ML19305E882
| ML19305E882 | |
| Person / Time | |
|---|---|
| Site: | Palo Verde  |
| Issue date: | 05/13/1980 |
| From: | EL PASO ELECTRIC CO. |
| To: | |
| Shared Package | |
| ML17296A708 | List: |
| References | |
| NUDOCS 8005200601 | |
| Download: ML19305E882 (61) | |
Text
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l 8 1979 Annual Report El Paso Electric Company s
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Contents .
1 Highlights 2 Letterto Shareholders 4 ReportonthePaloVerdeNuclear Generating Station: Energy for the 80's 6 Yearin Review - Operations and Area Deve opment 8 Fuel 9 Rates and Regulations 10 CustomerCommunications 12 Boardof Directors Officers 13 Financial Market Pnce of Common Stock and Dividends 14 Consolidated Balance Sheet 16 Consolidated Statement of Income 17 Consolidated Statementof Retained Earnings 18 Consolidated Statement of Changesin Financial Position 20 Notes tc Consolidated Financial Statements 37 Report of Independent Certified Public Accountants 38 Summary of Operating Data 42 Management's Discussion and Analysis of the Consolidated l Statement of income 44 Corporate Information Dividerid Reinvestment Another year of growth was noted in the Company's Dividend Reinvastment and Stock Purchase Plan. The plan is available to holders of record of Common Stock and is a convenient method ofinvesting dividends and optional cash paymentsin new shares without payment of issuing expenses.
An enrollment card may be obtained by wnting the Company Secretary.
About the Cover Figures appeanng ir.this report are An on-site look at presented as generalinformation and construction in progress not in connection with any sale or offer inside the containr ent to sell or schcitation of any offer to buy building at Palo Verde any secunties nor are they intended as Nuclear Gererating a representation ey the Company of Staten Unit No. 2. the value of its secunties.
. Highlights 1 At December 31.
1979 _
1978 Op: rating Revenues (000) S 159.712 S 136.556 Operating Expenses (000) S 135,643 5 116.107 Net income (000) S 23.190 S 16.024 N:t income per share (Common) $ 1.45 S 1.30 Dividends per share (Common) 5 1.07 5 1.02 Book Value per share S 10.44 5 10.01 Common Shares Outstanding 14.503.373 11,191,371 Number of Common Shareholders 32.995 25.633 Numberof Customers 175.311 168.009 Numberof Employees 965 908 Peak Load 688.000 KW 690.000 KW Net Generating Capacity 982.000 KW 982.000 KW Average Residential Use 6.072 KWH 6.153 KWH Fuel Expense (000) S 81.669 $ 73.447 Energy Sales (MWH) 3.424.284 3.320.649 Electnc Plant (000) $ 561.783 5 438.085 1)N 1
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Letter to Shareholders
- 2 The 1970's were a penod of vast Company's Texas rate increase request filed in technological, industnal, economic and social June.1979. Under terms of the settlement the change. The 1980's should also prove to be a Company received an $11.9 million annual pivotal pericd for the electnc utility industry revenue increase forits Texas service area.
since we veill continue to need additional energy The negotiated settlement was adopted by the facilities in the future despite reduced economic Public Utility Commission of Texas for the growth projections, unincorporated areas and for the balance of the The 1960's will be an era of great challenges Company's Texas service area. To my as reliance on imported petroleum products knov ledge this was the first time since the continues while we make the difficult and implementation of the Texas Public Utility expensive transition from a petroleum-based Regulatory Act of 1975 that a municipality and economy to alternative energy resources. You an electric utility reached a negotiated will find in this report how The Electnc Company settlement of a major electric rate case. In the is adjusting its operations and plans to address settlement the Company was authonzed a the new challenges it faces. 15.5 . retum on common equity and the new Dividends in 1979 totaled 51.07 a share. Up rates were made effective with November, Se from 1978. The quarterly dividend on 1979 billings. two months earlier than had the Common Stock was increased from 25c to case followed the usual course of appeal to the 27-1/2c per share in September,1979. Public Utility Commission of Texas.
Dividends on Common Stock continued, in New Mexico the Company applied for a $7 without interruption, as they have since million increase in December,1978. The New distnbution of the Common Stock to the public Mexico Public Service Commission authonzed in 1947.
an increase of S1.9 million and disallowed the Operating revenues for 1979 reached inclusion of construction work in progress approximately 5160 million. Total operating (CWIP) in rate base relative to the Palo Verde expenses were approximately $136 million, an Nuclear Generating Station. The Company increase of 17 . over 1978. We continue to presently has an application pending for an exercise careful control over expenses to $8.9 million increase in New Mexico including insure that electncity is generated or purchased S1.6 million intenm rate relief. Testimony has at the lowest possible cost to our customers, been presented to the commission regarding Fuel costs represented 60 '.of the Company's the interim rate relief and a decision is expected total operating expenses. by May 1.1980.
Earnings per share of The funds for the Company's construction Common Stock for 1979 were program are obtained from internally generated
$1.45. compared with S1.30 in funds and sale of secunties and long-term
, 1978. The weighted average borrowings. Construction spending for 1979 4 numberof common was about $130 million and approximately shares outstanding S158 million is budgeted for 1980.
_ increased from 10.3 million Achieving adequate rates is a challenge for in 1978 to 13.3 million in our Company and the utility industry in general.
, 1979. Such nationwide problems as double-digit A landmark inflation, scanng interest rates. higher raw negotiated settlement energy prices and increased environmental was reached between and other regulatory requirements have
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the City of El Paso required penodic rate increases. Rate and the Company structures that accurately reflect our cost to regarding the serve eacn customer and provide a fair return to investors are an integral part of the Company's rate requests.
Since the late 1920's The Electnc Company has been largely dependent on natural gas and oil for boiler fuel. In 1969 the Company's cost of fuel was S6.5 million. The Company's total fuel
- bill in 1979 was approximately S81.7 million, representing an 11.6 times increase over the past ten years, primanly the result of the fuel shortage and rapid inflation. The pnce of oil and natural gas has increased much faster than the inflation rate and fuel continues to be the Company's largest expense item.
3
- Your Comp:ny must contend with Thm Electnc Compiny works agr:ssivily to diminishing and uncertain petroleum fuel protect natural resources as well as to comply supplies, inflationary costs, major capital with the many and proliferating laws and requirements, and shifting - often conflicting - regulations in the environmental area. The gov:rnment policies and regulations to provide Company is working on a number of proNts to r:liible electnc service to a growing service improve the environment primanly at the tour t:rntory. Our best hope to lessen the impact of Comers Power Station. Construction th!se scanng costs and to lead stability to our improvements are continually being made to customers' rising energy bills is the Palo Verde insure that all facilities are in satisfactory Nuclear Generating Station. Your Company compliance with environmental requirements.
owns an undivided 15.8*' interest in the 3,810 Looking back over the last decade it can be megawatt Palo Verde Project, now under said that your Company did its job of providing a construction 50 miles west of Phoenix, Arizona. necessary product exceptionally well in the Nuclear power will be increasingly relied upon face of many adversities.
by the Company the remainder of this century This record of accomplishment is a inbute to to make it less dependent on nsky petroleum the people of The Electric Company working fucts. together to serve the customers and Public awareness of nuclear power was communities in our service terntory.
intensified in 1979 as a result of the accident at The many successes we have expenenced the Three Mile Island (TMI) nuclear power over the years have been due to the combined station in Pennsylvania. The accident at TMI efforts of many individuals: employees, was the most senous in the history of directors, friends, and Shareholders. We look commercial nuclear power and opponents forward to their continuing support and active quickly seized the opportunity in an attempt to participation in meeting the challenges of the influence public opinion. At TMI not a single years ahead.
injury or fatality resulted. No energy source is 100's nsk-free and the risk to the public posed by operating nuclear plants is less than those pos:d by other methods of generating the same quantity of electricity. Nuclear power will x become an even safer and more efficient 4 en:rgy source as a result of industry and government actions following the TMlincident as explained elsewhere in this report. Evern fl. Wall Our customers view higher energy prices as President and Chief Executive Officer particularly upsetting when accompanied by the dramatic nse in other living costs. A number of factors must be addressed dunng the near term by consumers, business and government to exert dec.nward pressure on inflation. These include the reduction of excessive government y anding, elimination of unnecessary and costly government regulations, reduction of business taxes and institution of measures to '
boost productivity and stimulate investment.
Tha Electnc Company intends to continue its efforts to hold the line on costs wherever j possible and continue to speak out whenever necessary to identify actions by govemment I and regulators when their policies will result in '
increased costs.
l l
A Report on The Palo Verde Nuclear Generating Station: 4 Nuclear power is a proven tech' jy for generating electricity benefits in the future, in 1979 commercial economcally, cleanly and safely o now provides a substantial portion nuclear power saved the nation approximately of the electncity consumed in the United States, saving thousands of 425 million barrels of oil while producing about barrels of oil daily. 11.5% of an the electricity produced in this At The Electnc Company nuclear power will play an increasingly country. At the same time the Organization of significant role in satisfying the energy demands of our customers Petroleum Exporting Countries (OPEC) raised beginning in 1983 when the first unit at the Pato Verde Nuclear oil pnces by an average of 94% with further Generating Station is scheduled to go into commercial operation. increases a certainty.
The Electric Company owns a 15.8% undivided interest in the Palo The nuclear industry experienced its first Verde Project,50 miles west of Phoenix, along with four other major industrial accident in the 25-year history Southwestem utilities: Public Service Company of New Mexico, of commercial nuclear power generation in Southern Califomia Edison Co., Arizona Public Service Company and 1979 at the Three Mile Island power station in Salt River Project. The three Palo Verde units, each with a capacity of P1nnsylvania. The public was made more 1,270 megawatts, are scheduled for commercial operation in 1983, acutely aware of the nuclear industry as a 1984, and 1986, respectively. Upon completion the Palo Verde Nuclear result. While the planned nuclear safeguards Generating Station will be the largest nuclear power station in the United functioned at TMI and the public was protected.
States, delivenng three times the amount of electncity as the Hoover 3everal lessons were learned from the incident Dam. The Electnc Company will receive 200 megawatts from each unit. which will result in an even safer nuclear Construction advanced significantly dunng 1979 on the Palo Verde industry.
Station and at year's end Unit 1 was 57% complete; Unit 2 was 26% immediately after the TMI incident the Palo complete; and Unit 3 was 6% complete. The Company's estimated Verde participants organized a task force share of the cost of the Palo Verde Project, including transmission composed of experts from among the facilities and Allowance for Funds Used Dunng Construction (AFUDC), participants and suppliers of major components is approximately $853.9 million. As of December 31,1979, the Company to conduct a thorough and exhaustive review of had invested approximately $241.3 million in the Project. the safety related systems at Palo Verde. The Labor and weather related problems at the site resulted in a one year task force is expected to issue its final report in delay in the completion of Unit One until May of 1983 while the other two mid-1980.
units remained on schedule. The industry demonstrated its seriousness When nuclear power becomes a part of t.M Company's fuel mix in the and dedication to nuclear safety planning and 1980's, it will begin reducing the Company's dependence on oil and operation in the immediate aftermath of the TMI natural gas and help stabilize rising energy costs. The Electric Company incident, anticipating the " fundamental is confident its investment in Palo Verde will provide important economic changes" recommended by the President's i
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.' Energy for the 80's s Commission on the Accident at Three Mile The Electric Company views the future of nuclear power with Island. The industry moved swiftly to establish confidence as the world petroleum situation tightens and intemational the Nuclear Safety Analysis Center (NSAC) politics continues to distort the oil markets.
through the Electric Power Research Institute The energy shortage, clearly signaled at least in the late 1960's and and the Institute of Nuclear Power Operations confirmed by the arab oil embargo of 1973-74, is not difficult to (INPO) which will set standards of excellence comprehend. The wortd, and the United States in particular, simply has t for operation and management of nuclear been consuming and continues to consume energy at a rate faster than power programs. Another major component of new energy sources are being developed. Since before 1956 our nation f
the industry's efforts is a mutual insurance has been using more energy than it produced domestically and since company to help protect utilities against some 1972 that gap has widened dramatically. OPEC has pushed the price of of thefinancialconsequencesof aprolonged their exports higher since 1974 while in the United States federal controls nuclear reactor outage. Improved reactor on oil and natural gas pricing have discouraged production and operator training, equipment and controls stimulated use by maintaining prices at artificially low levels.
improvement, and improved operating The Electric Company is examining various energy sources for the procedures are also being addressed. long term and contemplates additional use of nuclear and coalin the foreseeable future. The Company participates in a variety of Research and Development programs through the Electnc Power Research Institute and is increasing its level of participation with The Department of
. Energy, pnvate research organizations and area universities including
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several local solar, geothermal and wind energy projects. Nuclear fusion will prove to be a valuable energy option and El Paso Electric is backing h_\~~ fusion research through the Texas Atomic Energy Research Foundation.
q All research is vital to the future application of altemate energy g-
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w made to its customers as a major energy supplier. Management remains N % : convinced, af;er considering all the immediately available options, that nuclear power is the safest, most economical and environmentally superior method of generating electricity particularly in the 1980's and 1990's. ,
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Year in Review e- ,
l l Throughout the 1970's El Paso and Construction activity in 1979 continued at a surrounding areas expenenced substantial moderate pace in El Paso and Las Cruces, growth and development and has continued to New Mexico, the largest community served by l develop as a major regional economic, trade the Company in its New Mexico jurisdiction.
and population center of the Sun Belt. The value of all building permits in El Paso l
i Th e El Paso area economy exhibited totaled approximately $238 million in 1979, a l
unusual strength in the 1970's and its solid nine percent increase over 1978.
development was supported by a modern and Approximately $20 million of the 1979 totalis for broad-based economy. One of the most solid the new 18 story El Paso Natural Gas
, indicators is employment which increased Company building now under construction in 15.6*b dunng the past five years. downtown El Paso.
Dunng th'= 1970's. the population of El Paso A decrease in construction of single family increased 27% to 410.000 and is projected to units from 3.153 in 1978 to 2.606 in 1979 increase an additional 40*6 dunng the 1980's. appears to be the result of sharply higher The economic impact of new industnes interest rates dunng the year.
locating in El Paso in 1979 is approximately Retail sales in El Paso have estaolished new
$1.1 billion as calculated by the Texas highs almost every year. In 1979 retail sales Industnal Commission. By the end at 1979 a were up about 15 percent over 1978. Military total of 27 new industnallocations in El Paso installations continue to be major economic and vicinity had been announced. This growth factors in the Company's service area. Fort will provide about 3.000 new jobs. Interest in Bliss Army Air Defense Center, William El Paso and twin plant locations in Ciudad Beaumont Army Medical Center, White Sands Juarez, Mexico remains high and severallarge Missile Range and Holloman Air Force Base foreign and domestic firms have indicated an are major facilities served by the Company.
interest in f ar West Texas.
More than 105 American companies are gfs'.? - ,w*74 operating under the Mexican Border '
Industrialization Program, or twin-plant ]b, -
concept. When Juarez begins to receive .
,. J natural gas through a pipeline now under - g ." y~
construction from the Mexican intenor, the twin- jM, "e '[h 2 ..I- -! ' -
i plant operation could expand significantly, resulting in a strong economic impact on the h.,, -M . [ %$
l_ r q ' { ; )' j entire area. In addition, El Paso is now the g _gl
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between the United States and Mexico. '
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7 The Company's Total system sales climbed to 3.424,284 Mesilla Valley megawatt-hours (MWH), a 3.1 percent Division, increase over 1978.
- headquartered in The commercial and industrial customer Las Cruces, New category, including schools, hospitals and Mexico,also other public facilities, as well as stores and Continued to attract offices, accounted for 1,632,000 MWH, up four )
j Las Cneces l new residents and percent from 1978. Hesidential customers !
businesses in 1979. accounted for 938,000 MWH, up three percent Building permit totals from 1978. The average residential customer for 1979 in Las used 6,072 KWH, a one percent decrease in
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- The annual growth rate in energy sales has slowed dunng the 1970's. Conservation and l
fh,. .' N 2. )p.h . E-ND ~_'I-i'l The totalfor 1979 was increased energy price awareness, while g-;i p.f , . -
. S29.3 million j '*, P 3 N g; - "7 , , , compared with $38.3 hf million in 1978.
expected to continue, should not totally negate the impact of customer growth.
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,, # :ser . a Standard July 10 and was slightly less than the all-time
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Metropolitan high system peak of 690,000 KW established in Statistical Area in 1978.
1979 as a result of a special census. The The El Paso Electric 1979 net system population of Las Cruces grew from 48,000 in capacitywas982 megawatts,composedof 498 1978 to 50,000 in 1979. At the end of the year megawatts at Newman Power Station in the Company was serving 34,292 customers in El Paso; 372 megawatts at the Rio Grande New Mexico, five percent more than in 1978. Power Station, five miles from downtown l
' Business relocations to Las Cruces include the El Paso in New Mexico, and a seven percent Joy Canning Company, Furtex, Inc., a synthetic entitlement, or 112 megawatts, from the coal-fur manufacturer, and Davidson Rubber fueled Four Corners Power Station near Company, an auto parts manuf acturer, Farmington, New Mexico.
In 1979, The Electric Company added The Company is constructing a 73 megawatt approximately 7,300 new customers to its combustion turbine generating station in system reflecting the stesdy growth of the El Paso to be used for peaking purposes. The Southwest as an attractive place to live and unit, capable of operating on oil or gas,is l
work. scheduled for operation in the second quarter of 1980. The total estimated cost of the peaking unit is $11 million.
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1 Fuel 8 The Company's fuel mix in the 1980's will not be denved totally f rom oil and natural gas as has been the case for much of its 78-year history. The events of the 1970's have served as additional stimulus for recognizing the need to reduce dependence on uncertain and increasingly expensive supplies of oil and natural gas.
Natural gas in 1979 provided 79% of the Company's fuel mix. The remainder of its fuel requirements were 13% coal and 8% oil. The gas i and oil outlook has changed over the decade of the 1970's with even more uncertainty foreseen in the 1980's. The industry continues to receive mixed signals from the government concerning natural gas.
Dunng the past 10 years the Company's total fuel bill increased more
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than eleven times. Individually, since 1970 the cost of oil has increased approximately 600Y., natural gas increased 500% and coal increased ,
100%. Fuel costs increased approximately $8.3 million in 1979 over p, '
1978 to approximately $81.7 million, or approximately 60% of 1979 operating expenses.
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ll The nation's energy policies are designed to reduce dependence on t, expensive depleting petroleum fuels and to encourage conversion to more abundant altemative fuel supplies such as coal and nuclear power.
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I The National Er'ergy Act goes so far as to prohibit new electnc power plants from using natural gas or petroleum as a pnmary energy source j j except in certain cases and also requires the phasing out of these fuelt in ,. - .
u existing plants. 5 .2 -
Converting to alternative fuel sources requires an extensive financial F,) -
q commitment by the Company but it is a commitment the Company must undertake in order to provide adequate and reliable electnc service in the Four Corners Power Staten future at the most economical pnce.
The Palo Verde Nuclear Generating Station represents the Company's effort to reduce substantially the use of oil and gas and provide electncty to a growing service area at the most reasonable cost possible. With the Palo Verde Station the Company will regain some control over fuel costs by using uranium, one of the only viable domestic fuels available. The participants in the Palo Verde Project have firm -
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v' tracts for the supply of uranium concentrate to fuel the three units ending to the year 2003. In addition, the participants have acquired a h[3 g
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50% interest in and are developing 60.000 acres of uranium properties in C Wyoming which will further assure Palo Verde fuel requirements. <
The Company began diversuying its fuel mix in the late 1960's when it became a part owner of the coal-fueled Four Comers Power Station. By *h i the 1990's electnc generation is expected to be approximately 60% coal and nuclear-fueled. ;
Franklin Land and Resources. Inc. is the Electnc Company's wholly oil storage Tank owned subs: diary, organized to secure property and water nghts for the p,o Grande Power Station Company's vanous projects and business-related needs. pnmanly plant sites and water for cooling purposes at generating plants.
As we continue to develop important domestic energy resources like l coal and nuclear fuels, we are increasingly concerned over nsing inflation, higher fuel pnces, increased operating expenses and nigher , JM l interest rates. f. $
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Rates and Regulation 9 Converting to alternate fuel sources to assure an adequate supply of studies. This information will be utilized for electncity for the coming decades has required an extensive financial engineenng and system planning as well as for commitment by The Electnc Company. It has been necessary for the regulatory requirements.
Company to seek rate increases dunng the last few years to support its The Company continually stnves to maintain construction program and to offset the effects of persistent high inflation. rates which adequately cover all costs of in 1979. the Company and the City of El Paso reached a landmark service, including fair compensation to negotiated rate settlement calling for a revenue increase of $11.9 million. investors. and which preserve its financial
, a 15 5% return on common equity and an effective date two months integnty and ability to attract the capital earlier than would have otherwise been possible. In addition, the required to build the facilities to meet the needs negotiated settlement eliminated the prospect of an appeal to the Public of all customers. As the economic and Utility Commission of ,.xas, which has been costly in the past and regulatory factors desenbed throughout this provides an opportunity for the City and the Company to undertake report continue to affect the Company's settlements of pending litigation without further appeals. If no further financial results and because the rates appeal to past cases is made by the City, the time and money which approved have been lower than requested, it would otherwise be spent solving these problems in court will be saved. will be necessary for the Company to file for The negotiated rate settlement witn the City of El Paso was the first additional rate relief in the near future.
since the implementation of the Texas Public Utility Regulatory Act of ,
1975. The Act created the Public Utility Commission of Texas as the appellate jurisdiction over electnc rates and services in Texas N
municipalities and empowered it with onginal Junsdiction in -- c_. N 4 unincorporated areas of the state. The PUC and other incorporated ^/ '. .
areas later adopted the City settlement to cover the balance of the ' , f.
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(ompany's Texas service temtory. Cooperation between the City and / ,; g t The Electnc Company is very important to the community.and this {.0 g
- agreement should pave the way to improved relations and cooperation for the benefit of all concerned since continued community support is essential if long-range energy needs are to be satisfied.
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We believe it is clearly advantageous from an economic and financial ,. $ ,
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M, lengthy formal litigation over many months or even years at great % g ... /
expense to the Company and its customers. ] l ,'
The Company has appealed the New Mexico Public Service 50 095247
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Commission decision that granted the Company a $1.9 million increase \
in annual revenues on retail sales in New Mexico. An application for an N. 5a
$8.9 million increase in annual revenues is pending in New Mexico including $1.6 million intenm rate relief. The commission has heard the ,
Company s testimony regarding the intene rate relief and a decision is j ' 2g expected by May 1.1980. F [5#
s @ Q7 The Company was allowed to include in its rate base approximately .
549 9 million of construction work in progress (CWIP) for the Palo Verde gT Station by its Texas regulatory authonties. The New Mexico rate order @ '.
did not authonze the Company to include CWIP in rate base. y4 Anticipating that more information
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in a world where govemment actions and The public demand for the Company's various pnnted matenals public opinion rnay have as much impact on regarding electrical safety, energy conservation, and alterrntive energy business decisions as market considerations, sources has been very strcng with thousands of copies distnbuted to the the responsibilities of mar'agement must public, local schools and organizations dunng the year. The Company's extend beyond day to day operations, standardized monthly bill insert "The Electnc Guide" has been favorably Responding to the impact of these extemal received by customers.
forces on the business environment The Much of this materialis utilized by the Cornpany's Community Electnc Company, hke othe r electnc utihties, Services Section's public school energy education program.
has started speaking out and providing Programs on the environment, solar energy, conservation, nuclear I
information to its custcmers on important energy, safety and field tops to Company facilities are provided to issues. consumers and area school districts. In addition, the Company has Throughout the 1970's energy conservation provided much valuable information to several schools through the and proper energy management have been the Edison Electnc Institute High School Grant Program.
predominant theme of corporate The Company's Energy Utilization and Conservation Section is communications. This has been broadened to trained and staffed to provide energy management information and include pertinent information on sucn matters energy audits for residential and commercial customers. The National as the Company's construction program. Energy Act requirements for utikties to offer home energy audits starting l electrical safety and nuclear power. in 1980 will pose no unusual problems for the Company since this activity l The Three Mile Island accident created has been offered for a number of years.
some confusion and uncertainty regarding The Company continues to encourage construction of the WISE nuclear power in the United States. To provide (Weatherized and Insulated to Save Energy) Home among local home accurate information and to facihtate better builders as well as retrofitting existing homes to energy efficient public understanding of nuclear power in standards.
general and the Company's participation in the Palo Verde Nuclear Generating Station, a Employees thorough mass-media campaign addressing .
these issees was launched in 1979. Former The Company's success in accomplishing its stated goals of:
astronaut Scott Carpenter appears in many of - protecting and enhancing the investment of its shareholders; the advertisements speaking on tehalf of The - providing an ennching and satisfying place to work:
Electnc Company and Palo Verde. - providing the best possible service to its customers at a reasonable These messages have been well-received cost i and are carrying the Company's message to can be attnbuted to the skills and contnbutions of its dedicated employees. l customers: That Palo Verde and nuclear ;
energy are essential to the continued economic At year-end 1979 the Company had 965 employees in its two-state i
well-being in the area served by the Company semce area.
and that despite setbacks in 1979 nuclear Emoloyees continued to dernonstrate interest in the Company's power is as safe as any technology ever Emp'oyee Stock Purchase Plan through payroll deductions to purchase developed by man and safer than most common stock. Approximately 180 of the Company's employees were comparable industrial undertakings. participating at the end of the year. The Company also offers an The Company recognizes the diverse Employee Stock Ownership Plan (ESOP) which provides employees cultural backgrounds which exist throughout its with greater participation in the ownership of the Company under service area and has attempted to tailor its attractive terms and provides the Company with additional tax credits _
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11 The Company continues to emphasize Fintncing training in all its operations to further upgrade the quality of service as well as employee Dunng 1979 the Company's construction program, beyond intemally performance and productivity. generated cash, was funded by the sale of a combination of Common A two-year labor agreement between the Stock, Preferred Stock, First Mortgage Bonds, and vanous banking Company and Loca1960 of the International arrangements. The permanent financing provided aggregate gross Brotherhood of Electncal Workers, which proceeds to the Company of approximately $107.8 million.
, represents 340 bargaining unit employees, was To finance the Company's construction program in the 1980's it is l finalized in February,1980. The contract estimated that funds generated from operations will provide became effective March 1,1980, and contains approximately 30% to 32% of the cash required. Additional financing will a mutually acceptable wage and benefit come from sources outside the Company and wi!! be influenced by package for the IBEW. market conditions, earnings performance and reasonable regulatory The Company s move to its new treatment.
headquarters in the histonc Mills Building in Shareholders authonzed additional future financing by approving an downtown El Paso was completed in the amendment to the Restated Articles of incorporation to increase the summer of 1979. The renovated Mills Building number of authonzed shares of Common Stock from 15 million to 30 provides expanded and economical f acilities million shares at the annual meeting in May,1979.
Conducive to the orderly and efficient An additional positive long-range financial step was taken in January, operations of a growing employee family. 1979, when the Company entered into a nuclear fuel financing The first woman director of El Paso Electnc arrangement whereby a Trust acquired a portion of the nuclear fuel Company was elected dunng the annual necessary for the Palo Verde Nuclear Generating Station. Under this meeting of shareholders in May as one of two arrangement the Company was reimbursed for all previous nuclear fuel new directors. Mrs. Josefina A. Salas-Porrasis expenditures and intends to enter into a basic heat supply contract executive director of BI Language Services, a whereby title to the fuel will remain with the Trust and the Company will firm she founded in 1970, and also serves as a make lease payments for the heat generated.
director of the El Paso branch of the Federal Reserve Bank of Dallas.
Leonard A. Goodman, Jr., general agent for John Hancock Mutual Life Insurance Company, was also elected to the Board.
Mrs. Salas-Porras and Mr. Goodman succeeded former Company president.
Chairman of the Board and retinng director Dennis H. Lane and retinng director Dr. Joseph R. Smiley. Dr. Smiley and Mr. Lane ,
served as advisory directors to the Board dunng 1979 l
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From left to right - seated l George G. Matkin' Paul Harvey* Evern R. Wall
- Robert E. Boney
- Robert H. Cutler
- j Chairman of the Board. The Honorary Chairman of the President and Chief Investments. Las Cruces. Chairman of the Board.
State National Bank of Board of the Compar,y: Executive Officer of the lilinois-California Express. l New Mexico (32) i El Paso. Chairman of ttie Honorary Vice President. Company (5) inc.; Chairman of tne i Board P anNational Group. El Pasa National Bank; Board. ICX, Inc. (9) '
, Inc (13) Chairrnan of the Board.
- First State Bank (39)
From left to right - standing i Leonard A. Goodman,Jr. Tad R. Smith Josefina A.Salas-Porras Ben L fvey
' " Members of the Executive l Chartered Life Underwnter: Attorney: Partner. Kemp. Esecutive Director. Farmer; Director. Chairman i Committee General Agent.Jonn Smith White. Duncan and 81 Language Services (t) of theBoard.Bankof Ysleta l Hancock Mutual Life Hammond. Counsel for the (10) ( ) Years of Service on the insurance Co (1) Company i19)
Board i
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Officers EVERN R WALL. HARRYIZ:MMER. CHARLES MAIS. THETA S FIELDS. RICHARD E. FARLOW.
President and Chief Vice President Vice President Secretary Assistant Treasurer Executive Officer JAMES H. JCNES RALPH G. CRCCKER. ROBERT L. CORBIN. CECELIA R. SHEA ROLLAND E YORK. Vice President Treasurer Assistant Treasurer and Assistant Secretary Senior Vice President DONALD G. ISBELL. WILLtAM J. JOHNSON. Assistant Secretary BILLYE E. BOSTIC. Vice Prescent Controller Senior Vice President l
Financial ia FINANCIAL INFORMATION dNot covered by Report of independent CertMed Pub 6c Accountant)
WHERE THE REVENUE DOLL AR CAME FROM:
Residential 33c Sales to Public Autnonties 17c Sales for yo ~
i Resale 3c g Other ic s . e
[;$ J Commercial and ghM[ industnal - Large 17c ThSD Commercial and s industnat - Sma:t 29c WHERE THE REVENUE DOLLAR WENT:
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,TP ~ ' ' Taxes 14c (bb ,J ..
& p:y Otner Operating Expenses 10c
,h.;$ ' ]
Depreciation Sc Interest Expense 5c Dividends 12c Retained Eamings 3c Fuet Expense Sic MARKET PRICES OF COMMON STOCK AND DMDENDS INot covered by Report of kh w 4 Certded Public Accountants)
The following table indicates the high and low bid price of the common stock and dividends paid for the quarters indicated:
84 Pnce Range Ouarter Hgn Low Dnndends 1979 First Quarter 10's 10 4 $026 Second Quarter 10 % 9's 0 26 Third Quarter 11 to 0275 Fourtn Quarer 10's 9'a 0 275 1978 F>rst Ouarter it's 107: 50 25 Second Quarer 112e 104 0.25 Third Ouarter it's to's 0 26 Four n Quarter 10 4 9'e 0 26 El Paso E!ectnc Company Common Stock is traded in the over-the-counter market.
The tabulation. whicn sets fortn the high and low bid pnces and represents pnces betwcon dealers.
does not include retail markups, map. downs or commissions.
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Financial i EL PASO ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEET ASSETS December 31, 1979 1978 (In thousands)
Utility plant:
Electnc plant (Notes 8 and E) .. . . $561,783 $438.085 Accumulated provision for depreciation . . .. (76,053) (68.672) 485,730 369,413 Nonutility property, at cost . .. 2,357 1.563 Accumulated provision for depreciation . .
(81) (27) 2.276 1.536 Current assets:
Cash (Note F) 10,684 6.032 Accounts receivable (less allowance for doubtful accounts of $205.000 and $228.000, respectively) . 18,327 15.325 Federalincome taxes refu..dable . . 2,694 6,038 Matenals and supplies . . . 3,880 2.821 Fuel (Note H) . 8,060 8.849 Prepayments . . . . 1,712 1,788 Deferred fuelcosts . . . 309 1.823 Other . . .
. 721 303 46,387 42.979 Deferred charges and other assets:
Unamortized debt expense . . 844 808 Other 1,881 1.239 2,725 2.047
$527.118 $415.975 The accompanying notes are an integra' part of the consolidated financial statements.
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. ~ Financial is EL PASO ELECTRfC COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEET - (Continued)
LIABILITIES AND SHAREHOLDERS' EQUITY December 31, 1979 1978 (In thousands)
Capitalization:
Common stock, rso par value,30,000,000 and 15,000,000 shares authorized, 14,503,373 and 11.191,371 shares issued and outstanding at December 31,1979 and 1978, respectively (Note C) .$106,329 $ 71,269 Unamortized cap'tal stock expense . (1,029) (788)
Retained earnings (Note E) 46,126 41,541 Common stock equity 151,426 112,022 Preferred stock - Redemption required, cumulative, no par value, 500,000 and 240,000 shares outstanding at December 31, 1979 and 1978, respectively (Note D) 50,000 24,000 Preferred stock - Redemption not required, cumulative, no par value, 190,000 shares outstanding at December 31,1979 and 1978 (Note D) 18,873 18,873 Long-term debt (Note E) 171,721 126,152 Total capitalization 392,020 281,047 Current liabilities:
Current portion of long-orm debt (Note E) 4,549 1,045 Notes payable to banks (Note F) ?,125 26,600 Notes payable to other(Note F) 15,290 -
Commercial paper (Note F) 34,332 32,175 Turbine contract payable (Note B) 7,754 -
Fuel purchase commitment (Note H) 7,958 8,747 Accounts payaole, pnncipally trade 10,607 8,982 Customer deposits 2,849 2,447 Taxes accmed 6,123 5,419 Deferred income taxes 284 1,021 Interest accrued 3,183 2.831 Other 1,841 955 96,895 90,222 Deferred credits and other liabilities:
24,873 17,998 Accumulated deferred federal income taxes 22,537 19,191 Accumulated deferred investment tax credit Customer advances for construction and other 793 354 48,203 37,543 Long-term purchase commitment (Note B)
- 7,163 Commitments and contingencies (Notes H and J)
$537,118 S415,975 s
The accompanying notes are an integral part of the consolidated financial statements, L
Financial 'e
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EL PASO ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENT OF INCOME For the years ended December 31,1979 and 1978 1979 1978 (In thousands)
Operating revenues . $159,712 5136,556 Operating expenses (Notes'J and K):
Fuel 81,669 73,447 Purchased and interchanged power (3,531) (2,110)
Operation . 20,962 17,722 Maintenance 6,725 5,559 Depreciation (Note B) . 8,245 7,361 Taxes (Note G):
Federalincome, current 1,238 (2,617)
Federalincome, deferred 6,138 (1.500)
Charge equivalent to investment tax credit, net of amortization . 4,083 9,014 Other 10,114 9,231 135,643 116,107 Operating income 24,069 20.449 Otherincome:
Allowance for other funds used dunng construction (Note 1) 7,450 3,197 Other income, net of other expenses 561 954 Federalincome taxes (Note G) (269) (463) 7,742 3.688 income before interest charges 31,811 24.137 Interest charges:
Interest on long-term debt 11,589 9,477 Other interest (Note B) 7,420 4,041 Other interest capitalized (Note B) (1,643) (1,098)
Allowance for borrowed funds used dunng construction (Note 1) (8,745) (4,307) 8,621 8,113 Net income (Note I) 23,190 16,024 Preferred dividend requirements (Note D) 3,948 2,575 Net income applicable to common stock (Note C) . $ 19,242 S 13,449 Net income per share of common stock (Notes C and I) $1.45 $1.30 Weighted average number of common shares outstanding .13,252,102 10,333,109 i
The accompanying notes are an integral part of the consolidated financial statements.
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Financial 17 EL PASO ELECTRIC COMPANY AND SUBSIDIARY ,
CONSOLIDATED STATEMENT OF RETAINED EARNINGS For the years ended December 31,1979 and 1978 1979 1978 (in thousands)
Retained earnings at beginning of year $41,541 S39,056 Net income 23.190 16,024 Amortization of capital stock expense _ 134)
( (139) 64,597 54,941 Cash dividends:
Preferred stock . 3,948 2,575 Common stock 14,523 10,825 18,471 13,400 Retained earnings at end of year $46,126 S41,541 The accompanying notes are an integral part of the consolidated financial statements.
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Financial 18 l
1 EL PASO ELECTRIC COMPANY AND SUBSIDIARY !
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION I For the years ended December 31,1979 and 1978 1979 1978 (in thousands)
Source of funds:
From operations:
Netincome . . . $ 23,190 S 16.024 Items not requinng outlay of working capitalin the current period:
Depreciation 8,245 7,361 Deferred federa; income tax 6,875 1,354 investment tax credit 4,083 9,014 Allowance for other funds used dunng construction (7,450) (3,197)
Other 278 223 Funds provided by operations 35,221 30,779 Other sources:
Sale of nuclear fuel to trust 4,712 -
Sale of preferred stock 26,000 14,000 Sale of common stock 35,060 30.205 Sale of first mortgage bonds 25,000 9,000 Sale of unsecured floating rate promissory note 25,000 -
Long term mortgages - 2,124 Long-term purchase commitment 591 563 Advances for construction and other 439 (51) 152,023 86,620 Application of funds:
Gross additions to pl ant 130,282 100,101 Allowance for other funds used during construction (7,450) (3,197)
Transfer of 'ong-term purchase commitment to current 7,754 -
Gross additions to other property and investments ,
794 1,539 increase (decrease) in other d6ferred debits 642 (74)
Dividends on preferred stock 3,948 2,575 Dividends on common stock 14,523 10,825 Capital stock expense 375 431 Reduction of long-term debt 4,549 1,000 Increasein bond discount - 2,196 Other (129) 903 155,288 116.299 Decrease in working capital $ 3,265 $ 29,679 The accompanying notes are an integral part of the consolidated financial statements.
' Financial 19 !
EL PASO ELECTRIC COMPANY AND SUBS 4 DIARY CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION- (Continued)
FC'the years ended December 31,1979 and 1978 1979 1978 (In thousands)
Increase (decrease) in components of working capital:
Current assets:
Cash . , S 4,652 S1,685 Restncted cash .
(6,600)
Accounts receivable 3,002 942 Federalincome tax refundable . (3,344) 2,011 Matenals and supplies 1,059 203 Fuel (789) 2,647 Prepayments (76) 272 Deferred fuel costs (1,514) (5,411)
Other 418 (534) 3,408 (4,785)
Current liabilities:
Current portion of long-term debt 3,504 1,045 Notes payable to banks (24,475) 15.735 Notes payable, other . , 15,290 -
Commercial paper 2,157 6,875 Turbine contract payable 7,754 -
Fuel purchase commitment (789) 2,647 Accounts payable 1,625 (823)
Customer deposits 402 450 Taxes accrued 704 1,132 Deferred income taxes (737) (2,854)
Interest accrued 352 509 Other 886 178 6,673 24,894 Decrease in working capital $3,265 S29.679
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The accompanying notes are an integral part of the consolidated financial statements.
1
Financial 20
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EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. Summary of Significant Accounting Policies:
General The Company maintains its accounts in accordance with the Uniform System of Accounts presenbed for electric utilities by the Federal Energy Regulatory Commission (FERC).
Reclassification In accordance with the Secunties and Exchange Commission Accounting Series Release No. 268 issued July 27,1979, the Consolidated Balance Sheet at December 31,1978, has been reclassified to state preferred stock-redemption required and preferred stock-redemption not required, separately.
Principles of Consolidation The consolidated financial statements include El Paso Electric Company and its wholly-owned subsidiary, Franklin Land & Resources, Inc. Allintercompany balances and significant intercompany transactions have been eliminated in consolidation.
Utility Plant Utility plant and equipment are stated at original cost. The Company provides for depreciation on a straight-line basis at annual rates which will amortize the undepreciated cost of depreciable property over estimated remaining service lives.
The Company charges the cost of repairs and minor replacements to the appropriate operating expense and capitalizes the cost of renewals and betterments. The cost of depreciable plant retired or sold, and the cost of removal, less salvage, 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 penod.
Revenues Revenues are recognized based on cycle billings rendered to customers monthly. The Company does not accrue revenues in respect to energy consumed but not billed at the end of a fiscal penod.
Financial 2, EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED F.NANCIAL STATEMENTS - (Cortinued)
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 federalincome tax reporting purposes which differs from the methods used for financial reporting purposes. Differences in the tax and financial methods of accounting for fuel costs and other capitalized costs also exist. In accordance with regulatory authonty requirements, provision has been made in the financial statements for federal income taxes deferred to future years as a result of these items. The Company has not provided defe. . d taxes on certain other differences between financial and tax reporting, prior to 1979, since sucn differences were not approved as an expense in rate of return computations by regulatory authonties.
Effective January 1.1979, in accordance with a Texas rate order, the Company began providing deferred federalincome taxes relating to the borrowed portion of AFUDC, to certain capitalized costs, and to all differences between book and tax depreciation for property placed in service after 1978.
Investment tax credits are deferred and amortized to income over the estimated service lives of the related properties.
. Pension Plan The Company has a noncontnbutory 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. The Company's policy is to fund pension costs accrued. Prior service costs are being amortized over a thirty-year period beginning ir.1972 and are included in the determination of annual expenses.
Net income Per Common Share Net income per common share is computed using the weighted average number of common shares outstanding dunng the year. Common equivaler.t shares re:ated to the Amended Employee Stock Purchase Plan are not significant.
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Financial 22 ' .
EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
- 8. Utility Plant:
Electric plant consisted of the following:
December 31, 1979 1978 (In thousands)
Intangibles S 50 $ 50 Production 131,761 130.714 Transmission . 48,668 47.159 Distnbution . 100,148 92.959 General ...
9.205 9.324 Plant held for future use 397 397 Construction work in progress 260.419 143.826 N. clear fuel and other investments 11,135 13.656 Total $561.783 5438.085 At December 31,1979 and 1978, a commitment in the annount of approximately $7,754,000 and $7,163,000, respectively, to purchase a turbine from an independent trust no later than June 20,1980, has been included in construction work in progress. Corresponding amounts have been reflected as a turbine contract payable and as a long-term purchase commitment at December 31,1979 and 1978, respectively.
During the years ended December 31,1979 and 1978,interestin the amount of approximately
$1,643,000 and $1,098,000, respectively, relative to funds borrowed by a turbine trust and the Company's subsidiary has been capitalized. The borrowed funds at rates ranging from 4-1/4% to 15-1/4% were used to acquire utility plant (construction work in progress and nuclear fuel and other investments). The interest amount has been included in the Consolidated Statement of income as "Other Interest" with a corresponding amount included in "Other Interest Capitalized." Such interest amounts prior to January 1,1978, were minimal.
The Company has a 7% undivided interest in Units 4 and 5 of the Four Corners Project located in northwestern New Mexico and a 15.8% undivided interest in Units 1,2 and 3 of Palo Verde Nuclear Generating Station which are under construction near Phoenix, Arizona. The Company is also constructing transmission facilities related to this station. Participants in the joint plants are responsible for obtaining their respective financing. The extent of Company interests in these facilities, excluding nuclear fuel, is as follows:
December 31.
1979 1978 Palo Verde Nuclear Four Comers Pato Verde Nuclear Four Comers Generating Station Project Generating Station Protect (In thor, ands)
Utdity plant (in serv ce) $13,681 S13.391 Accumulated provision for depreciation (2.712) (2.362)
Utility plant (under construction) $241,352 1,453 $130.900 848 l
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Financial 23 EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company's direct expenses associated with Four Corners Project are included in the applicable operating e'< pense categories of the Consolidated Statement of Income.
Total depreciation was approximately $8,531,000 in 1979 and S7,616,000 in 1978, of which approximately S286.000 and S255.000, respectively, was applicable to transportation equipment and has been charged to other accounts.
The average annual depreciation rate used by the Company for the years ended December 31,1979 and 1978, was 2.93%
C. Common Stock:
Under a shareholder approved employee stock purchase plan qualified employees may purchase shares of the Company's common stock at two specified dates each year for a period ending no later than June 30,1984. The purchase pnce is 90% of the average bid pnce of the stock at the option dates. During 1979 and 1978,6,717 and 11,120 shares of common stock, respectively, were purchased at an aggregate cost of approximately S63,000 and S111,000, respectively. The cumulative aggregate corresponding fair market values as of the purchase dates were approximately $70,000 and S117,000, in 1979 and 1978, respectively. At December 31,1979,66,878 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.
The Company has a Dividend Reinvestment and Stock Purchase Plan which provides holcers of its common stock the option to invest cash dividends and/or optional cash payments (up to
$3,000 per quarter)in additional shares of the Company's common stock. During 1979 and 1978, 178,652 and 116,904 shares, respectsely, were purchased by shareholders who reinvested dividends and invested cash in the amounts of approximately $1.854,000 and $1,263,000, respectively. At December 31,1979,332,195 shares were reserved for future purchases under the plan. The purchase price is the average of the last bid and asked price of the stock on the purchase date.
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Financial 24 EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company adopted an employee stock ownership plan in May,1978, pursuant to which it contnbutes common stock to the plan for the benefit of employees. The value of such common stock is equal to a specified amount of investment tax credit. The Company reserved 500,000 shares of common stock for issuance under the plan. In October,1979, the Company contnbuted 126,633 shares of stock with a market value of approximately $1.287,000 to the plan. In June, 1978, the Company contributed 26,529 shares of stock with a market value of approximately 5294.000 to the pl&n. At December 31,1979,346,838 shares were reserved for future contributions under the plan.
Dunng June,1979, the Company's Restated Articles of incorporation were amended, increasing tho number of authonzed shares of common stock to 30,000,000.
Changes in common stock and unamortized capital stock expense were as follows (In thousands, except share amounts):
Unamortized Common Stock Eon Descnotion Shares Amount Net
- Balance. December 31,1977 - 8.536.818 $ 41.064 tS 496)
Sales of Common Stock . 2.654 553 30.205 (292)
Balance. December 31,1978 - 11.191.371 71.269 (788)
Sates of Common Stock . 3 312.002 35.060 (241)
Balance. December 31,1979. 14.503.373 $106.329 ($1.029)
- Capital stock expenses reflected above are stated net of amortiza m and include expenses of all capital stock issues.
Subsequent to December 31,1979 (in February 1980), the Company sold 1,500,000 shares for aggregate net proceeds of $13.518,000 before expenses of sale.
Net income applicable to common stock, het income per share of common stock, and weighted average number of common shares outstanding for the year ended December 31,1979, would have been $19,469,000, $1.34, and 14,502.102, respectively, assuming that the proceeds (before expenses of sale) of $121.374,000 from the sale of first mortgage bonds, preferred stock, common stock and a promissory note dunr.g the year and in February,1980, were used to retire short-term debt outstanding dunng the year ended December 31,1979.
/
, Financial 25 EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
D. Preferred Stock (authonzed 1,000,000 shares):
Preferred stock - Redemption required Following is a summary of outstanding preferred stock - redemption required:
Optional Redemption Stated Value Pnce Per Share December 31. at issue 1979 1978 December 31.1979 On thousands) 100.000 Shares $10 75 Dividend $10,000 $10.000 $110.75 140 000 Shares S 8 44 Dividend 14,000 14.000 108.44 10.000 Snares S 8.44 Dividend 1,000 108.44 150.000 Shares S 8.95 Dividend 15,000 108.95 100.000 Shares $ 9.00 Davidend 10.000 -
$50,000 $24.000 The $10.75 preferred shares are entitled to the benefits of an annual sinking fund whereby on January 1 of each year, beginning in 1980, the Company will redeem 4,000 shares at the sinking fund redemption price of $100 per share plus accrued dividends. The $10.75 preferred shares are redeemable at the option of the Company; however, no optional redemption of the shares may be made prior to January 1,1985, as a part of, or.in anticipation of, any refunding involving the issue of indebtedness or preferred stock having an effective interest or dividend cost of less than 10.75% per annum.
The 58.44 preferred shares are entitled to the benefits of an annual sinking fund whereby on October 1 of each year, beginning in 1984, the Company will redeem 4% (and may, at its option, redeem an additional 4%) of the aggregate maximum number of shares outstanding at the sinking fund redemption price of $100 per share plus accrued dividends. The $8.44 preferred shares are redeemable at the option of the Company; however, except as set forth above, no optional redemption of the shares may be made pnor to October 1,1988, as a part of, or in anticipation of, any refunding involving the issue of indebtedness or preferred stock having an effective interest or dividend cost of less than 8.44% per annum.
The 58.95 preferred shares are entitled to the benefits of an annual sinking fund whereby on October 1 of each year, beginning in 1985, the Company will redeem 5% (and may, at its option, redeem an additional 5%) of the aggregate maximum number of shares outstanding at the sinking fund redemption price of $100 per share plus accrued dividends. The S8.95 preferred shares are redeemable at the option of the Company; however, no optional redemption of the shares may be made prior to October 1,1984, as a part of, or in anticipation of, any refunding involving the issue of indebtedness or preferred stock having an effective interest or dividend cost of less than 8.95% per annum.
Sinking fund reppirements for each of the above series are cumulative and,in the event they are not satisfied at any redemption date, the Company is restncted from paying any dividends on its common stock (other than dividends in common stock or other class of stock ranking junior to the preferred stock as to dividends and assets).
The 59.00 preferred shares have no provision for a sinking fund, are not redeemable at the option of the Company, and must be redeemed in fu'l on October 1,1986 at $100 per share plus accrued dividends, in the event the Company fails to provide sufficient funds for redemption, the Company is restricted from paying any dividends on its common stock (other than dividends in common stock or other class of stock ranking junior to the preferred stock as to dividends and assets).
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e Financial 28 EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The aggregate amounts of the above preferred stock required to be retired for each of the next five years are as follows:
(in inousands) 1980. S 400 1981 400 1982 400 1983 400 1984 1.000 Sales of preferred stock - redemption required were as follows:
Descnotion Shares Amount (In tnousands)
Batance. December 31,1977 . . . . , . . .
100.000 $10.000 issuance of Preferred Stock. 58 44 Dividend . 140.000 14 000 Balance December 31,1978 . . -
240.000 24.000 Issuance of Preferred Stock. 58.44 Dividend . 10.000 1.000 issuance of Preferred Stock. $8 95 Divdend . 150.c30 15.000 Issuance of Preferred Stock, $9 00 Dividend . t00,000 10,000 Balance. December 31,1979 .
500.000 550.000 Preferred stock - Redemption not required Following is a summary of preferred stock which is not redeemable except at the option of the Company:
Optional Redemption Stated Value at Pnce Per Share December 31. at issue 1979 1978 December 31,1979 (In tnousands) 15.000 Shares $4.50 Divdend . S 1,534 5 1.534 $109.00 15.000 Shares $412 Dmdend . 1,506 1.506 103.98 20.000 Shares S4.72 Dividend . 2.001 2.001 104.00 40.000 Shares $4.56 Dmdend . 4,000 4.000 100.00 100.000 Shares 58 24 Dividend . 9,832 9.832 107.52 518,873 $18.873 The $8.24 preferreo shares are redeemable at the option of the Company; however, no optional redemption of the shares may be made pnor to April 1,1982, directly or indirectly as part of, or in anticipation of, any refunding involving the issue of the indebtedness or preferred stock having an interest or dividend cost less than the effective dividend cost of the 58.24 preferred stock.
All preferred stock issues (redemption required and redemption not required) are entitled, in Dreierence to common stock, to $100.00 per share, plus accrued dividends, upon involuntary liquidation. Al! issues except the 59.00 preferred stock are e 1 titled to an amount per share equal to the applicable optional redemption price, plus accrued dividends, upon voluntary liquidation.
The $9.00 preferred stock issue is entitled to a fixed price (S109.00 per share at December 31, 1979), plus accrued dividends, upon voluntary liquidation.
There have been no changes in preferred stock - redemption not required during the two years ended December 31,1979.
Fjnancial 27 EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
E. Long-Term Debt:
Outstanding long-term debt is as follows:
Redemption Pnce at December 31 December 31, 1979 1978 1979 (in thousands)
First rTiortgage bonds:
2 7/8*. Senes, due 1980 . $ 4,500 $ 4.500 $100.00 31/8% Senes, due 1984 4,950 4.950 100.85 4-1/4% Senes, due 1988 . 6,100 6.100 101.90 4-5/8*. Senes, due 1992 10.385 10.385 102.42 6-3/4% Senes, due 1998 24.800 24.800 104.19 7-3/4*. Senes. due 2001 15,838 15.838 106.46 9*.Senes due 2004 20.000 20.000 107.04 9 95*. Senes. due 2004 25.000 - 109.95 10-1/2% Senes due 2005 . 15,000 15.000 109.84 8-1/2*'. Senes, due 2007 . 25,000 25.000 108.15 151,573 126.573 Unsecured floating rate (15.25% at December 31.1979) promissory note, due 1984 25,000 -
4-1/4% pollution control revenue bonds.
1977 Senes A. due 1979 - 5.000 Less funds on deposit with trustee - (4.000)
Other 8.8125%. due in installments through 1998 2,124 2.169 178.697 129,742 Current matunties of long-term debt . (4,549) (1.045)
Unamortized premium and discount _L2 427) (2.545) 5171,721 $126.152 Scheduled matunties of long-term debt at December 31,1979, are as follows (in thousands):
1980 $ 4.549 1981 54 1982 59 1983 64 1984 30.020 Thereafter 143.951
$178.697
Financial 28
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EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company's indenture of mortgage provides for sinking and improvement funds. For each senes other than the 9.95% senes, the Company is required to make annual payments to the trustee equivalent to 1 % ($1,275,000 at December 31,1979 and 1978) of the greatest aggregate pnncipal amount of such series outstanding prior to a specified date. The Company has generally satisfied the 1 *'o requirement by relinquishing the right to use a net amount of additional property for the issuance of bonds or by purchasing bonds in the open market and expects to continue this practice in the future. With respect t'., the 9.95% series, commencing April 30,1985, the Company will be required to make annual cash payments to the trustee equivalent to 4-1/4% of the greatest aggregate pnncipal amount of such series outstanding at any one time prior to a specified date. The 4-1/4% cash payment must be applied to redeem bonds of the 9.95% series at 100% of the pnncipal amount thereof plus accrued interest.
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 matunty.
Substantially all of the Compand utility plant is subject to a lien under the indenture of mortgage collateralizing the Compan/ s bonds.
In accordance with certain provisions of the indenture covering the first mortgnge bonds, payment of cash dividends on common stock is restncted to an amount equa! to retained earnings accumulated after December 31,1966, plus $4,100.000. Retainea earnings in the amount of approximately $27,800,000 is unrestricted as to the payment of cash dividends at December 31,1979.
The funds on deposit with a trustee ($4,000,000) at December 31,1978, represent a portion of the proceeds from pollution control revenue bonds issued in November,1977. The bonds were redeemed in November,1979.
F. Notes Payable and Commercial Paper:
Short-term notes at December 31,1979, consisted of $34,332,000 of commercial paper with an effective weighted average interest rate of 13.9%, $2.125,000 of notes payable to banks with an effective weighted average interest rate of 14.7%, and $15,290,000 of notes payable, other, with an effective weighted average interest rate of 13.1%.
Short-term notes at December 31,1978, consisted of $32,175,000 of commercial paper with an effective weighted average interest rate of 10.4% and $26,600,000 of notes payable to banks with an effective weighted average interest rate of 10.6%.
The Company and its subsidiary have informal lines of credit with vanous tenders. Certain of these arrangements provide for the maintenance of compensating balances for the available lines of credit and the loans outstanding. At December 31,1979 and 1978, the lines of credit available under these arrangements totaled $104,336,000 (including subsidiary Enes of
$17,625,000 not guaranteed by the Company) and $67,925,000 (including subsidiary lines of
$10,925,000 not guaranteed by the Company), respectively. Average bank balances of approximately $4,710,000 and $2,550,000 were required to be maintained as compensating balances at December 31,1979 and 1978, respectively, in connection with the informal lines of credit.
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. ' Financial 29 EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The maximum and average amounts of aggregate short-term borrowings outstanding at any month-end during the year ended December 31,1979, were $74,767,000 and $59,717,000, respectively, and for the year ended December 31,1978, were $58,775,000 and $43,054,000, respectively. The weighted average interest rate was 10.9% and 7.4% during the years ended December 31,1979 and 1978, respectively, and was calculated by dividing actual interest expense by the average month-end balances outstanding during the related period.
Through December 31,1980, the FERC has authorized the Company to incur short-term debt (in the form of promissory notes or commercial paper) in an amount not to exceed $130,000,000 outstanding at any one time. The interest rates on the notes are to be at the primo rate in effect at the time of issuance, plus in some cases, provisions for compensating balances of 20% u7 der certain conditions. The net proceeds from the issuance of the short-term debt are to be used for construction expenditures.
G. Federal Income Taxes:
The provisions for deferred federal income taxes, which arise from timing differences between financial and tax reporting, are as follows:
Years Ended December 31, 1979 1978 (in thousands)
Tax effect of:
Depreciation differences 51,769 $1.572 Deferred fael costs . _ (1,074) (2.597)
Allowance for borrowed funds used dunng construction 4.023 -
Other costs capitalized 733 -
Amortization related to emergency facilities . (111) (111)
Deferred rate case expense and other 798 (364) 56,138 ($1.500)
Effective January 1,1979, in accordance with a Texas rate order, the Company began providing deferred federal income taxes applicable to the allowance for borrowed funds used during construction, to other costs capitalized and to all differences between book and tax depreciation for property placed in service sfter 1978. Accordingly, additional deferred taxes of approximately $4,828,000 are reflected in deferred tax expense for the year ended December 31,1979.
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Financial 30 EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Federal income tax provisions are less than the amounts computed by applying the statutory rate to income before federal income taxes. Octails are as follows:
Years Ended December 31, 1979 1978 (in thousands)
Tax computed at statutory rate . $16,062 S10.264 Decreases due to:
Allowance for funds used dunng construction (3,427) (3.602)
Excess of straight-line tax depreciaton over book deprecaten (176) (348)
Amortizaten of deferred investment tax credit . (296) (398)
Other (556)
(4351 Total federalincome tax expense 511.728_ S 5.360 Effective federahncome tax rate 33.6?. 25.1 *.
Total federal income tax expense is as follows:
Years Ended December 31 1979 1978 (in thousands)
Federal income tax, current (credit) . S 1,238 ($2.617)
Income taxes associated with other income . 269 463 Total current 1,507 (2.154)
Deferred federal income tax (credit) 6,138 (1.500)
Deferred investment tax credit 4,379 9.412 Amortizaton of deferred investment tax credit . (296) (398) 311,728 $5.360 At December 31,1979, the Company has available for federal income tax purposes an investment tax credit carryforward of approximately S7,000,000 expiring in 1986.
' Financial 3i EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
H. Commitments and Contingencies:
The Company has a 15.8% interest in three units of a nuclear plant and related transmission lines and switchyard presently under construction. The costs to be incurred by the Company at December 31,1979, are approximately $612,600,000, including approximately $169,700,000 of AFUDC. The Company is also committed at December 31,1979, for construction of pollution control facilities in the amount of approximately $15,200,000, including approximately
$2,600,000 of AFUDC. The above amounts were computed assuming an estimated average annualinflation rate of 7%.
In January,1979, the Company entered into an agreement with an independent trust whereby the Company sold to the trust, at cost, substantially all of its nuclear fuel. Under the trust agreement the Company has the option of either repurchasing the fuel from the trust or leasing the heat generated by the fuel. Management of the Company intends to enter into a basic heat supply contract whereby title to the fuel remains with the trust and the Company makes lease payments for the heat generated. Based on this intention and in accordance with industry practice, tne nuclear fuel and related liability are not included in the accompanying balance sheet. At December 31,1979, the trust has incurred cumulative costs of approximately S8,200,000. The Company expects that fuel costs incurred will be recouped at the time the fuelis used. The Company is committed to reimburse the trust for its cash investment in nuclear fuel, not expected to exceed a maximum cash amount of $68.000,000 dunng the ten-year period ending December 31,1989, as well as for interest and other carrying costs of the trust.
The Company's fuel supply arrangements include short-term commitments under a fuel supply arrangement entered into in 1977 with a trust, whereby the Company concurrently assigned its principal long-term fuel supply contract to the trust and agreed to purchase all fuel oil delivered to the trust by the fuel supplier, Payments to the trust for fuel oil purchases consist of the trust's cost of oil determined on an average cost basis plus related administrative and carrying costs. For financial reporting purposes, purchases of the trust are assumed to have been made on behalf of the Company. Accordingly, the balance sheet at December 31,1979 and 1978, includes approximately $7,958,000 and $8,747,000, respectively, recorded as fuel and fuel purchase commitment, representing the Company's commitment to purchase the trust's fuel oil inventory as of those dates.
The Company's operations are subject to environmental protection measures imposed under federal and state laws and regulations. Management does not believe that the impact of any of these matters will have a material adverse effect on the financial statements.
The Company's rates, including fuel adjustment clauses, are subject to the jurisdiction of local, state, and federal authonties. The Company believes that regulatory agencies will continue to allow rate increases designed to allow utilities to recover costs and a reasonable return on investment.
Revenues for 1979 and 1978 include approximately $623,000 and $635,000, respectively, subject to refund pending final determination by the FERC.
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Financial 32 EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
- 1. Allowance for Funds Used During Construction:
The applicable regulatory uniform system of accounts provides for" allowance for funds used dunng construction" ("AFUDC") which is defined as an amount which includes tt.e net cost dunng a period of construction of borrowed funds used for construction purposes plus a reasonable rate on other funds when so used. While AFUDC results in an increase in utility plant under construction for ratemaking purposes with a corresponding credit to income, it is not a current cash item. AFUDC is realized in cash after the re!ated 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 utility plant additions. The Company used an accrual rate of 9-1/2% in 1978. Dunng 1979, the Company changed the rate used to calculate AFUDC from 9-1/2% to 11%, effective as of January 1,1979. In this connection, the FERC promulgated procedures for the computation (a prescnbed formula) of the accrual rate which became effective in 1977. The rates used by the Company do not exceed those permitted under the presenbed FERC formula.
The increase in the AFUDC rate as of January 1,1979, increased net income by approximately S1,659.000 and net income per share by approximately S.13 for the year ended December 31,1979. The AFUDC rate is reviewed quarterly and adjustments,if any, are applied to the full year.
J. Pension Plan:
The Company had $751,000 of pension expense in 1979 and $680,000 in 1978. As of July 1, 1978, date of the most current actuarial valuation, assets of the pension fund exceeded vested benefits by approximately $677,000 and unfunded prior service benefits were estimated to be approximately $3,500.000.
K. Supplementary Profit and Loss Information:
Supplementary profit and loss information with respect to operating expenses is as follows:
Years Ended Decernber 31 1979 1978 (In thousands)
Taxes. other than federal incorne taxes:
Munsc: pal and state property 5 6.653 $ 4.654 Occupancy and street rental . 1,964 1.701 State gross receipts 2.029 1.741 Other 1,109 2.473 Total 511,755 $10.569 Charged to:
Taxes, other $10,114 $ 9.231 Utihty plant and other accounts 1.641 1.338 Total $11,755 $10.569
. Financial 33 EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Expenditures for rents, royalties, advertising and development costs individually did not exceed 1% of total revenues and hence are not presented.
L. Quarterly Financial Summary (Unaudited):
The following table sets fo(th the quarterly financial summary of the Company for the years ended December 31,1979 and 1978:
(in Thousands of Dollars Except for Per Share Data)
(AH Ouarterfy Data is Unaudited)
Net Net incorne income Apphcable Per Operating Operating Operating Net To Comrnon Cornrnon 1979 Revenues Expenses income income Stock Share 1st quarter $36.873 $32.119 $4.754 $3.976 $3.085 S.25 2nd quarter . 37,147 31.564 5.583 5.334 4.441 .35 3rd quarter 45.604 37.927 7.677 7,705 6.801 .50 4th quarter 40.088 34.033 6.055 6.175 4.915 .34 1_978 1st quarter 31.418 27.142 4.276 2.812 2.236 .24 2nd quarter . 36.219 30.899 5.320 3.883 3.307 .33 3rd quarter 37.787 31.470 6.317 5.133 4.556 .43 4th quaner 31,132 26.596 4.536 4.196 3.350 .30 M. 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 ability to 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 Company's ability to obtain adequate and timely rate relief. The Company retained Stone & Webster Appraisal Corporation of Boston, Massachusetts (" Stone & 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 if the assets were sold.
Rather, replacement cost generally represents the estimated amount that would be required to replace, at today's prices. tne productive capacity of certain of the Company's existing assets with assets of a modern type including additional pollution coritrol equipment presently required under environmental regulations. Such replacement would result in changes in fuel, operation and maintenance cost which are not reflected in the data submitted.
Financial k ~ '.
EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 federallegislation in connection with a national energy policy, replacement of existing capacity with capacity fueled by oil may no longer be a viable altemative. To the extent existing capacity n:ust be replaced by capacity using coal or nuclear fuel, replacement 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 indicates 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 junsdiction 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 histoncal dollars invested in productive capacity. The ratemaking process does not allow the Company to recover the excess of replacement cost over histoncal cost. However, at such time as amounts are actually expended to replace existing assets, such amounts will be considered in determining the Company's rate base for purposes of ratemaking.
The Company believes that the difference between depreciation 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 for service and no further inflation in costs.
The consolidated replacement cost information on a comparative basis with historical cost is shown in the tabulation below as of December 31,1979 and 1978 (amounts in thousands):
1979 1978 Estimated Actual Estimated Actual Replacement Historical Replacement Histoncal Cost Cost Cost Cost Plant investment suciect to replacement cost disclosure * . $1,043,102 $561,783 $854,720 5438.085 Accumulated depreciation 203.860_ 76.053 171.808 68.672 Net piant investment .5 239.242 $485.730 $682.912 $369.413 Depreciation enpense for the year . .5 20.205 $ 8.s31 S 18.089 $ 7.616
' Amounts exclude nonutility plant of approximately $2,357,000 and $1,563.000, respectively, and include land, intangibic assets, construction work in progress, and nuclear fuel and other investments at onginal cost of approximately $275,712,000 and S160,750.000 as of December 31,1979 and 1978, respectively.
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'Fmanc.ia l 3s EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STAT EMENTS - (Continued)
N. Estimated Effect of inflation (Unaudited):
The Financial Accounting Standards Board issued Statement No. 33 " Financial Reporting and I . nging Pnces" to provide estimates of the impact from inflation on a business' operations. The
.b edules below are intended to indicate the effect on the Company from general inflationary Wsures as measured by the Consumer Price Index (CPI). Due to estimating techniques and cortain judgemental decisions, the information should be viewed as only an approximation of inflation's effect.
Constant dollar amounts represent historical costs stated in dollars of equal purchasing power, as measured by the Consumer Pnce Index for all Urban Consumers. The cost of plant was restated to average 1979 dollars and depreciation expense was calculated by applying the Company's depreciation rate to the restated amounts.
As presenbed in Statement 33 income taxes were not adjusted.
Fuel used in generation has not been restated from historical cost amounts nor have inventories. Fuel costs are recoverable currently through the operation of fuel adjustment cla uses and inventory tumover periods are relatively short. In accordance with FASB Statement No. 33, other items of income and expense have not been restated.
The regulatory commissions having jurisdiction over the Company's rates allow for the recovery of the historical cost of plant through depreciation. The restated cost of plant is not presently recoverable. Therefore, the difference between historical plant cost and restated plant cost is shown below as a reduction to net recoverable cost. The reduction to recoverable cost should be offset by tne gain from the decline.in purchasing power of net amounts owed.
Dunng inflationary periods, holders of monetary assets suffer a loss of general purchasing power while holders of monetary liabilities expenence a gain. The gain from the decline in purchasing power shown below is attnbutable to the substantial amount of debt used to finance property, plant and equipment. Since the depreciation on plant is limited to the recovery of historical costs, the Company does not have the opportunity to realize a holding gain on debt and is limited to the recoser/ only of the embedded cost of debt capital.
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Financial se' .
EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SUPPLEMENTARY STATEMENT OF INCOME FROM OPERATIONS ADJUSTED FOR CHANGING PRICES (Unaudited)
Year Ended December 31,1979 (Thousands of Dollars)
Constant Conventonal Dollar Histoncal Average Cost 1979 Dollars Operating Revenues $159.712 5159.712 Fuel Purchased and Interchanged Power . 78.138 78.138 Other Operating and Maintenance Expenses . 37.801 37.801 Depreciaton . . . . 8.245 15.614 Federalincome Tax 11 A59 11.459 Interest Expense 8.621 8.621 Other ir come . (7.742) (7.742) 136.522 143.891 Income From Operations S 23.190 $ 15,821' Net income Per Share of Common Stock . $1.45 $ 90 Net Assets at Year End at Net Recoverable Amount . $208.321 Reducten of Plant to Net Recoverable Cost . ($45.674)*
Gain From Dechne in Purchasing Power of Net Amounts Owed . 29.996 Difference ($15.678)
- Incluson of the reducten to net recoverable cost in income from ooeratens produces a loss of $29.853.
FIVE YEAR COMPARISON OF SELECTED FINANCIAL DATA AVERAGE 1979 CONSTANT DOLLARS (Unaudited)
Years Ended December 31, 1979 1978 1977 1976 1975 Operating Revenues (Thousands)
Actual . . $159.712 5136.556 5112.339 S111.188 $ 91.461 1979 Dollars 159,712 151.931 134.559 141.773 123.348 Cash Dividends Per Common Share Actual . $1.07 $1.02 S .99 5 .95 5 .91 1979 Dollars $1.07 $1.13 $1.19 $1.21 $1.23 Year-End Market Pnce Per Common Share Actual . . . 39.38 $10 88 512.00 $12.00 S10.38 1979 Dollars $8.87 11.66 14.02 14 97 13.57 Average Consumer Pnce Index 217.4 195.4 181.5 170.5 161.2
' Financial 27 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Shareho!ders and Board of Directors El Paso Electric Company We have examined the consolidated balance sheet of El Paso Electric Company and Subsidiary at December 31,1979 and 1978, and the related consolidated statements of income, retained earnings and changes in financial position for the years then ended. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.
In our opinion, the consolidated financial statements referred to above present fairly the consolidated financial position of El Paso Electric Company and Subsidiary at December 31,1979 and 1978, and the consolidated results of operations and changes in financial position for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis.
COOPERS & LYBRAND Dallas, Texas February 22,1980
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Financial 38 I
SUMMARY
OF OPERATING DATA 1979 1978 1977 1
Population served at retail, estimated (a) 554,000 544.000 532,000 i Numberof Customers:
Residential . . . . 157,601 150,739 143,645 Commercial and industnal, small . 15,791 15.381 14.518 Commercal and industnai,large 44 47 46 Other 1,875 1,842 1,715 Total . 175,311 168,009 159,924 Annual system peak load, ne' kilowatts 688,000 690,000 657,000 Output, net gensrated and pu chased, thousand kilowatt-hours:
Steam 3,771,043 3,673,685 3,475,753 Purchased and interchanged (119,166) (84,609) (3.574)
Total (b)(c) 3,651,877 3,589,076 3,472.179 Sales of electnoty, thousands of dollars:
Residential .S 52.899 $ 44,178 $ 34,484 Commercal and industnal, srqall . 46,741 39,780 33,583 Commercal and industnal,large 26,402 22,402 17.666 Other 32,577 29289 25.581 Total . , S 158,619 $ 135.649 $ 111.314 Sales, thousand kilowatt-hours:
Residential 937,858 907,3 % 874,140 Commercal and industnal, small . 949,514 913.036 902.699 Commeroaland industnal, farge 682,163 650,542 617,955 Other 854,749 849,113 847.930 Total (b)(c) 3,424,284 3,320.649 3242,724 Average annual use per residential customer, kwh 6.072 6,153 6.261 Average annual revenue per residential customer 5 342.49 $ 299.40 $ 246.99 Average revenue per kwh sold, cents:
Residential (d) ... 5.64 4.87 3.94 Commercial and industnal, small (d) . 4.92 4.36 3.72 Commercal and industnal,large (d) 3.87 4.14 3.47 Average revenue per kwh: total sa'es (d) 4.63 4.09 3.45 Electncline polemiles:
Over 15,000 volts . 2,070 1.999 1,811 Less than 15.000 votts (e) . 2,794 2.759 2.755 Total 4,864 4,758 4.566 Totalemployees . 965 908 838 (a) Restated as a resuit of 1970 census.
(b) Differences between total output and total sales represent company use and losses.
(c) in addition to the Company s 345 inr transmisson hne % tween El Paso and Albuquerque, the company system is interconnected at Las Cruces, New Mexico, with Pubic Service Company of New Mexico: Community Pubhc Servce Company, Plains Electnc Generaton and Transmisson Cooperative, Inc., and Elephant Butte Generating Staten through the faolities of the United States Bureau of Reclamaton under a pool agreement.
(d) includes adlustments under existing ft.el clauses.
(e) includes small amount of kne on poles owned by telephone company.
. 39 1976 1975 1974 1973 1972 1971 1970 520.000 505.000 495.000 485.000 475.000 465.000 450.000 135.344 130.010 126.760 123.653 11S.170 114.M0 110.308 14.203 13294 13.163 12.816 12.333 11.666 11.279 39 32 29 27 27 23 21 1.748 1.663 1.545 1.445 1.351 1255 1228 151.334 144.999 141.497 137.941 132.881 127.584 122.836 677.000 640.000 638.000 618.000 543.400 500.700 469.100 3.501.416 3.433.698 3.369.606 3.450.021 3.075.013 2.705.160 2.506.048 51.013 15.837 (13.709) (180.767) (112.435) (43.375) 360 U52.429 3.449.535 3.355.897 3.269.254 2.962.578 2.661.785 2.506.408
$ 31.415 S 27.080 $ 20.126 $ 16.749 $ 15.133 $ 14.081 $ 13.099 33.628 28,870 19.192 14.942 12.948 11.515 10.336 15.709 11.816 7.824 6.061 5231 4,517 4.194 29.537 22.880 15.595 11.416 9.696 8.565 8.155
$ 110.289 $ 90.646 $ 62.737 $ 49.168 $ 43.008 5 38,678 5 35.784 816.169 782.285 765.636 755.701 694.855 643.313 598.240 929.556 909.967 853,960 799.997 696.584 610.876 540.529 582.125 513.637 508.482 536.754 487.945 440.568 426.177 1.030.812 1.006.311 980.175 958.252 853.978 758.769 763.597 3.358.662 3.212.200 3.108.253 3.050.704 2.733.362 2.453.526 2.328.543 6.193 6.097 6.116 6211 5.948 5.718 5.499
$ 238.36 5 211.04 S 160.72 $ 137.59 5 129.53 $ 125.16 S 120.39 3 85 3.46 2.63 2.22 2.18 2.19 2.19 3.62 3.17 2.25 1.87 1 86 1.89 1.91 2.70 2.30 1.54 1.13 1.07 1.03 .98 3.30 2.82 2.02 1.61 1.57 1.58 1.54 1.759 1.706 1.647 1.581 1.539 1.503 1.442 2.727 2.691 2.673 2.616 2.565 2.507 2.457 4,486 4.397 4.320 4.197 4.104 4.010 3,899 816 778 726 704 659 644 629 l
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Financial 4
SUMMARY
OF OPERATIONS (Thousands of Dollars)
Year Ended December 31 1979 1978
_'977 Operating revenues . . $159,712 5136.556 $11.2.339 Fuel 81,669 73.447 59.442 Operation and maintenance . 24,156 21.171 16.685 Depreciation (a) 8.245 7,361 6.498 Taxes 21,573 14.128 12.377 Otherincome F,742) (3.688) (1.689) 127,901 112.419 99.313 income before interest charges 31,811 24,137 19.026 Totalinterest charges 8,621 8.113 7.604 income before cumulative effect on pnor years of change in account:ng method . ..... .. 23,190 16.024 11,422 Cumulative effect to January 1.1974 of changc ,n accounting for fuel costs, net of related income taxes s$912.000)
Net income S 23,190 $ 16.024 5 11.422 Earnings per share of common stock. based on weignted average number of shares outstanding dunng each year:
Income apphcable to ccr 1 mon stock Defore cumulative effect of change in accounting method S 1.45 $ 1.30 5 1.11 Cumulative effect to January 1,1974, of change in accounting forfuelcosts .
Net income apphcable to common stock $ 1.45 5 1.30 5 1.11 Pro forma amounts assuming the new method of accounting for fuel costs is apphed retroactively (b):
Net encome apphcable to common stock Earnings per share .
Dividends paid per share on common stock . $ 1.07 5 1.02 5 .99 Electnc Plant . $561,783 5438.085 5338.598 (a) Does not include depreciation on automobiles and trucks, which was allocated to other accounts.
(b) The effect of the accounting change in years pnor to January 1.1971. is not sqnificant.
, . 41 t
5 1976 1975 1974 1973 1972 1971 1970
$111.188 $ 91.461 5 63.072 5 49.483 5 43.264 5 38.919 5 36.026
! 53.154 44.714 24.914 15.766 10.951 8.974 7.330 17.954 14.516 11.463 8.160 8.101 7.717 7.149 1 6233 5.506 4.345 4.102 3.776 3.509 3.255 15.727 11.197 9.809 9.573 9.279 8,151 8.194 (838) (1.423) (770) (84) (668) (699) (393) 92230 74.510 49.761 37.517 31.439 27.652 25.536 18.958 16.951 13.311 11.966 11.845 11267 10.490 7.442 6.853 5200 3.962 3.591 3.450 3.073 11.516 10.098 8.031 8.004 8254 7.817 7.417 988
$ 11.516 5 10.098 $ 9.019 5 8.004 S 8.254 5 7.817 5 7.417 5 129 $ 1.30 S 1.19 5 1.19 5 122 S 1.16 S 1.10
.15 5 1.29 5 1.30 S 1.34 S 1.19 $ 1.22 S 1.16 S 1.10 S 8270 $ 8.035 S 7.481 S 1.29 5 1.25 5 1.17 5 95 S .91 S 88 5 .86 S .83 S 80 $ .76 5274.502 $250.375 5227.196 S185.058 $174.485 5166275 $150.859
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Financial 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED STATEMENT OF INCOME The f actors discussed in the following summary of period to period changes, which may not be indicative of future operations or earnings, have had an effect upon the Company's results of operations during the years ended December 31,1979 and 1978 (in thousands, except for per share data).
1979 increase (Decrease) 1976 increase Over 1978 Over 1977 Operating revenues . . $23.156 17.0*. 524.217 21.6*'.
Operating expenses 19.536 16.8*. 21,105 22.2*'.
Operating income 3.620 17.P. 3,112 18.0*'.
Allowance for funds used dunng construction:
Other 4253 1330*. 1.597 99 8*'.
Borrowed . 4.438 103.0's 2.1% 104.0*.
Otherincome (199) (40 5*.) 402 451.7's interest charges:
Long-term ceot 2.112 22.3*. 1.316 16.1 *.
Other 2.834 96.3*'. 1.389 89 4*.
Net income 7.166 44 7*. 4.602 40.3*.
Preferred dnndend requirements . 1.373 53.3*. 538 26.4*.
Net income per share .15 11.5*. .19 17.1 *.
Weighted average number of common shares outstanding 2.919 28.2*s 1.845 21.7*.
Operating Revenues Operating revenues increased in 1979 over 1978 principally as a result of an increase in the average base rate (calculated without giving effect to the recovery of fuel costs). The average base rate for 1979 was .3c per kilowatt-hour higher than it was in 1978. Base rates, fuel (collected both in base rates and through fuel adjustment clauses) and volume accounted for approximately 62%,29% and 9%, respectively, of the total 17.0% increase in revenues in 1979 over 1978.
Operating te a increased in 1978 over 1977 partially as a result of increased base rates (calculated without giving effect to the recovery of fuel costs). Base rates for 1978 were approximately .3c per kilowatt-hour higher than those in 1977. Base rates, fuel (collected both ir.
base rates and through fuel adjustme.,t clauses) and volume accounted for approximately 45%,
50% and 5%, respectively, of the total 21.6% increase in remues in 1978 over 1977.
Operating Expenses increases in operating expenses for 1979 over 1978 were due primanly to increases in fuel expense and federal income tax provisions. Escalations in fuel cost accounted for approximately 42% of the total 16.8% increase, while federalincome tax increases contnbuted 34%. Taxes increased in 1979 over 1978 partially due to the presence of tax credits in 1978 not present in 1979 and the deferral of taxes on allowance for borrowed funds used during construction (ABFUDC) which began in January,1979.
Increases in operations and maintenance expense (23% of the increase) were due primanly to inflationary pressure on wages, employee benefits, matenals and other costs.
Increased operating expenses in 1978 over 1977 were due principally to escalating fuel costs and increases in the aggregate costs of operation, maintenance and depreciation. Such costs accounted for approximately 92% of the total increase. The escalating fuel costs accounted for approximately 66% of the totalincrease. Increased operations expense (18% of the increase) was due to inflationary pressure on wages, employee benefits, matenals and other costs.
Increased depreciation expense, which accounted for approximately 4% of the increase, was due to increases in depreciable property together with increased average annual rates in 1978.
Increases in federal income taxes accounted for approximately 2% of the increase, while other taxes contributed 7% toward the total increase.
4 s
. Financial 43 Operating income increases in operating income are directly related to changes in operating revenues and operating expenses in their respective periods. (See the captions " Operating Revenues" and
" Operating Expenses' above.)
Allowance for Funds Used Dunng Construction AFUDC increased in 1979 over 1978 and in 1978 over 1977 due to increased construction expenditures principal'y associated with the Palo Verde Station as well as increased accrual rates. The Company changed its accrua! rate from 9-1/2% to 11% effective January 1,1979, and from 7-1/2% to 9-1/2% effective January 1,1978.
AFUDC amounted to 63% and 56% of net income applicable to common stock during the years ended December 31,1979 and 1978. The 1979 AFUDC contnbution to net income is net of the effect of deferred federalincome taxes on the borrowed portion of AFUDC.
Other Income Other incorne changed in each comparable period pnmanly as a result of fluctuations in interest income.
Interest Charges Interest on long-term debt increased in all periods due to the issuance of additional first mortgage bonds and a long-term promissory note dunng the penods. The changes in other interest in 1979 and 1978 reflect increased short-term borrowing and higher prevailing interest rates in both years.
Net income Per Share Changes in net income per share are the result of fluctuations in net income, increases in preferred dividend requirements, and increases in common shares outstanding during the penods.
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Corporate Information o .
Annual Meeting of Shareholders Common Stock Shareholders All shareholders are invited to attend the 1980 Annual The Common Stock of the Company is necn every state Meeting of Shareholders Moncay. May 19.1980 at 10 a m. of the union. the Distnct of Columbia. some U.S. temtones El Paso time,in the Oleander Room of the Rodeway inn, and many foreign countnes The number of Sharelaiders 6201 Gateway West. EI Paso. Texas increased from 25.633 in 1978 to 32.995 in 1979_ Many of Proxies for the meeting will be solicited by the Board of our customers and other persons in the Soutnwest are Directors in a communication to be mailed in earty Apnl. Shareholders as evidenced by the S.874 Shareholders in This Annual Report is not a part of such proxy solicitation Texas and New Mexico who own 19 percent of the and is not intended to be used as such outstanding shares. Our records show that 82 percent of the Company a shareholders own less than 500 shares A copy of the Company's most recent each.
10-K Report, including the financial statements and Transfer Agents schedules thereto, filed by El Paso Electric Company Irving Trust Company with the Securities and Exchange Commission. will be One Wall Stres made available to Shareholders without charge upon New York. New York 10015 written request to: (Common and Preferred Stock)
Theta S. Fields, Secretary El Paso Electric Company The State National Bank of El Paso Post Office Box 982 ost OMice Box 1072 El Paso, Texas 79%0 aso. Texas 79958 (Common Stock Only)
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4,s o i Service Area El Paso Electnc is an investor-owned. tax-paying electnc utility operating in Texas and New Mexico.
The Comoany is engaged in the generation. El Paso Electric Company transmission. distnbution and sale of electnc P. O. BOX 982 i energy. El Paso Electnc serves acoroximately 175.000 customers in West Texas and South El Paso. Texas 79960 l i
Central New Mexico in a service area of '
apprCximately 10.000 square miles. The sennce area extends from the Cacatio Dam in New Mexico southeasterfy to Van Hom. Texas. Equal Ooportuns'y Employer
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SAI.T HIVER PRO. LECT ACHICULTURAL IMPROVEMENT AND POWER DISTRICT AND ITS ACENT SALT HIVER VALLEY WATER USERS' ASSOCI ATION l COMBINED RA, LANCE SHE2TS - DECEMBER 31, 1979 AND 1978 ASSETS
~~~---
CAPITALIZATION AND LIABILITIES
($000) ($000) 1979 ~~~1978 1979 1978 UTILITY PLANT, st original cost LONG-TERM DEST (Note 5):
(Notes I, 2, 3 and 4): Electric system revenue bonds Plant in service. $1,658,844 $1,386,725 General obligation bonds and other 255,236 269,289 Electric $1,467,048 $ 891.865 Irrigation ...---.--- -....-....
67,381 66,140 1,914.080 1,656,014 Ceneral 51,792 44.468 .---.....- --...---.-
Total plant in service 'il586l535 ~i$565$433 ACCUMULATED NET REVENUES, invested l Less. Accumulated depreciation on principally in utility plant:
plant in service 286,099 254,019 Balance beginning of year 276,684 210,891 Het revenues for the year 100,435 65,793 1,300,122 748,454 ....-..... ..........
Construction work in progress 769,562 909,666 Balance end of year 377,119
.......... .......... 276.684 2,069,684 1,658,120 Total capitalization 2,291,199 1,932,699 +
SECREGATED FUNDS, consisting of cash, U. 5.
Covernment obligations and bankers' acceptances set aside in accordance with resolutions of bond issues: CURRENT LIABILITIES, excluding $18,999,000 in Debt service funds, excluding $54,768,000 1979 and $16.132,000 in 1978 representing in 1979 and $47,156,000 in 1978 for current portion of long-term debt which is payment of accrued interest (Note 5) 138,540 118,487 to be paid from segregated funds:
Construction funds 246 491 Notes payable to banks (Note 7) 120,000
.......... .......... Accounts payable 74,302 50.635 138,786 118,978 Accrued taxes and tax equivalents (Note 6) 18,419 17,875 CURkEST ASSETS:
Accrued interest 56,044 47,156 Customers' deposits 6,440 5,255 Cash 396 524 Tec.porary investments, at cost, held Other current and accrued liabilities 7.271 6,572 primarily for const ruction 115,631 119,938 282,476 127,493 Deposit in debt service fund for payment .......... ..........
of accrued interest on bonds 54,768 47,156 Tr.de and other account s receivable, less reserves of $1,455,000 in 1979 and DEFERRED CREDITS AND RESERVES 10,161 8,733 51.335,000 in 1978 for doubtful accounts 37,335 38,621 .......... ..........
Fuel stocks, at average cost 77,427 15,221 Materials and supplies, at average cost 20,625 14.926 Prepayments, interest receivable and other 9,935 8,387 COMMITMENTS AND CONTINCENCIES (Notes 3 and 6) 316.117 244,773 .
DEFERRED CilARCES AND OTHER ASSETS (Note 1) 59,249 47,053 $2,583,836 $2,068,924
- = assansassa
$2.583,836 $2,068,924 3333333333 2EE2323:2E The accompanying notes are an integral part of these combined balance sheets,
SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT AND ITS AGENT, SALT RIVER VALLEY WATER USERS' ASSOCIATION NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1979 AND 1978 (1)
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES:
(a) The Project's Board of Directors serves as its regulatory agent.
(b) Principles of Combination The combined financial statements include the accounts of the Salt River Project Agricultural Improvement and Power District
("the District") and the accounts of its agent, the Salt River Valley Water Users' Association, together referred to as the Salt River Project ("the Project"), and a wholly owned subsidiary, Salt River Generating Company. All significant intercompany transactions have been eliminated.
(c) Utility Plant, Depreciation and Maintenance The accounting records of the Project are maintained substantially in accordance with the Uniform System of Accounts pre-scribed for electric utilities by the Federal Energy Regulatcry Commission. Utility plant is stated at the historical cost of con-struction. Construction costs include labor, materials , services purchased under contract, and allocations of indirect charges for engineering, supervision, transportation, and administrative expenses.
An allowance for funds used to finance construction work in progress is capitalized as a part of ".he electric and general plant. This allowance is deducted from net financing costs in the combined statements of net revenues and added to utility plant.
Capitalization rates of 7.2% and 7.5% were used in 1979 and 1978, respectively.
Depreciation expense is computed on the straight-line basis over estimated useful liv ~es of the various classes of plant. Rates in effect resulted in provisions approximating 3.49% for 1979 and 3.46%
for 1978 on the average cost of depreciable electric plant, and 1.94%
for 19/9 and 1.93% for 1973 for depreciable irrigation plant. When property representing a retirement unit is replaced, removed, or abandoned, the cost of such property is credited to the appropriate utility plant account, and such cost together with removal costs less salvage is charged to accumulated depreciation.
The Project charges to maintenance expense the cost of labor, materials, and other expenses incurred in the repair, restoration of condition and replacement of minor items of property.
SALT R2VER' PROJECT AGR2 CULTURAL KMPROVEMENT AND POWER DISTRICT AND ITS AGENT, SALT RIVER VALLEY VATER USERS' ASSOCIATION COMBINED STATEMENTS OF SOURCES OF FUNDS FOR ADDITIONS TO UTIL1TY PLANT FOR THE YEARS ENDED DECEMBER 31, 1979 AND 1978 (S000) 1979 1978 GROSS ADDITIONS TO UTILITY PLANT, excluding allowance for funds used during construction $394,728 $406,124
== ==
FUNDS GENERATED FROM OPERATIONS:
Net revenues for the year $100,435 S 65,793 Add- Depreciation (including charges to clearing accounts) and other charges not requiring current funds 37,624 34,969 Deduct. Allowance for funds used during construction not providing curren:1 funds (59,735) (42,183)
Total funds generated from operations before retirement of debt 78,324 58,579 Less- Repayment of long-term debt (16,167) (15,393)
Net funds generated from operations 55155 b5[55 FUNDS OBTAINED FROM FINANCING:
Proceeds of bond issues, less defeased bonds 273,122 239,588 Advances from U.S. Government for rehabilitation of irrigation plant 766 1,236 Contributions in aid of construction 7,582 7,898 Borrowings, net of repayments 119,256 926 Total funds obtained from financing ~555$f55 ~559$558 Other-Increase in segregated funds set aside for debt service (20,053) (13,417)
Decrease in segregated funds set aside for construction 245 49,856 Decrease in temporary investments held primarily for construction 4,307 26,517 Net funds obtained from financing ~555$555 ~555$5hd CHANGES IN OTHER ITEMS AFFECTING FUNDS:
Decrease in receivable on sale of plant - 47,480 Increase in unamortised loss on defeased debt - (6,639)
Increase in accounts payab'.e 23,667 9,563 Decrease (increase) in accounts receivable 1,236 (7,413)
(Increase) decrease in fuel stocks and materials and supplies (67,905) 5,998 Increase in deposits for payment of accrued interest on bonds (7,612) (8,300)
Increase in accrued interest 8,888 8,300 (Increase) decrease in cash 128 (183)
Change in other assets and liabilities, net (11,106) 1,528 Net change in other items "55$55E)
( ~~5h$35E FUNDS USED FOR ADDITIONS TO UTILITY PLANT 555E f55 5Eb5$555
== ==
The accompanying notes are an integral part of these combined statements.
4
, SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT AND ITS AGENT, SALT RIVER VALLEY WATER USERS' ASSOCIATION COMBINED STATEMENTS OF NET REVENUES FOR THE YEARS ENDED DECEMBER 31, 1979 AND 1978 (5000) 1979 1978 OPERATING REVENUES:
Electric $413,066 $333,329 Water and irrigation 4,723 4,435 Total operating revenues 417,789 337,764 OPERATING EXPENSES:
Power purchased 25,020 23,449 Fuel used in electric generation 100,352 73,050 Other operation expenses 57,876 52,051 Maintenance 32,508 29,201 Depreciation and amortization (Note 1) 32,995 30,806 Taxes and tax equivalents (Note 6) 42,859 38,340 Total operating expenses 291,610 246,897 Net operating revenues 126,179 90,867 FINANCING COSTS:
Interest on bonds at coupon rates 104,964 88,125 Amortization of bond discount 1,100 953 Amortization of bond issue expense 231 211 Amortization of loss on defeased debt 976 901 Interest on other obligations 6,475 1,797 Interest earned on inves tments and
. deposits (28,841) (25,059)
Net financing costs 84,905 66,928 s
Less- Allowance for funds used during construction (Note 1) (59,735) (42,183)
Financing costs less allowance for funds used during construction 25,170 24,745 OTHER DEDUCTIONS, net 574 329 l
i NET REVENUES FOR THE YEAR S100,435 S 65,793
== ==
l The accompanying notes are an integral part of these combined statements.
4 ARTHUR ANDERSEN & CO.
PHOENIX ARITONA To the Board of Directors, Salt River Project Agricultural Improvement and Power District, and Board of Governors ,
Salt River Valley Water Users' Association:
We have examined the combined balance sheets of SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT (a political subdivision of the State of Arizona) and its & gent, SALT RIVER VALLEY WATER USERS' ASSOCIATION, together referred to as the SALT RIVER PROJECT, as of December 31, 1979 and 1978, and the related combined statements of net revenues and sources of funds for additions to utility plant for the years then ended. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.
In our opinion, the financial statements referred to above present fairly the financial position of the Salt River Project as of December 31, 1979 and 1978, and the results of its operations and sources of funds for additions to utility plant for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis.
!NM A k.
Phoenix, Arizona, February 15, 1980.
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. (d) Bond Expense Bond discount, premium, and bond issue expense are being amortized over the terms of the related bond issues.
(e) Unamortized Loss on Defeased Debt In April 1978 and August 1977 electric system revenue bonds were sold. Portions of the proceeds of these bonds were used to defease $210,000,000 of the outstanding electric system revenue bonds. These defeasances resulted in gross savings in
- debt service over the lives of the new issues of S32,300,000. The combined financing costs of the defeasances were $26,055,000.
The District Board of Directors approved deferral of the financing costs and their amortization over the lives of the April 1978 and August 1977 issues.
(f) Employes' Retirement Plan The Project has a retirement plan covering substantially all employes. The plan is funded entirely from employers' contri-butions and the earnings of the invested assets. The estimated unfunded past service liability, as determined by the plan's actuary using the " entry age normal cost" valuation method, with frozen initial liability, was $9,641,776 as of July 1,1979. This amount is being funded and amortized over a period ending in 2009. The employers' contributions to this plan totaled S7,392,482 in 1979 and $5,970,882 in 1978.
At July 1, 1979, the plan's assets exceeded the actuarially computed value of the vested benefits at the same date.
(g) Revenues Meters for residential, commercial and small industrial customers are read cyclically and sales recorded only when billed.
This system of billing results in earned but unbilled revenues which amounted to S10,438,200 at December 31, 1979, and S8,956,000 at December 31, 1978. For large industrial customers, meters are read near month-end and billings recorded on the accrual basis. Electric revenue billings are adjusted pericdically for changes in costs of fuel and purchased power. Revenues from water and irrigation operations are recorded when earned.
(h) Electric Rates Under Arizona law, the District Board of Directors has the exclusive authority to establish electric rates. The District ir required to follow certain procedures, including certain public notice requirements anc holding a special Board meeting, before implementing any changes in the standard electric rate schedules.
A general rate increase of 9.6% approved by the District's Board on .,anuary 29, 1980 becomes effective March 1, 1980.
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(2) POSSESSION AND USE OF UTILITY PLANT:
The United States of America retains a paramount right or claim in the Project which arises from the original construction and operation of the Project's facilities as a Federal Reclamation Project. The Project's right to the possession and use of, and to all revenues produced by, these facilities is evidenced by contractual arrangements with the United States.
(3) CONSTRUCTION PROGRAM:
Balances shown for construction work in progress represent expenditures for new facilities required to serve anticipated custo=er needs, and consist of:
December 31 (S000) 1979 1978 Electric generating facilities $741,638 S828,371 Transmission and distribution 19,937 75,349 Irrigation plant 5,219 3,247 Other construction 2,768 2,699 Total S769,562 $909,666
== ==
Construction expenditures planned for 1980 through 1984 approximate S328,200,000; S300,900,000; S197,500,000; S281,100,000 and $221,100,000, respectively.
At December 31, 1979, necessary commitments had been i entered into for delivery of materials and services on construc-tion projects. In addition, various firm commitments exist under coal and fuel oil supply contracts.
Palo Verde Nuclear Generating Station (PVNGS):
The Project has a 29.1% interest in PVNGS. From informa-tion now available the Project cannot assess whether the construction schedule used for Units 1, 2 and 3 will be affected by delays or moratoriums in the issuance of permits and licenses of the nature currently under review by Congress and the Nuclear Regulatory Commission as a result of the Three Mile Island incident.
Currently there is a contingency allowance to reflect the possibility of one year delays in the completion of Unit 2 and 3, and the possibility of more stringent regulatory requirements related to nuclear facilities. There can be no assurance that this provision will be adequate to cover possible increased costs l associated with any major changes mandated by regulatory agencies as a result of the Three Mile Island incidenc.
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. Anti-nuclear groups active in Arizona are circulating petitions for ballot measures that purport to prohibit the con-struction and operation of any nuclear facilities in Arizona, including those now under construction, until certain conditions are met, and to deny recovery of expenses resulting from accidents and outages of such facilities to PVNGS participants whose rates are regulated by the Arizona Corporation Commission. If these measures are on the 1980 Arizona general election ballot, the PVNGS participants intend to actively oppose their approval.
(4) INTERESTS IN JOINTLY OWNED ELECTRIC UTILITY PLANTS:
The Project has entered into various agreements with other electric utilities for the joint ownership of electric generating and transmission facilities. Each participating owner in these facilities must provide for and furnish the financing for its ownership share. The follcuing schedule reflects the Project's ownership interest (at cost) in jointly owned electric utility plant at December 31, 1979.
In Millions Ownership Plant Construction Share in Accumulated Work in Plant Name Percent Service Deoreciation Progress Four Corners (New Mexico) 10.0 S 21.0 S 6.7 $ 3.1
- Mohave (Nevada) 10.0 30.5 7.9 2.7 Navajo (Arizona) 21.7 200.6 29.5 .3 Hayden (Colorado) 80.0 102.1 11.7 .1 Coronado (Arizona) 70.0 439.8 .5 167.2 Craig (Colorado) 29.0 124.5 .1 78.0 Palo Verde (Arizona) 29.1 3.4 -
428.6 S921.9 $56.4 $680.0
=====
The Project's share of direct expenses of the jointly owned plants is included in the corresponding operating expenses in the combined statements of net revenues.
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. (5) LONG-TERM DEBT:
($000)
Future Interest Rate 1979 1978 Maturities Electric System Revenue Bonds (a):
1973 Series A and B 5 to 6-1/2 5 144,090 $ 145,885 1980-2011 1974 Series A and B 5.7 to 7.6 140,000 140,000 1983-2012 1976 Series A, B, C and D 4.0 to 7.2 405,000 405,000 1980-2016 1977 Series A, B Refunding and C 3-3/4 to 6-l/8 395,915 395,915 1980-2017 1978 Series A, B and C 4.4 to 7 317,900 317,900 1981-2018 1979 Series A, B and C 4-3/4 to 7-1/4 281,107 -
1983-2019 1,684,012 1,404,700 Unamortized bond discount (25,168) (17,975)
Total electric system revenue bonds outstanding 1,658,844 1,386,725 General Obligations Bonds and Other, 1% to 7.77% (b) 255,236 269,289 1980-2004 Total long-term debt $1,914,080 $1,656,014 (a) Electric system revenue bonds are secured by a pledge of, and a lien on, the revenues of the electric system af ter deducting " operating expenses", as defined in the bond resolutions, subject to prior liens of general obligation i bonds of $241,074,998 and amounts due the United States :
of S12,545,337. In all years to date electric revenues, I after deducting " operating expenses" as defined in the -
bond resolutions, have been more than sufficient to meet ,
all debt service requirements. '
i (b) General obligation bonds are a lien upon the real property included in the District and are additionally secured by a pledge of revenues from.the operation of the electric system. If the net electric revenues, as defined in the bond resolutions, are not sufficient to meet the principal and interest payments, the bonds and interest are payable from a levy of taxes on the real property.
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. The annual maturities of bonds and other long-term debt outstanding as of December 31, 1979 due in each of the years 1980 through 1984 are $19,524,000; S21,934,000; $22,814,000; $23,220,000 and $24,642,000, respectively.
Interest and amortization of discount on the various issues outstanding during the year resulted in an effective rate of 6.17%
for 1979 and 6.04% in 1978. This rate approximates 6.40% over the remaining terms of the bonds.
The debt service portion of segregated funds includes
$29,309,000 at December 31, 1979, and $22,463,000 at December 31, 1978, restricted for operating reserve requirements under bond resolutions.
Electric system revenue bonds totaling S405,888,000 principal amount are authorized, but unissued. Electric system refunding revenue bonds not to exceed $115,000,000 principal amount were also authorized, but unissued.
In March 1980, the District plans to issue Electric System Revenue Bonds (1980 Series A) for an estimated amount of S100,000,000.
(6) LITIGATION:
Environmental Various pending litigation or administrative proceecings involving environmental matters could affect interests owned by the Project in present and proposed generating facilities. In general, these lawsuits seek to impose higher air quality standards for generating plants. If ultimately decided adversely to the interest of the Project, the outcome of the lawsuits could result in increased construction costs, increased future operating costs, and a possible loss in the operational reliability of certain generating plants. All of these effects would increase the costs to be passed on to customers through increased electric rates.
Property Valuation Lawsuits filed by the State of Arizona against the Project to increase contributions in lieu of property taxes over the amounts already paid by the Project for the years 1970 through 1974 and 1978 were settled and $2,100,000 was paid in August, 1979 to the various taxing authorities in full and final settlement of all claims.
i
I l -
- Navajo Tax The Navajo Tribe has created a Tax Commission which claims authority to tax facilities on the Navajo Indian Reservation. The Tribe has adopted a possessory interest tax and a business ac".ivity tax on certain facilities and operations on the Reservation, and
! the District is informed that such taxes are intended to apply to L
the Navajo and Four Corners Projects. The District is unable to estimate the magnitude of the possessory interest tax because of its inability to interpret the way the tax is to be calculated. The
, District estimates that the business activity tax, if upheld by the courts, could expose it to claims approximating S4.6 million per year. The District and other Navajo and Four Corners Project co-owners have filed actions in the Federal District Court for Arizona and New Mexico contesting the validity and imposition of the taxes. The District has appealed a decision from Federal District Court for Arizona upholding the right of the Tribe to impose the possessory interest tax to the Ninth Circuit Court of Appeals.
The Navajo Tribal Council has adopted resolutions which, if valid, require permits and the quarterly payment of taxes for emission of sulphur at rates which commence at S.15 per lb. the first year and increase annually to S.75 per lb. in the fifth year.
The District and other Navajo and Four Corners Project co-owners filed actions in Federal District Court for Arizona and New Mexico.
The tax will become effective subsequent to either approval of the Secretary of the Interior or a finding by him that such approval is not required. If such tax is upheld by the courts, the District could be exposed to claims approximating $3 million in the first year and increasing to S15 million in the fifth year and each year thereafter.
The assertion by the tribal council of taxing and regulatory authority on the Navajo Indian Reservation has caused the Board of Directors of the District to adopt a resolution allowing it to recover from its customers the amounts of such taxes if the payment thereof is ultimately required.
Other Principally as a result of certain water flooding in March and December 1978, various lawsuits have been filed against the Project alleging that the Project has a responsibility in regard to flood control and a liability in regard to flood damage. The ultimate liability, if any, is not determinable, but management expects that a significant portion of any liabilities which might result from flood damage claims will be covered by insurance.
i I
- w
~~ ---- --
(7) LINE OF CREDIT:
The District has a line-of-credit agreement with 14 banks, which provides for a maximum commitment of $120,000,000 with interest on borrowings at a rate equal to 60% of the banks' price rate as established from time to time by a lead bank. No compensating balances nor commitment fees are required under the line of credit.
The current agreement terminates on September 2, 1980. The line-of-credit borrowings are borrowed in the name of and payable from the General Fund and rank junior to payments required for the Prior Lien Bonds and the Revenue Bonds. At December 31, 1979, $120,000,000 was borrowed at an initial rate of 9.45%, payable on or before September 2, 1980.
(8) IRRIGATION AND WATER OPERATIONS:
The expenses, including depreciation, for irrigation and water operations exceeded the assessments , delivery fees , and other revenues therefrom by approximately S6,182,000 in 1979 and $7,507,000 in 1978. These amounts do not include expenditures for additions and improvements to irrigation plant and for repayment of long-term debt.
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Southern California Edison Company N
- Southern California Edison Company provides electric l service in a 50,0o0 square-mile area of Central and j il , qf-t f Southern California. This area includes some 8oo cities
[ig / .- __, and communities with a population of more than eight
'
- l millim people.
j ' "'"o ,
Edison's gross investment in utility piant totals nearly i
i ! avouac j
[~gp ; ~~__ _ l
$7 6 billion. The installed Company-owned generating capacity at the end of 1979 was 13,a63 megawatts of which
,) } 79% is composed of oil and gas-fired generating units.
'; i l
j SCE's interest in coal-fired generating units accounts for
- 'i < '
ll ""' '"'"
another ta%, and 6Te is in hydroelectric plants. The K Mo..oo! Company's 8 ore interest in a nuclear plant accounts for
,, ,,,,, M \d 1
p gy y jf ( j l the remaining 3fc. In addition, Edison had 2,67o mega-watts of capacity under contract from other utility sources
! - M*hJ j c%,. l * * {*"
, Co pany, incorporated in 19o9 under the laws of
- N .. * **'"
California,is a public utility and its retail operations are Q 8ad**w W .: "**J
) '"'
' 4"o subject to regulation by the California Public Utilities Commission which has the power, among other things,
! I#'" to establish retail rates and to regulate securities issues, j h p- accounting and depreciation. The Company's resale opera-l D tions are subject to regulation by the Federal Energy
- N Regulatory Commission as to rates on sales for resale, as 1 Service Territory well as to other matters including accounting and
= Extra.Hish %ItneIEHV) Transmission Lines depreciation.
Under the National Energy Act, the federal Department of Energy has been granted regulatory authority over certain aspects of energy conservation, solar energy development, power plant fuel use, coal conversion, public utility regulatory policy and natural gas pricing.
The Company's planning and siting of new plant construc-tion are subject to the jurisdiction of the California Energy Commission. Edison also is subject to various governmental licensing requirements, to Securities and Exchange Com-mission filing and disclosure requirements, and to certain other federal, state and local laws and regulations, including those related to nuclear energy and nuclear plant construc-tion, environmental protection, fuel supplies and land use.
Contents 2: Letter to Shareholders 4: Review of 1979 12 Financial Review 24: Capital Stock - Dividend and Price Information 15: Reports of Management and Independent Public Accountants 16: Financial Statements a9: Commentary on Summary of Operations 30: Summary of Operations and Comparative Statistics of Progress 196 9-1979 1
1