El Paso Electric Announces First Quarter Financial Results

Business Wire, May 6, 2008

EL PASO, Texas -- El Paso Electric Company (NYSE:EE):

Overview

For the first quarter 2008, EE reported net income of $14.5 million, or $0.32 basic and diluted earnings per share, respectively. In the first quarter of 2007, EE had net income of $15.1 million, or $0.33 basic and diluted earnings per share.

"The first quarter of 2008 was another good quarter for El Paso Electric Company," said J. Frank Bates, Interim President and Chief Executive Officer. "Improved retail-related and off-system revenues more than offset increases in non-fuel operation and maintenance costs at Palo Verde and our gas-fired generating plants. Adjusted for an executive severance payment and unrealized losses recognized on debt and equity investments, earnings in the first quarter of 2008 were $0.36 per share compared to $0.33 per share in the first quarter of 2007."

Earnings Summary

The table and explanations below present the major factors affecting 2008 net income relative to 2007 net income.

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First Quarter 2008

Earnings for the quarter ended March 31, 2008 when compared to the same period last year were positively affected by:

* Increased retained margins on off-system sales in 2008 due to increased MWh sales partially offset by lower margins per MWh.

* Higher proxy market prices for deregulated Palo Verde Unit 3 power sold to retail customers.

* Increased AFUDC (allowance for funds used during construction) and capitalized interest due to increased construction work in progress subject to AFUDC and nuclear fuel inventory subject to capitalized interest in 2008.

* Higher retail base revenues in 2008 primarily due to increased kWh sales to small commercial and industrial and public authority customers. KWh sales to small commercial and industrial and public authority customers increased 4.1% and 7.0%, respectively.

Earnings for the quarter ended March 31, 2008 when compared to the same period last year were negatively affected by:

* Increased Palo Verde non-fuel operations and maintenance expenses in 2008 due to the timing of maintenance at Palo Verde Unit 2 and increased operating costs at all three units. The Palo Verde spring 2008 refueling outage for Unit 2 began in March 2008, while the corresponding spring 2007 refueling outage for Unit 1 did not begin until May 2007.

* Increased O&M costs at our gas-fired generating plants due to the timing of planned maintenance.

* Executive severance costs net of forfeited restricted stock in the first quarter of 2008 with no comparable costs in the first quarter of 2007.

* Decreased investment and interest income due to a decrease in the fair value of our investments in auction rate debt securities and impairments of equity investments in our decommissioning trust funds.

* Increased interest expense related to our pollution control bonds. The interest rate on two series of our pollution control bonds are reset through weekly auctions which, due to well publicized problems in the auction rate market, has resulted in substantially higher interest rates in the first quarter of 2008.

Key Earnings Drivers

Historically, our earnings are largely influenced by base revenues from retail electric customers, operations at Palo Verde, and off-systems sales margins.

Retail Non-fuel Base Revenues

Retail non-fuel base revenues increased by $1.8 million, pretax, or 1.8% in the first quarter of 2008 compared to the same period in 2007. Non-fuel base revenues from small commercial and industrial customers increased by $2.0 million, or 5.5%, in 2008 due primarily to a 4.1% increase in kWh sales in the first quarter of 2008 compared to the same period in 2007. The increase in kWh sales resulted from a 6.9% increase in the average number of customers served. Other public authority revenues increased $0.9 million, or 5.6%, in 2008 due to a 7.0% increase in kWh sales reflecting increased sales to military bases, to colleges and universities, and for municipal water pumping. These increases were partially offset by decreased residential base revenues of $0.3 million, or 0.8%, in the first quarter of 2008 compared to the same period in 2007 as a result of a 0.8% decrease in kWh sales. The decrease in residential kWh sales was due to milder winter weather in 2008 compared to the first quarter of 2007 which was colder than normal. Heating degree days in the first quarter of 2008 were 7.5% below the first quarter of 2007 and 0.8% below the 10-year average. Large commercial and industrial revenues decreased $0.7 million, or 7.3%, due to the loss of several large commercial and industrial customers and the transfer of customers to the small commercial and industrial class.

Palo Verde Operations

We own approximately 633 MW (undivided interest) of generating capacity in the three generating units at the Palo Verde nuclear power station. The operation of Palo Verde not only affects our ability to make off-system sales, but also impacts fuel costs to native load customers and represents a significant portion of our non-fuel operating expenses. Total Palo Verde MWh generation increased 1.1% in the first quarter of 2008 as a result of an increase in the net generating capability at Palo Verde Unit 3 due to the replacement of the steam generators and an extra day of output in February 2008.