ML18192A376

El Paso Electric Company 1977 Annual Report

ML18192A376
Person / Time
Site:	Palo Verde
Issue date:	04/21/1978
From:	El Paso Electric Co
To:	Office of Nuclear Reactor Regulation
References
Download: ML18192A376 (38)

Text

El Paso Electric Company P. 0. Box 982 El Paso, Texas 79999

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1 Contents Page Highlights 1

Letter to Shareholders.

2 Area and Company Development............................

4 Construction Keyed to Growth...

5 System Fuel Supplies.

7 Regulatory Matters 8

Environment.

9 Financing..

10 Management Changes.

10 Employees

.10 Conservation, Research and Development..............11 Communications 12 Operations at a Glance

.14 EPE's Service Area.

.16 Financial Information..

.17 Consolidated Statement of Income..........................18 Consolidated Balance Sheet..19 Consolidated Statement of Shareholders'quity.....20 Consolidated Statement of Changes in Financial Position.

21 Notes to Consolidated Financial Statements...........22 Opinion of Independent Accountants.......................27 Summary of Operating Data

...28 Summary of Operations.

.30 Management's Discussion and Analysis of Consolidated Statement of Income.......................32 Market Prices of Common Stock and Dividends......33 Board of Directors..

.34 Company Offices, Annual Meeting of Shareholders, Common Stock Shareholders, Transfer Agents....36 The Cover Progress is the art of converting raw land into a new business, a new sub-division or a new transmission line.

The photograph of heavy earth-moving equipment has been altered to illustrate man and his machinery creating his art.

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At December 31 Operating Revenues (000)

Operating Expenses (000)

Net Income (000)

Earnings per share Dividends per share (Common)

Book Value per share Common Shares Outstanding Number of Common Shareholders Number of Customers Number of Employees Peak Load Net Generating Capacity Average Residential Use Fuel Expense (000)

Energy Sales (MWH)

Electric Plant (000)

Highlights 1977 112,339 95,002 11,422 1.11

.99 9.33 8,536,818 19,156 159,924 838 657,000 KW 982,000 KW 6,261 KWH 59,442 3,242,724 338,598 1976 111,188 93,068 11,516 1.29

.95 9.20 8,448,767 17,504 151,334 816 677,000 KW 999,000 KW 6,193 KWH 53,154 3,358,662 274,502 Per Cent Increase

~Decrease 1 0'I 2.1%

(0.8%)

(14 0%)

42%

1 4'I 1.0%

94%

27%

(3.0%)

(1 7%)

1.1%

11.8%

(3 5%)

23.3%

Dividend Reinvestment A Dividend Reinvestment and Stock Purchase Plan is available to holders of Common Stock. The Plan provides a convenient method of investing dividends and optional cash payments in new shares without payment of service charges or other expenses.

An en-rollment card may be obtained from the Company Sec-retary.

Letter to Shareholders EI Paso Electric (EPE) and the economy of the region it serves experienced another year of decided progress and growth in 1977. This was also a year in which the Company was required to seek rate increases throughout its service area in order to meet higher

expenses, to finance its construction program and to restore earnings to their historical level.

Earnings per share of common stock decreased from $1.29 in 1976 to $1.11 in 1977. The decrease in earnings resulted from loss of revenue due to delays in obtaining necessary rate increases in both the Texas and New Mexico service areas. Also contributing to the earnings decline was a 3.5 per cent decrease in kilowatt-hour sales of electricity, primarilydue to the loss of the Juarez, Mexico load in March 1977, when the Mexican Federal Government began serving all the city's energy requirements and the effects of very mild weather throughout 1977. Discounting the loss of Juarez, however, peak load was up 3.1 per cent during 1977. Operating revenues forthe year rose from $ 111.2 million in 1976 to $112.3 million in 1977. Operating expenses increased from $93.1 millionin 1976 to $95.0 million in 1977.

Quarterly dividends on Company common stock were increased from 24 cents per share to 25 cents in 1977. Holders of common stock received dividends totaling 99 cents per share in 1977.

You willfind in this report, the El Paso Southwest is a dynamic region experiencing phenomenal growth and development and has even greater potential for progress in years ahead. EPE is an essential part of this growth.

The Company's service area characterizes the pattern of development being experienced throughout the "sunbelt," and El Paso is in the heart of that region. It is also evident that our economy is increasingly electric-based.

As the area grows and develops, this means more jobs and an improving economic base.

Building permits in the city of El Paso increased 46 per cent over 1976, while permits in Las Cruces, New Mexico increased 35 per cent over last year. Victor Comptometer and Allen Bradley Co. are among the national companies which are in the process of moving 400 to 500 new families to this area along withtheir large manufacturing facilities.

A major factor in this healthy growth has been your Company's ability to provide the necessary energy to accommodate new industry and a growing population.

For this type of development to continue, new Company facilities are needed and rate increases will be necessary to cover the cost. The Company must grow and expand its facilities correspondingly to serve growing customer demands.

Your Company is now engaged in the largest construction program in its history. To keep pace with continued growth, to end its dependence on natural gas and fuel oil as generating plant boiler fuel, itis moving to nuclear power and increased use of coal.

EPE's consolidated construction additions in 1977 were $64.7 million, most of which was for the Company's share of the Palo Verde Nuclear Generating

Station. When completed, Palo Verde willbe the largest nuclear power station in the world. Construction additions for 1978 are expected to be approximately

$ 103.0 million.

Effective in December, 1977 the Public Utility Commission of Texas (PUC) authorized a rate increase throughout the Company's Texas service area adding approximately

$7.5 million annually to Texas revenues.

The authorized rate increase represented slightly more than half that requested. The PUC order reflected the Commission's approach to utility regulation in Texas. The Commission authorized the Company to include $17.4 millionof construction work in progress (CWIP) in rate base for Palo Verde Nuclear Generating Station. This is expected to result in substantial savings to customers and benefit to investors.

The New Mexico Public Service Commission authorized the Company to begin collecting increased rates in the New Mexico service area effective January, 1978. The increase is expected to produce an additional

$2.8 million in annual revenues.

The Federal Energy Regulatory Commission also authorized a rate increase for wholesale electric rates amounting to $614,000 annually, a portion of which is subject to refund.

I want to again repeat my message of last year that, it is likely that circumstances will warrant continued requests for rate increases...to cover the increased cost of doing business and to service the debt necessary for financing additional generating capacity to serve our growing service area.

The Company's construction program is the primary reason higher rates were needed and will be needed in the future. Electric energy continues to represent a growing proportion of the total energy used in this country. Meeting increased demands for electricity requires construction of large, expensive projects to provide additional generating and delivery capacity creating heavy demands for new capital investment. Future rate increases are essential in order for the Company to be able to attract new investment capital through the adequacy and quality of earnings.

While in 1977 earnings were not up to the levels of prior years, the decline was not unexpected and steps were taken to offset loss of the Juarez loadby increased sales to other utilities and by filing rate increase requests to help improve earnings. We believe our state regulatory authorities realize that prompt attention to the Company's requirements are necessary and that earnings must be sufficient to attract new investment capital.

The primary goal of the Company's construction program is to reduce dependence on natural gas and oil which is being required at all levels by the states and the national government.

In addition to participation in the Palo Verde Nuclear Generating Station, an interim agreement has been executed with Public Service Company of New Mexico to construct a coal-fired generating station in northwest New Mexico referred to as the New Mexico Project.

The Company received Certificates of Public Convenience and Necessity for the Palo Verde Project from both the New Mexico Public Service Commission and the Public UtilityCommission of Texas. Both states issued unqualified approval of the nuclear project.

Approval had been received previously from the Nuclear Regulatory Commission (NRC) and the City of El Paso.

Meanwhile, construction on Palo Verde Unit One is about 30 per cent complete. The station, located 50 miles west of Phoenix, Arizona, is well within its scheduled budget and construction plan. The Company owns a 15.8 per cent undivided interest in the station and willreceive 200 megawatts from each of three units scheduled to go on line in 1982, 1984, and 1986, respectively. The Company is also actively participating in NRC licensing procedures for two additional units at Palo Verde.

One of the Company's many strengths is the long range planning we have done by taking the steps necessary to insure that reliable electric power is available at the most reasonable cost throughout our service area. Coal and nuclear fuels are expected to account for approximately 67 per cent of the electricity the Company willgenerate by 1986.

While our particular area was spared serious effects of the winter of 1976-77, the severe weather in other locations again demonstrated serious deficiencies in supplies of natural gas and oil and reemphasized the urgent need for a viable national energy policy and the necessity to develop our nation's coal and nuclear resources.

The use of electricity continues to increase notwithstanding the effort EPE and others have put forth working with and encouraging customers to conserve electric energy.

The Company remains committed to furnishing high quality service to all its customers at the lowest rates consistent with the need to maintain the financial integrity of the Company and to provide a reasonable return to Shareholders.

Last year's Annual Report to Shareholders focused on EPE's first75 years of achievement and growth. This edition looks at the challenges and opportunities faced in 1977 and how your management willcontinue to meet the challenges of the future.

I want to personally commend EPE employees who have continued to demonstrate dedication, perseverance and loyaltywhile maintaining productivity and high standards of job performance in the face of elemental and political problems.

Continued success depends on maintaining the confidence of our investors, customers and employees, whose active support of Company objectives is necessary in order for the Company to continue to progress.

Evern R. Wall President and Chief Executive Officer

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El Paso Electric serves one of the fastest growing regions in the country, a region which has a bright future and great potential in coming years.

El Paso, a citywhose name stirs romantic images of the Old West, is now the 33rd largest city in the United States and is among the fastest growing. With a population of more than 385,000 people, located in 160.7 square miles, it is the largest community served by the Company. EPE is proud of its contribution toward making El Paso a major metropolitan center of business and commerce for the Southwest.

Las Cruces, New Mexico, 45 miles north of El Paso, also continues its rapid development and is one of the largest cities in New Mexico and the largest served by the Company in that state. Both El Paso and Las Cruces completed their most prosperous year in 1977.

The EPE service area has a strong and stable economy characterized by dynamic growth in the past decade. The solid economic development in its service area is supported by a modern education

base, abundant land, an equitable tax structure and a rapidly expanding tax base. New industry and new people are attracted to the El Paso Southwest through its combination of mild climate, and favorable economic conditions. It is an interesting place to work and live.

El Paso has a distinct international flavor, and while the Rio Grande serves as the political boundary between El Paso and Ciudad Juarez, it does not separate the culture and commerce between the two largest cities located on the U.S.-Mexico border.

One contribution to El Paso's economic stability is the Twin Plant concept. This system allows components to be assembled in Juarez and sent to El Paso for packaging for worldwide distribution. Several major manufacturers have taken advantage of this situation including General Electric, RCA, Sylvania and General Motors.

Other manufacturing enterprises in the "Sun City" include one of the largest custom smelters in the world at the El Paso plant of ASARCO Incorporated. Phelps Dodge Refining Corporation operates a large smelting plant in El Paso and El Paso Natural Gas is headquartered in EI Paso. The city is a major center of the garment manufacturing industry.

Arecord amount ofconstruction occurred in El Paso in 1977, as reflected by building permit figures which totaled $214,789,091, compared with $147,303,001 in 1976. This is an increase of 25 per cent over the previous record set in 1972 of $ 172,262,818.

Residential construction accounted for nearly half the total and was nearly 40 per cent higher than in 1976.

Building permits issued in Las Cruces in 1977 likewise reached a record level with a total of

$25,085,897. This represented a 35 per cent increase over 1976 figures, the previous record.

In El Paso 165 subdivision applications were processed and approved by the City, 144 residential, the others primarily commercial.

Business is good in El Paso, and improved economic activity resulted in increased bank clearings,

new vehicle registrations, airline passengers, railroad cars loaded and other economic indicators. Despite an unemployment rate of nearly 10 per cent, El Paso's employment picture has improved. Significantly, total employment was up nearly 5 per cent in 1977. The manufacturing payroll increased nearly 22 per cent. The EI Paso Chamber of Commerce estimates that in recent years the dollar value of economic expansion in EI Paso has averaged about 15 per cent per year unadjusted for inflation. An important contribution to El Paso's economic activity has been a 25 per cent increase in militarypersonnel at Fort Bliss compared to the previous year.

The City's Department of Planning, Research and Development has projected nearly 60 per cent population growth by the end of this century, and the City could have well over 600,000 residents by the year 2000. An electric utilitymust be responsive to the energy needs of its customers, and EPE has kept pace with the mushrooming development throughout its service area by growing with the area it serves.

The number of customers served by EPE has increased by about 20 per cent in the past five years, to 159,924 in 1977. In addition to incorporated and rural areas, the Company serves several important military installations, including the U. S. Army Air Defense Center at Fort Bliss, White Sands Missile Range and Holloman Air Force Base.

The system peak load in 1977 was 657,000 KWand reflects a 3 per cent decrease from the 1976 all-time high of 677,000 KW. Kilowatt-hour sales of electricity decreased 3.5 per cent from a year ago. The decrease was a result of mild weather and the loss of firmsales of electricity to Juarez, which is now served entirely by recently installed generating units by the Mexican Federal Government.

Juarez sales accounted for 40,000 KW in the record peak load of 1976. Eliminating the effects of the loss of the Juarez load, the 1977 peak load shows a 3.1 per cent increase in demand in the Company's service area.

Among the Company's major customer categories, residential kilowatt-hour consumption increased 7 per cent over 1976 levels, small commercial and industrial decreased 3 per cent and large commercial and industrial increased 6 per cent. The average annual consumption per residential customer in 1977 was 6,261 kilowatt-hours, compared with 6,193 in 1976.

The EPE 1977 net system capacity was 982,000 KW composed of 498,000 KW at Newman Power Station, north of El Paso; Rio Grande Power Station, near Downtown El Paso in New Mexico, with 372,000 KW;and its 7 per cent entitlement, or 112,000 KW, from the coal-fired Four Corners Power Station near Farmington, New Mexico.

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Construction Keyed To Growth The electric utility industry is the most capital-intensive industry in the American economy.

Enormous amounts of money must be obtained in order to construct the facilities needed to insure an adequate and reliable source of electric energy.

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The Company's 1977 construction budget was the largest in its history. EPE's consolidated construction program, during the next three years will require estimated additions of approximately $415 million.

Included in these additions are construction expenses for new production facilities, transmission and distribution systems, general plant and related financing costs.

The Company and four Western utilities, Arizona Public Service Company, Southern California Edison Company, Public Service Company of New Mexico, and Salt River Agricultural Improvement and Power District, are participants in the Palo Verde Nuclear Generating Station, now under construction 50 miles west of Phoenix, Arizona.

EPE owns a 15.8 per cent undivided interest in the initial three units which willprovide a total net output of approximately 3,810,000 KWwhen completed in 1982, 1984 and 1986, respectively.

EPE's entitlement from the three units is approximately 600,000 KW. As of December 31, 1977, the Company has had additions of approximately

$55.7 million to the station. The Company's total estimated share of the nuclear plant and related fuel is approximately $663.0 million, including related Allowance For Funds Used During Construction (AFUDC). In addition, the Company's share of the cost of related switchyard and transmission facilities is estimated to be about $126.4 million including AFUDC.

All permits required for construction of the station have been issued by the Nuclear Regulatory Commission, the Public Utility Commission of Texas and the New Mexico Public Service Commission. As of December 31, the total project was 15 per cent complete.

When electric power begins flowing to West Texas and New Mexico from Palo Verde Nuclear Generating Station in 1982, uranium fuel will be added to the EPE fuel mix. One of the principal goals of the Company's construction program is to reduce its reliance on oil and natural gas to fuel its generating units. Palo Verde Nuclear Generating Station will be a major step in that direction.

A successful energy production program is based on sound planning principles. Since planning for future energy needs is growing in complexity, the Company must begin now in order to meet customers'eeds many years in the future. Schedules for new production facilities have been lengthened from four years to ten years or longer because of increased regulatory requirements at all levels of government city, state and federal.

Keeping in mind the long lead time required to bring an electric generating unit on line today, the Company has completed initial agreements to participate in additional nuclear units and a coal-fired generating station for base load purposes after 1982.

The Company and ten other participants have announced plans to file an application with the Nuclear Regulatory Commission in April 1978 for permits to construct two replicate units at Palo Verde Nuclear Generating Station, identical to the firstthree units. The Company's anticipated participation in the additional

units will be about 4 per cent, or 100,000 KW.

Additionally, the Company has completed an interim agreement with Public Service Company of New Mexico whereby the Company would own 15 per cent of the first 500,000 KW unit of a proposed coal-fired generating station located about 35 miles south of Farmington, New Mexico. The proposed station tentatively will consist of four 500,000 KW units scheduled for completion in 1983, 1988 and 1990 and 1992, respectively.

A 73,000 KW peaking unit in El Paso is planned to be on line in 1980, subject to regulatory approval. The proposed unit willcost an estimated $ 11 millionand will operate primarily on fuel oil.

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'+k>'or many years the Company has been exclusively dependent on natural gas, fuel oil and a small amount of coal to fuel its generating units. As oil and natural gas become more expensive and less available, and state and federal governments undertake to restrict oil and gas as industrial fuels, the Company is taking steps to use more plentiful and less expensive fuels such as uranium and coal.

The average price offuel oil decreased 1 per cent in 1977, to $2.64 per millionBTU, compared with$2.67 per million BTU in 1976. On a per barrel basis the average price of delivered fuel oil decreased from $15.74 per barrel to $ 1 5.48. The Company entered into a 10-year contract with the Big Bend Resources Trust in June, whereby the Trust purchased the Company's fuel oil inventory, and the Company agreed to purchase fuel oil from the Trust. The Trust agreement resulted in a change in the method of financing the Company's fuel oil and a reduction in fuel oil carrying costs.

The Company's fuel oil purchase agreement with Southern Union Refining Company was assigned to the Big Bend Trust, and the Company licensed the Trust to use Company storage facilities.

The average price of interstate natural gas increased from $0.82 per million BTU in 1976 to $ 1.07 per million BTU in 1977, an increase of 30 per cent, while the average price of intrastate gas increased 17 per cent from $1.74 to $2.03 per million BTU. Further increases in natural gas prices are anticipated.

Interstate gas, when available, was delivered to Rio Grande Station in New Mexico under contract provisions with EI Paso Natural Gas (EPNG) in quantities varying from 9 per cent to 65 per cent of the station's daily natural gas requirements in 1977. El Paso Natural Gas has advised the Company that itcan expect to receive only minimal deliveries of interstate natural gas in the future. However, during 1978 EPNG will provide approximately 4.4 billion cubic feet of gas that was misallocated in 1975.

Intrastate natural gas requirements at Newman Power Station in Texas are currently being met under a contract with EPNG. Although intrastate gas is more expensive than interstate gas, it is not regulated by the Federal Energy Regulatory Commission and supplies System Fuel Supplies

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are more readily available. Terms ofthe present contract are expected to supply the major portion of the fuel needs at Newman through 1980.

The Company owns a 7 per cent undivided interest in Units 4 and 5 at the coal-fired Four Corners Station for a total entitlement of 112,000 KW. Coal supplies for the lifeof the Four Corners project are being obtained under a contract with Utah Construction and MiningCompany.

In 1977, 15 per cent of the kilowatt-hours supplied by the Company were generated at the Four Corners Station.

The price of coal used at the Four Corners Station in northwestern New Mexico increased 10 per cent over 1976 levels from an average of $0.29 per million BTU to $.32.

Since fuel oil is the most expensive fuel used by the Company in its operations, any curtailment in natural gas deliveries results in increased overall fuel expense.

Fuel oil must be burned in the absence of natural gas.

The average fuel mix forgeneration in 1977 was 75 per cent natural gas, 10 per cent fuel oil, and 15 per cent coal.

Fuel purchases are continuing for Palo Verde Nuclear Generating Station, and participants have contracts extending through the late 1990's for uranium concentrate to fuel the nuclear reactors.

Coal and nuclear energy are the only available practical alternatives to utilities faced with rising costs and inadequate supplies of petroleum fuels. The Company has taken initial steps on a long-range program of developing and using the more abundant supplies of coal and uranium. This country can ill-afford to continue to rely on foreign petroleum supplies and needs a policy which encourages the full development of domestic fuel resources instead of impeding the use of coal and uranium. The Company willremain flexible and utilize all available fuels in meeting the service area's growing need for energy.

Regulatory Matters Ih 1

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The Company filed rate increase applications in May, 1977 with regulatory authorities in its seven juris-dictional areas the four incorporated municipalities in the Texas service area, the New Mexico Public Service Commission, the Public UtilityCommission ofTexas (for unincorporated areas of the state) and the Federal Energy Regulatory Commission (for wholesale rates).

The incorporated Texas communities, including El Paso, which have original jurisdiction over retail rates, denied the Company any portion of the rate increase request. An immediate appeal was made to the Public UtilityCommission of Texas which, under the terms of the Texas Public Utility Regulatory Act, has appellate jurisdiction in utilityrate matters. The Commission con-solidated into one order all the Company's Texas ser-vice area and on October 25 granted a rate increase of

$7.5 million, 9 per cent over the 1976 adjusted test year revenues of $84.7 million.

The Commission's order permitted the Company to include $17.4 million of Construction Work in Progress (CWIP) associated with Palo Verde Nuclear Generating Station in rate base, thus allowing the Company to earn a return to recover financing costs of the nuclear project.

The Texas rate order also called for elimination of the declining block rate schedule for residential custom-ers, substituting a flat rate per kilowatt-hour.

In an order dated January 12, 1978, the New Mexico Public Service Commission authorized a rate increase of approximately $2.8 million annually. While not allowing CWIP in rate base, the order included suffi-cient revenues to recover current financing costs in the base rate.

Although the CWIP issue remains an item of con-tention, management believes that the Public Utility Commission of Texas and the New Mexico Public Ser-vice Commission have demonstrated a sensitivity to the many problems faced by the utility industry and have done a creditable job under very difficultcircumstances of balancing the needs of the shareholder with those of the consumer.

Because of the Commissions'rompt attention to this rate case, the financial integrity of the Company has been protected.

The Federal Energy Regulatory Commission au-thorized the Company to place new wholesale rates into effect, subject to refund, December 1, 1977. The issues of CWIP in rate base and return on common equity are reserved for hearing. Settlement rates resolving all out-standing issues are expected this summer.

The 1977 rate increase was only the second in the Company's history. The Company willcontinue to offer its customers a reliable source of electric energy at the lowest price consistent with providing a fair return to investors. Balancing the needs of customers and inves-tors requires the establishment of rates by regulatory authorities which are responsive to the needs of both.

Additional rate filings willbe made in 1978 because of continued higher construction and financing costs and the effects of inflation on operating expenses.

Meeting the Company's environmental obligation is an increasingly expensive undertaking. Since 1970 the Company has spent about $ 1.3 million on envi-ronmental facilities and equipment.

An environmental dispute of more than five years at the Four Corners Station moved one step closer to resolution in 1977. The New Mexico Environmental Improvement Board voted to accept a compromise proposal submitted by the plant owners and the New Mexico Citizens for Clean Airand Water to set up an air monitoring system in the high terrain near the station.

The air monitoring program will determine whether a proposed regulation calling for removal of 67.5 per cent of sulfur dioxide would be sufficient to protect the environment. Plans are for improved flyash control in all units at the mine-mouth complex, which burns low BTU coal with less than 1 per cent sulfur but with a high ash content.

Plans for Units 4 and 5 call for a battery of 8 horizontal venturi sulfur dioxide scrubbers and upgrading flyash control from 97 per cent to 99.9 per cent, with the Company's share of the expense estimated at $15 million.

EPE also expects to spend approximately $400,000 as its share of a $6.0 million program to bring the Four

Corners Station into compliance with federal clean water requirements.

The Company is in compliance with present environmental regulations applicable to its operations but expects to continue spending substantial amounts forenvironmental control measures as construction and engineering improvements are mandated by regulatory agencies.

Financing

~I sE In April, 1977, the Company received the proceeds from the sale of 100,000 shares of 8.24 per cent Preferred Stock; and a bid price of 99.501 per cent was accepted for the sale of $25 million principal amount of the First Mortgage Bonds, 8-1/2% Series. The nearly

$35 millionproceeds were applied toward the reduction of short-term indebtedness incurred as a result of the Company's construction program. An estimated $225 million in external financing will be required to finance the Company's construction program through 1980 with the balance of the required funds expected to be obtained from internal sources.

Management Changes A number of management changes occurred in 1977 including the election of the first woman to senior officer status in the Company's history.

The Board of Directors elected Mrs. Theta S. Fields as Company Secretary.

She had been assistant Secretary for three years.

Donald G. Isbell, who had been Manager of Energy Resources, was elected Vice President Energy Resource and Planning.

Board Chairman and former President and Chief Executive Officer of the Company, Dennis H. Lane, announced his retirement effective July 1, 1977. Mr.

Lane remains as a Director.

Allother Officers were reelected to their respective posts.

Martin P. Kuric, Vice President for Rates and Contracts, resigned in December to accept a position as Chief Financial Officer at Montana-Dakota Utilities effective January 1978.

Employees The employment, development and retention of qualified employees is becoming increasingly important as the production and distribution of energy increases in complexity.

At year's end there were 838 employees, a 2.7 per cent increase over 1976.

The challenges of this rapidly growing business require a highly skilled and motivated work force. In that regard the Company's training program plays an impor-tant role in the overall performance of the Company.

In order to handle better the volume of customer inquiries, a program entitled "Customer Contact for

Electric Utilities" was undertaken using modern audio-visual techniques and curriculum. Most employees who deal directly with customers had completed the course by year's end. This training, in conjunction with a direct computerized system of handling customer inquiries which became operational in 1976, is enhancing the customer contact function and improving the flow of information between the customer and the Company.

A two-year contract was signed with Local Union No. 960 of the International Brotherhood of Electrical Workers beginning March 1, 1978. IBEW represents about 40 per cent of the Company's employees.

An apprenticeship training program, recognized by the Department of Labor and the Texas Education Agency, has now been expanded to over 13 crafts. The program is administered by a joint union-management committee.

Acompany's greatest asset is its employees, a fact most clearly demonstrated at two Service Award An-niversary Banquets held in April and October where employees are honored after completing a minimum of five years of continued service. A total of 91 employees were so recognized in 1977 with service ranging from five to 40 years with a total of 1,420 years of service among them.

In addition to other employee benefits, all eligible employees may participate in the Company's Stock Purchase Plan through payroll deductions for purchase of Common Stock without commissions or brokerage fees.

In addition, the Company is proposing an Employee Stock Ownership Plan (ESOP) through which eligible employees may receive shares of Com-mon Stock at no cost to the employee or to the Com-pany. The plan will be submitted to shareholders for approval at the annual meeting in May, 1978.

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Untilnew energy sources are developed, conserva-tion is one means of dealing with the energy crisis in America. For several years the Company has been asking its customers to eliminate energy waste. In 1977, EPE formed an Energy Utilization and Conservation Department and has developed conservation manuals, allotted much of its advertising toward the need to con-serve and participates in research programs to develop more exotic means of power generation to replace oil and natural gas.

It is a multi-faceted approach.

Employees assigned to Energy Utilization are knowledgeable in modern methods of weatherizing an existing home, business or industrial plant. Upon re-quest they will perform an energy audit with an on-site inspection of a building's insulation, caulking, weath-erstripping, windows, heating and cooling methods, etc., and then recommendations are made to bring it up to an Energy Efficientstandard. Acertified listof insulat-ing contractors can be furnished on request. Once the home is retrofitted to the specifications, an Energy Effi-cient Award is presented.

A WISE (Weatherized and Insulated to Save Energy) home program has been developed for new home construction. The Energy Utilization Department Conservation, Research and Development i'~~~

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, HIKIEIIOAHOMES has developed specifications covering the areas of weatherizing needed to meet prevailing standards of energy conservation. The WISE home program is con-ducted in conjunction with area home builders.

Some advertising has been done on behalf of the Energy Efficient Home and WISE Home Programs with the inclusion of the Company's advertising slogan for the year, "Let's All Save Energy Today for a Stronger Tomorrow!"

More than 17,000 copies of the Company's booklet, "82 Ways to Help Control Your Energy Bill,"had been distributed by year's end. Billstuffers, buttons, bulletins and articles in Company publications all added to the conservation appeal.

The Company was recognized by the Federal Energy Administration in 1977 as having one of the best energy conservation action programs in the nation.

Although the only methods of providing central station electric power during the next few decades are nuclear and coal energy sources treated elsewhere in this report the Company has not ignored the more exotic fuels that may be developed in the future.

The Company is a member of the Southwest Solar Project, which is charged with developing a feasibility study of the technical, financial, regulatory and legislative factors of incorporating solar power into existing generating systems.

The study is being conducted in conjunction with the Department of Energy.

Company support of the solar heated and cooled home on the campus of New Mexico State University has been substantial.

The Company maintains membership in Western Energy Supply and Transmission (WEST) Associates, a 20-member utility organiztion that sponsors research on alternate energy sources.

EPE is also active in the Electric Power Research Institute and the Fast Breeder Nuclear Research Project.

Significant research on nuclear fusion as an energy source has been conducted by the Texas AtomicEnergy Research Foundation in conjunction with the University of Texas at Austin Engineering and Physics De-partments. EPE is one of the Texas utilities sponsoring this program.

All of these exotic sources of fuel for electric generation have yet to be proven technically and economically feasible for large-scale power generation.

When a viable plan is developed, the conversion to commercial generation could take many years.

Communications People everywhere are concerned, disturbed and frustrated over the increased cost of electricity. They are confused by the public controversy surrounding the utilityindustry, nuclear power, the relation between the industry and its customers and shareholders.

Much of the uncertainty is due to a lack of technical understanding by the news media. This state of frustration and uncertainty makes fertile political ground.

In 1977, the Company agreed to sponsor the formation of a Political Action Committee after several

employees expressed an interest in forming the organization.

Supervisory and executive personnel have submitted a statement of organization to support causes or candidates that believe in the principles of the American free enterprise system.

In order to assist better public understanding of energy economics and practical energy alternatives, the Company also organized a speakers'ureau in 1977 composed of volunteers from throughout the Company.

The participants undergo training in public speaking from professionals and are available to speak on a variety of topics.

Public awareness of the circumstances faced by EPE in providing electric energy is a continuing challenge. The Company has continued to use mass media advertising to inform its customers of energy basics and energy conservation.

The Company also organized an educational services program in 1977 in cooperation with local public schools.

This program provides teachers and students with energy-related teaching materials and classroom presentations.

R

!,l yk i".

a CONSTRUCTION PROGRAM ACTUALADDITIONS 140 120 110 ESTIMATEDADDITIONS (IN MILLIONS OF DOLLARS) 70 50 40 10 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981

Operations at a Glance OPERATING REVENUES (IN MILUONS OF DOLLARS) 0 30 1968 ~ D 1969 1970 1971 1972 1973 1974 1975 1976 1977 35 40 45 50 55 60 65 70 75 80 85 90 95 100 105 110 115 OPERATING EXPENSES (IN MILUONS OF DOLLARS) 0 25 1968 1969 1970 ~ 13 30 35 40 45 50 55 60 65 70 75 80 85 90 95 1971 1972 1973 1974 1975 1976 1977

~~n

~~~~~~~~~~~~~~O ELECTRIC PLANT (IN MILLIONS OF DOLLARS) 1969 1970 1971 1972 1973 1974 1975 1976 1977 KD~~C3

~~~~0

~~~~~~~Cl

~~~~~~~~~~~~~~~~ C3 0

120 130 140 150 160 170 180 190 200 210 220 230 240 250 260 270 280 290 300 31 0 320 330 340 1968 KWH SALES (IN MILLIONS OF DOLLARS) 0 2,000 2,100 1968 1969 1970 1971 1972 1973 1974 1975 1978 1977 2,200 2,300 2,400 2,500 2,600 2,700 2.800 2.900 3,000 3,)00 3.200 3.300 NUMBER OF CUSTOMERS (IN THOUSANDS) 0 100 105 110 115 1969 1970 197'I isn 1973 i974 1975 1976 1977 120 125 130 135 140 145 150 155 160

PEAK LOAD-KW (IN THOUSANDS) 0 400 1968 ~ Q 1969 1970 1973 1974 420 440 460 480 500 520 540 560 580 600 620 640 660 680 DIVIDENDSI SHARE (IN DOLLARS) 75

.80

.85 90

.95 1.00 0

.50

.55

.60

.65

.70 1948 1989 ~~~~~8:3 1879~~~~~~ 83 1977

\\978 1973~~~~~~C 3~85 1974~E:l~~~~~~~

1975~~~~~~~~~83 1978~~~~~~~~~~

1977~~~~~~~~~~~

WEIGHTED AVERAGEI MMBTU (IN DOLlARS) 40

.50

.60

.70

.80

.90 1.00 1.10 1.20 1.30 1.40 1.50 1.60 1.70 0

.10

.20

.30 1968 1969 ~~CD 1970 1971 ~~~0 1972 ~~~CD 1973 ~~~~ CI 1974 1975 1976 1977~~~~~~~~~~~~~~~~~

NUMBER OF SHAREHOLDERS.

COMMON (IN THOUSANDS) 11 12 13 14 15 16 17 18 19 20 0

6 7

8 9

10 1968 1969~~~~~8 1970 1971 1972 ~~~~~~EI 1973 1974 ~~~~~~~CI 1975~~~~~~~~~ I 1978 1977 ~~~~~C IC IC II IC IL'C II II:III GENERATING MIX (IN PERCENTAGES) 0 4

1972 1973 11174 1975 7978 1977 1979 8

12 16 20 24 28 32 36 40 44 48 52 56 60 64 68 72 76 80 84 88 92 96 100n COAL~

GAS~

OIL~

Service Area El Paso Electric is an investor-owned electric utility operating in a two state area, Texas and New Mexico, principally engaged in the generation, transmission, distribution and sale of electric energy. The Company serves approximately160,000 customers in West Texas and South Central New Mexico in a service area of about 10,000 square miles. The area extends from the Caballo Dam in New Mexico southeasterly to Van Horn, Texas.

HATCH NEW MEXICO TO WEST MESA ELEPHANT 8UT'IE Irr To WEST MESA DAM CARALLO ALAMOOORDO I~HOLLOMAN I

,I WHITE err SANDS Ci lAS CRVCE

~08 ARROyO

~ SVRSTA'IION/

+ QR / +P M< GREGOR

)as a

~8RL +

ANTHONY NEWMAN STATION I

UTAH r

r rrrorr I

CA" O+ I

~o OO COLORADO 0

O NEW MEXICO AO Iel FOUR CORNERS STATION Ao Jp 4~

P Oo O~4F'C WEST MESA 8

(ALEVOVEROVE) 8 8

To ELEPHANT EUTTE DAM 8

To El PASO RID GRANDE STATION CIVDAD JVAREZ MEXICO

~~i COMPAHY LINES

~ ~ Rsaa COMPANY 345 KV LINE OTHER SYSTEMS lSI POWER STATIOHS EL PASO TEXAS

+~R~SE FARE NS

~Cy 04r m4C4'

Operating Revenues Total operating revenues for 1977 were

$112,339,000, an increase of$1,151,000 or 1.0 per cent over 1976. Residential revenues increased by 9.8 per cent, large commercial and industrial 12.5 per cent, and sales to public authorities increased 21.7 per cent.

Decreases were experienced in small commercial and industrial revenue of 0.1 per cent and in sales for resale of 62.9 per cent due to the termination on March 31, 1977, of sales to the Comision Federal de Electricidad which supplies the city of Juarez, Mexico. Operating revenues include $28,156,000 from the application of the fuel adjustment clause during 1977.

FlNANCIAL INFORMATION Where the revenue dollar came from:

Residential

.30 Commercial and industrial ~ large.16 Sales for resale

.04 Sales to ublic authorities.19 Commercial and industrial, small.30 Operating Expenses Fuel expense for 1977 was $59,442,000 which represents an increase of $6,288,000 or 11.8 per cent.

Operation, purchased and interchanged power, and maintenance expenses of $ 16,685,000 decreased 7.1 per cent from 1976.

Other.01 Earnings and Dividends Net income for 1977 was $11,422,000, a decrease of $94,000 compared with 1976. After provision for preferred dividends of $2,037,000, the net income remaining for common stock was

$9,385,000, equivalent to $1.11 per share compared with $ 1.29 per share in 1976. The weighted average number of shares increased in 1977 8.8 per cent over 1976. Dividends paid during 1977 totaled $0.99 per share of common stock which was paid on the basis of $0.24 in March and

$0.25 in June, September and December.

Dividends paid during 1976 totaled $0.95 per share of common stock which were paid on the basis of $0.23 per share in March and $0.24 in June, September and December.

Where the revenue dollar went:

Financing At the beginning of 1977 there were outstanding short-term bank loans and commercial paper of

$25,700,000. At the end of the year short-term bank loans and commercial paper totaled $36,165,000.

During 1977, the Company sold 100,000 shares of

$8.24 dividend preferred stock and $25,000,000 of 8-1/2~/o First Mortgage Bonds with proceeds of approximately

$9,832,000 and

$24,875,000, respectively.

These funds were used to pay off short-term notes and for general corporate purposes, including the financing of the Company's construction program.

Reinvested earnings.01 Other operating expenses

.1 3 Dividends.09 Taxes.11 Fuel expense

.53 Depreciation.06 Interest expense.07

EL PASO ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENT OF INCOME Years ended December 31 Operating revenues Operating expenses (Note L):

Fuel Purchased and interchanged power Operation Maintenance Depreciation (Note B)

Taxes (Note I):

Federal income, current Federal income, deferred Charge equivalent to investment tax credit, net of amortization Other 59,442

(

1,947) 13,984 4,648 6,498 20 2,635 53,154 788 12,248 4,918 6,233 2,975 3,020 1,894 2,147 7 828 7 585 95 002 93 068 1977 1976 (Thousands of Dollars)

~112 339

~111 188 Operating income 17 337 18 120 Other income:

Allowance for other funds used during construction (Note K)

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

Income before interest charges.

Interest charges:

Interest on long-term debt Other interest Allowance for borrowed funds used during construction (Note K)

Net income Preferred dividend requirements (Note E) 1,600 162

~73 1 689 19 026 8,161 1,554 2 111 7 604 11,422 2 037 786 100

~48 838 18 958 6,719 1,611

~888 7 442 11,516 1 481 Net income applicable to common stock (Note F)

Earnings per share of common stock (Note F)

Weighted average number of common shares outstanding

~9385 ~10 035 8 488 340 7 800 143 The accompanying notes are an integral part of the financial statements.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED BALANCESHEET December 31 ASSETS 1977 1976 (Thousands of Dollars)

Utilityplant:

Electric plant (Notes B and G)

Accumulated provision for depreciation

$338,598

~61 451

$274,502

~55 060 277 147 219 442 Nonutility property, at cost Current assets:

Cash (Note H)

Restricted cash (Note C)

Accounts receivable (less allowance for doubtful accounts of $260,000 and $287,000, respectively)

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

Prepayments Deferred fuel costs (Note D)

Other 24 4,347 6,600 14,383 4,027 2,618 6,202 1,516 7,234 837 24 3,004 14,799 2,034 2,712 8,267 1,289 5,340 47 764 37 445 Deferred charges and other assets:

Restricted cash (Note C)

Unamortized debt expense Other 4)000 662 1 313 453 1 043 LIABILITIESAND SHAREHOLDERS'QUITY 5975 1 496 I330 910

$258 407 Shareholders'quity:

Preferred stock, cumulative, no par value, 1,000,000 shares authorized, issued and outstanding 290,000 and 190,000 shares, respectively (Note E)

Common stock, no par value, 15,000,000 shares authorized, issued and outstanding 8,536,818 and 8,448,767 shares, respectively (Note F)

Unamortized capital stock expense Retained earnings (Note G)

$ 28,873 41,064

(

496) 39 056

$ 19,041 40,033

(

437) 38 132 Long-term debt (Note G)

Long-term purchase commitment (Note C) 108 497 96 769 122 171 92 290 6 600 Current liabilities:

Notes payable to banks (Note H)

Commercial paper (Note H)

Fuel purchase commitment (Note J)

Accounts payable Customer deposits Taxes accrued (Note I)

Deferred income taxes (Note I)

Interest accrued Other 10,865 25,300 6,100 9,805 1,997 4,287 3,875 2 322 777 3,500 22,200 5,113 1,693 6,756 2,563 1,759 703 65 328 44 287 Deferred credits and other liabilities:

Accumulated deferred federal income taxes (Note I)

Accumulated deferred investment tax credit (Note I)

Customer advances for construction and other Commitments and contingencies (Notes J and L)

The accompanying notes are an integral part of the financial statements.

16,644 11,265 405 28,314

$330 910 15,321 9,383 357 25,061 S258 407

EL PASO ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENT OF SHAREHOLDERS'QUITY (Dollar Amounts in Thousands)

Balance at December 31, 1975 Net income for the year ended December 31, 1976 Amortization of capital stock expense Cash dividends:

Preferred Common ($0.95 per share)

Sale of shares to employee stock purchase plan participants Sale of shares to dividend reinvestment plan participants Sale of common stock Additions to capital stock expense Balance at December 31, 1976 Net income for the year ended December 31, 1977 Amortization of capital stock expense Cash dividends:

Preferred Common ($0.99 per share)

Sale of shares to employee stock purchase plan participants Sale of shares to dividend reinvestment plan participants Sale of preferred stock Additions to capital stock expense Balance at December 31, 1977 Preferred Stock Common Stock Shares 190,000 Dollars

$19,041 Shares Dollars 7,396,165

$28,646 9,437 86 43,165 1,000,000 491 10,810 190,000 19,041 8,448,767 40,033 8,967 96 100,000 9,832 79,084 935 290 000

$28 873 8 636 818

$ 41 064 Unamortized Capital Stock E~xenee 48 485

( 437) 56 496 Retained Earnin<as

$35,667 11,516

(

48)

(

1,481)

(

7,522) 38,132 11,422

(

56)

( 2,037)

( 8,405) 39 056 The accompanying notes are an integral part of the financial statements.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN FINANCIALPOSITION Years ended December 31 1977 1976 (Thousands of Dollars)

Source of funds:

From operations:

Net income Items not requiring (providing) working capital:

Depreciation Deferred federal income tax Investment tax credit Allowance for other funds used during construction Other Funds provided by operations Sale of preferred stock Sale of common stock Sale of first mortgage bonds Sale of pollution control bonds Long-term purchase commitment

$11,422 6)682 1 )323 1,894

(

1,600) 308 20)029 9,832 1)031 25,000 5,000 6 600

$11,516 6,366 1,962 2,147

(

786) 297 21,502 11,387 67 492 32 889 Application of funds:

Gross additions to plant Reclassification of prepayments to electric plant Allowance for other funds used during construction Increase in restricted cash Dividends on preferred stock Dividends on common stock Reduction of long-term debt Other 64,747

(

1,600) 4)000 2,037 8,405 625 23,967 1,492

(

786) 1,481 7,522 817 787 78 214 35 280 Decrease in working capital Increase (decrease) in components of working capital:

Current assets:

Cash Restricted cash Accounts receivable Federal income taxes refundable Materials and supplies Fuel Prepayments Deferred fuel costs Other 10 722

$ 1,343 6,600

(

416) 1)993

(

94)

(

2,065) 227 1,894 837 2 391

($ 1,282) 844

(

2,783)

(

379) 1,565

(

1,156) 2,204 10 319

~98 Current liabilities:

Notes payable Commercial paper Current installments of long-term debt Fuel purchase commitment Accounts payable Customer deposits Taxes accrued Deferred income taxes Interest accrued Other 7,365 3,100 6,100 4,692 304

(

2,469) 1 312 563 74

(

5,200) 7,200

(

6,000) 1,252 45 3,460 1,058

(

150)

~261 21 041 1 404 Decrease in working capital The accompanying notes are an integral part of the financial statements.

10 722 2 391

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) (formerly the Federal Power Commission).

Principles of Consolidation The consolidated financial statements include El Paso Electric Company and its wholly-owned subsidiary, Franklin Land & Resources, Inc., which was organized in 1977.

All intercompany balances and significant intercompany transactions have been 'eliminated in consolidation.

UtilityPlant Utilityplant and equipment are stated at original cost.

The company provides for depreciation 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 recorded cost of depreciable plant retired or sold, and the cost of removal, less salvage, is charged to accumulated provision for depreciation.

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

Unamortized Capital Stock Expense Unamortized amounts apply to outstanding issues and are being charged to retained earnings over a ten-year period.

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

Deferred Fuel Costs Fuel costs in excess of base rates provided for by fuel adjustment clauses in applicable authorized rate schedules are deferred until the related revenues are billed which is usually in the first or second month after the costs are incurred.

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 and amortization of emergency facilities are used for federal income tax reporting purposes which differs from the methods used forfinancial reporting purposes. Differences in the tax and financial methods of accounting forfuel costs B. UtilityPlant:

Electric plant consisted of the followingat December 31 (amounts in thousands):

1977 1976 50 50 130,216 128,714 30)629 30,150 84)699 79,801 8,468 8,143 Intangibles Production Transmission Distribution General Plant held for future use Construction work in progress Nuclear fuel in process Total 397 397 24,928 79,762 4 377 2 319

$274 502 338 598 Total depreciation was approximately $6,734,000 in 1977, and $6,403,000 in 1976, of which approximately

$236,000 and $170,000, respectively, was applicable to transportation equipment and has been charged to other accounts.

The average annual depreciation rate used by the 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 does not provide deferred taxes on certain other differences between financial and tax reporting since such differences are not approved as an expense in rate of return computations by regulatory authorities.

Accordingly, income taxes deferred to future years related primarily to allowance for funds used during construction and other depreciation methods have not been recognized in the financial statements.

Investment tax credits are being deferred and amortized to income over the estimated service lives of the related properties.

Pension Plan The company has a noncontributory retirement annuity plan (future participation terminable at any time) under a group annuity contract. The pension plan provides annual pensions for regular employees with more than one year of

service, which together with social security benefits, approximate 70'/o of average annual earnings during the period of employment. The company's policy is to fund pension costs accrued.

Prior service costs are being amortized over a thirty-year period beginning in 1972 and are included in the determination of annual expenses.

Earnings Per Common Share Earnings per common share are computed using the w'eighted average number of common shares outstanding during the year. Common equivalent shares related to the amended employee stock purchase plan are not significant.

company for the years ended December 31, 1977 and 1976 was 2.68.

C. Restricted Cash:

The company entered into a long-term utility plant purchase commitment with a trust, whereby the company will sell a turbine (currently held in construction work in progress) to the trust for an amount equal to its cost. For financial reporting purposes, debt incurred by the trust is assumed to have been incurred on behalf of the company.

Accordingly, the balance sheet at December 31, 1977, includes funds borrowed by the trust in the amount of

$6,600,000 to be used to acquire the turbine from the company upon FERC approval of the transaction.

The amount has been reflected as restricted cash and long-term purchase commitment in the financial statements.

Issue 15,000 shares,

$4.50 dividend 15,000 shares,

$4.12 dividend 20,000 shares,

$4.72 dividend 40,000 shares,

$4.56 dividend 100,000 shares,

$10.75 dividend 100,000 shares,

$8.24 dividend Stated Value 1977 1976 Caii Price Per Share at Dec. 31 1977 1,506 2,001 4,000 1,506 103.98 2,001 104.00 4,000 101.00 10,000 10,000 110.75 8 832 328 873 319 041 107.52

$ 1,534

$ 1,534

$109.00 The company has approximately $4,000,000 in other restricted cash at December 31, 1977, which represents a portion of the proceeds from pollution control revenue bonds issued in November 1977. The funds will be withdrawn from the escrow account as qualified construction expenditures for pollution control facilities are made.

D. Deferred Fuel:

In October 1977, the Public UtilityCommission of Texas ordered the company to discontinue deferring the collection of fuel costs in Texas. Accordingly, the company began estimating and billing fuel costs related to Texas customers, beginning in December 1977. The company will be allowed to recover the existing deferred fuel costs at December 31, 1977 related to Texas customers (approximately $5,800,000) ratably over a twelve-month period in the form of a fuel surcharge.

E. Preferred Stock:

On April20, 1977, the company sold 100,000 shares of preferred stock with an annual dividend rate of $8.24. The new preferred shares have no provision for a sinking fund.

The shares are callable; however, no optional redemption of the shares may be made priorto April1, 1982, directly or indirectly as part of, or in anticipation of, any refunding involvingthe issue of indebtedness, preferred stock, or any other stock having aninterest or dividend cost less than the effective dividend cost of the $8.24 preferred stock.

All preferred stock is callable and upon voluntary redemption or voluntary liquidation of the company is redeemable at the current call price plus accrued dividends.

The premiums reflected in the current redemption prices continue to decrease, ultimately resulting in redemption at par. Allseries are redeemable at

$100 per share plus accrued dividends upon involuntary liquidation. Following is a summary of the shares out-standing at December 31, 1977 and 1976 (amounts in thousands):

The $10.75 preferred shares are entitled to the benefits of a sinking fund whereby on January 1 of each year, beginning with the year 1980, the company will redeem 4,000 shares annually at the sinking fund redemption price of $ 100.00 per share plus accrued dividends. Sinking fund requirements are cumulative and in the event they are not satisfied at any redemption date, the company is restricted from paying any dividends (other than dividends in common stock or other class of stock ranking junior to the 23 preferred stock as to dividends and assets) on common stock. The $10.75 preferred shares are callable; however, no optional redemption of the shares may be made prior to January 1, 1985, as a part of, or in anticipation of, any refunding involving the issue of preferred stock or any other stock having an effective dividend cost of less than 10.75/o per annum.

F. Common Stock, Employee Stock Purchase Plan and Dividend Reinvestment and Stock Purchase Plan:

In February 1978, the company issued 1,500,000 shares of common stock. Assuming the shares had been issued and outstanding on January 1, 1977, and the proceeds of $17,208,000 had been used to retire short-term debt, the pro forma net income applicable to common stock would have been approximately

$9,877,000 and the pro forma net income per share of common stock would have been $.99 for the year ended December 31, 1977. The pro forma weighted average number of common shares outstanding would have been 9,988,340.

Under a shareholder approved employee stock purchase plan qualified employees may purchase shares of the company's common stock at two specified dates each year for a period ending no later than June 30, 1979.

The purchase price is 90/o of the average bid price of the stock at the option dates. During 1977 and 1976, 8,967 and 9,437 shares, respectively, of common stock were purchased at total prices of $95,986 and $86,089, respectively, with corresponding fair market values at the purchase dates of $106,290 and $103,086, respectively.

24 First mortgage bonds:

2-7/8% Series, due 1980 3-1/8% Series, due 1984 4-1/4% Series, due 1988 4-5/8% Series, due 1992 6-3/4% Series, due 1998 7-3/4% Series, due 2001 9%

Series, due 2004 10-1/2% Series, due 2005 8-1/2% Series, due 2007 S

4,500 4,950 6,100 10,385 15,800 15,838 20,000 15,000 25 000 S 4,500 4,950 6,100 10,385 15,800 15,838 20,000 15,000 S100.40 101.25 102.40 102.83 104.66 107.08 107.63 110.63 108.75 4-1/4% pollution control revenue bonds, 1977 Series A, due 1979 Unamortized premium and discount 117,573 92,573 5,000

~402

~2$ 3

$122 171

$92 290 The company's first mortgage provides for sinking and improvement funds which require the company to make annual payments to the trustee equivalent to 1%

($1,185,000 at December 31, 1977) of the greatest aggregate principal amount of bonds of the respective series outstanding at any one time prior to a specified date preceding the sinking fund payment date, with certain allowable credits. The company has generally satisfied these requirements in past years by relinquishing the right to use a net amount of additional property forthe issuance of bonds or purchasing bonds in the open market and expects to continue such practices in 1978.

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.

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

In accordance with certain provisions of the indenture covering the first mortgage bonds, payments of cash dividends on common stock are restricted to an amount At December 31, 1977, 84,715 shares were reserved for future purchases under the plan. Proceeds from purchases are credited to common stock and no charges are reflected in income with respect to the plan.

Effective June 1976, the company instituted 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. Since inception of the plan, a total of 122,249 shares of common stock have been purchased for shareholders who have reinvested dividends and cash in the amount of

$1,426,500. At December 31, 1977, 627,751 shares were reserved for future purchases under the plan. The purchase price is the average of the last bid and asked price at the purchase date.

G. Long-Term Debt:

Outstanding long-term debt at December 31, 1977, and 1976, is as follows (amounts in thousands):

Redemption Price at 1977 1976 0ee.31 1977 equal to retained earnings accumulated after December 31, 1966, plus $4,100,000.

The calculation of retained earnings available for dividends under the indenture of mortgage includes a "minimum provision fordepreciation" amount (15% of operating revenues less certain credits and deductions) which was in excess of actual depreciation expense in 1977 and 1976, which has the effect of reducing the amount of retained earnings available fordividends. Retained earnings in the amount of approximately

$6,500,000 is unrestricted as to the payment of cash dividends at December 31, 1977.

H. Notes Payable to Banks and Commercial Paper:

Short-term notes payable at December 31, 1977, consisted of $25,300,000 of commercial paper with a weighted average discount rate of 6.5% and $10,865,000 of notes payable to banks witha weighted average interest rate of 6.4%. Short-term notes payable at December 31, 1976, consisted of $22,200,000 of commercial paper with a weighted average discount rate of 5% and $3,500,000 of notes payable to banks with a weighted average interest rate of 6.4%.

The company has informal lines of credit with various lenders whereby the lenders have agreed to provide specified maximum amounts as a temporary source of funds for its capital program.

Certain of these arrangements provide for the maintenance of compensating balances of 10% of the available lines of credit and 10% of the loans outstanding. At December 31,

1977, the lines of credit available under these arrangements totaled $51,600,000 and approximately

$1,300,000 of the company's cash at that date was maintained as compensating balances.

The maximum and average amounts of aggregate short-term borrowings outstanding at any month-end during the year ended December 31, 1977, were

$36,750,000 and $23,598,000, respectively, and for the year ended December 31, 1976, were $28,000,000 and

$24,210,000, respectively. The weighted average interest rate was 5.5% and 5.9% during the years ended December 31, 1977 and 1976, respectively, and was calculated by dividing actual interest expense by the average aggregate month-end balances outstanding during the related period.

In November 1976, the Federal Power Commission authorized the company to issue short-term promissory notes to commercial banks in an amount not to exceed

$100,000,000 outstanding at any one time. The final maturity date on the notes is to be no later than December 31, 1978. The interest rates on the notes are to be at the prime rate in effect at the time of issuance, plus in some cases, provisions for compensating balances of 20%. The net proceeds from the issuance of the notes are to be used for construction expenditures.

Commercial paper in an amount not exceeding 25% of operating revenues for the preceding twelve months may be issued in place of notes.

I. Federal Income Taxes:

The provision for deferred federal income tax, which arises from timing differences between financial and tax reporting, is comprised as follows for the years 1977 and 1976 (amounts in thousands):

Tax effect of:

Excess of accelerated tax depreciation over straight-line tax depreciation Deferred fuel costs Amortization of deferred income tax related to emergency facilities Other 1977 1976

$1,599

$1,893 909 1,058

(

111)

(

111) 238 180

~2635 33 020 Tax computed at statutory rate on book income before tax Increases (decreases):

Allowance for funds used during construction Excess of straight-line tax depreciation over book depreciation Amortization of accumulated investment tax credit

Other, Total income tax expense Effective federal income tax rate

$7,701

$9,255

( 1,781)

(

599)

(

707)

(

649)

(

297)

(

260)

~294 17

~4622

~7764 28.8%

40.3%

Total federal income tax expense is comprised as fol-lows (amounts in thousands).

1977 1976 Federal income tax, current Income taxes associated with other income Income tax credits included in the allowance for borrowed funds used during construction 20

$2,975 73 48 426 Federal income tax currently payable Deferred federal income tax Deferred investment tax credit Amortization of deferred investment tax credit 93 2,635 2,191

{

297) 4 622 2,597 3,020 2,407 260 7 764 J. Commitments and Contingencies:

The company is committed at December 31, 1977, in the amount of approximately $731,000,000 for a 15.8%

Federal income tax provisions for the years ended De-cember 31, 1977, and 1976 are less than the amounts computed by applying the statutory rate (48%) to book income before tax. Details are as follows (amounts in thousands):

1977 1976 interest in the construction of three units of a nuclear power plant (expected to be completed in 1986), related transmission

lines, and nuclear

fuel, including approximateiy $161,000,000 of estimated allowance for funds used during construction. In addition, the company is committed at December 31, 1977, in the amount of approximately $27,000,000 for construction of pollution control facilities and a transmission line, including approximately $3,000,000 of estimated allowance for funds used during construction.

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 sheet at December 31,

1977, includes approximately $6,100,000, recorded as fuel and fuel purchase commitment, reflecting the company's commitment to purchase the trust's fuel oil inventory as of December 31, 1977.

K.Allowance for Funds Used During Construction The applicable Regulatory Uniform System of Accounts defines "allowance for funds used during construction"

("AFUDC") as an amount which includes the net cost during a period of construction of borrowed funds used for construction purposes plus a reasonable rate on other funds when so used. While AFUDC results in a current increase in utility plant for ratemaking purposes and represents, in this fashion, current compensation for the use of capital devoted to construction, AFUDC is not an item of current cash income. AFUDC is realized in cash after the related plant is placed in service through the allowance for depreciation charges based on the total cost of the plant, including AFUDC.

The amount of AFUDC is determined by applying an accrual rate to the balance of certain utilityplant additions.

The company uses an accrual rate of 7-1/2%, which represents the accrual rate approved by state and local regulatory authorities having primary jurisdiction over the company's rates.

In this connection, the FERC promulgated procedures forthe computation (a prescribed formula) of the accrual rate which were effective January 1, 1977. The 7-1/2% accrual rate being used by the company during 1977 is less than the rate permitted under the prescribed FERC formula.

Effective January 1, 1977, the FERC also revised its Uniform System of Accounts in connection with the classification of AFUDC. Accordingly, AFUDC is presented in the statements of income as "allowance for other funds used during construction" and "allowance for borrowed funds used during construction."

The presentation of AFUDC in the income statement for the year 1976 has been reclassified to effect this change.

In 1976 the income tax effect of the borrowed component of AFUDC was allocated in the income

1977 Net Income Applicable Operating Operating operating Net to Common Re e

~E*

t t ee e

et k

Net Income Per Common Share 1st quarter

$28,134 2nd quarter 26,841 3rd quarter 31,183 26 4th quarter 26,181 1976

$23,943 22,426 25,987 22,646

$4,191

$2,613

$2,242

$.27 4.415 2,753 2,240

.26 5,196 3,711 3,135

.37 3,535 2,345 1,768

.21 1 st quarter 2nd quarter 3rd quarter 4th quarter 24,399 28,396 32,036 26,357 20,494 23,703 26,348 22,523 3,905 2,248 1,878

.25 4,693 2,794 2,424

.33 5,688 4,017 3,647

.46 3,834 2,457 2,086

.25 N. Replacement Cost Information (Unaudited):

The impact of inflation experienced in recent years has resulted in replacement costs of productive capacity that are significantly greater than the historical costs of such assets reported in the company's financial statements.

The company's abilityto maintain its productive capacity in the future will be contingent upon its ability to finance the needed additions. This, in turn, will depend on the com-pany's ability to obtain adequate and timely rate relief. The company retained Stone 8 Webster Appraisai Corporation of Boston, Massachusetts

("Stone 8 Webster Appraisal" )

to determine the approximate replacement cost of the company's productive capacity.

The replacement cost information does not purport to represent the current value or reproduction costs of the assets or the amounts which could be realized ifthe assets were sold. Rather, replacement cost generally represents the estimated amount that would be required to replace, at today's prices, the productive capacity of certain of the company's existing assets with assets of a modern type including additional pollution control equipment presently required under environmental regulations. Such replace-ment would result in changes in fuel, operation and maintenance cost which are not reflected in the data sub-mitted.

statement which has the effect of increasing both current operating income taxes and allowance for borrowed funds used during construction by the same amount. The allocation of the income tax effect was not made during the year 1977. The treatment of the income tax effect in relation to AFUDC in the two periods reflects the methods by which the company's electric rates have been determined by state and local regulatory authorities.

L. Pension Plan:

The company had pension expense in the years ended December 31, 1977 and 1976 of approximately $560,000 and $490,000, respectively, after reflecting dividends earned by its pension fund. The assets of the pension fund exceeded the vested benefits at December 31, 1977. The unfunded prior service benefits were estimated to be approximately $3,483,000 as ofJune 30, 1977 which is the date of the most current actuarial valuation.

MeQuarterly Financial Summary:

The following table sets forth the quarterly financial summary of the company for the years ended December 31, 1977 and 1976.

(In thousands of dollars except for per share data)

AII uarterl data is unaudited Plant investment subject to replacement disclosure" Accumulated depreciation Net plant investment Depreciation expense for the year ended December 31, 1977

$709,300

$338,598 151 640 61 451

~557 460

$277 147

$ 15 136

~6734 The replacement costs reflected in the table below were determined on the basis of replacing existing capacity (which uses gas, oil and coal as fuels) with capacity fueled by oil and coal. Due to pending federal legislation in con-nection with a national energy policy, replacement of exist-ing capacity with capacity fueled by oil may no longer be a viable alternative. To the extent existing capacity must be replaced by capacity using coal or nuclear fuel, replace-ment costs could be expected to increase substantially.

The difference between historical and replacement cost of net plant investment does not represent additional book value for the company's common stock; instead, it indi-cates the capital funds (in excess of booked depreciation and other prior capital provisions) that may have to be provided to replace existing service capacity of the plant of the company.

The company's business is subject to the jurisdiction of regulatory commissions in the determination of fair rates of return on its investment in utility plant. Under current ratemaking policy, the company recovers, through future depreciation charges, the historical dollars invested in pro-ductive capacity. The ratemaking process does not allow the company to recover the excess of replacement cost over historical cost. However, at such time as amounts are actually expended to replace existing assets, such amounts willbe considered in determining the company's rate base for purposes of ratemaking.

The company believes that the difference between de-preciation based on historical cost and depreciation based on estimated replacement cost, which difference is not deductible in determining income tax expense, is not truly an additional amount of depreciation expense. Rather, it is a measure of the extent to which the company should be making provision in the current year for replacement of its existing plant, assuming no growth in demands forservice and no further inflation in costs.

The consolidated replacement cost information on a comparative basis with historical cost is shown in the tabu-lation below for the year ended December 31, 1977 and 1976 (amounts in thousands):

1977 Estimated Actual Replacement Historical Cost Cost

Plant investment subject to replacement disclosure*

Accumulated depreciation Net plant investment Depreciation expense for the year ended December 31, 1976 1976 Estimated Actual Replacement Historical Cost Cost

$601,400

$274,502 128 458 55 060

~472 942

$219 442

$ 13 794 3

6 403

• Amounts exclude nonutility plant of approximately

$24,000 in 1977 and 1976 and include land, intangible assets and construction work in progress at original cost of approximately $86,700,000 in 1977 and $29,400,000 in 1976.

27 To the Shareholders and Board of Directors El Paso Electric Company:

We have examined the consolidated balance sheet of El Paso Electric Company, Inc. and Subsidiary at December 31, 1977 and 1976, and the related consolidated state-ments of income, shareholders'quity and changes in fi-nancial position for the years then ended. Our examina-tions were made in accordance with generally accepted auditing standards and accordingly included such tests of the accounting records and such other auditing proce-dures as we considered necessary in the circumstances.

In our opinion, the aforementioned consolidated finan-cial statements present fairly the consolidated financial position of EI Paso Electric Company, Inc. and Subsidiary at December 31, 1977 and 1976, and the consolidated results of operations and changes in financial position for the years then ended, in conformity with generally ac-cepted accounting principles applied on a consistent basis.

OPINION OF INDEPENDENT ACCOUNTANTS COOPERS & LYBRAND Dallas, Texas February 27, 1978

EL PASO ELECTRIC COMPANY

SUMMARY

OF OPERATING DATA 1977 1976 1975 28 Population served at retail, estimated (a)

Number of customers:

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

Steam Purchased and interchanged Total (b) (c)

Sales of electricity, thousands of dollars:

Residential Commercial and industrial, small Commercial and industrial, large Other Total Sales, thousand kilowatt-hours:

Residential Commercial and industrial, small Commercial and industrial, large Other Total (b) (c)

Average annual use per residential customer, kwh Average annual revenue per residential customer Average revenue per kwh sold, cents:

Residential (d)

Commercial and industrial, small (d)

Commercial and industrial, large (d)

Average revenue per kwh; total sales (d)

Electric line, pole miles:

Over 15,000 volts Less than 15,000 volts (e)

Total 532,000 143,645 14,518 46 1,715 159,924 657,000 3,475,753

(

3,574) 3)472,179 34,484 33,583 17,666 25,581 111,314 874,140 902,699 617,955 847,930 3)242,724 6,261 246.99 3.94 3.72 3.47 3.45 1,811 2,755 4,566 520,000 505,000 135,344 14,203 39 1,748 151,334 677,000.

130,010 13,294 32 1,663 144,999 640,000 3,501,416 51,013 3,433,698 15,837 31,415 33,628 15,709 29,537 27,080 28,870 11,816 22,880 816,169 929,556 582,125 1,030,812 782,285 909,967 513,637 1,006,311 3,358,662 3,212,200 6,193 6,097 238.36 211.04 3.85 3.62 2.70 3.30 3.46 3.17 2.30 2.82 1,759 2,727 4,486 1,706 2,691 4,397 110,289 90,646 Total employees 838 81.6 778 (a) Restated as a result of 1970 census.

(b) Differences between total output and total sales represent company use and losses.

(c) In addition to the company's 345 kv transmission line between El Paso and Albuquerque, the company system is interconnected at Las Cruces, New Mexico, with Public Service Company of New Mexico, Community Public Service Company, Plains Electric Generation and Transmission Cooperative, Inc., and Elephant Butte Generating Station through the facilities of the United States Bureau of Reclamation under a pool agreement.

(d) Includes adjustments under existing fuel clauses.

(e) Includes small amount of line on poles owned by telephone company.

1974 495,000 1973 485,000 1972 475,000 1971 465,000 1970 450,000 1969 435,000 1968 423,000 126,760 13,163 29 1,545 141,497 638,000 123,653 12,816 27 1,445 137,941 618,000 119,170 12 333 27 1,351 132,881 543,400 114,640 11,666 23 1 255 127,584 500,700 110,308 11,279 21 1 228 122,836 469,100 107,284 11,129 19 1 188 119,620 448,300 104,708 11,063 18 1 129 116,918 400,200 3,369,606

(

13,709) 3,355,897 3,450,021

(

180,767) 3,269,254 3,075,013 112,435 2,962,578 2,705,160 43,37 2,661,785 2,506,048 360 2,506,408 2,460,571 536 2,461,107 2,166,682 3,194 2,169,876 20,126 19,192 7,824 15,595 16,749 14,942 6,061 11,416 15,133 12,948 5,231 9,696 14,081 11,515 4,517 8,565 13,099 10,336 4,194 8,155 12,535 9,739 3,411 8,004 11,423 8,970 3,068 7,041 62,737 49,168 43,008 38,678 35,784 33,689 30,502 765,636 853,960 508,482 980,175 3,108,253 6,116 755,701 799,997 536,754 958,252 3,050,704 6,211 694,855 696,584 487,945 853,978 2,733,362 5,948 643,313 610,876 440,568 758,769 2,453,526 5,718 598,240 540,529 426,177 763,597 2,328,543 5,499 571,454 526,275 374,694 836,802 2,309,225 5,391 160.72 137.59 129.53 125.16 120.39 118.25 518,763 469,953 330,097 29 706,286 2,025,099 5,026 110.68 2.63 2.25 1.54 2.02 2.22 1.87 1.13 1.61 2.18 1.86 1.07 1.57 2.19 1.89 1.03 1.58 2.19 1.91

.98 1.54 2.19 1.85

.91 1.46 2.20 1.91

.93 1.51 1,647 2,673 4,320 726 1,581 2,616 4,197 704 1,539 2,565 4,104 659 1,503 2,507 4,010 1,442 2,457 3,899 629 1,343 2,394 3,737 637 1,055 2,356 3,411 621

EL PASO ELECTRIC COMPANY

SUMMARY

OF OPERATIONS (Thousands of Dollars) 12 Months Ending December 31 Operating revenues Fuel Operation and maintenance Depreciation (a)

Taxes Other income 1977 1976 59,442 16)685 6)498 12)377

(

1,689) 53,154 17,954 6,233 15,727

(

838) 93,313 92,230

$112,339

$111,188 1975 91,461 44,714 14,516 5,506 11,197

(

1,423) 74,510 Income before interest charges Total interest charges 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 Earnings 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 (b);

Net income applicable to common stock Earnings per share Dividends paid per share on common stock Electric plant 19,026 7,604 11,422

$ 11,422 1.11

.99

$338,598 18,958 7,442 11,516

$ 11,516 1.29 1.29

.95

$274,502 16,951 6,853 10,098

$ 10,098 1.30 1.30

.91

$250,375 (a) Does not include depreciation on automobiles and trucks, which was allocated to other accounts.

(b) The effect of the accounting change in years prior to January 1, 1971, is not significant.

1974 1973 1972 1971 1970 1969 1968 63,072 49,483 43,284 38,919 36,026 33,933 30,695 24,914 11,463 4,345 9,809

(

770) 15,766 8,160 4,102 9,573

(

84) 10,951 8,101 3,776 9,279

(

668) 8,974 7,717 3,509 8,151

(

699) 7,330 7,149 3,256 8,194

(

393) 6,525 6,578 2,936 8,639

(

621) 5,817 6,184 2,654 7,862

(

814) 49,761 37,517 31,439 27,652 25,536 24,057 21,703 13 311 5,280 11,966 3,962 11,845 3,591 11,267 3,450 10,490 3,073 9,876 2,768 8,992 2,290 8,031 8,004 8,254 7,817 7,417 7,108 6,702 988 9,019 8,004 8,254 7,817 7,417 7,108 6,702 1.19 1.19 1.22 1.16 1.10 1.05

.98

.15 1.34 1.19 1.22 1.16 1.10 1.05

.98 8,270 1.29 8,035 1.25 7,481 1.17

.88

$227,196

.86

$185,058

.83

$174,485

.80

$166,275

.76

$150,859

.72

$143,350

.68

$134,095

EL PASO ELECTRIC COMPANY AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSISOF THE CONSOLIDATED STATEMENT OF INCOME The factors discussed below, which may not be indica-tive of future operations or earnings, have had an effect upon the Company's results ofoperations during 1976 and 1977.

Operating Revenues Following is an analysis of the changes in operating revenues for the two years ended December 31, 1977 (in thousands):

1976 Increase 1977 Increase Over 1975 Over 1976 1975 1976 Dollars Per Cent 1977 Dollars Per Cent Total Operating Revenues Increase caused by:

Base Rate Increase:

$91 461

~111 188

~19 727 21.6%

~112 339

~1151 1.0%

Volume Price Fuel Adjustments Total Increase

$ 3,402 9,061 7 264 619 727

($2,814) 1,305 2 660 1 151 Volume increased in 1976 due to a general overall increase in kilowatt-hour sales and decreased in 1977 because of a major decrease in kilowatt-hour sales for 32 resale. The decrease in resale sales resulted from the termination of sales to the Comision Federal de Electricidad (the "Comision") which supplies the city of

Juarez, Mexico. Historically, approximately 8% of the Company's revenues were derived from sales to the Comision. In 1976, the Comision purchased 232,104,000 KWH's while in 1977 it purchased only 3,408,000 KWH's.

This decrease was offset by additional sales of 112,758,000 KWH's to other customers and additional interchange deliveries discussed below. Loss of.sales to the Comision has resulted in a temporary adverse effect on operating income and earnings.

This loss was partially offset in 1977, and the Company does not expect the loss to have any long-term adverse effects.

The price and fuel adjustments increases in 1976 and 1977 are due to base rate increases and the escalation of fuel costs.

Operating Expenses Following is a summary of the changes in operating expenses for the two years ended December 31, 1977 (in thousands):

1976 Increase 1977 Increase Over 1975 Over 1976 1975 1976 Dollars Per Cent 1977 Dollars Per Cent Total Operating Expenses

$75 933

$93 068 617 135 22.6%

$95 002

~1934 2.1%

Increase caused by:

Fuel Purchased and Interchanged Power Operations Maintenance Depreciation Federal Income Taxes Other Taxes

$ 8,440 539 2,594 305 727 2 721 1 809 617 135

$6,288

( 2,735) 1,736

(

270) 265 (3,593) 243

~1934

Fuel expenses increased in 1976 due to escalating prices ofgenerating fuel and increases in volume, while the 1977 increase was due to price escalation.

Purchased and interchanged power includes the net credit for power delivered to another utility, which experienced a major equipment failure, under an interchange agreement, offsetting the cost of purchased power. The power delivered under this agreement was available from the amount previously sold to the city of

Juarez, Mexico.

Operations expense increased in 1977 and 1976 due to inflationary pressure on wages, employee

benefits, material and other costs.

Maintenance expense decreased in 1977 and increased in 1976. The 1977 decrease was due to a reduction in expense for steam power generation maintenance, while the 1976 increase resulted from repairs at Newman Station Unit2 and a firsttime inspection of Newman Station Unit 4.

Depreciation expense increased in 1977 due to general increases in depreciable plant. The 1976 expense increase resulted principally from Newman Station Unit 4 being phased into service. Effective January 1, 1978, the Company's annual depreciation rate increased from 2.68% to 2.93%.

Total federal income tax expense increased in 1976 and decreased in 1977 primarily due to decreased AFUDC in 1976, resulting from the placing in service of Newman Station Unit 4 in 1975, and increased AFUDC in 1977, primarily as a result of increased progress payments in relation to the Palo Verde Nuclear Generating Station.

AFUDC Allowance for funds used during construction

("AFUDC"), segregated between borrowed and other funds, increased in 1977 due to increased construction principally associated withthe Palo Verde Station. In 1976, AFUDCdecreased due primarilyto Newman Station Unit4 being placed in service late in 1975.

Interest Charges Interest on long-term debt increased fn 1977, due to the issuance of $25,000,000 of bonds in April and the realization of a fullyear's interest expense on $15,000,000 of bonds issued during 1976. The 1976 increase was due to this issuance and a fullyear of expense on bonds issued in 1975.

Net Income Applicable to Common Stock Net income applicable to common stock decreased in 1977, due to increases in expenses which were not offset by increased revenues and an increase in preferred dividend requirements.

The Company filed for rate increases with all regulatory bodies during 1977. Rate increases were granted late in the year, and only a small portion of the increases were reflected in 1977 revenues.

Net income increased in 1976, due principally to rate increases granted in 1975.

Earnings Per Share Earnings per share

("EPS") of common stock decreased 18~ in 1977 as compared to 1976. The decrease resulted from a decrease in net income, an increase in preferred dividend requirements and an increase of 8.8% in the weighted average number of common shares outstanding. EPS for 1976 decreased 1~

per share, despite a 13.9% increase in net income applicable to common stock, due to an increase of 14.9%

in the weighted average number of shares outstanding.

QUARTER BID PRICE RANGE HIGH LOW DIVIDENDS 1976 First quarter 11s/s 9s/4

$0.23 Second quarter 11 97/e

$0.24 Third quarter 11~/4 10'/e

$0.24 Fourth quarter 11e/e 107/e

$0.24 1977 First quarter 12Ve 11'/s

$0.24 Second quarter 12'/s 11

$0.25 Third quarter 12e/s 11e/e

$0.25 Fourth quarter 12'/4 11%

$0.25 El Paso Electric Company Common Stock is traded in the over-the-counter market.

The tabulation, which sets forth the high and low bid prices and represents prices between dealers, does not include retail markup, markdown commission.

MARKET PRICES OF COMMON STOCK AND DIVIDENDS The following table indicates the high and low price of the common stock and dividends paid for the quarters indicated:

33

BOARD OF DIRECTORS I

'~~Ij

(

J l

3 I(

l 34 Evern R. Wall*

President and Chief Executive Officer of the Company (3)

Paul Harvey*

Honorary Chairman of the Board of the Company; Honorary Vice President, El Paso National Bank; Chairman of the Board, First State Bank (37)

Robert E. Honey*

Investments Las Cruces, N. M. (29)

George G. Matkin Chairman of the Board, The State National Bank of El Paso; Chairman of the Board, PanNational Group, Inc. (11)

OFFICERS Evern R. Wall President and Chief Executive Officer Rolland E. York Senior Vice President James H. Jones Vice President Harry I. Zimmer Vice President Billye E. Bostic Vice President Donald G. Isbell Vice President Ralph G. Crocker Treasurer Theta S. Fields Secretary Richard E. Farlow Assistant Treasurer Robert L. Corbin Assistant Treasurer

Tad R. Smith Attorney; Partner, Kemp, Smith, White, Duncan & Hammond; Counsel for the Company (17)

Dr. Joseph R.

Smiley President Emeritus, The University of Texas at El Paso; Professor of Modern Languages, U.T.

El Paso (9)

Ben L. Ivey Farmer; Director, Vice Chairman of the Board, Bank of Ysteta (8)

Robert H. Cutler Chairman of the Board, illinois-California Express, Inc. (7)

Dennis H.

Lane'ormer Chairman of the Board of the Company 35 (retired July 1, 1977) (6)

'Members of the Executive Committee

(

)Years of Service on the Board

Annual Meeting of Shareholders The 1978 Annual Meeting of Shareholders will be held at 10 A.M., El Paso time, on Monday, May 8, in the Oleander Room of the Rodeway Inn, 6201 Gateway West in El Paso. AllShareholders are cordially invited to attend and learn more about the Company. Last year 72.8 per cent of the shares were represented at the annual meeting, either in person or by proxy.

Proxies for the meeting will be solicited by the management in a communication to be mailed early in 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, including the financial statements and schedules thereto, filed by El Paso Electric Company with the Securities and Exchange Com-mission, will be 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 79999 El Paso Electric Company P. O. Box 982 El Paso, Texas 79999 Common Stock Shareholders The Common Stock of the Company is held in every state of the union, the District of Columbia, some U. S.

territories and many foreign countries. The number of shareholders increased from 17,504 in 1976 to 19,156 in 1977. Many of our customers and other persons in the Southwest are shareholders as evidenced by the 4,874 shareholders in Texas and New Mexico who own 29 per cent of the outstanding shares. Our records show that 15,469 shareholders, or 81 per cent, own less than 500 shares each.

Transfer Agents IrvingTrust Company One Wall Street New York, New York 10015 (Common and Preferred Stock)

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