,689) 93,313 19,026 7,604 1976

$111,188 53,154 17,954 6,233 15,727 (838) 92,230 18,958 7,442 1975

$ 91,461 44,714 14,516

.5,506 11,197 (1,423) 74,510 16,951 6,853 1974

$ 63,072 24,914 11,463 4,345 9,809 (770) 49,761 13,311 5,280 1973

$ 49,483 15,766 8,160 4,102 9,573 (84) 37,517 11,966 3,962 1972

$ 43,284 10,951 8,101 3,776 9,279 (668) 31,439 11,845 3,591 1971

$ 38,919 8,974 7,717 3,509 8,151 (699) 27,652 11,267 3,450 11,422 11,516 10,098 8,031 8,004 8,254 7,817

$ 11,422

$ 11,516

$ 10,098 988 9,019 8,004 8,254 7,817 1.11 1.11 129 130 119 119 122 116

.15 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

$326,910

$274,502

$258,407

$250,375

$240,659

$227,196

$206,490

$ 185,058

$ 156,435

$174,485

$ 146,401

$ 'f66,275

$ 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 STATISTICALDATA Population served at retail, estimated.

Number of Customers:

Residential Commercial and industrial, small Commercial and industrial, large Other Total Annual native system peak load, net kilowatts Output, net generated and purchased, thousand kilowatt-hours:

Steam Other Purchased and interchanged Total(a)

Sales of electricity, thousands of dollars; Residential Commercial and industrial, small Commercial and industrial, large Other 1980 600,000 162,770 16,169 42 1,941 180,922 718,000 3,928,860 47,969 9,794 3,986,623 63,659 58,679 28,155 59,043 1979 554,000 157,601 15,791 44 1,875 175,311 688,000 3,771,043 (119,166) 3,651,877 52,899 46,741 26,402 32,577 1978 544,00C 150,73~

15,381 4) 1,84c 168,00.'90,00C 3,673,68.'84,60'.

3,589,07(

44,17$

39,78(

22,40~

29,28 Total 209,536 158,619 135,64 Sales, thousand kilowatt-hours:

Residential Commercial and industrial, small Commercial and industrial, large Other Total (a).

972,070 985,123 621)877 1,148,952 3,728,022 937,858 949,514 682,163 854,749 3,424,284 907,95 913,03 650,54 849,11 3,320,64 Average annual use per residential customer, KWH.

Average annual revenue per residential customer...

6,065 6,072 397.74 342.49 6,15 299.4 Average revenue per KWH sold, cents(b):

Residential Commercial and industrial, small Commercial and industrial, large Average revenue per KWH; total sales.

Electric line, pole miles:

Over 15,000 volts Less than15,000volts(c)

Total Total employees 6 56c 5.96 4.53 5.64 2,131 2,841 4,972 986 5.64~

4.92 3.87 4.63 2,070 2,794 4,864 965 4.

4.3 3.4 4.0 1,99 27 4,7 (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.

I

~ ~ I I III II~

~ ~ III

~

III I I I

~

~

~

~ I

~

~

~

~

~

~ ~ ~

~ ~

~ ~

~

~

~

~

~

~ ~ ~

~

~

~

~

~ 0 0 0

~

~

~

III

~

III

~

> I III

~

~ III

~

~ III II II I

~

~

~

~

~

~ I ~

I

~

I

~ I

~ I

~

~

~

~ ~

~ ~

~ ~ ~

~

~

I ~

I ~ I

~

~

I

~

~

~ ~ I I

~

~

~

~

~

~

~

~

~ I ~

~

~

~

~

~ ~ ~

~ I ~

~

~

~

~

'I

~ '

~ ~

I ~ ~

~

~

~

~ I

~ I

~ ~ ~

~

~

~

0

~

~

~

~ I ~

~

II~

~

~

~

0

' I I ~

~

~ ~ ~

~

~

~ ~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~ 0

~

~ ~

I ~

I I

I

~

~

~

~ f0

~

~

~

~

~ ~

~

~

~ I

~ ~

~ ~

I ~

~ ~

~

~

~ ~

~

~

~

~

~

~

~

~

~

~ >

Service Area III FOUR CORNERS,N.M.

400 MILES V

ELEPHANT BUTTE DAM TO ALBUQUERQUE Q

CABALLO OAM 1

1 AI HATCH 1

ALAMOGORDO HOLLOMANA.F.B.

R(O G RIIPE~ROZ MAR OLLO IMllll IIIII"'AM WHITE SANDS MISSILE RANGE a

ll'IVIIIIIIII

,Eil'll IIIIIINlllllllllllMIS LAS CRUCES

~

TO PALO VERDE Vsg~ SAIC 450 MILES SVSIEV iM'I~

~III

~I

~I McGREGOR RANGE ANTHONY NEWMAN FORT BLISS WM. BEAUMONT NEW MEXICO.

RIO GRANDE EL PA MEXICO CIUDAD JUAREZ

'80 Gl

~o FABENS El Paso Electric is an investor-owned, tax-paying electric utilityoperating in Texas and New Mexico. The Company is engaged inthe generation, transmission, distribution and sale of electric energy.

EI Paso Electric serves approximately 181,000 customers in West Texas and South Central New Mexico in a sewice area of approximately 10,000 square miles. The service area extends from the Caballo Darn in New Mexico southeasterly to Van Horn, Texas.

44

+E P~~>g

~5P~M~PP COMPANY LINES

><<>>~ COMPANY 345K IIIIIMIMIIIIIIOTHER LINES

~IE POWER STATION NEW MEXICO TEXAS SIERRA BLANCA P@

/CI VANHORN El Paso Electric Company P.O. Box 982 El Paso, Texas 79960 Equal Opportunity Employer

~

~

~

o ~

~

~

~

~

~ ~

~ I