ML20151Z784
| ML20151Z784 | |
| Person / Time | |
|---|---|
| Site: | Palo Verde  |
| Issue date: | 12/31/1997 |
| From: | Bohle C, Geoffrey Edwards, Haines J EL PASO ELECTRIC CO. |
| To: | |
| Shared Package | |
| ML17313A590 | List: |
| References | |
| NUDOCS 9809220118 | |
| Download: ML20151Z784 (99) | |
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California and also has a contract for sales of power to the Comisi6n Federal lsafetsintegrity andexc,ellbncei
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de Electricidad de Mexico (the national electric utility of Mexico). Principal ' [ ' Jin allthat we do/and we willl industrial and.other large customers of EPE include steel production, copper f abhieve financialhealth.' y and oil refining, and garment manufacturing concerns as well as United E t ' E-States military installations, including the United States Army Air Defense [ .,w b Center at Fort Bliss in Texas, White Sands Missile Range and Holloman Air l7(pgg]pg E <? 4
' ' , .c .
, Force Base in New Mexico. U Gi w
*J -&
EPE's principal offices are located at' Kayser Center,100 North Stanton, k : Safety JElectricityis an
. v . . . ..
El Paso, Texas 79901. EPE was incorporated in Texas in 1901. f /nherently hazardous product,i { , (u - yet it is essehtial'in ourN , py.:hyn,;; m y x { modem socie' ty,? Producing l vwpy.,3.,gwugny. p.,. m
. Y s m .na.+ . s.:.:,ww;MMa%mf.Mnmw$ YY n. O :gwy,.m b b, ". >
^ and distributing it' safely is :
p essential to our success.' in 1997, EPE made significant progress toward improving its financial e p ' fundamentals. EPE continues to experience strong sales growth with increases '
, a, of 2.3% in retail energy sales and 1.7% customer growth, over 1996 levels. integn.ty1 Accountability, , "
e{ EPE or.ce again successfully renewed a 200 MW power sales contract with ' c honesty, and reliabilit)hnust 1 Mexico for 1998. Operationally, the Palo Verde Nuclear Generating Station ) ' characterize allthat we dot - achieved an 88% capacity factor and earned a 1.25 overall SALP score \ *
$ )- P while operations and maintenance costs associated with the plant declined 6<.,;
e' ' ExcellenceL We' measure 7.2% from the previous year. EPS for 1997 were $0.64, an increase of 25%, ; 4,( urpdtmance against the ? " and EBITDA per share were $4.38. EPE also continued efforts to delever its { ( ~ m capital structure, with $83 million of long-term debt repurchases on the '
. highest standards ~and expecta
- c open market, bringing total debt (net of available cash) to approximately h fcontinuous improfementini g _
l 64% of capital at year-end. ' all'that we do. e .< ,
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I'QQ @ m A*f## Q.;3 3 M M W 'ggLa;M,Jw,"",*ss E1 ggg7 h .-~ 'S q 19 %m g y; W ?; Q*TfM,Na" $0.51 24.60 % g. .
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%. > g-ggf7pA $256,857 g. ,
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p(4 pebt Repurcha5#5 $63,102 ' $ 117,951 ; operating Reve""# $594,038 $583J93 1.82 % (h dghed,ywado . D g ,$$$mne am$ 0* gg gqwrise $166,698 $169,720 p ^ D- .
+
Net inC0"* $ 38,649 $30,757 25 66% {b.' g' 4 y - N ;.;q z ~ s s Capitdlitati " ij '"> 4y y ,t p - 1 Common Stocn, Equity $369,640 '
'4 87% I331'257 21 M ,
Prefened Stock ,339 8.16% $108.426 #* g5,; Long.Tenn Deb 50 - ' F
,,nancin, and capital t,, Op ations g $28,248 - 66 *7% $24,424 "- 70.96% b cunen
,e qa financina and Capit g;. t ' >i i- + . ,:
L j; ystggys..= sment o t >W> tease Opgations $28.463 - $2aan - Total Capitali2ab"" 399 o0 % $ 1.514.139 100 M 6 Licensee Petforman..
.~ ce jpp number & Sha"* -
n ., n p,,e .) Ave (46ei h !R eport . Date. ,. , e t Average Share , g Shares and W.vaW ' (g-l ' ' .Y-1, 1 w b h-03/98L. ~ Outstanding 60A17,632 60,116,709 *' gg)B ' - - 4 1.25 ..
- ye- +.
Actual Shares
..A g4 '
Outstanding @ 60,256,438 60.179.9BI '
.//05736 l 12/94 qs y s E b Book ValueperSharc s u73
$6.13 $5.50 - 1gh '
;06/93tlII c,, y gg 7 Market Price PerShare $731 $6.50 6{.- i ev,a~uat"* O,"
h !w(2)W"dMyhgg,f t aW H)pwesuM '. i 1*'5 11,847 h ; QMeun range h Ll or 3 t bdng theb 3 to , > y #m daw > [;
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=
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"l r
Y a' 1995 ' Megawatt-hw Sab ' P'
" b Octobet IM .}
Sales for Resale 3,897,085 179' 671 2,484,128 4 -'o e< , Retail ' 47 5,652,907 < 16 902 SJ96p40 MN f 3 Oitober 1N: ~ Q gg4 T (wned Generatin8 p Capacify (MM ' 1,500 i'500 1,500 97 1,497 ' ypy,,;[
-p %.
Total 5Y5fe'" ppa (MW)
- 442
" I" 0 1,374 t,363 1,335 "l h,4tions aretenchW",' N M T. ' e a nwnth45A
;p " . - ' - '
Number dCustomers 284,174 279,M6 ~ 273'g3 26y,775 26L95g g; , /,gpg,,i L. ,9. se - g dp.--niaatu'M' " ; Administrapon# M tk m g, g,,,,,n,n,.e,
' g,gng,neering.Gchemistry,(61WW 3
S
*d Number #"9W 1,076 1,082 'i i i,133 1*140 w gr} Traim6Jt .4 y
, 1
" s vv Capac*ty Ia* g) .: 33,a ~,4w ranF gia,h 4.pr E *# W I BB O 66 -
- o. Sw higW 5**-
,, o $
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a ' ') '
? Working smarter than ever before, EPE's dedicated employees added substantially to EPE's accomplishments over the past year.
'. f. - In 1997, we paid down debt by $83 million through open market purchases. We also f accumulated cash of $111 million. This cash is now available for additional open
- s market purchases of debt or the retirement of debt and preferred stock as debt matures
- and the preferred stock becomes callable. In addition, we renewed our power sale 4 .iF agreement with Mexico's national electric utility, the Comisi6n federal de Electricidad.
It is a valuable association which we will continue to cultivate and expand. While retail sales increased 2.3% over 1996, we held O&M costs below 1996 levels - 7- a third straight year of O&M cost reductions. Earnings per share were 5.64 and free Leu mecce m c-mm + . cash flow per share was $ 2.30. Standard and Poors improved our debt rating from BB-f _ , $: to BB+ with a positive outlook, and Moody's and Duff & Phelps improved our credit
.J. g ,, -
f 9 h~ s < i s> ratings as well, to Ba2 and BB, respectively.
+ ;
e ^y We are focused on winning the loyalty of our customers. From streamlining the process 4 i ; , q o' b _ through which we plan and build facilities to connect new customers, and improving the reliability of our electric service, to providing value-added products and services b '
+ -
7g '
+ -' 4- % through our Energy Services Business Unit, we are taking care of our customers in ways which benefit them and EPE. Notably, our ESBU began operation in July 1997
@ [' 3 and now has over $6.5 million in energy service proposals outstanding and $1.9 million of energy service projects in progress.
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y;, v+ Although our very strong cash flow and rapid deleveraging are indicative of bright g' , future prospects, our future is not entirely free of uncertainty. Three separate matters a: w are cause for concern: our controversy with Las Cruces, New Mexico; the New Mexico
^
Jand3/reCtorsI ' t
- Public Utility Commission's review of our New Mexico retail rates; and the potential u'
9 g s-S~'q enactment in 1999 of laws introducing retail competition to the electric industry in s ~ ' - s
- Texas and New Mexico, 6fERE ai% ' ,
y s
'A
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5 Our controversy with Las Cruces, which represents about 8% of our total revenue, is the most vexing. Las Cruces has created a municipal utility and is attempting to take 4 ...
,p , .7 g .. m over, through acqu:sition or condemnation, our distribution facilities in Las Cruces.
= Committed ,to:
; Ai,hemgh Las C,uces ha,,efused ,e ,ene. ee,f,anchise which exp,,edim 19es,we
' continue to provide Las Cruces with electric service pending the outcome of the 79 h '
* ^
municipalization effort. At the center of the controversy is the issue of fair compensation aI p( 1 to E PE for costs we have incurred, primarily through our investment in the Palo Verde 4/DCreaS!Dg th'eY~ - Nuclear cenerating station, to assure our ability to satisfy the present and Q
'p' . future energy needs of our customers, including those in Las Cruces.
P ;,s .. This issue is awaiting decision at the Federal Energy Regulatory Commission. The
. Vakte Oh0UT;
~
4 s FERC staff has calculated a range for the Las Cruces stranded costs from $8 million
~ to $74 million, and made an initial recomrnendation that Las Cruces pay $30 million.
s Las Cruces contends the range should be from zero to $20 million. We believe fair IlDVe$tment,,,;g q compensation would be $101 million. To acquire our system, Las Cruces would also
'l have to pay us the value of our distribution facilities in Las Cruces, over and above 4
;[. . 4 _v the amount of stranded cost compensation. Barring agreement, that value would be
^ ^
determined through a condemnation proceeding in state court. i%<n,' ,
, 4 a We prefer a negotiated settlement with Las Cruces. However, we will not voluntarily 4 <
agrce to a solution which does not fairly compensate us for investments we have made to serve our Las Cruces customers. While we will continue to pursue a negotiated i settlement, we do not predict a speedy resolution of this controversy.
?
The New Mexico Commission's review of our rates is a separate proceeding from the
%y 4 Las Cruces matter, and is a result of rate complaints filed by two residential customers.
4.w , ,7 '9 4 4 3 Q Although we are not seeking to increase our New Mexico rates, we have fik<l evidence
, ? ,%
which shows that under existing interpretation of New Mexico law, our New Mexico 4 ^ rates should be increased by approximately 8.5% Other parties to the case, however, n3 , [ may file evidence which will argue that our rates should be reduced. Our goal is to j
., 5%
find a basis upon which this case can be settled. We expect this case to be resolved 4 $_ ~i# 4 '/ 4 by year-end 1998.
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i ,% y Finally,'the Texas and New Mexico legislatures appear prepared to consider legislative - proposals during their 1999 sessions which would introduce retail competition to the generation of electricity. EPE supports such a transition as long as all customers are treated fairly, the new competitive playing field is level (i.e. electric utilities are allowed y h to compete on the same basis as other generators), and past investments by electnc utilities approved by utility commissions may be recovered. We will continue our efforts to resolve these three concerns. Their successful resolution, however, will not in itself assure our success; at best, it will only set the stage. To further increase the value of EPE, we will pursue four principal objectives:
- Enhancing our transmission interconnection with the Comisidn federalde A Electricidad to permit joint planning and development of mutually beneficial pm* Wa* ce= $=== , ,
generation projects and energy trading; p' V v
- Maintaining above-average growth in retail sales, coupled with aggressive m action to win the loyalty of our customers; e[
Y
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.' . . e
- Increasing revenue from our Energy Services Business Unit; and b~
- 1 N
y
=m a Controlling costs and rnaintaining our cash flow so that we can continue to "P r - '
delever and move toward investment-grade credit fundamentals.
~Ir The first two objectives require elaboration. The El Paso /Las Cruces/Judrez metroplex . .
M.' is a unique international community celebrating its 400th anniversary this year. The I of ~ , potential economic development of this area, driven by international trade, is almost [ , I # unlimited. El Paso /Juarez is the busiest border point in the world. Approximately 20% of the U.S. land trade with Mexico moves through the El Paso area. One startling p tG ('~ ' indicator of the substantial growth potential in this international community is the rise N m electric energy consumption in judrez, from 1993 to 1997, electricity use in Judrez [ b
~ ffggggg 2
gg'i 5 grew at an annual compound rate of more than 9% in 1997,48,000 new jobs were p ~ created in Judrez, w# b
, ,, , ,.. .. ,3, -
~ '
El Paso itself is poised for significant economic growth. While El Paso lost many '
' ' WinntnO -e .
garment industry jobs in 1997, the Greater El Paso Chamber of Commerce reports that I ~ 'b M'< < El Paso gained more than 4,000 new jobs in 1997. The Chamber's goal for 1998 is D - _ s .
. 1 6,000 jobs. V. lt /Op/f[
As for EPE's growth, our retail sales have increased at a compound annual rate of over D ' 3.5% for the last five years, a substantially higher rate than the industry average. The F < number of our customers has grown at an average annual rate of 2% to 2.5% per year, and more than 30% of our sales to large commercial and industrial customers are l'JO ' [- O(f . r .' ' l + under long-term, competitively priced contracts. ' [ We are pleased to report that at the end of the year Patricia Holland-Branch and James k Cicconi joined our Board. Both bring outstanding business and public affairs experience "ChSlOmCTSN ' T to an already strong and independent Board. All the officers and directors of EPE are [' , committed to increa' sing the value of your investment by maintaining our strong cash ,
)f' ,
flow, winning the loyalty of our customers through outstanding service, effectively , . meeting challenges in New Mexico, and seeking regional and international opportunities p " " for growth, p '4 Thank you for your confidence. t: for the Board, p h
' p
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p : '- y i - r M h k _. N i h George W. Edwards, Jr. Chairman of the Board Jam'es S. Haines, Jr. President and Chief Executive Officer [ s1 T q, I e m f ? > 1 V l $dhdDh%3d4@'9 8 M%M MFMb M.
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.LRITIf Al_ ARE AS OF BUSINESS-
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Change in the electric industry is occurring daily. Federal open access rules guiding transmission service related to wholesale competition are a reality, and retail competition is taking shape in several states. Texas and New Mexico will likely consider restructuring legislation during their 1999 legislative sessions. As part of our plan to succeed and achieve our , principal objectives, we have identified critical areas of our business which <P merit our concentrated focus: ..
- Deleveraging and Cash Flow 7._ , , , ,
u t.u. w m, e . % c. ,,u - W Competitive Service and Pricing { '""""*" ** **"*7 m ?
- System Reliability f s_
7 Cr ,
,
- Safety h,- % ' - -
C " Reducing the amouht.
- Corporate Citizenship
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- m. x , -
V :ofdebt in the CapitalI, t EPE sets specific yearly corporate goals relating to these areas of focus, and b ' Structure /S Crit /Cdif has established an all-employee cash bonus plan if goals are attained. Under *
- n. ,
,,, . .'f the plan, no bonus is paid, irrespective of performance in other areas, if the h
. ' J to EPE'S abilitP tol ~
cash flow goal is not achieved. The cash flow goal must be achieved net [' , . ~ # L. C -
; achieve finanCla$
of any bonus paid. V Ihealth Hbs4esier,l During 1997, the first full year of the plan, EPE met or exceeded most of the goals set, including the cash flow goal, resulting in a bonus pay out to all [YP ' j, ~ <de/evefaginggoes;
~ "
employees. EPE believes that this type of goal alignment between employees ~- ' F [- -- t
,~ -
and shareholders creates the culture necessary for success in today's changing g :beyondSimply..i utility landscape. ;
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mm,-gym m.ym y gm y- vny - m - e 7 Efficiencies which i g
?? i N. ..lwuaa.:w a ua;, ; l fo reduce costs orl y$ 'In 1997, EPE repurchased $83 million of first mortgage bonds in the open b ' , ~/ncrease prod, uctivity ,
market. At year-end, the debt component of the capital structure was ' approximately 67% (including current maturities). Net of available cash, C
' improve CaSb [/ owe
- 2. ,
- W.
the debt ratio at year-end would have been approximately 64% By ( % ,[pnd helpIdeiever EPE("' - comparison, EPE emerged from bankruptcy protection in February 1996 ' 17 . , with debt (net of cash) at approximately 74% of its capital structure. [
~. ,
, t l
This rapid deleveraging progress was cited by credit rating agencies as a t .1 contributing factor to their decision to upgrade credit ratings for EPE in 1997 g [ and early 1998. t .. I Minimizing financial risk through the reduction of fixed obligations will 0 c, continue to be a primary focus. Currently, credit rating agencies define an investment grade capital structure as having a debt-to-capital ratio between b {; y
.50-55% Achieving an investment grade credit rating is a fundamental [ " '
t f objective for EPE, which we believe is achievable in the relatively near term j[ b l given EPE's strong free cash flow ($2.30 per share in'1997). p r. V i.N ..
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n,, ,_ m - _ , y . "It's important (br. w ,mL Co , titive Serv; ice and Pricing:: -- .
~~.~. ~-a - ; . . Lu -" e v EPE to demonstrate One factor in EPE's recent financial improvement has been its ability to a ty Npmk reduce costs. The Rate Freeze Agreement currently in effect in EPE's Texas va/ue-addedservices,i , [,
jurisdiction provides for EPE to maintain the benefit of cost reductions and o L tofbe competitive anh . increases in productivity. In 1997, EPE was able to reduce its operations and maintenance costs by 1.79% from 1996 levels, marking the third year h; ' to be custoiner-locusek/."' in a row of declining costs. I . ii d i
,7r ]
Recognizing that revenue enhancement is equally vital to success, EPE I created an Energy Services Business Unit during 1997. The ESBU was ' charged with developing energy efficient products and services that will ; build on EPE's core competencies in the electric utility business and should b serve to differentiate EPE from potential competitors. Marketing plans have been developed and are being implemented. Customers are now being
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offered pricing options, as well as value-added products and services that ;> 4' give them greater value for the kilowatt-hours purchased from EPE. These t efforts are focused primarily on developing customer loyalty in addition .. , to providing a base for incremental revenue growth in the future. f ' t -s. . During approximately six months of operat' ion, since its inception in 1997, ' y
~
the ESBU has contracted to provide energy services such as lighting retrofits, ' mapping services, upgrading customer facilities and other energy-related ,, g services to customers which have resulted in over $6.5 million in energy ! ,. . service proposals outstanding as of year-end 1997, approximately $1.9 -
' "As retail competit/On; , -
million of which are currently in progress. [ ap' proaches/one of thei
, l primary distinguishing;
, .--- , , characteristics ofpot'ential]
}ystem ReliabilitYL *
= . ., .a f '
Alectric service providers J lis likely to'be quality) " " System reliability will-be a major issue in the transition to a competitive
- o/ serv' ice. One major -
market. Emphasizing that fact, the Public Utility Commission of Texas >
' ~
~~
adopted rules during 1997 requiring all Texas utilities under its jurisdiction ; component o@uality of. . to file semi-annual reports on their service performances, based on several
~ service is reliability- the industry-accepted reliability indices. EPE also measures the performance 4 measure ola utility's ab//ith' of its New Mexico service area with the same reliability indices. Of , 1 . ; .
s the 10 largest T.exas utilities fih.ng mitial reports m 1997, EPE ranked 10 maintain continuou's a '
~ hird-best t in the category measuring frequency of outages. ,
service to its customers." T . EPE engages in an active ongoing program to upgrade facilities and enhance , reliability. In 1997, EPE expended $47.7 million for capital improvements (' on its facilities, of which approximately 33% was directly related to maintaining or improving system reliability. Capital improvement projects y range from new construction and equipment installations to facility F replacement and repair. EPE has and continues to expend significant capital for underground cable replacement, feeder reconductoring and voltage ' upgrades, protective device improvements, line rebuilds, substation upgrades r and power plant improvements. The ultimate objective of all facility ,.
..- /
improvements, replacements and repairs is to ensure operational integrity ,' f e and to maintain or enhance total system reliability. '
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