El Paso Electric Company

views updated

El Paso Electric Company

Kayser Center
100 North Stanton
E1 Paso, Texas 79901
U.S.A.
(915) 543-5711
Fax: (915) 521-4766

Public Company
Incorporated: 1901 as the E1 Paso Electric Railway
Company
Employees: 1,100
Sales: $524 million (as reorganized company; February
12 to December 31, 1996)
Stock Exchanges: American
SICs: 8340 Electric, Water & Gas Utilities

E1 Paso Electric Company is a public utility which generates, transmits, and distributes electricity in a 10,000-square-mile area in west Texas and southern New Mexico. The company also serves wholesale customers in Texas, New Mexico, California, and Mexico. E1 Paso has a capacity of about 1,500 megawatts with its ownership or significant ownership interests in five electrical generating facilities. In 1996 the energy sources of the company consisted of about 53 percent nuclear fuel, 32 percent natural gas, seven percent coal, and eight percent purchased power. The company emerged from four years of bankruptcy on February 12, 1996.

In 1996, E1 Paso Electric had about 279,000 residential, commercial, industrial, and wholesale customers. Most of its retail customers were in E1 Paso, Texas, and Las Cruces, New Mexico, and represented about 56 percent and seven percent, respectively, of the company’s revenues in 1996. The wholesale customers of the company included Texas-New Mexico Power Company, the Imperial Irrigation District (a southern Californian electric power agency), and the Comision Federal de Electricidad de Mexico (CFE) (the national electric utility of Mexico). The company’s industrial customers included steel producers, copper miners, oil refiners, garment manufacturing concerns, and U.S. military installations, including the United States Army Air Defense Center in Fort Bliss, Texas, and White Sands Missile Range and Holloman Air Force Base in New Mexico.

Origins in Transportation, 1901

General Anson Mills, who designed the original streets of E1 Paso and the Mills Building (headquarters of E1 Paso Electric since 1978), helped to launch the city’s first mule-drawn streetcar system in 1882. Soon electric streetcars ran throughout the city as well as on the original route between Juarez, Mexico, and E1 Paso. Thus when the E1 Paso Electric Railway Company commenced operations on August 30, 1901, it focused mainly on transportation.

In 1889 the state of Texas allowed a charter for the International Light and Power Company to construct and operate a generating plant to supply power to E1 Paso as well as to the communities of Rio Grande and Juarez. With engineering and financial assistance obtained through a management contract with Stone and Webster Subsidiary Engineers Public Service Company in 1902, E1 Paso Electric Railway Company was able to expand its offerings. E1 Paso Electric Railway Company had purchased the International Light and Power Company by 1905 and the electric division of E1 Paso Gas and Electric Company by 1914. Alternating current soon replaced direct current in the growing electric systems except in streetcars and some elevators.

The E1 Paso Electric Railway Company grew steadily through World War I and the postwar era, and by 1925 the name of the company was changed to E1 Paso Electric Company. The same year the company began serving New Mexico. High voltage lines were strung from Sierra Blanca and Van Horn, Texas, to the southeast in 1927, and by 1928 Hatch and Rincorn, New Mexico, were also connected. The Rio Grande Power Plant was built in 1929.

Growth continued in the 1940s and 1950s. E1 Paso Electric acquired Mesilla Valley Electric Company, which served Las Cruces, New Mexico, and its surrounding communities in 1940. Between 1923 and 1959 generating capacity for the company rose from 18,000 kilowatt hours to over one billion kilowatt hours owing to continued construction of generating units, mainly at the Rio Grande Power Station. The company’s customer base rose from 54,108 in 1950 to 75,747 in 1955. In addition to the company’s growth, E1 Paso Electric began to operate again as an independent electric utility when its contractual agreement with the Stone and Webster Subsidiary Engineers Public Service Company ended in 1947.

Expansion in the 1960s, 1970s, and 1980s

The 1960s were marked by the rapid growth of the company’s New Mexican division. Unit 1 of the Newman Power Station was completed in 1960; Unit 2 was finished in 1963; and Unit 3 began operation in 1966. By 1969, the company had purchased seven percent interest in two of the five units at the Four Corners Generating Station, a coal-fired plant in Farmington, New Mexico, in the northwest corner of the state. In addition, a new division office was constructed in Las Cruces, New Mexico, in 1967.

Growth continued into the 1970s, but that decade was marked by the “energy crisis,” and the company negotiated its growth carefully. E1 Paso Electric focused on signing long-term fuel contracts and developing production of alternative energy sources. As natural gas and oil sources dwindled, E1 Paso Electric, along with others in the industry, focused on developing nuclear and coal fuels for electric generation. By 1973, E1 Paso Electric had also agreed to join other utilities in the Arizona Nuclear Power Project, which was slated to produce energy in 1983. The company’s first rate increase, which was granted in 1974, helped fund the project.

When completed, the nuclear plant was named the Palo Verde Nuclear Generating Station. It had three units, which began producing energy in February 1986, September 1986, and September 1988, respectively. At the time, E1 Paso Electric held a 15.8 percent interest in the station. The company maintained its interest into the 1990s, when the Palo Verde Station had the ability to produce more electricity than any other commercial nuclear plant in the United States, with a lower net cost of production than any other Texas nuclear plant.

As a sideline, the company formed a subsidiary called Franklin Land & Resources in 1977. The original mission of Franklin was to prospect for new power plant sites. Within a year the scope of Franklin’s business had broadened when it began purchasing and restoring historic sites within the city of E1 Paso. Under the Economic Recovery Act of 1981, Franklin could restore buildings and in return retain a significant amount of former tax money. However, by January 7, 1990, E1 Paso Electric had decided to focus solely on its utility business and sold Franklin to DDG Investment Corporation. In addition to eliminating its real estate business, E1 Paso Electric also discontinued its PasoTex Corporation, which manufactured specialty steel products. In a company newsletter, E1 Paso explained that its focus on its core utility business was based on “cash requirements of the operations, along with regulatory, contractual, and financing restrictions.” That year the company incurred a $30 million loss due to its investment in Commercial Federal Savings and Loan Association, an investment that the company predicted would incur more losses due to “existing significant uncertainties” according to Public Utilities Fortnightly.

As E1 Paso Electric pared down its activities, it signed a long-term agreement with the Republic of Mexico in 1991. The 5½ year contract stated that E1 Paso would provide an initial 40 megawatts to Juarez, Mexico, then increase the amount to 120-150 megawatts around 1992, and maintain that level into 1996. About the contract, E1 Paso Electric’s chairman, chief executive officer, and president David H. Wiggs, Jr., noted in Public Utilities Fortnightly that “Mexico has experienced exceptional growth in the demand for electricity and E1 Paso Electric is strategically located to help serve this demand.” Indeed, E1 Paso Electric had a previous firm-power contract with the CFE which expired in 1977, and the company had continued to provide non-firm power until the 1991 contract. When the firm-power agreement terminated in 1996, E1 Paso Electric submitted another proposal to provide Mexico’s replacement power for 1997. The Comision Federal de Electricidad de Mexico approved the utility’s bid, and the company agreed to provide a range of 120 to 200 megawatts of power during 1997. In addition, the company allowed a provision for the CFE to request increases of power deliveries up to five percent each month, according to its customers’ needs. The revenues from the CFE were planned to be lower than those for 1996, however.

Bankruptcy in 1992

In 1992, E1 Paso Electric Company became only the second utility company to declare bankruptcy since the Depression. Public Service Company of New Hampshire was the first, filing for Chapter 11 in 1988. With $400 million in past-due loans and failed negotiations with creditors in November, E1 Paso Electric filed for Chapter 11 on January 8, 1992. Public Utilities Fortnightly listed the “high costs at [El Paso Electric’s] Palo Verde Nuclear Generating Station, a lower than expected rate increase in October, bad real estate investments, and indictments […] on defrauding purchasers of annuities” as the main reasons for the company’s failure.

Company Perspectives:

E1 Paso Electric’s mission is to provide reliable, competitively priced electric service. We will keep to the highest standards of safety, integrity, and excellence in all that we do and we will achieve financial health.

The next four years proved tumultuous for the company. Soon after E1 Paso Electric filed for bankruptcy both Central and South West Corp. (CSW) and Southwestern Public Service Co. submitted proposals to merge with E1 Paso Electric. CSW’s proposal was accepted because it allowed for reasonable reimbursement to creditors, according to Emily L. Aitken in Fortnightly. The proposed merger generated controversy and resulted in years of review and negotiation. First the Securities and Exchange Commission, the Texas Public Utilities Commission, the New Mexico Public Utilities Commission, and the Federal Energy Regulatory Commission (FERC) had to approve the merger, which both Southwestern Public Service Co. and the city of Las Cruces, one of E1 Paso Electric’s largest customers, believed would have anticompetitive effects. All the commissions found the proposed merger to be in the public interest, but the Federal Energy Regulatory Commission would not approve the merger unless the parties agreed to provide comparable transmission services. In 1995 the two parties requested a rehearing of the FERC order. CSW challenged the ruling, “claiming that the FERC has departed from precedent without clear factual basis and has exceeded its authority under the Federal Power Act,” according to Lori A. Burkhart in Public Utilities Fortnightly.

The issue of whether or not the two utilities would provide comparable transmission services became a moot point in July 1995 when CSW pulled out of the merger, claiming that E1 Paso Electric had breached the agreement by discussing and spending large sums of money on a possible stand-alone reorganization plan. Progression toward the merger had been shaky for some time due to the pending FERC order as well as to a stream of uncertainties regarding E1 Paso Electric’s customer base, including the ongoing attempt of the city of Las Cruces to condemn E1 Paso Electric’s distribution system in the city and become a municipal utility, the possible loss of Holloman Air Force Base and White Sands Missile Range, and the Palo Verde Nuclear Generator’s cracking steam generator tubes. E1 Paso Electric denied breaching the agreement and chairman and CEO Wiggs told Public Utilities Fortnightly that “after more than two years of very hard work under extremely difficult situations, it is bitterly disappointing to have our merger partner abandon us without just cause.”

Recovery in the Late 1990s

Nevertheless, after four years and four different reorganization plans, E1 Paso Electric emerged from bankruptcy as an investor-owned utility on February 12, 1996. The reorganization plan allowed for the company to be recapitalized in a public offering of $1.2 billion of debt and $100 million of preferred stock. The offering resulted in a greater demand for the debt and stock than the available supply, a sign of investor confidence in the company’s future. Indeed, in December of 1996 when Business Week asked four notable stock-pickers to invest a fictional $100,000 in any stocks of their choice, Eric E. Ryback of Ryback Management Corp. picked E1 Paso Electric among his favorites.

With the reorganization came a new management team. Wiggs resigned in August 1996 and was replaced by George W. Edwards as chairman of the board and James Haines as president and CEO. In the 1996 annual report, Edwards credited Wiggs’s effort and leadership for “much of the company’s success since emerging from bankruptcy.” The new management focused on taking care of customers, creating opportunities from within the electric industry, and increasing shareholder value. A “significant” portion of management’s incentive compensation was tied to increases in shareholder value.

Although E1 Paso Electric had high debt levels in 1996, it was focused on reducing its debt and enhancing its operations. Chief outstanding concerns of the company included Las Cruces’s continuing attempt to condemn its distribution facilities and create a municipal utility, the company’s higher than industry average rates, and the lack of pending mergers with other utilities in an industry that was consolidating. Even with these problems the company won several awards in 1996, including the EPA Region VI Environmental Excellence award, Computational Systems Inc.’s Reliability Based Maintenance award for Best Reporting of a New Program, Southwest Electric Safety Exchange’s Tom Hughston Stop Shock Safety award, and the State of New Mexico’s 1996 Compliance Environmental Excellence award. To plan for the future the company was focusing on safety, deleveraging, competitive service and pricing, system reliability, and corporate citizenship. The company regarded its isolation from competitors, closeness to Mexico, and its stable customer base as strengths on which it could build.